14‐2487 UFCW Local One Pension Fund v. Enivel Properties, LLC

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ______________

August Term, 2014

(Submitted: April 24, 2015 Decided: July 1, 2015)

Docket No. 14‐2487 ____________

UFCW LOCAL ONE PENSION FUND, AND ITS TRUSTEES: FRANK C. DERISO, JOHN P. BARRETT, ERIC GLATHAR, RAYMOND WARDYNSKI, ROBERT BOEHLERT, AND KRISTINE WYDRO,

Plaintiffs‐Appellants,

–v.–

ENIVEL PROPERTIES, LLC,

Defendant‐Appellee.*

______________

Before: WESLEY, LIVINGSTON, AND CHIN, Circuit Judges.

______________

* The Clerk of the Court is directed to amend the caption of this case as set forth above. Appeal from the United States District Court for the Northern District of New York (Suddaby, J.). Plaintiffs‐Appellants United Food and Commercial Workers Local One Pension Fund and its Trustees brought an action under the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. §§ 1381–1453, against Defendant‐Appellee Enivel Properties, LLC, seeking to recover a withdrawal liability assessment of a business under common control with Enivel. After a bench trial, the district court determined that Enivel was not a “trade or business” and that withdrawal liability did not attach, and entered judgment for Enivel. For the reasons that follow, we AFFIRM the district court’s judgment.

Jeffrey S. Swyers, Barry S. Slevin, Paul E. Knupp, III, Slevin & Hart, P.C., Washington, D.C., for Plaintiffs‐ Appellants.

Glenn E. Pezzulo, William S. Levinson, Culley, Marks, Tanenbaum & Pezzulo, LLP, Rochester, NY, for Defendant‐Appellee. ______________

WESLEY, Circuit Judge:

The issue in this appeal is whether a separate business organization can be

held responsible for the liabilities of another commonly controlled entity under

the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by

the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), 29 U.S.C.

§§ 1381–1453.

Steven Levine was the sole shareholder of Empire Beef Co., Inc.

(“Empire”), a food‐processing company. Empire was party to a collective

2 bargaining agreement that required it to contribute to the United Food and

Commercial Workers Local One Pension Fund (the “Fund”) for retirement and

related benefits for its employees. In November 2007, Empire effected a

“complete withdrawal” from the Fund pursuant to

(a) and

incurred a withdrawal liability assessment to the Fund of $1,235,644.00. The

Fund sued Empire under the MPPAA for the assessment, as well as liquidated

damages, interest, costs, and attorneys’ fees, and secured a judgment against

Empire for $1,790,343.90. Empire has not paid any portion of the judgment.

In addition to Empire, Steven and his wife, Lori, owned an investment

company, Enivel Properties, LLC (“Enivel”).1 Steven held forty percent of

Enivel’s stock; Lori owned the remainder and was solely responsible for Enivel’s

business operations.2 The Fund sued Enivel to recover on its judgment against

Empire, alleging that Enivel is a trade or business under common control with

Empire such that it is jointly and severally liable for Empire’s withdrawal

liability.

1 “Enivel” is Levine spelled backwards.

2 Lori is a licensed real estate broker. In addition to managing Enivel, Lori works for a separate entity, “Enivel Commercial Reality.” J.A. 76.

3 To ensure the viability of multiemployer pension plans against the failure

of a contributing employer, the MPPAA has broad provisions that disregard the

usual legal barriers between affiliated, but legally distinct, businesses. All

“trades or businesses” under “common control” are treated as a single employer

for the purpose of collecting withdrawal liability, and each is jointly and

severally liable for the withdrawal liability of another. See

(b)(1);

Corbett v. MacDonald Moving Servs., Inc.,

(2d Cir. 1997) (citing

(b)(1) and

(c)‐1 to ‐5).

Enivel was formed as a limited liability company, had an Employer

Identification Number and a business checking account, and filed New York

State tax returns. In its 2007 New York State tax return, Enivel reported a net loss

in the amount of $2,275.00. Enivel owned three investment properties. The

district court (Glenn T. Suddaby, Judge) found that Enivel was formed for the

purpose of shielding the Levines from liability in case someone was injured on

one of their properties. In addition, the court found it likely that Lori did not

spend more than a few hours per year attempting to sell these properties or

managing their leasing. There is no evidence in the record that any other

4 individuals spent more than a negligible amount of time acting on behalf of

Enivel.

In May 2007, Enivel purchased a residential condominium unit in

Rochester, New York (the “Rochester Condo”). The unit was originally

purchased for the Levines’ daughter. After the Levines’ daughter moved out of

New York, Enivel held the unit from 2007 to 2010 as an investment, leasing it

periodically to tenants who responded to advertisements Lori posted on

Craigslist. Lori testified that her purpose in leasing the property was to offset its

carrying costs (including condominium association fees, property taxes, and

insurance premiums) and that her hope was to “get rid of it” after it became clear

that her daughter was not going to move in. J.A. 103. Enivel sold the Rochester

Condo at a loss in 2010.

Enivel purchased a 5.2‐acre parcel of unimproved land in Walworth, New

York in 2004 (the “Walworth Property”). Enivel attempted to sell the Walworth

Property by erecting a “For Sale” sign on the property, listing it with various

brokers and websites, and cold‐calling developers. The Walworth Property has

not been leased or sold.

5 The third Enivel property is a 42‐acre parcel of unimproved land in Ogden,

New York (the “Ogden Property”). Enivel listed the Ogden Property for sale on

LoopNet.com, a web‐based commercial real estate marketplace, and leased it to a

farmer to preserve the land against erosion and to offset its tax burden.

Applying the standard articulated in Commissioner v. Groetzinger,

(1987), the district court determined that for an entity to be a “trade or

business,” it must operate “(1) for the primary purpose of income or profit, and

(2) with continuity and regularity.” UFCW Local One Pension Fund v. Enivel

Props., LLC (Enivel), No. 6:11‐CV‐1144 (GTS/ATB),

, at *5

(N.D.N.Y. June 16, 2014). Enivel failed both prongs of the “trade or business”

definition, the district court concluded, first, because “while the secondary

purpose of Enivel was for income or profit, the primary purpose of Enivel was

personal.”

. In the alternative, the court concluded “that any income or

profit activities engaged in by Enivel were not continuous and regular, but were

interrupted and/or sporadic.”

. The Fund appealed.

6 DISCUSSION

We will not disturb findings of fact made by the district court unless they

are clearly erroneous. Fed. R. Civ. P. 52(a); Puma Indus. Consulting, Inc. v. Daal

Assocs., Inc.,

, 985–86 (2d Cir. 1987). “Where there are two

permissible views of the evidence, the factfinder’s choice between them cannot

be clearly erroneous.” Banker v. Nighswander, Martin & Mitchell,

(2d Cir. 1994) (internal quotation marks omitted). “However, the district court’s

application of those facts to draw conclusions of law . . . is subject to de novo

review.” Travellers Int’l, A.G. v. Trans World Airlines, Inc.,

(2d

Cir. 1994).

Under the MPPAA, an employer incurs withdrawal liability when it

withdraws from a multiemployer pension plan. See

(a). “The

purpose of withdrawal liability ‘is to relieve the funding burden on remaining

employers and to eliminate the incentive to pull out of a plan which would result

if liability were imposed only on a mass withdrawal by all employers.” ILGWU

Nat’l Ret. Fund v. Levy Bros. Frocks, Inc.,

(2d Cir. 1988) (quoting

H.R. Rep. No. 96‐869, pt. 1, at 67 (1980), as reprinted in 1980 U.S.C.C.A.N. 2918,

2935). The MPPAA thus “protect[s] the interests of participants and beneficiaries

7 in financially distressed multiemployer plans and . . . encourage[s] the growth

and maintenance of multiemployer plans.” T.I.M.E.–DC, Inc. v. Mgmt.‐Labor

Welfare & Pension Funds, of Local 1730 Int’l Longshoremen’s Ass’n,

(2d Cir. 1985). Withdrawal liability discourages employers from evading their

obligations to pension funds by fractionalizing or balkanizing their operations.

See Bd. of Trs. of the W. Conf. of Teamsters Pension Tr. Fund v. H.F. Johnson, Inc.,

(9th Cir. 1987).

In order to impose withdrawal liability on an organization other than the

one obligated to the pension fund, two conditions must be satisfied: the second

organization must be (1) under common control with the obligated entity; and (2)

a “trade or business.” See

(b)(1). Enivel does not dispute that

Steven Levine controlled both Empire and Enivel. The only question in this

appeal is whether Enivel is a “trade or business.”

The district court correctly noted that section 1301(b)(1) does not define

“trade or business.” In light of the interpretive difficulties that arise with that

phrase in cases such as this, several of our sister circuits, and the district court,

have seen fit to employ the Supreme Court’s reasoning in a tax case, Groetzinger,

, for guidance in determining the types of conduct that constitute

8 engaging in a “trade or business.” See Connors v. Incoal, Inc.,

, 250–51

(D.C. Cir. 1993); Cent. States, Se. & Sw. Pension Fund v. Personnel, Inc. (Personnel),

, 794 (7th Cir. 1992); Enivel,

, at *5.

In Groetzinger, the Court considered the meaning of the phrase “trade or

business” as it appears in section 162(a) of the Internal Revenue Code. 480 U.S.

at 33–35; see

(a) (1988) (providing for income tax deductions for

“ordinary and necessary expenses paid or incurred . . . in carrying on any trade

or business”). Groetzinger explained that, “to be engaged in a trade or

business, . . . the taxpayer’s primary purpose for engaging in the activity must be

for income or profit. A sporadic activity, a hobby, or an amusement diversion

does not qualify.”

. The Court in Groetzinger confined its

construction of the term “trade or business” to the tax statute at issue in that case

and the Court “[did] not purport to construe the phrase where it appears in other

places.”

at 27 n.8. However, Groetzinger is useful to “distinguish trades or

business from investments, which are not trades or business and thus cannot

form a basis for imputing withdrawal liability under § 1301(b)(1).” Cent. States,

Se. & Sw. Areas Pension Fund v. Fulkerson (Fulkerson),

(7th Cir.

2001); see also Personnel, 974 F.2d at 794. Groetzinger’s construction of “trade or

9 business” is the most helpful authoritative pronouncement available, and worthy

of reliance here. See Connors,

. Accordingly, for an activity to be a

“trade or business” under section 1301(b)(1), a person or entity must engage in

the activity: (1) for the primary purpose of income or profit; and (2) with

continuity and regularity. Groetzinger,

.3

The district court found that Enivel’s primary purpose was “personal” and

that profit was only a secondary purpose. Judge Suddaby noted that the

Rochester Condo was originally purchased as a residence for the Levines’

daughter and only after she moved away did Enivel lease the unit to tenants to

offset the investment’s carrying costs. Similarly, the district court found that the

Walworth and Ogden properties were personal investments. There was no

evidence that the Walworth Property was ever leased and Enivel’s decision to

lease the Ogden Property was simply to offset its carrying costs. For all three

properties, the district court further found that the Levines’ activity was not

3 The relevant time period for evaluating whether an entity is a trade or business is the period before the employer withdraws from the pension fund. See, e.g., McDougall v. Pioneer Ranch Ltd. P’ship,

(7th Cir. 2007) (analyzing the business activity of the partnership the year it was established through the year of the employer’s withdrawal); Fulkerson, 238 F.3d at 895–96 (same). Evidence from after the employer withdraws from the pension fund is relevant only insofar as it reveals the character of the entity at the time that it withdrew from the fund.

10 continuous or regular because it was likely that Lori’s time spent managing,

leasing, and trying to sell the properties was negligible.

On appeal, the Fund contends that Enivel’s status as a separate juridical

entity prohibited any conclusion that Enivel’s purpose is “something other than

the generation of income or profit.” Appellant’s Br. 20. In Central States,

Southeast & Southwest Areas Pension Fund v. White (White),

(7th Cir.

2001), the Seventh Circuit determined that renting two over‐the‐garage

apartments on residential property was not a “trade or business” that could be

held to account for the withdrawal liability of a commonly controlled trucking

company that went bankrupt, even though the owners obtained tax benefits,

satisfied their mortgage, and increased the equity in their property through

rental income. See

.

The Fund contends that White is distinguishable because, unlike this case

where the Levines formed a separate legal entity that owned the three properties

(Enivel), the owner of the failed trucking company did not form a limited

liability company to own and manage the rental units. We are unpersuaded.

The Fund would have us hold that because Enivel is organized in a particular

way, its primary purpose is inherently to generate income or profit without

11 regard for the entity’s actual purpose. To the contrary, Groetzinger presents a

holistic, fact‐dependent inquiry that requires courts to examine the actions taken

by the entity in addition to its formal status. While the organizational form of an

entity is highly relevant to this inquiry, it is not always dispositive. Moreover,

separate legal entities, even those not exempted from federal taxation by section

501(c) of the Internal Revenue Code,

(c), can have legitimate

purposes other than the generation of income, such as protecting personal assets

from liability. Here, while Enivel was formally incorporated, the district court

found that Enivel was not organized as a profit‐making enterprise. Its activities

were exceedingly limited and it operated at a loss. The district court’s finding

that Enivel is not a “trade or business” despite its juridical form is not legal error.

Next, the Fund argues that Enivel’s activities could not have had a

personal purpose because “there was no evidence or finding of any other

purpose for Enivel’s activities other than ‘investments.’” Appellant’s Br. 21.

Clearly, most entities that acquire property do so as a way to make money. See

SEC v. W. J. Howey Co.,

(1946) (defining “investment” as “the

placing of capital or laying out of money in a way intended to secure income or

profit from its employment” (internal quotation marks omitted)). But the Fund’s

12 argument has no limiting principle. The Fund would have us hold that every

entity that owns investment property necessarily satisfies the first prong of

Groetzinger. To the contrary, the Seventh Circuit’s decisions engage in searching

explorations of the facts to discover what, exactly, was the entity’s objective

behind its investment choices. See, e.g., White,

; Fulkerson, 238 F.3d

at 896–97. Here, the district court found that the Levines made real estate

investments not to earn a living but for personal reasons or to further private

wealth management objectives: housing for the Levines’ daughter (Rochester

Condo) and long‐term personal investments (Walworth Property and Ogden

Property).

Finally, the Fund contends that the district court’s conclusion that Enivel

had a personal and not‐for‐profit purpose was clearly erroneous in light of

Enivel’s admission that its purpose was to earn a profit. Enivel stipulated that its

objective is to buy properties and later sell them at a higher price, realizing a

profit. And, during the bench trial, Lori testified that Enivel was formed for the

purpose of buying real estate to resell it at a profit. The Fund’s argument is

unpersuasive for two reasons. First, despite a profit motive, the facts show that

Enivel made little or no effort to make money from the parcels it owned. While

13 Enivel’s “intent” may have been clear, its efforts more accurately reflect the

nature of its investments. Second, clear error is not shown by contrary evidence.

The district court weighed and considered these “admissions.” See Enivel,

, at *2 (noting that “Enivel’s purpose was to buy properties at one

price and later sell them at a higher price, in order to realize a profit”). Yet the

district court still concluded that Enivel’s primary purpose was personal. The

presence of competing evidence is insufficient to demonstrate clear error. See

United States v. Yellow Cab Co.,

(1949) (holding no clear error

“where the evidence would support a conclusion either way but where the trial

court has decided to weigh more heavily for the defendants”).

The second prong of Groetzinger asks whether the putative trade or

business operates regularly and continuously. “[P]ossession of a property, be it

stocks, commodities, leases, or something else, without more is the hallmark of

an investment” and not a trade or business activity. Fulkerson,

.

“Thus, mere ownership of a property (as opposed to activities taken with regard

to the property) cannot be considered in determining whether conduct is regular

or continuous.”

at 895–96. The district court found that the Fund had not

proved that Enivel did anything more than de minimis business activities. Judge

14 Suddaby noted that he was “left merely with discrete and vague pieces of

testimony regarding property management” from which he was “unable to draw

the reasonable inferences necessary to render a finding that any income or profit

activities engaged in by Enivel were continuous and regular.” Enivel,

, at *8.

On appeal, the Fund challenges the district court’s factual conclusions on

two grounds. First, the Fund contends that “Enivel’s status and activities as a

formal business entity demonstrate that its activities were not those of a passive

investor.” Appellant’s Br. 26. This is a repackaging of the Fund’s argument on

prong one, and it fails for the same reasons. Second, the Fund argues that “the

undisputed facts establish specific real estate activities performed by Enivel as to

the properties it owned that . . . readily distinguish it from a passive investor.”

at 26–27. The district court considered this argument and the evidence to

which the Fund points and determined that the time Lori expended on these

activities was de minimis. Enivel,

, at *8. Nor is there evidence in

the record that any other individuals spent more than a negligible amount of

15 time doing work for Enivel. The Fund’s competing interpretation of this

evidence does not show clear error.4

CONCLUSION

The MPPAA prevents employers from avoiding their pension obligations

by balkanizing their business operations. Although Enivel and Empire are

commonly controlled, Enviel’s limited leasing and sales activity was personal in

nature—not primarily for profit—and Enivel did not operate continuously and

regularly. The Levines did not fragment their business operations over several

entities. Rather, Enivel’s mission was primarily personal and any profit it

derived was incidental. We conclude that Enivel is not a “trade or business” for

the purposes of the MPPAA. The judgment of the district court is AFFIRMED.

4 “Owning property can be considered a personal investment, at least where the owner spends a negligible amount of time managing the leases, although a more substantial investment of time may be considered regular and continuous enough to rise to the level of a ‘trade or business.’” Cent. States, Se. & Sw. Areas Pension Fund v. SCOFBP, LLC,

, 878–79 (7th Cir. 2011) (citations omitted).

16