Posted on: 7/25/2012
Mark W. Hastings, Transamerica Life Insurance Co
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In denial of benefits claims under ERISA, the accrual date for statute of limitations purposes commences when a participant knows, or should know, that his claim for benefits was clearly repudiated.
In the past, courts held that a clear repudiation of benefits occurred after a formal and final denial of benefits. Recently, however, courts are finding clear repudiation in cases alleging underpayment on the date a participant first received his benefit payment, because that is when the participant should have been aware that he was underpaid and that his right to a greater benefit was repudiated.
In the context of class action lawsuits, courts are making individualized determinations of when clear repudiation occurs for each participant, which can defeat the commonality and typicality prongs needed for class certification.
ERISA contains no statute of limitations for benefits claims under 29 U.S.C. § 1132(a)(1)(B). Instead, courts borrow the most closely analogous statute of limitations from the forum state, which in most cases is the limitations period that governs written contracts. Redman v. Sud Chemie, Inc. Retirement Plan for Union Emps., 547 F.3d 531 (6th Cir. 2008); Withrow v. Halsey, 655 F.3d 1032 (9th Cir. 2011).
While courts borrow state law to determine the applicable statute of limitations, federal law determines when the limitations period begins to accrue. Miller v. Fortis Benefits Co., 475 F.3d 516, 520 (3d Cir. 2007). Under federal common law, courts generally employ the "discovery rule" under which a plaintiff's cause of action accrues when he discovers, or with due diligence should have discovered, the injury forming the basis for his lawsuit.
Case law in the context of the discovery rule and ERISA indicates that a cause of action accrues when a plan clearly and unequivocally repudiates a plaintiff's claim for benefits and that repudiation is known, or should be known, to the plaintiff. Carey v. Intern'l Bd. of Elec. Workers Local 363 Pension Plan, 201 F.3d 44 (2d Cir. 1999); Miller v. Fortis Benefits Ins. Co., 475 F.3d 516 (3d Cir. 2007); Kingsbury v. Marsh & McLennan Co., Inc., 2011 U.S. Dist. LEXIS 9525 (D. Mass. Feb. 1, 2011).
Cases in which a claim for benefits accrues before there has been a formal administrative denial of benefits are rare, because the exhaustion of administrative remedies requirement affects when a claim is clearly repudiated. Pikas v. Williams Cos., 822 F. Supp. 2d 1163 (N.D. Okla. 2011). Some courts have ruled that a statute of limitations runs from the time a participant first receives his benefit payment, where the miscalculation is obvious on the face of the payment. Miller v. Fortis Benefits Ins. Co., 475 F.3d at 523; Chuck v. Hewlett Packard Co., 455 F.3d 1026 (9th Cir. 2006).
Also, in cases involving wrongful denial of benefits resulting from the misclassification of a worker as an independent contractor, some courts have found that the limitations period begins to run when it is clear to the worker that he is an independent contractor and is not entitled to benefits, regardless of a formal claim for benefits. Brennan v. Metro. Life Ins. Co., 275 F. Supp. 2d 406 (S.D.N.Y. 2003), Downes v. J.P. Morgan Chase & Co., 2006 U.S. Dist. LEXIS 27386 (S.D.N.Y. May 8, 2006).
When Is Claim Repudiated?
The analysis for determining unequivocal repudiation of a participant's claim is fact-intensive and depends on the information provided to the participant about the plan. Generic information can prospectively result in unequivocal repudiation, usually a direct communication to a participant who is pressing his claim. This means that the date can be individualized for different participants, which is problematic in the class action context.
For example, in Thompson v. Retirement Plan for Emps. of S.C., 651 F. 3d 600 (7th Cir. 2011), the plan sponsor amended its ERISA plan in 1998, converting it from a traditional defined benefit plan to a cash balance plan. A cash balance plan is a defined benefit plan, except that it functions like a defined contribution plan, because the promised benefit is defined in terms of a stated account balance. The amendment applied a "wash calculation" to the lump sum benefit available at termination. For a participant leaving at age 40, the plan calculated interest to age 65 at the 30-year treasury rate, then discounted it back to age 40 at the same rate.
The participants in the cash balance retirement plan brought a class action lawsuit, alleging that the company had incorrectly calculated lump sum distributions paid to pre-retirement plan participants. The wash calculation was acknowledged as illegal; however, the defendant argued that the plaintiffs' claims were untimely.
The district court held that a lump sum benefit payment can trigger the running of the statute of limitations. The court held that the applicable statute of limitation was Wisconsin's six-year contract limitations period. It divided the plaintiffs into two subclasses – subclass A, plaintiffs who received their lump sum distributions after November 27, 2001 (six years prior to the filing of suit); and subclass B, plaintiffs who received their lump sum benefits before November 27, 2001. The claims of subclass A were considered timely and those of subclass B untimely. Both parties appealed on the issue of timeliness.
While labeling it a "very close call," the Seventh Circuit upheld the district court's holding on the two classes. The panel determined that clear repudiation did not occur when information was distributed to the participants, because the information was "a collection of hints" that did not provide clear notice to the participants about the wash calculation. In effect, the summary plan description and certain newsletters did not adequately illuminate the crucial defect about the wash calculation. Also important, the court noted that it was possible that generic plan communications could prospectively repudiate a participant's rights. Had the plan or the later newsletters clearly disclosed the wash calculation, or had the miscalculation been more straightforward and obvious, the accrual date would have been determined earlier.
In Novella v. Westchester Cnty., 661 F.3d 128 (2d Cir. 2011), the participant, a 61-year-old carpenter, took disability retirement in 1995 and also applied for his pension. He worked for the employer from 1962 to 1995, but with a break in service between 1981 and 1987. Instead of receiving his defined benefit payments at the 1995 rate he thought he was promised, the 1995 rate was applied only to the participant's work performed during or after 1987. A lower rate was paid for work performed before 1981. On March 19, 2002, having exhausted administrative plan remedies challenging the calculation, Novella filed a class action lawsuit.
In early 2004, before moving for class certification, the parties filed cross-motions for summary judgment on the ERISA claim for benefits. The district court concluded that application of the two-rate calculation was illegal. Novella then moved for class certification, which the district court granted, holding that "the relevant date for fixing the accrual of the putative class members claims is when a plaintiff is put on notice that the defendants believed the method used to calculate his disability pension was correct."
Thus, the time to bring a legal action was determined not to run until a prospective class member had inquired about the calculation of his benefits and the plan had rejected his claim that the benefits were miscalculated. Applying that standard, the district court found 24 putative class members whose claims were timely, determined that this number met the numerosity requirement of Rule 23(a)(1) of the federal rules, and certified the class.
Class Certification Reversed
On appeal, the Second Circuit upheld the main ruling that the plan administrator had acted illegally in applying two different rates. However, the panel decertified the class based on the lower court's calculation of the statute of limitations.
The panel rejected the defendant's argument that the limitations period began to run when a pensioner received his first benefit check, because it placed too great a burden on the participant to understand a complicated pension plan and to confirm the correctness of the benefit amount at the outset. The panel also rejected the district court's holding that a cause of action accrued when the member first inquired about the calculation and the plan rejected it, because a participant could collect benefits for many years before making an inquiry.
The Second Circuit also rejected a continuing violation theory that each disability payment constituted a separate breach that started a new limitations period, which was applied in Meagher v. Int'l Ass'n of Machinists & Aerospace Workers Pension Plan, 856 F.2d 1418 (9th Cir. 1988), because the dual rate calculation in Novella, even though it caused reverberations into the future, came from a single decision, as opposed to new, repeated decisions by the plan.
Instead, the panel found that the accrual date was the date when the participant had adequate information about the miscalculation, such that he knew, or reasonably should have known, of the miscalculation. If a participant was given notice of the dual rate, that would start the accrual date for him. If the participant had the correct rate-times-units calculation, so that the miscalculation was obvious on the face of the benefits check, that would likely start the accrual date too. The court acknowledged that the fact-intensive, individualized nature of its approach could be problematic in establishing a relationship between a plaintiff's claims and those alleged on behalf of a class, an important criteria for class certification.
Conclusion
With the need to make a fact-intensive determination concerning when a participant should know that his benefits have been clearly repudiated, meeting the commonality and typicality prongs for class certification in these ERISA actions should become increasingly difficult. Courts are increasingly willing to find clear repudiation when a participant's benefits commence, which will require participants to bring an action within a reasonable time thereafter. In addition, depending on the types of plan communications sent to a participant, clear repudiation could be found to occur much earlier.
Mark W. Hastings is an attorney with Transamerica Life Insurance Company, 100 Light Street, B-1, Baltimore, Maryland. Prior to working at Transamerica, he practiced law in New Hampshire and then worked for two small, mutual insurance companies in the Mid-Atlantic region. He received his undergraduate degree at Middlebury College, his law degree at New England School of Law, and an L.L.M at Georgetown University Law Center. Mr. Hastings can be reached at mark.hastings@transamerica.com.