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Laborers Pension Fund v. Novak And Sons Paving, Inc.

United States District Court, N.D. Illinois, Eastern Division

March 23, 2017

NOVAK AND SONS PAVING, INC., an Illinois corporation, d/b/a NOVAK & SONS PAVING, INC., also d/b/a NOVAK PAVING, INC.; STONEHILL LANDSCAPING, INC., an Illinois corporation, d/b/a GREENVIEW MAINTENANCE; MAUREEN NOVAK, individually, and d/b/a GREENVIEW MAINTENANCE; and JAMES E. NOVAK, individually, and d/b/a GREENVIEW MAINTENANCE, Defendants.


          Susan E. Cox, Magistrate Judge

         Plaintiffs, Laborers' Pension Fund; Laborers' Welfare Fund of the Health and Welfare Department of the Construction and General Laborers' District Council of Chicago and Vicinity; and James S. Jorgensen, Administrator of the Funds (collectively, the “Funds”), sued Defendants, Novak and Sons Paving d/b/a Novak & Sons Paving, Inc., and also d/b/a Novak Paving, Inc. (“N&S”); Stonehill Landscaping, Inc. d/b/a Greenview Maintenance (“Stonehill”); Maureen Novak, individually (“Maureen”) and d/b/a Greenview Maintenance; and James E. Novak, individually (“James”) and d/b/a Greenview Maintenance (collectively, “Defendants”), to recover allegedly delinquent contributions to the Funds pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. §§ 1132(e)(1) and (2) and 1145, Section 301(a) of the Labor Management Relations Act (“LMRA”) of 1947 as amended, 29 U.S.C. § 185(a), and 28 U.S.C. § 133');">133');">133');">1331. This matter comes before the Court on the Funds' Motion for Summary Judgment [Dkt. 119]. For the reasons stated below, the Court denies the Funds' Motion for Summary Judgment.

         I. Factual Background

         The corporate defendants in this matter, N&S and Stonehill, performed commercial and residential construction work including sealcoating, paving, patching, resurfacing, excavating, saw-cutting, striping, and stone work. [Funds' Statement of Material Facts (“FSOF”), ¶¶ 18, 33.] Some N&S and Stonehill work was performed by union employees. [Id. at ¶ 23, 34.] The applicable collective bargaining agreement (“CBA”) and Trust Documents obligate the corporate Defendants to make contributions “for each hour worked” on behalf of its employees covered by the CBA for pension benefits, health and welfare benefits, and/or benefits for the training fund. [Id. at ¶ 13.] The documents also require the corporate Defendants to submit monthly reports regarding CBA-covered-employees and the amount of contributions to be remitted to the Funds on behalf of each covered employee. [Id.] The Funds then collect employer contributions from the wages of employees in payment of union dues. [Id. at ¶ 4.]

         In the instant matter, the Funds undertook an audit of the corporate Defendants' books and records to determine compliance with the Funds' reporting and contribution procedures, and to calculate whether there were any amounts owing to the Funds.[1" name="FN1" id= "FN1">1] [Dkt. 120, p. 8.] The Funds' initial audit was undertaken only on corporate Defendant N&S, and covered the time period of January 1, 2008 through January 31, 2011.[2] [FSOF, ¶ 59.] This audit period was later extended to January 1, 2008 through December 31, 2014, and covered both corporate Defendants, N&S and Stonehill (“Second Audits”). [Id.] As it appears that neither party has attached the Second Audits to any document filed in this case, the Court cannot tell when the Second Audits were issued.

         The Second Audits for both corporate Defendants were subsequently revised based on challenges submitted by the Defendants (“Revised Audits”). [Id. at ¶ 61.] As part of the process that led to the Revised Audits, the Defendants submitted Declarations from some, but not all, of the individuals who received non-payroll payments analyzed on the audits. [Id.] Also, “[d]uring the course of this litigation and audit process [the Defendants] provided the names and address of all employees of Stonehill” to the Funds.[3] [Dkt. 136-14; Dkt. 136-1, ¶ 23.] After consideration of the challenges raised by Defendants, the Revised Audits were issued on June 6, 2016. [Dkt. 122-1, ¶ 10, pp.7-8; Dkt. 129, pp. 42-71]. The Revised Audits are the basis for the Funds' calculation of damages in this case. [Dkt. 120, p. 2.] The total audit liability reflected in the Revised Audits is $663, 684.57. [FSOF, ¶¶ 63-65, 67, 68, 70.]

         Under each of the audits and revisions mentioned above, the auditor, Timothy Kalnes, applied what is known as the “Chicago 10” procedure to all payments made to any employee where the employee's hourly rate is unknown. [Funds' Supplemental Statement of Material Facts (“FSSOF”), ¶¶ 2, 11.] Although neither party explains well how the Chicago 10 procedure operates (e.g., the Funds never even mention this key term in their opening brief), the Court will endeavor to explain it as follows. When reviewing payroll records during an audit, the auditor may find that an employee will receive more than one pay rate for different job functions under the CBA; or an employee will receive a payment outside of the normal payroll such as a bonus or a cash payment/reimbursement (i.e., a non-payroll payment); or an employee will perform some work covered by a CBA and some that is not. Non-payroll payments can create a problem for auditors because there is typically no designation of whether the payment was issued for covered or non-covered work under the relevant CBA and, thus, the auditor will not be able to tell what work was being performed at what rate and if contributions are owed to any ERISA fund based on that work.

         To compensate for this issue, an auditor attempting to determine if a union employer made proper ERISA contributions will assume that, unless otherwise specified, any individual who receives a non-payroll payment from the employer is a laborer performing work covered under an applicable CBA. For example, if an individual receives a non-payroll payment of $100 and her hourly rate cannot be determined for such payment, an auditor applying the Chicago 10 would assume this payment was made to the employee for CBA-covered-work she performed at an hourly rate of $10.00, thus concluding the employee worked 10 hours in exchange for that $100 payment; the employer would then potentially be liable to the ERISA funds for any unpaid contributions based on these 10 hours worked by the employee.

         However, if the hourly rate applied by the auditor was increased, the number of hours for which an employer would potentially be liable to the funds would shrink. For example, if a rate of $20.00 an hour were assumed by the auditor for that same $100 non-payroll payment, the auditor would conclude the employee worked 5 hours in exchange for that $100 payment, and thus, the employer would potentially be liable for any unpaid contributions based on these 5 hours worked by the employee. Hence, an increase in the hourly rate applied by the auditor would necessarily reduce the number of hours for which any audited employer would potentially owe contributions.

         Here, however, the Funds have placed at issue a fact they find material to this matter, bearing on this exact issue: the existence of the “Chicago 18” procedure.[4] Specifically, the Funds' Supplemental Material Fact No. 16 states that “[o]n or about November 9, 2015, the Funds later revised the Chicago 10 procedure by amending the hourly wage rate assumption from $10.00 an hour to $18.00 an hour.” [FSSOF, ¶ 16.] The Kalnes Affidavit and its exhibits [Dkt. 147, pp. 18-29] submitted by the Funds shed no light on the effective dates of the Chicago 18 procedure, although Kalnes does affirm that under the revised procedure “auditors are now to reasonably assume that those payments were made to the employee for work performed at an hourly rate of $18.00.” [Id., p. 20, ¶ 9 (emphasis added).] Although the Revised Audits were issued June 6, 2016, roughly seven months after the Chicago 18 procedure was implemented (November 9, 2015), the Chicago 18 rate was not applied to the Revised Audits.

         It appears that the Kalnes Affidavit, and the Funds' Supplemental Material Fact No. 16, both submitted as part of the Funds' Reply, might have been the first inkling given to Defendants that the Chicago 10 procedure had been revised, as Defendants brief largely centers around whether $10.00 an hour was a reasonable assumption made by the auditor.[5] Curiously, though, neither Party discusses the Chicago 18 in its briefs.

         II. Standard of Review

         Summary judgment is proper where “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56 (c). In determining whether there is a genuine issue of fact, the Court “must construe the facts and draw all reasonable inferences in the light most favorable to the nonmoving party.” Foley v. City of Lafayette Indiana, 359 F.3d 925, 928 (7th Cir. 2004). The party seeking summary judgment has the burden of establishing the lack of any genuine issue of material fact. See Cellotex Corp. v. Catrett, 17');">477 U.S. 317, 323, 106 S.Ct. 2548');">106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A genuine issue of material fact exists if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248, 106 S.Ct. 2505');">106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Summary judgment is proper against “a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party will bear the burden of proof at trial.” Cellotex, 477 U.S. at 322. “The mere existence of a scintilla of evidence in support of the [non-movant's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-movant].” Anderson, 477 U.S. at 252.

         III. ...

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