Jackman Financial Corp. v. Humana Insurance

In the United States Court of Appeals For the Seventh Circuit No. 10-2112 JACKMAN F INANCIAL C ORP., Plaintiff-Appellant, v. H UMANA INSURANCE C O ., Defendant-Appellee. Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:08-cv-05784—Charles R. Norgle, Judge. A RGUED M ARCH 29, 2011—D ECIDED M AY 31, 2011 Before R OVNER, W ILLIAMS, and H AMILTON, Circuit Judges. H AMILTON, Circuit Judge. When Kunta Torrence was killed in a car accident, he held a life insurance policy through his employer that named his brother as the sole beneficiary. His brother was also in the same car and died at the same time as Torrence. A “facility-of- payment” clause in Torrence’s group life insurance plan allowed the insurer, if the named beneficiary was not living, to choose a substitute beneficiary from 2 No. 10-2112 among a list of relatives and the deceased’s estate. The insurer did so, choosing to pay Torrence’s children. Long before the insurer had done so, however, the future administrator of Torrence’s estate (his mother) separately executed an assignment of the same life insurance proceeds to a financing company that had funded Torrence’s funeral. The assignee, plaintiff Jackman Fi- nancial Corporation, brought this ERISA case against the insurer to recover the proceeds from the life insurance policy. The district court granted summary judgment to the insurer, defendant Humana Insurance Company, concluding that the insurer properly exer- cised its right under the policy by selecting a substitute beneficiary under the facility-of-payment clause. We agree with that reasoning and affirm. I. Facts and Procedural Background As an employee of a North Carolina company, Kunta Torrence participated in an employee life insurance and welfare benefits plan administered by defendant-appellee Humana Insurance. Torrence’s group life insurance plan provided that, in the event of his death, $15,000 would be paid to his named beneficiary. Torrence chose his brother Adair to be the sole beneficiary. The group plan also included a “facility-of-payment” clause, which provided: if the beneficiary he or she named is not alive at the Employee’s death, the payment will be made at Our option, to any one or more of the following: No. 10-2112 3 • Your spouse; • Your children; • Your parents; • Your brothers and sisters; or • Your estate. In general, a facility-of-payment clause provides for “payment to a named beneficiary or to a member of a named class or, in the alternative, to any person found by the insurer to be equitably entitled.” Forcier v. Metropoli- tan Life Ins. Co., 469 F.3d 178, 184 (1st Cir. 2006), quoting 4 Couch on Insurance 3d § 61:14 (2005). See also 2A John Alan Appleman & Jean Appleman, Insurance Law & Practice § 1163 (1966) (“facility of payment clauses give the insurer the option of paying to any person pos- sessing the qualifications set forth in the clause”); 166 A.L.R. 10 (1947) (facility-of-payment clause creates “an appointment, by the parties to an insurance contract, of persons or classes of persons who may receive pay- ment of the benefits or proceeds accruing under the contract”). Torrence and the named beneficiary were killed simulta- neously in a car crash on April 1, 2007. On April 11th, their mother Nancy Kelly executed a contract assigning $10,664.93 of Torrence’s life insurance policy proceeds to plaintiff-appellant Jackman Financial, a finance company that advances funds for funeral expenses, as security for Jackman Financial’s loan to pay for Torrence’s funeral. The assignment stated: 4 No. 10-2112 the undersigned [Kelly] hereby irrevocably assigns and transfers over to Jackman Financial Corp. the sum of $10,664.93, or so much thereof as is available from the proceeds of the following policies: #s Group number 617912 ID # 002939350 of the Humana IN- SURANCE COMPANY which may be or is due to the undersigned as beneficiary or by reason of any other qualification. On April 13th, two days after Kelly signed the assignment to Jackman Financial, a North Carolina court appointed Kelly administrator of Torrence’s estate. That same day, Kelly signed a Humana Beneficiary Form identifying herself, “Nancy T. Kelly—Administrator of Estate,” as the beneficiary of Torrence’s plan. Later that month, Jackman Financial paid the funeral home and sent Humana a request for payment from Torrence’s life insurance policy proceeds, attaching the assignment from Kelly and the form Kelly signed claiming to be the plan benefi- ciary. On May 3, 2007, Humana sent a letter to Kelly ex- plaining that Torrence’s group plan included a facility-of- payment clause and stating that the company required additional information from Kelly “to determine benefit payment.” Humana acknowledged having received a copy of the assignment from Jackman Financial, as well as the Beneficiary Form signed by Kelly. The letter, quoting from the plan, noted that Humana would “rely upon an affidavit to determine benefit pay- ment, unless We receive written notice of valid claim before payment is made.” Humana requested that a No. 10-2112 5 member of Torrence’s family complete its enclosed form affidavit. Three months later, after Humana issued a second notice to Kelly with the same request for an affidavit, Kelly completed the affidavit and identified Torrence’s living relatives. On August 31, 2007, Humana sent Kelly a letter acknowledging receipt of her affidavit. The letter included the following language: Our records indicate that the listed beneficiaries for any available life insurance proceeds are [redacted children’s names,] minor children. Please note we are unable to issue life insurance proceeds to a minor. We require guardianship papers from the probate court . . . . Humana delivered Kelly a second identical notice in November 2007. In early December 2007, the Superior Court of Rowan County, North Carolina, issued an order authorizing Humana to “deliver all funds due” to Torrence’s minor children to the care of the court. On December 28, 2007, Humana communicated to Kelly that it had completed its review and issued checks totaling $16,053.29 to the clerk of the superior court for the benefit of Torrence’s children. Jackman Financial filed suit in an Illinois state court in September 2008 to recover the amount it had advanced for Torrence’s funeral costs. Humana removed the case to the federal district court, asserting that the claims necessarily arose under the Employee Retirement Income 6 No. 10-2112 Security Act of 1974 (ERISA). Jackman Financial then amended its complaint by deleting its state law claims and adding a single claim for denial of benefits under ERISA. When a purported assignee of a plan beneficiary brings a colorable claim for plan benefits under 29 U.S.C. § 1132(a)(1)(B), a federal district court has subject matter jurisdiction under ERISA. See, e.g., Kennedy v. Connecticut General Life Ins. Co., 924 F.2d 698, 700 (7th Cir. 1991). The district court granted Humana’s motion for summary judgment and denied Jackman Financial’s motion for reconsideration. Jackman Financial has appealed. II. Discussion A. Humana’s Decision to Pay the Children We review de novo a district court’s grant of summary judgment and denial of a cross-motion for summary judgment. See Prate Installations, Inc. v. Chicago Regional Council of Carpenters, 607 F.3d 467, 470 (7th Cir. 2010). Under 29 U.S.C. § 1132(a)(1)(B), federal courts also review de novo an ERISA plan administrator’s denial of benefits unless the plan gives the administrator discre- tionary authority to determine eligibility for benefits. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). Because the group plan here gave Humana discre- tionary authority to administer it, we instead evaluate whether Humana’s decision to deny benefits to Jackman Financial was arbitrary and capricious. See Marrs v. Motorola, Inc., 577 F.3d 783, 786 (7th Cir. 2009). Under the arbitrary and capricious standard, we over- turn the administrator’s decision only where there is an No. 10-2112 7 absence of reasoning to support it. See Hess v. Reg-Ellen Machine Tool Corp., 423 F.3d 653, 658 (7th Cir. 2005); Tegtmeier v. Midwest Operating Engineers Pension Trust Fund, 390 F.3d 1040, 1045 (7th Cir. 2004). We apply the standard as an abuse of discretion standard. See Holmstrom v. Metropolitan Life Ins. Co., 615 F.3d 758, 767 n.7 (7th Cir. 2010). Applying that standard here, we agree with the district court that Humana’s decision to pay the proceeds of Torrence’s life insurance plan to his children was not an abuse of its discretion. The facility-of- payment clause in Torrence’s group plan provided Humana with the option of paying the life insurance proceeds to any of five named entities or groups if the named beneficiary had died. Humana did exactly that. Plaintiff Jackman Financial argues that Kelly’s assign- ment of the proceeds effectively entitled plaintiff to receive them and that Humana acted arbitrarily by ig- noring the assignment. For plaintiff to acquire a right to the proceeds, however, Kelly herself must have had such a right to assign. Plaintiff argues that Kelly, as administra- tor of Torrence’s estate, had the authority to disburse or assign the proceeds from the plan which, plaintiff contends, became part of Torrence’s estate in the absence of a named beneficiary. We disagree with plain- tiff’s reasoning because it fails to come to grips with the facility-of-payment clause in the policy.1 1 We do not reach the second step of Jackman Financial’s argument, that Kelly had authority to make the assignment (continued...) 8 No. 10-2112 A facility-of-payment clause is one practical solution to the problems that arise when an insured person dies without an effective designation of a beneficiary. Rather than requiring a court to decide through a potentially expensive interpleader action, the clause allows the insurer simply to choose one or more beneficiaries, pre- sumably in line with what the insured probably would have wanted if he or she had known that the beneficiary designation was not effective. See generally French v. Lanham, 57 F.2d 422, 422-23 (D.C. Cir. 1932) (noting that the purpose of the facility-of-payment clause is for the insurer to be able to issue a prompt valid payment, in- cluding payment for funeral expenses). When a facility-of-payment clause applies, it confers broad discretion on an insurer in making certain benefit determinations. See, e.g., Forcier, 469 F.3d at 185 (describing how a facility-of-payment clause “puts both the policy- holder and the participant on notice that, in the absence of a beneficiary designation, payment by [the insurer] to any member(s) of an enumerated class ‘will discharge [the company’s] liability for the amount so paid’ ”). By using such a clause, an insurer can contract for varying 1 (...continued) two days before she received official letters of administration from the North Carolina courts. Jackman Financial maintains that Kelly’s authority as administrator related back to the time of Torrence’s death under North Carolina law. Because neither the policy nor its proceeds became part of Torrence’s estate, it is irrelevant whether Kelly’s authority as admin- istrator related back. No. 10-2112 9 degrees of discretion with respect to the distribution of insurance proceeds. See id.; Brown v. Metropolitan Life Ins. Co., 100 F.2d 98, 99-100 (D.C. Cir. 1938) (recognizing the validity of facility-of-payment clauses); La Raw v. Prudential Ins. Co. of America, 12 F.2d 140, 142 (D.C. Cir. 1926) (right of election as to whom payment shall be made under a facility-of-payment clause “undoubtedly rests with the company”). The facility-of-payment clause in Torrence’s group plan gave Humana the option of distributing the policy proceeds to any of the listed relatives or the estate identi- fied in the clause. Like the facility-of-payment clause in Forcier, the clause in Torrence’s group plan made Humana’s right to choose any one of the listed entities unconditional, enabling the company to make its selec- tion among them. See Forcier, 469 F.3d at 185. Although Torrence’s estate was one of the possible recipients, as was Kelly as Torrence’s mother, Humana was under no obligation to select either of them as the substitute beneficiary. Unless and until such a selection was made—and it never was—Kelly never had an interest in Torrence’s life insurance policy or in its proceeds that she could assign to plaintiff either in her personal capacity or as administrator of Torrence’s estate. Plain- tiff’s claim to collect based on Kelly’s assignment fails. Plaintiff nevertheless contends that Humana’s decision to pay Torrence’s children was arbitrary and capricious because Humana knew about Kelly’s assignment of the plan proceeds to plaintiff and could have used its dis- cretion to select Torrence’s estate as beneficiary. Plaintiff 10 No. 10-2112 is correct that Humana could have used its discretion in this way, but it need not have done so. Humana was not required to bail plaintiff out from an imprudent business risk. Where an ERISA administrator makes an informed decision and articulates a plausible reason for its deci- sion, that informed explanation is sufficient for us to uphold its decision. See Mote v. Aetna Life Ins. Co., 502 F.3d 601, 606 (7th Cir. 2007). The totality of the evidence indicates that Humana decided to distribute the plan’s proceeds to Torrence’s children based on the facility-of- payment clause and the affidavit provided by Kelly. Humana explained this basis for its decision by describing in its correspondence with Kelly throughout 2007 the discretion granted to it by Torrence’s group plan. It did not need to explain the “reasoning behind the reasons.” Herman v. Central States, Southeast & Southwest Areas Pension Fund, 423 F.3d 684, 693 (7th Cir. 2005), quoting Gallo v. Amoco Corp., 102 F.3d 918, 922 (7th Cir. 1996). B. Humana’s Request for Fees Humana asks this court for an award of reasonable attorney fees in its favor, though it did not seek them in the district court. ERISA authorizes an award of reasonable attorney fees to either party at the court’s discretion. See 29 U.S.C. § 1132(g)(1). We have recognized a “modest presumption” in favor of awarding fees to the prevailing party, though that presumption can be rebutted. See Laborers’ Pension Fund v. Lay-Com, Inc., 580 F.3d 602, 615 (7th Cir. 2009), quoting Senese v. Chicago Area I.B. of No. 10-2112 11 T. Pension Fund, 237 F.3d 819, 826 (7th Cir. 2001). Here, we find that Jackman Financial’s position and the sur- rounding circumstances effectively rebut the presump- tion, so we deny Humana’s request. In determining whether a fee award is appropriate under ERISA, we have long recognized two tests, both of which ask whether the losing party had a legitimate basis to bring its suit. See Production & Maintenance Em- ployees’ Local 504, Laborers’ Int’l Union v. Roadmaster Corp., 954 F.2d 1397, 1402 (7th Cir. 1992). Under the first test, an award of fees to a successful defendant in an ERISA suit “may be denied if the plaintiff’s position was both ‘substantially justified’—meaning something more than non-frivolous, but something less than meritorious—and taken in good faith, or if special circumstances make an award unjust.” See Herman, 423 F.3d at 696; Harris Trust & Savings Bank v. Provident Life & Accident Ins. Co., 57 F.3d 608, 616-17 (7th Cir. 1995). Under the second test, we consider the following factors: (1) the degree of the offending party’s culpability or bad faith; (2) the ability of the offending party to satisfy personally an award of attorney fees; (3) whether an award of attorney fees would deter other persons acting under similar circumstances; (4) the amount of benefit conferred on members of the plan as a whole; and, (5) the relative merits of the parties’ positions. See Sullivan v. William A. Randolph, Inc., 504 F.3d 665, 671 (7th Cir. 2007); Brewer v. Protexall, Inc., 50 F.3d 453, 458 (7th Cir. 1995). This five-factor test is often used in con- junction with the “substantially justified” test and 12 No. 10-2112 largely involves the same inquiry. See, e.g., Herman, 423 F.3d at 696; Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 593 (7th Cir. 2000) (concluding that regardless of which test is used, the question asked is essentially the same); Quinn v. Blue Cross & Blue Shield Ass’n, 161 F.3d 472, 478 (7th Cir. 1998) (same). Humana asserts that it should be awarded attorney fees because Jackman Financial’s position was not sub- stantially justified. The question is close, but we disagree. The indications here are that Jackman Financial’s com- plaint was filed in good faith in an attempt to recover the outstanding balance it was owed. In the days following her son’s death, Kelly intended to assign Torrence’s plan proceeds to Jackman Financial to cover the cost of her son’s funeral. It appears that neither Jackman Financial nor Kelly knew about or considered the facility-of-payment clause in Torrence’s group plan at the time the assignment was executed. Long before Humana paid the policy proceeds, Jackman Financial gave Humana timely notice of its claim and the basis for it. Although the suit was not successful, it had an under- standable foundation. Humana also argues that an award of fees in its favor would deter future conduct by similarly situated persons and would conserve plan expenses. On the merits, we agree with Humana that where an insurance plan contains a similar facility-of-payment provision, the insurer is able to select a substitute beneficiary at its discretion. Third parties seeking to recover by filing suit will likely be unsuccessful. Nevertheless, we do not No. 10-2112 13 believe that awarding fees to Humana in this case, in light of the assignment and Jackman Financial’s payment of the funeral expenses in reliance upon it, will have any more deterrent effect than our clear statement that a facility-of-payment provision grants the insurer broad discretion. Future potential beneficiaries, as well as assignees of such potential beneficiaries, should take heed as to the broad selection authority granted to the insurer through these clauses—longstanding features of insurance policies. We do not discount the possibility of fee awards in future cases if similar facility-of-pay- ment clauses defeat future unsuccessful challenges to insurers’ exercises of discretion. III. Conclusion The facility-of-payment clause in Torrence’s group life insurance plan gave Humana the authority to choose a beneficiary from the pre-determined list laid out in the plan. Because Humana acted within its rights and not in a manner that was arbitrary or capricious, we A FFIRM the judgment of the district court. 5-31-11