Opinion ID: 2784330
Heading Depth: 2
Heading Rank: 3

Heading: breach of fiduciary duty requires a remedy

Text: Persisting in the fiction that Rochow seeks to recover twice for the same injury, the majority incorrectly posits that “the district court thus treated its finding of an arbitrary and capricious denial of benefits, in and of itself, as a breach of fiduciary duty,” and claims to be unaware of any “persuasive authority for the proposition that a wrongful denial of benefits in and of itself constitutes a breach of fiduciary duty.” Maj. Op. at 7 n.1. Even if that were the issue— and it is not because LINA engaged in fiduciary misconduct in addition to denying Rochow’s benefits—at least four circuits besides our own (the Second, Third, Seventh, and Eighth) recognize that a fiduciary’s arbitrary and capricious delay in paying benefits due under a plan in itself can constitute a breach of fiduciary duty. I begin with our own precedent. More than twenty years ago we stated the well-established principle that “ERISA requires that a retirement plan be operated for the exclusive benefit of the employees and beneficiaries.” Sweet v. Consol. Aluminum Corp., 913 F.2d 268, 270 (6th Cir. 1990). Although we assumed there that a trustee acted prudently in withholding pension funds until a certain date, we nonetheless held that the delay in payment conferred a benefit on the trustee. Id. “Any additional time one gains, rightfully or wrongfully, in not having to submit payment of a sum of money owed another is without doubt a benefit. Moreover, the payee . . . has been deprived of the benefit of those payments.” Id. We expressly held that “[t]o allow the Fund to retain the interest it earned on funds wrongfully withheld from a beneficiary would be to approve of an unjust enrichment. Further, the relief granted would fall short of making the beneficiary whole because he has been denied the use of money which was his.” Id. (internal quotation marks omitted). Ten years after Sweet we upheld a district court’s decision requiring an ERISA fiduciary to pay to the plan participant class certain benefits along with the rate of return the fiduciary actually realized on the use of that withheld money. Rybarczyk v. TRW, Inc., 235 F.3d 975, 977– No. 12-2074 Rochow v. Life Ins. Co. of N. Am. Page 37 78, 986 (6th Cir. 2000). TRW argued that imposing the actual rate of return was “unprecedented,” id. at 986, but we disagreed, pointing to the Seventh Circuit’s decision in Lorenzen v. Employees Retirement Plan of Sperry & Hutchinson Co., 896 F.2d 228 (7th Cir. 1990). In that case an employee’s widow contended that the administrator of a retirement plan violated its fiduciary duties to her and to her deceased husband causing a loss in retirement benefits. Id. at 230. The Seventh Circuit held that § 1132(a)(3) authorizes a civil action by a participant or beneficiary to obtain “appropriate equitable relief” for a violation of plan terms and that equitable relief to remedy a breach of fiduciary duty can include a payment of money. Id. (citing Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 154 n.10 (1985)). Because the retirement plan had held money that belonged to the widow, the Seventh Circuit stated: “Now that the collateral dispute is over, the plan must return [the money] to her together with the fruits that it has gleaned by holding on to it.” Id. at 236–37 (emphasis added). Relying on this passage from Lorenzen and our own prior opinion on unjust enrichment, Sweet, 913 F.2d at 270, we held that using the rate of return “actually realized by TRW on the relevant funds seems an appropriate way of avoiding unjust enrichment.” Rybarczyk, 235 F.3d at 986. Importantly, we said that requiring TRW to pay the actual rate of return “merely deprives TRW of its profit on the wrongfully denied benefits.” Id. (emphasis added). We decided this approach was equitable, not punitive, and appropriate under the circumstances where TRW “would arguably receive a windfall” if we permitted TRW to pay compensation for the delayed payment of benefits to the plaintiff that was lower than TRW’s actual rate of return. Id. at 987. Sweet and Rybarcyzk align closely with the law of our sister circuits. The Second Circuit considered a case in which MetLife denied benefits for nearly five years after submission of a claim, but then reversed its prior denials without explanation and paid retroactive benefits in a lump sum without compensating the claimant for the delay in payment. Dunnigan v. Metro. Life Ins. Co., 277 F.3d 223, 226 (2d Cir. 2002). Having received disability payments after almost five years of delay, Dunnigan filed suit under § 1132(a)(3) alleging that MetLife breached its fiduciary duties by delaying payment and MetLife was unjustly enriched through its breach. Id. at 226–27. Dunnigan asked for a constructive trust on the amount MetLife earned by failing to pay the delayed benefits when due or, alternatively, restitution equal to the amount MetLife earned on the late payment and/or disgorgement of MetLife’s profits. Id. at 227. The Second No. 12-2074 Rochow v. Life Ins. Co. of N. Am. Page 38 Circuit ruled that MetLife’s delay in paying benefits long after Dunnigan was entitled to receive them constituted a breach of fiduciary duty because the “delay enriche[d] the fiduciary at the expense of the beneficiary.” Id. at 230. The court further concluded that no showing of bad faith by MetLife was required in order for Dunnigan to prevail, id. at 229–30, and she was entitled to an “equitable make-whole remedy” under § 1132(a)(3) for MetLife’s breach of fiduciary duty. Id. at 229. The court vacated the dismissal of Dunnigan’s suit and remanded for further proceedings. Id. at 232. The Seventh Circuit reached similar decisions in two cases, Clair v. Harris Trust & Savings Bank, 190 F.3d 495 (7th Cir. 1999), and May Department Stores Co. v. Federal Insurance Co., 305 F.3d 597 (7th Cir. 2002), both involving § 1132(a)(3) claims for equitable remedies in addition to payment of benefits. In Clair, participants in a defined-contribution retirement plan sued for breach of fiduciary duty because their benefits were not paid to them in a timely fashion and no compensation for the delay was offered. Clair, 190 F.3d at 496–97. The participants characterized their remedy as “restitution of the wrongful gain that the plan obtained by having the interest-free use of money rightfully theirs under the terms of the plan.” Id. at 498. Explaining that restitution can be either legal or equitable, the court noted that restitution is equitable when the person seeking the remedy complains of a breach of trust, as the plaintiffs did. Id. Constructive trust “is an equitable remedy commonly sought and granted in cases of unjust enrichment. It operates much like restitution—indeed it is sometimes referred to as a restitutionary remedy, but it is securely equitable because it is never a legal remedy.” Id. (citing 1 Dan B. Dobbs, Law of Remedies § 4.3, at 587 (2d ed. 1993)). According to the Seventh Circuit, “such relief is squarely within the scope of” § 1132(a)(3). Id. at 499. Although the plaintiffs in Clair did not prevail on the merits, the court determined that they were “entitled to maintain this suit” under § 1132(a)(3). Id. In May Department Stores Co., 305 F.3d at 603, the Seventh Circuit followed Clair and the Second Circuit’s Dunnigan opinion to conclude that the “wrongful withholding of benefits due can entitle the beneficiary to impose a constructive trust on interest on the withheld benefits, an equitable remedy that results in a money payment to the plaintiff” under § 1132(a)(3). The court explained: No. 12-2074 Rochow v. Life Ins. Co. of N. Am. Page 39 By withholding benefits, a plan can obtain interest that would otherwise be obtained by the beneficiary. That interest is not itself a benefit, and so the beneficiary cannot bring a suit under (a)(1)(B) to recover it. But he can sue to recover it under (a)(3), because it is an amount by which the plan has unjustly enriched itself, and unjust enrichment is a basis, indeed the usual basis, for imposing a constructive trust on a sum of money. Id. at 603 (citing Wsol v. Fiduciary Mgt. Assoc., Inc., 266 F.3d 654, 656 (7th Cir. 2001), and Fisher v. Trainor, 242 F.3d 24, 31 (1st Cir. 2001)). The same principles govern in the Third Circuit. In Fotta v. Trustees of United Mine Workers of America, 165 F.3d 209, 211 (3d Cir. 1998), a plan participant invoked § 1132(a)(1)(B) and § 1132(a)(3) to recover compensation for delayed payment of benefits where the benefits ultimately were paid without litigation. The Third Circuit determined that §1132(a)(3) was “the appropriate vehicle” to recover monetary compensation for delayed benefits because such an award “serves to prevent unjust enrichment. Restitution—the traditional remedy for unjust enrichment—is widely, if not universally, regarded as a tool of equity.” Id. at 213 (citing Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 570 (1990) (“Money damages are considered equitable when ‘they are restitutionary.’”). The court rejected the notion that it was engrafting a remedy on a statute that Congress did not intend to provide. Id. at 214. Rather, the court determined that it “effectuate[d] ERISA’s objectives by recognizing, under principles of equity, that beneficiaries should be fully compensated and that any unjust enrichment of plans at beneficiaries’ expense should be avoided.” Id. Accordingly, relying on § 1132(a)(3), the court held “that a beneficiary of an ERISA plan may bring an action for interest on delayed benefits payments . . . irrespective of whether the beneficiary also seeks to recover unpaid benefits. Because the remedy we recognize here is equitable in nature, its award involves an exercise of judicial discretion.” Id. Significantly, Supreme Court Justice Alito, then a circuit judge on the Third Circuit, concurred in the Fotta opinion, observing: If the plaintiff in this case can establish that the trustees violated the plan by failing to pay his benefits on time, an award of interest would constitute “appropriate equitable relief.” Such an award is recognized as appropriate equitable relief in comparable circumstances under the law of trusts. See Restatement (2d) of Trusts § 207 at 470 (1959); 3 Austin Wakeman Scott and No. 12-2074 Rochow v. Life Ins. Co. of N. Am. Page 40 William Franklin Fratcher, The Law of Trusts § 207.1 at 262–63 (4th ed. 1987); Nedd v. United Mine Workers of America, 556 F.2d 190, 207 (3d Cir. 1977); Toombs v. Daniels, 361 N.W.2d 801, 810 (Minn. 1985). Thus, this is not a case like Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), in which we were asked to supplement the remedies specified in the statute. Id. at 215. In addition to the Second, Third and Seventh Circuits, the Eighth Circuit also adheres to the proposition that a fiduciary’s delay in paying benefits due under a plan constitutes a breach of fiduciary duty that may be rectified through an action filed under § 1132(a)(3). “It is undisputed that an accounting for profits—the remedy that allows for the disgorgement of profits awarded by the district court—is a type of relief that was typically available in equity and therefore is appropriate under § 1132(a)(3)(B).” Parke v. First Reliance Standard Life Ins. Co., 368 F.3d 999, 1008 (8th Cir. 2004). “An accounting for profits is one of a category of traditionally restitutionary remedies in equity, and is often invoked in conjunction with a constructive trust.” Id. The court explained that “[a]n accounting is imposed when the property subject to the constructive trust produces profits while in the defendant’s possession. The defendant is forced to disgorge those profits, although it is not necessary for the plaintiff to identify any particular res or fund of money holding the profits.” Id. Significantly, “[u]nder traditional rules of equity, a defendant who owes a fiduciary duty to a plaintiff may be forced to disgorge any profits made by breaching that duty, even if the defendant’s breach was simply a failure to perform its obligations under a contract. Id. (emphasis added). If a fiduciary breaches a contract and also breaches a fiduciary duty, that fiduciary can be forced to disgorge the profits he earned as a result of his wrong. Id. (quoting 1 Dobbs § 4.3(5), at 611 n.16). “The important ingredient added by the fiduciary status, however, is not that status in itself; what is added is wrongdoing as distinct from contract breach.” Id. at 1008–09 (quoting 1 Dobbs § 4.3(5), at 611 n.16; Valdes v. Larrinaga, 233 U.S. 705, 709 (1914) (“holding that a ‘proper case for equitable relief’ existed where the defendant breached a fiduciary duty to the plaintiff by failing to pay money owing under the contract”). Based on these principles, the Eighth Circuit held that First Reliance owed a fiduciary duty to Parke, First Reliance breached that duty, and First Reliance could be forced under § 1132(a)(3) to disgorge its profits earned as a result of the breach. Id. at 1009. See also Skretvedt v. E.I. No. 12-2074 Rochow v. Life Ins. Co. of N. Am. Page 41 DuPont De Nemours, 372 F.3d 193, 212–14 (3d Cir. 2004) (following Fotta and Parke to hold that an ERISA beneficiary could force disgorgement of profits earned on withheld benefits). As do several other circuits, the Eighth Circuit authorizes the remedy that the district court below awarded to Rochow. Thus, our own cases and a litany of others from four of our sister circuits undermine the majority’s premise that no legal basis exists to conclude that LINA’s delay in payment of benefits to Rochow constituted both an arbitrary and capricious denial of plan benefits under § 1132(a)(1)(B) and a breach of LINA’s fiduciary duties remediable under § 1132(a)(3). The majority ignores these cases because they correct the majority’s mistaken impression that the district court’s “award reflects concern that LINA had wrongfully gained something, a consideration beyond the ken of ERISA make-whole remedies.” Maj. Op. at 9. Not only does the district court’s award appropriately address LINA’s wrongful gain at Rochow’s expense, but the relief for the wrongful gain falls squarely within ERISA’s equitable remedies, as recognized by the Supreme Court, our court, and other circuits. “ERISA’s duty of loyalty bars a fiduciary from profiting even if no loss to the plan occurs,” and the remedy of disgorgement exists to deprive “wrongdoers of ill-gotten gains,” not “to compensate for a loss.” Edmondson, 725 F.3d at 415 (internal quotation marks omitted); Leigh v. Engle, 727 F.2d 113, 122 (7th Cir. 1984) (“ERISA clearly contemplates actions against fiduciaries who profit by using trust assets, even where the plan beneficiaries do not suffer direct financial loss.”). According to the majority, the payment of benefits, attorney’s fees, and prejudgment interest are sufficient to compensate Rochow for his injuries. But only the disgorgement of ill-gotten profits can wholly remedy LINA’s breach of its fiduciary duties. The court below got it exactly right. By arbitrarily and capriciously failing to pay Rochow benefits owed under the terms of the plan and by delaying the payment of full benefits for more than seven years to enrich itself, LINA violated both the plan terms and its fiduciary duties under ERISA. LINA’s wrongful gain of profit, earned through breach of its fiduciary duties, can be equitably remedied under § 1132(a)(3) by ordering an accounting and by directing LINA to disgorge the profit and pay it directly to Rochow. See Great-West Life & Annuity Ins. Co., 534 U.S. at 214 n.2 (recognizing “an accounting for profits, a form of equitable restitution”). No. 12-2074 Rochow v. Life Ins. Co. of N. Am. Page 42 “The elementary rule of restitution is that if you take my money and make money with it, your profit belongs to me.” Nickel v. Bank of Am. Nat’l Trust & Sav. Ass’n, 290 F.3d 1134, 1138 (9th Cir. 2002).