Unpaid employer contributions cannot be plan assets; debt is dischargeable in bankruptcy

Bos v. Bd. of Trustees, 795 F.3d 1006 (9th Cir. 2015), involved the owner of a company that participated in a multi-employer pension plan. Because the owner had full control over the company finances, he was personally responsible for making the required contributions. Moreover, he signed a promissory note for some $360,000 in payments that the company had failed to make. Then he filed bankruptcy. The bankruptcy court and the district court held that the debt was not dischargeable, because it was incurred due to the debtor’s “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). To so hold, the lower courts had concluded that the unpaid contributions were plan assets, and plaintiff’s control over those unpaid contributions made him a fiduciary, which gave rise to non-dischargeability.

The 9th Circuit reversed. It first noted that it had consistently held that unpaid contributions to employee pension plans are not plan assets. It then noted that several districts within the 9th Circuit, and some other circuits (particularly the 2d and 11th), had recognized that unpaid contributions could be plan assets if the plan expressly so provided (making the employer who failed to pay a fiduciary). Other circuits (the 6th and 10th) had reached contrary conclusions. The 10th, for example, held that, regardless of plan language, a plan can only hold a contractual right to collect unpaid contributions, and not the unpaid contributions themselves. The 6th held that, even if a plan could make an unpaid contribution a plan asset, an employer cannot become a fiduciary by virtue of failing to make a required contribution.

The court agreed with the 6th and 10th Circuits. The court noted that fiduciary status should not be imposed unless the individual is clearly aware of his status, and that a typical employer never has sufficient control over a plan asset to make it a fiduciary. The court further held that, no matter how one described the supposed “asset” – a right to collect payments, unpaid past-due contributions, or amounts that must be paid but are not yet due – an employer did not have sufficient control over that asset to make it a fiduciary.

Because unpaid contributions cannot be plan assets, the failure to pay cannot be a breach of fiduciary duty, and plaintiff’s debt was dischargeable.

Preferred provider agreements do not support ERISA claim

In Penn. Chiro. Assoc. v. Independence Hosp. Indem. Plan, Inc., — F.3d –, 2015 WL 5853690 (7th Cir., Oct. 1, 2015), two chiropractors who had signed preferred provider agreements with an insurer claimed that the insurer violated ERISA in determining payments to them. In particular, plaintiffs claimed that the insurer had improperly recouped overpayments without holding a hearing.

As the court described the function of the agreement: “Providers bill the insurer directly and do not know (or care) whether a given patient obtained the coverage as part of an ERISA welfare-benefit plan or through some other means, such as an affinity-group policy or an insurance exchange under the Affordable Care Act.”

Plaintiffs conceded they were not participants in any plan, but argued that they were beneficiaries, contending that the preferred provider agreements assigned to them the right to receive participants’ benefits. The court held:

The problem with this contention all but catapults off the page: a “beneficiary” is a person designated “by a participant” or “by the terms of an employee benefit plan,” and plaintiffs are neither. … Plaintiffs do not rely on a valid assignment from any patient. Nor do they rely on a designation in a plan. Instead they rely on their contracts with an insurer. That does not meet the definition in § 1002(8). No employee’s benefits are at issue and none had to pay an extra penny as a result of the insurer’s treatment of some procedures as capitation based rather than fee-for-service based; plans’ duties to their participants are unaffected by this litigation.

The court expressly aligned itself with the Second Circuit, and decisions from other circuits, which distinguish between a provider’s status as an assignee of a particular claim, and its status as voluntary members of a network.

A couple of other points are noteworthy. First, the court disagreed with the notion that this was a question of “standing” to sue under ERISA, as other courts have labeled it. It stated that the plaintiffs unquestionably had standing to sue the insurer, but “whether their claim comes within the zone of interests regulated by [ERISA].” It explained that there was value in “keeping standing distinct from statutory coverage.”

Second, the court chose some unfortunately broad language in addressing plaintiffs’ concern that, if they could not sue under ERISA, ERISA might preempt their contractual claim, stating that preemption was not a concern because “[t]he state law of insurance contracts is a form of state law regulating insurance and is enforceable whether or not a given insurer sells its policy to employers.”

SPD can be governing plan document when there is no actual plan

Bd. of Trustees v. Moore, 800 F.3d 214 (6th Cir. 2015), considered whether a summary plan description (SPD) that was the only document containing a subrogation provision was a binding plan document. The Board of Trustees of the National Elevator Industry (NEI Board) established a health benefits plan, pursuant to two relevant documents. The first was a Trust Agreement between the NEI Board and participating elevator companies, which provided for the establishment and funding of a health benefit plan. The Trust Agreement did not, however, contain any details of a health plan. The NEI Board never created a plan document, but did create an SPD, which details the terms of the plan, and contains a subrogation provision. The Plan’s director of health claims administration testified that the SPD constituted both the plan and the summary of that plan.

The defendant argued that, under Amara, the SPD could not be the plan, so that the Trust Agreement, which did not have a subrogation provision, had to be the governing plan document.

The Sixth Circuit began by noting that the Third and Eleventh Circuits had previously held that the same NEI SPD was the controlling ERISA plan in the absence of a separate plan document, and that it authorized subrogation (certiorari has been granted in the Eleventh Circuit case, Bd. of Trustees of the Nat’l Elevator Indus. Health Ben. Plan v. Montanile, 593 Fed.Appx. 903, 910 (11th Cir.2014), on the question whether a subrogation claim is equitable when the beneficiary had dissipated the fund).

Ultimately, the court adopted a holding of the Second Circuit in an unrelated case, stating: “an SPD describing employee benefits that anticipates the existence of a Plan, but is issued long in advance of the Plan, constitutes the actual plan, as well as a summary of a plan ‘that is nowhere else in writing.’” Quoting Feifer v. Prudential Ins. Co. of America, 306 F.3d 1202, 1209 (2d Cir. 2002). The Sixth Circuit then stated: “Nothing in the Supreme Court’s later opinion in Amara has any negative effect on the Second Circuit’s analysis in Feifer.

Third Circuit rules that claim denial letters must disclose contractual limitation period

In Mirza v. Ins. Administrator of Amer., Inc., 800 F.3d 129 (3d Cir. 2015), the court held that the failure to disclose a contractual limitation period in a denial letter precluded enforcement of that limitation, and required application of the most analogous state limitation period.

The district court had ruled, in granting summary judgment for defendant, that a lack of notice was irrelevant, because the plaintiff had knowledge of the limitation, and therefore could not benefit from the equitable tolling that might otherwise flow from a lack of required disclosure. The Third Circuit held “we do not find equitable tolling to be an obstacle, or even relevant, to Mirza’s claim.”

The court reviewed 29 C.F.R. § 2560.503-1(g), and held that it required disclosure of contractual limitations by stating that denial letters were required to include a “description of the plan’s review procedures and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action … following an adverse benefit determination.” The court held that the word “including” meant that “civil actions are logically one of the review procedures envisioned by the Department of Labor. And as with any other review procedure, the administrator must disclose the plan’s applicable time limits.” The court did not address subsection 1(j), which applies to decisions on administrative appeal, and which does not require disclosure of any time limits.

The court held that its interpretation was limited to “plan-imposed time limits on the right to bring a civil action,” and would not require administrators to research and disclose applicable statutes of limitation. The court did not explain how it read that limitation into the regulation.

The court also rejected defendant’s argument that the lack of disclosure was irrelevant when plaintiff had knowledge of the limitation provision: “the doctrine of equitable tolling should not bear on Mirza’s case. If we allowed plan administrators in these circumstances to respond to untimely suits by arguing that claimants were either on notice of the contractual deadline or otherwise failed to exercise reasonable diligence, plan administrators would have no reason at all to comply with their obligation to include contractual time limits for judicial review in benefit denial letters. Instead, they could almost invariably argue that the contractual deadline was in the plan documents and that claimants are charged with knowledge of this fact.”

Ninth Circuit judge calls for en banc review to overturn Providence Health v. McDowell

In Oregon Teamster Employers Trust v. Hillsboro Garbage Disposal, Inc., 800 F.3d 1151 (9th Cir. 2015), the corporate defendant, Hillsboro Garbage entered into contracts with a union health plan that provided coverage for Hillsboro’s union and non-union employees. Beginning in 2003, the union received contributions for the two individual defendants, who purportedly worked for Hillsboro, but actually were employed by a different company owned by Hillsboro’s owner. The plan covered these defendants until 2011, even though a 2006 audit showed that they were not eligible for coverage.

The plan asserted two 1132(a)(3) claims, the first against Hillsboro and the two individuals for restitution, and the second against Hillsboro for specific performance to repay the benefits wrongly paid. The plan also asserted state law breach of contract claims. The district court granted summary judgment to the defendants, and the Ninth Circuit affirmed.

The court first held that ERISA preempted the breach of contract claims, because the claims are premised on the existence of an ERISA plan, and the existence of the plan is essential to the claims’ survival. Particularly, the court held that interpretation of the plan was necessary to the outcome of the claims. In so ruling, the court distinguished Providence Health Plan v. McDowell, 385 F.3d 1168, 1172 (9th Cir.2004), which allowed a plan to assert a breach of contract claim to enforce the reimbursement provision in an ERISA plan, where the parties did not dispute the correctness of the benefits paid. Here, in contrast, the court held that a key issue was whether the individual defendants were eligible for coverage under the plan.

In a concurring opinion, Judge Fletcher called for an en banc review to overrule McDowell: “I concur in the panel’s opinion because I agree that McDowell is narrowly distinguishable (if unconvincingly) from this case, and because we must distinguish McDowell if McDowell remains the law and we are to reach the correct result in this case. But the underlying reality is that McDowell was wrongly decided. We should take the opportunity to rehear this case en banc and overrule McDowell.

The court also rejected as speculative an argument that a finding of ERISA preemption would subject the plan to liability under the Labor Management Relations Act.

The court next found that the claim for specific performance of the reimbursement provisions of the plan was legal, not equitable, because “Knudson held that specific performance is typically a legal remedy unless it is ‘sought to prevent future losses that either were incalculable or would be greater than the sum awarded.’ … The exception Sereboff carved out to this rule was for restitution sought from a particular fund (or ‘res’), not specific performance.”

The court also found the restitution claim was not equitable, under Sereboff and Bilyeu: “Although the plan contained ‘a promise by the beneficiary to reimburse’ OTET, it did not ‘specifically identify a particular fund, distinct from the beneficiary’s general assets, from which the fiduciary will be reimbursed’—that is, there is no res from which OTET seeks recovery. … Moreover, even if the agreement specifically identified funds from which OTET could recover, the amounts it paid for the individual defendants’ medical expenses are not in their ‘possession and control.’”

First Circuit Applies Younger abstention doctrine to ERISA preemption claim

In Sirva Relocation, LLC v. Richie, 794 F.3d 185 (1st Cir. 2015), ERISA preemption met federal abstention, and lost. Knight was an employee of Sirva, which had a disability plan insured by Aetna. Knight received 24 months of disability benefits, which were then terminated under a mental illness limitation; he responded by filing a discrimination charge against Sirva and Aetna with the Massachusetts Commission Against Discrimination (MCAD), alleging that Sirva and Aetna paid disparate benefits depending on whether the claimant suffered from a physical or mental impairment. Sirva and Aetna moved to dismiss, arguing ERISA preemption, and, after a three-year wait, MCAD denied the motion without prejudice.

After another several years passed, MCAD certified the case for a hearing, and Sirva and Aetna sued the state, MCAD and Knight in federal court, seeking a declaration that ERISA preempted the state action. The district court enjoined the action, relying in the federal abstention doctrine.

On appeal, the First Circuit provided a lengthy history of the abstention doctrine, enunciated in Younger v. Harris, 401 U.S. 37 (1971), and recently clarified and narrowed in Sprint Comms., Inc. v. Jacobs, 134 S.Ct. 584 (2013). The doctrine provides that a court will abstain from a suit seeking to enjoin certain state actions if the state action allows the federal defense to be raised, and there is no irreparable harm. It applies to three types of state actions: (i) criminal prosecutions, (ii) “civil proceedings that are akin to criminal prosecutions,” and (iii) proceedings “that implicate a State’s interest in enforcing the orders and judgments of its courts.” There are various exceptions and nuances to the doctrine, discussed by the First Circuit.

The court first ruled that the MCAD proceeding was a civil proceeding akin to a criminal prosecution, because the path chosen by Knight to raise his discrimination claim results in a prosecution by MCAD in its own name, rather than a civil action by Knight.

The court next held that the MCAD proceeding implicates important state interests, and gave sufficient opportunity to raise the ERISA preemption defense, which typically exists as long as no state procedural rule bars the assertion of the defense, and there is a fair opportunity to raise it. Though MCAD initially rejected the defense without prejudice, it “has acknowledged that ERISA preemption remains an open question in the case.”

Finally, and most significantly, the court addressed whether the claim of ERISA preemption was “facially conclusive,” and found that it did not exist here. The court found that the statute plainly related to an ERISA plan; then observed that a state anti-discrimination law is preempted only to the extent it prohibits more conduct than its federal counterpart, here the ADA. The court rejected the state’s argument that an issue of first impression – which this was – could never be facially conclusive.

Turning to the question whether the state statute went farther than the ADA (and thus would be preempted) the court was not persuaded by Sirva’s argument that “the unanimous consensus of federal circuit courts on this issue” had ruled that the ADA permitted disparate benefits based on the type of disability. It found that the Supreme Court had never ruled on the question, and that “deciding this question would entail resolving a complex web of legal issues.” Moreover, “some of the circuit court decisions upon which the appellants rely were made over strong dissents.” The court noted that some of its prior decisions “have left open the possibility that an ADA claim based on differential benefits may be viable.” The court concluded: “Given this littered legal landscape, it cannot be said that there is no room for principled disagreement about the viability of differential-benefits claims under the ADA. While the answer to that question seems much clearer than the MCAD admits, it is not the slam dunk that the appellants suggest. In short, resolving the preemption question presented here calls for exactly the sort of extensive legal analysis that places the facially conclusive preemption exception out of reach.”

Finally, the court ruled that appellants had not explained how they would be irreparably harmed by allowing MCAD to resolve the question whether ERISA preempted the state law.

Upcoming Amendments to Federal Rules Will Impact ERISA Litigation

On December 1, 2015, barring action by Congress, amendments to the Federal Rules of Civil Procedure, will take effect. A number of these amendments are intended to fine-tune the discovery process, and they may have an impact on ERISA-related discovery. Of particular note are the increased emphasis on proportionality in discovery; additional requirements in objecting to discovery requests; and a significant limitation on sanctions for loss of electronically stored information. Continue reading

When does ERISA govern a severance plan?

Typically, ERISA litigation starts with a concrete plan, whether it is a retirement plan or an insurance plan. It is much more unusual to have an ERISA dispute turn on whether there is a plan at all. It is still more unusual to have the employee arguing that ERISA governs, and the employer arguing that it does not. But that is the dispute in Okun v. Montefiore Med. Ctr., 793 F.3d 277, 279 (2d Cir. 2015). Continue reading

Third Circuit Rules That Assignment of Plan Benefits Confers Standing to Sue

In North Jersey Brain & Spine Ctr. v. Aetna, Inc., — F.3d –, 2015 WL 5295125 (3d Cir. Sep. 11, 2015), the court addressed the question “whether a patient’s explicit assignment of payment of insurance benefits to her healthcare provider, without direct reference to the right to file suit, is sufficient to give the provider standing to sue for those benefits under ERISA § 502(a)[.]” Continue reading

Where Administrative Appeal Deadline Ends on Saturday, Monday Appeal Is Timely

In LeGras v. Aetna Life Ins. Co., 786 F.3d 1233 (9th Cir. 2015), plaintiff’s 180-day period to administratively appeal ended on a Saturday, and he mailed his appeal the following Monday. Aetna denied the appeal as untimely. Plaintiff sued, and the district court had dismissed the claim for failure to exhaust administrative remedies.

The 9th Circuit reversed (in a divided decision), stating: “We hold that because the last day of the appeal period fell on a Saturday, neither that day nor Sunday count in the computation of the 180 days. As LeGras mailed his notice of appeal on Monday, it was timely. This method of counting time is widely recognized and furthers the goals and purposes of [ERISA]. … We therefore adopt it as part of ERISA’s federal common law.”