Reversing the district court, the First Circuit endorsed a structure ensuring that investors will not be liable for withdrawal from a multiemployer pension plan. The guinea pig was two investment funds established by Sun Capital Partners Inc.
On a motion for summary judgment, the district court had found that the two Sun Capital investment funds were jointly and severally liable for more than $4 million in withdrawal liability when the bankruptcy of a brass company led to withdrawal from a multiemployer pension fund.
In her November 22 opinion, Circuit Judge Sandra L. Lynch laid out the two competing policy considerations: (1) Holding investors liable for withdrawal liability “would likely disincentivize much-needed private investment in underperforming companies with unfunded pension liabilities;” and (2) if investors are not held liable, the Pension Benefit Guaranty Corp. will assume responsibility for paying pensioners, but the maximum annual benefit will be less than $13,000 for an employee with 30 years of service.
Judge Lynch said she was “reluctant to impose withdrawal liability on the private investors because we lack a firm indication of congressional intent to do so and any formal guidance from the PBGC.”
The Complex Ownership Structure
The ownership structure was complex but boiled down to this: For an investment of $2.1 million, one Sun Capital fund bought 70% of the brass company. For 30% ownership, a different Sun Capital fund paid $900,000.
As investors, the two funds had 124 and 230 limited partners, respectively. Sixty-four of the limited partners invested in both funds. The two funds were both organized as limited liability corporations. The general partner of both was another Sun Capital entity.
The investment funds had no offices and no employees and made nothing on their own. Their organization documents expressly disclaimed being part of any partnerships or joint ventures.
The two funds bought the brass company with their $3 million investment and $4.8 million in debt. The purchase price was a 25% discount to fair market value in view of the brass company’s unfunded pension liability. Functionally speaking, decisions for the two funds were made by the same two high-level executives at Sun Capital.
Liability Under MPPAA
The outcome was governed by the Multiemployer Pension Plan Amendments Act of 1980, or MPPAA. The MPPAA has a two-part test to determine whether the two funds would be liable for the shortfall in funding the pension plan. First, they must have been part of an “implied partnership-in-fact which constituted a control group,” Judge Lynch said. Second, the funds had to be engaged in a trade or business.
The opinion by Judge Lynch focused on the first test. The existence of a partnership-in-fact turned on the Internal Revenue Code and the eight-part test in Luna v. Commissioner, 42 T.C. 1067 (1964).
Sun Capital used two investment funds with 70%/30% ownership for a simple reason: Treasury regulations provide that an entity with 80% ownership is deemed to have a controlling interest. The issue therefore became a question of whether the two funds met the 80% ownership test because they were functionally a partnership.
Under the eight-part Luna test, there were some indicia of a partnership, Judge Lynch said. Sun Capital’s control of the two funds by the same two senior executives, she said, was “some evidence of a partnership-in-fact,” because the two men “essentially ran things for both” the funds and the brass company.
However, the “consideration of all the factors” led Judge Lynch to “the opposite conclusion.” She pointed to the funds’ express disclaimer of being in “any sort of partnership.” Also, she said, they “did not operate in parallel, that is, invest in the same companies at a fixed or even variable ratio.”
Concluding that the two funds had not formed a partnership-in-fact, Judge Lynch reversed the district court. She therefore did not reach the second part of the test: the issue of a trade or business.
Reversing the district court, the First Circuit endorsed a structure ensuring that investors will not be liable for withdrawal from a multiemployer pension plan. The guinea pig was two investment funds established by Sun Capital Partners Inc.
On a motion for summary judgment, the district court had found that the two Sun Capital investment funds were jointly and severally liable for more than $4 million in withdrawal liability when the bankruptcy of a brass company led to withdrawal from a multiemployer pension fund.
In her November 22 opinion, Circuit Judge Sandra L. Lynch laid out the two competing policy considerations: (1) Holding investors liable for withdrawal liability “would likely disincentivize much-needed private investment in underperforming companies with unfunded pension liabilities;” and (2) if investors are not held liable, the Pension Benefit Guaranty Corp. will assume responsibility for paying pensioners, but the maximum annual benefit will be less than $13,000 for an employee with 30 years of service.
Judge Lynch said she was “reluctant to impose withdrawal liability on the private investors because we lack a firm indication of congressional intent to do so and any formal guidance from the PBGC.”