• Third Circuit Rules That Administrator of Welfare Benefit Plan Abused Discretion in Denying Claim for Benefits Under Program Following Sale of Business
  • November 4, 2010 | Author: Kari Knight Stevens
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • In Howley v. Mellon Financial Corporation, the U.S. Court of Appeals for the Third Circuit held that an employer, which sold a subsidiary, must pay severance benefits under a ­welfare benefit plan, to a former employee who was terminated just one day after the change of ownership transaction was completed. Prior to the sale, Mellon provided a Displacement Program to employees. Mellon’s Displacement Program is a welfare benefit plan subject to the requirements and protections of ERISA. The Displacement Program states that it is “intended to help displaced employees ‘bridge the gap’ between periods of employment or retirement income.” The program provided a “sale of business exception,” whereby an employee is ineligible for severance benefits if his/her employment with a Mellon subsidiary is terminated due to Mellon’s sale of the subsidiary to a company that provides comparable employment. One day after Mellon sold the ­subsidiary, the acquirer—who committed to providing comparable employment to over 3,600 acquired employees—­terminated 100 former Mellon employees. Shortly thereafter, one of the 100 terminated employees filed a claim for benefits under Mellon’s Displacement Program.

    The plan administrator determined that the “sale of business” exception applied and denied the claim. In denying the claim, the administrator relied upon a “snap shot” approach. Under the “snap shot” approach, the plan administrator concluded that the “sale of business” exemption applied because the former employee received comparable employment at the time the change of ownership transaction was completed.

    While the court observed that the use of the “snap shot” approach is permitted, the court noted that use of such an approach does not relieve the Plan Administrator of its duty to ascertain whether the broader purpose of a particular welfare program is satisfied. Since the buyer did not continue the employment of the transferred employees for a reasonable period of time, the court concluded that such temporary employment did not satisfy the Displacement Program’s intended purpose of “bridging the gap.” As stated by the court, “[a]dministering benefits in a way that controverts a plan’s stated purpose, renders plan language meaningless, and creates benefits that can exist only on paper, is unreasonable.”

    Comment: Plan Administrators evaluating welfare benefit plans subject to ERISA must be mindful of both the text and broader purpose of the plan. Employers conducting trans­actions implicating these types of plans should consult with an attorney prior to making a determination about whether a particular provision or exception applies to that specific transaction.