In a decision that will have significant repercussions for private equity sponsors and their portfolio companies, the United States District Court for the District of Massachusetts has found a private equity sponsor liable for the unfunded pension obligations of a bankrupt portfolio company that it had acquired through two separate investment funds. The case is Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 10-10921-DPW.

Despite the use of a common investment structure designed to avoid such a result, the court ruled against the private equity sponsor on two critical issues under ERISA. First, applying the “investment plus” test articulated by the First Circuit in 2013, the court found that the investment funds in question constituted an active “trade or business” (rather than a passive investment vehicle). Second, the court found that by virtue of their coordinated activities and hands on involvement with their portfolio investment, the two funds were a “partnership-in-fact,” even though the funds were formed as separate legal entities, with different investors, and different portfolio investments. Finding a partnership existed among the two funds allowed the court to aggregate their equity interests to satisfy the statutory threshold of 80% ownership in the portfolio company, making the funds jointly and severally liable under ERISA for a $4.5 million funding shortfall in the portfolio company’s multiemployer pension plan.