United States: 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. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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