United States District Court, E.D. Pennsylvania
R. ALEXANDER ACOSTA, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR, Plaintiff,
ADAM SCHWAB, JODI SCHWAB, SCHWAB CONTRACTING, INC., and SCHWAB CONTRACTING, INC. SIMPLE IRA PLAN, Defendants.
OPINION PLAINTIFF'S MOTION FOR ENTRY OF DEFAULT
JUDGMENT, ECF NO. 7-GRANTED
F. Leeson, Jr. United States District Judge
Secretary of Labor of the United States commenced this
action against Adam Schwab, Jodi Schwab, Schwab Contracting,
Inc., and Schwab Contracting, Inc. SIMPLE IRA Plan, to enjoin
acts and practices which allegedly violate provisions of the
Employment Retirement Income Security Act of 1974, 29 U.S.C.
§ 1001, et seq. (“ERISA”), as well
as to obtain restitution resulting from alleged breaches of
fiduciary duties thereunder. See generally,
Plaintiff's Complaint (“Compl.”), ECF No. 1.
According to the Secretary, Schwab Contracting, Inc.,
(“the Company”) is a general construction
contractor located in Allentown, Pennsylvania, and is
principally owned by Adam Schwab, with Jodi Schwab, his wife,
serving as payroll officer (“the Schwabs”)
(collectively, “Defendants”). See Id.
¶¶ 7-8, 10. The Company is allegedly the Plan
Sponsor and Plan Administrator of Schwab Contracting, Inc.
SIMPLE IRA Plan (“the Plan”), an employee benefit
plan as defined by ERISA. Id. ¶ 6. The
Secretary contends that in 2015 and 2016, the Plan was
unlawfully mismanaged by the Schwabs. Specifically, the
Secretary alleges that the Schwabs failed to remit employee
contributions to the Plan, remitted certain employee
contributions late without interest, and commingled employee
contributions with the general assets of the Company. See
Id. ¶¶ 12-13. As a result, the Secretary
claims the Plan suffered approximately $18, 531.57 in losses
from unremitted employee contributions, and approximately $1,
706.36 in lost interest. See id. ¶ 17.
Defendants have failed to respond to the Secretary's
Complaint, see ECF No. 1, or otherwise appear in
this action. On December 6, 2018, the Secretary moved for
entry of default pursuant to Federal Rule of Civil Procedure
55(a), see ECF No. 6, which the Clerk of the Court
entered the same day. On March 1, 2019, the Secretary moved
for entry of default judgment pursuant to Federal Rule of
Civil Procedure 55(b). See generally Plaintiff's
Motion for Entry of Default Judgment, ECF No. 7; see
also Plaintiff's Memorandum in Support of his Motion
(“Pl.'s Mem.”), ECF No. 7-1. The Defendants
have failed to respond to the Secretary's motion despite
reasons set forth below, the Secretary's Motion for Entry
of Default Judgment is granted.
a party against whom a judgment for affirmative relief is
sought has failed to plead or otherwise defend, and that
failure is shown by affidavit or otherwise, the clerk must
enter the party's default.” Fed.R.Civ.P. 55(a).
Once the Clerk enters default, if the claim is not for a sum
certain as contemplated by Federal Rule of Civil Procedure
55(b)(1), then “the party must apply to the court for a
default judgment.” Fed.R.Civ.P. 55(b)(2); see,
e.g., Phoenix Ins. Co. v. Small, 307 F.R.D.
426, 433 (E.D. Pa. 2015). In reviewing a motion for default
judgment under Rule 55(b),
[t]he court's initial inquiry is “whether the
unchallenged facts constitute a legitimate cause of
action.” 10A Charles Alan Wright, Arthur R. Miller, et
al., Federal Practice and Procedure § 2688 (3d
ed. 2013) (citing cases). As at the motion to dismiss stage,
the court accepts as true the well-pleaded factual
allegations in the plaintiff's complaint, except those
relating to damages, as though they were admitted or
established by proof, Comdyne I, Inc. v. Corbin, 908
F.2d 1142, 1149 (3d Cir. 1990), as well as all reasonable
inferences that can be drawn from the complaint, e.g.,
Yang v. Hardin, 37 F.3d 282, 286 (7th Cir. 1994).
Conclusory allegations and the parties' legal theories or
“conclusions of law” are not entitled to the same
presumption and are not deemed admitted. Wright & Miller,
supra, § 2688.
Joe Hand Promotions, Inc. v. Yakubets, 3 F.Supp.3d
261, 270-71 (E.D. Pa. 2014) (footnotes omitted).
the court determines that the plaintiff has stated a cause of
action, it must then assess damages.”
Yakubets, 3 F.Supp.3d at 271. To that end,
“[t]he court must ‘conduct an inquiry in order to
ascertain the amount of damages with reasonable
certainty.'” Spring Valley Produce,
Inc. v. Stea Bros., No. CIV.A. 15-193, 2015 WL
2365573, at *3 (E.D. Pa. May 18, 2015) (quoting Star
Pacific Corp. v. Star Atlantic Corp., 574 F. App'x.
225, 231 (3d Cir. 2014)). Rule 55(b)(2) provides that the
court “may conduct hearings” when it needs to
determine the amount of damages; however, “[i]f the
court can determine the amount of damages to be awarded based
on affidavits or other evidentiary materials, ‘[t]he
Court is under no requirement to conduct an evidentiary
hearing with testimony.'” Yakubets, 3
F.Supp.3d at 271 n.8 (quoting E. Elec. Corp. of N.J. v.
Shoemaker Constr. Co., 657 F.Supp.2d 545, 552 (E.D. Pa.
addition to whether a complaint's allegations state a
cognizable claim, and, if so, whether damages are
ascertainable with “reasonable certainty, ”
Spring Valley Produce, Inc., 2015 WL 2365573, at *3,
there are three critical factors a court must consider in
resolving a motion for entry of default judgment-factors
which recognize that entry of defaults and default judgments
are not favored. See United States v. $55, 518.05 in U.S.
Currency, 728 F.2d 192, 194 (3d Cir. 1984); see also
E. Elec. Corp. of New Jersey, 652 F.Supp.2d at 604
(“Generally, the entry of a default judgment is
disfavored because it has the effect of preventing a case
from being decided on the merits. Thus, because a party is
‘not entitled to a default judgment as of right,'
the court must use ‘sound judicial discretion' in
weighing whether or not to enter a default judgment.”
(quoting Prudential-LMI Commercial Ins. Co. v. Windmere
Corp., 1995 WL 422794, at *1 (E.D. Pa. July 14, 1995))).
These three factors are “(1) prejudice to the plaintiff
if default is denied, (2) whether the defendant appears to
have a litigable defense, and (3) whether defendant's
delay is due to culpable conduct.” Chamberlain
v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000); cf.
Malibu Media, LLC v. Waller, No. 15-CV-03002, 2016 WL
184422, at *2-*3 (D.N.J. Jan. 15, 2016) (explaining that
“[u]nder Fed.R.Civ.P. 55(c), a district court
‘may set aside an entry of default for good
cause'” only where it considers “(1)
‘whether the plaintiff will be prejudiced,' (2)
‘whether the defendant has a meritorious defense,'
and (3) ‘whether the default was the result of the
defendant's culpable conduct, '” and observing
that “[t]hese are the same three factors that the Third
Circuit considers in determining whether to grant default
judgment against a defendant” (quoting Budget
Blinds, Inc. v. White, 536 F.3d 244, 256-57 (3d Cir.
2008) and Chamberlain, 210 F.3d at 164)).
The Secretary has stated claims for violations of
Secretary's Complaint claims that the Defendants, through
their conduct with respect to the Plan, have violated six
substantive provisions of ERISA: (1) Section 403(c)(1) of
ERISA, 29 U.S.C. § 1103(c)(1), which prohibits the
assets of a plan from inuring to the benefit of an employer;
(2) Section 404(a)(1)(A) of ERISA, 29 U.S.C. §
1104(a)(1)(A), which provides that a fiduciary shall
discharge his duties for the exclusive purpose of providing
benefits to plan participants and their beneficiaries, as
well as defraying reasonable expenses of administering the
plan; (3) Section 404(a)(1)(B) of ERISA, 29 U.S.C. §
1104(a)(1)(B), which provides that a fiduciary shall
discharge his duties with care, skill, prudence, and
diligence; (4) Section 406(a)(1)(D) of ERISA, 29 U.S.C.
§ 1106(a)(1)(D), which prohibits a fiduciary from
causing a plan to engage in a transaction constituting a
direct or indirect transfer to, use by, or for the benefit
of, a party of interest, of any asset of the plan; (5)
Section 406(b)(1) of ERISA, 29 U.S.C. § 1106(b)(1),
which prohibits a fiduciary from dealing with the assets of a
plan in his own interest or for his own account; and (6)
Section 406(b)(2) of ERISA, 29 U.S.C. § 1106(b)(2),
which prohibits a fiduciary from acting in any transaction
involving a plan on behalf of a party whose interests are
adverse to the interest of the plan or the interest of its
participants and beneficiaries. See Compl.
Facts alleged in the Complaint
Secretary contends the following allegations in the Complaint
state claims for violations of each of the above-six
provisions of ERISA.
Contracting, Inc, is a general construction contractor that
performed business in the Allentown, Pennsylvania area.
Compl. ¶ 10. At all relevant times, Adam Schwab was the
owner and principle officer of the Company, and his wife,
Jodi Schwab, was the Company's payroll officer.
Id. ¶¶ 7-8. The Company allegedly
established the Schwab Contracting, Inc. SIMPLE IRA Plan on
March 1, 2014, which permitted employee-participants to
contribute a portion of their pay to the Plan as elective
salary deferrals through payroll deductions. Id.
¶ 11. The Secretary asserts that Adam and Judy Schwab
exercised discretionary authority or control as to the
management and administration of the Plan and disposition of
the Plan's assets, as well as discretion over how
employee contributions were withheld by the Company through
weekly payroll deductions. Id. ¶¶ 7-8,
14-15. The Complaint contends that, as a result, both Adam
and Judi Schwab are fiduciaries of the Plan within the
meaning of Section 3(21) of ERISA, 29 U.S.C. § 1002(21),
as well as “parties in interest” within the
meaning of Section 3(14)(A), (C), (E), and (F) of ERISA, 29
U.S.C. § 1002(14)(A), (C), (E), and (F). Id.
Secretary asserts that for payroll periods between June 1,
2015 and December 21, 2016, the Company and the Schwabs
deducted money from the participants' pay as employee
contributions to the Plan. Compl. ¶ 12. During this
period, the Company and the Schwabs allegedly failed to remit
employee contributions to the Plan, remitted certain
contributions late without interest, and commingled employee
contributions with the general assets of the Company.
Id. Similarly, the Secretary contends that
unremitted employee contributions are assets of the Plan
within the meaning of ERISA, which assets the Schwabs failed
to ensure were collected by the Plan. Id.
¶¶ 13, 14-15. The Secretary alleges that for the
period between June 2015 and December 2016, the Plan suffered
approximately $18, 531.57 in losses from unremitted employee
contributions. Id. ¶ 17. Moreover, as of May
30, 2018, the Secretary alleges the Plan suffered $1, 706.36
in lost interest from unremitted employee contributions.
Id. The Company allegedly ceased operations on
December 31, 2016. Id. ¶ 16.
Jurisdiction, the Secretary's authority to sue, and other
addressing whether the Complaint states causes of action for
the six claimed ERISA violations, the Court must address
several threshold matters. First, subject matter jurisdiction
properly lies with this Court pursuant to Section 502(e)(1)
of ERISA, 29 U.S.C. § 1132(e)(1). Personal
jurisdiction is also present, as the Secretary effected
proper service of the summons and Complaint on the
Defendants. Additionally, the Court notes that the
Secretary has the authority to commence the instant action to
enforce provisions of Title I of ERISA pursuant to Sections
502(a)(2) and (5) of ERISA, 29 U.S.C. §§ 1132(a)(2)
Court must make several additional threshold findings before
proceeding to an analysis of the alleged ERISA violations.
Specifically, the Court finds that Schwab Contracting, Inc.
SIMPLE IRA Plan is, as alleged in the Complaint, properly
considered an “employee benefit plan” or
“plan” as that term is defined in Section 3(3) of
ERISA, 29 U.S.C. § 1002(3).Additionally, the Court finds
the Company and the Schwabs to be, as alleged in the
Complaint, properly considered both parties in interest and
fiduciaries as those terms are defined in Sections 3(14)(A),
(C), (E), (F) and (21) of ERISA, 29 U.S.C. §§
1002(14)(A), (C), (E), (F), and (21).
Individual alleged ERISA violations
Court next turns to addressing whether the facts alleged in
the Complaint are sufficient to state claims for the six
ERISA violations alleged. Unfortunately, this is made
difficult by the fact that the Secretary has failed to
provide any case citations to support his contention
that the six alleged ERISA violations have been sufficiently
pleaded. See Pl.'s Mem. at 5-7. This failure has
moved the Secretary's burden onto the Court. However, in
light of the public policy behind ERISA and the significant
interests at play here, see Pittsburgh Mack Sales &
Serv., Inc. v. Int'l Union of Operating Engineers, Local
Union No. 66, 580 F.3d 185, 193 (3d Cir. 2009)
(explaining that through ERISA, “Congress wanted to
guarantee that if a worker has been promised a defined
pension benefit upon retirement-and if he has fulfilled
whatever conditions are required to obtain a vested
benefit-he actually will receive it”), the Court
proceeds to address the individual alleged violations, based
primarily on its own independent research.
Section 403(c)(1) of ERISA, 29 U.S.C. §
first cause of action is for the Defendants' alleged
violation of Section 403(c)(1) of ERISA, 29 U.S.C. §
1103(c)(1). That provision mandates, with limited exceptions,
that “the assets of a plan shall never inure to the
benefit of any employer and shall be held for the exclusive
purposes of providing benefits to participants in the plan
and their beneficiaries and defraying reasonable expenses of
administering the plan.” As the Supreme Court has
explained, “[t]he purpose of the anti-inurement
provision, in common with ERISA's other fiduciary
responsibility provisions, is to apply the law of trusts to
discourage abuses such as self-dealing, imprudent investment,
and misappropriation of plan assets, by employers and
others.” Raymond B. Yates, M.D., P.C.
Profit Sharing Plan v. Hendon, 541 U.S. 1, 23 (2004).
Court has found scant caselaw discussing the precise elements
of a prima facie claim of violation of ERISA's
anti-inurement provision. Indeed, it has found no binding
precedent from this Circuit. Making this absence of guiding
case law more difficult is the fact that the Secretary's
allegations border on conclusory. They can be boiled down to
the following: between June 1, 2015 and December 21, 2016,
the Defendants failed to remit employee contributions to the
Plan, remitted certain contributions late without interest,
and commingled employee contributions with the general assets
of the Company, resulting in the Plan suffering losses.
See Compl. ¶¶ 13, 16-17. Notably, there
are no specific allegations as to what the Defendants used
the unremitted funds for. Such conclusory assertions have
been found insufficient to state a claim for violation of the
anti-inurement provision by other courts. See, e.g., Maez
v. Mountain States Tel. & Tel., Inc., 54 F.3d 1488,
1505 (10th Cir. 1995) (upholding the district court's
finding that the allegation that defendants “used
surplus assets of the Pension Plan in a manner which inured
to the benefit of the Plaintiffs' employer, [ ] and [ ]
and failed to hold the Pension Plan assets for the exclusive
purposes of providing benefits to participants in the Pension
Plan and their beneficiaries” was inherently conclusory
and could not state a claim for violation of the
anti-inurement provision); LaLonde v. Textron, Inc., 369
F.3d 1, 7 (1st Cir. 2004) (upholding the district court's
dismissal of an anti-inurement violation claim where
appellants made “no effort at all to explain how the
scheme alleged caused plan assets to inure to the benefit of
[the plan sponsor] itself”).
the Court recognizes that notwithstanding the lack of
specific factual assertions, where Plan assets have been
commingled with Company funds, the Company ceases operation,
and the Plan suffers a significant loss-the alleged
circumstances here-it cannot be said that the Plan assets
have been held “for the exclusive purposes of
providing benefits to participants in the Plan.” 29
U.S.C. § 1103(c)(1) (emphasis added). See,
e.g., Chao v. Stuart, No. CIV.H-04-1115, 2005
WL 1693939, at *7 (S.D. Tex. July 20, 2005) (explaining that
with respect to the duty of Section 1103(c)(1) to hold plan
assets for “the exclusive purposes of providing
benefits to partisans in the plan and their beneficiaries,
” where “a fiduciary breaches this duty and
allows plan assets to commingle with other corporate assets,
then he will be held liable”). Moreover, as at least
one court has observed, the “intentionally one-sided
purpose of protecting employees and protecting the financial
integrity of pension plans suggests that the general command
of 29 U.S.C. § 1103(c)(1) must be read liberally.”
Soft Drink Indus. Local Union No. 744 Pension
Fund v. Coca-Cola Bottling Co. of Chicago, 679 F.Supp.
743, 747 (N.D. Ill. 1988) (footnote omitted).
these considerations into account, the Court finds that
despite its barren nature, the Secretary's Complaint has
stated a claim for violation of ...