Stephens v. Pension Benefit Guaranty Corp.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 27, 2014 Decided June 24, 2014

No. 13-5129

JAMES C. STEPHENS AND RICHARD MAHONEY,

APPELLANTS

v.

PENSION BENEFIT GUARANTY CORPORATION,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:07-cv-01264)

Jacks C. Nickens Jr. argued the cause for appellants.

With him on the briefs was Robert P. Trout.

Colin B. Albaugh, Attorney, Pension Benefit Guaranty

Corporation, argued the cause for appellee. With him on the

brief were Judith R. Starr, General Counsel, Israel Goldowitz,

Chief Counsel, Stephanie Thomas, Assistant Chief Counsel,

and Jean Marie Breen and Mark R. Snyder, Attorneys.

Before: BROWN and PILLARD, Circuit Judges, and

EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge BROWN.

2

BROWN, Circuit Judge: When a group of U.S. Airways

pilots hung up their wings over a decade ago, they expected

prompt payment of their retirement benefits. When payment

was delayed 45 days, Appellants filed a class action on behalf

of themselves and similarly situated pilots seeking interest for

the period of delay. The district court refused to certify a

class, holding that James Stephens’s claim is not typical of the

claims of the rest of the putative class because only Stephens

exhausted internal plan remedies before filing suit under the

Employee Retirement Income Security Act (ERISA). Today

we hold the class members were not required to exhaust

internal remedies before bringing their claims in court

because they seek enforcement of ERISA’s substantive

guarantees rather than contractual rights. We reverse the

district court’s judgment and remand for reconsideration of

Appellants’ motion to certify a class.

I

The U.S. Airways pension plan for pilots allowed retirees

to choose between receiving their benefits as a lifetime

monthly annuity or as an equivalent lump sum payment

actuarially equivalent to the projected value of all annuity

payments. For pilots who chose the annuity option, payments

would commence on the first day of the month after the pilot

retired. 1 For retirees who chose to receive their benefits as a

lump sum, U.S. Airways calculated the amount of that benefit

to be actuarially equivalent to the annuity benefit as of the

annuity commencement date. But those pilots were not paid

the lump sum until 45 days after the annuity starting date, and

they were not paid interest accrued on their benefits during

that time. U.S. Airways maintained this delay was

1

At all times relevant to this action, the mandatory retirement age

for commercial pilots under federal law was 60.

3

administratively necessary to perform additional calculations

and to ensure pilots were paid the correct amount.

James Stephens and Richard Mahoney retired from their

jobs as U.S. Airways pilots in 1996 and 1999, respectively.

They, like many other U.S. Airways pilots, chose to receive

their retirement benefits as a lump sum. And, like the other

retirees that chose the lump sum option, Stephens and

Mahoney received their payments approximately 45 days

after what would have been their annuity start date. Stephens

received $488,477.22, and Mahoney received $672,162.79. If

the plan had paid interest during the 45-day delay, Stephens

and Mahoney would have received an extra $3,665.06 and

$5,043.25, respectively.

In 1997, Stephens filed an administrative claim with U.S.

Airways arguing the company was required to pay interest for

the 45-day delay under both the terms of the retirement plan

and ERISA, 29 U.S.C. § 1054(c)(3), which requires that any

lump sum benefit be the “actuarial equivalent” of the annuity

benefit. Stephens argued that ERISA’s actuarial equivalence

rule required not only that his lump sum benefit be calculated

to be actuarially equivalent to the annuity benefit as of the

time the annuity benefit would have started, but also that he

be paid the lost time value of the lump sum benefit to the

extent payment of the lump sum was delayed past the annuity

starting date. When U.S. Airways denied his claim, Stephens

appealed to the U.S. Airways Retirement Board, which

rejected Stephens’s claim in 1999. Neither Mahoney nor any

other U.S. Airways pilot filed a similar claim with the airline

or Retirement Board.

In 2000, Appellants filed a complaint against the

retirement plan and U.S. Airways in the U.S. District Court

for the Northern District of Ohio. They sought to represent a

4

class of similarly situated pilots whose lump sum benefits

payments had been delayed. The district court dismissed the

complaint for lack of subject matter jurisdiction, but the Sixth

Circuit reversed. See Stephens v. Ret. Income Plan for Pilots

of U.S. Air, Inc. (Stephens I), 464 F.3d 606 (6th Cir. 2006).

When the retirement plan subsequently terminated due to U.S.

Airways’s bankruptcy, Appellants substituted the Pension

Benefit Guaranty Corporation (PBGC), a federal agency and

the statutory trustee of the terminated plan, as the defendant.

Consequently, the case was transferred to the U.S. District

Court for the District of Columbia in 2007. Three years later,

the district court granted summary judgment in PBGC’s

favor. Stephens v. US Airways Grp. (Stephens II), 696 F.

Supp. 2d 84 (D.D.C. 2010).

The pilots appealed, and a panel of this court affirmed in

part and reversed in part. 2 Each of the panel’s judges wrote a

separate opinion. Judges Brown and Henderson, forming a

majority of the court, concluded that, because “U.S. Airways

accurately calculated [Appellants’] lump sums to be the

actuarial equivalent of the annuity option as of the annuity

start date, the lump sum payment does not violate

§ 1054(c)(3).” Stephens v. US Airways Grp. (Stephens III),

644 F.3d 437, 440 (D.C. Cir. 2011); id. at 444 (Henderson, J.,

dissenting in part). 3 But we held U.S. Airways was permitted

only a “reasonable delay[]” in paying retirees their lump sum

2

We affirmed the district court’s ruling that Appellants were not

entitled to attorney’s fees from PBGC. Stephens v. US Airways

Grp., 644 F.3d 437, 441–42 (D.C. Cir. 2011).

3

Judge Kavanaugh would have held U.S. Airways’s practice of

delaying payments violated the actuarial equivalence requirement

of 29 U.S.C. § 1054(c)(3). Stephens III, 644 F.3d at 442–43

(Kavanaugh, J., concurring in the judgment). Therefore, he would

have found PBGC liable for interest during the entire 45-day delay.

5

benefit, and the airline was required to pay interest on any

additional delay. Id. at 440 (Brown, J., for the court). We

identified this standard in an Internal Revenue Service (IRS)

regulation providing that “[a] payment shall not be considered

to occur after the annuity starting date merely because actual

payment is reasonably delayed for calculation of the benefit

amount if all payments are actually made.” 26 C.F.R.

§ 1.401(a)–20 (Question & Answer 10(b)(3)); Stephens III,

644 F.3d at 440; Stephens III, 644 F.3d at 444 (Henderson, J.,

dissenting in part).

The panel was further split on the question of what

portion of the delay in paying the lump sum benefit was

reasonable. Judge Brown, writing only for herself in a

controlling opinion, 4 held a 45-day delay was not reasonable.

Stephens III, 644 F.3d at 440–41 (Brown, J., for the court).

She suggested a delay of about thirty days may be reasonable.

See id. at 440–41. 5 Concluding that the lump sum payments

were unreasonably delayed, we remanded to the district court

to determine the period of unreasonable delay and to calculate

the corresponding amount of interest due Appellants.

On remand, Appellants moved to certify a class of

plaintiffs consisting of all pension plan participants and

beneficiaries who had retired between 1997 and 2003 and

elected to receive their benefits as a lump sum. The district

4

Judge Brown’s opinion was controlling because it presented the

narrowest grounds of the opinions forming a majority. See

Stephens III, 644 F.3d at 442 n.1 (Kavanaugh, J., concurring in the

judgment).

5

Judge Henderson would have held the entire 45-day delay was

reasonable, and thus that Appellants were not entitled to any

interest for the delay. Stephens III, 644 F.3d at 444–45 (Henderson,

J., dissenting in part).

6

court denied the motion to certify the class, holding Stephens

did not present a claim typical of the claims of the putative

class. Stephens v. US Airways Grp. (Stephens IV), 908 F.

Supp. 2d 10 (D.D.C. 2012). The court noted that only

Stephens had exhausted his internal remedies under the plan

before bringing suit. Id. at 14. Although the court assumed

without deciding that exhaustion is not required when a

plaintiff alleges a violation of ERISA’s substantive

guarantees, the court held Appellants’ claim did not fall

within that exception because it implicated issues of plan

administration, not merely statutory interpretation. Id. at 15–

16. The district court also held putative class members were

not excused from the exhaustion requirement under the

futility exception. Id. at 16–18.

After the district court denied Appellants’ motion for

class certification, and in order to obtain a final appealable

judgment, Stephens settled his individual claim with PBGC.

Mahoney, seeing the writing on the wall for his unexhausted

claim, agreed to a dismissal without prejudice. Accordingly,

the district court entered a final judgment dismissing the

action on April 3, 2013. This appeal followed.

II

We begin, as we so often do, by assuring ourselves of our

own jurisdiction. See Floyd v. District of Columbia, 129 F.3d

152, 155 (D.C. Cir. 1997). Because Stephens settled his

individual claim against PBGC and Mahoney agreed to a

dismissal of his case without prejudice, Appellants’ standing

to bring this appeal may be subject to some doubt. Cf.

Calderon v. Moore, 518 U.S. 149, 150 (1996) (“[A]n appeal

should . . . be dismissed as moot when, by virtue of an

intervening event, a court of appeals cannot grant any

effectual relief whatever in favor of the appellant.”).

7

However, our precedent makes clear Stephens has standing to

maintain this appeal because he has a continuing “interest in

spreading the litigation costs among numerous litigants with

similar claims.” Richards v. Delta Air Lines, Inc., 453 F.3d

525, 528–29 (D.C. Cir. 2006). PBGC suggests Richards may

not apply because, as we have previously held, see Stephens

III, 644 F.3d at 441–42, Appellants are not entitled to recover

attorney’s fees from PBGC. Appellee’s Br. at 11 & n.41. But

our holding in Richards did not depend on the ability of the

class representative to recover attorney’s fees from the

defendant. Rather, the class representative has an interest in

spreading the litigation costs among other members of the

plaintiff class—a result that will be obtained if class counsel

is paid out of a class-wide recovery. Because we conclude

Stephens has standing to maintain this appeal, we need not

consider whether Mahoney has standing. See Comcast Corp.

v. FCC, 579 F.3d 1, 6 (D.C. Cir. 2009); Robinson-Reeder v.

Am. Council on Educ., 571 F.3d 1333, 1336–40 (D.C. Cir.

2009) (discussing whether a voluntary dismissal of

unresolved claims makes a district court’s judgment final and

appealable).

III

Appellants challenge the district court’s denial of their

motion for class certification. They argue the putative class

members did not need to exhaust the retirement plan’s

internal remedies before they could challenge in court U.S.

Airways’s 45-day delay. Thus, the fact that only Stephens

exhausted internal remedies is not legally material, and,

Appellants argue, his claim is typical of the class’s claims

within the meaning of Federal Rule of Civil Procedure

23(a)(3). We agree with Appellants because (1) there is no

exhaustion requirement for ERISA claims alleging

statutory—rather than plan-based—violations, and (2) the

8

class claims in this action assert statutory violations not

subject to the exhaustion requirement. 6

A

Although ERISA itself does not require a plan

beneficiary to exhaust internal plan remedies before bringing

suit, courts have universally applied the requirement as a

matter of judicial discretion. Commc’ns Workers of Am. v.

AT&T, 40 F.3d 426, 431–32 (D.C. Cir. 1994). In doing so,

courts have relied on the law’s structure and history. See

Kross v. W. Elec. Co., 701 F.2d 1238, 1243–45 (7th Cir.

1983); Amato v. Bernard, 618 F.2d 559, 566–68 (9th Cir.

1980). The exhaustion doctrine effectuates Congress’s

purpose in requiring that benefit plans provide for

administrative review procedures by ensuring those internal

remedial procedures are utilized. See ERISA § 503, 29

U.S.C. § 1133 (“[E]very employee benefit plan

shall . . . afford a reasonable opportunity to any participant

whose claim for benefits has been denied for a full and fair

review by the appropriate named fiduciary of the decision

denying the claim.”); Amato, 618 F.2d at 567 & n.7. As we

have previously noted, the requirement “enables plan

administrators to apply their expertise and exercise their

discretion to manage the plan’s funds, correct errors, make

considered interpretations of plan provisions, and assemble a

factual record that will assist the court reviewing the

administrators’ actions.” Commc’ns Workers of Am., 40 F.3d

at 432. The exhaustion requirement also reduces the number

6

Alternatively, Appellants would prevail if we found the putative

class members were excused from the exhaustion requirement

under the futility doctrine. See Commc’ns Workers of Am. v.

AT&T, 40 F.3d 426, 431–32 (D.C. Cir. 1994). Because we find the

exhaustion requirement inapplicable to the claims at issue in this

action, we do not reach the futility issue.

9

of frivolous lawsuits, promotes the “consistent treatment of

claims for benefits,” provides a “nonadversarial method of

claims settlement,” and “minimize[s] the cost of claims

settlement.” Amato, 618 F.2d at 567. On the other hand,

courts apply the exhaustion doctrine keeping in mind that, in

enacting ERISA, “Congress intended that a body of Federal

substantive law w[ould] be developed by the courts to deal

with issues involving rights and obligations under private

welfare and pension plans.” Id.

Despite the universal acceptance of the general

exhaustion rule, the courts of appeal are split on the question

of whether beneficiaries of an ERISA plan “must exhaust

internal plan remedies before suing plan fiduciaries on the

basis of an alleged violation of duties imposed by the statute.”

Mason v. Cont’l Grp., 474 U.S. 1087, 1087 (1986) (White, J.,

dissenting from denial of certiorari). We have not yet

weighed in on the question, but this case requires us to do so.

The Third, Fourth, Fifth, Ninth, and Tenth Circuits have

held exhaustion is not required when plaintiffs seek to enforce

statutory ERISA rights rather than contractual rights created

by the terms of a benefit plan. See Zipf v. AT&T, 799 F.2d

889, 891–94 (3d Cir. 1986); Smith v. Sydnor, 184 F.3d 356,

364–65 (4th Cir. 1999); Galvan v. SBC Pension Benefit Plan,

204 F. App’x 335, 338–39 (5th Cir. 2006); Amaro v. Cont’l

Can Co., 724 F.2d 747, 751–52 (9th Cir. 1984); Held v. Mfrs.

Hanover Leasing Corp., 912 F.2d 1197, 1204–05 (10th Cir.

1990). In Zipf, the Third Circuit distinguished between

actions brought “to enforce the terms of a plan” and those

brought “to assert rights granted by the federal statute.” 799

F.2d at 891. The court invoked ERISA’s legislative history to

show Congress intended statutory rights to be enforced by the

courts, not by plan administrators. Id. at 892. Congress

required plans to provide procedures to review claims for

10

benefits, but did not require internal remedial procedures to

embrace claims based on ERISA’s substantive guarantees. Id.

at 891–92; see also ERISA § 503, 29 U.S.C. § 1133

(requiring internal procedures to provide review for a

participant “whose claim for benefits has been denied”

(emphasis added)). Furthermore, while plan fiduciaries may

have expertise in interpreting the terms of benefit plans, they

have no similar expertise in interpreting statutory guarantees.

Zipf, 799 F.2d at 893. Rather, statutory interpretation is a

matter within the expertise of the judiciary. Id. Finally,

judicial resolution of statutory claims will provide a consistent

source of law for plan fiduciaries. Id.; see also Amaro, 724

F.2d at 751–52.

The Seventh and Eleventh Circuits, on the other hand,

have held the exhaustion requirement applies even where

plaintiffs assert statutory rights. See Kross, 701 F.2d at 1245;

Lindemann v. Mobil Oil Corp., 79 F.3d 647, 649–50 (7th Cir.

1996); Mason v. Cont’l Grp., 763 F.2d 1219, 1226–27 (11th

Cir. 1985). In Lindemann, the Seventh Circuit noted that

requiring parties to exhaust statutory claims would enable

plan fiduciaries to assemble a factual record that would assist

the court in reviewing their actions. 79 F.3d at 650.

Additionally, even where plan beneficiaries seek to file

statutory claims, the exhaustion requirement “minimize[s] the

number of frivolous lawsuits, promote[s] a non-adversarial

dispute resolution process, and decrease[s] the cost and time

of claims settlement.” Id.

We agree with the Third, Fourth, Fifth, Ninth, and Tenth

Circuits. In determining the scope of the exhaustion doctrine,

we are called upon to balance two competing interests

recognized by ERISA. On the one hand, Congress intended

for the courts to develop a body of federal substantive law

that would address issues involving rights and obligations

11

under pension plans. See Amato, 618 F.2d at 567. On the

other hand, Congress intended that plan administrators have

primary responsibility for adjudicating benefits claims to

promote the consistent treatment of claims and to minimize

the burden on the courts and all parties. See id. This

balancing compels us to require claimants to exhaust internal

remedies when they assert rights granted by a benefit plan.

But it logically suggests direct resort to the federal courts

where claimants assert statutory rights—a practice that better

promotes Congress’s intent to create minimum terms and

conditions for pension plans.

While plan administrators may have particular expertise

in interpreting their pension plans’ terms, federal judges have

particular expertise in interpreting statutory terms. And while

consistent application of a pension plan’s terms might best be

achieved by allowing plan administrators to interpret those

terms in the first instance, consistent application of the law is

best achieved by encouraging a unitary judicial interpretation

of that law. Federal district courts also have the expertise to

create a factual record, should that be necessary, and to

encourage settlement of disputes where appropriate. Finally,

we are persuaded by Zipf’s interpretation of ERISA’s

legislative history and by its conclusion that Section 503 of

ERISA does not require pension plans to create internal

remedial procedures to evaluate statutory claims. Zipf, 799

F.2d at 891–92; see also Amaro, 724 F.2d at 751 (“There is

no internal appeal procedure either mandated or

recommended by ERISA to hear . . . claims [alleging

violations of protections guaranteed by ERISA].”).

Pension plan beneficiaries need not exhaust internal

remedial procedures before proceeding to federal court when

12

they assert violations of ERISA’s substantive guarantees. 7

We must determine, therefore, whether Appellants in this

action assert statutory or contractual rights. 8

B

In light of our previous opinion in Stephens III, which

partially decided the merits of Appellants’ claim, we easily

conclude Appellants have asserted a claim alleging a statutory

violation. In Stephens III, we held U.S. Airways’s 45-day

delay in making retirees’ lump sum payment was

unreasonable. 644 F.3d at 440. We found this

“reasonableness” standard in an IRS regulation, not in the

terms of the pension plan. See id. at 440–41; id. at 444

(Henderson, J., dissenting in part).

We further held U.S. Airways did not violate the actuarial

equivalence requirement of 29 U.S.C. § 1054(c)(3). Id. at 440

(Brown, J., for the court). But that does not mean the

company did not violate other provisions of ERISA. In fact,

we explicitly held the airline’s practices ran afoul of federal

law, stating “a pension plan could not satisfy ERISA by

7

This exception to the exhaustion requirement does not embrace

plan-based claims “artfully dressed in statutory clothing,” such as

where a plaintiff seeks to avoid the exhaustion requirement by

recharacterizing a claim for benefits as a claim for breach of

fiduciary duty. Drinkwater v. Metro. Life Ins. Co., 846 F.2d 821,

826 (1st Cir. 1988). As discussed below, the claims here are

accurately characterized as statutory.

8

Claims alleging a violation of ERISA’s regulations fall within the

category of claims not subject to the exhaustion requirement. Our

discussion applies equally to all claims relying on federally-granted

protections, whether they are found in ERISA or its implementing

regulations.

13

correctly calculating an actuarially equivalent lump sum, then

delaying payment of that sum indefinitely.” Id. (emphasis

added). We thus found a violation not of the terms of the U.S.

Airways pension plan, but rather of ERISA and the IRS

regulations implementing that law.

In the district court’s view, the questions we directed that

court to answer on remand—namely, how much of the 45-day

delay was unreasonable—related to plan administration and

not statutory interpretation. Stephens IV, 908 F. Supp. 2d at

16. It is true we held U.S. Airways’s administration of the

plan violated the statute. But the relevant question is not what

action Appellants challenge—here, the 45-day delay, which is

a matter of plan administration. Rather, the relevant inquiry is

what forms the basis of Appellants’ right to relief: the

contractual terms of the pension plan or the provisions of

ERISA and its regulations. Because Appellants assert a right

granted them by ERISA’s regulations—the right to receive a

lump sum payment without unreasonable delay—they assert a

statutory claim not subject to the exhaustion requirement. In

other words, Appellants assert a statutory claim because the

district court on remand will have to evaluate the plan’s

administration under a reasonableness standard created and

defined by federal law. 9

9

Our opinion in Stephens III explained the nature of Appellants’

claim and decided the merits of that claim in favor of Appellants.

We remanded to the district court to determine the extent of

liability (the extent of unreasonableness in U.S. Airways’s delay)

and the amount of damages. On remand, Appellants filed a Fourth

Amended Class Action Complaint, asserting three separate counts

and complicating the question we had remanded to the district

court. The complaint both seeks “enforcement of the Plan, as

written,” J.A. 229–30, and alleges violations of statutory

protections, see J.A. 230–31. We leave it to the district court on

remand to clarify which of Appellants’ claims are properly

14

IV

Thus, the district court’s ruling on the typicality of the

class representatives’ claims was erroneous. We remand for

the district court to reconsider Appellants’ motion to certify a

class. 10

This case was originally filed more than fourteen years

ago. When we decided Stephens III in 2011, we thought we

had seen the last of this case. We definitively decided the

issue of liability, and remanded to the district court to

determine the extent of liability and the amount of damages.

Three years later, this case is no closer to a final disposition.

We hope the district court can make short work of the motion

for class certification and this action can move speedily to a

final resolution.

presented. Our decision here relates only to the claim we

previously found Appellants successfully asserted—that U.S.

Airways unreasonably delayed its lump sum payment under 26

C.F.R. § 1.401(a)–20 (Question & Answer 10(b)(3)). If, on

remand, Appellants continue to assert other, plan-based claims, the

district court might consider certifying a class only as to the

statutory claims. See FED R. CIV. P. 23(c)(4).

10

After the district court made its initial ruling on the motion for

class certification, Stephens settled his claims. The district court

should consider on remand whether Stephens would be an adequate

class representative. See U.S. Parole Comm’n v. Geraghty, 445

U.S. 388, 405–06 (1980). Nevertheless, we are confident that

Mahoney or another class member could adequately represent the

class even if Stephens cannot.

15

The opinion and judgment of the district court are

Reversed.