Opinion ID: 152633
Heading Depth: 2
Heading Rank: 2

Heading: Equitable Reformation Due to Scrivener's Error

Text: ERISA is a comprehensive statute designed to uniformly regulate employee benefit plans. Aetna Health Inc. v. Davila, 542 U.S. 200, 208, 124 S.Ct. 2488, 159 L.Ed.2d 312 (2004). To achieve uniformity, ERISA contains numerous requirements for adopting and administering plans. Plans must be established and maintained pursuant to a written instrument. 29 U.S.C. § 1102(a)(1). The plan terms must be communicated to participants through an easily understood summary plan description, as well as a summary of any material modification to the plan. Id. § 1022(a). These ERISArequired writings are given primary effect and strictly enforced, and plan administrators must adhere to the bright-line requirement to follow plan documents in distributing benefits. Kennedy v. Plan Adm'r for DuPont Sav. & Inv. Plan, ___ U.S. ___, ___, 129 S.Ct. 865, 876, 172 L.Ed.2d 662 (2009). While ERISA's strict requirements ensure[ ] fair and prompt enforcement of rights under a plan, Congress was careful not to make those requirements so onerous that administrative costs, or litigation expenses, unduly discourage employers from offering plans in the first place. Conkright v. Frommert, ___ U.S. ___, ___, 130 S.Ct. 1640, 1649, 176 L.Ed.2d 469 (2010) (quotations omitted). So ERISA also allows some flexibility in plan administration and enforcement to achieve fair, equitable results. In particular, employers may grant plan administrators broad discretion in interpreting plan terms. Id. Deference promotes efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation. Id. Another ERISA provision that promotes equitable plan enforcementand the statute important hereis § 502(a)(3), which allows a plan participant, beneficiary, or fiduciary to bring a civil action for appropriate equitable relief. 29 U.S.C. § 1132(a)(3)(B). The Supreme Court has explained that the statute authorizes those categories of relief that were typically available in equity during the days when common law courts were divided as courts of law or of equity. Mertens v. Hewitt Assocs., 508 U.S. 248, 256, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993); see also Kenseth v. Dean Health Plan, Inc., 610 F.3d 452, 482-83 (7th Cir.2010) (describing categories of equitable relief available under 29 U.S.C. § 1132(a)(3)). The issue in this case, then, is whether Verizon's claim for equitable reformation of its Cash Balance Plan is the type of equitable relief authorized by § 502(a)(3). We have never considered whether § 502(a)(3) authorizes equitable reformation of an ERISA plan due to a scrivener's error, but our case law addressing the related problem of ambiguous plan language suggests that such relief may be appropriate. In Mathews v. Sears Pension Plan, 144 F.3d 461 (7th Cir.1998), we put the parties' reasonable expectations ahead of the literal text of an ERISA plan. Although the plain language of the plan suggested a benefits formula more favorable to employees, the employer offered objective, extrinsic evidence showing an extrinsic ambiguity in this language. Id. at 466-67. The summary plan documents and the parties' course of dealing were consistent with the employer's reading of the plan, so we declined to adopt the employees' contrary reading under rigid and archaic rules of contract interpretation. Id. at 469. We reached a different result in Grun v. Pneumo Abex Corp., 163 F.3d 411, 420-21 (7th Cir.1998), refusing to set aside unambiguous plan language based on an employer's claim of mutual mistake. Still, we acknowledged that such relief would be available in the rare case where literal application of a text would lead to absurd results or thwart the obvious intentions of its drafters. Id. at 420 (quotation omitted). Reformation was inappropriate in Grun because the employee relied on the literal plan language to predict his right to severance compensation. Id. at 421; cf. Mathews, 144 F.3d at 469 (noting absence of claim that any beneficiary actually relied on plan language). Other circuits have directly addressed claims for equitable reformation of an ERISA plan. Using reasoning similar to that in Mathews and Grun, these courts have either concluded that ERISA authorizes such relief or does not foreclose the possibility. Verizon's strongest case is Int'l Union v. Murata Erie N. Am., Inc., 980 F.2d 889, 907 (3d Cir.1992), in which the Third Circuit recognized an employer's § 502(a)(3) claim to correct a scrivener's error in a plan provision on the distribution of excess funds. The court found equitable reformation appropriate because holding the employer to the scrivener's error would produce what is admittedly a `windfall'  an excess remaining in the Plans that the plaintiffs could not have reasonably expected. Id. The Eighth Circuit applied a similar rationale in Wilson v. Moog Auto., Inc. Pension Plan, 193 F.3d 1004, 1008-10 (8th Cir.1999), to conclude that an ERISA plan's failure to provide a minimum age for retirement benefits was a reformable mistake. Reformation was possible because extrinsic evidence showed that none of the plaintiffs actually relied on the erroneous plan language or believed that they would be eligible for early retirement. Id. at 1009-10. The Ninth Circuit distinguished Murata in Cinelli v. Sec. Pac. Corp., 61 F.3d 1437, 1444-45 (9th Cir.1995), rejecting an employee's claim that the absence of a plan provision entitling him to vested life insurance benefits was a mistake. Although reformation of a scrivener's error was appropriate in Murata to avoid a windfall and uphold employees' reasonable expectations of benefits, those factors were lacking in Cinelli. Id. at 1445. Likewise, in Blackshear v. Reliance Standard Life Ins. Co., 509 F.3d 634, 643-44 (4th Cir.2007), abrogated on other grounds as stated in Williams v. Metro. Life Ins. Co., 609 F.3d 622, 630 (4th Cir.2010), the Fourth Circuit declined to equitably reform an ERISA plan under the circumstances, where the plan language was clear and neither the summary plan description nor other plan documents supported the employer's claim of a scrivener's error. From this authority, we conclude that ERISA § 502(a)(3) authorizes equitable reformation of a plan that is shown, by clear and convincing evidence, to contain a scrivener's error that does not reflect participants' reasonable expectations of benefits. Though complex in design, ERISA maintains the basic goal of protecting employees' justified expectations of receiving the benefits their employers promise them. Cent. Laborers' Pension Fund v. Heinz, 541 U.S. 739, 743, 124 S.Ct. 2230, 159 L.Ed.2d 46 (2004). It would thwart this goal to enforce erroneous plan terms contrary to those expectations, even if doing so would increase employees' benefits. The appropriate equitable relief authorized by § 502(a)(3) allows a court to reform an ERISA plan to avoid such an unfair result. See Cent. Pa. Teamsters Pension Fund v. McCormick Dray Line, Inc., 85 F.3d 1098, 1105 n. 2 (3d Cir.1996) ([I]n circumstances where a court can establish that no plan participants were likely to have relied upon the scrivener's error in question ... allowing reformation of the scrivener's error does not thwart ERISA's statutory purpose....); Murata, 980 F.2d at 907 ([T]he alleged error relates to what is admittedly a `windfall'... that neither side could have reasonably expected.); cf. Mathews, 144 F.3d at 469 (We cannot see how ERISA beneficiaries or anyone else ... would be benefited by the adoption of principles of contractual interpretation so rigid and archaic as to permit the class to reap the pure windfall here sought to the potential prejudice of other beneficiaries.). We acknowledge, like the Third Circuit in Murata, 980 F.2d at 907, that equitable reformation of an ERISA plan creates some tension with the written instrument requirement of 29 U.S.C. § 1102(a)(1), also known as the plan documents rule, Kennedy, 129 S.Ct. at 877. This rule ensures that every employee may, on examining the plan documents, determine exactly what his rights and obligations are under the plan, Murata, 980 F.2d at 907, without complicated enquiries into nice expressions of intent behind plan language, Kennedy, 129 S.Ct. at 875. Young cautions that allowing equitable reformation of ERISA plans will undermine the efficient, easily enforceable plan documents rule and encourage protracted, discovery-intensive litigation over the intended meaning of a plan. Even so, since we interpret § 502(a)(3) to authorize the equitable reformation claim asserted here, we cannot simply reject such a claim based on the added litigation burden that it might represent. Moreover, we see little difference between the intent-based inquiry that took place in this reformation case and what must occur in the related case of an ambiguous ERISA plan. In each case, the court must look beyond the plan document to extrinsic evidence to determine the parties' understanding of the plan. See Mathews, 144 F.3d at 467. We do not think that the availability or scope of this judicial inquiry should turn on whether the error in an ERISA plan is deemed an ambiguity or a scrivener's error. Drafting mistakes in ERISA plans may take many forms; some involve language that is ambiguous on its face while others, like the mistake here, involve language that is not intrinsically ambiguous but still misstates participants' benefits. It would not further the purposes of ERISA to allow courts to correct one type of mistake but not the other. Also, other limitations on the equitable reformation claim that we recognize under § 502(a)(3) will mitigate its impact on the plan documents rule. Only those who can marshal clear and convincing evidence that plan language is contrary to the parties' expectations will have a viable claim. Murata, 980 F.2d at 908. This standard of proof is rigorous, requiring evidence that is clear, precise, convincing and of the most satisfactory character that a mistake has occurred and that the mistake does not reflect the intent of the parties. Id. at 907 (quotation omitted); accord Blackshear, 509 F.3d at 642. The evidence also must be objective and not dependent on the credibility of testimony (oral or written) of an interested party. Mathews, 144 F.3d at 467. These high standards of proof should deter an employer from seeking to reform plan language simply because it has proven unfavorable. In this case, though, we agree with the district court that Verizon presented enough objective, convincing evidence to show that the second reference to the transition factor in § 16.5.1(a)(2) of the Cash Balance Plan was a scrivener's error inconsistent with participants' expected benefits. The drafting history left little doubt that the second transition factor in § 16.5.1(a)(2) was a mistake. It first appeared in the fourth draft of the Plan, the first draft prepared by Bell Atlantic attorney Barry Peters. This draft reformatted the multiplication formula in § 16.5.1(a)(2), but in doing so, failed to omit the prior draft's trailing clause that referred to the transition factor, thereby duplicating the transition factor. We need not rely on Peters's arguably self-serving testimony to conclude that this botched reformatting led to the second transition factor; so much is clear by comparing the fourth draft with the prior version. And given the absence of any evidence contemporaneous to the fourth draft suggesting that Bell Atlantic was reworking the Plan to increase benefits, it is evident that duplicating the transition factor was a drafting mistake. The communications and course of dealing between Bell Atlantic/Verizon and plan participants further illustrate that the parties intended a single-transition-factor formula. Young and other participants received a Plan brochure that described their opening cash balances as the product of their lump-sum values under the 1995 BAMPP and a single transition factor. Although the brochure did not explicitly state that a single transition factor would be used, the formula depicted in the brochure makes clear that only one multiplier would apply. That was confirmed in the personalized statements sent to participants of their estimated and actual opening cash balances, which reported values based on the use of a single transition factor. By way of illustration, Young received an estimated opening balance statement that reported her transition factor of 2.659 and her BAMPP lump-sum cashout value of $90,027, for an estimated opening balance of $239,381. Her actual opening balance reported in a later statement, $240,127, was calculated similarly. If a second 2.659 transition factor were applied to these figures, Young's estimated and actual opening balances would have been $636,514 and $638,498, respectively. Bell Atlantic/Verizon never squared transition factors in this manner but instead calculated benefits using only a single transition factor, consistent with the Plan communications. Prior to Young's claim, no employee complained that cash balances should have been increased by an additional transition factor. Granted, many of the Plan communications, including the Plan brochure and opening balance statements, are less compelling because they contain what Young describes as plan trumps provisions, which stated that the communications were subordinate to any contrary language in the Plan. As Young points out, were the situation reversed and the employee-favorable language contained in a Plan communication rather than the Plan itself, Verizon no doubt would contend that these plan trumps provisions barred Young from relying on the communication. See Kolentus v. Avco Corp., 798 F.2d 949, 958 (7th Cir.1986) ([W]hen the summary booklet expressly states that it is merely an outline of the pension plan and that the formal text of the plan governs in the event a question arises, the plaintiffs cannot rely on the general statements of the booklet but must look to the plan itself.). Young's point is well-taken, but we cannot agree that the mere existence of plan trumps provisions precludes Verizon from reforming the Plan consistent with Plan communications. At issue is whether Verizon has established by clear and convincing evidence that the intended meaning of § 16.5.1(a)(2) was to apply only a single transition factor to calculate opening cash balances. Verizon may include all the Plan communications describing a single-transition-factor formula as part of that evidence, even though they contain plan trumps provisions. Based on this evidence of the intended meaning of the Plan, the district court correctly found that the second transition factor in § 16.5.1(a)(2) was a scrivener's error inconsistent with plan participants' expected benefits. Under these circumstances, equitable reformation of the Plan to remove the error is appropriate. We close our discussion of Verizon's reformation claim by considering additional defenses to equitable relief. Because Verizon's claim is one for appropriate equitable relief under ERISA § 502(a)(3)(B), 29 U.S.C. § 1132(a)(3)(B), it is subject to the traditional equitable defenses at common law, provided that they are not inconsistent with ERISA. Young raises the defense of good faith and fair dealing, under which a contracting party may be precluded from reforming a mistake caused by the party's own gross negligence. Restatement (Second) of Contracts § 157 & cmt. a (1981). As the district court put it, Bell Atlantic/Verizon's failure to prevent the drafting mistake in § 16.5.1(a)(2) was profound negligence. Bell Atlantic charged a single in-house attorney, Barry Peters, with revising a critical provision of a multi-billion-dollar pension plan, apparently without critical review by another ERISA expert. It is baffling that a major corporation would not invest greater resources to ensure accuracy in the drafting of such an important document. Still, we cannot agree with Young that this institutional failure showed a lack of good faith. Verizon never misrepresented its intended meaning of the Cash Balance Plan, and indeed, based on the extrinsic evidence examined above, it made great efforts to accurately communicate how participants' benefits would be calculated. Cf. id. cmt. a, illustration 2 (misrepresentation that party verified bid for accuracy was failure to act in good faith). For similar reasons, we do not accept Young's unclean hands defense, under which equitable relief will be refused if it would give the plaintiff a wrongful gain. Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1021 (7th Cir.2002). A plaintiff who acts unfairly, deceitfully, or in bad faith may not through equity seek to gain from that transgression. See Packers Trading Co. v. Commodity Futures Trading Comm'n, 972 F.2d 144, 148-49 (7th Cir.1992). Verizon made a mistake, and a big one at that, in drafting the Cash Balance Plan, but Verizon did not attempt to deceive plan participants regarding their benefit rights under the intended meaning of § 16.5.1(a)(2). Cf. id. (barring relief for a plaintiff who concealed his knowledge of the defendant's mistake and then attempted to recover based on that mistake). On the contrary, Verizon's Plan administration and communications reflected its consistent view that opening cash balances would be calculated using only a single transition factor. Finally, Young raises the equitable defense of laches, or unreasonable delay, by Verizon in seeking equitable reformation. Laches means culpable delay in suing and may apply if the plaintiff commits an unreasonable, prejudicial delay in bringing the suit. Teamsters & Employers Welfare Trust of Ill. v. Gorman Bros. Ready Mix, 283 F.3d 877, 880 (7th Cir.2002). For reasons explained above in our discussion of the statute of limitations, Verizon did not unreasonably delay in bringing its equitable reformation claim. Although Verizon learned of the scrivener's error in the Cash Balance Plan in 1997, at that time it had no reason to believe that this error would lead to a benefits dispute. Instead, the parties' correspondence and course of dealing were consistent with Verizon's understanding that only a single transition factor would be used to calculate benefits. By 1998, Verizon had corrected the Plan to reflect this understanding, and no employee communicated a contrary interpretation before Young brought her administrative claim in 2004. Since this course of conduct reinforced Verizon's interpretation of the Cash Balance Plan, Verizon did not sleep on [its] rights, Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 820 (7th Cir.1999), by not bringing an equitable reformation claim before Young's lawsuit. In sum, no equitable defenses bar Verizon's equitable reformation claim under ERISA § 502(a)(3), and the district court properly granted that claim to remove the scrivener's error from the Cash Balance Plan.