Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund

Summarized by Guy Moss ,
12 years 7 months ago

Citation:

United States Court of Appeals for the First Circuit, No. 12-2312 (July 24, 2013)

Tag(s):

Ruling:

In matters of first impression, the First Circuit addressed two issues relating to the withdrawal liability of private equity firms, as owners of a bankrupt portfolio company, under the Multiemployer Pension Plan Amendment Act of 1980 (the "MPPAA"). First, to impose withdrawal liability on a third party a court must find that (i) the party is under common control with the debtor, and (ii) the party is a "trade or business." The Court held that when examining the exposure of investors under the MPPAA, the test for being a "trade or business" should not be determined from Supreme Court cases dealing with similar terms in other sections of the Internal Revenue Code but, rather, must be an "investment plus" approach based on all relevant facts explaining the precise activities of the third party and without other general guidelines for what the "plus" is. Here, the test was met as to one of the two funds (see facts below). Second, while the MPPAA does allow a court to impose liability without regard to a "transaction" if a principal purpose of the transaction is to "evade or avoid liability," no such liability exists here despite evidence that the investors divided their ownership so as to avoid the 80% parent-subsidiary common control requirement mentioned above. The Court reasoned that under the statute's plain meaning a court would have to examine the situation as if the offending transaction had never occurred, and doing so here would only sever any ties between the two acquiring funds and the debtor. A court would not be free to re-write the original transaction as if the two funds were merely one and had purchased 100% of the debtor. The district court's grant of summary judgment was, accordingly, reversed in part, affirmed in part, and vacated in part, with a remand for further proceedings.

Procedural context:

This is an appeal from the United States District Court for the District of Massachusetts of summary judgment rulings under the MPPAA.

Facts:

Two related private equity firms (together "Sun Capital") together acquired, indirectly, a 30% and 70% interest in Scott Brass, Inc. ("SBI"), a producer of metals which was obligated to make contributions to the Teamsters multiemployer pension fund ("TPF") under a collective bargaining agreement. Sun Capital was part of a larger, general program by which investors seek to find, turn around and eventually sell struggling portfolio companies following active, not passive, involvement in their acquisitions. To that end, among other things, Sun Capital was intimately involved in the management and operation of SBI through employees and service agreements, and received certain economic benefits in the form of offsets against fees it would have paid to its general partner that a passive investor would never have received. In 2008 SBI went into bankruptcy and terminated its contibutions to the TPF, thereby triggering withdrawal liability for its proportionate share of the TPF's unfunded vested benefits. When the TPF sought to collect $4.5mm from third-party Sun Capital under the MPPAA, Sun filed a declaratory judgment action seeking a ruling that it was not subject to withdrawal liability. The Pension Benefit Guaranty Corporation intervened as an amicus because it was potentially exposed as a guarantor if the TPF became insolvent. Sun Capital prevailed on its motion for summary judgment in the district court and this appeal followed.

Judge(s):

Lynch, Thompson and Kayatta

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