# Petition for Writ of Certiorari — Covington v. Sappington

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1989
- **Citation:** 490 U.S. 1107

## Text

Supreme Court, U.S,

| FILED
' APR 8 109

S8-1689 ff

No. _ 7
' CLERK
In The if -

"errr ew

. ° ‘
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

si

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

iv
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,
14

STATUTES:

28 USA... § 1
28 USA.
ao USC.

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TABLE OF AUTHORITIES - Continued

Page
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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.

yN
vv

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.

y%
il

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
7

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

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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.

,%
Vv

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

a

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

a

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

10

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,

11

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.

12

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

13

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

14

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

———

15

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

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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.

4

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.

os

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

Se

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_1211%3A1. Public record. Not legal advice.