Employment Law Daily Pension withdrawal liability imposed to prevent alter ego of bankrupt employer from avoiding labor obligations
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Tuesday, March 26, 2019

Pension withdrawal liability imposed to prevent alter ego of bankrupt employer from avoiding labor obligations

By Ronald Miller, J.D.

A district court’s grant of summary judgment to a union pension fund on grounds that an employer was the alter ego of a signatory employer for recovery of withdrawal liability under ERISA was affirmed to prevent manipulation of the corporate form.

In an action by a union pension fund seeking to recover withdrawal liability from a bankrupt signatory employer, a district court’s grant of summary against a newly formed company on the grounds that it was the alter ego of the signatory employer was affirmed by the Sixth Circuit. The appeals court first found that the employer failed to preserve a challenge to the applicability of the NLRA alter ego test to the pension fund’s ERISA claim. Further, weighing the six factors in the Sixth Circuit’s test for determining alter ego status, it was determined that Bourdow Contracting was “merely a disguised continuance” of Bourdow Trucking. Accordingly, the appeals court found it necessary to treat the two companies as the same entity in order to prevent either of them from manipulating its corporate form to avoid its labor obligations (Operating Engineers Local 324 Pension Fund v. Bourdow Contracting, Inc., March 21, 2019, Clay, E.).

Fringe benefit payments. Bourdow Trucking sold and transported dirt, stone, and sand throughout Michigan’s Lower Peninsula. It also engaged in construction site preparation and excavation. The company was owned by a husband and wife and their four children. For most of its existence, the company employed a unionized workforce, and executed a number of collective bargaining agreements with the union. As part of these CBAs, the employer made fringe benefit payments to a union pension fund.

In 2007, the employer began experiencing financial difficulties. As a result, it terminated its CBA with the union, relieving it of its obligation to make fringe benefit payments to the pension fund. However, because the individual responsible for making those payments was never told to stop doing so, the employer continued to make fringe benefit payments until July 2011. At that time, the pension fund mailed an uncashed check back to the employer, and no further payments were made.

Withdrawal liability. In August 2012, the pension fund informed the employer that because it had completely withdrawn from the fund in July 2011, it had incurred withdrawal liability under ERISA. The pension fund assessed the employer $1,163,279 in withdrawal liability, and demanded payment in installments beginning on November 1, 2012.

In November 2012, the employer missed its first withdrawal liability payment, and the pension fund filed a lawsuit to recover it. However, the lawsuit was stayed when the employer filed for bankruptcy. The pension fund filed a proof of claim for the amount of the withdrawal liability plus interest. The employer did not object to the claim, and it was allowed pursuant to the Bankruptcy Code. At the conclusion of bankruptcy proceedings, the pension fund received $52,034 on its claim.

New family entity. While Bourdow Trucking was coming to an end, another Bourdow family company was just beginning. Bourdow Contracting was incorporated the day after Bourdow Trucking missed its first withdrawal liability payment. It bid on its first project two days before Bourdow Trucking filed for bankruptcy. Since its inception, Bourdow Contracting has engaged in construction site preparation and excavation. Bourdow Contracting was owned by the family’s three sons, who served as corporate officers. It also employed other family members and retained the services of the professionals formerly retained by Bourdow Trucking.

Alter ego. In 2015, the pension fund filed suit against Bourdow Contracting, seeking to recover the outstanding withdrawal liability that was not satisfied during Bourdow Trucking’s bankruptcy proceedings. The pension fund alleged that Bourdow Contracting was created for the purpose of evading Bourdow Trucking’s withdrawal liability and that the two companies were alter egos, so that Bourdow Contracting was responsible for Bourdow Trucking’s withdrawal liability.

Following discovery, the parties filed cross motion for summary judgment. The district court entered judgment granting the pension fund’s motion on grounds that Bourdow Contracting was the alter ego of Bourdow Trucking. In making that determination, the district court applied the alter-ego test of the NLRA. Bourdow Contracting appealed.

Applicability of NLRA alter ego test. Bourdow Contracting first argued that the district court erred by applying the alter ego test of the NLRA to the pension fund’s ERISA claim. However, because the employer failed to challenge the applicability of the test before the district court, it failed to preserve this issue for appellate review. As to whether the court should exercise its discretion and review a question first raised on appeal, the appeals court concluded that the factors set forth in Friendly Farms v. Reliance Ins. Co. weighed against entertaining the issue. Moreover, the question of whether the NLRA’s alter ego test applied to ERISA claims is an issue of first impression in the Sixth Circuit, and other circuits have split on the issue.

Alter ego status. Next, the employer argued that the district court erred in finding that Bourdow Contracting was the alter ego of Bourdow Trucking under the NLRA alter ego test. The Sixth Circuit’s test for determining whether two companies are alter egos looks to see whether the two companies have substantially identical management, business purpose, operation, equipment, customers, supervision, and ownership. An employer’s “intent to evade” its labor obligations is also a factor.

Because there was minimal similarity in “the nature of the management structure in the two companies” and minimal overlap in who “played a managerial role,” the district court correctly determined that this factor weighed in favor of the employer. Further, Bourdow Contracting did not acquire any of Bourdow Trucking’s equipment sold as a result of the bankruptcy, so the district court correctly determined that this factor also weighed in favor of the employer.

On the other hand, there was a significant overlap in the type of work performed by the two companies. Further, while there was no continuity of work space, there was significant continuity of work force. Additionally, while Bourdow Contracting’s customer base was smaller than Bourdow Trucking’s customer base, there was some significant overlap in customers. Finally, there was significant overlap in those individuals who held supervisory roles with the two companies and in the ownership of the companies. Accordingly, the district court correctly determined that these factors weighed in favor of the pension fund. More importantly, the court found persuasive evidence of an intent to evade labor obligations. Thus, the district court determined that Bourdow Contracting was “merely a disguised continuance” of Bourdow Trucking.

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