Employee Benefit Plan Review – From the CourtsOctober 29, 2019 | Norman L. Tolle | |
Eighth Circuit Affirms Dismissal of Complaint by Participant in Defined-Contribution Retirement Savings Plan
The U.S. Court of Appeals for the Eighth Circuit, applying the reasoning in a 2014 decision by the U.S. Supreme Court, has upheld dismissal of a complaint brought by a participant in a defined-contribution retirement savings plan governed by the Employee Retirement Income Security Act of 1974 (ERISA).
In May 2014, after SunEdison Semiconductor, LLC (Semi) was spun off from SunEdison, Inc., Semi created a defined-contribution retirement savings plan subject to ERISA that it made available to its employees.
The plan offered several investment options to its participants, including a fund that invested solely in the common stock of Semi’s former corporate parent, SunEdison. The plaintiff elected to exercise this option and held shares of SunEdison common stock through his individual plan account.
By mid-2015, it was widely reported that SunEdison was facing liquidity problems and was in financial distress due to an ambitious series of acquisitions. On July 20, 2015, SunEdison issued a press release announcing that it would acquire Vivint Solar, Inc., for $2.2 billion. Markets reacted poorly, and SunEdison’s stock price fell from $31.56 per share to $26.01 per share in one week.
On August 6, SunEdison issued another press release, reporting a $263 million loss in its second quarter. That same day, the financial press warned that SunEdison had a $10.7 billion corporate debt load and negative cash flow from operations. By the end of the day, SunEdison’s stock closed at $17.08 per share.
On November 10, SunEdison issued a press release reporting its third quarter results. These results spurred more negative commentary from the financial press, which questioned whether SunEdison would even be able to meet its existing financial obligations.
On January 7, 2016, SunEdison announced that it was restructuring $738 million of its debt. That same day, the financial press reported that this decision had triggered a massive sell-off because of its dilutive effect on investors, even though SunEdison’s strategy would add an estimated $555 million to its liquidity. That week, shares of SunEdison dropped roughly 30 percent, closing at $3.41.
By January 12, the financial press was reporting that SunEdison might not survive the year, and SunEdison’s stock closed at $3.02 per share, hitting a low of $2.36 during the day.
In April, SunEdison and certain of its subsidiaries filed for bankruptcy. SunEdison’s common stock was suspended immediately from trading at the market opening on the New York Stock Exchange on April 21, 2016.
All told, between July 20, 2015 and April 21, 2016, the market price of SunEdison stock fell from $31.66 to $0.34. As a result, those who had invested in SunEdison stock through Semi’s retirement plan effectively lost the entire value of their investment.
The plaintiff sued derivatively on behalf of the plan and, in the alternative, as a putative class action on behalf of plan participants. The plaintiff claimed that Semi, the investment committee of Semi’s retirement savings plan, and the members of the investment committee had breached their fiduciary duties under ERISA. The plaintiff alleged that between July 20, 2015 and April 21, 2016, the defendants knew or should have known that SunEdison was in poor financial condition and faced poor long-term prospects and, therefore, should have removed SunEdison stock from the plan’s assets.
The U.S. District Court for the Eastern District of Missouri dismissed the plaintiff’s complaint, and he appealed to the Eighth Circuit.
The Eighth Circuit’s Decision
In its decision affirming the district court, the Eighth Circuit explained that, to prevail on a claim of breach of fiduciary duty under ERISA, a plaintiff must make a prima facie showing that the defendant acted as a fiduciary, breached its fiduciary duties, and thereby caused a loss to the plan.
The Eighth Circuit pointed out that the U.S. Supreme Court, in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), opined that where a stock was publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock were “implausible as a general rule,” at least in the absence of special circumstances. The Supreme Court embraced the view that a security’s price in an efficient market reflected all publicly available information and represented the market’s best estimate of its value in light of its riskiness and the future net income flows that those holding it were likely to receive.
The Eighth Circuit said that the similarity between the allegations in Dudenhoeffer and the plaintiff’s allegations involving the Semi plan was “undeniable.” It noted that the plaintiff’s complaint presented a series of public announcements by SunEdison that spurred negative commentary by the financial press and concomitant drops in stock price; that it faulted the defendants for failing to act on this publicly available information; and that it alleged that the declines in SunEdison’s stock price and reports of SunEdison’s extraordinary debts and liquidity problems should have prompted the defendants to investigate and ultimately determine that divesting from SunEdison stock would have been prudent as early as July 20, 2015.
The court also found that the plaintiff’s complaint contained no allegations that the circumstances indicated to the defendants that they could not rely on the market’s valuation of SunEdison stock. Indeed, the court added, the allegations suggested that SunEdison’s stock price did react to the company’s announcements and the financial press’s negative commentary as to the company’s high debt load and liquidity problems, among other concerns.
In sum, the court stated, the plaintiff alleged that the defendants breached their fiduciary duties because they failed to “outperform the market based solely on their analysis of publicly available information” and to decide that, because SunEdison stock was excessively risky, the plan should divest from SunEdison. Given the Supreme Court’s decision in Dudenhoeffer, the court concluded that these allegations failed to plausibly allege that the defendants had breached the duty of prudence. [Usenko v. MEMC LLC, No. 18-1626 (8th Cir. June 4, 2019).]
DuPont Trust Created in 1947 to Provide Pension Benefits to Family Employees Found Subject to ERISA
A federal district court in Delaware recently held that a trust created in 1947 by Mary Chichester DuPont was a pension plan subject to the Employee Retirement Income Security Act of 1974 (ERISA).
As the court explained, Mary Chichester DuPont created the Mary Chichester DuPont Clark Employee Pension Trust on September 11, 1947. The trust initially was funded with 50 shares of the common stock of Christiana Securities Company. The trust provided that every qualified beneficiary “shall be entitled to an annual pension for the life of such Pensioner or during the continuance of this trust whichever is shorter, at the rate of sixty percent (60%) of the annual money wages or salary at which such Pensioner was employed.” The trust defined its beneficiaries as “any domestic employee or any employee rendering secretarial, accounting, or other assistance in the management of his employer’s private, financial, and social affairs who may be employed by any one or more of Mary Chichester DuPont, A. Felix DuPont, Jr., Lydia C. DuPont, Alice DuPont Mills, Allaire Crosier DuPont and/or any grandchild of the Trustor.”
Two grandchildren of Mary Chichester DuPont who employed domestic employees allegedly entitled to benefits under the trust filed a lawsuit seeking a determination that the trust was a pension plan governed by ERISA.
The District Court’s Decision
The U.S. District Court for the District of Delaware ruled that the trust qualified as an ERISA plan governed by ERISA.
The court explained that a plan affecting interstate commerce was an ERISA plan if, from the surrounding circumstances, “a reasonable person” could ascertain “the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits.”
The court first found that the trust met the interstate commerce nexus. It reasoned that the trust and its trustees were involved in overseeing investments and managing a portfolio of securities and other assets; that they conducted that activity across state lines and through national markets for securities; that the plan participants – both employers and employees – were residents of different states; and that the trust directed payment to beneficiaries in multiple states.
Next, the court ruled that the trust was an ERISA plan governed by ERISA. It said that it could “easily ascertain the intended benefits and procedures for receiving benefits” from the terms of the trust itself. The court noted that the trust described the benefits and eligibility requirements in detail and that 13 employees had received or were receiving benefits under the trust. In the court’s view, a reasonable person would conclude that there was a class of beneficiaries: the DuPont family’s former, present, and future domestic or household employees. The court added that a reasonable person also could ascertain the source of funding for the plan, with the initial contribution set out in an addendum to the trust and appreciation and income from investments also funding the trust.
In addition, the court continued, the trust was not a “single, aberrational occurrence” but reflected a calculated commitment to provide pension benefits to qualified former, present, and future employees on a regular and long-term basis.
The court found that there was a “documented history of a multi-decade effort to provide pension benefits to the family’s long-term domestic employees,” and it concluded that the trust was an ERISA plan that was covered by ERISA. [Wright v. Elton Corp., No. 17-286-JFB (D. Del. June 3, 2019).]
Sixth Circuit Affirms Decision Denying AD&D Benefits After Insured Died in Private Plane Crash
The U.S. Court of Appeals for the Sixth Circuit recently affirmed a district court’s decision rejecting a complaint seeking accidental death and dismemberment (AD&D) benefits under an employer welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) following the insured’s death in a crash of a private plane.
After her son died in a private plane crash, the plaintiff claimed benefits under the optional AD&D policy that her son had purchased as part of his employer’s welfare benefit plan, which was governed by ERISA.
The claim administrator denied the plaintiff’s claim, citing the policy’s aerial navigation exclusion, which excluded from coverage any loss caused by “flight in . . . any vehicle used for aerial navigation, other than as a fare-paying passenger on a scheduled or charter flight operated by a scheduled airline whether as a passenger, pilot, operator or crew member.”
The claim administrator then denied the plaintiff’s administrative appeal, and she sued under ERISA. The plaintiff sought to recover benefits under 29 U.S.C. § 1132(a)(1)(B) and equitable relief under 29 U.S.C. § 1132(a)(3).
The U.S. District Court for the Western District of Michigan entered judgment in favor of all of the defendants and the plaintiff appealed to the Sixth Circuit.
The Sixth Circuit’s Decision
In its decision affirming the district court, the Sixth Circuit pointed out that the plaintiff conceded that the policy, under a literal reading, excluded coverage for death occurring in private aircraft travel. Therefore, the court said, the plaintiff was not entitled to benefits because the plaintiff’s son died in a private plane crash.
The court then rejected the plaintiff’s contention that she was entitled to equitable relief under 29 U.S.C. § 1132(a)(3).
First, the plaintiff claimed that the benefits guide for the AD&D policy was inaccurate because it stated that if “you or a family member suffers an injury or dies as a result of an accident, the Plan will pay . . . benefits.” The court explained that the benefits guide explicitly stated that it was not a summary plan description or a controlling plan document and it ruled, therefore, that the plaintiff failed to plausibly allege that the benefits guide contained any material misrepresentation.
Moreover, the court found that the plaintiff did not allege that her son had read the benefits guide and had concluded that AD&D benefits would be payable in the event of a private airplane crash. The court added that, given the benefits guide’s admonitions, the plaintiff’s son could not reasonably have inferred that insurance benefits would be payable “in the event of any and every accident simply because he paid premiums.”
The court reached the same conclusion with respect to the plaintiff’s contention that she should be awarded benefits because her son had not received a summary plan description, explaining that a failure to provide a summary plan description was “not a basis” for an award of benefits. Instead, the court pointed out, 29 U.S.C. § 1132(c) limited recourse for failure to provide a summary plan description to statutory penalties.
Finally, the court concluded that the plaintiff’s allegation that her son had not received a certificate of insurance or the actual policy also did not entitle her to recover benefits, finding that the alleged failure to provide her son with a certificate of insurance or the policy was “irrelevant to her denial of benefits claims.” [Briggs v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 18-1828 (6th Cir. May 23, 2019).]
11th Circuit Upholds Denial Decision Where Claim Administrator Substantially Complied with ERISA’s Notice Requirements
The U.S. Court of Appeals for the Eleventh Circuit, applying the arbitrary and capricious standard of review, has upheld a claim administrator’s denial of coverage under a healthcare plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) after finding that the claim administrator substantially complied with ERISA’s notice requirements.
The plaintiff, a minor covered by a healthcare plan governed by ERISA, was treated for bulimia at a residential eating disorder treatment center. After one day in inpatient treatment, the plaintiff transitioned to residential treatment, where she remained for about two months. The plaintiff’s health improved significantly during her stay at the center.
The claim administrator denied the plaintiff’s claim for benefits for her treatment at the center. A physician for the claim administrator explained the decision, noting that the plaintiff was “medically stable, and does not require 24 hour monitoring for medical or psychiatric symptoms.” The physician concluded that the plaintiff “could continue to have treatment in an eating disorder partial hospital program for eating disorders.” The denial letter explained that the decision was “[b]ased on our Level of Care Guideline for Mental Health Residential Rehabilitation Level of Care.”
The claim administrator denied the plaintiff’s appeal, and the plaintiff filed suit. The U.S. District Court for the Northern District of Georgia granted summary judgment in favor of the claim administrator, and the plaintiff appealed to the Eleventh Circuit.
The Eleventh Circuit’s Decision
In its decision affirming the district court’s decision, the Eleventh Circuit explained that the plan vested the claim administrator with discretion to make coverage decisions and that, as a result, it would review its denial of coverage under the arbitrary and capricious standard.
The court rejected the plaintiff’s argument that it should apply a less deferential standard. The plaintiff argued that a less deferential standard was warranted because the claim administrator failed to comply with ERISA’s notice requirements in that its adverse benefit determinations did not provide “an explanation of the scientific or clinical judgment for the determination, applying the terms of the plan to the claimant’s medical circumstances.”
The court stated that a notice of an adverse benefit determination only must “substantially comply” with ERISA’s notice requirements. It then found that the claim administrator had substantially complied with ERISA’s notice requirements. It reasoned that although the denial letters did not expressly refer to the plan’s “medical necessity” definition, each letter explained that although the plaintiff was suffering from an eating disorder, her medical records did not support a finding that inpatient or residential treatment was necessary. According to the court, the letters specifically identified an alternative level of care – partial hospitalization – that the claim administrator’s psychiatrists opined could properly address the plaintiff’s condition.
The court added that it was “clear from these descriptions” that the claim administrator was referring to its medical necessity definition, which required that the level of care be, among other things, “clinically appropriate, in terms of type, frequency, extent, site and duration.”
The court also observed that although the level of care guidelines were not attached to the letters, the letters identified the relevant guideline and they also included a link to the guidelines.
Next, the court found that “reasonable” grounds supported the claim administrator’s medical necessity determination. The court pointed out that four separate board-certified psychiatrists reviewed the plaintiff’s medical records and determined that partial hospitalization with drug testing and monitoring for self-injury “with appropriate interventions” was the clinically appropriate level of care. Moreover, the court said, when the plaintiff was admitted, she had never attempted suicide, had no plan to self-harm, was at a healthy weight, and had no other medical conditions that rendered her medically unstable. And, from that point, she only continued to improve.
The court concluded that the evidence showed that the plaintiff had serious mental health problems, but because there was a reasonable basis to support the claim administrator’s decision, it was not arbitrary and capricious for it to only approve coverage for the plaintiff’s partial hospitalization rather than treatment at the center. [O.D. v. Jones Lang LaSalle Medical PPO Plus Plan, No. 17-13060 (11th Cir. May 15, 2019).]
- Norman L. Tolle