District Court Limits The Collection Of Withdrawal Liability Against Private Equity Funds

In Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund, 2012 WL 5197117 (D. Mass. Oct. 18, 2012), a federal district court in Massachusetts concluded that a private equity fund was not a "trade or business" subject to the imposition of withdrawal liability and thus was not responsible for paying the withdrawal liability owed by one of its portfolio companies that had completely withdrawn from a multiemployer pension fund.1 In so holding, the court rejected a Pension Benefit Guaranty Corporation ("PBGC") Appeals Board opinion letter that reached the opposite conclusion, finding the PBGC's analysis "unpersuasive" and "incorrect as a matter of law." If adopted by other courts, this decision could significantly limit a multiemployer pension fund's ability to assess and collect withdrawal liability against companies that are owned and operated by private equity funds.

The Multiemployer Pension Plan Amendments Act of 1980 and Private Equity Funds

Since the enactment of the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"), employers that withdraw from a multiemployer plan have been required to pay their share of the pension plan's unfunded liabilities, i.e., an employer's withdrawal liability. In the event of a contributing employer's complete or partial withdrawal, a multiemployer pension fund must assess and collect the employer's withdrawal liability. But what if the employer is unable to pay all or a portion of the withdrawal liability demanded by the multiemployer pension fund? For purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the signatory company to the collective bargaining agreement and all "trades or business (whether or not incorporated) that are under common control" with the withdrawing company are treated as the "employer." Each member of the controlled group is jointly and severally liable (i.e., the members of a group are either individually or mutually responsible) to the multiemployer pension plan for the withdrawal liability.

Private equity funds are pools of actively managed capital raised from institutional investors that are used to make investments in public and private companies (known as portfolio companies). These investments are made with the intent of creating value for the investors in the portfolio companies by improving their operations, reducing costs, selling non-core assets and maximizing cash flow. As employers, the portfolio...