Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-01090/USCOURTS-casd-3_06-cv-01090-1/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 29:1104 Recovery of Benefits to Employee

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

PAUL CHASAN, M.D., an individual; PAUL

CHASAN, M.D., INC., a California

corporation; PAUL CHASAN, M.D., INC.

WELFARE BENEFIT PLAN, an employee

benefits plan under ERISA,

Plaintiffs,

CASE NO. 06CV1090 WQH (NLS)

ORDER RE: DEFENDANTS’

MOTION TO DISMISS

vs.

THE GARRETT GROUP, a California

corporation; MATTHEW GARRETT, an

individual; JOHN HANCOCK LIFE

INSURANCE COMPANY, a Delaware

corporation; and DOES 1 through 100,

inclusive,

Defendants.

HAYES, Judge:

Pending before the Court is Defendants’ motion to dismiss (Doc. # 12) Plaintiffs’ First

Amended Complaint (Doc. # 5). The Court finds this matter suitable for submission on the papers and

without oral argument pursuant to Civil Local Rule 7.1(d)(1). 

PROCEDURAL HISTORY

On May 18, 2006, Plaintiffs Paul Chasan, M.D. (Dr. Chasan) and Paul Chasan, M.D., Inc.

(Chasan Inc.) filed the Complaint in this matter, and asserted ten claims for relief. (Doc. # 1).

Plaintiffs’ first two claims for relief contend that Defendants’ conduct violated the Employee

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Retirement Income Security Act’s (ERISA) self dealing and fiduciary responsibility requirements.

FAC, ¶¶ 30-54, 55-75. Plaintiffs’ remaining claims for relief assert supplemental state law claims for

common law and statutory negligent misrepresentation, fraud, breach of covenant of good faith and

fair dealing, unfair practices or deceptive acts, and violation of the Unfair Competition Act.

On September 20, 2006, Defendant John Hancock Life Insurance Company (Hancock)

answered and asserted affirmative defenses. (Doc. # 10). On September 22, 2006, Defendants

Matthew Garrett (Garrett) and The Garrett Group (Garrett Group) moved to dismiss the Complaint.

(Doc. # 12). Defendant Hancock did not join Garrett and Garrett Group’s motion to dismiss.

ALLEGATIONS OF THE FIRST AMENDED COMPLAINT

Plaintiff Paul Chasan, M.D., is doctor residing in San Diego, California. First Amended

Complaint, ¶¶ 10-11. Dr. Chasan conducts his medical practice and provides medical services through

Plaintiff Chasan Inc., a California corporation. FAC, ¶ 11. Plaintiff Paul Chasan, M.D., Inc. Welfare

Benefit Plan (the Plan) is an ERISA benefit plan which Dr. Chasan created with the advice and

assistance of Defendants Garrett and Garrett Group. FAC, ¶¶ 17-21. Garret is an employee of Garrett

Group, and at all relevant times, Garrett acted within the scope of his employment. FAC, ¶ 16. 

Plaintiffs allege that in the spring of 2004, Dr. Chasan twice met with Garrett about creating

the Plan. FAC, ¶ 17. During those meetings, Garrett informed Dr. Chasan of the tax-advantages

associated with the Plan. FAC, ¶ 18. Garrett further informed Dr. Chasan that the Plan had “been

tested by other clients who underwent an IRS audit.” FAC, ¶ 18. Garrett told Dr. Chasan that there

were some risks associated with the Plan, but ultimately Garrett represented to Dr. Chasan that there

was a very low likelihood of any problems with the plan. FAC, ¶ 21. Garrett supported the Plan’s

legality and efficacy by telling Dr. Chasan that the Plan had been analyzed by many legal experts, had

legal precedent supporting it, and had been upheld as qualified under IRS audit. FAC, ¶ 21. Garrett

indicated that the Plan could not only be tax deferred, but indicated that it could also be tax free. FAC,

¶ 19. Garrett told Dr. Chasan that Dr. Chasan could borrow money against the Plan and not pay it

back, so long as Dr. Chasan left the Plan alone for a minimum of five years. FAC, ¶ 19. 

In encouraging Dr. Chasan to create the Plan, Garrett did not disclose to Dr. Chasan that there

would be an interest expense associated with policy loans. FAC, ¶ 19. Garrett did not mention that

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Garrett would charge fees which were associated with the Plan. FAC, ¶ 20. Garrett did not disclose

pertinent case law which indicated substantial risks associated with the Plan. FAC, ¶ 42. Plaintiffs

allege that Garrett’s omissions were material, and that Dr. Chasan would not have created the Plan if

omitted information had been disclosed. FAC, ¶¶ 41, 47. Plaintiffs allege that Garrett purposefully

or negligently concealed material information regarding the Plan to induce Dr. Chasan to create the

Plan. FAC, ¶¶ 41-42, 73, 77. Plaintiffs allege that Garrett omitted material information for his own

benefit and self interest. FAC, ¶ 42. Plaintiffs allege that Garrett Group ratified and approved all of

Garrett’s acts. FAC, ¶ 16.

After speaking with Garrett in the spring of 2004, Dr. Chasan created, and became a participant

in, the Plan. FAC, ¶¶ 17-24, 39. As part of the transaction which created the Plan, the Plan purchased

an insurance policy (the Policy) from Defendant Hancock to insure Dr. Chasan and to fund the Plan.

FAC, ¶¶ 28, 39. Garrett and Garrett Group are insurance agents for Hancock, and they sold the Policy

to the Plan on behalf of Hancock. FAC, ¶ 29.

Plaintiffs allege that Defendants Garrett, Garrett Group, and Hancock failed to disclose

pertinent and material information to Plaintiffs prior to selling the insurance policy to Dr. Chasan and

the Plan. FAC, ¶ 40. Defendants failed to disclose Policy renewal sales commissions paid by

Hancock to each agent or broker who received commissions when Hancock sold the Policy. FAC, ¶

40(a). Defendants failed to disclose a description of the charges, fees, discounts, penalties, or

adjustments related to the Policy. FAC, ¶ 40(b). Defendants failed to disclose accurate information

regarding payments related to the Policy, earnings that Policy funds would yield, and the risk of loss

and expenses that affected the yield. FAC, ¶ 40(c). Defendants failed to require Plaintiffs to

acknowledge receipt of information regarding the Policy in writing. FAC, ¶ 40. Defendants failed

to disclose that it would be necessary to purchase life insurance policies for all eligible participants

of the Plan to prevent discrimination in operation. FAC, ¶ 73(e). Defendants failed to disclose that

Plaintiffs would incur additional annual reporting costs as a result of purchasing the Policy. FAC, ¶

73(g). Defendants also failed to disclose that the Plan’s purchase of the Policy was a “non-exempt

prohibited transaction” as defined in 29 U.S.C. § 1106. FAC, ¶ 73(h). 

Plaintiffs allege that Defendants’ representations regarding the Policy, including information

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about Policy premiums, premium due dates, the Policy’s cash value, and the advantages and

disadvantages of the Policy, were incomplete and omitted material information. FAC, ¶¶ 43, 73(d).

Plaintiffs allege that Defendants exaggerated and misrepresented information about the Policy and the

Plan. FAC, ¶¶ 43, 77. Plaintiffs allege that they would not have created the Plan or purchased the

Policy had they been aware of the omitted material information and Defendants’ misrepresentations.

FAC, ¶¶ 43, 47, 78. 

Sometime after creating the Plan, Plaintiffs realized that the Plan was a “carefully crafted,

deceptive, improper tax avoidance scheme.” FAC, ¶ 73(a). Plaintiffs allege that Defendants were on

notice of tax court litigation and the Internal Revenue Service’s (IRS) position on tax avoidance

schemes of the type Defendants induced Plaintiffs to create (i.e.–the Plan and Policy). FAC, ¶ 73(b).

Defendants knew or should have known of substantial adverse tax consequences related to the Plan

and the Policy, yet not only failed to disclose the information, but in fact reassured Plaintiffs of the

Plan and Policy’s efficacy and legality. FAC, ¶ 82. Plaintiffs allege that Defendants intentionally

failed to disclose information regarding the Plan and the Policy to induce Plaintiffs’ participation in

the tax avoidance scheme. FAC, ¶ 73(b). Plaintiffs allege that Garret and Garret Group’s

misrepresentations related to the Policy and the Plan were “false, wrongful, in bad faith, and unfair.”

FAC, ¶ 135. According to the First Amended Complaint, Defendants’ misrepresentations and

concealments were also willful, malicious, and fraudulent. FAC, ¶ 102.

Plaintiffs allege that Defendants’ conduct caused Plaintiffs substantial financial losses in

excess of $96,000. FAC, ¶ 136. Plaintiffs allege that Defendants’ conduct will cause future damages.

FAC, ¶ 137. Plaintiffs allege that Dr. Chasan suffered anxiety, worry, mental and emotional distress,

and financial injury as a result of Defendants’ conduct. FAC, ¶ 138.

STANDARD OF REVIEW

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the pleadings. De La

Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978). A complaint may not be dismissed for failure to state

a claim under Rule 12(b)(6), “unless it appears beyond a doubt that the plaintiff can prove no set of

facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46

(1957). In ruling on a motion pursuant to Rule 12(b)(6), a court must construe the pleadings in the

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light most favorable to the plaintiff, and further, must accept as true all material allegations in the

complaint, as well as any reasonable inferences to be drawn therefrom. See Broam v. Bogan, 320 F.3d

1023, 1028 (9th Cir. 2003). In considering a Rule 12(b)(6) dismissal, a court may not look beyond

the complaint. Moore v. Costa Mesa, 886 F.2d 260, 262 (9th Cir. 1989).

DISCUSSION

Defendants Garrett and Garrett Group move to dismiss the Complaint on the grounds that (1)

Plaintiffs Chasan Inc. and the Plan lack standing to state claims under ERISA, and (2) Plaintiffs’ state

law claims are preempted by ERISA. Plaintiffs contend that they are entitled to standing by operation

of ERISA, and further, that their state claims are not preempted by ERISA.

I. Standing - Chasan Inc. & The Plan

ERISA “regulates the provision of health and welfare benefits by employers,” and “federal

jurisdiction over ERISA-related questions is defined and limited by 29 U.S.C. § 1132(a).” Cripps v.

Life Ins. Co. of North America, 980 F.2d 1261, 1265 (9th Cir. 1992). Section 1132(a) determines

which persons are empowered to bring civil actions pursuant to ERISA. 29 U.S.C. § 1132(a). Section

1132(a)(2) provides that a participant, beneficiary, fiduciary, or the Secretary of Labor may bring suit

for claims of breach of fiduciary duty pursuant to 29 U.S.C. § 1109. Section 1132(a)(3) provides that

a participant, beneficiary, or a fiduciary may bring suit to enjoin any other act or practice which

violates Title 29, or to obtain other appropriate equitable relief. “The list of potential claimants in

section 1132 is exclusive.” McBride v. PLM International, 179 F.3d 737, 742 (9th. Cir. 1999), citing

Harris v. Provident Life & Accident Ins. Co., 26 F.3d 930, 933 (9th Cir. 1994), but see Fentron Indus.

v. Nat’l Shopmen Pension Fund, 674 F.2d 1300, 1305 (9th Cir. 1982).

Garrett and Garrett Group contend that Plaintiffs Chasan Inc. and the Plan lack standing to

bring suit because neither Chasan Inc. nor the Plan is a participant, beneficiary, or a fiduciary as

required by 29 U.S.C. § 1132(a). Plaintiff Chasan Inc. contends that it has standing to pursue ERISA

claims because it is an employer who has alleged specific and personal injuries under Fentron

Industries and Award Service, Inc. v. Northern California Retail Clerks, 763 F.2d 1066, 1068 (9th Cir.

1985). Chasan Inc. further argues that it has standing by operation of ERISA. Plaintiff Plan asserts

ERISA standing under 29 U.S.C. § 1132(a)(3), but provides no further detail.

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A. Chasan Inc.

Chasan Inc. asserts standing to bring suit under ERISA based on its status as an employer. As

alleged in the First Amended Complaint, Chasan Inc. is a small personal services provider corporation

which employs Dr. Chasan. FAC, ¶ 11. Dr. Chasan conducts his medical practice and provides

medical services through Chasan Inc. FAC, ¶ 11.

29 U.S.C. § 1132(a) lists the parties which may bring suit under ERISA, and states clearly that

participants, beneficiaries, fiduciaries, and in some cases the Secretary of Labor, may bring suit.

Section 1132(a)’s list of persons entitled to bring suit under ERISA does not include employers like

Chasan Inc. In McBride, the Court of Appeals for the Ninth Circuit stated that the list of parties

entitled to bring suit under 29 U.S.C. § 1132(a) was exclusive. 179 F.3d at 742. The United States

Supreme Court has stated that, “ERISA carefully enumerates the parties entitled to seek relief under

§ 502 [29 U.S.C. § 1132],” and “does not provide anyone other that participants, beneficiaries, or

fiduciaries with an express cause of action . . . .” Franchise Tax Bd. of State of California v.

Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 27 (1983); see also Dime

Coal Co. v. Combs, 796 F.2d 394, 396 (11th Cir. 1986). The Court concludes that Chasan Inc.’s

argument that employers have standing to bring suit under ERISA is contrary to the statutory scheme

and the majority of relevant case law. 

 Chasan Inc. contends that employers have standing to bring ERISA claims in the Ninth

Circuit by virtue of Fentron Indus. v. Nat’l Shopmen Pension Fund, 674 F.2d 1300, 1305 (9th Cir.

1982). In Fentron the Ninth Circuit held that an employer could have standing to bring suit under

ERISA if it alleged specific and personal injury. Id. at 1304. The theory of Fentron was that an

employer who alleged specific and personal injury, though not specifically listed in section 1132(a),

was nevertheless within the zone of interests ERISA intended to protect. Id. at 1305. The reasoning

in Fentron, however, has been severely questioned by both this Circuit and other Circuits. See Cripps

v. Life Ins. Co. of North America, 980 F.2d 1261, 1265 (9th Cir. 1992) (“The reasoning of Fentron has

twice been repudiated by the United States Supreme Court.”); Pilkington PLC v. Perelman, 72 F.3d

1396, 1401 (9th Cir. 1995) (“Fentron has been largely undermined by subsequent Supreme Court

authority.”); McBride v. PLM International, 179 F.3d 737, 742 (9th Cir. 1999) (section 1132(a)’s list

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of potential claimants is exclusive); Dime Coal Co. v. Combs, 796 F.2d 394, 396 (11th Cir. 1986);

Grand Union Co. v. Food Employers Labor Relations Asso., 800 F.2d 66, 71 (D.C. Cir. 1987).

Though the Ninth Circuit has yet to specifically overrule Fentron, many districts courts have

concluded that Fentron is no longer good law, and have refused to acknowledge employer standing

under ERISA. Tool v. National Employee Benefit Services, 957 F. Supp. 1114, 1117-18 (N.D. Cal.

1996); Beck v. Pace International Union, No. C 02-1407 MHP, 2003 U.S. Dist. LEXIS 2283, at *12-

16 (N.D. Cal. January 10, 2003); Bel-Aire Heating & Air Conditioning v. Sheet Metal Workers’

National Pension Fund, No. C94-1508, 1995 U.S. Dist. LEXIS 17338, at *10-12 (W.D. Wash. June

7, 1995).

After reviewing the case law and ERISA’s statutory scheme, the Court concludes that

employers like Chasan Inc. do not have standing under ERISA pursuant to 29 U.S.C. § 1132(a). Even

assuming that employers do have standing to bring suit under ERISA, the Court concludes that Chasan

Inc. has not alleged specific and personal injury such that it would be entitled to standing under

Fentron. Rather than alleging specific and personal injury, the Complaint asserts general, and in many

cases potential, injuries which are not specific to Chasan Inc. See Bel-Aire Heating, 1995 U.S. Dist.

LEXIS 17338, at *10-12; Stead v. Behl, No. C 91-0465 BAC, 1992 U.S. Dist. LEXIS 3025, at *4-5

(N.D. Cal. February 19, 1992). Such general and vague allegations do not support standing under

ERISA and Fentron. 674 F.2d at 1304. Finally, the Court concludes that Fentron is distinguishable

on the grounds that in Fentron the employer’s suit was to recover funds mistakenly contributed to a

benefit plan, whereas in this case the claims relate to fraud in the creation of a benefit plan. See

Trustees of the Operating Engineers v. International Union, 224 F. Supp. 2d 1272, 1282-83 (D. Nev.

2002) (to the extent Fentron remains good law, it is limited to employers suing for mistaken

contributions). 

Chasan Inc. has not alleged that it is a fiduciary of the Plan, nor has it alleged that it has

discretionary authority or control with respect to the Plan’s management or administration. See 29

U.S.C. § 1102(21)(A). Likewise, Chasan Inc. has not cited authority supporting its contention that

it is an ERISA fiduciary. For those reasons, and for those noted above, the Court concludes that

Chasan Inc. does not have standing under ERISA to bring suit as an employer.

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B. The Plan

Plaintiff Plan is an ERISA plan created by Dr. Chasan, and it asserts standing to bring suit

under ERISA pursuant to 29 U.S.C. § 1132(a). The Plan fails to provide authority, rationale, or

reasoning to support its contention that it is entitled to standing. Furthermore, the Plan does not allege

that it is a participant, beneficiary, or fiduciary under 29 U.S.C. § 1132(a).

The Court of Appeal for the Ninth Circuit has established that ERISA plans, like the Plan, do

not have standing to bring suit under ERISA. Steen v. John Hancock Life Ins. Co., 106 F.3d 904, 917

(9th Cir. 1997); Local 159, et al. v. Nor-Cal Plumbing, 185 F.3d 978, 983 (9th Cir. 1999); Bowles v.

Reade, 198 F.3d 762, 760-61 (9th Cir. 1999). Accordingly, the Court concludes that the Plan does

not have standing to bring suit under ERISA here.

C. Supplemental Jurisdiction

Though Plaintiffs Chasan Inc. and the Plan lack standing to bring suit under ERISA, they join

Plaintiff Dr. Chasan in asserting various state common law and statutory causes of action. Chasan Inc.

and Plan’s lack of standing, however, alters their status in regards to preemption of the state law

claims. Harris v. Provident Life and Accident Ins. Co., 26 F.3d 930, 934 (9th Cir. 1994); Curtis v.

Nevada Bonding Corporation, 53 F.3d 1023, 1026-27 (9th Cir. 1995). As the Ninth Circuit noted in

Curtis, ERISA standing is a prerequisite to ERISA preemption. Curtis, 53 F.3d at 1027. While Dr.

Chasan’s state law claims may or may not be preempted by ERISA, Chasan Inc. and the Plan’s state

claims are not preempted. 

Pursuant to 28 U.S.C. § 1367, a district court has supplemental jurisdiction over state law

claims which are “so related to claims in the action within such original jurisdiction that they form part

of the same case or controversy . . . .” 28 U.S.C. § 1367(a). However, even where supplement

jurisdiction exists, a district court may decline to exercise supplemental jurisdiction if the state claims

are novel or complex, substantially predominate over federal claims, or for other compelling reasons.

28 U.S.C. § 1367(c); see also City of Chicago v. Int’l College of Surgeons, 522 U.S. 156, 172-73

(1997). Aside from the factors listed explicitly in 28 U.S.C. § 1367(c), a court may consider the

circumstances of a particular case, the nature of the state laws, and the relationship between the state

and federal claims when considering whether to exercise supplemental jurisdiction. Id. Supplemental

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jurisdiction is “a doctrine of discretion, not of plaintiff’s right.” City of Chicago, 522 U.S. at 172.

Chasan Inc. and the Plan assert four state causes of action in addition to their two ERISA

claims. Given the Court’s analysis below (finding three of Dr. Chasan’s state law claims preempted),

and given the nature of the case, the Court declines to exercise supplemental jurisdiction over Chasan

Inc. and the Plan’s state law claims. The Court concludes that Chasan Inc. and the Plan’s state claims

will predominate over the federal claims, and given the circumstances of the case and the fact that

more than fifteen California statutes are alleged to have been violated, Chasan Inc. and the Plan’s

claims are more appropriately decided by a California court. Accordingly, Chasan Inc. and The Plan’s

state law causes of action–the third, fifth, seventh, and ninth claims for relief in the Complaint–are

dismissed without prejudice.

II. Preemption of Dr. Chasan’s State Law Claims

Dr. Chasan asserts a state cause of action for negligent misrepresentation, statutory fraud,

deceit and concealment, breach of covenant of good faith and fair dealing, and violation of the Unfair

Trade Practices Act in the Complaint. Defendants Garrett and Garrett Group contend that Dr.

Chasan’s state law claims are completely preempted, and request that this Court dismiss each of them.

Congress enacted ERISA to protect “the interests of participants in employee benefit plans and

their beneficiaries by setting out substantive regulatory requirements for employee benefit plans and

to provide for appropriate remedies, sanctions, and ready access to the Federal Courts.” Aetna Health

Inc. v. Davila, 542 U.S. 200, 208 (2004) (internal citations omitted); see also 29 U.S.C. § 1001(b).

Consistent with its purpose of providing “a uniform regulatory regime over employee benefit plans,”

ERISA includes expansive preemption provisions. Id., see also 29 U.S.C. § 1144. Those provisions

ensure that ERISA plans and plan sponsors are subject to a “uniform body of benefits law,” which

minimizes “the administrative and financial burden of complying with conflicting directives among

States or between States and the Federal Government . . . .” New York State Conference of Blue Cross

& Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 656-57 (1995). The Supreme Court has

noted that ERISA’s preemptive provisions are “deliberately expansive,” Pilot Life, 481 U.S. at 45-46,

and “broad.” Shaw v. Delta Airlines, Inc., 463 U.S. 85, 98-100 (1983). ERISA’s preemptive prowess

ensures that employee benefit plan regulation is “exclusively a federal concern.” Aetna, 542 U.S. at

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208, quoting Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981).

ERISA’s preemptive provision, 29 U.S.C. § 1144(a), provides that, “the provisions of this title

and title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any

employee benefit plan described in section 4(a) [29 U.S.C. § 1003(a)] and not exempt under section

4(b) [29 U.S.C. § 1003(b)].” 29 U.S.C. § 1144(a) (Emphasis added.). “The question whether a certain

state action is pre-empted by federal law is one of congressional intent.” Pilot Life Ins. Co. v.

Dedeaux, 481 U.S. 41, 45 (1987). Generally speaking, a state law “relates” to a benefit plan if it “has

a connection with or reference to such a plan.” Id. at 47, citing Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724, 739 (1985); see also Blue Cross of California v. Anesthesia Care Assoc.,

187 F.3d 1045, 1052 (9th Cir. 1999). A state law claim has “reference to” an employee benefits plan

if the state law claim is premised on the existence of an ERISA plan, or if existence of the ERISA plan

is essential to the state law claim’s survival. California Div. of Labor Standards Enforcement v.

Dillingham Constr., 519 U.S. 316, 324-25 (1997). 

Neither the Supreme Court, nor the Ninth Circuit has articulated a single precise rule for

determining when a state law claim has a “connection with” an employee benefits plan. Rutledge v.

Seyfarth, 201 F.3d 1212, 1217 (9th Cir. 2000). However, the most commonly and recently used test

in this Circuit is the “relationship test.” Id. at 1220; Providence Health Plan v. McDowell, 385 F.3d

1168, 1172 (9th Cir. 2004). Under the relationship test, a state law claim has a connection with an

ERISA plan if the state claim encroaches upon relationships regulated by ERISA, such as the

relationship between plan and plan member, plan and employer, and plan and trustee. McDowell, 385

F.3d at 1172; Abraham v. Norcal Solid Waste Systems, 265 F.3d 811, 820-21 (9th Cir. 2001).

A. State law claims for Negligent Misrepresentation and Statutory Fraud, Deceit and

Concealment

Dr. Chasan’s state law claims for common law negligent misrepresentation and statutory fraud,

deceit and concealment arise from Defendants’ allegedly improper conduct prior to the creation of the

Plan. Specifically, Dr. Chasan alleges that Defendants’ misled Dr. Chasan regarding the efficacy and

legality of the Plan, and further materially misrepresented information regarding the Plan. Dr. Chasan

alleges that he would not have created the Plan if he had been aware of the material

misrepresentations.

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Dr. Chasan correctly notes that some Courts have held that state law claims for pre-plan fraud

in the inducement and misrepresentation are not preempted under certain circumstances. See Perry

v. P.I.E. Nationwide, 872 F.2d 157 (6th Cir. 1989); Perkins v. Time Insurance, 898 F.2d 470 (5th Cir.

1990). The Ninth Circuit, however, has yet to squarely address whether ERISA preempts such claims,

and the circumstances under which such preemption might occur. Camp v. Pacific Financial Group,

956 F. Supp. 1541, 1547-48 (C.D. Cal. 1997). In Farr v. U.S. West Comm., No. 96-36051, 1998 U.

S. App. LEXIS 38509, at *11-13, (9th Cir. June 15, 1998), the Ninth Circuit addressed whether a state

law claim alleging that an employer’s misleading concealment of tax consequences induced ERISA

plan participation was preempted. On appeal, and affirming the district court, the Circuit held that

“the tax consequences of the 5 + 5 plan clearly ‘relate to’ plan administration because they are part

of the overall mix of information relied upon by Plaintiffs in making their decisions to participate in

the plan.” Id. at 12. While Farr involved an existing plan, and the claims in this case involve fraud

in the creation of a plan, it is evident that the Ninth Circuit viewed information relating to the decision

whether to participate in a plan as relating to “plan administration.” Id.

In Camp, plaintiffs argued that their state law claim for fraudulent inducement to enter into an

ERISA plan was not preempted. The district court noted that such claims could survive preemption,

see Camp, 956 F. Supp. at 1547-48, but ultimately found the state law claim “hopelessly

interconnected” with the plan, and ruled that ERISA preempted the claim. Id. at 1548. The same

analysis applies to the case at bar. Dr. Chasan is a participant in an ERISA plan, and the allegations

that form the basis for his ERISA claims are, in part, the same allegations which support his claims

for pre-plan fraud, deceit and negligent misrepresentation. The allegations are intertwined, and as

noted in Camp, “[t]his is not a situation where, absent the state law claim, the [plaintiff is] without any

remedy to redress the wrongful conduct which caused [his] damages.” Id. at 1548. To the contrary,

Dr. Chasan has pleaded two ERISA claims, which are not challenged in the motion to dismiss. The

Court concludes that Plaintiff’s state law claims for pre-plan fraud and negligent misrepresentation

are so intertwined with Plaintiff’s ERISA claims that preemption is required. See Camp, 956 F. Supp.

at 1547-49. 

Despite the difficulty in articulating a precise test to determine ERISA preemption, the Ninth

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Circuit has repeatedly stated that, “under each test, a core factor leading to the conclusion that a state

law claim is preempted is that the claim bears on an ERISA-regulated relationship.” Rutledge, 201

F.3d at 1219; Norcal Solid Waste Systems, 265 F.3d at 820-21. In this case, the Complaint alleges that

Plaintiff Dr. Chasan is an ERISA participant and that Defendants Garrett and Garrett Group are

fiduciaries under ERISA. ERISA clearly regulates the relationship between participant and fiduciary

of a plan. See 29 U.S.C. § 1104. Though some (but not all) of the alleged fraud occurred before the

Dr. Chasan created the Plan, that fraud nevertheless bears on the relationship between plan participant

and plan fiduciary. Furthermore, the allegations of fraud and negligent misrepresentation involve

conduct which occurred after the creation of the Plan, and related to the Plan’s purchase of insurance.

As noted in Castonguay, “[b]ecause the state law[s] here regulate one of the relationships regulated

by ERISA, [the court] must give effect to ERISA’s broad preemption clause.” Castonguay, 984 F.2d

at 1522. The Court concludes that ERISA preempts Dr. Chasan’s state law claims for negligent

misrepresentation and statutory fraud, deceit, and concealment (Dr. Chasan’s third and fifth claims

for relief).

B. Dr. Chasan’s State law claims for breach of covenant of good faith and fair dealing

and violation of the California Insurance Code

Aside from the state law claims for pre-plan fraud and negligent misrepresentation, Dr. Chasan

also asserts state law claims against Defendants Garrett and Garrett Group for breach of covenant of

good faith and fair dealing and for violations of the Unfair Competition Act and Cal. Ins. Code §§

790.02 and 790.03 (Dr. Chasan’s seventh and ninth claims for relief). 

Dr. Chasan’s state law claim for breach of covenant of good faith and fair dealing not only

concerns conduct which occurred after the creation of the Plan–specifically misrepresentations made

by Defendants which urged the Plan to purchase an insurance policy to fund the Plan and insure Dr.

Chasan–but it also regulates the relationship between plan and fiduciary, a relationship which is

regulated extensively by ERISA. 29 U.S.C. § 1104. “[A]ny regulation of an ERISA relationship,

whether direct or indirect, is a sufficient basis for preemption.” McBride, 179 F.3d at 745-46. The

Court concludes that ERISA preempts the claim for breach of covenant of good faith and fair dealing

(Dr. Chasan’s seventh claim for relief).

The question whether ERISA preempts Dr. Chasan’s claim pursuant to Cal. Ins. Code §§

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790.03 and 790.03 (ninth claim for relief) is more difficult. Though the claim does relate to an ERISA

plan, ERISA includes a savings clause which exempts state laws “regulating insurance” from ERISA

preemption. 29 U.S.C. § 1144(b)(2)(A). Pilot Life, 481 U.S. at 48-50; Aetna, 542 U.S. at 217-18.

The Ninth Circuit has held that claims under Cal. Ins. Code §§ 790.02 and 790.03 are preempted by

ERISA despite the savings clause when the claims attempt to seek a remedy for the improper

processing of insurance claims under Cal. Ins. Code §§ 790.03(h), since such claims are at the core

of ERISA’s regulatory scheme. Kanne v. Connecticut Gen. Life Ins. Co., 867 F.2d 489 (9th Cir. 1988)

(finding preemption because claim was essentially one for improper processing of insurance claims);

See also Moore v. Provident Life and Accident Insurance Co., 786 F.2d 922 (9th Cir. 1986).

However, neither the Ninth Circuit nor a district court in this Circuit has determined whether a claim

for fraudulent inducement of an insurance policy’s purchase pursuant to the Cal. Ins. Code falls within

ERISA’s savings clause. 

Many district courts have concluded that claims under Cal. Ins. Code §§ 790.03 should not be

preempted under ERISA if the claims do not attempt to directly regulate an ERISA plan, and instead

regulate the relationship between insurance company and policy holder, a relationship traditionally

regulated by State law. Presti v. Connecticut General Insurance Co., 605 F. Supp. 163 (N.D. Cal.

1985) (state claims against insurer not preempted as a purpose of ERISA is to maintain ascendancy

of state regulation of insurance matters); Eversole v. Metropolitan Life Ins. Co., 500 F. Supp. 1162

(C.D. Cal. 1980) (the rule that emerges from these cases is that any law directly regulating an

employee benefit plan is preempted, while laws regulating an insurance company or policy purchased

by the plan from an insurance company are not preempted); see also McLaughlin v. Connecticut

General Life Ins. Co., 565 F. Supp. 434 (N.D. Cal. 1983); Graves v. Blue Cross of California, 688 F.

Supp. 1405 (N.D. Cal. 1988). After reviewing the ERISA savings clause and the relevant case law,

the Court concludes that Dr. Chasan’s state law claim pursuant to Cal. Ins. Code §§ 790.02 and 790.03

is not preempted, and falls within ERISA savings clause. Dr. Chasan’s claim that Defendants

fraudulently induced his purchase of the Policy through fraudulent acts does not directly regulate

ERISA, and instead regulates the relationship between policy holder and insurance company, a

relationship which is traditionally regulated by state law. See Eversole, 500 F. Supp. at 1169-1170,

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citing Wadsworth v. Whaland, 562 F.2d 70 (1st Cir. 1977) (state regulation of insurance policies

purchased by ERISA plans fall within the savings clause and are not preempted).

CONCLUSION

Defendant Garrett and Garrett Group’s motion to dismiss (Doc. # 12) is granted and denied

in part as follows:

(1) The Complaint (Doc. # 1) is dismissed with respect to Plaintiffs Chasan Inc. and the Plan,

as each party lacks standing to bring suit under ERISA. The Court declines to exercise supplemental

jurisdiction over Chasan Inc. and the Plan’s state law claims, and those claims are dismissed without

prejudice.

(2) Defendants’ motion to dismiss (Doc. # 12) is granted as to Dr. Chasan’s state law claims

for negligent misrepresentation (third claim for relief), statutory fraud, deceit and misrepresentation

(fifth claim for relief), and breach of covenant of good faith and fair dealing (seventh claim for relief),

and denied as to Cal. Ins. Code §§ 790.02 and 790.03 (ninth claim for relief).

IT IS SO ORDERED.

DATED: January 18, 2007

WILLIAM Q. HAYES

United States District Judge

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