Equitable Reformation Is An Available Remedy Under ERISA § 502(a)(3)
YOUNG v. VERIZON'S BELL ATLANTIC CASH BALANCE PLAN (AUGUST 10, 2010)
In 1996, Bell Atlantic replaced its Bell Atlantic Management Pension Plan, a defined annuity pension plan, with the Bell Atlantic Cash Balance Plan. The old pension plan included a lump sum option for certain employees that used an enhanced discount rate. The new Plan contained provision for converting employees' benefits from the pension plan to the new Plan. One key to the conversion was an employee's "transition factor." The transition factor was a multiplier that increased as an employee's age and years of service increased. Unfortunately for Bell Atlantic, the Plan's formula for computing an employee's opening balance contained the transition factor twice. The Plan Summary and all communications to employees described the formula correctly -- using the transition factor only once. The company also recognized the error and corrected it in a 1998 version of the Plan. Cynthia Young retired in 1997 after 32 years of service. After receiving her lump sum benefit, Young sought administrative review. She made two claims: that the company failed to apply the transition factor twice and that the company improperly applied the enhanced discount rate from the earlier pension plan. The company denied Young's claim. Young filed suit pursuant to ERISA § 502(a). The company counterclaimed for equitable reformation to correct the "scrivener's error." Magistrate Judge Denlow (N.D. Ill.) upheld the company's denial of the discount rate claim as not arbitrary and capricious and granted the equitable reformation counterclaim. Young appeals.
In their opinion, Judges Bauer, Flaum, and Tinder affirmed. The Court first addressed both party's statute of limitations arguments. The parties and the Court agreed that Pennsylvania's four-year limitations period applies. At issue was when the claims accrued. The Court concluded that the complaint and counterclaims were both timely. Young's claim did not accrue until she had a "clear repudiation" of her demand, which occurred in 2005. Although the company knew about the drafting mistake in 1997, the Court concluded that its claim for reformation did not accrue at that time. It was not on notice of the need to reform because it had always treated the second transition factor inclusion as a mistake. It paid benefits and communicated with its employees on that basis. It corrected the mistake and no one complained until Young brought suit. On the merits, the Court noted that § 502(a)(3) of ERISA permits "appropriate equitable relief." Although the Court has never addressed the propriety of equitable reformation, other circuits have and have either concluded that it is available or at least not foreclosed. Relying on those cases and the Court's own cases on ambiguous plan language, the Court concluded that equitable reformation is permitted when there is clear and convincing evidence of a scrivener’s error that does not reflect participants' reasonable expectations. The Court found such evidence present here. It relied on the drafting history, the communications and course of dealing between the company and its employees, the plan statements to participants, and the lack of any complaint until Young. The Court then considered and rejected the traditional equitable defenses raised by Young (good faith, unclean hands, and laches). Finally, the Court used principles of contract construction and interpretation, particularly that specific provisions control general provision, to reject Young's enhanced discount rate claim. The Court found that the most reasonable reading of the Plan required the enhanced rate.
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Stephen Bandak was employed by an Eli Lilly company in England, his native country, from 1978 to 1995. He participated in the company's retirement plan. He was transferred to the United States in 1995. The company told him, upon his enrollment in the U. S. company's plan, that his benefits in that plan would be based on years of employment retroactive to 1978. The plan also provided that benefits would be reduced by the actuarial equivalence of any other benefits under a “qualified defined benefit plan” maintained by an Eli Lilly company. When Bandak retired in 2004, the company took the position that his benefits under the English company's plan were benefits under a qualified defined benefit plan and were thus properly deducted from his U.S. pension benefits. Bandak sued the company under ERISA. Judgment was entered in his favor for both damages and an injunction relating to future benefit payments. The court also concluded that Lilly's position was not substantially justified and awarded attorneys’ fees. Eli Lilly appeals.
Donald Perry and William Wilk both participated in their 