Blankenship v. Liberty Life Assurance Co. of Boston

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

VORRIS BLANKENSHIP, 

Plaintiff-Appellee,

v.

LIBERTY LIFE ASSURANCE No. 05-15077

COMPANY OF BOSTON, as

Administrator and Fiduciary of the  D.C. No.

CV-03-01132-SC

KPMG Employee Long-term

OPINION

Disability Plan and the KPMG

Employee Long-term Disability

Plan,

Defendant-Appellant.



Appeal from the United States District Court

for the Northern District of California

Samuel Conti, District Judge, Presiding

Argued and Submitted

November 13, 2006—San Francisco, California

Filed May 18, 2007

Before: William C. Canby, Jr., John T. Noonan, and

Richard A. Paez, Circuit Judges.

Opinion by Judge Paez;

Concurrence by Judge Noonan

5877

5880 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

COUNSEL

Mark G. Bonino, Pamela E. Cogan, Kathryn C. Curry, Elisa

Nadeau, San Jose, California, for the defendant-appellant.

Scott Calkin, San Francisco, California, for the plaintiff-

appellee.

BLANKENSHIP v. LIBERTY LIFE ASSURANCE 5881

OPINION

PAEZ, Circuit Judge:

Liberty Life Assurance Company of Boston (“Liberty

Life”) appeals the district court’s award of disability benefits

to Vorris Blankenship, following a court trial on his claims

under the Employment Retirement Income Security Act

(“ERISA”) § 502(a)(1)(B) and § 502(a)(3). 29 U.S.C.

§ 1132(a). Liberty Life does not challenge the district court’s

ruling that Blankenship was entitled to long-term disability

benefits. Instead, Liberty Life argues that the disability bene-

fits owed Blankenship should have been reduced by the

amount of retirement benefits transferred to his Individual

Retirement Account (“IRA”) upon his retirement. Liberty Life

also challenges the use of a 10.01-percent interest rate to cal-

culate prejudgment interest. We have jurisdiction under 28

U.S.C. § 1291, and we affirm.

FACTS & PROCEDURAL HISTORY

The facts are not in dispute. Vorris Blankenship, an attor-

ney employed by KPMG LLP (“KPMG”), developed cancer.

He suffered severe complications as a result of his medical

treatment. Blankenship’s treating physician informed him

that, although he could undergo surgery to attempt to improve

his situation, it was not advisable because the surgery could

cause further complications and exacerbate his condition.

Liberty Life, administrator and fiduciary of the KPMG

Employee Long-Term Disability Plan (“Disability Plan”), of

which Blankenship was a member, initially determined in

June 1998 that Blankenship qualified for long-term disability

benefits under the Disability Plan. However, on April 20,

2000, Liberty Life sent Blankenship a letter informing him

that his benefits would be terminated because it had deter-

mined that there were alternative treatments that could

improve his condition. Blankenship appealed the decision to

5882 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

Liberty Life. Five months later, in September 2000, Liberty

Life rejected Blankenship’s appeal, reaffirming its prior deci-

sion to terminate benefits, and adding additional reasons for

the determination. Liberty Life also informed Blankenship

that he had exhausted his administrative remedies and that its

decision was final.

On September 13, 2000, KPMG terminated Blankenship,

who was 64 at the time, for failure to return to work. Upon

termination, Blankenship became eligible to receive retire-

ment benefits from several of his retirement plans with

KPMG. In a written letter, KPMG informed Blankenship of

his options for distribution of these benefits. The KPMG Pen-

sion Plan offered the benefits as either a joint and survivor

annuity for the lives of Blankenship and his spouse or as a

lump-sum payment. The lump-sum payment could be distrib-

uted directly to Blankenship, or he could elect to “roll it over

into an IRA or other tax qualified vehicle.” The KPMG Per-

sonal Account for Retirement (“PAR Plan”), a defined-

contribution plan in which the employer contributed an

amount equal to 1.5 percent of Blankenship’s salary each

year, also allowed for an annuity, a lump-sum payment, or a

lump-sum direct rollover to an IRA, with the additional

options of payment in monthly installments or deferred distri-

bution of the funds until Blankenship reached the age of 70½.

Blankenship chose to roll over both accounts directly into

an IRA managed by the Vanguard Fiduciary Trust Company

(“Vanguard”). On December 11, 2000, KPMG transferred

$29,291, representing the amount in Blankenship’s Pension

Plan account, to his Vanguard IRA. On January 9, 2001,

KPMG transferred $761,149, the amount in Blankenship’s

PAR Plan account, to the Vanguard IRA. The Disability Plan

requires that “other income benefits” be deducted from the

total monthly disability benefit paid to the insured. These

other income benefits are defined to include “[t]he amount of

benefits the insured receives under the employer’s retirement

plan as follows: (a) any disability benefits; (b) any retirement

BLANKENSHIP v. LIBERTY LIFE ASSURANCE 5883

benefits.” (emphasis added). “Retirement benefits” are

defined as money from a retirement plan1 which:

(1) is payable under a retirement plan either in a

lump sum or in the form of periodic payments;

(2) does not represent contributions made by an

employee . . . ; and

(3) is payable upon:

(a) early or normal retirement; or

(b) disability if the payment does not

reduce the amount of money which would

have been paid at the normal retirement age

under the plan if the disability had not

occurred.

Blankenship sued Liberty Life and the Disability Plan to

recover benefits under ERISA § 502(a)(1)(B) and appropriate

equitable relief under ERISA § 502(a)(3). See 29 U.S.C.

§§ 1132(a)(1)(B) and (a)(3). The parties agreed, as did the

district court, that the court should apply a de novo standard

of review in determining whether Blankenship was entitled to

disability benefits because the Disability Plan did not give

“the administrator or fiduciary discretionary authority to

determine eligibility for benefits or to construe the terms of

the plan.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S.

101, 115 (1989); see also Abatie v. Alta Health & Life Ins.

Co., 458 F.3d 955, 963 (9th Cir. 2006) (en banc) (discussing

standards of review to be used by courts in reviewing cases

in which ERISA-covered plan administrators have denied

benefits). Following a court trial, the court issued Findings of

Fact and Conclusions of Law, which it subsequently

1

Both parties agree that the Pension and PAR Plans fall within the defi-

nition of “retirement plan” under the Disability Plan.

5884 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

amended. The district court found that Blankenship was “to-

tally disabled” under the terms of the Disability Plan and enti-

tled to an award of benefits, attorney’s fees, costs, and

prejudgment interest. The district court also determined that

Liberty Life was not entitled to reduce the benefits owed by

the amount of outside retirement benefits transferred to

Blankenship’s IRA because these benefits were not “re-

ceived” by Blankenship as required by the Disability Plan.

The court based its ruling on: (1) the text of the Disability

Plan; (2) the distinction in the Internal Revenue Code (“IRC”)

between a trustee-to-trustee transfer (a “direct rollover”) and

a 60-day rollover; (3) the plain meaning of the word “re-

ceives”; and (4) the policy behind the Age Discrimination in

Employment Act (“ADEA”) provision which permits employ-

ers to offset long-term disability benefits with pension bene-

fits. The court entered judgment in favor of Blankenship in

the amount of $325,451.28, which included prejudgment

interest at a rate of 10.01 percent, attorney’s fees, and costs.

Liberty Life does not appeal the district court’s determina-

tion that Blankenship was entitled to long-term disability ben-

efits. Instead, Liberty Life argues that the disability benefits

owed Blankenship should have been reduced by the retire-

ment benefits from the Pension and PAR Plans. Liberty Life

also appeals the interest rate used to calculate prejudgment

interest.

DISCUSSION

A.

We first address Liberty Life’s challenge to the district

court’s ruling that it is not entitled to deduct the long-term

disability payments due Blankenship by the retirement bene-

fits transferred to Blankenship’s IRA at Vanguard. The Dis-

ability Plan requires that “other income benefits” be deducted

from the total monthly disability benefit payments paid to the

insured. These other income benefits are defined to include

BLANKENSHIP v. LIBERTY LIFE ASSURANCE 5885

“[t]he amount of benefits the insured receives under the

employer’s retirement plan as follows: (a) any disability bene-

fits; (b) any retirement benefits.” (emphasis added). The issue

here is whether Blankenship “received” his retirement funds

when they were transferred to his Vanguard IRA under the

terms of the Disability Plan.

We review de novo a district court’s determinations regard-

ing the text of an ERISA plan, including whether plan terms

are ambiguous. Cisneros v. UNUM Life Ins. Co. of Am., 134

F.3d 939, 942 (9th Cir. 1998); see also Metropolitan Life Ins.

Co. v. Parker, 436 F.3d 1109, 1113 (9th Cir. 2006) (citing

Cisneros, 134 F.3d at 942).

[1] We begin by recognizing that the term “receives” is not

defined in the Disability Plan. On appeal, both parties accept

the term “receive” to mean “to take into possession or con-

trol,” with Blankenship focusing on the possession aspect,

arguing that it means “to accept custody of; collect.” How-

ever, a definition of receipt based on possession and one

based on control may lead to two separate outcomes. Thus,

when considered in the context of the Disability Plan, the

term “receives” is ambiguous. We therefore apply the rule of

contra proferentem, and we conclude that it supports the dis-

trict court’s determination.

[2] Contra proferentem, which is recognized by federal

common law and the law of every state and the District of

Columbia, see Kunin v. Benefit Trust Life Ins. Co., 910 F.2d

534, 538-40 (9th Cir. 1990), holds that “if, after applying the

normal principles of contractual construction, the insurance

contract is fairly susceptible of two different interpretations,

another rule of construction will be applied: the interpretation

that is most favorable to the insured will be adopted.” Id. at

539. The rule applies in interpreting ambiguous terms in an

ERISA-covered plan except where the plan: (1) grants the

administrator discretion to construe its terms, (2) is the result

of a collective-bargaining agreement, or (3) is self-funded.

5886 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

See Winters v. Costco Wholesale Corp., 49 F.3d 550, 554 (9th

Cir. 1995); Eley v. Boeing Co., 945 F.2d 276, 279-80 (9th Cir.

1991); Kunin, 910 F.2d at 540. None of these exceptions

apply here. Applying contra proferentem, we construe the

term “receives” to mean possession through actual receipt of

funds.

[3] This interpretation is buttressed by the terms of the Dis-

ability Plan. As discussed above, the Disability Plan requires

that “other income benefits” be deducted from the total

monthly disability benefits paid to the insured. “Other income

benefits” is defined to include two categories of benefits:

those which an insured “receives,” and those for which an

employee is “eligible.” The latter category includes benefits

under workers’ compensation, occupational disease, and other

related laws, disability income benefits under any other group

insurance plan of the employer, and benefits under a govern-

mental retirement system as a result of the job with the

employer. The fact that the Disability Plan reduces disability

benefits based on eligibility for certain types of payments,

without requiring evidence that the individual received the

payments or even applied for them, supports the conclusion

that, where the Disability Plan requires a deduction of benefits

because of funds “received,” the term is properly read to

mean funds that actually come into the possession of the

insured.

[4] Blankenship elected to have the retirement funds

directly rolled over into his Vanguard IRA. We hold that,

under these circumstances, Blankenship did not obtain posses-

sion of his retirement funds.2 We base this determination on

Vanguard’s status as a trustee under the IRC and the fact that

Blankenship’s funds were transferred from KPMG to his Van-

2

It is undisputed by the parties that had Blankenship elected to directly

receive the benefits, whether in the form of an annuity, monthly install-

ments, or a lump-sum payment, the Disability Plan benefits owed

Blankenship would have been reduced accordingly.

BLANKENSHIP v. LIBERTY LIFE ASSURANCE 5887

guard IRA through a trustee-to-trustee transfer. See 26 U.S.C.

§§ 401(a)(31)(A), 402(e)(6), 408(a).

[5] Liberty Life argues that Vanguard is more properly des-

ignated as an agent than as a trustee for the purposes of deter-

mining its role in receiving Blankenship’s retirement funds.

According to Liberty Life, if Vanguard is acting as a mere

agent, the transfer to the IRA would constitute receipt by

Blankenship through Vanguard. In our view, however, if Van-

guard is properly characterized as a trustee, the funds are no

more in Blankenship’s possession than they were before the

transfer, and possession would be gained only at the time the

funds were withdrawn from the IRA. In the latter circum-

stance, the transfer of funds to Vanguard would not constitute

actual receipt within the meaning of the Disability Plan.

[6] Vanguard, in this context, lacks most of the traditional

powers and responsibilities that characterize a trustee. It is

Blankenship who directs the investment choices, Blankenship

who controls the flow of funds in and out of the account, and

Blankenship who can at any time terminate the account.

Nonetheless, an IRA established in accordance with IRC

§ 408(a) constitutes a special type of trust account, in which

the custodian of the account must fulfill particular obligations

and must conform to certain restrictions. See 26 U.S.C.

§ 408(a). The custodian, acting as a trustee, must ensure that

contributions to the account are made in cash; that the contri-

butions not exceed the amount the individual is permitted to

contribute each year; that the funds not be commingled with

other property except in a common trust or investment fund;

that the funds not be invested in life insurance contracts; and

that the interest of an individual in the balance of his or her

account be nonforfeitable. See id. It is compliance with these

requirements that establishes the custodian of a IRA as a trustee.3

3

The IRC further supports the conclusion that Blankenship did not

receive the retirement funds through the direct rollover: under IRC

§ 402(a), a disbursal from an employee trust is taxable only if it is “actu-

5888 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

[7] Liberty Life argues that the IRS’s categorization of the

transfer to a trustee account has no bearing on whether the

funds were “received” by Blankenship. However, the IRC is

clearly relevant; it provides the backdrop for Liberty Life’s

arguments. That is, Liberty Life argues that Blankenship pos-

sessed and controlled his retirement funds because at the time

the funds were transferred to Vanguard, Blankenship was

over the age of 59½ and was therefore permitted under the

IRC to withdraw money from his IRA without an early-

withdrawal penalty. See 26 U.S.C. § 72(t)(2)(A)(i). This argu-

ment implies that if Blankenship were under the age of 59½

at the time the funds were transferred into his Vanguard

account, the 10 percent penalty for early withdrawal would

create a restriction on the account that limited his possession

and control of the funds.4 See 26 U.S.C. § 72(t)(1). Thus, the

ally distributed” to the employee. See 26 U.S.C. § 402(a). However, a

trustee-to-trustee transfer in which the employer plan distributes funds

directly to the employee’s IRA is exempt from taxation. See 26 U.S.C.

§§ 401(a)(31)(A), 402(e)(6). In contrast, a 60-day rollover transfer, in

which the plan distributes funds directly to the employee, requires the

withholding of 20 percent of the proceeds for tax purposes. See 26 U.S.C.

§§ 402(c)(3), 3405(c). Under a 60-day rollover, the employee receives the

funds, maintaining control over them, but he must transfer some or all of

the funds to an IRA within 60 days to avoid income tax on the transferred

funds. See 26 U.S.C. § 402(c)(3).

4

Blankenship’s age cannot be overlooked. Our holding is consistent

with the policy purposes behind the ADEA safe harbor, § 4(l)(3)(B),

which is the statutory authority for an employer-provided disability plan

to reduce payments paid to an employee by pension benefits despite the

age-based impact of such a plan provision. See 29 U.S.C. § 623(l)(3) (per-

mitting an employer-sponsored plan to reduce disability benefits by pen-

sion benefits “(A) paid to the individual that the individual voluntarily

elects to receive; or (B) for which an individual who has attained the later

of age 62 or normal retirement age is eligible.”). As explained in Kalvin-

skas v. California Institute of Technology:

[The] legislative history demonstrates that the purpose of

§ 4(l)(3)(B) was to prevent an employee from receiving the wind-

fall of simultaneous payments of long-term disability and pension

BLANKENSHIP v. LIBERTY LIFE ASSURANCE 5889

IRC defines the relationship between an IRA account holder

and the custodian/trustee of the account through the duties

and obligations it imposes on each, and is directly relevant to

our analysis. See id.; 26 U.S.C. § 408(a). Vanguard was not

a mere agent for Blankenship, but was a trustee as established

under the IRA provisions of the Internal Revenue Code. We

therefore conclude that Blankenship did not obtain possession

of his retirement funds through the trustee-to-trustee transfer

from KPMG to Vanguard.

[8] Although we hold that under the doctrine of contra

proferentem, the definition of receipt is one that requires pos-

session, we also note that Blankenship did not gain any addi-

tional authority to control his retirement funds through the

transfer to the Vanguard IRA. Liberty Life acknowledged at

oral argument before this court that if Blankenship had

elected upon retirement to defer distribution of his funds by

leaving them in his KPMG account, he would not have “re-

ceived” the funds under the terms of the Disability Plan.

There is no significant difference, however, between Blanken-

ship electing to keep the funds in KPMG’s care through

deferred distribution and electing to transfer the funds to the

Vanguard IRA. In both instances, Blankenship could choose

to take out some or all of the money without penalty; in both

instances, the money belonged to Blankenship and would be

held for him by a trustee. As the district court explained:

benefits in full. In other words, Congress created § 4(l)(3)(B) to

permit employers to offset disability benefits by pension benefits

when necessary to avoid double payments.

96 F.3d 1305, 1309 (9th Cir. 1996) (holding that an employer violated the

ADEA’s prohibition of involuntary retirement by reducing an employee’s

disability benefits by the pension benefits the employee could only receive

by retiring, effectively coercing him to retire). We agree with the district

court that the policy of avoiding “double dipping,” that is, receiving two

independent benefit payments at once, did not apply here. By electing to

directly roll over his retirement benefits into an IRA, Blankenship deferred

collecting additional income during the relevant time period, avoiding

concurrent income streams.

5890 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

Blankenship did not receive anything through this

transfer. He did not receive the funds as income, nor

did he obtain the use and enjoyment of the funds.

Although Blankenship has beneficial ownership of

the funds in the Vanguard IRA, as well as the rights

to obtain those funds and appoint a beneficiary of

them, he similarly possessed these rights and bene-

fits when the funds were held by the KPMG plans,

and therefore cannot be said to have received any-

thing in the transaction.

Thus, the fact that Blankenship could withdraw the retire-

ment funds distributed into his Vanguard IRA did not change

Blankenship’s ability to control his funds.

[9] Because Blankenship had the same type of possession

(and control) of the funds once transferred into the Vanguard

account that he would have had were the funds left with

KPMG, he did not “receive” these funds for the purposes of

offset under the Disability Plan. Therefore, the district court

properly concluded that Blankenship’s award of disability

benefits was not subject to reduction based on the distribution

of his retirement benefits under the PAR and Pension Plans.

B.

[10] A district court may award prejudgment interest on an

award of ERISA benefits at its discretion. See, e.g., Dishman

v. UNUM Life Ins. Co. of Am., 269 F.3d 974, 988 (9th Cir.

2001); Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d

1154, 1163-64 (9th Cir. 2001); Blanton v. Anzalone, 813 F.2d

1574, 1575 (9th Cir. 1987). Generally, “the interest rate pre-

scribed for post-judgment interest under 28 U.S.C. § 1961 is

appropriate for fixing the rate of pre-judgment interest unless

the trial judge finds, on substantial evidence, that the equities

of that particular case require a different rate.” Grosz-

Salomon, 237 F.3d at 1164 (quoting Nelson v. EG & G

Energy Measurements Group, Inc., 37 F.3d 1384, 1391 (9th

BLANKENSHIP v. LIBERTY LIFE ASSURANCE 5891

Cir. 1994)). “Substantial evidence” is defined as “such rele-

vant evidence as a reasonable mind might accept as adequate

to support a conclusion.” Blanton, 813 F.2d at 1576 (holding

that district court abused its discretion by awarding, on an

ERISA award, a prejudgment interest rate below the Treasury

bill rate without making a finding as to the equities which jus-

tified the departure) (citations omitted). The court may com-

pensate a plaintiff for “the losses he incurred as a result of

[the defendant’s] nonpayment of benefits.” Dishman, 269

F.3d at 988 (holding that the district court abused its discre-

tion in awarding a 16 percent prejudgment interest rate on an

ERISA award — double the rate of return on the defendant’s

investment portfolio — because “[p]rejudgment interest is an

element of compensation, not a penalty”).

[11] Here, the district court determined that prejudgment

interest was necessary to compensate Blankenship. The court

deviated from the standard Treasury bill rate, awarding a

10.01-percent rate. In doing so, the court made factual find-

ings necessary to support the deviation. The court cited

Blankenship’s declaration that as a result of Liberty Life’s

nonpayment of benefits, Blankenship was forced to replace

the $6,093.82 per month he would have received with his own

personal funds. Those funds would otherwise have been

invested in a Vanguard mutual fund in which he had already

invested over one half million dollars, and which had a 10.01-

percent return since its inception in June 2000. Based on this

factual record, the court concluded that “in order for Blanken-

ship to be adequately compensated for Liberty’s wrongful

nonpayment of benefits,” it was awarding prejudgment inter-

est at a rate of 10.01 percent, compounded monthly. These

factual findings are supported by the record, and are adequate

to satisfy the “substantial evidence” requirement. Therefore,

the district court did not abuse its discretion in awarding pre-

judgment interest at a rate that exceeded the standard Trea-

sury bill rate.

For the foregoing reasons, the judgment of the district court

is AFFIRMED.

5892 BLANKENSHIP v. LIBERTY LIFE ASSURANCE

NOONAN, Circuit Judge, concurring:

By the principles of law distinguishing trusteeship and

agency, Vanguard was an agent, not a trustee. The restrictions

on Vanguard’s power of investment imposed by the Internal

Revenue Code 26 U.S.C. § 408(a), however, infringe on

Blankenship’s control as does the provision in the same stat-

ute that the balance of his account be nonforfeitable. If Van-

guard were his agent, Blankenship would be free to invest the

account as he chose, and he could not confer upon it a nonfor-

feitable status. Because of these peculiarities of the position

of Vanguard — peculiarities owed to the Internal Revenue

Code — Vanguard does not completely meet the criteria of

agency, and, therefore, Blankenship prevails in this case.