Court Rejects PBGC Position That An Investment Fund Is Part Of A Controlled Group For Purposes Of Pension Liabilities Of A Portfolio Company

Keywords: PBGC, investment fund, pension liabilities, portfolio company

Late in 2012, in Sun Capital Partners v. New England Teamsters ("Sun Capital"),1 a federal district court in Massachusetts (the "District Court") held that certain private equity funds were not trades or businesses that could be held jointly and severally liable for the pension obligations of a portfolio company in which such funds had invested. In so holding, the District Court rejected a 2007 ruling of the Appeals Board of the US Pension Benefit Guaranty Corporation ("PBGC") that a private equity fund was engaged in a trade or business and, therefore, a member of one of its portfolio companies' controlled group for purposes of pension liabilities to the PBGC. The District Court's decision in the Sun Capital case was also a departure from a 2010 Michigan district court decision that examined similar facts and issues and found the PBGC Appeals Board's reasoning persuasive.2

While the decision in Sun Capital is an encouraging development, the issue is far from settled. Accordingly, as discussed below, in structuring their investments, private equity funds must continue to be mindful of the potential for controlled group liabilities for the pension obligations and liabilities of their portfolio companies.

Background

Under the Employee Retirement Income Security Act ("ERISA"), and the Internal Revenue Code (the "Code"), all employees of trades or businesses, whether or not incorporated, that are under common control are treated as being employed by a single employer for purposes of applying various employee benefit requirements and imposing various employee benefit liabilities. As the guarantor (up to statutory limits) of participants' accrued benefits under private pension plans, the PBGC will seek to recover from the members of a controlled group, the liabilities it has incurred as a result of an underfunded pension plan's termination. Under ERISA, withdrawal liability to multiemployer pension plans is also imposed on a controlled group basis. In addition, the PBGC lien that arises on the date of an underfunded plan's termination applies to all assets of a controlled group that includes the sponsor of the underfunded plan, and all members of a controlled group are liable for the payment of contributions to pension plans.3

The liability of a controlled group member for pension obligations under ERISA is joint and several. Because of this joint and several liability, the PBGC or a multiemployer plan may seek to recover against any member of the controlled group, including a private equity fund if it is deemed to be part of a controlled group. The PBGC need not look first to the...