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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386001_1213%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2004
- **Citation:** 541 U.S. 1042

## Text

(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
-

UNUM LIFE INSURANCE COMPANY OF AMERICA
AND UNUMPROVIDENT CORPORATION,

Petitioners,

V.

JANCYE H. TIERNEY,

Respondent.

4
-

On Petition For Writ Of Certiorari
To The Court Of Appeals For
The Eighth District Of Texas

ry
Vv

RESPONDENT’S BRIEF IN OPPOSITION

ry
v

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386001_1213%3A2. Public record. Not legal advice.