Successor not liable for misrepresentations by past fiduciaries regarding retiree health care

The current contractor providing security services at a nuclear complex was shielded from liability for alleged misrepresentations committed by past fiduciaries with regard to health care benefits for retirees, ruled a federal district court in Tennessee. Retired security guards had brought suit seeking to restore health care benefits to prior levels, alleging that they were promised stable premiums and retirement benefit levels similar to what they received as active employees. However, because the contractor did not assume control of the health care plans until after these representations had been made, the court granted its motion for summary judgment on the misrepresentation claim.

Retirement benefits. The retirees had been employed at various times by various contractors at the nuclear complex. Consolidated Nuclear Security (CNS) is the current contractor operating and administering the health care plans for retirees of the predecessor employers. The plaintiffs alleged that many of the employees were attracted to positions at the complex based on representations made by the contractors that they were earning a valuable package of retiree benefits—including health care—which would provide security and stability during retirement.

The various contractors entered into a series of agreements with employees providing terms and conditions of employment. The agreements provided health care benefits, which included medical, prescription, dental, vision, a Medicare subsidy, life insurance, and related benefits. The agreements also covered spouses and surviving spouses of retired employees.

Representations of predecessors. Over the years, several different individual contracts were executed that defined health care benefits. As each new contractor took over from the previous one, it adopted the provisions of those agreements. Some prior contractors adopted an early retirement program. According to the plaintiffs, the contractors represented that accepting early retirement would enable them to retain their health care benefits and avoid application of any future changes in benefits.

However, the plaintiffs contended they were misinformed about the level of health care benefits and out-of-pocket costs they would be subjected to at the end of their employment. Among those representations were that (1) retirees would be able to keep the exact policy they had as employees; (2) health care benefits would continue after retirement at the levels they had while actively employed; (3) premium amounts would increase slightly; and (4) retirees would have comparable benefits throughout retirement, among others. According to the plaintiffs, these statements induced them to believe that they would continue to receive company-subsidized health care benefits for their lifetimes at the levels that were in place at the time they retired.

On July 1, 2014, CNS became the contractor responsible for operating the nuclear complex. On January 1, 2015, it made changes to the retirees’ health care benefits which significantly altered the cost, coverage, and value of the benefits. Specifically, premiums increased, there was a significant reduction in the level of coverage, and retirees could no longer obtain alternative medical or prescription drug coverage due to their advanced ages and impaired health conditions.

Misrepresentation. While the plaintiffs acknowledged that the contractors retained the ability to reduce or terminate the retiree health care benefits at any time, they asserted that agents of previous contractors, acting in a fiduciary capacity, made numerous misrepresentations regarding lifetime rights to post-retirement health care benefits that would remain unchanged from the levels they had as active employees. They did not allege that CNS made misrepresentations regarding their retirement benefits.

In their suit, the plaintiffs alleged that CNS breached its fiduciary duty arising under ERISA. They sought to either restore their health care benefits to the levels that existed prior to January 1, 2015, or to be reimbursed for the value of their increased out-of-pocket costs resulting from the reduction in benefits. CNS filed a motion for summary judgment on the remaining misrepresentation claim.

Fiduciary duties. In order to establish a claim for breach of fiduciary duty under ERISA based on alleged misrepresentations concerning coverage under an employment benefit plan, plaintiffs must show that: (1) the employer acted in a fiduciary capacity when it made the challenged representations; (2) the employer’s statements constituted material misrepresentations; and (3) the plaintiffs relied on the employer’s materials representations to their detriment.

CNS argued that it was not a proper defendant to the retirees’ sole remaining claim, as they did not allege that CNS had made any misrepresentations. For their part, the retirees argued that because prior contractors made material misrepresentations, CNS, as the current fiduciary, was obligated to act in the best interest of its beneficiaries. In other words, they argued that CNS must act in conformity with the prior contractors’ misrepresentations.

However, the retirees cited to no authority suggesting that CNS assumed liability for the misrepresentations of prior contractors when it took control of the pension plans, nor that CNS was required to act in conformity with the misrepresentations of the prior contractors. Moreover, there was no dispute that CNS was not a fiduciary at the time the challenged representations were made, as CNS did not assume control of the plans until 2014. Accordingly, the retirees were unable to maintain an ERISA misrepresentation claim against CNS.

SOURCE: Hatmaker v. Consolidated Nuclear Security, LLC (E.D. Tenn.), No. 3:150CV-351-TAV-HBG, May 30, 2018.
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