United States District Court, D. Massachusetts
SUN CAPITAL PARTNERS III, LP, SUN CAPITAL PARTNERS III QP, LP, and SUN CAPITAL PARTNERS IV, LP, Plaintiffs/ Counter-Defendants,
NEW ENGLAND TEAMSTERS AND TRUCKING INDUSTRY PENSION FUND, Defendant/ Counter-Plaintiff.
MEMORANDUM & ORDER
DOUGLAS P. WOODLOCK UNITED STATES DISTRICT JUDGE
This case addresses whether the plaintiffs - private equity funds, referred to herein as “Sun Fund III” and “Sun Fund IV” - may be held liable under the Multiemployer Pension Plan Amendments Act (“MPPAA”) for the pro rata share of unfunded vested benefits owed to a multiemployer pension fund by a bankrupt company, Scott Brass, Inc. (“SBI”), that is owned by the funds. The plaintiffs seek a declaratory judgment that they are not liable for the payment of such withdrawal liability. The defendant has counter-claimed seeking a declaratory judgment that the private equity funds are jointly and severally liable for the amounts owed by Scott Brass Inc.
In September of 2011, the plaintiffs and defendant filed cross-motions for summary judgment. In September 2012, I granted the plaintiffs’ motion for summary judgment and denied that of the defendant. On appeal, the First Circuit reversed in part, vacated in part, and affirmed in part my grant of summary judgment, and remanded the case to this court for further proceedings to answer two questions: (1) Whether Sun Capital Partners III, LP and Sun Capital Partners III QP, LP are engaged in “trade or business”; and (2) Whether the plaintiffs were under “common control” with Scott Brass, Inc. within the meaning of 29 U.S.C. § 1301(b)(1).
The facts relevant to this dispute have been described extensively in the two prior reported opinions in this litigation. Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund, 903 F.Supp.2d 107 (D. Mass. 2012), Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013). I will assume general familiarity with those opinions and discuss facts more specifically in connection with the remaining questions.
For the sake of clarity, I provide a brief restatement of the entities involved. Scott Brass, Inc. (“SBI”), is the entity that incurred withdrawal liability under the MPPAA after it went bankrupt and ceased payments into the defendant Pension Fund. At the time of its bankruptcy, it was owned by Scott Brass Holding Corp., which in turn was owned by Sun Scott Brass, LLC. Sun Scott Brass, LLC was formed by Sun Fund III, which owned 30 percent of the LLC, and Sun Fund IV, which owned the other 70 percent. The two Sun Funds are investment funds and limited partnerships. Their general partners are Sun Capital Advisors III, LP and Sun Capital Advisors IV, LP, respectively, and those general partners each have a limited partner committee made up of Marc Leder and Rodger Krouse. Leder and Krouse are also the co-CEOs of Sun Capital Advisors, Inc., which advises the Sun Funds, structures their deals and provides management consulting and employees to the portfolio companies owned by the Funds. Additional detail is provided in the prior opinions and, as needed, in the opinion below; additionally, an organizational chart is provided as an appendix to this memorandum.
The parties have filed renewed cross-motions for summary judgment setting forth their positions on the questions posed by the First Circuit.
I. WHETHER THE SUN FUNDS ARE ENGAGED IN TRADE OR BUSINESS
The Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) provides: “For purposes of this subchapter, under regulations prescribed by the corporation, 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).
In the previous appeal of this case, the First Circuit set forth the standard for determining whether an investor is a “trade or business” under the statute. The First Circuit stated that, under the MPPAA, “[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.” Sun Capital, 724 F.3d at 138 (quoting McDougall v. Pioneer Ranch Ltd. P’ship, 494 F.3d 571, 577 (7th Cir. 2007)).
The First Circuit explained that “[w]here 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.” Sun Capital, 724 F.3d at 141. Declining “to set forth general guidelines for what the ‘plus’ is, ” the First Circuit found it sufficient that “on the undisputed facts of this case, Sun Fund IV is a ‘trade or business’ for purposes of § 1301(b)(1).” Id. In reaching that determination, the First Circuit adopted a “very fact-specific approach . . . tak[ing] into account a number of factors [and] cautioning that none is dispositive in and of itself.” Id. Many of the factors leading to the determination that Sun Fund IV was engaged in trade and business are commonly established as to both Sun Fund IV and Sun Fund III:
The Sun Funds make investments in portfolio companies with the principal purpose of making a profit . . . [T]he Sun Funds have also undertaken activities as to the SBI property. The Sun Funds’ limited partnership agreements and private placement memos explain that the Funds are actively involved in the management and operation of the companies in which they invest . . . 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 . . . 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 . . . 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.
Sun Capital, 724 F.3d at 141-143. The First Circuit’s determination that Sun Fund IV was a “trade or business” also relied on one characteristic that the court was unable to determine was also a characteristic of Sun Fund III:
[T]he 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 general partner for managing the investment in SBI. 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. Id. at 143 (footnotes omitted).
The First Circuit held that the sum of these “plus” factors satisfied the “investment-plus” test for the Sun Fund IV. However, because it was unable to determine whether Sun Fund III received a similar economic benefit in the form of an off-set of fees otherwise owed by Sun Fund III to its general partner, the First Circuit was unable to determine whether Sun Fund III was engaged in a “trade or business.” The First Circuit left that issue to this court’s determination: “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 determine the issue of common control.” Id. at 148-49.
On remand, the Sun Funds contend that the First Circuit, as well as this court in its previous summary judgment opinion, misstated relevant facts regarding the management fee offsets accruing to the Sun Funds as a result of the management of SBI. As they explain, “[i]n this case, Sun Fund III did receive an offset of the management fee owed to its GP from fees paid by SBI . . . Ironically, Sun Fund IV did not.” To sort out this state of affairs, I will set forth the facts as I now understand them to be and then analyze those facts under the rubric set forth by the First Circuit.
A. The Sun Fund III and Sun Fund IV Limited Partnership Agreements
Under the limited partnership agreements (the “LP Agreements”) establishing Sun Fund III and Sun Fund IV,  all partners, including the general partners of each Fund (Sun Capital Advisors III, LP and Sun Capital Advisors IV, LP, respectively), are obligated to make contributions to the capital of the partnerships upon receiving a capital call. The amount of the contributions required of the General Partners are determined based upon the pro rata share of each partner’s commitments. (Jt. Ex. 12, § 5.1(a)-(b)).
In addition to being obligated to make capital contributions to the Sun Funds, the General Partners are entitled to an annual management fee (the “Management Fee”) from the Sun Funds, calculated as a percentage of the aggregate commitments or invested assets. (Jt. Ex. 12, § 5.1(a)-(b)).
Under 5.1(c) of the Sun Fund LP Agreements, the General Partners may elect to “waive” their management fees, generating what is termed in the LP Agreements a “Waived Fee Amount.” These “Waived Fee Amounts” reduce the General Partners’ obligation to contribute to future capital calls made by the Sun Funds. Section 3.1(a)(ii) of the Sun Fund agreement provides:
[A]t such time as the General Partner delivers any Capital Call Notice, the General Partner’s required Capital Contributions in respect of anticipated or actual Investments and/or expenses incurred directly in connection with the making, maintaining or disposing of such Investments, at the General Partner's election, shall be reduced by an amount designated by the General Partner up to the lesser of (A) the amount of Capital Contributions otherwise required to be made by the General Partner . . . or (B) the amount of any existing Unapplied Waived Fee amounts . . . .
In addition to waivers, the Management Fee owed by the Sun Funds to its General Partner may be reduced in a second way. Under Section 5.1(d) of the LP Agreement, after the application of Waived Fee Amounts under Section 5.1(c), the Management Fee is further reduced by “100% of any Directors Fees, 50% of any Corporate Services Fees, 50% of any Investment Banking Fees and 50% of any Net Fees” as well as by the aggregate amount of any “private placement fees” (the “Management Fee Offsets”). The Sun Funds have explained the function of this term of the limited partner agreements thus: “[T]he limited partners of the Sun Funds negotiated offsets of the management fees they owed the general partners of the Sun Funds for the payment of other fees to the general partners such as those covered under the Management Services Agreement [between Scott Brass Holding Corp and SCP Management IV, LLC.].” [Dkt. 149 Resp. No. 115].
When no Management Fees are owed or the amount of Management Fee Offsets is greater than the Management Fees owed (after taking into account any fee waivers elected by the General Partners), Management Fee Offset “carryforwards” are generated, which can be used to offset future Management Fees owed by the Sun Funds to their General Partners: In the event that the amount of Directors Fees, Corporate Services Fees, Investment Banking Fees, Net Fees or private place fees to be applied against the Management Fee exceeds the Management Fee for the immediately succeeding six-month period, such excess shall be carried forward to reduce the Management Fee payable in the following six-month periods.
B. The Sun Scott Brass Holding Corp. Management Agreement
Scott Brass Holding Corp. and Sun Capital Partners Management IV, LLC (“SCP Management IV”) (which is a subsidiary of Sun Capital Advisors IV, LP) entered into an agreement (the “Management Agreement”) pursuant to which the latter would provide “management and consulting services regarding the business of [SBI].” The fees paid to SCP Management IV under this Management Agreement are offset against the Management Fees, or, if no Management Fees are presently owed, are carried forward as potential future offsets pursuant to Section 5.1(d) of the LP Agreements.
In addition, pursuant to Section 5.1(d) of the LP Agreements, the amounts paid to SCP Management IV are allocated pro rata between Sun Fund III and Sun Fund IV based upon their proportionate holdings in Sun Scott Brass, LLC--that is 70% to Sun Fund IV and 30% to Sun Fund III.
C. The Payment of Management Fees, Offsets, and Waivers to Sun Fund III
Scott Brass, Inc. paid $664, 027.78 in management fees to SCP Management IV. As described above, 30% of this amount is allocated as a potential Management Fee Offset or Carryforward to ...