U.S. Supreme Court Declines to Review Sun Capital Decision

On March 3, 2014, the U.S. Supreme Court declined to review Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, No. 13-648, a July 2013 decision by the First Circuit that held a private equity fund was a “trade or business” under the controlled group rules of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and, as a result, could be held jointly and severally liable for the pension obligations of a bankrupt portfolio company. In its petition, Sun Capital had sought review of the following question[s]:

1. Did the First Circuit err by holding (contrary to decisions of the Seventh and D.C. Circuits) that “trade or business” status under ERISA should be governed by a novel, multi-factor “investment plus-like” test rather than by the U.S. Supreme Court’s decisions defining “trade or business” status for purposes of section 162(a) of the Internal Revenue Code?
   
   
2. Did the First Circuit err by holding, contrary to Whipple v. Commissioner, 373 U.S. 193, 202 (1963), that an entity that solely makes investments and manages the businesses in which it has invested is a “trade or business”?

The Court’s decision to let the First Circuit ruling stand has important implications for private equity funds in terms of potential acquisitions, currently-held portfolio companies, and structuring since it effectively ruled that the private equity funds in the case should be treated for purposes of ERISA as holding companies rather than as investment funds. Now, the case is to be remanded back to the District Court for further factual development proceedings under the second part of the “control group” test, that of “common control,” which in the partnership context is based on economic ownership, not voting control.

For additional analysis of the First Circuit’s opinion, you can read the alert memo here.