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Central States

September 8, 2010


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


Plaintiff Central States, Southeast and Southwest Areas Pension Fund ("Central States" or "the Fund") operates a non-profit multi-employer pension plan. Plaintiff Howard McDougall is a trustee and sponsor of the Fund. (Pl.'s 56.1 Stat.) Defendant SCOFBP, LLC ("SCOFBP") is a now-defunct lumber and milling company, which was bound by collective bargaining agreements that required it to make contributions to the Fund on behalf of its employees. In October 2001, SCOFBP permanently shuttered its operations and ceased making contributions to the Fund. By doing so, SCOFBP incurred withdrawal liability to the Fund. SCOFBP and its parent company, Southern Cross and O'Fallon Building Products Company ("Southern Cross"), report that they currently have no assets and are, therefore, incapable of satisfying their liability. As a result, Central States seeks to recover from two other companies, MCOF/Missouri LLC ("MCOF") and MCRI/Illinois LLC ("MCRI") which, Plaintiffs urge, were under the "common control" of Southern Cross's owner, Michael Cappy, at the time that SCOFBP withdrew from the Fund.

The parties have filed cross-motions for summary judgment.*fn1 Plaintiffs claim that the undisputed evidence demonstrates that all of the corporate Defendants were under Cappy's common control at the time of the withdrawal. Defendants contend that the same evidence proves that they were not. Essentially, the parties dispute the meaning of the term "common control," as that phrase is used in the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1371. As explained below, in the court's view, the evidence demonstrates that Cappy, and subsequently his bankruptcy estate, exercised common control over SCOFBP, Southern Cross, MCOF, and MCRI during the relevant periods. Thus, each company is jointly and severally liable for SCOFBP's withdrawal liability. The court therefore grants Plaintiffs' motion for summary judgment.


Michael Cappy is a graduate of Harvard Business School and a sophisticated businessman who, for almost three decades, has specialized in "operating, refinancing, recapitalizing, acquiring, merging, developing, strategically and organizationally planning, marketing, and selling various businesses." In re Cappy, No. 99-31466, at 3 (Bankr. Ct. W.D. Ky., August 26, 2002) (Ex. E to Pl.'s 56.1 Stat.) Southern Cross was among these businesses. Prior to January 19, 1999, Cappy was the 100 percent owner of Southern Cross, and Southern Cross in turn owned 98 percent of SCOFBP. (Def. 56.1 Resp. at ¶ 22-23.) Cappy personally owned one percent of SCOFBP, and the remaining one percent was held by the MLC Family Trust III, a trust established by Cappy and for which Cappy was both the settlor and a beneficiary. (Trust III Document, Ex. 41 to Cappy Dep. at 1, 67.) Between 1996 and 1999, Cappy established and maintained at least three trusts--MLC Family Trust I, MLC Family Trust II, and MLC Family Trust III--for the benefit of himself and his family. (Trust I Documents, Ex. 37 and 38 to Cappy Dep.; Trust II Document, Ex. 40 to Cappy Dep.; and Trust III Document, Ex. 41 to Cappy Dep.) For each of these trusts, Cappy was both the settlor and a beneficiary.*fn2 (Id.; In re Cappy, Ex. E to Pl.'s 56.1 Stat., at 14.) He was also named "protector" of each trust, a designation that endowed Cappy with the power to "veto" any action by the trustee and to remove or replace the trustee at any time in Cappy's unfettered discretion. (In re Cappy, Ex. E to Pl.'s 56.1 Stat., at 7-8; Trust I Document, Ex. 37 to Cappy Dep., § 8-9; Trust II Document, Ex. 40 to Cappy Dep., § 8-9; Trust III Document, Ex. 41 to Cappy Dep. at 26-28; 54-55, 69.) The trustees were also granted discretion, subject only to Cappy's veto, to apply all of the trusts' assets for Cappy's benefit. (Id.) Thus, by the plain terms of the trusts themselves, Cappy maintained essentially complete control over the activities of the trustees and the assets in the trusts.*fn3

Among the trust assets purportedly under Cappy's "protect[ion]" were controlling interests in Defendants MCOF and MCRI, two companies that own and lease real estate. MCOF owned the lumber yard in O'Fallon, Missouri that was used and leased by SCOFBP. (Def. 56.1 Resp. at 32.)

MCRI held and continues to hold parcels of land in Rock Island, Illinois, which it leases to a third-party company. (Id.) As of January 1999, the MLC Family Trusts were, on paper, the owners of a 99 percent stake in MCOF, with Cappy owning the remaining one percent in his personal capacity. (Def. 56.1 Resp. ¶ 29-30.)*fn4 Similarly, the MLC Family Trusts held a 99 percent ownership interest in MCRI, again with Cappy holding the remaining one percent. (Id. at ¶ 50-51.)*fn5

On January 20, 1999, Cappy filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Western District of Kentucky. (Pl.'s 56.1 Resp. at ¶ 7.) The bankruptcy was converted into a Chapter 7 bankruptcy on May 18, 2001, and a man named Michael Wheatley was appointed Trustee of Cappy's bankruptcy estate. (Id. at ¶ 8.) Defendants contend that 100 percent of Cappy's shares of Southern Cross--the entire stock of the company--passed into the bankruptcy estate. (Def. Ans. to Interog. at ¶ 3, Ex. E to Pl.'s 56.1 Stat.) Cappy testified that, as a result of this transfer, Wheatley assumed functional control over Southern Cross.*fn6 (Cappy Dep. at 119-21.) Before he filed for bankruptcy, however, Cappy had "conveyed a substantial portion" of his assets and interests in his other companies--including MCOF and MCRI--to the MLC Family Trusts. In re Cappy, Case No. 03 C 6H, at 4 (W.D. Ky. Feb. 5, 2004) (Ex. F. to Pl.'s 56.1 Stat).

On October 20, 2001, SCOFBP shut down its operations and ceased making contributions to the the Central States pension fund, thereby effecting a complete withdrawal from the Fund. (Def.'s 56.1 Resp. at ¶ 74.) In January 2002, as required by statute, Central States sent SCOFBP a demand notice for payment of the company's withdrawal liability. (Id. at ¶ 77.) The Fund sent follow-up demands to SCOFBP and Cappy in March and April 2002, but SCOFBP neither made the demanded payments nor initiated arbitration under ERISA to challenge its withdrawal liability.

In August 2002, after reviewing the trust documents for the MLC Family Trusts and the circumstances surrounding Cappy's asset transfers, the Bankruptcy Court for the Western District of Kentucky determined that Cappy's transfers to the trusts were fraudulent. (In re Cappy, Ex. E to Pl.'s 56.1 Stat., at 23-24.) "The trusts," the bankruptcy court explained, "failed to divide legal and beneficial interest to any of the assets residing within them to the extent Cappy has a beneficial interest in those assets." (Id. at 23.) Accordingly, the bankruptcy court declared the transfers "null and void" and ordered that the trust assets be returned to Cappy's bankruptcy estate. (Id. at 24.) The assets explicitly referred to in the bankruptcy court's order include 100 percent of the membership interest in SCOFBP, MCOF, and MCRI, and 100 percent of the corporation stock in the parent corporations who held those interests. (In re Cappy, Ex. E to Pl.'s 56.1 Stat., at 24.) The U.S. District Court for the Western District of Kentucky subsequently affirmed the bankruptcy court's ruling with respect to the trust assets, though on somewhat narrower grounds. The district court agreed with the bankruptcy court that Cappy was not entitled to spendthrift protection from his creditors under the trusts and that the asset transfers to the MLC Family Trusts were indeed fraudulent.*fn7 As such, the court concluded, the trust assets were "properly part of Cappy's estate."

(Id. at 26.) As a result of the ruling, therefore, 100 percent of SCOFBP, MCOF, and MCRI were attributed to the Cappy's bankruptcy estate. Plaintiffs now sue to recover SCOFBP's outstanding withdrawal liability under the theory that all of the defendant companies were under common control of either Cappy or his bankruptcy estate at the time of SCOFPB's withdrawal from the Fund.


Under ERISA, 29 U.S.C. §§ 1001-1371, as amended by the Multiemployer Pension Plan Amendments Act ("MPPAA"), 29 U.S.C. §§ 1381-1461, an employer who ceases to contribute to a multi-employer pension fund is liable for withdrawal liability. See Central States, Southeast & Southwest Areas Pension Fund v. Ditello, 974 F.2d 887, 888 (7th Cir.1992). This liability is the employer's proportionate share of the "unfunded vested benefits" owed to its employees. Id.; 29 U.S.C. § 1381. Here, there is no dispute that SCOFBP completely withdrew from the Fund on October 20, 2001 and, as a result, incurred withdrawal liability under these provisions. (Def. 56.1 Resp. At 74-75.) The sole issue for the court to decide is whether Cappy's other companies may be held liable for SCOFBP's withdrawal, as well. To answer this question, the court must apply Section 1301(b)(1) of the MPPAA, which provides that "all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses as a single employer." 29 U.S.C. § 1301(b)(1). Congress enacted Section 1301(b)(1) to "prevent withdrawn employers from avoiding liability by fractionalizing their business operations." Central States, Southeast and Southwest Pension Fund v. Personnel, Inc., 974 F.2d 789, 793 (7th Cir. 1992). Thus, each business under common control is jointly and severally liable for the withdrawal liability of the others. See Ditello, 974 F.2d at 889.

To impose withdrawal liability on an organization other than the one originally obligated to the pension fund, two conditions must be satisfied: (1) the organization must be under "common control" with the obligated organization and (2) the organization must be a "trade or business." Central States, Southeast ...

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