Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-03078/USCOURTS-cand-4_06-cv-03078-17/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 29:1001 E.R.I.S.A.: Employee Retirement

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CALIFORNIA SERVICE EMPLOYEES HEALTH &

WELFARE TRUST FUND, MIKE GARCIA,

Trustee, CHARLES GILCHRIST, Trustee,

RAYMOND C. NANN, Trustee, LARRY T.

SMITH, Trustee,

Plaintiffs,

v.

ADVANCE BUILDING MAINTENANCE,

Defendant.

 /

No. C 06-3078 CW

ORDER GRANTING IN

PART PLAINTIFFS'

MOTION FOR SUMMARY

JUDGMENT AND

GRANTING PLAINTIFFS'

MOTION FOR LEAVE TO

FILE A FIRST AMENDED

COMPLAINT

Plaintiffs California Service Employees Health & Welfare Trust

Fund (Trust) and trustees Mike Garcia, Charles Gilchrist, Raymond

Nann and Larry Smith have filed motions for summary judgment and

for leave to file a first amended complaint (FAC). Defendant

Advance Building Maintenance (Advance) opposes the motions. The

matters were heard on September 13, 2007. Having considered the

parties' papers, the evidence cited therein and oral argument on

the motions, the Court grants in part Plaintiffs' motion for

summary judgment and denies it in part and grants Plaintiffs'

motion for leave to file an amended complaint.

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BACKGROUND

The Trust is a non-profit neutral third-party established to

administer health and welfare benefits to members of various unions

pursuant to collective bargaining agreements with employers

including Advance. This dispute arises out of successive

collective bargaining agreements (CBAs), also called Maintenance

Contractors Agreements (MCAs), between Defendant and members of

Local 1877 (previously Local 399) of the Service Employees

International Union (SEIU). Stillwell Decl., Ex. A. Under the

agreements, Defendant was required to make contributions to the

Trust for health and welfare benefits for covered employees. 

In 2003, the Trust retained the accounting firm Linquist LLP

to audit Defendant's records for the period January 1, 1999 through

December 31, 2002. Thiermann Decl. ¶ 2. According to Plaintiffs,

Defendant breached its duties under the Employee Retirement Income

Security Act (ERISA) by failing fully to respond to Lindquist's

requests for information. Joseph Thiermann, a shareholder of

Lindquist, declares that Defendant failed to respond to requests

for additional information during the audit. Thiermann Decl. ¶ 5. 

According to Defendant, it was not aware that Lindquist needed

additional information. 

Lindquist provided Defendant with a draft report on October 3,

2003, stating that it found $800,251.98 in delinquent

contributions. Although the parties dispute the nature and content

of the communications that occurred following the draft report, it

is clear that the final Lindquist report, provided to Defendant in

April, 2004, asserted $347,394.49 in delinquent payments.

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Plaintiffs sent an initial demand letter seeking $486,360.95 in

delinquent payments, liquidated damages, interest and attorneys'

fees on May 25, 2004. On April 28, 2006 Plaintiffs sent another

demand letter seeking $577,368.06. 

On May 8, 2006, Plaintiffs filed the complaint in this case

alleging unpaid contributions based on the Lindquist report, for

delinquent contributions related to two trust accounts, Accounts

#718 and #719, and for late contributions made for the period

between August and December, 2003. Plaintiffs originally alleged

$327,394.49 in unpaid contributions based on the Lindquist report,

$4,249.09 in unpaid contributions to Account #718 for the period

February, 2000 through March, 2002 and $1,248.87 in unpaid

contributions to Account #719 for the period February through

April, 2003. 

Because Advance concedes that it owes some of the amounts

claimed and the Trust voluntarily dismisses some of its claims, the

parties now disagree on (1) $30,271.42 in benefits for employees

Advance argues were managers and therefore not covered by the CBA,

(2) $4,249.09 in allegedly delinquent contributions for the period

between February, 2000 and March, 2002 for Account #718, and 

(3) liquidated damages, interest and attorneys' fees for all of the

allegedly unpaid or late contributions, whether they are contested

or not.

DISCUSSION

I. Summary Judgment

Summary judgment is properly granted when no genuine and

disputed issues of material fact remain, and when, viewing the

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evidence most favorably to the non-moving party, the movant is

clearly entitled to prevail as a matter of law. Fed. R. Civ. P.

56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

1987).

The moving party bears the burden of showing that there is no

material factual dispute. Therefore, the court must regard as true

the opposing party's evidence, if supported by affidavits or other

evidentiary material. Celotex, 477 U.S. at 324; Eisenberg, 815

F.2d at 1289. The court must draw all reasonable inferences in

favor of the party against whom summary judgment is sought. 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d

1551, 1558 (9th Cir. 1991). 

Material facts which would preclude entry of summary judgment

are those which, under applicable substantive law, may affect the

outcome of the case. The substantive law will identify which facts

are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986).

Where the moving party does not bear the burden of proof on an

issue at trial, the moving party may discharge its burden of

production by either of two methods. Nissan Fire & Marine Ins.

Co., Ltd., v. Fritz Cos., Inc., 210 F.3d 1099, 1106 (9th Cir.

2000). 

The moving party may produce evidence negating an

essential element of the nonmoving party’s case, or,

after suitable discovery, the moving party may show that

the nonmoving party does not have enough evidence of an

essential element of its claim or defense to carry its

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ultimate burden of persuasion at trial. 

Id. 

If the moving party discharges its burden by showing an

absence of evidence to support an essential element of a claim or

defense, it is not required to produce evidence showing the absence

of a material fact on such issues, or to support its motion with

evidence negating the non-moving party's claim. Id.; see also

Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990); Bhan v.

NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). If the

moving party shows an absence of evidence to support the non-moving

party's case, the burden then shifts to the non-moving party to

produce "specific evidence, through affidavits or admissible

discovery material, to show that the dispute exists." Bhan, 929

F.2d at 1409. 

If the moving party discharges its burden by negating an

essential element of the non-moving party’s claim or defense, it

must produce affirmative evidence of such negation. Nissan, 210

F.3d at 1105. If the moving party produces such evidence, the

burden then shifts to the non-moving party to produce specific

evidence to show that a dispute of material fact exists. Id.

If the moving party does not meet its initial burden of

production by either method, the non-moving party is under no

obligation to offer any evidence in support of its opposition. Id.

This is true even though the non-moving party bears the ultimate

burden of persuasion at trial. Id. at 1107.

Where the moving party bears the burden of proof on an issue

at trial, it must, in order to discharge its burden of showing that

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1Advance argues that the Trust "seek[s] relief based on a 

single theory of liability, ERISA Section 515" and therefore the

Trust's motion must either be granted in full or denied in full

because "Judgment cannot be entered as to a portion of the

contributions allegedly due." Opposition at 20-21. However, as

the Trust points out, it asserts several distinct claims under a

single statute. Therefore, partial summary judgment is appropriate

as to any of the claims, even if it is denied on the others. 

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no genuine issue of material fact remains, make a prima facie

showing in support of its position on that issue. UA Local 343 v.

Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1994). That

is, the moving party must present evidence that, if uncontroverted

at trial, would entitle it to prevail on that issue. Id.; see also

Int’l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th

Cir. 1991). Once it has done so, the non-moving party must set

forth specific facts controverting the moving party's prima facie

case. UA Local 343, 48 F.3d at 1471. The non-moving party's

"burden of contradicting [the moving party's] evidence is not

negligible." Id. This standard does not change merely because

resolution of the relevant issue is "highly fact specific." Id.

Plaintiffs argue that they are entitled to summary judgment on

all of their claims.1

A. Delinquent Payments

1. Claims Based on the Lindquist Report

The majority of Plaintiffs' claims are based on delinquent

payments identified in the April, 2004 Lindquist report. That

report identified $347,394.49 in delinquent contributions. Of that

amount, Defendant does not dispute that it owes $232,130.76. 

Further, Plaintiffs concede that they are not owed $84,992.31 of

the contributions identified by Lindquist and voluntarily dismiss

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those claims. 

Therefore, the Court grants Plaintiffs' motion for summary

judgment with respect to the $232,130.76 of undisputed

contributions identified in the Lindquist report. The Court notes

that in January through May, 2007, Defendant made monthly payments

of $10,000 toward the $232,130.76 of uncontested delinquent

payments identified in the Lindquist report. McCulloch Decl. ¶ 16.

The remaining disputed amount of $30,271.42 based on the

Lindquist report represents the benefits Plaintiffs allege were due

for ten employees who Defendant argues were managers not entitled

to benefits under the CBA. Defendant further contends that, even

if these employees are covered by the CBA despite their status as

managers, there are triable questions of fact regarding whether

benefits were due, because the CBA requires that an employee

perform 110 hours of covered work per month to be entitled to

benefits. 

Defendant provides employment summaries for each of the ten

employees, demonstrating that it classified them as "assistant

district managers," "district managers," "building supervisors,"

"project managers" or "supervisors." Mosieznicki Decl., Ex. B. 

These summaries indicate that the ten employees each spent between

ten and fifty percent of their time performing janitorial work and

describe their other responsibilities. Id. These hours spent

doing janitorial work are sufficient to rebut Defendant's first

argument, that the employees are not covered by the CBA because it

considered them to be managers. As Plaintiffs note, the CBA

specifically states, 

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The employer recognizes the Union as the sole collective

bargaining representative for all employees coming under

the classifications of this Agreement or performing the

duties of those classifications, and within the

jurisdiction of the Union.

Chung Decl., Ex. F at 1; Ex. G at 2 (emphasis added). 

Further, Plaintiffs counter that many of the non-janitorial

tasks that these employees performed were in fact duties covered by

the "cleaning foreperson" classification under the CBA. For

example, the summaries indicate that the workers at issue spent the

remainder of their time on tasks including "assign employees to

their tasks," "check for time and attendance," "deliver janitorial

paper supply," and "pick up timecards." Id. Plaintiffs provide

the declaration of an individual who represented the Union in

negotiations leading to the CBA at issue, stating that these tasks

are typical of "cleaning forepersons" who have general duties

including, "Organization and issuance of supplies, communicating

cleaning specifications and/or special cleaning orders for the

crew, inspection of work to insure its completion and submission of

time sheets and reports to management." Stillwell Decl. ¶ 7. 

Defendant provides no contrary evidence regarding the duties of a

"cleaning foreperson."

Although Defendant's summaries provide evidence that none of

the ten employees performed 110 hours of janitorial work in any

month, they do not provide evidence of the number of hours spent on

other non-janitorial work covered by the CBA. Even if Defendant

classifies these employees as "managers," their performance of

tasks performed by "cleaning forepersons" can be counted toward the

110 hours required for benefit eligibility. As Defendant argues,

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it is not clear how many covered hours each of the ten employees

performed. 

However, under Motion Picture Industry Pension & Health Plans

v. N.T. Audio Visual Supply, Inc., 259 F.3d 1063 (9th Cir. 2001),

cert. denied, 534 U.S. 1109 (2002), Defendant bears the burden of

establishing that these employees have not worked sufficient hours

to entitle them to benefits under the CBA. In Motion Picture, the

Ninth Circuit held that "once the Trustees show 1) that [the

employer] failed to keep adequate records, and 2) that there exist

some employees who (a) performed covered work that was 

(b) unreported to the trust funds, then the burden shifts to [the

employer] to show the extent of the unreported covered work for

those employees." Id. at 1066.

Here, the records produced by Defendant indicate that the

employees at issue performed some covered work, but they are not

adequate to determine the number of hours of covered work

performed. Until Plaintiffs performed the audit, they were unaware

that these employees performed covered work. Therefore, the burden

shifts to Defendant to prove that the employees spent fewer than

110 hours per month performing tasks covered by the CBA. However,

the only evidence that Defendant presents is a conclusory statement

that "none of the ten supervisors at issue performed more than 110

hours of work in one of the listed categories in any month at

issue." Mosieznicki Decl. ¶ 18. Although the declarant states

that she "reviewed the employment files for each of the ten

supervisors," she does not state that she has any personal

knowledge of the activities of the employees, nor does she attach

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time sheets or other records to support her conclusion. Id. at 

¶ 3.

Defendant has not met its burden of establishing the extent of

the covered work performed by the ten employees it claims are

managers. Therefore, the Court grants Plaintiffs' motion for

summary judgment with respect to these workers.

2. Claim Based on Account #718

Plaintiffs argue that they are entitled to summary judgment on

a shortage of $3,000.17 in the contributions made to Trust Account

#718 for the period February, 2000 through March, 2002. Defendant

does not dispute the evidence demonstrating the shortage, but

argues only that this claim is barred by ERISA's four-year statute

of limitations. Defendant argues that Plaintiffs knew or had

reason to know about the purported unpaid contributions at the time

they were due. Therefore, according to Defendant, the latest date

on which these shortages could have been challenged was in March,

2006 and the claim included in the May, 2006 complaint is therefore

time-barred. 

However, Defendant provides no evidence or argument to support

its assertion that Plaintiffs knew or should have known about the

alleged underpayments at the time they accrued. Defendant argues

only that Plaintiffs did not discover these claims through the

audit and cite an October, 2002 letter regarding the underpayments. 

If Plaintiffs first became aware of the underpayments in October,

2002, their May, 2006 claim is not time-barred.

The Court grants Plaintiffs' motion for summary judgment with

respect to the claim related to underpayment of Account #718. 

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2

Plaintiffs originally sought underpayments of $262,402.20

related to the Lindquist Report and $5,022.90 related to Account

#718. Defendant has conceded that it owed, and paid, some portion

of both of these claims. These calculations are based on the full

amount originally sought because Advance did not concede or pay any

amount prior to the filing of the complaint.

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 3. Liquidated Damages and Interest

In addition to the delinquent payments discussed above,

Plaintiffs seek interest and liquidated damages related to those

payments under Title 29 U.S.C. § 1132(g)(2) and the terms of the

CBA. Section 1132(g)(2) provides, 

In any action under this title by a fiduciary for or on

behalf of a plan to enforce section 515 in which a

judgment in favor of the plan is awarded, the court

shall award the plan--

 (A) the unpaid contributions,

 (B) interest on the unpaid contributions,

 (C) an amount equal to the greater of--

 (i) interest on the unpaid contributions, or

 (ii) liquidated damages provided for under the

plan in an amount not in excess of 20 

percent (or such higher percentage as may

be permitted under Federal or State law) 

of the amount determined by the court 

under subparagraph (A),

 (D) reasonable attorney's fees and costs of the

action, to be paid by the defendant, and

 (E) such other legal or equitable relief as the

court deems appropriate.

29 U.S.C. § 1132(g)(2). 

The Trust Agreement provides for liquidated damages at the

rate of twenty percent of the delinquent contributions where a

lawsuit is filed to recover those contributions. McCulloch Decl.,

Ex. B at 16. Plaintiffs therefore request liquidated damages of

$52,480.44 in relation to their claim based on the Lindquist report

and $1,004.58 in relation to their claim based on Account #718.2

Defendant does not contest the request for liquidated damages and

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the Court grants summary judgment on these amounts.

Plaintiffs also seek interest of $126,639.39 on their claim

based on the Lindquist report and $2,218.93 on their claim based on

Account #718. Defendant disputes Plaintiffs' interest calculation

on two grounds: that the interest should be simple, not compounded

monthly, and that Defendant's overpayments should be deducted

before interest is computed. 

Section 1132(g)(2) provides that "interest on unpaid

contributions shall be determined by using the rate provided under

the plan, or, if none, the rate prescribed under section 6621 of

the Internal Revenue Code of 1986." 29 U.S.C. § 1132(g)(2). In

turn, the Trust Agreement provides, 

Prior to the filing of a lawsuit, delinquent

contributions shall accrue interest from the Due Date

until paid at a rate of ten percent (10%) simple

interest per annum. After the filing of a lawsuit,

delinquent contributions shall accrue interest from the

Due Date until paid at the rates prescribed from time

to time pursuant to the underpayment rate of the

Internal Revenue Code section 6621. 

McCulloch Decl., Ex. A at 1; Ex. B at 17.

 Defendant notes that the reference to simple interest per

annum with respect to interest prior to the filing of a lawsuit

appears immediately before the reference to interest accruing after

the filing of a lawsuit. Therefore, Defendant argues that it is

"reasonable that the IRC § 6621 rates should, like the 10% rate,

not be compounded." Defendant's Objections to Interest

Calculations at 2. Plaintiffs counter that the Trust Agreement's

reference to "the underpayment rate" of § 6621 indicates that the

Trust intended that delinquent contributions should be "treated in

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the way tax underpayments are normally treated under IRC § 6621, at

the rates provided in that section, compounded as mandated by IRC 

§ 6622." Plaintiffs' Reply to Defendant's Objections at 3. The

Court agrees with Plaintiffs, and will award interest compounded

monthly as they request. 

Defendant also argues that Plaintiffs' interest calculation is

inaccurate because it does not take into account Defendant's past

overpayments, which are discussed in further detail below. 

Defendant argues that the amount of the overpayments should be

deducted from the delinquent payments prior to any calculation of

interest. However, the overpayments are distinct from the

delinquent payments due and, if awarded, can only be used to offset

the damages Defendant owes to Plaintiffs. 

Therefore, the Court grants Plaintiffs' motion for summary

judgment to the extent it seeks these amounts of interest on the

delinquent payments discussed above. 

B. Untimely Payments

Plaintiffs also argue that they are entitled to liquidated

damages and interest on the $634,249.52 in untimely contributions

paid by Defendant for the period August through December, 2003. 

When delinquent contributions are paid without a lawsuit being

filed, the Trust Agreement provides for liquidated damages at a

rate of five percent of the delinquent contributions so long as the

total amount paid is no greater than $800 and no less than $50. 

McCulloch Decl., Ex. B at 16. Further, as noted above, the

Agreement provides, "Prior to the filing of a lawsuit, delinquent

contributions shall accrue interest from the Due Date until paid at

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a rate of ten percent simple interest per annum." Id. at 17. 

Therefore, Plaintiffs request $7,637.47 in liquidated damages

for the late payments and $6,262.65 in interest. Defendant does

not dispute that the payments were untimely or that either of these

amounts is appropriate. Therefore, the Court grants Plaintiffs'

request for these amounts of liquidated damages and interest. 

C. Defenses

1. Overpayments 

Defendant argues that summary judgment is inappropriate on any

claim because it has made overpayments in the amount of $62,193.39. 

Therefore, Defendant asserts that "triable issues of fact exist

regarding Advance's overpayments." Opposition at 18. Plaintiffs

respond that the majority of Defendant's overpayment claims are

barred because they were untimely, because Plaintiffs relied on the

overpayments or both. 

Under the Trust Agreement, 

a mistaken Employer contribution may not be returned to

the Employer unless a written refund request is

submitted to the Trust by the Employer within four years

of the Due Date of the report form containing the

erroneous contributions.

McCulloch Decl., Ex. A at 9; Ex. B at 19. Therefore, Plaintiffs

argue that Defendant's September 18, 2006 request for a refund "for

overpayments made from 1/1/1999 to 12/31/2002, as found and

reported by the Trust office for a combined total of $62,193.39"

was for the most part untimely. Chung Decl., Ex. D. The Lindquist

report only included $1,825.48 in overpayments that were paid

between September and December, 2002. See Thiermann Decl., Ex. B. 

Plaintiffs further argue that even these non-time-barred

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contributions cannot be refunded because they were "full rate

contributions reporting eligibility to persons who were not

eligible." Supplemental Thiermann Decl. ¶ 7. Therefore,

Plaintiffs argue that they relied upon Defendant's representation

and need not refund the payments under the Trust Agreement

provision that when

the Trust has provided coverage to ineligible persons in

reliance upon mistaken employer contribution report

forms (whether or not benefits have already been paid),

then . . . [the Trust] may retain the Employer's

contributions and refuse to refund any or all of the

mistaken portion. 

Id., Ex. A at 9; Ex. B at 13. However, Plaintiffs provide evidence 

only that the five individuals were "reported as eligible to the

Trust," Plaintiffs' Reply at 11, not that they actually provided

coverage to those individuals. This is not enough to establish as

a matter of law that Defendant is precluded from seeking a refund

of the non-time-barred mistaken payments of $1,825.48. 

The Court finds that questions of fact remain regarding

Defendant's affirmative defense based on the mistaken overpayment

of $1,825.48.

2. Laches

Defendant also argues that summary judgment is inappropriate

on all of Plaintiffs' claims because they are barred by the

affirmative defense of laches. To raise the defense of laches,

Defendant must show unreasonable delay and subsequent prejudice. 

Brown v. Continental Casualty, 765 F.2d 810, 184 (9th Cir. 1985). 

Defendant asserts that Plaintiffs did not respond to its objections

to the audit report between November, 2004 and May, 2006 despite

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its own good faith efforts to negotiate a resolution to the

dispute. However, Defendant overlooks its own failure to pay any

portion of the $125,206.66 in benefits that it never disputed that

it owed until after this case was filed and its failure to provide

Plaintiffs' auditors with the materials needed to assess whether it

was fulfilling its fiduciary duties. 

Further, Defendant represents that "between June 2002 and the

present," it continued to provide "documentation supporting its

position that its supervisors are not covered under the MCA." 

Chung Decl. ¶ 3. If Plaintiffs were still receiving documentation

in support of Defendant's challenges, they were not unreasonable in

waiting to file their complaint. 

D. Attorneys' Fees and Accounting Fees

Title 29 U.S.C. § 1132(g)(2)(D) provides, "In any action under

this title by a fiduciary for or on behalf of a plan to enforce

section 515 in which a judgment in favor of the plan is awarded,

the court shall award the plan . . . reasonable attorney's fees and

costs of the action, to be paid by the defendant." As discussed

above, judgment will be entered in favor of Plaintiffs. As of the

time Plaintiffs' motion was filed, they had incurred attorneys'

fees of $120,732 and costs totaling $4,463.75. Miller Decl. ¶¶ 5,

6. Therefore, the Court will award Plaintiffs $125,195.75 in

attorneys' fees and costs. 

Section 1132 also provides for the award of "such other legal

or equitable relief as the court deems appropriate." 29 U.S.C. 

§ 1132(g)(2)(E). The Ninth Circuit has held that the recovery of

accounting fees is appropriate "[b]ecause an award of audit costs

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to the prevailing party is consistent with the policy of

encouraging full and fair contributions." Operating Eng. Pen.

Trust, et al. v. A-C Co., 859 F.2d 1336, 1343 (9th Cir. 1988). 

Therefore, the Court will award Plaintiffs $62,366.00, representing

their accounting fees. See Thiermann Decl. ¶ 28. 

E. Injunctive Relief

Finally, Plaintiffs seek injunctive relief pursuant to 29

U.S.C. § 1132(a)(3), which provides that they may bring an action

"(A) to enjoin any act or practice which violates any provision of

this title or the terms of the plan, or (B) to obtain other

appropriate equitable relief (i) to redress such violations or 

(ii) to enforce any provisions of this title or the terms of the

plan." Plaintiffs request an injunction "directing defendants to

not pay any dividends, bonuses or extraordinary salary to its

officers or directors until after all monetary damages . . . , as

determined by this court have been paid in full." Motion at 24. 

This request is based on Plaintiffs' belief that "the sole

shareholder of Advance, Forrest I. Nolin, will dissipate the

corporate assets and render the Corporation insolvent." Id. at 25.

Counsel for Plaintiffs declares on information and belief as

follows, 

Nolin was an owner of a previous contributing employer

of the Trust, Tripar Enterprises. In the 1980’s Tripar

Enterprise [sic] failed to make health care

contributions due to the Trust exceeding $250,000.00. 

When the Trust sued it, Tripar Enterprises was

dissolved in a bankruptcy proceeding in which no

material assets were available to pay the Trust.

Miller Decl. ¶ 7. As the Court found in its earlier preliminary

injunction order, this supports Plaintiffs' argument that, absent

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injunctive relief, they likely will not receive the amount owed. 

The only remaining question on the merits of Plaintiffs'

claims is the whether Defendants are entitled to credit for the

$1,825.48 overpayment. Therefore, the Court modifies its earlier

preliminary injunction and now enjoins Defendant from paying any

dividends, bonuses or extraordinary salary to its officers or

directors until after $647,382.08 has been paid in full. This

amount represents the sum of the delinquent payments based on the

Lindquist audit and Account #718, liquidated damages and interest

related to those delinquent payments, interest and liquidated

damages related to untimely payments for the period August through

December, 2003 and Plaintiffs' attorneys' fees, costs of litigation

and accounting fees, less the $1,825.48 of potential overpayment

that is still at issue.

II. Leave to File an Amended Complaint

Federal Rule of Civil Procedure 15(a) provides that leave of

the court allowing a party to amend its pleading "shall be freely

given when justice so requires." Leave to amend lies within the

sound discretion of the trial court, which discretion "must be

guided by the underlying purpose of Rule 15 to facilitate decision

on the merits, rather than on the pleadings or technicalities." 

United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981) (citations

omitted). Thus, Rule 15's policy of favoring amendments to

pleadings should be applied with "extreme liberality." Id.; DCD

Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987)

(citations omitted).

The Supreme Court has identified four factors relevant to

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whether a motion for leave to amend should be denied: undue delay,

bad faith or dilatory motive, futility of amendment, and prejudice

to the opposing party. Foman v. Davis, 371 U.S. 178, 182 (1962). 

The Ninth Circuit holds that these factors are not of equal weight;

specifically, delay alone is insufficient ground for denying leave

to amend. Webb, 655 F.2d at 980. Further, the "liberality in

granting leave to amend is not dependent on whether the amendment

will add causes of action or parties." DCD Programs, 833 F.2d at

186. Rather, the court should consider whether the proposed

amendment would cause the opposing party undue prejudice, is sought

in bad faith, or constitutes an exercise in futility. Id. (citing

Acri v. Int’l Ass'n of Machinists & Aerospace Workers, 781 F.2d

1393, 1398-99 (9th Cir. 1986); United States v. City of Twin Falls,

806 F.2d 862, 876 (9th Cir. 1986); Howey v. United States, 481 F.2d

1187, 1190-91 (9th Cir. 1973); Klamath-Lake Pharm. Ass’n v. Klamath

Med. Serv. Bureau, 701 F.2d 1276, 1293 (9th Cir. 1983)).

Prejudice typically arises where the opposing party is

surprised with new allegations which require more discovery or will

otherwise delay resolution of the case. See, e.g., Acri, 781 F.2d

at 1398-99; Guthrie v. J.C. Penney Co., 803 F.2d 202, 210 (5th Cir.

1986). The party opposing the motion bears the burden of showing

prejudice. DCD Programs, 833 F.2d at 186; Beeck v. Aquaslide 'N'

Dive Corp., 562 F.2d 537, 540 (8th Cir. 1977).

Plaintiffs seek leave to amend their complaint to allege four

additional causes of action, to add Forrest Nolin as a Defendant

and to add the Trust derivatively on behalf of Advance as a

Plaintiff. These proposed amendments are based on Plaintiffs' new

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allegations that Defendant has improperly transferred hundreds of

thousands of dollars to Nolin since the complaint was filed. 

Plaintiffs allege that these transfers have left Defendant "unable

to pay its debts as they became due, which thereby rendered

Defendant Advance to be insolvent." Proposed FAC ¶ 10. Therefore,

Plaintiffs seek to add claims (1) for fraudulent transfer of assets

with actual intent to hinder, delay or defraud a creditor in

violation of California Civil Code § 3439; (2) for fraudulent

transfer of assets with constructive intent to hinder, delay or

defraud a creditor in violation of California Civil Code § 3439;

(3) for a derivative action against Nolin for knowing receipt of

illegal dividends in violation of California Corporations Code 

§ 500; and (4) for imposition of a constructive trust under

California Civil Code § 2224. 

Defendant opposes the motion, arguing that granting it would

prejudice Nolin, that Plaintiffs are seeking the amendment in bad

faith and that the amendment would be futile. Further, Defendant

argues that the Court should decline to exercise supplemental

jurisdiction over Plaintiffs' proposed claims, all of which arise

under state law. 

A. Prejudice

Defendant argues that Nolin will be prejudiced if the motion

is granted because he resides in Southern California. However, as

Plaintiffs point out, as the sole shareholder in Advance, Nolin

will already be involved in the litigation, and will be called as a

witness. This factor does not weigh against granting leave to

amend.

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B. Bad Faith

Defendant next argues that Plaintiffs have acted in bad faith

because they have disclosed confidential information in their

filings and used information disclosed only for purposes of

mediation and because counsel for Plaintiffs has violated her

ethical responsibilities.

Defendant argues that Plaintiffs have used information

provided to them during and in connection with the parties' courtordered mediation session in violation of the parties'

confidentiality agreement, ADR Local Rule 6-11, the federal

mediation privilege and Federal Rule of Evidence 408. However,

Plaintiffs counter, and Magistrate Judge Zimmerman has already

found, that these communications occurred the day after the

mediation and were outside of the scope of the parties'

confidentiality agreements. Order Granting in Part and Denying in

Part Defendant's Motion to Enforce Stipulated Protective Order and

Confidentiality Agreements and for Civil Contempt Sanctions, Docket

No. 130.

Defendant also argues that counsel for Plaintiffs improperly

communicated with Steve Vallen, the outside accountant for

Defendant. According to Plaintiffs' counsel's declaration, Joseph

Thiermann, Plaintiffs' auditor, called her to inform her that

Vallen had called him and to ask that she participate in the

conversation. McCulloch Decl. ¶ 4. She declares that Vallen told

her and Thiermann that Nolin asked him to call Thiermann "to

explain and clarify the change in cash position during the period

of December 31, 2006 through the current date." Id. at ¶ 6. 

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Defendant argues that it was improper for Plaintiffs' counsel to

speak ex parte with Vallen. However, Vallen is not a party to this

case and is, according to Plaintiffs, an independent outside

accountant. Further, Magistrate Judge Zimmerman has already ruled

that counsel's conversation with Vallen and Plaintiffs' disclosure

of the information in question was not improper. Magistrate Judge

Zimmerman's Order.

The Court finds that there is no bad faith to warrant denying

Plaintiffs' motion for leave to file an amended complaint.

C. Futility

Finally, Defendant argues that the proposed amendments are

futile because the evidence regarding its assets is inadmissible

and does not support Plaintiffs' claims. Further, Defendant argues

that because the claims are based on state law, they are preempted

by ERISA. Finally, it argues that the claims do not justify an

exercise of supplemental jurisdiction. 

1. Evidence

Defendant first argues that the evidence gleaned from the

conversation with Vallen is inadmissible because of the way in

which it was obtained and that it is irrelevant to Plaintiffs'

existing ERISA claim so it would not have been discoverable. 

However, as discussed above, the evidence is not inadmissible. It

was received from a third party outside the context of the

mediation. Further, the information upon which the proposed

amendments are based is relevant to the claim for injunctive relief

included in the original complaint.

Defendant next argues that the evidence cited in Plaintiffs'

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counsel's declaration does not support the proposed amendment

because it demonstrates that "Advance's current assets are more

than sufficient to satisfy the judgment plaintiffs seek in this

action." Opposition to Motion for Leave to File a FAC at 11. 

However, the declaration also states that Defendant's accounts

payable were greater than its assets at the time of the

conversation. Therefore, the declaration supports Plaintiffs'

claim that Defendant is insolvent.

2. ERISA Preemption

Defendant argues that Plaintiffs' proposed state law claims

for fraudulent conveyance and constructive trust are preempted by

ERISA because "they provide an alternative cause of action to

collect monies owed under ERISA." Opposition at 6. However, as

Plaintiffs argue, the claims are a means of ensuring that Defendant

will have the funds necessary to pay any monies owed under ERISA,

not an attempt to establish that monies are owed under ERISA. 

Therefore, these claims are similar to the claims under

California's stop-notice and payment bond statutes which were

allowed in Southern California IBEW-NECA Trust Funds v. Standard

Industrial Electrical Co., 247 F.3d 920 (9th Cir. 2001). As in

that case, the fraudulent conveyance and constructive trust claims

in this case do "not require the establishment of a separate

benefit plan, and impose[] no new reporting, disclosure, funding,

or vesting requirements for ERISA plans." Id. at 925. Further,

the claims do "not tell employers how to write ERISA benefit plans

or how to determine ERISA beneficiary status, and [do] not

condition requirements on how ERISA benefit plans are written." 

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Id. Therefore, the Court finds that these claims are not preempted

by ERISA.

Defendant also cites Peacock v. Thomas, 516 U.S. 349 (1996),

in support of its argument that allowing a constructive trust to be

placed on Nolin's money "would amount to veil-piercing as a means

of collection, which is not authorized under ERISA." Opposition at

6. However, in Peacock, the plaintiff sought to establish federal

jurisdiction under ERISA to pierce the corporate veil to collect

the benefits awarded to it under ERISA two years earlier. Peacock

stated only that there is no veil-piercing cause of action under

ERISA, not that the plaintiffs could not do so under state law. 

516 U.S. at 354. 

Plaintiffs' proposed amended claims are not preempted by

ERISA.

3. Supplemental Jurisdiction

Finally, Defendant argues that the Court should decline to

exercise supplemental jurisdiction over Plaintiffs' state law

claims. Under 28 U.S.C. § 1367(a), a federal court has the power

to hear pendant state law claims where the federal and state claims

are so related as to form part of the same controversy under

Article III. 28 U.S.C. § 1367(a); United Mine Workers of Am. v.

Gibbs, 383 U.S. 715, 725 (1966). Under Ninth Circuit law, the

relatedness requirement of § 1367(a) is met if the claims derive

from a common nucleus of operative fact and, as such, would

ordinarily be expected to be tried in the same proceeding. See

Brady v. Brown, 51 F.3d 810, 816 (9th Cir. 1995). The Court's

exercise of supplemental jurisdiction is discretionary, and the

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Court can decline to exercise such jurisdiction, particularly in

the interest of economy, convenience, and fairness to the parties. 

See City of Chicago v. International College of Surgeons, 522 U.S.

156, 173 (1997); Moor v. County of Alameda, 411 U.S. 693, 716-17

(1973).

Defendant argues that the allegedly fraudulent conveyances

made in 2006 and 2007 cannot be said to derive from the same

nucleus of operative fact as the alleged delinquent contributions

due between 1999 and 2003. Defendant again cites Peacock, in which

the Supreme Court found that there was no ancillary jurisdiction

over a separate action filed under state law to collect ERISA

benefits after judgment entered in the ERISA case. However, the

Court in Peacock recognized that it had "approved the exercise of

ancillary jurisdiction over a broad range of supplementary

proceedings involving third parties to assist in the protection and

enforcement of federal judgments" and distinguished the situation

in that case noting that it had "never authorized the exercise of

ancillary jurisdiction in a subsequent lawsuit to impose an

obligation to pay an existing federal judgment on a person not

already liable for that judgment." 516 U.S. at 357. 

Further, as Plaintiffs note, in Thomas, Head & Greisen

Employees' Trust v. Buster, 95 F.3d 1449, 1454 (9th Cir. 1996), the

Ninth Circuit distinguished Peacock on that basis and allowed the

trustees of an ERISA plan to seek disgorgement, under Alaska law,

from third parties, as fraudulent transferees, of funds necessary

to satisfy the ERISA judgment that had been transferred by the

original defendants in the ERISA action. Therefore, the Court

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Advance's objections to evidence submitted by Plaintiffs

(Docket Nos. 71, 83) are DENIED as moot. The Court did not consider

any improper or inadmissible evidence in deciding these motions. 

26

exercises its supplemental jurisdiction over Plaintiffs' proposed

claims and grants Plaintiffs' motion for leave to file an amended

complaint.

CONCLUSION

For the foregoing reasons, the Court GRANTS IN PART

Plaintiffs' motion for summary judgment and GRANTS Plaintiffs'

motion for leave to file their FAC (Docket Nos. 55, 95).3

Defendant is enjoined from paying any dividends, bonuses or

extraordinary salary to its officers or directors until after

$647,382.08 has been paid in full. 

IT IS SO ORDERED.

11/1/07

Dated: ________________________ 

CLAUDIA WILKEN

United States District Judge

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