933 F.2d 449 (7th Cir. 1991), 90-1233, Lumpkin v. Envirodyne Industries, Inc.

Docket Nº:90-1233.
Citation:933 F.2d 449
Party Name:Frank LUMPKIN, et al., Plaintiffs-Appellants, v. ENVIRODYNE INDUSTRIES, INC., Defendant-Appellee.
Case Date:May 17, 1991
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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933 F.2d 449 (7th Cir. 1991)

Frank LUMPKIN, et al., Plaintiffs-Appellants,



No. 90-1233.

United States Court of Appeals, Seventh Circuit

May 17, 1991

Argued Oct. 26, 1990.

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Leslie A. Jones, Johnson, Schaaf, Jones & Snelling, Thomas E. Johnson, Thomas H. Geoghegan, Despres, Schwartz & Geoghegan, Chicago, Ill., for plaintiffs-appellants.

Charles B. Wolf, Stanley Block, Michael I. Richardson, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., for defendant-appellee.

Before BAUER, Chief Judge, and CUMMINGS and RIPPLE, Circuit Judges.

CUMMINGS, Circuit Judge.

I. Background

This case requires us to untangle the legal positions of parties disputing whether former employees of the Wisconsin Steel Division ("Division") should be awarded more than $40 million in lost pension benefits that they earned from 1977-1980. The litigation before us represents but one chapter in a complex cycle of litigation stemming from the sale of a steel plant in 1977. 1 The plaintiff class appeals Judge Moran's grant of Envirodyne's motion to dismiss their case for vested benefits earned between 1977 and 1980. Because this dismissal was granted on the basis of a failure to state a claim, Fed.R.Civ.P. 12(b)(6), we construe the facts on appeal in a light most favorable to the plaintiffs.

International Harvester (its name has since changed to "Navistar" and it will be referred to as such) owned the Division, which included a steel plant located in Chicago, Illinois, the steel mill's inventory and receivables, two iron-ore mines, and a coal mine, for 75 years. In 1977, Navistar concluded that the plant was no longer profitable for the corporation and began to look for a buyer. However, the plant did not come unencumbered. Any prospective buyer of the Division would not only receive a steel plant but also would assume responsibility for over $62 million in unfunded pension liabilities, a considerable amount for any prospective buyer to absorb.

In 1977, Navistar found an unlikely buyer, however, in Envirodyne Industries, Inc., a small engineering company located in Oak Brook, Illinois, interested in purchasing the Division in order to test new environmental technologies. Envirodyne also viewed the Division as serving certain short-term pressing financial needs. Navistar's sale of the Division to Envirodyne was not a straight sale, however, and ultimately the deal took the form of a transfer of title by Navistar to two wholly-owned subsidiaries of Envirodyne, set up specifically for the purpose of assuming control over the Division. The two subsidiaries were named EDC Holding Company ("EDC"), a subsidiary of Envirodyne, and WSC Corporation ("WSC"), in turn a subsidiary of EDC. Under the terms of the sale by Navistar, the two subsidiaries assumed responsibility for the substantial unfunded pension fund of the Division.

This arrangement endured from 1977 until 1980, when EDC and WSC filed for bankruptcy under Chapter 11 of the Bankruptcy Code and the Division closed. The bankruptcy filing was precipitated by Navistar, which foreclosed on the mortgages extended to EDC and WSC as part of the sale of the Wisconsin Steel Division. 2

The bankruptcy spawned a flurry of litigation, precipitated by the claims brought

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by the creditors of EDC and WSC for the debts due to them. In 1980, the logical defendant was not the parent of the two subsidiaries, Envirodyne, which had yet to grow into the Fortune 500 company which it has now become, but Navistar, for it was Navistar that initiated and leveraged the sale of the Division in the first place to Envirodyne, a buyer that was alleged to be undercapitalized and incapable of assuming sole responsibility for the huge pension fund. Indeed, Lehman Brothers, which had prepared a report reviewing the terms of the ultimate sale of the Division by Navistar to EDC and WSC, stated unequivocally that the deal smelled of fraud, and called for Envirodyne to take responsibility for the pension benefits as opposed to the two subsidiaries, set up presumably to insulate the parent from liability for the pension fund.

A series of claims was subsequently brought against Navistar. First, there were the claims brought by the creditors of EDC and WSC for the debts of the two subsidiaries. Next were two sets of pension claims for the pension monies due to the former employees of the Division for benefits from the period both before and after the sale of the Division. Under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Secs. 1081 et seq., the employees filed claims for vested pension benefits with the Pension Benefit Guaranty Corporation ("PBGC"), which acknowledged that the claims were insured and proceeded to assume fiscal responsibility for a portion of the claims. PBGC in turn filed suit against Navistar for indemnification for the pension claims it had satisfied. The remaining claim against Navistar was filed by Frank Lumpkin et al., the class of former employees of the Division, who filed claims for the pension and contractual obligations not guaranteed by the PBGC and running from 1977 through 1980.

These three lawsuits were subsequently consolidated by Chief Judge Moran into what became known as Lumpkin I. Before trial of these consolidated claims, Navistar settled with the various parties for $14.8 million in February 1988. Contained in the Settlement Agreement was a release, which has since become crucial to the disposition of the instant case. The release provided that "[t]he Settlement Agreement settles all claims by or on behalf of members of the Settlement Class in the Lumpkin class action and in the WSC bankruptcy proceedings." The Definitions section of the Settlement Agreement identified the parties included in the Settlement Agreement. They included Navistar, the Lumpkin Class, EDC and WSC. Significantly, however, Envirodyne Industries, Inc. was not named in the Settlement Agreement, and the Lumpkin plaintiffs' present claims hinge on a finding that Envirodyne was not released by the terms of the Settlement Agreement. This is a point to which we will return.

One important fact worth noting at the outset is that when the settling parties presented the Settlement Agreement in district court for a fairness hearing by Judge Moran, counsel to the Lumpkin class pronounced in open court that the plaintiffs did not intend by the release to absolve Envirodyne of potential liabilities. Plaintiffs' counsel suggested also that it wished to reserve its rights against Envirodyne even though EDC and WSC were named explicitly in the release. At the time of this statement, Judge Moran did not make any explicit ruling on the viability of future claims by plaintiffs against Envirodyne.

Following the Settlement Agreement, the other claims outside the Settlement went to trial. In Pension Ben. Guaranty Corp. v. Envirodyne Industries, Inc., Judge Moran held that Navistar was liable to the PBGC for the employees' pension benefits to the date of the 1977 sale and not after. 10 EBC 1458 (N.D.Ill.1988). The district judge determined further that Navistar had no liability to the debtors-in-possession, EDC and WSC. The decision rejected Envirodyne's claim that Navistar was liable to it for fraud, recognizing that Envirodyne had the necessary information available and was not an "unsophisticated old person relying on some glib-tongued huckster." 10 EBC at 1462. This Court recently affirmed Judge Moran's decision that Navistar

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was not liable in fraud to EDC. In re EDC, Inc., 930 F.2d 1275 (7th Cir.1991). In that decision, the Court, alluding to cases like this one, acknowledged that "venturesome creditors might try * * * to pierce the corporate veil and reach Envirodyne's assets and might even succeed." In re EDC, Inc., 930 F.2d at 1279. Thus at the time the present litigation began, the plaintiffs had entered into the 1988 Settlement Agreement with Navistar, whose pension liability had been limited as a matter of law to the 1977 sale by Judge Moran's decision in Pension Ben. Guaranty Corp. v. Envirodyne Industries, Inc. See note 1 supra.

Remaining unrecovered as a result of the proceedings were the pension benefits earned by the plaintiff class from the time that the Division was sold in 1977 to the time that it closed three years later in 1980. In an effort to recover these benefits, the plaintiff class successfully petitioned for recertification for this class action suit against Envirodyne Industries, Inc., the parent corporation of the defunct subsidiaries EDC and WSC. The plaintiffs brought this class action suit under ERISA Section 502 (29 U.S.C. Sec. 1132) and the Labor Management Relations Act ("LMRA") Section 301 (29 U.S.C. Sec. 185) for uninsured pension and contract benefits for the period from the date of sale in 1977 to the date of closure in 1980. The basis for their claim against the parent corporation was that Envirodyne, as parent of EDC and WSC, was liable for the lost benefits under a corporate law alter ego theory. In other words, plaintiffs asserted that they should be permitted to disregard the corporate form that would otherwise insulate Envirodyne Industries from plaintiffs' pension claims against EDC and WSC.

As mentioned earlier, Judge Moran, in a memorandum order, certified a plaintiff class identical to the class in Lumpkin I, but the plaintiffs' claims did not advance much further because Judge Moran in the same order proceeded to grant Envirodyne's motion to dismiss. The district judge based his decision on several grounds. First and foremost, he concluded that Envirodyne was released under the terms of the Settlement Agreement. Although the Settlement Agreement did not name...

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