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Central Pennsylvania Teamsters Pension Fund v. McCormick Dray Line Inc.

June 16, 1996




Appeal from the United States District Court for the Eastern District of Pennsylvania

(D.C. Civil No. 93-2118)

Before: NYGAARD, SAROKIN, and ALDISERT, Circuit Judges

SAROKIN, Circuit Judge.

Argued March 13, 1996

Filed June 12, 1996)


This case poses the question of whether a provision in a collective bargaining agreement which establishes eligibility for employee participation in a health and welfare plan can be reformed as the result of mutual mistake by the contracting parties. Because this case involves a multiemployer plan, we conclude that reformation is not available and that third party beneficiaries to the underlying agreement are entitled to rely on its plain language notwithstanding that such language was the result of the mistake or negligence of the contracting parties.

Here, the Central Pennsylvania Teamsters Health & Welfare Fund ("Welfare Fund") seeks to recover delinquent funds from McCormick Dray Lines, Inc. ("McCormick"). McCormick argues that these funds are not delinquent because they are sought pursuant to a clause in a collective bargaining agreement that McCormick avers was the result of a "mutual mistake" or a "scrivener's error." The district court agreed and ruled in favor of McCormick. We reverse.


McCormick is a trucking company employing approximately sixty drivers, of whom twenty-two are union drivers. The union drivers are represented by Teamsters Local Union No. 764 ("Local 764" or "the union"). From the 1970s until 1991, McCormick was a party to a series of collective bargaining agreements with Local 764. During that period, Charles Greenawalt was the President and Business Representative for Local 764, and he was the principal negotiator for Local 764 in the collective bargaining negotiations. James Webb has been President of McCormick since 1984, and in that role negotiated with the union on behalf of McCormick.

Included in these bargaining agreements were provisions requiring that McCormick make monthly contributions to the Welfare Fund on behalf of the union drivers for purposes of providing them with medical benefits for themselves and their families. Typically, just before the time that a prior collective bargaining agreement would expire, the Welfare Fund would send to Local 764 "suggested" health and welfare language for the collective bargaining agreement. Greenawalt would then ask his secretary to incorporate the "suggested" language into a draft of the new collective bargaining agreement. If the parties to a collective bargaining agreement wanted changes made to this "suggested" language, they would negotiate those changes themselves and then submit them to the Welfare Fund for approval.

In 1983, McCormick and Local 764 negotiated a change in the employee Eligibility Clause to the Health and Welfare portion of their contract. Specifically, the Eligibility Clause in the 1983 Agreement was negotiated to include the following language:

Section 2. Eligibility of Employees

(A) An employee shall be deemed to be an eligible member employee if such employee has worked at least 60 hours for the employer during the preceding month . . . .

The Sixty

(B) Any newly hired employee shall qualify as an eligible member employee after forty-five (45) working days or on the sixtieth calendar day whichever comes first.

Joint Appendix ("JA") at 484. Before this negotiated clause could be included in the collective bargaining agreement, Greenawalt had to obtain approval from the Welfare Fund. The fund did agree, reluctantly, to approve the language. This same language then also appeared in the 1985 collective bargaining agreement.

Greenawalt testified that just before the Union's 1985 collective bargaining agreement was about to expire, he received suggested language from the Welfare Fund, as per usual, and this language was then incorporated into the draft contract. Afterwards, Greenawalt and Webb negotiated over the dollar amount McCormick would be required to contribute to the Welfare Fund. Webb never made any requests to change any of the other Welfare Fund language, including the Eligibility Clause.

Once Greenawalt and Webb agreed to the essential terms of the contract, Greenawalt sent Webb a copy of the 1988 Agreement accompanied by a letter asking that Webb "[p]lease review [the Agreement] and get back to [him] with any additions or corrections which [Webb] fe[lt] need[ed] to be made" prior to signing the agreement. Webb testified that he never specifically checked the Eligibility Clause of the contract because it had not been the subject of specific negotiations. No changes were made to the Fund's proposed language, and the 1988 Agreement was formally executed.

About one year following the execution of the 1988 Agreement, Webb noticed that the language in the Eligibility Clause of Article XII did not include the same language that had appeared in the past two collective bargaining agreements. Specifically, the Eligibility Clause in Article XII provided in relevant part:

Section 2. Eligibility of Employees

A. Any newly hired employee shall qualify as an eligible member employee as of the first day of the month immediately following his employment if such employee meets the requirements of Subsection (B) next below.

B. An employee shall be deemed to be an eligible member employee if such employee has worked at least 60 hours for the Employer during the preceding month.

JA at 202-03. Unlike the Eligibility Clause that appeared in the 1983 and 1985 Agreements, this clause included no additional requirement that the employee work at least 45 days prior to eligibility.

Webb testified that he called John Kleinfelter, *fn1 the administrator of the Welfare Fund, to find out how the mistake had occurred, and that "John kind of pooh-poohed and ha-ha'd and laughed about it." JA at 302. Webb also contacted Greenawalt, informing him that, unless Local 764 agreed to reform the Eligibility Clause to be identical to that in the 1983 and 1985 Agreements, he would pursue a formal grievance under the parties' collective bargaining agreement. Greenawalt testified that he "was as surprised as [Webb] was" to learn of the actual language in the Eligibility Clause. JA at 416. However, he further testified that the point at which the error was discovered was so long after the Agreement was signed that he was reluctant to change it unilaterally because he feared the union could be held liable by the Welfare Fund. Therefore, on August 18, 1989 Greenawalt formally advised Webb that Local 764 would not agree to modify the Eligibility Clause and that McCormick should file a grievance with the American Arbitration Association if it wished to pursue the issue.

Webb did not pursue a formal grievance. Instead, McCormick adopted a new practice of notifying each newly hired employee that there had been an error in the 1988 Agreement, explaining to each of them that they would become eligible for health and welfare benefits only after they had completed their 45th work day or their 60th calendar day and requiring them to sign a form acknowledging that they were aware of this.

In 1991, auditors conducted a routine examination of McCormick's payroll records on behalf of the Welfare Fund and the Pension Fund. This payroll audit revealed that McCormick had not been making contributions on behalf of newly hired employees in accordance with the Eligibility Clause as it actually appeared in the 1988 Agreement. In particular, the auditors discovered that McCormick owed $27,930.00 in delinquent contributions to the Welfare Fund. There is no dispute that under the plain language of the 1988 Agreement, McCormick owes the $27,930.00.

Webb testified that after learning of the audit, he again called John Kleinfelter at the Welfare Fund. He testified that during his conversation, Kleinfelter told him "[W]e haven't come after you for the money, have we? . . . [W]ell you know it was a mistake." JA at 309. Greenawalt testified, however, that he spoke to Kleinfelter about the language, too, and that Kleinfelter never told him it was a mistake but that it was the standard language they sent at the end of every contract and that if McCormick had not wanted to agree to it, they should have gone back to the Welfare Fund for approval to change it.

After failing in its efforts to recover the delinquent funds, the Welfare Fund commenced this action against McCormick on April 22, 1993. Meanwhile, in 1991, Donald Deivert replaced Greenawalt as President of Local 764. On June 17, 1993 -- almost two months after the Welfare Fund filed the instant action in federal court -- Webb executed a Memorandum of Agreement with Deivert, acknowledging that there was an error in the 1988 Agreement. Deivert's testimony, however, indicates that he signed this Agreement out of fear that he and the Union would be sued and the union drivers would lose their jobs if he did not.

In March of 1994, both parties filed cross-motions for summary judgment. The district court granted summary judgment in favor of McCormick, finding that the Eligibility Clause in the 1988 Agreement was subject to reformation because the language in the clause was the result of a mutual mistake or a scrivener's error. Central Pennsylvania Teamster Pension Fund, et al. v. McCormick Dray Lines, Inc., No. 93-2118, slip op. at 16 (E.D. Pa. Nov. 21, 1994) (hereinafter "Memorandum Opinion"). This appeal followed.


The district court had jurisdiction over this action brought under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. Section(s) 1001 et seq. pursuant to 28 U.S.C. Section(s) 1331. This court exercises appellate jurisdiction pursuant to 28 U.S.C. Section(s) 1291.

Our review of the district court's order for summary judgment is plenary. Stroehmann Bakeries v. Local 776, 969 F.2d 1436, 1440 (3d Cir.), cert. denied, 506 U.S. 1022 (1992). We thus apply the same test applied by the district court: (1) are there no material facts in dispute; and (2) is one party entitled to judgment as a matter of law? Id. at 1441 (citing Fed. R. Civ. P. 56(c); International Union, United Mine Workers of Am. v. Racho Trucking Co., 897 F.2d 1248, 1252 (3d Cir. 1990)).


In this dispute, as in others in which welfare funds seek to recover payments that are delinquent under the terms of collective bargaining agreements with unions, the Welfare Fund occupies the position of third-party beneficiary -- i.e. the beneficiary of the agreement between the union and McCormick. See, e.g., Agathos v. Starlite Motel, 977 F.2d 1500, 1505 (3d Cir. 1992). Third-party beneficiaries are generally subject to the same defenses that the promisor (here McCormick) could raise in a suit by the promisee (here the union). See id. (citing J. Calamari & J. Perillo, The Law of Contracts Section(s) 17-10 (3d ed. 1987)). Such defenses include fraud in the inducement, breach of contract and mutual mistake.

In 1960, however, the Supreme Court held that the rule is different for employee benefit plans that are third-party beneficiaries pursuant to collective bargaining agreements. In Lewis v. Benedict Coal Corp., 361 U.S. 459, 470-71 (1960), the Court held that an employer could not raise the union's breach of a collective bargaining agreement as a defense against an employee benefit plan suing for delinquent ...

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