United Paperworkers Intern. U. v. Penntech Papers, Inc.

Decision Date21 October 1977
Docket NumberCiv. A. No. 77-78 ND and 77-113 ND.
Citation439 F. Supp. 610
CourtU.S. District Court — District of Maine

John J. Flaherty, Preti & Flaherty, Portland, Me., for plaintiffs.

Sidney St. F. Thaxter, II, and Raymond G. McGuire, Curtis, Thaxter, Corey, Lipez & Stevens, Portland, Me., John W. Ohlweiler, and James S. Frank, Simpson, Thacher & Bartlett, New York City, for defendants.


BOWNES, District Judge, By Designation.

This action is brought pursuant to Section 301 of the Labor Management Relations Act of 1947, as amended. 29 U.S.C. § 185.

Plaintiffs are United Paperworkers International Union and its Locals Nos. 36 and 37, International Brotherhood of Firemen and Oilers, Local No. 270, and International Brotherhood of Machinists and Aerospace Workers, Local 559. The defendants are Kennebec River Pulp and Paper Company, Inc., Penntech Papers, Inc., Maine Guarantee Authority, and T. P. Property Corporation.

The issue to be decided is whether Penntech Papers, Inc., which was not a signatory, can be ordered to arbitrate certain provisions of a collective bargaining agreement entered into between the plaintiff Unions and the defendant Kennebec.

Background and Procedural History

The precipitating cause of this law suit was the March 29, 1977, closing of the Kennebec Paper Mill in Madison, Maine. Penntech, through its subsidiary, TP, had acquired all of Kennebec's outstanding capital stock on March 3, 1976. The mill at Madison, which had been shut down since December 20, 1975, was then reopened by Kennebec, but was shut down permanently on March 29, 1977.

The original complaint was filed on April 20, 1977. On April 21, the court issued a temporary restraining order prohibiting the defendants from removing or dissipating any of the property and assets of the defendants located at the Kennebec Mill site. This order was continued by consent of the parties until June 6, 1977. On June 7, the defendants posted surety bonds totalling $175,000, and the temporary restraining order was dissolved. Prior to the termination of the temporary restraining order, Kennebec agreed to and did enter into collective bargaining with the plaintiffs relative to wages, vacation pay, severance pay, pensions, insurance benefits, and other claims made by the plaintiffs under the Union contract.

On July 13, the plaintiffs brought a separate action against TP which is now consolidated with the original action. No one has appeared for the Maine Guarantee Authority, and, since it does not have any role in the present proceedings, it will be ignored.

The resolution of the issue as to whether Penntech can be forced to arbitrate under the collective bargaining agreement requires a careful examination of the corporate relationship between Penntech, Kennebec, and TP, as well as an analysis of the pertinent law.


All of the pertinent facts have been stipulated by the parties. What follows is my summary.

Penntech is a Delaware corporation which owns and operates a mill located in Johnsonburg, Pennsylvania. Its principal corporate offices are located at 600 Third Avenue, New York City. TP is a Delaware corporation organized and owned by Penntech which was incorporated on May 12, 1975. At the time of its incorporation, TP's sole activity was an unsuccessful attempt to purchase a parcel of land in Pennsylvania. TP had no further activity until it acquired Kennebec on March 3, 1976. Every officer or director of TP is also an officer or director of Penntech.1

Penntech and TP share the same corporate headquarters. The title on the door reads only "Penntech Papers, Inc." No portion of the office contains separate space for TP. TP has no separate employees or furniture of its own. It is not a party to the lease for the New York headquarters, nor does it pay salaries to any of its officers.

TP does not employ legal counsel on a regular retained basis, but only when needed, and, in the past, such counsel has been the same as used by Penntech.

Kennebec was incorporated in the State of New York on January 9, 1959. On January 1, 1975, it changed its domicile from New York to Maine. In 1959, Kennebec had acquired the Madison Mills Division of the Economy Corporation, which became Kennebec's headquarters and is the locus of the current dispute.

Kennebec and the plaintiff Unions have been parties to a series of collective bargaining agreements since at least 1961. The present collective bargaining agreement between Kennebec and the plaintiffs covers employees represented by all four Unions.

In 1971, all of the outstanding capital stock in Kennebec was owned by ten educational and charitable institutions. On September 14, 1971, Kennebec effected a $4,953,900 sale and lease-back financing agreement in order to finance the rebuilding of Kennebec's Number One Paper Machine. On March 13, 1973, Southeastern Capital Corporation, a Tennessee corporation headquartered in Atlanta, Georgia, acquired all of the outstanding stock of Kennebec. At the same time, the lease-back agreement and other financial arrangements were amended to lengthen the period for repayment.

Kennebec lost over $8,000,000 on sales of $55,000,000 in the years 1971-1975. On December 20, 1975, Kennebec discontinued operations and laid off all of its employees except for a skeleton force.

TP acquired all of Kennebec's outstanding capital stock on March 3, 1976, as provided in a Stock Purchase Agreement dated March 2, 1976, between Kennebec, SCC and TP. Kennebec then recalled the laid off employees and recommenced operations. Immediately following TP's acquisition of Kennebec's stock, its Board of Directors was filled by Penntech people.2

TP's only assets other than the stock of Kennebec were two parcels of timberland which it acquired subsequent to its purchase of Kennebec and which had previously belonged to Kennebec. TP financed no enterprise other than Kennebec and its current income, if any, derives solely from the sale of its assets.

Prior to its acquisition of Kennebec stock in March of 1976, TP's liquid assets consisted of several hundred thousand dollars obtained by way of an advance from Penntech for the purpose of acquiring Kennebec's stock. TP and Penntech participated in negotiations with Kennebec's creditors which resulted in a write down of Kennebec's debt with four major secured creditors. Penntech guaranteed approximately 25% of the amount due on a nonaccelerated basis as a write down. Neither Penntech nor TP guaranteed Kennebec's debt to other creditors.

Both Penntech and TP were aware of the existence of the collective bargaining agreement in effect between Kennebec and the plaintiff Unions. There were discussions between the officers and directors of Penntech and TP relative to the labor contract prior to the stock purchase. They felt that "certain changes in the contract would be desirable." Ford Dep. at 48, Stip. 16 at 9. Among the desired changes which were conveyed to Kennebec in written form, was a recommendation that the length of time during which the agreement would be in effect be extended. The March 1, 1976, Labor Agreement between Kennebec and the Unions also provided for the revamping of the Kennebec pension plan to comply with the Employee Retirement Income Stabilization Act (ERISA).

Penntech also retained Maine counsel who were the same as represented Kennebec in other matters.

On March 3, 1976, the same day on which TP purchased all of the outstanding stock of Kennebec, TP also advanced $101,000 to Kennebec in exchange for two demand notes in the amount of $100,000 and $1,000 respectively. TP made subsequent advances to Kennebec as evidenced by Kennebec's demand note dated December 31, 1976, in the amount of $2,700,000.

On May 9, 1975, when the 1970 labor contract between Kennebec and the plaintiffs expired, an agreement was executed in which Kennebec and the plaintiffs agreed to defer negotiation of a new labor contract. On November 1, 1975, Kennebec and the plaintiffs entered into a collective bargaining agreement covering the period from November 1, 1975, to June 30, 1977. This was superseded on March 1, 1976, by an agreement which was effective retroactive to January 31, 1976. The Labor Agreement was administered by Kennebec personnel, primarily by John McLeod, Kennebec's Manager of Industrial Relations who had been an employee of Kennebec prior to its acquisition by TP.

In 1976, plaintiffs sought arbitration with Kennebec once. They did not seek arbitration with Penntech or TP at any time prior to this suit.

During the period between March, 1976, and March, 1977, Kennebec maintained its own corporate books of account, its own personnel, payroll, tax and other corporate records at its headquarters in Madison. The corporate minute books and stock books were maintained by Kennebec's clerk, and Kennebec maintained its own bank accounts at two banks in the State of Maine. All payments to employees covered by the collective bargaining agreement were made from a Kennebec bank account. Kennebec filed its own separate withholding tax returns. Matters involving production, scheduling, maintenance, and other operating problems and procedures were left to the direction of Kennebec management. All accounting, bookkeeping, payroll, and other clerical functions were performed by Kennebec employees, and all design, engineering, and maintenance were performed by Kennebec employees. Kennebec obtained and maintained all operating licenses and permits and handled all other regulatory matters. All relations with the employees covered by the collective bargaining agreement were handled by Kennebec's Office of Industrial Relations, including the hiring of personnel, grievance proceedings, insurance enrollment, and processing of workmen's compensation claims, retirement, and termination.

The salaries of Ford and Weinroth, Penntech personnel, were paid by...

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