Answers That Are Simple, Obvious and Wrong – The Risk Inherent in a Common Business Structure

Answers That Are Simple, Obvious and Wrong – The Risk Inherent in a Common Business Structure

     In many closely held business ventures, the real estate from which the business operates is held in a separate LLC owned by some or all of the owners of the operating company. The rationale for this structure is that the operating company will each year pay to the real estate company lease payments, generating for the operating company a tax deduction. In turn, the real estate company will have a deduction for any mortgage interest (if any) it pays and will in turn distribute net earnings exempt from Social Security and Medicare taxes. Mot oft recognized is that this structure exposes the real estate company to employee injury claims for which the operating company enjoys the benefit of worker’s compensation exclusivity.

       This issue was identified in a recent decision from Maine, Clark v. Benton LLC, 2018 ME 99, __ A.3d __, 2018 WL 3432039 (Ma. July 17, 2018). Therein, the facilities from which a number of lumber company operations, Hammond Lumber Company, operated from realty owned by separate LLC's owned by one or more of the shareholders of Hammond Lumber. In February, 2015, Clark, a Hammond Lumber employee since 2009, visited the facility located in Fairfield, that property being owned by Benton LLC. Clark’s manager identified rooftops from which Clark was to remove the accumulated snow. In the course of doing so, he fell through a skylight, suffering significant injuries. In accordance with the worker’s compensation insurance policy maintained by Hammond Lumber, Clark’s claim for workers compensation was satisfied.

      That was not, however, the end of the story, Clark then brought suit against Benton LLC on a variety of claims, specifically its:

Failure to (1) properly maintain the property; (2) provide premises reasonably safe for his work; and (3) warn him of dangerous conditions that Benton LLC, knew or should have known existed. 2018 WL 3432039, *2.

      When Benton LLC moved for summary judgment on the ground that Clark had already been compensated in accordance with the worker’s compensation law and therefore Benton LLC was immune from suit, Clark objected, and Benton, LLC appealed.

      The Maine Supreme Court, considered its prior law that, in certain instances, the worker’s compensation exclusivity could extend to a landlord closely affiliated with the employer. Focusing on the particular facts here presented, the Maine Supreme Court wrote “We know that a property-owning entity is not afforded immunity by the [Worker’s Compensation] Act by the simple facts that one of its officers is also an officer of the entity that employs the injured person, the employer has secured compensation according to the Act for the injured person, and the property-owning entity allows the employer to use its premises for its business purposes.” Id., *3.

      From there, the Maine Supreme Court explored the “dual persona doctrine.” The court was clear that the effort by Benton LLC to utilize this doctrine was inapposite its intention, namely “as an exception to the employer immunity provisions of the workers’ compensation statutes.” Id., *4.

      Distinguishing prior law, the Maine Supreme Court noted that:

“There is no employment relationship between Benton, LLC and Clark. Rather, Benton, LLC, is a legally separate entity from Hammond Lumber Company, with separate duties as a property owner.” Id.

      Further, the Court indicated that this case may be more similar to that of Labelle v. Crepeau, 593 A.2d 653 (Me. 1991), wherein it was held that

“The land owner was not afforded immunity by the [Worker's Compensation] Act because he ‘was not sued in his capacity as an employee or corporate officer. Rather, he was sued individually as the owner of premises he leased to a separate corporate entity,’ and for his alleged breach of the duty to ensure that those premises were safe.” Id.

      For that reason, the denial of summary judgment to Benton LLC was not improper, and Benton LLC is not immune from suit.

      In a footnote, it was observed that “Benton, LLC, essentially argues that we should disregard its and Hammond Lumber’s separate corporate forms.” Id., n. 4. In rejecting those efforts, the court cited the Labelle decision for the principle that “[w]e do not ignore the corporate entity in order to allow a shareholder to avoid the burdens of incorporation.”

      It should be recognized that this case is in no manner an outlier. Rather, there are a number of decisions from across the country that in effect call into question the operating company/realty company format. For example, in Howsden v. Roper’s Real Estate Company, 2011 WL 5105810 (Neb. Oct. 28, 2011), the real estate holding company affiliated with an operating company defended a claim brought by an employee who fell down a seldom-used elevator shaft.  It was held that the suit against the realty company could proceed because it was not the plaintiff’s employer entitled to the exclusivity protections of the worker’s compensation statute. A similar decision from Kentucky, Jessie v. Dermitt, No. 2005-CA-0011961-MR (Ky. App. Dec 8, 2016), likewise held that the real estate holding company did not enjoy the exclusivity of the worker’s compensation coverage when an employee of the operating company fell through a hole cut in the floor as part of a remodeling effort and then covered with a tarp. Curiously, both the Nebraska Howsden and Kentucky Jessie decisions involve funeral homes.

      Companies utilizing the dual operating company/realty company structure may be doing so for well reasoned, entirely legitimate reasons. The caution of these cases should be simply another component of that analysis, one that is recognized when insurance coverage is being sought.