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Opinions – 1/30/12: 4th U.S. Circuit Court of Appeals


Determination of pre-disability earnings

BOTTOM LINE: In calculating the amount of pre-disability pay to determine a physician’s eligibility for long-term disability benefits, the plan administrator reasonably deducted the same extraordinary and start-up costs the physician had deducted on his federal income tax as necessary business expenses.

CASE: Fortier v. Principal Life. Ins. Co., US4th No. 10-1441 (filed Jan. 11, 2012) (Judges Wilkinson, and NIEMEYER; dissent by Floyd). RecordFax #12-0111-60, 23 pages.

FACTS: Dr. Kenneth Fortier formed a medical practice in 1994 and, as a result of a dispute with his co-owners, left it in 2002 to start a new practice. In doing so, he incurred substantial start-up expenses, as well as attorneys’ fees in prosecuting litigation against his former partners. He deducted these costs from the income he reported on his federal income tax forms.

In 2005, Fortier closed the new practice because he had become medically disabled. He applied for disability benefits from two companies: UNUM, his individual disability insurer, and Principal Life Insurance Company, which insured his practice under group policies for long-term and short-term disability.

UNUM approved his claim at $15,470 a month.

Principal Life determined Fortier was disabled under the terms of its policies, but that his pre-disability earnings were less than the benefit he was receiving from UNUM. Under the terms of Principal Life’s policy, that conclusion precluded any benefits under Principal Life group disability policies.

Dr. Fortier sued under ERISA, claiming Principal had misconstrued the policies and, therefore, miscalculated his pre-disability earnings. He claimed the pre-disability earnings were almost three times as much as his benefit from UNUM, and that he was, in fact, eligible for the maximum benefits from Principal.

Specifically, Fortier contended that Principal, in calculating his pre-disability earnings, erroneously deducted extraordinary and one-time business expenses incurred by him in 2003-2004 in starting up his practice and in pursuing litigation with partners in his former medical practice. Without those reductions, Fortier argued, his pre-disability earnings were sufficiently large to entitle him to the maximum disability benefits from the group policies.

The district court entered judgment for Principal, concluding the administrator’s interpretation was reasonable.

LAW: According to Internal Revenue Code §162(a), to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in trade or business. A necessary expense is one that is helpful and appropriate for trade or business. An expense does not have to be indispensible to be considered necessary.

The definition of “business expense” in Principal’s policy explicitly included tax-deductibility as one of several factors. Fortier maintained that the other factors narrowed the policy’s definition.

The policy’s definition included: (1) “usual and customary unreimbursed business expenses,” (2) “which are incurred on a regular basis,” (3) “are essential to the established operation of the Policyholder,” and (4) “are deductible for Federal Income Tax purposes.”

The 4th Circuit agreed that Principal’s interpretation probably rendered the much of the policy’s definition of business expenses repetitive and superfluous, but said it was, if not the best, at least a reasonable solution to an interpretive dilemma.

For example, the court said it was significant that Fortier’s interpretation of “incurred on a regular basis” would make it virtually impossible to distinguish includable and excludable expenses when dealing with such things as a 10-year light bulb or depreciation expense.

On the other hand, the administrator’s position that the section merely restated I.R.C. § 162(a) was reasonable inasmuch as the term “regular,” even though having several possible meanings, does include the meaning “ordinary.”

Similarly, the court found “not at all unreasonable” Fortier’s argument that start-up expenses are not “essential to an established business.” However, the majority said, the plan administrator could also reasonably conclude that the entire phrase reiterates I.R.C. §162(a)’s requirement that business expenses be “necessary … in carrying on any trade or business” and that the word “established” merely functions to underscore that “not every income-producing and profit-making endeavor constitutes a trade or business… . [T]o be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity.” Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987).

And the overall policy language, taken in context, would seem to permit the administrator reasonably to conclude that the policies’ definition of business expenses should be read in light of I.R.C. § 162(a).

Finally, it was undisputed that the policy gave the plan administrator discretion to construe the policies and to determine eligibility for benefits. Thus, the 4th Circuit noted, a court reviewing the administrator’s decision must review only for abuse of discretion and therefore “must not disturb the … decision if it is reasonable, even if the court itself would have reached a different conclusion.”

Because the policy entrusts Principal Life with “complete discretion” to resolve ambiguities and to determine benefits, the majority said it was bound to respect the administrator’s reasonable interpretation of the language when calculating Fortier’s pre-disability earnings.

DISSENT: Floyd, J., dissented, saying Principal Life was ignoring the plain, literal, natural, ordinary and unambiguous meaning of the policy language and instead using the Internal Revenue Code to determine what the language actually means. Floyd called the interpretation unreasonable and an abuse of the plan administrator’s discretion, and said the court “ought not put our imprimatur on it.”

Labor & Employment

Waiver of immunity from ADA claims

BOTTOM LINE: In a suit by a hearing-impaired employee against a public school board under the Americans with Disabilities Act, the federal court did not err in relying on a decision by the state’s highest court that found the state had waived its 11th Amendment immunity for claims of $100,000 or less.

CASE: Lee-Thomas v. Prince George’s County Public Schools, No. 10-1699 (filed Jan. 11, 2012) (Judges KING and Davis; dissent by Keenan). RecordFax #12-0111-61, 26 pp.

FACTS: Hope Lee-Thomas was employed by the Prince George’s County Public Schools Board. In December 2008, she initiated a proceeding alleging that the Board violated the Americans with Disabilities Act (the “ADA”) by failing to reasonably accommodate her hearing disability. The board moved for summary judgment on Eleventh Amendment grounds, and Lee-Thomas moved separately to amend her complaint to reduce her request for compensatory damages from $1,000,000 to $100,000, and to add a request for injunctive relief.

On February 5, 2010, the district court granted the Board’s summary judgment motion only insofar as Lee-Thomas’s damage claim exceeded $100,000. In so doing, the court adhered to the precedent of the Court of Appeals of Maryland. In 2009, that court concluded that the enactment of Cts. & Jud. Proc. § 5-518(c) (the “immunity provision”), effectuated a waiver of a county board of education’s Eleventh Amendment immunity “for all claims in the amount of $100,000 or less.” Bd. of Educ. of Balt. Cnty. v. Zimmer-Rubert, 973 A.2d 233, 243 (Md. 2009). The Opinion also granted Lee-Thomas’s motion to amend her complaint.

The Board appealed.

LAW: As a threshold matter, the 4th Circuit noted that denial of Eleventh Amendment immunity is subject to immediate appeal under the collateral order doctrine. 28 U.S.C. § 1291. Also, for purposes of Eleventh Amendment analysis, the county board of education is considered a state agency.

The board argued the U.S. District Court erred in deferring to the decision by the Court of Appeals of Maryland in Zimmer-Rubert on the question of the waiver of immunity.

In Zimmer-Rubert, the Maryland Court of Appeals held that Cts. & Jud. Proc. § 5-518(c) effectuated a waiver of a county board of education’s 11th Amendment immunity for all claims of $100,000 or less. The board in this case posited that no such deference is owed because the question is one of federal law, controlled by U.S. Supreme Court decisions.

The 4th Circuit concluded that although the federal courts must apply federal law as embodied in Supreme Court precedent, when a state’s highest court has applied federal law and determined that a state statute effects a waiver of 11th Amendment immunity, the federal courts must accord deference to that state court decision.

The board erroneously conflated a state statutory waiver of 11th Amendment immunity with a litigation conduct waiver. The district court properly deferred to the decision in Zimmer-Rubert.

The 4th Circuit also found it “of some importance” that there had been no legislative response to the Zimmer-Rubert decision.

Thus, the court affirmed the ruling below.

DISSENT: Keenan, J., dissented, concluding the question of 11th Amendment immunity presents an issue of federal rather than state law. In her view, to hold otherwise would bind the 4th Circuit to follow a state court’s erroneous interpretation of federal law.