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Nelson v. Frana Companies, Inc.

United States District Court, D. Minnesota

March 30, 2017

TERRY NELSON, JOHN NESSE, CLARK ANDERSON, and GARY MEYERS and their successors in their capacities as Trustees and Fiduciaries of the Painters and Allied Trades District Council No. 82 Health Care Fund, the Painters and Allied Trades District Council No. 82 Vacation Fund, the Painters and Allied Trades District Council 82 STAR Fund, the International Painters and Allied Trades Industry Pension Fund, the Finishing Trades Institute of the Upper Midwest Trust Fund, the National Painting, Decorating, and Drywall Apprenticeship Committee, the St. Paul Painting Industry Pension Fund, the Minneapolis Local 386 Drywall Finishing Industry Pension Fund, the Finishing Trades Institute, the Painters and Allied Trades Labor Management Cooperation Initiative, and each above-named Fund, Plaintiffs,

          Carl S. Wosmek, Amy L. Court, and Christy E. Lawrie, MCGRANN SHEA CARNIVAL STRAUGHN & LAMB, CHARTERED, for plaintiffs.

          Keith J. Broady and Bryan R. Feldhaus, LOMMEN ABDO P.A.; and Nicholas A. Dolejsi, ZELLE LLP, for defendant Frana Companies, Inc.

          Martin D. Kappenman and Gregory L. Peters, SEATON, PETERS & REVNEW, P.A., for defendants Diamond Drywall, Inc., David Stellmach, and Karen Stellmach.


          Patrick J. Schiltz United States District Judge

         This is an action to recover contributions that are allegedly owed to various union-sponsored fringe-benefit funds under the terms of various collective-bargaining agreements (“CBAs”). Plaintiffs are the funds and the trustees of the funds. Defendant Diamond Drywall, Inc. (“Diamond”) is a drywall contractor that was a signatory to CBAs that required Diamond to make fringe-benefit contributions to the funds. Prior to going bankrupt in 2012, non-party Lincoln Drywall, Inc. (“Lincoln”) was also a drywall contractor and also a signatory to the CBAs.

         Under the CBAs, Diamond and Lincoln were contractually obligated to pay their employees by the hour and to make fringe-benefit contributions based on the total number of hours worked by those employees. According to plaintiffs, Diamond and Lincoln breached the CBAs by paying some employees on a piece-work or “footage” basis and by not accurately recording or reporting the number of hours that those employees actually worked. As a result, plaintiffs allege, Diamond and Lincoln failed to pay the full amount of the fringe-benefit contributions that they were obligated to pay under the CBAs.

         Plaintiffs further allege that defendant Frana Companies, Inc. (“Frana”)-a general contractor that subcontracted drywall work to both Diamond and Lincoln-should be held liable for Diamond's and Lincoln's breaches under an alter-ego theory. Finally, plaintiffs allege that defendant Twin Cities Drywall, Inc. (“Twin Cities”) is the corporate successor to Lincoln and thus should be held liable for Lincoln's breaches.

         Based on these core allegations, plaintiffs brought 15 claims against defendants, including claims under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., the Minnesota Uniform Fraudulent Transfer Act, Minn. Stat. § 513.41 et seq., and the common law. The Court dismissed all of plaintiffs' claims, save their ERISA and breach-of-contract claims. The surviving claims were tried in two phases spanning a total of nine days, after which the parties submitted extensive briefing. Having heard the evidence and considered the briefs, the Court makes the following findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a).


         A. Background

         1. The individual plaintiffs are trustees and fiduciaries of the plaintiff multi- employer fringe-benefit funds.

         2. Diamond is a drywall contractor that specializes in wood-frame multi- family construction. TT 1264, 1266.[1]

         3. Defendant David Stellmach is the sole owner of Diamond. TT 483. Stellmach's wife, Karen Stellmach, works as a part-time bookkeeper for Diamond.[2]TT 656.

         4. Twin Cities is a drywall contractor. TT 914. Plaintiffs allege that Twin Cities is the common-law successor to Lincoln. Compl. ¶¶ 184-87.

         5. Frana is a general contractor that specializes in wood-frame multi-family construction. TT 1258, 1720. During the period August 15, 2007 through December 31, 2012 (the “audit period”), Frana subcontracted with both Diamond and Lincoln to perform drywall work. TT 836.

         6. Since 1998, Diamond has been a signatory to CBAs with the Painters and Allied Trades District Council 82 (“the painters' union”), which represents drywall tapers. P1, P2, P3; TT 484.

         7. Before it went bankrupt, Lincoln was also a signatory to the painters' union CBAs. TT 858.

         8. The CBAs require that covered employees be paid by the hour and establish hourly wage rates for those employees. See, e.g., P2 Art. 9 & Add. A.

         9. The CBAs also require employers to make contributions to the plaintiff fringe-benefit funds for each hour of covered work. P2, Art. 27; P3, Art. 28. Each month, employers must report the number of hours worked by covered employees and remit the required contributions to the funds. TT 858-59.

         B. Drywall and Multi-Family Construction

         10. Drywall contractors typically employ three types of workers: carpenters, tapers, and laborers. TT 611-12. Of these three trades, only tapers are represented by the painters' union. TT 604-05, 659.

         11. Drywall is hung by carpenters. TT 611. Tapers then come through to tape and coat the seams and fasteners and thereby create a finished surface. TT 15-17, 613- 14.

         12. Surface finishes are designated by level, with level 5 being the highest and most time-consuming and level 1 being the lowest and least time-consuming. TT 15-17. With respect to each level, a finish may be textured or smooth; applying a smooth finish typically takes more time than applying a textured finish. TT 642, 923, 947-48, 1268.

         13. Tapers tend to finish more square feet per hour in multi-family construction than in commercial construction because ceiling heights are lower and the finish is often lower level or textured. TT 642, 854, 878-79, 903-04, 1264-65, 1467. In addition, work on multi-family construction projects tends to be highly repetitive, with each floor having consistent layouts, ceiling heights, and finishes. TT 1264-65. Multi- family construction does not commonly require a level 5 finish (which, again, is the most labor intensive), and Frana never used level 5 as a primary finish in any of the buildings that it constructed during the audit period. TT 878, 1268.

         14. In 2015, Frana constructed the Five15 building, a large wood-frame multi- family building that was typical of the projects that Frana built during the audit period. TT 1293. Diamond was the drywall subcontractor on the Five15 project. TT 1293-94. Because the Five15 project was subject to wage oversight, Diamond had to submit certified payrolls to the Department of Housing and Urban Development and the City of Minneapolis. TT 1296. Representatives from these agencies regularly visited the site to interview workers and verify that they were being paid for all of the hours that they worked. TT 1296-97. Based on the square footage of the project and the certified payroll records, Diamond's productivity rate for the Five15 project was 116 square feet per hour. TT 1299.

         C. Diamond

         1. Diamond's Footage System

         15. During the audit period, Diamond paid most of its tapers by the hour, as Diamond was required to do under the CBAs. Diamond did, however, pay a small number of its tapers on a unit or “footage” basis to give them an incentive to work faster.

         16. Diamond's footage system worked as follows: Stellmach would determine an amount that he would pay for a unit of work (such as a single apartment in a multi-unit building). TT 586. The tapers working “on footage” would report units worked (rather than hours) or a combination of units and hours. TT 535-36. Stellmach would then divide the unit price by the hourly wage to calculate a number of hours, and Diamond would calculate its obligations to the funds based on that number of hours. TT 536, 547-52, 659-61, 684. So, for example, if a taper completed three apartments at $300 per apartment, the taper would be owed $900. If the taper's hourly wage was $30 per hour, Stellmach would report that the taper had worked 30 hours, regardless of how many hours the taper had actually worked. Karen then used that number of hours to generate payroll and report covered hours to the funds.

         17. A footage system can work to either the advantage or the disadvantage of the funds. If, in the above example, the taper actually worked 25 hours, then the funds would benefit from the footage system, as Diamond would report and make contributions on 30 hours of covered work, when the funds were entitled to receive contributions on only 25 hours. But if the taper actually worked 35 hours, the funds would be cheated, as they would receive contributions on only 30 hours of covered work, when they were entitled to receive contributions on 35 hours.

         18. As will be discussed below, the footage system used by Stellmach during the audit period generally resulted in Diamond reporting more covered hours to the funds than the employees actually worked. This makes sense, as the purpose of the footage system was to provide an incentive for tapers to work quickly, and the footage system would fail of its purpose unless it gave tapers a realistic opportunity to earn more money than they would earn if they were paid by the hour. Over the course of the audit period, then, both the employees and the funds profited from Stellmach's use of the footage system.

         19. At the end of a project, Stellmach discarded any notes or other documents that would have reflected the unit prices that he set for that project. TT 589. Stellmach discarded the documents because he had no use for them; he did not do so because he thought that he was violating the CBA and was attempting to hide evidence of that fact.

         20. Approximately 150 tapers worked for Diamond at some point during the audit period. TT 556. Only about ten or eleven of those tapers were ever paid on the footage system. TT 622. Thus, over 90 percent of the tapers who worked for Diamond during the audit period were never paid on the footage system.

         2. Diamond's Payroll Records

         21. Stellmach paid all of his employees every week with payroll checks; he never paid cash. TT 923, 929, 951-52, 993-94, 996, 999.

         22. Diamond tapers who were paid hourly would either turn in a timecard or report their hours to Stellmach. TT 532, 630-31.

         23. Each week, Stellmach recorded his employees' hours on a sheet that he gave to his wife, Karen. TT 532-33, 630-31. Karen recorded the information from these sheets in handwritten ledgers and accounting software, which she used to generate weekly paychecks and monthly remittance reports to the funds. TT 630-31, 658-61, 684. After recording information from the sheets, Karen returned the sheets to Stellmach, who eventually discarded them. TT 532-33, 550, 661. Stellmach discarded the sheets because he had no more use for them, not because he was trying to hide anything.

         24. Stellmach kept timecards in a stack on a ledge in his office. TT 514-15. When the stack got so tall that it started to tip over, Stellmach would discard a chunk of cards from the bottom of the stack in order to bring the stack down to a manageable height. TT 515-16. Stellmach was not aware that he was obligated to retain timecards until a union official informed him of that fact sometime around 2013. TT 512, 530.

         3. Diamond's Audits

         25. Approximately every 18 months, Wilson-McShane, a firm retained by the funds, audited Diamond's payroll records. TT 513-14, 678. Wilson-McShane never told the Stellmachs that their records were inadequate. TT 636, 692, 694, 1039-40. If Wilson- McShane had told the Stellmachs to retain timecards or other records, the Stellmachs would have done so. TT 636, 692.

         26. With one exception involving Diamond's use of a subcontractor called Quality Sanders (discussed below), Wilson-McShane sent a letter after every audit stating that Diamond's remittance reports accurately reflected Diamond's underlying records. TT 694-96; see, e.g., D112; D115.

         27. In January 2012, Wilson-McShane sent a letter requesting an audit. D124. In the past, similar letters had requested that Diamond produce seven categories of records. See, e.g., D113. The January 2012 letter added an additional seven categories of records, including job-cost detail reports, the master payroll file, monthly and annual financial statements, tax returns, job files, estimating documentation, and job-analysis reports. D124. It appears that this request for additional information came about because Dustin Partain, a Diamond taper, had complained to the union about Diamond's footage system sometime in 2011. TT 779-83. The evidence suggests, however, that both the union and the funds were already aware of-and appeared to tolerate-the footage system. TT 779-82, 816-18, 959, 967, 970. In any event, the January 2012 audit request spawned a dispute over the production of records, and that dispute ultimately led to this lawsuit.

         4. Testimony from Tapers Employed by Diamond

         28. Walter, Dustin, and Troy Partain-a father and two sons-are the only Diamond tapers who testified that they may have been shorted hours under the footage system. None of the other 150 or so tapers who worked for Diamond during the audit period-each of whom was a member of the painters' union-complained to the union or to anyone else about the footage system. None of the three Partains could identify any weeks that they were underpaid, and none of them could quantify the amount by which they were underpaid. TT 723-24, 731-33, 739-40, 773-74, 777-78, 801, 812, 816.

         29. Troy Partain could not say for certain that he was, in fact, underpaid. TT 731-32.

         30. Dustin Partain testified at trial that he was certain that he had been underpaid, TT 773, but this trial testimony conflicted with his deposition testimony that he did not know if he had been underpaid, TT 777-78.

         31. In contending that they were probably underpaid when working under the footage system, both Walter and Troy emphasized the loss of overtime. TT 731-32, 739, 802-03, 814-15.

         32. Walter testified that, of all of the Diamond tapers, he and perhaps Dustin were harmed the most by the footage system. TT 826. Walter also testified that, at the same time that he and Dustin were being harmed, other Diamond tapers were getting easier work (and (presumably) making more money than they would make if paid by the hour). TT 807-09, 826.

         33. On one occasion in 2007, Walter asked to be paid hourly instead of under the footage system. Stellmach accommodated his request. TT 799-800. On the next project, however, Stellmach returned to paying Walter on a footage basis. TT 800-01. Walter did not complain or again ask to be paid hourly.

         34. Walter was an active member of the painters' union who attended meetings nearly every month, but Walter never complained to the union about short pay. TT 819. A few years before he retired, Walter told a union organizer that Diamond was paying him under a footage system, but Walter did not claim that, as a result, he was being shorted pay. TT 816-19. Although Walter testified that he often complained to Stellmach “about the things that were going on, ” TT 801-02, this vague statement is likely a reference to Walter's ongoing complaints about his foreman-whom Walter said he “hated” and regarded as “the real problem” at Diamond-as well as Walter's ongoing complaints about Stellmach's willingness to hire workers of Mexican ancestry, TT 810-11, 826-27.

         35. Dustin testified that he could have opted out of the footage system and been paid hourly, but he chose not to exercise that option. TT 788-89. He also testified that he sometimes complained about working footage, but the context of his testimony indicates that he was complaining about the footage rates-i.e., he sometimes thought that the per-unit rate was set too low to give him a reasonable opportunity to earn more than he would earn if paid by the hour. TT 771-73.

         36. Ten other Diamond tapers-including four who worked on the footage system-testified that they were never shorted hours. Of the four who worked footage, three testified that they always made more than their hourly rate, TT 929, 938, 944, 948, and the fourth testified that he made more than his hourly rate most of the time and at worst equaled his hourly rate, TT 922, 924-26. The remaining six tapers were all paid by the hour and were never shorted pay. TT 951-52, 993-94, 996, 999, 1002; D268 at 29-32.

         37. The extra pay that tapers made under the footage system was substantial, on the order of several hundred dollars per week. TT 922 (taper averaged around $300 extra per week); TT 929-30 (taper usually earned 6 to 8 extra hours of pay each week); TT 938 (taper averaged around $250 extra per week). As a result, Diamond likely made thousands (or tens of thousands) of dollars in fringe-benefit contributions to the funds that Diamond was not required to make under the CBAs.

         38. An additional seven tapers submitted affidavits stating that they were never shorted hours. D55.

         5. Diamond's Subcontracting

         39. On one occasion prior to the beginning of the audit period, Diamond hired a non-union subcontractor. Stellmach was not aware that hiring a non-union subcontractor was a breach of the CBA. TT 651. The auditor discovered Diamond's breach and informed Stellmach that he could hire only union subcontractors. TT 651, 486-87, 510. Stellmach did not again knowingly hire a non-union subcontractor.

         40. In 2009 and 2010, Diamond subcontracted with Quality Sanders. Diamond hired Quality Sanders because Stellmach had been told that it was a union contractor. In fact, Stellmach had been misinformed, as Quality Sanders was a non- union contractor. TT 636-37, 651, 486-87; D121.

         41. In September 2011, the auditor sent Diamond an invoice for $61, 881.41 in delinquent contributions and $6, 188.14 in liquidated damages based on Diamond's subcontract with Quality Sanders. D46 at 6319.

         42. There is no indication that Diamond attempted to conceal its subcontract with Quality Sanders from the auditor.

         43. Diamond did not dispute its liability or the amount of damages on the Quality Sanders invoice. D46 at 6321. Instead, Diamond asked that the amount be waived because it had acted in good faith. Id.

         44. The funds denied Diamond's request for waiver and stated that their attorneys would be in contact regarding a payment plan. D46 at 6322. In fact, though, no one ever ...

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