First Circuit Holds Private Equity Fund Liable for Employer's Withdrawal


Two private equity funds that held a combined 100 percent stake in an employer that withdrew from a multiemployer pension plan can be liable for the employer's withdrawal liability, the U.S. Court of Appeals for the First Circuit ruled July 24 (Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund,1st Cir., No. 12-2312, 7/24/13).

Chief Judge Sandra Lynch, writing for the court, found that at least one of the private equity funds qualified as a trade or business under the Multiemployer Pension Plan Amendments Act (MPPAA) for purposes of assessing withdrawal liability. In so ruling, Lynch focused on the profit-seeking motives of the private equity funds, the degree of control they exercised over the withdrawing employer, and the extent to which they received economic benefits greater than that which could be expected from a passive investment.

The court's ruling largely reversed a 2012 decision of the U.S. District Court for the District of Massachusetts. It also afforded limited deference to a 2007 opinion letter promulgated by the Pension Benefit Guaranty Corporation and defended by PBGC in an amicus brief filed with the court.

Withdrawal Liability Assessment.

Pursuant to a collective bargaining agreement, Scott Brass Inc. made contributions to the New England Teamsters and Trucking Industry Pension Fund. In 2008, Scott withdrew from the pension plan and entered into bankruptcy, and the plan assessed withdrawal liability of more than $4.5 million.

After conducting an investigation into Scott's finances, the plan learned that two private equity funds owned by Sun Capital Advisors Inc.—Sun Fund III and Sun Fund IV—held a 100 percent interest in Scott. The plan then sought to hold the Sun Funds jointly and severally liable for Scott's withdrawal liability, on the theory that the funds were trades or businesses under common control with Scott within the meaning of MPPAA.

The Sun Funds filed an action for a declaratory judgment that they were not trades or businesses under common control with Scott, and the plan filed a counterclaim seeking payment of Scott's withdrawal liability.

District Court: Investment Funds Not Liable.

Under the MPPAA, members of a common controlled group are jointly and severally liable for an employer's withdrawal liability. For an entity to be held liable for withdrawal liability, the entity must be a “trade or business” under “common control” with the withdrawing employer.

In considering whether the investment funds constituted trades or businesses, the district court said that a 2007 PBGC opinion deemed a private equity fund similar to the Sun Funds to be a trade or business under MPPAA, because the fund's stated purpose was to make a profit and because its investment activity was continuous and regular. The district court declined to defer to the PBGC decision, however, because it found that PBGC “misread Supreme Court precedent” by finding the fund's activity continuous and regular based on “the mere size of the investment or its profitability.”

Instead, the district court found that the Sun Funds' involvement with Scott was “not sufficiently continuous or regular” to constitute a trade or business, because they were passive investments. The Sun Funds had no employees, office space, or products, the district court said, and they each made a “single investment” in Scott that required little management or oversight. This was true even though Sun Funds elected members of Scott's board of directors, the district court said, because the funds performed those acts “only as shareholders.”

The district court also rejected the plan's argument that the principal purpose of the Sun Funds' investment in Scott was to evade or avoid withdrawal liability.

PBGC Urges First Circuit to Reverse.

On appeal, PBGC filed an amicus brief in support of the plan and in favor of finding liability on the part of the investment funds. PBGC argued that its interpretation of trade or business under MPPAA was entitled to deference and did not conflict with agency regulations. Further, the district court's ruling would “create an unintended loophole in controlled group liability” and would “allow investment funds that purchase contributing employers categorically to escape withdrawal liability,” PBGC said.

According to PBGC, the district court based its trade or business analysis on “tax cases that narrowly construed ‘trade or business' to prevent income tax avoidance.” Calling those cases “irrelevant” in a trade or business analysis, PBGC said that “entities that are not operating companies—but that own operating companies and exist for the purpose of making a profit—are ‘trades or businesses' if they have regular influence and control over the operating company.”

First Circuit Pays Limited Deference to PBGC Opinion.

The First Circuit began its analysis by examining the 2007 PBGC opinion that the district court declined to give deference. According to the First Circuit, PBGC adopted an “investment plus” standard to determine whether a private equity fund qualifies as a trade or business. Under that standard, a fund is more likely to be a trade or business if its investment activity was done for the purpose of making a profit and if it exercised control over the contributing employer, the First Circuit said.

PBGC argued that its 2007 opinion was entitled to deference under the standard set forth in Auer v. Robbins, 519 U.S. 452 (1997), which would require a court to defer to PBGC's interpretation of its own regulations unless that interpretation was “plainly erroneous or inconsistent with its own regulations.” The First Circuit disagreed, explaining that Auer deference is inappropriate in situations in which “significant monetary liability would be imposed on a party for conduct that took place at a time when that party lacked fair notice of the interpretation at issue.”

However, the First Circuit elected to defer to PBGC's opinion under the standard set forth in Skidmore v. Swift & Co., 323 U.S. 134 (1944). Under Skidmore, the First Circuit said, the deference extended to an agency determination depends on “the thoroughness evident in [the agency's] consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.”

Despite according limited deference to PBGC's interpretation, the First Circuit also expressed its “dismay” that PBGC “has not given more and earlier guidance” on this issue.

Excerpted from a story that ran in Pension & Benefits Daily (7/25/2013).