Courts consider who can be sued as the defendant

July 13, 2011
By MARK D. DEBOFSKY

DeBofsky is a name partner of Daley, DeBofsky & Bryant. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage . He can be reached at [email protected].

A simple issue that has nonetheless confounded the courts in Employee Retirement Income Security Act (ERISA) benefits litigation is the question of who may be sued as a defendant.

Since insurance funds many ERISA benefits such as health, life and disability payments, courts wrestle over whether an insurer that both funds the benefits and determines a claimant's eligibility to receive benefits may be sued as a defendant in actions seeking to recover benefits brought under § 502(a)(1)(B) of ERISA (29 U.S.C. § 1132(a)(1)(B)). The 9th U.S. Circuit Court of Appeals granted an en banc hearing in Cyr v. Reliance Standard Life Ins.Co., 2011 U.S.App.LEXIS 12601 (9th Cir. June 22, 2011)to consider that question and, after considering the parties' arguments, the court overruled its prior precedent holding that only the benefit plan or the plan administrator is a proper defendant.

The underlying claim was brought by Laura Cyr, a vice president of Channel Technologies Inc., who was fired from her job and thereafter brought a claim for disability benefits due to a back condition. The claim was approved by her employer's disability benefits insurer, Reliance Standard Life Insurance Co., which paid benefits based on a reported annual salary of $85,000. However, Cyr also brought a discrimination suit against her employer alleging her salary was approximately half of what her male counterparts were paid. That lawsuit was settled with an agreement that Cyr's salary was retroactively adjusted to $155,000 a year, effective one week prior to her termination date. When Cyr tried to have her disability benefits adjusted, though, Reliance balked and refused to increase the benefit payment even though Reliance previously acknowledged that if the salary adjustment was bona fide, the benefits would be adjusted to reflect the appropriate percentage of the higher salary.

Cyr then filed suit against Reliance, the benefit plan, and her employer as plan administrator of the disability benefit plan. Reliance was subsequently dismissed on summary judgment with the court finding that Reliance could not be sued as a defendant in an action for benefits. The district court subsequently changed its mind, though, and ultimately entered judgment against the insurer finding the insurer could be sued so long as it was functioning as the plan administrator. Reliance appealed, and among the arguments presented it, maintained that it was not a proper party against whom a judgment could be entered in a claim brought under § 1132(a)(1)(B). Although a request for an initial hearing en branch pursuant to Rule 35(b)(1)(B) of the Federal Rules of Appellate Procedure was denied after oral argument was heard by a three-judge panel, but before a decision was issued, the 9th Circuit revisited the issue of whether the case should be heard en bancand granted the motion to decide the question of "whether [Reliance] is a proper defendant in a suit for benefits under 29 U.S.C. § 1132(a)(1)(B) even though it isn't a plan or a plan administrator."

The statute in question states:

"A civil action may be brought … by a participant or beneficiary … to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan."

However, while that provision is clear as to which parties have standing to bring suit, notably absent from § 1132(a)(1)(B) is the identity of who may be sued. However, in relation to a different section of the same statute, § 1132(a)(3), the Supreme Court ruled in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc ., 530 U.S. 238 (2000), the court permitted a suit against a broker-dealer that was not a fiduciary of a pension trust, for participating in a prohibited transaction under ERISA. That section authorizes a civil action "by a participant, beneficiary or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan." The Supreme Court found there to be no limitation as to who could be sued under that section, ruling that while other sections of ERISA limit the universe of potential defendants, there was no such limitation found in 1132(a)(3). From that reasoning, the 9th Circuit concluded, "We see no reason to read a limitation into § 1132(a)(1)(B) that the Supreme Court did not perceive in § 1132(a)(3)."

The court also looked to another provision of ERISA, Section 1132(d)(2), which provides: "Any money judgment under this subchapter against an employee benefit plan shall be enforceable only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity under this subchapter." Parsing that provision, the court ruled, "The 'unless' clause necessarily indicates that parties other than plans can be sued for money damages under other provisions of ERISA, such as § 1132(a)(1)(B), as long as that party's individual liability is established." The court acknowledged that while the designated plan administrator had certain reporting and disclosure responsibilities under ERISA, it did not have the authority to resolve or pay benefit claims. Hence, while Cyr's employer "was identified as the plan administrator, [ ] it had nothing to do with denying Cyr's claim for increased benefits." Instead, since Reliance was the entity responsible for determining and paying benefits it was therefore "a logical defendant" in an action brought by Cyr to recover benefits due under the terms of the plan and to enforce her rights under the plan. Accordingly, the court overruled several prior decisions that had found to the contrary: Ford v. MCI Communications Corp. Health & Welfare Plan , 399 F.3d 1076, 1081 (9th Cir. 2005); Everhart v. Allmerica Financial Life Insurance Co ., 275 F.3d 751, 756 (9th Cir. 2001); Spain v. Aetna Life Insurance Co ., 13 F.3d 310, 312 (9th Cir. 1993); and Gelardi v. Pertec Computer Corp ., 761 F.2d 1323 (9th Cir. 1985).

The fact that this issue even had to be decided en banc in 2011, 37 years after ERISA's passage, illustrates one of the many absurdities that ERISA litigation has produced. The notion the party that both decides and pays the claim may not be a proper party defendant is plainly illogical and provoked the following comment in a case I litigated:

"In the present case, for example, while the plan sponsor, MWF, and the plan's actual administrator, Standard, have assets, the plan itself appears not only to have no assets, but to be no more than a piece of paper. Finally, the understandable efforts of plaintiffs to sue defendants other than plans have led to considerable unnecessary litigation. See generally, "Who Does a Plaintiff Sue for Benefits?", 7 No. 4 ERISA Litig. Rep., Oct. 1998. Black v. Long Term Disability Ins. , 373 F.Supp.2d 897, 900 (E.D.Wisc. 2005).

Although many courts still adhere to the fiction that only the "plan" may be sued, the straightforward ruling in Cyr should pave the way to a more realistic approach to ERISA litigation that would avoid the unbelievable course of the Kirby litigation where an insurer successfully argued that it was not a proper party defendant in an ERISA benefit claim and it took three rulings and more than six years before the New Mexico Supreme Court in Kirby v. Guardian Life Ins.Co., 231 P.3d 87 (N.M. 2010) finally allowed a plaintiff who had obtained a judgment against a "plan" a right of garnishment against the insurer to collect benefits that had been wrongfully denied. While ERISA may be perceived as an acronym for Everything Ridiculous Imagined Since Adam, in the coinage invented by U.S. District Judge William Acker Jr. of the Northern District of Alabama, in the 9th Circuit at least, there is now one issue that is no longer confounding the courts.