By: Mark Casciari and Michael Cederoth

Seyfarth Synopsis: The Court of Appeals for the Ninth Circuit recently rejected the application of the doctrine of equitable estoppel to prevent a plan trustee from enforcing the clear terms of the plan.  So, it bears repeating that drafters of ERISA plans are well advised to draft as clearly and carefully as possible.

In Wong v. Flynn-Kerper, 999 F.3d 1205 (9th Cir. 2021), an ESOP trustee sued to enforce the terms of the Plan. The operative Plan terms mandated that the Plan not pay more than fair market value for company stock, as determined at the time of the transaction by an independent appraiser. The Plan sought revision of a transaction where the Plan had promised to pay for stock, by alleging that the stock was overvalued.  The Plan claimed that the independent appraiser was unaware that the Plan sponsor was carrying substantial uncollectable debt and facing mounting attorney’s fees and administrative penalties.

The defendant holder of the promissory note attempted to invoke the doctrine of equitable estoppel to dismiss the claim, relying on a side agreement between the defendant and the trustee that affirmed an obligation to pay for the stock even if overvalued. The defendant thus argued that the Plan was equitably estopped from reducing the value of the note. The district court agreed and granted the defendant’s motion to dismiss.  The Ninth Circuit reversed, holding that the doctrine of equitable estoppel could not be invoked against an ERISA plan trustee to contradict the terms of the plan. Allowing the terms of the side agreement to prevail, the court stated, would plainly violate those Plan terms mandating that the Plan not pay more than fair market value. The Ninth Circuit thus joined the Fourth Circuit in barring the defensive use of equitable estoppel to contradict an ERISA plan’s express terms. See Ret. Comm. of DAK Ams. LLC v. Brewer, 867 F.3d 471 (4th Cir. 2017).

We note as well that the Ninth Circuit did not apply a wholesale ban on the application of equitable estoppel in ERISA actions.  Rather, the court said that equitable estoppel could apply if,  in addition to meeting the traditional elements of equitable estoppel, a party established (1) extraordinary circumstances, (2) that the provisions of the plan are ambiguous, and (3) that the representations made about the plan were an interpretation, and not a modification, of the plan.

Takeaway — We have previously discussed the importance of careful drafting of ERISA plans. See here and here. That admonition bears repeating. As the Supreme Court has stated:  “The plan, in short, is at the center of ERISA.” See US Airways, Inc. v. McCutchen, 569 U. S. 88 (2013). And even the Ninth Circuit agrees in Wong v. Flynn-Kerper.