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Hugler v. Sherrod

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

March 27, 2017

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


          Milton I. Shadur, Senior United States District Judge.

         Acting Secretary of Labor Edward Hugler (the "Actual knowledge of a breach or violation 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 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.


         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 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]

         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

         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 ...

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