Opposition Brief — UNUM Life Insurance Co. of America v. Tierney

(2) “Supreme Court, U6.

FILED

No. 03-1299 | APR 1 4 2004

LOSRICE OF THE CLERK |

In The

Supreme Court of the Anited States

é

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UNUM LIFE INSURANCE COMPANY OF AMERICA

AND UNUMPROVIDENT CORPORATION,

Petitioners,

V.

JANCYE H. TIERNEY,

Respondent.

4

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On Petition For Writ Of Certiorari

To The Court Of Appeals For

The Eighth District Of Texas

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Vv

RESPONDENT’S BRIEF IN OPPOSITION

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MALONEY, BEAN, HorRN & HULL, PC.

WALLACE MALONEY, Counsel of Record

DAN K. HORN

JOHN M. WEAVER

102 Decker Drive, Suite 200

Irving, Texas 75062-2740

Telephone: (972) 281-2900

Telecopier: (972) 281-2929

Counsel for Jancye H. Tierney

COUNTER-STATEMENT OF

QUESTION PRESENTED

Whether a disability insurance plan procured by three

owner/managers of an S corporation that covers only the

three owner/managers and no non-owner employees is

governed by the Employee Retirement Income Security Act

of 1974, as amended, 29 U.S.C. §1001, et seg. (“ERISA”)?

ll

TABLE OF CONTENTS

Page

COUNTER-STATEMENT OF QUESTION PRE-

ARES EABED socsvccnvsasoeaionsnipianvaneeiigemmaaniamaaiane panies

STATEMENT OF THE CASB........ccccccccccscssssscsrssssssseses

REASONS FOR DENYING THE WRIT.......................

I. THE STATE COURT DECISION DOES NOT

COMP LICE WEES SeeR ME car ccncecissnsnstiinsteonstince

Il. THE COURT NEED NOT REVIEW THE

STATE COURT DECISION TO RESOLVE

ANY CONFLICT BETWEEN THE CIRCUITS

AND THE STATE COURTS..........cssessesmonssssooees

COO LATS is. <02:sinevecssnesdasterengeheeinaenartneiaetie ees

12

iil

TABLE OF AUTHORITIES

Page

CASES

Briscoe v. Goodmark Corp., 102 S.W.3d 714 (Tex.

MANNA dA Lav Wlidirsisshcapeinveconsenvesteascdnbieunds vseisdshevee 2, 5

Christensen v. Harris County, 529 U.S. 576 (2000).......... 14

Clackamas Gastroenterology Assocs., P.C. v. Wells,

538 U.S. 440, 123 S.Ct. 1673, 155 L.Ed.2d 615

Nic tiddibsObaihGuntvnnnschesersxoulaivcedeieseveuvecses 16, 17, 18

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 95

S.Ct. 1029, 43 L.Ed.2d 328 (1975).......0 cece. 2, 4, 5, 6

Davis v. Sheerin, 754 S.W.2d 375 (Tex.App. -

Houston [14th Dist.] 1988, writ denied) ................. wanes OU

DeWoody v. Rippley, 951 S.W.2d 935 (Tex.App. -

Fort Worth 1997, writ dis’m by agr.)...........cccccceeseeees 19

Dickey v. Dickey, 908 S.W.2d 311 (Tex.App. — San

ABitonio 1905, Mo Writ)...........0.0.ccccbscsescocccccosccsseccsoseceess 19

Eichelberger v. Eichelberger, 582 & “V.2d 395 (Tex.

TE Ne aie e ssi ssn docs vase Msewasesscoo'sesussanconsasionsceusi 4

Florida v. Thomas, 532 U.S. 774, 121 S.Ct. 1905,

BE) ) acer vess 5

Flynt v. Ohio, 451 U.S. 619, 101 S.Ct. 1958. 68

ET CID os ctssnsccsvcovesverocvevevensvovsesscensioverases 3, 6, 7

Henry v. Champlain Enterprises, Inc., 212 F.R.D. 73

I ida siscighec tiehdsaassapveivevievactaedeipeesecasbenaaeéias 15

House v. American United Life Ins. Co., 2002 WL

I Bs als salechasnsicanoondeenansaseurrusnssooveesiessees 15

Meredith v. Time Ins. Co., 980 F.2d 352 (5th Cir.

dhe ESE SALES te oe 1,13

lv

TABLE OF AUTHORITIES — Continued

Page

Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318

DE atc ctarxe ctashaalvaciasutuslataanes cabubete oeusee catenins aienda ooee 17, 18

Ross v. Arkwright Mut. Ins. Co., 892 S.W.2d 119

(Tex.App. — Houston [14th Dist.] 1994, no writ)........... 19

Russell v. UNUM Life Ins. Co. of America, 40

Fe TEE LED TOLG. TO vices ctnissveonvvsencsenvensseesseesvseveves 9

Stiles v. Resolution Trust Corp., 867 S.W.2d 24 (Tex.

I iin Mdanencihaaiiscusenescisae ions aoebereeeainte oadaiiaal doin 18

Vega v. Natl Life Ins. Servs., Inc., 188 F.3d 287 (5th

I eaicensninciccenciecineasteedexensiansaclicseaidiaasnaen ener 12

Yates v. Hendon, __ U.S. 124 S.Ct. 1330 (2004)... 12, 13

_—"

STATUTES

Be ee SP icsrccsictctshinsintibiatavidinindn as 15

es iat crrctrieminennamnntesacmmnanes 1

Se ees Ae CE: canis vhcnsicnsncctrcsansrserncceommintnszasnoniamasens i

es OS hticcenets eeeeioinnanenmanniand 16

29 C.F.R. $§ 2510.3-10))-(4) (1992)... ccccsssssessereeeees 1

BONE e BP) ctisvitirinieicmnninausnve 13, 14

BEES BPI) iciicnsstircmaniecssenwarmes 13, 14

OBJECTION TO JURISDICTION

This Court does not have jurisdiction to consider

hearing UNUM’s Petition for Writ of Certiorari. UNUM

contends that this Court has jurisdiction under 28 U.S.C.

§ 1257(a) because the decision on review involves a title,

right, privilege or immunity claimed under a federal

statute. UNUM, however, neglects to address or even

mention an essential element of § 1257(a), namely, the

express limitation of this Court’s jurisdiction to “[flinal

judgments or decrees rendered by the highest court of a

State.” UNUM omits this essential element because the El

Paso Court of Appeals’ judgment in this case clearly does

not meet the § 1257(a) finality requirement.

The court of appeals’ judgment in the case at hand

clearly does not qualify as final under a literal reading of

the requirement. The court of appeals merely reversed two

summary judgments rendered in favor of UNUM and

remanded the case for further proceedings consistent with

the court’s opinion. On remand, Tierney is arguing that

there are separate plans for the three owner/managers of

the corporation and the nonowner/employees, and that the

separate nature of the owners plan negates UNUM’s

ERISA defense based on three grounds.’ The state courts,

* In a motion for partial summary judgment filed after remand,

Tierney has argued that ERISA does not apply because: (1) the owners

plan does not cover any employees (the issue that is the subject of

UNUM’s Petition to this Court); (2) the owners plan meets the require-

ments of the safe harbor provisions of 29 C.F.R. §§ 2510.3-1(j)-(4)

(1992); and (3) UNUM cannot meet the third prong of the ERISA

analysis, namely, whether the owners plan was created or maintained

by the employer for the benefit of its employees. See Meredith v. Time

(Continued on following page)

including the jury, may decide that there are indeed

separate plans and that ERISA does not apply for one or

more of the reasons Tierney is arguing. The state courts

might ultimately decide that there are separate plans but

ERISA applies regardless.’ It is also possible that the

courts might decide over Tierney’s objections that there is

but one plan covering both owners and employees. In that

case, the state courts will have to determine whether

Tierney can meet the threshold of recovery under ERISA.

Regardless of the ultimate outcome, one thing is certain:

the state courts have many issues, both federal and state,

to decide before their decision ultimately becomes final

under a literal reading of the jurisdictional statute.

Although a plain reading of the finality requirement

would preclude the exercise of jurisdiction “where any-

thing further remains to be determined by a State court,”

this Court has recognized four very narrow categories of

exceptions to such a literal reading of the limitation. See

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 477, 95

S.Ct. 1029, 1037, 43 L.Ed.2d 328 (1975). The question then

becomes whether this case fits under any of the four very

Ins. Co., 980 F.2d 352, 355 (5th Cir. 1993). The trial court denied the

motion, stating that the issues will be determined at trial.

* The fact that the Texas Supreme Court declined to grant UNUM’s

Petition for Review from the court of appeals’ reversal of the summary

judgments does not foreclose the possibility that the Texas Supreme

Court might hear an appeal from a final judgment in this case. The law

of the case doctrine is not absolute, but is to be applied by the appellate

courts in a discretionary manner according to the circumstances of each

case. See Briscoe v. Goodmark Corp., 102 S.W.3d 714, 716-717 (Tex.

2003) (holding that the law of the case doctrine does not apply to

findings that were clearly erroneous). Therefore, the Texas Supreme

Court has not necessarily had its final say on this matter.

TM us

narrow categories of exceptions. UNUM has offered this

Court no guidance on this issue, instead choosing to stick

its head in the sand by pretending that the finality re-

quirement does not even exist. UNUM surely would have

briefed the issue and argued for application of one of the

exceptions if it believed it could advance a reasonable

argument. Having failed to do so, UNUM has opened itself

up to the assumption that UNUM did not believe it could

make a good faith argument. Indeed, a review of the

exceptions reveals that none of them apply here.

It should first be noted that this Court has observed

that “in most, if not all, of the cases falling within the four

exceptions, not only was there a final judgment on the

federal issue for purposes of state-court proceeding, but

also there were no other federal issues to be resolved.

There was thus no probability of piecemeal review with

respect to federal issues.” Flynt v. Ohio, 451 U.S. 619, 621,

101 S.Ct. 1958, 1960, 68 L.Ed.2d 489 (1981). In the case at

hand a number of federal issues remain to be resolved. As

noted above, the state courts may need to decide issues

regarding the safe harbor regulations, the third prong of

the ERISA analysis, and proper application of the sliding

scale of reasonableness applicable to administrators

operating under a conflict of interest. Review of the iso-

lated issue presented by UNUM in its Petition for Writ of

Certiorari will not resolve these other federal issues,

thereby creating the real possibility of piecemeal review of

federal issues rejected by this Court in Flynt. Thus, this

Court can and should refuse to exercise jurisdiction over

UNUM’s Petition on this basis alone without the need to

even look at the four exceptions.

In any case, a review of the four exceptions reveals

that none applies in the case at hand. The first category of

4

exceptions includes cases in which “there are further

proceedings — even entire trials — yet to occur in the state

courts but where for one reason or another the federal

issue is conclusive or the outcome of further proceedings

preordained.” Cox Broadcasting Corp, 420 U.S. 469, 479,

95 S.Ct. 1029, 1037. Resolution of the issue UNUM pre-

sents to this Court by way of its Petition will not be

conclusive on the outcome of this case. As discussed above,

Tierney has raised additional alternative grounds to

support a finding that ERISA does not apply. Also, no final

decision has been made as to whether a separate owners

plan exists and, if not, whether Tierney can still recover in

the face of ERISA. Most importantly, the Texas Supreme

Court has not necessarily had its final say on the issue of

whether ERISA would apply to a separate owners plan.

Again, that court may still review the issue at the conclu-

sion of the trial below.’ Thus, the first exception does not

apply.

The second category of exceptions includes those cases

in which “the federal issue, finally decided by the highest

court in the State, will survive and require decision

* UNUM wrongly suggests that the Texas Supreme Court may not

have jurisdiction to review the ERISA question. Although Tierney did

question that court’s jurisdiction, UNUM cited the court to Eichelberger

v. Eichelberger, 582 S.W.2d 395, 397 (Tex. 1979) (holding that the Texas

Supreme Court has implied jurisdiction to correct the judgment of a

court of appeals that conflicts with the supreme law of the land as

expressed by Congress and the United States Supreme Court). More-

over, the Texas Supreme Court apparently agreed with UNUM on the

jurisdictional question in that it requested briefing on the merits and

ultimately denied the petition instead of dismissing the petition for

want of jurisdiction.

regardless of the outcome of future state-court proceed-

ings.” Cox, 420 U.S. at 480, 95 S.Ct. 1029. This exception

does not apply for many reasons. For example, as set forth

above, Tierney is arguing alternative grounds to defeat

UNUM’s ERISA defense that are not dependent on the

issue presented by UNUM’s Petition to this Court. Thus,

the Texas courts might hold on a second appeal that

ERISA does not apply because the owners plan falls within

the safe harbor provisions and not even reach the legal

issue UNUM is presenting here. See Florida v. Thomas,

532 U.S. 774, 779, 121 S.Ct. 1905, 1909, 150 L.Ed.2d 1

(2001) (holding that the second exception does not apply

where on remand an alternative basis may make resolu-

tion of the issue unnecessary). It is also possible that the

Texas courts could conclude that there is only one plan and

ERISA does apply, which would render UNUM’s present

argument moot. There are many more combinations of

possibilities that would render UNUM’s present conten-

tion moot. Therefore, the second exception fails.

-

The third category of exceptions is where “the federal

claim has been finally decided, with further proceedings

on the merits in the state courts to come, but in which

later review of the federal issue cannot be had, whatever

the ultimate outcome of the case.” Cox, 420 U.S. at 481, 95

S.Ct. 1029. Again, both the Texas Supreme Court and the

court of appeals may still review the federal issue raised

by UNUM on a second appeal. See Briscoe v. Goodmark

Corp., 102 S.W.3d 714, 716-717 (Tex. 2003). Therefore, the

third exception does not apply.

The fourth and final category includes those cases

“where the federal issue has been finally decided in the

state courts with further proceedings pending in which the

party seeking review here might prevail on the merits on

ee

6

nonfederal grounds, thus rendering unnecessary review of

the state court on the federal issue by this Court, and

where reversal of the state court on the federa! issue

would be preclusive of any further litigation on the rele-

vant cause of action rather than merely controlling the

nature and character of, or determining the admissibility

of evidence in the state proceedings to come. In these

circumstances, if a refusal to immediately review the

state-court decision might seriously erode federal policy,

the Court has entertained and decided the federal issue,

which itself has been finally determined by the state

courts for purposes of the state litigation.” Cox, 420 U.S. at

482-483, 95 S.Ct. 1029. Once again, this exception depends

on the federal issue being finally decided by the state

courts, a requirement that is absent in the case at hand.

The Texas Supreme Court’s refusal to consider the rever-

sal of a summary judgment is by no means final inasmuch

as that court may still consider the matter later. Moreover,

nothing about the court of appeals’ holding could seriously

erode federal policy.‘ In Flynt, this Court recognized that

the cases falling under the fourth exception “involved

identifiable federal or constitutional policies which would

have been undermined by the continuation of the litigation

in state courts.” 451 U.S. at 622, 101 S.Ct. 1958. As

UNUM recognizes in its briefing, however, state courts

have concurrent jurisdiction to adjudicate ERISA claims.

Petition for Writ of Certiorari at 4, n. 1. Therefore, con-

tinuation of this case in state court, whether ultimately

* Indeed, the court of appeals’ published opinion has not been cited

by any other court (other than the same court of appeals on an issue of

state court procedure).

under ERISA or not, will not undermine any federal

statutory or constitutional policy. “A contrary conclusion

would permit the fourth exception to swallow the rule.”

451 U.S. at 622, 101 S.Ct. 1958.

After reviewing the four categories of exceptions, it is

not hard to understand why UNUM chose not to argue for

application of any of them to the case at hand. What is

surprising, however, is that UNUM attempted to invoke

this Court’s jurisdiction without a candid consideration of

this Court’s limited jurisdiction in cases arising from state

courts. In so doing, UNUM has wasted Tierney’s time and

resources as well as the precious time and resources of this

Court. Tierney respectfully requests that this Court

summarily reject UNUM’s Petition for Writ of Certiorari

for want of jurisdiction.

STATEMENT OF THE CASE

UNUM’s Statement of the Case does not fairly and

accurately set forth the facts necessary for a proper de-

termination of UNUM’s Petition. Therefore, Tierney

submits her own statement. In 1997, Jancye Tierney

(“Tierney”) was one of three (not “several” as stated by

UNUM) owner/managers of Special Insurance Services

(“SIS”).° In the Spring of 1997, the owners of SIS decided

to procure a long term disability policy through UNUM

Life Insurance Company of America (“UNUM”). UNUM

* Although UNUM’s summary judgment motion did not clearly

establish what type of entity SIS is, the record suggests that SIS is an S

corporation.

8

issued a policy that created multiple benefit plans, one for

owners and a separate one for non-owner/employees.’ The

plans differed in several different respects, including the

source of funding (the owners paid for their coverage while

SIS paid for the employees’), the definition of disability,

the amount of coverage, and the length of payments.

Moreover, the plans were set up to be separate and inde-

pendent of one another in that one plan could be termi-

nated or modified without affecting the other.

In the Spring of 1998, Dr. John Mathias evaluated

Tierney, a single mother, for chronic abdominal pain and

constipation. Dr. Mathias performed objective tests on

Tierney, which indicated a gastrointestinal motor dysfunc-

tion with ampulla of Vator-duodenal wall spasms. In

September of 1998, Tierney filed a claim for long-term

disability benefits with UNUM on account of her abdomi-

nal condition. UNUM determined that Tierney was dis-

abled and accepted her claim in November of 1998.

At the time UNUM accepted Tierney’s claim, it be-

lieved that she might respond quickly to treatment and

return to work within a matter of months. In April of 1999,

however, UNUM concluded that Tierney was not likely to

improve for quite some time, if ever. UNUM was unwilling

to pay Tierneys claim indefinitely and, therefore, it

devised a blueprint for terminating Tierney’s claim, a

scheme totally at odds with UNUM’s contemporaneous

* Throughout its briefing before this Court, UNUM asserts that

SIS sponsored the owners plan. This assertion, however, is incorrect.

Tierney presented summary judgment evidence that SIS did not

sponsor the owners plan. Instead, the owners themselves elected to

obtain coverage for their own interests separate from the employees.

9

conclusion that Tierney’s condition was unchanged from

the time UNUM had accepted the claim. The plan was to

obtain a forensic file review from a GI specialist to deter-

mine whether Tierney did indeed have gastric dysmotility

disorder. If it was determined that she did not, the ad-

juster concluded that the self-reported symptom limita-

tion’ would apply. If, however, the review showed that she

did have the disorder, then UNUM would conduct surveil-

lance on Tierney in hopes of showing that she was not

really disabled.

UNUM conducted surveillance of Tierney in June of

1999, but the surveillance found nothing inconsistent with

Tierney’ reported condition. In October of 1999, Dr.

Kumar Gutta performed an “Independent Medical Exami-

nation” of Tierney. Dr. Gutta issued to UNUM a written

report of the examination in which he affirmed Dr.

Mathias’ diagnosis that Tierney was suffering from a

gastric dysmotility disorder and recognized the disabling

effect of such a condition.

Despite the fact that both prongs of UNUM’s plan to

terminate Tierneys benefits had failed, UNUM termi-

nated the benefits anyway. Tierney asked UNUM to

reconsider its termination, but, in May of 2000, UNUM

informed her that it was standing by its decision. Tierney

filed the present action in a state district court in June of

" The policy limits to twelve months benefits payable due to

disebilities caused by symptoms that are not verifiable using tests,

procedures or clinical examinations. The limitation coes not apply

where the symptoms are associated with a medically diagnosed

condition. See Russell v. UNUM Life Ins. Co. of America, 40 F.Supp.2d

747 (D.S.C. 1999).

10

2000. UNUM removed the suit to a federal district court

on July 25, 2000, on the ground that Tierney’s suit related

to a policy of insurance that qualified as an ERISA em-

ployee benefit plan and thus, UNUM argued, was subject

to complete federal preemption. Tierney filed a motion to

remand. On February 12, 2001, the federal district court

remanded the action on the basis that UNUM had failed to

establish that the insurance policy in question was an

employee welfare benefit plan within the meaning of

ERISA. UNUM filed a second notice of removal once again

based on ERISA. Tierney filed a motion to remand with

the federal court, which the federal court granted along

with ordering UNUM to pay sanctions for a groundless

removal.

Despite the fact that the federal court had determined

that ERISA did not apply, UNUM moved for summary

judgment in state court based on ERISA preemption.

Tierney argued in response that her claim came under a

separate plan that covered only owners and not employees

and, therefore fell outside of ERISA. UNUM argued that

the policy created only one plan covering both owners and

employees. The trial court agreed with UNUM, finding

that only one plan was created and rejecting Tierney’s safe

harbor argument as to that plan. The trial court went on

to enter two summary judgment orders, one directed to

Tierney’s state court claims, and the other upholding

UNUM’s decision to terminate Tierney’s disability bene-

fits.

Tierney appealed from these orders, again arguing

that the policy created a separate owners plan to which

ERISA does not apply. In response, UNUM argued for the

first time in the litigation that ERISA applies even to a

separate owners plan because the owners are shareholders

11

of a corporation. The El Paso Court of Appeals rejected

UNUM’s argument, reversed the summary judgments and

remanded the case, holding that UNUM had failed

conclusively to establish that ERISA applies to this action.

UNUM petitioned the Texas Supreme Court to review the

court of appeals’ judgment, but the higher court denied

UNUM's petition after considering briefing on the merits.

On February 13, 2004, the court of appeals issued its

mandate remanding the case to the trial court. Tierney

subsequently filed a motion for partial summary judgment

asking the trial court to find as a matter of law that

Tierney’s claim for benefits is made under a separate

owners plan. Tierney argued that ERISA does not apply to

the owners plan for three independent reasons: (1) the

owners plan does not cover any employees; (2) the safe

harbor requirements are met when applied separately to

the owners plan; and (3) SIS neither created nor main-

tained the owners plan for the benefit of its employees.

The trial court heard the motion on April 6, 2004, and

denied it, stating that fact issues remained to be deter-

mined by a trial. Ajury trial is scheduled for November 29,

2004.

* UNUM'’s suggestion that the court of appeals remanded the case

for consideration only of the issue of whether a separate owners plan

exists is misleading. The court clearly remanded the case for further

proceedings consistent with the opinion and nothing in the opinion

limits the scope to that one issue. App. 8, App. 10.

12

REASONS FOR DENYING THE WRIT

I. THE STATE COURT DECISION DOES NOT

CONFLICT WITH YATES

UNUM’s reliance on this Court’s recent opinion in

Yates v. Hendon, __ U.S. __, 124 S.Ct. 1330 (2004) is

misplaced. This Court held in Yates that a working owner

of a professional corporation qualified as a participant of

an ERISA pension plan so long as the plan covers one or

more employees other than the working owners and their

spouses. 124 S.Ct. at 1336. In the-case at hand, however,

Tierney has never contended and the court of appeals did

not hold that Tierney would not qualify as a “participant”

should it be determined that the owners plan fell under

ERISA. Indeed, the court of appeals expressly recognized

that ERISA would apply if the plan covered both employ-

ees and owners. App. 6-7; citing Vega v. Nat'l Life Ins.

Servs., Inc., 188 F.3d 287, 294 (5th Cir. 1999).

The issue in the case at hand is not whether Tierney

would qualify as a participant of the owners plan should it

be found to constitute an ERISA plan, but whether the

owners plan itself falls under ERISA. Tierney contends

that the separate owners plan does not fall under ERISA

because the plan covers no employees who are not working

owners and because the plan, which is one hundred

percent contributory, falls under the safe harbor. The

holding in Yates does nothing to impact either of these

arguments. Indeed, the holding in Yates expressly recog-

nizes the fact that the plan must cover at least one em-

ployee who is not a working owner in order for the plan to

come under ERISA. :

In Yates, this Court determined that Congress in-

tended working owners to qualify as plan participants

13

and, therefore, there was no need to resort to the common

law to determine the issue. 124 S.Ct. at 1342. Again, the

issue of “participant” is distinct from the issue of whether

an ERISA plan exists. Not applying ERISA to plans

covering only working owners makes sense in the context

of ERISA’s stated purpose: “Safeguarding the well-being

and security of working men and women and to apprise

them of their rights and obligations under any employee

benefit plan.” Meredith v. Time Ins. Co., 980 F.2d 352, 358

(5th Cir. 1993) Where the employee and the owner are one

and the same, this need is not present. Jd. Nothing in Yates

alters this analysis. Indeed, Yates expressly recognized:

“Courts agree that if a benefit plan covers only working

owners, it is not covered by Title I (of ERISA).” 124 S.Ct.

at 1345, n. 6.

UNUM appears to be arguing that Yates is important

to the case at hand because Yates tangentially touches on

29 C.F.R. § 2510.3-3(c)(1), (2), which UNUM contends is

controlling in the case at hand. UNUM itself admits,

however, that the regulation did not apply in Yates because

the plan covered other non-owner employees. Moreover,

§ 2510.3-3(c)(1), (2) should not be applied as narrowly as

UNUM suggests. The regulation clarifies that a plan that

does not cover any employees does not qualify as an

ERISA plan. The regulation states that sole proprietors

and partners are not employees. This creates a type of a

“safe harbor” that applies regardless of the level of control

the owner or particular partner exercises over the enter-

prise. The regulation does not go on to say that in no case

can any other individual be considered an employer.

UNUM relies on a 1976 Department of Labor opinion

letter, which answers a question posed by an unnamed

party asking for confirmation that a pension or profit

eee ee

14

sharing plan whose only participants are shareholders and

spouses of shareholders of the employer do not need to

comply with the reporting requirements of ERISA. The

opinion letter simply quotes section 2510.3-3(c)(1), which

provides that an individual owner of a wholly owned

incorporated business is not an employee where the stock

is owned by the individual or his or her spouse. The letter

concludes that the party’s position is correct if the com-

pany is wholly owned by one shareholder. The regulation

does nothing more than provide a safe harbor for sole

proprietorships and partnerships. The letter opinion only

states that the questioner is not correct in assuming that

no reporting is required unless it falis within that safe

harbor. It does not state that all other corporations conclu-

sively fall within the ambit of ERISA. To the extent the

letter opinion could be read as concluding that the regula-

tion prohibits courts from treating S corporations the same

as partnerships and sole proprietorships, the letter opin-

ion would be entitled to no weight whatsoever. This Court

has made clear that a letter opinion from the Department

of Labor is entitled to “respect,” but only to the extent that

it has the power to persuade. Christensen v. Harris

County, 529 U.S. 576, 587, 120 S.Ct. 1665, 1663, 146

L.Ed.2d 621 (2000). The reason the Court gave for giving a

letter opinion little to no deference is the fact that the

letter was not generated with the same deliberative

process as regulations and other agency guidelines. Id.

The 1976 letter opinion does nothing more than parrot

back the text of the regulation. It offers no analysis or

discussion of intent that could persuade a reasonable

person to conclude that the regulation was anything other

than a safe harbor.

15

The regulation expressly provides that partners of a

partnership are not to be counted as employees for purposes of

determining whether a plan falls under ERISA. Although the

record before the court of appeals is not clear, it appears that

SIS was an S corporation.” An S corporation is a hybrid

between a corporation and a partnership. See Henry v. Cham-

plain Enterprises, Inc., 212 FR.D. 73, 85 (N.D.N.Y. 2003). In

fact, with respect to fringe benefits, such as disability insur-

ance, the Internal Revenue Code expressly states that share-

holders such as the three owner/managers of SIS are treated

as partners of a partnership. See 26 U.S.C. § 1372." Thus, SIS

acted as a partnership with respect to the UNUM policy

acting through its three owner/managers and the owners

should be treated as partners in determining whether an

ERISA plan was established. See, e.g., House v. American

United Life Ins. Co., 2002 WL 31729483 (E.D. La.) (treating

shareholders of a limited liability company as partners for

purposes of the ERISA analysis). The result of treating the

three working owners of SIS as partners is that the separate

owners plan does not cover any non-owner employees and,

thus, does not fall under ERISA.

* Tierney has clearly established that SIS is an S corporation in

her motion for partial summary judgment filed with the trial court on

remand.

That section provides:

§ 1372. Partnership rules to apply for fringe benefit

purposes

(a) General rule. — For purposes of applying the provisions

of this subtitle which relate to employee fringe benefits —

(1) the S corporation shall be treated as a partnership,

and

(2) any 2-percent shareholder of the S corporation shall be

treated as a partner of such partnership.

16

Il. THE COURT NEED NOT REVIEW THE STATE

COURT DECISION TO RESOLVE ANY CON-

FLICT BETWEEN THE CIRCUITS AND THE

STATE COURTS

UNUM attempts to create a clear conflict among the

circuits by relying on an unpublished Ninth Circuit

opinion (which does not even address the issue on its face)

as well as speculation as to what the Fifth Circuit might

decide in a pending appeal. The truth of the matter is that

the cases on which UNUM relies for the proposition that

joint shareholders are not working owners are now seri-

ously in question in light of this Court’s opinion in

Clackamas Gastroenterology Assocs., P.-C. v. Wells, 538

U.S. 440, 123 S.Ct. 1673, 155 L.Ed.2d 615 (2003).

The issue decided by this Court in Clackamas was

whether four shareholder/directors of a_ professional

corporation are to be considered employers or employees of

the corporation for purposes of the Americans with Dis-

abilities Act of 1990 (ADA), 42 U.S.C. § 12101 et seg. The

ADA applies only to employers who have at least 15

employees. The issue of whether the corporation met the

threshold depended on whether the four shareholders

were employers or employees. The Court noted that the

Ninth Circuit had rejected an economic realities approach

on the basis that a corporation should not be permitted to

secure the “best of both possible worlds” by being allowed

to invoke its corporate status to reap tax advantages and

avoid civil liability and then argue that it is more like a

partnership in an attempt to avoid the ADA. 123 S.Ct at

1676. Thus, the Ninth Circuit employed the same analysis

as the cases upon which UNUM relies in the case at hand.

This Court, however, rejected the Ninth Circuit’s strict

corporate structure approach. The Court first turned to

17

the ADA’s definition of employee and found it to be identi-

cal to ERISA’s definition, “an individual employed by an

employer.” The Court, therefore, turned to Nationwide

Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992), which in-

volved the issue of whether a particular individual was an

employee or an independent contractor under ERISA. The

Court noted that, as it had explained in Darden, Supreme

Court cases concerning similar statutory language give

“guidance on how best to fill the gap in the statutory text.”

123 S.Ct. at 1678. The Court found that Darden had

adopted a common law approach to determining whether

an individual is an employee. The Court found, however,

that the factors used in Darden were intended to distin-

guish between an employee and an independent contractor

and, therefore, do not apply where the inquiry is whether

a shareholder is an employee of an employer. Jd.

That is not to say that the Court rejected Darden’s

premise. Indeed, the Court embraced Darden’s decision to

look to the common law notion of master-servant as

offering helpful guidance. 123 S.Ct. at 1679. The Court

noted that the focus of the relevant factors in defining the

master-servant relationship is control and approved of six

factors developed by the EEOC that focus on the “touch-

stone of control.”" Jd. at 1679-80. The Court summed up

" These factors are: (1) Whether the organization can hire or fire

the individual or set the rules and regulations of the individuals work;

(2) whether and, if so, to what extent the organization supervises the

individual’s work; (3) whether the individual reports to someone higher

in the organization; (4) whether and, if so, to what extent the individual

is able to influence the organization; (5) whether the parties intended

that the individual be an employee, as expressed in written agreements

er contracts; and (6) whether the individual shares in the profits, losses

and liabilities of the organization.

18

the analysis by declaring that “an employer is the person,

or group of persons, who owns and manages the enter-

prise.” Jd. at 1680 (emphasis supplied). Finally, the Court

held that, as was the case in Darden, the answer to

whether a shareholder is an employee or an employer

depends on all of the incidents of the relationship and no

one factor is decisive. Jd. Applying the analysis to the facts

before it, the Court held that the evidence in the record

was not conclusive and, therefore, remanded the case for

determination consistent with the Court’s holding. Jd.

Although Clackamas arose under the ADA, the same

reasoning applies to ERISA. Indeed, the Court relied

heavily on the Court’s reasoning in Darden in deciding to

reject the Ninth Circuit’s strict corporate structure ap-

proach in favor of a control analysis based on economic

realities. The reasoning of this Court in Clackamas applies

in the ERISA context for the same reason the reasoning of

Darden applied in the ADA context — both statutes use the

same definition of “employee.” Thus, this Court has firmly

rejected the strict corporate veil stance advocated by

UNUM in favor of an economic reality analysis focusing on

the common law notion of control and, thus, has rejected

the reasoning of the cases upon which UNUM relies.

Even if this Court did decide that it can and should

grant UNUM’s petition and reverse the state court judg-

ment, the state court of appeals may still reach the same

conclusion on state court procedural grounds. Tierney

argued to the court of appeals that UNUM had waived its

joint shareholder argument by not raising that argument

first before the trial court. Although the court of appeals

apparently ruled on the merits of UNUM’s argument, on

remand the court could decide that UNUM did indeed

waive its argument. See Stiles v. Resolution Trust Corp.,

OO EO ae Re im Oe ae

-_

19

867 S.W.2d 24, 26 (Tex. 1993) (summary judgment may not

be affirmed on grounds not specifically set forth in the

trial court); DeWoody v. Rippley, 951 S.W.2d 935, 942

(Tex.App. — Fort Worth 1997, writ dis’m by agr.) (appellee

waived argument not made in connection with summary

judgment); Dickey v. Dickey, 908 S.W.2d 311, 313 (Tex.App.

— San Antonio 1995, no writ) (legal argument not made in

support of summary judgment motion may not be raised

on appeal); Ross v. Arkwright Mut. Ins. Co., 892 S.W.2d

119, 124 (Tex.App. — Houston [14th Dist.] 1994, no writ)

(same). Tierney respectfully submits that this Court

should not expend its valuable judicial resources reviewing

an issue that has not been properly preserved.

UNUM’s argument that plan administrators must

have a bright line test for determining whether ERISA

applies to a given plan rings hollow. UNUM ignores the

fact that determining whether a plan exists is just one of

the three prongs of the analysis of whether ERISA applies.

The other prongs, the four elements of safe harbor and the

issue of whether the employer created or maintained the

plan for the benefit of its employees, are fraught with

issues of fact requiring discovery and determination by the

courts. Thus, even if a bright line test is imposed on the

issue of whether a plan exists in the case at hand, an

insurer would still have to resolve the factually charged

issues of safe harbor and of the employer’s intent in order

to determine whether ERISA applied to the plan. UNUM

offers the Court no rationale to justify sacrificing congres-

sional intent in order to create a bright line test as a minor

short cut in an inherently fact-laden area. Indeed, UNUM

has no one but itself to blame for developing and market-

ing a policy that created a separate plan for the owners of

an S corporation.

20

UNUM is also disingenuous in its suggestion that

Tierney is in need of ERISA protection. UNUM has at-

tempted to use ERISA as a virtually impenetrable shield

to protect itself from any liability for its bad faith denial of

the disability benefits Tierney so desperately needs. The

three working owners of SIS sought only to purchase

disability insurance and were in no need of protection from

each other. Again, the three are treated as partners with

respect to the provision of fringe benefits to each other and

should be treated no differently for ERISA purposes.” It is

unconscionable for a disability insurer to invoke the

safeguarding attributes of ERISA in order to deny a

working owner the disability benefits it marketed to her as

a separate plan tailored to her needs as a working owner. |

The facts in this case reveal an abusive course of

treatment of an insured by a disability insurer who as-

sumed it was operating under the protective cloak of

ERISA. This scenario is played out across the country in

the name of safeguarding workers. The only safeguarding

Tierney as a working owner needs in the case at hand is

safeguarding from the unreasonable conduct of her disabil-

ity insurer offered by state insurance laws and regula-

tions. These state law safeguards, however, are exactly

what UNUM seeks to deny Tierney through its defensive

use of ERISA.

Indeed, in Texas, owners of a closely held corporation owe each

other certain obligations, including fiduciary duties. See Davis uv.

Sheerin, 754 S.W.2d 375, 382-83 (Tex.App. — Houston [14th Dist.] 1988,

writ denied). In this way, closely held corporations are very similar to

partnerships.

j

;

21

CONCLUSION

For the reasons discussed above, Tierney respectfully

urges the Court to deny UNUM’s Petition for Writ of

Certiorari.

Respectfully submitted,

WALLACE MALONEY,

Counsel of Record

DAN K. HoRN

JOHN M. WEAVER

MALONEY, BEAN, Horn & HULL, P.-C.

102 Decker Drive, Suite 200

Irving, Texas 75062

(972) 281-2900 telephone

(972) 281-2929 facsimile

Attorneys for Respondents