Marsh Supermarkets has underfunded its employee pensions by more than $75 million, and retirees now will likely need to depend on the federal government to pay their benefits.
That's not an unusual situation for former portfolio companies of Sun Capital Partners, a giant international private-equity firm that has a history of leaving behind troubled companies that have sizable pension fund obligations. Boca Raton, Florida-based Sun acquired Marsh Supermarkets in 2006 but quietly sold controlling interest to a newly formed limited liability company in late March.
Indianapolis-based Marsh, which has been closing stores at a rapid pace, filed Thursday to reorganize its assets under the protection of Chapter 11 bankruptcy as it seeks a buyer for all or part of the chain and its remaining 44 stores.
Bankruptcy documents show Marsh participated in a multi-employer pension plan, or MEPP, which the company pulled out of in November 2012. Marsh also provided a single-employer defined-benefit pension plan, which was frozen in 1997.
The MEPP is underfunded by $55 million, and the defined-benefit pension plan by more than $21 million, according to court documents.
If Marsh is unable to pay its pension liabilities, the federal government is likely to step in to provide some relief, said Kim F. Ebert, an employment law attorney at Ogletree Deakins Nash Smoak & Stewart PC.
The Pension Benefit Guaranty Corp., or PBGC, is an independent U.S. government agency that protects retirement benefits in private-sector defined-benefit plans. The agency often comes to the rescue of underfunded or failed pension plans. The PBGC doesn't use tax dollars to bail out funds, but relies on insurance premiums paid by nearly 24,000 insured defined-benefit pension plans. Current projections say it will run out of money in eight to 10 years without major changes.
The amount Marsh owes for unfunded pension obligations isn't unusual, according to Ebert.
“The numbers in this [pension liability] area can get big in a hurry,” Ebert said. “Those numbers don’t shock me. They’re amazing, but they don’t necessarily shock me in the context of withdrawal liability.”
The grocery chain also said it owes more than $37 million to secured lenders, $30 million to suppliers and $11 million in property-lease-related expenses.
Sun retains a financial interest in Marsh but said it sold control to Delaware-based JT Grocery Consulting LLC on March 24, the same day JT Grocery was formed. The buyer acquired “25 percent of the economic rights and all of the voting and control rights,” bankruptcy papers show. It isn't clear who's behind JT Grocery Consulting. A Marsh spokesman declined further comment.
Sun Capital and pension liability
Private-equity firms such as Sun and their limited partner investors aren't typically responsible for pension liabilities in their portfolio companies because they are considered investors instead of a controlling business.
Sun, however, has been in several court cases involving pension fund responsibility and has been sued by the PBGC.
The private-equity firm is appealing a March 2016 U.S. District Court case in Boston involving two Sun funds that collectively owned defunct portfolio manufacturer Scott Brass Inc. The judge ruled the funds were on the hook for $4.5 million in pension liabilities because they were found to be "trades or businesses under common control" of the manufacturer. Legal experts called the case one of the most important ever involved in federal Employee Retirement Income Security Act law.
In March, the U.S. Supreme Court ordered a Sun-owned New Jersey trucking company, Jevic Transportation, back to bankruptcy court after it ruled Sun couldn't escape paying drivers $8.3 million in back pay as part of a bankruptcy settlement.
In 2011, PBGC accused Sun of fraud in the company's bankruptcy proceedings for Friendly Ice Cream Corp., which was owned by Sun. The agency said Sun tried to avoid paying retirement benefits to 6,000 employees and and retirees by shifting assets from one Sun entity to another. The PBGC and Sun settled the matter out of court.
A spokesman for Sun didn't have an immediate comment Friday on Marsh's pension liabilities and why they were left unfunded. Marsh declined to comment on the matter.
JT Grocery Consulting has hired Lee Diercks, a veteran retail executive who's founding partner of Hillsborough, New Jersey-based Clear Thinking Group LLC, as chief restructuring officer for Marsh. He'll guide the company through the Chapter 11 process.
Diercks said in a court filing that JT Grocery Consulting will seek bids until June 7 on Marsh’s remaining stores and will conduct an auction on June 12, with a potential closing date of June 25. JT is seeking to hold the auction as quickly as possible to avoid paying additional rent at the stores.
Marsh currently operates 60 stores—54 in Indiana and six in Ohio. Sixteen of those are set to close by the end of May. That would leave 44 remaining “core” stores that now are in danger of closing if a buyer isn’t found.