Monday, January 17, 2011

When has an ERISA Plaintiff failed to state a claim for failure to exhaust administrative remedies?

Point #1: Not all ERISA Plaintiffs are required to exhaust administrative remedies prior to filing suit. Indeed, the Eastern District of Missouri has a well-established rule that “ERISA plaintiffs [must] exhaust the plan review procedures before bringing suit, when the plan clearly requires exhaustion.” Wootten v. Monumental Life Ins. Co., 412 F. Supp. 2d 1020, 1024 (E.D. Mo. 2006). So -- does the 401(k) Plan at issue in your case require exhaustion of administrative remedies if a claim for benefits was never denied.

By way of example, some 401(k) Plans provide that:

“[a]ny Participant or Beneficiary who is entitled to a payment of a benefit for which provision is made in this Plan shall file a written claim with the Plan Administrator on such forms as shall be furnished to him by the Plan Administrator…If a claim for benefit is denied by the Plan Administrator, in whole or in part, the Plan Administrator shall provide adequate notice in writing to the Participant or Beneficiary. . . .

As clearly set forth in this 401(k) Plan example, the plan participant need only exhaust administrative remedies—i.e., file a notice of appeal—if the Plan Administrator denied the participant’s claim for benefits. So the next question is: did the Plan Administrator deny, either in whole or in part, a claim for benefits (equivalent to their requests for distribution)? They likely did if, after requesting distribution, the Plaintiff received a distribution notice which clearly stated, “[y]ou are entitled to distribution under the 401(k) Retirement Plan and Trust.”

Some Plan defendants may rely upon a 1997, non-binding Arizona District Court case, McElwaine v. U.S. West, 1997 WL 34609606 (D. Ariz. 1997), to improperly assert that a miscalculation of retirement benefits is somehow a “separate and new claim.” However, the 401(k) Plan at issue in our example does not set forth such a distinction. And again, at least the Eastern District of Missouri has previously held that exhaustion of remedies is only required if a plan “clearly requires exhaustion.” Wootten, 412 F. Supp. 2d at 1024. Since the 401(k) Plan language above does not “clearly require exhaustion” for a miscalculation (as opposed to a denial) of benefits, the Plaintiff in our example should not be required to exhaust his administrative remedies.

Even if the Court deems that a Plaintiff’s claims for benefits were “denied,” a Plaintiff is still not required to exhaust his administrative remedies if he never received any notice of the proper appeals procedure. The Eastern District is clear that plan participants must only exhaust their administrative remedies “when exhaustion is clearly required by the particular plan involved and the beneficiary has notice of the procedure.” Chorosevic v. MetLife Choices, 2009 WL 723357, at *4 (E.D. Mo. 2009).

The Eighth Circuit is also clear that ERISA plaintiffs are not required to exhaust administrative remedies if doing so would be futile. Brown v. J.B. Hunt Transport Services, Inc., 586 F.3d 1079, 1085 (8th Cir. 2009). “When exhaustion is futile, an ERISA beneficiary's claim accrue[s] at the time at which it became futile to apply for benefits, because…at that time there was a de facto denial of [the beneficiary's] claim.” Union Pacific R. Co. v. Beckham, 138 F.3d 325, 332, n. 4 (8th Cir. 1998). A Defendant’s conduct toward a Plaintiff, both before and after the disbursement of their 401(k) funds, may establish that an exhaustion of Plaintiffs’ administrative remedies would be futile.

Should a Court find that a Plaintiff did in fact fail to exhaust his or her administrative remedies, the Plaintiff should move to stay the proceedings in the case to allow him or her sufficient time to exhaust his or her remedies. Both the Eastern District of Missouri and Eighth Circuit (along with other federal courts) have either held or suggested that a stay of court proceedings is a proper procedure to allow an ERISA plaintiff to exhaust administrative remedies. And courts have generally allowed a stay of the proceedings upon request, either directly or in the alternative. For instance, in a recent 2006 case, the defendants moved for a stay or dismissal of the ERISA suit because the plaintiff had not exhausted administrative remedies. Michael v. American Intern. Group, Inc., 2006 WL 5736351, at *1 (E.D. Mo. 2006). Rather than dismissing the plaintiff’s suit, the District Court stayed the case, noting the Eighth Circuit’s previous holding that “where a claimant has prematurely filed suit, a court may stay proceedings to allow the claimant to complete the administrative review process.” Id. at *1; (citing the Eighth Circuit’s holding in Galman v. Prudential Ins. Co. of Am., 254 F.3d 768, 769 (8th Cir. 2001), wherein the Eighth Circuit affirmed the district court’s stay of proceedings to allow for exhaustion of administrative remedies where claimant prematurely filed suit). Moreover, in Painter v. Golden Rule Ins. Co., 121 F.3d 436 (8th Cir. 1997), the Eighth Circuit suggested that a stay of court proceedings to allow time for a plaintiff to exhaust remedies is a proper procedure upon the plaintiff’s request:

We also reject Painter's suggestion that dismissal of Golden Rule's declaratory judgment action was inevitable. The district court never considered Golden Rule's alternative motion to stay the action while contract remedies were exhausted; had Golden Rule pressed that point after the court corrected its subject matter jurisdiction ruling, a stay might have been granted.

Id. at 441. In its opinion, the Eighth Circuit ratified the district court’s determination that a failure to exhaust remedies is not a jurisdictional defect depriving a court of power over a case. See id. at 440.

Other circuits have similarly held that a stay of the case is proper when a court finds that an ERISA plaintiff failed to exhaust administrative remedies. For instance, the Southern District of West Virginia recently held that a stay is proper in an ERISA case to allow a plaintiff to exhaust administrative remedies. In re Workman, 2005 WL 3481509, at *1 (S.D. W.Va. 2005). In that case, the defendants moved to stay the action, and the only issue before the Southern District was whether a stay of the case was proper. Id. After determining that the plaintiff had not exhausted administrative remedies, the court granted the defendants’ motion to stay pending the plaintiff’s exhaustion of administrative remedies. Id. In addition, in Caldwell v. Western Atlas Intern., 871 F. Supp. 1392 (D. Kan. 1994), the Kansas District Court stayed the case pending the ERISA plaintiff’s exhaustion of administrative remedies instead of dismissing the case. 871 F. Supp. at 1397. In its holding, the court opined that “judicial economy will better be served by staying the proceedings related to plaintiff's ERISA claim, rather than dismissing the claim.” Id.

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