Court Holds Fund Can Be Liable for Obligations of Bankrupt Portfolio Company
In Sun Capital Partners, III, L.P., et al. v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312, 2013 WL 3814985, the First Circuit held that a private equity fund may be liable for its bankrupt portfolio company’s pension fund withdrawal liability under Title IV of ERISA. The First Circuit is the first Court of Appeals to address whether a private equity fund can be liable for the pension obligations of one of its insolvent portfolio companies.
ERISA generally requires employers that withdraw from a union-sponsored pension plan (known as a “multiemployer plan”) to pay a proportionate share of the plan’s funding obligations for vested but unfunded benefits accrued by the employer’s union employees. Under ERISA “controlled group” rules, withdrawal liability is imposed jointly and severally among a contributing employer and each “trade or business” under common control with the contributing employer.
In Sun Capital Partners, a pension fund guaranty company asserted that the private equity fund was in the controlled group with its portfolio company. Two conditions must be present for a control group to exist between a private equity fund and its portfolio company:
· The private equity fund must be a “trade or business”
· A private equity fund must be under “common control” with the portfolio company
Private equity funds are traditionally viewed as not engaging in “trades or business.” The First Circuit rejected this position, however, finding that the private equity fund could be in the controlled group because the fund actively participated in the management of its portfolio company through affiliated entities. The Court held that the private equity fund
· Received management and consulting fees through its affiliates
· Received a direct economic benefit in the form of offsets against the management fees it would
have otherwise paid to its general partner
The private equity fund’s partnership agreement also factored in the First Circuit’s decision. The agreement provided the fund’s general partner with authority to provide management services to portfolio companies. The First Circuit remanded to the District Court to determine whether a control group existed.
In light of Sun Capital, private equity funds and other pooled investment vehicles should carefully consider the pension plan funding obligation of targeted portfolio companies. Private equity funds should also consider how to structure their investments in portfolio companies to address ERISA controlled group rules, such as how it manages portfolio companies and how it collects management fees.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.