Free Response to Motion - District Court of Colorado - Colorado

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I N T HE U NITED S TATES D ISTRICT C OURT F OR T HE D ISTRICT O F C OLORADO

Civil Action No. 2003-cv-02344 RPM-MJW CLEMENT J. DeFRANCESCO, JR. Plaintiff, vs. UNUM LIFE INSURANCE COMPANY OF AMERICA, a Maine corporation, Defendant.

DEFENDANT UNUM'S RESPONSE IN OPPOSITION TO PLAINTIFF'S MOTION FOR ISSUANCE OF A CONTEMPT CITATION
Defendant UNUM Life Insurance Company of America ("UNUM"), through its attorneys, Holland & Hart
LLP ,

hereby respectfully submits this Response in Opposition

to Plaintiff's Motion for Issuance of A Contempt Citation. I. INTRODUCTION

Plaintiff attempts to twist the words of UNUM's counsel at oral argument into an absurdity: That counsel waived the right to offset any future benefit liability by the amounts which UNUM previously overpaid Mr. DeFrancesco (an overpayment well in excess of $40,000.00). Plaintiff would have this Court believe that, despite the fact that Mr. DeFrancesco died owing UNUM such a significant amount, UNUM's counsel

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actually agreed to paying Plaintiff even more money, without any regard to offsetting the previous overpayment. Plaintiff completely confuses UNUM's right to assert a counterclaim for affirmative relief under F ED . R. C IV . P. 13--which UNUM waived--with UNUM's assertion of a set-off or "recoupment" defense under Rule 8(c)--which UNUM did not waive. Plaintiff's argument also runs completely contrary to the principles that waiver must be knowing and intentional, and that any supposed waiver by counsel must be unequivocal and unambiguous. UNUM did not waive its right to offset any future benefit liability to Plaintiff by the amount of remaining overpayment. UNUM acted completely in accordance with the statements of its counsel, and the Court's Order based thereon. Plaintiff's current uncalled-for Motion must therefore be denied. II. A. FACTUAL BACKGROUND

The Governing Employee Benefit Plan

The following facts are important to an understanding of the current dispute. This statement of facts is based upon previous Court proceedings and rulings, and therefore (unless otherwise indicated) is believed by UNUM to be undisputed. Mr. DeFrancesco was formerly employed by Anheuser Busch Company, and a participant in a long-term disability benefit plan (the "Plan") sponsored by the Fort Collins Brewery Workers. UNUM insured benefits under the Plan, and made decisions concerning claims for benefits, under Policy No. 342493 (the "Policy"). The Policy was originally issued on June 15, 1989.

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For a disabled Plan participant, the Plan provided monthly benefits in the amount of 50% of a claimant's qualified monthly pre-disability earnings. However, benefits were subject to a number of reductions. Most importantly, benefits were to be reduced by "other income benefits" received by a claimant, including "[t]he amount of disability or retirement benefits under the United States Social Security Act," and "amounts received under any state workers' compensation law." However, the receipt of Social Security disability benefits (or any other type of "other income benefits") would reduce Plan benefits only if "payable as a result of the same disability . . .." The Policy was amended effective October 1, 2001. The amended Policy provided discretionary authority for determining benefits and interpreting the Plan. However, as the Court pointed out at the hearing on cross-motions for summary judgment, the amendment also raised the basic benefit under the Plan from 50% to 60% of qualified pre-disability earnings. The provision for benefit reduction based on "other income benefits" remained essentially unchanged. B. Plaintiff's Claim for Plan Benefits, and Social Security Disability Benefits.

Plaintiff commenced a claim with the Social Security Administration to receive Social Security Disability Income ("SSDI") benefits. His initial claim was denied on December 13, 1999. A few weeks later, on January 3, 2000, Plaintiff applied for benefits under the Plan, claiming to have been disabled as of February 4, 1999 as a result of orthopedic problems. UNUM approved Plaintiff's claim for benefits, and calculated his basic monthly benefit to be $1,768.87. From this, UNUM deducted the monthly amount of

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$345.82, based on Plaintiff's receipt of workers' compensation benefits. However, UNUM did not make any deduction for SSDI benefits, because Plaintiff's claim for such benefits had been denied. After offset, UNUM paid Plaintiff a monthly benefit in the amount of $1,423.05. Plaintiff continued to appeal the denial of SSDI benefits. On January 17, 2002, a Social Security Administration ALJ reversed the denial, and awarded SSDI benefits to Plaintiff in the monthly amount of $1,456.00. Plaintiff also received a lump sum payment of benefits retroactive to March 3, 1999. UNUM became aware of the SSDI award in mid-2002. By virtue of Plaintiff's receipt of SSDI payments from March 1999 to June 2002 (when UNUM recalculated benefits based upon the SSDI award), UNUM should have paid Plaintiff only a minimum contract benefit of $176.88. 1 Thus, taking into account all offsets (and giving Plaintiff credit for the portion of his SSDI award that was paid in attorneys' fees), UNUM had overpaid Plaintiff by $44,986.52. C. Offset of Plan Benefits to Recover Overpayment; Mr. DeFrancesco's Death

The Plan allowed UNUM to recover overpayments by withholding any benefits due until full recovery of the overpayment. Thus, UNUM ceased making benefit payments in approximately June 2002. By the time of Plaintiff's death on March 19,
1

The Plan provides that a claimant shall receive a minimum amount of 10% of his basic monthly benefit. This provision would have been invoked because, after application of SSDI and workers' compensation offsets, Plaintiff would have received less than 10% of his basic monthly benefit of $1,768.87. However, in the event of overpayment, the Plan also provides that the minimum benefit may be withheld to recover such overpayment.

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2005, the overpayment had been reduced to about $43,000.00. At that point, no further benefits were due on account of Plaintiff's death, and UNUM's only option for recovering the remaining overpayment would have been to assert a claim against Mr. DeFrancesco's estate. Until the hearing on summary judgment in this matter, UNUM had not considered the fact that, when the Policy was amended in October 2001, the basic benefit percentage was raised from 50% to 60%. Even at the higher benefit level, however, benefit payments would have been withheld to recover the outstanding overpayment. Based on the 60% benefit level, if benefits had been calculated correctly beginning in October 2001, the overpayment at the time of Mr. DeFrancesco's death still would not have been eliminated, but it would have been reduced to approximately $30,000.00. D. The Summary Judgment Hearing, and UNUM's Waiver of Overpayment Claim

Previously in this litigation, Plaintiff claimed that UNUM was not entitled to take the SSDI offset because it was not based on the "same disability" as was the basis for benefit payments under the Plan. The parties cross-moved for summary judgment, and the Court held a hearing on the cross-motions on October 12, 2005. At the outset of the hearing, the Court inquired into UNUM's possible assertion of a claim for overpayment: THE COURT: I thought there was a claim back for overpayment, too.

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MR. BEAVER:

Your Honor, there is. There was an approximately $43,000 overpayment, and UNUM has elected not to pursue that.

Exhibit K 2 (Hearing Transcript) at p. 3, lines 10-14 (emphasis added). At that point, UNUM's counsel believed that the obligations of the parties had become "fixed" as of the date of Mr. DeFrancesco's death. Exhibit L (Declaration of Michael S. Beaver) at ¶ 2. Because, in view of his death, there were no additional payments due to Mr. DeFrancesco, UNUM's only avenue to recover the remaining overpayment would have been a claim for relief against the estate (which probably would have to be asserted in state court estate proceedings). Id. UNUM's counsel further understood the Court to be inquiring only as to whether UNUM would assert an affirmative claim for relief to recover remaining overpayments. Exhibit L at ¶ 3. UNUM waived such a claim. 3 Later in the hearing, the Court noted the difference in benefit percentages between the old Policy and the amended Policy. Exhibit K at p. 5, lines 10-14. UNUM's counsel indicated that he previously was not aware of the benefit percentage difference in the amended Policy, and had not considered the issue. Id. at p. 7, lines 10-23; see also Exhibit L at ¶ 4. After the Court noted the benefit percentage difference, the following colloquy occurred: Exhibits A-E were used during summary judgment briefing; UNUM uses exhibit designations "F" through "L" in this Response to avoid confusion with earlier exhibits. Plaintiff's counsel never raised the issue of a higher benefit percentage in any way prior to the summary judgment hearing. In particular, Plaintiff's counsel did not raise the issue in his extended appeal concerning the overpayment and offset issue.
3 2

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THE COURT:

. . . [I]f I were to agree with the Defendant's position on that, and also affirm the setoff decision in July, and if it is the fact, as I think it is, that the benefits under the amended policy are different that from the I think it's 60 percent instead of 50 percent, you'd go back and apply that to what the claimant--or what the insured received from the date of the amendment? Absolutely, your honor. If there's been some kind of calculational-- Yes. -- absolutely, it would be corrected. It would be very small, because as a result of these offsets, Mr. DeFrancesco was entitled to receive, if anything, only a minimum contract benefit. So we'd be talking only a few dollars a month.

MR. BEAVER:

THE COURT: MR. BEAVER:

Exhibit K at p. 34, lines 1-15 (emphasis added). UNUM's counsel did not understand the Court to be ordering that any recalculated amount be simply paid without further consideration of offsets. Instead, UNUM's counsel understood the Court to require that the higher benefit percentage be applied (the Court's term) to the calculation of what, if anything, would be due to Plaintiff. UNUM's counsel indicated that this would be done. At that point, in the middle of oral argument, it was not possible for UNUM's counsel to run an "on the fly" calculation to determine whether there might be additional dollars due after applying the higher percentage. Exhibit L at ¶ 5. Indeed, as noted, UNUM's counsel had not even previously considered this possibility. However, UNUM's counsel did note that there were multiple offsets to be considered, and the result of the new calculation might result in no amount due to Plaintiff. Id.

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On October 18, 2005, the Court entered an Order granting UNUM's Motion for Summary Judgment, and denying Plaintiff's cross-motion. The Court found that UNUM was entitled to apply the SSDI offset, because it had paid benefits based on the "same disability" as was the basis of Plaintiff's SSDI claim. The Court also ordered that UNUM "recalculate the amount of monthly benefits owed to Mr. DeFrancesco, offset by the award of [SSDI], under the terms of the amended Policy with an effective date of October 1, 2001, and the difference between this recalculated amount and the amount already paid to Mr. DeFrancesco shall be paid to his Estate." Three days later, UNUM complied with the Court's Order. UNUM recalculated benefits, and UNUM's counsel wrote to Plaintiff's counsel about the recalculation on October 21, 2005. Exhibit F. UNUM stated that the higher benefit amount was still not enough to overcome the offset to which UNUM was entitled to recover the remaining overpayment balance. This was in complete compliance with the Court's Order. The Order required UNUM to recalculate "under the terms of the Amended Policy." The Amended Policy provided that UNUM was entitled to reduce or withhold benefit payments to recover an overpayment. Thus, UNUM's calculation was performed under the terms of the Amended Policy. Plaintiff's responded about three weeks later, on November 13, 2005. Exhibit G. Plaintiff's counsel took the position that UNUM had waived its right to offset any benefit payments in connection with the outstanding overpayment balance of over $43,000.00, and suggested that "clarification from the Court" might be needed.

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UNUM's counsel responded on November 15, 2005, attempting to correct Plaintiff's assertion that UNUM had waived not only the right to make an affirmative claim, but had also waived the right to offset benefit payments in order to recover the overpayment. Exhibit H. Two months later, On January 23, 2006, Plaintiff's counsel wrote again to UNUM's counsel, indicating for the first time that he would assert that UNUM was in "contempt" of the Court's Order. Exhibit I. UNUM's counsel asked for clarification as to what Plaintiff's counsel asserted the "contempt" to comprise. Exhibit J. Plaintiff's counsel then filed the current Motion. III. A. ARGUMENT

UNUM Assserted, and Never Waived, A Right of Offset With Respect to Any Future Benefit Liability It Might Have to Mr. DeFrancesco.

In its initial Answer in this case, UNUM asserted the following "Ninth Defense:" "[A]ny benefits sought by Plaintiff would be subject to offsets and deductions as set forth in Plan documents and the policy, including (without limitation) offsets and deductions applicable to any overpayments, Social Security Disability Income payments, workers' compensation benefits, or retirement income received (or to be received) by Plaintiff." Answer, filed January 26, 2004, at p. 17. UNUM never waived this Defense at any time in this case. In fact, neither Plaintiff nor the Court ever asked UNUM about this Defense. To the contrary, UNUM's counsel was asked only about waiver of a claim to recover any remaining overpayment. The law well-recognizes the affirmative defense of "recoupment," sometimes referred to as setoff or offset--the notion that a defendant's liability may be reduced or

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eliminated by amounts that may be owed by the plaintiff arising from the same subject matter. E.g., Davis v. Odeco, Inc., 18 F.3d 1237, 1246-47 (5th Cir.), cert. denied, 513 U.S. 819 (1994); Chicago Great Western Ry. Co. v. Peeler, 140 F.2d 865, 868 (8th Cir. 1944). Such a defense must be pleaded under F ED . R. C IV . P. 8(c). E.g., Midamerican Communications Corp. v. US West Communications, Inc., 857 F. Supp. 772, 773-74 (D. Colo. 1994) (Babcock, J.); Regency Communications, Inc. v. Cleartel Communications, Inc., 304 F. Supp. 2d 1, 6-7 (D.D.C. 2004); see also 61A A M . J UR . 2d Pleading, § 370. A defense is to be distinguished from an "affirmative" claim for relief, such as a counterclaim. E.g., 6 Wright, Miller & Kane, F EDERAL P RACTICE AND P ROCEDURE , §1407 (counterclaim seeks "affirmative relief"). The courts have expressly held that, even where a defendant cannot pursue a counterclaim (i.e., because of applicable statutes of limitations, or federal preemption), the defendant can still defensively offset amounts owed to him by the plaintiff. E.g., Distribution Services, Ltd. v. Eddie Parker Interests, Inc., 897 F.2d 811, 812-13 (5th Cir. 1990) (defense of damages offset allowed, even where affirmative claim for relief would have been barred); Norwalk Cove Marina, Inc. v. S/V Odysseus, 64 Fed Appx. 319, 321 (2nd Cir. 2003) (defense of offset allowed even where affirmative counterclaims had been dismissed); Lago & Sons Dairy, Inc. v. H.P. Hood, Inc., 892 F. Supp. 325, 337 (D.N.H. 1995) (defendant could assert amounts owed by plaintiff as a defense, even where counterclaim was barred); UNUM's affirmative claim to recover overpayments was extinguished by voluntary waiver. However, as clearly established above, UNUM's defense of offset is distinct from, and survives the extinguishment of, the right to affirmative relief.

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Neither UNUM nor its counsel waived any right of offset with respect to the substantial sum UNUM overpaid to Mr. DeFrancesco. UNUM waived only the right to affirmatively state a claim for the amount remaining after offset. In granting summary judgment for UNUM, the Court necessarily held that UNUM was entitled to offset SSDI payments against any Plan benefits, in accordance with the Policy. The Policy allows UNUM to offset any benefits due to recover overpayments. Exhibit A (submitted with UNUM's Motion for Summary Judgment) at pp. UASP 10031, 10043. UNUM had previously done so with respect to Mr. DeFrancesco, and he never contested this. UNUM, by express assertion of its Ninth Defense, and by its unchallenged conduct of offsetting payments to recover the overpayment to Plaintiff, plainly preserved the right to recover by offset. UNUM took this unchallenged, undisputed offset into account in calculating benefits after the entry of the Court's October 18, 2005 Order. Thus, UNUM is in no way in contempt of Court. B. UNUM's Counsel Did Not Effect A Waiver of UNUM's Right to Offset.

At the summary judgment hearing, UNUM had had no occasion to apply the higher benefit percentage pointed out by the Court. Until that time, UNUM's counsel was unaware of the issue. Despite the fact that he had received the amended Policy almost one year prior, Plaintiff's counsel never raised the issue of the higher benefit percentage. Effective waiver is the intentional surrender of a known right. E.g., Universal Resources Corp. v. Ledford, 961 P.2d 593, 596 (Colo. App. 1998). A person

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supposedly waiving a right "must have had full knowledge of the facts concerning such waiver." Adams v. Paine, Webber, Jackson & Curtis, 686 P.2d 797, 801 (Colo. App. 1983), aff'd, 718 P.2d 508 (Colo. 1986) (emphasis added). "[A]n effective waiver requires voluntary action based upon knowledge of the consequences." Id. (emphasis added). Further, when a waiver is supposedly committed by counsel for a party, the courts have held that it must be unequivocal and unambiguous. E.g., Crowe v. Coleman, 113 F.3d 1536, (11th Cir. 1997) (waivers made in oral argument "need to be unambiguous"); Glick v. White Motor Co., 458 F.2d 1287, 1291 (3d Cir. 1972) ("to be binding, judicial admissions must be unequivocal"). In addition, where a supposed waiver is made during oral argument, consideration must be given to the extemporaneous nature of such proceedings, in which misunderstandings may arise. As the United States Supreme Court has stated, "[w]e are loath to attach conclusive weight to the relatively spontaneous responses of counsel to equally spontaneous questioning from the Court during oral argument." Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 170 (1972). UNUM's counsel clearly did not waive the defense of offset. Such a waiver would have to have been intentional, unequivocal, and unambiguous. However, no defense of offset was even discussed by UNUM's counsel, let alone waived. UNUM's counsel clearly did not intend, and did not have authority, to waive the offset defense. Further, even under Plaintiff's strained interpretation of the words of UNUM's counsel, it cannot be said that counsel acted knowingly. As set forth above, UNUM's

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counsel was not even aware, at the time he expressed UNUM's waiver of its affirmative right to a counterclaim, that UNUM had a remaining right of offset, because he did not believe that UNUM owed any further payments to Mr. DeFrancesco. Thus, because any supposed "waiver" was not knowing, it cannot be effective. Finally, it would be completely unjust to attribute a broad waiver to UNUM's counsel, in view of the spontaneity of oral argument. UNUM's counsel had not previously contemplated a possible recalculation of benefits, and could not possibly have run such recalculation in his head while he stood at the lectern during oral argument. Exhibit L at ¶¶ 5-6. For these reasons, it is clear that UNUM's counsel did not intend, and did not effectuate, a waiver of UNUM's right to offset any remaining benefit liability by deducting amounts by which it overpaid Plaintiff. Thus, Plaintiff's current Motion must be denied. IV. CONCLUSION

Plaintiff's position simply turns the equity of all of this on its head. Plaintiff asserts that UNUM's counsel, in response to unanticipated developments at oral argument, unwittingly and implicitly agreed that UNUM, having already overpaid Mr. DeFrancesco by over $40,000.00, should now pay his estate even more money, increasing the net overpayment. After Mr. DeFrancesco's death, UNUM could have asserted a counterclaim seeking to affirmatively recover against the estate the amount of remaining overpayment. Although it had the right to do so, UNUM--in a gesture of good will and humanity--chose not to.

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Now, Plaintiff seeks to seize upon and exploit UNUM's good will by asserting that UNUM waived much more than was stated or intended. This is simply unfair, unintended, unjust, and contrary to both fact and law. Plaintiff's Motion for Issuance of A Contempt Citation must be denied. WHEREFORE, Defendant UNUM Life Insurance Company of America respectfully prays that this Court enter an Order denying Plaintiff's Motion for Issuance of A Contempt Citation, and further that this Court award UNUM its attorneys' fees incurred in opposing such Motion. Dated: February 14, 2006. Respectfully submitted, s/ Michael S. Beaver Michael S. Beaver Holland & Hart LLP 8390 East Crescent Parkway, Suite 400 Greenwood Village, CO 80111-2800 Telephone: 303-290-1600 FAX: 303-290-1606 E-mail: [email protected] Attorneys for Defendant UNUM Life Insurance Company of America

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C ERTIFICATE O F S ERVICE I hereby certify that on February 14, 2006, I electronically filed the foregoing with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: David M. Herrera [email protected] s/ Michael S. Beaver Attorney for Defendant Holland & Hart LLP 8390 East Crescent Parkway, Suite 400 Greenwood Village, CO 80111-2800 Telephone: 303-290-1600 FAX: 303-290-1606 E-mail: [email protected]

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