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Cross v Bragg, 4CA 7/24/2009 decision (unpublished)


J Simmons
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Facts: Plan's actuary mistakenly changed the formula in a DB plan from a 'step formula' to a richer 'integrated formula' in 1996. Plan continued calculating and paying benefits under old 'step formula' until it discovered the problem in 2002. It then applied for EPCRS correction; the IRS granted it. So in 2003, the sponsoring ER attempted to 'revise' the documents retroactively.

Some EEs, who acknowledged they did not know of much less rely on the error until 2002, filed suit for the richer benefits.

The 4th Circuit held that the ER had not put on any evidence of the EEs' intentions at the time of the scrivener's error, and therefore mutual mistake (a contract law doctrine) would not apply. For a unilateral mistake, there had to be some fraud by the other party. The mistake was not mutual; the EEs did not make the same mistake. The mistake was unilateral by the ER, but there was no fraud by the EEs.

The 4th Circuit rejected the ER's claim that the IRS approval per EPCRS ought to allow the ER to reform the plan documents:

the IRS determination that inclusion of the Integrated Formula in the 1996 plan was a scrivener's error, thus justifying an equitable reformation of that provision. Put simply, however, the IRS determination is neither helpful nor controlling in this appeal. A primary purpose of the IRS program—and the only purpose of the IRS ruling on the 1996 plan—is to authorize an ERISA plan to amend its provisions without losing the tax exemption provided for by 26 U.S.C. § 501(a). Notably, such IRS proceedings are ex parte, predicated only on the submissions of the ERISA plan seeking relief. The IRS determination thus only resolves issues between the IRS and the ERISA plan—it is not a formal adjudication, and it does not impact on the relationship between an ERISA plan and its beneficiaries. Even though the IRS may decide whether to tax an ERISA plan, it is not entitled to alter the contractual rights of a plan beneficiary. Although we accord great deference to the IRS with respect to tax policy and regulation, the judiciary retains its dominion in ERISA civil actions.

The appeals court gave great importance to what the documents actually provided (error or not) because of the congressional intent behind ERISA that each EE "may, on examining the plan documents, determine exactly what his rights and obligations are under the plan."

So it appears that a scrivener's error correction, even if allowed by the IRS, will not save the day for an ER facing claims from EEs. An ER wanting to put the matter to rest completely might want to consider a declaratory judgment action, which would require notice to all the affected EEs. Alternatively, giving the benefits as erroneously promised will solve the matter as well (with an EPCRS filing because the greater benefits were not provided when specified under the plan).

Cross v Bragg, 4th Cir Docket ## 07-1699, 07-1755 and 08-1190, 7/24/2009.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Very interesting. <!-- /* Font Definitions */ @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Arial","sans-serif"; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-bidi-language:EN-US;} h1 {mso-style-priority:9; mso-style-unhide:no; mso-style-qformat:yes; mso-style-link:"Heading 1 Char"; mso-style-next:Normal; margin-top:12.0pt; margin-right:0in; margin-bottom:3.0pt; margin-left:0in; mso-pagination:widow-orphan; page-break-after:avoid; mso-outline-level:1; font-size:16.0pt; font-family:"Cambria","serif"; mso-ascii-font-family:Cambria; mso-ascii-theme-font:major-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:major-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:major-latin; mso-font-kerning:16.0pt; mso-bidi-language:EN-US;} span.Heading1Char {mso-style-name:"Heading 1 Char"; mso-style-priority:9; mso-style-unhide:no; mso-style-locked:yes; mso-style-link:"Heading 1"; mso-ansi-font-size:16.0pt; mso-bidi-font-size:16.0pt; font-family:"Cambria","serif"; mso-ascii-font-family:Cambria; mso-ascii-theme-font:major-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:major-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:major-latin; mso-font-kerning:16.0pt; font-weight:bold;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-size:12.0pt; mso-ansi-font-size:12.0pt; mso-bidi-font-size:12.0pt; mso-ascii-font-family:Arial; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Arial; mso-bidi-font-family:Arial; mso-bidi-language:EN-US;} .MsoPapDefault {mso-style-type:export-only; margin-bottom:10.0pt; line-height:115%;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> to you too!

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John, thank you for telling us about this decision!

It confirms a risk that many of us have explained to clients, and it's nice to have a quotable decision.

A follow-up question: Do we have any information on whether the practitioner's malpractice insurer paid (or committed to pay) the difference between the plan-promised benefits and the lower benefits that the employer says it intended?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Hi, Peter,

I did not see anything in the 37 page opinion of the 4th Circuit in Cross v Bragg about the liability of the actuary/drafter of the plan document, his malpractice carrier or the measure of damages payable. Because the actuary/drafter 'fell on his sword' and confessed his error as part of the ER's effort to get a scrivener's error "bye", I suppose that the measure of damages is all that remains to be settled there.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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I think that the court is probably wrong.

I would want to know what the Plan's SPD said during the time the documents were in error. And how many requests for actual plan document were received and plan documents provided to employees. In other words, did any employees actually rely on the wording of the plan documents or are they simply playing gotcha in hopes of getting something for nothing.

How many of the employees would even understand the difference in the language of a step rate plan and an integrated plan so that they could reasonably rely on it. It is most likely that all that was relied upon were the annual benefit statements which were done in the way intended.

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I think that the court is probably wrong.

I would want to know what the Plan's SPD said during the time the documents were in error. And how many requests for actual plan document were received and plan documents provided to employees. In other words, did any employees actually rely on the wording of the plan documents or are they simply playing gotcha in hopes of getting something for nothing.

How many of the employees would even understand the difference in the language of a step rate plan and an integrated plan so that they could reasonably rely on it. It is most likely that all that was relied upon were the annual benefit statements which were done in the way intended.

The 4th Circuit might be wrong. Regarding reliance, it said

Further, though each of the plaintiffs "acknowledged by affidavit that he had not relied ... upon the unambiguous plan documents that included the error ... nor [was he] aware of the erroneous integrated formula until the plan sponsor announed its investigation into whether an error existed in the plan documents, " Br. of Appellants 24, ignorance of a mistake is insufficient proof of a party's intent to the contrary. See Williston & Lord, [A Treatise on the Law of Contracts, (4th ed. 2003)] § 70.9 ("[A] clear mistake by one party, coupled with ignorance by the other party, is not a mutual mistake and will not be corrected."). Taken together, the defendants' assertions fail to establish a mutual mistake. Put succinctly, the defendants have produced no evidence of the plaintiffs' intent, nor have they alleged or shown that there were negotiations with respect to the benefits calculation formula through which such intent could be ascertained. Because its terms are unambiguous and there is a patent lack of evidence of mutual mistake, the district court committed no error by declining to equitably reform the 1996 plan.

The 4th Circuit analyzed under contract law without taking into account that the terms of an ERISA plan usually are not negotiated (CBA plans being the exception). Rather, an ERISA plan is typically a unilaterally formed contract, with its terms merely being disclosed to the EEs. That might be argued to another court on another day in another case as reason for not giving as much weight to the employees' intentions for purposes of contractual mistake (and allowing correction) as courts ought to give in the more typical situation where contracts are formed mutually.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Any indications whether an appeal is coming? Possible?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Without regard to the merits of this case (or any other case), it's hard to argue with the conclusion that the mere fact that IRS has granted permission to cure an operational error through a plan amendment has no effect on a participant's rights under Title I of ERISA (or under State contract law principles if the plan is not an ERISA plan).

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Any indications whether an appeal is coming? Possible?

No indications that I am aware of, but possible. Apart from the 4th Circuit 3-judge panel perhaps re-hearing, there's the possibility that the employer could request an en banc (bigger) panel of the 4th Circuit take a look, and even U.S. Supreme Court--after all, it decided a plan amendment issue in Schoonejongen v Curtiss-Wright in the 1990s.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Without regard to the merits of this case (or any other case), it's hard to argue with the conclusion that the mere fact that IRS has granted permission to cure an operational error through a plan amendment has no effect on a participant's rights under Title I of ERISA (or under State contract law principles if the plan is not an ERISA plan).

Agreed. The 4th Circuit decision nicely dissected the employee issues of ERISA plans from the tax issues over which the IRS has administrative jurisdiction.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Without regard to the merits of this case (or any other case), it's hard to argue with the conclusion that the mere fact that IRS has granted permission to cure an operational error through a plan amendment has no effect on a participant's rights under Title I of ERISA (or under State contract law principles if the plan is not an ERISA plan).

Agreed. The 4th Circuit decision nicely dissected the employee issues of ERISA plans from the tax issues over which the IRS has administrative jurisdiction.

Yes, they did...and gave even more employers a good reason to not sponsor a voluntary retirement plan.

William C. Presson, ERPA, APA, QPA, QKA, APR
bill.presson@gmail.com
C 205.994.4070
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