Key takeaways:

• In the latest round of the closely-watched Sun Capital case, the District Court of Massachusetts held that two separate, but affiliated, private equity investment funds, each of which held less than a controlling interest in one of their bankrupt portfolio companies, are jointly and severally liable for the pension liabilities of the company.
• The decision veers from the statutory and regulatory “common control” regime of the Employee Retirement Income Security Act (ERISA) and rests on the novel analysis that the two funds were deemed to create a general partnership-in-fact that was the common parent of the bankrupt company, and with respect to which the two funds were deemed to have unlimited liability as general partners under common partnership pass-through liability principles.
• Although the facts on which the decision relies could be argued to be equally applicable to any funds that choose to invest in a target together, even funds of unaffiliated private equity sponsors that join in a club deal, we believe statements made by the court indicate the decision should be limited to actions taken in unison by affiliated funds.
• It is unclear how the rationale of the decision will fare on appeal.  The court’s decision to interpose a deemed partnership could be challenged as inconsistent with ERISA, but one can read the prior First Circuit decision to be sympathetic to the result in this case, and it is possible that the First Circuit may uphold the decision (hopefully providing greater clarity on when a partnership-in-fact may or may not be found).