Opinion
00 Civ.9649 (JGK.)
October 16, 2003
OPINION and ORDER
This suit arises out of an employment relationship between the plaintiff, Joseph Suozzo ("Suozzo"), and his former employer, Defendant Bernard D. Bergreen ("Bergreen"), and it involves the plaintiff's right to benefits under a retirement pension plan named the Bernard D. Bergreen and Bernard D. Bergreen, P.C., Pension Plan and Trust (the "Plan"). The plaintiff contends, among other things, that he was denied certain retirement benefits because the Plan administrators applied a number of Plan amendments that allegedly violated the notice requirements of the Employment Retirement Income Security Act of 1974 ("ERISA").See ERISA § 204(h), 29 U.S.C. § 1054 (h).
The defendants respond that they did not have to provide notice because they adopted a Restated Plan pursuant to "Alternative IID," a model amendment issued by the Internal Revenue Service ("IRS") that obviated the need to comply with the notice requirement of § 204(h). See I.R.S. Notice 88-131, 1988-2 C.B. 546, 1998 WL 561201 (providing model amendments that would bring ERISA plans into compliance with tax code reforms and would be exempt from ERISA § 204(h)). The defendants now bring this motion in limine to exclude the plaintiff from introducing any evidence at trial in support of his argument that the defendants violated or failed to comply with the requirements of Alternative IID.
I.
As described in greater detail in this Court's earlier opinions,Suozzo v. Bergreen, No. 00 Civ. 9649, 2003 WL 256784 (S.D.N.Y. Feb. 5, 2003), and Suozzo v. Bergreen, No. 00 Civ. 9649, 2002 WL 1402316 (S.D.N.Y. June 27, 2002), the plaintiff worked for the defendant Bergreen for around thirty years and specifically was employed with Bergreen's wholly owned law firm, Bernard D. Bergreen, P.C., as a legal secretary and administrative assistant from the early 1980s to January 4, 2000. (Proposed Pretrial Order, Statement of Agreed Facts and Points of Law ("PPO Facts"), at ¶¶ A.2-3, attached at Aff. of Edward J. Reich ("Reich Aff.") sworn to Aug. 1, 1993, Ex. A, Tab A.) During that time, Suozzo was a participant in the Plan, which went into effect in 1985 and was defined as a benefit plan within the meaning of ERISA. (See id. ¶ B.1.) Bergreen and his company were the sponsors of the Plan and funded it, and Bergreen was the sole trustee of the Plan.(Id. ¶¶ B.2-4.)
The plaintiff was allegedly terminated after a dispute with Bergreen over plan benefits on January 4, 2000, and shortly thereafter the plaintiff reached normal retirement age under the Plan. (First Am. Compl. ¶¶ 34-36, 39.) On April 13, 2000, the plaintiff requested his benefits in a lump-sum payment and on April 28, 2000 he received $597,982.30.(PPO Facts, ¶¶ D.3-4.) The sum allegedly was calculated by applying a number of Plan Amendments and a Restatement put into effect between January 1986 and December 1994.(See id. ¶¶ B.5-6 (listing Amendments and Restatement); Letter from Jerome A. Siegel to Daniel S. Welytok dated Aug. 11, 2000 ("Claim Decision"), attached at Reich Aff., Ex. G (denying plaintiff's claim for additional benefits and explaining plan amendments).)
Of particular importance, on December 27, 1994 the defendants enacted a Restatement, retroactively effective January 1 1989 (the "1989 Restatement"). (PPO Facts, fcB.6.) The alleged purpose of the Restatement was to bring the Plan into compliance with the Tax Reform Act of 1986. The defendants submitted the Restated Plan to the IRS for a determination of the plan's qualified tax status, and in August 1995, the IRS issued a favorable determination letter. (PPO Facts, ¶¶ B.9-10.)
As part of the restated benefits formula, the 1989 Restatement imposed a $48,000 cap on annual accrued benefits. (Id. ¶ B.8.) The plaintiff, through his then-attorney Daniel S. Welytok ("Welytok"), challenged the application of the $48,000 limitation, among other things, in a claim submitted to the Plan Administrative Committee pursuant to ERISA § 503 and Section 7.1 of the Plan. (See Letter from Welytok to the Administrative Committee dated May 17, 2000 ("the Claim"), attached at Reich Aff., Ex. F.) The plaintiff contested the validity of several Plan Amendments and the 1989 Restatement primarily by arguing that he was not provided with sufficient notice of the changes, as allegedly required by ERISA § 204(h).(Id.)
The Secretary of the Plan Administrative Committee, Jerome A. Siegel ("Siegel"), responded to the plaintiff's claim with a fourteen-page letter that addressed the objections raised by Suozzo through his counsel. (See Claim Decision.) Siegel stated that he conducted an investigation, reviewing Plan; records and files and conducting interviews with Bergreen and Kevin Ferris, the Plan actuary. (Id. at 3.) The Plan denied Suozzo's claim based on two main reasons. First, Suozzo allegedly did in fact have notice of the Amendments and Restatement through his position as Bergreen's legal secretary administrative assistant.(See id. at 3.) Second, the Plan claimed that notice, particularly with respect to the 1989 Restatement, was not necessary because "[p]ursuant to IRS Notice 88-131, as modified by subsequent IRS guidance, the Plan relied on so-called `Alternative IID.'" (Id. at 7.) Siegel's letter continued: "[A] plan operated under Alternative IID would be deemed not to violate either the anti-cut back rules under [Internal Revenue] Code Section 411(d)(6) and ERISA Section 204(g) or the notice requirements under ERISA Section 204(h) if [four required] conditions were met." (Id.) The Claim Decision letter then listed those four conditions and concluded that the "Plan complied with each of these requirements." (Id. at 8.)
On August 25, 2000, the plaintiff's counsel submitted a letter appealing the decision not to increase his benefits. (Letter from Welytok to the Administrative Committee dated Aug. 25, 2000 ("Appeal"), attached at Reich Aff., Ex. H.) The Appeal reiterated that "Mr. Suozzo never received notification of any Plan amendments which would have the effect of reducing his accrued benefit," and that under ERISA § 204(h) those amendments should be disregarded in calculating Suozzo's benefits. (Id. at 1.) The Appeal further asserted that Bergreen had acted in bad faith by Grafting amendments to increase his benefits while decreasing the benefits of others. (Id. at 2.) In support, of this claim, the plaintiff alleged that Bergreen avoided "the draconian effect of a change in ERISA" by receiving a lump-sum payment of benefits in 1993, but, in a breach of fiduciary duty, did not inform Suozzo of the impending changes in the law. (Id.) The Appeal, however, did not contest, or even mention, the Plan's reliance on Alternative IID.
The Administrative Committee denied the appeal in a letter dated October 23, 2000 and signed by Bergreen as Chairman of the Committee and Siegel as Secretary. (Letter from Administrative Committee to Welytok dated Oct. 23, 2000 ("Appeal Decision"), attached at Reich Aff., Ex. I.) With respect to the 1989 Restatement, the Appeal Decision extensively explained the effect of Alternative IID in relieving employers and plan administrators from the obligation to provide § 204(h) notice. (Id. at 5-9.) The Plan Committee then reiterated its position that Suozzo had actual notice of all changes in plan benefits. (Id. at 9-11.)
The plaintiff then filed suit in this Court, alleging, among other causes of action, that by imposing the $48,000 ceiling on the plaintiff's benefits the defendants violated ERISA § 204(h). (Am. Compl. ¶¶ 48-51.) The defendants filed a motion to dismiss on the pleadings, invoking Alternative IID as a legal basis for avoiding the notice requirements. At that point and in response to a motion for reconsideration, the "plaintiff challenged Plan's reliance on Alternative IID on two grounds: that a $1.7 million lump-sum pension benefit distributed to Bergreen in 1993 violated a condition for compliance with Alternative IID; and that the $48,000 cap on annual accrued benefits in the 1989 Restatement also violated Alternative IID because it was beyond what was necessary to bring the plan into compliance with the Tax Reform Act.
II.
The defendants now bring this motion in limine to exclude the plaintiff from introducing any evidence at trial in support of his argument that the defendants violated or failed to comply with the requirements of Alternative IID, which would exempt the defendants from the notice requirements of ERISA § 204(h) for the Restatement allegedly adopted pursuant to that Alternative. The defendants specifically seek to prevent the plaintiff from introducing evidence outside of the administrative record to show (1) that the $1.7 million distribution to Bergreen violated a condition for compliance with Alternative IID, or (2) that the $48,000 cap in the 1989 Restatement violated Alternative IID because it was beyond what was necessary to comply with the Tax Reform Act.
District courts review a denial of benefits under ERISA either under a de novo standard or under an arbitrary and capricious standard if the administrator retains discretionary authority to implement the plan. See Firestone Tire Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989); Pagan v. NYNEX Pension Plan, 52 F.3d 438, 442 (2d Cir. 1995). Regardless of the standard, the court's review is generally limited to administrative record. See Muller v. First Unum Life Ins. Co., 341 F.3d 119, 125 (2d Cir. 2003); Zervos v. Verizon N.Y., Inc., 277 F.3d 635, 646 (2d Cir. 2002) ("Even where the district court exercises de novo review of the plan administrator's determination, the district court `ought not' to accept additional evidence absent `good cause.'" (quoting DeFelice v. Am. Int'l Life Assurance Co., 112 F.3d 61, 66 (2d Cir. 1997))). The Court's role is to provide, in effect, a bench trial on the papers with the judge acting as the finder of fact. Muller, 341 F.3d at 124.
The plaintiff attempts to argue that the appropriate standard for review in this case is de novo, and not arbitrary and capricious. The defendants, while reserving the right to argue that this case should be reviewed under the arbitrary and capricious standard, have assumed the standard is de novo for purposes of this motion. Moreover, as explained below, regardless of the standard, the presumption is that the Court should review the Plan administrator's decision based on the administrative record.
As the Court of Appeals for the Second Circuit has recently explained: "The decision whether to consider evidence from outside the administrative record is within the discretion of the district court. Nonetheless, the presumption is that judicial review is limited to the record in front of the claims administrator unless the district court finds good cause to consider additional evidence.'" Muller, 341 F.3d at 125 (citation omitted) (quoting DeFelice, 112 F.3d at 66). As the plaintiffs conceded at the argument of this motion, they never argued to the Administrative Committee that the Plan failed to follow Alternative IID for either reason now asserted, and the determination of those claims would require the development of facts not in the administrative record. (Tr. of Oct. 9, 2003 ("Tr."), at 19-22.) Because there is nothing in the administrative record with respect to whether the $1.7 million distribution to Bergreen or the $48,000 cap on Suozzo's benefits violated Alternative IID, the question before this Court is whether there is "good cause" to supplement the administrative record with respect to these issues.
As explained in DeFelice, "a demonstrated conflict of interest in the administrative reviewing body is an example of `good cause' warranting the introduction of additional evidence."DeFelice, 112 F.3d at 67. In this case, the Claim investigation was conducted by Siegel, an employee of Bergreen. Moreover, the Appeal was considered by the Plan Administrative Committee, which is chaired by Bergreen. Given the alleged dispute between Bergreen and Suozzo leading to Suozzo's termination, as well as the repeated charges by Suozzo that Bergreen acted in bad faith, this situation involves a plan administrator whose conflict of interest goes beyond merely being both the plan administrator and payor.
Some courts have interpreted DeFelice as holding that a conflict constitutes good cause per se, and that the plaintiff does not have to show that the conflict of interest actually caused the record to be underdeveloped. See, e.g., Parker v. Reliance Standard Life Ins. Co., No. 99 Civ. 1822, 2000 WL 97362, at *3 (S.D.N.Y. Jan. 27, 2000). But DeFelice refers to "evidence not available at the administrative level," suggesting that "good cause" involves evidence that should have been included in the administrative record but was not, because of no fault of the claimant.DeFelice, 112 F.3d at 66 ("The normal scope of limited ` de novo' review is inappropriate where the fairness of the ERISA appeals process cannot be established using only the record before the administrator.").
Even if the existence of a conflict of interest alone, without any evidence of an effect on the administrative record, could constitute good cause, the Court retains discretion not to expand the administrative record. See Critchlow v. First Unum Life Ins. Co. of Am., 340 F.3d 130, 133 n. 2 (2d Cir. 2003) ("The decision whether to consider information outside the administrative record is a discretionary one, even where there is `good cause.'"), aff'g 198 F. Supp.2d 318, 322 (W.D.N.Y. 2002) (refusing to admit affidavits not in administrative record because plaintiff "offered no good reason why she could not have submitted these or similar expert opinions to UNUM before UNUM rendered its decision"); see also Krizek v. Cigna Group Ins., No. 02-9321, 2003 WL 22196605, at *4 (2d Cir. Sept. 24, 2003);Muller, 341 F.3d at 125.
In this case, the Court chooses not to exercise its discretion to expand the administrative record because the reason that the evidence is not in the record is straightforward: The plaintiff failed to contest the defendant's reliance on Alternative IID. The motivating factor behindDeFelice was that claimants "are utterly helpless against the whim of the conflicted body's interpretation of the facts." Id. at 66. Even if the administrative process in this case was adversarial as the plaintiff claims, the plaintiff still was not "at the whim" of the conflicted administrator. The Plan administrator responded to Suozzo's claims about notice by relying on Alternative IID, and the plaintiff simply did nothing to challenge that contention.
The plaintiff in this case asks this Court to consider a particular factual question about the company — whether it complied with Alternative IID-which was never put at issue during the appeals process. Moreover, the determination of that question would depend on the factual development of whether it he $1.7 million distribution and the $48,000 cap violated Alternative IID. (Tr. at 19-22.) The defendants clearly invoked Alternative IID as the basis for calculating the plaintiff's benefits and the reason why notice was unnecessary. (See Claim Decision, at 3, 5-9.) Having been given a specific — and extensively explained — reason for the denial of benefits, the plaintiff could have challenged the reliance on Alternative IID, and the defendant could have responded and, if necessary, developed the factual record as to why the neither the 1993 distribution to Bergreen nor the $48,000 cap violated Alternative IID.
Although the plaintiff's Appeal letter complained generally about Bergreen's 1993 lump-sum benefits and the $48,000 ceiling, neither point was made in the context of Alternative IID, which was never mentioned. (See Appeal, at 2.) The IRS in 1995 reviewed the Restated Plan, including its use of Alternative IID, for a determination of the Plan's qualified tax status, and the IRS thereafter issued a favorable determination letter. (PPO Facts, ¶¶ B.9-10.) There was therefore no reason for the Plan administrators to think that the Plan was not in compliance with Alternative IID, and there is no reason why Suozzo's broad protests about Bergreen's bad faith should have put the defendants on notice that compliance was at issue.
Moreover, it is clear that the plaintiff understood the significance of Alternative IID prior to submitting his claim and pursuing his appeal. Suozzo's then-attorney Steven Schmutter ("Schmutter") wrote that "a 204(h) Notice was not necessary to be given to Suozzo with respect to the cessation of benefit accruals in 1989" because "the Company used alternative IID" from IRS Notice 88-131. (Internal Mem. of Schmutter, re: Joseph Suozzo, dated May 15, 2000, at 1, attached at Reich Aff., Ex. B.) Regarding the 1993 benefit distribution to Bergreen, the memorandum prepared by Schmutter specifically advised:
The fact that Bergreen may have taken more than his Restricted benefit' in 1993, should only be used to show the `bad faith' of Bergreen. If we pursue litigation, I doubt that the court would rule that this Plan was disqualified due to the distribution to Bergreen. Even if the court were to rule that this Plan was disqualified, this would harm Suozzo. Specifically, if this were a disqualified plan, Suozzo would not be able to roll his monies over into a IRA and he would be taxed on the amount immediately.
(Id. at 2.) On May 17, 2000, the plaintiff submitted his claim to the Plan Committee. The only protest to the 1993 payment to Bergreen came in the Appeal, which used the distribution as evidence of Bergreen's "lack of good faith" and "one of he more egregious breaches of fiduciary duty." (Appeal, at 2.)
This is not a case where the Court must go beyond the record "to ensure a comprehensive and impartial review of the case," or where the "fairness of the ERISA appeals process cannot be established using only the record before the administrator." See DeFelice, 112 F.3d at 66 (announcing "good cause" standard where, in addition to being conflicted, plan administrator had no established criteria for determining appeal and destroyed records immediately after deciding case). The plaintiff should not be allowed to attempt to develop new theories and factual bases for the alleged inapplicability of Alternative IID when he failed to raise those arguments or develop a factual record on those issues in the course of the administrative process. See Critchlow, 198 F. Supp.2d at 322. The plaintiff was put on notice of the relevance of Alternative IID both by the Plan administrators and his own attorneys. (See Test, of Schmutter, attached at Reich Aff., Ex. C.) He had ample opportunity to develop the record during the appeals process, which is the most appropriate time to raise factual issues about particularized benefit accruals.
III.
In addition to arguing that the conflict of interest creates good cause, the plaintiff suggests that the additional evidence should be admitted because the question involves: a pension plan's compliance with statutory and regulatory requirements. The plaintiff points out that in the majority of cases where plaintiffs seek to expand the administrative record, the additional evidence goes to the claimant's disability on medical condition. See, e.g., Krizek, 2003 WL 22196605, at *3-4 (affirming district court's stated refusal to consider additional testimony that plaintiff was totally disabled); Muller, 341, F.3d at 125 (involving evidence from treating psychiatrists and physicians as to claimant's disability); DeFelice, 112 F.3d at 63-64 (involving medical evidence as to cause of claimant's spouse's death).This case is distinguishable, the plaintiff contends, because he is seeking to introduce evidence of a "statutory violation." The plaintiff is allegedly challenging the legality of the Restatement rather than its interpretation or application in his case.
Courts have disagreed on whether exhaustion is required for "statute-based claims" as opposed to "plan-based claims." See Santana v. Deluxe Corp., 12 F. Supp.2d 162, 174-75 (D. Mass. 1998) (surveying courts that have accepted and rejected this distinction).Compare Zipf v. AT T Co., 799 F.2d 889, 891-94 (3d Cir. 1986), and Amaro v. Cont'l Can Co., 724 F.2d 747, 751-52 (9th Cir. 1984) (not requiring exhaustion for plaintiff bringing wrongful termination or retaliation claim under ERISA § 510), with Powell v. AT T Communications, Inc., 938 F.2d 823, 827 (7th Cir. 1991), Simmons v. Willcox, 911 F.2d 1077, 1081 (5th Cir. 1990), and Mason v. Cont'l Group, Inc., 763 F.2d 1219, 1225-27 (11th Cir. 1985) (requiring exhaustion for all ERISA claims). The Court of Appeals for the Second Circuit has yet to decide the issue, although one district court did not require exhaustion for a wrongful termination claim arising under § 510See Lawford v. N.Y. Life Ins. Co., 739 F. Supp. 906, 911-12 (S.D.N.Y. 1990) (recognizing split and following Zipf).
It is unnecessary to attempt to resolve the split in this case because even the cases not requiring exhaustion for "statutory violation" claims do not support the plaintiff's argument that he should be allowed to admit new evidence to challenge the Plan's compliance with Alternative IID.
First, the courts not requiring exhaustion generally reached their decision because "there [was] only a statute to interpret/'Amaro, 724 F.2d at 751-52, or because the plaintiff was raising "purely legal claims." See Harrow v. Prudential Ins. Co. of Am., 76 F. Supp.2d 558, 565 (D.N.J. 1999) (explaining that Court of Appeals for the Third Circuit in Zipf did not require exhaustion in § 510 case because "statutory rights involved purely legal claims such as discrimination, which plan fiduciaries have no expertise in interpreting, and the courts are uniquely designed to handle"). In Costantino v. TRW, Inc., 13 F.3d 969 (6th Cir. 1994), a case relied on by the plaintiff, the Court of Appeals emphasized that the challenge was to "the constitutionality of the retroactive provision of the [Tax Reform Act]" and therefore an administrative hearing would be "pointless" because it could not provide a remedy. Costantino, 13 F.3d at 975.
In contrast, as the plaintiff admitted in argument on this motion, the plaintiff's challenge to the Plan's reliance on Alternative IID requires two Plan-specific factual determinations. The Court first would have to determine whether the $1.7 million distribution of benefits to Bergreen in 1993 exceeded the amount permitted under the second condition of Alternative IID. See I.R.S. Notice 88-131, 1988 WL 561201. The Court then would have to examine the extent to which the Plan's decision to adopt a $48,000 cap for accrued benefits was consistent with Alternative IID as a means to comply with the requirements of the Tax Reform Act of 1986. While these questions ultimately go to the Plan's regulatory compliance, they do not involve a "purely legal claim" nor are they strictly a matter of statutory interpretation, and both issues could have been addressed by the Plan Administrative Committee if raised during the appeal process. See Harrow, 76 F. Supp.2d at 565 (determining that, under "rationale behind Zipf," exhaustion was required in breach of fiduciary claim because, although claim involved legal issues, it was "premised on the fiduciaries' responsibilities under the Plan" and thus was "a topic on which the Plan fiduciaries ha[d] expertise").
The plaintiff specifically alleges that the $1.7 million distribution to Bergreen violates the second condition Alternative IID, which provides:
A plan participant who is a highly-compensated employee . . . may not receive a distribution after January 31, 1989 of a benefit that exceeds the benefit that the participant had accrued as of the last day of the 1988 plan year until such time as the benefit accrued for that participant under the plan as amended for the TRA'86 exceeds that participant's 411(d)(6) protected benefits as of the last day of the 1988 plan year.
I.R.S. Notice 88-131, 1988 WL 561201.
Second, the cases not requiring exhaustion for "statutory violations" generally distinguish between discrimination claims arising under ERISA § 510 and claims for benefits arising under § 503. See Zipf, 799 F.2d at 892-93, Amaro, 724 F.2d at 751-52. In Zipf, for example, the Court of Appeals for the Third Circuit held that exhaustion is not required for claims arising under § 510 because plan fiduciaries have no expertise in interpreting such "substantive rights." Zipf, 799 F.2d at 892-93. However, "[w]hen a plan participant claims that he or she has unjustly been denied benefits, it is appropriate to require participants first to address their complaints to the fiduciaries to whom Congress, in Section 503, assigned the primary responsibility for evaluating claims for benefits."Id. at 892.
The plaintiff in this case has included a claim alleging wrongful termination under ERISA § 510. There is no question that the plaintiff is entitled to trial on that claim. But the plaintiff's challenge to Alternative IID arises in a claim for a recalculation of benefits under ERISA § 503. Regardless of whether regulatory conditions are involved, calculating accrued benefits and deciding on a formula to comply with the Tax Reform Act are the kinds of issues clearly within the expertise of plan fiduciaries. See Harrow, 76 F. Supp.2d at 565; see also Diaz, 50 F.3d at 1483 (rejecting argument that attaching "`statutory violation' sticker" to claim justifies the failure to satisfy internal plan procedures). Requiring plaintiffs to raise such challenges during the administrative process serves several of the main purposes behind ERISA's exhaustion requirement: reducing the number of frivolous claims, enabling plan fiduciaries to manage their funds expertly and efficiently, allowing fiduciaries to correct their own errors, and encouraging fiduciaries to build a factual record to assist courts in reviewing plan decisions. See, e.g.,Costantino, 13 F.3d at 975 (listing purposes of ERISA's exhaustion requirement).
Even the cases excusing exhaustion for "statutory violations" do not support the plaintiff's failure to raise his factual challenges to the applicability of Alternative IID, which is part of his claim under § 503 that he is entitled to more benefits than he received. That challenge, if entertained, would require the Court to make factual determinations that are not in the administrative record. The plaintiff had an opportunity to challenge the Plan's compliance with Alternative IID during the administrative process. Had he done so, the; defendants would have had an opportunity to respond and develop the administrative record with respect to Bergreen's 1993 distribution and the necessity of the $48,000 cap. The plaintiff simply failed to raise those issues, which is why the record is incomplete. The exhaustion cases on which the plaintiff relies do not, therefore, excuse his failure to raise these issues in the administrative process.
Conclusion
For the reasons explained above, the motion in limine is granted. The plaintiff is precluded from introducing at trial evidence that the Plan failed to comply with or violated the requirements of Alternative IID.