Ninth Circuit Bars Defensive Use of Equitable Estoppel When It Would Result in Contradiction of an ERISA Plan’s Express Terms

In Wong v. Flynn-Kerper, No. 19-56289, __F.3d__, 2021 WL 2307485 (9th Cir. June 7, 2021), the Ninth Circuit considered for the first time whether a defense of equitable estoppel is barred in an ERISA case brought by an ERISA plan. The court joined the Fourth Circuit in barring the defensive use of equitable estoppel when estopping the plaintiff would contradict an ERISA plan’s express terms. See Ret. Comm. of DAK Ams. LLC v. Brewer, 867 F.3d 471, 485 (4th Cir. 2017).

Plaintiff David Wong, in his capacity as Trustee of the Anaplex Corporation Employee Stock Ownership Plan (ESOP), sued Defendant Danette Flynn-Kerper, in her individual capacity as the present holder of a $1,000,654.20 promissory note from Anaplex. The promissory note was originally acquired by Flynn-Kerper’s late husband in exchange for shares of Anaplex stock he sold to the ESOP. Based on facts later discovered, the valuation of the shares was inflated such that the promissory note exceeded the fair market value of the company stock. Section 6(d) of the ESOP provides that purchases of company stock by the Trust shall be made at a price which does not exceed the fair market value of the stock.

Wong sought equitable relief pursuant to 29 U.S.C. § 1132(a)(3); ERISA § 502(a)(3) in the form of an adjustment to the purchase price and a declaration that the ESOP had overpaid. Flynn-Kerper moved to dismiss for failure to state a claim, arguing that Wong was equitably estopped from asserting his claims against her based on an agreement they reached to settle a prior lawsuit. In the past lawsuit, Flynn-Kerper sued Anaplex in state court for failure to repay various promissory notes, including the one at issue. They entered into a Note Repayment Agreement (NRA) which established a new repayment schedule for the promissory note and Flynn-Kerper dismissed the claims without prejudice. Regarding the circumstances of when the NRA was negotiated, the parties disagree as to whether: (1) the NRA confirmed the amount owed and the ESOP’s obligation to pay it; (2) Wong knew of the underlying facts impacting the valuation; (3) Flynn-Kerper knew Wong would litigate the value of the promissory note; and (4) Flynn-Kerper reasonably relied on the NRA in dismissing her claims. Wong raised three factual disputes in opposition to the motion to dismiss but the district court granted Flynn-Kerper’s motion to dismiss without leave to amend. The district court found Wong’s arguments about the factual disagreements to be “unconvincing” and concluded that Wong made a clear and unambiguous promise to pay Flynn-Kerper the outstanding balance on the promissory note and that she reasonably relied on this promise when she voluntarily dismissed her state court lawsuit. To allow Wong to renege on the promise would punish Flynn-Kerper for her reliance on Wong’s representation.

The Ninth Circuit reversed the district court. First, it explained that “[e]quitable estoppel applies if the party to be estopped knew the facts and intended for his conduct to be acted on, and if the party asserting estoppel was ignorant of the true facts and relied on the other party’s conduct to her injury.” The parties’ knowledge at the time of entering the NRA are all factual issues which are subject to genuine dispute. Even if estoppel principles were available in this ERISA context, the district court could not equitably estop Wong’s claims at the motion to dismiss stage simply because it found Wong’s position unconvincing. More importantly, however, is that the district court erred in its ERISA analysis. The Ninth Circuit explained that “Flynn-Kerper cannot equitably estop Wong, the ERISA Trustee, because doing so would contradict the clear terms of the ESOP.” A federal equitable estoppel claim in the ERISA context must also allege that the provisions of the ERISA plan were ambiguous because an estoppel claim against a trust fund where recovery would contradict written plan provisions is not allowed. The court also highlighted the policy concerns of ensuring that pension funds are actuarially sound and that funds should not pay pensions to people who are expressly not entitled to them. Whether it is an affirmative or defensive use of equitable estoppel does not matter since the end result would come at the expense of plan participants.