Private equity funds not accountable for pension withdrawal liabilities.

Byline: Eric T. Berkman

Two private equity funds that co-owned a manufacturer that went bankrupt were not responsible for pension fund withdrawal liability the company incurred at the time of its bankruptcy, the 1st U.S. Circuit Court of Appeals has found.

Plaintiffs Sun Capital Partners III, LP (Sun Fund III) and Sun Capital Partners IV, LP (Sun Fund IV), held respective 70- and 30-percent ownership stakes in manufacturer Scott Brass, Inc. When Scott Brass went bankrupt, it withdrew from defendant New England Teamsters & Trucking Industry Pension Fund, resulting in the company owing $4.5 million for its proportionate share of the plan's unfunded pension liabilities.

A U.S. District Court judge determined that the plaintiffs were an implied "partnership-in-fact" consciously structured so that each remained below the 80-percent ownership threshold that triggers responsibility under ERISA for a portfolio company's pension withdrawal liability.

[box type="shadow" align="alignright" width="325px"]Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, Lawyers Weekly No. 01-247-19 (25 pages)

THE ISSUE: Was a pair of private equity funds that co-owned a manufacturer that went bankrupt responsible for pension fund withdrawal liability owed by the company at the time of its bankruptcy?

DECISION: No (1st U.S. Circuit Court of Appeals)

LAWYERS: John C. O'Quinn and Devin A. DeBacker, of Kirkland & Ellis, Washington, D.C.; John F. Hartmann of Kirkland & Ellis, Chicago; Theodore J. Folkman of Pierce, Bainbridge, Beck, Price & Hecht, Boston (plaintiffs)

Catherine M. Campbell, Melissa A. Brennan and Renee J. Bushey, of Feinberg, Campbell & Zack, Boston (defense)[/box]

Accordingly, the judge held the plaintiffs jointly and severally liable under the federal Multiemployer Pension Plan Amendments Act.

But the 1st Circuit reversed, holding that the two private equity funds were not a partnership-in-fact under the factors laid out in Luna v. Commissioner, a 1964 decision from the U.S. Tax Court.

Specifically, the 1st Circuit found that while the funds were controlled by the same two individuals, who coordinated to identify, acquire and sell portfolio companies like Scott Brass, the funds operated as distinct business entities with primarily different investors and investments.

"The district court held that there was an implied partnership-in-fact which constituted a control group. We reverse because we conclude the Luna...