Erin S. Govrik v. Unum Life Insurance Company

This appeal arises from a dispute between Unum Life Insurance Company ofAmerica ("Unum”) and the late Kevin Sullivan over long-term disability benefitpayments. After paying benefits to Sullivan for several years, Unum discontinued thepayments in January 2010. Sullivan sued Unum, arguing that the termination of hisbenefits violated the Employee Retirement Income Security Act of 1974 ("ERISA”), 29 U.S.C. §§ 1001–1461 (2010), and Unum counterclaimed for overpayment ofbenefits. The district court granted summary judgment in favor of Sullivan andgranted Sullivan's subsequent motion for attorneys' fees. Unum appeals. We reversethe district court's grant of summary judgment and award of attorney's fees, andremand for consideration of Unum's counterclaims.

I.

Sullivan was injured in a diving accident in 1984 and became a partialquadriplegic. In 1991, he founded In Home Personal Care, Inc. ("IHPC”), a companythat provided home health care services. At first, Sullivan was the sole shareholderin the company, but his shares were transferred to his sister and then in 1996 to aSupplemental Needs Trust established under Minnesota law to provide for Sullivan'sneeds. Sullivan served as president of the company until he died during the pendencyof this litigation on June 14, 2011. Sullivan also owned a subsidiary corporationcalled In Home Personal Care Home Health, Inc.

In 2000, Sullivan sold his interest in the subsidiary corporation to IHPC for$440,000. IHPC paid Sullivan with a promissory note with terms that included aminimum payment of "$5,000.00 on monthly or yearly intervals” and a method forcalculating the interest rate.

In 2004, IHPC purchased a group long-term disability policy from Unum. Thepolicy covered Sullivan, as president, for two-thirds of his monthly salary up to$10,000. The $10,000 maximum monthly payment was subject to several offsets,including disability payments from the Social Security Administration ("SSA”). Under the Unum disability policy, the payments to which a claimant is entitleddepend in part on the claimant's monthly earnings before he is disabled. The timeframe to calculate a claimant's earnings under the policy depends on whether his income came in the form of a commission or a bonus. If the income werecommissions, the earnings calculation would include "the 12 full calendar monthperiod . . . just prior to the date your disability begins.” For bonus payments, thecalculation included "the prior calendar year's 12 month period . . . just prior to thedate your disability begins.” In other words, the policy would consider commissionpayments received over a 12-month period from just before the disability claim, andthe policy would consider bonus payments received in the prior calendaryear—January to December. On October 3, 2005, Sullivan reduced his work hours due to worsening medicalconditions. In March 2006, he filed a claim for long-term disability under IHPC'spolicy with Unum. As part of the claim, IHPC's accountant, Michael Holmquist,provided ledgers documenting Sullivan's compensation from 2004 through 2006. For2004, the records show Sullivan received six payments of $740 and two largerpayments—$150,000 and $25,000—which were listed as "[f]or prior services.” Sullivan received the $150,000 payment on September 30, 2004, and the $25,000payment on December 31, 2004. In 2005, Sullivan received six payments of $720 to$780 and a payment of $50,000 on December 30. The $25,000 payment at the endof 2004 falls within one year of the disability occurring on October 3, 2005. Unum sent Holmquist a list of questions, including whether Sullivan's officersalary was "inclusive of a bonus or a commission, or both.” Holmquist's responsewas inconclusive:

[Sullivan]'s officer salary is inclusive of a commission. Thecommission could be called a bonus, depending on the definition used. This commission paid has been approximately 6% of annual companyrevenue. Company policy is to pay [Sullivan] a commission based onboth that guideline and his work performance, and the timing ofpayment is based on company cash position and liquidity needs.

Unum also asked how much was a bonus and how much was commission, to whichHolmquist answered: "It is all commission, unless definitions would deem part of itbonus. In any event, it is based on the 6% guideline.”

In August 2006, Unum approved Sullivan's benefit claim. Unum alsodetermined that the large payments were commissions for purposes of the policy. Inmaking an earnings calculation, therefore, Unum considered only those largepayments Sullivan received from October 1, 2004, to September 30, 2005, andexcluded the $150,000 payment made on September 30, 2004. When totaling theamounts, however, a representative of Unum mistakenly recorded the $25,000payment from December 31, 2004, as $250,000. As a result, Unum paid Sullivan themaximum possible monthly benefit under the policy (offset by Sullivan's SSAdisability payments).

Sullivan also received disability payments from the SSA, beginning inapproximately 1999. In April 2007, however, the SSA informed Sullivan that thebenefits should have ceased in December 2001, and that he would be required torepay $163,794 in benefits received thereafter. After receiving further informationfrom Sullivan, the SSA reinstated his disability payments dating back to whenSullivan reduced his work hours in October 2005. But Sullivan still owed the SSAover $120,000. To collect that amount, the SSA declared that it would retainSullivan's monthly benefit payments until the agency was reimbursed for theoverpayment.

In December 2008, Sullivan challenged the SSA's decision by submitting arequest for reconsideration. In his request for reconsideration, Sullivan declaredunder penalty of perjury that he had sold In Home Personal Care Home Health, Inc.to IHPC in 2000 for $440,000, and that "[a]ccording to the Social SecurityAdministration, the sale of a business is not considered earned income.” Sullivanalso declared that at the time of the sale, IHPC and Sullivan "were given incorrect financial advice . . . . to pay [Sullivan] as W-2 wages instead of as proceeds from thesale of a business.” Sullivan asserted that his "monthly salaries were between $720and $800,” and that he was thus allowed "to continue receiving [SSA disability]payments.” Sullivan also submitted an amortization schedule for IHPC's promissorynote for the sale of the business. This schedule set forth the accrued interest eachyear and called for payments from IHPC to Sullivan of $350,000, $175,000, and$50,000, on the last day of the year in 2003, 2004, and 2005, respectively. After the SSA suspended Sullivan's disability benefits, Sullivan notified Unumof the change. The new information raised questions at Unum regarding its ownbenefit payments to Sullivan and prompted a review of Sullivan's file. In the review,Unum discovered its initial accounting error, removed the erroneous zero from the$250,000 entry, and recalculated Sullivan's benefits using the actual payment of$25,000. The correction dramatically reduced Sullivan's benefit payments.

Unum also had several other questions about Sullivan's situation and sent afield representative to interview Sullivan, with his attorney, in February 2009. During the interview, Sullivan discussed the sale of his subsidiary business to IHPCand noted that IHPC still owed him $36,064 from the sale, to be paid out over thenext ten years. Sullivan also indicated that the large increase in his income in 2003was partly based on payments by IHPC from the sale of the business. The fieldrepresentative also attempted to interview Holmquist, but Holmquist stopped servingas IHPC's accountant at the end of 2004 and referred any questions to the newaccountant.

In April 2009, Unum reduced Sullivan's benefit payment based on thecorrected clerical error and asked several more questions about his finances. InOctober 2009, Sullivan, through an attorney, contested Unum's benefit calculation,arguing the large payments were not commissions, but were either salary or bonuses. Classifying the large payments as salary or bonuses would change the time frame used to calculate the benefits, so that it would include the $150,000 payment thatSullivan received one year and three days before he reduced his work hours. Sullivanalso provided Unum with various documents, including personal and corporate taxreturns, and Sullivan's request for reconsideration with the SSA. Sullivan's counselstated that "Sullivan intends to notify Social Security that he is dropping his requestfor reconsideration,” and asserted that the large payments were salary, not incomefrom the sale of a business.

After further review, Unum concluded in January 2010 that the large paymentsin 2004 were for the sale of a business to IHPC, and that those payments thus couldnot be included in the calculation of Sullivan's pre-disability earnings. Unumexplained:

The information provided to the SSA in December of 2008, signedunder penalty of perjury, was supported by documentationcontemporaneous to the 2000 sale of a business referenced above. Therefore, we are giving more significant weight to the information Mr.Sullivan provided to the SSA than to documents prepared in 2006 andlater documents in response to Unum's inquiries.

Once the large payments were removed from the calculation of pre-disability income,Unum determined that Sullivan's pre- and post-disability income from IHPC wasroughly the same. Therefore, in January 2010, Unum discontinued the payment ofdisability benefits to Sullivan.

Sullivan appealed Unum's decision. He argued, among other things, that hisrequest for reconsideration to the SSA "did not say that the payments were in fact forthe sale of the subsidiary,” but argued only that "it could have been, because in facthe was owed that money.” Sullivan claimed that the information he provided to theSSA stated that the 2004 income was paid as wages. Sullivan included a letter fromhis current accountant regarding the sale of the business to IHPC. The letter stated that "[p]rior to 2008 it is our understanding that no payments were made by IHPC toKevin Sullivan.” The accountant explained that "[w]e, therefore, in 2008 determinedthat annual payments should be made over five years to pay off this debt.”

Unum reviewed the information submitted with Sullivan's appeal and affirmedits earlier decision. The decision letter on the appeal explained as follows:

Given that the various financial documents that have been submittedcontradict one another, Unum must determine which document to relyon and that analysis consisted of identifying those documents that arethe most accurate and objective. Therefore, the second financial reviewconcurred with the prior review that the sworn statements to the SSAseem to be the most accurate and objective. These statements weremade under penalty of perjury and are also supported by a notarizedpromissory note dated January 3, 2000, which is well before the adversedecision by the SSA or the filing of the Unum claim, and a supportingamortization schedule showing the 2004 payments.

In your appeal letter, you state that your client did not say to the SSAthat amounts paid to him were for the sale of the subsidiary company tothe employer. You state that he said they "could have been” paymentson that note. You also assert that since the payments were characterizedas wages, Unum is obligated to view them as such. We were unable toidentify any caveat to the statement that your client made to the SSA. His statement specifically says that the employer incorrectly reported theproceeds of the sale as W2 wages and attached an amortization scheduleto show that the payments were not wages. The amortization schedulecharacterizes them as payments on the promissory note. Therefore, the lump sum payments are not considered as part of yourclient's pre-disability monthly earnings as defined by the policy.

Our Response to Your Concerns:

You have stated that your client cannot change the characterization ofthe aforementioned payments because the time has passed for him to filean amended tax return, and you have also stated that Unum is placingtoo much reliance on the SSA documentation. Given the inconsistenciesand contradictions in the financial information, the SSA documentationappears to be the most objective and therefore, the one relied upon byour financial department in their analysis. In that sworn documentation,your client stated that the payments were not wages. Therefore, thelump sum payments would not be considered in the calculation of Mr.Sullivan's basic monthly earnings.

Sullivan sued Unum in the district court seeking the reinstatement of hisbenefits. Unum counterclaimed seeking recovery of all benefits it paid to Sullivan. On cross-motions for summary judgment, the district court granted summaryjudgment in favor of Sullivan, and ultimately awarded him retroactive benefits fromMarch 2009 to June 14, 2011. The court reasoned that because Sullivan had informedUnum that he intended to withdraw his request for reconsideration before the SSA,it was unreasonable for Unum to rely on that submission "when the remainder of therecord before it clearly demonstrated that the 2004 lump sum payments wereconsidered by [Sullivan] and IHPC as wages.” The district court further concludedthat the lump sum payments were properly considered bonuses rather thancommissions. Sullivan then moved to recover litigation expenses and reasonableattorneys' fees pursuant to 29 U.S.C. § 1132(g). The district court granted themotion, and awarded Sullivan $81,770.52 in attorneys' fees and costs. Unum appealsboth decisions.

II.

Under ERISA, a plan beneficiary may bring a civil action to obtain judicialreview of a benefits determination. 29 U.S.C. § 1132(a)(1)(B). Where, as here, thelanguage of an ERISA plan provides the administrator discretionary power toconstrue ambiguous terms or make eligibility determinations, the administrator'sdecisions are reviewed for an abuse of discretion. Firestone Tire & Rubber Co. v.Bruch, 489 U.S. 101, 111 (1989); King v. Hartford Life and Acc. Ins. Co., 414 F.3d994, 998–99 (8th Cir. 2005) (en banc). "This highly deferential standard reflects thefact that courts are hesitant to interfere with the administration of [an ERISA] plan.”Khoury v. Grp. Health Plan, Inc., 615 F.3d 946, 952 (8th Cir. 2010) (internalquotation omitted). Under an abuse of discretion standard, the administrator'sdecision "will not be disturbed if reasonable.” Bruch, 489 U.S. at 111. "We measurereasonableness by whether substantial evidence exists to support the decision,meaning more than a scintilla but less than a preponderance.” Wakkinen v. Unum LifeIns. Co. of Am., 531 F.3d 575, 583 (8th Cir. 2008) (internal quotation omitted). Wereview the district court's decision on summary judgment de novo.

In determining whether the plan administrator abused its discretion, we mustalso consider the inherent conflict of interest that arises when a plan administratoracts as both the payer of benefits and the decision-maker in a claim determination. Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 112 (2008). This conflict of interest doesnot change the standard of review, and should be weighed only as a factor indetermining whether the administrator abused its discretion. Id. at 115–17. Aconflict of interest should be given greater weight "where circumstances suggest ahigher likelihood that it affected the benefits decision.” Id. at 117.

In this case, Unum is both the decision-maker on the claim and the payer ofbenefits. Sullivan contends that the conflict of interest should be given significant weight. He argues that by February 2009, Unum was motivated by a reasonableprospect of litigation and was considering litigation strategy when it sought additionalinformation from Sullivan. He further asserts that Unum provided the claim file onlyafter repeated requests from Sullivan and his attorney, and that Unum performed abiased financial review.

The record shows the initial reduction of Sullivan's benefits resulted fromUnum's correction of its initial clerical error. In recalculating Sullivan's benefits, thecompany continued to treat the large payments as a commission—the same methodUnum used initially, without objection, in 2006. Unum also provided a multi-tieredreview of Sullivan's disability claim, provided multiple opportunities for Sullivan toclarify the situation, and consistently informed him of the specific information neededto support his claim. Sullivan has not presented evidence that the three-month delayin providing the claim file prejudiced him. Consistent with Glenn, we consider theconflict of interest as a factor, but we decline to give it the substantial weightrequested by Sullivan.

On the merits of Unum's decision, we conclude that it was not an abuse ofdiscretion for the administrator to determine that the large payments totaling$175,000 that Sullivan received in 2004 were payments for the sale of a business. Itwas reasonable for Unum to rely on the information that Sullivan provided to theSSA, rather than Sullivan's latter-day claim to Unum that the large payments weremonthly earnings (i.e., salary or bonuses). Sullivan represented to the SSA that hesold a home healthcare company to IHPC in 2000 for $440,000, and that IHPC wasto make payments "as specified in the Promissory Note.” Sullivan explained that heand IHPC were given "incorrect financial advice” to pay Sullivan "as W-2 wagesinstead of as proceeds from the sale of a business.” He argued that because "incomefrom the sale of a business is not considered earned income,” his monthly salary of$720 to $800 allowed him to continue receiving Social Security disability benefits.

Sullivan's declaration was corroborated by documentary evidence. He attacheda promissory note executed in 2000 in which IHPC promised to pay Sullivan$440,000. He presented an amortization schedule, entitled "In Home Personal Care'sPromissory Note Amortization Schedule to Kevin Sullivan,” that showed scheduledpayments on the note. The schedule called for a payment of $175,000 to Sullivan onDecember 31, 2004. The company's "salary” records show payments for the sameamount of $175,000 in late 2004, albeit divided into payments of $150,000 onSeptember 30, 2004, and $25,000 on December 31, 2004. Records concerningpayments in 2005 further corroborated Sullivan's representation to the SSA. Theamortization schedule called for a payment of $50,000 on December 31, 2005, whilethe company's "salary” records show a corresponding payment of $50,000 onDecember 30, 2005. The minor discrepancies between the amortization schedule andthe actual disbursements do not make it unreasonable for Unum to conclude that thepayments in 2004 were what Sullivan said they were—proceeds from the sale of abusiness.

Sullivan's representative argues that it was unreasonable for Unum to rely onSullivan's submissions to the SSA, because Sullivan withdrew his administrativeappeal and the SSA never relied on the representations. It is true that Sullivan'sattorney sent a letter to Unum in October 2009, stating that Sullivan "intends to notifySocial Security that he is dropping his request for reconsideration.” But as of the timewhen Unum terminated Sullivan's benefits in January 2010, and upheld that decisionon administrative appeal on July 1, 2010, Sullivan had furnished no proof that hisrequest to the SSA had been withdrawn. Not until July 7, 2010, after Unum hadresolved Sullivan's administrative appeal and denied benefits, did Sullivan's counselnotify Unum that Sullivan had "now reached an agreement with the [SSA] onrepayment of the overpayment.”

Given Sullivan's shifting positions on how his income should be characterized,it was not unreasonable to hold Sullivan to his formal declaration. Sullivan's representative now claims that Sullivan's position on the request for reconsiderationwith the SSA was "not supportable,” and that the SSA documents are "not reliableevidence, because they were prepared for the purpose of Sullivan avoiding the largeSSA overpayment.” Id. at 32. But Sullivan's submissions to Unum were prepared,of course, with a comparable motive to receive a large amount of long-term disabilitybenefits, and there is no reason to consider them inherently reliable.

Sullivan's representative points to evidence that the company treated the largepayments to Sullivan as compensation for his work. This evidence includes IHPC'scorporate tax return for 2004, which listed $179,410 as compensation of officers,Sullivan's IRS Form W-2 for 2004, which listed the same amount as wages, andIHPC's internal accounting records, which listed the payments of $175,000 as"salary.” But a plan administrator does not abuse its discretion "merely because therewas evidence before it that would have supported an opposite decision.” Bolling v.Eli Lilly & Co., 990 F.2d 1028, 1030-31 (8th Cir. 1993). Sullivan explained underpenalty of perjury, moreover, that the payments were characterized as wages onlybecause he received "incorrect financial advice.”

To accept Sullivan's revised position that the payments were salary or bonuses,the administrator would have to believe that Sullivan received nothing for his sale ofthe business to IHPC until 2008. This despite an amortization schedule calling forpayments of $225,000 on a promissory note during the same time frames in which hereceived three large payments totaling $225,000 in 2004 and 2005. And this despitea promissory note dated January 2000 that required IHPC to make minimumpayments on monthly or yearly intervals until the note is fully paid. On the otherhand, a finding that the large payments were for the sale of a business would meanthat Sullivan received only a minimal salary in 2004. A minimal salary isunderstandable, however, if Sullivan received income of $175,000 in 2004 for saleof a business, especially given that all of the money came from a single company thatwas owned by a trust for Sullivan's benefit.

Either characterization of the payments results in some anomalies in thecompany records. Speaking to different audiences, Sullivan variously described thelarge payments in 2004 and 2005 as "for prior services,” as commissions or bonuses,or as proceeds from the sale of a business. Given the conflicting information, it wasnot unreasonable for Unum to reject Sullivan's most recent characterization of theevidence, and to accept his corroborated representations made under penalty ofperjury to the Social Security Administration.

* * *

See: http://www.ca8.uscourts.gov/opndir/13/01/113711P.pdf

For these reasons, we conclude that Unum did not abuse its discretion incalculating Sullivan’s benefits. We therefore reverse the judgment of the districtcourt awarding benefits, attorneys’ fees, and costs to Sullivan’s representative, andwe remand the case for consideration of Unum’s counterclaims.