Laborers' Pension Fund v. Lay-Com, Inc.

• Decision Date: 02 September 2009
• Docket Number: No. 06-3821.,No. 06-3711.,No. 07-1071.,06-3711.,06-3821.,07-1071.
• Citation: 580 F.3d 602
• Parties: LABORERS' PENSION FUND, Laborers' Welfare Fund of the Health and Welfare Department of the Construction and General Laborers' District Council of Chicago and Vicinity, and James S. Jorgensen, Administrator of the Funds, Plaintiffs-Appellees/Cross-Appellants, v. LAY-COM, INC., an Illinois Corporation, Lord & Essex, Inc., an Illinois Corporation, and John J. Popp Jr., as Trustee of the Irrevocable Lay Trust Dated December 26, 1995, Defendants-Appellants, and John J. Popp, Jr., individually, Defendant/Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

580 F.3d 602

LABORERS' PENSION FUND, Laborers' Welfare Fund of the Health and Welfare Department of the Construction and General Laborers' District Council of Chicago and Vicinity, and James S. Jorgensen, Administrator of the Funds, Plaintiffs-Appellees/Cross-Appellants, v. LAY-COM, INC., an Illinois Corporation, Lord & Essex, Inc., an Illinois Corporation, and John J. Popp Jr., as Trustee of the Irrevocable Lay Trust Dated December 26, 1995, Defendants-Appellants, and John J. Popp, Jr., individually, Defendant/Cross-Appellee.

No. 06-3711.

No. 06-3821.

No. 07-1071.

United States Court of Appeals, Seventh Circuit.

Argued May 8, 2009.

Decided September 2, 2009.

Patrick T. Wallace (argued), Chicago, IL, for Plaintiffs-Appellees/Cross-Appellants.

Timothy D. Elliott (argued), Rathje & Woodward, Wheaton, IL, for Defendants-Appellants.

Before CUDAHY, MANION and TINDER, Circuit Judges.

CUDAHY, Circuit Judge.

The Laborers' Pension funds won a default judgment against M.A. King Construction, Inc. and King & Larsen Construction, Inc., as well as against Mike King, a director and officer of both companies. Those defendants were judgment proof, so the funds added new defendants in an amended complaint. The district court found some of the new defendants, Lay-Com, Inc., Lord & Essex, Inc. and the Lay Trust—but not John Popp Jr., an individual—liable on a veil-piercing theory, and granted summary judgment to the funds and to Popp Jr. We affirm the decision to pierce M.A. King's veil to reach Lay-Com and Lord & Essex, and we affirm the dismissal of Popp Jr. from suit. The Lay Trust, however, played no role in the transactions that rendered Lay-Com and Lord & Essex liable, nor did it wield control over M.A. King. We therefore reverse with respect to the Lay Trust and dismiss it from the case.

I

The veil-piercing question before us arises from the close relationship among several construction companies located just outside Chicago. Those companies included King & Larsen, a unionized subcontractor that did excavation work and poured foundations and driveways for residential properties. Mike King was King & Larsen's sole shareholder and a director and officer. Lord & Essex is a residential housing contractor that regularly hired King & Larsen to work on its job sites. Lay-Com is a developer of commercial and residential real estate.

Lord & Essex and Lay-Com are owned by the Popp family. More precisely, Lord & Essex is owned by John Popp Jr. and was previously owned by the Lay Trust. Lay-Com is still owned by the Lay Trust, which otherwise exists for the benefit of the Popps. John Popp Sr. and his wife were the trust's primary beneficiaries; Popp Jr. and his sister are secondary beneficiaries and, since Popp Sr.'s death in the midst of this litigation, co-trustees. Popp Sr. was the president and a director of both Lay-Com and Lord & Essex. Popp Jr. remains a director and officer in both companies.

In 1995, King & Larsen entered a collective bargaining agreement that required it to make monthly benefits contributions and payments of union dues to the funds. Late in 2000, King & Larsen began missing payments.¹ The company was suffering financially, and Lord & Essex and Lay-Com began loaning it money and paying some of its bills.² Meanwhile, Popp Sr. and King began plans for a new company called M.A. King Construction that would take over King & Larsen's business. Popp Sr.'s companies were to provide new financing for M.A. King in exchange for a first-lien position on King & Larsen's assets.

M.A. King was incorporated on March 19, 2001, with the Popps and King as directors. The directors elected King as president and treasurer, and King's wife Gail as vice president and secretary. The directors also resolved to issue 25,000 shares of stock to the GAK Irrevocable Living Trust in exchange for a promissory note from the trust for $25,000. Both sides agree, however, that the shares were never issued and the capital contribution was never made. This turns out to be critical. No other capital contributions were made to M.A. King. To be sure, M.A. King did receive other types of financing, but all of it was debt. On April 1, M.A. King received a $250,000 loan from Lay-Com, secured by M.A. King's assets and Mike King's personal guaranty.³ Also on April 1, M.A. King's board (with Mike King abstaining) entered into an employment agreement with King, setting his salary and prohibiting him from spending more than $2,500 on behalf of M.A. King (other than for taxes and payroll) without Lay-Com's consent. King was authorized to enter into banking relationships, but prohibited from borrowing on the corporation's behalf without Lay-Com's written consent.

At the center of the plans of Popp Sr. and King for the creation of M.A. King is a series of transactions (visually represented by Chart 1) that circuitously transferred most of King & Larsen's assets to M.A. King. As described in detail below, those assets traveled first through Lord & Essex and Lay-Com. The defendants have cast these transactions as a service to Mike King, but Popp Sr. arranged the transfer of assets through his companies so that Lay-Com and Lord & Essex could obtain first-lien priority on them before they were transferred on to M.A. King. Mike King agreed to the transactions because Popp Sr. promised to release a junior mortgage on the house of King's mother, Doralee. The defendants thus clearly believed they stood to benefit from the deal.

Chart 1

NOTE: OPINION CONTAINING TABLE OR OTHER DATA THAT IS NOT VIEWABLE

Turning to the series of transactions at the heart of the case, the first occurred on April 24, when King & Larsen and Lord & Essex executed an "Assignment of Collateral and Satisfaction of Debt." In this agreement, King & Larsen assigned all of its assets to Lord & Essex, including $1.2 million in receivables, $80,000 in work in progress, $61,000 worth of shop materials, and perhaps $593,000⁴ worth of vehicles and heavy equipment. In exchange, Lord & Essex released King & Larsen from debts of about $423,000 and assumed $1.1 million in accounts payable and $326,000 in other notes owed by King & Larsen. As even the defendants concede, "[n]otably, [Lord & Essex] declined to assume King & Larsen's tax liabilities and King & Larsen's obligations to the funds." Those liabilities remained in King & Larsen's otherwise empty shell. King & Larsen dissolved on July 2, 2001.

The second set of transactions also took place on April 24. Lord & Essex borrowed from Lay-Com to pay off the outstanding debts it had acquired from King & Larsen, observing corporate formalities when it did so (the companies executed security agreements and promissory notes for the amounts borrowed). Lord & Essex and Lay-Com then executed their own assignment agreement, whereby Lord & Essex satisfied its nascent obligations to Lay-Com by transferring King & Larsen's assets on to Lay-Com. Again the companies observed corporate formalities. Both sides agree that Lord & Essex "was merely a conduit" between King & Larsen and Lay-Com, which had funded Lord & Essex's acquisition from King & Larsen in the first place.

On May 1, the final transaction occurred. Lay-Com and M.A. King entered a "Master Lease and Assignment Agreement," in which Lay-Com leased to M.A. King the vehicles and equipment formerly owned by King & Larsen (these are the assets the defendants valued at $593,000, supra n. 4) and assigned to M.A. King all of King & Larsen's other assets and liabilities. The assignment included the $1.2 million in King & Larsen receivables, the $80,000 in work in progress and the $61,000 in shop materials, as well as the $1.1 million in accounts payable and the $326,000 in other notes. In exchange, M.A. King agreed to make monthly payments of $17,805.24 to Lay-Com starting June 1 and continuing through May 1, 2008. M.A. King also agreed to pay an "operations fee" of 50% of its profits every other month starting July 1, with 15% interest payable on unpaid balances. The Master Lease and Assignment Agreement also contained a third-party distribution restriction (also incorporated in Mike King's employment contract), prohibiting M.A. King from making any payments (except taxes and payroll) to third parties greater than $2,500 without Lay-Com's consent.

M.A. King never made any of the payments required under the Master Lease and Assignment Agreement, nor did it make payments on the April 1 $250,000 loan from Lay-Com. Lay-Com nonetheless continued to loan M.A. King money. Between April and October 2001, Lay-Com made another $268,000 in payments to M.A. King and its creditors, all subject to Mike King's guaranty and the security agreement applicable to the April 1 loan. The Lay Trust also issued five checks to M.A. King between April and August 2001, totaling $277,000. There is no corresponding note or other documentation covering these Lay Trust payments to M.A. King in the record. (The Lay Trust also issued a check to King & Larsen in October 1999 for $40,000.) As further evidence of the various companies' interrelatedness, Lord & Essex made two payments in August for prior King & Larsen services—due to M.A. King under the Master Lease and Assignment Agreement—not to M.A. King but instead to the Lay Trust. Lay-Com also made at least one payment to M.A. King for work performed for Lord & Essex.

Throughout the summer of 2001, M.A. King operated in King & Larsen's stead, picking up its contracts and operating out of the same yard and office, using the same fax and telephone number, the same employees, the same equipment. That summer Mike King also began making payments to the funds for King & Larsen's past-due obligations. (Recall that he had personally guaranteed an installment note for unpaid contributions in February 2001. See supra, n. 1.) But King made those payments, totaling about $100,000, from M.A. King's accounts, not from his personal account or from any account of the defunct King &...