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Laborers' Pension Fund v. Lay-Com

September 2, 2009

LABORERS' PENSION FUND, LABORERS' WELFARE FUND OF THE HEALTH AND WELFARE DEPARTMENT OF THE CONSTRUCTION AND GENERAL LABORERS' DISTRICT COUNCIL OF CHICAGO AND VICINITY, AND JAMES S. JORGENSEN, ADMINISTRATOR OF THE FUNDS, PLAINTIFFS-APPELLEES\CROSS-APPELLANTS,
v.
LAY-COM, INC., AN ILLINOIS CORPORATION, LORD & ESSEX, INC., AN ILLINOIS CORPORATION, AND JOHN J. POPP JR., AS TRUSTEE OF THE IRREVOCABLE LAY TRUST DATED DECEMBER 26, 1995, DEFENDANTS-APPELLANTS, AND JOHN J. POPP, JR., INDIVIDUALLY, DEFENDANT\CROSS-APPELLEE.



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 01-C-6855-Milton I. Shadur, Judge.

The opinion of the court was delivered by: Cudahy, Circuit Judge.

ARGUED MAY 8, 2009

Before CUDAHY, MANION and TINDER, Circuit Judges.

The Laborers' Pension funds won a default judgment against M.A. King Construstion, Inc. and King & Larsen Construction, Inc., as well as against Mike King, a director and officer of both companies. Those defendants were judgment proof, so the funds added new defendants in an amended complaint. The district court found some of the new defendants, Lay-Com, Inc., Lord & Essex, Inc. and the Lay Trust-but not John Popp Jr., an individual-liable on a veil-piercing theory, and granted summary judgment to the funds and to Popp Jr. We affirm the decision to pierce M.A. King's veil to reach Lay-Com and Lord & Essex, and we affirm the dismissal of Popp Jr. from suit. The Lay Trust, however, played no role in the transactions that rendered Lay-Com and Lord & Essex liable, nor did it wield control over M.A. King. We therefore reverse with respect to the Lay Trust and dismiss it from the case.

I.

The veil-piercing question before us arises from the close relationship among several construction companies located just outside Chicago. Those companies included King & Larsen, a unionized subcontractor that did ex- cavation work and poured foundations and driveways for residential properties. Mike King was King & Larsen's sole shareholder and a director and officer. Lord & Essex is a residential housing contractor that regularly hired King & Larsen to work on its job sites. Lay-Com is a developer of commercial and residential real estate.

Lord & Essex and Lay-Com are owned by the Popp family. More precisely, Lord & Essex is owned by John Popp Jr. and was previously owned by the Lay Trust. Lay- Com is still owned by the Lay Trust, which otherwise exists for the benefit of the Popps. John Popp Sr. and his wife were the trust's primary beneficiaries; Popp Jr. and his sister are secondary beneficiaries and, since Popp Sr.'s death in the midst of this litigation, co-trustees. Popp Sr. was the presi- dent and a director of both Lay-Com and Lord & Essex. Popp Jr. remains a director and officer in both companies.

In 1995, King & Larsen entered a collective bargaining agreement that required it to make monthly benefits contributions and payments of union dues to the funds. Late in 2000, King & Larsen began missing payments.*fn1 The company was suffering financially, and Lord & Essex and Lay-Com began loaning it money and paying some of its bills.*fn2 Meanwhile, Popp Sr. and King began plans for a new company called M.A. King Construction that would take over King & Larsen's business. Popp Sr.'s companies were to provide new financing for M.A. King in exchange for a first-lien position on King & Larsen's assets.

M.A. King was incorporated on March 19, 2001, with the Popps and King as directors. The directors elected King as president and treasurer, and King's wife Gail as vice president and secretary. The directors also resolved to issue 25,000 shares of stock to the GAK Irrevocable Living Trust in exchange for a promissory note from the trust for $25,000. Both sides agree, however, that the shares were never issued and the capital contribution was never made. This turns out to be critical. No other capital contributions were made to M.A. King. To be sure, M.A. King did receive other types of financing, but all of it was debt. On April 1, M.A. King received a $250,000 loan from Lay-Com, secured by M.A. King's assets and Mike King's personal guaranty.*fn3 Also on April 1, M.A. King's board (with Mike King abstaining) entered into an employment agreement with King, setting his salary and prohibiting him from spending more than $2,500 on behalf of M.A. King (other than for taxes and payroll) without Lay-Com's consent. King was authorized to enter into banking relationships, but prohibited from borrowing on the corporation's behalf without Lay-Com's written consent.

At the center of the plans of Popp Sr. and King for the creation of M.A. King is a series of transactions (visually represented by Chart 1) that circuitously transferred most of King & Larsen's assets to M.A. King. As described in detail below, those assets traveled first through Lord & Essex and Lay-Com. The defendants have cast these transactions as a service to Mike King, but Popp Sr. arranged the transfer of assets through his companies so that Lay-Com and Lord & Essex could obtain first-lien priority on them before they were transferred on to M.A. King. Mike King agreed to the transactions because Popp Sr. promised to release a junior mortgage on the house of King's mother, Doralee. The defendants thus clearly believed they stood to benefit from the deal.

Chart 1

The arrows show the movement of assets and liabilities in the April--May 2001 transactions.

Popp ...


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