Appellate Court Finds Summary Judgment Was Hasty in Church Plan Challenge

A federal appellate court has found that a district court abused its discretion by granting summary judgment for OSF Healthcare System in a case challenging its pension plans’ church plan status under the Employee Retirement Income Security Act (ERISA) despite the plaintiff’s motion under Federal Rule of Civil Procedure 56(d) to postpone a summary judgment decision so that she could complete further discovery.

The 7th U.S. Circuit Court of Appeals noted that the underlying issue in the case is whether ERISA applies at all to the pension plans offered by OSF HealthCare System, a religious nonprofit organization that operates 11 hospitals in Illinois and Michigan.

It also noted that the definition of “church plan” in ERISA states, “A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”

The plaintiff in the case, a former employee and participant of one of the OSF pension plans, sued on behalf of herself and other similarly situated plaintiffs alleging that the plans are not eligible for the church plan exemption because the committees assigned to the plans are not “principal-purpose organizations” within the meaning of ERISA, and even if they were, the church plan exemption itself is unconstitutional. She alleged that OSF has violated ERISA by allowing the plans to become severely underfunded, with the OSF plan holding assets sufficient to fund only 56% of accrued benefits and the St. Anthony’s plan only 54%. She alleged that OSF also failed to follow the proper notice, disclosure, and managerial requirements, and breached its fiduciary duties.

According to the appellate court, the district court’s primary reason for denying the plaintiff’s Rule 56(d) motion was its view that plaintiff had failed to act diligently to conduct the discovery she said she needed to respond to the motion for summary judgment. The 7th Circuit found the district court pointed out correctly that the need for the discovery she sought, such as details of plan administration, had been apparent from the early stages of the case. “The court’s explanation overlooked, however, the earlier delays imposed on plaintiff by the court itself and by the defendants. The explanation also overlooked the plaintiff’s sensible approach to staging discovery so that, for example, document discovery would be essentially complete before plaintiff took depositions of key witnesses (thus minimizing the risk that second depositions would be needed if important documents sur-faced after the depositions),” the appellate court wrote in its opinion.

The opinion noted that OSF filed its motion for summary judgment almost nine months before the scheduled close of discovery, and despite the pending deposition notices and unresolved issues surrounding production of electronically stored information. OSF’s motion argued that further discovery would be pointless in light of the Supreme Court’s decision in Advocate Health Care Network v. Stapleton and the 10th Circuit’s decision in Medina v. Catholic Health Initiatives.

On the question of futility, the 7th Circuit looked into the merits of the case. It disagreed with the plaintiff’s argument that OSF’s plan committees cannot qualify as principal-purpose organizations because they are not juridical entities legally distinct from OSF itself. “The statute notes parenthetically that such an ‘organization’ may be “a civil law corporation or otherwise.” That last word is capacious. It does not require that the organization in question be any particular type of non-corporate legal entity nor, indeed, an entity legally separate from the plan sponsor at all,” the appellate court wrote.

However, it found that further discovery on remand will not be futile. The district court wrote that Medina was “well-reasoned and essentially ‘on all fours’ with this case” and followed Medina in granting summary judgment. Medina presented similar issues in applying the ERISA church plan exemption to a hospital chain affiliated with the Roman Catholic Church, where the plans were administered by internal committees established by the employer.

The 7th Circuit found Medina does not justify the denial of the plaintiff’s Rule 56(d) motion for two related reasons. First, Medina was decided on a motion for summary judgment filed after the parties completed discovery, providing a more complete factual record. Second, the court said it is not prepared, at this point, to commit to the three-part test to determine whether the committees assigned to the plans are “principal-purpose organizations” within the meaning of ERISA, under which, for example, it would not matter if the committees formally charged with plan administration did not actually administer them. “In this case, which presents at least genuine issues of material law, it would be more prudent to know more about the potentially relevant facts before deciding they are not relevant,” the appellate court wrote.

The plaintiff argues that OSF has thus far refused to produce evidence that could show whether the committees that were at least formally charged with administering these plans actually did so in reality. She has offered evidence that the committees met rarely and briefly. According to the record, the committee for the OSF plan met for a total of only 70 minutes over an eight-year period. The committee for the St. Anthony Plan met only twice from 2010 to 2017. The plaintiff argues that this evidence at least suggests that the committees may not be really administering the plans at all, making discovery of internal emails and other communications, and depositions of key personnel, vital to her ability to defend summary judgment, the 7th Circuit determined.

“Smith has alleged OSF is underfunding its pension by nearly half, perhaps jeopardizing the benefits of thousands of hospital and health care employees who depend upon these plans. With such high stakes, beneficiaries are entitled to conduct meaningful discovery before the courts decide legal issues such as whether formal structures are sufficient to satisfy the church plan definition, regardless of day-to-day realities,” the opinion states.

The 7th Circuit vacated the judgment of the district court and remanded the case for further proceedings.