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Acosta v. Schwab

United States District Court, E.D. Pennsylvania

December 20, 2019

R. ALEXANDER ACOSTA, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR, Plaintiff,
v.
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

          Joseph F. Leeson, Jr. United States District Judge

         I. BACKGROUND

         The Secretary of Labor of the United States[1] 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.

         The 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 proper service.

         For the reasons set forth below, the Secretary's Motion for Entry of Default Judgment is granted.

         II. LEGAL STANDARD

         “When 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).

         “If 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. 2009)).

         In 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.”[2] 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)).

         III. ANALYSIS

         A. The Secretary has stated claims for violations of ERISA.

         The 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. ¶¶ 19(a)-(f).

         1. Facts alleged in the Complaint

         The Secretary contends the following allegations in the Complaint state claims for violations of each of the above-six provisions of ERISA.

         Schwab 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).[3] Id. ¶¶ 7-8.

         The 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.

         2. Jurisdiction, the Secretary's authority to sue, and other threshold matters

         Before 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).[4] Personal jurisdiction is also present, as the Secretary effected proper service of the summons and Complaint on the Defendants.[5] 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) and (5).[6]

         The 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).[7]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).[8]

         3. Individual alleged ERISA violations

         The 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.

         a. Section 403(c)(1) of ERISA, 29 U.S.C. § 1103(c)(1)

         The 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).

         The 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);[9] 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”).

         However, 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).

         Taking these considerations into account, the Court finds that despite its barren nature, the Secretary's Complaint has stated a claim for violation of ...


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