Local 705 International Brothe v. Anthony Pitello

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 20-2142 LOCAL 705 INTERNATIONAL BROTHERHOOD OF TEAMSTERS PENSION FUND, Plaintiff-Appellee,

v.

ANTHONY PITELLO and PAT PITELLO, Defendants-Appellants. ____________________

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 18 CV 6893 — Joan H. Lefkow, Judge. ____________________

ARGUED JANUARY 12, 2021 — DECIDED JULY 7, 2021 ____________________

Before EASTERBROOK, WOOD, and ST. EVE, Circuit Judges. WOOD, Circuit Judge. Although many pension plans cover only the employees of one employer, in some industries multi-employer plans are common. But participating employ- ers may come and go, and when a firm withdraws from the plan, there is a risk that the plan will be underfunded. The Employee Retirement Income Security Act (ERISA), as amended by the Multiemployer Pension Plan Amendments of

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1980 (MPPAA), addresses that problem by requiring with- drawing employers to pay a sum that covers their liability for unfunded vested benefits attributable to their employees. See 29 U.S.C. §§ 1381(a), 1404(a) (defining “withdrawal liability”). Withdrawal liability applies to the withdrawing employer, but it also applies to “all trades or businesses (whether or not incorporated) that are under common control” with that em- ployer. Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson, 238 F.3d 891, 894 (7th Cir. 2001) (internal quotations omitted); 29 U.S.C. § 1301(b)(1). This case arose when Gradei’s Express Co. withdrew from the Local 705 International Brotherhood of Teamsters Pension Fund. Gradei’s asserted that it had ceased all operations cov- ered by the governing multi-employer collective bargaining agreement and thus was no longer required to contribute to the Fund. The Fund responded with this lawsuit, in which it seeks to collect $221,932.55 in withdrawal liability from Gradei’s. In addition to Gradei’s, the Fund sued Anthony and Pat Pitello (Gradei’s owners) and another Illinois corporation owned by the Pitellos (GX Warehousing), on the theory that they were trades or businesses under common control. The district court found that Gradei’s was conducting its business rent-free on property owned by the Pitellos, and that this was enough to establish common control. It thus ruled in favor of the Fund with respect to all defendants. We affirm. I In 2000, Anthony and Pat Pitello purchased the property at 2035 N. 15th Avenue, Melrose Park, Illinois (“Melrose Park Property”) with their father, Pat M. Pitello. Gradei’s and GX both used the property as their principal place of business, but the Pitellos never required either corporation to pay rent. In

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February 2018, Gradei’s ceased all operations. GX continued to use the property under the rent-free arrangement. After Gradei’s moved out, GX (not the Pitellos) began leasing the property to an unrelated third party and collecting rent pay- ments in the amounts of $2,800 per month. Later GX leased space to another third party for $19,000 per year. It signed the leases and collected the rents, but it never acquired any own- ership interest in the property. Because some of Gradei’s employees were members of Lo- cal 705, Gradei’s had been required to report and make con- tributions to the union’s pension fund. That obligation ended in February 2018 when Gradei’s ceased all operations covered by the CBA and thereby completely withdrew from the pen- sion plan. See 29 U.S.C. § 1383. The Plan establishes defined pension benefits for eligible employees, and the Fund pro- vides those benefits. The Plan also describes how the Fund must go about assessing and collecting withdrawal liability payments. If an employer defaults on those payments and le- gal action is required for collection, the Fund is entitled to re- cover several things: (1) interest on the assessed withdrawal liability at a rate of 8% per year from the date of the first missed payment, (2) the greater of liquated damages in the amount of interest on the unpaid liability or 20%, (3) court costs, and (4) attorneys’ fees. On March 2, 2018, the Fund sent Gradei’s, GX, and the Pi- tellos (in their capacity as the owners of Gradei’s principal place of business), a notice and demand for payment of the assessed withdrawal liability in the amount of $221,932.55. See 29 U.S.C. § 1399(b)(1). The notice contained payment op- tions and advised Gradei’s that it could request a review of the assessed withdrawal liability amount within 90 days of

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the letter. Gradei’s essentially ignored the demand—it did not request a review of the assessed amount or demand arbitra- tion to contest the assessment, and no one began payment to the Fund. See 29 U.S.C. § 1401(a)–(b). On June 4, 2018, the Fund sent another notice informing Gradei’s that it was delin- quent on payment and had 60 days to respond. Gradei’s again failed to do anything in response to the Fund’s letters. It did, however, file for Chapter 7 Bankruptcy on June 8, 2018. The bankruptcy proceedings concluded on July 19, 2018. Gradei’s has never suggested that the bankruptcy case affected its ob- ligations to the Fund. With no payment or response, the Fund filed this action against Gradei’s on October 12, 2018, seeking withdrawal lia- bility, interest, damages, court costs, and attorneys’ fees. It also sued GX, Anthony Pitello, and Pat Pitello as trades or businesses under common control with Gradei’s. The Fund then moved for summary judgment, arguing that the defend- ants had no legal basis to contest the withdrawal liability as- sessment, given their failure to request a review of the assess- ment or initiate arbitration. In a cross-motion for summary judgment, the Pitellos argued that their ownership of the Mel- rose Park Property and the activities there were not enough to support a finding of common control among the defend- ants. Instead, they asserted, the property was nothing but a passive investment. Gradei’s and GX did not dispute liability. On April 24, 2020, the district court entered judgment against all defendants, awarding the Fund $312,252.04. After filing an unsuccessful motion to alter or amend the judgment on April 28, 2020, the Pitellos appealed.

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II “The purpose of § 1301(b)(1) ‘is to prevent businesses from shirking their ERISA obligations by fractionalizing operations into many separate entities.’” Cent. States, Se. & Sw. Areas Pen- sion Fund v. Nagy, 714 F.3d 545, 549 (7th Cir. 2013) (quoting Cent. States, Se. & Sw. Areas Pension Fund v. Messina Prod., LLC, 706 F.3d 874, 878 (7th Cir. 2013)). But Congress nonetheless drew a line between affiliated trades or businesses, on the one hand, and passive or personal investments, on the other. Withdrawal liability is intended to reach only the former, ra- ther than “things like holding shares of stock or bonds in pub- licly traded corporations” or “[o]wning property … at least where the owner spends a negligible amount of time manag- ing the leases.” Cent. States, Se. & Sw. Areas Pension Fund v. SCOFBP, LLC, 668 F.3d 873, 878–79 (7th Cir. 2011). Since there is no statutory definition for “trade or busi- ness” in ERISA, we have looked elsewhere for guidance. For many years now we have used the test developed in Commis- sioner v. Groetzinger, 480 U.S. 23 (1987), which defines similar terms for tax purposes. We “construe the term ‘trade or busi- ness’ in light of the purpose of the MPPAA[:] … to prevent dissipation of assets required to secure vested pension bene- fits.” Cent. States, Se. & Sw. Areas Pension Fund v. Ditello, 974 F.2d 887, 890 (7th Cir. 1992) (quotation omitted). To draw a workable line between activities that qualify as trades or businesses and those that do not, the Groetzinger test asks two questions: (1) whether the activity is for the primary purpose of income or profit; and (2) whether the activity is undertaken with continuity and regularity. Nagy, 714 F.3d at 550. If these criteria are met, the activity in question is consid- ered a trade or business. Our holding in SCOFBP simplified

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this inquiry further when it comes to leasing property: “leas- ing property to a withdrawing employer itself is categorically a ‘trade or business.’” 668 F.3d at 879; Nagy, 714 F.3d at 547 (“[Defendant]’s leasing activity is categorically a trade or business for purposes of personal liability under § 1301(b)(1).”); see also Messina, 706 F.3d at 881 (“[R]enting property to a withdrawing employer is ‘categorically’ a trade or business … .”). In Messina we explained why a more fact-specific inquiry is unnecessary in the leasing context: But where the real estate is rented to or used by the withdrawing employer and there is common owner- ship, it is improbable that the rental activity could be deemed a truly passive investment. In such situations, the likelihood that a true purpose and effect of the “lease” is to split up the withdrawing employer’s as- sets is self-evident. We see no reason why that princi- ple should not apply here. 706 F.3d at 882. The Pitellos contend that their situation is one of the “im- probable” ones to which that passage alludes: they insist that their ownership of the Melrose Park Property is “really” a passive investment and thus the categorical rule should not apply. In support of that position, they offer a number of facts: they purchased the property for investment purposes with their father in 2000, 18 years before Gradei’s ceased opera- tions; they did not receive tax benefits, exemptions, or deduc- tions as a result of Gradei’s use of the property; they never received or used any rent payments; they did not perform

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leasing activities after Gradei’s left (though GX did); and they never employed anyone to manage the property. We do not disagree with the Pitellos that evidence can re- but the presumption that leasing property to a withdrawing employer is a trade or business. But the Pitellos have failed to do that. The problem with their list is that it omits other de- tails that undermine their position, and it does not recognize the economic equivalence between a return on investment in the form of rent collection and return on investment in the form of dividends or salaries made possible by the absence of any rent obligation. Land owned by a firm’s equity investors and used by that firm in its business is itself a form of equity investment in the firm. Logically that means that the land should be treated as part of the business. Absent persuasive evidence that does not appear in this record, “the inescapable conclusion is that the [defendant]s’ leasing activity was simply an extension of the business oper- ations of … the withdrawing employer, [sic] and was a means to fractionalize [the withdrawing employer]’s assets.” Mes- sina, 706 F.3d at 883; see, e.g., Cent. States, Se. & Sw. Areas Pen- sion Fund v. Fulkerson, 238 F.3d 891, 894 (7th Cir. 2001) (“[De- fendants] also offered an expert witness in the real estate mar- ket who opined that the triple net leases were economically identical to passive investments such as stocks or bonds.”). The Pitellos, with their father, provided office and storage space exclusively to companies that they own. Far from incur- ring nothing of value, the Pitellos and their businesses all reaped benefits from this arrangement. The Pitellos secured workspace for their businesses and known tenants for their property. The fact that GX, a company owned by the Pitellos, began leasing the property and collecting rent payments only

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after Gradei’s withdrew does not suggest that the Pitellos were passive investors. To the contrary, it is a strong indicator that whatever value the Pitellos received through their rent- free arrangement with Gradei’s had been lost upon Gradei’s failure as a business venture. Without evidence to the con- trary, the logical inference is that the rent-free arrangement protected Gradei’s, GX, and the Melrose Park Property, all trades or business under the Pitellos’ control. Nothing in Groetzinger compels a different conclusion. III Anthony and Pat Pitello were engaged in a trade or busi- ness under common control with Gradei’s because of their ownership of the Melrose Park Property and Gradei’s use of that property rent-free. We presume that the activity of leas- ing property to a withdrawing employer is a trade or busi- ness, and the Pitellos have not rebutted that presumption. The district court thus correctly found Anthony Pitello and Pat Pi- tello personally liable for Gradei’s withdrawal liability, along with Gradei’s and GX. The judgment of the district court is AFFIRMED.