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Leah A. Bilyeu v. Morgan Stanley Long Term

June 20, 2012


Appeal from the United States District Court for the District of Arizona Susan R. Bolton, District Judge, Presiding D.C. No. 2:08-cv-02071-SRB

The opinion of the court was delivered by: Fisher, Circuit Judge:



Argued and Submitted August 29, 2011-San Francisco, California

Before: Raymond C. Fisher and Johnnie B. Rawlinson, Circuit Judges, and Otis D. Wright, II, District Judge.*fn1

Opinion by Judge Fisher; Partial Concurrence and Partial Dissent by Judge Rawlinson


Leah A. Bilyeu appeals the district court's dismissal of her claim challenging the termination of her long-term disability benefits under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132. Bilyeu also challenges the district court's grant of summary judgment in favor of First Unum Life Insurance Company (Unum) on Unum's counterclaim for restitution of overpaid benefits. We have jurisdiction under 28 U.S.C. § 1291, and we vacate and remand.

We vacate the judgment in favor of Unum on Bilyeu's claim for denial of benefits. We hold that the district court abused its discretion by dismissing this claim for failure to exhaust administrative remedies. The exhaustion requirement should have been excused because Bilyeu acted reasonably in light of Unum's ambiguous communications and failure to engage in a meaningful dialogue.

We also vacate the judgment in favor of Unum on Unum's counterclaim for reimbursement of overpaid long-term disability benefits. Unum has not shown that it is seeking equitable relief because it has not satisfied the elements for an equitable lien by agreement, which is the only form of equitable relief Unum has asserted. These elements are not satisfied because the particular fund subject to the lien, having been dissipated, is no longer in Bilyeu's possession. Unum thus seeks only the imposition of personal liability against Bilyeu, to be paid out of her general assets. That is quintessentially legal, rather than equitable, relief.


Bilyeu was employed by Discover Financial Services from 1987 through April 2004. Compl. ¶ 8. Morgan Stanley Long-Term Disability Plan (the Plan) provides benefits for long-term disabilities to Discover employees. Id. ¶¶ 4-5. Unum is the Plan's claim administrator, and also the insurer and payor of Plan benefits. Id. ¶¶ 6-7.

Alleging she suffered from several medical conditions that prevented her from materially performing the duties of any occupation, Bilyeu filed a long-term disability (LTD) claim with Unum in April 2004. Id. ¶¶ 9-10. These conditions included Behcet's disease, fatigue and anxiety. Id. ¶¶ 12-18; Clerk's Record 13-2 at 3. Unum approved the claim in October 2004. Compl. ¶ 11. Under the Plan, benefits for disabilities arising from mental illness are limited to 24 months. Id.

¶ 19. Unum concluded that Bilyeu's disability was subject to the mental illness limitation. Id. Bilyeu disputed that conclusion. Id. ¶¶ 12-20.

Nearing the 24-month deadline, Dr. Sharon Hogan, a medical consultant for Unum, called Bilyeu's treating physician, Dr. Kenneth Proefrock, to discuss her medical condition. Clerk's Record 15.1 at 5-7. On December 6, 2006, Dr. Hogan sent a summary of the conversation to Dr. Proefrock, asking him to respond within 10 business days if he believed the letter inaccurately summarized their conversation. Id. at 6. The letter reflected disagreement between Dr. Hogan and Dr. Proefrock regarding the nature of Bilyeu's limitations. Dr. Hogan believed "Bilyeu's fatigue in large part arises from her anxiety and depression, since her Behcet's is not very active." Id. at 6. It was Dr. Proefrock's opinion, however, "that her fatigue is mainly physical." Id. Dr. Hogan also believed that Bilyeu "should have full-time sedentary work capacity," an assessment with which Dr. Proefrock disagreed. Id. at 5; Clerk's Record 13-2 at 3.

On December 27, 2006, Unum sent Bilyeu a termination of benefits letter. Clerk's Record 13-2. Unum terminated benefits under the Plan provision limiting disability benefits due to mental illness to 24 months. Id. at 3. The letter reported that, although "fatigue can result from Behcet's, . . . your anxiety and depression are the more likely causes of your fatigue." Id. It said, "because your claim is subject to a 24 month mental [illness] limitation and we have now provided 24 months of benefits, we will stop paying benefits on your claim as of December 03, 2006 and your claim will be closed at this time." Id. at 4. The letter also recorded Unum's conclusion that "you have full time sedentary work capacity" and thus "no longer meet the definition of disability from a physical perspective." Id. The letter noted Dr. Proefrock's contrary determination that Bilyeu was unable to return to work. Id. at 3.

The letter then advised Bilyeu:

If you have additional information to support your request for disability benefits, it must be sent to my attention for further review at the address noted on this letterhead, within 180 days of the date you receive this letter.

However, if you disagree with our determination and want to appeal this claim decision, you must submit a written appeal. This appeal must be received by us within 180 days of the date you receive this letter.

Id. at 4. The "address noted on this letterhead" was:

First Unum Life Insurance Company The Benefits Center PO Box 100158 Columbia, SC 29202-3158 Phone: 1-800-858-8843 Fax: 1-800-447-2498 Id. at 1.

After receiving Unum's termination of benefits letter, Bilyeu asked Dr. Proefrock to respond to the letter. Compl. ¶ 22. Dr. Proefrock did so, writing a letter to Unum on April 19, 2007. Id. ¶ 23. Dr. Proefrock's letter was addressed "To Whom It May Concern" and, it appears, faxed to 1-800-447-2498 - the number listed in the letterhead of Unum's December 27, 2006 termination of benefits letter as the place to send "additional information to support your request for disability benefits." Clerk's Record 15-1 at 2-4.

Unum construed Dr. Proefrock's letter as "new information," but concluded that it did not "change [the] prior decision" to terminate benefits. Id. at 9. Unum, however, never communicated this conclusion to Bilyeu or, for that matter, contacted Bilyeu or Dr. Proefrock at all in response to the letter. Compl. ¶ 27.

In November 2008, Bilyeu filed a complaint against Unum, alleging that Unum wrongfully terminated benefits under the 24-month mental illness limitation because "[t]he substantial weight of the medical opinion contained in the claim file reasonably supports a finding that [her] disability is not due to 'mental illness,' rather, it is due to an autoimmune condition which was exacerbated by anxiety and mental/emotional stressors in [her] life." Id. ¶ 20. The complaint sought a reinstatement of benefits under 29 U.S.C. § 1132(a)(1)(B). Id. at ¶ 44.

Unum filed an answer and a counterclaim. In its counter-claim, Unum sought reimbursement of overpaid long-term disability benefits. Unum alleged that it had paid Bilyeu LTD benefits subject to her promise to reimburse Unum for any overpayment arising from her receipt of disability benefits from any other source, including social security disability benefits. Answer and Counterclaim ¶¶ 5-10. Bilyeu subsequently received an award of social security benefits, resulting in an overpayment of LTD benefits in the amount of $36,597.82. Id. ¶¶ 11-12. Unum's counterclaim sought to recover the overpayment from Bilyeu. Specifically, Unum asserted a claim for equitable relief under ERISA, 29 U.S.C. § 1132(a)(3), as well as a claim for breach of contract. Id. at 7-8.

Unum then moved to dismiss Bilyeu's denial-of-benefits claim for failure to exhaust administrative remedies. Clerk's Record 13. In that motion, Unum contended that the December 2006 termination of benefits letter required Bilyeu to file a written appeal within 180 days, which she failed to do. Id. Unum thus sought dismissal of Bilyeu's claim. The district court granted the motion, concluding that Bilyeu failed to exhaust administrative remedies and dismissing Bilyeu's claim with prejudice. Clerk's Record 21 at 7.

Unum then filed a motion for summary judgment on its counterclaim for reimbursement of overpaid benefits. Clerk's Record 28. Unum argued that it was entitled to relief under ERISA because it "has an equitable lien by agreement over the long-term disability benefits that it overpaid to Bilyeu." Id. at 1. Bilyeu opposed the motion, arguing that Unum could not satisfy the requirements for an equitable lien by agreement because it could not establish that the overpaid LTD benefits remained in her possession. Clerk's Record 30 at 2. The parties stipulated that, by the time Bilyeu was awarded social security benefits, "she had dissipated at least a portion of her LTD benefits." Joint Statement of Facts ¶ 15. The district court granted Unum's motion, and it directed the clerk of court "to enter judgment in the amount of $36,597.82 in favor of [Unum]." Clerk's Record 32 at 6.

The court entered judgment and Bilyeu timely appealed. Clerk's Record 33, 35.


The district court dismissed Bilyeu's denial-of-benefits claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Both parties, however, have relied on matters outside the pleadings. Consistent with circuit practice addressing exhaustion, we construe Unum's motion as an unenumerated motion to dismiss. In addressing that motion, a court may look beyond the pleadings and decide disputed issues of fact. See Payne v. Peninsula Sch. Dist., 653 F.3d 863, 881 (9th Cir. 2011) (en banc); Wyatt v. Terhune, 315 F.3d 1108, 1119-20 (9th Cir. 2003). We review for an abuse of discretion a district court's refusal to grant an exception to ERISA's exhaustion requirement. See Barboza v. Cal. Ass'n of Prof'l Firefighters, ...

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