IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-30570
CENTRAL STATES, SOUTHEAST
AND SOUTHWEST AREAS PENSION
FUND, a pension trust; and
MARION M. WINSTEAD; R. JERRY
COOK; HOWARD MCDOUGALL; ROBERT
J. BAKER; R.V. PULLIAM, SR.;
ARTHUR H. BUNTE, JR.; HAROLD D.
LEU, present trustee, and
RAYMOND CASH, present trustee,
Plaintiffs/Appellants/Cross-
Appellees,
versus
CREATIVE DEVELOPMENT COMPANY,
a Louisiana Partnership, TERRY
SMITH, partner; SANDRA THERIOT
SMITH, partner; JACK ROME, JR.,
partner; SUZANNE MCCRAINE ROME,
Defendants/Appellees/Cross-
Appellants.
Appeals from the United States District Court
for the Middle District of Louisiana
November 1, 2000
Before HIGGINBOTHAM, WIENER, and DENNIS, Circuit Judges.
WIENER, Circuit Judge.
Plaintiffs/Appellants/Cross-Appellees Central States, South-
east and Southwest Areas Pension Fund, a multiemployer pension
fund, and its trustees (collectively “Central States”), appeal from
the district court’s judgment that dismissed Central States’s
pension plan withdrawal liability claims against
Defendants/Appellees/Cross-Appellants Creative Development Company
("Creative Development”), a Louisiana partnership, and its
partners,, Terry Smith, Sandra Theriot Smith, Jack Rome, Jr., and
Suzanne McCraine Rome.1 Disagreeing with the district court as a
matter of law, we conclude that a written agreement ("the 1986
Agreementv) unambiguously provided for and effectuated the transfer
of a capital interest in Creative Development to Sheldon Beychok,
the majority owner of a different business organization which had
ceased making pension fund contributions to Central States. We
therefore reverse the district court's judgment for Creative and
remand for the limited purpose of affording that court the initial
opportunity to determine whether, by virtue of such acquisition of
a capital interest in Creative Development, Beychok (either alone
or in combination with appellee Jack Rome, Jr.) owned both a
"controlling interest" and "effective control" of each business,
within the intendment of the Employment Retirement Income Security
Act (“ERISA”)2 as amended by the Multiemployer Pension Plan
Amendment Act (“MPPAA”),3 thereby placing Creative Development and
1
Hereafter, Creative Development and its partners are sometimes
referred to collectively as "Creative."
2
29 U.S.C. § 1001 et seq.
3
29 U.S.C. §§ 1381 - 1453.
2
Beychok’s other business organization under “common control”4 and
subjecting Creative to responsibility for the other business’s
“withdrawal liability” to Central States.
I.
BACKGROUND
A. Statutory Framework
Central States is a multiemployer pension plan within the
meaning of §§ 3(37) and 4001(a)(3) of ERISA.5 Central States
brought this suit to recover “withdrawal liability" from Creative
Development and its individual partners under MPPAA. The term
"withdrawal liability" refers to the share of unfunded vested
benefits, i.e., the difference between the present value of a
pension plan's assets and the present value of the benefits it will
be obligated to pay in the future, that an employer owes to a
multiemployer pension plan governed by ERISA when the employer
“withdraws” from the plan.6 An employer is deemed to have
withdrawn from a multiemployer pension plan when the employer “(1)
permanently ceases to have an obligation to contribute under the
plan, or (2) permanently ceases all covered operations under the
4
Id.
5
29 U.S.C. §§ 1002(37) and 1301(a)(3).
6
29 U.S.C. § 1381(a)(“If an employer withdraws from a
multiemployer plan..., then the employer is liable to the plan in
the amount determined under this part to be the withdrawal
liability.").
3
plan.”7 ERISA imposes withdrawal liability on an employer in these
situations to ensure that “the financial burden of his employees’
vested pension benefits will not be shifted to the other employers
in the plan and, ultimately, to the Pensin Benefit Guaranty
Corporation, which insures such benefits.”8
When an employer officially withdraws from a multiemployer
pension plan, the plan sponsor must then (1) determine the amount
of the employer’s liability, if any, (2) notify the employer of
this amount, and (3) collect the sum from the employer.9 If the
withdrawing employer is unable to pay its assessed withdrawal
liability in full, the plan may recover the deficiency from other
entities that are “trades or businesses” under “common control”
with the withdrawing employer.10 Consequently, all such trades or
businesses, including the withdrawing employer, that are determined
to be under “common control” within the meaning of MPPAA and its
7
29 U.S.C. § 1383(a).
8
Central States, Southeast and Southwest Areas Pension Fund v.
Slotky, 956 F.2d 1369, 1371 (7th Cir. 1992).
9
29 U.S.C. § 1382.
10
29 U.S.C. § 1301(b)(1)(“For purposes of this title, under
regulations prescribed by the [Pension Benefit Guaranty
C]orporation, 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.")(emphasis added); see also Central States
Pension Fund v. Personnel, Inc., 974 F.2d 789, 792 (7th Cir. 1992)
(citing Board of Trustees of Western Conference of Teamsters
Pension Trust Fund v. Lafrenz, 837 F.2d 892, 893-94 (9th Cir.
1988)).
4
regulations, are deemed to belong to a “controlled group” of trades
or businesses and are treated as a “single employer.” As such, all
are jointly and severally (solidarily) liable for the withdrawal
liability incurred by any member of the controlled group.11 This
form of liability is commonly referred to as “control group”
liability.12
The determination whether particular entities are in fact
controlled group members requires resort to several Treasury
Department regulations, among which is one that specifies that a
trade or business belongs to a "brother-sister" controlled group
if:
(i) the same five or fewer persons who are individuals,
estates, or trusts own...a controlling interest in each
organization, and (ii) taking into account the ownership of
each such person only to the extent such ownership is
identical with respect to each such organization, such persons
are in effective control of each organization.13
In the case of a trade or business that is a partnership, a
“controlling interest" means “ownership of at least 80 percent of
the profits interest or capital interest of such partnership,14 and
11
Central States, Southeast and Southwest Areas Pension Fund v.
Koder, 969 F. 2d 451, 452 (7th Cir. 1992) (citing Lafrenz, 837 F.2d
at 893). The term "control group" is used interchangeably with the
term "controlled group." For the balance of this opinion, we will
refer to "controlled group," being the more commonly used term.
12
Central States. Southeast and Southwest Areas Pension Fund v.
Ditelo, 974 F.2d 887, 889 (7th Cir. 1992).
13
26 C.F.R. § 1.414(c)-2(c)(1)(emphasis added).
14
26 C.F.R. § 1.414(c)-2(b)(2)(i)(C)(emphasis added).
5
“effective control” exists when five or fewer persons “own an
aggregate of more than 50 percent of the profits interest or
capital interest of such partnership.15
In this case, a Baton Rouge, Louisiana bakery business known
as Wolf Baking Co. Inc. (“Wolf Baking”) had been a signatory to a
collective bargaining agreement (“CBA”) pursuant to which Wolf
Baking was required to make contributions to Central States. In
December 1986, Wolf Baking filed for bankruptcy and discontinued
its operations, thereby permanently terminating its obligation to
make contributions to Central States. As a result, Wolf Baking was
deemed to have withdrawn from Central States. Accordingly, Central
States calculated Wolf Baking’s withdrawal liability and determined
it to be $1,352,710.73. Because of its bankruptcy, however, Wolf
Baking was able to pay only $289,858 of this obligation to Central
States, leaving a deficit in excess of $1 million. Central States
now seeks to recoup the Wolf Baking shortfall through a withdrawal
liability assessment and recovery against the partnership and the
individual partners comprising Creative, asserting that the
partnership was, at all pertinent times, a member of a brother-
sister controlled group with Wolf Baking. This, Central States
posits, resulted from the three-cornered transaction among (1) Wolf
Baking and its affiliates, (2) Beychok, individually, and (3)
Creative Development, as formalized in the 1986 Agreement.
15
26 C.F.R. § 1.414(c)-2(c)(2)(iii)(emphasis added).
6
B. The Brother-Sister Entities: Creative Development and the
Bakeries
Creative Development was formed as a Louisiana partnership in
1981 by the above-named individual appellees to develop a
residential subdivision near Baton Rouge. The initial capital of
the partnership was $5,000, consisting of equal contributions from
the founding partners.
In the same year, 1981, W.B.C. Inc. (“WBC”) was formed by
Sheldon Beychok, now deceased, appellee Jack Rome, and Harold
Salmon, Jr., to acquire the stock of two bakeries that had recently
emerged from bankruptcy. One of those bakeries was Wolf Baking;
the other was Wm. Wolf Bakery, Inc. (“Wm. Wolf Bakery”). At all
times relevant to this case, those two bakeries were wholly owned
subsidiaries of the holding company, WBC.16 Furthermore, at all
relevant times, Sheldon Beychok and appellee Jack Rome collectively
owned 85 percent of the issued and outstanding capital stock of the
holding company, WBC, with Beychok owning 61.45 percent and Rome
owning 23.55 percent.17 Thus, Beychok and Rome, through their
controlling interest in the parent corporation, WBC, owned or
controlled more than 80 percent of the capital stock of its Wolf
Baking and Wm. Wolf Bakery subsidiaries —— actually, 100 percent
16
Hereafter WBC and its wholly owned subsidiaries, Wolf Baking
and Wm. Wolf Baker, are sometimes referred to collectively as “the
bakeries.”
17
As of December 1986, the remaining 15 percent of WBC’s
outstanding stock was owned by Harold Salmon, Jr. (10 percent) and
Robert Sehring (5 percent).
7
control by virtue of their combined 85 percent control of WBC,
which owns 100 percent of the stock of each subsidiary.
During the mid-1980s, the wholly owned subsidiary bakeries of
WBC were chronically in need of cash, so Beychok made loans to each
from time to time. By June 1, 1986, the outstanding balance of
these loans aggregated $324,000.
C. Creative Development’s Initial Involvement with the
Bakeries: The Sale and Leaseback of the Bakery Depots
For a better understanding of the 1986 transaction, which is
at the vortex of the dispute in this case, we briefly review how
Creative Development first became directly involved with the
bakeries and Beychok. In the early 1980s, after completion of the
real estate venture for which it was originally formed, Creative
Development decided to invest in two "bakery depots"18 owned by Wm.
Wolf Bakery. In March 1982, Creative Development purchased the two
bakery depots for a price of $250,000, then immediately leased both
depots to Wolf Baking “and/or its affiliates.” Beychok —— who,
with Harold Salmon, had previously purchased two other bakery
depots from Wm. Wolf Bakery —— confirmed that the purpose of this
March 1982 sale to Creative Development was to obtain cash for
injection into Wolf Baking and its affiliates so that the bakeries
could continue to operate.
18
A “bakery depot” is a drop-off point for the localized
distribution of bread and bakery products.
8
The financing for Creative Development’s 1982 purchase of the
bakery depots came from two sources: (1) cash, obtained from a
$200,000 loan from River City Federal Savings & Loan (“River
City”), evidenced by Creative Development’s promissory note, which
was secured by a first mortgage on the depot properties, and (2)
credit, evidenced by an unsecured $50,000 purchase money promissory
note given by Creative Development to the vendor, Wm. Wolf Bakery.
As an additional, inducement for Creative Development to
purchase the two depots, Beychok agreed to become a party to the
depot leases and personally guarantee the lease payments to
Creative Development. In consideration for Beychok’s becoming a
party to and personally guaranteeing the leases,19 Rome and Smith
executed a counter letter to Beychok, acknowledging that in truth
Creative Development owned only an undivided two-thirds (2/3)
interest in the two depots purchased from Wm. Wolf Bakery and that
the remaining one-third (1/3) interest was purchased for the
account of Beychok. The counter letter further declared that Rome
and Smith would, when called upon to do so, transfer record title
to Beychok of his undivided one-third (1/3) interest in the depots.
Creative Development’s purchase of the two bakery depots in
March 1982, coupled with the provisions of the counter letter,
produced a joint venture between Creative and Beychok. Subsequent
19
In addition to being a surety of the obligations of the
bakeries on the lease, Beychok was also a guarantor on the note to
River City.
9
financial statements and tax returns prepared for or filed by the
Romes, the Smiths, Creative Development, and the Creative/Beychok
joint venture, reflect Creative’s two-thirds (2/3) and Beychok’s
one-third (1/3) ownership interests in this depot venture.
D. The 1986 Transaction
By the spring of 1986, Rome and Beychok knew that WBC’s
subsidiary bakeries were headed for bankruptcy and that as a result
Beychok, an insider, would never recover the $324,000 owed to him
by the bakers. The parties also knew that the $50,000 promissory
note given by Creative Development to Wm. Wolf Bakery as the credit
portion of the partnership’s purchase of the bakery depots was
still outstanding and would become an asset of the bankruptcy
estate of the bakeries.
In an apparent effort to “save” Creative Development’s
$50,000, the bakeries’ bankruptcy counsel suggested that these two
debts be offset to the extent possible and that the transaction be
disclosed to the bankruptcy court. Accordingly, at Rome’s request,
Beychok caused the 1986 Agreement to be prepared. It was signed on
June 1, 1986 by Terry Smith (on behalf of Creative Developemnt),
Jack Rome (as President and CEO of Wm. Wolf Bakery, Inc. and Wolf
Baking Company, Inc.) and Sheldon Beychok, individually. In the
1986 Agreement, the parties first acknowledged the existence of (1)
Creative Development’s $50,000 promissory note owed to Wm. Wolf
Baker, and (2) the bakeries’ cumulative debt of $324,000 owed to
Beychok. The parties then agreed to the following: (1) Beychok
10
authorized the bakeries to reduce the amount of their $324,000
indebtedness to him by $50,000; (2) the bakeries, in turn, agreed
to credit the indebtedness owed to them by Creative Development by
the same amount ($50,000), “forever extinguishing the obligation
[on the promissory note] from Creative to Wolf and/or Baking
Company”; and (3) Creative agreed that it
does hereby sell, transfer and assign unto Beychok an interest
in that partnership [Creative] equal to said Fifty Thousand
($50,000) Dollar offset as described hereinabove. (emphasis
added).
The legal effects of this round robin transaction comprise the
crux of the threshold issue of the instant litigation: whether
Sheldon Beychok, the now-deceased former majority owner of WBC and
its subsidiaries, acquired a capital or equity interest in Creative
Development as a result of the 1986 transaction, or merely became
its creditor. If Beychok acquired a capital interest and such
interest, either alone or in combination with Rome’s, equaled or
exceeded the minimum percentages needed to constitute “controlling
interest” and “effective control” for purposes of the relevant
Treasury Regulation,20 then Creative Development and the bakeries
would have been under “common control,” i.e., members of the same
brother-sister group of trades or businesses under the common
control of Rome and Beychok. As such, Creative would be liable to
20
26 C.F.R. § 1.414(c)-2.
11
Central States under MPPAA.21 If, however, Beychok merely became
a creditor of the partnership, no such liability would attach.
As shall be seen in the analysis that follows, this case turns
on the answers to three questions: (1) Is the subject provision of
the 1986 Agreement ambiguous?; (2) regardless of whether that
provision is ambiguous, what is the nature of the “interest”
acquired by Beychok in Creative Development by virtue of the 1986
Agreement?; and (3) if the interest Beychok acquired was capital
and not debt, does Beychok’s percentage of capital interests, or
the combined percentage interests of Beychok and Rome, in both
Creative Development and the bakeries meet the two-pronged test for
“common control” under the applicable Treasury Regulation?22
II.
PROCEEDINGS
Central States filed the instant action in September 1992,
alleging that Wolf Baking and Creative Development constitute a
controlled group and should be treated as a single employer for,
purposes of assessing and recovering withdrawal liability under
MPPAA. The district court denied cross notions for summary
judgment, finding that the 1986 agreement was ambiguous, and that
further inquiry into the intent of the parties was required. After
a one day trial, the district court reaffirmed its earlier
21
29 U.S.C. §§ 1381-1453.
22
26 C.F.R. § 1.414(c)-2.
12
determination that the 1986 Agreement is ambiguous. The court then
held, based on extrinsic evidence, that the 1986 Agreement was
entered into solely to make Beychok a $50,000 creditor of Creative
Development which, to that extent, simply replaced the bakeries as
Beychok’s debtor. The court concluded that Beychok neither became
a partner nor acquired a capital interest in Creative Development
but merely became its creditor. Accordingly, judgment was entered
for Creative, dismissing Central States’s claims at its costs. As
it decided the case on that reasoning, the district court never
reached the questions of common control or controlled group
liability for purposes of assessing withdrawal liability.
Victorious, Creative filed a motion urging the district court
to amend its judgment to include an award of costs, expenses, and
attorneys’ fees under ERISA.23 The district court considered the
factors affecting entitlement to such an award and held that it
would not be appropriate. Central States timely appealed from the
district court’s judgment dismissing the withdrawal liability
claims against Creative, and Creative cross-appealed from the
district court’s denial of its request for costs, expenses, and
attorneys’ fees.
III.
ANALYSIS
A. Standard of Review
23
See 29 U.S.C. §§ 1132(g)(1) and 1451(e).
13
The principal thrust of Central States’s contention on appeal
is that the district court erred in finding the language of the
1986 Agreement to be ambiguous on the question whether Beychok
acquired a capital ownership interest in Creative Development or
merely became its creditor. A district court’s interpretation of
a written agreement, including its initial determination whether
that agreement is ambiguous, presents questions of law and thus is
subject to our de novo review.24 Findings of historical or discrete
facts are reviewed for clear error.
B. The 1986 Agreement Was Not Ambiguous and Conveyed a Capital
Interest in Creative Development to Beychok
Central States insists that the meaning of the 1986 Agreement
among Beychok, Creative Development, and the bakeries, is plain:
Beychok acquired a capital interest in Creative Development; any
other reading simply disregards what the 1986 Agreement actually
says. Central States argues that the transaction conveyed to
Beychok an equity or “capital” interest in Creative Development
equal to $50,000, thus giving Beychok and Rome a combined capital
or asset interest in that partnership of more than 80 percent. As
together Rome and Beychok also owned more than 80 percent of WBC
and thus of its Wolf Baking subsidiary, concludes Central States,
a combined ownership interest of 80 percent or more of Creative
Development placed Rome and Beychok in “common control” of both
24
See Louisiana Land and Exploration Co. v. Offshore Tugs, Inc.,
23 F3d 967, 969 (5th Cir. 1994); American Totalisator Co., Inc. v.
Fair Grounds Corp., F.3d 810, 813 (5th Cir. 1993).
14
businesses. This in turn subjected Creative Development and its
partners to solidary liability for the remainder of Wolf Baking’s
withdrawal liabiity under MPPAA.25
Creative, of course, rejects this view of the transaction
memorialized in the 1986 Agreement. Creative insists that the
district court correctly determined, vis-à-vis Beychok, the
transaction amounted to nothing more than an exchange of debtors ——
Creative Development for the bakeries —— on the $50,000 owed to
him. As such, Beychok was substituted for the bakeries as the
$50,000 creditor of Creative Development; in essence, Beychok only
made a loan to, and became a creditor of, Creative Development.
This, asserts Creative, precludes the possibility that Creative
Development and Wolf Baking were under common control.
After carefully reading the 1986 Agreement as a whole and
giving its words their generally prevailing meaning,26 we agree with
Central States’s position to the extent that it characterizes the
1986 Agreement as unambiguously transferring a capital interest in
Creative Development to Beychok, albeit without admitting him as a
partner. We therefore conclude that, as this interpretation does
25
See 29 U.S.C. § 1301(b)(1) and 26 C.F.R. § 1.414(c)-2(c).
26
See LA. CIV. CODE ANN. art. 2050 (West 1987)(“Each provision
in a contract must be interpreted in light of the other provisions
so that each is given the meaning suggested by the contract as a
whole.”)(emphasis added) and LA. Civ. Code Ann. art 2047 (West
1987)(“The words of a contract must be given their generally
prevailing meaning.”).
15
not produce any absurd consequences, it must be given effect
without resort to extrinsic evidence.27
“A contract is not ambiguous merely because the parties
disagree upon the correct interpretation.28 In determining the
presence of ambiguity vel non, we both parse the provision in
question and construe that provision in the context of the entire
document. The particular provision of the 1986 Agreement that we
examine for ambiguity today states:
Creative does hereby sell, transfer, and assign unto Beychok
an interest in that partnership [Creative] equal to said Fifty
Thousand ($50,000) Dollar offset as described hereinabove.
(Emphasis added).
The functional purpose of this provision is to identify the
consideration that Beychok received from Creative Development in
27
See American Totalisator, 3 F.3d at 813; La. Civ. Code Ann.
art 2046 (West 1987)(“When the words of a contract are clear and
explicit and lead to no absurd consequences, no further
interpretation may be made in search of the parties’
intent.”)(emphasis added).
28
D.E.W., Inc. v. Local 93, Laborers’ Int'l Union of N. Amer.,
957 F.2d 196, 199 (5th Cir. 1992); Wards Co. v. Stamford Ridgeway
Assocs., 761 F.2d 117, 120 (2d Cir. 1985) (“‘A Court will not
torture words to import ambiguity where the ordinary meaning leaves
no room for ambiguity, and words do not become ambiguous simply
because lawyers or laymen contend for different meanings.’”)
(quoting Downs v. National Cas. Co., 146 Conn. 490, 494, 152 A.2d
316, 319 (1959)). See also Ideal Mut. Ins. Co. v. Last Days
Evangelical Assoc., Inc., 783 F.2d 1234, 1238 (5th Cir. 1986)(“As
necessity is the mother of invention, so is ambiguity the father of
multiple reasonable constructions, and where lawyers are involved,
one never lacks an eager parent of either gender.”).
16
exchange for the bakeries’ cancellation of the $50,000 debt
theretofore owed to them by that partnership. As noted, that
cancellation by the bakeries was made possible by Beychok’s $50,000
reduction of the $324,000 then owed to him by the bakeries.29
In endeavoring to determine whether the “interest in that
partnership” that Creative expressly sold, transferred, and
assigned to Beychok could have more than one sensible meaning and
thus be ambiguous, we find it helpful to engage in that venerable
deductive exercise known as the process of elimination. In so
doing, we first identify all of the possible kinds of interests
that the words themselves could conceivably refer to in the context
29
The district court characterized Beychok's role in the 1986
transaction as that of a friendly creditor who gratuitously
exchanged one debtor for another without "consideration.” This
conclusion is erroneous in both fact and law. First, in Louisiana
"consideration" has never signified an exchange of equivalents or
quid pro quo but causa or cause. Particularly when, as in the 1986
Agreement, the contract is totally bereft of language of donative
intent, then cause or consideration is akin to motivation. So, as
a matter of law, the 1986 Agreement reflects the presence of
consideration for Beychok and the other parties as well. Second,
if we were to go beyond the plain language of the agreement
regarding consideration, as did the district court, we would find
that even Common Law consideration was present for Beychok.
Apparently disregarded was the fact that Beychok was an undisclosed
joint venturer with Creative Development in the bread depot
purchase for which Creative Development's $50,000 note was given to
the bakeries. If the note had remained in the ownership of the
bakeries and become an asset of the bankrupt estate, Creative
Development would have had to pay it to the trustee or the eventual
holder, and Beychok would have owed one-third of that payment to
Creative Development by way of contribution. So, not only did
Beychok receive a $50,000 interest in a then-viable and —— by
virtue of the elimination of its debt to the bakeries —— solvent
partnership, he was instantly relieved of a $16,667 contribution
obligation.
17
of the entire 1986 Agreement. We then examine each such
possibility to see if it withstands legal analysis and remains a
sensible reading of the agreement. If two or more of the
possibilities remain viable, there is ambiguity; but if only one is
left standing, there is no ambiguity.
Like the district court and the parties before us, we discern
but three possibilities: (a) membership as a partner in Creative
Development; (b) debt owed by Creative Development to Beychok, or
(c) an innominate financial interest (income, capital, or both) in
that partnership, which interest is neither debt nor membership in
the partnership. We proceed to analyze each possibility in order.
1. Beychok as a Partner in Creative Development
After the district court found the presence of ambiguity, it
had no difficulty eliminating membership as a partner in Creative
Development as one of the possibilities of the kind of interest
that Beychok acquired. And, on appeal, neither the appellants nor
the appellees seriously urge that the 1986 Agreement admitted
Beychok into Creative Development as a partner. Clearly it did
not. As Creative correctly explains, under Louisiana partnership
law (1) unanimous action by the parties is required to amend a
partnership agreement for the purpose of admitting a new partner
unless otherwise agreed,30 (2) neither the number nor the identity
of the partners of Creative had changed since it was formed in
30
LA. CIV. Code ANN. art. 2807 (West 1994).
18
1981, and (3) the 1986 Agreement was not signed by or on behalf of
all four partners qua partners.31 In short, as the unanimous
consent of the partners was not evidenced in the 1986 Agreement,
then as a matter of law Beychok could not have been admitted as a
partner.32 Moreover, the phrase “interest in that partnership”
clearly eschews the contention that the sale, transfer, and
assignment of such an interest somehow admitted Beychok as a
partner: Memberships in partnerships are not sold, transferred or
assigned; rather, persons are “admitted” into partnerships or
“made” partners. Obviously, then, the first of the three
31
As noted earlier, the 1986 Agreement was not signed at all by
Mrs. Rome or Mrs. Smith, and was signed by Jack Rome only on behalf
of the bakeries; only Terry Smith signed on behalf of Creative
Development.
32
Central States’s assertion that spouses cannot enter into
partnership agreements, thus eliminating the necessity for the
wives of Rome and Smith to have given their assent to the inclusion
of Beychok as a partner in Creative, had been disposed of by the
Louisiana legislature's 1980 revisions of the Civil Code articles
governing matrimonial regimes. See LA. CIV. CODE arts. 2325-2437
(West 1985) and former LA. CIV. CODE art. 1790 of the 1870 Code,
repealed by 1979 La. Acts. No. 711, § 1 (West 1972 Compiled Ed.).
As leading commentators have noted, these revisions made it
possible for spouses to contract with each other with virtually no
impediments and thus permit spouses to enter, inter alia,
partnership agreements. See Katherine S. Spaht & W. Lee Hargrave,
16 Louisiana Civil Law Treatise § 8:10, at 395 & 398 (West 1989).
In addition, Mrs. Rome did not sign and her husband did not sign as
a partner of Creative Development, but solely as an executive of
the bakeries, the interests of the Romes in Creative Development
were not represented at all in the 1986 Agreement.
19
possibilities —— membership in Creative Development —— must be
eliminated.33
2. Beychok as a Creditor of Creative Development
Differing with the district court, we hold as a matter of law
that, whether read “in a vacuum” or in context of the entire 1986
Agreement, the above quoted contractual provision neither
transferred to Beychok the old promissory note that Creative
Development had given to the bakeries in connection with
acquisition of the bread depots nor created a new debt owed by
Creative Development to Beychok. First, only the bakeries, as
payee and holder of the old promissory note, had the legal capacity
to transfer it, yet there is no record evidence, much less any
provision in the agreement, reflecting such a transfer by the
bakeries. Conversely, Creative Development was the maker of the
old note, not the payee or the holder, so it had no legal capacity
to transfer the note. In fact, the 1986 Agreement states that it
“expressly extinguished” the obligation, which under Louisiana law
33
The choice of the phrases, “sell, transfer and assign," and
"interest in that partnership" cannot be ascribed to inadvertence
or sloppiness in drafting the 1986 Agreement. We take judicial
notice of the fact that the attorneys who represented all parties
to the 1986 Agreement enjoy superlative reputations in the Baton
Rouge and State bars in the fields of commercial transactions in
general, and both bankruptcy and partnership law in particular.
Indeed, we speculate that the language was carefully chosen in an
effort to avoid any possibility of Beychok’s being deemed to be
either a partner in Creative Development or a creditor of that
partnership.
20
voids the note as well. Thus, neither the bakeries nor Creative
ever purported to transfer or assign the old Creative Development
note to Beychok.
Second, there is neither record evidence nor any language in
the 1986 Agreement to indicate that a new or replacement note was
made by Creative when that agreement was executed. There is simply
no evidence that a new note was issued and made payable either to
Beychok or to “Bearer,” then delivered to Beychok.
Absent express transfer or assignment of the old note or
creation and delivery of a new note, only the above quoted language
of the 1986 Agreement itself remains as a potential candidate for
evidencing the creation or acknowledgment of debt owed by Creative
Development to Beychok or the transfer or assignment to Beychok of
an old debt owed by Creative to the bakeries. Yet absolutely
nothing in that provision sounds in debt. Elsewhere in the 1986
Agreement the parties correctly employed such terms as
“indebtedness,” “loan,” “debt,” and “obligation,” and did so with
the professional facility we would expect of learned counsel who
drafted it, thereby confirming the understanding of these terms and
concepts by the parties and their scrivener. Unlike other portions
of the 1986 Agreement, the particular provision that we now review
for ambiguity employs none of these terms of indebtedness. In
fact, none of the traditional objective indicia of a loan or credit
21
relationship are anywhere to be found in the subject provision.34
Notably, there is (1) no reference to a promissory note
representing the purported loan or credit obligation, (2) no
maturity date for the purported loan, (3) no provision for
repayment of the purported loan, (4) no specification of a rate of
interest or a way to calculate it, (5) no reference to a due date
or “payment on demand," and (6) no provision concerning default.
Perhaps most significantly, the subject provision of the 1986
Agreement contains no stipulation that, in the event of termination
or liquidation of the purported debt, assets of that partnership
would be paid to Beychok as a creditor in preference to monies due
to its partners. The complete absence of these objective
indicators of a debtor-creditor relationship far outweighs the
subjective testimonial evidence proffered by Creative —— and relied
on by the trial court —— to support the contention that the
transaction's purpose was to convey an old creditor’s interest or
create a new one.35
34
See Texas Farm Bureau v. United States, 725 F.2d 307, 311 (5th
Cir. 1984), cert. denied, 469 U.S. 1106 (1985)(tax case setting
forth a number of factors, largely objective, that may be usefully
considered in resolving debt-versus-equity controversies);
Retirement Benefit Plan v. Standard Bindery, Co., 654 F. Supp. 770,
772-73 (E.D. Mich. 1986)(applying traditional debt/equity factors
to resolve debt/equity controversy in an MPPAA withdrawal liability
case).
35
Creative has urged that if our inquiry were to venture beyond
the four corners of the Agreement, we should follow the Eleventh
Circuit’s decision in Conners v. Ryan's Coal Co., Inc., 923 F.2d
1461 (11th Cir. 1991), which states that “[t]he true focus of the
inquiry [into whether a business relationship qualifies as a
22
Furthermore, were we to have found ambiguity and considered
extrinsic evidence, we would be compelled to observe the presence
of four sworn documents, executed respectively by Jack Rome,
Beychok and Rome, the bakeries’ bankruptcy counsel, and Wolf
Baking's comptroller, each of which was prepared for admission in
various bankruptcy proceedings, and all of which uniformly state
that Beychok was either a partner in or an owner of Creative
Development. This is far too uniform and consistent to be
explained away by press of the lawyers’ business. As a minimum,
this independent sworn documentation would cast serious doubt on
the subjective, self-serving testimonial evidence relied on by
Creative and the district court to support the conclusion of debt,
and would further support our conclusion that the 1986 Agreement
was not intended to transfer a note to Beychok or to create a
partnership for purposes of assessing withdrawal liability] must be
on whether the alleged partners really and truly intended to join
together in the present conduct of the enterprise.” Id. at 1467
(emphasis added). The Eleventh Circuit went on to say, however,
that parties’ intention with respect to the formation of a
partnership “may be determined with reference to an express
agreement or from the circumstances surrounding the purported
partnership agreement.” Id. (emphasis added). Notwithstanding
that under ERISA, Central States need not prove that Beychok became
a member of Creative Development (see infra text accompanying notes
43 and 44), here the 1986 Agreement and the circumstances
surrounding its confection —— principally the absence of any
objective indicia of a debtor-creditor relationship —— indicate
that the parties “truly intended” for Beychok to acquire a capital
interest in Creative.
23
debtor-creditor relationship between Beychok and the partnership.36
It follows inescapably that, like membership in Creative
Development, debt too must be eliminated as the type of
consideration that Beychok received in the transaction memoralized
by the 1986 Agreement.
3. Beychok as the Owner of a “Capital Interest” in Creative
Development
Having determined that the “interest in that partnership”
sold, transferred, and assigned to Beychok was neither membership
for him in Creative Development nor debt owed to him by that
partnership, all remains to be done is to identify precisely what
interest Beychok did acquire from Creative Development in the 1986
transaction, and whether identifying the interest as such would
lead to “absurd consequences.”37
Creative takes the position that the process of elimination
supports the district court’s determination that the “interest”
36
When the 1986 Agreement was confected in June, there was no
short fuse or mad scramble to rationalize the absence of debt
terminology —— the excuse proffered for the references to Beychok
as a partner in bankruptcy documents. And, despite the district
court’s reliance on the shaky extrinsic evidence, even it depicts
the financial vice-president of Creative Development testifying
that Beychok had an interest in Creative Development, and neither
Rome nor Beychok unequivocally denying that Beychok had an interest
in the partnership —— only that he was not a partner, thus begging
the question. Even if the extrinsic evidence were admissible, the
conclusion of the district court made in reliance on it —— in the
face of all other testimony and documentation —— would be clearly
erroneous to the extent it characterized Beychok’s interest as that
of a creditor.
37
LA. CIV. CODE ANN. art. 2046 (West 1987).
24
Beychok received was that of a creditor. Creative does so first by
eliminating the possibility that the Agreement made Beychok a
partner (with which we and the district court —— and, presumably,
Central States —— all agree). But Creative then asserts that, as
a matter of state law, the “in that partnership” that Creative
Development transferred to Beychok could not have been a capital
interest. Creative insists that Louisiana law does not permit a
non-partner to acquire and own a capital or equity interest in a
partnership without first being or becoming a partner. In this
contention Creative badly misapprehends —— or consciously
mischaracterizes —— Louisiana partnership law.
In a number of circumstances, Louisiana law does in fact
permit persons who are not partners to acquire capital or equity
interests in the partnership. Perhaps the most commonly
encountered example occurs when a partner dies. Although the heirs
or legatees of the deceased partner do not themselves become
partners, they nevertheless do, in the absence of a contrary
provision in the partnership agreement, “inherit the interest of
the deceased partner, which entitles them to be paid as provided in
Civil Code Article 2823 et seq.”38 The same holds true in the
instances of (1) a creditor who seizes the interest of a partner,
38
LA. CIV. CODE ANN. art. 2818 rev. cmt. c (West 1994) (emphasis
added); see also LA. Civ. CODE ANN. art. 2823 (West 1994) (The
successor of a partner is “entitled to an amount equal to the value
that the share of the former partner had at the time membership
ceased.”).
25
(2) a partner who voluntarily withdraws or is expelled from the
partnership, and (3) a partner whose membership in the partnership
terminates pursuant to provisions of the partnership agreement.39
In each of these variations, there exists “an interest in the
partnership” that has value and must be accounted for, even though
the successor to such interest never was or has ceased to be a
partner.
The point is even more vividly demonstrated by the situation
contemplated in article 2812 which provides that “partner may share
his interest in the partnership with a third person without the
consent of his partners, but he cannot make [the third person] a
member of the partnership....”40 This code article, which follows
the approach of the French Civil Code, recognizes that, “[i]n the
absence of an express prohibition in the partnership agreement, a
partner may associate a third person in his interest in the
partnership [even though] the association would not make the third
person a partner.”41 And we are aware of nothing in Creative
Development’s partnership agreement that prohibits the total or
partial sale, transfer, or assignment of an interest to a non-
partner third person. Obviously, it would be sophistry for
Creative to argue that a partnership cannot “transfer, and assign”
39
See LA. CIV. CODE ANN. arts. 2818 and 2823.
40
LA. CIV. CODE ANN. arts. 2812 (West 1994) (emphasis added).
41
Id. rev. cmt.
26
that which can be alienated by a partner. Moreover, as such a
disposition does not require admission of a new partner or
amendment of the partnership agreement, nothing in the Louisiana
Civil Code or the partnership agreement mandates unanimous consent
of the partners.
In sum, these examples confirm that Louisiana partnership law
anticipates and expressly provides for the possibility that a third
person may acquire and possess (at least for a time) “an interest
in a partnership” —— capital or income or both —— without being a
partner. We are satisfied that our interpretation of the 1986
Agreement as unambiguously transferring to Beychok a capital
interest in Creative Development (and conceivably, though
unimportantly, an income interest as well) does not produce any
consequences that are impossible under Louisiana partnership law or
either nonsensical or absurd. Therefore this reading must be given
effect without exiting the four corners of the 1986 Agreement to
conduct further inquiry into the intentions of the parties.42 It
follows that the district court’s resort to extrinsic evidence of
intent was unwarranted and eventually led to reversible error in
both methodology and substance.43
42
See LA. CIV. CODE art. 2046; American Totalisator, 3 F.3d at
813.
43
Even if the determination of ambiguity had not been erroneous
and consideration of extrinsic evidence of intent had been
admissible, we would have found the court’s “debt” conclusion to be
clearly erroneous.
27
C. Withdrawal Liability
1. Membership as a Partner is Not a Prerequisite
As a final observation in the circuitous and arcane route to
the determination of withdrawal liability of all members of a
controlled group, we underscore the truism that, to recover for
withdrawal liability under MPPAA, an ERISA multiemployer pension
plan need not prove that one who, with others, owns a “controlling
interest” in, and exercises “effective control” over, a partnership
that is one organization in a purported controlled group of trades
or businesses, actually satisfies all of the state law requirements
to be a partner in such partnership.44 Rather, all that MPPAA and
its implementing regulations require is that such person own the
requisite percentage of a “profits interest” or a “capital interest”
in that partnership.45 As we have determined that the interest in
Creative Development that Beychok acquired by virtue of the 1986
Agreement was a “capital interest” within the meaning of 26 C.F.R.
§ 414(c)-2, there can be no serious disagreement with the
proposition that the interests of Beychok and Rome in both Creative
Development and the bakeries are such that they must be tested to
determine whether the requisite percentages —— over 50 percent for
“effective control” and 80 percent or more for the “controlling
interest” —— are present, irrespective of the fact that Beychok’s
44
See 26 C.F.R. §§ 1.414(c)-2(c)(b)(2)(I)(c) (“controlling
interest”) and 1.414(c)-2(c)(2)(iii) (“effective control”).
45
Id.
28
capital interest in Creative Development was not owned by him as a
partner. If those capital interests are found to be present in such
percentages, Creative Development and its partners cannot avoid
solidary liability for the deficiency in the bakeries, withdrawal
liability to Central States simply because Beychok was not a full-
fledged partner in Creative Development.
If there are some who feel that controlled group rules produce
unduly harsh results or set traps for the unwary, they should not
turn a blind eye to all the facts that Rome and Beychok, as well as
able counsel, knew or should have known when they confected the plan
to salvage what they could from the impending bankruptcy of the
bakeries. They had to have known, for example, that the bakeries
(1) employed union labor, (2) were parties to a CBA, (3) were
participating employers in a multiemployer pension plan pursuant to
the CBA, (4) were approaching imminent bankruptcy, and (5) would,
by virtue of bankruptcy, cease to participate in that multiemployer
plan, leaving a substantial deficit in funding and thus withdrawal
liability. As such, Rome, Beychok, and their counsel also knew or
should have known that opting to confect and enter into the 1986
Agreement, which purposefully employed carefully crafted language
that clearly eschews partner status for Beychok but just as clearly
eschews debtor-creditor relationship between Creative and Beychok,
was a high-risk endeavor. It amounted to flying perilously close
to the flame that always burns brightly when super-majority
interests in two separate entities are vested in five or less
29
individuals and one of those entities is a participating employer
in a multiemployer pension plan.
Neither should the history of intertwined business dealings
among Rome and Beychok and the organizations that they owned and
controlled be disregarded. The 1986 Agreement was no chance
encounter; these two businessmen had been in business with each
other on a number of prior occasions, in both the bakery business
and the real estate business. And on at least one occasion —— the
1982 bakery depot transaction —— both individuals as well as the
bakeries, Creative Development, and the Smiths were directly
involved. In hindsight, it may well prove to be regrettable for
Creative if the tangled web they helped weave by confecting and
entering into the 1986 Agreement, and possibly the bakery depot
joint venture as well, ultimately traps its weavers. Yet that
distinct possibility was —— or at least should have been —— a known
risk.46
46
Creative made an alternative argument which the district court
never reached. First, Creative notes that following the 1982 sale
and leaseback transaction involving the bakery depots, Central
States demanded and obtained from Wm. Wolf Bakery a collateral
mortgage position superior to Creative Development on its bakery
depots, the express purpose of which was to secure payment to
Central States of a portion of the bakery’s pension contribution
obligation. The documentation of this arrangement states that
Creative Development would have no personal liability and that the
security would provide Central States with only an in rem claim on
the depot properties. Creative argues that Central States should
be estopped from seeking to make Creative liable in personam in
this action. But Creative’s estoppel argument suffers from two
fatal defects: (1) The release agreement was drafted and executed
before withdrawal liability was triggered and assessed, and thus
cannot be construed as releasing a claim that at the time was at
30
2. Render or Remand?
Time and again in its briefs and post-argument submittals,
Central States expresses or implies that if Beychok’s $50,000
interest in Creative Development is found to be a capital interest
and not a creditor’s interest, the conclusion is foregone that
Beychok and Rome together owned at least 80 percent of the capital
interest in both Creative Development and the bakeries at the time
in question, and that those two organizations would be under common
control per se. Central States finds this same conclusion implicit
in the district court’s opinion as well. Even though at this
juncture the presence of the “at least 80 percent” factor is
irrefutable as to the bakeries, its presence is less than certain
as to Creative Development.
More significant (and curious) is the observation that nowhere
does Central States advert to the fact that the 80 percent
best inchoate and contingent, see 66 AM. JUR. 2D RELEASE § 33, at 710-
11 (“A release which in terms covers only a present right will not
be construed to discharge a demand which was then uncertain and
contingent.”); and (2) the text of the relevant document expressly
released Creative Development from liability for “delinquent
pension and health and welfare contributions” (emphasis added), not
from withdrawal liability. The “contributions” referred to are
simply an employer’s ongoing, periodic payments to a pension plan
trust on behalf of participant employees; withdrawal liability, on
the other hand, is a well-defined term of art for an employer’s pro
rata, unfunded vested benefit obligation that is assessed under
MPPAA after the obligation to make contributions has ended.
Creative’s release argument confounds these two obligations, even
though the document at issue was only concerned with contributions,
not withdrawal liability. Creative’s estoppel claim that Central
States release Creative from withdrawal liability fails.
31
“controlling interest” factor is but one of two prongs of the
conjunctive test for “common control.”47 Although the 80 percent
test determines “controlling interest,” that is only one-half of the
“common control” calculus.48 The other half —— “effective control”
—— is determined under the second prong of the test for common
control in the brother-sister context.49 For partnerships,
“effective control” is defined as “an aggregate of more than 50
percent of the...capital interest of such partnership.”50
Importantly, this second, “effective control” prong takes into
account the “ownership of each such person [singular] only to the
extent such [person’s] ownership is identical with respect to each
such organization.”51 One need only consider the relevant example
set forth in the regulation52 to realize that the “effective
control” prong of the common control test is no simple arithmetic
47
26 C.R.F. § 1.414(c)-2(b)(2).
48
“The term ‘brother-sister group of trades or businesses
under common control’ means two or more organizations conducting
trades or businesses if (i) the same five or fewer persons who are
individuals . . . own . . . a controlling interest in each
organization [first prong], and (ii) taking into account the
ownership of each such person only to the extent such ownership is
identical with respect to each such organization, such persons are
in effective control [second prong] . . . . 26 C.F.R. 1.414(c)-
2(c)(1)(emphasis added).
49
Id.
50
26 C.F.R. § 1.414(c)-2(c)(2)(iii).
51
26 C.F.R. § 1.414(c)-2(c)(1)(ii)(emphasis added).
52
26 C.F.R. S 1.414(c)-2(e) Example (4).
32
exercise; after all, if it were, there would always be a “more than
50 percent” capital interest when the persons in question satisfy
the controlling interest “at least 80 percent” prong of the test.
But in the “effective control” second prong there is a tricky factor
lurking just beneath the surface of the facially murky phrase, “only
to the extent such ownership is identical with respect to each such
organization....”53
The turbidity of that phrase, especially the operative word
“identical,” clears up considerably, however, when the “effective
control” test is applied to actual examples. In this second prong
test, the ownership of each person must be examined separately,
focusing on one person’s ownership in each organization under
consideration to find his or her ownership only to the extent it is
identical in each organization. Practical application of this test
reveals, every time, that the identity of ownership for each person
is the smallest percentage that he or she owns in any of the
targeted organizations.
Purely for purposes of illustration, we will employ Central
States’s post-argument approach to ascertaining the percentages for
Rome and Beychok, i.e., determining the percentages of capital
ownership in Creative Development on the basis of the parties’
respective capital contributions. Thus we begin this hypothetical
example by assuming that, of the total capital contribution of
53
26 C.F.R. § 1.414(c)-2(c)(1)(ii) .
33
$55,000,54 Rome’s $2,500 represented 4.545 percent and Beychok’s
$50,000 represented 90.9 percent. As for the bakeries, it is
undisputed that Rome’s percentage of the stock in WBC was 23-55
percent and Beychok’s was 61.45 percent. In this example, then,
Rome’s “identical” ownership in the two businesses would be 4.54
percent, i.e., his percentage of ownership interest in the capital
of Central States; the difference between that percentage and his
larger percentage of ownership in the bakeries drops out as non-
identical. In like manner, Beychok’s “identical" ownership in the
two businesses would be 61.45 percent, i.e., his percentage of
ownership interest in WBC; the difference between that percentage
and his larger hypothetical percentage of ownership in Creative
Development drops out as non-identical.
In this illustration, the “identical” ownerships of Rome and
Beychok —— 4.54 percent for Rome and 61.45 for Beychok, for a total
of 65.99 percent —— obviously satisfy the second prong, “effective
control” test which only requires an aggregate of more than 50
percent. Indeed, Beychok alone satisfies that test, as he is “five
or fewer persons” and his “identical” ownership in each organization
is more than 50 percent.
Additionally, in this hypothetical example, the first prong,
“controlling interest” test for common control would be satisfied
because the first prong examines seriatim the capital owners’
54
$2,500 from the Roses, $2,500 from the Smiths, and $50,000
from Beychok.
34
combined percentage in each separate trade or business. Based on
his hypothetical 90.9 percent capital interest in Creative
Development, Beychok alone would satisfy the “at least 80 percent
of the...capital interest” test for the partnership. And together,
Beychok’s 61.45 percent and Rome’s 23.55 percent of the stock of
WBC, totaling 85 percent, would satisfy the “at least 80 percent”
test of both the voting power and the total value of all shares of
all classes in the bakeries.
As the district court concluded that the 1986 Agreement (which
it found ambiguous) neither admitted Beychok into Creative
Development as a partner nor conveyed “an interest in” Creative
Development to him, but instead made him a creditor to the extent
of $50,000, the court never reached or addressed the crucial MPPAA
question whether separately or jointly Rome and Beychok had
“controlling interest” in and “effective control” of both Creative
Development and the bakeries. Moreover, the status of the record
on appeal is such that —— without engaging in substantial appellate
fact finding regarding matters that at this juncture are not
uncontested, stipulated, or otherwise clear beyond cavil —— we
cannot determine whether Rome and Beychok had controlling interest
and effective control.55 And, as we decline to engage in such
55
Following oral argument to this panel, Creative and Central
States were asked to file joint stipulations that could have
provided factual information sufficient for the panel to determine
the elements of controlling interest and effective control.
Regrettably, the parties failed in this cooperative effort, thereby
depriving us of the opportunity to render a judgment and end this
35
inappropriate fact finding, we are not able to render a judgment in
this case, one way or the other. Instead, we are constrained to
remand it to the district court for the limited purpose of adducing
the evidence that it needs to make such indispensable factual
determinations and calculations.
Inasmuch as the governing regulation on this point expresses
“controlling interest” and “effective control” in percentages,56 the
fundamental factual determination that the district court must make
on remand is the percentage of the capital interest in Creative
Development that Beychok owned at the time the bakeries “withdrew”
from Central States. This will require the court to adduce
sufficient evidence to enable it to convert Beychok’s $50,000
capital interest into a percentage. More specifically, the court
must first convert that dollar amount to a percentage as of June 1,
1986, and then find whether, between that date and the effective
date of the bakeries’ withdrawal from Central States, Beychok’s
percentage changed or remained the same. The district court must
also ascertain the percentage of Rome’s capital ownership in
Creative Development as of the relevant time or times, presumably
one-half of the figure derived by subtracting Beychok’s percentage
from 100 percent. Then, with those percentages firmly established,
the court must proceed to determine whether Beychok and Rome (or
litigation.
56
26 C.F.R. § 1.414(c)-2(b)(2)(C) and (c)(2)(iii).
36
Beychok alone) owned at least 80 percent of the capital interest in
the partnership for purposes of “controlling interest.” Thereafter,
taking into account Beychok’s and Rome’s respective ownerships “only
to the extent such ownership is identical” in both the partnership
and the bakeries, the court must ascertain whether those two
individuals (or one of them alone) owned more than 50 percent of the
capital interest —— and thus “effective control” —— in both
Creative Development and the bakeries.57
Should the district court ultimately conclude that both prongs
of the common control test are satisfied, it must then render a
judgment assessing Creative’s responsibility (and that of its
partners) for the delinquency in the withdrawal liability owed by
the bakeries to Central States. If, however, the court concludes
that either prong of that test is not satisfied, it must render a
judgment dismissing Central States’s action against Creative and its
partners.
In the interest of judicial economy and to avoid the need for
another panel of this court to “reinvent the wheel” if either or
57
26 C.F.R. § 1.414(c)-2(c)(1)(ii) and (c)(2)(iii). The court
must also test the bakery depot joint venture’s ownership against
the bakeries as of the latter’s withdrawal for the presence of
“controlling interest” and thus controlled group status, once the
percentage of Beychok’s capital interest in Creative Development is
determined. Even though it appears counterintuitive that Beychok
and Rome could fail to have controlling interest in Creative
Development and the bakeries, while having a controlling interest
in the joint venture and the bakeries, it is also counterintuitive
that such a situation is beyond the realm of mathematical
possibility, thus the need for testing.
37
both sides are so disappointed with the district court’s findings
and rulings on remand that they appeal, this panel retains appellate
jurisdiction pending this limited remand to the district court.
Consequently, regardless of whether or not the district court finds
on remand that the required joint or aggregate percentages of
“controlling interest” and “effective control” are sufficient to
constitute “common control” and thus impose controlled group
liability on Creative under MPPAA, any appellate review will be
conducted by this panel.
IV.
CONCLUSION
The district court reversibly erred in holding that the 1986
Agreement was ambiguous, and it compounded the error by considering
extrinsic evidence of the parties’ intent and basing its judgment
on that evidence. We conclude de novo that the 1986 Agreement was
not ambiguous and that it conveyed a capital interest in Creative
Development to Sheldon Beychok. Consequently, if in combination the
interests of Beychok and Rome in both Creative Development and the
bakeries are ultimately found to be sufficient to constitute
Creative Development a member of the same controlled group of trades
and businesses as Wolf Baking, then Creative Development and its
partners, the Romes and the Smiths, will be liable in solido to
Central States for the outstanding balance of Wolf Baking’s
withdrawal liability.
38
Only one facet of one prong of the two-prong common control
test is discernible from the record on appeal: In both combined
voting power and total value, Rome’s and Beychok’s shares of stock
in WBC were sufficient to vest those two shareholders with a
“controlling interest.” Without engaging in inappropriate appellate
fact finding, however, we cannot convert Beychok’s dollar interest
in Creative Development to a percentage interest. And without that
indispensable piece of the puzzle before us, we are unable to
determine whether Beychok’s and Rome’s combined capital ownership
in Creative Development equaled at least 80 percent and thus
constituted a controlling interest in that partnership. For the
same reason, we are unable to determine the extent of either
Beychok’s or Rome’s ownership interests in those two business
organizations to the extent that they are “identical with respect
to each,” so we cannot say whether those two individuals had
“effective control” of the bakeries and the partnership. It follows
that neither we nor the district court can tell whether the two
business organizations were under “common control” for purposes of
MPPAA, a determination that is critical to either court’s ability
to decide whether Creative Development and its partners have
solidary withdrawal liability to Central States.
Accordingly, we reverse the district court's judgment that
dismissed Central States’s withdrawal liability claims, and we
remand the case to that court for the limited purpose of (1)
determining the several ownership percentages required to test for
39
the presence of common control; (2) applying the percentages thus
determined to both prongs of the common control test; and (3) if
common control is found to have been present, assessing the quantum
of Creative’s withdrawal liability to Central States and rendering
a judgment accordingly. In the interest of judicial economy, this
panel retains appellate jurisdiction for the purpose of reviewing
the determinations and judgment of the district court on remand,
should the parties or any of then elect to appeal.
REVERSED and REMANDED with instructions; appellate jurisdiction
retained by this panel.
40
DENNIS, Circuit Judge, dissenting:
I respectfully dissent because (1) the Central States
plaintiffs failed to establish the necessary factual basis under
Louisiana partnership law to prove that Terry Smith was authorized
to amend the Creative partnership contract so as to change the
proportionate share of each partner’s capital interest and to
transfer an interest in the capital of Creative to a third person;
(2) under Louisiana law a partnership agreement is a simple
contract, and the unanimous consent of the partners is required to
amend the partnership contract; (3) the majority concedes that
plaintiffs failed to prove that Terry Smith was authorized by
unanimous consent of the Creative partners to act for them in his
transaction with Beychok; (4) because an amendment of the
partnership contract is required to change or affect any partner’s
capital or profit interest, Terry Smith was not authorized to grant
or transfer to Beychok an interest in the capital of the Creative
partnership; (5) under Louisiana law a partner may agree between
himself and a third person to share that partner’s interest in the
partnership, but such an agreement cannot give the third person any
interest in the partnership or affect the other partners’ interests;
and a partner’s heirs, assigns, or seizing creditors are entitled
to an amount equal to the value that the share of the former partner
had at the time membership ceased; but, a third person cannot
acquire, succeed to, or seize a partner’s membership or interest in
the capital of the partnership without amendment of the partnership
41
contract, which requires unanimous consent of the other partners;
therefore, lacking unanimous consent of the partners to amend the
partnership contract, Beychok could not acquire an interest in the
capital of the partnership; (6) contrary to the majority’s
assumption, the federal laws and regulations do not consider that
anyone other than a partner has an interest in the profits or
capital of a partnership.
I. Determinative Issue on Appeal
In order to hold the individual Creative partners liable for
the $1.35 million withdrawal liability of Wolf Baking, Central
States must prove (1) that Creative was under “common control” with
Wolf Baking and (2) that both Creative and Wolf Baking were “trades
or businesses.” See 29 U.S.C. § 1301(b)(1). See, e.g., Central
States v. Personnel, Inc., 974 F.2d 789, 792 (7th Cir. 1992);
Central States v. White, 2000 WL 690346, *4 (N.D. Ill.); Central
States v. Stroh Brewery Co., 220 B.R. 959 (Bankr. N.D. Ill. 1997).
The district court found that the two entities involved, Creative
and Wolf Baking, were never under common control, and therefore that
the Creative partners were not liable for Wolf Baking’s debt under
the MPPAA. Because the district court apparently did not reach the
issue of “trades or businesses,” we are called upon to decide only
whether Creative and Wolf Baking were under common control under the
MPPAA, applicable Treasury regulations, and Louisiana partnership
law.
42
II. The MPPAA and the Treasury Regulations
under section 414(c) of Title 26
The MPPA provides that “under regulations prescribed by the
[Pension Benefit Guaranty Corporation], all employees of trades or
businesses (whether or not incorporated) which are under common
control shall be treated as a single employer. The regulations
prescribed under the preceding sentence shall be consistent and
coextensive with regulations prescribed for similar purposes by the
Secretary of the Treasury under section 414(c) of Title 26.” 29
U.S.C. § 1301(b)(1). In the absence of independent regulations
promulgated by the corporation, we refer to the pertinent Secretary
of the Treasury’s regulations, 26 CFR § 1.414(c).
The criteria for determining whether there is common control
of a “brother-sister group of trades or businesses” is provided by
26 CFR § 1.414(c)-2(c). The definition of such a group requires,
inter alia, that the same persons own a controlling interest in each
of the trades or businesses in question. With respect to
partnerships, § 1.414(c)-4(a) states: “In determining the ownership
of an interest in an organization for purposes of § 1.414(c)(2) .
. . the term ‘interest’ means: in the case of . . . a partnership,
an interest in the profits or capital.” 26 C.F.R. § 1.414(c)-4(a).
43
The majority apparently assumes that the regulation implicitly
recognizes that an “interest in the profits or capital” of a
partnership may be transferred by a single partner to a third party
who is not a partner. The majority does not cite any authority for
that proposition, and I have found no indication of such a
phenomenon. In the common usage of the Internal Revenue Code, the
Secretary of the Treasury’s regulations, tax law scholars, and tax
law practitioners, “capital interest” refers, in the partnership
context, to a partner’s capital interest. In fact, the Internal
Revenue Code and regulations evidently presume that only the
partners own interests in the capital of the partnership.58 See 26
U.S.C. §§ 706(b)(1), 706(b)(3), 707(b)(1)(A), 707(b)(2)(A),
708(b)(2)(A), 708(b)(2)(B), 743(b); 26 C.F.R. §§ 1.721-1(b)(1),
1.704-1(e). Regulation § 1.704-1(e), which “defines a capital
interest as any interest in the assets of the partnership to which
the partner is entitled upon withdrawal from the partnership or upon
58
The same is true with respect to a “profits interest” in a
partnership. See cited material in the text accompanying note 4;
ARTHUR B. WILLIS, ET. AL, PARTNERSHIP TAXATION ¶ 1.07[4] at 1-114 (6th Ed.
1999) (“Neither the Code nor the Regulations contains a definition
of a profits interest in a partnership. However, Regulation §§
1.721-1(b)(1) and 1.704-1(e)(1)(v) discuss partnership capital
interests in such a way as to indicate that a profits interest is
one which does not entitle the partner to share in partnership
assets upon the partner’s withdrawal from the partnership or upon
the partner’s liquidation.”) (emphasis added). However, the
majority opinion focuses on whether Beychok acquired a “capital
interest” (presumably because it is indisputable that he had no
right to share in the profits of Creative), so that is the focus of
my dissent as well.
44
the liquidation of the partnership and distinguishes that interest
from a mere right to participate in the earnings and profits of the
partnership[, provides an] . . . appropriate definition for most,
if not all, purposes of the Code.” ARTHUR B. WILLIS, ET. AL, PARTNERSHIP
TAXATION ¶ 1.07[3], at 1-112 (6th Ed. 1999)(hereinafter
“Willis”)(emphasis added).59 Consequently, I believe the majority
is mistaken in its apparent assumption that the Federal tax laws and
Treasury regulations suggest the existence of substantive
partnership laws permitting a single partner to favor third persons
with free-floating interests in the profits and capital of the
partnership without the consent of the other partners.
III. Louisiana Law of Partnerships
Proceeding under the false conception that someone other than
a partner can hold a capital interest in a partnership under the
applicable Federal Tax laws and Treasury regulations, the majority
opinion mistakenly concludes that such an arrangement is possible
under Louisiana partnership law. The majority concludes that (1)
under Louisiana law any partner of a partnership, without either
authorization by the partnership agreement or the unanimous consent
of the partners, has the legal power to create and transfer to a
59
In explaining the significance of the terms “capital interest”
vs. “profits interest” in a partnership for tax purposes, Willis
states that “[i]n several areas of partnership tax law, important
consequences turn on the measurement of the partners’ interests in
capital, profits, or both.” Id. at 1-110 (emphasis added).
45
third person a capital or an income interest in the partnership; and
that (2) Central States proved by a preponderance of the evidence
that the undefined “interest” in Creative which Terry Smith
transferred to Beychok was intended by them to be an interest in the
capital of the partnership. In my opinion, the majority’s
interpretation of the Louisiana partnership law provisions is
contrary to the plain meaning of the law, and its finding that Terry
Smith intended and was authorized to transfer a capital interest in
Creative to Beychok in the June 1, 1986 agreement is not supported
by the contract or the record as a whole.60
60
I also disagree with the majority opinion’s statement of the
law with respect to releases of future liability. The majority,
supra n.46, summarily dispenses with Creative’s estoppel argument
by concluding, in part, that the release agreement could not be
construed as releasing the withdrawal liability claim as the
agreement was executed before withdrawal liability was triggered
and assessed.
Louisiana law clearly allows releases of future actions before
they arise if the parties clearly so intend. La. Civ. Code art.
3073; Brown v. Drillers, Inc., 630 So.2d 741, 744, 753 (La.
1994); Ritchey v. Azar, 383 So.2d 360, 363 (La. 1980); Bogalusa
Community Med. Ctr. v. Batiste, 603 So.2d 183, 188 (La. App. 1 Cir.
1992). See also America’s Favorite Chicken Co. v. Suryoutomo,
889 F.Supp. 916, 918 (E.D. La. 1995)(assignment agreement released
all past, present, or future claims arising under franchise
agreement). Relinquishing future rights of action is not against
public policy unless such rights arise from physical injury or from
the gross fault or intentional wrong of another party. Daigle v.
Clemco Industries, 613 So.2d 619, 623 (La. 1993). Such releases,
however, will be narrowly construed to assure the parties
understand the agreement and its consequences. Brown, 630 So.2d at
753.
Furthermore, as I read all of the passages of the authority
cited by the majority opinion, the common law is consistent with
Louisiana law in this respect. American Jurisprudence Second
provides, in pertinent part,
46
A. Terry Smith Was Not Authorized to Enter
the Transaction on Behalf of Creative
For proof that Beychok owned a capital interest in Creative,
Central States relies upon the June 1, 1986 written contract whereby
Terry Smith professed to transfer to Sheldon Beychok an undefined
“interest” in the Creative partnership. Smith was the only
signatory or party who claimed that he acted in behalf of Creative.
Jack S. Rome, Jr., a partner in Creative, professed to act and sign
the contract only on behalf of Wolf Baking. Beychok signed only for
himself individually. Central States failed to introduce any
evidence to prove that the other partners of Creative, Jack S. Rome,
Jr., Suzanne McCraine Rome, and Sandra Theriot Smith, authorized or
ratified Smith’s transfer of the undefined “interest,” much less an
interest in the capital of Creative, to Beychok. Even if it could
be assumed without supporting evidence that Rome, as a partner in
The scope of a release is determined by the intention of
the parties as expressed in the terms of the particular
instrument, considered in the light of all the facts and
circumstances.
66 AM. JUR. 2D Release §30, p. 706.
[R]eleases of rights which have not yet matured under
contracts have been held valid and are self-operative,
and discharge the future rights or claims when they
arise. A release which covers only a present right will
not be construed to discharge a demand which was then
uncertain and contingent.
66 AM. JUR. 2D Release § 33, p. 710. (emphasis added). The ultimate
effect of the release, therefore, depends on the parties’ intent.
Accord C.J.S. Release § 66, p. 617.
47
Creative, by signing the contract only for Wolf Baking, consented
for himself to Smith’s transfer of an undefined “interest” to
Beychok, there is still no evidence of consent by the other partners
and none that Rome intended for Smith to transfer an interest in the
capital of Creative to Beychok.
B. Such Unauthorized Transfer Is Not
Allowed Under Louisiana Law
Under Louisiana law, a partnership is a juridical person,
distinct from its partners. La. Civ. Code art. 2801. The
legislative decision to establish a partnership as a separate and
distinct entity, different from its partners, expressly reflected
in Article 2801, permeates all of the Louisiana Civil Code’s
partnership provisions. Max Nathan, Jr., Reporter, Partnership Law
Revision Committee, Introduction: 1980 Partnership Revision, 12
West’s LSA Louisiana Civil Code pp. 3, 5 (1994). When partners
create a partnership, they utilize contract law to create a new,
separate and distinct legal entity. Id.
Unless the partners have agreed otherwise in the partnership
agreement or subsequently, each partner participates equally in the
profits, commercial benefits, and losses of the partnership. La.
Civ. Code art. 2803. Unanimous agreement of the partners is
required to amend the partnership agreement, to admit new partners,
or to terminate the partnership. La. Civ. Code art. 2807. Major
decisions of this type obviously are of sufficient importance to
48
require the unanimous agreement of the partners. Id., comment(b).
In the absence of an express prohibition in the partnership
agreement, a partner may share or associate a third person in his
own interest in the partnership without the consent of his partners,
but this association in the single partner’s interest does not make
the third person a member of the partnership. La. Civ. Code art.
2812 and comment.
A partner is a mandatary or agent of the partnership for all
matters in the ordinary course of its business, except for the
alienation, lease, or encumbrance of the partnership’s immovables.
La. Civ. Code art. 2814. The scope of authority of the mandate
created by this article is limited to acts within the ordinary
course of the business of the partnership. Id., comment (a).
The Civil Code provides for the cessation of a partner’s
membership in the partnership due to certain causes and for the
effects of that cessation of membership. A partner ceases to be a
member of a partnership upon any of the following: his death or
interdiction; his being granted an order for relief under Chapter
7 of the Bankruptcy Code; his interest in the partnership being
seized under a writ of execution and not released within thirty
days; his expulsion from the partnership; or his withdrawal from the
partnership. La. Civ. Code art. 2818. The occurrence of any of
the enumerated events terminates the membership of the partner, not
the partnership itself. Id., comment(a). Upon such a cessation of
49
membership, the former partner, his successors, or the seizing
creditor is entitled to an amount equal to the value that the former
partner’s share had at the time membership ceased, and the
partnership must pay in money that amount as soon as it is
determined. La. Civ. Code arts. 2823, 2824. This amount bears
interest from the time the party ceases to be a partner. La. Civ.
Code 2824 and comment (b). The former partner, his successor, or
his seizing creditor is not entitled to an interest in the assets
of the partnership, but is only entitled to be paid an amount equal
to the value of his interest as of the time his membership ceased.
La. Civ. Code art. 2823, comment (a); La. Civ. Code art. 2824.61
The term “successors” includes heirs, assigns, or anyone standing
in the shoes of the former partner. La. Civ. Code art. 2823,
comment (b).
Applying the legal principles of partnerships to the present
case, it is clear that Terry Smith’s act in entering the 1986
agreement did not have the legal effect of granting Beychok a right
to a share in the capital, profits, benefits or assets of the
Creative partnership. Obviously, Terry Smith’s actions exceeded a
61
The rule that the partnership need only make a payment in
money protects the partnership in that it does not have to
partition its assets in order to make a payment. La. Civ. Code
art. 2824, comment (a). The value of the interest may be set by
the partnership agreement or by separate agreement, or it may be
judicially determined pursuant to the provisions of Article 2825.
La. Civ. Code art. 2823, comment (a).
50
partner’s scope of authority to act as an agent for the partnership,
which is limited to acts within the ordinary course of business of
the partnership. La. Civ. Code art. 2814, comment (a). No one
contends that Smith’s action was within the ordinary course of
business. Creative’s partnership agreement expressly provided for
equal participation by the partners and did not authorize any
partner to grant a third person a share in the capital, profits,
income, benefits, or assets of the partnership or to effect a change
in the equal one-fourth share of each of the four partners in the
capital, profits, benefits, and assets of the partnership. In fact,
Creative’s articles of partnership expressly provide the following:
“The net profits of the partnership shall be divided equally among
the partners and the net losses shall be borne equally among the
partners,” Articles of Partnership of Creative Development Company,
Article IV; “[t]he relationship between [the partners] can be varied
only by agreements in writing signed by [the partners] concurrently
herewith or subsequent hereto,” Id., Article XVII; and “[t]his
agreement is subject to amendment only with the consent of all
partners, and such amendment shall be effective as of such date as
may be determined by them.” Id., Article XVIII.
Even in the absence of these stipulations in the partnership
agreement, Louisiana Civil Code articles 2803 and 2807 would mandate
equal participation by the partners and prohibit amendment of the
partnership agreement unless there had been unanimous consent
51
thereto by the partners.62 La. Civ. Code art. 2803, comment (a);
La. Civ. Code art. 2807.
The parties introduced no evidence that the partners
unanimously agreed, either by amendment of the articles or by
separate agreement, to grant Beychok an interest in the capital,
assets, or profits of the partnership, to change the relationships
of the partners, or to modify the right of each of the four partners
to share equally in the capital, profits, benefits, and assets of
the partnership. In rejecting Central State’s contention that
Beychok had been admitted as a partner in Creative Development, the
majority opinion correctly concludes that “[i]n short, as the
unanimous consent of the partners was not evidenced in the 1986
Agreement, then as a matter of law Beychok could not have been
admitted as a partner.” Maj. Op. at 18. For the same reason, as
there was no unanimous consent of the partners to amend the
partnership contract to grant an interest in the capital of the
partnership to Beychok, or to change the relationships of the
partners, Beychok, as a matter of law, could not have been granted
an interest in the capital, income, benefits, or assets of the
Creative partnership by Terry Smith. Partnership agreements are
62
See GLENN G. MORRIS AND WENDELL H. HOLMES, 7 LOUISIANA CIVIL LAW
TREATISE—BUSINESS ORGANIZATIONS § 2.08 at 69 (“Partnership law . . .
has . . . guarded carefully the right of each partner to approve of
the identity of all those with whom he is to associate as a
coowner.”).
52
contracts which cannot be changed without the consent of the
partners.63
The majority opinion’s conclusion that each partner of a
partnership, without the consent of the other partners, can legally
transfer to a third person an interest in the capital of the
partnership is based on faulty reasoning, i.e., that if a partner
can unilaterally act so as to affect his own individual interest he
can also act alone to affect the other partners’ interests in the
capital of the partnership.64 As noted supra, however, such
autonomous action by Terry Smith was expressly prohibited by the
63
See GLENN G. MORRIS AND WENDELL H. HOLMES, 7 LOUISIANA CIVIL LAW
TREATISE—BUSINESS ORGANIZATIONS § 2.16 at 95-96 (1999)(“The unanimity
requirement is imposed by the Code or by ancillaries with respect
to five decisions apparently considered to be fundamental:
amending the contract of partnership, admitting new partners,
terminating partnership, . . . allowing a partner to withdraw from
the partnership if the partnership has been constituted for a term,
and merging the partnership with another partnership or business
organization. In a sense, every one of the listed decisions may be
considered simply variations on the same theme: to amend the
contract of partnership . . . requires the unanimous consent of the
parties to the contract, i.e., the partners. . . . [P]artnership
agreements are considered simple contracts, not subject to change
without the approval of the affected parties.”)(footnotes and
citations omitted).
64
The fallacy of the majority’s position is that Louisiana law
clearly does not allow a single partner to transfer to a non-
partner an interest in the capital of a partnership that all of the
partners own in common. Each of the provisions of Louisiana
partnership law relied upon by the majority involve the specific
effects upon a single partner’s interest in the partnership caused
by the death or act of that partner with regard to his own
creditors or assignees. The other partners’ interests in the
partnership are not affected by those acts or events.
53
Creative partnership agreement. Furthermore, even without the
express prohibitions in the Creative articles of partnership, the
law prohibits such solo action by a partner affecting the interests
of the other partners. La. Civ. Code art. 2807. Otherwise, any
partner acting alone and contrary to the wishes of the other
partners could dilute each partner’s right to receive his or her
original share of the capital, profits, benefits, and assets of the
partnership, and thus single-handedly change the relationships
between the partners and amend the partnership agreement.
The majority opinion mistakenly relies on Louisiana Civil Code
articles 2818 and 2823, governing the causes and effects of
cessation of partnership membership, in its attempt to show that one
partner without consent of the others may amend the partnership
agreement to grant an interest in the capital of the partnership to
a third person. When a partner ceases to be a member for one of the
reasons stated in Article 2818, and the partnership continues to
exist, the former partner, his successor, or the seizing creditor
does not acquire an interest in the capital of the partnership as
the majority opinion assumes. Instead, the partnership is obliged
to pay such person an amount equal to the value that the share of
the former partner had at the time the membership ceased. La. Civ.
Code art. 2823 and comment (a); La. Civ. Code art. 2818 and
comments. That amount draws interest from the time that the former
partner’s membership ceased. La. Civ. Code art. 2824. Thus, a
54
debtor-creditor relationship between the partnership and the former
partner, his successor, or the seizing creditor is established and
fixed as of the time of the cessation of membership. The Code
clearly does not provide that a former partner’s interest in the
capital may continue after the cessation of his membership in the
partnership so as to appreciate or depreciate with the value of the
partnership. The cessation of partnership membership has only the
specific effects provided for by the Code. Thus, the partnership’s
obligation to a former partner, successor, or seizing creditor is
expressly provided by law and only in certain specific instances.
Articles 2823 et seq. do not expressly or implicitly authorize a
partner to amend the partnership agreement to grant capital, equity,
or profits interests in the partnership to third persons.
Furthermore, although the majority opinion accurately quotes
from Article 2812 and its comment regarding a partner sharing his
or her interest with a third person, the majority draws the
incorrect inference that a partner can make a third person a direct
owner of an interest in the capital of the partnership by sharing
his interest. That inference is at odds with Article 2812, which
adopts the approach of the French Civil Code. See id., comment.
Planiol explains French Civil Code art. 1861 as follows:
[T]he law permits each partner to join with him
someone to share with him the risks and benefits of his
share. There is then formed a little partnership of a
subordinate character between such partner and the third
person with whom he contracts, without the other partners
55
being entitled to benefit from, or being liable on such
contract as to which they are strangers (Art. 1861). The
third person thus associated in a subordinate way with
the operations of the partnership is called a “croupier.”
[fn.16]
[fn.16:] The use of this word in card or dice
games is very old. It is an allusion to the
habit which people who formerly travelled by
horse had, when carriages were rare and the
roads bad, of picking up riders on the crupper
to render them a service.
2 PLANIOL, CIVIL LAW TREATISE NO. 1975 (La. State Law Institute transl.
1959). When a partner elects to share his interest in the
partnership with a third person, he cannot thereby establish any
relationship between the third person and the partnership or the
other partners. The latter remain “strangers” to and insulated from
liability due to the fact that the little subordinate partnership
is formed strictly between the partner and the third person. In
short, the third person is taken on as a “croupier” only by the
partner with whom he contracts and he rides only on that partner’s
“crupper.” Consequently, Article 2812 does not authorize a partner
to create partnership obligations to a third person by sharing his
partnership interest with a third party. See MORRIS AND HOLMES § 2.08
at 68-74. Thus, the majority opinion errs in relying on Article
2812 to support its theory that Terry Smith created and transferred
a capital interest in Creative Development because Article 2812
56
contemplates merely the sharing of a partner’s existing share in the
partnership.65
Thus, it is clear that under Louisiana law a single partner
cannot amend the partnership contract or grant an interest in the
capital of the partnership to an outsider without the authorization
of the other partners, and that Central States failed to adduce
evidence or proof that Terry Smith was vested with authority to
transfer any interest in Creative to anyone. Moreover, Central
States failed to prove that the undefined “interest” which Terry
Smith professed to transfer to Beychok was intended even between
them to be a capital interest in the Creative partnership.
The law is well settled in Louisiana, this circuit, and
generally that a plaintiff who claims that a defendant is legally
subjected to a contractual obligation has the burden of proving
every fact essential to establish the obligation and that the
defendant was a party to and bound by the obligation. E.g., National
By-Products, Inc. v. United States, 405 F.2d 1256, 1264 (Ct.Cl.
1969); Bell v. Ralston Purina Co., 257 F.2d 31, 32 (10th Cir.
1958); Carp v. California-Western States Life Ins. Co., 252 F.2d
337, 339 (5th Cir. 1958); La. Civ. Code arts. 1831 (1987) and 2232
65
See also Black’s Law Dictionary p. 1121 (6th ed.
1990)(“Subpartnership. One formed where one partner in a firm makes
a stranger a partner with him in his share of the profits of that
firm. It is not a partnership but an arrangement in which the
subpartner shares in the profits and losses of a partner.”)
57
(1870); Kilpatrick v. Kilpatrick, 660 So.2d 182, 185 (La. App. 2
Cir.), writ denied, 664 So.2d 444 (La. 1995); Pennington Const. Inc.
v. R A Eagle Corp., 652 So.2d 637 (La. App. 1 Cir. 1995); Bordlee
v. Pat’s Const. Co. 316 So.2d 16, 17 (La. App. 4 Cir. 1975); Hunter
Co. v. Bossier Levee Dist. of La., 115 So.2d 226, 227 (La. App. 2d
Cir. 1959).
Consequently, even if Central States had proved that Terry
Smith was authorized by all of the partners of Creative to transfer
an undefined “interest” to Beychok, the record is devoid of any
evidence that the transfer of a capital interest was authorized or
intended. Because there is no evidence in the record that the
partners of Creative vested any authority in Smith to transfer any
interest in Creative to Beychok, Smith unquestionably did not have
authority to transfer a capital or profits interest to him. There
is no evidence in the record that the undefined interest which Smith
intended to transfer and which Beychok intended to receive was a
capital or profits interest in Creative. The written contract
itself does not define the interest intended to be transferred.
According to the testimony of Rome and Beychok, the intent of the
parties was not to transfer a capital or profits interest in
Creative to Beychok, and the trial court which saw and heard the
witnesses found that the parties indeed did not have such an
58
intention.66 Central States has fallen far short of carrying its
burden to prove that a transfer of an interest in the capital of
Creative was authorized, intended or effected.
III. Issues Which Must Be Decided On Remand
I would affirm the district court’s judgment dismissing Central
States’ claims for the reasons I have stated, and I also
respectfully disagree with the majority’s limitation of the issues
that the district court may consider and decide on remand. Given
the majority decision, it must remand the case. But it should send
the case back for further proceedings and decision on all of the
issues which the district court did not reach in its first judgment.
For example, Central States must prove that Creative was a “trade
or business” in order to hold it liable under a “brother-sister” or
“common control” theory. See 29 U.S.C. § 1301(b)(1). Cf.
Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1987);
Central States v. Personnel, Inc., 974 F.2d 789 (7th Cir. 1992);
Susan C. Glen, Central States v. Personnel, Inc.: When Real Estate
Investments Create Personal Liability Under the Multiemployer
Pension Plan Amendments Act of 1980, 78 Minn.L.Rev. 501 (1964).
Therefore, the district court should be directed on remand to hear
66
The trial court found that the “June 1986 agreement was
entered into in order to substitute Bechok [sic] as the creditor of
the partnership in lieu of the bakery.”
59
and decide that issue, as well as any other essential element of the
case not reached previously, unless of course the parties have
already stipulated or admitted such issues.
IV. Conclusion
The majority opinion is at odds with both federal law and
Louisiana law, as well as the concept and purposes of partnership
as a juridical entity. The majority decides, in effect, that any
partner in a partnership has the autonomous legal power to transfer
an interest in the capital of a partnership to third persons, which
in effect allows any party to the partnership contract to
unilaterally amend the contract to affect the interests, rights, and
obligations of the other non-consenting partners, change the
partners’ relationships, and dilute each partner’s interest in the
capital, profits, benefits, and distribution of assets of the
partnership. All of these major decisions and changes require the
unanimous consent of the partners. La. Civ. Code arts. 2803 and
2807. If this were not the law, each partner would have the
autonomous power to create unlimited additional capital and profits
interests; each partner would be tempted or forced in self-defense
to feather his or her own nest by granting additional interests to
family or cronies; and the entire law of partnerships would fall
into disarray and probably become defunct. As if this were not
enough, the majority’s reading of the Louisiana partnership law, as
60
this case demonstrates, would empower any partner in any partnership
to subject all other partners to massive, unforeseeable personal
liability, without their consent.
The Central States plaintiffs failed to demonstrate a legal
basis under federal law or Louisiana partnership law for Terry
Smith’s authority to transfer ownership of either a “profits
interest” or “capital interest” in the Creative partnership to
Sheldon Beychok. Lacking proof that Smith legally effected the
grant or transfer of an interest in the capital or profits of the
Creative partnership to Beychok, Central States has also failed to
prove that Creative and Wolf Baking were trades or businesses under
the “common control” of Beychok. Because the Central States
plaintiffs failed to prove either of these elements of their case,
their claims against Creative and its partners individually for
payment of Wolf Baking’s $1.35 million withdrawal liability were
properly dismissed by the district court.
61
Central States, Southeast & Southwest Areas Pension Fund v. Creative Development Co.
Court: Court of Appeals for the Fifth Circuit
Date filed: 2000-11-03
Citations: 232 F.3d 406
Copy CitationsCombined Opinion