A recent decision by the U.S. Court of Appeals for the Seventh Circuit, Young v. Verizon’s Bell Atlantic Cash Balance Plan, Nos. 09-3872 & 09-3965 (7th Circuit 2010), has drawn attention for allowing Verizon Communications Inc. (Verizon) to retroactively reform its plan document to correct a drafting error that, had it been enforced, would have resulted in at least a $1.67 billion windfall for participants. In Young the Seventh Circuit rejected an ERISA class action brought by a participant claiming denial of benefits based on an unambiguous plan provision. The Seventh Circuit instead granted Verizon's counterclaim to retroactively reform the plan documents due to a scrivener's error, finding the plan did not reflect the clear intent of the parties. In its decision, the Court said, "People make mistakes, even administrators of ERISA plans."

Verizon's drafting error occurred when its predecessor, Bell Atlantic, converted a traditional defined benefit plan to a cash balance plan. The cash balance plan provided that, as part of the conversion, each participant's accrued benefit in the traditional defined benefit plan would be reflected in an opening balance. The opening balance of each participant was calculated using a special transition factor, particular to each participant. Outside experts prepared the initial drafts of the cash balance plan, but in-house counsel took over this responsibility with the fourth draft and therein made the error. Intending to make the document more "readable," in-house counsel inadvertently included a provision that applied the transition factor twice. The inadvertent provision survived unnoticed in the subsequent drafts of the plan document, including the final one adopted by Bell Atlantic in 1996. Bell Atlantic discovered the error in 1997 and in 1998 adopted a new document removing the provision, prior to the plaintiff, Ms. Young, seeking administrative review of her benefits.  

Background

Young was an appeal from the U.S. District Court for the Northern District of Illinois. Initially, the district court found that the administrative committee for Verizon had abused its discretion in disregarding the unambiguous plan language that specified the transition factor was to be multiplied twice. If Verizon wished to fix the scrivener's error, the district court said, it must obtain a court order for reformation of the plan. Verizon followed the district court's cue and counterclaimed for equitable reformation to correct the scrivener's error. In a subsequent decision, the district court granted Verizon's request for reformation finding the evidence overwhelmingly supported a determination of scrivener's error where the plan language did not reflect the clear intent of the parties. Ms. Young appealed the district court's ruling to the Seventh Circuit, but again Verizon prevailed, with the Seventh Circuit finding scrivener's error and granting reformation.

The Evidence Must Be Clear and Convincing

With Young the Seventh Circuit set a high standard for future scrivener's error cases — the evidence must be "clear and convincing." The Court stressed that "only those that can marshal clear and convincing evidence that the plan language is contrary to the parties' expectations will have a viable claim." Further, the evidence must be objective and not dependent on the credibility of an interested party's oral or written testimony.  

The Seventh Circuit found that the evidence in Young overwhelmingly met this high standard. All plan communications (summary plan documents, summary material modifications, plan brochure, and the opening balance statements) stated that the transition factor was only to be applied once. The consistency of the communications, the Court found, put the participants on notice of Verizon's understanding that the transition factor was to be used only once. Further, the Court found that there simply was no evidence that plan participants had relied on the plan language specifying a second application of the transition factor.  

The Court acknowledged that the communications to participants contained disclaimers that the language of the plan document superseded conflicting information included in the communications. Nevertheless, the Court found that the disclaimers did not preclude Verizon from reforming the plan. The issue, the Court said, is whether Verizon could prove with clear and convincing evidence that the parties’ intended meaning was to include only a single transition factor. Evidence of the parties' intentions may include all plan communications even if the communications contain the disclaimer.

Statute of Limitations


Because the Seventh Circuit had never recognized a claim for equitable reformation under ERISA, the Court was left to figure out when such a claim accrues for purposes of the statute of limitations. Verizon's claim for reformation, the Court found, was not barred by the applicable four-year limitation because the claim only began accruing upon the filing of the suit in 2005. Basing its finding on general federal common law, the Court found that an ERISA claim begins to accrue on the date when the plaintiff knows or should know of conduct that interferes with the plaintiff's ERISA rights. Though Verizon's predecessor, Bell Atlantic, discovered the error in the plan language in 1997, and corrected the error in its restatement of the plan in 1998, it was not on notice of a controversy that would require Verizon to raise an equitable reformation claim. Verizon (Bell Atlantic) was consistent in its understanding and course of dealing with participants as to its understanding that the transition factor was to be multiplied only once. It was not until Ms. Young brought suit in federal court in 2005 that Verizon knew or should have known that the controversy may require Verizon to file a reformation claim.  

Potential Implications with the IRS's EPCRS Program

The Internal Revenue Service (IRS) has been following Young closely for its potential implications to its correction program — the Employee Plans Compliance Resolution System (EPCRS). Although the IRS has stated repeatedly that it does not recognize scrivener's error, it has approved corrections permitting the retroactive amendment of a plan document to conform with plan operations.  

Concerned about this and other courts' approaches to how a scrivener's error can be remedied, the IRS is in the midst of internal discussions of whether EPCRS is the proper forum for correcting scrivener's errors. Under consideration is the possibility that such errors are correctable through EPCRS or whether plan sponsors are limited to seeking correction through the courts. A concern for plan sponsors is that costs associated with correction of scrivener's error through the courts are likely to be higher than costs associated with administrative corrections by EPCRS.