Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
The Second Circuit recently considered for the first time whether the equitable remedy of reformation was available under the Employee Retirement Income Security Act (ERISA) where a court determined that the written terms of a retirement plan violated ERISA but no allegation of fraud, mistake, or inequitable conduct existed. In Laurent v. PricewaterhouseCoopers LLP, the court found that “terms violative of ERISA” may serve an independent basis justifying an award of a reformation remedy as to a plan, indicating that its decision is in line with a “hint” from the Supreme Court in its 2011 decision in CIGNA Corp. v. Amara1 (referred to as “Amara III”) that courts should broadly construe remedies in equity under ERISA § 502(a)(3).2
The plaintiffs in Laurent are former employees and participants in the defendant’s cash balance retirement plan. They filed suit in 2006, claiming that the retirement plan violated ERISA. In the long procedural history of the case, it had previously been before the Second Circuit after the district court denied the defendant’s motion to dismiss the complaint, and found that the retirement plan violated ERISA. On appeal, the Second Circuit agreed that the plan violated ERISA and remanded the case to the district court to determine the proper remedy.3
On remand, the parties engaged in additional discovery, after which the defendant filed a motion seeking dismissal of the case (again), arguing that the plaintiffs were not entitled to relief for their ERISA claims. The district court granted the motion, concluding that (1) no breach of fiduciary duty existed because the plan administrator was not acting in his fiduciary capacity when he distributed benefits in accordance with the plan; (2) equitable reformation of the plan was not available because there was no allegation of fraud or mutual mistake; and (3) the plaintiffs’ “attempt to restyle” the requested relief as seeking “an accounting for profit, surcharge, or unjust enrichment, or a constructive trust” was unpersuasive. The plaintiffs lodged motions to reconsider and for clarification but the district court denied both motions.
The Second Circuit’s Decision
On appeal, the plaintiffs argued that the following two-step procedure is a remedy authorized by ERISA:
- An order compelling the defendants to bring the terms and administration of the plan into compliance with ERISA.
- An order requiring defendants to recalculate the benefits accrued and/or due under the terms of the plan in accordance with the requirements of ERISA, and for the plan to pay those amounts, plus interest, to or on behalf of all class members who received less in benefits or benefit accruals than the amount to which they are entitled.4
The plaintiffs and the Secretary of Labor, as amicus curiae, argued that both steps are authorized by ERISA § 502(a)(1)(B), but that, in the alternative, Step 1 is authorized under ERISA § 502(a)(3) and Step 2 is authorized under ERISA § 502(a)(1)(B).
ERISA §§ 502(a)(1)(B) and 502(A)(3) both provide that an ERISA plan participant or beneficiary may bring a civil action to enforce rights under ERISA, though there are differences in the recovery available. Under § 502(a)(1)(B), a civil action may be brought
to recover benefits due to him under the terms of the plan or to clarify his rights to future benefits under the terms of the plan,
and under § 502(a)(3), the action may seek
(A) to enjoin any act or practice which violates any provision of [subchapter I of ERISA] or the terms of the plan or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [subchapter I of ERISA] or the terms of the plan.
Recognizing that Amara III held that reformation, or modifying a plan’s terms, was not authorized under ERISA § 502(a)(1)(B),5 the Second Circuit stated that courts of appeal, itself included, have construed § 502(a)(1)(B) as being limited to authorizing the enforcement of pension plans as written. The term “appropriate equitable relief” in § 502(a)(3), on the other hand, was recognized in Amara III as referring to categories of relief that were traditionally available in equity. In Amara III, the Supreme Court determined that the remedy of reformation of the plan was available under § 502(a)(3) without a showing of detrimental reliance. The Second Circuit stated in Laurent that the Amara III finding “hinted that courts should construe remedies in equity available under § 502(a)(3) broadly.”
Applying the reasoning in Amara III, the Second Circuit concluded that § 502(a)(3) authorized district courts to grant equitable relief, including reformation of an ERISA plan, and that plaintiffs are not required to allege or show mistake, fraud, or inequitable conduct, elements usually required for reformation of a contract, because § 502(a)(3) “tells us that equitable remedies are available to ‘redress violations of’ or ‘to enforce any provisions of’ ERISA subchapter I.” In other words, terms that violate ERISA are independent bases that justify the equitable remedy of reformation under § 502(a)(3). The court’s conclusion, in turn, rejected the argument that where employees prove an ERISA violation they have no remedy, which the court stated was inconsistent with the “maxim of equity . . . that equity suffers not a right to be without a remedy.”
In line with its holding, the Second Circuit found that Step 1 of the Laurent plaintiffs’ proposed remedy was authorized under § 502(a)(3). The court then had “little trouble holding” that the district court was authorized to grant Step 2 of the proposed remedy under § 502(a)(1)(B), stating that the two-step remedy of reformation-and-enforcement had been expressly affirmed by the Second Circuit in the years since the Amara III decision.
The Significance of the Case
The Second Circuit’s decision in Laurent provides further guidance for ERISA plans, plan participants, and the courts regarding the remedies available when a plan allegedly violates ERISA. Not only does the court make clear that a plan may be reformed where there is a violation without a showing of mistake, fraud or inequitable conduct, the court recognizes that the remedial provision in ERISA § 502(a)(3) should be broadly construed, potentially expanding the scope of equitable remedies that may be available for equitable violations of ERISA.
1 563 U.S. 421, 444-45 (2011).
2 Laurent v. PricewaterhouseCoopers LLP, No. 18-487-cv, 945 F.3d 739, 2019 U.S. LEXIS 38178 (2d Cir. Dec. 23, 2019).
3 The decision on liability in the case is not addressed in this article, but by way of background: As a cash balance plan, the retirement plan at issue in the case is subject to regulation under ERISA and the Internal Revenue Code. In 1996, the Internal Revenue Services announced that where a cash balance plan permits participants to take benefits before normal retirement age (NRA) in the form of a lump-sum payment and promises future credits, the plan must: (1) project the participant’s account balance out to the participant’s NRA and add an amount reflecting the value of the future interest credits that would have accrued had the account balance remained in the plan until that future date; and (2) discount that projected total back to the distribution date using the plan’s discount rate, as limited by a statutory maximum. (Known as a “whipsaw” calculation.) The terms of the plan in this case provided that when a vested employee left employment, the employee has the option of receiving (1) an annuity commencing at NRA or (2) an immediate lump-sum payment. The plan also stated that the present value of the lump-sum payment must be worth at least as much as the value of the stream of income from the annuity commencing at NRA. The plan defined NRA to be “the earlier of the date a Participant attains age 65 or completes five (5) Years of Service.” In reasoning that differed from the district court’s finding of liability, the Second Circuit found that the plan’s method of calculating the NRA was unlawful because it “bears no plausible relation to ‘normal retirement,’ and is therefore inconsistent with the plain meaning of the statute.” 2019 U.S. LEXIS 38178, at *4 to *7.
4 2019 U.S. LEXIS 38178, at *9.
5 As stated in Amara III, contract reformation is a standard remedy for altering the terms of a writing that fails to express the agreement of the parties owing to the fraud of one of the parties and mistake of the other.