Reed Smith Client Alert

Authors: Allison Warden Sizemore

Pacific Coast Shipyards Pension Fund v. Nautical Engineering, Inc.

On January 13, 2014, the U.S. District Court for the Northern District of California (the "District Court") granted a motion to dismiss, holding that a family trust and its sole trustee were not liable to a multiemployer pension fund for the withdrawal liability of a company wholly owned by the trust. This case provides helpful guidance regarding when a business owner is considered to be operating a "trade or business," such that it may be jointly responsible for withdrawal liability of the contributing company.

Factual Background

The Esteves Family Trust (the "Trust") is the sole owner of Nautical Engineering, Inc. (the "Company"). Pursuant to a collective bargaining agreement, the Company contributed to the Pacific Coast Shipyards Pension Fund (the "Fund"), a multiemployer pension plan under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). At all times relevant, the sole trustee of the Trust and CEO of the Company was Ursula Esteves, the widow of the Company’s founder.

In August 2011, the Company ceased contributing to the Fund, which caused the Fund to take action to collect delinquent contributions and withdrawal liability. When the Fund eventually brought suit in the District Court to collect, it included the Trust and trustee as defendants (with the Company), claiming that they were jointly liable because the Trust was a "trade or business" under common control with the Company, and the trustee was an alter ego of the Company.

Trade or Business under Common Control

For purposes of withdrawal liability, ERISA defines the "employer" that is liable for such amounts to include not only the entity obligated to make contributions to the fund, but also any "trades or businesses (whether or not incorporated)" that are under "common control" with the contributing entity. As relevant to this case, businesses are considered under common control if there is at least 80 percent common ownership.

The Fund alleged that the Trust is jointly liable for the Company’s withdrawal liability because it is a "trade or business" under common control with the Company. In support of this, the Fund averred that the Trust owned 100 percent of the Company for 10 years, profited from it, decided to sell certain trust property, and made certain loans to the Company.

The District Court’s Holding

The District Court dismissed the Trust and trustee as parties to the case, holding that the Fund failed to plead facts showing that the Trust was a "trade or business" within the meaning of ERISA. The District Court noted that prior court decisions interpreting "trade or business" required some profit-oriented activity separate and distinct from mere ownership of the contributing company. The Trust’s activities did not rise to that level, according to the District Court, instead showing only profit-making motive associated with mere ownership. Therefore, the Trust was not a proper defendant. The trustee also was dismissed as a defendant because the Fund failed to plead facts supporting its alter-ego claim.

Implications of the Decision

This case bookends a recent First Circuit case, Sun Capital Partners, et al. v. New England Teamsters & Trucking Industry Pension Fund [CR&B News Nov. 2013], in which a court held that a private equity fund was a trade or business liable for its portfolio company’s withdrawal. These cases and others emphasize that the level and consistency of active management are critical factors in determining whether particular owners are "trades or businesses" that may be jointly responsible for withdrawal liability. This issue is of significance for all business owners and affiliates of companies that contribute to multiemployer plans, particularly private equity funds, owners of unincorporated businesses, and "passive" business owners.

If you have any questions regarding potential withdrawal liability, or any other employee benefits-related issues, please contact one of the authors or your Reed Smith Attorney.


Client Alert 2014-026