business concern, distinct from its shareholders.
Articles of Incorporation were filed by Pelbro with the Department of State of the Commonwealth of Pennsylvania, and maintained by the corporation (Plaintiffs' Exh. 1). The corporation acquired a corporate minute book (Plaintiffs' Exh. 14) which was maintained by the corporation. Corporate minutes and resolutions were prepared with some degree of regularity (Plaintiffs' Exh. 2, 11). By-laws were adopted by the corporation (Defendants' Exh. 16) and maintained in the corporate minute book. Stock certificates were acquired by the corporation (Plaintiffs' Exh. 14) and issued to the shareholders. A stock transfer ledger (Plaintiffs' Exh. 13) was further acquired by the corporation, kept up-to-date and maintained ledgers and books of account and dutifully maintained its financial records.
Corporate transactions and meetings were reduced to minutes with some degree of regularity, and maintained in the corporate minute book (Plaintiffs' Exh. 2, 11). It should be noted that the courts have universally held that a substantial degree of informality is permissible in the context of the operation of a small, closely held corporation, and informality of little consequence. Zubick v. Zubick, supra, 384 F.2d at 271 fn. 4; Seymour v. Hull Moreland Engineering, 605 F.2d at 1112, fn. 9. Cf., Wolfe v. United States, 798 F.2d 1241, 1244 (9th Cir. 1986) where no records were maintained by the corporation, and Pisani, where the corporate records had been mysteriously lost shortly before trial.
Federal tax returns were timely and consistently filed by Pelbro throughout the course of its operation (Plaintiffs' Exh. 24, 29-41). State income tax returns and corporate stock returns were filed with like regularity (Defendants' Exh. 18-30). Employers quarterly federal tax returns (Defendants' Exh. 31) were also consistently filed by the corporation (N.T. 1081-1085). Financial statements were routinely prepared, including comprehensive depreciation schedules (Plaintiffs' Exh. 19).
Unemployment compensation reports and returns were consistently filed with both the federal and state government, as were workers compensation reports, federal coal excise tax returns and surface and reclamation returns.
Although, generally, most of the shareholder loans made to the corporation were not reflected by formal notes, all of the loans made to Pelbro by its shareholders were recorded in such form on deposit records prepared by Pelbro (Defendants' Exh. 44) and the transactions were recorded as such by Pelbro's accountant.
7. Insolvency of Debtor at the Time. Nearly all of the pertinent decisions that have promulgated factors in determining when it is justifiable to "pierce the corporate veil" have included that of the "insolvency of the debtor at the time". See Solomon v. Klein, supra, 770 F.2d at 354; United States v. Pisani, supra, 646 F.2d at 88: American Bell, Inc. v. Federation of Telephone Workers of Pennsylvania, supra, 736 F.2d at 886; DeWitt Truck Brokers v. W. Ray Flemming Fruit Company, supra, 540 F.2d at 686. These decisions do not, however, provide much insight as to the meaning of the wording "at the time" In Realco Serv. Inc. v. Holt, 513 F. Supp. 435 (E.D.Pa. 1980), the district court added substance to the element by describing the factor as the insolvency of the debtor corporation ". . . at the time of contracting. . . ." 513 F. Supp. at 441. See also, TSS Sportswear Limited v. Swank Shop (Guam), Inc., 380 F.2d 512 (9th Cir. 1967).
Defendants are not sure as to the applicable date at which this Court should determine whether Pelbro was solvent or insolvent. On the one hand, a material date is the time at which Pelbro contracted with the UMWA, e.g., entered into the National Bituminous Coal Wage Agreement of 1978, as described in Paragraph 8 of Plaintiffs' Amended Complaint.
Arguably this date should apply in that the obligation of Pelbro to contribute to the Pension Fund rose out of this Agreement, and the termination of Pelbro's obligation to contribute to the Pension Fund, had its "roots" in this Agreement.
A review of Pelbro's balance sheet for its fiscal year ending August 31, 1978 (Plaintiffs' Exh. 29, Schedule L) reveals that Pelbro was extremely solvent at that time.
On the other hand, it appears that a much stronger argument can be made that the date at which the solvency or insolvency of Pelbro should be determined is the date of "withdrawal", e.g., the date
that Pelbro ceased to have any further obligation to contribute to the Pension Fund, 29 U.S.C. § 1383(a), and the time at which, as Plaintiffs have alleged in Paragraphs 13 and 14 of their Amended Complaint:
As a result of its complete withdrawal from the Trusts, Pelbro . . . incurred withdrawal liability . . . under Section 4201 and 4202(1) ERISA, 29 USC 1381 and 1382(1).
A review of Pelbro's balance sheet at its fiscal year ending August 31, 1981 (Plaintiffs' Exh. 19) reveals that Pelbro was financially strong and extremely solvent at this time, notwithstanding the UMWA strike in March of 1981 that precipitated Pelbro's withdrawal from the Pension Fund.
Perhaps the most reasonable approach, would be to view the corporation's financial picture during the terms of the two collective bargaining agreements between Pelbro and the UMWA, the termination of which led to the withdrawal liability.
To make the determination at any date beyond the date of Pelbro's withdrawal from the Pension Fund would, in effect, change the nature of the Plaintiffs' claim from an "alter ego" approach of "piercing the corporate veil" for the withdrawal liability obligations of the corporation, to that of a type of bankruptcy preferential avoidance action, a fraudulent conveyance theory or, an action under the Avoidance sections of ERISA. None of these claims have been pleaded, and they are not before the Court.
8. Commingling of Funds. An additional factor noted by many courts as relevant to an "alter ego" determination is whether there was substantial commingling of funds between the corporation and its "alter egos". Zubick v. Zubick, supra, 384 F.2d at 271 (". . . no evidence that funds oscillated at will . . ."); Seymour v. Hull and Moreland Engineering, supra, 605 F.2d at 1112 (". . . no evidence of comingling of the personal funds of [the shareholders] with those of the corporation"); Maritime Ventures Inc. v. Caribbean Trading & Fid., 689 F. Supp. 1340, 1353 (S.D.N.Y. 1988) (". . . the deposit of corporate money in a personal account indicates the same disregard for the corporate form as does commingling of funds"). See also, Wolfe v. United States, 798 F.2d 1241, 1244 (9th Cir. 1986) and Mobler v. Braverman, 669 F. Supp. 592, 594 (S.D.N.Y. 1987).
The reasoning behind the analysis in this context is simply that a commingling of corporate funds with the personal funds of the shareholders evidences a substantial disregard for the corporate form. No commingling of Pelbro's corporate funds was ever shown by plaintiffs. To the contrary, Pelbro, at all times maintained separate bank accounts (N.T. 1191-1192) maintained separate financial records, filed separate federal income tax returns (Plaintiffs' Exh. 24, 29-41), Pennsylvania income tax returns and capital stock tax returns (Defendants' Exh. 18-30), financial statements (Plaintiffs' Exh. 19), depreciation schedules (Plaintiffs' Exh. 3-5). Pelbro obtained and consistently used a federal tax identification number (N.T. 1081-1085, Defendants' Exh. 24, 29-41). Pelbro's records were kept separate and apart from any of the other business entities (N.T. 1073-1074). All employees were paid by Pelbro, from Pelbro funds. Pelbro routinely filed employers withholding returns (Defendants' Exh. 31).
All UMWA check-offs and contributions to the Pension Fund were made by Pelbro (N.T. 1122, Defendants' Exh. 38).
In short, there was never any commingling of funds between Pelbro and its shareholders.
9. Siphoning of Funds. The siphoning of funds of a corporation by its shareholders has been recognized as an additional factor in an analysis of whether the shareholders are the "alter ego" of the corporation, so as to justify a piercing of the corporate veil. Solomon v. Klein, supra 770 F.2d at 354; DeWitt Truck Brokers v. W. Ray Flemming Fruit Company, supra, 540 F.2d at 686.
In the case at hand, the Defendant shareholders had made substantial loans to Pelbro, most of which were made by the Defendant shareholders after the date (March 27, 1981) of "withdrawal" and "withdrawal liability", in an effort to maintain the survival of the corporation at the time that the deterioration of the coal seam was discovered and to cover backfilling expenses resulting from the Department of Environmental Resources order.
In general, the shareholder loans to the corporation were not documented through formal Notes or security agreements.
All of the loans, however, were recognized as loans by both the corporation and its shareholders, and were contemporaneously recorded as "loans" on the bank deposits records of Pelbro (N.T. 1191-1192, Defendants' Exh. 44) at the time the loans were made. No interest was paid on the shareholder loans (N.T. 20-21). The shareholder loans were never fully repaid (N.T. 1302-1303).
Circumstances here are drastically different from those presented in United States v. Pisani, supra. There, Dr. Pisani's corporation always operated at a loss, was continuously undercapitalized, never paid dividends, kept no records or minute books, followed no corporate formalities and involved circumstances where Dr. Pisani continuously ". . . operated the corporation with his personal funds . . . ." 646 F.2d at 85, 88.
Circumstances here are more like those presented in Carp. Hlth. & Welfare Fund of Philadelphia v. Ambrose, 727 F.2d 279 (3rd Cir. 1983), an "alter ego" case under ERISA involving delinquent contributions to a union pension fund before the Third Circuit. There, the shareholders also loaned large sums to the corporation. However, as the Court noted:
"There is no evidence in the record to suggest that the Ambroses were taking money out of the corporation for their personal use; rather they acted more like good samaritans for the survival of the corporation." 727 F.2d at 284.
The repayment of legitimate loan obligations by a corporation, to its shareholders, does not, by itself, establish siphoning of funds. Mobler v. Braverman, supra 669 F. Supp at 595. Shareholder loans to a closely held corporation are not improper. Zubick v. Zubick, supra, 384 F.2d at 271.
Nor can any inference be raised that the "management fees" paid by Pelbro to PR & W and Ren-Koe resulted in the siphoning of funds. The aggregate of the management fees paid by Pelbro to these partnerships, throughout the operating existence of the corporation, was $ 65,000 (N.T. 545-555, 558-559). Even assuming, arguendo, that the management fees of $ 528,702 paid by Yellow Creek Coal Sales to PR & W are relevant, it must be noted that the management fees were paid by Pelbro and Yellow Creek Coal Sales for services rendered.
In the context of the operating life of the corporation, the aggregate of all management fees during fiscal years 1977 through 1982 ($ 593,702) is far less than an amount that would be considered reasonable compensation in the coal industry to managers and superintendents, who generally receive compensation of $ 50,000 to $ 75,000 per year (N.T. 74-75).
Nor may the transfers of certain items of equipment by Pelbro to its shareholders be viewed as a siphoning of funds. Pelbro transferred a dragline and certain motor vehicles to shareholders
in 1983. The dragline, having a current market price between $ 350,000 and $ 400,000 (N.T. 378), was transferred to the shareholders and PR & W in consideration of loans previously made by these parties to Pelbro totalling $ 373,383.73 (N.T. 378). The transfer of the dragline resulted in a cancellation of indebtedness of Pelbro to these parties for the loans previously made (N.T. 1200-1202) and the Notes (Defendants' Exh. 45) previously issued by Pelbro on the loans. The corporate minutes (Plaintiffs' Exh. 11, p. 24), dated September 17, 1983, reflect the payment to be in cancellation of the indebtedness of Pelbro to these parties.
The motor vehicles transferred to Defendants had an aggregate "blue book" value of $ 30,000 (Plaintiffs' Exh. 12). Earlier corporate minutes dated July 18, 1983, indicate that the motor vehicles were transferred by Pelbro to the shareholders as partial payment against shareholder loans (N.T. 334-335, Plaintiffs' Exh. 11, p. 20). Later corporate minutes dated January 8, 1984, reflect that the motor vehicles were transferred by Pelbro to the shareholders as compensation for services rendered to the corporation (N.T. 558-593, Plaintiffs' Exh. 11, p. 35).
While these transfers may very well have been pertinent in a bankruptcy "preference" action, or the subject of a separate ERISA claim under the Avoidance statute, 29 U.S.C. § 1392(c)
they occurred long after the withdrawal and the determination of Pelbro's withdrawal liability.
It is very questionable whether the transfers under any circumstances would be viewed as "siphoning", as the transfers were in consideration of pre-existing indebtedness of Pelbro to its shareholders.
10. Fraudulent Intent in Formation. A fraudulent intent behind incorporation has been viewed as exceptionally pertinent. Zubick v. Zubick, supra 384 F.2d at 273; Seymour v. Hull & Moreland Engineering, supra, 605 F.2d at 1111; Laborers Clean-up Contract Administration Trust Fund v. Uriart Clean-up Service, Inc., supra, 736 F.2d at 524-525.
Policy reasons dictate that individuals incorporate in good faith, Seymour v. Hull Moreland, supra. The organization of a corporation as a shield against personal liability does not, however, justify disregard of the corporate entity. In fact, protection against personal liability is one of the recognized purposes behind the corporation. Zubick v. Zubick, supra, at 384 F.2d 273. Indeed, many courts view fraudulent intent behind incorporation as a necessary element of an "alter ego". Operating Engineers Pension Trust v. Reed, 726 F.2d 513, 515 (9th Cir. 1984); Seymour v. Hull & Moreland Engineering, supra, 605 F.2d at 1112-1113; Audit Services, Inc. v. Rolfson, 641 F.2d 757, 764 (9th Cir. 1981).
Absolutely no evidence was produced by Plaintiffs that would raise even a hint of suspicion that there was any bad faith behind the initial corporation. Defendant Nestor Peles stated the reasons behind incorporation, being that of adding continuity of life to the family business, tax reasons (N.T. 84) and as a shield against personal liability (N.T. 984-991).
11. Recent Incorporation. Close proximity of initial incorporation to the date the liability is incurred, has been considered by many courts to be an indicia of a disregard of basic corporate principles requiring adequate capitalization, a sound business plan, a fraudulent intent behind incorporation and may lead to an inference that the corporation is a facade for the operations of its shareholders. As noted in Seymour v. Hull & Moreland Engineering, supra:
"The very fact of continuing to do business for a period of at least five years intends to indicate a good faith use of the corporation to conduct a legitimate business enterprise." 605 F.2d at 1113.