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Contractor's Failure to Make Pension Contributions Results in Personal Liability for Executive
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June 4, 2007
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Howrey LLP
A recent court decision demonstrates how easily a person can become an ERISA fiduciary and thereby become personally liable for unpaid pension contributions.
A U.S. District Court recently held the former president of a defunct company personally liable for unpaid Taft-Hartley benefit fund contributions. Trustees of the Connecticut Pipe Trades Local 777 Health Fund v. Nettleton Mechanical Contractors Inc., D. Conn., No. 3:05-cv-847 (JCH).
The court ruled that the unpaid contributions were plan assets, based on the express language of the trust document, and the company president acted as a fiduciary when he failed to forward company contributions to the plans because he had sufficient discretion over those assets.
The company's collective bargaining agreement with a union required the company to contribute to two multi-employer funds. The defendant had signed the collective bargaining agreement in his capacity as president. The benefit fund trust agreement defined the term "plan assets" as "such sums of money as have been or shall be paid" to the fund by employers as contributions required by collective bargaining agreements. [emphasis added]
When the company began experiencing financial difficulties, the president, who had authority to direct what bills would be paid, failed to pay required contributions to the funds. The funds sued both the company and the president for the unpaid contributions. Citing a 2005 U.S. Circuit Court of Appeals decision, Navarre v. Luna, 406 F.3d 1192 (10th Cir. 2005), the president argued that he was not a plan fiduciary because the unpaid contributions merely were a debt owed to the plan and not plan assets.
The U.S. District Court rejected the president's argument because the trust language clearly defined plan assets to include unpaid plan contributions. According to the court, the president exercised discretionary control over the unpaid contributions because he had authority to determine which bills would be paid.
What is most disconcerting about this case, from the employer's perspective, is the lack of control that employer has over the language of the trust. In most multi-employer arrangements, the trust terms are not subject to negotiation by individual employers.
Given the risks involved, companies that contribute to multiemployer plans should familiarize themselves with the terms of the trust documents and collective bargaining agreements to ensure compliance with contribution requirements. Companies also should review their insurance coverage to determine whether the company and any employees who may be deemed ERISA fiduciaries have adequate insurance in the event of a claim for breach of fiduciary duty.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2007 Howrey LLP
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