Denial of Attorney Fees Ruled an Abuse of Discretion

A district court “abused its discretion” when denying attorney fees to a plaintiff under the Employment Retirement Income Security Act, the U.S. Court of Appeals for the Second Circuit held.

The circuit found that the lower court “committed an error of law” by not granting fees to a man who won long-term disability benefits for the depression he suffered over the feel and sound of his prosthetic aortic valve.

John Donachie, an employee of FleetBoston, had surgery in 2001. He suffered the unanticipated side effect of feeling and hearing the compressions of the valve with each beat of his heart—a sound others could hear as well.

His cardiologist testified the noise from the device caused Donachie “a great deal of anxiety” that led to physical and mental exhaustion from lack of sleep and left him unable to do his job. A psychiatrist ultimately diagnosed him with major depression.

Donachie’s claim for short-term disability benefits was approved by Liberty Life Assurance in July 2003 but his application for long-term disability (LTD) benefits was denied five months later.

He sued in the Eastern District in 2004, where the case dragged on for years because of discovery disputes, extension requests and reassignment to a new judge.

Summary judgment motions were briefed in 2008, and in March 2009, Magistrate Judge Arlene Rosario Lindsay (See Profile) recommended denying Liberty’s motion for summary judgment. Judge Roslynn Mauskopf (See Profile) awarded summary judgment to Donachie but denied him fees under ERISA, 29 U.S.C. §1001.

Judges Jose Cabranes (See Profile), Susan Carney (See Profile) and Christopher Droney (See Profile) heard oral arguments on Jan. 29, 2014 in Donachie v. Liberty Life Assurance Co., 12-2996-cv.

In an opinion released Tuesday, Cabranes wrote that Mauskopf was correct to find that denying long-term disability benefits was arbitrary and capricious because “Liberty ignored substantial evidence from Donachie’s treating physicians that he was incapable of performing his current occupation, while failing to offer any reliable evidence to the contrary.”

But Cabranes took issue with the district court’s denial of fees—a decision Mauskopf said she made because the plaintiff had “failed to show any bad faith by Liberty’s administrator in making its LTD benefits determination.”

After the U.S. Supreme Court’s decision in Hardt v. Reliance Standard Life Ins. C., 560 U.S. 242 (2010), Cabranes said, “whether a plaintiff has obtained some degree of success on the merits is the sole factor that a court must consider in exercising its discretion” to award fees under ERISA.

He said Hardt made clear that courts retain discretion to consider other factors (known in the Second Circuit as the Chambless factors), including “the degree of opposing parties’ culpability or bad faith”; whether a fee award would deter others from acting similarly in another case and “the relative merits of the parties’ positions.”

“Although the District Court had discretion to consider whether the Chambless factors provided a particular justification for denying Donachie attorneys’ fees, it misapplied that framework,” Cabranes said. “It originally denied attorneys’ fees on the sole basis that Liberty had not acted in bad faith.”

The point, Cabranes said, was that a party doesn’t have to prove bad faith in order to deserve an award of attorneys’ fees.

The district court did not consider culpability, which is distinct from bad faith, he said, and it also did not address the “relative merits” of both sides’ positions.

“By inadequately addressing these two important factors and, instead, treating the absence of bad faith as the most salient factor, the District Court committed an error of law, and, therefore, ‘abused its discretion’,” Cabranes said.

Therefore, with no “particular justification” for denying Donachie fees and “persuaded that awarding attorneys’ fees in the circumstances presented furthers the policy interest in vindicating the rights secured by ERISA” the court remanded Donachie’s case with an instruction to award him fees.

Michael Mongelli of Flushing argued for Donachie.

Michael Zaretsky of Chorpenning, Good, Carlet & Garrison argued for Liberty.

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