Takeaways
- Despite recent guidance, the status of private equity firms and their affiliates as “employers” for purposes of withdrawal liability remains unsettled.
- Approaches adopted by courts vary, and the difference could result in exposure for significant withdrawal liability incurred by a portfolio company.
- Private equity funds that acquire a controlling interest in a portfolio company with unionized operations should exercise particular caution, since the parameters of the liability determination remain somewhat unclear.
Article
Under ERISA’s multiemployer pension plan provisions (the Multiemployer Pension Plan Amendments Act of 1974 or MPPAA), an employer who withdraws from a multiemployer pension plan normally is liable for withdrawal liability. For this purpose, the “employer” includes both the withdrawn entity and all trades or businesses under common control.
Although the U.S. District Court for the Western District of Missouri Western Division’s opinion in Longroad Asset Management, LLC v. Boilermaker-Blacksmith National Pension Trust, No. 4:23-cv-00738 (Aug. 19, 2025), provides some guidance for private equity entities’ potential status as “employers” for purposes of (and potential exposure for) withdrawal liability, the law remains unsettled in this area.
Fact Pattern
Longroad presents a typical private equity fact pattern. Longroad Capital Partners, LLC (“Limited Partnership”) was a pooled investment vehicle that was 99.9% owned by its investors (the limited partners). Longroad Partners III, GP, LLC (“General Partner”) was the general partner of the Limited Partnership. The General Partner was a “pass through” entity. The General Partner contracted with Longroad Asset Management, LLC (LAM) to manage the Limited Partnership’s business affairs, delegating all Limited Partnership management responsibilities and powers to LAM. As consideration for providing management services to the Limited Partnership, LAM was paid a management fee equal to a percentage of either the Limited Partnership’s capital commitments or asset value.
In 2011, the Limited Partnership indirectly acquired the assets of Brown-Minneapolis Tank-Northwest, LLC (BMT-NW), a company with a unionized workforce, through a wholly owned subsidiary of the Limited Partnership (“BMT-NW Acquisition”). BMT-NW Acquisition was signatory to a collective bargaining agreement that obligated contributing to the Boilermaker-Blacksmith National Pension Trust (“Fund”). The Fund is a multiemployer pension plan subject to the withdrawal liability provisions in Part 4 of Title IV of ERISA.
BMT-NW Acquisition failed and ceased all covered operations. As a result, it triggered withdrawal liability of approximately $975,000. Because the company filed for bankruptcy, the Fund sought to collect the withdrawal liability from LAM, the Limited Partnership, and the General Partner. The Fund alleged that each was a “trade or business” that was under “common control” with the withdrawn employer.
LAM, the Limited Partnership, and the General Partner then sued for a declaratory judgment that they were not MPPAA “employers” and, therefore, were not liable for the withdrawal liability asserted by the Fund.
Entities Liable for Withdrawal Liability
Under MPPAA, an employer who withdraws from a multiemployer pension plan is liable for its allocable share of any underfunding, referred to as “withdrawal liability.” For this purpose, each trade or business that is under common control is considered a single employer. As a result, each trade or business that is under common control with a withdrawn employer is jointly and severally liable for any resulting withdrawal liability.
As the Missouri court explained in Longroad, imposing withdrawal liability on an entity other than the withdrawing employer is a two-pronged inquiry:
- Is the entity a trade or business?
- Is the entity under common control with the withdrawing employer?
Both need to be answered in the affirmative for liability to attach.
Whether an entity qualifies as a trade or business is a factual inquiry focused on the entity’s activities. Common control, however, is an objective test that considers whether the entity has a direct or indirect ownership interest of at least 80% in the withdrawing employer. The court noted, because this bright line test “can be easily avoided by fractionalizing ownership across multiple entities,” courts have considered whether entities’ ownership should be aggregated to satisfy the 80% threshold because they have formed a partnership-in-fact.
“Partnership-in-Fact” under Sun Capital
In a protracted litigation involving a group of affiliated private equity funds, the U.S. Court of Appeals for the First Circuit held that a private equity fund could be considered a trade or business subject to pension liabilities. Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013).
Six years later, the First Circuit ultimately held that the two funds, neither of which satisfied the 80% threshold but which collectively owned 100%, did not form a deemed “partnership-in-fact” with respect to the bankrupt portfolio company in which each was a co-investor. Sun Capital Partners III, LP v. New England Trucking and Teamsters Industry Pension Fund, 943 F.3d 49 (1st Cir. 2019). Therefore, the First Circuit held that they did not have controlled group liability under MPPAA for that portfolio company’s withdrawal liability.
The Court’s Analysis
In Longroad, the court described the relevant inquiries:
- Whether LAM or the General Partner was in a partnership-in-fact with the Limited Partnership; and
- Whether the Limited Partnership is a trade or business.
The court first noted that the existence of a partnership-in-fact is a question of federal law, with several factors relevant and none dispositive. The court quickly determined that the limited activities of the General Partner (a pass-through entity with no employees, bank accounts, or operations) were insufficient to create a partnership-in-fact with any of the affiliated entities.
The court next analyzed whether LAM had formed a partnership-in-fact with any of the affiliated entities. LAM received a contractual management fee from the Limited Partnership that did not vary with the profitability of the Limited Partnership’s investments. All actions taken by LAM were expressly authorized, either under its management contract with the Limited Partnership or by express delegation from the General Partner. The court noted the Fund was seeking to impose withdrawal liability on an entity that held no ownership interest in the relevant entities and acted solely in a contractual management capacity. It concluded that it was “not persuaded that the MPPAA sweeps so broadly.” The court focused on LAM’s lack of any significant ownership interest and that LAM acted solely as an agent, not an owner. This, the court found, readily distinguished the case from Sun Capital, “where each entity possessed a substantial ownership interest in the withdrawing employer.” Because there was “no legal basis for aggregating ownership through a partnership-in-fact,” the court concluded that LAM was not an employer for withdrawal liability purposes.
The Limited Partnership owned more than 80% of the withdrawn employer and, therefore, would be liable for the withdrawal liability if it was a trade or business. As articulated by the U.S. Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23 (1987), economic activity qualifies as a trade or business under federal tax law if its primary purpose is income or profit and the activity is conducted with regularity and continuity.
Although some courts have adopted Groetzinger for purposes of MPPAA, others (including the First Circuit in Sun Capital) have refined Groetzinger in the context of private equity funds. They apply an “investment plus” approach that requires activity beyond mere passive investment in portfolio companies.
Under the investment-plus standard, the court found the Limited Partnership actively managed its portfolio companies through LAM and LAM’s conduct on behalf of the Limited Partnership, which included exercising their delegated authority to oversee and direct the portfolio companies’ operational affairs and which were conducted with continuity and regularity for several years, “goes beyond mere passive investment activity and satisfies the ‘plus’ factor under the investment plus framework.” The court therefore concluded the Limited Partnership was a trade or business and, by virtue of its ownership interest in the withdrawn portfolio company, was an employer for purposes of MPPAA.
Uncertainty
Longroad confirms what the First Circuit had previously held: A private equity fund will be considered a trade or business potentially liable for withdrawal liability incurred by a portfolio company if its activities extend beyond passive investment. Thus, private equity funds remain subject to the uncertainty inherent in the investment-plus framework to determine trade or business status.
Further, while concluding that its requirements were not met, the court applied the partnership-in-fact doctrine first employed in the MPPAA context in Sun Capital.
Lastly, the court held that the Fund cannot hold LAM or the General Partner liable for the withdrawal liability, limiting potential liability to the Limited Partnership.
What the case most clearly illustrates is that private equity funds that acquire a controlling interest in a portfolio company remain potentially liable for the unpaid withdrawal liability of the portfolio company. The parameters of that liability determination, however, remain somewhat unclear.
