Opinion ID: 22187
Heading Depth: 3
Heading Rank: 3

Heading: Beychok as the Owner of a Capital Interest in Creative Development

Text: 42 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 43 Creative takes the position that the process of elimination supports the district court's determination that the interest 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. 44 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 contraryprovision 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, (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. 45 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 nonpartner third person. Obviously, it would be sophistry for Creative to argue that a partnership cannot transfer, and assign 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. 46 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 C. Withdrawal Liability 47 1. Membership as a Partner is Not a Prerequisite 48 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 thatone 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 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. 49 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 individuals and one of those entities is a participating employer in a multiemployer pension plan. 50 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 51 2. Render or Remand? 52 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. 53 More significant (and curious) is the observation that nowhere does Central States advert to the fact that the 80 percent 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 regulation 52 to realize that the effective control prong of the common control test is no simple arithmetic exercise; after all, if it were, there would always be a more than 50 percent capital interest when the personsin 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 54 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. 55 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 $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 nonidentical. 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. 56 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. 57 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' 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. 58 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 statusof 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 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. 59 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 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 60 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. 61 In the interest of judicial economy and to avoid the need for another panel of this court to reinvent the wheel if either or 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.