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ERISA Watch – Sixth Circuit Court of Appeals Holds That Exhaustion Is Not Required for Statutory Violations

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This week’s notable decision is Brundle v. Wilmington Trust N.A., No. 115CV1494LMBIDD, 2017 WL 979106 (E.D. Va. Mar. 13, 2017), where the court found that the defendant engaged in a prohibited transaction by failing to ensure that the Employee Stock Ownership Plan (“ESOP”) paid no more than adequate consideration for Constellis Group Inc. stock and overpaid $29,773,250.00 for the stock.  The recap below was prepared by ERISA Watch guest contributor, Gregory Porter of Bailey & Glasser LLP.  Mr. Porter represented Plaintiff Brundle and the ESOP in this matter.

Also noteworthy is the Sixth Circuit’s decision in Hitchcock v. Cumberland University 403(b) DC Plan, et al., No. 16-5942, 2017 WL 971790 (6th Cir. Mar. 14, 2017), where the court joined the Third, Fourth, Fifth, Ninth, Tenth, and D.C. Circuits in holding that there is no exhaustion requirement for ERISA claims alleging statutory violations.

And, if you’re exhausted after reading this week’s summaries, kick back and enjoy the most recent segment of the Law Is My Ass podcast, hosted by ERISA Watcher Joe Creitz of Creitz Serebin LLP.  In the last segment, he and comedian Sid Singh interview fellow ERISA Watcher and Class Action expert, Joe Barton of Block & Leviton LLP, about the state of class action litigation.  (Boo to H.R. 895)

Last but not least, a special shout out to Peter Stris and Radha Pathak of Stris & Maher LLP for receiving the 2017 CLAY award for their excellent advocacy in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan.  Keep up the great team work!

Brundle v. Wilmington Trust N.A. – by Greg Porter
Judge Brinkema of the Eastern District of Virginia held that Wilmington Trust failed to discharge its duties in good faith and caused an ESOP to overpay for a company by $30 million. The plaintiff/ESOP was represented by Bailey & Glasser LLP. McGuire Woods represented Wilmington Trust. The trial lasted approximately six days.

The case turned on Wilmington proving the ESOP transaction satisfied all exemptions. It failed on several elements, but the key question was: Did the ESOP pay no more than adequate consideration for the stock? “Adequate consideration” has two parts, good faith and fair market value. Good faith is the trustee’s independence and due diligence. Fair market value is the valuation report. The judge found material omissions of trustee due diligence and evidence of trustee bias and material errors in the valuation prepared by Stout Risius Ross (SRR).

Valuation: The judge identified several material flaws in SRR’s valuation. First, the valuation included a 10% control premium when the ESOP did not obtain control of the company. Essentially, the ESOP had few rights beyond those of any shareholder (controlling or not) and did not “control the company in fact” as required by Department of Labor regulation.  Second, because the ESOP did not obtain control, the court held that it should have received a discount for lack of control. This is very important because it means the court agreed that the inverse of control is lack of control. Thus, it is a material error not to account for lack of control where there is no control. Importantly, the overpayment for control and the lack of discount for no control are independent sources of damages. Third, the court rejected as unreliable the application of a beta factor in the discount factors. Beta, as used by SRR, is a measure of risk versus the S&P 500. A beta of 1 means the same risk as S&P 500. Below one means the company is less risky. A lower beta yields a higher price for the selling shareholders. SRR assigned a beta of .7—increasing the purchase price by several million dollars. Fourth, rounding up by millions of dollars to increase the price paid by the ESOP was an error. Finally, it was a mistake for SRR to accept management projections in light of several factors: management had financial incentives to juice numbers; projections several further years out than prior sets of projections; projections materially more rosy than several months earlier with no material change in business; and unexplained contradictions in projections.

Due Diligence: The court identified multiple material omissions by Wilmington in the conduct of its investigation and negotiation of the transaction. Wilmington failed to ask any questions about key valuation errors like those discussed above. It violated internal policies on reviewing transactions. Its fiduciary committee members did not review or barely reviewed key documents. Wilmington rushed through a $201 million transaction. It did not have a coherent negotiating strategy. It failed to consider an earlier valuation of the company at substantially lower value.

Independence: The court found a lot of evidence of conflicts and lack of independence. It noted that Wilmington maintained a list of ESOP referrals, on which the selling shareholders’ investment advisor, CSG, featured prominently. It commented on the close ties between players in the ESOP space. It found instances of back-channel communications between SRR and CSG, although they were on opposite sides of the deal.

Damages: On damages, the court adopted the prevailing view: for an ESOP stock purchase, the damages are the difference between the price paid and the actual value of the stock at the time of the transaction. The court found damages totaling $29.8 million from valuation errors on rounding, control premium, no discount for lack of control, and beta. It denied prejudgment interest, reasoning that because the ESOP only lasted seven months, the participants were not counting on the money for retirement. (Plaintiff does not agree with the holding on prejudgment interest. The proper question was whether the ESOP would have reasonably earned interest on the damages since they accrued.)

Below is Kantor & Kantor LLP’s summary of this past week’s notable ERISA decisions.

Breach of Fiduciary Duty

Fourth Circuit

Brundle v. Wilmington Trust N.A., No. 115CV1494LMBIDD, 2017 WL 979106 (E.D. Va. Mar. 13, 2017) (Judge Leonie M. Brinkema).  The court held that Wilmington is liable for violating § 1106(a)(1)(A), causing $29,773,250 in damage to the ESOP, but not liable for violating § 1106(a)(1)(B) or § 1106(b).

Eighth Circuit

Hugler v. Claxton, No. 4:15-CV-1946 CAS, 2017 WL 976941 (E.D. Mo. Mar. 14, 2017) (Judge Charles A. Shaw).  In this suit by the Secretary for breach of fiduciary duties, failure to forward employee elective deferrals to a 401(k) plan, and failure to forward payroll withholdings of insurance premiums for a group health plan, the court held that the Secretary is entitled to default judgment against Defendant for violations of ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A); ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B); ERISA § 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D); ERISA § 406(b)(1) and (2), 29 U.S.C. § 1106(b)(1) and (2); and ERISA § 403(c)(1), 29 U.S.C. § 1103(c)(1).

Ninth Circuit

Lorenz v. Safeway, Inc., No. 16-CV-04903-JST, 2017 WL 952883 (N.D. Cal. Mar. 13, 2017) (Judge Jon S. Tigar).  Plaintiff’s complaint plausibly suggest that Defendants acted imprudently in selecting and retaining JP Morgan target date funds, where Plaintiff alleges that these funds charged higher fees than comparable funds, had no meaningful record of performance so as to indicate that higher performance would offset this difference in fees, and was managed by a company affiliated with the Plan’s record-keeper and trustee.  The court declined to adopt an approach that would immunize an investment from scrutiny simply because its expense ratio fell within a certain range.  The court also declined to dismiss at this stage Plaintiff’s claim that Defendants breached their duty of prudence by entering into a revenue sharing arrangement with the Plan’s record-keepers.

Terraza v. Safeway Inc., No. 16-CV-03994-JST, 2017 WL 952896 (N.D. Cal. Mar. 13, 2017) (Judge Jon S. Tigar).  Plaintiff’s allegations plausibly suggest that the Safeway Defendants breached their duty of loyalty by allowing the Plan’s trustee to make Plan-related decisions that were not in the best interests of Plan participants.  But, Plaintiff failed to plausibly allege that Defendants breached their fiduciary duties with respect to disclosures about fees, expenses, and revenue sharing payments.  Plaintiff’s allegation that Defendants offered a disproportionate number of non-transparent investment options in the form of common trusts and separately managed accounts do not support her breach of fiduciary duty claim.  Plaintiff’s complaint plausibly suggests that Defendants acted imprudently in selecting and retaining the challenged investment options.

Class Actions

Ninth Circuit

Wit v. United Behavioral Health, No. 14-CV-02346-JCS, 2017 WL 930776 (N.D. Cal. Mar. 9, 2017) (Magistrate Judge Joseph C. Spero).  The court granted the motion to amend the class definitions.  It also ruled on the parties’ disagreement as to the form of notice to class members.

Disability Benefit Claims

Third Circuit

Davies v. First Reliance Standard Life Ins. Co., No. 1:15-CV-2348, 2017 WL 930604 (M.D. Pa. Mar. 9, 2017) (Judge John E. Jones III).  The court granted summary judgment to First Reliance because Plaintiff, who suffered from anxiety and depression, did not establish that it was arbitrary and capricious for First Reliance to determine that her physical conditions, including fibromyalgia, alone did not render her totally disabled from performing any occupation.

Fifth Circuit

Himel v. Deere & Co., No. CV 16-6712, 2017 WL 931292 (E.D. La. Mar. 9, 2017) (Judge Ivan L.R. Lemelle).  In this matter involving long term disability benefits, the court granted Defendant’s motion for summary judgment.  It found that the fact that Defendant failed to acknowledge the SSA award explicitly in its denial letters was not an abuse of discretion.  There was no evidence that the reviewing doctors acted in a biased way.  A plan administrator does not need to provide a claimant with a list of jobs for which it believes the claimant is qualified and capable.  The court did grant Plaintiff’s motion to supplement the administrative record with records he sent to the administrator after the appeal submission but before the final denial.

Sixth Circuit

Justice v. Reliance Standard Life Ins. Co., No. 2:15-CV-134, 2017 WL 1017641 (E.D. Tenn. Mar. 13, 2017) (Judge J. Ronnie Greer).  In this matter Reliance Standard paid long term disability benefits to Plaintiff for six years even though the plan only covered salaried employees, which he was not.  Plaintiff did pay premiums for the coverage when he was an employee.  Reliance Standard terminated benefits when it realized its mistake.  The court found that Plaintiff failed to show that the plan language was unambiguous, and therefore, he cannot recover under the theory of equitable estoppel.  Even if he could, Plaintiff failed to meet at least one of the estoppel requirements, that there is conduct or language amounting to a representation of a material fact.  The court overruled Plaintiff’s objections to the Magistrate Judge’s report and recommendation.

Blackwell v. Liberty Life Assurance Co. of Boston, No. 3:15-CV-376-DJH, 2017 WL 927239 (W.D. Ky. Mar. 8, 2017) (Judge David J. Hale).  The court granted Liberty Life’s motion for partial summary judgment on Plaintiff’s Section 1132(a)(3) claim since Plaintiff failed to allege a separate and distinct injury from the denial of long term disability benefits.  The court rejected Plaintiff’s argument that Liberty Life has failed to prove that Section 1132(a)(1)(B) is adequate to make Plaintiff whole and that discovery is necessary to determine whether Section 1132(a)(1)(B) provides an adequate remedy.

Tenth Circuit

Robison v. Reliance Standard Life Ins. Co., No. CIV-14-1262-D, 2017 WL 972126 (W.D. Okla. Mar. 10, 2017) (Timothy D. Degiusti).  Reliance Standard did not abuse its discretion in denying Plaintiff’s short and long term disability benefits where the record evidence shows that Plaintiff did not leave her job due to injury or disability, but that she was laid off from employment.

Discovery

Sixth Circuit

Blackwell v. Liberty Life Assurance Co. of Boston, No. 3:15-CV-376-DJH, 2017 WL 927239 (W.D. Ky. Mar. 8, 2017) (Judge David J. Hale).  The court overruled Liberty Life’s objections to the Magistrate Judge’s order regarding Plaintiff’s motion to compel discovery.  In his complaint, Plaintiff alleges that there is “an inherent and structural conflict of interest because any disability benefits provided to Mr. Blackwell are paid from Liberty’s assets.” He also alleged that “Liberty failed to provide him with a full and fair review.” These allegations are sufficient to permit discovery.  The court permitted depositions of Defendant’s employees, a corporate deposition, statistical data regarding third-party medical reviewers, Defendant’s affirmative defenses, and Liberty Life’s organizational structure of the entire claims and appeals units.

ERISA Preemption

Second Circuit

Chang v. Pfizer, Inc., No. 15-CV-8994 (KMK), 2017 WL 975975 (S.D.N.Y. Mar. 10, 2017) (Judge Kenneth M. Karas).  Plaintiff brought state law claims against Defendant for denial of short term disability benefits (not governed by ERISA).  She alleged that the denial caused her to be ineligible for long term disability benefits.  The court determined that Plaintiff’s request for damages calculated pursuant to the long term disability plan and her request for the ability to apply for LTD benefits satisfies the Davila test for complete preemption.  The court denied Plaintiff’s motion to remand and granted Defendant’s motion to dismiss.

Ninth Circuit

Lodi Mem’l Hosp. Ass’n, Inc. v. Tiger Lines, LLC, No. 215CV00319MCEKJN, 2017 WL 999458 (E.D. Cal. Mar. 15, 2017) (Judge Morrison C. England, Jr.).  This is a lawsuit by a hospital against an administrator of a self-insured medical plan.  The court found that Plaintiff’s SAC, which alleges breach of oral contract, implied-in-fact contract, and negligent misrepresentation for 56 incidents based on three representations made by Defendants’ agents, identified and adequately alleged independent grounds for purposes of surviving ERISA conflict preemption.

Heldt v. Guardian Life Ins. Co. of Am., No. 16-CV-00885-BAS-NLS, 2017 WL 980181 (S.D. Cal. Mar. 13, 2017) (Judge Cynthia Bashant).  In this dispute involving a denial of long term disability benefits and claims regarding the disclosure of confidential medical information, the court found that the breach of contract claim was preempted by ERISA but that his claims for: (1) violation of California’s Confidentiality of Medical Information Act, Cal. Civ. Code §§ 56–56.37; (2) negligence, and (3) invasion of privacy are not completely preempted by ERISA.

Exhaustion of Administrative Remedies

Sixth Circuit

Hitchcock v. Cumberland University 403(b) DC Plan, et al., No. 16-5942, 2017 WL 971790 (6th Cir. Mar. 14, 2017) (Before: MERRITT, CLAY, and DONALD, Circuit Judges).  The court held that there is no exhaustion requirement for ERISA claims alleging statutory, rather than plan-based, violations.  Count II, asserting an anti-cutback violation on behalf of the benefits class, in violation of 29 U.S.C. § 1054(g), and Count IV, asserting breach of fiduciary duty, in violation of 29 U.S.C. § 1104, are claims for statutory violations not subject to the exhaustion requirement.

Pension Benefit Claims

Third Circuit

Matthews v. E.I. Dupont De Nemours & Company, No. 16-3237, __F.App’x__, 2017 WL 1024761 (3d Cir. Mar. 16, 2017) (Before: SMITH, Chief Judge, HARDIMAN, and KRAUSE, Circuit Judges).  The district court erred in holding that the decision of DuPont’s Plan Administrator to revise Matthews’ pension-benefit calculation was entitled to deference under ERISA.  The district court should have reviewed the Administrator’s decision de novo because it was interpreting a state court order (QDRO) instead of the Plan.  Because the standard of review dictates the result in this appeal and because the district court should have applied de novo review, the court reversed the district court.

Seventh Circuit

Schlichter v. Bert Bell/Pete Rozelle NFL Players Ret. Plan, No. 1:16-CV-61-WTL-TAB, 2017 WL 1001204 (S.D. Ind. Mar. 15, 2017) (Judge William T. Lawrence).  Defendant did not act arbitrarily and capriciously in denying Plaintiff service credit for 1983 where the NFL’s suspension of Plaintiff is the type of regulatory act that made it impossible for Plaintiff to perform the services required of him under his contract with the Colts.

Plan Status

Second Circuit

Kuhbier v. McCartney, Verrino & Rosenberry Vested Producer Plan, No. 14-CV-888 (KMK), __F.Supp.3d__, 2017 WL 933126 (S.D.N.Y. Mar. 8, 2017) (Judge Kenneth M. Karas).  The court determined that the Vested Producer Plan falls within the regulation excluding from ERISA those plans that provide bonus payments since it is designed to pay out a “bonus amount” to retiring employees.  Additionally, the Vested Producer Plan does not provide deferred compensation benefits although a producer’s entitlement to plan benefits vests on the 7th anniversary of employment and are calculated based on the commissions earned in the 12 months preceding the producer’s retirement or death.  However, the structure of the Plan demonstrates that it contemplates the provision of retirement income and therefore qualifies as an employee pension benefit plan.  It also implements an administrative scheme necessary to qualify as an ERISA plan.

Pleading Issues & Procedure

Second Circuit

Frommert v. Conkright, No. 00-CV-6311L, 2017 WL 952674 (W.D.N.Y. Mar. 10, 2017) (Judge David G. Larimer).  Plaintiffs’ motion for clarification and/or reconsideration of the court’s order regarding attorney’s fees is denied where Plaintiffs filed a notice of appeal to the 2nd Circuit and the district court “lacks jurisdiction to decide the pending motions, and that even if the Court has jurisdiction, the wiser course would be to deny the motions pending the outcome of the appeal.”

Third Circuit

Krauter v. Siemens Corp., No. CV 16-2015 (JLL), 2017 WL 979093 (D.N.J. Mar. 13, 2017) (Judge Jose L. Linares).   Plaintiff’s First Amended Complaint must be dismissed for failure to properly plead any injury in fact, where Plaintiff alleges that Defendant improperly transferred his retirement benefits to Sivantos when Defendant sold Sivantos its audiology unit and Sivantos has more liabilities than assets, in contrast to Defendant who has significant assets with less liabilities on its books.  The FAC is devoid of any allegations of actual harm to Plaintiff. Thus, he lacks standing to bring this suit.

Sixth Circuit

Huttsell v. Radcliff Co., Inc., No. 3:16-CV-00796-CRS, 2017 WL 938324 (W.D. Ky. Mar. 9, 2017) (Judge Charles R. Simpson III).  In this matter where Plaintiff alleges numerous claims against her former employer, including discrimination under ERISA Section 510, the court granted Defendant’s motion to stay the proceedings and compel the claims into arbitration based on a Dispute Resolution Agreement Plaintiff signed.

Ninth Circuit

Williams-Ilunga v. Directors/Trustees Of Producer-Writers Guild Of America Pension Plan; et al., No. 15-55599, __F.App’x__, 2017 WL 1031362 (9th Cir. Mar. 17, 2017) (Before: REINHARDT, TASHIMA, and NGUYEN, Circuit Judges).  The court affirmed dismissal of all three counts in Plaintiff’s complaint.  Assuming that Count II is premised on a benefits dispute under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), the claim was properly dismissed pursuant to the Rooker-Feldman doctrine since the state court in a previous interpleader action entered an order purporting to resolve all claims to the benefits in question.  If Count II is a claim for breach of fiduciary duty under ERISA § 502(a)(2) and (3), 29 U.S.C. § 1132(a)(2) and (3), Williams fails to state a claim upon which relief can be granted because the Plan itself cannot be sued for breach of fiduciary duty and he fails to state a claim for breach of fiduciary duty against the lawyer-defendants since they did not perform more than the usual professional services.  Plaintiff’s ERISA § 510, 29 U.S.C. § 1140 claim, which seeks relief from the allegedly erroneous state court judgment in the interpleader action, is barred by the Rooker-Feldman doctrine.

B.R & W.R. v. Beacon Health Options, No. 16-CV-04576-MEJ, 2017 WL 930796, at *1 (N.D. Cal. Mar. 9, 2017) (Magistrate Judge Maria-Elena James).  The court granted Plaintiff’s motion for leave to file a first amended complaint to name the Screen Actors Guild—Producers Health Plan, a self-funded plan, as the defendant.

Provider Claims

Seventh Circuit

OSF Healthcare Sys. v. Matcor Metal Fabrication (Illinois) Inc, No. 1:16-CV-1052-SLD-JEH, 2017 WL 935158 (C.D. Ill. Mar. 9, 2017) (Judge Sara Darrow).  The court granted Defendant’s motion to dismiss for failure to exhaust administrative remedies.  The Plan provided an unambiguous and reasonable procedure by which OSF could have become authorized to act on behalf of the covered individual, but OSF did not follow that procedure.  Just because OSF received direct payment from the Plan for some portion of the services rendered does not make it a beneficiary entitled to an appeal.

Eighth Circuit

Peterson v. Unitedhealth Grp. Inc., No. 14-CV-2101 (PJS/BRT), 2017 WL 991043 (D. Minn. Mar. 14, 2017) (Judge Patrick J. Schiltz).  The health plans at issue do not authorize cross-plan offsetting.  Because this order “involves a controlling question of law as to which there is substantial ground for difference of opinion” and because “an immediate appeal from the order may materially advance the ultimate termination of the litigation,” the court certified this order for immediate appeal pursuant to 28 U.S.C. § 1292(b).

Statute of Limitations

Ninth Circuit

Guenther v. Lockheed Martin Corp., No. 5:11-CV-00380-EJD, 2017 WL 976939 (N.D. Cal. Mar. 14, 2017) (Judge Edward J. Davila).  Plaintiff’s breach of fiduciary duty claim alleging that Defendants had a fiduciary duty to him “as a vested participant to make accurate and correct representations concerning his ability to obtain service credit under the Plan after rehire,” and that Defendants breached this duty when they did not disclose a 2005 plan amendment barring him from obtaining additional service credit, will not be dismissed at this stage because the face of the SAC does not disclose that its sole cause of action is barred by the three-year statute of limitations.  Through discovery, Plaintiff may be able to show fraud and concealment for application of a six-year statute of limitations.

Lorenz v. Safeway, Inc., No. 16-CV-04903-JST, 2017 WL 952883 (N.D. Cal. Mar. 13, 2017) (Judge Jon S. Tigar).  Plaintiff’s breach of fiduciary duty claim is timely under both the six-year statute of repose and the three-year statute of limitations because Defendants had a continuing duty of prudence that went beyond their initial decision to include the JP Morgan target date funds in 2011 or their initial decision to enter into a revenue-sharing arrangement with the record-keeper in 2009.  Plaintiff’s prohibited transaction claim is untimely under ERISA’s three-year statute of limitations regardless of whether the Safeway Defendants had a continuing duty not to engage in prohibited transactions.

Subrogation/Reimbursement Claims

Seventh Circuit

Pike v. Premier Transportation & Warehousing, Inc., No. 13 C 8835, 2017 WL 951323 (N.D. Ill. Mar. 10, 2017) (Magistrate Judge Mary M. Rowland).  The court denied Plaintiff’s motion to strike or reduce the self-funded plan’s lien amount.  In the personal injury action against Defendants, while the jury was deliberating, the parties entered into a high-low settlement agreement.  The jury returned a verdict in favor of Defendants and against Plaintiff, which triggered the Settlement Agreement’s minimum award.  The Illinois Health Care Services Lien Act does not apply because there was no comparative fault finding and ERISA preempts state any-subrogation laws that are inconsistent with subrogation clauses in self-funded welfare benefit plans.  The common fund doctrine does not apply because the Plan documents specifically waive it.

Ninth Circuit

MedCath Employment Health Care Plan v. Dustin Stratton, et al., No. 15-15267, __F.App’x__, 2017 WL 957214 (9th Cir. Mar. 13, 2017) (Before: GOULD and BERZON, Circuit Judges, and GARBIS,** District Judge).  The court affirmed the district court’s dismissal of the Health Plan’s subrogation claim against settlement proceeds from a wrongful death action brought by the surviving children and mother of a health plan participant.  The Plan’s contractual rights of subrogation do not apply to the settlement received by the family because the settlement did not compensate the family for the participant’s injuries or medical expenses.

Venue

Third Circuit

Aetna Life Ins. Co. v. Sanders, No. CV 2015-55, 2017 WL 970272 (D.V.I. Mar. 13, 2017).  In this interpleader action involving allegations of fraud with respect to a life insurance policy beneficiary designation, the court denied the motion to transfer to St. Croix.  Although the relevant conduct in this action is alleged to have occurred on St. Croix and several witnesses and defendants reside on that island, the moving Defendants’ conclusory assertions of hardship are insufficient to meet their burden of establishing that transfer is appropriate.

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