A Commentary on Great West Life & Annuity Co. v. Knudson, And ERISA Section 502(a)(3)
By Edward X. Clinton, Jr.
Copyright 2004
In Great West Life & Annuity Co. v. Knudson, 122 S.Ct.
708 (1/08/2002), the Supreme Court held that Section 502(a)
(3) of the Employee Retirement Income Security Act
(“ERISA”) does not authorize an award of compensatory
damages. This decision, the third in a line of Supreme
Court decisions on the relief authorized by Section 502(a)
(3), has important implications for much of the ERISA
jurisprudence. As we shall see, the Great West decision
will (1) prevent some plaintiffs from obtaining money
damages for violations of ERISA; (2) prevent health plans
from recovering the costs they incurred on behalf of
certain injured insureds.
Congress enacted the Employee Retirement Income
Security Act, (“ERISA”)1 to protect the rights of
participants in company-sponsored and multi-employer
retirement plans. ERISA contains numerous requirements for
employer-sponsored retirement plans. The act also contains
enforcement provisions in § 502 that allow a beneficiary to
bring a lawsuit to obtain benefits or challenge other
adverse decisions of plan administrators. Section 502(a)
1
1
The Act’s title is the Employee Retirement Income Security Act of 1974, P.L. 93-406.
(1)(B) allows a plan participant or beneficiary to bring an
action “to recover benefits due to him under the terms of
this 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.”2 This section limits the beneficiary to
recovering benefits he is entitled to under the terms of
the plan. The plan documents will determine the outcome of
the lawsuit. What happens if a plan administrator misleads
the beneficiary as to the terms of the plan? Section
502(a)(1) provides no remedy because any recovery is
limited to the terms of the plan documents. Similarly,
section 502(a)(2) does not allow individual beneficiaries
to sue for a remedy.3
Section 502(a)(3) allows a participant, beneficiary,
or fiduciary “(A) to enjoin any act or practice which
violates any provision of this title or the terms of the
plan, or (B) to obtain other appropriate equitable relief
(i) to redress such violations or (ii) to enforce any
provision of this title or the terms of the plan.”4 The
key question raised by § 502(a)(3) is what type of relief 2
2
§ 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B).
3
3
See Strom v. Goldman Sachs, 202 F.3d 138 (2d Cir. 1999)(“Plaintiff cannot sue under section 502(a)(1)(B) because there are no benefits due her under the plan. She cannot proceed under section 502(a)(2) because it affords no remedies to individual beneficiaries.”).
4
4
ERISA § 502(a)(3).
2
is permitted by the phrase “other appropriate equitable
relief to redress such violations.”5
This commentary will discuss ERISA’s civil recovery
provisions, the relief provided to civil litigants by
Section 502, the debate surrounding Section 502(a)(3) and
the Supreme Court’s resolution of that debate in Great
West. The article will also discuss various commentators’
views of Section 502(a)(3).
I. ERISA’s Civil Recovery Provisions
A. The Fiduciary Standard
ERISA contains numerous provisions regulating the
conduct of plan fiduciaries. Section 404(a) is the most
important provision regulating fiduciary conduct. It
requires that a fiduciary:
shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries, and
(A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
5
5
Id.
3
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and Title IV.
Section 409(a) makes a fiduciary personally liable to
the plan for any breach of fiduciary duty. It provides:
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.6
Section 409 only creates a standard by which to measure
the conduct of a fiduciary. It does not allow any
individual plaintiff to sue to recover benefits.
Congress intended that ERISA’s fiduciary obligations
should be interpreted according to the law of trusts, where
the law of trusts does not conflict with a specific
statutory provision of ERISA. The House Committee on
Education and Labor stated: “The fiduciary responsibility
section, in essence, codifies and makes applicable to these
fiduciaries certain principles developed in the evolution
6
6
ERISA § 409.
4
of the law of trusts.”7 The Committee expressed concern
that some plans were structured so that the law of trusts
did not apply. Moreover, traditional trust law allowed the
settlor to draft an exculpatory clause, under which the
trustee would not be subject to liability for certain
actions.8
In Varity Corp. v. Howe, however, the Supreme Court
noted that traditional trust law does not always provide
the correct answer. The majority opinion comments: “[i]n
some instances, trust law will offer only a starting point,
after which courts must go on to ask whether, or to what
extent, the language of the statute, its structure, or its
purpose require departing from common-law trust
requirements.”9 Indeed, the House Committee noted that the
statute had modified certain principles of trust law to
make them more suitable to employee benefit plans.10 Thus,
the common law of trusts may provide helpful information in
construing the fiduciary standard set forth in § 409, but
it does not provide all the answers. 7
7
House Report No. 93-533, 3 U.S. Code Congressional and Administrative News at 4649 (1974); see also Senate Report, No. 93-127, 3 U.S. Code Congressional and Administrative News at 4865 (1974) (containing an identical statement).
8
8
Id. at 4650.
9
9
516 U.S. 489, 116 S. Ct. 1065, 1070 (1996).
10
1
House Report, No. 93-533, 3 U.S. Code Congressional and Administrative News at 4651 (1974); see also Varity, 116 S.Ct. at 1070.
5
B. Enforcing The Fiduciary Standard
Section 502 provides certain person with rights to
sue to enforce the provisions of ERISA. Section 502(a)(1)
(B) allows a participant or a beneficiary to sue to obtain
benefits due under the plan, to enforce his rights under
the terms of the plan, or to clarify his rights to future
benefits under the plan. Of course, a beneficiary or
participant has no right to recover any benefits under
this section if the plan documents do not create a right
to a benefit.
Section 502(a)(2) allows a participant, beneficiary or
fiduciary to obtain “appropriate relief under section 409.”
This section also provides limited relief to a participant
or beneficiary because § 409 requires that a fiduciary who
breaches a fiduciary duty make the plan whole for his
breach. Section 409 does not require the breaching
fiduciary to make the participant or beneficiary whole. If
the plaintiff is no longer a participant or a beneficiary
under the plan’s terms, the plaintiff will not be able to
recover lost benefits under this section.
Section 502(a)(3) allows a participant, beneficiary
or fiduciary to sue to enjoin any act or practice that
violates ERISA or the terms of the plan or “to obtain
other appropriate equitable relief (i) to redress such
6
violations or (ii) to enforce any provision of this title
or the terms of the plan.”11 This section is very
important to beneficiaries of pension plans because it may
allow direct recovery from a party, which breached ERISA
or a fiduciary duty. Unlike § 502(a)(1), §(a)(3) is not
specifically limited to the actual terms of the benefit
plan. Section 502(a)(3) allows the plaintiff to obtain
direct relief rather than the relief provided by §(a)(2),
which allows the plan to obtain reimbursement.
C. The Legislative History
A review of the legislative history indicates that
Congress intended that § 502 would give the courts broad
powers to enforce the new statute. The House Education and
Labor Committee stated:
The enforcement provisions have been designed specifically to provide both the Secretary [of Labor] and participants and beneficiaries with broad remedies for redressing or preventing violations of the Act. The intent of the Committee is to provide the full range of legal and equitable remedies available in both state and federal courts and to remove jurisdictional and procedural obstacles which in the past appear to have hampered effective enforcement of fiduciary responsibilities under state law for recover of benefits due to recipients.12
11
1
ERISA § 502(a)(3).
12
1
House Report No. 93-533, 93rd Congress, 2d Sess., reprinted in 3 U.S.Code Congressional and Administrative News 4639, 3655 (1974). The Senate Report, S. Rep. No. 93-127, 93d Congress, 2d Sess., which contains an identical statement is reprinted in 3 U.S.C.C.A.N. 4838, 4871 (1974).
7
The Senate Finance Committee dealt with the remedial
provisions in greater detail and defined "appropriate
equitable relief" as follows:
Appropriate equitable relief may be granted in a civil action. For example, injunctions may be granted to prevent a violation of fiduciary duty, and a constructive trust may be imposed on the plan assets, if needed to protect the participants and beneficiaries. Also, the bill specifically provides that a fiduciary may be removed through civil action brought by the Secretary or participants or beneficiaries if he has violated any of the specified fiduciary obligations . . .. It is expected that a fiduciary . . . may be removed for repeated or substantial violations of his responsibilities, and that upon removal the court may, in its discretion, appoint someone to serve until a fiduciary is properly chosen in accordance with the plan.13
The Senate Report suggests that §502(a)(3) was intended to
offer plaintiffs equitable relief, not compensatory
damages. The legislative history is consistent with the
plain language of the statute.
II. Supreme Court Decisions Interpreting Section 502(a)(3)
The Supreme Court has decided several cases
interpreting § 502(a)(3) in different contexts. These
cases have provoked a complex debate concerning the relief
available under that section.
13
1
Senate Report No. 93-406, 93d Cong., 2d Sess. 105-06, reprinted in 3 U.S. Code Cong. & Admin. News 4890, 4989 (1974).
8
A. Massachusetts Mutual Life Insurance Co. v. RussellIn Russell,14 the plaintiff was an employee of Mass
Mutual and was governed by the company’s short-term
disability plan. Russell injured her back in May 1979 and
was granted disability benefits until October 1979, when
the company decided to terminate her benefits. Russell
requested that the decision be reviewed. Four months
later her benefits were reinstated and she was paid
retroactive benefits. Russell then filed suit pursuant to
§409, arguing that she was entitled to damages for
emotional distress and that she should recover punitive
damages. The Ninth Circuit held that an award of
compensatory damages would “`remedy the wrong and make the
aggrieved individual whole.’”15
The Supreme Court reversed the Ninth Circuit and held
that § 409 did not authorize any award of extra-
contractual damages. Moreover, § 502(a)(1) did not
authorize the recovery of extracontractual damages either.
The Supreme Court also rejected Russell’s argument that it
should create a private right of action for
extracontractual damages. It noted that the remedies
14
1
473 U.S. 134, 105 S.Ct. 3085 (1985).
15
1
Id. at 139, 105 S.Ct. at 3090.
9
provided in § 502 were carefully drafted: “The six
carefully integrated civil enforcement provisions found in
§ 502(a) of the statute as finally enacted, however,
provide strong evidence that Congress did not intend to
authorize other remedies that it simply forgot to
incorporate expressly.”16 A plaintiff under ERISA could
even recover attorney’s fees under subsection (g).
Justice Brennan concurred in the judgment.17 He argued
that courts should broadly construe the provisions of
section 502. His concurrence suggests that § 502(a)(3)
would authorize extracontractual damages:
ERISA’s legislative history also demonstrates beyond question that Congress intended to engraft trust-law principles onto the enforcement scheme… and a fundamental concept of trust law is that courts ‘will give to the beneficiaries of a trust such remedies as are necessary for the protection of their interests.’18
Justice Brennan concluded that § 502 should authorize the
same relief that a beneficiary could obtain at common law,
unless that relief conflicts with a provision of ERISA.
The concurrence suggests that a beneficiary could obtain
extra-contractual damages, in the same fashion that a
16
1
Id. at 147, 105 S.Ct. at 3092.
17
1
Id. at 158, 105 S.Ct. at 3094.
18
1
Id. at 148, 105 S.Ct. at 3095 (quoting Austin Wakeman Scott, Law of Trusts, § 199, p. 1638 (1967)).
10
beneficiary can obtain compensatory and punitive damages
where a trustee breaches a fiduciary duty.
III. Mertens v. Hewitt Associates.In Mertens v. Hewitt Associates19 the Supreme Court
considered the meaning of the term “other appropriate
equitable relief” in the context of a claim by a plan
beneficiary against a benefit plan’s actuary. The actuary
was not an ERISA fiduciary. The plaintiff in Mertens was a
retired employee of Kaiser Steel who participated in Kaiser
Steel’s retirement plan. The defendant was the actuary for
the Kaiser pension plan in 1980 when Kaiser began to phase
out its steel operations. The phase out caused many of the
participants in the plan to opt for early retirement.
Mertens alleged that Hewitt failed to alter its actuarial
assumptions when Kaiser began phasing out its steel
operations. Hewitt’s failure to alter its actuarial
assumptions caused the plan to be severely underfunded.
Eventually, the plan’s assets could not satisfy its
liabilities and the Pension Benefit Guaranty Corporation
terminated the plan. As a result, Mertens and his co-
workers lost substantial benefits they would have received
had the Kaiser Steel retirement plan remained solvent.
19
1
508 U.S. 248, 113 S.Ct. 2063 (1993).
11
Mertens sued the plan fiduciaries for breach of
fiduciary duty. Mertens also brought suit under §502(a)(3)
alleging that Hewitt knowingly participated in the breach
of fiduciary duty by the Kaiser Steel plan trustees.
However, Mertens conceded that Hewitt was not a plan
fiduciary. Mertens requested that Hewitt be required to
make the plan whole for the losses its negligence caused.
Hewitt argued that Mertens could not recover money damages
under § 502(a)(3) because the phrase “other equitable
relief” limited a successful plaintiff to traditional
equitable remedies such as an injunction.
The plaintiffs argued that they were only seeking
equitable relief. The court disagreed: “[a]lthough they
often dance around the word, what petitioners in fact seek
is nothing other than compensatory damages -- monetary
relief for all losses their plan sustained as a result of
the alleged breach of fiduciary duties. Money damages are,
of course, the classic form of legal relief.”20 The court
held that the plaintiffs were not entitled to money damages
under § 502(a)(3). In response to the argument that the
purpose of ERISA was to protect beneficiaries and that
purpose would be served by awarding compensatory damages,
Justice Scalia wrote: “vague notions of a statute’s ‘basic
20
2
Id. at 255, 113 S.Ct. at 2068.
12
purpose’ are nonetheless inadequate to overcome the words
of its text regarding the specific issue under
consideration.”21 Thus, the specific holding of Mertens is
that plaintiffs could not recover compensatory damages
under § 502(a)(3) from a nonfiduciary. The Court
specifically did not decide whether § 502(a)(3) allowed a
plaintiff to recover compensatory damages against an ERISA
fiduciary.
IV Varity Corp. v. HoweThe Supreme Court’s decision in Varity Corp. v. Howe
provoked much debate concerning the relief authorized by §
502(a)(3). In Varity Corp. v. Howe, the plaintiffs were
employees of Massey-Ferguson, a farm equipment maker, and
were beneficiaries of that firm’s employee welfare benefit
plan.22 In the mid-1980’s Massey-Ferguson’s parent
corporation, Varity, became concerned that some of its
divisions were losing money. Varity’s management decided
to solve the financial problem by transferring money-losing
operations to a new subsidiary named Massey Combines.
Varity’s management hoped to transfer certain obligations
to Massey Combines, thus relieving Varity of the
21
2
Id. at 256, 113 S.Ct. at 2069. The Court also commented that holding nonfiduciaries liable for compensatory damages “would impose high insurance costs upon persons who regularly deal with and offer advice to ERISA plans, and hence upon ERISA plans, themselves.” Id.
22
2
516 U.S. 489, 116 S.Ct. 1065 (1996).
13
liabilities.23 One of these obligations arose from the
Massey-Ferguson plan’s promises to pay medical and other
nonpension benefits to its employees.24 Instead of
terminating the benefits directly, Varity induced Massey-
Ferguson employees to voluntarily release Varity from the
medical and other obligations by promising that the newly
formed Massey Combines would promise to pay those benefits
to the employees. Shortly after the employees relinquished
their rights under the Massey-Ferguson benefit plan and
joined Massey Combines, the new company was placed in
receivership. As a result of the collapse of Massey
Combines, the employees lost their nonpension benefits.
The employees brought suit under § 502(a)(3) alleging
that Varity had breached its fiduciary duty to them by
fraudulently inducing them to relinquish their rights to
medical and other benefits from Massey-Ferguson in exchange
for worthless rights to those same benefits from Massey
Combines. After trial the district court found that Varity
had violated ERISA section 404(a) which requires that an
ERISA fiduciary manage a benefit plan “solely in the
interest of the participants and beneficiaries.”25 Pursuant
23
2
Id. at 493, 116 S.Ct. at 1068.
24
2
Id.
25
2
Id. at 494, 116 S.Ct. at 1068.
14
to § 502(a)(3), the district court ordered Varity to
reinstate the employees into its own employee welfare plan.
Varity argued that reinstating the employees into its
pension plan was not “appropriate equitable relief” under §
502(a)(3). The Supreme Court held that Varity breached its
fiduciary duty by deceiving its employees and that the
district court’s order that Varity reinstate the plaintiffs
into its own employee welfare plan was “appropriate
equitable relief.” The court commented:
We should expect that courts, in fashioning ‘appropriate’ equitable relief, will keep in mind the ‘special nature and purpose of employee benefit plans,’ and will respect the ‘policy choices reflected in the inclusion of certain remedies and the exclusion of others.’ Thus, we should expect that where Congress elsewhere provided adequate relief for a beneficiary’s injury, there will likely be no need for further equitable relief, in which case such relief normally would not be ‘appropriate.’”26
Varity implies that federal courts will have broad
authority in fashioning equitable relief under § 502(a)(3).
The relief provided by § 502(a)(3) was essential to the
Varity plaintiffs because they could not possibly recover
damages under § 502(a)(1) because they had no right to
medical benefits under the Varity plan. The plaintiffs
could not recovery under § 502(a)(2) either because
requiring Varity to make a payment to its own plan would
26
2
Id. at 515, 116 S.Ct. at 1079.
15
not benefit plaintiffs because they were not members of the
plan. As in many ERISA cases, plaintiffs’ only remedy was
available under § 502(a)(3).
In his dissenting opinion, Justice Thomas argued that §
502(a)(3) did not allow an individual beneficiary or plan
participant to secure equitable relief for breach of
fiduciary duty. In support of that argument, Justice
Thomas noted that § 502(a)(3) does not mention the term
“fiduciary breach” and “uses language identical to that in
section(s) 409, which we have already held authorizes
equitable relief only on behalf of the plan.”27 The dissent
concluded that Congress intended to authorize equitable
relief only on behalf of the plan.
Neither Mertens nor Varity definitively resolved the
issue of whether a plaintiff can obtain money damages, or
an injunction granting relief similar to money damages,
against a fiduciary defendant. The Varity court allowed
the plaintiffs to obtain an injunction requiring the
defendant to admit them to its employee welfare plan. Such
an award is almost equivalent to allowing the plaintiffs to
recover money damages for the company’s breach of fiduciary
duty. It is, however, not an award of money damages. In
Mertens, the Supreme Court held that a plaintiff could not
27
2
Id. at 520, 116 S.Ct. at 1081(Thomas, J., Dissenting).
16
obtain equitable relief under § 502(a)(3) against a
nonfiduciary.
A. Commentators Struggle With the Mertens and Varity Decisions.
The commentators who analyzed the Mertens and Varity
decisions reached different interpretations of the phrase
“other appropriate equitable relief.” Several commentators
noted that after Varity it was no longer clear whether or
not monetary relief was permitted by Section 502(a)(3).28
In his article, Equitable Remedies For Breach of
Fiduciary Duty Under ERISA After Varity Corp. v. Howe,29
Eduard A. Lopez argued that the relief provided by §502(a)
(3) “should correspond to that relief available in equity
for breach of trust.” The problem, of course, is that it is
not clear exactly what remedies were available at common
law for breach of trust. Lopez
V. “Other Appropriate Equitable Relief” Since Varity Corp. v. Howe.Some courts have broadly construed § 502(a)(3) to allow
the recovery of money damages, while others have held that
the section only allows traditional equitable remedies such
28
2
Tina Kukaza, Varity Corp. v. Howe: Will It Cause An Increase In Litigation Against Employers Who Administer ERISA Plans? 48 Mercer L. Rev. 965 (1997).
29
2
18 Berkeley Journal of Employment and Labor Law 323 (1997)
17
as an injunction. As we shall see, decisions from several
circuits are in conflict.
A. Courts Allowing Recovery of Compensatory DamagesThe Second, Third and Eleventh Circuits have issued
decisions granting plaintiffs monetary relief under §
502(a)(3). These courts have based their decisions on the
broad congressional purpose in enacting ERISA to protect
beneficiaries of retirement and employee welfare plans.
The most dramatic example of a court’s decision to
allow monetary relief under § 502(a)(3) is Strom v. Goldman
Sachs.30 In Strom, the plaintiff was the surviving spouse of
an employee of Goldman Sachs. In January 1994, her husband
went to work for Goldman Sachs. As an employee Strom had
group life insurance coverage of $500,000. He applied to
increase the amount of his group life insurance from
$500,000 to $1,000,000. Goldman Sachs, however, failed to
correctly process Strom’s application and, as a result, the
effective date of his coverage under the group plan was
delayed until four days after he died.31
Strom’s wife brought suit against Goldman Sachs under
several provisions of ERISA. Her claim under § 502(a)(1)
(B) was dismissed because that section only allows a
30
3
202 F.3d 138 (2d Cir. 1999).
31
3
Id. at 141.
18
plaintiff to recover benefits that were due under the terms
of the employer’s plan. Because Goldman Sachs delayed in
submitting her husband’s application for increased life
insurance coverage, she was not entitled to the additional
$500,000 of life insurance coverage under the terms of the
plan. This portion of the court’s opinion illustrates the
limitations of § 502(a)(1)(B).
However, her breach of fiduciary duty claim under §
502(a)(3) fared better. Plaintiff argued that by failing
to submit Strom’s application for increased group life
insurance on time, Goldman Sachs breached its fiduciary
duty. The Second Circuit agreed that these allegations
stated a claim for breach of fiduciary duty. Goldman Sachs
argued that plaintiff could not recover under § 502(a)(3)
because she sought money damages, $500,000, under a section
which only allowed a plaintiff to obtain “other
appropriate equitable relief (i) to redress such
violations.” Goldman Sachs relied on Mertens and argued
that ordering it to pay $500,000 was an order to pay money
damages, which was not permitted by the statute.32
The Second Circuit disagreed. It held that Congress
intended that the phrase “equitable relief” included more
than simply an injunction. The court noted that
32
3
Id. at 143.
19
traditionally courts of equity were permitted to require
that a defendant who had breached his fiduciary duty
provide restitution to the plaintiff. It also commented
that courts of equity were allowed to order remedies to
make plaintiffs whole.33 In the court’s view, ordering
Goldman Sachs to pay Strom’s widow $500,000 would make her
“whole” for the company’s failure to submit Strom’s
insurance application in a timely fashion.34 In the court’s
view, such an award was consistent with the statutory
purpose and legislative history of ERISA. Accordingly, the
Second Circuit reversed the judgment in favor of Goldman
Sachs and held that if the plaintiff proved that Goldman
Sachs breached its fiduciary duty it could enter an award
of money damages to make Strom’s widow whole.
The Third Circuit has also held that a plaintiff may
obtain money damages under § 502(a)(3). In Ream v. Frey
and Fulton Bank, Jeffrey Ream was an employee of a
construction company.35 Ream participated in the company’s
profit sharing plan. By the end of 1992, Ream had a
balance of $13,829.92 in the plan. Fulton Bank was the
plan’s trustee. It held all of the plan’s funds in one of
33
3
Id. at 145.
34
3
Id. at 150.
35
3
107 F.3d 147 (3d Cir. 1997).
20
its accounts. The plan administrator was Jeffrey Frey, the
owner of the construction company. Under the plan the
trustee was to receive and invest contributions and to make
distributions in accordance with instructions from the
company.36 In the early 1990’s the company began struggling
financially. The company often delayed sending employer
contributions for the profit sharing plan to the trustee
bank. The company also failed to provide the Fulton bank
with necessary information. On several occasions the bank
threatened to resign as trustee for the plan.37 In 1993, the
bank resigned as trustee and requested that the company
appoint a successor trustee. The company never designated
a successor trustee. However, Fulton Bank sent Frey a
check for the full amount of all money in the plan and
designated him as the successor trustee. Frey endorsed the
check and converted all of the plan’s money to his own use.38
Ream and the other employees of the construction
company were unaware that the bank had resigned as the
trustee. Ream continued making contributions to the plan
after the proceeds of the plan were returned to Frey. In
1994, the construction company filed a bankruptcy petition.
36
3
Id. at 149.
37
3
Id. at 150.
38
3
Id.
21
Ream sued Frey, but Frey agreed to make partial payment to
reimburse Ream for the converted plan money. Ream did not
obtain full recovery from Frey.
Ream then sued Fulton Bank for the remainder of the
benefits he was owed, alleging that the bank had breached
its fiduciary duty to plan beneficiaries by returning the
proceeds of the plan to Frey. Ream argued that Fulton Bank
was also liable as a co-fiduciary for Frey’s own breach of
fiduciary duty. The district court granted summary
judgment to Ream and entered a money judgment in his favor.
Fulton Bank appealed on the ground that it did not
breach its fiduciary duty and on the ground that Ream could
not obtain monetary relief under § 502(a)(3). The Third
Circuit disagreed and held that the bank breached its
fiduciary duty to Ream by turning over the proceeds of the
retirement plan to Frey. The Third Circuit held that Ream
had a cause of action under § 502(a)(3).39 The court noted
that the employee benefit plan was no longer in existence
because Frey converted its assets. If the plan were still
in existence and could pursue its own remedies, “it might
be inappropriate to permit a beneficiary to seek personal
39
3
Id. at 156.
22
relief as a recovery by the plan effectively would make the
beneficiary whole.”40
In Blue Cross v. Sanders,41 Blue Cross sued Doyle and
Tina Sanders to recover sums spent on health care for Tina
Sanders after an auto accident. The Sanders participated
in a health plan offered by Doyle’s employer, Nichols
Research Corporation. The plan required that any
participating member for whom the plan had incurred costs
reimburse the plan for its expenses in the event the member
obtained a settlement from a third party.
In 1991, Tina was injured in an accident. Blue Cross
authorized the health plan to pay $12,678.69 to reimburse
various health care providers. In 1992, the Sanders filed
a personal injury lawsuit against the driver of the other
vehicle involved in Tina’s accident. They obtained a
default judgment in the amount of $200,000. Blue Cross
requested that the Sanders reimburse the health plan for
the expenses it had incurred on Tina’s behalf. The Sanders
refused to reimburse the plan and Blue Cross filed suit
pursuant to § 502(a)(3). The court held that Blue Cross 40
4
Id. But see Kemmerer v. Ici Americas, 70 F.3d 281 (3d Cir. 1995), cert. denied, 517 U.S. 1209, 116 S.Ct. 1826 (1996) (plaintiffs sued the administrator of an employee benefit plan where they received full payment from the plan on an accelerated schedule which caused them additional tax liabilities; the court implied, but did not rule on the issue, that plaintiffs’ damages were not recoverable under §502(a)(3) because they were money damages).
41
4
138 F.3d 1347 (11th Cir. 1998).
23
could obtain a money judgment requiring the Sanders to
reimburse the plan for its expenses on behalf of Tina.
Blue Cross could not obtain relief under § 502(a)(1)
because it was not a participant or beneficiary of the
plan.42 Blue Cross could not obtain relief under § 502(a)(2)
because that section only allows recovery for breach of
fiduciary duty and does not allow a plan administrator to
recover costs incurred by a plan for a participant. Thus,
§ 502(a)(3) provided the only avenue to relief for Blue
Cross. The court was not troubled by the fact that it was
awarding money damages to Blue Cross when § 502(a)(3)
apparently allows only “appropriate equitable relief.”43
B. Cases Awarding Prejudgment Interest.The Third and Eighth circuits have affirmed money
judgments for prejudgment interest to plaintiffs. In
Mansker v. TMG Life Insurance Co.,44 the plaintiff and her
son received medical coverage from the defendant insurance
company. Plaintiff’s son was injured in an accident and
incurred enormous medical bills, but the defendant would
42
4
Id. at 1350.
43
4
Id. at 1352, n. 5. See also, Administrative Committee v. Gauf, 188 F.3d 767 (7th Cir. 1999) (in a case with facts virtually identical to Sanders the Seventh Circuit held that the health plan could obtain an injunction requiring the defendant to reimburse the plan in the amount of $9,870 and held that the injunction requiring the payment of money damages was appropriate equitable relief.)
44
4
54 F.3d 1322 (8th Cir. 1995).
24
not pay them. After trial, the court held that the son’s
injuries were covered under the policy and that defendant
had wrongfully withheld payment. The court awarded
prejudgment interest to Mansker on the ground that the
interest award would make plaintiff whole, promote
settlement of cases, and would deter defendants from
attempting to benefit from the delays inherent in the
litigation process.45
In Fotta v. Trustees of United Mine Workers of
America,46 the plaintiff was a miner who suffered a disabling
injury. The pension fund withheld his disability benefits
for nine years and, after adverse legal rulings in other
cases, granted Fotta his benefits. Fotta sued for
prejudgment interest and the court entered a judgment for
interest on the award. The Third Circuit held that an
award of prejudgment interest would make Fotta whole and
prevent the plan from being unjustly enriched by the delay
in payment. The court noted that: “[a] late payment of
benefits effectively deprives the beneficiary of the time
45
4
Id. at 1330-31.
46
4
165 F.3d 209 (3d Cir. 1998).
25
value of his or her money.”47 The Court regarded the award
as an equitable award of restitution.48
C. No Compensatory Damages Allowed Because § 502(a)(3) Does Not Permit It.
The First, Sixth and Eighth Circuits have held that
compensatory damages cannot be recovered under § 502(a)(3)
because compensatory damages are not “appropriate equitable
relief.” As we shall see, these decisions are in conflict
with Strom and Ream, but not Sanders.
In Kerr v. Vatterott, the plaintiff was hired by the
defendant to manage a partnership in the real estate
development business.49 The plaintiff elected to participate
in defendant’s 401k plan. Under the plan, the defendant
made matching contributions to the plan on behalf of its
employees. In July 1991, the defendant decided to
terminate its involvement in the real estate business and
it terminated all of its employees, including plaintiff.
Although Kerr was fully vested in the defendant’s 401k plan
when he was terminated, the defendant refused to distribute 47
4
Id. at 214.
48
4
Id. at 213. See also M. Stacey Bach, The Awarding Of Interest As “Other Equitable Relief” Under ERISA: The Third Circuit Enlarges Interest Recovery In Fotta v. Trustees of the United Mine Workers, 44 Villanova L. Rev. 807, 835 (1999) (noting that the Third Circuit was “confident” that the award of prejudgment interest was “other equitable relief” under section 502(a)(3)). Ms. Bach’s article, however, does not comment on whether the award of prejudgment interest was appropriate under the statute.
49
4
184 F.3d 938 (8th Cir, 1999).
26
his 401k funds until he repaid defendant for the employer
matching contribution it had made on his behalf.50 Kerr
refused to reimburse the plan for the amount of the
matching contributions and the defendant continued to
withhold his money. Three years later the defendant
authorized the transfer of Kerr’s 401k plan account to
another trustee. By this time, however, Kerr’s 401k
account was worth several thousand dollars more than it had
been worth when he was terminated. The money had grown at
an annual rate of 8.6%.
Kerr sued under § 502(a)(3) arguing that the defendant
breached its fiduciary duty by wrongfully withholding his
funds for three years. Kerr argued that he could have
earned an additional amount had he been able to invest the
money when he left the company. The district court granted
summary judgment on Kerr’s § 502(a)(3) claim on the ground
that Kerr could not recover money damages under § 502(a)
(3).51 Kerr appealed.
The Eighth Circuit held that § 502(a)(3) “provides
relief for the individual harm that Kerr may have suffered
from Vatterott & Co.’s breach of its fiduciary duties, but
50
5
Id. at 942.
51
5
The district court also granted summary judgment on Kerr’s claim under § 502(a)(1)(B) because Kerr had ultimately received all of the money that was due him.
27
limits his recovery to ‘appropriate equitable relief,’
which includes injunctive, restitutionary, and mandamus
relief, but does not include compensatory damages.”52 The
Eighth Circuit characterized Kerr’s request for relief as
follows: “Kerr is seeking monetary damages for the
difference between what he says he could have earned and
what he in fact earned, or ‘lost opportunity costs.’”53 The
court noted that restitution may be viewed as either an
equitable award or as compensatory damages. According to
the court an award of equitable restitution “focuses on the
defendant’s wrongfully obtained gain while a compensatory
award focuses on the plaintiff’s loss at the defendant’s
hands.”54 Because the defendant did not gain anything by
withholding Kerr’s money, Kerr was not seeking equitable
restitution. Indeed, Kerr had obtained all of the money in
his plan account after a lengthy delay. Kerr was seeking
compensation, a form of money damages. Therefore, § 502(a)
(3) barred his claim. The court reasoned:
Vatterott & Co. gained nothing by withholding Kerr’s money. Kerr received the earnings in his account. If we focus on Vatterott & Co.’s zero gain, rather than Kerr’s alleged loss, there is nothing to disgorge. Thus, Kerr’s claim is not a claim for restitution.55
52
5
Id. at 944.
53
5
Id. at 945.
54
5
Id. at 944.
55
5
Id. at 945.
28
The Eighth Circuit distinguished Mansker, which allowed
ERISA plaintiffs to obtain prejudgment interest on the
ground that an award of prejudgment interest is an
equitable as well as a compensatory award. The court noted
that “a common thread throughout the prejudgment interest
cases is unjust enrichment – the wrongdoer should not be
allowed to use the withheld benefits or retain interest
earned on the funds during the time of dispute.”56 In other
words, the court concluded that an award of prejudgment
interest was proper equitable restitution and was not an
award of compensatory damages.57
In Allinder v. Inter-City Products Corp., the
plaintiff became a computer systems analyst for the
defendant and enrolled in its long-term disability plan.58
According to the policy, the insurance company was
56
5
Id. at 946
57
5
In Novak v. Andersen Corp., 962 F.2d 757 (8th Cir. 1992), cert. denied, 508 U.S. 959, 113 S.Ct. 2928 (1993), the Eighth Circuit also rejected an argument for compensatory damages under § 502(a)(3). Novak quit his job and elected to cash out his interest in the company’s employee stock ownership plan. The plan neglected to inform him that he could avoid paying income tax if he elected a rollover to another retirement plan. As a result, Novak was required to pay income tax. The court rejected his breach of fiduciary duty claim on the ground that he was seeking compensatory damages, not equitable relief. The court reasoned that the statute allowed a plaintiff to obtain an injunction, a declaration of rights, or the imposition of a constructive trust. “We are not inclined to legislate by adding monetary damages to this already complete list.” Id. at 761.
58
5
152 F.3d 544 (6th Cir. 1998), cert. denied, 525 U.S. 1178, 119 S.Ct. 1115 (1999).
29
obligated to make long-term payments of disability benefits
once it received proof that the employee became totally
disabled while insured. In March 1990, Allinder became ill
after the company hired an exterminator to spray for
termites in her work area. Allinder was initially moved to
another work area, but the company decided that she should
return to her normal work area. She then began
experiencing tremors in her legs and hands. At one point
she was hospitalized for treatment. Allinder then took
some time off work. In July 1990, Allinder met with
company management to discuss her health condition. At the
end of the meeting the company decided to terminate
Allinder’s employment.59
Three months later Allinder filled out the employee’s
portion of the long-term disability benefits claim form and
requested that the company fill out the remainder of the
form. The company declined on the ground that Allinder was
not an active employee when her request for benefits was
made. The company’s action was inconsistent with the terms
of the plan. Allinder then contacted the insurer that
administered the company’s long-term disability plan. The
59
5
Id. at 547.
30
insurer provided Allinder with a lump-sum payment of the
long-term benefits to which she was entitled.60
Allinder then sued the company for compensatory and
punitive damages. The district court granted summary
judgment and the Sixth Circuit affirmed on the ground that
§ 502(a)(3) did not authorize an award of compensatory or
punitive damages. Allinder argued that § 502(a)(3)
authorized compensatory damages because courts of equity
have traditionally had the right to award compensatory
damages for a breach of trust.61 The Sixth Circuit,
following Mertens, held that the statute did not authorize
any form of compensatory damages.62
In Armstrong v. Jefferson Smurfit Corp., 30 F.3d 11
(1st Cir. 1994), plaintiffs were disabled retirees of the
defendant who were members of its group medical insurance
plan. In 1992, defendant offered plaintiffs an offer of
either (1) continuing participation in the medical plan at
current premium costs or (2) discontinuing participation in
exchange for a lump-sum payment. Defendant did not tell
plaintiffs that if they chose the second option, the lump-
sum payment would be subject to income tax. Plaintiffs
60
6
Id. at 548.
61
6
Id.
62
6
Id. at 552.
31
chose the lump-sum payment and incurred substantial income
taxes.63 They then brought suit for breach of fiduciary duty
under § 502(a)(3), arguing that the defendant should have
informed them that the lump-sum payment would be taxable.
The court held that defendant did not breach any duty to
plaintiffs and alternatively held that plaintiffs were
seeking compensatory damages, which were not recoverable
under § 502(a)(3).64 The court cited Mertens and held that
compensatory damages were not recoverable in claims under §
502(a)(3).65
Moreover, in Choi v. Massachusetts General Physicians
Organization,66 the plaintiffs were former employees of
Massachusetts General Hospital. Under the Hospital’s
deferred compensation plan an employee who left the
Hospital’s employ was entitled to a deferred bonus. Choi
quit his job and was denied the bonus. Choi ultimately
filed an administrative claim against the Hospital and was
63
6
Id. at 12.
64
6
Id. at 13.
65
6
Id. The court rejected plaintiffs’ argument that Merten’s holding applied only to claims against nonfiduciaries because the relief allowed by the statute should not depend on the identity of the defendant. Id. See also Rogers v. Hartford Life, 167 F.3d 933 (5th Cir. 1999) (where defendant denied plaintiff’s application for long-term disability benefits, plaintiff could not recover his medical expenses under § 502(a)(3) because that section does not permit recovery for compensatory damages).
66
6
66 F. Supp. 2d 251 (D. Mass 1999).
32
awarded the bonus. He filed suit in federal court to seek
restitution for the attorney’s fees necessary to recover
the bonus. Choi’s claim was denied on the ground that an
award of attorney’s fees was not an award of equitable
restitution, but an award of compensatory damages. The
court agreed with the defendant that while Choi was
required to hire an attorney to obtain the bonus, the
hospital was not unjustly enriched. The Hospital never
withheld the attorney’s fees from Choi.
VI. The Conflict In The CircuitsFrom our review of the foregoing cases, it appears
that there may be a conflict in the circuits as to the
relief allowed under § 502(a)(3). Strom, Sanders and Ream
allowed plaintiffs to obtain money damages under § 502(a)
(3) while Kerr and Allinder hold that no such relief is
available. Moreover, the Mansker and Fotta courts held
that plaintiffs could receive prejudgment interest on
wrongfully withheld benefits. To more carefully determine
whether there is a direct conflict in the circuits we will
review each case granting monetary relief under the
reasoning of Kerr and Allinder.
Kerr and Allinder each held that a plaintiff cannot
recover compensatory damages under § 502(a)(3) of ERISA.
In Kerr, however, the court notes that ERISA may permit a
33
judgment of restitution because a court of equity could
award restitution. According to the Kerr opinion an award
of equitable restitution “focuses on the defendant’s
wrongfully obtained gain while a compensatory award focuses
on the plaintiff’s loss at the defendant’s hands.”67
Explained more fully:
Restitution seeks to punish the wrongdoer by taking his ill-gotten gains, thus, removing his incentive to perform the wrongful act again. Compensatory damages on the other hand focus on the plaintiff’s losses and seek to recover in money the value of the harm done to him.68
Under this standard, was the relief awarded by the courts
in Strom, Sanders and Ream compensation or restitution?
In Sanders, the defendants were covered by an employer
sponsored health plan administered by Blue Cross. The plan
contained a provision that provided that a covered person
would reimburse all plan expenses if that person obtained
an injury settlement. Mrs. Sanders was injured in an
automobile accident and obtained treatment which Blue Cross
paid for. The Sanders then obtained a settlement of their
personal injury action, but they refused to reimburse Blue
Cross. Blue Cross obtained a money judgment against the
defendants on the ground that it was entitled to be
67
6
184 F.3d at 944.
68
6
Id. at 945(citing Dan B. Dobbs, Law of Remedies §4.1(1), at 369-71 (Abridged 2d edition 1993)).
34
reimbursed for the money it spent on their behalf.69 The
award of damages to Blue Cross appears to be a form of
restitution. By receiving the award, Blue Cross recovered
the amount of money it spent on health care for Mrs.
Sanders. To view it another way, it was unfair for Mrs.
Sanders to accept the benefit of the Blue Cross health
insurance (her medical bills were paid) without also
accepting the burden (complying with her agreement to
reimburse Blue Cross). As the Kerr court noted: “the
wrongdoer should not be allowed to use the withheld
benefits or retain interest earned on the funds during the
time of the dispute.”70 Under the reasoning of the Kerr
opinion, the judgment in favor of Blue Cross would be
allowed as appropriate restitution.
In Ream, the court allowed the plaintiff to recover a
money judgment against a bank which had allowed plaintiff’s
money to be converted by plaintiff’s employer. The court
held that Ream could recover a money judgment against the
bank for the amount of money he lost when his 401k plan was
converted.71 Under the reasoning in Kerr, Ream’s recovery
more closely resembles compensatory damages than
69
6
138 F.3d at 150.
70
7
184 F.3d at 946.
71
7
107 F.3d at 156.
35
restitution. The court was not focusing on the defendant’s
wrongfully obtained gain because the defendant bank gained
nothing by its actions. Instead, the court appeared to
focus on the bank’s negligence and the loss incurred by
Ream as a result of the bank’s negligence.72 The holding of
Ream is thus inconsistent with Kerr.
In Strom, the Second Circuit held that Mrs. Strom
could recover a money judgment against Goldman Sachs where
that company negligently processed her husband’s
application for group life insurance. Under the reasoning
of the Kerr opinion, the award in Strom was an award of
compensatory damages. Goldman Sachs gained nothing by its
failure to properly process Strom’s insurance application.
Indeed, Strom would have been required to pay at least a
portion of the insurance premium. The court appeared to
base its decision on the damage caused by Goldman Sachs’
negligence. The court agreed that Goldman Sachs was not
unjustly enriched by its mistake. The court commented:
“[t]he absence of unjust enrichment here therefore is not
inconsistent with accurate characterization of the relief
plaintiff seeks as ‘equitable.’”73 Even though the Strom
court referred to the award as “equitable relief,” its
72
7
Id.
73
7
Strom, 202 F.3d at 145.
36
award of damages was designed not to give Mrs. Strom
restitution but instead to give her compensation. Strom is
thus inconsistent with Kerr.
The holdings of Mansker and Fotta, that a plaintiff
can recover prejudgment interest on the amount of
wrongfully withheld benefits, are consistent with the
principles of equitable restitution and are not
inconsistent with Kerr and Allinder. Both awards were
designed to prevent the defendant from being unjustly
enriched. As the court noted in Kerr, the awards focus on
preventing the defendant from earning interest on money
that rightfully belonged to the plaintiff. The award of
prejudgment interest sought to punish the defendants by
taking their “ill-gotten gains” to remove any incentive to
wrongfully withhold benefits in the future.74
In sum, there is a conflict in the circuits as to the
relief available under § 502(a)(3).75 Two courts have
74
7
Kerr, 184 F.3d at 946; see also Mansker, 54 F.3d at 1322; Fotta, 165 F.3d at 209. Professor Dobbs writes: “where the plaintiff is entitled to recover restitution against a defendant, usually a fiduciary, who is liable to account for any profits he has made by the use of the plaintiff’s money or property, the plaintiff may ordinarily opt to claim interest on the value of his property or money instead of the profits derived from its use.” Dobbs, § 3.5 at 166.
75
7
No litigant has raised the issue of the conflict between Strom, Ream and Kerr in the United States Supreme Court. The appropriate case for the resolution of the conflict may not yet have arisen. Of course, some litigants may argue that there is no conflict in the circuits, even though two decisions awarded what appear to be compensatory damages while the other decisions did not. As noted above, the author disagrees with this reasoning.
37
awarded compensatory damages to successful plaintiffs after
describing the relief as “equitable.” The holdings of Strom
and Ream are inconsistent with the plain language of §
502(a)(3) and appear to ignore the Supreme Court’s opinion
in Mertens. Neither case contains a proper interpretation
of “appropriate equitable relief” under § 502(a)(3).76
VIII What Relief Does §502(a)(3) Allow?Section 502(a)(3) allows a plaintiff to obtain
“appropriate equitable relief.” This relief includes an
injunction, which as in Varity might require that the
employer reinstate a plaintiff in its employee benefit
plan.77 Or it can be a more simple injunction requiring a
corporation to provide a group pension plan with accurate
information concerning its employee participants in the
76
7
Several commentators have discussed the Varity decision but none has addressed whether Varity permits an award of compensatory damages under section 502(a)(3). See e.g., John D. Shire, Varity Corp. v. Howe in the Wake of Mertens v. Hewitt Associates: Did the Supreme Court Impermissibly Authorize A Damages Award Under ERISA Section 502(a)(3)?, 102 Dickinson L. Rev. 411 (1998)(the author argues that the section does not allow awards of consequential damages); Kukaza, 48 Mercer L. Rev. 965 (1997) (the author comments that the Varity decision did not resolve whether a court can award compensatory damages under section 502(a)(3))
77
7
Varity, 1996 S.Ct. 58 (1996) (affirming the district court’s order requiring the defendant to reinstate certain employees in its own retirement plan); Griggs v. E.I. Dupont De Nemours & Co., No. 99-2508 (4th Cir. January 9, 2001) (where defendant failed to notify plaintiff of the tax consequences of a withdrawal from its pension plan, the court held that plaintiff was entitled to an injunction reinstating him as a member of the company’s pension plan prior to the taxable withdrawal).
38
plan so the plan can calculate the employer’s contribution.78
The court can also enter a declaratory judgment, which
would allow plaintiffs to obtain future benefits under a
plan. A successful plaintiff can obtain attorney’s fees
under § 502(g).
Section 502(a)(3) also allows a plaintiff to equitable
restitution where the defendant has wrongfully withheld the
plaintiff’s money. Equitable restitution includes the
constructive trust remedy and the accounting remedy. It
also includes awards of prejudgment interest where benefits
have been wrongfully withheld.79 However, the phrase
“appropriate equitable relief” does not include
compensatory damages, or damages designed to compensate the
plaintiff for his loss as in Strom and Ream. This means
that in some cases, the plaintiff will not be able to
78
7
See Jaspan v. Glover Bottled Gas Corp., 80 F.3d 38 (2d Cir. 1996) (holding that § 502(a)(3) allows a court to order the corporation to give the group pension plan access to its records); Chappel v. Laboratory Corporation of America, No. 98-17361 (9th Cir.) (November 14, 2000) (where defendant denied plaintiff’s claim for medical benefits and failed to notify plaintiff of the 60 day deadline to seek an arbitrator’s review of the denial, plaintiff had leave to amend her claim to add a count for breach of § 502(a)(3); court noted that the appropriate relief would be to order the defendant to construe the late appeal as timely).
79
7
See Mansker, 54 F.3d 1322 (8th Cir. 1995) (awarding prejudgment interest where the defendant wrongfully refused to pay plaintiff’s medical bills on the ground that it would be unjust to allow the defendant to wrongfully withhold payment and then earn interest on that money); Fotta, 165 F.3d 209 (3d Cir. 1998) (holding that plaintiff could recover interest on employee benefits that were paid after a nine year delay on the ground that it would be unjust to enrich the plan at the employee’s expense).
39
obtain a full recovery with an equitable remedy. Equitable
restitution for unjust enrichment would not be available
against the defendants in Strom and Ream because those
defendants were not unjustly enriched. In some cases, this
will leave an unfortunate gap in the remedies provided by
section 502. Even with this limitation, section 502(a)(3)
remains a powerful remedy for the individual plaintiff and
will allow many plaintiffs complete relief. Congress chose
to allow a plaintiff “appropriate equitable relief,” not
compensatory damages and it would be improper for courts to
expand the remedies beyond those provided for by Congress.
40