Court Opinion

ID: 32693
Source: CourtListenerOpinion
Date Created: 2010-04-25 18:56:32+00
Date Added: 2024-06-11T16:49:38.180030
License: Public Domain

United States Court of Appeals
                                                                Fifth Circuit
                                                             F I L E D
              IN THE UNITED STATES COURT OF APPEALS        September 23, 2003
                      FOR THE FIFTH CIRCUIT
                     _______________________             Charles R. Fulbruge III
                                                                 Clerk
                              No. 02-60803
                        _______________________

             BLAKE HOBSON and MASTER FINISHES, INC.,

                    Plaintiffs - Appellants,

                                  v.

         PAUL RAYMOND ROBINSON, JAMES ROBERT MCDANIELS,
                JOE CHRESTMAN and JOHN CHRESTMAN,

                        Defendants - Appellees.

_________________________________________________________________

          Appeal from the United States District Court
             for the Northern District of Mississippi
                    District Court No. 02-CV-94
_________________________________________________________________

Before WIENER, CLEMENT, and PRADO, Circuit Judges.1

PRADO, Circuit Judge:

     Appellants Blake Hobson and Master Finishes, Inc.

(collectively “Hobson”) appeal the dismissal of their claims

against Appellees Paul Raymond Robinson (“Robinson”), James

Robert McDaniels (“McDaniels”), Joe Chrestman and John Chrestman

on the grounds that their state law claims for fraud,

misrepresentation and breach of contract, which were removed to

     1
     Pursuant to 5th Cir. R. 47.5, this Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5th Cir. R.
47.5.4.

                                   1
federal court, were preempted by the Employment Retirement Income

Security Act (“ERISA”), 29 U.S.C. § 1144(a).   We affirm the

dismissal as to John Chrestman for all claims and as to Robinson,

McDaniels and Joe Chrestman for the breach of contract claims,

but reverse and remand the dismissal of the fraud and

misrepresentation claims against Robinson, McDaniels, and Joe

Chrestman.

               Background and Nature of the Dispute

     The following facts are as alleged by Hobson.    Brett Hobson,

Blake Hobson's brother, was employed by his brother’s company,

Master Finishes, Inc. (“Master Finishes”), a small business in

Tupelo, Mississippi, and acted as the company’s contact person

for obtaining insurance coverage for Master Finishes’s employees.

Joe Chrestman, sales manager for Business Partners, Inc.

(“Business Partners”), approached Master Finishes about health

insurance and other benefits acting as an agent of Business

Partners subject to the supervision and control of the owners of

Business Partners, Paul Raymond and James McDaniels.    Joe

Chrestman advised Hobson that he could provide comparable health

insurance coverage for Master Finishes at rates much lower than

Master Finishes’s current insurance plan with Blue Cross/Blue

Shield.   Joe Chrestman represented to Hobson that he was selling

health insurance and never informed him that he was offering a

self-funded ERISA plan that had little or no assets.    Master

                                 2
Finishes cancelled its Blue Cross/Blue Shield policy to purchase

what it believed was health insurance from Chrestman and Business

Partners.    No insurance policy was ever procured.

     Blake Hobson subsequently incurred approximately $15,000 in

medical bills.    He and other employees of Master Finishes

attempted to make claims on the insurance policy.     Hobson

contacted John Chrestman concerning his claims, who consistently

represented that someone from Business Partners would return his

call regarding the policy.    No payment was ever made and

plaintiffs brought this suit.

     Master Finishes and Hobson sued Robinson, McDaniels and Joe

and John Chrestman for fraud, misrepresentation and breach of

contract in Mississippi state court.    Nine days after filing the

state claims, the plaintiffs filed a separate action for unpaid

benefits under ERISA in federal court.    The defendants removed

the state action to federal district court, asserting that the

claims were preempted by ERISA.    The defendants also moved for

dismissal under Rule 12(b)(6) of the Federal Rules of Civil

Procedure.

     The district court granted the motion to dismiss after

determining ERISA preempted Hobson’s state law claims for fraud,

misrepresentation and breach of contract.    Although the original

complaint did not contain allegations of wrongful conduct on the

part of John Chrestman, the plaintiffs sought to amend their

complaint to allege that John Chrestman made misrepresentations

                                  3
to Hobson in connection with Hobson’s submitted claims and that

John Chrestman failed to communicate with Hobson about those

claims.    The district court, however, found that the proposed

amendments did not contain any claims that would not be preempted

by ERISA, and denied the motion as moot.    Accordingly, the

district court dismissed the case in its entirety.      The

plaintiffs timely appealed.

                  Jurisdiction and Standard of Review

     We have jurisdiction over this appeal as an appeal from a

final judgment pursuant to section 1291 of title 28.      The

standard of review for an ERISA preemption is de novo. See Roark

v. Humana, Inc., 307 F.3d 298, 305 (5th Cir. 2002).

               Whether ERISA Preempts Hobson’s Claims

      Relying on Pilot Life Insurance Company v. Dedeaux, 481

U.S. 41, 57 (1987), the district court held that “state law

claims for fraud and gross negligence dealing with an ERISA

policy are an area of exclusive federal concern.”       Pilot

Life involved state law claims for common law tort and contract

actions asserting improper processing of a claim.       Pilot Life,

481 U.S. at 43.    We agree that under Pilot Life, all of Hobson’s

claims for breach of contract are preempted because those claims

involve the interpretation of the ERISA policy.     See Mem’l Hosp.

Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 250 (5th Cir.

1990).    Pilot Life is inapposite, however, to the claims for

                                   4
fraud and misrepresentation because the underlying conduct

occurred in the inducement of an ERISA policy, not in its

administration.

     ERISA’s preemption clause states that ERISA “shall supersede

any and all State laws insofar as they may now or hereafter

relate to any employer benefit plan.”   29 U.S.C. § 1144(a)

(expressly excepting two situations not applicable here).     A

state cause of action relates to an employee benefit plan

whenever it has “a connection with or reference to such plan.”

Hubbard v. Blue Cross & Blue Shield Assoc., 42 F.3d 942, 945 (5th

Cir. 1995)(citations omitted).   Despite its broad construction of

ERISA’s supersedure language, the United States Supreme Court has

indicated that it will not extend the "relate to" language to its

outer limit.2   In Shaw v. Delta Air Lines, Inc., the Supreme

Court noted that "[s]ome state actions may affect employee

benefit plans in too tenuous, remote, or peripheral a manner to

warrant a finding that the law 'relates to' the plan.”   Shaw, 463

U.S. at 100 n.21.   We must, therefore, determine whether a state

law claim for fraud and misrepresentation “relates to” a plan and

is thus encompassed in ERISA’s preemptive sweep.

     The Supreme Court has acknowledged the expansive scope of

     2
     See Sommers Drug Stores Co. Employee Profit Sharing Trust
v. Corrigan Enter., Inc., 793 F.2d 1456, 1465 (5th Cir. 1986)
(citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 100 n.21
(1983)).

                                 5
ERISA.3   Courts have noted, however, that “this observation

provides little aid in actually determining whether ERISA

supersedes state law.”   Woodworker’s Supply, 170 F.3d at 989

(citing N.Y. St. Conference of Blue Cross & Blue Shield v.

Traveler’s Ins. Co., 514 U.S. 645, 655 (1995)).     The Supreme

Court suggests, however, “[w]e simply must go beyond the

unhelpful text and the frustrating difficulty of defining its key

term, and look instead to the objectives of the ERISA statute as

a guide to the scope of state law that Congress understood would

survive.”   Traveler’s Ins. Co., 514 U.S. at 656.

     Congress enacted ERISA to “protect . . . the interests of

participants in employee benefits plans and their beneficiaries .

. . by establishing standards of conduct, responsibility, and

obligation for fiduciaries of employee benefit plans, and by

providing for appropriate remedies.”   29 U.S.C. § 1001(b).    State

law preemption “affords employers the advantages of a uniform set

of regulations governing plan fiduciary responsibilities and

governing procedures for processing claims and paying benefits”4

to minimize “the administrative and financial burden of complying

with conflicting directives among states or between states and

     3
     See Woodworker’s Supply v. Principal Mutual Life Ins. Co.,
170 F.3d 985, 989 (10th Cir. 1999)(citing Ingersoll-Rand Co. v.
McClendon, 498 U.S. 133, 138-39 (1990)); Pilot Life Ins. v.
Dedeaux, 481 U.S. 41, 47 (1983)(citations omitted).
     4
     Mem’l Hosp. Sys., 904 F.2d at 245; see Fort Halifax v.
Packaging Co. v. Coyne, 482 U.S. 1, 9-11 (1987).

                                 6
the federal government.”5

     In determining whether a claim is preempted by ERISA, this

Court applies a two-prong test; that is, this Court asks: 1)

whether the claim addresses areas of exclusive federal concern

and not of traditional state authority, such as the right to

receive benefits under the terms of an ERISA plan, and (2)

whether the claim directly affects the relationship among

traditional ERISA entities – the employer, the plan and its

fiduciaries,6 and the participants and beneficiaries.7   After

considering these questions, we find Hobson’s claims for fraud

and misrepresentation against Robinson, McDaniels and Joe

Chrestman are not preempted by ERISA.

     The gravamen of Hobson’s claims for fraud and

     5
      Travelers Ins. Co., 514 U.S. at 656-57 (quoting Ingersoll-
Rand Co., 498 U.S. at 142) (citations omitted).
     6
      Congress defined a plan fiduciary as a person
     (i) [who] exercises any discretionary authority or
     discretionary control respecting management of such
     plan or exercises any authority or control respecting
     management or disposition of its assets, (ii) [who]
     renders investment advice for a fee or other
     compensation, direct or indirect, with respect to any
     moneys or other property of such plan, or has any
     authority or responsibility to do so, or (iii) [who]
     has any discretionary authority or discretionary
     responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A).
     7
     See Smith v. Tex. Children’s Hosp., 84 F.3d 152, 155 (5th
Cir. 1996); Hubbard, 42 F.3d at 945; Mem’l Hosp. Sys., 904 F.2d
at 245.

                                7
misrepresentation arise from Joe Chrestman’s alleged conduct

inducing Hobson to give up Master Finishes’s Blue Cross/Blue

Shield plan and to procure a plan with Business Partners.   In

Hobson’s proposed amended complaint, he imputes Joe Chrestman’s

conduct to Robinson and McDaniels.8   Thus, if the claims against

Joe Chrestman are not preempted, the claims against Robinson and

McDaniels as Business Partners’ principals also cannot be

preempted at this stage.   We agree, however, that the claims

against John Chrestman, an employee of Business Partners with no

alleged involvement in the fraudulent inducement claim, are

preempted by ERISA.   Thus, the primary legal question in this

case is whether ERISA preempts Hobson’s claims for fraudulently

inducing him to surrender his insurance coverage in order to

procure coverage from Business Partners.

     Hobson argues that under Perkins v. Time Insurance Company,

898 F.2d 470 (5th Cir. 1990), Hobson’s claims for fraud and

     8
      The proposed amended complaint states:

          The statements made by Joe Crestman [sic] that
     health insurance was being provided were authorized by
     the Defendants, Robinson and McDaniels, since they were
     principles [sic] of Business Partners, Inc. Robinson and
     McDaniels, as owners and principles [sic] in Business
     Partners, Inc., were in control of the affairs of
     Business Partners, Inc. and had the authority to control
     the activity of its agent. Upon information and belief,
     Robinson and McDaniels had actual knowledge that Crestman
     [sic] was making statements that insurance was being
     provided. Alternatively, if Robinson and McDaniels did
     not know that such statements were being made, they were
     guilty of gross negligence in failing to control the
     activities of Joe Crestman [sic].

                                 8
misrepresentation do not relate to a particular ERISA plan,

rather they relate to fraud in the procurement before the plan

came into existence and thus are not preempted.   In Perkins, we

held that a state law claim for fraud in the procurement against

an independent insurance agent was not preempted by ERISA.     See

Perkins, 898 F.2d at 473.9   In the instant case, the district

court distinguished Perkins in that the agent in Perkins was an

independent agent while Joe Chrestman was an employee/and or

agent of Business Partners and thus an ERISA fiduciary.   In

     9
      See also Woodworker’s Supply, 170 F.3d at 991 (state law
claim against former insurer for unfair trade practices and fraud
resulting from pre-plan conduct are not preempted by ERISA
because no plan fiduciary could exist before the plan existed);
Wilson v. Zoellner, 114 F.3d 713, 721 (8th Cir. 1997)(“[w]e hold
that ERISA does not preempt [plaintiff’s] suit against [an
insurance agent] for the Missouri state common-law tort of
negligent misrepresentation”); Coyne & Delany Co. v. Selman, 98
F.3d 1457, 1467 (4th Cir. 1996)(plaintiff’s malpractice claim
against insurance professional not preempted because it does not
“relate to” an employee benefit plan within the meaning of
ERISA’s preemption provision); Morstein v. Nat’l Ins. Serv.,
Inc., 93 F.3d 715,723 (11th Cir. 1996)(ERISA does not preempt a
fraudulent inducement claim against insurance agent, but would
preempt against insurer if the claim regarded the scope of
coverage); but see Hall v. Blue Cross/Blue Shield of Ala., 134
F.3d 1063, 1064-65 (11th Cir. 1998)(holding ERISA preempts a
fraudulent inducement claim that an insurer and its licensed
agent marketed and sold an insurance policy that allegedly
differed from the plan the agents had proposed); Reliable Home
Health Care, Inc. v. Union Cent. Ins. Co., 295 F.3d 505 (5th Cir.
2002)(ERISA preempts employer’s fraudulent inducement claim that
an insurance agent falsely represented an insurance company’s
expertise because the underlying conduct involved the creation,
operation and subsequent failure of the plan which could not be
severed from its connection to the plan); Elmore v. Cone Mills
Corp., 23 F.3d 855, 863 (4th Cir. 1994)(ERISA preempts breach of
fiduciary duty claim which seeks to enforce representations made
regarding the establishment of an ESOP).

                                 9
Perkins, however, the agent’s status as an independent agent was

not the dispositive factor in the analysis.    Rather, the critical

determination was whether the claim itself created a relationship

between the plaintiff and defendant that is so intertwined with

an ERISA plan that it cannot be separated.10   Thus, the timing of

plan formation is not the crucial factor in ERISA preemption.

Rather, the extent the claim itself relates to an ERISA plan

guides our determination.

     In Perkins, we relied in part on Sommers Drug Stores Company

     10
          In Perkins, we found:

     While ERISA clearly preempts Perkins’ claims as they
     relate to Time, the same cannot necessarily be said,
     however, as regards Davis’s solicitation of Perkins,
     which allegedly induced him to forfeit an insurance
     policy that covered his daughter’s condition for one
     that did not. While ERISA clearly preempts claims of
     bad faith as against insurance companies for improper
     processing of a claim for benefits under an employee
     benefit plan and while ERISA plans cannot be modified
     by oral representations, we are not persuaded that this
     logic should extend to immunize agents from personal
     liability for their solicitation of potential
     participants in an ERISA plan prior to its formation.
     Giving the ERISA “relates to” preemption standard its
     common-sense meaning, we conclude that a claim that an
     insurance agent fraudulently induced an insured to
     surrender coverage under an existing policy, to
     participate in an ERISA plan which did not provide the
     promised coverage, “relates to” that plan only
     indirectly. A state law claim of that genre, which
     does not affect the relations among the principal ERISA
     entities . . . as such, is not preempted by ERISA.

Perkins, 898 F.2d at 473 (internal citations omitted).

                                  10
Employee Profit Sharing Trust v. Corrigan Enterprises, Inc.11        In

Sommers Drug Stores, we determined the plaintiff’s claim for

common law breach of corporate fiduciary duty was not preempted

by ERISA, despite the fact that the corporate director was also a

plan fiduciary and that the plaintiffs were both shareholders and

plan beneficiaries.      See Sommers, 793 F.2d at 1468.   In other

words, the defendant corporate director was an ERISA fiduciary in

regards to some claims, but not in regards to others.12      The

critical determination was the relationship between the

     11
      We also relied on Perry v. P.*I.*E.* Nationwide, Inc., 872
F.2d 157 (6th Cir. 1989) (state claims alleging fraudulent
inducement to participate in an ERISA plan are not preempted by
ERISA).
     12
          In Sommers, we noted:

     The state common law of fiduciary duty that the Trust
     seeks to invoke in this case centers upon the relation
     between corporate director and shareholder. The
     director's duty arises from his status as director; the
     law imposes the duty upon him in that capacity only.
     Similarly, the shareholder's rights against the
     corporate director arise solely from his status as
     shareholder. That in a case such as ours the director
     happens also to be a plan fiduciary and the shareholder
     a benefit plan has nothing to do with the duty owed by
     the director to the shareholder. The state law and
     ERISA duties are parallel but independent: as director,
     the individual owes a duty, defined by state law, to
     the corporation's shareholders, including the plan; as
     fiduciary, the individual owes a duty, defined by
     ERISA, to the plan and its beneficiaries. Thus, the
     state law does not affect relations between the ERISA
     fiduciary and the plan or plan beneficiaries as such;
     it affects them in their separate capacities as
     corporate director and shareholder.

Sommers, 793 F.2d at 1468.

                                   11
plaintiffs and defendants and what duty the law imposed upon that

relationship.   Thus, the fact that the agent in Perkins was an

independent agent and not an employee of Time (the ERISA entity)

simply bolsters the point that the duty imposed upon the

relationship between Perkins and the agent did not derive from

ERISA.   The agent could never have been an ERISA entity and Time

could never have been responsible for the agent’s conduct because

of the agent’s independent status.   If the agent in Time had been

an employee of Time, then Time could have been liable for its

agent’s conduct.

     Our decisions since Perkins have reaffirmed that the

important factor in ERISA preemption is the relationship between

the parties involved in the claim itself and whether that claim

is intricately bound with an ERISA plan.   For example, in

Hubbard, the plaintiff brought state law claims against the Blue

Cross & Blue Shield Association for both fraudulent inducement

under the Texas Deceptive Trade Practices Act and for “secret

coverage guidelines.”   Hubbard, 42 F.3d at 944.   We held that a

state law claim for “secret coverage guidelines” was preempted by

ERISA because it required interpretation and administration of

the plan, but that the claim for deceptive trade practices

(fraudulent inducement) was not preempted.   Id. at 946-47.   Both

claims were against the same entity, the Blue Cross & Blue Shield

Association, yet both claims were not preempted.   The critical

factor was that the fraudulent inducement claim did not require

                                12
interpretation and administration of the ERISA policy as did the

“secret coverage guidelines” claim.      The ERISA policy defined the

duty as between the entities for the “secret coverage guidelines

claim,” but not for the fraudulent inducement claim.      Likewise,

Hobson’s claims for fraud and misrepresentation do not require

interpretation or administration of the ERISA plan.

     We reached a consistent determination in Smith v. Texas

Children’s Hospital.      In Smith, Plaintiff Smith sued Texas

Children’s Hospital seeking damages for a state law claim of

fraudulent-inducement and seeking disability benefits under an

ERISA plan.      See Smith, 84 F.3d at 155.   Smith alleged Texas

Children’s promised her that if she relinquished her job and

benefits at St. Lukes and came to work for Texas Children’s,

Texas Children’s would offer her the same benefits.       See Smith,

84 F.3d at 155.      We held that Smith’s state law claim for

fraudulent inducement was not preempted by ERISA while her claim

for disability benefits was preempted by ERISA.13      See id.

     13
          Specifically, we found:

     Though ERISA preempts Smith’s claim seeking benefits
     under Texas Children’s ERISA plan, she may have a
     separate claim based upon the benefits that she had at
     St. Luke’s and relinquished by leaving. The difficulty
     here arises in that Texas Children’s allegedly promised
     that Smith would have the same benefits at Texas
     Children’s as she had at St. Luke’s, so the measure of
     her injury is the same regardless of whether she
     pursues recovery of benefits relinquished or of
     benefits denied. . . . But, to the extent that Texas
     law permits a plaintiff asserting fraudulent-inducement
     to recover for value relinquished in addition to value

                                    13
Smith confirms the law in this circuit that a state law claim for

fraudulent inducement is not preempted by ERISA.14   As in Smith,

Hobson’s claims are based upon benefits given up for purposes of

ERISA and thus are not preempted by ERISA.

     These decisions demonstrate why Hobson's claims for fraud

and misrepresentation fail both prongs of the preemption test.

Joe Chrestman, like the agent in Perkins and Texas Children’s

Hospital in Smith, allegedly fraudulently induced Hobson to

surrender his pre-existing insurance coverage in order to obtain

an ERISA plan.   Joe Chrestman’s underlying conduct relates only

indirectly to the ERISA plan.   As such, the relationship between

Hobson and Joe Chrestman derives from state common-law claims,

not the ERISA plan.   Moreover, this conclusion does not

contradict Congress’s intent in enacting ERISA–the simplification

of plan interpretation and administration–because Hobson’s claims

     not received, Smith may also have a claim based upon
     the disability benefits relinquished, separate from her
     claim for benefits under Texas Children’s ERISA plan.
     The Texas state court can decide the grounds for relief
     available to Smith under Texas law; we need only decide
     whether ERISA preempts such a claim of recovery based
     upon the benefits that Smith gave up by leaving St.
     Luke’s . . . . Such a claim escapes ERISA preemption
     because it does not necessarily depend upon the scope
     of Smith’s rights under Texas Children’s ERISA plan.

Id. at 155-56.
     14
      See Erwin v. U-Haul Int’l, Inc., 2002 U.S. Dist. LEXIS
2937, *6-7 (N.D. Tex. Feb. 22, 2002)(holding that although a
state law fraudulent inducement and misrepresentation claim
against an employer “necessarily touches upon the existence of
the ERISA plan, it is related to the plan only indirectly”).

                                14
do not require either plan interpretation or administration.

                             Conclusion

     As a result, Hobson’s state law claims for breach of

contract and all claims against John Chrestman are preempted, and

Hobson’s state law claims for fraud and misrepresentation against

Joe Chrestman, Robinson and McDaniels are not preempted.

Consequently, we therefore AFFIRM the district court’s entry of

judgment in favor of defendant John Chrestman for all of Hobson’s

claims and of Joe Chrestman, Robinson and McDaniels for Hobson’s

breach of contract claims.   We REVERSE the entry of judgment in

favor or defendant Joe Chrestman, Robinson and McDaniels for

Hobson’s claims for fraud and misrepresentation.   Accordingly, we

REMAND this case for reconsideration of the plaintiffs’ motion to

amend their complaint in light of this Court’s determination.

AFFIRMED IN PART; REVERSED AND REMANDED IN PART.

                                 15