In Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund, 2012 WL 5197117 (D. Mass. Oct. 18, 2012), a federal district court in Massachusetts concluded that a private equity fund was not a “trade or business” subject to the imposition of withdrawal liability and thus was not responsible for paying the withdrawal liability owed by one of its portfolio companies that had completely withdrawn from a multiemployer pension fund.[1]  In so holding, the court rejected a Pension Benefit Guaranty Corporation (“PBGC”) Appeals Board opinion letter that reached the opposite conclusion, finding the PBGC’s analysis “unpersuasive” and “incorrect as a matter of law.” If adopted by other courts, this decision could significantly limit a multiemployer pension fund’s ability to assess and collect withdrawal liability against companies that are owned and operated by private equity funds.

The Multiemployer Pension Plan Amendments Act of 1980 and Private Equity Funds

Since the enactment of the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), employers that withdraw from a multiemployer plan have been required to pay their share of the pension plan’s unfunded liabilities, i.e., an employer’s withdrawal liability.  In the event of a contributing employer’s complete or partial withdrawal, a multiemployer pension fund must assess and collect the employer’s withdrawal liability. But what if the employer is unable to pay all or a portion of the withdrawal liability demanded by the multiemployer pension fund? For purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the signatory company to the collective bargaining agreement and all “trades or business (whether or not incorporated) that are under common control” with the withdrawing company are treated as the “employer.” Each member of the controlled group is jointly and severally liable (i.e., the members of a group are either individually or mutually responsible) to the multiemployer pension plan for the withdrawal liability.

Private equity funds are pools of actively managed capital raised from institutional investors that are used to make investments in public and private companies (known as portfolio companies). These investments are made with the intent of creating value for the investors in the portfolio companies by improving their operations, reducing costs, selling non-core assets and maximizing cash flow. As employers, the portfolio companies contribute to multiemployer pension plans for their employees who are covered under the terms of a collective bargaining agreement with a labor union.  As such, these portfolio companies have potential exposure for withdrawal liability.  But what about the private equity funds that invested in these companies?   

Procedural History

Sun Funds, the private equity funds at issue here, are advised by Sun Capital Advisors, Inc. (“Sun Capital”), which specializes in leveraged buyouts and investing in underperforming companies.  Sun Capital recommends investments to the Sun Funds and then negotiates and structures the investments on behalf of the Sun Funds. The Sun Funds are limited partnerships to which investors contribute money for investment purposes. The Sun Funds do not have employees, office space or goods for sale; they are essentially pools of assets managed by Sun Capital. Sun Capital is a general partner to each of the Sun Funds and operates the Sun Funds along with a limited partner committee. 

The Sun Funds invested in Scott Brass, Inc., a manufacturer of brass and copper coil for industrial purposes (the “Employer”), through investment vehicles established for the purpose of buying the ownership interests of the Employer. The first vehicle purchased 70% of the ownership interests of the Employer, while the other purchased the remaining 30%. 

For two years after the purchase, the Employer regularly made contributions to a pension plan pursuant to a collective bargaining agreement with the New England Teamsters Union. However, in 2008, the Employer was unable to remain in business and closed its doors. As a result, the Employer withdrew from the plan, and shortly thereafter, filed for bankruptcy. The plan demanded approximately $4.5 million in withdrawal liability from the Employer. Upon learning of the Sun Funds’ investment in the Employer, the plan determined that the Sun Funds were a “joint venture or partnership in common control with” the Employer and demanded payment of the withdrawal liability from the Sun Funds as well.

The Sun Funds filed a declaratory judgment action seeking an order from the district court that they were not employers under ERISA, and thus not liable for withdrawal liability because they were not a “trade or business” under “common control” with the Employer. The plan filed a counterclaim in the action seeking to hold the Sun Funds jointly and severally liable for the Employer’s withdrawal liability. The parties cross-moved for summary judgment.

The District Court’s Decision

The district court concluded that the Sun Funds were not a trade or business as a matter of law, and thus, could not be held liable to the plan for the Employer’s withdrawal liability.  In so ruling, the court relied on the U.S. Supreme Court’s decision in Commissioner v. Groetzinger, 480 U.S. 23, 25 (1987), which held that a “trade or business” under the federal tax code must have a primary purpose of making “income or profit” and must conduct its activity “with continuity and regularity.”  It also relied on prior Supreme Court precedent that ruled “investments” are not trades or businesses. See Whipple v. Comm’r, 373 U.S. 193, 202 (1963).

The district court rejected a 2007 PBGC Appeals Board Opinion that held that a private equity fund (similar to the Sun Funds) qualified as a “trade or business” for the purposes of ERISA withdrawal liability. In the 2007 opinion, the PBGC applied the Groetzinger test and determined that the first prong of the test was satisfied because the purpose of the private equity fund was to make a profit. The PBGC observed that the private equity fund was engaged in “investment services” and the private equity fund’s general partner was paid for consulting and management services.  The PBGC concluded that the second prong of the test also was satisfied because the size of the profits produced by the private equity fund were considerable, and as such, constituted sufficient evidence of “continuity and regularity.”

The district court determined that the PBGC opinion was flawed because:  (i) it incorrectly attributed the activity of the general partner of the private equity fund to the fund itself, which was a “misapplication of agency law;” (ii) there was no basis for its reasoning that the prior Supreme Court cases holding that “investments” were not trades or business were limited to individual investors, and did not apply to partnerships as investors; and (iii) the PBGC opinion was in “direct conflict with Supreme Court precedent, not to mention Tax Code interpretations it is bound to follow.”

Applying the Groetzinger test to the Sun Funds, the district court concluded that the first prong was easily satisfied since there was no dispute that the Sun Funds’ primary purpose was to make a profit. Thus, the critical question was whether the Sun Funds were engaged in activity with “continuity and regularity,” keeping in mind that “merely holding passive investment interests” was not adequately “continuous or regular” to constitute a trade or business for purposes of the statute.  The Sun Funds argued that they made single investments in the Employer and served as “passive pools” yielding only capital gains and dividends. The plan countered that the Sun Funds were active in managing the Employer after the investment, taking control of the board of directors and running the daily operations of the Employer. Furthermore, the plan contended that the Sun Funds received reimbursements and other non-investment income, thus making the Sun Funds’ investments active in nature and not passive.

The district court rejected the plan’s arguments and ruled that the Sun Funds were not a trade or business for purposes of withdrawal liability.  The court observed that the Sun Funds did not have “any employees, own any office space, or make or sell any goods,” and their tax returns listed only investment income.  Moreover, the evidence suggested that while Sun Capital Advisors may have had a role in managing the Employer’s operations, the Sun Funds had no such relationship with the Employer.  Also, the fact that the Sun Funds elected individuals to the board of directors of the Employer did not constitute active management of the Employer since those elections were made by the Sun Funds in their role as shareholders of the Employer.

Proskauer’s Perspective

If other courts adopt the district court’s analysis in the Sun Capital Partners’ case, then the PBGC Advisory Opinion will cease to serve as a vehicle for holding private equity funds liable for withdrawal liability.[2]  However, it bears noting that the district court’s decision turned on the role that the Sun Funds played with respect to the operation of the Employer. The funds were found to be acting as passive investors and were not involved in the active management or operation of the company.  Implicit in the court’s decision is that if a private equity fund’s activities cross the threshold from passive investing to active management of an enterprise, then the private equity fund may be engaging in a trade or business for controlled group purposes.

[1] The court also concluded that the Sun Funds did not “evade or avoid” the assessment of withdrawal liability by splitting the ownership of the Employer between two funds so that neither fund would exceed 80% ownership of the Employer because there were business purposes for structuring the investments in that manner. 

[2]  A district court in a different circuit analyzed the same PBGC opinion and ruled in favor of a pension fund seeking to hold a private equity fund liable for withdrawal liability.  See Bd. of Trustees, Sheet Metal Workers’ Nat’l Pension Fund v. Palladium Equity Partners, 722 F. Supp 2d 854 (E.D. Mich. 2010).  

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Photo of Anthony Cacace Anthony Cacace

Anthony S. Cacace is a partner in Proskauer’s Labor & Employment Law Department and a member of the Employee Benefits & Executive Compensation Group. Anthony serves as legal counsel to the boards of trustees and other fiduciaries of Taft-Hartley multiemployer pension and welfare…

Anthony S. Cacace is a partner in Proskauer’s Labor & Employment Law Department and a member of the Employee Benefits & Executive Compensation Group. Anthony serves as legal counsel to the boards of trustees and other fiduciaries of Taft-Hartley multiemployer pension and welfare benefit plans subject to ERISA in a variety of industries. These include construction, transportation, private sanitation, trucking, industrial, health care and maritime.

Anthony’s representation of trustees and other fiduciaries ranges from counseling on the day-to-day operations of multiemployer funds, including:

  • drafting plan documents, amendments and procedures;
  • negotiating and drafting fund service provider agreements;
  • counseling with respect to participant claims; and
  • providing legal advice with respect to requirements of ERISA and the IRC.

His practice also includes more complex and high stakes scenarios, such as:

  • advising on fund mergers;
  • advising on fund acquisitions of real property;
  • drafting and submitting corrective applications to the IRS; and
  • counseling fiduciaries in investigations and audits by governmental agencies (including the U.S. DOL, U.S. DOJ and the IRS).

Anthony’s practice is unique because of his specialization in ERISA litigation. He advises trustees and fiduciaries from a litigation avoidance perspective, solving problems and rendering advice in risk exposure situations before they evolve into disputes or litigations. A skilled litigator, he often defends trustees and fiduciaries in lawsuits brought pursuant to ERISA, alleging claims for breaches of fiduciary duty, benefit claim denials, plan investment losses and improper plan amendments. In addition, he regularly represents his fund clients as plaintiffs in court, seeking to collect withdrawal liability and delinquent contributions from contributing employers.

Anthony is an accomplished author and speaker on issues confronting trustees of multiemployer funds. He has authored several articles featured in Bloomberg Law Reports and Benefits Magazine, and also serves as a chapter editor of the withdrawal liability section of the American Bar Association’s Employee Benefits Law treatise published by BNA. Anthony is routinely invited to speak at International Foundation of Employee Benefit Plans conferences and the ABA Employee Benefits Committee mid-winter meetings.

Photo of Neal Schelberg Neal Schelberg

Neal serves as legal counsel to numerous pension and welfare benefit plans subject to ERISA. His clients span a wide variety of industries, including professional sports, teamsters, building and construction, health care, industrial, wholesale and retail food and newspaper publishing. He has particular…

Neal serves as legal counsel to numerous pension and welfare benefit plans subject to ERISA. His clients span a wide variety of industries, including professional sports, teamsters, building and construction, health care, industrial, wholesale and retail food and newspaper publishing. He has particular experience representing insolvent and financially distressed multiemployer pension plans.

He practices the full spectrum of employee benefits law. From advising on compliance issues, to negotiating benefit provisions in mergers and other business reorganizations and advising benefit plan clients and sponsors on investment transactions in traditional and alternative asset classes, Neal deftly hones in on the critical issues in order to protect the plan fiduciaries and meet their business needs.

Neal has been widely recognized as a leading employee benefits practitioner in Proskauer’s Employee Benefits & Executive Compensation Group which is rated “Tier 1” by The Legal 500 United States, a leading legal directory which rates firms and lawyers based on client feedback. Clients cite Neal as ‘one of a kind’ – he is the only practitioner in the field I would select to brief a CEO or corporate board.”

He is a former Chair of the ERISA Advisory Council, having been appointed to this position by the U.S. Secretary of Labor in 2014

Neal is a frequent lecturer and prolific author for many organizations such as the International Foundation of Employee Benefit Plans, the Law Education Institute and the Practising Law Institute. He has also been quoted in numerous journals and periodicals.

He serves as a board member for the National Association of Drug Abuse Programs and the D.C. 9 Scholarship Fund.