ERISA-First Circuit Rules That Investment Fund Could Be Liable For The Withdrawal Liability Of A Portfolio Company

In Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312 (1st Cir. 2013), the First Circuit Court of Appeals (the “Court”) was presented with the issue as to whether the withdrawal liability to a multiemployer pension plan (the “Plan”) of a bankrupt company, here, Scott Brass, Inc. (“SBI”) could be imposed on two private equity funds that had invested in and had operated SBI. The private equity funds had argued that they were merely passive investors, and so could not be aggregated with SBI for purposes of imposing the withdrawal liability on them.

In order to be aggregated with SBI for such purposes, the private equity funds must satisfy the two prong “control group” test, under which they must (1) be a “trade or business” and (2) be under “common control” with SBI. As to prong (1), the Court concluded that at least one of the private equity funds which operated SBI, albeit through layers of fund-related entities, was not merely a “passive” investor, but sufficiently operated and managed SBI, and was advantaged by its relationship with its portfolio company, the now bankrupt SBI. Thus, that fund was a “trade or business” , meeting prong (1). The Court further concluded that factual development is necessary as to whether the other equity fund is a “trade or business”.

Also, the Court ruled that the district court needed to develop facts to determine whether the private equity funds met prong (2). As such, the Court remanded the case back to the district court for further factual development on these matters. The Court did rule, however, that the district court was correct to enter summary judgment in favor of the private equity funds on the Plan’s claim of liability, on the ground that the funds had engaged in a transaction to evade or avoid withdrawal liability.

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