Ninth Circuit Rules that Withdrawal Liability May Be Discharged in Bankruptcy

In a decision that comes as welcome news to some employers, the Ninth Circuit Court of Appeals recently ruled that an employer that incurred withdrawal liability to a multiemployer pension plan had not become a plan fiduciary by failing to pay the withdrawal liability, and could discharge that liability in bankruptcy.

In the case, Carpenters Pension Trust Fund for Northern California v. Michael Gordon Moxley AKA MGM’s Cabinet Installation Services, No. 11-16133 (9th Cir. Aug. 20, 2013), the employer (“Moxley”) had contributed to the Carpenters Pension Fund (the “Fund”) for several years pursuant to a collective bargaining agreement. When the agreement expired, Moxley did not renew but continued performing carpentry work in the Bay Area that would have been covered by the agreement — thereby withdrawing from the Fund under the special ERISA rules for construction industry pension plans. Because the Fund’s vested benefit liabilities were greater than its assets at the time of Moxley’s withdrawal, Moxley was billed for its pro rata share of the Fund’s unfunded vested benefits liability — in this case, about $172,000.

Moxley did not challenge the validity of the withdrawal liability assessment — but it also did not pay it. The Fund sued in federal district court to recover the amount that Moxley owed, but Moxley was able to put a stop to that proceeding by filing for bankruptcy. The dispute then moved to bankruptcy court, where Moxley sought to discharge its debts, including the withdrawal liability debt to the Fund. The Fund, however, fought back, arguing to the bankruptcy court that Moxley was a fiduciary to the Fund because it exercised control over Fund assets — namely, the money that was owed to the Fund — and that Moxley’s failure to pay constituted “defalcation”, or wrongdoing, by a fiduciary. Therefore, the withdrawal liability debt could not be discharged in bankruptcy.1 The bankruptcy court rejected the Fund’s argument, relying on prior Ninth Circuit cases holding that employers that simply owed contributions to pension plans were not automatically ERISA fiduciaries.

The Fund then pursued its argument in federal district court, pointing out that the trust agreement establishing the Fund defined the Fund to include “all Contributions required by the Collective Bargaining Agreement … to be made for the establishment and maintenance of the Pension Plan….” Moxley’s withdrawal liability, the Fund argued, was in the nature of a “contribution” required to be made to the Fund, and was therefore a Fund asset. But the result was no different. The Bankruptcy Code’s defalcation exception only applies if the fiduciary’s alleged “defalcation” is separate from the act that made the debtor become a fiduciary. Here, the court noted, it was Moxley’s failure to pay its withdrawal liability — thereby allegedly exercising discretion over “plan assets,” if the debt was in fact a plan asset — that converted the employer into a fiduciary, and therefore the defalcation exception to dischargeability was not applicable.

The Fund appealed to the Ninth Circuit, arguing that Moxley had in fact always been a fiduciary to the Fund by virtue of the trust agreement’s language defining the trust assets as including all required contributions. There are indeed a number of cases (including some within the Ninth Circuit) holding that an employer that owes contributions to a pension plan may be a fiduciary where the trust agreement establishing the fund specifically includes unpaid contributions as trust assets. Without opining on whether those cases are still good law, the Ninth Circuit distinguished unpaid contributions owed to a pension fund as a matter of contract — i.e., pursuant to a collective bargaining agreement — from unpaid withdrawal liability that arises solely as a matter of ERISA’s statutory scheme. Withdrawal liability, the court held, is not an unpaid contribution — even assuming that unpaid contributions could be considered to be assets of the Fund. Therefore, the court held, Moxley could not be a fiduciary to the Fund, and its withdrawal liability obligation could be discharged in bankruptcy.

The decision is important for employers as well as pension plan trustees in the Ninth Circuit. Employers now know that, if faced with a large withdrawal liability assessment, they will be able to discharge the debt through bankruptcy (although other affiliated businesses may still be liable for the debt under ERISA’s controlled group rules), and employers that participate in multiemployer plans should consult with their counsel if contemplating any action that might result in a withdrawal. Pension plan trustees, meanwhile, may wish to review with their counsel the governing plan and trust documents to ensure that they support all available avenues to collect withdrawal liability from departing contributing employers.


1  11 U.S.C. Section 523(a)(4) provides that a bankruptcy discharge “does not discharge an individual debtor from any debt . . . for fraud or defalcation while acting in a fiduciary capacity . . .”