Partner Andrew Kassner and senior attorney Joseph Argentina have written “No Private Equity Fund Responsibility for Company’s Pension Withdrawal Liability,” published in The Legal Intelligencer on December 6, 2019.
Two funds established by private equity firm Sun Capital Advisors, Inc. (SCAI) owned brass manufacturing company SBI as a direct subsidiary, through intermediary companies: one owning 30% and the other owning 70%. SBI formed and financed its own subsidiary, and then combined the funds’ $3 million investment with $4.8 million in debt to purchase all of SBI’s stock. The funds through their employees jointly operated SBI, which filed for bankruptcy in 2008 and withdrew from the New England Teamsters & Trucking Industry Pension Fund. The withdrawal caused SBI to incur $4,516,539 in liability.
The Multiemployer Pension Plan Amendments Act of 1980 imposes joint and several withdrawal liability not only on withdrawing employers, but also on all entities under “common control” with the employer and that qualify as engaging in “trade or business.” On remand from a 2013 decision of the First Circuit, the U.S. District Court for the District of Massachusetts held that the funds and SBI were under common control and imposed liability on the Sun Capital Funds. The funds appealed the decision to the First Circuit.
However, the First Circuit found the funds did not intend to join together to control SBI, at least beyond the intermediate holding company that owned SBI. The opinion notes the funds’ creation of a holding company to act as the immediate parent of SBI also showed an intent not to form a partnership, although creation of an intermediate holding company did not act as a per se bar to liability. Here, the intermediary holding company limited the funds’ mutual control over and assumption of mutual responsibilities for managing SBI. The decision of the district court was reversed, and the appellate court ordered summary judgment in favor of the funds.
The First Circuit’s 2019 decision provides some comfort to the private equity sector, but it remains unclear how and when courts will impose withdrawal liability on private equity funds in the future.