Pension Plan of Local Union 786 Retirement Fund v. Lee Lumber & Building Material Corp.

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

PENSION PLAN OF LOCAL UNION

786 RETIREMENT FUND, et al.,

Plaintiffs,

No. 19-cv-06933

v. Judge Franklin U. Valderrama

LEE LUMBER & BUILDING

MATERIAL CORP, et al.,

Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiffs, a multiemployer pension benefit plan, a multiemployer welfare

benefit plan, and members of their respective boards of trustees,1 have brought suit

against Defendants, Lee Lumber & Building Material Corp. (Lee Lumber), Richard

Baumgarten, Arthur Rand Baumgarten (together with Richard Baumgarten, the

Baumgartens), the Richard Lee Baumgarten Child’s Separate Trust (Richard Trust),

the A. Rand Baumgarten Child’s Separate Trust (Arthur Trust, and together with

the Richard Trust, the Child Trusts), DEE-Illinois, LLC (DEE-Illinois) and unnamed

other controlled group members of Lee Lumber (collectively, all Defendants), under

various provisions of the Employee Retirement Income Security Act of 1974, as

amended (ERISA), 29 U.S.C. §§ 1001–1461, as amended by the Multiemployer

1Plaintiffs are: Pension Plan of Lumber Employees Local 786 Retirement Fund (Pension

Fund), Welfare Plan of the Local Union 786 Building Material Welfare Fund (Welfare Fund)

and Michael Philipp, Ron Sandack, Michael Yauger, Steven Warnke, Kevin Jarchow, Edward

Rizzo, Steven Fisher, Ricky Blevins, Dave Mashek, and Marty Ozinga IV as the members of

the Funds’ respective Boards of Trustees (collectively, the Trustees).

Pension Plan Amendments Act of 1980 (MPPAA), 29 U.S.C. § 1381 et seq. Plaintiffs

seek over $4.7 million in withdrawal liability that they allege Lee Lumber incurred

by exiting the Plaintiff Pension Fund, and over $2,800 in delinquent contributions to

the Plaintiff Welfare Fund. Plaintiffs also seek to hold the Baumgartens, as the

owners of Lee Lumber, personally liable for Lee Lumber’s withdrawal liability, along

with DEE-Illinois as the alter-ego of the Child Trusts and/or the Baumgartens. R. 31,

SAC.2

Before the Court are Defendants Lee Lumber, the Baumgartens, the Child

Trusts’ (collectively, Lee Defendants) Motion to Dismiss Plaintiffs’ Second Amended

Complaint (Lee Motion to Dismiss), R. 39, Lee Mot. Dismiss, and Defendant DEE-

Illinois’ Motion to Dismiss the Second Amended Complaint (DEE Motion to Dismiss),

R. 38, DEE Mot. Dismiss. Both motions are brought pursuant to Federal Rule of Civil

Procedure 12(b)(6). For the reasons that follow, both Motions to Dismiss are denied.

Background

Lee Lumber operated at 633 West Pershing Road, in Chicago, Illinois (the

Property).3 SAC ¶ 13. Before withdrawal on or about November 1, 2018, Lee Lumber

was an employer engaged in an industry affecting commerce and was subject to a

collective bargaining agreement with the Building Material, Lumber, Box, Shaving,

Roofing and Insulating Chauffeurs, Teamsters, Warehousemen and Helpers Union

2Citations to the docket are indicated by “R.” followed by the docket number or filing name,

and where necessary, a page or paragraph citation.

3The Court accepts as true all of the well-pleaded facts in the SAC and draws all reasonable

inferences in favor of Plaintiffs. Platt v. Brown, 872 F.3d 848, 851 (7th Cir. 2017).

No. 768 (the Union). Id. ¶ 66. Under the terms of the collective bargaining agreement,

Lee Lumber was required to make contributions to the Pension Fund on behalf of

certain of its employees. Id.

Lee Lumber was owned by the Baumgartens and operated on property owned

by the Child Trusts. SAC ¶¶ 15, 19, 22. Richard Baumgarten is the sole beneficiary,

sole trustee, and representative of the Richard Lee Baumgarten Child’s Separate

Trust. Id. ¶ 16. Arthur Rand Baumgarten is the sole beneficiary, sole trustee and

representative of the A. Rand Baumgarten Child’s Separate Trust. Id. ¶ 20.

On or about March 1, 2017, Lee Lumber requested from the Pension Fund an

estimate of its withdrawal liability. SAC ¶ 31. On or about June 1, 2017, Lee Lumber

contacted the Pension Fund to negotiate a pre-payment of its withdrawal liability

based on the March 17, 2017 estimated liability by the Pension Fund’s actuary. Id.

¶ 32.

In response, on or about June 1, 2017, the Pension Fund sent Lee Lumber a

statement of business affairs (SOBA) to determine its controlled group and any

entities that could be subject to joint and several liability. SAC ¶ 33. Lee Lumber

returned the SOBA to the Pension Fund on or about June 17, 2017. Id. ¶ 34. On or

about November 20, 2017, the Pension Fund informed Lee Lumber that based on the

information provided on the SOBA, Lee Lumber and the Baumgartens were in a

controlled group and the Baumgartens were personally liable for the withdrawal

liability. Id. ¶ 35.

On July 18, 2018, Lee Lumber signed a non-binding Letter of Intent (LOI) with

Kodiak Building Partners, Inc., (Kodiak), whereby Kodiak would acquire certain

assets and assume certain liabilities of Lee Lumber. SAC ¶ 37. On or about July 25,

2018, Lee Lumber contacted the Pension Fund regarding the potential sale of assets

to Kodiak pursuant to the LOI. Id. ¶ 38. Lee Lumber again requested a settlement of

its estimated withdrawal liability. Id.

On or about September 1, 2018, the Pension Fund informed Lee Lumber that

it would not accept Lee Lumber’s offer to settle the estimated withdrawal liability

before Lee Lumber triggered such liability. SAC ¶ 39.

Lee Lumber closed on or about November 1, 2018 and auctioned its assets

shortly thereafter. SAC ¶ 40. Lee Lumber is no longer engaged in business activities

involving Union employees. Id. When Lee Lumber closed, it ceased making

contributions to the Pension Fund and triggered withdrawal liability on or about

November 1, 2018.4 Id. ¶ 41.

On or about November 14, 2018, the Pension Fund sent Lee Lumber a revised

statement of business affairs (Revised SOBA) to determine its controlled group and

any entities that could be subject to joint and several liability. SAC ¶ 42. Lee Lumber

returned the Revised SOBA letter to the Pension Fund, in which Lee Lumber stated

that it had recovered more than $260,000 in cash from the auction of its assets. Id.

¶ 43.

4The SAC later states that Lee Lumber stopped making contributions to the Pension Fund

on November 30, 2018. SAC ¶ 67. The exact date does not matter for purposes of this Opinion.

Lee Lumber, during all relevant times up to and including the date of

withdrawal, leased an office and warehouse facility on the Property. SAC ¶ 48. The

parties to the Lease were Lee Lumber and the Baumgartens and/or Child Trusts. Id.

¶ 49. During all relevant times, the Property was an asset of the Child Trusts and

the Child Trusts allowed Lee Lumber to conduct business operations on the Property.

Id. ¶¶ 54–55.

Some time prior to January 7, 2019, the Child Trusts mortgaged the Property.

SAC ¶ 84. On or prior to January 7, 2019, DEE-Illinois purchased the note under

which the Child Trusts had mortgaged the Property. Id. ¶ 85. The Child Trusts never

made a payment on the note purchased by DEE-Illinois. Id. ¶ 87.

On January 7, 2019, the Child Trusts executed a “Deed in Lieu of Foreclosure

Agreement” conveying the Property to DEE-Illinois, in partial satisfaction of a note

that DEE-Illinois purchased from the mortgagee from whom the Child Trusts had

mortgaged the Property. SAC ¶¶ 44, 86. In consideration of the transfer of the

Property from the Child Trusts to DEE-Illinois, DEE-Illinois agreed to reduce the

debt owed by Lee Lumber to DEE-Illinois by $800,000. Id. ¶ 88.

Shortly thereafter, on January 10, 2019, the Pension Fund issued a notice and

demand for withdrawal liability (Demand Letter). SAC ¶ 45. No payment was

received by the Pension Fund regarding the withdrawal liability assessed against Lee

Lumber in the Demand Letter. Id. ¶ 72. On March 22, 2019, the Pension Fund sent

a notice of default letter to Lee Lumber informing Lee Lumber that it had missed its

first payment and that it had 60 days to correct its missed payment or the Pension

Fund would default Lee Lumber and all amounts would become immediately due.

SAC ¶ 73.

On April 2, 2019, Lee Lumber’s counsel timely filed a request for review in

accordance with Section 4219(b)(2)(A) of ERISA, 29 U.S.C. § 1399(b)(2)(A). SAC

¶¶ 46, 74. On May 31, 2019, the Pension Fund notified Lee Lumber that its Trustees

had reviewed Lee Lumber’s request for review and had confirmed the withdrawal,

but modified the amount of the withdrawal liability owed to $4,789,377. Id. ¶¶ 47, 75.

The Pension Fund granted Lee Lumber additional time to cure its default from its

original deadline of March 22, 2019, to June 7, 2019. Id. ¶ 76. Neither Lee Lumber,

nor any member of its controlled group has made any payments to the Pension Fund

for withdrawal liability. Id. ¶ 77.

The Property is currently for sale by DEE-Illinois and the asking price is

$3,200,000. SAC ¶ 89.

The Pension Fund subsequently filed suit against Lee Lumber and the

Defendants. The complaint has been amended and the operative complaint is the

Second Amended Complaint (SAC). Count I asserts that pursuant to Sections 502(g)

and 4301(e) of ERISA, 29 U.S.C. § 1132(g) and 1451 (e), all Defendants are jointly

and severally liable for the Withdrawal liability. Count II asserts that all Defendants

are liable for the delinquent contributions.

Lee Defendants and DEE-Illinois move separately to dismiss the SAC

pursuant to Federal Rule of Civil Procedure 12(b)(6). Lee Mot. Dismiss; DEE Mot.

Dismiss.

Legal Standard

A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the

complaint. Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811,

820 (7th Cir. 2009). Under Rule 8(a)(2), a complaint must include only “a short and

plain statement of the claim showing that the pleader is entitled to relief.” FED. R.

CIV. P. 8(a)(2). To survive a motion to dismiss, a complaint need only contain factual

allegations, accepted as true, sufficient to “state a claim to relief that is plausible on

its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads

factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Id. The allegations “must be enough

to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. The

allegations that are entitled to the assumption of truth are those that are factual,

rather than mere legal conclusions. Iqbal, 556 U.S. at 678–79.

Analysis

ERISA was enacted “to protect employee pension plans from underfunding.”

Loc. 705 Int’l Bhd. of Teamsters Pension Fund v. Gradei’s Express Co., 2020 WL

1530737, at *3 (N.D. Ill. Mar. 31, 2020) (citing Cent. States. Se. & Sw. Areas Pension

Fund v. Midwest Motor Exp., Inc., 181 F.3d 799, 803 (7th Cir. 1999)). As amended by

the MPPAA, it “requires an employer to make contributions to a multiemployer

pension plan ‘in accordance with the terms and conditions of such a plan.’” Bd. of Trs.

v. 6516 Ogden Ave, LLC, 170 F. Supp. 3d 1179, 1182 (N.D. Ill. 2016) (quoting 29

U.S.C. § 1145). The MPPAA requires employers who withdraw from a multiemployer

pension plan “to contribute to a proportionate share of the plan’s unfunded vested

benefits.” Gradei’s Express, 2020 WL 1530737, at *3 (citing Midwest Motor Exp., Inc.,

181 F.3d at 803). ERISA defines this obligation as an employer’s “withdrawal

liability.” 29 U.S.C. § 1381.

“Withdrawal liability applies not only to the withdrawing employer itself, but

also to all other ‘trades or businesses’ that are under the same umbrella of ‘common

control.’” Gradei’s Express, 2020 WL 1530737, at *3 (citing 29 U.S.C.

§ 1301(b)(1); Cent. States, Se. & Sw. Areas Pension Fund v. SCOFBP, LLC, 668 F.3d

873, 876 (7th Cir. 2011)). “This is commonly referred to as ‘the controlled group

provision.’” Trustees of Suburban Teamsters of N. Illinois Pension Fund v. E Co., 2018

WL 1427172, at *3 (N.D. Ill. Mar. 22, 2018) (quoting Cent. States. Se. & Sw. Areas

Pension Fund v. Slotky, 956 F.2d 1369, 1372 (7th Cir. 1992)). “This prevents

employers from ‘fractionalizing’ their assets among several entities to avoid

liability.” 6516 Ogden Ave., LLC, 170 F. Supp. 3d at 1183 (quoting Cent. States, Se.

& Sw. Areas Pension Fund v. Neiman, 285 F.3d 587, 589 (7th Cir. 2002). “Withdrawal

liability was not intended, however, to reach the personal assets of owners or

shareholders of a withdrawing employer, absent a showing that they acquired assets

to evade withdrawal liability.” Gradei’s Express, 2020 WL 1530737, at *4 (internal

citations omitted).

ERISA provides that “all . . . trades and businesses” whether incorporated or

not, that are under common control, shall be treated as a single employer. 29 U.S.C.

§ 1301(b)(1). Thus, “each trade or business under common control is jointly and

severally liable for the withdrawal liability of any other.” McDougall v. Pioneer Ranch

L.P., 494 F.3d 571, 574 (7th Cir. 2007). ERISA does not define “trade or business.”

The Seventh Circuit, however, for purposes of defining what constitutes a “trade or

business,” has adopted the test articulated in Commissioner of Internal Revenue v.

Groetzinger, 480 U.S. 23, 35 (1987). See Cent. States Se. & Sw. Areas Pension Fund

v. Messina Prod., LLC, 706 F.3d 874, 878 (7th Cir. 2013). The “Groetzinger test” “asks

whether the entity’s activities ‘are performed (1) for the primary purpose of income

or profit; and (2) with continuity and regularity.’” Gradei’s Express, 2020 WL

1530737, at *4 (quoting Messina Prod., 706 F.3d at 878). “These criteria are intended

to distinguish a trade or business from passive investments or hobbies.” Id.

I. Lee Motion to Dismiss

As a preliminary matter, although the Lee Motion to Dismiss is purportedly

brought on behalf of all Defendants, the arguments for dismissal only pertain to the

Baumgartens and the Child’s Trusts. See generally Lee Mot. Dismiss. Therefore, the

Court construes the Lee Motion to Dismiss as brought only on behalf of the

Baumgartens and the Child’s Trust, and not Lee Lumber.

A. Forfeiture of Right to Contest Membership in Controlled Group

Plaintiffs first argue that Lee Lumber and its controlled group’s liability in this

case is fixed and not subject to challenge because all Defendants failed to initiate

arbitration with respect to the withdrawal liability within the statutory time frame

required by Section 4221(a) (29 U.S.C. § 1401(a)(1)). R. 41, Pls.’ Resp. Lee Mot.

Dismiss at 3–7; R. 40, Pls.’ Resp. to DEE Mot. Dismiss at 4–7. In their responses to

both motions to dismiss, however, Plaintiffs rely solely on cases holding at summary

judgment that defendants who should know they might be members of the controlled

group to have waived the opportunity to contest their membership by failing to

institute arbitration. Id. (citing Tr. Of Suburban Teamsters of N. Ill. Pension Fund v.

E Co., 914 F.3d 1037, 1039 (7th Cir. 2019); Chicago Truck Drivers v. El Paso CGP

Co., 525 F.3d 591, 597–98 (7th Cir. 2008); Cent. States, Se. & Sw. Areas Pension Fund

v. Slotky, 956 F.2d 1369, 1373 (7th Cir. 1992))). Plaintiffs fail to cite—and the Court

is unaware of—any cases holding, on a motion to dismiss, that a party who did not

receive notice waived its rights to contest its membership in a controlled group by

failing to initiate arbitration.

The Court finds that the question of waiver is more appropriate at the

summary judgment stage than on a motion to dismiss. But no matter, because as

discussed below, the Court agrees with Plaintiffs that the SAC adequately pleads that

each of the Lee Defendants was a trade or business under common control with the

withdrawing employer who received notice (Lee Lumber), and thus are jointly and

severally liable for the withdrawal liability of Lee Lumber. Pls.’ Resp. Lee Mot.

Dismiss at 1–2.

B. Child Trusts

Lee Defendants argue that the SAC fails to sufficiently allege that the Child

Trusts’ lease of the Property to Lee Lumber constitutes a trade or business such that

the Child Trusts could be considered members of a controlled group of Lee Lumber

under ERISA. Lee Mot. Dismiss at 4–6. Lee Defendants note that an activity does not

constitute a “trade or business” unless it is performed: (1) for the primary purpose of

income or profit and (2) with continuity and regularity. Id. at 4 (citing Groetzinger,

480 U.S. at 35). Merely holding a lease, assert Lee Defendants, is not sufficient to

constitute a “trade or business” under § 1301(b)(1). Id. at 5–6 (citing Central States v.

Fulkerson, 238 F3d. 891 (7th Cir. 2001)). Here, Lee Defendants contend that

Plaintiffs have merely alleged that Lee Lumber leased the Property from the Child

Trusts, without any allegations regarding the nature of the Child’s Trusts ownership

activity. Id. The Court finds that the Child Trusts’ motion ignores well-settled law.

A decade ago, the Seventh Circuit stated that “leasing property to a

withdrawing employer is a ‘trade or business’ within the meaning of the MPAA.”

SCOFBP, 668 F.3d at 878–79. This principle was reiterated two years later in

Messina Prod. 706 F.3d at 882. In Messina, the Seventh Circuit explained that “where

the real estate is rented to or used by the withdrawing employer and there is common

ownership, it is improbable that the rental activity could be deemed a truly passive

investment.” Id. Rather, “[i]n such situations, the likelihood that a true purpose and

effect of the ‘lease’ is to split up the withdrawing employer’s assets is self-evident.”

Id. Yet Lee Defendants’ motion fails to mention, much less distinguish SCOFBP or

Messina. See generally Lee Mot. Dismiss.

Defendants have not cited, nor is the Court aware of, any authority holding

that a plaintiff must allege that a formal lease exists or specifics about the nature of

the lease between the withdrawing employer and entity leasing the property. The

only case cited by Defendants, Central States v. Fulkerson, 238 F.3d 891, 894–95 (7th

Cir. 2001) does not support Defendants’ contention. True, Fulkerson involved a lease.

Id. However, that case is distinguishable because the defendants in Fulkerson did not

lease the properties to the entities that incurred the withdrawal liability. Id. By

contrast, here, Plaintiffs allege that the Child Trusts leased the Property to Lee

Lumber, the entity that incurred the withdrawal liability. SAC ¶¶ 48–49. Nothing in

Fulkerson requires the existence of a formal lease to establish the owner of property

as engaging in the activity of a “trade or business” for purposes of attributing

withdrawal liability to said owner as a controlled group member with the

withdrawing employer operating on its property. Rather, “renting property to a

withdrawing employer is categorically a trade or business.” SCOFBP, 668 F.3d at

879; see also Gradei’s Express, 2020 WL 1530737, at *4–5 (collecting cases). That is

not to say that the MPAA imposes liability for a “withdrawing employer on purely

passive investment entities, including those that invest in real estate.” Messina Prod.,

706 F.3d at 882. But, as noted above, where there is common ownership between the

lessor and the withdrawing employer lessee, “it is improbable that the rental activity

could be deemed a truly passive investment.” Id.

Here, Plaintiffs have alleged that Lee Lumber and the Child Trusts had

common ownership, namely the Baumgartens. SAC ¶¶ 15–16, 19–20. Plaintiffs have

further alleged that the Child Trusts leased the property on which the withdrawing

employer operated, to the withdrawing employer. Id. ¶¶ 13, 22–23, 48–49. Lee

Defendants dispute these allegations, arguing that the Child Trusts never entered

into a lease with Lee Lumber, did not own the Property to earn a profit but rather

held the property as a passive investment, and that Lee Lumber never paid the Child

Trusts any rent. Lee Mot. Dismiss at 6. Lee Defendants’ denials and contentions

about the nature of the lease may be issues subject to a motion for summary

judgment, but are not proper on a Rule 12(b)(6) motion. See Adams v. Detella, 248

F.3d 1156 (7th Cir. 2000) (whether allegations in a complaint are true is

appropriately decided on a motion for summary judgment, not a motion to dismiss).

Accordingly, the Court finds, that in viewing the allegations of the SAC in the

light most favorable to Plaintiffs (as it must), that Plaintiffs have adequately pled

that the Child Trusts’ lease of the Property to Lee Lumber constituted a “trade or

business activity” subject to common control for purposes of withdrawal liability and

thus the Child Trusts can be jointly and severally liable with Lee Lumber, the

withdrawing employer. See Gradei’s Express, 2020 WL 1530737, at *5.

C. The Baumgartens’ Alter-Ego Liability

Next, Lee Defendants argue that Plaintiffs have failed to sufficiently allege

that the Baumgartens are alter-egos of the Child Trusts. Lee Mot. Dismiss at 7–8.

Defendants contend that Plaintiffs rely solely on the allegations that the

Baumgartens are the trustees and beneficiaries of their respective Child Trusts,

which is insufficient to establish the Baumgartens’ alter-ego liability because a

property owned by a trust is not owned by its beneficiaries. Id. at 8 (citing Doyle v.

Hood, 112 N.E.3d 1040, 105354 (Ill. App. Ct. 2018)). Lee Defendants contend that

trust assets are owned by trusts, and beneficiaries hold beneficial interests rather

than ownership interests. Id. (citing In re Marriage of LaRocque, 107 N.E.3d 349,

356, 365 (Ill. App. Ct. 2018)).

But neither case cited by Lee Defendants evaluates alter-ego liability under

ERISA. The Court agrees with Plaintiffs that the Federal Regulations governing

ERISA make it clear that the Baumgartens can be found individually liable for Lee

Lumber’s withdrawal liability because they are beneficiaries of their respective Child

Trusts. Pls.’ Resp. Lee Mot. Dismiss at 13. Under the Regulations, a beneficiary of a

trust is attributed ownership of the trust for purposes determining ownership

interests and for withdrawal liability purposes. 26 C.F.R. §1.414(c)-4(b)(3)(i) (“An

interest in an organization (hereinafter called an ‘organization interest’) owned,

directly or indirectly, by or for [a] . . . trust shall be considered as owned by any

beneficiary of such . . . trust who has an actuarial interest of 5 percent or more in

such organization interest, to the extent of such actuarial interest.”). Plaintiffs also

argue that a brother-sister controlled group exists for withdrawal liability purposes

under ERISA. Under 26 C.F.R. § 1.414(c)-2(c)(1), a brother sister-controlled group

exists among “two or more organizations conducting trades or businesses if (i) the

same five or fewer persons who are individuals . . . or trusts own (directly and with

the application of § 1.414(c)–4) a controlling interest in each organization, and (ii)

taking into account the ownership of each such person only to the extent such

ownership is identical with respect to each such organization, such persons are in

effective control of each organization.”

Here, Plaintiffs have alleged that Richard Baumgarten is the “sole beneficiary,

sole trustee and representative of the Richard Trust,” SAC ¶ 16, and that Arthur

Rand Baumgarten is the “sole beneficiary, sole trustee and representative of the

Arthur Trust,” id. ¶ 20. Plaintiffs have also alleged that the Baumgartens each owned

50% of Lee Lumber, SAC ¶¶ 15, 19, and the Baumgartens, as beneficiaries of the

Child Trusts, each owned 50% of the Property, id. ¶¶ 17, 21. Therefore, the leasing

activity of the Baumgartens and the Child Trusts is under “common control” with the

trade and business of Lee Lumber as part of the Lee Lumber controlled group.5 See

Trustees of Suburban Teamsters of N. Illinois Pension Fund v. E Co., 2018 WL

1427172, at *7 (N.D. Ill. Mar. 22, 2018), aff’d, 914 F.3d 1037 (7th Cir. 2019) (citing

Central States, Se. & Sw. Areas Pension Fund v. White, 258 F.3d 636, 641 (7th Cir.

2001); Cent. States Se. & Sw. Areas Pension Fund v. Miller, 868 F. Supp. 995, 1000

(N.D. Ill. 1994)). Together, these allegations are sufficient under the Federal

Regulations to adequately state a claim for relief against the Baumgartens

individually. See id. (holding individuals individually liable for withdrawal liability

where individuals, individually and as trustees, owned 100% of rental activity

associated with the withdrawing entity that was owned by the same individuals).

5Additionally, as discussed above, see supra Section I.B, Plaintiffs have sufficiently pled that

the Child Trusts were engaged in a “trade or business” activity by leasing the Property to Lee

Lumber.

D. Fraudulent Transfer

Last, Lee Defendants posit that although Plaintiffs only assert two counts in

their SAC, they appear to assert a claim for fraudulent transfer based on the Child

Trust’s deed-in-lieu transfer of the Property to Defendant DEE-Illinois. Lee Mot.

Dismiss at 9. A review of the SAC reveals that Plaintiffs do not assert a claim of

Fraudulent Transfer,6 and Plaintiffs do not contend that they have alleged such a

claim in their response. See generally SAC; Pls.’ Resp. Lee Mot. Dismiss at 14–15

(arguing that Lee and the Child Trusts effectuated the fraudulent transfer to evade

or avoid withdrawal liability, thus making DEE-Illinois jointly and severally liable).

Therefore, the Court holds that the SAC does not allege a standalone fraudulent

transfer claim under Illinois law, and Plaintiffs waived their right to allege that such

a claim was included in the SAC by failing to address Lee Defendants’ argument in

their response. See Bonte v. U.S. Bank, N.A., 624 F.3d 461, 466 (7th Cir. 2010)

(“Failure to respond to an argument . . . results in waiver.”).

II. DEE-Illinois Motion to Dismiss

A. Notice

As they did in their response to Lee Defendants’ Motion to Dismiss, Plaintiffs

argue in response to DEE-Illinois’ Motion to Dismiss that DEE-Illinois waived its

right to contest its membership in the controlled group by failing to initiate

6The elements of a fraudulent transfer claim under Illinois are Illinois' Uniform Fraudulent

Transfer Act are:  (1) the transferor made a voluntary transfer;  (2) at the time of the transfer,

the transferor had obligations elsewhere;  (3) the transferor made the transfer without

receiving a reasonably equivalent value in exchange;  and (4) after the transfer the transferor

failed to retain sufficient property to pay his indebtedness. 740 ILCS 160/5(a)(2), 160/6(a).

arbitration. Pls.’ Resp. DEE Mot. Dismiss at 4–7. But as discussed above, see supra

Section I.A, the Court finds that the question of waiver is more appropriate at the

summary judgment stage than on a motion to dismiss. That is even more true in the

case of DEE-Illinois, which is not under common ownership or management like Lee

Defendants, see SAC ¶ 30, and therefore has a more plausible argument that it falls

into the waiver exception articulated by the Seventh Circuit in E Co., 914 F.3d 1039

(“Our case law has recognized a narrow exception to this general rule of forfeiture for

a party who ‘had absolutely no reason to believe that they might be deemed members

of a controlled group’ but is nonetheless sued and alleged to be liable for another

party’s withdrawal liability based on ERISA’s ‘controlled group’ provision.”) (citing

Slotky, 956 F.2d at 1373).

B. Evade or Avoid Liability

Plaintiffs allege in the SAC that the sale of the Property from the Child Trusts

to DEE-Illinois was a fraudulent transfer with the intent to evade or avoid

withdrawal liability under Section 4212(c) of ERISA, 29 U.S.C. 1392(c), and therefore,

the transfer can be ignored for purposes of withdrawal liability. Pls.’ Resp. DEE Mot.

Dismiss at 7. DEE-Illinois argues that Plaintiffs do not allege sufficient facts to

support this theory. DEE Mot. Dismiss at 4; R. 53, DEE Reply at 4. The Court

disagrees.

The MPPAA added this Section to ERISA “to ensure that employers live up to

the obligations they owe to the pension fund and to the employees who participate in

it.” Bd. of Trustees of the Auto. Mechanics’ Loc. No. 701 Union & Indus. Pension Fund

v. Joyce, 2015 WL 1888005, at *2 (N.D. Ill. Apr. 24, 2015) (internal citations and

quotations omitted). “When an employer violates § 1392(c), liability will be

determined as if the transaction to evade or avoid liability never occurred, and a

plaintiff can reach those assets that were transferred in order to evade or avoid

liability, as well as the parties to whom they were improperly transferred.” Id.

(citations and quotations omitted) (emphasis in original).

To adequately allege an evade or avoid claim, a plaintiff must allege “(1) the

consummation of a transaction that allows [d]efendants to evade or avoid withdrawal

liability, and (2) that a principal purpose of the transaction was to evade or avoid

withdrawal liability.” Id. It need not be the only purpose, just one that weighed

heavily in the organization’s thinking. Santa Fe Pac. Corp. v. Cent. States, Se. & Sw.

Areas Pension Fund, 22 F.3d 725, 727 (7th Cir. 1994).

In addition to satisfying Rule 12(b)(6) standards, at least some courts in this

District have held that § 1392(c) claims are subject to the heightened pleading

standard for fraud claims set forth in Rule 9(b). See Joyce, 2015 WL 1888005, at *2;

Bd. of Trustees, Sheet Metal Workers’ Nat. Pension Fund v. Illinois Range, Inc., 186

F.R.D. 498, 503 (N.D. Ill.), adopted in part, 71 F. Supp. 2d 864 (N.D. Ill. 1999). But

see Cent. States, Se. & Sw. Areas Pension Fund v. King Auto Fin., Inc., 2012 WL

4364310, at *3–4 (N.D. Ill. Sept. 19, 2012) (applying Rule 8(a) standard). Rule

9(b) states that “[i]n all averments of fraud or mistake, the circumstances

constituting the fraud or mistake shall be stated with particularity. Malice, intent,

knowledge, and other condition of mind of a person may be averred generally.” FED.

R. CIV. P. 9(b). As noted above, Rule 8(a) requires only “a short and plain statement

of the claim showing that the pleader is entitled to relief.” FED. R. CIV. P. 8(a). But

the Court need not definitively decide which is the appropriate pleading standard, as

the Court finds that that Plaintiffs have satisfied Rule 9(b)’s more demanding

requirements.

DEE-Illinois argues that Plaintiffs allege only conclusions, and no facts, to

support their evade or avoid claim. DEE Reply at 4. DEE-Illinois also argues that the

only case cited by Plaintiffs in support of their evade or avoid claim, King Auto Fin.,

2012 WL 4364310, is distinguishable because the parties in that case were part of the

same controlled group based on the brother-sister theory. DEE Reply at 4. DEE-

Illinois is correct that King found that four of the five defendants were part of a

controlled group based on the brother-sister formulation or based on common control,

but it did not so hold as to the fifth defendant (the WJB Trust). 2012 WL 4364310, at

*3–4. So King is instructive to the extent that it held—under Rule 8(a)’s notice

pleading standard—that the WJB Trust could be held liable under evade or avoid

theory, where the defendant contributing employer: (1) sold its assets; (2)

permanently closed all of its operations; (3) distributed the proceeds of the sale to

controlled group defendants (including the WJB Trust) without receiving any

consideration; and (4) became unable to pay its withdrawal liability as a result. Id. at

*4.

Similarly, here Plaintiffs allege that: (1) Lee Lumber, through the Child

Trusts, transferred its most valuable asset, the Property, to DEE-Illinois, SAC ¶¶ 44,

85–88; (2) Lee Lumber permanently closed all of its operations, SAC ¶ 40; (3) Lee

Lumber did not receive adequate consideration for the Property (DEE-Illinois

reduced Lee’s debt to it by $800,000 but subsequently listed the Property for sale for

$3.2 million), SAC ¶¶ 44, 88–89; and (4) Lee is unable to pay its withdrawal liability,

see SAC ¶ 77.

But importantly, Plaintiffs also allege that the Child Trusts transferred the

Property to DEE-Illinois in consideration of Lee’s debt to DEE-Illinois on January 7,

2019, just three days before the Pension Fund issued notice and demand for

withdrawal liability on January 10, 2019. SAC ¶¶ 44–45. DEE-Illinois argues that

because the transfer occurred before the Pension Fund issued its notice and demand

for withdrawal liability undermines Plaintiffs’ argument that the principal purpose

of the transfer was to evade or avoid liability. DEE Reply at 4. The Court disagrees.

Plaintiffs allege that, in the several months before the transfer, Lee had requested a

settlement of its estimated withdrawal liability in July 2018, which the Pension Fund

rejected in September 2018 because Lee had not yet triggered such liability, and Lee

subsequently closed and ceased making contributions, thus triggering its withdrawal

of liability on November 1, 2018, after which Lee and Plaintiffs exchanged written

statements of business affairs in November and December 2018. SAC ¶¶ 38–43.

Although Plaintiffs had not yet sent Lee a notice and demand for withdrawal of

liability at the time of the transfer of the Property, Lee had actively engaged in the

process to determine its withdrawal liability and the Court finds that it is reasonable

based on Plaintiffs’ allegations to infer that Lee knew such a notice and demand was

forthcoming.

Relevant to this claim, Plaintiffs also allege that DEE is managed by the

Baumgartens’ spouses, and that “the transfer of the Property by the Child Trusts to

Dee-Illinois amounted to a fraudulent transfer with the intent to evade or avoid

withdrawal liability” under § 1392. SAC ¶¶ 30, 90. True, some of Plaintiffs’

allegations are conclusory, but together, the SAC alleges that Lee knew about

withdrawal liability, conspired to avoid withdrawal liability, and intended the

transaction to be a means of avoiding withdrawal liability. Other courts in this

District have held such allegations to be sufficient, and have noted that because

Plaintiffs are dependent on defendants’ representations to allege fraud, courts should

“not require plaintiffs to include in their pleadings information only available from

defendants through discovery.” Illinois Range, 186 F.R.D. at 503 (citing IUE AFL-

CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1058 (2d Cir. 1993)). Here, Plaintiffs

were not part of the negotiations between the Child Trusts, Lee, and DEE-Illinois for

the transfer from the property or reduction of Lee’s debt, so “a more particularized

account of the fraud claims [can] only be established through discovery.” Id. Plaintiffs’

allegations supporting their evade or avoid claim are similar to those held to be

sufficient by other courts under Rule 9(b). See Joyce, 2015 WL 1888005, at *2; Illinois

Range, 186 F.R.D. at 503.

Therefore, the Court finds that Plaintiffs have put DEE-Illinois on fair notice

as to the claims and the factual basis for them. Plaintiffs pled the elements of the

claim—a transaction with the purpose being to avoid liability, and additionally pled

both knowledge of the withdrawal liability and intent to avoid it, thus meeting Rule

9’s liberal pleading requirements for knowledge and intent. Plaintiffs have

sufficiently alleged an ERISA evading and avoiding liability claim.’

Conclusion

For the foregoing reasons, the Court denies all Defendants’ Motions to Dismiss.

[38], [39]. The Court refers discovery supervision, including setting all deadlines, and

settlement matters to Magistrate Judge Valdez.

lwsls Fle —

Dated: March 12, 2021

United States District Judge

Franklin U. Valderrama

“Because Plaintiffs have adequately pled an evade or avoid claim against DEE-Ilinois, the

Court need not address its alternative theory to impose liability on DEE-Ilinois, that DEE-

Illinois is an alter-ego of the Child Trusts and/or the Property and/or Arthur Rand

Baumgarten and Richard Baumgarten and along with Lee Defendants, is liable to Plaintiffs.

SAC 9 91-92. However, based on the parties’ briefs and case law, the Court finds it unlikely

that the allegations in the SAC sufficiently allege that DEE-I[linois is an alter ego of Lee

Defendants.

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