Depenbrock v. Cigna Corp ( 2004 )

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
11-10-2004
Depenbrock v. Cigna Corp
Precedential or Non-Precedential: Precedential
Docket No. 03-3575
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PRECEDENTIAL Counsel for Appellant
IN THE UNITED STATES COURT OF
APPEALS Joseph J. Costello, Esq. (Argued)
FOR THE THIRD CIRCUIT Tamsin J. Newman
____________ Morgan, Lewis & Bockius
1701 Market Street
No. 03-3575 Philadelphia, PA 19103
____________
Counsel for Appellee
JOHN DEPENBROCK, ____________
Appellant OPINION OF THE COURT
____________
v.
ROSENN, Circuit Judge.
CIGNA CORP.; CIGNA PENSION PLAN
This case is a by-product of
____________
corporate America’s recent effort to curb
costs by, inter alia, scaling back the
Appeal from the United States District
benefits provided under pension plans.
Court
John Depenbrock (“Depenbrock”) claims
the Eastern District of Pennsylvania
that his employer, CIGNA Corporation
D.C. No.: 01-cv-06161
(“CIGNA”), violated the Employee
District Judge: Honorable Robert F.
Retireme nt I nc ome Se c ur it y A ct
Kelly
(“ERISA”), 29 U.S.C. § 1001, et seq., by
____________
denying him benefits without the required
notice and lawful amendment to the
Argued: September 21, 2004
pension plan. Depenbrock also alleges
that CIGNA violated ERISA by failing to
Before: McKEE, ROSENN and WEIS,
provide him an opportunity to review
Circuit Judges
pertinent documents relating to his denial-
of-benefits claim, and by breaching the
(Filed: November 10, 2004)
fiduciary duty owed as plan administrator.
The District Court granted
Stephen R. Bruce, Esq. (Argued)
CIGNA’s motion for summary judgment
805 15th Street, N.W.
and denied Depenbrock’s cross motions.
Washington, DC 20005-2271
We reverse the summary judgment in
favor of CIGNA and remand with
William M. O'Connell, III, Esq.
directions to enter summary judgment for
Barbin, Lauffer & O'Connell
Depenbrock.
608 Huntingdon Pike
I.
Rockledge, PA 19046
In 1983, Depenbrock began
working at CIGNA. At that time, CIGNA benefits.3 In addition, the proposed plan
provided its employees with a generous amendment included a “Rehire Rule”
traditional pension plan.1 On November 4, which stated that long-term employees
1997, presumably to cut costs, CIGNA who left CIGNA and were re-employed
proposed amendments to its plan that were after December 31, 1997, would not
to become effective January 1, 1998. participate in the Old Plan upon return but
According to the amendments, younger, instead would be transferred immediately
short-term employees w ere to be into the New Plan. For reasons unknown,
transferred to a more modest “cash CIGNA did not formally adopt the
balance” pension formula (“the New amendment and “Rehire Rule” until
Plan”), 2 while long-term employees – December 21, 1998, when CIGNA’s CEO
such a s D epenbrock – would executed a written adoption in accordance
“grandfather” in under the traditional plan with the amendment procedure set forth in
(“the Old Plan”) and receive higher the plan.
On January 2, 1998, Depenbrock
resigned from CIGNA to work for another
1
company. However, Depenbrock was
A traditional pension plan is a defined rehired at CIGNA on November 30, 1998.
benefit plan that “pays an annuity based Depenbrock claims that the pension rule in
on the retiree’s earnings history, usually effect when he was rehired provided that
the most recent or highest paid years, and he immediately resume participation under
the number of completed years of service the Old Plan. Depenbrock bases this
to the company.” Campbell v. assertion on the fact that the proposed
BankBoston, N.A., 327 F.3d 1, 4 (1st amendment to CIGNA’s plan had not yet
Cir. 2003). The CIGNA pension plan been formally adopted when he was
was determined by factoring in the rehired on November 30, 1998. Because
retiree’s credited years of service, 2% of the formal adoption date came twenty-two
his 36-month average compensation at days after Depenbrock returned to work,
the time of retirement, minus a Social Depenbrock asserts that the amendment
Security offset. does not apply to him. To hold otherwise,
2 Depenbrock argues, would amount to an
“Cash balance” plans “guarantee an
impermissible retroactive reduction of his
employee a certain contribution level,
usually an annual percentage of salary,
plus a fixed percentage of interest.”
Campbell, 327 F.3d at 4. CIGNA’s
3
“cash balance” plan offered employees CIGNA refers to the Old Plan as
an account balance to which was credited “Part A” and the New Plan as “Part B.”
an amount based on eligible earnings and We employ the terms “Old” and “New”
credited years of service, as well as an in order to orient the plans
annual declared interest rate. chronologically.
2
rights.4 District Court denied Depenbrock’s
CIGNA counters that although the motion to compel without offering any
amendment was not formally adopted until explanation for its finding. The District
December 21, 1998, the announcement of Court held oral argument on cross motions
the proposed changes on November 4, for summary judgment and on July 31,
1997, coupled with the CEO’s conduct 2003, issued an opinion and order granting
subsequent to the announcement, served to s u m m a r y j u d g m e n t to C IG N A .
implement and retroactively ratify the Depenbrock timely appealed.
amendment as of November 4, 1997. As II.
such, CIGNA asserts that the effective This case having arisen under
date of the amendment was January 1, ERISA, the District Court had subject
1998 – the effective date specified in the matter jurisdiction pursuant to 28 U.S.C. §
internal announcement of the amendment. 1331 and 29 U.S.C. § 1132. This Court
Because Depenbrock resigned from has appellate jurisdiction pursuant to 28
CIGNA on January 2, 1998, one day after U.S.C. § 1291 over the final judgment of
the specified effective date of the “Rehire the District Court. Berger v. Edgewater
Rule,” CIGNA contends the “Rehire Rule” Steel Co., 911 F.2d 911, 916 (3d Cir.
lawfully applies. 1990).
Depenbrock filed suit against We review de novo the District
CIGNA in the Eastern District of Court’s order granting CIGNA’s motion
Pennsylvania on December 11, 2001, for for summary judgment. Bixler v. Cent. Pa.
wrongful denial of ERISA benefits, Teamsters Health & Welfare Fund, 12
disclosure violations, and breach of F.3d 1292, 1297 (3d Cir. 1993). Motions
fiduciary duty. During discovery, for summary judgment must be granted if
Depenbrock moved to compel the there is no genuine issue as to any material
production of fifty-two documents that fact and the moving party is entitled to
CIGNA claimed were protected by the judgment as a matter of law. Fed. R. Civ.
attorney-client privilege and/or “work P. 56(c); Ryan by Capria-Ryan v. Fed.
product” doctrine. The District Court Express Corp., 78 F.3d 123, 125 (3d Cir.
invited CIGNA to submit an ex parte 1996).
memorandum in support of its claims. Depenbrock initially raised five
After conducting an in camera review, the issues on appeal: 1) whether the “Rehire
Rule” was effective January 1, 1998; 2)
whether the plan amendment adopted
4 December 21, 1998, can be given
One of CIGNA’s actuaries estimated
retroactive effect; 3) whether CIGNA
that transferring Depenbrock from the
complied with ERISA’s notice and
Old Plan to the New Plan will result in
disclosure requirements; 4) whether
his losing $800,000 in benefits, assuming
Depenbrock’s failure-to-produce claim
he continued to work for CIGNA until
against CIGNA fails as a matter of law;
age 55.
3
and 5) whether the “fiduciary exception” amendments must be conducted according
to the attorney-client privilege compels to formal procedures. 29 U.S.C. § 1102.5CIGNA to produce fifty-two ostensibly “[W]hatever level of specificity a company
privileged documents. Disposition of the ultimately chooses, in an amendment
first two issues renders discussion of the procedure or elsewhere, it is bound to that
remaining issues unnecessary. We level.” Curtiss-Wright, 514 U.S. at 85.
therefore turn to the effective date of the Thus, an amendment is ineffective if it is
amendment and analyze whether the incon sis te nt with the gov ernin g
amendment may be applied retroactively. instruments. Delgasso v. Sprang & Co.,
A. Effective Date of the Amendment 769 F.2d 928, 935-36 (3d Cir. 1985); see
Before turning to the merits, we Confer, 952 F.2d at 43 (“Only a formal
first set forth some background on ERISA. wr itte n am e ndme nt, e xec ute d in
“Erisa does not create any substantive accordance with the Plan’s own procedure
entitlement to employer-provided . . . for amendment, could change the Plan.”).
welfare benefits. Employers or other plan
sponsors are generally free under ERISA, As a threshold matter, Depenbrock
for any reason at any time, to adopt,
modify, or terminate welfare plans.”
Curtiss-Wright Corp. v. Schoonejongen, 5
The pertinent provisions of 29 U.S.C.
514 U.S. 73, 78 (1995); see Bellas v. CBS,
§ 1102 provide:
221 F.3d 517, 522 (3d Cir. 2000) (“ERISA
(a) Named fiduciaries
neither mandates the creation of pension
(1) Every employee benefit
plans nor in general dictates the benefits a
plan shall be established
plan must afford once created.”).
and maintained pursuant to
However, “ERISA requires that all
a written instrument. . . .
employee benefit plans be ‘established and
***
main tained pursuant to a written
(b) Requisite features of
instrument,’ 29 U.S.C. § 1102(a)(1) . . . .”
plan: Every employee
Ryan by Capria-Ryan, 78 F.3d at 126.
benefit plan shall--
Thus, “[t]his section precludes oral or
***
informal amendments to employee benefit
(3) provide a procedure for
plans.” Confer v. Custom Eng’g, 952 F.2d
amending such plan, and for
41, 43 (3d Cir. 1991) (citing Hozier v.
identifying the persons who
Midwest Fasteners, Inc., 908 F.2d 1155,
have authority to amend the
1163 (3d Cir. 1990)). Although the
plan, and
Supreme Court has established a de
(4) specify the basis on
minimus standard for compliance with
which payments are made to
ERISA, see Curtiss-Wright, 514 U.S. 73,
and from the plan.
the plan must identify the person who has
the authority to amend the plan, and
4
claims that CIGNA’s CEO lacked Rule.” Section 16.1 of the CIGNA plan
authority to amend the plan. Alternatively, specified three methods for amendment:
Depenbrock contends that even if the CEO 1) a resolution of the Board of Directors;
was authorized to amend the plan, he 2) a resolution of the People’s Resources
failed to comply with CIGNA’s own Committee of the Board of Directors
written amendment procedures so that the (“PRC”); or 3) a written instrument
amendment was not effective until approved and executed by one or more
December 21, 1998, the date when duly authorized officers of CIGNA. On
CIGNA finally executed revised formal July 23, 1997, the PRC adopted a
plan documents in accordance with the resolution authorizing the CEO to:
amendment procedure set forth in the plan. adopt amendments to the
Because the amendment’s effective date CIGNA Pension Plan . . . to
came twenty-two days after Depenbrock be effective January 1, 1998
was rehired, Depenbrock contends the (or a later date if deemed
adverse amendment does not apply to him. appropriate by the CEO), as
necessary or appropriate to .
CIGNA counters that its CEO was . . [c]hange the Plan’s
duly authorized to amend the plan and he current “final average pay”
did so pursuant to the doctrine of benefit accrual formula to a
ratification. According to CIGNA, “cash balance” formula for
although the plan amendment was not all eligible participants
formally adopted until December 21, 1998, under the Plan except those
the CEO’s approval on November 4, 1997, who (1) are currently
of a summary of the proposed “cash accruing benefits under the
balance” pension formula and “Rehire form ula in effect o n
Rule,” coupled with his subsequent December 31, 1988, and (2)
conduct, effected a retroactive ratification whose combined age plus
of the plan amendment to be effective years of credited service . . .
January 1, 1998. Accordingly, CIGNA is 45 or more as of
claims that the “Rehire Rule” was December 31,
effective as of the date specified for the 1997 . . . .
amendment – January 1, 1998 – and
applied to Depenbrock because he This resolution gave the CEO plenary
resigned on January 2, 1998, one day after authority to amend the plan from a “final
the alleged effective date of the rule. average pay” to a “cash balance” formula.
We first address the CEO’s The exception provided for long-term
authority to amend. As a threshold employees does not insulate them from the
determination, we agree with the District CEO’s decision-making authority so much
Court that the CEO was authorized to as clarify that long-term employees are not
amend the plan and adopt the “Rehire subject to the plan changes. Accordingly,
5
we conclude that the CEO had authority to weeks after Depenbrock had been rehired.
adopt the “Rehire Rule” amendment. Thus, December 21, 1998, is the effective
However, the CEO did not exercise date of the amendment. However, this
his authority to amend the plan until does not resolve the issue, for we must
December 21, 1998, the date the written consider whether the doctrine of
amendment was executed and formally r a t i f i c a t i o n , u rg e d b y C I G N A ,
adopted. ERISA specifies that a valid retroactively rendered the amendment and
amendment can only be made in the “Rehire Rule” effective as of January 1,
manner specified in the plan document. 1998.
Cu rtiss-W right, 514 U.S. at 85. B. Retroactive Ratification
Regardless of the method specified for The doctrine of ratification provides
amendment, however, an indispensable that an improperly authorized amendment
requirement under ERISA for effective may be ratified ex post by subsequent acts.
plan amendment is that the amendment be See Curtiss-Wright, 514 U.S. at 85.
in writing. See Hozier, 908 F.2d at 1163 M oreover, a validly accomplished
(citing Nachwalter v. Christie, 805 F.2d ratification ordinarily must be given
956. 960 (11th Cir.1986) (“ERISA retroactive effect, rendering the ratified
precludes oral modifications of employee action valid as of the original decision
benefit plans.”)); Pizlo v. Bethlehem Steel date. Schoonejongen v. Curtiss-Wright,
Corp., 884 F.2d 116, 120 (4th Cir.1989) Nos. 92-5695 & 92-5710, slip op. at 3 (3d
(stating that “informal” or “unauthorized” Cir. Aug. 30, 1995). However, ratification
modification of pension plans is is prohibited where the amendment
“impermissible” under ERISA); Degan v. retroactively reduces the intervening rights
Ford Motor Co., 869 F.2d 889, 895 (5th of third parties, such as plan participants.
Cir.1989) (“ERISA mandates that [a] plan See Curtiss-Wright v. Schoonejongen, 143
itself and any changes made to it [are] to F.3d 120, 124-25 (3d Cir. 1998) (on
be in writing.”); Musto v. Am. Gen. Corp., remand) (rejecting ex post ratifications that
861 F.2d 897, 910 (6th Cir.1988) (“[A] defeat intervening rights); Confer, 952
written employee benefit plan may not be F.2d at 43 (holding that an amendment
modified or superceded b y oral limiting eligibility can operate only
undertakings on the part of the prospectively); 2A W illiam Fletcher,
employer.”), cert. denied, 490 U.S. 1020 Fletcher Cyclopedia of the Law of Private
(1989); Moore v. Metro. Life Ins. Co., 856 Corporations § 782, at 647-48 (perm. ed.
F.2d 488, 492 (2d Cir.1988) (“[A]n ERISA rev. vol. 1992) (“Ratification cannot relate
welfare plan is not subject to amendment back so as to defeat intervening rights of
as a result of informal communications strangers to the transaction.”).
between the employer and pla n In the instant case, the District
beneficiaries.”). The CEO did not sign a Court concluded that the December 21,
written instrument amending the plan until 1998, date of formal adoption is not fatal
December 21, 1998, more than three to the adoption of the amendment to the
6
“Rehire Rule” as of January 1, 1998. ineffective.
According to the District Court, the CEO CIGNA argues nonetheless that the
“manifested his intent” to amend the amendment did not reduce Depenbrock’s
“Rehire Rule,” effective January 1, 1998, then-accrued benefits under the plan
by his approval of a summary of the because Depenbrock worked for only a
proposed amendment on November 4, short period in 1998 before the amendment
1997. Furthermore, the CEO’s actions became effective on December 21, 1998.
subsequent to his approval ostensibly Because Depenbrock worked only a
“constituted a ratificatio n of the fraction of the year, CIGNA contends he
amendment both express and implied.” did not amass the 1,000 work hours
The District Court cites as proof the needed to accrue a year of service credit
following subsequent conduct: the CEO’s under the Old Plan. Because Depenbrock
failure to voice opposition to the “Rehire allegedly accrued no service credit under
Rule” described in the “Signature Benefits the Old Plan, retroactive application of the
Retirement Kit” distributed to participants “cash balance” formula to his service
in December, 1997; the CEO’s failure to following his rehire did not reduce any
object to the “Rehire Rule” described in accrued benefit. As such, CIGNA claims
the Summary Plan Description that was there is nothing unlawful in subjecting
generated for the New Plan in October, Depenbrock to the “Rehire Rule.”
1998; and the CEO’s express execution of Even if we were somehow to
the formal amendment to the plan on conclude that excluding Depenbrock from
December 21, 1998. the Old Plan was not a retroactive
Unfortunately for CIGNA, the reduction of benefits, CIGNA’s argument
District Court’s reliance on the doctrine of fails because it wrongly assumes that
ratification is misplaced because CIGNA could transfer Depenbrock out of
ratification would effect a retroactive the Old Plan and into the New Plan
reduction of Depenbrock’s accrued without effectuating another formal plan
benefits under the Old Plan. Given that amendment. CIGNA contends that even if
the amendment was not formally adopted the amended plan were not properly
until December 21, 1998, Depenbrock adopted until December 21, 1998, CIGNA
acquired rights in the interval before could leave Depenbrock in the Old Plan
affirmance – namely, the right to receive for twenty-two days, and then transfer him
benefits under the Old Plan – and retained to the New Plan on December 21, 1998,
his right to accrued benefits, instead of the effective date of the amendment.
having to settle for the more modest However, CIGNA overlooks that it would
benefits provided under the New Plan. have no authority upon which to transfer
Because ratification of the amendment as Depenbrock without effectuating another
of November 4, 1997, would unlawfully formal plan amendment, which it did not
deprive Depenbrock of intervening do.
substantial bene fits, ratification is Moreover, CIGNA’s assertion that
7
t h e ame ndm ent did n ot re duce a dollar amount of benefits. According to
Depenbrock’s accrued benefits is premised this interpretation, retroactive amendments
on an unsubstantiated interpretation of to a plan are permissible so long as the
ERISA’s “Anti-cutback” rule, 29 U.S.C. § dollar amount of accrued benefits is not
1054(g).6 The “Anti-cutback” rule reduced. CIGNA claims – which
prohibits a plan amendm ent from Depenbrock disputes – that transferring
decreasing a participant's “accrued Depenbrock to the New Plan does not
benefits.” Id.; see, e.g., Cent. Laborers’ reduce his dollar amount of benefits
Pension Fund v. Heinz, 214 S. Ct. 2230, because the benefits he earned under the
2237 (2004); Bellas, 221 F.3d at 522 (“[A] Old Plan were converted into an opening
plan amendment that retroactively reduced account balance in the New Plan. 7
benefits promised to plaintiffs for almost Regardless of the merits of
seven years was precisely the sort of Depenbrock’s challenge to CIGNA’s
inequity Congress designed ERISA to assertion, CIGNA’s argument fails
prevent.”). ERISA defines “accrued because it is predicated upon a proposed
benefit” as an individual's right to a treasury regulation that is not yet the law.
retirement benefit “determined under the See Prop. Treas. Reg. § 1.411(d)-3(a)(4),
plan . . . expressed in the form of an annual Example 2, 69 Fed. Reg. 13769 (M ar. 24,
benefit commencing at normal retirement 2004) (proposing to reinterpret the “Anti-
age.” 29 U.S.C. § 1002(23); see Berger, cutback” rule so as to limit the protection
911 F.2d at 917. CIGNA construes of accrued benefits to purely a dollar
“accrued benefit” narrowly to mean purely amount). Although the Treasury
Department retains interpretive jurisdiction
over the “Anti-cutback” rule, see 43 Fed.
6 Reg. 47713 (Oct. 17, 1978), “a proposed
29 U.S.C. § 1054(g) provides in
regulation does not represent an agency's
relevant part:
considered interpretation of its statute . . .
(1) The accrued benefit of a participant
.” Commodity Futures Trading Comm’n
under a plan may not be decreased by an
amendment of the plan . . . .
(2) For purposes of paragraph (1),
7
a plan amendment which has the effect Depenbrock maintains that CIGNA
of-- credits the initial “cash balance”
(A) eliminating or reducing an early accounts of rehired employees like him
retirement benefit or a retirement-type with less than the full value of their
subsidy (as defined in regulations), or previously earned annuities. As a result,
(B) eliminating an optional form of he claims employees start with lower
benefit, with respect to benefits benefits for purposes of the “cash
attributable to service before the balance” formula than they had before
amendment shall be treated as reducing and it takes years for rehired employees
accrued benefits. . . . to catch-up with where they began.
8
v. Schor, 478 U.S. 833, 845 (1986); see, prohibit plan amendments that “directly or
e.g., Ca. Rural Legal Assistance, Inc. v. indirectly” affect accrued benefits. “Plan
Legal Servs. Corp., 917 F.2d 1171, 1173 provisions indirectly affecting accrued
n.5 (9th Cir. 1990) (“We decline to take benefits include, for example, provisions
cognizance of the proposed regulation relating to years of service and breaks in
however, because ‘a proposed regulation service for determining benefit accrual . .
does not represent an agency's considered . .” Id. Because CIGNA’s amendment
interpretation of its statute . . . .’”) (quoting adopts the “Rehire Rule” that “directly or
Schor, 478 U.S. at 845). indirectly” affects the calculation of
Until the proposed treasury benefits, the amendment as applied to
regulation becomes law, the current Depenbrock is prohibited.
regulations govern.8 The current Even if Depenbrock had been
regulations, 26 C.F.R. § 1.411(d)-3(b), 9 notified of the proposed “Rehire Rule” by
the “Signature Retirement Benefits Kit” –
8
as CIGNA urges – such notice was
We note that as of June 28, 2004, the insufficient to have implemented the
proposed treasury regulation redefining amendment because ERISA provides that
“Protected Benefits” – Section 411(d)(6) amendments to a plan may only occur if
(BIN 1545-BC26) – has progressed to made in writing. See supra Part II.A. The
the “Final Rule Stage.” See 69 Fed. Reg. written amendment, as previously stated,
37976. However, it is still not the law. was not executed until December 21,
9 1998. Thus, December 21, 1998, is the
26 C.F.R. § 1.411(d)-3(b) provides in
effective date of the amendment.
relevant part:
Under section 411(d)(6) a plan is
Depenbrock’s participation in the
not a qualified plan (and a trust
forming a part of such plan is not a
qualified trust) if a plan amendment
decreases the accrued benefit of adoption and effective dates shall
any plan participant, unless the plan be treated as one plan amendment.
a m e nd m en t satisfies th e Plan provisions indirectly affecting
requirements of section 412(c)(8) accrued benefits include, for
(relating to certain retroactive example, provisions relating to
amendments) and the regulations years of service and breaks in
thereunder. For purposes of service for determining benefit
determining whether or not any accrual, and to actuarial factors for
participant's accrued benefit is determining optional or early
decreased, all the provisions of a retirement benefits.
plan affecting directly or indirectly
the computation of accrued benefits
which are amended with the same
9
Old P l a n should h av e re su m ed
immediately upon his return to work on
November 30, 1998. And his participation
should have continued until either his
employment ended or the terms of
participation in the Old Plan were altered
by a prospective amendment executed in
accordance with CIGNA’s specified
procedures.
Having determined that the
amendment adversely affects Depenbrock,
we do not reach the question of CIGNA’s
compliance with ERISA’s notice and
disclosure requirements, the validity of
Depenbrock’s failure-to-produce claim
against CIGNA, or the correctness of the
District Court’s finding of attorney-client
privilege.
IV.
Accordingly, for the reasons set
forth above, the summary judgment in
favor of CIGNA Corporation will be
reversed and the case remanded to the
District Court with direction to enter
summary judgment in favor of John
Depenbrock. Costs taxed against CIGNA.
10