Ninth Circuit Holds Res Judicata Does Not Bar LTD Claim Despite Prior Adverse Judgment

Here’s a spicy memorandum disposition from the Ninth Circuit on res judicata in an ERISA disability suit.

• ERISA in Practice: Many disability insurance cases include a short- and long-term disability component. Each claim is governed by different plan terms or insurance policies. Applicants can make a critical error in failing to apply for LTD benefits separately from STD despite an early STD denial. Claimants can sometimes argue that further administrative steps are “futile,” but on the wrong facts this can risk losing access to benefits for failure to meet “proof of loss” requirements.

• The Law: For as long as there have been courts, there has been the problem of what to do about claimants who bring successive lawsuits on the same issue.

  • The principle of “res judicata” or “claim preclusion” dates to Roman law. It bars re-litigating a claim already decided by a prior court.

  • In federal practice, claim preclusion “applies when there is: (i) an identity of claims between the prior and subsequent actions; (ii) a final judgment on the merits; and (iii) identity or privity between the parties.”

• The Facts: Kayle Flores was a nurse impaired by Cushing’s disease.

  • She applied for STD coverage with Life Insurance Company of North America (LINA) and was denied. She sued for benefits and won.

    • Her Complaint included a “successive benefits” claim for LTD asserting she was entitled to LTD coverage and benefits as a natural consequence of being entitled to the STD.

    • The court found that Flores had failed to separately apply for LTD benefits and through counsel had “declined” to have LINA evaluate her LTD eligibility.

    • It held Flores was not entitled to LTD benefits as she had failed to abide by the LTD “proof of loss” requirement, prejudicing LINA. It rejected Flores’s “futility” argument because the STD and LTD policies had differing definitions “Disability.”

  • Flores then submitted an application for LTD benefits which LINA denied on the basis of Flores I. She sued again.

    • The District Court dismissed, applying res judicata because “the Court’s original ruling was a decision on the merits based on [Flores’s] failure to timely comply with the proof of loss provision of the policy, and [the] new suit seeking entitlement to LTD benefits would impair the rights established in a suit that found Plaintiff was not entitled to LTD benefits.”

    • Flores appealed.

• The Holding: The Ninth Circuit held Flores I did not bar the application and claim.

  • Applying the rule that “res judicata does not apply to events post-dating the filing of the initial complaint,” it reasoned that LINA had not denied the LTD claim until April 2022 and therefore Flores’s LTD cause of action had not “accrued” until then and could not have been brought when her operative complaint was filed in January 2021.

  • By footnote, it emphasized that the district court’s decision on LINA’s “prejudice” was not preclusive because it was based out of LINA’s lost opportunity to evaluate the LTD claim and Flores had cured the prejudice by subsequently applying.

• The Dissent: Judge Collins saw things differently.

  • “The district court in Flores I applied California's "notice-prejudice rule" and held that Flores's failure to timely present her LTD benefits claim, as required under the policy, had resulted in actual prejudice to Defendant and thereby established a defense to liability for Flores's claim of LTD benefits.”

  • He criticized the majority decision for ignoring that Flores II arose from the same “nucleus of fact” and instead “mistakenly” relied the rules applied for determining when a claim accrues for statute of limitations purposes.

  • “All of this is wrong. … whether the statute of limitations had technically begun to run when Flores asserted her LTD benefits claim in Flores I cannot alter the fact that she actually did assert her LTD benefits claim in Flores I and it was rejected on the merits. . . . Having litigated and lost her LTD claim on the merits in Flores I, Flores cannot create a new "claim" simply by filing a formal LTD claim with Defendant. The majority's allowance of such an evasion of the Flores I judgment is all the more inappropriate given that the Flores I court found that Defendant was prejudiced by Flores's failure to provide timely proof of loss.”
    
    It may well be that the judgment in Flores I was wrong. But Flores did not appeal from it, and preclusion doctrines ‘prevent[] relitigation of wrong decisions just as much as right ones.’”

• The Bottom Line:

  • Flores I strongly suggests Flores would have been found entitled to benefits under the LTD policy if she applied and substantively litigated that claim, leaving the Court of Appeals with a sympathetic claimant whose administrative decisions while represented proved disastrous in court.

  • Flores pleaded her LTD claim in Flores I and it’s hard to fault LINA for standing by that (seemingly) binding determination under res judicata law.

  • The underlying administrative issue of a claimant not applying for LTD after STD denial and then asserting “futility” after retaining counsel comes up a lot. When I was defense counsel we would sometimes write letters strongly encouraging STD plaintiffs to apply for LTD to avoid timeliness problems and “failure to exhaust” issues. This claimant could well have been awarded benefits in Flores I but for refusing to complete ERISA’s administrative requirements.

  • The decision seems a fair candidate for rehearing or en banc review, though it is a memorandum disposition and will not be precedent in the Ninth Circuit. As of this writing LINA has a few more days to seek review (or a Circuit Judge could call for a vote to review en banc).