Corporate > AG Deal Diary > Appeals Court Finds Private Equity Fund Constitutes a “Trade or Business” for Multiemployer Plan Withdrawal Liability Purposes
05 Sep '13

On July 24, 2013, the First Circuit Court of Appeals held that a Sun Capital Partners (“Sun Capital”) private equity fund constituted a “trade or business” for multiemployer plan withdrawal liability purposes.  This court ruling is particularly important for funds (alone or together with affiliates) that could satisfy “common control” for a portfolio company with underfunded pension liabilities.  Although the “common control” analysis is complex, generally two entities will be under common control if one entity owns 80 percent or more of the other entity or when five or fewer persons directly or indirectly own 80 percent or more of two or more entities and have effective control over each entity. 

The issue arose in connection with a claim by New England Teamsters and Trucking Industry Pension Fund, which argued that investment funds managed by Sun Capital were responsible for pension liabilities for one of its bankrupt portfolio companies.  Private equity funds have previously asserted that no liability accrued to their funds because private equity funds were not involved in a “trade or business” — one component of “control group” liability under ERISA.  ERISA imposes joint and several liability for certain pension plan liabilities for each member of the controlled group. A controlled group is generally two or more trades or businesses that are under common control.

The court’s conclusion that the funds were involved in a trade or business hinged on (i) the active management of the fund’s portfolio company by the fund’s general partner and (ii) the economic benefit realized by the fund as a result of management fees paid to the general partner.  The Court focused on the direct and indirect active involvement in the portfolio company’s operation and management.  Further, the Court identified the direct economic benefit realized by the fund that an ordinary, passive investor would not generally derive — management fees.  The court did not determine whether the Sun Capital funds were under common control.