a valid claim against them, would also result in an irreparable injury to the Funds.
2. Likelihood of Success on the Merits
Plaintiff asserts a likelihood of success on the merits based on its prior successes in obtaining judgments against Crest. Mem. Supp. Pl.'s App. Order Enj. Def.'s Sale, Transf. Disp. Assts. at 14. However, this is not necessarily true with respect to Daron, against the sale of whose assets the injunction is also sought. Prior judgments against Crest in and of themselves do not demonstrate a likelihood of success on the merits as to Daron; Plaintiff's "alter ego" allegations as to Daron are new and distinct from those already adjudicated.
The alter ego of a party required to make trust fund contributions may be a liable party under ERISA. See, e.g., Sasso v. Cervoni, 985 F.2d 49, 51 (2d Cir. 1993) (alter ego status is a basis for imposition of liability for corporate ERISA obligations), cert. denied, 113 S. Ct. 2964 (1993); Leddy v. Standard Drywall, Inc., 875 F.2d 383, 387 (2d Cir. 1989) (corporate officers may be personably liable for unpaid benefit-fund contributions where officers and company are "alter egos"); Goldberg v. Colonial Metal Spinning and Stamping Co., Inc., 1993 U.S. Dist. LEXIS 12732, 1993 WL 361672 (S.D.N.Y. Sept. 14, 1993) (corporate alter ego and individual officers and shareholders liable for delinquent contributions). Cf. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1220-21 (2d Cir. 1987) (related corporate and individual defendants liable for violation of ERISA fiduciary duties).
However, in order to decide whether Plaintiff's alter ego allegations are either "likely to succeed on the merits, or present sufficiently serious questions going to the merits to make them fair ground for litigation," this Court must, as an initial matter, determine whether to apply a federal or state alter ego test.
At the outset the Court notes that ERISA contains extraordinarily broad pre-emption language. The statute displaces all state law that even "relates to" employee benefit plans.
See, e.g., Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S. Ct. 478, 482, 112 L. Ed. 2d 474 (1990) (quoting FMC Corp. v. Holliday, 498 U.S. 52, 111 S. Ct. 403, 407, 112 L. Ed. 2d 356 (1990) ("'The pre-emption clause is conspicuous for its breadth'")) Moreover, "the Supreme Court has repeatedly acknowledged the province of the courts to fashion a 'federal common law of rights and obligations under ERISA-regulated plans.'" Goldberg, 1993 U.S. Dist. LEXIS 12732, 1993 WL 361672 at *5 (quoting Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 110, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989) (citations omitted)). Not surprisingly, these broad principles have been applied to the question of determining alter ego status. See, e.g, Goldberg, 1993 U.S. Dist. LEXIS 12732, 1993 WL 361672 at *4 ("Piercing a corporate veil in an action arising under ERISA 'is a question of federal substantive law, though state law may be used as a reference guide'" (quoting Trustees of UIU Health and Welfare Fund v. New York Flame Proofing, Inc., 649 F. Supp. 843, 847 (S.D.N.Y. 1986), rev'd on other grounds, 828 F.2d 79 (1987)).
As a general matter, "the Supreme Court has consistently refused to give effect to the corporate form where it is used to defeat legislative purposes." Lowen, 829 F.2d at 1220 (quoting First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 630, 77 L. Ed. 2d 46, 103 S. Ct. 2591 (1983)).
In Lowen, an ERISA matter in which related corporations and common individual owners were held personally liable for losses from investments involving prohibited transactions, the court noted that federal law "gives less deference to the corporate form than does the strict alter ego doctrine of state law," and that "courts have without difficulty disregarded form for substance where ERISA's effectiveness would otherwise be undermined," 829 F.2d at 1220. See also Lowen v. Tower Asset Management, Inc., 653 F. Supp. 1542, 1551 (S.D.N.Y. 1987), aff'd, 829 F.2d 1209 (2d Cir. 1987) ("Although no explicit ERISA provisions pertain to piercing the corporate veil, the remedial thrust of ERISA is not to be frustrated by meticulous emphasis on the corporate form"); Alman v. Danin, 801 F.2d 1, 3 (1st Cir. 1986) ("the general rule adopted in the federal cases is that a corporate entity may be disregarded in the interests of public convenience, fairness and equity" (quotations and citations omitted)).
In this District, Judge Keenan recently explained in the course of adjudicating an ERISA matter with strikingly similar facts, that "this less deferential [federal] inquiry [into the weight to be attached to the corporate form] can be attributed to a statutory format which was intended 'to remove jurisdictional and procedural obstacles which in the past appear to have hampered . . . recovery of benefits due to participants who were otherwise being deprived of benefits due them.'" Goldberg, 1993 U.S. Dist. LEXIS 12732, 1993 WL 361672 at *5 (quoting S.Rep. No. 127, 93 Cong., 2d sess., reprinted in 1974 U.S. Cong. & Admin. News 4639, 4838, 4871).
Although there is "no litmus test in the federal courts governing when to disregard corporate form," Alman, 801 F.2d at 3, the Second Circuit has articulated the purpose of, and factors to be considered under, a federal alter ego test. "The alter ego doctrine is designed to defeat attempts to avoid a company's union obligations through a sham transaction or technical change in operations. The key factors to be weighed in an alter ego analysis are whether the two enterprises have substantially identical management, business purpose, operation, equipment, customers, supervision, and ownership." Local 1, Amalgamated Lithographers v. Stearns & Beale, 812 F.2d 763 (2d Cir. 1987) (quoting Goodman Piping Products, Inc. v. NLRB, 741 F.2d 10, 11 (2d Cir. 1984) (other citations omitted)).
Employing these factors, the Court finds that many of the facts alleged in the instant case create, at the very least, serious questions going to the merits of each element of the alter ego question. First, the two corporate defendants share the same president; other management personnel at Daron are close relatives of the common president. While Defendants assert that Crest and Daron have only "a single common director," Aff. of John Bifone, Jr. P 26, Crest has only one director. Second, both companies are engaged in the printing industry. Third, Crest's key pieces of operating equipment, the printing presses, are controlled by Daron. Moreover, as alleged by Plaintiff, Daron holds the leases to Crest's presses without having received any consideration in exchange, a transaction which -- control issues aside -- on its face indicates the absence of arms-length dealings between the two companies. Fourth, the companies are located at the same address. Fifth, the companies allegedly share a common receptionist and telephone operator.
Sixth, Plaintiff alleges that the ownership of the two Defendant corporations is intertwined and that Defendants have failed to comply with discovery requests on this issue.
While an unsupported allegation could not normally suffice to create a "serious question" for litigation, the Court finds that Defendants' withholding of pertinent information has kept the question of the ownership of Crest very much alive. Thus, on the record currently before it, as to the question of Daron's alter ego liability, this Court finds that there are at least "sufficiently serious questions going to the merits to make them fair ground for litigation." ICN Pharmaceuticals, 2 F.3d at 490. In view of the outstanding judgments already entered against Crest, the Court finds a likelihood of success on the merits as to Crest.
Supplemental to employing a federal standard, as noted supra, a court may use state law as a "reference guide" in addressing the veil piercing question. In addition, the Supreme Court has stated, in undertaking a choice of law inquiry concerning the implementation of a federal statute, a court must consider to what extent application of a federal rule will disrupt commercial relationships predicated in state law. United States v. Kimbell Foods, Inc., 440 U.S. 715, 728-29, 59 L. Ed. 2d 711, 99 S. Ct. 1448 (1979). Heeding this directive, the Court notes that New York Business Corporation Law § 630, already a factor in New York commercial relationships, provides for shareholder liability for benefits owed to employees.
Pre-emption issues aside, on the question of the extent that the corporate form may protect a party from liability for employee compensation obligations, the statute evidences New York norms consistent with a possible eventual finding of alter ego liability in this case.
3. Balance of the Hardships
A "balance of the hardships tipping decidedly toward the party requesting preliminary relief" must be shown only when a movant fails to sufficiently demonstrate a likelihood of success on the merits, and can instead make out only "sufficiently serious questions going to the merits to make them fair ground for litigation." ICN Pharmaceuticals, 2 F.3d at 490. Without deciding that Plaintiff's allegations as to Daron fail to meet the higher hurdle, this Court nonetheless finds that the greatest potential hardship stands to be borne by employees represented by Plaintiff, who could face the prospect of the loss of significant value of their retirement income should the remaining assets of Crest or Daron disappear. Defendants imply that an asset sale would generate proceeds that would be available to the Funds. Def.'s Mem. Opp. Pl.'s Mot. Inj. Rel. at 10. However, in the absence of any affirmative obligation on the part of the owners of Crest and certain Crest equipment and/or leases (West Shore and Daron, respectively), which Defendants assertedly do not recognize, there is no reason to believe that the proceeds of such a sale would accrue to the Funds.
The Defendants, on the other hand, have not demonstrated that temporarily enjoining the sale of Crest would work a hardship to them. Defendants state that if they are enjoined from disposing of Crest, they will have to cease doing business entirely. Id. The Court finds this argument unpersuasive; by definition, if the Defendants sell Crest, they will cease conducting that printing business. As to Daron, the Defendants have presented no evidence to this Court indicating that the company would be imperiled by a Court order placing the proceeds from any asset sales into an escrow account pending settlement or adjudication of the merits of the case at bar.
Summary and Order
For the foregoing reasons, the Court finds that Plaintiff has met its burden of demonstrating that the sale or other disappearance of Crest's and/or Daron's assets would constitute an irreparable injury to the Funds. In light of prior judgments handed down concerning Crest's delinquency in making required contributions to the Funds, the Court finds that Plaintiff has demonstrated a likelihood of success on the merits as to Crest; as to Daron, the Court finds that Plaintiff has at least shown sufficiently serious questions going to the merits of the issue of alter ego liability to make them fair ground for litigation. In addition, the Court finds that the balance of hardships on the question of the issuance of an injunction tips decidedly toward the Plaintiff. Therefore, Defendants, their agents, servants, employees and all persons acting in their behalf are hereby enjoined from, directly or indirectly, transferring, selling, or in any other way disposing of the business and/or assets of Crest and/or Daron without the prior consent of the Plaintiff; provided, however, that such consent shall not be withheld except in the event that Plaintiff in good faith believes such transfer, sale, or disposition to be fraudulent or not to be the result of an arms-length transaction. It is further Ordered that any proceeds from any sale of assets by any Defendant executed pursuant to this Order be deposited in escrow with the Clerk of this Court (or, upon Plaintiff's consent, in some other account) until the relative rights of Plaintiff, Defendants, and other creditors are adjudicated or otherwise agreed to by the parties.
Settle injunction (through the Orders and Appeals section of the Clerk's office) on five days' notice, with suggestions as to bond.
The parties will complete discovery by March 31, 1994. The case is referred to Magistrate Judge Buchwald for general pretrial purposes.
Dated: New York, New York
November 1, 1993
LAWRENCE M. McKENNA