Central States Areas v. Fulkerson, Thomas C. ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2596
Central States, Southeast and Southwest Areas
Pension Fund, and Howard McDougall, trustee,
Plaintiffs-Appellees,
v.
Thomas C. Fulkerson and Dolly S. Fulkerson,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 0420--James F. Holderman, Judge.
Argued January 9, 2001--Decided January 29, 2001
Before Flaum, Chief Judge, and Bauer and Coffey,
Circuit Judges.
Flaum, Chief Judge. Defendants Thomas and Dolly
Fulkerson appeal the district court’s grant of
summary judgment to plaintiff Central States on
its claim for withdrawal liability. The
Fulkersons argue that the district court erred in
determining that their activities met the
statutory requirements for liability. For the
reasons stated herein, we reverse and remand.
I. Background
Thomas ("Tom") and Dolly are husband and wife.
They are the only shareholders of Holmes Freight
Lines, Inc. ("Holmes"), a trucking company that
is now in bankruptcy. Tom is the President of
Holmes and owns 68% of its stock, while Dolly is
a 32% owner and is the Vice-President, Secretary,
and a member of the Board of Directors, though
the defendants claim she has never been active in
running Holmes.
In addition to managing Holmes, Tom leased a
few properties. At his direction, Holmes
purchased three parcels of land between January,
1985 and January, 1987. The properties were
located in Portland, Oregon, Salt Lake City,
Utah, and Auburn, Washington. Holmes built
trucking terminals on the properties and then
sold these back to Tom. Tom then leased the
properties to Action Express, Inc. ("Action").
Action was another trucking company owned by the
Fulkersons’ sons, though Holmes and Action were
always maintained as separate corporations and
Tom and Dolly did not have any interest in or
participate in the management of Action. Tom
negotiated both the purchases of the property and
the leases. These leases were "triple net
leases," under which the tenant is responsible
for most obligations such as maintenance,
operating expenses, real estate taxes, and
insurance (though Holmes may have paid the
insurance premium on these properties and have
been reimbursed by Tom). Thus, Tom had few
obligations associated with being a traditional
landlord. Tom sold the Auburn property in 1990
and the Portland property in 1995, realizing
gains on both sales. The Salt Lake City property
is still leased to Action. Tom has not devoted
more than five hours in any year in connection
with the properties, and claims that he purchased
the properties for investment purposes. According
to Tom, he does little more than deposit the rent
checks and make mortgage payments, and reports
the rental income on Schedule E of his federal
income tax forms for supplemental income.
Holmes was subject to various collective
bargaining agreements that required it to
contribute to Central States. After Holmes ceased
operations in July, 1998, it began self-
liquidating and paid unsecured creditors one-
quarter of the amount they were owed. Holmes paid
Central States $236,126.45, a fourth of the
amount Holmes believed sufficient to cover its
pension obligations. Central States, on the other
hand, calculated Holmes’s withdrawal liability
under the Multiemployer Pension Plan Amendments
Act of 1980 ("MPPAA") to be $1,889,011.61. See
generally Central States, Southeast and Southwest
Areas Pension Fund v. Midwest Motor Express,
Inc., 181 F.3d 799, 803-04 (7th Cir. 1999)
(discussing the mechanics of withdrawal
liability). The fund decided to sue the
Fulkersons to recover the deficiency.
In the district court on a motion for summary
judgment, Central States argued that the
Fulkersons’ leasing activities constituted an
unincorporated trade or business under 29 U.S.C.
sec. 1301(b)(1), which states that all "trades or
businesses," whether or not they are
incorporated, shall be treated as a single
employer. Under this theory, because both the
supposed leasing business and Holmes are under
the common control of the Fulkersons, the leasing
business was obligated to pay the remainder of
Holmes’s withdrawal liability. Since the leasing
business was unincorporated, the Fulkersons
became personally liable for these payments to
Central States. See Central States, Southeast and
Southwest Areas Pension Fund v. Johnson, 991 F.2d
387, 388-89 (7th Cir. 1993) (describing a similar
theory of liability).
The Fulkersons responded with a variety of
arguments, which primarily center on the claim
that they did not spend enough time engaging in
leasing activities for these to constitute a
"trade or business" as required by the statute.
They also offered an expert witness in the real
estate market who opined that the triple net
leases were economically identical to passive
investments such as stocks or bonds. In the
alternative, they contended that Dolly had shown
that she did not intend to be a partner in the
alleged leasing business, and so she should not
be personally liable for the withdrawal liability
even if Tom is. The district court rejected all
of the Fulkersons’ arguments, granted summary
judgment to the fund, and ordered the Fulkersons
to pay Central States the withdrawal liability
plus liquidated damages, interest, and attorneys’
fees, as provided in 29 U.S.C. sec. 1132(g)(2).
The Fulkersons now appeal the district court’s
determinations that the leasing was a trade or
business and that Dolly intended to be a partner
with Tom.
II. Discussion
A. Standard of Review
The initial question presented by this case is
the standard by which we review the district
court’s decision. The district court’s
interpretation of the statutory phrase "trade or
business" is, of course, purely a question of law
that we review de novo. See Salve Regina College
v. Russell, 499 U.S. 225, 231-32 (1991); Eli
Lilly & Co. v. Natural Answers, Inc., 233 F.3d
456, 467 (7th Cir. 2000). Summary judgments are
reviewed de novo, viewing all of the facts, and
drawing all reasonable inferences from those
facts, in favor of the nonmoving party. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
255 (1986); Opp v. Wheaton Van Lines, Inc., 231
F.3d 1060, 1063 (7th Cir. 2000).
However, Central States argues that in the
circumstances of this case we review the district
court’s "characterizations" of undisputed
historical facts, which apparently means mixed
questions of law and fact, under a clearly
erroneous standard of review, citing Central
States, Southeast and Southwest Areas Pension
Fund v. Slotky, 956 F.2d 1369, 1373-74 (7th Cir.
1992) and Central States, Southeast and Southwest
Pension Fund v. Personnel, Inc., 974 F.2d 789,
792 (7th Cir. 1992). Central States claims that
for both the trade or business issue and the
partnership question the underlying facts are
undisputed, the district court merely applied the
law to the facts, and the Fulkersons have no
right to a jury trial. According to the fund, the
satisfaction of these three conditions requires
this court to deferentially review the district
court’s decision. The Fulkersons argue that
Slotky and Personnel are unsound to the extent
that these opinions contradict well-settled law
of the Supreme Court and this circuit regarding
review of summary judgments, and in the
alternative that they are entitled to a jury
trial; thus, a de novo standard should be
applied.
We agree with the Fulkersons that our review is
de novo on the trade or business question
because, as explained more fully below, the
district court committed a legal error in
interpreting the statute. Slotky and Personnel
are inapplicable for this reason. Thus, we
decline the Fulkersons’ invitation to partially
overrule these cases.
B. Trade or Business
An employer incurs withdrawal liability for
withdrawing from a multiemployer pension plan, 29
U.S.C. sec. 1381(a), and employer means all
"trades or businesses (whether or not
incorporated)" that are under common control, 29
U.S.C. sec. 1301(b)(1). Thus, in order to impose
withdrawal liability on an organization other
than the one obligated to the fund, two
conditions must be satisfied: (1) the
organization must be under common control with
the obligated corporation; and (2) it must be a
trade or business. The Fulkersons do not dispute
that Tom Fulkerson controlled both Holmes and the
leasing. Thus, the only question is whether Tom’s
leasing constitutes a trade or business.
As in all statutory interpretation cases, we
begin with the statutory language. See Hughes
Aircraft Co. v. Jacobson, 525 U.S. 432, 438
(1999). Statutory terms or words will be
construed according to their ordinary, common
meaning unless these are defined by the statute
or the statutory context requires a different
definition. See Walters v. Metropolitan Educ.
Enters., Inc., 519 U.S. 202, 207 (1997); Perrin
v. United States, 444 U.S. 37, 42 (1979). Section
1301(b)(1) presents no interpretive difficulties
when it is used to impute withdrawal liability to
another corporation or other formally recognized
business organization that is under common
control with the obligated entity. However,
thorny questions can arise when informal economic
activities are claimed to be a trade or business.
In these circumstances, given the interpretive
principles outlined above and the fact that MPPAA
does not define "trades or businesses," we
reaffirm that the test for what constitutes a
trade or business established in Commissioner v.
Groetzinger, 480 U.S. 23, 35 (1987) applies in
determining whether an activity is a trade or
business for purposes of sec. 1301(b)(1)./1 See
Personnel, 974 F.2d at 794; see also Connors v.
Incoal, Inc., 995 F.2d 245, 250-51 & n.7. For an
activity to be a trade or business under
Groetzinger, a person must engage in the
activity: (1) for the primary purpose of income
or profit; and (2) with continuity and
regularity. 480 U.S. at 35. While Groetzinger was
interpreting only a specific provision in the tax
code, its test comports with the common meaning
of trade or business and thus can be used more
generally./2 One purpose of the Groetzinger test
is to distinguish trades or business from
investments, which are not trades or business and
thus cannot form a basis for imputing withdrawal
liability under sec. 1301(b)(1). See Personnel,
974 F.2d at 794.
The district court committed a legal error in
determining that the second part of the trade or
business test was satisfied. The district court
relied only on the Fulkersons’ holding of the
leases alone, which they had done for over ten
years, in concluding their leasing had been
continuous and regular conduct; this was
incorrect. Actions of a person, such as
negotiating leases, researching properties,
maintaining or repairing properties, etc., are
business or trade conduct and thus are
appropriately considered in determining whether
the continuity and regularity prong of
Groetzinger is satisfied. However, possession of
a property, be it stocks, commodities, leases, or
something else, without more is the hallmark of
an investment. Thus, mere ownership of a property
(as opposed to activities taken with regard to
the property) cannot be considered in determining
whether conduct is regular or continuous./3
Central States argues that even if the holding
of the leases is not considered, Tom Fulkerson
engaged in activities such as selecting the
properties, negotiating purchases, and
negotiating the leases. However, the Fulkersons
presented evidence, including an expert witness,
that the leases were an investment that rarely
required the time or attention of the Fulkersons.
Tom Fulkerson averred that he never spent more
than five hours in a year dealing with the leases
or the leased properties. Once the possession of
the leases is removed from the equation, a
reasonable factfinder could determine that the
leasing activities were not sufficiently
continuous and regular to constitute a trade or
business.
In making this decision, we are mindful that
sec. 1301 (b)(1) was not intended to impose
automatic personal liability on individuals who
own companies that are required to contribute to
pension funds. The plain statutory language
demonstrates this by stating that only "trades or
businesses" can be considered as a single
employer, and we have held that shareholders
generally are not responsible for withdrawal
liability. See Johnson, 991 F.2d at 390-91;
Plumbers’ Pension Fund, Local 130 v. Niedrich,
891 F.2d 1297, 1299-1301 (7th Cir. 1989). Given
the prevalence of investing, permitting the
holding of investments (which will normally
satisfy the first prong of Groetzinger since the
purpose is to produce income) without more to be
considered regular and continuous activity would
eviscerate the limitations placed in the text of
sec. 1301(b)(1). Pension funds have statutory
means to recover assets that are transferred to
evade withdrawal liability, such as 29 U.S.C.
sec. 1392(c), and must employ these rather than
a personal liability mechanism not granted to
them by Congress.
Central States has a couple of arguments in
support of the district court’s holding, though
we find these unconvincing. First, it claims that
Tom Fulkerson’s leasing activities are virtually
identical to those in Personnel, where the
defendant was held to be responsible for the
withdrawal liability. However, the defendant in
Personnel much more frequently engaged in
activities related to leasing, such as buying and
selling multiple properties annually and
advertising, than the Fulkersons. 974 F.2d at
794-95. Thus, in Personnel the defendant spent
enough time engaged in actions related to leasing
to show that his conduct was regular and
continuous. In the present case, taking the facts
regarding the minimal time spent on leasing
activities as presented by the Fulkersons, we are
unable to make such a conclusion. For example, in
contrast to the numerous real estate sales and
purchases the defendant in Personnel transacted
every year, Tom Fulkerson bought only three
properties and sold two over a span of more than
ten years.
Second, Central States argues that "trades or
businesses" should be construed broadly in
accordance with MPPAA’s policy to prevent the
avoidance of withdrawal liability obligations by
fractionalizing assets. Central States is correct
that this was a policy behind MPPAA, see, e.g.,
Johnson, 991 F.2d at 388, Personnel, 974 F.2d at
794, but knowing what the policy is tells us
little about how far it should extend. MPPAA,
like much other legislation, is a compromise
embodying competing purposes and is intended to
effectuate certain policies only to a restricted
degree. See Central States, Southeast and
Southwest Areas Health and Welfare Fund v. Cullum
Cos., 973 F.2d 1333, 1339 (7th Cir. 1992)
(explaining that a number of MPPAA’s provisions
were meant to limit the impact and application of
withdrawal liability and that giving these less
effect than the plain language requires would
distort the statutory scheme). The only way in
which we can determine the boundaries on these
policies is by examining the statutory language.
This explains why we have in the past rejected
policy-based interpretations of MPPAA that did
not find support in the text. See Trustees of
Chicago Truck Drivers, Helpers and Warehouse
Workers Union (Independent) Pension Fund v.
Leaseway Transp. Corp., 76 F.3d 824, 830-31 (7th
Cir. 1996); Johnson, 991 F.2d at 390-91; Cullum
Cos., 973 F.2d at 1338-40. Congress demarcated
the extent to which the anti-fractionalization
policy would be pursued in the text of the MPPAA,
such as by not imposing personal liability on
shareholders, as explained above. The provision
imposes liability only on "trades or businesses,"
and those words must be given their ordinary
meaning in accordance with established canons of
interpretation. Under a proper construction of
the language of sec. 1301(b)(1), a reasonable
factfinder could determine that the Fulkersons’
leasing activities do not constitute a trade or
business./4
III. Conclusion
The plain meaning of MPPAA precludes considering
the passive holding of property in determining
whether an activity rises to the level of a trade
or business. Thus, the district court committed
error by relying only on the fact that the
Fulkersons had held the leases for ten years in
determining whether the continuity and regularity
prong of Groetzinger was satisfied. On remand (to
which Circuit Rule 36 will apply) only the
actions of the Fulkersons regarding the leasing,
rather than mere possession of the leases, should
be considered. For the reasons stated herein, we
Reverse the decision of the district court and Remand
for further proceedings consistent with this
opinion.
FOOTNOTES
/1 We also reaffirm that no economic nexus is
required between the obligated organization and
trades or business under common control because
the statute does not impose one. See Personnel,
974 F.2d at 793; Slotky, 956 F.2d at 1374.
/2 In Central States, Southeast and Southwest Areas
Pension Fund v. Ditello, 974 F.2d 887, 889-90
(7th Cir. 1992), we cautioned against using tax
code cases to interpret MPPAA. Ditello noted that
the phrase "trade or business" appears almost two
hundred times in the tax code. Id. at 889. The
particular meaning given to any single instance
of the phrase may be shaped by the surrounding
statutory context of the tax code and thus
involve considerations that are absent in MPPAA.
While we adhere to the idea that courts must be
careful in using tax code cases to construe MPPAA
because of the different context, Groetzinger
states the common, ordinary definition of trade
or business and is thus appropriately used to
interpret sec. 1301(b)(1).
/3 Board of Trustees of Western Conference of
Teamsters Pension Trust Fund v. Lafrenz, 837 F.2d
892, 894-95 & n.7 (9th Cir. 1988) contains
language indicating that passively holding
investments might be considered a trade or
business under MPPAA, though it limits its
holding to the facts before it. To the extent
that Lafrenz might be read to conflict with our
decision, we decline to follow it. As stated in
Personnel and supported by Groetzinger, passively
holding investments without more cannot normally
be considered to be a trade or business.
/4 This court’s holding that the district court
erred in deciding that Tom Fulkerson’s leasing is
a trade or business vacates the district court’s
finding that Dolly was a partner of Tom in the
leasing business. Thus, we need not reach the
Fulkersons’ argument that the district court
incorrectly determined that Dolly intended to be
Tom’s partner.