Supreme Court Asked to Weigh in on Multiemployer Plan Withdrawal Liability for PE Firms

The New England Teamsters and Trucking Industry Pension Fund has filed a petition with the U.S. Supreme Court in its long-running legal attempt to collect withdrawal liability from two entities of Sun Capital Partners as members of an implied partnership-in-fact under “common control” with Scott Brass Inc. (SBI), a withdrawing employer from the fund.

The petition asks whether the 1st U.S. Circuit Court of Appeals’ holding that the Sun Funds did not form a partnership-in-fact is inconsistent with the Supreme Court’s precedent in Culbertson v. Commissioner and presents a conflict among the circuits. It also asks whether the 1st Circuit’s analysis has created a judicial exemption shielding private equity funds from withdrawal liability in contravention of the purpose of the Employee Retirement Income Security Act (ERISA) and the Multiemployer Pension Plan Amendments Act (MPPAA).

The 1st Circuit reversed a U.S. District Court ruling that there was an implied partnership-in-fact which constituted a control group and made the two funds liable for the pro rata share of unfunded vested benefits owed to the pension fund. The 1st Circuit reversed the decision because it concluded the multi-factored partnership test set forth in the case of Luna v. Commissioner had not been met, and it couldn’t conclude that Congress intended to impose liability in this scenario.

In its petition, the New England Teamsters and Trucking Industry Pension Fund said the appellate court’s decision reversing the district court’s finding of a partnership-in-fact is based on its “reluctance” to impose withdrawal liability for private equity funds and provides “a blueprint for such funds to escape withdrawal liability while securing virtually risk-free investments in portfolio companies with known, unfunded pension liability.” The pension fund says the decision limits recovery of withdrawal liability by multiemployer pension funds.

New England Teamsters argues that the 1st Circuit decision failed to follow the totality of the circumstances test outlined by the Supreme Court in Commissioner v. Culbertson (1949), which the fund says, “is the seminal case in determining whether a partnership exists.” The fund says the appellate court’s analysis under Luna v. Commissioner, a 1964 Tax Court case, is narrower. “By limiting its analysis to the ‘Luna factors,’ the decision ignores the facts that throw light on the ‘true intent’ of the parties, specifically the undisputed fact that all of the entities in question were controlled by the same two men,” the petition says. “As the sole members of the limited partner committees, [the two men] made all of the decisions (both before and after the purchase of SBI), while hiding behind the guise of an LLC.”

In addition, New England Teamsters says the 1st Circuit’s analysis is informed by a misstatement of the purpose of ERISA and the MPPAA. “It finds without justification that a principal purpose of the statute is ‘to encourage the private sector to invest in, or assume control of, struggling companies with pension plans.’ Citing this misstatement, it seeks authorization from Congress and the Pension Benefit Guaranty Corporation (PBGC) which reaches beyond what is provided in the current statute in order to hold private equity funds liable for withdrawal liability,” the petition says.

The pension fund argues that this is at odds with the purpose of the MPPAA acknowledged by the Supreme Court—to protect multiemployer plans from the financial burdens that result when one employer withdraws from a multiemployer plan without first funding its uncovered liabilities.

“In essence, it has created a judicial exemption to withdrawal liability that shields private equity firms,” the petition says.

The case is important as more private equity funds do acquisitions in industries where multiemployer plans are common, according to John Lowell, Atlanta-based actuary and partner with October Three Consulting LLC.