Hannington v. Sun Life and Health Insurance, (1st Cir. 2013)

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United States Court of Appeals

For the First Circuit

 

No. 12-1085

 

DAVID HANNINGTON,

Plaintiff, Appellee,

v.

SUN LIFE AND HEALTH INSURANCE COMPANY,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Nancy Torresen, U.S. District Judge]

Before

Howard, Ripple,

[1]

and Lipez,

Circuit Judges.

    Joshua Bachrach, with whom Wilson, Elser, Moskowitz, Edelman

& Dicker LLP, Byrne Joseph Decker, and Pierce Atwood LLP were on

brief, for appellant.

    Gisele M. Nadeau for appellee.

 

March 29, 2013

 

         RIPPLE, Circuit Judge. David Hannington filed this ERISA

action against Sun Life and Health Insurance Company (“Sun”) after

Sun reduced his disability payments under an ERISA-qualified plan

(the “Plan”) because he also was receiving disability compensation

under the Veterans’ Benefits Act. The parties filed cross-motions

for judgment on the record. After a hearing, the magistrate judge

recommended that the district court grant Mr. Hannington’s motion

and deny Sun’s. The district court approved the magistrate judge’s

recommended decision and entered judgment for Mr. Hannington.

[2]

Sun

timely appealed.

[3]

For the reasons set forth in this opinion, we

affirm the judgment of the district court.

 

I

BACKGROUND

A.

         Mr. Hannington participated, through his employer, in a

group long-term disability plan issued by Sun, then known as GE

Group Life Assurance Company (“GE”). Under the Plan, a disabled

beneficiary receives sixty percent of his pre-disability salary.

However, the Plan reduces this benefit by amounts received as

“Other Income.” This term is defined in the “Other Income” section

of the Plan, which lists seven categories of income that will be

deemed “Other Income” for purposes of reducing payments under the

Plan. The fifth of these categories, the focus of the current

dispute, defines “Other Income” to include “any amount of

disability or retirement benefits under: a) the United States

Social Security Act . . . ; b) the Railroad Retirement Act; c) any

other similar act or law provided in any jurisdiction.”

[4]

The Plan

further identifies GE, now replaced by Sun, as the claims fiduciary

and grants it “the sole and exclusive discretion and power to . . .

construe any and all issues relating to eligibility for benefits.”

[5]

It further provides that “[a]ll findings, decisions, and/or

determinations of any type made by the Claims Fiduciary shall not

be disturbed unless the Claims Fiduciary has acted in an arbitrary

and/or capricious manner.”

[6]

         Mr. Hannington cannot work because he suffers from a

blood disease that he contracted from the administration of

vaccinations during his service in the United States Air Force. On

account of this disability, he receives service-connected

disability compensation (“VA benefits”) under the Veterans’

Benefits Act.

         Sun approved Mr. Hannington’s claim for benefits under

the Plan. Upon learning that Mr. Hannington was receiving VA

benefits, however, Sun determined that these VA benefits qualify as

“Other Income” and so reduced the amount of Mr. Hannington’s

monthly plan benefit by the amount of his VA benefits.

Consequently, Mr. Hannington filed an administrative appeal as

required by the Plan. Sun denied the appeal.

 

B.

         Mr. Hannington then initiated this action in the district

court. When Sun submitted the administrative record to the

district court, it also produced an affidavit from the associate

director of its appeal unit that set forth the procedures

implemented by Sun to fulfill its fiduciary duties under the Plan.

It submitted that these procedures sufficiently neutralize its

structural conflict of interest as both plan underwriter and

fiduciary.

         The district court referred the case to a magistrate

judge for a recommended decision. In her recommendation, the

magistrate judge first noted that, because the plan document gave

Sun discretion to interpret and construe the Plan’s language, the

court’s review was governed by the deferential arbitrary and

capricious standard. The magistrate judge further noted, however,

that the fact that Sun was construing policy language in favor of

its own financial interest while laboring under a structural

conflict of interest was not an irrelevant factor and that the

court was entitled to take such a situation into consideration.

         Turning to the merits of the dispute, the magistrate

judge reviewed the similarities that Sun had pointed out between

the Social Security Act and the Veterans’ Benefits Act

[7]

and

compared the service-connected disability compensation that

Mr. Hannington receives to Social Security disability benefits.

She reviewed the respective statutes’ definitions of “disability”

and their purposes in awarding disability benefits.

[8]

Ultimately,

the magistrate judge determined that those similarities were

superficial and represented only a “few common threads [which] are

woven into larger and distinctly different fabrics.”

[9]

In her view,

it was “the differences [between these Acts] that stand out upon

comparison, not the similarities.”

[10]

         She also emphasized Sun’s structural conflict of

interest, concluding that “[a] fiduciary free of a structural

conflict of interest would not attempt to emphasize the limited

similarities given the more substantial and meaningful differences

that are readily apparent, particularly as the Plan Certificate

makes no mention of VA benefits at all.”

[11]

In the magistrate

judge’s view, “[a] reasonable fiduciary would be troubled by the

[Plan’s] omission of any reference to veterans’ benefits or

service-connected disability compensation.”

[12]

The magistrate judge

found persuasive the decision of the Eighth Circuit in Riley v. Sun

Life & Health Insurance Co., 657 F.3d 739, 741 (8th Cir. 2011),

cert. denied, 132 S. Ct. 1870 (2012), in which the court construed

identical plan language under a de novo standard of review because

the fiduciary’s interpretation was “based on its construction of

existing law.” The Riley court concluded that VA benefits, awarded

“for a wartime service-related disability, as a matter of statutory

construction, do not derive from an act that is ‘similar to’ the

SSA [Social Security Act] or the RRA [Railroad Retirement Act].”

Id. at 742.

         In due course, the district court concurred in the

magistrate judge’s analysis and entered judgment for

Mr. Hannington. Sun then filed this timely appeal.

 

II

DISCUSSION

         We review de novo the district court’s grant of judgment

on the record. Morales-Alejandro v. Med. Card Sys., Inc., 486 F.3d

693, 698 (1st Cir. 2007). Therefore, we must employ the same

standard of review that the district court was required to employ

on the issue for decision.

 

A.

         The district court reviewed Sun’s offset of

Mr. Hannington’s VA benefits under a deferential, arbitrary and

capricious standard.

[13]

This deferential standard is appropriate

when “the benefit plan gives the administrator or fiduciary[

[14]

]

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). Thus, when such discretion is

vested in the plan fiduciary, as it is here, our standard of review

for the fiduciary’s interpretation of plan language is deferential.

See Cusson v. Liberty Life Assurance Co., 592 F.3d 215, 230 (1st

Cir. 2010). However, when the plan fiduciary is required, in the

course of determining the meaning of the plan language, to

interpret material outside the plan, our review of the extra-plan

material is de novo.

         For instance, in Coffin v. Bowater Inc., 501 F.3d 80 (1st

Cir. 2007), we addressed an administrator’s determination that its

plan obligations to its subsidiary’s workers terminated upon the

subsidiary’s sale. The plan at issue allowed the administrator “to

modify, amend or terminate the plan at any time” and “afford[ed]

the administrator substantial deference.” Id. at 84, 85. The

Coffin administrator argued that a stock purchase agreement

executed in connection with the sale contained language sufficient

to terminate its obligations and satisfy ERISA’s procedural

termination requirements. Id. at 84. Discussing the standard of

review, we held that “[w]here the administrator’s determination of

eligibility depends upon an interpretation of non-plan documents

(in this case, the [stock purchase agreement]), our review is . . .

de novo.” Id. at 85 (citing Firestone, 489 U.S. at 112). Thus, we

reviewed de novo the administrator’s interpretation of the stock

purchase agreement and of ERISA (that the stock purchase agreement

satisfied ERISA’s requirements).

         Our decision in Coffin is in accord with the decisions of

the other circuits that have recognized that when a fiduciary’s

interpretation of the plan is based on a legal determination,

review is de novo. See, e.g., Daft v. Advest, Inc., 658 F.3d 583,

594 (6th Cir. 2011) (noting that the deferential standard of review

“does not apply to a plan administrator’s determination of

questions of law, such as whether a plan meets the statutory

definition of a top-hat plan; a court reviews those questions de

novo”); Riley, 657 F.3d at 741-42 (concluding in a case identical

to the one before us in all significant respects that the de novo

standard of review ought to apply because the court was required to

review the administrator’s “interpretation of a controlling

principle of law”--the character and scope of benefits under the

Veterans’ Benefits Act (internal quotation marks omitted));

Johannssen v. Dist. No. 1--Pac. Coast Dist., MEBA Pens. Plan, 292

F.3d 159, 169 (4th Cir. 2002) (“Such legal questions are

appropriate terrain for the courts, not plan administrators, and

when eligibility determinations turn on questions of law we have

not hesitated to apply a de novo standard of review.”), abrogated

on other grounds by Metro. Life Ins. Co. v. Glenn, 554 U.S. 105

(2008); Weil v. Ret. Plan Admin. Comm. of Terson Co., 913 F.2d

1045, 1049 (2d Cir. 1990) (same), vacated on other grounds, 933

F.2d 106 (2d Cir. 1991); see also 2 Lee T. Polk, ERISA Practice &

Litigation § 11:53 (2010).

         In the particular dispute before us, Sun’s interpretation

of the “Other Income” section of the Plan depends wholly upon its

interpretation of external, non-plan material: the Veterans’

Benefits Act,

[15]

the Social Security Act

[16]

and the Railroad Retirement

Act.

[17]

Under the Plan language, the character of, and especially

the benefits available under, the comparator acts and the statute

providing the benefits potentially available for off-set determine

the scope of benefits available under the Plan. If the Veterans’

Benefits Act is not similar to the Social Security Act and/or the

Railroad Retirement Act, then Sun cannot offset Mr. Hannington’s VA

benefits. Therefore, because Sun’s decision to offset

Mr. Hannington’s VA benefits was governed entirely by its

interpretation of several statutes, the district court ought to

have reviewed de novo Sun’s determination that Mr. Hannington’s VA

benefits were “Other Income” under the Plan; this is the standard

of review which we also must employ.

 

B.

         We now turn to an examination of Sun’s decision, as plan

fiduciary, to set off Mr. Hannington’s VA benefits against the

amount owed him under the Plan.

 

1.

         Sun seeks reversal of the district court’s decision

prohibiting its offset of Mr. Hannington’s service-connected

disability compensation under the Veterans’ Benefits Act against

the long-term disability payments that it provides to him under the

Plan. Sun bases its position on an interpretation of the Plan’s

“Other Income” section. In its view, under the fifth clause of

this section, Mr. Hannington’s VA service-connected disability

compensation must be considered income from “a similar act or law.”

The fifth clause defines “Other Income” as follows:

[a]ny amount of disability or retirement

benefits under:

 

a) the United States Social Security Act to

which[:]

 

i) you are entitled; and

 

ii) your Dependents may be entitled

because of your disability or retirement;

 

b) the Railroad Retirement Act;

 

c) any other similar act or law provided in

any jurisdiction.[

[18]

]

         Sun determined that the Veterans’ Benefits Act is similar

to the Social Security Act and/or the Railroad Retirement Act based

simply on its identification of some common characteristics of the

statutes. Sun observes that all (1) are federal, (2) pay certain

periodic disability benefits, (3) have anti-assignment clauses and

(4) are administered by independent agencies. It also stresses the

similarities between the Social Security Act and the Veterans’

Benefits Act: Both pay benefits based on impairment of earning

capacity, both ensure a minimum level of income and both can have

identical qualifications because one way to qualify for VA benefits

is to have been determined permanently disabled under the Social

Security Act.

         Importantly, Sun has never considered whether the VA

service-connected disability compensation Mr. Hannington receives

is similar to available disability benefits under the comparator

acts. Sun’s statutory interpretation ignored the context and the

purpose of the comparison. When, as here, the object of the

inquiry is to identify sources of income for purposes of set-off,

a meaningful comparison of the Social Security Act and the Railroad

Retirement Act to a potentially similar act or law requires a

comparison of the benefits offered by the laws in question. The

“Other Income” section has no interest in the administrative

mechanics of various statutory schemes or of the statutory

structure of the agency administering the disbursement. Its focus

is simply the nature of the payments and the role that they play in

the financial health of the recipient. The district court was

therefore correct in characterizing Sun’s focus on factors not

relevant to this inquiry as “superficial.”

[19]

Sun’s approach to the

interpretation question was thus improper and, as we shall explain,

its conclusion also was erroneous.

 

2.

         Sun’s inexplicable decision to omit from its comparison

of the disability statutes any examination and comparison of the

substantive features of the veterans’ disability scheme caused it

to misapprehend, seriously, the degree of dissimilarity between the

Veterans’ Benefits Act and the comparator acts. When the

substantive features of the Veterans’ Benefits Act are viewed as a

whole, its dissimilarity in scope and purpose to the Social

Security Act and the Railroad Retirement Act is evident.

         The primary purpose of the Veterans’ Benefits Act is to

care for and to support those who have served our Country in the

Armed Forces of the United States.

[20]

Its purpose is to, “in the

words of Abraham Lincoln, ‘provide[] for him who has borne the

battle, and his widow and his orphan.’” Walters v. Nat’l Ass’n of

Radiation Survivors, 473 U.S. 305, 309 (1985). VA benefits

therefore are linked not to employment but to past service in the

Armed Forces. Notably, because of this fundamental difference in

purpose and scope, “funding for SSA [Social Security Act] and RRA

[Railroad Retirement Act] disability benefits derives from a tax on

both the employee and employer” whereas Veterans’ Benefits Act

“benefits are funded by Congress through the VA’s budget instead of

by a tax on members of the military.” Riley, 657 F.3d at 742, 743.

         This purpose stands in stark contrast to the Social

Security Act and the Railroad Retirement Act. The Social Security

Act and the Railroad Retirement Act, like many of the other types

of “Other Income” defined in the Plan, are insurance programs tied

to the beneficiary’s employment.

[21]

See generally Hisquierdo v.

Hisquierdo, 439 U.S. 572, 573 (1979) (discussing the Railroad

Retirement Act’s purpose as “provid[ing] a system of retirement and

disability benefits for persons who pursue careers in the railroad

industry”); California Dep’t of Human Res. Dev. v. Java, 402 U.S.

121, 130-32 (1971) (discussing the purposes and history of the

Social Security Act).

         Furthermore, when we focus only on benefits related to

disability, the statutory scheme of the Veterans’ Benefits Act

provides for two different types of benefits: service-connected

disability compensation (which Mr. Hannington receives) and

disability pensions for veterans of wartime service or their

surviving spouses or children.

[22]

The latter benefit arguably might

bear some substantive similarity to the benefits obtainable under

the Social Security Act and the Railroad Retirement Act, but we

need not and do not decide that question today. The former,

however--the service-connected disability compensation received by

Mr. Hannington--is decidedly different, and it is the substantive

nature of this benefit that must be compared to those under the

comparator statutes. These VA benefits are based on diseases and

injuries incurred by service personnel on account of their military

service. They are calculated not on a particular veteran’s actual

disability but rather “represent as far as can practicably be

determined the average impairment in earning capacity resulting

from such diseases and injuries and their residual conditions in

civil occupations.”

[23]

Because they are based on the special

sacrifice of illness or injury in military service, they are

payable in increments of disability ranging from ten percent to one

hundred percent.

[24]

Notably, although Congress has forbidden

duplication for some government benefits, it has not done so when

there is an overlap between Social Security Act or Railroad

Retirement Act benefits and VA benefits.

[25]

         There are very important substantive differences between

the Veterans’ Benefits Act and the Social Security Act and the

Railroad Retirement Act, especially between the service-connected

disability compensation received by Mr. Hannington and the

available benefits under the comparator acts. These differences

render the Veterans’ Benefits Act, as a matter of statutory

construction, dissimilar to the Social Security Act and the

Railroad Retirement Act. Thus, the VA benefits Mr. Hannington

receives are not “Other Income” for purposes of reducing the

payment Sun owes Mr. Hannington under the Plan.

 

 

Conclusion

         The judgment of the district court is affirmed.

         AFFIRMED.

APPENDIX

Footnotes

[1] '  Of the Seventh Circuit, sitting by designation.

[2] '  The district court’s jurisdiction was predicated on 28

U.S.C. § 1331 and 29 U.S.C. § 1132(e).

[3] '  The jurisdiction of this court is based on 28 U.S.C.

§ 1291.

[4] '  A.R. 103. These seven categories of “Other Income” are:

(1) temporary or permanent awards under various laws;

(2) disability benefits under any compulsory benefit act or law;

(3) disability or loss of income benefits under various insurance

plans; (4) benefits received under an employer retirement plan;

(5) the disputed section; (6) income received from any salary

continuance plan; and (7) benefits under unemployment compensation

laws. Id. To provide context, a copy of the “Other Income”

section, denominated “Part 5” of the Plan, is appended to this

opinion.

[5] '  Id. at 120.

[6] '  Id.

[7] '  Before the magistrate judge, Sun provided no specific

discussion of the Railroad Retirement Act. R.31 at 9 n.8. Sun

identified the following similarities between the Veterans’

Benefits Act and the Social Security Act: (1) they are federal

laws, which provide disability benefits; (2) benefits are paid

periodically; (3) death benefits are available; (4) the Acts

contain anti-assignment clauses; (5) benefit claims are

administered by independent agencies; and (6) a single application

can be used to apply for both Social Security and VA benefits.

R.21 at 6. Sun also argued that benefits under both are awarded

without regard to fault and represent compensation for lost earning

capacity. Id. The magistrate judge rejected these last two

arguments as erroneous. R.31 at 9-10 nn. 9, 10.

[8] '  R.31 at 9-11.

[9] '  Id. at 10.

[10] '  Id.

[11] '  Id.

[12] '  Id. at 11.

[13] '  See id. at 5.

[14] '  “Administrator,” “claims fiduciary” and “plan fiduciary”

are used interchangeably by the parties in this case. For

consistency, we shall refer to Sun as the Plan’s “fiduciary.”

[15] '  The only citation Sun provides to the Veterans’ Benefits

Act is 38 U.S.C. § 1110. See Appellant’s Br. 16. Section 1110 is

only the provision concerning basic entitlement to

service-connected disability compensation. Like other courts to

consider the issue, see, e.g., Riley v. Sun Life & Health Ins. Co.,

657 F.3d 739, 740 (8th Cir. 2011), we believe that the Veterans’

Benefits Act begins at 38 U.S.C. § 101 and encompasses all of Title

38 (Veterans’ Benefits).

              It is probably a misnomer to refer to Title 38 this way. See

Gov’t’s Amicus Br. 5. Title 38 provides for all veterans’ benefits

but is not comprised of one act. In 1958, Congress passed Public

Law 85-857, which was codified as Title 38, “[t]o consolidate into

one Act all of the laws administered by the Veterans’

Administration.” Pub. L. No. 85-857, 72 Stat. 1105 (1958). This

enactment codified provisions for both service-connected disability

compensation and non-service-connected disability pensions. In

subsequent years, Title 38 has been amended multiple times.

However, since the parties use the term “Veterans’ Benefits Act,”

we also refer to Title 38 in this way for ease of discussion.

              On October 15, 2012, this court issued an order inviting the

United States to file a brief as amicus curiae “presenting its view

on whether the Veterans’ Benefits Act reasonably could be

characterized as similar to the Social Security Act or the Railroad

Retirement Act such that benefits under the Veterans’ Benefits Act

could be deemed equivalent to those provided under the other two

acts.” Hannington v. Sun Life & Health Ins. Co., No. 12-1085, R.32

at 2 (Oct. 15, 2012). The court expresses its thanks to the United

States for having accepted the invitation and for having provided

a very helpful brief.

[16] '  42 U.S.C. §§ 401 et seq.

[17] '  45 U.S.C. §§ 231 et seq.

[18] '  A.R. 103.

[19] '  R.31 at 10. Sun also cites the Texas Supreme Court’s

statement in Barnett v. Aetna Life Insurance Co., 723 S.W.2d 663,

666 (Tex. 1987), of the “similar features” of the Social Security

Act and the Veterans’ Benefits Act. Both “are (1) governmental or

legislative plans providing for (2) periodic payment (3) to

qualified individuals (4) who have suffered a physical disability

(5) without regard to fault. In addition, all provide death

benefits, have anti-assignment clauses, and are administered by

independent agencies.” Id. These similarities are superficial; as

the Texas Supreme Court went on to note, “the similarity of

features of the acts are not the key ingredient, rather it is the

objectives for which they were created and the manner in which the

acts are implemented.” Id. at 666-67.

[20] '  Title 38 therefore includes not only disability

compensation, but a host of other benefits for veterans. See,

e.g., 38 U.S.C. §§ 1902 (life insurance policies), 3461

(entitlement to educational assistance), 3710 (loans to purchase or

construct a primary residence). Therefore, as a threshold matter,

the Veterans’ Benefits Act’s broad scope demonstrates the

inaccuracy of Sun’s view that its “primary purpose [is] providing

the same types of benefits” as the Social Security Act and the

Railroad Retirement Act. Appellant’s Br. 16. The Social Security

Act and Railroad Retirement Act do not provide life insurance, home

or small business loans, educational benefits or any other benefits

beyond those for disability and retirement; they certainly do not

offer benefits specifically designed to assist beneficiaries with

navigating most major facets of civilian life. See 38 U.S.C.

§§ 3001-4335 (Part III. Readjustment and Related Benefits).

[21] '  “Other Income” includes: workers’ compensation; benefits

under an occupational disease law; a settlement with an employer in

lieu of workers’ compensation; benefits received under a plan

related to or from the beneficiary’s employer; unemployment

compensation; and a salary continuance plan. A.R. 103.

[22] '  See 38 U.S.C. §§ 1521, 1541, 1542.

[23] '  38 C.F.R. § 4.1; see also 38 U.S.C. § 1155.

[24] '  See 38 U.S.C. §§ 1114, 1115.

[25] '  See 20 C.F.R. § 226.72(d) (Railroad Retirement benefits are

not reduced by the receipt of VA benefits); id. § 404.408(b)(2)(ii)

(Social Security benefits are not reduced by the receipt of VA

benefits).


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