Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund

• Decision Date: 18 October 2012
• Docket Number: CIVIL ACTION NO. 10-10921-DPW
• Parties: SUN CAPITAL PARTNERS III, LP, SUN CAPITAL PARTNERS III QP, LP, and SUN CAPITAL PARTNERS IV, LP, Plaintiffs/ Counter-Defendants, v. NEW ENGLAND TEAMSTERS AND TRUCKING INDUSTRY PENSION FUND, Defendant/Counter-Plaintiff.
• Court: U.S. District Court — District of Massachusetts

SUN CAPITAL PARTNERS III, LP, SUN CAPITAL PARTNERS III QP, LP, and

SUN CAPITAL PARTNERS IV, LP, Plaintiffs/ Counter-Defendants,

v.NEW ENGLAND TEAMSTERS AND TRUCKING INDUSTRY PENSION FUND, Defendant/Counter-Plaintiff.

CIVIL ACTION NO. 10-10921-DPW

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

October 18, 2012

MEMORANDUM AND ORDER

Sun Capital Partners III, LP and Sun Capital Partners III QP, LP (together, "Sun Fund III"), and Sun Capital Partners IV, LP ("Sun Fund IV") (collectively, the "Sun Funds"), seek a declaratory judgment that they are not liable to New England Teamsters and Trucking Industry Pension Fund (the "Pension Fund") for the payment of withdrawal liability stemming from the bankruptcy of Scott Brass, Inc., one of the companies in which the Sun Funds invested.

The Sun Funds moved for summary judgment, asserting that they are not "trades or businesses" under ERISA and the investment transactions were not structured with the primary purpose of "evading or avoiding" withdrawal liability. The Pension Fund opposed the Sun Funds' motion and filed a cross-motion for summary judgment, seeking a declaration that the Fundsare jointly and severally liable for payment of Scott Brass, Inc.'s withdrawal liability. I have granted the motion of the Sun Funds and denied that of the Pension Fund. This memorandum provides the extended explanation of the reasons judgment shall enter for the Sun Funds.

I. BACKGROUND

A. Withdrawal Liability

The Pension Fund seeks to recover approximately $4.5 million in "withdrawal liability" incurred by Scott Brass, Inc., under a collective bargaining agreement, when it went bankrupt and withdrew from the pension plan. When an employer withdraws from a multiemployer pension plan, the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA") requires that the employer pay the pension plan a sum sufficient to cover the employer's fair share of the pension's unfunded liabilities, "that is, the difference between the present value of vested benefits . . . and the current value of the plan's assets." Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 609 (1993) (quotations and citations omitted). That sum is the employer's "withdrawal liability."

B. Facts

I. The Sun Funds

Sun Capital Advisors, Inc. is a private investment firm founded by Marc Leder and Rodger Krouse specializing in leveragedbuyouts and other investments in underperforming, market-leading companies. It provides investment advice to Sun Capital investment funds, two of which are the plaintiffs in this action, Sun Fund III¹ and Sun Fund IV. Sun Capital Advisors finds and recommends investment opportunities for the Sun Funds, then negotiates, structures, and finalizes the investment deals. Sun Capital Advisors also collects fees pursuant to management services agreements both from the Sun Funds and from the companies in which the Sun Funds invest on Sun Capital Advisor's recommendations.

Sun Fund III and Sun Fund IV are two of Sun Capital Advisors' investment funds. Each is a limited partnership, to which individuals and institutional investors contribute capital for investment purposes. Neither has any employees, owns any office space, or makes or sells any goods. They are simply pools of investment capital managed by a general partner.

The general partner oversees the fund's investment activities in return for a fee and a "carried interest" portion of the Fund's investment profits. The Sun Funds' limitedpartnership agreements have identical language concerning the powers of their general partners:

6.1. Management Authority.

(a) The management of the Partnership shall be vested exclusively in the General Partner, and the General Partner shall have full control over the business and affairs of the Partnership. The General Partner shall have the power on behalf and in the name of the Partnership to carry out any and all of the objectives and purposes of the Partnership and to perform all acts and enter into and perform all contracts and other undertakings which the General Partner, in its sole discretion, deems necessary or advisable or incidental thereto, including the power to acquire and dispose of any security (including marketable securities).

(b) All matters concerning (i) the allocation and distribution of net profits, net losses, Investment Proceeds, Short-Term Investment Income, and the return of capital among the Partners, including the taxes thereon, and (ii) accounting procedures and determinations, estimates of the amount of Management Fees payable by any Defaulting Partner or Regulated Partner, tax determinations and elections, and other determinations not specifically and expressly provided for by the terms of this Agreement, shall be determined by the General Partner in good faith and in a manner not inconsistent with this Agreement, whose determination shall be final and conclusive as to all the Partners absent manifest error.

(c) Third parties dealing with the Partnership can rely conclusively upon the General Partner's certification that it is acting on behalf of the Partnership and that its acts are authorized. The General Partner's execution of any agreement on behalf of the Partnership is sufficient to bind the Partnership for all purposes.

Sun Fund Ill's general partner is Sun Capital Advisors III, LP, and Sun Fund IV's general partner is Sun Capital Advisors IV,LP. Each general partner has a limited partner committee that makes investment decisions for the Fund. The general partners' limited partnership agreements states that:

Except as otherwise expressly provided in this Agreement, all material Partnership decisions and determinations will be made by the Limited Partner Committee established under Article VI, including all Partnership decisions and determinations relating to (a) the acquisition of Fund investments, (b) the disposition of Fund investments, (c) distributions by the Fund of cash and/or securities, (d) amendments to the Fund Agreement, (e) distributions of Partnership cash and securities, (f) distributions of cash and securities from escrow accounts, (g) the borrowing of money, (h) hiring, terminating and establishing the compensation of employees and agents of the Fund or Portfolio Companies and (I) the incurring of expenses on behalf of the Partnership. The Partnership may (I) appoint such officers or employ such Persons on behalf of the Partnership, who may but need not be Active Limited Partners, to carry out such terms and to perform such functions as the Limited Partner Committee shall determine, (ii) appoint or otherwise contract with such other Persons for the transaction of the business of the Partnership or the performance of services for or on behalf of the Partnership as the Limited Partner Committee shall determine and (iii) delegate to any such officer or Person such authority to act on behalf of the Partnership as the Limited Partner Committee may from time to time deem appropriate. Each Founding Partner is hereby appointed as a "Managing Director" of the Partnership (in each case, only so long as such Person is an Active Partner) and shall have, in such capacity, the powers and duties granted to them by the Limited Partner Committee.

Leder and Krouse, the founders of Sun Capital Advisors, Inc., are the sole members of the limited partner committees of the general partners of both Sun Fund III and Sun Fund IV. In turn, Sun Capital Advisors III, LP (the general partner of Sun Fund III) also has a general partner, Sun Capital Partners III,LLC. Likewise, Sun Capital Advisors IV, LP (the general partner of Sun Fund IV) has a general partner, Sun Capital Partners IV, LLC.

Each of the Sun Funds' general partners also has a management company, Sun Capital Partners Management III, LLC and Sun Capital Partners Management IV, LLC respectively. The management companies of the general partners provide managerial and consulting services to the holding companies in which the Funds invest. In essence, the management companies act as middle-men, providing the companies in which the Sun Funds invest with employees and consultants from Sun Capital Advisors. The management companies also collect the consulting and management fees earned.

ii. The Investment

In 2006, Sun Capital Advisors brought Scott Brass, Inc., a manufacturer of brass and copper coil for industrial purposes, to the attention of the Sun Funds' general partners as a potential investment opportunity. The Sun Funds created a Delaware limited liability corporation named Sun Scott Brass, LLC to act as an investment vehicle. Acting as the limited partner committee of the Sun Funds' general partners, Leder and Krouse authorized Sun Fund IV to invest $2.1 million in Sun Scott Brass, LLC, in exchange for 70% ownership of its membership interests, and alsoauthorized Sun Fund III to invest $900,000 in exchange for the remaining 30%.

Sun Scott Brass, LLC, then invested that $3 million in a holding corporation, Scott Brass Holding Corp., in exchange for $1 million in Scott Brass Holding Corp. stock and $2 million in debt. Scott Brass Holding Corp. then purchased all of the stock in Scott Brass, Inc. with this $3 million in cash and an additional $4.8 million it borrowed.

iii. Bankruptcy and the Pension Fund

At the time of purchase in 2006, Scott Brass, Inc. was regularly making its payments into the Pension Fund, and continued to do so over the next two years. However, in the fall of 2008 the price of copper declined, and Scott Brass, Inc. was unable to obtain credit to stay in business.

In October 2008, Scott Brass, Inc. withdrew from the Pension Fund and, on November 21, 2008, entered into bankruptcy. On December 19, 2008, the Pension Fund demanded Scott Brass, Inc. pay its withdrawal liability in the amount of $4,516,539. Upon further investigation, the Pension Fund asserted that Sun Fund III and Sun Fund IV had entered into a joint venture or partnership in common control with Scott...