District Court Rejects PBGC Opinion that Sought to Impose Pension Liabilities on Private Equity Funds: A Recent U.S. District Court Decision Rejects the 2007 PBGC Opinion that Sought to Hold Private Equity Funds Liable for the Unfunded Pension Liabilities of their Portfolio Companies

Sullivan & Cromwell LLP - November 12, 2012

In a recent case, Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund, the U.S. District Court of Massachusetts has specifically rejected the PBGC’s position that private equity funds are jointly and severally liable for the pension liabilities of their portfolio companies under the Employee Retirement Income Security Act of 1974 (“ERISA”). Under ERISA, members of a controlled group of trades or businesses are jointly and severally liable for the pension liabilities of any member of the group. Prior to 2007, based on well-established case law, a private equity fund and its portfolio companies generally were not considered a controlled group for this purpose, because the activities of a typical fund do not constitute a “trade or business” under these rules. In 2007, however, the Pension Benefit Guarantee Corporation issued an opinion (the “PBGC Opinion”) imposing the underfunded pension liability of a portfolio company on a private equity fund, concluding that the investment activities of the private equity fund constituted a trade or business and, as a result, the fund and the portfolio company were members of a controlled group. Although many practitioners believed the PBGC Opinion was incorrect—either because it directly contradicted governing authorities or because the PBGC lacked interpretative authority—since 2007, the opinion has created uncertainty regarding a private equity fund’s exposure to the pension liabilities of its portfolio companies. Although further developments can be expected (the New England Teamers and Trucking Industry Pension Fund has filed a notice of appeal with respect to the decision), the Sun Capital decision has reaffirmed the legal basis for concluding that a private equity fund generally should not be liable for the pension liabilities of its portfolio companies.