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Connie J. Edmonson, Individually and On Behalf of All v. Lincoln National Life Insurance Company

April 1, 2011


The opinion of the court was delivered by: Baylson, J.


I. Introduction

The issue presented requires examination of "retained asset accounts" and the application of ERISA principles to this novel but increasingly utilized form of death benefits. Plaintiff Connie J. Edmonson, on behalf of herself and others similarly situated, filed a civil action against Defendants Lincoln National Life Insurance ("Lincoln" or "Defendant") and John Does 1 through 100, seeking equitable relief under Section 502(a)(3) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132(a)(3). Presently before the Court is Defendant Lincoln's Motion to Dismiss for Lack of Jurisdiction Pursuant to Fed. R. Civ. P. 12(b)(1) and for Failure to State a Claim Pursuant to Fed. R. Civ. P. 12(b)(6).

The Defendant's Motion to Dismiss raises several separate grounds. Initially, the Court rejects Defendant's argument that the Plaintiff lacks standing. On the more difficult questions of ERISA liability, Defendant argues that the case law establishes as a matter of law that under the ERISA statute, it had discharged any fiduciary duty to the Plaintiff, and also that the fund, as to which Plaintiff asserts Defendant had a fiduciary duty, was not a "plan asset."

Although Defendant's arguments may have merit, it would be error to grant the Motion to Dismiss. The Court notes substantial Supreme Court and Third Circuit precedent that some factual discovery may be appropriate on the issues of "fiduciary duty" and "plan assets." Plaintiff should be given an opportunity to develop a record on these points by at least inspection of documents and possibly other limited discovery.

There is a paucity of appellate authority on these issues in the context of the facts of this case. The First Circuit held, on somewhat analogous but not exactly the same facts, that Plaintiff may have a claim. Although Judge Baer in the Southern District of New York has ruled in favor of an insurer on other analogous facts, an appeal is pending to the Second Circuit. Although Defendant's Rule 12 Motion will be denied, Defendant may raise its legal issues at the conclusion of discovery, on dispositive motions or, if necessary, at trial.

II. Factual and Procedural Background

A. Factual Background

1. The Parties

Defendant Lincoln National Life Insurance Company issued group life insurance policies to fund ERISA-governed employee welfare benefit plans ("the plans"). Compl. ¶ 8. Does 1 through 100, inclusive, are indirect or direct subsidiaries of Lincoln, whose identity are unknown to Plaintiff. Compl. ¶ 5. Plaintiff and the proposed members of the class, which has not been certified, are beneficiaries of policies issued by Lincoln. Compl. ¶ 9. Plaintiff's husband, Russell Edward Edmonson, was a participant in an ERISA plan sponsored by Schurz Communications, Inc. ("the plan") for which Lincoln issued a group life insurance policy. Compl. ¶ 16. Plaintiff was the life insurance beneficiary under the plan. Id.

2. The SecureLine Accounts

Lincoln's method of paying a death benefit of $5000 or more due under the plan was to inform the beneficiary that Lincoln had established a "SecureLine account" through Northern Trust Company in the beneficiary's name containing the life insurance proceeds.*fn1 Compl. ¶ 10. Plaintiff alleges that Lincoln did not actually deposit funds in a SecureLine account until the beneficiary drew a draft on the account, meanwhile retaining and investing the proceeds. Compl. ¶¶ 11-12. Lincoln earned more money by managing and investing the death benefits owed to any beneficiary than Lincoln paid in interest to the beneficiary in connection with the SecureLine account. Compl. ¶ 13.

3. Plaintiff's Claim

Following her husband's death, Plaintiff submitted her Life Claim Form (Compl. Ex. A) to Lincoln on March 30, 2009 to claim the benefits owed to her under the plan. Compl. ¶¶ 17-18. The Life Claim Form stated that benefits would be paid via a SecureLine account, which "gives you complete control of your funds" and on which the account holder "may write checks for any amount over $250 and up to your full balance at any time" without fees. Compl. Ex. A at 2. On April 9, 2009, Plaintiff received a letter from Lincoln (Compl. Ex. B), explaining that a SecureLine account was established in Plaintiff's name for $10,000, those funds were secure and earning interest, and Plaintiff would receive a checkbook giving her access to the funds. Compl. ¶¶ 19-20. Plaintiff also received a SecureLine Certification of Confirmation, which showed that the opening balance of her SecureLine account was $10,000, and that the interest rate was "1.76% (subject to change monthly)" (Compl. Ex. C)*fn2 ; a statement of Terms and Conditions of the SecureLine account (Compl. Ex. D); and a brochure describing features of the SecureLine account (Compl. Ex. E). Compl. ¶¶ 21-22. Both the Terms and Conditions and the brochure explained that the SecureLine account "starts earning interest the day the account is opened" at a "minimum rate . . . equal to the national average for interest bearing checking accounts as published daily by Bloomberg, plus 1%." Compl. Ex. D at 1; Compl. Ex. E at 3.

Plaintiff alleges that despite the notification that Lincoln transferred proceeds into a SecureLine account, Lincoln did not initiate a transfer of funds to the account at that time. Compl. ¶¶ 22-23. Rather, Lincoln invested the death benefits for its own account, and earned more interest on the investment than it paid to Plaintiff. Compl. ¶ 24.

B. Procedural Background

On the basis of these allegations, Plaintiff filed suit on September 21, 2010, alleging in one count that Defendants breached their fiduciary duty under ERISA. Plaintiff contends that Defendant Lincoln's retention of the "spread"--i.e., the difference between the interest that Lincoln earned on the death benefits in the SecureLine account and the interest paid to Plaintiff--was unjust enrichment. Compl. ¶ 28. Plaintiff's claim arises under two provisions of ERISA: 29 U.S.C. § 1104(a), which requires a fiduciary to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries; and 29 U.S.C. § 1106(b)(1), which prohibits fiduciaries from self-dealing in ERISA plan assets. Compl. ¶ 26.

Plaintiff requests the following relief: a) an order certifying the claims of herself and others similarly situated, appointing Plaintiff as the class representative and Plaintiff's counsel as Class counsel; b) a declaratory judgment that Defendant was unjustly enriched, that Defendant holds the plaintiff beneficiaries' interest in constructive trust, and directing disgorgement; c) disgorgement and equitable distribution of the funds held in constructive trust; d) attorney's fees, expenses and costs; and e) further just and proper relief.*fn3

Defendant Lincoln filed its Motion to Dismiss for Lack of Jurisdiction Pursuant to Fed. R. Civ. P. 12(b)(1) and for Failure to State a Claim Pursuant to Fed. R. Civ. P. 12(b)(6) on November 29, 2010 (ECF No. 24). Lincoln filed with the Motion a plan document, the Group Insurance Policy No. 000010106793 issued to Schurz Communications, Inc., revised and dated January 1, 2009, under which Plaintiff was a beneficiary. Mot. Dismiss. Ex. 1. Lincoln also filed a screenshot of Plaintiff's claim number 1090060098. Mot. Dismiss. Ex. 2. The screenshot shows that Lincoln received Plaintiff's claim on April 6, 2009; Plaintiff's claim status is "closed"; Plaintiff's claimed benefit, in the amount of $10,000.00 plus $138.08 interest, was accepted; and Plaintiff was approved to receive a check on June 8, 2009. Id. Plaintiff did not object to either of these documents at oral argument. Defendant also filed a declaration by its officer, Joseph Serino, that the policy document and the screenshot are "objective documentary evidence that is incorporated by reference in, or integral to the claims asserted in, Plaintiff's Class Action Complaint." Declaration of Joseph Serino ¶ 2, Nov. 29, 2010.

Plaintiff filed her Response in Opposition on January 7, 2011 (ECF No. 26), and Lincoln filed a Reply on January 21, 2011 (ECF No. 27). The Court held a hearing with counsel for both parties on February 3, 2011, and requested letter briefs about supplemental authorities from the Third Circuit and the production of plan documents. In a letter to the court dated February 24, 2011 (ECF No. 35), Plaintiff's counsel represented that Defendant's counsel had provided two additional documents related to the plan, that they had found no plan document with terms different from those in the policy, and concluded that no additional discovery was necessary at the motion to dismiss stage. Defense counsel concurred in a February 24, 2011 letter (ECF No. 36) that the group life policy attached to Lincoln's Motion to Dismiss was the only plan document in Lincoln's possession related to this case.

III. The Parties' Contentions

A. Defendant Lincoln's Contentions

Defendant argues that Plaintiff lacks standing to bring the claim, and alternatively, even if Plaintiff has standing, the Motion to Dismiss should be denied. With respect to standing, Defendant first argues that Plaintiff does not satisfy the threshold constitutional standing requirement of showing a redressable injury in fact. Defendant also argues that Plaintiff does not have standing as a beneficiary under ERISA because Plaintiff already received all of the benefits to which she was entitled.

On the merits, Defendant's primary argument is that Plaintiff cannot state a claim for breach of fiduciary duty because Defendant was not acting as an ERISA fiduciary with respect to the investment of her death benefits once they were credited to her SecureLine account. Defendant also contends that it did not owe Plaintiff a fiduciary duty because the policy at issue was a "guaranteed benefit policy," or alternatively, the funds at issue were not "plan assets." Defendant also argues it could not have breached its fiduciary duty because it complied with the express terms of the plan. Defendant's additional reasons to dismiss Plaintiff's claim are that Plaintiff requests a disgorgement remedy under the equitable relief provision of ERISA, Section 502(a)(3), and that Plaintiff has not alleged likelihood of an injury to the plan as a whole under ERISA Section 406(b)(1).

B. Plaintiff's Contentions

Plaintiff asserts that she satisfies the requirements of both constitutional standing and statutory standing. First, Plaintiff has alleged an economic harm that constitutes an injury in fact. Second, Plaintiff is an ERISA beneficiary, even though she cashed out her SecureLine account, because she was entitled to receive all of the interest that Defendant earned on her benefit award.

Plaintiff also disputes Defendant's arguments as to whether she has stated a claim for breach of fiduciary duty under ERISA. In her primary argument, Plaintiff asserts that Lincoln was acting as a fiduciary when it managed Plaintiff's benefits in the SecureLine account. Relatedly, she argues that the guaranteed benefit policy exception does not apply, and that the funds at issue are "plan assets" within the definition of ERISA. Plaintiff also asserts that Defendant's compliance with the plan is not tantamount to compliance with ERISA because Defendant engaged in self-dealing. In addition, Plaintiff contends that the disgorgement remedy she seeks is equitable restitution. Plaintiff asserts that there is no required "injury to the plan" element for a Section 406(b)(1) claim, but even if there were, she has made that showing.

IV. Legal Standards

A. Jurisdiction

Plaintiff's claim arises under the federal ERISA statutory scheme. This Court has jurisdiction pursuant to 28 U.S.C. ยง ...

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