United States: A Warning Shot For Private Equity Funds: First Circuit Court Of Appeals Holds Fund Engaged In A "Trade Or Business" For Purposes Of Allocating ERISA Pension Withdrawal Liability

Under Title IV of the Employee Retirement Income Security Act (ERISA), withdrawal liability upon cessation of participation in a multiemployer pension plan and termination liability upon the involuntary or distressed termination of a single-employer pension plan may be assessed jointly and severally among members of the employer's controlled group. Section 4001(b) of ERISA indicates that two or more entities will be considered to be a single employer where: (1) the entities are under common control1 and (2) the entities are each engaged in a "trade or business." Private equity funds have historically taken the position that they are not engaged in a "trade or business" under ERISA and, as a result, should not be jointly and severally liable for any pension liability incurred by a portfolio company in which the fund invests, regardless of the level of ownership. However, a recent ruling by the First Circuit Court of Appeals highlights that multiemployer pension funds and the Pension Benefit Guaranty Corporation may be successful in challenging this position, particularly if a private equity fund utilizes a "turnaround" strategy or other investment strategy which necessitates the private equity fund's active participation (directly or through its affiliated entities) in the management of its portfolio companies.

In Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312 (1st Cir. July 24, 2013), the First Circuit Court of Appeals considered an appeal from the U.S. District Court for the District of Massachusetts, which had previously ruled that, for ERISA purposes, two affiliated private equity funds, Sun Capital Partners III, LP (Sun Fund III) and Sun Capital Partners IV, LP (Sun Fund IV), were not "trades or businesses" responsible for withdrawal liability owed by a jointly owned bankrupt portfolio company, Scott Brass, Inc., to the New England Teamsters and Trucking Industry Pension Fund upon its withdrawal from the Pension Fund.

In reversing the lower court's decision with respect to Sun Fund IV, the Court of Appeals found that the private equity fund was not a mere passive investor in Scott Brass, but rather was actively involved in the management and operations of Scott Brass through the actions of the Sun Fund IV's managing general partner and that general partner's wholly owned subsidiary management company. Moreover, the court found that Sun Fund IV had benefited from those management activities in ways distinguishable from a passive investor: while Sun Fund IV's general partner and its subsidiary management company had separately contracted with Scott Brass for the provision of management and consulting services and were separately compensated by Scott Brass, the benefit of these fees under those separate contracts accrued to Sun Fund IV through a fee offset arrangement between Sun Fund IV and its general partner.

In determining that these activities constituted a "trade or business" for ERISA purposes, the court applied an "investment plus" standard previously utilized in a Sixth Circuit decision (Bd. of Trs., Sheet Metal Workers Nat'l Pension Fund v. Palladium Equity Partners, 722 F. Supp. 2d 854 (E.D. Mich. 2010)) and derived from a 2007 PBGC Appeals Board ruling. 2 The court held that Sun Fund IV was indeed a "trade or business" as it was "able to funnel management and consulting fees to Sun Fund IV's general partner and its subsidiary" for management services provided by the general partner. The court noted that Sun Fund IV's investment strategy called for "active management through an agent" for the benefit of the fund and that the Sun Funds' private placement memoranda "explain that the Funds are actively involved in the management and operations of the companies in which they invest." Illustrative of this fact was that the authority to make determinations about hiring, terminating and compensating agents and employees of the Sun Funds and their portfolio companies (including Scott Brass) was given to the Sun Fund IV's general partner's limited partner committee.

As noted above, Section 4001(b)(1) of ERISA provides for shared responsibility for pension withdrawal and termination liability among trades or businesses which are under common control. While the Court of Appeals determined that Sun Fund IV constituted a trade or business, it remanded the case back to the District Court to determine whether either Sun Fund III or Sun Fund IV was under common control with Scott Brass.3 The purchase of Scott Brass by Sun Fund III and Sun Fund IV appears to have been structured to limit each of the Fund's ownership interest in Scott Brass so as to avoid the 80 percent parent-subsidiary common control threshold of Section 4001(b)(1) of ERISA. Key issues before the District Court on remand may include whether Sun Fund III or Sun Fund IV had voting power over Scott Brass in excess of its equity interest or whether the Funds could be viewed as a single entity under an "alter ego" doctrine.

The Sun Capital Partners case is the latest example of the intensified efforts by multiemployer pension funds and the PBGC to recoup pension withdrawal and termination liability. Where the pension plan sponsor or contributing employer has sought bankruptcy protection, multiemployer plans and the PBGC will have added incentive to seek to creatively expand the scope of the "employer" under Section 4001(b)(1) of ERISA. While this decision may be cited as controlling precedent only within the First Circuit, Sun Capital Partners joins Palladium Equity Partners in suggesting that private equity funds may no longer be automatically viewed as passive investors when multiemployer plan withdrawal liability is incurred by a portfolio company. Furthermore, although both the Sun Capital Partners and the Palladium Equity Partners cases involved multiemployer pension plan withdrawal liability under Section 4201 of ERISA, there is nothing in those decisions that would suggest that the "investor plus" analysis utilized therein could not be equally applicable for allocating PBGC liability under Section 4062 of ERISA to a private equity investor in connection with the distressed or involuntary termination of a single employer pension plan. Indeed, the September 26, 2007, PBGC Appeals Board decision cited by the court in Sun Equity Partners involved the allocation of PBGC liability under Section 4062 of ERISA to a private equity fund resulting from an involuntary PBGC-initiated termination of a single-employer pension plan sponsored by one of the private equity fund's portfolio companies.

The Sun Capital Partners case highlights the importance of careful structuring of equity investments by private equity firms, particularly with regard to potential portfolio companies that sponsor defined benefit pension plans or that participate in multiemployer pension plans under the terms of one or more collective bargaining agreements and which may face substantial termination or withdrawal liability to avoid controlled group status. For private equity funds that are part of a controlled group with their portfolio companies (e.g., 80 percent or greater shareholders), those funds need to be aware of the risks involved, at least within the First Circuit (the states of Maine, Massachusetts, New Hampshire and Rhode Island, as well as the commonwealth of Puerto Rico) absent a reconsideration of the issue by the court.4 For questions or assistance with issues involving employee benefit plan liability exposure, please contact any member of BakerHostetler's  Employee Benefits Group or  Private Equity and Venture Capital Team.


1 Separate entities are generally consider to be under "common control" if the entities are part of a parent-subsidiary controlled group (i.e., the parent entity directly or indirectly owns at least 80 percent of the stock or voting power of the subsidiary) or a brother-sister controlled group (i.e., five or fewer individuals, estates or trusts own more than 50 percent of the stock or voting power of each of the entities). See, ERISA § 4001(b)(1) (29 U.S.C. § 1301(b)) and PGGC Regulation § 4001.3.
2 A copy of the September 26, 2007 PBGC Appeals Board decision.
3 In addition, the court did not make a determination as to whether the activities of Sun Fund III were sufficient for it to constitute a 'trade or business" for purposes of ERISA. Finding that insufficient facts had been provided for it to make such a determination, the court also remanded this issue back to the District Court for further proceeding.
4 On August 7, 2013, Sun Fund III and Sun Fund IV filed a petition for a panel rehearing or a hearing en banc by the Court of Appeals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions