Central States, Southeast & Southwest Areas Pension Fund v. Scofbp, LLC , 668 F.3d 873 ( 2011 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3633
C ENTRAL S TATES, S OUTHEAST AND
S OUTHWEST A REAS P ENSION F UND, et al.,
Plaintiffs-Appellees,
v.
SCOFBP, LLC, et al.,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:07-cv-05941—Rebecca R. Pallmeyer, Judge.
A RGUED S EPTEMBER 21, 2011—D ECIDED D ECEMBER 27, 2011
BeforeEASTERBROOK, Chief Judge, and TINDER and
HAMILTON, Circuit Judges.
H AMILTON, Circuit Judge. The issues in this appeal
govern whether two solvent business entities can be
held responsible for the liabilities of an insolvent
affiliate under the Multiemployer Pension Plan Amend-
ments Act of 1980, 29 U.S.C. §§ 1381-1461. The insolvent
employer in the pension plan is defendant-appellant
2 No. 10-3633
SCOFBP, LLC, which incurred withdrawal liability in
2001 for unfunded pension benefits when it stopped
operating and paying into a union’s pension fund,
plaintiff Central States, Southeast and Southwest Areas
Pension Fund. The solvent affiliates are defendant-ap-
pellants MCRI/Illinois, LLC and MCOF/Missouri, LLC.
They and SCOFBP were part of a complex set of business
entities and off-shore trusts under the control of Michael
Cappy, a businessman who went through personal bank-
ruptcy in 1999.
To protect the solvency of multiemployer pension
plans, the Multiemployer Pension Plan Amendments Act
of 1980, also known as the MPPAA, contains broad pro-
visions that pierce the usual legal barriers between affili-
ated but legally distinct businesses. Under the MPPAA,
all “trades or businesses” under “common control” are
treated as constituting a single employer for purposes
of determining withdrawal liability. 29 U.S.C. § 1301(b)(1).
Each trade or business under common control is jointly
and severally liable for any withdrawal liability of any
other. See McDougall v. Pioneer Ranch Ltd. Partnership,
494 F.3d 571, 574 (7th Cir. 2007); Central States, Southeast
and Southwest Pension Fund v. Ditello, 974 F.2d 887, 889
(7th Cir. 1992).1
The district court held here that the solvent MCRI and
MCOF were both trades or businesses that were under
common control with insolvent SCOFBP at the relevant
1
For a more extensive discussion of the MPPAA see
Pioneer Ranch, 494 F.3d at 574, and Ditello, 974 F.2d at 888.
No. 10-3633 3
times, so that both MCRI and MCOF are liable for
SCOFBP’s withdrawal liability. Central States, Southeast
and Southwest Areas Pension Fund v. SCOFBP, LLC, 738
F. Supp. 2d 840 (N.D. Ill. 2010). All three entities appeal
from that determination, arguing first that MCRI
and MCOF were only passive investment vehicles rather
than trades or businesses, and second that Cappy’s per-
sonal bankruptcy disrupted what had been common
control of the three entities. We reject both arguments
and affirm the judgment in favor of the pension plan
against all three entities.
I. Standard of Review
The district court granted summary judgment in favor
of the pension plan, finding that there was no genuine
issue as to any fact material to whether MCRI and
MCOF are businesses or as to whether they were under
common control with SCOBFP at the relevant time. We
ordinarily review a district court’s grant of summary
judgment in an ERISA case de novo. Pioneer Ranch,
494 F.3d at 575. When, however, the only issue before
the district court is the characterization of undisputed
subsidiary facts, and where a party does not have the
right to a jury trial, the clearly-erroneous standard of
review applies. Id. Appellants argue that the de novo
standard of review should apply because they claim
there are significant issues of material fact, but they have
not pointed to any specific facts in dispute that would
require a trial. The parties agree on the activities in
which MCRI and MCOF were engaged. The parties also
4 No. 10-3633
agree on ownership of SCOFBP, MCRI, and MCOF at
all relevant points in time. We thus review the district
court’s characterization of these undisputed facts for
clear error, though we would reach the same result even
if we applied de novo review here.
II. Trades or Businesses
We first address whether the solvent affiliated organiza-
tions MCOF and MCRI are “trades or businesses” within
the meaning of the MPPAA. The district court did not
err in finding that they are.
Appellant MCOF owned the lumberyard in O’Fallon,
Missouri that was used and leased by SCOFBP. Appellant
MCRI held and continues to hold parcels of land in
Rock Island, Illinois, which it leases to a third-party
company. Both MCRI and MCOF are for-profit limited
liability companies. Each has an operating agreement
detailing the type of business the company intends to
conduct, initially “to hold real estate and investments
approved by the Manager.” Payments on the triple-net
leases held by MCRI and MCOF were paid into their
bank accounts and the mortgage payments were with-
drawn from them.2 Both applied for and were issued
federal employer identification numbers. Both main-
2
A “triple-net lease” is one in which the tenant is responsible
for most obligations such as maintenance, operating expense,
real estate taxes, and insurance. See Central States, Southeast
and Southwest Areas Pension Fund v. Fulkerson, 238 F.3d 891,
893 (7th Cir. 2001).
No. 10-3633 5
tained offices, elected officers, and kept formal records
of activities and expenditures. Both employed profes-
sionals to provide legal, management, and accounting
services on a contract basis, although neither admitted
to having any permanent employees.
Although the MPPAA does not define “trade or busi-
ness,” this court has adopted the test established in Com-
missioner v. Groetzinger, 480 U.S. 23, 35 (1987), to determine
whether an enterprise constitutes a trade or business.
Under Groetzinger, the Court must consider whether
the organization engaged in an activity (1) with con-
tinuity and regularity and (2) for the primary purpose
of income or profit. Id. These criteria are intended to
distinguish a trade or business from investments,
hobbies, or “amusement diversion[s].” Groetzinger, 480
U.S. at 35; Central States, Southeast and Southwest Areas
Pension Fund v. Fulkerson, 238 F.3d 891, 895 (7th Cir. 2001).
Appellees argue that Groetzinger is inapplicable here
because MCRI and MCOF were established as limited
liability companies. That argument finds support in some
case law. See Fulkerson, 238 F.3d at 895 (“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.”).
Because formal business organizations ordinarily op-
erate with continuity and regularity and are ordinarily
formed for the primary purpose of income or profit, it
seems highly unlikely that a formal for-profit business
organization would not qualify as a “trade or business”
6 No. 10-3633
under the Groetzinger test. More recently than Fulkerson,
however, we have applied the Groetzinger test to a
formal business organization, see Pioneer Ranch, 494 F.3d
at 577 (applying Groetzinger test to hold that a limited
partnership was a trade or business), so we do so here.
In evaluating whether an enterprise meets the Groet-
zinger test, we are mindful of the purpose of the MPPAA,
which is to “prevent the dissipation of assets required
to secure vested pension benefits.” Central States, Southeast
and Southwest Areas Pension Fund v. Slotky, 956 F.2d 1369,
1374 (7th Cir. 1992); see also Ditello, 974 F.2d at 890.
For example, leasing property to a withdrawing
employer is a “trade or business” within the meaning
of the MPPAA. Leasing property “is an economic rela-
tionship that could be used to . . . dissipate or frac-
tionalize assets.” Ditello, 974 F.2d at 890.
Unrelated real estate activity, even activity that does
not produce a net gain, also can be “for the primary
purpose of income or profit” where that activity increases
equity, appreciates value, and generates tax deductions
that reduce the overall tax burden. Central States,
Southeast and Southwest Pension Fund v. Personnel, Inc.,
974 F.2d 789, 795-96 (7th Cir. 1992). Actions such as negoti-
ating leases or researching, maintaining, or repairing
properties are also “business or trade conduct” and
should be considered for the “continuity and regularity”
prong of the Groetzinger test. See Fulkerson, 238 F.3d at 895.
Additionally, creating a formal business entity, having
employees, and claiming business exemptions and de-
ductions also point to a “trade or business.” Pioneer
Ranch, 494 F.3d at 577-78.
No. 10-3633 7
In contrast, personal investments are things like
holding shares of stock or bonds in publicly traded corpo-
rations. Personnel, 974 F.2d at 796. Ownership of this type
of property “without more is the hallmark of an invest-
ment.” Fulkerson, 238 F.3d at 895. Owning property can
be considered a personal investment, at least where the
owner spends a negligible amount of time managing
the leases, see id. at 896, although a more substantial
investment of time may be considered regular and con-
tinuous enough to rise to the level of a “trade or business,”
see Personnel, Inc., 974 F.2d at 795. Likewise, renting
apartments above a residential garage was held not to
be a “trade or business,” even when the owner realized
income, where the owner’s primary purpose for renting
the apartments was the added security from the
tenant’s presence. Central States, Southeast and Southwest
Areas Pension Fund v. White, 258 F.3d 636, 643 (7th Cir.
2001).
Appellants argue that MCRI and MCOF were
Cappy’s personal investment activities and had
no connection with SCOFBP. The MPPAA does not,
however, require an economic nexus between the ob-
ligated organization and trades or businesses under
common control, and we have declined to impose such a
non-statutory requirement. Fulkerson, 238 F.3d at 895 n.1;
see also White, 258 F.3d at 641 (again rejecting an
economic nexus requirement). Furthermore, we have
held that leasing property to a withdrawing employer
itself is categorically a “trade or business.” Ditello, 974
F.2d at 890. Thus, the district court did not err by
holding that MCOF, which owned the lumberyard that
8 No. 10-3633
was used and leased by withdrawing employer SCOFBP,
is a “trade or business” for purposes of the MPPAA.
The district court also did not err by holding that
MCRI is a trade or business for purposes of the MPPAA.
Appellants argue that MCRI is a personal investment
analogous to the individually-owned leased property in
Fulkerson or the above-the-garage rental apartments in
White. Fulkerson and White, however, presented unusual
situations that tested the outer bounds of the “personal
investment” concept. Unlike the activity at issue in
Fulkerson or White, MCRI is a for-profit LLC. It earned
rental income, paid business management fees, and
claimed business-related income deductions on its
federal income tax returns. It applied for and was issued
a Federal Employer Identification Number and con-
tracted with professionals to provide legal, management,
and accounting services on a contract basis, although
it does not admit to having any permanent employees.
Thus, MCRI is more akin to the limited partnerships
at issue in Pioneer Ranch.
Appellants attempt to distinguish Pioneer Ranch, where
we determined that a limited partnership was a “trade
or business,” by calling attention to the part of the part-
nership agreement in that case stating that the purpose
of the company was to engage in the business of farming.
Appellants claim that there is no similar statement by
MCRI or MCOF in this case. The district court, however,
pointed to analogous language both from MCRI and
MCOF’s operating agreements and from a response
by appellants to a request for admission. All clearly
No. 10-3633 9
stated that MCRI and MCOF are businesses created for
the primary purposes of generating income or profit.
MCOF leased property directly to SCOFBP, the with-
drawing employer, and therefore is a “trade or business”
for the purposes of the MPPAA. MCRI, also a formal
business organization, engaged in regular and con-
tinuous activity for the purpose of generating income or
profit and thus is also a “trade or business” for purposes
of the MPPAA.
III. Common Control
Next we must determine whether the solvent organiza-
tions, MCOF and MCRI, were under common control
with the insolvent organization, SCOFBP. We find that
common control existed at the relevant time. The net-
work of related entities is complex, but the ultimate
issue is straightforward: whether MCOF and MCRI
should be treated as part of Michael Cappy’s bankruptcy
estate when SCOFBP withdrew from the pension plan
on October 20, 2001.
Appellant SCOFBP was the operator of a now-defunct
lumber yard and milling company and is one of a
number of business entities linked to Cappy. Prior to
January 19, 1999, Cappy owned 100% of Southern Cross,
and Southern Cross owned 98% of SCOFBP. Cappy
personally owned 1% of SCOFBP. The remaining 1%
was owned by the MCL Family Trust III, a foreign trust
settled by Cappy under the laws of the Cook Islands.
Appellant MCOF owned the lumberyard in O’Fallon,
Missouri that was used and leased by SCOFBP. Prior
10 No. 10-3633
to January 19, 1999, MCOF was owned 51% by MCOF,
Inc. (which was owned 100% by MCL Family Trust III),
48% by MCL Family Trust II, a foreign trust settled
by Cappy under the laws of New Zealand, and 1% by
Cappy.
Appellant MCRI owned and continues to own parcels
of land in Rock Island, Illinois that it leases to an
unrelated company. Prior to January 19, 1999, MCRI was
owned 71% by MCL Family Trust III, 28% by MCL Family
Trust II, and 1% by Cappy.
On January 20, 1999, Cappy filed for Chapter 11 bank-
ruptcy in the United States District Court for the
Western District of Kentucky.3 In August 2002, after
SCOFBP had withdrawn from the pension plan, the
United States Bankruptcy Court for the Western District
of Kentucky determined that Cappy’s transfers to the
MCL Family Trusts had been fraudulent and that all
of the trust assets, including their ownership interests
in the three appellants, were therefore properly part of
the Cappy bankruptcy estate. Vesper v. MLC Holdings, LLC
(In re Cappy), No. 99-31466-(7)-L, at 23 (Bankr. W.D. Ky.
Aug. 28, 2002). Under that reasoning, 100% of MCRI and
100% of MCOF were part of the bankruptcy estate, which
also included 100% of SCOFBP. Cappy appealed the
bankruptcy court’s decision, which was affirmed by the
Kentucky district court in February 2004, although on
somewhat narrower grounds. See Cappy v. Vesper (In re
3
The bankruptcy was converted into a Chapter 7 bankruptcy
on May 18, 2001.
No. 10-3633 11
Cappy), No. 3:03CV-6-H at 26 n.29 (W.D. Ky. Feb. 5,
2004) (“Since all the assets remaining in the trusts are
properly part of Cappy’s estate pursuant to 11 U.S.C.
§ 541(a)(1) and KRS 381(7)(a), it seems unnecessary to
find that the transfers of the same property into the
trusts were invalid. Under either theory, the transfers
will be a part of Cappy’s estate.”).
To impose the insolvent organization’s liability on a
related solvent organization, the insolvent organization
must have been under “common control” with the
related solvent organization. The MPPAA draws its
definition of “common control” from the regulations
promulgated under § 414(c) of the Internal Revenue
Code. 29 U.S.C. § 1301(b)(1). The Internal Revenue reg-
ulations set out three ways a group of trades or busi-
nesses can be commonly controlled — a parent-sub-
sidiary group, a brother-sister group, or a “combined”
group consisting of both parent-subsidiary and brother-
sister relationships. 26 C.F.R. § 1.414(c)-2(a). The only
potentially applicable formation in this case is the parent-
subsidiary group. A parent-subsidiary group exists
when a common parent owns a “controlling interest”
in the relevant subsidiary organizations. 26 C.F.R.
§ 1.414(c)-2(b)(1). A “controlling interest” is defined for
these purposes as at least 80% ownership. 26 C.F.R.
§ 1.414(c)-2(b)(2).
Appellants argue that there was no common control
of SCOFBP, MCRI, and MCOF at the time SCOFBP in-
curred withdrawal liability on October 20, 2001 because
Cappy did not have common control at that time.
12 No. 10-3633
SCOFBP was under the control of the bankruptcy estate.
Appellants argue that MCRI and MCOF were then
under the control of the MCL Family Trusts or, in the
alternative, under the control of Cappy himself. We
agree that Cappy personally was not in control of
SCOFBP, MCRI, and MCOF as of the date SCOFBP in-
curred withdrawal liability, but that does not mean
that common control did not exist.
As the district court explained, prior to January 1999,
each company was under Cappy’s control through the
rather elaborate web of ownership interests that Cappy
wove through the MCL Family Trusts. See SCOFBP,
738 F. Supp. 2d at 846-47. Notwithstanding the MCL
Family Trusts’ labels as trusts, they were settled under
the laws of foreign nations that permitted Cappy a
degree of involvement and control not permitted the
settlor of a trust by the laws of any U.S. state. Among
those trust assets were controlling interests in MCOF
and MCRI. There is no doubt that after February 2004,
when the district court affirmed the bankruptcy court’s
finding that the assets held by the MCL Family Trusts
were properly part of Cappy’s bankruptcy estate,
SCOFBP, MCRI, and MCOF were under common con-
trol, as defined by the Internal Revenue Code regulations.
The bankruptcy estate is a common parent with a 100%
controlling interest in each of the three organizations.
Our task is to determine whether common control
existed on October 20, 2001, the date SCOFBP incurred
withdrawal liability, which was after Cappy declared
bankruptcy but before the Kentucky district court
affirmed the bankruptcy court in February 2004.
No. 10-3633 13
Appellants criticize the Illinois district court for
relying on the “after-the-fact” decision of the bankruptcy
court in Cappy’s personal bankruptcy, and further
urge that the Kentucky district court’s opinion af-
firming the bankruptcy court limited the reach of the
decision to Cappy’s personal creditors. This argument is
not persuasive. The Bankruptcy Code broadly defines
property of the estate as “all legal or equitable interests
of the debtor in property as of the commencement of the
case,” carving out some exceptions for property of a
type not at issue here. 11 U.S.C. § 541(a)(1). As the
Illinois district court noted, after Cappy filed for bank-
ruptcy in January 1999, controlling interests in MCRI
and MCOF would have passed into the common control
of Cappy’s bankruptcy estate but for the fraudulent
conveyance of his interests to the MCL Family Trusts.
SCOFBP, 738 F. Supp. 2d at 847.
If the courts had issued their decisions before
SCOFBP closed on October 21, 2001 and incurred with-
drawal liability, there would be no question that the
bankruptcy estate had common control over SCOFBP,
MCRI, and MCOF at that time. A fundamental purpose
of ERISA is to protect employees who have been
promised retirement benefits from employers who seek
to avoid their responsibilities to pay such benefits.
When the bankruptcy and district courts ruled on the
scope of the bankruptcy estate, they were exercising
equitable power to pierce transactions that had been
used improperly to shelter assets from creditors. It
simply stands to reason that a creditor under the
MPPAA is entitled to rely on the later court deci-
14 No. 10-3633
sion piercing those transactions. We will not permit
Cappy to thwart the purpose of ERISA and the MPPAA
based on the fact that the bankruptcy court and the district
court took time to fully and fairly adjudicate his tangled
personal bankruptcy. Because MCRI and MCOF were
adjudged to be properly part of the Cappy bankruptcy
estate, the district court did not err by finding that
SCOFBP, MCRI, and MCOF were under “common con-
trol” for ERISA purposes at the time SCOFBP in-
curred withdrawal liability.
The judgment of the district court is A FFIRMED.
12-27-11