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Benefits Notes Post

Company Owners Can be Personally Responsible for Contributions to Multiemployer Plans

By Angela Bohmann | July 8, 2013 in Multi-employer Plans

I have blogged in the past about the reach of obligations to multiemployer plans and how other businesses owned by a participating employer can be held responsible for withdrawal liability based upon the common ownership. If one of the businesses is owned personally by an individual, the liability can be personal. A recent case from the bankruptcy court for the District of Massachusetts shows another way in which a business owner can be found to be personally liable for unpaid multiemployer plan contributions, even if the employer does not own other businesses and even if the business that owes the money is an entity that typically provides its owners with liability protection (corporation or LLC, for example). The case involved an individual who served as the president, treasurer and sole shareholder of a corporation. The corporation was required to contribute to multiemployer funds. Some of the required contributions were withheld from employee paychecks; the bulk of the contributions were not. As business conditions deteriorated, the shareholder decided to pay creditors other than the multiemployer funds. The funds sued the business and the owner and obtained a judgment for about $200,000. The owner filed for personal bankruptcy protection and sought to have the debt to the funds discharged in bankruptcy.

The business owner admitted that amounts withheld from the employees’ paychecks were held in a fiduciary capacity and therefore he was personally liable for those contributions. That debt could not be discharged. He claimed, however, that the remaining amounts were dischargeable as ordinary business debts.

Unfortunately for the business owner, the bankruptcy court determined that the failure to pay the contributions to the multiemployer funds was a “defalcation” so the owner’s debt was nondischargeable. The court reached this conclusion because the multiemployer fund agreements provided that “all contributions shall be considered and defined as plan assets including contributions that are properly due and owing but not yet paid to the fund by contributing employers.” In my experience, a number of pension funds are adding such provisions to their trust agreements. Based on that language, the court concluded that the unpaid contributions were assets of the funds that were not paid over to the funds. In this case, the business owner chose to pay other creditors in lieu of paying the funds. According to the court, the owner prioritized the payment of corporate expenses that were beneficial to him, such as bank loans that he had personally guaranteed or other personal loans, over payments to the multiemployer funds. That preference violated a duty of loyalty to the funds and constituted defalcation under bankruptcy rules. The obligation was therefore nondischargeable.

Employers experiencing financial difficulty should keep in mind their obligations under multiemployer fund agreements. Depending on the language of the fund agreements and the manner in which the employers manage the cash flow of the business, owners may find themselves personally liable for contributions the employers owe to those funds.