Hess, James v. Reg-Ellen Employee ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-2797
JAMES HESS and JOHN HESS,
Plaintiffs-Appellants,
v.
REG-ELLEN MACHINE TOOL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Western Division.
No. 04 C 50238—Philip G. Reinhard, Judge.
____________
ARGUED APRIL 2, 2007—DECIDED SEPTEMBER 18, 2007
____________
Before RIPPLE, ROVNER, and WOOD, Circuit Judges.
WOOD, Circuit Judge. Plaintiffs James and John Hess
are brothers who used to work for Reg-Ellen Machine
Tool Corporation. While there, they participated in the
company’s Employee Stock Option Plan (“the Plan”). Since
1998, some time after the brothers stopped working
for Reg-Ellen, they have been seeking a variety of benefits
under the Plan. Now that they are over 55, they are
apparently entitled to benefits, and indeed we are told
that they have begun to receive payments under the Plan.
As the present lawsuit demonstrates, however, they
believe they are entitled to more.
2 No. 06-2797
The Hess brothers have not always been clear about
what exactly they do want from the Plan. At times, they
have sought benefits to which they were not yet entitled.
See Hess v. Reg-Ellen Mach. Tool Corp., 423 F.3d 653 (7th
Cir. 2005) (“Hess I”). This time around, they claim that
the Plan improperly denied direct rollover distributions
of their Plan accounts into the employee benefits plans
of their new employer or into a 401k plan. They also argue
that they are entitled to segregation and liquidation of
their accounts, even though they may never have re-
quested that relief. Finally, they complain that the Plan
wrongly denied John Hess’s diversification request in
1999. We conclude that the district court correctly re-
jected these claims, and thus we affirm that court’s
judgment for the Plan.
I.
The facts underlying this case have been largely set
out in this court’s previous decision involving these
parties. Hess I, 423 F.3d at 656-58. We review them very
briefly here. John and James Hess (who are twins) began
working at Reg-Ellen in 1987 and 1989; they both resigned
in 1996 at the age of 51 or 52. Each one had participated
in Reg-Ellen’s Employee Stock Option Plan. Their ac-
counts included both employer contributions of stock and
their individual contributions through a salary reduction
system. The Plan allowed participants to devote their
contributions either to Reg-Ellen stock purchases or to
a more diversified portfolio called the “Other Invest-
ments Account.” In 1995, Reg-Ellen’s Board of Directors
amended the Plan to eliminate employee salary reduc-
tion contributions and most of the company’s contributions
to the Plan.
Two years after their departure from the company, in
1998, the Hesses wrote identical letters to the president of
Reg-Ellen, Timothy Turner, requesting that their funds
No. 06-2797 3
under the Plan be rolled over into an IRA of their choice,
essentially demanding an early distribution. The attorney
for the Plan, Craig Thomas, wrote back telling them that
they were not eligible for a distribution until they reached
their 55th birthday. Later that same year, John wrote to
the Plan trustee and asked that his Reg-Ellen stock be
transferred to the Other Investments Account and diversi-
fied. This request was also denied on the ground that he
was not eligible for this kind of diversification until he
reached age 55. The Hesses filed lawsuits challenging
these decisions, but our decision in Hess I affirmed the
district court’s judgment in the company’s favor.
Over five years later, on March 3, 2003, the Hesses made
a written request to the Plan for review of the denial of
their January 1998 and January 1999 requests for a
rollover of their vested benefit accounts. After a certain
amount of scheduling and rescheduling, the Plan adminis-
trator held a hearing on May 22, 2003. It issued a decision
on July 21, 2003. Just before the hearing, on May 13, 2003,
John Hess also requested review of the Plan’s denial of his
claim for a diversification distribution in 2000. The
administrator issued a decision on that claim on Septem-
ber 23, 2003. In April 2004, the Hesses sent the Plan
additional information and requested reconsideration of
the July 21, 2003, decision, but the Plan did not respond.
The Hesses filed the present action on May 20, 2004.
II
We review a district court’s grant of summary judgment
de novo, drawing all reasonable inferences in favor of the
nonmoving party. Ruttenberg v. United States Life Ins. Co.,
413 F.3d 652, 658-59 (7th Cir. 2005). In ERISA cases,
if the plan grants to its administrator the discretion to
construe the plan’s terms, then the district court must
review a denial of benefits deferentially, asking only
whether the plan’s decision was arbitrary or capricious. Id.4 No. 06-2797
In this case, the parties agree that the Plan confers on the
administrator that type of discretionary authority. An
administrative decision is arbitrary and capricious if the
decision conflicts with the plain language of the plan; we
will overturn it only if it is “downright unreasonable.”
Cozzie v. Met Life Ins., 140 F.3d 1104, 1110 (7th Cir. 1998).
Counts I and III of the complaint dealt with the Hesses’
effort to obtain a rollover distribution. The district court
rejected the Hesses’ challenge to the Plan’s denial of that
measure for the straightforward reason that “[p]laintiffs
never identified or asserted any substantive provision
entitling them to a rollover.” Instead, the district court
found, “plaintiffs relied exclusively on language in section
8 in contending that a rollover . . . was available.” While
this is an accurate representation of the arguments
that the Plan administrator made, it is not an entirely
accurate characterization of what went on during the
proceedings before the Plan.
At the May 22, 2003, hearing regarding the Hesses’
rollover claims, their attorney indicated that he was
relying on the rollover provisions in section 8 of the Plan
to support his clients’ claims. The representative for the
Plan asked, “Is there any other provision of the Plan that
the Hesses are calling to the administrator’s attention
that entitle them to the type of distribution, or is it just
this direct rollover provision?” The plaintiffs’ attorney
replied, “The claim in appeal today is simply for a rollover
under the direct rollover, under Section 8.11 of the Plan.
The other claims that they have are not related to today’s
request.” Section 8.11, aptly enough, is entitled “Direct
Rollover.” It describes the circumstances under which “a
distributee” may elect to have “any portion of an eligible
rollover distribution” paid directly into “an eligible retire-
ment account.” Article VII of the Plan is where the rules on
“Determination and Distribution of Benefits” are found.
No. 06-2797 5
Shortly after the exchange between the Hesses’ lawyer
and the Plan representative, James Hess tried to pose a
question to a Reg-Ellen Board member who was present at
the hearing. Pointing out that “we know that other people
have been paid out,” James Hess said, “My question is
what was the provision that [former employee] Bill Ray
was paid out? That’s all I’m asking. Does anybody here
know what the provision—.” At that point, the Plan
representative cut off the question, but he ultimately
conceded, “Your statement regarding Bill Ray’s payout is
so noted, and the Plan administrator will take that to
mean that you believe that somehow supports your
entitlement to a payout, and that will be considered.” The
Hesses’ attorney then clarified that Bill Ray was “one of
the ten people that we believe received payouts.” He
continued, “We don’t have that information. That informa-
tion is the Plan’s information . . . . We may be wrong . . .
because we don’t have all the records, but . . . we wanted
to be treated in a same nondiscriminatory manner.” As a
final statement, James Hess added, “Bill Ray did have
all his shares bought out . . . . Whatever that provision
was. I feel that both John and I have that same entitle-
ment.” The entire Plan was entered into the record by
the plaintiffs. In its denials of the Hesses’ claims made
at the May 2003 hearing, the Plan explained that “Mr.
Hess has not identified the underlying Plan provision
which entitles him to a distribution” and that the Plan
does not “allow any participant at any time to ‘roll’ their
account balance out of the Plan.”
It turns out that Ray received a lump sum payment from
the Plan pursuant to section 7.4, which is entitled “Deter-
mination of Benefits upon Termination.” This is the sec-
tion under which the Hess brothers are currently being
paid by the Plan. Section 7.4 is not a rollover provision;
it is a distribution provision. That section provides for
details like amount, manner, and timing of distribution.
With respect to timing, it says:
6 No. 06-2797
Distribution of the funds due to a Terminated Partici-
pant shall be made on the occurrence of an event
which would result in the distribution had the Termi-
nated Participant remained in the employ of the
Employer (upon the Participant’s death, Total and
Permanent Disability, Early or Normal Retirement).
Section 7.4(a), ¶ 3. The earliest of the times mentioned is
early retirement, which the Plan defines in section 1.14 as
the first day of the month following the date on which the
participant or former participant attains age 55. Section
7.4 goes on to provide that some Plan participants will
receive their benefits in a lump sum (if the benefits total
less than $50,000, but no annual lump sum can be more
than $10,000), while others receive payments over a five-
year period (if the benefits total more than $50,000). The
Hess brothers both are receiving their benefits over
five years. Bill Ray appears to have received his benefits in
one lump sum. From this, one would infer that Ray’s
benefits were less than $10,000; there is no reason to
assume that Ray received the kind of rollover that the
Hesses wanted.
This brief look at the Plan is enough to show that the
Plan’s denial of the Hesses’ request for a rollover was not
arbitrary and capricious; indeed, it strikes us as a reason-
able interpretation of the Plan. Section 8.11 allows roll-
overs only “at the time and in the manner prescribed by
the Plan Administrator” and only for “eligible rollover
distribution[s].” The Hesses have no evidence that the
Plan is inconsistently allowing or denying rollovers
under section 8.11, and even if they did, it might not be
enough to render the Plan’s interpretation of their sec-
tion 8.11 rights unreasonable.
We note briefly that the Hesses make several other
arguments in an effort to save Counts I and III. They
argue that the July 21, 2003, decision was not an exercise
No. 06-2797 7
of discretion and was not a final decision on the merits
and that de novo review applies to the administrator’s
decision. The Plan counters that all of these arguments
have been waived by plaintiffs for failing to present them
to the district court. The Hess brothers did not submit
a reply brief, and thus did not respond to these waiver
arguments. Our own review of the record indicates that
these arguments were indeed not raised in the district
court; the Hesses therefore may not rely on them here.
III
In Counts II and IV of their complaint, the Hesses
asserted claims relating to the Plan’s refusal to segregate
and liquidate their accounts. The district court held that
the plaintiffs did not exhaust their administrative reme-
dies with respect to these theories. We review a district
court’s decision to dismiss a complaint on exhaustion
grounds for an abuse of discretion. Zhou v. Guardian Life
Ins. Co. of Am., 295 F.3d 677, 679 (7th Cir. 2002). As the
district court noted, the only exceptions to exhaustion are
where “there is a lack of meaningful access to review
procedures. . . [or] if pursuing such internal remedies
would be futile.” Ruttenberg, 413 F.3d at 662. The Hess
brothers concede that they did not directly present these
claims for administrative review. They offer several
reasons why we should nonetheless reach them: (1) be-
cause at their appeal hearing in May 2003 they implicitly
referred to section 7.4, which includes the relevant segre-
gation and liquidation provision, these claims were
denied as part of the July 21, 2003, decision; (2) even if
these claims did not go through administrative review,
exhaustion is an affirmative defense that the defendant
failed to plead; and (3) these claims should be “deemed
denied” and therefore deemed exhausted based on what
appears to be a variation of the first Ruttenberg exception.
8 No. 06-2797
The first argument is easy to reject, because the brothers
never discussed their segregation and liquidation claims
at the May 2003 hearing. The Reg-Ellen Plan is a long
and detailed (some might even say tedious) document,
which contains multiple instructions to beneficiaries
and the Plan Administrator. Section 7.4 goes on for five
pages. A simple, generic reference to this section of the
Plan falls woefully short of exhausting the plaintiffs’
administrative remedies for their segregation and liquida-
tion claims.
The next question is whether the Plan failed to plead
exhaustion as an affirmative defense. The Plan contends
that the Hesses waived this argument, or, in the alterna-
tive, that this is the type of affirmative defense that can be
raised in post-answer motions for summary judgment. We
have held that “a delay in asserting an affirmative de-
fense waives the defense only if the plaintiff was harmed
as a result.” Curtis v. Timberlake, 436 F.3d 709, 711 (7th
Cir. 2005). As the Plan notes, the Hesses fully understood
the exhaustion requirement, as they explicitly stated
in their complaint that they had exhausted their adminis-
trative remedies for Counts I and III. The Hesses claim,
however, that if the Plan had alleged failure to exhaust
during the district court proceedings, they “could and
would have taken a voluntary dismissal of their suits,
attempted further exhaustion and thereafter refiled
their suit.” The Plan did allege failure to exhaust in its
reply to the Hesses’ response to the Plan’s summary
judgment motion. If what the Hesses wanted was time to
move for a voluntary dismissal of their case so that they
could perfect exhaustion, they had ample time during
the four months that followed before the district court
granted the Plan’s motion. In short, the Hesses have not
suffered any prejudice from the way in which the Plan
brought its exhaustion argument into the case.
No. 06-2797 9
Finally, the Hesses cannot contend that they were
denied full and fair review of their segregation and
liquidation claims. It was they who failed to raise these
claims in their administrative review proceedings. There
is therefore no reason why we should deem these claims
denied. The district court properly granted summary
judgment on Counts II and IV to the Plan based on the
Hesses’ failure to exhaust their administrative remedies.
IV
The district court also concluded that the Plan’s decision
that John Hess was not “entitled to diversification for
the year 1999 was not arbitrary and capricious.” This
conclusion is not only correct, but also appears to be the
same result reached by this court in Hess I. See 423 F.3d
at 653. The Plan, responding to the argument at issue
here, decided that a claimant had to turn 55 in a calendar
year in order to claim certain available benefits within
the following 90 days at the close of that calendar year. It
was not enough, in the Plan’s view, for the claimant to
turn 55 within the 90 days following the end of the year.
The Plan does not appear to argue res judicata or any
similar defense, but the result is still the same. The
Plan’s reading of its own language is not arbitrary and
capricious. The district court’s grant of summary judg-
ment to Reg-Ellen on Count V was proper.
* * *
We AFFIRM the judgment of the district court. We trust
that this is the last time that we, or any other court, will
be seeing this case: two lawsuits are enough.
10 No. 06-2797
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-18-07