SUN CAPITAL PARTNERS III, LP; SUN CAPITAL PARTNERS III QP, LP; SUN CAPITAL PARTNERS IV, LP, Plaintiffs, Appellants,
NEW ENGLAND TEAMSTERS & TRUCKING INDUSTRY PENSION FUND, Defendant, Third Party Plaintiff, Appellee, SCOTT BRASS HOLDING CORP.; SUN SCOTT BRASS, LLC, Third Party Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MASSACHUSETTS [Hon. Douglas P. Woodlock, U.S.
C. O'Quinn, with whom John F. Hartmann, Devin A.
DeBacker, Kirkland & Ellis LLP, Theodore J. Folkman, and
Pierce Bainbridge Beck Price & Hecht LLP, were on brief
Catherine M. Campbell, with whom Melissa A. Brennan, Renee J.
Bushey, and Feinberg, Campbell & Zack, PC were on brief
T. Fessenden, with whom Judith R. Starr, Kartar S. Khalsa,
Charles L. Finke, and Louisa A. Soulard were on brief for
Pension Benefit Guaranty Corporation, amicus curiae.
Before Lynch, Stahl, and Lipez, Circuit
issue on appeal is whether two private equity funds, Sun
Capital Partners III, LP ("Sun Fund III") and Sun
Capital Partners IV, LP ("Sun Fund IV"), are liable
for $4, 516, 539 in pension fund withdrawal liability owed by
a brass manufacturing company which was owned by the two Sun
Funds when that company went bankrupt. The liability issue is
governed by the Multiemployer Pension Plan Amendments Act of
1980 ("MPPAA"). Under that statute, the issue of
liability depends on whether the two Funds had created,
despite their express corporate structure, an implied
partnership-in-fact which constituted a control group. That
question, in the absence of any further formal guidance from
the Pension Benefit Guaranty Corporation ("PBGC"),
turns on an application of the multifactored partnership test
in Luna v. Commissioner, 42 T.C. 1067 (1964).
MPPAA imposes such withdrawal liability, PBGC states it
assumes the New England Teamsters & Trucking Industry
Pension Fund ("Pension Fund") intends to look to
the private equity funds, including their general partners
and their limited partners, to pay the liability. The issues
raised involve conflicting policy choices for Congress or
PBGC to make. On one hand, imposing liability would likely
disincentivize much-needed private investment in
underperforming companies with unfunded pension liabilities.
This chilling effect could, in turn, worsen the financial
position of multiemployer pension plans. On the other hand,
if the MPPAA does not impose liability and the Pension Fund
becomes insolvent, then PBGC likely will pay some of the
liability, and the pensioned workers (with 30 years of
service) will receive a maximum of $12, 870 annually.
See 18 U.S.C. § 1322a.
district court held that there was an implied
partnership-in-fact which constituted a control group. We
reverse because we conclude the Luna test has not
been met and we cannot conclude that Congress intended to
impose liability in this scenario.
describe the facts as to the organizational structures of the
Sun Funds and related entities. We also refer to the
facts set forth in our previous opinion in Sun Capital
Partners III, LP v. New England Teamsters & Trucking
Industry Pension Fund, 724 F.3d 129, 135 n.3 (1st Cir.
2013) (Sun Capital II). The two Sun Funds are each
distinct business entities with primarily different investors
and investments. But they are controlled by the same two men,
and they coordinate to identify, acquire, restructure, and
sell portfolio companies. The Funds form and finance
subsidiary LLCs, through which they acquire and control
portfolio companies, including Scott Brass, Inc.
("SBI"), the brass manufacturing company. While the
Funds jointly owned SBI, it filed for bankruptcy and
subsequently withdrew from the Pension Fund, a multiemployer
pension fund, incurring withdrawal liability. We restate here
only certain facts, and then briefly give a procedural
history of the litigation leading to the instant appeal.
The Organization of the Sun Funds
Capital Advisors, Inc. ("SCAI") is a private equity
firm which pools investors' capital in limited
partnerships, assists these limited partnerships in finding
and acquiring portfolio companies, and then provides
management services to those portfolio companies. SCAI
established at least eight funds. Two of them, Sun Fund III
and Sun Fund IV, appellants here, are the investors in SBI,
and both are organized under Delaware law as limited
partnerships. The Sun Funds themselves do not have offices or
employees, do not make or sell goods, and report to the IRS
only investment income. The Funds expressly disclaimed in
their respective limited partnership agreements any
partnership or joint venture with each other. The Funds also
maintained distinct tax returns, financial books, and bank
Funds III and IV each have one general partner, Sun Capital
Advisors III, LP and Sun Capital Advisors IV, LP,
respectively. These general partners each own respective
subsidiary management companies, Sun Capital Partners
Management III, LLC ("SCPM III") and Sun Capital
Partners Management IV, LLC ("SCPM IV"). The two
management companies act as intermediaries between SCAI and
holding companies. The management companies contract with
SCAI for the management services of SCAI's employees and
consultants, and then with the holding company to provide
these management services.
Funds III and IV, respectively, have 124 and 230 limited
partners. Sixty-four of these limited partners overlap
between the Funds. The limited partners include both
individual and institutional investors, including pension
funds, other private equity funds, family trusts, and
universities. The Sun Funds' limited partnership
agreements vest exclusive control of the Funds in their
respective general partners, assign the general partners
percentages of the Funds' total commitments and
investment profits, and require the Funds to pay their
general partners an annual management fee. The Sun
Funds' general partners, which are themselves organized
as limited partnerships, have limited partnership agreements,
which vest exclusive control over the general partners'
"material partnership decisions" in limited
partnership committees. These limited partnership committees
are each made up of two individuals, Marc Leder and Rodger
Krouse. These two men also founded and serve as the co-CEOs
and sole shareholders of SCAI. Leder and Krouse were the
co-CEOs of the management company SCPM IV.
The Operation of the Sun Funds and SBI
Funds used their controlling share of portfolio companies
"to implement restructuring and operational plans, build
management teams, become intimately involved in company
operations, and otherwise cause growth in the portfolio
companies." Sun Capital II, 724 F.3d at 134.
The Sun Funds owned and managed their acquisitions through
various corporate intermediaries. The Sun Funds together
sought out potential portfolio companies and, through SCAI,
developed restructuring and operating plans before
acquisition. The Sun Funds then would attempt to sell a
portfolio company for a profit, typically within two to five
years of acquisition. The Sun Funds would acquire,
restructure, and sell companies both independently and
of their acquisition of SBI, the Sun Funds formed and
financed Sun Scott Brass, LLC ("SSB-LLC"). Sun Fund
III owned 30% of SSB-LLC and Sun Fund IV owned 70% of
SSB-LLC. These shares reflect Sun Fund III investing $900,
000 and Sun Fund IV investing $2.1 million in SSB-LLC.
SSB-LLC in turn formed and financed Scott Brass Holding
Corporation ("SBHC"), a wholly owned, subsidiary
holding company. SBHC used the Sun Funds' $3 million
investment in SSB-LLC and $4.8 million in debt to purchase
all of SBI's stock. The purchase price reflected a 25%
discount from the fair market value of the SBI stock at
acquisition to account for SBI's known, unfunded pension
liability. The Funds, through SCAI employees placed in SBI,
jointly operated SBI.
Sun Capital II, we remanded to the district court to
determine whether the Funds were under common control with
SBI and whether Sun Fund III engaged in trade or
business. 724 F.3d at 150. It determined that the
Sun Funds had formed a partnership-in-fact sitting on top of
SSB-LLC and that this partnership-in-fact owned 100% of SBI
through SSB-LLC, and so concluded the Funds met the
"common control" test utilized in MPPAA law.
Sun Capital Partners III, LP v. New England Teamsters
& Trucking Indus. Pension Fund, 172 F.Supp.3d 447,
463-66 (D. Mass. 2016). That test is derived from tax law.
See 26 C.F.R. § 1.414(c)-2(b); 29 C.F.R.
§§ 4001.2, 4001.3(a) (incorporating regulations
promulgated under 26 U.S.C. § 414(c)). The district
court held that this partnership-in-fact engaged in
"trade or business" in its operation of SBI.
Sun Capital III, 172 F.Supp.3d at 466-67.
Accordingly, the district court held the Sun Funds jointly
and severally responsible for SBI's withdrawal liability.
Id. at 467.
Funds appealed the rulings that they were under common
control with SBI, that they formed a partnership-in-fact,
and, if a partnership-in-fact did exist, that it engaged in
trade or business. PBGC filed an amicus brief in support of
the district court ruling.
Standard of Review
case reaches the court on appeal from a grant of summary
judgment. "We review a grant or denial of summary
judgment, as well as pure issues of law, de novo."
Sun Capital II, 724 F.3d at 138 (citing
Rodriguez v. Am. Int'l Ins. Co. of P.R., 402
F.3d 45, 46-47 (1st Cir. 2005)). This includes both the
determination of withdrawal liability and the recognition of
a partnership-in-fact. See Pension Ben. Guar. Corp. v.
Beverley, 404 F.3d 243, 246, 250-53 (4th Cir. 2005).
Because the parties filed cross-motions for summary judgment,
we "view each motion, separately, in the light most
favorable to the non-moving party, and draw all reasonable
inferences in that party's favor." OneBeacon Am.
Ins. Co. v. Commercial Union Assurance Co. of Can., 684
F.3d 237, 241 (1st Cir. 2012) (internal quotation marks