On March 28, 2016, the U.S. District Court – District of Massachusetts issued a much-anticipated ruling on remand in Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, holding that two non-parallel private equity funds formed a “partnership-in-fact” and conducted a “trade or business” and, as such, were jointly and severally liable for multiemployer pension plan withdrawal liability triggered by a portfolio company of the two funds.
The case presented issues of first impression involving the imposition of a portfolio company’s withdrawal liability obligations on two private equity funds that had invested in the bankrupt company, owning respectively 30% and 70% of the company.
Under ERISA, multiemployer withdrawal liability is imposed on an entity other than the contributing employer if such entity is under “common control” with the employer and is a “trade or business.” The pension fund asserted that the funds were also liable for the withdrawal liability because they were engaged in a trade or business under common control with the portfolio company. Conversely, the equity funds argued that they were mere passive investors that had indirectly controlled and tried to turn around the struggling company.
In 2013, the First Circuit Court of Appeals applied an “investment plus” standard (i.e., passive/active management of portfolio company and level of economic benefit received), ultimately holding that one of the funds was engaged in a trade or business and remanding to the District of Massachusetts District Court for a factual determination with respect to the second fund.
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On remand, applying the “investment plus” standard, the District Court found that the second fund was also a trade or business. The court held that the two equity funds were therefore jointly and severally liable for the portfolio company’s withdrawal liability obligations as under common control with the company (i.e., combined ownership of at least 80%).
In reaching its decision, the court reasoned that the two equity funds were engaged in a single “partnership” notwithstanding that the two funds had separate lifecycles and investors, had separate financial statements and bank accounts, were not parallel funds, and had, for the most part, different portfolio companies. Just as troubling is the court’s acknowledgment that the two funds had expressly stated in the operating agreement of the LLC that they did not intend the investment overlap to constitute a partnership or joint venture.
This is a critical decision for private equity funds that have portfolio companies (or are considering investing in companies) that contribute to multiemployer pension plans. The decision is likely to spur more litigation on the “trade or business” question in other circuits, as more pension funds seek to collect on withdrawal liability from private equity funds as deep pockets. Of course, whether other circuit courts adopt the Sun Capital rationale and conclusions remains to be seen.
For more information, please contact Myriem Bennani at (262) 956-6227 or email@example.com, Erik Eisenmann at (414) 978-5371 or firstname.lastname@example.org, or another member of the Employee Benefits Team.