ERISA - Equitable Relief Archives - Page 2 of 3

Multi-Million Dollar Disgorgement Award Struck Down in Rochow – But the Disgorgement Remedy May Still Be Alive

In December 2013, we published an article highlighting the Sixth Circuit Court of Appeals’ bold decision to award the plaintiff disability benefits plus $2.8 million in disgorged earnings, as a potential “game-changer” in Employee Retirement Income Security Act of 1974 (“ERISA”) litigation—that is, if it survived review. Rochow v. Life Ins. Co. of N. Am., 737 F.3d 415 (6th Cir. 2013) (“Rochow I”). Alas, the Sixth Circuit Court of Appeals vacated the decision in February 2014 and stayed the case. Rochow v. Life Ins. Co., 2014 U.S. App. LEXIS 3158 (6th Cir. Feb. 19, 2014) (“Rochow II”). Finally, in March 2015, the Court of Appeals issued an en banc decision vacating the disgorgement award and remanding the case for a review of prejudgment interest. Rochow v. Life Ins. Co. of N. Am., 2015 U.S. App. LEXIS 3532 (6th Cir. 2015) (“Rochow III”). The Court held that because the plaintiff was adequately compensated by an award of the insurance benefits, attorneys’ fees and possible prejudgment interest, that in this case, disgorgement was not necessary to make the plaintiff whole. Although this decision is disheartening to claimant’s attorneys eager to test the limits of ERISA remedies, a careful reading of Rochow III reveals that the Sixth Circuit does not entirely foreclose disgorgement as an appropriate remedy under ERISA. Moreover, the concurring and dissenting opinions provide additional guidance for future ERISA claimants who suffer injuries and seek equitable remedies beyond their policy benefits.

Briefly, the original suit involved Daniel Rochow, an executive who applied for, and was denied, long-term disability benefits after being diagnosed with a severely debilitating brain infection. He brought suit under ERISA for the insurer’s failure to pay benefits and breach of fiduciary duty. The district court held the insurer’s denial was arbitrary and capricious, and on appeal, awarded $3.78 million to the estate, $910,629 for Rochow’s disability benefits and $2.8 million to disgorge the insurer’s profits based on return on equity as “appropriate equitable relief” under 29 U.S.C. section 1132(a)(3) (Rochow I). This award was upheld by the Court of Appeals under the theory of unjust enrichment in Rochow I, but vacated in Rochow II. Thus, the stage was set for Rochow III.

Rochow III addressed whether Rochow was entitled to recover benefits under both ERISA section 502(a)(1)(B) and equitable relief under section 502(a)(3). The Court explained:

A claimant can pursue a breach-of-fiduciary-duty claim under § 502(a)(3), irrespective of the degree of success obtained on a claim for recovery of benefits under § 502(a)(1)(B), only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § 502(a)(1)(B) is otherwise shown to be inadequate.

The court noted that both of Rochow’s claims were based on the same underlying “injury” (the insurer’s failure to pay benefits), and an award granting him these benefits plus attorneys’ fees did make him whole. Accordingly, the court vacated the disgorgement award under section 502(a)(3).

Of note, the Rochow III dissent sends a strong signal that the disgorgement issue is far from settled, and offers insureds guidance for future ERISA claims. First, Circuit Judge Helene White notes that although she agrees with the majority decision that disgorgement was not adequately supported, she would allow consideration of a refashioned disgorgement remedy on remand. Significantly, Judge White points out that the justices “all appear to agree disgorgement of profits is a potential remedy under ERISA.” Moreover, Judge White disagrees that disgorgement requires two separate injuries—the inquiry should be whether other equitable relief is appropriate under the circumstances, and the extent to which disgorgement duplicates the benefits-denial claim is one factor in this inquiry. Indeed, even if Rochow recovered his benefits and attorneys’ fees, other equitable relief may be appropriate—as evidenced by the fact that the majority permitted an interest award. Judge White underscores the Court of Appeal did not discern why one equitable remedy (interest) was appropriate, but another (disgorged profits) was not. Finally, Judge White suggested that disgorgement may be appropriate where an insurer’s denial was based on “impermissible considerations” such as “an organizational policy to delay paying valid claims for as long as possible” or if disgorgement was necessary to ensure proper claims processing in the future.

The dissent by Circuit Judge Jane Stranch held disgorgement was appropriate because Rochow brought two distinct claims (to recover plan benefits and for an accounting and disgorgement of profits wrongfully earned through the insurer’s breach of its fiduciary duty) and suffered two distinct injuries (the insurer’s denial of his disability benefits, and breach of its fiduciary duties). Specifically, the insurer engaged in “deliberate and willful wrongful acts” to deny Rochow’s claim. This denial allowed the insurer to retain substantial funds rightfully due to Rochow in its corporate account and earn millions in profits during a seven-year period. Ultimately, the dissent held that the majority mischaracterized the Rochow’s injuries and disgorgement was a proper remedy.

Although Rochow III is undeniably a victory for insurance companies, the strong concurring and dissenting opinions reveal that the Court did not foreclose the possibility of a disgorgement award. However, insureds may have to show a distinct injury or “impermissible considerations” at the hands of the insurance company such that payment of their claim is insufficient to make them whole. Indeed, the takeaway from Rochow III appears to be the Sixth Circuit reassuring insureds, better luck next time. This issue has not been resolved in the Ninth Circuit. Maybe there will be better luck next time.

Robert McKennon and Scott Calvert Publish Article: “Expanding Equitable Remedies in ERISA Cases”

The January 8, 2015 edition of the Los Angeles Daily Journal featured Robert McKennon and Scott Calvert’s article entitled: “Expanding Equitable Remedies in ERISA Cases.” In it, Mr. McKennon and Mr. Calvert discuss a new case, Gabriel v. Alaska Electrical Pension Fund, 2014 DJDAR 16590 (9th Cir. 2014) and also discuss equitable remedies generally in ERISA cases and, in particular, how the Ninth Circuit Court of Appeals has joined other circuits in allowing certain equitable remedies, most especially the surcharge remedy. Mr. McKennon and Mr. Calvert also explain how insurance claimants should go about proving equitable remedies. The article is posted below with the permission of the Daily Journal.

Case highlights importance of agent-broker distinction

Expanding equitable remedies in ERISA cases

One of the biggest changes in the ever-fluid law that is the Employee Retirement Income Security Act of 1974 was the expansion in the availability of claims for equitable remedies. In 2011, the U.S. Supreme Court, in Cigna Corp. v. Amara, opened the door to allowing claimants to seek monetary relief through equitable remedies in ERISA cases. With a recent ruling, the 9th U.S. Circuit Court of Appeals has expanded the available equitable remedies and set forth a road map for claimants when asserting the equitable remedies of reformation, equitable estoppel and surcharge.

Following the Supreme Court’s 1985 decision in Massachusetts Mutual Life Insurance Co. v. Russell, courts across the country grappled with the extent to which equitable remedies are available under ERISA. While equitable remedies were always technically available to ERISA claimants through Section 502(a)(3)(B), which allows an ERISA claimant “to obtain other appropriate equitable relief,” such relief was only available in some circuits, and even then only under “extraordinary circumstances.” Prior to Amara, the lower courts interpreted the Supreme Court’s 1993 ruling in Mertens v. Hewitt Assocs. as precluding the recovery of any monetary relief under Section 502(a)(3) because monetary relief was not considered to be equitable relief.

However, following Amara, courts expanded the availability of equitable remedies. Consistent with that trend, recently, the 9th Circuit withdrew an earlier decision denying the availability of the equitable remedy of surcharge in ERISA cases, and issued a new ruling consistent with the holdings of other circuit courts. The new ruling, Gabriel v. Alaska Electrical Pension Fund, 2014 DJDAR 16590 (9th Cir. 2014), is much more favorable to ERISA claimants and clarifies that surcharge, a form of equitable relief, is available to claimants under ERISA Section 502(a)(3).

While the 9th Circuit ruled that the district court was correct in holding that the plaintiff was not entitled to the payment of the pension funds he sought because his rights to those funds never vested, it also remanded one aspect of the case to the district court, but virtually instructed the lower court to deny that claim. However, the ruling is important because, by providing the equitable remedy of surcharge to ERISA claimants, the 9th Circuit aligned itself with the 4th, 5th, 7th and 8th Circuits in expanding the rights of ERISA claimants.

In the ruling, the 9th Circuit explained that Amara clarified that because ERISA Section 502(a)(3) allows a claimant to seek “appropriate equitable relief,” those remedies traditionally viewed as equitable were available.

For example, a claim of “appropriate equitable relief” may include “the reformation of the terms of the plan, in order to remedy the false or misleading information” provided by a plan fiduciary. The court explained:

“A plaintiff may obtain reformation based on mistake in two circumstances: ‘if there is evidence that a mistake of fact or law affected the terms of [a trust] instrument and if there is evidence of the settlor’s true intent’; or (2) ‘if both parties [to a contract] were mistaken about the content or effect of the contract’ and the contract must be reformed ‘to capture the terms upon which the parties had a meeting of the minds.’ Under a fraud theory, a plaintiff may obtain reformation when either (1) ‘[a trust] was procured by wrongful conduct, such as undue influence, duress, or fraud,’ or (2) a ‘party’s assent [to a contract] was induced by the other party’s misrepresentations as to the terms or effect of the contract’ and he “was justified in relying on the other party’s misrepresentations.” (Internal citations omitted).

However, while the Gabriel court reiterated the availability of the equitable remedy of reformation in ERISA cases, the court also clarified that the plan documents themselves must actually contain an error for reformation to be properly applied. It is not enough that the administrative record contains misinformation about the plan. The mistake must be in the plan itself, not in its administration. Absent an actual mistake in the plan documents, reformation is likely not available.

Next, the 9th Circuit held that equitable estoppel is another form of equitable relief available under ERISA. With respect to equitable estoppel, a fiduciary is held to what it promised and the claimant is entitled to the benefit consistent with that promise. However, in ERISA cases, enforcing equitable estoppel is not as simple as demonstrating that a promise for certain benefits was made; other conditions apply. As with a claim for reformation, the 9th Circuit explained that “a federal equitable estoppel claim in the ERISA context [cannot] contradict written plan provisions.”

This principle is consistent with the primacy that plan documents hold in ERISA cases. Given the important role that plan documents play in ERISA, the Court stated:

“Accordingly, a plaintiff may not bring an equitable estoppel claim that ‘would result in a payment of benefits that would be inconsistent with the written plan,’ or would, as a practical matter, result in an amendment or modification of a plan, because such a result ‘would contradict the writing and amendment requirements of 29 U.S.C. [Sections] 1102(a)(1) and (b)(3).’ … For the same reason, ‘oral agreements or modifications cannot be used to contradict or supersede the written terms of an ERISA plan.’” (Internal citations omitted).

However, the court did explain there was a difference “between oral statements that contradict or supersede the terms of an ERISA plan,” which are not enforceable, and “oral interpretations of a plan’s provisions that are not contrary to the plan’s written provisions,” and could be enforced if they offer interpretations of ambiguous plan provisions.

In addition, the court explained that to meet traditional equitable estoppel requirements, an ERISA claimant must demonstrate: “(1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan.” (Internal quotations and citations omitted.)

Finally, regarding the equitable remedy of surcharge, in which the claimant is placed in the position he or she would have been in but for the fiduciary’s breach of duty, the 9th Circuit reversed its previous, now-withdrawn, decision and noted that Amara allows a claimant to obtain surcharge relief. The 9th Circuit explained that to prevail on a surcharge claim, consistent with Amara, the claimant must establish a breach of fiduciary duty that caused his harm and is not necessarily required to show detrimental reliance. The court held:

“‘[A] plan participant or beneficiary must show that the violation injured him or her,’ but ‘need only show harm and causation,’ not detrimental reliance … [S]urcharge may be an appropriate form of equitable relief to redress losses of value or lost profits to the trust estate and to require a fiduciary to disgorge profits from unjust enrichment.”

The court then remanded the case to the district court to determine whether the surcharge remedy is “appropriate equitable relief” as it pertained to the plaintiff.

As Gabriel demonstrates, courts are using Amara to expand the ability of plan participants and beneficiaries to bring claims for equitable relief under ERISA, even to obtain monetary relief, not previously available to them.By confirming that surcharge is an available equitable remedy in ERISA cases, and providing a road map for obtaining monetary relief through reformation, equitable estoppel, and most especially surcharge, the 9th Circuit issued another plaintiff-friendly ruling.

Ninth Circuit Expands the Availability of Equitable Remedies in ERISA Cases, Approving Surcharge as a Viable Remedy

Since the Supreme Court’s decision in Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985), the courts have grappled with the issue of the extent to which equitable remedies are available under the Employee Retirement Income Security Act (“ERISA”). One of the most interesting and beneficial for plan participants is the issue of the equitable remedy of surcharge under ERISA. Recently, the Ninth Circuit withdrew an earlier decision regarding the availability of the equitable remedy of surcharge in ERISA, and issued a new ruling consistent with the holdings of other Circuit courts. The new ruling, Gabriel v. Alaska Electrical Pension Fund, 2014 DJDAR 16590 (9th Cir. 2014), is much more favorable to ERISA claimants and makes clear that surcharge, a form of equitable relief, is available to ERISA claimants under 29 U.S.C. section 1132(a)(3). Further, the Court also set forth the requirements that a claimant must meet to qualify for other forms of equitable relief, including equitable estoppel and reformation.

The specific facts of the Gabriel matter are unimportant, and ultimately the Ninth Circuit ruled that the district court was correct in holding that the plaintiff was not entitled to the payment of the pension funds that he sought because his rights to those funds never vested. The Ninth Circuit also remanded one aspect of the case to the District Court, but virtually instructed the lower court to deny that claim as well. However, the ruling is important because, by making the equitable remedy of surcharge available to ERISA claimants, the Ninth Circuit aligned itself with the Fourth, Fifth, Seventh and Eighth Circuits in expanding the rights of ERISA claimants.

In the ruling, the Ninth Circuit explained that in Cigna Corp. v. Amara, 131 S. Ct. 1866 (2011), the United States Supreme Court made it clear that because ERISA section 1132(a)(3) allows a claimant to seek “appropriate equitable relief,” those remedies traditionally viewed as equitable were available.

Thus, for example, a claim of “appropriate equitable relief” may include “the reformation of the terms of the plan, in order to remedy the false or misleading information” provided by a plan fiduciary. The Ninth Circuit then explained:

A plaintiff may obtain reformation based on mistake in two circumstances: “if there is evidence that a mistake of fact or law affected the terms of [a trust] instrument and if there is evidence of the settlor’s true intent”; or (2) “if both parties [to a contract] were mistaken about the content or effect of the contract” and the contract must be reformed “to capture the terms upon which the parties had a meeting of the minds.” Skinner, 673 F.3d at 1166. Under a fraud theory, a plaintiff may obtain reformation when either (1) “[a trust] was procured by wrongful conduct, such as undue influence, duress, or fraud,” or (2) a “party’s assent [to a contract] was induced by the other party’s misrepresentations as to the terms or effect of the contract” and he “was justified in relying on the other party’s misrepresentations.” Id.

Next, the Ninth Circuit explained that equitable estoppel is another form of equitable relief available to ERISA claimants. Under the remedy of equitable estoppel, a fiduciary is held to what it promised and the claimant is entitled to the benefit consistent with that promise. However, in ERISA cases, enforcing equitable estoppel is not as simple as demonstrating that a promise for certain benefits were made; other conditions apply. For example, “a federal equitable estoppel claim in the ERISA context [cannot] contradict written plan provisions.”

Accordingly, a plaintiff may not bring an equitable estoppel claim that “would result in a payment of benefits that would be inconsistent with the written plan,” or would, as a practical matter, result in an amendment or modification of a plan, because such a result “would contradict the writing and amendment requirements of 29 U.S.C. §§ 1102(a)(1) and (b)(3).”

…

For the same reason, “oral agreements or modifications cannot be used to contradict or supersede the written terms of an ERISA plan.” (Citations omitted.)

In addition, the court explained that in order to meet the traditional equitable estoppel requirements, the ERISA claimant must also demonstrate “(1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan.” (Internal quotations and citations omitted.)

Finally, with respect to the equitable remedy of surcharge, an equitable remedy in which the claimant is placed in the position he or she would have been in but for the fiduciary’s breach of duty, the Ninth Court reversed its previous, now-withdrawn, decision and noted that Amara allows a claimant to obtain relief by surcharge. The Ninth Circuit explained that in order to prevail on a claim surcharge remedy, after Amara, the claimant is not required to show detrimental reliance, only that the plan or claim fiduciary breached its fiduciary duty owed to the injured claimant. In other words, all that is needed is harm and causation.

While the plaintiff in Gabriel may not ultimately obtain the benefits he was seeking, this was another plaintiff-friendly ruling from the Ninth Circuit.

Echague v. Met Life: Equitable Surcharge is an Available Remedy Against Unresponsive Plan Administrators Under ERISA

The Employee Retirement Income Security Act of 1974 (“ERISA”) seeks to protect participants in employer-sponsored plans, but lack of adequate communication and transparency is an often an unfortunate byproduct of the insurance industry. The California district court shed light on this issue in Echague v. Metro. Life Ins. Co., 2014 U.S. Dist. LEXIS 68642 (N.D. Cal. May 19, 2014) by holding an insurer breaches its fiduciary duty when providing insufficient responses and the insured may be entitled to equitable surcharge. Echague is highly beneficial to insureds and beneficiaries, as it warns plan fiduciaries (such as insurers and plan administrators/employers) to think twice before ignoring requests for information, giving incorrect information, or neglecting to provide updates regarding the policies they administer, as their inactions or providing of incorrect information about the plan may open them up to equitable remedies such as equitable surcharge which would allow plan participants to recover the full value of the plan benefits in dispute.

In Echague, Carol Echague (“Mrs. Echague”) opted for a basic life insurance policy and a supplemental life insurance policy worth a total of $440,000 through her employer, Pacific Coast Bankers’ Bank (“PCBB”). The policies were issued as part of a cafeteria-type plan by TriNet Group, Inc. (“TriNet”), the plan administrator and Metropolitan Life Insurance Company (“MetLife”), the claims administrator. In January 2011, Mrs. Echague was diagnosed with breast cancer and took medical leave. Mrs. Echague sent TriNet an inquiry stating she did not want her policies to lapse, inquired which policies she needed to pay on her own, and where to send the premium payments. TriNet resent two confusing form letters which did not address that the policies were in danger of lapsing. Following Carol Echague’s death, TriNet notified her husband (“Mr. Echague”), that it submitted a life insurance claim on his behalf to MetLife. This was the first time TriNet informed the Echagues that MetLife was the claims administrator. However, the life insurance policies lapsed due to nonpayment of premiums, and MetLife denied the claim. MetLife also denied Mr. Echague’s appeal, which argued neither he nor his wife ever received notice that the policies were at risk of terminating, or that PCBB ceased premium payments. Subsequently, Mr. Echague sued MetLife, TriNet and PCBB, for benefits under 29 USC section 1132(a)(1)(B) and equitable relief for breach of fiduciary duty under 29 USC section 1132(a)(3).

The court granted summary judgment for TriNet, PCBB and MetLife as to Mr. Echague’s first claim for reinstatement of the life insurance benefits under section 1132(a)(1)(B), holding the denial was proper. Here, MetLife did not act with a conflict of interest in denying Mr. Echague’s claim. The only information MetLife needed to issue a decision on the claim was whether premium payments were made to continue the policy, and proof of Mrs. Echague’s death. Here, MetLife already had this information and accordingly, did not need to conduct an investigation or state with specificity what additional information it needed. Finally, TriNet and PCBB were not proper defendants, as MetLife had sole authority to issue denials on the life insurance claims.

However, the court held Mr. Echague presented a different theory under section 1132(a)(3) for breach of fiduciary duty and thus the claim survived. The court explained Mr. Echague’s (a)(1)(B) claim was directed at MetLife for its failure to pay benefits, while his section 1132(a)(3) claim was primarily directed at TriNet for its failure to provide adequate notice and act in a fiduciary manner. TriNet cannot escape liability by claiming MetLife had discretion for claims determination, because TriNet retained responsibility for interpreting the Plan, applying the terms and administering the Plan. As such, TriNet had a duty to deal fairly and honestly with fiduciaries under ERISA by providing complete, thorough and accurate information. Prior to Ms. Echague’s death, the Echagues sent several inquiries to TriNet requesting information on her disability and supplemental policies. TriNet responded by sending form letters that did not provide information relating to Ms. Echague’s life insurance policies. The letters pointed her to an overarching cafeteria plan, a Summary Plan Description which did not provide answers to her questions, and a non-existent employee handbook. TriNet failed to refer the Echagues to the Certificate of Insurance, the only document which describes how to convert or continue life insurance coverage, and explain when the premiums for the policies would end. Therefore, TriNet breached its fiduciary duties because its response failed to provide complete and accurate information to the claimant’s specific questions. Accordingly, the court granted Mr. Echague the face value of the policies under the doctrine of equitable surcharge.

Echague is a clear win for insureds in several ways. First, Echague clarifies that even if an insurer denies a claim on a reasonable basis, insureds may assert breach of fiduciary duty claims. Secondly, the district decision expanded a plan fiduciary’s duty to provide insureds with complete and accurate policy/plan information. The court indicates that insurers must provide specific answers when asked specific questions, and implies a general response referring an insured to a number of documents may be insufficient. In addition, the insurer must provide specific answers even when an insured asks a general question—such as providing Ms. Echague with information pertaining to her life policies when her questions inquired as to all insurance policies. Finally, this court allowed insureds to sue simultaneously for benefits and for breach of fiduciary duty where these claims request alternate relief, distinguishing cases that held to the contrary.

Rochow v. LINA: A Game-Changer in ERISA Disability Benefits Litigation

While this blog often discusses disability, life and health insurance/employee benefit decisions under the Employee Retirement Income Security Act of 1974 (“ERISA “), we rarely discuss federal circuit court of appeal decisions from outside the Ninth Circuit Court of Appeals (which governs California). We are making an exception here, as a recent case from the Sixth Circuit Court of Appeals really caught our attention. The case is Rochow v. Life Insurance Company of North America, __ F.3d ___ (6th Cir. December 6, 2013). It is a “game-changer” in the world of ERISA disability, life and health insurance/employee benefit litigation, and could fundamentally change the way in which ERISA remedies are discussed and how these cases are litigated. To say this is a “plaintiff friendly” case is probably to understate it.

The case otherwise involved a typical denial of disability insurance benefits matter under ERISA in which the amount of benefits owed was determined to be $910,629. Despite the large award, that was not actually the interesting part of the case. The much more interesting part of the case is the court’s ruling affirming an almost $3.8 million disgorgement of profits award.

Daniel Rochow sued for disability benefits under 29 U.S.C. section 1132 (a)(1)(B) of ERISA and also sought equitable accounting and disgorgement of profits as “appropriate equitable relief” under section under 29 U.S.C. section 1132(a)(3). The district court determined that Life Insurance Company of North America’s (LINA) benefit determination had been arbitrary and capricious, and the Sixth Circuit affirmed that decision. After the case was remanded to the district court, Rochow sought an accounting and disgorgement of profits under 29 U.S.C. section 1132(a)(3). The district court applied a return-on-equity (“ROE”) analysis to the disgorgement claim, and awarded an additional $3.8 million in disgorged profits against LINA.

LINA appealed the second district court decision as well, but in a 2-to-1 decision, the Sixth Circuit again affirmed the district court. The court addressed and upheld Rochow’s argument that ERISA allows separate claims for withheld benefits under 29 U.S.C. section 1132(a)(1)(B) and breach of fiduciary duty claims under 29 U.S.C. section 1132(a)(3). The majority held that because Rochow had sought the disgorgement remedy as a separate claim of relief, disgorgement was an appropriate remedy for the arbitrary and capricious benefit denial. This remedy was based on LINA’s ill-obtained earnings on the amount it did not pay Rochow but should have paid him. The court explained that “disgorgement does not result in double compensation, nor does it represent punishment.

The court rejected LINA’s argument that allowing Rochow to maintain a breach of fiduciary duty claim based on a denial of benefits would frustrate ERISA’s goal of providing an inexpensive and expeditious dispute resolution process, by explaining that “ERISA also has a goal of ensuring that plan fiduciaries act solely in the interest of the participants and for the exclusive purpose of providing benefits to their participants.” The majority also affirmed the district court’s application of a ROE method of calculating the disgorgement claim, rather than LINA’s analysis that equated disgorgement of profits to an award of prejudgment interest on the withheld benefits. The court, quoting the Ninth Circuit’s phraseology that the fundamental tenet of disgorgement is “if you take my money and make money with it, your profit belongs to me,” determined that the rationale for the more generous disgorgement award was the fact that LINA did not retain the unpaid benefits in a segregated account, but rather retained the money in its general assets.

The dissent echoed LINA’s positions, viewing the majority’s holding as shortsighted. It criticized the majority decision as “willfully blind to the negative repercussions that undoubtedly will ensue in ERISA benefits litigation,” with the dissent also stating:

Furthermore, disgorgement under the circumstances of this case fundamentally alters how denied disability-benefits claims are litigated, forcing district courts to wrestle with complex calculations of profits and raising the specter that any claimant who was arbitrarily and capriciously denied benefits would have a viable claim for disgorgement.

We expect to see a request for reconsideration and/or rehearing en banc. Although we would not be surprised if the decision survives circuit review, LINA will almost certainly seek relief in the United States Supreme Court as this decision has too many implications for LINA to let this ground-breaking decision remain good law. There can be little question that in the short term, this case will substantially alter ERISA litigation. As for this firm, we will attempt to use this decision to assist our plan participant/beneficiary clients, including amending some of our existing complaints to expand the relief we are requesting to include disgorgement claims. We look forward to seeing how this all unfolds. It will be very interesting for sure.

Recovery of Overpayments Under ERISA

Keith Parker, an excellent mediator who specializes in mediating ERISA matters, authored the following article on “Recovery of Overpayments Under ERISA” We at the McKennon Law Group PC are happy to recommend this outstanding article for your reading. We include the entire article below with permission from Mr. Parker.

Section 1132(a)(3)(B) of ERISA authorizes participants, beneficiaries and/or fiduciaries to bring civil actions seeking “appropriate equitable relief” to enforce the provisions of an ERISA plan. Just what constitutes “appropriate equitable relief” has challenged courts and practitioners, in large part because the Supreme Court has interpreted that language to incorporate the “archaic” (Justice Ginsburg’s word) and “obsolete” (Justice Steven’s word) distinction between relief available in equity and that available in law at the time of the so-called divided bench. While most members of the bar (academics and certain members of the Supreme Court excepted) have no experience with, or interest in, the distinction in this day of the unified bench, the distinction is part of the Federal common law of ERISA and, so, must be considered when dealing with claims for equitable relief under ERISA.

The Ninth Circuit recently considered whether an action by a plan fiduciary to recover an overpayment of disability benefits resulting from an award of Social Security Disability Income (“SSDI”) benefits sought “appropriate equitable relief” under ERISA. Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012). The facts presented were typical of those often seen in disability cases: Bilyeu began receiving benefits under a long-term disability plan which provided that her benefits would be reduced by other income, including SSDI benefits, and that permitted the plan fiduciary to immediately reduce her benefits by an estimate of her potential SSDI benefits. However, the plan fiduciary agreed not to reduce Bilyeu’s benefits when she agreed in writing to repay any overpayment in plan benefits that might result if she received an award of SSDI benefits. The plan fiduciary subsequently terminated Bilyeu’s plan benefits; thereafter Bilyeu received an award of SSDI benefits resulting in an overpayment which she refused to repay. When Bilyeu brought an action under ERISA for improper termination of her benefits, the plan fiduciary filed a counterclaim under Section 1132(a)(3)(B) to recover the amount of the overpayment. Id. at 1086-88, 1090-91.

The Ninth Circuit relied on two Supreme Court decisions – Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2008) and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) – interpreting Section 1132(a)(3)(B) to identify the elements necessary to state a claim for “appropriate equitable relief” under ERISA. In both those cases the plan participants suffered injuries in automobile accidents and their group medical plans paid for the participants’ subsequent medical care. In both cases the participants settled actions against third-parties responsible for the accidents and their group medical plans then brought Section 1132(a)(3)(B) actions against the participants seeking to recover the amounts paid for their medical care pursuant to provisions in the plans requiring participants to reimburse the plans from amounts recovered from third-parties responsible for their injuries. Sereboff, 547 U.S. at 359-60; Great-West, 534 U.S. at 207-09. The difference in the cases arose from the manner in which the participants had handled the proceeds of the settlements:

In Great-West, the participant carefully structured the settlement such that the proceeds never came into her possession, but rather were placed directly into a special needs trust and her attorney’s trust account. The Supreme Court held that the plan’s claim was not one typically available in equity because the plan had failed to identify a specific fund in the possession of the participant to which an equitable lien attached; the Supreme Court characterized the plan’s claim as one seeking a judgment payable from the participant’s general assets, a garden variety claim at law. Great-West, 534 U.S. at 207-08, 211-14. In Sereboff, on the other hand, the participants took possession of the settlement proceeds and, when the plan demanded reimbursement of amounts paid on their behalf, the participants agreed to set aside a portion of the settlement equal to the amount at issue in a separate investment account. On these facts the Supreme Court held that the plan’s claim was one typically available in equity because the plan sought to recover a specific fund in the possession of the participants to which an equitable lien attached. Sereboff, 547 U.S. at 362-66.

The Ninth Circuit identified three elements necessary to state a claim for “appropriate equitable relief” under ERISA in this context: (1) A promise by the participant to reimburse the disability plan for excess benefits paid upon the receipt of other income such as SSDI benefits; (2) the promise must identify a specific fund, distinct from the participant’s general assets, from which the plan will be reimbursed; and (3) the specific fund must be in the possession of the participant. Bilyeu, 683 F.3d at 1092-93. The plan fiduciary’s claim in Bilyeu met the first element, but not the second and third elements:

At the outset, the Ninth Circuit expressed concern that the specific fund identified by the plan fiduciary – the overpaid portion of the periodic disability benefits paid to the participant – was not, in fact, a distinct or separate fund, but rather was an undifferentiated component of a larger fund – the aggregate disability benefits paid to the participant. Id. at 1093-94. Although the Ninth Circuit did not fully develop its position, its concern seems consistent with the reasoning of the Supreme Court: If, as seems likely, the disability benefits were comingled with the general assets of the participant upon receipt, the plan fiduciary’s claim was essentially one for a judgment for a portion of the general assets of the participant, a quintessential claim at law.

A more compelling argument (in my view) that the plan fiduciary’s claim in Bilyeu failed to meet the specific fund element is that at the time the periodic disability payments were received by the participant, she did not (and could not) know whether an overpayment would occur and, if so, the amount of the overpayment because SSDI benefits had not been awarded. In other words, when the periodic disability benefits were received and comingled with the general assets of the participant, no specific portion of those benefits could be identified as subject to an equitable lien.

The Ninth Circuit did not, however, have to make a definitive ruling on the second element because it found that the plan fiduciary’s claim clearly failed to meet third element – the participant had spent her disability benefits long before she received the SSDI benefits and the plan fiduciary demanded reimbursement of the overpayment and, so, no longer had possession of the specific fund. That being the case, the Ninth Circuit concluded that the plan fiduciary was simply seeking a judgment payable from the general assets of the participant – a claim at law. In so holding, the Ninth Circuit acknowledged contrary precedent from other circuits. Id.at 1094. Review of those cases, however, suggests that the Ninth Circuit’s decision more closely reflects the reasoning of the Supreme Court:

In Funk v. Cigna Group Ins., 648 F.3d 182 (3d Cir. 2011), for example, the Third Circuit held that an equitable lien by agreement attaches to the “specific fund” as soon as it is received by the participant. At that moment, according to the Third Circuit, the participant becomes a constructive trustee of the fund and may be compelled in equity to repay it even if he has spent or otherwise converted the fund. Id. at 194-95. The flaw in the Third Circuit’s analysis is that the “specific fund” it identified as being received by the participant consisted of the SSDI benefits. As the Ninth Circuit correctly observed, the Social Security Act prohibits recipients from assigning SSDI benefits or creditors from attaching liens to such benefits. Bilyeu, 683 F.3d at 1093-94. And, as discussed above, when the disability benefits (as opposed to the SSDI benefits) were received by the participant, no overpayment existed and, so, no equitable lien could attach to any specific portion of those benefits.

Likewise in Cusson v. Liberty Life Assurance Co., 592 F.3d 215 (1st Cir. 2010), the First Circuit concluded that the reimbursement agreement targeted “specific funds for recovery” and “put [the participant] on notice” that she would be required to repay the amount that she “might get from Social Security.” Id. at 231. The problem, however, remains the same – while the participant was receiving her disability benefits, the amount of a potential overpayment, if any, was entirely speculative and, so, no specific fund existed to which an equitable lien attached. These decisions, and others cited by the Ninth Circuit, while perhaps reaching an equitable result – after all, the participant did agree to reimburse any overpayments resulting from her receipt of SSDI benefits – are not consistent with ERISA because the plan fiduciaries were not seeking relief typically available in equity.

In sum, the Ninth Circuit held that the plan fiduciary had no claim under ERISA to recover the overpayment. And (although the Ninth Circuit did not reach the issue) because the plan fiduciary’s state law claims were likely preempted by ERISA, the plan fiduciary was left without a remedy to recover the overpayment. This result is not surprising in light of similar results under ERISA in far more compelling circumstances. See, e.g., Bast v. Prudential Ins. Co., 150 F.3d 1003 (9th Cir. 1998)(no remedy for participant in ERISA medical plan for delays in approval of potentially life saving treatment, allegedly resulting in her death).

Is the lack of a remedy to recover overpayments a cause for concern? After all, the typical group disability plan gives the plan fiduciary the authority to reduce a participant’s benefits by an estimate of potential SSDI benefits, and the lack of a remedy to recover overpayments might cause plan fiduciaries to stop offering participants the option of signing a reimbursement agreement. If such a practice became widespread, participants would certainly suffer as they would not have access to their full disability benefits for the period necessary (often lengthy) to receive a final decision on an award of SSDI benefits.

Another consideration, however, is likely (in my view) to limit the frequency that plan fiduciaries elect to reduce disability benefits by an estimate of potential SSDI benefits. Plan fiduciaries are, after all, fiduciaries. As such, before making a decision to offset an estimate of SSDI benefits, plan fiduciaries presumably will be required to engage in some analysis of whether the participant is, in fact, eligible for SSDI benefits. Such an analysis would require plan fiduciaries to assess whether the participant was disabled under Social Security Act’s broad any occupation standard. Concluding that a participant is likely entitled to SSDI benefits arguably would limit the plan fiduciary’s flexibility to reach a contrary any occupation decision under the disability plan. (Plan fiduciaries currently avoid this predicament by requiring participants to apply for SSDI benefits (and, often times, providing representation to do so), but leaving the actual determination on the merits to the Social Security Administration.) As a result, plan fiduciaries may well decide to accept the risk of the occasional unrecoverable overpayment in lieu of reducing their flexibility to conclude that a participant is not disabled under the any occupation standard.

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