Withdrawal Liability From Multiemployer Plan and Alter-Ego Liability.

Because of the severe underfunding in many multiemployer defined benefit funds, we are seeing increased collection activities by these funds to collect withdrawal liability. In many situations, the direct contributing employer is unable to pay withdrawal liability. Therefore, multiemployer funds look for other entities that could be liable for such payments. One theory that funds have been pursuing is to claim that other entities are “alter-egos” of the withdrawing employer and thus are liable to the fund. As two recent cases illustrate, this theory is very fact-specific; sometimes funds are successful and other times they are not.

In the first case in the U.S. District Court for the Northern District of Ohio, (Local 134 Board of Trustees of the Toledo Roofers Pension Plan v. Enterprise Roofing & Sheet Metal, N.D. Ohio, 2013), the district court found that a related company was an alter-ego. Enterprise Roofing and Sheet Metal (Enterprise) participated in a multiemployer plan and, when it ceased operations, it was subject to withdrawal liability of slightly more than $600,000. Enterprise did not pay the withdrawal liability, and the fund sought payment from an entity owned by family members. Enterprise was a family-owned business and was the party to a collective bargaining agreement. The second company, which had a similar name, Enterprise Roofing and Remodeling Services Inc. (Newco), and was non-union, was founded when the president of Enterprise realized that Enterprise would probably fail financially. The president’s wife, who had no experience in the business field, incorporated Newco. The president helped his wife run the company, used the same attorney to form the new company, and two employees from Enterprise served as Newco managers. The president, upon divorcing his wife, received all the shares of the new company. Over the period of operation, there was a substantial overlap in management, shared business facilities and equipment, and shared customers between the two companies. It was also found that there was extensive lending of money between the two companies with no intention to repay. The district court found that the new company was formed to avoid the burden of Enterprise’s collective bargaining agreement with the union and, therefore, was liable as an alter-ego.

The second case, in the U.S. District Court for the District of Columbia (Boland v. Thermal Specialties Inc., D.D.C., 2013), Thermal Specialties Inc. (TSI) operated for more than 30 years and participated in a multiemployer defined benefit plan. In 2009, one of TSI’s former employees purchased all the assets of TSI, and TSI closed. The new company (Newco) encouraged the employees of TSI to apply for work with Newco with the caution that benefits and terms of employment would be changed. The union filed a charge with the National Labor Relations Board (NLRB) alleging that Newco was an alter-ego of TSI. The NLRB dismissed the charge. Subsequently, the fund trustees sued TSI and Newco, claiming them to be jointly and severally liable for deficient pension contributions to the multiemployer plan. The district court found that many of the elements necessary to impose alter-ego liability were present because there was some substantial overlapping of management and business purpose operations and customers. However, the district court did not find the companies were alter-egos because it found they are not essentially the same company. The district court found that the purchase was sufficiently an arm’s length transaction with no record of “flim-flammery,” citing that the negotiations for the purchase were arm’s length and that the court’s analysis follows that of the NLRB’s.

As these two cases illustrate, the application of the alter-ego theory is dependent on the factors that are present, and we can expect funds to raise the alter-ego claim more frequently in the current multiemployer plan environment.

Source: Hodgson Russ LLP