In re: Michael P. Harris, As surety for Faribault Mills Inc., As surety for Faribault Woolen Mill Company, Debtor
Michael P. Harris, Appellant U.S. Department of Labor, Appellee
Submitted: February 15, 2018
from the United States Bankruptcy Appellate Panel for the
SMITH, Chief Judge, MURPHY and COLLOTON, Circuit
United States Department of Labor (DOL) obtained a
pre-bankruptcy judgment against debtor Michael Harris in
federal district court. The judgment provided that, under the
Employee Retirement Income Security Act of 1974 (ERISA),
Harris breached his fiduciary duty when the company he
managed as the chief executive officer (CEO) failed to remit
funds withheld from its employees' paychecks for their
health insurance plan. The DOL filed an adversary proceeding
in Harris's Chapter 7 bankruptcy to have that judgment
debt declared nondischargeable as a debt for defalcation
while acting in a fiduciary capacity under 11 U.S.C. §
523(a)(4). The bankruptcy court granted summary judgment in
the DOL's favor, declaring the debt nondischargeable.
Eighth Circuit Bankruptcy Appellate Panel (BAP) affirmed the
bankruptcy court's grant of summary judgment in the
DOL's favor. Harris appeals, arguing that he (1) was not
acting in a fiduciary capacity under § 523(a)(4) when
the alleged defalcation occurred, and (2) did not act with
the intent required for defalcation under § 523(a)(4).
2001, Harris became CEO, President, and Chairman of the Board
of Directors of Faribault Woolen Mills Company
("Faribault"), a blanket manufacturer. He owned 0.3
percent or less of Faribault's outstanding stock and had
sponsored the Faribault Woolen Mills, Inc. Fully Insured
Hospital Life Welfare Plan ("Plan") to provide
health insurance for its employees. The Plan contracted with
HealthPartners Health Insurance Company
("HealthPartners") to provide healthcare benefits
for Plan participants. Employee contributions funded 100
percent of the health insurance premiums. The premiums were
due to HealthPartners on the first of every month to provide
insurance coverage for that month. Faribault withheld the
health insurance premiums from the employee-participants'
paychecks and then remitted the amount owed to HealthPartners
from its general operations account on the first of each
month. (Faribault also paid its general corporate
expenditures from the same general operations account.)
Harris knew that the payments were due monthly.
Glienke, Faribault's Vice President of Human Resources,
was responsible for receiving and rectifying the bills from
HealthPartners for the health insurance premiums. He then
sent the bills to Carla Craig, Faribault's Accounts
Payable Administrator. From January 2008 to April 1, 2009,
Harris, Glienke, and Faribault Chief Financial Officer (CFO)
Carmen Dorr all had signatory authority on the general
operating account, payroll account, and other Faribault
2008, HealthPartners notified Faribault via letter that the
health insurance premiums were past due for January,
February, March, April, May, June, August, September,
October, and December. When Glienke received these letters,
he alerted Harris that the premiums were past due and had to
be paid. Harris then usually asked Glienke to see if he could
obtain an extension on payment.
least two occasions in 2008-January 29 and November
26-Faribault issued checks to HealthPartners that Harris had
signed that were subsequently returned by Faribault's
bank to HealthPartners due to insufficient funds. Following
the return of those checks, Faribault ultimately remitted
payment of the insurance premiums to HealthPartners without
loss of Plan insurance coverage.
issued a check on January 27, 2009, signed by Harris, to
HealthPartners for $22, 593.02 to pay Plan premiums owed for
January 2009. That check also bounced. In a letter dated
February 28, 2009, HealthPartners informed Glienke that the
January check had bounced and that it would cancel the Plan
if Faribault did not pay in full. That same day,
HealthPartners also sent letters to the Plan participants,
informing them that Faribault did not pay in full. As a Plan
participant himself, Harris received that letter. Glienke
also testified that when he received letters like the
February 28 letter, he would inform Harris of it.
on February 27, 2009, Faribault issued a check that Harris
signed to HealthPartners for $19, 466.91 to pay the February
2009 Plan premiums. HealthPartners returned the February 27
check to Faribault. In an accompanying letter dated March 3,
2009, HealthPartners informed Dorr, Faribault's CFO, that
it would accept only wire payments due to Faribault's
prior insufficient-funds checks.
March 26, 2009, Harris contacted HealthPartners and requested
a payment extension of the Plan premiums for January and
February 2009. HealthPartners denied the request and demanded
payment of the full two months' worth of premiums by
March 31, 2009. When Faribault did not remit the overdue
payments, HealthPartners canceled the Plan's insurance
policy on April 1, 2009, retroactive to January 31, 2009, due
to non-payment of premiums. Faribault thus never remitted
$55, 040.61 withheld from its employees' paychecks for
insurance premiums from January 9, 2009, to March 20, 2009.
Forty-two employees (and some of their families) were
affected by the Plan's cancellation.
from January to March 2009, Faribault issued checks to other
creditors from the general operations account containing
commingled Plan premiums. For instance, between March 26 and
March 31, 2009, over $70, 000 was either transferred to
Faribault accounts or was used to pay creditors and expenses.
This amount includes several payments that were made to
Harris's personal accounts, such as (1) a March 27, 2009
wire transfer for $1, 500 made from Faribault's general
operations account to Harris and his wife's account; (2)
a March 30, 2009 payment of $4, 000 made at Harris's
direction from Faribault's general operations account to
Harris's American Express account; and (3) a March 31,
2009 payment of $21, 531.48 made from Faribault's general
operations account on Harris's home equity line of
credit. Importantly, Harris asked Dorr to make the March 31
payment despite having been informed by Dorr that Faribault
could not make the full HealthPartners Plan premium payment
that was due.
lost control of Faribault's finances sometime after March
2009, and he resigned as CEO in May 2009. Faribault was later
District Court Proceedings
December 12, 2012, the DOL filed a complaint against Harris
in federal district court, alleging that he violated ERISA.
Specifically, the DOL asserted Harris failed to remit the
$55, 040.61 in withheld employee earnings to pay for the
Plan's healthcare premiums to HealthPartners. The DOL
alleged that Harris's failure to use the employees'
withheld wages to pay the HealthPartners premium breached his
duty of loyalty to the Plan participants, in violation of
ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A).
a bench trial, the district court held that Harris breached
his fiduciary duty of loyalty under ERISA. The court found
that Harris diverted $55, 040.61 in employee contributions
intended for insurance premiums to pay corporate expenses and
his own home-equity loan. The district court first determined
that Harris acted as an ERISA fiduciary. Harris served in a
fiduciary capacity in the handling of his employees'
withheld-but unremitted-contributions to the Plan to pay Plan
premiums. According to the court, the amounts withheld from
Faribault employees' paychecks for Plan premium payments
became "'plan assets,' and they became so as of
the date on which the employees' wages were paid (i.e.,
the date on which the employees' contributions were
withheld)." Perez, 2015 WL 6872453, at *10. The
court also found "that Harris exercised authority or
control respecting the management or disposition of those
plan assets." Id. As an example, the district
court cited Dorr's testimony "that she did not have
the authority, without Harris's approval, to remit
employee contributions to HealthPartners. Indeed, the checks
to HealthPartners were signed by Harris." Id.
Additionally, the court noted that "when Glienke brought
HealthPartners's past-due notices to Harris's
attention, Harris asked Glienke to try to get ...