On July 29, 2014, in Central States, Southeast and Southwest Areas Pension Fund v. CLP Venture LLC, the US Court of Appeals for the Seventh Circuit held that an individual's right to acquire stock in a corporation gave him a controlling interest in the corporation (Nos. 13-3010, 13-3776, (7th Cir. July 29, 2014)). This controlling interest placed the liable corporation in a controlled group with the other corporations owned by the shareholder, for purposes of withdrawal liability under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA).

An employer, General Warehouse, was part of a parent-subsidiary group known as the General Warehouse Group, and GEOBEO was the parent company. GEOBEO's majority shareholder, George Cibula, was given the right to acquire at least 80% of GEOBEO stock through a Stock Redemption Agreement executed between Cibula and the company's co-owner. Under the Agreement, the co-owner surrendered his shares, and new stock certificates were issued to an escrowee, who was to release them when installment payments under the Stock Redemption Agreement were made.

Although numerous shares were released from escrow following payments by GEOBEO, GEOBEO defaulted on the Agreement, and the untransfered shares, constituting 27% of the total shares, remained in escrow. Cibula then entered into an Assignment Agreement to resolve his liability under the Stock Redemption Agreement. The Assignment Agreement provided that Cibula had the right to direct the voting shares while in escrow or direct a distribution of the shares to himself. The remaining 27% of shares remained in escrow. Under the Assignment, voting control of the escrow was vested in Cibula.

General Warehouse was obligated to contribute to a multiemployer pension plan, the Central States Pension Fund (the Fund), for certain employees. In 2005, General Warehouse ceased to have an obligation to the Fund, which led to a complete withdrawal. As a result, General Warehouse incurred withdrawal liability to the Fund in the amount of $1,262,568. The Fund sued General Warehouse and several businesses in the General Warehouse Group, including GEOBEO, to collect the withdrawal liability. The parties entered into a consent judgment, acknowledging that the named defendants were jointly and severally liable. The Fund then initiated this action to add the defendants to the group of business entities from which it could collect the withdrawal liability.

The district court granted summary judgment in favor of the Fund. The defendants appealed to the Seventh Circuit, challenging the district court's holding that Cibula had a controlling interest in GEOBEO and that the defendants were therefore:

The defendants also challenged the district court's conclusion that they were "trades" or "businesses" under the MPPAA.

The Seventh Circuit affirmed the district court's judgment.

The Seventh Circuit defined the central issue as whether Cibula had a controlling interest in GEOBEO. If Cibula did have a controlling interest in GEOBEO, the defendants were part of a combined group (a type of controlled group under the Internal Revenue Code) under Cibula's common control and are jointly and severally liable for General Warehouse's withdrawal liability (see Practice Note, Multiemployer Pension Plans: Controlled Group Rules Apply).

The Seventh Circuit held that Cibula had a controlling interest in GEOBEO.

Under the Assignment Agreement, Cibula could elect to demand the transfer of the escrowed shares to himself. Even though Cibula never exercised that right, MPPAA regulations provide that if a person has an option to acquire an outstanding interest in an organization, that interest is considered owned by that person. Therefore, Cibula's right to acquire the stock under the Assignment Agreement makes him the owner of the stock under the MPPAA, even though 27% of the stock remained in escrow.

The Seventh Circuit relied on the language of the Assignment Agreement to rebut the defendants' assertion that Cibula did not control the shares in escrow because GEOBEO's co-owner retained the right to reclaim the shares in the event of default. However, the Assignment Agreement explicitly assigned to Cibula the right to demand the shares in escrow.

Furthermore, Cibula had 100% voting control of GEOBEO. Under the Stock Redemption Agreement, while GEOBEO was in default, the escrowee was required to abstain from voting the stock in escrow, which meant that Cibula's stock was the only stock entitled to vote.

For these reasons, Cibula had a controlling interest in GEOBEO before the date that General Warehouse incurred withdrawal liability. Therefore, the defendants were part of a combined group under common control, which made them jointly and severally liable for General Warehouse's withdrawal liability.

The Seventh Circuit also found that the defendants can be characterized as businesses under the MPPAA, because they are not Cibula's passive investments in light of the considerable expense and work associated with them. In 2005, for example, Cibula paid over $250,000 to other companies to manage the businesses.

This case demonstrates that a person can have a controlling interest in an organization for purposes of the controlled group rules even when the organization's stock is held in escrow. Under MPPAA, a shareholder can have a controlling interest in an organization if he has the right to acquire an outstanding interest in an organization.