In 2007, the U.S. Pension Benefit Guaranty Corporation (PBGC)
created a furor in the investment and employee benefits worlds when
it issued an appeals opinion finding that a private equity
fund that owned at least 80% of a portfolio company could be liable
for the portfolio company's plan termination underfunding under
Title IV of the U.S. Employee Retirement Income Security Act
ERISA provides that if the requisite ownership exists, all
trades or businesses that are part of a controlled group of
corporations or group of commonly controlled trades or businesses
are jointly and severally liable for this underfunding, which means
that all of the liability can be assessed against any group member.
However, this was the first time that the PBGC had publicly made a
determination that a private equity fund was a trade or
Many practitioners thought the PBGC opinion was wrong, given
that PBGC is supposed to follow Internal Revenue Service (IRS)
rules in making these determinations. They thought the PBGC opinion
was inconsistent with IRS authority as to when investment
activities constitute a trade or business. On October 18, a federal
district court judge in Massachusetts agreed with these
One Sun Fund owned 70% and another Sun Fund owned 30% of the
company, Scott Brass. After Scott Brass withdrew from the Fund and
filed for bankruptcy, the Pension Fund sought to collect withdrawal
liability payments from the Sun Funds, relying on the PBGC opinion.
They also argued that the Court should ignore the 70/30 ownership
split under a separate provision that ignored transactions intended
to avoid or evade withdrawal liability, which usually requires at
least an 80% ownership interest.
In dismissing the claims against the Sun Funds, the Court made
the following findings:
The PGBC opinion was not entitled to deference because it was
"unpersuasive" and conflicted with U.S. Supreme Court
The Sun Funds were not trades or businesses. They had no
employees or offices; they were simply passive pools of investment
capital managed by a general partner.
A decision by an investor to obtain less than an 80% interest
in a business is not a decision to evade or avoid ERISA
This is only one district court decision, and it should be noted
that the PBGC was not a party to this suit, since it does not
collect withdrawal liability under the statutory scheme. Nor is
there any indication that PBGC filed an amicus brief related to
this case. While the decision is not technically binding outside
the district of Massachusetts, it is a well-reasoned decision that
may well be followed by other federal courts and cited in response
to multi-employer funds and the PBGC. However, it is clearly not
the final word on this issue, and investment funds should continue
to be cautious about ERISA when they acquire an 80% interest in
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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