Court Finds Pension Overpayment Traceable, Recoverable

March 31, 2003 ( - An employer who, in a good faith mistake, overpaid pension benefits to a former employee can recover the overpayment as an equitable remedy, since it was able to trace the funds to a specific source.

>The US District Court for the Northern District of Illinois held that, although the former employee claimed that she no longer had the overpayment in her possession, “It is undisputed that the alleged overpayment was disbursed into an IRA,” and since funds were subsequently disbursed from that account to a make a downpayment on a house, “the overpayment is thus attributable to the house.”  

>Although the pension plan at issue did not clearly set out the employer’s right to recover overpaid benefits, “society’s reasonable expectations would be frustrated” by allowing the employee to keep the overpayments, District Judge Elaine L. Bucklo said, also noting that the employee “would be unjustly enriched by allowing her to retain overpaid benefits to which she was not entitled.”

Case History

>Elizabeth Jarvis worked for Lumenite Control Technology Inc. from September 1992 until she resigned in March 1999. In May 1999, Lumenite paid Jarvis $13,878 from Jarvis’s pension account, followed by another $22,271 in January 2000.   In September of that year Lumenite discovered that it overpaid Jarvis, who the firm says was entitled to only about $8,000 in benefits.   In October Lumenite attempted to recover the overpayment, but Jarvis refused, claiming that the funds from the overpayment were no longer in her possession.

>However, the court found that Jarvis had placed the entire January 2000 distribution into an IRA that was later cashed out to pay for a down payment on Jarvis’s house.   “Because the alleged overpayment is potentially traceable to Ms. Jarvis’ home, and if so, Lumenite could seek a constructive trust in a share of it, this action can be considered one for equitable relief,” the court said. The court then noted that once Lumenite provided the court with clear evidence that the overpayments went into an IRA that was used to pay for Jarvis’s house, Lumenite could collect its overpayment.

Detrimental Reliance

>Additionally, the court rejected Jarvis’s argument that Lumenite was estopped from collecting the overpayment because Jarvis allegedly relied on Lumenite’s calculation to her detriment because she cashed out the IRA and incurred approximately $10,012 in taxes and penalties. “[H]olding Lumenite to its mistaken calculation of Ms. Jarvis’ benefits would not avoid injustice. To the contrary, it would further it,” the court said.

>In addition, the court found that the employer did not violate the Employee Retirement Income Security Act’s notice and disclosure requirements when in 1999 it responded to the employee’s request for a benefit statement by providing her with account information dating back to 1997.

>The court also tossed a counterclaim by Jarvis against her former employer that Lumenite violated its reporting and disclosure duties under ERISA when, on Jarvis’s request for her most recent benefit statement, Lumenite in 1999 gave Jarvis a 1997 benefit statement.   The court found that the 1997 statement was the most up-to-date statement of Jarvis’s benefits.

The case is Lumenite Control Technology Inc. v. Jarvis, N.D. Ill., No. 01 C 3445, 3/25/03.