Estate of Kensinger v. URL Pharma, Inc.

• Citation: 52 Employee Benefits Cas. 2514,674 F.3d 131
• Decision Date: 20 March 2012
• Docket Number: No. 10–4525.,10–4525.
• Parties: ESTATE OF William E. KENSINGER, Jr., Appellant, v. URL PHARMA, INC.; Adele Kensinger.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

52 Employee Benefits Cas. 2514

674 F.3d 131

ESTATE OF William E. KENSINGER, Jr., Appellant,

v.URL PHARMA, INC.; Adele Kensinger.

No. 10–4525.

United States Court of Appeals, Third Circuit.

Argued: Dec. 8, 2011.Opinion Filed: March 20, 2012.

Lori M. McNeely, Esq. (Argued), McNeely McGuigan & Briody, Moorestown, NJ, for Appellant.

Michael S. Rothmel, Esq. (Argued), Mount Holly, NJ, Daniel J. Bitonti, Esq., Cozen O'Connor, Cherry Hill, NJ, for Appellees.

Before: HARDIMAN, BARRY, Circuit Judges and RUFE,^* District Judge.

OPINION OF THE COURT

BARRY, Circuit Judge.

This is a dispute over the disposition of proceeds from a decedent's ERISA-governed 401(k) plan. The decedent, William Kensinger (“William”) was married to Adele Kensinger (“Adele”) until their divorce in 2008. As part of their divorce decree, Adele waived her right to the proceeds of William's 401(k) plan. William, however, neglected to replace Adele as the designated beneficiary of his 401(k) plan prior to his death a few months after the divorce. His estate (“the Estate”) and Adele both claimed a right to the plan proceeds, leading to this litigation. In light of a recent Supreme Court case, there is no dispute that, notwithstanding Adele's waiver, the plan administrator is obligated to pay the 401(k) proceeds to her in accordance with the plan documents. The question before us, which is one of first impression in this circuit, is this: after the plan administrator distributes the funds to Adele, can the Estate attempt to recover the funds by bringing suit directly against Adele to enforce her waiver? For the reasons that follow, we hold that the Estate can sue Adele to enforce her waiver and recover the disputed plan proceeds. The District Court, however, held to the contrary. Accordingly, although we affirm in part, we will also reverse in part.

I. Background

A. Factual Background

The material facts in this case are straightforward and undisputed. In 2000, William enrolled in an employee-sponsored deferred savings plan (“401(k) plan”) through his employer, URL Pharma, Inc. (“URL”). The 401(k) plan was governed by the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1001–1461. At the time of his enrollment, William was married to Adele, whom he designated as the plan's primary beneficiary. Their marriage did not last, however, and divorce proceedings commenced in 2008. On April 20, 2008, William and Adele entered into a Property Settlement Agreement (“PSA”), which, in relevant part, provided:

[T]he parties mutually agree to waive, release, and relinquish any and all right, title and interest either may have in and to the other's IRA account(s), or any other such retirement benefit and deferred savings plan of like kind and character, and neither shall make any claim to possession of such property as it is presently titled.

The divorce was then finalized in New Jersey state court, with a final divorce decree incorporating the PSA entered on July 10, 2008.

Nine months after the divorce, William died intestate without having changed the designated beneficiary of his 401(k) plan. Following his death, a dispute arose regarding distribution of the plan proceeds. Although Adele was still the named beneficiary of the 401(k) plan, the Estate argued that, given her waiver, it was entitled to the proceeds of the plan. Adele countered that ERISA, which requires that the proceeds be paid to the beneficiary named in the plan documents, trumped her common law waiver. On November 9, 2009, the Estate filed an action against Adele and URL in the Superior Court of New Jersey seeking a declaration that the Estate was entitled to the funds in the 401(k) account.¹ URL removed the matter to the District Court.

B. The Supreme Court's Decision in Kennedy

The leading case in this area is Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285, 129 S.Ct. 865, 172 L.Ed.2d 662 (2009). The facts in Kennedy are virtually identical to those in this case. In Kennedy, an employee participated in an ERISA employee pension benefit plan and designated his wife as the sole beneficiary. The couple subsequently divorced, and as part of the divorce decree the wife agreed to waive her interest in her husband's pension plan. However, the husband died without amending the pension plan documents to replace his ex-wife as the designated beneficiary. The husband's estate claimed a right to the plan proceeds, citing the ex-wife's waiver. The plan administrator, however, relied on the husband's designation form and paid the funds to the ex-wife. The husband's estate then sued the plan administrator to recover the benefits.

The district court granted summary judgment to the estate and ordered the plan administrator to pay the estate. The Fifth Circuit reversed, holding that the ex-wife's waiver was rendered void by ERISA's anti-alienation provision, which states that “benefits provided under the plan may not be assigned or alienated.” ² 29 U.S.C. § 1056(d)(1). The Supreme Court affirmed, albeit on different grounds. Contrary to the Fifth Circuit, the Court held that the ex-wife's waiver “did not constitute an assignment or alienation rendered void [by ERISA's anti-alienation provision]” and therefore was not invalidated by ERISA. Kennedy, 555 U.S. at 297, 129 S.Ct. 865 (emphasis added). Nonetheless, the Court declared that a plan administrator is “obliged to act ‘in accordance with the documents and instruments governing the plan,’ ” and that “ERISA provides no exemption from this duty when it comes time to pay benefits.” Id. at 300, 129 S.Ct. 865 (quoting 29 U.S.C. § 1104(a)(1)(D)). Thus, although the ex-wife had waived her right to the pension, the Court concluded that the plan administrator “did its statutory ERISA duty by paying the benefits to [the ex-wife] in conformity with the plan documents.” Id. at 299–300, 129 S.Ct. 865. In adopting this so-called “plan documents rule,” the Court emphasized the desirability of a “straightforward rule of hewing to the directives of the plan documents.” Id. at 300, 129 S.Ct. 865.

Significantly, although the Supreme Court held that a plan administrator must distribute benefits in accordance with plan documents, it noted the open question of whether another avenue of recovery might be available to the estate. In a footnote, the Court made clear that its holding did not address the question of whether the estate could have sued the ex-wife to recover the benefits after she received them from the plan administrator. Id. at 299 n. 10, 129 S.Ct. 865 (“Nor do we express any view as to whether the Estate could have brought an action in state or federal court against [the ex-wife] to obtain the benefits after they were distributed.”). In light of this footnote, lower courts interpreting Kennedy have observed that “the Supreme Court may have closed one door to litigation against plan administrators but it may well have opened another to litigation between family or former family members.” Staelens v. Staelens, 677 F.Supp.2d 499, 507 (D.Mass.2010).

C. The District Court's Decision

Adele moved for summary judgment on the ground that she was entitled to the 401(k) proceeds as the named beneficiary. The Estate opposed the motion and cross-moved for summary judgment, arguing that the PSA was a valid contractual waiver and that the proceeds, therefore, belonged to the Estate. Properly relying on Kennedy, the District Court had little trouble concluding that, despite Adele's waiver, ERISA required URL to distribute the 401(k) funds to her, as the named beneficiary, in accordance with the plan documents. This conclusion is not challenged on appeal.

The District Court then turned to the question left open in Kennedy: whether, once the plan proceeds are distributed to Adele, the Estate may pursue a claim directly against her to enforce her waiver and recover the benefits. ³ Concluding that allowing the Estate to sue Adele would undermine one of ERISA's “principal objectives”—namely, that “named beneficiaries actually receive the benefits of ERISA-governed plans”—the District Court held that “the Estate may not assert a claim against [Adele] regarding the 401(k) proceeds.” (App. at 7–8.) This appeal followed.

II. Jurisdiction and Standard of Review

The 401(k) plan at issue in this dispute is an “employee welfare benefit plan” within the meaning of ERISA, 29 U.S.C. § 1002(1). As such, the District Court had jurisdiction pursuant to 28 U.S.C. § 1331. We have jurisdiction pursuant to 28 U.S.C. § 1291, and exercise plenary review over this appeal from the grant of summary judgment. McGowan v. NJR Serv. Corp., 423 F.3d 241, 244 (3d Cir.2005), abrogated on other grounds, Kennedy, 555 U.S. at 291 n. 4, 129 S.Ct. 865.

III. Discussion

Enacted in 1974, ERISA remains a comprehensive and complex scheme for regulating employee benefits plans. “The statute, however, does not address many of the issues which arise in the normal course of the administration of such plans.” Teamsters Pension Trust Fund v. Littlejohn, 155 F.3d 206, 208 (3d Cir.1998). In such cases, “it is well settled that Congress intended that the federal courts would fill in the gaps by developing, in light of reason, experience, and common sense, a federal common law of rights and obligations imposed by the statute.” Einhorn v. M.L. Ruberton Constr. Co., 632 F.3d 89, 96–97 (3d Cir.2011) (citation and internal quotations omitted). Relevant to this case, ERISA does not address whether a waiver of benefits can be enforced through a direct suit against a named beneficiary once the benefits have been paid to that beneficiary. We, therefore, look to federal common law in answering that question and, as stated above, answer it in the affirmative.

A. ERISA's Policy Rationale

Kennedy produced what appears to be a somewhat odd result given that the Supreme Court held that a plan administrator must adhere to the plan documents and distribute plan proceeds to the named beneficiary...