Washington Mutual Inc. has won an ownership battle over funds in deferred employee compensation plans after a bankruptcy judge in Delaware refused to impose a constructive trust on the funds.
Although certain employees of WaMu’s predecessors-in-interest contended they are entitled to the funds, Judge Mary F. Walrath of the U.S. Bankruptcy Court for the District of Delaware said the employees are entitled only to general unsecured claims because they do not have a right to the funds that is superior to the rights of the other general unsecured creditors.
WaMu is the successor to Home Savings of America FSB, which was the successor of H.F. Ahmanson & Co.
WaMu’s predecessors created trusts to hold money for various deferred employee compensation plans.
In order to qualify for deferred tax benefits, the plans had to be “unfunded,” meaning any distributions to the employees would come only from the general assets of the company, Judge Walrath said.
When WaMu acquired Home Savings, the plan participants became employees of Washington Mutual Bank.
WaMu later filed a Chapter 11 petition in 2008 after the Office of Thrift Supervision seized WMB. The company sought permission from the Bankruptcy Court to terminate the plans and exercise ownership rights in the trust assets. As of February 2009 the assets totaled about $69 million, the opinion said.
Several plan participants opposed WaMu’s request. They argued that a constructive trust should be imposed on the assets because WaMu had refused prior to its bankruptcy filing to grant their withdraw requests.
WaMu responded that the participants’ claim to the trust funds is preempted by the Employee Retirement Income Security Act.
Judge Walrath rejected that argument.
“ERISA itself expressly permits equitable relief and does not preclude a court from fashioning the appropriate remedy for its violation,” she wrote.
The judge also found that WaMu did not have the authority to deny the participants’ pre-petition withdraw demands.
“There is nothing in the ... plans themselves that gave [WaMu] the discretion to deny a distribution to the plan participants,” Judge Walrath said.
Nevertheless, she concluded the court could not impose a constructive trust because the money allegedly owed to the participants can no longer be clearly traced to funds or property in their possession.
Because the plans were unfunded, and the funds were identified as property of WaMu, no such tracing is possible, the judge said.
She therefore held WaMu is entitled to use the funds from the plans to pay creditors according to the priorities established by the Bankruptcy Code and any reorganization plan.
Attorneys:
WaMu: Andrew C. Irgens, Richards Layton & Finger, Wilmington, Del.; David B. Hird, Weil Gotshal & Manges, Washington; David L. Permut, Goodwin Procter LLP, Washington
In re Washington Mutual Inc. et al., No. 08-12229, 2011 WL 2162917 (Bankr. D. Del. June 1, 2011).
(Reporting by Chip Giambrone, Westlaw Journal Bankruptcy)