Digital Extra: The Station Fire

A judge rules that Jeffrey and Michael Derderian's personal assets can be used to pay the penalty for failure to carry workers' compensation insurance.

01:00 AM EDT on Thursday, August 19, 2004

BY LYNN ARDITI
Journal Staff Writer

A judge for the state Workers' Compensation Court yesterday ordered the state to hold the owners of The Station nightclub personally liable for a $1.06-million state penalty against their company for failing to carry workers' compensation insurance.

The decision means that Jeffrey and Michael Derderian's personal assets, not just those of their company, Derco LLC, can be accessed to pay the penalty.

Judge John Rotondi rejected the Derderians' lawyers' argument that the brothers could not be held personally liable for the $1.06 million because Derco is a limited liability company.

Members of the business community said that yesterday's ruling should come as no surprise to owners of the 15,205 limited liability companies registered to do business in Rhode Island.

"I honestly believe that most people who have a limited liability company realize that corporate managers or officers would be held personally liable," said James Hagan, president of the Greater Providence Chamber of Commerce.

The same holds true for most small-business owners, said Mark S. Hayward, district director for the U.S. Small Business Administration in Rhode Island and acting district director in Boston.

"I think everybody realizes they have personal responsibilty for the business and the employees, and most small businesses accede to that," Hayward said. "They know the risks."

Everett A. Petronio Sr., a Providence lawyer who represents a family-owned Chinese restaurant that has been fined by the state for not having workers' compensation insurance, said business owners understand that if they are without coverage they'll be liable for employees injured on the job.

"Most likely if you're personally responsible for the [medical] bills," Petronio said, "you're personally responsible for the fines, too."

The state workers' compensation insurance law provides employees who are injured on the job with medical benefits and some compensation for lost wages. The families of workers who die in on-the-job accidents also are entitled to benefits.

The insurance also generally shields a business and its owners from liability in connection with job-related injuries or deaths.

The Station fire on Feb. 20, 2003, killed 100 people, including 4 nightclub workers, and injured about 200.

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.

Lawyers for the Derderians have argued that the law addresses personalliability only in reference to "corporate officers," but makes no mention of members or managers of limited liability companies.

In his written decision, Rotondi said that the law "clearly and unambiguously outlines the legislative intent to hold all employers civilly and/or criminally liable for failing to purchase workers' compensation insurance. It also goes a step further and provides personal liability for those who would normally have been shielded yet held the responsibility for securing coverage. . . ."

Rotondi dismissed the distinction made by the Derderians' lawyers between corporate officers and members and managers of limited liability companies, saying the law "is to be construed liberally."

To shield managers of a limited liability company from personal liability for the state penalty, Rotondi said, is also to keep them from being held personally responsible for compensating any injured employees.

"This is an absurd result," Rotondi said in the written decision. "The legislature never intended to emasculate the requirement of providing worker's compensation insurance coverage by allowing individuals to shield themselves from personal liability by forming limited liablity companies such as Derco, LLC."

Lawyers for the Derderians said yesterday that they plan to appeal to a three-judge appeals panel of the state Workers' Compensation Court.

The case, which may ultimately be decided by the state Supreme Court, could determine what, 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 have said their clients don't have the $1.06 million.

After The Station fire, the law was amended and language was added to specifically include, among other things, members and managers of limited liability companies.

Carter G. Bishop, a professor of law at Suffolk University Law School in Boston and an expert in limited liability companies, said that if the state law holds corporate officers personally liable it would almost surely apply to members and managers of limited liability companies.

"Unless there's some unique law that I'm not aware of that treats limited liability companies differently than corporations," Bishop said, "they all have liability shields."

Bishop said it appears Judge Rotondi's ruling is saying the state law overrides the shield provided by corporations and limited liablity companies.

The fact that the state law, until recently, made no reference to limited liability companies, he said, is not surprising nor legally problematic. "There are lots of statutes that existed before limited liability companies were around," Bishop said.

Rhode Island enacted its law on limited liability companies in 1992; the state Workers' Compensation Act was enacted in 1912.

The reference to corporate owners, he said, is often interpreted to cover limited liability companies.

The distinction between a corporation and a limited liability company ''probably is not as important as who is responsible under the statute for securing the insurance," Bishop said. "The judge is saying that workman's compensation liability goes against the employer himself. If the statute says that, it [the penalty] is certainly not unconstitutional."

The penalty against Derco -- $1,000 for each day that the West Warwick nightclub was without coverage -- is the largest ever imposed by the state in a workers' compensation case.

The Derderians' lawyers have argued that the $1.06-million penalty is excessive, and have appealed to the state Supreme Court.

Jeffrey B. Pine, who represents Jeffrey Derderian, said he was surprised at yesterday's ruling. "I actually had some hope that the court would agree with our position," Pine told reporters outside the courthouse.

"They're not millionaires," Pine said of the Derderians. "The irony is that they have expressed that they want to do something for the workers and their families, but until the state stops chasing them they can't do what's right . . . to make the victims and their families whole."

Pine would not be more specific about what compensation the Derderians would be prepared to give the victims and their families.

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

DIGITAL EXTRA: Read Judge Rotondi's ruling in the Derderians' workers' compensation case, find previous related rulings and look back at Station fire coverage, at:

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