Opinion
No. 98 C 1484
March 27, 2001
MEMORANDUM OPINION AND ORDER
Plaintiffs, collectively Central States, commenced an action against defendants, Leo Wolk (Walk) and Stanley Kagin (Kagin), to collect withdrawal liability payments pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemplayer Pension Plan Amendments Act of 1980 (MPPAA), 29 U.S.C. § 1001 et. seq. In March 2000, summary judgment was granted in favor of defendant Stanley Kagin following Central States' concession to summary judgment in Kagin's favor. Before this Court is Walk's and plaintiffs' Motions far Summary Judgment under Federal Rule of Civil Procedure 56(c).
Summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions an file, together with affidavits, if any, show that there is no genuine issue as to any material fact." Fed.R.Civ.P. 56(c). All the evidence and the reasonable inferences that may be drawn from the evidence is viewed in the light most favorable to the nonmovant. Miller v. American Family Mutual Ins. Co., 203 F.3d 997, 1003 (7th Cir. 2000). However, the nomnovant must still come forward with evidence establishing the elements of its claim on which it bears the burden of proof at trial. As such, it must establish specific facts that show there is a genuine issue for trial. Miller, 203 F.3d at 1003.
George Wintz (Wintz) owned all of the outstanding shares of the trucking company Wintz Freightways, Inc. (Freightways). (Def.'s 56.1 (a)(3) Statement ¶ 8). Freightways was subject to a collective bargaining agreement executed between itself and various local unions affiliated with the International Brotherhood of Teamsters. Pursuant to the collective bargaining agreement, Freightways was required to make contributions to Central States on behalf of certain of its employees. (Def.'s 56.1(a)(3) Statement ¶ 4).
Wintz owned all of the outstanding shares in Freightways and Wintz Properties, Inc. (Properties). (Def.'s 56.1(a)(3) Statement ¶¶ 10-11). Wolk never owned any Freightways stock and never owned an option to acquire any Freightways shares. (Id., at ¶¶ 12-13). The companies owned by Wintz are trades or businesses under the common control of Wintz within the meaning of Section 4001(b)(1) of ERISA, 29 U.S.C. § 1301 (b)(1). (Plaint.'s 56.1(a)(3) Statement ¶ 8).
Wolk and Kagin, acting jointly or through a partnership, made loans to Freightways, Wintz, or Wintz Companies, Inc. as follows:
Date Lender(s) Borrower Principal Amount
June 14, 1993 Wolf Associates George Wintz $1,800,000 August 15, 1994 Wolk and Kagin Freightways $1,200,000 October 28, 1994 Wolk Kagin Freightways $1,680,000 December 5, 1994 Wolk Kagin George Wintz $1,105,000 December 5, 1994 Wolk Kagin Wintz Companies $1,125,000 January 6, 1995 Wolk Kagin George Wintz $1,060,000
None of these loans were secured by or involved any transfer of stock or other ownership in any entity in which Wintz had an interest. Each of the loans were secured by accounts receivables and/or assets or mortgages on real properly owned by Wintz or one of his companies. (Def.'s 56.1(a)(3) Statement ¶ 27). Wolk also made a small number of "short term loans" to Wintz or a company he owned. Each of the "short term loans" consisted of Wolk writing a check to pay creditors of Wintz or one of his companies and accepting in return a check from Wintz to be cashed once sufficient funds had cleared Wintz's account. None of the "short term loans" involved a security interest or transfer of stock or other ownership interest in any entity in which Wintz had an interest. (Id., at ¶ 28).
In May 1996, Central States initially determined that Freightways' successor, XPress, permanently ceased all covered operations and/or permanently ceased contributing or was no longer obligated to contribute to Central States. (Plaint.'s 56.1(a)(3) Statement ¶ 10). Thereafter, Central States determined that the Wintz controlled group effected a "complete withdrawal" from the Pension Fund within the meaning of Section 4203 of ERISA, 29 U.S.C. § 1383. (Id., at ¶ 11). As a result of this complete withdrawal, the entities constituting the Wintz Controlled Group incurred liability to Central States in the principal amount of $2,958,136.71. (Id., at ¶ 12). Central States filed the present suit, alleging that a specific loan from Wolk to Wintz and subsequent pledge documents brought Wolk within the Wintz controlled group, thereby making Wolk liable for the withdrawal liability of Freightways.
The specific loan relied upon by Central States was made on July 11, 1995. Wolk made the loan in the principal amount of $1,700,000 to Wintz (July loan), which was secured by a Pledge Agreement, pursuant to which, Wintz pledged 100% of Wintz's stock in Properties to Wolk. (Def.'s 56.1 (a)(3) Statement ¶ 29). In conjunction with the July loan, Wintz also executed an Irrevocable Proxy in favor of Wolk in all the Properties' stock, that, in part, granted Wolk the right to "demand the call by any officer of the Company . . . of a meeting of its shareholders, and at any such meeting of shareholders . . . vote for the transaction of any and all business that may come before such meeting. . . ." (Plaint.'s 56.1(a)(3) Statement ¶ 28). Wintz made payments on the July loan in September 1995 and July 1997. (Id., at ¶ 29).
On December 26, 1996, Wintz wrote a letter to Wolk delivering all shares of Properties to Wolk. The letter stated that the stock certificates were given to Wolk "with the express understanding and [Wolk's] agreement to defer the installment payments due under the Promissory Note until February 11, 1997." (Plaint.'s 56.1(a)(3) Statement ¶ 30). On that same day, Wintz executed a Pledge Assignment wherein he "sells, assigns and transfers unto Leo Wolk, in accordance with that certain Pledge Agreement dated July 11, 1995 . . . one thousand (1000) shares of the issued and outstanding capital stock of Wintz Properties, Inc. . . . and does hereby irrevocably constitute and appoint Leo Wolk as his true and lawful attorney to transfer the said stock on the books. . . ." (Id., at ¶ 31). In conjunction with the Pledge Agreement, Wolk agreed to defer installment payments and waive default under the July loan until February 11, 1996. (Id., at ¶ 32). After February 11, 1996, Wintz made no further payments on the July loan until July 1997. (Id., at ¶ 33). Wolk did not take any steps to foreclose on the Properties stock, and Wolk did not propose to Wintz that Wolk retain the stock in full satisfaction of the loan. (Def.'s 56.1(a)(3) Statement ¶¶ 37-38).
Wolk initially argues that his activities of loaning money did not constitute a "trade or business" for controlled group purposes.
All members of a"common control" group of "trades or businesses" are jointly and severally liable for the withdrawal liability incurred by any one member of the controlled group. Central States, Southeast and Southwest Areas Pension Fund v. Koder, 969 F.2d 451, 452 (7th Cir. 1992). Neither ERISA nor the MPPAA define the term "trade or business". Central States, Southeast and Southwest Areas Pension Fund v. Fulkerson, 238 F.3d 891, 895 (7th Cir. 2001) ( Fulkerson). Citing to Commissioner v, Groetzinger, 480 U.S. 23, 35 (1987), the Seventh Circuit holds that for an activity to be a "trade or business," an individual must engage in the activity: (I) for the primary purpose of income or profit and (2) with continuity and regularity. Fulkerson, 238 F.3d at 895.
Plaintiffs brought suit against Wolk, alleging that he conducted an unincorporated trade or business of lending money. The undisputed facts show that, as an alleged unincorporated company, Wolk made one loan to Wintz in July 1995 and an unknown number of short or long term loans to an unknown number of people over an unknown amount of time. Wolk's single loan in July 1995 does not demonstrate regular and continuous activity to constitute a trade or business, and the other loans relied upon by the plaintiffs contain numerous unknown factors that raise questions of genuine issues of material fact whether Wolk's loan activities were sufficiently continuous and regular to constitute a trade or business. See Fulkerson, 238 F.3d at 896 (summary judgment reversed because a reasonable factfinder could find that defendants' leasing activities did not constitute a trade or business). Accordingly, plaintiffs' Motion for Summary Judgment is denied on this basis.
In support of his Motion for Summary Judgment, Wolk argues that assuming his loan activities did constitute a trade or business, summary judgment should be granted in his favor because the Pledge Agreement, Irrevocable Proxy, and Pledge Assignment (collectively, loan documents) did not create an option for him to acquire the Properties' stock. Therefore, Wolk could not be liable for any withdrawal liability because he did not own any entity that could be considered part of Freightways controlled group. Plaintiffs argue that the loan documents created an option for Wolk to acquire the Properties' stock.
Pursuant to the MPPAA, a person is considered to own shares of stock in a corporation if he or she actually owns the stock or has an option to acquire the stock. 26 U.S.C. § 1563 (d)(2)(A), (B); (e)(1). ERISA does not define "option"; therefore, the traditional common law has been examined to develop the federal common law to interpret this statutory term. Board of Trustees of Trucking Employees of North Jersey Welfare Fund v. Centra, 983 F.2d 495, 502 (3rd Cir. 1992) (Centra). An option contract exists when a promise meets the requirements for contract formation and the contract limits the promisor's power to revoke an offer. Centra, 983 F.2d at 502.
The parties do not dispute that the loan documents meet the requirements for contract formation. Defendant argues that the loan documents demonstrate that any rights he had were inconsistent with ownership of the stocks. The Promissory Note and Pledge Agreement set forth Wolk's rights as to the Properties' stocks and explicitly referred to the stocks as a pledge and limited Wolk's rights to the stocks to those of a pledgee. However, the Pledge Assignment stated that Wintz "sells, assigns and transfers unto Leo Wolk, in accordance with [the] Pledge Agreement . . . one thousand (1,000) shares of . . . Wintz properties, Inc. . . ." This language would appear to remove any contract limits on Wintz's power to revoke the offer and would create an option to acquire the stock. At the minimum, the Pledge Assignment creates a genuine issue of material fact whether Wolk had an option to acquire the Properties' stocks.
Wolk also argues that even if the Court assumes his lending activities constituted a trade or business and that he had an option on Properties' shares, summary judgment should be granted in his favor because he was not under "common control" with Freightways.
All businesses that are under "common control" with the withdrawn employer are deemed to be a single employer and are jointly and severally liable for withdrawal liability incurred by any member of the controlled group. 29 U.S.C. § 1301(b)(1); Central States, Southeast and Southwest Areas Pension Fund v. Ditello, 974 F.2d 887, 889 (7th Cir. 1992) ( Ditello). Whether two or more entities are under "common control" is determined by reference to the regulations prescribed by the Secretary of the Treasury under section 414(c) of the Internal Revenue Code. See 29 U.S.C. § 1301 (b)(1); Chicago Truck Drivers, Helpers Warehouse Union Pension Fund v. Steinberg, 32 F.3d 269, 271 (7th Cir. 1994) ( Steinberg). One category of common control defined by the regulation is a "brother-sister" controlled group. 26 C.F.R. § 1.414 (c)-2(c). A brother-sister controlled group exists when the same "five or fewer persons": (1) own a controlling interest, defined as 80% or more, in each of two or more entities; and (2) exercise "effective control" over each entity, defined as ownership of more than 50% of a corporation's stock, "taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each corporation." 26 C.F.R. § 1.414 (c)-2(c); Ditello, 974 F.2d at 890-91.
Here, assuming argumendo, that the Pledge Agreement, Irrevocable Proxy, and Pledge Assignment entered into in conjunction with the July loan created an option in favor of Wolk in 100% of the Properties' stock, two brother-sister groups of trades or businesses under common control would exist: (1) Freightways and Properties and (2) Properties and Wolk, as an unincorporated business. Freightways and Wolk are not under common control because the same five or fewer persons do not own at least 80% of each entity. Wintz's 100% ownership in Freightways cannot be used toward the 80% threshold because Wintz does not have any ownership interest in Wolk. See United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982); CMSH Co. v. Carpenters Trust Fund for Northern Cal., 963 F.2d 238, 241 (9th Cir. 1992) ( CMSH) (`a person's stock ownership is not taken into account for purposes of the 80% control test unless that person owns stock in each corporation of the putative brother-sister group') (citation omitted). Likewise, Wolk's 100% ownership in his unincorporated company cannot be used to meet the threshold with Freightways because he owns none of Freightways. and he is unable to have ownership in Wintz, a person. Furthermore, the 50% effective control test cannot be met because Wolk owns 0% of Freightways and Wintz; therefore, he has no identical ownership shares with Freightways or Wintz.
Plaintiffs do not dispute the existence of two separate controlled groups. Plaintiffs argue that liability attaches to Wolk because his controlled group membership with Properties has an "overlapping" controlled group membership with Freightways. Under Central States' theory, assuming the Pledge Agreement gave Wolk some level of ownership in Properties, plaintiffs would find that Wolk's ownership in Properties somehow gave Wintz, the sole owner of Freightways, some level of ownership in Wolk, or Wolk some ownership in Freightways. Such is not the case or law. ERISA does not include language consistent with imposing liability for "overlapping" control groups, and plaintiffs cite to no controlling authority that allows liability based on "overlapping" controlled group membership.
ERISA provides that "all employees of trades or businesses which are under common control shall be treated as employed by a single employer and all such trades or businesses as a single employer." 29 U.S.C. § 1301(b)(1) (emphasis added). The statute explicitly requires that the trades or businesses be under common control in order for them to be treated as a single employer. "MPPAA states that all companies in common control with the withdrawing employer are jointly and severally liable. Congress extended liability to all entities in common control with the actual withdrawing employer. . . ." Centra, 983 F.2d at 503-04 (emphasis added).
In the present case, Wolk is not under common control with Freightways; therefore, it is not liable for Freightways' withdrawal from the Pension Fund. See Centra, 983 F.2d at 503-04; see also, CMSH, 963 F.2d at 241 (reversing lower court's finding of withdrawal liability for corporation because the corporation was not under common control with the withdrawing company and the corporation could not be treated as the same entity for the purposes of ERISA withdrawal liability); Fulkerson, 238 at 897 (rejecting pension find's argument that "trades or businesses" must be construed broadly to prevent avoidance of withdrawal liability obligations by fractionalizing assets, finding that imposition of liability based on the ordinary meaning of those terms as used in § 1301(b)(1) was consistent with competing purposes intended to effectuate certain ERISA and MPPAA policies).
For the reasons set forth above, Central States' Motion for Summary Judgment is denied, and Wolk's Motion for Summary Judgment is granted.