Bankruptcy Judge Mary F. Walrath ruled that she would not create a constructive trust to hold assets from an employee compensation plan. A constructive trust is a trust created for the benefit of parties who have been wronged. In this case, WaMu employees said that the company wrongfully prevented them from withdrawing money from the employee compensation plans before the company filed Chapter 11 bankruptcy. WaMu argued that they had the authority and obligation to deny those withdrawal requests so they could be in compliance with the Employee Retirement Income Security Act. The bankruptcy judge disagreed with WaMu’s assertion.“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.
The bankruptcy judge’s decision means that while WaMu employees still have valid claims, it can only be listed as unsecured debt along with other general unsecured claims. Debts with a higher priority will be paid before the employees, which means there is a possibility that the employees will receive less compensation once other claimants are paid.