In the most recent installment of the Sun Capital1
line of cases, the U.S. District Court for the District of
Massachusetts (on remand from the First Circuit) held that two Sun
Capital private equity funds were jointly and severally liable
under the Employee Retirement Income Security Act (ERISA) for a
bankrupt portfolio company's $4.5M multiemployer pension plan
withdrawal liability. Under ERISA and the U.S. Internal Revenue
Code, each member of a controlled group (which includes a
corporation's subsidiaries, parent and other subsidiaries of
the parent that are a "trade or business" provided that
an 80% ownership threshold is met) is jointly and severally
responsible for various pension-related liabilities.
Although neither fund owned the requisite 80% interest on its
own (SCP-IV held 70% and SCP-III and SCP-IIIQ held 30% in the
aggregate) and the funds' organizational documents expressly
disclaimed any intent to form a partnership or joint venture, the
U.S. District Court found that the funds had formed a partnership
under federal common law that controlled the bankrupt portfolio
company. The District Court's finding of a
"partnership-in-fact" was based on the funds' joint
investigation and action prior to investment, their co-investment
activities, the lack of disagreement between the funds with respect
to the management of the portfolio company and their joint efforts
to control the portfolio company through Sun Capital Advisors.
Since the activities of the funds went beyond passive investment
(e.g., the funds had the ability to place employees of Sun Capital
Advisors as board members, and benefited from management fee offset
carry forwards that were not available to passive investors), they
were engaged in a "trade or business" under the
"investment plus" standard. Accordingly, the funds were
held to be a part of a controlled group with the portfolio
What You Need To Know
The ruling establishes that a private equity fund can be
engaged in a trade or business and be subject to controlled group
liability under ERISA if either on its own, or together with other
related funds, it owns at least 80% of a portfolio company. The
Court looked beyond the funds' organizational formalities,
largely non-overlapping sets of limited partners, and largely
non-overlapping portfolio companies to find a partnership-in-fact
that controlled the portfolio company. If the decision is upheld on
appeal or followed by courts in other circuits, private equity
funds will need to reassess the current market practice for
structuring investments in portfolio companies that contribute to
multiemployer pension plans or sponsor defined benefit pension
Private equity funds acquiring U.S. entities should conduct
thorough due diligence of single employer and multi-employer
pension liabilities and consider appropriate seller
indemnifications or purchase price adjustments.
1 Sun Capital Partners III, LP v. New England Teamsters
& Trucking Industry Pension Fund (Sun Capital).
2 For full analysis of the Sun Capital line of cases,
please see our March 7, 2014 bulletin, U.S. Supreme Court Declines
to Review Liability Decision
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