Central States, Southeast & Southwest Areas Pension Fund v. CLP Venture LLC , 760 F.3d 745 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 13-3010, 13-3776
CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION
FUND and ARTHUR H. BUNTE, JR., TRUSTEE,
Plaintiffs-Appellees,
v.
CLP VENTURE LLC, et al.,
Defendants-Appellants.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 3785 — Ronald A. Guzmán, Judge.
____________________
ARGUED JUNE 4, 2014 — DECIDED JULY 29, 2014
____________________
Before WOOD, Chief Judge, and CUDAHY and ROVNER, Cir-
cuit Judges.
CUDAHY, Circuit Judge. This case arises under the Mul-
tiemployer Pension Plan Amendments Act of 1980 (MPPAA);
we must determine primarily whether or not the various co-
defendants were under common control, and therefore are
jointly and severally liable for the withdrawal liability indis-
putably incurred by General Warehouse, Inc.. Because there
2 Nos. 13-3010, 13-3776
is overwhelming evidence that these entities were under
common control, we now affirm.
This appeal originated with General Warehouse, which
as an employer was obligated to contribute to the Central
States Pension Fund (the Fund) on behalf of certain employ-
ees. In 2005 it ceased to have an obligation to the fund,
which led to a complete withdrawal, incurring withdrawal
liability in the amount of $1,262,568. The Fund filed suit to
collect from General Warehouse, as well as GEOBEO and
other businesses under common control. The parties to that
litigation entered into a consent judgment, acknowledging
that the named defendants were jointly and severally liable.
The Fund then initiated this action to add the defendants to
the group of business entities from which it can collect.
The only other pertinent facts in this case pertain to
George Cibula’s ownership of GEOBEO, and the rather con-
voluted Stock Redemption Agreement that resulted in his
acquiring the right to acquire at least 80% of GEOBEO
shares. In 1997, Cibula owned 65% (650 shares) of GEOBEO,
while Robert Pieranunzi owned the remaining 35% (350
shares). That same year, they entered into a Stock Redemp-
tion Agreement through which GEOBEO 1 would buy back
Pieranunzi’s stock. Pieranunzi surrendered his shares and
new stock certificates were issued to an escrowee. The es-
crowee was to hold the stock certificates in escrow and re-
lease them as installment payment were made according to
the Stock Redemption Agreement. GEOBEO made the first
1 According to the regulations relating to MPPAA liability, because
Cibula owned at least 50% of GEOBEO, GEOBEO was under his “effec-
tive control.” 26 C.F.R. § 1.414(c)-2(c)(2).
Nos. 13-3010, 13-3776 3
of several payments, and accordingly 112 shares were re-
leased from escrow, giving Cibula 73% of GEOBEO’s total
shares. GEOBEO defaulted on the Stock Redemption
Agreement, and the untransferred shares remained in es-
crow. To resolve his liability under the Stock Redemption
Agreement, Cibula entered into an Assignment Agreement
with Pieranunzi, under which Cibula gained the right to di-
rect the voting shares while in escrow or direct a distribution
of the shares to himself. At all relevant times, the remaining
27% of GEOBEO shares were in escrow. Pursuant to the As-
signment, voting control of the escrow was vested in Cibula.
The district court granted summary judgment in favor of
the Fund and struck the defendants’ jury demand. The de-
fendants now appeal the district court’s finding that Cibula
had a controlling interest in GEOBEO, the characterization
of the defendants as “trades” or “businesses” and the order
striking their jury demand. While a grant of summary judg-
ment is typically reviewed de novo, because the only issue
before the district court was the characterization of undis-
puted subsidiary facts, we review for clear error. Cent. States,
Se. & Sw. Areas Pension Fund v. SCOFBP, 668 F.3d 873 (7th
Cir. 2011). We review the order striking the jury demand de
novo.
I.
Under 29 U.S.C. § 1301(b)(1), if a withdrawing employer
is unable to pay in full, a pension plan can recover the defi-
ciency jointly and severally from any other trade or business
under common control with the withdrawing employer. See
Central States, Se. & Sw. Areas Pension Fund v. Personnel, Inc.,
974 F.2d 789, 792 (7th Cir. 1992).
4 Nos. 13-3010, 13-3776
There are a few pieces to this analysis; however, the only
real question before us is whether the district court properly
concluded that Cibula had a controlling interest in GEOBEO.
If Cibula did in fact have a controlling interest in GEOBEO,
then the defendants are part of a combined group2 under
Cibula’s common control and are jointly and severally liable
for General Warehouse’s withdrawal liability.
In this context, a controlling interest is defined as having
ownership of stock representing at least 80% of voting power
of all classes 3 of stock or 80% of the total value of all shares.
26 C.F.R. § 1.414(c)-2(b)(2)(i)(A). The district court deter-
mined that Cibula had a controlling interest because he ac-
quired all of Pieranunzi’s interest in GEOBEO stock (includ-
ing that in escrow), including both the right to demand the
release of the stock from escrow and the right to vote 100%
2 Under the regulations defining common control, there are three differ-
ent common control categories relevant to this case. First is a “parent-
subsidiary” group, where one or more organization is connected through
a common parent. The parties to the General Warehouse litigation are a
parent-subsidiary group (General Warehouse Group), of which
GEOBEO is the parent. Second is a “brother-sister” group, where five or
fewer individuals own a controlling interest and effectively control two
or more organizations. All of the Appellants here are a brother-sister
group, with Cibula owning at least 80% (Cibula Group). The final cate-
gory is a “combined group” which is defined as a group of three or more
organizations where each organization is a member of a parent-
subsidiary or brother-sister group and at least one of the organizations is
the common parent of the parent-subsidiary group AND a member of
the brother-sister group. GEOBEO is both the parent organization (if
Cibula owns 80% of the stock) in the parent-subsidiary group and a
member of the brother-sister group. See 26 C.F.R. §§ 1.414(c)-2(b)(1);
2(c)(1); 2(d).
3 GEOBEO had only one class of shares, all of which were voting shares.
Nos. 13-3010, 13-3776 5
of the stock in escrow before the date of General Ware-
house’s withdrawal. We agree with the district court that
Cibula had a controlling interest.
Paragraphs four and five of the Assignment Agreement
make Cibula’s interest in the shares abundantly clear. Those
paragraphs provide that Pieranunzi transfers to Cibula all
rights he had in the shares created by the Stock Redemption
Agreement, “including the right to demand a transfer from
GEOBEO to Assignee of Assignor’s Shares in the event of a
default under the Note.” The Agreement also provides that
Pieranunzi “relinquishes, waives and releases and rights
which Assignor may have under the Stock Redemption
Agreement.” Thus, under the clear terms of the agreement,
Cibula can elect to demand the transfer of the shares to him-
self.
The defendants contend that despite having the right to
demand the release of the escrowed shares to himself, Cibula
never exercised that right. What the defendants misunder-
stand is that the regulations concerning common control for
purposes of the MPPAA provide that “if a person has an op-
tion to acquire any outstanding interest in an organization,
such interest shall be considered as owned by such a per-
son.” 26 C.F.R. § 1.414(c)-4(b)(1). Thus, because Cibula gained
the right to acquire the stock under the assignment, he is consid-
ered to own that stock for purposes of the MPPAA.
The defendants also contend that Pieranunzi retained the
right to reclaim the shares in the event of default, and there-
fore Cibula did not control the shares in escrow. They rely on
6 Nos. 13-3010, 13-3776
paragraph six of the Assignment Agreement 4, which states
that Pieranunzi retains any legal remedies available to him
in the event of a default. The defendants contend that his le-
gal remedies include the right to reclaim his shares. Thus,
they argue that if Pieranunzi has a right to reclaim, then he
never relinquished control of those shares, which would lim-
it Cibula’s control of GEOBEO to less than 80%. However,
the defendants ignore the fact that in the paragraphs imme-
diately preceding paragraph six Pieranunzi explicitly as-
signed to Cibula the right to demand the shares in escrow. 5 It
is inconsistent then to construe the broad language of para-
graph six to include a right that was explicitly surrendered
in the preceding paragraph. Therefore, the defendants’ reli-
ance on paragraph six is misplaced.
In addition to having the right to direct the shares to
himself, Cibula had 100% voting control of GEOBEO. Pursu-
ant to the terms of the Stock Redemption Agreement while
4Paragraph six states: “In the event the Assignee [Cibula] fails to timely
make any of the payments … under the Assignment … Assignor [Piera-
nunzi] shall have the right to declare the total remaining balance imme-
diately due and payable and to pursue any and all legal remedies which
Assignor may have against Assignee.”
5 Specifically, paragraph four of the Assignment Agreement transferred
from Pieranunzi to Cibula the right to demand the shares in escrow in
the event that GEOBEO defaulted under the Stock Redemption Agree-
ment. Because GEOBEO was in default at the time of the Assignment
Agreement, Pieranunzi transferred the right to reclaim his shares at the
time of the Assignment Agreement. The relevant portions of paragraph
four read: “Assignor [Pieranunzi] does hereby transfer and assign to As-
signee[Cibula] all rights Assignor has or holds … including the right to
demand a transfer from GEOBEO to Assignee of Assignor’s Shares [in
escrow] in the event of a default under the Note.”
Nos. 13-3010, 13-3776 7
GEOBEO was in default the escrowee was required to ab-
stain from voting the stock in escrow. This effectively meant
that the stock owned by Cibula (that which remained out-
side of escrow) was the only stock entitled to vote, giving
Cibula 100% of the voting power whether or not he owned
the stock in escrow. The defendants would have us believe
that because the escrowee voted he had voting control over
the stock in escrow, regardless of the fact that he voted to ab-
stain as he was required to. We are concerned with who had
voting power, thus the fact that the escrowee technically vot-
ed is irrelevant because he was bound by the Stock Redemp-
tion Agreement to abstain. See 26 C.F.R. § 1.414(c)-
4(b)(2)(i)(A).
Accordingly, we agree with the district court that before
the date General Warehouse incurred withdrawal liability,
Cibula had a controlling interest in GEOBEO. As a result, the
defendants were properly characterized as being part of a
“combined group” under common control, making them
jointly and severally liable for General Warehouse’s with-
drawal liability.
II.
We now turn to consider whether the defendants can be
characterized as “trades” or “businesses” under the MPPAA.
See 29 U.S.C. § 1301(b)(1). The defendants are all formally
organized business entities. Two of the defendants are cor-
porations and the remaining are for-profit limited liability
corporations. The defendants are engaged in various for-
profit enterprises, from property management to commercial
equipment leasing.
8 Nos. 13-3010, 13-3776
The defendants argue that Cibula spent so little time per-
sonally involved with these businesses, that they are more
correctly characterized as passive investments, rather than
trades or businesses. We disagree. There is no real question
as to whether these formally registered business entities are
aptly construed as such for purposes of withdrawal liability
under the MPPAA. However strained the defendants’ con-
tention is in this regard, the district court still properly ap-
plied the relevant test from Groetzinger and determined that
the defendants were indeed trades or businesses under the
MPPAA. Under the test the court considers whether the per-
son was engaged in the activity (1) for the primary purpose
of income or profit; and (2) with continuity and regularity.
Comm’r of Internal Revenue v. Groetzinger, 480 U.S. 23, 35
(1987). More specifically, when applying this test courts look
to factors such as the purpose, tax status, and legal form of
the enterprise. See, e.g., Personnel, 974 F.2d at 795; Connors v.
Incoal, Inc., 995 F.2d 945, 954 (D.C. Cir. 1993). The point of
this test is to distinguish trades and businesses from invest-
ments, “which are not trades and businesses and thus cannot
form a basis for imputing withdrawal liability.” Personnel,
974 F.2d at 794.
We have previously held that formally recognized busi-
ness organizations pose “no interpretative difficulties” for
the Groetzinger test. Central States, Se. & Sw. Areas Pension
Fund v. Fulkerson, 238 F.3d 891, 895 (7th Cir. 2001). We have
also noted that because “formal business organizations ordi-
narily operate with continuity and regularity and are ordi-
narily formed for the primary purpose of income or profit, it
seems highly unlikely that a formal for-profit business or-
ganization would not qualify as a “trade or business.”
Nos. 13-3010, 13-3776 9
SCOFBP, 668 F.3d at 878. The defendants here pose no con-
tradictions to these qualifications.
In mounting their challenge to the district court’s charac-
terization of them as trades or businesses, the defendants re-
ly heavily on the fact that Cibula spent very little time—less
than ten hours per year—personally managing these busi-
nesses. Viewed in isolation, Cibula’s minimal involvement
might be persuasive, but defendants ignore other, more per-
suasive factors, which undercut their argument that these
were mere passive investments.
In 2005, the defendants paid a combined total of over
$250,000 to companies who managed and operated the vari-
ous business entities. Thus, the argument that Cibula was
not involved in these entities is a red herring, since these
significant management fees obviated the need for Cibula’s
personal involvement. In fact, the management fees indicate
that the activities undertaken by the defendants were con-
tinuous and regular. See, e.g., SCOFPB, 668 F.3d at 879. In
addition to the management fees paid, the defendants also
claimed business-related income deductions on their federal
income tax returns; they applied for and were issued Federal
Employer Identification Numbers; and they contracted with
professionals to provide legal, managerial, and accounting
services. All factors indicate that the defendants were
properly characterized as businesses or trades. Id. at 878.
III.
The defendants also contend the district court improper-
ly struck their jury demand. They are wrong. We have pre-
viously held that there is no right to a jury trial in an MPPAA
withdrawal liability action—no provision in the MPPAA or
10 Nos. 13-3010, 13-3776
the Seventh Amendment provides for one. McDougall v. Pio-
neer Ranch Ltd., 494 F.3d 571, 576 (7th Cir. 2007). McDougall
presented the same type of claim as is made in this case, thus
the Appellants’ attempt to distinguish it is unavailing. In any
event, even if the court did commit error in striking the jury
demand, it would not be grounds for reversal—the court did
not hold a bench trial, but resolved the matter on summary
judgment. The defendants cannot avoid summary judgment
by challenging this form of disposition when no trial was
necessary.
AFFIRMED.