Individual Owners Held Personally Responsible for Withdrawal Liability Based on Rent-Free Leasing Activity

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The Seventh Circuit recently issued an important decision imposing personal liability on individuals for certain debts of their company pursuant to ERISA’s controlled group rules.  In Local 705 Int’l Broth. of Teamsters Pension Fund v. Pitello, the court concluded that individual owners of a company can be held jointly and severally liable for their company’s withdrawal liability simply by leasing property to their company, even if the company never paid them rent.  __ F.4th __, 2021 WL 2818326 (7th Cir. 2021).  Consistent with its prior cases on the subject, the court concluded that, under these circumstances, the individual owners constituted “trades or businesses” for purposes of ERISA’s controlled group rules. 

The individual owners sought to avoid liability on the basis that their leasing activity to the company was merely a passive investment, as opposed to a trade or business.  In support of their theory, they argued that they purchased the property for investment purposes 18 years before their company’s withdrawal from the fund; did not receive tax benefits, exemptions or deductions as a result of the company’s use of the property; never received or used any rent payments; did not perform leasing activities after the company left; and never employed anyone to manage the property. 

The Seventh Circuit, however, held that these facts were insufficient to rebut the presumption that leasing property to a withdrawing company is categorically a trade or business.  As the court explained, although the individual owners did not receive rental income, they reaped other economic benefits by virtue of this rent-free arrangement, including a higher return on investment in their company in the form of dividends or salaries that would have been lost if the company had been required to pay its rent.  The court also noted that the individual owners and their businesses benefited economically from having exclusive access to the office and storage space at issue.  Accordingly, the court held that the individual owners must pay the $312,252.04 in withdrawal liability and related statutory damages owed to the pension fund by their companies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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