Employment Law - Pension Withdrawal Liability - First Circuit Holds Private Equity Fund Is "Trade or Business" under Multiemployer Pension Plan Amendments Act
EMPLOYMENT LAW--PENSION WITHDRAWAL LIABILITY--FIRST CIRCUIT HOLDS PRIVATE EQUITY FUND IS "TRADE OR BUSINESS" UNDER MULTIEMPLOYER PENSION PLAN AMENDMENTS ACT.--Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129 (1st Cir. 2013).
Private equity firms often make money by taking over troubled companies, improving their business operations, and selling them at a profit. (1) Occasionally, however, private equity firms' best efforts fail, and their portfolio companies wind up bankrupt. Sometimes these companies go bust before they are able to pay out all of the pension obligations they owe their employees. recently, in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, (2) the First Circuit held as a matter of first impression that a private equity fund was a "trade or business" under the Multiemployer Pension Plan Amendments Act of 1980' (MPPAA). That designation leaves the private equity fund potentially liable for a bankrupt portfolio company's unfunded pension obligations. The First Circuit's decision would have been more compelling, and possibly more helpful, if the court had grounded it in an explicit discussion of the MPPAA's statutory objectives. Nevertheless, the court was wise to advance cautiously. in future cases, courts should likewise hesitate before adopting or expanding Sun Capital. Federal agencies and Congress are likely better positioned to resolve this dispute.
Sun Capital Advisers, Inc. is a private equity firm specializing in leveraged buyouts. (4) In 2006, Sun Capital drew money from two of its private equity funds, (5) together called "the Sun Funds," to purchase Scott Brass, Inc., a Rhode Island metals producer. (6) After the Sun Funds acquired Scott Brass, Sun Capital Advisers implemented a plan designed to revitalize the ailing corporation. Management companies were set up for each fund, providing Scott Brass "with employees and consultants from Sun Capital." (7) A host of Sun Capital agents, including co-CEOs Marc Leder and Rodger Krouse, "exerted substantial operational and managerial control" over Scott Brass. (8) But in the autumn of 2008, declining copper prices drove Scott Brass into bankruptcy. (9) By stopping required payments to the New England Teamsters and Trucking Industry Pension Fund, Scott Brass triggered withdrawal liability under the MPPAA, obligating it to pay $4.5 million in "unfunded vested benefits." (10)
The Teamsters Fund alleged that the Sun Funds' relationship with Scott Brass made them jointly and severally liable for Scott Brass's withdrawal obligations. (11) Under the MPPAA, "[t]o impose withdrawal liability on an organization other than the one obligated to the [pension] Fund, two conditions must be satisfied: 1) the organization must be under common control with the obligated organization, and 2) the organization must be a trade or business." (12)
In June 2010, the Sun Funds sought a declaratory judgment in federal district court. (13) The district court granted summary judgment in favor of the Sun Funds, ruling that they are not "trades or businesses" and hence cannot be subject to MPPAA withdrawal liability. (14) As the district court noted, neither ERISA nor the MPPAA defines "trade or business." Rather, courts are directed to "look to the tax code and tax caselaw to interpret" the phrase. (15) The district court relied on two seminal Supreme Court tax cases, Higgins v. Commissioner (16) and Whipple v. Commissioner, (17) which held that "investments are not trades or businesses." (18) The district court refused to attribute Sun Capital's management activities to the Sun Funds; instead, it accepted their self-characterization as mere "passive pools of investing funds." (19) On that basis, the court concluded that Higgins and Whipple shield the Funds from trade or business designation. Finally, the court rejected the Teamsters' alternative theory: that the Sun Funds should be made to cover Scott Brass's withdrawal obligations because they structured their acquisition purposely to "evade or avoid" withdrawal liability. …