Durand v. Hanover Ins. Grp., Inc.

• Decision Date: 14 October 2016
• Docket Number: CIVIL ACTION NO. 3:07–CV–00130–HBB
• Citation: 244 F.Supp.3d 594
• Parties: Jennifer A. DURAND, On behalf of herself and on Behalf of all others similarly situated, Plaintiffs v. The HANOVER INSURANCE GROUP, INC., and The Allmerica Financial Cash Balance Pension Plan, Defendants.
• Court: U.S. District Court — Western District of Kentucky

244 F.Supp.3d 594

Jennifer A. DURAND, On behalf of herself and on Behalf of all others similarly situated, Plaintiffs

v.The HANOVER INSURANCE GROUP, INC., and The Allmerica Financial Cash Balance Pension Plan, Defendants.

CIVIL ACTION NO. 3:07–CV–00130–HBB

United States District Court, W.D. Kentucky, Louisville Division.

Signed October 14, 2016

Filed October 17, 2016

Albert Huang, Eli Gottesdiener, Steven D. Cohen, Gottesdiener Law Firm, PLLC, Brooklyn, NY, E. Douglas Richards, E. Douglas Richards, PSC, Lexington, KY, for Plaintiffs.

Alan S. Gilbert, Christopher Q. King, Jeffery S. Davis, Dentons US LLP, Chicago, IL, Angela Logan Edwards, Lisa D. Hughes, Richard H.C. Clay, Dinsmore & Shohl LLP, Louisville, KY, Stephen J. O'Brien, Dentons US LLP, St. Louis, MO, for Defendants.

MEMORANDUM, OPINION, AND ORDER

H. Brent Brennenstuhl, United States Magistrate Judge

BACKGROUND

Before the Court is a motion to compel production of allegedly privileged documents and submission of more complete privilege logs filed by Plaintiffs (DN 168, 170; DN 169 Sealed Document). Defendants, the Hanover Insurance Group, Inc. and the Allmerica Financial Cash Balance Pension Plan (collectively "Defendants"), have filed a memorandum in opposition (DN 173). Plaintiffs have filed a reply memorandum in support of her motion (DN 175).

Pursuant to orders (DN 182, 202), Defendants have submitted directly to the undersigned the documents at issue for in camera review (DN 185, 189, 203). Additionally, Defendants have filed a notice indicating withdrawal of a privilege claim regarding a specific document submitted for in camera review (DN 204). This matter is ripe for determination.

FINDINGS OF FACT

Plaintiffs in this ERISA class action lawsuit are former employees of Defendant Hanover Insurance Group, Inc. ("Hanover"), and participants in its pension plan, The Allmerica Financial Cash Balance Pension Plan (the "Plan"), which is also named as a Defendant (DN 1, 46). Durand v. Hanover Ins. Group, Inc. , No. 3:07-CV-130-JDM, 2013 WL 6633961, at *1 (W.D. Ky. Dec. 17, 2013). Hanover has provided the Plan for its employees since 1995. Durand v. Hanover Ins. Group, Inc. , 806 F.3d 367, 371 (6th Cir. 2015) (citations omitted) (" Durand II ").

The Plan belongs to a subset of defined-benefit pension plans, known as "cash-balance" plans. Durand v. Hanover Ins. Group, Inc. , 560 F.3d 436, 437 (6th Cir. 2009) (citing ERISA § 3(35), 29 U.S.C. § 1002(35) ) (" Durand I "). A cash-balance plan creates for bookkeeping purposes a hypothetical account for each participant. Id. (citing West v. AK Steel Corp. , 484 F.3d 395, 399 (6th Cir. 2007) ). On paper, these hypothetical accounts look 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.’ " Durand I , 560 F.3d at 437 (quoting I.R.S. Notice 96–8, 1996–1 C.B. 359).

"Interest credits, which are at issue in this case, are the earnings attributable to the account balance over time." Durand II , 806 F.3d at 371 (citing AK Steel , 484 F.3d at 399 ). "The formula for calculating interest credits may provide for a fixed rate of return on the account balances, or it may use a variable rate tied to an identified index". Id.

The Sixth Circuit recently provided the following explanation of how interest credits were calculated in the Plan:

From 1995 until early 1997, the Plan provided a fixed rate of return of six percent. Then, from 1997 until the 2004 Amendment, the Plan allowed members to select hypothetical investment options from a "broadly diversified menu" described in Plan documents, including "an Allmerica stock fund and a wide variety of domestic and international equity funds, corporate and United States government bond funds, and a fixed interest fund and money market fund." (R. 46, Amended Complaint, PageID 623.) Each member's interest credits were calculated based on the actual performance of the investment options he or she had selected. As mentioned above, the 2004 Amendment eliminated the menu of investment options and provided that all interest credits would be indexed to the 30–year Treasury bond rate.

Durand II , 806 F.3d at 371.

Under a cash-balance plan, "the pay credits cease at the time of employment separation; however, separated employees continue to earn interest credits, which accrue to the hypothetical account until the normal retirement age of 65." Durand v. Hanover Ins. Group, Inc. , No. 3:07–CV–130–JDM, 2011 WL1302227, at *1 (W. D Ky. Mar. 31, 2011). "The pension benefit is, therefore, the value of the hypothetical account balance at normal retirement age and is known as the participant's ‘accrued benefit.’ " Id. (citing Durand I , 560 F.3d at 437–38 ; ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A) ).

Under the Plan, employees who left their employment with Hanover could choose either to continue participation in the Plan, in which case they would receive an annuity based on their accrued benefits once they reach the retirement age of 65, or they could cash out their benefits and receive a lump sum. Durand II , 806 F.3d at 371 (citation omitted). As the Sixth Circuit explained in Durand I :

A departing employee cannot be penalized for choosing the lumpsum distribution; thus, "[t]o comply with ERISA, lump-sum payments such as the one [ ] received by [Durand] in the present case must be the actuarial equivalent of the normal accrued pension benefit.

560 F.3d at 438 (citing AK Steel , 484 F.3d at 400 ) (emphasis in original).

Prior to 2006¹ , cash-balance plans were required to use a two-step "whipsaw" calculation to determine the proper amount of the lump-sum distribution. Durand I , 560 F.3d at 438 (citing AK Steel , 484 F.3d at 400 ). The first-step was to project the participant's account balance forward to its value at the participant's normal retirement age of 65, " ‘using the rate at which future interest credits would have accrued ’ had the participant remained in the plan." Id. (quoting AK Steel , 484 F.3d at 400 (emphasis added). Thus, the first-step provided an estimation of the value of the participant's accrued benefit at age 65. Durand II , 806 F.3d at 371. The second step involved discounting the projected amount back to its present value on the date of the actual lump-sum distribution. Durand I , 560 F.3d at 438 (citing AK Steel , 484 F.3d at 400 ).

The Sixth Circuit has indicated the projection forward must include a "fair estimate of what the participant's future interest credits actually would have been had [the participant] retained a single-life annuity under the plan. Id. (internal quotations and case citations omitted). "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 [the participant's] hypothetical account balance at the time of the distribution." Id. (citing AK Steel , 484 F.3d at 401 ).

1. Audit by the Inspector General

In September 2000, the Department of Labor's ("DOL") Office of Inspector General ("OIG") commenced an audit of the DOL's Pension and Welfare Benefits Administration ("PWBA"), which administers Title I of ERISA (DN 1–3 p. 9; DN 169–14 p. 2). The purpose of the audit was to evaluate the adequacy of the PWBA's "oversight policy regarding defined benefit plans that have converted from traditional final average pay models to a cash balance model" (DN 169–14 p. 2).

In a letter dated May 31, 2001, the OIG advised the Plan's sponsor, First Allmerica Financial Life Insurance Company ("Allmerica"), that the Plan had been "judgementally [sic] selected" as part of the audit, and that the OIG would be visiting Allmerica's offices to "examine conversion implementations to verify that participants' accrued benefits were accurately calculated and conversion procedures complied with ERISA and plan documents" (DN 169–14 p. 2). The OIG requested documentation from Allmerica, including sample participant files demonstrating calculations of lump-sum distributions (DN 169–14 p. 2). Allmerica responded to the OIG's requests in July 2001 (DN 169–16).

Following Allmerica's compliance with the OIG's requests, the OIG sent a letter dated October 26, 2001, to Ms. Megan McCabe with Allmerica's Office of General Counsel (DN 169–3 p. 2–7). The letter explained that the attached NOTICE OF POSSIBLE REFERRAL presented the results of the OIG's review of materials related to the Plan (DN 169–3 p. 2–7). The letter asked Allmerica to review the OIG's conclusion/calculations and provide a response indicating its concurrence or non-concurrence, and any comments it wished the OIG to consider (DN 169–3 p. 2–7). Notably, the letter included the following paragraph:

We wish to emphasize that the Office of Inspector General does not make official determinations regarding ERISA benefit plans and the attached NOTICE OF POSSIBLE REFERRAL does not represent an official position of the Department of Labor. However, the results of our review will be referred to management officials. Additional actions may be initiated as a result of that referral.

(DN 169–3 p. 2).

The introductory paragraph to the NOTICE OF POSSIBLE REFERRAL reads as follows:

The Office of Inspector General conclusion in this notice does not represent an official position of the Department of Labor, and no action is required as a result of this notice. Within the Department, official ERISA determinations are made solely by the Pension and Welfare Benefits Administration. However, the Office of Inspector General may refer this situation, including any comments you may provide, to the Pension and Welfare Benefits Administration for its determination.

(DN 169–3 p. 4) (emphasis in original). Immediately below, the document states as follows:

CONCLUSION: Based on our analysis of the material submitted to us, we beleve [sic] two

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