Milgram v. Orthopedic Associates Defined Contribution Pension Plan
Docket: Docket Nos. 10-1862-cv (L), 10-1893 (CON)
Court: Court of Appeals for the Second Circuit; November 28, 2011; Federal Appellate Court
The appeal addresses the enforceability of a judgment against pension plan assets under ERISA, specifically Section 502(a)(1) (29 U.S.C. § 1132(a)(1)). Plaintiff Robert Milgram seeks to recover approximately $1.5 million from The Orthopedic Associates Defined Contribution Pension Plan due to an erroneous transfer of his pension account balance to his ex-wife, Norah Breen, following their 1996 divorce. A 2006 bench trial resulted in a judgment in favor of Milgram, which the Plan now contests, arguing that enforcing this judgment would violate ERISA’s anti-alienation provision (ERISA § 206(d)(1), 29 U.S.C. § 1056(d)(1)) and other legal standards. The Plan also claims that the district court incorrectly interpreted the plan document regarding compensation for Milgram’s lost use of funds over fifteen years.
The court applies a de novo review standard to the Plan's legal claims and finds them without merit, affirming the district court's judgment. The background reveals that Milgram, an orthopedic surgeon until his retirement in 1991, was a beneficiary of two ERISA-governed pension plans administered by Orthopedic Associates. Following his 1996 divorce, a clerical error led to Breen receiving an excess distribution of $763,847.93. Milgram discovered the overpayment in 1999 and, after unsuccessful recovery efforts by Orthopedic, initiated a lawsuit against multiple parties, including the Plan and Breen, consolidating claims under ERISA.
In October 2005, Milgram filed for partial summary judgment against Orthopedic and the Plan under ERISA § 502(a)(1), seeking recovery of an erroneously transferred principal amount and accumulated earnings. The Plan opposed the motion, arguing that granting relief would conflict with ERISA policies, as it could harm other Plan members before the Plan recovered from Breen. While Milgram's motion was pending, Orthopedic also sought summary judgment against Breen. In March 2006, the district court decided to hold a bench trial on Milgram's equitable claims instead of immediately ruling on the summary judgment motions. On the trial's first day, the judge indicated he would grant Milgram's motion for partial summary judgment regarding the principal amount, leading Milgram to withdraw his equitable claims against other defendants.
The trial focused on Breen's equitable defenses, Sedor's potential fiduciary status, and Milgram's rights to accumulated earnings and interest. After several trial days in summer 2006, a jointly prepared order was issued, granting Milgram summary judgment against the Plan for the principal amount of $763,847.93, while deferring decision on accumulated earnings and interest. In December 2006, Milgram sought to enforce this judgment, but the Plan opposed, citing ERISA's prohibition on alienation of benefits for the first time. The district court delayed action until March 2010, ultimately ruling that Milgram was entitled to recover both the principal and accumulated earnings. It recognized that the 2006 judgment had been unenforceable due to lack of certification under Federal Rule of Civil Procedure 54(b) and issued a new judgment totaling $1,571,723.73. The court dismissed all ERISA claims against Sedor and Bay Ridge for lack of fiduciary duty and ordered Breen to reimburse the Plan the same amount awarded to Milgram, with a 30-day payment deadline and potential constructive trust on her assets if she failed to comply.
The Plan sought to prevent the enforcement of a district court’s award to Milgram, claiming that requiring payment prior to recovering funds from Breen would violate ERISA’s anti-alienation provisions. For the first time, it also argued for relief from the judgment under New York Civil Practice Law and Rules and Federal Rule of Civil Procedure concerning relief from judgment. Milgram opposed this motion and cross-moved to reinstate equitable claims he had previously released. The district court denied both motions and issued a writ of execution against the Plan in August 2010. The Plan subsequently appealed this order and a prior decision from March 2010.
Under ERISA, specifically Section 502(d)(1), employee benefit plans can sue or be sued, and any resulting money judgment is enforceable only against the plan. The Supreme Court in Mackey reaffirmed that this language applies to benefit plans without distinction. However, the Plan contends that the anti-alienation provision applicable only to pension plans constrains the district court's authority in this case. This provision requires pension plans to prohibit the assignment or alienation of benefits. The Plan's documents echo this requirement, stating benefits cannot be assigned or encumbered.
While the Plan acknowledges that a defined contribution pension plan may be subject to a money judgment, it argues that the district court erred by demanding payment to Milgram before the Plan could recover equivalent funds from Breen, asserting that the assets in question are allocated to other participants, not Milgram or Breen.
The Plan asserts that anti-alienation provisions under ERISA, the IRC, and the plan document prohibit the use of funds to satisfy the district court’s judgment. However, it is determined that undistributed funds in a defined contribution pension plan do not qualify as benefits under these provisions, and the anti-alienation rule does not bar the use of plan assets to satisfy a judgment against the plan itself. The Plan’s definition of benefits, derived from Section 6.1 of the plan document, states that participants are entitled to collect amounts credited to their Combined Account upon retirement. The argument that all plan assets attributed to a participant are inalienable benefits is flawed, as it would prevent necessary debits for expenses that ERISA and the Plan allow. For instance, the plan document requires debiting accounts for investment losses and insurance premiums, and ERISA permits using pension assets for reasonable administrative expenses. Furthermore, the interpretation of Section 6.1 is narrow, as it relates to benefit calculations specifically upon retirement. Until then, participants do not have a true claim to specific assets, as all undistributed assets are owned by the trustee for the collective benefit of all participants, with gains and losses shared proportionally. A participant's account serves primarily as a bookkeeping entry for determining benefits at retirement. This distinction aligns with case law, which clarifies that ERISA’s anti-alienation provision does not prevent creditors from garnishing pension trust funds.
The cases cited by the Plan to support its anti-alienation argument involve attempts to levy against pension income already received by plan members, specifically in Guidry v. Sheet Metal Workers National Pension Fund and Kickham Hanley P.C. v. Kodak Retirement Income Plan. In these cases, the Supreme Court and the Second Circuit upheld ERISA’s anti-alienation provision, preventing creditors from garnishing current pension income or withholding attorney's fees from pension benefits. The excerpt clarifies that these cases do not support the Plan's assertion that undistributed account funds could be considered benefits subject to anti-alienation restrictions when satisfying court-ordered judgments against the Plan itself. The anti-alienation provision aims to protect pension beneficiaries, not plan administrators, and there is a statutory distinction between using plan assets for the debts of the plan versus those of its participants. Further, the Plan’s argument regarding defined contribution plans lacks persuasive support, as the historical dominance of defined benefit plans does not negate the legal principles established in prior rulings. Defined benefit plans promise specific retirement benefits, with the employer typically assuming the risk of any funding shortfalls.
In a defined contribution plan, the employer makes fixed periodic contributions, and the employee's retirement benefits depend on these contributions and the account's performance, including gains, losses, and any forfeitures from other participants. There is no risk of insufficient funds to cover promised benefits since each participant is entitled to the assets in their individual account. Unlike defined benefit plans, where a judgment against the plan does not affect individual benefits, a judgment against a defined contribution plan will impact individual participants’ benefits because employers are not obligated to maintain set benefit levels.
The Plan argues that imposing costs on pension beneficiaries contradicts ERISA’s objectives and violates the anti-alienation provision; however, defined contribution plans inherently place the investment risks and management decisions on participants. The anti-alienation provision does not protect participants from poor investment or management decisions. The Plan's assertion that the novelty of defined contribution plans justifies the absence of litigation risk limitations is incorrect; the lack of such limitations is part of their appeal.
Additionally, the Plan cites various legal provisions to contest the enforceability of the district court’s judgment against it, arguing that compensating Milgram for funds incorrectly disbursed would violate the plan's document prohibiting fund diversion. This claim overlooks Milgram's status as a Retired Participant and ERISA § 502(d), which allows for the enforcement of money judgments against plan assets. The Plan also contends that enforcing the judgment would force the plan administrator to breach fiduciary duties under ERISA § 404, which allows reasonable administrative expense defrayment as consistent with fiduciary responsibilities.
The Plan argues that compensating Milgram does not qualify as a reasonable expense under the statute, citing an advisory opinion that addresses a different scenario. However, this opinion states that reasonable expenses for plan administration include direct costs incurred in fulfilling a fiduciary’s responsibilities, which contradicts the Plan's position. The court concludes that paying a judicial judgment required by law in favor of a beneficiary whose rights were violated is a legitimate expense for the plan administrator. The court further asserts that failing to pay Milgram would violate fiduciary duties. The Plan's claim that using assets to satisfy the judgment constitutes a prohibited transaction under ERISA § 406(b)(1) is also dismissed, as paying the judgment is deemed a ministerial action, not one of discretionary fiduciary liability.
Additionally, the Plan contends that allowing recovery against its assets contravenes ERISA’s provision that a judgment against an employee benefit plan is not enforceable against individuals unless personal liability is established. While the judgment may affect current plan participants' benefits, Milgram pursues enforcement against the Plan itself, not individuals, and any loss for participants is limited to their account balances.
Lastly, the Plan claims the district court incorrectly refused to suspend judgment enforcement under state procedural rules or Federal Rule of Civil Procedure 60(b)(6). However, the state rules are deemed irrelevant to federal proceedings, whereas Rule 60(b)(6) allows relief from a final judgment in the interests of justice.
The district court has the discretion to enforce a judgment under the relevant rule, and its denial of relief can only be overturned if deemed an abuse of discretion, which was not established in this case. The judgment in question is authorized by ERISA, and potential harm to the Plan or its participants is likely to be mitigated by the Plan's recovery from Breen. Consequently, the district court acted within its discretion by enforcing the judgment in the interests of justice.
Regarding Milgram's claims for accumulated earnings and prejudgment interest on the principal amount of $763,847.93, the court found that the right to compensation for the time value of misdirected funds is a matter of contract interpretation under federal common law, as established in Dobson v. Hartford Financial Services Group, Inc. The district court determined that the plan document allows for the recovery of accumulated earnings when funds have been misallocated due to an invalid Qualified Domestic Relations Order (QDRO). The plan's specific provision and fairness considerations supported the conclusion that there is an inherent time value associated with the delay in payment to Milgram.
The Plan challenged this interpretation, arguing that it did not profit from the funds during the delay, but the decision in Dobson focused on the plan's terms rather than equitable considerations. The court reaffirmed that common law contract interpretation supports the notion of compensating beneficiaries for delayed disbursements, which is rooted in principles of natural justice. The Plan also claimed Milgram contributed to the delay by not reviewing his statements timely, but this factor is irrelevant to his contract claim, which is based on the plan’s express and implied terms favoring compensation for the lost use of funds. Other arguments presented by the Plan regarding its liability for the principal amount were similarly deemed unpersuasive.
Interest and accumulated earnings owed to Milgram by the Plan are deemed expenses stemming from the Plan's mismanagement of the trust fund, which all members agreed to share as a condition of participation. The Plan has a judgment against Breen, enforceable through a constructive trust, assuring that no innocent party will ultimately suffer losses. The district court's judgment is affirmed, with the court noting the uncertainty regarding whether ERISA allows individual plan members to bring breach of fiduciary duty claims against plan administrators. The Supreme Court clarified that such claims are permissible (LaRue v. DeWolff). Regulations interpret IRC § 401(a)(13) to prohibit any arrangement that would assign plan benefits to an employer or allow third-party claims against plan benefits.
In response to a petition for rehearing, the Plan cited three out-of-circuit cases it argues contradict the current ruling, but these references are characterized as mere dictum. The Third Circuit case Graden, which involved a former participant suing for mismanagement, ruled that if the plaintiff proved a breach of fiduciary duty, he could claim additional funds that should have been in his account. The court indicated potential contractual claims under Section 502(a)(1)(B) but noted the complexities involved with such claims, particularly in individual account plans. The First and Ninth Circuits followed Graden's reasoning regarding standing. The passages cited by the Plan are deemed unpersuasive and speculative. A substantial judgment against a financially troubled defined benefit plan could lead to insolvency, while some plans allow participants to manage their exposure to investment risk.
