Railroad Maintenance and Industrial Health and Welfare Fund v. Hacker et al
Filing
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OPINION: Defendant's Motion (d/e 19) is DENIED. This matter is referred back to Judge Cudmore for further pre-trial proceedings. Entered by Judge Sue E. Myerscough on 10/19/2011. (MJ, ilcd)
E-FILED
Thursday, 20 October, 2011 09:16:36 AM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
RAILROAD MAINTENANCE AND
INDUSTRIAL HEALTH AND WELFARE
FUND,
Plaintiff,
v.
MATTHEW E. HACKER, individually,
VINCENT HERMAN, individually, and
TRACK SERVICES, INC.
Defendants.
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No. 10-3305
OPINION
SUE E. MYERSCOUGH, U.S. District Judge:
This matter is before the Court on the Motion to Dismiss Second
Amended Complaint (d/e 19) (Motion) of Defendants Matthew E.
Hacker, Vincent Herman, and Track Services, Inc. Because the
allegations in Plaintiff’s Second Amended Complaint are sufficient to
avoid dismissal under Federal Rule of Civil Procedure 12(b)(6),
Defendants’ Motion is DENIED.
I. BACKGROUND
A. The Second Amended Complaint
On March 24, 2011, Plaintiff filed its three-count Second
Amended Complaint (d/e 18) which alleges as follows. Plaintiff Railroad
Maintenance and Industrial Health and Welfare Fund (the Fund) is an
employee benefit plan created and administered pursuant to a Restated
Agreement and Declaration of Trust. The Fund is administered in
accordance with the Labor Management Relations Act of 1947 and the
Employee Retirement Income Security Act of 1974 (ERISA). The Fund
entered into an agreement with H&H Trackworks, Inc. to receive
employer contributions on behalf of the corporation’s employees.
H&H Trackworks, Inc. is a railroad and industrial equipment
contractor located in Bartonville, Illinois, that employed members of
Operating Engineers Local 150 who participated in the Fund pursuant to
a Participation Agreement and Letter of Assent. Defendant Hacker is a
five percent owner and the President of H&H Trackworks, Inc.
Defendant Herman owns the remaining ninety-five percent interest in
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H&H Trackworks, Inc. and serves as its Secretary. Defendant Track
Services, Inc. is a Tennessee corporation owned by Tracy J. Hacker and
Barb Herman, the spouses of Defendants Matthew Hacker and Vincent
Herman.
Count I of the Second Amended Complaint alleges that Hacker
and Herman each breached the duties incumbent upon an ERISA plan
fiduciary pursuant to 29 U.S.C. §§ 1104 and 1145. Count II alleges
that Hacker and Herman each breached the terms of a Trust Agreement
between Plaintiff and H&H Trackworks. Finally, Count III alleges that
Track Services, Inc. is the alter ego of H&H Trackworks and is therefore
liable for the amounts owed the Fund.
B. Allegations Relating to H&H Trackworks’ Bankruptcy
Plaintiff brought this suit to recover unpaid employer
contributions, liquidated damages, interest, and audit costs it alleges are
owed to the Fund. Initially, Plaintiff sought to recover directly from
H&H Trackworks, Inc. Plaintiff hired Romolo and Associates, an
accounting firm, to do anaudit of H&H Trackworks’ payroll records.
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Romolo and Associates determined that H&H Trackworks owed a total
of $41,281.16 in contributions, interest, liquidated damages, and audit
costs for a period from January 1, 2006 through December 31, 2008.
Further, except in June 2010, Defendants submitted contribution
reporting forms to the Fund without contribution payments from
January 1, 2009 through October 2010. Including the cost of the audit,
Plaintiff alleges Defendants owe a total of $276,084.22. However,
Plaintiff’s suit against H&H Trackworks was dismissed due to H&H
Trackworks’ bankruptcy.
On October 28, 2010, H&H Trackworks filed a Chapter 11
bankruptcy. On November 22, 2010, at the first meeting of creditors in
the bankruptcy proceeding, Defendant Hacker stated under oath that he
was responsible for deciding which H&H Trackworks’ creditors to pay,
and that he decided not to pay Plaintiff the contributions H&H
Trackworks owed. In addition, Hacker noted that Defendant Herman
contributed significant capital to the business operations of the
corporation. Further, Hacker stated that, prior to H&H Trackworks’
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bankruptcy filing, H&H Trackworks had “migrated customers” to a new,
nonunion company, Track Services, Inc. Hacker also concurred with the
statement that Track Services, Inc. was a “spin off” corporation of H&H
Trackworks. Track Services is in the same business as H&H Trackworks
and uses H&H Trackworks’ equipment in its operations. Ten employees
laid off by H&H Trackworks were rehired by Track Services. As noted
earlier, Track Services, Inc. is owned by Tracy J. Hacker and Barb
Herman, the spouses of Defendants Hacker and Herman.
Prior to its bankruptcy, H&H Trackworks had assets of
$1,845,616. The company had gross receipts of $2,819,787 in 2009
and $1,500,000 in 2010. Following its bankruptcy filing, H&H
Trackworks has paid Track Services $48,500.
C. Agreements between the Fund and H&H Trackworks
There are multiple agreements bearing on the present case. As
noted, H&H employees participated in the Fund pursuant to a
Participation Agreement and Letter of Assent. Plaintiff asserts that
Defendants, through H&H Trackworks, are bound by the Letter of
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Assent as well. The Letter of Assent incorporates the terms and
conditions of the Rail Transportation and Operation Agreement
(RTOA). Section 1(A)(1) of the RTOA provides in pertinent part that,
“The Employer agrees to make payment to . . . the Railroad Maintenance
and Industrial Health and Welfare Fund . . .” Further, § 7F of the
RTOA states, “[p]ayment . . . shall be made by the Employer no later
than the fifteenth (15th) day of the month following the month for
which the payments are required.” Finally, Article VI(B)(1) of the
RTOA reads, “All contributions due and owing to any of the fringe
benefit fund[s] mentioned in this Article are deemed and are considered
to be trust funds”; the fringe benefit fund referenced is the Railroad
Maintenance and Industrial Health and Welfare Fund.
Second, H&H Trackworks also agreed to be bound by the terms of
the Trust Agreement of the Railroad Maintenance and Industrial Health
and Welfare Fund. The Trust Agreement stipulates that for:
any willful violation of any of the requirements of this Trust
Agreement . . . those officers and directors . . . who supervised
the completion of the report form, signed report form, or can
be determined to have had personal knowledge of such
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conduct, shall be personally liable for any underpayment or
other pecuniary loss to the fund as a result of such conduct.
The Trust Agreement goes on to mandate payment of employer
contributions, payment of liquidated damages when appropriate, and
payment of contributions, liquidated damages, and interest owed
following an audit.
It is essential to note that the documents provided by Plaintiff
obliged H&H Trackworks, Inc. to make monthly employer contributions
to the Fund. These contributions were calculated by multiplying a set
contribution amount for each type of employee by the total number of
employees of that type.
D. Defendants’ Motion to Dismiss
On April 8, 2011, Defendants filed their Motion and an
accompanying Memorandum in Support of its Motion to Dismiss the
Second Amended Complaint. Defendants contend that all three counts
of the Second Amended Complaint fail to state a claim. Defendants
argue that Count I fails to state an actionable claim because all of its
factual allegations pertain to actions taken by Hacker or Herman in their
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capacities as corporate officers. In addition, Defendants contend that,
under ERISA, personal liability for a breach of fiduciary duties should
not be permitted absent knowledge of one’s status as a fiduciary.
Similarly, Defendants argue Count II should be dismissed because: (1)
Hacker signed the agreements between the Fund and H&H Trackworks
in only his corporate capacity; (2) Herman did not sign any of the
agreements; and (3) the language of the Trust Agreement which
purportedly creates personal officer and director liability is not
implicated by the pleaded facts. Finally, Defendants argue that the
Second Amended Complaint fails to adequately plead facts creating the
likelihood that Track Services, Inc. acted as the alter-ego of H&H
Trackworks, Inc.
II. STANDARD
A Rule 12(b)(6) motion to dismiss asserts that a complaint fails to
state a claim upon which relief may be granted. See Fed.R.Civ.P.
12(b)(6); Patten v. Northern Trust Co., 703 F. Supp. 2d 799, 803 (N.D.
Ill. 2010). To properly state a claim, a plaintiff must plead a “short and
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plain statement of the claim showing that the pleader is entitled to
relief.” Fed.R.Civ.P. 8(a)(2). A complaint will survive a Rule 12(b)(6)
challenge if it provides the defendant with fair notice of the claim’s basis
and establishes that, taken at face value, the requested relief is plausibly
available. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d
868 (2009); see also Bell Atlantic v. Twombly, 550 U.S. 544, 555, 127
S.Ct. 1955, 167 L. Ed. 2d 929 (2007). A claim is facially plausible when
the plaintiff pleads facts that allow the court to draw a reasonable
inference that the defendant is liable for the alleged misconduct. See
Bissessur v. Indiana University Bd. Of Trustees, 581 F.3d 599, 602 (7th
Cir. 2009), citing Ashcroft, 129 S. Ct. at 1949. In evaluating such a
motion, the court accepts as true all well-pleaded facts in the complaint
and draws in favor of the plaintiff all reasonable inferences those facts
entail. In re marchFIRST, Inc., 589 F.3d 901, 904 (7th Cir. 2009), citing
Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008). Finally,
allegations made “on information and belief” remain permissible when
matters alleged are particularly within the defendants’ knowledge. See
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Fed.R.Civ.P. 8(a); see also Trustees of the Auto. Mechanics’ Industry
Welfare and Pension Funds Local 701 v. Elmhurt Lincoln Mercury, 677
F. Supp. 2d 1053, 1054 (N.D. Ill. 2010).
III. ANALYSIS
A. Count I: Breach of Fiduciary Duty
ERISA imposes a duty on fiduciaries to act “solely in the interest of
the participants and beneficiaries” “with the care, skill, prudence, and
diligence . . . that a prudent man acting in like capacity . . . would use.”
29 U.S.C. § 1104(a)(1) and §1104(a)(1)(B). A claim under ERISA
asserting a breach of fiduciary duty requires a showing that: (1)
defendant is a fiduciary; (2) defendant acted toward the plan in some
way covered by the statute; (3) a fiduciary duty imposed upon the
defendant was breached by that act; and (4) the breach caused damage
or loss to the plan. See Jenkins v. Yager, 444 F.3d 916, 924 (7th Cir.
2006). Officers and employees who are ERISA fiduciaries (and thus
“wear” both a corporate and a fiduciary “hat”) are required to wear only
the fiduciary “hat” when making fiduciary decisions. Pegram v.
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Herdrich, 530 U.S. 211, 225, 120 S.Ct. 2143, 147 L. Ed. 2d 164
(2000).
The status of unpaid contributions is the crux of the present
action. Taken in the light most favorable to the Plaintiff, the pleadings
raise the inference that, if the Defendants owed the Fund a fiduciary
duty, the Fund has a plausible claim for relief.
Courts considering ERISA claims consistently have given the term
“fiduciary” a liberal interpretation. See Central Ill. Carpenters Health &
Welfare Trust Fund v. S & S Fashion Floors, Inc., 516 F. Supp. 2d 931,
934 (C.D. Ill. 2007), citing Baker v. Kingsley, 387 F.3d 649, 663-664
(7th Cir. 2004), Mutual Life Ins. Co. of N.Y. v. Yampol, 840 F.2d 421,
425 (7th Cir. 1988). An individual is a fiduciary with respect to an
ERISA plan “to the extent (i) he exercises any discretionary authority or
discretionary control respecting management of such plan or exercises
authority or control respecting management or disposition of its assets.”
29 U.S.C. § 1002(21)(A). It follows that an employer of ERISAparticipating employees does not acquire fiduciary status by means of
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such employment alone. See In re Luna, 406 F.3d 1192, 1205 (10th Cir.
2005) (citations omitted). The phrase “to the extent” entails a factintensive analysis in which “a court must ask whether [a] person is a
fiduciary with respect to the particular activity at issue.” Baker v.
Kingsley, 387 F.3d 649, 660 (7th Cir. 2004), quoting Plumb v. Fluid
Pump Serv. Inc., 124 F.3d 849, 854 (7th Cir. 1997). Indeed, an
individual need not be expressly designated as a plan fiduciary; fiduciary
status should be analyzed “in functional terms of control and authority
over the plan.” Ruiz v. Continental Cas. Co., 400 F.3d 986, 990 (7th Cir.
2005), citing Mertens v. Hewitt Assocs., 508 U.S. 262, 113 S. Ct. 2063,
124 L. Ed. 2d 161 (1993).
The Seventh Circuit has not held precisely when unpaid ERISA
contributions qualify as plan assets. However, the court in Central Ill.
Carpenters conducted a thorough survey of courts’ holdings in similar
circumstances. The Central Ill. Carpenters court held that absent
contractual language that states otherwise, employee contributions
withheld from paychecks are plan assets while still in an employer’s
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control, but that employer contributions are merely contractual duties of
the employer toward the fund and confer on officers or directors no
fiduciary duties. See Central Ill. Carpenters, 516 F. Supp. 2d at 936-37;
Luna, 406 F.3d at 1205-06. However, the Central Ill. Carpenters court
noted that other courts have held that specific language in plan
documents or governing trust documents can override the general
principle that employer contributions cannot create fiduciary duties.
Central Ill. Carpenters, 516 F. Supp. 2d at 936-937, citing ITPE Pension
Fund v. Hall, 334 F.3d 1011, 1014 (11th Cir. 2003) (additional citations
omitted). Significantly, the court in Luna noted that the language of the
collective bargaining and trust agreements at issue were “at best
ambiguous regarding the point when unpaid contributions become plan
assets” when it held that employer contributions created no fiduciary
duties. Luna, 406 F.3d at 1200-201; see also Central Ill. Carpenters,
516 F. Supp. 2d at 937 (noting that governing documents “provide [no]
guidance in determining whether unpaid contributions constitute assets
of the Funds”).
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Here, Plainiff alleges Article VI(B)(1) of the RTOA specifically
states that all contributions owed to the Fund are deemed to be trust
funds. The Second Amended Complaint also alleges specific statements
made by Defendant Hacker indicating his exercise of authority to not
pay contributions to the Fund. Although the allegation regarding
Defendant Herman’s involvement in the decision making process is
based only on information and belief, the role of a corporate director and
officer in the internal decisions of the company is peculiarly within the
Defendants’ knowledge. These allegations are sufficient to state a claim
for breach of fiduciary duty. The Court has noted above that other
courts have varied, depending on the circumstances, on the issue of
whether an employer who fails to make contributions to an ERISA plan
is acting in a fiduciary capacity when it does so or fails to do so. The
Court need not make such a determination on a motion to dismiss.
Therefore, Defendant’s Motion to Dismiss as to Count I of the Second
Amended Complaint will be denied.
B. Count II: Breach of the Trust Agreement
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In Count II, Plaintiff contends the terms of the Trust Agreement
make Defendant’s Hacker and Herman personally liable for the amounts
claimed. When “the plaintiff submits along with its complaint copies of
contracts and other documents referenced therein, the court may
consider them.” Metro Federal Credit Union v. Federal Insurance Co.,
607 F. Supp. 2d 870, 873-74 (N.D. Ill. 2009). “[I]f the unambiguous
terms of an attached contract conflict with the plaintiff’s allegations, the
contract controls.” The Agreement states the following:
Where an audit discloses a substantial difference
between hours actually worked and an employee’s hours
reported to the Trust by his Employer, or where the matter
has been referred to Fund Counsel for collections or to obtain
an audit, regardless of whether the audit discloses a
delinquency, the Employer must pay the cost of the audit.
Furthermore, where such audit discloses any willful violation
of any of the requirements of the Trust Agreement or rules
and regulations adopted in connection herewith, those
officers and directors of such Employer, if a corporation, who
supervised the completion of the report forms, signed report
forms, or can be determined to have had personal knowledge
of such conduct, shall be personally liable for any
underpayment or other pecuniary loss to the Fund as a result
of such conduct. Nothing herein shall prevent a personal
liability for owners or partners who are not otherwise
incorporated. . . .
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In the event an Employer party to this Trust Agreement
or otherwise bound thereby becomes delinquent in his
contributions and the Trustees place the account in the hands
of legal counsel for collection, said delinquent Employer shall
be liable for reasonable attorney’s fees and for all reasonable
costs incurred in the collection process, including court fees,
audit fees, etc.
Defendants argue that the separation into a second paragraph of
conditions pertaining to delinquent employers implies that only its
provisions could be pertinent to the present case. Reading the first
paragraph to refer only to employers who return willfully inaccurate
report forms, Defendants assert that the Trust Agreement makes H&H
Trackworks liable and preclude’s Defendants Hacker’s and Vincent’s
personal liability. In relevant part, the language of the Trust Agreement
that creates personal liability states: “where such audit discloses any
willful violation of any of the requirements of the Trust Agreement or
rules and regulations adopted in connection herewith, those officers and
directors of such Employer, if a corporation, who supervised the
completion of the report forms, signed report forms, or can be
determined to have had personal knowledge of such conduct, shall be
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personally liable for any underpayment or other pecuniary loss to the
Fund as a result of such conduct.”
Count II of the Second Amended Complaint alleges, in part, that
an audit showed Defendants owed $41,281.16 in contributions, interest,
liquidated damages, and audit costs for the period from January 1, 2006
through December 31, 2008. Plaintiff alleges Defendants willfully
violated the terms of the Trust and RTOA Agreements by failing to make
prompt contributions to the Trust Fund and willfully diverted plan assets
and used those assets for other purposes. Further, Plaintiff alleges
Defendants Hacker and Herman both had personal knowledge of the
willful conduct and that Defendant Hacker supervised the completion of
the report forms and the report forms contained his signature stamp.
Therefore, Plaintiff has sufficiently alleged a breach of the Trust
Agreement against Defendants Hacker and Herman to survive dismissal
under 12(b)(6).
C. Count III-Alter Ego Liability
Plaintiff alleges in Count III of the Second Amended Complaint
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that Track Services, Inc. is the “alter ego” of H&H Trackworks, Inc. In
general, the alter ego doctrine analysis incorporates the single employer
doctrine, which determines when two employers will be treated as a
single entity. See Boudreau v. Gentile, 646 F. Supp. 2d 1016, 1021
(N.D. Ill. 2009) (citations omitted). However, alter ego liability places
added emphasis on “the existence of a disguised continuance of a former
business entity or an attempt to avoid the obligations of a collective
bargaining agreement . . . . ” Trustees of Pension, Welfare and Vacation
Fringe Ben. Funds of IBEW Local 701 v. Favia Elec. Co., Inc., 995 F.2d
785, 788-789 (7th Cir. 1993), quoting Int’l Union of Operating
Engineers v. Centor Contrators, 831 F.2d 1309, 1312 (7th Cir. 1987).
The following criteria are examined in determining whether two
companies are a single entity: (1) interrelation of operations, (2)
common management, (3) common ownership, and (4) centralized
control of labor relations. Boudreau, 646 F. Supp. 2d at 1021, quoting
Moriarty v. Svec, 164 F.3d 323, 332 (7th Cir. 1998). No single factor is
conclusive; the court must weigh the totality of the circumstances.
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Esmark, Inc. v. N.L.R.B., 887 F.2d 739, 753 (7th Cir. 1989). Indeed,
“[m]eeting all of the elements of the single employer doctrine is not
essential to a finding that the alter ego doctrine applies.” Favia Elec.
Co., 995 F.2d at 789 (citations omitted). Courts have found alter ego
relationships even when there is no evidence of common ownership. See
Central States Pension Fund v. Sloan, 902 F.2d 593, 597 (7th Cir. 1986).
Thus, “unlawful motive or intent are critical inquiries in an alter ego
analysis . . . .” Favia Elec. Co., 995 F.2d at 789, quoting Centor
Contractors, 831 F.2d at 1312. Finally, “[n]either the courts nor the
National Labor Relations Board have limited the alter ego analysis to
those fact patterns where the original employer has disappeared entirely .
. . . ” Central States, 902 F.2d at 597 (7th Cir. 1990), quoting Crest
Tankers, Inc. v. National Maritime Union, 796 F.2d 234, 238 (8th Cir.
1986).
Plaintiff has not alleged that H&H Trackworks and Track Services
shared common management. However, Plaintiff has affirmatively
stated that Track Services, Inc. is owned by the spouses of Defendants
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Hacker and Herman, not the Defendants themselves. Moreover,
Plaintiff’s alleges that Track Services, Inc. is in the same field as H&H
Trackworks, employs a significant number of former H&H Trackworks
employees following layoffs, and uses leased equipment from H&H
Trackworks raises a plausible claim for relief based on alter ego liability.
The pleadings, taken in the most favorable light, demonstrate that Track
Services uses H&H equipment for the same purposes for which it was
used by H&H. The fact that the lease agreement for such equipment
between Track Services and H&H is based on market rates is offset by
the significant amount of money H&H has paid Track Services since the
former corporation’s bankruptcy. Further, the assets and gross receipts
of H&H leading up to its bankruptcy, coupled with the layoffs and
subsequent hiring by Track Services of ten H&H employees, allow a
plausible inference of an attempt to avoid ERISA obligations. Finally,
Defendant’s suggestion that the lack of common ownership or the
continued existence of H&H renders Plaintiff’s claims generally
implausible runs counter to Seventh Circuit precedent. See Central
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State’s, 902 F.2d at 597. Therefore, Defendants’ Motion to Dismiss
Count III will be denied.
IV. CONCLUSION
THEREFORE, Defendant’s Motion (d/e 19)is DENIED. This
matter is referred back to Judge Cudmore for further pre-trial
proceedings.
IT IS SO ORDERED.
ENTER: October 19, 2011.
FOR THE COURT:
s/ Sue E. Myerscough
SUE E. MYERSCOUGH
United States District Judge
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