On July 24th, 2013, the First Circuit for the US Court of Appeals held in Sun Capital that the private equity fund in question was a trade or business under ERISA. In the case, the Court examined the structure of the Sun Funds, which identified portfolio companies in need of intervention with regard to management and operations, corrected the management and operations issues, and sold the companies. While the Sun Funds owned the stock of their portfolio companies, they did not own or leases offices or buildings, nor did they employ any workers. Rather, the Sun Funds authorized their general partner to carry out the objectives of the Funds. Two Sun Funds, Sun Fund III and Sun Fund IV, purchased Scott Brass Inc. (SBI), 30% and 70% respectively. The Sun Funds then appointed Sun Capital Advisors Inc. (SCAI) personnel to run SBI, which the funds did for approximately two years. When SBI collapsed, it stopped contributing to its pension fund, and became liable for its share of the plan’s unfunded vested liability. ERISA dictates that both SBI and the members of SBI’s controlled group are jointly and severally liable for the unfunded liabilities as well.

As threshold issues for joint and severable liability, ERISA required a determination of whether Sun Funds were part of a controlled group if it is under common control with SBI, and whether Sun Funds constituted a trade or business. At issue in the case was whether the Sun Funds, as collection of private equity funds, was a “trade or business” within the meaning of ERISA.

The First Circuit Court of Appeals stated that that when the ERISA issue “is one of whether there is mere passive investment to defeat pension withdrawal liability, we are persuaded that some form of an investment plus approach is appropriate” to determine whether a private equity fund is a trade or business. Ultimately, the First Circuit held that Sun Fund IV was a trade or business, and remanded the issue of whether Sun Fund III was a trade or business to the trial court.