The Right-to-Collect Doctrine: Second Circuit Affirms § 664 Liability for Conversion of Contractual Benefit-Fund Claims

1. Introduction

United States v. O’Sullivan (23-7076-cr, decided 2 July 2025) is a consolidated appeal before the U.S. Court of Appeals for the Second Circuit. Three senior executives of Navillus Tile, Inc.—Donal O’Sullivan (founder/president), Helen O’Sullivan (payroll manager) and Padraig Naughton (comptroller)—were convicted in the Eastern District of New York for an elaborate payroll diversion scheme that deprived multi-employer union benefit funds of mandatory contributions. The appellants challenged their convictions on four principal grounds:

• Insufficiency of the evidence as to knowledge and intent;
• Erroneous admission of “other acts” evidence arising from the Moore v. Navillus Tile civil litigation;
• Improper conscious avoidance jury instruction; and
• Misapplication of 18 U.S.C. § 664 (embezzlement from employee benefit plans).

The Second Circuit affirmed in full, issuing an extensive summary order that nonetheless crystallises an important point of statutory interpretation: the contractual right to collect unpaid contributions is itself an “asset” capable of conversion under § 664. This commentary explores the ruling’s reasoning, its relationship to prior precedent, and its implications for labour-management relations, white-collar criminal defence, and ERISA enforcement.

2. Summary of the Judgment

After reviewing the trial record de novo, the panel—Judges Lynch, Lee and Pérez—held:

1. Sufficiency of the Evidence: When viewed in the light most favourable to the Government, circumstantial evidence amply proved each defendant’s knowledge of and participation in the scheme.
2. Other-Acts Evidence: The district court acted within its discretion by admitting limited evidence from the Moore civil lawsuit once the defence “opened the door” by highlighting Navillus’s legitimate benefit contributions.
3. Conscious Avoidance Instruction: The charge was permissible because (a) each defendant denied actual knowledge and (b) the evidentiary record supported a finding that they deliberately shielded themselves from confirming an obvious illegality.
4. Interpretation of § 664: Consistent with United States v. LaBarbara (2d Cir. 1997) and not inconsistent with In re Halpin (2d Cir. 2009), “the right to collect monies owed” to a benefit fund is an asset subject to conversion. The indictment therefore stated a cognisable offence.

The sentences (custodial terms, probation and $1.276 million restitution) and all convictions were consequently affirmed.

3. Analysis

3.1 Precedents Cited and Their Influence

• United States v. LaBarbara, 129 F.3d 81 (2d Cir. 1997)
  First to label unpaid benefit-fund contribution obligations as property interests convertible under § 664. The panel relied heavily on LaBarbara to reject the appellants’ “intangible-rights-are-not-assets” argument.
• In re Halpin, 566 F.3d 286 (2d Cir. 2009)
  A bankruptcy/ERISA decision holding that unpaid contributions are not “plan assets” for fiduciary-breach liability. The O’Sullivan panel distinguished Halpin as a civil, statutory-construction case that nonetheless recognised LaBarbara’s separate criminal-law logic.
• United States v. Raniere, 55 F.4th 354 (2d Cir. 2022) & United States v. Atilla, 966 F.3d 118 (2d Cir. 2020)
  Articulated the “view-in-the-light-most-favourable-to-the-prosecution” standard for sufficiency challenges. The court used these cases as analytical templates.
• United States v. Curley, 639 F.3d 50 (2d Cir. 2011) and United States v. LaFlam, 369 F.3d 153 (2d Cir. 2004)
  Govern Rule 404(b)/“other acts” analysis; guided the four-factor inquiry on admission of the Moore evidence.
• United States v. Aina-Marshall, 336 F.3d 167 (2d Cir. 2003)
  Canonical blueprint for issuing a conscious-avoidance instruction. The panel applied its two-prong test verbatim.

3.2 Court’s Legal Reasoning

1. Circumstantial Mosaic: The court emphasised that conspiracy is “intrinsically secretive”; therefore, intent may be inferred from a web of transactions (signing hundreds of Allied cheques, falsified invoices, personal cheques after Allied collapsed, silence during audits, etc.).
2. Door-Opening & Rule 403 Balancing: The defendants attempted to portray Navillus as a compliant union contractor by quantifying $80-plus million in legitimate fund contributions. That strategic choice made their prior alter-ego conduct relevant to rebut “lack of motive” and outweighed the risk of unfair prejudice, especially with limiting instructions.
3. Conscious Avoidance Versus Actual Knowledge: A charge is proper even where the prosecution’s primary theory is actual knowledge; the two are not mutually exclusive because a jury may credit one for some defendants and another for others.
4. Statutory Interpretation of § 664: Using ordinary-meaning canons and Black’s Law Dictionary, the panel reaffirmed that “conversion” encompasses interference with intangible choses-in-action such as the contractual entitlement of benefit funds to receive contributions. Because the defendants diverted labour costs through Allied, the funds were deprived of their enforceable claim—the very asset § 664 intends to protect.

3.3 Potential Impact

• Re-energised § 664 Prosecutions: By squarely reiterating LaBarbara, prosecutors now have fresh confirmation that intangible benefit-fund rights can trigger criminal liability—important in the construction, shipping, and trucking sectors where “payroll-through-third-party” practices proliferate.
• Compliance & Corporate Governance: Payroll managers and controllers are reminded that willful blindness is functionally equivalent to actual knowledge. Internal audit functions must scrutinise outside-payroll vendors and benefit-fund reporting processes.
• Evidentiary Strategy in White-Collar Trials: The opinion illustrates the danger of introducing favourable “good acts” evidence: it can open the door to otherwise excluded Rule 404(b) materials. Defence counsel must weigh such decisions carefully.
• Clarification of Halpin’s Reach: Civil litigants sometimes cite Halpin to argue that unpaid contributions cannot be “assets.” O’Sullivan confirms that the argument does not translate to criminal prosecutions under § 664.

4. Complex Concepts Simplified

18 U.S.C. § 664

A federal statute criminalising theft, embezzlement, or conversion of “moneys, funds, securities, premiums, credits, property, or other assets” of an employee benefit plan. The Government must prove (1) the plan asset, (2) conversion/embezzlement, and (3) specific intent.

Conversion (Criminal)

Intentional interference with another’s property rights—tangible or intangible—so as to deprive the owner of its use or benefit. In labour-benefit contexts, the “property” can be an enforceable contractual claim.

Conscious Avoidance (a/k/a “Willful Blindness”)

A doctrine permitting the jury to find knowledge where the defendant was aware of a high probability of an illegal fact and deliberately avoided confirming it. The Second Circuit’s two-prong test derives from Aina-Marshall.

Rule 404(b) “Other Acts” Evidence

Evidence of prior bad acts is generally inadmissible to prove propensity, but is admissible for non-propensity purposes (motive, intent, knowledge, absence of mistake, etc.), subject to Rule 403 balancing. “Door-opening” occurs when the opposing party makes a fact relevant that would otherwise not be.

Summary Order

A non-precedential disposition under Second Circuit Local Rule 32.1.1. While not formally binding, its reasoning is persuasive and frequently cited for its analytical value.

5. Conclusion

United States v. O’Sullivan reinforces the Second Circuit’s robust view of criminal liability under 18 U.S.C. § 664: the contractual right to collect unpaid benefit contributions is itself an “asset” capable of conversion. The court’s methodical treatment of sufficiency, evidentiary balance, and jury instructions provides a blueprint for future litigation involving complex payroll and ERISA-adjacent frauds. For employers bound by collective-bargaining agreements—and for the professionals who administer their payrolls—the decision is a stark reminder that sophisticated outsourcing schemes can carry not only civil but also criminal exposure.

In a post-O’Sullivan landscape, compliance programmes should:

• Audit third-party payroll vendors;
• Align remittance reporting with actual on-site labour;
• Train executives on willful-blindness risks; and
• Document all benefit-fund contributions and related decision-making processes.

By vindicating benefit funds’ intangible rights as protectable assets, the Second Circuit has expanded the prosecutorial toolkit for safeguarding union members’ pensions and welfare plans— a development that will likely reverberate well beyond the construction industry.