Courts have held that bankruptcy relief is for the “honest but unfortunate debtor.” Does that description apply to the co-owner of an electrical contractor who deliberately stopped payment on past due contributions owed to union benefit funds and transferred the money to his own account? After weighing that issue, the court in Thrower v. Godwin, No. 8:20-AP-00418-CPM (Bankr. M.D. Fla. Oct. 14, 2025) found that the co-owner’s debt to the benefit funds was dischargeable in his personal bankruptcy case, because the evidence failed to establish that he knew that he owed the funds a fiduciary duty when he stopped the payment or possessed the money.
In Godwin, the electrical contractor had collective bargaining agreements with two locals of the International Brotherhood of Electrical Workers, obligating it to contribute to the unions’ affiliated benefit funds. The funds’ trust agreement made clear that all contributions, whether collected or not, were trust assets and thus subject to fiduciary obligations.
After the contractor’s co-owner stopped the payment, the funds sued, and the co-owner then filed Chapter 7 bankruptcy. In the bankruptcy court, the funds argued that the co-owner’s debt to them was not dischargeable by the bankruptcy court because, they contended, he had committed “defalcation while acting in a fiduciary capacity,” one of the exceptions to dischargeability set out in Section 523 of the Bankruptcy Code. See 11 U.S.C. § 523(a)(4). As the Supreme Court has explained, “defalcation” refers to a mishandling of funds held in trust involving immoral conduct or an intentional wrong. See Bullock v. BankChampaign, N.A., 569 U.S. 267, 271 (2013).
The bankruptcy court held that whether the co-owner fell within the “defalcation” exception to dischargeability turned on his state of mind when he stopped the contribution payment or possessed the money. Following a trial, bankruptcy judge Catherine Peek McEwen found insufficient evidence that the co-owner had committed defalcation because, she held, he was unaware of his fiduciary duty to make the payment to the funds. To support that conclusion, the judge noted that in its communications with him, the benefit funds had failed to “clearly and directly” inform the co-owner of his fiduciary duty. As a result, the bankruptcy court discharged the co-owner’s debt.
If union benefit funds want to hold the principals of contracting employers responsible for unpaid contributions, and not allow them to escape liability through their own personal bankruptcy filings, fund trustees might consider putting the principals on notice, in writing, that they have a fiduciary duty to make the contributions. Had such a notice existed in Godwin, the case likely would have come out the other way.