Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_09-cv-04618/USCOURTS-cand-3_09-cv-04618-0/pdf.json

Parties Involved:
Blue Shield of California
Defendant
Blue Shield of California Life and Health Insurance Company
Defendant
California Physicians' Service
Defendant
John M. Hagan
Plaintiff

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United States District Court 

For the Northern District of California 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

JOHN M. HAGAN, individually and as 

Successor-in-Interest of the 

ESTATE OF LORI HAGAN, 

Plaintiff, 

v. 

CALIFORNIA PHYSICIANS' SERVICE, 

dba BLUE SHIELD OF CALIFORNIA, a 

California Corporation, BLUE 

SHIELD OF CALIFORNIA LIFE AND 

HEALTH INSURANCE COMPANY, a 

California Corporation, and DOES 1 

through 100, inclusive, 

Defendants. 

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Case No. 09-4618 SC 

ORDER GRANTING MOTION TO 

REMAND

I. INTRODUCTION

 This suit involves a dispute between Plaintiff John M. Hagan 

("Hagan" or "Plaintiff") and Defendants California Physicians' 

Service and Blue Shield of California Life and Health Insurance Co. 

(collectively "Blue Shield" or "Defendants"). Blue Shield removed 

this action to federal court after it discovered what it believed 

to be a basis for federal question jurisdiction. See Docket No. 1 

("Notice of Removal"). The Court is now considering Hagan's Motion 

to Remand ("Motion"). Docket No. 12.1

 Blue Shield has submitted 

 

1

 Hagan also requests attorney fees through an Amended Motion to 

Remand. Docket No. 14. 

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an Opposition, and Hagan has submitted a Reply. Docket Nos. 16, 

19. In addition, Blue Shield has submitted a surreply, coupled 

with an ex parte motion for permission to file this surreply. 

Docket Nos. 20.2 Having considered the submissions from both 

parties, the Court finds that remand is appropriate, and GRANTS 

Hagan's Motion. 

II BACKGROUND

 This is an insurance dispute between Hagan and Blue Shield, 

who issued a health insurance policy that covered Hagan and his 

wife on July 1, 2005. See Notice of Removal Ex. F ("FAC") ¶ 14. 

Hagan claims that his wife was diagnosed with a rare form of 

adenocarcinoma around February of 2006. Id. ¶ 15. On August 23, 

2006, Blue Shield rescinded the Hagans' coverage, claiming that 

Hagan's wife had failed to disclose material medical history 

information when she applied for coverage under Blue Shield's 

policy. Id. ¶ 16. Hagan's wife died on May 9, 2007. Id. ¶ 20. 

 Hagan claims that Blue Shield's practices are designed to give 

it unfair and unreasonable opportunities to rescind coverage for 

customers who have serious health conditions. Id. ¶¶ 21-24. He 

brought suit in the Superior Court of the State of California, Lake 

County, against Blue Shield for breach of contract, breach of the 

duty of good faith and fair dealing, and a number of other state 

 

2

 Because Blue Shield filed its surreply in response to a novel 

argument raised by Hagan in his Reply, the Court GRANTS Blue 

Sheild's Motion for Permission to File Sur-Reply Brief re 

Plaintiff's Motion to Remand. Hagan also filed a request for 

permission to submit a responsive surreply, Docket No. 22, but the 

Court does not see any similar good reason for Hagan's late 

submission. Hagan's Motion for Permission to File Sur-Surreply 

Brief re Motion to Remand is DENIED. Consideration of this 

submission would not have changed the outcome of this Order. 

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causes of action. See Compl.

 This matter found its way into federal court after Blue Shield 

discovered that businesses owned by Hagan had paid the premiums for 

the Blue Shield policy, as opposed to Hagan personally. Notice of 

Removal ¶ 20.3

 Blue Shield claims that the policy was therefore 

part of an ERISA plan, that all of Hagan's state cause of action 

are preempted by ERISA, and that this Court has subject matter 

jurisdiction over the dispute. Id. ¶¶ 8-17. 

 Hagan is the owner of two businesses: Economy Heating, a sole 

proprietorship, and Economy Propane, an S corporation in which he 

is the sole shareholder and sole operator. Hagan Decl. ¶ 2.4

 

Around 1995, Hagan obtained a Blue Cross health insurance policy to 

cover his employees. See Johna Decl.5 Ex. 1 ("Def.'s Hagan Dep. 

Excerpts") at 367:25-368:6. Hagan and his family were apparently 

covered under this policy. C.f. Johna Decl. Ex. 2 ("Krebser 

Decl.") at 178:24-179:13.6 Between May and July of 2005, Hagan 

switched his family from the Blue Cross policy to a separate Blue 

Shield policy. FAC ¶ 15. Blue Shield concedes that the Blue 

Shield policy covered only Hagan and his family. Opp'n at 5. 

 During the time that the Blue Shield policy was active (until 

August 23, 2006), each and every premium payment for the Blue 

Shield policy was paid by business checks from either Economy 

 

3

 Plaintiff raises no objection to removal on the basis of 

timeliness. 

4

 Hagan filed a declaration in support of the Motion to Remand. 

Mot. at 9. This declaration did not have a separate docket entry. 

5

 Ophir Johna ("Johna"), counsel for Blue Shield, filed a 

declaration in support of the Opposition. Docket No. 18. 

6

 Peter Krebser ("Krebser") was a broker who assisted Hagan in 

procuring his insurance policies. 

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Heating or Economy Propane. Johna Decl. Ex. 6 ("Checks") at 189-

203. Hagan claims that although "some" of the policy premiums were 

paid by his businesses, they were kept -- or at least intended to 

be kept -- as a personal policy that was separate from the ERISA 

insurance policy that his business maintained for his employees, 

and they were charged -- or intended to be charged -- to his 

personal draw. See Mot. at 5-6. 

III. LEGAL STANDARD

 An action that might have originally been brought in federal 

court is removable to federal court. 28 U.S.C. § 1441(a). "The 

removal statute is strictly construed, and the court must reject 

federal jurisdiction if there is any doubt as to whether removal 

was proper. The defendants bear the burden of proving the 

propriety of removal." Simpson v. Union Pac. R.R. Co., 282 F. 

Supp. 2d 1151, 1153 (N.D. Cal. 2003) (citation omitted). Where 

removal depends on contested facts, the removing party must 

establish "by a preponderance of evidence" that removal was proper 

-- i.e., that there is a sufficient basis for jurisdiction. See

Sanchez v. Monumental Life Ins. Co., 102 F.3d 398, 403-04 (9th Cir. 

1996) (discussing burden where amount in controversy was 

contested). "Federal jurisdiction must be rejected if there is any 

doubt as to the right of removal in the first instance." Gaus v. 

Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). 

 Courts will generally only have federal-question jurisdiction 

where the federal question is presented on the face of a "wellpleaded" complaint. See Rivet v. Regions Bank, 522 U.S. 470, 475 

(1998). "Allied as an 'independent corollary' to the well-pleaded 

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complaint rule is the further principle that 'a plaintiff may not 

defeat removal by omitting to plead necessary federal questions.'" 

Id. (quoting Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation 

Trust for Southern Cal., 463 U.S. 1, 14 (1983)). According to this 

principle, a federal court may have jurisdiction "where federal law 

completely preempts a plaintiff's state-law claim," such as where 

claims are completely preempted by the Employee Retirement Income 

Security Act ("ERISA"), 29 U.S.C.S. § 1001 et seq. Id. (citing 

Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 65-66 (1987)). 

IV. DISCUSSION

A. Blue Shield's Objections

 Before moving to the substance of Hagan's Motion, the Court 

will briefly address Blue Shield's evidentiary objections. Docket 

No. 17 ("Objections"). The Court does not appreciate the 

concurrent filing of eight pages of objections separate from and in 

addition to an opposition brief that already reaches the page limit 

set out by the Civil Local Rules. Civ. Local Rules 7-3(b), 7-4(b). 

The Court OVERRULES Blue Shield's objections with respect to the 

Hagan Declaration. Blue Shield first argues that Hagan's 

statements with respect to his intended use and the intended scope 

of the policy are irrelevant. Objections ¶¶ 1-2. The Court simply 

disagrees, and finds that Hagan's claims are both relevant and 

supported by deposition testimony cited by both parties, as 

described in more detail below. Blue Shield also challenges 

several of Hagan's statements based upon the "best evidence rule," 

even though the statements to which Blue Shield objects do not 

purport to describe the "content of a writing, recording or 

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photograph . . . ." Id. ¶¶ 3-4; Fed. R. Evid. 1002. Blue Shield 

apparently misunderstands the application of this rule. If a 

declarant has firsthand knowledge of a fact, this rule does not 

prevent the declarant from testifying to that fact, simply because 

there exists a separate document that also speaks to that fact. 

 The Court SUSTAINS Blue Shield's objections to the October 28 

Declaration of Scott Glovsky ("First Glovsky Decl.").7 The Court 

finds the contents of the declaration to be irrelevant to the 

factual and legal issues involved in the Motion. Similarly, 

because the December 17 Declaration of Scott Glovsky ("Second 

Glovsky Decl.")8 only speaks to issues related to attorney fees, 

and because the Court does not find an award of attorney fees to be 

appropriate, it SUSTAINS Blue Shield's objections to the Second 

Glovsky Declaration. 

B. Whether the Blue Shield Policy Falls Under ERISA

 "ERISA contains one of the broadest preemption clauses ever 

enacted by Congress." Evans v. Safeco Life Ins. Co., 916 F.2d 

1437, 1439 (9th Cir. 1990). It preempts any claim that "relates 

to" a covered employee benefit plan, 29 U.S.C. § 1144(a), such that 

"it has a connection with or reference to such a plan." Shaw v. 

Delta Air Lines, 463 U.S. 85, 96-97 (1983). "[A] common-law cause 

of action premised on the existence of an ERISA plan" will be 

preempted by ERISA. See Cal. Div. of Labor Stds. Enforcement v. 

Dillingham Constr., N.A., 519 U.S. 316, 324 (1997). Of course, 

 

7

 Scott Glovsky ("Glovsky"), counsel for Hagan, filed a declaration 

in support of the Motion to Remand. Mot. at 10-11. This 

declaration did not have a separate docket entry. 

8

 Glovsky also filed a declaration in support of his Amended 

Motion. Docket No. 15. 

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ERISA preemption is only relevant if Blue Shield can prove that the 

Blue Shield policy was in fact part of an ERISA plan. 

 Under 29 U.S.C. § 1002(1), an "employee welfare benefit plan" 

includes: 

(1) a "plan, fund or program" (2) established or 

maintained (3) by an employer or by an employee 

organization, or by both, (4) for the purpose of 

providing medical, surgical, hospital care, 

sickness, accident, disability, death, 

unemployment or vacation benefits, apprenticeship 

or other training programs, day care centers, 

scholarship funds, prepaid legal services or 

severance benefits (5) to the participants or 

their beneficiaries. 

Kanne v. Conn. Gen. Life Ins. Co., 867 F.2d 489, 492 (9th Cir. 

1988). 

 At the heart of this dispute is whether the Blue Shield policy 

was part of a plan established for the benefit of participants or 

their beneficiaries.9 This is because "[a]n ERISA employee benefit 

plan must have 'participants' which are present or former employees 

of an employer." Watson v. Proctor, 161 F.3d 593, 596 (9th Cir. 

1998) (citing 29 U.S.C. § 1002(6)). It is undisputed that the only 

people covered by the Blue Shield policy were Hagan and his family, 

Hagan Decl. ¶ 3, and "an individual and his or her spouse shall not 

 

9

 Hagan also claims that because the Blue Shield policy was 

procured in connection with a Health Savings Account ("HSA"), it is 

not subject to ERISA. Reply at 1-8. The Court is unpersuaded. 

The only substantive, on-point law that Hagan cites explicitly 

states that, even though HSAs are often not covered by ERISA, the 

status of an HSA does not affect the ERISA status of employersponsored high deductible health plans related to that HSA. See

Dept. of Labor Field Assistance Bulletin 2004-1. This Court 

understands HSAs and employer-sponsored insurance policies to be 

two separate things, the latter of which may fall under ERISA even 

when the former does not. Hagan's emphatic reliance upon this 

argument is therefore unfounded. The Court declines Hagan's 

invitation to sanction Blue Shield for failing to brief this issue 

in its Opposition. 

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be deemed to be employees with respect to a trade or business, 

whether incorporated or unincorporated, which is wholly owned by 

the individual and his or her spouse . . . ." 29 C.F.R. § 2510.3-

3(c)(1); Watson, 161 F.3d at 596-97. Consequently, if the Blue 

Shield policy is construed as a stand-alone "plan," then it cannot 

be an ERISA plan. This would mean that ERISA cannot preempt 

Hagan's claims against Blue Shield, and this Court has no 

jurisdiction over this dispute. 

 Blue Shield points to the existence of the Blue Cross policy, 

which covered Hagan and his family before they established the Blue 

Shield policy, and which admittedly does qualify as an ERISA plan 

because it covers Hagan's employees. See Opp'n at 12, 18-20; Mot. 

at 3. Blue Shield argues that both policies in fact make up part 

of the same "plan," which provided coverage for "employees" when 

taken as a whole, and which is therefore governed by ERISA. Blue 

Shield is correct to point out that the mere fact that an 

owner/shareholder has an individual policy does not render that 

policy a separate "plan" for ERISA purposes, so long as it was part 

of or derived from a larger ERISA "plan." See, e.g., Peterson v. 

American Life & Health Insurance Co., 48 F.3d 404, 407-08 (9th Cir. 

1995); Harper v. Am. Chambers Life Ins. Co., 898 F.2d 1432, 1434 

(9th Cir. 1990). If the Blue Shield policy is part of a broader 

"plan" that also includes the Blue Cross policy, then Hagan's 

claims are preempted and this Court has jurisdiction. 

 In Peterson, a partnership purchased a short-term group policy 

that covered the business' two partners as well as their only 

employee; this policy was intended to provide coverage only while 

the business tried to secure a long-term policy under a different 

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insurer. 48 F.3d at 406. When the long-term policy was secured, 

one partner and the employee shifted to the new policy, while the 

other partner, Peterson, was not accepted by the new carrier and 

remained on the first policy. Id. Peterson then required medical 

treatment, was denied coverage, and brought state law claims 

against his insurance carrier, which invoked ERISA preemption. Id.

at 406-07. The Ninth Circuit panel held that "the fact that the . 

. . policy covered only a . . . partner at the time of Peterson's 

surgery is not determinative." Id. at 407. The business 

"continued to provide insurance to at least one non-partner 

employee, albeit" under a different policy. Id. at 407-08. It 

stated that the business: 

not only paid its partners' and employees' 

insurance premiums but also played an active role 

in the administration of the coverage, including 

choosing the insurance, adding and deleting 

employees and partners from various policies, 

contacting insurance companies for employees and 

partners, and distributing information relevant 

to the coverage. 

Id. at 408. Finally, the Court found it pertinent that the policy 

"originally covered a non-partner employee" and was effectively 

"derived from" an ERISA plan. Id. It concluded that Peterson's 

policy "was just one component of [the business'] employee benefit 

program and that the program, taken as a whole, constitutes an 

ERISA plan." Id. at 407. 

 In contrast, Hagan likens this case to LaVenture v. The 

Prudential Ins. Co, of Am., in which a panel for the Ninth Circuit 

held that a disability insurance policy, is "not converted into an 

ERISA plan merely because a company offers its employees unrelated 

health insurance coverage." 237 F.3d 1042, 1044-45 (9th Cir. 

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2001). The plaintiff, LaVenture, was the sole shareholder of a 

company. Id. at 1043. She had purchased, for herself and her 

husband, disability insurance that had been solicited to the 

company, and she later purchased health insurance (but not 

disability insurance) for a new employee. Id. at 1044. The panel 

contrasted the facts before it with those in Peterson, noting that 

the disability policy in question "did not originate as part of an 

ERISA plan . . . ." Id. at 1045-46. It stated that the disability 

policy "was not an ERISA plan because all of the benefits flow to 

the owner," and there was "no evidence to establish that the 

disability policy and health plan were intertwined so as to 

constitute an overall benefit plan." Id. at 1047. 

 Considering all of the facts raised by both Hagan and Blue 

Shield, the Court concludes that the Blue Shield policy was a 

separate plan, more akin to the disability policy in LaVenture than 

the health insurance policy in Peterson. Even though both of these 

policies included health insurance, there is no evidence that they 

were intertwined -- no employees were ever covered by the Blue 

Shield policy, and there is no evidence that coverage was ever 

offered to them. Hagan Decl. ¶ 3. Unlike in Peterson, while the 

Blue Shield policy existed, every owner (i.e., Hagan) was covered 

only by the Blue Shield policy, and no owner was covered by the 

Blue Cross policy. Unlike in Peterson, the individual Blue Shield 

policy was never "derived" from a group policy that was 

unequivocally part of an ERISA plan. The Blue Shield policy was 

created roughly ten years after the Blue Cross policy, and the 

former was independent from the latter. There is no indication 

that Hagan's businesses, as opposed to Hagan acting in his personal 

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capacity, made any administrative decisions or exercised any power 

over the Blue Shield policy. 

 In reaching its conclusion that the policy was part of a 

single ERISA plan, the panel in Peterson noted the fact that the 

partnership paid for the policy. 48 F.3d at 408. Blue Shield 

therefore makes much of the fact that the premiums for the Blue 

Shield policy were paid from the accounts of Hagan's businesses, 

rather than from a personal checking account. See Checks at 189-

203. These include payments from the Economy Propane account, 

which, unlike the Economy Heating account, Hagan does not claim to 

have ever used as a "personal" account. See Checks at 192-93, 195-

97, 199-201; Third Glovsky Decl.10 Ex. B ("Pl.'s Hagan Dep. 

Excerpts") at 150:16-153:16. It cannot be reasonably disputed that 

Hagan's businesses accounted for the premiums as business expenses, 

rather than personal expenses or disbursements, and Hagan even 

accounted for them as expenses on the business' tax statements for 

2005 and 2006.11 Johna Decl. Exs. 7, 8, 9, 10 (collectively, 

"Account Transaction Details"); id. Exs. 12 ("2005 Form 1040"), 13 

("2006 Form 1040"), 14 ("2005 Form 1120S"), 15 ("2006 Form 1120S"). 

 This Court nevertheless finds that the payment of the premiums 

 

10 Glovsky attached this declaration in support of the Motion to 

the Reply. It does not have a separate docket entry. 

11 Blue Shield claims that Hagan should be estopped from claiming 

that the premiums were not paid by his businesses. Opp'n at 16-18. 

Although Hagan claims that most of the premiums were paid for from 

his "personal checking," a quick inspection of the checks 

themselves reveals that this is incorrect -- most premiums were 

paid by Economy Propane. See Checks at 189-203. However, the 

issue is not simply whether the businesses paid for the premiums, 

but rather whether the Blue Shield policy was part of the same 

"plan" as the Blue Cross policy. Determining the entity that 

ultimately paid the premium informs, but does not decide, this 

question. 

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should not be determinative, particularly given the peculiar facts 

of this case. Hagan was the sole proprietor and owner of his 

businesses, and he regularly paid personal expenses and made 

personal draws from Economy Heating's account. Pl.'s Hagan Dep. 

Excerpts at 150:16-153:16. John Robertson ("Robertson"), Hagan's 

accountant, testified in deposition that he had received 

instructions from Hagan which he understood to require him to treat 

all of the policy payments as distributions to Hagan, rather than 

business expenses.12 Third Glovsky Decl. Ex. A ("Pl.'s Robertson 

Dep. Excerpts") at 220:16-221:21. Robertson states that the 

premiums were treated as a business expense only because he "must 

not have communicated properly to the accounting department" the 

requirement that the Blue Shield policy be treated as a personal 

expense. Id. at 220:16-24. Robertson incorrectly believed that 

the policies were being treated "correctly" (i.e., separately) in 

2005 and 2006. Id. at 225:6-13. While it is true that Hagan's 

businesses paid for the premiums, Robertson's testimony provides 

clear evidence of an attempt (albeit a failed attempt) to keep the 

two insurance policies separate, and to treat them differently. 

This is further evidence that the policies were never intended to 

 

12 Blue Shield claims that Hagan never gave any such instructions. 

Opp'n at 15. After examining the excerpts from Robertson's 

deposition that Blue Shield cited to support this claim, the Court 

disagrees. Both of the excerpts cited by Blue Shield appear to 

speak to later time periods, see Johna Decl. Ex. 4 ("Def.'s 

Robertson Dep. Excerpts") at 105:3-9, 174:6-13, and this point is 

more clearly addressed by Robertson's testimony that, "at that 

point in time," Robertson's "expectation back then would have been 

that we would have treated all the individual policy payments as a 

distribution . . . ." See Pl.'s Robertson Dep. Excerpts at 220:16-

221:21. 

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be a part of the same overarching ERISA plan.13 

 Blue Shield also points out that, after the Blue Shield policy 

was rescinded, Hagan moved his family back onto the Blue Cross 

policy. Opp'n at 7-8.14 This does not undermine the independent 

nature of the Blue Shield plan. Notably, shortly after Hagan 

joined the Blue Cross policy, Hagan's accountants apparently 

realized their accounting mistake and began treating payments for 

Hagan under the Blue Cross policy as a separate draw, distinct from 

the payments made for other employees, just as the Blue Shield 

policy was supposed to have been treated.15 Pl.'s Robertson Dep. 

Excerpts at 224:3-225:4. This fact reinforces Robertson's 

testimony that the businesses had always intended to treat the Blue 

Shield policy separately, and it supports the Court's conclusion 

that the policies were not so "intertwined . . . as to constitute 

one overall benefit plan." LaVenture, 237 F.3d 1047. 

 The Court finds that Blue Shield has failed to demonstrate by 

a preponderance of the evidence that the Blue Shield policy could 

be considered, with the Blue Cross policy, to constitute a single 

ERISA plan. The Court believes that the Blue Shield policy was 

 

13 The Court does not believe that the evidence suggests that Hagan 

is attempting to "rewrite history" to make it look as though his 

businesses never paid for the Blue Shield policy; rather, the 

testimony of Robertson suggests that it was an honest error which 

they simply had not noticed until this suit arose, at which point 

Robertson (apparently on his own initiative) attempted to correct 

the prior tax statements. See Pl.'s Robertson Dep. Excerpts at 

229:4-24. 

14 The Court assumes, arguendo, that this is true, although it 

notes that the deposition excerpts that Blue Shield cites for 

support appear to address separate points. 

15 Blue Shield does not discuss how payment for Hagan's Blue Cross 

policy was treated prior to his enrollment under the Blue Shield 

policy. 

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intended as a separate policy made especially for the owner and 

shareholder of Economy Heating and Economy Propane, together with 

his family. Consequently, the Blue Shield policy had no employee 

participants and cannot be governed by ERISA. 

C. Attorney Fees

 Under 28 U.S.C. 1447(c), "[a]n order remanding the case may 

require payment of just costs and any actual expenses, including 

attorney fees, incurred as a result of the removal." A district 

court has wide discretion in assessing fees pursuant to section 

1447(c). Rutledge v. Seyfarth, Shaw, Fairweather & Geraldson, 201 

F.3d 1212, 1215 (9th Cir. 2000). Absent unusual circumstances, 

attorney's fees should not be awarded when the removing party has 

an objectively reasonable basis for removal. See Martin v. 

Franklin Capital Corp., 546 U.S. 132, 141 (2005); Patel v. Del 

Taco, Inc., 446 F.3d 996, 999 (9th Cir. 2006). The Court believes 

that Blue Shield's claim that the Blue Shield policy and the Blue 

Cross policy constituted a single ERISA plan is incorrect, but not 

unreasonable -- particularly in light of the incorrect accounting 

treatment that the Blue Shield policy received, and the fact that 

the explanation for this treatment was only elicited after removal. 

Any "unusual circumstances" in this case weigh against, and not 

for, an award of attorney fees. 

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United States District Court

For the Northern District of California 

V. CONCLUSION

 For the reasons stated above, Hagan's claims are not preempted 

by ERISA, and this Court lacks subject matter jurisdiction over 

this lawsuit. The Court hereby GRANTS Plaintiff John M. Hagan's 

Motion to Remand. This matter is remanded to the Superior Court of 

California, in and for the County of Lake. The request for an 

award of attorney fees is DENIED. 

IT IS SO ORDERED. 

Dated: February 4, 2009 

UNITED STATES DISTRICT JUDGE

Case 3:09-cv-04618-SC Document 23 Filed 02/04/10 Page 15 of 15