Central States v. Creative Dev. Co.

• Citation: 232 F.3d 406
• Decision Date: 01 November 2000
• Docket Number: No. 96-30570,96-30570
• Parties: (5th Cir. 2000) CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, a pension trust; and MARION M. WINSTEAD; R. JERRY COOK; HOWARD MCDOUGALL; ROBERT J. BAKER; R.V. PULLIAM, SR.; ARTHUR H. BUNTE, JR.; HAROLD D. LEU, present trustee, and RAYMOND CASH, present trustee, Plaintiffs/Appellants/Cross-Appellees, v. CREATIVE DEVELOPMENT COMPANY, a Louisiana Partnership, TERRY SMITH, partner; SANDRA THERIOT SMITH, partner; JACK ROME, JR., partner; SUZANNE MCCRAINE ROME, Defendants/Appellees/Cross-Appellants
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 406

232 F.3d 406 (5th Cir. 2000)

CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, a pension trust; and MARION M. WINSTEAD; R. JERRY COOK; HOWARD MCDOUGALL; ROBERT J. BAKER; R.V. PULLIAM, SR.; ARTHUR H. BUNTE, JR.; HAROLD D. LEU, present trustee, and RAYMOND CASH, present trustee, Plaintiffs/Appellants/Cross-Appellees, v. CREATIVE DEVELOPMENT COMPANY, a Louisiana Partnership, TERRY SMITH, partner; SANDRA THERIOT SMITH, partner; JACK ROME, JR., partner; SUZANNE MCCRAINE ROME, Defendants/Appellees/Cross-Appellants.

No. 96-30570

IN THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

November 1, 2000

[Copyrighted Material Omitted]

Appeals from the United States District Court for the Middle District of Louisiana

Before HIGGINBOTHAM, WIENER, and DENNIS, Circuit Judges.

WIENER, Circuit Judge.

Plaintiffs/Appellants/Cross-Appellees Central States, South-east and Southwest Areas Pension Fund, a multiemployer pension fund, and its trustees (collectively "Central States"), appeal from the district court's judgment that dismissed Central States's pension plan withdrawal liability claims against Defendants/Appellees/Cross-Appellants Creative Development Company ("Creative Development"), a Louisiana partnership, and its partners,, Terry Smith, Sandra Theriot Smith, Jack Rome, Jr., and Suzanne McCraine Rome.¹ Disagreeing with the district court as a matter of law, we conclude that a written agreement ("the 1986 Agreementv) unambiguously provided for and effectuated the transfer of a capital interest in Creative Development to Sheldon Beychok, the majority owner of a different business organization which had ceased making pension fund contributions to Central States. We therefore reverse the district court's judgment for Creative and remand for the limited purpose of affording that court the initial opportunity to determine whether, by virtue of such acquisition of a capital interest in Creative Development, Beychok (either alone or in combination with appellee Jack Rome, Jr.) owned both a "controlling interest" and "effective control" of each business, within the intendment of the Employment Retirement Income Security Act ("ERISA")² as amended by the Multiemployer Pension Plan Amendment Act ("MPPAA"),³ thereby placing Creative Development and Beychok's other business organization under "common control"⁴ and subjecting Creative to responsibility for the other business's "withdrawal liability" to Central States.

I. BACKGROUND

A. Statutory Framework

Central States is a multiemployer pension plan within the meaning of §§ 3(37) and 4001(a)(3) of ERISA.⁵ Central States brought this suit to recover "withdrawal liability" from Creative Development and its individual partners under MPPAA. The term "withdrawal liability" refers to the share of unfunded vested benefits, i.e., the difference between the present value of a pension plan's assets and the present value of the benefits it will be obligated to pay in the future, that an employer owes to a multiemployer pension plan governed by ERISA when the employer "withdraws" from the plan.⁶ An employer is deemed to have withdrawn from a multiemployer pension plan when the employer "(1) permanently ceases to have an obligation to contribute under the plan, or (2) permanently ceases all covered operations under the plan."⁷ ERISA imposes withdrawal liability on an employer in these situations to ensure that "the financial burden of his employees' vested pension benefits will not be shifted to the other employers in the plan and, ultimately, to the Pensin Benefit Guaranty Corporation, which insures such benefits."⁸

When an employer officially withdraws from a multiemployer pension plan, the plan sponsor must then (1) determine the amount of the employer's liability, if any, (2) notify the employer of this amount, and (3) collect the sum from the employer.⁹ If the withdrawing employer is unable to pay its assessed withdrawal liability in full, the plan may recover the deficiency from other entities that are "trades or businesses" under "common control" with the withdrawing employer.¹⁰ Consequently, all such trades or businesses, including the withdrawing employer, that are determined to be under "common control" within the meaning of MPPAA and its regulations, are deemed to belong to a "controlled group" of trades or businesses and are treated as a "single employer." As such, all are jointly and severally (solidarily) liable for the withdrawal liability incurred by any member of the controlled group.¹¹ This form of liability is commonly referred to as "control group" liability.¹²

The determination whether particular entities are in fact controlled group members requires resort to several Treasury Department regulations, among which is one that specifies that a trade or business belongs to a "brother-sister" controlled group if:

(i) the same five or fewer persons who are individuals, estates, or trusts own...a controlling interest in each organization, and (ii) taking into account the ownership of each such person only to the extent such ownership is identical with respect to each such organization, such persons are in effective control of each organization.¹³

In the case of a trade or business that is a partnership, a "controlling interest" means "ownership of at least 80 percent of the profits interest or capital interest of such partnership,¹⁴ and "effective control" exists when five or fewer persons "own an aggregate of more than 50 percent of the profits interest or capital interest of such partnership.¹⁵

In this case, a Baton Rouge, Louisiana bakery business known as Wolf Baking Co. Inc. ("Wolf Baking") had been a signatory to a collective bargaining agreement ("CBA") pursuant to which Wolf Baking was required to make contributions to Central States. In December 1986, Wolf Baking filed for bankruptcy and discontinued its operations, thereby permanently terminating its obligation to make contributions to Central States. As a result, Wolf Baking was deemed to have withdrawn from Central States. Accordingly, Central States calculated Wolf Baking's withdrawal liability and determined it to be $1,352,710.73. Because of its bankruptcy, however, Wolf Baking was able to pay only $289,858 of this obligation to Central States, leaving a deficit in excess of $1 million. Central States now seeks to recoup the Wolf Baking shortfall through a withdrawal liability assessment and recovery against the partnership and the individual partners comprising Creative, asserting that the partnership was, at all pertinent times, a member of a brothersister controlled group with Wolf Baking. This, Central States posits, resulted from the three-cornered transaction among (1) Wolf Baking and its affiliates, (2) Beychok, individually, and (3) Creative Development, as formalized in the 1986 Agreement.

B. The Brother-Sister Entities: Creative Development and the Bakeries

Creative Development was formed as a Louisiana partnership in 1981 by the above-named individual appellees to develop a residential subdivision near Baton Rouge. The initial capital of the partnership was $5,000, consisting of equal contributions from the founding partners.

In the same year, 1981, W.B.C. Inc. ("WBC") was formed by Sheldon Beychok, now deceased, appellee Jack Rome, and Harold Salmon, Jr., to acquire the stock of two bakeries that had recently emerged from bankruptcy. One of those bakeries was Wolf Baking; the other was Wm. Wolf Bakery, Inc. ("Wm. Wolf Bakery"). At all times relevant to this case, those two bakeries were wholly owned subsidiaries of the holding company, WBC.¹⁶ Furthermore, at all relevant times, Sheldon Beychok and appellee Jack Rome collectively owned 85 percent of the issued and outstanding capital stock of the holding company, WBC, with Beychok owning 61.45 percent and Rome owning 23.55 percent.¹⁷ Thus, Beychok and Rome, through their controlling interest in the parent corporation, WBC, owned or controlled more than 80 percent of the capital stock of its Wolf Baking and Wm. Wolf Bakery subsidiaries ---- actually, 100 percent control by virtue of their combined 85 percent control of WBC, which owns 100 percent of the stock of each subsidiary.

During the mid-1980s, the wholly owned subsidiary bakeries of WBC were chronically in need of cash, so Beychok made loans to each from time to time. By June 1, 1986, the outstanding balance of these loans aggregated $324,000.

C. Creative Development's Initial Involvement with the Bakeries: The Sale and Leaseback of the Bakery Depots

For a better understanding of the 1986 transaction, which is at the vortex of the dispute in this case, we briefly review how Creative Development first became directly involved with the bakeries and Beychok. In the early 1980s, after completion of the real estate venture for which it was originally formed, Creative Development decided to invest in two "bakery depots"¹⁸ owned by Wm. Wolf Bakery. In March 1982, Creative Development purchased the two bakery depots for a price of $250,000, then immediately leased both depots to Wolf Baking "and/or its affiliates." Beychok ---- who, with Harold Salmon, had previously purchased two other bakery depots from Wm. Wolf Bakery ---- confirmed that the purpose of this March 1982 sale to Creative Development was to obtain cash for injection into Wolf Baking and its affiliates so that the bakeries could continue to operate.

The financing for Creative Development's 1982 purchase of the bakery depots came from two sources: (1) cash, obtained from a $200,000 loan from River City Federal Savings & Loan ("River City"), evidenced by Creative Development's promissory note, which was secured by a first mortgage on the depot properties, and (2) credit, evidenced by an unsecured $50,000 purchase money promissory note given by Creative Development to the vendor, Wm. Wolf Bakery.

As an additional, inducement for Creative Development to purchase the two depots, Beychok agreed to become a...