April 04, 2016
The most recent Sun Capital decision is a troubling development for private equity fund sponsors and will likely require a “rethink” of fund structuring when private equity funds own portfolio companies with significant underfunded or contingent pension liabilities.
In the earlier decision Sun Capital Partners III, L.P. v. New England Teamsters & Trucking Indus. Multiemployer Plan, 724 F.3d 129 (1st Cir. 2013) (“Sun II”), the Court of Appeals for the First Circuit determined that one of the two private equity funds involved in the case (collectively, the “Sun Funds”) operated as a “trade or business” for purposes of ERISA. However, the Court of Appeals remanded the case back to the district court in order to determine whether the second Sun Fund was a “trade or business,” and whether the two Sun Funds together were under “common control” with Scott Brass, Inc. (“Scott Brass”), the bankrupt portfolio company previously owned by the two funds.
On March 28th, on remand, the District Court of Massachusetts in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 10-10921-DPW (D. Mass. 2016) (“Sun III”) held that the two Sun Funds were liable for the unfunded vested benefits owed to the New England Teamsters and Trucking Industry Pension Fund (the “Multiemployer Plan”) by Scott Brass. In reaching its decision, the district court concluded that both Sun Funds were engaged in a “trade or business” and that the two Sun Funds constituted a “partnership-in-fact,” thereby allowing aggregation of their ownership of Scott Brass for purposes of ERISA’s “common control” test.