Central States, Southeast & Southwest Areas Pension Fund v. Scofbp, LLC

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