Opinion
CASE NO. 8:21-cv-00250-JLS-ADS
2022-12-05
Frank JORGENSEN and Andrea Zinder, as Trustees of the Southern California United Food and Commercial Workers Unions and Food Employers Joint Pension Trust Fund, Plaintiffs, v. HOWS MARKETS, LLC and R&K Hughes Family Partners, LP and Does 1-10, Defendants.
Donald William Heine, Jr., Richard M. Swartz, Francisco Manuel Alejandro Delgado, Stuart Libicki, Schwartz Steinspair Dohrmann and Sommers LLP, Los Angeles, CA, for Plaintiffs. Michael Andrew Lundholm, Robert James Guite, Sheppard Mullin Richter Hampton LLP, San Francisco, CA, for Defendants Hows Markets, LLC, R and K Hughes Family Partners, LP.
Donald William Heine, Jr., Richard M. Swartz, Francisco Manuel Alejandro Delgado, Stuart Libicki, Schwartz Steinspair Dohrmann and Sommers LLP, Los Angeles, CA, for Plaintiffs. Michael Andrew Lundholm, Robert James Guite, Sheppard Mullin Richter Hampton LLP, San Francisco, CA, for Defendants Hows Markets, LLC, R and K Hughes Family Partners, LP.
ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
JOSEPHINE L. STATON, UNITED STATES DISTRICT JUDGE
Before the Court is a Motion for Summary Judgment brought by Defendants HOWS Markets, LLC and Hughes Family Partners, LP. (Mot., Doc. 83.) Plaintiffs Frank Jorgensen and Andrea Zinder opposed (Opp., Docs. 93, 95), and Defendants replied (Reply, Doc. 96.) Having considered the parties' briefs and underlying evidence, and having held oral argument, the Court GRANTS Defendants' Motion for Summary Judgment for the reasons set forth below.
Plaintiffs' Opposition was filed on November 14, 2022 even though it should have been filed no later than November 11, 2022—21 days before Defendants' Motion was scheduled for hearing. See C.D. Cal. R. 7-9. November 11, 2022 was a federal holiday—Veterans Day—but Plaintiffs' counsel were on notice for months that their Opposition would be due on a holiday—Defendants filed their Motion on September 12, 2022—and failed to take steps to file in a timely manner before the holiday. That said, the Court will consider Plaintiffs' Opposition and decide Defendants' Motion on the merits.
I. BACKGROUND
In 1999, Roger Hughes, Mark Oerum, David Wolf and Steven Strickler founded HOWS Markets, LLC ("HOWS") to operate a small chain of supermarkets in Southern California. (Plaintiffs' Statement of Genuine Disputes of Material Fact and Additional Material Facts ("Pls.' Statement") ¶ 4, Doc. 93-2.) HOWS operated from 1999 to 2014. (Id. ¶ 40.) Hughes contributed $8,146,189 in start-up capital, while Oerum, Wolfe and Strickler each contributed $1,667. (Libicki Decl. Ex. L (1999 Tax Documents), Doc. 93-1 at 56-76.) Strickler testified in deposition that Hughes ultimately contributed approximately $13 million in capital to HOWS. (Libicki Decl. Ex. V. (Strickler Dep. Tr.) at 24:5-6, 25:20-23, Doc. 93-1 at 289-367.) Oerum, Strickler, and Wolff contributed a total of approximately $250,000 between 1999 and 2014. (Opp. at 10 n.3.) Overall, Roger Hughes and his successor, the Hughes Bypass Trust, contributed approximately 98% of HOWS's capital between 1999 and 2014.
Defendants have improperly redacted capital contribution figures from their filings. (See, e.g., Guite Decl. Exs. C-H, Docs. 83-5-10.) Because Defendants have not disputed Plaintiffs' representation as to the total capital contributions from Oerum, Wolff, and Strickler, the Court accepts them as undisputed.
Between January 1999 and March 2014, HOWS entered into collective bargaining agreements ("CBAs") with several local unions of the United Food and Commercial Workers Union covering the bargaining-unit employees working in HOWS's markets. (Pls.' Statement ¶ 42.) HOWS became a participating employer in the Southern California United Food and Commercial Workers Unions and Food Employers Joint Pension Trust Fund ("Pension Fund") pursuant to those CBAs. (Id. ¶¶ 37, 42.) Plaintiffs Frank Jorgensen and Andrea Zinder are trustees of the Pension Fund. (Id. ¶ 38.)
The Pension Fund provides pension benefits to retired employees of participating employers. (Id. ¶ 39.) As a participating employer, HOWS was obligated under the terms of the CBAs to contribute to the Pension Fund to provide retirement and related benefits to its bargaining-unit employees. (Id. ¶ 43.) HOWS contributed to the Pension Fund as a participating employer for over ten years. (Id. ¶ 37.) On March 31, 2014, HOWS permanently ceased its operations and withdrew from the Pension Fund. (Id. ¶ 44.)
After Roger Hughes' death in 2010, his interest in HOWS passed to the Hughes Bypass Trust. (Id. ¶¶ 27, 64.) The Hughes Bypass Trust is governed by the Third Complete Amendment and Restatement of the Agreement Establishing the Hughes Revocable Trust. (Id. ¶¶ 28, 64.) It was established initially to provide funds for either Roger Hughes or his wife, Katharine, upon the other's death for health, education, support or maintenance in the surviving spouse's accustomed manner of living. (See Guite Decl. Ex. K (Third Complete Amendment and Restatement of the Agreement Establishing the Hughes Revocable Trust) § 4.4.1, Doc. 83-13.) Upon Roger Hughes' death, Katharine Hughes received a life interest in the Hughes Bypass Trust as its beneficiary. (Pls.' Statement ¶ 65.) Katharine Hughes also received a "Special Power of Appointment" to determine who would receive the principal and undistributed income of the Bypass Trust upon her death. (See Guite Decl. Ex. K (Third Complete Amendment and Restatement of the Agreement Establishing the Hughes Revocable Trust) § 4.4.2.)
On June 22, 2011, section 4.4.1 of the Hughes Revocable Trust was modified to provide that:
During the lifetime of the Surviving Settlor, the Trustee may distribute to or for the benefit of any one or more (or none) of the Surviving Settlor, the children of the Deceased Settlor and the descendants of a deceased child of the Deceased Settlor, as much of the net income and, if insufficient, as much of the principal of the trust as in the reasonable discretion of the Trustee may be required for the health, education, support or maintenance of such beneficiaries. When making such distributions, the Trustee may pay or apply more for some beneficiaries than for others, and may make payments to or for one or more beneficiaries to the exclusion of others. However, the needs of the Surviving Settlor shall have priority over the needs of the other beneficiaries. In exercising discretion, the Trustee may consider or disregard, to the extent the Trustee deems advisable, such beneficiary's other income or resources that are known to the Trustee and the obligation of others to support such beneficiary. All decisions of the Trustee regarding payments under this subsection, if any, are within the Trustee's sole and absolute discretion and shall be final and incontestable by anyone. The Trustee shall
accumulate any income not so distributed and add it to the principal of such trust.(Guite Decl. Ex. M (Power of Modification) at 2, Doc. 83-15.) Upon Katharine Hughes' death, any assets in the Hughes Bypass Trust over which she did not exercise her Special Power of Appointment would be divided into equal shares for her living children and predeceased children with living issue. (See Guite Decl. Ex. K (Third Complete Amendment and Restatement of the Agreement Establishing the Hughes Revocable Trust) § 5.5.3.) Roger and Katharine Hughes had four children (collectively, the "Hughes Children"). (Pls.' Statement ¶ 35.)
In a June 13, 2014 letter to counsel for the Pension Fund, Strickler—a HOWS founder and member—stated: "The Hughes Bypass Trust effectively owned 100% of [HOWS's] stock . . . . The Hughes Bypass Trust came into being upon the death of Roger Hughes who effectively owned 100% of the stock of HOWS Markets, LLC." (Libicki Decl. Ex. C, Doc. 93-1 at 13-14.) In an October 14, 2014 email to counsel for the Pension Fund, Strickler confirmed that Oerum, Wolff, and himself were "profit sharers (as opposed to 'shareholders') because the Hughes Bypass Trust owned 100% of the stock": "That is correct Oerum Wolff, Strickler [sic] shared in profits and did not have any positive capital." (Libicki Decl. Ex. B, Doc. 93-1 at 9-11.) In a November 24, 2014 email, Strickler reiterated: "HOWS Markets LLC (HM) was 100% owned by Roger Hughes, upon Roger's death his interest in HOWS was transferred to the HBT [Hughes Bypass Trust]." (Libicki Decl. Ex. D, Doc. 93-1 at 14-16.) Strickler later testified in deposition that this statement was not accurate because Roger Hughes owned 50% of HOWS and Oerum, Wolff, and Strickler owned the other 50%. (See, e.g., Libicki Decl. Ex. V. (Strickler Dep. Tr.) at 28:25-29:14.)
According to Plaintiffs, HOWS is liable under the Employee Retirement Income Security Act of 1974 ("ERISA") and owes $3,054,415.00 in withdrawal liability, plus liquidated damages and attorneys' fees. (First Amended Complaint ("FAC") ¶¶ 11-12, Doc. 36.) Because HOWS ceased operations in 2014 and cannot satisfy Plaintiffs' claim for withdrawal liability, Plaintiffs seek to hold another entity, R & K Hughes Family Partners, LP ("Hughes LP"), jointly and severally liable for HOWS's withdrawal liability.
Hughes LP was established and registered in the State of California as a limited partnership on July 16, 1996. (Pls.' Statement ¶ 41.) As of the date of HOWS's withdrawal from the Pension Fund, Hughes LP was owned by three entities: (1) the Hughes Children's Trust; (2) R & K Hughes Children's LLC; and (3) the Hughes Grandchildren's Trust. (Id. ¶ 31.) The Hughes Children's Trust owns 41% of Hughes LP. (Id. ¶ 32.) R & K Hughes Children's LLC owns 50% of Hughes LP. (Id. ¶ 33.) The Hughes Grandchildren's Trust owns 9% of Hughes LP—1% for each of Roger and Katharine Hughes' nine grandchildren. (Id. ¶¶ 34, 36.) Between 2007 and 2010, Hughes LP made 23 loans to HOWS totaling approximately $3,8500,000, usually at a 6% interest rate, to finance the chain's operations and the construction of a North Hollywood store. (See Mot. at 20 n.9; Guite Decl. Ex. N (Hughes LP Loans to HOWS), Doc. 83-16; Libicki Decl. Ex. H (Loans Summary), Doc. 93-1 at 31-36; Libicki Decl. Ex. V. (Strickler Dep. Tr.) at 54:14-19, 57:3-24, 62:2-72.11, Doc. 93-1 at 289-367.) In November 2010, Hughes LP and HOWS entered into an agreement providing Hughes LP with a security interest in all of HOWS's assets to secure the repayment of Hughes LP's loans. (Libicki Decl. Ex. I (UCC Filings), Doc. 93-1 at 37-44; Libicki Decl. Ex. V (Strickler Dep. Tr.) at 72:17-75:14.)
According to Plaintiffs, HOWS and Hughes LP should be treated as a single employer for purposes of ERISA withdrawal liability because the four Hughes Children owned a controlling interest of at least 80% in both HOWS and Hughes LP at the time of withdrawal. (FAC ¶¶ 28, 32.)
Defendants have moved for summary judgment on the grounds that Plaintiffs cannot establish the necessary predicates to impose withdrawal liability on Hughes LP. According to Defendants, the undisputed facts on the record establish that: "(1) Roger Hughes owned no more than 50% of HOWS Markets; (2) the Hughes children have no current interest in Roger Hughes' ownership interest in HOWS Markets based on the structure of the Hughes Bypass Trust; and (3) the Hughes children own less than the requisite 80% of Hughes LP necessary to impose withdrawal liability." (Mot. at 1.) Defendants further contend that Hughes LP cannot be liable for HOWS's unpaid withdrawal liability because it is not a "trade or business" under ERISA. According to Plaintiffs, Defendants' contentions are not supported by either the record in this case or the applicable law. (See generally Opp.)
II. LEGAL STANDARD
In deciding a motion for summary judgment, the Court must view the evidence in the light most favorable to the non-moving party and draw all justifiable inferences in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Summary judgment is proper "if the [moving party] shows that there is no genuine dispute as to any material fact and the [moving party] is entitled to judgment as a matter of law." Fed. R. Civ. P. 56. A factual dispute is "genuine" when there is sufficient evidence such that a reasonable trier of fact could resolve the issue in the non-movant's favor, and a fact is "material" when it might affect the outcome of the suit under the governing law. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. "In judging evidence at the summary judgment stage, the court does not make credibility determinations or weigh conflicting evidence. Rather, it draws all inferences in the light most favorable to the nonmoving party." Medina v. Multaler, Inc., 547 F. Supp. 2d 1099, 1119 (C.D. Cal. 2007).
The role of the Court is not to resolve disputes of fact but to assess whether there are any disputes to be tried. The moving party bears the initial burden of demonstrating the absence of a genuine dispute of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "Once the moving party carries its initial burden, the adverse party 'may not rest upon the mere allegations or denials of the adverse party's pleading,' but must provide affidavits or other sources of evidence that 'set forth specific facts showing that there is a genuine issue for trial.' " Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001) (quoting Fed. R. Civ. P. 56(e)). Conclusory and speculative testimony in affidavits and moving papers is insufficient to raise triable issues of fact and defeat summary judgment. See Thornhill Publ'g Co. v. GTE Corp., 594 F.2d 730, 738 (9th Cir. 1979). And the evidence that the parties present must be admissible. Fed. R. Civ. P. 56(c).
III. DISCUSSION
ERISA, as amended by the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"), provides in part that "[i]f an employer withdraws from a multiemployer plan . . . , then the employer is liable to the plan in the amount determined . . . to be the withdrawal liability." 29 U.S.C. § 1381. Additionally, ERISA provides that "all trades and businesses [that are under common control, shall be treated] as a single employer." 29 U.S.C. § 1301. That is, for purposes of withdrawal liability under ERISA, "the MPPAA's definition of an 'employer' spans beyond the entity that actually withdrew from the plan." Marine Carpenters Pension Fund v. Puglia Marine, LLC, 382 F. Supp. 3d 1134, 1143 (W.D. Wash. 2019) (citing Auto. Indus. Pension Tr. Fund v. Tractor Equip. Sales, Inc. ("Tractor Equip."), 73 F. Supp. 3d 1173, 1179 (N.D. Cal. 2014)). Under 29 U.S.C. § 1301(b)(1), "withdrawal liability may be imposed against an entity other than the one obligated to contribute to the pension plan so long as: (1) the entity is under 'common control' with the withdrawing entity; and (2) the entity is a 'trade or business.' " Tractor Equip., 73 F. Supp. 3d at 1180. All entities that satisfy these requirements are jointly and severally liable for withdrawal liability. Bd. of Trustees of W. Conference of Teamsters Pension Tr. Fund v. Lafrenz, 837 F.2d 892, 893 (9th Cir. 1988).
"Common control for purposes of Section 1301(b) is defined in 26 C.F.R. 1.414(c)-2 and 1.414(c)-4." Auto. Indus. Pension Tr. Fund v. Fitzpatrick Chevrolet Inc. ("Fitzpatrick"), 833 F. Supp. 2d 1162, 1164 (N.D. Cal. 2011); Lafrenz, 837 F.2d at 893. 26 C.F.R § 1.414(c)-2 sets forth three ways in which two or more trades or business can be under common control: (1) a parent-subsidiary group, (2) a brother-sister group, and (3) some combination of the previous two. Here, the relevant question is whether HOWS and Hughes LP constitute a brother-sister group. The relevant regulations define a brother-sister group as two or more trades or businesses where the same five or fewer persons have both a (1) controlling interest in each organization and (2) those same five or fewer persons are in effective control of each organization. 26 C.F.R. § 1.414(c)-2(c)(1). A controlling interest for a corporation is defined as ownership of at least 80 percent of either total voting power or total value of all shares of stock and effective control is 50%. 26 C.F.R. §§ 1.414(c)-2(b)(ii)(2)(A), 1.414(c)-2(c)(2)(i). For partnerships, a controlling interest is at least 80 percent of the "profits interests" or "capital interest" of the partnership and effective control is 50%. Id. §§ 1.414(c)-2(b)(ii)(2)(C), 1.414(c)-2(c)(2)(iii). Section 1.414(c)-2 does not address whether LLCs should be considered as corporations or partnerships for determining common control.
26 C.F.R. § 1.414(c)-4(a) provides that for "determining the ownership of an interest in an organization for purposes of 1.414(c)-2 [common control analysis,] the constructive ownership rules of paragraph (b) of this section shall apply[.]" Paragraph (b) provides in relevant part:
An interest in an organization ["organization interest"] owned, directly or indirectly, by or for an estate or trust shall be considered as owned by any beneficiary of such estate or trust who has an actuarial interest of 5 percent or more in such organization interest, to the extent of such actuarial interest.26 C.F.R § 1.414(c)-4(b)(3)(i). Thus, for the purposes of determining if two entities are under common control, if a trust has an interest in an entity, it is attributed to the beneficiaries of that trust so long as a beneficiary has an actuarial interest greater than or equal to 5 percent. Paragraph (b)(3) further provides that "the actuarial interest of each beneficiary shall be determined by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary and the maximum use of the organization interest to satisfy the beneficiary's rights." Id. Here, Plaintiffs argue that the four Hughes Children had at least an 80% interest in HOWS at the time of withdrawal based on an actuarial valuation of the Hughes Children's remainder interests in the Hughes Bypass Trust. (Opp. at 13-16.)
According to Defendants, Hughes LP cannot be held liable for HOWS's withdrawal from the Pension Fund as a matter of law because: (1) HOWS and Hughes LP were not under "common control" at the time of withdrawal; and (2) Hughes LP cannot be considered a "business or trade." (Mot. at 1-2.) First, Defendants contend that Roger Hughes never owned more than 50% of HOWS, which prevents the four Hughes Children from owning 80% or more of HOWS as beneficiaries of the Hughes Bypass Trust. (Id. at 7-13.) Then, Defendants argue that no ownership interest in HOWS at the time of its withdrawal from the Pension Fund can be attributed to any of the Hughes Children as beneficiaries of the Hughes Bypass Trust because their interests in the Hughes Bypass Trust were contingent and subject to divestment by Katharine Hughes. (Id. at 13-15.)
The Court agrees with Defendants that, as a matter of law, the Hughes Children did not have an 80% or greater capital interest in HOWS as beneficiaries of the Hughes Bypass Trust as of March 31, 2014. Accordingly, the Court does not address the Hughes Children's ownership interest in Hughes LP or whether Hughes LP can be considered a "business or trade" under ERISA.
A. Roger Hughes' Capital Interest in HOWS
Defendants first contend that there is no genuine dispute that Roger Hughes owned only 50% of HOWS. They argue that this conclusion is compelled by the following evidence: (1) the HOWS Operating Agreement; (2) Strickler's deposition testimony, where he stated that Roger Hughes owned 50% of HOWS; and (3) K-1 tax returns for HOWS members stating that Roger Hughes' share of capital in HOWS was 50%. (Mot. at 7-13.)
Plaintiffs offer the following counterarguments. First, the Operating Agreement is irrelevant here because its terms address HOWS's governance, not its capital structure or members' ownership interests. (Opp. at 10-12.) Plaintiffs argue that, because HOWS elected to file taxes as a partnership, not a corporation, the "controlling interest" test for partnerships—which, unlike the test applied to corporations, is indifferent to voting power or managerial authority—applies here. Under that test, a controlling interest is "ownership of at least 80 percent of the profits interests or capital interest" of the partnership. 26 C.F.R. § 1.414(c)-2(b)(ii)(2)(C) (emphasis added). Because the Treasury Regulations do not set forth a test for LLCs like HOWS and HOWS elected to be taxed as a partnership, the Court agrees with Plaintiffs that HOWS should be treated as a partnership here. See 26 C.F.R. § 301.7701-3(a) (providing that a business entity that is not classified as a corporation can elect its classification for federal tax purposes). Consequently, the Court agrees that HOWS's governance as outlined in the Operating Agreement is irrelevant for determining the members' ownership interests in HOWS.
Defendants submitted a report authored by Robert Rasmussen, who concludes that "Roger Hughes and his successors owned 50% of HOWS Markets from the time it was formed until the present." (Guite Decl. Ex. C (Rasmussen Rep.) at 2, Doc. 83-5.) The Court agrees with Plaintiffs that Rasmussen's analysis and ultimate opinion state legal conclusions. (See Plaintiffs' Evidentiary Objections to Defendants' Evidence at 3-4, Doc. 93-3.) Interpreting the Operating Agreement is the Court's province and competence, so Rasmussen's report is improper. Plaintiffs' objection is SUSTAINED.
Second, Plaintiffs argue that Strickler's deposition testimony cannot be credited because it contradicts his earlier representations about HOWS's ownership and capitalization. (Opp. at 10-11.) Strickler's change in position puts his credibility at issue here, and it is not appropriate for the Court to determine whether Strickler is credible or not on a motion for summary judgment. See, e.g., TransWorld Airlines, Inc. v. Am. Coupon Exch., Inc., 913 F.2d 676, 684-85 (9th Cir. 1990) ("[C]ourts must not rush to dispose summarily of cases . . . unless it is clear that more complete factual development could not possibly alter the outcome and that the credibility of the witnesses' statements or testimony is not at issue."). Accordingly, Strickler's deposition testimony cannot establish beyond dispute that Roger Hughes owned 50% of HOWS.
Third, Plaintiffs argue that the HOWS tax returns on which Defendants rely do not establish that Roger Hughes' capital interest in HOWS was only 50%—rather, the tax returns support Plaintiffs' position that Roger Hughes' capital interest in HOWS was over 98%. (Opp. at 9-10.) On one hand, the tax returns represent that Roger Hughes' share of both profits and "ownership of capital" in HOWS was 50%. (Guite Decl. Exs. D, E, F, G, H, Docs. 83-6-10; Libicki Decl. Exs. L, M, N, Doc. 93-1 at 56-119.) On the other hand, the tax returns' analyses of the HOWS partners' capital accounts support Plaintiffs' contention that Roger Hughes—and, after his death, the Hughes Bypass Trust—contributed more than 98% of HOWS's capital. For example, the 1999 tax return shows that Hughes contributed $8,146,189 in start-up capital, while Oerum, Wolfe and Strickler each contributed $1,667. (Libicki Decl. Ex. L (1999 Form 1065), Doc. 93-1 at 56-76.) That means that Hughes provided 99.9% of HOWS's initial capitalization. Furthermore, the 2009 summaries of the capital account balances for Hughes, Oerum, Wolff, and Strickler indicate that Hughes' capital account balance at the end of the year was $5,700,276, Oerum's and Wolff's balance was -$5,585 each, and Strickler had a balance of -$5,606. (Libicki Decl. Ex. N. (2009 Tax Documents), Doc. 93-1 at 96-119; see also Libicki Decl. Exs. S, T (Kaplan Rep. & Rebuttal Rep.), Doc. 93-1 at 191-221.)
Although Defendants argue that Oerum, Wolff, and Strickler acquired their respective ownership interests in the other 50% of HOWS's capital by "contributing their financial wherewithal as well as sweat equity to the business[,]" (Mot. at 12), no record evidence before the Court directly supports the existence of such an arrangement. Further, when Strickler—who prepared the tax returns—was asked during his deposition why the returns represented that Roger Hughes' ownership of capital in HOWS was 50%, he stated that the Operating Agreement provides that Hughes is a 50% owner. (Guite Decl. Ex. A (Strickler Dep. Tr.) at 122:11-23, Doc. 83-3.) But the Operating Agreement provides that Hughes owned 100% of the Class A membership interest in HOWS based on his initial capital contribution and 50% of the Class B membership interest based on $5,000 of that initial contribution—the document does not address capital interests or ownership. (Guite Decl. Ex. B (Operating Agreement) at 57, Doc. 83-4.)
In their Reply, Defendants argue that there is no legal authority supporting the position that a party's capital interest in a business can be determined by reference to that party's capital contributions to that business. (Reply at 5-7.) Defendants cite to Teamsters Joint Council No. 83 of Virginia Pension Fund v. Empire Beef Co. ("Empire Beef"), where the district court rejected a pension fund's argument that a partner's ownership share exceeded the 80% threshold based on that partner's capital contributions to the partnership because the partnership agreement made it clear that the partner's ownership share was 50%. 2009 WL 1764554 (E.D. Va. June 18, 2009), aff'd in part, vacated in part, remanded sub nom. Teamsters Joint Council No. 83 of the Virginia Pension Fund v. Weidner Realty Assocs., 377 F. App'x 339 (4th Cir. 2010). But Empire Beef does not set forth a categorical rule that partners' capital accounts should never be used to determine their capital interest in a partnership. Relying on the then-current IRS Publication 541, the Empire Beef court started from the premise that "a capital interest in a partnership . . . is an interest that is distributable to the owner of the interest upon the partnership's liquidation." Id. at *3. Then, the court examined the partnership agreement at issue, which provided that, upon liquidation of the partnership, the partnership's asserts and proceeds from the sale would be distributed in the following order:
(a) To pay or provide for the payment of all liabilities of the Partnership;Id. at *3. The partnership agreement at issue in Empire Beef differentiated between partners' balance in their capital accounts and their percentage interest in the partnership for purposes of distribution upon the partnership's liquidation.
(b) To pay all expenses of liquidation;
(c) To return to the Partners any credit balance in their capital accounts; and
(d) To the Partners in proportion to their percentage interest in the Partnership.
Here, the Operating Agreement does not include an analogous provision differentiating between the HOWS founders' "percentage interest[s]" and their capital accounts balances. Instead, the following provisions in Article X of the Operating Agreement, "Dissolution and Winding Up," indicate that capital account balances would determine each founder's entitlement to HOWS's remaining assets in the event of dissolution or liquidation. Section 10.5, for example, provides:
After determining that all known debts and liabilities of the Company in the process of winding-up, including, without limitation, debts and liabilities to Members, the Managers and Affiliates of the Members and Managers who are creditors of the Company, have been paid or adequately provided for, the remaining assets shall be distributed to the Members in accordance with their positive Capital Account balances, after taking into account income and loss allocations for the Company's taxable year during which liquidation occurs.(Guite Decl. Ex. B (Operating Agreement) at 38 (emphasis added).) And sections 10.6 and 10.7 provide: first, that "All payments to the Members upon the winding and dissolution of Company shall be strictly in accordance with the positive capital account balance limitation"; and, second, that "each Member shall only be entitled to look solely at the assets of the Company for the return of its positive Capital Account balance and shall have no recourse for its Capital Contribution and/or share of Net Profits (upon dissolution or otherwise) against the Managers or any other Member except as provided in Article XI." (Id. at 39.) Unlike the liquidation provision at issue in Empire Beef, these dissolution provisions do not differentiate between members' ownership interest and their capital account balance. But, more importantly, these provisions make each member's capital account balance determinative of his entitlement to HOWS assets upon the company's dissolution or liquidation. Unlike the agreement in Empire Beef, the Operating Agreement here supports using capital account balances to determine ownership interests.
In sum, neither the Operating Agreement nor the tax returns on which Defendants rely establish beyond dispute that Roger Hughes' capital interest in HOWS was 50%. The record is unclear as to why the returns attributed 50% of capital ownership to Hughes when his capital account balance was approximately 100%. Further, the capital accounts analyses in the tax returns are consistent with Strickler's past statements that Roger Hughes owned 100% of HOWS—evidence that supports Plaintiff's position here. Accordingly, the Court finds that Defendants have not established that there is no genuine dispute regarding Roger Hughes' ownership interest in HOWS. Based on the evidence before it, the Court cannot conclude that, as a matter of law, Roger Hughes—and, upon his death, the Hughes Bypass Trust—had a capital interest in HOWS of only 50%.
B. Capital Interest in HOWS Attributable to the Hughes Children
Defendants next contend that, even if one assumes that Roger Hughes owned 80% or more of HOWS at the time of his death and that interest passed to the Hughes Bypass Trust, no ownership interest in HOWS can be attributed to any of the Hughes Children as of March 31, 2014. According to Defendants, the Hughes Children are only contingent remainder beneficiaries and sprinkle income beneficiaries of the Hughes Bypass Trust, which prevents attributing any interest in HOWS owned by the Hughes Bypass Trust to them. (Mot. at 14-15.) Defendants' arguments here rely on California trust law and federal Treasury Regulations. (Mot. at 14-15, citing Guite Decl. Ex. J (Hartog Rep.), Doc. 83-12.) According to Defendants, the Hughes Children's interest in the Hughes Bypass Trust cannot be valued actuarially using the Treasury Regulations because those regulations do not apply to contingent interests that are not vested. (Mot. at 14.) Defendants further argue that the Hughes Children's income interests in the Hughes Bypass Trust are "restricted interests" not subject to valuation according to the Treasury Regulations' actuarial tables. (Id. at 14-15.)
This section of Defendants' Motion cites to a report authored by John Hartog, an attorney specializing in trusts and tax law. Plaintiffs object to Defendants' submission of the Hartog report on similar grounds as they object to Rasmussen's report. (See Plaintiffs' Evidentiary Objections to Defendants' Evidence at 4-8.) The Court considers Hartog's opinions only to the extent they are directly incorporated in Defendants' Motion for Summary Judgment, and treats those opinions, not as expert evidence, but as Defendants' legal arguments.
Plaintiffs offer the following counterarguments. First, Plaintiffs contend that the Hughes Children's remainder interests in the Hughes Bypass Trust vested upon Roger Hughes' death in 2010, when the Hughes Revocable Trust—of which the Hughes Bypass Trust is a sub-trust—became irrevocable. (Opp. at 13-14.) Second, Plaintiffs contend that the fact that the Hughes Children's remainder interests in the Hughes Bypass Trust were subject to divestment under Katharine Hughes' Special Power of Appointment does not mean that they were not vested, as Defendants contend, because potential divestment by a trustee does not render a future interest contingent or prevent its vesting. (Id. at 14, 18-19.) The Court agrees that the Hughes Children's interests were vested and not contingent.
There is no dispute that the Hughes Children had a remainder interest in the Hughes Bypass Trust as of March 31, 2014, or that they were living and ascertained remaindermen at the time of Roger Hughes' death in 2010. And, unless their remainder interests were subject to a condition precedent other than Katharine Hughes declining to divest them, the Hughes Children's interests vested when the Hughes Revocable Trust became irrevocable. "[I]t has long been a settled rule of construction in the courts of England and America that estates, legal or equitable, given by will, should always be regarded as vesting immediately, unless the testator has by very clear words manifested an intention that they should be contingent upon a future event." McArthur v. Scott, 113 U.S. 340, 378, 5 S.Ct. 652, 28 L.Ed. 1015 (1885) (emphasis added). Remainders are, of course, estates, and there is no reason why this long-established rule would not apply here—there are no "very clear words" that indicate a condition precedent making the Hughes Children's remainder interests contingent.
Furthermore, "American authorities are uniformly to the effect that a remainder subject to a power of appointment may be vested[,]" and "a remainder subject to a power in a trustee to exhaust the corpus of the trust before the remainderman is entitled to enjoyment may still be vested." 1 Simes and Smith, The Law of Future Interests § 150 (3d ed.) (collecting cases). Such a remainder interest would be contingent if it were "limited to unascertained persons or on an express condition precedent other than the mere nonexercise of the power." Id. (emphasis added) ("[I]f property be conveyed to trustees, for the benefit of A for life, with power in the trustees to expend all or any part of the corpus for the benefit of A, remainder to B in fee, the remainder interest of B is vested, even though he may never enjoy the beneficial use of the property."). Accordingly, Katharine Hughes' Special Power of Appointment did not render the Hughes Children's remainder interests in the Hughes Bypass Trust contingent and not vested.
Even under California law, on which Defendants rely, "takers in default (i.e., persons specified by a donor of a power of appointment to take property in default of the appointment) hold property interests even though 'their interests are subject to complete divestment' through exercise of a power of appointment." Roth v. Jelley, 45 Cal. App. 5th 655, 669-70, 259 Cal.Rptr.3d 9 (2020), reh'g denied (Mar. 12, 2020), review denied (July 15, 2020) (quoting Ammco Ornamental Iron, Inc. v. Wing, 26 Cal. App. 4th 409, 418, 31 Cal. Rptr.2d 564 (1994)); see also Cal. Prob. Code § 672(a) ("[I]f the powerholder of a discretionary power of appointment fails to appoint the property, releases the entire power, or makes an ineffective appointment, in whole or in part, the appointive property not effectively appointed passes to the person named by the donor as taker in default[.]"). As the California Court of Appeal explained in Ammco Ornamental Iron, Inc. v. Wing:
A remainder interest is vested, subject to complete divestment, when the remainderman is in existence and ascertained and his interest is not subject to a condition precedent, although his right to possession or enjoyment on the expiration of the prior interests is subject to termination by reason, e.g., of a power of appointment. Stated another way, persons in existence, who are specifically designated in a trust instrument to take in default of the exercise of a power of appointment by the holder of the preceding estate, are beneficiaries of that trust and acquire vested remainder interests, although their interests are subject to complete divestment.26 Cal. App. 4th at 418, 31 Cal.Rptr.2d 564 (cleaned up). There, the trust at issue granted Wing a life estate in the trust income and provided that the trust corpus would be distributed to his children per stirpes upon his death unless Wing exercised of a special testamentary power of appointment. Id. The court held that "Wing's children, who were in existence and ascertained when the trust was created, have a remainder interest in the trust property which vested the day the trust was created." Id. (citing Otto v. Union Nat. Bank of Pasadena, 38 Cal. 2d 233, 239, 238 P.2d 961 (1951)). The facts are similar here and there is no reason for the Court to deviate from this logic: just as Wing's children's remainder interests vested even though they were subject to complete divestment under Wing's special testamentary power, so did the Hughes Children's remainder interests vest immediately upon Roger Hughes' death regardless of the possibility of their future divestment under Katharine Hughes' Special Power of Appointment.
Next, Plaintiffs argue that Defendants have not demonstrated that the Hughes Children's interests in the Hughes Bypass Trust were restricted such that they cannot be valued actuarially in accordance with Section 7520 of the Treasury Regulations. (Opp. at 16.) Here, the Court disagrees.
Treasury Regulation § 20.7520-3 provides that the valuation tables used to calculate actuarial interest set forth in regulations promulgated pursuant to Internal Revenue Code § 7520 may not be used to value certain interests. See 26 C.F.R. § 20.7520-3(b). As relevant here, that Treasury Regulation provides that "a standard section 7520 annuity, income, or remainder factor may not be used to value a restricted beneficial interest." Id. § 20.7520-3(b)(ii). "A restricted beneficial interest is an annuity, income, remainder, or reversionary interest that is subject to any contingency, power, or other restriction, whether the restriction is provided for by the terms of the trust, will, or other governing instrument or is caused by other circumstances." Id. (emphasis added). Regarding remainder interests, the Regulation further provides:
A standard section 7520 remainder interest factor for an ordinary remainder or reversionary interest may not be used to determine the present value of a remainder or reversionary interest (whether in trust or otherwise) unless, consistent with the preservation and protection that the law of trusts would provide for a person who is unqualifiedly designated as the remainder beneficiary of a trust for a similar duration, the effect of the administrative and dispositive provisions for the interest or interests that precede the remainder or reversionary interest is to assure that the property will be adequately preserved and protected (e.g., from erosion, invasion, depletion, or damage) until the remainder or reversionary interest takes effect in possession and enjoyment. This degree of preservation and protection is provided only if it was the transferor's intent, as manifested by the provisions of the arrangement and the surrounding circumstances, that the entire disposition provide the remainder or reversionary beneficiary with an undiminished interest in the property transferred at the time of the termination of the prior interest.Id. § 20.7520-3(b)(iii) (emphasis added). The Regulation illustrates the application of this rule in Example 5:
Example 5. Power to consume. The decedent, A, devised a life estate in 3 parcels of real estate to A's surviving spouse with the remainder to a child, or, if the child doesn't survive, to the child's estate. A also conferred upon the spouse
an unrestricted power to consume the property, which includes the right to sell part or all of the property and to use the proceeds for the spouse's support, comfort, happiness, and other purposes. Any portion of the property or its sale proceeds remaining at the death of the surviving spouse is to vest by operation of law in the child at that time. The child predeceased the surviving spouse. In this case, the surviving spouse's power to consume the corpus is unrestricted, and the exercise of the power could entirely exhaust the remainder interest during the life of the spouse. Consequently, the remainder interest that is includible in the child's estate is not considered an ordinary remainder interest for purposes of this paragraph and may not be valued actuarially under this section.Id. § 20.7520-3(b)(v) (emphasis added).
Here, the Hughes Children had vested remainder interests in the Hughes Bypass Trust. That said, as of March 31, 2014 Katharine Hughes' Special Power of Appointment allowed her to leave the assets in the Hughes Bypass Trust to one or more of her and Roger Hughes' descendants to the exclusion of others. (Guite Decl. Ex. K (Third Complete Amendment and Restatement of the Agreement Establishing the Hughes Revocable Trust) § 4.4.2.) Plaintiffs do not dispute that Katharine Hughes had the power to divest the Hughes Children from their remainder interests in the Hughes Bypass Trust—they recognize the "potential future divestment" of the Hughes Children under the Special Power of Appointment. (See Opp. at 14.) There is therefore no dispute that the Hughes Children's remainder interests, although they vested upon Roger Hughes' death, were nevertheless "restricted" insofar as they were "subject to . . . a power . . . provided for by the terms" of the Hughes Bypass Trust. 26 C.F.R. § 20.7520-3(b). Furthermore, Plaintiffs' acknowledgement of this possibility of complete divestment entails a concession that the Hughes Bypass Trust did not, as required for actuarial valuation in accordance with Internal Revenue Code § 7520 to be appropriate, "assure that the [Hughes Bypass Trust] property w[ould] be adequately preserved and protected (e.g., from erosion, invasion, depletion, or damage) until the remainder" interests of the Hughes Children "t[ook] effect in possession and enjoyment." Id. § 20.7520-3(b)(iii).
Additionally, the Trustee of the Hughes Bypass Trust enjoyed unrestricted discretion to distribute all of the income and the principal of the Trust to Katharine Hughes, to the exclusion of the Hughes Children:
During the lifetime of the Surviving Settlor, the Trustee may distribute to or for the benefit of any one or more (or none) of the Surviving Settlor, the children of the Deceased Settlor and the descendants of a deceased child of the Deceased Settlor, as much of the net income and, if insufficient, as much of the principal of the trust as in the reasonable discretion of the Trustee may be required for the health, education, support or maintenance of such beneficiaries. When making such distributions, the Trustee may pay or apply more for some beneficiaries than for others, and may make payments to or for one or more beneficiaries to the exclusion of others . . . . All decisions of the Trustee regarding payments under this subsection, if any, are within the Trustee's sole and absolute discretion and shall be final and incontestable by anyone.(Guite Decl. Ex. M (Power of Modification) at 2 (emphasis added).) Because the Trustee could, if necessary, deplete the corpus of the Hughes Bypass Trust to provide for Katharine Hughes' health, education, support, or maintenance, none of the Hughes Children had a right to their remainder interests in the Trust during her lifetime. This feature of the Hughes Bypass Trust is also contrary to an assurance that the Trust's property would be "adequately preserved and protected" until the Hughes Children took "possession and enjoyment" of their remainder interests.
For these reasons, the Hughes Children's remainder interests in the Hughes Bypass Trust were restricted and therefore not subject to valuation according to Internal Revenue Code § 7520 and the Treasury Regulations promulgated thereunder. That Katharine Hughes did not exercise her Special Power of Appointment as of the date of withdrawal is immaterial here, as her ability to divest her children from their interests and the Trustee's ability to deplete the Hughes Bypass Trust's corpus for her benefit are enough to make actuarial valuation of those interests inappropriate under Treasury Regulation § 20.7520-3(b).
Plaintiffs rely on an inappropriate valuation of the Hughes Children's interest in the Hughes Bypass Trust to attribute to them an 80% capital interest in Hughes as of March 31, 2014, the date of HOWS's withdrawal from the Pension Fund. (See Opp. at 14-16.) They have not argued that the Hughes Children had an 80% or greater capital interest in HOWS on any grounds beside their flawed valuation of the Hughes Children's interest in the Hughes Bypass Trust—which owned HOWS at the time of withdrawal. Thus, Plaintiffs have not shown that they can prove at trial that the Hughes Children had an 80% or greater capital interest in HOWS as of March 31, 2014.
If Plaintiffs cannot prove that the Hughes Children had an 80% or greater capital interest in HOWS at the time of withdrawal, they cannot prove that HOWS and Hughes LP were part of the same control group on account of the Hughes Children's ownership interests in those entities. That means that they cannot prove that Hughes LP is jointly and severally liable for HOWS's withdrawal liability under ERISA—regardless of the Hughes Children's ownership interest in Hughes LP or whether Hughes LP can be considered a "trade or business" under ERISA.
Based on the reasons stated above, the Court GRANTS summary judgment in Defendants' favor.
IV. CONCLUSION
For the foregoing reasons, Defendants' Motion for Summary Judgment is GRANTED.
Defendants are ORDERED to file a proposed judgment within seven days of the issuance of this Order.