Petition for Writ of Certiorari — Covington v. Sappington

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Supreme Court, U.S,

| FILED

' APR 8 109

S8-1689 ff

No. _ 7

' CLERK

In The if -

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. ° ‘

Supreme Court of the United States

October Term, 1988

JAMES COVINGTON,

dott Hp

Petitione?

LROLD SAPPINGTON,

JO law

Xe SPOON ae reR-s

PETITION FOR WRIT OF CERTIORARI TO THE

SUPREME COURT OF NEW MEXICO

RopryY, DICKASON, SLOAN, AKIN & Ross, P.A

Post Office Box 1888

\Ibuquerque, New Mexico 87103

Telephone: (505) 765-5900

’ } ) ; ‘

s~samocol f Dee

OUuMSEeL TO? Petitioner

QUESTIONS PRESENTED

The New Mexico courts have refused to apply ERISA

preemption to a common law negligence claim

against an insurance agent even though the allega-

tions entirely stem from nonpayment of benefits by

an ERISA plan; may state courts disregard the Con-

gressional intent to provide an exclusive means for

making claims for nonpayment by an employee wel-

fare benefits plan?

May state courts modify the statutory definitions (29

U.S.C. §§ 1002, 1003) of an ERISA-regulated employee

welfare benefit plan subject to federal preemption?

a. May state courts graft to the statutory definition a

requirement that an ERISA plan must be backed

by an insurance policy before ihe state court must

recognize that claims involving employee welfare

benefit plans are governed solely by the federal

statutory scheme?

b. May a state court restrict the reach of ERISA

regulation by interpreting the federal statute to

apply only to “solvent” plans, even though Con-

gress put no such restriction in the statute?

May state courts circumvent Congress’ intent to

establish ERISA remedies as the exclusive vehicle for

an employee’s claims involving employee welfare

benefit plans by carving out a parallel state law cause

of action for failure of a plan to pay benefits? That is,

may a state court provide the employee with an alter-

native to suit under 29 U.S.C. § 1132(a)?

QUESTIONS PRESENTED-Continued

When a state court is called upon to determine

whether a plaintiff’s state suit is related to an ERISA-

regulated employee welfare benefits plan, is it perti-

nent to decide the issue based on the rubric “if the

plan will have to pay the judgment, the suit relates to

a plan, but if someone else may be liable for a judg-

ment, then the suit does not relate to a plan.”

ili

TABLE OF CONTENTS

Page

Questions Presented for Review ........ hn Pe i

a | | iii

Gees Ge Aimoriies .... 5. ........5:5. . RAPA

Opinions Below ............. wera: <7

gs 5k go 6c we bb 05.0.0 alee oe 6 b's wma’ 1

United States Statutes .......... ee aes

oe a” re i~ &

Reasons for Granting the Petition:

I. The New Mexico Appellate Courts’ Precedent

Creates an Exception to the ERISA Remedies

Which Eviscerates the Effort to Establish a Com-

prehensive National Regulatory/Enforcement

Scheme for Employee Welfare Benefits Plans.. 5

II. The New Mexico Rule Is at Odds with This

Court’s Decisions As Well As Those of the

United States Circuit Courts and the United

et 10

III. If the New Mexico Decision is Followed in

Other States Because This Court Rejects Review,

the Way Will be Clear For Litigants to Eschew

the Congressional Remedy for Disputes Over

Plan Benefits and Choose an Alternative Pro-

vided by State Courts Regardless of What This

Court Has Ruled in Prior Cases............... 13

eee ee te ee ce ead bee eas wis 14

Appendix IA - New Mexico Court of Appeals

SS OO rere eer ea App. 1

Appendix IB - Petition to the New Mexico

Oe ee eee App. 12

TABLE OF CONTENTS - Continued

Page

Appendix II - Order of the New Mexico Supreme

OE ones Sc ace dea cepaees aneaeetes saree ns App. 24

Appendix III - Mr. Sappington’s Complaint....App. 25

Appendix IV - Mr. Sappington’s Answers to

Requests for Admissions...........---++++++: App. 28

TABLE OF AUTHORITIES

Page

ee :

Belasco v. W.K.P. Wilson & Sons, Inc., 833 F.2d 277

(11th Cir. 1987).. >iettie

Comprehensive Care Corp. v. Doughtry, 682 F Supp

aries Oe MR “re, Se ae eee EN te Se 12

Daniel v. Eaton Corp., 839 F.2d 263 (6th Cir. 1988)....12

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987) ..8, 12

setts Mutual Life Insurance Co. v. Russell,

S. 134 (1985)

4 (1985)

Mid America Hotel Corp. v. Bernstein, 664 F. Supp.

, — f

"384 Fee, Sek (RTD ee ck vow wee tee eee ee 12

Pane v. RCA Corp., 667 F. Supp. 168 (D.N.J. 1987) ..... 7

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) 10, 11,

STATUTES:

28 USA... § 1

28 USA.

ao USC.

—

—_

PRO is oo ee eee 1

Nk G8 OO: wavs aceeacr ep none aces ie

6s 6 es eee 6

TABLE OF AUTHORITIES - Continued

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Petitioner James Covington petitions the United

States Supreme Court for a Writ of Certiorari to review

the final order of the Supreme Court of New Mexico

(which affirmed the earlier opinion of the Court of

Appeals of New Mexico) entered January 10, 1989.

OPINIONS BELOW

The order and the opinion are not reported as of this

date. The opinion of the Court of Appeals of New Mexico

is at Appendix IA. The order of the Supreme Court of

New Mexico denying review of that opinion is at Appen-

dix I.

JURISDICTION

This Petition is docketed in this Court within 90 days

of the final judgment below. 28 U.S.C. § 2101(c). Jurisdic-

tion is invoked under 28 U.S.C. § 1257(a) (1982), as

amended by Act of June 27, 1988, Pub. L. No. 100-352, § 3,

1988 U. S. Code Cong. & Admin. News (102 Stat.) 662.

The decisions of the New Mexico courts draw in question

the validity of a statute of the United States and in

particular its preemption of state common law remedies.

pln

UNITED STATES STATUTES

This Petition involves an employee welfare benefit

plan as defined by the Employee Retirement Income

Security Act of 1974 (ERISA) 29 U.S.C. § 1001 et seq. The

preemption provision found at 29 U.S.C. § 1144(a) pro-

vides that state law causes of action are superseded by

the federal statutory scheme. 29 U.S.C. § 1132 provides

the plan participant/employee with federal remedies to

enforce plan rights and payment of plan benefits. This

Petition seeks review of the New Mexico appellate opin-

ion and order which established a rule in New Mexico

permitting a dissatisfied plan participant to ignore ERISA

and to choose an alternative common law remedy for

nonpayment of plan benefits.

STATEMENT OF THE CASE

Plaintiff-Respondent Sappington filed suit expressly

alleging that his employer Levy Auto Supply purchased a

health care plan (Mark I| Benefits) for the employees, that

Respondent participated, but that the plan failed to reim-

burse him for his hospital expenses. Respondent chose

not to exercise his rights under 29 U.S.C. § 1132 by suing

the plan or the employer or the plan fiduciary and

administrators. Respondent instead sued Defendant-

Petitioner Covington and another man in a common law

negligence action purportedly because they had intro-

duced the Mark I Benefits plan to the Respondent’s

employer without checking on the plan’s financial

strength. Respondent alleged that he was entitled to, but

did not receive payments from the Mark I Benefits plan as

reimbursement for hospital expenses covered by that

plan. Respondent alleged that he did not get plan benefits

to which he was entitled because Petitioner-Defendant

Covington was negligent in investigating the financial

ie eeceneeemnemnaneanieaieniemenimneitlianaaial

status of Mark I Benefits as an employee welfare benefits

plan.

Mr. Covington moved for dismissal, or in the alterna-

tive, for summary judgment on the basis of federal pre-

emption. Mr. Covington contended that when Congress

passed the Employee Retirement Income Security Act of

1974 (ERISA), that statute was intended to provide for

complete control over employee benefit plans, including

the eanployee’s means for enforcing rights to payments

under employee welfare benefits plans.

The facts necessary for reaching the legal issue pre-

sented by Mr. Covington’s motion were established by

the Respondent’s Answers to Request for Admissions and

by several material, well-pleaded facts contained in the

Respondent’s Complaint. That record was not in dispute

before the New Mexico courts and shows: Respondent

participated in an employee welfare benefits plan known

as Mark I Benefits provided by his employer, Levy Auto

Supply. He claimed that the plan became financially

insolvent and that he was not reimbursed for some of his

hospital expenses. However, he made no attempt to make

a claim upon the plan or its assets in any insolvency

proceedings; nor did he in any other form attempt to

make a claim or file suit under 29 U.S.C. § 1132(a).

Respondent never has contended that his suit against Mr.

Covington was intended to assert or make use of his

federal ERISA remedy for nonpayment of plan benefits.

Respondent’s Complaint did not contend (and no

evidence suggested) that Petitioner Covington was an

officer of the plan, a plan administrator, or a fiduciary

within the meaning of ERISA. Nor did Respondent con-

tend that Petitioner controlled the plan assets or held any

official position with Mark I Benefits whereby he could

influence payment of benefits. Respondent did not allege

that Mr. Covington did anything to cause the nonpay-

ment or to improperly manage the plan assets — the gist

of the Complaint alleged that Mr. Covington’s role was

confined to supplying Levy Auto with information on

how to go about putting in place the Mark I Benefits plan

to pay medical and hospital expenses for Levy Auto

employees. Respondent admitted that he never had any

conversations or direct dealings with Mr. Covington.

Respondent made no claim that Mr. Covington or the

other Defendant made any extra-plan personal promises

to pay Respondent or that Mr. Covington made any indi-

vidual commitment to Respondent independent of the

plan. Respondent simply and explicitly alleged that since

the Mark I Benefits plan did not reimburse him for his

medical expenses, Mr. Covington should do so because

allegedly Mr. Covington was negligent in not investigat-

ing Mark I Benefits financing at the point when Levy

selected Mark I Benefits for the Levy employee benefits

plan. In particular, Respondent sought to enforce against

Petitioner Covington his right to reimbursement for spe-

cific hospital expenses purportedly covered by the plan

but which apparently went unpaid by the plan fiduciary.

The New Mexico District Court denied the motion by

merely stating that the Respondent’s negligence claim is

not preempted; then the district court certified its ruling

(there were no New Mexico opinions on ERISA) for an

interlocutory appeal to the New Mexico Court of

Appeals. That court affirmed with an opinion. Appendix

IA. To date, that opinion is the sole opinion on ERISA

preemption reported by a New Mexico court. Mr.

Covington petitioned the New Mexico Supreme Court to

issue a writ of certiorari to the Court of Appeals. Appen-

dix IB. The New Mexico Supreme Court refused to review

the matter by order entered January 10, 1989, Appendix

Il. The underlying Complaint and Plaintiff's Answers to

Requests for Admissions are Appendix III and IV.

REASONS FOR GRANTING THE WRIT

I. THE NEW MEXICO APPELLATE COURTS’ PRECE-

DENT CREATES AN EXCEPTION TO THE ERISA

REMEDIES WHICH EVISCERATES THE EFFORT

TO ESTABLISH A COMPREHENSIVE NATIONAL

REGULATORY/ENFORCEMENT SCHEME FOR

EMPLOYEE WELFARE BENEFITS PLANS.

The questions presented are substantial. If other

states’ Supreme Courts follow the guidance of the New

Mexico appellate opinion, the comprehensive and exclu-

sive remedies provided by ERISA will be a meaningless

fiction. State courthouses will offer to a dissatisfied bene-

fit plan claimant a common law negligence adjunct or

alternative which will bypass and ultimately defeat the

congressional intent for a national standard for regulating

employee benefit plans and employees’ claims against

those plans.

The New Mexico decision relies on several distinc-

tions to find a rationale for exempting from ERISA pre-

emption this employee’s claim for benefit plan

entitlements. The first distinction is that the Mark I Bene-

fits plan in question was allegedly insolvent. Thus, even

though acknowledging that Mark I Benefits is an

employee welfare benefit plan as defined by ERISA, the

New Mexico decision fixed on the notion that the plan

had not “ripened.” In other words, the court decided that

if the plan was not supported by a “valid insurance

policy,” then it was not a “viable” plan or an ERISA plan.

Therefore, the court could construe the suit to be outside

ERISA’s reach: “We do not believe that Congress intended

federal preemption under ERISA to apply where the basis

of plaintiff’s claim is an alleged negligent failure to pro-

vide a valid insurance policy.” Opinion, p. 5. This reason-

ing is contrary to the explicit declaration in § 1002(1)

which states that plans that provide hospital benefits

“through the purchase of insurance or otherwise” are

within the meaning of an ERISA plan.

Of course, Section 1003, the statutory provision

which sets forth the coverage of ERISA regulation, does

not in any way justify the holding that the alleged finan-

cial backing for the plan with a valid insurance policy

determines whether a plan is subject to ERISA. Section

1002(1) explicitly states otherwise, and the New Mexico

court’s rationale flies in the face of the fact that one of the

obvious reasons for national regulation through ERISA

was to exert federal controls over the quality and perfor-

mance of employee welfare benefit plans —- § 1109 pro-

vides for liability for a fiduciary who breaches a duty to

properly manage plan assets. Clearly, Congress would

not have enacted so many provisions on fiduciary respon-

sibility if it had no intention of establishing an exclusive

scheme for regulation of a plan’s financial integrity. It

makes no sense for the New Mexico Court of Appeals to

interpret congressional intent in the way construed

because when Congress chose to regulate employee bene-

fit plans on a national scale, why would it exempt under-

financed plans when those are the ones most likely to

engender claim payment and related problems? The

ERISA definition of a regulated plan simply does not in

any way turn on whether it is supported by insurance or

by a valid policy or whether it has “ripened” or is finan-

cially solvent. See Pane v. RCA Corp., 667 F. Supp. 168

(D.N.J. 1987).

The effect of the New Mexico holding is that any

dissatisfied plan claimant can ignore ERISA merely by

alleging that the plan’s assets are insufficient. Such an

allegation would now in New Mexicc erase the Federal

supremacy of ERISA and permit the plan claimant to

avoid ERISA even though one of the major regulatory

features of the legislation is to hold plans, trustees and

administrators responsible for not paying employees’

rightful claims. The plan itself could even avoid ERISA

regulation in New Mexico by intentionally under- ©

collateralizing or not underwriting for claims and then

contending it was not within the New Mexico definition

of an ERISA plan. Could a New Mexico plan not be

ERISA-regulated at the option of a suing plan participant,

but simultaneously be subject to ERISA regulation when

the Secretary sues under the next provision of

§ 1132(a)(2)? New Mexico has strained logic to reach an

inappropriate construction of Congress’ intent and by

doing so has brought about the very inconsistency § 1144

sought to eliminate.

The New Mexico Court of Appeals’ opinion selected

another suspect distinction to hold that this suit was not

related to an ERISA plan and hence not subject to ERISA

preemption. That distinction is found at page 6:

The alleged negligent conduct of defendant [not

investigating Mark I benefit plan’s financial sound-

ness] took place before the employee benefit plan

was ever acquired or took effect. .. . We do not

construe the provisions of ERISA to preempt plain-

tiff’s claim of negligence grounded upon alleged acts

or omissions preceding the institution of a benefit

plan.

This ignores the statutory language which repeatedly

refers to the intent to control the establishment of ERISA

plans. Section 1001(a), where Congress expressed its dec-

laration of policy, states an intent that “safeguards be

provided with respect to the establishment, operation,

and administration of such plans.” There simply is no

warrant for the New Mexico Court of Appeals holding

that this suit is not preempted by ERISA because of

nothing more than an artificial temporal distinction. Fort

Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), points out

that ERISA contains fiduciary standards to address self-

dealing, imprudent investing and misappropriation of

plan funds. Plainly, ERISA was intended to provide a

remedy for and to regulate in the area of a plan’s finan-

cial solvency regardless of whether the issue arises in

connection with the establishment, operation or adminis-

tration of the plan. The New Mexico court’s search for a

way around ERISA on this basis is simply contrary to the

statute.

The other novel distinction employed by the New

Mexico court is the notion that ERISA can be avoided by

referring to the status of the defendant rather than look-

ing to the substance of the claim and cause of action. That

is, the court observes that Mr. Covington is an insurance

agent and his tie to the ERISA plan is that he introduced

the employer to Mark I Benefits plan. Here again, the

court bootstraps the conclusion that an ERISA plan is not

really a plan if not “ripened” by a “valid” insurance

policy. From this, the court opines that ERISA does not

attempt to set standards for insurance agents when estab-

lishing a plan through the purchase or sale of insurance

that “never in fact ripen into an ERISA-regulated

employee benefit plan.” In short, the court freely inter-

prets Metropolitan Life Ins. Co. v. Massachusetts, 471 US.

724 (1985), as stating that if the employee claimant sues

an insurance agent for establishing an unsatisfactory

plan, ERISA does not preempt the action even though the

heart and soul of the claimant’s suit is to recover for

unpaid plan benefits.

Again, the effect is that a claimant can neutralize and

shelve ERISA merely by characterizing the defendant as a

person not regulated by name in specific provisions of

the statute, ergo a person for whom there are no stan-

dards or rules of conduct in ERISA. This then, in New

Mexico, provides the vehicle to transcend ERISA: If

ERISA does not explicitly set standards for the named

defendant’s occupation, then ERISA was not intended to

regulate the subject matter, and therefore, any suit

between those parties is not ERISA-related. This ignores

the fact that nonpayment to plan participants is the rea-

son and basis for the suit and ignores the ERISA provi-

sion that specifies § 1132(a) as the employee’s method for

enforcing payments. Of course, ERISA preemption can

easily be defeated by such semantics if one is willing to

pretend that there is no ERISA-regulated plan and further

characterize the defendant as well as the allegations

against him as falling outside Congress’ regulatory

purpose.

It is worth noting that in the course of discussing the

nature of the allegations made by this plaintiff against

this defendant, the New Mexico court cites two New

Mexico cases which recognize the type of common law

negligence action asserted in the complaint. The court's

own citations show that this plair iff’s cause of action is

not a state law specifically directed toward regulating

insurance Cf. 29 U.S.C. § 1144(b)(2)(A). By citing the New

Mexico case allowing suit for an appraiser’s negligence,

the opinion gives silent witness to the fact that we are not

here concerned with a state law which pertains strictly to

insurance regulation. This plaintiff's complaint of failure

to investigate the solvency of a plan might be made

against a stockbroker, accountant, financial consultant,

attorney, appraiser or actuary. Hence, under this Court’s

analysis in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987),

the underlying suit cannot be construed to fall within the

§ 1144(b)(2)(A) exception to preemption.

II. THE NEW MEXICO RULE IS AT ODDS WITH

THIS COURT’S DECISIONS AS WELL AS THOSE

OF THE UNITED STATES CIRCUIT COURTS AND

UNITED STATES DISTRICT COURTS.

The federal courts have applied ERISA preemption in

numerous cases involving claims against insurance com-

panies and brokers. There are cases involving allegations

of fraud and misrepresentation in connection with inade-

quately funded plans. None of those cases encourage,

much less are precedent for a corollary to preemption

along the lines that if suit is against an insurance agent,

ERISA was not intended to apply or that if the plan’s

assets are not “viable,” ERISA does not apply.

The United States Supreme Court’s decisions turn on

whether the suit is related to an employee welfare bene-

fits plan, and “related to” is broadly interpreted. This

Court has applied preemption to state common law

actions which seek to enforce a right related to a plan.

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987). Mr.

Sappington’s suit against Mr. Covington relates to an

ERISA plan for obvious reasons. Mr. Sappington would

not be suing had his hospital expenses been reimbursed

by Mark I Benefits; this suit shifts the plan’s liability to

Mr. Covington and excuses the plan from paying. The

adversaries’ tie to each other exists solely because of a

plan which meets ERISA’s definition. The state law cause

of action meets none of the Pilot Life criteria for an

exception to preemption. It is perplexing how New Mex-

ico’s courts could hold that the instant suit does not relate

to an ERISA plan.

Massachusetts Mutual Life Insurance Co. v. Russell, 473

U.S. 134 (1985) noted the clearly expressed intent of Con-

gress to design a national statutory scheme to prevent

past abuses of plans by plan fiduciaries, including misuse

and mismanagement of plan assets. Id. at 140 n.8. The

Court quoted from the Congressional Record to make the

point that ERISA would control asset manipulation and

create an exclusive scheme for oversight. Yet, New Mex-

ico seeks to reserve an alternative or option to the ERISA

remedies against those who cause a plan’s insolvency.

New Mexico courts, by illusory distinctions, reserve the

right to regulate a plan’s adequacy or sufficiency by

permitting a common law negligence suit against persons

such as Mr. Covington who had no control over Mark I

Benefits asset management, investment dealings or claims

decisions. This is contrary to the decisions which hold

that the only proper remedy for non-payment is an

ERISA suit against those who control the plan and make

the decisions. See Daniel v. Eaton Corp., 839 F.2d 263 (6th

Cir. 1988). Although the New Mexico Court of Appeals

ultimately allows this negligence suit based on allega-

tions that the plan was not adequately funded to pay

benefits to the plaintiffs, this holding is not supported by

its citation to Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

(1987).

Federal decisions have held expressly that ERISA

preempts common law claims against insurance com-

panies and insurance brokers. Belasco v. W.K.P. Wilson &

Sons, Inc., 833 F.2d 277 (11th Cir. 1987).

Federal decisions have not countenanced common

law claims merely because the claimant alleges that the

plan’s assets are inadequate or that the defendant is

responsible for the inadequacy of the plan assets. Mid

America Hotel Corp. v. Bernstein, 664 F. Supp. 384 (N.D. Ill.

1987).

The New Mexico Court of Appeals’ search for dis-

tinctions is very similar to the approach rejected in Com-

prehensive Care Corp. v. Doughtry, 682 F. Supp. 516 (S.D.

Fla. 1988). In that case, the court was told that there was

no conflict with ERISA because there was no claim seek-

ing recovery of benefits from the plan, and that the suit

was not against a plan but on a collateral agreement

outside the scope of ERISA. These arguments did not

overcome the obvious fact that the suit would not exist

but for the plaintiff’s failure to obtain payment of benefits

which the plaintiff thought should have been paid by an

ERISA plan. In the present case, all the artificial distinc-

tions aside, this plaintiff is suing Mr. Covington as a

result of the nonpayment of benefits by Mark I Benefits.

The federal statute and cases do not support the artificial

distinctions New Mexico has now approved as the route

around ERISA preemption.

Ill. IF THE NEW MEXICO DECISION IS FOLLOWED

IN OTHER STATES BECAUSE THIS COURT

REJECTS REVIEW, THE WAY WILL BE CLEAR

FOR LITIGANTS TO ESCHEW THE CONGRES-

SIONAL REMEDY FOR DISPUTES OVER PLAN

BENEFITS AND CHOOSE AN ALTERNATIVE

PROVIDED BY STATE COURTS REGARDLESS

OF WHAT THIS COURT HAS RULED IN PRIOR

CASES.

This Respondent’s suit seeks recovery of unpaid plan

benefits from Mr. Covington - there can be no genuine

argument as to this suit’s direct relation to an ERISA

plan. This Respondent’s alleged grounds for his claim fall

squarely within the words of 29 U.S.C. § 1132(a)(1)

although he chooses not to sue Mark I Benefits or the

plan principals. By refusing to acknowledge this, the New

Mexico courts make the crack and provide the wedge for

all litigants to shatter the federal preemption provision

and destroy the underlying goal of uniform comprehen-

sive regulation of employee benefit plans through ERISA.

That is, this suit very directly permits state law to dictate

and control the consequences of a plan’s failure to ade-

quately underwrite its obligations or its failure to prop-

erly manage assets and pay claims. This undermines the

purpose of ERISA and is contrary to this Court’s state-

ment in Pilot Life that varying state causes of action for

resolving claims within the scope of ERISA “would pose

an obstacle to the purposes and objectives of Congress.”

481 U.S. at 52.

It would seem that the United States Supreme Court

had said enough on ERISA preemption, but the New

Mexico Court of Appeals’ opinion and the New Mexico

Supreme Court order show otherwise. If other states

adopt the New Mexico strategy for preserving a local

option to ERISA, there will be no national and uniform

regulation of employee welfare benefit plans.

CONCLUSION

In the New Mexico trial court, the Respondent

acknowledged he had shunned his ERISA remedy and he

justified his non-ERISA negligence action on the grounds

that he suspected that an ERISA action against the proper

defendants would be fruitless, and therefore, the present

suit represented his preferred method for obtaining a

collectible award. Whether in this Respondent’s instance

ERISA provides the optimal solution or the most conven-

ient means for monetary recovery, is no valid legal

ground for circumventing a statutory scheme. Whether

state courts agree or disagree with the philosophy behind

the ERISA legislation, there is no valid basis for ignoring

this Court’s precedents that § 1144 simply is inconsistent

———

with and does not permit a local alternative to the ERISA

remedy for unpaid plan claims.

Respectfully submitted,

Ropey, DicKASON, SLOAN, AKIN &

Ross, P.A.

By /s/ Mark C. Meiering

Mark C. Meiering

Counsel for Petitioner

Post Office Box 1888

Albuquerque, New Mexico 87103

Telephone: (505) 765-5900

App. 1

APPENDIX IA

IN THE COURT OF APPEALS OF THE

STATE OF NEW MEXICO

HAROLD SAPPINGTON,

Plaintiff-Appellee,

VS. No. 10,635

JAMES COVINGTON,

Defendant-Appellant.

“yy

(Filed November 23, 1988)

APPEAL FROM THE DISTRICT COURT

OF LEA COUNTY

R.W. GALLINI, District Judge

JAMES E. TEMPLEMAN

TEMPLEMAN & CRUTCHFIELD

Lovington, New Mexico Attorneys for Plaintiff-

Appellee

MARK C. MEIERING

RODEY, DICKASON, SLOAN,

AKIN & ROBB, PA.

Albuquerque, New Mexico Attorneys for Defendant-

Appellant

OPINION

DONNELLY, Chief Judge.

This case involves the issue of whether plaintiff's

common law negligence action against defendant insur-

ance agents is barred by federal preemption under the

Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. Sections 1001 to 1461 (1982). We affirm

the trial court’s denial of defendant’s motion to dismiss.

Plaintiff is an employee of Levy Auto Supply (Levy)

of Hobbs. Plaintiff was hospitalized in April 1984 because

App. 2

of an illness and incurred medical expenses, including

hospital and doctor bills, totalling approximately $20,000.

Plaintiff alleged he attempted to submit a claim for reim-

bursement through an insurance plan purportedly

obtained by Levy for the benefit of plaintiff and other

employees. Plaintiff also alleged that defendant insurance

agents, Larry G. Brodie and James Covington, who had

arranged the sale of a Mark I Benefits, Inc. (Mark I) group

health care plan to plaintiff's employer, “represent-

ed... that the was fully insured for. . . medical expenses

incurred during his hospitalization, [but] the hospitaliza-

tion insurer, Mark I Benefits, failed to pay” and plaintiff

learned later “that such company had never been

licensed to do business in the State of New Mexico and

that insolvency proceedings had begun against it in the

State of Texas.”

Plaintiff brought this action against defendants alleg-

ing that they negligently failed to determine the status o!

Mark i and negligently arranged the sale of the health

policy to Levy without ascertaining whether the company

was solvent and were thereby liable in damages to plain-

tiff for negligence. Plaintiff also alleged that “[dJefend-

ants knew, or should have known, that Mark I Benefits

was not a company in good standing in the State of New

Mexico and that harm could result to customers, benefici-

aries and third-party beneficiaries of any such insurance

contracts sold.” After the filing of this action, defendant

Brodie died and the remaining defendant, Covington

ved to dismiss or, in the alternative, for summary

judgment. We granted defendant’s application for inter

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App. 3

CLAIM OF PREEMPTION

Defendant asserts that plaintiff’s common law negli-

gence claim is barred because 29 U.S.C. Section 1144(a)

effectively preempts any action relating to an employee

benefit plan expressly provided under ERISA. Defendant

argues that the preemptive provision of ERISA precludes

a common law action against an insurance agent where

the claim involves an employee benefit plan. The issue of

whether Congress intended to preempt by federal legisla-

tion the area of law embraced within plaintiff’s claim is a

matter of first impression in New Mexico. Whether pre-

emption exists involves ascertaining the purposes and

intent of Congress leading to the enactment of ERISA. See

Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 95 (1983).

ERISA “subjects to federal regulation plans provid-

ing employees with fringe benefits.” Id. at 90. It is a wide-

ranging statutory scheme whose express purpose is to

protect the interests of participants in employee benefit

plans by requiring disclosure and reporting of financial

and other information to participants, by establishing

standards of conduct, responsibility, and obligation for

plan fiduciaries, and by providing appropriate remedies

and sanctions for breach of the duties set forth in the

statute. 29 U.S.C. § 1001(b). A reading of the Act, we

think, clearly evinces that Congress intended that ERISA

cover and apply to the administration of comprehensive

employee benefit plans. See Alessi v. Raybestos-Manhattan,

Inc., 451 U.S. 504, 510 (1981).

To eliminate the threat posed by conflicting state

regulation of employee benefit plans, Congress included

in the text of ERISA a broad preemption clause, Section

App. 4

1144(a), which provides that “[e]xcept as provided in

subsection (b) .. . the provisions of this [act] . . . shall

supersede any and all State laws insofar as they may now

or hereafter relate to any employee benefit plan... .”

(Emphasis added.) In considering to what extent ERISA

preempts claims involving employee benefit plans, the

United States Supreme Court broadly interpreted the

words “relate to” contained in Section 1144. Pilot Life Ins.

Co. v. Dedeaux, 481 U.S. 41 (1987). The expansive language

of Section 1144(a) was deliberately chosen by Congress,

see Shaw, 463 U.S. at 98-99 & note 18, indicating congres-

sional intent “to preempt the field for Federal regula-

tions, thus eliminating the threat of conflicting or

inconsistent state and local regulation of employee bene-

fit plans.” “A law ‘relates to’ an employee benefit plan, in

the normal sense of the phrase, if it has a connection with

or reference to such a plan.” Id. at 96-97 (footnote

omitted).

In this-case there is no dispute that the health insur-

ance policy defendant sold to Levy would have qualified

as an “employee benefit plan” under ERISA. See 29 U.S.C.

§§ 1002(1) & 1003. Nor is it disputed that if the plan were

solvent, plaintiff would be considered a “participant” in

such a plan and that his interest in the benefits of the

plan would be protected under ERISA. Compare Totton v.

New York Life Ins. Co., 682 FSupp. 731 (D.Conn.1987)

(plaintiff’s suit against defendant alleging that employer

breached employment contracts by wrongful termination

ruled not preempted by ERISA); Schultz v. National Coali-

tion of Hispanic Mental Health & Human Servs. org., 678

F.Supp. 936 (D.C.C.1988) (plaintiff’s suit seeking in part

to recover health, life insurance, and disability benefits

App. 5

based on the claim, inter alia, that defendants discrimi-

natorily terminated her employment held not preempted

under ERISA); Morningstar v. Meijer, Inc., 662 F.Supp. 555

(E.D.Mich.1987) (former employee who sought damages

that included the value of future fringe benefits was no

longer a “plan participant” and complaint had no direct

and distinct relationship to ERISA); Isaacs v. Group Health,

Inc., 668 F.Supp. 306 (S.D.N.Y.1987) (court held action not

within preemptive provision of ERISA where plan

trustees brought suit against fund actuary and computer

services provider for breach of contract and negligence);

Greenblatt v. Budd Co., 666 FSupp. 735 (E.D.Pa.1987)

(employee’s claim that employer tortiously misrepre-

sented that the pension benefits he was receiving would

be made equal to those provided under a corporate pen-

sion plan, held not preempted under ERISA). See also

Sepanske v. Bendix Corp., 147 Mich.App. 819, 384 N.W.2d

54 (1985) (plaintiff’s claim against defendant for breach of

employment contract not preempted under ERISA even

though loss of ability to earn pension benefits was

claimed as element of special damages).! Equally relevant

to our analysis is the fact that defendant does not claim to

be a “fiduciary” of Levy’s employee benefit plan, for

' Although questioned by different panel of the Michigan

Court of Appeals in Teper v. Park West Galleries, Inc. 153

Mich.App. 520, 396 N.W.2d 210 (1986), Sepanske is discussed

with approval in Morningstar, 662 F.Supp. at 557, “This court

agrees with the rationale expressed in Sepanske as more accu-

rately expressing this aspect of federal law. The Teper holding

is rejected...”

App. 6

which standards of conduct are outlined by ERISA. See 29

U.S.C. § § 1001(b) & 1002(21)(A) (defining “fiduciary”

under ERISA).

State laws attempting to regulate or administer

employee benefit plans which “relate to” ERISA are gen-

erally held to be preempted. E.g., Alessi v. Raybestos-

Manhattan, Inc., 451 U.S. at 524-25; Pilot Life Ins. Co. v.

Dedeaux (involving complaint alleging bad faith of

insurer in processing insurance claim). But where the

state law relied on does not directly intrude upon the

area reserved by federal legislation, the state law is not

preempted. See Fort Halifax Packing Co. v. Coyne, 482 U.S.

__, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987) (ERISA held not to

preempt Maine statute providing for severance payment

to employees of company that terminated or moved oper-

ation; ERISA preempts state laws relating to employee

benefit plans, not laws related to employee benefits). In

his complaint plaintiff does not allege negligence in regu-

lating, “directly or indirectly, the terms and conditions of

employee benefit plans... .” 29 U.S.C. § 1144(c)(2).

Instead, the complaint alleges negligence in selecting a

licensed and solvent insurance company. Thus, where the

state law in question is not designed to affect employee

benefit plans directly, our inquiry must focus upon

whether the law has an indirect effect on such plans. See

Shaw v. Delta Air Lines, Inc., 463 U.S. at 98. Section 1144(a)

also preempts state law where the law in question indi-

rectly intrudes into the area of employee benefit plan

regulation. Alessi v. Raybestos-Manhattan, Inc., 451 US. at

525. In resolving the question raised on appeal, we must

therefore compare plaintiff’s claim with the area covered

by ERISA to determine whether this state law claim

App. 7

“relates to” an “employee benefit plan” so as to directly,

or indirectly, intrude into the area exclusively reserved by

the federal legislation. See Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724 (1985).

Defendant argues that plaintiff’s claim is barred

because the transaction in which the alleged negligence

occured involved the establishment of or “relates to” an

employee benefit plan within the meaning of Section

1144(a). We do not believe that Congress intended federal

preemption under ERISA to apply where the basis of

plaintiff’s claim is an alleged negligent failure to provide

a valid insurance policy. Instead, we look to the impact

that plaintiff’s claim may have upon the areas congress

intended to be covered by ERISA.

We begin our analysis by observing that ERISA,

though clearly broad ranging, does not attempt to set

standards for or regulate the conduct of insurance agents

involved in acquiring or establishing an employee benefit

plan if the agent is not further involved in creation or

administration of the plan. Nor does ERISA set standards

or attempt to regulate the purchase or sale of insurance

policies that, because of the alleged conduct of an agent,

never in fact ripen into a ERISA-regulated employee ben-

efit plan. As the Supreme Court observed in Metropolitan

Life, “laws that regulate only the insurer, or the way in

which it may sell insurance, do not ‘relate to’ [employee]

benefit plans” and “would not be preempted... .” 471

U.S. at 741. The rationale utilized in Metropolitan Life is

instructive in the instant case and the absence of any

standards or rules of conduct in ERISA for agents

through whom insurance policies are sold significantly

bears upon our analysis.

App. 8

Plaintiff’s complaint is grounded on a claim of negli-

gence. Plaintiff’s claim focuses on the sale of an insurance

policy that was expected to establish an employee benefit

plan wherein he would be a beneficiary. Under these

circumstances, the fact that the subject of the transaction

about which plaintiff complains was intended to be an

ERISA regulated plan is tenuous in nature and does not

compel the conclusion that plaintiff’s negligence claim is

preempted. Here, as asserted in plaintiff’s complaint, the

alleged negligent conduct of defendant took place before

the employee benefit plan was ever acquired or took

effect. It is well settled in New Mexico that an insurance

agent or broker who undertakes to procure insurance for

others and, through his fault or neglect, fails to do so may

be held liable for damage resulting therefrom. Cf. Sanchez

v. Martinez, 99 N.M. 66, 653 P.2d 897 (Ct.App.1982). Sim-

ilarly it has been held that a third party beneficiary who

has suffered damages as a result of appraiser’s negli-

gence has standing to sue. See Stotlar v. Hester, 92 N.M.

26, 582 P.2d 403 (Ct.App.1978). We do not construe the

provisions of ERISA to preempt plaintiff’s claim of negli-

gence grounded upon alleged acts or omissions preced-

ing the institution of a benefit plan.

We conclude that the trial judge correctly determined

that Congress did not intend to preempt the specific area

involved in plaintiff’s claim. The relief sought by plaintiff

does not affect the administration of any plan, nor is

plaintiff’s claim of liability against defendant predicated

on any right or standard contained in ERISA. Plaintiff's

allegation of negligence is grounded upon alleged con-

duct of the defendant that has no reference to ERISA. See

Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804

App. 9

(1986). Moreover, plaintiff’s claim for compensatory dam-

ages, if successful, would be subject to payment by the

defendant and not from ERISA funds. Plaintiff makes no

claim for insurance benefits; instead the negligence claim

is premised entirely upon allegations of negligent con-

duct of defendant and Brodie.

Defendant also relies upon two additional argu-

ments. He asserts, and plaintiff concedes, that in lieu of

pursuing his claim against defendant, plaintiff has a rem-

edy for recovery of benefits due to him against his

employer and against Mark I under ERISA as a “particip-

ant” in an employee benefit plan. Defendant contends

that because plaintiff’s claims is based upon the alleged

negligent failure to obtain a viable employee benefit plan,

plaintiff is limited to recovery against a potential party

named in ERISA under the federal statute’s civil enforce-

ment provision and not a direct action against defendant.

See 29 U.S.C. § 1132(a). We are not persuaded that this

alternative is determinative of the preemption analysis in

this case.

Where a viable employee benefit plan is created,

ERISA’s civil enforcement provisions provides the exclu-

sive avenue to plaintiff for recovery of benefits due to

him under his employer’s medical benefit plan. See Met-

ropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987). Sim-

ilarly, where plaintiff seeks to enforce a right relating to

an employee benefit plan, Section 1144(a) constitutes a

bar to the action because of the availability of a remedy

under Section 1132(a). See Pilot Life Ins. Co. v. Dedeaux.

However the relief sought by plaintiff herein is not an

indirect attempt to regulate an employee benefit plan

through a mechanism of state law. Because plaintiff has

App. 10

charged defendant with negligent misconduct and

because the transaction upon which plaintiff’s claim is

grounded is not regulated under ERISA, we determine

that the claim stated in plaintiff’s complaint is not pre-

empted by ERISA. The crux of plaintiff’s claim is based

upon the alleged negligence of defendant in selecting a

licensed and solvent insurance company to furnish insur-

ance and does not directly or indirectly relate to the

provisions of an employee benefit plan as intended by

Congress.

Defendant also argues that because plaintiff has a

remedy under Section 1132(a), plaintiff is in effect seek-

ing to recover the value of benefits he would have

received under a solvent plan and which his employer

would have provided but for defendant’s alleged negli-

gence. The relief sought by plaintiff, however, is for com-

pensatory damages arising from the claimed negligence

of defendant, not for enforcement of benefits payable

under any ERISA plan. The fact that the measure of

damages applicable to plaintiff’s alleged injury parallels

the amount he might otherwise have recovered under a

solvent plan does not compel a finding of preemption

where an award to plaintiff would have no effect on any

employee benefit plan, would not require any change in

an existing plan, and where the money for an award to

plaintiff would not be paid out of ERISA funds. See Fort

Halifax Packing Co. v. Coyne; Martori Bros. Distribs. v.

James-Massengale, 781 F.2d 1349, amended 791 F.2d 799 (9th

Cir.), cert. denied, 479 U.S. 949 (1986). As observed in

Totton, although the preemption provisions of ERISA are

far ranging in nature, nevertheless, clearly there is a point

App. 11

beyond which even ERISA was not designed to reach. 682

F.Supp. at 734.

In sum, we conclude that plaintiff's claim does not

“relate to any employee benefit plan” but instead consti-

tutes an action in negligence against defendant for failure

to provide insurance. Thus, it does not impermissibly

intrude into the area preempted or reserved to federal

legislation under ERISA. We affirm the trial court’s denial

of defendant’s motion to dismiss.

IT IS SO ORDERED.

/s/ Thomas A. Donnelly

THOMAS A. DONNELLY,

Chief Judge

WE CONCUR:

/s/ A. Joseph Alarid

A. JOSEPH ALARID, Judge

/s/ Rudy S. Apodaca

RUDY S. APODACA, Judge

App. 12

APPENDIX IB

IN THE SUPREME COURT OF THE

STATE OF NEW MEXICO

HAROLD SAPPINGTON,

Plaintiff-Respondent,

vs.

JAMES COVINGTON,

Defendant-Petitioner.

PETITION FOR WRIT OF CERTIORARI

RODEY, DICKASON, SLOAN, AKIN &

ROBB, P.A.

By: Mark C. Meiering

Attorneys for Petitioner

Post Office Box 1388

Albuquerque, New Mexico 87103

Telephone: (505) 765-5900

PETITION FOR WRIT OF CERTIORARI

Supreme Court's Jurisdiction:

[The court of appeals opinion attached as Exhibit A

was filed November 23, 1988. No motion for rehearing is

pending. This case came before the court of appeals on an

ry? ri “rat OTY babals: ]

L©LIVUCULUITY a4 pea

App. 13

Questions Presented for Review:

1. Whether ERISA pre-empts Plaintiff’s negligence

action founded upon nonpayment of benefits by his

employee benefits Plan.

a. The federal legislation referred to as ERISA (29

U.S.C. 1001 et. seq.) was a comprehensive effort to regu-

late all aspects of employee benefits plans, and it includes

exclusive procedures for resolving employee’s disputes

relating to nonpayment of plan benefits. Does the court of

appeals’ decision defeat that purpose?

b. Recent United States Supreme Court cases have

held explicitly that all state causes of action for claims

relating to employee benefits plans are pre-empted by

ERISA’s provisions for resolving claims based on nonpay-

ment of benefits. Is the court’s opinion in conflict?

c. Does the New Mexico Court of Appeals opin-

ion defeat the pre-emption doctrine, by permitting the

Plaintiff to bypass his exclusive ERISA remedy and to

seek a non-ERISA remedy for his plan’s alleged refusal

and failure to reimburse his medical bills?

2. Whether the court of appeals should have fol-

lowed other federal court cases which applied the pre-

emption doctrine to similar theories of claims? For

example:

a. Belasco v. W.K.P. Wilson & Sons, Inc., 833 F.2d

277 (11th Cir. 1987) (state fraud claim dismissed against

broker of plan).

b. Mid America Hotel Corp. v. Bernstein, 664 F.

Supp. 384 (N.D. Ill. 1987) (no state common law action

arising from a plan’s insolvency).

ana ei

App. 14

3. Whether the court of appeals was justified in

using key assumptions which are not warranted conclu-

sions found in the record.

Facts Material to the Questions:

Plaintifi participated in an employee benefits plan

provided by his employer, Levy Auto Supply. The Plan

was established to reimburse employee’s medical bills.

Plaintiff admitted this in Response to Requests for

Admissions. (ROA 29-30). Nonetheless, the court of

appeals’ opinion assumes for reasons unclear and not

found in the district court record that there was never a

ripe employee benefit plan. (Opinion, page 5; see also

page 7). From this, the court erroneously reasoned that

since there was no ERISA-regulated employee benefit

plan, then the ERISA regulatory statute is not involved

and the pre-emption doctrine would not bar Plaintiff's

non-ERISA common law negligence action.’

Plaintiff’s Complaint is founded on the allegation

that he was employed by Levy Auto, and by virtue of this

employment, he was under an employer provided group

health plan called Mark I Benefits. (ROA 1, 2). Despite the

court of appeals’ statements, Plaintiff admitted that there

1 Conversely, the opinion, p.7, acknowledged that where

there is an actual employee benefit plan, ERISA’s civil enforce-

ment provisions provided the exclusive avenue for recovery of

benefits. The opinion thereafter proceeds on the basis that if

there is no plan, then ERISA pre-emption is not offended by a

negligence suit for failure to provide a plan.

App. 15

was in fact a plan and that he was enrolled in the plan.

(ROA 29, Requests No. 4 and 5). He complains that he

incurred hospital and medical expenses but was not fully

reimbursed by the Mark I Benefits Plan. (ROA 2, 29, 30)

Plaintiff also alleges that he was not paid because the

plan became insolvent. He made no direct claim in the

insolvency proceeding. (ROA 29) He never proceeded

under his ERISA remedies. Instead, he sued the two

individuals, Brodie and Covington, who allegedly put

this plan in place with the employer, Levy Auto. (ROA 1)

The Plaintiff alleges that the Defendants negligently

failed to investigate the financial soundness of the Mark I

Benefits plan and are liable to the Plaintiff for his unpaid

medical expenses. (ROA 2)

It is undisputed by the parties that Plaintiff Sap-

pington’s participation in the plan and right to make

claims under the plan stem strictly from his enrollment in

the Levy Auto employee Mark I Benefit Plan. (ROA 30). It

is also undisputed that Plaintiff Sappington has never

had any conversations or contact with Defendant

Covington and, therefore, Defendant Covington made no

personal representations to the Plaintiff. (ROA 29; But see

Court’s Opinion, page 1).

The Basis for Granting the Writ:

1. This is a case of first impression in New Mexico

as stated by the court of appeals (Opinion, page 2) and

the Application for Interlocutory Appeal.

2. There are no New Mexico Supreme Court deci-

sions on the issue. The United States Supreme Court

App. 16

recently has issued several significant “Federal Pre-

emption” opinions. The New Mexico Court of Appeals’

opinion (despite the effort to apply and distinguish the

federal rulings) may be in conflict with the controlling

United States Supreme Court precedents.

3. There are other cases pending in the trial courts

of New Mexico which are or may be controlled by

whether the federal legislation (ERISA) is deemed to pre-

empt state law causes of action related to employee bene-

fits plans.

4. This case involves a significant question of con-

stitutional law, as well as sub-issues involving the va-

lidity of attempting to avoid the pre-emptive effect of

Federal legislation by carving out a semantical but not

substantive exception to the precedents from the United

States Supreme Court. Implicit in the entire analysis is the

issue of state-federal comity when state courts are unwill-

ing to accept federal pre-emption in a particular area of

law.

5. Not only will the decision in this case guide the

district courts in pending cases, this legal issue has sub-

stantial public impact because employee benefits plans

have become a major fringe benefit in today’s economy.

Practically every New Mexico family has or will have a

benefits claim on an employer’s benefit plan. Invariably,

there will be disputed claims and the public has a sub-

stantial interest in pursuing the correct remedy when

resolving those disputes. Because of the magnitude of the

issue, the United States Congress established a compre-

hensive plan for regulating employee benefits plans,

including a system of remedies and dispute resolution.

App. 17

The United States Supreme Court has declared that sys-

tem paramount and ruled that it supersedes and

supplants state remedies or common law causes of action.

The New Mexico Court of Appeals’ decision carves out

an exception whereby a dissatisfied claimant can pursue

unpaid plan benefits outside ERISA and despite the fed-

eral pre-emption. The court of appeals’ “exception” can

and will be used to swallow the rule in the sense that it

will permit anyone to circumvent ERISA and the intent of

Congress. It is difficult to exaggerate the magnitude of

the impact on the public because in this modern Ameri-

can economy of pervasive health plans, pension plans

and other employee benefits plans, disputes over paid

and unpaid plan benefits are inevitable, and a uniform

national method for resolving those disputes was

intended by Congress.

Argument for Granting the Writ:

The opinion of the court of appeals is well written

and on the face seems routinely to dispatch a mundane

appeal on a boring issue of unremarkable consequence.

The court of appeals cited many of the controlling prece-

dents in journeyman fashion and quoted many of the

important principles of law which must be applied and

followed. But the effort displayed in the court’s opinion

does not mean the result is correct or that it is compatible

with the acknowledged authorities. Moreover, the conse-

quence of the errors in reasoning is major —- even though

not immediately apparent from merely reading the opin-

ion — because it ultimately defeats the substance of the

statute and the federal precedents.

App. 18

First of all, the opiriion assumes facts which are fun-

damental to the opinion but which are not valid assump-

tions and are not justified by the record. To clearly see

this, one must back up one step. The opinion quite cor-

rectly cites and quotes from Supreme Court cases which

hold that Congress intended that ERISA pre-empt the

field for feceral regulation of employee benefits plans to

eliminate inconsistent state and local regulation. State

statutory or common law falls in this category if it has a

connection with or reference to such a plan. [Opinion,

page 3, quoting from Shaw v. Delta Air Lines, Inc., 463 U.S.

85 (1983) and Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41

(1987).] The opinion goes on to acknowledge from Shaw

and Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724

(1985) that a state law claim relates to an employee bene-

fit plan if it directly or indirectly intrudes into the area of

employee benefit plan regulation.

Against this background it is plain that if this Plain-

tiff’s claim even indirectly relates to a statutorily defined

employee benefit plan, he must proceed through his

ERISA remedies and the pre-emption doctrine prohibits

his common law negligence complaint against this Defen-

dant. But having said this, the court of appeals’ opinion

immediately jumps the track by shifting to whether it can

interpret Congress’s legislation under ERISA to be an

App. 19

attempt to regulate the conduct of insurance agents.?

Herein arises the faulty assumptions that there was no

valid insurance policy and that there was no ERISA-

regulated employee benefit plan. From this, the court of

appeals ruled that the Defendant’s alleged negligence

was in failing to produce a viable employee benefit plan,

and therefore without an ERISA-regulated plan, and for

conduct preceding institution of a benefit plan, there is

no ERISA bar to a state negligence action.

This court cannot work from the confused premise of

questioning whether there was a plan, or attaching some

great temporal importance to whether the alleged negli-

gence occurred before there was a plan. First of all, in this

case there was in fact a Mark I Benefits Plan which fell

within the statutory definition at § 1002. Plaintiff

acknowledged in Answer to Requests for Admissions

Numbers 4 and 5 that he was an employee-participant

and was enrolled in the Mark I Benefits Plan. His Com-

plaint is that he incurred medical expenses but his plan

did not reimburse them because of alleged insolvency

proceeding (paragraph 4 of the Complaint). Rather than

even try his ERISA remedy against the plan (Request for

Admission 2), or sue the plan fiduciary under ERISA, he

2 ERISA may not directly single out insurance agents but

its entire focus is a uniform regulatory system to insure that

the employer’s plans and employee’s rights under the plans

are protected from all angles. An integral part is the regulation

of plan operators so that the plan assets are protected. A

number of cases have specifically held that state insurance

unfair trade practices acts are superseded by ERISA’s pre-

emption. If ERISA goes this far, then clearly the opinion of the

Court of Appeals wrongly states that ERISA cannot be inter-

preted as an attempt to regulate the conduct of insurance

agents. See cases cited by Appellant’s Brief pp. 5-6.

App. 20

sued the individual who brokered the Mark I Benefits

Plan to the employer (paragraph 2 of the Complaint).

Hence, it is a mystery how the court of appeals could

ignore the statutory definition of a regulated plan and

concoct its own criteria to conclude that there was no

ripened ERISA-regulated plan and there was no viable

employee benefit plan within the meaning of ERISA civil

enforcement provisions. It is even more perplexing that

the opinion assumes (without any supporting legal

authority) that there must be an insurance policy before

there can be an ERISA plan, and compounds that with the

conclusion that Congress did not intend to regulate plans

which lack a “valid insurance policy.”?

The concept that the temporal element is important is

also not supported by precedent and is an illogical con-

clusion. The court of appeals’ attaches key importance to

the thought that the alleged negligence (failure to investi-

gate the financial status of Mark I Benefits) preceded the

institution of the employee benefit plan. The opinion

does not explain why “preceding in time” is sufficient to

conclude that the allegation of negligence does “not

relate” to an ERISA benefit plan. See Metropolitan Life, 471

U.8. at 741. On the contrary and regardless of any tempo-

ral distinction, this Plaintiff’s claim is founded precisely

on the alleged failure of an ERISA plan to pay him

benefits and is an attempt to collect these benefits in a

3 Not only is there no such prerequisite for plan assets, the

ERISA legislation specifically contemplates plans without

insurance. § 1002(1). And the legislation includes measures to

regulate asset management, including governmental oversight.

E.g., §§ 1001a(c)(4), 1103 and 1132 (a)(2)

App. 21

manner outside the ERISA framework. Plaintiff never

argued for such a distinction based on time and here

again is a key element in the opinion which the parties

never briefed.

The opinion fails to mention and is at odds with at

least two cases which were cited to the court.

Belasco v. W.K.P. Wilson & Sons, Inc., 833 F.2d 277

(11th Cir. 1987) in part was an attempt to sue the broker

of the plan who put it in place with the employer. The

court rejected the plaintiff’s fraud_and bad faith claims

against the broker on the grounds of pre-emption. The

Belasco court certainly did not intimate that suits against

brokers are an exception to the exclusivity of ERISA

remedies. Belasco contradicts the court of appeals’ state-

ment “that Congress did not intend to pre-empt the spe-

cific area involved in plaintiff’s claims.” (Opinion Page 6)

Mid America Hotel Corp. v. Bernstein, 664 F. Supp. 384,

386 (N.D. Ill. 1987) involved an allegation that the plan

was not financially sound because of the defendants’

conduct. The plaintiff coupled ERISA claims with state

common law claims. There also was the allegation that

the defendants fraudulently induced the establishment of

the plan and the plan assets were improperly diminished

by the defendants’ conduct. The court dismissed the state

law claims and permitted only the ERISA action. Neither

the allegations of financial insolvency nor the allegation

of misconduct “preceding” establishment of the plan

were viewed as distinctive issues which validated the

right to pursue state law remedies instead of ERISA. In

short, the court in Mid America did the exact opposite of

App. 22

the New Mexico Court of Appeals: it held that ERISA

pre-emption applied.

Having said why the New Mexico Court of Appeals’

Opinion is faulty, it remains to be reiterated what it will

mean if it is left uncorrected. By carving out this excep-

tion to ERISA preemption, the court permits virtually all

claimants to achieve exactly what Congress did not

intend and what the United States Supreme Court did not

allow in Pilot Life v. Dedeaux, 481 U.S. 41 (1987). Any plan

participant dissatisfied with the benefits he receives on a

specific claim can draft pleadings which will allege negli-

gent conduct which preceded the institution of the bene-

fit plan so as to contend that no “viable” benefit plan

exists. By this modest pleading and the court of appeals’

decision, every disgruntled plan enrollee will be entitled

to circumvent ERISA pre-emption. Moreover, because the

court of appeals says that the availability of ERISA

remedies is not determinative of pre-emption (Opinion,

page 7), the disgruntled plan employee can argue with

logic that in New Mexico he can pursue non-ERISA suits

right along with claiming his ERISA remedies. Not only

will the exception swallow the rule, the result will fly

against Pilot Life and the other cases cited to the court of

appeals: ERISA regulation “would make little sense if the

remedies available to ERISA participants and benefici-

aries under § 502(a) could be supplemented or sup-

planted by varying state laws.” Id., 107 S. Ct. 1549 at 1558.

Conclusion and Prayer for Relief:

Supporting the federal statute and federal precedents

is not condoning some unnecessary evil inflicted on New

App. 23

Mexicans which should be resisted. The ERISA statute is

salutary and provides protection for plan beneficiaries. It

also provides a different but a real method for handling

disputes, and that itself is a relief to state courts. The

federal pre-emption doctrine is the means for being cer-

tain that the system operates the same regardless of artifi-

cial lines on the map. There is nothing bad about any of

those objectives and therefore there is no threat to New

Mexico’s people or courts which must be turned back by

finding some theory to thwart the exclusivity of the

ERISA remedies.

The supreme court should grant the Petition for Cer-

tiorari, and should allow the parties to file briefs which

address the court of appeals rationale and how it conflicts

with the principle that Congress can establish a national

system for overseeing employee benefits plans. That is,

New Mexico courts should support, not defeat, a compre-

hensive system for handling disputes relating to plans

without trying to undercut the system with its parallel

local remedy. The district court should be reversed.

RODEY, DICKASON, SLOAN, AKIN

& ROBB, P.A.

By /s/ Mark C. Meiering

Mark C. Meiering

Attorneys for Petitioner

Post Office Box 1888

Albuquerque, New Mexico 87103

Telephone: (505) 765-5900

App. 24

APPENDIX II

IN THE SUPREME COURT OF THE

STATE OF NEW MEXICO

Tuesday, January 10, 1989

NO. 18,118

JAMES COVINGTON,

Petitioner,

VS.

HAROLD SAPPINGTON,

Respondent.

This matter coming on for consideration by the Court

upon petition for writ of certiorari, and the Court having

considered said petition and being sufficiently advised;

NOW, THEREFORE, IT IS ORDERED that petition for

writ of certiorari is hereby denied.

IT IS FURTHER ORDERED that the Record in Cause

No. 10635 is hereby returned to the Clerk of the Court of

Appeals.

ATTEST: A True Copy

ROSE MARIE ALDERETE

CLERK OF THE SUPREME COURT

By /s/ Jane Gurule

Deputy

App. 25

APPENDIX III

IN THE DISTRICT COURT OF LEA COUNTY

STATE OF NEW MEXICO

HAROLD SAPPINTON,

Plaintiff,

No. CV 85-1014

VS (Filed September 25, 1985)

LARRY G. “PAT” BRODIE and

JAMES COVINGTON,

Defendants.

COMPLAINT FOR DAMAGES

Plaintiff states:

1. Plaintiff is a resident of Lea County, New Mexico

and the facts upon which this claim is based occurred in

Lea County, New Mexico.

2. At all times relevant to this proceeding, Plaintiff

was an employee of Levy Auto Supply of Hobbs, New

Mexico, who had purchased a policy of health insurance

on its employees from Mark I Benefits which had been

sold to Plaintiff's employer by Defendants, or either of

them.

3. On or about April 9, 1984, Plaintiff had occasion

to be hospitalized at Lea Regional Hospital which hospi-

talization continued until on or about April 24, 1984.

During this period of time, Plaintiff accumulated medical

expenses, including hospitalization and doctor bills,

totally approximately $20,000.

ait ilaieiiaieeiaiiee

App. 26

4. Although Defendants represented to Plaintiff or

his employer that he was fully insured for such medical

expenses as he incurred during his hospitalization, the

hospitalization insurer, Mark I Benefits, failed to pay

when requested to do so. Plaintiff later learned that such

company had never been licensed to do business in the

State of New Mexico and that insolvency proceedings

had begun against it in the State of Texas.

5. Defendants knew, or should have known, that

Mark I Benefits was not a company in good standing in

the State of New Mexico and that harm could result to

customers, beneficiaries and third-party beneficiaries of

any such insurance contracts sold.

6. Defendants were negligent in failing to investi-

gate the status of Mark I Benefits to determine whether or

not it was in good standing in the State of New Mexico,

whether or not it was financially stable and in continuing

to sell such insurance without having knowledge as to

the companies standing or financial condition. Due to

Defendant’s negligence, Plaintiff has been damaged in

the sum of $20,000.

WHEREFORE, Plaintiff prays damages against the

Defendants in the sum of $20,000, for its costs, attorney’s

App. 27

fees and for such other relief as the Court may deem just

and proper.

TEMPLEMAN AND CRUTCHFIELD

Second Floor, Reed McCrory Building

Lovington, New Mexico 88260

(505) 396-4927

By: /s/ James E. Templeman

JAMES E. TEMPLEMAN,

Attorney for

Plaintiffs

App. 28

APPENDIX IV

FIFTH JUDICIAL DISTRICT COURT

COUNTY OF LEA

STATE OF NEW MEXICO

HAROLD SAPPINGTON,

Plaintiff, NO. CV 85-1014

VS. (Filed March 4, 1988)

LARRY G. “PAT” BRODIE ~ —

and

JAMES COVINGTON,

Defendants.

RESPONSE TO

REQUESTS FOR ADMISSIONS

COMES NOW the Defendant, James Covington, and

pursuant to the Rules of Civil Procedure, propounds the

following Requests for Admission to the Plaintiff, Harold

Sappington:

REQUEST NO. 1: Plaintiff Harold Sappington has

had no conversations or direct dealings with Defendant

James Covington.

Admitted

REQUEST NO. 2: Plaintiff Harold Sappington has

not appeared in any bankruptcy or insolvency proceeding

involving Mark I Benefits for the purpose of making a

claim on the assets of Mark I Benefits.

Admitted

REQUEST NO. 3: Plaintiff Harold Sappington was

entitled to participate in the Mark I Benefits plan because

of the Plaintiff’s employment with Levy Auto Supply of

Hobbs, New Mexico.

App. 29

My employer said I was.

REQUEST NO. 4: At the time when Plaintiff Harold

Sappington incurred the medical and hospital expenses

for which he makes a claim in the Complaint in the above

captioned cause, he was an employee of Levy Auto Sup-

ply and was enrolled in the Mark I Benefits plan because

of that employment.

I was so employed and was told I was so enrolled.

REQUEST NO. 5: The Plaintiff Harold Sappington

was first employed by Levy Auto Supply prior to the date

when the Mark I benefits plan was accepted and placed

into effect by Levy Auto Supply.

Admitted.

INTERROGATORIES

Pursuant to the rules of Civil Procedure, Defendant

James Covington propounds the following Interrogato-

ries to be answered fully in writing by the Plaintiff within

30 days:

Interrogatory No. 1: If you deny any of the above

Requests for Admission, then for each numbered request

for admission, state the complete facts within your

knowledge or that of your representative which forms the

basis or reasons for your denial of the request for

admission. .

Answer: N/A

Interrogatory No. 2: If you have any documents or

tangible items which you rely upon as grounds for

| |

App. 30

denying any of the Requests for Admission, please iden-

tify the specific document you rely upon, and state the

content of each document, as well as the name and

address of the person in possession of each document.

Answer: N/A

HAROLD SAPPINGTON

TEMPLEMAN AND CRUTCHFIELD

2nd Floor, Reed McCrory Building

Lovington, New Mexico 88260

(505) 396-4927

By: /s/ James E. Templeman

JAMES E. TEMPLEMAN

Attorneys for Plaintiff

STATE OF )

SS:

COUNTY OF )

Harold Sappington, being first duly sworn upon oath

states: I have read and answered the foregoing instru-

ment, know and understand the contents thereof and

state that the matters and things therein stated are true

and correct to the best of my knowledge, information and

belief.

/s/ Harold Sappington

HAROLD SAPPINGTON

App. 31

SUBSCRIBED AND SWORN TO before me this 26th

day of February, 1988.

/s/ Jo Addison

NOTARY PUBLIC

My Commission Expires:

5-15-89

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.