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

In re: Charles H. Henneborn, 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. Charles H. Henneborn, Defendant.

Case No: 13-73280-las

Adv. Pro. No. 13-8111-las

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

June 14, 2017

Chapter 7

MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

I. Introduction

Plaintiffs Sheet Metal Workers' National Pension Fund ("NPF"), 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") (collectively, "plaintiffs") bring this action asserting that the debt owed them by defendant Charles H. Henneborn ("defendant"), the debtor in this chapter 7 case, is not dischargeable under 11 U.S.C. § 523(a)(4).¹ Nondischargeability under § 523(a)(4) requires a showing that the debt at issue was obtained by (i) fraud or defalcation while acting in a fiduciary capacity, (ii) embezzlement, or (iii) larceny. In their amended complaint, plaintiffs allege that they are employee benefit plans under Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq., and that their debt, in the amount of $370,034.66, arises out of the failure of All Seasons Siding, Inc. ("All Seasons") to pay outstanding employer contributions to plaintiffs pursuant to certain collective bargaining agreements, for which defendant is personally liable. Plaintiffs contend that defendant, as an officer of All Seasons, had authority and control over the management and disposition of employee benefit plan assets, and the failure of All Seasons to account for and pay over employee benefit fund contributions renders its debt nondischargeable under § 523(a)(4) based upon defendant's defalcation while acting in a fiduciary capacity.

Now before the Court is plaintiffs' motion for summary judgment [Adv. Dkt. No. 21]² pursuant to Rule 56 of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rule 7056. Defendant did not file opposition. The Court has carefully reviewed the moving papers and considered the parties' oral argument. For the reasons discussed in this Memorandum Opinion and Order, material issues of fact preclude summary judgment, and on that basis, the motion is denied.

II. Jurisdiction

The Court has jurisdiction over this matter under 28 U.S.C. § 1334(a) and (b) and the Standing Order of Reference entered by the United States District Court for the EasternDistrict of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. Consideration of the motion is a core proceeding under 28 U.S.C. § 157(b)(2) in which final orders or judgment may be entered by this Court pursuant to 28 U.S.C. § 157(b)(1).

III. Background

a. Factual Background³

Plaintiffs are multi-employer, employee benefit funds within the meaning of Section 3(3) of ERISA. Pls.' 7056-1 ¶ 1⁴; Strang Decl., Exhibits D, E, and F; see 29 U.S.C. § 1002(3). Defendant was a principal owner and Vice President of All Seasons, a New York corporation engaged in the installation and repair of architectural siding and roofing panels. Pls.' 7056-1 ¶ 3, Def. Dep. at 6:3-10, 9:8-11. Originally a 50% shareholder when he began working at All Seasons in December 2004, defendant's ownership interest was reduced to 20%⁵approximately three years later and remained at that level until he left the company in November 2012.⁶ Def. Dep. at 6:11-7:17.

All Seasons entered into collective bargaining agreements under which All Seasons was obligated to make certain contributions to plaintiffs based upon the hours worked by the participants employed by All Seasons.⁷ Def. Dep. at 20:2-18. Pursuant to the collective bargaining agreements, All Seasons was required to make contributions to plaintiffs for the period January 1, 2009 through February 28, 2013. Pls.' 7056-1 ¶ 16; Strang Decl., Exhibit D, Art. XII B, Exhibit E, Art. XII B, Exhibit F, Art. XII B. Plaintiffs are third party beneficiaries of the collective bargaining agreements. Pls.' 7056-1 ¶ 6; Strang Decl., Exhibit D, Art. XII B; Exhibit E, Art. XII B; and Exhibit F, Art. XII B. The collective bargaining agreements incorporate by reference certain agreements and declarations of trust of plaintiffs. Pls.' 7056-1 ¶ 7; Strang Decl., Exhibit D, Art. XII B, Sections 21C and 24A; Exhibit E, Art. XII B, Sections 21C and 24A; Exhibit F, Art. XII B, Sections 21C and 24A; Exhibits G, H, I, J, K. The collective bargaining agreements provided, inter alia:

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.

Pls.' 7056-1 ¶ 9; Strang Decl., Exhibit D, Art. XII A, Section 19.B, Art. XII B, Section 24B; Exhibit E, Art. XII A, Section 19.B, Art. XII B Section 24.B; Exhibit F, Art. XII A, Section 19.B, Art. XII B, Section 24.B.

On July 17, 2012, defendant and Kakareko signed a confessed judgment note agreeing that All Seasons and defendant and Kakareko, individually, owed plaintiffs $229,596.27 in delinquent contributions, interest and liquidated damages. Strang Decl., Exhibit P.

b. Procedural History

Defendant filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on June 19, 2013 (Case No. 13-73280-las).⁸ On July 16, 2013, NPF filed two proofs of claim for unpaid contributions, plus interest and liquidated damages, in defendant's bankruptcy case: (1) Proof of Claim #1 for $224,916.77; and (2) Proof of Claim #2 for $145,117.89. On July 17, 2013, plaintiffs filed a complaint against defendant. [Adv. Dkt. No. 1]. In the complaint, plaintiffs brought an action under § 727(a)(2) to deny defendant's discharge or, in the alternative, to except the debt owed by defendant from discharge under § 523(a)(4). By stipulation, plaintiffs filed an amended complaint. In the amended complaint [Adv. Dkt. No. 10], plaintiffs withdrew the claim for relief under § 727(a)(2) and renewed their allegation that the debt owed to them by defendant arose out of defendant's defalcation while acting in a fiduciary capacity and is nondischargeable under § 523(a)(4). Plaintiffs' claim is premised on defendant's exercise of authority or control over the management or disposition of certain assets of plaintiffs within the meaning of Section 1002(21)(A) of ERISA. Amended Comp. ¶¶ 28, 35. Plaintiffs alleged that plan assets include the unpaid employer contributions, and defendant determined whether All Seasons timely made contributions to plaintiffs. Amended Compl. ¶¶ 15, 29-34. Plaintiffs contend that by exercising control over plan assets defendantis an ERISA fiduciary within the meaning of Section 3(21) of ERISA, 29 U.S.C. § 1002(21)(A), and defendant breached his fiduciary duty by permitting plan assets to be used for purposes other than payment to plaintiffs. Amended Compl. ¶¶ 37, 38, 40.

Defendant answered the original complaint.⁹ [Bankr. Dkt. No. 13]. In his answer, defendant asserted that he did not exercise authority or control over the management or disposition of corporate assets, nor did he have authority and control over contributions by All Seasons to plaintiffs. Ans. ¶ 18. Defendant further asserted that "[f]ull authority and control of all financial matters lied exclusively with the eighty percent shareholder." Id.

Plaintiffs filed the motion for summary judgment claiming that defendant's debt for the unpaid contributions was nondischargeable under § 523(a)(4) because his failure to make the required contributions to plaintiffs constituted defalcation while acting in a fiduciary capacity. As noted above, defendant did not file opposition to plaintiffs' motion.

The Court heard oral argument on the motion. At the hearing, defendant's counsel, Joseph J. Fontanetta, Esq., represented that he did not oppose the motion because defendant had instructed him to cease any further work in this adversary proceeding. However, counsel did raise certain arguments on behalf of defendant. In particular, counsel argued that the deposition testimony of Kakareko and Egan, submitted by plaintiffs in support of the motion for summary judgment, could not be used against defendant because the testimony was taken in an action pending in the District Court for the Eastern District of New York against Kakareko to which defendant was not a party. Further, counsel stated that defendant did not receive notice of the depositions and, therefore, had no opportunity to cross-examine the witnesses. The Court entered a scheduling order requiring plaintiffs and defendant to briefthe issue of whether Egan and Kakareko's deposition testimony could be used in support of the motion for summary judgment.¹⁰ [Adv. Dkt. No. 26].

Subsequently, plaintiffs' counsel advised the Court that in lieu of submitting an additional brief on the admissibility of the deposition testimony, plaintiffs intended to submit an affidavit from Egan, pursuant to Rule 56(e)(1) of the Federal Rules of Civil Procedure. An amended scheduling order was entered to allow time for the filing of the affidavit and any opposition to the motion for summary judgment. [Adv. Dkt. No. 27]. Plaintiffs timely filed the Egan Declaration. [Adv. Dkt. No. 30].¹¹ Defendant did not oppose, and...