:: Reformation Remedy Held Viable Against ERISA Plan

An Arizona district court refused to dismiss claims for reformaion of an insurance policy in Carbajal v. Dorn, 2009 U.S. Dist. LEXIS 32688 (D. Ariz. Apr. 14, 2009). The opinion provides an interesting perspective on viable claims under ERISA outside the context of a simple claim for benefits.

The dispute arose over life insurance policies issued by Liberty under the terms of an employee benefit plan operated by the plaintiffs’ employer. The policies insured the lives of Plaintiffs Michael and Mary Carbajal (the “Liberty policies”). Claims of wrongdoing were leveled by the plaintiffs at the insurance agents as follows:

David Dorn and the Dorn Agency were Plaintiffs’ agents for purchase of the life insurance policies. Plaintiffs allege that the Dorn defendants conspired with Danny Carbajal (Michael’s brother and Mary’s son) to fraudulently change the ownership of and beneficiary designations on the Liberty policies. Id. Plaintiffs filed suit in Arizona state court on January 9, 2009, alleging breach of fiduciary duty and negligence against the Dorn defendants, and seeking judicial reformation of the Liberty policies to reflect Michael and Mary Carbajal as owners of the policies with their choice of beneficiaries. Id. PP 43-56.

Removal Of The Case

Liberty removed the case  alleging federal question jurisdiction under the Employee Retirement Income Security Act of 1974 (ERISA). Liberty simultaneously moved to dismiss Plaintiffs’ claims against it, arguing that it was not a proper defendant.

Plaintiffs’ Claim for Reformation Under ERISA

Liberty argued that Plaintiffs’ claims arose under 29 U.S.C. § 1132(a)(1)(B), which permits an ERISA plan participant or beneficiary to bring a civil action “to recover benefits due” under the terms of a plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan. This would end the case since actions brought under § 1132(a)(1)(B) “may be enforced ‘only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity.’”

 (The defendant cited Everhart v. Allmerica Fin. Life Ins. Co., 275 F.3d 751, 753 (9th Cir. 2001) and Ford v. MCI Commc’ns Corp. Health and Welfare Plan, 399 F.3d 1076, 1081 (9th Cir. 2005) (noting that under section 1132(a)(1)(B), a claimant “may not sue the plan’s insurer for additional ERISA plan benefits”  for this proposition.) 

On the other hand, liability under § 1132(a)(3) is not limited to the plan itself or its fiduciary.

Thus, the plaintiffs countered that they were not seeking damages from Liberty, but only equitable reformation of the insurance policies. If ERISA preemption applied to their claims, the plaintiffs argued that preemption would convert their equitable state claims to claims pursuant to 29 U.S.C. § 1132(a)(3), not claims arising under 1132(a)(1)(B).

The court framed the issue this way:

The question, then, is whether Plaintiffs’ claim for reformation of the policies falls within section 1132(a)(1)(B) or 1132(a)(3). The Court finds both Everhart and Ford distinguishable. In both those cases, plaintiff beneficiaries brought suit under section 1132(a)(1)(B) seeking recovery of benefits under their ERISA plans. See Everhart, 275 F.3d at 753; Ford, 399 F.3d at 1078. 2 That is not the case here. Reformation is a remedy that “can only be characterized as arising under 29 U.S.C. § 1132(a)(3).” Ross v. Rail Car America Group Disability Income Plan, 285 F.3d 735, 740-41 (8th Cir. 2002) (stating that Plaintiff’s request to reform his employer disability plan was not one for benefits under section 1132(a)(1)).

The court held of the plaintiff’s on this critical issue, stating that “Plaintiffs’ claims against Liberty seek equitable relief within the scope of section 1132(a)(3).”

Section 1132(a)(3) Claims Against Non-Fiduciaries

As a fallback position, citing the Ford decision, Liberty argued that, assuming Plaintiffs’ claims are for equitable relief under § 1132(a)(3), “the defendant must be an ERISA fiduciary” to establish a claim for relief. This argument was rejected for several reasons:

#1 Ford’s statement that section 1132(a)(3) relief may only be had against an ERISA fiduciary is in direct conflict with the Ninth Circuit’s opinion in Everhart, which held that “[l]iability under § 1132(a)(3) is not limited to the plan itself or its fiduciary.” Everhart, 275 F.3d at 753 (citing Harris Trust, 530 U.S. at 247). Until an en banc panel reverses course, this Court must follow the Ninth Circuit’s earlier decision in Everhart. See Miller v. Gammie, 335 F.3d 889, 899 (9th Cir. 2003) (holding that neither a district court nor a three-judge panel may overrule a prior decision of the court unless it has been “undercut by higher authority to such an extent that it has been effectively overruled”).

#2 Ford also relies for the quoted proposition on Mathews v. Chevron Corp., 362 F.3d 1172 (9th Cir. 2004), which in turn relies on the United States Supreme Court’s 1996 decision in Varity Corp. v. Howe in stating that “[t]o establish an action for equitable relief under ERISA section . . . 1132(a)(3), the defendant must be an ERISA fiduciary acting in its fiduciary capacity [internal citation omitted], and must ‘violate [] ERISA-imposed fiduciary obligations.’” Mathews, 362 F.3d at 1178 (citing Varity Corp., 516 U.S. at 498, 506). This Court does not believe Varity Corp. can fairly be read to stand for the proposition that equitable relief may only be had against ERISA fiduciaries.

# 3 Even if Mathews contains a fair reading of Varity Corp., the Supreme Court’s subsequent decision in Harris Trust made clear that status as a fiduciary is not required for claims under section 1132(a)(3). See Harris Trust, 530 U.S. at 241 (finding that section 1132(a)(3) “admits of no limit . . . on the universe of possible defendants”). This Court is persuaded that Everhart correctly followed current Supreme Court precedent in finding that section 1132(a)(3) does not limit the reach of equitable remedies to the plan or its fiduciary.

Note: The “catch all” civil remedies provision, 29 U.S.C. 1132(a)(3), provides that a participant, beneficiary, or fiduciary of an ERISA plan may bring a civil action “(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” 29 U.S.C. § 1132(a)(3). It has often been noted in past commentary that the choice of remedies is ever so critical in ERISA cases. In this case, the plaintiffs began in state court, so the complete preemption of their claims actually worked to their advantage in allowing some flexibility in argument as to how their state law claims should be recharacterized. An interesting outcome thus developed from what one might had anticipated to be a mundane preemption case