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DEVITO v. HEMPSTEAD CHINA SHOP

October 22, 1992

GINA DEVITO, CHARLES CASTELLI, RALPH VAMPINI, and RUTH GORDON, as Trustees of Local 1245 General Benefits Funds, Plaintiffs, against HEMPSTEAD CHINA SHOP, INC., Defendant.

SPATT


The opinion of the court was delivered by: ARTHUR D. SPATT

SPATT, District Judge

 This ERISA case raises what appears to be a novel issue in this Circuit, namely, whether a participating employer in a multiemployer employee benefit fund is obligated to continue making contributions when the Trustees reduce benefit levels as the result of the abrupt and catastrophic departure of the major employer from the Fund.

 In the instant case, the plaintiff Trustees move for summary judgment, pursuant to Fed. R. Civ. P. 56, granting them mandatory relief under 29 U.S.C. § 1132 (g)(2), based upon a claim that the defendant employer, Hempstead China Shop, Inc., failed to make required contributions to the employee welfare benefit fund as required under the provisions of ERISA. The defendant employer is also moving for summary judgment, dismissing the complaint, and for leave to amend its Answer to add a counterclaim. Oral argument of these motions was heard by the Court on October 16, 1992.

 FACTUAL BACKGROUND

 This action was brought pursuant to 29 U.S.C. §§ 1132 and 1145 ("ERISA") to collect delinquent contributions due to the plaintiff Local 1245 General Benefits Fund ("the Fund") from defendant Hempstead China Shop ("Hempstead China" or "the employer"), pursuant to the terms of a collective bargaining agreement with Local 1245 which was in effect from April 1, 1989 through March 31, 1992. The agreement obligated Hempstead China to make specified monthly contributions to the Fund on behalf of all eligible full-time and part-time employees in the Local 1245 bargaining unit. The plaintiffs claim that the defendant violated section 14 of the bargaining agreement by failing to make any contributions for the month of April 1989 and for the twenty-month period from August, 1990 though the Agreement's expiration in March, 1992.

 United Food and Commercial Workers Local 1245 ("the Union") and the Local 1245 Health Fund is the successor to the Local 1245 General Benefits Fund. The Local 1245 Health Fund is an ERISA multi-employer, welfare benefits fund established by the Union and employers who were parties to collective bargaining agreements with the Union. It was jointly administered by equal numbers of employer-appointed and union-appointed Trustees. The predecessor General Benefits Fund provided health benefits to the employees of contributing employers.

 When Hempstead China joined the Fund, Time Square Stores ("TSS") was the largest contributing employer to the General Benefits Fund, employing approximately 1,600 of the Fund's 1,750 participants. Of the remaining 150 participants employed by ten other contributing employers, Hempstead China was the second largest employer with 75 participants. In October, 1989, TSS abruptly notified the Fund that it intended to close all of its stores and lay off all of its employees by December 31, 1989. TSS thereafter instituted chapter 11 bankruptcy proceedings.

 The unanticipated closing of TSS represented an overnight loss of 88% of the Fund's income, while the Fund remained obligated to pay claims incurred by TSS participants as well as those of the remaining employers. The Fund's monthly income was reduced from approximately $ 81,000 to $ 10,000. The Plan Administrator advised the Trustees that the current contributions from the remaining employers would be grossly inadequate to pay for the existing schedule of benefits. Consistent with their fiduciary obligations under ERISA, the Trustees were presented with three alternatives: (1) require the remaining employers to increase immediately their contributions by a staggering amount; (2) immediately reduce benefits to a level that could be supported by the current contributions of the remaining employers; or (3) terminate the Fund or merge it into another plan. The Trustees chose the second option and reduced the level of benefits. That action eliminated hospital medical and surgical benefits, major medical, and life insurance benefits. Only dental, optical and prescription coverages were retained.

 On December 11, 1991, the Local 1245 General Benefits Fund was merged into the Local 1245 Health Fund, which became the surviving entity.

 In its Answer, the defendant contends that its obligations to contribute to the Fund were contingent on the Fund's maintenance of particular benefit levels. Since the benefit levels were substantially reduced, Hempstead China argues that it was not required to pay the contractual contributions to the Fund.

 PROCEDURAL SETTING

 A. Plaintiffs' Motion for Summary Judgment

 The plaintiffs move for summary judgment on the complaint awarding them money damages in the amount of the withheld contributions. The plaintiffs also seek additional relief in the form of a mandatory award of interest and attorney's fees under section 502(g)(2) of ERISA.

 The Local 1245 General Benefits Fund was administered pursuant to the collective bargaining agreement and the Declaration of Trust, which provided that the Trustees had broad authority to administer the fund and set benefit levels. In their Rule 3(g) Statement, the plaintiffs outline the health contributions required of the employer to the Plan based upon Section 14 of the 1986-1989 collective bargaining agreement. That section provides that the employer "shall on the 10th day of each and every month during the period of this Agreement, contribute . . . the following amounts to insure and protect the health benefits presently enjoyed by the employees." The provision then delineates the actual dollar contribution per month to be made for each full-time and part-time employee, and provides for increments in each year of the contract.

 The Rule 3(g) Statement also provides as follows:

 "11. The Trustees understood Article 14 to require Hempstead China to contribute the amounts specified therein throughout the term of the contract, regardless of the benefit levels set by the Trustees. . . .

 16. In December, 1989, the Trustees voted to adopt a reduced schedule of benefits based upon current contribution income. . . .

 19. In November, 1991, the Trustees, exercising their authority under the Trust Agreement, voted to merge the Fund into the Local 1245 Health Fund effective December 11, 1991, and the merger was approved by the voting contributing employees and the Union."

 The plaintiffs also provided an affidavit from Vincent A. DeVito, President of United Food and Commercial Workers Local 1245, AFL-CIO. DeVito states that after the demise of TSS, the Union offered the remaining employers a mid-term modification of their contracts, although they were under no obligation to do so, because the sudden closure of TSS was so unexpected and "had such a devastating impact on the financial health of the General Benefits Fund." DeVito adds that "six contributing employers agreed to amend their collective agreements mid-term to provide for contributions to the Health Fund, instead of the General Benefits Fund, but Hempstead China did not."

 In November 1991, the Trustees exercised their authority under paragraph 25 of the Trust Agreement and voted to merge the General Benefits Fund into the larger and apparently more stable Local 1245 Health Fund, and that action was approved by a majority of the contributing employers as well as by the Union. According to DeVito, the Agreement covering 1989-1992

 " . . . did not commit the Fund to provide any particular type of benefits, but rather committed Hempstead China to contribute a specified amount each and every month per eligible employee to the General Benefits Fund; and Hempstead China's contribution obligation was not dependent on the Fund's provision of any level of benefits . . . " (DeVito Affidavit, P 11).

 B. Defendant's Summary Judgment Motion

 In addition to moving for summary judgment dismissing the complaint, the defendant moves pursuant to Fed. R. Civ. P. 13 for leave to file a counterclaim. In support of the motion, the defendant provides the affidavit of Henry Poronoff, Vice-President of Hempstead China Shops, Inc. According to Poronoff, "the Fund is asking Hempstead China to make contributions in clear contravention of our collective bargaining agreement and despite the fact that it has refused to provide employees with health insurance benefits" (Poronoff Affidavit, P 2).

 The defendant also relies upon Section 14 of the Agreement, but places the emphasis on different elements in that provision than those stated by the plaintiffs:

 "A. The employer shall on the tenth . . . day contribute to Local 1245 General Benefit Fund the following amounts to insure and protect the health benefits presently enjoyed by the employees.

 1. Effective April 1, 1989, the Employer shall increase contributions to the General Benefits Fund for all eligible full-time employees to ninety-five ($ 95.00) dollars per month to maintain the ...


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