Durand v. Hanover Ins. Group, Inc.

Decision Date18 March 2009
Docket NumberNo. 07-6468.,07-6468.
PartiesJennifer A. DURAND, on behalf of herself and all others similarly situated, Plaintiff-Appellant, v. The HANOVER INSURANCE GROUP, INC. and The Allmerica Financial Cash Balance Pension Plan, Defendants-Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

ARGUED: Eli Gottesdiener, Gottesdiener Law Firm, Brooklyn, New York, for Appellant. Alan S. Gilbert, Sonnenschein, Nath & Rosenthal, Chicago, Illinois, for Appellees. ON BRIEF: Eli Gottesdiener, Gottesdiener Law Firm, Brooklyn, New York, E. Douglas Richards, E. Douglas Richards, Lexington, Kentucky, for Appellant. Alan S. Gilbert, Sonnenschein, Nath & Rosenthal, Chicago, Illinois, Richard H.C. Clay, Angela Logan Edwards, Lisa H. Thomas, Woodward, Hobson & Fulton, Louisville, Kentucky, for Appellees.

Before NORRIS, ROGERS, and KETHLEDGE, Circuit Judges.

OPINION

KETHLEDGE, Circuit Judge.

Plaintiff Jennifer A. Durand appeals the district court's dismissal of her complaint filed under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (ERISA). The district court held that Durand had failed to exhaust her administrative remedies. We conclude that exhaustion of those remedies would have been futile, and reverse.

I.
A.

Durand's complaint challenges the legality of Defendants' methodology for calculating lump-sum distributions pursuant to their defined-benefit pension plan. "Under a defined benefit plan, an employee's benefit is an amount, either in the form of an annuity or a lump-sum payment, equal to a specified percentage of the employee's salary in the final years of his or her employment." West v. AK Steel Corp., 484 F.3d 395, 399 (6th Cir.2007).

The plan at issue here—the Allmerica Financial Cash Balance Pension Plan (the "Allmerica Plan" or "Plan")—belongs to a subset of defined-benefit plans, known as "cash-balance" plans. See ERISA § 3(35), 29 U.S.C. § 1002(35). A "cash-balance plan creates an account for each participant," but "the account is hypothetical and created only for recordkeeping purposes." AK Steel, 484 F.3d at 399. "The hypothetical account on paper looks much like a traditional 401(k) account." Id. Each participant's account is funded by hypothetical allocations, called "pay credits," and hypothetical earnings, called "interest credits," that "are determined under a formula selected by the employer and set forth in the plan." I.R.S. Notice 96-8, 1996-1 C.B. 359.

This case is about interest credits. Interest credits "may be fixed or variable[.]" AK Steel, 484 F.3d at 399. Of importance here, "[e]ven if the employee ceases working for the plan sponsor, interest credits continue to accrue to the employee's hypothetical account until he or she begins receiving pension benefits. When an employee reaches the normal retirement age of 65, the pension benefit is the value of this hypothetical account balance." Id. That value is known as the normal "accrued benefit." ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A).

An employee who leaves the plan sponsor "can usually choose whether the benefit is distributed in the form of a single-life annuity[,]" pursuant to which payments begin when the departing employee reaches retirement age, or a "lump-sum" distribution, made at the time of the employee's departure. AK Steel, 484 F.3d at 399. A departing employee cannot be penalized for choosing the lump-sum distribution; thus, "[t]o comply with ERISA, lump-sum payments such as the one[] received by the plaintiff[] in the present case must be the actuarial equivalent of the normal accrued pension benefit." Id. at 400 (emphasis added).

For distributions made prior to 2006, determining this actuarial equivalent required a two-step "whipsaw" calculation.1 First, the participant's account balance was projected forward to its value at the participant's normal retirement age, "using the rate at which future interest credits would have accrued" had the participant remained in the plan. Id. (emphasis added). Second, "that projected amount [was] discounted back to its present value on the date of the actual lump-sum distribution." Id.

Critically for our purposes here, the projection forward must have "`include[d] a fair estimate'" of what the participant's future interest credits actually would have been had she retained a single-life annuity under the plan. Id. at 408 (quoting Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 761 (7th Cir.2003)) (emphasis added). The "fair estimate" is critical because, if the participant's future interest rate exceeds the discount rate, the participant's lump-sum distribution will be greater than her hypothetical account balance at the time of the distribution. AK Steel, 484 F.3d at 401.

B.

That "fair estimate" is precisely what Durand contends the Plan's methodology did not include. Under the Plan, participants selected investment options from a 401(k)-style menu. The market rate of return on the options selected determined the participant's interest credits; and those credits thus varied among participants.

But the Plan did not attempt to make individualized estimates of departing participants' future interest credits. Instead, the Plan used a uniform projection rate— the 30-Year Treasury Bill rate—in performing every such participant's whipsaw calculation. The Plan then used that same rate to discount the projected balances back to their present values. The result in every case was a wash: as in AK Steel, "the lump-sum payout would always equal the participant's hypothetical account balance at the time of distribution." Id. at 406.

This aspect of the Plan did not pass unnoticed. In March 2002, the Department of Labor examined the lump-sum calculation methodologies of several cash-balance plans, and specifically concluded that, given the variable nature of interest credits under the Allmerica Plan, the Plan's use of a uniform projection rate violated ERISA. See Complaint ¶¶ 21-22. In response, the Plan issued a press release stating that "[w]e are very confident that we have been calculating benefits in accordance with the terms of the plan and in accordance with applicable laws and regulations[.]" See id. Ex. 4. Meanwhile, during the years 2000-03, three circuit courts—the Second, Seventh, and Eleventh—held that a departing participant's future interest credits must be included in determining the amount of any lump-sum distribution for the participant. See AK Steel, 484 F.3d at 406-08 (discussing cases). No circuit court has ever held the contrary. At no time relevant to Durand's claim, however, did the Plan or its administrators depart from the Plan's stated methodology for calculating lump-sum distributions.

C.

Jennifer Durand worked for the First Allmerica Financial Life Insurance Company (the "Company"), a subsidiary of Defendant The Hanover Insurance Group, Inc. ("Hanover"), from October 1995 to April 2003. When Durand left the Company at age 32, she elected to take her pension benefit in the form of a lump-sum distribution. Her hypothetical account balance on the date of her distribution was $17,038.18. Pursuant to the Plan's terms, its administrators projected her balance forward using the 30-Year Treasury Bill rate, and then discounted the projected amount back to its present value using that same rate. The calculation was thus a wash; and, in August 2003, the Allmerica Plan paid Durand $17,038.18.

On March 9, 2007, Durand filed a putative class-action complaint against Hanover and the Allmerica Plan, alleging that the Plan's methodology for calculating lump-sum distributions violated ERISA. Defendants moved to dismiss on exhaustion grounds, arguing that Durand should have first presented her claim to the Plan's administrators. The district court agreed, and granted the motion.

This appeal followed.

II.

We review the district court's application of the administrative-exhaustion requirement in an ERISA case for abuse of discretion. Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410, 418 (6th Cir.1998). However, "a court is obliged to exercise its discretion to excuse nonexhaustion where resorting to the plan's administrative procedure would simply be futile or the remedy inadequate." Id. at 419.

We routinely enforce the exhaustion requirement when an ERISA plaintiff contends that his benefits were improperly calculated under the terms of a plan. See, e.g., Weiner v. Klais and Co., Inc., 108 F.3d 86, 90-91 (6th Cir.1997). ERISA plans are often complicated things, and the question whether a plan's methodology was properly applied in a particular case is usually one best left to the plan administrator in the first instance. Administrators, not courts, are the experts in plan administration.

But the same is not true of an across-the-board challenge to the legality of a plan's methodology. In those cases, the claimant typically concedes that her benefit was properly calculated under the terms of the plan as written, but argues that the plan itself is illegal in some respect. See, e.g., AK Steel, 484 F.3d at 404-05. And that question—legality—is one within the expertise of the courts. Sending such a claimant back to the administrative process, to recalculate a benefit she concedes was already properly calculated under the terms of the plan as written, misses the point of the dispute. In that situation, exhaustion wastes resources rather than conserves them. Consequently, we have held that, in an ERISA case, when the plaintiff's "suit [i]s directed to the legality of [a plan], not to a mere interpretation of it[,]" exhaustion of the plan's administrative remedies would be futile. Costantino v. TRW, Inc., 13 F.3d 969, 975 (6th Cir.1994) (emphasis in original).

This case is governed by that simple rule. Durand has no quarrel with Allmerica's calculation of her lump-sum distribution under the terms of the Plan as written; instead, her claim is that the Plan's methodology for calculating such...

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