Solis v. Wallis

• Decision Date: 30 August 2012
• Docket Number: No. 11 C 3019,11 C 3019
• Citation: Solis v. Wallis, No. 11 C 3019 (N.D. Ill. Aug 30, 2012)
• Parties: HILDA L. SOLIS, Secretary of Labor, United States Department of Labor, Plaintiff, v. SCOTT WALLIS, RONALD ERIKSEN, U.S.A. BABY, INC., U.S.A. BABY, INC. 401(k) PLAN, and U.S.A. BABY, INC. HEALTH PLAN, Defendants.
• Court: U.S. District Court — Northern District of Illinois

HILDA L. SOLIS, Secretary of Labor, United States Department of Labor, Plaintiff,

v. SCOTT WALLIS, RONALD ERIKSEN, U.S.A. BABY, INC.,U.S.A. BABY, INC. 401(k) PLAN, and U.S.A. BABY, INC. HEALTH PLAN, Defendants.

No. 11 C 3019

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Date: August 30, 2012

Judge Ruben Castillo

MEMORANDUM OPINION AND ORDER

Hilda L. Solis, the Secretary of Labor for the United States Department of Labor ("Secretary") brings this action against U.S.A. Baby, Inc. ("USA Baby"), Scott Wallis ("Wallis"), Ronald Eriksen ("Eriksen"), the U.S.A. Baby, Inc. 401(k) Plan (the "401(k) Plan") and the U.S.A. Baby, Inc. Health Plan (the "Health Plan") (collectively, "Defendants"), alleging that Defendants violated provisions of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq. (R. 1, Compl. ¶ 1.) The Secretary brings this action pursuant to (1) ERISA Section 502(a)(2), 29 U.S.C. § 1132(a)(2), for appropriate equitable relief for breaches of fiduciary duty under ERISA Section 409, 29 U.S.C. § 1109; and (2) ERISA Section 502(a)(5), 29 U.S.C. § 1132(a)(5), to enjoin acts and practices that violate provisions of Title I of ERISA and to obtain further equitable relief to redress such violations and enforce the provisions of Title I of ERISA. (Id.) Presently before the Court is the Secretary's Rule 59(e) motion to reconsider the Court's sua sponte dismissal of Eriksen. (R. 34, Pl.'s Mot. Recons.)Also before the Court is Wallis and Eriksen's ("Moving Defendants") pro se motion to dismiss the Secretary's action pursuant to Federal Rules of Civil Procedure 12(b)(1), (3), (6), and (7). (R. 40, Mot. Dismiss.) For the reasons stated below, the motion to reconsider is granted and the motion to dismiss is denied.

BACKGROUND

The Secretary commenced this ERISA action against Defendants after the Employee Benefits Security Administration ("EBSA") of the United States Department of Labor ("DOL") initiated an investigation into the 401(k) Plan. (R. 35, Pl.'s Mem. at 1-2.) The Secretary alleges that between April 7, 2006, and November 28, 2008 (the "relevant time period")¹ , Wallis served as partial owner and president of USA Baby (R. 1, Compl. ¶ 8), a company "formed in 2003 to franchise stores that sell furniture and other products for children." In re USA Baby, Inc., 674 F.3d 882, 883 (7th Cir. 2012). According to the Secretary, both USA Baby and Wallis exercised authority and control over the assets of the 401(k) Plan and the Health Plan (the "Plans"), and were fiduciaries and parties in interest to the Plans. (R. 1, Compl. ¶ 8.) The Secretary further alleges that during the relevant time period, Eriksen served as a majority owner and chief executive officer of USA Baby. (Id. ¶ 9.) He allegedly exercised authority and control over the 401(k) Plan assets, and was both a fiduciary and party in interest to the 401(k) Plan. (Id.)

The Secretary alleges that Wallis, Eriksen, and USA Baby engaged in misconduct including failing to ensure that 401(k) Plan contributions were remitted to the 401(k) Plan, failing to pay Health Plan participants' contributions for their respective premiums to the HealthPlan's two insurance providers, which resulted in both providers canceling coverage, retaining these amounts in USA Baby's general operating account and using the funds to pay for USA Baby's general expenses. (Id. ¶¶ 10-31.)

On September 5, 2008, three USA Baby creditors filed an involuntary bankruptcy petition against USA Baby under Chapter 11 of the Bankruptcy Code. Involuntary Petition, In re USA Baby, Inc., No. 08-23564 (Bankr. N.D. Ill. Sept. 5, 2008). The Bankruptcy Court appointed Barry Chatz ("Chatz") as trustee of USA Baby assets during the bankruptcy proceedings on February 11, 2009. Trustee Letter of Appointment, In re USA Baby, Inc., No. 08-23564 (Bankr. N.D. Ill. Sept. 5, 2008). Wallis has since contested the appointment of Chatz as the trustee and challenged decisions made by Chatz on behalf of USA Baby in multiple court proceedings. See, e.g., In re USA Baby, Inc., 674 F.3d at 884; In re USA Baby, Inc., 424 Fed. Appx. 558, 561 (7th Cir. 2011).

PROCEDURAL HISTORY

On May 6, 2011, the Secretary filed a six-count complaint against Defendants. (R. 1, Compl.) In Count I the Secretary alleges that between February 22, 2008, and September 19, 2008, Wallis, Eriksen, and USA Baby each failed to remit participant contributions to the 401(k) Plan. (Id. ¶ 11.) Instead, the contributions were retained in USA Baby's operating account and used to pay USA Baby's general operating expenses in violation of ERISA Sections 403(a) and (c)(1), 29 U.S.C. §§ 1103(a) and (c)(1), Section 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A), and Sections 406(a)(1)(D) and (b)(l)-(2), 29 U.S.C. §§ 1106(a)(1)(D) and (b)(l)-(2). (Id. ¶¶ 12-13.) In Count II, the Secretary alleges that between April 7, 2006, and September 19, 2008, Wallis, Eriksen, and USA Baby also failed to remit employee contributions to the 401(k) Plan in a timelymanner in violation of the same ERISA provisions identified in Count I. (Id. ¶¶ 15-16.) In Count III, the Secretary alleges that between January 18, 2008, and November 28, 2008, Wallis, Eriksen, and USA Baby failed to remit participant loan repayments to the 401(k) Plan. (Id. ¶ 18.) According to the Secretary, the participant loan repayments were retained in USA Baby's operating account and used to pay USA Baby's general operating expenses in violation of the same ERISA provisions identified in Count I. (Id. ¶¶ 19-20.) In Count IV, the Secretary avers that between April 13, 2007, and November 28, 2008, Wallis, Eriksen, and USA Baby failed to remit participant loan repayments to the 401(k) Plan in a timely manner, again in violation of the earlier-identified ERISA provisions. (Id. ¶¶ 22-23.)

In Count V, the Secretary alleges that between May 2, 2008, and November 28, 2008, USA Baby failed to transfer Health Plan participants' contributions that were intended to pay insurance premiums to the appropriate insurance providers, and instead retained these contributions in its own general assets. (Id. ¶¶ 25-29.) Wallis then used the Health Plan participants' contributions to pay for USA Baby's business expenses. (Id. ¶ 30.) According to the Secretary, USA Baby and Wallis' actions violated ERISA Section 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A), and Sections 406(a)(1)(D) and (b)(1)-(2), 29 U.S.C. §§ 1106(a)(1)(D) and (b)(1)-(2). (Id. ¶ 31.) Finally, in Count VI, the Secretary avers that Wallis, Eriksen, and USA Baby failed to ensure that all 401(k) Plan fiduciaries were bonded against losses to the 401(k) Plan resulting from fraudulent or dishonest acts, in violation of ERISA Section 412, 29 U.S.C. § 1112. (Id. ¶ 33.)

On July 14, 2011, the Court entered default judgments against USA Baby and the Plans for failure to timely appear, answer, or otherwise plead after each failed to respond to thecomplaint or appear in Court. (R. 14, Min Entry.) On August 23, 2011, Eriksen notified the Court that he had filed for bankruptcy protection. (R. 31, Not. Bankr. Filing.) Upon receiving Eriksen's notice, the Court dismissed Eriksen "without prejudice and with leave to reinstate once the automatic bankruptcy stay is lifted." (R. 32, Min. Entry.) On September 2, 2011, the Secretary moved for reconsideration of Eriksen's dismissal. (R. 34, Pl.'s Mot. Recons.) According to the Secretary, this ERISA action is exempted from the automatic stay provisions of the Bankruptcy Code pursuant to 11 U.S.C. § 362(b)(4) because the Secretary brings the action pursuant to her police and regulatory power. (R. 35, Pl.'s Mem. at 3.) Eriksen failed to file a response to the motion to reconsider.

On September 13, 2011, Wallis filed a motion to dismiss and Eriksen subsequently joined Wallis' motion. (R. 40, Mot. Dismiss; R. 44, Not. Joinder.) In their motion, the Moving Defendants argue that the Secretary's complaint should be dismissed for lack of subject-matter jurisdiction, improper venue, failure to state a claim, and failure to join a required party. (R. 40, Mot. Dismiss at 1.) The Moving Defendants also appear to argue that the Secretary's action should be stayed because of the pending USA Baby bankruptcy proceedings and a pending appeal concerning Wallis' objection to the appointment of Chatz as the USA Baby bankruptcy trustee. (Id. at 3-9). On October 18, 2011, the Secretary responded to the Moving Defendants' motion. (R. 42, Pl.'s Resp.) On October 28, 2011, the Moving Defendants filed a reply in support of their motion to dismiss. (R. 46, Defs.' Reply at 2-3.) Thereafter, the Secretary sought to strike the Moving Defendants' reply, or in the alternative, to file a sur-reply. (R. 47, Pl.'s Mot. Strike.) The Court granted the Secretary the alternative relief requested, (R. 49, Min. Entry), and on November 28, 2011, the Secretary filed a sur-reply addressing the Moving Defendants' newarguments. (R. 50, Pl.'s Sur-Reply.)

On June 18, 2012, the Bankruptcy Court found Eriksen's debt to the 401(k) Plan, "incurred during the period from April 7,2006 through September 19, 2008 and consisting of $7,987.46 in unremitted contributions was lost opportunity costs" to be non-dischargeable. (R. 52, Pl.'s Not.); Order, In re Eriksen, No. 11-28958 (Bankr. N.D. Ill. June 19, 2012).

LEGAL STANDARDS

The Secretary asks the Court to reconsider its prior dismissal of Eriksen. (R. 34, Pl.'s Mot. Recons. at 1.) A motion to reconsider, or to be precise, a motion to alter or amend a judgment pursuant to Rule 59(e) "is permissible when there is newly discovered evidence or there has been a manifest error of law or fact." Harrington v. City of Chi., 433 F.3d 542, 546 (7th Cir. 2006). To succeed on a Rule 59(e) motion, "the movant must 'clearly establish' one of the aforementioned grounds for relief." (Id.) (quoting Romo v. Gulf Stream Coach, Inc., 250 F.3d 1119, 1122 n.3 (7th Cir. 2001)). When the basis for relief is a manifest...