BOARD OF TRUSTEES v. PALLADIUM EQUITY PARTNERS, LLC (E.D.Mich. 7-14-2010)

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881 F.2d 336, 338-39 (6th Cir. 1989) (stating that passive investment activity is not "trade or business" for the purposes of an Internal Revenue Code provision allowing the deduction of expenses incurred in carrying on a trade or business); Cent. States, SE SW Areas Pension Fund v. Fulkerson, 238 F.3d 891, 895 (7th Cir. 2001) (stating that "possession of a property, be it stocks, commodities, leases, or something else, without more[,] is the hallmark of an investment" and rejecting the claim that merely holding leases was a sufficiently continuous and regular business activity to satisfy the second prong of the Groetzinger test). At least one court however has rejected the idea that a passive investment can never qualify as a "trade or business" under the MPPAA. See Bd. of Trustees of W. Conference of Teamsters Pension Trust Fund v. Lafrenz, 837 F.2d 892, 894 (9th Cir. 1988) (noting that the statute does not distinguish between active and passive investors and finding a proprietorship that leased the trucks to the commonly controlled corporation to be a "trade or business" under section 1301(b)(1)).

The plaintiffs rely heavily on an opinion of the Pension Benefit Guaranty Corporation Appeals Board ("PBGC") issued on September 26, 2007 in which the Board held a private equity fund liable for the underfunded liabilities of a pension plan sponsored by one of its portfolio companies. App'x to Pls.' Mot. for Sum. J., Ex. A [dkt. # 90] (PBGC Appeals Board Opinion). The PBGC concluded that the privaty equity fund satisfied the first prong of the Groetzinger test because (a) the general partner of the fund and various independent institutional investors created the fund for the express purpose of "creating and realizing long-term capital gains primarily from investments . . . including . . . the general buying, selling, holding, and otherwise investing in securities of every kind and nature"; (b) the fund reported on partnership tax returns that its principal business activity was "investment advisory" and its principal service was "investment services"; and (c) the general partner of the fund received compensation for its investment advisory and management services, including consulting fees, management fees, and carried interest. When considering the second prong of the Groetzinger test, the PBGC found significant the size of the fund's overall portfolio (almost $470 million) and the profits generated as a result of the fund's investments ($207,203 in total investment income reported, as well as over $7 million in management fees). The PBGC distinguished the Whipple line of cases based on active involvement of the Fund in the activities of the portfolio company and on Whipple's focus on personal investments. The Board noted that Higgins v. Comm'r of Internal Rev., 312 U.S. 212 (1941), and Whipple "refer to individuals managing their own personal investments rather than to partnerships, like the Fund, whose purpose is to acquire, hold, and sell securities and other investment interests in United States industrial businesses. . . ." Op. at 12. The Board continued:

The Fund, unlike the taxpayer in Higgins, is not: (1) an individual acting on his own behalf; (2) merely keeping records and collecting dividends and interest from investments; and (3) solely receiving a return as an [sic] passive investor. Instead, the Fund is a "trade or business" because it regularly is involved in investment activities of a much more active nature than those in Higgins. This is reflected in the responsibilities of its agent . . . who: (i) provides investment advisory and management services to others (i.e., its partners); (ii) hires a third-party . . . to assist in selecting and purchasing potential investments (e.g., the Other Companies) and in distributing the net profits and losses from these companies to itself and limited partners; and (iii) receive compensation for such services (e.g., 20% of all realized profits from the Fund's investments).

. . .

The facts in Whipple are distinguishable because the Fund, as evidenced by its tax returns and Partnership Agreement, was directly and substantially involved in a recognized business activity (i.e., providing investment advisory and management services) for the benefit of several other entities (i.e., its general and limited partners). . . . Furthermore, in contrast to the taxpayer in Whipple, . . . the Fund's agent was entitled to compensation for investment advisory and management services it performed.

Id. at 12-13.

The parties dispute the degree of deference the Court ought to pay to the opinion of the PBGC. That body is charged with interpreting the MPPAA and is "entitled to substantial deference when it construes the statute." Cent. States, Se. Sw. Areas Pension Fund v. Nitehawk Express, Inc., 223 F.3d 483, 491 (7th Cir. 2000); see also 29 U.S.C. § 1301(a)(14)(B) ("the determination of whether two or more persons are under `common control' shall be made under regulations of the [Pension Benefit Guaranty] corporation which are consistent and coextensive with regulations prescribed for similar purposes by the Secretary of the Treasury under subsections (b) and (c) of section 414 of Title 26"). However, "PBGC opinion letters are not as authoritative as PBGC regulations, but they have been discussed in the same vein as revenue rulings." Nitehawn Express, Inc., 223 F.3d at 491. In this circuit, revenue rulings are "not entitled to the deference accorded a . . . Treasury Regulation," Threlkeld v. Comm'r of Internal Rev., 848 F.2d 81, 84 (6th Cir. 1988); they are merely persuasive authority. Constantino v. TRW, Inc., 13 F.3d 969, 980-81 (6th Cir. 1994). "[I]nterpretations contained in formats such as opinion letters are `entitled to respect' under our decision in Skidmore v. Swift Co., 323 U.S. 134, 140 (1944), but only to the extent that those interpretations have the `power to persuade,' ibid." Christensen v. Harris County, 529 U.S. 576, 587 (2000).

The Court finds the PBGC's reasoning persuasive, and it remains faithful to the general rule that no matter how large an investor's portfolio or how much managerial attention an investor pays to his investments, investing alone does not constitute a "trade or business." Higgins v. Comm'r of Internal Rev., 312 U.S. 212, 218 (1941). Rather, the approach coins an "investment plus" standard, which the facts in this case, taken in the light most favorable to the plaintiffs, tend to support. There is evidence in the record that Fund II, consisting of the three LPs led by PEP LLC, had a business purpose other than mere investment. The three LPs joined their investments to exert power over financial and managerial activities of Haden. See Defs.' Mot. for Sum. J., Exs. 1-3 (Investment Guidelines, Annex B to PEP LP Agrs.), at 1 (describing the purpose of the partnerships to "make equity . . . investments in connection with the acquisition of a controlling interest in companies"). Collectively, the three LPs were able to select five of the seven members of Haden's board and set up several committees to control internal operations of the company. The three LPs also purchased the rights to Haden Schweitzer's senior credit facility and became a major source of credit to the

Haden corporations. These practices were consistent with the overall functional model for private equity funds, which, according to the defendants' expert Steven M. Adams,

aggregat[e] capital with a long term investment horizon (typically four to eight years) with the involvement of a team of experienced and professional financial experts ("Private Equity Managers"). In this model, value is created by investing in relatively large, often controlling, percentages of the stock of an enterprise. Thus, the Private Equity Manager achieves some degree of governance control and ability to influence the management of the corporation in which it has invested. This can be done by assuming seats on the board of directors and by frequent communication with the officers of the company. Often, the economic incentives of the shareholders and management are aligned by compensating management in the same currency held by the shareholders — stock in the company.

Defs.' Mot. for Sum. J., Ex. 12 (Adams Report) at ¶ 16. That satisfies the first prong of the Groetzinger test.

In addition, the consistent involvement of the private equity funds in the management of the portfolio company meets the second prong of the Groetzinger test. As Adams further stated,

the typical characteristics of the private equity form of investing [are that e]xperienced, professional fund managers make relatively large and non-diversified investments where they intend to own the companies for a long period of time, typically several years, and intend to exert an active influence over the management and affairs of the company. This consistency and activism of ownership allows the Private Equity Fund to create value by improving the operations, practices, financial conditions, capital structure and governance of the corporation in which it has a controlling shareholding or shares a controlling shareholding (a "Portfolio Company").

Defs.' Mot. for Sum. J., Ex. 12 (Adams Report) at ¶ 17 (emphasis added). The objectives of the three limited partnership defendants in this case were no different: to acquire controlling interest in companies and actively manage that investment. Defs.' Mot. for Sum. J., Exs. 1-3 (Investment Guidelines, Annex B to PEP LP Agrs.) at 1; see also Pls.' Mot. for Sum. J., Ex. 4 (Reymond dep.) at 199-200; Pls.' Mot. for Sum. J., Ex. 6 (Dargatz dep.) at 41 (characterizing the defendants' approach to Portfolio Companies as "hands-on operating and financial approach" and stating that Palladium LPs' objective was "to bring financial expertise to these [troubled] companies" and "to bring resources to bear in finance and operations"). This strategy is far from passive investment discussed in the tax cases. Imposing the burdens of controlled group liability in this instance would be reasonable and consistent with remedial purpose of ERISA.

Of course, the opposite inference could be drawn from the facts as well. Therefore, neither side can prevail as a matter of law on this issue at this stage of the proceedings.

B. Alter ego theory

The plaintiffs also argue that the defendants were the alter ego of the Haden companies and should be liable for withdrawal liability under that theory. Alternatively, the plaintiffs urge the Court to treat the defendants as a single employer. The defendants seek a judgment as a matter of law dismissing those claims.

1. Alter ego

"The alter ego doctrine was developed to prevent employers from evading obligations under the [MPPAA] merely by changing or altering their corporate form." NLRB v. Allcoast Transfer, Inc., 780 F.2d 576, 579 (6th Cir. 1986). The alter ego theory is fundamentally different from the controlled group theory because "[a]n alter ego's liability is the same as the liability of the alleged corporation . . . [and] a controlled group member is jointly and severally liable only if it is a party to the action and the plaintiff obtains a judgment against it." Cent. States, Se. Sw. Areas Pension Fund v. Mississippi Warehouse Corp., 853 F. Supp. 1053, 1059 (N.D. Ill. 1994). The theory has been extended to the MPPAA context. Brown v. Astro Holdings, Inc., 385 F. Supp. 2d 519, 531 (E.D. Pa. 2005).

In the labor law context, courts have employed the so-called "relaxed" version of the alter ego test, which requires a showing that "the two enterprises have substantially identical management, business, purpose, operation, equipment, customers, supervision and ownership," Nelson Elec. v. NLRB, 638 F.2d 965, 968 (6th Cir. 1981), and which is applied in "a more relaxed, less exacting fashion than would be required under federal common law principles," NLRB v. Fullerton Transfer Storage Ltd., Inc., 910 F.2d 331, 336 (6th Cir. 1990). Under the relaxed version of the test, the plaintiff is relieved of the obligation to show intent to avoid labor obligations. See Yolton v. El Paso Tenn. Pipeline Co., 435 F.3d 571, 587-88 (6th Cir. 2006).

The relaxed version of the alter ego test applies in two situations:

The alter ego doctrine is most commonly used in labor cases to bind a new employer that continues the operations of an old employer in those cases where the new employer is "merely a disguised continuance of the old employer." Southport Petroleum, Co. v. NLRB, 315 U.S. 100, 106 (1942); see also Howard Johnson Co. v. Detroit Local Joint Executive Bd., Hotel and Restaurant Employees, and Bartenders Int'l Union, 417 U.S. 249, 259 n. 5 (1974). Increasingly, the term also is applied to so-called double-breasted operations to determine whether two or more coexisting employers performing the same work are in fact one business, separated only in form.

Fullerton Transfer Storage Ltd., Inc., 910 F.2d at 336 (footnote omitted).

In both of these situations, the company sought to be held liable must be engaged in the same line of business as the company originally liable under labor law. See Fullerton Transfer, 910 F.2d at 337 336 n. 7 (explaining that double-breasted operations arise "where a company operating with a unionized work force establishes a second, nonunionized company performing the same work in the same market under the same control") (emphasis added). The relaxed standard is not applicable where the two entities "are, respectively, a corporation engaged in a different business and stockholders and officers of another corporation." Id. at 337. This is so because, unlike in the

situation where employers are able to thwart union obligations by merely changing a corporate form, in which case "intent can too easily be disguised," the application of the relaxed standard is not justified where the businesses are separated into multiple corporations from the get-go, before facing any pension liability repercussions. Ibid.

Under regular iteration of the test, "`an intent to evade' preexisting obligations is `clearly the focus of the alter ego doctrine.'" Trustees of Resilient Floor Decorations Ins. Fund v. A M Installations, Inc., 395 F.3d 244, 248 (6th Cir. 2005) (quoting Cement Masons' Pension Trust Fund v. O'Reilly, 664 F. Supp. 277, 279 (E.D. Mich. 1987)). But see Trustees of Detroit Carpenters Fringe Benefit Funds v. Indus. Contracting, LLC, 581 F.3d 313, 319 (6th Cir. 2009) (recognizing limited application of the Resilient Floor holding and insisting that this quotation referred to the purpose of the alter ego doctrine rather than its formulation). Still, no factor of the test is controlling and all relevant factors must be considered together. NLRB v. Allcoast Transfer, Inc., 780 F.2d at 581-82.

In deciding whether corporate formalities can be disregarded, the Fullerton Transfer court considered the following three factors: "`the amount of respect given to the separate identity of the corporation by its shareholders, the degree of injustice visited on the litigants by recognition of the corporate entity, and the fraudulent intent of the incorporators.'" Fullerton Transfer, 910 F.2d at 340 (quoting Seymour v. Hull Moreland Eng'g, 605 F.2d 1105, 1111 (9th Cir. 1979)). The court instructed: "When fraud is shown, we do not believe that it is always necessary to show the other two factors. Similarly, if both injustice and little respect for the corporate entity are shown, we do not believe it necessary to show fraud. Where extraordinary injustice is shown, it may alone be a sufficient predicate to liability." Ibid.

The defendants in this case argue that the standard test should apply, whereas the plaintiffs advocate for the relaxed test.

2. Single-employer doctrine

The single-employer doctrine permits courts to aggregate several smaller private entities for purposes of determining whether they constitute "employer" within the meaning of federal employment discrimination statutes. See Swallows v. Barnes Noble Book Stores, Inc., 128 F.3d 990, 993 (6th Cir. 1997). Under the doctrine, when there is "sufficient indicia of an interrelationship between the immediate corporate employer and the affiliated corporation to justify the belief on the part of an aggrieved employee that the affiliated corporation is jointly responsible for the acts of the immediate employer," courts may view subsidiary's conduct as that of both subsidiary and a parent. Armbruster v. Quinn, 711 F.2d 1332, 1337 (6th Cir. 1983), abrogated on other grounds by Arbaugh v. Y H Corp., 546 U.S. 500 (2006). Courts must consider "the degree of (1) interrelated operations, (2) common management, (3) centralized control of labor relations, and (4) common ownership." Armbruster, 711 F.2d at 1337 (citations and footnote omitted). No single factor is conclusive, and all four factors need not be present. Ibid.

This "integrated enterprise" test for the presence of a single employer represents a "sort of labor-specific veil-piercing test, first developed by the National Labor Relations Board." Pearson v. Component Technology Corp., 247 F.3d 471, 485 (3d Cir. 2001). Although extended to several employment discrimination statutes, the test has not been applied in the contexts other than to meet the jurisdictional prerequisites of such statutes. Ibid.; see also Stephen F. Befort, Labor Law and the Double-Breasted Employer: A Critique of the Single Employer and Alter Ego Doctrines and a Proposed Reformulation, 1987 Wis. L. Rev. 67, 75 (1987).

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Genuine issue of material fact on the issue of alter ego liability under the standard alter ego liability test as set forth in Fullerton Transfer preclude summary judgment on those counts. At this point, it is unclear how much "respect" the three Palladium LPs paid to Haden's independence, how much "injustice" would be visited upon the litigants through denial of the alter ego liability, and how much the three defendant LPs influenced and controlled the HIG business. Although this theory of liability is weak due to equivocal evidence on the extent to which the defendants' interference with Haden's business rose to the level justifying imposition of alter ego liability, the record before the Court contains some testimony that the Palladium entities took it upon themselves to contact Haden's clients directly, to fire some percentage of Haden's work force, to force Haden to seek Palladium's approval for bids and all capital expenditures, and were generally intimately involved in the operation of Haden. See, e.g., Pls.' Mot. for Sum. J., Ex. 4 (Reymond dep.) at 199-200; Pls.' Mot. for Sum. J., Ex. 6 (Dargatz dep.) at 41. At the summary-judgment stage of the litigation, these facts are sufficient to preclude disposition of the alter ego issues as a matter of law.

IV. Building and construction industry defense

The defendants also assert they were entirely exempt from withdrawal liability by virtue of the "building and construction industry" exemption, 29 U.S.C. § 1383(b), and that they established applicability of this exemption as a matter of law. They argue that the National Fund has admitted that more than 85% of the Haden Corporations' employees were engaged in construction work over the five-year period preceding the assessment, as would be required to trigger the exemption, and therefore, the defendants seek dismissal of the National Fund's claims stated in counts I and II of the amended complaint. The defendants alternatively ask for the opportunity to arbitrate the issue. The plaintiffs argue that the defendants have waived that defense by failing to demand arbitration within 60 days of receiving notice of the assessment of withdrawal liability as required by 29 U.S.C. § 1401(a)(1)(A)-(B).

Under the MPPAA, mulitemployer pension plans can assess proportional liability on withdrawing employers for the unfunded vested benefit obligations of their plans. Ordinarily, a plan assesses such liability when an employer terminates its obligation to contribute or ceases all operations covered by the plan. 29 U.S.C. § 1383(a). However, "in enacting the MPPAA Congress recognized the transitory nature of contracts and employment in the building and construction industry with a specific exception" that defined an event triggering withdrawal liability for employers within that industry differently. Carpenters Pension Trust Fund for N. Cal. v. Underground Constr. Co., 31 F.3d 776, 778 (9th Cir. 1994). Under the building and construction industry exemption, withdrawal for the purposes of the MPPAA withdrawal liability provisions occurs when two conditions are met:

(A) an employer ceases to have an obligation to contribute under the plan, and

(B) the employer —

(i) continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required, or

(ii) resumes such work within 5 years after the date on which the obligation to contribute under the plan ceases, and does not renew the obligation at the time of the resumption.

29 U.S.C. § 1383(b)(2). Therefore, withdrawal depends on whether an employer continues to engage in the covered activity. When the employer covered by this exemption does not continue in the industry, withdrawal liability never occurs. Under the facts in this case, since the Haden companies dissolved, and the Palladium entities never continued the business thereafter, this exception could be a complete defense to the plaintiffs' claims, if it applies.

To qualify for the construction industry exception, an employer must meet the following conditions:

(A) substantially all the employees with respect to whom the employer has an obligation to contribute under the plan [must] perform work in the building and construction industry, and

(B) the plan —

(i) [must] primarily cover[] employees in the building and construction industry, or

(ii) [must be] amended to provide that this subsection applies to employers described in this paragraph.

29 U.S.C. § 1383(b)(1). ERISA does not define the term "substantially all the employees" in subsection (b)(1)(A) of section 4203, 29 U.S.C. § 1383, nor has the Sixth Circuit spoken on that point. However, the Seventh Circuit has defined the phrase to mean 85% or more. See Cent. States, SE SW Areas Pension Fund v. Robinson Cartage Co., 55 F.3d 1318, 1321 (7th Cir. 1995). The term "building and construction industry" must be construed narrowly; work or significant involvement of the employees on the construction site (as opposed to abstract relationship to the construction industry) is a sine qua non to the exception's applicability. Union Asphalts Roadoils, Inc. v. MO-KAN Teamsters Pension Fund, 857 F.2d 1230, 1234-35 (8th Cir. 1988) (cataloguing cases that hold that employers who manufacture construction materials but do not install them at the construction site are not in the building and construction industry). The record contains factual disputes on all these points.

More fundamentally, however, the MPPAA requires that "[a]ny dispute between an employer and the plan sponsor of a multiemployer plan concerning a determination made under sections 1381 through 1399 of [title 29] . . . be resolved through arbitration." 29 U.S.C. § 1401(a)(1). As in many other areas, in withdrawal liability actions under ERISA "arbitration reigns supreme." Mason Dixon, 852 F.2d at 164; see also Trustees of Sheet Metal Workers' Local Union No. 80 Pension Trust Fund v. W.G. Heating Cooling, 555 F. Supp. 2d 838, 853 (E.D. Mich. 2008).

Notably, the main issue before the Court — whether the Palladium defendants are an "employer" under 29 U.S.C. § 1301(b)(1) — falls within one of the three exceptions to the arbitration requirement under the MPPAA outlined in Mason Dixon, 852 F.2d at 165-68, and none of the parties disputes that that issue is properly before the Court.

The issue of the applicability of the building and construction industry exception is another matter. The district courts that have addressed the subject, albeit in unpublished decisions, all hold that this defense is subject to MPPAA's mandatory arbitration requirement. See Trustees of Laborers' Local 310 Pension Fund v. Able Contracting Group, Inc., No. 06-1925, 2007 WL 2238361, at *7 (N.D. Ohio Aug. 1, 2007) (concluding that applicability of the building and construction industry exception is subject to arbitration); Trucking Employees of New Jersey Welfare Fund, Inc. v. Parsippany Constr. Co., No. 08-2763, 2009 WL 1076201, at *2-3 (D.N.J. Apr. 21, 2009) (requiring an employer to arbitrate whether the case falls within the building and construction industry exception); Trustees of Utah Carpenters' Cement Masons' Pension Trust v. New Star/Culp LC, No. 07-699, 2009 WL 321573, at *5 (D. Utah Feb. 9, 2009) (stating that applicability of the exception must have been arbitrated because "an arbitrator skilled in pension and labor matters would have had superior expertise to offer . . . [a]nd this court would have undoubtedly benefitted from a thoroughly developed factual record"). This Court agrees.

The MPPAA establishes strict time frames for demanding arbitration. 29 U.S.C. § 1401(a)(1)(A)-(B). They have not been met in this case. Normally, the employer's failure to submit its dispute to arbitration results in a waiver of any defenses to the imposition of withdrawal liability. 29 U.S.C. § 1401(b)(1). However, because arbitration is conceptualized as an exhaustion requirement, not a jurisdictional prerequisite, Mason Dixon, 852 F.2d at 163; Cent. States, Se. Sw. Areas Pension Fund v. 888 Corp., 813 F.2d 760, 764 (6th Cir. 1987), courts can equitably toll the deadline for initiating arbitration. See Bowers v. Transportacion Maritima Mexicana, S.A., 901 F.2d 258, 264 (2d Cir. 1990); Banner Indus. v. Cent. States, Se. Sw. Areas Pension Fund, 875 F.2d 1285, 1293 (7th Cir. 1989).

For the purposes of the present motion, the Court need not determine if the arbitration deadline should be extended or whether the defendants have waived the defense. If the Court determines that the defendants are employers subject to withdrawal liability under the MPPAA, the parties may have an opportunity to present evidence on the question of equitable tolling. At that time, if the Court decides that equitable tolling applies, the matter can be referred to an arbitrator. If not, then the defense will be deemed waived. In either event, the defendants have not established that they qualify for that defense as a matter of law.

V. Conclusion

The Court finds that the facts in this detailed record present questions that cannot be resolved at the summary judgment stage under Rule 56. Therefore, a trial will be necessary.

Accordingly, it is ORDERED that the defendants' and the plaintiffs' motions for summary judgment [dkt #s 89, 90] are DENIED.

It is further ORDERED that counsel for the parties appear before the Court for a status conference to discuss further case management dates on August 23, 2010 at 4:30 p.m.