MEMORANDUM AND ORDER
Christopher Thompson, Kimberly Thompson, Air Quality Experts, Inc. ("Air Quality"), and AQE, Inc. ("AQE") (collectively, "defendants") are charged with mail fraud, theft or embezzlement from an employee benefit plan, and making false ERISA statements. The indictment alleges that the defendants made false reports to the Massachusetts Laborers' Benefit Fund ("MLBF") and, based on those reports, failed to make payments due to the MLBF.
The defendants moved to dismiss the indictment. They argued that, under the facts as alleged, their representations were not false and they did not fail to pay any money to which the alleged victim was entitled. For the reasons below, the defendants' motion (Docket No. 39) is
The following facts stated in the indictment are taken as true for the purpose of a motion to dismiss the indictment.
At times relevant to the indictment, Air Quality was an asbestos abatement company incorporated in New Hampshire in 1987. AQE was an asbestos abatement company incorporated in New Hampshire in 2005.
Christopher and Kimberly Thompson together owned and operated Air Quality and AQE. Christopher Thompson was the president and treasurer of Air Quality. Kimberly Thompson, his wife, was the president of AQE and the clerk of Air Quality.
On or about September 22, 2005, AQE agreed to be bound by any collective bargaining agreement ("CBA") between the Massachusetts Laborers' District Council of the Laborers' International Union of North America and the Massachusetts Building Wreckers and Environmental Remediation Association, Inc. During the relevant time period, there were three consecutive CBAs that spanned the dates of July 1, 2004 to June 30, 2016. The CBAs governed the remittance of fringe benefit contributions to a number of employee welfare and pension benefit plans, some of which were subject to the provisions of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"). Under the terms of the CBAs, AQE was obligated to make monthly "remittance reports" to the MLBF that reported the number of hours worked by union members for AQE and to make benefit contributions to the MLBF based on those hours.
There is no suggestion in the indictment or by either of the parties that Air Quality was a signatory to any of the CBAs.
Air Quality operated out of the same location as AQE under the same management, using the same equipment, and employing the same workforce. As a result, the indictment alleges that the companies were actually "a single business."
"[W]henever conditions permitted," the defendants paid employees from the payroll of Air Quality rather than that of AQE because that choice was "generally financially advantageous." By doing so and reporting to the MLBF only the hours worked by union members paid from the payroll of the union signatory AQE, the defendants allegedly failed to report all of the hours they were obligated to report and failed to make the required amount of contributions to the MLBF. The indictment further alleges that this "double-breasted
The indictment also alleges that the defendants failed to report and to make benefit contributions for "shop hours" (time spent preparing for and traveling to a job site at the beginning of a workday and returning and unloading trucks and equipment at the end of a workday) that union members worked for AQE.
On January 19, 2016, the defendants were indicted on eighteen counts of mail fraud, in violation of 18 U.S.C. § 1341; one count of theft or embezzlement from an employee benefit plan, in violation of 18 U.S.C. § 664; and eighteen counts of making false ERISA statements, in violation of 18 U.S.C. § 1027. The indictment also included forfeiture allegations for any property traceable to the commission of the alleged mail fraud.
Standard of Review
Federal Rule of Criminal Procedure 12(b)(3) allows defendants to make a pretrial motion challenging a defective indictment that fails to state an offense. "When grading an indictment's sufficiency, we look to see whether the document sketches out the elements of the crime and the nature of the charge so that the defendant can prepare a defense and plead double jeopardy in any future prosecution for the same offense."
To prove mail fraud, the government must show "(1) a scheme to defraud based on false pretenses; (2) the defendant's knowing and willing participation in the scheme with the intent to defraud; and (3) the use of interstate mail ... communications in furtherance of that scheme."
To prove theft or embezzlement from an employee benefit plan, the government must show that the defendant "embezzle[d], st[ole], or unlawfully and willfully abstract[ed] or convert[ed] to his own use... any of the moneys ... of any employee welfare benefit plan or employee pension benefit plan." 18 U.S.C. § 664.
To prove the making of false ERISA statements, the government must show that the defendant "ma[de] any false statement or representation of fact, knowing it to be false, or knowingly conceal[ed], cover[ed] up, or fail[ed] to disclose any fact the disclosure of which is required by [ERISA]."
Fraudulent Misrepresentation of Corporate Relationship
The government argues that the required elements of each of the three charged offenses are met by its allegation that the defendants mailed false remittance reports to the MLBF and, based on the underreporting of hours in those remittance reports, failed to pay the full value of benefit contributions to which the MLBF was entitled. According to the government, the remittance reports were false because they failed to report hours that union members worked for Air Quality.
A double-breasted operation is a business comprised of both union and non-union companies in which the non-union company bids on contracts that do not require a union contractor and the union company bids on union contracts.
The government recognizes that the operation of a double-breasted structure is, by itself, lawful. However, the government alleges that under the defendants' fraudulent scheme, the union and non-union companies were not actually two separate companies but rather a single company with the same location, workforce, equipment, and management.
The defendants' response is that they made no misrepresentation because the two companies were separate businesses for CBA purposes. They also point out there is no allegation that AQE shifted union work to Air Quality. Specifically, the defendants point to the "alter ego" and "reverse alter ego" theories of civil liability for double-breasted operations and argue that not even civil liability would attach in this case. Their argument fails.
Under the alter ego theory, civil liability for CBA benefit contributions may be imposed on a company that is an "alter ego" of another company where the former is used to evade the latter's CBA obligations.
The defendants argue that civil liability under the alter ego theory exists only where an existing union company creates a non-union affiliate to escape its CBA obligations and that there can be no such liability in a "reverse alter ego" situation in which the non-union company preexists its union affiliate. Relying primarily on the First Circuit's decision in
But the order of creation of the union and non-union aspects of the double-breasted operation is not determinative for purposes of "alter ego" liability. In
The defendants err in suggesting that the Ninth Circuit's decision in
The indictment states the criminal offenses with sufficient adequacy to survive the defendants' motion to dismiss. To prove those stated criminal offenses at trial, the government must prove more than the existence of a double-breasted operation. Instead, the government will have to prove that the defendants underreported hours in remittance reports and improperly withheld payments owed to the MLBF, and did so with the requisite criminal intent.
"Shop Hours" Allegation
The indictment also alleges that AQE fraudulently failed to make required contributions to the MLBF for AQE employees' shop hours. The defendants point to the definition of covered work in the CBA to argue that AQE had no obligation under the CBA to report shop hours.
In Article XVIII, Section 2 of the CBAs, covered work is defined as "[t]he removal, handling and/or packaging of asbestos, lead paint, microbial, mold and all hazardous and toxic materials, oil and fuel tanks
As such, the government's shop hours allegations survive the defendants' motion to dismiss. Going forward, it bears noting that the government must do more than prove a mere contractual breach by the defendants. To make out a criminal case, the government must prove that the exclusion of shop hours from the reports and payments made to the MLBF was fraudulent.
Finally, the defendants argue that the indictment must be dismissed for reason of vagueness, as the criminal offenses are not defined with sufficient definiteness to give notice of criminal conduct. They point out that there are sophisticated labor lawyers who are of the opinion that the arrangement was lawful. This challenge is premature, as the question of whether the criminal offenses are vague as applied to the defendants' conduct needs to be decided in context of the evidence presented at trial.