Seyfarth Synopsis: The First Circuit reversed a district court’s ruling holding two Sun Capital private equity (PE) funds responsible for the withdrawal liability incurred by a bankrupt portfolio company. The Circuit Court found that because the two PE funds were not acting in partnership with each other, neither was responsible for the portfolio company’s withdrawal liability, and vacated an award of nearly $9.4 million to a union pension fund. Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370 (1st Cir. Nov. 22, 2019)

In a 2013 decision, the District Court of Massachusetts found that the two Sun Capital PE funds were not only engaged in “trade or business,” but also were a partnership acting under “common control” with a bankrupt portfolio company, and therefore, liable for the portfolio company’s $4.5 million withdrawal liability to a multiemployer pension plan incurred upon its bankruptcy. Under ERISA, the common control standard is met if there is an 80% ownership interest. The district court found that even though the two PE funds had individual investment stakes in the portfolio company of only 70% and 30% respectively, they were acting as a partnership and so their ownership interests should be aggregated, thereby exceeding the 80% threshold.

The PE funds appealed the decision and the First Circuit reached its decision just last week: no partnership, no common control, no withdrawal liability. The First Circuit applied factors derived from an old tax court case, Luna v. Commissioner, and concluded that the PE funds’ activities did not rise to the level of a partnership. Among the factors considered, the PE funds were not acting in concert when making investments, conducted business under separate names, filed separate tax returns, kept separate books, and disclaimed any sort of partnership. The court also noted the fact that the PE Funds were formed as LLCs further demonstrated an intent not to form a partnership.

Importantly, the court stated that it was reluctant to impose withdrawal liability on the PE funds when there was no clear congressional intent to do so, and no guidance from the PBGC.

But beware: While this is a significant victory for PE funds in general, the court’s decision was very fact specific, and it did not “reach other arguments that might have been available.” It will be interesting to see if other circuit courts follow this precedent.