Sheet Metal Workers' Nat'l Pension Fund v. Kern (In re Kern)

542 B.R. 87

In re: Richard Kern, Debtor.

Sheet Metal Workers' National Pension Fund; National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry, Sheet Metal Occupational Health Institute Trust, International Training Institute for the Sheet Metal and Air Conditioning Industry, and National Stabilization Agreement of the Sheet Metal Industry Fund, Plaintiffs,

v.Richard Kern, Defendant.

Case No.: 13–71700–ast

Adv. Pro. No.: 13–08096–ast

United States Bankruptcy Court, E.D. New York.

Signed December 10, 2015

Jeffrey S. Dubin, Amy E. Lucas–Strang, Jeffrey S Dubin PC, Huntington, NY, for Plaintiffs.

Gary C. Fischoff, Berger, Fischoff & Shumer, LLP, Woodbury, NY, for Defendant.

DECISION AND ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT'S CROSS–MOTION FOR SUMMARY JUDGMENT

Alan S. Trust, United States Bankruptcy Judge

Pending before the Court are the following: (I) the motion for summary judgment filed by Sheet Metal Workers' Pension Fund ("Pension Fund"), National Energy Management Institute Committee for the Sheet Metal and Air Conditioning Industry ("NEMIC"), Sheet Metal Occupational Health Institute Trust ("SMOHIT"), International Training Institute for the Sheet Metal and Air Conditioning Industry ("ITI"), and National Stabilization Agreement of the Sheet Metal Industry Fund ("SASMI," and collectively, "Plaintiffs" or the "Benefit Funds") (the "Summary Judgment Motion") [dkt item 26]; (II) the cross-motion for summary judgment filed by Richard Kern ("Kern," "Debtor" or "Defendant") ("Defendant's Cross–Motion for Summary Judgment") [dkt item 28]; and (III) Plaintiffs' Memorandum of Law in Further Support of Plaintiffs' Motion for Summary Judgment and in Opposition to Defendant's Motion for Summary Judgment (the "Plaintiffs' Opposition," together with Plaintiffs' Summary Judgment Motion, Defendant's Cross–Motion for Summary Judgment, the "Motions"). [dkt items 35, 36 and 38].

Each of the Plaintiffs are benefit funds established under the statutory framework of ERISA. Debtor was the principal owner and control person of a closely held company which employed persons who were entitled to have contributions made on their behalf to the Benefit Funds. The issue before the Court is whether $1,369,803.98 of unpaid contributions due to these Benefit Funds are non-dischargeable debts pursuant to § 523(a)(4) of the Bankruptcy Code. There is no issue in this case about misuse or misappropriation by Debtor of funds collected from employees that were not remitted to one or more of the Benefit Funds; rather, the sole issue is whether Debtor's failure to cause the employer he controlled to make various contributions to the Benefit Funds constitutes defalcation while acting in a fiduciary capacity. Because the Court concludes that Debtor's liability for the unpaid contributions is dischargeable, Plaintiffs' Summary Judgment Motion is denied and Defendant's Cross–Motion for Summary Judgment is granted.

JURISDICTION AND AUTHORITY TO ENTER A FINAL ORDER

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (I), and (O), and 1334(b), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011. Furthermore, this Court has the authority to enter a final order in this nondischargeability action. See In re Salim, Case No. (ESS), Adv. Pro. No. 13–01442(ESS), 2015 WL 1240000, at *1–2, 2015 Bankr.LEXIS 815 at *3–5 (Bankr.E.D.N.Y. Mar. 16, 2015).

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The Court is not stating findings of facts and conclusions of law because Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), incorporating Rule 52(a)(3) of the Federal Rules of Civil Procedure, does not so require in ruling on a motion for summary judgment. FED. R. BANKR. P. 7052.

BACKGROUND AND PROCEDURAL HISTORY¹

General Background

On April 3, 2014, Debtor commenced a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code").² [dkt item 1]

On September 17, 2013, Debtor's case was converted from a case under Chapter 11 to a case under Chapter 7. [dkt item 76]

On January 29, 2014, Debtor received his discharge under Chapter 7. [dkt item 96]On January 31, 2014, the Clerk of the Court notified all creditors of Debtor's discharge. [dkt item 97]

The Adversary Proceeding

On June 19, 2013, Plaintiffs timely commenced this adversary proceeding seeking a denial of Debtor's discharge pursuant to 11 U.S.C. §§ 727(a) and (c)(1) and a determination of nondischargeability under § 523(a)(4) (the "Complaint"). [dkt item 1]

On July 30, 2013, Defendant filed an answer to the Complaint asserting general denials. [dkt item 6]

On August 6, 2013, the Court entered an Initial Adversary Scheduling Order . [dkt item 7]

On December 5, 2013, the Court entered a Discovery Scheduling Order . [dkt item 13]

On December 6, 2013, the Court approved a stipulation permitting Plaintiffs to amend their Complaint. [dkt item 15]

On December 9, 2013, Plaintiffs filed an amended complaint (the "Amended Complaint") by which they withdrew their cause of action pursuant to 11 U.S.C. § 727(a) and (c)(1), and now seek only a determination of nondischargeability of the ERISA contributions pursuant to 11 U.S.C. § 523(a)(4). [dkt item 16] Plaintiffs.

On April 1, 2014, the Court entered an Adversary Pre–Trial Scheduling Order . [dkt item 21]

On April 17, 2014, Defendant filed an answer to the Amended Complaint asserting general denials. [dkt item 22]

On May 5, 2014, the Court entered an Amended Adversary Pre–Trial Scheduling Order, with a trial date scheduled for October 2, 2014. [dkt item 23]

On July 24, 2014, Plaintiffs filed their Summary Judgment Motion. [dkt item 26]

On August 18, 2014, Defendant filed his Cross–Motion for Summary Judgment. [dkt item 28]

On September 8, 2014 and September 9, 2014, Plaintiffs filed their Opposition to Defendant's Cross–Motion for Summary Judgment. [dkt items 35, 36 and 38]

On September 10, 2014, the Court heard oral arguments on the Motions and took the Motions on submission.³

UNDISPUTED FACTS AND MATERIAL FACTS AS TO WHICH THERE IS NO GENUINE DISPUTE

The contractual relationships and consent judgments

Plaintiffs are and were national and local employee benefit plans within the meaning of Section 3(3) of ERISA, 29 U.S.C. § 1002(3).⁴ Defendant, Kern, was the principal owner of the now defunct closely held corporation, Cool Sheetmetal, Inc. ("CSI").⁵

CSI was an employer within the meaning of Section 3(5) of ERISA, 29 U.S.C. § 1002(5).⁶ CSI entered into certain Collective Bargaining Agreements which, inter alia, provided for various contributions to be made by CSI to the Benefits Funds; these contributions were based on hours worked by fund participants who were employed by CSI.⁷

The Benefits Funds are expressly third party beneficiaries of the CBA's.⁸

Most relevant here the CBA's provide:

contributions are considered assets of the respective Funds and title to all monies paid into and/or due and owing said Funds shall be vested in and remain exclusively in the Trustees of the respective Funds. The Employer shall have no legal or equitable right, title or interest in or to any sum paid by or due from the Employer.

(emphasis added).⁹

Defendant, in his capacity as principal of CSI, employed persons who were participants in the Benefits Funds within the meaning of Section 3(7) of ERISA, 29 U.S.C. § 1002(7), while the CBA's were in full force and effect.¹⁰

As the principal owner of CSI, Kern exercised authority, control and management over the disposition of assets of CSI, had decision making authority with respect to whether or not to pay the obligations of CSI and which accounts payable were to be paid by CSI, and determined whether or not and when CSI made contributions to the Benefits Funds.¹¹

Between 1994 and 2012, CSI periodically fell behind on contributions due to Plaintiffs, although CSI continued to pay portions of the contributions through early 2012.¹² CSI and Kern entered into two consent judgments concerning unpaid contributions: one dated July 30, 2010 in the amount of $725,265.25 (the "2010 Judgment"), and one dated December 4, 2012 in the amount of $968,843.90 (the "2012 Judgment," and together with the 2010 Judgment, the "Consent Judgments").

On December 1, 2011, CSI was terminated by Plaintiffs as a pension fund contributory employer (the "Termination"). See Defendant's Statement, ¶ 3; Kern Aff., ¶ 12 and Exhibit 2 annexed thereto; Plaintiffs' Reply Statement, ¶ 3. As a result, CSI could no longer make pension contributions for any of the union members it employed. This Termination lead to a loss of union employees and contributed to CSI's inability to continue its business operations. See Defendant's Statement, ¶ 4; Kern Aff., ¶ 13. As of the Termination, Debtor and CSI owed $1,369,803.98 of unpaid contributions to the Benefit Funds.

The financial relationships among Plaintiffs, CSI and Kern

Prior to the Termination, CSI paid at least $455,165.00 of the contributions owed under the 2010 Judgment. See Defendant's Statement, ¶ 5; Kern Aff., ¶ 16. Also, prior to the Termination, Kern had personally paid at least $150,000.00 of the contributions owed to the Benefit Funds under the 2012 Judgment. See Defendant's Statement, ¶ 6; Kern Aff., ¶ 17 and Exhibit 12.

In order to keep CSI operating, Kern and Sharon Kern (Kern's wife) personally contributed $577,392.00 of their own funds into CSI's operations from September 11, 2010 through February 7, 2012 by direct cash deposits; the vast bulk of these were contributed prior to the Termination. See Defendant's Statement, ¶ 8; Kern Aff., ¶ 24, Affidavit of Sharon Kern ("Sharon Kern Aff."), ¶ 5 and Exhibits 13 and 14 attached thereto; Plaintiffs' Reply Statement, ¶ 8.

Kern and Sharon Kern paid direct obligations of CSI's totaling $45,446.49...