Blankenship v. Liberty Life Assurance
__ F.3rd __ (9th Cir. 2007)
07 C.D.O.S. 5482

Disability Benefits Owed To A Member Of An ERISA Plan Could Not Be Reduced By The Amount Of Retirement Benefits Transferred Into An Individual Retirement Account

The Ninth Circuit Court of Appeals affirmed the District Court's judgment in favor of a member of an ERISA disability plan. The District Court concluded that retirement benefits that the member "rolled over" from his former employer's retirement plan directly into an Individual Retirement Account ("IRA") had not been "received" by the member. Because the disability plan allowed for a reduction of the member's disability benefits only if retirement benefits were "received" by him, the sum rolled into an IRA could not reduce the disability benefit.

Vorris Blankenship, a KPMG employee, developed cancer. Blankenship's medical treatment seriously complicated his condition. Blankenship was told by his doctor that, although surgery was possible, is was not advisable because it could further exacerbate the diagnosis.

Liberty Life Assurance ("Liberty") was the fiduciary and administrator of the KPMG Long-Term Disability Plan ("the Disability Plan"). Liberty initially approved Blankenship's application for disability benefits. Less than two years later, Liberty terminated Blankenship's benefits because it had concluded that alternative treatments existed that would improve his condition. Thereafter, KPMG terminated Blankenship's employment because he did not return to work.

Because of his termination, Blankenship became eligible to receive retirement benefits from two different KPMG retirement plans - the KPMG Pension Plan and the KPMG Personal Account for Retirement. Both retirement plans allowed for benefits to be distributed directly to Blankenship or Blankenship could transfer the funds into an IRA account. Blankenship chose to transfer the funds from both retirement plans into an IRA account managed by Vanguard Fiduciary Trust Company ("Vanguard").

Blankenship sued Liberty to recover benefits under ERISA § 502(a)(1)(B). The District Court concluded that Blankenship was "totally disabled" as defined by the Disability Plan and that Liberty was not entitled to reduce the amount of the disability benefit by the amounts transferred by the retirement plans into the IRA. Liberty appealed only the District Court's conclusion that the disability benefits could not be reduced by the amounts transferred to the IRA account.

The Disability Plan allowed for the amount of disability benefits to be reduced by the recipient's "other income." The definition of "other income" included "[t]he amount of benefits the insured receives under the employer's retirement plan...."

The Ninth Circuit noted that the Disability Plan did not define the word "receives." Although both Blankenship and Liberty accepted the word to mean "to take into possession or control," the meaning of "possession" and "control" are different. The Court therefore applied the doctrine of contra proferentem which requires that ambiguous language in an insurance contract be interpreted in the manner most favorable to the insured where, after the application of normal principles of contract construction, the ambiguity still exists. Applying this doctrine, the word "received" in the Disability Plan did not include amounts that Blankenship rolled over from the retirement plans into the IRA.

The Ninth Circuit noted that the Disability Plan allowed benefits to be reduced by "other income" that was either "received" by Blankenship, such as retirement benefits, or for which Blankenship was merely "eligible," such as benefits under a state's workers' compensation system. The Disability Plan's distinction in treatment between receipt of some income and eligibility for other income supported the Ninth Circuit's conclusion that the word "received" should be interpreted to mean monies that "actually come into the possession of the insured."

In addition, the Ninth Circuit noted that Vanguard, the holder of Blankenship's retirement funds, was a "trustee" under the Internal Revenue Code ("IRC"). Blankenship's decision to have his funds moved directly from his retirement plans into an IRA constituted a "trustee-to-trustee" transfer (also known as a "direct roll-over") under the IRC.

Liberty argued that Vanguard was more like an "agent" because, for instance, Blankenship could control the flow of funds into or out of his account, could direct investment choices, and because he was older than 59 years old, could terminate his account at any time without a financial penalty under the IRC. Nevertheless, the Ninth Circuit noted that the IRC imposes numerous duties of a trustee upon Vanguard such as ensuring that contributions to the IRA are made in cash and ensuring that contributions do not exceed the amount the individual is permitted to contribute each year.

Furthermore, because Vanguard is a trustee, just like KMPG was a trustee when it held Blankenship's retirement funds, Blankenship never "received" the funds himself when the funds were directly rolled over because "in both instances, the money belonged to Blankenship and would be held for him by a trustee." Blankenship had the same type of possession and control of the funds once they had been rolled over into his IRA as he had when the monies were held by KPMG.

Finally, the Ninth Circuit upheld the District Court's decision to award Blankenship pre-judgment interest at a rate of 10.01 percent. A District Court has discretion under ERISA to make such an award and, based upon substantial evidence that a higher rate should be imposed, may exceed the post-judgment interest rate authorized by 28 U.S.C. § 1961 and normally used to calculate pre-judgment interest as well.

The Court noted that Blankenship had presented the District Court with evidence that, if he had not been forced to rely upon his own funds based upon Liberty's denial of disability benefits, he would have invested the money in a Vanguard mutual fund account, in which had had already placed over one half million dollars, that had earned a return of 10.01 percent since the fund's inception. Consequently, "substantial evidence" existed to support the District Court's deviation from the standard prejudgment interest rate.

This opinion may be withdrawn from publication, modified on rehearing, or review may be granted by the United States Supreme Court. These events may impact the availability of the decision for use as legal authority.

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