Your ERISA Watch - Sixth Circuit Ruling

Your ERISA Watch

Sixth Circuit Rules That Employers Act in a Fiduciary Capacity When They Mishandle Premium Payments for Employee Benefit Plans

Chelf v. Prudential Ins. Co. of Am., No. 20-6097, __ F.4th __, 2022 WL 1090168 (6th Cir. Apr. 12, 2022) (Before Circuit Judges Moore, Clay, and Stranch)

Elmer Chelf, a Wal-Mart employee, passed away while on disability leave. His wife, plaintiff Ruth Chelf, submitted a claim under Wal-Mart’s basic and optional life insurance employee benefit plans. The plan’s insurer, defendant Prudential Insurance Company of America, approved Ms. Chelf’s claim for basic life insurance. However, it denied her claim for optional life insurance benefits on the ground that Mr. Chelf’s life insurance coverage had terminated prior to his death.

After an unsuccessful appeal, Ms. Chelf filed this action against Wal-Mart and Prudential. After losing a partial motion to dismiss, Prudential settled with Ms. Chelf, leaving only Wal-Mart in the litigation.

Ms. Chelf alleged that Wal-Mart breached its fiduciary duty under 29 U.S.C. § 1132(a)(3) by mishandling his coverage under the optional life insurance plan. Specifically, Ms. Chelf argued that Wal-Mart did not inform Mr. Chelf of his right to convert his optional life insurance, did not communicate with him regarding the payment of premiums or the alleged termination of his insurance, and failed to apply his unpaid time off to cover the cost of the premiums while he was on disability.

Wal-Mart filed a motion to dismiss, which the district court granted. The district court ruled that Ms. Chelf failed to state a claim because Wal-Mart’s handling of premiums fell under an administrative, not fiduciary, function, and that Wal-Mart had no obligation under ERISA to provide notice of conversion rights outside of the plan documents. Ms. Chelf appealed this decision to the Sixth Circuit.

The Sixth Circuit separated Ms. Chelf’s allegations into two categories: allegations of “mishandling of plan assets,” and allegations of “failure to disclose.” Tackling the first category, the court noted that the district court relied on an ERISA regulation, 29 C.F.R. § 2509.75-8 (D-2), which explains that certain “person[s] who perform[] purely ministerial functions” for an employee benefit plan are not fiduciaries. However, the Sixth Circuit found that this did not apply to Wal-Mart because Wal-Mart “indisputably exercised control over the Plan’s assets when it handled Mr. Chelf’s premiums, exercised control over the disposition of the Plan’s assets, and had discretionary authority over the administration of the Plan.” As a result, the Sixth Circuit found that Wal-Mart was “acting in a fiduciary capacity” and not a “purely ministerial” capacity by mishandling Mr. Chelf’s premium payments, and thus Ms. Chelf’s allegations “suffice to state a claim for breach of fiduciary duty[.]”

Ms. Chelf had less luck with her claims regarding Wal-Mart’s alleged failure to disclose. The Sixth Circuit explained that in Sprague v. Gen. Motors Corp. it had only recognized a breach of fiduciary duty for failure to disclose information not expressly required to be disclosed by ERISA in three circumstances: “(1) an early retiree asks a plan provider about the possibility of the plan changing and receives a misleading or inaccurate answer or (2) a plan provider on its own initiative provides misleading or inaccurate information about the future of the plan or (3) ERISA or its implementing regulations required the employer to forecast the future and the employer failed to do so.”

The court ruled that none of the allegations in Ms. Chelf’s complaint fell into any of the three Sprague categories. It also rejected Ms. Chelf’s argument that she had properly alleged that the benefit plan imposed an affirmative duty on Wal-Mart to disclose certain information. The court noted that the complaint “did not allege that the terms of the life insurance policy required Wal-Mart to provide Mr. Chelf with notice of his right to convert. Nor did she allege that the Plan or [summary plan description] had any such requirement that would have given rise to such an independent duty.” As a result, the court affirmed the district court’s dismissal of the “failure to disclose” claims.

However, the court also noted that Ms. Chelf might be able to fix this problem by amending her complaint, although it left that issue for the district court to sort out on remand.

This case should serve as a warning to employers that they may be held liable if their employees lose coverage under their benefit plans due to a mishandling of premium payments. This only makes sense, as employees should be able to trust their employers to administer their benefit coverage properly and should have a remedy under ERISA when employers fail to do so.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Breach of Fiduciary Duty

Third Circuit

Miller v. Campbell Soup Co., No. 19-11397, 2022 WL 1093652 (D.N.J. Apr. 11, 2022) (Judge Robert B. Kugler). Plaintiff Sherry Miller commenced this suit disputing her pension calculation after defendant Campbell Soup Company Retirement & Pension Plan Administrative Committee made two written misrepresentations, one in 2003 and one in 2008, informing her she had accumulated more pension-eligible years than the plan ended up paying. In her complaint, Ms. Miller asserted claims for breach of fiduciary duty for misrepresentation and equitable estoppel under ERISA. Defendant moved to dismiss. Defendant argued that the letters misstating Ms. Miller’s years of eligibility could not constitute a breach of fiduciary duty because the calculation of benefits is ministerial. The court disagreed, emphasizing that “this lawsuit is not against a ‘person who performs purely ministerial functions.’ It is against the administrative committee of the Plan.” The committee, the court held, is a fiduciary and “blaming their recordkeeper for incorrect plan estimates does not change that fiduciary status.” Additionally, the court held that the misrepresentations were material and Ms. Miller had detrimentally relied on the misrepresentations when planning her retirement. Therefore, the court held that Ms. Miller stated a valid claim for breach of fiduciary duty. Finally, the two misrepresentations made over an “extended period of time” were an adequately extraordinary circumstance, according to the court, to state a claim for equitable estoppel. For these reasons, the court denied the motion to dismiss.

Wright v. Elton Corp., No. 17-286-JFB, 2022 WL 1091280 (D. Del. Apr. 12, 2022) (Judge Joseph F. Bataillon). In this order, the court ruled on a series of pre-trial motions in limine in this action involving ERISA violations and mismanagement of the Mary Chichester DuPont Clark Pension Trust. First, the court stated that it would allow remote testimony of witnesses during the trial “as long as there is the technical ability to do so.” In fact, plaintiff’s motion authorizing testimony from remote locations was the only motion granted by the court. Plaintiff’s other motion, requesting that the court exclude testimony of the third-party defendants’ expert witness regarding his commentary in the addendum of his report was denied without prejudice, as the court stated repeatedly throughout this order that it was “inclined to admit the evidence and determine its relevance later.” The court also denied the third-party defendants’ motions (1) to exclude the expert report and testimony of plaintiff’s expert, (2) objecting to appearing as witnesses at trial, and (3) to exclude evidence related to claims not pleaded. As to the latter of these motions, the court stated that the third-party defendants are aware that they are “employers, plan sponsors, administrators and fiduciaries…accountable under ERISA.” Two more motions requesting that the court preclude witnesses were also mooted given the court’s allowance of remote testimony. The order ended with the court stressing its view that “evidence that is relevant to the questions at the heart of this case, i.e., how the Plan has been administered, by whom, and whether any party has breached its fiduciary duties under ERISA, will be allowed.”

Ninth Circuit

Kong v. Trader Joe’s Co., No. 20-56415, __ F. App’x __, 2022 WL 1125667 (9th Cir. Apr. 15, 2022) (Before Circuit Judges Schroeder and Graber, and District Judge Stephen M. McNamee). In this brief decision, the Ninth Circuit reversed the district court’s pleading stage dismissal of the plaintiff retirement plan participants’ breach of fiduciary duty claims. The appeals court stated the lower court had erred by accepting the moving party’s explanations over the plausible allegations of the plaintiffs. Accepting the claims of the complaint as true, the Ninth Circuit articulated that plaintiffs plausibly alleged that the plan’s retail share classes were identical in all respects other than the extra fees to the available institutional share classes which the plan did not offer despite its large size. The court further ruled, “Taking all allegations as true, Defendants did not act with the purpose of defraying reasonable administrative expenses.” For this reason, the Ninth Circuit reversed and remanded.

Disability Benefit Claims

Fifth Circuit

Young v. Reliance Standard Life Ins. Co., No. 1:20-CV-739-LY-SH, 2022 WL 1105752 (W.D. Tex. Apr. 13, 2022) (Magistrate Judge Susan Hightower). Plaintiff Jason Thomas Young, a truck driver, was permanently disabled in a collision in 2019. Following the accident, Mr. Young submitted a claim for long-term disability benefits to Reliance Standard Life Insurance Company, which was approved. Reliance began paying Mr. Young $3,150.76 a month in disability benefits. However, after Mr. Young received a settlement from the third party responsible for the accident, Reliance began offsetting the disability benefits by the settlement amount, determining the settlement to be “Other Income Benefits” under the plan. Reliance reduced the monthly payments down to $587.86. Mr. Young, arguing that settlement of a third-party tort liability suit was not included in the Other Income Benefits listed under the plan, appealed the offset. After Reliance upheld its decision, Mr. Young commenced this suit. A mere eighteen days later, Reliance terminated the offset and refunded Mr. Young the money it had offset to date and requested Mr. Young dismiss his lawsuit. Mr. Young refused to do so. Reliance moved for summary judgment, arguing the reinstatement of benefits as well as a declaration by Reliance’s director promising not to offset any future benefit payments under the plan with tort settlement proceeds mooted Mr. Young’s claims for benefits and future benefits and related claims for declaratory and injunctive relief. The magistrate judge agreed, holding there is “no longer a live case or controversy between the parties,” and recommended that the motion for summary judgment be granted except with regard to awards of pre-judgment interest and attorney’s fees and costs. The magistrate judge held that Mr. Young is entitled to pre-judgment interest for the amounts that were withheld from him. Additionally, the magistrate judge stated that Mr. Young achieved “some success on the merits” and should thus be awarded attorney’s fees and costs.

Seventh Circuit

Ten Pas v. The Lincoln Nat’l Life Ins. Co., No. 20-1259, __ F. 4th __, 2022 WL 1074533 (7th Cir. Apr. 11, 2022) (Before Circuit Judges Sykes, Brennan, and Scudder). Plaintiff-appellee Harlan Ten Pas worked at an accounting firm until he was hospitalized from a series of cardiovascular events including a heart attack, an ischemic stroke, and brain bleeding secondary to the stroke over Labor Day weekend in 2015. Mr. Ten Pas now receives long-term disability benefits from defendant Lincoln. However, Mr. Ten Pas contests the amount of his monthly disability benefit. His policy calculates benefits based on 60% of an employee’s salary on the “Determination Date,” which is the last day worked prior to the date of the onset of the disability. Mr. Ten Pas received a substantial raise on September 1, 2014, a single day after he was hospitalized with the heart attack on August 31. Lincoln determined that Mr. Ten Pas’s determination date fell on August 31, the date of his heart attack. In the district court, Mr. Ten Pas was granted summary judgment. The district court agreed with Mr. Ten Pas that he was “Actively at Work” throughout Labor Day weekend as defined by the policy and that the appropriate determination date was September 2, the first business day after the heart attack. Lincoln National appealed, arguing that under the arbitrary and capricious review standard its application of the August 31 determination date was a reasonable reading of the plan language. The Seventh Circuit agreed with Lincoln. “Simply put, we see no role for the active-work definition in either of the constituent parts of the determination-date definition.” Accordingly, the appeals court concluded that the district judge erred in holding that it was arbitrary and capricious of Lincoln National to select August 31 as the determination date. Having so determined, the Seventh Circuit reversed and remanded with instructions to enter judgment in favor of Lincoln.

Discovery

Fifth Circuit

Sibley v. Citizens Bank & Tr. Co. of Marks, No. 3:20-CV-282-GHD-JMV, 2022 WL 1096854 (N.D. Miss. Apr. 12, 2022) (Magistrate Judge Jane M. Virden). Plaintiff Franklin Sibley initiated this action under ERISA Sections 502(a), 503, and 510. Mr. Sibley, whose retirement was accepted and about to commence, was sent a letter from the Citizens Bank and Trust Company of Marks’s Board of Directors stating that he had been terminated for cause. This occurred during a period of financial hardship for Citizens Bank. One day after the letter was sent to Mr. Sibley, the Board sent a report to the Federal Deposit Insurance Corporation (“FDIC”) detailing how the termination of Mr. Sibley and his pension benefits “provided another $1,049,633 of capital to the Bank.” Mr. Sibley moved for discovery. Mr. Sibley requested in his motion to depose defendants and board members, and to serve subpoenas for production of documents relating to the Board of Directors and their financial interests, the Bank, and the status reports sent to the FDIC. Defendants’ argument that discovery in ERISA cases should be limited to the administrative record was unpersuasive to the court, which held that “discovery regarding fiduciary duty claims under ERISA § 502(a)(3) should not be limited to the administrative record and should, instead, be governed by the general scope of discovery provided by Rule 26(b).” The court, therefore, granted the discovery motion in part, but limited the time frame of several of the document requests.

ERISA Preemption

Third Circuit

Reed v. Sossong, No. 3:20-35, 2022 WL 1063113 (W.D. Pa. Apr. 8, 2022) (Judge Stephanie L. Haines). Plaintiffs Daniel A. Reed and Amber Reed commenced this medical malpractice case against Dr. Alex Mark Sossong and the Dubois Regional Medical Center for negligence and loss of consortium after they improperly treated a hairline fracture of Mr. Reed’s right tibia, specifically by failing to administer or prescribe antibiotics, which led to sepsis and an amputation above the knee three weeks later. Defendants argued that the treatment they gave Mr. Reed was appropriate and that the infection and subsequent amputation were the result not of their care but of Mr. Reed being immunocompromised. A trial is set to commence shortly on April 25, 2022. Here, defendants moved for partial summary judgment seeking to preclude the Reeds “from recovering damages for past medical expenses in connection with a lien for medical bills paid by a private insurer.” Enter ERISA, or as defendants argued, the inapplicability of ERISA preemption. Defendants contended that the plaintiffs did not show that the ERISA-governed plan at issue is self-funded, which would exempt the plan from the requirements of a Pennsylvania state law, the Pennsylvania Medical Care Availability and Reduction of Error Act, which precludes the recovery of damages for past medical expenses that are covered by an insurer. The court expressed that the issue of preemption hinges on whether the “deemer clause” of ERISA is applicable. The court referred to FMC Corp. v. Holliday, 498 U.S. 52 (1990), in which the Supreme Court ruled “that the ‘deemer clause’ exempts self-funded plans under ERISA from state laws that ‘regulate insurance’ within the meaning of the savings clause.” The court concluded that the evidence indicated that the plan at issue is a fully-insured policy purchased by Mr. Reed’s employer. Accordingly, because the benefit plan is insured, it is subject to state laws that regulate insurance. Therefore, the court held that “ERISA does not supersede State law because the plan at issue is not an ERISA qualified self-funded plan.” For this reason, the court granted defendants’ partial summary judgment motion and held that plaintiffs are precluded from recovering damages for the past medical expenses which were covered by their insurer.

Pleading Issues & Procedure

First Circuit

Sanders v. Voya Fin., No. 2:22-cv-00084-JDL, 2022 WL 1090270 (D. Me. Apr. 12, 2022) (Magistrate Judge John C. Nivison). Plaintiff Craig Sanders filed this wrongful termination and ERISA Section 502(a)(1)(B) suit in forma pauperis against defendant Voya Financial. The magistrate judge in this order recommended that the court dismiss the complaint for failure to state a claim. According to the magistrate, Mr. Sanders did not “allege any facts to support any of the claims,” and his complaint was purely conclusory. Mr. Sanders’s ERISA claim for benefits was lacking in facts that “would allow the Court to conclude Plaintiff is entitled” to the ERISA benefits, or that violations of ERISA even occurred. Because Mr. Sanders did not describe the terms of his pension plan and did not allege facts suggesting he was entitled to additional disability benefits, the magistrate stated that he failed to state a plausible claim under ERISA.

Seventh Circuit

Thompson v. Majchrowicz, No. 1:21-cv-02238-TWP-MG, 2022 WL 1104933 (S.D. Ind. Apr. 13, 2022) (Judge Tanya Walton Pratt). Qualified Domestic Relations Order cases typically involve marital problems, but most aren’t as dramatic as this one. Here, pro se plaintiff Douglas Thompson is currently incarcerated, having been convicted of murdering his wife, Beverly Thompson. He initiated this suit after a QDRO order was granted in favor of Beverly Thompson’s daughters, defendants Cheryl Majchrowicz and Amy Bensema, on behalf of their mother’s estate, giving them 100% of Mr. Thompson’s pension from the Beer Industry Local Union No. 703. Defendants moved to dismiss the complaint. They argued that “the federal court lacks jurisdiction, Thompson has failed to state a claim upon which relief may be granted, there is no genuine issue of material fact, and Thompson’s claim is frivolous.” Defendants also sought Rule 11 sanctions. The court granted the motion to dismiss but denied the sanctions request. The court agreed with defendants that the Rooker-Feldman doctrine prohibits Mr. Thompson’s claims because his allegations are inextricably tangled with the state court QDRO order in which Mr. Thompson was the losing party. However, because Mr. Thompson has not “abused the judicial process with frivolous litigation,” the court held that an award of sanctions was not warranted.

Ninth Circuit

Trs. of the Operating Eng’rs Pension Tr. v. Smith-Emery Co., No. 2:19-cv-04058-CAS-AFMx, 2022 WL 1122832 (C.D. Cal. Apr. 11, 2022) (Judge Christina A. Snyder). The Trustees of the Operating Engineers Pension Trust brought suit alleging the Smith-Emery Company has failed to make required payments for union members it employs as required by collective bargaining agreements in violation of ERISA. Smith-Emery moved to appoint the assigned magistrate judge as special master pursuant to Federal Rule of Civil Procedure 53 to oversee and assess the Trustees’ audit and address any potential evidentiary issue raised by the parties. The Trustees opposed the motion, claiming that their auditor has conducted thousands of compliance audits and “no part of the Trustees’ audit process requires or would be aided by the appointment of a Special Master.” Instead, the Trustees argued that if Smith-Emery has disputes with the audit, even without appointment of a special master they will have avenues through the court to argue those disputes. The court agreed with the Trustees and found that a special master is unnecessary and inappropriate in this case. Accordingly, the court denied Smith-Emery’s motion.

Provider Claims

Ninth Circuit

Meridian Treatment Servs. v. United Behavioral Health, No. 19-cv-05721-JSW, 2022 WL 1105071 (N.D. Cal. Apr. 13, 2022) (Judge Jeffrey S. White). Plaintiffs are behavioral healthcare providers who treat substance use disorders and provide both inpatient and outpatient care to patients. Plaintiffs provided healthcare services to patients insured by United Behavioral Health under plans both governed by ERISA and not governed by ERISA. According to their complaint, plaintiffs allege that UBH’s guidelines used to make care determinations use “actuarial predictability rather than generally accepted standards of medical care…to determine medical necessity.” The providers claim UBH’s conduct is depriving them of reimbursement for services which are medically necessary and consistent with accepted standards of medical care. Plaintiffs asserted claims for violations of California’s Unfair Competition Law, breach of implied contract, breach of oral contract, intentional misrepresentation, negligent misrepresentation, concealment, intentional interference with prospective economic relations, promissory estoppel, and a RICO violation. UBH moved to dismiss. The court granted the motion to dismiss the state law claims as preempted by ERISA to the extent they arise out of denials of coverage of claims for patients covered by ERISA plans. The court also dismissed the RICO claims for lack of standing because plaintiffs could not demonstrate they suffered an injury by reason of UBH’s actions. The court also dismissed plaintiffs’ claim for intentional interference with prospective economic relations because they failed to show how the relationships, they had with their patients were disrupted by UBH. The fraud-based claims were also dismissed because the court held that plaintiffs had failed to comply with the heightened pleading standard of Federal Rule of Civil Procedure 9(b). Finally, the unfair competition law was dismissed in light of the recent Ninth Circuit ruling in Wit v. United Behavioral Health, No. 20-17363, __ F. App’x __, 2022 WL 850647 (9th Cir. Mar. 22, 2022). In all other respects, the motion to dismiss was denied.

Note from the Your ERISA Watch editors:

Your ERISA Watch is written and edited by Elizabeth Hopkins and Peter Sessions, with the assistance of Emily Hopkins. Each week our goal is to provide you with the benefit of the expertise of knowledgeable ERISA litigators who are on the frontline of benefit claim and fiduciary breach litigation. Although our firm represents plaintiffs, we strive to provide objective and balanced summaries, so they are informative for the widest possible audience.

We include recent cases that have been picked up by Westlaw or sent to us by one of our readers. If you have a decision you'd like to see included in Your ERISA Watch, please send it to Elizabeth Hopkins at ehopkins@kantorlaw.net.

If you have any colleagues who might want to receive this free newsletter, they can subscribe here.

And don't forget to check out the ERISA Watch podcast, which tells the true stories behind the cases. You can listen to the ERISA Watch podcast here.

Related Posts
  • New ERISA Watch Blog Announcement Read More
  • Courts Are Right To Reject Insurer ERISA Atty Fee Awards Read More
  • The State Of Article III Standing In ERISA Cases Read More
/