The opinion of the court was delivered by: HECKMAN
ORDER AND REPORT AND RECOMMENDATION
This matter was referred to the undersigned by the Hon. Richard J. Arcara, to hear and report, in accordance with 28 U.S.C. § 636(b). The following constitutes the undersigned's proposed findings and recommendations for the disposition of the several motions pending.
This action, brought under § 515 of the Employee Retirement Income Security Act ("ERISA"), was filed on November 1, 1991, by fiduciaries of the National Electrical Benefit Fund ("NEBF") and the health, pension and annuity funds of Local 41 of the International Brotherhood of Electrical Workers ("IBEW" or the "International"). Named as defendants are Heary Bros. Lightning Protection Co. and its corporate officers, Kenneth P. Heary and Edwin W. Heary (collectively, the "Hearys"). On January 16, 1992, an amended complaint was filed before defendants answered or otherwise appeared in the action (Item 2). The amended complaint, which did not substantially change the allegations in the original complaint, sets forth five claims for monetary and injunctive relief based on defendants' alleged failure to contribute to the plaintiff funds, as required by ERISA and the terms of various collective bargaining agreements or letters of assent entered into between IBEW and defendants.
NEBF alleges that the Hearys first entered a collective bargaining relationship with IBEW in 1964 when Heary Bros. executed a "Letter of Assent-B," effective from May 1, 1964 through April 30, 1966. A "Letter of Assent" is a typical short-form agreement by which an employer agrees to be bound by a collective bargaining agreement already negotiated, or about to be negotiated, between a local union and the employer's collective bargaining representative. A "Letter of Assent-B" binds the employer to an existing agreement and is of limited duration. A "Letter of Assent-A" establishes an ongoing relationship between the employer and the collective bargaining representative and binds the employer to the agreement from year to year until the relationship is terminated by the employer (see Reilly Aff., P 9, and Ex. A thereto, attached to Item 58).
Under the 1964 Letter of Assent-B, Heary Bros. expressly agreed to be bound by the Inside Wiremen's Agreement then in effect. Heary Bros. subsequently executed additional Letters of Assent-B effective from May 1, 1969 through April 30, 1972, and from May 1, 1972 through April 30, 1973. Heary Bros. also executed a series of Letters of Assent-A, the last of which became effective on July 16, 1979 (Reilly Aff., Ex. A). Finally, Heary Bros. entered a Specialty Agreement with IBEW effective April 1, 1979 (Item 2, PP 16-17; Reilly Aff., Ex. B).
NEBF's ERISA claim is based on the results of an audit conducted in 1990 which concluded that for the period of 1985 through mid-1990, Heary Bros. failed to report fully the wages earned and hours worked by its employees, resulting in underpayments of principal contributions for that period in the amounts of $ 64,260.88 to NEBF (Item 2, P 39), $ 209,279.55 to the Local 41 health fund (id., P 44), $ 272,866.75 to the pension fund (id., P 49), and an unspecified amount to the annuity fund (for which plaintiffs request an accounting) (id., P 53).
On March 5, 1992, the Hearys moved to stay the action pending the outcome of a criminal investigation that was being conducted by the United States Attorney's office. Defendants claimed that their defense of the civil action would ultimately be based on the alleged illegality of the collective bargaining agreements, and that those same agreements were also the basis for the pending criminal investigation (Item 4). This motion was joined by the United States Attorney (Item 7). On March 31, 1992, the district court entered an order staying this action until July 24, 1992, giving defendants until that date to answer or otherwise respond to the amended complaint (Item 13). Defendants' subsequent motion for an additional stay was denied (Item 19), and defendants answered the amended complaint on July 31, 1992, asserting various affirmative defenses based on the alleged illegality or unenforceability of the collective bargaining agreements and letters of assent at issue (Item 20). The criminal investigation is still pending as of the date of this report and recommendation.
On June 10, 1993, the Hearys filed a third-party complaint against Local 41, the IBEW, and various current and former union officers, and against the Western New York Chapter of the National Electrical Contractors Association ("NECA") and its executive director. The third-party complaint sets forth thirteen causes of action alleging illegality or unenforceability of the collective bargaining agreements and letters of assent, breach of contract, negligence, intentional tort, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 et seq. (Item 38). On that same date, the Hearys filed an amended answer with sixteen affirmative defenses and nine counterclaims based on the same allegations set forth in the third-party complaint (Item 39). On July 19, 1993, a "corrected" third-party complaint was filed, without substantive changes.
The third-party complaint alleges generally that, beginning in the 1960's and continuing until approximately 1991, IBEW and Local 41 officers engaged in an extortion scheme whereby Heary Bros. employees were granted access to union construction sites in order to perform contracts for the installation of lightning protection systems on commercial buildings, in exchange for illegal cash "pay-offs" which the Hearys were directed to deposit in secret at various locations. As part of this alleged scheme, the Hearys were required to enter into "sham" collective bargaining agreements with IBEW and to deliver "bogus" union election votes on behalf of their employees. The Hearys allege that this scheme constitutes a RICO pattern of racketeering activity based on predicate acts of extortion, in violation of the Hobbs Act (18 U.S.C. § 1951) and state law, and unlawful demands for payment of monies, in violation of the Labor-Management Relations Act ("LMRA"), 29 U.S.C. § 186(b) (also referred to as the "Taft-Hartley Act").
On August 6, 1993, individual third-party defendants Gene Adams and Charles Pillard answered the third-party complaint against them. At approximately the same time, each of the remaining third-party defendants moved to dismiss the third-party complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. Adams and Pillard subsequently filed Rule 12(b)(6) motions. In addition, third-party defendant NECA moved in the alternative for summary judgment, and for Rule 11 sanctions. The original plaintiff NEBF answered the counterclaim against it, and moved for partial summary judgment to determine the Hearys' liability under ERISA and to dismiss the counterclaims and affirmative defenses asserted against it, as well as to strike or sever the third-party claims from the suit. The plaintiff funds also moved to dismiss the counterclaims and affirmative defenses asserted against them.
Meanwhile, on October 15, the Hearys moved to amend the third-party complaint. The proposed amended complaint deletes Count Four, which sought declaratory relief as to the Hearys' obligations under the express terms of the collective bargaining agreements, based on the Hearys' recognition that such a claim would be preempted by federal labor law. The proposed amended complaint also deletes individual third-party plaintiffs Edwin and Kenneth Heary as RICO plaintiffs, in recognition of their lack of shareholder standing, and further amplifies the federal and state statutory bases for the alleged RICO predicate acts.
Each of these motions will be discussed in turn.
I. Motion to Amend the Third-Party Complaint.
Rule 15(a) of the Federal Rules of Civil Procedure provides in relevant part as follows:
A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served . . .. Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.
Only NEBF and third-party defendants Adams and Pillard have filed responsive pleadings to the third-party complaint. The remaining third-party defendants have filed dispositive motions in lieu of answers.
Leave to amend should be given in the absence of any apparent or declared reason such as undue delay, bad faith or dilatory motive on the part of the party seeking amendment, undue prejudice to the opposing party by virtue of the allowance of the amendment, or futility of the amendment. Seagoing Uniform Corp. v. Texaco, Inc., 705 F. Supp. 918, 925 (S.D.N.Y. 1989) (citing Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962)); see generally Moore's Federal Practice P 15.08. There is no showing that any such reason exists in this case. Furthermore, allowance of the amendment would serve the interests of justice because it would delete preempted claims and result in a better overall definition of the claims presented in the case.
Accordingly, leave to amend the third-party complaint is granted, and the amended complaint shall be filed with the Clerk of the Court. Responsive pleadings shall be filed in accordance with the requirements of the Federal Rules of Civil Procedure and the Local Rules for the Western District of New York.
II. NEBF's Motion for Summary Judgment.
Summary judgment is appropriate if the pleadings, discovery materials and affidavits on file "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In reaching this determination, the court must assess whether there are any material factual issues to be tried while resolving ambiguities and drawing reasonable inferences against the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S. Ct. 2505, 2510-11, 91 L. Ed. 2d 202 (1986); Coach Leatherware Co., Inc. v. Ann Taylor, Inc., 933 F.2d 162, 166-67 (2d Cir. 1991). A dispute regarding a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., supra, 477 U.S. at 248; see Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir.), cert. denied, 502 U.S. 849, 112 S. Ct. 152, 116 L. Ed. 2d 117 (1991).
Once the moving party has met its burden of demonstrating the absence of a genuine issue of material fact, the nonmoving party must come forward with enough evidence to support a jury verdict in its favor, and the motion will not be defeated merely upon a "metaphysical doubt" concerning the facts, or on the basis of conjecture or surmise. Bryant v. Maffucci, supra (citing Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986)). In order to avoid summary judgment, the nonmoving party is under the obligation "to make a sufficient showing on an essential element of [its] case with respect to which [it] has the burden of proof." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986); Burke v. Bevona, 931 F.2d 998, 1001 (2d Cir. 1991). "Entry of summary judgment indicates that no reasonable jury could return a verdict for the losing party." Coach Leatherware, Inc. v. Ann Taylor, Inc., supra, 933 F.2d at 167.
NEBF moves for partial summary judgment as to the Hearys' liability under ERISA. NEBF contends that there are no material factual disputes regarding the Hearys' obligation to contribute to the various employee benefit funds. According to NEBF, the 1990 audit clearly shows that the Hearys' failed to meet that obligation, mandating entry of judgment on NEBF's ERISA claims.
The Hearys oppose this motion on the ground that the collective bargaining relationship with IBEW was tainted from the outset by Local 41's extortion scheme, thereby nullifying their contractual obligation to contribute to the employee benefit funds. The Hearys contend that material factual issues therefore exist regarding the validity of the collective bargaining agreements or Letters of Assent relied upon by NEBF, precluding summary judgment on ERISA liability.
Section 515 of ERISA provides:
Every employer who is obligated to make contributions to a multiemployer plan under the terms of the plan or under the terms of a collectively bargained agreement shall, to the extent not inconsistent with law, make such contributions in accordance with the terms and conditions of such plan or agreement.
29 U.S.C. § 1145. The liability created by this section may be enforced by the trustees of an employee benefits plan by bringing an action in federal district court pursuant to § 502, 29 U.S.C. § 1132.
As the Second Circuit has recognized, the purpose of § 515 is to "permit trustees of plans to recover delinquent contributions efficaciously, and without resort to issues which might arise under labor-management relations law--other than 29 U.S.C. § 186. " Benson v. Brower's Moving & Storage, Inc., 907 F.2d 310, 314 (2d Cir.), cert. denied, 498 U.S. 982, 112 L. Ed. 2d 524, 111 S. Ct. 511 (1990) (emphasis added) (quoting 126 Cong.Rec. 23,039 (1980) (remarks by Rep. Thompson)). Only two very limited defenses are available to an employer when sued by plan trustees to recover delinquent payments under § 515: (1) that the pension contributions themselves are illegal, and (2) that the collective bargaining agreement is void, and not merely voidable. Id. "Thus, once an employer knowingly signs an agreement that requires him to contribute to an employee benefit plan, he may not escape his obligation by raising defenses that call into question the union's ability to enforce the contract as a whole." Id. This is because employee benefit funds, as "third party beneficiaries" to collective bargaining agreements, have been placed by Congress in a position superior to that of the original promisee. "Simply put, benefit plans must be able to rely on the contribution promises of employers because plans must pay out to beneficiaries whether or not employers live up to their obligations." Id. (citing Central States, Southeast and Southwest Areas Pension Fund v. Gerber Truck Serv., Inc., 870 F.2d 1148, 1151 (7th Cir. 1989)).
The Hearys characterize their defenses to the ERISA delinquency action as involving both illegal pension contributions and a void (not merely voidable) collective bargaining relationship. This is based on their allegations that the local union has demanded illegal payments in return for allowing Heary Bros. employees access to union job sites, in violation of the Labor Management Relations Act, 29 U.S.C. § 186, and the Hobbs Act, 18 U.S.C. § 1951. According to the Hearys, these are precisely the kinds of allegations recognized by the Benson v. Brower's case, and by the Supreme Court in Kaiser Steel Corporation v. Mullins, 455 U.S. 72, 70 L. Ed. 2d 833, 102 S. Ct. 851 (1982), as sufficient to interpose an "illegality" defense to an ERISA delinquency claim under § 515.
Kaiser Steel dealt with an ERISA deficiency claim, brought prior to the enactment of § 515, by trustees of the United Mine Workers Union Health and Retirement Funds. The trustees alleged that the defendant coal producer failed to comply with a clause in the collective bargaining agreement which required contributions to the fund based on amounts of coal purchased from other producers who were not covered by the agreement. The coal producer defended the action by asserting that the purchased-coal clause of the agreement was illegal as a violation of federal labor and antitrust laws. The Supreme Court agreed, holding that the clause could not be enforced "without commanding unlawful conduct." Kaiser Steel, supra, 455 U.S. at 79. The Court stated:
[The employer] . . . did not make a naked promise to pay money to the union funds. The purchased-coal provision obligated it to pay only if it purchased coal from other employers and then only if contributions to the [union] funds had not been made with respect to that coal. [The employer]'s obligation arose from and was measured by its purchases from other producers. If [the employer]'s undertaking is illegal under the antitrust or labor laws, it is because of the financial burden which the agreement attached to purchases of coal from non-[union] producers, even though they may have contributed to other employee welfare funds.
Section 515 was added to ERISA in 1980 as a means of foreclosing defenses "unrelated" or "extraneous" to simple collection actions brought by plan trustees . . ..' Id. at 87-88. The Kaiser Steel Court examined the legislative history of § 515 and found nothing to indicate congressional intent to foreclose the employer from raising "a defense based on the illegality of the very promise sought to be enforced." Id. at 88.
Based on the collective bargaining provisions applicable to this case, the Hearys' reliance on the holding in Kaiser Steel is misplaced. Item 4 of the April 1, 1979 Specialty Agreement provides as follows:
The Employer agrees to comply with all the terms and conditions of the approved applicable local collective bargaining agreement, including the [NEBF], the National Electrical Industry Fund, and/or the local Joint Apprenticeship Training Fund, in the area where the work is being performed; EXCEPT that the Employer shall continue to pay into the IBEW Local Union 41 Pension Fund and Health and Welfare Fund on his permanent Employees, in lieu of contributing to similar Funds in the area where the work is being performed. Any difference in contribution shall be adjusted in the basic wage rate so that the permanent Employees and the Employees secured locally receive the equivalent of the total package of benefits as set forth in the local agreement.
(Reilly Aff., Ex. B, p. 1, attached to Item 58) (emphasis supplied). The Fringe Benefit provision of the Inside Wiremen's Agreement between Local 41 of the IBEW and the Western New York Chapter of NECA has remained substantially unchanged throughout the course of the Hearys' collective bargaining relationship with IBEW. This provision states in relevant part as follows:
It is agreed that in accord with the National Benefit Agreement entered into between [NECA] and [IBEW] on September 3, 1946, as amended, that unless authorized otherwise by the National Employees Benefit Board, the individual employer will forward monthly to the designated Local Employees Benefit Board an amount equal to 3% of his gross monthly labor payroll, which he is obligated to pay to the employees in this bargaining unit . . ..
(§ 4.01 of Inside Wiremen's Agreement, Item 73, Exs. 2(I)-(L)).
The Hearys have not demonstrated that these provisions violate federal law. The benefit fund contributions required by the agreements are not contractually tied to any illegal undertaking, as were the contributions in the Kaiser Steel case. The alleged "extortion scheme" detailed by the Hearys involved separate payments to union officials to obtain job site access. There are no allegations that these illegal payments were earmarked by the union to be used as employee benefit fund contributions. Thus, the Hearys have not demonstrated that the contributions themselves were "inconsistent with law . . .," 29 U.S.C. § 1145, in any way that would prevent this court from entering judgment on the Hearys' ERISA delinquency liability without regard for defenses "unrelated" or "extraneous" to their contractual promise to pay. Kaiser Steel, supra at 88; see also Berry v. Garza, 919 F.2d 87, 90 (8th Cir. 1990) (relying on Benson v. Brower's to hold that employer's entry into facially valid collective bargaining agreement in order to obtain union work estopped employer from asserting unenforceability of agreement based on union's lack of majority status); Washington Area Carpenters' Welfare Fund v. Overhead Door Co., 220 U.S. App. D.C. 273, 681 F.2d 1, 4-5 (D.C.Cir. 1982), cert. denied, 461 U.S. 926, 77 L. Ed. 2d 296, 103 S. Ct. 2085 (1983) (payments to funds under non-enforceable "prehire" agreements would not be illegal themselves, as would payments under the "purchased coal clause" in Kaiser Steel).
The analysis turns then to whether the collective bargaining agreements between the Hearys and IBEW were void ab initio. The Hearys argue that the collective bargaining relationship was invalid from the outset because it was only entered into so that the union could extract illegal pay-offs in return for job-site access. The cases have recognized an important distinction between defenses to delinquency actions based on allegations of "fraud in the inducement" and those based on allegations of "fraud in the execution." See Southwest Administrators, Inc. v. Rozay's Transfer, 791 F.2d 769, 773-75 (9th Cir. 1986), cert. denied, 479 U.S. 1065, 93 L. Ed. 2d 999, 107 S. Ct. 951 (1987) (cited in Benson v. Brower's Moving & Storage, supra, 907 F.2d at 314). Only the latter type may be raised by an employer in defense of an ERISA delinquency claim. Southwest Administrators, Inc. v. Rozay's Transfer, supra at 773; Agathos v. Starlite Motel, 977 F.2d 1500, 1505 (3rd Cir. 1992).
In Southwest Administrators, Inc. v. Rozay's Transfer, the Ninth Circuit explained the distinction between "fraud in the inducement" and "fraud in the execution" as follows:
The former induces a party to assent to something he otherwise would not have; the latter induces a party to believe the nature of his act is something entirely different than it actually is. See 12 Williston on Contracts § 1488, at 332 (3d ed. 1970). "Fraud in the execution" arises when a party executes an agreement "with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms." Uniform Commercial Code § 3-305(2)(c); see Restatement (Second) of Contracts § 163 (1981).
The Hearys contend that the alleged extortion scheme amounted to "fraud in the execution" of the agreement. To maintain this defense, the Hearys must be able to establish "excusable ignorance of the contents of the writing signed." Id. (citing U.C.C. § 3-305 comment 7); Agathos v. Starlite Motel, supra, 977 F.2d at 1505 (citing J. Calamari & J. Perillo, The Law of Contracts, § 17-10 (3d ed. 1087)).
For example, in Operating Engineers Pension Trust v. Gilliam, 737 F.2d 1501 (9th Cir. 1984), the owner of a small construction company employing six people was relieved of his ERISA obligation because he had signed a short-form collective bargaining agreement under the mistaken, justifiable belief that he was merely filling out union membership application forms. The Ninth Circuit found that the employer signed the document reasonably believing it to be something quite different than it was, and that therefore the employer could not be bound to the terms of the collective bargaining agreement requiring him to contribute to the union employee benefit funds. Id. at 1504-05.
No such circumstances have been presented in this case, and the Hearys have not convinced the court that any such showing could be made after discovery. The Hearys do not argue that Kenneth Heary signed the Letters of Assent or the Specialty Agreement in ignorance of the contents or significance of those documents. Instead, the essence of the Hearys' position is that they were induced by the union to enter the collective bargaining agreement, which they did in order to gain access to union construction sites. Such a claim sounds in "fraud in the inducement," rendering the collective bargaining agreement "voidable" but not "void." This defense is thus foreclosed as a matter of law by the Second Circuit's holding in Benson v. Brower's Moving & Storage. "Once an employer knowingly signs an agreement that requires him to contribute to an employee benefit plan, he may not escape his obligation by raising defenses that call into question the union's ability to enforce the contract as a whole." 907 F.2d at 314.
Further support for this result is contained in the legislative history of the 1 980 amendment to § 515, as cited in the Kaiser Steel and Benson v. Brower's cases. Rep. Thompson's remarks clearly evince congressional concern for the "failure of employers to make promised contributions in a timely fashion. . .," and for conversion of simple collection actions into "lengthy, costly, and complex litigation concerning claims and defenses unrelated to the employer's promise and the plan's entitlement to the contributions." 126 Cong.Rec. 23,039 (1980). Discussing this legislative history in his dissent in the Kaiser Steel case, Justice Brennan stated:
With the benefit of legislative history, it is apparent that §  was designed to allow an employer to be relieved of a plan contribution obligation only when that payment at issue is inherently illegal--for example, when the payment is in the nature of a bribe. In sum, illegality defenses, once arguably available whenever the payment in question could be connected with illegal activities or results, are now meant by Congress to be available only when the payment itself constitutes an illegal act.
As discussed above, the Hearys claim that their contributions to employee benefit funds should be excused because the collective bargaining agreement is a sham. They have not alleged that the contributions themselves constitute an illegal act. The only illegal payments alleged to have been made are the "pay-offs" or "bribes" in exchange for access to union construction sites. Under Kaiser Steel and Benson, and in accord with the legislative history of § 515, these allegations are insufficient to defend against the funds' action to collect the Hearys' ERISA deficiency.
In summary, the Hearys have failed to demonstrate that the collective bargaining agreements are void ab initio or that the fund contributions themselves are illegal. Accordingly, since there is no material factual dispute as to the availability of any defense to the ERISA delinquency action, NEBF's motion for partial summary judgment should be granted, and judgment ...