Last month, the Sixth Circuit reversed a wife’s liability and affirmed a husband’s liability for over $1M in withdrawal liability from a multi-employer union pension plan of a single member corporation formerly owned and managed by the husband several years earlier. Local 499 v. Art Iron, Inc., No. 22-3925/3926 (6th Cir. 9/26/24). While the evidence showed that the husband was the sole owner of the defunct corporation and his consulting business, there was no evidence that the wife’s hobby business of making jewelry was regular and continuous as required.
According to the Court’s opinion, the husband owned a
corporation which wound up its business in 2017, stopped paying taxes, sold its
assets and distributed some of its proceeds to the husband as the sole
shareholder and director. Prior to that
time, he had taken profit distributions from the corporation and also charged
it consulting fees from his consulting business (a single member LLC), which
continued to operate for several years after the corporation was dissolved and
paid him with 1099-MISC forms instead of W-2s.
He and his wife (who owned her own single-member jewelry- making hobby-business
LLC) shared a minor son. The pension
plan then sued both husband and wife for withdrawal liability and the district court
agreed that they were jointly and severally liable since their single-member
LLCs were under common control with the defunct corporation. Notably,
the wife had never responded to the pension plan’s motion or sought judgment in
her favor.
The spouses disputed that their respective LLCs were “trades
or businesses” for purposes of withdrawal liability. The Sixth Circuit noted that:
Section 1301(b)(1) provides that,
for ERISA purposes, all employees of trades or businesses that are under common
control with an employer signatory to the pension plan shall be treated as
employed by a single employer and all such trades or businesses are
treated as a single employer. 29 U.S.C. § 1301(b)(1). Under the statute, this
means that a trade or business under common control with Art Iron is treated as
a single employer with Art Iron. The “primary purpose of the common control
provision is to ensure that employers will not circumvent their ERISA and MPPAA
obligations by operating through separate entities.”
The Court had no difficulty finding the husband’s consulting
business to be a “trade or business”:
As the primary shareholder of [the
corporation], [the husband] controlled how his income was allocated to him. He
chose to receive income from [the corporation] in three different ways, as (1)
employee wages, (2) shareholder distributions, and (3) independent-contractor
fees for his consulting services. There is nothing in the record that suggests [he]
received these payments for any purpose other than as income or profit.
The second factor, whether an
activity is regular and continuous, is also met. According to the record, [he]
provided consulting services to [the corporation] for several consecutive years
including the year that [it] withdrew from the Plan. This regularity and
continuity make [his] consulting business a “trade or business” under Groetzinger.
The Court rejected his argument that his consulting fees
were wages because his “argument fails to account for the fact that tax returns
are considered sworn statements, and well-established precedent dictates that
contradicting sworn statements does not create a genuine issue of fact.”
The Court reversed the judgment against the wife because her
hobby jewelry business did not qualify when she did not earn income from it
every year, including 2017. “Her minimal level of engagement in her jewelry
enterprise in 2017 falls well below what other cases have required for
establishing whether continuity and regularity in a trade or business existed.”
It also refused to hold against her her
failure to oppose the pension plan’s summary judgment motion because a court
may not grant judgment merely because the adverse party failed to respond.
NOTICE: This summary is designed merely to inform and alert
you of recent legal developments. It does not constitute legal advice and does
not apply to any particular situation because different facts could lead to
different results. Information here can change or be amended without notice.
Readers should not act upon this information without legal advice. If you have
any questions about anything you have read, you should consult with or retain
an employment attorney.
