Digital Extra: The Station Fire

The question is whether the former nightclub owners' "limited liability company" shields them from a $1-million penalty for lacking workers' compensation insurance.

01:00 AM EDT on Thursday, August 5, 2004

BY LYNN ARDITI
Journal Staff Writer

A state Workers' Compensation Court judge yesterday heard opposing arguments about whether Michael and Jeffrey Derderian can be held personally liable for a $1.06-million penalty against their company for violating the state workers' compensation insurance law.

The focus of the hearing was on the state law and how it applies to the "limited liability company" that the Derderian brothers had in place when the nightclub burned to the ground on Feb. 20, 2003.

The case, which may ultimately be decided by the state Supreme Court, could determine how much, if any, of the $1.06 million the state may be able to collect. The Station is the only known asset of the Derderians' company, Derco LLC. The Derderians lawyers maintain their clients do not have $1.06 million.

The Derderians admitted to state labor officials more than a year ago that they had no workers' compensation coverage for nearly three years before the nightclub fire.

The state Department of Labor and Training ordered the Derderians' company, Derco LLC, to pay $1,000 for each day that the West Warwick nightclub was without workers' compensation insurance coverage. In addition, a lawyer for the state Labor Department is trying to get a ruling on whether the department can hold the Derderians personally liable for the $1.06 million.

The Derderians' lawyers have been waging a two-pronged defense against the Labor Department's penalty. First, they argue that the penalty against Derco LLC is "excessive" compared with those imposed in other cases, and they've appealed the matter to the state Supreme Court.

Second, they are fighting in state Workers' Compensation Court to keep the Derderians from being held personally liable for the $1.06 million penalty.

Thomas M. Dickinson, a Providence lawyer representing the Derderians, told Judge John Rotondi that it wasn't until later in 2003 that the General Assembly amended the law to allow for the imposition of administrative penalties on corporate officers. And just last month, he noted, the General Assembly added language to include members and managers of limited liability companies, or LLCs.

"On the strict language of this statute" prior to those amendments, Dickinson said, "even corporate officers could not be held liable for administrative penalties."

Yet Bernard P. Healy, a lawyer for the state Department of Labor and Training, said that the additional language was designed to clarify the law's original intent. The state workers' compensation law was enacted in 1923, "when the concept of a separate, limited liability company did not exist," Healy said.

Rhode Island enacted its law on limited liability companies in 1992.

"It was clearly the intent of the General Assembly not to create an outlaw entity," Healy said, "but rather to meld a limited liability company into the existing structure as amended."

The primary purpose of creating LLCs, Healy said, was to provide firms with certain tax advantages. 'The question is: in 1992, did the General Assembly intend to make a limited liability company a form of a rogue business organization?" Healy said. If LLCs were exempt from the state workers' compensation law they "would exist as a form of business enterprise where there would be no personal responsibility."

Judge Rotondi is expected to rule on the matter next Wednesday.

Lynn Arditi, a Journal staff writer, can be reached by e-mail at larditi [at] projo.com

DIGITAL EXTRA: Read the original Department of Labor hearing officer's ruling in the workers' compensation case, and find more Station fire coverage, at:

http://projo.com/extra/2003/stationfire/