Central States, Southeast & Southwest Areas Pension Fund v. Nagy

In the

United States Court of Appeals

For the Seventh Circuit

No. 11-3055

C ENTRAL S TATES, S OUTHEAST AND

S OUTHWEST A REAS P ENSION F UND and

A RTHUR H. B UNTE, JR., Trustee,

Plaintiffs-Appellees,

v.

C HARLES F. N AGY,

Defendant-Appellant.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 10 CV 358—Marvin E. Aspen, Judge.

A RGUED A PRIL 2, 2012—D ECIDED A PRIL 22, 2013

Before R OVNER, S YKES, and T INDER, Circuit Judges.

S YKES, Circuit Judge. Central States, Southeast and

Southwest Areas Pension Fund (“Central States” or “the

Fund”) is a multiemployer pension plan for members

of the Teamsters union in the eastern half of the United

States. Nagy Ready Mix employed Teamsters labor and

participated in the Central States plan. In 2007 Ready

2 No. 11-3055

Mix ceased employing covered workers and thus

incurred $3.6 million in “withdrawal liability” owed to

Central States and assessed against it to fully fund its

pension obligations.

Ready Mix was unable to pay the full $3.6 million

assessment. This case asks whether Charles F. Nagy, its

owner, and two affiliated companies under his common

control are liable for the shortfall under the Employee

Retirement Income Security Act (“ERISA”), as amended

by the Multiemployer Pension Plan Amendments Act

of 1980 (“MPPAA”), 29 U.S.C. § 1301(b)(1). The related

Nagy-owned companies conceded liability in the dis-

trict court, so the only question on appeal concerns

Nagy’s personal liability. The answer turns on whether

he engaged in an unincorporated “trade or business”

under common control with Ready Mix. If so, he is per-

sonally liable for the payments.

The Fund identified two possibilities. First, Nagy

owns the property on which Ready Mix conducts its

operations and leases the property back to his company.

The Fund contends that this rental activity qualifies as a

trade or business under § 1301(b)(1). Second, Nagy pro-

vided management services to a country-club venture.

The Fund claims that he did so as an independent con-

tractor, which likewise would qualify as a trade or

business under § 1301(b)(1).

On cross-motions for summary judgment, the district

court concluded that Nagy held and leased the prop-

erty to Ready Mix as a passive investment, not a trade or

business, so the leasing activity did not trigger personal

No. 11-3055 3

liability under § 1301(b)(1). But the court also held that

Nagy worked for the country club as an independent

contractor, not an employee, and this activity qualified

as a trade or business under § 1301(b)(1). That alone

was enough for personal liability, so the court entered

judgment for the Fund. Nagy appealed.

We affirm, though on a somewhat different analysis.

Recent decisions of this court confirm that Nagy’s

leasing activity is categorically a trade or business for

purposes of personal liability under § 1301(b)(1). See

Cent. States, Se. & Sw. Areas Pension Fund v. Messina

Prods., LLC, 706 F.3d 874, 881 (7th Cir. 2013); Cent. States,

Se. & Sw. Areas Pension Fund v. SCOFBP, LLC, 668 F.3d

873, 879 (7th Cir. 2011). Although the district court

did not have the benefit of these decisions, it is now

clear that it was a mistake to conclude that Nagy’s

leasing of property to Ready Mix did not qualify as a

trade or business. But this just means there are two

grounds for personal liability, not one. The district

court correctly held that Nagy provided management

services to the country club as an independent con-

tractor, which also qualifies as a trade or business

under § 1301(b)(1).

I. Background

Charles F. Nagy operates several small businesses.

Among them is Nagy Ready Mix, Inc., a concrete

company based in Utica, Michigan. For several years

Ready Mix employed Teamsters labor and made pay-

ments to the Central States Fund, the Teamsters’ pension

4 No. 11-3055

plan, under the terms of a collective-bargaining agree-

ment. In June 2007 Ready Mix stopped using Teamsters

labor and ended its participation in the Fund. This

action constituted a “complete withdrawal” from the

plan, see 29 U.S.C. § 1383, and to fully fund the com-

pany’s outstanding obligations, Central States assessed

Ready Mix a “withdrawal liability” in the principal

amount of $3,656,058.59. In May 2008 Ready Mix

initiated arbitration to challenge that calculation.

While arbitration was pending, Ready Mix was

obligated under 29 U.S.C. § 1401(d) to make payments

on the assessment. The company failed to do so, and

the Fund initiated this lawsuit against Nagy and

two related companies seeking to hold them jointly

and severally liable for the assessment. Before the

district court, the parties agreed that two other Nagy-

owned enterprises—Nagy Trucking and Nagy Concrete

Company—were under common control with Ready

Mix and therefore were jointly and severally liable for

the assessment. The parties disagreed, however, over

whether Nagy was personally liable.

The Fund suggested two possible grounds for

Nagy’s personal liability. First, the Fund argued that

Nagy’s property-leasing activities constituted an unin-

corporated “trade or business” under § 1301(b)(1). This

statutory definition treats all commonly controlled

“trades or businesses,” incorporated and unincorporated

alike, as a single employer for purposes of withdrawal

liability. The facts of Nagy’s rental activity were undis-

puted. In 1972 Ready Mix purchased property at

No. 11-3055 5

480100 Hixson Avenue in Utica, Michigan, to serve as

its base of operations. In 1986 the company sold the

property to Nagy, who conveyed it to a revocable trust.

Nagy then leased the property back to Ready Mix

pursuant to a triple-net lease that made Ready Mix re-

sponsible for utilities, insurance, and tax payments, as

well as maintenance and repair. Thus, though owned

by Nagy individually, the property remained the

primary facility for both Ready Mix and Nagy Trucking.

The second possible ground for personal liability

focused on Nagy’s management work for a country club

located in the City of Washington, Michigan. The club,

consisting of a golf course and a restaurant, was owned

by the Wells Venture Corporation, of which Nagy was

a shareholder, director, and president. From the early

1990s through 2005, Nagy oversaw operations at the

golf course and in that capacity handled the book-

keeping and management. In 2005 the club’s board of

directors decided to sell the golf course. Nagy took the

lead in accomplishing this task, and for the first time

the board began compensating him to reflect his new

responsibilities. He was paid $150 per hour. After

selling the golf course, Nagy continued to manage the

club’s remaining assets, working from his home. Wells

Venture paid him as an independent contractor,

without payroll deductions, as reflected on 1099-MISC

forms for tax years 2005, 2006, 2007, and 2008. Nagy

reported this income, which exceeded $200,000 in

total, on Schedule C of his tax returns, which covers

sole proprietors. Wells Venture repossessed the golf

course in January 2010 after the purchaser defaulted.

6 No. 11-3055

On cross-motions for summary judgment, the district

court rejected the first ground for Nagy’s personal

liability but accepted the second. In the court’s view,

Nagy’s leasing activity was a passive investment, not a

trade or business within the meaning of § 1301(b)(1).

Regarding Nagy’s work for the country club, however,

the court held that Nagy provided managerial services

as an independent contractor, which qualified as a

trade or business under § 1301(b)(1). Because Nagy’s

independent-contractor work for the club was enough

to support personal liability, the court granted sum-

mary judgment for the Fund and against Nagy, and

also entered summary judgment for the Fund holding

Nagy Trucking and Nagy Concrete jointly and severally

liable for the assessment. This appeal followed.

II. Discussion

The MPPAA protects multiemployer pension plans

and their beneficiaries by preventing withdrawing em-

ployers from ducking their pension obligations. See

Messina Prods., 706 F.3d at 878; Cent. States, Se. & Sw.

Areas Pension Fund v. Slotky, 956 F.2d 1369, 1374 (7th

Cir. 1992). The withdrawal-liability provisions at issue

in this case were enacted “to ensure that when an

employer withdraws from a pension plan, the financial

burden of its employees’ vested pension benefits

would not be borne by the other employers in the

plan.” Cent. States, Se. & Sw. Areas Pension Fund v.

Personnel, Inc., 974 F.2d 789, 791 (7th Cir. 1992). In

current parlance we might say that the MPPAA has a

No. 11-3055 7

“no bailouts” clause—a withdrawing employer cannot

shift its obligations onto the other companies in the

plan or ultimately onto the taxpayers via the Pension

Benefit Guarantee Corporation. See Messina Prods.,

706 F.3d at 878.

To ensure that assets are available to cover a withdraw-

ing employer’s liability, Congress provided that all

trades or businesses under common control with the

withdrawing employer are treated as a single em-

ployer for purposes of joint and several liability:

An individual who owns the entire interest in an

unincorporated trade or business is treated as his

own employer . . . . For purposes of this subchapter,

under regulations prescribed by the corporation,

all employees of trades or businesses (whether or

not incorporated) which are under common con-

trol shall be treated as employed by a single

employer and all such trades or businesses as a

single employer.

29 U.S.C. § 1301(b)(1). The purpose of § 1301(b)(1) “is to

prevent businesses from shirking their ERISA obliga-

tions by fractionalizing operations into many separate

entities.” Messina Prods., 706 F.3d at 878 (internal quota-

tion marks omitted). “Common control” is defined by

the relevant regulations as 80% shared ownership.

26 C.F.R. § 1.414(c)-2(b)(2).

The parties agree that the two other Nagy-owned

companies—Nagy Trucking and Nagy Concrete—are

under common control with Ready Mix, and thus both

are liable for the $3.6 million that Ready Mix owes the

8 No. 11-3055

Fund. The contested issue is whether Nagy himself can

be held personally liable. An individual is personally

liable when he holds the entire interest in an unincorpo-

rated “trade or business” under common control with

the withdrawing employer. 29 U.S.C. § 1301(b)(1);

Messina Prods., 706 F.3d at 878; Cent. States, Se & Sw.

Areas Pension Fund v. Fulkerson, 238 F.3d 891, 893-94

(7th Cir. 2001). Under the circumstances here, the

common control is obvious; the key question is whether

Nagy engaged in an unincorporated “trade or business”

within the meaning of § 1301(b)(1). The answer depends

on whether his leasing arrangement with Ready Mix

or his management services to the country club, or

both, qualify as an unincorporated trade or business

within the meaning of § 1301(b)(1).

These are questions we would ordinarily review

de novo on an appeal from a summary judgment.

SCOFBP, 668 F.3d at 877. However, where, as here, there

is no right to a jury trial and “the only issue before

the district court is the characterization of undisputed

subsidiary facts,” we have held that the clear-error stan-

dard of review applies. Messina Prods., 706 F.3d at 879;

see also SCOFBP, 668 F.3d at 877. Put differently, in

these sorts of ERISA cases, we review “mixed questions

of law and fact” under a clearly erroneous standard.

Fulkerson, 238 F.3d at 894.1

1

Because it alters normal summary-judgment review, our

approach to the standard of review has sometimes been resisted.

(continued...)

No. 11-3055 9

The evaluation of Nagy’s work for the country club

is such a mixed question. We are asked to review

whether the district court properly characterized the

undisputed facts as establishing Nagy’s status as an

independent contractor. The leasing issue is different,

however. The parties dispute whether a categorical rule

governs leasing of property to a commonly controlled

company. This is a question of law under our prece-

dents, so our review is de novo. See Messina Prods., 706

F.3d at 879. We follow the district court’s order of

battle and take up the leasing question first.

1

(...continued)

See, e.g., Jurcev v. Central Cmty. Hosp., 7 F.3d 618, 623 (7th Cir.

1993) (“[T]his new standard causes us some concern.”). The

framework first appeared in Central States, Southeast & Southwest

Areas Pension Fund v. Slotky, 956 F.2d 1369, 1373 (7th Cir. 1992)

(citing United States v. McKinney, 919 F.2d 405, 419 (7th Cir.

1991) (Posner, J., concurring)). See Cent. States, Se. & Sw.

Pension Fund v. Personnel, Inc., 974 F.2d 789, 792 (7th Cir.

1992). On several occasions we have been asked to revisit and

overrule Slotky on the standard-of-review issue, but each time

we have declined to do so in the specific circumstances of the

case. See Cent. States, Se. & Sw. Areas Pension Fund v. Neiman,

285 F.3d 587, 593 (7th Cir. 2002); Cent. States, Se. & Sw. Areas

Pension Fund v. White, 258 F.3d 636, 640 (7th Cir. 2001); Cent.

States, Se. & Sw. Areas Pension Fund v. Fulkerson, 238 F.3d 891,

894 (7th Cir. 2001). We have noted, however, that the D.C.

Circuit has adopted standard summary-judgment review for

these cases. Neiman, 285 F.3d at 594 n.4 (citing Connors v.

Incoal, Inc., 995 F.2d 245, 251 n.9 (D.C. Cir. 1993)). The parties

have not asked us to revise our approach to the standard of

review, nor would a different standard affect our decision.

10 No. 11-3055

A. Leasing Activity

The Fund argues that because Nagy owned and leased

to Ready Mix the property on which it conducted its

business operations, he essentially acted as a commercial

landlord to his own company, thus engaging in an unin-

corporated trade or business under common control

with the withdrawing employer within the meaning of

§ 1301(b)(1). The term “trade or business” in § 1301(b)(1)

is not defined, but this circuit uses the test developed

by the Supreme Court in Commissioner of Internal Revenue

v. Groetzinger, 480 U.S. 23, 35 (1987), for applying a

similar phrase in the tax code. See Messina Prods., 706

F.3d at 878; Fulkerson, 238 F.3d at 895. The Groetzinger

test examines whether the activity in question is under-

taken (1) for the primary purpose of income or profit;

and (2) with continuity and regularity. 480 U.S. at 35; see

also Messina Prods., 706 F.3d at 878; Fulkerson, 238 F.3d

at 895. We have explained that “[o]ne 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 § 1301(b)(1).” Fulkerson, 238 F.3d at 895.

The district court, applying Groetzinger, concluded

that Nagy’s leasing activity was primarily for passive

investment purposes. This conclusion was heavily influ-

enced by our decision in Fulkerson. As we have recently

explained, however, Fulkerson does not apply where, as

here, the property is leased to the withdrawing em-

ployer itself. See Messina Prods., 706 F.3d at 882. In

that situation, the bright-line rule of SCOFBP and Central

No. 11-3055 11

States, Southeast & Southwest Areas Pension Fund v. Ditello,

974 F.2d 887, 890 (7th Cir. 1992), applies. See Messina

Prods., 706 F.3d at 881-83. We held in Ditello that the

leasing of property to a withdrawing company under

the common control of the property owner constitutes

a “trade or business” within the meaning of § 1301(b)(1).

974 F.2d at 890; see also Personnel, Inc., 974 F.2d at 793-

94; Cent. States, Se. & Sw. Areas Pension Fund v. Koder,

969 F.2d 451, 453 (7th Cir. 1992); Slotky, 956 F.2d at 1374.

The district court thought that the rule set forth in

Ditello had been vitiated by subsequent decisions under-

taking a more fact-specific analysis under Groetzinger.

The court specifically focused on Fulkerson, and to a

lesser degree on Central States, Southeast & Southwest

Areas Pension Fund v. Neiman, 285 F.3d 587, 595 (7th Cir.

2002), and Central States, Southeast & Southwest Areas

Pension Fund v. White, 258 F.3d 636, 642-43 (7th Cir.

2001), all of which had been decided differently—more

particularly, not in accordance with the Ditello rule.

The court did not have the benefit of SCOFBP, however,

which reiterated the principle established in Ditello

and explained that “leasing property to a withdrawing

employer itself is categorically a ‘trade or business.’ ” 668

F.3d at 879 (emphasis added). Our recent decision in

Messina Products elaborates this principle and explains

that categorical treatment of leasing activity between

the owner and the withdrawing employer is consistent

with the Groetzinger test and serves the purpose of

§ 1301(b)(1):

[W]here the real estate is rented to or used by the

withdrawing employer and there is common owner-

12 No. 11-3055

ship, it is improbable that the rental activity could

be deemed a truly passive investment. In such sit-

uations, the likelihood that a true purpose of

the “lease” is to split up the withdrawing em-

ployer’s assets is self-evident.

Messina Prods., 706 F.3d at 882.

Fulkerson, Nieman, and White are not irreconcilable

with Ditello, SCOFBP, and Messina Products. In Nieman

the defendant earned income for management services

rendered to a real-estate company; the real-estate com-

pany had not leased property to the withdrawing em-

ployer. 285 F.3d at 595. Fulkerson and White both dealt

with real-estate holdings that were related to the with-

drawing employer only by common ownership. Fulkerson,

238 F.3d at 893; White, 258 F.3d at 642-43. Distin-

guishing Fulkerson and White in Messina Products,

we explained that “neither the Fulkersons nor the

Whites rented property to the withdrawing employer

itself.” 706 F.3d at 882.

There were other issues in Messina Products, but on

this point the case is materially indistinguishable from

this one. In Messina Products the Central States Fund

sought to impose personal liability on the owners of a

withdrawing company based in part on the fact that they

owned the property on which their company operated

and leased it to the company. That situation, we said,

was controlled by the “categorical” rule of SCOFBP and

Ditello. Id. at 881-83. The same is true here. Nagy holds

and leases to Ready Mix the commercial property on

which Ready Mix conducts its operations. This categori-

No. 11-3055 13

cally constitutes a trade or business under common

control with the withdrawing employer, which triggers

personal liability under § 1301(b)(1).

B. Independent-Contractor Status

Alternatively, if Nagy provided management services

for Wells Venture as an independent contractor, then he

is personally liable to the Fund as the sole proprietor of

an unincorporated trade or business. If, however, he

was an employee of Wells Venture, then his work

does not supply a basis for personal liability under

§ 1301(b)(1).

Distinguishing between an employee and an independ-

ent contractor depends on an analysis of the following

factors: (1) the extent of the employer’s control and super-

vision over the worker, including directions on sched-

uling and performance of work; (2) the kind of occupa-

tion and the nature of the skills required, including

whether skills are obtained in the workplace; (3) respon-

sibility for the costs of operation, such as equipment,

supplies, fees, licenses, workplace, and maintenance of

operations; (4) the method and form of payment and

benefits; and (5) the length of job commitment and/or

expectations. Mazzei v. Rock-N-Around Trucking, Inc., 246

F.3d 956, 963 (7th Cir. 2001); see also Nationwide Mut. Ins.

Co. v. Darden, 503 U.S. 318, 323-24 (1992). The district

court weighed these factors and concluded that Nagy

was an independent contractor.

We see no clear error in this determination. As

president of Wells Venture, Nagy was responsible to its

14 No. 11-3055

board of directors, of which he was also a member. No

one supervised Nagy’s work on a day-to-day basis. In

his management of Wells Venture’s affairs, Nagy had

total freedom, subject only to occasional decisions by

the board. We agree with the district court that the

“control and supervision” exercised by the board

was minimal, suggesting Nagy’s independent-contractor

status.

The “skills” factor in the analysis is inconclusive, as

the district court held. Nagy provided management

services, which can indicate either employee or

independent-contractor status. There is no evidence

that Wells Venture gave Nagy any specialized training.

Rather, he performed general management tasks, like

accounting and processing paperwork. The “expenses”

factor is likewise inconclusive. In a typical employer-

employee relationship, the employer pays for overhead

and other operational expenses, while independent

contractors usually bear their own costs. EEOC v. N.

Knox Sch. Corp., 154 F.3d 744, 749 (7th Cir. 1998). After

the golf course was sold, Wells Venture’s business

address shifted to Nagy’s home. He did not take a

tax deduction for a home office, but he did take small

deductions for office expenses related to his work for

Wells Venture. But his management duties did not

imply a significant cost, so this factor is at best neutral,

as the district court held.

Most important to the district court’s conclusion was

the method and form by which Nagy was paid. He

did not receive a salary through a payroll system, as

No. 11-3055 15

one would expect of an employee. Rather, Wells Venture

paid Nagy an hourly rate and did not withhold taxes or

provide fringe benefits. Presumably at his request, Wells

Venture accounted for Nagy’s compensation on the 1099-

MISC form, which is used to report “miscellaneous in-

come,” often for independent contractors. See Forms and

Associated Taxes for Independent Contractors, Internal

Revenue Service (Page Last Reviewed or Updated Jan. 14,

2013), http://www.irs.gov/businesses/small/article/0,,id=

179114,00.html. On his personal tax returns, Nagy re-

ported his Wells Venture income on Schedule C,

which covers “Profit or Loss from Business (Sole Propri-

etorship).” See Sole Proprietorships, Internal Revenue

Service (Page Last Reviewed or Updated Apr. 5, 2013),

http://w w w.irs.gov/Businesses/Sm a ll-Businesses-& -

Self-Employed/Sole-Proprietorships. We have held in

previous cases that the 1099 tax treatment weighs

heavily in favor of independent-contractor status. See

N. Knox, 154 F.3d at 750; Neiman, 285 F.3d at 595. It does

here as well.

Nagy’s other activities confirm that he provided

services to Wells Venture as an independent contractor.

Nagy had at least three other going concerns during

the relevant time period: Nagy Ready Mix, Nagy

Trucking, and Nagy Concrete. The record suggests he

was a sales agent for another enterprise for some time

as well, though the company flopped. Certainly a

person can be a part-time employee for more than one

enterprise. But on this record it looks more like Nagy

was compensated by Wells Venture for purposes of a

short-term project: handling the golf-course deal and

16 No. 11-3055

winding down the club’s operations by selling off its

assets and closing its accounts. This project took longer

than expected because the golf-course purchaser de-

faulted. But the signs of an employer-employee relation-

ship are missing. Nagy provided management services

independently and for a limited, short-term purpose,

and he was paid as an independent contractor. All

this leads us to agree with the district court that Nagy

was an independent contractor for Wells Venture and

thus was engaged in an unincorporated trade or busi-

ness. This is an independent basis for personal lia-

bility under § 1301(b)(1).

III. Conclusion

Nagy owned and leased property to Ready Mix, a

withdrawing employer over which he had common

control. He also provided management services to Wells

Venture as an independent contractor. Both activities

qualify as an unincorporated trade or business under

§ 1301(b)(1). The district court therefore correctly found

Nagy personally liable for Ready Mix’s withdrawal

liability, along with Nagy Trucking and Nagy Concrete.

Summary judgment for the Fund was proper.

A FFIRMED.

4-22-13