Young v. Verizon's Bell Atlantic Cash Balance Plan

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 09-3872 & 09-3965

C YNTHIA N. Y OUNG, on behalf of

herself and others similarly situated,

Plaintiff-Appellant/

Cross-Appellee,

v.

V ERIZON’S B ELL A TLANTIC C ASH

B ALANCE P LAN, et al.,

Defendants-Appellees/

Cross-Appellants.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 05 C 07314—Morton Denlow, Magistrate Judge.

A RGUED JUNE 1, 2010—D ECIDED A UGUST 10, 2010

Before B AUER, F LAUM, and T INDER, Circuit Judges.

T INDER, Circuit Judge. “People make mistakes. Even

administrators of ERISA plans.” Conkright v. Frommert,

130 S. Ct. 1640, 1644 (2010). This introduction was fitting

2 Nos. 09-3872 & 09-3965

in Conkright, which dealt with a single honest mistake

in the interpretation of an ERISA plan. It is perhaps an

understatement in this case, which involves a devastating

drafting error in the multi-billion-dollar plan admin-

istered by Verizon Communications, Inc. (“Verizon”).

Verizon’s pension plan contains erroneous language

that, if enforced literally, would give Verizon pensioners

like plaintiff Cynthia Young greater benefits than they

expected. Young nonetheless seeks these additional

benefits based on ERISA’s strict rules for enforcing plan

terms as written. Although Young raises some forceful

arguments, we conclude that ERISA’s rules are not so

strict as to deny an employer equitable relief from the

type of “scrivener’s error” that occurred here. We will

accordingly affirm the district court’s judgment granting

Verizon equitable reformation of its plan to correct the

scrivener’s error.

I. Background

A. Bell Atlantic’s Pension Plans

Bell Atlantic, the predecessor of Verizon, operated the

Bell Atlantic Management Pension Plan (“BAMPP”) until

1996. The BAMPP expressed an employee’s retirement

benefit as a defined annuity, but employees also had

the option of receiving a lump sum if they retired during

specified “cashout windows.” For certain employees

who retired during the 1994-1995 cashout window, the

BAMPP provided a lump sum equal to the “actuarial

equivalent present value” of the employee’s pension

Nos. 09-3872 & 09-3965 3

benefit, but calculated using an enhanced discount rate.

Specifically, section 4.19 of the BAMPP required the use

of a discount rate of “120% of the applicable . . . PBGC

[Public Benefit Guarantee Corporation] interest rate in

effect” at the time of severance.

In 1996, Bell Atlantic adopted the Bell Atlantic Cash

Balance Plan to replace the BAMPP. The new Plan ex-

pressed an employee’s benefit as a cash balance that grew

steadily with the employee’s age and years of service.

Under the Cash Balance Plan, employees still had the

option of receiving their retirement benefit as either an

annuity or a lump sum.

Key to this transition to the Cash Balance Plan was

converting the value of employees’ benefits under the old

BAMPP to cash balances under the new Plan. The Plan

used “transition factors,” a series of multipliers that

increased with employees’ age and years of service, to

make the conversion. The Plan language describing this

conversion is critical, so we reproduce it in some detail

(the emphasis is ours):

16.5 Opening Balance

....

16.5.1 Pension Conversions as of the Transition

Date

Where a present value must be determined under this

Section 16.4 [sic, should read “Section 16.5”], the

present value shall be determined as follows: (a) using

the PBGC interest rates which were in effect for Septem-

ber of 1995 . . . .

4 Nos. 09-3872 & 09-3965

16.5.1(a) 1995 Active Participants and 1995

Former Active Participants

. . . the opening balance of the Participant’s

Cash Balance Account on January 1, 1996 shall

be the amount described in subsection (1) or (2)

below, as applicable:

16.5.1(a)(1) If Eligible for Service Pension

....

16.5.1(a)(2) Not Eligible for Service Pen-

sion

In the case of a Participant who is not

eligible for a Service Pension under the

1995 BAMPP Plan as of the Transition

Date, the amount described in this para-

graph (2) is the product of multiplying (A) the

Participant’s applicable Transition Factor

described in Table 1 of this Section, times

(B) the lump-sum cashout value of the Accrued

Benefit payable at age 65 under the 1995

BAMPP Plan, determined as if the Partici-

pant had a Severance From Service Date

on December 31, 1995, based on Compen-

sation paid through December 31, 1995,

multiplied by the applicable transition factor

described in Table 1 of this Section. . . .

B. Young’s Administrative Claim

Cynthia Young worked for Bell Atlantic from 1965 to

1997. When the Cash Balance Plan took effect in 1996,

Nos. 09-3872 & 09-3965 5

Young was not eligible for a service pension under the

BAMPP—that is, her age and service level did not qualify

her for full retirement benefits—so her opening cash

balance was calculated using § 16.5.1(a)(2), for a resulting

balance of $240,127. By the time Young retired in 1997,

her cash balance had grown to the point that she

received a lump-sum benefit of $286,095.

Several years later, in 2004, Young filed a claim with

the Claims Review Unit of Verizon (which by then had

taken over Plan administration as Bell Atlantic’s suc-

cessor). Young claimed that Bell Atlantic made two

errors in calculating her opening cash balance, and hence

her ultimate pension benefit, under the Cash Balance

Plan. First, Young read the language of § 16.5.1(a)(2)

to require that the “applicable transition factor” be multi-

plied twice to convert her lump-sum cashout under the

BAMPP to her opening cash balance under the new

Plan. Bell Atlantic, however, multiplied the transition

factor only once when making the conversion. Second,

Young claimed that Bell Atlantic improperly applied the

120% PBGC discount rate used in the 1995 BAMPP

to determine the “lump-sum cashout value” under

§ 16.5.1(a)(2). Young contended that Bell Atlantic

should have used a discount rate of simply 100% of the

PBGC rate.

Verizon’s Claims Review Unit denied Young’s claims,

and on appeal, Verizon’s Claims Review Committee

affirmed. The Committee concluded that the intended

meaning of § 16.5.1(a)(2) was to use only a single transi-

tion factor to calculate opening cash balances; the

6 Nos. 09-3872 & 09-3965

section’s second reference to the “applicable transition

factor” was a drafting mistake. As for Young’s discount

rate claim, the Committee concluded that § 16.5.1(a)(2)

incorporated the 120% PBGC rate used in the 1995 BAMPP

by referring to “the lump-sum cashout value . . . under

the 1995 BAMPP Plan.”

C. Young’s Federal Court Class Action

In 2005, Young brought a federal court action under

ERISA § 502(a), 29 U.S.C. § 1132(a), against Verizon and

its Cash Balance Plan (collectively “Verizon”). Young

asserted the same claims she raised in Verizon’s admin-

istrative process, arguing that Verizon improperly

applied only a single transition factor and the 120%

PBGC discount rate to calculate her opening cash balance.

The parties agreed to treat the case as a class action, and

the district court certified a class of some 14,000 Bell

Atlantic/Verizon pensioners similarly situated to Young.

Young’s class action presented the district court, acting

through Magistrate Judge Denlow, with a challenge. The

court was confronted with a convoluted ERISA plan

that seemed to contain a costly drafting error, but an

uncertain state of law on the scope of the court’s review

of such an error. So the court decided to bifurcate the

trial into two phases and apply alternative standards of

review. In the first phase, the court assumed that it was

limited to examining the administrative record and

reviewing the Verizon Review Committee’s denial of

benefits under a deferential standard. (The Cash Balance

Plan granted Verizon, as plan administrator, broad dis-

Nos. 09-3872 & 09-3965 7

cretion to interpret the Plan, so judicial review was con-

strained to an “arbitrary and capricious” standard. Black

v. Long Term Disability Ins., 582 F.3d 738, 743-44 (7th

Cir. 2009).) Under this standard, the district court upheld

the Committee’s denial of Young’s discount rate claim.

Conversely, on Young’s transition factor claim, the court

concluded that the Committee abused its discretion

in unilaterally disregarding the second reference to the

transition factor in § 16.5.1(a)(2) as a drafting mistake.

If Verizon wished to avoid that mistake, it would have

to seek a court order for equitable reformation of the Plan.

Taking the district court’s cue, Verizon counterclaimed

for equitable reformation of the Plan to remove the

second transition factor in § 16.5.1(a)(2) as a “scrivener’s

error.” The court took up Verizon’s counterclaim in the

second phase of the trial, in which the court conducted a

de novo review of the Plan and allowed the parties to

introduce extrinsic evidence on the intended meaning

of § 16.5.1(a)(2). And that evidence overwhelmingly

showed that the inclusion of the second transition

factor was indeed a scrivener’s error.

The drafting history of the 1996 Plan revealed how the

second, erroneous transition factor came to be. Six drafts

of the Plan were prepared prior to the final version. The

first three drafts were prepared by Mercer Human Re-

sources Consulting, an outside firm hired by Bell Atlantic,

and contained no mention of a second transition factor. It

was not until one of Bell Atlantic’s in-house attorneys,

Barry Peters, took over drafting responsibility that the

second transition factor appeared. In working on the

8 Nos. 09-3872 & 09-3965

fourth draft, Peters restructured the conversion formula

under § 16.5.1(a)(2) into a more readable “A times B”

format, but in doing so, neglected to delete a trailing

clause from the previous draft that referred to “the ap-

plicable Transition Factor.” Testifying in the district

court, Peters admitted that he made this mistake in

failing to delete the trailing clause in § 16.5.1(a)(2), there-

by duplicating the transition factor. Peters’s mistake

survived unnoticed in the fifth, sixth, and final drafts

of the Plan.

In addition to the drafting history, the correspondence

between Bell Atlantic and plan participants showed an

expectation that only a single transition factor would be

used to calculate opening cash balances. In October 1995,

Bell Atlantic sent participants a brochure entitled, “Intro-

ducing Your Cash Balance Plan,” which clearly depicted

opening cash balances as the product of an employee’s

lump-sum value under the 1995 BAMPP and a single

transition factor. In November 1995, Bell Atlantic

sent participants personalized statements of their esti-

mated opening account balances, which also illustrated

the use of a single transition factor. Following the imple-

mentation of the Plan, Bell Atlantic sent participants

personalized statements of their actual opening balances,

and thereafter quarterly cash balance statements, which,

again, reflected the use of only one transition factor.

Notably, though, these Plan-related communications

contained “plan trumps” provisions cautioning that, in

the event of discrepancies between those communica-

tions and the Plan, the Plan would govern.

Nos. 09-3872 & 09-3965 9

Also convincing was the course of dealing between Bell

Atlantic/Verizon and plan participants. Bell Atlantic

consistently calculated opening cash balances using a

single transition factor and paid benefits accordingly.

Taking Young’s case as an example, her transition factor

was 2.659. The estimated opening balance statement

that Young received illustrated the multiplication of this

2.659 transition factor by her BAMPP lump-sum cashout

value of $90,027, for an estimated opening balance of

$90,027 × 2.659 = $239,381. The actual opening balance

statement that Young received in 1996 applied the same,

single-transition-factor formula to slightly different

numbers: $90,307 × 2.659 = $240,127. Prior to Young’s

lawsuit, no employee complained that opening balances

should have been increased by an additional transition

factor. For her part, Young admitted that she never

relied on the transition factor language in § 16.5.1(a)(2)

prior to this litigation.

Based on this evidence of the intended meaning of

the Plan, the district court found that the second transi-

tion factor in § 16.5.1(a)(2) was a scrivener’s error

and granted Verizon’s counterclaim for equitable refor-

mation. The court also resolved a host of other argu-

ments raised by the parties, many of which we discuss

below. But suffice it to say, the district court’s treatment

of the issues presented by this case was exhaustive. Over

the course of a four-year, multi-phase litigation, the

court built a complete record, fully explored alternative

bases of decision, and sharply honed the issues for appel-

late review. These commendable efforts by the district

court, as well as the fine advocacy by both sides, have

10 Nos. 09-3872 & 09-3965

greatly assisted this court in deciding this complex

ERISA case.

II. Analysis

A. Statute of Limitations

Before reaching the merits, we must address each side’s

argument that the other’s claims are barred by the

statute of limitations. ERISA does not provide a limita-

tions period for actions brought under § 502, 29 U.S.C.

§ 1132, so we borrow the most analogous statute of limita-

tions from state law. Berger v. AXA Network LLC, 459

F.3d 804, 808 (7th Cir. 2006). We do not automatically

borrow the forum state’s limitations period; if another

state has a significant connection to the dispute and its

limitations period is more consistent with federal

ERISA policies, that state’s limitations period should

apply. Id. at 813. For actions such as this one to enforce

ERISA plans under § 502(a), we have previously bor-

rowed state limitations periods for suits on written con-

tracts. Leister v. Dovetail, Inc., 546 F.3d 875, 880-81 (7th Cir.

2008); Daill v. Sheet Metal Workers’ Local 73 Pension Fund,

100 F.3d 62, 65 (7th Cir. 1996).

The parties agree that Pennsylvania’s four-year statute

of limitations for breach of contract actions, 42 Pa. Cons.

Stat. § 5525, should apply to this ERISA case. Pennsylvania

has the most significant connection to this dispute, since

Bell Atlantic was headquartered and drafted the Cash

Balance Plan there. Also, more class members currently

live in Pennsylvania than any other state, and while a

Nos. 09-3872 & 09-3965 11

few class members live in the forum state of Illinois, Young

has never lived or worked there. We further note that

the Plan contains a choice of law provision stating that

Pennsylvania law will fill any gaps left by federal ERISA

law. See Berger, 459 F.3d at 813-14 (considering choice

of law clause as a non-controlling but relevant factor

in selecting a limitations period).

The real point of contention is the accrual date of the

parties’ claims, that is, when Pennsylvania’s four-year

limitations period started to run. Although federal

courts borrow state limitations periods for certain ERISA

claims, the accrual of those claims is governed by

federal common law. Daill, 100 F.3d at 65.

Beginning with Young’s ERISA claim, we have held

that a claim to recover benefits under § 502(a) accrues

“upon a clear and unequivocal repudiation of rights

under the pension plan which has been made known to

the beneficiary.” Id. at 66. In this case, Young did not

receive a clear repudiation of her claim for additional

benefits until 2005, when Verizon’s Review Committee

resolved her administrative appeal. (Actually, the Com-

mittee denied Young’s claim with respect to the dis-

count rate issue in 2005 but took until 2007 to deny

her claim with respect to the transition factor issue.

Since it is obvious that Young’s entire federal court

action, filed in 2005, would be timely using a 2005 accrual

date, this distinction is immaterial.) Prior to denying

Young’s administrative claim, Verizon did not inform

Young that it rejected her interpretation of the Plan

calling for two transition factors and a 100% PBGC dis-

12 Nos. 09-3872 & 09-3965

count rate. Cf. id. at 66 (claim accrued upon correspon-

dence from plan disagreeing with participant’s under-

standing of benefits).

Verizon argues that Young’s claim accrued in Feb-

ruary 1998, when she received her lump-sum benefit

computed under Verizon’s interpretation of the Cash

Balance Plan. At that time, however, the parties’ dispute

over the correct interpretation of the Plan had not devel-

oped. And nothing suggests that the $286,095 payment

that Young received should have been a red flag that

she was underpaid. Cf. Redmon v. Sud-Chemie Inc. Ret. Plan

for Union Employees, 547 F.3d 531, 539 (6th Cir. 2008)

(finding a clear repudiation when the plan stopped

making payments entirely, but not earlier when the

payment amount was merely inconsistent with the plain-

tiff’s understanding of benefits). The 1998 payment

that Young received was not so inconsistent with her

current claim for additional benefits as to serve as a

clear repudiation.

Moving to Verizon’s counterclaim, Seventh Circuit

precedent provides less guidance on the accrual of a

claim for equitable reformation under ERISA

§ 502(a)—understandably so, since the cognizance of

such a claim is an issue of first impression for this

court. The general federal common law rule is that an

ERISA claim accrues when the plaintiff knows or

should know of conduct that interferes with the plain-

tiff’s ERISA rights. See Berger, 459 F.3d at 815-16 (accrual

when beneficiaries learned of change in employer’s

method for determining benefit eligibility); Teumer v. Gen.

Nos. 09-3872 & 09-3965 13

Motors Corp., 34 F.3d 542, 550 (7th Cir. 1994) (“Once

an unlawful action is taken, a claim accrues when the

putative plaintiff discovers the injury that results.”).

Applying this rule to Verizon’s reformation action, we

consider when Verizon should have known that the

scrivener’s error in the Cash Balance Plan, if left unre-

formed, would impede its rights under the Plan.

The district court found, and Verizon does not dispute,

that Verizon’s predecessor Bell Atlantic learned of the

scrivener’s error in 1997. Indeed, Bell Atlantic removed

the second, erroneous transition factor from the 1998 plan

that it adopted to replace the 1997 version of the Cash

Balance Plan. Still, we conclude that this 1997 discovery

did not give Verizon notice of the need to reform the

scrivener’s error, given a course of dealing consistent

with Verizon’s interpretation of the Plan.

Verizon always treated the Plan’s second transition

factor as a drafting mistake, and through correspondence

with plan participants, it communicated that only a

single transition factor would be used to calculate

opening cash balances. Verizon consistently paid

benefits using this formula, and prior to Young’s admin-

istrative claim, no employee communicated a contrary

understanding that Plan benefits should be calculated

using two transition factors. Cf. Tolle v. Carroll Touch, Inc.,

977 F.2d 1129, 1141 (7th Cir. 1992) (employee’s ERISA

unlawful discharge claim accrued when employer com-

municated discharge decision); Bowes v. Travelers Ins.

Co., 173 F. Supp. 2d 342, 346 (E.D. Pa. 2001) (applying

Pennsylvania law, claim for reformation of written con-

14 Nos. 09-3872 & 09-3965

tract accrued when conflicting oral statements under-

lying the dispute were made). Under these circum-

stances, although Verizon discovered the drafting

mistake in 1997, it did not then know that this mistake

would give rise to a controversy requiring it to raise

an equitable reformation claim. See Int’l Union v. Murata

Erie N. Am., Inc., 980 F.2d 889, 901 (3d Cir. 1992) (ERISA

claim did not accrue when plan sponsor amended

plan absent evidence that participants knew of any poten-

tial controversy over amended language). Instead, it

was not before Young put the transition factor language

at issue in her 2005 federal court action that Verizon’s

counterclaim for equitable reformation accrued.

None of the parties’ claims accrued before 2005 when

Young brought her federal court ERISA action, so these

claims are timely under the applicable Pennsylvania four-

year limitations period. We may proceed to the merits

of Verizon’s claim for equitable reformation and Young’s

claim for additional benefits under ERISA § 502(a).

B. Equitable Reformation Due to Scrivener’s Error

ERISA is a comprehensive statute designed to uniformly

regulate employee benefit plans. Aetna Health Inc. v. Davila,

542 U.S. 200, 208 (2004). To achieve uniformity, ERISA

contains numerous requirements for adopting and ad-

ministering plans. Plans must be “established and main-

tained pursuant to a written instrument.” 29 U.S.C.

§ 1102(a)(1). The plan terms must be communicated to

participants through an easily understood “summary plan

description,” as well as a “summary of any material

Nos. 09-3872 & 09-3965 15

modification” to the plan. Id. § 1022(a). These ERISA-

required writings are given primary effect and strictly

enforced, and plan administrators must adhere to “the

bright-line requirement to follow plan documents in

distributing benefits.” Kennedy v. Plan Adm’r for DuPont

Sav. & Inv. Plan, 129 S. Ct. 865, 876 (2009).

While ERISA’s strict requirements “ensure[ ] fair and

prompt enforcement of rights under a plan,” Congress

was careful not to make those requirements so onerous

“that administrative costs, or litigation expenses, unduly

discourage employers from offering plans in the first

place.” Conkright v. Frommert, 130 S. Ct. 1640, 1649

(2010) (quotations omitted). So ERISA also allows some

flexibility in plan administration and enforcement to

achieve fair, equitable results. In particular, employers

may grant plan administrators broad discretion in inter-

preting plan terms. Id. “Deference promotes efficiency

by encouraging resolution of benefits disputes through

internal administrative proceedings rather than costly

litigation.” Id.

Another ERISA provision that promotes equitable plan

enforcement—and the statute important here—is

§ 502(a)(3), which allows a plan participant, beneficiary,

or fiduciary to bring a civil action for “appropriate

equitable relief.” 29 U.S.C. § 1132(a)(3)(B). The Supreme

Court has explained that the statute authorizes “those

categories of relief that were typically available in

equity” during the days when common law courts were

divided as courts of law or of equity. Mertens v. Hewitt

Assocs., 508 U.S. 248, 256 (1993); see also Kenseth v. Dean

16 Nos. 09-3872 & 09-3965

Health Plan, Inc., No. 08-3219, 2010 WL 2557767, at *24 (7th

Cir. June 28, 2010) (describing categories of equitable

relief available under 29 U.S.C. § 1132(a)(3)). The issue

in this case, then, is whether Verizon’s claim for

equitable reformation of its Cash Balance Plan is the

type of equitable relief authorized by § 502(a)(3).

We have never considered whether § 502(a)(3) author-

izes equitable reformation of an ERISA plan due to a

scrivener’s error, but our case law addressing the

related problem of ambiguous plan language suggests

that such relief may be appropriate.

In Mathews v. Sears Pension Plan, 144 F.3d 461 (7th Cir.

1998), we put the parties’ reasonable expectations ahead

of the literal text of an ERISA plan. Although the plain

language of the plan suggested a benefits formula

more favorable to employees, the employer offered ob-

jective, extrinsic evidence showing an “extrinsic ambigu-

ity” in this language. Id. at 466-67. The summary plan

documents and the parties’ course of dealing were con-

sistent with the employer’s reading of the plan, so we

declined to adopt the employees’ contrary reading

under “rigid and archaic” rules of contract interpreta-

tion. Id. at 469.

We reached a different result in Grun v. Pneumo Abex

Corp., 163 F.3d 411, 420-21 (7th Cir. 1998), refusing to set

aside unambiguous plan language based on an em-

ployer’s claim of “mutual mistake.” Still, we acknowl-

edged that such relief would be available in “the rare

case where literal application of a text would lead to

absurd results or thwart the obvious intentions of its

Nos. 09-3872 & 09-3965 17

drafters.” Id. at 420 (quotation omitted). Reformation

was inappropriate in Grun because the employee relied

on the literal plan language to predict his right to sever-

ance compensation. Id. at 421; cf. Mathews, 144 F.3d at

469 (noting absence of claim that any beneficiary

actually relied on plan language).

Other circuits have directly addressed claims for equi-

table reformation of an ERISA plan. Using reasoning

similar to that in Mathews and Grun, these courts have

either concluded that ERISA authorizes such relief or

does not foreclose the possibility.

Verizon’s strongest case is Int’l Union v. Murata Erie N.

Am., Inc., 980 F.2d 889, 907 (3d Cir. 1992), in which the

Third Circuit recognized an employer’s § 502(a)(3) claim

to correct a “scrivener’s error” in a plan provision on the

distribution of excess funds. The court found equitable

reformation appropriate because holding the employer

to the scrivener’s error would produce “what is ad-

mittedly a ‘windfall’ ”—“an excess remaining in the

Plans” that the plaintiffs could not have reasonably

expected. Id. The Eighth Circuit applied a similar

rationale in Wilson v. Moog Auto., Inc. Pension Plan, 193

F.3d 1004, 1008-10 (8th Cir. 1999), to conclude that an

ERISA plan’s failure to provide a minimum age for retire-

ment benefits was a reformable mistake. Reformation

was possible because extrinsic evidence showed that

none of the plaintiffs actually relied on the erroneous

plan language or believed that they would be eligible

for early retirement. Id. at 1009-10.

The Ninth Circuit distinguished Murata in Cinelli v. Sec.

Pac. Corp., 61 F.3d 1437, 1444-45 (9th Cir. 1995), rejecting

18 Nos. 09-3872 & 09-3965

an employee’s claim that the absence of a plan provision

entitling him to vested life insurance benefits was a

mistake. Although reformation of a scrivener’s error

was appropriate in Murata to avoid a “windfall” and

uphold employees’ reasonable expectations of benefits,

those factors were lacking in Cinelli. Id. at 1445. Likewise,

in Blackshear v. Reliance Standard Life Ins. Co., 509 F.3d

634, 643-44 (4th Cir. 2007), abrogated on other grounds as

stated in Williams v. Metro. Life Ins. Co., Nos. 09-1025 & 09-

1568, 2010 WL 2599676, at *5 (4th Cir. June 30, 2010), the

Fourth Circuit declined to equitably reform an ERISA

plan under the circumstances, where the plan language

was clear and neither the summary plan description

nor other plan documents supported the employer’s

claim of a scrivener’s error.

From this authority, we conclude that ERISA § 502(a)(3)

authorizes equitable reformation of a plan that is shown,

by clear and convincing evidence, to contain a scrivener’s

error that does not reflect participants’ reasonable ex-

pectations of benefits. Though complex in design, ERISA

maintains the basic goal of “protecting employees’ justified

expectations of receiving the benefits their employers

promise them.” Cent. Laborers’ Pension Fund v. Heinz,

541 U.S. 739, 743 (2004). It would thwart this goal to

enforce erroneous plan terms contrary to those expecta-

tions, even if doing so would increase employees’ bene-

fits. The “appropriate equitable relief” authorized by

§ 502(a)(3) allows a court to reform an ERISA plan to

avoid such an unfair result. See Cent. Pa. Teamsters Pension

Fund v. McCormick Dray Line, Inc., 85 F.3d 1098, 1105 n.2

(3d Cir. 1996) (“[I]n circumstances where a court can

Nos. 09-3872 & 09-3965 19

establish that no plan participants were likely to have

relied upon the scrivener’s error in question . . . allowing

reformation of the scrivener’s error does not thwart

ERISA’s statutory purpose . . . .”); Murata, 980 F.2d at

907 (“[T]he alleged error relates to what is admittedly a

‘windfall’ . . . that neither side could have reasonably

expected.”); cf. Mathews, 144 F.3d at 469 (“We cannot see

how ERISA beneficiaries or anyone else . . . would be

benefited by the adoption of principles of contractual

interpretation so rigid and archaic as to permit the class

to reap the pure windfall here sought to the potential

prejudice of other beneficiaries.”).

We acknowledge, like the Third Circuit in Murata, 980

F.2d at 907, that equitable reformation of an ERISA plan

creates some tension with the “written instrument”

requirement of 29 U.S.C. § 1102(a)(1), also known as the

“plan documents rule,” Kennedy, 129 S. Ct. at 877. This

rule ensures “that every employee may, on examining

the plan documents, determine exactly what his rights

and obligations are under the plan,” Murata, 980 F.2d

at 907, without complicated “enquiries into nice expres-

sions of intent” behind plan language, Kennedy, 129 S. Ct.

at 875. Young cautions that allowing equitable reforma-

tion of ERISA plans will undermine the efficient, easily

enforceable plan documents rule and encourage pro-

tracted, discovery-intensive litigation over the intended

meaning of a plan.

Even so, since we interpret § 502(a)(3) to authorize the

equitable reformation claim asserted here, we cannot

simply reject such a claim based on the added litigation

20 Nos. 09-3872 & 09-3965

burden that it might represent. Moreover, we see

little difference between the intent-based inquiry that

took place in this reformation case and what must occur

in the related case of an ambiguous ERISA plan. In

each case, the court must look beyond the plan document

to extrinsic evidence to determine the parties’ under-

standing of the plan. See Mathews, 144 F.3d at 467. We do

not think that the availability or scope of this judicial

inquiry should turn on whether the error in an ERISA

plan is deemed an “ambiguity” or a “scrivener’s error.”

Drafting mistakes in ERISA plans may take many

forms; some involve language that is ambiguous on its

face while others, like the mistake here, involve language

that is not intrinsically ambiguous but still misstates

participants’ benefits. It would not further the purposes

of ERISA to allow courts to correct one type of mistake

but not the other.

Also, other limitations on the equitable reformation

claim that we recognize under § 502(a)(3) will mitigate

its impact on the plan documents rule. Only those who

can marshal “clear and convincing” evidence that plan

language is contrary to the parties’ expectations will

have a viable claim. Murata, 980 F.2d at 908. This stand-

ard of proof is rigorous, requiring evidence that is

“clear, precise, convincing and of the most satisfactory

character that a mistake has occurred and that the

mistake does not reflect the intent of the parties.” Id. at 907

(quotation omitted); accord Blackshear, 509 F.3d at 642.

The evidence also must be “objective” and not dependent

“on the credibility of testimony (oral or written) of an

interested party.” Mathews, 144 F.3d at 467. These high

Nos. 09-3872 & 09-3965 21

standards of proof should deter an employer from

seeking to reform plan language simply because it has

proven unfavorable.

In this case, though, we agree with the district court

that Verizon presented enough objective, convincing

evidence to show that the second reference to the transi-

tion factor in § 16.5.1(a)(2) of the Cash Balance Plan was

a scrivener’s error inconsistent with participants’

expected benefits.

The drafting history left little doubt that the second

transition factor in § 16.5.1(a)(2) was a mistake. It first

appeared in the fourth draft of the Plan, the first

draft prepared by Bell Atlantic attorney Barry Peters.

This draft reformatted the multiplication formula in

§ 16.5.1(a)(2), but in doing so, failed to omit the prior

draft’s trailing clause that referred to the transition

factor, thereby duplicating the transition factor. We

need not rely on Peters’s arguably self-serving testimony

to conclude that this botched reformatting led to the

second transition factor; so much is clear by comparing

the fourth draft with the prior version. And given the

absence of any evidence contemporaneous to the fourth

draft suggesting that Bell Atlantic was reworking the

Plan to increase benefits, it is evident that duplicating

the transition factor was a drafting mistake.

The communications and course of dealing between

Bell Atlantic/Verizon and plan participants further illus-

trate that the parties intended a single-transition-

factor formula. Young and other participants received a

Plan brochure that described their opening cash balances

22 Nos. 09-3872 & 09-3965

as the product of their lump-sum values under the 1995

BAMPP and a single transition factor. Although the

brochure did not explicitly state that a “single” transition

factor would be used, the formula depicted in the

brochure makes clear that only one multiplier would

apply. That was confirmed in the personalized state-

ments sent to participants of their estimated and actual

opening cash balances, which reported values based on

the use of a single transition factor. By way of illustration,

Young received an estimated opening balance state-

ment that reported her transition factor of 2.659 and her

BAMPP lump-sum cashout value of $90,027, for an esti-

mated opening balance of $239,381. Her actual opening

balance reported in a later statement, $240,127, was

calculated similarly. If a second 2.659 transition factor

were applied to these figures, Young’s estimated and

actual opening balances would have been $636,514

and $638,498, respectively. Bell Atlantic/Verizon never

squared transition factors in this manner but instead

calculated benefits using only a single transition factor,

consistent with the Plan communications. Prior to Young’s

claim, no employee complained that cash balances

should have been increased by an additional transition

factor.

Granted, many of the Plan communications, including

the Plan brochure and opening balance statements, are

less compelling because they contain what Young

describes as “plan trumps” provisions, which stated that

the communications were subordinate to any contrary

language in the Plan. As Young points out, were the

situation reversed and the employee-favorable language

Nos. 09-3872 & 09-3965 23

contained in a Plan communication rather than the Plan

itself, Verizon no doubt would contend that these plan

trumps provisions barred Young from relying on the

communication. See Kolentus v. Avco Corp., 798 F.2d 949,

958 (7th Cir. 1986) (“[W]hen the summary booklet ex-

pressly states that it is merely an outline of the pension

plan and that the formal text of the plan governs in the

event a question arises, the plaintiffs cannot rely on the

general statements of the booklet but must look to the

plan itself.”). Young’s point is well-taken, but we

cannot agree that the mere existence of plan trumps

provisions precludes Verizon from reforming the Plan

consistent with Plan communications. At issue is

whether Verizon has established by clear and con-

vincing evidence that the intended meaning of

§ 16.5.1(a)(2) was to apply only a single transition

factor to calculate opening cash balances. Verizon may

include all the Plan communications describing a single-

transition-factor formula as part of that evidence, even

though they contain plan trumps provisions.

Based on this evidence of the intended meaning of the

Plan, the district court correctly found that the second

transition factor in § 16.5.1(a)(2) was a scrivener’s error

inconsistent with plan participants’ expected benefits.

Under these circumstances, equitable reformation of

the Plan to remove the error is appropriate.

We close our discussion of Verizon’s reformation claim

by considering additional defenses to equitable relief.

Because Verizon’s claim is one for “appropriate equi-

table relief” under ERISA § 502(a)(3)(B), 29 U.S.C.

24 Nos. 09-3872 & 09-3965

§ 1132(a)(3)(B), it is subject to the traditional equitable

defenses at common law, provided that they are not

inconsistent with ERISA.

Young raises the defense of “good faith” and “fair

dealing,” under which a contracting party may be pre-

cluded from reforming a mistake caused by the party’s

own “gross” negligence. Restatement (Second) of

Contracts § 157 & cmt. a (1981). As the district court put

it, Bell Atlantic/Verizon’s failure to prevent the drafting

mistake in § 16.5.1(a)(2) was “profound” negligence.

Bell Atlantic charged a single in-house attorney, Barry

Peters, with revising a critical provision of a multi-billion-

dollar pension plan, apparently without critical review

by another ERISA expert. It is baffling that a major corpo-

ration would not invest greater resources to ensure ac-

curacy in the drafting of such an important document.

Still, we cannot agree with Young that this institutional

failure showed a lack of good faith. Verizon never misrep-

resented its intended meaning of the Cash Balance

Plan, and indeed, based on the extrinsic evidence

examined above, it made great efforts to accurately com-

municate how participants’ benefits would be calcu-

lated. Cf. id. cmt. a, illustration 2 (misrepresentation

that party verified bid for accuracy was failure to act

in good faith).

For similar reasons, we do not accept Young’s “unclean

hands” defense, under which “equitable relief will be

refused if it would give the plaintiff a wrongful gain.”

Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1021 (7th Cir.

2002). A plaintiff who acts unfairly, deceitfully, or in bad

Nos. 09-3872 & 09-3965 25

faith may not through equity seek to gain from that

transgression. See Packers Trading Co. v. Commodity

Futures Trading Comm’n, 972 F.2d 144, 148-49 (7th Cir.

1992). Verizon made a mistake, and a big one at that, in

drafting the Cash Balance Plan, but Verizon did not

attempt to deceive plan participants regarding their bene-

fit rights under the intended meaning of § 16.5.1(a)(2).

Cf. id. (barring relief for a plaintiff who concealed his

knowledge of the defendant’s mistake and then at-

tempted to recover based on that mistake). On the con-

trary, Verizon’s Plan administration and communica-

tions reflected its consistent view that opening cash

balances would be calculated using only a single transi-

tion factor.

Finally, Young raises the equitable defense of laches,

or unreasonable delay, by Verizon in seeking equitable

reformation. Laches means “culpable delay in suing” and

may apply if the plaintiff commits an unreasonable,

prejudicial delay in bringing the suit. Teamsters & Employers

Welfare Trust of Ill. v. Gorman Bros. Ready Mix, 283 F.3d

877, 880 (7th Cir. 2002). For reasons explained above in

our discussion of the statute of limitations, Verizon did

not unreasonably delay in bringing its equitable refor-

mation claim. Although Verizon learned of the scrivener’s

error in the Cash Balance Plan in 1997, at that time it

had no reason to believe that this error would lead to

a benefits dispute. Instead, the parties’ correspondence

and course of dealing were consistent with Verizon’s

understanding that only a single transition factor would

be used to calculate benefits. By 1998, Verizon had

corrected the Plan to reflect this understanding, and

26 Nos. 09-3872 & 09-3965

no employee communicated a contrary interpretation

before Young brought her administrative claim in 2004.

Since this course of conduct reinforced Verizon’s inter-

pretation of the Cash Balance Plan, Verizon did not “sleep

on [its] rights,” Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d

813, 820 (7th Cir. 1999), by not bringing an equitable

reformation claim before Young’s lawsuit.

In sum, no equitable defenses bar Verizon’s equitable

reformation claim under ERISA § 502(a)(3), and the

district court properly granted that claim to remove the

scrivener’s error from the Cash Balance Plan.

C. Discount Rate for Opening Cash Balances

In addition to her argument regarding the second

transition factor in § 16.5.1(a)(2), Young claimed that

Verizon improperly applied the enhanced, 120% PBGC

discount rate used in the 1995 BAMPP to calculate her

opening balance under the Cash Balance Plan. Verizon’s

Review Committee denied Young’s discount rate claim,

and because the Plan grants the administrator broad

discretion to interpret Plan provisions, we review the

Committee’s decision for an abuse of discretion. See

Black v. Long Term Disability Ins., 582 F.3d 738, 744 (7th

Cir. 2009).

The interpretation of ERISA plans is governed by

federal common law, which draws on general principles

of contract interpretation to the extent they are con-

sistent with ERISA. Mathews, 144 F.3d at 465. Under these

principles, contract language is given its plain and ordi-

Nos. 09-3872 & 09-3965 27

nary meaning. Pitcher v. Principal Mut. Life Ins. Co., 93

F.3d 407, 411 (7th Cir. 1996). Contracts must be read as a

whole, and the meaning of separate provisions should

be considered in light of one another and the context of

the entire agreement. Taracorp, Inc. v. NL Indus., Inc.,

73 F.3d 738, 745 (7th Cir. 1996). Contract interpretations

should, to the extent possible, give effect to all language

without rendering any term superfluous, id. at 746, but

if both a general and a specific provision apply to the

subject at hand, the specific provision controls, Medcom

Holding Co. v. Baxter Travenol Labs., Inc., 984 F.2d 223,

227 (7th Cir. 1993).

The use of a discount rate to calculate opening balances

under the Cash Balance Plan occurs by operation of

§ 16.5.1(a)(2). That section defines opening cash balances

as the product of two variables (assuming, of course,

one ignores the second “transition factor” that we have

disregarded as a scrivener’s error): “(A) the Participant’s

applicable Transition Factor described in Table 1 of this

Section, times (B) the lump-sum cashout value of the

Accrued Benefit payable at age 65 under the 1995

BAMPP Plan . . . .” Under § 4.19 of the BAMPP, which

was attached to the Cash Balance Plan as an appendix,

lump-sum payments for employees who retired during

the 1994-1995 cashout window were calculated using a

discount rate of 120% of “the applicable PBGC interest

rate.”

Reading the language of § 16.5.1(a)(2) in the context of

the entire Cash Balance Plan—including the attached 1995

BAMPP—the best interpretation is one that applies the

28 Nos. 09-3872 & 09-3965

120% PBGC discount rate used in the 1995 BAMPP to

calculate opening cash balances. The plain meaning of the

“(B)” variable in § 16.5.1(a)(2)—“the lump-sum cashout

value . . . payable . . . under the 1995 BAMPP Plan”—is the

lump-sum value as calculated under the 1995 BAMPP.

Since the BAMPP used a 120% PBGC discount rate, that

same methodology carries over to calculating opening

balances under the Cash Balance Plan.

Young points to the umbrella section 16.5.1, which

provides that any “present value” that “must be deter-

mined under this Section 16.[5] shall be determined . . .

using the PBGC interest rates which were in effect for

September of 1995.” Young would apply this present

value definition, which uses a discount rate of simply

100% of the PBGC rate, to determine the “lump-sum

cashout value” in § 16.5.1(a)(2). Young’s interpretation

ignores the explicit reference in § 16.5.1(a)(2) to the

cashout value “under the 1995 BAMPP Plan.” Because

§ 16.5.1(a)(2) specifically uses the 1995 BAMPP formula

for discounting lump-sum values, the more general

present value formula in § 16.5.1 does not apply to that

section.

We also disagree with Young that incorporating the

1995 BAMPP, 120% PBGC formula into § 16.5.1(a)(2) in

this manner renders the 100% PBGC formula in § 16.5.1

superfluous. The latter formula applies broadly to cal-

culate present values under “this Section 16.[5].” Notably,

unlike § 16.5.1(a), provisions in § 16.5.2(a) use the “present

value” term defined in § 16.5.1 to determine opening

cash balances for employees covered by those sections.

Nos. 09-3872 & 09-3965 29

So it harmonizes all the language in § 16.5 to give effect

to the 120% PBGC rate incorporated into § 16.5.1(a)(2)

for that specific provision, while giving effect to the

general 100% PBGC rate for other provisions in § 16.5.

The most reasonable reading of § 16.5.1(a)(2) is one

that applies the 120% PBGC discount rate to calculate

opening cash balances. At the very least, Verizon’s

Review Committee did not abuse its discretion in

adopting this interpretation.

III. Conclusion

ERISA’s rules for written plans are strictly enforced,

but they are not so strict as to prevent equitable reforma-

tion of a plan that is shown, by clear and convincing

evidence, to contain a scrivener’s error that is inconsis-

tent with participants’ expected benefits.

A FFIRMED.

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