Triple Net Leases Could Make Business Owners Personally Liable in Withdrawal Liability Cases

Company owners who lease property to their companies could find themselves personally liable for withdrawal liability. On April 22, 2013, the Seventh Circuit Court of Appeals held in Central States v. Nagy, 714 F. 3d 545 (7th Cir. 2013), that Charles Nagy was personally liable for $3.6 million in withdrawal liability to the Teamsters Central States Pension Fund.

Nagy owned real estate which he leased to Nagy Ready Mix for its business operations. He was the sole owner of both the property and Ready Mix. When Nagy Ready Mix went out of business, the Central States, Southeast, Southwest Areas Pension Fund assessed withdrawal liability of $3.2 million against Ready Mix.  When Ready Mix was unable to pay the withdrawal liability, Central States sought payment from Nagy personally.

The Court found that leasing of property to a withdrawing company under the common control of the property owner constitutes a "trade or business" within the meaning of the law.  Because Nagy owned at least 80% interest in the property and Ready Mix, he was a common owner.  Under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA), Nagy was liable for Ready Mix's withdrawing liability.

The court commented on the rule established in Commissioner of Internal Revenue v. Groetzinger, which holds that a business established primarily for income or profit is an investment, not a trade or business. The court held that Groetzinger does not apply because in withdrawal liability cases the likelihood is that the true purpose of the "lease" is to split up the withdrawing employer's assets to avoid liability.

This case is a departure from prior case precedent which required not only common control, but also that the alleged trade or business be an active business, not simply a passive investment. Lots of business owners use the lease back of real estate, equipment and employees to take advantage of personal tax breaks under the code. These practices may expose the employer to withdrawal liability.

If you have any questions about this advisory, please contact L Steven Platt, 312-985-5943, splatt@clarkhill.com , Edward C. Hammond, 248-988-1821, ehammond@clarkhill.com or Thomas P. Brady, 313-965-8291, tbrady@clarkhill.com or any member of Clark Hill's labor and employment practice group.