United States: Sun Capital 一案更新:美国区域法院就在私募股权基金上加退休金责任一决定双

Last Updated: August 2 2016
Most Read Contributor in United States, September 2019

Amendments to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et seq., in 1980 made "trade[s] or business[es]" that are under "common control"—which has since been defined by regulation to mean 80 percent common ownership—jointly and severally liable for each other's withdrawal liability under a multi-employer pension plan. In addition, withdrawal liability must be assessed "without regard" to any transaction whose "principal purpose" is to "evade or avoid" withdrawal liability.

In the November/December 2013 edition of the Business Restructuring Review, we discussed a groundbreaking ruling by the U.S. Court of Appeals for the First Circuit in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013). The decision fired a shot across the bow of private equity funds with portfolio companies that are participants in multi-employer pension plans. In Sun Capital, the First Circuit held that a private equity fund was a "trade or business" which could be held jointly and severally liable under ERISA for the pension plan withdrawal liability incurred by one of its portfolio companies.

However, the First Circuit remanded the case to the district court to determine: (i) whether a related private equity fund was also a trade or business under ERISA; and (ii) whether the second prong of the test for imposing joint and several liability under ERISA—i.e., "common control"—had been met with respect to the group of related portfolio companies. On remand, the district court concluded in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 2016 BL 95418 (D. Mass. Mar. 28, 2016), that the answer to both of these questions is "yes."

Sun Capital

In 2007, two private equity funds of Sun Capital Advisors, Inc.—Sun Capital III and Sun Capital IV (collectively, the "Sun Capital funds")—acquired 30 percent and 70 percent stakes, respectively, in Scott Brass, Inc. ("Scott Brass"), a brass and copper manufacturer, through a series of jointly owned subsidiaries, including Sun Scott Brass, LLC ("SSB"). Scott Brass was a participant in a multi-employer pension plan, the New England Teamsters and Trucking Industry Pension Fund ("NETTI"). In the fall of 2008, following a collapse in the price of copper, Scott Brass breached its loan covenants and was unable to obtain sufficient credit to stay in business. The company stopped making pension contributions in October 2008, and an involuntary bankruptcy petition was filed against it the following month in the District of Rhode Island.

In December 2008, NETTI demanded that Scott Brass pay more than $4.5 million in withdrawal liability, and it also demanded payment from the Sun Capital funds. The funds sued NETTI in federal district court in Massachusetts, seeking a declaratory judgment that they were not jointly and severally liable for the withdrawal liability. The district court granted summary judgment in favor of the funds. Among other things, the court reasoned that, since the funds were "passive" and had no employees or offices, neither was a "trade or business" under section 1301(b)(1) of ERISA. NETTI appealed to the First Circuit.

Construing section 1301(b)(1) of ERISA, the First Circuit conducted a fact-specific "investment plus" approach and ruled that one of the funds—Sun Capital IV—was a trade or business within the meaning of the provision. The court predicated its ruling on factual findings that: (i) Sun Capital IV was actively involved in the management of Scott Brass and had the ability to control the company's board of directors; and (ii) Sun Capital IV received an economic benefit which an ordinary passive investor would not have derived in the form of an offset against fees it otherwise would have had to pay to its general partner.

The First Circuit remanded the case to the district court to determine whether Sun Capital III was also a trade or business within the meaning of section 1301(b)(1) and whether ERISA's common control requirement had been satisfied for the Sun Capital funds.

The District Court's Ruling on Remand

As an initial matter, the Sun Capital funds represented that the facts on which the First Circuit relied in determining whether Sun Capital IV was a trade or business were inaccurate because they pertained to Sun Capital III rather than Sun Capital IV. As a consequence, the district court examined whether: (i) in light of this confusion of the facts, the First Circuit's ruling concerning Sun Capital IV was clearly erroneous; (ii) Sun Capital III was a trade or business; and (iii) the Sun Capital funds were under common control.

The district court began its analysis of whether Sun Capital III was a trade or business within the meaning of section 1301(b)(1) by considering whether Sun Capital III derived an economic benefit from its activities. From 2005 through 2012, the court explained, the fees that Sun Capital III owed to its general partner had been reduced by the amount which Scott Brass had paid to Sun Capital III's general partner. On this basis, the court concluded that Sun Capital III qualified as a trade or business within the meaning of section 1301(b)(1) of ERISA.

Sun Capital IV argued that it was not a trade or business within the meaning of section 1301(b)(1) because it, unlike Sun Capital III, did not benefit from a corresponding reduction of management fees owed to its general partner. According to Sun Capital IV, although it owed and paid management fees in the years before and after the acquisition of Scott Brass, Sun Capital IV's general partner waived its management fees from 2005 through 2009. On the basis of this waiver, Sun Capital IV argued that, because it received a "carryforward" which was not guaranteed, it did not receive a direct economic benefit from 2007, when it acquired its interest in Scott Brass, through 2009, when Scott Brass was in bankruptcy, and therefore, it could not be a trade or business within the meaning of section 1301(b)(1) of ERISA.

The district court rejected this argument, stating that it offered "too crabbed a view" of the test articulated by the First Circuit in its ruling. The First Circuit, the district court explained, determined that the carryforward constituted a benefit to Sun Capital IV because it gave Sun Capital IV the potential to reduce future management fees by $58 million.

The district court also rejected the contention that the First Circuit's holding required a direct economic benefit for purposes of determining whether the "investment plus" approach was satisfied. According to the district court, the First Circuit instructed it to determine whether Sun Capital IV had received any benefit from the fee offset.

In support of its contention that the Sun Capital funds were under common control, NETTI argued that: (i) Sun Capital III and Sun Capital IV formed a partnership or joint venture; (ii) the partnership or joint venture was engaged in a trade or business; and (iii) the partnership or joint venture was the indirect parent of Scott Brass. The Sun Capital funds countered that, because they intentionally invested in Scott Brass through SSB, rather than directly, the district court was obligated to respect organizational formalities.

The district court rejected the Sun Capital funds' argument. The question of organizational liability, the court explained, must reflect the economic realities of the business entities that were created for the acquisition. According to the court: (a) the Sun Capital funds intentionally engaged in conduct supporting the existence of a partnership or joint venture that owned Scott Brass; (b) the funds were intimately involved in managing and operating Scott Brass; and (c) SSB was created as an attempt to limit withdrawal liability, not as a truly independent entity.

The district court also concluded, examining the Sun Capital funds' pre-acquisition activities and the manner in which the acquisition of Scott Brass was structured, that a partnership-in-fact existed sufficient to aggregate the funds' interests and place them under common control with Scott Brass.

Finally, the district court determined that this partnership-in-fact was a trade or business within the meaning of section 1301(b)(1) of ERISA. The court found, among other things, that the partnership-in-fact was involved in the active management of Scott Brass, controlled the company's board through a joint effort, and engaged in activities which were intended to generate compensation that an ordinary, passive investor would not have derived.


The Sun Capital decisions expose to pension withdrawal liability private equity funds that are actively involved in the management of their portfolio companies. They indicate that a private equity fund may be considered a trade or business under ERISA even if the fund does not receive direct economic benefits from its ownership of portfolio companies. In addition, affiliated private equity funds which individually stay below ERISA's 80 percent ownership threshold may still be subject to withdrawal liability if a court determines that a partnership-in-fact exists among affiliates whose aggregate holdings exceed the 80 percent threshold.

The Sun Capital funds appealed the district court's most recent ruling on April 4, 2016. If affirmed on appeal, the decision, together with the First Circuit's previous ruling, will likely have serious consequences for private equity funds, which may be forced to reevaluate their structuring practices where multi-employer pension plans are at issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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