On March 28, 2016, on remand from the First Circuit, the United States District Court for the District of Massachusetts held that Sun Capital Fund III and Sun Capital Fund IV were jointly and severally liable for the multiemployer pension plan withdrawal liability of their bankrupt portfolio company, despite the fact that these funds were not parallel investment funds, generally had different investors and neither fund individually held an 80% or greater ownership interest in the portfolio company. Under the Employee Retirement Income Security Act or “ERISA”, an entity such as a corporation or a partnership engaged in a trade or business may have liability for pension liabilities of other entities in the same “controlled group”. Although the rules are complicated and technical, entities that are under 80% or more common control with each other will generally be considered to be in the same controlled group for these purposes. In the Sun Capital case, the District Court concluded that the funds’ coordinated efforts in forming the limited liability corporation through which they held their respective investments resulted in the funds having formed an undocumented general partnership-in-fact that was engaged in a trade or business. As the 100% owner of the LLC formed by the funds, such de facto partnership was found to be in the portfolio company’s controlled group and its partners, the two funds, were held to be joint and severally responsible for the withdrawal liability of the portfolio company under general partnership unlimited liability principles.
This decision could have important implications for private equity fund investments in businesses that sponsor underfunded pension plans or that contribute to union-sponsored defined benefit pension plans – please be on the lookout for our upcoming memorandum analyzing in greater detail the ruling and outlining some practical considerations arising from this case.
If you have any questions, please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under “Executive Compensation and ERISA” in the “Practices” section of our website at (http://www.clearygottlieb.com).