Eastman Kodak Co. v. Stwb, Inc.

452 F.3d 215

EASTMAN KODAK COMPANY, Plaintiff Martin M. Coyne, Plaintiff-Appellant v. STWB, INC., formerly known as Sterling Winthrop Inc., Bayer Corp., formerly Miles Inc., The Supplemental Benefit Plan Committee of Sterling Drug Inc., and The Sterling Drug Inc. Supplemental Benefit Plan, Defendants-Appellees.

Docket No. 05-2937-cv.

United States Court of Appeals, Second Circuit.

Argued: February 2, 2006.

Decided: June 26, 2006.

Karen M. Wahle (Khuong G. Phan, on the brief), O'Melveny & Myers LLP, Washington, D.C., for Plaintiff-Appellant.

John J. Myers, Eckert Seamans Cherin & Mellott, LLC, Pittsburgh, Pa., for Defendants-Appellees.

W. Iris Barber, Senior Trial Attorney (Howard M. Radzely, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor, Nathaniel I. Spiller, Associate Deputy Solicitor for Supreme Court Litigation and Appellate Advice, and Karen L. Handorf, Counsel for Appellate and Special Litigation, on the brief), for Amicus Curiae Elaine L. Chao, Secretary of the United States Department of Labor, in support of Plaintiff-Appellant.

Jay E. Sushelsky, AARP Foundation Litigation (Melvin R. Radowitz, AARP, on the brief), for Amicus Curiae AARP, in support of Plaintiff-Appellant.

Before CALABRESI and STRAUB, Circuit Judges, and DRONEY, District Judge.^*

CALABRESI, Circuit Judge.

In this appeal, we are asked to decide whether an employee benefit plan participant is required, under the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1101 et seq., to exhaust an administrative claims procedure that was adopted by his plan only after he had already brought an ERISA action to recover benefits. The district court held that the exhaustion of such remedies was a prerequisite to seeking relief in court, and so dismissed the plaintiff's suit without prejudice. We hold that the exhaustion of such remedies is excused under 29 C.F.R. § 2560.503-1(l). Accordingly, we vacate the decision of the district court, and remand to the district court for a benefits determination.

BACKGROUND

While an employee of Sterling Winthrop ("Sterling"), Plaintiff-Appellant Martin Coyne began participating in employer-sponsored benefit plans.² These included Sterling's standard retirement plan as well as its Supplemental Benefit Plan ("Supplemental Plan" or "Plan"), a so-called "top hat" plan.³ Top hat plans are designed to provide certain employees with payments over and above the benefits provided by "qualified" employee benefit plans — i.e., plans that are eligible for favorable tax treatment, such as Sterling's standard retirement plan. The Internal Revenue Code limits the value of benefits that may be paid under qualified plans, see 26 U.S.C. §§ 401(a)(17), 415 — hence the need for top hat plans when employers wish to provide a higher level of deferred compensation to some of their employees. Top hat plans are exempt from many provisions of ERISA, including the participation and vesting, funding, and fiduciary responsibility requirements, see 29 U.S.C. §§ 1051(2), 1081(a)(3), 1101(a)(1), but like qualified plans, they are subject to disclosure requirements, to civil enforcement, and to the duty to have a claims procedure, see 29 U.S.C. §§ 1021, 1132, 1133.

In Coyne's case, Sterling's Supplemental Plan promises to make up the shortfall between (a) what the qualified plan actually pays, and (b) the level of regular pension benefits participants would receive, but-for the limits placed on qualified plan payouts by the tax code. The Supplemental Plan confers "full power and authority" on the Plan committee to make "binding and conclusive" decisions on benefit claims and all other issues arising under the Plan. Based on estimates from an actuarial consulting firm, Coyne places the pre-tax value of his benefits under the Plan at roughly $11,300 per month.

Coyne started working for Sterling in 1981. He and the company eventually parted ways amid a string of corporate recombinations. As a result, responsibility for Coyne's benefits under the Supplemental Plan seemed, for a time, to have gotten lost in the shuffle. Sterling was bought by Eastman Kodak Company ("Kodak") in 1989, at which point Sterling's retirement programs became part of Kodak's retirement plan. Sterling changed hands again in 1994, becoming a wholly-owned subsidiary of Defendant-Appellee Bayer Corporation ("Bayer") through a two-stage, three-firm transaction that also involved SmithKline Beecham. See Eastman Kodak Co. v. STWB Inc., 232 F.Supp.2d 74, 77-83 (S.D.N.Y.2002). The parties agree, however, that none of the transactions described above terminated Sterling's liability for any payments due to Coyne under the terms of the Supplemental Plan. Coyne continued to work for Sterling until shortly after the company's 1994 sale to Bayer, when Coyne became an employee of Kodak, for whom he worked until his retirement in July 2003.

Starting in May 2003, as Coyne approached retirement, representatives of Kodak contacted Bayer by e-mail on Coyne's behalf to arrange for payment of Coyne's benefits under the Supplemental Plan. It seems that no employee prior to Coyne had asserted a claim under the Plan — indeed, Coyne may be the only person eligible for benefits under it. Coyne's request for benefits was thus far from routine, and Bayer was not adequately prepared to handle it. Bayer had no claims procedure in place, and none was described in the Plan. Over the course of a year, Kodak made a number of entreaties to Bayer, by e-mail, express mail, and fax, and these were met variously with skepticism, befuddlement, and silence. Initially, Bayer representatives expressed some doubt that the company was liable for Coyne's benefits. After requesting a copy of the Plan and related documents, which Kodak duly sent, Bayer then voiced some confusion as to why the claim was being pursued before Coyne had reached the retirement age of 55. On October 8, 2003, Bayer reported that it would convene its benefits group to address Coyne's claim. Although Kodak followed up with e-mails, Bayer appears not to have responded. Finally, on January 30, 2004, Kodak's controller e-mailed to announce that Kodak would "proceed as necessary to enforce our rights under the stock purchase agreement" pursuant to which Bayer acquired Sterling and assumed its liabilities.

Coyne became eligible to receive benefits under the Supplemental Plan on March 1, 2004. Still having heard nothing from Bayer, Kodak paid Coyne's first month of benefits. Kodak's Controller again contacted Bayer, now seeking indemnification for the payment under the terms of the sale of Sterling to Bayer. Bayer did not respond, and in June 2004 Kodak and Coyne together filed suit in the United States District Court for the Southern District of New York. In the amended complaint,⁴ Coyne sought recovery of benefits owed under the Plan, pursuant to 29 U.S.C. § 1132(a)(1)(B). Kodak sought indemnification for the payments it had made to Coyne, and Kodak and Coyne together sought a declaratory judgment that Bayer is obligated to pay Coyne benefits under the Supplemental Plan for the rest of Coyne's life, and to Coyne's wife for the rest of her life if he pre-deceases her. STWB Inc., Bayer, Sterling's Supplemental Benefit Plan's Committee, and the Sterling Supplemental Benefit Plan were named as defendants.⁵

In its answer, filed October 15, 2004, Bayer alleged that Coyne had failed to exhaust administrative remedies. At a pre-trial conference held the following week, Bayer explained that those administrative remedies consisted of a new claims procedure added to the Plan by "Amendment No. 1" ("Amendment"), which Sterling's Board of Directors adopted on July 12, 2004. The Amendment was retroactive, and made the claims procedure effective as of January 1, 2004.

Kodak and Coyne moved for summary judgment. Coyne argued that the Amendment had an adverse impact on his vested rights under the Plan, and hence, was invalid under the terms of the Plan, which forbade amendments that "retroactively impair or otherwise adversely affect" vested rights. The district court agreed with Coyne that his rights under the Plan were vested, but found that these rights were not impaired or adversely affected by the "purely procedural" introduction of a claim procedure. Eastman Kodak Co. v. Bayer Corp., 369 F.Supp.2d 473, 479 (S.D.N.Y. 2005). Accordingly, the district court concluded that the Amendment was valid, and that Coyne had failed to exhaust the available administrative remedies. The action was dismissed without prejudice to its refiling after Coyne exhausted the claims procedure. The district court also directed Bayer to accept Coyne's complaint as a claim for benefits that triggered the Plan's administrative procedures. Id. at 483.

Kodak and Coyne filed a notice of appeal, but Kodak subsequently withdrew from the appeal. In response to an inquiry from Coyne, the district court clarified that the administrative claims proceeding was not stayed pending appeal.⁶

DISCUSSION

ERISA requires both that employee benefit plans have reasonable claims procedures in place, and that plan participants avail themselves of these procedures before turning to litigation. See 29 C.F.R. § 2560.503-1 (detailing requirements of claims procedures, including notification of adverse decisions within 90 days and the availability of a full and fair review of the initial determination); see also Jones v. UNUM Life Ins. Co. of Am., 223 F.3d 130, 140 (2d Cir.2000) (noting that "there is a `firmly established federal policy favoring exhaustion of administrative remedies in ERISA cases'") (quoting Kennedy v. Empire Blue Cross & Blue Shield, 989 F.2d 588, 594 (2d Cir.1993)). Unless a "clear and positive showing" is made that it would be futile for the claimant to pursue her claim through the internal claims process, "that remedy must be exhausted prior to the institution of litigation." Jones, 223 F.3d 130 (internal quotation marks omitted). We review ...