Peter Foltice v. Guardsman Products, Inc.

WISEMAN, District Judge,

dissenting.

As recognized by the Second Circuit, ERISA’s attorney fees provision is remedial legislation which should be liberally construed in order to vindicate the rights and protect the interests of those persons which it is meant to protect, i.e. participants in and beneficiaries of pension plans. Chambless v. Masters, Mates & Pilots Pension Plan, 815 F.2d 869, 871 (2d Cir.1987). The majority opinion is inconsonant with this approach.

Prior to severely injuring his knee on the job, Mr. Foltice was an employee of Guardsman Products, Inc., and its predecessor-in-interest for thirty years. As negotiated by his union, part of Mr. Foltice’s compensation package during his thirty-year career with Guardsman included the pension benefits underlying this litigation. Although Mr. Fol-tice became eligible for his pension benefits in 1990, Guardsman began paying him only upon being ordered to do so by the district court in 1994. Notwithstanding this success in vindicating his rights, in light of more than $19,000 of legal fees and costs, Mr. Foltice’s victory would have been hollow but for his attorneys’ pledge to this Court that they would take no fees unless awarded by the court. While such a pledge does honor to the attorneys’ sense of justice, it neither *940 corrects the district court’s error in denying attorneys fees nor establishes a likely precedent for other attorneys in similar cases. Accordingly, the district court’s errors in applying the King 1 test, particularly the first element of “culpability or bad faith,” is compounded by the majority’s affirmation of that decision. For the reasons that follow, I respectfully dissent.

I

In considering whether attorney fees were warranted, the district court found that Guardsman’s “denial of benefits was erroneous, even arbitrary, but did not evidence a degree of culpability evidencing bad faith.” 2 As the election of the disjunctive “or” in King demonstrates, culpability and bad faith are not the same. This Court has defined “bad faith” as “arbitrary, reckless, indifferent, or intentional disregard of the interests of the person owed a duty.” Benkert v. Medical Protective Co., 842 F.2d 144, 149 (6th Cir.1988). On the other hand, culpability is defined merely as “blameworthiness,” Black’s Law Dictionary 379 (6th ed. 1990), “implying that the act or conduct spoken of is reprehensible or wrong, but not that it involves malice or a guilty purpose.” Werner v. Upjohn Co., Inc., 628 F.2d 848, 856-57 (4th Cir.1980), cert. denied, 449 U.S. 1080 , 101 S.Ct. 862 , 66 L.Ed.2d 804 (1981). To read King as the District Court did is to edit out the terms “culpability or” from King. Culpability and bad faith are not synonymous and defining culpability solely in terms of bad faith was clear error.

The majority dismisses the error, asserting “the district court obviously did consider culpability, and found a higher degree of culpability than we would have done.” In affirming the district court in this manner, the majority disregards the plain language of King and ignores the record evidence.

“[Cjulpability evidencing bad faith” neither distinguishes between the two concepts nor indicates consideration of culpability separate and apart from bad faith. Rather than being an indication of separate consideration of the culpability factor, the finding that the denial of benefits was “erroneous, even arbitrary” is inherently a finding of culpability. The district judge went on to find Guardsman’s refusal to be “downright unreasonable” and “an abuse of discretion, based on an illegitimate interpretation of plan language.” 3

This finding of culpability is supported by ample objective evidence in the record. In the letter of October 13, 1992, to Foltice’s attorney, counsel for Guardsman asserted:

This plan has been interpreted to include workers compensation as an “accident or sickness benefit.” Employees have been advised of this by way of Page 10 of the Summary Plan Description which expressly states that no pension benefit will be paid during any period an accident or sickness benefit, including workers compensation, is received.

Guardsman could produce no evidence to support this assertion of a previous interpretation 4 and, by its own terms, the Summary Plan Description does not define an employee’s benefits. Thus, these statements made in the context of dissuading Foltice from pursuing his pension benefits are inaccurate, misrepresentative, and, as such, evidence of defendants’ culpability.

Likewise, in a 1992 Christmastime letter to Foltice’s attorney, counsel for Foltice stated:

Recognizing that you and your client want the plan interpreted differently, I suspect you will be tempted to rush off and file suit upon receipt of this letter. Before you do so, however, consider the following: *941 Under the plan in question, Guardsman is vested with discretionary authority to determine eligibility and to construe the terms of the plan documents. This is significant, because it allows Guardsman a reasonable degree of leeway in how it interprets the plan. The issue is not whether your client’s interpretation of the plan is reasonable or whether there is a more reasonable interpretation of the plan. Under the controlling authority of the United States Supreme Court, the issue is whether Guardsman’s interpretation of the plan is so unreasonable as to constitute an abuse of its discretion.

This thinly veiled threat (“If you sue, you will lose”) which relies on a eonelusory and inaccurate statement of law and fact, and which was sent at a time (Christmas) when its impact could be most keenly felt, inescapably goes to culpability.

As this Court indicated in Armistead v. Vemitron Corp., 944 F.2d 1287, 1304 (6th Cir.1991), the issue of fee-shifting is an evolving area of the law under ERISA and the King factors are merely a starting point. Diminishing the distinction between culpability and bad faith is not, however, a desirable evolutionary direction.

Beyond the instant case, the majority’s decision sets bad precedent by collapsing “bad faith or culpability” into a single test. Whereas bad faith is subjective and requires proof of motives that discovery in a beneficiary claim is unlikely to generate, culpability is objective and more easily proven from discoverable observations. The Third Circuit, which applies the same five-factor test, recently reversed an order denying attorneys’ fees because the trial court there made the same error, compressing “culpability or bad faith” into an inquiry focused on bad faith alone. McPherson v. Employees’ Pension Plan of American Re-Insurance Co., Inc., 33 F.3d 253 (3d Cir.1994). As McPherson recognized, “bad faith normally connotes an ulterior motive or sinister purpose. A losing party may be culpable, however, without having acted with an ulterior motive.” Id. at 256 ; see also DiSabatino v. DiSabatino Brothers, Inc., 894 F.Supp. 810, 818 (D.Del.1995); Vintilla v. United States Steel Corp., 642 F.Supp. 295, 296-97 (W.D.Pa.1986), aff'd, 815 F.2d 697 (3d Cir.), cert. denied, Belak v. U.S. Steel Corp., 484 U.S. 847 , 108 S.Ct. 143 , 98 L.Ed.2d 100 (1987) (finding no bad faith but “certain elements of culpability attributable to plaintiffs”).

In addition, there are practical reasons for refusing to collapse “culpability or bad faith” into a single test for bad faith. Courts, including our own, that have subsumed an examination of “culpability or bad faith” into an obsessive search for bad faith alone tend to over-emphasize the role of this first element of King’s five-part test. See, e.g., Tiemeyer v. Community Mutual Insurance Co., 8 F.3d 1094, 1102 (6th Cir.1993), cert. denied, — U.S. -, 114 S.Ct. 1371 , 128 L.Ed.2d 48 (1994); McPherson, 33 F.3d at 256 (stating “as we read the district court’s comments, they appear to reflect a view that the first, third, and fifth factors cannot favor an award in the absence of a finding that the defendants have acted with a sinister motive”). This is contrary to our precedent. Proof of bad faith is not a threshold element of a successful claim under § 1132(g)(1). Wells v. United States Steel, 76 F.3d 731 (6th Cir.1996). “The punishment of bad faith litigants is a legitimate purpose under ERISA, but not the only purpose.” Armistead, 944 F.2d at 1304 . While courts ought to search for the presence or absence of bad faith in applying the King test, Armistead makes clear that such evidence, either way, is not outcome-determinative.

II

In regard to the third factor of King — the deterrent effect of a fee award on other plan administrators — the majority states that “[hjonest mistakes are bound to happen from time to time, and fee awards are likely to have the greatest deterrent effect where deliberate misconduct is in the offing.” This reasoning is flawed. It will further the objectives of ERISA if fee awards are employed to deter behavior that falls short of bad faith conduct. See Kann v. Keystone Resources, Inc. Profit Sharing Plan, 575 F.Supp. 1084,1096-97 (W.D.Pa.1983) (in case where culpability has been shown, fee award will make plan “less likely and not so quick to *942 deny benefits to other participants”). Even if Guardsman did not act in bad faith, the district court should have considered whether it would serve the objectives of ERISA to award counsel fees in an effort to deter conduct of the kind in which Guardsman engaged.

Ill

A similar difficulty exists with the majority’s analysis of King’s fourth factor — whether the party requesting fees sought to confer a common benefit or resolve significant legal questions. The majority concludes only that “the merits of the case do not turn on the resolution of any difficult ERISA question, and most of the participants in and beneficiaries of the Guardsman plan stood to gain nothing from this law suit.”

Armistead instructs us to look beyond King in developing applicable considerations in ERISA fee-shifting determinations, particularly in regard to this factor and indicates that courts may provide the plaintiff with complete relief in appropriate cases, prevent the unjust enrichments of those who benefit from successful litigation, or remove deterrents to meritorious litigation by reducing the disparity between the resources available to the parties. 944 F.2d at 1304 . See Wells, 76 F.3d at 736 (adopting Armistead’s suggestion to expand King to consider whether the economic situation of the plaintiffs is such that they could not bring suit except for the prospect of fee-shifting).

Rather than consider the unjust enrichment derived from this litigation by other similarly situated participants in the Guardsman plan, the majority cites Armistead as limiting their consideration of obvious, relevant factors. Conceding that four other Guardsman employees “happened to be in a situation comparable to Mr. Foltice’s”, the majority extracts dicta from Armistead that “suggests” that the “fourth factor ‘appears to be a codification of the common fund doctrine of common law ” and indicates that this language is a defacto prohibition against consideration of “incidental” benefits derived by other participants which are not the result of litigation creating “a ‘common fund’ within the meaning of the common law doctrine of that name.” While the intent of this analysis is unclear, the result is both unjust and erroneous.

In Mills v. Electric Auto-Lite Company, 396 U.S. 375, 391-392 , 90 S.Ct. 616, 625 , 24 L.Ed.2d 593 (1970), the Supreme Court articulated the philosophy underlying the “common fund” doctrine as follows:

While the. American rule is that attorneys’ fees are not ordinarily recoverable as costs, both the courts and Congress have developed exceptions to this rule for situations in which overriding considerations indicate the need for such recovery. A primary judge-created exception has been to award expenses where a plaintiff has successfully maintained his suit, usually on behalf of a class, that benefits a group of others in the same manner as himself.... To allow the others to obtain full benefits from the plaintiffs efforts without contributing equally to the litigation expenses would be to enrich the others unjustly at the plaintiffs expense.

Clearly, the dispositive issue is not whether the benefit derived by others is “incidental”, nor whether “most of the participants in and beneficiaries of the Guardsman plan stood to gain nothing from this lawsuit.” Others clearly benefitted from this litigation at plaintiffs expense. To fail to consider this fact based upon an artificial construction of the “common fund” theory is inequitable.

IV

In the same manner, the majority strictly construes “the test suggested in Armistead ” to dismiss consideration of whether the plaintiffs case could have been brought at all but for the prospect of fee-shifting. There is ample evidence in the record that Foltice could not have afforded to litigate this action without fee-shifting. Now 76 years old, Fol-tice has not worked since a knee injury in 1976. His only income, outside his pension, is a $372 monthly workers compensation payment. Foltice’s attorneys at Vamum, Rid-dering, Schmidt & Howlett spent 119.75 hours (excluding this appeal) during nearly three years of litigation, time no doubt enlarged by Guardsman’s repeated insistence *943 on its “downright unreasonable” 5 positions. Foltice’s lawyers’ fees of $19,672.25 would, if insisted upon, deprive him of his entire lump sum award and more than a third of his expected pension.

By finding, as the majority does, that the so-called Armistead test is not satisfied because plaintiff was not actually denied access to the courts punishes the attorneys in this ease for their noble gesture. Moreover, because it is unclear under this facile approach what circumstances would constitute a showing that a “suit could not have been brought at all but for the prospect of fee-shifting”, a “Cateh-22” situation is created for future ERISA plaintiffs and attorneys, i.e. there can be no consideration of the issue unless the case is brought into court. Moreover, instead of encouraging emulation of the laudatory conduct evinced by the attorneys in this ease, the majority discourages other attorneys from advocating on behalf of ERISA plaintiffs, a segment of the population least able to afford litigation expenses.

V

With regard to the fifth factor — the relative merits of the parties positions — the majority concludes that the district court’s failure to consider language in the summary plan as dispositive was error in Mr. Foltiee’s favor. This conclusion is based on an assertion that this Circuit “has squarely held that where statements in a summary plan description are in conflict with the language of the plan itself, the summary plan description shall govern.” This assertion is simply incorrect.

Edwards v. State Farm Mutual Automobile Ins. Co., 851 F.2d 134 (6th Cir.1988), relied on by the majority as authority for this position, pertains to a ease where the plaintiffs detrimentally relied on a summary plan description. Detrimental reliance is not an issue here. Even accepting arguendo that Edwards is not distinguishable on that basis and does, in fact, stand as authority for the position asserted, then in light of 6th Circuit jurisprudence, Edwards must be viewed as an anomaly. See Bryant v. International Fruit Products Co., 793 F.2d 118, 123 (6th Cir.), cert. denied, 479 U.S. 986 , 107 S.Ct. 576 , 93 L.Ed.2d 579 (1986) (“the handbook is not a part of the plan agreement and cannot be relied upon to modify or affect any provision of the plan ...”); Musto v. American General Corp., 861 F.2d 897 (6th Cir.1988), cert. denied, 490 U.S. 1020 , 109 S.Ct. 1745 , 104 L.Ed.2d 182 (1989) (“Such an assumption would conflict with what is said in the booklets (‘the official Plan Documents will govern’), it would conflict with what is said in the policy (‘[tjhis Policy ... shall constitute the entire contract’) and it would seem in conflict with what is said in ERISA (the plan must be established pursuant to ‘a written instrument,’ of which the participants are to be furnished a ‘summary’)”).

Edwards is clearly not pertinent to this case. Consideration of the summary plan would not have altered the district court’s determination on the merits and, with regard to the relative merit of the parties positions under King, is weightless.

VI

A district court’s discretion, properly guided by the King/Armistead methodology and subject to appellate review for abuse of the same, is adequate to protect the interests of ERISA beneficiaries and claimants. However, a danger is created when, as indicated by the underlying tenor of the majority’s opinion in this case, an implicit presumption against awarding attorney fees is derived from the absence of a presumption in the prevailing plaintiffs favor. Based on the district court’s abuse of discretion in misinterpreting the “culpability or bad faith” element of King and in failing to consider Foltice’s financial ability to obtain a legal remedy for his deprived rights without fee-shifting, I would reverse the order of the District Court and remand for further consideration consistent herewith.

. Secretary of Department of Labor v. King, 775 F.2d 666 (6th Cir.1985).

. Order Concerning Attorney Fees, Prejudgment Interest and Costs, October 25, 1994, at page 2.

. Order Concerning Attorney Fees, Prejudgment Interest and Costs, October 25, 1994, at page 2.; Summary Judgment Motion Hearing, July 18, 1994, transcript at 45.

.See Algie v. RCA Global Communications, Inc., 891 F.Supp. 875, 892 (S.D.N.Y.1994), aff'd, 60 F.3d 956 (2nd Cir.1995) (persistence in pressing varying explanations for an event that defendants ultimately could not document is plainly relevant to culpability).

. Order Concerning Attorney Fees, Prejudgment Interest and Costs, October 25, 1994, at page 2; Summary Judgment Motion Hearing, July 18, 1994, transcript at page 45.