First Circuit Court of Appeals Holds That Private Equity Funds Can Be Liable for Pension Liabilities of Portfolio Companies: First Circuit Holds that a Private Equity Fund Can Be a Member of an ERISA Controlled Group with its Portfolio Companies, and Thus Potentially Be Subject to Pension Liabilities of Portfolio Companies

Sullivan & Cromwell LLP - July 30, 2013
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On July 24, 2013, in Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund, the U.S. Court of Appeals for the First Circuit ruled that a private equity fund was a “trade or business” that could be part of a controlled group with its portfolio companies for purposes of ERISA controlled group liability. If the decision is upheld and followed, a private equity fund could become liable for the pension liabilities of its controlled portfolio companies, and each such portfolio company could potentially become liable for the pension liabilities of the fund’s other controlled portfolio companies.

While the opinion contains analysis of the appropriate definition of a “trade or business” for purposes of ERISA, the opinion also cites and discusses authorities that address what constitutes a “trade or business” for income tax purposes. Nonetheless, while not entirely clear, it does not appear that the First Circuit intended to extend its holding beyond ERISA.