It’s not Always Sunny in Private Equity: Analysis and Impact of the First Circuit’s Sun Capital Decision

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Mark J. DeLuca

Private equity funds in the U.S. are known for generating large profits and, consequently, making fund managers extremely wealthy. But is the sun now beginning to set on this this level of profitability? For the first time, a court has determined that a private equity fund was engaged in a “trade or business” for purposes of the Multiemployer Pension Plan Amendments Act (“MPPAA”). In the eyes of pension funds and the Pension Benefit Guaranty Corporation (“PBGC”), both of whom want to reach deep pockets to ensure that employee pension benefits are paid in full, this is a significant step in the right direction. The door has now been opened, at least in the First Circuit, for pension funds to go after private equity investors when seeking to recover from companies that withdraw from multiemployer pension plans.

This is not only significant because of the additional liability that may accrue to the private equity fund, but also because the court in Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund took a novel approach to analyzing the activities of a private equity fund. Private equity funds have long been treated as passive investors, not businesses, under U.S. law. However, for purposes of the MPPAA’s withdrawal liability, Congress, federal agencies, and the courts have all remained silent on the definition of “trade or business.” In Sun Capital, the First Circuit, in holding that a private equity fund met the definition of a “trade or business” under the MPPAA, looked to the activities of the fund’s general partner that went beyond that of a typical investor. As Professor Victor Fleischer posits, the importance of Sun Capital is that it threatens to “collapse a legal structure aimed at keeping the activities of the fund manager legally separate from the fund’s investors.”

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