Court Opinion

ID: 3039194
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:00:15.434958+00
Date Added: 2024-06-11T07:37:57.166191
License: Public Domain

United States Court of Appeals
                         FOR THE EIGHTH CIRCUIT
                                    ___________

                                    No. 04-3676
                                    ___________

John Delcastillo; Lois Diane        *
Delcastillo,                        *
                                    *
      Plaintiffs - Appellees,       *
                                    * Appeal from the United States
      v.                            * District Court for the
                                    * District of Nebraska.
Odyssey Resource Management, Inc.; *
1st Odyssey Group,                  *
                                    *
      Defendants - Appellants,      *
                               ___________

                               Submitted: June 20, 2005
                                  Filed: December 23, 2005 (Corrected: 01/05/06)
                                   ___________

Before LOKEN, Chief Judge, ARNOLD and COLLOTON, Circuit Judges.
                             ___________

LOKEN, Chief Judge.

      In August 1996, John Delcastillo was severely injured while working at a
GLNX rail car repair facility in Omaha owned by Houston J-M Corporation. He
began receiving health insurance benefits under a GLNX-sponsored group policy
issued by United Healthcare Insurance Company. His benefits continued after
Integrated Rail Products (IRP) purchased the assets of GLNX in October 1997.
However, further benefits were denied after IRP replaced the United Healthcare
policy with a health care plan provided by Reliance Insurance Company.
       Delcastillo and his wife Diane commenced this action against multiple
defendants under the Employee Retirement Income Security Act (ERISA), 29 U.S.C.
§§ 1001 et seq., as amended by the Consolidated Omnibus Budget Reconciliation Act
of 1985 (COBRA), 29 U.S.C. §§ 1161-68. After other defendants were dismissed,
the district court held a two-day bench trial and concluded that Odyssey Resource
Management and 1st Odyssey Group are jointly and severally liable to the
Delcastillos for breach of ERISA fiduciary duties and for failure to provide the
notices of their right to continuation coverage mandated by COBRA. The court
awarded a total of $306,866.11 for COBRA statutory penalties and compensatory
damages and $109,317.50 in attorneys’ fees and costs. Delcastillo v. Odyssey
Resource Mgmt., Inc., 320 F. Supp. 2d 889, 901 (D. Neb. 2004). The Odyssey
defendants appeal. We conclude that the Delcastillos were covered by the Reliance
plan at its inception. Therefore, they may be entitled to recover unreimbursed
medical expenses under ERISA but are not entitled to recover statutory penalties
under COBRA. Accordingly, we reverse and remand.

                             I. Factual Background

      When John Delcastillo was injured in 1996, Odyssey Management, Inc., served
as “co-employer” of the GLNX employees under a Staff Services Agreement with
Houston J-M Corporation. As co-employer, Odyssey Management was responsible
for complying with COBRA and ERISA for any plans that it administered.1
However, Odyssey Management did not administer the United Healthcare health plan

      1
        The Odyssey companies are professional employer organizations that offer
small and mid-size companies services aimed at complying with federal, state, and
local employment-related laws and regulations. About 700 PEOs currently operate
in all 50 states, co-employing 2-3 million Americans. See generally Employers Res.
Mgmt. Co., Inc. v. Shannon, 65 F.3d 1126, 1128-29 (4th Cir. 1995), cert. denied, 516
U.S. 1094 (1996); National Ass’n of Professional Employer Organizations website
(visited Oct. 27, 2005) .

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for GLNX employees. Delcastillo was a participant in that plan. GLNX was the
policyholder of the United Healthcare group health policy.

      Delcastillo did not return to work after his 1996 accident. He and his wife
continued receiving health care benefits under the United Healthcare policy. In
November 1997, after IRP purchased the GLNX assets, Delcastillo received the
following letter from IRP’s Manager of Benefits Administration:

             This letter is to let you know that GLNX-Omaha was sold
      effective October 15, 1997. As of that date all employees of GLNX-
      Omaha were terminated.

            GLNX-Omaha no longer exists as of the aforementioned date.
      Houston J-M Corp. will pay your health insurance coverage until you
      have reached MMI [maximum medical improvement].

The Delcastillos continued to receive health care benefits from United Healthcare.
The explanation of benefits forms from United Healthcare identified IRP as the
policyholder of the same group policy previously held by GLNX.

       When it acquired GLNX, IRP engaged Odyssey Resource Management to
serve as co-employer of GLNX employees under a Staff Services Agreement virtually
identical to the agreement between Odyssey Management and Houston J-M
Corporation.2 Odyssey became responsible to IRP for complying with COBRA and
ERISA “for any plans it administered.” However, Odyssey did not administer the

      2
        Odyssey Management and defendant Odyssey Resource Management were
separate subsidiaries of Supreme Enterprises, Inc. Defendant 1st Odyssey Group is
a related company, apparently owned by Supreme Enterprises shareholders, that took
over the assets and service agreements of Odyssey Resource Management at the end
of the year 2000. For convenience, we will refer to the Odyssey defendants as
“Odyssey,” except when there is a need to differentiate between them.

                                       -3-
United Healthcare plan for IRP, and the Delcastillos continued to receive benefit
payments from United Healthcare.

       In January 1999, IRP engaged Odyssey to sponsor a health care plan. Odyssey
terminated the United Healthcare policy and purchased a group health care policy
from Reliance. Odyssey as co-employer served as the plan sponsor. See 29 U.S.C.
§ 1002(16)(B)(i). The Loomis Company served as a third-party administrator
responsible for paying claims on behalf of Reliance.3 To enroll eligible participants
in the new health care plan, an Odyssey account manager, Linda Reyna, went to the
IRP work site, where active employees filled out application forms that Odyssey sent
to Loomis. The disabled Delcastillo was not at the work site and therefore was not
enrolled in the plan.

       Shortly thereafter, when Diane Delcastillo was denied coverage for a
prescription drug, she called IRP to inquire. IRP’s human resources director called
Reyna, told her that IRP “had missed an employee when we did the enrollment,” and
instructed Reyna to send enrollment forms to Delcastillo. The Delcastillos promptly
filled out and returned the forms and received health insurance cards from Odyssey.
When Diane continued to be denied coverage, she called Loomis and was told she
had coverage. When she asked the Nebraska Department of Insurance to investigate,
Reliance assured the Department that Delcastillo was a covered employee and sent
Delcastillo a certificate of coverage in August 1999. However, Odyssey pursued the
coverage question internally, and Loomis “pended” approximately $27,000 of claims
submitted by the Delcastillos because of the lingering coverage uncertainty.
Ultimately, Odyssey and Reliance concluded that Delcastillo was not eligible for
coverage and refused to pay the claims. On July 5, 2000, Odyssey sent Loomis a

      3
      The record does not establish whether Odyssey or Loomis was the plan
“administrator” for ERISA purposes. See 29 U.S.C. § 1002(16)(A); Coker v. Trans
World Airlines, Inc., 165 F.3d 579, 582 (7th Cir. 1999).

                                        -4-
notice that Delcastillo’s coverage was canceled effective June 30. On July 19,
Loomis sent Delcastillo a COBRA notice explaining that his group health coverage
terminated on June 30 and that he was eligible for continuation coverage for up to
eighteen months following this “qualifying event.”

      The Delcastillos filed this action against Odyssey Resource Management, 1st
Odyssey Group, Loomis, and Reliance. After dismissing Reliance (apparently
because of insolvency), they filed an amended complaint against the Odyssey
defendants and Loomis seeking statutory penalties for their failure to give
continuation coverage notices mandated by COBRA, reimbursement of medical
expenses incurred, and an injunction granting future health insurance coverage. The
Delcastillos dismissed Loomis prior to trial.

       After trial, the district court held the Odyssey defendants jointly and severally
liable for statutory penalties based on their failure to give both an initial COBRA
notice of the Delcastillos’ statutory right to continuation coverage after a qualifying
event, and their failure to give timely notice of a qualifying event. The court further
held the Odyssey defendants liable for the Delcastillos’ unpaid medical expenses
based on affirmative misrepresentations as to coverage made after the
Reliance/Odyssey/IRP plan took effect on February 1, 1999.

                       II. Coverage under the Reliance Plan

       Odyssey’s defense to all the Delcastillos claims is premised on the contention
that John Delcastillo was never covered under the Reliance/Odyssey/IRP health care
plan because the Reliance group policy provided that only an IRP employee who
works “regularly throughout an employer’s entire work week . . . at any of the
employer’s business locations” is eligible for coverage. As Delcastillo was not
working regularly when Odyssey began providing health care benefits to IRP
employees through the Reliance policy, the Odyssey defendants argue, there was no

                                          -5-
coverage and the Delcastillos’ benefit claims were properly denied. See Turner v.
Safeco Life Ins. Co., 17 F.3d 141 (6th Cir. 1994). Moreover, the argument concludes,
Odyssey did not become responsible for any required COBRA notices.

       The Delcastillos do not seriously challenge Odyssey’s interpretation of the
eligibility provisions of the Reliance group policy. But they do argue that Delcastillo
was initially covered under the Reliance policy by reason of the following provision:

                     REPLACEMENT OF COVERAGE

      This provision shall apply when this Policy is replacing a prior plan of
      similar group coverage that the Employer had with another insurer.
      When this happens, the following provisions apply:

             a) this Policy will cover all persons who were covered under the
             previous policy on the date it was discontinued . . . .

We interpret the terms of the policy de novo when, as here, there is no claim that the
ERISA plan granted any fiduciary discretionary authority to construe the policy. See
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989).

       In our view, the Replacement of Coverage provision describes precisely the
situation here. The Reliance policy replaced IRP’s “prior plan of similar group
coverage” with United Healthcare. United Healthcare benefit statements in the record
are uncontroverted proof that the Delcastillos “were covered under the previous
policy on the date it was discontinued.” In these circumstances, it does not matter
whether John Delcastillo was working regularly when the Reliance policy was issued,
or whether he was even an IRP “employee” at that time. It is enough that he was a
covered plan participant under the health care plan being replaced. In a competitive
market for the sale of ERISA plan services, one would expect to find this type of
replacement coverage provision in a group health policy, because it enables

                                         -6-
employers to switch ERISA plan providers with the assurance that coverage
continuity will be preserved.

      Odyssey argues that the Replacement of Coverage provision does not apply
because Odyssey Resource Management, Inc. was the “employer” under the Reliance
policy and did not provide insurance to IRP employees prior to February 1, 1999.
This contention is so contrary to reality and to the policies underlying ERISA that it
jeopardizes judicial acceptance of the co-employer artifice. IRP chose to replace the
group health coverage previously provided to its employees by United Healthcare.
IRP engaged Odyssey as a limited “co-employer” for the purpose of sponsoring the
replacement plan. The fact that IRP was the United Healthcare policyholder and
Odyssey became the Reliance policyholder does not alter the reality that IRP obtained
“replacement coverage” for its employees. Thus, it is not surprising that, in the
months following February 1, 1999, representatives of IRP, Loomis, and Reliance all
assured the Delcastillos and the Nebraska Department of Insurance that the
Delcastillos were covered under the Reliance group policy. If the right to ERISA
benefits could be altered by the essentially non-substantive provision in Odyssey’s
contract with IRP making Odyssey a “co-employer,” the decision to engage PEOs as
co-employers might well violate ERISA fiduciary duties.

        As Delcastillo was covered under the United Healthcare policy when IRP and
co-employer Odyssey changed health care providers, we hold that Delcastillo was
initially covered under the Reliance policy’s replacement coverage provision.
Odyssey did not instruct Loomis to terminate this coverage until June 30, 2000. The
Delcastillos do not challenge Odyssey’s right to terminate coverage at that time.
Accordingly, the Delcastillos were covered from February 1, 1999, to June 30, 2000.

                                         -7-
          III. COBRA Notice Requirements and Statutory Penalties

        COBRA requires that a group health plan provide, “at the time of
commencement of coverage under the plan, written notice to each covered employee
. . . of [his COBRA] rights.” 29 U.S.C. § 1166(a)(1). Those rights include the
sponsoring employer’s obligation to offer continuation coverage to employees and
their spouses for at least eighteen months following a “qualifying event” that results
in a loss of group health plan coverage. See 29 U.S.C. §§ 1161(a), 1162(2), 1163.
When a qualifying event occurs, the plan administrator must give a timely additional
notice of the right to elect continuation coverage. See 29 U.S.C. § 1166(a)(4). A
plan administrator that fails to meet either or both of these notice requirements “may
in the court’s discretion be personally liable to such participant or beneficiary in the
amount of up to $100 a day from the date of such failure . . . and the court may in its
discretion order such other relief as it deems proper.” 29 U.S.C. § 1132(c)(1).

        In this case, the district court found that Odyssey provided no initial COBRA
notice under the Reliance/Odyssey/IRP plan until August 10, 1999, and no qualifying
event notice until July 19, 2000. Accordingly, the court awarded “statutory penalties
in the amount of $110.00 per day for each plaintiff for . . . failure to provide COBRA
notice measured from February 1, 1999, until July 19, 2000 . . . and for 18 months
thereafter, plus statutory penalties in the amount of $110.00 per day for each plaintiff
for failure to provide notice of COBRA rights measured from February 1, 1999, until
August 10, 1999.” 320 F. Supp. 2d at 901. If the questions were squarely presented,
we would not affirm this manner of measuring the statutory penalty periods, nor the
discretionary decision to award 110% of the statutory maximum daily penalty for
these extended periods of time. But we need not reach those questions, for we
conclude that there were no COBRA notice violations as a matter of law.

      The Initial Notice Issue. As we have explained, the Delcastillos were initially
covered under the Reliance group policy when it took effect on February 1, 1999.

                                          -8-
The obligation to provide an initial COBRA notice attaches “at the time of
commencement of coverage under the plan.” 29 U.S.C. § 1166(a)(1). A new group
health plan was not created when IRP purchased the GLNX assets and was
substituted as policyholder under the United Healthcare group policy in 1997, nor
when IRP changed plan providers by switching from the United Healthcare group
policy to the Reliance group policy on February 1, 1999. In each case, the existing
plan continued in effect, an event that does not give rise to a new initial notice
obligation under COBRA. See Truesdale v. Pacific Holding Co., 778 F. Supp. 77,
82-83 (D.D.C. 1991); Charles O. Hiler & Sons, Inc. v. Cole, 605 N.E.2d 235 (Ind. Ct.
App. 1992).

        Absent evidence to the contrary, we must assume that Delcastillo received an
initial COBRA notice at the commencement of his coverage under the GLNX/United
Healthcare plan. As that coverage continued under the Reliance plan by virtue of the
Replacement of Coverage provision, Delcastillo was not entitled to an additional
initial COBRA notice in February 1999. Therefore, we vacate in its entirety the
district court’s award of statutory penalties based upon Odyssey’s alleged failure to
provide an initial COBRA notice.

       The Qualifying Event Notice Issue. Without identifying the qualifying event,
the district court awarded substantial statutory penalties for Odyssey’s failure to
provide the qualifying event notice mandated by 29 U.S.C. § 1166(a)(4) until July 19,
2000. As the statutory penalty runs “from the date of such failure,” 29 U.S.C.
§ 1132(c)(1), and as the court began the penalty period on February 1, 1999, the court
apparently concluded that switching the health care plan provider from United
Healthcare to Reliance was a qualifying event. That was an error of law. Consistent
with the plain language of 29 U.S.C. § 1163, the applicable regulation defines a
qualifying event as one that “causes the covered employee . . . to lose coverage under
the plan.” 26 C.F.R. § 54.4980B-4, Q&A-1(c). As we have explained, Delcastillo

                                         -9-
did not lose coverage when his employer switched to the Reliance plan in February
1999, so no notice was required.

       The Delcastillos’ coverage under the Reliance policy continued until Odyssey
terminated coverage effective June 30, 2000. This was clearly a qualifying event.
Therefore, Delcastillo was entitled to a COBRA election notice. COBRA provides
that the employer must notify the administrator of a qualifying event within thirty
days, 29 U.S.C. § 1166(a)(2), and the administrator must notify the beneficiary within
fourteen days of receiving notice from the employer, 29 U.S.C. § 1166(c). Here, it
is undisputed that Odyssey notified plan administrator Loomis of the coverage
termination on July 5, 2000, and that Loomis sent Delcastillo the required COBRA
notice on July 19. Thus, both Odyssey and Loomis complied with their COBRA
notice obligations regarding the June 30 termination of coverage.4 The district
court’s award of statutory penalties for failure to give a COBRA notice upon the
occurrence of a qualifying event is vacated in its entirety.

                  IV. Recovery of Benefits Wrongfully Denied

      ERISA expressly provides a plan participant or beneficiary such as the
Delcastillos a cause of action “to recover benefits due to him under the terms of his
plan.” 29 U.S.C. § 1132(a)(1)(B). The Delcastillos asserted no claim under
§ 1132(a)(1)(B). Instead, they sought to recover denied benefits on the theory, as
explained in their brief on appeal, that “[b]y failing to provide coverage, Odyssey
violated their statutory fiduciary duty.” It is true that a plan administrator acts in a
fiduciary capacity in making benefits decisions, and ERISA provides a distinct cause

      4
       If Loomis was not the ERISA plan administrator, see note 3, supra, the
applicable regulation provides that Odyssey as employer was the plan administrator
and must provide notice within 44 days of the qualifying event, in which case the July
19 notice was still timely. See 29 C.F.R. § 2590.606-4(b)(2).

                                         -10-
of action for “other appropriate equitable relief” to remedy a breach of ERISA
fiduciary duties. 29 U.S.C. § 1132(a)(3). But “where Congress elsewhere provided
adequate relief for a beneficiary’s injury [such as an action for wrongful denial of
benefits under § 1132(a)(1)(B)], there will likely be no need for further equitable
relief, in which case such relief normally would not be ‘appropriate.’” Varity Corp.
v. Howe, 516 U.S. 489, 515 (1996); see Geissal v. Moore Med. Corp., 338 F.3d 926,
933 (8th Cir. 2003), cert. denied, 540 U.S. 1181 (2004). Moreover, only equitable
relief, not money damages, may be awarded under § 1132(a)(3). See Great-West Life
& Ann. Ins. Co. v. Knudson, 534 U.S. 204, 209-10 (2002).

       Though the Delcastillos did not assert a wrongful denial claim in their amended
complaint, the coverage issue was obviously tried by consent because the court’s
Order on Final Pre-Trial Conference listed as an unresolved issue, “[w]hether
Plaintiffs were actually eligible (at any of the relevant times) to participate in any
group health plan sponsored by Defendants.” See Fed. R. Civ. P. 15(b); Miller v.
Mills Constr., Inc., 352 F.3d 1166, 1171 (8th Cir. 2003). The Odyssey defendants
argued in the district court and on appeal that the Delcastillos lacked standing to
assert a claim for breach of fiduciary duties because John Delcastillo was never
covered by the Reliance policy. That contention falls with our resolution of the
coverage issue. The record on appeal does not reveal whether Odyssey also argued
to the district court that the Delcastillos may not recover wrongfully denied benefits
under a breach of fiduciary duty theory because the remedy under § 1132(a)(1)(B) is
exclusive. Thus, there may be an issue whether that defense has been waived. In
addition, the district court’s decision did not explain either the nature or the amount
of the “special damages” being awarded. Accordingly, we remand to the district court
for further consideration of whether the Delcastillos are entitled to recover damages
equal to their unreimbursed covered medical expenses during the period from
February 1, 1999, to June 30, 2000. However, we reverse the court’s alternative
award of statutory penalties for “breach of fiduciary duty,” 320 F. Supp. 2d at 901,
because “the Supreme Court has stressed that ERISA does not create compensatory

                                         -11-
or punitive damage remedies where an administrator of a plan fails to provide the
benefits due under that plan.” Turner v. Fallon Community Health Plan, Inc., 127
F.3d 196, 198 (1st Cir. 1997), cert. denied, 523 U.S. 1072 (1998), citing
Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).

                              V. The Alter Ego Issue

        The district court concluded that Odyssey Resource Management and 1st
Odyssey Group are jointly and severally liable to the Delcastillos based on its finding
that they acted as alter ego corporations “used to perpetuate the denial of Mr.
Delcastillo’s notice and benefits and to create confusion about the Delcastillos’
recourse and remedies.” Defendants appeal the alter ego determination. Apparently,
this issue arose in the district court when defense counsel intimated that the Odyssey
defendants would be judgment proof because Odyssey Resource Management is a
dormant shell and 1st Odyssey Group was not involved in the events at issue.
Because this issue may lose its relevance given our disposition of the appeal, we
decline to consider it at this time. We note, however, that a PEO organization that
uses multiple corporate entities to frustrate the recovery of valid ERISA claims might
become subject to drastic ERISA remedies, such as an order permanently enjoining
the culpable parties from acting as a service provider to any ERISA plan. See Martin
v. Feilen, 965 F.2d 660, 673 (8th Cir. 1992), cert. denied, 506 U.S. 1054 (1993).

                          VI. Attorney’s Fees and Costs

      ERISA provides the district court discretion to award “a reasonable attorney’s
fee and costs of action to either party.” 29 U.S.C. § 1132(g)(1). Applying our
decision in Lawrence v. Westerhaus, 749 F.2d 494, 495 (8th Cir. 1984), as modified
by our en banc decision in Martin v. Arkansas Blue Cross & Blue Shield, 299 F.3d
966 (8th Cir. 2002), cert. denied, 537 U.S. 1159 (2003), the district court awarded
attorney’s fees and costs in the amount of $109,317.50. We have reversed the court’s

                                         -12-
decision on the COBRA notice claims and the bulk of the court’s damage and
penalties award, and we have remanded for further consideration of whether the
Delcastillos may prevail on their claim for recovery of unreimbursed covered medical
expenses. Accordingly, we vacate the attorney’s fee award. On remand, if the
Delcastillos prevail on their remaining claim, the district court should redetermine
whether to exercise its discretion to award an attorney’s fee, bearing in mind that “[a]
reduced fee award is appropriate if the relief, however significant, is limited in
comparison to the scope of the litigation as a whole.” Hensley v. Eckerhart, 461 U.S.
424, 440 (1983).

                                  VII. Conclusion

      The judgment of the district court is reversed, and the case is remanded for
further post-trial proceedings not inconsistent with this opinion.
                        ______________________________

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