                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-27-2004

Post v. Kidspeace Corp
Precedential or Non-Precedential: Non-Precedential

Docket No. 02-4328




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                                                                  NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT


                                Nos. 02-4328 & 02-4402


                DAVID R. POST; CAROL A. POST, Husband and Wife,
          Individually and as Parents and Natural Guardians of Kristen M. Post,
                                                        Appellants at No. 02-4328

                                            v.

                             KIDSPEACE CORPORATION,
                                                Appellant at No. 02-4402


                     On Appeal from the United States District Court
                         for the Eastern District of Pennsylvania
                           D.C. Civil Action No. 01-cv-06112
                        (Honorable Franklin S. Van Antwerpen)


                  Submitted Pursuant to Third Circuit LAR 34.1(a)
                                October 29, 2003
       Before: SCIRICA, Chief Judge, NYGAARD and AMBRO Circuit Judges

                                 (Filed: April 27, 2004)




                               OPINION OF THE COURT


SCIRICA, Chief Judge.

       This is a cross-appeal from an order of summary judgment approving the

termination of plaintiff’s health care benefits. Although we disagree with the able
District Court on the appropriate standard of review, we agree with its interpretation of

the plan language. But we will vacate and remand to the District Court for further

development of plaintiff’s equitable estoppel claim.

                                              I.

       In 1993, plaintiff, Dr. David Post, was employed as a dentist by KidsPeace

Corporation. Thereafter, he and his family participated in the KidsPeace Health Care

Plan. In 1996, Dr. Post developed severe joint problems and was ultimately diagnosed

with irreversible arthritis.

       The KidsPeace Health Care Plan provides that termination is one of the five

enumerated ways an employee, the employee’s spouse and their dependents lose health

care benefits. The Plan provides:

       Coverage under this Plan for you and your covered dependents will
       terminate on the earliest of the following dates:

       1.      The date of the termination of the Plan, or the date the Plan ceases
               for the class of employees to which you belong; or

       2.      The last date of the month in which you cease to be actively at work
               as a full-time employee; or

       3.      The date an employee or dependent ceases to be eligible for coverage
               under the Plan; or

       4.      The date of entry to the military service of any country or
               international organization on a full-time active duty basis other than
               scheduled drill or other training not exceeding one month in any
               calendar year; and

       5.      The last day of the month in which an employee is terminated.

                                              2
       Cessation of active work shall be deemed termination of employment,
       except if an employee is not working because of an approved leave of
       absence, temporary layoff, or for illness or injury. Coverage will be
       continued during that time until discontinued by the Employer. (emphasis
       added).

       The KidsPeace Organization Employee Handbook, which Dr. Post received in

1993, contains the following language: “Status of Employment – When Long Term

Disability benefits take effect, employment with KidsPeace will be terminated.” 1

        The “Continuation of Coverage” section in the Health Care Plan states: “If you

become ineligible for coverage as the result of a change in your employment status, your

coverage ends the date of termination.” The section continues, “[a] covered spouse of an

employee may elect to continue coverage under the KidsPeace Corporation group plan on

a self-pay basis if they lose group health coverage for any of the following reasons: . . . 4.

the employee (spouse) becomes entitled to Medicare; . . . .”

       In 1996, KidsPeace distributed a newsletter to its employees announcing various

changes and enhancements to the Health Care Plan. The newsletter stated: “Health Care

Plan coverage has been extended to provide coverage for the entire length of continuous

disability. (Previously, coverage terminated after weekly disability income ended.).” In




   1
    We note that long-term disability benefits are separate from benefits under the Health
Care Plan. According to the employee handbook, long-term disability benefits provide
“55% of salary to a maximum of $5,000.00 per month.” JA 182a. Nothing in the sub-
section on long-term disability mentions health care benefits, which are addressed in a
separate sub-section of the handbook.

                                              3
September of 1997, KidsPeace issued to its employees a new Summary Plan Description.

An accompanying memorandum contained the following language: “Disabled Employees

(Effec. 08/96)–on medical leave with full medical benefits until recovery.”

       On October 23, 1998, two years after being diagnosed with arthritis and one year

after the Health Care Plan went into effect, Dr. Post went on short-term disability because

of his arthritis. When it became apparent that Dr. Post would not be able to return to

work, KidsPeace informed him that he would become eligible for long-term disability

benefits on April 21, 1999. Additionally, Dr. Post received Social Security Disability

benefits retroactive to April 1, 1999. He was notified by the Social Security

Administration that he would automatically become eligible for Medicare two years after

his social security benefits commenced, on April 1, 2001. During his disability, Deborah

Blaker, Senior Benefits Administrator of KidsPeace, and Dr. Post exchanged a series of

letters regarding the coordination of Medicare benefits and benefits under the KidsPeace

Health Care Plan.

       On October 26, 1998, Dr. Post wrote Blaker to inquire: (1) which employee

benefits would continue during his disability; and (2) what procedural responsibilities he

had to fulfill to secure the benefits. In this letter Dr. Post also wrote the following:

“When I spoke with you last week to discuss continuation of benefits during disability,

you informed me that KidsPeace would cover the cost of health insurance of my family

for as long as I remain disabled (unless Medicare benefits become effective).” On March



                                               4
18, 1999, the KidsPeace employee benefit department sent a letter to Dr. Post explaining

that when Dr. Post began to receive long-term disability benefits, his employment with

KidsPeace would be terminated. The letter noted that health care benefits would be

terminated only if: (1) the disability ended; (2) Dr. Post turned 65; or (3) Dr. Post passed

away. The letter did not say that health care benefits would be terminated upon Dr. Post’s

eligibility for long-term disability status or M edicare.

       On June 29, 1999, approximately two months after Dr. Post went on long-term

disability, his counsel wrote KidsPeace for clarification of the March 18th letter. On July

28, 1999, Blaker responded, stating that Dr. Post would no longer be eligible for

enrollment in the medical plan when he became eligible for Medicare. The letter also

stated that Dr. Post and his family could continue medical coverage through COBRA.

       In recognition of his receipt of Social Security Benefits, and eventual qualification

for Medicare benefits, Dr. Post wrote Blaker the following: “Therefore, I will

automatically become eligible for Medicare on April, 1, 2001. When I qualify for

Medicare benefits, I will most likely opt to continue the KidsPeace health Plan under the

COBRA provision. I would appreciate your forwarding me the appropriate forms for this

conversion.”

       Dr. Post became eligible for M edicare on April 1, 2001, at which time his health

care coverage under the KidsPeace Health Care Plan was terminated. On December 6,

2001, Dr. Post filed a claim with the District Court for the Eastern District of



                                               5
Pennsylvania under ERISA, 29 U.S.C. § 1332 et seq., seeking health care coverage under

the KidsPeace Health Care Plan, as it existed prior to the denial of benefits.

       Finding the terms of the Plan were too ambiguous to confer discretionary authority

on the Administrator with regard to the decision to terminate Dr. Post’s health care

benefits, the District Court applied a de novo standard of review. But the Court held that

the Plan terms authorized termination of Dr. Post’s medical benefits at the time Dr. Post

went on long-term disability, and granted summary judgment against Dr. Post on his

substantive claim. In reaching its decision, the District Court found no detrimental

reliance based on the March 18, 1999 letter. Both parties appealed. We have jurisdiction

to review the final order of the District Court under 28 U.S.C. § 1291.

                                             II.

       Our review of a summary judgment order is de novo. Curley v. Klem, 298 F.3d

271, 276 (3d Cir. 2002). We apply the same test employed by the District Court under

Fed. R. Civ. P. 56(c). Id. Accordingly, the District Court’s grant of summary judgment

was proper only if it appears “that there is no genuine issue as to any material fact and

that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).

                                            III.

       As a threshold matter, we must determine the proper standard of review under

ERISA. We exercise plenary review of the standard applied by the District Court. See

Gritzer v. CBS, Inc., 275 F.3d 291, 295 (3d Cir. 2002).



                                              6
       In Firestone Tire & Rubber Co. v. Burch, 489 U.S. 101 (1988), the Supreme Court

stated that “a denial of benefits challenge under § 1132(a)(1)(B) is to be reviewed under a

de novo standard unless the benefit plan gives the administrator or fiduciary discretionary

authority to determine eligibility for benefits or to construe the terms of the plan.” Id. at

115. Additionally, even if the plan at issue grants discretion, where a trustee fails to act

or exercise his or her discretion, de novo review is appropriate. Gritzer, 275 F.3d at 296.

Where the plan grants discretion, and it is exercised, the proper standard of review is the

more deferential arbitrary and capricious standard. Id.

       The District Court applied the de novo standard to the Administrator’s decision

because: (1) the Health Care Plan was vague and ambiguous regarding the grant of

discretion to the Plan Administrator; and (2) even assuming a grant of discretion, the Plan

Administrator did not make a discretionary determination. We cannot agree.

       To determine the proper standard of review, we begin with the language of the

plan. Luby v. Teamsters Health, Welfare & Pension Trust Funds, 944 F.2d 1176, 1180

(3d Cir. 1991). The KidsPeace Health Care Plan contains the following clause:

               Administration - The Plan Administrator is KidsPeace Corporation.
       . . . The Plan Administrator has the discretionary right to interpret the plan
       conditions. Determinations by the Plan Administrator are binding on all
       parties.

       The District Court found that two distinct meanings could be attributed to “plan

conditions,” thereby making the grant of discretion ambiguous. The court found that plan




                                              7
conditions could refer to the events or medical procedures that must occur before a claim

on the plan is triggered, or they could refer to the plan’s terms that limit liability.

       We find these meanings, in essence, identical. Plan conditions setting forth those

“events or medical procedures that must occur before a claim on the plan is triggered” are

sufficiently equivalent to “terms that limit the plan’s liability” to constitute a cognizable

grant of discretion to the Plan Administrator. 2

       The District Court also determined that the arbitrary and capricious standard

should not be applied because KidsPeace provided no explanation for the termination of

benefits and, moreover, no discretionary decision was made.3

        The correspondence between Blaker or KidsPeace’s Employee Benefits

Department and Dr. Post provided an explanation of the reasons that led to the denial of

   2
    We note as well that the discretion required to trigger the more deferential arbitrary
and capricious standard of review need not be explicitly stated in the employee welfare
plan or summary plan description, but may be implied from its terms. Marx v. Meridian
Bancorp, Inc., 32 Fed. Appx. 645, 649 (3d Cir. 2002). The statement in the Plan that
“[t]he Plan Administrator has the discretionary right to interpret the plan conditions”
supports the inference that KidsPeace intended to, and in fact did, reserve discretion
under the Plan.
   3
    Without a stated explanation for the denial of benefits, no interpretation exists on
which to confer deference. See Dewitt v. Penn-Del Directory Co., 106 F.3d 514, 520 (3d
Cir. 1997) (stating that arbitrary and capricious review will uphold “a plan interpretation
even if we disagree with it, so long as the administrator’s interpretation is rationally
related to a valid plan purpose and is not contrary to the plain language of the plan.”)
(emphasis added); see also 29 U.S.C. § 1133(1) (requiring that “[i]n accordance with
regulations of the Secretary, every employee benefit plan shall – (1) provide adequate
notice in writing to any participant or beneficiary whose claim for benefits under the plan
has been denied, setting forth the specific reasons for such denial, written in a manner
calculated to be understood by the participant . . .”).

                                                8
benefits. At a minimum, the record contains two letters from KidsPeace to Dr. Post in

which KidsPeace explains that Dr. Post will no longer be eligible for enrollment in the

Health Care Plan when Medicare benefits become effective. JA 219, 220.4

       As noted, the District Court determined that the Plan Administrator made no

discretionary decision. The first discretionary decision— that Dr. Post qualified for short-

term disability—was made by the third-party disability insurance carrier. The switch to

long-term disability then occurred either automatically or was made by another third

party. 5 At this point, under the language of the Plan, KidsPeace was authorized to end

benefits. See infra pt. IV. If Dr. Post’s entitlement to benefits under the Plan ended April

30, 1999—the last day of the month in which long-term disability benefits took

effect—then KidsPeace’s decision to continue providing health benefits under the Plan

for an additional twenty-three months until Dr. Post was eligible for Medicare constitutes

discretionary action on the part of KidsPeace.




   4
   The record also indicates that at some point prior to the letter he wrote on October 26,
1998, Dr. Post had been informed of KidsPeace’s interpretation of the Plan, namely that
under the Plan, KidsPeace was permitted to and would cease paying for Dr. Post’s
benefits at the time he became eligible for Medicare. JA 216.
   5
    The Handbook states, “when short term disability benefits are exhausted and the
employee can not return to work, ‘long term’ or ‘total disability’ will come into effect.”
JA 181a. Short-term disability can only last 26 weeks. Id. Blaker’s deposition is
somewhat unclear on whether this transition occurs automatically or at the discretion of a
third party. The resolution of this question does not influence our analysis of the standard
of review.

                                             9
       Consequently, we will apply an arbitrary and capricious standard, rather than a de

novo standard of review. Under this standard, a court may overturn KidsPeace’s

determination of Dr. Post’s ineligibility for continued benefits only if KidsPeace’s

decision was “clearly not supported by the evidence in the record or the administrator has

failed to comply with the procedures required by the plan. A court is not free to substitute

its judgment for that of the defendants in determining eligibility for plan benefits.”

Smathers v. Multi-Tool, Inc., 298 F.3d 191, 199 (3d Cir. 2002) (quoting Orvosh v.

Program of Group Ins. for Salaried Employees of Volkswagen of Am., Inc., 222 F.3d 123,

129 (3d Cir. 2000)). “Furthermore, whether a claim decision is arbitrary and capricious

requires a determination whether there was a reasonable basis for [the administrator’s]

decision, based upon the facts as known to the administrator at the time the decision was

made.” Id. at 199-200 (internal quotations omitted).

                                            IV.

       Applying a de novo standard of review to KidsPeace’s denial of Dr. Post’s

benefits, the District Court held that the Plan Administrator properly followed the terms

of the KidsPeace Health Care Plan and the KidsPeace Organization Employee Handbook

in terminating Dr. Post’s health care benefits following his eligibility for Medicare.

Although the terms of the Plan and supporting documents are not entirely clear, we agree

with the District Court that KidsPeace’s decision to end Dr. Post’s benefits when he

became eligible for Medicare is not arbitrary and capricious. Nevertheless, we will



                                             10
remand to the District Court for further development of Dr. Post’s equitable estoppel

claim.

         The KidsPeace Health Care Plan provides that termination is one of the five

enumerated ways an employee, the employee’s spouse and their dependents lose health

care benefits. The KidsPeace Organizational Employee Handbook, which Dr. Post

received, states that employment is terminated when long-term disability benefits take

effect.6 Therefore, it would appear that health benefits could have been terminated on the

last day of April 1999, the month in which Dr. Post went on long-term disability. But

KidsPeace continued benefits for almost two years until Dr. Post became eligible for

Medicare.

         The “Continuation of Coverage” section in the Health Care Plan could reasonably

be read to require KidsPeace to continue paying health benefits for Dr. Post’s family

members until Dr. Post became eligible for Medicare. A clause in this section states: “A

covered spouse of an employee may elect to continue coverage under the KidsPeace

Corporation group plan on a self-pay basis if they lose group health coverage for any of

the following reasons: . . . 4. the employee (spouse) becomes entitled to Medicare; . . . .”

Although this clause could be read to imply a conflict with the clause governing

termination of benefits, the continuation of coverage clause indicates that Medicare




   6
   As noted supra n.1, the record indicates that long-term disability benefits differ from
benefits under the Health Care Plan.

                                             11
entitlement does conclusively end any responsibility of KidsPeace to pay for health

benefits. We note as well, as the District Court did, that the opening sentence of the

continuation of coverage section does not support Dr. Post’s argument that the section

creates a conflict with the termination of benefits section of the Plan. This sentence

provides: “If you become ineligible for coverage as the result of a change in your

employment status, your coverage ends the date of termination.” As noted, eligibility for

long-term benefits terminates employment with KidsPeace.

       Dr. Post notes correctly that the KidsPeace Health Care Plan does not explicitly

identify long-term disability status or Medicare eligibility as an event that terminates

benefits. As noted, Dr. Post had been placed on long-term disability status and was

receiving Medicare benefits. Nonetheless, the terms of the Plan and the definition in the

employee handbook demonstrate that the Administrator’s decision to end benefits was not

arbitrary and capricious.

       Whatever ambiguity may exist in the KidsPeace Health Plan and its application,

we fail to see how the Plan language supports the extension of health care benefits

beyond Medicare eligibility to the lifetime benefits which Dr. Post seeks. As an example

of the Plan’s ambiguity, Dr. Post argues that the Health Care Plan does not allow a

disability to cause the employee’s termination, citing the following language in the

termination of benefits section of the Plan: “Cessation of active work shall be deemed

termination of employment, except if an employee is not working because of an approved



                                             12
leave of absence, temporary layoff, or for illness or injury. Coverage will be continued

during that time until discontinued by the employer.”

       But Dr. Post’s interpretation of this clause to preclude long-term disability status

from constituting termination directly contradicts the definition contained in the

Employee Handbook, which states that long-term disability status terminates

employment. The clause relied on by Dr. Post only delineates those situations that do not

automatically result in termination of employment. It does not bar KidsPeace from

terminating benefits in any of the conditions listed in the Plan. The exception announced

by this language is to the mechanical application of the termination policy, and does not

constitute a complete prohibition against terminating benefits for employees on long-term

disability. As KidsPeace argues in its brief, “[i]f KidsPeace had intended for the Plan to

provide coverage for disabled employees in perpetuity the Plan would have explicitly said

so.” In fact, the last sentence of this clause reads, “[c]overage will be continued during

that time until discontinued by the employer.” Therefore, the Plan specifically grants

KidsPeace the discretion to end benefits for an employee who has ceased active work due

to injury or illness.

       KidsPeace’s interpretation of its Plan satisfies the arbitrary and capricious standard

of review.7 Under this standard of review, the Plan Administrator’s decision to extend


   7
    Dr. Post argues that the District Court erred in failing to interpret ambiguities in the
Plan in accordance with the reasonable expectations of the insured under the principle of
                                                                                (continued...)

                                             13
benefits past long-term disability, and to terminate benefits at Medicare eligibility, was

reasonable.8

                                              V.

       The District Court raised the issue of equitable estoppel based on KidsPeace’s

erroneous interpretation in its March 18, 1999 letter, and found that no estoppel claim

could be established. The District Court found that equitable estoppel had no application

in this situation because: (1) the letter was corrected within three months; (2) Dr. Post did

not alter his actions in reliance on the erroneous letter; and (3) Dr. Post continued to

receive KidsPeace health care benefits for two years—until April 2001—so that no harm

in fact occurred. Two other non-Plan documents issued by KidsPeace—the 1996

newsletter and 1997 memorandum were not discussed. We will remand for further




   7
     (...continued)
contra proferentem. See Heasley v. Belden & Blake Corp., 2 F.3d 1249, 1257-58 (3d Cir.
1993). “Under that rule, if, after applying the normal principles of contractual
construction, an insurance contract is fairly susceptible of two different interpretations, . .
. the interpretation that is the most favorable to the insured will be adopted.” Id. at 1257
(internal quotations omitted). Because KidsPeace’s decision to end benefits at Medicare
eligibility was reasonable, we do not reach this issue.
   8
    We find as well that the two extrinsic documents pointed to by Dr. Post do not render
KidsPeace’s decision to end benefits at Medicare arbitrary and capricious in light of
language in the Plan and Handbook supporting its decision. This evidence may, however,
be considered in Dr. Post’s claim of detrimental reliance, discussed infra pt. V.

                                              14
development of Dr. Post’s estoppel claim based on these representations made by

KidsPeace.9

       An equitable estoppel claim is cognizable under ERISA. 29 U.S.C. § 1132(a)(3).

We have held that this section permits an ERISA beneficiary to recover benefits under an

equitable estoppel theory, upon establishing: (1) a material misrepresentation; (2)

reasonable and detrimental reliance upon the misrepresentation; and (3) extraordinary

circumstances. Smith v. Hartford Ins. Group, 6 F.3d 131, 137 (3d Cir. 1993).

       Dr. Post argues that further evidence is required on the question of whether he

detrimentally relied on misrepresentations in KidsPeace documents during the period

between his diagnosis and the time his injury became debilitating. Dr. Post claims that he

relied on misrepresentations by KidsPeace at a time when he could have investigated

other opportunities for insurance under plans which did not end benefits upon M edicare

eligibility. As support for his estoppel claim, Dr. Post points to two documents: A

KidsPeace newsletter from 1996 with the title “Important: Health Care Plan Changes,”

which noted, “Health Care Plan coverage has been extended to provide coverage for the

entire length of continuous disability. (Previously, coverage terminated after weekly




   9
    KidsPeace argues that Dr. Post failed to raise his estoppel argument in the District
Court, and therefore this argument is waived. See Gass v. Virgin Islands Telephone
Corp., 311 F.3d 237, 246 (3d Cir. 2002). Nonetheless, the District Court clearly
addressed the issue of detrimental reliance in its memorandum opinion. See Mem. Op., at
19 (“Yet, this grave error [March 18, 1999 letter] did not lead to Dr. Post’s reliance to his
detriment that would trigger estoppel as Plantiffs’ allege.”).

                                             15
disability income ended.);” and a September 8, 1997 memorandum accompanying the

Summary Plan Description that highlighted “changes and enhancements” to the Plan,

including the following: “Disabled Employees (effec. 08/96) - on medical leave with full

benefits until recovery.”

       Dr. Post claims that KidsPeace should be estopped from discontinuing his

coverage based upon these misrepresentations made before he became totally disabled.

We agree that this matter requires further factual development, and we will therefore

remand this issue to the District Court for further proceedings on the issue of whether Dr.

Post is entitled to benefits under an estoppel theory based on the KidsPeace newsletter

and memorandum.

                                           VI.

       For the foregoing reasons we will vacate the grant of summary judgment and

remand for further development of the record and consideration of plaintiff’s equitable

estoppel claim.




                                            16
