Perez v. Sherrod et al

Filing 43

MEMORANDUM Opinion and Order: For the reasons stated in this opinion and order, defendants' Motion for Leave To File Their Amended Answer and Affirmative Defenses [Dkt. No. 25] is denied. This action is set for a status hearing at 9 a.m. April 3, 2017 to discuss the future course of proceeding with the litigation. Signed by the Honorable Milton I. Shadur on 3/27/2017:Mailed notice(clw, ) Modified on 3/27/2017 (clw, ).

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

EDWARD HUGLER, Acting Secretary of
Labor, 1 United States Department of Labor,
Plaintiff,
v.
SHIRLEY T. SHERROD, et al.,
Defendants.

)
)
)
)
)
)
)
)
)
)

Case No. 16 C 4825

MEMORANDUM OPINION AND ORDER
Acting Secretary of Labor Edward Hugler (the "Secretary"), as named representative for
the Department of Labor (the "Department"), pursues this action under the civil enforcement
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.
§§ 1132(a)(2) and (5), 2 to enjoin alleged acts and practices that violate the provisions of ERISA's
Title I and to obtain relief for breaches of fiduciary duty under Section 1109 and further
equitable relief as may be appropriate (Complaint ¶ 1). Defendants Shirley Sherrod ("Sherrod"),
Leroy Johnson ("Johnson"), Shirley T. Sherrod, M.D., P.C. ("Sherrod PC") and Target Benefit
Pension Plan (the "Plan") have responded by joining in a motion for leave to file amended
_________________________
1
This action was filed by then United States Secretary of Labor Thomas E. Perez, who
has since been replaced by Acting Secretary Edward Hugler. Pursuant to Fed. R. Civ. P.
("Rule") 25(d), which provides for the automatic substitution of parties when the original party is
a public officer who ceases to hold office while an action is pending, this Court has caused the
Clerk's Office to replace Secretary Perez with Acting Secretary Hugler as the named
representative for the Department.
2

Future references to "29 U.S.C. § --" will take the form "Section --," omitting the
prefatory "29 U.S.C."

answers and affirmative defenses under Rule 15(a)(2), including an affirmative defense that
challenges the Secretary's allegations based on (1) Sherrod's use of Plan funds to post bond in a
court case and (2) her then improperly accounting for those funds (Section 1113). In turn the
Secretary has filed an objection to that aspect of Defendants' Motion for Leave To Amend. For
reasons explained in this memorandum opinion and order, defendants' motion to add the
affirmative defense referred to earlier in this opening paragraph is denied because that proposed
defense is untimely advanced.
Background
Sherrod PC established the Plan in 1987 to provide retirement benefits to the participants,
who were Sherrod PC employees (Complaint ¶ 2). Sherrod has been the named trustee of the
Plan since January 1987, and she is a Plan fiduciary within the meaning of Section 1002(21)(A)
(id. ¶ 7). Sherrod was the Plan administrator until May 30, 2012, at which time she appointed
Leroy Johnson to be the administrator (id. ¶ 14). Johnson was the Plan Administrator at least
during the period from May 30, 2012 to August 4, 2014 (Answer ¶ 8).
Sherrod PC terminated all its employees on or before December 31, 2008 (Complaint
¶ 11). At that time there were 19 former employee Plan participants -- ten with balances under
$5,000 and nine with balances over that amount (Answer ¶ 11). Plan documents require that
participants with account balances less than $5,000 at the time of termination receive
distributions as soon as administratively feasible (Complaint ¶ 12). For those with balances over
$5,000, the Secretary contends that the Plan requires that they be presented with the option for an
elective distribution after their termination (id.).
According to the Secretary, Sherrod processed her own request for a Plan distribution and
withdrew $253,114 from the Plan on or about November 10, 2011 (id. ¶ 16), but defendants deny

-2-

that allegation (Answer ¶ 16). 3 Since at least May 30, 2012 no participants have received
distributions from the Plan except for Sherrod (Complaint ¶ 15).
In 2008 Sherrod became the subject of a state court action in Michigan, which in 2011
resulted in a judgment against her and an order to freeze Sherrod's assets, including the Plan
(S. Mem. 2-3). 4 Sherrod sought to appeal that judgment, but the Michigan appellate court
required her to post a $250,000 bond to do so (D. Mem. 1). To enable her to post the bond,
Sherrod and Johnson then "took steps to unfreeze [Sherrod's] Plan account, including seeking a
reversal of the state court's order" (id.). And in 2012 Sherrod and Johnson also brought an action
in this District Court against Merrill Lynch, the custodian that held the Plan assets, under the
contention that the custodian's refusal to release the funds pursuant to the state court order
violated the federal Section 1056(d) directive that "[e]ach pension plan shall provide that benefits
provided under the plan may not be assigned or alienated" (D. Mem. 1, 2 n.1). 5

_________________________
3
On the other hand, defendants' proposed affirmative defense relies on the notion that
the Secretary had actual knowledge as early as 2012 that Sherrod used the $253,114 to post
bond, an assertion that causes this Court to call into question defendants' basis for denying the
allegation in the first place.
4

References to the parties' memoranda will take the following forms: for the Secretary's
Memorandum in Opposition to Defendants' Motion To Amend Answer, "S. Mem. --," for
Defendants' Memorandum in Support of Motion for Leave To File Their Amended Answer and
Affirmative Defenses, "D. Mem. --" and for Defendants' Reply Memorandum, "D. Reply --."
5

This Court's colleague, Honorable John Darrah, dismissed the Johnson and Sherrod
case against Merrill Lynch for lack of subject matter jurisdiction because (1) the injury in
question was not traceable to named defendant Merrill Lynch, which had sided with Sherrod and
Johnson in opposing the state court's order to freeze the Plan, and (2) in light of Sherrod's and
Johnson's appeal from the state court's freeze order to the Michigan appellate court, the
Rooker-Feldman doctrine barred any litigations seeking the same relief in federal court (Johnson
v. Merrill Lynch, Pierce, Fenner, & Smith, 12 C 2545, 2012 WL 5989345, at * 4 (N.D. Ill.
Nov. 28, 2012), aff'd 719 F.3d 601, 605 (7th Cir. 2013)).

-3-

On November 10, 2011 Sherrod signed an affidavit and sent it to Merrill Lynch directing
that $250,000 be paid directly to post the bond, with another $3,000 going directly to a surety
agency to file the bond (S. Mem. 3). Merrill Lynch then released from the Plan only the funds
needed to post the $250,000 bond in reliance on Sherrod's representations that the money
released was allocated to her account and that her assets contained sufficient funds (S. Mem. Ex.
5 at 2). Sherrod did not post the bond in the name of the Plan (S. Mem. 3).
Based on those facts, the Secretary alleges that defendants violated ERISA by
misallocating the $253,000 that was withdrawn from the Plan as "losses" to all participants, and
by failing to correct their misallocation (S. Mem. 4). In addition to the dispute about the
$253,114 distribution,6 the Secretary's complaint lists a series of unaccounted-for withdrawals
and misallocations by defendants, and it claims (1) that from January 1, 2015 to the present
Sherrod has continued to withdraw funds from the Plan and (2) that she and Johnson continually
fail to account for those distributions properly (Complaint ¶ ¶ 17, 20, 21-25).
Legal Standards
Rule 15(a)(2) instructs that with regard to motions to amend a party's pleadings "[t]he
court should freely give leave when justice so requires." But such cases as Indiana Funeral
Directors Ins. Trust v. Trustmark Ins. Corp., 347 F.3d 652, 655 (7th Cir. 2003) stand for the
related corollary that "[u]nder Rule 15, courts may deny an amendment for undue delay, bad
faith, dilatory motive, prejudice, or futility." Failure to assert a defense when the facts on which
it is based were well known to a defendant at the time of the initial pleading may be a ground on

_________________________
6
Neither side has accounted for the $114 difference between what is listed in the
Complaint as a withdrawal of $253,114 from the Plan on or about November 2011 and the
$253,000 discussed in the Secretary’s Memorandum.
-4-

which a motion to amend may be denied as untimely (see, e.g., Cont'l Bank, N.A. v. Meyer,
10 F.3d 1293, 1298 (7th Cir. 1993)).
Untimeliness and Lack of Evidentiary Support
Defendants now seek leave to inject into the case a statute of limitations defense to
allegations stemming from Complaint ¶¶ 16 to 18. That calls for consideration of Section 1113,
which reads in relevant part:
No action may be commenced under this subchapter with respect to a fiduciary's
breach of any responsibility, duty, or obligation under this part, or with respect to
a violation of this part, after the earlier of -(1) six years after (A) the date of the last action which constituted a part of
the breach or violation, or (B) in the case of an omission the latest date on
which the fiduciary could have cured the breach or violation, or
(2) three years after the earliest date on which the plaintiff had actual
knowledge of the breach or violation.
As defendants would have it, the Department had actual knowledge as early as 2012 that
in 2011 Sherrod used her $253,000 withdrawal to post bond for her state court appeal. So they
claim that the statute of limitations bars the Complaint ¶¶ 16 to 18 allegations (1) that Sherrod
withdrew the $253,114 from the Plan and accounted for it incorrectly and (2) that her actions
caused all the other participants' vested benefits to be decreased (D. Mem. Ex. B ¶ 19). But
analysis clearly shows that neither of Section 1113's alternatives bars the Secretary's ERISA
claims.
Defendants attempt to support their proposed amendment with two newly-filed
submissions. First they tender a fax from the Plan's then lawyer Edwin Conger to the
Department dated December 20, 2012, notifying the Department that Johnson had succeeded
Sherrod as Plan administrator (D. Mem. Ex. C):

-5-

Pursuant to our conversation I am transmitting a copy of the appointment dated
May 30, 2012 of Leroy Johnson as successor Plan administrator of the Shirley T
Sherrod MD PC Target Pension Plan and Trust.
That fax also referred to the Sherrod and Johnson federal case briefly and tangentially:
For your further information a Notice of Appeal was filed yesterday from the
orders entered November 28, 2012 in the District Court in Chicago in Case
No. 12 C 2545. I am transmitting a copy of this notice as well.
According to defendants the fax should have alerted the Secretary that Sherrod had posted the
bond with Plan assets (D. Mem. 2 n.1) (apparently the docket in the federal case made
documents publicly available that showed Sherrod used Plan assets to pay her state court bond
(id.)).
Second, defendants submit an earlier email from Sherrod to the Department (dated
August 10, 2012) inquiring about alienation of Plan assets by the state court (D. Mem. Ex. E).
Attached to that email is a demand letter dated February 14 of that year from Sherrod's lawyers
to Merrill Lynch insisting that it ignore the state court's order to freeze the Plan assets. In that
letter Sherrod's lawyers said in part:
Merrill Lynch has refused to follow the directions from the Plan Administrator,
except once where Merrill Lynch forced Ms. Sherrod to sign an affidavit stating
the funds would be used to post a bond in a state court proceeding.
Defendants' contend that the Department, having received that letter on August 10, 2012 in the
form of an email attachment, ought to have known that Sherrod used Plan assets to pay the bond
in her state court appeal.
Defendants' effort to cobble together the brief references in those two cases as somehow
triggering an obligation on the Secretary's part to engage in active outside research that could
have turned up Sherrod's breach of her own fiduciary obligations -- thus starting a limitations
clock that would relieve Sherrod of responsibility for the illegal actions that she herself had

-6-

taken -- is truly disingenuous. As stated earlier, a court may deny a party's motion to amend
when a proposed amendment is based on information and documents about which the party knew
when it filed its original pleading (Cont'l Bank, N.A., 10 F.3d at 1298) -- indeed, that case goes
farther, extending responsibility to matters of which the party itself should have been aware.
Here it is extraordinarily ironic for defendants to attempt to disclaim such responsibility by
stating in their memorandum, not once but twice (D. Mem. at 2, 4), that the documents were
"discovered in their own files" after they had submitted their Answer. This opinion will go on to
look at the situation in that respect, first addressing the earlier Sherrod email and then the later
Conger fax.
As for the first, it is certainly no excuse that Sherrod may have forgotten the email that
she herself authored that contained the sidelong reference that her counsel now tries to stress -much more tellingly, of course she had unquestionably not forgotten the far more directly
relevant information: the knowledge that she had committed the act on which the Complaint is
mounted. By sharp contrast, the notion that the brief statement in the letter attached to the email
gave the Department "actual knowledge of the breach or violation" (the unambiguous language
of Section 1113(2)) loads that figurative linguistic beast with more baggage than it can
figuratively carry.
As for the fax, defendants claim that the death of Conger complicated their efforts to
obtain the document (D. Reply 5). But even if it is assumed arguendo that defendants were
unable, despite good faith efforts, to locate the document before filing their original Affirmative
Defenses, that would not call for granting defendants' motion to amend. Once again it involves
an impermissible stretch to characterize the fax as showing that the Department had actual
knowledge that Sherrod withdrew funds from the Plan's general assets to pay her state court

-7-

bond -- after all, the fax was nothing more than a routine notification to the Department about a
change in Plan administrator. It cannot fairly be said that a fax cover note that offhandedly
mentions a federal case having nothing whatever to do with the type of wrongdoing alleged here
could have imparted "actual knowledge" of such wrongdoing to the Secretary.
In brief, even on defendants' distorted reading of the Section 1113(2) "actual knowledge"
requirement as discussed in the next paragraph of this opinion, they have really offered nothing
to suggest that the Secretary had such suspicions as to Sherrod's improper use of Plan funds as
would call for her to engage in an investigation of documents in Sherrod's federal case when the
fax was transmitted in 2012. Moreover, the notion that the Secretary would otherwise randomly
search a federal docket is patently absurd. Here defendants have not claimed that the
Department actually undertook that improbable course -- thus they have made no credible
assertion that the fax imparted to the Secretary "actual knowledge" that would bring the statute of
limitations into play.
To be blunt on that score, defendants' strained arguments that the analysis to this point
has already rejected are even more fundamentally flawed, for everything that defendants have
put forth ignores the stringency of the concept of "actual knowledge" that must be met to cut the
Section 1113 limitations period in half -- from six years in Section 1113(1) to three years in
Section 1113(2). What defendants have sought to do in that regard is to apply the concept of
"inquiry notice" embodied in such statutes as RICO with the far more demanding "actual
knowledge" test under ERISA.
That conceptual contrast has been explained well by the Court of Appeals for the Third
Circuit in Cetel v. Kirwan Fin'l Group, Inc., 460 F.3d 494 (3rd Cir. 2006), where an explanation

-8-

and application of RICO's "inquiry notice" requirement (id. at 507-08) was followed by this
exposition of ERISA's far stricter "actual notice" requirement (id. at 511):
By its terms then, ERISA's statute of limitations provision offers a choice of
periods, depending on "whether the plaintiff has actual knowledge of the
breach. . . ." Kurz v. Phila. Elec. Co., 96 F.3d 1544, 1551 (3d Cir. 1996). In
Gluck v. Unisys Corp., we established that:
Actual knowledge of a breach or violation requires that a plaintiff have
actual knowledge of all material facts necessary to understand that some
claim exists, which facts could include necessary opinions of experts,
knowledge of a transactions's harmful consequences, or even actual harm.
960 F.2d 1168, 1178 (3d Cir.1992) (internal citations omitted). We have thus
stated that for purposes of determining actual knowledge, it must be shown that
"plaintiffs actually knew not only of the events that occurred which constitute the
breach or violation but also that those events supported a claim of breach of
fiduciary duty or violation." Montrose Med. Group Participating Savs. Plan v.
Bulger, 243 F.3d 773, 787 (3d Cir. 2001) (citations omitted). In other words,
where a claim is for breach of fiduciary duty, to be charged with actual
knowledge "requires knowledge of all relevant facts at least sufficient to give the
plaintiff knowledge that a fiduciary duty has been breached or ERISA provision
violated." Gluck, 960 F.2d at 1178.
That plain-language conceptualization of the Section 1113(2) standard was acknowledged by the
Cetel court as "[r]ecognizing that the § 1113 statute of limitations sets a 'high standard for
barring claims against fiduciaries prior to the expiration of the six-year limitations' and the
requirements must be interpreted 'stringently,' Montrose, 243 F.3d at 778."
Although the Third Circuit completed its treatment of the matter in Cetel by finding that
the very different facts before it in that case met that more stringent standard, other courts too
have given the ERISA statute its plain meaning and have accordingly rejected the efforts of
parties such as defendants here to rewrite the statute, consequently rejecting limitations
arguments such as those advanced here by defendants (see, e.g., Maher v. Strachan Shipping Co.,
68 F.3d 951, 954-56 (5th Cir. 1995); Caputo v. Pfizer, Inc., 267 F.3d 181, 193-94 (2d Cir. 2001),
first citing Maher and later expressly rejecting the "should have known" approach urged by
-9-

defendants here -- an impermissible "constructive knowledge" substitute for "actual knowledge";
and LaScala v. Scrufari, 479 F.3d 213, 220 n.1 (2d Cir. 2007), citing Caputo and following the
same path to the same conclusion). It simply will not do for defendants -- or for this Court -- to
play legislator and amend the ERISA statute by taking the quantum leap from a purported need
to inquire further based on snippets of indirect references to the far more difficult "actual
knowledge" test.
Secretary's Contention as to Futility
Courts also may deny a motion to amend for futility, meaning that it has no legal basis to
affect the litigation (see, e.g. Wilson v. Am. Trans Air, Inc., 874 F.2d 386, 392 (7th Cir. 1989).
In that respect the Secretary seeks to invoke the recent Supreme Court decision on the
application of Section 1113 in Tibble v. Edison Int'l, 135 S. Ct. 1823, 1829 (2015), which
teaches (1) that fiduciaries have a continuing duty to monitor a plan's investments and (2) that if
a violation is of a type that can still be cured, the last date of the violation has yet to occur. In
that regard the Secretary claims that ever since defendants' misallocation of those funds as Plan
"losses," they have been bound by their fiduciary duty as described in Section 1104 to correct the
misallocation -- a duty on which they have failed to act to this day (S. Mem. 12). Hence the
Secretary contends that defendants' violation is ongoing because they still have an opportunity to
cure, a fact that assertedly torpedoes defendants' proposed limitations defense (S. Mem. 12).
But that attempted analogy to Tibble appears flawed, for the course of conduct alleged in
this case -- discrete misallocations that have yet to be corrected by defendants -- does not parallel
the breach of ongoing fiduciary duty at issue in that case. There the Supreme Court relied on the
defendants' common law duty under trust law to "monitor trust investments and remove
imprudent ones. This continuing duty exists separate and apart from the trustee's duty to

- 10 -

exercise prudence in selecting investments at the outset" (135 S. Ct. at 1838). No such
"continuing duty" is at issue here, where it is charged that defendants breached their duty to
manage the Plan with the prudence required by Section 1104 when they misallocated Plan funds.
Under the Secretary's reading, ERISA's limitations clock would not begin to tick on any
past wrongdoing that has yet to be corrected. To apply that approach to any breach of fiduciary
duty that has yet to be cured could well negate Section 1113 altogether. This Court will not take
that drastic step -- a declination that does not affect the result here in any event, for defendants'
motion fails for the reasons explained earlier.
Conclusion
Defendants' Motion for Leave To File Their Amended Answer and Affirmative Defenses
[Dkt. No. 25] is denied. This action is set for a status hearing at 9 a.m. April 3, 2017 to discuss
the future course of proceeding with the litigation. 7

__________________________________________
Milton I. Shadur
Senior United States District Judge
Date: March 27, 2017

_________________________
7
No change is made in the previously set April 27 status hearing date, which has been
scheduled to address another matter on which the parties have joined issue.

- 11 -