Court Opinion

ID: 7382
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:27:38+00
Date Added: 2024-06-11T16:46:16.799865
License: Public Domain

United States Court of Appeals,

                                Fifth Circuit.

                                 No. 93-7362.

 Nathan and Sharyl McDONALD, Individually and as Next Friend and
Guardians of Nathan Neil McDonald, a Minor, and J.N. McDonald, Jr.,
Individually and d/b/a McDonald Equipment, Plaintiffs-Appellants,

                                        v.

 PROVIDENT INDEMNITY LIFE INSURANCE COMPANY, et al., Defendants-
Appellees.

                                 Aug. 9, 1995.

Appeal from the United States District Court For the Southern
District of Texas.

Before POLITZ, Chief Judge, EMILIO M. GARZA and STEWART, Circuit
Judges.

     POLITZ, Chief Judge:

     McDonald Equipment Company and employee-beneficiaries of its

health insurance plan appeal an adverse summary judgment in their

action complaining of excessive—and unaffordable—premium increases.

We affirm.

                                  Background

     In 1986, McDonald Equipment, a sole proprietorship owned by

J.N. McDonald, Jr., subscribed to the Business Insurance Trust to

obtain    group     health   insurance        for    its    employees       and   their

dependents.       The BIT, a multiple employer trust, was organized by

Arden    O.   French,   Jr.,   who    served        as   trustee    and    also   owned

Insurance     Resources      Management       Corporation,         the    third   party

administrator of the group health plan.                  When McDonald subscribed

in 1986, the BIT plan was underwritten by a policy issued by

Northern Carolina Mutual.            In 1988 North Carolina Mutual ceased

                                          1
providing health insurance and French selected Provident Indemnity

Life Insurance Company as the replacement insurer.          IRM continued

as administrator until taken over by Provident in November 1989.

French then resigned as trustee and the trusteeship was transferred

first to three Provident employees and then to TrustMark Bank.

      Nathan McDonald, the son of J.N. McDonald Jr., managed the

McDonald business.     In September 1989, Nathan's son Neil suffered

a tragic, near-fatal swimming accident, resulting in a permanent

spastic quadriplegic condition. Provident paid $360,000 in medical

claims and raised McDonald Equipment's premium by 50 percent in

April 1990 (McDonald changed its deductible from $100 to $500 to

avoid a 150 percent increase), by 100 percent in November 1990, and

by   still   another   100   percent   in   April   1991.   As   a   result,

McDonald's initial monthly premiums of $2000 were increased to

$15,208.     The company could not afford continued coverage and the

policy lapsed.

      The McDonalds and McDonald Equipment brought suit against

Provident, the BIT and French, asserting various state law claims

and alternatively invoking the Employee Retirement Income Security

Act of 1974, 29 U.S.C. §§ 1001 et seq.          Granting the defendants'

motion for partial summary judgment, the district court found that

McDonald's health coverage constituted an ERISA plan and preempted

the state law claims.        Following a bench trial on the remaining

issues, the district court rendered judgment in favor of the

defendants.    This appeal timely followed.

                                 Analysis

                                       2
1. Was there an ERISA plan?

         In reviewing the grant of summary judgment, we may affirm

only if there is no dispute of material fact, and the movant is

entitled to judgment as a matter of law.1   The existence vel non of

an ERISA plan is a question of fact.2       Therefore, our initial

inquiry focuses on whether the summary judgment evidence would have

allowed a reasonable trier-of-fact to find that an ERISA plan did

not exist.

     ERISA defines an employee welfare benefit plan in pertinent

part as:

     any plan, fund, or program which was ... established or
     maintained by an employer or by an employee organization, or
     by both, to the extent that such plan, fund, or program was
     established or is maintained for the purpose of providing for
     its participants or their beneficiaries, through the purchase
     of insurance or otherwise ... medical, surgical, or hospital
     care or benefits....3

Relying on MDPhysicians & Associates, Inc. v. State Board of

Insurance,4 the McDonalds contend that the BIT was not such a plan.

The BIT was established by French in association with an insurance

company as an entrepreneurial venture, not by employers seeking to

provide employee benefits and, further, it had no relationship with

     1
      Fed.R.Civ.P. 56(c).
     2
      Gahn v. Allstate Life Ins. Co., 926 F.2d 1449 (5th
Cir.1991).
     3
      29 U.S.C. § 1002(1).
     4
      957 F.2d 178 (5th Cir.), cert. denied, --- U.S. ----, 113
S.Ct. 179, 121 L.Ed.2d 125 (1992).

                                  3
the employee-participants apart from the provision of benefits.5

The BIT's status, however, is not dispositive.                 In determining

whether an ERISA plan exists, we must focus on the employer and its

involvement with the plan.           The dispositive issue is whether

McDonald Equipment's subscription to the BIT constituted an ERISA

plan.6

     That inquiry is tripartite.           First we apply the safe-harbor

provisions   established     by   Department      of   Labor   regulations     to

determine whether the program was exempt from ERISA.                    Because

McDonald Equipment paid the insurance premiums, it was not.7               Next

we look to see if there was a "plan" by inquiring whether "from the

surrounding circumstances a reasonable person [could] ascertain the

intended   benefits,     a   class   of    beneficiaries,      the   source    of

financing, and procedures for receiving benefits."8                  Under this

standard a plan clearly existed.            The benefits provided by the

McDonald   plan   were   described    in    the   Provident     policy;       the

beneficiaries were the McDonald employees and their dependents;

McDonald Equipment paid the entire premiums for coverage of its

employees and a portion of the premiums for coverage of the

     5
      Id.; see also Donovan v. Dillingham, 688 F.2d 1367 (11th
Cir.1982) (en banc).
     6
      Gahn; Meredith v. Time Ins. Co., 980 F.2d 352 (5th
Cir.1993); Memorial Hospital System v. Northbrook Life Ins. Co.,
904 F.2d 236 (5th Cir.1990). Unlike the case at bar, the status
of the multiple employer trust was dispositive in MDPhysicians
because the issue was whether the state could regulate the MET.
     7
      29 C.F.R. § 2510.3-1(j).
     8
      Memorial Hospital, 904 F.2d at 240 (quoting Dillingham, 688
F.2d at 1373).

                                      4
dependents;            and the procedures for recovering benefits were

explained in the policy manual.                   Finally, we ask whether the

employer "established or maintained" the plan for the purpose of

providing benefits to its employees.                   McDonald Equipment did so,

purchasing the insurance, selecting the benefits, identifying the

employee-participants,           and    distributing         enrollment    and    claim

forms.9         A reasonable fact-finder could have reached but one

conclusion:          McDonald's subscription to the BIT constituted an

ERISA plan.

2. Standard of Review.

           The McDonalds first contend that the district court erred in

applying the arbitrary and capricious standard of review rather

than       a   de   novo   standard    in   reviewing       French's   actions     as   a

fiduciary.          In Firestone Tire & Rubber Company v. Bruch,10 the

Supreme        Court    recognized     that     when    a    fiduciary    is     granted

discretion in the performance of a duty the review is for an abuse

of discretion.          In the instant action the trust agreement creating

the BIT gave French the absolute discretion to contract with an

insurance provider. French acted under this authority in selecting

PILIC and the district court correctly reviewed the decision under

the arbitrary and capricious standard which is the equivalent of

the abuse of discretion standard in this circuit.11

       9
        Cf. Memorial Hospital.
       10
            489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989).
       11
      Penn v. Howe-Baker Engineers, Inc., 898 F.2d 1096 (5th
Cir.1990) (equating arbitrary and capricious standard with abuse
of discretion standard in ERISA context).

                                            5
3. Did French breach his fiduciary duties in selecting PILIC?

          At the outset, we note that as trustee of the BIT and

principal of IRM, the third-party administrator, French was a

fiduciary of the McDonald plan.12        The plaintiffs contend that

French breached his fiduciary duty by not disclosing Provident's

schedule for the re-rating of premiums, by selecting PILIC to

underwrite the BIT policy, and by benefitting personally from the

increased level of premiums.     We review these claims under a three

step analysis. To establish a claimed breach of fiduciary duty, an

ERISA plaintiff must prove a breach of a fiduciary duty and a prima

facie case of loss to the plan.13   "Once the plaintiff has satisfied

these burdens, "the burden of persuasion shifts to the fiduciary to

prove that the loss was not caused by ... the breach of duty.' "14

      In ruling on the McDonalds' nondisclosure claim, the district

court held that French breached his fiduciary duty by failing to

disclose PILIC's re-rating schedule for its group health coverage

premiums to McDonald Equipment.         We perceive no error in this

holding.       Section 404(a) imposes on a fiduciary the duty of

undivided loyalty to plan participants and beneficiaries, as well

as a duty to exercise care, skill, prudence and diligence.15      An

obvious component of those responsibilities is the duty to disclose

     12
          Donovan v. Mercer, 747 F.2d 304 (5th Cir.1984).
     13
      Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th
Cir.1994).
     14
          Id. at 917.
     15
          29 U.S.C. § 1104.

                                    6
material information.

       Shortly after the effective date of the plan, PILIC advised

French of a new rate schedule which French later conceded would

have resulted in prohibitive premiums for any small employer

experiencing a single catastrophic claim.             French, however, failed

to inform either McDonald Equipment or its employee-beneficiaries

of the schedule, at least in part due to marketing considerations.

Considering the impact that this rate schedule would have had on

McDonald Equipment or any other small employer, this information

was material to PILIC's suitability as a replacement insurer and

McDonald's decision to remain in the BIT.             Accordingly, French had

an obligation to disclose.

       The nondisclosure claim falters, however, at the second step

of our analysis, specifically, the plaintiffs failed to prove a

loss    to     the   plan   as   required   by   29   U.S.C.   1109(a).16    In

Massachusetts Mut. Life Ins. Co. v. Russell,17 the Supreme Court

interpreted the "loss to the plan" language in § 1109 to limit

claims under this section to those which inure to the benefit of

the plan as a whole rather than to individual beneficiaries.                The

court noted that this interpretation reflected ERISA's primary

concern with the possible misuse or mismanagement of plan assets.18

       A close examination of the McDonalds's claim does not disclose

       16
      The plaintiffs assert that the defendants are liable under
§ 409 of ERISA, codified at 29 U.S.C. § 1109.
       17
            473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985).
       18
      Id. at 140-42 & n. 8, 9, 105 S.Ct. at 3089-90 & n. 8, 9,
87 L.Ed.2d at 102-03 & n. 8, 9 (discussing legislative history).

                                        7
how it involved the requisite "loss to the plan" as described in

Russell.      The resulting harm of the breach of French's fiduciary

duties was the payment of higher premiums which ultimately lead to

the   decision,    albeit   under   economic    duress,   to     discontinue

insurance coverage with the BIT.         The relief sought is the balance

of the benefits due for the treatment of Neil McDonald.                This

relief, unfortunately in this legal analysis, inures to the benefit

of the McDonalds, not the plan, and thus has no impact on plan

assets.    Were we to consider the prohibitive increases in premiums

as the injury or loss, these increases actually made the plan

itself healthier and more likely to survive the catastrophic claims

of    other    beneficiaries,   including     other   McDonald    Equipment

employees.19    We must therefore conclude that the McDonalds failed

to establish a loss to the plan.20       Further, because the showing of

a loss to the plan is required for any breach of fiduciary duty

claim under § 1109, the McDonalds' other breach claims also fail.

4. Other claims.

      The remaining claims have no merit.             The state law civil

conspiracy and fraud claims are preempted by ERISA.21          The district

      19
      The plaintiffs also failed to provide any evidence that
coverage was available from other companies under better terms.
      20
      See Total Plan Services v. Texas Retailers Assoc., 932
F.2d 357 (5th Cir.1991) (dismissing claim for failure to allege a
loss to the plan); Physicians HealthChoice, Inc. v. Trustees of
Automotive Employee Benefit Trust, 988 F.2d 53 (8th Cir.1993).
      21
      See Christopher v. Mobil Oil Corp., 950 F.2d 1209 (5th
Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 68, 121 L.Ed.2d 35
(1992).

                                     8
court did not err in denying a jury trial on the ERISA claims.22

Finally, we find no abuse of discretion in the district court's

termination of discovery.23

     AFFIRMED.

     22
      Borst v. Chevron Corp., 36 F.3d 1308 (5th Cir.1994);
Calamia v. Spivey, 632 F.2d 1235 (5th Cir.1980).
     23
      See Wichita Falls Office Assoc. v. Banc One Corp., 978
F.2d 915 (5th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct.
2340, 124 L.Ed.2d 251 (1993) (according great deference to
judge's decision to curtail discovery).

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