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March 29 — Two private equity funds are jointly liable for $4.5 million in pension fund debts owed by one of the companies they own, a federal judge in Massachusetts ruled.
This decision is a blow to the private equity community, which may be forced to reevaluate the risks associated with investing in companies that have obligations to multiemployer pension plans.
The case involves a federal law that imposes pension liability on any entities found to be “trades or businesses” under “common control” with a company that has withdrawn from a multiemployer pension plan.
Three years ago, the U.S. Court of Appeals for the First Circuit issued a highly publicized decision finding that at least one private equity fund affiliated with Sun Capital Advisors qualified as a trade or business under this provision of the Multiemployer Pension Plan Amendments Act .
Building off that ruling, Judge Douglas P. Woodlock of the U.S. District Court for the District of Massachusetts concluded that both of the Sun Capital funds involved in the dispute qualified as trades or businesses under common control with bankrupt brass company Scott Brass Inc. Given this, Woodlock found the Sun Capital funds jointly liable for more than $4.5 million in withdrawal liability that Scott Brass owed to a Teamsters pension fund.
Jeffrey B. Cohen, a partner with Bailey & Ehrenberg PLLC who litigates disputes under the Employee Retirement Income Security Act, called this case “one of the most important ERISA cases of this decade.”
Woodlock's decision to treat the funds as a “partnership-in-fact” under common control with the withdrawing employer “comports with the economic reality” of the situation, Cohen told Bloomberg BNA in a March 29 e-mail.
Cohen also predicted that the judge's ruling would be affirmed on appeal.
“This decision is of great significance to both withdrawal liability in the multiemployer context and also to employer liability to PBGC for underfunded single-employer plans,” Cohen said. “The private equity community is going to have to adjust to this precedent, just as it has to the 2013 First Circuit opinion on the ‘trades or businesses' issue earlier in this case. As the court says in this recent decision, ‘the 80 percent ownership rule appears to provide a roadmap for exactly how to contract around withdrawal liability.' ”
Regina Olshan, a partner with Skadden, Arps, Slate, Meagher & Flom LLP and head of its executive compensation and benefits group, had a different take.
“The district court's application of the First Circuit's new ‘investment plus' standard is a noteworthy development for PE sponsors in that the court found not only that the various Sun Capital funds were trades or businesses individually, but also that the funds (none of which itself had the requisite 80% ownership interest in the portfolio company) in operation collectively constituted a partnership-in-fact—notwithstanding the lack of partnership formalities—that was itself a trade or business with a resulting 100% portfolio company ownership interest,” Olshan told Bloomberg BNA in a March 29 e-mail.
“The court's allusion to ‘the larger ecosystem of Sun Capital entities' in the course of its analysis suggests a potentially expansive view of the investment plus standard, one that could have a significant impact on PE fund operations, particularly if applied beyond the First Circuit,” she added.
Cohen and Olshan weren't involved in the case.
Woodlock's March 28 opinion followed the test used by the First Circuit and the Pension Benefit Guaranty Corporation to determine whether private equity funds qualify as trades or businesses under the MPPAA. The “investment plus” test asks whether an entity's activities involve something more than mere passive investment.
The Sun Equity funds argued for a strict application of this test, but Woodlock said that a “less restricted test” was more consistent with the First Circuit's opinion.
To that end, Woodlock found that the funds' receipt of certain benefits—including offsets against management fees related to Scott Brass and “carryforwards” with the potential to offset management fees—satisfied the “plus” portion of the investment plus test. That's because they were benefits “not available to an ordinary passive investor who does not engage in management activities,” Woodlock said.
Woodlock also considered a question left unanswered by the First Circuit's opinion—namely, whether the Sun Capital funds were under “common control” with Scott Brass for purposes of the MPPAA.
The Sun Capital funds argued that they each failed to meet the 80 percent ownership threshold required by the statute, because one fund owned 70 percent of the company that owned Scott Brass, and the other fund owned 30 percent.
However, Woodlock found the two Sun Capital funds combined to create a joint venture or partnership under federal law, and that “partnership-in-fact” was a trade or business that owned the entirety of Scott Brass. The funds argued that their use of a limited liability company foreclosed this result, but Woodlock disagreed, explaining that the MPPAA “is a statute that allows for, and may in certain circumstances require, the disregard of such formalities.”
Kirkland & Ellis LLP and Murphy & King PC represented the Sun Capital funds. Feinberg, Campbell & Zack PC represented the pension plan.
To contact the reporter on this story: Jacklyn Wille in Washington at email@example.com
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Text of the decision is at http://www.bloomberglaw.com/public/document/Sun_Capital_Partners_III_LP_v_New_England_Teamsters__Trucking_Ind/4.
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