ERISA-District Court Rules That Withdrawal Liability May Be Imposed On A Corporate Controlled Group Member (A Trade Or Business), But Not On Individual Company Owners (Who Do Not Conduct A Trade Or Business)

Are you a trade or business? The answer to that question can have numerous legal implications. Here is an example.

In Central States, Southeast & Southwest Areas Pension Fund v. Messina Trucking, Inc., No. 10-CV-00355 (N.D. Ill. 2011), Messina Trucking, Inc. (“Messina Trucking”) had withdrawn from the plaintiff, Central States, Southeast & Southwest Areas Pension Fund (the ” Fund”), a multiemployer pension plan, thereby incurring about $3 million in withdrawal liability under ERISA. Messina Trucking was part of a controlled group of corporations, which consisted of itself , Auburn Supply Company, Inc., Utica Equipment Company and Messina Products, L.L.C. (“Products”) (collectively, “Messina Controlled Group”). The defendants in the case are each member of the Messina Controlled Group, as well as Stephen L. Messina and Florence M. Messina, who together own at least 80% of each member of the Messina Controlled Group through certain trusts (the “Messinas”). However, the defendants argued, among other things, that neither Products nor the Messinas were a “trade or business”. As such, they cannot be responsible for the withdrawal liability.

On this issue, the Court noted that ERISA imposes withdrawal liability on all “trades or business (whether or not incorporated) which are under common control.” , whenever one such trade or business-here Messina Trucking-incurs withdrawal liability. Thus, each trade or business under common control becomes jointly and severally liable for the withdrawal liability. Here, the common control is conceded. But is Products and/or the Messinas a “trade or business”? On this issue, the Court applied the following test: to be a trade or business, an entity must engage in an activity (1) for the primary purpose of income or profit and (2) with continuity and regularity.

As to Products, its operating agreement states, in part, that the “Members have adopted a business plan for the development of properties and for the production, sale and marketing of gravel for road, subdivision, City and community development, both wholesale and retail.” Moreover, Products’ tax returns include a Federal Employer Identification Number and list Products’ principle business activity as “real estate rental” as well as its income and expenses. The above constitutes strong evidence that Products is a trade or business. Further , Products has a President, Vice President and a Secretary. An employee of Messina Trucking handles Products’ paperwork, prepares and files annual reports, and pays any bills. As such, the Court found that Products had continually maintained and operated what it self-proclaimed to be a real estate rental company. Products was not a passive investment or some other sporadic activity, such as a hobby, or an amusement diversion. Rather, Products was engaged in regular and continuous activity with the primary purpose of generating income or profit. Accordingly, the Court concluded that Products is engaged in trade or business and is jointly and severally liable for Messina Trucking’s withdrawal liability.

As to the Messinas, their unincorporated activities must constitute a trade or business. The Messinas own certain property. They allowed Messina Trucking to operate its business from one such property. Messina Trucking had paid some rent for this use, but ceased paying rent after a certain date. At no time did a written lease exist for Messina Trucking’s use of the property. In practice, with respect to the property, the Messinas paid the property taxes, while Messina Trucking paid the property insurance, utility bills, and all repairs and maintenance . Stephen Messina also owned two other properties. There are three homes located on these properties, which the Messinas rent out. The homes are all leased pursuant to written residential lease agreements. Either Stephen or his daughter, Anna, negotiate the terms of the leases. The rent is paid to the Messinas and deposited into their joint personal bank acount. Messina Trucking employees take care of the maintenance work, snow removal, and lawn care on the properties, but they are not paid extra for their time. Finally, the Messinas report the rental income from the homes they leased on Schedule E of their federal tax return and deducted expenses. The Court concluded that these activities do not constitute a trade or business under the test set out above. They more closely resemble a passive investment. Therefore, the Messinas cannot be held liable for Messina Trucking’s withdrawal liability.

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