Cappello et al v. Franciscan Alliance, Inc. et al

Filing 162

OPINION AND ORDER: The court DENIES the defendants' 126 motion to dismiss. Signed by Judge Robert L Miller, Jr on 3/27/19. (dk)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
SOUTH BEND DIVISION
LORRAINE CAPPELLO, et al.,
Plaintiffs
v.
FRANCISCAN ALLIANCE, INC., et al.,
Defendants

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Cause No. 3:16-CV-290 RLM-MGG

OPINION AND ORDER
This is a putative class action brought by retired employees of various
affiliates of Franciscan Alliance, Inc. seeking to represent a class of persons that
are participants or beneficiaries of the Franciscan Alliance Pension Security Plan.
They contend that the defendants – Franciscan Alliance, Inc., its Board of
Trustees, the Franciscan Alliance Pension and Benefits Committee, and 40 John
Does – have underfunded the Plan by as much as $320 million and have operated
it in violation of the Employee Retirement Income Security Act of 1974 (ERISA)
(Counts 1-9), state law (Counts 10-11), and/or the Establishment Clause in the
First Amendment (Count 12). The defendants (collectively referred to as
“Franciscan Alliance”) moved to dismiss the Consolidated Class Action Complaint
[Doc. No. 115] under Fed. R. Civ. P. 12(b)(1) for lack of standing and/or Rule
12(b)(6) for failure to state a claim.
The court heard oral argument on the motion on May

2017.

Notwithstanding the challenging and difficult issues the motion presents, the
court can’t justify such a delay, and can only apologize to the parties and their

counsel. For the reasons that follow, the court denies Franciscan Alliance’s
motion.

I. LEGAL STANDARD
Detailed factual allegations aren’t required to meet the notice pleading
requirements of Rule 8(a). To survive a motion to dismiss under Rule 12(b), the
factual allegations in the complaint must “state a claim to relief that is plausible
on its face” – one that "raise[s] a right to relief above the speculative level", “allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged", and gives the defendant fair notice of the claims being
asserted and the grounds upon which they rest. Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007). In determining whether the claims asserted are plausible,
the court construes the complaint in the light most favorable to the plaintiffs,
accepts all well-pleaded facts as true, draws all reasonable inferences in the
plaintiff’s favor, Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Anicich v. Home
Depot U.S.A., Inc., 852 F.3d 643, 648 (7th Cir. 2017), and generally won’t
consider matters outside the pleadings or engage in fact-finding. See Fed. R. Civ.
P. 12(d); Reger Dev., LLC v. National City Bank, 592 F.3d 759, 763 (7th Cir. 2010);
Stakowski v. Town of Cicero, 425 F.3d 1075, 1078 (7th Cir. 2005). There is an
exception: when considering a motion to dismiss under Rule 12(b)(1) for lack of
standing, the court can look beyond the allegations of the complaint and consider

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other competent evidence. Bastuen v. AT&T Wireless Servs., Inc., 205 F.3d 983,
990 (7th Cir. 2000).

II. DISCUSSION
Franciscan Alliance moved to dismiss the plaintiffs ERISA failure to fund,
state law breach of fiduciary duty and breach of contract, and Establishment
Clause claims (Counts 6 and 10-12) under Rule 12(b)(1), contending that the
plaintiffs lack standing to bring those claims because they haven’t sufficiently
alleged injury-in-fact. Franciscan Alliance argues, in the alternative, that the
complaint should be dismissed in its entirety under Rule 12(b)(6) because: (1) the
Franciscan Alliance Plan qualifies for the “church plan” exemption to ERISA, 29
U.S.C. § 1003(b)(2) (Counts 1-8);1 (2) the breach of fiduciary duty claims and
breach of contract claims (Counts 9-11) aren’t supported by sufficient factual
allegations; alternatively, the court should decline to exercise supplemental
jurisdiction over the state law claims (Counts 10-11), if it dismisses the federal
ERISA claims; and (3) the plaintiffs’ constitutional challenge to the “church plan”
exemption should be dismissed because the exemption satisfies the three-prong
test in Lemon v. Kurtzman, 403 U.S. 602 (1971).

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Franciscan Alliance also sought to impose limitations on the vesting claim in
Count 2, but plaintiffs have conceded that the vesting claim is limited to Plan
participants who worked after January 1, 2008.

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A. Standing
The plaintiffs bear the burden of proving that they have standing, and must
show that: (1) they suffered an injury in fact that’s “concrete and particularized”
and actual or imminent, not conjectural or hypothetical; (2) there’s a causal
connection between the injury and the conduct complained of; and (3) a favorable
decision can redress the injury. Spokeo v. Robins, 136 S. Ct. 1540, 1545 (2016);
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-561 (1992).
Franciscan Alliance challenges only the first requirement. It contends that
the plaintiffs have miscalculated and “exaggerated” the amount of the shortfall,
and lack standing because they haven’t shown that their benefits were actually
reduced, that the Plan is being (or is likely to be) terminated, or that Franciscan
Alliance can’t make up the deficit. Citing, i.e., Lee v. Verison Communications,
Inc., 837 F.3d 523, 545-46 (5th Cir. 2016); Perelman v. Perelman, 793 F.3d 368,
374 (3rd Cir. 2015); David v. Alphin, 704 F.3d 327, 338 (4th Cir. 2013).
But the plaintiffs don’t have to show past actual or tangible loss to have
standing. They allege in their complaint that the defendants have not only
underfunded the Plan by more than $320 million as of 2015, but have operated
the Plan as a “church plan”, even though it doesn’t qualify, and have failed to pay
premiums to the Pension Benefit Guaranty Corporation. As a result, the plaintiffs
assert, the Plan has suffered losses and Plan participants are subject to a
substantial risk of pensions being lost or reduced, without the benefit of insurance

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to protect them if the Plan defaults on its obligations or is terminated with
insufficient assets. The plaintiffs conclude that the risk of injury in this case is
both substantial and imminent, and that they therefore have standing to
challenge the defendants’ actions or failure to act. Citing Susan B. Anthony List
v. Driehaus, 134 S.Ct. 2334 (2014 ) (holding that a plaintiff has standing if there
is a “substantial risk” that the threatened future injury will occur); Remijas v.
Neiman Marcus Group, LLC, 794 F.3d 688, 693 (7th Cir. 2015) (standing may be
found on a “substantial risk” of harm); Scanlan v. Eisenberg, 669 F.3d 838, 847
(7th Cir. 2012) (plaintiffs not required to suffer a loss of benefits before they have
standing); Johnson v. Allsteel, Inc., 259 F.3d 885, 888 (7th Cir. 2001) (“increased
risk the [plan] participant faces ... is an injury-in-fact.”); Rollins v. Dignity Health,
338 F.Supp.3d 1025 (N.D. Cal. Sep. 6, 2018) (finding plaintiffs had standing based
on similar allegations). The court agrees.
The extent to which the Franciscan Alliance Plan may be underfunded and
whether the defendants could cover the deficit if required to do so are questions
of fact that can’t be resolved on a motion to dismiss. Unlike the plaintiffs in Lee
v. Verizon Communications, Perelman v. Perelman, and David v. Alphin, these
plaintiffs allege that the Plan is underfunded by more than $320 million, the
insurance provided to ERISA plan participants by the Pension Benefit Guaranty
Corporation isn’t available to them because Franciscan Alliance has been
operating the Plan as a church plan in violation of ERISA, and there is an inherent

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and substantial risk that their benefits will be reduced or terminated if corrective
action isn’t taken. The court must assume those facts are true for purposes of this
motion. The plaintiffs have sufficiently alleged injury-in-fact and have standing to
sue based on the enhanced risk of default and lack of insurance coverage.

B. The Church Plan Exemption
Franciscan Alliance contends that even if the plaintiffs have standing, the
Plan is exempt from ERISA because it’s a “church plan”, and that the plaintiffs
haven’t sufficiently alleged otherwise, so Counts 1-9 should be dismissed.
“The Employee Retirement Income Security Act of 1974 (ERISA) exempts
‘church plan[s]’ from its otherwise-comprehensive regulation of employee benefits
plans.” Advocate Health Care Network v. Stapleton, 137 S.Ct. 1652, 1655 (2017).
An organization can qualify for the exemption, if:
(1) it is a “tax-exempt nonprofit organization associated with a church”;
(2) its retirement plan is “maintained by an organization ... the principal
purpose or function of which is the administration or funding of [the retirement]
plan” for the benefit of its employees; and
(3) the principal purpose organization is also controlled by or associated
with a church.
29 U.S.C. § 1002(33); see also Medina v. Catholic Health Initiatives, 877 F.3d
1213, 1230-1234 (10th Cir. 2017).

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The plaintiffs allege in ¶¶ 85-135 of the complaint that the Franciscan
Alliance Plan doesn’t meet any of those requirements because:
•

Franciscan Alliance, not the Pension and Benefits Committee,
“maintains” the Plan;

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Franciscan Alliance’s “principal purpose or function” isn’t to
administer or fund a retirement plan – it’s to provide healthcare
services;

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Franciscan Alliance isn’t “controlled by or associated with a church”
because it “partners with organizations that claim no religious
affiliation” and doesn’t consider “religious affiliation ... in recruiting
and hiring employees”; and

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most of the plan participants aren’t members of the clergy or
“employee[s] of an organization ... which is exempt from tax under
section 501 or Title 26 and which is controlled by or associated with
a church or a convention or association of churches”, as required
under 29 U.S.C. § 1002(33)(B)(ii) and (C)(ii)(II).

Franciscan Alliance disputes those allegations and asserts that it’s Plan
qualifies for the exemption under § 1002(33)(C) because: the Pension and Benefits
Committee “maintains” the Plan, not Franciscan Alliance; the Committee’s
“principal purpose or function” is the administration of the Plan; and the
Committee is “controlled by or associated with a church [the Catholic Church].”

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It also contends that the Plan satisfies the requirements of § 1002(33)(B)(ii)
because “Franciscan Alliance is a tax-exempt organization” and its employees
qualify as “employees of a church”, as defined in § 1002(33)(C)(ii)(II) because
Franciscan Alliance is controlled or associated with the Catholic Church. It cites
in support various documents that weren’t referenced or incorporated in the
complaint, including an affidavit from defense counsel, Lars Golumbic [Doc. No.
127-1], Private Letter Rulings issued by the IRS [Doc. No. 127-4], Advisory
Opinions issued by the U.S. Dept. of Labor [Doc. No. 127-5], and the Official
Catholic Directory. Franciscan Alliance contends, on the basis of that evidence,
that the court should find that the Plan qualifies for the “church plan” exemption
and dismiss the ERISA claims (Claims 1-9).
Whether an organization meets the statutory requirements for the church
plan exemption is a fact intensive inquiry that can’t be decided on a motion to
dismiss when, as here, the parties disagree on key facts, including:
•

which organization – Franciscan Alliance, the Committee, or both –
“maintains” the Plan, within the meaning of § 1002(33)(C);

•

whether that organization is controlled by or associated with the
Catholic Church, as required under 1002(33)(C); and

•

whether “substantially all of the individuals included in the plan” are
“employee[s] of a church”, as required under 1002(33)(B)(ii) and
(C)(ii)(II).

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Franciscan Alliance didn’t address the limitations on the court’s ability to
look outside the pleadings on a motion to dismiss under Rule 12(b)(6), and hasn’t
asked the court to take judicial notice of the extrinsic evidence on which it relies.
To the extent it contends that the decisions in Overall v. Ascension, 23 F.Supp.3d
816 (E.D. Mich. 2014), and Medina v. Catholic Health Initiatives, 147 F.Supp.3d
1190 (D. Colo. 2015), support its argument and this court’s use of extrinsic
evidence, it is mistaken.
In Overall v. Ascension, the court cited Yeary v. Goodwill IndustriesKnoxville, Inc., 107 F.3d 443, 445 (6th Cir. 1997), for the proposition that
“extrinsic materials may be considered by a court if they ‘fill[] in the contours and
details’ of a complaint.” 23 F.Supp.3d at 824. But that standard differs
significantly from the judicial notice standard used in this circuit. Under the
Federal Rules of Evidence and circuit precedent, “[a] court may take judicial notice
of an adjudicative fact that is both ‘not subject to reasonable dispute’ and either
1) ‘generally known within the territorial jurisdiction of the trial court’ or 2)
‘capable of accurate and ready determination by resort to sources whose accuracy
cannot reasonably be questioned.’” General Elec. Capital Corp. v. Lease Resolution
Corp., 128 F.3d 1074, 1080-1081 (7th Cir. 1997) (quoting Fed. R. Evid. 201(b));
see also Hennessy v. Penril Datacomm Networks, Inc., 69 F.3d 1344, 1354 (7th
Cir. 1995) (“In order for a fact to be judicially noticed, indisputability is a
prerequisite.”). The material facts in this case are disputed and have yet to be

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adjudicated, and the cases on which Franciscan Alliance relies are not binding
authority in this court. See Christensen v. Harris County, 529 U.S. 576, 587-588
(2000) (agency interpretations contained in opinion letters lack force of law and
are entitled to deference only when language of regulation is ambiguous); Bankers
Life and Casualty Co. v. United States, 142 F.3d 973 (7th Cir. 1998) (“[IRS] letter
rulings apply only to the parties who specifically request them [and] [n]either the
courts nor the IRS may rely on letter rulings as precedent.”); Rollins v. Dignity
Health, 338 F.Supp.3d 1025, 1034 (N.D. Cal. Sep. 6, 2018) (denying request to
take judicial notice of excerpts from the Official Catholic Directory, when
“[d]efendants’ purpose in attempting to introduce this document is to argue a fact
that is in dispute, i.e., the degree of association or affiliation between Dignity
Health and the Catholic Church.”). The court might consider those documents on
a motion for summary judgment to prove the truth of the matters asserted if the
evidence rules allow, see, i.e., Smith v. OSF Healthcare Sys., 349 F.Supp.3d 733
(S.D. Ill. 2018); Medina v. Catholic Health Initiative, 147 F.Supp.3d 1190, 119798 (D. Colo. 2015), aff’d 877 F.3d 1213 (10th Cir. 2017); Hall v. USAble Life, 774
F.Supp.2d 953, 959-60 (E.D. Ark. March 28, 2011); Ward v. Unum Life Ins. Co.
of Am., No. 09-C-431, 2010 WL 4337821 (E.D. Wis. Oct. 25, 2010); Rinehart v.
Life Ins. Co. of N. Am., No. C08-5486 RBL, 2009 WL 995715 (W.D. Wash. Apr. 14,
2009); Okerman v. Life Ins. Co. of N. Am., No. CIV-S-00-0186, 2001 WL

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36203082, at *4 (E.D. Cal. Dec. 24, 2001),2 but for purposes of a motion to
dismiss, the court must accept as true the facts alleged in the complaint and draw
all reasonable inferences in the plaintiffs’ favor. Those facts and inferences present
plausible claims under ERISA.

C. Breach of Fiduciary Duty and Breach of Contract Claims (Counts 9-11)
Franciscan Alliance contends that the allegations that form the basis of the
plaintiffs’ claims for breach of fiduciary duty and breach of contract aren’t
supported by sufficient factual detail and don’t meet the minimal pleading
requirements of Rule 8(a).3 Their argument is based on an overly-restricted
reading of the complaint.
While the plaintiffs refer to the “Defendants” generically in Counts 9-11,
they incorporate by reference all prior allegations in the complaint. Those
allegations clearly identify who the fiduciaries are (Complaint ¶¶ 148-155), what
duties they allegedly breached (Complaint ¶¶ 156-165, 279, 281, and 285-286),

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Franciscan Alliance cited each of these cases in support of its motion to
dismiss for failure to state a claim, but each case was decided on a motion for
summary judgment under Fed. R. Civ. P. 56 (or, in the case of Ward v. Unum Life Ins.
Co. of Am., a motion to reconsider the grant of summary judgment) and the standards
are different. Other cases cited by the defendants in support of their argument
considered evidence outside the pleadings to support a finding that a plan was a
church plan exempt from ERISA, i.e., Feather v. SSM Health, No. 4:16CV1669HEA,
2018 WL 3536613 (E.D. Mo. July 23, 2018) and Sanzone v. Mercy Hospital, 326
F.Supp.3d 795 (E.D. Mo. 2018).
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Franciscan Alliance argued, in the alternative, that the court should decline
to exercise supplemental jurisdiction, if the federal claims are dismissed. Today’s
resolution of Franciscan Alliance’s motion to dismiss the ERISA claims renders that
argument moot, at least for now.

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and how the plaintiffs and the Plan were damaged (Complaint ¶¶ 255, 276, and
307). Rule 8(a) requires nothing more.
The plaintiffs’ breach of contract claim is a closer call. The plaintiffs outline
in great detail how the defendants breached their obligations under ERISA, but
devote only a few paragraphs to their alternative breach of contract claim, alleging
that they have a contract (the Plan Documents) with Franciscan Alliance that
requires it to contribute to the Plan “the amount recommended by the Actuary to
comply with th[e] funding policy,’” and Franciscan Alliance breached the contract
“by not adequately funding the Plan”. Although plaintiffs don’t specifically allege
in Count 11 that they were harmed by the alleged breach, they incorporate by
reference all prior allegations, including the allegation that failure to create and
enforce adequate funding policies for the Plan and to properly fund the Plan has
resulted in a loss to the Plan and substantially increased the risk of participants’
pensions being lost or reduced. (Complaint ¶¶ 276 and 307). When the complaint
is read in its entirety, it sufficiently states a plausible claim for breach of fiduciary
duty and breach of contract under ERISA and Indiana law.

D. The Establishment Clause (Count 12)
The United States intervened for the limited purpose of addressing the
constitutionality challenge to the “church plan” exemption in Count12.4 It argues

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The Department of Justice took no position on whether the plaintiffs have
standing, whether the Franciscan Alliance Plan qualifies for the “church plan”
exemption, or whether the complaint sufficiently alleges breach of fiduciary duty or

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that the exemption as applied doesn’t violate the Establishment Clause and urges
the court to adopt the holding in Medina v. Catholic Health Initiatives, 877 F.3d
1213, 1230-1234 (10th Cir. 2017) (affirming the district court’s grant of summary
judgment and holding that exempting Catholic Health Initiatives’ pension plan
from the requirements of ERISA did not “run[] afoul of the Establishment Clause”),
if it reaches the plaintiffs’ constitutional claim. [Doc. No. 137 at p. 2]. But as the
Government correctly points out, “[i]f the Court were to conclude ... that the
challenged Franciscan Alliance Plan is not a church plan, it would not need to
reach Plaintiffs’ constitutional claim.” See Northwest Austin Municipal Utility
District Number One v. Holder, 557 U.S. 193, 205 (2009) (“It is a well-established
principle governing the prudent exercise of [the federal court’s jurisdiction that
normally the Court will not decide a constitutional question if there is some other
ground upon which to dispose of the case.”).
For reasons previously discussed, the court can’t tell at this stage whether
the Franciscan Alliance Plan qualifies as a church plan under ERISA, and won’t
address the merits of the plaintiffs’ constitutional challenge until it has.

III. CONCLUSION
For the reasons stated, the court DENIES the defendants’ motion to dismiss
[Doc. No. 126].
SO ORDERED.
breach of contract under state law.

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ENTERED:

March 27, 2019

/s/ Robert L. Miller, Jr.
Judge, United States District Court

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