Last Friday, the U.S. Court of Appeals for the First Circuit ruled that two co-investing Sun Capital private equity funds (the Sun Funds)[1] had not created an implied “partnership-in-fact” for purposes of determining whether the Sun Funds were under “common control” with their portfolio company, Scott Brass, Inc. (SBI) – resulting in a ruling that the Sun Funds were not under “common control” with SBI or a part of SBI’s “controlled group” and, therefore, that the Sun Funds could not be held liable for SBI’s multiemployer pension fund withdrawal liability.  This ruling marks the end (for now) to the seven-year Sun Capital dispute (see our prior client alert here).  Read below for a high-level summary of the First Circuit’s ruling, as well as key takeaways for private investment funds and multiemployer pension funds. A forthcoming client alert will include more detailed analysis of the First Circuit’s decision, the history of the Sun Capital saga, and the implications for private investment funds and multiemployer pension funds.  Check back here for the link to the alert.

Factual and Procedural Background

As a refresher, in Sun Capital, the Sun Funds acquired 100% of SBI through SBI’s ultimate parent, Sun Scott Brass, LLC (SSB).  Sun Fund III owned 30% of SSB while Sun Fund IV owned 70% of SSB.  SBI eventually filed for bankruptcy and withdrew from a multiemployer pension fund.  As a result, the pension fund asserted withdrawal liability against the Sun Funds on the theory that the Sun Funds were both (i) under “common control” with SBI (which, in relevant part, generally requires an 80% or greater ownership interest), and (ii) engaged in a “trade or business” and, therefore, in SBI’s “controlled group” (which, if true, meant the Sun Funds would be jointly and severally liable for SBI’s withdrawal liability).

Following an initial round of rulings, in 2016, the U.S. District Court for the District of Massachusetts determined that the Sun Funds had formed a “partnership-in-fact” that was part of SBI’s “controlled group” because the implied “partnership-in-fact” was deemed to own 100% of SSB (and, therefore, SBI) and was engaged in a “trade or business”; and, that the Sun Funds could therefore be held liable for SBI’s withdrawal liability as partners in the implied “partnership-in-fact”.

First Circuit Decision

On appeal of the District Court’s decision, the First Circuit limited its analysis to a single issue: whether the record demonstrated that the Sun Funds had formed a “partnership-in-fact” under the U.S. Tax Court’s eight-factor Luna test.

The First Circuit noted that several facts in the record supported finding a partnership-in-fact between the Sun Funds.  For example, the Sun Funds, through their manager Sun Capital Advisors, Inc. (SCAI), developed restructuring and operating plans for target portfolio companies before actually acquiring them through limited liability companies; the two individuals in control of the general partners of the Sun Funds “essentially ran things” for the Sun Funds and SBI, including placing SCAI employees in two out of three director positions at SBI, allowing SCAI to “control” SBI; the Sun Funds had leveraged SCAI’s resources and expertise to not only identify, acquire, and manage portfolio companies, and structure their acquisitions, but also to provide management consulting and employees to the portfolio companies; and the record did not show a single disagreement between the Sun Funds regarding the operation of SSB.

However, on balance, the First Circuit concluded that more factors weighed in favor of finding that a partnership-in-fact did not exist, pointing to the following facts: the Sun Funds did not intend to form a partnership beyond their coordination within SSB and expressly disclaimed any sort of partnership; most of the limited partners in Sun Fund IV were not limited partners in Sun Fund III; the Sun Funds filed separate tax returns, kept separate books and maintained separate bank accounts; the Sun Funds did not invest in parallel in the same companies at a fixed or even variable ratio – which the First Circuit observed showed “some independence in activity and structure”; and the creation of a limited liability company (i.e., SSB) by the Sun Funds showed an “intent” not to form a partnership, and prevented them from conducting their business in their joint names and limited the manner in which they could exercise mutual control over and assume mutual responsibilities for managing SBI.

Having determined that the record pointed away from concluding that the Sun Funds had created an implied “partnership-in-fact” in connection with their investment in SBI – meaning their ownership interests could not be aggregated for purposes of determining whether they were under “common control” with SBI – the First Circuit held that the Sun Funds could not be held liable for SBI’s multiemployer pension fund withdrawal liability.  The First Circuit expressly declined to reach the other legal issues in the case – including whether the Sun Funds were engaged in a “trade or business.”  The First Circuit remanded the case to the District Court for entry of summary judgment in favor of the Sun Funds.

Key Takeaways

In light of the First Circuit’s decision, here are a few key points for private investment funds and multiemployer pension plans to consider:

  • The First Circuit did not rule on the “trade or business” issue, so the existing Sun Capital “trade or business” analysis remains intact. Further, there is still the possibility of two or more co-investing private investment funds being deemed to be engaged in a “trade or business” and under “common control” with a portfolio company under a “partnership-in-fact” analysis. While the First Circuit found that such a “partnership-in-fact” did not exist here under the facts, different facts could lead to a different holding in the future.
  • Accordingly, this ruling should not preclude, but it may hamper, the efforts of multiemployer pension plans and the PBGC to collect plan termination and withdrawal liability from private investment funds (and their other portfolio companies) based on a “partnership-in-fact” analysis.
  • In any event, as we have previously noted, private equity fund sponsors should be aware that (i) acquiring an 80% (or more) interest in a portfolio company, whether within one private equity fund or pursuant to a “joint venture” between related (and maybe even unrelated) funds, may trigger joint and several liability for the portfolio company’s underfunded pension or withdrawal liabilities, and (ii) even a smaller ownership interest percentage could possibly trigger the ERISA “controlled group” rules based on complicated “common control” determinations.

*          *          *

As noted above, a forthcoming client alert will include more detailed analysis of the First Circuit’s decision and the implications for private investment funds and multiemployer pension funds.  Check back here for the link to the alert.

[1]              Although the First Circuit referred to “two” co-investing funds, there were actually three separate funds –Sun Capital III, LP, Sun Capital III QP, LP and Sun Capital IV, LP (Sun Fund IV). The First Circuit treated the two Sun Capital III funds (i.e., Sun Capital III, LP and Sun Capital III QP, LP) (Sun Fund III) as one fund because they are parallel funds run by the same general partner and generally make the same investments in the same proportions. Accordingly, the remainder of this blog generally follows the First Circuit’s analysis as though there were only two funds, Sun Fund III and Sun Fund IV.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Ira G. Bogner Ira G. Bogner

Ira G. Bogner is the immediate former chair of the Firm’s Tax Department and a member of the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee. Ira represents a varied list of clients, including financial…

Ira G. Bogner is the immediate former chair of the Firm’s Tax Department and a member of the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee. Ira represents a varied list of clients, including financial service companies, entertainment industry clients, and tax-exempt organizations, and also actively represents individual executives in executive compensation matters.

Ira counsels clients with respect to the tax, securities law disclosure, corporate governance, stock exchange and other requirements relevant to executive compensation arrangements. Ira also provides advice regarding equity arrangements, employment agreements, change in control agreements and all other types of executive compensation arrangements, including guidance regarding “409A,” “162m,” “457A,” and “280G.”

Ira frequently is called on to structure and analyze alternative investments for pension trusts and other exempt organizations. He also works with the Firm’s corporate and real estate lawyers in structuring and maintaining investment funds that include participation by pension plans. Through his work in the investment fund area Ira has obtained substantial experience in applying the rules provided under the “plan asset” regulations, including the operation of venture capital operating companies and real estate operating companies. He has assisted in the formation of private equity, real estate, infrastructure and hedge funds, including “fund of funds.” Ira also has advised clients on both avoiding ERISA “plan asset” status and operating an investment fund in accordance with ERISA.

Areas of Concentration

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including:

  • investment of plan assets
  • implementation of employee benefit plans

  • employee benefit issues in mergers and acquisitions

  • awarding of equity-based compensation

  • negotiation and drafting of employment agreements and severance arrangements

  • structuring, analyzing and maintaining investment funds that are suitable for plan investors

Thought Leadership

Ira has published a number of articles in publications such as The New York Law Journal, The New Jersey Law Journal, The Daily Deal, The Journal of Pension Planning and Compliance, Mergers and Acquisitions (The Monthly Tax Journal), The Journal of Taxation and Regulation of Financial Institutions, The Metropolitan Corporate Counsel, European Private Equity & Venture Capital Associations, The LPA Anatomised and Private Equity International and has been named to the Board of Advisors of the Journal of Taxation and Regulation of Financial Institutions. He also has lectured on topics such as the classification of workers, drafting employment agreements, equity alternatives for senior executives, investing IRA assets, the plan asset regulations, shareholder approval of equity plans, Code Section 409A, and key provisions for ERISA investors investing in a private equity fund.

Recognition

Ira has been recognized and ranked by various directories. US Legal 500 has carried the following comments: “Ira Bogner is ‘available, responsive and knowledgeable;” “Ira Bogner ‘provides a level of comfort with respect to business issues that is rare in the world of ERISA;” “Ira Bogner is the ‘go-to guy for fund sponsors needing help with ERISA.’”

Photo of Ira Golub Ira Golub

Ira M. Golub is a partner in the Employee Benefits & Executive Compensation Group. He practices exclusively in the employee benefits area. The nature of Ira’s practice embraces virtually all aspects of employee benefits law, ranging from the establishment and design of pension…

Ira M. Golub is a partner in the Employee Benefits & Executive Compensation Group. He practices exclusively in the employee benefits area. The nature of Ira’s practice embraces virtually all aspects of employee benefits law, ranging from the establishment and design of pension, profit-sharing, welfare and executive compensation plans to the administration and termination of such programs.

Ira works regularly with both single employer and multiemployer pension, welfare, annuity, vacation and apprenticeship funds. He serves as fund counsel to numerous multiemployer funds in a variety of industries, providing advice to trustees and administrators in connection with the operation and maintenance of the funds. His understanding of the issues emanating from the operation of multiemployer funds is enhanced by his experience in effecting the termination and mergers of funds and representing contributing employers in disputes with employee benefit plans.

Ira has extensive experience representing employers in their efforts to manage withdrawal liability exposure. He has assisted numerous employers that have been assessed withdrawal liability in challenging, arbitrating and negotiating the settlement of such assessments. The fact that Ira formerly worked for an actuarial consulting firm and serves regularly as counsel to multiemployer funds that assess withdrawal liability enables him to bring a spectrum of analytical skills and a depth of experience when addressing withdrawal liability matters. He has provided advice to employers in connection with highly complex and multi-faceted withdrawal liability problems, worked intensively with all withdrawal liability methods (including the hybrid withdrawal liability allocation method recently adopted by some large multiemployer funds) and given advice in connection with multiple withdrawal liability transactions involving liabilities in excess of a billion dollars. He has represented clients before the Pension Benefit Guaranty Corporation (PBGC) and has negotiated a number of agreements with the PBGC in transactional and other contexts (such as, for example, Section 4062(e) of ERISA). He has been a legal advisor in many situations involving bankruptcy and restructuring as it relates to withdrawal liability and pension underfunding.

Over the years, Ira has developed a particular capability representing plan sponsors and trustees in connection with the full range of fiduciary and other plan asset and investment issues. He also has a breadth of knowledge with respect to issues relating to welfare programs, and is considered a leading authority with respect to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA) and Health Savings Account. Ira is often called upon to provide advice relating to managing and modifying significant employer retiree medical liabilities and obligations. He frequently has been involved in providing advice to large corporations in connection with reductions-in-force, and with respect to the full range of employee benefit aspects arising in corporate mergers and acquisitions. Ira also works with government sponsored employee benefit plans that are not subject to ERISA.

Ira has published the COBRA Handbook, a comprehensive text on COBRA that is updated annually. He is a member of the Board of Editors of HR Advisor. In addition to having worked at a national actuarial consulting firm, Ira previously was a trial attorney for the National Labor Relations Board.

Photo of Justin Alex Justin Alex

Justin S. Alex is a partner and a member of the Employee Benefits & Executive Compensation Group.

Justin advises private and public companies on all aspects of their employee benefits and executive compensation arrangements and plans.

He has particular experience in the sports…

Justin S. Alex is a partner and a member of the Employee Benefits & Executive Compensation Group.

Justin advises private and public companies on all aspects of their employee benefits and executive compensation arrangements and plans.

He has particular experience in the sports industry, including employment agreements for executives at the highest levels in professional sports and the benefits and compensation aspects of numerous transactions, such as the purchase or sale of the Buffalo Bills, Carolina Panthers, Denver Broncos, Miami Marlins, Real Salt Lake, OL Reign, Professional Hockey Federation, the Licensed Sports Group Unit of VF Corporation, Full Swing Golf, and ADPRO Sports and the merger of the USFL and XFL.

In addition to Justin’s general benefits and compensation practice, he spends a significant portion of his time advising employers and financial sponsors with respect to pension liabilities. He also advises the trustees of collectively bargained single-employer and multiemployer plans with respect to their administration, governance, and legal compliance.

Prior to joining Proskauer, Justin was an attorney in the Office of Chief Counsel at the Pension Benefit Guaranty Corporation (PBGC), where he gained significant experience with pension termination and underfunding issues. He also represented the PBGC in corporate bankruptcies and federal court litigation.

Justin is the co-editor of Proskauer’s Employee Benefits & Executive Compensation Blog and the Hiring Partner for Proskauer’s Washington office. He also serves on the Board of the Washington Lawyers’ Committee for Civil Rights and Urban Affairs.

Photo of Adam Scoll Adam Scoll

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard…

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard to compliance with ERISA’s complex fiduciary duty and prohibited transaction rules.

Adam regularly advises private investment fund sponsors regarding the structuring of their funds in order to accept investments from ERISA-covered pension trusts, including compliance with the ERISA “plan asset” regulations and the operation of venture capital operating companies (VCOCs) and real estate operating companies (REOCs).

Adam also represents both employers and senior executives in the negotiation and drafting of employment and separation agreements, deferred compensation plans, and equity and “phantom equity” arrangements, including compliance with the nonqualified deferred compensation rules under Sections 409A and 457A of the Internal Revenue Code.

Photo of Jennifer Rigterink Jennifer Rigterink

Jennifer Rigterink is senior counsel in the Labor Department and a member of the Employee Benefits & Executive Compensation Group.

Jennifer focuses on a diverse array of tax and ERISA issues impacting employee benefits.  Her wide-ranging practice encompasses qualified retirement plans and non-qualified…

Jennifer Rigterink is senior counsel in the Labor Department and a member of the Employee Benefits & Executive Compensation Group.

Jennifer focuses on a diverse array of tax and ERISA issues impacting employee benefits.  Her wide-ranging practice encompasses qualified retirement plans and non-qualified arrangements, health and welfare benefits, and fringe benefit programs.  She counsels single-employer and multiemployer clients on matters pertaining to plan administration, design and qualification, as well as regulatory, legislative and legal compliance.

In recent years, Jennifer has advised employers and plan sponsors with fiduciary and governance matters applicable to defined benefit plans and pension de-risking activities, including lump sum window programs, annuity purchases, and pension plan terminations.

Jennifer frequently counsels clients on health and welfare arrangements, with a particular focus on all matters relating to family building and reproductive health care benefits.  Her experience also includes working with employers and plan sponsors on mental health parity compliance issues.

Prior to joining Proskauer, Jennifer clerked for Judge Jacques L. Wiener, Jr., in the United States Court of Appeals for the Fifth Circuit and Judge Yvette Kane in the United States District Court for the Middle District of Pennsylvania.