The Journal of The DuPage County Bar Association

Back Issues > Vol. 25 (2012-13)

The Evolving and Murky World of ERISA Damages...I Mean Equitable Remedies
By Glenn R. Gaffney

The Employee Retirement Income Security Act (ERISA) is the Federal Act which governs virtually all employer created health, welfare and benefit plans. It not only controls employer created or established health insurance, disability insurance, defined contribution and similar plans, but also other benefit plans including severance, life insurance, incentive and stock option plans. ERISA applies to both large company welfare benefit plans as well as those created by your local small and mid-size corporations and LLC’s. Congress enacted ERISA to ensure employees receive the benefits they earned "but Congress did not require employers to establish benefit plans in the first place."[1] Therefore, courts have held that ERISA represents "a careful balancing" between the rights of plan participants while still encouraging companies to create and maintain those plans even in an unfavorable and highly competitive economic environment.[2] ERISA's goal is to induce employers to offer benefits and yet ensure a predictable set of liabilities under uniform standards with remedial but not punitive liability awards when a violation occurs.[3]

In 2010, U.S. Supreme Court Chief Justice Roberts began his ERISA opinion with the euphemistic words, "People make mistakes. Even administrators of ERISA plans."[4] Yes, especially in bad times when companies are in survival mode, the “mistakes” of some plan administrators who are virtual arms of the struggling entity are not so innocent. So when it is your client who has been prejudiced by a plan fiduciary’s "mistake," how you frame and fashion your claim and demand needs to fall within either the express statutory language of ERISA or by the use of acceptable equitable concepts which have evolved into a Federal common law under the statutory guidance of "other appropriate equitable relief."[5]

The easy case is when all your client seeks is "benefits due him under the terms of the plan" because that is plainly authorized by statute.[6] The more difficult situation is when the client is seeking other make-whole relief (i.e., money) such as loss of interest or investment opportunities, unpaid medical bills, and other legal-like relief from a breach of fiduciary duty. Although it is clear that extra-contractual damages such as emotional distress or punitive damages are unavailable under ERISA, which is guided by principles of trust law,[7] "trust law does not tell the entire story."[8] In recent years, courts have expanded equitable principles to enable participants to seek relief previously considered to be unavailable "legal damages."[9] This article outlines the court’s evolving use of equitable terms and concepts so as to provide jilted plan beneficiaries with make-whole relief resulting in a monetary judgment under ERISA’s statutory provision of "other appropriate equitable relief."

The Equitable Remedy of Surcharge. Surcharge is an "amount that a court may charge a fiduciary that has breached its duty."[10] It has been an historic equitable remedy evolved from the law of trusts used to “charge” a trustee with a loss or depreciation to the trust estate resulting from a breach of trust.[11] A recent U.S. Supreme Court decision, brought by a beneficiary against the plan fiduciary was remarked to be the kind of lawsuit that petitioners had to bring only within the court of equity but not a court of law prior to the merger of law and equity.[12] Nevertheless, the successful plaintiff received a money judgment, arguably a legal remedy unavailable for an ERISA claim. The Supreme Court said, “but the fact that this relief takes the form of a money payment does not remove it from the category of traditionally equitable relief.” Equity courts possess the power to provide relief in the form of monetary compensation for a loss resulting from the trustee's breach of duties, or to prevent the trustee's unjust enrichment.... “Indeed, prior to the merger of law and equity this kind of monetary relief against the trustee, sometimes called a 'surcharge' was exclusively equitable.”[13] Previously, the U.S. Supreme Court had held that an ERISA action could not seek to impose personal liability on the defendant, but only could restore the plaintiff plan participant to particular funds or property in the defendant's possession.[14] The Roberts Supreme Court concluded that contrary to the lower court's "fears" that "surcharge" violated the ERISA rule prohibiting legal judgments, surcharge was available as "appropriate equitable relief" pursuant to ERISA § 502(a)(3) so long as the plan participant makes a proper showing of "actual harm."[15] In addition to surcharge, the Supreme Court also upheld the District Court's award of an affirmative and negative injunction as a measure of equitable relief, stating "Indeed, a maxim of equity states that 'equity suffers not a right to be without a remedy.' "[16]

Apparently following the lead of the Supreme Court, even the conservative Seventh Circuit recently awarded a former employee medical expenses incurred as a result of a COBRA notice violation, less deductibles and premiums that the employee would have paid, finding that it was within the Court's inherent authority pursuant to ERISA's "such other relief" provision. However, the Seventh Circuit cautioned that it was "reticent to condone without limitation this method of compensation in COBRA notification violation cases."[17] What “limitation” is intended is yet to be determined.

Equitable Estoppel. An equitable estoppel precludes a party from asserting rights he otherwise would have against another when his own conduct renders assertion of those rights contrary to equity. Courts have recognized estoppel in the context of ERISA claims when a claimant relies to his detriment on some misrepresentation of coverage. In the ERISA context, the Seventh Circuit has listed the elements as (1) a knowing misrepresentation; (2) made in writing; (3) reasonable reliance on that representation by the plaintiff beneficiary; and, (4) detrimental reliance.[18]

Equitable estoppel is useful in ERISA cases when the plan administrator misrepresents plan terms and a plan beneficiary relies thereon to his detriment. The United States Supreme Court recently confirmed the availability of this remedy upon a proper showing of detrimental reliance articulated as "in truth, influences the conduct of the plaintiff, causing prejudice."[19] Estoppel is often used and discussed by courts in conjunction with other equitable remedies. For example, the Supreme Court recently upheld the remedy of reformation of an ERISA plan and enforced upon the employer what had promised to its employees stating, "This aspect of the remedy resembles estoppel, a traditional equitable remedy."[20] The Seventh Circuit has used an estoppel analysis to award a plan participant medical expenses after the administrator improperly invoked a preexisting condition limitation.[21]

Disgorgement. Disgorgement is considered a legal remedy when the plaintiff seeks money damages but cannot assert title or the right to possess particular property, fund or res. However, when the plaintiff seeks a constructive trust upon an identifiable res within the defendant's possession, disgorgement is then considered an available equitable remedy.[22] That kind of disgorgement is an equitable form of restitution "not to impose personal liability on the defendant, but to restore the plaintiff's particular funds or property in the defendant's possession."[23] Incumbent upon the plaintiff in such a case is the requirement to trace plaintiff’s funds held by the ERISA plan administrator.[24] A successful action can even seek interest or lost earnings on a delayed benefit payment as a form of "other appropriate equitable relief."[25] This can be described and prayed for as part of the “equitable clean-up doctrine.”[26]

Restitution. Courts have held that restitution can be either legal or equitable in nature.[27] Recently, the Seventh Circuit used the “equitable branch” of restitution to not only reverse an insurance company's erroneous denial of a benefit claim, but also required the insurance company to disgorge the profit it enjoyed from the delay and use of money its breach created.[28] In yet another Seventh Circuit decision, a plan administrator was held to be in breach of its fiduciary duty and the Court allowed the plan participant the opportunity to make a missed COBRA payment, then ordering the plan to "pay the maternity-related medical expenses it had refused to pay in reliance on the pre-existing conditions limitations."[29]

By withholding benefits, a plan can obtain interest that would otherwise be obtained by the beneficiary. That interest is not by itself a plan benefit, but because the plan has unjustly enriched itself, that is the basis for imposing an equitable remedy.[30] Although restitution amounts to a legal remedy in some circumstances, such as in a suit for breach of contract, it is considered an equitable remedy when a person complains of a breach of trust.[31]

Accumulated Earnings, Pre-Judgment Interest and the Clean-Up Doctrine. The wrongful withholding of benefits can entitle a beneficiary to obtain more than just a constructive trust or like equitable remedy. The Seventh Circuit has stated, "This is not to say that money can never be recovered in a suit in equity, apart from the equity clean-up document, which allows an equitable suitor to obtain incidental damages relief in his equity suit so as to spare himself, the defendant and the judiciary the burden of two suits on the same claim."[32]

 In a 2011 Second Circuit ERISA decision, a plan participant filed suit against the plan not seeking recovery of funds that were wrongfully removed from his account and improperly credited to his former wife's account pursuant to a Qualified Domestic Relations Order (QDRO), plus the economic equivalent of what accumulated after the improper credit. The Second Circuit held that ERISA's anti- alienation rule did not prevent the plan assets from being used to satisfy a judicial judgment entered against the plan itself, including an award of accumulated earnings and pre-judgment interest on the money improperly segregated pursuant to the invalid QDRO.[33] There, the Court held that plaintiff was entitled to be compensated for the time value of the "mis-directed funds" dictated by the Federal common law of "natural justice, and the law of every civilized country."[34] Now, there’s a concept and a quote any imaginative plaintiff’s lawyer can use when the ERISA plan trustee has done wrong.

Conclusion. Although it is clear that extra-contractual or punitive damages are unavailable under ERISA, when plan administrators breach their duty of trust, Federal courts should continue to expand upon the modern concept that for each such wrong there should be make whole relief and a reasonable remedy. The lines between law and equity have blurred over the years, plan beneficiaries should now be capable of obtaining all necessary relief to cure a fiduciary's breach, even those which take the form of a money judgment.

[1] Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996).

[2] Aetna Health Inc. v. Davila, 542 U.S. 200, 215 (2004).

[3] Rush Prudential HMO, Inc. v. Moran, 530 U.S. 355, 379 (2002).

[4] Conkright v. Frommert, 559 U.S. 506, 130 S.Ct. 1640, 1644 (2010) (The fact that plan administrators make mistakes should come as no surprise, given the Employee Retirement Income Security Act of 1974 is "an enormously complex and detailed statute," Mertens v. Hewitt Associates, 508 U.S. 248, 262 (1993), and the plan that administrators must construe can be lengthy and complicated).

[5] 29 U.S.C. §1132(a)(3); Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209-10 (2002).

[6] 29 U.S.C. §1132 (a)(1)(B).

[7] Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142 (1985); Mertens v. Hewitt Associates, 508 U.S. 248, 262 (1993).

[8] Varsity Corp. v. Howe, 516 U.S. 489, 497 (1996).

[9] Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142 (1985)(U.S. Supreme Court concluded that §1132(a)(2) did not authorize plaintiff to sue for compensatory and punitive damages for employer's alleged breach of fiduciary duty).

[10] Black's Law Dictionary, 1579 (9th Ed. 2009).

[11] Restatement of Trusts §205.

[12] Cigna Corp. v. Amara, 131 S.Ct. 1866, 1879 (2011).

[13] Cigna Corp. v. Amara, 131 S.Ct. at 1879.

[14] Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 214 (2002); Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993).

[15] Cigna Corp. v. Amara, 131 S.Ct. at 1881.

[16] Cigna Corp. v. Amara, 131 S.Ct. at 1879.

[17] Gomez v. St. Vincent Health, Inc., 649 F.3d 583, 588-9 (7th Cir. 2011).

[18] Kannapien v. Quaker Oats Co., 507 F.3d 629, 636 (7th Cir. 2007).

[19] Cigna Corp v. Amara, 131 S.Ct. at 1881.

[20] Cigna Corp. v. Amara, 131 S.Ct. 1866, 1880 (2010).

[21] Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 590 (7th Cir. 2000).

[22] Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213 (2002).

[23] Knudson, 534 U.S. at 214.

[24] Skretvedt v. E.I. duPont De Memours, 372 F.3d 193, 214 (3rd Cir. 2004).

[25] Fotta v. Trustees of United Mine Workers of America, Health & Retirement Fund of 1974, 165 F.3d 209, 214 (3rd Cir. 1998).

[26] Medtronic, Inc. v. Intermedics, Inc., 725 F.2d 440, 442 (7th Cir. 1984).

[27] Kenseth v. Dean Health Plan, Inc., 610 F.3d 452, 482 (7th Cir. 2010).

[28] Mondry v. American Family Mut. Ins. Co., 557 F.3d 781, 807 (7th Cir. 2009) (American Family's plan was self-funded and it arguably benefited from the delay that Mondry experienced in obtaining documents which should have been produced by the plan administrator and reversing an erroneous denial of a claim for benefits.).

[29] Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 592 (7th Cir. 2000).

[30] May Dept. Stores Co. v. Federal Ins. Co., 305 F.3d 597, 603 (7th Cir. 2002).

[31] Mondry, 557 F.3d at 806 (citing Clair v. Harris Trust & Sav. Bank, 190 F.3d 495, 498 (7th Cir. 1999).

[32] May Dept. Stores Co. v. Federal Ins. Co., 305 F.3d 597, 603 (7th Cir. 2002) (Wrongful withholding of benefits due can entitle the beneficiary to impose a constructive trust on interest from the withheld benefits which results in a monetary judgment for plaintiff).

[33] Milgram v. Orthopedic Associates Defined Contribution Pension Plan, 666 F.3d 68, 79-80 (2nd Cir. 2011).

[34] Ib. at 79 (First finding that implied agreements to pay interest on delayed disbursements of owed money fits squarely within the tradition of common law contract interpretation and then relying upon turn-of-the-century U.S. Supreme Court decision of Spalding v. Motion, 161 U.S. 375, 396 (1896).

Glenn Gaffney of Gaffney & Gaffney PC in Glendale Heights is a DCBA Past President representing employees and small to mid-sized suburban employers in employment disputes at the agencies as well as in state and federal court. He is presently a member and the secretary of the ISBA Federal Civil Practice Section Council and a member of the ISBA Judicial Polling Committee.
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