DEBTOR CASE NO. 97-10080




VS. ADV. NO. 97-1002









This matter is before the Court on the debtor=s Motion (1) for Order Abating Entry of Judgment or in the Alternative (2) to Alter or Amend the Judgment Pursuant to FRBP 9023 and the plaintiffs= Response. The debtor=s Motion sets out that on February 26, 1998, the Court sustained the plaintiffs= Motion for Summary Judgment against the debtor as to their claim of nondischargeability pursuant to 11 U.S.C. '523(a)(4), but did not enter a Memorandum Opinion or a final Order. Other issues raised in the plaintiffs= Complaint have been disposed of by orders entered previously herein.

As concerns the dischargeability issue, the debtor brings up the question of the effect of this Court=s decision in In re Penick, 199 B.R. 16 (Bkrtcy.E.D.Ky. 1996). The debtor contends that Penick means that an officer of a Kentucky corporation is not a fiduciary as that term is understood under '523(a)(4). The meaning of Penick is not quite so simple, as the plaintiffs point out in their Response. A review of the facts and the law in the within matter reveals that, in fact, Penick is not applicable here.

The pertinent facts in this matter are as follows:

Debtor=s company, Jagged Coal, was signatory to the 1988 National Bituminous Coal Wage Agreement (ANBCWA@), and the debtor signed on its behalf as president of the company. The debtor is the sole shareholder, president and director of Jagged Coal. (Depo. of Buel Pennington, June 4, 1996, pp. 52-54). The UMWA Health and Retirement Funds (Athe Funds@) have attached a copy of a partial default judgment which they obtained against Jagged Coal in Joseph P. Connors, et al. v. Jagged Coal, Inc., Civil Action No. 2:91-0684, the U.S.D.C. for the Southern District of West Virginia for delinquent contributions in the principal amount of $70,354.66 ($81,870.52 with interest after August 16, 1991). The judgment was registered in the Eastern District of Kentucky on November 22, 1991.

While the Funds were attempting to collect the judgment, Jagged Coal filed an action against Island Creek Corporation in Logan Circuit Court in West Virginia on April 27, 1993. In this litigation, Jagged Coal alleged that Island Creek had engaged in a course of conduct which rendered it unable to meet its obligations to its creditors, including the Funds. At Jagged Coal=s request, the Funds provided debt calculations, including amounts owed pursuant to the judgment set out above. This information was relied upon by Jagged Coal in this litigation. Island Creek settled with Jagged Coal for $536,000.00 and an Order of Dismissal was filed on July 11, 1995. (Depo. of Robert Woolery, July 24, 1997, p. 15).

The settlement check was issued in the name of Jagged Coal and its law firm, McKenzie, Woolery & Emrick (Athe firm@), and deposited into the firm=s escrow account. The Funds were not informed of the settlement. (Depo. of Robert Woolery, July 24, 1997, pp. 12-13, 15-16, 19-20). When they did become aware of it, they made a claim for payment of the outstanding amounts owed by Jagged Coal. The Funds corresponded with the firm concerning the settlement several times by letter, but did not obtain specific information concerning the nature of the settlement until the debtor=s affidavit was filed some four months later. (Affidavit of Buel Pennington, November 8, 1995).

On July 10, 1995, the debtor, on behalf of Jagged Coal, authorized payment to the firm in the amount of $181,941.26 for legal services. On the same date, the debtor authorized a check to be issued to Jagged Coal in the amount of $48,629.89, the only distribution that was made to Jagged Coal from the settlement proceeds. This amount was deposited into a checking account the debtor opened for Jagged Coal. Checks written on that account include $6,000.00 to Gaddy Engineering for services rendered in the Island Creek litigation, $25,558.34 to Peoples Exchange Bank for reimbursement for payment of Aexpert witness bills@ in the litigation, $8,083.00 to Danny Meenach, CPA, for services rendered in the litigation, $8,201.45 for Aout-of-pocket expenses@ in connection with the litigation, and $787.10 to Lana Clevenger for Areimbursement for expenses she paid@ in the litigation. (Pennington depo., June 4, 1996, p. 45).

On July 13, 1995, the remaining balance of the settlement monies in the amount of $300,000.00 was wired to the law firm of Brown, Todd & Heyburn for the benefit of the debtor individually. The debtor made claim to this amount as salary for his Alegal services@ in the Island Creek litigation. Within the space of about 42 months the debtor authorized payments for his own benefit from the $300,000.00 balance including $70,000.00 to the IRS and $9,500.00 to the Kentucky State Treasurer for his personal tax liability, $51,000.00 to himself, $119,000.00 for the purchase of a condominium in Florida, and $5,000.00 to the NLRB for settlement of his personal liability. (Pennington Affidavit, November 8, 1995; Pennington Supplemental Affidavit, November 21, 1995; Pennington depo., June 4, 1996, pp. 65-66; Pennington depo., November 7, 1996, pp. 202-205).

Less than six months after the purchase of the condominium, on January 26, 1996, the debtor obtained a mortgage loan against the property in the amount of $50,000.00, which he used for personal living expenses. After the deduction of expenses, the debtor authorized the balance of $41,595.88 to be wired back to Brown, Todd & Heyburn=s escrow account for disbursement to himself. Nine months later the entire sum had been expended. (Pennington depo., November 7, 1996, pp. 52-53, 56, 88-89). On November 12, 1995 the judgment in favor of Joseph P. Connors, et al. against Jagged Coal was recorded in Collier County, Florida. On April 26, 1996, the plaintiffs filed a Notice of Lis Pendens against the Florida property in the Official Records of Collier County, Florida. The debtor filed his Chapter 7 petition in this Court on February 18, 1997. The plaintiffs have filed copies of all these documents.

The plaintiffs alleged the nondischargeability of the debt to the Funds pursuant to 11 U.S.C. ''523(a)(2),(4), and (6) in their Motion for Summary Judgment; however they concentrated their efforts on '523(a)(4), arguing that the debtor at all relevant times had a fiduciary duty with respect to employee benefit plans. That section provides that a debt is excepted from discharge for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.

The first issue to be determined was therefore whether the debtor met the definition of a fiduciary. The leading case in the Sixth Circuit on this subject is In re Johnson, 691 F.2d 249 (6th Cir. 1982). There the court was interpreting '17(a)(4) of the Bankruptcy Act, the predecessor of 11 U.S.C. '523(a)(4). The court stated:

The question of who is a fiduciary for purposes of section 17(a)(4) is one of federal law, although state law is important in determining when a trust relationship exists. .... The term 'fiduciary' applies only to express or technical trusts and does not extend to implied trusts, which are imposed on transactions by operation of law as a matter of equity. .... Moreover, the requisite trust relationship must exist prior to the act creating the debt, and without reference to it. (Cites omitted.)

At pages 251-252. Specifically, the Johnson court considered whether the statutory trusts created under Michigan=s Building Contract Fund Act when a contractor or subcontractor receives payments in connection with a building project satisfied '17(a)(4). It found that the statutory trusts under that Act satisfied the above requirements where

[t]he trust relationship is unambiguously imposed on a contractor or subcontractor by language of the statute. The trust res is clearly defined as the monies paid by any person into the building contract fund. The trustee is charged with specific affirmative duties, including .... not using funds for its own purposes ....

At 252. The court later elaborated on the fact that there must be a fund which constitutes the res of the trust in In re Garver, 116 F.3d 176 (6th Cir. 1997) by stating that

the defalcation provision of '523(a)(4) is limited to only those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor. .... Defalcation then occurs through the misappropriation or failure to properly account for those trust funds.

At 180. The plaintiffs contended that under the relevant documents governing the Funds= employee benefit plans, contributions due and owing the Funds are plan assets. These constitute the fund which makes up the res of the trust, in this case delinquent contributions in the principal amount of $70,354.66 ($81,870.52 with interest after August 16, 1991) for which the plaintiffs received judgment as set out above. Under ERISA '3(21)(A), codified at 29 U.S.C. '1002(21)(A), anyone who exercises any discretionary authority or control respecting the management of an employee benefit plan or of a plan=s assets is a fiduciary with respect to such plan.

The plaintiffs pointed out that the debtor exercised management and control of assets which were due and owing the employee benefit plans, and filed a lawsuit on the grounds that these monies were due and owing the Funds. They argued that by withholding the settlement monies from the Funds and using them for his own purposes he breached his fiduciary duties and must be held personally accountable. They cited several cases in support of this position, including Connors v. Paybra Mining Co., 807 F.Supp. 1242 (S.D.W.Va. 1992). There the court said:

The next inquiry under the definition is whether the individual Defendants >exercise[d] any authority or control respecting management or disposition of= those plan assets. Again, the individual Defendants= respective admissions illustrate that contributions due and owing the Funds were withheld and directed elsewhere and such spending decisions were the personal, conscious choices of these Defendants: ....

Once contributions become due and owing, they become plan assets. The above admissions, with others in the record, demonstrate that the individual Defendants personally >exercise[d] ... authority or control respecting management or disposition of= these assets. As a result, the individual Defendants come within the ERISA definition of fiduciary.

Finally, the Court must address whether the individual Defendants breached their fiduciary duties. The Defendants= admissions clearly demonstrate a breach. Fund assets, in the form of due and owing contributions, were either diverted for other purposes or simply not paid as a result of the individual Defendants= personal, discretionary control and management of such. Because the individual Defendants failed to act >solely in the interest of the participants and beneficiaries= of the Fund, the Court thus concludes they breached their fiduciary duty.

At 1246. The court also pointed out that 29 U.S.C. '1109(a) imposes personal liability upon any person who is an ERISA fiduciary and breaches his fiduciary duties. Id., at 1247. See also Brock v. Hendershott, 840 F.2d 339 (6th Cir. 1987).

As concerns whether the settlement monies were plan assets, the plaintiffs set forth the 1988 NBCWA which specifically provides that any monies due and owing to the UMWA Health and Retirement Funds are Trust assets from the time they first become due and owing. NBCWA, Article XX(d)(8). Further, in Paybra, supra, the court held that the NBCWA vests title to delinquent contributions in the plan, and accordingly, those unpaid contributions are plan assets. Paybra, 807 F.Supp., at 1246.

Under the standard set out in In re Johnson, supra, a court must find that at least a technical trust existed in order to impose a fiduciary relationship. As this Court stated in applying that standard in In re Penick, supra, 199 B.R. at 20, ATechnical trusts are created by an agreement between the parties to impose a trust relationship, or by a statute that specifically imposes fiduciary obligations on a party.@ There is no doubt that a technical trust is created by the ERISA provisions cited above so as to make the debtor a fiduciary in regard to plan assets, and that he breached his fiduciary duty.

The matter under consideration here differs significantly from Penick, therefore, as all the requirements for finding a fiduciary relationship have been satisfied. In Penick the creditor bank could only argue that under KRS 271B.6-400(3) a trust was created whenever a corporation became insolvent, and that a director of the corporation then owed a Afiduciary@ duty to the shareholders not to make any distributions. This Court found that this provision did not create a trust, Anotwithstanding any inferences that might be drawn from it concerning a corporate director=s Afiduciary@ duty to the corporation=s shareholders.@ Id.

As concerns the debtor=s argument that a finding of nondischargeability has the effect of imposing a duty on him to pay the same debt to two different creditors, i.e. the plaintiffs and the I.R.S., the Court would observe first of all that a determination of nondischargeability is simply that. Priority of liens and order of payment are different questions, and in fact the lien priority question has already been determined as between the plaintiffs and the I.R.S. The fact that there is not enough money to go around to satisfy both of these creditors is not the problem. Had the debtor not taken Jagged Coal=s money, their would be no claim against him for the nonpayment of the sums due the Funds. The sums he received from Jagged Coal exceeds the amount of the claim against him by the Funds.

The plaintiffs were previously determined to be entitled to judgment as a matter of law that the debtor is personally liable for the debt to them, and that it is excepted from discharge pursuant to 11 U.S.C. '523(a)(4). This Court previously found their argument on their Motion for Summary Judgment to be persuasive. The Court=s decision in the Penick case does not change that outcome.

A judgment in conformity with this opinion will be entered separately.


By the Court -








Copies to:


James L. Lyon, Esq.

Jennifer Ruiz, Esq.

U.S. Trustee