The opinion of the court was delivered by: HARVEY BARTLE, III, District Judge
Plaintiffs, a local union and the trustees of various employee
benefit funds associated with it, bring this action against Garney
Morris, Inc., its President Garnett L. Morris, Jr., and its Secretary
Mary Beth Morris. The plaintiffs claim that the defendants failed to make
contributions to the union's multiemployer benefit funds in violation of
29 U.S.C. § 1145 and breached a related contract. The plaintiffs also
assert that the individual defendants Garnett L. Morris, Jr. and Mary
Beth Morris violated their purported duties as fiduciaries under
29 U.S.C. § 1109. In addition, the complaint alleges that all three
defendants breached a "forbearance agreement" and have not complied with
Pennsylvania's Wage Payment and Collection Law, 43 P.S. § 260.1
et seq. Now before the court are the motions of defendants for
partial summary judgment, and the motions of plaintiffs for partial
summary judgment on liability.
Under Rule 56(c) of the Federal Rules of Civil Procedure, we may grant
summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue
as to any material fact and that the moving party is entitled to judgment
as a matter of law." "A factual dispute is material if it bears on an
essential element of the plaintiff's claim, and is genuine if a
reasonable jury could find in favor of the nonmoving party."
Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd.,
298 F.3d 201 (3d Cir. 2002)(internal quotation marks and citations
omitted). We will review the evidence and make reasonable inferences from
the evidence in the light most favorable to the nonmoving party. See
Wicker v. Consol. Rail Corp., 142 F.3d 690, 696 (3d Cir. 1998). A
nonmoving party may not rest upon the allegations or denials of its
pleadings, but "the adverse party's response . . . must set forth
specific facts showing that there is a genuine issue for trial."
We begin with consideration of the motion of plaintiffs for summary
judgment against Garney Morris, Inc. on Count I of the complaint under
29 U.S.C. § 1145. This section of the Employee Retirement Income
Security Act (ERISA) states in relevant part: "Every employer
who is obligated to make contributions to a multiemployer plan under the
terms of the plan or under the terms of a collectively bargained
agreement shall, to the extent not inconsistent with law, make such
contributions in accordance with the terms and conditions of such plan or
such agreement." (emphasis added). It is undisputed that Garney Morris,
Inc. has failed to make all payments due to the multiemployer benefit
funds associated with the plaintiffs. Therefore, we will grant the motion
of plaintiffs for summary judgment against the corporate defendant on
Count I on the issue of liability.
Counts II and III of the complaint allege that Garnett L. Morris, Jr.
and his wife Mary Beth Morris also violated § 1145 in failing to make
the required payments to the union's benefit funds. Individual corporate
officers are not "employers" as the term is utilized in ERISA.
Trustees of Nat'l Elevator Industry v. Lutyk, 332 F.3d 188, 193
n.4 (3d Cir. 2003). Therefore, the only way that the plaintiffs can
proceed against the individual defendants on these counts is by piercing
the corporate veil of Garney Morris, Inc. See id. at 192-93;
Kaplan v. First Options, 19 F.3d 1503, 1521 (3d Cir. 1994). Our
Court of Appeals has expressed doubt about whether we have authority
under ERISA to do so when the corporate officer has not been determined
to be a fiduciary. Lutyk, 332 F.3d at 193. Nevertheless,
without a definitive ruling from that court and out of an abundance of
caution, we will analyze the issue.
In determining whether piercing the corporate veil is proper, we will
use the Third Circuit's "alter ego" test. See Lutyk, 332 F.3d
at 194. "Piercing the corporate veil is a `tool of equity,' a `remedy
that is involved when [a subservient] corporation is acting as an alter
ego of'" another legal entity. Board of Trustees of Teamsters Local 863 v. Foodtown,
Inc., 296 F.3d 164
, 171 (3d Cir. 2002) (citations omitted; brackets
in Foodtown). The following factors are relevant in determining
if the corporate veil should be pierced under an alter ego theory:
gross undercapitalization, failure to observe
corporate formalities, nonpayment of dividends,
insolvency of debtor corporation, siphoning of
funds from the debtor corporation by the dominant
stockholder, nonfunctioning of officers and
directors, absence of corporate records, and
whether the corporation is merely a facade for the
operations of the dominant stockholder.
Lutyk, 332 F.3d at 194; see also Kaplan, 19 F.3d
at 1521; United States v. Pisani, 646 F.2d 83
, 88 (3d Cir.
1981). "While `piercing of the corporate veil is an equitable remedy,'
and therefore `the situation must present an element of injustice or
fundamental unfairness, . . . a number of these factors can be sufficient
to show unfairness.'"*fn1
Lutyk, 332 F.3d at 194 (citations
omitted; ellipsis in Lutyk). The factors are not part of a
"rigid test." Id.
Alter ego liability must be proven by clear and convincing evidence.
Id. (citing Kaplan, 19 F.3d at 1522). "In `the
application of the alter ego theory to pierce the corporate veil[,] the
burden of proof on this issue rests with the party attempting to negate
the existence of a separate entity.'" Lutyk, 332 F.3d at 198
(citation omitted). The first factor for our consideration is whether Garney Morris, Inc.
suffered from "gross undercapitalization." We will "look to [Garney
Morris, Inc.'s] initial capitalization, asking whether [the] company was
adequately capitalized at the time of its organization." Matter of
Multiponics, Inc., 622 F.2d 709, 717 (5th Cir. 1980), quoted in
Lutyk, 332 F.3d at 197. The plaintiffs have made no suggestion
that the company was inadequately capitalized at its inception. It was
founded in 1977, and operated through late 2002 or early 2003. Between
approximately 1998 and 2002, it worked as an electrical subcontractor on
various projects at Pearl Harbor, Hawaii. The value of these projects was
roughly $350,000, $1,200,000, and $8,000,000, respectively, although the
latter project was not completed and Garney Morris, Inc. did not receive
full payment for it. In any case, the evidence before us does not suggest
that the corporation had any problems with financial solvency until 2002,
when it was unable to collect a receivable of $1,300,000 that it is
purportedly owed by a company known as Process Facilities, Inc. Garney
Morris, Inc. stopped conducting business in March, 2003. Twenty-five
years of continued operation, with subsequent setbacks lasting a year or
two because of a large unpaid receivable, does not constitute "gross
undercapitalization." See Teamsters Health and Welfare Fund of
Philadelphia and Vicinity v. World Transp., Inc., 241 F. Supp.2d 499,
504 (E.D. Pa. 2003); see also Lutyk, 332 F.3d at 196. We next turn to two closely related factors: the corporation's
observance of the necessary formalities and the presence of corporate
records. See United States v. Golden Acres, 702 F. Supp. 1097,
1105 (D. Del. 1988). Garney Morris, Inc. paid corporate taxes and
produced a 1977 certificate of incorporation, an undated document
containing bylaws, a few resolutions adopted by the company in 2002, and
a rudimentary "share ledger" indicating that Garnett L. Morris, Jr. was
the only recipient of the corporation's 1,000 shares of stock. On the
other hand, it has not been able to produce any minutes of corporate
meetings. Moreover, Mr. Morris was the company's only director, although
the plaintiffs have not argued that this violated the corporation's
bylaws. Viewing these facts in the light most favorable to the
plaintiffs, we must conclude that Garney Morris, Inc. satisfied some but
not all corporate formalities.*fn2
The plaintiffs do not argue that "nonpayment of dividends" weighs in
favor of piercing the corporate veil. The record is silent on this
subject. In any event, the nonpayment of dividends to a sole shareholder
would not strongly favor the plaintiffs' case here since nonpayment would
indicate that Mr. Morris was not improperly drawing assets from the corporation.
See Local 397, Int'l Union of Electronic, Electrical Salaried
Machine and Furniture Workers v. Midwest Fasteners, 779 F. Supp. 788,
794 (D.N.J. 1992).
Another matter for analysis is "insolvency of the debtor corporation."
It may well be true that Garney Morris, Inc. became insolvent in its last
couple years of existence. However, it is important to keep in mind that
"the very purpose of the corporate form is to limit the liability of
investors to the capital they pay in, see Zubik v.
Zubik, 384 F.2d 267, 273 (3d Cir. 1967); insolvency, without more,
is not a factor which can justify piercing a corporate veil."
Lutyk, 332 F.3d at 195 (citation omitted). There is nothing
before us to indicate that Mr. or Mrs. Morris inappropriately diverted
assets at any time, let alone when the company's liabilities may have
exceeded assets in 2002 and later. See id. On the contrary, at
various points Mr. Morris loaned large sums of money to the corporation
to maintain its solvency. By doing so, Mr. Morris acted to save the
corporation. His action in this regard militates against piercing the
corporate veil. See Teamsters Health & Welfare Fund,
241 F. Supp.2d at 504.
We must also determine whether the company's officers and directors
were "nonfunctioning." Garney Morris, Inc. did not have a designated
Board of Directors. While Mr. Morris was the only director, the company
did have officers who performed important functions. Mr. Morris, as
President, had responsibilities that varied over time. He managed corporate assets
and acted as a salesman and estimator. He also fulfilled roles in
customer relations and service. John Robinson, as Vice President, managed
the company's daily operations and served as a project manager until his
resignation sometime in 2002. Michelle Morris, the Chief Financial
Officer, coordinated the company's payables and receivables. To be sure,
the duties of the various company officers probably overlapped and
changed with the passage of the years. Mary Beth Morris was named
Secretary of the corporation, but she had no responsibility over the
company's operations or business affairs. Still, her lack of involvement
is entirely consistent with the type of corporation before us. That a
closely-held corporation has officers or directors who are not
functioning does not weigh strongly in favor of veil-piercing.
Lutyk at 196. What is clear, however, is that Garney Morris,
Inc. had officers who performed important functions for the corporation.
This counsels against going behind the corporate veil. See Teamsters
Health and Welfare Fund v. World Transportation, Inc., 241 F. Supp.2d 499,
505 (E.D. Pa. 2003).
Finally, we turn to the question of "whether the corporation is merely
a facade for the operations of the dominant stockholder." The record
contains nothing to establish that Garney Morris, Inc. was a "sham
corporation." See Kaplan, 19 F.3d at 1521-23. Indeed,
the company engaged in bona fide electrical contracting work for over
twenty years. Even assuming that piercing the corporate veil is permitted under §
1145 where the corporate officers have not been determined to be
fiduciaries, we conclude that plaintiffs cannot meet their burden by
clear and convincing evidence. As a result, we will grant the motion of
defendants Garnett L. Morris, Jr. and Mary Beth Morris for summary
judgment on Counts II and III and deny the motion of plaintiffs for
summary judgment on these counts.
In Counts IV and V, plaintiffs allege that Garnett L. Morris, Jr. and
Mary Beth Morris are liable under 29 U.S.C. § 1109, a section of
ERISA that addresses breach of fiduciary duty to employee benefit plan
assets. Section 1109 provides in relevant part that
Any person who is a fiduciary with respect to a
plan who breaches any of the responsibilities,
obligations, or duties imposed upon fiduciaries by
this subchapter shall be personally liable to make
good to such plan any losses to the plan resulting
from each such breach, and to restore to such plan
any profits of such fiduciary which have been made
through use of assets of the plan by the
fiduciary, and shall be subject to such other
equitable or remedial relief as the court may deem
appropriate. . . .
A corporate officer can be held liable under § 1109 regardless of
whether the corporate veil has been pierced. See Teamsters,
241 F. Supp.2d at 505. Such an individual falls within the statute if (1) it
is determined that unpaid contributions were "plan assets," and (2) "the
individual exercised discretionary control or authority over such assets." Id.; PMTA-ILA
Containerization Fund v. Rose, No. 94-5635, 1995 WL 461269 at *4
(E.D. Pa. Aug. 2, 1995).
To determine if the unpaid contributions were plan assets, we examine
the agreement that created the benefit plan. Teamsters at 505.
If the contract states that the moneys become assets of the employee
benefit plan as soon as they are due and owing, then they are deemed
"plan assets" from that point forward. See, e.g.,
id.; Gagqav v. Gangloff, 677 F. Supp. 295, 301 (M.D.
Pa. 1987), aff'd without opinion 932 F.2d 959
(3d Cir. 1991).
However, the applicable Health and Welfare Revised Trust Agreement
contains different language:
title to all monies paid into said fund shall
be vested in and remain exclusively in the
Trustees of the Fund, in trust. No
Contributing Employer, whether signatory hereto or
not, or the Union or any member thereof, or any
Employee, or any person claiming by, through or
under any of them, shall have any right, title or
interest in or to the Fund, or any part thereof,
except as provided in any Schedule of Benefits
hereby adopted or hereafter amended in accordance
with this Agreement.
(emphasis added). Significantly, this agreement does not provide that
the moneys are vested ...