By: Mark Casciari and Meg Troy

There are roughly 1,500 multiemployer pension plans covering more than 10 million American workers and retirees.  A March report by the U.S. Government Accountability Office revealed chronic underfunding and potential insolvency of these plans, noting that in 2011, about 40% of plans remain in critical or endangered status. 

The underfunding and insolvency issues will not be soon resolved.  The PBGC estimates that its insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years.  By 2017, the PBGC predicts the number of insolvencies to double.

As this instability continues, the effect on contributing employers is alarming.  Contributing employers are faced with large liabilities from increased contribution obligations and dramatically increased “withdrawal liability” that is imposed on withdrawing employers and is intended to reduce underfundedness.  And, the concern is not limited to contributing employers.  Under the Multiemployer Pension Plan Amendments Act (MPPAA) that amended ERISA, all “trade or businesses” under “common control” with the withdrawing employer are jointly and severally liable along with the contributing employer for withdrawal liability. 

What the courts consider to be a trade or business under common control continues to evolve.

On July 24, 2013, the Court of Appeals for the First Circuit held that even private equity funds may be responsible for withdrawal liability.  In Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 12-2312, the Court of Appeals for the First Circuit, overturning a decision from the district court, found that at least one private equity fund qualified as a trade or business.  The Court then remanded the case to  the district court to determine whether another fund was a trade or business, and whether common control existed.

In 2008, contributing employer Scott Brass Inc. entered into bankruptcy and withdrew from the New England Teamsters and Trucking Industry Pension Fund.  Two private equity funds owned by Sun Capital Advisors Inc. — Sun Fund III and Sun Fund IV (the “Sun Funds”) — held a 100% interest in the company.  The Plan held the Sun Funds jointly and severally liable for the withdrawal liability assessment.

The Sun Funds filed a declaratory judgment action asserting that they were not trades or businesses under common control with the company because they were mere passive.  They argued that they had no employees, no office space, and no products, and that they each made a single investment in Scott Bass.  

The First Circuit concluded that the Sun Funds invested in the company “with the principal purpose of making profit” and became “actively involved in [its] management and operation.”  It also noted that the Sun Funds’ general partners had authority to make decisions about hiring, terminating, and compensating the company’s employees.  As a result, the Court concluded that at least one of the Sun Funds was a “trade or business.”

The Court also focused on the fact that one of the Sun Funds received a direct economic benefit that an ordinary, passive investor would not derive.  Scott Bass made payments of more than $186,000 to the fund’s general partner, which were offset against the fees the fund had to pay the partner for managing the investment in the company.    

What can we learn from this decision?  The dire financial straits facing multiemployer pension funds will cause many funds to extend the scope of liability, leading to more litigation and uncertainty in this important area of the law.