PE Investor's Pension Liability Ruling Reversed

A federal appeals court reversed a district court ruling that a private equity firm is not liable for the pension debt of one of the companies in which it invests.

In the case of Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund, the 1st U.S. Circuit Court of Appeals ruled that the U.S. District Court for the District of Massachusetts should carry out further factual development and proceedings on the topic of common control. The appeals court did, however, find that the district court was correct to enter summary judgment in favor of the private equity funds on the claim of liability on the ground that the funds had engaged in a transaction to evade or avoid withdrawal liability.

According to the appeals court, “This case presents important issues of first impression as to withdrawal liability for the pro rata share of unfunded vested benefits to a multiemployer pension fund of a bankrupt company, here, Scott Brass, Inc.” In October 2008, Scott Brass, Inc., a member of the New England Teamsters and Trucking Industry Pension Fund, stopped making contributions to the fund and according to the court “in doing so became liable for its proportionate share of the [Fund’s] unfunded vested benefits” under the Multiemployer Pension Plan Amendments Act of 1980.

In November 2008, a Chapter 11 bankruptcy proceeding was brought against Scott Brass, Inc., and Sun Funds asserted that they “lost the entire value of their investment” in the company as a result of this bankruptcy. In December 2008, the pension fund demanded payment of estimated withdrawal liability from Scott Brass, Inc., as well as demanding that Sun Funds pay Scott Brass’ liability, calculated as just over $4.5 million. The fund “asserted that Sun Funds had entered into a partnership or joint venture in common control with Scott Brass and were therefore jointly and severally liable for Scott Brass’ withdrawal liability” under Section 1301(b)(1) of the Multiemployer Act.

In June 2010, Sun Funds filed declaratory judgment action in federal district court in Massachusetts, seeking a declaration that they were not subject to this withdrawal liability because they “were not part of a joint venture or partnership and therefore did not meet the common control requirements.” The pension fund counterclaimed against this.

The district court issued a memorandum and order in October 2012, granting summary judgment to Sun Funds, basing its decision on other factors in the statutory test, rather than the common control issue.

In making its decision to remand the case back to the district court over the common control issue, the appeals court cited the statutory test in the Multiemployer Act, which was mentioned in the case of McDougall v. Pioneer Ranch Ltd. Partnership, namely that “to impose withdrawal liability on an organization other than the one obligated to the pension fund, two conditions must be satisfied: 1) the organization must be under common control with the obligated organization and 2) the organization must a trade or business.”

In 2012, the district court had ruled that Sun Capital Partners was not liable for the pension debt of Scott Brass because it did not fall under these categories (see “PE Investor Not Liable for Firm’s Pension Debt”).

The full text of the court’s opinion can be found here.