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On June 20, 2018, the Sixth Circuit Court of Appeals, in Pearce v. Chrysler, reversed a lower court decision in favor of the plan sponsor (Chrysler) on the issue of whether a participant may bring an equitable claim for plan reformation based on a conflict between the terms of a summary plan description (SPD) and the terms of a plan. The court remanded the case to the lower court for further consideration of the plaintiff’s reformation claim, providing a set of “guideposts” for the consideration of these sorts of claims.
Plan reformation claims generally are based on a conflict between the terms of a retirement plan, on the one hand, and employee communications about the plan (e.g., the SPD), on the other. If a reformation claim is successful, a court will typically order a change in the terms of the plan, at least as they apply to the plaintiff(s). Such a remedy can – especially where a large class of plaintiffs is involved – be very expensive (Pearce v. Chrysler only involved one plaintiff).
In this article we review the Sixth Circuit’s decision.
In October 2008, “Chrysler offered certain employees buyouts with incentives to take early retirement. … At the time of the buyout offer, [plaintiff] was sixty years old and had worked for Chrysler for more than thirty-three years.” As a result, plaintiff was “eligible for the buyout offer as well as the Plan’s 30-and-Out benefits, which were a monthly pension supplement ‘designed to help early retirees make ends meet until eligible for Social Security benefits.’”
Plaintiff “was directed multiple times to the SPD for further explanation of his benefits.” The SPD stated: “You do not need to be actively employed at retirement to be eligible for a [30-and-Out] supplement.” And on the basis of that statement plaintiff “believed that he could not lose his 30-and-Out benefits if he lost his job.”
The plan, however, provided that “an employee who was terminated was ineligible for the early retirement supplement.” And the SPD included language stating that “[i]f there is a conflict between this summary and the Plan document and trust agreement, the Plan document and trust agreement will govern.”
In November 2008, “after discussing the terms of the SPD and his likely future with other employees of Chrysler,” plaintiff rejected the buyout offer. He was terminated the same day. He then applied for his retirement benefit under the plan, including the 30-and-Out supplement, and was told by Chrysler’s benefits manager that, “because he had been terminated prior to his retirement,” he was ineligible for the 30-and-Out benefit.
After his administrative appeal of the decision denying his claim for a 30-and-Out benefit was denied, the plaintiff brought a claim for benefits under ERISA. That complaint was ultimately amended to include a claim for equitable relief in the form of plan reformation under ERISA section 502(a)(3) (which authorizes a participant lawsuit “to obtain other appropriate equitable relief (i) to redress [ERISA] violations or (ii) to enforce any provisions of [ERISA] or the terms of the plan”).
The lower court granted summary judgment on the reformation issue for Chrysler, based on its holding that to succeed with such a claim the plaintiff “needed to prove Chrysler’s intent to deceive in order to demonstrate either fraud or inequitable conduct.” (Emphasis added.)
On appeal, the Sixth Circuit Court of Appeals held that “a contract may be reformed in two situations: (1) where there is a ‘mutual mistake of both parties’; or (2) ‘where one party is mistaken and the other commits fraud or engages in inequitable conduct.’” It rejected the lower court’s analysis based on the absence of intentional fraud on Chrysler’s part, finding that “Fraud has a broader meaning in equity [than at law] and intention to defraud or to misrepresent is not a necessary element.”
It remanded the case to the district court, providing the following “guideposts” for the district court’s consideration of the plaintiff’s reformation claim:
“First, whether a defendant had a ‘legal or equitable duty, trust, or confidence’ is an important factor, although not dispositive.” This was clearly a factor in this case, given Chrysler’s legal duty to adequately describe the terms of a plan in the SPD.
“Second, the defendant must have obtained ‘an undue and unconscientious advantage’ or the plaintiff must have suffered an injury or both.” In this regard, the appellate court instructed the lower court, on remand, to consider the plaintiff’s injury and any benefit Chrysler derived from the denial of his claim.
“Third, … [w]e have typically found constructive fraud in the ERISA context when there is: (1) an information asymmetry …; (2) the defendant misrepresents the benefits to which the plaintiff is entitled; and (3) the plaintiff investigated her benefits and drew a reasonable conclusion about them on the basis of the defendant’s misrepresentations, even when the documents the plaintiff relied upon contained a disclaimer that the plan would govern in the event of a conflict.”
Because plans are written in technical legal language, and summary plan descriptions are required by ERISA to be “written in a manner calculated to be understood by the average plan participant,” there is always a risk that the two documents may conflict. Thus, care should be taken that the SPD conforms to the terms of the plan. And the SPD should include language stating that in the case of conflicts between the plan and the SPD, the plan language governs.
Where there is a conflict, especially where (as in Pearce v. Chrysler) the participant relied on the language in the SPD for a critical decision, courts are likely to have some sympathy for the participant’s claim.
Risk is highest where a large number of participants are affected by a decision for which the terms of the plan (and the SPD) are critical.
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We will continue to follow this issue.