ERISA-Seventh Circuit Determines That Solvent Companies Are Responsible For The Withdrawal Liability Of An Insolvent Affiliate

In Central States, Southeast and Southwest Areas Pension Fund v. SCOFBP, LLC, No. 10-3633 (7th Cir. 2011), the issue raised was whether two solvent business entities can be held responsible under ERISA for the withdrawal liability of an insolvent affiliate. The insolvent employer is defendant SCOFBP, LLC (“SCOFBP”), which incurred withdrawal liability when it stopped operating and paying into a union’s pension fund, the plaintiff Central States, Southeast and Southwest Areas Pension Fund (the “Fund”). The solvent affiliates are defendants MCRI/Illinois, LLC (“MCRI”) and MCOF/Missouri, LLC (“MCOF”). They and SCOFBP were part of a group of entities under the control of Michael Cappy, a businessman who went through personal bankruptcy.

Under ERISA, for purposes of computing withdrawal liability, all “trades or businesses” under “common control” are treated as constituting a single employer. Each such trade or business is jointly and severally liable for any withdrawal liability of any other. 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 times, so that both MCRI and MCOF are liable for SCOFBP’s withdrawal liability. The defendants appealed. The Seventh Circuit Court of Appeals (the “Court”) faced two arguments from the defendants: (1) MCRI and MCOF were only passive investment vehicles, rather than trades or businesses, and (2) that Cappy’s personal bankruptcy disrupted what had been common control of the three entities. The Court rejected both arguments, and upheld the district court’s decision.

As to argument (1), the Court said that MCRI and MCOF are each a “trade or business”. MCOF owned the lumberyard in O’Fallon, Missouri that was used and leased by SCOFBP. 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 triple-net leases held by MCRI and MCOF were paid into their bank accounts and mortgage payments on properties they owned were withdrawn from them. Both applied for and were issued federal employer identification numbers. Both maintained offices, elected officers, and kept formal records of activities and expenditures. Both employed professionals to provide legal, management, and accounting services on a contract basis, although neither admitted to having any permanent employees. To constitute a”trade or business,” an entity must be engaged in an activity with continuity and regularity, and for the primary purpose of income or profit. This test is intended to distinguish a trade or business from a passive investment. Under the facts here and this test, both MCRI and MCOF constitute a trade or business. MCOF leased property directly to SCOFBP, the withdrawing employer. MCRI, also a formal business organization, engaged in regular and continuous activity for the purpose of generating income or profit.

As to argument (2), the Court found that, while the facts were complicated, MCRI, MCOF and SCOFBP were under common control at the relevant time, namely when SCOFBP withdrew from the Fund. At that time, the three entities formed a parent-subsidiary group, with Cappy’s bankruptcy estate being the common parent with a 100% controlling interest in each of the three entities. Having rejected arguments (1) and (2), the Court upheld the district court’s decision, and ruled that MCRI and MCOF were responsible for the withdrawal liability incurred by SCOFBP.

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