Johnson v. Merrill Lynch, Pierce, Fenner & Smith, Inc. ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-3869
L EROY JOHNSON, administrator,
Shirley T. Sherrod MD PC Target Benefits
Pension Plan and Trust,
Plaintiff-Appellant,
v.
M ERRILL L YNCH, P IERCE, F ENNER & S MITH, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:12-cv-02545—John W. Darrah, Judge.
A RGUED A PRIL 22, 2013—D ECIDED M AY 20, 2013
Before W OOD , T INDER and H AMILTON, Circuit Judges.
T INDER, Circuit Judge. Leroy Johnson, the administrator
of the Shirley T. Sherrod MD PC Target Benefit Pension
Plan and Trust (hereinafter “the Plan”), brings this suit
against the Plan’s custodian, Merrill Lynch, Pierce,
Fenner & Smith, Inc. (hereinafter “Merrill Lynch”).
2 No. 12-3869
Despite the fact that he is the Plan’s administrator and
sole fiduciary, Johnson alleges that Merrill Lynch has
refused to abide by his instructions and “has exercised
control over Plan assets by refusing to make distribution
to Shirley T. Sherrod.” As a result, Johnson asks the
federal court to “[o]rder Merrill Lynch to abide by John-
son’s directions regarding any disposition of Plan assets.”
Although Johnson has sued Merrill Lynch—sug-
gesting that Johnson and Merrill Lynch have a dis-
pute—in reality, the two parties seem to agree on all
the major issues. For instance, both Johnson and Merrill
Lynch agree that the Plan is a retirement account that
is exempt from garnishment under the anti-alienation
provision of the Employment Retirement Income Security
Act (ERISA), 29 U.S.C. § 1056(d). Both parties also
agree that a single Plan participant, Sherrod, has made
a claim for benefits from the Plan but has been unable
to collect anything due to a freeze on distributions to
her from the account. Moreover, both parties agree
that this freeze is the result of a Michigan state court
order in a post-judgment collection proceeding.
In sum, although Merrill Lynch concedes that a Plan
participant has been injured, Johnson concedes that the
Plan participant’s injury is fairly traceable to a Michigan
state court order, and not the defendant, Merrill Lynch.
U.S. Const. art. III, § 2, requires a plaintiff to have an
injury that is “fairly . . . trace[able] to the challenged
action of the defendant, and not . . . th[e] result [of] the
independent action of some third party not before the
court.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560
No. 12-3869 3
(1992) (quotation and citation omitted). If the plaintiff’s
injury is not fairly traceable to the defendant, the plain-
tiff lacks standing to bring suit against the defendant,
and the federal court lacks subject-matter jurisdiction
to adjudicate the matter. Id. Here, Johnson has failed to
identify an injury that is fairly traceable to the de-
fendant, so Johnson does not have standing to bring
suit against Merrill Lynch. Thus, we affirm the district
court’s dismissal of the case for lack of subject-matter
jurisdiction.
I
Because the freeze order at the center of the present
case arose from a post-judgment proceeding in Michigan
state court, a brief review of the related state litigation
is warranted. Michael S. Sherman and his affiliated
medical practice filed suit against Shirley T. Sherrod
and her affiliated medical practice over a contract
dispute in the Wayne County, Michigan, Circuit Court.
On June 25, 2010, the Wayne County Circuit Court
granted summary judgment to Sherman and entered a
judgment of $181,048.58 against Sherrod. Sherman filed
a writ of garnishment on Sherrod’s accounts at Merrill
Lynch approximately four months later. Merrill Lynch,
as a result, disclosed to Sherman the four accounts
in which Sherrod had an interest: a personal account,
an account in the name of her medical practice, an indi-
vidual retirement account, and the Plan (described in
the disclosure as “self-directed retirement account” in
the name of “SHIRLEY T SHERROD MD PC”). Never-
4 No. 12-3869
theless, Merrill Lynch warned Sherman in its dis-
closure that it did “not have control over and therefore
c[ould] not freeze or otherwise restrain or liquidate”
the assets of the Plan.
Although Merrill Lynch did not believe that it could
exercise control over the Plan, the Wayne County
Circuit Court believed that it could. On February 4,
2011, the Circuit Court judge issued a blanket order
prohibiting Sherrod (or anyone “acting for or on [her]
behalf or in active concert or participation” with her)
“from directly or indirectly selling, transferring, as-
signing, destroying, concealing, encumbering, hypothecat-
ing, or otherwise disposing of . . . assets, real or personal
property, money, or things in action now held or hereafter
acquired by or becoming due to them” (emphasis added).
The state-court order did not specifically mention the
Plan account, but understandably, Merrill Lynch read
the order’s broad and inclusive language—ordering a
freeze on all assets becoming due to Sherrod—to
include distributions from the Plan account. As a
result, Merrill Lynch froze the Plan account with respect
to Sherrod and, despite her retirement, prohibited any
distributions to her until further court order. (Note
that Merrill Lynch only froze the Plan account with
respect to Sherrod. The Plan account also contains
assets that will become due to the seventeen employees
of Sherrod’s former medical practice upon their retire-
ments. Merrill Lynch emphasizes that if any of Sherrod’s
former employees requests a distribution, it will “not . . .
refuse instructions from the Plan administrator re-
lating to any Plan Participant other than Dr. Sherrod.”)
No. 12-3869 5
Merrill Lynch never prohibited distributions to
Sherrod from the Plan account until it was compelled to
do so by Wayne County Circuit Court order. Moreover,
when the Plan administrator filed a motion to quash
the garnishment proceeding with respect to the Plan
account, Merrill Lynch supported the Plan administra-
tor. (Incidentally, the Plan administrator was Sherrod
herself until May 30, 2012. Johnson only took over as
Plan administrator after the instant suit was filed
in federal court—in an apparent attempt to render the
state-court and federal-court parties non-identical.) In
this motion, the Plan administrator argued that the gar-
nishment proceeding and resulting freeze should be
quashed because the Plan was an “employee pension
benefit plan” as defined by ERISA at 29 U.S.C. § 1002(2).
Therefore, 29 U.S.C. § 1056(d) prohibited its benefits
from being “assigned or alienated” by state-court order.
When arguing the motion to quash, the administrator
even acknowledged that Merrill Lynch supported the
Plan’s position, in an attempt to strengthen its argu-
ment that federal law prohibited the freeze (and ulti-
mately, the garnishment) of the Plan account.
In spite of the fact that both the Plan administrator
and Merrill Lynch viewed the Plan as an “ERISA
qualified pension account” not subject to garnishment,
the Wayne County judge denied the administrator’s
motion to quash. The new Plan administrator, Johnson,
decries this denial as erroneous and clearly contrary
to federal law, but it appears that the former Plan ad-
ministrator was at least partially responsible for the
denial. Before denying the motion to quash, the Wayne
6 No. 12-3869
County judge had ordered Sherrod (in her former
capacity as Plan administrator) to produce documents
proving that the Plan was an ERISA “qualified retire-
ment account,” but she never did. Without sufficient
documentation, Sherrod apparently hoped the judge
would take her on her word.1
Notwithstanding Sherrod’s failure to produce ade-
quate documentation demonstrating that the Plan was
protected from garnishment under 29 U.S.C. § 1056(d),
Merrill Lynch continued to side with Sherrod and the
Plan. On February 28, 2012, Merrill Lynch filed a
motion to release the freeze on the Plan account in the
Wayne County Circuit Court. As part of its effort to
release the freeze, Merrill Lynch drafted and circulated
an order proposing that the garnishment on the Plan
account be “hereby released and further withholdings
discontinued.” Merrill Lynch successfully negotiated
this order with Sherman, and as a result, Sherman stated
at a hearing in the Wayne County Circuit Court on
April 13, 2012 that he had “no objection to Merrill
Lynch releasing the funds . . . [and] withdrawing
our garnishment” of the Plan account. After Sherman’s
statement, the Wayne County judge initially agreed to
grant the motion to release and enter Merrill Lynch’s
proposed order. It seemed that Sherman, Merrill
1
It is still not clear whether the Plan is actually an ERISA-
qualified account protected from garnishment by 29 U.S.C.
§ 1056(d). Fortunately, we need not decide here whether the
Plan is truly ERISA-qualified.
No. 12-3869 7
Lynch, the Wayne County judge, and Sherrod had at last
reached a consensus regarding the Plan account—until
Sherrod suddenly reversed course.
During the fourteen months between the February 4,
2011 freeze order and the April 13, 2012 hearing,
Sherrod (in her capacity as Plan administrator) had con-
tinually argued for a release of the freeze on the
Plan account due to its protected status under ERISA.
Sherrod filed a motion to reconsider the February
freeze order on November 22, 2011. The Wayne County
judge denied her motion to reconsider, and Sherrod
appealed this denial to the Michigan Court of Appeals
in January 2012. That appeal currently remains pend-
ing. Sherrod also filed the instant case in federal
district court on April 6, 2012, seeking an “[o]rder [for]
Merrill Lynch to abide by [the Plan administrator’s]
directions” to release funds to Sherrod, despite the
Wayne County Circuit Court order freezing the account.
Given that Sherrod had been pursuing every possible
avenue to gain relief from the freeze order, Merrill
Lynch believed—not surprisingly—that Sherrod’s
foremost concern was releasing the funds in the Plan
account.
So imagine Merrill Lynch’s surprise at the April 13,
2012 hearing when Sherrod opposed its motion and pro-
posed order to release the Plan account freeze. Despite
the fact that both Merrill Lynch and Sherman had
agreed to the proposed order—and despite the fact
that the proposed order would have granted Sherrod im-
mediate relief from the freeze—Sherrod urged the
8 No. 12-3869
Wayne County judge to deny Merrill Lynch’s motion
until the Michigan Court of Appeals had reached a deci-
sion on Sherrod’s January 2012 appeal. Until that time,
Sherrod believed that the Wayne County Circuit Court
ha[d] no jurisdiction whatsoever to hear this
motion because . . . [t]he [Michigan] Court of
Appeals has accepted it, your decision [freezing
the Plan account], for a decision as an appeal. . . .
[Y]ou can’t modify it now. You can’t play with
it anymore. It’s funny that everybody on this
side of the bench believes the court was wrong
now back in December.
Predictably, the Wayne County judge withdrew
his initial approval of the proposed order, followed
Sherrod’s recommendation, and denied Merrill Lynch’s
motion to release the Plan account freeze.
Merrill Lynch was undoubtedly betrayed in its
attempt to support Sherrod at the April 13th hearing.
But this betrayal did not stop Merrill Lynch from once
again siding with Sherrod (and later, Johnson) in the
Michigan Court of Appeals. On May 22, 2012, Merrill
Lynch filed a response asking the Michigan Court of
Appeals to “set aside the trial court’s February 4, 2011
Order Prohibiting Third-Party Plaintiff from Transferring
or Otherwise Disposing of Assets and the trial court’s
Orders Denying Motion to Set Aside Order Freezing
Defendant’s Assets and Order Denying Motion to
Quash Garnishment.” Merrill Lynch has continued to
support Sherrod and Johnson’s position on multiple
occasions in multiple courts—in spite of all the road-
No. 12-3869 9
blocks that Sherrod and Johnson have thrown in its
way, including the present federal lawsuit.
Consequently, Merrill Lynch responded to the pre-
sent federal lawsuit by immediately pointing out its con-
tinual support of Sherrod and Johnson throughout
the related Michigan litigation. In its Fed. R. Civ. P. 12(b)(1)
motion to dismiss this suit for lack of subject-matter
jurisdiction, Merrill Lynch argued that it was not “ad-
verse” to the Plan administrator’s position. Any past
injury that the Plan administrator had suffered was
traceable to the Wayne County Circuit Court, not to
Merrill Lynch, and any “threat of future injury” to the
administrator was “self-inflicted.” Therefore, the Plan
administrator could “not satisfy the standing or
ripeness requirements of Article III.” Furthermore,
Merrill Lynch argued that the Rooker-Feldman doctrine,
which “precludes lower federal court jurisdiction over
claims seeking review of state court judgments . . . no
matter how erroneous or unconstitutional the state
court judgment may be,” also stood in the way of
federal subject-matter jurisdiction. Kelley v. Med-1 Solu-
tions, LLC, 548 F.3d 600, 603 (7th Cir. 2008) (quotation
and citations omitted). According to Merrill Lynch, the
current Plan administrator was seeking precisely the
same relief from the federal court system as he was
already seeking from the Michigan court system; in
essence, the administrator was asking the federal court
“to act impermissibly as a state appellate court and
enter an order that Merrill Lynch comply with
all Plan requests, even though such relief would
obviously . . . interfere with Dr. Sherrod’s appeal, which
remains pending.”
10 No. 12-3869
On December 20, 2012, the district court judge
agreed with all of Merrill Lynch’s arguments and dis-
missed the federal case for lack of subject-matter juris-
diction. Characterizing it as “apparent from the
actions taken by Merrill Lynch in the Wayne County
Circuit Court that Merrill Lynch’s position is aligned
with that of the Plaintiff,” the judge could not find a
case or controversy that existed between Merrill Lynch
and the current Plan administrator. (Recall that Johnson
had replaced Sherrod as Plan administrator on May 30,
2012.) Consequently, the case failed to satisfy federal
jurisdictional requirements both on standing and
ripeness grounds. Yet even if the case had not failed to
meet the standing and ripeness requirements, the
district judge found that it would have been barred by
the Rooker-Feldman doctrine. Quoting Commonwealth
Plaza Condo. Ass’n v. City of Chicago, 693 F.3d 743, 746
(7th Cir. 2012), the judge noted that “ ‘[a]bsent [a] state
court ruling, plaintiffs would not have suffered the
alleged injury they are asking the federal courts to
redress, and that is a clear symptom of the Rooker-
Feldman bar.’ ” The district court judge believed that
the Plan administrator was, in essence, seeking a
review of a Michigan state court judgment, which
lower federal courts “are barred [from doing] by the
Rooker-Feldman doctrine.” As a result, the judge
dismissed the federal case for lack of subject-matter
jurisdiction based on standing, ripeness, and the Rooker-
Feldman doctrine. Johnson, in his capacity as current
Plan administrator, filed a timely appeal with our
court, and we now review the district court’s dismissal
No. 12-3869 11
for lack of subject-matter jurisdiction de novo. Johnson
v. Orr, 551 F.3d 564, 567 (7th Cir. 2008).
II
Our review of the Plan administrator’s case against
Merrill Lynch both begins and ends with the issue
of standing, which is the “irreducible constitutional
minimum” required to bring a case in federal court.
Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 102
(1998) (quoting Lujan, 504 U.S. at 560). Standing arises
under the “case or controversy” requirement, found in
U.S. Const. art. III, § 2, and “ ‘serv[es] to identify
those disputes which are appropriately resolved
through the judicial process.’ ” Lujan, 504 U.S. at 560
(quoting Whitmore v. Arkansas, 459 U.S. 149, 155 (1990)).
In furtherance of this purpose, standing requires
plaintiffs to have (1) an “injury in fact,” (2) an injury that
is “fairly . . . trace[able] to the challenged action of
the defendant, and not . . . th[e] result [of] the
independent action of some third party not before the
court,” and (3) an injury that is “likely . . . [to] be ‘redressed
by a favorable decision.’ ” Lujan, 504 U.S. at 560-61 (quota-
tions and citations omitted). The plaintiff in this case,
the Plan administrator, cannot satisfy the second require-
ment and cannot bring suit against Merrill Lynch.
We do not dispute that the Plan administrator has
an injury in fact, thus fulfilling the first standing require-
ment. One of the Plan participants, Sherrod, has re-
quested a distribution of funds from the Plan account.
If not for the freeze on distributions to Sherrod, the
12 No. 12-3869
Plan administrator would be able to make the requested
distribution because Sherrod is otherwise qualified to
receive these funds (since she has reached the mini-
mum required age and is now retired from the medical
profession). As the Plan administrator points out in
his brief, the freeze renders him “unable to follow the
terms of the Plan and make a distribution to a participant
entitled to a distribution.” Thus, the Plan administrator
has an injury in fact.
Although the Plan administrator has an injury in
fact, that injury is not fairly traceable to the defendant,
Merrill Lynch. Merrill Lynch is not responsible for the
freeze on the Plan account; the Wayne County Circuit
Court judge is responsible for the freeze. His February 4,
2011 blanket freeze order prohibited the distribution of
any assets becoming due to Sherrod; Merrill Lynch
simply followed the directions of that court order—even
though Merrill Lynch disagreed with it. Like the
Plan administrator, Merrill Lynch believed that the
Plan was an “ERISA qualified pension account,” pro-
tected from garnishment by 29 U.S.C. § 1056(d). It is
for that reason that Merrill Lynch left the account
alone until ordered to do otherwise by the February 4th
order. The Plan administrator even admits that the
Wayne County judge’s order—and not Merrill Lynch—
is to blame for the current freeze on the Plan account,
remarking in his brief to our court, “Here, a state
court suit has made it impossible for a fiduciary of a
pension plan to carry out its duties under ERISA.”
Nonetheless, the Plan administrator seems to think that
Merrill Lynch should have ignored the Wayne County
No. 12-3869 13
Circuit Court order if it truly believed that the order
was in violation of federal ERISA law. But in such in-
stances, the directive of Michigan law is clear: “A
party must obey an order entered by a court with
proper jurisdiction, even if the order is clearly incorrect, or
the party must face the risk of being held in contempt
and possibly being ordered to comply with the order at
a later date.” Kirby v. Mich. High Sch. Athletic Ass’n,
585 N.W.2d 290, 297 (Mich. 1998) (emphasis added).
Consequently, if Merrill Lynch had permitted the dis-
tribution of Plan funds to Sherrod after February 4,
2011, then the Wayne County judge would have had
clear grounds to hold Merrill Lynch in contempt of court.
Merrill Lynch had no choice but to comply with the
Wayne County Circuit Court order. And Merrill Lynch
followed the order exactly by refusing to distribute
funds to Sherrod. The Plan administrator alleges in his
brief that Merrill Lynch went above and beyond the
order by freezing distributions to all eighteen Plan par-
ticipants, and not just to Sherrod. But this allegation
is simply not true. Throughout the pendency of this
suit, Sherrod is the only participant in the Plan who
has requested a distribution. Had any other of the
Plan’s eighteen participants requested a distribution,
Merrill Lynch maintains that it would “not . . . refuse
instructions from the Plan administrator.”
No matter how the Plan administrator attempts
to construe the facts of this case, his injury is not
“fairly trace[able] to . . . the defendant,” Merrill Lynch.
Lujan, 504 U.S. at 560. Instead, the Plan administrator’s
14 No. 12-3869
injury is “th[e] result [of] the independent action of
some third party not before the court”—namely, the
independent action of a judge on the Wayne County
Circuit Court. Indeed, if the Plan administrator’s injury
is fairly traceable to anyone else besides the Wayne
County judge, it is traceable to the Plan administrator
himself. The Wayne County judge may have been
initially responsible for the injury since he issued the
February 4, 2011 order prohibiting any distributions
to Sherrod. But arguably, the Plan administrator is re-
sponsible for the continuation of the injury past
April 13, 2012, when the Plan administrator rejected
the proposed agreement to unfreeze the Plan account.
In sum, the Plan administrator cannot trace his injury
to Merrill Lynch, and therefore, cannot meet the second
requirement for Article III standing as outlined by
Lujan, 504 U.S. at 560-61. Since a plaintiff must meet
all three requirements in order to have standing—and
the Plan administrator cannot meet at least one of
these requirements—then the Plan administrator lacks
standing to bring suit against Merrill Lynch. Without
standing, the federal court has no subject-matter juris-
diction to adjudicate the Plan administrator’s claim,
and the case must be dismissed.
III
Because we find that the Plan administrator lacks
Article III standing to bring the present suit, we need
not address Merrill Lynch’s ripeness argument. (Never-
theless, we note in passing that, given Merrill Lynch’s
No. 12-3869 15
continual support of the Plan administrator’s position
in the Michigan courts, we have a difficult time per-
ceiving an actual dispute between the parties. See Kawasaki
Heavy Indus., Ltd. v. Bombardier Recreational Prods., Inc.,
660 F.3d 988, 999 (7th Cir. 2011) (explaining that ripe-
ness requires “an actual dispute between parties with
adverse legal interests for a court to hear a case or is-
sue”).) Nor do we need to address Merrill Lynch’s
more complicated Rooker-Feldman argument. Our
finding that the Plan administrator cannot trace his
injury to the defendant, Merrill Lynch, gives us suf-
ficient grounds to A FFIRM the district court’s dismissal
of the case for lack of subject-matter jurisdiction.
5-20-13