The First Circuit Fires A Shot Across The Bow Of Private Equity Funds: Too Much Control Of Portfolio Companies May Lead To Pension Plan Withdrawal Liability

Few areas of law are as confusing—or as important to understand—as the growing intersection of employment and bankruptcy law. In recent years, funding shortfalls in multi-employer pension plans, which cover roughly 20 percent of U.S. workers with defined-benefit plans, have increased pressure on participating employers to reduce their contributions or even withdraw entirely. Although employers taking these actions would incur withdrawal liability as a consequence, that liability can likely be discharged in bankruptcy. As a result, multi-employer pension plans have been forced to look elsewhere to collect on their withdrawal-liability claims against bankrupt employers.

In a case of first impression, the First Circuit Court of Appeals considered one such attempt by a multi-employer pension plan ("MEPP") to collect withdrawal liability from a private equity fund sponsor of a bankrupt debtor. In Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013), the First Circuit held that the private equity fund in that case was a "trade or business" which could be held jointly and severally liable for the withdrawal liability incurred by one of its portfolio companies. As disturbing as the decision is for the private equity industry, and especially for those funds that suddenly find themselves with far greater exposure than they originally anticipated, the case may also offer opportunities for savvy investors who are willing to develop the legal structures that can reduce their exposure to withdrawal liability should their investments in companies with MEPPs fail.

MULTI-EMPLOYER PENSION PLANS AND CONTROL-GROUP LIABILITY

MEPPs are so named because more than one employer makes contributions to the plans, which are then used to provide benefits to all the participating businesses' employees upon retirement. Prior to 1980, an employer could cease making payments to, or "withdraw" from, a MEPP and would be liable only if the plan later became insolvent. Unfortunately, this created a perverse incentive for employers to withdraw as quickly as possible at the first sign of a MEPP's distress, or risk being left as the sole remaining contributor to fund all the benefits on its own. To ameliorate this problem, Congress amended the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et seq., in 1980 to create withdrawal liability. In principle, under the amended ERISA, employers that cease contributing to a MEPP are obligated to pay their fair share of any unfunded liabilities.

At the same time, Congress also added a series of provisions to enhance the collectability of the new withdrawal liability. Among other things, the 1980 amendments made "trade[s] or business[es]" that are under "common control"—which has since been defined by regulation to mean 80 percent common ownership—jointly and severally liable for each other's withdrawal liability. 29 U.S.C. § 1301(b)(1). In addition, withdrawal liability must be assessed "without regard" to any transaction whose "principal purpose" is to "evade or avoid" withdrawal liability. 29 U.S.C. § 1392(c).

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