Sun Capital pre-empts $43m pension liability claim

Sun Capital Partners has taken pre-emptive legal action to avoid liability for the employee pension payments owed by a portfolio company that has filed for bankruptcy. 

The firm's Fund IV has filed a complaint against Central States, Southeast and Southwest Areas Pension Fund, which it anticipates will hold it accountable for $43 million in pension payouts owed to employees of Marsh, a grocery chain it acquired in 2006 that filed for Chapter 11 bankruptcy on Thursday.  

Under the Employee Retirement Income Security Act “trades or businesses” are responsible for withdrawal liability. But Sun Fund IV claims this law is not applicable because it “does not participate in the day-to-day management and control of the portfolio companies in which it has invested.”

“This is a very important issue for Sun Capital and for the industry – for planning purposes, and how to deal with investments that involve potential withdrawal liability in portfolio companies,” a source familiar with the matter told pfm.

Historically courts have found passive investors, who are not actively involved in management of a company, are not trades or businesses, the source said, and the lawsuit questions the extent to which private equity, as a source of capital, can invest in struggling companies with withdrawal liability.

The source said if there is determination that Sun Capital is not a trade or business, it would be hard for the pension fund to pursue withdrawal liability, but that the pension fund would likely appeal that declaration.

Sun Capital Funds III and IV were involved in a similar case last year. They were found jointly liable for $4.5 million in unfunded vested benefits owed by its portfolio company Scott Brass to the New England Teamsters and Trucking Industry Pension Fund, as reported by PEI.