7. Circ. Coping with leasing actual property and rescission legal responsibility

The final suspension of the employer’s contributions to a collective pension scheme can trigger an obligation to leave. This liability can reach affiliated trades or companies with sufficient common ownership to be under “common control” with the employer. The affiliated companies are jointly and severally liable for the unpaid exit liability incurred by the withdrawing affiliated company.

Courts often have difficulties with the complex and fact-intensive distinction between a trade (liable for the exit liability of the control group members) and a passive investment (not liable). For the Seventh Circle, however, the result is clear where communal property is rented to or used by the departing employer. In Local 705 Int’l Bhd. of Teamsters Pension Fund v. Pitello (7th Cir. 2021) confirmed the rebuttable presumption that the rental of real estate to an outgoing employer is a trade or business.

The Pitello brothers owned a unionized company, another operating company, and land on which both companies operated. Neither company had a written lease and was not paying rent. Shortly after the unionized company closed all of its covered operations in 2018, the brothers leased the property to a third party (through their non-union company). The local Pension Fund 705 assessed exit liability against the brothers and their companies, but the Pitellos ignored the request. The Fund sued the disbanded union company, the non-union company and the Pitello brothers individually as businesses or companies under common control with the union company.

The Pitellos unsuccessfully argued that the property was a passive investment and not a “trade or business” and therefore would not be liable for the debts of the disbanded union company.

The appeals court first found that there was no legal definition of “trade or business”. Subsequently, the Internal Revenue Service, Commissioner v. Groetzinger, (1987) used the test developed for tax purposes that focuses on “two questions: (1) whether the activity is for the primary income or profit purpose; and (2) whether the activity is carried out with continuity and regularity. “

According to the court, the Groetzinger test is simplified when it comes to the rental of real estate, since “the rental of real estate to a resigning employer is categorically a ‘trade or business'”. Context because “if the property is rented to or used by the departing employer and there is joint ownership, it is unlikely that the rental activity can be considered a truly passive investment”. Central States, Southeast and Southwest Territories Pension Fund versus Messina Prod., LLC, (7th Cir. 2013). The Pitello Court stated there was a rebuttable presumption that the rental of property to a resigning employer was a trade or business. She was able to fend off the attempts of the brothers to rebut the presumption and to confirm the judgment of the district court in favor of the Local 705 pension fund.

According to Pitello, if the property in question is both jointly owned and used by the exiting employer, it is difficult to argue that leasing property to an affiliated employer is not a trade or business. The other potential avenue would have been to structure the property ownership so that the real estate company would not be a member of the control group. Depending on the facts, this structure may result in a “circumvention or avoidance claim” under ERISA Section 4212 (c).

Real estate is often the most valuable asset of the withdrawing employer. Understanding your potential revocable liability and making informed decisions before evaluating your revocable liability is of the utmost importance in limiting your liability risk.

© 2021National Law Review, Volume XI, Number 220