No matter how hard we try, mistakes occur. It is comforting, therefore, to learn that not all mistakes have fatal consequences. A recent case holds that plan administrators will not always be held liable for communication errors. In Fitch v. Chase Manhattan Bank, 1999 U.S. Dist. LEXIS 13646 (W.D.N.Y, June 17, 1999), Chase unrolled an early retirement incentive program for its employees. Each employee who elected to participate in the program had his or her retirement benefit enhanced by adding five years of service and five years of age to the basic benefits formula. Chase hired a consultant to calculate the enhanced benefit and distributed benefits estimates in October of 1994. Eligible participants had until December 12, 1994 to elect whether to participate in this special early retirement program.
Unfortunately, the consultant made a mistake when programming the enhanced benefits calculation and Chase did not spot the mistake until initial communications had already been sent to employees. As a result, the estimated enhanced retirement benefits were overstated for approximately 60 of the 2,200 participants who were eligible for this early retirement program. At the end of November, two weeks before the election deadline, Chase discovered the error. By this time many participants had already elected to take advantage of the early retirement program, relying, in part, on the overstated benefits estimates. Chase decided that the fairest way to proceed would be to inform the 60 affected participants of the mistake, provide them with corrected benefits information, and give them additional time to decide whether to accept the early retirement program.
Several participants who received incorrect benefits estimates sued Chase. They sought damages based on the amount of benefits set forth on the incorrect statements. In effect, they argued the erroneous benefits statements became part of the plan and that Chase was bound to honor the statements, mistakes and all. Additionally, these participants argued that estoppel principles required Chase to honor the erroneous statements and that Chase was liable for the communication error because it breached its fiduciary duties.
In a refreshing, well-reasoned decision, District Judge Charles Siragusa ruled in favor of Chase. First, the court concluded that the incorrect benefits estimates were informal communications that did not amend or become part of Chase’s plan. The court next addressed the plaintiffs’ estoppel claims. Courts in the Second Circuit (Connecticut, New York and Vermont) recognize estoppel claims under ERISA only in “extraordinary circumstances.” A plaintiff must show that there was a promise, the plaintiff relied on the promise, injury was caused by the reliance, and an injustice will occur if the promise is not enforced. The court held that to have the requisite #&147;extraordinary circumstances” required to establish a valid estoppel claim, the plaintiffs would have to show that Chase’s actions were tantamount to fraud. Because there were no facts supporting such a finding (in fact, the court found the incorrect benefits estimates were the result of an honest mistake), the court rejected plaintiffs’ estoppel arguments.
The court also concluded the plaintiffs could not demonstrate that they reasonably relied on the inaccurate estimates, they were injured by the estimates or that injustice would result if they were not paid benefits based on the incorrect statements. Finally, the court dismissed the plaintiff’s breach of fiduciary allegations, noting there was no evidence Chase knowingly misled the plaintiffs and holding that Chase was not acting in a fiduciary capacity when it prepared the benefits statements. Gene Ulterino of Nixon Peabody represented Chase in this case.
Honest mistakes will occur when administering a pension plan. Automatic liability for such mistakes unfairly penalizes employers and plan administrators and bestows unexpected windfalls on participants. It is encouraging to see a court rule that plan administrators who make such mistakes and promptly correct them will not necessarily be liable for the mistake.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require and further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative.