Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund , 724 F.3d 129 ( 2013 )

United States Court of Appeals
For the First Circuit
No. 12-2312
SUN CAPITAL PARTNERS III, LP; SUN CAPITAL PARTNERS III QP, LP;
SUN CAPITAL PARTNERS IV, LP,
Plaintiffs, Appellees,
v.
NEW ENGLAND TEAMSTERS & TRUCKING INDUSTRY PENSION FUND,
Defendant, Third Party Plaintiff, Appellant,
SCOTT BRASS HOLDING CORP.; SUN SCOTT BRASS, LLC,
Third Party Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Lynch, Chief Judge,
Thompson and Kayatta, Circuit Judges.
Renee J. Bushey and Catherine M. Campbell, with whom Melissa
A. Brennan and Feinberg, Campbell & Zack, PC were on brief, for
appellant.
Eric Field, Assistant Chief Counsel, with whom Judith R.
Starr, General Counsel, Israel Goldowitz, Chief Counsel, Karen L.
Morris, Deputy Chief Counsel, Craig T. Fessenden, Attorney, and
Beth A. Bangert, Attorney, were on brief, for Pension Benefit
Guaranty Corporation, amicus curiae.
Patrick F. Philbin, with whom Theodore J. Folkman, P.C.,
Murphy & King P.C., John F. Hartmann, P.C., Marla Tun, Jeffrey S.
Quinn, Kellen S. Dwyer, John S. Moran, and Kirkland & Ellis LLP
were on brief, for appellees.
July 24, 2013
LYNCH, Chief Judge. This case presents important issues
of first impression as to withdrawal liability for the pro rata
share of unfunded vested benefits to a multiemployer pension fund
of a bankrupt company, here, Scott Brass, Inc. (SBI). See Employee
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et
seq., as amended by the Multiemployer Pension Plan Amendment Act of
1980 (MPPAA), 29 U.S.C. § 1381 et seq. This litigation considers
the imposition of liability as to three groups: two private equity
funds, which assert that they are mere passive investors that had
indirectly controlled and tried to turn around SBI, a struggling
portfolio company; the New England Teamsters and Trucking Industry
Pension Fund (TPF), to which the bankrupt company had withdrawal
pension obligations and which seeks to impose those obligations on
the equity funds; and, ultimately, if the TPF becomes insolvent,
the federal Pension Benefit Guaranty Corporation (PBGC), which
insures multiemployer pension plans such as the one involved here.
If the TPF becomes insolvent, then the benefits to the SBI workers
are reduced to a PBGC guaranteed level. See 29 U.S.C. §§ 1322a,
1426, 1431. According to the PBGC's brief, at present, that level
is about $12,870 for employees with 30 years of service.
The plaintiffs are the two private equity funds, which
sought a declaratory judgment against the TPF. The TPF, which
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brought into the suit other entities related to the equity funds,1
has counterclaimed and sought payment of the withdrawal liability
at issue. The TPF is supported on appeal by the PBGC, as amicus.2
We conclude that at least one of the private equity funds
which operated SBI, through layers of fund-related entities, was
not merely a "passive" investor, but sufficiently operated,
1
Those related entities are not before us in this appeal. An
entry of default was entered against those parties in the district
court, but judgment was never entered on the claims against those
parties. However, it is apparent from the procedural history and
actions of the TPF that the TPF has abandoned the claims against
those parties, and therefore, we have appellate jurisdiction under
28 U.S.C. § 1291. See, e.g., Balt. Orioles, Inc. v. Major League
Baseball Players Ass'n, 805 F.2d 663, 667 (7th Cir. 1986) ("[A]n
order that effectively ends the litigation on the merits is an
appealable final judgment even if the district court did not
formally enter judgment on a claim that one party has abandoned.").
2
The authority of the PBGC to promulgate regulations for
§ 1301(b)(1) is set forth in the statute. The PBGC is a wholly
owned United States government corporation, which is modeled after
the FDIC and administers and enforces Title IV of ERISA. Pension
Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 637 (1990). The
PBGC also acts as an insurer of multiemployer plans when a covered
plan terminates with insufficient assets to satisfy its pension
obligations (i.e., is insolvent). Id. at 637-38. When a
multiemployer plan becomes insolvent, benefits must be reduced to
the PBGC-guaranteed level, and the PBGC provides the plan with
financial assistance. See 29 U.S.C. §§ 1322a, 1426, 1431. In this
case, it is not clear whether the plan will become insolvent if the
private equity funds are not determined to have withdrawal
liability, and as a result, it is not clear whether the PBGC will
incur any losses.
The PBGC insures about 1450 multiemployer plans covering about
10.3 million participants. Pension Benefit Guaranty Corporation,
2012 PBGC Annual Report 33, available at
http://www.pgbc.gov/documents/2012-annual-report.pdf. It provides
about $95 million in annual financial assistance to 49 insolvent
multiemployer plans covering 51,000 participants. Id. As of the
end of fiscal year 2012, the PBGC's multiemployer insurance fund
had a negative net position of $5.237 billion. Id.
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managed, and was advantaged by its relationship with its portfolio
company, the now bankrupt SBI. We also conclude that further
factual development is necessary as to the other equity fund. We
decide that the district court erred in ending the potential claims
against the equity funds by entering summary judgment for them
under the "trades or businesses" aspect of the two-part "control
group" test under 29 U.S.C. § 1301(b)(1). See Sun Capital Partners
III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund, 903
F. Supp. 2d 107, 116-18, 124 (D. Mass. 2012).
As a result, we remand for further factual development
and for further proceedings under the second part of the "control
group" test, that of "common control," in 29 U.S.C. § 1301(b)(1).
The district court was, however, correct to enter summary judgment
in favor of the private equity funds on the TPF's claim of
liability on the ground that the funds had engaged in a transaction
to evade or avoid withdrawal liability. See 29 U.S.C. § 1392(c);
Sun Capital, 903 F. Supp. 2d at 123-24.
I.
The material facts are undisputed.
A. The Sun Funds
Sun Capital Advisors, Inc. ("SCAI") is a private equity
firm founded by its co-CEOs and sole shareholders, Marc Leder and
Rodger Krouse. Sun Capital, 903 F. Supp. 2d at 109. It is not a
plaintiff or party in this case. SCAI and its affiliated entities
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find investors and create limited partnerships in which investor
money is pooled, as in the private equity funds here. Moreover,
SCAI finds and recommends investment opportunities for the equity
funds, and negotiates, structures, and finalizes investment deals.
Id. SCAI also provides management services to portfolio companies,
and employs about 123 professionals to provide these services.
The plaintiffs here are two of SCAI's private equity
funds (collectively the "Sun Funds"), Sun Capital Partners III, LP
("Sun Fund III")3 and Sun Capital Partners IV, LP ("Sun Fund IV").
They are organized as Delaware limited partnerships. SBI is one of
their portfolio companies, and the two Sun Funds have other
portfolio companies. The Sun Funds do not have any offices or
employees; nor do they make or sell goods, or report income other
than investment income on their tax returns.4 Id. at 117. The
3
Sun Fund III is technically two different funds, Sun Capital
Partners III, LP and Sun Capital Partners III QP, LP. Like the
district court, we consider them one fund for purposes of this
opinion because they are "parallel funds" run by a single general
partner and generally make the same investments in the same
proportions. Sun Capital Partners III, LP v. New Eng. Teamsters &
Trucking Indus. Pension Fund, 903 F. Supp. 2d 107, 109 n.1 (D.
Mass. 2012).
4
For ERISA purposes, the Sun Funds are Venture Capital
Operating Companies (VCOC). According to the Sun Funds' private
placement memos to potential investors, this requires that the
partnerships:
(i) . . . ha[ve] direct contractual rights to
substantially participate in or substantially influence
the management of operating companies comprising at least
50% of its portfolio (measured at cost) and (ii) in the
ordinary course of [their businesses], actively
exercis[e] such management rights with respect to at
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stated purpose of the Sun Funds is to invest in underperforming but
market-leading companies at below intrinsic value, with the aim of
turning them around and selling them for a profit. As a result,
the Sun Funds' controlling stakes in portfolio companies are used
to implement restructuring and operational plans, build management
teams, become intimately involved in company operations, and
otherwise cause growth in the portfolio companies in which the Sun
Funds invest. The intention of the Sun Funds is to then sell the
hopefully successful portfolio company within two to five years.
In fact, the Sun Funds have earned significant profits from sales
of various portfolio companies.5
These private equity funds engaged in a particular type
of investment approach, to be distinguished from mere stock holding
or mutual fund investments. See, e.g., S. Rosenthal, Taxing
Private Equity Funds as Corporate 'Developers', Tax Notes, Jan. 21,
2013, at 361, 364 & n.31 (explaining that private equity funds
differ from mutual funds and hedge funds because they "assist and
manage the business of the companies they invest in"). As one
least one of the operating companies in which [they
invest]. An "operating company" is an entity engaged in
the production or sale of a product or service, as
distinguished from a reinvesting entity.
See also 29 C.F.R. § 2510.3-101(d)(1), (d)(3). We do not adopt the
TPF's argument that any investment fund classified as a VCOC is
necessarily a "trade or business."
5
For instance, Sun Fund IV, the larger of the Funds, reported
total investment income of $17,353,533 in 2007, $57,072,025 in
2008, and $70,010,235 in 2009.
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commentator puts it, "[i]t is one thing to manage one's investments
in businesses. It is another to manage the businesses in which one
invests." C. Sanchirico, The Tax Advantage to Paying Private
Equity Fund Managers with Profit Shares: What Is It? Why Is It
Bad?, 75 U. Chi. L. Rev. 1071, 1102 (2008).
The Sun Funds are overseen by general partners, Sun
Capital Advisors III, LP and Sun Capital Advisors IV, LP. Leder
and Krouse are each limited partners in the Sun Funds' general
partners and, together with their spouses, are entitled to 64.74%
of the aggregate profits of Sun Capital Advisors III, LP and 61.04%
of such profits from Sun Capital Advisors IV, LP. The Sun Funds'
limited partnership agreements vest their respective general
partners with exclusive authority to manage the partnership. Part
of this authority is the power to carry out all the objectives and
purposes of the partnerships, which include investing in
securities, managing and supervising any investments, and any other
incidental activities the general partner deems necessary or
advisable.
For these services, each general partner receives an
annual fee of two percent of the total commitments (meaning the
aggregate cash committed as capital to the partnership6) to the Sun
Funds, paid by the limited partnership, and a percentage of the Sun
6
The aggregate capital commitment of Sun Fund IV was $1.5
billion, which the TPF asserts means the management fee at the 2%
rate was $30 million.
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Funds' profits from investments. The general partners also have a
limited partnership agreement, which provides that for each general
partner a limited partner committee makes all material partnership
decisions. Sun Capital, 903 F. Supp. 2d at 110-11. Leder and
Krouse are the sole members of the limited partner committees. Id.
at 111. Included in the powers of the limited partner committees
is the authority to make decisions and determinations relating to
"hiring, terminating and establishing the compensation of employees
and agents of the [Sun] Fund or Portfolio Companies." The general
partners also each have a subsidiary management company, Sun
Capital Partners Management III, LLC and Sun Capital Partners
Management IV, LLC, respectively. Id. These management companies
contract with the holding company that owns the acquired company to
provide management services for a fee, and contract with SCAI to
provide the employees and consultants. See id. When portfolio
companies pay fees to the management companies, the Sun Funds
receive an offset to the fees owed to the general partner.7
B. The Acquisition of Scott Brass, Inc.
7
This sort of fee arrangement is common in private equity
funds. See S. Rosenthal, Taxing Private Equity Funds as Corporate
'Developers', Tax Notes, Jan. 21, 2013, at 361, 362 n.6 (explaining
that equity funds usually pay the fees to their general partners,
which often redirect the fee to a management services company that
renders the management services for the partnership, and that the
general partner or management company will often receive fees from
the portfolio company, in which case the partnership (the equity
fund) receives a fee offset).
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In 2006, the Sun Funds began to take steps to invest in
SBI, the acquisition of which was completed in early 2007. Leder
and Krouse made the decision to invest in SBI in their capacity as
members of the limited partner committees.
SBI, a Rhode Island corporation, was an ongoing trade or
business, and was closely held; its stock was not publicly traded.
SBI was a leading producer of high quality brass, copper, and other
metals "used in a variety of end markets, including electronics,
automotive, hardware, fasteners, jewelry, and consumer products."
In 2006, it shipped 40.2 million pounds of metal. SBI made
contributions to the TPF on behalf of its employees pursuant to a
collective bargaining agreement.
On November 28, 2006, a Sun Capital affiliated entity
sent a letter of intent to SBI's outside financial advisor to
purchase 100% of SBI. In December 2006, the Sun Funds formed Sun
Scott Brass, LLC (SSB-LLC) as a vehicle to invest in SBI. Sun Fund
III made a 30% investment ($900,000) and Sun Fund IV a 70%
investment ($2.1 million) for a total equity investment of $3
million. This purchase price reflected a 25% discount because of
SBI's known unfunded pension liability.8 SSB-LLC, on December 15,
2006, formed a wholly-owned subsidiary, Scott Brass Holding Corp.
8
The Sun Funds contend that they reduced the purchase price
based on the expectation that a future buyer would pay less for a
company with unfunded pension obligations, not because of a concern
that they were incurring potential withdrawal liability.
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(SBHC). SSB-LLC transferred the $3 million the Sun Funds invested
in it to SBHC as $1 million in equity and $2 million in debt. Id.
at 111. SBHC then purchased all of SBI's stock with the $3 million
of cash on hand and $4.8 million in additional borrowed money. Id.
The stock purchase agreement to acquire SBI's stock was entered
into on February 8, 2007.9
On February 9, 2007, SBHC signed an agreement with the
subsidiary of the general partner of Sun Fund IV to provide
management services to SBHC and its subsidiaries, i.e., SBI. Since
2001, that general partner's subsidiary had contracted with SCAI to
provide it with advisory services. In essence, as the district
court described, the management company acted as a middle-man,
providing SBI with employees and consultants from SCAI. Id.
Numerous individuals with affiliations to various Sun
Capital entities, including Krouse and Leder, exerted substantial
operational and managerial control over SBI, which at the time of
the acquisition had 208 employees and continued as a trade or
business manufacturing metal products. For instance, minutes of a
March 5, 2007 meeting show that seven individuals from "SCP"
attended a "Jumpstart Meeting" at which the hiring of three SBI
salesmen was approved, as was the hiring of a consultant to analyze
9
The cover page of the agreement states the agreement is
dated February 8, 2007, but the text of the stock purchase
agreement says it is dated February 9, 2007. The discrepancy is
not of importance here.
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a computer system upgrade project at a cost of $25,000. Other
items discussed included possible acquisitions, capital
expenditures, and the management of SBI's working capital.
Further, Leder, Krouse, and Steven Liff, an SCAI employee, were
involved in email chains discussing liquidity, possible mergers,
dividend payouts, and concerns about how to drive revenue growth at
SBI. Leder, Krouse, and other employees of SCAI received weekly
flash reports from SBI that contained detailed information about
SBI's revenue, key financial data, market activity, sales
opportunities, meeting notes, and action items. According to the
Sun Funds, SBI continued to meet its pension obligations to the TPF
for more than a year and a half after the acquisition.
C. SBI's Bankruptcy and This Litigation
In the fall of 2008, declining copper prices reduced the
value of SBI's inventory, resulting in a breach of its loan
covenants. Unable to get its lender to waive the violation of the
covenants, SBI lost its ability to access credit and was unable to
pay its bills. See id.
In October 2008, SBI stopped making contributions to the
TPF, and, in so doing, became liable for its proportionate share of
the TPF's unfunded vested benefits. See 29 U.S.C. §§ 1381(a),
1383(a)(2). In November 2008, an involuntary Chapter 11 bankruptcy
proceeding was brought against SBI. The Sun Funds assert that they
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lost the entire value of their investment in SBI as a result of the
bankruptcy.
On December 19, 2008, the TPF sent a demand for payment
of estimated withdrawal liability to SBI. The TPF also sent a
notice and demand to the Sun Funds demanding payment from them of
SBI's withdrawal liability, ultimately calculated as $4,516,539.
Sun Capital, 903 F. Supp. 2d at 111. The TPF asserted that the Sun
Funds had entered into a partnership or joint venture in common
control with SBI and were therefore jointly and severally liable
for SBI's withdrawal liability under 29 U.S.C. § 1301(b)(1). Id.On June 4, 2010, the Sun Funds filed a declaratory
judgment action in federal district court in Massachusetts. The
Sun Funds sought a declaration that they were not subject to
withdrawal liability under § 1301(b)(1) because: (1) the Sun Funds
were not part of a joint venture or partnership and therefore did
not meet the common control requirement; and (2) neither of the
Funds was a "trade or business."
The TPF counterclaimed that the Sun Funds were jointly
and severally liable for SBI's withdrawal liability in the amount
of $4,516,539, and also that the Sun Funds had engaged in a
transaction to evade or avoid liability under 29 U.S.C. § 1392(c).
The parties both filed cross-motions for summary judgment in
September 2011.
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The district court issued a Memorandum and Order on
October 18, 2012, granting summary judgment to the Sun Funds. Id.
at 109. The district court did not reach the issue of common
control, id. at 118, instead basing its decision on the "trade or
business" portion of the two-part statutory test. It also decided
the "evade or avoid" liability issue.10
On the "trade or business" issue, the district court
addressed the level of deference owed to a September 2007 PBGC
appeals letter that found a private equity fund to be a "trade or
business" in the single employer pension plan context. Id. at 114-
16. The appeals letter found the equity fund to be a "trade or
business" because its controlling stake in the bankrupt company put
it in a position to exercise control over that company through its
general partner, which was compensated for its efforts.
The district court held that the appeals letter was owed
deference only to the extent it could persuade. Id. at 115. The
district court found the letter unpersuasive for two reasons: (1)
the appeals board purportedly incorrectly attributed activity of
the general partner to the investment fund; and (2) the appeals
board letter supposedly conflicted with governing Supreme Court tax
precedent. Id. at 115-16. Engaging in its own analysis, the court
found that the Sun Funds were not "trades or businesses," relying
10
No party demanded a jury trial in the event the district
court found that the case should proceed to trial rather than be
resolved at summary judgment.
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on the fact that the Sun Funds did not have any offices or
employees, and did not make or sell goods or report income other
than investment income on their tax returns. Id. at 117.
Moreover, the Sun Funds were not engaged in the general partner's
management activities. Id.As to its "evade or avoid" liability analysis, the
district court stated that § 1392(c) was not meant to apply to an
outside investor structuring a transaction to avoid assuming a
potential liability. Id. at 122. The language of the statute
suggested that "it is aimed at sellers, not investors," id., and
imposing liability on investors for trying to avoid assumption of
such liability would disincentivize investing in companies subject
to multiemployer pension plan obligations, thereby undermining the
aim of the MPPAA, id. at 124.
The TPF has timely appealed. It argues that the district
court erred in finding that the Sun Funds were not "trades or
businesses" and that the Sun Funds should be subject to "evade or
avoid" liability under § 1392(c). The PBGC has filed an amicus
brief on appeal in support of reversal of the district court's
"trades or businesses" decision, but has taken no position on the
§ 1392(c) claim.
II.
A. Standard of Review
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We review a grant or denial of summary judgment, as well
as pure issues of law, de novo. Rodriguez v. Am. Int'l Ins. Co. of
P.R., 402 F.3d 45, 46-47 (1st Cir. 2005). We may affirm the
district court on any independently sufficient ground manifest in
the record. OneBeacon Am. Ins. Co. v. Commercial Union Assurance
Co. of Can., 684 F.3d 237, 241 (1st Cir. 2012). The presence of
cross-motions for summary judgment does not distort the standard of
review. Rather, we view each motion separately in the light most
favorable to the non-moving party and draw all reasonable
inferences in favor of that party. Id. We make a determination
"based on the undisputed facts whether either [party] deserve[s]
judgment as a matter of law." Hartford Fire Ins. Co. v. CNA Ins.
Co. (Eur.) Ltd., 633 F.3d 50, 53 (1st Cir. 2011). To prevail, the
moving party must show "that there is no genuine dispute as to any
material fact," and that it "is entitled to judgment as a matter of
law." Fed. R. Civ. P. 56(a).
B. Withdrawal Liability Under the MPPAA
The MPPAA was enacted by Congress to protect the
viability of defined pension benefit plans, to create a
disincentive for employers to withdraw from multiemployer plans,
and also to provide a means of recouping a fund's unfunded
liabilities. Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467
U.S. 717, 720-22 (1984). As such, the MPPAA requires employers
withdrawing from a multiemployer plan to pay their proportionate
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share of the pension fund's vested but unfunded benefits. See 29
U.S.C. §§ 1381, 1391; Concrete Pipe & Prods. of Cal., Inc. v.
Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 609
(1993); R.A. Gray, 467 U.S. at 725. An employer withdraws when it
permanently ceases its obligation to contribute or permanently
ceases covered operations under the plan. 29 U.S.C. § 1383(a).
The MPPAA provides: "For purposes of this subchapter,
under regulations prescribed by the [PBGC], all employees of trades
or businesses (whether or not incorporated) which are under common
control shall be treated as employed by a single employer and all
such trades and businesses as a single employer." 29 U.S.C.
§ 1301(b)(1). So, "[t]o impose withdrawal liability on an
organization other than the one obligated to the [pension] Fund,
two conditions must be satisfied: 1) the organization must be under
'common control' with the obligated organization, and 2) the
organization must be a trade or business." McDougall v. Pioneer
Ranch Ltd. P'ship, 494 F.3d 571, 577 (7th Cir. 2007). The Act's
broad definition of "employer" extends beyond the business entity
withdrawing from the pension fund, thus imposing liability on
related entities within the definition, which, in effect, pierces
the corporate veil and disregards formal business structures. See
Cent. States, Se. & Sw. Areas Pension Fund v. Messina Prods., LLC,
706 F.3d 874, 877 (7th Cir. 2013) ("When an employer participates
in a multiemployer pension plan and then withdraws from the plan
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with unpaid liabilities, federal law can pierce corporate veils and
impose liability on owners and related businesses.").
While Congress in § 1301(b)(1) authorizes the PBGC to
prescribe regulations, those regulations "shall be consistent and
coextensive with regulations prescribed for similar purposes by the
Secretary of the Treasury under [26 U.S.C. § 414(c)]" of the
Internal Revenue Code.11 29 U.S.C. § 1301(b)(1). The PBGC has
adopted regulations pertaining to the meaning of "common control,"
see 29 C.F.R. §§ 4001.2, 4001.3(a), but has not adopted regulations
defining or explaining the meaning of "trades or businesses."12
The phrase "trades or businesses" as used in § 1301(b)(1)
is not defined in Treasury regulations and has not been given a
definitive, uniform definition by the Supreme Court. See Comm'r of
Internal Revenue v. Groetzinger, 480 U.S. 23, 27 (1987) (observing
that despite the widespread use of the phrase in the Internal
Revenue Code, "the Code has never contained a definition of the
words 'trade or business' for general application, and no
regulation has been issued expounding its meaning for all
11
In turn, § 414(c) is concerned with seven further sections
and sub-sections of the Code, which are themselves concerned with
qualified pension plans, profit-sharing plans, stock bonus plans,
and individual retirement accounts. See 26 U.S.C. § 414(c); see
also id. §§ 401, 408(k), 408(p), 410, 411, 415, 416.
12
29 C.F.R. § 4001.3(a) references regulations issued by the
Treasury under § 414(c) of the Code, but the Treasury regulations
cross-referenced do not define "trades or businesses" either. See,
e.g., 26 C.F.R. § 1.414(c)-2.
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purposes"). The Supreme Court has warned that when it interprets
the phrase, it "do[es] not purport to construe the phrase where it
appears in other places," except those sections where it has
previously interpreted the term. Id. at 27 n.8. The Court has not
provided an interpretation of the phrase as used in § 1301(b)(1).
C. Failing to Have Promulgated Regulations, the PBGC
Nonetheless Offers Guidance on the Meaning of "Trades or
Businesses"
The only guidance we have from the PBGC is a 2007 appeals
letter, defended in its amicus brief.
In a September 2007 response to an appeal,13 the PBGC, in
a letter, applied a two-prong test it purported to derive from
Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23, to
determine if the private equity fund was a "trade or business" for
purposes of the first part of the § 1301(b)(1) requirement. The
PBGC asked (1) whether the private equity fund was engaged in an
activity with the primary purpose of income or profit and (2)
whether it conducted that activity with continuity and regularity.
See id. at 35 ("We accept . . . that to be engaged in a trade or
business, the taxpayer must be involved in the activity with
13
The PBGC's Appeals Board renders final agency decisions on
various liability and benefit determinations in writing pursuant to
29 C.F.R. § 4003.59. According to the PBGC's website, only three-
member decisions are made available on its website. The 2007
letter was a one-member decision and was apparently not published,
or at least not made widely publicly available through its website.
See Pension Benefit Guaranty Corporation, Appeals Board Decisions,
http://www.pbgc.gov/prac/appeals-board-decisions.html.
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continuity and regularity and that the taxpayer's primary purpose
for engaging in the activity must be for income or profit.").
The PBGC found that the private equity fund involved in
that matter met the profit motive requirement. It also determined
that the size of the fund, the size of its profits, and the
management fees paid to the general partner established continuity
and regularity. The PBGC also observed that the fund's agent
provided management and advisory services, and received fees for
those services. Indeed, the Appeals Board noted that the equity
fund's agent, "N," received 20% of all net profits received in
exchange for its services and that its acts were attributable to
the fund as the fund's agent.14 In addition, the fund's controlling
stake in the portfolio company put it in a position to exercise
control through its general partner, consistent with its stated
purpose. The approach taken by the PBGC has been dubbed an
"investment plus" standard. See Bd. of Trs., Sheet Metal Workers'
Nat'l Pension Fund v. Palladium Equity Partners, LLC, 722 F. Supp.
2d 854, 869 (E.D. Mich. 2010).
The PBGC does not assert that its 2007 letter is entitled
to deference under Chevron, U.S.A., Inc. v. Natural Resources
Defense Council, 467 U.S. 837 (1984). It does, however, claim
entitlement to deference under Auer v. Robbins, 519 U.S. 45214
The letter did not mention whether the equity fund received
any offsets to the fees paid to "N" for fees "N" may have received
from the portfolio company, i.e., the withdrawing employer.
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(1997). We disagree. The PBGC's letter stating its position is
owed no more than Skidmore deference. See Skidmore v. Swift & Co.,
323 U.S. 134, 140 (1944).
The letter was not the result of public notice and
comment, and merely involved an informal adjudication resolving a
dispute between a pension fund and the equity fund. Thus far, the
letter has received no more deference than the power to persuade.
See Sun Capital, 903 F. Supp. 2d at 115; Palladium, 772 F. Supp. 2d
at 869. And rightly so. "[I]nterpretations contained in formats
such as opinion letters are 'entitled to respect' . . . only to the
extent that those interpretations have the 'power to persuade.'"
Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000) (quoting
Skidmore, 323 U.S. at 140).
The PBGC contends that, because it is interpreting a
phrase that appears in its own regulations, see 29 C.F.R.
§§ 4001.2, 4001.3, its interpretation is owed deference under Auer.
Which is to say that the court must defer to that interpretation
unless it is plainly erroneous or inconsistent with its own
regulations. Auer, 519 U.S. at 461.
The letter is not owed Auer deference in this case
because such deference is inappropriate where significant monetary
liability would be imposed on a party for conduct that took place
at a time when that party lacked fair notice of the interpretation
at issue. See Christopher v. SmithKline Beecham Corp., 132 S. Ct.
-21-
2156, 2167 (2012). Christopher stressed that the agency in that
case had taken decades before acting, during which time the
industry practice at issue developed and continued.15 Id. at 2168
("But where, as here, an agency's announcement of its
interpretation is preceded by a very lengthy period of conspicuous
inaction, the potential for unfair surprise is acute."). In this
case, the Sun Funds made their investment and operational
arrangements in early 2007, while the PBGC did not issue its
appeals letter until September 2007.
Moreover, even if Christopher was not an impediment to
Auer deference, the anti-parroting principle would be. Gonzales v.
Oregon, 546 U.S. 243, 257 (2006) ("Simply put, the existence of a
parroting regulation does not change the fact that the question
here is not the meaning of the regulation but the meaning of the
statute. An agency does not acquire special authority to interpret
its own words when, instead of using its expertise and experience
to formulate a regulation, it has elected merely to paraphrase the
statutory language."). The PBGC regulations make no effort to
15
So too, here. Private equity funds date back to the
nineteenth century, and have grown exponentially since around 1980.
N. Jordan et al., Advising Private Funds: A Comprehensive Guide to
Representing Hedge Funds, Private Equity Funds, and Their Advisers
§ 16:2 (2012) (observing that investor commitments were $10 billion
in 1991, $160 billion in 2000, and $680 billion in 2008). And,
before the PBGC's appeals letter, many fund managers did not think
they were exposed to withdrawal liability for portfolio companies.
Id. § 18:5 (explaining also that "the principles set out by the
PBGC are likely to apply across a wide spectrum of private equity
firms").
-22-
define "trades or businesses," 29 C.F.R. § 4001.3(a), and merely
refer to Treasury regulations, which, as mentioned, also do not
define the phrase.
Nonetheless, the views the PBGC expressed in the letter
are entitled to Skidmore deference. See Skidmore, 323 U.S. at 140(observing that the "weight" of an agency's determination
"depend[s] upon the thoroughness evident in [the agency's]
consideration, the validity of its reasoning, its consistency with
earlier and later pronouncements, and all those factors which give
it power to persuade").
D. Sun Fund IV is a "Trade or Business" Under
§ 1301(b)(1), the PBGC's "Investment Plus" Approach is
Persuasive, and the Same Approach Would Be Employed Even
Without Deference
The Sun Funds argue that the "investment plus" test is
incompatible with Supreme Court tax precedent. Regardless, they
argue, the Sun Funds cannot be held responsible for the activities
of other entities in the management and operation of SBI. And even
if the Sun Funds had engaged in those activities, they argue, that
would not be enough.
Where the MPPAA issue is one of whether there is mere
passive investment to defeat pension withdrawal liability, we are
persuaded that some form of an "investment plus" approach is
appropriate when evaluating the "trade or business" prong of
§ 1301(b)(1), depending on what the "plus" is. Further, even if we
were to ignore the PBGC's interpretation, we, like the Seventh
-23-
Circuit, would reach the same result through independent analysis.
In Central States, Southeast & Southwest Areas Pension Fund v.
Messina Products, LLC, 706 F.3d 874, the Seventh Circuit employed
an "investment plus"-like analysis without reference to any PBGC
interpretation. We agree with that approach. We see no need to
set forth general guidelines for what the "plus" is, nor has the
PBGC provided guidance on this. We go no further than to say that
on the undisputed facts of this case, Sun Fund IV is a "trade or
business" for purposes of § 1301(b)(1).16
In a very fact-specific approach, we take account of a
number of factors, cautioning that none is dispositive in and of
itself. The Sun Funds make investments in portfolio companies with
the principal purpose of making a profit. Profits are made from
the sale of stock at higher prices than the purchase price and
through dividends. But a mere investment made to make a profit,
without more, does not itself make an investor a trade or business.
See Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson, 238
F.3d 891, 895-96 (7th Cir. 2001); Palladium, 722 F. Supp. 2d at
868.
Here, however, the Sun Funds have also undertaken
activities as to the SBI property. The Sun Funds' limited
partnership agreements and private placement memos explain that the
16
We do not decide if Sun Fund III is a "trade or business"
for reasons discussed later.
-24-
Funds are actively involved in the management and operation of the
companies in which they invest. Pioneer Ranch, 494 F.3d at 577-78(observing that an entity's own statements about its goals,
purposes, and intentions are "highly relevant, because [they]
constitute . . . declaration[s] against interest." (quoting Connors
v. Incoal, Inc., 955 F.2d 245, 254 (D.C. Cir. 1993)) (internal
quotation mark omitted)). Each Sun Fund agreement states, for
instance, that a "principal purpose" of the partnership is the
"manag[ement] and supervisi[on]" of its investments. The
agreements also give the general partner of each Sun Fund exclusive
and wide-ranging management authority.
In addition, the general partners are empowered through
their own partnership agreements to make decisions about hiring,
terminating, and compensating agents and employees of the Sun Funds
and their portfolio companies. The general partners receive a
percentage of total commitments to the Sun Funds and a percentage
of profits as compensation -- just like the general partner of the
equity fund in the PBGC appeals letter.
It is the purpose of the Sun Funds to seek out potential
portfolio companies that are in need of extensive intervention with
respect to their management and operations, to provide such
intervention, and then to sell the companies. The private
-25-
placement memos explain that "[t]he Principals[17] typically work
to reduce costs, improve margins, accelerate sales growth through
new products and market opportunities, implement or modify
management information systems and improve reporting and control
functions." More specifically, those memos represent that
restructuring and operating plans are developed for a target
portfolio company even before it is acquired and a management team
is built specifically for the purchased company, with
"[s]ignificant changes . . . typically made to portfolio companies
in the first three to six months." The strategic plan developed
initially is "consistently monitored and modified as necessary."
Involvement can encompass even small details, including signing of
all checks for its new portfolio companies and the holding of
frequent meetings with senior staff to discuss operations,
competition, new products and personnel.
Such actions are taken with the ultimate goal of selling
the portfolio company for a profit. On this point, the placement
memos explain that after implementing "significant operating
improvements . . . during the first two years[,] . . . the
Principals expect to exit investments in two to five years (or
sooner under appropriate circumstances)."
17
"Principals" are defined in the private placement memos as
individuals who work for the general partner of the Fund.
-26-
Further, the Sun Funds' controlling stake in SBI placed
them and their affiliated entities in a position where they were
intimately involved in the management and operation of the company.
See Harrell v. Eller Maritime Co., No. 8:09-CV-1400-T-27AEP, 2010
WL 3835150, at *4 (M.D. Fla. Sept. 30, 2010) (the involvement in
decisionmaking at management level goes "well beyond that of a
passive shareholder" and supports a conclusion that an organization
is a "trade or business"). Through a series of appointments, the
Sun Funds were able to place SCAI employees in two of the three
director positions at SBI, resulting in SCAI employees controlling
the SBI board.18
Through a series of service agreements described earlier,
SCAI provided personnel to SBI for management and consulting
services. Thereafter, individuals from those entities were
immersed in details involving the management and operation of SBI,
as discussed.
Moreover, the Sun Funds' active involvement in management
under the agreements provided a direct economic benefit to at least
Sun Fund IV that an ordinary, passive investor would not derive: an
offset against the management fees it otherwise would have paid its
18
The Vice President of SSB-LLC, formed by the Sun Funds,
selected the board of SBHC. Two of those three board members were
employees of SCAI. On February 9, 2007, those same two SCAI
employees were named directors of SBI, along with the CEO, Barry
Golden, who had been retained after the purchase.
-27-
general partner for managing the investment in SBI.19 Here, SBI
made payments of more than $186,368.44 to Sun Fund IV's general
partner, which were offset against the fees Sun Fund IV had to pay
to its general partner.20 This offset was not from an ordinary
investment activity, which in the Sun Funds' words "results solely
in investment returns." See also United States v. Clark, 358 F.2d
892, 895 (1st Cir. 1966) (holding that taxpayer not engaged in a
"trade or business" in part because no evidence he received
compensation "different from that flowing to an investor").
In our view, the sum of all of these factors satisfy the
"plus" in the "investment plus" test. The conclusion we reach is
consistent with the conclusions of other appellate court decisions,
though none has addressed this precise question. In Messina, where
the Seventh Circuit employed an "investment plus"-like analysis on
its own, the pension fund was seeking to impose withdrawal
liability on a limited liability company (LLC) that owned rental
19
Specifically, the general partner of each private equity
fund is entitled to an annual fee of 2% of the aggregate
commitments to the fund, but fees the general partner and/or its
wholly-owned subsidiary or their officers, partners, or employees
receive from other sources are offset against the management fees
owed by the Sun Funds to the general partner.
20
We do not determine if Sun Fund III is a "trade or business"
because we cannot tell from the record before us if the Fund
received an economic benefit from the offset. Therefore, we leave
that factual issue and the ultimate "trade or business" conclusion
about Sun Fund III for the district court to resolve on remand.
-28-
property.21 706 F.3d at 877. The Seventh Circuit rejected the
LLC's argument that it was a passive investment vehicle. Id. at
885-86.
The Seventh Circuit looked to the stated intent in the
creation of the enterprise, as well as to the enterprise's legal
form and how it was treated for tax purposes.22 Id. at 885. The
company's operating agreement, which explained that it had
developed a business plan to produce, sell, and market gravel, was
highly relevant to the court's trade or business inquiry.23 Id. at
886 (stating that "[i]t was entirely appropriate for the district
court to take these documents at face value"). The court also
found it relevant that the activity was conducted "under the
auspices of a formal, for-profit organization," id., as are the Sun
Funds.
21
The LLC was owned by a couple who also owned the withdrawing
employer (a trucking company), establishing common control. See
Cent. States, Se. & Sw. Areas Pension Fund v. Messina Prods., LLC,
706 F.3d 874, 877 (7th Cir. 2013). The pension fund also sought to
impose liability on the couple for owning and renting a separate
property to the withdrawing employer. Id. at 879-80.
22
Admittedly, here, the Sun Funds did not list trade or
business income on their Form 1065, which cuts in favor of the Sun
Funds' argument.
23
As to the couple, the court looked to actions of the
couple's agents to impose withdrawal liability on the couple.
Messina, 706 F.3d at 884. However, to the extent the Seventh
Circuit imposed liability because the purpose of the couple's
separate rental business was to fractionalize assets of the
withdrawing employer, see id. at 883, we do not adopt a rule that
in order to impose withdrawal liability the purpose of having a
separate "trade or business" must be to fractionalize assets.
-29-
Likewise, in an earlier case, the Seventh Circuit
rejected an argument that a limited liability company that owned
rental property was merely a "personal investment."24 Cent. States,
Se. & Sw. Areas Pension Fund v. SCOFBP, LLC, 668 F.3d 873, 879 (7th
Cir. 2011). It noted that the company was a for-profit LLC, earned
rental income, paid business management fees, and contracted with
professionals to provide legal, management, and accounting
services. Id. Hence, the company was "a formal business
organization, engaged in regular and continuous activity for the
purpose of generating income or profit and thus is . . . a 'trade
or business' for purposes of the MPPAA." Id.The Sun Funds, however, argue that they cannot be "trades
or businesses" because that would be inconsistent with two Supreme
Court decisions -- Higgins v. Commissioner of Internal Revenue, 312
U.S. 212 (1941), and Whipple v. Commissioner of Internal Revenue,
373 U.S. 193 (1963) -- which interpret that phrase. The Sun Funds
24
The court defined "personal investments" as:
[T]hings like holding shares of stock or bonds in
publicly traded corporations. Ownership of this type of
property "without more is the hallmark of an investment."
Owning property can be considered a personal investment,
at least where the owner spends a negligible amount of
time managing the leases, although a more substantial
investment of time may be considered regular and
continuous enough to rise to the level of a "trade or
business."
Cent. States, Se. & Sw. Areas Pension Fund v. SCOFBP, LLC, 668 F.3d
873, 878-79 (7th Cir. 2011) (citations omitted) (quoting Cent.
States, Se. & Sw. Areas Pension Fund v. Fulkerson, 238 F.3d 891,
895 (7th Cir. 2001)).
-30-
argue that cases interpreting the phrase "trade or business" as
used anywhere in the Internal Revenue Code are binding because
Congress intended for that phrase to be a term of art with a
consistent meaning across uses. Also, the Sun Funds essentially
argue that, by relying on Groetzinger, which stated that it was not
cutting back on Higgins, the PBGC's "investment plus" test must be
interpreted in a way consistent with Higgins and its progeny.
Under Higgins, the Funds contend, they cannot be "trades or
businesses."
As to the first argument, we reject the proposition that,
apart from the provisions covered by 26 U.S.C. § 414(c),
interpretations of other provisions of the Internal Revenue Code
are determinative of the issue of whether an entity is a "trade or
business" under § 1301(b)(1). Accord United Steelworkers of Am.,
AFL-CIO & Its Local 4805 v. Harris & Sons Steel Co., 706 F.2d 1289,
1299 (3d Cir. 1983) (explaining that a term used for tax purposes
does not have to have the same meaning for purposes of pension fund
plan termination insurance). We are particularly convinced this is
the case because the Supreme Court has been hesitant to express a
uniform definition even within the Code itself. See Groetzinger,
480 U.S. at 27 n.8; see also Carpenters Pension Trust Fund for N.
Cal. v. Lundquist, 491 F. App'x 830, 831 (9th Cir. 2012) (rejecting
argument that Groetzinger test must be used in interpreting
§ 1301(b)(1)); Bd. of Trs. of the W. Conference of Teamsters
-31-
Pension Trust Fund v. Lafrenz, 837 F.2d 892 (9th Cir. 1988)
(deciding § 1301(b)(1) case without discussing Groetzinger).
Moreover, § 1301(b)(1)'s statement that it must be construed
consistently with only certain uses of the phrase in the Code
undercuts the Sun Funds' assertion that the phrase must be
uniformly interpreted.
As to the second argument, we see no inconsistency with
Higgins or Whipple. Those cases were concerned with different
issues and did not purport to provide per se rules, much less rules
determinative of withdrawal liability under the MPPAA. The premise
of the Sun Funds' argument is that Higgins and Whipple mean that
entities that make investments, manage those investments, and earn
only investment returns cannot be "trades or businesses" for any
purpose. That argument is too blunt an instrument. In Higgins,
the issue was whether certain claimed expenses were eligible for
the deduction the taxpayer sought. The taxpayer, who had extensive
investments in real estate, bonds, and stocks, spent a considerable
amount of effort and time administratively overseeing his
interests. 312 U.S. at 213. The taxpayer hired others to assist
him and also rented offices to oversee his investments. Id. He
claimed those expenses were deductible under Section 23(a) of the
Revenue Act of 1932 as ordinary and necessary expenses paid or
incurred in carrying on a "trade or business." Id. at 213-14. The
Supreme Court held that those expenses were not incurred while
-32-
carrying on a "trade or business" and were therefore not
deductible. Id. at 217-18.
The Supreme Court reasoned that this was true because
"[t]he petitioner merely kept records and collected interest and
dividends from his securities, through managerial attention for his
investments." Id. at 218. The Court held that, no matter the size
of the estate or the continuous nature of the work required to keep
a watchful eye on investments, that by itself could not constitute
a "trade or business." Id. Significantly, the Court noted that
the taxpayer "did not participate directly or indirectly in the
management of the corporations in which he held stock or bonds."
Id. at 214.
The facts of this case are easily distinguishable from
those of Higgins. See id. at 217 ("To determine whether the
activities of a taxpayer are 'carrying on a business' requires an
examination of the facts in each case."). First, the taxpayer in
Higgins was trying to claim a deduction to avoid paying taxes.
Second and more important, unlike the investor in Higgins, the Sun
Funds did participate in the management of SBI, albeit through
affiliated entities.25
25
Higgins stated that the size of the portfolio and the amount
of time making investment decisions and taking care of
administrative matters does not transform an investor into a "trade
or business"; we do not rely on those factors in our analysis.
-33-
Whipple is also distinguishable: The taxpayer there
sought to deduct a worthless loan made to a business he controlled
as a bad business debt incurred in the taxpayer's "trade or
business." 373 U.S. at 194-97. The taxpayer claimed that, because
he furnished regular services, namely his time and energy to the
affairs of the corporation, he was engaged in a "trade or
business." Id. at 201-02. The Supreme Court rejected the
argument, stating:
Devoting one's time and energies to the
affairs of a corporation is not of itself, and
without more, a trade or business of the
person so engaged. Though such activities may
produce income, profit or gain in the form of
dividends or enhancement in the value of an
investment, this return is distinctive to the
process of investing and is generated by the
successful operation of the corporation's
business as distinguished from the trade or
business of the taxpayer himself. When the
only return is that of an investor, the
taxpayer has not satisfied his burden of
demonstrating that he is engaged in a trade or
business since investing is not a trade or
business and the return to the taxpayer,
though substantially the product of his
services, legally arises not from his own
trade or business but from that of the
corporation.
Id. at 202 (emphasis added). The Sun Funds say that, because they
earned no income other than dividends and capital gains, they are
not "trades or businesses." But the Sun Funds did not simply
devote time and energy to SBI, "without more." Rather, they were
able to funnel management and consulting fees to Sun Fund IV's
general partner and its subsidiary. Most significantly, Sun Fund
-34-
IV received a direct economic benefit in the form of offsets
against the fees it would otherwise have paid its general partner.
It is difficult to see why the Whipple "without more" formulation
is inconsistent with an MPPAA "investment plus" test.
The "investment plus" test as we have construed it in
this opinion is thus consistent with the Groetzinger, Higgins, and
Whipple line of cases.26 Cf. SCOFBP, 668 F.3d at 878 ("[I]t seems
highly unlikely that a formal for-profit business organization
would not qualify as a 'trade or business' under the Groetzinger
test."); Rosenthal, Taxing Private Equity Funds as Corporate
'Developers', at 365 ("[P]rivate equity funds are active enough to
be in a trade or business.").
The Sun Funds make an additional argument: that because
none of the relevant activities by agents and different business
entities can be attributed to the Sun Funds themselves, withdrawal
liability cannot be imposed upon them. We reject this argument as
well. Without resolving the issue of the extent to which Congress
26
Very late in this case the TPF, for the first time, argued
that a series of tax cases from the tax court supported its view
that the Sun Funds are "trades or businesses" because they are
engaged in the development, promotion, and sale of companies. The
TPF cites Deely v. Commissioner of Internal Revenue, 73 T.C. 1081(1980), Farrar v. Commissioner of Internal Revenue, 55 T.C.M. (CCH)
1628 (1988), and Dagres v. Commissioner of Internal Revenue, 136
T.C. 263 (2011). The argument was presented too late. The
"developing business enterprises for resale" theory was not
presented to the district court nor in the opening briefs to us.
Whatever the merit of the theory, our decision does not engage in
an analysis of it.
-35-
intended in this area to honor corporate formalities, as have the
parties, we look to the Restatement of Agency. Cf. Vance v. Ball
State Univ., 133 S. Ct. 2434, 2441 (2013) (looking to Restatement
of Agency to decide when Title VII vicarious liability
appropriate). And, because the Sun Funds are Delaware limited
partnerships, we also look to Delaware law.
Under Delaware law, a partner "is an agent of the
partnership for the purpose of its business, purposes or
activities," and an act of a partner "for apparently carrying on in
the ordinary course of the partnership's business, purposes or
activities or business, purposes or activities of the kind carried
on by the partnership binds the partnership." Del. Code Ann. tit.
6, § 15-301(1); see also Comm'r of Internal Revenue v. Boeing, 106
F.2d 305, 309 (9th Cir. 1939) ("One may conduct a business through
others, his agents, representatives, or employees."). To determine
what is "carrying on in the ordinary course" of the partnership's
business, we may consider the partnership's stated purpose.
Rudnitsky v. Rudnitsky, No. 17446, 2010 WL 1724234, at *6 (Del. Ch.
Nov. 14, 2000).
Here, the limited partnership agreements gave the Sun
Funds' general partners the exclusive authority to act on behalf of
the limited partnerships to effectuate their purposes.27 These
27
The Sun Funds try to divert our attention from the Sun
Funds' limited partnership agreements and instead focus on the
purposes of the general partners as provided in their partnership
-36-
purposes included managing and supervising investments in portfolio
companies, as well as "other such activity incidental or ancillary
thereto" as deemed advisable by the general partner. So, under
Delaware law, it is clear that the general partner of Sun Fund IV,
in providing management services to SBI, was acting as an agent of
the Fund.
Moreover, even absent Delaware partnership law, the
partnership agreements themselves grant actual authority for the
general partner to provide management services to portfolio
companies like SBI. See Restatement (Third) of Agency §§ 2.01,
3.01; cf. id. § 7.04 (principal incurs tort liability vicariously
where agent acts with actual authority). And the general partners'
own partnership agreements giving power to the limited partner
committee to make determinations about hiring, terminating, and
compensating agents and employees of the Sun Funds and their
portfolio companies show the existence of such authority. Hence,
the general partner was acting within the scope of its authority.
Even so, the Sun Funds argue that the general partner
entered the management service contract with SBI on its own accord,
not as an agent of the Sun Funds.28 The Sun Funds' own
agreements. But it is the principal's purposes, i.e., the Sun
Funds' purposes, that are relevant.
28
The Sun Funds' citation of the Restatement (Third) of
Agency's comment that "[a]n agent may enter into a contract on
behalf of a disclosed principal and, additionally, enter into a
separate contract on the agent's own behalf with the same third
-37-
characterization is not dispositive.29 Cf. Restatement (Third) of
Agency § 1.02 cmt. a (stating "how the parties to any given
relationship label it is not dispositive").
The argument is unpersuasive for at least two reasons.
First, it was within the general partner's scope of authority to
provide management services to SBI. Second, providing management
services was done on behalf of and for the benefit of the Sun
Funds. Cf. Messina, 706 F.3d at 884 (individuals acting for
benefit of married couple are agents whose acts are attributable to
the couple). The investment strategy of the Sun Funds could only
be achieved by active management through an agent, since the Sun
Funds themselves had no employees. Indeed, the management services
agreement was entered into just one day after the execution of the
stock purchase agreement. In addition, Sun Fund IV received an
offset in the fees it owed to its general partner because of
payments made from SBI to that general partner. That provided a
party," is unpersuasive. Restatement (Third) of Agency § 6.01 cmt.
b. In that comment, the Restatement is explaining that an agent
may enter into a contract that binds the agent and not the
principal even where there is a separate contract which the agent
entered into on behalf of the principal. That is not the case here
where there is just one contract to provide management services to
SBI. Additionally, in the illustration that follows, the agent
permissibly enters into a second contract with the same third party
in an area outside the scope of his agency. Again, that is not the
case here where it was within the scope of authority for the
general partner of Sun Fund IV to manage the investment in SBI.
29
Likewise, the fact that the general partner did not sign the
management services agreement with SBI explicitly on behalf of Sun
Fund III or Sun Fund IV is not determinative.
-38-
benefit by reducing its expenses. The services paid for by SBI
were the same services that the Sun Funds would otherwise have paid
for themselves to implement and oversee an operating strategy at
SBI.30
The Sun Funds also make a policy argument that Congress
never intended such a result in its § 1301(b)(1) control group
provision. They argue that the purpose of the provision is to
prevent an employer "from circumventing ERISA obligations by
divvying up its business operations into separate entities." It is
not, they say, intended to reach owners of a business so as to
require them to "dig into their own pockets" to pay withdrawal
liability for a company they own. See Messina, 706 F.3d at 878.
These are fine lines. The various arrangements and
entities meant precisely to shield the Sun Funds from liability may
be viewed as an attempt to divvy up operations to avoid ERISA
obligations. We recognize that Congress may wish to encourage
investment in distressed companies by curtailing the risk to
investors in such employers of acquiring ERISA withdrawal
liability. If so, Congress has not been explicit, and it may
30
Contrary to the Sun Funds' argument, attributing activities
of an agent to a principal to determine if the principal is engaged
in a "trade or business" does not result in the principal assuming
the status of the agent. That is too simplistic of a way to view
the inquiry. Instead, "the court must attribute the activities of
an agent that is acting on behalf of a principal to the principal,
to determine whether there are sufficient activities of the
principal to constitute a trade or business." Rosenthal, Taxing
Private Equity Funds as Corporate 'Developers', at 365 n.43.
-39-
prefer instead to rely on the usual pricing mechanism in the
private market for assumption of risk.
We express our dismay that the PBGC has not given more
and earlier guidance on this "trade or business" "investment plus"
theory to the many parties affected. The PBGC has not engaged in
notice and comment rulemaking or even issued guidance of any kind
which was subject to prior public notice and comment. See C.
Sunstein, Simpler 216 (2013) ("[G]overnment officials learn from
public comments on proposed rules. . . . It is not merely sensible
to provide people with an opportunity to comment on rules before
they are finalized; it is indispensable, a crucial safeguard
against error."). Moreover, its appeals letter that provides for
the "investment plus" test leaves open many questions about exactly
where the line should be drawn between a mere passive investor and
one engaged in a "trade or business."
Because to be an "employer" under § 1301(b)(1) the entity
must both be a "trade or business" and be under common control, we
reverse entry of summary judgment on the § 1301(b)(1) claim in
favor of Sun Fund IV and vacate the judgment in favor of Sun Fund
III. We remand the § 1301(b)(1) claim of liability to the district
court to resolve whether Sun Fund III received any benefit from an
offset from fees paid by SBI and for the district court to decide
the issue of common control. We determine only that the "trade or
business" requirement has been satisfied as to Sun Fund IV.
-40-
III.
We deny, for different reasons than the district court,
the TPF's appeal from entry of summary judgment against its claim
under 29 U.S.C. § 1392(c). That provision of the MPPAA states
"[i]f a principal purpose of any transaction is to evade or avoid
liability under this part, this part shall be applied (and
liability shall be determined and collected) without regard to such
transaction." 29 U.S.C. § 1392(c) (emphasis added).
The TPF argues that § 1392(c) applies because the Sun
Funds, during the acquisition, purposefully divided ownership of
SSB-LLC into 70%/30% shares in order to avoid the 80% parent-
subsidiary common control requirement of § 1301(b)(1). Under
Treasury regulations, to be in a parent-subsidiary group under
common control, the parent must have an 80% interest in the
subsidiary. 26 C.F.R. § 1.414(c)-2(b)(2)(i). The TPF asserts
that, because a Sun Fund representative testified that a principal
purpose of the 70%/30% division was to avoid unfunded pension
liability and because an email states that a reason ownership was
divided was "due to [the] unfunded pension liability," liability
can be imposed on the Sun Funds under § 1392(c).31
31
The claim raises a number of issues that we need not
address. We do not decide whether an agreement between Sun Fund
III and Sun Fund IV can be considered a "transaction." Nor do we
decide whether, as the district court found, § 1392(c) can serve as
an independent basis for liability even if none were to exist under
§ 1301(b)(1) (that is, that the Sun Funds need not first be "trades
or businesses"). We also need not resolve whether an outside
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We hold that § 1392(c) cannot serve as a basis to impose
liability on the Sun Funds because, by applying the remedy
specified by the statute, the TPF would still not be entitled to
any payments from the Sun Funds for withdrawal liability. We begin
(and ultimately end) our analysis by reviewing the plain language
of § 1392(c). See United States v. Kelly, 661 F.3d 682, 687 (1st
Cir. 2011) ("We begin our analysis by reviewing the plain language
of the [statute].").
The language of § 1392(c) instructs courts to apply
withdrawal liability "without regard" to any transaction the
principal purpose of which is to evade or avoid such liability. 29
U.S.C. § 1392(c). The instruction requires courts to put the
parties in the same situation as if the offending transaction never
occurred; that is, to erase that transaction. It does not, by
contrast, instruct or permit a court to take the affirmative step
of writing in new terms to a transaction or to create a transaction
that never existed. In order for the TPF to succeed, we would have
to (improperly) do the latter because simply doing the former would
not give the TPF any relief, but would only sever any ties between
the Sun Funds and SBI.
Disregarding the agreement to divide SSB-LLC 70%/30%
would not result in Sun Fund IV being the 100% owner of SBI. At
investor who structures an investment in a manner to avoid assuming
unfunded pension liabilities can ever be held to be evading or
avoiding withdrawal liability.
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the moment SSB-LLC was divided 70%/30%, the transaction to purchase
SBI had not been completed. There is no way of knowing that the
acquisition would have happened anyway if Sun Fund IV were to be a
100% owner, but it is doubtful. SSB-LLC was formed on December 15,
2006, at which point the 70%/30% division became official. SBI did
not enter into a stock purchase agreement to be acquired until
February 8, 2007. In essence, the TPF requests that we create a
transaction that never occurred -- a purchase by Sun Fund IV of a
100% stake in SBI. But as stated, that we cannot do. Cf.
Teamsters Pension Trust Fund of Phila. & Vicinity v. Cent. Mich.
Trucking, Inc., 857 F.2d 1107, 1109 (6th Cir. 1988) ("There is no
congressional mandate to engage in legal gymnastics in order to
guarantee pension plans at all costs[,] . . . or to apply the
statute in a nonsensical fashion in order to assure full payment of
withdrawal liability."). Moreover, the TPF does not provide a
single case in which a court created a fictitious transaction in
order to impose § 1392(c) liability.
The TPF argues that because Sun Fund IV had already
signed a letter of intent to purchase 100% of SBI before the
decision was made to divide ownership between the Sun Funds, we can
rely on the letter of intent. The TPF claims that the decision to
split ownership to avoid the automatic assumption of withdrawal
liability at 80% ownership was made after a binding transaction was
entered into through the letter of intent. That is not true. The
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letter of intent was so named because it was not a binding contract
or any sort of purchase agreement. Rather, the letter explicitly
contained a clause stating that:
The first five captioned paragraphs of this
letter ('Purchase Price', 'Purchase Agreement
Terms', 'Financing', 'Timing & Process', and
'Due Diligence') represent only the intent of
the parties, do not constitute a contract or
agreement, are not binding, and shall not be
enforceable against the Sellers, the Company,
or Sun Capital. . . . [N]either party shall
have any legally binding obligation to the
other unless and until a definitive purchase
agreement is executed.
This is simply not a case about an entity with a controlling stake
of 80% or more under the MPPAA seeking to shed its controlling
status to avoid withdrawal liability. As such, disregarding the
agreement to divide ownership of SSB-LLC would not leave us with
Sun Fund IV holding a controlling 80% stake in SBI.
The Sun Funds are not subject to liability pursuant to
§ 1392(c) and the district court's conclusion that they are not is
affirmed.
IV.
Accordingly, the district court's grant of summary
judgment is reversed in part, vacated in part, and affirmed in
part. The case is remanded to the district court for further
proceedings, including those needed to determine the "trade or
business" issue as to Sun Fund III, and the issue of common
control. So ordered. No costs are awarded.
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