Patrick Baker v. Iron Workers Local 25 ( 2021 )

RECOMMENDED FOR PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 21a0124p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
┐
PATRICK BAKER,
│
Plaintiff, │
│
JAMES BUZZIE; CHRIS VLK; RICHARD J. SAWHILL, │
> No. 20-1946
Plaintiffs-Appellants, │
│
v. │
│
│
IRON WORKERS LOCAL 25 VACATION PAY FUND, et al., │
Defendants, │
│
MICHAEL RANDICK; DENNIS AGUIRRE; WAYNE │
COFFELL, │
│
Defendants-Appellees. │
┘
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 2:19-cv-12963—Terrence George Berg, District Judge.
Decided and Filed: May 28, 2021
Before: SUTTON, Chief Judge; DAUGHTREY and GRIFFIN, Circuit Judges.
_________________
COUNSEL
ON BRIEF: Gary C. Ankers, LITTLER MENDELSON, P.C., Detroit, Michigan, Jay Inman,
LITTLER MENDELSON, P.S.C., Lexington, Kentucky, Alan B. Carlson, LITTLER
MENDELSON, P.C., San Jose, California, for Appellants. Matthew I. Henzi, ASHERKELLY,
PLLC, Southfield, Michigan, for Appellees.
No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 2
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OPINION
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SUTTON, Chief Judge. Several construction companies and one union established a
trust fund to subsidize employee vacations. Six trustees oversaw the fund. A disagreement arose
over whether the trust needed to amend one of its tax returns. Three of the trustees (the ones
selected by the companies) filed a lawsuit in federal district court, seeking to obtain authority to
amend the tax return. The three union-appointed trustees intervened, arguing that the dispute
belongs in arbitration. The court agreed and dismissed the complaint. We affirm.
I.
In 1962, the Great Lakes Fabricators and Erectors Association (a group of construction
companies) and Iron Workers Local 25 (a union representing construction workers) created a
trust funded by contributions from the employers. The trust fund subsidizes vacations for
employees who participate in the employee vacation plan. A board of trustees manages the
vacation fund, with the employers and the union each choosing three of its six members. The
Employee Retirement Income Security Act of 1974 permits the trust fund, and it counts as a
tax-exempt entity under the tax code, which means that it does not have to pay taxes on its
investment earnings. See 26 U.S.C. § 501(c)(9).
In 2017, the three employer trustees reviewed the vacation plan to ensure that the fund
complied with the tax code. After this review, they became convinced that two features of the
plan jeopardized the fund’s tax-exempt status: the frequency with which employees receive
distributions and the ability of the employees to use their vacation money for non-vacation
purposes. The employer trustees notified the union trustees, who informally agreed in 2019 to
change the terms of the plan.
It soon came time for the trust to file its annual tax return. As part of the process, one of
the employer trustees had to certify that the fund did not face any potential liability for taking
contestable tax positions. Believing the board would soon change the plan to resolve these two
uncertainties, he certified the return.
No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 3
That belief proved to be unduly optimistic. At the board’s quarterly meeting in March
2019, the employer trustees moved to change the vacation plan to bring it into compliance with
the tax code, presumably by reducing the amount of vacation available and preventing
employees from using vacation funds for other purposes. The union trustees refused, concluding
that the tax code did not require any change. The matter never came to a vote.
The employer trustees responded that the trust needed to amend its tax return to reflect
uncertainty about the fund’s tax-exempt status. They put the matter on the agenda for the June
quarterly meeting, but none of the union trustees attended the meeting. At the September board
meeting, an employer trustee moved to amend the tax return, but the chair of the board, a union
trustee, rejected the motion as procedurally improper.
The employer trustees sued the trust fund in federal district court, claiming they had a
fiduciary duty under ERISA to ensure that the fund complied with the tax code. They sought a
declaratory judgment and an injunction compelling the trust to amend its tax return.
The union trustees intervened. They filed a motion to dismiss, arguing that the dispute
should be arbitrated. The district court agreed and dismissed the case.
II.
The Labor Management Relations Act forbids employers from directly giving money to
unions, 29 U.S.C. § 186(a), a bar designed to prevent bribery and corruption, Arroyo v. United
States, 359 U.S. 419, 425–26 (1959). An exception allows an employer and a union to operate a
trust fund for the benefit of employees, just like the one here. See 29 U.S.C. § 186(c)(5)(A).
Without this exception, the vacation trust fund would not exist.
As the price for permitting trusts of this sort, the Act requires them to follow several
rules. The trust’s managing board must have an even number of trustees, half hailing from the
employer, half from the union. Id. § 186(c)(5)(B). Anticipating that even-numbered boards
might deadlock from time to time, the Act requires the trust agreement to provide that an
arbitrator will resolve any “deadlock on the administration of such fund.” Id.No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 4
The trust agreement meets these requirements. It has a six-member board. It requires
three trustees to be selected by the employers and three by the union. And it provides that an
arbitrator will resolve any deadlocks. A covered deadlock, the agreement says, may arise in one
of two ways. The first occurs when “a proposal, nomination, motion or resolution made by any
Trustee is not adopted by a majority vote (unless the same has been defeated by a majority
vote).” R.20-2 at 12. The second occurs when “a quorum is lacking at a meeting duly called.”
Id. A quorum requires four trustees to gather, two from each side.
The deadlock provision applies to this dispute. As a matter of orientation, we must
resolve “any doubts concerning the scope of arbitrable issues . . . in favor of arbitration.” Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). With or without this
doubt-resolving presumption, this dispute generated both types of deadlocks.
Take the provision that applies when a proposal fails to receive a majority vote. In
March 2019, the employer trustees proposed changing the vacation plan to remedy the noted tax
uncertainties. Whatever else happened when it came to this proposal, one thing is clear. It was
“not adopted by a majority vote” or for that matter “defeated by a majority vote.” The same
problem happened six months later. At the September 2019 meeting, the employer trustees
moved to amend the tax return again. That motion also failed to receive a majority vote, as the
chairman ruled it out of order.
Now take the provision that applies when a meeting lacks a quorum. The union trustees,
the complaint alleges, failed to attend the June 2019 quarterly meeting, which deprived the board
of a quorum. A deadlock generated by the lack of a quorum amounts to a covered dispute.
Whether we look in one direction or the other, it is clear that the employer trustees and
the union trustees deadlocked on the proper response to the employer trustees’ concerns about
the fund’s tax-exempt status and on whether to file an amended tax return. Under the trust
agreement, that meant that arbitration, not federal court, was the mechanism for resolving the
dispute.
Apart from this defect in the lawsuit, there is another problem with it. ERISA makes
these claims premature. Before invoking ERISA in federal court, as the employer trustees do in
No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 5
their complaint, they had an obligation to exhaust remedies under the plan. Miller v. Metro. Life
Ins. Co., 925 F.2d 979, 986 (6th Cir. 1991).
The trust agreement, as shown, laid out a path for the employer trustees to follow in
resolving this deadlock. They needed to “notify the remaining Trustees in writing that a
deadlock exist[ed].” R.20-2 at 12. Then they needed to meet with the union trustees to appoint
an “impartial umpire” to resolve the dispute. Id. at 13. Only if those talks fell through could
“any of the Trustees” go to federal court, and then only for it to appoint a neutral umpire. Id.Nothing suggests that the employer trustees could circumvent this process by going straight to
the district court and asking it to resolve the underlying dispute over whether the trust needed to
file an amended tax return.
The point of this exhaustion requirement is to reduce frivolous lawsuits, minimize costs,
prevent premature judicial intervention into decisions by the board of a trust fund, and allow
trustees to correct errors of their own making. Costantino v. TRW, Inc., 13 F.3d 969, 975 (6th
Cir. 1994). Not one of these objectives is missing from this dispute.
The Second Circuit and the Third Circuit have handled similar cases in similar fashion.
Each has held that disappointed trustees may not bring ERISA claims without first availing
themselves of deadlock arbitration provisions. Alfarone v. Bernie Wolff Constr. Corp., 788 F.2d
76, 79 (2d Cir. 1986); Kilkenny v. Guy C. Long, Inc., 288 F.3d 116, 122–23 (3d Cir. 2002).
The employer trustees make several counterarguments, each unconvincing.
They insist that no deadlock occurred because their proposal to amend the tax return
never received a vote. But the trust agreement does not require a merits vote for a deadlock to
exist. It requires only that a proposal “is not adopted by a majority vote.” A motion shot down
on procedural grounds “is not adopted by a majority vote” no less than one rejected on the
merits. Plus, the lack of a quorum at the June quarterly meeting qualifies as a deadlock anyway.
Otherwise, any time one side of a dispute preferred federal court to an arbitrator, it could resort
to procedural gamesmanship—say by denying a quorum—to prevent a vote.
No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 6
Enix v. Burrell does little to advance a different approach. 572 F. Supp. 1364 (S.D. Ohio
1983). It did not hold that a deadlock requires a tie vote; it merely rejected an argument that a
deadlock requires more than a tie vote. Id. at 1368. Nothing in the opinion says that the trust
agreement classified a lack of a quorum as a deadlock. Nor did that case recognize the
presumption in favor of arbitrability, a presumption that has grown more salient over the last four
decades.
The employer trustees claim that an exception to ERISA’s exhaustion requirement
applies to these claims. Here is how the exception works. ERISA requires trustees and other
fiduciaries to discharge their duties “solely in the interest of the participants and beneficiaries,”
to do so with reasonable “care, skill, prudence, and diligence,” and to do so “in accordance with
the documents and instruments” of the plan. 29 U.S.C. § 1104(a). By failing to amend the tax
return, the argument goes, the union trustees breached their duty to operate the plan “in
accordance with” the trust agreement, which in turn required that the trustees operate the trust in
a way that complies with the tax code. This kind of breach, the argument concludes, qualifies for
an exception to the exhaustion requirement, which permits “ERISA plan participants or
beneficiaries” to sue for a breach of a statutory fiduciary duty in federal court without
“exhaust[ing] internal remedial procedures.” Hitchcock v. Cumberland Univ. 403(b) DC Plan,
851 F.3d 552, 564 (6th Cir. 2017).
But this argument mischaracterizes the complaint and the proceedings below. The
complaint did not allege a breach of fiduciary duties—not by the union trustees, not by anyone
else. Just the opposite is true. The complaint alleges that the employer trustees’ own fiduciary
duties compelled them to file the action to maintain the trust’s compliance with tax laws.
Confirming the point, the employer trustees represented to the district court that their claims
were “not directly adversarial to the [union trustees] or to the Fund.” R.9 at 17. They never
amended their complaint once the union trustees intervened, and the complaint continued to state
a non-adversarial claim against the trust alone.
Our decision in Hitchcock also does not permit this kind of lawsuit. The case did not
involve an agreement to arbitrate. It also did not involve trustees. Although we said that
“ERISA plan participants or beneficiaries do not need to exhaust internal remedial procedures
No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 7
before proceeding to federal court when they assert” a breach of fiduciary duty, Hitchcock, 851
F.3d at 564, we have never said the same for trustees, who face the Act’s additional obstacle, see
Kilkenny, 288 F.3d at 124.
The employer trustees seek aid from Fujikawa v. Gushiken, which concluded that one
trustee could sue other trustees under ERISA for a breach of a fiduciary duty without submitting
the dispute to arbitration. 823 F.2d 1341, 1346 (9th Cir. 1987). In that case, a single union
trustee sued the employer trustees after they refused to sign checks for beneficiaries, allegedly in
an attempt to maximize the employer’s bargaining power. Id. at 1343–44. The biggest quandary
raised by Fujikawa is whether it remains good law. The decision relied on Amaro v. Continental
Can Co., 724 F.2d 747, 750 (9th Cir. 1984), which held that a party can sue for a violation of
ERISA regardless of the existence of an arbitration agreement. Fujikawa, 823 F.2d at 1345. But
the Ninth Circuit later overruled Amaro as inconsistent with intervening Supreme Court
precedent. See Dorman v. Charles Schwab Corp., 934 F.3d 1107, 1112 (9th Cir. 2019).
Fujikawa differs materially from our case anyway. It never discussed whether a deadlock
existed, and it concluded that the deadlock arbitration provision did not apply because the other
trustees had stopped serving the interests of the beneficiaries and had started serving the interests
of the employers. Fujikawa, 823 F.2d at 1346. By any fair measure, that is not this case.
The employer trustees add that this case should not go to arbitration because whether the
tax laws require the fund to amend its return amounts to a legal dispute, not one over the
administration of a trust. But arbitrators resolve legal questions and mixed law and fact
questions all the time. Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013); see
also Am. Fed’n of Television & Radio Artists, Cleveland Local v. Storer Broad. Co., 745 F.2d
392, 398 (6th Cir. 1984) (“Our national labor policy favoring the resolution of labor disputes by
arbitration ‘eliminates searching judicial review of the factual and legal accuracy of arbitrators’
findings.’” (quoting Local Union 59, Int’l Brotherhood of Elec. Workers v. Green Corp.,
725 F.2d 264, 268 (5th Cir. 1984))), amended on denial of reh’g (Nov. 29, 1984).
That leaves one wrap-up question: Did the district court correctly dismiss the case under
Civil Rule 12(b)(1) (for lack of jurisdiction) as opposed to Civil Rule 12(b)(6) (for failure to state
a claim)? The union’s motion to dismiss invoked both rules. Because an arbitration agreement
No. 20-1946 Baker, et al. v. Iron Workers Local 25, et al. Page 8
presents a reason to dismiss under 12(b)(6), not under 12(b)(1), the court should have dismissed
the case for failure to state a claim. See Teamsters Local Union 480 v. United Parcel Serv., Inc.,
748 F.3d 281, 286 (6th Cir. 2014). We nonetheless may correct the label on our own and affirm
all the same. Id.We affirm.