Cappello v. Franciscan All., Inc.

LORRAINE CAPPELLO, et al., Plaintiffs v. FRANCISCAN ALLIANCE, INC., et al., Defendants

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

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF INDIANA SOUTH BEND DIVISION

March 27, 2019

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 considerother 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).

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 insuranceto 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 inherentand 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).

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;

• Franciscan Alliance's "principal purpose or function" isn't to administer or fund a retirement plan - it's to provide healthcare services;

• 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

• 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]."It also contends that the Plan satisfies the requirements of § 1002(33)(B)(ii) because "Franciscan Alliance is a...