Pension Fund’s Withdrawal Liability Claim Against Alter Ego Not Limited to Amount of Fund’s Bankruptcy Claim against the Employer, Sixth Circuit Holds

By Peter D. DeChiara

pdechiara@cwsny.com

April 2019

Employers that withdraw from pension plans may owe payments to the plan, payments known as withdrawal liability.  Often, the employer that withdraws from the plan declares bankruptcy, thwarting the pension plan’s efforts to collect such withdrawal liability from the employer.  To collect, pension funds may sue companies that they contend are “alter egos” of the employer, meaning companies created to carry on the employer’s business under another name.  If a pension fund sues an alter ego for the employer’s withdrawal liability, is the fund’s claim against the alter ego limited to the amount of the claim that the fund asserted in the employer’s bankruptcy case?  The U.S. Court of Appeals for the Sixth Circuit recently decided that no, a fund’s bankruptcy claim against an employer did not cap the amount it could seek in its suit against the alter egoSee Trustees of Operating Engineers Local 324 Pension Fund v. Bourdow Contracting, Inc., Case No. 18-1491 (6th Cir. March 21, 2019)

Bourdow Trucking, Inc., a family-owned trucking business, had collective bargaining agreements with Operating Engineers Local 324.  In 2011, Bourdow ceased making contributions to the union’s pension fund, prompting the fund to demand withdrawal liability payments.  The fund sued after the company missed its first scheduled payment in 2012.  The company stayed the suit by filing Chapter 7 bankruptcy.  The pension fund then asserted a claim in Bourdow’s bankruptcy case for $1.2 million in withdrawal liability.  The company raised no objection to the pension fund’s claim, the bankruptcy court allowed the claim, and the bankrupt estate paid a small amount on the claim.  But the fund’s withdrawal liability claim remained largely unsatisfied.

The day after the company had missed its first withdrawal liability payment, members of the Bourdow family incorporated a new company, Bourdow Contracting, Inc.  In 2015, the pension fund sued the new company, claiming that it was responsible for the withdrawal liability because the new company was an alter ego of the old one.  The federal district court agreed, concluding that the new company was “merely a disguised continuance” of the bankrupt employer.

The statute governing suits for withdrawal liability allows a pension fund to recover not just the principal amount owed, but also interest and fees.  Adding interest and fees to the amount of the pension fund’s original bankruptcy claim, the court issued a judgment against the alter ego company in the amount of $3.2 million.

On appeal, the alter ego argued that the pension fund had a right to no more than the amount of its allowed $1.2 million bankruptcy claim.  It based this argument on the legal doctrine of res judicata, Latin for “the matter has been decided.”  The U.S. Court of Appeals for the Sixth Circuit agreed that under the doctrine of res judicata, an uncontested bankruptcy claim could preclude litigation of an identical claim made later.  But the appeals court found that res judicata did not apply to the pension fund’s suit against the alter ego because its claim against the alter ego was not identical to its claim against the bankrupt employer.  In his decision, Judge Eric Clay explained that the pension fund’s claim against the bankrupt employer arose from the employer’s failure to make withdrawal liability payments, while the fund’s claim against the new company arose out of its status as an alter ego.

The Sixth Circuit reached the right decision.  Limiting the pension fund to the amount of its original bankruptcy claim would have deprived it of the interest and fees that the withdrawal liability statute allows, and there was no justification for doing so.