Opinion
CIVIL ACTION NO. 03-5272
May 21, 2004
MEMORANDUM
Plaintiffs, a local union and the trustees of various employee benefit funds associated with it, bring this action against Garney Morris, Inc., its President Garnett L. Morris, Jr., and its Secretary Mary Beth Morris. The plaintiffs claim that the defendants failed to make contributions to the union's multiemployer benefit funds in violation of 29 U.S.C. § 1145 and breached a related contract. The plaintiffs also assert that the individual defendants Garnett L. Morris, Jr. and Mary Beth Morris violated their purported duties as fiduciaries under 29 U.S.C. § 1109. In addition, the complaint alleges that all three defendants breached a "forbearance agreement" and have not complied with Pennsylvania's Wage Payment and Collection Law, 43 P.S. § 260.1et seq. Now before the court are the motions of defendants for partial summary judgment, and the motions of plaintiffs for partial summary judgment on liability.
Under Rule 56(c) of the Federal Rules of Civil Procedure, we may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." "A factual dispute is material if it bears on an essential element of the plaintiff's claim, and is genuine if a reasonable jury could find in favor of the nonmoving party."Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 298 F.3d 201 (3d Cir. 2002) (internal quotation marks and citations omitted). We will review the evidence and make reasonable inferences from the evidence in the light most favorable to the nonmoving party. See Wicker v. Consol. Rail Corp., 142 F.3d 690, 696 (3d Cir. 1998). A nonmoving party may not rest upon the allegations or denials of its pleadings, but "the adverse party's response . . . must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e).
I.
We begin with consideration of the motion of plaintiffs for summary judgment against Garney Morris, Inc. on Count I of the complaint under 29 U.S.C. § 1145. This section of the Employee Retirement Income Security Act (ERISA) states in relevant part: "Every employer who is obligated to make contributions to a multiemployer plan under the terms of the plan or under the terms of a collectively bargained agreement shall, to the extent not inconsistent with law, make such contributions in accordance with the terms and conditions of such plan or such agreement." (emphasis added). It is undisputed that Garney Morris, Inc. has failed to make all payments due to the multiemployer benefit funds associated with the plaintiffs. Therefore, we will grant the motion of plaintiffs for summary judgment against the corporate defendant on Count I on the issue of liability.
Counts II and III of the complaint allege that Garnett L. Morris, Jr. and his wife Mary Beth Morris also violated § 1145 in failing to make the required payments to the union's benefit funds. Individual corporate officers are not "employers" as the term is utilized in ERISA.Trustees of Nat'l Elevator Industry v. Lutyk, 332 F.3d 188, 193 n. 4 (3d Cir. 2003). Therefore, the only way that the plaintiffs can proceed against the individual defendants on these counts is by piercing the corporate veil of Garney Morris, Inc. See id. at 192-93;Kaplan v. First Options, 19 F.3d 1503, 1521 (3d Cir. 1994). Our Court of Appeals has expressed doubt about whether we have authority under ERISA to do so when the corporate officer has not been determined to be a fiduciary. Lutyk, 332 F.3d at 193. Nevertheless, without a definitive ruling from that court and out of an abundance of caution, we will analyze the issue.
In determining whether piercing the corporate veil is proper, we will use the Third Circuit's "alter ego" test. See Lutyk, 332 F.3d at 194. "Piercing the corporate veil is a `tool of equity,' a `remedy that is involved when [a subservient] corporation is acting as an alter ego of'" another legal entity. Board of Trustees of Teamsters Local 863 v. Foodtown, Inc., 296 F.3d 164, 171 (3d Cir. 2002) (citations omitted; brackets in Foodtown). The following factors are relevant in determining if the corporate veil should be pierced under an alter ego theory:
gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate records, and whether the corporation is merely a facade for the operations of the dominant stockholder.Lutyk, 332 F.3d at 194; see also Kaplan, 19 F.3d at 1521; United States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981). "While `piercing of the corporate veil is an equitable remedy,' and therefore `the situation must present an element of injustice or fundamental unfairness, . . . a number of these factors can be sufficient to show unfairness.'" Lutyk, 332 F.3d at 194 (citations omitted; ellipsis in Lutyk). The factors are not part of a "rigid test." Id.
The multifactor test of alter ego that we use is practically identical to that proposed by the plaintiffs.
Alter ego liability must be proven by clear and convincing evidence.Id. (citing Kaplan, 19 F.3d at 1522). "In `the application of the alter ego theory to pierce the corporate veil[,] the burden of proof on this issue rests with the party attempting to negate the existence of a separate entity.'" Lutyk, 332 F.3d at 198 (citation omitted).
The first factor for our consideration is whether Garney Morris, Inc. suffered from "gross undercapitalization." We will "look to [Garney Morris, Inc.'s] initial capitalization, asking whether [the] company was adequately capitalized at the time of its organization." Matter of Multiponics, Inc., 622 F.2d 709, 717 (5th Cir. 1980), quoted inLutyk, 332 F.3d at 197. The plaintiffs have made no suggestion that the company was inadequately capitalized at its inception. It was founded in 1977, and operated through late 2002 or early 2003. Between approximately 1998 and 2002, it worked as an electrical subcontractor on various projects at Pearl Harbor, Hawaii. The value of these projects was roughly $350,000, $1,200,000, and $8,000,000, respectively, although the latter project was not completed and Garney Morris, Inc. did not receive full payment for it. In any case, the evidence before us does not suggest that the corporation had any problems with financial solvency until 2002, when it was unable to collect a receivable of $1,300,000 that it is purportedly owed by a company known as Process Facilities, Inc. Garney Morris, Inc. stopped conducting business in March, 2003. Twenty-five years of continued operation, with subsequent setbacks lasting a year or two because of a large unpaid receivable, does not constitute "gross undercapitalization." See Teamsters Health and Welfare Fund of Philadelphia and Vicinity v. World Transp., Inc., 241 F. Supp.2d 499, 504 (E.D. Pa. 2003); see also Lutyk, 332 F.3d at 196.
We next turn to two closely related factors: the corporation's observance of the necessary formalities and the presence of corporate records. See United States v. Golden Acres, 702 F. Supp. 1097, 1105 (D. Del. 1988). Garney Morris, Inc. paid corporate taxes and produced a 1977 certificate of incorporation, an undated document containing bylaws, a few resolutions adopted by the company in 2002, and a rudimentary "share ledger" indicating that Garnett L. Morris, Jr. was the only recipient of the corporation's 1,000 shares of stock. On the other hand, it has not been able to produce any minutes of corporate meetings. Moreover, Mr. Morris was the company's only director, although the plaintiffs have not argued that this violated the corporation's bylaws. Viewing these facts in the light most favorable to the plaintiffs, we must conclude that Garney Morris, Inc. satisfied some but not all corporate formalities.
The parties have not made an issue of whether financial records of the company exist or have been produced. Additionally, in light of the certificate of incorporation and the by-laws which have been produced by Garney Morris, Inc., we are not especially convinced by the argument of plaintiffs that an absence of "articles of incorporation" weighs in favor of piercing the corporate veil.
The plaintiffs do not argue that "nonpayment of dividends" weighs in favor of piercing the corporate veil. The record is silent on this subject. In any event, the nonpayment of dividends to a sole shareholder would not strongly favor the plaintiffs' case here since nonpayment would indicate that Mr. Morris was not improperly drawing assets from the corporation.See Local 397, Int'l Union of Electronic, Electrical Salaried Machine and Furniture Workers v. Midwest Fasteners, 779 F. Supp. 788, 794 (D.N.J. 1992).
Another matter for analysis is "insolvency of the debtor corporation." It may well be true that Garney Morris, Inc. became insolvent in its last couple years of existence. However, it is important to keep in mind that "the very purpose of the corporate form is to limit the liability of investors to the capital they pay in, see Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967); insolvency, without more, is not a factor which can justify piercing a corporate veil."Lutyk, 332 F.3d at 195 (citation omitted). There is nothing before us to indicate that Mr. or Mrs. Morris inappropriately diverted assets at any time, let alone when the company's liabilities may have exceeded assets in 2002 and later. See id. On the contrary, at various points Mr. Morris loaned large sums of money to the corporation to maintain its solvency. By doing so, Mr. Morris acted to save the corporation. His action in this regard militates against piercing the corporate veil. See Teamsters Health Welfare Fund, 241 F. Supp.2d at 504.
We must also determine whether the company's officers and directors were "nonfunctioning." Garney Morris, Inc. did not have a designated Board of Directors. While Mr. Morris was the only director, the company did have officers who performed important functions. Mr. Morris, as President, had responsibilities that varied over time. He managed corporate assets and acted as a salesman and estimator. He also fulfilled roles in customer relations and service. John Robinson, as Vice President, managed the company's daily operations and served as a project manager until his resignation sometime in 2002. Michelle Morris, the Chief Financial Officer, coordinated the company's payables and receivables. To be sure, the duties of the various company officers probably overlapped and changed with the passage of the years. Mary Beth Morris was named Secretary of the corporation, but she had no responsibility over the company's operations or business affairs. Still, her lack of involvement is entirely consistent with the type of corporation before us. That a closely-held corporation has officers or directors who are not functioning does not weigh strongly in favor of veil-piercing.Lutyk at 196. What is clear, however, is that Garney Morris, Inc. had officers who performed important functions for the corporation. This counsels against going behind the corporate veil. See Teamsters Health and Welfare Fund v. World Transportation, Inc., 241 F. Supp.2d 499, 505 (E.D. Pa. 2003).
Finally, we turn to the question of "whether the corporation is merely a facade for the operations of the dominant stockholder." The record contains nothing to establish that Garney Morris, Inc. was a "sham corporation." See Kaplan, 19 F.3d at 1521-23. Indeed, the company engaged in bona fide electrical contracting work for over twenty years.
Even assuming that piercing the corporate veil is permitted under § 1145 where the corporate officers have not been determined to be fiduciaries, we conclude that plaintiffs cannot meet their burden by clear and convincing evidence. As a result, we will grant the motion of defendants Garnett L. Morris, Jr. and Mary Beth Morris for summary judgment on Counts II and III and deny the motion of plaintiffs for summary judgment on these counts.
II.
In Counts IV and V, plaintiffs allege that Garnett L. Morris, Jr. and Mary Beth Morris are liable under 29 U.S.C. § 1109, a section of ERISA that addresses breach of fiduciary duty to employee benefit plan assets. Section 1109 provides in relevant part that
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate. . . .
A corporate officer can be held liable under § 1109 regardless of whether the corporate veil has been pierced. See Teamsters, 241 F. Supp.2d at 505. Such an individual falls within the statute if (1) it is determined that unpaid contributions were "plan assets," and (2) "the individual exercised discretionary control or authority over such assets." Id.; PMTA-ILA Containerization Fund v. Rose, No. 94-5635, 1995 WL 461269 at *4 (E.D. Pa. Aug. 2, 1995).
To determine if the unpaid contributions were plan assets, we examine the agreement that created the benefit plan. Teamsters at 505. If the contract states that the moneys become assets of the employee benefit plan as soon as they are due and owing, then they are deemed "plan assets" from that point forward. See, e.g.,id.; Gagqav v. Gangloff, 677 F. Supp. 295, 301 (M.D. Pa. 1987), aff'd without opinion 932 F.2d 959 (3d Cir. 1991). However, the applicable Health and Welfare Revised Trust Agreement contains different language:
title to all monies paid into said fund shall be vested in and remain exclusively in the Trustees of the Fund, in trust. No Contributing Employer, whether signatory hereto or not, or the Union or any member thereof, or any Employee, or any person claiming by, through or under any of them, shall have any right, title or interest in or to the Fund, or any part thereof, except as provided in any Schedule of Benefits hereby adopted or hereafter amended in accordance with this Agreement.
(emphasis added). Significantly, this agreement does not provide that the moneys are vested in the fund as soon as they are due and owing. Instead, the moneys become vested only at the time they are paid into it.Cf. PMTA-ILA Containerization Fund v. Rose, No. 94-5635, 1995 WL 461269, at *4 (E.D. Pa. Aug. 2, 1995); Galgay v. Gangloff, 677 F. Supp. 295, 301-02 (M.D. Pa. 1987).
The plaintiffs initially argued that moneys can be automatically vested in an ERISA fund by operation of 29 C.F.R. § 2510.3-102(a), which provides in part that plan assets "include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer." However, as the plaintiffs have now conceded, this provision is not applicable here.
Accordingly, the unpaid contributions were never "plan assets," and there can be no basis for holding Garnett L. Morris, Jr. or Mary Beth Morris liable under § 1109. We will grant their motions for summary judgment on Counts IV and V and deny the motion of plaintiffs for summary judgment on Count IV. Since the plaintiffs have failed on the first part of the test, we need not turn to the question of whether the individual defendants were ERISA fiduciaries.
III.
We next turn to Counts VI, VII, and VIII, which allege that the defendants breached the contracts to remit working dues to Local Union No. 98. The defendant Garney Morris, Inc. does not dispute that it was bound by these contracts and that it is in breach by failing to make the proper contributions. Therefore, we will grant the local union's motion for summary judgment on Count VI against Garney Morris, Inc. on the issue of liability.
There are similar claims brought against Mr. and Mrs. Morris in their individual capacities under Counts VII and VIII respectively. As we have explained, they cannot be held liable for the corporation's liabilities as a result of piercing the corporate veil. Therefore, the only way that the plaintiffs could establish liability of the Morrises under these contracts would be if they were actually parties in their individual capacities.
Garnett L. Morris, Jr. did sign one of the contracts which is dated March 5, 1998, obligating Garney Morris, Inc. to remit working dues to the union. However, the language of the contract and the surrounding circumstances make it clear that Mr. Morris did not take on any obligation individually. He merely signed the contract in his position as President of the corporation. Indeed, the section of the one contract that he signed provides:
The other contract, dated November 9, 1998, was signed on behalf of Garney Morris, Inc. by the Vice President John Robinson.
SIGNED FOR THE EMPLOYER
BY [signature of Garnett L. Morris, Jr.]
NAME Garnett L. Morris, Jr.
TITLE/DATE President 3/5/98
Plaintiff's Ex. 3. This is not enough to bind Mr. Morris personally.See Electron Energy Corp. v. Short, 408 Pa. Super. 563, 597 A.2d 175 (1991). Therefore, we shall also grant the motion of Mr. Morris for summary judgment as to Count VII and deny the motion of the plaintiff Local Union No. 98.
Mary Beth Morris was not a party to the contracts, and there is no evidence that she assumed any obligations under them. We will grant her motion for summary judgment on Count VIII, and deny the summary judgment motion of Local Union No. 98.
IV.
In Counts IX, X, and XI, plaintiff Local Union No. 98 charges each of the defendants with violating Pennsylvania's Wage Payment and Collection Law ("WPCL"), 43 P.S. § 260.1 et seq., by failing to remit working dues to the International Brotherhood of Electrical Workers. Garney Morris, Inc. does not dispute that it is in violation of this statute, since it is an "employer," and under the statute "[e]very employer who by agreement deducts union dues from employes' pay or agrees to pay or provide fringe benefits or wage supplements, must remit the deductions or pay or provide the fringe benefits or wage supplements, as required. . . ." 43 P.S. § 260.3. Therefore, we will grant the motion of Local Union No. 98 for summary judgment with regard to liability against Garney Morris, Inc. under Count IX.
The defendants have made no argument that this state statute is preempted by federal law.
Counts X and XI make allegations against Mr. and Mrs. Morris, respectively, in their individual capacities. Regardless of whether the corporate veil has been pierced, individuals may be held personally liable under the Wage Payment and Collection Law if they fall within the statutorily-prescribed definition of "employer." Under the statute,
"Employer." Includes every person, firm, partnership, association, corporation, receiver or other officer of a court of this Commonwealth and any agent or officer of any of the above-mentioned classes employing any person in this Commonwealth.43 P.S. § 260.2a (emphasis added). "This definition has been interpreted as requiring, at a minimum, some indication that the defendant employer exercised a policy-making function in the company and/or an active role in the corporation's decision making process."Tyler v. O'Neill, 994 F. Supp. 603, 616 (E.D. Pa. 1998) (citations omitted).
Upon review of the record before us, Mrs. Morris cannot be considered a policymaker under the terms of the Wage Payment and Collection Law. She did not have any responsibility over corporation finances or daily operations. Mohney v. McClure, 390 Pa. Super. 338 (1990) is directly on point. In that case, the defendant was nominally the "Secretary" of a corporation that had failed to pay employee wages.Id. The Superior Court of Pennsylvania ruled that he could not be liable under the WPCL because there was no indication that he "exercised a policy-making function in the company." Id. at 345 (quoting Central Pennsylvania Teamsters Pension Fund v. Burten, 634 F. Supp. 128 (E.D. Pa. 1986)). Therefore, we will grant the motion of Mary Beth Morris for summary judgment with respect to Count XI.
It is clear, however, that Garnett L. Morris, Jr. was a policymaker of the corporation. He was the founder, President, and sole shareholder of Garney Morris, Inc. He executed a number of contracts purporting to bind the corporation. He was also involved in regular meetings where day-to-day operations of the company were discussed. Because there is no dispute that some working dues were not paid to the union, we will grant the motion of Local Union No. 98 for summary judgment against Mr. Morris on Count X on the question of liability.
V.
Finally, we consider Count XII (incorrectly denominated in the Complaint as Count XI), in which the plaintiffs make a contract claim for violation of the "Forbearance and Repayment Agreement" dated November 11, 2002.
After recognizing Garney Morris, Inc.'s indebtedness to the plaintiffs, this contract provided that the corporation would make a one-time payment of $78,000.00 to the plaintiffs, as well as a payment of $3,000.00 per week for fifty-two weeks beginning on December 2, 2002.
Defendant Garney Morris, Inc. does not dispute that it breached the forbearance and repayment agreement. The remaining issue, however, is whether and to what extent Mr. and Mrs. Morris may be held personally liable for the breach. The agreement was executed by both Garnett L. Morris, Jr. and Mary Beth Morris, in their personal capacities "only as to Paragraph[s] 2(b) and (c)." Agreement at 6. These paragraphs state:
2(b) As additional security for Contractor's obligations . . . Garnett Morris, Jr. and Mary Beth Morris agree to grant to the Funds a mortgage in the real property located at 6139 Emilie Road, Levittown, Pennsylvania.
2(c) The parties agree and acknowledge that the consent of Wachovia Bank, National Association, successor by name change to First Union National Bank, to the security provided by this paragraph 1 2 is required by the loan documents and Contractor [Garney Morris, Inc.] agrees to use its best efforts to obtain that consent.
Garnett L. Morris, Jr. signed the Forbearance Agreement twice, once in his capacity as "President" of Garney Morris, Inc. and once in his personal capacity.
Thus, Mr. and Mrs. Morris agreed on November 11, 2002 to be liable for the debt of Garney Morris, Inc. only up to the value of the mortgage they listed. However, before the obligation became effective, the corporation had to obtain the consent of Wachovia Bank. The plaintiffs have placed nothing in the record to show that the bank has given the appropriate consent or to show that the corporation or Mr. and Mrs. Morris refused to use their best efforts to obtain that consent. Thus, it is clear that the individual defendants cannot be held liable for breach of the forbearance and repayment agreement.
Accordingly, we will grant the motion of the plaintiffs for summary judgment on liability on Count XII against Garney Morris, Inc. The motion of the plaintiffs for summary judgment on Count XII as it relates to Garnett L. Morris, Jr. and Mary Beth Morris will be denied, and the motion of these individual defendants for summary judgment will be granted.
ORDER
AND NOW, this day of May, 2004, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that:(1) the motion of plaintiffs for summary judgment against defendant Garney Morris, Inc. on Count I of the complaint is GRANTED on the question of liability;
(2) the motion of plaintiffs for summary judgment against defendant Garnett L. Morris, Jr. on Counts II and IV of the complaint is DENIED;
(3) the motion of defendant Garnett L. Morris, Jr. for summary judgment against plaintiffs on Counts II and IV of the complaint is GRANTED;
(4) judgment is entered in favor of defendant Garnett L. Morris, Jr. and against plaintiffs on Counts II and IV of the complaint;
(5) the motion of plaintiffs for summary judgment against defendant Mary Beth Morris on Count III of the complaint is DENIED;
(6) the motion of defendant Mary Beth Morris for summary judgment against plaintiffs on Counts III and V of the complaint is GRANTED;
(7) judgment is entered in favor of defendant Mary Beth Morris and against plaintiffs on Counts III and V of the complaint;
(8) the motion of plaintiff Local Union No. 98 for summary judgment against defendant Garnett L. Morris, Jr. on Count VII of the complaint is DENIED;
(9) the motion of defendant Garnett L. Morris, Jr. for summary judgment against plaintiff Local Union No. 98 on Count VII of the complaint is GRANTED;
(10) judgment is entered in favor of defendant Garnett L. Morris, Jr. and against plaintiff Local Union No. 98 on Count VII of the complaint;
(11) the motion of plaintiff Local Union No. 98 for summary judgment against defendant Mary Beth Morris on Count VIII of the complaint is DENIED;
(12) the motion of plaintiff Local Union No. 98 for summary judgment against defendant Garney Morris, Inc. on Counts VI and IX of the complaint is GRANTED on the question of liability;
(13) the motion of plaintiff Local Union No. 98 for summary judgment against defendant Garnett L. Morris, Jr. on Count X of the complaint is GRANTED on the question of liability;
(14) the motion of defendant Mary Beth Morris for summary judgment against plaintiff Local Union No. 98 on Counts VIII and XI of the complaint is GRANTED;
(15) judgment is entered in favor of defendant Mary Beth Morris and against plaintiff Local Union No. 98 on Counts VIII and XI of the complaint;
(16) the motion of plaintiffs for summary judgment against defendants on Count XII (incorrectly denominated as Count XI in the complaint) is GRANTED in part and DENIED in part;
(17) the motion of plaintiffs for summary judgment against defendant Garney Morris, Inc. on Count XII (incorrectly denominated as Count XI in the complaint) is GRANTED on the question of liability;
(18) the motion of plaintiffs for summary judgment against defendants Garnett L. Morris, Jr. and Mary Beth Morris on Count XII (incorrectly denominated as Count XI in the complaint) is DENIED;
(19) the motion of defendants Garnett L. Morris, Jr. and Mary Beth Morris for summary judgment against plaintiffs on Count XII (incorrectly denominated as Count XI in the complaint) is GRANTED; and
(20) judgment is entered in favor of defendants Garnett L. Morris, Jr. and Mary Beth Morris and against plaintiffs on Count XII (incorrectly denominated as Count XI in the complaint).