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Ruling advances withdrawal liability of private equity portfolio companies

A U.S. District Court this week advanced a long-running legal dispute over whether private equity firms could be liable for pension liabilities of portfolio companies and related costs.

The case, brought by New England Teamsters & Trucking Industry Pension Fund, Burlington, Mass., against several Sun Capital Partners Inc. funds, has bounced back and forth between the District Court and the 1st U.S. Circuit Court of Appeals in Boston over the question of whether two Sun Capital funds were actively engaged as a trade or business in a now-bankrupt portfolio company, Scott Brass Inc., which owed $4.5 million in withdrawal liability to the pension fund.

In March 2016, U.S. District Judge Douglas Woodlock in Boston ruled that "substantial overlap" between the two funds' operations made them liable for payment, and the appeals court agreed. Sun Capital appealed that decision but lost a bid to have the U.S. Supreme Court review the case, which now will progress to the 1st Circuit to settle other questions.

In the order issued Monday, Mr. Woodlock agreed with the pension fund's request for additional payment of interest, damages and attorneys' fees on the basis that withdrawal liability and related costs in such cases are covered by the Employee Retirement Income Security Act. He also acknowledged that the result "disrupts hopeful expectations by the private equity plaintiffs in this case and other similar settings where withdrawal liability might be asserted against them."

The private equity funds "chose in their calculus of risk and return to structure their business to breach what the 1st Circuit accurately characterized as 'fine lines'… governing the circumstances in which withdrawal liability will be imposed on those who invest in distressed businesses," Mr. Woodlock wrote in the order, calling the effort to avoid ERISA obligations risky.

"Its choice has resulted in a diminished return for their investments. Any recalibration of the reasonable expectations of investors in companies with ERISA obligations must come from some source other than the courts applying current applicable law," he said.