Gary Starr v. Metro Systems, Inc. , 461 F.3d 1036 ( 2006 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 05-4178/06-1087
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Gary Starr, Individually, and as the *
Father and Natural Guardian of *
Gabrielle Cotton, a Minor, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Metro Systems, Inc., a Minnesota *
Corporation; Deborah Masanz, *
*
Appellees. *
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Submitted: June 15, 2006
Filed: August 24, 2006
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Before SMITH, HEANEY, and GRUENDER, Circuit Judges.
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SMITH, Circuit Judge.
Gary Starr sued his former employer, Metro Systems, Inc., and Deborah
Masanz, the administrator of Metro's plan under the Employee Retirement Income
Security Act ("ERISA"), 29 U.S.C. §§ 1001–1416, for their failure to provide Starr
with notification of his right to continue his health and dental insurance coverage, as
required by the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), 29
U.S.C. §§ 1161–1169. Following a bench trial, the district court found in favor of
Starr. However, the court denied Starr's requests for attorney fees and statutory
damages, which Starr appeals. We affirm in part and reverse in part.
I. Background
Starr refurbished office furniture for Metro Systems, Inc., a Minnesota
corporation. During his employment, Starr received an employee welfare benefit plan
as required by ERISA. The plan, administered by Metro Vice President Deborah
Masanz, provided Starr and his daughter, Gabrielle Cotton, with medical and dental
coverage.
On February 24, 2000, Metro terminated Starr's employment. Upon termination,
Starr was entitled to receive from Metro notice of his rights under COBRA. The plan
required Metro to provide Starr a form enabling him to elect to continue his and
Cotton's medical and dental insurance coverage. The plan states:
When a qualifying event occurs, your Employer [Metro] must give you
the necessary COBRA election form within the time period specified by
law. You must complete and return this form to your Employer within
60 days of the later of:
• The date you or your Dependent would lose
coverage; or
• The date you or your Dependent receives the
COBRA election forms.
Metro's compliance with this provision or rather its failure to comply is the focus of
this case.
Under Metro's customary processes, only Masanz sends COBRA notices, which
she normally does according to a standard procedure. However, Masanz did not
follow her standard procedure with Starr. On March 3, 2000, Masanz routinely drafted
a notification and election form to send to Starr. William Meyers, Metro's Chief
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Financial Officer, interrupted Masanz's normal procedure for creating and sending
COBRA notices before the March 3 Notice was mailed to Starr.1 In her deposition and
testimony at trial, Masanz had difficulty precisely recollecting events surrounding the
handling of Starr's notification and election form.2 Masanz equivocated in her
explanation of the creation and sending of Starr's March 3 Notice, offering conflicting
accounts in her deposition and trial testimony.
Ultimately, Masanz admitted that she had no recollection of sending the March
3 Notice to Starr. There is no record that the March 3 Notice was actually sent to Starr.
The district court found that the March 3 Notice was never sent to Starr.
Consequently, Metro did not handle the termination of Starr's coverage in accordance
with the plan.
According to the plan, Starr's coverage would terminate on March 1, 2000
without an election to continue his benefits and payment of the $338.75 monthly
premium. Nonetheless, Metro extended Starr's coverage until July 1, 2000, in an effort
to discourage Starr from pursuing a discrimination claim against the company. The
company did not inform Starr of its decision to continue coverage, but Starr submitted
claims and received benefits for medical expenses incurred in March, April, and May
of 2000. From August to October of 2000, Starr incurred $116,728.65 in medical
expenses for treatment provided to his daughter that undisputedly would have been
covered under the policy, if in effect.
1
Curiously, Meyers did not testify and was never deposed. Masanz provided
several different accounts of what happened on March 3 and ultimately admitted that
she could not remember anything that happened that day.
2
At trial, Starr offered testimony from a computer expert that Masanz's March
3 Notice to Starr was deleted from her computer a short time after its creation. The
expert also testified that Meyers saved the file on an area of the server to which
Masanz did not have access.
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By letter dated August 30, 2000, Starr informed Metro that he had not received
information regarding his rights under COBRA. Masanz responded by letter dated
September 5, stating that Metro's "records" indicate that it provided Starr with notice
of his COBRA rights on March 3, 2000, and that she was enclosing a "duplicate copy
of the notification." However, as previously stated, Masanz later acknowledged there
actually were no records indicating that the March 3 Notice was sent to Starr.3 The
district court found that when Masanz said "records," she meant her recollection.
Curiously, the district court also found that Masanz had no recollection of sending the
March 3 Notice to Starr.
Starr brought the instant action, individually and on behalf of his daughter
Cotton, against Metro and Masanz. Starr alleged that the defendants violated COBRA
by failing to provide adequate notice of his rights regarding a continuation of coverage
after his termination. Following a bench trial, the district court found in favor of Starr.
Specifically, the court found that "[h]aving failed to give Starr timely notice of his
right to continue coverage for himself and Cotton and denied Starr the ability to elect
to continue coverage, Defendants are bound to provide coverage to Starr and Cotton."
The court awarded Starr $113,468.86, which is the amount of medical expenses
incurred from August to October of 2000 less co-payments and premiums from March
through October of 2000. The court refused to award statutory damages, finding that
"Defendants' failure to maintain records sufficient to establish, by a preponderance of
the evidence, that timely notice was sent to Starr [did not arise] from a disregard of
COBRA's requirements."
3
The notice enclosed with the September 5 letter was not a "duplicate copy" of
the March 3 Notice: after unsuccessfully attempting to find the March 3 Notice,
Masanz created a COBRA notice and election form from a template. Masanz enclosed
this re-created notice in her September 5 letter, passing it off as a true copy. She also
created "copies" for the United States Department of Labor ("DOL") and Richard J.
Bruno, Starr's attorney. The latter two "copies" contained material differences from
the March 3 Notice and the "duplicate copy" enclosed with the September 5 letter.
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In his motion to amend the verdict, Starr argued that he was entitled to
prejudgment interest and statutory damages. The district court granted the motion in
part, ordering Metro to pay $15,567.50 in prejudgment interest. The court denied the
motion with respect to statutory damages, reiterating its earlier findings and finding
further than Masanz did not act in bad faith, noting the four-month extension of
coverage provided to Starr without payment of premium.
Starr filed a motion for attorney fees, but the district court denied the motion,
applying the five factors set forth in Lawrence v. Westerhaus, 749 F.2d 494, 496 (8th
Cir. 1984). The court found that Metro had the ability to pay and that an award of
attorney fees would have a deterrent effect; however, the court held these factors were
outweighed by the absence of bad faith, the fact that Starr did not bring the suit as a
class action, and the fact that the defendants' position was not without merit because
they survived summary judgment. Starr appeals the district court's denial of statutory
damages and attorney fees.
II. Discussion
A. Statutory Damages
Under 29 U.S.C. § 1132(c)(1)(A), an ERISA plan administrator "may in the
court's discretion be personally liable" up to $100 per day from the date of his or her
failure to comply with the notification requirements of 29 U.S.C. § 1166(a)(4). The
purpose of this statutory penalty is to provide plan administrators with an incentive
to comply with the requirements of ERISA, Kerr v. Charles F. Vatterott & Co., 184
F.3d 938, 948 (8th Cir. 1999), and to punish noncompliance, Chesnut v. Montgomery,
307 F.3d 698, 704 (8th Cir. 2002). In exercising its discretion to impose statutory
damages, a court primarily should consider "the prejudice to the plaintiff and the
nature of the plan administrator's conduct." Kerr, 184 F.3d at 948. Although relevant,
a defendant's good faith and the absence of harm do not preclude the imposition of the
§ 1132(c)(1)(A) penalty. Chesnut, 307 F.3d at 703. We review the decision to deny
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statutory damages for an abuse of discretion. Wilson v. Moog Auto., Inc. Pension Plan
& Trust, 193 F.3d 1004, 1010 (8th Cir. 1999).
Here, the district court declined to impose the statutory penalty. Based on the
record, we cannot say the district court abused its discretion. In its order, the district
court found that the plan administrator, Masanz, did not act in bad faith by failing to
give timely notice to Starr. Specifically, the district court found Masanz timely created
a COBRA notice addressed to Starr. The court acknowledged that the notice was not
sent to Starr but found no willful failure on Masanz's part to send the notice. The
district court further surmised that had Masanz acted in bad faith, Starr's coverage
would not have been extended for four months after his scheduled termination under
the plan. Interestingly, Meyers, Metro's Chief Financial Officer who apparently
handled the notice at some point, was neither deposed nor called to testify. Based
upon its assessment of the evidence and the credibility of the witnesses, the district
court found that although Starr established that Metro's record-keeping system failed,
the evidence did not show the plan administrator's conduct constituted disregard of
COBRA's notice requirements. If this were a de novo review, we might reach a
different conclusion, but the imposition of the statutory penalty is discretionary, and
the denial of statutory damages on these facts does not amount to an abuse of
discretion.
B. Attorney Fees
We review the district court's decision to award or deny attorney fees for an
abuse of discretion. Sheehan v. Guardian Life Ins. Co., 372 F.3d 962, 968 (8th Cir.
2004); see 29 U.S.C. § 1132(g)(1) (stating that a court, in its discretion, may allow a
reasonable attorney's fee and costs to either party in an action under ERISA). That
being said, this court has previously emphasized the role of ERISA's remedial nature
in determining whether to award fees, stating:
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ERISA is remedial legislation which should be liberally construed to
effectuate Congressional intent to protect employee participants in
employee benefit plans. A district court considering a motion for
attorney's fees under ERISA should therefore apply its discretion
consistent with the purposes of ERISA, those purposes being to protect
employee rights and to secure effective access to federal courts.
Welsh v. Burlington N., Inc., Employee Benefits Plan, 54 F.3d 1331, 1342 (8th Cir.
1995) (citations, internal quotations, ellipsis, and brackets omitted). Therefore,
although there is no presumption in favor of attorney fees in an ERISA action, a
prevailing plaintiff rarely fails to receive fees. See Martin v. Arkansas Blue Cross &
Blue Shield, 299 F.3d 966, 972 (8th Cir. 2002) (en banc). In exercising its discretion,
we have set forth the following list of five non-exclusive of factors for consideration:
(1) the degree of culpability or bad faith of the opposing party; (2) the
ability of the opposing party to pay attorney fees; (3) whether an award
of attorney fees against the opposing party might have a future deterrent
effect under similar circumstances; (4) whether the parties requesting
attorney fees sought to benefit all participants and beneficiaries of a plan
or to resolve a significant legal question regarding ERISA itself; and (5)
the relative merits of the parties' positions.
Id. at 969 & n.4 (citing Lawrence, 749 F.2d at 495–96).
In the proceedings below, the district court found that the balance of the above
factors weighed in favor of Metro. Considering ERISA's remedial nature and the facts
of this case, we disagree for the reasons stated below.
The district court denied Starr's motion for attorney fees after rejecting Starr's
assertion that Masanz perjured her testimony regarding the COBRA notice and
Metro's recordkeeping. However, the absence of bad faith is not dispositive. We note
that Starr brought the case individually and on behalf of his daughter, not as a class
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action. Nevertheless, the remaining factors favor Starr and indicate an award of
attorney fees is in order.
First, the defendants undisputedly have the ability to pay. Second, the deterrent
effect of an award of fees deserved more weight. An award of attorney fees will serve
as an incentive to Metro and the administrator to pay closer attention to their COBRA
notice handling procedures when an employee departs under circumstances similar to
Starr's.
Third, we believe the district court erred in its evaluation of the relative merits
of the parties' positions. The court considered this issue a toss-up because, even
though Starr won on the merits, the defendants survived a motion for summary
judgment. The defendants survived summary judgment primarily because a genuine
issue of material fact existed regarding whether the March 3 Notice was sent. In her
deposition, Masanz testified that she recalled mailing the March 3 Notice, which
allowed the defendants to survive summary judgment. However, Masanz admitted at
trial that she did not recall mailing it. The district court made a specific finding of fact
to that effect. Therefore, defendants' survival of summary judgment deserves little, if
any, weight as a showing of the relative merits. Further, the defendants may have
succeeded in showing that they did not act in bad faith, but Starr clearly succeeded in
establishing a meritorious claim that defendants failed to comply with COBRA's
notice requirements. Finally, given the remedial nature of ERISA legislation, and the
need for ERISA litigants to have effective access to the courts to vindicate their rights,
we hold that the district court abused its discretion in denying Starr's request for
attorney fees.4
4
Contrary to the dissent's assertion, we do not overturn the facts as found by the
district court. Instead, we hold that given the facts found by the district court, the
conclusion not to award attorney fees represents an abuse of discretion.
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III. Conclusion
We hold that the district court erred by refusing to award attorney fees.
Accordingly, we reverse on the issue of attorney fees. In all other respects, the order
of the district court is affirmed.
GRUENDER, Circuit Judge, concurring in part and dissenting in part.
I respectfully dissent from Part II. B. of the Court’s opinion, in which the Court
holds that the district court abused its discretion in denying attorney fees. I would
affirm the district court’s denial of attorney fees.
ERISA provides that “the court in its discretion may allow a reasonable
attorney’s fee and costs of action to either party.” 29 U.S.C. § 1132(g)(1). “In
making this determination, a district court abuses its discretion when there is a lack
of factual support for its decision, or when it fails to follow applicable law.” Martin
v. Ark. Blue Cross & Blue Shield, 299 F.3d 966, 969 (8th Cir. 2002) (en banc). While
I might join the Court in finding that an award of attorney fees was appropriate in this
case were I reviewing the issue de novo, the district court’s opposite decision had
factual support and followed the applicable law.
The district court presented a thorough discussion of the factors from Lawrence
v. Westerhaus, 749 F.2d 494, 495-96 (8th Cir. 1984) (per curiam), and concluded that
“an award of attorney fees to Starr is not appropriate.” The Court does not identify
any failure by the district court to follow the applicable law. Instead, the Court
contends that the district court erred in weighing two of the factors, future deterrent
effect and the relative merits of the parties’ positions.
With respect to future deterrent effect, the district court found that the factor
favored Starr because an award of attorney fees “might deter departures from
procedures designed to give timely notice of COBRA rights” and “failures to maintain
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sufficient records to establish [that] timely notice was given.” This is essentially
identical to what the Court itself states about future deterrent effect. Therefore, it is
unclear where the Court finds error in the district court’s analysis of this factor.
With respect to the relative merits of the parties’ positions, the district court
found that Metro’s position had merit because Metro survived summary judgment and
“resolution of the case required evaluation of evidence received at trial.” The Court
discounts the district court’s analysis of this factor because Masanz recalled mailing
the notice at the summary judgment stage, but she did not recall mailing it in her trial
testimony. However, in its order denying attorney fees, the district court addressed
this inconsistency in Masanz’s testimony in detail and still found that Metro’s position
was not without merit. The district court was in the best position to evaluate the
relative merits of the parties’ positions as the case developed, and I see no reason to
disturb its finding.
The Court draws a statement from Martin that a prevailing ERISA plaintiff
rarely fails to receive attorney fees, but Martin makes clear that this fact does not
justify any presumption in favor of awarding the fees. 299 F.3d at 972. To the extent
the Court uses this fact as support for reversing the district court here, it serves to
“pretermit the exercise of [the district court’s] discretion.” Id. at 971 (quoting Fogerty
v. Fantasy, Inc., 510 U.S. 517, 533 (1994)). This we are not allowed to do.
Accordingly, I respectfully dissent from Part II. B. of the Court’s opinion.
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