In a case of first impression at the U.S. appellate court level, the First Circuit Court of Appeals addressed whether a private equity fund can become liable under ERISA for the underfunded pension plan of a bankrupt portfolio company. The case arose after a union-sponsored pension plan sued the portfolio company and private equity firm seeking to collect the portfolio company's fair share of the underfunded pension plan.

Under ERISA, pension plan underfunding liability is imposed on a joint and several basis on the portfolio company and on all "trades or businesses" in a "controlled group" with the portfolio company. The union-sponsored pension plan claimed that the private equity fund was a "trade or business." The private equity fund argued that it was a passive investor in the portfolio company, rather than a trade or business for purposes of ERISA. The court determined that the private equity fund was a "trade or business" due to its significant involvement in the management and operation of the portfolio company. In making such determination, the court also found significant that an affiliate of the general partner of the private equity fund collected a management fee from the portfolio company.

The court remanded the case to the lower court for a determination of whether the private equity fund was under common control with the portfolio company. Absent a common control finding, the private equity fund would not be liable under ERISA for the underfunded pension plan.

Sun Capital Partners III, LP, et al. v. New England Teamsters and Trucking Industry Pension Fund, No. 12-2312 (U.S. Ct. of App. (1st Cir.) July 24, 2013)