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Corinne Ball and Miguel Eaton Corinne Ball and Miguel Eaton

The investor community, and particularly private equity funds, are breathing a sigh of relief after a recent decision by the U.S. Court of Appeals for the First Circuit in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370 (1st Cir. Nov. 22, 2019) (Sun Capital Partners). The First Circuit held that two private equity funds were not liable for their bankrupt portfolio company’s unfunded defined benefit pension plan liability or for the withdrawal liability assessed by a multiemployer pension plan. The private equity fund community’s concerns stemmed from the fact that the district court, in analyzing a fact pattern often used by private equity funds, found the funds liable through novel reasoning—that the private equity funds and portfolio company had created “an implied partnership-in-fact” and thus were under common control for pension liability purposes. The First Circuit reversed, finding no such partnership and thus no common control for pension liabilities.

The First Circuit reversed the district court even though there was evidence that the private equity funds knew the portfolio company’s pension plan was underfunded when they bought the company, paid less consideration for the company due to such liability and structured the ownership interests in the acquisition so as to insulate the private equity funds from the potential pension fund liability. Thus, Sun Capital Partners eradicates the one federal court decision that found liability for an ownership structure commonly employed by private equity funds that invest in distressed companies with pension liabilities.

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