Thursday, May 17, 2007

Personal Liability Imposed Against Sole Proprietor Operating Under "D/B/A" Designation

A sole proprietor operating as a “d/b/a” (i.e., doing business as) is personally liable for ERISA fringe benefit fund contributions owed by his/her “business” as well as for attorney’s fees. So holds the United States District Court for the Southern District of New York in Trustees, Mason Tenders District Council Welfare Fund v. Faulkner, 04 Civ. 5262 (S.D.N.Y. May 1, 2007).

In Faulkner, the union benefit funds commenced an action against Thomas Faulkner d/b/a American Demolition and Thomas Faulkner, individually, for injunctive and equitable relief as well as for breach of contract. The suit was brought on grounds that the defendants had failed to permit an audit of American Demolition’s books and records, and were delinquent in making fringe benefit contributions to the plaintiffs as required by a collective bargaining agreement and ERISA. The court determined ultimately that American Demolition was a sole proprietorship and, as such, Thomas Faulkner was personally liable for the debts of his “business,” including the delinquent benefit fund contributions. The court also awarded attorney’s fees as mandated by ERISA.

In discussing its reasoning for this finding, the court noted that the designation “d/b/a” "'is merely descriptive of the person or corporation who does business under some other name [and that] [d]oing business under another name does not create an entity [distinct] from the person operating the business'" [citation omitted]. Interestingly, the court also noted that “Faulkner did not create a distinct business entity by operating his sole proprietorship under the name American Demolition.” This is somewhat inconsistent with the court’s initial conclusion that a “d/b/a” designation confers no substantive separation between the individual and the faux entity. Could the court’s latter statement be construed to mean that operating the business as “American Demolition” without the "d/b/a" designation in the title might have saved Faulkner from personal liability? Could the statement be construed to mean that Faulkner should have operated his business in some variation of the corporate form in an effort to avoid personal liability? Given the holding of the case, I think not, but I continue to be amazed that courts simply plop sentences like that into an opinion to leave open for interpretation. Ain't it a hoot trying to read tea leaves, kids?

In any event, the unwary should heed the decision in Faulkner as it confirms that operating a business as a "d/b/a" provides absolutely no protection against personal liability whatsoever. It also confirms that being cheap doesn't pay ... spend the few bucks to incorporate, observe the corporate formalities, and perhaps, if you're very, very good boys and girls, an expensive problem may be avoided.

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