Last week, the Ninth Circuit’s decision in Wong v. Flynn-Kerper, No. 19-56289, __F.3d__, 2021 WL 2307485 (9th Cir. June 7, 2021) (before Circuit Judges Friedland and Bennett, and District Judge Frederick Block), is a meandering tale of deceit, greed, and incompetence with respect to Employee Stock Ownership Plan (ESOP) administration. But the moral of the story is clear, as the Ninth Circuit joined the Fourth Circuit in barring the defensive use of equitable estoppel when estopping the plaintiff would contradict an ERISA plan’s express terms.

Plaintiff, the trustee of an ESOP plan, sued defendant, who held a million-dollar promissory note from the ESOP plan’s corporate sponsor, Anaplex. Why? Because defendant’s now deceased husband had received the note in exchange for shares of Anaplex stock he sold to the ESOP. On its surface, the transaction was performed according to the plan’s terms and the requirements of ERISA. The purchase was seemingly done at a fair market price that had been determined by an independent appraiser. 

However, at the time of the transaction, defendant’s husband was the trustee of the ESOP, and, allegedly, had used the company as a piggy bank to the tune of more than one-million dollars. This debt appeared in Anaplex’s books as an asset, but defendant’s husband knew it was uncollectible – meaning the company was overvalued and the ESOP had thus enormously overpaid the decedent for his shares. Defendant’s husband also failed to disclose to the independent appraiser that the company was being investigated by the EPA – subjecting it to hundreds of thousands of dollars in legal fees and potential fines. 

The appraiser was not given all this information and purportedly overvalued the purchase price of the shares. When a new trustee was appointed, he claimed to discover these bad acts and sued defendant under ERISA Section 503(a)(3) seeking equitable relief. On behalf of the plan, the trustee sought an adjustment to the purchase price and a declaration that the ESOP had overpaid. 

Defendant moved to dismiss. She argued the plaintiff was equitably estopped from asserting a claim against her based on an agreement between the parties that had allegedly settled a prior lawsuit. These people had beef. What ensued was the submission of a series of declarations, founded and unfounded allegations regarding intent and knowledge in the settlement of the prior lawsuit, and belatedly made arguments. The district court acknowledged the stark factual disagreements over the impact of the prior settlement agreement, but found plaintiff’s arguments “unconvincing,” as it believed defendant had relied upon plaintiff’s unambiguous promise to pay the remaining balance on the note when resolving the prior suit. It dismissed the claim without leave to amend. 

On appeal, the Ninth Circuit held that the factual disagreements necessitated defendant’s motion to dismiss be converted into a Rule 56 motion. Under the standard applicable to such a motion, the Ninth Ciruit held the district court could not stop plaintiff’s suit merely because it found plaintiff’s position “unconvincing.” 

But the court wanted to address a more fundamental issue. It wanted to clarify that defendant could not estop plaintiff, the ERISA trustee, because doing so would contradict the clear terms of the ESOP, which required (as does ERISA) that fair market value be paid for any stock – notwithstanding any prior agreement. 

Federal equitable estoppel principles can, in certain circumstances, apply to claims for equitable relief under ERISA Section 502(a)(3). However, the Ninth Circuit has held that, in addition to the traditional equitable estoppel requirements, a party in an ERISA case must establish (1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan. Thus, in an ERISA case, it has long been clear that a plaintiff cannot maintain an equitable estoppel claim against an ERISA plan where recovery on the claim would contradict written plan provisions. 

ERISA does not expressly impose these heightened obligations. Rather, judges have determined policy concerns regarding the actuarial soundness of pension funds dictate that this soundness is too important to permit trustees to obligate the fund to pay pensions to persons not entitled to them under the express terms of the plan. The fair treatment of one person, suffering from the misdeeds of the plan trustee, will not be placed before the “unfair” treatment of other plan participants who may then risk having an unsound pension.  

In Wong, allowing defendant to assert her equitable estoppel claim against plaintiff would contradict the clear terms of the ESOP if plaintiff’s allegations were true. If the appraiser had overvalued the shares during his appraisal, applying equitable estoppel would require the payment of greater than the fair market value of the shares – which is forbidden by the plan. Thus, whether a plaintiff or defendant, the court held a party cannot use equitable estoppel to contradict the express terms of an ERISA plan in litigation with the plan. The district court’s decision was thus reversed and the case was remanded for further adjudication. 

The plaintiff’s allegations of misdeeds by the prior trustee to hide information from the independent appraiser in order to personally profit by overvaluing the share prices makes the holding in Wong seem appropriate. If true, the rest of the pension plan members should not be harmed by this fraud. Just as participants and beneficiaries can only assert claims for equitable estoppel to recover from a plan where there is some ambiguity in plan terms, the Ninth Circuit has now applied the same rules to trustees and other defendants.

Brent Dorian Brehm, a partner at Kantor & Kantor, LLP, prepared this week’s notable decision summary. Brent’s guiding principal of doing well by doing good has allowed him to help hundreds of people get their insurance claims paid. In Wong, few of the entities involved appear to follow that principle. Five years, two lawsuits, and a published Ninth Circuit decision later, they have no resolution. Often an outcome that can be avoided by laying a proper foundation. 

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Breach of Fiduciary Duty

Tenth Circuit

Lorraine M. Ramos, et al. v. Banner Health, Banner Health Board of Directors, Banner Health Retirement Plans Advisory Committee, et al. , No. 20-1231, 2021 WL 2387909, __ F.3d __ (10th Cir. June 11, 2021) (Before Circuit Judges Tymkovich, Kelly and Phillips). Banner Health sponsored and administered a 401(k) defined contribution plan for its employees (the “Plan”). Plaintiffs (representing a 40,000 member class) alleged that Banner breached its fiduciary duties and engaged in prohibited transactions through its contract with Fidelity Management Trust Company to provide recordkeeping and other administrative services related to the Plan. The contract between Banner and Fidelity provided for an uncapped, revenue sharing arrangement and Banner had not revisited this arrangement in over two decades. In 2012, however, Fidelity and Banner established a revenue credit account which was funded from Fidelity’s revenue sharing proceeds and could be used by Banner to pay expenses related to the Plan. After an 8-day bench trial, the district court held as follows: (1) Banner had breached its fiduciary duty by failing to monitor its recordkeeping service agreement with Fidelity, which resulted in years of overpayment to Fidelity and corresponding losses to the Plan from 1999 to 2012; (2) the expert witness testimony offered by Plaintiffs as to the damages incurred by the Plan was not reliable such that the court fashioned its own damages; and (3) Banner had not engaged in prohibited transactions with Fidelity. The court calculated damages to be $1.6 million, but plaintiffs had sought closer to $19 million (and $85 million initially). On appeal, plaintiffs challenged the court’s rejection of their expert, the manner in which the court fashioned damages, the amount of prejudgment interest awarded and the finding that Banner had not engaged in prohibited transactions. The Tenth Circuit, however, affirmed the trial court in each instance. The court explained that although damages under ERISA are necessarily imprecise, ERISA does not relieve an expert of demonstrating that his calculations are based on a reliable methodology. The Tenth Circuit held that the district court did not abuse its discretion in finding that the expert’s experience was sufficient for finding a breach, but not adequate to support his opinion as to damages.  The Tenth Circuit further held that the district court did not abuse its discretion to fashion a remedy using revenue credits which Fidelity voluntarily paid back to Banner as representing a reasonable estimate of damages. As plaintiffs had not offered evidence other than the expert testimony to establish the amount of damages, the court’s estimate was permissible.  The Tenth Circuit also affirmed the court’s use of the IRS underpayment rate to calculate pre-judgment interest. As to prohibited transactions, plaintiffs argued that Fidelity was a party in interest because Banner had contracted with Fidelity to provide services under the Plan. The Tenth Circuit disagreed and held that some prior relationship must exit between the fiduciary and the service provider to make the provider a party in interest under ERISA Section 406. The Tenth Circuit explained that “ERISA cannot be used to put an end to run-of-the-mill service agreements, opening plan fiduciaries up to litigation merely because they engaged in an arm’s length deal with a service provider.”

Class Actions

Ninth Circuit

Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK, 2021 WL 2309974 (C.D. Cal. June 2, 2021) (Judge Stanley Blumenfeld). On April 20, 2021, Magistrate Judge Kewalramani ordered defendants in this putative class action produce class members’ contact information. Read the ERISA Watch summary of that decision here. Defendants filed a motion for reconsideration. The district court agreed with the magistrate judge that the contact information is relevant to the class certification requirements of commonality and typicality, and that relevance for the purpose of discovery is to be construed broadly. The court found the magistrate judge had not clearly erred in his decision, denied the motion for reconsideration.


Fifth Circuit

Admin. Comm. Of Koch Indus. Employees’ Sav. Plan v. Ho, No. 4:21-CV-00222, 2021 WL 2376564 (S.D. Tex. June 10, 2021) (Magistrate Judge Andrew M. Edison). This case involves a dispute regarding the proper beneficiary of ERISA retirement benefits where two separate individuals claimed to be married to the decedent and thus entitled to survivor benefits simultaneously. The insurer filed an interpleader so the district court could determine the proper beneficiary, and the court was tasked with determining the proper scope of discovery in such an action. The court held that when an interpleader action requires the court to determine the rights of competing ERISA claimants, rather than the rights of a claimant from an ERISA plan. “it is wholly appropriate for the rival claimants to utilize the available discovery processes.”

ERISA Preemption

Third Circuit

Hua v. Board of Trustees, No. 20-748 (MAS) (TJB), 2021 WL 2190906 (D.N.J. May 28, 2021) (Judge Michael A. Shipp). Defendants offered self-funded medical benefits and maintained stop-loss insurance coverage as part of an employee benefit plan governed by ERISA (the “Fund”). If a plan participant incurred more than a certain amount of medical expenses, the stop-loss carrier would reimburse the exceeding amount to the Fund. Plaintiff was injured in an accident and filed a personal injury action against third parties. Defendant Board of Trustees subsequently asserted an equitable lien by agreement against plaintiff’s potential tort recovery. Plaintiff sought declaratory judgment to bar the lien pursuant to state insurance regulations, arguing that the Fund was insured for preemption purposes because of the stop-loss coverage. The court disagreed, citing Third Circuit precedent that explained that stop-loss insurance is designed to protect self-funded plans rather than individual participants, so plans purchasing stop loss insurance are not deemed “insured” under ERISA. The court granted summary judgment to defendants, determining that the plan was self-funded and therefore state insurance regulations were preempted by ERISA and defendants’ lien was enforceable. 

Fifth Circuit

Christopher Cauley, in his capacity as Independent Executor of the Estate of Katherine C. Berg, deceased v. Interprise/Southwest Interior & Space Design, Inc. No. 3:20-CV-03077, 2021 WL 2376720 (N.D. Texas June 10, 2021) (Judge Brantley Starr).  In 2011, defendant created an employee stock ownership plan (the ‘Plan”) to purchase 100% of the common stock of Interprise, an interior design firm which, at that time, was owned by Berg. Following Berg’s death, Interprise ceased making payments under the promissory note. Plaintiff, Berg’s executor, sued Interprise in state court for its failure to make payments under the promissory note. Interprise removed the case to federal court and plaintiff moved to remand. Plaintiff did not dispute that ERISA governs the Plan, however, it argued that state law governed its suit against Interprise for failure to pay under the not. Interprise argued that the estate was requesting an equitable remedy that related to the Plan. The court disagreed, concluding that Interprise failed to demonstrate how plaintiff could bring its claim under ERISA Section 502(a)(3),since the state was not seeking to enjoin an act that violates ERISA or a term of the Plan, nor was it seeking equitable relief for such a violation. The court also rejected defendant’s argument that there was no independent legal duty because the transaction was prohibited under ERISA in that adequate consideration for the stock had already been paid. The court explained that if this were a state law claim against plaintiff, then the allegation that Berg engaged in a prohibit transaction might be relevant. In this instance, however, complete preemption may re-characterize a state law complaint, but it cannot transpose the parties. The court remanded the case to state court.

Seventh Circuit

Hoogenboom v. Trustees of Allied Services Division Welfare Fund, No. 20-CV-4663, 2021 WL 2329373 (N.D. Ill. June 8, 2021) (Judge Robert M. Dow, Jr.). Plaintiff provided medical services to a family that was eligible for benefits under a healthcare plan administered in part by defendant. Plaintiff filed multiple claims in state court against defendant related to defendant’s improper handling of and refusal to pay plaintiff’s bills. Defendant removed the claims to federal court claiming ERISA preemption and filed a motion to dismiss. The court determined that all of plaintiff’s claims were pre-empted by ERISA except her promissory estoppel claim, which was not preempted because plaintiff alleged that she had relied on promises made by defendant that her services would be covered. The court dismissed the promissory estoppel claim without prejudice, declining to exercise supplemental jurisdiction, and granted plaintiff leave to amend remaining claims and “restyle” them as claims under ERISA. 

Exhaustion of Administrative Remedies

Eleventh Circuit

Ligotti, et al., v. United Healthcare Services, Inc., et al., No. 16-60558-CIV, 2021 WL 2333111 (S.D. Fla. June 8, 2021) (Judge Roy K. Altman). Plaintiffs filed an ERISA suit seeking recompense for medical services they provided to numerous patients who were members of ERISA plans administered by the defendants. The defendants denied hundreds of the plaintiffs’ claims for one of three main reasons: (1) because one of the plaintiffs, Dr. Ligotti – an out-of-network provider whose patients assigned him their claims – wasn’t properly licensed; (2) because Ligotti’s license needed verification; or (3) because Ligotti had misrepresented the nature of the services he was providing. According to the plaintiffs, these reasons were pretextual and the denials improper. After briefing and a hearing, the court narrowed the claims significantly: first, by eliminating patient claims for which the governing ERISA plan had an anti-assignment clause; and, second, by excluding patient claims the defendants had denied for reasons other than the licensure or (alleged) misrepresentations issue. The defendants then move for summary judgment as to 493 claims, arguing that the plaintiffs failed to exhaust their administrative appeals. The court agreed. The ERISA plans that governed those 493 claims unambiguously required the claimants to appeal adverse benefits determinations before filing their federal lawsuits. But the plaintiffs (as proxies for their patients) didn’t appeal those denials – or, at least, failed to submit any evidence that they did. Nor did they show that the appeals process would have been “futile.” Since there wasn’t any other colorable basis to disregard the exhaustion requirement, the court granted the defendants’ motion for summary judgment.

Life Insurance & AD&D Benefit Claims

Sixth Circuit

Campbell v. Hartford Life & Accident Co., Civil No. 5:18-cv-194-JMH, 2021 WL 2338861  (E.D. Ky. Jun. 8, 2021) (Judge Joseph M. Hood)  The decedent had a $200,000 life insurance policy insured by Hartford, governed by ERISA. The policy had a two-year incontestability provision where it could be contested within the first two years. When Plaintiff applied for the life insurance, he was sober, and accurately answered that he was not treated for alcohol abuse the past 5 years. After he obtained the insurance, he had a setback and began drinking. His medical records noted “alcohol dependence” when he was diagnosed with esophageal cancer, from which he died several months later. Hartford rescinded the policy based on alcohol abuse. The court held that alcohol abuse is different from alcohol dependence, which is why they have different diagnostic codes. The fact that the insured had a history of prior alcohol abuse did not mean that he treated for it in the 5 years prior to filling out the insurance application. The court held that there was no misrepresentation and that the rescission was therefore improper.

Medical Benefit Claims

Third Circuit

Venusti v. Horizon Blue Cross and Blue Shield of New Jersey, No. CV20714SDWLDW, 2021 WL 2310095 (D.N.J. June 7, 2021) (Judge Susan D. Wigenton). Plaintiff disputes payment of medical claims by Horizon as a secondary payor to Medicare. The parties brought cross motions for summary judgment. Regarding exhaustion of administrative remedies, the court found that Horizon does not point to specific language in the Plan stating that two appeals were required prior to bringing this action. Horizon did not meet its burden to prove plaintiff failed to exhaust administrative remedies. Moreover, because the plan provides discretion to Horizon, the court found unavailing plaintiff’s argument that Horizon’s noncompliance with ERISA warrants a de novo review. The court then concluded that Horizon did not abuse its discretion in deciding benefits and the Plan’s Medicare eligibility provision was consistent with the law. Thus, Horizon correctly reduced benefits as if plaintiff had applied for Medicare. The court also fund a breach of fiduciary duty claim duplicative of the benefits claim and therefore granted summary judgment to Horizon. 

Fifth Circuit

CFM Interests, LTD. et al. v. Aetna Health, Inc. et al., H-12-2070, 2021 WL 2342834 (S.D. Tex. June 8, 2021) (Judge Lynn N. Hughes). Plaintiffs treated patients insured by defendants at an unlicensed emergency medical center. Plaintiffs submitted bills to defendants using credentials from a licensed hospital, which were paid. When defendants learned the facility was unlicensed, they sought reimbursement. After the case was removed to federal court on the basis of ERISA preemption, the court held that plaintiffs were not entitled to hospital facility fees.  With respect to the claim for reimbursement, the court held that “[a] carrier does not have to pay facility charges billed by a freestanding emergency center that is not licensed by the State.” The Court found that plaintiffs were given the opportunity to revise their charges but instead continued to bill defendants dishonestly. It found that defendants paid more than they would have had they been listed properly – as an unlicensed urgent care center rather than a licensed hospital. Accordingly, the court ordered plaintiffs to reimburse defendants for all charges that were improperly paid.

Pension Benefit Claims

First Circuit

New England Biolabs, Inc. v. Ralph T. Miller, No. 20-11234 (D.C. Mass. May 26, 2021) (Judge Richard G. Stearns). This case involves allegations by an Employee Stock Ownership Plan (“ESOP”) against a participant to recoup an alleged overpayment, and counterclaims by the participant against the ESOP and three individuals for prohibited transactions, breaches of fiduciary duty and retaliation for making an inquiry with the Department of Labor. The case stemmed from a conversation plaintiff had with the ESOP administrator asking whether a participant could remain in the ESOP after retirement. The administrator advised that he could retain his ESOP shares after he retired. Miller retired at age 67 and stayed in the plan until he was 69 when the ESOP was amended to limit former employees from remaining in the plan. Miller reported the amendment to the Department of Labor and threats were made against Miller. Counter-defendants moved to dismiss Miller’s claims. The court dismissed some of the claims for lack of standing. The court also dismissed Miller’s claim that the ESOP failed to provide updated summary plan descriptions for many years, explaining that penalties are only available if a participant makes a request for a document. The court allowed the breach of fiduciary duty claims against the Committee for failing to timely liquidate Miller’s account at age 65 and for advising Miller that he could remain in the ESOP after retirement. The court also declined to dismiss Miller’s duty to monitor and retaliation claims.

Pleading Issues & Procedure

Second Circuit

Fuente v. Preferred Home Care of New York LLC, No. 20-3985-CV, __ F. App’x __, 2021 WL 2308786 (2d Cir. June 7, 2021) (Before Circuit Judges Calabresi and Nardidni, and Judge Gary S. Katzmann, United States Court of International Trade). In this unpublished summary order, the Second Circuit upheld the district court’s dismissal of the case for lack of constitutional standing on the basis plaintiffs did not claim any concrete harm. The case involved a welfare benefit plan that provides health benefits. Plaintiffs argued they were harmed because they did not receive the benefits to which they were entitled under the New York State Home Care Worker Wage Parity Law, making the healthcare benefits more akin to contributions to a defined contributions plan than a defined benefit plan, and because misappropriation of those funds caused concrete harm by increasing the out-of-pocket costs and reducing coverage. The Second Circuit disagreed stating that the participants had received all of their promised benefits under the ERISA plan and winning or losing the case would not change the health benefits under.  Therefore, the court concluded that plaintiff suffered no injury in fact and had no standing to pursue the case.

Third Circuit

Assoc. of New Jersey Chiropractors, Inc. v. Data Isight, Inc., et al., Case No. 19-21973, 2021 WL 2349858 (D.N.J. June 9, 2021) (John Michael Vazquez, U.S.D.J.). Plaintiffs were licensed chiropractors, and the Association of New Jersey Chiropractors, Inc. (“ANJC”), a corporation that promotes the chiropractic profession and the interests of chiropractors in the state of New Jersey. Plaintiffs alleged that the defendants Cigna and Aetna hired the vendor defendants to reprice insurance reimbursements made to plaintiffs. Plaintiffs further alleged that because of the repricing, they have been underpaid by the Cigna and Aetna for provided medical services, in contravention of ERISA plan documents. Plaintiffs also maintained that the repricing, and the vendors defendants’ delayed review of appeals concerning pricing, violated state and federal law.  Defendants filed motions to dismiss the first amended complaint, which the court granted, in part. The court found that an association may assert claims on its members’ behalf when: (1) its members would otherwise have standing to sue in their own right; (2) the interests it seeks to protect are germane to the organization’s purpose; and (3) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit. The court held plaintiffs did not meet the requirements for associational standing because plaintiffs failed to plausibly allege that all ANJC members have standing to assert ERISA claims. The court further held individual plaintiffs failed to allege sufficient facts demonstrating that they had an assignment of benefits from a patient with an Aetna plan or that Loewrigkeit had an assignment of benefits from a patient with a Cigna plan. Accordingly, the court granted defendants’ motion to dismiss their claims against Aenta and Loewigkeit’s claims against Cigna. The court also granted the vendor defendants’ motion to dismiss on the grounds that they were not proper defendants because plaintiffs failed to plausibly assert that the vendor defendants had discretionary authority to make decisions as to coverage. Instead, the court concluded that plaintiffs’ allegations demonstrated that the vendor defendants filled a ministerial role. Defendants also moved to dismiss counts one, two and three of the first amended complaint. In count one, plaintiffs alleged that defendants failed to provide a full and fair review of the denied claims, as required by Sections 502 and 503 of ERISA. However, the court held that plaintiffs failed to ask for any claim to be remanded for full review and therefore dismissed count one to the extent it was premised on a violation of Section 503. In Count Two, plaintiffs alleged that they were entitled to declaratory relief due to defendants’ breach of their fiduciary duties pursuant to Section 502(a)(3). The court denied Cigna’s motion to dismiss counts one and two, concluding that the remaining individual plaintiffs’ claim pursuant to Section 502(a)(3) was not duplicative of his claims for benefit under Section 502(a)(1)(B). With respect to count three, which sought statutory penalties pursuant to 29 U.S.C. § 1024(b)(4) based on Cigna’s failure to provide requested plan documents, the court dismissed on the basis that Cigna was not the plan administrator and only the administrator is liable for failure to provide plan documents.