NOT PRECEDENTIAL

UN ITE D STATES COURT OF APPEALS

FO R THE THIRD CIRCUIT

No. 05-5422

ANTHONY GAMBINO; DANIELLE GAMBINO

v. M .D . MUNZER ARNOUK; LIBERTY LIFE ASSURANCE

COMPANY OF BOSTON

Liberty Life Assurance Company of Boston,

Appellant.

On Appeal from the United States District Court

fo r the District of New Jersey

(D .C . No. 03-cv-01611)

D istrict Judge: Hon. Faith S. Hochberg

Argued on March 26, 2007

B e fo re : FISHER, JORDAN and ROTH, Circuit Judges

(O p inio n filed April 17, 2007

P a ul R. Rizzo, Esquire (ARGUED)

D iFa nc e s c o , Bateman, Coley, Yospin,

Kunz ma n, Davis & Lehrer

1 5 Mountain Boulevard

W a rre n, NJ 07059

C o uns e l for Appellees Anthony and Danielle Gambino

R o be rt J. Mormile, Esquire (ARGUED) Fa rk a s & Donohue, LLC 3 8 9 Passaic Avenue Fa irfie ld , NJ 07004 C o uns e l for Appellee Arnouk P atric ia A. Smith, Esquire (ARGUED) E d w ard T. Groh, Esquire B a llard , Spahr, Andrews & Ingersoll P la z a 1000 S uite 500, Main Street V o o rh e e s, NJ 08043 C o uns e l for Appellant Liberty Life Assurance C o m p any of Boston OPINION ROTH, Circuit Judge: Antho ny Gambino was denied short-term disability benefits by his insurance provider.

H e brought suit to recover benefits due pursuant to 29U.S.C. § 1132(a)(1)(B). The District C o urt awarded Gambino the short-term disability benefits for which he had applied, as well a s an opportunity to apply for long-term disability benefits, which he had never done. For th e reasons set forth below, the judgment of the District Court will be reversed in part and v a c a ted in part, and remanded for further proceedings consistent with the dictates of this o p inio n.

I . Background In March 2001, Gambino, a New Jersey resident, was employed as a sales manager a t IKON Office Solutions, Inc. IKON provided its employees with short-term disability (S T D ) and long-term disability (LTD) plans. Gambino participated in both plans, which w e re in effect in March 2001. In April, 2001, he applied for STD benefits. His claim was d e nie d , as was his appeal. He never applied for LTD benefits.

A. Disability Policies L ibe r t y Life Insurance Company of Boston (Liberty) insured and administered the S TD plan, pursuant to a Liberty policy purchased by IKON, and provided claims ad ministrat io n services for the LTD plan, which was self-funded by IKON. When an IKON e mp lo ye e applied for STD benefits, Liberty both evaluated the claim and paid the benefits w ith its own funds. Liberty's decisions regarding claims brought under the STD plan were c o nc lus ive and binding.

In contrast, IKON was the sponsor, insurer, and administrator of the LTD plan.

L ibe rty was responsible for processing LTD claims, but IKON retained the authority to o ve rrule Liberty's determinations. Benefits were paid by IKON, not Liberty.

U nd e r both policies, a claimant was required to make the same showing to establish d is a bility. When Liberty or IKON, as relevant, received proof that a covered person was d isa ble d due to injury or sickness and required the regular attendance of a physician, Liberty o r IKON would pay the covered person periodic benefits upon conclusion of an elimination p e rio d during which disability had to be established but no benefits would be paid.

"D is a b ility" was defined under both policies to mean that the covered person had to be una ble to perform all of the material and substantial duties of his or her occupation on an a c tive employment basis because of an injury or sickness. The proof furnished had to e sta blis h the date on which the disability started, as well as the cause and degree of the d is a bility. Under the STD policy, Liberty had sole authority to interpret the terms of the p o lic y, and its decisions regarding the construction of the contract were conclusive and bind ing . Under the LTD policy, Liberty's determinations could be overruled by IKON.

As the names suggest, the main difference between the two policies (besides the role o f IKON) was the duration of coverage. STD claims were for short-term benefits, up to 26 w e e k s , with an elimination period of two weeks. LTD claims were for long-term benefits, w ith the standard for proving disability heightening after 24 months, and an elimination p e rio d of six months. The difference between the lengths of the elimination periods meant th a t a covered person seeking STD benefits had to prove disability within a narrow two-week w ind o w , whereas a covered person seeking LTD benefits could prove disability lasting over a six-month period.

B . Gambino's Claim Ga m bino left work at IKON on March 9, 2001, after suffering a panic attack. On Ap ril 5, 2001, Gambino contacted Liberty to initiate a claim for STD benefits. Under the te rm s of his policy, it was Gambino's obligation to provide Liberty with proof of his d isa bility during the elimination period and the benefit period. Gambino provided Liberty w ith the name of only one health care provider -- his primary care physician, Dr. Munzel Arno uk -- and by April 16, 2001, Liberty had received no further information regarding the c la im . Liberty repeatedly contacted Dr. Arnouk's office to seek Gambino's medical records but received no response. On April 18, Liberty called Gambino to seek records and faxed t o Dr. Arnouk several forms for him to complete and return with copies of his records.

L ibe rty reminded Gambino of the terms of his policy and informed him that he had until July 2 , 2001, to provide the necessary information. No new information came. On July 3, 2001, L ibe rty determined that Gambino's STD claim should be denied for failure to provide m e d ic a l proof of the claimed disability.

On July 9, 2001, Liberty received a short fax from Dr. Arnouk, which consisted of a ce rtifica tio n of physician form, dated June 24, and an undated attending physician's s ta te m e nt. These forms contained short diagnostic statements but did not include any o bs e rva tio ns about Gambino's objective symptoms. Dr. Arnouk did not provide any records o f Gambino's office visits.1 Dr. Arnouk's submission provided Liberty with a limited a mo unt of additional information, including a short diagnosis of "severe anxiety reaction w ith depression and psychological set back" and an opinion that Gambino was unable to re turn to work. These forms also established that Dr. Arnouk was an internist who referred Ga mbino for psychiatric care. Finally, and somewhat confusingly, Dr. Arnouk listed Ga mbino 's condition as having started a week before Gambino left work.

W ith in several days of receiving the forms from Dr. Arnouk, Liberty received a fax from Dr. Jean Ying-Chang, a psychiatrist at Saint Clare's Behavioral Health Center, where Ga mbino was being treated. She stated that Gambino's diagnosis was "Social Phobia, Major D e p re ss ive Disorder, r/o Bipolar Disorder" and provided answers to those questions on the c e rtific a tio n of physician form which Dr. Arnouk had left blank. In particular, Dr. YingC h a ng represented that Gambino was unable to perform work of any kind as of March 27, 2 0 0 1 . Upon receipt of this information from Drs. Arnouk and Ying-Chang, Liberty notified Ga m bino that it was reopening his claim.

None of this information included actual copies of medical records, which Liberty m ainta ins are necessary so that it can independently verify the conclusions drawn by the tre a ting doctors. Liberty therefore requested copies of the office records necessary to s up p le me nt the information it had already received. Liberty later discovered, though a p p a re ntly not until the litigation process, that Dr. Arnouk had kept no records of treating Ga mbino and therefore had no office records. Despite Liberty's repeated requests for office re c o rd s , Dr. Arnouk never informed Liberty or Gambino that no office records existed.

L iberty did manage to collect significant additional information about Gambino's tre a tm ent at Saint Clare's Behavioral Health Center, including some office records. A brief no ta tio n in the record revealed that after Gambino saw Dr. Arnouk on March 9, 2001, his ne x t medical visit was to a Dr. Tintea at St. Clare's, on March 27, 2001. Liberty never re c eive d any documentation of this visit, though other records from Saint Clare's indicated th a t Dr. Tintea performed an initial intake and prescribed medication. Gambino also saw M a rio n Robinson, a clinician who performed a psychiatric evaluation. According to this e va lua tio n, Gambino had experienced irritability and feelings of depression over the previous o ne -a nd -a -h a lf to two years. The evaluation also provided Liberty with clinical notes d e s c ribing Gambino's condition, which is described as "irritable, constricted, and tense," w ith "notable flight of ideas." Records also described Gambino's panic symptoms in detail.

At Liberty, registered nurse Barbara McGivern and claims administrator Monica Dube re vie w e d the file. Nurse McGivern recommended that the claim be denied and expressed her r e a s o ns in internal notes. She expressed some confusion about "what changed" on March 9 , 2001, to render Gambino disabled, since his condition was listed by Dr. Arnouk as starting o n March 2, and reports from Saint Clare's suggested that he had been experiencing p ro ble ms of a similar nature for a year and a half. Because Dr. Arnouk provided no office no te s and no rationale for his medical decisions, Nurse McGivern felt that she was unable to evaluate Gambino's condition during the month of March (during which the entirety of th e elimination period ran). Moreover, because Dr. Arnouk indicated that he was seeing Ga m bino on a weekly basis, Nurse McGivern assumed that a series of office records would b e available. She was unable to determine much of anything regarding Gambino's a p p o intm e nt with Dr. Tintea on March 27, 2001, since no records of this visit were in the file. Monica Dube agreed with Nurse McGivern that the claim should be denied on the basis o f insufficient medical information.

On August 14, 2001, Liberty issued to Gambino a determination letter in which it e x p la ine d that it was denying his claim for STD benefits because he had submitted ins uffic ie nt supporting documentation. Liberty explained that, although it had received d o c um enta tio n relating to Gambino's treatment at Saint Clare's, this documentation did not r e la te back to start of the elimination period. Liberty also informed Gambino of his rights, includ ing the right to appeal, under the Employee Retirement Income Security Act (ERISA).

O n August 20, 2001, Gambino appealed his claim and assured Liberty that it would receive a ll the information it needed as soon as possible.

L iberty allowed Gambino until September 12, 2001, to supply the necessary info rm a tio n from Dr. Arnouk. The information never arrived. On October 1, 2001, Liberty inf o r m e d Gambino that it was maintaining its original decision to deny benefits and closing h is file. The same day, Liberty sent a letter informing IKON that Gambino's claim for STD be ne fits had been denied. On November 9, 2001, IKON contacted Gambino and informed h im that it had learned that his STD claim had been denied retroactive to March 9, 2001, and that he would be required to return to work on November 19, 2001. Gambino did not return to IKON and was terminated in December 2001. Gambino never applied for LTD benefits.

C . District Court Review G a mbino and his wife, Danielle, brought suit in the District of New Jersey against L ibe rty, alleging violations of ERISA that caused the loss of both STD and LTD benefits, a nd against Dr. Arnouk, claiming that his office's failure to supply information caused L ibe rty to deny Gambino's claim. Judge Hochberg presided over a bench trial at which she h e a r d testimony from Gambino and his wife, Dr. Arnouk, and Harriett Michael, the case manag er at Liberty who handled Gambino's appeal. During theGambinos' and Dr. Arnouk's te s tim o ny, counsel for Liberty frequently objected that the witnesses were providing tes timo ny as to facts that were not in the administrative record, upon which Liberty based its d e nia l of STD benefits, and which were not otherwise permissibly relevant.

At the conclusion of the bench trial, the District Court dismissed the suit against Dr.

Ar no uk , finding inconclusive proof of liability. Gambino v. Liberty Life Assurance C o o m p a n y of Boston, 2005 WL 4839146, at *1 (D.N.J. 2005). The District Court found L ibe rty's denial of Gambino's STD claim to be "arbitrary and capricious" and awarded Ga mbino STD benefits pursuant to 29U.S.C. § 1132(a)(1)(B), in the amount of $22,749.13.

Id . at *8. The District Court also found that Gambino "could not have been expected to have a p p lie d for" LTD benefits after being denied STD benefits, as it was "entirely foreseeable" th a t a denial of STD benefits "would likely cause a beneficiary to assume that an LTD claim w o uld be futile." Id. at *9. Because the District Court found that Liberty had violated the p ro vis io ns of ERISA by denying Gambino's STD claim in an arbitrary and capricious m anne r, the court determined that Gambino was also entitled to equitable relief with respect to his request for LTD benefits. Id. As an equitable remedy, the court ordered Liberty, w h ic h had the authority to process claims for LTD benefits, to process Gambino's claim for L TD benefits as if it had been timely filed and to make a recommendation to IKON fo llo w ing the usual and customary procedures for evaluating LTD claims. Id. The District C o urt did not explain what effect its ruling would have on IKON, a non-party to the suit, w h ic h serves as the insurer for the LTD plan and would be responsible for making any LTD be ne fit payments to Gambino.

I I I . Jurisdiction L ibe rty timely appealed the order of the District Court. The District Court had subject m a tte r jurisdiction over this case pursuant to 29U.S.C. § 1132(e). We have appellate juris d ic tio n pursuant to 28U.S.C. § 1291.

I V. Discussion A. STD Benefits W h e n a claims fiduciary has discretionary authority to determine eligibility for be ne fits , we employ an arbitrary and capricious standard of review in reviewing a denial by th a t fiduciary of a request for benefits under an ERISA-regulated plan. Firestone Tire & R u b b e r Co. v. Bruch, 489 U.S. 101, 115 (1989). Under the arbitrary and capricious standard, w e may overturn a fiduciary's decision "only if it is without reason, unsupported by s ubs ta ntia l evidence or erroneous as a matter of law." McLeod v. Hartford Life and Acc. Ins.

C o ., 372 F.3d 618, 623 (3d Cir. 2004). Where the entity with discretionary authority to d e te rm ine eligibility for benefits is also the entity that will be paying the benefits, we r e c o g niz e this structural conflict of interest by employing a "heightened" arbitrary and c a p ric io us standard of review. Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377, 392.

W e have adopted a "sliding scale" approach under which arbitrary and capricious review is a range, not a point, and our review is more or less probing depending on the degree of c o nflic t present. Id. at 392-93. Nonetheless, the ultimate burden to establish that the claim d e te rm ina tio n was improper remains with the beneficiary. Id. at 392. In determining the d e g re e of the conflict, we look not only to the ultimate decision, but also to the process by w h ic h the result was achieved. Id. at 393.

Th e District Court correctly summarized this law, but it did not determine where w ith in the range of arbitrary and capricious review Gambino's case fell. Indeed, the District C o urt never explicitly discussed Liberty's degree of conflict. Thus, when it determined that L ibe rty's determination was "arbitrary and capricious," it did not specify the level of scrutiny that Liberty had faced. This was error.

Th e correct standard of review in this case is a deferential one, only slightly h e ig h te ne d by Liberty's structural conflict. Liberty made repeated attempts to supplement G a mbino ' s file with the medical information it needed. Moreover, once it obtained some info rm atio n, it reopened his file. The District Court intimates that evidence of a heightened c o nflict might be present because "Liberty seized upon any possible basis to ignore the ample a nd strong evidence of psychiatric disability." 2005 WL 4839146, at *8 n.11. Strict a p p lic a tio n of an insurer's policies, without more, is not evidence of a heightened conflict; if lack of sufficient documentation relating to the two-week elimination period is an adequate basis for denial under the STD policy, then a denial on that basis cannot be evidence of a h e ig h te ne d conflict.

Moreover, by engaging in de novo factfinding, the District Court committed clear e rro r which infected its review of the case. In Lasser v. Reliance Standard Life Ins. Co., we h e ld that "de novo factfinding is improper in reviewing a claims administrator's decision und er the arbitrary and capricious standard of review." 344 F.3d 381, 385 n.3 (3d Cir. 2003).

Th e District Court's factual findings are a pastiche of evidence drawn from the a d minis tra tive record and testimony provided at the bench trial. The District Court relied on tria l testimony to make findings regarding, inter alia, Gambino's panic attack at work, visit to Dr. Arnouk, termination from IKON, attempts to work in 2002, and continued psychiatric c a re . 2005 WL 4839146, at *5. M o r e surprisingly, the District Court found it relevant to c o m m e nt upon Gambino's demeanor at trial, which "showed aberrant agitation and highly unus ua l affect." It is clear that the District Court did not base its decision on the record that w a s before Liberty when Liberty denied the claim. Moreover, Gambino had the burden of e s ta blis h ing disability.2 Th e District Court erred by collecting information which Liberty did not have in the re c o rd before it and by deciding the case on that expanded record. We will therefore vacate th e District Court's award of STD benefits and remand this case for further proceedings ­ i.e ., a largely deferential review of the administrative record that was before Liberty when it made its decision.

B . LTD Benefits Th e District Court's equitable remedy of granting Gambino an opportunity to pursue h is LTD is legally unsupportable. We will reverse the judgment as to that claim. As an initia l matter, IKON retains final authority to determine whether Gambino is entitled to LTD be ne fits , and IKON is the party obligated to pay any LTD benefits due. IKON, however, is no t a party to this suit. We therefore approach with skepticism an equitable "remedy" which, in reality, is likely to remedy nothing.

M o r e importantly, Gambino never filed a claim with Liberty for LTD benefits.

E x c e p t in limited circumstances, a federal court will not entertain an ERISA claim unless the p la intiff has exhausted the remedies available under the plan. Harrow v. Prudential Ins. Co. o f America, 279 F.3d 244, 249 (3d Cir. 2002); Weldon v. Kraft, Inc., 896 F.2d 793, 800 (3d C ir . 1990). The exhaustion requirement serves a number of important policy interests, inc lud ing helping reduce the number of frivolous lawsuits under ERISA, promoting c o ns is te nt treatment of claims, providing a nonadversarial method to settle claims, and m inim iz ing costs of settlement. Harrow, 279 F.3d at 249. Gambino's failure to seek LTD be ne fits in the first place surely qualifies as a failure to exhaust. Thus, if Gambino is to find a remedy under ERISA, he must demonstrate that his failure to exhaust falls within an e x c e p tio n to the exhaustion requirement.

A plaintiff is excused from exhausting his remedies if it would be futile to do so. Id.; B e rg e r v. Edgewater Steel Co., 911 F.2d 911, 916 (3d Cir. 1990). The law is clear that the p la intiff must show, by making a "clear and positive showing of futility," that it would have be e n actually futile to pursue the claim. Harrow, 279 F.3d at 249 (citation omitted). In H a r r o w, we quoted the Sixth Circuit as holding that "[a] plaintiff must show that it is certain th a t his claim will be denied on appeal, not merely that he doubts that an appeal will result in a different decision." Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410, 419 (6th Cir. 1 9 9 8 ) (internal quotation marks and citation omitted).

Th e District Court granted Gambino relief on the ground of futility because it was "e ntire ly foreseeable" that a denial of STD benefits "would likely cause a beneficiary to assume that an LTD claim would be futile." 2005 WL 4839146, at *8. The District Court fo und that Liberty had offered no proof of any instance in which an individual who had been d e nie d STD benefits was nonetheless awarded LTD benefits and that Liberty had never no tifie d Gambino of his right to apply for LTD benefits despite denial of his STD claim. Id.

Th e se findings, however, are not relevant as to whether it would actually have been futile for G a mbino to apply for LTD benefits. The STD and LTD plans contain different elimination p e rio d s. It is possible for a covered person who lacked sufficient medical evidence to e sta blis h disability within a two-week window to nonetheless amass sufficient medical e vid e nc e to establish disability under the longer six-month period. There are a number of s ubs e q ue nt records of treatment within a six-month period which could have supported an a w a rd of LTD benefits. Thus, Gambino's failure to apply for LTD benefits should not have be e n excused.

V. Conclusion Fo r the foregoing reasons, the judgment of the District Court will be reversed in part a n d vacated in part and the case remanded for further proceedings consistent with this O p inio n.

1 Item 9 of the Attending Physician's Statement form specifies that the doctor must attach "[o ]f fic e notes for the period of treatment" and "[t]est results showing objective findings."

2 Neither was Liberty obligated to inquire into Gambino's work-related duties. The D is tric t Court relied on Quinn v. Blue Cross and Blue Shield Ass'n, 161 F.3d 472 (7th Cir. 1 9 9 8 ) , to suggest that an insurer's failure to make such an inquiry is per se arbitrary and c a p ric io us . Quinn supports no such conclusion. In Quinn, the insurer made an affirmative d e te rm ina tio n that the beneficiary could perform her duties, even though the insurer did not k no w what those duties were. 161 F.3d at 476. The Seventh Circuit found such action by th e insurer to be arbitrary and capricious. Gambino's case is quite different. Liberty found that Gambino had not provided sufficient evidence to establish disability during the e lim ina tio n period. Liberty denied Gambino's claim because it lacked sufficient medical e vid e nc e regarding his condition. Without knowing the details of Gambino's condition, L ibe rty could not go on to the next step of determining whether that condition rendered him una ble to perform his duties, whatever those duties might have been. Liberty's lack of k no w le d g e regarding Gambino's specific duties was therefore irrelevant.