Central States, Southeast and Southwest Areas Pension Fund v. Johnson

• Decision Date: 13 April 1993
• Docket Number: No. 92-1088,92-1088
• Citation: 991 F.2d 387
• Parties: , 93-2 USTC P 50,407, 16 Employee Benefits Cas. 2025 CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, a pension trust, and Marion M. Winstead, Robert C. Sansone, Robert J. Baker, Howard McDougall, Arthur H. Bunte, Jr., R. Jerry Cook, R.V. Pulliam, Sr., and Harold D. Leu, the present trustees, Plaintiffs-Appellants, v. Lois S. JOHNSON, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 387

991 F.2d 387

61 USLW 2639, 93-2 USTC P 50,407,

16 Employee Benefits Cas. 2025

CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND a pension trust, and Marion M. Winstead, Robert C. Sansone Robert J. Baker, Howard McDougall, Arthur H. Bunte, Jr., R Jerry Cook, R.V. Pulliam, Sr., and Harold D. Leu, the present trustees, Plaintiffs-Appellants, v. Lois S. JOHNSON, Defendant-Appellee.

No. 92-1088.

United States Court of Appeals Seventh Circuit.

Argued Oct. 23, 1992.

Decided April 13, 1993.

Terence G. Craig, Thomas C. Nyhan, James P. Condon (argued), Central States, Southeast & Southwest Area Pension Fund, Law Dept., Rosemont, IL, for plaintiffs-appellants.

Mark A. Jones, Keith C. Hult, Wildman, Harrold, Allen & Dixon, Chicago, IL, Douglas J. Heckler, Michael K. McCrory (argued), Barnes & Thornburg, Indianapolis, IN, for defendant-appellee.

Carol Connor Flowe, Jeffrey B. Cohen, Carol A. Resch, Pension Ben. Guar. Corp., Office of the General Counsel, Washington, DC, amicus curiae.

Before FLAUM and RIPPLE, Circuit Judges, and KAUFMAN, Senior District Judge. ^*

FLAUM, Circuit Judge.

This case requires us to decide under what conditions an individual may be held liable for pension fund withdrawal liability owed by a spouse, pursuant to 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. § 1001 et seq. We decline to create a rule that one spouse's ownership interest in an unincorporated trade or business will automatically be imputed to the other spouse in order to extend personal liability to him or her. Instead, we hold that both spouses will be liable for a business's unmet pension obligations only when they intended to be partners in that enterprise.

Paul E. Johnson was the owner of several incorporated and unincorporated businesses in the state of Indiana. Johnson owned 100% of the capital stock of Johnco, Inc., which in turn owned 100% of the capital stock of RD Motor Express, Inc., a trucking company. He also owned unrelated companies. In August 1985, Johnson leased to RD Motor a building and a semi-tractor of which he was the owner of record. Later that year, RD Motor ceased operations entirely.

RD Motor had been subject to a collective bargaining agreement with a Teamster local union under which it was obligated to contribute to the Central States, Southeast and Southwest Areas Pension Fund ("the Fund"). In late 1985, the Fund determined that RD Motor had effected a "complete withdrawal" from the pension plan, see 29 U.S.C. § 1383 (1988), and notified RD Motor and Johnco that withdrawal liability was owed in the amount of $334,301.13. Neither RD Motor nor Johnco requested arbitration of this claim, as was their right pursuant to ERISA's dispute resolution mechanism. The Fund won a suit against the companies in 1988, see Central States, S.E. & S.W. Areas Pension Fund v. Johnco, Inc., 694 F.Supp. 478 (N.D.Ill.1988), but they were unable to satisfy the judgment. The Fund then brought the present suit against Paul Johnson and his wife Lois.

The theory of the Fund's suit against Paul Johnson was that he was jointly and severally liable for RD Motor's withdrawal liability on account of his ownership of the unincorporated leasing business. Under MPPAA, all trades or businesses under "common control"--meaning those businesses that share significant ownership by the same people--are treated as constituting a single employer for purposes of determining withdrawal liability. See 29 U.S.C. § 1301(b)(1). ¹ Thus, if one company incurs withdrawal liability, any other related company in the same "controlled group" assumes joint and several liability for its obligation. The main purpose of this rule is to prevent a business subject to an unfulfilled pension debt from "fractionalizing its operations" or shifting assets to related companies to avoid meeting its financial obligations to the plan. To define the scope of a controlled group, MPPAA looks to certain regulations issued by the Secretary of the Treasury. ² Under these regulations, two organizations belong to a "brother-sister" group if the same five or fewer people own a controlling interest (at least 80% of the stock) in each organization and exercise effective control over both. See 26 C.F.R. § 1.414(c)-2(c)(1) (1992).

The district court held that the unincorporated leasing business was under common control with RD Motor and, therefore, jointly and severally liable for the latter's withdrawal liability. See Central States, S.E. & S.W. Areas Pension Fund v. Johnson, 778 F.Supp. 425, 428 (N.D.Ill.1991). Because Paul Johnson owned the leasing business, and was not shielded by limited corporate liability, he in turn assumed this obligation. Accordingly, the district court entered summary judgment for the Fund against Paul Johnson. See id. at 430. He did not appeal the judgment.

The Fund also named Lois Johnson, Paul's wife, in the suit. One apparent purpose in suing her was to make a claim against the Johnsons' residence in Selma, Indiana. Because the Johnsons own their home as tenants by the entirety, the property is insulated against all but joint creditors. ³ See Brief of Plaintiffs-Appellants at 6-7, 18. The evidence of Lois Johnson's involvement in her husband's business affairs was inconclusive. She submitted an affidavit stating that she did not participate in the management or control of any of Paul's business concerns, including the leasing business. She admitted that she accompanied Paul to RD Motor's offices on weekends and holidays, but only to knit or do needlepoint, and occasionally to file papers; she stated that she never received compensation for these activities. The district court found that the money used to purchase the building and semi-tractor leased to RD Motor came out of joint bank accounts maintained by Paul and Lois. It also found that the rental income produced by these leasing activities was deposited into joint accounts, and that the Johnsons claimed deductions from their combined gross income on their joint federal tax return, based on losses from the leasing activities.

The Fund argued that Lois Johnson was liable for her husband's pension obligations under another of the treasury regulations to which ERISA looks to define the contours of a controlled group, called the spousal attribution regulation, 26 C.F.R. § 1.414(c)-4(b)(5) (1992). This regulation provides that "an individual shall be considered to own an interest owned, directly or indirectly, by or for his or her spouse." Id. The Fund contends that the spousal attribution rule requires us to impute Paul's ownership of the unincorporated leasing business to Lois, and therefore to find her jointly liable for the withdrawal obligation.

The Fund, however, misapprehends the function of the spousal attribution regulation. As the last sentence of ERISA section 1301(b)(1) explains, the treasury regulations come into play only to identify which businesses should be treated as forming a controlled group. The spousal attribution rule counts both spouses as one person to determine whether multiple businesses share the same owner. For example, if the husband owns 100% of business A and the wife owns 100% of business B, the regulation attributes the wife's ownership interest in B to her husband. Then business A and business B are considered owned by the same person, and hence part of the same controlled group. (The effect is the same if the husband's ownership of business A is attributed to the wife.) The purpose of the regulation is to prevent a couple from shifting marital property between the two spouses in order to defeat controlled group liability. See Western Conference of Teamsters Pension Trust Fund v. Lafrenz, 837 F.2d 892, 894 (9th Cir.1988).

In this case, the spousal attribution regulation prescribes that business interests owned by Lois Johnson should be lumped with those interests owned by Paul Johnson to determine the scope of the controlled group. Since Lois does not own any businesses on her own, the attribution rule has no effect here. The regulation does not state that one spouse's interests should be imputed to the other for the purpose of extending personal liability to him or her. As the district court correctly put it, "[t]he spousal attribution regulation only comes into play to add additional businesses to the control group, not to add additional owners for a business." Johnson, 778 F.Supp. at 429-30. This reading finds support in the PBGC's regulations, which describe their own purpose as "to determine the trades or businesses that shall be treated as a single employer for purposes of title IV of [ERISA]." 29 C.F.R. § 2612.1(a) (1992). Accordingly, the spousal attribution rule does not apply to the Johnsons' situation. ⁴

Thus, we approach the question of whether (and when) one spouse may be held liable for unmet pension obligations accruing to the other spouse without the benefit of enacted law. We must consider as a matter of federal common law whether Lois Johnson should be held personally liable for her husband's unfulfilled debts. See Western Conference of Teamsters Pension Trust Fund v. H.F. Johnson, Inc., 830 F.2d 1009, 1014 (9th Cir.1987) ("Congress 'intended that a body of Federal substantive law will be developed by the courts to deal with issues involving rights and obligations under private welfare and pension plans.' " (quoting 120 Cong.Rec. 29942 (1974) (remarks of Sen. Javits)). In formulating a rule to govern this situation, we must be mindful of the federal policies and goals underlying ERISA and MPPAA.

The Fund argues that even if the spousal attribution regulation does not apply of its own force in the personal liability context, the principles and policies behind it should convince us to impute Paul Johnson's ownership of the leasing business to Lois. The Fund maintains that just as spouses might juggle their...