Court Rules that Private Equity Funds May Be Responsible for Portfolio Company’s Pension Liability

For the first time, a federal court of appeals has ruled that two private equity funds are "trades or businesses" that could be liable for the multiemployer pension plan withdrawal liability of one of their portfolio companies. Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund, U.S. App. LEXIS 15190 (1st Cir. July 24, 2013). The ruling reverses a district court decision favorable to the funds and is a wake-up call for private equity funds whose portfolios include companies that contribute to multiemployer plans or sponsor single-employer pension plans with substantial unfunded benefit liabilities. This article discusses the case and key considerations for funds when investing in such companies.

Background

Scott Brass, Inc., a portfolio company of Sun Capital Partners III, LP and Sun Capital Partners IV, LP (the Sun Funds), was a contributing employer to the New England Teamsters & Trucking Industry Pension Fund (the Teamsters Plan), a multiemployer plan. Like most multiemployer plans today, the Teamsters Plan was not fully funded, and under ERISA, as amended by the Multiemployer Pension Plan Amendments Act of 1980, an employer withdrawing from the plan is liable for the employer's share of the plan's unfunded vested benefits.

Moreover, under ERISA all trades or businesses under common control (the controlled group) are jointly and severally liable for certain pension benefit obligations of any employer in the controlled group, including multiemployer plan withdrawal liabilities, unfunded pension benefit liabilities of single-employer plans, minimum funding obligations and Pension Benefit Guaranty Corporation (PBGC) premiums. However, the term "trade or business" is not defined in ERISA or the Internal Revenue Code (Code), nor in PBGC or Treasury regulations, and has not been given a definitive, uniform definition by the United States Supreme Court.

In recent years multiemployer plans have aggressively litigated against alleged controlled-group members to recover withdrawal liability payments that the contributing employer was unable to make. In Board of Trustees, Sheet Metal Workers Nat'l Pension Fund v. Palladium Equity Partners, LLC, 722 F. Supp. 2d 854 (E.D. Mich. 2010), the district court relied on a 2007 PBGC Appeals Board decision to find that a private equity fund could be liable for unpaid withdrawal liability as a trade or business controlled-group member or alter ego of the contributing employer.

When Scott Brass withdrew from the Teamsters Plan and filed for bankruptcy, the plan demanded that the Sun Funds pay Scott Brass' $4.5 million withdrawal liability. The Sun Funds sued for a declaratory judgment that they were not responsible for the withdrawal liability because:

The Sun Funds were not part of a joint venture or partnership and therefore did not meet ERISA's common-control element; and Neither Sun Fund...