Texas Life, Accident, Health & Hospital Service Insurance Guaranty Ass'n v. Gaylord Entertainment Co.

UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 95-50860

TEXAS LIFE, ACCIDENT, HEALTH & HOSPITAL

SERVICE INSURANCE GUARANTY ASSOCIATION,

Plaintiff-Appellant,

VERSUS

GAYLORD ENTERTAINMENT COMPANY, formerly known as

Oklahoma Publishing Company, ET AL.,

Defendants,

GAYLORD ENTERTAINMENT COMPANY, formerly known as

Oklahoma Publishing Company, ET AL.,

Defendants-Appellees.

Appeal from the United States District Court

for the Western District of Texas

January 24, 1997

Before REYNALDO G. GARZA, JOLLY and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

A state insurance guaranty association brought suit against

ERISA1 plan administrators for breach of fiduciary duty, alleging

that the plan administrators imprudently bought investments from a

failing insurance company. We hold that a guaranty association

which receives a valid assignment of an ERISA fiduciary breach

1

Employee Retirement Income Security Act (“ERISA”), 29 U.S.C.

§ 1001 et seq.

claim from a plan administrator can have derivative standing to

bring the action. However, we also hold that ERISA preempts a

state statute purporting to assign such claims by operation of law

and, instead, apply federal common law to determine the validity of

the assignment. Because the fiduciary breach claims were not

expressly and knowingly assigned, the assignment is invalid under

federal common law and the guaranty association does not have

derivative standing. Accordingly, the judgment of the district

court is affirmed.

I. BACKGROUND

The defendants are the current and former trustees and

sponsors (the “Plan Administrators”) of various pension plans

(“Plans”). In the 1980s, the Plans invested in guaranteed

investment contracts (“GICs”) issued by the Executive Life

Insurance Company (“ELIC”), a California insurance company. In

1991, ELIC became insolvent and was placed into receivership; as a

consequence the GICs lost their value, resulting in heavy losses to

the Plans’ assets. In 1993, the California Insurance Commissioner

proposed a rehabilitation plan that allowed holders of GICs from

ELIC to obtain new contracts issued by Aurora National Life

Assurance Company (“Aurora”), another insurer. Some of the Plans

participated and received Aurora GICs, resulting in a waiver of any

claims against the relevant state guaranty association; other Plans

did not participate, allowing them to receive the liquidated cash

2

value of the ELIC GICs as well as the opportunity to challenge the

guaranty association’s coverage determination.

The funds for this bailout were provided in part by the Texas

Life, Accident, Health & Hospital Service Insurance Guaranty

Association (the “Guaranty Association”). The Guaranty Association

is a statutory, nonprofit organization created by the Texas

Legislature in the Texas Life, Accident, Health & Hospital Service

Insurance Guaranty Act (the “Guaranty Act” or the “Act”), TEX. INS.

CODE ANN. Art. 21.28-D § 8, and is supervised by the Texas

Commissioner of Insurance. Its members are insurance companies

doing business in Texas, which are required by law to join the

Guaranty Association as a condition of doing business in the state.

Like similar programs in all other states,2 this system protects

those who buy insurance policies from insurance companies that

become insolvent. The protection can come in cash payments or

substitute policies or contracts. Pursuant to its statutory

mandate, the Guaranty Association in effect bailed out those Plans

under its jurisdiction (i.e., those having the requisite connection

to Texas) by supplementing the diminished assets of ELIC to the

point where Aurora would issue the substitute GICs.3

2

The National Association of Insurance Commissioners (“NAIC”)

has promulgated the Life and Health Insurance Guaranty Association

Model Act. All 50 states, the District of Columbia, Guam, Puerto

Rico and the Virgin Islands have adopted the NAIC model act or

similar laws. The NAIC model act may be found on Westlaw under

NAIC 520-1; the corresponding law in each state or territory may be

found on Westlaw under NAIC 520-27.

3

The Guaranty Association will pay $232 million to cover the

ELIC GICs. Of that $232 million, $11 million is attributable to

the GICS in this case.

3

The Guaranty Association sued in federal court, claiming that

the Plan Administrators breached their fiduciary duties under ERISA

when they invested in the ELIC GICs. The Guaranty Association

asserts that there was a host of warning signs that ELIC was on the

brink of insolvency due to its heavy investing in high-risk junk

bonds. The Guaranty Association further contends that it has the

right to pursue these claims on behalf of the beneficiaries of the

Plans due to the Guaranty Act’s assignment of the beneficiaries’

rights to sue the Plan Administrators for this breach. Through

this assignment, the Guaranty Association claims that it has

derivative standing to sue under ERISA. 29 U.S.C. § 1132(a)(2).

The ultimate claim of the Guaranty Association is violation of 29

U.S.C. § 1109(a), which establishes fiduciary duties under ERISA.

The parties consented to the jurisdiction of a magistrate

judge for the case. The magistrate judge granted the defendants’

pretrial motions for summary judgment, finding that the Guaranty

Association did not have standing to bring an ERISA breach of

fiduciary duty action. In support of his conclusion, the

magistrate judge first found that the Guaranty Association did not

fall into the enumerated list of potential plaintiffs under 29

U.S.C. § 1132(a)(2). He next found that because of ERISA

preemption, no valid assignment of rights had occurred and,

therefore, the Guaranty Association could not have derivative

standing. The Guaranty Association appeals.

4

II. STANDING

A. Derivative Standing

ERISA allows suits against plan administrators for breaches of

fiduciary duty. 29 U.S.C. § 1109. The list of parties allowed to

bring these actions is limited, however. Only the Secretary of

Labor, participants, beneficiaries or fiduciaries of plans may

bring suit under § 1109.4

The Guaranty Association contends that even though it is not

an enumerated party, it has derivative standing to sue. The

Guaranty Association maintains that, because it was assigned the

plans’ fiduciary duty breach causes of action, it steps into the

shoes of an enumerated party and thus has standing. In Hermann

Hosp. v. MEBA Medical & Benefits Plan, 845 F.2d 1286, 1289 (5th

Cir. 1988), we recognized derivative standing in the context of

employee welfare benefit plans (“welfare plans”).5 The plans in

this case are not welfare plans, but rather are employee pension

benefit plans (“pension plans”).6 We have never decided whether

derivative standing is allowed for breach of fiduciary duty claims

arising from pension plans.

4

29 U.S.C. § 1132(a)(2) (“A civil action may be brought . . .

by the Secretary [of Labor], or by a participant or fiduciary for

appropriate relief under section 1109 of this title.”); Hermann

Hosp. v. MEBA Medical & Benefits Plan, 845 F.2d 1286, 1289 (5th

Cir. 1988) (“Hermann”).

5

A welfare plan is a plan established to provide medical or

similar benefits. 29 U.S.C. § 1002(1).

6

A pension plan is a plan established to provide retirement

income or to enable savings for retirement. 29 U.S.C. § 1002(2).

Welfare plans and pension plans are collectively referred to as

“employee benefit plans.” 29 U.S.C. § 1002(3).

5

The Plan Administrators argue that while derivative standing

is appropriate for welfare plans, ERISA’s anti-assignment provision

for pension plans makes derivative standing improper for pension

plans.7 In deciding that derivative standing was allowed for

welfare plans, the Hermann Court noted that “the existence of an

elaborate and complex statutory anti-assignment clause for ERISA

pension benefits makes significant the complete absence of an anti-

assignment clause applicable to ERISA health benefits, especially

in light of the Supreme Court’s recognition of ERISA as

‘comprehensive and reticulated.’” Hermann, 845 F.2d at 1289

(internal citation omitted), quoting Nachman Corp. v. Pension

Benefits Guaranty Corp., 446 U.S. 359, 361 (1980). The Court in

Hermann observed that “the purpose of ERISA’s proscription on

assignment of pension benefits, to further insure that the

employees’ accrued benefits are actually available for retirement

purposes, would not be served by applying it to health care

benefits.” Id. (internal quotation and bracket omitted).

The Guaranty Association agrees that, because of the anti-

assignment provision, derivative standing is not possible in the

typical pension plan case. The Guaranty Association argues that

this case is different because the thing which has been assigned

(the right to sue for breach of fiduciary duty) is neither

7

ERISA’s anti-assignment provision states that “[e]ach pension

plan shall provide that benefits provided under the plan may not be

assigned or alienated.” 29 U.S.C. § 1056(d).

6

“benefits” nor “provided under the plan.” 29 U.S.C. § 1056(d).

Accordingly, the assignment is outside the scope of the anti-

assignment provision.

Our sister circuits have held that “benefits,” as used in

ERISA, “refers only to payments due to the plan participants or

beneficiaries.” Mack Boring & Parts v. Meeker Sharkey Moffitt, 930

F.2d 267, 273 (3d Cir. 1991); see Acosta v. Pacific Enterprises,

950 F.2d 611, 619 (9th Cir. 1991) (“term ‘benefit’ refers to a

participant’s or beneficiary’s right to receive monies from the

plan administrator or trustees”). We agree that the term

“benefits” in § 1056(d)(1) refers to the right to receive payments.

The right to sue a plan administrator for breach of fiduciary duty

is not a right to receive payments, so it is not “benefits” under

§ 1056(d). Additionally, the right to sue a plan administrator for

breach of fiduciary duty is not “provided under the plan.” 29

U.S.C. § 1056(d). Rather, this right is provided by ERISA itself.

29 U.S.C. §§ 1109, 1132(a)(2). Accordingly, assignment of a claim

for fiduciary duty breach is not prohibited by ERISA’s anti-

assignment provision.

Allowing derivative standing to assignees of breach of

fiduciary duty claims does not frustrate ERISA’s purpose. As

discussed above, the goal of ERISA’s prohibition of assignment of

pension benefits is to “insure that the employees’ accrued benefits

are actually available for retirement purposes.” Hermann, 845 F.2d

at 1289; see also Hightower v. Texas Hosp. Ass’n, 65 F.3d 443, 447

(5th Cir. 1995). The Hermann Court noted that:

7

To deny standing to health care providers as

assignees of beneficiaries of ERISA plans might

undermine Congress’ goal of enhancing employees’

health and welfare benefit coverage. [To not allow

derivative standing] would discourage providers

from becoming assignees and possibly from helping

beneficiaries who were unable to pay them “up-

front.”

Hermann, 845 F.2d at 1289 n.13.

The policy considerations regarding assignment of breach of

fiduciary duty claims are similar. Allowing assignees derivative

standing will help insure that pension funds are available for

retirement. Without derivative standing, plan administrators could

never be held accountable for breaches of fiduciary duty. If a

guaranty association pays a claim that resulted from the plan

administrator’s breach of fiduciary duty, no one would be able to

sue the plan administrator. The plan participants would have no

cause of action because after the claim was paid they would have

suffered no damages.

As discussed above, absent derivative standing, the guaranty

association would have no standing. This would allow plan

administrators to gamble with pension funds covered by guaranty

associations, safe in the knowledge they will never be held

accountable for their actions. Encouraging such reckless behavior,

even with insured pension benefits, does not promote ERISA’s goal

of safeguarding pension benefits for employees’ retirements. The

knowledge that they will be ultimately liable for any breaches of

fiduciary duty, regardless of whether a guaranty association pays,

will make plan administrators more mindful of their important

responsibilities as fiduciaries, thus helping to “insure that the

8

employees’ accrued benefits are actually available for retirement

purposes.” Hermann, 845 F.2d at 1289.

We hold that assignees of breach of fiduciary duty claims

under pension plans can have derivative standing under ERISA.

Assignment of those claims are not prohibited by ERISA’s pension

benefits anti-assignment provision, and allowing derivative

standing advances ERISA’s goal of safeguarding pension funds.

B. Validity of Assignment

1. Assignment Under the Guaranty Act

The fact that an assignee can have derivative standing does

not end our inquiry. We must determine whether the Guaranty

Association has a valid assignment of the claims. The Guaranty Act

provides that any person receiving benefits from the Guaranty

Association under the act “is considered to have assigned the

rights under, and any causes of action relating to, the covered

policy or contract to the [Guaranty A]ssociation to the extent of

the benefits received under this Act.” TEX. INS. CODE Art. 21.28-D

§ 8(t).8 The Guaranty Act further provides that “[t]he [Guaranty

8

Tex. Ins. Code Art. 21.28-D § 8(t) provides that:

A person receiving benefits under this Act is considered

to have assigned the rights under, and any causes of

action relating to, the covered policy or contract to the

association to the extent of the benefits received under

this Act, whether the benefits are payments of or on

account of contractual obligations, continuation of

coverage, or provision of substitute or alternative

coverages. The association may require an assignment to

it of the rights and cause of action by any payee, policy

or contract owner, beneficiary, insured, or annuitant as

a condition to the receipt of a right or benefit under

9

A]ssociation has all common-law rights of subrogation and any other

equitable or legal remedy that would have been available to the

impaired or insolvent insurer or holder of a policy or contract

with respect to such a policy or contract.” TEX. INS. CODE Art.

21.28-D § 8(u).

The Guaranty Association argues that when the Plan

Administrators accepted benefits under the Guaranty Act, by

operation of law they assigned to the Guaranty Association all

policy rights and causes of actions related to the ELIC GICs. TEX.

INS. CODE Art. 21.28-D § 8(t). The Guaranty Association contends

that the Plan Administrators breached their fiduciary duties to the

plan beneficiaries when they imprudently purchased the GICs of a

failing company. The Guaranty Association asserts that the right

to bring the breach of fiduciary duty action is a cause of action

related to the ELIC GICs and, therefore, was assigned to the

Guaranty Association. The Plan Administrators contend that the

Guaranty Act does not assign fiduciary duty breach claims. These

causes of action, they contend, do not relate to the covered

policies. Instead, this provision only assigns the Plans’ right to

sue ELIC.

Both the Guaranty Association’s and the Plan Administrators’

arguments have merit, and it is unclear from the text of the

Guaranty Act whether fiduciary duty breach claims are assigned. We

this Act. The subrogation rights of the association

under this subsection have the same priority against the

assets of the impaired or insolvent insurer as that

possessed by the person entitled to receive benefits

under this Act.

10

have found only one Texas case that even mentions the Guaranty Act,

and it does not discuss the issue of assignment. Unisys Corp. v.

Texas Life Accident Health & Hospital Service Insurance Guaranty

Association, 1996 WL 710769 (Tex. App. -- Austin 1996). We need

not decide this novel and difficult issue of Texas law, though,

because the result is the same under either party’s reading of the

Act. If the Plan Administrators are correct that the Act does not

assign the causes of action, then there is no valid assignment and,

thus, no derivative standing. If the Guaranty Association is

correct that the Act assigns the causes of action, there is also no

valid assignment and no derivative standing, because, as we discuss

below, the Act’s assignment provision is preempted by ERISA and

there is no valid assignment under federal law.

a. Preemption of the Guaranty Act’s Assignment Provision

Congress included a broad preemption provision in ERISA. 29

U.S.C. § 1144. Congress provided that ERISA “shall supersede any

and all State laws insofar as they may now or hereafter relate to

any employee benefit plan.” 29 U.S.C. § 1144(a).9 “Courts have

interpreted this preemption broadly. . . .” CIGNA Healthplan of

9

ERISA’s preemption provision is modified by the “saving

clause,” which leaves in force state laws that regulate “insurance,

banking or securities.” 29 U.S.C. § 1144(b)(2)(A); see II(a)(2)(c)

below. The saving clause is in turn modified by the “deemer

clause,” which provides that an employee benefit plan shall not “be

deemed to be an insurance company or other insurer, bank, trust

company, or investment company or to be engaged in the business of

insurance or banking for purposes of any law of any State

purporting to regulate insurance companies, insurance contracts,

banks, trust companies, or investment companies.” 29 U.S.C. §

1144(b)(2)(B).

11

Louisiana, Inc. v. Louisiana, 82 F.3d 642, 646-47 (5th Cir.), cert.

denied, 117 S. Ct. 387 (1996). ERISA’s pre-emption provisions are

designed to protect plan participants by eliminating the threat of

inconsistent state and local regulation of employee benefit plans

and establishing a uniform standard to govern employee benefit

plans as an exclusive federal concern. See Ingersoll-Rand Co. v.

McClendon, 498 U.S. 133, 138 (1990); Fort Halifax Packing Co. v.

Coyne, 482 U.S. 1, 10-11 (1987).

A law is preempted if it “relates to” an employee benefit

plan. 29 U.S.C. § 1144(a). “A law ‘relates to’ an employee

benefit plan . . . if it has a connection with or reference to such

a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983).

The relevant portion of the Guaranty Act does not refer to ERISA

plans.10 See New York Conference of Blue Cross v. Travelers Ins.,

115 S. Ct. 1671, 1677 (1995) (noting that statute in question did

not “make ‘reference to’ ERISA plans in any manner”); District of

Columbia v. Greater Wash. Bd. of Trade, 113 S. Ct. 580, 583 (1992)

(striking down law that “specifically refers to welfare benefit

plans regulated by ERISA and on that basis alone is pre-empted”).

Because the Guaranty Act does not refer to ERISA, it will be

preempted only if it has a connection with an ERISA plan.

Travelers, 115 S. Ct. at 1677.

10

The Guaranty Act does state that it does not provide coverage

for “a multiple employer welfare arrangement as defined by the

Employee Retirement Income Security Act of 1974 (29 U.S.C. Section

1002).” TEX. INS. CODE Art. 21.28-D §3(4)(A). That provision has

no connection whatsoever to this case or the Guaranty Act’s

assignment provisions, so we do not consider it to be a sufficient

reference to ERISA for preemption purposes.

12

The Supreme Court has cautioned that “[p]reemption does not

occur . . . if the state law has only a tenuous, remote, or

peripheral connection with covered plans, as is the case with many

laws of general applicability.” Greater Wash., 113 S. Ct. at 583

n.1 (internal quotation and citations omitted). The Supreme Court

recently held that ERISA did not preempt a state law that had “only

an indirect economic effect on the relative costs of various health

insurance packages” available to ERISA qualified plans. Travelers,

115 S. Ct. at 1680. Therefore, the Guaranty Act is connected with,

and thereby related to, an ERISA plan only if its association is

more than tenuous, remote or peripheral. If the Guaranty Act is

related to an ERISA plan, it is preempted.

The Guaranty Act’s assignment provision is connected with an

ERISA plan. Upon the receipt of benefits, the Guaranty Act assigns

by operation of law all causes of action related to the insurance

policy. This includes assignment of causes of action for breaches

of fiduciary duty under ERISA. 29 U.S.C. § 1109. A state law

which has the effect of assigning an ERISA cause of action clearly

is connected with and relates to an ERISA plan. The connection is

direct and substantial, not indirect, tenuous, remote or

peripheral. See Travelers, 115 S. Ct. at 1680; Greater Wash., 113

S. Ct. at 583 n.1.

b. Insurance Saving Clause

Because the Guaranty Act’s assignment provision relates to an

ERISA plan, it is preempted unless it falls under an exception in

13

the saving clause.11 The Guaranty Association contends that the

Guaranty Act regulates insurance and thus is rescued by the saving

clause. In deciding whether a law regulates insurance for saving

clause purposes, we apply a conjunctive two-step analysis. First,

we determine whether the law in question fits the common sense

definition of insurance regulation. Second, we consider three

factors drawn from the McCarran-Ferguson Act, 15 U.S.C. § 1011 et

seq.: (1) Whether the statute has the effect of spreading

policyholders’ risk; (2) whether the practice is an integral part

of the policy relationship between the insurer and the insured; and

(3) whether the practice is limited to entities within the

insurance industry. Metropolitan Life Ins. Co. v. Massachusetts,

471 U.S. 724, 742-43 (1985); CIGNA, 82 F.3d at 650. If the statute

fits the common sense definition of insurance regulation and we

answer yes to each of the questions in the three part test, then

the statute falls within the savings clause, and is not preempted.

CIGNA, 82 F.3d at 650.

The relevant statute in the case at bar is the Guaranty Act

and, more specifically, its provision that a policyholder assigns

by operation of law all claims related to the policy when the

Guaranty Association provides benefits. The Guaranty Act’s assign-

ment provision applies to policyholders; it is, therefore, not

limited to “entities within the insurance industry.” Metropolitan

11

The saving clause provides, in relevant part, that “[e]xcept

as provided in subparagraph (b) [the deemer clause], nothing in

this subchapter shall be construed to exempt or relieve any person

from any law of any State which regulates insurance, banking, or

securities.” 29 U.S.C. § 1144(a)(2)(A).

14

Life, 471 U.S. at 743. Because the Guaranty Act fails the third-

prong of the McCarran-Ferguson factors, we need go no further.

Accordingly, the Guaranty Act’s assignment provision does not fall

within the saving clause and is, thus, preempted by ERISA.

2. Assignment Under Federal Common Law

We have determined that the Guaranty Act’s assignment

provision is preempted. We must therefore look to federal law for

guidance in determining the validity of the Plan Administrators’

assignment of the breach of fiduciary duty claims.

The text of ERISA gives us no guidance in determining the

proper method for assigning ERISA breach of fiduciary duty claims

against pension plan administrators. The Supreme Court has

instructed that in the absence of statutory guidance, courts should

develop federal common law regarding ERISA rights. Pilot Life Ins.

Co. v. DeDeaux, 481 U.S. 41, 56 (1987) (Congress “expect[ed] that

a federal common law of rights and obligations under ERISA-

regulated plans would develop.”).

Because an assignment of a fiduciary duty breach claim affects

all plan participants, and unsuccessful claims can waste plan

resources that are meant to be available for employees’

retirements, these claims are not assigned by implication or by

operation of law. Instead, only an express and knowing assignment

of an ERISA fiduciary breach claim is valid. Cf. Gulfstream III

Assoc., Inc. v. Gulfstream Aerospace Corp., 995 F.2d 425, 439 (3d

Cir. 1993) (Greenberg, J., concurring) (“only an express assignment

15

of an antitrust claim can be valid”); RESTATEMENT (SECOND) OF CONTRACTS

§ 324 (1981) (“It is essential to an assignment of a right that the

obligee manifest an intention to transfer the right to another

person without further action or manifestation of intention by the

obligee.”).12

There is no evidence in the record that the Plan

Administrators expressly and knowingly assigned the fiduciary duty

breach claims. Instead, the only putative assignment is the

Guaranty Act’s broad provision that anyone accepting benefits under

the Act “is considered to have assigned the rights under, and any

causes of action relating to, the covered policy or contract to the

[Guaranty A]ssociation to the extent of the benefits received under

this Act.” TEX. INS. CODE Art. 21.28-D § 8(t). This assignment by

operation of law is not an express and knowing assignment and,

thus, is insufficient to assign the fiduciary breach claims.

Because the fiduciary breach claims were not validly assigned,

the Guaranty Association does not have derivative standing to bring

suit against the Plan Administrators.

12

While an express assignment by a plan administrator is

sufficient to transfer the cause of action, it may not be

sufficient to comply with all of ERISA’s fiduciary requirements.

Because the decision to assign a fiduciary breach claim is itself

a fiduciary act, ERISA plan fiduciaries must comply with all

fiduciary duties when assigning an ERISA claim, including the

duties of loyalty and prudence. As the Secretary of Labor notes in

his amicus curiae brief, where a plan administrator is asked to

assign a claim against himself or his co-fiduciaries arising from

imprudent investments, he faces a conflict of interest which may

require him to appoint an independent fiduciary to decide whether

to assign the claim. See, e.g., Leigh v. Engle, 727 F.2d 113,

135026 (7th Cir. 1984); Schwartz v. Interfaith Medical Ctr., 715 F.

Supp. 1190, 1196 (E.D.N.Y. 1989).

16

III. Conclusion

An assignee of an ERISA fiduciary breach claim can have

derivative standing to bring suit. Because the Guaranty Act’s

assignment provision has the effect of assigning ERISA claims, it

is preempted. As the state assignment provision is preempted, we

look to federal common law, which requires an express assignment.

The Plan Administrators did not expressly and knowingly assign the

fiduciary breach claims, so the Guaranty Association is not an

assignee and, thus, does not have derivative standing to bring this

action. The judgment of the district court is AFFIRMED.13

13

The Guaranty Association complains that the magistrate judge

erred in dismissing as moot its motion for leave to amend its

complaint. As the Plan Administrators point out, the Guaranty

Association agreed to the dismissal as moot, thereby waiving any

error.

17