The Intersection of Private Equity and ERISA after Sun Capital

In July 2013, the U.S. Court of Appeals for the First Circuit ruled in Sun Capital Partners
III, LP v. New England Teamsters & Trucking Industry Pension Fund that a private equity fund
was considered a “trade or business” under the rules of the Employment Retirement Income
Security Act of 1974 (“ERISA”).1 Under this standard, a private equity
fund can be held jointly or severally liable for pension obligations when a portfolio company goes
through bankruptcy.2 While the court noted that its ruling was only relevant to pension liability issues (a different
analysis may be necessary for tax purposes, for example), the decision was the first instance in
which a court has treated a private equity fund as a “trade or business” under ERISA. The ruling
“may have significant implications for private equity funds, which should evaluate their portfolios
in light of the Sun Capital decision to assess their risk of exposure to the unfunded benefit
obligations of portfolio companies.”3 This month, the Supreme Court denied review of
the First Circuit’s ruling, and because the lower court’s ruling essentially held that private equity
funds should be treated as holding companies rather than investment funds for the purposes of
ERISA, the ruling may have important consequences for private equity funds in regards to
acquisitions and corporate structuring.

The factual background is rather complicated, but bears mentioning. Scott Brass, Inc. (“SBI”), a
producer of brass and copper, was a portfolio company held by “Fund III” and “Fund IV” of Sun
Capital. SBI contributed to the New England Teamsters and Trucking Industry Pension Fund, a
multi-employer pension plan that is maintained per a collective bargaining agreement for unionized
employees.4 In 2008, an involuntary bankruptcy petition was filed against SBI, and SBI had stopped making
payments to the fund and thus was liable for the unfunded benefits.5 The Teamsters subsequently asserted that under the plan, the Sun Capital
Funds were jointly and severally liable for SBI’s withdrawal under ERISA. Section 1301(b)(1) of
ERISA states “all employees of trades or businesses that are under common control shall be
treated as employed by a single employer and all such trades and businesses as a single employer.”
6 By consequence, liability may be imposed on an entity not directly related to the
pension contract if the other entity is under “common control” with the party to the contract, and the
entity is a “trade or business.” While the term “trade or business” has not been precisely defined, the IRS defines “common control” as when a trade or business owns 80% or more equity in another trade or business.7

Sun Capital sought a declaration in the U.S. District Court for the District of Massachusetts that they were not liable for SBI’s liability because they did not meet the control requirement nor were they a “trade or business,” and the District Courted granted summary judgment for Sun Capital based solely on the “trade or business” prong of the analysis. However, on appeal, the First Circuit employed what it referred to as an “investment-plus” analysis, holding that the passive investment with other activities can result in an investor becoming a “trade or business.”8. The court repeatedly stressed that its analysis was “very fact specific” and relied on the fact that Sun Capital exercised oversight and management in SBI.9

Because not one factor is “dispositive in and of itself” it is unclear what the case means for private equity funds and their portfolios moving forward.10 Undeniably, Sun Capital has implications for private equity funds under “common control” with a company participating in pension funds, as those private equity funds may be subject to liabilities if the contracting entity does not pay their obligations. Thus, it would be well-advised for private equity firms to “evaluate their investments for present and future exposure, taking into account the factors considered by the Sun Capital court in determining whether a ‘plus’ exists for purposes of potential liability.”11 Similarly, because the Supreme Court declined the opportunity to provide clarity and uniformity on the questions of what constitutes a trade or business and what constitutes “common control,” it will be interesting to see if lower courts apply the same test that the First Circuit did or if other circuits will develop their own standard of analysis.

  1. Sun Capital Partners III, LP v. New England Teamsters and
Trucking Indus. Pension Fund,724 F.3d 129 (1st Cir. 2013) cert. denied, 134 S. Ct. 1492 (U.S. 2014). 

  2. First Circuit Sun Capital Decision Increases ERISA Exposure for Private
Equity Funds, Davis Polk (August 6, 2013),

  3. Adam H. Isenberg & Monique Bair DiSabatino, Private-
Equity Funds Beware: How You Could Be Exposed to Pension Liability after Sun Capital, [2013] 32 Am. Bankr. Inst. J. 20 (Oct. 2013), available at

  4. First Circuit Puts the ‘Fund’ in Pension Underfunding, Cleary Gottlieb Steen & Hamilton LLP (Aug. 
19, 2013),

  5. Isenberg & Bair DiSabatino,
supra note 3, at 21. 

  6. 29 U.S.C. § 1301(b)(1) (2012). 

  7. Supra, note 3. 

  8. See supra note 3 

  9. Sun Capital at 141, supra note 1. 

  10. Id

  11. Isenberg & Bair DiSabatino, supra note 2 at 21.