Opinion
No. X04 CV 02 0103472 S
September 22, 2006
MEMORANDUM OF DECISION
The plaintiff Connecticut Education Association ("CEA") is a union representing public school teachers. It in turn has its own employees, who at all relevant times were themselves unionized. This case is about the advice which the CEA received when it sought to reduce its costs of providing its pension plan for its employees. The CEA claims that it received erroneous advice from the defendant Milliman USA, Inc. ("Milliman"), its actuarial consultant and plan administrator, and Sorokin, Gross Hyde, ("Sorokin") its pension plan attorneys. The advice resulted in financial harm to the CEA, it is claimed.
Two individuals attorneys, Barrie Wetstone and Sharon Kowal Freilich, were added to the action. The counts as to them were severed by agreement.
Three counts were tried in April 2006. The first count alleged professional negligence as to Milliman; the second, breach of contract as to Milliman; and the third, breach of contract as to Sorokin.
The post-trial briefing concluded on June 8, 2006.
The plaintiff agreed that summary judgment should enter in Sorokin's favor as to a count alleging negligence against Sorokin.
I find the following facts to be more likely than not true. Sorokin, or its predecessors, had served as attorneys for the CEA, advising as to pension plan and related matters, from about 1989 until it was replaced in 1998. Sorokin consists of attorneys engaged in the practice of law. At relevant times, Barrie Wetstone was the partner who handled the CEA account; Sharon Kowal Freilich was an associate who did much of the work and who also communicated with the client. Milliman, or its predecessors, served as actuaries and actuarial consultants since about 1988, and still served CEA in that capacity at the time of trial. Althea Schwartz was the Milliman actuary who handled the CEA account at relevant times.
Carol DeBarba testified at the trial. She was employed by the CEA as the director of administration and finance from 1993-2005. John Yrchik also testified; he was the CEA's executive director from 1995 to the present. Two unions represented employees of the CEA. The Connecticut Education Association Professional Staff Organization ("CEAPSO") represented professional employees covered by the pension plan. The Associated Staff Organization of the Connecticut Education Association ("ASOCEA") represented, not surprisingly, the "staff." The unions were parties to separate collective bargaining agreements. The benefits provided by the pension plan were subject to collective bargaining.
In 1995, the CEA became concerned about the rising costs necessary to fund the pension plan. One problem, though presumably not the only problem, was that more retirees than had been predicted were choosing the lump sum pension payment rather than monthly annuities. Eligible retirees, under the terms of the plan, were entitled to choose at the time of retirement whether they wished to receive their pensions in a lump sum or in periodic payments. In 1995, each form of benefit included a cost of living adjustment ("COLA") of two percent annually. The calculation of the benefit as to the annuity is quite straightforward. As to the lump sum payout, the computation conceptually required an estimate of the amount of payments which would have been made in the future had an annuity been chosen, taking the COLA into account. The total would then be reduced to present value by using a percentage discount figure. The discount figure involves the use of an assumption as to the income which could reasonably be expected to be generated by a particular lump sum. The higher the discount number used, the lower the lump sum required to generate the income over time. In any event one of the problems faced in 1995 was that an unexpected number of retirees were opting for a lump sum, which created a more immediate financial strain.
The actuarial report submitted by Milliman in September 1995, showed that increased contributions needed to be made to the plan to ensure solvency. The budgeted amount had been roughly $600,000 and the newly recommended amount was roughly $830,000. CEA's Board of Directors, at a meeting on October 14, 1995, voted to transfer money from other areas to provide additional funding to the plan.
Yrchik and DeBarba investigated ways to reduce the strain and invoked the aid of their advisers. On November 2, 1995, DeBarba faxed to Wetstone at Sorokin a list of potential changes to the plan and asked for advice as to whether the changes were permissible. The letter states that members of the CEA's Staff Personnel Committee ("SPC") had questions about the items and wanted guidance. The letter includes, among other items, question 2e: "Could the COLA be eliminated when a lump sum option is chosen?"
DeBarba recalls that she had discussed some of the items with Schwartz in this time frame as well. Schwartz denies that she had such contact, and has introduced billing records consistent with her recollection. In the view I take of the case, I need not resolve this difference of recollection. In this context, it is important to remember that many of the events took place more than ten years before trial, and recollections, as perhaps opposed to documents, fade over time.
Freilich at Sorokin worked on the issues presented in the letter and had at least one telephone conversation with DeBarba, as Freilich's handwritten notes appear on one version of the letter. She explained her opinion at some length at trial. The short answer appeared in the written response to the letter, over Wetstone's signature, dated November 28, 1995: the answer was that such a change would be permissible legally, so long as no participant's accrued benefit would be reduced or eliminated. This was the answer to all of the questions except number four, which inquired whether the discount rate could be increased unilaterally, that is, without collective bargaining, thereby lowering the lump sum payout. The letter further suggested that the CEA may want to confer with Althea Schwartz regarding the costs, or cost savings, of the various options.
Freilich, in about the same time frame, had been asked that question and responded that although it was not entirely free from doubt, the safe course would be to include the discount rate as a subject of collective bargaining. The then recent GATT (General Agreement on Tariffs and Trade) legislation allowed for the actuarial use of the higher discount figure, but this did not necessarily address collective bargaining.
At about the same time, on October 27, 1995, Wetstone, or perhaps Freilich under Wetstone's name, sent to DeBarba, with a copy to Schwartz, an article by Atty. Donald Wellington about COLA's in pension plans. One issue addressed was whether COLA's in pension plans could be reduced. It was clear that COLA's could not be reduced retroactively, though they apparently could be reduced prospectively. The article did not address the precise questions raised by the CEA, but a footnote (n. 22) raised the possibility that a participant might claim that one who opted for an optional form of benefit, such as a lump sum payout, was also entitled to the value of the automatic COLA which would have attached to the "normal" periodic payout.
The CEA sought advice in preparation for the upcoming negotiations with CEAPSO. A meeting was held on December 15, 1995, which was attended by DeBarba, Yrchik, Wetstone, Schwartz, and several others. Various options included in the "laundry list" of suggested ways to reduce costs were discussed. Schwartz obtained a copy of the "laundry list" and she saw a copy of Wetstone's letter indicating, inter alia, that it was permissible to eliminate the COLA on a prospective basis from the lump sum option. At or shortly after the meeting, Schwartz was asked to work on the costs of the various proposals; she sent thoughts along those lines to both Sorokin and CEA at about the time negotiations with CEAPSO began, in mid-January 1996. She worked up the proposals in a form intended to be shared with CEAPSO negotiators.
Yrchik sent to Wetstone a slightly modified "laundry list" the day before the December 15 meeting.
CEA disputes that Schwartz was aware of Sorokin's imprimatur at this time. I credit Schwartz' testimony and find it more likely true than not that she was aware of Sorokin's opinion. The basis is partly based on documents found in Schwartz' file, and it makes sense from the circumstances.
The COLA issue and the lump sum benefit question were subjects of negotiation. Apparently CEAPSO began with a position of asking for 3% COLA's as to both the lump sum and the periodic payment options. There were also other items for discussion on the table. Ultimately the CEA and CEAPSO agreed to amend the plan such that there was no COLA adjustment to the lump sum payout, but the CEA agreed to a 2 1/2% COLA provision if the retiree opted for periodic payments. In June Sorokin was asked to draft language so amending the plan, and it did so promptly. Milliman adjusted its projections; a primary consideration was the assumption that the plan would save money because fewer retirees would opt for the lump sum on retirement.
So matters continued until 1998. The Sorokin firm was terminated as attorneys for CEA at about the end of August 1998. The current dispute had nothing to do with the switch in legal representation. A new firm, Bredhoff Kaiser ("Bredhoff") of Washington, D.C., was hired. Bredhoff reviewed the plan and expressed no reservation about the inclusion of the COLA in the periodic benefit and the absence of the COLA from the lump sum option. After Bredhoff was hired, the second union, ASOCEA, negotiated its bargaining agreement and agreed to the same terms regarding COLA's. Bredhoff drafted the changes. Shortly thereafter Bredhoff submitted the plan to the Internal Revenue Service for its review as a precautionary measure, and the IRS gave a "clean" approval on March 31, 1999. All seemed well.
On April 19, 2001, Milliman's Schwartz faxed to CEA's DeBarba a "tidbit" concerning a recent federal case from the Eastern District of Massachusetts entitled Laurenzano v. Blue Cross and Blue Shield of Massachusetts, Inc. This case suggested that COLA's, as "accrued benefits," must be included in lump sum distributions when they were included in annuity payments. DeBarba did not initially think that the case controlled the CEA's plan, but she did refer the question to Bredhoff a month later, on May 23, 2001. On October 19, 2001, Bredhoff responded formally in writing to the inquiry and advised that the discrepancy in treatment was improper. It recommended reverting immediately to the 2% COLA as applied to both options. Apparently Bredhoff had responded earlier to the inquiry as well, as on October 12, 2001, the CEA's Board of Directors voted to amend the plan in order to revert to the 2% COLA for both options. On October 15 the CEA wrote letters to the unions summarizing the "mistake of law" and asked that the unions agree to the reversion. If they didn't agree, CEA planned to revert unilaterally.
Laurenzano v. Blue Cross and Blue Shield of Massachusetts, 134 F.Sup.2d 189 (D.Mass. 2001).
The unions did not agree and a complaint was filed with the National Labor Relations Board. While the matter was pending, the CEA decided to install temporarily a 2 1/2 % COLA as to both options to avoid problems. Later, the sides negotiated a 2% COLA regarding both options, which is essentially where the parties started. There is considerable disagreement over the amount of damages caused by the temporary increase in the COLA computation.
Other facts will be noted in the course of discussion of the specific issues.
1. Sorokin, the contract claim and the statute of limitations.
Sorokin claims that there was no mutual agreement as claimed by the plaintiff, and that to the extent the action against it is a tort action, it is barred by General Statutes § 52-577, the three-year limitation for tort actions. Although the remaining count against it is couched in contract language, Sorokin contends that the evidence does not support an action brought in contract. If a plaintiff claims that a professional in a contractual relationship with a client does not perform the contractual obligations carefully, the argument goes, as opposed to not performing them at all, then any remedy lies in tort. The plaintiff argues that the evidence supports a finding that Sorokin agreed to maintain the pension plan in good standing — a step beyond the usual legal undertaking — so that if the plan was not in fact in good standing, the contract was breached.
The plaintiff alleges a rather precise contractual agreement: that Sorokin "contracted with the CEA to provide the CEA with competent and professional legal services necessary and appropriate to maintain the [plan] in good standing under [the Internal Revenue Code and ERISA] and agreed, as part of said contract, to perform said services with due diligence and reasonable care." Amended Complaint, Count Three, ¶ 4. The CEA introduced evidence at trial tending to show that Sorokin deviated from the standard of care by, at a minimum, not advising CEA that the law as to the COLA situation was not clear. With that advice, CEA would have been in a position to make a decision based on a rational consideration of the various risks.
It is not necessary to examine the underlying legal situation in depth here. Suffice it to say at this point that Freilich read the Wellington article referred to above and she presumably was familiar with the Shaw and Hickey cases referenced. Those cases held, with some variations, that COLA adjustments could be accrued benefits which could not be eliminated retroactively. Freilich formed the opinion that the COLA benefit envisioned in this case was a "conditional COLA," because the lump sum benefit was an option which could be elected in the future by a retiree, but would not necessarily be chosen. Conditional COLA's were subject to a different analysis.
Stewart Lewis, an employee benefits lawyer from Washington, D.C., testified as an expert at the trial of this case. He testified that the COLA in issue was not "conditional," because its efficacy did not depend on an external event. At the least according to Lewis, the law was not clear. A COLA on a lump sum was an accrued benefit, at least for the period of time it was in effect. The lump sum amount was computed, in part, on the actuarial value of the annuity payments. If those payments were affected by COLA adjustments, and lump sum payouts were not, then the two options would have different values. According to Lewis, all option offered were to be "actuarially equivalent."
The question of who is "correct" need not be decided. What does matter is that Freilich considered the question with at least a modicum of care.
I am not persuaded by a preponderance of the evidence that the CEA and Sorokin entered into the agreement which has been alleged. There was no comprehensive written contractual agreement. Both sides testified that the CEA considered Sorokin to be its pension plan attorneys. In that capacity, Sorokin drafted amendments to the plan when requested, answered questions when asked, and occasionally sent materials to the client which it thought might be helpful or interesting. Although CEA personnel testified that their understanding was that Sorokin had undertaken to maintain the plan in good order — which undertaking would perhaps be one guaranteeing a specific result — I do not find proved the assertion that Sorokin in effect promised the specific result of the plan's being in compliance with all IRS and ERISA standards.
An examination of relevant case law illustrates the situation. As the plaintiff correctly asserts, it is not true that the only possible contract action against a professional lies in breach of a promise to secure a particular result. See Mac's Car City, Inc. v. DeNigris, 18 Conn.App. 525 (1989); Hill v. Williams, 74 Conn.App. 654 (2003); Rosato v. Mascardo, 82 Conn.App. 396, 410 (2004). In Mac's Car City, Hill and Dubreuil v. Witt, 80 Conn.App. 410, 430-31 (2003), the professional allegedly agreed to do a job and allegedly didn't do it. Typically, the courts have found the possibility of a contract action where an attorney agreed to represent a client and then did noting in furtherance of the representation, thereby harming the client by, for example, the entry of a default judgment. In our case, then, had Sorokin agreed to provide a draft of a plan, for example, and then not provided it and the client had been harmed as a result, a breach of contract action may have been well founded.
Westport Bank Trust Co. v. Corcoran, Mallin Aresco, 221 Conn. 490 (1992), mentions that the complaint in that action, which alleged negligent performance, included both contract and tort actions. The court's holding had nothing to do with the issue under consideration here.
There is ample authority to the effect that there can be a breach of contract and a tort alleged in the same set of operative facts. For example, if a law firm agrees to serve a cause of action on someone, and doesn't do so, it may well be liable under both theories. This proposition is not very helpful to the resolution of the questions presented in this case.
Where, however, a professional agrees to do a job and then performs the job, but in an imprudent manner, the remedy lies not in contract but in tort. In Caffery v. Stillman, 79 Conn.App. 192 (2003), the plaintiff claimed negligence and breach of contract where the attorney had allegedly agreed to pursue his client's rights vigorously and to provide accurate and competent advice. Id., 194. Although there are contract and tort claims that can co-exist in the same cause of action, the court held that breach of a promise to work diligently or in accordance with standards is not a contract claim, but rather sounds in tort. Id., 197. See also Alexandru v. Strong, 81 Conn.App. 68, CT Page 17401 79-80 (2004).
To the extent that the third count alleges that the legal services were not performed "with due diligence and with reasonable care," then, the claim functionally sounds in tort and is barred by the statute of limitations. I do not find that any more specific agreement was mutually agreed to. I find in favor of Sorokin, then, as to the third count, and judgment shall enter accordingly.
Even if the statute is tolled by application of the doctrine of continuous representation or course of conduct, the latest date on which the statute could begin to run is the date that Sorokin's services were terminated. Service was accomplished more than three years later, in March 2002; thus, any relevant tort statute of limitations would have run.
2. Milliman and the contract claim.
The second count of the amended complaint alleges that Milliman contracted with the CEA on or about 1988 "to provide competent and professional actuarial and consulting services necessary and appropriate to maintain the CEA Pension Plan . . . in good standing as a qualified defined benefit pension plan, under [the Internal Revenue Code and ERISA] and agreed, as part of said contract, to perform said services with due diligence and reasonable care." Amended Complaint ¶ 4. The count concludes that Milliman breached its agreement by (a) failing to provide competent and professional actuarial and consulting advice necessary to maintain the plan in good standing and did not perform with due diligence and reasonable care; (b) recommending that the COLA be provided only with regard to annuity payments and not with lump sum payouts; (c) approving such amendment when the provision was not compliant with the applicable codes; and (d) failing to advise CEA in a timely manner that the change was in violation of the codes.
Milliman asserted at trial and in briefs that it never agreed to provide legal advice and never did provide legal advice, nor could it ethically provide legal advice. Both sides offered evidence in an effort to show the scope of the advice which was offered. For example, Milliman sent to the CEA on a reasonably regular basis articles and regulatory information which Schwartz and perhaps others thought might be of interest to the CEA. Typically, those materials included the admonition to seek advice from plan attorneys before taking specific steps. There are several examples which are more directly relevant to the present controversy: Schwartz, for example, sent information regarding the Laurenzano case to DeBarba for her perusal, and then suggested that pension counsel, by that time Bredhoff, review the issue presented. The examples which occurred in the history of the relationship are useful not so much for their substance, but rather to gain some insight into the nature of the contractual relationship.
Schwartz testified that she felt confident in expressing legal opinions in the course of administering a plan if the applicable law was entirely settled. If there was any real uncertainty, however, she believed that she should defer to counsel and advise clients accordingly. This understanding is consistent with the opinion of Paul Zeisler, the expert actuary who testified on behalf of Milliman and whose testimony I credit. As a practical matter, there are professionals who provide services in law-related areas and are not lawyers; these professionals include accountants, insurance professionals, financial planners, human resources administrators and real estate professionals, to name but a few. Some advice in matters affected by legal considerations is inevitable, and accommodation for such advice is made. See, e.g., State Bar Association v. Connecticut Bank Trust Co., 145 Conn. 222 (1958). Thus, as in the hypotheticals posed to Zeisler, an actuary could advise a pension plan that it could not raise the retirement age in a plan from 62 to 82, because such action would clearly violate ERISA. Similarly, an actuary could ethically provide advice that a plan could increase a benefit. The question of the COLA differential, on the other hand, was in a gray area and, if no attorney had already been consulted, the actuary should counsel a client to consult with its attorney before taking action. On legal issues, all agreed, the standard of care provided for deference to the advice of counsel if such advice was offered. The above analysis is consistent with ethical codes governing the actuarial profession.
The CEA contends that Milliman's advice need not necessarily be categorized as "legal." Rather, it simply gave advice in the course of its acting as the actuarial consultant and plan administrator. The CEA points to a memorandum of understanding which DeBarba requested from Schwartz regarding, inter alia, the scope of the services provided by Milliman. The memorandum was drafted for presentation to the pension trustees in November 1995. Included in the "Actuary's Responsibilities" were the duties of preparing the plan's financial reports and individual reports for retirees, recommending changes in actuarial assumptions, "consulting advice as needed," and keeping current on regulatory changes and so informing the employer and trustees, and making recommendations about plan changes that may be needed to keep the plan in compliance. Milliman stressed that the memorandum must be considered in the overall context of the actuarial, as opposed to legal, representation. The CEA contends that if Schwartz gave the opinion as claimed, it may well not matter for the purpose of this case if ethical standards were violated or customary actuarial roles exceeded.
There may be a significant difference between making recommendations regarding compliance — which may be contingent on outside legal advice — and actually keeping a plan in compliance.
The dispositive question is not the theoretical role of the actuary or the perhaps loosely worded language of the memorandum. It is, rather, what advice was actually given by Schwartz in this matter. Recollections differed, and to an extent this decision relies on the persuasion burden.
Much of the more generalized evidence may be useful in attempting to determine what advice was more likely than not rendered.
It is clear, to begin with, that the CEA, Sorokin and Milliman worked together to try to keep the plan affordable and compliant. DeBarba appeared to be an unusually bright and proactive administrator who was very much involved in the workings of the plan, and from time to time took the initiative in implementing discussion and change. In any event, I find the following scenario more likely than not true.
The plan, as noted above, experienced financial strain in 1995. In the fall, Milliman had sent the budgetary information showing a need for significantly greater finding. Prior to November 1995, DeBarba testified that she had conversations with Schwartz in which Schwartz recommended eliminating the COLA as to lump sum payouts. Schwartz denies making such a recommendation, and billing records tend to support Schwartz' version — though more casual "brainstorming" conversations may have occurred. The first document referring to eliminating the COLA is a faxed letter from Yrchik, perhaps "ghosted" by DeBarba, to Wetstone at Sorokin; question 2e inquires whether the idea of eliminating the COLA for lump sum payouts is legally permissible. Although the letter indicates that the Staff Personnel Committee at the CEA raised that and other questions, it may be that the questions were not in fact raised by the SPC. In any event, the letter does not refer in any way to Milliman, nor was the letter copied to Milliman. Meanwhile, however, on about November 8, DeBarba and Schwartz were corresponding back and forth about the financial situation and the actuary's responsibilities.
Sorokin's response to the November 2 fax, it will be recalled, was sent on November 28. Freilich approved of the suggestion, with the caveat that it could not be imposed with retroactive impact. The Staff Personnel Committee met on December 15, with attorneys and Schwartz present. There, if not before, Schwartz saw the list of suggestions and Sorokin's limited imprimatur. Schwartz was asked to "cost out" the various suggestions and responded with a more formal letter to the CEA on January 15, 1996. This letter was copied to Wetstone. During the course of union negotiations Schwartz from time to time provided input as to the costs of various proposals.
I conclude that the plaintiffs have not proved that Milliman "recommended" or "approved" the COLA amendment, nor that it breached any contractual duty by not advising CEA that the amendment was in violation of any regulatory provision. The contractual duty primarily was actuarial. To the extent that the agreement between the parties extended to regulatory advice, that duty did not extend to offering legal opinions on "gray areas" and the course of dealing between the parties so suggests: even if suggestions were made, the suggestions were not to be implemented without legal advice. The mutual agreement at most imposed on Milliman a duty to consult and to make recommendations regarding compliance, with the further understanding that in regulatory legal matters the CEA should refer to counsel. This is precisely what occurred. There was no breach: Milliman simply did not contradict Sorokin.
I do not find proved that Schwartz formally recommended the amendment to DeBarba prior to the submission to Sorokin. Even if she did, it must have been with the caveat, implicit or otherwise, that legal advice be sought. Legal advice actually was sought well before the plan was implemented. The plaintiffs have not proved that Milliman had the duty, contractual or otherwise, to contradict Sorokin, especially if the legal situation was other than crystal clear. The consensus of opinion testified to in this matter was that the area was a grey area, at least before Laurenzano. When Laurenzano was decided, it was Milliman who brought it up as a possible problem and, according to custom, recommended referral to counsel. I find that no contractual duty, as alleged, was breached by Milliman.
3. Milliman and the professional standard of care.
The first count of the complaint alleges a professional negligence count against Milliman. The parties appear to agree that in order to prevail on a professional negligence claim, the plaintiff has the burden to prove the standard of care, deviation from the standard of care and harm caused as a result. The plaintiff presented as an expert witness one Barry Cohen, a consulting actuary from Massachusetts. Cohen's testimony was, to be charitable, unpersuasive. Among other problems, he had no knowledge of the substance of the Sorokin advice, and his understanding of the standard of care was sketchy at best. He did, however, opine that Milliman deviated from the standard of care by not suggesting that the CEA seek legal advice in the course of its January 15, 1996, letter, which included reference to the elimination of the COLA for lump sum payouts. In the broad sense, this opinion is consistent with the testimony of Zeisler, the expert actuary produced by Milliman. The difficulty with Cohen's position was that the CEA already had consulted with counsel, and that everyone involved knew what counsel's opinion was. Cohen conceded that Milliman would have met the standard of care if it had recommended consultation with counsel. Because this is what had happened, I find there is no credible testimony supporting the conclusion that Milliman violated the standard of care.
Subparagraph (a) of paragraph 16 of the second count, which alleges breach of contract, claims that Milliman failed to provide competent advice and did not perform its services with reasonable care. According to the authority cited in connection with the claim against Sorokin, this claim is really founded in tort.
Even if it had violated the standard of care, there is no persuasive evidence as to causation. If the proper actuarial conduct is to seek the advice of counsel, and we know that the plan counsel approved the elimination of the COLA, then there would appear to be no harm caused by the claimed deviation from the standard of care.
I find, on the other hand, that Zeisler's testimony was most persuasive. His familiarity with the subject area was impressive. He was one of the authors of the relevant national standards. His position was simple and logical: the actuary's primary job is to supply financial information and predictions based on reasonable assumptions. To the extent the actuary offers advice as to compliance with regulatory provisions, she is to refer the client to counsel if the issue is other than cut and dry. The actuary may not second guess the advice given by counsel if the issue is referred. The standard of care was precisely followed in this case.
Finally, the CEA claims that even if Milliman did not originally have the duty to render correct legal advice, it had the duty to be careful in the course of rendering advice which it volunteered. It cites to Coville v. Liberty Mut. Ins. Co., 57 Conn.App. 275, 281 (2000). Although the context of Coville is considerably different from that in this case, I assume that the proposition advanced is true. Nonetheless, Milliman did not assume any standard of care which it subsequently violated.
Judgment shall enter in favor of Milliman.