Sheet Metal Workers Local No. 292 Pension Fund v. Palladium Equity Partners Llc.

• Citation: 722 F.Supp.2d 854
• Decision Date: 14 July 2010
• Docket Number: Case No. 08-12586.
• Parties: BOARD OF TRUSTEES, SHEET METAL WORKERS' NATIONAL PENSION FUND, and Board Of Trustees, Sheet Metal Workers Local No. 292 Pension Fund, Plaintiffs, v. PALLADIUM EQUITY PARTNERS, LLC, Palladium Equity Partners II, LP, Palladium Equity Partners II-A, LP, and Palladium Equity Investors II, LP, Defendants.
• Court: U.S. District Court — Eastern District of Michigan

722 F.Supp.2d 854

BOARD OF TRUSTEES, SHEET METAL WORKERS' NATIONAL PENSION FUND, and Board Of Trustees, Sheet Metal Workers Local No. 292 Pension Fund, Plaintiffs,

v.PALLADIUM EQUITY PARTNERS, LLC, Palladium Equity Partners II, LP, Palladium Equity Partners II-A, LP, and Palladium Equity Investors II, LP, Defendants.

Case No. 08-12586.

United States District Court, E.D. Michigan,Southern Division.

July 14, 2010.

Barbara A. Patek, Craig E. Zucker, Erman, Teicher, Southfield, MI, Brian J. Petruska, Jeffrey S. Swyers, Marc H. Rifkind, Slevin & Hart, Washington, DC, for Plaintiffs.

Debra A. Colby, Richard M. Tuyn, Ogletree, Deakins, Bloomfield Hills, MI, Ronald E. Richman, Schulte, Roth, New York, NY, for Defendants.

OPINION AND ORDER DENYING PLAINTIFFS' AND DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT AND SCHEDULING STATUS CONFERENCE

DAVID M. LAWSON, District Judge.

Before the Court are the parties' cross-motions for summary judgment. The plaintiffs, who are multi-employer pension plans, seek to impose the withdrawal liability of a group of bankrupt companies that supplied painting services to industrial customers upon three private equity limited partnerships and their common financial advisor under controlled group (statutory) and alter ego (common law) theories of liability. The Court heard oral argument on the motions on May 10, 2010 and now finds that fact issues preclude summary judgment for either side. Therefore, the motions for summary judgment will be denied.

I. Background

A. Withdrawal liability

The plaintiffs in this case seek to collect millions of dollars of “withdrawal liability” owed by the Haden group of companies under a collective bargaining agreement that benefits the plaintiff pension funds. “Withdrawal liability” is a creature of statute, and finds its source in the Multiemployer Pension Plan Amendments Act (MPPAA), 29 U.S.C. § § 1381-1453, which amended portions of the Employee Retirement Income Security Act of 1974 (ERISA) to increase the financial liability of employers who withdraw from underfunded employee benefit plans. Withdrawal liability can arise when an employer participates in and then withdraws from a multi-employer benefit plan through a collective bargaining agreement. “An employer's withdrawal liability is its proportionate share of the plan's unfunded vested benefits, that is, the difference between the present value of vested benefits (benefits that are currently being paid to retirees and that will be paid in the future to covered employees who have already completed some specified period of service, 29 U.S.C. § 1053) and the current value of the plan's assets.” Concrete Pipe and Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 609, 113 S.Ct. 2264, 124 L.Ed.2d 539 (1993) (citing 29 U.S.C. §§ 1381, 1391 and PBGC v. R.A. Gray & Co., 467 U.S. 717, 724, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984)) (internal quotations omitted).

B. The Haden companies

The Haden group of companies consists of four defunct entities, all Michigan corporations with their principal places of business in Auburn Hills, Michigan. Haden International Group, Inc. wholly owns Haden, Inc., which in turn wholly owns Haden Schweitzer Corporation, which in turn wholly owns Haden Environmental Corporation. Haden Schweitzer Corporation and Haden Environmental Corporation both dissolved on February 1, 2006 as a result of bankruptcy. Prior to bankruptcy, Haden Schweitzer Corporation and Haden Environmental Corporation were in the business of fabricating and installing paint systems for various automobile and other industrial manufacturers. These companies were signatories to a collective bargaining agreement with Local 292 of the Sheet Metal Workers Union and, upon dissolution on February 1, 2006, became subject to withdrawal liability. Plaintiff National Fund assessed $3,369,584.99 against Haden Schweitzer Corporation. Plaintiff Local Fund assessed $8,286,072.09 in withdrawal liability against Haden Schweitzer Corporation. and $1,533,456.80 against Haden Environmental Corporation. Because of its total control over these subsidiaries, Haden International Group, Inc. (HIG) was jointly and severally liable for these amounts. Together, the plaintiffs seek a joint and several judgment against all the defendants in this case in excess of $13 million, plus unpaid interest, statutory damages under 29 U.S.C. § 1132(g)(2)(C), attorney's fees, and costs.

C. The Palladium companies

The plaintiffs allege that the defendants took over the troubled Haden companies before the bankruptcy and as a result are responsible for Haden's withdrawal liability. According to the record presented by the parties, it is undisputed that the four defendants consist of three limited partnerships-Palladium Equity Partners II, L.P. (“PEP II LP”), Palladium Equity Partners II-A, L.P. (“PEP IIA LP”), and Palladium Equity Investors II, L.P. (“PEI II LP”)-and one private equity firm-Palladium Equity Partners, L.L.C. (“PEP LLC”), who acted as an advisor to these partnerships. The limited partners of the three limited partnerships do not overlap, but they all share the same single General Partner: Palladium Equity Partners II, LLC (“PEP II LLC”), which is not a party to this case. It is the relationship among these entities, and their collective relationship with the Haden companies, that form the basis of the dispute in this case.

II. Statutory framework

As mentioned above, to remove incentives for employers to withdraw from financially weak employee benefits plans, Congress amended ERISA in 1980 by enacting the MPPAA, 29 U.S.C. §§ 1381-1453. See Mason & Dixon Tank Lines, Inc. v. Cent. States, SE & SW Areas Pension Fund, 852 F.2d 156, 158 (6th Cir.1988). The MPPAA “requires employers who withdraw, completely or partially, from a multiemployer pension plan to contribute to the plan a proportionate share of the unfunded, vested benefits.” Ibid. Further, to prevent employers from circumventing their ERISA and MPPAA obligations by operating through separate entities, the MPPAA amended Title IV of ERISA to provide that members of the so-called common controlled group are held jointly and severally liable for withdrawal payments. Cent. States Se. & Sw. Areas Pension Fund v. Chatham Props., 929 F.2d 260, 263 (6th Cir.1991). Under the controlled group liability provision,

all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses as a single employer. The regulations prescribed under the preceding sentence shall be consistent and coextensive with regulations prescribed for similar purposes by the Secretary of the Treasury under section 414(c) of Title 26.

29 U.S.C. § 1301(b)(1).

“To impose withdrawal liability on an organization other than the one obligated to the Fund, two conditions must be satisfied: 1) the organization must be under ‘common control’ with the obligated organization, and 2) the organization must be a trade or business.” McDougall v. Pioneer Ranch Ltd. P'ship, 494 F.3d 571, 577 (7th Cir.2007).

Common control is established in one of three ways outlined in the Treasury regulations: through a parent-subsidiary control group, brother-sister control group, or a combined group of trades and businesses under common control. 26 C.F.R. § 1.414(c)-2(a); Cent. States, Se. & Sw. Areas Pension Fund v. Lloyd L. Sztanyo Trust, 693 F.Supp. 531, 538 (E.D.Mich.1988); see also Teamsters Joint Council No. 83 v. Centra, Inc., 947 F.2d 115, 120 n. 5 (4th Cir.1991) (explaining that although the Pension Benefit Guaranty Corporation is charged with developing regulations for implementing section 1301(b), the PBGC has not passed regulations on the subject, so courts have resorted to the Treasury Department regulations concerning what constitutes a common controlled group). The only theory the plaintiffs seem to be pursuing in this case is the parent-subsidiary controlled group. According to the Treasury Department regulations,

The term “parent-subsidiary group of trades or businesses under common control” means one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest with a common parent organization if-

(i) A controlling interest in each of the organizations, except the common parent organization, is owned (directly and with the application of § 1.414(c)-4(b)(1), relating to options) by one or more of the other organizations; and

(ii) The common parent organization owns (directly and with the application of § 1.414(c)-4(b)(1), relating to options) a controlling interest in at least one of the other organizations, excluding, in computing such controlling interest, any direct ownership interest by such other organizations.

26 C.F.R. § 1.414(c)-2(b).

The operative term “controlling interest” used in the regulations is defined, in the case of a corporation, as “ownership of stock possessing at least 80 percent of total combined voting power of all classes of stock entitled to vote of such corporation or at least 80 percent of the total value of shares of all classes of stock of such corporation.” 26 C.F.R. § 1.414(c)-2(b)(2)(i)(A).

It is the plaintiffs' theory that the Palladium entities qualify under the parent-subsidiary regulation as controlling the operation of the Haden companies at the time of the bankruptcy because they owned or controlled more than 80% of the outstanding stock in the Haden companies. The undisputed facts show that the three limited partnerships, under the guidance of their common advisor PEP LLC, acquired substantial interests in HIG beginning in the summer of 2001. At the time of the bankruptcy in February 2006, the stock ownership distribution of HIG's 4.1 million outstanding shares was:

                +------------------------------------+
                ¦¦PEP II         ¦1,842,938.47 shares¦
                ++---------------+-------------------¦

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