Gaudette v. Erricola

• Court: District Court, D. New Hampshire
• Decided: February 28, 2000
• Docket: CV-99-354-B
• Status: Published

Opinion

Gaudette v. Erricola CV-99-354-B 02/28/00

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Reginald Gaudette

v. Civil No. 99-354-B Opinion No. 2000 DNH 04! Richard Erricola

MEMORANDUM AND ORDER

Reginald Gaudette challenges a bankruptcy court ruling that

his interest in a pension plan maintained by his employer should

be included in his bankruptcy estate. Having reviewed the

bankruptcy court's decision, the parties' briefs and the

authorities cited therein, I affirm the decision for the reasons

described in the court's well-reasoned opinion. In addition, I

offer the following comments.

I agree with the bankruptcy court that the result in this

case is dictated by the First Circuit's opinion in Kwatcher v.

Massachusetts Serv. Employees Pension Fund, 879 F.2d 957 (1st

Cir. 1989) . Kwatcher stands for several propositions. First, it holds that a person cannot be an "employee" as that term is used

in ERISA if he is an "employer." See i d . at 959 ("''Employee' and

- 2 - ''employer' are plainly meant to be separate animals . . . the

twain shall never meet."). Second, it recognizes that ERISA

defines the term "employer" broadly to include "any person acting

directly as an employer, or indirectly in the interest of an

employer, in relation to an employee benefit plan." I d . at 960

(quoting 29 U.S.C. § 1002(5) (1994)). Third, it rejects

restrictive common law and corporate law conceptions of the term

and endorses an "economic reality" test to determine whether a

person qualifies as an "employer." See i d . Using this test, a

sole shareholder of a corporate employer is deemed to be an

employer under ERISA because such a person "dominates the actions

of a corporate entity" and, therefore, also "acts 'in the

interests of' the corporation." See i d .

The Bankruptcy Court determined in the present case that:

(1) Gaudette is the pension plan's sole beneficiary; (2) Gaudette

was the plan's sole trustee from 1989 until August 1, 1996, when

his wife succeeded him as sole trustee; (3) Gaudette's wife is

the sole shareholder of the corporation that employed him; (4) at

all relevant times, Gaudette was the president, treasurer, and

- 3 - sole director of his wife's corporation; and (5) on October 4,

1986, Gaudette's wife executed a power of attorney authorizing

him to "act as [her] attorney or agent in relation to all

matter[s] in which [she] may be interested or concerned and on

[her] behalf to execute any document and to do anything

effectively in my name, place, and stead as if [she] were

present." Applying Kwatcher to these facts, the court reasonably

concluded that the pension plan is not subject to ERISA because

Gaudette "dominate[d] the actions" of the corporations that

employed him and acted "directly as an employer, or indirectly in

the interest of an employer in relation to [the P]lan."

Bankruptcy Court Opinion at 11 (quoting 29 U.S.C. § 1002(5))

(1994) (internal quotations omitted)).

Kwatcher cites a Department of Labor regulation that

provides that "[a]n individual and his or her spouse shall not be

deemed to be employees with respect to a trade or business,

whether incorporated or unincorporated, which is wholly owned by

the individual or by the individual and his or her spouse." 29

C.F.R. § 2510.3-3 (c) (1) (1999) . The regulation does not apply

- 4 - here because Gaudette's wife owned all the stock in the

corporation that employed him. Accordingly, Gaudette argues that

Kwatcher also is inapplicable. I reject this argument for

several reasons. First, Kwatcher interprets and applies a

statute that includes as an "employer" even a person who acts

"indirectly" in the employer's interest with respect to a plan.

See 29 U.S.C. § 1002(5). This broad definition does not require

that a person have an ownership interest in the employing

corporation to qualify as an employer, provided that the totality

of the evidence demonstrates that the person actually controls

the corporation's affairs with respect to the plan. Second, the

Kwatcher court's use of a flexible "economic reality" test

suggests that the court did not understand the term "employer" to

be strictly limited to the circumstances specified in the

regulation. Finally, I am unpersuaded by Gaudette's argument

because it would permit a person to claim the benefit of ERISA

even when the person does not require protection from his or her

employer. When the "economic reality" is that the sole

beneficiary of a pension plan controls the affairs of the corporation that employs him, the beneficiary does not need ERISA

to protect him from the employer's arbitrary actions. "Self-

interest provides adequate protection" in such circumstances.

Watson v. Proctor, 161 F.3d 593, 598 (9th Cir. 1998). This is

true regardless of whether the person who actually controls the

corporation's affairs has an ownership interest in the

corporation. Accordingly, this case is not distinguishable from

Kwatcher simply because Gaudette's wife owns all of the stock in

the corporation that employ him.

Gaudette also argues that Kwatcher was overruled by

Nationwide Mutual Co. v. Darden, 503 U.S. 318 (1992) . Again, I

disagree. Darden considered whether a common law test should be

used in ERISA cases to distinguish employees from independent

contractors. See i d . at 319, 323, 327. As the Ninth Circuit has

observed, the decision is inapplicable to the very different

question of whether corporate formalities must be observed when

determining whether a person should be treated as an employer

rather than an employee under ERISA. See Watson, 161 F.3d at

597. Accordingly, the bankruptcy court was not free to disregard Kwatcher.

The bankruptcy court found in this case that Gaudette

qualified as an employer under ERISA because he "dominate[d] the

actions" of the corporations that employed him and acted

"directly as an employer, or indirectly in the interest of an

employer, in relation to [the p]lan." Bankruptcy Court Opinion

at 11 (quoting 29 U.S.C. § 1002(5)) (internal quotations

omitted). This conclusion is amply supported by the record.

Because a pension plan cannot be ERISA-qualified if its sole

beneficiary is an employer rather than an employee, I affirm the

bankruptcy court's decision.

SO ORDERED.

Paul Barbadoro Chief Judge

February 28, 2000

cc: Ralph F. Holmes, Esq. William Gannon, Esq. Thomas Raftery, Esq. Clerk, U.S. Bankruptcy Court, NH

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