In 2007, the U.S. Pension Benefit Guaranty Corporation (PBGC) created a furor in the investment and employee benefits worlds when it issued an advisory opinion finding that a private equity fund that owned at least 80% of a portfolio company could be liable for the portfolio company’s plan termination underfunding under Title IV of the U.S. Employee Retirement Income Security Act (ERISA).

ERISA provides that if the requisite ownership exists, all trades or businesses that are part of a controlled group of corporations or group of commonly controlled trades or businesses are jointly and severally liable for this underfunding, which means that all of the liability can be assessed against any group member. However, this was the first time that the PBGC had publicly made a determination that a private equity fund was a trade or business.

Many practitioners thought the PBGC opinion was wrong, given that PBGC is supposed to follow Internal Revenue Service (IRS) rules in making these determinations. They thought the PBGC opinion was inconsistent with IRS authority as to when investment activities constitute a trade or business. On October 18, a federal district court judge in Massachusetts agreed with these critics.

This 2012 case, Sun Capital Partners v. New England Teamsters and Trucking Industry Pension Fund, Civ. Action No. 10-10921-DPW, 2012 U.S. Dist. Lexis 150018, involved an assessment of multi-employer plan withdrawal liability against the Sun Funds. (Multi-employer liability is assessed under the same controlled group rules as the termination liability discussed in the PBGC opinion.)

One Sun Fund owned 70% and another Sun Fund owned 30% of the company, Scott Brass. After Scott Brass withdrew from the Fund and filed for bankruptcy, the Pension Fund sought to collect withdrawal liability payments from the Sun Funds, relying on the PBGC opinion. They also argued that the Court should ignore the 70/30 ownership split under a separate provision that ignored transactions intended to avoid or evade withdrawal liability, which usually requires at least an 80% ownership interest.

In dismissing the claims against the Sun Funds, the Court made the following findings:

  1. The PGBC opinion was not entitled to deference because it was “unpersuasive” and conflicted with U.S. Supreme Court authority.
  2. The Sun Funds were not trades or businesses. They had no employees or offices; they were simply passive pools of investment capital managed by a general partner.
  3. A decision by an investor to obtain less than an 80% interest in a business is not a decision to evade or avoid ERISA liability.

This is only one district court decision, and it should be noted that the PBGC was not a party to this suit, since it does not collect withdrawal liability under the statutory scheme. Nor is there any indication that PBGC filed an amicus brief related to this case. While the decision is not technically binding outside the district of Massachusetts, it is a well-reasoned decision that may well be followed by other federal courts and cited in response to multi-employer funds and the PBGC. However, it is clearly not the final word on this issue, and investment funds should continue to be cautious about ERISA when they acquire an 80% interest in portfolio companies.