Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund

United States District Court for the District of Massachusetts · 2013 · Corporations

CorporationsERISAMPPAAcommon controlprivate equity fundswithdrawal liabilitytrade or businesscommon control

Facts

Scott Brass, Inc. incurred MPPAA withdrawal liability after bankruptcy and was owned through Scott Brass Holding Corp. and Sun Scott Brass, LLC. Sun Fund III owned 30% and Sun Fund IV owned 70% of Sun Scott Brass, LLC, while affiliated Sun Capital entities actively managed Scott Brass and received management fees under a management agreement. Fees paid by Scott Brass generated management-fee offsets under the funds' limited partnership agreements; Sun Fund III received actual offsets, while Sun Fund IV received offset carryforwards because its general partner waived management fees during relevant years. The Sun Funds had jointly structured the 70/30 split and repeatedly co-invested through similar entities, while disclaiming any intent to form a partnership or joint venture.

Issue

Whether Sun Fund III and Sun Fund IV were each engaged in a trade or business for purposes of MPPAA withdrawal liability, and whether their interests could be aggregated because they operated through a partnership-in-fact or joint venture that was under common control with Scott Brass, Inc. More specifically, the court had to determine whether Sun Fund III received a qualifying management-fee benefit and whether the Sun Funds' relationship amounted to a partnership under federal law.

Rule

Under MPPAA, withdrawal liability may be imposed on an entity other than the directly obligated employer only if the entity is both a trade or business and under common control with the employer. The trade-or-business inquiry uses the First Circuit's fact-specific 'investment-plus' approach, under which active management and receipt of any benefit unavailable to an ordinary passive investor can satisfy the test; contingent management-fee offset carryforwards may qualify as such a benefit. Common control is generally determined under the 80% ownership rules applicable to parent-subsidiary groups, but ownership interests may be aggregated where the relevant investors formed a partnership-in-fact under federal law, determined by their intent and conduct under Tower, Culbertson, and Luna.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Granite Ridge Fund owns 40% of a Detroit manufacturing company through an acquisition structure. The fund's governing documents emphasize active supervision of portfolio companies, and its affiliated advisers installed managers at the company and directed operational changes. The company later incurs withdrawal liability, but Granite Ridge never received any fee offsets, carryforwards, or other economic benefits tied to those management activities.

Is Granite Ridge most likely a trade or business for withdrawal-liability purposes?

Explanation. The majority treated trade-or-business status as requiring more than mere passive investment under a fact-specific investment-plus approach. Active management was important, but the court also relied on receipt of a benefit unavailable to an ordinary passive investor, such as fee offsets or carryforwards arising from management. On these facts, the fund has active involvement but no qualifying management-linked benefit, so it is most likely not a trade or business under the court's reasoning.