Last month, the 1st Circuit Court of Appeals reversed the 2016 Sun Capital decision, in which a Massachusetts federal court imposed joint & several liability on 2 PE fund investors with a common sponsor for their portfolio company’s pension plan withdrawal liability. Here’s the intro to this Cleary Gottlieb memo on the case:
On November 22, 2019, the First Circuit Court of Appeals held in Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, that two private equity funds, Sun Capital Partners III, LP (“Fund III”) and Sun Capital Partners IV, LP (“Fund IV”, and together with Fund III, the “Funds”) were not liable for approximately $4.5 million in multiemployer pension plan withdrawal liability of their bankrupt portfolio company. The First Circuit reversed a 2016 District Court decision finding that the Funds had created an implied partnership-in-fact.
Although the First Circuit found in favor of the Funds, its opinion suggests that courts might imply a partnership-in-fact, and private equity funds could be found liable for the pension obligations of their portfolio companies, depending on the relevant facts and circumstances. While the decision relates to a private equity fund, and thus has several important implications for private equity firms as discussed in more detail below, the issues at play could also have implications for other alternative investment managers, including venture capital funds, family offices and sovereign wealth funds.
The memo reviews the background of the case and analyzes the 1st Circuit’s decision. It also points out that while the court ruled in the funds’ favor, the opinion suggests that a partnership-in-fact may be implied depending on the relevant facts and circumstances, and offers suggestions for actions that fund sponsors can take to mitigate the risk of such a result. We’re posting memos in our “Private Equity” Practice Area.