1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-7-1995

Ragan v Tri-County Excavating

Precedential or Non-Precedential:

Docket 94-1388

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Recommended Citation

"Ragan v Tri-County Excavating" (1995). 1995 Decisions. Paper 209.

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1 
2 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

---------- 

 

Nos. 94-1388 and 95-1189 

 

---------- 

MICHAEL J. RAGAN, AS ADMINISTRATOR AND FIDUCIARY OF THE 

INTERNATIONAL UNION OF OPERATING ENGINEERS LOCAL NO. 542 

PENSION, HEALTH AND WELFARE, APPRENTICESHIP, TRAINING AND 

SAFETY, SUPPLEMENTAL UNEMPLOYMENT BENEFIT AND ANNUITY FUNDS; 

INTERNATIONAL UNION OF OPERATING ENGINEERS, LOCAL 542 

 v. 

TRI-COUNTY EXCAVATING, INC.; 

UNITED STATES FIDELITY AND 

GUARANTY COMPANY; 

HARTFORD FIRE INSURANCE 

COMPANY 

 Hartford Fire Insurance Company, 

 Appellant

---------- 

On Appeal from the United States District Court 

for the Eastern District of Pennsylvania 

(D.C. Civil No. 92-00066) 

 

---------- 

Argued Monday, October 24, 1994 

BEFORE: STAPLETON, HUTCHINSON, and GARTH, Circuit Judges

---------- 

(Opinion filed August 7, 1995) 

 

---------- 

 Sam L. Warshawer, Jr. (Argued) 

 Edward Seglias 

 Venzie, Phillips & Warshawer 

 2032 Chancellor Street 
2 

 Philadelphia, Pennsylvania 19103 

 Attorneys for Appellant 
3 

 Robert T. Carlton, Jr. (Argued) 

 McAleese, McGoldrick & Susanin 

 455 South Gulph Road 

 Suite 240 - Executive Terrace 

 King of Prussia, Pennsylvania 19406 

 

 Attorneys for Appellees 

 

 ---------- 

 

 OPINION OF THE COURT 

 

 ---------- 

GARTH, Circuit Judge: 

 Defendant-Appellant Hartford Fire Insurance Company is 

the surety on a labor and material payment bond purchased by Mele 

Construction Co., Inc. ("Mele"). Hartford's bond required 

prospective claimants who were not in a "direct contract" with 

Mele to give written notice of their claims within 90 days after 

they ceased work. Plaintiffs-appellees, tardy claimants on 

Hartford's bond, are the International Union of Operating 

Engineers, Local 542 and Michael J. Ragan as administrator of 

various "fringe benefit" funds associated with Local 542 

(collectively, "Local 542"). 

 Local 542 had a collective bargaining agreement with 

Tri-County Excavating, Inc., a corporation owned by the three 

daughters of John Mele, president of Mele. Hartford rejected 

Local 542's claim, made roughly 120 days after Local 542 ceased 

work, because Local 542 was not in a "direct contract" with Mele 

and so was required to give notice of its claim within 90 days of 

the last labor performed. Local 542 responded that Tri-County 
4 

was the corporate "alter ego" of Mele, and that inasmuch as Local 

542 had contracted with Tri-County it had, ipso facto, contracted 

with Mele. 

 Following a bench trial, the district court held that 

Tri-County was indeed the alter ego/instrumentality of Mele and 

entered judgment in favor of Local 542. The district court held 

that under the terms of the bond Hartford was liable to Local 542 

for Tri-County's unpaid "fringe benefit" contributions, union 

dues, liquidated damages and attorney fees. 

 On appeal, Hartford advances three arguments: first, 

that the district court erred in its alter ego determination 

under Pennsylvania law; second, that the Employees Retirement 

Income Security Act, 29 U.S.C. §§ 1001-1461 ("ERISA"), preempts 

Local 542's state-law action on the bond; and third, that the 

bond does not obligate Hartford to pay liquidated damages and 

attorney fees. 

 We agree with all of the district court's holdings 

except its holding that Hartford was obliged to pay liquidated 

damages and attorney fees. Consequently, we will affirm the 

district court's award of unpaid fringe benefit contributions and 

union dues. However, because we conclude that Hartford cannot be 

held liable for attorney fees and liquidated damages, we will 

reverse so much of the district court's orders of March 2, 1994, 

and February 15, 1995, as granted judgment against Hartford for 

those damages. We will accordingly remand to the district court 

with directions that its judgment against Hartford and in favor 
5 

of Local 542 on Count IV be modified to delete all awards of 

attorney fees and liquidated damages. 

I. 

 Mele purchased the bond ("the Bond") from Hartford to 

cover Mele's wage and labor obligations in connection with earth 

work which Mele was hired to perform on Crown America 

Corporation's Viewmont Mall project in Lackawanna County, 

Pennsylvania. Crown is named as obligee on the bond. 

 For the past twenty years Mele, which owns heavy earth 

moving equipment, has sub-contracted with Tri-County on a job-byjob basis whereby Tri-County provided operating engineers to 

operate Mele's earth moving equipment. Tri-County is part of a 

group of at least five companies owned by the extended Mele 

family. 

 Under its contracts with with Mele, Tri-County would 

furnish Mele with Tri-County employees who were members of Local 

542. Tri-County and its employees were subject to the terms of a 

Collective Bargaining Agreement ("CBA"), negotiated between Local 

542 and Tri-County in 1988, and a Pension Fund Agreement ("PFA") 

entered into between Local 542 and the General Building 

Contractors Association and the Contractors Association of 

Eastern Pennsylvania and Delaware in 1974. 

 When Crown hired Mele for the Viewmont project in the 

Summer of 1990, Mele looked to Tri-County for operating engineers 

and, as it had done in the past, Tri-County engaged members of 

Local 542 pursuant to the CBA and PFA. As is particularly 
6 

relevant to the present dispute, the CBA obligated Tri-County to 

make regular "fringe benefit" contributions to Local 542's 

Pension, Health and Welfare, Apprenticeship, Training and Safety, 

Supplemental Unemployment Benefit, and Annuity funds (the 

"Funds") during the time that Local 542 members were in TriCounty's employ. The CBA also required Tri-County to pay 

"supplemental union dues" and provided for the payment of a 

specific monetary penalty should Tri-County become delinquent in 

its fringe benefit contributions. The PFA provided that in the 

event of a lawsuit against an employer to collect unpaid 

contributions, the employer was obliged to pay costs and 

reasonable attorney fees. 

 Work on the Viewmont project commenced some time in 

August of 1990, and Tri-County began making the required fringe 

benefit contributions to the Funds as required by the CBA. 

 The Viewmont project foundered in the spring of 1991, 

with disastrous results: Crown stopped paying Mele, Mele fell 

behind in progress payments to Tri-County, and Tri-County in turn 

failed to make the fringe benefit contributions to the Funds for 

the period March-June, 1991. Within months, Mele had filed for 

bankruptcy and Tri-County became insolvent. By this time the 

Funds were owed roughly $78,000.00 in unpaid contributions. 

 On or about November 1, 1991, Local 542, having been 

informed by Tri-County that it was unable to satisfy its 

obligations to the Funds, turned to Hartford for payment. 

 Hartford's Bond contained the following provision: 
7 

No suit or action shall be commenced 

hereunder by any claimant, (a) unless 

claimant, other than one having a direct 

contract with the principal, shall have given 

written notice to any two of the following: 

the principal, the owner or the surety. . ., 

within ninety days after such claimant did or 

performed the last of the work or labor . . . 

for which said claim is made. 

App. 97 (emphasis added). 

 Under this provision, all claimants who had not 

contracted directly with Mele were required to give written 

notice to any two of Mele, Hartford or Crown within 90 days after 

ceasing work. 

 As shown by Tri-County records, the "last labor" 

provided by Local 542 on the Viewmont job was for the week ending 

June 28, 1991. Local 542 did not give notice of its claim until 

on or about November 1, 1991, more than 120 days after "last 

labor" was performed. Hartford rejected Local 542's request on 

the ground that Local 542 had failed to make timely notice of its 

claim. 

 On January 3, 1992, Local 542 commenced this action in 

the federal district court for the Eastern District of 

Pennsylvania on the basis of diversity of citizenship, seeking 

delinquent fringe benefit contributions, union dues, liquidated 

damages and attorney fees.0 Local 542 claimed that Tri-County 

 

0Also named as defendants in Local 542's complaint were TriCounty (Counts I and II) and United States Fidelity and Guaranty 

Company ("USF&G"), another surety for Mele on a different 

construction project (Count III). Tri-County did not defend 

itself below, and a default judgment was entered against TriCounty in the district court. Tri-County has not appealed. 

 Sometime following the commencement of this action 

Local 542 and USF&G entered into a settlement agreement and Local 
8 

was Mele's alter ego, and that Local 542 was therefore in a 

"direct contract" with Mele and so was not subject to the bond's 

90 day notice provision. 

 The district court agreed with Local 542. Following a 

bench trial, the district court, by order dated March 2, 1994, 

entered judgment against Hartford and awarded Local 542 

$78,794.79 in unpaid fringe benefit contributions, $5,719.11 in 

unpaid union dues, and $42,190.21 in liquidated damages, less 

$480.00 in prepayment. The district court also awarded 

reasonable attorney fees to Local 542, but did not quantify those 

fees until it entered its order of February 15, 1995, which set 

attorney fees at $19,881.73. 

 Hartford appealed from the district court's March 2, 

1994 order on March 29, 1994, and timely appealed the February 

15, 1995 order.0

II. Appellate Jurisdiction 

 As noted above, the district court's March 2, 1994 

order entered judgment in favor of Local 542 and among other 

things awarded reasonable attorney fees but did not quantify the 

 

542 dismissed its action against USF&G pursuant to Federal Rule 

of Civil Procedure 41(a)(1). Accordingly, the instant appeal 

concerns only Count IV of the Complaint, naming Hartford as 

defendant. 

0After the district court entered its order quantifying attorney 

fees, Hartford filed another appeal at docket no. 95-1189 which 

challenged the award itself, but did not contest the amount of 

fees awarded. That appeal was limited to "the issue of the 

Benefit Funds' entitlement to attorney fees as previously briefed 

and argued," (Stipulation of Counsel for Consolidation of 

Appeals, ¶ 9), and has been consolidated with the present appeal. 

Both parties agreed that the issue raised in 95-1189 with respect 

to attorney fees is identical to the attorney fees issue raised 

in the earlier appeal at 94-1388. 
9 

amount of those fees. Although Hartford appealed the March 2, 

1994 order on March 29, 1994, it was not until February 15, 1995 

that the district court entered an order setting attorney fees at 

$19,881.73. Neither party questioned the jurisdiction of this 

court to hear Hartford's appeal. However, we must consider our 

appellate jurisdiction as a threshold matter. See Trent Realty 

Associates v. First Fed. Sav. and Loan Ass'n of Philadelphia, 657 

F.2d 29, 36 (3d Cir. 1981) ("A federal court is bound to consider 

its own jurisdiction preliminary to consideration of the 

merits."). 

 The district court's award of attorney fees was 

premised on a provision in the Pension Fund Agreement between 

Local 542 and Tri-County which provides that in the event of a 

lawsuit to collect delinquent contributions the employer "shall 

pay all costs and reasonable attorney's fees incurred." App. 

133. 

 In Beckwith Machinery Co. v. Travelers Indem. Co., 815 

F.2d 286 (3d Cir. 1987), we held that when an award of attorney 

fees is based on a contractual provision and is an "integral part 

of the contractual relief sought," the order does not become 

final and appealable until the attorney fees are quantified. Id.

at 287. Accord Vargas v. Hudson County Bd. of Elections, 949 

F.2d 665, 670 (3d Cir. 1991) (where attorney fees are sought as 

part of damages, and not as prevailing party, the rule of 

Budinich v. Becton Dickinson and Co., 486 U.S. 196 (1988), does 

not apply and the district court's ruling is not final until the 
10 

amount of fees is fixed); accord SPM Corp. v. M/V Ming Moon, 965 

F.2d 1297, 1300 (3d Cir. 1992). 

 Because the attorney fees awarded in this case were 

part of the contractual damages sought by Local 542, the district 

court's delay in quantifying the amount of such fees until 

February 15, 1995 rendered the earlier order non-final for 

purposes of appeal. 

 This defect was not fatal to Hartford's appeal, 

however. Even though the March 2, 1994 order was not final when 

entered, it became final upon entry of the February 15, 1995 

order fixing attorney fees and expenses at $19,881.73. We 

therefore exercise our jurisdiction pursuant to 28 U.S.C. § 1291 

and the principle expressed in Cape May Greene, Inc. v. Warren, 

698 F.2d 179, 184-85 (3d Cir. 1983), that this Court may 

entertain an appeal from a nonfinal order if an order which is 

final is subsequently entered before our adjudication on the 

merits. 

III. Alter Ego 

 Hartford argues on appeal that the district court's 

alter ego determination is infected by clearly erroneous 

underlying factual findings, and that in any event the district 

court misapplied Pennsylvania law to the facts as found. 

 When considering a district court's state law alter ego 

determinations, we review the court's factual findings for clear 

error, but exercise plenary review over the legal conclusions it 
11 

draws from those facts. Craig v. Lake Asbestos of Quebec, Ltd., 

843 F.2d 145, 148-49 (3d Cir. 1988). 

A. 

 After receiving evidence and taking testimony from 

Local 542 members Stanley Stracham and Edward Gilette, TriCounty's president Angela Scarantino, Hartford bond underwriter 

John Johnson and claims supervisor Dennis Powers, and Michael 

Ragan, administrator of the Funds, the district court found the 

following facts: 

 Tri-County has always maintained appropriate corporate 

formalities. Both Mele and Tri-County are duly authorized 

Pennsylvania corporations. Each filed articles of incorporation, 

held regular corporate meetings, kept their own corporate 

records, and took care not to intermingle funds. 

 Tri-County is owned by the three daughters of John 

Mele, Mele's president and majority shareholder. The three Mele 

daughters, Angela Scarantino, Beverly Occulto, and Karen 

Darbenzio, each also own 11% of the shares of Mele. The 

remainder of the stockholdings in Mele is in the name of John 

Mele (53%) and his wife, Catherine (14%). The Mele corporation 

has filed in bankruptcy. Angela Scarantino is the president of 

Tri-County, and Karen Darbenzio was an officer and shareholder of 

both Mele and Tri-County. 

 In addition to Tri-County, there are at least four 

other family-owned corporations in the Mele "group": Eleven-7 

Corporation, owned by Stephen Scarantino and Bert Occulto, 
12 

husbands of Angela and Beverly, respectively; John Sal Inc., also 

owned by the three Mele daughters; Melback Corp., of which John 

Mele is the president, and West Mountain Sand Stone & Aggregates, 

Inc., of which Bert Occulto is the president. 

 Tri-County, which operates from a trailer leased from 

Eleven-7 corporation on land owned by John Sal, Inc., owned no 

equipment of its own. For the past twenty years, its sole 

function has been to supply operating engineers to Mele. TriCounty has undertaken no projects since Mele's demise. 

 Tri-County has never paid a dividend and was grossly 

undercapitalized for the work it had contracted to perform. As a 

result, it became insolvent shortly after Mele stopped payments 

on the Viewmont job. 

 The district court found that Angela Scarantino, TriCounty's president, had little knowledge of the day-to-day 

business affairs of Tri-County. Although the facts are disputed 

by Hartford, Scarantino was unable, for instance, to state 

whether Tri-County's financial statements were audited or unaudited, or whether Tri-County could make a claim against Mele 

under the Bond, or how Tri-County billed Mele for the Viewmont 

job. 

 The district court also found that Mele had treated 

Bert Occulto, Tri-County's project manager and husband of one of 

the three Mele daughters, as a Mele employee. More to the point, 

Mele enlisted him to participate in the negotiations between Mele 

and Hartford regarding the Bond. 
13 

 Local 542 members solicited Tri-County jobs at Mele's 

offices. The court also found that John Mele had participated in 

Tri-County hiring, and greeted Stracham with the salutation, 

"glad to have you working for our company" when Stracham was 

seeking Tri-County employment. The district court concluded that 

the only contact Local 542 members had with Tri-County was that 

they were paid with Tri-County checks. 

 When Mele was negotiating the Bond with Hartford, 

Hartford requested and received from Tri-County and the other 

family-owned corporations indemnification for any payments 

Hartford would have to make on the Bond. The indemnity 

effectively precluded Tri-County itself from making a claim on 

the Bond. Moreover, it made Tri-County liable for all debts for 

labor and materials incurred by Mele on the Viewmont project, 

regardless of whether the debt was owed to Tri-County or another 

company. The district court described this agreement as a 

"financial albatross" which no "truly independent" corporation 

would assume. Dist. Ct. Op. 13. 

 The district court also observed that Mele had 

unilaterally proposed to subordinate its $75,000.00 debt to TriCounty to those of other creditors in its proposed plan of 

bankruptcy reorganization. Tri-County has not objected to the 

subordination, nor has it made a claim in the Mele bankruptcy. 

 Finally, the court found that Hartford itself 

considered Mele and Tri-County as one company. Dist. Ct. Op. 12. 

Hartford's internal correspondence referred to Tri-County as the 
14 

"union arm of Mele," and Hartford issued credit to Mele on the 

basis of composite Mele/Tri-County financial statements. 

 Hartford challenges a number of these factual findings 

as clear error, calling our attention to evidence which it 

contends the district court ignored, did not fully take into 

account, or evaluated incorrectly. See Hartford's Brief at pp. 

19 et seq.. Hartford also emphasizes that corporate formalities 

were scrupulously maintained throughout Tri-County's 23 year 

existence, and that there is no evidence of commingling or 

siphoning of funds or transfers without adequate consideration. 

Under its separate name, Tri-County had been dealing amicably 

with Local 542 for over twenty years. Further, Hartford notes 

that the two testifying union employees who supposedly had no 

contact with Tri-County beyond receiving their paychecks listed 

Tri-County, not Mele, as their employer on their unemployment 

claim forms. Hartford also represented at oral argument that 

indemnities like the one given by Tri-County are commonplace in 

the construction industry. 

 We will not find clear error of fact unless a review of 

the record leaves us with the "definite and firm conviction that 

a mistake has been made." Anderson v. Bessemer City, 470 U.S. 

564, 573 (1985). Although we are troubled by some aspects of the 

record, we are not persuaded by Hartford's argument. Our 

independent review of the record does not convince us that the 

district court was mistaken or committed clear error in its 

factual determinations. 
15 

 The dissent, although acknowledging the findings made 

by the district court, assesses the evidence differently than did 

the district court, and also reads the record differently than do 

we. The dissent concludes that, in its opinion, the district 

court was mistaken in its findings. See Dissent Typescript at 4-

5, 11-13. 

 Despite the position taken by the dissent, we are bound 

to defer to the district court's factfinding if evidence supports 

those findings. Under the clearly erroneous standard, a finding 

of fact may be reversed on appeal only "if it is completely 

devoid of a credible evidentiary basis or bears no rational 

relationship to the supporting data." Haines v. Liggett Group, 

Inc., 975 F.2d 81, 92 (3d Cir. 1992). When findings are based on 

determinations regarding the credibility of witnesses, Rule 52(a) 

demands even greater deference to the trial court's findings. 

Anderson, 470 U.S. at 575. Thus, an appellate court may not 

substitute its findings for that of the district court, but is 

limited to making an assessment of whether there is enough 

evidence on record to support such findings. Cooper v. Tard, 855 

F.2d 125, 126 (3d Cir. 1988). Here, there is more than 

sufficient credible evidence to sustain each and every finding 

made by the district court. 

 The district court judge heard the witnesses, assessed 

their credibility, and, on the basis of the credible evidence, 

made detailed findings to which we are obliged to defer. Based 

on those historical findings, the district court found as 

ultimate facts that "the interrelationship between Mele and Tri-
16 

County was such that Mele controlled Tri-County," Dist. Ct. Op. 

11, and that Tri-County was "merely an extension of Mele and not 

a truly independent corporation . . . ." Dist. Ct. Op. 17. The 

district court consequently held, relying on the same legal 

authorities as does the dissent, that Tri-County was the alter 

ego of Mele. 

 These findings and this conclusion were reached after 

full recognition of the arguments on the evidence made by 

Hartford. Giving the appropriate deference to the district 

court's findings mandates a holding that no mistake has been 

committed. Anderson, 470 U.S. at 573. 

 True, if we, rather than the district court, were 

assigned the task of fact finding, we arguably might have found 

the facts differently. But we are not charged with that task, 

and we are satisfied that there being no clear error of fact, 

and, as we explain below, no legal error, the district court's 

factual findings and its legal conclusion of alter ego should be 

upheld. 

B. 

 We also do not find that the district court committed 

legal error in holding Tri-County to be Mele's alter ego under 

Pennsylvania law. In Ashley v. Ashley, 393 A.2d 637 (Pa. 1978), 

the Pennsylvania Supreme Court set forth, in a formula familiar 

to the courts of that state, the following principles which are 

to be applied when a trial court disregards corporate forms and, 
17 

"piercing the corporate veil," holds that one individual or 

corporation is the alter ego of another: 

Th[e] legal fiction of a separate corporate 

entity was designed to serve convenience and 

justice . . . and will be disregarded 

whenever justice or public policy demand and 

where rights of innocent parties are not 

prejudiced nor the theory of the corporate 

entity rendered useless. . .. We have said 

that whenever one in control of a corporation 

uses that control, or uses the corporate 

assets, to further his or her own personal 

interests, the fiction of the separate 

corporate entity may properly be disregarded. 

Id. at 641 (citations omitted). Pennsylvania courts have largely 

embraced the flexible tenor of the Ashley standard, holding, for 

instance, that no finding of fraud or illegality is required 

before the corporate veil may be pierced, but rather, that the 

corporate entity may be disregarded "whenever it is necessary to 

avoid injustice." Rinck v. Rinck, 526 A.2d 1221, 1223 (Pa.Super. 

1987). Accord Lycoming County Nursing Home Ass'n, Inc. v. Com., 

Dept. of Labor and Industry, Prevailing Wage Appeal Bd., 627 A.2d 

238, 243-44 (Pa.Cmwlth. 1993). We have said that Pennsylvania 

alter ego law requires a showing that the subordinate company 

"acted robot- or puppet-like in mechanical response to the 

controller's tugs on its strings or pressure on its buttons." 

Culbreth v. Amosa (Pty) Ltd., 898 F.2d 13, 15 (3d Cir. 1990). 

 Despite the nominally separate formal existence of TriCounty, the record to which we have referred supports the 

district court's findings and conclusion that Tri-County was 

Mele's alter ego. We emphasize, as did the district court, that 

Tri-County was willing, at the request of John Mele and Hartford, 
18 

to indemnify Hartford for any obligations of Mele which might 

trigger Hartford's liability under the Bond. This effectively 

merged the obligations of Tri-County and Mele, and prevented TriCounty from making any claim under the Bond. As a result, TriCounty has not done so, even though Mele is indebted to it for 

over $75,000. 

 Although it may be true that an indemnity agreement, 

standing alone, is insufficient to establish alter ego status, 

see United States ex Rel. Global Bldg. Supply, Inc. v. WNH Ltd. 

Partnership, 995 F.2d 515, 516-17 (4th Cir. 1993), this fact 

alone cannot blunt the impact of Tri-County's general willingness 

to sacrifice its own interests for those of Mele. This view is 

confirmed by Tri-County's failure to object to Mele's proposed 

plan in bankruptcy proceedings to subordinate Mele's debt to TriCounty to that of all other creditors. 

 We agree with the district court that the record 

reveals a family enterprise divided into formal "divisions" but 

nonetheless controlled by the same people -- John Mele and his 

family -- and that Mele employed Tri-County to Mele's own 

business ends. Tri-County relied entirely on Mele for its 

existence, both financially and operationally. In function, TriCounty was nothing more than the "personnel" arm of Mele. In 

light of the district court's findings of undercapitalization, 

non-functioning of independent officers, non-payment of 

dividends, Tri-County's consequent insolvency, and the 

subordination of Tri-County's financial interests to those of 

Mele, all of which survive clear error scrutiny, we are satisfied 
19 

that Local 542 met its burden under Pennsylvania law of showing 

that "[Mele] wholly ignored the separate status of [Tri-County] 

and so dominated and controlled its affairs that its separate 

existence was a mere sham." Wheeling-Pittsburgh Steel Corp. v. 

Intersteel, Inc., 758 F.Supp. 1054, 1057 (W.D.Pa. 1990); accord

Lycoming County Nursing Home, 627 A.2d at 243-44. 

C. 

 Hartford next argues that even if Tri-County and Mele 

are alter egos in the traditional sense, it was inequitable for 

the district court to hold Hartford liable to Local 542 under the 

Bond. Hartford argues, in essence, that as it is a "third party" 

guarantor of Tri-County's obligations to Local 542, Hartford's 

bond cannot be reached. We disagree. 

 This particular issue has arisen a number of times in 

connection with the Miller Act, 40 U.S.C. § 270a et seq., and 

Pennsylvania courts have relied upon these Miller Act decisions 

in determining whether to pierce the corporate veil in non-Miller 

Act payment bond cases. See Lezzer Cash & Carry, Inc. v. Aetna 

Ins. Co., 537 A.2d 857, appeal denied, 548 A.2d 256 (Pa.Super. 

1988). 

 The Miller Act (the "Act") requires prime contractors 

on any construction contract with the United States exceeding 

$25,000 to execute a bond "for the protection of all persons 

supplying labor and materials." 40 U.S.C. § 270a(a)(2) (1986). 

The Act contains two important restrictions mirrored in many 

private payment bonds. First, Like Hartford's Bond, a Miller Act 
20 

bond's coverage is limited to "first-tier" subcontractors (such 

as Tri-County) and those who contract with them (such as Local 

542). J.W. Bateson Co., Inc. v. United States ex rel. Board of 

Trustees of Nat. Automatic Sprinkler Industry Pension Fund, 434 

U.S. 586, 594 (1978). 

 Second, § 270b(a) of the Act imposes a timely notice 

requirement essentially identical to that in Hartford's Bond, 

which requires those who contract with first-tier subcontractors, 

but not the first-tier subcontractors themselves, to give notice 

of their claims within 90 days after they last provided labor or 

materials. 

 These limitations have given rise to cases in which 

claimants on a payment bond seek to characterize the party with 

whom they contracted as the alter ego of a Miller Act contractor 

or subcontractor in order to avoid either the 90 day notice 

requirement or the coverage limitation of the Act. See, e.g., 

Continental Casualty Co. v. United States ex rel. Conroe 

Creosoting Co., 308 F.2d 846, 848 (5th Cir. 1962) (claim on 

Miller Act bond permitted by supplier of sub-subcontractor when 

sub-subcontractor was merely a "shadow" of the subcontractor); 

Glens Falls Ins. Co. v. Newton Lumber & Mfg. Co., 388 F.2d 66 

(10th Cir. 1967), cert. denied, 390 U.S. 905 (1968) (when 

claimants had negotiated primarily with subcontractor but 

contracted with a sub-subcontractor, the sub-subcontractor, whose 

principal was a relative of the president of the contractor, was 

held to be a "sham" and surety was therefore liable to them on 

the bond); National Surety Corporation v. Unites States ex rel. 
21 

Way Panama, S.A., 378 F.2d 294, cert. denied, 389 U.S. 1004 (5th 

Cir. 1967) (90 day notice provision not binding on plaintiff when 

contractor and subcontractor "operated essentially as one 

entity"); United States ex rel. Gilarde Environmental Management 

v. Federal Ins. Co., No. 89-1473, 1990 U.S. Dist. LEXIS 17929 

(M.D.Pa. 1990) (same).0

 The Fourth Circuit has held that Miller Act sureties 

may be reached "where ordinary principles of corporate law permit 

the courts to disregard corporate forms." Global Building 

Supply, Inc. v. WNH Ltd. Partnership, 995 F.2d 515, 519 (4th Cir. 

1993). The findings that we have upheld, and the conclusion to 

which they lead, have obliged us to hold that Mele and Tri-County 

were alter egos under ordinary principles of Pennsylvania law. It 

follows that Hartford may be held liable on the bond and, despite 

Hartford's argument, we are satisfied that the equities do not 

suggest a contrary result. 

 

0This Court has declined to pierce the corporate veil when there 

was "no evidence of familial ties or of any other facts" 

suggesting that the contractor and subcontractor had considered 

their own contractual relations to be other than "serious and 

enforceable obligations." United States ex rel. K & M Corp. v. A 

& M Gregos, Inc., 607 F.2d 44, 48 (3d Cir. 1979). Gregos, which 

recognized the limitations on the right of remote sub-contractors 

to sue imposed by the Supreme Court's interpretation of the 

Miller Act in J.W. Bateson Co., Inc. v. United States ex rel. 

Board of Trustees, 434 U.S. 586 (1978), also turned on a lack of 

evidence that the contractor had been motivated to limit its 

liability on the bond. Id. Here, different findings regarding 

alter ego have been made. The district court found Mele and TriCounty to be just one company, with strong family ties and with 

clear indicia of domination and control. Moreover, it cannot be 

gainsaid that Hartford attempted to limit its liability on the 

Bond by seeking Tri-County's indemnification. 
22 

 Further, Tri-County's indemnity obviated the very 

purpose of the notice provision, which is to remove the risk that 

the surety would end up "double-compensating" both 

subcontractors, such as Tri-County, and their suppliers, such as 

Local 542. See United States ex rel. Blue Circle West, Inc. v. 

Tuscon Mechanical Contracting Inc., 921 F.2d 911 (9th Cir. 1990). 

As the United States Supreme Court explained in J.W. Bateson Co., 

Inc. v. United States ex rel. Board of Trustees, 434 U.S. 586 

(1978), bond notice provisions function much like a statute of 

repose, "permit[ting] [the surety], after waiting ninety days, 

safely to pay [the] subcontractors without fear of additional 

liability to sub-subcontractors. . .. The notice provision thus 

prevents both 'double payments' by [sureties] and the alternative 

of interminable delay in settlements between contractors and 

subcontractors." Id. at 590-91 n.4 (citations omitted). See 

also Lezzer, 537 A.2d at 862. Because Tri-County itself could 

make no claim against Hartford, this risk was absent from the 

outset. 

 After having treated Mele and Tri-County as essentially 

the same company, Hartford cannot now assert Tri-County's 

independence as a means of avoiding liability. The district 

court determined that the facts and the equities in this case 

required piercing the corporate veil and holding Mele to be TriCounty's alter ego. We agree.0

 

0The dissent claims that "[t]he relationship between Mele and 

Tri-County does not deprive Hartford of its status as an innocent 

third party." Dissent Typescript at 9. We are confident that 

our analysis, which relies on the Miller Act cases and which 
23 

IV. ERISA Preemption 

 Hartford next contends that Local 542's action under 

the Bond is preempted by the Employees Retirement Income Security 

Act, 29 U.S.C. §§ 1001-1461 ("ERISA").0 We must also reject this 

argument. 

A 

 With several exceptions not relevant here, § 514(a) of 

ERISA, 29 U.S.C. § 1144(a), "preempts 'any and all State laws 

insofar as they may now or hereafter relate to any employee 

benefits plan' covered by the statute." Mackey v. Lanier 

Collection Agency & Service, Inc., 486 U.S. 825, 829 (1988) 

(quoting § 514(a)). 

 We recently stated that a rule of law "relates to" an 

ERISA plan "if it is specifically designed to affect employee 

benefits plans, if it singles out such plans for special 

treatment, or if the rights or restrictions it creates are 

predicated on the existence of such a plan." United Wire, Metal 

and Machine Health and Welfare Fund v. Morristown Memorial 

Hospital, 995 F.2d 1179, 1192 (3d Cir.), cert. denied, __ U.S. 

__, 114 S.Ct. 382 (1993) (footnotes omitted). 

 

leads to Hartford's liability, would be followed by Pennsylvania 

courts. 

0We are not persuaded by Local 542's argument that Hartford 

failed to preserve its preemption claim for appeal because 

Hartford first raised the issue in its proposed findings of fact 

after all evidence had been adduced. Accordingly, we address 

Hartford's preemption argument on the merits in text. 
24 

 In addition, state causes of action which conflict with 

ERISA § 502(a) (ERISA's civil enforcement mechanism) are also 

preempted. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 

(1987); see also Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 

142 (1990). 

 Although neither party has briefed the issue, we assume 

that Local 542 is proceeding at common law as third-party 

beneficiary of the surety bond. See Philadelphia v. Smith 

Roofing, 599 A.2d 222, 229 (Pa.Super. 1991). 

 At the outset, it is clear that the cause of action 

relied upon by Local 542 is neither "specifically designed to 

affect employee benefits plans" nor "singles out" such plans for 

special treatment. United Wire, 995 F.2d at 1192. Rather, such 

common law causes of action are "generally applicable" laws that 

"make[] no reference to, [and] indeed function[] irrespective of, 

the existence of an ERISA plan." Ingersoll-Rand, 498 U.S. at 

139. 

 Nor is the cause of action "predicated on the existence 

of" an ERISA plan. United Wire, 995 F.2d at 1192. In IngersollRand the Supreme Court held that ERISA preempted Texas' common 

law action against an employer for terminating an employee in 

order to avoid paying pension fund benefits. One of the two 

reasons given by the Court for why the Texas action was preempted 

was that "in order to prevail [in the cause of action], a 

plaintiff [must] plead, and the court [must] find, that an ERISA 

plan exists and the employer had a pension-defeating motive in 

terminating the employment." Id. at 140. Such a cause of action 
25 

"relates not merely to pension benefits, but to the essence of 

the pension plan itself." Id. (emphasis in the original). The 

Court concluded that "[b]ecause the court's inquiry must be 

directed to the plan, this judicially created cause of action 

'relate[s] to' an ERISA plan." Id. No such inquiry is 

necessary in the present action. 

 Here, the district court need only determine Hartford's 

obligations under the Bond. It need make no inquiry into the 

validity or status of the funds (or indeed whether they are ERISA 

funds), nor need it explore Hartford's motives regarding employee 

benefits. The fact that the claimant under the bond happens to 

be an ERISA fund is not the kind of "critical factor in 

establishing liability" that prompted preemption in IngersollRand. Id. at 139-40.0

 

0For this reason, Hartford's reference to our decisions in 

Bricklayers and Allied Craftsmen International Union Local 33 

Benefits Funds v. America's Marble Source, Inc., 950 F.2d 114 (3d 

Cir. 1991) and 1975 Salaried Retirement Plan v. Nobers, 968 F.2d 

401 (3d Cir. 1992), cert. denied, __ U.S. __, 113 S.Ct. 1066 

(1993) is inapposite. Bricklayers held that ERISA preempted the 

New Jersey Construction Workers' Fringe benefit Security Act, 

N.J.STAT.ANN. § 34:11A-1--34:11A-12, which imposed certain 

obligations on prime contractors and owners of construction 

projects to assure payments owed by subcontractors-employers to 

ERISA-regulated fringe benefit funds. The New Jersey statute 

challenged in Bricklayers was "specifically designed to affect 

employee benefit plans," Bricklayers, 950 F.2d at 118 (quoting 

Mackey v. Lanier Collection Agency & Serv., 486 U.S. 825, 829 

(1988)), and, as such, was clearly within the preemption 

doctrine. 

 In Nobers, various plaintiffs brought a contract action 

seeking damages equivalent to what they would have received under 

an ERISA plan had they not been terminated under certain 

allegedly improper circumstances. This Court determined, 

following Ingersoll-Rand, that the action was preempted because 

it "depend[ed] on the existence of an ERISA plan" and "if there 

were no plan, there would have been no cause of action." Nobers, 
26 

 Our recent decision in Haberern v. Kaupp Vascual 

Surgeons Pension Plan, 24 F.3d 1491, 1497 (3d Cir. 1994) is 

instructive on this point. Ms. Haberern's employer made 

contributions to her pension plan based on the size of her salary 

excluding bonus. By re-characterizing a portion of her 

compensation as a "bonus," the employer effectively reduced the 

amount it paid into her pension plan. Ms. Haberern claimed that 

this constituted a violation of ERISA. The defendant argued that 

Ms. Haberern's status as an at-will employee under Pennsylvania 

law allowed it to change her compensation at any time. Ms. 

Haberern responded that ERISA preempted Pennsylvania law on atwill employment in this regard. On appeal, we held that 

Pennsylvania's common law presumption of at-will employment 

relationships was not preempted by ERISA because the presumption 

was "unrelated to the existence vel non of any pension plan." Id.

at 1497. The very same may be said of Local 542's cause of 

action. Simply because the sums collected may ultimately feed 

into an ERISA-governed fund does not in itself mean that the 

cause sued upon creates rights or restrictions which are 

"predicated on" the existence of an ERISA plan.0

 

968 F.2d at 406. We find Nobers to be distinguishable. The 

state contract action challenged in Nobers was predicated on the 

existence of benefits allegedly available to certain employees 

under the ERISA plans. Thus, Nobers would have required "a 

plaintiff [to] plead, and the district court [to] find, that an 

ERISA plan exists" and that the plaintiffs would have been 

entitled to benefits under the plan, the very exercise which 

prompted preemption in Ingersoll-Rand, 998 U.S. at 140. We need 

undertake no such exercise here. 

0Indeed, it should not be overlooked that the damages sought by 

Local 542 and ordered to be paid by Hartford include not just 

benefit funds, but union dues as well. 
27 

B 

 Nor is the cause of action asserted here subject to 

what we have termed "conflict preemption" under ERISA. See PAS 

v. Travelers Insurance Company 7 F.3d 349, 356 (3d Cir. 1993). 

ERISA's civil enforcement remedies were meant to be exclusive. 

Pilot Life, 481 U.S. at 51. Thus, even a common law cause of 

action is preempted by ERISA if it conflicts directly with an 

ERISA cause of action. See Ingersoll-Rand, 498 U.S. at 142. 

 Together, ERISA §§ 502 and 515 (29 U.S.C. §§ 1132 

and 1145, respectively) "provide a cause of action and remedies 

for an employer's failure to fulfill its obligations to make 

pension or welfare fund contributions pursuant to a plan or 

collective bargaining agreement." Bricklayers and Allied 

Craftsmen International Union Local 33 Benefits Funds v. 

America's Marble Source, Inc., 950 F.2d 114, 117 (3d Cir. 1991) 

(emphasis added). 

 Section 3 of ERISA, 29 U.S.C. § 1002(5), defines 

"employer" as "any person acting directly as an employer, or 

indirectly in the interest of an employer, in relation to an 

employee benefit plan." Courts that have considered the matter 

have all but unanimously held that sureties do not fall within 

this definition. See, e.g., Carpenters So. Cal. Admin. Corp. v. D 

& L Camp Construction Co., Inc., 738 F.2d 999, 1000 (9th Cir. 

1984) (legislative history of ERISA revealed no Congressional 

intent to "expand the concept of employer . . . to include 
28 

sureties, whose obligations are fixed by contract and regulated 

by state law for the protection of the public"). 

 The Eleventh Circuit has emphasized that sureties who 

are not signatories to the collective bargaining agreement 

between the employer and the claimants do not fall within the 

ERISA definition of "employer," stating as follows: 

The phrase, "in the interests of the 

employer" is the operative one here. The 

surety does not act indirectly in the 

interests of the employer, but rather acts 

directly in the interests of employees 

damaged by the employer's failure to pay. 

Xaros v. U.S. Fidelity and Guarantee Co., 820 F.2d 1176, 1180 

(11th Cir. 1987); cf. Laborers Local 938 Joint Health & Welfare 

Trust Fund v. B.R. Starnes Co., 827 F.2d 1454, 1457 (11th Cir. 

1987); Giardiello v. Balboa Ins. Co., 837 F.2d 1566 (11th Cir. 

1988). But see Greenblatt v. Delta Plumbing & Heating Corp., 818 

F.Supp. 623, 629 (S.D.N.Y. 1993) (rejecting the reasoning of the 

Eleventh and Ninth Circuits and holding that a surety qualified 

as an employer under ERISA). 

 We agree with the Ninth and Eleventh Circuits that a 

surety does not act "in the interest of an employer." Although 

it is true that the surety's services are often purchased by the 

employer in order that it may proceed with its business, the 

ultimate beneficiaries of that contract are the claimants on the 

bond. The surety does not stand in an employer relationship to 

the claimants, nor is it the agent of the employer. Thus, 

Hartford, which is neither the employer of Local 542's operating 
29 

engineers nor acting "in the interests of" their employer, cannot 

claim ERISA preemption. 

V. Damages 

 Hartford's final argument on appeal concerns the extent 

of its liability under the Bond. The district court awarded 

Local 542 a total of $126,224.11, including $78,794.79 in unpaid 

contributions, $5,719.11 in union dues and $42,190.21 in 

liquidated damages, all derived from the provisions of the CBA 

(Collective Bargaining Agreement) less $480.00 in prepayment.0

The court also awarded reasonable attorney fees and costs of 

$19,881.73 according to the terms of the PFA (Pension Fund 

Agreement).0 Hartford contends that under Pennsylvania law its 

obligations do not extend to payment of liquidated damages and 

 

0Article VI of the Collective Bargaining Agreement requires the 

employer (Tri-County) to make timely fringe benefit contributions 

to the Funds of "26.6% of wages" divided up among the various 

funds, as well as a Union Check-Off equalling 3.2% of wages. 

Section seven of Article VI provides for a surcharge of 20% per 

annum or 2% above prime rate, whichever is higher, on certain 

late contributions. App. 25. 

0Article VIII, section 1 of the pension fund trust agreement 

between the union and the employer provides that: 

The Board of Trustees . . . shall have the 

right . . . to institute and prosecute . . . 

any proceeding at law . . . against any 

Employer . . . to collect unpaid 

contributions which may be or become due 

under this Agreement . . .. Such Employer 

shall pay all costs and reasonable attorney's 

fees incurred by the Board of Trustees in 

connection with any such litigation.

App. 133 (emphasis added) 
30 

attorney fees in the absence of a specific bond provision to the 

contrary. We agree. 

 Pennsylvania law, at least as announced by that State's 

intermediate courts, limits a surety's obligations to those 

detailed in the bond itself, Reliance Universal, Inc. v. Ernest 

Renda Contracting Co., Inc., 454 A.2d 39, 45 (Pa.Super. 1982), 

and not those contained in the agreement between the contractor 

and the claimant. J.C. Snavely & Sons, Inc. v. Web M & E, Inc., 

594 A.2d 333, 336 (Pa.Super. 1991). Local 542's claims against 

Hartford are predicated, at least in part, on Tri-County's 

obligations to it under the CBA and the PFA. Because the Bond 

makes no reference to liquidated damages or attorney fees, 

Hartford has disavowed any responsibility for these items. 

Hartford's bond provides as follows: 

[Hartford agrees] that every claimant . . . 

who has not been paid in full before the 

expiration of a period of ninety (90) days 

after the date on which the last of such 

claimant's work or labor was done or 

performed . . . may sue on this bond for 

. . . such sum or sums as may be justly due

claimant. . .. 

App. 97. Hartford is thus obliged to render to Local 542 all 

sums which Local 542 is "justly due" for labor. The district 

court reasoned that as Local 542 members would not be "paid in 

full" for their labor until all of Tri-County's obligations under 

the CBA and PFA (including liquidated damages and attorney fees) 

had been satisfied, Hartford must be liable for these items. 

Although the parties have pointed us to no decisions of the 
31 

Pennsylvania Supreme Court treating the issues presented here, we 

believe that the law of Pennsylvania is otherwise. 

 As previously noted, the bond is silent as to attorney 

fees and liquidated damages, and it is the language of the bond 

that is controlling under Pennsylvania law. Thus, the central 

question necessarily becomes: What obligations are "sums justly 

due" for labor? One answer is that the surety's obligations to 

the claimant are co-extensive with those of the employer. But 

this is simply to say that Hartford's obligations are fully 

determined by the agreements between Tri-County and Local 542. As 

already noted, this has been expressly (and recently) rejected by 

Pennsylvania's lower courts. Such decisions are persuasive 

precedent, National Surety Corp. v. Midland Bank, 551 F.2d 21, 29 

(3d Cir. 1977), and are "not to be disregarded by a federal court 

unless it is convinced by other persuasive data that the highest 

court of the state would decide otherwise." West v. American 

Telephone & Telegraph Co., 311 U.S. 223, 237 (1940).0

 

0The district court considered the Supreme Court's interpretation 

of the Miller Act in United States for the Benefit of Sherman, et 

al. v. Carter, et al., 353 U.S. 210 (1957) to be just such 

"persuasive data." The Miller Act requires contractors on public 

works projects to post a bond covering the "sum or sums justly 

due" suppliers of material and labor. See 40 U.S.C. 

§ 270a(a)(2). Carter held that "sums justly due" under the 

Miller Act included not only delinquent contributions to fringe 

benefits funds, but also liquidated damages and attorney fees. 

 We are not convinced that Carter is apposite in the 

present case. First, the Miller Act imposes policy-driven 

statutory obligations on the principal and surety which are not 

implicated here. Second, this Court implicitly rejected this 

view in Knecht, Inc. v. United Pacific Insurance Company, 860 

F.2d 74 (3d Cir. 1988), which concluded that under Pennsylvania 

law attorney fees are not "sums justly due" under a payment bond. 

Id. at 80-81. Further, in Carter the parties had expressly 
32 

 Nevertheless, it is clear that what Local 542 is 

"justly due" turns at least in part on what Tri-County promised 

Local 542. And this will inevitably be determined by reference 

to the agreements between them. Indeed, Hartford does not 

contest that Local 542 is "justly due" the fringe benefit 

contributions and union dues which are specified in detail in the 

CBA. The question thus becomes what of Tri-County's obligations 

to Local 542 are "sums justly due" for labor. 

 In regard to attorney fees, we have already held that 

they are not "sums justly due." In doing so, we rejected an 

argument very much like that proffered by Local 542 and accepted 

by the district court. In Knecht, Inc. v. United Pacific 

Insurance Company, 860 F.2d 74 (3d Cir. 1988), a supplier brought 

suit on a surety bond covering "sums justly due," seeking, inter 

alia, attorney fees. We stated as follows: 

The district judge noted that unless the 

[attorney] fees were paid, [the claimant] 

would not be made whole. This undoubtedly is 

correct but the judge's holding proved too 

much, as it is always true that when a 

plaintiff must make expenditures for 

attorney's fees to recover a debt it will not 

be made whole unless its fees are also 

recovered. Further, whenever a person is 

indebted to another the sum owed may be 

regarded as justly due. . . . In fact, we can 

hardly conceive of how a bond could be 

written to authorize a claimant to sue for 

 

stipulated that liquidated damages and attorney fees were 

compensation for labor. 353 U.S. at 220. Finally, whether 

Carter can stand for the broader proposition that such sums are 

always "justly due" must be questioned in the aftermath of F. D. 

Rich Co., Inc. v. United States, 417 U.S. 116 (1974), which held 

that an award of attorney fees under the Miller Act would in 

ordinary circumstances be an inappropriate abrogation of the 

American rule. Id. at 130-31. 
33 

anything less than a sum justly due. We also 

observe that in some contracts express 

provision is made for recovery of attorney's 

fees in the event of an action for breach. 

Yet in [the bond] no reference was made to 

attorney's fees. In the circumstances, we 

conclude that attorney's fees are not 

recoverable in this action. 

Id. at 80-81. Since Knecht, the Pennsylvania Superior Court has 

held that attorney fees are not sums "justly due." Snavely, 594 

A.2d at 334-37. As we are unable to discern a meaningful 

difference between the present action and the cause of action 

asserted in Knecht, we are constrained to reverse the district 

court's award of attorney fees. 

 We must similarly reverse the district court's award of 

"liquidated damages," a sum which the CBA refers to as a 

"penalty" to be assessed against Tri-County in the event of late 

payment of the fringe benefit contributions.0 On at least three 

occasions Pennsylvania courts (or courts applying Pennsylvania 

law) have rejected the liability of a surety for default 

obligations which add some percentage accretion to the underlying 

debt. See Reliance Universal, Inc. of Ohio v. Ernest Renda 

 

0Section seven of Article VI of the CBA, entitled "Penalty 

Clause," provides as follows: 

All Fringe Benefits Funds. [P]ayments are 

due . . . not later than the 25th of the 

month . . .. In the event [of a delinquency 

continuing until] the 15th of the next 

succeeding month, there will be due . . . a 

penalty in the amount of twenty percent (20%) 

per annum or 2% above the prime rate, 

whichever is higher, of the original 

contributions which will be assessed until 

the delinquency . . . [is] resolved. 

App. 25. 
34 

Contracting Co., 454 A.2d 39, 44-46 (Pa.Super. 1982) (surety on 

bond covering cost of "all labor and material used" not liable 

for a 1 1/2% "service charge" for late accounts provided for in 

contract between contractor and supplier because not part of the 

"cost" of labor and materials); Lite-Air Products, Inc. v. 

Fidelity & Deposit Co. of Maryland, 437 F.Supp. 801, 804 (E.D.Pa. 

1977) (surety on bond covering "amount due the claimant for such 

labor or material" not liable for "finance charges" on late 

payments for materials because such charges are more akin to 

penalties or damages than they are related to the value of the 

materials); J.C. Snavely & Sons, 594 A.2d at 335-37 (surety on 

bond covering "sums as may be justly due" not liable for attorney 

fees and finance charges accrued under agreement between claimant 

and contractor because not detailed in the payment bond). See 

also Salvino Steel & Iron Works, Inc. v. Fletcher & Sons, Inc., 

580 A.2d 853, 856 (Pa.Super. 1990) (surety on bond covering 

payment to those who have "furnished material or performed or 

supplied labor" not liable for delay damages attributable to 

contractor because not within the express language of the bond).0

 These cases reveal a clear reluctance on the part of 

Pennsylvania courts to expand the liability of a surety beyond 

the base or essential obligations of the contractor. Indeed, in 

Lite-Air the court declined to hold a surety liable for "finance 

charges" for delinquent payments as they were in the nature of a 

 

0The district court distinguished many of the above-cited cases 

on the ground that they involved suppliers of material, not 

labor. We are not persuaded by this distinction. 
35 

penalty -- and "penalty" is precisely how the "liquidated 

damages" are described in the CBA. In the absence of an express 

provision in the Bond, we conclude that such additional 

contractual "charges," "fees" or "penalties" cannot be considered 

"sums justly due" and hence are not recoverable from a surety 

under Pennsylvania law. Accordingly, we will reverse the 

district court on this ground as well. 

VI. 

 Having considered the record and the arguments of the 

parties, we will affirm the district court's March 2, 1994 and 

February 15, 1995 orders insofar as they entered judgment on 

Count IV against Hartford and in favor of Local 542 for unpaid 

contributions and union dues, less prepayments. 

 We will, however, reverse the district court's orders 

insofar as they grant liquidated damages and attorney fees to 

Local 542, and we will remand to the district court with 

directions that the March 2, 1994 order and the February 15, 1995 

judgment be modified to delete all amounts awarded to Local 542 

for liquidated damages and attorney fees, consistent with the 

foregoing opinion. 

Ragan v. Tri-County Excavating, Inc. et al.

Nos. 94-1388 & 95-1189 

HUTCHINSON, J., Dissenting. 
36 

 I respectfully dissent from the Court's decision to 

affirm the district court's March 2, 1994 order. In my view, the 

district court erred as a matter of law in piercing the corporate 

veil. This case does not involve exceptional circumstances, nor 

demand the use of this extraordinary remedy to impose liability 

on Hartford, an independent third-party surety. Moreover, the 

district court's factual findings leave me with a definite and 

firm conviction that a mistake was committed. In my opinion, the 

Court embraces, contrary to applicable Pennsylvania law, an 

overly broad view of the doctrine that permits a court to pierce 

the corporate veil in extraordinary cases to prevent fraud or 

injustice. In addition, I believe the Court's holding is likely 

to unsettle the reasonable expectations of parties who secure 

bonds for the payment of materialmen and suppliers (as well as 

others) in construction projects and reduce competition in the 

industry.0

 Local 542 concedes that it did not give Hartford ninety 

days notice of its claims in accord with the bond terms. 

Pennsylvania law requires compliance with this type of notice 

provision as a condition precedent to recovery on a payment bond. 

See Lezzer Cash & Carry, Inc. v. Aetna Ins. Co., 537 A.2d 857, 

865 (Pa. Super.) ("The notice provision at issue here stated 

specifically that written notice within the ninety day period was 

a condition precedent to Aetna's liability on the bond. We are 

 

0I agree with the Court that Pennsylvania law, not ERISA, governs 

this case. I also concur with the Court's conclusion that 

Hartford could not be liable for counsel fees or liquidated 

damages. 
37 

obliged to enforce the terms of the agreement."), appeal denied, 

548 A.2d 256 (Pa. 1988). Therefore, Local 542 cannot recover 

against Hartford unless it can prevail under an alter ego theory. 

 Pennsylvania law is unclear as to whether the finding 

of alter ego is a question of fact or law. I am not insensitive 

to this Court's statement, applying federal law, that "[a] 

finding of an alter ego situation is a factual one and must be 

supported by the record."0 Carpenters Health & Welfare Fund v. 

Kenneth R. Ambrose, Inc., 727 F.2d 279, 283 (3d Cir. 1983) 

(citation omitted). More recently, however, we stated: 

 Assuming that Pennsylvania will permit 

recovery on an alter-ego theory on a showing 

of injustice, as opposed to fraud or deceit 

(a point not yet decided by the Pennsylvania 

Supreme Court), it is nevertheless plain that 

Pennsylvania, like New Jersey, does not allow 

recovery unless the party seeking to pierce 

the corporate veil on an alter-ego theory 

establishes that the controlling corporation 

wholly ignored the separate status of the 

controlled corporation and so dominated and 

controlled its affairs that its separate 

existence was a mere sham. See In re Penn 

Cent. Sec. Litig., 335 F. Supp. 1026, 1035 

(E.D. Pa. 1971); Ashley v. Ashley, 482 Pa. 

228, 236-238, 393 A.2d 637, 641 (1978). In 

other words, both Pennsylvania and New Jersey 

require a threshold showing that the 

controlled corporation acted robot- or 

puppet-like in mechanical response to the 

controller's tugs on its strings or pressure 

on its buttons. 

Culbreth v. Amosa Ltd., 898 F.2d 13, 14-15 (3d Cir. 1990) (per 

curiam); see also Craig v. Lake Asbestos of Quebec, Ltd., 843 

 

0This statement, arguably dictum, can be read as standing for no 

more than the obvious proposition that every legal conclusion 

must have factual support. 
38 

F.2d 145, 150 (3d Cir. 1988). The Culbreth standard has been 

followed by several district courts. See Jiffy Lube Int'l, Inc. 

v. Jiffy Lube of Pa., Inc., 848 F. Supp 569, 580 (E.D. Pa. 1994); 

May v. Club Med Sales, Inc., 832 F. Supp. 937, 938-39 (E.D. Pa. 

1993); Stinson v. GAF Corp., 757 F. Supp. 644, 645-46 (W.D. Pa. 

1990). This suggests to me that the alter ego determination 

involves elements of law as well as fact. 

 In any event, the treatment of two companies as alter 

egos is "an extraordinary remedy preserved for cases involving 

exceptional circumstances." Village at Camelback Property Owners 

Ass'n, Inc. v. Carr, 538 A.2d 528, 533 (Pa. Super. 1988), aff'd 

per curiam, 572 A.2d 1 (Pa. 1990); see also First Realvest, Inc. 

v. Avery Builders, Inc., 600 A.2d 601, 604 (Pa. Super. 1991) 

(characterizing the alter ego remedy as "extreme"); Connors v. 

Peles, 724 F. Supp. 1538, 1559 (W.D. Pa. 1989) ("The decision of 

a court to pierce the corporate veil . . . is to be exercised 

reluctantly and cautiously."). A party attempting to negate the 

separate existence of a corporate entity has the burden of 

presenting "clear, direct, precise and believable evidence that 

the corporate veil should be pierced." Iron Worker's Sav. & Loan 

Ass'n v. IWS, Inc., 622 A.2d 367, 376 (Pa. Super. 1993); see also

First Realvest, 600 A.2d at 604 (party failed to state sufficient 

facts to support alter ego theory); Carpenters Health, 727 F.2d 

at 284 (burden of proof rests on party attempting to pierce the 

corporate veil). 

 Pennsylvania law considers a variety of factors to 

determine whether one corporation is the alter ego of another. 
39 

They include the ignoring of corporate formalities, gross 

undercapitalization, a lack of corporate records, non-functioning 

officers and directors, non-arms-length transactions between the 

corporations, and especially domination and day-to-day control 

sufficient to deprive the alter ego of its corporate identity. 

See Village at Camelback, 538 A.2d at 533; see also Carpenters 

Health, 727 F.2d at 284; United States v. Pisani, 646 F.2d 83, 88 

(3d Cir. 1981). Before concluding a corporation is the alter ego 

of another, the trial court must be able to conclude, based upon 

the record, that justice or public policy demands the use of such 

an extraordinary remedy, that the rights of innocent parties will 

not be prejudiced, and that the theory of the corporate entity 

will not be rendered useless. Lezzer Cash & Carry, 537 A.2d at 

861 (quoting Ashley, 393 A.2d at 641). Absent extraordinary or 

unusual circumstances, a court should recognize and maintain the 

separate corporate identity. First Realvest, 600 A.2d at 604; 

Reverse Vending Assoc. v. Tomra Systems US, Inc., 655 F. Supp. 

1122, 1128 (E.D. Pa. 1987). 

 In determining whether Tri-County was Mele's alter ego, 

the district court expressly found that Tri-County consistently 

complied with all corporate formalities. Despite this finding, 

however, it then went on to conclude that the two corporations 

were alter egos. It found: (1) Tri-County only worked on Mele 

projects; (2) Tri-County was grossly undercapitalized; (3) 

Hartford treated Tri-County and Mele as one company; (4) TriCounty's president, who was the daughter of Mele's owner, lacked 

knowledge of the company's business; (5) Mele assisted in hiring 
40 

Tri-County employees; (6) Tri-County had never paid dividends; 

(7) Tri-County's employees only contact with Tri-County was its 

name on their paychecks; (8) the two companies' employees were 

interchanged; and (9) Mele proposed to subordinate all of its 

debt to Tri-County in bankruptcy proceedings without Tri-County's 

knowledge or authorization. Ragan v. Tri-County Excavating, 

Inc., No. 92-0066, slip op. at 4-7, 15 (E.D. Pa. March 2, 1994). 

 I believe the district court's findings are 

insufficient to support an alter ego theory. Put simply, Local 

542 failed to meet its threshold burden of showing that Mele 

"wholly ignored the separate status of [Tri-County] and so 

dominated and controlled its affairs that its separate existence 

was a mere sham." Culbreth, 898 F.2d at 14. Nor did Local 542 

show that Tri-County "acted robot- or puppet-like in mechanical 

response to [Mele's] tugs on its strings or pressure on its 

buttons." Id. at 15. In my opinion, the present circumstances 

are not so "exceptional" or "unusual" as to warrant extension of 

this extraordinary remedy to force Hartford to pay debts it did 

not agree to cover. See Village at Camelback, 538 A.2d at 533; 

First Realvest, 600 A.2d at 604; Lezzer Cash & Carry, 537 A.2d at 

861. 

 I also believe the Court's statement that "no finding 

of fraud or illegality is required before the corporate veil may 

be pierced, but rather, that the corporate entity may be 

disregarded 'whenever it is necessary to avoid injustice,'" 

Majority Op. at 16 (quoting Rinck v. Rinck, 526 A.2d 1221, 1223 

(Pa. Super. 1987)), is an incorrect statement of Pennsylvania 
41 

law. The Court in Culbreth did assume that Pennsylvania would 

pierce the corporate veil upon a showing of injustice but, 

nevertheless, concluded that a party had to make a threshold 

showing that the subordinate company was completely controlled 

and dominated or "acted robot- or puppet-like." Culbreth, 898 

F.2d at 14-15. I do not think Local 542 has so shown. Neither 

Rinck nor Culbreth involved an attempt to impose liability on a 

third-party through the third-party's dealings with an alter ego. 

Though an "injustice" standard is more flexible than a standard 

of "fraud," nevertheless, when the corporate veil is pierced 

under either standard, the knife is usually pointed at the 

shareholder who stands behind the veil, not those who contract 

with the shareholder's alter ego. 

 In reaching its conclusion, I believe the district 

court was improperly induced to make Hartford a full participant 

in the activities of Mele and Tri-County by its fixation on the 

fact that Local 542 was attempting to recover money for pension 

and other benefit plans. During the hearing, for instance, the 

district court stated that "nothing is more sacred today in this 

country than a pension plan because it's been ignored by too many 

people and that's important." Appellant's Appendix ("App.") at 

585. It also stated that "[t]o preclude recovery on their claim 

would have a serious impact on their pensions and health and 

other benefits." Ragan, No. 92-0066, slip op. at 16. Though 

workers' pension rights are important, I think the district 

court's decision placed too much emphasis on the persons in whose 
42 

behalf Local 542 sued. The pension problem should have been left 

to ERISA, which we all agree does not apply here.0

 In addition to finding exceptional circumstances where 

none exist, I believe the district court committed legal error by 

utilizing the alter ego theory to impose liability on an innocent 

third-party (Hartford). Ordinarily, courts apply the alter ego 

theory to impose liability upon a shareholder who manipulates its 

so-called alter ego. These cases present issues of corporate 

governance. The district court, however, made no distinction 

between the issue of corporate governance and the issue of 

contract and surety law, which controls this case. Instead, it 

simply treated this matter as one involving the alter ego 

doctrine and then used that doctrine to change the text of a 

contract between Hartford and Mele. It allowed Local 542 to 

pierce the corporate veil and impose liability on Hartford, a 

third-party contracting with Mele in the ordinary course of its 

business as a surety, rather than on Mele, the manipulative 

corporate shareholder who is responsible for the injustice, if 

any, that may be present here. 

 In doing so, it failed adequately to consider 

Pennsyvlania's general rule against piercing the corporate veil 

to the prejudice of innocent parties. See Ashley, 393 A.2d at 

641; Lezzer Cash & Carry, 537 A.2d at 861. In Lezzer Cash & 

 

0The ERISA issues seem to have dropped out of the case when TriCounty conceded its liability for the pension payments due 

Local 542. 
43 

Carry, the Superior Court of Pennsylvania addressed a fact 

pattern similar to this one. It stated: 

[T]here is no need to pierce the corporate 

veil in order to avoid injustice. As to the 

corporate enterprises of SGA [principal and 

general contractor] and Oreland 

[subcontractor], whatever their relationship 

may be, both Aetna [surety] and Lezzer 

[materialman] are not involved. On the 

contrary, both are innocent parties. Aetna 

issued a payment bond as requested by SGA and 

included therein terms which were 

satisfactory to SGA, the principal, and PHP, 

the obligee. Lezzer entered a contract to 

sell materials to Independence [subsubcontractor], with whom it had been doing 

business on prior occasions. It did so with 

knowledge of or the ability to learn the 

terms of the payment bond which had been 

issued by Aetna. As between Aetna and 

Lezzer, both innocent parties, there was no 

reason to pierce the corporate veils of SGA 

and Oreland in order to alter the terms of 

the bond which Aetna had agreed to write to 

protect designated subcontractors and 

materialmen. 

Lezzer Cash & Carry, 537 A.2d at 861. 

 In determining that Hartford was not innocent because 

it "considered Mele and Tri-County as one company," Ragan, No. 

92-0066, slip op. at 12, 16, the district court relied upon TriCounty's indemnity agreement, an internal memorandum from 

Hartford that referred to Tri-County as part of Mele, and 

Hartford's review of Tri-County's financial statements. In my 

view, this is insufficient to support a finding that Hartford was 

not an innocent third-party. See James E. McFadden, Inc. v. 

Baltimore Contractors, Inc., 609 F. Supp. 1102 (E.D. Pa. 1985) 

(inter-office memoranda largely irrelevant to alter ego issue); 
44 

Global Building Supply, Inc. v. WNH Ltd. Partnership, 995 F.2d 

515 (4th Cir. 1993) (name association insufficient to find one 

company is alter ego of other). As with the surety in Lezzer 

Cash & Carry, Hartford issued a payment bond containing terms 

agreeable to Mele, not Local 542. The relationship between Mele 

and Tri-County does not deprive Hartford of its status as an 

innocent third-party. 

 In this respect, I recognize Pennsylvania's tendency to 

look to federal cases interpreting the Miller Act as persuasive 

authority, and I have no quarrel with the principle that 

"sureties may be reached 'where ordinary principles of corporate 

law permit the courts to disregard corporate forms.'" Majority 

Op. at 21 (quoting Global Building Supply, Inc., 995 F.2d at 

519). However, in Pennsylvania, "ordinary principles of 

corporate law" seem to me to preclude use of alter ego doctrine 

to impose liability on innocent third-parties. See Ashley, 393 

A.2d at 641; Lezzer Cash & Carry, 537 A.2d at 861. In 

particular, I do not find persuasive those Miller Act cases that 

pre-date Ashley and Lezzer Cash & Carry. See Global Building 

Supply, 995 F.2d at 519 (describing pre-Bateson cases as 

"arguably" more prove to excuse non-compliance with a bond's 

notice provision than those that came after Bateson). 

 Additionally, I am unable to accept the Court's 

conclusion that Hartford (as a third-party surety) can be 

compelled to pay because the party "in control of a corporation 

uses that control, or uses the corporate assets, to further his 

or her own personal interests. . . ." Majority Op. at 16 
45 

(quoting Ashley, 393 A.2d at 641). Such a general statement 

strikes me as obiter dictum. At best, it is a truism. At worst, 

if taken seriously, it would permit courts to ignore the fiction 

of separate corporate existence at will. That fiction is one of 

proven utility and, in my judgment, essential to the functioning 

of a modern free market industrial society. 

 Finally, I believe the district court not only erred as 

a matter of law, but that its ultimate finding that Mele and TriCounty were alter egos is clearly erroneous. Put somewhat 

differently, viewing the record as a whole leads me to a 

"definite and firm conviction that a mistake has been committed." 

Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985) (internal 

quote omitted). 

 Specifically, Tri-County followed all corporate 

formalities and maintained a legitimate set of corporate records. 

Although Mele may have participated in Tri-County's management, 

there is no clear indication that John Mele or his corporation 

dominated and controlled Tri-County to such an extent that it was 

a facade or a sham. See McFadden, 609 F. Supp. at 1105 (mere 

participation in management is insufficient). Further, neither 

John Mele nor his corporation owned any stock in Tri-County; nor 

can the court attribute a financial interest to John Mele and the 

Mele corporation simply because his three daughters were TriCounty's sole shareholders. Related family corporations often 

have common stockholders. 

 The fact the district court seemed to rely upon most 

strongly was the indemnity agreement Hartford demanded from Tri-
46 

County and the Mele family's other corporations. The record 

indicates, though, that Tri-County and its owners reasonably 

thought they would benefit financially if Mele obtained bonding 

and performed the project. Thus, I conclude the indemnity 

agreement is insufficient to justify the conclusion that TriCounty was Mele's alter ego. 

 The district court also relied on testimony that some 

of Tri-County's employees were interviewed and hired at Mele's 

offices. The record, however, also shows that these interviews 

were done by a Tri-County employee, who made the decision to 

hire. Moreover, the testimony to the effect that it was common 

knowledge that Tri-County and Mele were the same company can just 

as easily be taken as showing that Local 542 dealt with TriCounty with its eyes open. See Lezzer Cash & Carry, 537 A.2d at 

861. The fact that a Tri-County employee attended a meeting with 

Hartford concerning the surety bond does not appear unusual to me 

as Hartford was asking Tri-County to indemnify it. 

 I recognize, of course, that Tri-County's president's 

responses to the district court could indicate that she lacked 

any detailed knowledge of Tri-County's operations. The district 

court used these responses to conclude that the president was a 

mere figurehead. Many times, however, her answers merely 

indicated confusion over the nature of the question and the 

district court's manner in asking it. 

 The district court believed that Tri-County's ignorance 

of Mele's proposal to subordinate Tri-County's debt in its 

bankruptcy proceeding was significant. I fail to see how a 
47 

"unilateral" offer by Mele to subordinate its debt to Tri-County, 

without Tri-County's knowledge, is evidence of Tri-County's 

participation in abuse of the corporate form warranting 

application of the alter ego doctrine. 

 The district court's conclusion that Tri-County only 

worked on projects with Mele is not borne out by the record. The 

district court's belief that Tri-County was grossly 

undercapitalized ignores the economic reality that it had 

operated successfully for twenty-three years. So, too, TriCounty's failure to pay dividends strikes me as nothing unusual 

for family corporations whose owners are acquainted with our 

income tax laws. 

 On the other hand, the undisputed fact that there was 

no commingling of funds and Tri-County was not recently 

incorporated indicate, along with their observance of corporate 

formalities, that the separate corporate existence of Mele and 

Tri-County should not be ignored. Taking all these facts 

together, I am unable to conclude that Local 542 produced 

evidence that is clear, precise and convincing enough to warrant 

piercing the corporate veil. 

 Accordingly, I would reverse the district court's 

judgment in all respects. 
48