D'ANNUNZIO v. MUTUAL OF OMAHA LIFE INSURANCE COMPANY

Filing 22

OPINION fld. Signed by Judge Kevin McNulty on 7/30/13. (sr, )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

JOSEPH D’ANNUNZIO,

Civ. No. 2:1 1-cv-7576 (KM)
(MCA)

Plaintiff,
v.

OPINION

UNITED OF OMAHA LIFE INSURANCE
COMPANY,
Defendant.

KEVIN MCNULTY, U.S.D.J.:

This matter comes before the Court upon cross-motions for summary
judgment regarding the interpretation of a group insurance policy (“Policy”)
issued by defendant United of Omaha Life Insurance Company (“United”) to
D’Annunzio & Sons, Inc. (“D&S” or “Policyholder”), a close corporation owned
by the plaintiff, Joseph D’Annunzio (“D’Annunzio”), and his three brothers.
D&S has an employee welfare benefit plan (“Plan”) that is funded by the Policy.
D’Annunzio, who is disabled, is qualified to and does receive long-term
disability (“LTD”) benefits under the Plan and the Policy. The Policy, however,
requires that LTD benefits be reduced by the amount of certain “Other Income
Benefits.” The issue presented is this: Do monthly payments made to
D’Annunzio under an Income Continuation Agreement constitute “Other

1

Income Benefits,” as defined in the Policy, which must be offset against the
LTD benefits due to D’Annunzio?
As claim administrator of the Plan, United answered that question in the
affirmative and reduced D’Annunzio’s LTD benefits accordingly. The Policy
grants United the authority to interpret the terms of the Policy. United’s
decision must be upheld if it is supported by substantial evidence, and it can
be overturned only if it was arbitrary and capricious. Having read the Policy
and reviewed the administrative record, I hold that no reasonable fact-finder
could conclude that United’s interpretation was arbitrary and capricious.
Defendant’s motion for summary judgment is therefore GRANTED, and
Plaintiff’s motion for summary judgment is DENIED.
I.

FACTS

D&S is a close corporation owned by Plaintiff and his three brothers. For
the benefit of the brothers and other employees, D&S established and
maintained an ERISA-governed Plan. That Plan included provision for LTD
benefits in the event a participant became disabled. In April 2004, defendant
United issued the Policy, which funded the LTD benefits under the Plan. It is
undisputed that D’Annunzio was a participant in the Plan and was insured
under the Policy.
A. Applicable Terms of the Policy

Certain relevant provisions of the Policy are set out here:
2

LONG-TERM DISABILITY BENEFITS
Monthly Benefit
If You are Disabled and earning less than 20% of your Pre-Disability
Earnings, the Monthly Benefit is the lesser of:
a) 60% of Your Basic Monthly Earnings, less Other Income Benefits; or
b) the Maximum Monthly Benefit. The Maximum Monthly Benefit is
$6,000, less any Other Income Benefits.
***

Your monthly benefit will never be less than $100.
[Declaration of Molly Kuehi (“Kuehl Dec.”) Ex. A, at UNITED-0030
0031 (bold italics emphasis added)]

-

UNITED-

Other Income Benefits
Other Income Benefits are the following:
1) The amount for which You are eligible under:
a. a workers’ or workmen’s compensation law;
***

5) Benefits under a Social Security Plan, as follows:
a. disability benefits for which You are eligible;
b. Retirement Benefits You receive or are eligible to receive; or
c. the following
or children:

benefits which apply to Your spouse, child

1. disability benefits for which they are eligible
because of Your disability; or
3

2. Retirement Benefits they receive or are eligible to
receive because of Your receipt of the Retirement
Benefits.
***

6) Any formal salary continuation, sick leave benefits, or severance
pay for which You are eligible or that You are receiving from the
Policyholder.
***

Exceptions
Your Monthly Benefit will not be reduced by the following:
1)

Individual disability income insurance;
***

11)

Any informal salary continuation, sick leave benefits, or
severance pay;
***

[Id. at UNITED—0031

—

UNITED-0033 (bold italics emphasis added)]

AUTHORITY TO INTERPRET POLICY
By purchasing the policy, the Policyholder grants United of Omaha Life

Insurance Company the discretion and final authority to construe
and Interpret the policy. This means that United has the authority
to decide all questions of eligibility and all questions regarding the
amount and payment of any policy benefits within the terms of the
policy as interpreted by United. In making any decision, United may
rely on the accuracy and completeness of any information furnished by
the Policyholder or any insured person. Uniteds interpretation of the

policy as to the amount of benefits and eligibility shall be binding
and conclusive on all persons.
[Id. at UNITED-0007 (bold italics emphasis added)]

4

B. Income Continuation Agreement, Shareholder’s Agreement, and
D’Annunzio’s Claim for LTD Benefits
D’Annunzio held a 25% ownership interest in D&S and was also
employed by D&S as a construction manager.

On

February 8,

2005,

D’Annunzio and D&S entered into an Income Continuation Agreement. In that
Agreement, D&S agreed to pay D’Annunzio an “income continuation amount”
under

certain

conditions,

Continuation Amount was

any

including
initially

future

set at

disability.

$2,250,000

Income

The

(later

raised

to

$2,750,000),’ payable in 60 equal monthly payments. [Kuehi Dec., Exhibit B,
UNITED-0588

-

UNITED-0594].

the

On

same

day,

February 8,

2005,

D’Annunzio and D&S entered into a Shareholder’s Agreement which entitled
D&S to buy out D’Annunzio’s ownership shares at a specified price under
certain conditions, including “total disability.” [Id. at UNITED-0535

—

UNITED-

0587].
On or about September 30, 2006, D’Annunzio became permanently
disabled as a result of work-related accidents, injuries and illness. From
September 30, 2006, through December 31, 2007, while on disability leave,
D’Annunzio continued to receive his normal compensation as a manager and
owner of D&S. The Shareholder’s Agreement, however, limited such continued
payment of his salary to a maximum of 90 days.

By Unanimous Written Consent dated December 21, 2007, D&S and each of its
owners agreed to increase the total amount payable under the Income Continuation
Agreement from $2,250,000 to $2,750,000. [Id. at UNITED-0602 UNITED-0603].
1

—

5

D’Annunzio was involuntarily terminated in October 2008, after 2 years
of total disability. By Memorandum of Understanding dated October 15, 2008,
D’Annunzio and D&S agreed that D’Annunzio: (1) was deemed to be totally
disabled for purposes of the Shareholder’s Agreement and the Income
Continuation Agreement; and (2) would receive the Income Continuation
Amount of $2,750,000 payable over 60 months commencing (retroactively) as
of January 1, 2008.2 In addition, D’Annunzio (3) would sell his 25% ownership
share back to D&S for $5,040,445, payable in accordance with the terms of the
Shareholder’s Agreement. [Id. at UNITED-0595

—

UNITED-0600]

From January 1, 2008 through December 31, 2012, D’Annunzio received
monthly payments. [Id. at UNITED-0624]. D&S treated these as payments
under the Income Continuation Agreement. And it treated these payments as
ordinary

compensation

withholding.

[Id.

at

for

purposes

UNITED-0609,

of federal

and

UNITED-0624,

state

and

income

tax

UNITED- 1100

-

UNITED-i 103].
By letter dated July 9, 2009, D’Annunzio submitted a claim for LTD
benefits under the Plan. Upon receipt of D’Annunzio’s claim for LTD benefits,
United began to compile a Claim File. That Claim File came to constitute the
administrative record used by United in making its determination.

All payments made to D’Annunzio from January through October 2008 were
deemed to be payments pursuant to the Income Continuation Agreement. [Id. at
UNITED-0595 UNITED-0600]
6
2

-

Initially, by letter dated April 7, 2010, United denied D’Annunzio’s LTD
claim. That denial letter stated that D’Annunzio had not provided sufficient
information about the nature of his disability and the medical treatment he
received from September 30, 2006, through June 3, 2007. [Id. at UNITED-0054
-

UNITED-0059].

D’Annunzio

appealed

and

submitted

additional

documentation. By letter dated October 14, 2010, United overturned its earlier
denial of LTD benefits.
By letter dated January

14,

2011,

United

granted

D’Annunzio’s

application for LTD benefits, effective as of September 30, 2006. There was,
however, a catch. That same letter noted that D’Annunzio had been “receiving
salary continuance,” i.e., the Income Continuation Agreement payments. Those
monthly Income Continuation payments, said United, fell under the Policy’s
definition of “Other Income Benefits” because they constituted a “formal salary
continuation.” And, as “Other Income Benefits,” they had to be applied as an
offset to reduce the amount of LTD benefits. See Kuehi Dec., Ex. A, at UNITED0030, quoted at p. 3, above. As it happened, the monthly Income Continuation
payments exceeded (i.e., completely offset) D’Annunzio’s maximum monthly
LTD benefit of $6,000. Accordingly, United awarded D’Annunzio the minimum
monthly LTD benefit of $100.00.
D’Annunzio appealed the offset component of United’s decision. He
asserted that the payments under his Income Continuation Agreement were
not a “formal salary continuation,” but rather a retirement benefit. In addition,
7

he argued, they represented partial payment by D&S for its buyback of his 25%
ownership interest in the company. Accordingly, D’Annunzio contended, the
Income Continuation payments did not constitute “Other Income,” and should
not be set off against LTD benefits.
By letter dated April 22, 2011, United rejected that appeal and upheld its
determination

that payments

received

under

the

Income

Continuation

Agreement were “Qthcr Income Benefits” under the Policy. Speciflcally, the
letter explained:
The basis for this determination is the fact that those payments are
clearly being issued under the formal Income Continuation Agreement.
This agreement specifically provides income in the event of a disability.
As such, it is formal salary continuation pay and would be considered
“Other Income Benefits.” The Income Continuation Agreement is not a
retirement plan, thus the payments issued under this agreement are not
retirement benefits. Nor are the payments a refund of his ownership
interest in the corporation. The separate shareholders agreement governs
the purchase of his stock in the company.
[Id. at UNITED-0346
II.

—

UNITED-0348].

DISCUSSION
a. Summary Judgment Standard

Federal Rule of Civil Procedure 56(a) provides that summary judgment
should be granted “if the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.s. 242,
248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Kreschollek v. S. Stevedoring Co.,
223 F.3d 202, 204 (3d Cir. 2000). In deciding a motion for summary judgment,
8

a court must construe all facts and inferences in the light most favorable to the
nonmoving party. See Boyle v. County of Allegheny Pennsylvania, 139 F.3d

386, 393 (3d Cir. 1998). The moving party bears the burden of establishing
that no genuine issue of material fact remains. See Celotex Corp. v. Catrett, 477
U.S. 317, 322—23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). “[W]ith respect to an
issue on which the nonmoving party bears the burden of proof

...

the burden

on the moving party may be discharged by ‘showing’—that is, pointing out to
the district court—that there is an absence of evidence to support the
nonmoving party’s case.” Celotex, 477 U.S. at 325.
Once the moving party has met that threshold burden, the non-moving
party “must do more than simply show that there is some metaphysical doubt
as to material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475

U.S. 574, 586, 106 5.Ct. 1348, 89 L.Ed.2d 538 (1986). The opposing party
must present actual evidence that creates a genuine issue as to a material fact
for trial. Anderson, 477 U.S. at 248; see also Fed. R. Civ. P. 56(c) (setting forth
types of evidence on which nonmoving party must rely to support its assertion
that genuine issues of material fact exist). “[U]nsupported allegations

...

and

pleadings are insufficient to repel summary judgment.” Schoch v. First Fid.
Bancorporation, 912 F.2d 654, 657 (3d Cir. 1990); see also Gleason v. Norwest

Mortg., Inc., 243 F.3d 130, 138 (3d Cir. 2001) (“A nonmoving party has created
a genuine issue of material fact if it has provided sufficient evidence to allow a
jury to find in its favor at trial.”). If the nonmoving party has failed “to make a
9

showing sufficient to establish the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial,
there can be ‘no genuine issue of material fact,’ since a complete failure of proof
concerning an essential element of the nonmoving party’s case necessarily
renders all other facts immaterial.” Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53,
55 (3d Cir. 1992) (quoting Celotex, 477 U.S. at 322—23).
The summary judgment standard, however, does not operate in a
vacuum. “[I]n ruling on a motion for summary judgment, the judge must view
the evidence presented through the prism of the substantive evidentiary
burden.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254, 106 5. Ct. 2505,
2513, 91 L. Ed. 2d 202 (1986). That “evidentiary burden” is discussed in the
following section.
b. Standard of Review of Claims Administrator’s Decision

The ultimate decision before this Court is whether the decision of United,
as claims administrator, should be upheld. Before making that determination,
this Court must determine the burden that United must meet. I find that my
review in this case falls under the deferential “substantial evidence” standard,
under which United’s decision cannot be reversed unless it is arbitrary and
capricious.
Like so many issues involving employer-sponsored plans, the standard of
review is dictated by ERISA. D’Annunzio’s challenge to the offset of his LTD
10

benefits must be construed as a claim to recover unpaid benefits pursuant to
ERISA

§ 502(a)(1)(B). Thus Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 62—

63, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987), for example, held that a suit by a
beneficiary to recover benefits under an ERISA-governed plan “falls directly
under § 502(a)(1)(B) of ERISA, which provides an exclusive federal cause of
action for resolution of such disputes.”
ERISA dictates that the district court’s standard of review depends on
the authority granted to the claims administrator by the governing welfare
benefit plan. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct.
948, 103 L.Ed.2d 80 (1989). When the governing ERISA plan “gives [its]
administrator or fiduciary discretionary authority to determine eligibility for
benefits or to construe the terms of the plan,” a court must review a denial of
benefits under an “arbitrary and capricious” standard. Id.
Clearly this is such a case. The Policy grants United “the discretion and
final authority to construe and interpret the policy,” including the “authority to
decide all questions of eligibility and all questions regarding the amount and
payment of any policy benefits.

.

.

.

United’s interpretation of the policy as to

the amount of benefits and eligibility shall be binding and conclusive on all
persons.” (Kuehi Dec. Ex. A, at UNITED-0007) A broader delegation of
interpretive authority can hardly be imagined. Under Firestone, this Court
must review United’s decision pursuant to an “arbitrary and capricious”
standard.
11

The United States Court of Appeals for the Third Circuit has described
such arbitrary-and-capricious review as follows:
We review a challenge by a participant to a termination of benefits under
ERISA § 502(a)(1)(B) under an arbitrary and capricious standard where,
as here, the plan grants the administrator discretionary authority to
determine eligibility for benefits. An administrator’s decision is arbitrary
and capricious if it is without reason, unsupported by substantial
evidence or erroneous as a matter of law.
Miller v. Am. Airlines, Inc., 632 F.3d 837, 844-455 (3d Cir. 2011) (citations

omitted).
“Erroneous as a matter of law” is self-explanatory, but “substantial
evidence” is less so. “A decision is supported by ‘substantial evidence if there is
sufficient evidence for a reasonable person to agree with the decision.’
Courson v. Bert Bell NFL Player Retirement Plan, 214 F.3d 136, 142 (3d Cir.

2000) (quoting Daniels v. Anchor Hocking Corp., 758 F. Supp. 326, 331 (W.D.
Pa.

1991)).

In

other words,

a court reviewing a plan

administrator’s

interpretation of a plan under the arbitrary-and-capricious standard should
not disturb the administrator’s decision unless it is unreasonable. Dewitt v.
Penn—Del Directory Corp., 106 F.3d 514, 520 (3d Cir. 1997); see also Funk v.

CIGNA Group Ins., 648 F.3d 182, 190 (3d Cir. 2011) (summarizing standard
applicable to an ERISA § 502(a)(1)(B) claim). Such review is, of course, highly
deferential to the claims administrator’s decision.
For purposes of this motion, then, the summary judgment standard is
laid atop the standard of review of the United claims administrator’s decision. I
12

must determine whether there is a genuine issue of fact as to whether United’s
decision was arbitrary and capricious. See Hatchigian v. Int’l Bhd. of Elec.
Workers, Local Union No. 98, Health & Wefare Fund, 13-1377, 2013 WL

3816101 at *3 (3d Cir. July 24, 2013) (affirming district court’s award of
summary judgment in favor of ERISA-plan administrator where “there was no
genuine issue of material fact with respect to whether [plan administrator]
acted in an arbitrary and capricious manner in deciding not to extend” benefits
coverage).
If there is substantial uncontested evidence to support the claims
administrator’s decision, it must be upheld, even if other evidence might
support

a

competing

interpretation.

A

claims

administrator

which

demonstrates that its decision is supported by substantial evidence is entitled
to judgment as a matter of law.
c. Discussion

United, as claims administrator, determined that monthly payments
received under the Income Continuation Agreement were “Other Income
Benefits” under the policy, and therefore had to be set off against monthly LTD
benefits. That decision, far from being arbitrary and capricious, was reasonably
based on the plain language of the Policy. I will uphold it, and grant United’s
motion for summary judgment.

13

Under the terms of the Policy, United had the “discretion and final
authority to construe and interpret” its provisions and decide “all questions
regarding the amount and payment” of any benefits. Kuehi Dec., Ex. A, at
UNITED-0007, quoted above at p. 4. Following its established procedures,
United compiled a Claim File and evaluated all information provided by
D’Annunzio in support of his claim for benefits. It measured this information
against the terms of the Policy in arriving at its conclusion.
The Policy defines certain “Other Income Benefits” that are to be set off
against

LTD

Monthly

Benefits.

One

of

these

is

“Any

formal

salary

continuation.” Id. at UNITED-0033, quoted above at p. 4. United determined
that payments under the Income Continuation Agreement met the definition of
a “formal salary continuation.” That determination was based on substantial
evidence in the administrative claim file.
That evidence included, of course, the provisions of the Policy itself,
quoted above. It also included the Income Continuation Agreement. That
Agreement, as its title implies, provides for the employee to continue receiving
compensation despite his inability to work as the result of, for example, a
disability. The claim file also contained all the documents submitted to United
by or on behalf of D’Annunzio, and correspondence and communications
between and among D’Annunzio, his attorney, and representatives of United
concerning his claim. Additionally, the claim file included medical and other

14

information that was received and reviewed by United, and other information
developed during the course of United’s evaluation of D’Annunzio’s claim.
United even referred D’Annunzio’s file to a forensic accountant in order
to analyze the status of the payments D’Annunzio received with respect to the
provisions of the Policy. “The forensic accountant opined that.

.

.

the wages

Mr. D’Annunzio receives must be considered part of a formal salary
continuation plain if D’Annunzio and Sons, Inc. deducts these wages as a
business expense.” Kuehl Dec., Ex. B, UNITED-0612. The evidence is
uncontested that, for tax purposes, D&S did treat payments under the Income
Continuation Agreement as ordinary wages; for example, it withheld federal
and state income taxes. By any measure, this evidence in the administrative
record constitutes substantial evidence to support United’s conclusion that the
Income Continuation Agreement was a “formal salary continuation,” and hence
that it constituted “Other Income” under the policy.
D’Annunzio disagrees with United’s interpretation. He asserts that the
Income Continuation Agreement is more properly viewed as one of three things:
(1) A retirement benefit; (2) a deferred compensation agreement; or, especially,
(3) partial payment for D’Annunzio’s sale of his ownership interest back to the
company. Suffice it to say that there is not much evidence that any party ever
so characterized the Agreement before this dispute arose. But even if one of
these alternative interpretations were reasonable, it would not follow that
United’s interpretation was so arbitrary and capricious that the Court could
15

reject it. Under the applicable standard, such arguments are not sufficient to
defeat summary judgment when there is substantial evidence to support the
alternative that the claims administrator did adopt.
D’Annunzio argues in the alternative that the Court should remand this
matter to the plan administrator for reconsideration. Meeting notes compiled
by a financial planner for the D’Annunzio brothers in 2003 and 2004 have
apparently just come to light. This “new evidence,” D’Annunzio says, shows
that the Income Continuation Agreement was intended to be a “vehicle” for
paying each of the owners a portion of his equity interest in the business when
he died, retired, or became disabled. There are at least two problems with this
argument.
First, D’Annunzio made this exact argument to United during the
processing of his claim. Because the newly discovered meeting notes would be
largely cumulative, a remand would not be appropriate.
Second, this argument fails as a matter of law. D’Annunzio essentially
concedes that the payments were structured as Income Continuation, but
nevertheless asks the Court to disregard that reality in favor of the payments’
underlying “reason or purpose.” That “purpose,” says D’Annunzio, was to pay
him for his interest in the company. For tax reasons it was advantageous to
structure the payments so the IRS would treat them as ordinary income.
Having done so, and having enjoyed the tax benefit, D’Annunzio argues that
16

the Court should now treat the payments as something

--

anything

--

other

than income. Even if I were writing on a blank slate, I would not find this
position very persuasive. And under the arbitrary and capricious standard I
would have to find, in effect, that the claims administrator was compelled to
accept this flimsy argument. That I cannot do. There is no dispute that there
existed

substantial

evidence

to

support

United’s

decision

as

claims

administrator.
III.

CONCLUSION

For the foregoing reasons, United’s motion for summary judgment is
GRANTED. D’Annunzio’s motion for summary judgment, his alternative motion
to remand, and his request for attorney’s fees are DENIED. An appropriate
order will be filed.

KEVIN MCNULTY, U.S.D.4U

Dated: July 30, 2013

17