Court Rejects Plan Administrator’s Challenge To Employees’ Divorces

January 31, 2010 | Appeals | Insurance Coverage

According to the administrator of the Continental Airlines Pilots Retirement Plan, a group of senior pilots became concerned several years ago about the health of the plan. These pilots already had reached retirement age, but had not retired or been otherwise separated from their employment at Continental. They allegedly engaged in a scheme to obtain their money through the exception to the anti-alienation provision of ERISA for divorce. The pilots obtained divorces from various states with domestic relations orders (DROs) that assigned 100 percent (in one case, 90 percent) of their retirement benefits under the plan to their spouses – the alternate payees. The administrator “qualified” the DROs and because the pilots in question were of retirement age when the alternate payees requested a lump sum disbursement, the plan paid the benefits. Some payments were up to $900,000. Eventually, the plan administrator adopted the view that these pilots had obtained sham divorces for the specific purpose of withdrawing their pensions early. The pilots and their former spouses apparently did not behave in a manner consistent with the breakup of a marriage; many of the pilots continued to cohabitate, remarried soon after obtaining the lump sum payout, and all essentially conducted themselves as if the divorce had never happened. In many instances, they did not inform any of their family or friends that they had gotten a divorce. As a consequence, the administrator stopped “qualifying” DROs that were in process and indicated similar facts. Additionally, the administrator went to court seeking equitable lien/equitable restitution to retrieve the money it claimed had been erroneously paid and the imposition of a constructive trust. The pilots moved to dismiss the administrator’s claims for this relief.

The court found that the plan administrator did not have the authority to refuse to qualify a DRO based on criteria not present in ERISA. Moreover, the court ruled that the motivation or good faith of the divorce and resulting DRO was not a requirement enumerated in ERISA. Therefore, it held, the plan administrator could not refuse to qualify or retroactively disqualify DROs that met the specific criteria set out by Congress.

The court explained that the ERISA language was “unambiguous.” An agreement meeting ERISA’s definition of a DRO must be qualified if it met the statutory criteria for a QDRO – and none of those criteria involved the good faith of the divorce. The court added that none of the requirements included a catchall provision that would allow an administrator to evaluate criteria not specifically listed.  

The court acknowledged that ERISA allows administrators to “establish reasonable procedures to determine the qualified status of domestic relations orders.” But, the court continued, setting procedures for determining status and setting criteria that determine status were “two quite different things.”

The court rejected the administrator’s contention that to confine it to ERISA’s plain language would thwart ERISA policy by elevating form over substance and open a floodgate of bad faith DRO demands on the plan – and on every other plan in the country. The court stated that it certainly did not condone the pilots’ alleged actions of engaging in these divorces for the sole purpose of obtaining DROs that would allow immediate access to their pension funds, but concluded that it would not ignore “the unambiguous language of the statute.” It then dismissed the administrator’s complaint. [Brown v. Continental Airlines, Inc., 2009 U.S. Dist. Lexis 97392 (S.D. Tex. Oct. 19, 2009).]

Underwriters Tasked With Approving Loans In Accordance With Detailed Guidelines Provided By Their Employer Are Not Exempt Administrative Employees Under FLSA

The plaintiffs in this case were employed by J.P. Morgan Chase as underwriters, where they evaluated whether to issue loans to individual loan applicants by referring to a detailed set of guidelines, known as the Credit Guide, provided to them by Chase. The Credit Guide specified how underwriters should determine loan applicant characteristics such as qualifying income and credit history, and it instructed underwriters to compare such data with criteria, also set out in the Credit Guide, prescribing what qualified a loan applicant for a particular loan product. Chase also provided supplemental guidelines and product guidelines with information specific to individual loan products. An underwriter was expected to evaluate each loan application under the Credit Guide and approve the loan if it met the Guide’s standards.

The plaintiffs claimed that they frequently worked over 40 hours per week and that, under the Fair Labor Standards Act (FLSA), they were entitled to receive overtime compensation for the hours they worked in excess of 40 hours per week. At the time of the plaintiffs’ employment by Chase, however, Chase treated underwriters as exempt from the FLSA’s overtime requirements.

The plaintiffs went to court, seeking a declaratory judgment that Chase violated the FLSA by treating them as exempt and failing to pay them overtime compensation. After the plaintiffs and Chase filed motions for summary judgment, the district court granted Chase’s motion, dismissing the complaint. The plaintiffs appealed.

The U.S. Court of Appeals for the Second Circuit reversed the district court’s decision. It noted that there are a number of categories of employees under the FLSA exempted from the overtime pay requirement, including an exemption for employees who work in a bona fide administrative capacity. In this case, the circuit court continued, there was no indication that underwriters were expected to advise customers as to what loan products best met their needs and abilities. Rather, it said, underwriters were given a loan application and followed procedures specified in the Credit Guide to produce a yes or no decision. Their work was not related either to setting “management policies” or to “general business operations” such as human relations or advertising, but rather concerned the “production” of loans – the fundamental service provided by the bank.

The appellate court then concluded that the job of underwriter as it was performed at Chase fell under the category of production rather than of administrative work. The Second Circuit reasoned that underwriters at Chase performed work that was primarily functional rather than conceptual; they were not at the heart of the company’s business operations; they had no involvement in determining the future strategy or direction of the business; and they did not perform any other function that in any way related to the bank’s overall efficiency or mode of operation.

Accordingly, the circuit court ruled that the plaintiffs did not perform work directly related to management policies or general business operations. Because an administrative employee must both perform work directly related to management policies or general business operations and customarily and regularly exercise discretion and independent judgment, it thus held that the plaintiffs were not employed in a bona fide administrative capacity. They therefore were not exempt employees and the bank could not rely on the administrative exemption to avoid paying them overtime pay. [Davis v. J.P. Morgan Chase & Co., 2009 U.S. App. Lexis 25481 (2d Cir. Nov. 20, 2009).]

Letter Stating Intention To Appeal Was Not An Appeal; Appellate Court Finds that Employee Failed To Exhaust Remedies Before Bringing Suit

Through her employment with the Houston Chronicle newspaper, the plaintiff in this case obtained coverage under a long term disability benefits policy governed by ERISA and underwritten and administered by Hartford Life Insurance Co. The plaintiff received benefits under the policy beginning in January 2002, but, on April 4, 2003, Hartford notified her that benefits would terminate because she was cleared to return to work on a full time basis. The terms of the plan allowed the plaintiff 180 days to appeal this determination, after which Hartford would have 45 days – or 90 days in certain circumstances – to rule on the appeal.

On August 25, 2003, 144 days later, the plaintiff’s counsel submitted a letter to Hartford. It indicated that the counsel represented the plaintiff “in her efforts to reinstate her unlawfully terminated disability and health insurance benefits.” It further indicated:

Please accept this letter as notice of [the plaintiff’s] intention to appeal your decision terminating her benefits under the above referenced policy. Once we have had adequate time to review and supplement the record, we will notify you in writing to proceed with [the plaintiff’s] administrative appeal under the terms of [the plan].

The letter requested various documents from the plan, and asked Hartford to provide counsel with notice of further deadlines.

Hartford did not consider this to be an appeal. Hartford personnel recorded receipt of the letter in the plaintiff’s file, and added the following entry to the file: “Intent to appeal letter rec’d not an appeal – will send out acknow. letter.” Hartford forwarded the file, including this file entry, to the plaintiff’s counsel. When the 180 day deadline passed, and Hartford concluded no appeal had been received, Hartford closed the plaintiff’s file.

Three and a half years later, on February 23, 2007, the same counsel for the plaintiff submitted to Hartford what she subsequently described as “her brief with accompanying evidence, including medical records and a vocational expert’s report.” The cover letter stated that “[t]his firm represents [the plaintiff] in her ongoing appeal of the Hartford Life Insurance Company’s unlawful decision . . . to close [the plaintiff’s] claim for continued” long term disability (LTD) benefits. On April 21, 2007, Hartford wrote the plaintiff, rejecting the new submission as an appeal filed after the 180 day deadline.

The plaintiff then filed suit in federal district court, which granted the plan’s motion for summary judgment. The district court held that the August 25, 2003 letter merely expressed an intention to appeal in the future, but did not constitute an appeal, and that the plaintiff’s failure to file an actual appeal before the 180 day deadline amounted to a failure to exhaust administrative remedies prior to bringing suit.

The plaintiff appealed, arguing that she had indeed filed her appeal within 180 days. She contended that she “preserved her right to appeal by sending a letter on August 25, 2003 to Hartford as notice of her appeal well within the 180 day time limit,” and that “Hartford was required to issue its decision in writing 45 days after it received the written request.”

The U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision, deciding that the plaintiff’s August 25 letter was not an appeal; it merely expressed an “intention to appeal.” It explained that the plaintiff’s letter included no factual or substantive arguments, and no evidence. There was accordingly nothing for Hartford to consider on appeal, and no basis to require Hartford to “issue its decision in writing 45 days after it received the written request,” as the plaintiff proposed. The appropriate materials making the plaintiff’s case – her actual appeal – did not arrive until more than three years later, the appellate court pointed out.

Accordingly, the appellate court found in favor of Hartford, concluding that it was entitled to an affirmative defense of failure to exhaust administrative remedies. [Swanson v. Hearst Corp. Long Term Disability Plan, 2009 U.S. App. Lexis 24055 (5th Cir. Nov. 3, 2009).]

Statements Plaintiff Made To Obtain Disability Pension Bar His ADA Action, Court Rules

The plaintiff in this case was a police officer for the village of Round Lake, Illinois, who was diagnosed with chronic obstructive pulmonary disease (COPD), an incurable lung condition that makes breathing very difficult. After receiving his diagnosis, the plaintiff filed an application for a disability pension. The pension board found that the plaintiff qualified as disabled and awarded him benefits. While continuing to collect his pension, the plaintiff filed a lawsuit against the village for violating the Americans with Disabilities Act (ADA).

The court rejected the plaintiff’s action based on the principle of judicial estoppel. Judicial estoppel provides that a party who prevails on one ground in a prior proceeding cannot turn around and deny that ground in a subsequent one.  It is an equitable concept designed to protect the integrity of the judicial process and to prevent litigants from playing fast and loose with the courts.

In order to succeed on an ADA claim, a plaintiff must show that, with or without reasonable accommodation, the plaintiff can “perform the essential functions” of his or her job. Here, the court stated, accepting the plaintiff’s sworn testimony before the pension board as true, it was clear that he could not perform essential police functions – with or without accommodations.

In particular, the court explained that, to secure disability benefits, the plaintiff had stated that he was unable to perform basic police duties. To claim damages in his ADA suit, he stated he was able to perform those duties. The court declared that this was “just the kind of about-face judicial estoppel seeks to prevent.”

The court noted that claiming disability benefits and asserting ADA claims were not always mutually exclusive, but a plaintiff’s sworn assertion in an application for disability benefits that he or she was, for example, “unable to work” would appear to negate an essential element of the plaintiff’s ADA case – at least if the plaintiff did not offer a sufficient explanation. Concluding that the plaintiff had provided no satisfactory explanation for his inconsistency, the court concluded that his ADA claim had to fail. [Butler v. Village of Round Lake Police Dep’t, 2009 U.S. App. Lexis 23602 (7th Cir. Oct. 27, 2009).]

Employers Revenue-Neutral Changes To Shift Schedule To Accommodate Employees Wishes Does Not Violate FLSAs Overtime Pay Rules

Prior to 1989 or 1990, the Pomona Valley Hospital Medical Center scheduled its nurses to work almost exclusively in eight hour shifts. However, many of the hospital’s nurses preferred working 12 hour shifts to have more days away from the hospital. The nurses, therefore, requested 12 hour shift schedules. In response to these requests, the hospital developed and implemented an optional 12 hour shift schedule and pay plan in 1989-90. The pay plan provided nurses the option of working a 12 hour shift schedule in exchange for receiving a lower base hourly salary (that at all times exceeded the minimum wage set forth by the Fair Labor Standards Act) and time-and-a-half pay for hours worked in excess of eight per day. The result: nurses who volunteered for the 12 hour shift schedule would make approximately the same amount of money as they made on the eight hour shift schedule (while working the same number of hours and performing the same duties). After the hospital made the 12 hour shift schedule available, many of the hospital’s nurses (though not all) opted to work 12 hour shifts.

In 1993, the plaintiff in this case started working as a nurse in the hospital’s emergency room (ER). The nurses in the hospital’s ER (including the plaintiff) voted to implement 12 hour shifts.  The plaintiff favored the 12 hour shift format because it provided her more flexibility in her personal schedule, enabling her to care for her mother, pursue a second nursing job at other facilities, and pick up additional shifts at the hospital. After voting to implement 12 hour shifts in the ER, the plaintiff subsequently entered into a voluntary agreement with the hospital that reduced her base hourly wage rate from $22.83 to $19.57 in exchange for the 12 hour shift schedule. The plaintiff continued to work the 12 hour shift schedule without interruption since 1993.

In 2006, the plaintiff filed a complaint against the hospital alleging that its use of different base hourly rates violated the FLSA. She argued that the hospital violated the FLSA by creating a pay plan that paid nurses working 12 hour shifts a lower base hourly rate than nurses who worked eight hour shifts. In support of her argument, the plaintiff contended that the hospital could not reduce the base pay for nurses working the 12 hour shift, the 12 hour base pay rate was an “artifice” designed to avoid the FLSA’s overtime and maximum hours requirements, and the hospital could not justify the base hourly pay rate differences between the eight hour and 12 hour shifts because nurses working both shifts performed the same job duties. The district court found that the plaintiff did not provide evidence or law sufficient to support her claims and it therefore granted the hospital summary judgment. The plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit.

The circuit court affirmed the district court’s ruling. It rejected the plaintiff’s argument that the hospital’s pay plan violated the FLSA because it was designed to “make overtime payments cost neutral.” It pointed out that the 12 hour shift scheduling practice was first initiated at the nurses’ request, and then, after the nurses unionized in 2003, was memorialized in a collective bargaining agreement again at the nurses’ request. The circuit court observed that the wages paid under the pay plan were more than the minimum wages under federal law, and it found “no reason” to invalidate the agreement between the parties. Simply put, the circuit court decided that there was “no justification in the law and no public policy rationale” for invalidating the arrangement, concluding that the plaintiff also failed to cite any authority to suggest that a voluntary base rate wage reduction made in exchange for a 12 hour shift schedule was unlawful.

In conclusion, the circuit court held that there was “no authority” that suggested that employees could not be paid different rates for different shifts and, in fact, it found “ample authority” supporting the hospital’s argument that workers working different shifts could be paid different rates. [Parth v. Pomona Valley Hospital Medical Center, 584 F.3d 794 (9th Cir. 2009).]

Claimants Failure To Timely File Claim For Disability Benefits Dooms Lawsuit

The plaintiff in this case purchased three professional disability insurance policies between 1992 and 1996 that provided for varying monthly indemnities, totaling approximately $9,000, in the event the plaintiff became “totally disabled” “because of sickness or injury” and “unable to perform the major duties of [his] occupation.” The plaintiff was required to provide the insurance companies with notice of his claim for disability benefits within 30 days of the onset of “total disability.”

In January 2000, the plaintiff allegedly stopped working as a manager of medical facilities as result of “neurological/neuropathy, carpal syndrome type symptoms, heart disease, diabetes, right shoulder pain/lack of movement, sleep problems, constant pain.” Almost two years later, on December 7, 2001, the plaintiff contacted the insurers and verbally notified them that he was “totally disabled” and intended to make a claim. The following month, the plaintiff submitted a Disability Claimant’s Statement dated January 4, 2002, whereby he claimed to be “totally disabled” based upon the above mentioned ailments.

In a letter dated October 7, 2003, the insurers denied the plaintiff’s claim in a letter to his attorney. More than five years later, in December 2008, the plaintiff filed suit against the insurers, seeking disability benefits. The plaintiff alleged that “[d]uring November or December of 1992, plaintiff suffered from sickness classified and diagnosed as heart disease, later followed by cervical and lumbar nerve impingement, carpal tunnel syndrome symptoms, nerve injury, neuropathy and the need for surgery, along with dependence on pain medication, lethargy which illness prevented him from performing the major duties of his then occupation as an office manager from December 1992 to date….” The insurers moved for summary judgment dismissing the complaint as untimely. In response, the plaintiff cross moved for permission to file an amended verified complaint that changed the onset of the plaintiff’s total disability from “November or December 1992” to January 2000. The plaintiff’s counsel argued that the proposed amendment should be permitted because it was a mere “scrivener’s error,” there was no prejudice to the insurers, and there was a sufficient evidentiary showing of the merit of the amendment. In reply, the insurers argued that they had detrimentally relied on November or December 1992 as the onset of the plaintiff’s alleged total disability for six months of litigation, and, in any event, even if the plaintiff had not become totally disabled until January 2000, his claim still had to be dismissed as late.

In its decision, the court found that the “plain words” of the policies were dispositive. It pointed out that the Notice of Claim provision in the policies directed that the insured “must give us notice of claim within 30 days after any loss which is covered by our policy occurs or starts, or as soon after that as is reasonably possible.” The court continued by pointing out that compliance with the notice of claim provision in an insurance policy was “a foundational condition precedent to maintaining an insured’s action on a policy.” Moreover, “absent a valid excuse, a failure to satisfy the notice requirement vitiates the policy.”

The court ruled that assuming that the plaintiff was mistaken, and the date of onset of his illness was in fact “January 2000,” that still would not resolve the fact that the plaintiff “undisputedly delayed” notifying the insurers of the onset of his illness for 23 months, despite the fact that plaintiff admittedly had stopped working in January 2000. The court also rejected the plaintiff’s argument that the 23 month delay in giving notice could be construed to be “as soon as is reasonably possible” in light of the fact that the insurers could not demonstrate that they were prejudiced by the delay. The court explained that, contrary to the plaintiff’s argument, the “no prejudice” rule applied in actions seeking to recover disability benefits. The court added that compliance with notice of claim provisions promoted the policy goal of enabling insurers to make a “timely investigation of relevant events and exercise early control over a claim.”

The court then granted the insurers’ summary judgment because of the plaintiff’s failure to file a timely notice of claim. [Elmowitz v. Guardian Life Ins. Co. of America, #116152/08 (Sup. Ct. N.Y. Co. Nov. 10, 2009).]

Reprinted with permission from the January 2010 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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