Smith v. OSF Healthcare System et al

Filing 142

ORDER GRANTING Motion to Dismiss (Doc. 130 ). Defendants motion to dismiss Plaintiffs state law claims is GRANTED. Counts X-XIV of the Fourth Amended Complaint (Doc. 138 ) are hereby DISMISSED without prejudice. Signed by Judge Staci M. Yandle on 12/5/2017. (bps)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS

SHEILAR SMITH, et al., On Behalf of
Themselves and All Others Similarly
Situated, and On Behalf of the OSF Plans

)
)
)
)
)
)
)
)
)
)
)

Plaintiffs,
vs.
OSF HEALTHCARE SYSTEM, et al.,
Defendants.

Case No. 16-CV-467-SMY-RJD

MEMORANDUM AND ORDER
Before the Court is Defendants’ Motion to Dismiss Counts X-XIV of Plaintiffs’ Third
Amended Class Action Complaint (Doc. 130). 1 Plaintiffs filed a response (Doc. 140). For the
following reasons, the motion is GRANTED.
Background
Defendant OSF is an Illinois 501(c)(3) non-profit corporation. 2 OSF operates eleven
acute care hospitals, home health care services and other health care facilities in Illinois and
Michigan. As part of its operations, OSF maintains at least two defined-benefits plans covering
its own direct employees (“St. Francis Plan”) and employees of the recently-acquired St.
1

Subsequent to the filing of the instant Motion to Dismiss, Plaintiffs sought and received leave
to file a Fourth Amended Complaint (Doc. 138). The purpose of that amendment was to add
three parties who had been pursuing a parallel action by simply adding subparagraphs 15.1, 15.2
and 15.3 (Doc. 133). The parties have stipulated that the amendment did not changed the
substance or application of the instant motion, and the Court finds that judicial economy is best
served by ruling on the instant motion and applying the ruling to the Fourth Amended
Complaint.
2

The following facts are taken from the Fourth Amended Complaint (Doc. 138) and must be
accepted as true solely for purposes of the instant motion to dismiss. See Erickson v. Pardus,
551 U.S. 89, 94, (2007).
1

Anthony’s Health Center (“St. Anthony’s Plan”). Defendant Retirement Committee for the
Retirement Plan for Employees of Saint Anthony’s Health Center (“St. Anthony’s Committee”)
is the administrator of the St. Anthony’s Plan. Defendant Sisters of the Third Order of St.
Francis Employees Pension Plan Administrative Committee (“St. Francis Committee”) is the
administrator of the St. Francis Plan.
Plaintiffs Sheilar Smith and June Schwierjohn were employed at Saint Anthony’s Health
Center until 2015 and 2016 respectively. Both are vested participants in the St. Anthony’s Plan.
Plaintiffs Kasandra Anton, Bonnie Bailey and Peggy Wise were employed by OSF and are
vested participants in the St. Francis Plan.
Initially, this case involved only claims asserted under the Employee Retirement Income
Security Act of 1974 (“ERISA”), Pub.L. 93–406, 88 Stat. 840 as amended.

Specifically,

Plaintiffs allege that OSF and related entities had improperly treated the St. Anthony’s Plan and
St. Francis Plan (collectively, “The Plans”) as “church plans,” which are exempt from the
requirements of ERISA. 29 U.S.C. § 1003(b)(2). Plaintiffs further allege that OSF has failed to
adequately fund the Plans’ trust accounts to the level required under ERISA to cover all accrued
benefits, that the defendants failed to follow certain notice, disclosure and managerial
requirements, and that the defendants had breached their duties as fiduciaries.
After the case was filed, the Supreme Court issued its Opinion in Advocate Health Care
Network v. Stapleton, 137 S. Ct. 1652 (2017) which resolved some, but not all of the issues in
this litigation. Plaintiffs subsequently filed a Third (and later Fourth) Amended Complaint
adding five “alternative” causes of action “for relief under State law if the Court determines that
the OSF Plans are ‘church plans’ exempt from ERISA.” (Docs. 120 and 138 at n. 4). The state

2

law counts (Counts X-XIV) all center on OSF’s alleged failure to make adequate contributions to
the Plans to ensure that there were sufficient funds to pay accrued benefits.
Count X asserts a breach of contract claim against OSF based on express and implied
promises by OSF and its predecessors to “(1) pay to Plaintiffs and other Class members, upon
retirement, defined benefit pensions in amounts that increased with each year of service; and (2)
make ongoing contributions to the OSF Plan trusts that were sufficient, on an actuarial basis, to
pay for the accrued pension benefits.” (Doc. 138 at ¶251). Plaintiffs allege that these promises
were made in “summary plan descriptions, benefits statements, and other OSF Plan documents”
as inducements for employees to continue their employment, and that the “offer” was accepted
by the putative class members by beginning or continuing their employment with the
organizations covered by the Plans. (Id. at ¶¶ 253-54). Plaintiffs further allege that OSF has
breached its contractual obligations and violated the implied covenant of good faith and fair
dealing by failing to fund the Plans’ trusts sufficiently to pay accrued benefits, and request
specific performance of that promise. (Id. at ¶¶ 258-59).
Count XI is the equity alternative to Count X’s contract claim, in the event no
enforceable contract is found to exist. It is premised on the same alleged promises and asserts a
claim for promissory estoppel, on the theory that the Plaintiffs and putative class members relied
on these representations in starting or continuing their employment with the covered
organizations. (Id. at ¶¶ 267-70). Again, Plaintiffs request that the Court require OSF to
increase funding of the Plans to a level sufficient on an actuarial basis to meet the amount of
accrued benefits. Count XII also sounds in equity, asserting that OSF’s enjoying the benefits of
the class members’ work while retaining funds which should have been contributed to the Plans’
trust accounts amounts to unjust enrichment. (Id. at ¶¶275-88).

3

The remaining two counts assert claims for the breach of common law fiduciary duties by
OSF (Count XIII) and the St. Francis and St. Anthony’s Committees (Count XIV). Count XIII
alleges that Plaintiffs and the putative class are beneficiaries of the trusts which hold the Plans’
assets, that OSF is “a fiduciary pursuant to the OSF Plan documents” and that it has breached its
fiduciary obligations by retaining funds that should have been contributed to fund the Plans’
future obligations. (Id. at ¶¶ 292-99).
Count XIV asserts that the St. Francis and St. Anthony’s Committees are “trustees,”
“fiduciary trust managers” or “trust protectors within the meaning of the common law of trusts”
of the Plans’ trusts, as well as “fiduciaries pursuant to the OSF Plan documents.” (Id. at ¶¶ 3034). Plaintiffs allege that the St. Francis and St. Anthony’s Committees breached their fiduciary
duties in “failing to use reasonable diligence to take control of trust property without unnecessary
delay, including by failing to take reasonable steps to hold OSF to its obligation to make
contributions that were sufficient, on actuarial basis, to fund all accrued benefits under the OSF
Plans.” (Id. at ¶ 311). In both counts, Plaintiffs seek to compel the defendants to perform their
duties and make good any losses caused by the alleged breaches of those duties.
Discussion
Defendants argue that the state law counts must be dismissed on numerous grounds
pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). First, they contend that
Plaintiffs lack standing to assert their claims under Counts X through XII as there is no harm or
imminent threat harm. Second, they assert that Counts X through XIV are time-barred. Finally,
the defendants attack the “merits” of each State Law Count.
When a motion to dismiss asserts a lack of subject matter jurisdiction under Rule 12(b)(1)
as well as Rule 12(b)(6) defenses, a court should consider the jurisdictional challenge first. Bell

4

v. Hood, 327 U.S. 678, 682 (1946). Rule 12(b)(1) permits the Court to dismiss an action for lack
of jurisdiction over the subject matter, pursuant to a motion by the defendant. Fed. R. Civ. P.
12(b)(1). The Court may also dismiss a claim sua sponte if its review of the pleadings reveals
that it lacks subject matter jurisdiction. Moreover, “[i]t is the responsibility of a court to make an
independent evaluation of whether subject matter jurisdiction exists in every case”. Foster v.
Hill, 497 F.3d 695, 696-97 (7th Cir. 2007).
Plaintiffs assert federal subject matter jurisdiction on two related bases: as a civil action
involving a federal question (28 U.S.C. § 1331) and under the civil enforcement provision of
ERISA (29 U.S.C. § 1132(e)). (Doc. 138 at ¶10). The only federal questions involved in this
case arise in ERISA counts.

For the state law counts, Plaintiffs assert that Court has

supplemental jurisdiction pursuant to 28 U.S.C. § 1367 because “the state law claims are so
related to Plaintiffs’ other claims in this action that they form part of the same case or
controversy.” (Id.).
Under the supplemental jurisdiction statute, “in any civil action of which the district
courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all
other claims that are so related to claims in the action within such original jurisdiction that they
form part of the same case or controversy under Article III of the United States Constitution.” 28
U.S.C. § 1367(a). Put another way, a federal court has supplemental jurisdiction over a state law
cause of action when the claims “derive from a common nucleus of operative fact, such that the
relationship between [the federal] claim and the state claim permits the conclusion that the entire
action before the court comprises but one constitutional case.” Groce v. Eli Lilly & Co., 193
F.3d 496, 500 (7th Cir. 1999) quoting City of Chicago v. International College of Surgeons, 522
U.S. 156, 164–65 (1997).

5

A district court is not required to exercise supplemental jurisdiction, and may decline to
do so if it has dismissed all claims over which it has original jurisdiction, or “in exceptional
circumstances” where “there are other compelling reasons for declining jurisdiction.” 28 U.S.C.
§ 1367(c)(3)-(4). Under other circumstances, the Court would exercise supplemental jurisdiction
over the state law causes of action pled in this case. All five counts arise from the existence and
terms of the Plans, the alleged failure to fund the Plans adequately, and representations allegedly
made to the putative class about their interests in the Plans. It would be impossible to resolve the
state law questions without reference to the Plans’ terms.
ERISA cases, however, pose a special problem for supplemental jurisdiction because of
the doctrine of complete preemption.

ERISA § 514(a) provides (with some inapplicable

exceptions) that ERISA supersedes “any and all State laws insofar as they may now or hereafter
relate to any employee benefit plan.” 29 U.S.C. § 1144(a). “Relate to” has been interpreted
broadly to include “a state law claim if the claim requires the court to interpret or apply the terms
of an employee benefit plan[.]” Collins v. Ralston Purina Co., 147 F.3d 592, 595 (7th Cir. 1998)
quoting Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987). Such a claim is completely
preempted by ERISA (1) “if an individual, at some point in time, could have brought his claim
under ERISA's expansive civil enforcement mechanism … and (2) where there is no other
independent legal duty that is implicated by a defendant's actions.” Studer v. Katherine Shaw
Bethea Hosp., 867 F.3d 721, 724 (7th Cir. 2017) quoting Aetna Health Inc. v. Davila, 542 U.S.
200, 210 (2004). “Complete preemption means that a claim brought by the Plaintiff as a state
law claim is transformed through the magic of complete preemption into a federal ERISA claim.
That is, no matter how the Plaintiff styles it, if the substance of the claim is completely
preempted then it is an ERISA claim and only an ERISA claim.” Associated Fin. Grp., LLC v.

6

Qualified Annuity Servs., Inc., No. 10-C-419, 2010 WL 4853291, at *1 (E.D. Wis. Nov. 23,
2010) (emphasis added).
Here, Plaintiffs’ state law claims are preempted. Counts X-XII specifically seek to
enforce OSF’s alleged duty to adequately fund the Plans. As such, they could have been—and
have been— brought under the auspices of ERISA. Similarly, breach of fiduciary duty claims,
such as those set forth in Counts XIII and XIV are specifically authorized by the statute. 29
U.S.C. §§ 1109 and 1132(a)(2).
Additionally, the state law counts do not implicate any duty independent of the Plans.
Without the Plans, there would be no duty for OSF to contribute to the trusts and no violations
arising from the alleged failure to adequately do so. The breach of contract claim explicitly turns
on the language of the Plan documents. The equity-based claims (Counts XI and XII) require
examination of each party’s rights and responsibilities under the Plans and related documentation
in order to determine whether Plaintiffs’ expectations and reliance were reasonable and to assess
the overall balance of fairness. Finally, the fiduciary duties of the defendants underpinning the
claims asserted in Counts XIII and XIV are defined in large part by the powers and obligations
imposed by the terms of the Plans. Thus, the “common nucleus of operative fact” on which
supplemental jurisdiction would be based also triggers preemption if ERISA applies to the Plans.
ERISA is the only basis for this action to be in federal court. (Doc. 138 at ¶ 10).
Plaintiffs have pled the state law claims “in the alternative” to the ERISA counts because they
recognize the two approaches are mutually exclusive. If the Court were to find that ERISA
applies, the state law claims must be dismissed as preempted. On the other hand, if the Court
finds that ERISA does not apply, then the state law claims are not preempted, but lack any basis

7

for federal jurisdiction and the Court must dismiss the case. In either case, the result is the state
law counts being dismissed.
Given the absolute conflict between complete preemption and supplemental jurisdiction,
the state law claims are poisonous to federal subject-matter jurisdiction. Plaintiffs can either
proceed on their state law claims or they can be in federal court, but not both. There is no point
in continuing to litigate these claims in this Court because they are going to be dismissed sooner
or later. The Court will therefore exercise its discretion and dismiss them without prejudice now
for lack of subject matter jurisdiction.
Accordingly, Defendants’ motion to dismiss Plaintiffs’ state law claims is GRANTED.
Counts X-XIV of the Fourth Amended Complaint are hereby DISMISSED without prejudice.
IT IS SO ORDERED.
DATED: December 5, 2017
s/ Staci M. Yandle
STACI M. YANDLE
United States District Judge

8