The opinion of the court was delivered by: John A. Gorman United States Magistrate Judge
OPINION AND JUDGMENT ORDER
The parties have consented to have this case heard to judgment by a United States Magistrate Judge, pursuant to 28 U.S. §636(c), and the case was referred to me. A bench trial was conducted on September 29, September 30, and October 1, 2008. The parties have each tendered proposed findings of fact and conclusions of law, and this Opinion follows.
This is an action that arises under the Employee Retirement Income Security Act of 1974 ["ERISA"], as amended, 29 U.S.C. §1145. ERISA provides that an employee benefit plan, such as the Plaintiffs in this case, may sue or be sued as an entity. 29 U.S.C. § 1132(d). The complaint also includes state law claims.
The Court has original federal question jurisdiction over the ERISA claim pursuant to 28 U.S.C. § 1331. The Court also has supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. §1367.
Venue is proper in this court. Plaintiff Funds are administered in this District and the Locals have employees in this District whose relevant work was performed in this District. Defendant Helen Struben is a resident of this District. Both corporate Defendants operated their business within this District.
Plaintiffs are two union locals - Carpenters Local 63 and Carpenters Local 644 - and a number of employee benefit funds: Central Illinois Carpenters Health & Welfare Trust Fund; Mid-Central Illinois District Council of Carpenters; Mid Central Illinois District Council of Carpenters Apprenticeship Fund; Central Illinois Carpenters Annuity Fund; Carpenters Fringe Benefit Fund (collectively, "Funds"). The Funds are administered pursuant to the terms and provisions of various Agreements and Declarations of Trust. They must also be maintained and administered in accordance with the provisions of the Labor Management Relations Act of 1947 and the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001 et seq. (ERISA).
Defendant S&S Fashion Floors, Inc. ("S&S") is an employer engaged in an industry within the meaning of ERISA, 29 U.S.C. §§ 1002(5), (11), (12), and (14). S&S employed individuals who were members of and represented by one of the two Carpenters' Locals.
On April 17, 1995, S&S, by its President Helen Struben, entered into an Agreement "adopting all collective bargaining agreements to which the Mid-Central Illinois District Council of Carpenters was a party." (Plaintiffs' Exhibit 5, page 1). One such agreement was the Collective Bargaining Agreement in effect from May 1, 1998 through April 30, 2003 (which covers the entire period at issue in this case). The Agreement and the Collective Bargaining Agreement ("CBA") are Plaintiffs' Exhibit 5. S&S does not dispute that it was, during the relevant period of time, bound by the terms of that CBA.
Several pertinent portions of the CBA are contained in Article II, which is captioned "SCOPE OF AGREEMENT". Those sections read as follows:
Section 2: This Agreement shall apply to all construction, repair, and rehabilitations and all industrial maintenance work not covered by a maintenance agreement.
Section 3: This Agreement shall cover all employees employed by the Employer engaged in work coming under all classifications listed under the trade autonomy of the United Brotherhood of Carpenters and Joiners of America.
Section 5: The trade autonomy of the United Brotherhood of Carpenters and Joiners of America consists of the milling, fashioning, joining, assembling, erection, fastening or dismantling of all material of wood, plastic, metal, fiber, cork and composition, and all other substitute materials.
Section 6: The Unions claim of our jurisdiction extends over all the divisions and subdivisions of the trade including the following: ...Tile, Marble, Terrazzo, Finishers, Shopworkers, Granite Cutters;... all those engaged in the operation of woodworking or other machinery required in the fashioning, milling or manufacturing of Products used in the trade, and the handline, erecting and installing of materials on any of the above divisions or subdivisions...The layout work for all buildings, houses and apartments...The installation of all sheet piling and bracing of same. The installation of all shoring, underpinning and lagging. The installation of all caissons...The fabrication, erection, stripping and dismantling of all concrete forms whether of wood, metal or composition including form materials for houses, apartment building and structures of all sorts. ..The fabrication and erection of all framework for houses or apartments of any and all descriptions. The erection of all prefabricated components for houses or apartments or other buildings...The installation of all materials for exterior trim on houses or apartments...The installation of all material for interior trim on houses or apartments, including, but not limited to paneling, drywall, flooring, mouldings, doors and frames... The installation in all buildings of floor covering materials no matter what the method of installation, and whether of wood, linoleum, asphalt, rubber, vinyl, asbestos and other materials. The installation in all buildings, houses and apartments of rugs or carpets of all types and descriptions...
Section 7: FLOOR COVERING SCOPE OF WORK. The installation in all buildings, houses and apartments. To consist of installation, preparation, measuring, cutting, fitting, taking up and relaying of all carpets, rugs of all types, synthetic and natural fibers, woods, resilient floor coverings, linoleum, asphalt, rubber, vinyl, vinyl backed, cork, vinyl composition, no matter what combinations.
In Article XXII of the CBA, S&S agreed to be bound by the Trust Agreements that established the Plaintiff Funds. This Article required S&S to remit fringe benefit contributions to the Funds at specified rates. Article XXII Section 4 authorized the Trustees of the Funds to examine the books of S&S or to have a CPA do so. If a discrepancy was discovered during such an audit, the cost of the accounting was to be borne by the Employer.
S&S also entered into a Participation Agreement, another document obligating it to make contributions to the Plaintiffs. Pursuant to ERISA, those contributions were required to be made in accordance with the Funds Agreement and Declaration of Trust. In the event contributions were untimely, the Plaintiffs had the statutory right to sue for delinquent contributions and to recover liquidated damages over and above any delinquency. 29 U.S.C. § 1145. The Agreement and Declaration of Trust authorizes the Plaintiff Funds to examine the payroll books and records of a covered employer to determine compliance with those statutory obligations.
On April 16, 1998, Helen Struben, as President of S&S, signed another document entitled "ARTICLE XVII DURATION". (Plaintiffs' Exhibit 5, p.31) This document is in different typeface than the documents discussed above. It is not clear where this document fits in. Article XVII of the CBA is entitled Grievance Procedure, so it certainly is not intended to replace or add to that Article. The last Article of the CBA is Article XXXVI, so it is not simply an addendum to the CBA. Perhaps the heading was a typographical error, intended to be Article XXXVII, but there was no clarifying testimony on this matter, and no CBA other than Plaintiffs' Exhibit 5 is in evidence. The Document provides that the Agreement is effective August 1, 1997 through July 31, 2000 and is continued year to year thereafter unless terminated. Handwritten at the bottom of the document is "S&S Residential."
That handwriting does not appear to be that of either Helen Struben or the union representative Perry Sundell.
S&S submitted monthly contribution reports and payments in order to satisfy its contractual obligation to the Funds. S&S was required to make contributions to the Funds in accordance with the terms and conditions of the Funds' agreements and declarations of trust. Under the agreements and declarations of trust, S&S is liable for interest on delinquent contributions, as well as liquidated damages, attorney fees, and audit costs related to efforts to collect those contributions.
S&S was a C corporation, the sole owner of which was defendant Helen Struben. The Articles of Incorporation (Plaintiffs' Exhibit 1) shows that $7500 worth of common stock was issued on February 17, 1995. Helen Struben paid that amount into the company. No other incorporators or officers are shown on the incorporating documents. Helen's individual tax returns show that she took a salary of $8,547 in 2000, $15,159 in 2001, and $17,786 in 2002.
The business address shown on the Articles of Incorporation was 9705 Goetze Road in Green Valley, Illinois. The Green Valley address was owned by Anna Seelye, who was apparently Helen Struben's mother*fn1 . When Seelye died, Helen acquired ownership of the farm. S&S used a large (approximately 42'-78') machine shed on the property. The arrangement, according to Helen's son, Randy Struben, was that S&S fixed up the building, creating warehouse and office space, and maintained the grounds; in return, S&S did not pay rent. S&S had its own power supply to the building, and S&S paid insurance on the building.
S&S was a floor laying business. Initially, S&S worked on both commercial and residential jobs. In 1999, the company had enough residential work that 6,700 square feet of retail space was leased at 930 South Second in Pekin, Illinois. The shed in Green Valley became the center for commercial jobs. The building in Pekin housed a number of small businesses besides S&S, including a nail salon, a donut shop and a garage. In 2001, this property was acquired by Struben Properties, which was a company owned by Randy Struben. Thereafter, the garage tenant left and S&S took over another 1,500 square feet of space. Then the donut shop left and Flooring Products Inc. (FPI), another company owned by Randy Struben, took over that space.
According to S&S financial records, S&S put in over $11,000 in capital improvements to that leased property in Pekin, although there is no documentation of those improvements. Randy described the lease arrangement between S&S and Struben Properties as follows: in addition to paying $500 per month rent, any improvements made by S&S remained with the owner. In addition, S&S was responsible for the real estate taxes, according to Randy. (Transcript p.517). There is no documentation of this arrangement (Transcript p.538), other than a single item in the check register showing payment of real estate taxes.
Randy explained that S&S employees fell into several categories: estimators (who bid the work), installers (who physically installed carpet and other types of flooring), warehousemen (who loaded and unloaded trucks and otherwise saw to inventory), and property maintenance employees. Only the job of installing flooring was "covered work" under the CBA; estimating, warehousing and maintenance work was not within the scope of work defined by the CBA. On an installation job, the installers were supervised by Randy or some other foreman. The installers were paid hourly, with one rate for commercial installations and a lower rate for residential installations.
The employees did not keep time cards; instead, they (or a job supervisor) would call their time in to Helen Struben. (Transcript p.551). There is nothing in the record that would appear to be contemporaneous recording of this time by Helen; the only documentation of time worked by employees is payroll spread sheets prepared by Helen Struben (Transcript p. 542).
Not all installers were considered by Randy to be employees of S&S, however. Some of them he classified as "independent contractors" who had their own business run from their homes. They carried their own insurance, and when needed, Randy would call them. Randy testified that he (or his dad) would figure out how much material was needed and the cost of that material. They would call the independent installer, tell him about the job and the material, and the installer would provide a quote for the job. Upon completion, S&S would bill the customer and then pay the installer. Payment to these installers was usually made on a 1099, not a W-2.
In addition to these employees, Helen Struben served as bookkeeper, and Robert Breuhaus was a certified public accountant who was retained to prepare taxes, financial reports and the like. Breuhaus also prepared Helen's personal tax returns. Helen, Randy and Randy's sister Yvonne Hand had check writing authority for S&S. Yvonne also backed up Helen in the company's bookkeeping. According to Randy, S&S maintained two bank accounts, one at Green Valley Bank for commercial business and one at Pekin National Bank for residential business. Although there are in evidence check registers for these two accounts, there is no documentation explaining or supporting the distinction between the two accounts.
S&S employed Randy Struben as the field supervisor for S&S, in charge of all day-to-day operations. Early in the company's existence, Randy did the estimating work. As the company's business grew, he no longer had time to estimate. He thought that retired installers would make good estimators, because they knew the work and how long a particular job would take to complete. He therefore began retaining some of the retired installers who had earlier worked for S&S as union members. Once a job was bid, based on the estimator's figures, it might be some time before the company knew if it had the successfully obtained the business. Once the physical work of installation began, the estimator served as supervisor of the job. Randy testified that he included the estimator's time in the cost of a job as labor.
Randy also ran his own business, Flooring Products, Inc. ("FPI"), which he incorporated in 2001 (Plaintiffs' Exh. 33) as an S corporation. FPI did business at 930 S. Second Street in Pekin, Illinois, in space next to S&S; recall that Randy's business Struben Properties owned the building at that address. Randy testified that he invested his own money as capital into FPI; no other investors were involved. There were, according to Randy, no transfers of any kind between the two companies. As was the case with S&S, Helen was FPI's bookkeeper, and Helen, Randy and Yvonne Hand had check writing authority for FPI. The two companies also used the same accountant, but maintained separate bank accounts and phone numbers.
At first, FPI was a distributor of flooring-related products, such as padding, glue and various tools, used by flooring installers including but not limited to S&S. Randy's testimony (Transcript p. 441-444) regarding the relationship between FPI, the manufacturers of these products, and his customers (including S&S) was confusing and contradictory. At several times in his testimony, Randy stated that his customer paid the manufacturer of these products directly, and then the manufacturer paid him. At another time, he testified that S&S paid FPI for these "supplies." In yet another answer, he stated that FPI was paid nothing by S&S for products purchased; all billing went through the manufacturer. Yet another time he testified that FPI would order for a customer, such as S&S, and then the customer would pay FPI. Whatever the payment and ordering arrangement may have been, he stated that there was no difference in the way FPI ordered for or billed S&S, and there was no discount given to S&S.
FPI and S&S filed separate tax returns. Each company had its own tax identification number. Although both companies used the same accountant, separate financial reports were prepared for each company. Annually, the accountant would meet with Helen and Randy to prepare annual reports for S&S; his meeting regarding FPI was only with Randy. In addition, this same accountant prepared Helen's personal tax returns.
All information reflected in S&S tax returns and financial statements was provided to the accountant by Helen; he did no audits or independent investigations into the companies' records. S&S financial statements showing "compensation of officers" include Randy, as devoting 75% of his time to corporate business, although once again, Randy stated that he did not know why the accountant did that, and the accountant testified that it was a "mistake."
Until 2002, FPI (which was never signatory to a CBA) did not install flooring. Through the first quarter of 2002, S&S did both residential and commercial installation jobs. After the first quarter of 2002, Randy testified that FPI began "subcontracting residential work" (Transcript, p.445, 538) and installing floor coverings. As was the case with installation jobs at S&S, Randy served as field supervisor for FPI's installation jobs as well.
According to Randy, all FPI flooring installations were residential jobs; FPI did no commercial work. Although Randy testified that S&S did no residential work after the first quarter of 2002, S&S documents establish that S&S continued to do residential work throughout 2002 (Plaintiff's Exh. 16, p.47-49). And while Randy testified that the two companies did not share customers or work on the same jobs, he also stated that FPI "subcontracted" residential work from S&S.
Randy testified that S&S paid FPI for "subcontract labor for residential" jobs. (Transcript p. 448). At another time, he testified that if S&S installers were laid off and wanted to do residential work, he would hire them to work. (Transcript p. 489). Although FPI employed some of the same installers that S&S had employed to do its installation work, FPI never made contributions to the union Funds. Randy testified that this was either because residential installation is not covered under the collective bargaining agreement or because these employees were not union employees.
At around this same time, FPI began renting warehouse space from Helen Struben at the Goetze Road farm in a building separate from the building being used by S&S. FPI paid $200 per month rent for this building.
S&S purchased a 2001 Ford pickup truck, taking out a loan from Pekin National Bank to do so. The loan documents were signed by Randy Struben; he was identified on those documents as "Secretary" of S&S, although he denied holding such an office. That same designation shows up in S&S tax returns; Randy testified the accountant must have "assumed" he held that office, but that the designation was not accurate. The S&S tax returns were signed by Helen Struben. Both Helen and Randy testified that they did not read the return before Helen signed it.
On March 25, 2002, the Funds sent a letter to S&S, notifying it that an examiner from Romolo & Associates would be conducting a random examination of the company's records. The letter listed 11 types of documents that would be subject to review: payroll journals, individual earnings and time records for all employees; W-2 and W-3 forms; quarterly employer's federal withholding and Fica tax returns (Form 941); quarterly employer's contribution and wage reports for state unemployment compensationForm UI-3); employer's copies of monthly contribution report to the Funds; all pertinent personnel file information; cash disbursement records; payments to subcontractors (Form 1096 and 1099); most recent union contract; and federal income tax returns.
The examiner, Larry Williams, arrived to perform the audit on May 15, 2002. S&S was not ready for him, and he had to return on May 20. On that date he reviewed S&S records. His preliminary summary ("Fringe Benefit Compliance Examination Sheet", Defendant's Exh 45, p58-9) showed that no time cards were available and that other records were "good" for 2001-2002 but only fair for the years 1997 through 2000. His explanation for his preliminary finding of delinquency of $56,832.87 was "not reporting all hours."
Williams then prepared a formal report for the Funds, dated July 23, 2002. (Plaintiff's Exhibit 3). Because there were no itemized time cards, Williams had to resort to use of the S&S payroll journal, which did not show the type of work that was done. If Williams could not determine from the journal or from some other document what type of work an employee performed, then he considered all hours worked as covered work at the commercial scale, leading to a delinquency that, with interest and liquidated damages, totaled $57,130.75. Some other individuals were paid during the same calendar year on both a 1099 form (indicating they were subcontractors) and on a W-2 form (indicating they were employees). Williams assumed these individuals could not have been both but were actually employees for whom Fund contributions were due.
Williams testified that Helen told her these individuals were retired carpenters who were now doing estimating work (not "covered work" under the CBA) and that being paid on a 1099 was the way they wanted to be paid. He asked her for some verification or documentation but she provided none.
On August 8, 2002, Helen Struben, on S&S letterhead, responded (Def's Exh. 16) to the Romolo Report. Her letter read verbatim as follows:
I received the report ...