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CHICAGO DIST. COUNCIL OF CARPENTERS PENSION FUND V

February 1, 1996

CHICAGO DISTRICT COUNCIL OF CARPENTERS PENSION FUND, et al., Plaintiff,
v.
CEILING WALL SYSTEMS, INC., ROSEMONT CONTRACTORS, INC., MACHON ENTERPRISES, INC., CHARLES SELLERGREN, and RICHARD MACHON, Defendants.



The opinion of the court was delivered by: NORDBERG

 ALLEGED BACKGROUND

 The Funds are multiemployer plans that receive contributions from numerous employers pursuant to Collective Bargaining Agreements between the employers and the Chicago and Northeast Illinois District Council of Carpenters, successor of the Chicago District Council of Carpenters. The Agreement and Collective Bargaining Agreements bind Defendant Ceiling Wall Systems to the provisions of the Agreement and Declarations of Trust that created those Funds. Pursuant to the CBA, Defendants are required to make contributions to the Funds for each hour worked by their carpenter employees at the rate and in the manner specified in the CBA. Additionally, Defendant is required to make contributions to the Funds measured by the hours worked by subcontractors that are not signatory to a CBA with the Union.

 Plaintiffs allege that Defendants Rosemont and Machon are the alter egos of Ceiling in that their business transactions and operations are intermingled, the employees of all three have been paid for work within the occupational scope of the CBA performed for Ceiling out of accounts of the other two, and Rosemont and Machon are controlled and operated by the managers and controllers of Ceiling. Plaintiffs allege that the corporate defendants breached the CBA by underpaying contributions owed to the Funds. Further, Plaintiffs allege that Defendants Sellergren and Machon are the alter egos of the corporate defendants in that the individual defendants: (1) transfer funds between themselves and the corporations; (2) make loans without the requisite formalities between themselves and the corporations; (3) have common control of the corporations' daily operations; and (4) commingle assets, equipment, and vehicles with the corporations. Accordingly, Plaintiffs allege that failure to pierce the corporate veil and allow compliance with the CBA from Sellergren and Machon would result in injustice and perpetuate a fraud. Thus, Plaintiffs allege that Sellergren and Machon breached the CBA by underpaying owed contributions to the Funds.

 Finally, Plaintiffs allege that Sellergren and Machon engaged in a scheme to defraud the Funds of the benefits created in the CBA and used the U.S. mail in furtherance of the scheme. Plaintiffs describe the scheme as follows: Defendants use the corporate names interchangeably "to identify their single business operation when it will serve their economic interest" and "refer to Ceiling as a signatory/union company and Rosemont and Machon Enterprises as non-signatory companies." (Compl. P 11). Each week Defendants give their employees two different paychecks, one printed with the signatory company's name and the other with one of the non-signatory company's names, even though the employees only worked for one company that week. Further, each week the employees turn in one sheet of paper listing their total hours worked rather than turn in separate sheets listing the number of hours worked for each Defendant. Sellergren and Machon allegedly divide the total number of hours reported by the employees between the three companies, regardless of the actual division of work between the three companies, and call in the payroll for the alleged three separate companies into a payroll service. (Compl. P 14). Plaintiffs allege that Sellergren and Machon intentionally and fraudulently omit the total number of hours on the monthly fringe benefit contribution reports that are sent through the U.S. mail. Further, Defendants allegedly fraudulently misrepresented that their signatory company included two non-signatory companies, thus enabling them to circumvent their obligations to submit full contributions to the Funds while successfully bidding and working projects that require union affiliation. Plaintiffs allege that Defendants mailed the reports monthly since June of 1990, thus engaging in a pattern of racketeering activity with each mailing constituting a predicate act of mail fraud that was related to the others and posing a continuous threat of harm. The three companies, with the latter two being alter egos of the first, allegedly constituted the enterprise. Accordingly, Plaintiffs complain that Sellergren and Machon violated: (1) § 1962(a) of RICO because they used or invested the extra income gained from the activity in the operations of the enterprise, (Count III); § 1962(b) of RICO because they acquired or maintained control of the enterprise through the activity, (Count IV); and (3) § 1962(c) because they are associated and employed by the enterprise to conduct the enterprise's affairs through the activity.

 ANALYSIS

 The purpose of a Rule 12(b)(6) motion is to test the legal sufficiency of the complaint. Adams v. Cavanagh Communities Corp., 847 F. Supp. 1390, 1396 (N.D. Ill. 1994). In order to survive a motion to dismiss, a complaint must allege sufficient facts to outline a cause of action. Davis v. Frapolly, 747 F. Supp. 451 (N.D. Ill. 1989). The complaint "must state either direct or inferential allegations concerning all of the material elements necessary for recovery under the relevant legal theory." Carl Sandburg Village Condominium Ass'n No. 1 v. First Condominium Dev. Co., 758 F.2d 203, 207 (7th Cir. 1985).

 The Court must accept as true all well-pleaded factual allegations in the complaint and view them, along with the reasonable inferences to be drawn, in the light most favorable to the plaintiff. Cornfield v. Consolidated High Sch. Dist. No. 230, 991 F.2d 1316, 1324 (7th Cir. 1993). However, the Court need not accept conclusory legal allegations as true. Baxter v. Vigo County Sch. Corp., 26 F.3d 728, 730 (7th Cir. 1994). A strict standard applies when a court evaluates the legal sufficiency of a plaintiff's factual allegations. A court may grant a motion to dismiss only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Cushing v. City of Chicago, 3 F.3d 1156, 1159 (7th Cir. 1994).

 I. Motion to Dismiss Count II

 Sellergren moves the Court to dismiss Count II pursuant to Rule 9(b) for failure to allege fraud with particularity and Rule 12(b)(6) for failure to "properly allege that Sellergren and Ceiling are alter egos." Fed. R. Civ. P. 9(b), 12(b)(6).

 The parties do not dispute that Illinois law governs whether the corporate veil will be pierced in this case. Plumber's Pension Fund Local 130 v. Niedrich, 891 F.2d 1297 (7th Cir. 1989), cert. denied, 495 U.S. 930, 109 L. Ed. 2d 499, 110 S. Ct. 2169 (1990). Illinois law follows a two-pronged test: "First, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and second, circumstances must be such that an adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice." Hystro Products, Inc. v. MNP Corp., 18 F.3d 1384, 1388-89 (7th Cir. 1994)(quoting Van Dorn Co. v. Future Chem. & Oil Corp., 753 F.2d 565, 569-70 (7th Cir. 1985)). Defendant's attempt to apply the particularity requirement of Rule 9(b) to alter ego allegations must fail. Rather, Plaintiffs allege that the failure to pierce the corporate veil would result in injustice and would perpetuate a fraud. Illinois law requires only that in order to satisfy the second prong there be "some element of unfairness, something akin to fraud or deception or the existence of a compelling public interest." Pederson v. Paragon Pool Enter., 214 Ill. App. 3d 815, 158 Ill. Dec. 371, 574 N.E.2d 165 (1st Dist. 1991), appeal denied, 141 Ill. 2d 545, 162 Ill. Dec. 493 (1991). Thus, because fraud is not a prerequisite to piercing the corporate veil, Rule 9(b) does not apply to alter ego allegations.

 Likewise, the Court denies Sellergren's motion to dismiss for failure to state a claim for piercing the corporate veil. Plaintiffs' satisfy the first prong of the Illinois standard with the following allegations:

 (1) the transfer of funds between Sellergren and the corporate Defendants; (2) loans made between Sellergren and the corporate Defendants without the requisite formalities; (3) the failure of Sellergren to operate at arms length with the corporate Defendants; and (4) the commingling ...


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