Court Opinion

ID: 614161
Source: CourtListenerOpinion
Date Created: 2011-09-26 14:31:38+00
Date Added: 2024-06-11T08:29:27.392206
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                              File Name: 11a0679n.06

                                       Nos. 10-1006/10-1190                                  FILED
                                                                                        Sep 26, 2011
                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT                            LEONARD GREEN, Clerk

TIMOTHY O’CALLAGHAN,                                      )
                                                          )
       Plaintiff-Appellee Cross-Appellant,                )         ON APPEAL FROM THE
                                                          )         UNITED STATES DISTRICT
               v.                                         )         COURT FOR THE EASTERN
                                                          )         DISTRICT OF MICHIGAN
SPX CORPORATION,                                          )
                                                          )
       Defendant-Appellant Cross-Appellee.                )
                                                          )

BEFORE: ROGERS and KETHLEDGE, Circuit Judges; and RUSSELL, Chief District Judge.*

       ROGERS, Circuit Judge. Timothy O’Callaghan, a participant in SPX Corporation’s long-

term disability plan, sued his former employer after the company discontinued his disability benefits.

The district court entered judgment on the administrative record for O’Callaghan, finding that the

plan administrator’s decision was arbitrary and capricious. Because there is insufficient indication

that the plan administrator adequately considered O’Callaghan’s objective evidence of disability,

judgment on the administrative record was proper. However, O’Callaghan is not entitled to

attorney’s fees.

       *
         The Honorable Thomas B. Russell, United States Chief District Judge for the Western
District of Kentucky, sitting by designation.
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

       SPX maintains a long-term disability plan pursuant to the Employee Retirement Income

Security Act of 1974 (ERISA). See 29 U.S.C. § 1001 et seq. The plan defines “disability” as

follows:

       You are considered disabled under this Plan if, due to a non-work related illness or
       accidental injury, you are receiving appropriate care from a physician on a regular
       basis and

               for the first 24 months from the onset of the disability, you are not
               able to earn 70% of your pre-disability earnings from your regular
               occupation in the local economy; or

               beyond 24 months, you are not able to earn 70% of your pre-disability
               earnings at any occupation for which you are reasonably qualified in
               the local economy.

R. 8 at 5. The plan limits disability benefits to 18 months for “neuromusculoskeletal or soft tissue

disorder, unless there is some objective medical evidence of certain conditions.” R. 8 at 8. The plan

is organized as a Voluntary Employees’ Beneficiary Association (VEBA), a form of trust that is

funded entirely by employee contributions. SPX self-insures the trust in the event of a deficit in

employee contributions.

       O’Callaghan worked as a sales manager for SPX until January 2002. He had a history of

lower back pain and had previously been diagnosed with a degenerative disc disease. After several

spinal surgeries failed to relieve the pain, O’Callaghan in July 2002 applied for and began receiving

long-term disability benefits under the company’s ERISA plan. As a condition for receiving

payments, SPX required O’Callaghan to apply for Social Security Disability Income (SSDI) benefits,

which he was awarded in February 2004.

                                                -2-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

       Shortly thereafter, O’Callaghan underwent another spinal surgery in October 2004. The

results of this surgery were promising, and O’Callaghan’s condition began to improve over the next

year. By October 2005, O’Callaghan’s treating physician, Dr. Bradley Ahlgren, noted that

O’Callaghan was off all pain medication and was pleased with the outcome of his surgery.

       The plan administrator reviewed O’Callaghan’s claim in late 2006 and required him to

submit to an independent medical examination. An electromyographic (EMG) exam administered

in February 2007 did not reveal any objective neurological deficits, suggesting that O’Callaghan’s

condition had improved since his October 2004 surgery. The plan administrator also referred

O’Callaghan to Dr. Bala Prasad for a physical examination. Dr. Prasad determined that O’Callaghan

was subject to light (but permanent) functional restrictions due to his residual back pain, but

concluded that O’Callaghan retained the functional capacity to return to work. Based on these

findings and the absence of “objective medical evidence” of disability, the plan administrator denied

continuation of long-term coverage in 2007.

       O’Callaghan then appealed administratively. In his first-level appeal, O’Callaghan submitted

Dr. Ahlgren’s old treatment notes from October 2005, which did little to rebut Dr. Prasad’s findings.

Dr. Ahlgren’s notes indicated that O’Callaghan had experienced “significant improvement” and was

doing “much better than he had been doing preoperatively.” R. 8 at 352. The plan administrator

denied O’Callaghan’s first-level appeal in January 2008, noting the absence of objective medical

findings to support O’Callaghan’s claim that he was disabled, and citing Dr. Ahlgren’s statement that

O’Callaghan was doing better.

                                                -3-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

       In reality, it appears that O’Callaghan had taken a turn for the worse after October 2005. His

second-level appeal was accompanied by the report of a rehabilitation specialist, Dr. James

Stathakios, who physically examined O’Callaghan in February 2008 and administered an MRI scan

and another EMG exam. The results of these tests indicated that O’Callaghan had been experiencing

postoperative problems since his October 2004 surgery. The clinical tests came back as “abnormal”

and showed postoperative changes including “disc bulging” and “nerve root irritation.” From his

physical examination, Dr. Stathakios concluded that O’Callaghan had a decreased range of motion

in his spine, and decreased reflexes and sensation in his lower left leg. In addition to the new

medical evidence, O’Callaghan submitted the report of a vocational consultant, which suggested that

O’Callaghan’s “difficulty with concentration” and “need to lie down or recline frequently throughout

the day” would “preclude all work activity” and “would not be acceptable to any employer.”

O’Callaghan also cited his 2004 Social Security award—which had not been discontinued—as

evidence of his disability.

       The plan administrator referred the new medical evidence to another medical examiner, Dr.

Philip Marion, for a file review. Dr. Marion was given copies of Dr. Stathakios’s treatment notes

and the subsequent MRI and EMG results, as well as Dr. Prasad’s report and the initial EMG results.

In a two-page opinion, Dr. Marion concluded that O’Callaghan was not disabled and that he was

“functionally capable of performing sedentary capacity occupational activities.” R. 8 at 449. SPX

denied O’Callaghan’s second-level appeal in August 2008, noting that its decision was based on

information from O’Callaghan’s treating physicians and the results of Dr. Prasad’s examination. The

                                               -4-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

final benefits denial letter concluded that “[t]he objective clinical findings did not support Mr.

O’Callaghan’s claim to be disabled from any occupation.” R. 8 at 367 (emphasis in original).

       O’Callaghan filed this suit in state court in November 2008. After SPX removed the case

to the federal district court below, the parties filed cross motions for judgment on the administrative

record. The district court granted O’Callaghan’s motion, finding that the plan administrator’s

decision was arbitrary and capricious, and gave three reasons for its decision. First, the court

concluded that the plan administrator was acting under a conflict of interest because SPX retains

potential liability under the plan and would be required to fund the plan in the event of a deficit in

employee contributions. Second, the district court found that SPX had failed to address the favorable

evidence O’Callaghan presented during his second-level appeal. The court reasoned that “Dr.

Prasad’s limited review did not include the objective tests and the narrative statements that

O’Callaghan submitted during the appeals process,” and that “Dr. Marion did not explain why he

disagreed with Dr. Stathakios’ interpretation of the objective medical tests and did not even

acknowledge that there was a disagreement.” R. 15 at 8. Third, the district court cited the plan

administrator’s failure to explain why it took a position different from that of the Social Security

Administration regarding O’Callaghan’s disability.

       The district court declined to award O’Callaghan attorney’s fees, reasoning that SPX had not

acted in bad faith and its position was not frivolous. O’Callaghan v. SPX Corp., No. 2:09-cv-10196,

2010 WL 259052, at *1 (E.D. Mich. Jan. 20, 2010). However, the court granted O’Callaghan’s

                                                 -5-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

request for prejudgment interest. Id. at *2. SPX appeals the denial of its motion for judgment on

the administrative record, and O’Callaghan cross-appeals the denial of attorney’s fees.

        The plan administrator’s decision to deny continuation of long-term disability benefits was

arbitrary and capricious because it was not the result of a “deliberate, principled reasoning process”

and was not “supported by substantial evidence.” See Glenn v. MetLife, 461 F.3d 660, 666 (6th Cir.

2006). There is no indication that either the plan administrator or its independent medical examiner,

Dr. Marion, adequately considered the subsequent evidence of disability submitted in O’Callaghan’s

second-level administrative appeal.

        Where, as here, an ERISA plan grants the plan administrator discretionary authority to

determine benefit eligibility, benefit denials are reviewed under a deferential arbitrary-and-capricious

standard. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). Deferential though

the standard may be, however, it is more than a “mere formality” or “rubber stamp.” See Glenn, 461

F.3d at 666 (internal quotation marks omitted). The plan administrator’s decision must be the result

of a “deliberate, principled reasoning process” and must be “supported by substantial evidence.” Id.

(internal quotation marks omitted). In determining whether the plan administrator’s decision passes

muster under this standard, “we are required to review ‘the quality and quantity of the medical

evidence and the opinions on both sides of the issues.’” Id. (quoting McDonald v. Western-Southern

Life Ins. Co., 347 F.3d 161, 168 (6th Cir. 2003)). Application of this standard leads to the

conclusion that SPX’s decision to discontinue O’Callaghan’s long-term disability benefits was

arbitrary and capricious.

                                                 -6-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

        First, there is no indication from the record that either the plan administrator or its

independent medical examiner, Dr. Marion, adequately considered O’Callaghan’s objective medical

evidence submitted after the initial denial of benefits. “[T]he failure to consider evidence that is

offered after an initial denial of benefits renders a final denial of benefits arbitrary and capricious.”

Glenn, 461 F.3d at 672. Here, the new evidence includes (1) recent MRI and EMG results

contradicting the results of tests performed by the plan administrator’s first medical examiner, Dr.

Prasad; (2) a statement from O’Callaghan’s second treating physician, Dr. Stathakios, interpreting

these results and opining that O’Callaghan is permanently disabled; and (3) the report of a vocational

consultant suggesting that O’Callaghan’s functional limitations would preclude all work activity.

SPX’s final benefits denial letter, informing O’Callaghan of the results of his second-level appeal,

makes no mention of the new medical evidence, and there is no indication that the plan administrator

otherwise considered it.

        Instead, the administrative record reflects that Dr. Marion is the only person who ever

reviewed O’Callaghan’s objective evidence of disability. But Dr. Marion’s two-page report gives

no indication that he adequately considered this evidence. Although Dr. Marion noted the MRI

report “demonstrating the patient’s postsurgical degenerative lumbar spine changes,” he did not

explain why he discounted this evidence in favor of the results of Dr. Prasad’s examination,

undertaken more than a year earlier. Similarly, although Dr. Marion’s report mentions the statement

from Dr. Stathakios, the report does not explain why Dr. Marion discounted the opinion of

O’Callaghan’s treating physician. Generally speaking, a plan administrator “may not reject

                                                  -7-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

summarily the opinions of a treating physician, but must instead give reasons for adopting an

alternative opinion.” Elliott v. Metropolitan Life Ins. Co., 473 F.3d 613, 620 (6th Cir. 2006). Here,

the plan administrator gave controlling weight to Dr. Marion’s opinion—a non-treating, non-

examining source—without any explanation and, as in Elliott, “for no apparent reason.” We have

held that benefit denials based on similarly perfunctory file reviews are arbitrary and capricious. See

Kalish v. Liberty Mutual, 419 F.3d 501, 509-11 (6th Cir. 2005); Calvert v. Firstar Finance, Inc., 409

F.3d 286, 295-97 (6th Cir. 2005).

       Contrary to SPX’s argument, the district court did not misapply the arbitrary-and-capricious

standard in reaching this conclusion. The court properly reviewed “the quantity and the quality of

the medical evidence and the opinions on both sides of the issue,” the requirement stated in Glenn,

461 F.3d at 666, and concluded that the final benefits denial was not supported by substantial

evidence because the plan administrator failed to consider evidence submitted after the initial denial

of benefits. SPX protests that the court should have deferred to the plan administrator’s finding that

the opinion of Dr. Marion was more credible than the opinions of O’Callaghan’s treating physicians.

But in light of the record as supplemented after the first-level appeal, Dr. Marion’s two-page report

is hardly “substantial evidence” on which to base a final denial of benefits. And without some

explanation for why one side was credited over the other, there is no indication that the plan

administrator’s finding was the result of a “deliberate, principled reasoning process.”

       Second, the plan administrator failed to mention the Social Security Administration’s

contrary conclusion. The Administration found that O’Callaghan was permanently disabled despite

                                                 -8-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

the fact that its definition of “permanently disabled” is more stringent than the definition of

“disability” under the SPX plan. SSDI benefits are awarded only if the person’s impairment is so

severe that he or she “cannot . . . engage in any other kind of substantial gainful work which exists

in the national economy.” 42 U.S.C. § 423(d)(2)(A). In contrast, a person may be considered

“disabled” under the SPX plan if he or she is “not able to earn 70% of [his/her] pre-disability

earnings at any occupation for which [s/he] is reasonably qualified in the local economy.” R. 8 at

5. Despite the apparent anomaly of considering O’Callaghan disabled for Social Security purposes

but not for purposes of SPX’s plan, the final benefits denial letter completely ignores O’Callaghan’s

SSDI award.

       This is especially troubling given that SPX required O’Callaghan to apply for Social Security

benefits and indeed profited from his receipt of those payments, because the plan’s long-term

disability payments were offset to the extent of O’Callaghan’s SSDI award. See Bennett v. Kemper

National Services, Inc., 514 F.3d 547, 554 (6th Cir. 2008). SPX counters that there was good reason

to discount the SSDI award because it was “stale.” See Cox v. Standard Life Ins. Co., 585 F.3d 295,

303 (6th Cir. 2009). O’Callaghan was awarded SSDI benefits in February 2004, several months

before his October 2004 surgery, which at least temporarily improved his condition, and the Social

Security Administration did not review its award for another three years. Thus, at the time the plan

administrator reviewed O’Callaghan’s claim in late 2006, the SSDI award may not have accurately

reflected O’Callaghan’s functional capacity.

                                                -9-
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

        It is true that the Social Security award would be more relevant, and the failure to mention

it even more troubling, if the plan administrator had conducted its review in late 2004, shortly after

the SSDI award and before O’Callaghan underwent surgery. Nevertheless, the failure to mention

and rebut the SSDI award, like the failure to adequately consider O’Callaghan’s objective medical

evidence, is a factor that weighs in favor of finding that the plan administrator’s decision was

arbitrary and capricious. See Bennett, 514 F.3d at 553-54.

        We do not, however, rely on the third basis for the district court’s ruling—the presence of

a conflict of interest. Whether SPX was acting under a conflict of interest is questionable. SPX does

not have an “immediate financial interest,” like that in Metropolitan Life Ins. Co. v. Glenn, 554 U.S.

105, 112 (2008), in the payment of benefits because it does not pay benefits from its general assets

and does not fund the trust from which benefits are paid. Instead, SPX’s ERISA plan is funded

entirely by employee contributions. There is no evidence that SPX has ever had to make a stop-loss

contribution to the plan. Indeed, there is no evidence that any conflict of interest actually influenced

the plan administrator’s decision at all. Thus, even if there was a structural conflict of interest (and

we have our doubts about this), its effect on the plan administrator’s decision was negligible.

        With respect to O’Callaghan’s cross appeal, the district court did not abuse its discretion in

denying O’Callaghan’s motion for attorney’s fees. Under ERISA, a “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). We

review a district court’s decision to deny attorney’s fees for abuse of discretion.

                                                 - 10 -
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

        The district court considered the following factors in denying O’Callaghan’s motion for

attorney’s fees:

        (1) the degree of the opposing party’s culpability or bad faith; (2) the opposing
        party’s ability to satisfy an award of attorney’s fees; (3) the deterrent effect of an
        award on other persons under similar circumstances; (4) whether the party requesting
        fees sought to confer a common benefit on all participants and beneficiaries of an
        ERISA plan or resolve significant legal questions regarding ERISA; and (5) the
        relative merits of the parties’ positions.

O’Callaghan, 2010 WL 259052, *1 (quoting Shelby Cnty. Health Care Corp. v. S. Council of Indus.

Workers Health and Welfare Trust Fund, 203 F.3d 926, 936 (6th Cir. 2000)). The parties agree that

this was the correct standard to apply.

        The district court made findings on each of these factors. The court found that SPX had not

“acted with a high degree of culpability or bad faith”; that its ability to satisfy an award of attorney’s

fees was uncontested; that awarding attorney’s fees would not have a deterrent effect because there

was nothing in the record to indicate deliberate misconduct; that O’Callaghan had not sought to

confer a common benefit on all participants and beneficiaries of the ERISA plan or to resolve

significant legal questions regarding ERISA; and that both parties’ positions had merit. Id. at *1-*2.

All of these factors—except for the ability to pay—weigh against an award of attorney’s fees.

        O’Callaghan provides no good reason to second-guess these factual findings. O’Callaghan

argues that he “conclusively established” the first, second, and fifth factors—SPX’s culpability or

bad faith, ability to pay, and the merits of the parties’ positions, respectively. But the district court

carefully considered whether the plan administrator acted in bad faith, despite finding that its

decision was arbitrary and capricious. O’Callaghan, 2010 WL 259053, at *1. Although the district

                                                  - 11 -
Nos. 10-1006/10-1190
O’Callaghan v. SPX Corp.

court properly decided that the plan administrator’s decision was arbitrary and capricious, and even

if this court might take a different view of whether the plan administrator acted in bad faith, the

district court’s contrary conclusion was not an abuse of discretion. See id.

       The same reasoning applies to O’Callaghan’s argument that the merits of the parties’

positions favored his request for attorney’s fees. In disposing of the fifth factor, the district court

found that “[b]oth parties proffered positions that had merit. Although defendant’s position was not

sufficiently persuasive on the merits of this case, it certainly was not frivolous.” Id. Again, even

though the district court’s judgment on the administrative record was proper, it was a close call for

O’Callaghan under the arbitrary and capricious standard. The district court’s finding that this factor

also weighed against an award of attorney’s fees was not an abuse of discretion.

       The Supreme Court’s subsequent decision in Hardt v. Reliance Standard Life Ins. Co., 130

S. Ct. 2149, 2156 (2010), does not change matters. Hardt clarified that a fee claimant need not be

a “prevailing party” to be eligible for attorney’s fees under ERISA’s fee-shifting statute. Eligibility

for attorney’s fees requires merely that the claimant have achieved “some degree of success on the

merits.” Id. at 2158. But Hardt does not change the district court’s five-factor analysis. Hardt

merely relaxes the threshold for eligibility for attorney’s fees—from “prevailing party” to “some

degree of success on the merits.” Id. at 2156. Even under this more relaxed threshold for eligibility,

O’Callaghan must still demonstrate his entitlement to attorney’s fees under 29 U.S.C. § 1132(g)(2).

The district court’s conclusion that he has not done so was not an abuse of discretion.

       The judgment of the district court is affirmed.

                                                - 12 -