Advertisement

July 21, 2014

Company Owners Personally Liable for $3.1 Million Withdrawal Liability Assessment — Owners’ Lease of Commercial Property to Company Constituted “Trade or Business”

The U.S. Court of Appeals for the Seventh Circuit ruled that owners can be personally liable for multiemployer withdrawal liability where the owner leases property to its own closely held corporation.  The decision highlights the dangers of related-party transactions, failing to observe business formalities and holding property personally.


In Central States Southeast and Southwest Areas Pension Fund v. Messina Products, LLC, the U.S. Court of Appeals for the Seventh Circuit ruled that an owner can be personally liable for multiemployer withdrawal liability when the owner leased property to its closely held corporation that withdrew from a multiemployer pension plan.

Defendants Stephen and Florence Messina owned Messina Trucking, Inc.  For several years, Messina Trucking contributed to a multiemployer union pension plan on behalf of its union workforce: the Central States Southeast and Southwest Areas Pension Fund (the Fund).  In October 2007 the company withdrew from the Fund and was assessed $3.1 million in withdrawal liability, representing a pro rata share of the plan’s underfunding.  Under the Employee Retirement Income Security Act of 1974 (ERISA), related businesses are also liable for an employer’s withdrawal liability assessment.  Specifically, all “trades or businesses” under “common control” with a withdrawing employer are treated as a single entity for the purpose of collecting withdrawal liability.  The Fund sued the owners personally, seeking to hold them liable for operating an unincorporated “trade or business” as commercial and residential landlords, with the trade or business under common control with the withdrawing employer. 

The Messinas owned and leased several residential properties adjacent to Messina Trucking and leased commercial property to Messina Trucking from which it conducted its operations.  The company paid rent to the Messinas for the property for many years, although there was never any written lease agreement and the rent payment was limited to the cost of property insurance and utilities.  Prior to 2005, the lease payments ceased, as the company experienced financial difficulties.  Repairs and maintenance on the property were performed by company employees.  Adjacent pieces of property owned by the Messinas were used by the company for an expanded garage and additional means of ingress and egress from the company operations.  A company employee and his wife lived in a residence located on the adjacent property.  Two other homes on the adjacent property were leased to residential tenants pursuant to a written agreement.  A Messina Trucking employee monitored the rent payments and the company paid the water utility bills.  Company employees maintained the lawns and removed snow from the properties. 

The Seventh Circuit applied a two-part test to determine whether an economic activity constitutes a trade or business.  First, the activity must be performed for the primary purpose of income or profit and, second, the activity must be performed with continuity and regularity.  The court held that in this case renting property to the withdrawing employer is categorically a trade or business.  The absence of a formal written lease, the lapse in rent payments for several years, the failure to account properly for property maintenance by company employees and the company’s operations on the property were each imputed to the owners.  This level of activity exceeded passive investment, in the court’s opinion. 

The court’s decision has particular significance as the property was held by the owners in their personal capacities and not in corporate form.  Therefore, the owners in their unincorporated landlord “trade or business” have been rendered personally liable for the withdrawal liability.  The owner’s personal assets are now at risk, including assets that are unrelated to the property used for company operations.

Employers that participate in multiemployer plans are well advised to closely review, and potentially avoid, related-party transactions, especially where the activities are conducted in an unincorporated capacity.  This case also further highlights the importance of observing business formalities, including use of formal lease documents and service agreements. 

© 2014 McDermott Will & Emery

About the Author

Jonathan J. Boyles, McDermott WIll Emery Law Firm, Labor Employment Attorney
Partner

Jonathan J. Boyles is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's New York office.  He counsels clients on a wide array of employee benefit issues, including ERISA’s fiduciary obligations, plan design issues, and reporting and disclosure requirements.  His practice has a special emphasis on benefits issues and integration in corporate transactions, investment product design considerations in dealing with benefit plan investors, multiemployer plan issues and executive compensation issues for nonprofits.  He has...

212-547-5550

About the Author

Paul J. Compernolle, McDermott Will Emery law Firm, Labor Employment Attorney
Partner

Paul Compernolle is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  He focuses his practice on the employee benefits field, advising businesses on a broad range of employee benefits matters, including establishing and administering 401(k), pension plans and employee stock ownership plans (ESOPs) and the benefits aspects of acquisitions and sales of businesses.

Paul was recognized by Chambers USA as a leader in labor and employment law.

Paul is admitted to the...

312-984-7632
Associate

David Diaz is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office. His practice includes a variety of employee benefits matters related to pension plans, 401(k) plans, cafeteria and welfare plans.

202-756-8059

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.