Attorneys’ Fees Available Under Correct Application Of Five-Factor Test, Second Circuit Rules

An insured covered under an employer-sponsored long-term disability insurance plan could recover attorneys’ fees because he was successful on the merits in his lawsuit against the plan administrator, and the lower court misapplied the legal framework when evaluating his eligibility for those fees, the Second Circuit ruled, vacating and remanding the lower court’s ruling in part. The case is Donachie v. Liberty Life Assurance Company of Boston, (Nos.12-2996-cv (Lead) and 12-3031 (XAP)).

Background. John J. Donachie was unable to return to his regular work schedule at a financial company on account of increased anxiety caused by a side effect from aortic valve replacement surgery. Following the surgery, Donachie could hear and feel the prosthetic valve’s compressions. Although his cardiologist believed the surgery was successful, the doctor opined that the prosthetic’s noise caused anxiety, which led Donachie to suffer physical and mental exhaustion from lack of sleep, rendering him unable to perform his current job. Donachie’s treating psychiatrist concurred that the prosthetic’s noise significantly contributed to his work-related anxiety and diagnosed him with “major depression.”

Donachie attempted to recover long-term disability benefits under his employer-sponsored plan administered by Liberty Life Assurance Company of Boston but was denied coverage. The plan administrator relied upon its own psychiatrist, who reviewed the medical file and the treating psychiatrist’s records but did not speak with either Donachie or his psychiatrist.

Benefits denial. The Second Circuit affirmed the lower court’s sua sponte grant of benefits coverage to Donachie, concurring that the plan administrator’s determination denying benefits was arbitrary and capricious. Specifically, the plan administrator ignored substantial evidence that Donachie was unable to work and failed to offer any reliable evidence to the contrary. Accordingly, Donachie was entitled to summary judgment.

Attorneys’ fees. The Second Circuit concluded that the lower court abused its discretion when it denied attorneys’ fees to Donachie because the court had misapplied the Chambless five-factor test. Under ERISA, courts are permitted to award attorneys’ fees and costs. Supreme Court precedent clarifies that some degree of success on the merits is required for a beneficiary to be eligible to receive attorney fees and is the only factor that must be considered by a court exercising discretion. Additionally, courts retain discretion to consider five other factors, which include the degree of the opposing parties’ culpability or bad faith and the relative merits of the parties’ positions. The Second Circuit stated that there was no doubt that Donachie, as the prevailing party, could recover attorneys’ fees.

However, the Second Circuit explained that district courts do not have unbridled discretion when considering factors beyond “success on the merits.” Courts that choose to consider additional factors may apply the Chambless or an equivalent factor test—but the reviewing court must apply the five-factor test consistent with case law and cannot select some factors while ignoring others.

The lower court erred when it denied the award of attorney fees on the sole basis that the plan administrator had not acted in bad faith. The Chambless factor at issue requires consideration of the degree to which the plan administrator was culpable or acted in bad faith, which are distinct concepts. Additionally, the lower court failed to consider the “relative merits” factor, which favored Donachie. Applicable case law holds that those two factors, although not dispositive, do weigh heavily in the evaluation. Because the lower court’s focus on the bad faith element was an error of law, its decision was an abuse of discretion.

Therefore, the denial of attorneys’ fees was vacated and the issue was remanded to the lower court to award Donachie reasonable attorneys’ fees.

Visit our News Library to read more news stories.