PE Investor Not Liable for Firm’s Pension Debt

Under the Multiemployer Pension Plan Amendments Act of 1980, members of a common controlled group are jointly and severally liable for the withdrawal liability of an employer that withdraws from a multiemployer pension plan. Section 1301 explains that for another entity to be liable for the withdrawal liabilities of the employer, it must be a “trade or business” and under “common control” with the employer.  

U.S. District Judge Douglas P. Woodlock of the U. S. District Court for the District of Massachusetts noted that in 1941, the U.S. Supreme Court held that an individual with extensive investments, who devoted a considerable portion of his time to managing them, hired others to assist him in managing them, and rented offices for those helping him, was not engaged in a “business” as a matter of law, “[n]o matter how large the estate or how continuous or extended the work required may be.” In Commissioner v. Groetzinger, the Supreme Court established a test for when an activity constitutes a trade or business: The primary purpose of the activity must be income or profit, and the activity must be performed with continuity and regularity.  

In applying the Groetzinger test to the current case, Woodlock noted that the Sun Capital Partners’ funds that invested in Scott Brass, a member of the New England Teamsters and Trucking Industry Pension Fund, do not have any employees, own any office space, or make or sell any goods. They each made a single investment in Sun Scott Brass LLC. The tax returns for each fund list only investment income in the form of dividends and capital gains. 

In addition, the fact the Sun Funds elected members of the boards of directors of Scott Brass Holding Corp. does not make them actively involved in the management of Scott Brass Inc. because they performed those acts only as shareholders.   

Woodlock rejected the pension fund’s contention that the Sun Funds’ income was not pure investment income because they received investment reimbursements directly, and their general partners collected additional non-investment fees. He found that the tax returns filed by the Sun Funds each show that the only income for each fund was from capital gains or dividends, the two types of investment income, and more fundamentally, investment reimbursements are not considered income at all.  

Finally, Woodlock noted, the management and consulting fees were paid through a contractual arrangement between the management companies of the general partners and Scott Brass Holding Corp., and did not involve the Sun Funds themselves. That the general partner of each fund was receiving non-investment income does not mean that the Sun Fund itself was engaged in the full range of the general partner’s activities.  

The MPPAA provides that “[i]f a principal purpose of any transaction is to evade or avoid liability under [the MPPAA], this part shall be applied and liability shall be determined and collected without regard to such transaction.” The pension fund filed an “evade or avoid” claim against the Sun Funds for the decision to invest in Sun Scott Brass LLC in a 70%/30% ratio. The pension fund argued that the Sun Funds’ “principal purpose” in dividing the ownership of Scott Brass, Inc. in this manner was to “evade or avoid” its withdrawal liability, which only attaches to entities with a greater than 80% interest in the employer who accrued the withdrawal liability.  

The Sun Funds disputed that their “primary purpose” was to avoid withdrawal liability, but conceded that they did consider the potential to lessen their exposure to liability in determining the percentage split of the Sun Funds’ investment in Scott Brass Inc. Woodlock said it is not clear that Congress intended the provision to apply in such a situation at all, noting that statements from the legislative history suggest that the focus of the statute was on “essentially fraudulent maneuvers lacking in economic substance” by employer-sellers, and not by outside investors. 

Woodlock refused to give deference to a 2007 advisory opinion for a similar factual situation issued by the Pension Benefit Guaranty Corporation (PBGC) Appeals Board. Woodlock said “the Appeals Board’s misapplication of agency law in its “trade or business” analysis is unpersuasive, in error, and not entitled to deference.”  

The PBGC Appeals Board applied the Groetzinger test to the situation discussed in its advisory opinion and determined both prongs were met. According to the court opinion, the first prong was said to be met because the stated purpose of the fund was to make a profit, the fund’s partnership tax returns stated that the fund was engaged in “investment services,” and the general partner of the fund received compensation in the form of consulting fees, management feess and carried interest, not just through investment income.  

The Appeals Board held that the second prong was met because, although it had no evidence of the length of time the general partner devoted to managing the private equity fund’s portfolio, the size of the fund’s overall portfolio (approximately $470 million) and the profits generated ($207,000 in investment income and $7 million in management fees) were sufficient to evidence continuity and regularity.  

Woodlock said the Appeals Board incorrectly attributed the activity of the general partner to the investment fund. The trade or business of an agent does not transfer to the principal. As an example, he noted that a real estate broker is an agent for an individual looking to sell his home, but the homeowner is not therefore engaged in the broker’s trade or business by fact of their relationship.