Central States Areas v. Neiman, Orin S. ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 01-1964 & 01-2379
Central States, Southeast &
Southwest Areas Pension Fund, et al.,
Plaintiffs-Appellees,
v.
Orin S. Neiman,
Defendant-Appellant.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 1181--John W. Darrah, Judge.
Argued February 21, 2002--Decided April 2, 2002
Before Flaum, Chief Judge, and Harlington
Wood, Jr. and Williams, Circuit Judges.
Flaum, Chief Judge. Following a bench
trial, the district court held that
Defendant-Appellant Orin S. Neiman
operated a sole proprietorship in 1991
and 1993, resulting in withdrawal
liability under the Employee Retirement
Income Security Act ("ERISA"), 29 U.S.C.
sec. 1001, et seq. Neiman appeals, and,
for the reasons stated herein, we affirm.
I. Background
Central States, Southeast and Southwest
Areas Pension Fund ("Central States") is
a multi-employer pension fund. As is
evident from many of the citations below,
Central States is actively engaged in
enforcing its rights under ERISA sec.
4001(b)(1), under which an employer that
reduces the amount it contributes to a
multi-employer pension plan may be liable
for "withdrawal liability." 29 U.S.C.
sec. 1381(b)(1). Because one employer’s
withdrawal results in decreased payments
even though employee benefits may have
vested, ERISA imposes a statutory
obligation to continue payments despite
the cessation of contributions. ERISA
imposes this statutory obligation on "all
trades or businesses" under "common
control" with the company that withdrew
from the fund. 29 U.S.C. sec. 1301(b)(1).
This prevents employers from
"fractionalizing" their assets among
several entities to avoid liability. See
Central States, Southeast & Southwest
Areas Pension Fund v. Ditello, 974 F.2d
887, 890 (7th Cir. 1992). Both parties
agree that the only issue in this case is
whether Neiman operated a sole
proprietorship under common control with
South Coast Transport Company ("South
Coast"), which partially withdrew from
Central States in 1991 and completely
withdrew in 1993. If Neiman did, then the
sole proprietorships--and Neiman
personally--are subject to withdrawal
liability under ERISA.
A. 1991
In 1991, Neiman owned a family of
interstate trucking companies that
included both South Coast and Transcon,
Inc. On December 31, 1991, Central States
determined that South Coast partially
withdrew from the pension fund due to a
substantial and permanent decline in
contributions. This partial withdrawal
resulted in liability in the amount of
$1,750,527.76. At the time South Coast
withdrew, Neiman devoted all of his daily
activity to Transcon, where he served as
president. However, Neiman was also a
shareholder and officer of NCO Financial
Corporation ("NCO"), a real estate
management company. Throughout 1991, Nei
man received regular monthly payments
from NCO in the total amount of
$36,875.45. NCO reported these payments
as non-employee compensation on IRS Form
1099. NCO recorded many of these payments
in a "Cash Disbursement Journal," and
characterized them as "mgmt. fees."
Neiman forwarded all tax documents to
his accountant, Arnold Anisgarten.
Anisgarten was responsible for completing
Neiman’s income tax returns. In this
case, Anisgarten reported the income from
NCO on IRS Schedule C, which is entitled
"Profit or Loss from Business (Sole
Proprietorship)." Beyond the selection of
the form, Anisgarten provided information
on Schedule C suggesting that Neiman
provided management services to NCO. For
example, Anisgarten checked a box stating
that Neiman materially participated in
the operation of the business throughout
the year. In addition, Anisgarten stated
that the business’s accounting method was
"cash," that the principal business or
profession was "business and
management/management," and that all of
Neiman’s investment was at risk. Neiman
signed the income tax return before
forwarding it to the Internal Revenue
Service. Neiman’s signature attested to
the fact that he had examined the return
and believed it was true and correct.
B. 1993
On December 16, 1993, South Coast
permanently ceased contributions to
Central States and thus incurred a
complete withdrawal. The complete
withdrawal resulted in liability in the
amount of $503,325.71. Several months
prior to the complete withdrawal, Neiman
had been employed by TC Services, a
Transcon subsidiary. In September 1993,
Neiman and Transcon’s other officers sold
their shares of stock to Michael Kibler
and a group of investors. Transcon stated
in a proxy statement filed with the SEC
that Neiman would serve as a consultant
for the remaining months in 1993 as part
of a severance package. Neiman received
several payments from Transcon at the end
of 1993 totaling slightly more than
$100,000. Like NCO, Transcon reported
these payments on three separate 1099s,
which reflected non-employee
compensation. At least one 1099 contained
the notation "Consult," although the
record is unclear concerning who marked
the form.
Anisgarten also prepared Neiman’s 1993
income tax return. Anisgarten reported
the Transcon payments on IRS Schedule C,
Profit or Loss From Business (Sole
Proprietorship). Once again, the Schedule
C reflected that the principal business
or profession was "Business and
Management--Management Services." The
Schedule C also represented that Neiman
materially participated in the business,
that all of the taxpayer’s investment was
at risk, and that the business referred
to had previously filed a Schedule C. In
addition, by filing the 1993 Schedule C,
Neiman was able to claim business tax
deductions totaling $107,285. Anisgarten
based these deductions on a business
expense ledger, prepared at Neiman’s
direction, that included typical business
expenses such as travel, entertainment,
Federal Express charges, payments for
office supplies, and an advance to NCO.
Neiman signed the 1993 income tax return
before forwarding it to the IRS.
C. Proceedings
Central States sued Neiman to recover
the shortfalls attributable to South
Coast’s withdrawal from the pension fund
in 1991 and 1993. Central States’ theory
of recovery derived from the fact that
all "trades or businesses" under Neiman’s
control were responsible for the missing
funds, and that Neiman operated
businesses providing management and
consulting services in both 1991 and
1993. Both parties moved for summary
judgment before the district court./1
In support of its motion, Central States
relied exclusively upon documentary
evidence, including Neiman’s income tax
returns from 1991 and 1993, the 1099s,
NCO’s Cash Disbursement Journal,
Transcon’s proxy statement to the SEC,
and the business expense ledger prepared
at Neiman’s direction. In response, both
Neiman and Anisgarten submitted
affidavits swearing that Neiman did not
operate a trade or business in either
1991 or 1993.
The district court denied both motions.
With respect to Central States, the
district court held that the tax
documents did not unequivocally prove the
existence of a trade or business because
Neiman’s and Anisgarten’s affidavits
attempted to explain the use of Schedule
C, thus creating a genuine issue of
material fact and making summary
disposition improper. The district court
ruled that Central States offered no
evidence regarding whether Neiman engaged
in the activity for income or profit.
Similarly, the district court held that
Neiman’s and Anisgarten’s affidavits were
insufficient to prove that Neiman had not
engaged in a trade or business in 1991 or
1993. In the end, neither party had
submitted "any additional helpful
evidence" beyond the income tax returns
describing the disputed activities.
Central States, Southeast & Southwest
Areas Pension Fund v. Neiman, No. 99 C
1181, slip op. at 17 (N.D. Ill. March 23,
2000).
Following the denial of cross-motions
for summary judgment, Judge Darrah
conducted a bench trial. Central States
rested entirely on the documentary
evidence already before the district
court. Neiman moved for judgment as a
matter of law, arguing that Central
States failed to carry its burden of
proving that Neiman operated a trade or
business. The district court denied that
motion.
Both Neiman and Anisgarten testified for
the defense. Anisgarten described his
practices in completing Neiman’s tax
return in both 1991 and 1993. Although he
believed that the $36,000 received from
NCO, and the $100,000 from Transcon,
should have been reported as salary on W-
2 forms, Anisgarten reported the income
on Schedule C because it did not have any
effect on the amount of income tax Neiman
owed. Moreover, Anisgarten stated that he
described Neiman’s business activities as
"business and management services"
because it was a "catch-all" term
included within the software program he
used to complete Neiman’s tax return.
Anisgarten testified that although he
checked the box indicating Neiman
materially participated in the activity
generating the income, it did not mean
Neiman operated a trade or business in
1991. Anisgarten offered similar
explanations regarding his completion of
Neiman’s 1993 income tax return.
Neiman attempted to explain further the
documentary evidence offered by Central
States. Neiman testified that the monthly
payments from NCO represented
compensation for a business relationship
Neiman established between a warehouse
and its tenants. While Neiman did not
perform any services to earn the money in
1991, he had previously initiated the
relationship by introducing the two
parties. Neiman also testified about
payments received from Transcon in the
fall of 1993. Neiman stated that after
his business relationship with Transcon
ended, he spent the last three months of
1993 seeking new employment and looking
for another business to purchase.
According to Neiman, he did not provide
any consulting services to Transcon.
Rather, Neiman claimed that Transcon paid
him for other reasons. Neiman asserted
that the first payment from Transcon rep
resented two months of severance
compensation, which he negotiated upon
leaving the company. The second payment
constituted reimbursement for corporate
expenses incurred while he was employed
at Transcon. The third was for payment of
accrued interest on Transcon preferred
stock or notes that Neiman previously
owned.
Neiman also offered, and the district
court considered, the deposition
testimony of Michael Kibler, one of the
investors who purchased Transcon from
Neiman in 1993./2 In that deposition,
Kibler testified that Neiman never
performed consulting services for
Transcon in 1993 after Neiman left the
company.
At the close of evidence, Judge Darrah
issued findings of fact and conclusions
of law. Although Judge Darrah’s findings
of fact were less than comprehensive, he
held that (1) Neiman’s testimony was not
credible; (2) Neiman engaged in
activities with NCO and Transcon for
income or profit; (3) Neiman’s activities
were regular and continuous; and (4)
Neiman operated a trade or business in
both 1991 and 1993. Accordingly, Judge
Darrah entered judgment for Central
States in the amount of $3,747,143.61,
which represents the amount of withdrawal
liability in addition to interest,
liquidated damages, attorney’s fees and
costs./3 Neiman appeals.
II. Discussion
A. Standard of Review
The initial question in this case
concerns the appropriate standard of
review. Neiman urges this court to adopt
a de novo standard, arguing that the
determination of whether an individual
operated a trade or business under ERISA
is a pure question of law. In contrast,
Central States maintains that Neiman is
challenging the district court’s findings
of fact that: (1) Neiman operated a trade
or business during 1991; (2) Neiman
operated a trade or business during 1993;
and (3) Neiman’s testimony was not
credible. Central States also notes the
procedural posture of this case, which
arrives at this court following a bench
trial below.
This is not the first instance in which
this Court has struggled to define the
appropriate standard of review. In our
first case to address the issue, Central
States, Southeast and Southwest Areas
Pension Fund v. Slotky, 956 F.2d 1369
(7th Cir. 1992), we held that the
determination of whether an individual
operated a "trade or business" under
ERISA was "a question of fact, even
though all the ’facts’ as a layman would
perceive them are agreed upon and the
only dispute is over characterization."
Id. at 1373. Because "the application of
a legal standard to undisputed facts is
classified as a fact for delimiting the
respective spheres of trial and appellate
court," we deferred to the district
court’s application in the same way we
would defer to its factual findings. Id.
See also Central States, Southeast and
Southwest Areas Pension Fund v.
Personnel, Inc., 974 F.2d 789, 792 (7th
Cir. 1992) ("where we examine[ ] an
assessment of withdrawal liability, we
review[ ] the district court’s
conclusions for clear error because the
facts were undisputed and the only
factual issue was one of
characterization.").
Appellants in two later cases urged this
court to revisit the appropriate standard
of review following summary disposition
of whether an individual operated a trade
or business resulting in withdrawal
liability; in each, however, we declined
to do so because the district court erred
as a matter of law in interpreting the
statutory phrase "trade or business."/4
See Central States, Southeast and
Southwest Areas Pension Fund v. White,
258 F.3d 636, 640 (7th Cir. 2001) ("We
need not revisit [Slotky and Personnel]
to determine whether a lower standard of
review is appropriate on a review of
summary judgment because . . . we
conclude that the district court erred on
a question of law in interpreting the
statute."); Central States, Southeast and
Southwest Areas Pension Fund v.
Fulkerson, 238 F.3d 891, 894 (7th Cir.
2001) ("We agree . . . that our review is
de novo on the trade or business question
because . . . the district court
committed a legal error in interpreting
the statute.").
In this case, there can be no question
that we review the district court’s
decision under a clearly erroneous
standard. As the Supreme Court held in
Commission v. Groetzinger, 480 U.S. 23,
36 (1987), determining whether an
activity is a trade or business "requires
an examination of the facts of each
case." Id. (internal quotations omitted).
In both White and Personnel, the only
justification for possibly reexamining
the appropriate standard of review
concerned the tension between traditional
review following summary judgment and the
unique standard given the fact-intensive
circumstances of cases involving the term
"trade or business." Unlike our prior
precedents, this case arrives following a
bench trial after which the district
court made express findings of fact and
conclusions of law. Thus, we are not
faced with the situation in Slotky and
Personnel, in which we decided to review
for clear error even though the
traditional standard of review following
summary judgment is de novo.
The Supreme Court has admonished the
courts of appeals to avoid encroaching
upon the proper province of the district
court in cases like the present one.
"In applying the clearly erroneous
standard to the findings of a district
court sitting without a jury, appellate
courts must constantly have in mind that
their function is not to decide factual
questions de novo." Zenith Radio Corp. v.
Hazeltine Research, Inc., 395 U.S. 100,
23 L. Ed. 2d 129, 89 S. Ct. 1562 (1969).
If the district court’s account of the
evidence is plausible in light of the
record viewed in its entirety, the court
of appeals may not reverse it even though
convinced that had it been sitting as the
trier of fact, it would have weighed the
evidence differently.
Anderson v. Bessemer City, 470 U.S. 564,
573-74 (1985). With this standard in
mind, we turn to the merits of Neiman’s
appeal.
B. Trade or Business
ERISA, as amended by the Multiemployer
Pension Plan Amendments Act of 1980
("MPPAA"), 29 U.S.C. sec.sec. 1381-1461,
subjects employers who withdraw from a
multi-employer pension fund to
"withdrawal liability" equal to its
proportionate share of the plan’s
unfunded vested benefits. 19 U.S.C. sec.
1381(b)(1); Pension Benefit Guaranty
Corp. v. R.A. Gray & Co., 467 U.S. 717,
725 (1984). The MPPAA imposes this
statutory obligation on "all employees of
trades or businesses (whether or not
incorporated) which are under common
control," such that each business under
common control is jointly and severally
liable to the pension fund. 29 U.S.C.
sec. 1301(b)(1). Thus, a plaintiff must
demonstrate two distinct facts to
establish withdrawal liability on an
organization other than the one
originally obligated to the pension fund:
first, the defendant-organization must
fall under common control as the owing
entity; and second, the defendant-
organization must be engaged in a "trade
or business." Fulkerson, 238 F.3d at 895.
Both parties concede that the only issue
in this case concerns whether Neiman
operated a trade or business in 1991 and
1993. If he did, then the businesses were
under common control with South Coast,
and the sole proprietorships--as well as
Neiman individually--are jointly and
severally subject to withdrawal
liability.
In assessing whether Neiman operated a
trade or business, we rely on the test
enunciated in Commissioner of Internal
Revenue v. Groetzinger, 480 U.S. 23
(1987). See White, 238 F.3d at 895;
Personnel, 974 F.2d at 794. "For an
activity to be a trade or business under
Groetzinger, a person must engage in the
activity: (1) for the primary purpose of
income or profit; and (2) with continuity
and regularity." Fulkerson, 238 F.3d at
895 (citing Groetzinger, 480 U.S. at 35).
Here, the district court’s decision that
Neiman operated a trade or business as
defined by Groetzinger was not clear
error. Central States proffered
documentary evidence tending to show the
existence of a trade or business engaged
in for income or profit. Indeed, Neiman
does not dispute the fact that the
compensation he received from both NCO
and Transcon was for income or profit.
Nor did the district court commit clear
error in ruling that the activity was
regular and continuous. In 1991, NCO’s
cash disbursement journal reflected
monthly payments to Neiman in exchange
for "management fees." In 1993, Neiman
deducted business expenses incurred
throughout the previous year related to
the business described in his Schedule C.
These detailed expenses support the
district court’s finding of continuity.
Neiman maintains that the payments he
received from NCO are more akin to a
passive investment and do not reflect the
regular and continuous income that
evinces a trade or business. In
Fulkerson, we held that the district
court committed reversible error in
applying the second prong of the
Groetzinger analysis, i.e., in
determining whether an activity was
regular and continuous. Fulkerson, 238
F.3d at 895-96. In that case, we held
that the mere possession of property over
a period of time did not establish
regular and continuous activity because
it was more akin to a "passive
investment." Id. Neiman urges this court
to adopt a similar approach with respect
to his dealings with NCO. We decline to
do so. Neiman’s explanation regarding his
income tax return and NCO’s Cash
Disbursement Journal is entirely
plausible, but it is an argument rejected
by the district court. Because we may not
second guess the district court’s
credibility determination, we are left
with documentary evidence that shows
regular and continuous payments in
exchange for management services. This is
entirely distinct from the passive
property ownership at issue in Fulkerson.
See also White, 258 F.3d at 643.
Next, Neiman argues that because the
documentary evidence submitted by Central
States was not sufficient to establish a
trade or business at the summary judgment
stage, it was necessarily inadequate at
the bench trial as well. Neiman contends
that he was entitled to judgment as a
matter of law because Central States
offered nothing beyond the documentary
evidence already before the court.
Neiman’s argument, however, is based on
an incorrect premise: that the evidence
at the summary judgment stage was the
same as that presented at the bench
trial. This clearly is not the case.
After conducting a brief bench trial,
Judge Darrah had the opportunity to
observe Neiman testify, and the court
ruled specifically that he was not
credible. Thus, Judge Darrah accepted the
validity of the documentary evidence over
Neiman’s purported explanations-- a
credibility determination entirely within
the province of the district court.
Neiman also claims that even if the
documentary evidence tends to establish
that he operated a trade or business,
there was substantial evidence at trial
proving that he did not. In particular,
Neiman highlights Anisgarten’s testimony
and Kibler’s deposition. Judge Darrah did
not mention these two sources of
testimony in his findings of fact, which
handicaps our ability to determine
whether his findings were supported.
However, while this omission is
troubling, it is not enough to warrant
reversal. The documentary evidence
submitted by Central States offered one
version of Neiman’s activities in 1991
and 1993. Neiman’s testimony, which was
corroborated by Anisgarten and Kibler,
offered a competing--and mutually
exclusive-- account. Once the district
court rejected Neiman’s version of the
facts, he implicitly disregarded the
corroborating testimony offered by
Anisgarten and Kibler. As we have already
stated, there was evidence within this
record to support the existence of an
activity that was engaged in for income
or profit and that was regular and
continuous. That we might have decided
the factual issues differently is not
sufficient to upset the district court’s
judgment. See Anderson, 470 U.S. at 573-
74.
Finally, Neiman contends that the
imposition of withdrawal liability
against him individually contravenes
ERISA’s purpose. See White, 258 F.3d at
644 ("A law with the sound purpose of
preventing fractionalization should not
be stretched to such an extreme
application that would expose a common
owner of a completely unrelated personal
business to such withdrawal liability.").
In crafting this argument, Neiman
misconstrues the judgment below. Although
the district court’s order may have the
effect of imposing individual liability,
it does so only because the trades or
businesses owned by Neiman were under
common control with an entity that owed
substantial amounts to the pension fund.
If anything, the judgment effects ERISA’s
purpose by protecting vested employee
benefits from employers who attempt to
avoid their responsibilities. See White,
258 F.3d at 644 (citing Bd. of Trustees
of the Western Conference of Teamsters
Pension Trust Fund v. H.F. Johnson, Inc.,
830 F.2d 1009, 1013 (9th Cir. 1987)
("Congress enacted sec. 1301(b) in order
to prevent businesses from shirking their
ERISA obligations by fractionalizing
operations into many separate
entities.")). The fact that Neiman’s
personal activities were wholly unrelated
to South Coast’s trucking operations is
without moment because we recently
reaffirmed the principle that an economic
nexus between businesses under common
control need not exist to impose
withdrawal liability. See White, 258 F.3d
at 641; Fulkerson, 238 F.3d at 895 n.1.
III. Conclusion
While recognizing the force of Neiman’s
arguments, we are constrained to conclude
that they cannot surmount the stringent
standard of review in this case. Put
simply, Neiman cannot overcome the
critical fact that the documentary
evidence satisfies the two elements of
the Groeztinger analysis. Although the
district court’s opinion does not contain
as complete an analysis as is customary
in fact-intensive cases, the deferential
standard of review in this case requires
us to conclude that the judgment finding
that Neiman operated a trade or business
in 1991 and 1993 below was not clearly
erroneous. The documentary evidence
supported the trial court’s findings of
fact. Accordingly, we AFFIRM the decision
of the district court.
FOOTNOTES
/1 The case was originally assigned to Judge Charles
P. Kocoras, who ruled on the parties’ motions for
summary judgment. Later, the case was reassigned
to Judge John W. Darrah, who conducted a bench
trial and ultimately entered judgment.
/2 Central States disputes whether it is proper for
this court to consider Kibler’s deposition testi-
mony because it does not meet the requirements
for admission pursuant to Federal Rule of Civil
Procedure 32. In his written order, Judge Darrah
stated that because Central States failed to
object at trial, the court would admit the depo-
sition. See Central States, Southeast and South-
west Areas Pension Fund v. Neiman, No. 99 C 1181
at 5 n. 1 (N.D. Ill. March 19, 2001). Central
States is correct that Judge Darrah’s ruling is
inconsistent with his own statements at trial,
where he stated that counsel could "put that in
a motion if you wish." Further, when counsel
attempted to object to the introduction of the
deposition at trial, the following colloquy
occurred:
THE COURT: I have already ruled on that.
MR. WEITHERS: But, Your Honor, I do have a differ-
ent objection.
THE COURT: I thought I asked you to put that in
writing. You can put that in your closing argu-
ment if you wish.
MR. WEITHERS: Your Honor, as a separate motion or
as part of the argument?
THE COURT: You can put it in as part of the
argument. You can respond to it in the argument,
if you wish. Okay.
This hardly constitutes a waiver by Central
States. However, we need not rule on the admis-
sion of the deposition because, as discussed
below, the district court considered it and
implicitly rejected its contents.
/3 Judge Darrah initially entered judgment on March
19, 2001. Later, Judge Darrah entered a supple-
mental judgment in favor of Central States that
included interest, liquidated damages, attorney’s
fees and costs. Neiman filed timely appeals to
both orders, and this court consolidated them on
appeal.
/4 At least one circuit has disagreed with our
decision to review for clear error the district
court’s determination on summary judgment that a
particular activity constituted a trade or busi-
ness. In Connors, et al. v. Incoal, Inc., 995
F.2d 245, 251 n. 9 (D.C. Cir. 1993), the court
noted that the clearly erroneous standard is im
proper following a grant of summary judgment. The
court went on to state, however, that "because a
district court’s finding that an enterprise is
(or is not) a trade or business constitutes a
factual determination, that factual determination
is reviewable after trial only for clear error."
Id. at 252 (citing Pullman-Standard v. Swint, 456
U.S. 273, 287 (1982) (emphasis in original)).