Gill v. Bausch & Lomb Supplemental Retirement Income Plan I
Docket: No. 6:09-CV-6043(MAT)
Court: District Court, W.D. New York; March 2, 2014; Federal District Court
Michael A. Telesca, District Judge, addresses a case brought by retired Bausch & Lomb Incorporated executives Daniel E. Gill, Thomas C. McDermott, and Jay T. Holmes, who are participants in the Bausch & Lomb Supplemental Retirement Income Plan (SERP I). The plaintiffs challenge the defendants on the termination of their monthly benefits under SERP I's Change of Control (COC) provision and the calculation and distribution of their benefits as lump sums. Both parties have submitted motions for summary judgment.
SERP I is designed to provide supplemental retirement benefits to its vested participants, who are solely Gill, McDermott, and Holmes. Their rights to benefits vested before the current version of SERP I, restated on December 18, 1990, which defines "Participant" and "Retired Participant." The plan is administered by the Vice President of Human Resources or designated employees, under the authority of a committee from the Board of Directors that interprets the plan and makes necessary decisions.
The COC provision states that upon a change of control, participants become fully vested and their benefits are converted to a cash lump sum, to be paid within 15 days, using specific actuarial assumptions. The plan continues in effect despite any change in control, with obligations assumed by any successor company.
In May 2007, B&L agreed to sell its shares to Warburg Pincus, LLC, prompting a review of benefit plans to identify COC provisions that could be triggered by the merger. SERP I was identified as such a plan. Discussions with Mercer Human Resource Consulting emphasized the COC provision's purpose: to maintain senior executives' employment and objectivity during a change in control by facilitating lump sum payments rather than waiting for employment termination.
Weber opined that the change in control provision specifies "Participants," excluding "Retired Participants," indicating that three retirees would not be entitled to lump sum distributions upon a change in control. He noted that B&L could still terminate the plans based on the termination provisions. Weber strongly urged B&L to consult legal counsel before proceeding with any lump sum distributions. Zaucha and Reigle obtained further insights on the change of control (COC) provision from Nadir Minocher, who stated that SERP I is not B&L's asset but beneficially owned by executives, and a change in control would not affect it. Reigle communicated with Minocher that no decision had been finalized regarding the COC provisions, emphasizing the need to explore all options before making any decisions.
On September 19, 2007, Zaucha informed the Plaintiffs that the COC provisions in SERP I would be activated if shareholders approved the Warburg merger, converting their SERP I benefits to cash lump sums payable within 15 days of the vote. Gill's financial planner, Patrick D. Martin, expressed uncertainty regarding the plan document's clarity on the lump sum payout, prompting Zaucha to offer a meeting to discuss differing interpretations. After the shareholders approved the merger on September 21, 2007, B&L's CFO directed the SERP I trustee to cease monthly benefit payments. On September 27, Zaucha indicated that B&L was consulting actuaries and a law firm regarding the lump-sum distribution amounts.
On October 5, 2007, payments were submitted to the Plaintiffs, who then retained counsel to express concerns about the sufficiency of the lump sum payments and requested a process for addressing these issues. They argued that the Plan explicitly stated trusts would survive any change in control. B&L responded that it was reviewing the claims and would establish a process for communication. On November 1, 2007, B&L informed the Plaintiffs that to contest the benefit payments, they must file a claim with the Board's Committee on Management, which at that time did not exist. Subsequently, on November 21, 2007, the Board appointed a new Compensation Committee responsible for SERP I determinations.
On November 28, 2007, Plaintiffs contested the adequacy of lump sum payments to the Board's Committee and requested remediation. In response, B&L's Chairman indicated on January 2, 2008, that the matter was referred to the new Compensation Committee. By January 8, 2008, B&L provided a Company Position Statement regarding SERP I Claims to the Compensation Committee. On January 15, 2008, Plaintiffs' counsel expanded their claims, arguing that the change in control provisions of the Plan did not apply to them, as they had retired before the 2007 acquisition. In February 2008, the Compensation Committee's attorneys shared the claims procedures under ERISA Section 503 with Plaintiffs' attorneys. B&L's counsel, Proskauer Rose, actively opposed the Plaintiffs during the claims review. Plaintiffs were notified of the denial of their claims on April 14, 2008, through a letter from Zorn, which did not identify the Plan Administrator. The Compensation Committee denied Plaintiffs' appeal on December 11, 2008. Subsequently, Plaintiffs filed a lawsuit on January 29, 2009, claiming under ERISA that their benefits were wrongfully terminated and reduced (29 U.S.C. 1132(a)(1)(B)) and seeking additional information under 29 U.S.C. 1132(c)(1)(B), the latter of which was dismissed. The remaining claim alleges that the lump sum payments were less than the benefits owed and that a conflict of interest from a right-of-reversion affected the Defendants' decision on claims. Following extensive discovery, both parties filed motions for summary judgment in April 2012. Oral arguments occurred on July 19, 2012, and mediation was unsuccessful. The case was reassigned multiple times, ultimately leading to a ruling where Plaintiffs' motion for summary judgment was granted while Defendants' motion was denied.
A party can obtain summary judgment if it demonstrates that no genuine dispute exists regarding any material fact, and it is entitled to judgment as a matter of law, as established by Federal Rule of Civil Procedure 56(a). The burden is on the movant to show the absence of material fact disputes, after which the non-movant must present specific facts to demonstrate a genuine issue for trial, rather than relying on mere speculation or conclusory allegations. In assessing a summary judgment motion, courts must view evidence in the light most favorable to the non-movant and draw reasonable inferences in their favor.
Under the Employee Retirement Income Security Act (ERISA), participants or beneficiaries may initiate civil actions to recover benefits, enforce rights, or clarify future benefits under their plans. Denials of benefits under ERISA are generally reviewed de novo by district courts unless the plan grants the administrator discretionary authority. If discretion is granted, courts will only overturn the administrator's decision if it is deemed arbitrary and capricious. The determination of a party's fiduciary status is crucial for establishing the appropriate standard of review for benefit denials. ERISA defines a fiduciary based on functional control and authority over plan assets, rather than formal trusteeship.
The Second Circuit has emphasized a broad interpretation of ERISA's fiduciary definition, while acknowledging certain limitations. Individuals engaged solely in ministerial tasks, such as eligibility determinations, benefit calculations, and record maintenance, are excluded from fiduciary status. Employers can operate as both plan administrators and employers, meaning not all employer actions are considered fiduciary. Regarding standards of review under ERISA, plaintiffs must demonstrate their entitlement to benefits, while defendants must establish that an "arbitrary and capricious" review standard applies. This requirement is based on the principle that the party seeking deferential review must justify it. The determination of whether a plan grants discretionary authority to an administrator is a legal question. Defendants can only claim the deferential standard if an authorized party made the benefits decision; otherwise, a de novo review applies. In this case, since the plan documents did not confer discretionary authority to the Plan Administrator who denied benefits, the court correctly applied the de novo standard.
In the specific case of the 2007 decision made by B&L Human Resources, plaintiffs argue that this decision should be reviewed as it involved unauthorized fiduciary actions that interpreted the Plan and terminated benefits, warranting a de novo review. Conversely, defendants maintain that the actions taken were merely ministerial and thus permissible under the Plan.
Defendants argue that the Zaucha letter is irrelevant, asserting that only the Compensation Committee's decision is subject to judicial review. They contend that the Committee acted as a fiduciary, thus its 2008 decision should be evaluated under the arbitrary and capricious standard. However, the Court finds that (1) the 2007 termination of benefits, as indicated in the Zaucha and Rivera letters, constitutes an "adverse benefits decision" under ERISA; (2) this decision was discretionary and unauthorized since the B&L Human Resources employees lacked delegated fiduciary authority; (3) B&L intended the 2007 decision to serve as the final adverse determination; and (4) it does not withstand de novo review.
Trust law allows fiduciaries to delegate administrative tasks to "agents" or "other persons," but a clear delegation process must be present according to 29 U.S.C. 1105. SERP I stipulates that only the Committee on Management holds authority to determine participant rights and benefits and to interpret the Plan, with no delegation to any other employees aside from the Vice President of Human Resources. The parties disagree on the scope of this delegation, but there is no evidence that the Committee delegated authority to anyone besides the Vice President of Human Resources. Defendants claim multiple individuals were designated with authority under SERP I, yet there is no evidence of a Vice President of Human Resources position. The Court supports the Plaintiffs' view that only the Committee on Management had discretionary authority, and there is no indication that this Committee was involved in the decisions concerning the termination of benefits. Zaucha and Reigle were not recognized as employees authorized to administer the Plan, and both were significantly involved in the decision to terminate the Plaintiffs' benefits and issue lump-sum payouts.
Defendants assert that Zaucha, Reigle, and other B&L employees did not violate the Plan or ERISA, arguing their tasks were purely ministerial. They acknowledged the SERP I requirement for lump sum payments within 15 days of a Change in Control and communicated with Plaintiffs about this. The legal definition of a fiduciary under ERISA is contingent on the functions performed rather than mere administrative roles. According to 29 C.F.R. 2509.75-8, individuals who perform administrative functions without decision-making power regarding plan policies are not considered fiduciaries.
Zaucha and Reigle avoided using terms like "interpret" during depositions, but their actions indicate they engaged in interpretative functions regarding SERP I. Zaucha reviewed SERP I in anticipation of the Change in Control and sought advice from consultants Mercer and Minocher regarding its applicability to the Plaintiffs. Despite consultant recommendations that the Change in Control provision did not apply, Zaucha sent letters informing Plaintiffs that their benefits would be converted to a cash lump sum.
Additionally, Zaucha communicated with Gill's financial advisor about differing interpretations of the Plan and confirmed consultations with actuaries and legal experts regarding the lump sum payout methodology. Rivera instructed the Plan’s trustee to halt monthly payments to the Plaintiffs and process lump sum payments instead. The comprehensive discussions and consultations by B&L Human Resources personnel regarding the interpretation of SERP I led to the determination that Plaintiffs' monthly benefits would be terminated in favor of lump sum payments.
B&L personnel performed discretionary duties, which the Court interprets as establishing their status as unauthorized Plan fiduciaries in the 2007 termination of benefits due to their role in interpreting disputed Plan provisions. Defendants argue that only the Compensation Committee's fiduciary decision is subject to judicial review, while Plaintiffs claim that Zaucha's 2007 letters regarding lump-sum benefits payments were final, as he indicated the decision was not a proposal. The Court disagrees with Defendants’ assertion that the 2007 decision was not an "adverse benefit determination" under ERISA, as it constituted a termination of benefits. The definition of an "adverse benefit determination" encompasses any denial or termination of benefits. Additionally, while ERISA lacks a statutory exhaustion requirement, there is a strong federal policy favoring the exhaustion of administrative remedies in ERISA cases, supported by case law emphasizing this principle.
Defendants reference the case Funk, 648 F.3d 182, emphasizing that a plan administrator's final decision after an appeal should be the primary focus of judicial review, aligning with ERISA's exhaustion requirement. The Third Circuit criticized the district court for focusing on an initial decision instead of the final one, but acknowledged that earlier decisions may inform the understanding of the final decision and could indicate potential abuse of discretion if inconsistencies are present.
In Funk, various ERISA procedural rules were cited, which mandate that claimants facing adverse benefit determinations must be given a reasonable opportunity to appeal, proper notice of their appeal rights, and a review that considers new information without deferring to the initial decision. However, the Defendants allegedly violated these rules by denying that B&L's 2007 decision constituted an adverse benefit determination and failing to provide the Plaintiffs with an opportunity to appeal or notice of their appeal rights.
Furthermore, the appeal process did not involve consideration of documentation related to the 2007 decision, and there are claims that the appeal was not conducted by an authorized fiduciary. The Committee on Management, which had the exclusive authority to interpret the Plan, did not participate in the 2007 decision, while Defendants argue that the Compensation Committee had been reauthorized post-merger to act as the Plan’s fiduciary despite the lack of involvement from the Committee on Management in the decisions affecting the Plaintiffs' benefits.
Waltrip, a longstanding member of the B&L Board, indicated that prior to the establishment of the COC, the Management and Compensation Committees functioned as a single entity. Following the COC's formation, the restructured B&L Board delegated discretionary authority regarding SERP I to the Compensation Committee, which was established under the Board's authority within the Plan. The Court finds it problematic that the Compensation Committee, argued by Defendants to be the Plan fiduciary, did not exist when the Plaintiffs' benefits were terminated and lump-sum payments were made. The Compensation Committee was reconstituted only two months after the Warburg acquisition and shortly after the Plaintiffs’ attorney contested the benefits termination. Defendants' claim that the Compensation Committee’s later review rectified previous unauthorized decisions is viewed by the Court as flawed and insufficient.
The 2008 decision by the Compensation Committee cannot stand up to arbitrary and capricious review. The Plaintiffs have demonstrated that the plan administrator lacked the authority to interpret ambiguous terms, implying a de novo standard should apply. However, the Court opts to apply the arbitrary and capricious standard, concluding the 2008 decision fails this scrutiny due to evidence of bad faith, procedural violations, and a structural conflict of interest that biased the Committee’s decisions. Consequently, neither the 2007 decision by B&L employees nor the 2008 decision can withstand review under the more rigorous de novo standard. Under the arbitrary and capricious standard, the Court can overturn a benefits denial if it is found to be unreasonable, unsupported by substantial evidence, erroneous as a matter of law, or indicative of bad faith.
Where both a fiduciary and a plan participant present rational but conflicting interpretations of a plan, the fiduciary's interpretation prevails. However, if trustees impose standards not required by the plan, interpret it inconsistently with its explicit terms, or render provisions superfluous, their actions may be deemed arbitrary and capricious. In cases where a plan grants discretion to an administrator or fiduciary operating under a conflict of interest, this conflict must be considered when assessing potential abuse of discretion. Such a conflict does not eliminate the application of the "arbitrary and capricious" standard; rather, its impact must be evaluated based on the likelihood that it influenced the benefits decision. Claimants do not need to prove that the conflict actually affected the benefits decision, as direct evidence of bias in ERISA cases is rare. Greater scrutiny is warranted when there is a higher likelihood that the conflict influenced the decision. Additionally, the manner in which an administrator manages a conflict can affect the deference given to their decision. In this case, plaintiffs allege that defendants faced a conflict of interest due to the potential reversion of excess plan funds to B.L/Warburg after distributing lump-sum benefits, while defendants assert that this reversion was not a factor in denying the plaintiffs' claim for benefits.
The secular trust document established under SERP I and ERISA allows employers to recapture surplus assets after a pension plan termination, with any excess after benefits and expenses returned to the company. The Supreme Court in Glenn recognized a conflict of interest when the employer funds the plan and decides on claims, as any savings benefit the employer directly. The court found that the Compensation Committee and B. L operated under such a conflict, which influenced their decisions against the Plaintiffs' claims. Despite independent consultants stating that the Change of Control (COC) provision did not apply to the Plaintiffs, internal communications indicated a desire to eliminate SERP plans. The termination letter provided no rationale, and while the Compensation Committee members claimed the conflict did not affect their decisions, their self-serving testimonies were deemed unpersuasive. Evidence suggested that Committee members stood to benefit from denying claims, and B. L's legal counsel actively supported the decision to terminate benefits, indicating a biased process favoring the employer's interests over those of the plan participants. The selection of uninformed decision-makers and lack of fiduciary advice further pointed to a structure designed to uphold the company's position rather than fairly assess the claims.
The claims procedure implemented by the Compensation Committee's attorneys in February 2008 excluded B. L from participating in the administrative review process. The established procedures did not allow for any challenge to adverse benefit determinations made by B. L, defining a "Claim" solely as a request from a Claimant or their representative, thereby lacking a mechanism for appeals against B. L's decisions. This omission violates ERISA regulations requiring plans to provide appeal processes for adverse benefit determinations, which encompass any reductions or terminations of benefits.
The Supreme Court's decision in Glenn emphasized that conflicts of interest should be scrutinized more closely when fiduciaries take contradictory positions that benefit them financially. Defendants argued that a continuity provision in Section 13 of the Plan applied only to current employees and excluded Retired Participants, which they claimed allowed them to terminate benefits for Plaintiffs. However, no language in the Plan supports this interpretation, and the argument appears to have been constructed to benefit Defendants financially.
The Court concurs with Plaintiffs that this contradictory interpretation was essential for Defendants to eliminate SERP I benefits. The evidence of procedural violations by Defendants, alongside the indication that B. L and the Compensation Committee predetermined the outcome of Plaintiffs' claims, suggests that the conflict of interest influenced their decision-making adversely. Additionally, the treatment of evidence regarding this conflict during the claims process indicated a lack of neutrality and fairness from Liberty, reinforcing the notion that decision-making was likely affected by the conflict of interest.
The Court must evaluate procedural violations in addition to conflicts of interest, focusing on the treatment of the claimant by the administrator. Relevant to this assessment are the ERISA regulations stipulating that a claimant must have access to all documents pertinent to their claim. A document is deemed "relevant" if it was relied upon during the benefit determination process, submitted or considered during that process, or demonstrates compliance with required administrative safeguards. The plaintiffs' counsel sought information related to B.L.'s adverse benefits determination, but B.L. and the Compensation Committee denied these requests, asserting they had provided all necessary information and were not obligated to produce more under ERISA. The Court is particularly troubled by the defendants' concealment of the Westport and Minocher reports, which favored the plaintiffs. ERISA mandates the disclosure of such documents, regardless of whether they were relied upon in the decision-making process, and the defendants' refusal to disclose these reports constitutes a violation of ERISA. The Court may conclude that either Liberty lacked the necessary processes and safeguards for fair claim determinations or had such processes but failed to disclose them, both of which would violate ERISA regulations. Additionally, the plaintiffs contend that the Compensation Committee did not perform a thorough review of their claims as it delegated its discretionary authority to outside counsel, Ropes & Gray.
Defendants assert that the Compensation Committee merely consulted with Ropes & Gray and ultimately decided on Plaintiffs’ claims. Under ERISA, plan administrators are permitted to rely on outside legal counsel, but they must conduct a full and fair review of claims and cannot simply defer to others' opinions. A fiduciary is obligated to consider all relevant information when evaluating claims. In a cited case, the fiduciary improperly relied on an outside consultant's opinion, leading to a violation of ERISA obligations. In this instance, Zorn from Ropes & Gray drafted the ERISA Section 503 procedures and the final decision letter rejecting the claims, with the Compensation Committee making no substantive changes. Evidence shows that the Committee's deliberations were minimal, with members lacking familiarity with the claims and the decision-making process. Notably, members Mackesy, Carney, and Weatherman had little recollection of discussions or relevant documentation. Zorn, without any input from the Compensation Committee, determined the outcome of the claims following directions from Defendants.
Courts disfavor post-hoc rationalizations by administrators, as highlighted in University Hosps. v. Emerson Elec. Co., where allowing an administrator to bolster a decision after litigation begins raises concerns about the integrity of the decision-making process. Similarly, Zorn and Ropes lacked proper delegation of authority in 2007, and the Compensation Committee acted merely as a rubber-stamp for counsel's interpretations, undermining Plaintiffs' right to a full and fair review of their claims, as seen in Tholke v. Unisys Corp.
Regarding remedies, the Second Circuit emphasizes that a district court's review under the arbitrary and capricious standard is confined to the administrative record. If a fiduciary's decision is found arbitrary and capricious, remand is necessary unless no new evidence could reasonably support a denial of the claim or if remand would be pointless. Defendants argued for remand due to the Westport and Minocher reports not being in the administrative record, but the Court rejected this claim, noting that Defendants had initially excluded these reports. Ultimately, the Court determined that the new evidence could not permit a reasonable conclusion to deny the claim, asserting that Section 13 of SERP I applies only to current employees (Participants) and not to retired participants, who had already ceased employment with B. L. The language within the plan clearly delineates this distinction, thereby negating any claims for retired participants under Section 13.
Plaintiffs were receiving benefits under Section 5 as of September 19, 2009, and were classified as "Retired Participants" following their termination of employment. Section 13 of the Plan states that it and its associated trusts will continue despite any Change of Control (COC), obligating any successor company to assume the Plan's responsibilities. This implies that if "Participants" and "Retired Participants" were considered the same, there would be no need for the Plan to survive a COC, as no beneficiaries would remain. The Court found that remanding to the Compensation Committee would be pointless and vacated the decisions from 2007 and 2008 that terminated the Plaintiffs' benefits under SERP I.
The Court granted Plaintiffs' motion for summary judgment (Dkt. 56) based on several violations of the Employee Retirement Income Security Act (ERISA): 1) the lump sum payments made in October 2007 violated ERISA; 2) the directive to the SERP I trustee to cease monthly payments violated ERISA; 3) the refusal to continue monthly benefits since October 1, 2007, violated ERISA; and 4) the termination of SERP I violated ERISA. Defendants' motion for summary judgment (Dkt. 55) was denied. In calculating damages, Defendants will receive credit for lump-sum payments already made to Plaintiffs. Additionally, Section 1105 of ERISA allows for named fiduciaries to designate others to fulfill fiduciary duties. The document references the Secular Trust and identifies the 2007 B.L. decision as an "adverse benefit determination."
