In Frommert v. Conkright, the US Court of Appeals for the Second Circuit affirmed the equitable remedy awarded to retirement plan participants by the US District Court for the Western District of New York for violations of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, the Second Circuit upheld the district court's decisions to fashion the equitable remedy of reformation (which calculated benefits as if the plaintiffs were newly hired) and to award the plaintiffs prejudgment interest at the federal prime rate.
In Frommert v. Conkright, the US Court of Appeals for the Second Circuit affirmed the equitable remedy awarded to retirement plan participants by the US District Court for the Western District of New York for violations of the Employee Retirement Income Security Act of 1974 (ERISA) (Nos. 17-114-cv(L), 17-738-cv(CON), (2d Cir. Jan. 14, 2019)). Specifically, the Second Circuit upheld the district court's decisions to:
Apply the equitable remedy of reforming the plan, calculating benefits as if the plaintiffs were newly hired.
Award the plaintiffs prejudgment interest at the federal prime rate.
Background
The plaintiffs in Frommert are Xerox employees who were previously employed by the company and participated in the Xerox Retirement Income Guarantee Plan (Plan), left the company in the 1980's, and received lump-sum distributions of their accrued retirement benefits when they left. They were subsequently rehired by Xerox and reentered the Plan (the Plan's structure is discussed in detail in Legal Update, Second Circuit: Plan Is Liable for Unreasonable Interpretation and Not Properly Informing Participants of Rights).
The underlying issue in the Frommert cases is how the plaintiffs' prior lump-sum distribution affects the determination of their benefits under the Plan when they reentered the Plan. In the first round of litigation, the plaintiffs brought suit under ERISA against the Plan and individually named plan administrators, claiming that they were entitled to greater benefits than the administrators had granted them. The district court granted summary judgment in favor of the administrator but the Second Circuit vacated that decision, holding that the plan administrator's method of accounting for distributions of prior benefits, and its calculation of benefits, violated the plaintiffs' rights under ERISA (Frommert I).
On remand, the district court calculated the plaintiffs' benefits using a different method, which was affirmed by the Second Circuit (Frommert II). However, the US Supreme Court reversed and remanded, stating that the Second Circuit erred in holding that the district court could refuse to defer to the plan administrator's interpretation of the Plan on remand simply because the Second Circuit found the plan administrator's previous related interpretation to be invalid, and that the court must defer to the plan administrator's interpretation (Conkright v. Frommert, 559 U.S. 506 (2010)).
The Second Circuit then remanded the case to the district court to determine the appropriate offset, applying Firestone deference. The district court applied Firestone deference and held that the plan administrator's interpretation of the Plan (specifically, its proposed offset approach) was reasonable. On appeal, the Second Circuit vacated the district court's decision, holding that the administrator's proposed offset was an unreasonable interpretation of the Plan and a violation of ERISA's notice provisions (Frommert III) (see Legal Update, Second Circuit: Plan Is Liable for Unreasonable Interpretation and Not Properly Informing Participants of Rights).
On remand, the district court applied an equitable remedy, resolving the plaintiffs' claims by reforming the Plan. The court decided to recalculate the plaintiffs' retirement benefits, treating the plaintiffs upon their re-employment with Xerox as if they had been newly hired, with no offset that reduced the plaintiffs' benefits to account for any previous benefit distributions or any credit for earlier years of service with Xerox (the new hire remedy). The district court chose the new hire remedy because:
At different stages of the litigation the Plaintiffs had agreed that the new hire remedy was appropriate.
The new hire remedy properly accounts for the time value of money.
The Second Circuit stated in Frommert III that rehired employees should not end up with lower benefits than similarly situated, newly hired employees.
The new hire remedy "strikes a balance" between penalizing the plaintiffs by subtracting the value of their prior distributions without proper notice and overpaying the plaintiffs by allowing double benefits for the same period of service.
In a later decision and order, the district court selected the federal prime rate of 3.5 percent as the rate of prejudgment interest to apply to the award. The district court rejected the plaintiff's proposed rate (the New York statutory rate of 9 percent) as too high and the plan administrator's proposed rate (the federal post-judgment rate of 0.66 percent) as too low. It held that the federal prime rate is balanced and fairly compensates the plaintiffs.
The plaintiffs appealed the district court's decisions to the Second Circuit.
Outcome
On appeal, the Second Circuit affirmed the district court's equitable remedy and the interest rate award.
Equitable Remedy
The plaintiffs argued that the district court should have chosen a calculation of benefits that was more favorable to them than the new hire approach. The Second Circuit rejected this argument because the district court's selection of the new hire remedy was a permissible equitable remedy under an abuse of discretion standard, which is the standard of review applied to equitable remedies awarded by a district court under ERISA.
The Second Circuit explained that each equitable remedy for calculating plaintiffs' benefits has proven to be imperfect, and earlier decisions preclude the use of several equitable remedies, such as the expected value, unadjusted value, and no-offset methods. Although the new hire remedy method used by the district court is flawed, it has several advantages over other approaches. For example, it accounts for the time value of money, which is lacking in certain other methods. Furthermore, the Second Circuit in its last decision in this case stated that the plaintiffs are entitled to at least the new hire remedy, and the new hire approach better balances the interests of the plan administrator and the plaintiffs. Therefore, the district court did not abuse its discretion is using the new hire remedy. As a result:
The Second Circuit did not have to address whether relief would have been proper under the alternative theories of equitable remedy suggested by the plaintiffs (surcharge and estoppel).
The Second Circuit affirmed the district court's award of prejudgment interest at the federal prime rate because the district court:
Had broad discretion to grant prejudgment interest and to select an interest rate.
Carefully considered all the relevant factors in determining whether prejudgment interest was warranted, and, if so, what the rate should be.
Thoroughly explained its reasoning for using the federal prime rate.
Practical Implications
This is the fourth decision that the Second Circuit has rendered in this case. Retirement plan administrators and counsel in the Second Circuit should be aware of this decision because it shows how the Second Circuit analyzed a district court's equitable remedy and prejudgment interest award following the Supreme Court's decision in Conkright. To learn more about the significance of Supreme Court's decision in Conkright v. Frommert, see: