Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund

943 F.3d 49

SUN CAPITAL PARTNERS III, LP; Sun Capital Partners III QP, LP ; Sun Capital Partners IV, LP, Plaintiffs, Appellants,

v.NEW ENGLAND TEAMSTERS & TRUCKING INDUSTRY PENSION FUND, Defendant, Third Party Plaintiff, Appellee,Scott Brass Holding Corp.; Sun Scott Brass, LLC, Third Party Defendants.

Nos. 16-1376

19-1002

United States Court of Appeals, First Circuit.

November 22, 2019

John C. O'Quinn, with whom John F. Hartmann, Devin A. DeBacker, Kirkland & Ellis LLP, Theodore J. Folkman, and Pierce Bainbridge Beck Price & Hecht LLP, were on brief for appellants.

Catherine M. Campbell, with whom Melissa A. Brennan, Renee J. Bushey, and Feinberg, Campbell & Zack, PC were on brief for appellee.

Craig T. Fessenden, with whom Judith R. Starr, Kartar S. Khalsa, Charles L. Finke, and Louisa A. Soulard were on brief for Pension Benefit Guaranty Corporation, amicus curiae.

Before LYNCH, STAHL, and LIPEZ, Circuit Judges.

LYNCH, Circuit Judge.

The issue on appeal is whether two private equity funds, Sun Capital Partners III, LP ("Sun Fund III") and Sun Capital Partners IV, LP ("Sun Fund IV"), are liable for $4,516,539 in pension fund withdrawal liability owed by a brass manufacturing company which was owned by the two Sun Funds when that company went bankrupt. The liability issue is governed by the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"). Under that statute, the issue of liability depends on whether the two Funds had created, despite their express corporate structure, an implied partnership-in-fact which constituted a control group. That question, in the absence of any further formal guidance from the Pension Benefit Guaranty Corporation ("PBGC"), turns on an application of the multifactored partnership test in Luna v. Commissioner, 42 T.C. 1067 (1964).

If the MPPAA imposes such withdrawal liability, PBGC states it assumes the New England Teamsters & Trucking Industry Pension Fund ("Pension Fund") intends to look to the private equity funds, including their general partners and their limited partners, to pay the liability. The issues raised involve conflicting policy choices for Congress or PBGC to make. On one hand, imposing liability would likely disincentivize much-needed private investment in underperforming companies with unfunded pension liabilities. This chilling effect could, in turn, worsen the financial position of multiemployer pension plans. On the other hand, if the MPPAA does not impose liability and the Pension Fund becomes insolvent, then PBGC likely will pay some of the liability, and the pensioned workers (with 30 years of service) will receive a maximum of $12,870 annually. See 18 U.S.C. § 1322a.

The district court held that there was an implied partnership-in-fact which constituted a control group. We reverse because we conclude the Luna test has not been met and we cannot conclude that Congress intended to impose liability in this scenario.

I.

We describe the facts as to the organizational structures of the Sun Funds¹ and related entities. We also refer to the facts set forth in our previous opinion in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129, 135 n.3 (1st Cir. 2013) ( Sun Capital II ). The two Sun Funds are each distinct business entities with primarily different investors and investments. But they are controlled by the same two men, and they coordinate to identify, acquire, restructure, and sell portfolio companies. The Funds form and finance subsidiary LLCs, through which they acquire and control portfolio companies, including Scott Brass, Inc. ("SBI"), the brass manufacturing company. While the Funds jointly owned SBI, it filed for bankruptcy and subsequently withdrew from the Pension Fund, a multiemployer pension fund, incurring withdrawal liability.² We restate here only certain facts, and then briefly give a procedural history of the litigation leading to the instant appeal.

A. The Organization of the Sun Funds

Sun Capital Advisors, Inc. ("SCAI") is a private equity firm which pools investors' capital in limited partnerships, assists these limited partnerships in finding and acquiring portfolio companies, and then provides management services to those portfolio companies. SCAI established at least eight funds. Two of them, Sun Fund III and Sun Fund IV, appellants here, are the investors in SBI, and both are organized under Delaware law as limited partnerships. The Sun Funds themselves do not have offices or employees, do not make or sell goods, and report to the IRS only investment income. The Funds expressly disclaimed in their respective limited partnership agreements any partnership or joint venture with each other. The Funds also maintained distinct tax returns, financial books, and bank accounts.

Sun Funds III and IV each have one general partner, Sun Capital Advisors III, LP and Sun Capital Advisors IV, LP, respectively. These general partners each own respective subsidiary management companies, Sun Capital Partners Management III, LLC ("SCPM III") and Sun Capital Partners Management IV, LLC ("SCPM IV"). The two management companies act as intermediaries between SCAI and holding companies. The management companies contract with SCAI for the management services of SCAI's employees and consultants, and then with the holding company to provide these management services.

Sun Funds III and IV, respectively, have 124 and 230 limited partners. Sixty-four of these limited partners overlap between the Funds. The limited partners include both individual and institutional investors, including pension funds, other private equity funds, family trusts, and universities.³ The Sun Funds' limited partnership agreements vest exclusive control of the Funds in their respective general partners, assign the general partners percentages of the Funds' total commitments and investment profits, and require the Funds to pay their general partners an annual management fee.⁴ The Sun Funds' general partners, which are themselves organized as limited partnerships, have limited partnership agreements, which vest exclusive control over the general partners' "material partnership decisions" in limited partnership committees. These limited partnership committees are each made up of two individuals, Marc Leder and Rodger Krouse. These two men also founded and serve as the co-CEOs and sole shareholders of SCAI. Leder and Krouse were the co-CEOs of the management company SCPM IV.⁵

B. The Operation of the Sun Funds and SBI

The Funds used their controlling share of portfolio companies "to implement restructuring and operational plans, build management teams, become intimately involved in company operations, and otherwise cause growth in the portfolio companies." Sun Capital II, 724 F.3d at 134. The Sun Funds owned and managed their acquisitions through various corporate intermediaries. The Sun Funds together sought out potential portfolio companies and, through SCAI, developed restructuring and operating plans before acquisition. The Sun Funds then would attempt to sell a portfolio company for a profit, typically within two to five years of acquisition. The Sun Funds would acquire, restructure, and sell companies both independently and together.⁶

As part of their acquisition of SBI, the Sun Funds formed and financed Sun Scott Brass, LLC ("SSB-LLC"). Sun Fund III owned 30% of SSB-LLC and Sun Fund IV owned 70% of SSB-LLC. These shares reflect Sun Fund III investing $900,000 and Sun Fund IV investing $2.1 million in SSB-LLC. SSB-LLC in turn formed and financed Scott Brass Holding Corporation ("SBHC"), a wholly owned, subsidiary holding company. SBHC used the Sun Funds' $3 million investment in SSB-LLC and $4.8 million in debt to purchase all of SBI's stock. The purchase price reflected a 25% discount from the fair market value of the SBI stock at acquisition to account for SBI's known, unfunded pension liability. The Funds, through SCAI employees placed in SBI, jointly operated SBI.

C. Procedural History

In Sun Capital II, we remanded to the district court to determine whether the Funds were under common control with SBI and whether Sun Fund III engaged in trade or business.⁷ 724 F.3d at 150. It determined that the Sun Funds had formed a partnership-in-fact sitting on top of SSB-LLC and that this partnership-in-fact owned 100% of SBI through SSB-LLC, and so concluded the Funds met the "common control" test utilized in MPPAA law. Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 172 F. Supp. 3d 447, 463–66 (D. Mass. 2016). That test is derived from tax law. See 26 C.F.R. § 1.414(c)-2(b) ; 29 C.F.R. §§ 4001.2, 4001.3(a) (incorporating regulations promulgated under 26 U.S.C. § 414(c) ). The district court held that this partnership-in-fact engaged in "trade or business" in its operation of SBI. Sun Capital III, 172 F. Supp. 3d at 466–67. Accordingly, the district court held the Sun Funds jointly and severally responsible for SBI's withdrawal liability. Id. at 467.

The Sun Funds appealed the rulings that they were under common control with SBI, that they formed a partnership-in-fact, and, if a partnership-in-fact did exist, that it engaged in trade or business. PBGC filed an amicus brief in support of the district court ruling.

II.

A. Standard of Review

This case reaches the court on appeal from a grant of summary judgment. "We review a grant or denial of summary judgment, as well as pure issues of law, de novo." Sun Capital II, 724 F.3d at 138 (citing Rodriguez v. Am. Int'l Ins. Co. of P.R., 402 F.3d 45, 46–47 (1st Cir. 2005) ). This includes both the determination of withdrawal liability and the recognition of a partnership-in-fact. See Pension Ben. Guar. Corp. v. Beverley, 404 F.3d 243, 246, 250–53 (4th Cir. 2005). Because the parties filed cross-motions for summary judgment, we "view each motion, separately, in the light most favorable to the non-moving party, and draw all reasonable inferences in that party's favor."...