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


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.


ERISA imposes joint and several liability for pension liabilities on any entity under common control with the sponsor of the pension plan (e.g., underfunded termination liabilities, PBGC termination premiums and minimum contribution requirements for single-employer plans and withdrawal liabilities from multi-employer plans, etc.). ERISA does not itself define "common control" but requires that the term be interpreted "consistent and coextensive" with regulations under the Internal Revenue Code (the "Code") applicable to tax-qualified plans. These regulations generally provide that a group of entities will be treated as under common control if they are "trades or businesses" with common ownership of 80% or more (by vote or value). In this regard, the Supreme Court has long held that investment activities generally do not constitute a trade or business for tax purposes, even when considerable time and resources are devoted to the activity.1

In the PBGC Opinion, however, the PBGC opined that a private equity fund was engaged in a trade or business because it had a stated purpose of seeking a profit and it pursued this activity with continuity and regularity (a fact inferred by the PBGC from the size of the fund). Notwithstanding the fact that the funds at issue had no assets or income other than investments in portfolio companies, the PBGC attempted to distinguish the Supreme Court precedent by asserting that the Supreme Court cases applied to an individual acting on his own behalf and receiving solely an investment return, but not a partnership like a private equity fund. In particular, although its reasoning is not entirely clear, the PBCG argued that the private equity fund at issue was engaged through its general partner (acting as agent for the Fund) in providing investment management services, hiring other advisers, distributing investment returns and receiving fees and compensation for services (e.g., fees for services and a 20% promote). As a result, since 2007, the PBGC Opinion has created uncertainty as to the extent of a private equity fund’s exposure to the pension liabilities of its portfolio investments. In this regard, we note that this same analysis could further be applied to hold a portfolio company jointly and severally liable for the pension liabilities of sibling portfolio companies.

In the recent Sun Capital case, two affiliated private equity funds ("Sun Capital") owned 70% and 30% of a bankrupt portfolio company (the sole investment of each fund) with an unpaid withdrawal liability to the New England Teamsters and Trucking Industry Pension Fund (the "Teamsters Pension Fund"). Each fund had a general partner and also received services from a management company affiliated with the sponsors of the funds. Sun Capital sought summary judgment that it was not a member of the portfolio company’s ERISA controlled group and, accordingly, had no liability to the Teamsters Pension Fund. The Teamsters Pension Fund sought a contrary summary judgment on the basis of the PBGC Opinion.

The District Court granted summary judgment to the Sun Capital funds, specifically rejecting the analysis in the PBGC Opinion (referring to it as an "errant agency decision"). The court held that the PBGC misunderstood the law of agency and incorrectly imputed the activities of the general partner to the Sun Capital funds. The court also ruled that the PBGC Opinion, by attempting to limit the Supreme Court decisions to investments made by individuals, was "in direct conflict with governing Supreme Court precedent, not to mention Tax Code interpretations [the PBCG] is bound to follow." Next, in its independent review of the Sun Capital funds, the court held that the funds were not trades or businesses, having made a single investment, having no employees or office space, not making or selling any goods and earning only dividends and capital gains. In reaching this conclusion, the court held that activities taken by the funds as a shareholder (appointing directors, receiving information, interviewing management candidates and advising with respect to budgets and other matters) did not create a trade or business. Last, the court rejected the Teamsters Pension Fund’s argument that Sun Capital’s decision to divide its ownership of the portfolio company among two funds 70/30 (and thus avoid the 80% control threshold for either fund) was done to impermissibly evade or avoid pension liability—even though minimizing pension liability was one of Sun Capital’s reasons for doing so. The Teamsters Pension Fund has filed a notice of appeal with respect to the decision.

Although the decision likely will not represent the last word on this issue on account of the pending appeal and the potential for other similar cases, the Sun Capital decision serves to reaffirm the longstanding legal basis for concluding that a private equity fund generally should not be liable for the pension liabilities of its portfolio companies.