LYNCH, Chief Judge.
This case presents important issues of first impression as to withdrawal liability for the pro rata share of unfunded vested benefits to a multiemployer pension fund of a bankrupt company, here, Scott Brass, Inc. (SBI). See Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., as amended by the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA), 29 U.S.C. § 1381 et seq. This litigation considers the imposition of liability as to three groups: two private equity funds, which assert that they are mere passive investors that had indirectly controlled and tried to turn around SBI, a struggling portfolio company; the New England Teamsters and Trucking Industry Pension Fund (TPF), to which the bankrupt company had withdrawal pension obligations and which seeks to impose those obligations on the equity funds; and, ultimately, if the TPF becomes insolvent, the federal Pension Benefit Guaranty Corporation (PBGC), which insures multiemployer pension plans such as the one involved here. If the TPF becomes insolvent, then the benefits to the SBI workers are reduced to a PBGC guaranteed level. See 29 U.S.C. §§ 1322a, 1426, 1431. According to the PBGC's brief, at present, that level is about $12,870 for employees with 30 years of service.
The plaintiffs are the two private equity funds, which sought a declaratory judgment against the TPF. The TPF, which brought into the suit other entities related to the equity funds,
We conclude that at least one of the private equity funds which operated SBI, through layers of fund-related entities, was not merely a "passive" investor, but sufficiently operated, managed, and was advantaged by its relationship with its portfolio company, the now bankrupt SBI. We also conclude that further factual development is necessary as to the other equity fund. We decide that the district court erred in ending the potential claims against the equity funds by entering summary judgment for them under the "trades or businesses" aspect of the two-part "control group" test under 29 U.S.C. § 1301(b)(1). See Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund, 903 F.Supp.2d 107, 116-18, 124 (D.Mass.2012).
As a result, we remand for further factual development and for further proceedings under the second part of the "control group" test, that of "common control," in 29 U.S.C. § 1301(b)(1). The district court was, however, correct to enter summary judgment in favor of the private equity funds on the TPF's claim of liability on the ground that the funds had engaged in a transaction to evade or avoid withdrawal liability. See 29 U.S.C. § 1392(c); Sun Capital, 903 F.Supp.2d at 123-24.
The material facts are undisputed.
Sun Capital Advisors, Inc. ("SCAI") is a private equity firm founded by its co-CEOs and sole shareholders, Marc Leder and Rodger Krouse. Sun Capital, 903 F.Supp.2d at 109. It is not a plaintiff or party in this case. SCAI and its affiliated entities find investors and create limited partnerships in which investor money is pooled, as in the private equity funds here. Moreover, SCAI finds and recommends investment opportunities for the equity funds, and negotiates, structures, and finalizes investment deals. Id. SCAI also provides management services to portfolio companies, and employs about 123 professionals to provide these services.
The plaintiffs here are two of SCAI's private equity funds (collectively the "Sun Funds"), Sun Capital Partners III, LP ("Sun Fund III")
These private equity funds engaged in a particular type of investment approach, to be distinguished from mere stock holding or mutual fund investments. See, e.g., S. Rosenthal, Taxing Private Equity Funds as Corporate `Developers', Tax Notes, Jan. 21, 2013, at 361, 364 & n. 31 (explaining that private equity funds differ from mutual funds and hedge funds because they "assist and manage the business of the companies they invest in"). As one commentator puts it, "[i]t is one thing to manage one's investments in businesses. It is another to manage the businesses in which one invests." C. Sanchirico, The Tax Advantage to Paying Private Equity Fund Managers with Profit Shares: What Is It? Why Is It Bad?, 75 U. Chi. L.Rev. 1071, 1102 (2008).
The Sun Funds are overseen by general partners, Sun Capital Advisors III, LP and Sun Capital Advisors IV, LP. Leder and Krouse are each limited partners in the Sun Funds' general partners and, together with their spouses, are entitled to 64.74% of the aggregate profits of Sun Capital Advisors III, LP and 61.04% of such profits from Sun Capital Advisors IV, LP. The Sun Funds' limited partnership agreements vest their respective general partners with exclusive authority to manage the partnership. Part of this authority is the power to carry out all the objectives and purposes of the partnerships, which include investing in securities, managing and supervising any investments,
For these services, each general partner receives an annual fee of two percent of the total commitments (meaning the aggregate cash committed as capital to the partnership
In 2006, the Sun Funds began to take steps to invest in SBI, the acquisition of which was completed in early 2007. Leder and Krouse made the decision to invest in SBI in their capacity as members of the limited partner committees.
SBI, a Rhode Island corporation, was an ongoing trade or business, and was closely held; its stock was not publicly traded. SBI was a leading producer of high quality brass, copper, and other metals "used in a variety of end markets, including electronics, automotive, hardware, fasteners, jewelry, and consumer products." In 2006, it shipped 40.2 million pounds of metal. SBI made contributions to the TPF on behalf of its employees pursuant to a collective bargaining agreement.
On November 28, 2006, a Sun Capital affiliated entity sent a letter of intent to SBI's outside financial advisor to purchase 100% of SBI. In December 2006, the Sun Funds formed Sun Scott Brass, LLC (SSB-LLC) as a vehicle to invest in SBI. Sun Fund III made a 30% investment ($900,000) and Sun Fund IV a 70% investment ($2.1 million) for a total equity investment of $3 million. This purchase price reflected a 25% discount because of SBI's known unfunded pension liability.
On February 9, 2007, SBHC signed an agreement with the subsidiary of the general partner of Sun Fund IV to provide management services to SBHC and its subsidiaries, i.e., SBI. Since 2001, that general partner's subsidiary had contracted with SCAI to provide it with advisory services. In essence, as the district court described, the management company acted as a middle-man, providing SBI with employees and consultants from SCAI. Id.
Numerous individuals with affiliations to various Sun Capital entities, including Krouse and Leder, exerted substantial operational and managerial control over SBI, which at the time of the acquisition had 208 employees and continued as a trade or business manufacturing metal products. For instance, minutes of a March 5, 2007 meeting show that seven individuals from "SCP" attended a "Jumpstart Meeting" at which the hiring of three SBI salesmen was approved, as was the hiring of a consultant to analyze a computer system upgrade project at a cost of $25,000. Other items discussed included possible acquisitions, capital expenditures, and the management of SBI's working capital. Further, Leder, Krouse, and Steven Liff, an SCAI employee, were involved in email chains discussing liquidity, possible mergers, dividend payouts, and concerns about how to drive revenue growth at SBI. Leder, Krouse, and other employees of SCAI received weekly flash reports from SBI that contained detailed information about SBI's revenue, key financial data, market activity, sales opportunities, meeting notes, and action items. According to the Sun Funds, SBI continued to meet its pension obligations to the TPF for more than a year and a half after the acquisition.
In the fall of 2008, declining copper prices reduced the value of SBI's inventory, resulting in a breach of its loan covenants. Unable to get its lender to waive the violation of the covenants, SBI lost its ability to access credit and was unable to pay its bills. See id.
In October 2008, SBI stopped making contributions to the TPF, and, in so doing, became liable for its proportionate share of the TPF's unfunded vested benefits. See 29 U.S.C. §§ 1381(a), 1383(a)(2). In November 2008, an involuntary Chapter 11 bankruptcy proceeding was brought against SBI. The Sun Funds assert that they lost the entire value of their investment in SBI as a result of the bankruptcy.
On December 19, 2008, the TPF sent a demand for payment of estimated withdrawal liability to SBI. The TPF also sent a notice and demand to the Sun Funds demanding payment from them of SBI's withdrawal liability, ultimately calculated as $4,516,539. Sun Capital, 903 F.Supp.2d at 111. The TPF asserted that the Sun Funds had entered into a partnership or joint venture in common control with SBI and were therefore jointly and severally
On June 4, 2010, the Sun Funds filed a declaratory judgment action in federal district court in Massachusetts. The Sun Funds sought a declaration that they were not subject to withdrawal liability under § 1301(b)(1) because: (1) the Sun Funds were not part of a joint venture or partnership and therefore did not meet the common control requirement; and (2) neither of the Funds was a "trade or business."
The TPF counterclaimed that the Sun Funds were jointly and severally liable for SBI's withdrawal liability in the amount of $4,516,539, and also that the Sun Funds had engaged in a transaction to evade or avoid liability under 29 U.S.C. § 1392(c). The parties both filed cross-motions for summary judgment in September 2011.
The district court issued a Memorandum and Order on October 18, 2012, granting summary judgment to the Sun Funds. Id. at 109. The district court did not reach the issue of common control, id. at 118, instead basing its decision on the "trade or business" portion of the two-part statutory test. It also decided the "evade or avoid" liability issue.
On the "trade or business" issue, the district court addressed the level of deference owed to a September 2007 PBGC appeals letter that found a private equity fund to be a "trade or business" in the single employer pension plan context. Id. at 114-16. The appeals letter found the equity fund to be a "trade or business" because its controlling stake in the bankrupt company put it in a position to exercise control over that company through its general partner, which was compensated for its efforts.
The district court held that the appeals letter was owed deference only to the extent it could persuade. Id. at 115. The district court found the letter unpersuasive for two reasons: (1) the appeals board purportedly incorrectly attributed activity of the general partner to the investment fund; and (2) the appeals board letter supposedly conflicted with governing Supreme Court tax precedent. Id. at 115-16. Engaging in its own analysis, the court found that the Sun Funds were not "trades or businesses," relying on the fact that the Sun Funds did not have any offices or employees, and did not make or sell goods or report income other than investment income on their tax returns. Id. at 117. Moreover, the Sun Funds were not engaged in the general partner's management activities. Id.
As to its "evade or avoid" liability analysis, the district court stated that § 1392(c) was not meant to apply to an outside investor structuring a transaction to avoid assuming a potential liability. Id. at 122. The language of the statute suggested that "it is aimed at sellers, not investors," id., and imposing liability on investors for trying to avoid assumption of such liability would disincentivize investing in companies subject to multiemployer pension plan obligations, thereby undermining the aim of the MPPAA, id. at 124.
The TPF has timely appealed. It argues that the district court erred in finding that the Sun Funds were not "trades or businesses" and that the Sun Funds should be subject to "evade or avoid" liability under § 1392(c). The PBGC has filed an amicus brief on appeal in support of reversal of the district court's "trades or businesses" decision, but has taken no position on the § 1392(c) claim.
We review a grant or denial of summary judgment, as well as pure issues of law, de novo. Rodriguez v. Am. Int'l Ins. Co. of P.R., 402 F.3d 45, 46-47 (1st Cir.2005). We may affirm the district court on any independently sufficient ground manifest in the record. OneBeacon Am. Ins. Co. v. Commercial Union Assurance Co. of Can., 684 F.3d 237, 241 (1st Cir.2012). The presence of cross-motions for summary judgment does not distort the standard of review. Rather, we view each motion separately in the light most favorable to the non-moving party and draw all reasonable inferences in favor of that party. Id. We make a determination "based on the undisputed facts whether either [party] deserve[s] judgment as a matter of law." Hartford Fire Ins. Co. v. CNA Ins. Co. (Eur.) Ltd., 633 F.3d 50, 53 (1st Cir.2011). To prevail, the moving party must show "that there is no genuine dispute as to any material fact," and that it "is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).
The MPPAA was enacted by Congress to protect the viability of defined pension benefit plans, to create a disincentive for employers to withdraw from multiemployer plans, and also to provide a means of recouping a fund's unfunded liabilities. Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 720-22, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984). As such, the MPPAA requires employers withdrawing from a multiemployer plan to pay their proportionate share of the pension fund's vested but unfunded benefits. See 29 U.S.C. §§ 1381, 1391; Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 609, 113 S.Ct. 2264, 124 L.Ed.2d 539 (1993); R.A. Gray, 467 U.S. at 725, 104 S.Ct. 2709. An employer withdraws when it permanently ceases its obligation to contribute or permanently ceases covered operations under the plan. 29 U.S.C. § 1383(a).
The MPPAA provides: "For purposes of this subchapter, under regulations prescribed by the [PBGC], 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). So, "[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." McDougall v. Pioneer Ranch Ltd. P'ship, 494 F.3d 571, 577 (7th Cir. 2007). The Act's broad definition of "employer" extends beyond the business entity withdrawing from the pension fund, thus imposing liability on related entities within the definition, which, in effect, pierces the corporate veil and disregards formal business structures. See Cent. States, Se. & Sw. Areas Pension Fund v. Messina Prods., LLC, 706 F.3d 874, 877 (7th Cir. 2013) ("When an employer participates in a multiemployer pension plan and then withdraws from the plan with unpaid liabilities, federal law can pierce corporate veils and impose liability on owners and related businesses.").
While Congress in § 1301(b)(1) authorizes the PBGC to prescribe regulations,
The phrase "trades or businesses" as used in § 1301(b)(1) is not defined in Treasury regulations and has not been given a definitive, uniform definition by the Supreme Court. See Comm'r of Internal Revenue v. Groetzinger, 480 U.S. 23, 27, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987) (observing that despite the widespread use of the phrase in the Internal Revenue Code, "the Code has never contained a definition of the words `trade or business' for general application, and no regulation has been issued expounding its meaning for all purposes"). The Supreme Court has warned that when it interprets the phrase, it "do[es] not purport to construe the phrase where it appears in other places," except those sections where it has previously interpreted the term. Id. at 27 n. 8, 107 S.Ct. 980. The Court has not provided an interpretation of the phrase as used in § 1301(b)(1).
The only guidance we have from the PBGC is a 2007 appeals letter, defended in its amicus brief.
In a September 2007 response to an appeal,
The PBGC found that the private equity fund involved in that matter met the profit motive requirement. It also determined that the size of the fund, the size of its profits, and the management fees paid to the general partner established continuity and regularity. The PBGC also observed
The PBGC does not assert that its 2007 letter is entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). It does, however, claim entitlement to deference under Auer v. Robbins, 519 U.S. 452, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997). We disagree. The PBGC's letter stating its position is owed no more than Skidmore deference. See Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944).
The letter was not the result of public notice and comment, and merely involved an informal adjudication resolving a dispute between a pension fund and the equity fund. Thus far, the letter has received no more deference than the power to persuade. See Sun Capital, 903 F.Supp.2d at 115; Palladium, 722 F.Supp.2d at 869. And rightly so. "[I]nterpretations contained in formats such as opinion letters are `entitled to respect' ... only to the extent that those interpretations have the `power to persuade.'" Christensen v. Harris Cnty., 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000) (quoting Skidmore, 323 U.S. at 140, 65 S.Ct. 161).
The PBGC contends that, because it is interpreting a phrase that appears in its own regulations, see 29 C.F.R. §§ 4001.2, 4001.3, its interpretation is owed deference under Auer. Which is to say that the court must defer to that interpretation unless it is plainly erroneous or inconsistent with its own regulations. Auer, 519 U.S. at 461, 117 S.Ct. 905.
The letter is not owed Auer deference in this case because such deference is inappropriate where significant monetary liability would be imposed on a party for conduct that took place at a time when that party lacked fair notice of the interpretation at issue. See Christopher v. SmithKline Beecham Corp., ___ U.S. ___, 132 S.Ct. 2156, 2167, 183 L.Ed.2d 153 (2012). Christopher stressed that the agency in that case had taken decades before acting, during which time the industry practice at issue developed and continued.
Moreover, even if Christopher was not an impediment to Auer deference, the anti-parroting principle would be. Gonzales v. Oregon, 546 U.S. 243, 257, 126 S.Ct. 904, 163 L.Ed.2d 748 (2006) ("Simply put, the existence of a parroting regulation does not change the fact that the question here is not the meaning of the regulation but the meaning of the statute. An agency does not acquire special authority to interpret its own words when, instead of using its expertise and experience to formulate a regulation, it has elected merely to paraphrase the statutory language."). The PBGC regulations make no effort to define "trades or businesses," 29 C.F.R. § 4001.3(a), and merely refer to Treasury regulations, which, as mentioned, also do not define the phrase.
Nonetheless, the views the PBGC expressed in the letter are entitled to Skidmore deference. See Skidmore, 323 U.S. at 140, 65 S.Ct. 161 (observing that the "weight" of an agency's determination "depend[s] upon the thoroughness evident in [the agency's] consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade").
The Sun Funds argue that the "investment plus" test is incompatible with Supreme Court tax precedent. Regardless, they argue, the Sun Funds cannot be held responsible for the activities of other entities in the management and operation of SBI. And even if the Sun Funds had engaged in those activities, they argue, that would not be enough.
Where 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. Further, even if we were to ignore the PBGC's interpretation, we, like the Seventh Circuit, would reach the same result through independent analysis. In Central States, Southeast & Southwest Areas Pension Fund v. Messina Products, LLC, 706 F.3d 874, the Seventh Circuit employed an "investment plus"-like analysis without reference to any PBGC interpretation. We agree with that approach. We see no need to set forth general guidelines for what the "plus" is, nor has the PBGC provided guidance on this. We go no further than to say that on the undisputed facts of this case, Sun Fund IV is a "trade or business" for purposes of § 1301(b)(1).
In a very fact-specific approach, we take account of a number of factors, cautioning that none is dispositive in and of itself. The Sun Funds make investments in portfolio companies with the principal purpose of making a profit. Profits are made from the sale of stock at higher prices than the purchase price and through dividends. But a mere investment made
Here, however, the 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. Pioneer Ranch, 494 F.3d at 577-78 (observing that an entity's own statements about its goals, purposes, and intentions are "highly relevant, because [they] constitute[]... declaration[s] against interest." (quoting Connors v. Incoal, Inc., 995 F.2d 245, 254 (D.C.Cir.1993)) (internal quotation mark omitted)). 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.
In addition, the general partners are empowered through their own partnership agreements to make decisions about hiring, terminating, and compensating agents and employees of the Sun Funds and their portfolio companies. The general partners receive a percentage of total commitments to the Sun Funds and a percentage of profits as compensation — just like the general partner of the equity fund in the PBGC appeals letter.
It is the purpose of the Sun Funds to seek out potential portfolio companies that are in need of extensive intervention with respect to their management and operations, to provide such intervention, and then to sell the companies. The private placement memos explain that "[t]he Principals[
Such actions are taken with the ultimate goal of selling the portfolio company for a profit. On this point, the placement memos explain that after implementing "significant operating improvements ... during the first two years[,] ... the Principals expect to exit investments in two to five years (or sooner under appropriate circumstances)."
Further, 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. See Harrell v. Eller Maritime Co., No. 8:09-CV-1400-T-27AEP, 2010 WL 3835150, at *4 (M.D.Fla. Sept. 30, 2010) (the involvement in decisionmaking at management level goes
Through a series of service agreements described earlier, SCAI provided personnel to SBI for management and consulting services. Thereafter, individuals from those entities were immersed in details involving the management and operation of SBI, as discussed.
Moreover, the 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.
In our view, the sum of all of these factors satisfy the "plus" in the "investment plus" test. The conclusion we reach is consistent with the conclusions of other appellate court decisions, though none has addressed this precise question. In Messina, where the Seventh Circuit employed an "investment plus"-like analysis on its own, the pension fund was seeking to impose withdrawal liability on a limited liability company (LLC) that owned rental property.
The Seventh Circuit looked to the stated intent in the creation of the enterprise, as well as to the enterprise's legal form and how it was treated for tax purposes.
Likewise, in an earlier case, the Seventh Circuit rejected an argument that a limited liability company that owned rental property was merely a "personal investment."
The Sun Funds, however, argue that they cannot be "trades or businesses" because that would be inconsistent with two Supreme Court decisions — Higgins v. Commissioner of Internal Revenue, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783 (1941), and Whipple v. Commissioner of Internal Revenue, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963) — which interpret that phrase. The Sun Funds argue that cases interpreting the phrase "trade or business" as used anywhere in the Internal Revenue Code are binding because Congress intended for that phrase to be a term of art with a consistent meaning across uses. Also, the Sun Funds essentially argue that, by relying on Groetzinger, which stated that it was not cutting back on Higgins, the PBGC's "investment plus" test must be interpreted in a way consistent with Higgins and its progeny. Under Higgins, the Funds contend, they cannot be "trades or businesses."
As to the first argument, we reject the proposition that, apart from the provisions covered by 26 U.S.C. § 414(c), interpretations of other provisions of the Internal Revenue Code are determinative of the issue of whether an entity is a "trade or business" under § 1301(b)(1). Accord United Steelworkers of Am., AFL-CIO & Its Local 4805 v. Harris & Sons Steel Co., 706 F.2d 1289, 1299 (3d Cir.1983) (explaining that a term used for tax purposes does not have to have the same meaning for purposes of pension fund plan termination
As to the second argument, we see no inconsistency with Higgins or Whipple. Those cases were concerned with different issues and did not purport to provide per se rules, much less rules determinative of withdrawal liability under the MPPAA. The premise of the Sun Funds' argument is that Higgins and Whipple mean that entities that make investments, manage those investments, and earn only investment returns cannot be "trades or businesses" for any purpose. That argument is too blunt an instrument. In Higgins, the issue was whether certain claimed expenses were eligible for the deduction the taxpayer sought. The taxpayer, who had extensive investments in real estate, bonds, and stocks, spent a considerable amount of effort and time administratively overseeing his interests. 312 U.S. at 213, 61 S.Ct. 475. The taxpayer hired others to assist him and also rented offices to oversee his investments. Id. He claimed those expenses were deductible under Section 23(a) of the Revenue Act of 1932 as ordinary and necessary expenses paid or incurred in carrying on a "trade or business." Id. at 213-14, 61 S.Ct. 475. The Supreme Court held that those expenses were not incurred while carrying on a "trade or business" and were therefore not deductible. Id. at 217-18, 61 S.Ct. 475.
The Supreme Court reasoned that this was true because "[t]he petitioner merely kept records and collected interest and dividends from his securities, through managerial attention for his investments." Id. at 218, 61 S.Ct. 475. The Court held that, no matter the size of the estate or the continuous nature of the work required to keep a watchful eye on investments, that by itself could not constitute a "trade or business." Id. Significantly, the Court noted that the taxpayer "did not participate directly or indirectly in the management of the corporations in which he held stock or bonds." Id. at 214, 61 S.Ct. 475.
The facts of this case are easily distinguishable from those of Higgins. See id. at 217, 61 S.Ct. 475 ("To determine whether the activities of a taxpayer are `carrying on a business' requires an examination of the facts in each case."). First, the taxpayer in Higgins was trying to claim a deduction to avoid paying taxes. Second and more important, unlike the investor in Higgins, the Sun Funds did participate in the management of SBI, albeit through affiliated entities.
Whipple is also distinguishable: The taxpayer there sought to deduct a worthless loan made to a business he controlled as a bad business debt incurred in the taxpayer's "trade or business." 373 U.S. at 194-97, 83 S.Ct. 1168. The taxpayer claimed that, because he furnished regular services, namely his time and energy to
Id. at 202, 83 S.Ct. 1168 (emphasis added). The Sun Funds say that, because they earned no income other than dividends and capital gains, they are not "trades or businesses." But the Sun Funds did not simply devote time and energy to SBI, "without more." Rather, they were able to funnel management and consulting fees to Sun Fund IV's general partner and its subsidiary. Most significantly, Sun Fund IV received a direct economic benefit in the form of offsets against the fees it would otherwise have paid its general partner. It is difficult to see why the Whipple "without more" formulation is inconsistent with an MPPAA "investment plus" test.
The "investment plus" test as we have construed it in this opinion is thus consistent with the Groetzinger, Higgins, and Whipple line of cases.
The Sun Funds make an additional argument: that because none of the relevant activities by agents and different business entities can be attributed to the Sun Funds themselves, withdrawal liability cannot be imposed upon them. We reject this argument as well. Without resolving the issue of the extent to which Congress intended in this area to honor corporate formalities, as have the parties we look to the Restatement of Agency. Cf. Vance v. Ball State Univ., ___ U.S. ___, 133 S.Ct. 2434, 2441, 186 L.Ed.2d 565 (2013) (looking to Restatement of Agency to decide when Title VII vicarious liability appropriate). And, because the Sun Funds are Delaware limited partnerships, we also look to Delaware law.
Under Delaware law, a partner "is an agent of the partnership for the purpose of its business, purposes or activities,"
Here, the limited partnership agreements gave the Sun Funds' general partners the exclusive authority to act on behalf of the limited partnerships to effectuate their purposes.
Moreover, even absent Delaware partnership law, the partnership agreements themselves grant actual authority for the general partner to provide management services to portfolio companies like SBI. See Restatement (Third) of Agency §§ 2.01, 3.01; cf. id. § 7.04 (principal incurs tort liability vicariously where agent acts with actual authority). And the general partners' own partnership agreements giving power to the limited partner committees to make determinations about hiring, terminating, and compensating agents and employees of the Sun Funds and their portfolio companies show the existence of such authority. Hence, the general partner was acting within the scope of its authority.
Even so, the Sun Funds argue that the general partner entered the management service contract with SBI on its own accord, not as an agent of the Sun Funds.
The argument is unpersuasive for at least two reasons. First, it was within the general partner's scope of authority to provide management services to SBI. Second,
The Sun Funds also make a policy argument that Congress never intended such a result in its § 1301(b)(1) control group provision. They argue that the purpose of the provision is to prevent an employer "from circumventing ERISA obligations by divvying up its business operations into separate entities." It is not, they say, intended to reach owners of a business so as to require them to "dig into their own pockets" to pay withdrawal liability for a company they own. See Messina, 706 F.3d at 878.
These are fine lines. The various arrangements and entities meant precisely to shield the Sun Funds from liability may be viewed as an attempt to divvy up operations to avoid ERISA obligations. We recognize that Congress may wish to encourage investment in distressed companies by curtailing the risk to investors in such employers of acquiring ERISA withdrawal liability. If so, Congress has not been explicit, and it may prefer instead to rely on the usual pricing mechanism in the private market for assumption of risk.
We express our dismay that the PBGC has not given more and earlier guidance on this "trade or business" "investment plus" theory to the many parties affected. The PBGC has not engaged in notice and comment rulemaking or even issued guidance of any kind which was subject to prior public notice and comment. See C. Sunstein, Simpler 216 (2013) ("[G]overnment officials learn from public comments on proposed rules.... It is not merely sensible to provide people with an opportunity to comment on rules before they are finalized; it is indispensable, a crucial safeguard against error."). Moreover, its appeals letter that provides for the "investment plus" test leaves open many questions about exactly where the line should be drawn between a mere passive investor and one engaged in a "trade or business."
Because to be an "employer" under § 1301(b)(1) the entity must both be a "trade or business" and be under common control, we reverse entry of summary judgment on the § 1301(b)(1) claim in favor of Sun Fund IV and vacate the judgment in favor of Sun Fund III. 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
We deny, for different reasons than the district court, the TPF's appeal from entry of summary judgment against its claim under 29 U.S.C. § 1392(c). That provision of the MPPAA states "[i]f a principal purpose of any transaction is to evade or avoid liability under this part, this part shall be applied (and liability shall be determined and collected) without regard to such transaction." 29 U.S.C. § 1392(c) (emphasis added).
The TPF argues that § 1392(c) applies because the Sun Funds, during the acquisition, purposefully divided ownership of SSB-LLC into 70%/30% shares in order to avoid the 80% parent-subsidiary common control requirement of § 1301(b)(1). Under Treasury regulations, to be in a parent-subsidiary group under common control, the parent must have an 80% interest in the subsidiary. 26 C.F.R. § 1.414(c)-2(b)(2)(i). The TPF asserts that, because a Sun Fund representative testified that a principal purpose of the 70%/30% division was to avoid unfunded pension liability and because an email states that a reason ownership was divided was "due to [the] unfunded pension liability," liability can be imposed on the Sun Funds under § 1392(c).
We hold that § 1392(c) cannot serve as a basis to impose liability on the Sun Funds because, by applying the remedy specified by the statute, the TPF would still not be entitled to any payments from the Sun Funds for withdrawal liability. We begin (and ultimately end) our analysis by reviewing the plain language of § 1392(c). See United States v. Kelly, 661 F.3d 682, 687 (1st Cir.2011) ("We begin our analysis by reviewing the plain language of the [statute].").
The language of § 1392(c) instructs courts to apply withdrawal liability "without regard" to any transaction the principal purpose of which is to evade or avoid such liability. 29 U.S.C. § 1392(c). The instruction requires courts to put the parties in the same situation as if the offending transaction never occurred; that is, to erase that transaction. It does not, by contrast, instruct or permit a court to take the affirmative step of writing in new terms to a transaction or to create a transaction that never existed. In order for the TPF to succeed, we would have to (improperly) do the latter because simply doing the former would not give the TPF any relief, but would only sever any ties between the Sun Funds and SBI.
Disregarding the agreement to divide SSB-LLC 70%/30% would not result in Sun Fund IV being the 100% owner of SBI. At the moment SSB-LLC was divided 70%/30%, the transaction to purchase SBI had not been completed. There is no way of knowing that the acquisition would have happened anyway if Sun Fund IV were to be a 100% owner, but it is doubtful. SSB-LLC was formed on December 15, 2006, at which point the 70%/30% division
The TPF argues that because Sun Fund IV had already signed a letter of intent to purchase 100% of SBI before the decision was made to divide ownership between the Sun Funds, we can rely on the letter of intent. The TPF claims that the decision to split ownership to avoid the automatic assumption of withdrawal liability at 80% ownership was made after a binding transaction was entered into through the letter of intent. That is not true. The letter of intent was so named because it was not a binding contract or any sort of purchase agreement. Rather, the letter explicitly contained a clause stating that:
This is simply not a case about an entity with a controlling stake of 80% or more under the MPPAA seeking to shed its controlling status to avoid withdrawal liability. As such, disregarding the agreement to divide ownership of SSB-LLC would not leave us with Sun Fund IV holding a controlling 80% stake in SBI.
The Sun Funds are not subject to liability pursuant to § 1392(c) and the district court's conclusion that they are not is affirmed.
Accordingly, the district court's grant of summary judgment is reversed in part, vacated in part, and affirmed in part. The case is remanded to the district court for further proceedings, including those needed to determine the "trade or business" issue as to Sun Fund III, and the issue of common control. So ordered. No costs are awarded.
The PBGC insures about 1450 multiemployer plans covering about 10.3 million participants. Pension Benefit Guaranty Corporation, 2012 PBGC Annual Report 33, available at http://www.pgbc.gov/documents/2012-annual-report.pdf. It provides about $95 million in annual financial assistance to 49 insolvent multiemployer plans covering 51,000 participants. Id. As of the end of fiscal year 2012, the PBGC's multiemployer insurance fund had a negative net position of $5.237 billion. Id.
See also 29 C.F.R. § 2510.3-101(d)(1), (d)(3). We do not adopt the TPF's argument that any investment fund classified as a VCOC is necessarily a "trade or business."
Cent. States, Se. & Sw. Areas Pension Fund v. SCOFBP, LLC, 668 F.3d 873, 878-79 (7th Cir.2011) (citations omitted) (quoting Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson, 238 F.3d 891, 895 (7th Cir.2001)).
