Private Equity Funds Liable for Bankrupt Company’s Withdrawal Obligation

Sun Capital Partners court found that the private equity fund actively participated in the management of its portfolio company

In a recent and significant ruling from the First Circuit, Sun Capital Partners III, L.P. et al. v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312, 2013 WL 3814985 (1st Cir. July 24, 2013,) the court has determined that private equity funds can be held liable for its bankrupt portfolio company’s withdrawal obligation, as imposed under the Employment Retirement Income Security Act (ERISA).  As reported by The National Law Review, the ruling was made on the basis that a private equity fund may constitute a “trade or business” under the legislation’s controlled group determination.

Private Equity Fund

“As a threshold matter, in order for a controlled group to exist between a private equity fund and its portfolio company, two conditions must be satisfied: (1) the private equity fund must be a trade or business, and (2) the private equity fund must be under “common control” with the portfolio company. Historically, the prevailing viewpoint had been that private equity funds were not carrying on “trades or businesses”, and therefore, were not treated as members of the same controlled group with their portfolio companies, even though the common control prong was met. In Sun Capital Partners, by rejecting the private equity fund’s argument that it was not carrying on a “trade or business,” the First Circuit opened the door for ERISA pension underfunding liabilities of portfolio companies to reach the private equity funds that own them.”