Buyer Beware! First Circuit Declines to Hold Purchaser Private Equity Fund Liable for Pension Plan Liabilities but Risks Remain

As fiduciary liability cases wind their way from the initial trial to appeals, they are often subject to analysis from outside parties. Policy think tanks, large plan providers, and other entities who will be impacted by the outcome of the case like to review and sometimes even submit comments regarding the impacts of a particular decision one way or the other on the part of the courts.

Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund

Over the last 11 years, Sun Capital Partners has been one such case to receive scrutiny. In this case, Sun Fund IV owned 70% of Scott Brass, Inc. Sun Fund III and IV owned the remaining 30%. Each of these funds (collectively, “the Funds”) was owned by a general partner and shared the same limited partnership committee which included two people who were also the advisors for the two funds. When Scott Brass, Inc. filed for bankruptcy and withdrew from the pension fund for the New England Teamsters, it incurred a $4.5 million withdrawal liability.

Under ERISA, this type of withdrawal liability implicates joint and several responsibility of each member in a “controlled group.” A “controlled group” is, broadly, entities that have common ownership of at least 80% with another entity. There is a complex set of IRS rules for determining whether entities form a controlled group for purposes of ERISA liabilities. The question in Sun Capital Partners turns on whether, for the purposes of ERISA, private equity investments could be considered a trade or business and thus an entity in a “controlled group.”

Court Decisions

Initially, the Massachusetts District Court in Sun Capital Partners held that the investments did not constitute a “trade or business” and thus the Funds did not create a controlled group for ERISA liability purposes and thus were not liable for the withdrawal liability. This reasoning was overturned on appeal by the First Circuit in 2013. The appeals court set forth an “investment plus” test to determine whether the Funds were passive or active investors and thus their resultant liability. Their analysis focused on facts and circumstances and found that there was a fee offset arrangement between the Funds and their portfolio companies. This, they held, was enough to satisfy their investment plus standard.

While the District Court then clarified the “investment plus” test, they also made a partnership-in-fact finding. The court found that the decision to split the ownership so that neither party owned 80% of the company was, in itself, evidence of joint management. This ruling was overturned by the First Circuit.

The back and forth in this case, including the various new standards and tests set out by the appeals court, is what is so closely watched by the industry. The experienced team at Hall Benefits Law watches court decisions, as well as analysis by other big players and thinkers in the benefits industry, to help guide our clients to both avoid liability and put in processes to manage plans and plan liability in a compliant fashion. Learn more by calling 678-439-6236 or visiting the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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