In June and September of this year, both the Sixth Circuit Court of Appeals and the U.S. District Court for the Middle District of North Carolina issued decisions that counsel in favor of careful treatment of contested claims for a decedent’s benefit from an employee benefits plan. These two courts grappled with the following questions:

• An employee benefits plan participant dies, and her husband is indicted, but not yet convicted, for her murder. Can the plan distribute the decedent’s benefits to the husband while a murder investigation and prosecution are pending? See Atwater v. Nortel Networks, Inc., 388 F.Supp.2d 610 (M.D.N.C. 2005).
• Can a trustee of an employee benefits plan obtain an award of its attorney’s fees in an interpleader lawsuit it initiated to resolve competing benefit claims where the trustee chose the wrong venue for the lawsuit, failed to join all possible claimants to the benefits in the action, and wrongly decided that an ex-spouse was not entitled to the benefits? See First Trust Corp. v. Bryant, 410 F.3d 842 (6th Cir. 2005).

In both of these cases, the courts answered “no.” The courts reprimanded the plan in Atwater and the trustee in First Trust for, among other things, wrongly deciding who among potential beneficiaries was entitled to disputed benefits when they should have, instead, waited for a court to decide that issue. Thus, in certain situations, a plan should decline to make a decision on the competing benefit claims and should, instead, defer to a court’s adjudication of who is entitled to the benefit. This is just one of the potentially important reminders these cases offer for plans facing contested or competing claims to a single benefit.

Atwater v. Nortel Networks, Inc.,

388 F.Supp.2d 610 (M.D.N.C. 2005)The Atwater decision arose from the highly-publicized murder of a Nortel executive, Kathleen Hunt Peterson, in December 2001. In early 2002, several Nortel employee benefits plans distributed hundreds of thousands of dollars in benefits to Kathleen’s husband and designated beneficiary, Michael, who had been indicted but not yet convicted of Kathleen’s murder. Michael was convicted of first-degree murder in October 2003. Shortly thereafter, Kathleen’s daughter Caitlin, the administratrix of Kathleen’s estate, submitted claims for plan benefits to the Nortel employee benefit plans. The plans denied the estate’s claims and those denials were upheld when Caitlin appealed. Caitlin then commenced a lawsuit against the plans on the basis that the plans had improperly paid Michael and had wrongly denied the estate’s claims. On the parties’ cross-motions for summary judgment, the court held that the plan benefits should have been paid not to Michael, but to Kathleen’s estate, unless the plans could establish that the estate had intentionally waived its rights to the benefits or was otherwise estopped from making claims to the benefits.

The Court held that the plans’ decisions to distribute benefits quickly to Michael, and to later deny the estate’s claims for the benefits, were “seriously flawed.” The Court recognized that in North Carolina, one who kills another (a “slayer”) may be barred from receiving any benefit from killing another person under the state’s “slayer statute” and the common law rule that no one may profit from their own wrongdoing. Moreover, even if state law was preempted by ERISA, the court recognized that federal common law similarly prevented an individual from profiting from his own wrong. The defendant plans believed distribution of benefits to Michael was justified by the terms of the plans which directed payment of benefits to the participant’s beneficiary as soon as administratively or reasonably practicable. The plans also believed that absent a conviction, there was no legal justification for denying distribution to Michael. The court noted that while an indictment alone is insufficient to bar an alleged slayer-beneficiary from receiving a distribution, a plan has a fiduciary duty, in light of a pending murder investigation and trial, to delay distribution to the alleged slayer until there is a judicial determination regarding that beneficiary’s ability to receive benefits. The defendants should have waited for the outcome of the criminal proceeding against Michael before distributing the benefits or, if they did not want to wait, they should have brought an action (an interpleader) to seek a judicial determination regarding the proper beneficiary.

First Trust Corp. v. Bryant,

410 F.3d 842 (6th Cir. 2005)While the defendant plans in Atwater were admonished for rushing to distribute benefits without a judicial determination of who was entitled to those benefits, the trustee involved in the First Trust case brought an interpleader action to obtain such a judicial determination but faced several unexpected obstacles in doing so.

The facts underlying this contested benefits case are somewhat noteworthy. Money Purchase Pension Plan participant Marvin married Kay and designated her as his beneficiary under the Plan. By the time that Marvin and Kay had divorced, married each other again, and divorced again, they had two sons. Marvin then married Brenda and proceeded to divorce her and marry her again as well. Through all of this, Marvin never changed his beneficiary designation.

Shortly after Marvin was murdered by Brenda’s brother, First Trust, the nondiscretionary, directed trustee of the plan, received competing claims from Brenda and from Marvin’s sons to Marvin’s plan account, which exceeded $300,000. It then received conflicting orders from a Kentucky probate court regarding how Marvin’s benefits should be distributed. Adding to the confusion, Marvin’s and Brenda’s prenuptial agreement stated that Brenda would receive all sums in excess of $200,000 in the plan should Marvin die while married to Brenda.

When the Plan Administrator (Marvin’s brother) failed to decide who was the rightful beneficiary, First Trust brought an interpleader action in the District of Colorado where First Trust was based and where the plan assets were being held. It named only Brenda and the sons as defendants. The District of Colorado held that venue was improper and transferred the case to the Eastern District of Kentucky, where one of Marvin’s sons resided. Kay then intervened into the action.

The Kentucky court determined that Kay was entitled to the benefits as Marvin’s designated beneficiary. The court awarded to First Trust approximately $53,000 in attorney’s fees from the interpleaded fund, the remainder of which was to be paid to Kay, and it awarded Kay $1,000 for attorney’s fees incurred in intervening into the litigation.

Kay appealed. In a decision that no doubt stunned First Trust, the Sixth Circuit:

• reversed the award of attorney’s fees to First Trust, holding that First Trust was not entitled to any attorney’s fees;
• reversed the award of attorney’s fees to Kay to the extent that the district court had limited allowable fees to the costs of intervening; and
• remanded the case to the district court for a decision on the amount of Kay’s fees.

Adding insult to injury, the court held that First Trust had engaged in bad faith or culpable conduct at several points in the litigation.

First, First Trust filed its action in the wrong venue. The court held that it was unreasonable for First Trust to take the position that its demand for attorney’s fees qualified it as a claimant to the interpleaded stake and thus, the action was properly brought in its home jurisdiction. The court also identified First Trust’s calculated litigation tactics regarding venue as evidence of bad faith: First Trust had tried to work out a deal with Marvin’s sons to voluntarily transfer venue from Colorado to Kentucky in exchange for attorney’s fees and a signed release of liability. Marvin’s sons had argued this was “blackmail.”

The court also held that First Trust was culpable for not naming Kay as a defendant. First Trust did not join Kay as a party to the action because it believed that the designation of Kay as Marvin’s beneficiary was invalidated by Marvin’s subsequent marriage to Brenda. The court held that this determination regarding the validity of the beneficiary designation was improper and that First Trust should have left that determination to the court. Moreover, First Trust failed to join Kay even after Brenda had moved to have her joined, therefore causing Kay to incur the needless expense of moving to intervene.

Lessons Learned
Atwater and First Trust emphasize that plans and their agents and fiduciaries can never be too careful in taking a reasoned approach to deciding contested benefit claims. As shown by Atwater, a plan fiduciary must take into account events surrounding a beneficiary’s involvement in a participant’s death and be willing to either wait for a judicial determination of an alleged slayer-beneficiary’s right to receive benefits or bring its own action for judicial determination of entitlement to the benefits. In First Trust, we are reminded that plans and their agents or fiduciaries must be careful not to threaten suit in a distant forum inconvenient to the claimants as leverage to negotiate a release of liability and payment of its attorney’s fees, that they must join all potential beneficiaries to an interpleader action or be able to reasonably explain why not all have been joined, and that they should remain impartial regarding which of claimants should be entitled to the interpleaded benefits. In short, where entitlement to a benefit is not clear, plans and their fiduciaries need to be conscious of how their actions and decisions will be scrutinized by potential beneficiaries and the courts.