Court Opinion

ID: 11677
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:06:52+00
Date Added: 2024-06-11T15:04:35.907594
License: Public Domain

United States Court of Appeals,

                              Fifth Circuit.

                               No. 96-20850

                             Summary Calendar.

   CYPRESS FAIRBANKS MEDICAL CENTER INC., Plaintiff-Appellant,

                                     v.

     PAN-AMERICAN LIFE INSURANCE COMPANY;         National Insurance
Services, Inc., Defendants-Appellees.

                              April 17, 1997.

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

Before DAVIS, EMILIO M. GARZA and STEWART, Circuit Judges.

     STEWART, Circuit Judge:

     This case requires us to determine the scope of our decision

in Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236

(5th Cir.1990), in which we held that a third-party provider's

state-law claim for misrepresentation of medical coverage was not

preempted by the Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. §§ 1001-1461. Because we find that the district

court erred in concluding that the plaintiff's state-law claim for

misrepresentation was preempted, we reverse.          In addition, because

this case was removed to federal court on the ground that the

plaintiff's claim implicated ERISA—thereby giving rise to federal

question jurisdiction—and because we conclude that ERISA is not

implicated,    we   remand   this   case   to   the   district   court   with

instructions to remand the plaintiff's state-law claim to Texas

state court.

                                     1
                                 BACKGROUND

     In December 1993, Deborah J. Meyer established an employee

welfare benefit plan which provided group health insurance for

Meyer's employees and their dependents.            The insurance plan was

funded through insurance purchased from the defendant Pan-American

Life Insurance Company.     National Insurance Services acted as Pan-

American's agent.      Both parties agree that the health insurance

plan is an ERISA plan.

     Jack    Schwartz,   one    of   Meyer's    full-time   employees,   was

admitted to Cypress Hospital and ran up a bill of $178,215.44 in

medical services related to a respiratory ailment.                Prior to

admitting Schwartz, Cypress on two occasions was informed by Pan-

American's agent, National Insurance Services, that Schwartz was

covered by Meyer's health insurance plan.           It is undisputed that

Cypress     extended   health   services   in    reliance   on   National's

representations, that Schwartz was in fact not covered by the

health insurance plan, and that National therefore incorrectly

informed Cypress about Schwartz's status under the health plan.

Cypress eventually submitted a bill for services to National, who

refused to pay on the ground that Schwartz's "coverage [was]

rescinded as of [the] effective date."1

     Cypress then brought suit against Pan-American and National

(defendants) in Texas state court alleging a violation of § 21.21

    1
     The meaning of this phrase is not altogether clear. Nor does
the record reveal the precise reasons for National's denial of
coverage. For our purposes, however, Cypress has claimed, and the
defendants appear to agree, that National denied coverage because
Schwartz was not covered at all under the ERISA plan.

                                      2
of Texas's Insurance Code. Specifically, Cypress argued that the

defendants negligently misrepresented Schwartz's coverage under the

health insurance plan, and as such, were liable for deceptive and

unfair trade practices. The case was eventually removed to federal

court       on   the   basis   of   federal   question   jurisdiction.   The

defendants then filed a motion to dismiss, or in the alternative,

a motion for summary judgment, arguing that Cypress's claim was

preempted by ERISA.        The district court agreed with the defendants

and entered a take-nothing judgment against Cypress.             This appeal

followed.

                                     DISCUSSION

     This case requires us to revisit our holding in Memorial Hosp.

Sys. v. Northbrook Life Ins. Co., 904 F.2d 236 (5th Cir.1990), in

which we held that a state-law cause of action for negligent

misrepresentation brought pursuant to Texas Insurance Code § 21.21

was not preempted by ERISA.              Id. at 245-50.       Cypress claims

Memorial controls this case.            The defendants, on the other hand,

argue that Memorial is distinguishable because "this Court [in

Memorial ] distinguished between a situation involving an alleged

misrepresentation as to the extent of coverage, and one as to the

existence of coverage at the time of the misrepresentation."             Red

Brief, at 5 (citing Memorial, 904 F.2d at 2462).                The district

        2
      The defendants erroneously cited to page 25 6 of Memorial.
Because our opinion in Memorial does not extend to page 256, we
assume that the defendants are directing our attention to page 24
6, which allegedly contains language that supports the defendants'
position.

                                         3
court did not rely on or cite our decision in Memorial.3                  Instead,

the district court concluded that Cypress's

      claims are indistinct from a participant's claim that his
      employer misrepresented the plan benefits. ... It does not
      matter whether it was the employee or his hospital that was
      misled by the benefit plan-related entities. Extensions of
      coverage however sought are not the plan;     the preemption
      works like a [sic ] omnipotent parole evidence rule to block
      all extension of amounts recoverable from entities whose
      involvement is related to plan benefits.

Blue Brief, Appendix, at 5 (emphasis added).                  Because we find that

the   defendants      have    erroneously         concluded    that   Memorial   is

inapplicable to this case and that the district court erred in not

applying Memorial, we reverse the district court's holding that

Cypress's claims are preempted by ERISA.

I. ERISA PREEMPTION   AND   OUR DECISION   IN   MEMORIAL

      We begin with a brief review of the logic and reasoning of our

decision in Memorial because that decision controls our disposition

of Cypress's claims in this case.                  ERISA preempts "any and all

State laws insofar as they now or hereafter relate to an employee

benefit plan." 29 U.S.C. § 1144(a) (emphasis added). In Memorial,

we set out to define the meaning of "relate to" in cases involving

independent, third-party providers of medical services, who assert

state-law causes of action for misrepresentation against insurance

companies that have misrepresented the existence of health coverage

to the detriment of the third-party provider.

      3
      The district court incorporated by reference its preemption
opinion "in a parallel case" as the basis for decision in this
case. Rec. at 133 (referring to Hermann Hosp. v. Pan Am. Life Ins.
Co., 932 F. Supp. 899 (1996)). Our analysis of the district court's
reasoning is therefore based on the district court's opinion in
Hermann.

                                           4
     Memorial   Hospital   was   incorrectly   informed   by   Northbrook

Insurance Company that an employee of Noffs, Incorporated was

covered under Noffs's health insurance plan. The benefit plan came

within ERISA's scope. After tendering the employee's hospital bill

to Northbrook, Memorial was informed that the employee in fact was

not covered under Noffs's plan.         Memorial sued, alleging, among

other things, negligent misrepresentation in violation of § 21.21

of Texas's Insurance Code. The district court held that Memorial's

state-law cause of action for misrepresentation was preempted by

ERISA.

     We reversed.    In reaching our conclusion that Memorial's

state-law claim for negligent misrepresentation was not preempted,

we initially made a distinction between hospitals who assert a

derivative claim for benefits (i.e., the hospital stands in the

shoes of the beneficiary of the plan) and independent, third-party

claims brought by health care providers such as Memorial. 904 F.2d

at 243-44.   To determine on which side of the line Memorial fell,

we looked to our prior cases in which we found ERISA preemption had

     two unifying characteristics:     (1) the state law claims
     address areas of exclusive federal concern, such as the right
     to receive benefits under the terms of an ERISA plan; and (2)
     the claims directly affect the relationship among the
     traditional ERISA entities—the employer, the plan and its
     fiduciaries, and the participants and beneficiaries.
904 F.2d at 245 (footnotes omitted).4       We concluded that Memorial

    4
     We have since followed this two-part inquiry in ERISA cases.
See Hook v. Morrison Milling Co., 38 F.3d 776, 781 (5th Cir.1994);
Weaver v. Employers Underwriters, Inc., 13 F.3d 172, 176 (5th
Cir.), cert. denied, 511 U.S. 1129, 114 S. Ct. 2137, 128 L. Ed. 2d 866
(1994).

                                    5
fit into neither category and was therefore asserting its state-law

claim for misrepresentation as an independent, third-party provider

of medical services.

       We asserted three justifications for our conclusion.                   First,

we   recognized    the     "commercial        realities"   facing     third-party

providers of health care services, noting that in situations in

which it is not clear whether a patient is covered by a health

insurance plan, "the provider wants to know if payment reasonably

can be expected.         Thus, one of the first steps in accepting a

patient for treatment is to determine a financial source for the

cost of care to be provided." 904 F.2d at 246.

       Second, when an insurance company erroneously informs a health

care provider such as Memorial that a patient is covered by health

insurance,    state      law,   which     "allocat[es]     ...   risks        between

commercial entities that conduct business in a state," normally

provides a remedy.         Id. at 246-47.          This is so, we reasoned,

because "[a] provider's state law action under these circumstances

would not arise due to the patient's coverage under an ERISA plan,

but precisely because there is no ERISA plan coverage."                       Id. at

246.

       Third, depriving an independent third-party provider of a

state-law cause of action in no way furthers, but rather defeats,

Congress's   purpose      behind      enacting    ERISA.    We   recognized       in

Memorial that third-party providers would be less likely to accept

the risk of nonpayment, and as a result, may require patients to

make    up-front   payments      or     subject    those   patients      to    other

                                          6
unnecessary inconveniences before treatment is offered.                  Id. at

247.    Nor, we reasoned, could Congress have wanted to "shield

welfare plan beneficiaries from the consequences of their acts

toward non-ERISA health care providers when a cause of action ...

would not relate to the terms or conditions of a welfare plan, nor

affect—or affect only tangentially—the ongoing administration of

the plan."    Id. at 250.

       In short, in Memorial, we staked out the policy arguments

which   support   the   conclusion       that   ERISA   does    not   preempt   a

third-party provider's state-law claims if that third party's claim

is premised on a finding that the beneficiary is not covered at all

by an existing ERISA plan.          As such, we defined what it meant for

a third party's state-law claims to "relate to" an ERISA plan,

premising our conclusion on the commercial realities faced by

third-party providers, basic notions of federalism, and Congress's

intent behind enacting ERISA.

II. POST-MEMORIAL TENSION   IN   OUR CASE LAW

       After we decided Memorial, some lower courts within our

Circuit encountered a tension in our cases between Memorial and

Hermann Hosp. v. MEBA Medical & Benefits Plan, 845 F.2d 1286 (5th

Cir.1988) (Hermann I ) and Hermann Hosp. v. MEBA Medical & Benefits

Plan, 959 F.2d 569 (5th Cir.1992) (Hermann II ).5              In Hermann I and

        5
       See Metroplex Infusion Care v. Lone Star Container, 855
F. Supp. 897, 900-01 (N.D.Tex.1994);    Oaks Psychiatric Hosp. v.
American Heritage    Life   Ins.  Co.,   814 F. Supp. 553,  555
(W.D.Tex.1993); Forest Springs Hosp. v. Illinois New Car & Truck
Dealers Ass'n Employees Ins. Trust, 812 F. Supp. 729, 732-33
(S.D.Tex.1993);   Brown Schs., Inc. v. Florida Power Corp., 806
F. Supp. 146, 150 (W.D.Tex.1992).

                                         7
Hermann II, we held that a third-party provider's state-law claims

were preempted by ERISA.        It therefore became unclear whether our

holding in Memorial applied to all third-party providers of medical

services (contra to Hermann I and Hermann II ) or whether Memorial

invited lower courts to conduct a fact-sensitive inquiry into

whether the third-party provider, under the unique circumstances of

each case, could properly be characterized as an independent,

third-party provider or as an assignee asserting a derivative claim

for ERISA benefits.          Accordingly, we take this opportunity to

clarify the scope of Memorial in light of Hermann I and Hermann II

and conclude that the cases are consistent with another.

     In Hermann I, 845 F.2d 1286, Hermann Hospital provided a

patient medical services after Hermann was informed by MEBA (the

insurance company) that the patient was covered by a health plan

governed by ERISA.     The patient, who had died, assigned her rights

to the benefits of the health plan to Hermann.                   MEBA neither

declined nor tendered payment, but told Hermann that the claim was

being "investigated."        Hermann then filed suit, alleging state-law

causes   of   action   for    breach   of   fiduciary    duty,    negligence,

equitable estoppel, breach of contract, and fraud. Hermann did not

assert violations of Texas's Insurance Code. We held that Hermann's

claims were preempted by ERISA.        Id. at 1290.     An important element

of our holding in Hermann I was our reading of the Supreme Court's

decisions in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S. Ct.
1549, 95 L. Ed. 2d 39 (1987) and Metropolitan Life Ins. Co. v.

Taylor, 481 U.S. 58, 107 S. Ct. 1542, 95 L. Ed. 2d 55 (1987).              These

                                       8
cases, we reasoned, stood for the proposition that where a claim

relates to an employee benefit plan governed by ERISA and are

"based   upon   state   law   of   general    application   and   not   a   law

regulating insurance," that state-law cause of action is preempted

by ERISA.    Hermann I, 845 F.2d at 1290.

     In Hermann II, 959 F.2d 569, we did nothing more than hold

that our preemption determination in Hermann I was the law of the

case in Hermann II. Id. at 578.              Accordingly, Hermann II adds

nothing to our understanding of ERISA preemption.

     However, we did clarify the meaning of Hermann I in Memorial.

In footnote 20, we distinguished Hermann I on the ground that "the

hospital was aggrieved over a plan's delay in processing its claim

and was seeking recovery of plan benefits allegedly owed to its

assignor." 904 F.2d at 249 n. 20. We further suggested that

Hermann I did not control the situation faced by Memorial Hospital

because the claims in Hermann I were "dependent on, and derived

from, the rights of the plan beneficiaries to recover benefits

under the terms of the plan."             Id. Stated differently, Hermann

Hospital was not an independent, third-party provider of medical

services, but rather more akin to a first-party beneficiary whose

causes of action are normally preempted by ERISA.6          Because Hermann

I was decided before Memorial, Hermann II did not discuss ERISA

preemption, and because we have never questioned the holding or

analytical underpinnings of Memorial, our understanding of Hermann

     6
      See, e.g., Hogan v. Kraft Foods, 969 F.2d 142, 144-45 (5th
Cir.1992); Ramirez v. Inter-Continental Hotels, 890 F.2d 760, 763-
64 (5th Cir.1989).

                                      9
I as expressed in Memorial is the law of this Circuit.

     As such, the difference between Hermann I and Memorial has

nothing to do with the bare existence of an ERISA plan.                Rather,

the proper inquiry is whether the beneficiary under the ERISA plan

was covered at all by the terms of the health care policy, because

if the beneficiary was not, the provider of health services acts as

an independent, third party subject to our holding in Memorial.

This is no doubt what our district courts have understood Memorial

to mean.7

III. APPLICATION OF MEMORIAL   TO   CYPRESS'S STATE-LAW CAUSE   OF   ACTION   FOR
     MISREPRESENTATION

     Pan-American and National argue that Memorial does not control

this case because in its pleadings, Cypress admitted that it was

      7
      See Jefferson Parish Hosp. Dist. No. 2 v. Principal Health
Care of La., Inc., 934 F. Supp. 206, 208 (E.D.La.1996) ("The
patient's assignment of right in this action is irrelevant to the
hospital's right to recover from the plan in its independent status
as a hospital."); Cornett v. Aetna Life Ins. Co., 933 F. Supp. 641,
644 (S.D.Tex.1995) ("A careful distinction was drawn [in Memorial
] between plan participants, on the one hand, and independent,
third-party health providers, on the other....");         Metroplex
Infusion Care, 855 F. Supp. at 901 ("The apparent contradiction
between the Hermann cases and Memorial may be resolved in light of
their underlying factual differences: whereas there was no ERISA
coverage in Memorial, so that the hospital would have had no
recourse under either ERISA or state law had its state law claims
been preempted, in Hermann ERISA coverage did not exist but had
allegedly been improperly denied."); Forest Springs, 812 F. Supp.
at 732 ("The facts in Hermann differed from that of Memorial ...
because the dispute in Hermann centered around an alleged
misrepresentation as to the extent of coverage, not a situation
where, like here and in Memorial ..., the defendant contends there
is no coverage at all."); Brown Schools, 806 F. Supp. at 150 ("The
apparent reason for the discrepancy between the cases is that in
Memorial there was no ERISA coverage and therefore the hospital
would have "no recourse under either ERISA or state law' if the
hospital's state law claims were preempted ..., whereas in the
Hermann cases, ERISA coverage existed but was allegedly improperly
denied.").

                                      10
inquiring about the extent rather than the existence of coverage

for Schwartz.     In addition, Pan-American and National argue that

because an ERISA plan was in place and Schwartz was enrolled in the

plan, Cypress's state-law claim should be preempted by ERISA.

     The     defendants'   position   is   unavailing   because   Schwartz,

although enrolled in the plan, was not covered by the health care

plan insured by Pan-American and National.         It is undisputed that

National refused to pay Cypress because "coverage [was] rescinded

as of [the] effective date." Admittedly, because no discovery took

place in this case, the record is unclear as to the meaning of this

phrase.      Nor does the record reveal the precise reasons behind

National's refusal to pay for Schwartz's services.           Nonetheless,

Cypress has asserted, and the defendants do not dispute, that

coverage was denied because Schwartz was not covered by the health

plan.       Indeed, neither National, Pan-American, nor the record

suggest that "coverage rescinded" means anything else than Schwartz

was not covered by the plan at the time of his hospitalization.         As

such, Cypress's cause of action does not relate to ERISA, but

rather arises under state law.         Memorial is therefore triggered.

Cypress's state-law claim under § 21.21 for misrepresentation is

not preempted by ERISA.

     Finally, the district court's reasoning is of no help to the

defendants.8     As we have pointed out, the district court concluded

that for ERISA purposes, third-party providers such as Cypress are

        8
       We note that the defendants do not rely on or attempt to
justify the district court's reasoning in this case.

                                      11
on no better footing than first-party beneficiaries.       We rejected

that premise in Memorial, where we reasoned as follows:

          We have held under different circumstances that ERISA
     preemption may occur even though ERISA itself could not offer
     an aggrieved employee a remedy for alleged misrepresentations.
     That principle should not be extended, however, to encompass
     third-party providers, particularly when to do so would run
     counter to one of Congress's overriding purposes in enacting
     ERISA.
904 F.2d at 248 (emphasis added) (footnote omitted).       The district

court's reasoning to the contrary is foreclosed by Memorial.

                                CONCLUSION

     Because   the   district    court   erroneously   determined   that

Cypress's state-law cause of action for violating § 21.21 of

Texas's Insurance Code was preempted by ERISA, we REVERSE the

district court's decision.        In addition, the district court's

jurisdiction to hear this case was based on the federal question

presented by ERISA preemption, and because we hold that ERISA is

not implicated, we REMAND this case to the district court with

directions to remand Cypress's § 21.21 claim to Texas state court.

     REVERSED AND REMANDED.

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