UNITED STATES OF AMERICA, Plaintiff, v. PALUMBO BROS., INC., MONARCH ASPHALT CO., PETER PALUMBO, JOSEPH PALUMBO, SEBASTIAN PALUMBO, KELSON ABDISHI, DANIEL FERRARINI, and GERALD McGREEVEY, Defendants.

1997 U.S. Dist. LEXIS 12998, *

Case No. 96 C 613

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION

1997 U.S. Dist. LEXIS 12998

August 15, 1997, Decided
August 18, 1997, Docketed

DISPOSITION: [*1] Laborers' and Teamsters' section of Count 1, Counts 8-30 and Counts 35-42 dismissed.

CORE TERMS: preemption, indictment, mail fraud, wage, predicate, collective bargaining agreement, unionized, preempted, preempt, hours worked, preemptive effect, et seq, laborers, pension, predicate act, collective-bargaining, unfair, mail, teamsters, Labor Management Relations Act, National Labor Relations Act, virtually identical, federal labor law, organized crime, designated, seniority, payroll, generic, ambit, pattern of racketeering activity

COUNSEL: For PALUMBO BROTHERS, INC. dba Leininger Mid-States Paving Company dba Palumbo Excavating Company, defendant: Julie Anne Bauer, Hal B. Merck, Winston & Strawn, Chicago, IL.

For MONARCH ASPHALT COMPANY, defendant: Samuel Mendenhall, Winston & Strawn, Chicago, IL.

For PETER PALUMBO, defendant: Scott J. Szala, George Carter Lombardi, Winston & Strawn, Chicago, IL.

For JOSEPH PALUMBO, defendant: Robert Walter Tarun, Lawrence R. Desideri, Winston & Strawn, Chicago, IL.

For SEBASTIAN PALUMBO aka Car 8 aka Sam Palumbo, defendant: Dan K. Webb, Robert L. Michels, Winston & Strawn, Chicago, IL.

For KELSON ABDISHI, defendant: Robert A. Novelle, Serpico, Novelle & Navigato, Ltd., Chicago, IL.

For DANIEL FERRARINI, defendant: George Joseph Murtaugh, Jr., Attorney at Law, Chicago, IL.

For GERALD MCGREEVY, defendant: James R. Streicker, Cotsirilos, Stephenson, Tighe & Streicker, Theodore Thomas Poulos, Cotsirilos, Stephenson, Tighe & Streicker LTD, Chicago, IL.

For U. S.: John Hudson Newman, United States Attorney's Office, Chicago, IL.

JUDGES: Elaine E. Bucklo, United States [*2] District Judge.

OPINIONBY: Elaine E. Bucklo

OPINION: MEMORANDUM OPINION AND ORDER

The government filed a forty-four count second superseding indictment (the "indictment") against defendants Palumbo Brothers, Inc. ("PBI"), Monarch Asphalt Co. ("Monarch"), Peter Palumbo, Sebastian Palumbo, and Joseph Palumbo (collectively "the defendants") alleging a course of fraudulent conduct involving, inter alia, mail and wire fraud, 18 U.S.C. §§ 1341, 1343, false statements in connection with the Employee Retirement Income Security Act ("ERISA"), 18 U.S.C. § 1027, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. The defendants have moved to dismiss parts of Count 1, Counts 8-30, and Counts 35-42 on grounds of preemption. They argue that these counts allege violations of the National Labor Relations Act ("NLRA"), 29 U.S.C. § 151, et seq. and/or Section 301 of the Labor Management Relations Act ("LMRA"), 29 U.S.C. § 185, and that these laws preempt criminal prosecution for any such violations. The government argues that the conduct detailed in the indictment does not amount to unfair labor practices and that the defendants' [*3] actions are proscribed by laws other than the labor laws. For the reasons set forth below, the defendants' motion is granted.

Background

The defendants are engaged in the business of constructing and repairing roads. The corporate defendants, PBI and Monarch, are businesses which are owned by members of the Palumbo family including the individual defendants, Sebastian Palumbo, Peter Palumbo, and Joseph Palumbo. During the relevant time period, PBI and Monarch provided road construction and repair services for many of the roads, highways, and interstates in Chicago and its surrounding suburbs.

To do this work, PBI and Monarch employed many unionized workers. These workers were represented by several unions including the International Brotherhood of Teamsters ("Teamsters"), the Construction and General Laborers District Council of Chicago and Vicinity ("Laborers District Council"), and the Fox Valley Laborers. PBI, Monarch, and these unions entered into collective bargaining agreements ("CBAs") that governed the terms and conditions of employment for union members. For example, these agreements required the defendants to pay their employees a double time rate for any work [*4] performed on Sundays.

The government's indictment alleges that the defendants engaged in a pattern of racketeering activity spanning approximately a twenty-three year period from 1973-96. Count 1 of the indictment, the RICO count, alleges numerous predicate acts of mail fraud by the defendants. The government has classified some of these predicate acts as laborers' and teamsters' fraud. The government contends that the defendants executed a scheme to defraud their employees and labor unions. The scheme allegedly consisted of under-reporting the number of hours worked by employees, thereby reducing the defendants' contributions to the pension and health and welfare fund "in violation of the agreements . . . with the Laborers Union and Teamsters Union." Indictment PP 12-13. The government also claims that, as part of this scheme, the defendants engaged in several practices to avoid paying their employees the required wages pursuant to the terms of their CBAs with the Laborers Union and Teamsters Union. Id. PP 14-21. To conceal the scheme, the government contends that the defendants sent many false statements and compliance documents through the mail to the Teamsters Union, Laborers [*5] Union, and the Illinois Department of Transportation (IDOT) which under-reported the number of hours worked by employees of PBI on certain road projects. Id. PP 24-27.

Counts 8-30 of the indictment allege acts of mail fraud connected with the above described labor fraud scheme. These acts are charged as separate violations of the mail fraud statute, 18 U.S.C. § 1341, as opposed to their use in Count 1 as predicate acts to establish a pattern of racketeering activity in violation of RICO. These counts reallege almost all of the factual information and conduct contained in Count 1. Similarly, Counts 35-42 are based on the alleged submission of false statements by the defendants in connection with required ERISA filings. See 18 U.S.C. § 1027. The defendants argue that these counts, like Count 1, are preempted because they are intertwined with issues involving breach of the CBAs and unfair labor practices. The government claims that proof of the defendants' crimes will involve neither an analysis of the CBAs nor a determination about unfair labor practices.

Federal Labor Laws and Preemption

Congress created a special legal framework to govern the relationship between labor [*6] and management. Congress enacted the National Labor Relations Act ("NLRA"), 29 U.S.C. § 151, et seq., which set the rights and obligations of unions and management in the collective bargaining process. To administer this law, Congress established the National Labor Relations Board ("NLRB") and gave it primary jurisdiction over many disputes involving labor and management. San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236, 242-43, 3 L. Ed. 2d 775, 79 S. Ct. 773 (1959). In order "to remedy conduct that is arguably protected or prohibited" by sections 7 or 8 of the NLRA, the Act "pre-empts state and federal court jurisdiction" in favor of the NLRB. Amalgamated Ass'n of Street Employees v. Lockridge, 403 U.S. 274, 276, 29 L. Ed. 2d 473, 91 S. Ct. 1909 (1971).

Congress also enacted Section 301 of the Labor Management Relations Act ("LMRA"), 29 U.S.C. § 185. Preemption under Section 301 is "related to but distinct from" NLRA preemption. Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 212 n.6, 85 L. Ed. 2d 206, 105 S. Ct. 1904 (1985). Unlike the NLRA, Section 301 does allow for federal court jurisdiction but only for disputes involving breaches of CBAs. 29 U.S.C. § 185(a). [*7] Section 301, however, preempts claims that are "founded directly on rights created by collective-bargaining agreements . . . [or] 'substantially dependent on analysis of a collective-bargaining agreement.'" Caterpillar, Inc. v. Williams, 482 U.S. 386, 394, 96 L. Ed. 2d 318, 107 S. Ct. 2425 (1987) (citations omitted).

Over the course of seven pages, the indictment describes numerous acts of the defendants by which they sought to reduce the amount of wages they paid to their unionized employees. According to the government, the defendants failed to pay their unionized employees at the double time rate on Sundays and for any amount of hours worked over ten and one-half hours Monday through Friday and eight hours on Saturday. Indictment PP 18, 20-21. They also did not pay their workers one-half hour's wages for working during their scheduled lunch times and at least four hours' wages for any employees who started work on Saturdays, Sundays or holidays but did not work for a full four hours. Id. PP 16, 19. Furthermore, the defendants failed to pay eight hours of wages to their employees who worked more than four hours but less than eight hours through no fault of their own. [*8] Id. P 17. Finally, the indictment alleges that the defendants did not pay their employees for show-up time. n1 Id. P 14. All of these alleged actions which were taken as part of this scheme to "unlawfully retain money and property from . . . union member employees" were in violation of the CBAs between PBI and its unions. Id. PP 10, 14-21. These practices resulted in the union employees receiving checks from the defendants that allegedly "contained less money than was due those employees under the terms of their union agreements." Id. P 28.

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n1 Show-up time refers to the situation where a union member is scheduled to work, shows up at the job site, but is sent home because no work is available for the employee to do.

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The government also has alleged that the defendants devised and executed a scheme to reduce the amount they paid to the union pension and health and welfare funds on behalf of their unionized workers. The defendants supposedly accomplished this by submitting reports to the Laborers [*9] and Teamsters Unions which under-reported the number of hours worked by union employees. Id. P 27. Based on these reduced hours, the defendants mailed checks to the Laborers and Teamsters Unions that contained less money than was due under the terms of their CBAs because contributions to the union pension and health and welfare funds are based on the number of hours worked by employees. Id. P 29.

The individual acts of mailing doctored hours reports, certified payroll statements, union benefit contribution checks, and employee paychecks comprise the predicate acts of mail fraud alleged to support the RICO claim in Count I of the indictment. Id. PP 32-33 (Racketeering Acts 1a-1hh, 2a-2m). They also are breaches of the CBAs. The defendants' payroll and benefit obligations are determined by the provisions of the CBAs. See Underwood v. Venango River Corp., 995 F.2d 677, 685 (7th Cir. 1993), overruled on other grounds by Hawaiian Airlines, Inc. v. Norris, 512 U.S. 246, 129 L. Ed. 2d 203, 114 S. Ct. 2239 (1994) (finding that severance pay and seniority rights originate in CBA) n2; Chicago District Council of Carpenters Pension Fund v. Ceiling Wall Sys., Inc., 915 [*10] F. Supp. 939, 944 (N.D. Ill. 1996) (finding that right to proper amount of fringe benefit contributions is based in CBA). By allegedly failing to make the proper payments to their employees and unions, the defendants breached the CBAs. The question now becomes whether this breach, consistent with the LMRA statutory scheme, also may serve as the basis for predicate acts of mail fraud under RICO. For the answer to that question, I must determine if Congress intended for the LMRA to preempt RICO claims.

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n2 The Supreme Court's decision in Hawaiian Airlines overruled Underwood only on the narrow ground concerning the scope of preemption under the Railway Labor Act, 45 U.S.C. § 151, et seq. ("RLA"). The Seventh Circuit held that RLA preemption was broader in scope than LMRA preemption, Underwood, 995 F.2d at 682. The Supreme Court disagreed and held that the scope of preemption under both statutes was "virtually identical." Hawaiian Airlines, 512 U.S. at 261, 263. Given this holding and the fact that the Seventh Circuit's preemption analysis in Underwood was based largely on LMRA cases, the precedential effect of the court's decision preempting the RICO claims is not diminished. See Ceiling Wall, 915 F. Supp. at 944 n.1.

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Preemption of RICO

The LMRA ensures that a uniform body of federal labor law will govern the enforcement of CBAs. Textile Workers v. Lincoln Mills, 353 U.S. 448, 451, 1 L. Ed. 2d 972, 77 S. Ct. 912 (1957). RICO's purpose, on the other hand, is to eradicate the infiltration of legitimate businesses by organized crime. S. Rep. No. 91-617, at 76 (1969). Congress, however, did not intend to limit RICO's scope solely to activities of or people involved with organized crime. Section 1962(c), the portion of the RICO statute under which the defendants have been indicted, applies to "any person" and "any enterprise." See United States v. Turkette, 452 U.S. 576, 590-91, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981); United States v. Aleman, 609 F.2d 298, 303-304 (7th Cir. 1979). Given the differing nature and purposes of these two statutes, the LMRA's preemptive effect on RICO claims is not immediately evident.

Congress has not expressly stated its intent to remove RICO claims involving CBA breaches from the preemptive effect of the LMRA. In fact, when Congress designated what statutory violations could constitute predicate acts under RICO, it designated only one section of the [*12] labor laws, Section 186 of Title 29, as a predicate act. Brown v. Keystone Consol. Indus., 680 F. Supp. 1212, 1225 (N.D. Ill. 1988)(citing Butchers' Union, Local No. 498 v. SDC Inv., Inc., 631 F. Supp. 1001, 1007 (E.D. Cal. 1986)). This specific reference to Section 186 as a RICO predicate act has led courts to conclude that "Congress was being selective as to what activities were being removed from the ambit of the exclusive jurisdiction of the labor law. The violation of no other labor statute constitutes a RICO predicate act." Butchers Union, 631 F. Supp. at 1009, cited with approval in Brown, 680 F. Supp. at 1225. This case does not involve any violations of Section 186.

In the absence of any express Congressional intent, the Seventh Circuit has provided "a two step analysis for determining when Congress intended to preempt a claim" under Section 301. n3 Underwood, 995 F.2d at 684. The court explained the test as follows:

The first step asks whether the claim seeks to vindicate a substantive right derived from some source other than the collective-bargaining agreement. Examples include FELA claims, FLSA claims, § 1983 claims, and state tort claims. [*13] If a claim survives the first inquiry, the second step asks whether adjudication of the claim requires interpretation of the CBA. When such interpretation is required, it impermissibly interferes with the federal scheme for labor dispute resolution.

Id. The first part of the test is satisfied if the predicate acts for the RICO claim are wrongful by virtue of something other than the obligations in the CBA. See id. (quoting Hubbard v. United Airlines, Inc., 927 F.2d 1094, 1099 (9th Cir, 1991, overruled on other grounds by Hawaiian Airlines, 512 U.S. at 246). n4 A plaintiff, however, cannot avoid LMRA preemption by "'artfully pleading'" ordinary claims for breach of a CBA as RICO claims. Id.

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n3 Underwood actually addressed preemption under the RLA. Nevertheless, its reasoning is equally applicable in the present case. See Ceiling Wall, 915 F. Supp. at 944. First, the Underwood court relied extensively on LMRA preemption cases for part of its analysis. 995 F.2d at 680-81. Second, the Supreme Court has held that the preemption standard for RLA cases "is virtually identical to the pre-emption standard the Court employs in cases involving § 301 of the LMRA." Hawaiian Airlines, 512 U.S. at 260. [*14]

n4 Hubbard was overruled on the same narrow grounds as Underwood concerning the scope of RLA preemption. Hawaiian Airlines, 512 U.S. at 263 n.9. For the same reasons, its primary holding regarding LMRA preemption of RICO claims is unaffected.

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In the present case, the government has alleged violations of the mail fraud statute, and these violations serve as the predicate acts for the RICO claim. 18 U.S.C. § 1961(1). The mail fraud statute, however, is a generic fraud statute because it does not define what is a fraud. Butchers Union, 631 F. Supp. at 1011. Congress left "the matter of what conduct may constitute such a [fraudulent] scheme for determination under other laws." Parr v. United States, 363 U.S. 370, 389, 4 L. Ed. 2d 1277, 80 S. Ct. 1171 (1960). Therefore, I will look to other laws to determine "the underlying fraud which makes the use of the mails . . . actionable." Brown, 680 F. Supp. at 1226.

In this case, the defendants' alleged mail fraud is unlawful only by virtue of the obligations in the CBAs. See Underwood, 995 F.2d at 685; Hubbard, 927 F.2d [*15] at 1099 (9th Cir, 1991). Only the CBAs guarantee the defendants' unionized employees the right to a double-time wage, show-up pay, or any other wage and benefit provisions that are part of their CBA. See Trans World Airlines, Inc. v. Sinicropi, 887 F. Supp. 595, 606 (S.D.N.Y. 1995), aff'd 84 F.3d 116 (2nd Cir. 1996). n5 Thus, the RICO claim "does not seek to vindicate an independent substantive right derived from a source other than the collective bargaining agreement." Ceiling Wall, 915 F. Supp. at 944 (citing Underwood, 995 F.2d at 684-86). Any remedy for these alleged violations must be pursued under federal labor law which "was intended to provide the exclusive remedy for generic fraud claims relating to rights under a CBA." Hubbard, 927 F.2d at 1098. Because the government's RICO claim does not satisfy the first step in the preemption analysis, I need not reach the second inquiry except to note that the RICO claim would falter at this stage as well because it would require an interpretation of the CBA. Underwood, 995 F.2d at 685. n6

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n5 The court in Sinicropi provided a useful illustration of the difference between rights which depend solely on a CBA for their existence and those that trace their source to a law independent of the agreement. The court explained:

A collective bargaining agreement might provide that certain employees working in "managerial" positions are entitled to $ 18/hour. The right to be paid that wage does not exist in any source of law, and came into existence solely through the terms of the collective bargaining agreement. The employee would have no right to it if the collective bargaining agreement did not exist. . . . Conversely, if that same collective bargaining agreement provided that "non-managerial" employees would earn a wage of $ 2/hour, an employee disgruntled with an interpretation of the collective bargaining agreement placing him in this category . . . would not be pre-empted from bringing an action under the Federal law establishing a minimum hourly wage. This is because the employee's right to a wage above that provided for by the collective bargaining agreement exists independently of whatever obligations may be specified in the agreement.

Sinicropi, 887 F. Supp at 606, quoted in Goulart v. United Airlines, Inc., 1996 U.S. Dist. LEXIS 2894, No. 94 C 6237, 1996 WL 111895, at *4 (N.D. Ill. Mar. 12, 1996). [*16]

n6 Although most courts that have addressed this issue have found the RICO claims to be preempted, one court has reached the opposite conclusion. In Boffa, the Third Circuit held that a scheme by an employer to defraud unionized employees of wages and seniority rights as guaranteed in a CBA "lies squarely within the ambit of the mail fraud statute, and accordingly, it refused to preempt a RICO claim based on this mail fraud. Id. at 930. Boffa is distinguishable from the instant case because its preemption analysis involved the NLRA. It did not address preemption under the LMRA.

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Thus, the government's RICO claim in Count 1 is preempted by the LMRA to the extent that it is based on predicate acts of mail fraud in connection with a scheme to defraud the defendants' employees and unions. n7 Counts 8-30, alleging mail fraud based on the same labor fraud scheme, also are preempted.

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n7 These allegations are contained in Paragraphs 12-33 of the indictment.

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ERISA Claims Preemption

Counts 35-42 of the indictment charge the defendants with making false statements in connection with required ERISA filings. 18 U.S.C. § 1027. The defendants argue that these charges, like the RICO and mail fraud charges, also are preempted by the LMRA. Based on the analysis above, I already have determined that the defendants' alleged actions concerning their contributions to the unions' pension and health and welfare benefit funds would constitute breaches of the CBAs. Thus, the issue is whether the LMRA has the same preemptive effect on Section 1027 as it does on RICO.

To establish a violation of Section 1027, the government must prove that "(1) the defendant made a false statement; (2) knowing it to be false; and (3) in a document required by ERISA" United States v. Coyle, 63 F.3d 1239, 1245 (3rd Cir. 1995). Therefore, in the instant case, the government will have to prove that the statements made by the defendants in their ERISA filings with the unions were false. The truth or falsity of the defendants' statements, however, cannot be determined without reference to the underlying CBAs which created the ERISA obligations. The formula for determining [*18] the amount of the defendants' contributions and the exact amount of those contributions are controlled by the CBA. The defendants would not have made any contributions, prepared any reports, and made any filings without the requirements in the CBAs to do so. Therefore, these requirements owe their "existence solely to the terms of the collective bargaining agreement[s]. . . ." Sinicropi, 887 F. Supp. at 606. Consequently, Counts 35-42 also must be dismissed on the basis of preemption

Conclusion

Because of the preemptive effect of the LMRA, portions of the government's indictment cannot stand. Accordingly, the Laborers' and Teamsters' section of Count 1, Counts 8-30, and Counts 35-42 are dismissed.

ENTER ORDER:

Elaine E. Bucklo

United States District Judge

Dated: August 15, 1997