Stephens v. Pension Benefit Guaranty Corp. , 755 F.3d 959 ( 2014 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 27, 2014 Decided June 24, 2014
No. 13-5129
JAMES C. STEPHENS AND RICHARD MAHONEY,
APPELLANTS
v.
PENSION BENEFIT GUARANTY CORPORATION,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:07-cv-01264)
Jacks C. Nickens Jr. argued the cause for appellants.
With him on the briefs was Robert P. Trout.
Colin B. Albaugh, Attorney, Pension Benefit Guaranty
Corporation, argued the cause for appellee. With him on the
brief were Judith R. Starr, General Counsel, Israel Goldowitz,
Chief Counsel, Stephanie Thomas, Assistant Chief Counsel,
and Jean Marie Breen and Mark R. Snyder, Attorneys.
Before: BROWN and PILLARD, Circuit Judges, and
EDWARDS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge BROWN.
2
BROWN, Circuit Judge: When a group of U.S. Airways
pilots hung up their wings over a decade ago, they expected
prompt payment of their retirement benefits. When payment
was delayed 45 days, Appellants filed a class action on behalf
of themselves and similarly situated pilots seeking interest for
the period of delay. The district court refused to certify a
class, holding that James Stephens’s claim is not typical of the
claims of the rest of the putative class because only Stephens
exhausted internal plan remedies before filing suit under the
Employee Retirement Income Security Act (ERISA). Today
we hold the class members were not required to exhaust
internal remedies before bringing their claims in court
because they seek enforcement of ERISA’s substantive
guarantees rather than contractual rights. We reverse the
district court’s judgment and remand for reconsideration of
Appellants’ motion to certify a class.
I
The U.S. Airways pension plan for pilots allowed retirees
to choose between receiving their benefits as a lifetime
monthly annuity or as an equivalent lump sum payment
actuarially equivalent to the projected value of all annuity
payments. For pilots who chose the annuity option, payments
would commence on the first day of the month after the pilot
retired. 1 For retirees who chose to receive their benefits as a
lump sum, U.S. Airways calculated the amount of that benefit
to be actuarially equivalent to the annuity benefit as of the
annuity commencement date. But those pilots were not paid
the lump sum until 45 days after the annuity starting date, and
they were not paid interest accrued on their benefits during
that time. U.S. Airways maintained this delay was
1
At all times relevant to this action, the mandatory retirement age
for commercial pilots under federal law was 60.
3
administratively necessary to perform additional calculations
and to ensure pilots were paid the correct amount.
James Stephens and Richard Mahoney retired from their
jobs as U.S. Airways pilots in 1996 and 1999, respectively.
They, like many other U.S. Airways pilots, chose to receive
their retirement benefits as a lump sum. And, like the other
retirees that chose the lump sum option, Stephens and
Mahoney received their payments approximately 45 days
after what would have been their annuity start date. Stephens
received $488,477.22, and Mahoney received $672,162.79. If
the plan had paid interest during the 45-day delay, Stephens
and Mahoney would have received an extra $3,665.06 and
$5,043.25, respectively.
In 1997, Stephens filed an administrative claim with U.S.
Airways arguing the company was required to pay interest for
the 45-day delay under both the terms of the retirement plan
and ERISA, 29 U.S.C. § 1054(c)(3), which requires that any
lump sum benefit be the “actuarial equivalent” of the annuity
benefit. Stephens argued that ERISA’s actuarial equivalence
rule required not only that his lump sum benefit be calculated
to be actuarially equivalent to the annuity benefit as of the
time the annuity benefit would have started, but also that he
be paid the lost time value of the lump sum benefit to the
extent payment of the lump sum was delayed past the annuity
starting date. When U.S. Airways denied his claim, Stephens
appealed to the U.S. Airways Retirement Board, which
rejected Stephens’s claim in 1999. Neither Mahoney nor any
other U.S. Airways pilot filed a similar claim with the airline
or Retirement Board.
In 2000, Appellants filed a complaint against the
retirement plan and U.S. Airways in the U.S. District Court
for the Northern District of Ohio. They sought to represent a
4
class of similarly situated pilots whose lump sum benefits
payments had been delayed. The district court dismissed the
complaint for lack of subject matter jurisdiction, but the Sixth
Circuit reversed. See Stephens v. Ret. Income Plan for Pilots
of U.S. Air, Inc. (Stephens I), 464 F.3d 606 (6th Cir. 2006).
When the retirement plan subsequently terminated due to U.S.
Airways’s bankruptcy, Appellants substituted the Pension
Benefit Guaranty Corporation (PBGC), a federal agency and
the statutory trustee of the terminated plan, as the defendant.
Consequently, the case was transferred to the U.S. District
Court for the District of Columbia in 2007. Three years later,
the district court granted summary judgment in PBGC’s
favor. Stephens v. US Airways Grp. (Stephens II), 696 F.
Supp. 2d 84 (D.D.C. 2010).
The pilots appealed, and a panel of this court affirmed in
part and reversed in part. 2 Each of the panel’s judges wrote a
separate opinion. Judges Brown and Henderson, forming a
majority of the court, concluded that, because “U.S. Airways
accurately calculated [Appellants’] lump sums to be the
actuarial equivalent of the annuity option as of the annuity
start date, the lump sum payment does not violate
§ 1054(c)(3).” Stephens v. US Airways Grp. (Stephens III),
644 F.3d 437, 440 (D.C. Cir. 2011); id. at 444 (Henderson, J.,
dissenting in part). 3 But we held U.S. Airways was permitted
only a “reasonable delay[]” in paying retirees their lump sum
2
We affirmed the district court’s ruling that Appellants were not
entitled to attorney’s fees from PBGC. Stephens v. US Airways
Grp., 644 F.3d 437, 441–42 (D.C. Cir. 2011).
3
Judge Kavanaugh would have held U.S. Airways’s practice of
delaying payments violated the actuarial equivalence requirement
of 29 U.S.C. § 1054(c)(3). Stephens III, 644 F.3d at 442–43
(Kavanaugh, J., concurring in the judgment). Therefore, he would
have found PBGC liable for interest during the entire 45-day delay.
5
benefit, and the airline was required to pay interest on any
additional delay. Id. at 440 (Brown, J., for the court). We
identified this standard in an Internal Revenue Service (IRS)
regulation providing that “[a] payment shall not be considered
to occur after the annuity starting date merely because actual
payment is reasonably delayed for calculation of the benefit
amount if all payments are actually made.” 26 C.F.R.
§ 1.401(a)–20 (Question & Answer 10(b)(3)); Stephens III,
644 F.3d at 440; Stephens III, 644 F.3d at 444 (Henderson, J.,
dissenting in part).
The panel was further split on the question of what
portion of the delay in paying the lump sum benefit was
reasonable. Judge Brown, writing only for herself in a
controlling opinion, 4 held a 45-day delay was not reasonable.
Stephens III, 644 F.3d at 440–41 (Brown, J., for the court).
She suggested a delay of about thirty days may be reasonable.
See id. at 440–41. 5 Concluding that the lump sum payments
were unreasonably delayed, we remanded to the district court
to determine the period of unreasonable delay and to calculate
the corresponding amount of interest due Appellants.
On remand, Appellants moved to certify a class of
plaintiffs consisting of all pension plan participants and
beneficiaries who had retired between 1997 and 2003 and
elected to receive their benefits as a lump sum. The district
4
Judge Brown’s opinion was controlling because it presented the
narrowest grounds of the opinions forming a majority. See
Stephens III, 644 F.3d at 442 n.1 (Kavanaugh, J., concurring in the
judgment).
5
Judge Henderson would have held the entire 45-day delay was
reasonable, and thus that Appellants were not entitled to any
interest for the delay. Stephens III, 644 F.3d at 444–45 (Henderson,
J., dissenting in part).
6
court denied the motion to certify the class, holding Stephens
did not present a claim typical of the claims of the putative
class. Stephens v. US Airways Grp. (Stephens IV), 908 F.
Supp. 2d 10 (D.D.C. 2012). The court noted that only
Stephens had exhausted his internal remedies under the plan
before bringing suit. Id. at 14. Although the court assumed
without deciding that exhaustion is not required when a
plaintiff alleges a violation of ERISA’s substantive
guarantees, the court held Appellants’ claim did not fall
within that exception because it implicated issues of plan
administration, not merely statutory interpretation. Id. at 15–
16. The district court also held putative class members were
not excused from the exhaustion requirement under the
futility exception. Id. at 16–18.
After the district court denied Appellants’ motion for
class certification, and in order to obtain a final appealable
judgment, Stephens settled his individual claim with PBGC.
Mahoney, seeing the writing on the wall for his unexhausted
claim, agreed to a dismissal without prejudice. Accordingly,
the district court entered a final judgment dismissing the
action on April 3, 2013. This appeal followed.
II
We begin, as we so often do, by assuring ourselves of our
own jurisdiction. See Floyd v. District of Columbia, 129 F.3d
152, 155 (D.C. Cir. 1997). Because Stephens settled his
individual claim against PBGC and Mahoney agreed to a
dismissal of his case without prejudice, Appellants’ standing
to bring this appeal may be subject to some doubt. Cf.
Calderon v. Moore, 518 U.S. 149, 150 (1996) (“[A]n appeal
should . . . be dismissed as moot when, by virtue of an
intervening event, a court of appeals cannot grant any
effectual relief whatever in favor of the appellant.”).
7
However, our precedent makes clear Stephens has standing to
maintain this appeal because he has a continuing “interest in
spreading the litigation costs among numerous litigants with
similar claims.” Richards v. Delta Air Lines, Inc., 453 F.3d
525, 528–29 (D.C. Cir. 2006). PBGC suggests Richards may
not apply because, as we have previously held, see Stephens
III, 644 F.3d at 441–42, Appellants are not entitled to recover
attorney’s fees from PBGC. Appellee’s Br. at 11 & n.41. But
our holding in Richards did not depend on the ability of the
class representative to recover attorney’s fees from the
defendant. Rather, the class representative has an interest in
spreading the litigation costs among other members of the
plaintiff class—a result that will be obtained if class counsel
is paid out of a class-wide recovery. Because we conclude
Stephens has standing to maintain this appeal, we need not
consider whether Mahoney has standing. See Comcast Corp.
v. FCC, 579 F.3d 1, 6 (D.C. Cir. 2009); Robinson-Reeder v.
Am. Council on Educ., 571 F.3d 1333, 1336–40 (D.C. Cir.
2009) (discussing whether a voluntary dismissal of
unresolved claims makes a district court’s judgment final and
appealable).
III
Appellants challenge the district court’s denial of their
motion for class certification. They argue the putative class
members did not need to exhaust the retirement plan’s
internal remedies before they could challenge in court U.S.
Airways’s 45-day delay. Thus, the fact that only Stephens
exhausted internal remedies is not legally material, and,
Appellants argue, his claim is typical of the class’s claims
within the meaning of Federal Rule of Civil Procedure
23(a)(3). We agree with Appellants because (1) there is no
exhaustion requirement for ERISA claims alleging
statutory—rather than plan-based—violations, and (2) the
8
class claims in this action assert statutory violations not
subject to the exhaustion requirement. 6
A
Although ERISA itself does not require a plan
beneficiary to exhaust internal plan remedies before bringing
suit, courts have universally applied the requirement as a
matter of judicial discretion. Commc’ns Workers of Am. v.
AT&T, 40 F.3d 426, 431–32 (D.C. Cir. 1994). In doing so,
courts have relied on the law’s structure and history. See
Kross v. W. Elec. Co., 701 F.2d 1238, 1243–45 (7th Cir.
1983); Amato v. Bernard, 618 F.2d 559, 566–68 (9th Cir.
1980). The exhaustion doctrine effectuates Congress’s
purpose in requiring that benefit plans provide for
administrative review procedures by ensuring those internal
remedial procedures are utilized. See ERISA § 503, 29
U.S.C. § 1133 (“[E]very employee benefit plan
shall . . . afford a reasonable opportunity to any participant
whose claim for benefits has been denied for a full and fair
review by the appropriate named fiduciary of the decision
denying the claim.”); Amato, 618 F.2d at 567 & n.7. As we
have previously noted, the requirement “enables plan
administrators to apply their expertise and exercise their
discretion to manage the plan’s funds, correct errors, make
considered interpretations of plan provisions, and assemble a
factual record that will assist the court reviewing the
administrators’ actions.” Commc’ns Workers of Am., 40 F.3d
at 432. The exhaustion requirement also reduces the number
6
Alternatively, Appellants would prevail if we found the putative
class members were excused from the exhaustion requirement
under the futility doctrine. See Commc’ns Workers of Am. v.
AT&T, 40 F.3d 426, 431–32 (D.C. Cir. 1994). Because we find the
exhaustion requirement inapplicable to the claims at issue in this
action, we do not reach the futility issue.
9
of frivolous lawsuits, promotes the “consistent treatment of
claims for benefits,” provides a “nonadversarial method of
claims settlement,” and “minimize[s] the cost of claims
settlement.” Amato, 618 F.2d at 567. On the other hand,
courts apply the exhaustion doctrine keeping in mind that, in
enacting ERISA, “Congress intended that a body of Federal
substantive law w[ould] be developed by the courts to deal
with issues involving rights and obligations under private
welfare and pension plans.” Id.
Despite the universal acceptance of the general
exhaustion rule, the courts of appeal are split on the question
of whether beneficiaries of an ERISA plan “must exhaust
internal plan remedies before suing plan fiduciaries on the
basis of an alleged violation of duties imposed by the statute.”
Mason v. Cont’l Grp., 474 U.S. 1087, 1087 (1986) (White, J.,
dissenting from denial of certiorari). We have not yet
weighed in on the question, but this case requires us to do so.
The Third, Fourth, Fifth, Ninth, and Tenth Circuits have
held exhaustion is not required when plaintiffs seek to enforce
statutory ERISA rights rather than contractual rights created
by the terms of a benefit plan. See Zipf v. AT&T, 799 F.2d
889, 891–94 (3d Cir. 1986); Smith v. Sydnor, 184 F.3d 356,
364–65 (4th Cir. 1999); Galvan v. SBC Pension Benefit Plan,
204 F. App’x 335, 338–39 (5th Cir. 2006); Amaro v. Cont’l
Can Co., 724 F.2d 747, 751–52 (9th Cir. 1984); Held v. Mfrs.
Hanover Leasing Corp., 912 F.2d 1197, 1204–05 (10th Cir.
1990). In Zipf, the Third Circuit distinguished between
actions brought “to enforce the terms of a plan” and those
brought “to assert rights granted by the federal statute.” 799
F.2d at 891. The court invoked ERISA’s legislative history to
show Congress intended statutory rights to be enforced by the
courts, not by plan administrators. Id. at 892. Congress
required plans to provide procedures to review claims for
10
benefits, but did not require internal remedial procedures to
embrace claims based on ERISA’s substantive guarantees. Id.
at 891–92; see also ERISA § 503, 29 U.S.C. § 1133
(requiring internal procedures to provide review for a
participant “whose claim for benefits has been denied”
(emphasis added)). Furthermore, while plan fiduciaries may
have expertise in interpreting the terms of benefit plans, they
have no similar expertise in interpreting statutory guarantees.
Zipf, 799 F.2d at 893. Rather, statutory interpretation is a
matter within the expertise of the judiciary. Id. Finally,
judicial resolution of statutory claims will provide a consistent
source of law for plan fiduciaries. Id.; see also Amaro, 724
F.2d at 751–52.
The Seventh and Eleventh Circuits, on the other hand,
have held the exhaustion requirement applies even where
plaintiffs assert statutory rights. See Kross, 701 F.2d at 1245;
Lindemann v. Mobil Oil Corp., 79 F.3d 647, 649–50 (7th Cir.
1996); Mason v. Cont’l Grp., 763 F.2d 1219, 1226–27 (11th
Cir. 1985). In Lindemann, the Seventh Circuit noted that
requiring parties to exhaust statutory claims would enable
plan fiduciaries to assemble a factual record that would assist
the court in reviewing their actions. 79 F.3d at 650.
Additionally, even where plan beneficiaries seek to file
statutory claims, the exhaustion requirement “minimize[s] the
number of frivolous lawsuits, promote[s] a non-adversarial
dispute resolution process, and decrease[s] the cost and time
of claims settlement.” Id.
We agree with the Third, Fourth, Fifth, Ninth, and Tenth
Circuits. In determining the scope of the exhaustion doctrine,
we are called upon to balance two competing interests
recognized by ERISA. On the one hand, Congress intended
for the courts to develop a body of federal substantive law
that would address issues involving rights and obligations
11
under pension plans. See Amato, 618 F.2d at 567. On the
other hand, Congress intended that plan administrators have
primary responsibility for adjudicating benefits claims to
promote the consistent treatment of claims and to minimize
the burden on the courts and all parties. See id. This
balancing compels us to require claimants to exhaust internal
remedies when they assert rights granted by a benefit plan.
But it logically suggests direct resort to the federal courts
where claimants assert statutory rights—a practice that better
promotes Congress’s intent to create minimum terms and
conditions for pension plans.
While plan administrators may have particular expertise
in interpreting their pension plans’ terms, federal judges have
particular expertise in interpreting statutory terms. And while
consistent application of a pension plan’s terms might best be
achieved by allowing plan administrators to interpret those
terms in the first instance, consistent application of the law is
best achieved by encouraging a unitary judicial interpretation
of that law. Federal district courts also have the expertise to
create a factual record, should that be necessary, and to
encourage settlement of disputes where appropriate. Finally,
we are persuaded by Zipf’s interpretation of ERISA’s
legislative history and by its conclusion that Section 503 of
ERISA does not require pension plans to create internal
remedial procedures to evaluate statutory claims. Zipf, 799
F.2d at 891–92; see also Amaro, 724 F.2d at 751 (“There is
no internal appeal procedure either mandated or
recommended by ERISA to hear . . . claims [alleging
violations of protections guaranteed by ERISA].”).
Pension plan beneficiaries need not exhaust internal
remedial procedures before proceeding to federal court when
12
they assert violations of ERISA’s substantive guarantees. 7
We must determine, therefore, whether Appellants in this
action assert statutory or contractual rights. 8
B
In light of our previous opinion in Stephens III, which
partially decided the merits of Appellants’ claim, we easily
conclude Appellants have asserted a claim alleging a statutory
violation. In Stephens III, we held U.S. Airways’s 45-day
delay in making retirees’ lump sum payment was
unreasonable. 644 F.3d at 440. We found this
“reasonableness” standard in an IRS regulation, not in the
terms of the pension plan. See id. at 440–41; id. at 444
(Henderson, J., dissenting in part).
We further held U.S. Airways did not violate the actuarial
equivalence requirement of 29 U.S.C. § 1054(c)(3). Id. at 440
(Brown, J., for the court). But that does not mean the
company did not violate other provisions of ERISA. In fact,
we explicitly held the airline’s practices ran afoul of federal
law, stating “a pension plan could not satisfy ERISA by
7
This exception to the exhaustion requirement does not embrace
plan-based claims “artfully dressed in statutory clothing,” such as
where a plaintiff seeks to avoid the exhaustion requirement by
recharacterizing a claim for benefits as a claim for breach of
fiduciary duty. Drinkwater v. Metro. Life Ins. Co., 846 F.2d 821,
826 (1st Cir. 1988). As discussed below, the claims here are
accurately characterized as statutory.
8
Claims alleging a violation of ERISA’s regulations fall within the
category of claims not subject to the exhaustion requirement. Our
discussion applies equally to all claims relying on federally-granted
protections, whether they are found in ERISA or its implementing
regulations.
13
correctly calculating an actuarially equivalent lump sum, then
delaying payment of that sum indefinitely.” Id. (emphasis
added). We thus found a violation not of the terms of the U.S.
Airways pension plan, but rather of ERISA and the IRS
regulations implementing that law.
In the district court’s view, the questions we directed that
court to answer on remand—namely, how much of the 45-day
delay was unreasonable—related to plan administration and
not statutory interpretation. Stephens IV, 908 F. Supp. 2d at
16. It is true we held U.S. Airways’s administration of the
plan violated the statute. But the relevant question is not what
action Appellants challenge—here, the 45-day delay, which is
a matter of plan administration. Rather, the relevant inquiry is
what forms the basis of Appellants’ right to relief: the
contractual terms of the pension plan or the provisions of
ERISA and its regulations. Because Appellants assert a right
granted them by ERISA’s regulations—the right to receive a
lump sum payment without unreasonable delay—they assert a
statutory claim not subject to the exhaustion requirement. In
other words, Appellants assert a statutory claim because the
district court on remand will have to evaluate the plan’s
administration under a reasonableness standard created and
defined by federal law. 9
9
Our opinion in Stephens III explained the nature of Appellants’
claim and decided the merits of that claim in favor of Appellants.
We remanded to the district court to determine the extent of
liability (the extent of unreasonableness in U.S. Airways’s delay)
and the amount of damages. On remand, Appellants filed a Fourth
Amended Class Action Complaint, asserting three separate counts
and complicating the question we had remanded to the district
court. The complaint both seeks “enforcement of the Plan, as
written,” J.A. 229–30, and alleges violations of statutory
protections, see J.A. 230–31. We leave it to the district court on
remand to clarify which of Appellants’ claims are properly
14
IV
Thus, the district court’s ruling on the typicality of the
class representatives’ claims was erroneous. We remand for
the district court to reconsider Appellants’ motion to certify a
class. 10
This case was originally filed more than fourteen years
ago. When we decided Stephens III in 2011, we thought we
had seen the last of this case. We definitively decided the
issue of liability, and remanded to the district court to
determine the extent of liability and the amount of damages.
Three years later, this case is no closer to a final disposition.
We hope the district court can make short work of the motion
for class certification and this action can move speedily to a
final resolution.
presented. Our decision here relates only to the claim we
previously found Appellants successfully asserted—that U.S.
Airways unreasonably delayed its lump sum payment under 26
C.F.R. § 1.401(a)–20 (Question & Answer 10(b)(3)). If, on
remand, Appellants continue to assert other, plan-based claims, the
district court might consider certifying a class only as to the
statutory claims. See FED R. CIV. P. 23(c)(4).
10
After the district court made its initial ruling on the motion for
class certification, Stephens settled his claims. The district court
should consider on remand whether Stephens would be an adequate
class representative. See U.S. Parole Comm’n v. Geraghty, 445
U.S. 388, 405–06 (1980). Nevertheless, we are confident that
Mahoney or another class member could adequately represent the
class even if Stephens cannot.
15
The opinion and judgment of the district court are
Reversed.