Call For A FREE Case Evaluation 510.992.6130

Your ERISA Watch – Seventh Circuit Holds that “Substantial Compliance” Does Not Apply to Blown Deadlines

Posted By:

Hello, ERISA Watchers!  I’m bringing you this mid-week report to share yesterday’s stunning decision from the Seventh Circuit Court of Appeals in Fessenden v. Reliance Standard Life Ins. Co., No. 18-1346, __F.3d__, 2019 WL 2589122 (7th Cir. June 25, 2019).  Circuit Judge Barrett, authoring the panel opinion, explained that Reliance Standard could not enjoy deferential review because it blew its deadline to decide Fessenden’s appeal for long-term disability benefits.  This is significant because some circuits allow plan administrators to claim “substantial compliance” when not meeting their deadlines to decide claims or appeals and invoke little or no penalty for these transgressions.  The Seventh Circuit has made it clear to plan administrators:  substantial compliance does not apply to ERISA’s regulatory deadlines.  Make a decision on time or be subject to de novo review.

Now that the good stuff is out of the way, here’s a little more background about the dispute.  Reliance Standard denied Fessenden’s long-term disability benefits and he submitted an appeal of that denial on April 24, 2015.  Because Fessenden mailed the appeal to the wrong address, Reliance did not confirm receipt until May 8, 2015.  Under the ERISA Regulations, Reliance had 45 days to issue a final decision, but if special circumstances exist, it could take one 45-day extension.  See 29 C.F.R. § 2560.503-1(i)(1)(i) & (i)(3)(i) (2002).  It’s undisputed that Reliance did not make a decision after 90 days.  Fessenden filed suit on August 19, 2015 and then Reliance issued its decision late on August 27, 2015.

The district court sided with Reliance on the issue of whether substantial compliance applies to the timing to decide appeals and found that Reliance had substantially complied with the deadline.  It also found that Reliance’s decision to deny benefits was not arbitrary and capricious.

The Seventh Circuit disagreed.  It held that the “substantial compliance” exception does not apply to a blown deadline, which “is a bright line.”  Violation of this “hard-and-fast obligation” strips an administrator of its deference.  The court declined Fessenden’s invitation to scrap the substantial compliance doctrine altogether.  Its holding assumes that the substantial compliance doctrine remains valid, it simply does not apply to violation of regulatory deadlines.  A claimant has a right to file suit as soon as his claim is deemed exhausted (after the deadline has passed and there is no decision).  The court explained that when there is an untimely decision there is nothing to review at the time that administrative remedies are deemed exhausted.  If a “claimant files suit before the decision arrives, there is neither an exercise of discretion to which a court could defer nor anything for the court to use to measure the degree of the administrator’s compliance.”  The court disagreed with its sister circuits (Sixth, Ninth, and Tenth) that have applied the substantial compliance exception to blown deadlines.

This decision is a huge win for claimants in the Seventh Circuit.  I await to see if this issue makes it to the Supremes.  Congratulations to Fessenden’s attorney and friend of ERISA Watch, Bridget L. O’Ryan of O’Ryan Law Firm in Indianapolis, IN.

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

Attorneys’ Fees

Ninth Circuit

McBean v. United of Omaha Life Insurance Company, No. 18CV166-MMA (JLB), 2019 WL 2588151 (S.D. Cal. June 24, 2019) (Judge Michael M. Anello).  In this case, where the court previously entered summary judgment in favor of Plaintiff on his equitable surcharge claim against Referral for the face value of life insurance policies, or $143,550.00, the court granted, in part, Plaintiff’s motion for attorneys’ fees.  Plaintiff achieved some degree of success on the merits because judgment was entered on his second cause of action against Referral.  Though Referral was not acting in bad faith, it was culpable in that it owed Plaintiff a legal duty that it was not fulfilling, namely, giving misinformation to the decedent about the continuation of her life insurance.  Referral claims that it cannot afford the judgment and is in financial straits but did not provide a financial statement, P&L, or company balance sheet.  Since Plaintiff did not provide the court with contrary evidence, the court found the factor regarding its ability to satisfy a fee award slightly in favor of Referral.  The court found that the fee award would deter Referral and other plan administrators from making representations about coverage without ensuring the accuracy of the information provided.  However, Plaintiff’s lawsuit did not benefit other participants or resolve a significant legal issue.  The relative merits factor weighs in Plaintiff’s favor.  Overall, the factors militate in favor of a fee award.  The court awarded a total of $80,640 in fees which comprised an hourly rate of $600 for only 134.4 hours due to Plaintiff’s limited success.  The time awarded did not include time spent on litigating claims against Defendant United of Omaha.  The court denied prejudgment interest because Referral did not act in bad faith and no losses were incurred as a result of Referral’s nonpayment of benefits to the decedent’s trust.

Disability Benefit Claims

Fourth Circuit

Arrington v. Sun Life Assurance Company of Canada, No. CV TDC-18-0563, 2019 WL 2571160 (D. Md. June 21, 2019) (Judge Theodore D. Chuang).  This is a dispute over whether S-Corporation Distributions reported on Plaintiff’s Schedule K-1 should be classified as part of pre-disability Monthly Pay and offset against long-term disability benefits.  The policy lists “Other Sources” of post-disability income that could offset LTD benefits including “any amount you receive of a type included in your monthly pay,” but also “any salary, wages, partnership or proprietorship draw, commissions, or similar pay from any work you do,” without any exclusion of “returns of capital.”  Applying the abuse of discretion standard, the court found that “since the term [draw] has also been used to refer to compensation for principals of S-corporations, Defendants’ treatment of S-Corporation Distributions as falling within the term “draw” in the definition of Monthly Pay was not unreasonable.”  It was also not unreasonable for Defendants to include in Monthly Pay S-Corp Distributions on her Form 1120S Schedule K-1 in addition to her salary listed in her Form W-2.  The court found that the inclusion of S-Corp Distributions in Monthly Pay and as an offset is consistent with the purposes and goals of the plan.

Seventh Circuit

Fessenden v. Reliance Standard Life Ins. Co., No. 18-1346, __F.3d__, 2019 WL 2589122 (7th Cir. June 25, 2019) (Before Wood, Chief Judge, and Sykes and Barrett, Circuit Judges).  See Notable Decision summary above.

Eleventh Circuit

Garcon v. United Mutual of Omaha Insurance Company, No. 18-12220, 2019 WL 2577418 (11th Cir. June 24, 2019) (Before Jill Pryor, Branch, and Anderson, Circuit Judges).  The court affirmed the district court’s decisions: (1) denying the pro se plaintiff’s motion for remand since his claims for disability benefits from his employer’s plan are preempted by ERISA; (2) granting United’s motion for judgment on the pleadings on the basis that the short-term disability plan did not cover work-related injuries and Plaintiff did not exhaust administrative remedies for long-term disability benefits; and (3) denying Plaintiff’s motion for reconsideration.

ERISA Preemption

Third Circuit

In re Reliance Standard Life Ins. Co., No. CV 19-331, __F.Supp.3d__, 2019 WL 2577478 (E.D. Pa. June 24, 2019) (Judge Cynthia M. Rufe).  In these lawsuits involving twelve individual foreign nationals seeking long-term disability benefits, the court examined ERISA’s legislative history and statutory language to address the extraterritoriality doctrine and found that ERISA does not cover foreign nationals working in a foreign country.  The court noted that ERISA does not contain any explicit language clearly expressing extraterritorial reach and that no court has held that a foreign national working abroad can bring a claim under ERISA.  Absent a clear expression by Congress that ERISA applies extraterritorially, the court must presume ERISA “is primarily concerned with domestic conditions.”  The court granted Plaintiffs’ motion to remand the lawsuits to the Philadelphia Court of Common Pleas.

Eleventh Circuit

Sarasota County Public Hospital Board v. Blue Cross and Blue Shield of Florida, Inc., et al., No. 8:18-CV-2873-T-23SPF, 2019 WL 2567979 (M.D. Fla. June 21, 2019) (Judge Steven D. Merryday).  The court found that a public hospital’s seventeen-count complaint including claims for breach of contract and violation of Section 648.513, Florida Statutes is preempted by ERISA and granted Defendants’ motion to dismiss.  Though the hospital purports to just challenge the rate of payment under the Provider Agreements rather than the right to payment under an ERISA plan, the court found that some of the counts allege improper denial of coverage that appear to include coverage denials under ERISA-regulated plans.  The hospital has standing to sue under ERISA because beneficiaries of the plans assigned their benefits to it.  “Section 641.513 entitles healthcare providers lacking a contract with a health management organization (HMO) to reimbursement for emergency care provided to the HMO’s subscriber.”  The court found that Section 648.513 does not create a legal duty independent of ERISA since ERISA controls the coverage determinations.

Medical Benefit Claims

Seventh Circuit

Dominic W. v. The Northern Trust Company Employee Welfare Benefit Plan, No. 18 C 327, 2019 WL 2576558 (N.D. Ill. June 24, 2019) (Judge Matthew F. Kennelly).  The court found that Blue Cross improperly terminated coverage of residential treatment that was medically necessary for a minor’s mental health issues.  The court faulted two file reviews which failed to address overwhelming evidence from treating providers that residential treatment was medically necessary.  They did not address the fact that the minor’s extensive long-term regiment of outpatient treatment had proven inadequate or that her home environment posed challenges for her recovery.  They also failed to give proper significance to the fact that the minor had been put on self-harm watch on five separate occasions.  The court also rejected the opinion of an anonymous external reviewer who initially and erroneously found that residential treatment was excluded from the benefit plan and then later found that residential treatment was not medically necessary.  “Blue Cross’s reliance on Sofia’s ‘volunteering,’ attendance at therapy, and lack of suicidal or homicidal ideation to deny coverage is arbitrary and capricious.”  The court declined to decide whether it was reasonable for Blue Cross to use the Milliman Care Guidelines because Blue Cross’ decision that a lower level of care was appropriate was unreasonable in light of the medical evidence.  As a remedy, the court vacated the decision terminating coverage since Blue Cross previously determined that residential treatment was medically necessary.  The court also found that a remand would be inappropriate because this “case is so clear cut.”

Provider Claims

Ninth Circuit

Salinas Valley Memorial Healthcare System v. Monterey Peninsula Horticulture, Inc., et al., No. 17-CV-07076-LHK, 2019 WL 2569545 (N.D. Cal. June 21, 2019) (Judge Lucy H. Koh).  Third Party Defendant Employee Benefit Management Services, Inc. (“EBMS”) moved to dismiss the Third Party Complaint filed against it by the sponsor and fiduciary of the defendant employee benefit plan.  The court determined that because Monterey has not exhausted a contractual obligation arising from the Administrative Services Agreement to mediate before filing suit, the court must dismiss Monterey’s TPC against EBMS.

Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross Blue Shield of Illinois, No. CV 18-3866-RSWL-JPR, 2019 WL 2568343 (C.D. Cal. June 20, 2019) (Judge Ronald S.W. Lew).  The court granted Defendant’s motion to dismiss Plaintiff’s SAC without leave to amend, finding that the Teamster Plan provides an express anti-assignment provision.  Though the Plan permits participants to direct payment, it prohibits the assignment of benefits.  “The Court has twice now emphasized that provisions allowing direct payments to the Provider do not afford the Provider ‘beneficiary’ status under ERISA.”  The court also found that the Financial Responsibility Agreement between the provider and the patient does not reflect the terms of an ERISA plan nor does it supersede the anti-assignment provision.

State Bans on Discretion

Fourth Circuit

Arrington v. Sun Life Assurance Company of Canada, No. CV TDC-18-0563, 2019 WL 2571160 (D. Md. June 21, 2019) (Judge Theodore D. Chuang).  On the standard of review, the court found that the Maryland ban on discretionary clauses, Md. Code Ann., Ins. § 12–211, did not apply to this policy which was issued in 2007.  The court rejected Sun Life’s argument that the note to § 12–211—which states that it applies to all disability policies sold, delivered, issued for delivery, or renewed in the State on or after October 1, 2011—has no effect because it appears in the statute as a note, not a section or subsection.  The court explained that because the text was part of the enacted bill, the prospective nature of section 12–211 is law in Maryland.  However, the court found that the ban does not apply to this case because the language of the policy evidences an intent for the policy to continue indefinitely without renewal; a policy “anniversary date” is not the equivalent of a renewal under Maryland law.  The court was not persuaded by extra-record statements or notices referring to “renewal rates” and “renewal premiums.”  The court found that the term renewal appeared to be short-hand for the change to the rates and premiums.  The language of the policy does not provide for renewal.  Even though Defendants amended the policy in 2013, the delivery of the endorsement does not constitute delivery of the policy in 2013.

Subrogation/Reimbursement Claims

Fourth Circuit

Arrington v. Sun Life Assurance Company of Canada, No. CV TDC-18-0563, 2019 WL 2571160 (D. Md. June 21, 2019) (Judge Theodore D. Chuang).  The court denied Defendants summary judgment on their counterclaim seeking an order requiring Plaintiff to repay the amount of long-term disability overpayments to Defendants.  The court found that the LTD policy and the agreement Plaintiff signed stating that Defendants have the right to recover overpayments created an equitable lien by agreement.  However, “Defendants have not alleged where Arrington kept these funds, whether she still retains them, or whether she has used them to buy traceable property or nontraceable goods. . . .  The parties do not identify, and the Court could not locate, any evidence in the record that describes the disposition of the funds. At the hearing, Defendants acknowledged that they did not put forward evidence regarding the present location of the funds and that they may have to recoup the overpayment by withholding Arrington’s monthly benefits until they are reimbursed in full.”  Because the court does not have enough information to determine whether Defendants can succeed on their equitable claim, it denied Defendants’ motion.

Withdrawal Liability & Unpaid Contributions

D.C. Circuit

Crabtree v. Island Breeze Marine, Inc., No. CV 18-1054 (CKK), 2019 WL 2569662 (D.D.C. June 21, 2019) (Judge Colleen Kollar-Kotelly).  “The Plaintiff is entitled to a default judgment, but the value of that judgment differs from what he has requested. The Court shall award the Plaintiff unpaid contributions ($19,754.25); interest on the unpaid contributions ($2,056.53); liquidated damages ($2,950.10); and attorney’s fees and costs ($4,765.00), totaling $29,525.88. The Plaintiff is also entitled to recover post-judgment interest as prescribed by 28 U.S.C. § 1961.”

Get The Help You Need Today