Veil Piercing and ERISA Litigation
posted by Dave Hoffman
Christy Boyd and I have been working on revising our article Disputing Limited Liability, 104 NW. U. L. Rev. ___ (forthcoming 2010). In DLL, we analyze a hand-collected dataset of federal district court cases in which plaintiffs (or counter-claim plaintiffs) set out to pierce the veil of a corporation or LLC. For each case, we’ve gone to the electronic docket and culled every significant judicial order, with the goal of predicting the success, failure, or settlement of veil piercing claims. I’ll be blogging more about the paper when it is out on SSRN, which will happen as soon as I’ve finished re-coding the dockets to collect some information we foolishly missed the first time around. Incidentally, I can think of no better way to spend May and June that sitting in front of a computer, coding dockets.
In any event, we’ve noticed a curiosity about the dataset that I thought our readers might be able to shed some light on. About 20% of our cases involve an ERISA cause of action, often against a small service company and its principal owner, brought by a labor union that seeks unpaid contributions to a pension fund. Almost every such case either settles quickly or ends in a default judgment against the individual and the company. (Thus, although we find about 200 cases from 2000-2006 asserting such claims, there are very relatively few reported opinions which would signal that ERISA cases constitute such a significant component of the law of veil piercing.) We find such cases disproportionately in the Northern District of Illinois — i.e., Chicago.
Here are my questions:
(1) Why do lawyers bring such cases in federal court when the stakes are so low (typically, under $50,000) and ERISA claims can be brought concurrently in state court? [Update: A reader informs me that this is more complicated than I realized. 29 USC 1451 states that the "district courts. . . shall have exclusive jurisdiction of an action under this section . . . except that State courts . . . shall have concurrent jurisdiction over an action brought by a plan fiduciary to collect withdrawal liability." I believe that the kinds of actions at issue here fall under that saving proviso.]
(2) Why bring such claims at all when settlement/default is so likely? That is, why don’t such cases settle before filing? My working hypothesis is that the Trustees of the Unions are seeking a hammer in later negotiations, but it’s still not clear why pre-filing settlement doesn’t sweep all such cases out of the system.
(3) What is up with the Northern District of Illinois? Again, I’ve a working hypothesis: this is a law firm driven phenomenon, and certain firms have a practice of joining the principal officers/shareholders to the corporation routinely. But, given the evident success of the practice, why hasn’t it caught on elsewhere?
Audience participation is welcome!
June 16, 2009 at 8:33 am
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Responses (2)
Jessica Erickson - June 16, 2009 at 12:20 pm
I don’t know, but as someone who is similarly enmeshed in docket research, I wonder if you could simply ask one of the law firms involved. It is obviously possible that they won’t talk to you, but if you ask several, I bet that you could get at least a brief explanation from one or two. It wouldn’t give you perfect insight, but it would be better than any hunch.
James Shaw - June 22, 2009 at 4:46 am
Typically, union funds (which are in fact jointly managed employer-union funds) have a fiduciary duty to collect all the monies owed to the fund. Hence the litigation. Filing in federal court is typically a time-saver, given that these cases would just be removed if brought in state court. I think the “hammer” theory is wrong, primarily because these suits are not in fact brought by the union, but by the labor-management trust (with equal numbers of labor and management appointed trustees), with the goal being to get the money owed the fund. These cases don’t settle before filing typically because the defendant does not pay absent a court order, particularly if they are going out of biz.
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