Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

LOOMIS v. EXELON CORP. (September 6, 2011)

Exelon Corp. maintains a defined-contribution pension plan for its employees. It offers its participants 24 no-load mutual funds among its 32 different options. The expense ratios of the 24 funds range from 0.03% to 0.96%, depending on how actively the fund is managed. The expenses are deducted from the fund assets and therefore, in effect, paid for by the participants. Some participants brought suit against the Plan under ERISA, alleging that the Plan violated its fiduciary duties by 1) offering only funds that are available to the general public, and 2) requiring the Plan's participants to pay for the funds’ expenses. Judge Darrah (N.D. Ill.) concluded that the claim was controlled by Hecker and dismissed it. The court also awarded $42,000 in costs. Plaintiffs appeal.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Posner and Tinder affirmed. The Court stated that it had resolved the first of the plaintiffs' complaints in Hecker, where the Court held that a plan's menu of 25 mutual funds that were available to the public with expense ratios ranging from 0.07% to 1.00% was acceptable as a matter of law. The Court expressed no interest in overruling Hecker. The plaintiffs' second claim, that the Plan should cover the expenses of the funds, was not presented in Hecker. But if fails also. Although Exelon could have set up its Plan in that way, it was not required to. An employer can act in its own interest when it designs a plan and decides how much to contribute. The Court turned to the costs award. Rule 54(d), on which the district court relied in awarding costs, creates a presumption in favor of the prevailing party unless a statute or rule provides otherwise. ERISA, on the other hand, provides that a court in its discretion may allow costs to either party. Plaintiffs contend that ERISA is therefore a statute that provides otherwise and thus supersedes Rule 54 (D.). They further contend that ERISA requires a finding of bad faith or harassment to award costs. The Court conceded that it had never addressed the question head-on and that it's treatment of the question has not been consistent. It concluded that it did not need to resolve the question, because it disagreed with plaintiffs' premise that ERISA required a finding of bad faith in order to award costs. Both the rule and ERISA give the district court discretion to award costs -- that is what the district court did.

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KENSETH v. DEAN HEALTH PLAN (June 28, 2010)

In 1987, Deborah Kenseth decided to do something about her serious weight problem. She underwent a surgical procedure known as vertical banded gastroplasty (“VBG”) and shed 120 pounds. Kenseth joined Highsmith, Inc., a library furniture and supply distributor, in 1996. Kenseth elected to participate in the Dean Health Plan through her employer. The plan did not cover surgical treatment for gross obesity such as VBG. It also generally excluded any services "related to" a non-covered service. Several years later, Kenseth began to experience complications arising from the VBG. In 2004, she had a surgical procedure to address one of those complications. Notwithstanding the plan language, Dean paid for the procedure. The procedure, however, was not totally successful. Her physician recommended a gastric bypass procedure as a long-term solution to her situation. After the surgery was scheduled, the physician's office provided standard instructions to Kenseth. Included in the instructions was a direction to call her insurance company to check on coverage. Kenseth did just that. Kenseth described the procedure to the Dean customer service agent as one dealing with the "bottom of the esophagus." She did not disclose, she says unintentionally, that the procedure was related to her 1987 VBG surgery. The plan representative told her that the procedure would be covered. The day after the surgery, Dean made its initial decision to deny coverage. Its rationale was that the procedure addressed a complication arising from, and therefore related to, the VBG, a non-covered service. Kenseth unsuccessfully challenged Dean's decision internally. She then brought suit under ERISA and state law. She asserted that: a) Dean breached its fiduciary obligation because the plan was unclear both as to coverage and as to how she could determine coverage and because Dean failed to provide a pre-approval authorization procedure, b) Dean was collaterally estopped from denying benefits because of the representative's "approval," and c) Dean violated Wisconsin law on an insurer's ability to deny coverage for pre-existing conditions. Judge Crabb (W.D. Wis.) granted summary judgment to Dean on all counts. Kenseth appeals.

In their opinion (as amended), Judges Manion, Rovner, and Tinder affirmed in part, vacated in part, and remanded. First, the Court affirmed summary judgment on collateral estoppel. Kenseth failed to advise the Dean customer service agent of the connection between the procedure and her earlier surgery, even if unintentionally. Equitable estoppel should not be applied when the party being estopped is unaware of a material fact. Second, the Court also affirmed with respect to the state statutory argument. The Wisconsin statute deals with pre-existing conditions. The exclusion on which Dean relies focuses on the nature of the benefit, not whether it was pre-existing. Third, the Court addressed the breach of fiduciary duty claim. Such a claim requires a plan fiduciary, a breach, and harm. Dean is a plan fiduciary, not because it is the customer service agent's employer, but because it is a claims administrator with discretionary authority to assess a plan participant's entitlement to benefits. Thus, it owes the plan participants duties of loyalty and reasonable care. One core duty to beneficiaries is the duty to disclose all material information. That duty has a negative component (not to mislead or misrepresent) but also has an affirmative component (to communicate material facts). Here, on the record before the Court, it concluded that a fact finder could determine the Dean had a duty to a) advise callers to its customer service line that they were not entitled to rely on any advice recieved, and b) inform callers how to obtain a binding determination of coverage. Dean could have avoided that liability by providing plan beneficiaries with a clear and unambiguous statement of benefits. Although the Court concluded that Dean's statement of benefits was clear that a procedure like the VBG was not covered, it concluded that the "related to" exclusion was not clear. In addition to the fact that the language itself was not clear, the Court also referred to the fact that Dean had already paid for a procedure to address a complication of the original surgery. Finally, the Court had no difficulty in finding an injury caused by Dean's breach of its fiduciary duty. Having found a breach and an injury, the Court turned to the remedy. It emphasized that Kenseth's claim was not a denial of benefits claim under section 1132(a)(1)(B) nor was it a representative action under section 1109 (a). Instead, it was an individual action under section 1132 (a)(3). But that section allows only equitable relief, not damages. The Court remanded to allow Kenseth an opportunity to identify, if possible, an appropriate form of equitable relief.

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SHARP ELECTRONICS CORP. v. METROPOLITAN LIFE INSURANCE CO. (August 18, 2009)

Sandra Rudzinski was an active employee of Sharp Electronics when she began experiencing fatigue and headaches. As a Sharp employee, she participated in its disability plan. Under the plan, Sharp paid short-term benefits during an initial 180-day period and Metropolitan Life Insurance Company ("MetLife") paid long-term benefits. Sharp paid premiums to MetLife on behalf of its employees. Rudzinski received short-term benefits from Sharp and applied for long-term benefits from MetLife. MetLife denied her application, first on the ground that she had a pre-existing disability and later on the ground that she had not completed the 180 days of short-term benefits. Rudzinski sued MetLife under ERISA. During the litigation, MetLife told Rudzinski that MetLife also denied her benefits because Sharp stopped remitting premium payments after her employment ended. She added Sharp as a defendant. She accused Sharp of interfering with her benefits, violating fiduciary duties, and for telling her that she could maintain her benefits by obtaining a conversion policy. Sharp cross-claimed against MetLife, alleging breach of fiduciary duty, equitable estoppel and indemnity. Rudzinski voluntarily dismissed her claim against Sharp and the court entered judgment in her favor in her claim against MetLife, leaving only Sharp's cross-claim. Sharp filed an amended complaint, alleging breach of fiduciary duty under ERISA, indemnification, negligence, negligent inducement, negligent misrepresentation, abuse of process and common-law breach of fiduciary duty. The court granted MetLife's motion to dismiss, concluding that MetLife had not breached a fiduciary duty and that the state law claims were preempted by ERISA. Sharp appeals.

In their opinion, Judges Kanne, Rovner and Wood affirmed with respect to ERISA and vacated and dismissed with respect to the state law claims. In order to recover under its ERISA claim, Sharp had to prove that MetLife owed it a fiduciary duty, that it was involved in fiduciary functions when it told Rudzinski about Sharp's failure to pay premiums, and that it was seeking damages for losses suffered by the plan (as opposed to the company). Although the Court agreed that Sharp and MetLife both occupied fiduciary roles, it concluded that MetLife did not owe a fiduciary duty to Sharp. It also concluded that Sharp's only losses were its fees and expenses in defending the suit brought by Rudzinski, losses not recoverable under ERISA. With respect to the state law claims, the Court disagreed with the district court that they were preempted by ERISA. ERISA does not preempt state law claims that are not related to a benefit plan. Here, Sharp's claims relate to its contractual relationship with MetLife. Even though the subject of that relationship is a benefit plan, claims relating to the contract are not preempted. The Court nevertheless dismissed the state law claims based on the lower court's alternative ruling that it would not exercise its discretion to hear the state law claims, considering that the only federal claim was dismissed. 

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INTERNATIONAL UNION OF OPERATING ENGINEERS, LOCAL 150 v. WARD (April 16, 2009)

Local 150 represents over 22,000 union members in Illinois, Indiana and Iowa. Joseph Ward was its treasurer 1986 until 2007. In 1994, the president of the local asked Ward to purchase property adjacent to the local’s headquarters. Instead of purchasing the property for the union, however, Ward participated in the purchase of the property by an investment group. The group sold the parcel several years later at a substantial profit. Local 150 filed a complaint against Ward, alleging violations of § 501 of the Labor-Management and Reporting Disclosure Act of 1959 (the “Act”) and breaches of fiduciary duty. The district court dismissed the complaint, concluding that § 501 does not allow a labor union to bring a private cause of action. Local 150 appeals.

In their opinion, Judges Kanne, Williams and Sykes reversed and remanded. The Court started with the language of the Act. Section 501(a) imposes fiduciary duties, including a duty of loyalty, on a union’s officers and agents. Section 501(b) creates a federal cause of action for individual union members. Damages recovered under § 501 (b) inure to the benefit of the union itself. Before a union member may sue, she must make a demand that the union take appropriate action and then must receive the court’s permission, on a showing of good cause, to proceed. The Act is silent on a union’s ability to bring an action. On that threshold question, the Court first found no express cause of action under a plain reading of the Act. With respect to whether the Act contains an implied cause of action, the Court noted a split of authority between the Ninth in Eleventh Circuits. Relying on the Supreme Court’s holding in Alexander, the Court concluded that its task was to determine whether Congress intended to create both a private Right and a private remedy. The Court's analysis of the text and structure of § 501 led it to conclude that Congress did intend to create both a federal right and a federal remedy for a union.

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SOLIS V. CURRENT DEVELOPMENT CORP. (March 5, 2009)

George Klein is the president and sole shareholder of Current Development Corporation (CDC). CDC sponsored two employee benefit plans. The Department of Labor objected to the way Klein ran the plans and filed suit in District Court. In a settlement by consent order, Klein agreed to terminate both plans and distribute their assets -- a vacant parcel of land and almost $900,000 in cash. Klein allowed the plan participants to choose to take their shares in cash or in an ownership interest in the property. Almost everyone selected the cash option. Klein and his wife, themselves plan participants, were left with a 97% interest in the land. While Klein was winding up the plans, unbeknownst to the participants, he was negotiating the sale of the property. He used a property value of $1.7 million in calculating the participants' shares, even though he had already rejected a $2.3 million purchase offer. The Department of Labor found out about these negotiations and returned to court. The court concluded that Klein had breached his duty of loyalty to the participants and removed him as trustee. The court also appointed an independent fiduciary, who soon sold the property for $2.6 million. The independent fiduciary concluded, after a review of CDC's books and records, that Klein owed the plan another $170,000. The court ordered Klein to repay the money, with prejudgment interest. The independent fiduciary then calculated the final asset distribution figures, which the court adopted. Klein appeals.

In their opinion, Judges Bauer, Rovner and Evans dismissed in part and affirmed in part. The Court first addressed the jurisdictional issue. Klein filed two notices of appeal -- one after the court's denial of his motion to reconsider the order of prejudgment interest, and one after the court’s final payment determination. The Court noted that the consent decree itself was a final order. All orders after that were post-judgment orders. The Court compared a post-judgment proceeding to a freestanding lawsuit. In determining its scope of appeal, an appellate court will look for the nature of the proceeding and a final determination of the issues. Here, the Department of Labor began the proceedings when it filed its motion seeking Klein's removal as trustee and disgorgement of his gains. Thus, the proceeding was not final until both those issues were decided. The Court concluded that the post-judgment proceedings were final upon the court's determination of the distribution amounts. Since Klein filed a timely notice of appeal from that decision, the Court concluded that it had appellate jurisdiction of the matters presented during the proceedings. The Court dismissed Klein’s first appeal. The Court then addressed the standard of proof. Klein attempted to characterize the proceeding as one for civil contempt – with an accompanying clear and convincing standard of proof. The Court rejected that conclusion, holding that the proceeding was merely one for violation of the consent order. On the merits, the Court had little difficulty dismissing Klein's arguments: a) he waived his right to evidentiary hearing, b.) he should have disclosed the ongoing negotiations for the sale of the property to the plan's participants, c.) the court authorized the investigation into his operation of the plan, and d) the lower court's order for Klein to return money he took from the plan's assets in violation of ERISA and the final determination order were not clearly erroneous.

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MONDRY V. AMERICAN FAMILY MUTUAL INSURANCE COMPANY (March 5, 2009)

Sharon Mondry was an employee of American Family Mutual Insurance Company ("American Family") and participated in its health insurance plan. When her son needed speech therapy, she contacted the company to ascertain the extent of her benefits. After being referred to the Summary Plan Description ("SPD"), she enrolled her son in speech therapy in January 2003. In June 2003, CIGNA, the claims administrator, denied coverage. The letter indicated that the denial was based on CIGNA’s “Benefit Resource Tools guidelines” (“BRT”). The language used in the denial letter and the BRT was not consistent with the SPD, The SPD indicated that speech therapy is typically covered if performed by a certified therapist. Mondry began an effort that lasted over a year to get the documentation that was used by CIGNA to deny the coverage. For months, CIGNA and American Family either ignored or denied her requests. Mondry’s appeal of the denial was upheld in July of 2003. The letter upholding the denial again referenced a document that Mondry had never seen -- the Clinical Resource Tool (“CRT”). Mondry added the CRT to her document request. Her requests continued to go unanswered or denied. In September 2003, Mondry left her employment with American Family and elected not to continue her health coverage. She did continue her efforts to receive a complete set of plan documents and to reverse the denial of coverage. Mondry finally obtained copies of the CRT in July of 2004 in the BRT in October 2004. It became clear that the criteria contained in the CRT and the BRT were different from the criteria contained in the SPD. CIGNA reversed its position and authorized coverage of the speech therapy. Ten months later, CIGNA reimbursed Mondry for most of her out-of-pocket therapy expenses. Mondry filed suit against American Family and CIGNA pursuant to ERISA. She alleged that American Family and CIGNA failed to produce documents as required by the statute and that they both breached fiduciary duties owed to her. The district court dismissed the claims against CIGNA and entered summary judgment for American Family. Mondry appeals.

In their opinion, Judges Flaum, Kanne and Rovner affirmed in part and reversed in part. The court first addressed the failure to produce documents. ERISA requires a plan administrator to produce to a plan participant the Summary Plan Description and other documents, including "other instruments under which the plan is established or operated." The court affirmed the district court's dismissal of CIGNA with respect to this count because CIGNA is not the plan administrator. As the claims administrator, it is not subject to the requirement. The Court reversed, however, with respect to American Family. It held that American Family was required to produce the claims administration agreement as well as the BRT in the CRT. The Court had little problem in requiring the production of the claims administration agreement. Since it established the respective authorities and obligations of a plan administrator and claims administrator, it was a document on which the plan was operated. The Court found the BRT and the CRT closer questions. The Court stated that the catchall language should be narrowly construed to reach only documents that formally govern the establishment or operation of the plan. Since CIGNA treated the documents as authoritative sources -- in fact, the bases for their decision to deny the claim -- they are more than simply private guidelines. The Court emphasized the narrowness of its holding, only to apply to documents that are treated by the claims administrator as the equivalent of plan language. Finally, the Court held that the fact that American Family was not in possession of the documents was not relevant to its liability. If American Family did not have the right to obtain the documents from CIGNA, they certainly should have bargained for that right. The Court remanded to the district court for determination of the appropriate penalty.

The Court went on to address Mondry's claim that both American Family and CIGNA violated their fiduciary duties. Before addressing the existence of a fiduciary duty, the Court considered whether Mondry qualified for one of the statute’s limited range of remedies. The section of the statute upon which Mondry relies authorizes only equitable relief. The Court concluded that her claims for unreimbursed expenses and the expense she incurred as a result of her decision not to participate in COBRA were not authorized remedies. The Court did, however, concluded that Mondry had a viable claim for the time-value of the money she spent on the speech therapy. The Court noted that this was a restitutionary remedy -- sometimes considered a legal remedy and sometimes an equitable one. Restitution is equitable when it is sought as a result of a breach of fiduciary duty. Here, American Family had the interest-free use of the money and restitution by Mondry negate its gain. Having found relief to which Mondry may be entitled, the Court proceeded to address the fiduciary duty issue. ERISA imposes a duty of loyalty like that of a trustee and it creates a duty of care in executing that duty. The Court looked to a Fourth Circuit decision that concluded that a fiduciary breaches its fiduciary obligation when it fails to make the disclosures required by the statute. The Court concluded that there was sufficient evidence from which a fact-finder could determine that American Family breached its fiduciary duty to Mondry. With respect to CIGNA, however, the Court found so no such duty. CIGNA did not have the same obligation to produce documents, nor did profit from a refusal to do so. The Court affirmed the lower court's dismissal of all counts as against CIGNA and reversed with respect to both counts as against American Family. It remanded the claim for penalties for a determination of the appropriate amount and reversed the summary judgment on the fiduciary duty count and remanded for further proceedings.

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