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Arrington v. Sun Life Assurance Co. of Canada

United States District Court, D. Maryland

June 21, 2019




         Plaintiff Kathryn Arrington has filed a civil action against Defendants Sun Life Assurance Company of Canada ("Sun Life") and Union Security Insurance Company ("Union Security") alleging that Defendants violated the terms of a long-term disability insurance policy by partially denying her benefits. Arrington seeks a declaratory judgment, pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132 (2012), that Defendants erroneously determined that Arrington's disability claim was overpaid and that Defendants are not entitled to reimbursement of benefits already paid to Arrington. Defendants, in turn, seek an order requiring Arrington to reimburse them for the overpaid benefits. Presently pending before the Court are the parties' Cross-Motions for Summary Judgment. The Court held a hearing on the Motions on May 16, 2019. For the reasons set forth below, Defendants' Motion is GRANTED IN PART and DENIED IN PART, and Arrington's Motion is DENIED.


         I. The Policy

         Arlington is a Board-certified doctor of veterinary medicine who works as a staff internal-medicine specialist and the Medical Director for Beltway Veterinary Cardiology, Inc. ("BVC"). In addition to being BVC's Medical Director, Arrington owns 50 percent of BVC's shares. BVC has elected, for purposes of federal taxation, to be taxed pursuant to subchapter S of the Internal Revenue Code and so is an "S-corporation."

         BVC has sponsored a group employee benefit plan that provides long-term disability benefits for some of its employees. Beginning on November 1, 2007, BVC contracted with Union Security to administer the long-term disability benefit plan and underwrite and provide benefits pursuant to Policy No. G 5, 308, 504 (the "Policy"). The Policy is an employee welfare benefit plan governed by ERISA, 29 U.S.C. § 1002(1). Arrington is covered by the Policy.

         For employees eligible for benefits under the Policy, the Policy "pays a monthly benefit designed to partly replace income lost during periods of disability that result from injury, sickness, or pregnancy." Administrative Record ("A.R.") US000019, ECF No. 42. By the terms of the Policy, BVC gives "sole discretionary authority" to Defendants both to interpret the Policy's terms and to decide which claimants may receive benefits. Id. at US000032. For an employee deemed to be disabled, the amount of the monthly benefit is based on the claimant's monthly pay before becoming disabled ("Monthly Pay") and generally represents 60 percent of that calculated amount, but is offset by certain pay or benefits received during the period of disability, including retirement benefits or other disability benefits, and is subject to a maximum and minimum amount. The Policy requires the claimant to provide Defendants "with all of the information we specify as necessary" to determine if benefits are due, including "tax returns, business records," and "payroll and attendance records." Id. If a claimant received more or less than the benefit due under the Policy, the benefit is to be adjusted. In the case of an underpayment, the Policy requires Defendants to pay the claimant the difference between the amount originally paid and the amount that should have been paid. In the case of an overpayment, the Policy requires the claimant to reimburse Defendants by the amount overpaid. The Policy does not expire upon a particular date; rather, it terminates only upon certain conditions, such as nonpayment of premiums or notice of termination by the policyholder. The Policy does, however, permit Defendants to alter premium rates under certain circumstances but generally not more often than once per year.

         II. Initial Benefit Determination

         On March 9, 2015, Arrington filed a long-term disability claim under the Policy after a disability prompted her to reduce the number of days she worked and to transfer clinical duties to other members of BVC's veterinary team. On the claim statement, Arrington reported that she earned $5, 000 in salary on a biweekly basis and that she had a 50 percent ownership stake in BVC. On May 4, 2015, Defendants approved her claim, finding that Arrington had become disabled for purposes of the Policy in September 2014 and was due benefits retroactively, starting in December 2014. Although Defendants agreed to pay monthly benefits to Arrington, since her benefit would be calculated based on her pre-disability earnings, Defendants requested Arrington's 2013 tax records, including Internal Revenue Service ("IRS") Form W-2 and Schedule K-1 of IRS Form 1120S, and her pay stubs from September 2014 forward. In Schedule K-1 of IRS Form 1120S ("Schedule K-1"), an owner of an S-corporation reports the ordinary business income of the S-corporation, the owner's share of income, business deductions, and credits, including any distributions of cash the owner received from the S-corporation during the relevant tax year ("S-Corporation Distributions").

         Arrington sent Defendants her 2013 tax return and pay stubs on July 20, 2015. Defendants referred her claim to an outside accountant at CPA Risk Services, Inc. to calculate her pre-disability Monthly Pay and her benefit. The accountant, Judy Bogdanovich, reviewed the Policy and the submitted documents and found that Arrington was due the maximum benefit allowed under the Policy, $6, 000 per month, but also concluded that Arrington's Schedule K-1 was "needed to finalize the pre-disability Monthly Pay." Id. at US000405. Bogdanovich recommended that Defendants request Arrington's Schedule K-1 for 2013 and request that Arrington provide records relating to any S-Corporation Distributions she received from BVC after the onset of her disability. On August 19, 2015, Arrington sent to Defendants her 2013 Schedule K-1. On August 28, 2015, Defendants were informed by email that Arrington did not receive any S-Corporation Distributions from BVC after December 2014.

         Based on the additional information, Bogdanovich calculated that Arrington's total pay in 2013 was $200, 750, comprised of $130, 250 in wages and $70, 500 in S-Corporation Distributions reported in her Schedule K-1, resulting in a pre-disability Monthly Pay of $16, 729.16. Based on this pre-disability Monthly Pay and the payroll records attesting that Arrington's post-disability salary had decreased to $11, 083 per month for the period up to May 1, 2015, Bogdanovich calculated that the monthly benefit due to Arrington from December 2014 to May 1, 2015 was the maximum benefit of $6, 000 per month less an offset of $353.84. Because her salary was further reduced to $5, 416.67 per month starting in May 2015, she was entitled to the full maximum benefit of $6, 000 per month after May 2, 2015. Bogdanovich noted that the "above calculations would be impacted if the Insured received any distributions from the practice post-disability. The 8/28/15 email states that the Insured reports no distributions starting 12/2014." Id. at US000422. Based on the new calculations, Defendants determined that as of September 2015, Arlington had been underpaid by $30, 146.89. Defendants paid Arrington benefits based on these calculations.

         III. 2015 Overpayment Determination

         In March and May 2016, to ensure that they had correctly calculated the amount of Arrington's disability benefit, Defendants requested Arrington's 2015 tax returns. After learning that Arrington's tax information would be delayed because she had received a filing extension on her taxes, Defendants received a copy of her 2015 tax return on December 14, 2016. Arrington's Form W-2 showed that she had received $77, 500 in salary in 2015. Since Arrington had not provided a Schedule K-1, Defendants specifically requested it. On February 7, 2017, Arrington provided a copy of her 2015 Schedule K-1, which reflected that she had received $627, 500 in S-Corporation Distributions in 2015.

         Having received these 2015 tax records, Defendants again referred Arrington's claim to Bogdanovich for review. Bogdanovich found that although Arrington had previously informed Defendants that she received no S-Corporation Distributions from BVC after December 2014, she had in fact received $627, 500 in such distributions in 2015, which by itself was more than Arrington's pre-disability Monthly Pay. Therefore, these distributions fully offset her disability benefit. Defendants concluded that as a result, under the terms of the Policy, they should have paid her only the minimum monthly benefit of $100 for 2015 and had overpaid her benefits by $69, 846.16. On March 7, 2017, Defendants sent Arrington a letter and an email in which they requested reimbursement for the overpayment, detailed the Policy provisions and financial documents they had reviewed, and described how they had calculated the overpayment. Also in March 2017, Defendants stopped sending Arrington benefits under the Policy and began withholding benefits in order to recover the amount of the overpayment.

         IV. Administrative Proceedings

         In response, Arlington retained an attorney, who sent a letter on April 3, 2017 to Defendants contesting the overpayment. Defendants forwarded the letter to Bogdanovich and asked her to review Arrington's arguments and determine whether the pre-disability Monthly Pay had been correctly calculated. Bogdanovich maintained her prior determination, relying in part on informal guidance from Defendants, which predated Arrington's claim, that discussed how S-Corporation Distributions were to be categorized under the Policy. On May 4, 2017, Defendants sent Arrington a letter in which they reviewed and rejected her arguments and affirmed their decision, requested reimbursement of the alleged overpayment, and provided her with instructions on how to appeal the decision.

         In response to a request by Arrington, on October 5, 2017, Defendants asked Bogdanovich to provide any written documentation of the prior guidance she had received from Defendants that S-Corporation Distributions have been consistently included in a claimant's pre-disability Monthly Pay when the claimant is a principal of an S-corporation. Bogdanovich then located certain emails from September 2014 in which a Disability Claims Accountant on Defendants' staff told a CPA Risk Services accountant that Defendants had been treating S-Corporation Distributions as part of Monthly Pay pursuant to the definitions contained in the Policy.

         On October 26, 2017, Arrington filed her appeal of Defendants' 2015 overpayment determination. While the appeal was pending, in December 2017, Defendants confirmed with Connie Cardamone of CPA Risk Services that they had "been consistent" in instructing CPA Risk Services on how to calculate the Monthly Pay for principals of S-corporations under the Policy's language. Id. at US000108. Cardamone suggested that Defendants change their calculation methodology, but Defendants decided that a change was not warranted based on the "policy language." Id.; see Id. at US001344-45. On December 14, 2017, Defendants informed Arrington that they had denied her appeal and affirmed their initial determination that her 2015 benefits were overpaid.

         V. 2016 Overpayment Determination

         While Defendants and Arrington were communicating about the alleged overpayment for her 2015 benefits, Defendants sent her a letter on April 20, 2017 seeking her 2016 earnings information to evaluate whether they had correctly paid her benefits for 2016. Because Arrington had requested an extension on filing her 2016 tax returns, Defendants received her 2016 tax returns on October 26, 2017. The tax returns revealed that Arrington's salary had been further reduced to $49, 500 in 2016. Defendants again referred the tax documents to Bogdanovich, who recommended that Defendants request Arrington's 2016 Schedule K-1 to ascertain whether she had received S-Corporation Distributions from BVC that year. On November 16, 2017, Arrington sent Defendants her 2016 Schedule K-1, which showed that Arrington had received $833, 234 in distributions in 2016, which again exceeded Arrington's pre-disability Monthly Pay even without considering her wages. Based on these records, Bogdanovich stated that where the 2016 salary and S-Corporation Distributions surpassed Arrington's pre-disability Monthly Pay, she had suffered no "earnings loss." Id. at US001359. On February 7, 2018, Defendants informed Arrington that her 2016 disability benefits had been overpaid by $70, 800 and requested reimbursement for both the 2015 overpayment and the 2016 overpayment.

         On February 23, 2018, Arrington filed her Complaint in this Court pursuant to ERISA, 29 U.S.C. § 1132, appealing the partial denial of benefits for both 2015 and 2016. She requests a declaratory judgment that Defendants' overpayment determinations relating to her 2015 and 2016 disability benefits were erroneous and unreasonable and that she is entitled to the initially- calculated benefits. She also seeks injunctive relief, costs, and fees. Defendants then filed a counterclaim against Arrington seeking reimbursement for the alleged overpayments of her disability benefits.


         Both Arrington and Defendants seek summary judgment on their claims. Defendants argue that the Court should apply an abuse of discretion review to their benefits determination, and that under that standard, their determination was reasonable and thus must be upheld. They further assert that if the Court finds that their benefits determination was reasonable, they are entitled to judgment in their favor on their counterclaim. Arrington argues that the proper standard of review in this case is de novo, that Defendants' determination was contrary to the plain, unambiguous language of the Policy and thus erroneous, or, in the alternative, that the decision was an abuse of discretion. She further argues that judgment is not warranted on Defendants' counterclaim because they have not properly alleged a claim for equitable relief. While Arrington exhausted her administrative remedies only as to the 2015 overpayment determination, she asks the Court to ...

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