Are Private Equity Partners Responsible for Unfunded Pensions?

A Massachusetts judge has ruled in a widely watched case, overturning a previous decision.
(July 30, 2013) – Two private equity partnerships that purchased 100% of a troubled company’s shares are not responsible for the firm’s pension obligations, a Massachusetts judge has ruled.

Sun Capital Advisors, through two of its LP/GP private equity vehicles, took a controlling stake in metal producer SBI in 2006. By the end of that year, its stake had grown to 100% and the leveraged buyout firm was “exerted substantial operational and managerial control over SBI,” according to court documents. 

Declining copper prices pushed SBI into insolvency and involuntary Chapter 11 bankruptcy in 2008. At the year’s end, the New England Teamsters and Trucking Industry Pension Fund demanded payment for $4.5 million in outstanding pension liabilities from the Sun funds. 

The private equity firm asserted it had lost its entire $8 million initial investment, and was not responsible for SBI’s unpaid retirement benefits. The matter escalated to court, where a district judge issued a summary judgment in favor of the pension plan.  

In the appeals stage, however, the court overturned this decision. Judge Douglas Woodcock ruled that because the two Sun funds had split ownership of SBI 70%/30%, it did not meet the 80% standard of ownership.

US law “instructs courts to apply withdrawal liability ‘without regard’ to any transaction the principal purposed of which is to evade or avoid such responsibility,” Woodcock wrote.

The private equity firm’s splitting of SBI shares may have met that standard of intentional evasion, according to his written opinion. However, to rule in favor of the pension fund, Woodcock would have to “create a transaction that never occurred”—a purchase of 80% or more of SBI’s shares by a single entity. “But as stated,” the judge wrote, “that we cannot do.”

Woodcock did express his “dismay that the Pension Benefit Guaranty Corporation has not given more and earlier guidance” on cases such as these.

Susan Hoffman, the co-chair of employee benefits litigation with law firm Littler Mendelson, called the decision “a well-reasoned opinion.” The ruling “is quite important to investors considering purchasing a business with…significantly underfunded single employer pension plans.”

The case in is number 12-2312, Sun Capital Partners III, LP; Sun Capital Partners ILL QP, LP; Sun Capital Partners IV, LP, vs. New England Teamsters & Trucking Industry Pension Fund. 

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