Please ensure Javascript is enabled for purposes of website accessibility

Opinions – U.S. District Court: 3/14/11

Consumer Protection

Debt collection

BOTTOM LINE: Defendant acted as a debt collector in the State of Maryland without a license and unlawfully filed lawsuits against plaintiffs as part of its debt collection practices, in violation of the Fair Debt Collection Practices Act, the Maryland Consumer Debt Collection Act, and the Maryland Consumer Protection Act.

CASE: Bradshaw v. Hilco Receivables, LLC, Civil Action No. RDB-10-113 (decided Feb. 23, 2011) (Judge Bennett). RecordFax No. 11-0223-40, 21 pages.

FACTS: Wayne Bradshaw filed a class action lawsuit in the circuit court seeking damages and declaratory and injunctive relief against Hilco Receivables, LLC. Bradshaw alleged that Hilco acted as a debt collector in the State of Maryland without a license and that Hilco unlawfully filed lawsuits against Bradshaw and others as part of its debt collection practices, in violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692, the Maryland Consumer Debt Collection Act (MCDCA), CL §14-201, and the Maryland Consumer Protection Act (MCPA), CL §13-101.

Hilco removed Bradshaw’s lawsuit to the district court on the basis of federal question jurisdiction under 28 U.S.C. §1331.

The plaintiff class, as represented by Bradshaw (collectively referred to as Bradshaw), consisted of all persons in the State of Maryland who within three years prior to the filing of the initial complaint were contacted by Hilco in connection with any effort to collect a debt.

Prior to Bradshaw’s action, Hilco had filed suit (the Underlying Lawsuit) against Bradshaw in the district court in order to collect a debt that it purchased from Bradshaw’s creditors after the debt went into default.

Bradshaw moved for partial summary judgment as to liability only on Counts II, III, and IV of the complaint. Hilco cross moved for summary judgment.

The district court granted Bradshaw’s motion and denied Hilco’s motion with respect to Counts II, III, and IV. Hilco’s motion was partially granted with respect to Count I.

LAW: The district court had jurisdiction over this matter pursuant to 15 U.S.C. §1692k(d) and 28 U.S.C. §1331 because Bradshaw’s claims constituted a federal question arising under the FDCPA. The court had supplemental jurisdiction over Bradshaw’s state law claims under 28 U.S.C. §1367(a).

The FDCPA safeguards consumers from abusive and deceptive debt collection practices by debt collectors. Spencer v. Henderson-Webb, Inc., 81 F.Supp.2d 582, 590 (D.Md.1998). The FDCPA regulates debt collectors who “regularly collect or attempt to collect, directly or indirectly, [consumer] debts owed or due another.” Heinz v. Jenkins, 514 U.S. 291, 294 (1995).

Section 1692a(6) provides: “The term ‘debt collector’ means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”

The FDCPA prohibits the use of any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” 15 U.S.C. §1692e, and provides a non-exhaustive list of conduct that violates the FDCPA, including “[t]he threat to take any action that cannot legally be taken.” 15 U.S.C. §1692e(5).

The FDCPA is a strict liability statute and a consumer has only to prove one violation in order to trigger liability. See 15 U.S.C. §1692k(a); see also Spencer v. Henderson-Webb, Inc., 81 F.Supp.2d 582, 590-91 (D.Md.1999).

The Maryland Collection Agency Licensing Act, BR §7-101 (MCALA), requires that “a person must have a license whenever the person does business as a collection agency in the State.” §7-301(a). A “collection agency” is “a person who engages directly or indirectly in the business of:…(ii) collecting a consumer claim the person owns, if the claim was in default when the person acquired it.” §7-101(c).

MCALA is clear on its face-it requires that any person who directly or indirectly engages in collecting debts must be licensed. Moreover, there is ample legislative history confirming the Maryland General Assembly’s intention to require companies that acquire defaulted consumer debt, such as Hilco, to be licensed. See H.B. 1324, 2007 Leg. Sess., S. Fin. Comm. (Md.2007), ECF No. 16-9; Testimony in Support of HB 1324 by Charles W. Turnbaugh, Comm’r Fin. Reg. ECF No. 16-9.

Accordingly, Hilco is a debt collector and engaged in collection activity within the meaning of the FDCPA as a result of its initiation of state court lawsuits brought against Bradshaw and the class members. Furthermore, Hilco violated the MCALA by engaging in collection activity without the required license.

As such, because a violation of MCALA will not give rise to a private right of action, see BR §7-401, the next issue was whether a violation of the Maryland state licensing law may give rise to a federal cause of action under the FDCPA.

Essentially, Bradshaw argued that Hilco’s violation of MCALA’s licensing requirement is a per se violation of §1692e(5)’s prohibition on threats to take action that cannot legally be taken.

There is precedent for that argument. See, e.g., Gaetano v. Payco of Wisconsin, Inc., 774 F.Supp. 1404, 1415 (D.Conn.1990); Sibly v. FirstCollect, Inc., 913 F.Supp. 469, 471-72 (M.D.La.1995); Russey v. Rankin, 911 F.Supp. 1449, 1459 (D.N.M.1995). There is also, however, ample precedent for the argument that the failure to obtain a collection agency license does not constitute a per se violation of the FDCPA. See, e.g., LeBlanc v. Unifund CCR Partners, 601 F.3d 1185, 1190, 1192 (11th Cir.2010); Carlson v. First Revenue Assurance, 359 F.3d 1015, 1018 (8th Cir.2004); Wade v. Reg’l Credit Ass’n, 87 F.3d 1098, 1099-1101 (9th Cir.1996).

Thus, a violation of Maryland’s MCALA licensing requirement may support a cause of action under the FDCPA. However, any violation of state law, no matter how trivial, does not constitute a per se violation of the FDCPA.

Accordingly, the next issue was whether the actual conduct complained of by Bradshaw – namely, Hilco’s filing of lawsuits to collect defaulted debt without a license – violated §1692e(5) of the FDCPA which prohibits threatening to take action that cannot legally be taken.

The majority view is that §1692e(5) protects consumers against debt collectors that actually complete illegal acts as well as against debt collectors who merely threaten to complete those acts. See Poirer v. Alco Collections, Inc., 107 F.3d 347, 350-51 (5th Cir.1997); Harrington v. CACV of Colorado, LLC, 508 F.Supp.2d 128, 136-37 (D.Mass.2007). Accordingly, §1692e(5) of the FDCPA includes the taking of “action that cannot legally be taken.”

Finally, in the 4th Circuit, the “least sophisticated debtor” standard applies to evaluate violations of §1692e(5). See United States v. Nat’l Fin. Servs. Inc., 98 F.3d 131, 135 (4th Cir.1996). The actual filing of a lawsuit fulfills this low standard. See Marchant v. U.S. Collections West, Inc., 12 F.Supp.2d 1001, 1006 (D.Ariz.1998).

Under the FDCPA, a debt collector is shielded from liability under the Act upon a showing, by a preponderance of the evidence, that “the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. §1692k(c).

However, the “bona fide error” defense does not apply to “a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA,” but may only be used in circumstances where a violation of the FDCPA results from other causes, such as a clerical or factual mistake. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S.Ct. 1605, 1608 (2010).

Hilco provided no basis for a finding that its flawed interpretation of the Maryland licensing requirements and the FDCPA were in any way “factual” mistakes.

As a matter of law, therefore, Hilco’s filing of lawsuits against the class members constituted “a threat to take…action that cannot legally be taken” in violation of 15 U.S.C. §1692e(5) and summary judgment was entered in favor of Bradshaw on this claim.

COMMENTARY: The MCDCA states that, in collecting a consumer debt, a collector may not “[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist.” CL §14-202(8). The MCPA prohibits “unfair or deceptive trade practices,” CL §13-301, and expressly designates as “unfair or deceptive trade practices” those that constitute any violation of the MCDCA. CL §13-301(14)(iii).

“Considering the remedial aim of the MCDCA and the dilution of the statute that would result from a contrary interpretation, the Court holds that the term ‘knowledge’ in the Act does not immunize debt collectors from liability for mistakes of law.” Spencer, 81 F.Supp.2d at 594.

In addition, the “knowledge” requirement of the MCDCA “has been held to mean that a party may not attempt to enforce a right with actual knowledge or with reckless disregard as to the falsity of the existence of the right.” Kouabo v. Chevy Chase Bank, F.S.B., 336 F.Supp.2d 471, 475 (D.Md.2004).

Moreover, “it does not seem unfair to require that one who deliberately goes perilously close to an area of proscribed conduct shall take the risk that he may cross the line.” Spencer, 81 F.Supp.2d at 595.

Hilco undoubtedly went perilously close to an area of proscribed conduct in failing to abide by Maryland’s licensing laws for debt collectors and actually crossed the line. Thus, Hilco violated CL §14-202(8).

In addition, because violations of the MCDCA are expressly designated as “unfair or deceptive trade practices” under the Maryland Consumer Protection Act, Hilco violated that statute as well.

Finally, because declaratory and injunctive relief was not available under the FDCPA, MCDCA, or the MCPA, see Hauk v. LVNV Funding, LLC, —F.Supp.2d —-, 2010 WL 4395395 (D.Md. Nov.5, 2010), Hilco’s cross motion for summary judgment was granted with regard to count I of the complaint.

PRACTICE TIPS: Under the Rooker-Feldman doctrine, a federal court does not have jurisdiction to overturn state court judgments, even when the federal complaint raises allegations that the state court judgments violate a claimant’s constitutional or federal statutory rights. See Rooker v. Fidelity Trust Co., 263 U.S. 413, 415-16 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 482-86 (1983). See also Adkins v. Rumsfeld, 464 F.3d 456, 463-64 (4th Cir. 2006).


Want of due diligence

BOTTOM LINE: “Want of due diligence,” under an insurance policy’s liner negligence clause, equated to simple negligence.

CASE: National Casualty Company v. Lockheed Martin Corporation, Civil Action No. AW-05-1992 (decided Feb. 14, 2011) (Judge Williams). RecordFax No. 11-0214-41, 7 pages.

FACTS: National Casualty Company sued Lockheed Martin Corporation, seeking a declaration that the shorter of two limitations periods in the insurance policy applied to Lockheed Martin’s claim for vessel damage and asserting controversy with respect to scope of coverage and cost of reasonable repairs. Lockheed Martin counterclaimed for breach of contract and demanded a jury trial.

The Liner Negligence Clause (LNC) in the insurance policy issued to Lockheed Martin by National Casualty initially provided for broad coverage that included, among other things, the “[n]egligence, error of judgment or incompetence of any person.” However, the LNC concluded with a proviso limiting the previously mentioned coverage with the following language: “Provided such loss or damage…has not resulted from want of due diligence by the Assured(s), the Owner(s) or Manager(s) of the Vessel, or any of them.”

The court instructed the jury that the phrase “want of due diligence” meant negligence. A verdict was returned in favor of Lockheed Martin. Nonetheless, because Lockheed Martin took exception to the court’s instruction on due diligence, and because the meaning of due diligence was one of the most important legal issues that arose during this litigation, the court explained the basis for its instruction.

The district court concluded that want of due diligence, under the LNC, equated to simple negligence.

LAW: As an initial matter, the plain meaning of the phrase “want of due diligence” implies the absence of reasonable care and ordinary prudence, which are central to the concept of negligence. “Diligence” means “[c]are; caution; the attention and care required from a person in a given situation.” BLACK’S LAW DICTIONARY 468. More specifically, “due diligence” is “[the] diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation.” Id.

In light of the plain meaning of due diligence, courts across the nation, including the 4th Circuit, routinely use the terms negligence and lack of due diligence interchangeably in a wide range of different legal contexts. See, e.g., Woods-Leber v. Hyatt Hotels of Puerto Rico, Inc., 124 F.3d 47, 50 (1st Cir.1997); Oriente Commercial, Inc. v. Am. Flag Vessel, M/V Floridian, 529 F.2d 221, 223 (4th Cir.1975).

Numerous jurisdictions have treated the concepts of negligence and lack of due diligence as identical in the course of interpreting marine insurance provisions similar to the LNC. In fact, many of the reported decisions dealing with such clauses assume or determine that a particular person was negligent, and then focus on the question of whether that negligent person was a “master” of the vessel (whose negligence is covered by the Clause) or an owner or manager (whose lack of due diligence voids coverage). See, e.g., Allen N. Spooner & Son, Inc. v. Conn. Fire Ins. Co., 314 F.2d 753, 757-58 (2d Cir.1963).

Furthermore, the 8th Circuit has explicitly held that it is proper to instruct the jury that lack of due diligence means negligence in the context of marine insurance clauses similar to the LNC. See L & L Marine Serv., Inc. v. Ins. Co. of N. Am., 796 F.2d 1032, 1033 (8th Cir.1986). The opinion is substantially based on a Supreme Court decision holding that “[a] defect of seaworthiness, arising after the commencement of the risk, and permitted to continue from bad faith or want of ordinary prudence or diligence on the part of the insured or his agents, discharges the insurer from liability for any loss which is the consequence of such bad faith, or want of prudence or diligence.” Union Ins. Co. v. Smith, 124 U.S. 405 (1888).

Lockheed contended, based on a decision of the 5th Circuit, that the due diligence proviso is only triggered when the insured, “from bad faith or neglect, knowingly permit[s] the vessel to break ground in an unseaworthy condition,” or when the owner has “privity and knowledge” of the vessel’s unseaworthiness. Saskatchewan Gov’t Ins. Office v. Spot Pack, Inc., 242 F.2d 385 (5th Cir.1957).

Spot Pack does limit the Union Insurance Company holding to “those acts in which the owner, if an individual, personally participates, or if a corporation or multiple ownership, in which there is personal participation by those having shoreside managerial responsibilities,” Spot Pack, 242 F.2d at 389, but this limitation does not completely nullify the “want of ordinary prudence or diligence” language from Union Insurance Company, 124 U.S. at 427.

Instead, the holding in Spot Pack centers on a distinction it draws between “acts of those in supervisory management,” on the one hand, and “neglect by agents or servants below the level of management,” on the other. Spot Pack, 242 F.2d at 390. Because lack of due diligence “will not be imputed [from agent to owner] on the usual notions of respondeat superior,” the negligent acts of “agents or servants below the level of management” generally do not establish a lack of due diligence on the part of the owner or manager (except where the owner or manager has “actual knowledge” of the negligent acts). Id.

By contrast, the Union Insurance “ordinary prudence or diligence” standard applies to persons with “shoreside managerial responsibilities” (i.e., owners or managers) when they personally take actions to prepare a vessel for a voyage. Union Insurance, 124 U.S. at 427.

The jury instruction issued here incorporates the distinction and prevents the jury from finding lack of due diligence by mistakenly applying respondeat superior principles. In accordance with Spot Pack, the court instructed the jury not to confuse the negligent acts of low-level ship masters and other employees (whose negligent acts are covered by the LNC) with the negligence of Lockheed’s owners or managers (which is exempted by the due diligence proviso).

Next, Lockheed argued that other language within the LNC suggests that negligence is not the appropriate standard for the due diligence proviso. Specifically, Lockheed pointed out that the LNC expressly covers the “[n]egligence…of any person,” and that this language would effectively be modified to “[n]egligence…of any person except owners or managers” if the Court were to equate lack of due diligence with negligence.

Although Lockheed was correct regarding the functional outcome of the Court’s interpretation of the proviso, that outcome was not problematic. The purpose of a proviso clause is to restrict or clarify the scope of what came before. Thus, there was nothing incongruous in reading the LNC as initially providing broad coverage for the “[n]egligence…of any person” and subsequently clarifying that the negligence of certain categories of persons (i.e., “the Assured(s), the Owner(s) or Manager(s) of the Vessel”) constitutes an affirmative defense.

COMMENTARY: Lockheed relied on Goodman v. Fireman’s Fund Insurance Company, 600 F.2d 1040 (4th Cir.1979), where the 4th Circuit was confronted with an insurance policy with an Inchmaree Clause, which is closely related to the LNC at issue here. The court found that the predominant cause of vessel damage was the negligence of the plaintiff/insured, yet it nonetheless concluded that, if the Inchmaree Clause “were considered alone,” the court “would find coverage.” Id. at 1042.

Even though the underlying district court opinion in Goodman discussed the due diligence proviso to the Inchmaree Clause, the 4th Circuit never even mentioned the phrase “due diligence” in its analysis of the Clause and, instead, focused its analysis exclusively on determining what types of risks are covered by the Inchmaree Clause and never considered the issue of due diligence. See id. at 1042.

Thus, Goodman was inapplicable.

Labor & Employment

Retirement benefits

BOTTOM LINE: Plaintiffs’ count for violation of ERISA’s minimum vesting requirements stated a claim for “other appropriate equitable relief” and they could simultaneously bring a claim for recovery of benefits under ERISA; however, plaintiffs failed to state a claim with respect to employees who ceased employment with defendants before ERISA’s effective date.

CASE: England v. Marriott International, Inc., No. RWT 10cv1256 (decided Feb. 14, 2011) (Judge Titus). RecordFax No. 11-0214-40, 35 pages.

FACTS: This putative class action involved ERISA claims by former employees of Marriott International, Inc. and its predecessor companies (collectively Marriott).

Robert England and others (the Employees) worked for various corporate predecessors of Marriott. They received Retirement Deferred Stock Bonus Awards (Retirement Awards) which promised to issue stock to the recipients when they turned 65, took early retirement, became permanently disabled, or died.

England, who worked for Marriott-Hot Shoppes and/or Marriott Corporation from 1966 through January 9, 1970, alleged he received Retirement Awards in 1966 and 1967 from Marriott-Hot Shoppes and in 1968 from Marriott Corporation. Another employee worked for Marriott from 1971-1991, during which time Marriott Corporation issued him “a number of Retirement Awards.” A third employee worked for Marriott from September 1974 to November 1976, during which time he received “at least one Retirement award.”

Each employees alleged that he only received a paper copy of the Retirement Award at the time the award was given, that the paper award apprised him of the number of shares of stock he had been awarded along with the terms and conditions governing accrual, vesting, and eventual distribution of stock, and that he did not receive any additional information in the form of plan documents or Summary Plan Descriptions thereafter.

At the time the Employees received their Retirement Awards, they became participants in the Marriott-Hot Shoppes, Inc. Deferred Stock Bonus Plan or the Marriott Corporation Deferred Stock Plan. The Marriott International, Inc. Stock and Cash Incentive Plan subsequently assumed all obligations under the Retirement Awards.

The Employees alleged that after the passage of ERISA, which became effective in 1976, the Retirement Award program became subject to and governed by ERISA’s provisions. However, Marriott never informed Plan participants, the Department of Labor, or the IRS that the Retirement Award program was an ERISA-governed plan. Marriott never complied with the reporting and disclosure requirements or the vesting schedule mandated by ERISA.

All four of the Employees have turned 65 and Marriott has not contacted them to inform them of their entitlement to distributions under their Retirement Awards. England made a informal inquiry regarding his benefits. After Marriott denied his request, England’s attorney made a formal demand for stock. Marriott acknowledged that England had never received a distribution in 1970, and offered to distribute stock to England if he signed a release of all claims. Marriott offered England adjusted vested shares based on its calculation that 3.41 shares had vested to England’s benefit before his separation from Marriott Corporation. England refused the offer.

The Employees filed a three count complaint, alleging, in Count I, that the vesting scheme established in the Employees’ Retirement Awards violates ERISA’s minimum vesting requirements of 29 U.S.C. §1053(a). The Employees therefore sought injunctive and other equitable relief pursuant to 29 U.S.C. §1132(a)(3). In Count II, the Employees sought declaratory relief and the distribution of benefits under ERISA, 29 U.S.C. §1132(a)(1)(B). Count III asserted a breach of contract claim.

Marriott moved to dismiss the complaint, which the district court granted in part and denied in part.

LAW: Under ERISA §502(a)(3), plan participants or beneficiaries may sue to “(A) enjoin any act or practice which violates any provision 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 [ERISA] or the terms of the plan.”

Under §502(a)(1)(B), an ERISA plan participant may sue “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan[.]”

ERISA does not contain an explicit statute of limitations for claims brought pursuant to §502(a)(3). Romero v. Allstate Corp., 404 F.3d 212 (3d Cir.2005). Therefore, the court must refer to the forum state’s laws and apply the most analogous statute of limitations, Shofer v. Hack Co., 970 F.2d 1316 (4th Cir.1992), which is Maryland’s three-year statute of limitations for breach of contract actions. CJ §5-101.

In an ERISA case, a cause of action generally does not accrue until a claim for benefits is made and formally denied. Rodriguez v. MEBA Pension Trust, 872 F.2d 69, 72 (4th Cir.1989). However, an ERISA cause of action may accrue later if the plaintiff had no reason to know of his injury at the time it occurred. See Romero, 404 F.3d at 222.

In Fenwick v. Merrill Lynch & Co., Inc. 570 F.Supp.2d 366 (D.Conn.2008), the court held that a complaint was not time-barred where plaintiffs did not receive a summary plan description communicating the terms of the purported plan to plaintiffs, and the “plaintiffs had no notice that the terms of the Plan repudiated their entitlement to accrued benefits because they had no knowledge of the Plan terms as a whole or whether the Plan was subject to ERISA.” Id. at 372. Thus, the plaintiffs’ claims did not accrue when they received notice of the non-ERISA compliant forfeiture provisions. Id.

Here, the amended complaint did not allege exactly when the Employees became aware that ERISA governed the Retirement Awards. It seemed clear, however, that the Employees were not aware that the Retirement Awards were subject to ERISA’s requirements at the time ERISA was passed. The Retirement Awards did not even mention ERISA, did not indicate how Marriott intended to calculate a year of service and did not indicate how participants could be apprised of Plan amendments; the awards did not indicate how the Employees’ shares would be converted when obligations under the Retirement Awards were assumed by successor companies and they contained no details regarding any claims procedures. Summary Plan Descriptions were never provided to the Employees with respect to the Awards and the Department of Labor and the IRS were never informed of the ERISA status of the Retirement Awards. Accordingly, the statute of limitations grounds did not bar this action.

Marriott argued that though the Employees purported to seek equitable relief in Count I, this claim was actually a claim for legal relief.

In Carrabba v. Randalls Food Markets, Inc., 145 F.Supp.2d 763 (N.D.Tex.2000), plaintiffs alleged that a plan considered by the employer to be a “top hat plan” was not in fact a top hat plan, and therefore, they were entitled to additional benefits that they would have received had the plan been properly categorized as a plan subject to ERISA’s accrual and vesting requirements.

The district court agreed that the plan was not a top hat plan, and was therefore subject to ERISA’s vesting and accrual requirements. Id. In determining what relief plaintiffs were entitled, the court held that where plan participants alleged that the terms of their ERISA plan were illegal and sought payment of additional benefits under revised terms that complied with ERISA, plaintiffs were entitled to seek relief under §502(a)(3) not §502(a)(1)(B). Id. at 770-71. The court reasoned that the plaintiffs were not seeking to recover “under the terms of” their plan, as provided for by §502(a)(1)(B), but were seeking reformation of the terms of their plan to comply with ERISA and payment of benefits under these revised terms. See also Laurezano v. Blue Cross & Blue Shield of Massachusetts, Inc. Retirement Income Trust, 134 F.Supp.2d 189 (D.Mass.2001).

The heart of the allegations contained in Count I was that payment under the terms of the Retirement Awards’ vesting provisions will violate ERISA, and reformation of the terms of the Awards is the only way to bring the Retirement Awards into compliance with ERISA. Count I therefore stated a claim “to obtain other appropriate equitable relief” under ERISA §502(a)(3).

Further, reformation of the terms of a contract is a form of equitable relief. 66 Am.Jur.2d Reformation of Instruments §3. Therefore, to the extent that the Employees sought to reform the Retirement Awards’ vesting provisions to comply with ERISA’s vesting requirements, they sought equitable relief.

Marriott also argued that the Supreme Court’s decision in Varity Corp. v. Howe, 516 U.S. 489 (1996), as interpreted by the 4th Circuit in Korotynska v. Metropolitan Life Ins. Co., 474 F.3d 101 (4th Cir.2006), precluded the Employees from simultaneously pursuing claims under ERISA §§502(a)(1)(B) and 502(a)(3).

In Varity, 516 U.S. at 515, the plaintiffs, relying on their employer’s representations, agreed to transfer from that employer to another company and the new company’s ERISA benefit plan. When the company to which they transferred later failed, they sued the corporate parent and a subsidiary of their former employer to recover benefits under their old ERISA plan.

The Supreme Court held that the Varity plaintiffs, who could not sue under §1132(a)(1) because they were no longer members of the plan from which they sought benefits (and who also could not sue under §1132(a)(2), because that provision did not provide a remedy for individual beneficiaries), could sue under §1132(a)(3) because they had no “adequate relief” under other provisions of ERISA. Id.

In Korotynska, 474 F.3d at 106, the 4th Circuit held that the plaintiff could not bring a claim for equitable relief under §1132(a)(3) because her injury could adequately be redressed under §1132(a)(1)(B).

The Employees clearly sought reformation of their Retirement Awards to comply with the terms of ERISA and the payment of benefits under those reformed awards. They could not receive complete and adequate relief under §502(a)(1)(B) alone, because that section only allows a beneficiary “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” Nor could they receive complete relief under §502(a)(3), which does not allow for payment of damages.

The Employees were entitled to first pursue a claim under §502(a)(3) for reformation of the terms of the Retirement Awards, and then to pursue a claim under §502(a)(1)(B) for recalculation and distribution of benefits due under the ERISA-complaint terms of the revised awards.

Accordingly, Count I stated a claim for equitable relief and the Employees may simultaneously bring claims under ERISA § 502(a)(3) and (a)(1)(B). However, Count I failed to state a claim that the Retirement Awards failed to comply with ERISA’s minimum vesting requirements with respect to employees who ceased employment with predecessor companies prior to January 1, 1976. See Cohen v. Martin’s, 694 F.2d 296 (2d Cir.1982).

COMMENTARY: ERISA plan participants must “both pursue and exhaust [ERISA] plan remedies before gaining access to the federal courts.” Gayle v. UPS, 401 F.3d 222, 226 (4th Cir.2005).

In Eastman Kodak Co. v. STWB, Inc., 452 F.3d 215 (2d Cir.2006), the 2nd Circuit held that, “under the ‘deemed exhausted’ provision of [Department of Labor regulation] 29 C.F.R. §2560.503.1(l), an ERISA benefits claimant is not required to exhaust a claims procedure that was adopted only after a suit to recover benefits has been brought.” Id. at 223.

The 2nd Circuit court looked at the context in which the “deemed exhausted” provision was adopted and held that “[t]he ‘deemed exhausted’ provision was plainly designed to give claimants faced with inadequate claims procedures a fast track into court-an end not compatible with allowing a ‘do-over’ to plans that failed to get it right the first time.” Id. The 2nd Circuit held that the litigants’ administrative remedies should be “deemed exhausted” due to the Defendant’s failure to provide them with an adequate claims procedure until after they brought suit to recover their ERISA benefits in court.

Marriott instituted a claims procedure and appeals process for denial of benefits under the Retirement Awards less than two months after the Employees filed this suit. Marriott was motivated to institute a formal claims procedure only after they were sued. To allow Marriott to require the Employees, who have incurred the expense of investigating the grounds for and filing this suit, to go back and exhaust an administrative procedure that may never have been implemented but for their lawsuit would completely undermine the “deemed exhausted” provision of 29 C.F.R. §2560.503.1(l ). Therefore, the Employees’ administrative remedies were “deemed exhausted.”

Defendants also made an essentially factual argument that the Employees should have been required to exhaust administrative remedies because they did not make any inquiry of Marriott about their benefits before filing this action.

There was no reason to believe that the Employees, had they inquired of Marriott regarding their benefits, would have been given any other response than that given England. England was told he was not entitled to benefits because those benefits had been paid out when he separated from Marriott; then, after his attorney made a demand for the benefits, he was told he would be given certain stock if he signed a release of all claims. At no time was England told of an administrative claims process through which he could seek payment of benefits under the Retirement Awards.

Second, the policy implications outlined in Eastman Kodak persuade the court that to allow Marriott to now compel Craig, Bond and Foster to complete an administrative claims process would create a perverse incentive for a company to delay implementing an ERISA-compliant claims procedure until litigation was initiated.

PRACTICE TIPS: A motion to dismiss is not an appropriate time to consider the impact of a statute of limitations defense on absent class members, Guerra v. GMAC LLC, 2009 WL 449153 (E.D.Pa. Feb.20, 2009), especially when class certification has not yet occurred.


False Claims Act

BOTTOM LINE: Because the defendants were serving as members of the federal armed forces when they allegedly submitted false claims for payment to the government, the plaintiff’s qui tam action was barred by the False Claims Act’s intramilitary immunity provision.

CASE: United States v. Anthony, Civil No. CCB-09-356 (decided Feb. 9, 2011) (Judge Blake). RecordFax No. 11-0209-40, 13 pages.

FACTS: Robert Conover, an officer in the Maryland Air National Guard (MDANG) employed as a dual-status technician pursuant to 10 U.S.C. §10216(a), sued members of the MDANG (collectively, the Officers) on behalf of the United States government pursuant to the qui tam provision of the False Claims Act (FCA), 31 U.S.C. §3730(b)(1).

Conover’s allegations arose out of military training flights conducted as part of Inactive Duty for Training by the 104th Fighter Squadron, 175th Wing. Although the 104th Fighter Squadron is a unit within the MDANG, it receives federal funds to compensate members of the MDANG for conducting training exercises in accordance with minimum federal guidelines. In the past decade, the 104th Fighter Squadron has been activated for federal duty and deployed overseas for combat operations on five occasions.

The Air National Guard Instruction 36-2001 (ANGI 36-2001) provides federal guidelines for training members of the MDANG. Section 1.3.7 of the ANGI 36-2001 authorizes members of the Air National Guard not in active federal service to perform Inactive Duty for Training (IDT) under 32 U.S.C. §§502(a)(1) or 502(f). IDT includes Additional Flying Training Periods (AFTPs). Under the guidelines established in the ANGI 36-2001, a pilot may receive training pay and points credited toward retirement pay for no more than two AFTPs per day. Each AFTP must last at least four hours in duration and include at least one “sortie” (a takeoff and landing).

On November 2, 2003, several of the Officers confronted Conover for allegedly claiming payment for completing AFTPs that he did not actually fly. They accused Conover of submitting false claims for payment and commenced an internal investigation into his conduct.

Conover informed the investigating officer that, since 1999, he had observed other pilots claim payment for flying AFTPs that they had not actually flown. Conover also informed the investigating officer that several pilots had taught him and others this technique to maximize pay without taking leave. A military tribunal ultimately cleared Conover of any misconduct.

Conover then filed this action under seal, as required by 31 U.S.C. §3730(b)(2), alleging that the Officers defrauded the government by: (1) submitting payment claims for AFTPs when they did not actually fly on the specified date, and (2) submitting payment claims for performing two AFTPs in a single day when they completed only one flying AFTP and a short “out-and-back.” The defendants filed a motion to dismiss for lack of subject matter jurisdiction.

The district court granted the Officers’ motion to dismiss.

LAW: The FCA’s intramilitary immunity provision bars a former or present member of the armed forces from asserting a qui tam action against another member of the armed forces if the action arises out of that person’s service in the armed forces. 31 U.S.C. §3730(e)(1). See United States ex rel. Karr v. Castle, 746 F.Supp. 1231, 1248 (D.Del.1990). “No court shall have jurisdiction over an action brought by a former or present member of the armed forces…against a member of the armed forces arising out of such person’s service in the armed forces.” 31 U.S.C. §3730(e)(1). The FCA fails to provide a definition for the term “armed forces.”

The FCA’s initial liability provision applied to “any person not in the military or naval forces of the United States, nor in the militia called into or actually employed in the service of the United States.” Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 782 (2000). Thus, in its initial version, the FCA exempted persons in the militia from liability only when they were called into or employed in the service of the United States.

In 1982, Congress replaced the phrase “any person not in the military or naval forces of the United States, nor in the militia called into or actually employed in the service of the United States” with the phrase “[a] person not a member of an armed force of the United States.” This was a “housekeeping change” intended to incorporate the term of art “member of the armed forces” as used in Title 10 of the United States Code. Vermont Agency, 529 U.S. at 782.

In 1986, Congress replaced the phrase “[a] person not a member of an armed force of the United States” with the term “[a]ny person.” See 31 U.S.C. §3729(a). In doing so, Congress eliminated the blanket liability exemption for members of the armed forces, permitting an action by the United States. See S.Rep. No. 99-345, at 18 (1986), reprinted in 1986 U.S.C.C.A.N. 5226, 5283. At the same time, however, Congress included an intramilitary immunity provision in the FCA to bar qui tam actions between members of the armed forces. See 31 U.S.C. § 3730(e)(1).

Based on this legislative history, Conover urged the court to interpret the term “armed forces” in §3730(e)(1) according to the definition provided in Title 10 of the United States Code. Title 10 defines the term “armed forces” as “the Army, Navy, Air Force, Marine Corps, and Coast Guard.” 10 U.S.C. §101(a)(4). The “Air Force” is further defined as “the Regular Air Force, the Air National Guard of the United States, the Air National Guard while in the service of the United States, and the Air Force Reserve.” 10 U.S.C. §8062(d)(1). The “Air National Guard” consists of “the organized militia of the several States” that is an “air force,” see 10 U.S.C. §101(c)(4), and includes the MDANG.

In Perpich v. Dep’t of Defense, 496 U.S. 334 (1990), the Supreme Court held that when a member of the National Guard is called into federal service, he is relieved of his status in the state militia for the entire period of federal service. Id. at 346. In doing so, the Court explained that “all [members of the National Guard] must keep three hats in their closets-a civilian hat, a state militia hat, and an army hat-only one of which is worn at any particular time.” Id. at 348.

Even if the court assumed that a guardsman can only wear either his state militia hat or his army hat at one time, the statutory scheme governing the training of dually enlisted guardsmen supported the contention that the Officers were serving in the federal, not state, capacity when conducting their AFTPs.

Section 501 of Title 32, which governs the training of state guardsmen, states: “The training of the National Guard shall be conducted by the several States, the Commonwealth of Puerto Rico, the District of Columbia, Guam, and the Virgin Islands in conformity with this title.” 32 U.S.C. §501(b).

At the same time, however, §502(a) requires guardsmen to assemble for inactive duty training at least 48 times each year under regulations issued by the federal, not state, government. See 32 U.S.C. §502(a)(1). Section 502(f) also allows the federal government to order guardsmen to perform training or duty in addition to that required under §502(a). 32 U.S.C. §502(f).

Federal laws treat training completed by guardsmen under §502 distinctly from training completed by guardsmen strictly in their state capacity. See, e.g., 10 U.S.C. §12602(b)(3). The Federal Tort Claims Act also defines federal employees to encompass “members of the National Guard while engaged in training or duty under section 115, 316, 502, 503, 504, or 505 of title 32.” 28 U.S.C. §2671. These provisions support the contention that guardsmen training pursuant to §502 serve in their federal, rather than state, capacities. See also Matreale v. New Jersey Dept’of Military & Veteran Affairs, 487 F.3d 150, 156 (3d Cir.2007).

The Officers conducted their AFTPs as part of inactive duty training pursuant to §1.3.7 of the ANGI 36-2001. Section 1.3.7 authorizes training under 32 U.S.C. §§502(a)(1) or (f). Whether the Officers conducted their AFTPs under §502(a)(1) or (f), they were performing inactive duty training required under federal law in accordance with regulations issued by the federal, not state, government. Moreover, their training was considered to be “in Federal service as a Reserve of the Air Force” for the purposes of 10 U.S.C. §12602(b)(3), they were paid with federal funds, and they were considered federal employees under the FTCA.

Thus, even though they were not actively called into federal service, the Officers were wearing their “army hat” when they allegedly submitted false claims for payment to the government and, therefore, the Officers were serving as members of the federal armed forces as contemplated by the FCA.

Accordingly, the FCA’s intramilitary immunity provision barred Conover’s qui tam action and the court lacked jurisdiction under 31 U.S.C. §3730(e)(1).

COMMENTARY: In Clark v. United States, 322 F.3d 1358 (Fed.Cir.2003), the Federal Circuit interpreted whether 37 U.S.C. §206(d) applied to members of the National Guard.

At the time, 37 U.S.C. §206(a) provided that “a member of the National Guard or a member of a reserve component of a uniformed service who is not entitled to basic pay…is entitled to compensation, at the rate of 1/30 of the basic pay authorized for a member of a uniformed service of a corresponding grade entitled to basic pay.” 37 U.S.C. §206(a) (1994). Section 206(d), however, excluded compensation for work or study performed in connection with correspondence courses only for members of the reserve components of the armed forces, not for members of the National Guard. 37 U.S.C. §206(d) (1994).

To avoid making Congress’s delineation of who was entitled to compensation in §206(a) superfluous, the Federal Circuit held that guardsmen serve solely in the state militia when not called into active federal service. Clark, 322 F.3d at 1365-66.

By contrast, in an opinion analyzing the application of the Privacy Act to the National Guard, as an agency, the D.C. Circuit explained that “[a]lthough Perpich…stands for the proposition that federally activated guardsmen temporarily lose their State National Guard status, nothing in the decision’s holding severs the continuous link between the Army National Guard of the United States and federally recognized units of the Army National Guard when not on active federal service.” In re Sealed Case, 551 F.3d 1047, 1052 (D.C.Cir.2009).