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Business owners, entrepreneurs, and investors often create business entities as a means of protecting themselves from liability, as well as protecting their business or investment from their own liability. If an individual debtor has some form of individual liability for unlawful business activity, however, those activities may be considered a factor in the bankruptcy proceeding. This was the case in a claim brought by the U.S. Department of Labor (DOL) against a business owner accused of withholding employee retirement contributions in violation of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq.

The debtor was the sole member and manager of a limited liability company (LLC) organized in Massachusetts. The LLC operated a weight loss business through a Jenny Craig franchise at eight locations around New York state. It established a retirement plan and trust for its employees in 2012, with the debtor named as the plan’s fiduciary and trustee. Employees funded the plan through contributions withheld from their paychecks. The debtor was responsible for transferring the withheld amounts to the employees’ retirement plan accounts.

The DOL claimed that the debtor failed to transfer a total of $8,646.00 to the plan during pay periods in 2012 and 2013. Under ERISA, funds withheld from an employee’s paycheck for the purpose of contributing to a retirement plan automatically become an asset of that plan, and the plan’s trustee has a fiduciary duty to remit those funds to the plan promptly. The debtor, according to the DOL, violated ERISA by failing to transfer those funds to the retirement plan.

The LLC ceased business operations in January 2014, and the debtor and his wife filed for Chapter 7 bankruptcy in May of that year. In re Herring (“Herring I”), No. 14-12482, vol. pet. (Bankr. D. Mass., May 28, 2014). He claimed liabilities in an amount between $1,000,0001 and $10 million, and assets totalling $50,000 or less. Id. at 1. He identified the LLC as a creditor, id. at 7, but not the retirement plan.

In October 2014, the DOL filed an adversary proceeding against the debtor, alleging that he “breached his duty of loyalty” by failing to transfer the withheld funds to the retirement plan. In re Herring (“Herring II”), Adv. No. 14-01209, complaint at 4 (Bankr. D. Mass., Oct. 24, 2014). Any debt associated with this breach, the DOL claimed, was not subject to discharge under the exception for debts arising from “defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4).

The debtor and the DOL filed a stipulation with the bankruptcy court in November 2014, in which the debtor stipulated that he was a fiduciary with regard to the retirement plan for ERISA purposes, and that debt in the amount of $8,646 was not dischargeable because of a breach of fiduciary duty. The bankruptcy court granted a discharge of other debts that month. The DOL filed a civil suit against the debtor for ERISA violations, along with a settlement agreement, two months later. Perez v. Herring, No. 1:15-cv-10034, complaint (D. Mass., Jan. 8, 2015).

Since 1997, bankruptcy attorney Devin Sawdayi has helped Los Angeles individuals and families with rebuilding their finances through the Chapter 7 and Chapter 13 bankruptcy processes. To schedule a free and confidential consultation with an experienced and dedicated advocate, contact us today online or at (310) 475-939.

More Blog Posts:

The Cautionary Tale of the World’s “Most Indebted Man”, Los Angeles Bankruptcy Lawyer Blawg, December 19, 2014

Embezzlement Judgment Does Not Prevent Debtor From Exempting Proceeds of Civil Lawsuit Against Creditor, Los Angeles Bankruptcy Lawyer Blawg, November 14, 2014

Creditor Challenges Debtor’s Transfer of Business Assets to Himself Prior to Chapter 13 Bankruptcy Filing, Los Angeles Bankruptcy Lawyer Blawg, December 16, 2013