United States: U.S. District Court Says Private Equity Funds On Hook For Portfolio Company's Pension Fund Withdrawal Liability

On March 28, 2016, the U.S. District Court in Massachusetts ruled that two Sun Capital private equity funds were responsible for a $4.5 million multiemployer pension plan withdrawal liability incurred by a bankrupt portfolio company. The court held that (a) each fund was a trade or business and (b) the funds were under common control with the portfolio company. Therefore, each fund is liable for the portfolio company's pension plan withdrawal liability under the Employee Retirement Income Security Act of 1974 (ERISA) "controlled group" rules.


Under ERISA, a trade or business that is a member of a common controlled group is jointly and severally liable for the pension liabilities of every other member of the controlled group. In a prior ruling on the Sun Capital case, the First Circuit Court of Appeals held that the Sun Capital funds may be engaged in a trade or business under ERISA (rather than merely investing) under an "investment plus" standard. See our 2013 article on that development. The Appeals Court directed the District Court to make that determination based on the facts of the case as well as to determine if the Sun Capital funds were part of a controlled group with the portfolio company.

A common controlled group generally involves a parent-subsidiary group whereby one parent maintains at least an 80% ownership in a subsidiary. In this case, ownership of the portfolio company was split 70/30 among the two Sun Capital funds so neither would cross the 80% threshold.


The District Court, relying on the guidance from the Appeals Court, held that both funds were engaged in a trade or business (not merely passive investors in the portfolio company) and were part of a controlled group with the portfolio company because the funds had formed a "partnership-in-fact". Consequently, even though the funds had structured their ownership of the portfolio company to avoid forming a controlled group, and they had formally disclaimed the existence of any partnership or joint venture in the management of the portfolio company, the funds were nonetheless found responsible for the portfolio company's withdrawal liability.

Trade or Business

The Appeals Court and District Court looked to whether the facts and circumstances surrounding the funds' investment in the company, and their other investment activities, were more than that of a "passive investor who does not engage in management activities" — an "investment plus" standard. Applying that standard, the District Court focused on the following factors in concluding that the funds met the "investment plus" standard were thus engaged in a trade or business:

  • The funds' activities in making investments in portfolio companies with the principal purpose of making a profit.
  • The funds' involvement in the management and operation of company (e.g., the funds' ability to place employees of Sun Capital Advisors in the majority of the director positions at the company), and the funds' similar activities with respect to their investments in other portfolio companies.
  • The economic benefits enjoyed by the funds that would not be available to an ordinary passive investor - specifically, offsets against management fees paid to Sun Capital by the portfolio company that the funds would have paid to their respective general partners for managing the investment in the portfolio company.

Common Control

Despite the 70/30 split in ownership of the company between the two funds, the District Court found that the two funds should be treated as partners in a partnership which owned 100% of the portfolio company. It based its conclusion on:

  • The same individuals at Sun Capital retained substantial control over both funds.
  • The funds had identical language in their partnership agreements and were operated similarly.
  • The funds acted in a coordinated manner to invest in the portfolio company (i.e., their joint ownership was not happenstance by passive investors). In addition, the funds used the same organizational structure to co-invest in five other companies.
  • The funds made a purposeful decision to divide their ownership stake 70/30 for reasons that demonstrate the existence of a partnership.
  • There was no meaningful evidence of independence in each fund's investment activity, such as co-investments with outside entities or disagreements over how to operate the portfolio company.


The District Court's holding governs only in the U.S. District of Massachusetts and is subject to appeal to the First Circuit. However, if sustained on appeal, it would govern throughout the First Circuit (Massachusetts, Maine, New Hampshire and Rhode Island) and may find favor in other jurisdictions. Further, its reasoning could be extended to other employee benefit areas - for example, single employer defined benefit pension plan funding liability, and testing required for qualified plans.

In light of this decision, private equity firms should give extra scrutiny to the pension plans of target companies and consider structuring acquisitions in companies with underfunded pension plans so that the private equity fund does not become part of a controlled group with the portfolio company.

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.

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