UAW v. Aguirre , 410 F.3d 297 ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0236p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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INTERNATIONAL UNION, UNITED AUTOMOBILE,
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AEROSPACE AND AGRICULTURAL IMPLEMENT
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WORKERS OF AMERICA; UNITED AUTOMOBILE,
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No. 04-1056
AEROSPACE AND AGRICULTURAL IMPLEMENT
,
WORKERS OF AMERICA LOCAL 600; MARISOL >
IRAIRA; LETICIA MENDOZA; MARIA CASTELLO; -
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Plaintiffs-Appellants, -
JORGE FERNANDEZ; MARY ALLENBOROUGH,
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v.
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PAMELA AGUIRRE; ROBIN KRYCH; JILL AGUIRRE; -
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Defendants-Appellees. -
RANCE AGUIRRE,
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Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 01-72394—Victoria A. Roberts, District Judge.
Argued: January 26, 2005
Decided and Filed: June 1, 2005
Before: BOGGS, Chief Judge; MARTIN, Circuit Judge; GWIN, District Judge.*
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COUNSEL
ARGUED: Renate Klass, MARTENS, ICE, KLASS, LEGGHIO & ISRAEL, Royal Oak,
Michigan, for Appellants. Timothy K. Carroll, DYKEMA GOSSETT, Detroit, Michigan, David E.
Sims, FINKEL, WHITEFIELD, SELIK, RAYMOND, FERRARA & FELDMAN, Farmington Hills,
Michigan, for Appellees. ON BRIEF: Renate Klass, MARTENS, ICE, KLASS, LEGGHIO &
ISRAEL, Royal Oak, Michigan, Michael F. Saggau, ASSOCIATE GENERAL COUNSEL, Detroit,
Michigan, for Appellants. David E. Sims, FINKEL, WHITEFIELD, SELIK, RAYMOND,
FERRARA & FELDMAN, Farmington Hills, Michigan, John W. Smith, DYKEMA GOSSETT,
Detroit, Michigan, for Appellees.
*
The Honorable James S. Gwin, United States District Judge for the Northern District of Ohio, sitting by
designation.
1
No. 04-1056 Int’l Union, United Automobile, Aerospace and Agricultural Page 2
Implement Workers of Am., et al. v. Aguirre, et al.
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OPINION
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BOYCE F. MARTIN, JR., Circuit Judge. The plaintiffs in this case are the International
Union, United Automobile, Aerospace and Agricultural Implement Workers of America, its Local
Union Number 600, and five former employees of an automobile parts supply company1 called
Mexican Industries in Michigan, Inc. Plaintiffs filed suit against defendants Pamela Aguirre, Robin
Krych, Jill Aguirre and Rance Aguirre, who at all relevant times were the principal shareholders of
the company, alleging violations of the Employee Retirement Income Security Act, 29 U.S.C.
§ 1101 et seq., the Labor Management Relations Act, 29 U.S.C. § 141 et seq., and the Worker
Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq. In this appeal, plaintiffs
challenge several rulings by the district court—namely, the award of summary judgment in favor
of defendants on all claims, the grant of Rance Aguirre’s motion for sanctions and the striking of
an affidavit of plaintiffs’ purported expert witness. For the following reasons, we AFFIRM the
district court’s rulings.
I.
In 1979, Henry J. Aguirre, commonly referred to as “Hank Aguirre,” founded Mexican
Industries in Michigan, Inc., which was organized as a subchapter “S” corporation under the Internal
Revenue Code. As an S corporation, the company did not pay corporate income tax; instead, its net
income passed through to the shareholders, who were taxed based upon their pro rata ownership of
the company’s stock. See 26 U.S.C. § 1366(a). The extent of the company’s profits, if any, were
determined by its auditors. Hank Aguirre and the company’s board of directors established an
eighteen-month hold-back provision for corporate profits, whereby the company’s profits during the
calendar year were distributed in twelve equal monthly increments to shareholders beginning in July
of the following calendar year. This provision was used to ensure that the company maintained
sufficient operating capital.
When Hank Aguirre died in September 1994, his estate owed taxes of approximately 6.8
million dollars. Most of his stock in the company—4,590 shares—was transferred to the Henry J.
Aguirre Living Trust, of which his four children, who are the defendants in this case, were the
beneficiaries. Pursuant to the Internal Revenue Code, the Trust was required to distribute the stock
to the beneficiaries or to another trust within two years of Hank Aguirre’s death in order to maintain
the company’s status as an S corporation. See 26 U.S.C. § 1361(c)(2)(A)(ii). The trustees—John
Noonan and Edward Phillips—decided to establish four Qualified Subchapter S Trusts, one for each
defendant, which were used to distribute stock while maintaining the company’s subchapter S status.
Noonan and Phillips served as the trustees of these qualified trusts, and the defendants played no
role in their administration.
In March 1995, the board appointed defendant Rance Aguirre to be the company’s chief
executive officer. He resigned a few months later, but remained involved with the company as a
director on a limited basis until 1998. Pamela Aguirre became chief executive officer after Rance’s
resignation. When it became clear that she was borrowing large sums of money from the company
for her own personal use, however, the board added defendants Robin Krych and Jill Aguirre as co-
chief executive officers. Defendants contend that Pamela was not replaced outright because of her
high profile in the community.
1
Pamela Aguirre apparently defaulted in the district court and is not a party to this appeal.
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Implement Workers of Am., et al. v. Aguirre, et al.
Between 1995 and 1999, defendants received salaries, health insurance, director fees and
distributions from the company, which plaintiffs maintain were excessive and unwarranted.
Pursuant to the eighteen-month hold-back provision, the distribution of corporate profits that
defendants received during this period included profits from the last six months of 1993 and all of
the profits from 1994. The company continued to enjoy financial success throughout the first few
years following Hank Aguirre’s death. In approximately 1997, however, the company began
experiencing financial problems. Between 1997 and 1999, its spending and debt increased and, after
1998, it made no annual profits at all. The company’s financial condition continued to decline in
2000, as customers were lost and the company’s principal lender refused to extend further credit.
A management shake-up apparently further contributed to the company’s demise.
In September 2000, in the midst of these events, the company entered into a collective
bargaining agreement with the International and Local Unions. The agreement provided for
employee vacation leave and other benefits, including medical, dental and vision coverage. In April
2001, due to its declining business and increasing debt, the company closed several plants and began
laying off employees. The individual plaintiffs were laid off in June. On June 25, the company filed
a voluntary bankruptcy petition pursuant to Chapter 11 of the Bankruptcy Code and ceased
operations. On August 17, 2001, the International Union filed a claim in the bankruptcy proceeding
for unpaid vacation, medical, dental and vision benefits, union dues and other amounts; it also
alleged violations of the Worker Adjustment and Retraining Notification Act. The company’s
Chapter 11 proceeding was converted to a Chapter 7 liquidation proceeding in December.
The present action against the four Aguirre siblings was subsequently filed in the United
States District Court for the Eastern District of Michigan. Plaintiffs allege that the company
committed various violations of the Employee Retirement Income Security Act, the Labor
Management Relations Act and the Worker Adjustment and Retraining Notification Act, and that
defendants are personally liable for the damages caused by those violations. Plaintiffs have not sued
the company directly because of the automatic stay provisions of the Bankruptcy Code. See 11
U.S.C. § 362(a)(1) (providing that the filing of a bankruptcy petition operates as a stay of the
commencement or continuation of a judicial proceeding against the debtor).
On September 30, 2002, the district court denied defendants’ motion for judgment on the
pleadings. It permitted plaintiffs to amend their complaint to clarify their claims and to develop their
theory during discovery. After the completion of discovery, defendants moved for summary
judgment. On November 26, 2003, the district court granted the motion and dismissed the
complaint. It also granted Rance Aguirre’s motion for sanctions, as well as his motion to strike the
affidavit of plaintiffs’ purported expert witness. Plaintiffs then filed a motion for reconsideration,
which was denied. This timely appeal followed.
II.
A. Summary Judgment
We review the district court’s award of summary judgment de novo. See Graham v. County
of Washtenaw, 358 F.3d 377, 382 (6th Cir. 2004). Summary judgment is appropriate where “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 a judgment as a matter of law.” Fed. R. Civ. P. 56(c). In determining the
existence of a genuine issue of material fact, we view the evidence in the light most favorable to the
non-moving party. Graham, 358 F.3d at 382.
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Implement Workers of Am., et al. v. Aguirre, et al.
The primary issue in this case is whether the defendants can be held individually liable for
the company’s alleged statutory violations. As an initial matter, defendants rely on Peacock v.
Thomas, 516 U.S. 349 (1996), for the proposition that federal subject matter jurisdiction is lacking
over plaintiffs’ claims. In Peacock, the Supreme Court held that a plaintiff who had obtained a
judgment against a corporate employer could not enforce the judgment in a second suit asserting a
veil-piercing theory against a shareholder, without an independent basis for federal subject matter
jurisdiction. 516 U.S. at 357-60. Defendants argue that there is no subject matter jurisdiction here
because plaintiffs are seeking to hold them merely vicariously, rather than directly, liable for the
company’s alleged statutory violations. See, e.g., Ellis v. All Steel Constr., Inc., 389 F.3d 1031,
1034 (10th Cir. 2004) (holding that claims for direct ERISA liability against a corporation’s alter
ego “do not implicate Peacock concerns,” whereas claims positing vicarious liability reflect “an
attempt to use ancillary jurisdiction to impose an obligation to pay an existing debt on a person not
already liable for that judgment, which is precisely what Peacock holds must have its own
jurisdictional basis independent of the federal character of the underlying ERISA judgment”)
(discussing Cent. States, S.E. and S.W. Areas Pension Fund v. Cent. Transp., Inc., 85 F.3d 1282,
1286 (7th Cir. 1996)). In an apparent attempt to rebut plaintiffs’ jurisdictional argument, plaintiffs
insist that they are seeking to hold defendants directly, not merely vicariously, liable for the statutory
violations alleged in the complaint, under a theory that they have labeled the “veil piercing version
of the alter ego doctrine.”2
Contrary to plaintiffs’ assertions, we agree with the district court and defendants that there
is no such thing as a “veil piercing version of the alter ego doctrine.” Veil piercing and alter ego
concepts are separate and distinct. In general, as the Seventh Circuit has explained, “[e]fforts to
pierce the corporate veil ask a court to hold A vicariously liable for B’s debt.” Bd. of Trustees, Sheet
Metal Workers’ Nat’l Pension Fund v. Elite Erectors, Inc., 212 F.3d 1031, 1038 (7th Cir. 2000).
By contrast, “a contention that A is B’s ‘alter ego’ asserts that A and B are the same entity; liability
then is not vicarious but direct.” Id. (citations omitted) (emphasis in original). Plaintiffs’ purported
theory of recovery conflates and confuses these two very different concepts and is unsupported by
any legal authority of which we are aware. In any event, neither concept permits recovery against
defendants under the facts of this case.
In the labor law context, the alter ego doctrine of direct liability typically applies in
“disguised continuance” cases “to bind a new employer that continues the operations of an old
employer in those cases where the new employer is merely a disguised continuance of the old
employer.” NLRB v. Fullerton Transfer & Storage Ltd., Inc., 910 F.2d 331, 336 (6th Cir. 1990)
(citations and internal quotation marks omitted). The doctrine also applies in “so-called double-
breasted operations to determine whether two or more coexisting employers performing the same
work are in fact one business, separated only in form.” Id. “In both instances, the [National Labor
Relations] Board has formulated the test as whether the two enterprises have substantially identical
management, business, purpose, operation, equipment, customers, supervision and ownership.” Id.
(citations and internal quotation marks omitted). Although the present case arises in the labor law
context, the district court found, and plaintiffs concede on appeal, that it involves neither a disguised
continuance situation nor a double-breasted operation; accordingly, the alter ego doctrine is
inapplicable.
2
Plaintiffs’ second amended complaint alleges as follows:
As alter egos of [the company], the individual Defendant shareholders are personally liable for the
obligations owed by [the company] as set forth in this Complaint. As alter egos of [the company], the
individual Defendant shareholders are the ‘employer’ under Section 3(5) of ERISA, under Section 301
of the LMRA, and under Section 2(a) of the WARN Act.
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Implement Workers of Am., et al. v. Aguirre, et al.
With respect to veil piercing, even if it were enough for plaintiffs to prove that the corporate
veil should be pierced (which, as explained, defendants vehemently dispute), such proof is lacking
here. We have held that the corporate veil may be pierced if the court finds “substantial reasons for
doing so” after considering three general factors: (1) “the amount of respect given to the separate
identity of the corporation by its shareholders;” (2) “the degree of injustice visited on the litigants
by recognition of the corporate entity,” and (3) “the fraudulent intent of the incorporators.” Mich.
Carpenters Council Health & Welfare Fund v. C.J. Rogers, Inc., 933 F.2d 376, 384 (6th Cir. 1991)
(citing Laborers’ Pension Trust Fund v. Sidney Weinberger Homes, 872 F.2d 702, 704 (6th Cir.
1988)) (internal quotation marks omitted). In analyzing these three general factors, courts frequently
consider more specific factors such as “undercapitalization of the corporation, the maintenance of
separate books, the separation of corporate and individual finances, the use of the corporation to
support fraud or illegality, the honoring of corporate formalities, and whether the corporation is
merely a sham.” Sidney Weinberger Homes, 872 F.2d at 704-05.
In an attempt to establish entitlement to veil piercing, plaintiffs argue primarily that the
company was undercapitalized and that its funds were improperly siphoned to pay defendants
excessive salaries and distributions. The district court found, however, that plaintiffs had produced
insufficient evidence to establish a genuine issue of material fact as to whether defendants caused
the company to be undercapitalized or whether they should have made more prudent or conservative
decisions regarding salaries and distributions. On the present record, we agree with the district
court’s assessment that the evidence does not warrant piercing of the corporate veil.
Plaintiffs have failed to show a genuine issue of material fact as to any of the three veil-
piercing factors. First, there is no evidence of a lack of respect for the separate identity of the
corporation. Until its demise, the company observed standard corporate formalities. For example,
it had an accounting department headed by a chief financial officer, as well as non-shareholder
officers and staff who managed day-to-day corporate operations. It conducted regular shareholder
and director meetings and kept thorough minutes. There is no evidence that defendants commingled
their personal funds with corporate funds. To the extent that defendants were paid for their service
as officers and directors, the company issued the necessary tax forms to reflect their compensation.
Nor have plaintiffs demonstrated the kind of injustice that is required to disregard the
corporate form. Although plaintiffs view defendants’ salaries and director fees as excessive, there
is no evidence indicating that they were not authorized in good faith by an informed board.
Plaintiffs also argue that the distributions that defendants received from 1995 to 1999 were excessive
in light of the company’s net income during that period. But the fact that the distributions may have
been large as compared to the company’s net income during that particular period is explained by
the eighteen-month hold-back provision established by Hank Aguirre and the board of directors.
Moreover, when the company started suffering losses, defendants stopped receiving distributions.
They still had to pay taxes on the corporate income, however, because of the company’s status as
an S corporation. 26 U.S.C. § 1366(a) (providing that shareholders of an S corporation are taxed
on corporate income regardless of whether they receive distributions). In sum, although plaintiffs
certainly have a right to be upset about the company’s failure, their plight does not constitute the
type of injustice that warrants veil piercing. See Fullerton, 910 F.2d at 341 (“The mere fact that the
company ceased operation without being able to pay all of its debts is, of course, not the sort of
injustice contemplated [in the veil-piercing analysis].”) (citations omitted).
Finally, plaintiffs offer no evidence of fraudulent intent on the part of defendants-appellees.
Although the evidence indicates some wrongdoing on the part of Pamela Aguirre, she is not a party
to this appeal and there is no basis upon which to impute her actions or intent to her siblings. As a
general matter, it appears to us that the state of affairs of which plaintiffs complain is largely a
function of legitimate factors—such as business decisions that proved unsuccessful, the company’s
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status as an S corporation, the administration of the trusts and the execution of corporate policies
established by Hank Aguirre and the board—rather than any fraud on the part of defendants-
appellees.
For these reasons, we hold that the district court’s award of summary judgment was proper.
B. Rule 11 Sanctions
Plaintiffs also challenge the district court’s grant of Rance Aguirre’s motion for Rule 11
sanctions. The district court indicated that it granted the motion because plaintiffs’ evidence fell “far
short” of establishing Rance’s liability. Notably, the district court limited the award to the amount
of the costs, expenses and attorney fees incurred in presenting the motion for sanctions. Later, the
court ruled that the sanctions award was to be paid by plaintiffs’ counsel.
“The test for the imposition of Rule 11 sanctions in this circuit is whether the individual’s
conduct was reasonable under the circumstances.” Mihalik v. Pro Arts, Inc., 851 F.2d 790, 792 (6th
Cir. 1988) (citation omitted). We review the district court’s imposition of Rule 11 sanctions for
abuse of discretion. Id. at 792-93. “Although the reasonableness test presents a mixed question of
law and fact, a district court’s decision regarding Rule 11 sanctions is reviewed under an abuse of
discretion standard because of the district court’s more intimate knowledge of the facts of these
cases.” Id. (citations omitted).
We find no abuse of discretion in the district court’s very limited sanctions award. In our
view, the district court properly exercised its discretion in determining that, at least by the close of
discovery, it should have been clear to plaintiffs that the evidence failed to support any type of claim
against Rance Aguirre, and that plaintiffs’ counsel should bear all costs, expenses and fees incurred
by Rance in the preparation of the sanctions motion.
C. Motion to Strike
Finally, plaintiffs challenge the district court’s grant of Rance Aguirre’s motion to strike the
affidavit of their purported expert witness, a certified public accountant. Generally, “[w]e review
the decision to grant or deny a motion to strike for an abuse of discretion, and decisions that are
reasonable, that is, not arbitrary, will not be overturned.” Seay v. Tenn. Valley Auth., 339 F.3d 454,
480 (6th Cir. 2003). In his affidavit, the witness testified primarily in support of plaintiffs’
contention concerning the company’s supposed undercapitalization. Even if the affidavit had been
admitted, however, it would not alter our conclusion that defendants cannot be held liable under any
alter ego or veil piercing theory. Accordingly, even assuming that the district court did abuse its
discretion in striking the affidavit, such abuse would constitute harmless error.
III.
For these reasons, the district court’s rulings are AFFIRMED.