Johnson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 20 May 2013
• Docket Number: No. 12–3869.,12–3869.
• Citation: 719 F.3d 601
• Parties: Leroy JOHNSON, administrator, Shirley T. Sherrod MD PC Target Benefits Pension Plan and Trust, Plaintiff–Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

719 F.3d 601

Leroy JOHNSON, administrator, Shirley T. Sherrod MD PC Target Benefits Pension Plan and Trust, Plaintiff–Appellant,

v.MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant–Appellee.

No. 12–3869.

United States Court of Appeals,Seventh Circuit.

Argued April 22, 2013.

Decided May 20, 2013.

Edwin H. Conger (argued), Attorney, Tenney & Bentley, Chicago, IL, for Plaintiff–Appellant.

Robert C. Levels (argued), Attorney, Miller Canfield Paddock & Stone, Chicago, IL, for Defendant–Appellee.

Before WOOD, TINDER and HAMILTON, Circuit Judges.

TINDER, Circuit Judge.

Leroy Johnson, the administrator of the Shirley T. Sherrod MD PC Target Benefit Pension Plan and Trust (hereinafter “the Plan”), brings this suit against the Plan's custodian, Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereinafter “Merrill Lynch”). Despite the fact that he is the Plan's administrator and sole fiduciary, Johnson alleges that Merrill Lynch has refused to abide by his instructions and “has exercised control over Plan assets by refusing to make distribution to Shirley T. Sherrod.” As a result, Johnson asks the federal court to “[o]rder Merrill Lynch to abide by Johnson's directions regarding any disposition of Plan assets.”

Although Johnson has sued Merrill Lynch—suggesting that Johnson and Merrill Lynch have a dispute—in reality, the two parties seem to agree on all the major issues. For instance, both Johnson and Merrill Lynch agree that the Plan is a retirement account that is exempt from garnishment under the anti-alienation provision of the Employment Retirement Income Security Act (ERISA), 29 U.S.C. § 1056(d). Both parties also agree that a single Plan participant, Sherrod, has made a claim for benefits from the Plan but has been unable to collect anything due to a freeze on distributions to her from the account. Moreover, both parties agree that this freeze is the result of a Michigan state court order in a post-judgment collection proceeding.

In sum, although Merrill Lynch concedes that a Plan participant has been injured, Johnson concedes that the Plan participant's injury is fairly traceable to a Michigan state court order, and not the defendant, Merrill Lynch. U.S. Const. art. III, § 2, requires a plaintiff to have an injury that is “fairly ... trace[able] to the challenged action of the defendant, and not ... th[e] result [of] the independent action of some third party not before the court.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) (quotation and citation omitted). If the plaintiff's injury is not fairly traceable to the defendant, the plaintiff lacks standing to bring suit against the defendant, and the federal court lacks subject-matter jurisdiction to adjudicate the matter. Id. Here, Johnson has failed to identify an injury that is fairly traceable to the defendant, so Johnson does not have standing to bring suit against Merrill Lynch. Thus, we affirm the district court's dismissal of the case for lack of subject-matter jurisdiction.

I

Because the freeze order at the center of the present case arose from a post-judgment proceeding in Michigan state court, a brief review of the related state litigation is warranted. Michael S. Sherman and his affiliated medical practice filed suit against Shirley T. Sherrod and her affiliated medical practice over a contract dispute in the Wayne County, Michigan, Circuit Court. On June 25, 2010, the Wayne County Circuit Court granted summary judgment to Sherman and entered a judgment of $181,048.58 against Sherrod. Sherman filed a writ of garnishment on Sherrod's accounts at Merrill Lynch approximately four months later. Merrill Lynch, as a result, disclosed to Sherman the four accounts in which Sherrod had an interest: a personal account, an account in the name of her medical practice, an individual retirement account, and the Plan (described in the disclosure as “self-directed retirement account” in the name of “SHIRLEY T SHERROD MD PC”). Nevertheless, Merrill Lynch warned Shermanin its disclosure that it did “not have control over and therefore c[ould] not freeze or otherwise restrain or liquidate” the assets of the Plan.

Although Merrill Lynch did not believe that it could exercise control over the Plan, the Wayne County Circuit Court believed that it could. On February 4, 2011, the Circuit Court judge issued a blanket order prohibiting Sherrod (or anyone “acting for or on [her] behalf or in active concert or participation” with her) “from directly or indirectly selling, transferring, assigning, destroying, concealing, encumbering, hypothecating, or otherwise disposing of ... assets, real or personal property, money, or things in action now held or hereafter acquired by or becoming due to them ” (emphasis added). The state-court order did not specifically mention the Plan account, but understandably, Merrill Lynch read the order's broad and inclusive language—ordering a freeze on all assets becoming due to Sherrod—to include distributions from the Plan account. As a result, Merrill Lynch froze the Plan account with respect to Sherrod and, despite her retirement, prohibited any distributions to her until further court order. (Note that Merrill Lynch only froze the Plan account with respect to Sherrod. The Plan account also contains assets that will become due to the seventeen employees of Sherrod's former medical practice upon their retirements. Merrill Lynch emphasizes that if any of Sherrod's former employees requests a distribution, it will “not ... refuse instructions from the Plan administrator relating to any Plan Participant other than Dr. Sherrod.”)

Merrill Lynch never prohibited distributions to Sherrod from the Plan account until it was compelled to do so by Wayne County Circuit Court order. Moreover, when the Plan administrator filed a motion to quash the garnishment proceeding with respect to the Plan account, Merrill Lynch supported the Plan administrator. (Incidentally, the Plan administrator was Sherrod herself until May 30, 2012. Johnson only took over as Plan administrator after the instant suit was filed in federal court—in an apparent attempt to render the state-court and federal-court parties non-identical.) In this motion, the Plan administrator argued that the garnishment proceeding and resulting freeze should be quashed because the Plan was an “employee pension benefit plan” as defined by ERISA at 29 U.S.C. § 1002(2). Therefore, 29 U.S.C. § 1056(d) prohibited its benefits from being “assigned or alienated” by state-court order. When arguing the motion to quash, the administrator even acknowledged that Merrill Lynch supported the Plan's position, in an attempt to strengthen its argument that federal law prohibited the freeze (and ultimately, the garnishment) of the Plan account.

In spite of the fact that both the Plan administrator and Merrill Lynch viewed the Plan as an “ERISA qualified pension account” not subject to garnishment, the Wayne County judge denied the administrator's motion to quash. The new Plan administrator, Johnson, decries this denial as erroneous and clearly contrary to federal law, but it appears that the former Plan administrator was at least partially responsible for the denial. Before denying the motion to quash, the Wayne County judge had ordered Sherrod (in her former capacity as Plan administrator) to produce documents proving that the Plan was an ERISA “qualified retirement account,” but she never did. Without sufficient documentation, Sherrod apparently hoped the judge would take her on her word. ¹

Notwithstanding Sherrod's failure to produce adequate documentation demonstrating that the Plan was protected from garnishment under 29 U.S.C. § 1056(d), Merrill Lynch continued to side with Sherrod and the Plan. On February 28, 2012, Merrill Lynch filed a motion to release the freeze on the Plan account in the Wayne County Circuit Court. As part of its effort to release the freeze, Merrill Lynch drafted and circulated an order proposing that the garnishment on the Plan account be “hereby released and further withholdings discontinued.” Merrill Lynch successfully negotiated this order with Sherman, and as a result, Sherman stated at a hearing in the Wayne County Circuit Court on April 13, 2012 that he had “no objection to Merrill Lynch releasing the funds ... [and] withdrawing our garnishment” of the Plan account. After Sherman's statement, the Wayne County judge initially agreed to grant the motion to release and enter Merrill Lynch's proposed order. It seemed that Sherman, Merrill Lynch, the Wayne County judge, and Sherrod had at last reached a consensus regarding the Plan account—until Sherrod suddenly reversed course.

During the fourteen months between the February 4, 2011 freeze order and the April 13, 2012 hearing, Sherrod (in her capacity as Plan administrator) had continually argued for a release of the freeze on the Plan account due to its protected status under ERISA. Sherrod filed a motion to reconsider the February freeze order on November 22, 2011. The Wayne County judge denied her motion to reconsider, and Sherrod appealed this denial to the Michigan Court of Appeals in January 2012. That appeal currently remains pending. Sherrod also filed the instant case in federal district court on April 6, 2012, seeking an “[o]rder [for] Merrill Lynch to abide by [the Plan administrator's] directions” to release funds to Sherrod, despite the Wayne County Circuit Court order freezing the account. Given that Sherrod had been pursuing every possible avenue to gain relief from the freeze order, Merrill Lynch believed—not surprisingly—that Sherrod's foremost concern was releasing the funds in the Plan account.

So imagine Merrill Lynch's surprise at the April 13, 2012 hearing when Sherrod opposed its motion and pro posed order to release the Plan account freeze. Despite the fact that both Merrill Lynch and Sherman had agreed to the proposed order—and despite the fact that...