:: Corporate Executives Sentenced To Prison For Failure To Remit Health Plan Contributions: Criminal Prosecutions Under 18 U.S.C. Section 664
From August 11, 2000 through October 20, 2000, Jackson and Carey deducted health care contributions from employee wages and failed to pay those funds to the third party health care plan administrator. On October 4, 2000, the third party administrator stopped paying the medical claims of Burruss employees. On November 7, 2000, The Burruss Company filed Chapter 11 Bankruptcy. The third party administrator filed a claim in bankruptcy court for approximately $374,000 which represented medical claims paid by the third party administrator, and unpaid by Jackson and Carey.
NEWS RELEASE UNITED STATES ATTORNEY’S OFFICE WESTERN DISTRICT OF VIRGINIA (via FBI Richmond, Virginia)
According to official reports, from August 11, 2000 through October 20, 2000, Jackson and Carey, officers of the Burruss Corporation, deducted health care contributions from employee wages and failed to pay those funds to the third party health care plan administrator. The third party administrator thereupon stopped paying the medical claims of Burruss employees. When the Burruss Company filed Chapter 11 Bankruptcy, the third party administrator filed a claim in bankruptcy court for approximately $374,000 in unpaid medical claims. A federal prosecution ensued and both Jackson and Carey were convicted of embezzlement.
The Richmond Times Dispatch reports:
Carey and Jackson were convicted on charges that included bank fraud, wire fraud, making false statements on financial documents, and stealing from employee pension- and health plans. Both men inflated inventory reports to obtain cash advances from Fleet Capital Corp., now part of Bank of America. Prosecutors said the two men, unknown to Fleet or Burruss accountants, set up a Wachovia Bank account, where they stashed tax refunds, equipment-sales proceeds and an insurance check. From that bank account, Jackson received $514,000 in bonuses, while Carey received $230,000. At the same time, some employee pension plans and health-insurance payments went unpaid.
While troubled companies may view all financial obligations alike, this is a serious error. From the United States Attorneys’ Criminal Resource Manual:
[18 U.S.C.] Section 664 prohibits the embezzlement and theft of property by any person from an employee pension or welfare benefit plan subject to title I of the Employee Retirement Income Security Act (ERISA). 29 U.S.C. § 1001, et seq. The statute also prohibits embezzlement and theft from a “fund connected” with such an employee benefit plan. Employee benefit plans which are excluded from regulation by ERISA include church plans and benefit plans which are established or maintained by the United States or state or local governments on behalf of their employees. See 29 U.S.C. § 1003. [* See Form Indictment set forth below]
Thus, in the Burruss case, United States Attorney John L. Brownlee announced this month that John Alvis Jackson, Jr., age 65, of Lynchburg, Virginia and Larry Carey, age 59, of Lynchburg, Virginia, were sentenced to prison for fraud and embezzlement. Jackson was sentenced to nine years in prison. Carey was sentenced to seven years and three months in prison.
United States Attorney John Brownlee is quoted as stating:
The criminal actions of these two defendants impacted the lives of hundreds of others. Mr. Jackson and Mr. Carey paid themselves large bonuses with money that was meant for the medical insurance costs for their employees . . . We hope that this case sends the message that anyone who commits fraud or embezzlement will be prosecuted and punished.
When do employee contributions become “plan assets”?
Withholdings from employee wages for health plan contributions must be timely remitted to the funding of group health plan obligations. The failure to remit funds owing to the plan can constitute embezzlement under federal statute 18 U.S.C. 644.
Further, the failure to forward employee contributions to an ERISA-governed plan will constitute a breach fiduciary duties. See, Pension Benefit Guaranty Corp. v. Solmsen, 671 F.Supp. 938 (E.D.N.Y.1987). But see, Phelps v. CT Enterprises, 194 Fed.Appx. 120 (4th Cir. 2006) (employer did not breach fiduciary duty even though funds taken out of employee paychecks were not sequestered from other company funds since all contributions were remitted to the plan within 90 days).
29 C.F.R. § 2510.3-102 (2004) provides:
Definition of “plan assets”–participant contributions. (a) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.
The date on which the contributions become plan assets cannot occur later than 90 days from the date the contributions are withheld. Nonetheless, even if all employee contributions are submitted to the plan within 90 days, this fact does not necessarily establish that an employer has fulfilled its fiduciary duty. The 90-day period is not intended to serve as a “safe harbor.†Regulation Relating to Definition of “Plan Assetsâ€-Participant Contributions, 61 Fed.Reg. 41220, 41223 (Aug. 7, 1996).
An ERISA Technical Release provides that:
[t]he regulation is not intended ··· to allow employers to use participant contributions for their own purposes ··· employers who fail to transmit promptly such amounts, and plan fiduciaries who fail to collect those amounts in a timely manner, will violate the requirement that plan assets be held in trust; in addition, such employers and fiduciaries may be engaging in prohibited transactions···· The Department wishes to stress that the outside limit of 90 days is not intended to supercede the preceding portion of the rule, that is, the participant contributions become plan assets “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.â€
4 ERISA Technical Release 92-01, 57 Fed.Reg. 23272 (June 2, 1992).
Interplay Between Plan Asset Regulation and 18 U.S.C. 664
Note that the Labor Department regulation contains the proviso that it does not contain “any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664.” Therefore, any “safe harbor” sought in the regulation gives little solace to those who fall within the reach of the embezzlement statute.
Further 18 U.S.C. 664 does not require fiduciary status as a prerequisite to liability:
Criminal culpability under § 664 does not require that a defendant hold any particular status in relation to an employee benefit plan or fund connected with a plan or that he or she act as a fiduciary with respect to an employee welfare benefit plan transaction. United States v. Goodstein, 883 F.2d 1362, 1371 (7th Cir.1989), cert. denied, 494 U.S. 1007, 110 S.Ct. 1305, 108 L.Ed.2d 481 (1990) (proof of lawful possession or lawful access to property at the time of appropriation is not required to demonstrate conversion in violation of 18 U.S.C. § 664); United States v. Wuagneux, 683 F.2d 1343, 1359 (11th Cir.1982), cert. denied, 464 U.S. 814, 104 S.Ct. 69, 78 L.Ed.2d 83 (1983) (affirming conviction pursuant to 18 U.S.C. § 664 predicated on the disbursement of loan proceeds from a plan which resulted from the borrower’s fraudulent overvaluation of the collateral pledged for the loan). Congress intended the statute to be read broadly to include any person who misuses or misappropriates contributions intended for deposit in an employee welfare benefit *948 plan. We find that the language “any person†in § 664 includes an employer who agrees to withhold wages from employees’ paychecks for deposit in a welfare benefit plan.
U.S. v. Grizzle, 933 F.2d 943 (11th Cir. 1991)
The elements of a Section 664 embezzlement claim include: (1) the unauthorized; (2) taking or appropriation; (3) of union benefit plan funds; (4) with specific criminal intent. In order to have specific criminal intent, “the criminal act must have been willful, which means an act done with a fraudulent intent or bad purpose or an evil motive.†United States v. Andreen, 628 F.2d 1236, 1240-41 (9th Cir.1980)
(See:: ERISA Criminal Convictions Affirmed)
Beyond Traditional Concepts of Embezzlement
According to the influential Andreen decision, 18 U.S.C. 664:
goes beyond traditional concepts of embezzlement, however, and imposes liability for an intentional breach of special fiduciary duties imposed by other regulatory statutes or governing instruments. See 29 U.S.C. s 186(c). The statute defines an offense “the common thread (of which) is that the defendant, at some stage of the game, has taken another person’s property or caused it to be taken, knowing that the other person would not have wanted that to be done.†United States v. Silverman, 430 F.2d 106, 126-27 (2d Cir. 1970). The essence of the crime is theft and in the context of union funds or pension plans the offense includes a taking or appropriation that is unauthorized, if accomplished with specific criminal intent. In this respect lack of authorization may be shown if the diversion is substantially inconsistent with the fiduciary purposes and objectives of the union funds or pension plan, as set forth by statutes, bylaws, charters, or trust documents which govern uses of the funds in question.
Possible Extension of Statute
Thus, though the discussion thus far has addressed the issue of withheld employee contributions, the issue has expanded to include possible liability for delinquent employer contributions. In Young v. West Coast Indus. Relations Ass’n, Inc., 763 F.Supp. 64 (D.Del.) (1991), for example, the plaintiff asserted violation of 18 U.S.C. 664 as a predicate act for a RICO claim. The plaintiff alleged that the employer violated the criminal statute on a theory that employer contributions required under the collective bargaining agreement became plan assets upon the employees’ performance of services under the agreement.
While the court declined to accept the argument, it did note that the wording of the agreement was instrumental in its decision as it viewed the documents as creating a debt not an asset. On the other hand, the court did note that at least one other court had reached a contrary conclusion in a breach of fiduciary duty case. See, Galgay v. Gangloff, 677 F.Supp. 295 (M.D.Pa.1987), aff’d without opinion, 932 F.2d 959 (3d Cir.1991).
In Board of Trustees of the Airconditioning and Refrigeration Industry Health and Welfare Trust Fund v. J.R.D. Mechanical Services, Inc., 99 F.Supp.2d. 1115 (C.D.Cal.1999), a breach of fiduciary duty case, the district court stated:
The Court rejects defendants’ contention that there is a distinction between employer contributions in the form of employee wage deductions and other employer contributions. Although the Trust Agreements do not specify that unpaid employer contributions are vested assets of the Trust Funds, such contributions, regardless if they are deducted from wages, are due and owing on the tenth day of the month following the month in which the responsibility for such contributions are incurred. ( See Retirement Trust Fund Agreement, Art. VII, § 2; Health and Welfare Trust Agreement, Art. VII, § 2.) Inherent in the Trust Agreements is the concept that employer contributions become trust assets immediately after employees earn their wages .
Whether liability could be predicated under 18 U.S.C. 664 for failure to remit employer contributions appears to be an open question, but the caselaw suggests that the wording of the applicable plan and other legal documents as well as the existence of a fund play a critical role in any conclusions on the issue.
Note: The responsibility for funding employee benefit plans goes beyond issues of civil liability for breach of fiduciary duty. Impediments to the advancement of such claims by civil plaintiffs do not apply to criminal prosecutions under 18 U.S.C. 664 and related statutes. Further, as indicated in the Young case cited above, the violation of the statute may form the basis of claims under federal or State RICO statutes.
A list of decisions under 18 U.S.C. 664, by jurisdiction:
FIRST CIRCUIT
United States v. Daley, 454 F.2d 505 (1st Cir. 1972).
United States v. Silva, 517 F. Supp. 727 (D.R.I. 1980), aff’d., 644 F.2d 68 (1st Cir. 1981).
United States v. Richard Rowe, 999 F.2d 14 (1st Cir. 1993) (sentencing guidelines).
United States v. Rivera, 994 F.2d 942 (1st Cir. 1993) (sentencing guidelines).
SECOND CIRCUIT
United States v. Santiago, 528 F.2d 1130 (2d Cir.), cert. denied, 425 U.S. 972 (1976).
United States v. DeLillo, 421 F. Supp. 1012 (E.D.N.Y. 1976).
United States v. Snyder, 668 F.2d 686 (2d Cir. 1982), cert. denied, 458 U.S. 1111 (1982).
United States v. Panepinto, 818 F. Supp. 48 (E.D.N.Y. 1993), aff’d without opinion, 28 F.3d 103 (2d Cir. 1994).
United States v. Issaacson, 853 F. Supp. 83 (E.D.N.Y. 1994) (disqualification of plan counsel).
United States v. Holmes, 44 F.3d 1150 (2d Cir. 1995) (embezzlement vs. money laundering).
United States v. Loeb, 45 F.3d 719 (2d Cir. 1995) (sentence).
THIRD CIRCUIT
United States v. McCrae, 344 F. Supp. 942 (E.D. Pa. 1972), aff’d. without opinion, (3d Cir. 1973).
United States v. Furst, 886 F.2d 558 (3d Cir. 1989), cert. denied, 439 U.S. 1062 (1990).
United States v. Cusumano, 943 F.2d 305 (3d Cir. 1991).
Young v. West Coast Industrial Relations Ass’n., Inc., 763 F. Supp. 64 (D.Del. 1991), aff’d without opinion, 961F.2d 1570 (3d Cir. 1992).
FOURTH CIRCUIT
United States v. Blood, 806 F.2d 1218 (4th Cir. 1986).
FIFTH CIRCUIT
United States v. Moore, 427 F.2d 38 (5th Cir. 1970), cert. denied, 400 U.S. 965 (1970).
United States v. Osorio, 482 F.2d 1343 (5th Cir.), cert. denied, 414 U.S. 1095 (1973).
United States v. Rubin, 559 F.2d 975
