Depenbrock v. Cigna Corp

• Court: Court of Appeals for the Third Circuit
• Decided: November 10, 2004
• Docket: 03-3575
• Status: Published

Opinion

Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit

11-10-2004

Depenbrock v. Cigna Corp Precedential or Non-Precedential: Precedential

Docket No. 03-3575

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Recommended Citation "Depenbrock v. Cigna Corp" (2004). 2004 Decisions. Paper 109. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/109

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IN THE UNITED STATES COURT OF APPEALS Joseph J. Costello, Esq. (Argued) FOR THE THIRD CIRCUIT Tamsin J. Newman ____________ Morgan, Lewis & Bockius 1701 Market Street No. 03-3575 Philadelphia, PA 19103 ____________ Counsel for Appellee JOHN DEPENBROCK, ____________

Appellant OPINION OF THE COURT ____________ v. ROSENN, Circuit Judge. CIGNA CORP.; CIGNA PENSION PLAN This case is a by-product of ____________ corporate America’s recent effort to curb costs by, inter alia, scaling back the Appeal from the United States District benefits provided under pension plans. Court John Depenbrock (“Depenbrock”) claims the Eastern District of Pennsylvania that his employer, CIGNA Corporation D.C. No.: 01-cv-06161 (“CIGNA”), violated the Employee District Judge: Honorable Robert F. Retireme nt I nc ome Se c ur it y A ct Kelly (“ERISA”), 29 U.S.C. § 1001, et seq., by ____________ denying him benefits without the required notice and lawful amendment to the Argued: September 21, 2004 pension plan. Depenbrock also alleges that CIGNA violated ERISA by failing to Before: McKEE, ROSENN and WEIS, provide him an opportunity to review Circuit Judges pertinent documents relating to his denial- of-benefits claim, and by breaching the (Filed: November 10, 2004) fiduciary duty owed as plan administrator. The District Court granted Stephen R. Bruce, Esq. (Argued) CIGNA’s motion for summary judgment 805 15th Street, N.W. and denied Depenbrock’s cross motions. Washington, DC 20005-2271 We reverse the summary judgment in favor of CIGNA and remand with William M. O'Connell, III, Esq. directions to enter summary judgment for Barbin, Lauffer & O'Connell Depenbrock. 608 Huntingdon Pike I. Rockledge, PA 19046 In 1983, Depenbrock began working at CIGNA. At that time, CIGNA benefits.3 In addition, the proposed plan provided its employees with a generous amendment included a “Rehire Rule” traditional pension plan.1 On November 4, which stated that long-term employees 1997, presumably to cut costs, CIGNA who left CIGNA and were re-employed proposed amendments to its plan that were after December 31, 1997, would not to become effective January 1, 1998. participate in the Old Plan upon return but According to the amendments, younger, instead would be transferred immediately short-term employees w ere to be into the New Plan. For reasons unknown, transferred to a more modest “cash CIGNA did not formally adopt the balance” pension formula (“the New amendment and “Rehire Rule” until Plan”), 2 while long-term employees – December 21, 1998, when CIGNA’s CEO such a s D epenbrock – would executed a written adoption in accordance “grandfather” in under the traditional plan with the amendment procedure set forth in (“the Old Plan”) and receive higher the plan. On January 2, 1998, Depenbrock resigned from CIGNA to work for another 1 company. However, Depenbrock was A traditional pension plan is a defined rehired at CIGNA on November 30, 1998. benefit plan that “pays an annuity based Depenbrock claims that the pension rule in on the retiree’s earnings history, usually effect when he was rehired provided that the most recent or highest paid years, and he immediately resume participation under the number of completed years of service the Old Plan. Depenbrock bases this to the company.” Campbell v. assertion on the fact that the proposed BankBoston, N.A., 327 F.3d 1, 4 (1st amendment to CIGNA’s plan had not yet Cir. 2003). The CIGNA pension plan been formally adopted when he was was determined by factoring in the rehired on November 30, 1998. Because retiree’s credited years of service, 2% of the formal adoption date came twenty-two his 36-month average compensation at days after Depenbrock returned to work, the time of retirement, minus a Social Depenbrock asserts that the amendment Security offset. does not apply to him. To hold otherwise, 2 Depenbrock argues, would amount to an “Cash balance” plans “guarantee an impermissible retroactive reduction of his employee a certain contribution level, usually an annual percentage of salary, plus a fixed percentage of interest.” Campbell, 327 F.3d at 4. CIGNA’s 3 “cash balance” plan offered employees CIGNA refers to the Old Plan as an account balance to which was credited “Part A” and the New Plan as “Part B.” an amount based on eligible earnings and We employ the terms “Old” and “New” credited years of service, as well as an in order to orient the plans annual declared interest rate. chronologically.

2 rights.4 District Court denied Depenbrock’s CIGNA counters that although the motion to compel without offering any amendment was not formally adopted until explanation for its finding. The District December 21, 1998, the announcement of Court held oral argument on cross motions the proposed changes on November 4, for summary judgment and on July 31, 1997, coupled with the CEO’s conduct 2003, issued an opinion and order granting subsequent to the announcement, served to s u m m a r y j u d g m e n t to C IG N A . implement and retroactively ratify the Depenbrock timely appealed. amendment as of November 4, 1997. As II. such, CIGNA asserts that the effective This case having arisen under date of the amendment was January 1, ERISA, the District Court had subject 1998 – the effective date specified in the matter jurisdiction pursuant to 28 U.S.C. § internal announcement of the amendment. 1331 and 29 U.S.C. § 1132. This Court Because Depenbrock resigned from has appellate jurisdiction pursuant to 28 CIGNA on January 2, 1998, one day after U.S.C. § 1291 over the final judgment of the specified effective date of the “Rehire the District Court. Berger v. Edgewater Rule,” CIGNA contends the “Rehire Rule” Steel Co., 911 F.2d 911, 916 (3d Cir. lawfully applies. 1990). Depenbrock filed suit against We review de novo the District CIGNA in the Eastern District of Court’s order granting CIGNA’s motion Pennsylvania on December 11, 2001, for for summary judgment. Bixler v. Cent. Pa. wrongful denial of ERISA benefits, Teamsters Health & Welfare Fund, 12 disclosure violations, and breach of F.3d 1292, 1297 (3d Cir. 1993). Motions fiduciary duty. During discovery, for summary judgment must be granted if Depenbrock moved to compel the there is no genuine issue as to any material production of fifty-two documents that fact and the moving party is entitled to CIGNA claimed were protected by the judgment as a matter of law. Fed. R. Civ. attorney-client privilege and/or “work P. 56(c); Ryan by Capria-Ryan v. Fed. product” doctrine. The District Court Express Corp., 78 F.3d 123, 125 (3d Cir. invited CIGNA to submit an ex parte 1996). memorandum in support of its claims. Depenbrock initially raised five After conducting an in camera review, the issues on appeal: 1) whether the “Rehire Rule” was effective January 1, 1998; 2) whether the plan amendment adopted 4 December 21, 1998, can be given One of CIGNA’s actuaries estimated retroactive effect; 3) whether CIGNA that transferring Depenbrock from the complied with ERISA’s notice and Old Plan to the New Plan will result in disclosure requirements; 4) whether his losing $800,000 in benefits, assuming Depenbrock’s failure-to-produce claim he continued to work for CIGNA until against CIGNA fails as a matter of law; age 55.

3 and 5) whether the “fiduciary exception” amendments must be conducted according to the attorney-client privilege compels to formal procedures. 29 U.S.C. § 1102.5 CIGNA to produce fifty-two ostensibly “[W]hatever level of specificity a company privileged documents. Disposition of the ultimately chooses, in an amendment first two issues renders discussion of the procedure or elsewhere, it is bound to that remaining issues unnecessary. We level.” Curtiss-Wright, 514 U.S. at 85. therefore turn to the effective date of the Thus, an amendment is ineffective if it is amendment and analyze whether the incon sis te nt with the gov ernin g amendment may be applied retroactively. instruments. Delgasso v. Sprang & Co., A. Effective Date of the Amendment 769 F.2d 928, 935-36 (3d Cir. 1985); see Before turning to the merits, we Confer, 952 F.2d at 43 (“Only a formal first set forth some background on ERISA. wr itte n am e ndme nt, e xec ute d in “Erisa does not create any substantive accordance with the Plan’s own procedure entitlement to employer-provided . . . for amendment, could change the Plan.”). welfare benefits. Employers or other plan sponsors are generally free under ERISA, As a threshold matter, Depenbrock for any reason at any time, to adopt, modify, or terminate welfare plans.” Curtiss-Wright Corp. v. Schoonejongen, 5 The pertinent provisions of 29 U.S.C. 514 U.S. 73, 78 (1995); see Bellas v. CBS, § 1102 provide: 221 F.3d 517, 522 (3d Cir. 2000) (“ERISA (a) Named fiduciaries neither mandates the creation of pension (1) Every employee benefit plans nor in general dictates the benefits a plan shall be established plan must afford once created.”). and maintained pursuant to However, “ERISA requires that all a written instrument. . . . employee benefit plans be ‘established and *** main tained pursuant to a written (b) Requisite features of instrument,’ 29 U.S.C. § 1102(a)(1) . . . .” plan: Every employee Ryan by Capria-Ryan, 78 F.3d at 126. benefit plan shall-- Thus, “[t]his section precludes oral or *** informal amendments to employee benefit (3) provide a procedure for plans.” Confer v. Custom Eng’g, 952 F.2d amending such plan, and for 41, 43 (3d Cir. 1991) (citing Hozier v. identifying the persons who Midwest Fasteners, Inc., 908 F.2d 1155, have authority to amend the 1163 (3d Cir. 1990)). Although the plan, and Supreme Court has established a de (4) specify the basis on minimus standard for compliance with which payments are made to ERISA, see Curtiss-Wright, 514 U.S. 73, and from the plan. the plan must identify the person who has the authority to amend the plan, and

4 claims that CIGNA’s CEO lacked Rule.” Section 16.1 of the CIGNA plan authority to amend the plan. Alternatively, specified three methods for amendment: Depenbrock contends that even if the CEO 1) a resolution of the Board of Directors; was authorized to amend the plan, he 2) a resolution of the People’s Resources failed to comply with CIGNA’s own Committee of the Board of Directors written amendment procedures so that the (“PRC”); or 3) a written instrument amendment was not effective until approved and executed by one or more December 21, 1998, the date when duly authorized officers of CIGNA. On CIGNA finally executed revised formal July 23, 1997, the PRC adopted a plan documents in accordance with the resolution authorizing the CEO to: amendment procedure set forth in the plan. adopt amendments to the Because the amendment’s effective date CIGNA Pension Plan . . . to came twenty-two days after Depenbrock be effective January 1, 1998 was rehired, Depenbrock contends the (or a later date if deemed adverse amendment does not apply to him. appropriate by the CEO), as necessary or appropriate to . CIGNA counters that its CEO was . . [c]hange the Plan’s duly authorized to amend the plan and he current “final average pay” did so pursuant to the doctrine of benefit accrual formula to a ratification. According to CIGNA, “cash balance” formula for although the plan amendment was not all eligible participants formally adopted until December 21, 1998, under the Plan except those the CEO’s approval on November 4, 1997, who (1) are currently of a summary of the proposed “cash accruing benefits under the balance” pension formula and “Rehire form ula in effect o n Rule,” coupled with his subsequent December 31, 1988, and (2) conduct, effected a retroactive ratification whose combined age plus of the plan amendment to be effective years of credited service . . . January 1, 1998. Accordingly, CIGNA is 45 or more as of claims that the “Rehire Rule” was December 31, effective as of the date specified for the 1997 . . . . amendment – January 1, 1998 – and applied to Depenbrock because he This resolution gave the CEO plenary resigned on January 2, 1998, one day after authority to amend the plan from a “final the alleged effective date of the rule. average pay” to a “cash balance” formula. We first address the CEO’s The exception provided for long-term authority to amend. As a threshold employees does not insulate them from the determination, we agree with the District CEO’s decision-making authority so much Court that the CEO was authorized to as clarify that long-term employees are not amend the plan and adopt the “Rehire subject to the plan changes. Accordingly,

5 we conclude that the CEO had authority to weeks after Depenbrock had been rehired. adopt the “Rehire Rule” amendment. Thus, December 21, 1998, is the effective However, the CEO did not exercise date of the amendment. However, this his authority to amend the plan until does not resolve the issue, for we must December 21, 1998, the date the written consider whether the doctrine of amendment was executed and formally r a t i f i c a t i o n , u rg e d b y C I G N A , adopted. ERISA specifies that a valid retroactively rendered the amendment and amendment can only be made in the “Rehire Rule” effective as of January 1, manner specified in the plan document. 1998. Cu rtiss-W right, 514 U.S. at 85. B. Retroactive Ratification Regardless of the method specified for The doctrine of ratification provides amendment, however, an indispensable that an improperly authorized amendment requirement under ERISA for effective may be ratified ex post by subsequent acts. plan amendment is that the amendment be See Curtiss-Wright, 514 U.S. at 85. in writing. See Hozier, 908 F.2d at 1163 M oreover, a validly accomplished (citing Nachwalter v. Christie, 805 F.2d ratification ordinarily must be given 956. 960 (11th Cir.1986) (“ERISA retroactive effect, rendering the ratified precludes oral modifications of employee action valid as of the original decision benefit plans.”)); Pizlo v. Bethlehem Steel date. Schoonejongen v. Curtiss-Wright, Corp., 884 F.2d 116, 120 (4th Cir.1989) Nos. 92-5695 & 92-5710, slip op. at 3 (3d (stating that “informal” or “unauthorized” Cir. Aug. 30, 1995). However, ratification modification of pension plans is is prohibited where the amendment “impermissible” under ERISA); Degan v. retroactively reduces the intervening rights Ford Motor Co., 869 F.2d 889, 895 (5th of third parties, such as plan participants. Cir.1989) (“ERISA mandates that [a] plan See Curtiss-Wright v. Schoonejongen, 143 itself and any changes made to it [are] to F.3d 120, 124-25 (3d Cir. 1998) (on be in writing.”); Musto v. Am. Gen. Corp., remand) (rejecting ex post ratifications that 861 F.2d 897, 910 (6th Cir.1988) (“[A] defeat intervening rights); Confer, 952 written employee benefit plan may not be F.2d at 43 (holding that an amendment modified or superceded b y oral limiting eligibility can operate only undertakings on the part of the prospectively); 2A W illiam Fletcher, employer.”), cert. denied, 490 U.S. 1020 Fletcher Cyclopedia of the Law of Private (1989); Moore v. Metro. Life Ins. Co., 856 Corporations § 782, at 647-48 (perm. ed. F.2d 488, 492 (2d Cir.1988) (“[A]n ERISA rev. vol. 1992) (“Ratification cannot relate welfare plan is not subject to amendment back so as to defeat intervening rights of as a result of informal communications strangers to the transaction.”). between the employer and pla n In the instant case, the District beneficiaries.”). The CEO did not sign a Court concluded that the December 21, written instrument amending the plan until 1998, date of formal adoption is not fatal December 21, 1998, more than three to the adoption of the amendment to the

6 “Rehire Rule” as of January 1, 1998. ineffective. According to the District Court, the CEO CIGNA argues nonetheless that the “manifested his intent” to amend the amendment did not reduce Depenbrock’s “Rehire Rule,” effective January 1, 1998, then-accrued benefits under the plan by his approval of a summary of the because Depenbrock worked for only a proposed amendment on November 4, short period in 1998 before the amendment 1997. Furthermore, the CEO’s actions became effective on December 21, 1998. subsequent to his approval ostensibly Because Depenbrock worked only a “constituted a ratificatio n of the fraction of the year, CIGNA contends he amendment both express and implied.” did not amass the 1,000 work hours The District Court cites as proof the needed to accrue a year of service credit following subsequent conduct: the CEO’s under the Old Plan. Because Depenbrock failure to voice opposition to the “Rehire allegedly accrued no service credit under Rule” described in the “Signature Benefits the Old Plan, retroactive application of the Retirement Kit” distributed to participants “cash balance” formula to his service in December, 1997; the CEO’s failure to following his rehire did not reduce any object to the “Rehire Rule” described in accrued benefit. As such, CIGNA claims the Summary Plan Description that was there is nothing unlawful in subjecting generated for the New Plan in October, Depenbrock to the “Rehire Rule.” 1998; and the CEO’s express execution of Even if we were somehow to the formal amendment to the plan on conclude that excluding Depenbrock from December 21, 1998. the Old Plan was not a retroactive Unfortunately for CIGNA, the reduction of benefits, CIGNA’s argument District Court’s reliance on the doctrine of fails because it wrongly assumes that ratification is misplaced because CIGNA could transfer Depenbrock out of ratification would effect a retroactive the Old Plan and into the New Plan reduction of Depenbrock’s accrued without effectuating another formal plan benefits under the Old Plan. Given that amendment. CIGNA contends that even if the amendment was not formally adopted the amended plan were not properly until December 21, 1998, Depenbrock adopted until December 21, 1998, CIGNA acquired rights in the interval before could leave Depenbrock in the Old Plan affirmance – namely, the right to receive for twenty-two days, and then transfer him benefits under the Old Plan – and retained to the New Plan on December 21, 1998, his right to accrued benefits, instead of the effective date of the amendment. having to settle for the more modest However, CIGNA overlooks that it would benefits provided under the New Plan. have no authority upon which to transfer Because ratification of the amendment as Depenbrock without effectuating another of November 4, 1997, would unlawfully formal plan amendment, which it did not deprive Depenbrock of intervening do. substantial bene fits, ratification is Moreover, CIGNA’s assertion that

7 t h e ame ndm ent did n ot re duce a dollar amount of benefits. According to Depenbrock’s accrued benefits is premised this interpretation, retroactive amendments on an unsubstantiated interpretation of to a plan are permissible so long as the ERISA’s “Anti-cutback” rule, 29 U.S.C. § dollar amount of accrued benefits is not 1054(g).6 The “Anti-cutback” rule reduced. CIGNA claims – which prohibits a plan amendm ent from Depenbrock disputes – that transferring decreasing a participant's “accrued Depenbrock to the New Plan does not benefits.” Id.; see, e.g., Cent. Laborers’ reduce his dollar amount of benefits Pension Fund v. Heinz, 214 S. Ct. 2230, because the benefits he earned under the 2237 (2004); Bellas, 221 F.3d at 522 (“[A] Old Plan were converted into an opening plan amendment that retroactively reduced account balance in the New Plan. 7 benefits promised to plaintiffs for almost Regardless of the merits of seven years was precisely the sort of Depenbrock’s challenge to CIGNA’s inequity Congress designed ERISA to assertion, CIGNA’s argument fails prevent.”). ERISA defines “accrued because it is predicated upon a proposed benefit” as an individual's right to a treasury regulation that is not yet the law. retirement benefit “determined under the See Prop. Treas. Reg. § 1.411(d)-3(a)(4), plan . . . expressed in the form of an annual Example 2, 69 Fed. Reg. 13769 (M ar. 24, benefit commencing at normal retirement 2004) (proposing to reinterpret the “Anti- age.” 29 U.S.C. § 1002(23); see Berger, cutback” rule so as to limit the protection 911 F.2d at 917. CIGNA construes of accrued benefits to purely a dollar “accrued benefit” narrowly to mean purely amount). Although the Treasury Department retains interpretive jurisdiction over the “Anti-cutback” rule, see 43 Fed. 6 Reg. 47713 (Oct. 17, 1978), “a proposed 29 U.S.C. § 1054(g) provides in regulation does not represent an agency's relevant part: considered interpretation of its statute . . . (1) The accrued benefit of a participant .” Commodity Futures Trading Comm’n under a plan may not be decreased by an amendment of the plan . . . . (2) For purposes of paragraph (1), 7 a plan amendment which has the effect Depenbrock maintains that CIGNA of-- credits the initial “cash balance” (A) eliminating or reducing an early accounts of rehired employees like him retirement benefit or a retirement-type with less than the full value of their subsidy (as defined in regulations), or previously earned annuities. As a result, (B) eliminating an optional form of he claims employees start with lower benefit, with respect to benefits benefits for purposes of the “cash attributable to service before the balance” formula than they had before amendment shall be treated as reducing and it takes years for rehired employees accrued benefits. . . . to catch-up with where they began.

8 v. Schor, 478 U.S. 833, 845 (1986); see, prohibit plan amendments that “directly or e.g., Ca. Rural Legal Assistance, Inc. v. indirectly” affect accrued benefits. “Plan Legal Servs. Corp., 917 F.2d 1171, 1173 provisions indirectly affecting accrued n.5 (9th Cir. 1990) (“We decline to take benefits include, for example, provisions cognizance of the proposed regulation relating to years of service and breaks in however, because ‘a proposed regulation service for determining benefit accrual . . does not represent an agency's considered . .” Id. Because CIGNA’s amendment interpretation of its statute . . . .’”) (quoting adopts the “Rehire Rule” that “directly or Schor, 478 U.S. at 845). indirectly” affects the calculation of Until the proposed treasury benefits, the amendment as applied to regulation becomes law, the current Depenbrock is prohibited. regulations govern.8 The current Even if Depenbrock had been regulations, 26 C.F.R. § 1.411(d)-3(b), 9 notified of the proposed “Rehire Rule” by the “Signature Retirement Benefits Kit” – 8 as CIGNA urges – such notice was We note that as of June 28, 2004, the insufficient to have implemented the proposed treasury regulation redefining amendment because ERISA provides that “Protected Benefits” – Section 411(d)(6) amendments to a plan may only occur if (BIN 1545-BC26) – has progressed to made in writing. See supra Part II.A. The the “Final Rule Stage.” See 69 Fed. Reg. written amendment, as previously stated, 37976. However, it is still not the law. was not executed until December 21, 9 1998. Thus, December 21, 1998, is the 26 C.F.R. § 1.411(d)-3(b) provides in effective date of the amendment. relevant part: Under section 411(d)(6) a plan is Depenbrock’s participation in the not a qualified plan (and a trust forming a part of such plan is not a qualified trust) if a plan amendment decreases the accrued benefit of adoption and effective dates shall any plan participant, unless the plan be treated as one plan amendment. a m e nd m en t satisfies th e Plan provisions indirectly affecting requirements of section 412(c)(8) accrued benefits include, for (relating to certain retroactive example, provisions relating to amendments) and the regulations years of service and breaks in thereunder. For purposes of service for determining benefit determining whether or not any accrual, and to actuarial factors for participant's accrued benefit is determining optional or early decreased, all the provisions of a retirement benefits. plan affecting directly or indirectly the computation of accrued benefits which are amended with the same

9 Old P l a n should h av e re su m ed immediately upon his return to work on November 30, 1998. And his participation should have continued until either his employment ended or the terms of participation in the Old Plan were altered by a prospective amendment executed in accordance with CIGNA’s specified procedures. Having determined that the amendment adversely affects Depenbrock, we do not reach the question of CIGNA’s compliance with ERISA’s notice and disclosure requirements, the validity of Depenbrock’s failure-to-produce claim against CIGNA, or the correctness of the District Court’s finding of attorney-client privilege. IV. Accordingly, for the reasons set forth above, the summary judgment in favor of CIGNA Corporation will be reversed and the case remanded to the District Court with direction to enter summary judgment in favor of John Depenbrock. Costs taxed against CIGNA.