The Ninth Circuit Court of Appeals has held, in Castillo v. Metropolitan Life Ins. Co., that ERISA does not authorize an award of attorney’s fees incurred during the administrative phase of the ERISA claims process.
Background. The plaintiff was a participant in a long term disability (“LTD”) plan. After becoming disabled, he retired in 2013, and began collecting LTD benefits. At that same time, he rolled his pension benefits into an individual retirement account (“IRA”).
In 2017, the claims administrator for the LTD plan contacted the plaintiff and explained that it would be reducing his LTD benefits retroactively to 2013, to account for the pension rollover. Consequently, the claims administrator withheld payment of future LTD benefits and sought to recover benefits paid from 2013 to 2017. The plaintiff retained counsel and, through the plan’s administrative appeal process, successfully appealed the claims administrator’s adverse decision.
Following his successful appeal, the plaintiff sued the claims administrator under ERISA Section 502(a)(3), claiming that it breached its fiduciary duties of prudence and loyalty by failing to timely notify him that it would be considering an offset of his LTD benefits as a result of the rollover of his pension benefits into an IRA. As relief, the plaintiff sought an order charging the claims administrator for the losses he sustained from the breach (i.e., the attorney’s fees he paid in connection with his administrative appeal).
At trial, the claims administrator moved to dismiss the plaintiff’s claim on the basis that it: (i) failed to state a claim for fiduciary breach under ERISA; and, (ii) did not seek “appropriate equitable relief” under ERISA Section 502(a)(3). The district court granted the claims administrator’s dismissal request, ruling that attorney’s fees paid in connection with an administrative appeal are not appropriate for equitable relief under ERISA. The plaintiff appealed the district court’s dismissal.
Ninth Circuit. The Ninth affirmed the district court’s dismissal and agreed that ERISA does not authorize the reimbursement of attorney’s fees paid in connection with an administrative appeal.
In reaching this holding, the Ninth Circuit initially recognized several valid premises on which the plaintiff’s claim is based. The Ninth Circuit first noted that “surcharge” or monetary compensation for a loss caused by a fiduciary breach is an available remedy under ERISA 502(a)(3). The Ninth Circuit also recognized that courts have discretion to award attorney’s fees to a prevailing beneficiary as part of ERISA’s surcharge remedy.
In addition, the Ninth Circuit rejected the claims administrator’s assertion that the plaintiff was precluded from proceeding under ERISA Section 502(a)(3) because other ERISA remedies (e.g., a denial-of-benefits claim under ERISA Section 502(a)(1)(B)) were available and could provide adequate relief. In particular, the Ninth Circuit concluded that a denial-of benefits claim under ERISA would not enable the plaintiff to obtain the attorney’s fees he was seeking in this case.
Notwithstanding the above, the Ninth Circuit ultimately disagreed with the plaintiff’s argument on account of “two factors that counsel against the award of attorney’s fees” in the present case. First, the Ninth Circuit observed that in an earlier precedent, it had held that attorney’s fees for an administrative appeal are not recoverable under ERISA’s fee-shifting provisions (i.e., ERISA Section 502(g)). The court noted that the word “action”, as used in ERISA’s fee-shifting provisions, “generally designates only proceedings in court, not administrative proceedings.”
The Ninth Circuit also concluded that awarding the plaintiff attorney’s fees in the instant case would result in a rule under which the availability of attorney’s fees for an administrative appeal would turn on whether the claimant characterized their claim as either a denial-of-benefits claim under ERISA 502(a)(1)(B) or a fiduciary breach claim under 502(a)(3). The court noted that it was “not persuaded that the availability of fees should turn on the claimant’s characterization of the benefits dispute or that ERISA should … incentivize claimants to characterize denial-of-benefits claims as breach-of-fiduciary-duty claims.”
The Ninth Circuit further reasoned that allowing attorney’s fees for administrative proceedings would undermine ERISA’s purpose of promoting “soundness and stability of plans with respect to paying promised benefits.” The court observed that this purpose might be undermined by judicial decisions which encouraged plans to pay questionable claims to avoid potential liability for attorney’s fees.