The First Circuit recently ruled in Sun Capital Partners III, LP v. New England Teamsters & Trucking Ind. Pension Fund that two investment funds controlled by private equity firm Sun Capital were not part of a “controlled group” with a former portfolio company, Scott Brass, Inc. (“Scott Brass”), and therefore not liable for Scott Brass’s withdrawal liability from a multi-employer pension plan.[1] While this decision ends the decade-long attempt by the New England Teamsters pension fund to hold the Sun Capital funds liable, the opinion is not a repudiation of the principle that private equity funds may constitute a “controlled group” for purposes of pension plan withdrawal liability. Rather, it signals that each case will have to be evaluated on its own facts. So, while the ruling is good news for Sun Capital, the message for investors is that they need to be mindful of pension plan withdrawal liability in structuring private equity acquisitions.
Withdrawal Liability
The liability of the members of a “controlled group” for withdrawal from a multi-employer pension plan is governed by the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"). Under the MPPAA, the potential liability of the two Sun Capital funds depended on whether they had created an implied partnership-in-fact that constituted a control group for purposes of ERISA. When an employer withdraws from a multi-employer plan, it must pay its proportionate share of the plan's unfunded vested benefits. To prevent evasion of withdrawal liability, the MPPAA imposes joint and several withdrawal liability, not only on the withdrawing employer, but also on all entities (1) under "common control" with the obligated organization, and (2) that qualify as engaging in “trade or business.”[2]
Facts
In 2007, two private equity funds sponsored by Sun Capital Advisors, Inc. — Sun Capital III and Sun Capital IV — acquired 30% and 70%, respectively, of Scott Brass, a brass and copper manufacturer that was a participant in a multi-employer pension plan, the New England Teamsters and Trucking Industry Pension Fund (“NETTI”). Scott Brass stopped making pension contributions in October 2008. In the fall of 2008, an involuntary bankruptcy petition was filed against Scott Brass in the District of Rhode Island. In December 2008, NETTI demanded that Scott Brass pay more than $4.5 million in withdrawal liability and it also demanded payment from the Sun Capital funds. The funds sued NETTI in federal court in Massachusetts, seeking a ruling that they were not liable for the withdrawal liability. The district court granted summary judgment in favor of the funds, ruling that because the funds were passive investors and had no employees or offices, neither was a “trade or business” for purposes of the ERISA provisions governing withdrawal liability. NETTI appealed to the First Circuit.
First Circuit 2013 Ruling
Construing § 1301(b)(1) of ERISA, the First Circuit conducted a fact-specific “investment plus” approach and ruled that Sun Capital IV was a trade or business. The court based its ruling on findings that: (i) Sun Capital IV was actively involved in the management of Scott Brass and controlled its board of directors; and (ii) Sun Capital IV received an economic benefit which an ordinary passive investor would not have derived in the form of an offset against fees it had to pay to its general partner. The First Circuit remanded the case to the district court to determine whether Sun Capital III was also a trade or business and whether ERISA’s common control requirement had been satisfied.
