Benefits and Compensation

9th Circuit Reverses Ruling on Participant’s Claim for Surcharge

Plan participants can recover personal, rather than plan, losses under arguments of “surcharge,” the 9th U.S. Circuit Court of Appeals recently ruled, reversing an earlier opinion, which had been at odds with other federal circuits.

On Dec. 16, the circuit court handed down the new ruling in Gabriel v. Alaska Elec. Pension Fund2014 WL 7139686 (9th Cir. Dec. 16, 2014). The case addressed, among other things, whether a retiree was eligible for the surcharge remedy to recover an amount equal to retirement benefits he had been paid in error.

The U.S. Supreme Court’s 2011 ruling on equitable remedies in Cigna Corp. v. Amara was not enough to tip the balance in the retiree’s favor. In that decision, the justices ruled that equitable surcharge could be an appropriate remedy in some situations.

In June, the 9th Circuit  upheld a district court ruling in favor of an employer-sponsored pension plan that erred in paying a retiree unearned pension benefits, then terminated those benefits. The December reversal disadvantaged the participant and showed the limits to participant claims for equitable relief.

Background of the Case

Retiree-plaintiff Gregory Gabriel claimed the pension fund that covered contractors and electrical workers abused its discretion in denying him benefits after the fund found Gabriel never met its vesting requirements. The suit claims that the defendants violated their fiduciary duties under ERISA and under plan terms, making Gabriel eligible for “appropriate equitable relief.”

Gabriel was paid the unearned benefit of more than $1,200 a month for more than three years after he retired in 1997. After being informed of the plan’s termination of these benefits, he sought a court estoppel order — a bar or impediment preventing a party from asserting a claim inconsistent with a position that the party previously took —  to prevent the fund from relying on its corrected records to cancel his benefit.

The vesting errors were recognized in 1979, when it was learned Gabriel owned the company under which he was covered for part of his tenure under the plan. The removal of this period from his credited service disqualified him from the plan, which required 10 years’ service for vesting. He was told in a letter at that time that he was to be terminated from the plan for two ineligible years.

In 1980, Gabriel signed a release agreement to receive a modest refund for “improper employer contributions” made on his behalf during his period of company ownership. Gabriel later sued to recover the halted erroneous payments he had begun receiving after retirement despite notification of termination from the plan about 10 years earlier.

But the 9th Circuit rejected the claim that the defendants erred in denying Gabriel benefits on the ground that he was not vested. The appellate panel also disagreed with Gabriel’s argument that the fund waived this rationale for benefits denial by not raising it in a timely manner. The court said Gabriel failed to show that the fund’s notifications to him were faulty, and that he could not show he was ignorant of the facts of his earlier termination and ineligibility for vesting in the plan.

While one judge one judge said Gabriel might be entitled to an equitable remedy similar to surcharge, the remaining judges rejected extending surcharge to include “make whole” monetary relief to compensate Gabriel for his claimed loss.