Local 705 International Brothe v. Anthony Pitello ( 2021 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20-2142
LOCAL 705 INTERNATIONAL BROTHERHOOD OF TEAMSTERS
PENSION FUND,
Plaintiff-Appellee,
v.
ANTHONY PITELLO and PAT PITELLO,
Defendants-Appellants.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 18 CV 6893 — Joan H. Lefkow, Judge.
____________________
ARGUED JANUARY 12, 2021 — DECIDED JULY 7, 2021
____________________
Before EASTERBROOK, WOOD, and ST. EVE, Circuit Judges.
WOOD, Circuit Judge. Although many pension plans cover
only the employees of one employer, in some industries
multi-employer plans are common. But participating employ-
ers may come and go, and when a firm withdraws from the
plan, there is a risk that the plan will be underfunded. The
Employee Retirement Income Security Act (ERISA), as
amended by the Multiemployer Pension Plan Amendments of
2 No. 20-2142
1980 (MPPAA), addresses that problem by requiring with-
drawing employers to pay a sum that covers their liability for
unfunded vested benefits attributable to their employees. See
29 U.S.C. §§ 1381(a), 1404(a) (defining “withdrawal liability”).
Withdrawal liability applies to the withdrawing employer,
but it also applies to “all trades or businesses (whether or not
incorporated) that are under common control” with that em-
ployer. Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson,
238 F.3d 891, 894 (7th Cir. 2001) (internal quotations omitted);
29 U.S.C. § 1301(b)(1).
This case arose when Gradei’s Express Co. withdrew from
the Local 705 International Brotherhood of Teamsters Pension
Fund. Gradei’s asserted that it had ceased all operations cov-
ered by the governing multi-employer collective bargaining
agreement and thus was no longer required to contribute to
the Fund. The Fund responded with this lawsuit, in which it
seeks to collect $221,932.55 in withdrawal liability from
Gradei’s. In addition to Gradei’s, the Fund sued Anthony and
Pat Pitello (Gradei’s owners) and another Illinois corporation
owned by the Pitellos (GX Warehousing), on the theory that
they were trades or businesses under common control. The
district court found that Gradei’s was conducting its business
rent-free on property owned by the Pitellos, and that this was
enough to establish common control. It thus ruled in favor of
the Fund with respect to all defendants. We affirm.
I
In 2000, Anthony and Pat Pitello purchased the property
at 2035 N. 15th Avenue, Melrose Park, Illinois (“Melrose Park
Property”) with their father, Pat M. Pitello. Gradei’s and GX
both used the property as their principal place of business, but
the Pitellos never required either corporation to pay rent. In
No. 20-2142 3
February 2018, Gradei’s ceased all operations. GX continued
to use the property under the rent-free arrangement. After
Gradei’s moved out, GX (not the Pitellos) began leasing the
property to an unrelated third party and collecting rent pay-
ments in the amounts of $2,800 per month. Later GX leased
space to another third party for $19,000 per year. It signed the
leases and collected the rents, but it never acquired any own-
ership interest in the property.
Because some of Gradei’s employees were members of Lo-
cal 705, Gradei’s had been required to report and make con-
tributions to the union’s pension fund. That obligation ended
in February 2018 when Gradei’s ceased all operations covered
by the CBA and thereby completely withdrew from the pen-
sion plan. See 29 U.S.C. § 1383. The Plan establishes defined
pension benefits for eligible employees, and the Fund pro-
vides those benefits. The Plan also describes how the Fund
must go about assessing and collecting withdrawal liability
payments. If an employer defaults on those payments and le-
gal action is required for collection, the Fund is entitled to re-
cover several things: (1) interest on the assessed withdrawal
liability at a rate of 8% per year from the date of the first
missed payment, (2) the greater of liquated damages in the
amount of interest on the unpaid liability or 20%, (3) court
costs, and (4) attorneys’ fees.
On March 2, 2018, the Fund sent Gradei’s, GX, and the Pi-
tellos (in their capacity as the owners of Gradei’s principal
place of business), a notice and demand for payment of the
assessed withdrawal liability in the amount of $221,932.55.
See 29 U.S.C. § 1399(b)(1). The notice contained payment op-
tions and advised Gradei’s that it could request a review of
the assessed withdrawal liability amount within 90 days of
4 No. 20-2142
the letter. Gradei’s essentially ignored the demand—it did not
request a review of the assessed amount or demand arbitra-
tion to contest the assessment, and no one began payment to
the Fund. See 29 U.S.C. § 1401(a)–(b). On June 4, 2018, the
Fund sent another notice informing Gradei’s that it was delin-
quent on payment and had 60 days to respond. Gradei’s again
failed to do anything in response to the Fund’s letters. It did,
however, file for Chapter 7 Bankruptcy on June 8, 2018. The
bankruptcy proceedings concluded on July 19, 2018. Gradei’s
has never suggested that the bankruptcy case affected its ob-
ligations to the Fund.
With no payment or response, the Fund filed this action
against Gradei’s on October 12, 2018, seeking withdrawal lia-
bility, interest, damages, court costs, and attorneys’ fees. It
also sued GX, Anthony Pitello, and Pat Pitello as trades or
businesses under common control with Gradei’s. The Fund
then moved for summary judgment, arguing that the defend-
ants had no legal basis to contest the withdrawal liability as-
sessment, given their failure to request a review of the assess-
ment or initiate arbitration. In a cross-motion for summary
judgment, the Pitellos argued that their ownership of the Mel-
rose Park Property and the activities there were not enough
to support a finding of common control among the defend-
ants. Instead, they asserted, the property was nothing but a
passive investment. Gradei’s and GX did not dispute liability.
On April 24, 2020, the district court entered judgment against
all defendants, awarding the Fund $312,252.04. After filing an
unsuccessful motion to alter or amend the judgment on April
28, 2020, the Pitellos appealed.
No. 20-2142 5
II
“The purpose of § 1301(b)(1) ‘is to prevent businesses from
shirking their ERISA obligations by fractionalizing operations
into many separate entities.’” Cent. States, Se. & Sw. Areas Pen-
sion Fund v. Nagy, 714 F.3d 545, 549 (7th Cir. 2013) (quoting
Cent. States, Se. & Sw. Areas Pension Fund v. Messina Prod., LLC,
706 F.3d 874, 878 (7th Cir. 2013)). But Congress nonetheless
drew a line between affiliated trades or businesses, on the one
hand, and passive or personal investments, on the other.
Withdrawal liability is intended to reach only the former, ra-
ther than “things like holding shares of stock or bonds in pub-
licly traded corporations” or “[o]wning property … at least
where the owner spends a negligible amount of time manag-
ing the leases.” Cent. States, Se. & Sw. Areas Pension Fund v.
SCOFBP, LLC, 668 F.3d 873, 878–79 (7th Cir. 2011).
Since there is no statutory definition for “trade or busi-
ness” in ERISA, we have looked elsewhere for guidance. For
many years now we have used the test developed in Commis-
sioner v. Groetzinger, 480 U.S. 23 (1987), which defines similar
terms for tax purposes. We “construe the term ‘trade or busi-
ness’ in light of the purpose of the MPPAA[:] … to prevent
dissipation of assets required to secure vested pension bene-
fits.” Cent. States, Se. & Sw. Areas Pension Fund v. Ditello, 974
F.2d 887, 890 (7th Cir. 1992) (quotation omitted).
To draw a workable line between activities that qualify as
trades or businesses and those that do not, the Groetzinger test
asks two questions: (1) whether the activity is for the primary
purpose of income or profit; and (2) whether the activity is
undertaken with continuity and regularity. Nagy, 714 F.3d at
550. If these criteria are met, the activity in question is consid-
ered a trade or business. Our holding in SCOFBP simplified
6 No. 20-2142
this inquiry further when it comes to leasing property: “leas-
ing property to a withdrawing employer itself is categorically
a ‘trade or business.’” 668 F.3d at 879; Nagy, 714 F.3d at 547
(“[Defendant]’s leasing activity is categorically a trade or
business for purposes of personal liability under
§ 1301(b)(1).”); see also Messina, 706 F.3d at 881 (“[R]enting
property to a withdrawing employer is ‘categorically’ a trade
or business … .”).
In Messina we explained why a more fact-specific inquiry
is unnecessary in the leasing context:
But where the real estate is rented to or used by the
withdrawing employer and there is common owner-
ship, it is improbable that the rental activity could be
deemed a truly passive investment. In such situations,
the likelihood that a true purpose and effect of the
“lease” is to split up the withdrawing employer’s as-
sets is self-evident. We see no reason why that princi-
ple should not apply here.
706 F.3d at 882.
The Pitellos contend that their situation is one of the “im-
probable” ones to which that passage alludes: they insist that
their ownership of the Melrose Park Property is “really” a
passive investment and thus the categorical rule should not
apply. In support of that position, they offer a number of facts:
they purchased the property for investment purposes with
their father in 2000, 18 years before Gradei’s ceased opera-
tions; they did not receive tax benefits, exemptions, or deduc-
tions as a result of Gradei’s use of the property; they never
received or used any rent payments; they did not perform
No. 20-2142 7
leasing activities after Gradei’s left (though GX did); and they
never employed anyone to manage the property.
We do not disagree with the Pitellos that evidence can re-
but the presumption that leasing property to a withdrawing
employer is a trade or business. But the Pitellos have failed to
do that. The problem with their list is that it omits other de-
tails that undermine their position, and it does not recognize
the economic equivalence between a return on investment in
the form of rent collection and return on investment in the
form of dividends or salaries made possible by the absence of
any rent obligation. Land owned by a firm’s equity investors
and used by that firm in its business is itself a form of equity
investment in the firm. Logically that means that the land
should be treated as part of the business.
Absent persuasive evidence that does not appear in this
record, “the inescapable conclusion is that the [defendant]s’
leasing activity was simply an extension of the business oper-
ations of … the withdrawing employer, [sic] and was a means
to fractionalize [the withdrawing employer]’s assets.” Mes-
sina, 706 F.3d at 883; see, e.g., Cent. States, Se. & Sw. Areas Pen-
sion Fund v. Fulkerson, 238 F.3d 891, 894 (7th Cir. 2001) (“[De-
fendants] also offered an expert witness in the real estate mar-
ket who opined that the triple net leases were economically
identical to passive investments such as stocks or bonds.”).
The Pitellos, with their father, provided office and storage
space exclusively to companies that they own. Far from incur-
ring nothing of value, the Pitellos and their businesses all
reaped benefits from this arrangement. The Pitellos secured
workspace for their businesses and known tenants for their
property. The fact that GX, a company owned by the Pitellos,
began leasing the property and collecting rent payments only
8 No. 20-2142
after Gradei’s withdrew does not suggest that the Pitellos
were passive investors. To the contrary, it is a strong indicator
that whatever value the Pitellos received through their rent-
free arrangement with Gradei’s had been lost upon Gradei’s
failure as a business venture. Without evidence to the con-
trary, the logical inference is that the rent-free arrangement
protected Gradei’s, GX, and the Melrose Park Property, all
trades or business under the Pitellos’ control. Nothing in
Groetzinger compels a different conclusion.
III
Anthony and Pat Pitello were engaged in a trade or busi-
ness under common control with Gradei’s because of their
ownership of the Melrose Park Property and Gradei’s use of
that property rent-free. We presume that the activity of leas-
ing property to a withdrawing employer is a trade or busi-
ness, and the Pitellos have not rebutted that presumption. The
district court thus correctly found Anthony Pitello and Pat Pi-
tello personally liable for Gradei’s withdrawal liability, along
with Gradei’s and GX. The judgment of the district court is
AFFIRMED.