On July 24, 2013, in a controversial ruling in the Sun Capital case, the U.S. Court of Appeals for the First Circuit endorsed the view of the Pension Benefit Guaranty Corporation (PBGC) that a private equity fund can be held jointly and severally liable for the unfunded pension obligations of its portfolio companies.

Focusing on the active role of the management company affiliated with a Sun Capital fund, the First Circuit held that the Sun Capital fund was engaged in a trade or business, a critical test for control group liability for unfunded pension obligations. Similar to prior authorities in this area, the Sun Capital decision was careful to note that whether a fund is a trade or business for tax purposes may not be an identical analysis. Accordingly, the First Circuit’s ruling is so far relevant only for pension liability issues.

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