Employment Law Daily Alter-ego company was liable for unpaid benefit contributions, but damages award reduced
Thursday, August 31, 2017

Alter-ego company was liable for unpaid benefit contributions, but damages award reduced

By Marjorie Johnson, J.D.

An alter ego of a signatory of a collective bargaining agreement was precluded from disputing liability for unpaid fringe-benefit contributions based on a prior finding of liability against the signatory. Partially affirming and partially reversing summary judgment in favor of the trustee responsible for collecting the contributions, the Eighth Circuit also found that certain damages should not have been awarded since they weren’t part of an ERISA plan, but injunctive relief was appropriate (Twin City Pipe Trades Service Association, Inc. v. Wenner Quality Services, Inc., August 29, 2017, Colloton, S.).

A husband and wife purchased a plumbing company (Mankato Plumbing) in 2004, which was a party to a CBA with two local unions. The couple purchased a Mr. Rooter franchise two years later, which they operated using Mankato Plumbing’s facility, employees, and equipment. Mankato Plumbing also paid fringe-benefit contributions pursuant to the CBA.

In 2010, the couple ceased operations of their Mankato Plumbing. Instead, they formed S&S Thermo Dynamics to take over commercial plumbing operations and Wenner Quality Services (WQS) to provide residential services. At the time, they informed the unions that S&S would assume Mankato’s responsibility under the CBA and that Mr. Rooter would be discontinuing its operations. However, WQS continued to use the Mr. Rooter name in its residential operations.

First lawsuit. In 2011, the Twin City Pipe Trades Service Association—a trustee responsible for collecting the fringe-benefit contributions due under the CBA—brought an ERISA lawsuit against S&S, Mankato Plumbing, and the husband shareholder. Having discovered that Mr. Rooter was still operating, it alleged the defendants had failed to pay fringe-benefit contributions arising from work performed for the franchise. It did not sue WQS at that time since it was not aware of it.

Alter ego status. The claims against Mankato Plumbing were tossed since it hadn’t failed to make contributions before ceasing operations, but the court granted summary judgment for the Association on the issue of liability against S&S. It concluded that because S&S (the successor signatory to the CBA) and WQS (Mr. Rooter’s operator) were alter egos of one another, S&S was liable for the past-due contributions on behalf of Mr. Rooter. Though the issue of damages remained, the case was administratively terminated because S&S and the shareholder filed for bankruptcy.

Current action. The Association then brought the instant action against WQS seeking the same unpaid fringe-benefit contributions that it pursued in the S&S lawsuit, plus injunctive relief. On cross-motions for summary judgment, the district court determined that issue preclusion prevented WQS from disputing its liability as an alter ego of S&S, awarded the requested unpaid fringe-benefit contributions, and enjoined WQS from failing to comply with its obligations under the CBA.

Issue preclusion. The Eighth Circuit rejected WQS’s assertion that the district court erroneously applied offensive collateral estoppel on the issue of alter ego liability since it never awarded damages or entered a final judgment. Issue preclusion can apply “to matters resolved by preliminary rulings or to determinations of liability that have not yet been completed by an award of damages or other relief,” and the parties to the prior lawsuit had ample opportunity to litigate the issue of alter ego liability. Though the amount of damages remained unresolved, there was no reason to believe that the court’s judgment on liability was “tentative or likely to be changed.”

Moreover, WQS was indisputably in privity with the husband-shareholder—a party in the first case—since he was one of the two shareholders of WQS and for the same reason in privity with S&S. Accordingly, since WQS did not raise any additional fairness considerations that would preclude issue preclusion, the district court’s determination that it was liable for the unpaid fringe-benefit contributions due from Mr. Rooter was affirmed.

Damages award. However, though the court properly determined that the Association had a right to collect certain contributions under the CBA, two of the categories of damages it awarded were not authorized by ERISA. Six of the 10 categories of contributions provided in the CBA were at issue: Credit Union, Working Fee Fund, TCPT Pension, Pension Supplement, International Training Fund, and Industry Fund benefits.

Any unpaid contributions that fall outside the definition of an employee benefit or employee pension benefit plan are not recoverable in an ERISA action. Thus, because the Working Fee and the Industry Fund undisputedly did not arise under an ERISA “plan,” unpaid contributions due to those funds should not have been awarded and the damages award had to be reduced accordingly. However, since the Credit Union fund served to fund vacation benefits, WQS did not escape liability for those unpaid contributions.

Permanent injunction. Finally, the district court did not err in granting a permanent injunction. In addition to payment for past unpaid contributions, the Association sought an order requiring WQS to fulfill its ongoing obligations under the CBA. The injunction thus provided a separate and independent remedy to ensure that it paid future fringe-benefit contributions.

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