ERISA-Second Circuit Rules That A Company’s Alter Ego Is Responsible For Withdrawal Liability

In the Retirement Plan of the UNITE HERE National Retirement Fund v. Kombassan Holding A.S., No. 07-4143-cv (2nd Cir. 2010), the defendant, Kombassan Holding A.S. (“Kombassan”), was appealing a judgment from the district court holding it liable to the plaintiffs, the Retirement Plan of the UNITE HERE National Retirement Fund (the “Plan”) and its trustees, for withdrawal liability incurred under ERISA by the entity Hit or Miss (“HOM”).

In this case, HOM had entered into a collective bargaining agreement, under which it was obligated to make contributions to the Plan. The Plan was a multiemployer pension plan. Kombassan had owned HOM, but had assigned its shares in HOM to four Turkish corporations, in order to avoid a Turkish law limiting overseas investments. Some time after the assignment was made, HOM incurred financial difficulty. As a result, HOM went into bankruptcy and ceased its operations, triggering the withdrawal liability. HOM did not have the funds to pay the withdrawal liability. The issue faced by the Court was whether Kombassam was the “alter ego” of HOM, and therefore responsible for paying the withdrawal liability.

On that question, the Court found that there were sufficient facts to show commonality of control and business purpose between Kombasson and HOM, including: (1) a single individual served as chairman of Kombassan and each of the four assignees of the HOM shares, (2) Kombassan had made multiple representations to the HOM bankruptcy court that it controlled HOM and its board (for example, Kombassan had repeatedly stated to that court that it held, directly or indirectly, 100% of HOM’s outstanding stock and was in control of the HOM board) and (3) Kombassan’s general counsel testified that the purpose of the assignment was to circumvent Turkish law, which would otherwise have prevented Kombassan’s ownership of HOM, while retaining control of HOM’s day-to-day business operations. The Court indicated that the application of the alter ego theory, in the context of determining responsibility for withdrawal liability, is broad and flexible. The Court ruled that the forgoing facts established that Kombassan was the alter ego of HOM, and therefore responsible for paying the withdrawal liability.

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