Private Equity Funds Held Liable for Pension Liabilities of a Portfolio Company: Following Remand by the First Circuit, District Court Rules That Two Affiliated Private Equity Funds Formed a “Partnership-in-Fact” and Had Controlled Group Liability for the Pension Liabilities of Their Portfolio Company

Sullivan & Cromwell LLP - March 31, 2016

In the latest development in the Sun Capital litigation, on March 28, 2016, following remand from the First Circuit, the District Court for the District of Massachusetts held that Sun Capital funds with substantially different investor bases and investment portfolios formed a deemed “partnership-in-fact” with respect to a bankrupt portfolio company in which each fund was a co-investor and, as a consequence, the funds had controlled group liability under ERISA for the defined benefit pension liabilities of the portfolio company, even though neither fund, standing alone, was an 80-percent owner of the company.

As discussed in more detail below, this decision may have broad impact within the private equity industry.  If the reasoning adopted by the courts in the Sun Capital cases is broadly applied in other circuits, private equity funds could become directly liable for the pension liabilities of certain of their portfolio companies.  In addition, it is possible that the District Court’s decision could be applied to cause portfolio companies in which affiliated funds have co-invested to become liable for the pension liabilities of other such portfolio companies (although the scope of the opinion is not entirely clear in this regard).