Operating Engineers' Pension Trust Fund et al v. Western Power & Equipment Corp. et al

Filing 98

ORDER by Judge Phyllis J. Hamilton granting in part and denying in part 67 Motion to Dismiss (hlk, COURT STAFF) (Filed on 6/23/2011)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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OPERATING ENGINEERS &
PENSION TRUST FUND, et al.,

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Plaintiffs,

No. C 10-4460 PJH

v.
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For the Northern District of California

United States District Court

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WESTERN POWER & EQUIPMENT CORP.,
et al.,

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ORDER GRANTING IN PART AND
DENYING IN PART MOTION TO
DISMISS

Defendants.
_______________________________/

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Defendants’ motion to dismiss the second amended complaint (“SAC”) came on for

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hearing before the court on June 22, 2011. Plaintiffs Operating Engineers’ Pension Trust

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Fund (“Trust Fund”), and individual Trustees of the Trust Fund, F.G. Crosthwaite and

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Russell E. Burns (collectively “plaintiffs”) appeared through their counsel, Shaamini Babu.

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Defendants Case Dealer Holding Company LLC (“Case Dealer”) and CNH America, LLC

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(“CNH America”) (collectively “CNH defendants”) appeared through their counsel, Steven

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Brenneman. Having read all the papers submitted and carefully considered the relevant

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legal authority and the argument of counsel, the court hereby GRANTS defendants’ motion

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in part and DENIES the motion in part, as stated at the hearing, and summarized as

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follows.

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1.

Plaintiffs have amended the complaint to allege two theories of parent liability:

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agency and the single employer, or integrated enterprise, doctrine. SAC ¶ 74 (Fourth

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Cause of Action). A parent corporation may be held liable for the acts of its subsidiary

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“where stock ownership has been resorted to, not for the purpose of participating in the

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affairs of a corporation in the normal and usual manner, but for the purpose of controlling a

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subsidiary company so that it may be used as a mere agency or instrumentality of the

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owning company.” United States v. Bestfoods, 524 U.S. 51, 62-63 (1998). Agency is a

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highly fact-specific inquiry that requires the plaintiff to demonstrate the following elements:

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“‘(1) there must be a manifestation by the principal that the agent shall act for him; (2) the

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agent must accept the undertaking; and (3) there must be an understanding between the

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parties that the principal is to be in control of the undertaking.’” Bowoto v. Chevron Texaco

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Corp., 312 F.Supp.2d 1229, 1239 (N.D. Cal. 2004) (quoting Rubin Bros. Footwear, Inc. v.

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Chemical Bank, 119 B.R. 416, 422 (S.D.N.Y.1990)).

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For the Northern District of California

United States District Court

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To support their claims against CNH for liability as the parent of Case Dealer,
plaintiffs allege the following:
(a)

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that CNH is the sole member of Case Dealer and the two entities share a
website (www.cnh.com);

(b)

in October and November 2008, Thomas H. Graham, the chief negotiator for

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CNH, negotiated with the Union in an attempt to enter into a collective

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bargaining agreement on behalf of the employees of Case Dealer;

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(c)

on November 6, 2008, Case Dealer and CNH’s counsel, Larry G. Hall, sent a

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letter to the Union’s counsel stating that CNH created Case Dealer solely for

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the purpose of acquiring the assets of the WPE defendants;

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(d)

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on November 17, 2008, Michael P. Going, Vice-President and General
Counsel of CNH, executed an agreement on behalf of Case Dealer;

(e)

on November 24, 2008, Graham sent correspondence on letterhead for CNH

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and Fiat Group to Union counsel regarding the negotiations involving the

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employees of Case Dealer;

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(f)

Case Dealer secured a possible release for CNH under the letter agreement.

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SAC ¶ 74 (a) - (f). Taken as true, these allegations are sufficient to allege an agency

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theory of liability. Defendants’ motion to dismiss the agency theory of parent liability is

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therefore DENIED.
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With respect to plaintiffs’ alternative theory of parent liability, the Ninth Circuit has

which the same contractor owns both union and non-union companies, to prevent the

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contractor from avoiding its collective bargaining obligations. UA Local 343 United Ass'n of

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Journeymen & Apprentices of the Plumbing & Pipefitting Industry of the United States &

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Canada v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1469-70 (9th Cir. 1994). Courts have

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applied the single employer doctrine to prevent employers from avoiding their collective

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bargaining obligations by shifting union work to a non-union entity, and the doctrine has

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been extended to the Title VII and employment context to determine employer liability in

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wrongful termination and discrimination disputes. See Cellini v. Harcourt Brace & Co., 51

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For the Northern District of California

recognized the “single employer” theory in the context of a “double breasted” operation, in

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United States District Court

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F.Supp.2d 1028 (S.D.Cal. 1999) (applying integrated enterprise test to parent corporation

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in employee’s sexual discrimination and harassment suit against employer). The Third

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Circuit has recognized that the single employer doctrine was developed by the National

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Labor Relations Board to pierce corporate veils in the limited context of labor relations.

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Pearson v. Component Technology Corp., 247 F.3d 471, 486 (3d Cir. 2001) (“The

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integrated enterprise test, with its focus only on labor relations and its emphasis on

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economic realities as opposed to corporate formalities . . . is demonstrably easier on

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plaintiffs than traditional veil piercing.”) (citation omitted). Pearson noted that the single

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employer test has been applied in cases brought under the Labor Management Relations

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Act, Age Discrimination in Employment Act, the Americans with Disabilities Act, and the

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Fair Labor Standards Act. However, plaintiffs cite no authority that this doctrine has been

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applied to attach general liability to a parent corporation for the subsidiary’s conduct, as

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proposed here. The court therefore GRANTS defendants’ motion to dismiss the single

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employer theory of parent liability against CNH.

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2.

The amended allegations in support of plaintiffs’ claim for breach of contract

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fail to state viable claim for relief because plaintiffs lack third-party beneficiary standing to

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enforce the letter agreement. As the court held in the March 28, 2011 order, a purported

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third-party beneficiary must show that the contract was “made expressly for the benefit of a
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third person.” Doc. no. 66 at 2 (citing Cal. Civ. Code § 1559; Trustees of Screen Actors

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Guild-Producers Pension and Health Plans v. NYCA, Inc., 572 F.3d 771, 779 (2009)).

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Plaintiffs’ amended allegations fail to demonstrate that the letter agreement discloses any

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affirmative promise by Case Dealer to convey unpaid withdrawal liability to the Trust or to

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assume WPE defendants’ withdrawal liability. Rather, the letter agreement recognizes

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WPE defendants’ pre-existing obligations to the ERISA plan, rendering the plan only an

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incidental, not intended, beneficiary of the agreement. NYCA, 572 F.3d at 779-80.

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Accordingly, defendants’ motion to dismiss the breach of contract claim is GRANTED.

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Having previously granted leave to amend, the court dismisses the breach of contract claim
with prejudice.

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For the Northern District of California

United States District Court

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3.

Similarly, plaintiffs’ amended allegations in support of their conversion claim

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do not cure the deficiencies identified by the court in the March 28 order. The SAC fails to

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allege the required elements of (a) ownership of the property and (b) defendants’ wrongful

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act or disposition of property rights. Doc. no. 66 at 4 (citing Oakdale Vill. Grp. v. Fong, 43

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Cal. App. 4th 539, 543-44 (1996)). With respect to the ownership element, the court

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previously held that the letter agreement does not purport to give plaintiffs a property

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interest in the WL Holdback; rather, the WL Holdback was set aside in order to satisfy a

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possible claim by the Trust as to WPE’s withdrawal liability. Doc. no. 66 at 4. The

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amended allegations do not demonstrate that plaintiffs gained an ownership interest in the

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WL Holdback, making plaintiffs’ claim distinguishable from cases recognizing a surety’s

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right to possess set-aside funds where the set-aside was established as a requirement

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under a surety agreement. See Gulf Ins. Co. v. First Bank, 2009 U.S. Dist. Lexis 32488

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(E.D. Cal. April 10, 2009), aff’d, 400 Fed. Appx. 188 (9th Cir. 2010), and Travelers Cas. &

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Surety Co. of America v. RBC Centura Bank, 2008 U.S. Dist. Lexis 80062 (E.D. Cal. April

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29, 2008). This claim is therefore dismissed with prejudice.

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4.

The SAC alleges a claim against WPE and CNH defendants for engaging in

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transactions to evade and avoid withdrawal liability in violation of section 4212(c) of ERISA,

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as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). That
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provision, codified at 29 U.S.C. § 1392(c), states: “If a principal purpose of any transaction

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is to evade or avoid liability under this part, this part shall be applied (and liability shall be

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determined and collected) without regard to such transaction.” The court previously held

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that the allegations demonstrated an arm’s length transaction and did not demonstrate the

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type of sham transaction that is required to violate section 1392(c), and that plaintiffs failed

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to allege that the sale of assets by WPE to Case Dealer, and the resulting letter agreement,

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were entered into for the express purpose of avoiding or evading withdrawal liability. Doc.

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no. 66 at 5 (citing Cuyamaca Meats, Inc. v. San Diego and Imperial Cntys. Butchers' and

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Food Emp’rs' Pension, 827 F.2d 491 (9th Cir. 1987)).
In support of their section 1392(c) claim, plaintiffs now allege that Case Dealer

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For the Northern District of California

United States District Court

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received notice of the claim for withdrawal liability in July and September 2008 and was

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aware of the estimated withdrawal liability provided by the Trust to WPE defendants. SAC

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¶¶ 79-80. Plaintiffs do not contend that the purchase agreement itself was a sham

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transaction but that Case Dealer’s failure to notify the Trust about the WL Holdback

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provision, its failure to release the WL Holdback in accordance with the agreement, and its

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use of the WL Holdback to satisfy a judgment against WPE defendants, resulted in a

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transaction to evade and avoid withdrawal liability. See, e.g., SAC ¶¶ 40, 82-85. Although

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Case Dealer was not the contributing employer, the Second Circuit has held that liability for

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evasion or avoidance of withdrawal liability is not limited to employers, and “any party”

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whose acts have adversely affected the benefits fund is within the reach of the statute. IUE

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AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1056 (2d Cir. 1993). The Ninth Circuit

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has not ruled directly on the issue whether a non-employer can be held liable under section

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1392(c), but has recognized that section 1392(c) extends liability for evasion or avoidance

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to entities other than the contributing employer. See Resilient Floor Covering Pension

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Fund v. M&M Installation, Inc., 630 F.3d 848, 852 n.5 (9th Cir. 2010) (noting that the parties

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did not raise the issue “whether ERISA ‘common control’ or § 1392(c) are the only ways for

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a company to be responsible for another entity’s withdrawal liability”).

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Plaintiffs’ allegations are therefore sufficient to state a claim of evasion or avoidance

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against Case Dealer.

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CNH defendants argue that plaintiffs’ allegations do not satisfy section 1392(c)’s

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“principal purpose” requirement because the principal purpose of the letter agreement was

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to protect Case Dealer from WPE defendants’ non-payment of their potential withdrawal

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liability to plaintiffs. Doc. no. 67 at 18. Though the court has recognized a bona fide

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purpose of the letter agreement at issue, this legitimate purpose does not preclude a

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finding that Case Dealer had other motives or intentions to avoid withdrawal liability. See

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Supervalu, Inc. v. Board of Trustees, 500 F.3d 334, 343-44 (3d Cir. 2007) (bona fide, arm’s
length transactions are not exempt from section 1392(c)). As the Sixth Circuit has

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For the Northern District of California

United States District Court

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recognized, “the language of the MPPAA makes it clear that an employer can have more

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than one principal purpose in conducting a transaction.” Sherwin-Williams Co. v. New York

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State Teamsters Conference Pension and Retirement Fund, 158 F.3d 387, 395 (6th Cir.

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1998).

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Here, plaintiffs allege that Case Dealer received notice of the claim for withdrawal

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liability in July and September 2008, and that in October 2008, CNH’s chief negotiator

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discussed withdrawal liability of about $700,000 with Union representatives. SAC ¶¶ 79-80.

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Plaintiffs allege that despite its knowledge of WPE defendants’ estimated withdrawal

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liability, Case Dealer failed to notify the Trust about the WL Holdback provision, imposed an

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arbitrary one-year deadline from August 29, 2008 to August 29, 2009, and failed to extend

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the WL Holdback Period, all for the primary purpose of evading or avoiding withdrawal

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liability. SAC ¶¶ 83-84. Plaintiffs also allege that Case Dealer failed to release the WL

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Holdback in accordance with the agreement and instead used the WL Holdback to satisfy

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an unrelated judgment to Case Dealer, despite awareness of the withdrawal liability,

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thereby giving itself priority over the Trust’s claim for withdrawal liability as well as the

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claims of other creditors. SAC ¶¶ 40, 82, 85. Plaintiffs’ amended allegations are sufficient

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to raise an issue of fact whether “a principal purpose” of defendants’ transactions was to

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evade or avoid withdrawal liability.
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To the extent that CNH defendants argue that they cannot be held liable for

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withdrawal liability under ERISA because Case Dealer did not assume such liability under

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the letter agreement, section 1392(c) imposes statutory liability for evasion or avoidance

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“without regard” to the terms of the letter agreement. Under Herrmann, any parties who

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participated in a scheme to evade or avoid and to whom assets were improperly transferred

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are liable under section 1392(c). Following the view that ERISA “is remedial legislation

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which should be liberally construed in favor of protecting participants in employee benefits

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plans,” Smith v. CMTA-IAM Pension Trust, 746 F.2d 587, 589 (9th Cir. 1984), the court

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determines that plaintiffs’ amended allegations state a plausible claim against CNH
defendants for evasion or avoidance of withdrawal liability. Defendants’ motion to dismiss

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For the Northern District of California

United States District Court

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the claim under section 1392(c) is therefore DENIED.

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Plaintiffs may file an amended complaint consistent with this order and the order of

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March 28, 2011, within 21 days of the date of this order. No additional claims or parties

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may be added without leave of court. Defendants must answer or otherwise respond within

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21 days after plaintiffs file the amended complaint.

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IT IS SO ORDERED.

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Dated: June 23, 2011
______________________________
PHYLLIS J. HAMILTON
United States District Judge

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