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July 22, 2014

ERISA-Sixth Circuit Rules That Plaintiffs Are Entitled To Pension Benefits Under The Plan's Change In Control Provisions

In Adams v. Anheuser-Busch Companies, Inc., No. 13-3149 (6th Cir. 2014), the plaintiffs had brought suit against defendants Anheuser-Busch Companies, Inc. and others (collectively, "Anheuser-Busch"), in which they seek benefits under the terms of an employee benefits plan sponsored by Anheuser-Busch. They now appeal the district court's decision upholding the plan administrator's denial of their claims for benefits provided under Section 19.11(f) of the plan. That Section authorized enhanced pension benefits for plan participants whose employment with an Anheuser-Busch company is involuntarily terminated within three (3) years after a Change in Control. The district court held that the plaintiffs had not been involuntarily terminated within the meaning of Section 19.11(f), because they secured employment with a successor corporation. In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") concluded that the district court's reading of Section 19.11(f) of the plan was flawed, and it reversed the district court's holding.

The Court said the following. Section 19.11(f) of the Anheuser-Busch plan states that, in the event of a "change in control," the retirement benefits of a plan participant "whose employment with the Controlled Group is involuntarily terminated within three (3) years after the Change in Control shall be determined by taking into account an additional five (5) years of Credited Service and . . . an additional five (5) years of age." In this case, the administrator concluded that "Section 19.11(f) was intended to provide an enhanced benefit to participants who suffer an actual termination or loss of employment." The district court concluded both that the language of Section 19.11(f) was ambiguous and that the administrator's interpretation was reasonable.

The Court continued by saying that the scope of the parties' disagreement is narrow: they dispute only the meaning of the phrase "involuntarily terminated." The defendants argue that the common understanding of the phrase "involuntarily terminated" requires an actual job loss, and that the plaintiffs' jobs were not "involuntarily terminated" because they continued to work uninterrupted in the same positions with the company's purchaser. The plaintiffs, on the other hand, contend that their employment with Anheuser-Busch's Controlled Group was involuntarily terminated on October 1, 2009, because, although still employed by someone, their employment with the Controlled Group was terminated, and the termination was "involuntary" because they did not choose it.

The Court concluded that a careful reading of the plan language demonstrates that the plaintiffs' interpretation of Section 19.11(f) is the only plausible interpretation. As such, the Court ruled that the district court erred in upholding the plan administrator's interpretation of Anheuser-Busch's pension-benefit plan provision at issue in this case. Accordingly, the Court reversed the judgment of the district court and remanded the case for entry of judgment in favor of the plaintiffs.

July 21, 2014

ERISA-Fifth Circuit Holds That A Wealth Accumulation Plan Is A "Pension Plan" Within The Meaning Of ERISA

In Tolbert v. RBC Capital Markets Corporation, No. 13-20213 (5th Cir. 2014), the plaintiffs in this case are former employees of the defendant ("RBC") who participated in a wealth accumulation plan ("WAP") during their periods of employment. Giving rise to this lawsuit, portions of the plaintiffs' WAP accounts were forfeited when the plaintiffs left their jobs at RBC. The plaintiffs allege that the forfeitures amounted to violations of ERISA. The district court granted RBC's motion for summary judgment, concluding that the WAP is not subject to ERISA because it is not an "employee pension benefit plan."

In analyzing the case, the Fifth Circuit Court of Appeals (the "Court") said the following. If the WAP is a "pension plan," ERISA applies, and the plaintiffs may proceed with their lawsuit. To be a "pension plan", by its express terms or as a result of surrounding circumstances, the WAP must either (1) provide retirement income to employees or (2) result in a deferral of income by employees for periods extending to the termination of covered employment or beyond." See 29 U.S.C.§ 1002(2)(A)(i)-(ii).

As to clause (1), the record reflects that the WAP was not designed to provide retirement income, considering, for example: the WAP's statement of purpose at the beginning of the document (announcing the goal of allowing "employees to share in [RBC's] growth and profitability" and the de facto distribution date immediately upon vesting. To fall within clause (2), the arrangement must allow the employees to defer the income to the end of their employment or beyond. The WAP satisfies clause (2) and therefore is a pension plan. The WAP's "express terms" reveal themselves at the outset of the document. The first section of the WAP, the statement of purpose, refers to the WAP as a "deferred compensation plan" and explains that, by design, employees have the option "to defer receipt of a portion of their compensation to be earned with respect to the upcoming Plan Year." The WAP provides for several categories of compensation which is deferred. A deferral of income thus ensues from (or, "arises as an effect of") the express terms of the WAP to termination of employment or beyond. As such, the Court reversed the district court's grant of summary judgment.

July 17, 2014

ERISA-Fifth Circuit Upholds The Insurer's/Plan Administrator's Denial Of Life Insurance Benefits Due Intoxication Exclusion

Green v. Life Insurance Company of North America, No. 13-60049 (5th Cir. 2014), the Fifth Circuit Court of Appeals (the "Court") faced the following situation. Lindsey Green and Brenda Green (collectively "Plaintiffs") were appealing the district court's grant of summary judgment in favor of the defendant, Life Insurance of North America ("LINA"), upholding LINA's denial of life insurance benefits to Plaintiffs, the beneficiaries of the two policies at issue.

In this case, Joshua Green ("Green"), husband of Lindsey Green and son of Brenda Green, died while operating a boat on July 16, 2010. Around 8:20 p.m, he called his wife to say he was on his way home. When he did not arrive, she called the police. The Coast Guard found Green in his boat the next morning. He had died because of a head injury sustained when his boat struck the support legs of a landing light at Keesler Air Force Base. The police report and radio log on the incident noted that Green had a blood alcohol content of .243, there were empty beer bottles and cans in the boat, he had not been using his running lights and when he had spoken to his wife he sounded intoxicated.

Plaintiffs sought to recover life insurance benefits on two Accidental Death and Dismemberment ("AD&D") policies Green held with LINA through his employer, Northrop Grumman Corporation. LINA is the issuer, insurer, claims administrator, and plan administrator of the two policies. However, the policies excluded recoveries for death occurring when operating a vehicle while intoxicated. LINA therefore denied Plaintiffs' claim on the basis of this exclusion and related matters. In analyzing the case, the Court said, first, it was assuming that a de novo review applies to LINA's decision to deny the benefits. The Court said, next, that-even using a de novo review- LINA properly applied the exclusion for intoxication in the policies. As such, the Court affirmed the district court's summary judgment in LINA's favor.

July 15, 2014

ERISA-Eighth Circuit Rules That Retiree Health Benefits Are Not Vested And Therefore May Be Unilaterally Changed By The Employer

In Windstream Corporation v. Lee, No. 13-1723 (8th Cir. 2014), the Eighth Circuit Court of Appeals (the "Court") faced the following situation. In 2009, Windstream Communications (the "Windstream") modified the premium subsidy it paid to former employees enrolled in its medical benefits plan for retirees. Windstream filed this action in November 2009, against retirees, and subsequently their union, who challenged Windstream's authority to modify retiree benefits unilaterally, seeking a declaratory judgment that it has the authority to modify retiree benefit premium contributions without violating either the applicable collective bargaining agreement (the "CBA") or ERISA. The district court granted summary judgment to Windstream. The retirees and the union appealed.

In analyzing the case, the Court said that, under ERISA, an employer may unilaterally modify or terminate retiree health and other welfare benefits unless they have been vested. Retiree health and welfare benefits are not vested unless the employer has contracted an agreement to the contrary. The burden is on the retiree or union to prove vesting languages exists in the plan documents. Vesting promises may be found in a collective bargaining agreement if they are incorporated into the formal written ERISA plan.

Here, the Court continued, because the summary plan description for the plan containing the retiree health benefits say that the plan is maintained pursuant to the CBA, the Court must determine if the CBA contains a contractual promise to provide vested retiree health benefits. The Court concluded that the CBA language does not contain any such contractual promise. It said that the CBA is not
"reasonably susceptible of the meaning" that the retiree health benefits were permanently vested. As such, the Court affirmed the district court's summary judgment in Windstream's favor.

July 9, 2014

ERISA-D.C. Circuit Rules That Plaintiff Class, Seeking Enforcement Of Their Substantive Rights Under ERISA, Did Not Have To Exhaust Internal Plan Remedies Before Bringing Suit.

In Stephens v. Pension Benefit Guaranty Corporation, No. 13-5129 (D.C. Cir. 2014), the Court faced the following situation. When a group of U.S. Airways pilots hung up their wings over a decade ago, they expected prompt payment of their retirement benefits. When payment was delayed 45 days, the group filed a class action on behalf of themselves and similarly situated pilots seeking interest for the period of delay. But did the class members have to exhaust internal plan remedies before filing suit under ERISA? The Court ruled that the class members were not required to exhaust internal remedies, because they seek enforcement of ERISA's substantive guarantees rather than contractual rights.

In so ruling, the Court said that, although ERISA itself does not require a plan beneficiary to exhaust internal plan remedies before bringing suit, courts have universally applied the requirement as a matter of judicial discretion. However, despite the universal acceptance of the general exhaustion rule, the courts of appeal are split on the question of whether beneficiaries of an ERISA plan must exhaust internal plan remedies before suing plan fiduciaries on the basis of an alleged violation of duties imposed by the statute, an issue now facing the D.C. Circuit for the first time.

The Court noted that the Third, Fourth, Fifth, Ninth, and Tenth Circuits have held exhaustion is not required when plaintiffs seek to enforce statutory ERISA rights rather than contractual rights created by the terms of a benefit plan. The Seventh and Eleventh Circuits, on the other hand, have held the exhaustion requirement applies even where plaintiffs assert statutory rights. The Court said that it agreed with the courts of appeal ruling that exhaustion is not required. A balancing of interests compels the Court to require claimants to exhaust internal remedies when they assert rights granted by a benefit plan. But it logically suggests direct resort to the federal courts where claimants assert statutory rights--a practice that better promotes Congress's intent to create minimum terms and conditions for pension plans. And in this case, the Court said, the proposed class was asserting statutory rights, since the class relied on a right granted them by ERISA's regulations--the right to receive a lump sum payment without unreasonable delay. In other words, the class asserts a statutory claim because the district court on remand will have to evaluate the plan's administration under a reasonableness standard created and defined by federal law.

July 2, 2014

ERISA-Supreme Court Provides Guidance As To How ERISA Prudence Requirement Applies To ESOP Fiduciaries

In Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, (S.Ct. 2014) the United States Supreme Court (the "Court") ruled that ESOP fiduciaries are NOT entitled to a presumption of prudence when they purchase and hold employer stock (see my blog of yesterday). In so ruling. The Court expressed its view on how the ERISA prudence requirement applies to ESOP fiduciaries. Here is what the Court said:

In our view, the law does not create a special presumption favoring ESOP fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP's holdings.

Reviewing ERISA Section 1104, Section 1104(a)(1)(B) "imposes a `prudent person' standard by which to measure fiduciaries' investment decisions and disposition of assets." Massachusetts Mut. Life Ins. Co. v. Russell, 473 U. S. 134, 143, n. 10 (1985). ERISA Section 1104(a)(1)(C) requires ERISA fiduciaries to diversify plan assets. And §1104(a)(2) establishes the extent to which those duties are loosened in the ESOP context to ensure that employers are permitted and encouraged to offer ESOPs. Section 1104(a)(2) makes no reference to a special "presumption" in favor of ESOP fiduciaries. It does not require plaintiffs to allege that the employer was on the "brink of collapse," under "extraordinary circumstances," or the like. Instead, §1104(a)(2) simply modifies the duties imposed by §1104(a)(1) in a precisely delineated way: It provides that an ESOP fiduciary is exempt from §1104(a)(1)(C)'s diversification requirement and also from §1104(a)(1)(B)'s duty of prudence, but "only to the extent that it requires diversification." §1104(a)(2) (emphasis added).

In our view, where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.

Respondents also claim that petitioners behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were FifthThird insiders. To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. The following three points inform the requisite analysis:

1. In deciding whether the complaint states a claim upon which relief can be granted, courts must bear in mind that the duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law. As every Court of Appeals to address the question has held, ERISA's duty of prudence cannot require an ESOP fiduciary to perform an action--such as divesting the fund's holdings of the employer's stock on the basis of inside information--that would violate the securities laws.

2. Where a complaint faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for failing to disclose that information to the public so that the stock would no longer be overvalued, additional considerations arise. The courts should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws.

3. Lower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases--which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment--or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.

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July 1, 2014

ERISA-Supreme Court Rules That Presumption Of Prudence Does NOT Apply To ESOP Fiduciaries

In Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (S. Ct. 2014), the U.S. Supreme Court (the "Court") considered whether, when an ESOP fiduciary's decision to buy or hold the employer's stock is challenged in court, the fiduciary is entitled to a defense-friendly standard called a "presumption of prudence." The Court noted that the Courts of Appeals that have considered the question have held that such a presumption does apply, with the presumption generally defined as a requirement that the plaintiff make a showing that would not be required in an ordinary duty-of-prudence case, such as that the employer was on the brink of collapse.

The case involved a suit by former ESOP participants against the fiduciaries for investing in and holding employer stock, when the fiduciaries allegedly knew that the stock was overpriced and risky, and the stock subsequently declined in price by 74% when the stock market crashed. The Court held that no such presumption of prudence applies to ESOP fiduciaries. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund's assets per ERISA §1104(a)(2).

The Court had a lot to say on how the prudence requirement is to apply to an ESOP fiduciary. More on that in a later blog.

June 26, 2014

ERISA-First Circuit Upholds Employer's/Administrator's Decision To Terminate Disability Benefits

In Rolando Ortega-Candelaria v. Johnson & Johnson, No. 13-1564 (1st Cir. 2014), plaintiff Ortega was appealing the district court's dismissal of his claims under ERISA. Before the district court, Ortega sought judicial review of the decision to terminate payment of disability benefits to him under the Johnson & Johnson Long-Term Disability Plan (the "Plan"). Ortega requested a judgment restoring his terminated benefits and ordering payment of past benefits. The district court dismissed Ortega's claims with prejudice.

On appeal, Ortega argued that his employer, Johnson & Johnson, and the Plan's administrator, Medical Card System,Inc. ("MCS") (collectively, the "Appellees"), arbitrarily and capriciously terminated his disability benefits. Ortega contends that the Appellees erroneously credited an examination by a physical therapist over the opinion of his treating physician. In analyzing the case, the First Circuit Court of Appeals (the "Court") said that, although a plan administrator may not arbitrarily refuse to credit a claimant's reliable evidence, including the opinions of a treating physician, we do not require administrators to automatically grant "special weight" to the opinion of a claimant's chosen provider. Further, Ortega was uncooperative during a functional capacity examination, failing to use his best efforts to complete required tasks, thereby invoking a Plan provision under which his benefits could be terminated on account of such failure. The Court concluded that, given the substantial record evidence supporting the Appellees' determination, the decision to terminate Ortega's benefits did not constitute an abuse of discretion and was neither arbitrary nor capricious. As such, the Court affirmed the district court's decision.

June 23, 2014

ERISA-Seventh Circuit Agrees With A Majority Of The Circuits And Holds That Funds In A Pension Plan Lose Anti-Assignment/Anti-Alienation Protection After Being Paid Out By The Plan

In National Labor Relations Board v. HH3 Trucking, Inc., Nos. 05-1362, 05-4075 (7th Cir. 2014), the issue arose as to whether money received from a pension plan covered by ERISA-which the money at issue was- is forever free of all legal claims by third parties.

In analyzing this issue, the Seventh Circuit Court of Appeals (the "Court") note that Section 206(d)(1) of ERISA provides that each pension plan shall provide that benefits provided under the plan may not be assigned or alienated. The Court further noted that in Guidry v. Sheet Metal Workers National Pension Fund, the Supreme Court held that a constructive trust on benefits, under which the pension plan must pay someone other than the plan's participant, violates this rule, even when the trust would be a remedy for the participant's violation of some other part of ERISA.

However, the Court continued, Section 206(d)(1), and the Supreme Court's decision in Guidry, concern assets in a plan's hands. The Tenth Circuit (from which Guidry originated) later concluded that §206(d)(1) does not prohibit the attachment or garnishment of funds after the plan had distributed them to the retiree. Five other circuit courts of appeals (1st, 2nd, 3rd ,6th, and 9th circuits) have agreed with the Tenth Circuit. The Court concluded that it agrees with the majority of the circuits, so that money loses its anti-alienation/ anti-assignment or protection after it leaves the plan.

June 18, 2014

ERISA-Seventh Circuit Rules That Plaintiffs Did Not Have Actual Knowledge Of The ERISA Violation, So The Three-Year Statute Of Limitations In ERISA § 413(2) Did Not Apply

In Fish v. GreatBanc Trust Company, No. 12-3330 (7th Cir. 2014), the central issue in the appeal is the application of the statute of limitations for claims for breach of fiduciary duty under ERISA. The presumptive limitation period for violations is six years from the date of the last action constituting part of the breach or violation, but the statute provides a limited exception. The time is shortened to just three years from the time the plaintiff gained "actual knowledge of the breach or violation." 29 U.S.C. § 1113. (The six-year limit can also be extended in cases of fraud or concealment, but neither was at issue here.)

The plaintiffs in this case were employees of The Antioch Company who participated in an employee stock ownership plan or ESOP. Their claims arise from a buy-out transaction at the end of 2003 in which Antioch borrowed money to buy all stock except the stock owned by the employee stock ownership plan. The buy-out ended badly, leaving Antioch bankrupt and the employee stock ownership plan worthless. The plaintiffs have sued under ERISA for breach of fiduciary duties in the buy-out. The district court granted summary judgment for the defendants under the three-year limit of ERISA § 413(2), finding that proxy documents given to plaintiffs at the time of the buy-out transaction and their knowledge of Antioch's financial affairs after the transaction gave them actual knowledge of the alleged ERISA violations more than three years before suit was filed.

The Seventh Circuit Court of Appeals (the "Court") reversed the district court's summary judgment. It said that the plaintiffs' claims for breach of fiduciary duty do not depend solely on the disclosed substantive terms of the 2003 buy-out transaction. Their claims also depend on the processes that defendant GreatBanc Trust used to evaluate, to negotiate, and ultimately to approve the ill-fated transaction. The plaintiffs' knowledge of the substantive terms of the buyout transaction itself therefore did not give them "actual knowledge of the breach or violation" alleged in this case. Without actual knowledge, the three-year limit does not apply.

June 16, 2014

ERISA-Ninth Circuit Discusses The Availability Of Surcharge As A Type Of Equitable Relief

In Gabriel v. Alaska Electric Pension Fund, No. 12-35458 (9th Cir. 2014) (discussed in my blog of June 12), the plaintiff sued the defendants for, among other things, breach of the fiduciary duties under ERISA section 502(a)(3). The district court had granted summary judgment to the defendants on this and the plaintiffs other claims. The Ninth Circuit Court of Appeals (the "Court") affirmed the district court's judgment.

The Court noted that three types of remedies are available to a plaintiff, as "appropriate equitable relief", on a claim brought under section 502(a)(3)-equitable estoppel, plan reformation and surcharge. The Court found that, in this case, the plaintiff was not entitled to any of the remedies. The remedy of surcharge has lately drawn a lot of interest, having been brought up by the Supreme Court in CIGNA Corp. v. Amara. Here is what the Court said on surcharge:

The remedy, "appropriate equitable relief" also includes "surcharge", defined as "the power to provide relief in the form of monetary 'compensation' for a loss resulting from a trustee's breach of duty, or to prevent the trustee's unjust enrichment." (quoting Amara). Under the traditional equitable principles specified in Amara, the surcharge remedy was available when a breach of trust committed by a fiduciary resulted in a loss to the trust estate or allowed the fiduciary to profit at the expense of the trust. Under these circumstances, a surcharge remedy can protect the beneficiaries of a trust by making the trust estate whole. If a breach of trust causes a loss, including any failure to realize income, capital gain, or appreciation that would have resulted from proper administration, the beneficiaries are entitled to restitution and may have the trustee surcharged for the amount necessary to compensate fully for the consequences of the breach. However, the trustee is not subject to surcharge for a breach of trust that results in no loss to the estate or profit to the trustee.

The remedy of surcharge is available under ERISA to the extent it has been available as a traditional equitable remedy. The remedy may be applied to redress losses of value or lost profits to the trust estate and to require a fiduciary to disgorge profits from unjust enrichment. Specifically, as the Court held earlier: (1) the remedy of surcharge is available against the fiduciary for benefits it gained through unjust enrichment or for harm caused as the result of its breach; and (2) the fiduciary could be liable for loss of value to the trust or for any profits that the trust would have accrued in the absence of the breach, in both cases in order to return the beneficiary to the position he or she would have attained but for the fiduciary's breach.

June 12, 2014

ERISA-Ninth Circuit Holds That The Plaintiff Is Not Entitled To Plan Benefits Based On Claim For Equitable Relief

In Gabriel v. Alaska Electric Pension Fund, No. 12-35458 (9th Cir. 2014), for over three years, a defendant, Alaska Electric Pension Fund (the "Fund"), paid plaintiff Gabriel monthly pension benefits he had not earned. This case arises from the events that occurred after the Fund discovered this error.

In short, the Fund determined that Gabriel did not have enough service to vest in pension benefits payable by the plan underlying the Fund. The Fund terminated Gabriel's benefit payments, and threatened to seek reimbursement for $81,033 in benefits Gabriel had previously received. In response, Gabriel brought an ERISA action in district court against the Fund and others. In his complaint, Gabriel brought claims for recovery of benefits and clarification of rights to future benefits under ERISA section 502(a)(1)(B) and breach of the fiduciary duties under ERISA section 502(a)(3). The district court granted summary judgment to the defendants on all of Gabriel's claims, and Gabriel appeals.

In analyzing the case, the Ninth Circuit Court of Appeals (the "Court") considered Gabriel's argument that the defendants violated their fiduciary duties under ERISA (or the terms of the Plan) for which he is entitled to "appropriate equitable relief" under section 502(a)(3). The Court identified , and rejected Gabriel's claim as to, the three available types of equitable relief:

(1) equitable estoppel, providing no relief because the Fund did not interpret ambiguous plan language, but rather made a mistake in paying benefits, and Gabriel was not ignorant of the true facts (i.e., that he was not vested);

(2) reformation of the plan, providing no relief because Gabriel could not establish that a mistake of fact or law affected the plan's or Fund's terms or that any fraud was involved; and

(3) surcharge, providing no relief because Gabriel did not claim that any of the fiduciaries were unjustly enriched, rather, they discontinued a benefit to which Gabriel was not entitled, and Gabriel is not seeking a monetary award to recoup losses.

As to Gabriel's claim under section 502(a)(1)(B), the Court said that Gabriel argues that the Fund waived the rationale that it was denying him benefits because he was not vested. The Court reject this argument, finding that the Fund met all procedural requirements in stopping the benefits, and otherwise did nothing to waive its determination that it needed to stop the benefits because Gabriel was not vested.

The Court concluded that Gabriel cannot demonstrate that he is entitled to any of the equitable remedies available under section 502(a)(3), or that the Fund waived its argument that he never vested. Therefore, the Court affirmed the district court's grant of summary judgment in favor of the defendants.

June 9, 2014

ERISA-Sixth Circuit Rules That Suit Is Not Time Barred, And Upholds Award of Damages and Prejudgment Interest For Violation Of ERISA Fiduciary Duty

In Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, Nos. 13-1773/1859 (6th Cir. 2014), the Hi-Lex corporation ("Hi-Lex") filed suit in 2011 alleging that Blue Cross Blue Shield of Michigan ("BCBSM") breached its fiduciary duty under ERISA, by inflating hospital claims with hidden surcharges in order to retain additional administrative compensation. The district court granted summary judgment to Hi-Lex on the issue of whether BCBSM functioned as an ERISA fiduciary and whether BCBSM's actions amounted to self-dealing. A bench trial followed in which the district court found that Hi-Lex's claims were not time-barred and that BCBSM had violated ERISA's general fiduciary obligations under 29 U.S.C. § 1104(a). The district court awarded Hi-Lex $5,111,431 in damages and prejudgment interest in the amount of $914,241. BCBS appeals.

Hi-Lex is an automotive supply company with approximately 1,300 employees. BCBSM contracts to serve as a third-party administrator ("TPA") for companies and organizations that self-fund their health benefit plans. Since 1991, BCBSM has been the contracted TPA for Hi-Lexs Health and Welfare Benefit Plan (the "Health Plan"). In 1993, BCBSM implemented a new system whereby it would retain additional revenue by adding certain mark-ups (i.e., surcharges) to hospital claims paid by its clients. These fees were charged in addition to the normal administrative fee that BCBSM collected. Hi-Lex eventually brought this suit over these surcharges.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") ruled, first, the BCBS was an ERISA fiduciary with respect to the Health Plan, and when it imposed the surcharges, since it exercised authority or control over the plan assets. As such, imposing the surcharges is an act of self-dealing (BCBS discretionarily set fees for its own account) and violated its general fiduciary duties (loyalty, prudence and acting for participant's exclusive benefit).

As to whether the suit is time barred, the Court said that, for actions-as here-brought under 29 U.S.C. §§ 1104(a) and 1106(b), ERISA requires that a claim be brought within three years of the date the plaintiff first obtained actual knowledge of the breach or violation forming the basis for the claim. Three years is extended to six years in the case of fraud or concealment. . Actual knowledge means knowledge of the underlying conduct giving rise to the alleged violation, rather than knowledge that the underlying conduct violates ERISA. In this case, Hi-Lex obtained knowledge of the surcharges August 2007 ( when a "Value of Blue" pie chart that depicted the charges was presented to the company as part of an annual settlement meeting with BCBSM). Since Hi-Lex filed suit in June 2011, it must avail itself of ERISA's fraud or concealment exception or its action is time-barred. Here, BCBSM breached its fiduciary duty by committing fraud and then acting to conceal that fraud (by knowingly misrepresenting and omitting information about the surcharges) in contract documents. As such, the 6 year statute of limitations applies and Hi-Tech's suit is not time barred. The Court affirmed the district court's judgment, including the damages and prejudgment interest the district court had awarded

June 4, 2014

ERISA-Second Circuit Finds That The Employer And Its Directors Did Not Violate ERISA By Contributing Employer Stock (Instead Of Cash) To Two Retirement Plans, Despite A Price Decrease Of The Stock

In Coulter v. Morgan Stanley & Co. Inc. (2nd Cir. 2014), the plaintiffs had alleged violations of ERISA's fiduciary requirements, in connection with the drop of the price of employer stock held by two retirement plans (a 401(k) plan and an ESOP, together the "Plans") in which they participate. The defendants were the employer, Morgan Stanley, and certain of its directors. The district court, in finding that the Moench presumption of prudence applies to the defendants' conduct, and that the plaintiffs failed to rebut this presumption, granted defendants' motions to dismiss. The plaintiffs appealed. The Second Circuit Court of Appeals (the "Court") did not rule on this finding, but concluded that the defendants' conduct did not trigger fiduciary liability under ERISA and therefore affirmed the district court's dismissal of the case on that ground.

In this case, in 2007 and 2008, the employer, Morgan Stanley, had made certain contributions to the Plans in the form of employer stock instead of cash. After the price of the employer stock fell during a broad economic downturn, the plaintiffs brought this suit, alleging breach of fiduciary duty under ERISA. In reviewing the case, the Court found that the conduct complained of-contributing employer stock rather than cash-did not occur in the performance of a fiduciary function. Such a function requires the management or administration of the plan as opposed to a "settlor function", i.e., a business decision. Therefore, the conduct in question cannot trigger fiduciary liability under ERISA.

June 2, 2014

ERISA-Eighth Circuit Holds That The Administrator Did Not Abuse Its Discretion In Determining the Beneficiary Of The Plan's Life Insurance Proceeds

In Hall v. Metropolitan Life Insurance Company, No. 13-1332 (8th Cir. 2014), the plaintiff, Jane Hall ("Hall"), had sued Metropolitan Life Insurance Company ("MetLife"), alleging that MetLife abused its discretion in denying her claim to receive the proceeds of her late husband's life insurance policy under an employee benefit plan governed by ERISA. The district court granted summary judgment for MetLife, and Hall appeals.

In this case, Dennis Hall began work at Newmont USA Limited in August 1988. Through his employment at Newmont, Dennis obtained a life insurance policy issued by MetLife. In 1991, Dennis designated his son, Dennis Hall II, as the beneficiary of the life insurance policy. The designation was appropriately filed. Under the terms of the governing employee benefit plan ("the Plan"), MetLife is expressly granted "discretionary authority to interpret the terms of the Plan and to determine eligibility for and entitlement to Plan benefits in accordance with the terms of the Plan." The Plan also informs Newmont employees how they may designate or change the beneficiary or beneficiaries of their policy.

Jane Hall married Dennis in May 2001. Around March 2010, Jane and Dennis began traveling regularly to the Mayo Clinic in Rochester, Minnesota, for medical examinations and treatment relating to Dennis's cancer diagnosis. Dennis made a new beneficiary designation of the life insurance proceeds, naming Hall, but never filed the new designation with the Plan. Just before he died from the cancer, Dennis made a will under which all of his life insurance and other benefits will be paid to Hall. Even though Dennis Hall II was the designated beneficiary of the life insurance proceeds on file with the Plan, Hall claimed payment, based on Dennis' will and the unfiled new beneficiary designation. MetLife decided to deny Hall's claim, and ultimately distributed the life insurance proceeds to Dennis Hall II. This suit ensued.

In analyzing the case, the Eighth Circuit Court of Appeals (the "Court") said that where, as here, a plan governed by ERISA gives the administrator discretionary power to interpret the terms of the plan or to make eligibility determinations, a federal court reviews the administrator's decisions for abuse of discretion. Hall argued that MetLife abused its discretion by refusing to recognize either Dennis's will or the new beneficiary designation. However, the Court disagreed with these arguments, stating that MetLife reasonably viewed the will as applying only to Dennis' estate and not the Plan, and that MetLife reasonably rejected the new beneficiary designation because it was never filed with the Plan. The Court also rejected an argument by Hall that that the district court erred by refusing to apply the federal common law doctrine of substantial compliance to conclude that Dennis effected a change of beneficiary. Accordingly, the Court upheld the district court's judgment that Dennis Hall II is the appropriate recipient of the life insurance proceeds.