A long-running case challenging whether private equity firms could be liable for pension liabilities of bankrupt portfolio companies took a new twist Friday when the 1st U.S. Circuit Court of Appeals in Boston unanimously reversed a lower court's ruling that two separate but related private equity funds — Sun Capital Partners III and Sun Capital Partners IV — were jointly and severally liable.
The case originally filed by the New England Teamsters & Trucking Industry Pension Fund seeking $4.5 million in withdrawal liability owed by now-bankrupt portfolio company, Scott Brass Inc., bounced back and forth between the appellate court and the U.S. District Court in Massachusetts over several legal issues, including the degree of control and when ERISA controlled group liability for a multiemployer pension plan withdrawal can be applied.
In this latest development, the appellate court unanimously reversed the lower court's 2016 determination that the two private equity funds were liable because there was an implied partnership-in-fact. The reversal was based on application of eight factors derived from a seminal 1964 Tax Court case regarding identification of tax partnerships, Luna vs. Commissioner. While some facts tend to support the lower court's conclusion, "consideration of all the (Luna) factors leads to the opposite conclusion ... and we cannot conclude that Congress intended to impose liability in this scenario," Judge Sandra Lynch wrote. "We are reluctant to impose withdrawal liability on these private investors because we lack a firm indication of congressional intent to do so and any further formal guidance from PBGC," wrote Ms. Lynch, who also noted that "the issues raised involve conflicting policy choices for Congress or PBGC to make."
Officials at the Pension Benefit Guaranty Corp. have argued since 2007 that private equity funds are "trades or businesses" that should be held liable for pension withdrawal liability. Ms. Lynch noted that this latest decision does not address the trade or business issue.
A client alert from Kirkland & Ellis described last week's decision as welcome news but cautioned that the appellate court "clearly indicated that the decision is highly fact-specific, and an adverse finding could occur if the facts are appropriate." The decision is only binding in the 1st Circuit, and "it is also possible that the PBGC and/or Congress will accept the First Circuit's invitation to implement (possibly adverse) guidance or legislation." the alert said.