Fiduciary Liability Can’t Be Erased in Personal Bankruptcy, Court Finds

A recent Illinois federal bankruptcy court ruling is an important reminder to ERISA plan fiduciaries that violations of fiduciary duties under ERISA can result in personal liability from which Chapter 7 bankruptcy proceedings cannot protect the fiduciary. The case is In re John Dombek III, No. 11-40894 (Bankr. N.D. Ill. Oct. 16, 2012); In re John Dombek Jr., No. 12-00564 (Bankr. N.D. Ill. Oct. 5, 2012).

In Dombek, the U.S. Bankruptcy Court for the Northern District of Illinois said the president and part-owner of several related companies whose plans he managed could not discharge, through his personal bankruptcy case, his liability in unremitted employee contributions to retirement and group health plans governed by ERISA. His liability amounted to more than $67,000. The U.S. Department of Labor brought suit based on the findings of a DOL Employee Benefits Security Administration investigation.

In April 2012, DOL sued John Dombek III in the U.S. District Court for the Northern District of Illinois in Solis v. John Dombek Jr., John Dombek III, the Wisconsin Tool & Stamping Co. 401(k) Profit Sharing Plan & Trust et. al , No. 1:12-cv-02992, 2012 WL 5232053, for breaches of fiduciary duty. DOL alleged that for nearly three years, the defendants improperly managed the company benefit plans’ assets by failing to remit participant contributions to ERISA retirement and group health plans and commingling these contributions with the companies’ general assets in violation of DOL regulations. It also alleged that John Dombek Jr., a vice president and co-fiduciary of the Wisconsin Tool & Stamping Co. 401(k) plan, improperly managed plan assets by failing to monitor the timely remittance of employee contributions. 

ERISA sets forth strict requirements for U.S. plan fiduciaries, including rigorous fiduciary standards and prohibitions on certain related party transactions. The court determined that the Dombeks violated their duty of loyalty as ERISA plan fiduciaries by failing to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing plan benefits.

DOL also sued the Dombeks in bankruptcy court to prevent them from circumventing their obligation to reimburse the employee retirement plan contributions through their October 2011 Chapter 7 bankruptcy filings. The original DOL lawsuit included the allegation that John Dombek III’s Wisconsin Tool & Stamping company for nearly three years, starting Jan. 1, 2008, withheld thousands of dollars in contributions from employees’ paychecks and never remitted them to the company’s 401(k) profit-sharing plan. Similar allegations were made at related companies for whose plans the Dombeks also had responsibility.

In a decision by U.S. Bankruptcy Judge Jack Schmetterer, the bankruptcy court concluded that, under ERISA, Dombek, as president of the companies, was a “functional fiduciary” of the retirement and group health plans. Dombek exercised discretionary control over plan assets — the employee contributions — when he retained those funds in the companies’ general assets to pay other corporate debts, rather than timely remitting them to the plans as ERISA requires. The president’s conduct also violated his fiduciary duty to avoid prohibited transactions.

Finding out More

Also see ¶240 in the Guide to Assigning and Lending Plan Benefit Money for more information on the implications of embezzlement, criminal convictions and breach of fiduciary duties in relation to retirement plan assets and benefit offsets.

To read the full story on Thompson’s HR Compliance Expert, click here.