A recent 2d U.S. Circuit Court of Appeals ruling, Slupinski v. First Unum Life Insur. Co., 2009 U.S.App.LEXIS 1157 (Jan. 23), offers a textbook lesson on attorney’s fee awards as well as the propriety of prejudgment interest awards under ERISA.

The case arose when an associate for a major New York law firm suffered severe injuries in a car accident and despite multiple surgeries, was unable to return to work. Although benefits were paid for a period of time, First Unum cut off the benefit payments. The district court found gross errors in First Unum’s evaluation of the claim and ordered benefits reinstated. However, the court refused to award attorneys’ fees and also denied prejudgment interest. Although the Courts of Appeals review such denials under the often insurmountable abuse of discretion standard, the 2d Circuit found an abuse of discretion in this case and awarded both fees and interest to the plaintiff. The court’s discussion of those issues is illuminating.

The court began its discussion by emphasizing that ERISA’s ”central purpose … is to protect beneficiaries of employee benefit plans, see, e.g., 29 U.S.C. § 1001(b).” As part of that protection, the court in an ERISA action may ”in its discretion may allow a reasonable attorney’s fee and costs of action to either party,” 29 U.S.C. § 1132(g)(1). The court explained that ”Congress intended the fee provisions of ERISA to encourage beneficiaries to enforce their statutory rights” and added that ”’ERISA’s attorney’s fee provisions must be liberally construed to protect the statutory purpose of vindicating’ employee benefits rights.”

The court focused on two considerations relevant to a fee award: ”the degree of culpability – or of bad faith, if any – on the part of First Unum and the relative merits of the parties’ positions.” The court deemed culpability and bad faith distinct, and ruled that the plaintiff need not prove bad faith. But the court added, ” ‘[C]ulpable conduct is commonly understood to mean conduct that is ”blameable; censurable … at fault; involving the breach of a legal duty or the commission of a fault….” ” In the context of ERISA claims, the court found ”the administrator may properly be found culpable if it ‘failed to engage in a fair and open-minded consideration of [the] claim.”’ The court also cited a prior precedent finding Unum culpable when it relied on an in-house doctor whose analysis was unscientific.

The court thus found First Unum’s conduct culpable since the benefit denial was made ”without any basis” and was based on medical findings that were incredible on their face. The court also pointed to First Unum’s evidentiary assessment as being ”unreasonably selective.”

The court likewise found the relative merits of the parties’ positions strongly favored the plaintiff, Zbigniew Slupinski. The court focused on two findings made by the district court: (a) that the reports relied on by First Unum were not credible and (b) that those reports, even if they had been credible, ”could not possibly outweigh” the numerous other medical opinions confirming Slupinski’s disabling pain. Given such findings, the court determined that it was evident that the district court had not properly considered the relative merits of the parties’ positions.

Overall, the Court of Appeals was dissatisfied with the district court’s application of what was essentially a frivolousness standard in assessing fees.

The court explained: ”But the frivolousness standard is more pertinent to a fee award that is meant as a sanction than to an award to a plan participant who has prevailed on his claim under ERISA, whose provision for awards of attorney’s fees is designed to be remedial. The position taken by a defendant in violation of ERISA need not descend to the level of frivolity in order to be sufficiently culpable to weigh in favor of awarding fees to the ERISA claimant.”

The court then ticked off even more reasons why First Unum’s decision was unwarranted in addition to the other reasons stated: Besides not conducting an examination, Unum also contacted only 3 of the 12 treating physicians; and even as to those doctors, the insurer misstated their opinions. The court also pointed to First Unum stating a rationale ”that Slupinski could work as an attorney because there was no heavy lifting, an opinion that gave no apparent recognition either to an attorney’s need to be able to concentrate or to the concept that pain could interfere with concentration.” Finally, the court found that just because ”First Unum fulfilled its ERISA obligations for a while [by initially paying benefits for three years prior to cutting off the payments] did not make it less culpable for changing course and violating ERISA by ceasing to pay Slupinski disability benefits in the face of ‘voluminous’ and ‘overwhelming’ evidence that he continued to be disabled.” The court also agreed with the plaintiff that the denial of prejudgment interest was unwarranted. The court found that interest awards are necessary to prevent defendants from profiting from their failure to comply with the ERISA law, and also cited a prior ruling which held, ”Failure to award interest would create an incentive to violate [federal law], because violators in effect would enjoy an interest-free loan for as long as they could delay paying out….” The court further noted, ”First Unum unfairly had the use of the money that it should have paid to Slupinski during that nearly 10-year period.” The court also quoted from a First Unum internal investigation report, which remarked, ”Bottom line, this guy is really in bad shape, you wouldn’t believe it … keep paying this guy for life, he deserves the money.” Thus, as a matter of fairness and overwhelming support for the claim, the court deemed interest due on the withheld payments.

The court concluded its opinion with an interesting discussion. It remarked that First Unum had made implications in its briefs that Slupinski had been working during the same time he claimed disability, and that the insurer had referenced documents that were not in the record. Although some of the same concerns had been raised before the district court, and the court had invited Unum to either file a separate action or a post-trial motion to properly raise those issues, Unum did nothing. That suggested to the Court of Appeals that First Unum’s ”persist[ence] in proffering evidence that is not in the record, despite being expressly informed of the inappropriateness of such conduct, tends to cast doubt both on the substantive validity of its proffers and on its claim that the equities in this case weigh in its favor.”

This is a welcome ruling because it restates principles that seem to have been forgotten. More than 15 years ago, the 7th Circuit made many of the same points in Production & Maintenance Employees’ Local 504, Laborers’ Int’l Union v. Roadmaster Corp., 954 F.2d 1397, 1405 (1992), which found a modest presumption in favor of fee awards and held that a party need not ”show subjective bad faith to justify a fee award. Requiring a showing of subjective bad faith would defeat the purpose of this presumption (modest though it may be) because of the difficulty of proving subjective bad faith. Attorney’s fee litigation is time-consuming and tedious enough without adding subjective inquiries into litigants’ and attorneys’ good or bad faith.”

Instead, the court found the test would allow fees against a party ”who pursues a position that is not substantially justified – that is, a position without a ‘solid basis’ – has, in an objective sense, really done nothing more than harass his opponent by putting him through the expense and bother of litigation for no good reason.”

The 7th Circuit also explained in Hooper v. Demco Inc., 37 F.3d 287, 291 (7th Cir. 1994): ”We note that the primary purpose of ERISA, to protect the participants in employee benefit plans, is achieved by establishing standards of conduct, responsibility, and obligations for fiduciaries of employment benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the federal courts. ERISA § 2(b), 29 U.S.C. § 1001(b). To encourage aggrieved parties to seek redress under ERISA, the statute gives the trial court discretion to award attorney’s fees to a prevailing party.

These cases, and the recent Slupinski ruling focus on Congress’ intent in enacting ERISA. The message of these rulings is that the salutary goals of the ERISA statute are unmet unless insurers are forced to pay fees and disgorge interest when they wrongfully deny claims. Without those remedies, there is an incentive to violate federal law since there is no effective deterrent against it. The Slupinski decision will no doubt be read carefully and its message heeded in the future.

This article was initially published in the Chicago Daily Law Bulletin.

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