Plan Sponsor Procedural Errors Rebuked by Appeals Court

A federal appeals court found easy grounds for approving a default judgement levied against a plan sponsor whom effectively ignored participants’ claims regarding delinquent employer contributions. 

The United States Court of Appeals for the Seventh Circuit has backed a lower court’s ruling in the interesting case of Central Illinois Carpenters Health And Welfare Trust Fund vs. Con-Tech Carpentry LLC.

Unlike other recent court cases to make the retirement industry news headlines, this one is not gaining attention for its price tag or the intractable nature of the legal principles being debated. Instead the case presents some telling examples of clear-cut procedural errors which resulted in the 7th Circuit’s refreshingly short, 5-page decision approving some $100,000 in damages for the plaintiffs.  

Simply speaking, the appeals court found no grounds to overturn a district court’s earlier decision to hold the plan sponsor liable for roughly $70,000 in delinquent contributions (plus interest and fees), owed to several multiemployer health and welfare benefit funds. This initial decision was based not on close consideration of the plan documents or contribution control practices of the plan sponsors—but simply on the fact that the plan sponsor apparently made no effort to formally answer the charges before some critical deadlines had passed.

As Mark Casciari, partner at Seyfarth Shaw LLP, and Christopher Busey, an associate in the firm’s labor and employement department, explain in a Lexicology blog post, the plaintiffs “sought roughly $70,000 in delinquent contributions from the defendant employer. The defendant failed to answer the complaint within 21 days. The plaintiffs then requested a default judgment, and the defendant again failed to respond. When the company failed to appear at the hearing on the default motion, the district court entered a default judgment.”

While the plaintiffs still had to submit adequate proof of damages, they did so successfully in the eyes of the district court, case documents show, leading to nearly $100,000 in total damages. As Casciari and Busey explain, only then did the defendants formally respond, “by filing a motion under Rules 60(b) and 55(c) of the Federal Rules of Civil Procedure. The district court denied the motion, and the company appealed.”

NEXT: Plan sponsors must mind court deadlines 

Casciari and Busey further explain that the company “could not rely on Rule 55(c) because it did not seek to set aside the entry of default until after the court entered judgment. The company’s arguments also could not satisfy the Rule 60(b) standard of ‘excusable neglect.’ It first argued that it believed answering was unnecessary because the parties were already discussing settlement. The court responded that a party can both answer a complaint and work towards settlement simultaneously.”

The text of the appellate court decisions explains the decision this way: Instead of properly filing a Rule 55(c) motion, “Con-Tech filed a motion for a stay in favor of arbitration. So by January 13, when the district judge turned to the subject of damages, the complaint had not been answered, a default had been entered, no Rule 55(c) motion had been filed, and Con-Tech had not contested the plaintiffs’ evidentiary submissions about relief. And once the district court entered its judgment, the time to seek relief for ‘good cause’ under Rule 55(c) expired.”

The appellate court explains Rule 55(c) clearly says that “to set aside a default judgment a litigant must file a motion under Fed. R. Civ. P. 60(b).” The requirements under that rule are steeper, for example in that relief under Rule 60(b)(1) depends on excusable neglect, and in that “appellate review is deferential,” as discussed/applied in the previous case Moje v. Federal Hockey League (7th Circuit 2015).

“Con-Tech filed a Rule 60(b) motion on January 15,” the appellate decision shows. “The motion also invoked Rule 55(c), but too late. Con-Tech told the district judge that it had not ignored the suit but had instead started negotiating with plaintiffs’ lawyers, seeking a satisfactory settlement. The judge replied that Con-Tech may not have ignored the plaintiffs’ demands, but that it had ignored the litigation.”

Casciari and Busey explain the defendants also “contended that filing a substantive response would waive its right to arbitration. The court held, however, that nothing prevents a party from answering with a demand for arbitration. The defendant thus failed to show excusable neglect and instead decided to march to the beat of its own drum.”