Sixth Circuit Revives Breach of Fiduciary Duty Claim Against Wal-Mart for Alleged Mishandling of Insurance Plan Assets

The Sixth Circuit Court of Appeals recently decided, Chelf v. Prudential Ins. Co. of Am., No. 20-6097, __F.4th__, 2022 WL 1090168 (6th Cir. Apr. 12, 2022), which revived a breach of fiduciary duty claim under ERISA Section 502(a)(3) against Wal-Mart Associates, Inc.

Plaintiff-Appellant Ruth Mae Chelf is the widow of Elmer Chelf, a former employee of Wal-Mart, who was on long-term disability leave when he passed away. Mr. Chelf had disability and life insurance coverage through his employment with Wal-Mart and continued to pay premiums for the coverage while on disability. When he passed away, Prudential Insurance Company paid Ms. Chelf basic life insurance benefits but denied her claim for the $25,000 Mr. Chelf allegedly should have had in optional life insurance coverage. Ms. Chelf alleged that Wal-Mart breached its ERISA “fiduciary duty to Mr. Chelf in several ways, including by assessing certain premiums in error; by failing to inform him that his premiums were assessed in error; by failing to remit premiums to Prudential to cover his optional life insurance policy resulting in that policy’s termination; by failing to inform Mr. Chelf that his accrued paid time off (PTO) could cover his life insurance premiums; and by failing to notify him of his right to convert his term life insurance policy.” The district court granted Wal-Mart’s motion to dismiss Ms. Chelf’s fiduciary breach claims. The Sixth Circuit affirmed in part, reversed in part, and remanded for further proceedings.

The court broke up Ms. Chelf’s fiduciary breach allegations into two categories: mishandling of plan assets and failure to disclose information. As to the mishandling of plan assets, Ms. Chelf argued that Wal-Mart was acting as a fiduciary when it managed plan assets and took Mr. Chelf’s short- and long-term disability premiums when he was on leave when they were not owed. She also alleged that Wal-Mart should have credited his accrued PTO hours to his optional life insurance premiums or informed him he could have used these hours towards the payment of premiums. The district court, relying on 29 C.F.R. § 2509.75-8 (D-2), found that Wal-Mart was not acting in a fiduciary capacity when it was performing administrative functions of collecting and applying premiums. The Sixth Circuit found that 29 C.F.R. § 2509.75-8 (D-2) is not applicable here because Wal-Mart was a fiduciary that indisputably exercised control over the Plan’s assets when it handled Mr. Chelf’s premiums, exercised control over the disposition of plan assets, and had discretionary authority over the administration of the plan. Taking Ms. Chelf’s allegations as true, the court found that Wal-Mart was acting in a fiduciary capacity, and that the allegations sufficiently state a claim for breach of fiduciary duty. That is, Wal-Mart breached a fiduciary duty, the breach caused harm to Ms. Chelf, and if proven after discovery, the breach would entitle her to an equitable remedy of surcharge under ERISA Section 502(a)(3).

With respect to the allegations of Wal-Mart’s failure to disclose, the court found that the allegations do not fall under three Sprague categories it recognizes to constitute a breach of fiduciary duty: “(1) an early retiree asks a plan provider about the possibility of the plan changing and receives a misleading or inaccurate answer or (2) a plan provider on its own initiative provides misleading or inaccurate information about the future of the plan or (3) ERISA or its implementing regulations required the employer to forecast the future and the employer failed to do so.” Specifically, there are no allegations suggesting that Wal-Mart omitted information or made misleading statements. Further, Ms. Chelf does not allege that the Plan’s Summary Plan Description was misleading or that Wal-Mart provided incorrect or misleading information about conversion of the life insurance policy. Though Ms. Chelf contends that the duty to advise Mr. Chelf of his conversion right arises under the language of the Plan, the court agreed with Wal-Mart that the Plan language should not be considered at this point because the complaint did not allege that the Plan or the SPD contained any requirement that would have given rise to the independent duty to inform Mr. Chelf of the conversion right. On remand, Ms. Chelf may seek leave to amend the complaint which will be in the discretion of the district court to decide.