Multi Employer and Defined Pension, Welfare. to Affiliated Entities Navigating Group Control, Successor and Alter Ego Rules to Minimize Liability

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Caroline Kelley
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1 Presenting a live 90 minute webinar with interactive Q&A Multi Employer and Defined Pension, Welfare and Top Hat Plans: Shifting Funding Liability to Affiliated Entities Navigating Group Control, Successor and Alter Ego Rules to Minimize Liability WEDNESDAY, APRIL 27, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Lonie A. Hassel, Principal, Groom Law Group, Washington, D.C. Susan Katz Hoffman, Shareholder, Littler Mendelson, Philadelphia The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 SUCCESSORSHIP, CONTRACTOR, AND ALTER EGO LIABILITY FOR WITHDRAWAL LIABILITY UNDER ERISA Susan Katz Hoffman Littler Mendelson, P.C. Philadelphia, PA I. Employer Responsible for Withdrawal Liability A. The Employer Concept Under Title IV of ERISA. When an employer with an obligation to contribute to a multiemployer plan ceases to have an obligation to contribute, closes all covered operations, or substantially reduces the scope of covered operations or transfers operations from a closed facility or bargains out of the contribution obligation, the employer may incur complete or partial withdrawal liability. 1 Liability extends to trades or businesses under common control (controlled group). Section 4001(b) of ERISA provides that a controlled group shall be treated as a single entity. 2 All businesses in the controlled group are jointly and severally liable, whether or not they have ever contributed to the multiemployer plan. A controlled group has the same meaning for aggregation purposes as applies for the purpose of aggregating corporate taxpayers under the consolidated return provisions of Code Section An employer is typically an entity that signs a collective bargaining agreement obligating it to contribute to a multiemployer plan on behalf of a designated portion of its workforce. The courts have addressed questions regarding whether an entity that leases plan-covered employees from the direct employer is also an employer responsible for withdrawal liability, whether an entity that succeeded to a withdrawn employer in an asset acquisition is liable on a successorship theory, and whether a successor employer that is alleged to be a labor law alter ego is liable for the predecessor employer s withdrawal liability. B. Contractor/Subcontractor Liability While some district courts have ruled that a company that retains a driver-leasing company under a cost-plus agreement was an employer under ERISA that was jointly liable for the driver-leasing company's withdrawal liability when the contract was terminated, two appellate courts have rejected that argument. 3 1 Section of ERISA as amended by the Multiemployer Plan Amendments Act of 1980 ( MPPAA ) U.S.C. 1301(b). 3 Transpersonnel, Inc. v. Roadway Express, Inc., 422 F.3d 456 (7th Cir. 2005) (in declaratory judgment

3 In Central States, Southeast and Southwest Areas Pension Fund v. International Comfort Products, LLC, 4 the court reached a surprising and troubling result in a typical case involving a company (ICP) that contracted out its trucking operations to a union employer. The Fund demanded payment from both the contractor and ICP. The contractor defaulted, but assigned its rights under its ICP contract to the Fund. The Fund then sued ICP both for withdrawal liability under ERISA and for breach of contract as assignee. On appeal, the panel majority disagreed with the Seventh, Eighth, and Ninth Circuits (which had limited withdrawal liability to signatory employers) and held that a contractual obligation is not required. Rather, an obligation to contribute can also mean an obligation arising as a result of a duty under applicable labor-management relations law. 5 The court remanded for the district court to determine whether ICP had an obligation to contribute under the NLRA. (ICP also argued that this question was in the exclusive jurisdiction of the NLRA an issue also remanded to the district court.) With respect to the breach of contract claim, the majority held that ICP's obligation was only to reimburse actual costs and that because the contractor never paid the withdrawal liability, it never gained the right to be reimbursed, and therefore the Fund's claim was worth nothing. II. Successorship Doctrines Under ERISA A. Overview Generally, a purchaser of assets of a contributing employer will not be liable for any multiemployer plan contribution obligations of the seller, unless the purchaser expressly agreed to assume those obligations. Furthermore, in the event a contributing employer is insolvent or dissolved, majority shareholders and corporate officers generally are not liable for the payment of contributions owed by the corporation in the absence of a clear basis for piercing the corporate veil. 6 They may be held personally liable as alter egos of the corporate entity, however, where there is evidence to support a finding that the corporation is a sham designed to escape obligations owed under a collective bargaining agreement, or the corporation has failed to preserve corporate formalities, or if two corporations are determined to be alter egos. 7 action brought by driver-leasing company, court held recipient business was not an employer liable for withdrawal liability despite reimbursement obligation; question of indemnity was dismissed by district court as premature); Rheem Mfg. Co. v. Central States Pension Fund, 63 F.3d 703 (8th Cir. 1995). The contrary district court decisions are cited in n.5 of Transpersonnel F.3d 281 (6th Cir. 2009). 5 Citing ERISA 4212, 29 U.S.C. 1392(a). 6 Plumbers Pension Fund Local 130 v. Niedrich, 891 F.2d 1297 (7th Cir. 1989), cert. denied, 110 S. Ct (1990); Scarbrough v. Perez, 870 F.2d 1079 (6th Cir. 1989); International Bhd. of Painters v. George A. Kracher, Inc., 856 F.2d 1546 (D.C. Cir. 1988); Massachusetts Laborers Health & Welfare Fund v. Startett Paving Co., 845 F.2d 23 (1st Cir. 1988); Solomon v. Klein, 770 F.2d 352 (3d Cir. 1985); Operating Eng'rs Pension Trust v. Reed, 726 F.2d 513 (9th Cir. 1984). Contra West Virginia-Ohio Valley Area IBEW Welfare Fund v. Ball Elec. Co., 685 F. Supp. 953 (S.D. W. Va. 1988). 7 See, e.g., Central States Pension Fund v. Sloan, 714 F. Supp. 943 (7th Cir. 1990); Leddy v. Standard Drywall, Inc., 875 F.2d 383 (2d Cir. 1989); Laborers Clean-Up Contract Admin. Trust Fund v. Uriarte Clean-Up Serv., Inc., 736 F.2d 516 (9th Cir. 1984); Carpenters Health & Welfare Fund of Phila. v. Kenneth Ambrose, Inc., 727 F.2d 279 (3d Cir. 1983); NLRB v. Al Bryant, Inc., 711 F.2d 543 (3d Cir. 1983), cert.

4 B. Successorship Doctrine in Seventh and Third Circuits Notwithstanding the general rule, the Seventh Circuit, and more recently, the Third Circuit, have held that an employer that acquired an insolvent employer's assets could be held liable for the prior employer's delinquent contributions and (in the case of the Seventh Circuit) withdrawal liability if the plan could show that the successor employer had prior notice of the delinquency and if there was sufficient continuity of operations (in all three cases, the successor was operating under the same name, had hired all of the predecessor's employees, and had signed a substantially similar collective bargaining agreement). The courts relied on federal labor policy expressed in cases under the National Labor Relations Act, holding a successor employer liable to correct a predecessor's unfair labor practices. 8 Purchasers of businesses out of bankruptcy have attempted to deal with the successorship problem by specifying in the bankruptcy court order approving the purchase that the sale would be free and clear of all liabilities arising from singleemployer or multiemployer pension plans. In one case, the pension fund challenged the validity of that order, and the withdrawal liability case was stayed pending a reopening of the bankruptcy case for clarification of the order. 9 C. Alter Ego Doctrine Federal courts, in the labor context, have routinely found that a labor law successor can be held liable for the predecessor s labor law violations where the successor is the alter ego of the predecessor. 10 Under the traditional successor standard, in determining whether a company is a mere continuation of its predecessor, Recently, the Ninth Circuit Court of Appeals held that the traditional denied, 104 S. Ct. 699 (1984); Trustees of Plumbers Local 519 Health & Welfare Fund v. Garcia, 128 L.R.R.M. (BNA) 2392 (S.D. Fla. 1988); Baker v. Caravan Moving Corp., 561 F. Supp. 337, (N.D. Ill. 1983). 8 Einhorn v. M.L. Ruberton Constr. Co., 632 F.3d 89 (3d Cir. 2011) (delinquent contributions); Chicago Truck Drivers Union Pension Fund v. Tasemkin, Inc., 59 F.3d 48, 19 Employee Benefits Cas. (BNA) 1463 (7th Cir. 1995) (withdrawal liability); Upholsterers' Int'l Union Pension Fund v. Artistic Furniture, 920 F.2d 1323 (7th Cir. 1990) (contributions). See also Stotter Div. of Graduated Plastics Co. v. District 65, UAW, 16 Employee Benefits Cas. (BNA) 2094 (2d Cir. 1993) (Purchaser of assets in foreclosure sale must arbitrate its liability for predecessor's delinquency, where purchaser operates under same name and signed agreement with union); Hawaii Carpenters Trust Funds v. Waiola Carpenter Shop, Inc., 823 F.2d 289 (9th Cir. 1987); Sullivan v. J&S Sales Plumbing, Inc., 1994 WL (N.D. Md. 1994) (also finding alter ego status). In Central States, Southeast & Southwest Areas Pension Fund v. Wiseway Motor Express, Inc., 2000 WL (N.D. Ill. Sept. 26, 2000), the court found that a corporation established by the shareholders of an employer that had reduced its withdrawal liability pursuant to a Chapter 11 bankruptcy reorganization plan was liable to the multiemployer plan for unpaid liability under the reorganization plan because it was a successor under Tasemkin, but that it was not liable for the full liability that had been discharged in the bankruptcy. 9 National Shopmen Pension Fund v. Folger Adam Sec., Inc., 274 B.R. 1 (D.D.C. 2002). 10 Alcoa v. Beazer East, Inc., 124 F.3d 551, 565 (3d Cir. 1997) (recognizing exceptions to the general common law rule that purchaser is not liable for predecessor s debts including where the purchaser is merely a continuation of the seller).

5 successorship standards should be applied to determine whether a successor employer would be held liable for its predecessor s unpaid withdrawal liability. 11 The Court held that despite the MPPAA s concern for payment of withdrawal liability, the only relevant factors are: (1) that the two firms 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 which, in the context of withdrawal liability, should be interpreted to require the pension fund to show that the non-union firm was used to avoid the payment of withdrawal liability. In contrast, the Third Circuit adopted an expansive vision of the alter ego doctrine. 12 The court rejected the defendants assertion that because the alleged alter egos were not successor employers (but existed simultaneously) and there was no evidence of anti-union animus, the doctrine was inapplicable. Rather, the alter ego doctrine should be applied flexibly to further a public policy of binding a non-signatory to collective bargaining obligations, where the defendant sought to avoid those obligations by sham transactions or technical changes in operations. 11 Resilient Floor Covering Pension Fund v. M&M Installation Inc, 2010 WL (9th Cir. Dec ). Notably, the Ninth Circuit indicated that because both parties agreed that alter ego liability applies to withdrawal liability, it did not need to address whether the only route to impose successorship obligations for withdrawal liability lies in the sham transaction provision of ERISA 4212(c). 12 Retirement Plan of UNITE-HERE National Retirement Fund v. Kombassan Holdings A.S., 2010 WL (2d Cir. Dec. 21, 2010).

COLLECTIVELY BARGAINED AND MULTIEMPLOYER PENSION PLANS

XVI COLLECTIVELY BARGAINED AND MULTIEMPLOYER PENSION PLANS A plan maintained by a single employer pursuant to a collective bargaining agreement (a CBA ) is generally subject to the same rules under Title