United States Court of Appeals For the First Circuit
Nos. 16-1376 19-1002
SUN CAPITAL PARTNERS III, LP; SUN CAPITAL PARTNERS III QP, LP; SUN CAPITAL PARTNERS IV, LP,
Plaintiffs, Appellants,
v.
NEW ENGLAND TEAMSTERS & TRUCKING INDUSTRY PENSION FUND,
Defendant, Third Party Plaintiff, Appellee,
SCOTT BRASS HOLDING CORP.; SUN SCOTT BRASS, LLC,
Third Party Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Lynch, Stahl, and Lipez, Circuit Judges.
John C. O'Quinn, with whom John F. Hartmann, Devin A. DeBacker, Kirkland & Ellis LLP, Theodore J. Folkman, and Pierce Bainbridge Beck Price & Hecht LLP, were on brief for appellants. Catherine M. Campbell, with whom Melissa A. Brennan, Renee J. Bushey, and Feinberg, Campbell & Zack, PC were on brief for appellee. Craig T. Fessenden, with whom Judith R. Starr, Kartar S. Khalsa, Charles L. Finke, and Louisa A. Soulard were on brief for Pension Benefit Guaranty Corporation, amicus curiae. November 22, 2019 LYNCH, Circuit Judge. The issue on appeal is whether
two private equity funds, Sun Capital Partners III, LP ("Sun Fund
III") and Sun Capital Partners IV, LP ("Sun Fund IV"), are liable
for $4,516,539 in pension fund withdrawal liability owed by a brass
manufacturing company which was owned by the two Sun Funds when
that company went bankrupt. The liability issue is governed by
the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA").
Under that statute, the issue of liability depends on whether the
two Funds had created, despite their express corporate structure,
an implied partnership-in-fact which constituted a control group.
That question, in the absence of any further formal guidance from
the Pension Benefit Guaranty Corporation ("PBGC"), turns on an
application of the multifactored partnership test in Luna v.
Commissioner, 42 T.C. 1067 (1964).
If the MPPAA imposes such withdrawal liability, PBGC
states it assumes the New England Teamsters & Trucking Industry
Pension Fund ("Pension Fund") intends to look to the private equity
funds, including their general partners and their limited
partners, to pay the liability. The issues raised involve
conflicting policy choices for Congress or PBGC to make. On one
hand, imposing liability would likely disincentivize much-needed
private investment in underperforming companies with unfunded
pension liabilities. This chilling effect could, in turn, worsen
the financial position of multiemployer pension plans. On the
- 3 - other hand, if the MPPAA does not impose liability and the Pension
Fund becomes insolvent, then PBGC likely will pay some of the
liability, and the pensioned workers (with 30 years of service)
will receive a maximum of $12,870 annually. See 18 U.S.C. § 1322a.
The district court held that there was an implied
partnership-in-fact which constituted a control group. We reverse
because we conclude the Luna test has not been met and we cannot
conclude that Congress intended to impose liability in this
scenario.
I.
We describe the facts as to the organizational
structures of the Sun Funds1 and related entities. We also refer
to the facts set forth in our previous opinion in Sun Capital
Partners III, LP v. New England Teamsters & Trucking Industry
Pension Fund, 724 F.3d 129, 135 n.3 (1st Cir. 2013) (Sun Capital
II). The two Sun Funds are each distinct business entities with
primarily different investors and investments. But they are
controlled by the same two men, and they coordinate to identify,
acquire, restructure, and sell portfolio companies. The Funds
1 Sun Fund III and Sun Fund IV are collectively referred to as the "Sun Funds" or "Funds." Sun Fund III technically comprises two funds: Sun Capital Partners III, LP and Sun Capital Partners III QP, LP. Because these are parallel funds, share a single general partner, and invest nearly identically, we treat them as one entity, as we did in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129, 135 n.3 (1st Cir. 2013).
- 4 - form and finance subsidiary LLCs, through which they acquire and
control portfolio companies, including Scott Brass, Inc. ("SBI"),
the brass manufacturing company. While the Funds jointly owned
SBI, it filed for bankruptcy and subsequently withdrew from the
Pension Fund, a multiemployer pension fund, incurring withdrawal
liability.2 We restate here only certain facts, and then briefly
give a procedural history of the litigation leading to the instant
appeal.
A. The Organization of the Sun Funds
Sun Capital Advisors, Inc. ("SCAI") is a private equity
firm which pools investors' capital in limited partnerships,
assists these limited partnerships in finding and acquiring
portfolio companies, and then provides management services to
those portfolio companies. SCAI established at least eight funds.
Two of them, Sun Fund III and Sun Fund IV, appellants here, are
the investors in SBI, and both are organized under Delaware law as
2 The price of copper dropped in 2008, reducing the value of SBI's inventory, which caused a breach of SBI's loan covenants. This prevented SBI from accessing credit and paying its bills, causing its bankruptcy and subsequent withdrawal from the Pension Fund. Sun Capital II, 724 F.3d at 136. There is no suggestion that mismanagement of SBI by the Funds caused, or even contributed to, the bankruptcy. It is clear that declining copper prices, likely a product of the global recession, caused SBI's bankruptcy. The Funds' acquisition of SBI may have prolonged the operation of SBI, and so lengthened the employment of its employees, but there is no evidence of how the Funds' investment in SBI impacted the company. There is also no indication that SBI employees had any alternative retirement savings vehicles (e.g., a 401(k) plan).
- 5 - limited partnerships. The Sun Funds themselves do not have offices
or employees, do not make or sell goods, and report to the IRS
only investment income. The Funds expressly disclaimed in their
respective limited partnership agreements any partnership or joint
venture with each other. The Funds also maintained distinct tax
returns, financial books, and bank accounts.
Sun Funds III and IV each have one general partner, Sun
Capital Advisors III, LP and Sun Capital Advisors IV, LP,
respectively. These general partners each own respective
subsidiary management companies, Sun Capital Partners Management
III, LLC ("SCPM III") and Sun Capital Partners Management IV, LLC
("SCPM IV"). The two management companies act as intermediaries
between SCAI and holding companies. The management companies
contract with SCAI for the management services of SCAI's employees
and consultants, and then with the holding company to provide these
management services.
Sun Funds III and IV, respectively, have 124 and 230
limited partners. Sixty-four of these limited partners overlap
between the Funds. The limited partners include both individual
and institutional investors, including pension funds, other
private equity funds, family trusts, and universities.3 The Sun
3 The identities of the limited partners remain under seal.
- 6 - Funds' limited partnership agreements vest exclusive control of
the Funds in their respective general partners, assign the general
partners percentages of the Funds' total commitments and
investment profits, and require the Funds to pay their general
partners an annual management fee.4 The Sun Funds' general
partners, which are themselves organized as limited partnerships,
have limited partnership agreements, which vest exclusive control
over the general partners' "material partnership decisions" in
limited partnership committees. These limited partnership
committees are each made up of two individuals, Marc Leder and
Rodger Krouse. These two men also founded and serve as the co-
CEOs and sole shareholders of SCAI. Leder and Krouse were the co-
4 The Sun Funds owe to their general partners an annual management fee equal to two percent of their total commitments. A general partner may waive these fees to receive "waived fee amounts," which reduce its capital obligations in the event of a Sun Fund's future capital call. Additionally, the Sun Funds receive an offset to the fees they owe their general partners commensurate to a portion of the fees the portfolio companies pay the management companies. When a Fund's management fee offsets exceed its management fees owed in a six-month period, it receives a "carryforward" that may offset the fees owed in the subsequent six-month period. The district court quite properly found Sun Fund III's fee waivers and Sun Fund IV's carryforwards to be direct economic benefits because they each provided either current, or potential future, financial benefits that a passive investor would not accrue. Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 172 F. Supp. 3d 447, 453–54 (D. Mass. 2016) (Sun Capital III).
- 7 - CEOs of the management company SCPM IV.5
B. The Operation of the Sun Funds and SBI
The Funds used their controlling share of portfolio
companies "to implement restructuring and operational plans, build
management teams, become intimately involved in company
operations, and otherwise cause growth in the portfolio
companies." Sun Capital II, 724 F.3d at 134. The Sun Funds owned
and managed their acquisitions through various corporate
intermediaries. The Sun Funds together sought out potential
portfolio companies and, through SCAI, developed restructuring and
operating plans before acquisition. The Sun Funds then would
attempt to sell a portfolio company for a profit, typically within
two to five years of acquisition. The Sun Funds would acquire,
restructure, and sell companies both independently and together.6
As part of their acquisition of SBI, the Sun Funds formed
and financed Sun Scott Brass, LLC ("SSB-LLC"). Sun Fund III owned
30% of SSB-LLC and Sun Fund IV owned 70% of SSB-LLC. These shares
reflect Sun Fund III investing $900,000 and Sun Fund IV investing
$2.1 million in SSB-LLC. SSB-LLC in turn formed and financed Scott
5 The record does not include SCPM III's Limited Liability Company Agreement, and so does not set forth the identity of SCPM III's executives.
6 The record shows that Sun Funds III and IV held interests in eighty-eight entities at the relevant times, of which only seven overlapped. Only the ownership of SBI is at issue here.
- 8 - Brass Holding Corporation ("SBHC"), a wholly owned, subsidiary
holding company. SBHC used the Sun Funds' $3 million investment
in SSB-LLC and $4.8 million in debt to purchase all of SBI's stock.
The purchase price reflected a 25% discount from the fair market
value of the SBI stock at acquisition to account for SBI's known,
unfunded pension liability. The Funds, through SCAI employees
placed in SBI, jointly operated SBI.
C. Procedural History
In Sun Capital II, we remanded to the district court to
determine whether the Funds were under common control with SBI and
whether Sun Fund III engaged in trade or business.7 724 F.3d at
150. It determined that the Sun Funds had formed a partnership-
in-fact sitting on top of SSB-LLC and that this partnership-in-
fact owned 100% of SBI through SSB-LLC, and so concluded the Funds
met the "common control" test utilized in MPPAA law. Sun Capital
Partners III, LP v. New England Teamsters & Trucking Indus. Pension
Fund, 172 F. Supp. 3d 447, 463–66 (D. Mass. 2016). That test is
derived from tax law. See 26 C.F.R. § 1.414(c)-2(b); 29 C.F.R.
§§ 4001.2, 4001.3(a) (incorporating regulations promulgated under
26 U.S.C. § 414(c)). The district court held that this
7 On remand, the district court held that Sun Fund III engaged in trade or business. Sun Capital III, 172 F. Supp. 3d at 454–55. The Funds acknowledge that our decision in Sun Capital II controlled this holding and do not challenge it on appeal. But the Funds "reserve the right to seek further review of this . . . decision."
- 9 - partnership-in-fact engaged in "trade or business" in its
operation of SBI. Sun Capital III, 172 F. Supp. 3d at 466–67.
Accordingly, the district court held the Sun Funds jointly and
severally responsible for SBI's withdrawal liability. Id. at 467.
The Sun Funds appealed the rulings that they were under
common control with SBI, that they formed a partnership-in-fact,
and, if a partnership-in-fact did exist, that it engaged in trade
or business. PBGC filed an amicus brief in support of the district
court ruling.
II.
A. Standard of Review
This case reaches the court on appeal from a grant of
summary judgment. "We review a grant or denial of summary
judgment, as well as pure issues of law, de novo." Sun Capital
II, 724 F.3d at 138 (citing Rodriguez v. Am. Int'l Ins. Co. of
P.R., 402 F.3d 45, 46–47 (1st Cir. 2005)). This includes both the
determination of withdrawal liability and the recognition of a
partnership-in-fact. See Pension Ben. Guar. Corp. v. Beverley,
404 F.3d 243, 246, 250–53 (4th Cir. 2005). Because the parties
filed cross-motions for summary judgment, we "view each motion,
separately, in the light most favorable to the non-moving party,
and draw all reasonable inferences in that party's favor."
OneBeacon Am. Ins. Co. v. Commercial Union Assurance Co. of Can.,
684 F.3d 237, 241 (1st Cir. 2012) (internal quotation marks
- 10 - omitted).
B. Withdrawal Liability under the MPPAA
Congress enacted the MPPAA to ensure defined pension
benefit plans remain viable, dissuade employers from withdrawing
from multiemployer plans, and enable a pension fund to recoup any
unfunded liabilities. See PBGC v. R.A. Gray & Co., 467 U.S. 717,
720–22 (1984). An employer completely withdraws from a
multiemployer plan when it "(1) permanently ceases to have an
obligation to contribute under the plan, or (2) permanently ceases
all covered operations under the plan." 29 U.S.C. § 1383(a). On
withdrawal, an employer must pay its proportionate share of the
plan's "unfunded vested benefits." Id. § 1391; see also id.
§ 1381; Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers
Pension Tr. for S. Cal., 508 U.S. 602, 608–11 (1993); Sun Capital
II, 724 F.3d at 138.
To prevent evasion of the payment of withdrawal
liability, the MPPAA imposes joint and several withdrawal
liability not only on the withdrawing employers but also on all
entities (1) under "common control" with the obligated
organization (2) that qualify as engaging in "trade or business."
29 U.S.C. § 1301(b)(1); see also Sun Capital II, 724 F.3d at 138.
The imposition by Congress of withdrawal liability on commonly
controlled group members can have the beneficial effect of delaying
or preventing pension plans from becoming insolvent, preventing
- 11 - reductions in pension benefits, and limiting claims on public
monies, i.e., PBGC's multiemployer insurance fund. See PBGC v.
Dickens (In re Challenge Stamping & Porcelain Co.), 719 F.2d 146,
150 (6th Cir. 1983).
C. Common Control
The MPPAA's "common control" provision exists to prevent
the "shirking [of] ERISA obligations by fractionalizing operations
into many separate entities." Cent. States Se. & Sw. Areas Pension
Fund v. Messina Prods., LLC, 706 F.3d 874, 878 (7th Cir. 2013)
(quoting Cent. States, Se. & Sw. Areas Pension Fund v. White, 258
F.3d 636, 644 (7th Cir. 2001)). ERISA, of which the MPPAA is a
part, as a remedial statute, is to be construed liberally.
Teamsters Pension Tr. Fund-Bd. of Trs. of W. Conference v. Allyn
Transp. Co., 832 F.2d 502, 507 (9th Cir. 1987). We have held, in
consequence, that the common control provision "in effect, pierces
the corporate veil and disregards formal business structures."
Sun Capital II, 724 F.3d at 138. And other circuits which have
addressed the question agree. See Messina, 706 F.3d at 877
(holding that the MPPAA can "pierce corporate veils and impose
[withdrawal] liability on owners and related businesses"); Ceco
Concrete Constr., LLC, v. Centennial State Carpenters Pension Tr.,
821 F.3d 1250, 1260 (10th Cir. 2016) (holding the same). The
legislative history is also consistent with this view. See S.
Rep. No. 383, at 43 (1974) ("[T]he committee, by [§ 1301(b)],
- 12 - intends to make it clear that the . . . provisions cannot be
avoided by operating through separate corporations instead of
separate branches of one corporation."); H.R. Rep. No. 807, at 50
(1974) (same).
In 1986, Congress authorized PBGC to promulgate
regulations for implementing the common control provision
"consistent and coextensive with regulations prescribed for
similar purposes by the Secretary of the Treasury under section
414(c) of Title 26" of the Internal Revenue Code. 29 U.S.C.
§ 1301(b)(1).
The MPPAA regulations adopted in 1996 by PBGC, in turn,
adopt the Treasury Department's regulations governing "common
control." The regulations state that entities are under common
control if they are members of a "parent-subsidiary group of trades
or business under common control."8 26 C.F.R. § 1.414(c)-2(b); 29
C.F.R. §§ 4001.2, 4001.3(a) (incorporating Treasury regulations
under 26 U.S.C. § 414(c)). Notably, PBGC has not provided the
courts or parties with any further formal guidance on how to
determine common control specifically in the MPPAA context. Nor
has PBGC updated its regulation on common control, 29 C.F.R.
§ 4001.3, since that regulation's adoption.
8 There are also regulations defining "brother-sister groups of trades or businesses under common control," but these are not relevant to this appeal. See 26 C.F.R. § 1.414(c)-2(c).
- 13 - The Treasury regulations9 define a "parent-subsidiary
group" under the term "parent-subsidiary groups of trades or
businesses under common control" as:
one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest with a common parent organization if . . . (i) [a] controlling interest in each of the organizations, except the common parent organization, is owned . . . by one or more of the other organizations; and (ii) [t]he common parent organization owns . . . a controlling interest in at least one of the other organizations.
26 C.F.R. § 1.414(c)-2(b)(1).
Treasury regulations also establish that there is a
"controlling interest" if there is "ownership of stock possessing
at least 80 percent of total combined voting power . . . or at
least 80 percent of the total value of shares." Id. § 1.414(c)-
2(b)(2)(A). The plain language of these provisions requires us to
find, and ascribe liability to, the entity that controls (by at
least 80%) the withdrawn employer. See Dickens, 719 F.2d at 151
("The purpose of the 80% regulation is obviously to find the party
in control.").
D. Federal Partnership Law
Like the district court, we inquire into the legal
9 We also do not engage the Funds' argument that we should consider interpreting present Treasury regulations in light of the fate of earlier IRS regulations concerning partnerships and corporations which were rejected by some circuits.
- 14 - question of whether the record demonstrates the Funds formed a
partnership-in-fact, as a matter of federal common law, to acquire
and operate SBI through SSB-LLC.
We must look to federal tax law on the partnership-in-
fact issue. We do so because Congress "intended that a body of
Federal substantive law [would] be developed by the courts to deal
with issues involving rights and obligations under private welfare
and pension plans." Mass. Mut. Life Ins. Co. v. Russell, 473 U.S.
134, 156 (1985) (quoting Remarks of Senator Javits, 120 Cong. Rec.
29,942 (1974)); Bd. of Trs. of W. Conference of Teamsters Pension
Tr. Fund v. H.F. Johnson, Inc., 830 F.2d 1009, 1014 (9th Cir. 1987)
(quoting the same with respect to MPPAA withdrawal liability).
Moreover, by statute, PBGC's "common control" regulations must be
"consistent and coextensive" with treasury regulations under
§ 414(c). 29 U.S.C. § 1301(b)(1). These treasury regulations
incorporate federal tax law's definition of partnership. 26 C.F.R.
§ 1.414(c)–2(a) (referencing 26 U.S.C. § 7701(a)(2)). And courts
facing similar issues have relied on federal tax law. See, e.g.,
Connors v. Ryan's Coal Co., Inc., 923 F.2d 1461, 1466–67, 1467
n.37 (11th Cir. 1991) (relying on federal tax precedent to affirm
recognition of a partnership and holding one of the partners
responsible for the other partner's withdrawal liability).
Federal tax law provides that the choice(s) of
organizational form under state law does not control this question
- 15 - of whether a partnership-in-fact was established. See Comm'r v.
Tower, 327 U.S. 280, 287–88 (1946) (holding that federal law
governs whether parties formed partnership for tax purposes); H.F.
Johnson, Inc., 830 F.2d at 1014 (concluding that federal law
governed whether parties formed a partnership and so were liable
for pension withdrawal under ERISA). But state law, and express
disclaimers of partnership formation that are determinative under
state law, do provide some guidance. H.F. Johnson, Inc., 830 F.2d
at 1014 (holding that, "while [a court] may look to state law for
guidance," federal law governs whether joint venturers share
withdrawal liability).
The Internal Revenue Code defines a "partnership" to
include "a syndicate, group, pool, joint venture, or other
unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on, and which
is not, within the meaning of this title, a trust or estate or a
corporation." 26 U.S.C. § 7701(a)(2) (emphasis added). It
similarly defines "partner" to include "a member in such a
syndicate, group, pool, joint venture, or organization." Id.
We look to the partnership10 factors the Tax Court
10 A joint venture differs from a partnership primarily in scope, see Podell v. Comm'r, 55 T.C. 429, 432 (1970), and the differences do not affect our analysis. Consequently, and like the district court and parties to this case, we employ the terms "partner" and "partnership" in our analysis.
- 16 - adopted in Luna. 42 T.C. at 1077–78. The factors are:
1. "The agreement of the parties and their conduct in
executing its terms";
2. "the contributions, if any, which each party has made
to the venture";
3. "the parties' control over income and capital and the
right of each to make withdrawals";
4. "whether each party was a principal and coproprietor,
sharing a mutual proprietary interest in the net
profits and having an obligation to share losses, or
whether one party was the agent or employee of the
other, receiving for his services contingent
compensation in the form of a percentage of income";
5. "whether business was conducted in the joint names of
the parties";
6. "whether the parties filed Federal partnership returns
or otherwise represented to respondent or to persons
with whom they dealt that they were joint venturers";
7. "whether separate books of account were maintained for
the venture"; and
8. "whether the parties exercised mutual control over and
assumed mutual responsibilities for the enterprise."
Id.
- 17 - To the extent the Funds argue we cannot apply the Luna
factors because they have organized an LLC through which to operate
SBI, we reject the argument. Merely using the corporate form of
a limited liability corporation cannot alone preclude courts
recognizing the existence of a partnership-in-fact. There is
precedent for recognizing a partnership-in-fact where the parties
have formed a different entity through an express agreement.
Wabash Railway Co. v. American Refrigerator Transit Co., 7 F.2d
335, 342–44 (8th Cir. 1925), cert. denied, 270 U.S. 643 (1926),
and Shorb v. Beaudry, 56 Cal. 446, 450 (1880), do just that. See
also In re Hart, Nos. 09-71053, 11-42424, 2014 WL 1018087, at *20
n.11 (Bankr. N.D. Cal. Mar. 14, 2014) ("Shorb [v. Beaudry], though
dated, is still authority in California."). Given our
understanding, we also reject the separate argument made by the
Funds that the question of liability is resolved by the district
court's conclusion that "[t]he conventional theories of a general
partnership -- those that on the face reflect operational and
institutional overlap between the Funds -- are not evident here."
Sun Capital III, 172 F. Supp. 3d at 463.
If the Funds have, under this multi-factored Luna test,
formed a partnership-in-fact, then under the common control
regulations they are jointly and severally liable for the debts of
the partnership, including MPPAA withdrawal liability, if the
separate trade or business test is also met. E.g., Cent. States,
- 18 - Se. & Sw. Areas Pension Fund v. Johnson, 991 F.2d 387, 391–92 (7th
Cir. 1993).
Importantly, federal common law11 allows a pre-
incorporation venture or partnership to survive the fact of the
partners incorporating. See Wabash Ry., 7 F.2d at 342–44; cf.
Chi., Milwaukee & St. Paul Ry. Co. v. Minn. Civic & Commerce Ass'n,
247 U.S. 490, 498 (1918) (holding, for the purposes of a regulatory
regime, that a "technically . . . separate," subsidiary
corporation was "a mere agency or instrumentality" of the two
railway corporations that wholly controlled it). That is, under
federal law, if entities have in fact formed a partnership, merely
creating a corporation through which they pursue the goals of the
partnership does not necessarily end that partnership. Although
not as onerous as the common law veil piercing standard, the test
is rigorous: when parties, including when operating as a
partnership, "control[] a subsidiary company so that it may be
used as a mere agency or instrumentality," a court may "deal with
the substance of the transaction involved as if the corporate
agency did not exist and as the justice of the case may require."
Wabash Ry., 7 F.2d at 344.
11 See also Jolin v. Oster, 172 N.W.2d 12, 16 n.1 (Wis. 1969) (collecting cases stating whether jurisdictions recognize joint ventures may survive incorporation, and noting the Eighth Circuit does).
- 19 - III.
The MPPAA, ERISA, and tax law require courts to look
beyond how the parties label, or structure, themselves. Courts
must rather look to the substance of the relationships. See, e.g.,
Connors, 923 F.2d at 1467–68 (finding MPPAA withdrawal liability
where individuals formed a partnership despite never explicitly
agreeing to form one); Johnson, 991 F.2d at 391–94 (adopting the
test in Connors).12 PBGC regulations direct us to Treasury
regulations governing common control, which in turn require us to
determine, under federal partnership law and the Luna test, whether
the Funds formed a partnership-in-fact. There are some facts here
under the Luna factors that tend to support a conclusion that the
Sun Funds formed a partnership-in-fact to assert common control
over SBI, but consideration of all of the factors leads to the
opposite conclusion.
We first consider the Luna factors that favor a finding
of de facto partnership. Even before incorporating SSB-LLC, the
Sun Funds together "[sought] out potential portfolio
companies . . . in need of extensive intervention with respect to
their management and operations, to provide such intervention, and
then to sell the companies." Sun Capital II, 724 F.3d at 142
12 Indeed in Tower, the Supreme Court disregarded the parties' own identification as a partnership when the substance of their relationship did not evidence a partnership. 327 U.S. at 282, 291–92.
- 20 - (emphasis added). The Funds, through SCAI, developed
restructuring and operating plans for target companies before
actually acquiring them through LLCs.13 Id. This behavior is some
evidence of the Sun Funds "exercis[ing] mutual control over and
assum[ing] mutual responsibilities for the enterprise" of
identifying, acquiring, and selling portfolio companies together.
Luna, 42 T.C. at 1078. Moreover, if the Sun Funds had in fact
formed a partnership through these pre-incorporation activities,
the mere creation of SSB-LLC would not, as a matter of law, in and
of itself end this already-existing partnership-in-fact. See
Wabash Ry., 7 F.2d at 342–44.
The organization of the control of the Sun Funds and of
control over SBI also is some evidence of a partnership-in-fact.
The two men in control of the Funds' general partners, Leder and
Krouse, essentially ran things for both the Funds and SBI.14
13 This was a usual mode of operation; the Funds similarly coinvested and comanaged other companies between 2005 and 2008. They adopted the same organizational structure for these companies as they did with SBI.
14 Sun Capital III, 172 F. Supp. 3d at 461–62. As the only members of the Sun Funds' general partners' limited partner committees, Leder and Krouse wholly controlled the general partners and, by extension, the Sun Funds. Sun Capital II, 724 F.3d at 134. Although the Sun Funds have different limited partners, these partners may not participate in management decisions, and so Leder and Krouse had sole management authority. See B. Cheffins & J. Armour, The Eclipse of Private Equity, 33 Del. J. Corp. L. 1, 9 (2008) (discussing the role of limited partners).
- 21 - Together, and at Leder and Krouse's direction, the Sun Funds placed
SCAI employees in two of SBI's three director positions, allowing
SCAI to control SBI. Sun Capital III, 172 F. Supp. 3d at 467.
Moreover, this pooling of resources and expertise in SCAI, which
the Funds used not only to identify, acquire, and manage portfolio
companies, and structure those deals, but to provide management
consulting and employees to portfolio companies, including SBI, is
evidence tending to show a partnership. See Cahill v. Comm'r, 106
T.C.M. (CCH) 324, 2013 WL 5272677, at *4 (2013) (concluding a
party's desire "to pool his resources and to develop business
jointly" evidenced a partnership); Luna, 42 T.C. at 1078 (holding
that "mutual control over and . . . mutual responsibilities for
[an] enterprise" indicate a partnership-in-fact). Indeed, the
record does not show a single disagreement between the Sun Funds
over how to operate SSB-LLC. The Funds' conduct in managing SSB-
LLC is further evidence of a partnership-in-fact sitting above.
Cf. Luna, 42 T.C. at 1077 (paralleling Luna factor one: "[t]he
agreement of the parties and their conduct in executing its terms"
(emphasis added)).
We next discuss the Luna factors that counsel against
recognizing a partnership-in-fact. The record evidence is clear
that the Funds did not "intend[] to join together in the present
conduct of the enterprise" (at least beyond their coordination
within SSB-LLC). Comm'r v. Culbertson, 337 U.S. 733, 742 (1949);
- 22 - see also Luna, 42 T.C. at 1077 (counting against factor one). The
fact that the Funds expressly disclaimed any sort of partnership
between the Funds counts against a partnership finding as to
several of the Luna factors. See Luna, 42 T.C. at 1077-78
(counting against factor one, the "agreement of the parties";
factor five, "whether business was conducted in the joint names of
the parties"; and factor six, "whether the parties . . .
represented to . . . persons with whom they dealt that they were
joint venturers"). Most of the 230 entities or persons who were
limited partners in Sun Fund IV were not limited partners in Sun
Fund III. The Funds also filed separate tax returns, kept separate
books, and maintained separate bank accounts -- facts which tend
to rebut partnership formation.15 Id. at 1078 (counting against
factors six and seven). The Sun Funds did not operate in parallel,
that is, invest in the same companies at a fixed or even variable
ratio, which also shows some independence in activity and
structure.
The creation of an LLC by the Sun Funds through which to
acquire SBI also shows an intent not to form a partnership
(although not as categorically as the Funds contend). The
formation of an LLC both prevented the Funds from conducting their
15 There was some disagreement at oral argument about whether the record shows the Sun Funds co-investing with entities that Leder and Krouse do not control. The answer to this question would not change our decision.
- 23 - business in their "joint names" (Luna factor five) and limited the
manner in which they could "exercise[] mutual control over and
assume[] mutual responsibilities for" managing SBI (Luna factor
eight). Id.
The fact that the entities formally organized themselves
as limited liability business organizations under state law at
virtually all levels distinguishes this case from Connors and other
cases in which courts have found parties to have formed
partnerships-in-fact, been under common control, and held both
parties responsible for withdrawal liability. E.g., Connors, 923
F.2d at 1467–68. These cases often involved individuals (typically
married couples), rather than limited liability business entities
like limited partnerships, further distinguishing them from the
instant case. E.g., id. at 1464. And many of the cases in which
courts have recognized these types of partnerships involved
fractionalizing already-existing businesses, rather than pursuing
investments in different ones. E.g., id. at 1467–68; Johnson, 991
F.2d at 392–94. Using the Luna factors, we conclude that most of
them, on these facts, point away from common control.
We credit the district court for its careful and reasoned
analysis of the complex facts and law at hand. Nonetheless, the
district court (and the Pension Fund and PBGC) too greatly
discounted the Luna factors rebutting partnership-in-fact
formation. Importantly, although the district court correctly
- 24 - concluded that incorporating SSB-LLC did not in and of itself
prevent recognizing a partnership-in-fact between the Funds, SSB-
LLC's incorporation implicates many Luna factors counting against
that recognition (an analysis absent from the district court's
opinion).
Moreover, we are reluctant to impose withdrawal
liability on these private investors because we lack a firm
indication of congressional intent to do so and any further formal
guidance from PBGC. Two of ERISA and the MPPAA's principal
aims -- to ensure the viability of existing pension funds and to
encourage the private sector to invest in, or assume control of,
struggling companies with pension plans -- are in considerable
tension here.
We do not reach other legal issues in the case, including
the trade or business issue. We decide the issue of common control
only as it has been framed before us and do not reach other
arguments that might have been available to the parties.
IV.
We reverse entry of summary judgment for the Pension
Fund and remand with directions to enter summary judgment for the
Sun Funds. No costs are awarded.
- 25 -