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Obtaining participant consent to benefit distribution.

In Franklin, 983 F2d 939 (1993), rev'g DC Cal., the Ninth Circuit confirmed the importance of receiving formal participant consent before distributing qualified plan benefits, even though the participant may have requested the distribution.

In August 1988, Roberta Franklin sent a letter to the administrator of her former employer's pension plans, and a letter to her former employer (Thornton), as trustee of the plans, requesting distribution of her plan interests. Thornton sent Franklin a reply that included consent documents and listed her account value at $67,141. In the meantime, however, Franklin had spoken with a financial adviser who recommended that she keep her money in the plans' fund where it could earn a higher rate of return. As a result, Franklin did not sign or return the consent documents.

In December 1988, Thornton sent a new set of consent forms and an updated, year-end calculation of Franklin's account, now valued at $68,713; once again, Franklin did not sign the forms. On advice of the plan administrator, Thornton sent Franklin a check for $68,713. Franklin returned it a few days later with a letter clarifying that she was interested in a distribution, but only if the valuation date was acceptable to her. In response, Thornton deposited the amount in an interest-bearing savings account. Franklin also sent the administrator a letter, stating that she was interested in receiving her benefits, but explicitly stating she would not consent to a valuation date on Sept. 30, 1988.

Franklin sued Thornton, claiming breach of fiduciary duties under Sections 404 and 409 of the Employee Retirement Income Security Act of 1974 (ERISA), and

seeking to enforce and clarify her rights under the plans. The district court granted Thornton summary judgment, concluding that Franklin's written consent was not required prior to a valid distribution of her plan interests, or alternatively that Franklin's initial August 1988 letter was an effective written consent. The court also ordered Franklin to pay Thornton's attorney's fees and expenses.

In holding that Franklin's consent was not required under the plans, the district court had relied on plan language that seemed to require consent only if the plans' joint and survivor annuity provisions were applicable. However, on appeal the Ninth Circuit found that the district court had ignored other sections of the plans clarifying that the joint and survivor annuity provisions of the plans applied unless the married or unmarried participant makes a valid waiver election.

Thornton also argued that the plan's joint and survivor annuity provisions did not apply to participants without a spouse. But the appeals court said:

The very language Thornton cites refutes his argument. Section 6.05 provides in part, "The Plan Administrator may accept as valid a waiver election which does not satisfy the spousal consent requirements, if the Plan Administrator establishes the Participant does not have a spouse."

The appeals court concluded, "This language ... merely clarifies, as common sense would dictate, that the additional requirement of spousal consent is not required if the participant is unmarried."

The appeals court moved on to discuss the notice requirements of ERISA and Se. 417(e), requiring a participant's written consent prior to a lump-sum distribution exceeding $3,500. The district court's incorrect interpretation would throw the plans dramatically out of compliance with ERISA, according to the appeals court, because Regs. Sec. 1.417(e)-1 "unambiguously" requires written consent of an unmarried (as well as a married) participant before making a lump-sum distribution when the participant's interest in the plan exceeds $3,500.

The appeals court also rejected the finding that, even if Franklin's consent was required, she gave the consent in writing with her August 1988 letter. In rejecting this finding, the appeals court quoted directly from Regs. Sec. 1.417(e-1(b)(2)(i): "No consent is valid unless the participant has received a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the plan in a manner which would satisfy the notice requirements of section 417(a)(3)." Because she had not yet received the required description of features and explanation of optional payment values, Franklin's August 1988 letter could not serve as a valud consent.

The record also revealed that Thornton did not treat Franklin's August 1988 letter as sufficient formal consent to the distribution. In the two subsequent communications to her Thornton included formal written consent forms, together with other enclosures stating that the forms "must" be signed prior to any lump-sum distribution.

The appeals cour then addressed the award of attorneys' fees to Thornton. An abuse of discretion in the grant of attorneys' fees in an ERISA case is found "only when there is a definite conviction that the court made a clear error of judgment in its conclusion upon weighing relevant factos" (Hummell, 634 F2d 446 (9th Cir. 1980)). The lower court had relied on a plan provision granting the plan administrator all costs and fees against a losing plan challenger. The appeals court noted that its reversal of the case would negate the award of fees under the plan.

The lower court had also relied on ERISA Section 502(g), which provides that the "court in its discretion may allow a reasonable attorney's fee and costs of action to either party." In Hummell, the Ninth Circuit set out the five factors to decide whether an award of attorney's fees is proper in an ERISA case: 1. The degree of the opposing parties' culpability or bad faith. 2. The ability of the opposing parties to satisfy an award of fees. 3. Whether an award of fees against the opposing parties would deter others from acting under similar circumstances. 4. Whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA. 5. The relative merits of the parties' positions.

The district court had not analyzed these factors, but instead had merely concluded that ERISA Section 502(g) "directs the award of attorney's fees to a prevailing party in litigation such as this." Thus, the appeals court ruled that the district court abused its discretion by granting Thornton fees without weighing the relevant factors in Hummell. In the Ninth Circuit's view, actually applying the Hummell test to the facts here revealed that fees should not have been awarded.

Ironically, the basic dispute between the parties--the appropriate valuation date for the benefits--apparently was never addressed by either party and, of course, was not addressed by the courts. But the case does show that compliance with notification requirements will be enforced by the courts--at least when the participant complains.
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Author:Patterson, Martha Priddy
Publication:The Tax Adviser
Date:Jun 1, 1993
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