First Circuit Finds Private Equity Partnerships Can be Liable for Employer's Withdrawal Liability

by Littler

On July 24, 2013, the U.S. Court of Appeals for the First Circuit reversed a Massachusetts district court in a widely-watched case addressing whether private equity partnerships are "trades or businesses" for purposes of liability under Title IV of ERISA.  The First Circuit held in Sun Capital Partners III, L.P. v. New England Teamsters & Trucking Ind. Pension Fund that where the management company affiliated with the two investing private equity funds engaged in active management of the contributing employer, an investing fund was more than a mere passive investor, and therefore was engaged in a trade or business.  This case is significant for private equity investors holding interests in companies with unfunded pension liabilities, since the holding applies equally to single employer plan terminations as well as multiemployer plan obligations.

Two private equity partnerships, both of which were managed by Sun Capital, invested (through a holding company) in SBI, a troubled business with an obligation to contribute to the New England Teamsters Fund. One partnership held 70% of the holding company shares, and the other partnership held 30%.  The management company affiliated with the partnerships provided significant management services to SBI.  Within two years of the purchase of SBI's shares, SBI was bankrupt and liable for over $4 million in withdrawal liability (greater than the total Sun Capital cash investment).  The New England Teamsters Fund sought the unpaid withdrawal liability from the two investing partnerships, which responded by filing a declaratory judgment action in the Massachusetts district court. 

In a well-reasoned opinion widely praised by the investment community, Judge Woodlock held that the activities of the management company could not be imputed to the partnerships, that the partnerships were mere investors,1 and the pension fund could not aggregate the ownership of the two partnerships under the "avoid or evade transaction" rule of ERISA § 4212(c) because that provision is aimed at sellers, not purchasers (and therefore purchasers can structure their ownership in such a way as to avoid creating a controlled group).  The New England Teamsters Fund filed a timely appeal, supported by an amicus brief filed by the Pension Benefit Guaranty Corporation (PBGC) arguing that a contrary Appeals Board opinion it issued should be upheld on the "trade or business" issue.  In that opinion, the PBGC concluded that a private equity fund was a "trade or business" responsible for single employer plan termination liability because its controlling ownership of the company that sponsored the pension plan gave the equity fund control over the operations of that company.

The court of appeals disagreed with the district court's view of the roles the private equity investment funds and the related management committee play.  The First Circuit rejected the partnerships' argument that the Sun Company affiliates' management activities could not be attributed to the partnerships, relying on the court's interpretation of the Delaware laws of agency (because the partnerships were established under Delaware law). The court adopted an "investment plus" standard that had been articulated by the PBGC in its Appeals Board opinion (albeit without deference to that opinion), and found that the activities of the Sun Capital affiliates (attributed to the partnership under the agency doctrine) were sufficient to create a trade or business in the facts of this case – at least with respect to the partnership owning 70% of SBI.  The court considered its "investment plus" standard as comparable to the approach recently applied by the Seventh Circuit in Central States, Southeast & Southwest Areas Pension Fund v. Messina Products, LLC, 706 F.3d 874 (7th Cir. 2013).

In holding that the Sun Capital investment partnership was a trade or business, the court indicated that it was not saying what might constitute a "plus" in any other particular case – characterizing such future determinations as a facts and circumstances question.  In this case, the court noted that the operating documents of the investment partnerships stated that a principal purpose of the partnership was the management and supervision of its investments.  These agreements also gave the general partner of each partnership "exclusive and wide-ranging management authority."  In the view of the court of appeals, the partnership agreements indicated that the primary purpose of the partnerships was "to seek out potential portfolio companies that are in need of extensive intervention with respect to their management and operations, to provide such intervention, and then to sell the companies."  The ownership of the stock (through the holding company) allowed the partnership to place employees of the Sun Capital managing company on the SBI Board of Directors, and to become intimately involved in the operations and management of SBI.  The court explained also that the partnerships' management fees that were payable to the Sun Capital management company were offset by payments made by SBI to the management company for management services – and that this also constituted a "plus" because these offsets would not have arisen from a mere passive investment. Of course, all of these "plus" aspects are typical in many private equity structures.

Ultimately, the court did not decide whether the partnership with the 30% interest in SBI was also a trade or business, but remanded that question to the district court to determine if the partnership obtained any financial benefit from the management fee offset (presumably because as a minority owner, this partnership did not have the ability to engage in active management of SBI – the agency theory therefore applied only to the partnership holding the majority share).  The court also did not decide whether the two partnerships could be aggregated under a common-control theory once the "trade or business" status was determined. 

The court upheld Judge Woodlock's refusal to apply the "avoid or evade" provision of ERISA § 4212(c), but on a different theory.  There was no doubt that one of the purposes of dividing the initial investment in SBI on a 70/30 basis between two investment partnerships was to prevent creation of a controlled group (because of the 80% ownership test for a controlled group under the Internal Revenue Code).  The New England Teamsters Fund argued that this fact was sufficient to allow the two partnerships to be aggregated, so that their other assets could be reached for payment of withdrawal liability.  Without deciding whether creation of the ownership structure in this way was a "transaction" at all, the court looked to the language of § 4212(c) to conclude that even if it applied, it would not help the New England Teamsters Fund.  That section holds that if there is an "avoid or evade" transaction, the withdrawal liability provisions of ERISA are to be applied "without regard to such transaction."  It does not allow the pension fund to create a transaction that never existed.  If the investment of the partnerships in SBI were ignored, there would have been no investment at all and therefore no look-through liability.  Under no circumstances did either partnership ever own 100% of SBI.  To the contrary, the holding company (with the 70/30 split) was created well before the SBI stock purchase agreement was signed, and therefore applying § 4212(c) would not help the pension fund in this case.  The Teamsters Fund argued that because the majority-owning partnership had signed a letter of intent to purchase 100%, applying § 4212(c) would attribute 100% to that partnership.  The court rejected that argument because the letter of intent itself stated that it was not a binding commitment.

This aspect of the decision is quite important to investors considering purchasing a business with substantial withdrawal liability exposure or significantly underfunded single employer plans, because the single employer provisions of ERISA have a similar avoid-or-evade rule.  If the investors sign a binding commitment to purchase the stock of the target business, and then create a structure that transfers more than 20% of the stock to an investor that was not party to the initial commitment, the result could be attribution of the minority share back to the primary investor under the avoid-or-evade rule.  The controlled group issues therefore must be addressed well before any binding commitment is signed.

1 In arriving at this conclusion, the court relied on the U.S. Supreme Court opinion in Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1987), and rejected a contrary opinion of the Appeals Board of the Pension Benefit Guaranty Corporation (PBGC).


Written by:


Littler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.