Carter v. Commissioner , 746 F.3d 318 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 13-2822
KENNETH A. CARTER, et al.,
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL
REVENUE, et al.,
Respondents-Appellees.
Appeal from the
United States Tax Court
No. 002909-10R
SUBMITTED FEBRUARY 14, 2014* — DECIDED MARCH 25, 2014
Before WOOD, Chief Judge, and MANION and WILLIAMS,
Circuit Judges.
*
This successive appeal has been submitted to the original panel pursuant
to Operating Procedure 6(b). After reviewing the briefs and the record, the
panel is unanimously of the view that oral argument is unnecessary.
Accordingly, the appeal has been submitted on the briefs and the record
alone. See Fed. R. App. P. 34(a).
2 No. 13-2822
MANION, Circuit Judge. A group of Finkl employees filed a
lawsuit in the United States Tax Court alleging that a change
in their defined pension plan violated the Employment
Retirement Income Security Act, the Internal Revenue Code, or
contractual anti-cutback1 provisions of the plan. The Tax Court
concluded that the employees’ claims were collaterally
estopped by our decision in Carter v. Pension Plan of A. Finkl &
Sons Co., 654 F.3d 719 (7th Cir. 2011). We affirm.
I. Facts and procedural history
A. Finkl & Sons, Co., (“Finkl”) is a Delaware corporation
based in Chicago that produces industrial steel products. In
2006, Finkl initiated the process of terminating its defined
benefit pension plan (the “Plan”) under the Employment
Retirement Income Security Act of 1974 (“ERISA”) apparently
in anticipation of merging with another company. Carter v.
Pension Plan of A. Finkl & Sons Co., 654 F.3d 719, 721 (7th Cir.
2011).
As part of the termination process, the Plan was amended
on January 28, 2008, to include Section 11.6, which was a
special provision for distributions to participants in connection
with the contemplated termination. The special provision was
to apply if the participant “ha[d] not begun to receive a benefit
under the Plan at the time benefits are to be distributed on
account of termination of the Plan.”
On May 9, 2008, Finkl decided not to terminate the Plan due
to “a significant number of issues” that had arisen during the
1
“Anti-cutback” provisions prohibit an amendment that reduces accrued
benefits.
No. 13-2822 3
termination process. Section 11.6, the special provision in the
January 28, 2008, amendment providing for distributions in
connection with the contemplated termination, was deleted
from the Plan by an amendment on May 27, 2008. On June 27,
2008, Finkl notified the Commissioner of Internal Revenue (the
“Commissioner”) that the Plan was not going to terminate.
On December 15, 2008, seven Finkl employees (“appel-
lants”) filed a complaint against the Plan, its fiduciaries, and
Finkl pursuant to 29 U.S.C. § 1132.2 Appellants’ operative filing
alleged that they were entitled to an immediate distribution of
benefits while they were still working for Finkl and that Finkl’s
adoption of Amendment 2 repealing the Special February 28,
2007, Termination Provisions of Section 11.6 violated the
anti-cutback terms of the Plan, I.R.C. § 411(d)(6), and ERISA
§ 204(g), 29 U.S.C. § 1054(g). [AJA59].
On December 23, 2008, Finkl requested a favorable determi-
nation by the Commissioner that the Plan continued to qualify
for favorable tax treatment under Code § 401(a). Finkl apprised
2
Appellant Robert J. Kurek is now retired and is receiving benefits under
the Plan. The Commissioner argues that because Kurek is now receiving the
relief he sought from this suit, his claims are moot, so we should dismiss
him from this appeal. See Comm’r Br. 5, 19–20. We disagree that Kurek’s
claims are moot because although the general relief sought by this action is
the receipt of benefits under the Plan, if appellants are successful in this
action they will likely seek interest from the date the benefits should have
issued, so Kurek may still have a pecuniary interest in the disposition of this
case. Consequently, we decline to dismiss Kurek from this appeal. We have
also been notified that appellant John McFawn no longer desires to
participate in the instant appeal. Pursuant to Fed. R. App. P. 42(b), we
dismiss McFawn from this case. See Reply Br. (cover page).
4 No. 13-2822
the Commissioner of the pending litigation (Carter I) wherein
appellants were arguing that the May 27, 2008, amendment
deleting Section 11.6 violated the anti-cutback provision in
I.R.C. § 411. They claimed they were entitled to receive pension
benefits under the January 28, 2008, amendment while they
continued to work. Finkl stated its position that the May 27,
2008, amendment was not a prohibited cutback because it
deleted a provision that was superfluous since the Plan did not
terminate.
On November 2, 2009, the Commissioner sent Finkl a
favorable determination letter that the Plan had retained its tax
qualified status. On February 1, 2010, appellants challenged the
Commissioner’s determination by filing a petition for a
declaratory judgment against the Commissioner under I.R.C.
§ 7476 in the United States Tax Court. Finkl asserted in its
answer that the district court had granted summary judgment
in Carter I, and in doing so rejected the arguments which the
appellants had presented in their Tax Court petition. See Carter
v. Pension Plan of A. Finkl & Sons Co. for Eligible Office Employees,
No. 08 C 7169, 2010 WL 1930133 (N.D. Ill. May 12, 2010).
In August 2011, we affirmed the district court’s award of
summary judgment to Finkl. Carter v. Pension Plan of A. Finkl &
Sons Co., 654 F.3d 719 (7th Cir. 2011). After we denied appel-
lants’ petition for rehearing en banc, they advised the Commis-
sioner and Finkl that they intended to pursue their Tax Court
proceeding and Finkl and the Commissioner amended their
pleadings to assert the Carter I decision as an affirmative
defense. Finkl and the Commissioner also argued that collat-
eral estoppel precluded appellants from re-litigating the anti-
cutback issue. Due to the procedural cloud, the Tax Court
No. 13-2822 5
bifurcated the procedure from the merits and considered the
procedural issues first.
On May 16, 2013, the Tax Court ruled that appellants were
collaterally estopped by our decision in Carter I from challeng-
ing the Commissioner’s November 2, 2009, determination
letter, which concluded that the Plan had not been terminated
and that it continued to qualify for favorable tax treatment
under I.R.C. § 401(a). Carter v. CIR, T.C. Memo. 2013-124 (May
16, 2013). Appellants timely appeal.
II. Analysis
A. Standard of Review
We review the Tax Court’s factual determinations and the
application of legal principles to factual determinations for
clear error, and we review legal determinations de novo. Square
D Co. & Subsidiaries v. Comm’r, 438 F.3d 739, 743 (7th Cir. 2006).
Additionally, “[w]e view the evidence in the light most
favorable to the [T]ax [C]ourt finding.” Id. Whether an issue
was litigated and resolved in a prior action is, of course, a
question of law that we review de novo. In re Davis, 638 F.3d
549, 553 (7th Cir. 2011). To determine whether an issue was
litigated and resolved in a prior action, we consider established
principles of preclusion in light of “the materials submitted,
the record, pleadings, exhibits and transcripts” from the prior
litigation. E.B. Harper & Co., Inc. v. Nortek, Inc., 104 F.3d 913, 922
(7th Cir. 1997) (citations omitted).
6 No. 13-2822
B. Is appellants’ Tax Court case barred by collateral
estoppel?
The Commissioner and Finkl contend that this case is
barred by collateral estoppel. Under the doctrine of collateral
estoppel (also known as issue preclusion), “once an issue is
actually and necessarily determined by a court of competent
jurisdiction, that determination is conclusive in subsequent
suits based on a different cause of action involving a party to
the prior litigation.” Montana v. United States, 440 U.S. 147, 153
(1979). “The party against whom the issue had been resolved
must have had, first, a ‘full and fair opportunity’ to litigate the
issue in the previous suit … and, second, a meaningful
opportunity to appeal the resolution of the issue.” DeGuelle v.
Camilli, 724 F.3d 933, 935 (7th Cir. 2013) (citations omitted). But
collateral estoppel is not confined to the same parties; the
Commissioner may also assert collateral estoppel as an
affirmative defense even when it was not a party to the prior
federal court proceeding.3 Brotman v. Comm’r, 105 T.C. 141, 148
(1995).
In light of these standards, we consider whether our
decision in Carter I collaterally estops the instant proceeding in
the Tax Court. We note from the outset that the appellants had
a full and fair opportunity (which they exercised) to litigate the
issue of the Plan’s termination in the previous Carter I litiga-
3
“Mutuality of parties is no longer a prerequisite for the application of
collateral estoppel.” Crowder v. Lash, 687 F.2d 996, 1010 n.13 (7th Cir. 1982)
(citing Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 327–28 (1979)).
Although, in fact, here the appellants and Finkl were both parties to the
prior case.
No. 13-2822 7
tion; final judgment was entered in that litigation; and appel-
lants had an opportunity to appeal, which they exercised by
appealing to this court and by filing a petition for rehearing en
banc (which we denied). Appellants declined to exercise their
right to file a petition for a writ of certiorari in the United
States Supreme Court. Thus, the only dispute is whether the
issue appellants seek resolution of in the Tax Court was the
one conclusively decided in Carter I.
In Carter I, we concluded that Finkl initiated—but did not
complete—the process of terminating its employee benefits
plan. 654 F.3d at 721. In reaching that conclusion, we agreed
with the district court that the immediate payment of pension
benefits that the appellants sought while still working for Finkl
was not a right protected by ERISA because the Plan did not
terminate. Id. And we held that the pre-retirement distribution
of pension benefits under the January 28, 2008, amendment
was not an accrued benefit under ERISA § 204(g), 29 U.S.C.
§ 1054(g) and 26 U.S.C. § 411(d)(6). Id. at 725. We further held
that nothing in ERISA, related regulations, or case law suggests
that the payment the appellants sought “would qualify as an
‘optional form of benefit’” under ERISA. Id. at 726. Finally, we
held that the anti-cutback clause in Section 11.1(a) of the Plan
applied only to pension benefits already accrued, and there
was no accrued benefit under the January 28, 2008, amendment
because the Plan had not terminated. Id. Because the Commis-
sioner considered the Plan to be ongoing and fully compliant
with ERISA, we held that appellants’ right to an annuity while
working at Finkl was not a right protected by ERISA, the I.R.C.,
or the Plan’s anti-cutback clause. Id. at 727–28.
8 No. 13-2822
In 2010, while appellants were litigating Carter I against
Finkl and the Plan in Article III courts, they simultaneously
sued the Commissioner in the Tax Court to hedge their bets. In
2012, after failing to prevail in this court in Carter I, appellants
revived their dormant Tax Court proceeding. The Special Trial
Judge reviewed appellants’ arguments from Carter I and held,
inter alia, that “the record shows that the Court of Appeals
considered, and rejected, the identical argument that petition-
ers now present to this Court on brief.” The Special Trial Judge
then concluded that appellants’ Tax Court claims were
collaterally estopped.
The Tax Court is correct. This scenario is textbook collateral
estoppel. In Carter I we concluded that Finkl did not terminate
its Plan. Appellants argue that
the Opinion of [the Tax Court] did not address, did
not decide and did not need to decide whether 29
C.F.R. sec. 4041.28(a) mandated, upon and subse-
quent to Finkl’s adoption of Amendment #1, that it
proceed with the termination by distributing its
assets by a date certain (rather than instead adopting
Amendment #2) as a condition of retaining qualified
status.
Appellants’ Br. 18. In other words, appellants want the Tax
Court to consider and conclude that the Commissioner’s
November 2, 2009, letter acknowledging the continuation of
the Plan was an erroneous conclusion of law. But by conclud-
ing in Carter I that the Plan did not terminate, we rejected any
subsequent challenge to the Plan’s continuation—the precise
challenge appellants assert here. For appellants to secure any
No. 13-2822 9
relief from the Tax Court, they must establish that Finkl
terminated its Plan. But such a ruling would directly contradict
our holding in Carter I. 654 F.3d at 721. In short, collateral
estoppel applies in the Tax Court.
So the appellants have exercised their “full and fair oppor-
tunity” to litigate the issue of whether Finkl’s Plan terminated
in the previous suit and had a meaningful opportunity to
appeal the resolution of the issue (which they exercised by
filing suit in the district court, appealing to this court, filing a
petition for rehearing en banc, and could have exercised further
had they sought certiorari). DeGuelle, 724 F.3d at 935. There-
fore, collateral estoppel precludes appellants from re-litigating
in the Tax Court the issue of whether the Plan terminated.
III. Conclusion
In Carter I, we concluded that the Plan did not terminate.
Appellants possessed—and exercised—a full and fair opportu-
nity in Carter I to litigate the issue it seeks to have adjudicated
in the Tax Court: specifically, whether the Plan terminated.
However, appellants’ unsuccessful action in Carter I collater-
ally estops the Tax Court from making that determination.
Appellants are precluded from re-litigating the issue of
whether the Plan terminated. For these reasons, we AFFIRM
the decision of the United States Tax Court.