Bankruptcy Stay Offers No Protection To Principals Of Chapter 7 Debtor Sued For Delinquent Fund Contributions, Nevada District Court Rules

Does the automatic stay of Section 362 of the Bankruptcy Code sweep within the scope of its protection principals and key management employees of a bankrupt employer when those individuals are sued for delinquent benefit fund contributions that the employer failed to make?  Not if those company officials are sued under a breach-of-fiduciary duty theory, says a June 2014 decision of the federal district court for the District of Nevada.  See Unite Here Health v. Gilbert, No. 2:13-CV-00937 (D. Nev. June 4, 2014).

In that case, a Las Vegas restaurant bound to a collective bargaining agreement with UNITE HERE owed over half a million dollars in unpaid benefit fund contributions to the union benefit funds when it went belly up and filed Chapter 7 bankruptcy.  The trustees of the funds filed suit in federal district court against the restaurant’s managers, principals and key employees, alleging that their discretionary control over whether contributions to the funds would be paid made them fund fiduciaries and that they breached their fiduciary duties by allowing the contributions to go unpaid.

The defendants moved to dismiss, asserting that the Section 362 automatic stay shielded them from the litigation.  District judge Jennifer Dorsey rejected their argument, explaining that if they had been sued as alter egos of the Chapter 7 debtor, they would have been seen as legally identical to the debtor.  But, the court held, the stay could not protect them from an independent breach-of-fiduciary duty claim.  The court allowed the trustees to proceed on that claim.

The court similarly reasoned that when the employer was discharged in bankruptcy, and its debts to the benefits funds washed clean, the non-debtor company officials would not enjoy the benefit of the discharge.

The Unite Here decision provides a helpful roadmap for benefit fund trustees seeking alternative ways to collect delinquent contributions when the employer’s bankruptcy blocks suit against the employer itself.

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