A Company May be Liable for Delinquent Benefit Fund Contributions and Withdrawal Liability of Another Company Under Certain Circumstances
In unrelated cases, two federal courts of appeals recently held
that one construction company could be liable for the debts owed by a separate company
to multiemployer fringe benefit funds.
In the first case, Resilient Floor Covering Pension Fund v.
M&M Installation, Inc., the U.S. Court of Appeals for the Ninth
Circuit (AK, AZ, CA, ID, MT, NV, OR, WA, HI, Guam) addressed whether the
open-shop company of a double-breasted operation could be held liable for
withdrawal liability incurred by the union company. In the second case, Einhorn v. M.L. Ruberton Constr. Co., the U.S. Court of Appeals
for the Third Circuit (DE, NJ, PA, Virgin Islands) addressed whether the
purchaser of assets could be held liable for the delinquent benefit fund
contributions of the seller of those assets.
Installation, one of three cousins who owned Simas Floor, a nonunion
residential and commercial flooring contractor, formed a new company called
M&M Installation, a union flooring contractor, to enable Simas Floor to bid
on union jobs by subcontracting the work to M&M Installation. In addition to some common ownership, the
companies had the same directors, chief financial officer, human resources
manager, and main address. After 10
years of operating under a collective bargaining agreement (CBA) covering
M&M Installation’s flooring installers, the parties had a dispute over
coverage of Simas Floor’s employees that lead to a strike and ultimately the
company’s repudiation of the CBA.
M&M then stopped making contributions to the pension fund, prompting
the fund to assess withdrawal liability of over $2 million. M&M Installation made quarterly payments
to the fund for over three years, but then went out of business and stopped
making payments. The pension fund then
sued both M&M Installation and Simas Floor to collect withdrawal liability. The fund claimed that the two companies were
alter egos or that Simas Floor was the successor to M&M Installation, and
that M&M Installation wound up its business for the unlawful purpose of
avoiding withdrawal liability.
The court first had to decide what is the correct test for
determining whether the companies were alter egos in the present context. The court decided that an adapted version of
the test set forth in Nor-Cal Plumbing
– which is normally used to determine whether one company is constrained by the
collective bargaining obligations, rather than the withdrawal liability, of
another company as its alter ego – should apply. The test requires proof (1) that the two
companies have “common ownership, management, operations, and labor relations,”
and (2) that the non-union firm is used “in a sham effort to avoid collective bargaining
obligations.” The fact that this case
involves a “reverse alter ego” theory – because the union company was formed so
the nonunion company could avoid future collective bargaining obligations
rather than the traditional situation of a nonunion company being formed so the
union company can avoid existing collective bargaining obligations – did not
matter to the court. The court concluded
that “assuming it is possible to be responsible on an alter ego theory, the
non-union company may be liable when there is commonality between the union and
nonunion firms and an abuse of the double-breasted structure to avoid payment
of withdrawal liability.” It remanded
the case to the district court to determine whether alter ego liability is
available and, if so, to apply the proper test.
The second case arose out of a purchase of assets of struggling
highway contractor Statewide Hi-Way Safety (Statewide) by general contractor M.L.
Ruberton Construction (Ruberton).
Ruberton was a non-union contractor, while Statewide was a union
contractor and was already delinquent in contributions to its employees’
Taft-Hartley pension and welfare funds. When
the administrator of the funds learned that the companies were in negotiations,
it obtained a temporary restraining order to enjoin the sale. Ruberton and the union then entered into an
agreement providing that Ruberton would hire, subject to its work needs, Statewide’s
current workers covered by the existing CBA, that the CBA would govern that
employment on an interim basis, and that a newly negotiated CBA would cover all
Ruberton employees. The parties did not address whether Ruberton would be
liable for the delinquent contributions.
After the sale of assets took place, the administrator sued both
companies to recover the delinquent contributions. In a settlement agreement, Statewide agreed
to pay the debt in a series of installments.
After Statewide breached that agreement, the administrator sued again.
The court noted that, while successor liability for
delinquent ERISA fund contributions in the context of a merger is well-settled
in the circuit, it is not so settled in the context of a sale of assets. The court decided to follow the approach
established by the Seventh Circuit and adopted by several other circuit and
district courts, holding that a successor purchaser of assets may be liable for
the seller's delinquent ERISA fund contributions where the buyer had notice of
the liability prior to the sale and where there was sufficient evidence of
“continuity of operations” between the buyer and seller. The primary rationale was the “central policy
goal” underlying ERISA of protecting plan participants and their beneficiaries. “Statewide's failure to pay contributions
caused harm to plan beneficiaries and changed the nature of the employment relationship,”
the court stated. “Absent imposition of
successor liability on Ruberton, other employers will be forced to make up the
difference to ensure that workers receive their entitled benefits. If these outcomes were permitted, it would
contravene congressional policy for multiemployer pension funds.” The court remanded the case to the district
court to apply the test to determine whether Ruberton is liable for Statewide's
delinquencies to the funds.
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