SUN CAPITAL PARTNERS III, LP; SUN CAPITAL PARTNERS III QP, LP; SUN CAPITAL PARTNERS IV, LP, Plаintiffs, 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.
No. 12-2312
United States Court of Appeals For the First Circuit
July 24, 2013
Before Lynch, Chief Judge, Thompson and Kayatta, Circuit Judges.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Douglas P. Woodlock, U.S. District Judge]
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.
The plaintiffs are the two private equity funds, which sought a declaratory judgment against the TPF. The TPF, which
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,
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
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
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
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
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 partnership) to the Sun Funds, paid by the limited partnership, and a percentage of the Sun
B. The Acquisition of Scott Brass, Inc.
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.
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
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
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
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
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
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
As to its “evade or avoid” liability analysis, the district court stated that
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
II.
A. Standard of Review
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 judgmеnt 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.”
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
The MPPAA provides: “For purposes of this subchapter, under regulations prescribed by the [PBGC], all employеes 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.”
While Congress in
The phrase “trades or businesses” as used in
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
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, Inc., 467 U.S. 837 (1984). It does, however, claim entitlement to deference under Auer v. Robbins, 519 U.S. 452 (1997)
(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
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. 2156, 2167 (2012).
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
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
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
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 tо 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
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).”
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
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
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.
The Sun Funds, hоwever, 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
As to the first argument, we reject the proposition that,
apart from the provisions covered by
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
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
Devoting one‘s time аnd 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
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
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 сarrying 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.”
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
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
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 manаgement 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
The Sun Funds also make a policy argument that Congress
never intended such a result in its
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 operatiоns 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
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
We deny, for different reasons than the district court,
the TPF‘s appeal from entry of summary judgment against its claim
under
The TPF argues that
We hold that
The language of
Disregarding the agreement to divide SSB-LLC 70%/30%
would not result in Sun Fund IV being the 100% owner of SBI. At
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
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
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 tо determine the “trade or business” issue as to Sun Fund III, and the issue of common control. So ordered. No costs are awarded.