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Durand v. The Hanover Insurance Group, No. 07-6468 (6th Cir. Mar. 18, 2009); Hackett v. Standard Insurance Co., No. 07-3166 (8th Cir. Mar. 19, 2009)


Here's some end-of-the-week coverage about ERISA developments. The Sixth Circuit issues an excellent decision on the "futility" exception to the judicially-created exhaustion doctrine for benefit claims. The Eighth Circuit remands a denial of benefits claim in light of Metropolitan Life Insurance Co. v. Glenn, 128 S. Ct. 2343 (2008).

Durand v. The Hanover Insurance Group, No. 07-6468 (6th Cir. Mar. 18, 2009):  Despite that Congress imposed no administrative exhaustion requirement on ERISA claimants, the courts have long required that participants and beneficiaries first submit their contested requests for benefits to the plan administrator for review.  Sometimes, though, courts have excused this requirement when it would be futile to do so.  This Sixth Circuit case lets some air into the futility exception, showing that where the plaintiff challenges the practice as illegal (as opposed to simply a breach of the plan itself), exhaustion would be futile.

The claim here involved the correct method of calculating of a lump sum distribution from a defined-benefit pension plan. A participant electing to cash out by law may not be penalized for that choice, so to comply with ERISA, lump sum payments must be the actuarial equivalent of the normal accrued pension benefit. 

As the panel states "Each participant's account is funded by hypothetical allocations, called 'pay credits,' and hypothetical earnings, called 'interest credits,' that 'are determined under a formula selected by the employer and set forth in the plan.'"  The interest credits are at the crux of this case.  The panel described the formula:

"For distributions made prior to 2006, determining this actuarial equivalent required a two-step 'whipsaw' calculation. First, the participant's account balance was projected forward to its value at the participant's normal retirement age, 'using the rate at which future interest credits would have accrued' had the participant remained in the plan. Second, 'that projected amount [was] discounted back to its present value on the date of the actual lump-sum distribution.'

"Critically for our purposes here, the projection forward must have 'include[d] a fair estimate' of what the participant's future interest credits actually would have been had she retrained a single-life annuity under the plan. The 'fair estimate' is critical because, if the participant's future interest rate exceeds the discount rate, the participant's lump-sum distribution will be greater than her hypothetical account balance at the time of the distribution." [Citations omitted, emphasis in original]

The participants here, proceeding as a class, disputed the plan's "fair estimate," arguing that the "the Plan did not attempt to make individualized estimates of departing participants' future interest credits. Instead, the Plan used a uniform projection rate-the 30-Year Treasury Bill rate-in performing every such participant's whipsaw calculation."  This method was rejected by the Department of Labor and several courts of appeals by the time that the plan in this case calculated the named plaintiff's lump sum. 

The plaintiff brought suit to order recalculation of the benefits, but the case was tossed for lack of exhaustion. The Sixth Circuit reverses, and in so doing demystifies the doctrine of futility.

"ERISA plans are often complicated things, and the question whether a plan's methodology was properly applied in a particular case is usually one best left to the plan administrator in the first instance. Administrators, not courts, are the experts in plan administration.

"But the same is not true of an across-the-board challenge to the legality of a plan's methodology. In those cases, the claimant typically concedes that her benefit was properly calculated under the terms of the plan as written, but argues that the plan itself is illegal in some respect. And that question -- legality -- is one within the expertise of the courts. Sending such a claimant back to the administrative process, to recalculate a benefit she concedes was already properly calculated under the terms of the plan as written, misses the point of the dispute. In that situation, exhaustion wastes resources rather than conserves them." [Citations omitted]

The panel contrasts exhaustion in this context with administrative exhaustion of government agencies:

"We do recognize that, in the somewhat different context of judicial review of government-agency action, exhaustion is not excused merely because the outcome of the administrative-review process is very predictable. Where there is an exhaustion requirement for claims in which an administrative agency has experience and expertise, or delegated discretion, the courts must allow the administrative process to take its course even when the outcome will almost certainly be adverse to the claimant. However, in this case, Allmerica is not a government agency but a regulated body under ERISA; it has neither discretion to determine the legality of its own Plan nor special expertise in interpreting the statute. Allowing the administrative process to go forward would thus do little to vindicate the purposes of the exhaustion requirement." [Citations omitted]

Although the plan gamely seeks to rechannel this case back into the failure-to-exhaust framework -- principally, by attempting to reclassify it as a mere challenge to the calculation of benefits -- the panel steadfastly treats the "fair estimate" issue as a question of law, unsuited to internal plan review.  In sum, a fine opinion for ERISA plaintiffs challenging statutory (as opposed to plan) violations.

Hackett v. Standard Insurance Co., No. 07-3166 (8th Cir. Mar. 19, 2009):  Until the MetLife decision, the Eighth Circuit had been one of the courts that declined to give weight to a conflict of interest by a plan administrator in weighing whether the plan abused its discretion.  As the panel here writes, in this case involving the denial of long-term disability benefits:

"Hackett sued Standard arguing it improperly denied her claim for 'any occupation' disability benefits. Hackett argued Standard was operating under a conflict of interest because it was both the plan administrator and had discretionary authority to interpret and apply plan language. The district court, applying Woo v. Deluxe Corp., 144 F.3d 1157, 1160 (8th Cir. 1998), held Standard was operating under a conflict of interest but the conflict could not be considered because Hackett failed to prove any serious breach of Standard's fiduciary duty. After concluding the conflict of interest could not be factored into its review, the district court held Standard did not abuse its discretion in denying Hackett's claim."

The panel reverses the district court, but -- oddly, for a case pending over a year -- publishes a decision purely to remand the decision in light of the Supreme Court's decision, without exemplification:

"In Glenn, the Court concluded a conflict of interest exists whenever the plan administrator is also the employer or insurance company which ultimately pays benefits. Id. at 2348. addition ally, Glenn resolved the question of how the conflict should be considered when determining if a plan administrator abused its discretion. Under Woo, if a claimant proved a conflict of interest, he also had to prove a serious breach of the plan administrator's fiduciary duty. If the claimant met the Woo test, the district court would review the administrator's decision using a sliding-scale approach, decreasing the 'deference given to the administrator in proportion to the seriousness of the conflict of interest.' 144 F.3d at 1161. In Glenn, the Supreme Court made clear the conflict does not change the standard of review applied by the district court. Rather, 'a conflict should 'be weighed as a factor in determining whether there is an abuse of discretion.'" Glenn, 128 S. Ct. 2350 (quoting Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989) (addition al quotation and citation omitted)). In this instance, the district court erred by concluding the conflict of interest could not be taken into account."

So other than telling us that the Woo test was superceded by MetLife, and remanding this case for reconsideration in light of the intervening change in law, the panel tells us nothing more in ten pages.  Hence my end of 2008 observation that MetLife has given us no clarity on this arcane, yet outcome-determinative issue.

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