When the U.S. Court of Appeals for the Second Circuit initially determined, in Sullivan v. LTV Aerospace and Defense Co., that jury trials were not available to plan participants and beneficiaries in Employee Retirement Income Security Act (ERISA) benefit litigations, it specifically based its rationale upon its “sister circuits” opinions that the trust-like nature of ERISA made all benefit claims equitable, rather than legal, in nature.
In the less than 10 years since Sullivan was handed down, the foundation for the court’s decision in Sullivan has crumbled. Thus, the Second Circuit appears poised to finally return disappointed plan beneficiaries the jury trial rights it divested from them by mistaken statutory interpretation.
The catalyst for the Second Circuit’s perspicuous retreat from its previous holdings that all ERISA benefit actions are, without exception, equitable in nature was the Supreme Court’s explication of the distinction between law and equity in Great-West Life & Annuity Insurance Company v. Knudson.2Great-West reconfigured the legal landscape of equity.3 There, the Court held that a ERISA plan fiduciary could not enforce the reimbursement provision of its contract to recover health plan payments it made to Knudson. The Court concluded that because the particular funds sought by Great-West were not in the defendant’s possession, Great-West could not seek equitable restitution. In reaching its conclusion, the Court held that Great-West’s action sounded in law because: 1) it sought money due and owing under a contract; and 2) the funds it sought were not specifically identifiable. Because Great-West, a plan fiduciary, was limited to the equitable remedies provided in §502(a)(3) of ERISA, the Court held, it was foreclosed from seeking legal remedies.
Second Circuit and ‘Knudson’
The Second Circuit’s recent decisions are in lockstep with the Supreme Court’s rulings in Knudson. Indeed, its recent decisions demonstrate that it no longer considers actions for money due and owing under an ERISA governed insurance contract governed to sound in equity. Accordingly, while the Second Circuit previously held that jury trials are not available in employee benefit actions, because the trust-like nature of ERISA’s remedial scheme renders such claims equitable, subsequent decisions by this circuit lead to the inescapable conclusion that this is no longer controlling law, and that suits for money due and owing under a contract of insurance are now considered legal, not equitable, in nature, entitling litigants to a trial by jury.
Set forth below is an analysis of Great-West and its Second Circuit progeny supporting the authors’ thesis.
A. The Great-West Road Map to Jury Trials in ERISA Benefit Actions. In Great-West, the Supreme Court analyzed whether an ERISA-governed health plan was entitled to recoup payments made to a beneficiary by a third party under the health plan’s reimbursement provision. In that case, the defendant, Janet Knudson, was a beneficiary of a health plan administered by Great-West. The plan contained a subrogation clause conditioning payment of benefits upon the plan receiving, from each beneficiary, a lien on any recovery from a third party. Immediately upon settling her underlying personal injury case, Ms. Knudson’s attorney placed the third-party proceeds into a Special Needs Trust. Thereafter, Great-West sought injunctive and other equitable relief, to enforce restitution of the plan’s expenses under the plan’s subrogation clause.
The Court engaged in the following analysis to find that Great-West was not entitled to seek monies due and owing under the insurance contract. First, the Court held that because Great-West was a plan fiduciary, it was limited to equitable remedies under ERISA’s civil enforcement provision.
[I]n the very same section of ERISA as §502(a)(3), Congress authorized ‘a participant or beneficiary’ to bring a civil action ‘to enforce his rights under the terms of the plan’, without reference to whether the relief sought is legal or equitable. 29 USC §1132(a)(1)(B)(1994 ed.). But Congress did not extend the same authorization to fiduciaries. Rather, §502(a)(3), by its terms, only allows for equitable relief.
Finding that ERISA litigation plan fiduciaries are only entitled to equitable remedies, the Court next analyzed whether Great-West could recover the funds sought under any available equitable theory. First, the Court rejected the notion that Great-West sought injunctive relief holding that “[a]n injunction to compel the payment of money past due under a contract, or specific performance of a past due monetary obligation was not typically available in equity.”
Next, the Court analyzed whether Great-West could recover under a restitution theory. Here, the Court provided a specific, two-pronged test for courts to follow in assessing whether a restitution claim sounded in law or equity.4 “Whether [restitution] is legal or equitable depends on ‘the basis for the plaintiff’s claim and the nature of the underlying remedies sought.'” Thus, in analyzing whether a restitution claim sounds in equity or law, a court should “[l]ook at both the underlying basis for the plaintiff’s claim and the nature of the remedy sought.”
The Court then ruled that the basis of Great-West’s claim was legal in nature, as it sought to enforce the terms of a contract. There, the Court reasoned:
[I]n cases in which the plaintiff could not assert title or right to possession of particular property, but in which nevertheless he might be able to show just grounds for recovering money to pay for some benefit the defendant had received from him, the plaintiff had a right to restitution at law through an action derived from the common-law writ of assumpsit. In such cases, the plaintiff’s claim was considered legal because he sought to obtain a judgment imposing a merely personal liability upon the defendant to pay a sum of money. Such claims were viewed essentially as actions at law for breach of contract (whether the contract was actual or implied).
Next, the Court reasoned that the nature for Great-West’s claim was not equitable because restitution will only lie in equity “[w]here money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” Because the basis for Great-West’s claim was not that Ms. Knudson held particular funds that, in good conscience, belonged to Great-West, but that Great-West was contractually entitled to some funds for benefits it conferred upon Ms. Knudson, the Court ruled no equitable basis for Great-West’s claims existed. Thus, “n determining the propriety of a remedy, [a court] must look to the real nature of the relief sought, not its label.”5
After completing its two-pronged analysis of the both the basis and nature of Great-West’s claim, the Court held “[t]he kind of restitution that petitioners seek, therefore, is not equitable — the imposition of a constructive trust or equitable lien on the particular property — but legal — the imposition of personal liability for benefits they conferred upon respondents.” Thus, the Court held that ERISA did not afford Great-West a right of recovery, “because petitioners here are seeking legal relief — the imposition of personal liability on respondents for a contractual obligation to pay money — §502(a)(3) does not authorize this action.”
B. The Second Circuit Follows the ‘Great-West’ Road Map. The Second Circuit previously held that benefits actions arising under §502(a)(1)(B) of ERISA (29 USC §1132[a][B]), such as this one, are not proper for jury consideration because they are equitable in nature. The foundation supporting the rationale of the Court in Sullivan has, however, been mortally eroded by Great-West. Moreover, two recent and significant Second Circuit decisions have faithfully followed Great-West’s legal/equitable road map, leaving the Sullivanholding as nothing more than a remnant of abandoned doctrine.
In Pereira v. Farace, this circuit extended the Supreme Court’s reasoning in Great-West to find that the Seventh Amendment right to a jury trial attaches to causes of action previously sounding in equity, such as breach of fiduciary duty, where a plaintiff seeks to impose personal financial liability on a defendant.
In Pereira, the plaintiff brought an adversary proceeding against a corporate debtor’s former chief executive officer for breach of fiduciary duty arising out of his self-dealing. Prior to trial, the defendants demanded a jury trial on Counts IV and V of the complaint, which alleged breaches of fiduciary duty under Delaware common law and Delaware statutory law, and sought millions in monetary damages. The district court denied the defendants’ request for a jury trial, reasoning that counts IV and V, for breach of fiduciary duty, did not constitute a suit “at law.” Specifically, the district court reasoned that that actions for breach of fiduciary duty and claims for restitution thereunder were historically equitable and that the plaintiff was, in fact, seeking restitution. Thus, the district court determined that the defendants did not have a Seventh Amendment right to a jury trial.
On appeal and after an exhaustive review and discussion of Great-West and its progeny, the Second Circuit reversed the trial court, holding that it improperly characterized plaintiff’s claim for monetary damages as restitution. “Plaintiff’s claim is for compensatory damages — a legal claim.”
While the decision in Pereira turned on the second part of the two-part test enunciated in Great-West (the underlying nature of the remedy sought), this Court’s decision in Nechis v. Oxford Health Plan, Inc.,6 took a more-rounded approach and weighed both the basis of the claim and the nature of the remedy sought.
The named plaintiff in Nechis brought suit under §502(a)(3) of ERISA alleging, inter alia, that defendants breached their fiduciary obligations imposed by ERISA by denying, delaying or mishandling claims for chiropractic care. On appeal, Ms. Nechis argued that the district court improperly concluded that restitution was not available to her under §502(a)(3) of ERISA.
After employing the two-part Great-West analysis, the court upheld the district court’s determination and found that Ms. Nechis’ ERISA claims for benefits were contractual in nature, and not permitted under §502(a)(3) of ERISA, which only permits equitable remedies. Specifically, the Court reasoned:
[A]lthough Nechis seeks restitution, the Supreme Court, as the district court noted here, has stated that almost invariably suits seeking to compel the defendant to pay a sum of money to the plaintiff are suits for money damages. A claim for money due and owing under a contract is quintessentially an action at law. The Supreme Court has delineated what forms of equitable restitution are available under § 502(a)(3), distinguishing permissible forms of equitable restitution such as employment of a constructive trust or of an equitable lien from forms of legal restitution. Thus, a constructive trust or equitable lien is imposed when, in the eyes of equity, a plaintiff is the true owner of funds or property, and the money or property identified as belonging in good conscience to the plaintiff [can] clearly be traced back to particular funds or property in the defendant’s possession. For the reasons aptly articulated by the district court, neither form of equitable restitution is involved here; the monies upon which Nechis seeks to impose a trust are premiums paid for health care coverage, which Oxford is under no obligation to segregate and which Nechis does not allege to be segregated in a separate account. Moreover, the language of Nechis’s request for relief involves words of contract rather than those of equity, a circumstance that undermines her claim that the district court misconstrued the nature of the relief that she has sought. Since early on, Nechis has complained that she did not receive the benefit of the bargain and has requested disgorgement of ill-gotten gains and restitution of premiums paid. And she persists in seeking money damages under a theory of unjust enrichment, alleging that ERISA’s remedies must be supplemented by the federal common law since the statute does not provide adequate relief in the present circumstances. We decline this invitation to perceive equitable clothing where the requested relief is nakedly contractual.
Thus, the Second Circuit held that claims for money due and owing under an ERISA-governed health care plan are legal in nature. Therefore, it is axiomatic that the Seventh Amendment right to a jury trial attaches to these types of actions.
The Southern District
C. The Southern District Has Followed ‘Great-West’s’ Road Map. Significantly, at least one court in this circuit did not wait for the decisions in Pereira and Nechis to abandon the holding in Sullivan.
In Bona v. Barasch,7 Chief Judge Michael B. Mukasey found that current and former employees participating in an ERISA-governed employee benefit fund had the right to a jury trial, in their action against the trustees of that fund, for damages resulting from the trustees’ mismanagement of that fund. In that case, the court found that while Great-West did not “[d]eal with the right to a jury trial per se, the Supreme Court’s explication of the distinction between law and equity,” in that decision, was relevant to its analysis of whether the plaintiffs were entitled to a jury trial on their ERISA claims.
Although the court in Bona analyzed the legal and equitable distinction in an action arising under §502(a)(2) of ERISA, not §502(a)(1)(B), this is distinction without a difference, because §502(a)(2), similar to §502(a)(1)(B), is silent as to whether actions arising thereunder may be brought in law or equity.
In reaching its conclusion that the plaintiffs in Bona were entitled to a jury trial, the court employed the two-part test set forth Chauffeurs, Teamsters and Helpers Local No. 391 v. Terry.8 The first part of theChauffeurs’ test requires a court to resolve whether the statutory action would have been one brought in law or in equity, prior to the merger of courts of law and equity. The second part of the Chauffeurs’ test requires a court to examine the remedy sought and determine whether it is legal or equitable in nature. The second part of the test is more important to the analysis. Parenthetically, it is important to note that Great-West’s two-pronged analysis of restitution is similar to the two-pronged test that the Supreme Court has used to determine the right to a jury trial in both Chauffeurs and Granfinanciera, S.A. v. Nordberg.9
Indeed, in the wake of Great-West, district courts in this circuit have held that the following ERISA actions no longer sound in equity: (1) the forced payment of life insurance proceeds10; (2) past-due benefits under a deferred compensation plan11; and (3) compensatory damages for back pay under an employee severance plan.12 It is, therefore, academic, if an ERISA benefits action is not equitable, it is legal in nature and the Seventh Amendment right to a jury trial attaches.
The Supreme Court’s decision in Great-West has undermined the foundation for the rule disallowing jury trials in ERISA benefits litigations. The Second Circuit has recognized that its previous distinctions between law and equity fail to survive Supreme Court muster and has clearly retreated from its previous holdings that actions for past-due benefits under employee welfare benefit plans are equitable in nature. Thus, the authors’ fully anticipate that the Second Circuit will make explicit that which is already implicit from Pereira and Nechisand reverse its holdings in Sullivan and DeFelice, finding that ERISA plan beneficiaries will continue to enjoy the same right to a jury trial that they should have continued to enjoy subsequent to ERISA’s enactment.13
Evan S. Schwartz, the founder of Schwartz, Conroy & Hack of Garden City, N.Y., represents policyholders in long-term disability insurance and other insurance litigation. Michail Z. Hack, an associate at Schwartz, Conroy & Hack, concentrates on disability insurance litigation and insurance class actions.
1. Sullivan v. LTV Aerospace & Defense Co., 82 F.3d 1251 (2d Cir. 1996). The Sullivan court ruled that claimants seeking benefits or relief under ERISA were not entitled to a jury trial when the arbitrary and capricious standard of review applied to the claim for benefits. The Second Circuit later relied upon Sullivan to deny ERISA claimants a jury trial in any case where a de novo review, rather than an arbitrary and capricious standard of review, applied. DeFelice v. American International Life Insurance Company of New York, 112 F.3d 61 (2d Cir. 1997). The DeFelice court reiterated the Sullivan rationale in making its determination, stating “cases involving ERISA benefits are inherently equitable in nature, not contractual, and that no right to jury trial attaches to such claims.” Id. at 64, citing, Sullivan, 82 F.3d at 1257-59.
2. Great-West Life & Annuity Insurance Company v. Knudson, 534 U.S. 204 (2002).
3. See Pereira v. Farace, 413 F.3d 330, 340 (2d Cir. 2005).
4. See Scholastic Corp. v. Najah Kassem & Casper & De Toledo LLC, 389 F.Supp.2d 402, 411(D.Conn. 2005).
5. Gerosa v. Savasta & Co. Inc., 329 F.3d 317, 321 (2d Cir.2003).
6. Nechis v. Oxford Health Plan, Inc., 421 F.3d 96 (2d. Cir. 2005).
7. Bona v. Barasch, 2003 WL 1395932 (S.D.N.Y. March 20, 2003).
8. Chauffeurs, Teamsters and Helpers Local No. 391 v. Terry, 494 U.S. 558 (1990).
9. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 42 (1989). See Scholastic Corp. v. Najah Kassem & Casper & De Toledo LLC, 389 F.Supp.2d 402, 411(D.Conn. 2005).
10. Kishter v. Principle Life Ins. Co., 186 F.Supp.2d 438, 444 (S.D.N.Y. 2002).
11. Auginello v. Coast-To-Coast Financial Corp., 2002 WL 1822926, 6 (S.D.N.Y. Aug. 7, 2002).
12. De Pace v. Matsushita Elec. Corp. of Am., 257 F.Supp.2d 543 (E.D.N.Y. 2003).
13. The U.S. Supreme Court expressly stated in Firestone Tire and Rubber Company v. Bruch 489 U.S. 101, 112 (1989) that it refused interpret ERISA to afford less protection to employees and their beneficiaries “[t]han they enjoyed before ERISA was enacted.” Firestone 489 U.S. at 114. In that same decision, the Supreme Court acknowledged that, prior to ERISA’s enactment “[a]ctions challenging an employer’s denial of benefits . . . were governed by the principles of contract law,” Firestone 489 U.S. at 112, in which a jury trial was available. Thus, certain presumably inviolate rights, like the one to a jury trial, should have been, in the authors’ opinion, preserved after the enactment of ERISA.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack