Petition for Writ of Certiorari — International Resources, Inc. v. New York Life Insurance

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91-1666 | : )

No.

MEN AERO ETEE NR AONE seinieeieiiomenaiaiaaie seated

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1991

INTERNATIONAL RESOURCES, INC

and LARRY E. SMITH,

Petitioners.

NEW YORK LIFE INSURANCE COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

JAMES G. LeMASTER

DANNY C. REEVES*

ANNE ADAMS CHESNUT

GREENBAUM DOLL & McDONALD

1400 Vine Center Tower

P.O. Box 1808

Lexington, Kentucky 40593-1808

(606) 231-8500

Counsel for Petitioners

* Counsel of Record

COURT INDEX PRESS, IN¢ 215 E. Ninth Street, Cincinnati, Ohio 45202 513) 241-1450

QUESTIONS PRESENTED

I. Does the bare purchase of health insurance by a small,

closely-held corporation constitute the establishment of an

employee welfare benefit plan within the meaning of the

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

§ 1001 et seq. (“ERISA”)?

I]. Should ERISA be deemed to pre-empt an insured’s

state law claims against an insurance company when the only

purported “ERISA plan” is the insurance itself?

III. Are the insured’s claims based on _ state laws

regulating insurance pre-empted, or do they survive by virtue

of ERISA’s saving clause?

PARTIES AND CORPORATE AFFILIATIONS

The parties to the proceedings below were petitioners In-

ternational Resources, Inc. and Larry E. Smith, and respon-

dent New York Life Insurance Company. International

Resources, Inc. has no parent or subsidiary company to report

pursuant to Rule 29.1.

Ill

TABLE OF CONTENTS

QUESTIONS PRESENTED ............

PARTIES AND CORPORATE AFFILIATION

JURISDICTION ..............

STATUTES INVOLVED ..........

STATEMENT OF THE CASE............

REASONS FOR GRANTING THE WRIT .....

I. The Sixth Circuit’s application of ERISA to the

bare purchase of insurance by a small closely-

held employer is in conflict with decisions by

the former Fifth Circuit and the present Fifth

Circuit on the same issue and is even in conflict

with the reasoning of the Eleventh Circuit case

upon which the Sixth Circuit relied... ...

II. State courts are similarly split on this issue, cre-

ating a need for Supreme Court guidance at

Ne oar ory ee ee «Fiano

III. The “statutory complexity” of ERISA and the

“wide variety of state statutory and decisional

law arguably affected by federal pre-emption”

warrant the further guidance of this Court... . .

IV. The Sixth Circuit’s decision thwarts Congres-

sional intent, which the Court has instructed

must be the ultimate touchstone in every ERISA

case, by extending the reach of ERISA to “em-

ployee benefits” even where no “employee

benefit plan” exists.

VI.

VII.

Page

The Sixth Circuit's decision carries this Court’s

decision in Pilot Life to an extreme never in-

tended, and is contrary to Congressional in-

The Sixth Circuit’s decision defeats both the

judicial and legislative efforts of the Common-

wealth of Kentucky to protect its citizens from

illusory insurance practices............. Pere 25

The Sixth Circuit has decided an important

question of federal law which has not been, but

should be, settled by this Court. ............... 27

Sf Ot Rs dere ee ear eG ee eee 29

APPENDIX

Opinion and Judgment of the Court of Appeals

for the Sixth Circuit entered November 26,

Sixth Circuit’s Order Entered January 15, 1992,

Denying Petition for Rehearing................ 23a

Sixth Circuit’s Order Entered July 8, 1991, Per-

mitting Second Interlocutory Appeal ........... 24a

Memorandum Opinion and Order from the

District Court Entered March 28, 1991 (as

amended by Order of May 7, 1991)............. 26a

Sixth Circuit’s Order of Remand Entered Janu-

et Pe ere Wea d ye tu wee 32a

Sixth Circuit’s Order Entered November 9,

1990, Permitting First Interlocutory Appeal ..... 34a

District Court’s Order Granting Plaintiffs’ Mo-

tion for Reconsideration, entered September 4,

1990 (as amended by order of October 25,

eC ere en Cdn S aaa Seen 35a

Page

District Court's Memorandum Opinion and

Order Entered August 6, 1990................. 38a

District Court’s Memorandum Opinion Grant-

ing Injunctive Relief to Plaintiff Entered March

DRO el eee an ee ee eee 47a

29 U.S.C. § 1002(1) (definition of “employee

WERNTG TNE PEN Pe oe Bone eee ee 59a

29 U.S.C. § 1144(a) (pre-emption clause) ....... 56a

29 U.S.C. § 1144(b)(2)(A) (saving clause) ....... 56a

29 U.S.C. § 1144(b)(2)(B) (deemer clause)....... 56a

KRS 304.12-230 (from Kentucky's Unfair

Claims Settlement Practices Act) ............... 57a

KRS 367.170, 367.220 (from Kentucky's Con-

eet THI A eo cee es or eee 59a

KRS 301.12-010, 304.12-020 (from Kentucky’s

Trade Practices and Frauds Statute) ............ 60a

KRS 304.18-110(5) (from Kentucky's Insurance

CHD aac han fd bev ee Sree eee 6la

KRS 446.070 (Kentucky’s civil action statute) .... 62a

TABLE OF AUTHORITIES

Cases Page

Aetna Life Ins. v. Gullett,

253 Ky. 544, 69 S.W.2d 1068 (1934)................ 22

Alessi v. Raybestos-Manhattan, Inc.,

45) 0.5. Ge Chee ke va ive a ee 25

Allis-Chalmers Corp. v. Lueck,

471 U.S. Sa as eon eee oe 21

Ballay v. General American Life Insurance Company,

No. 89-4671 (E.D. La. August 2, 1990) (1990 U.S. 27

Det. LCIRes ROO oss ois 0s Poked gees ek yee

Blue Cross & Blue Shield of Alabama v. Lewis,

154 F. Supp. 849 (N.D. Ala. 1991) ................. 24

Blue Cross/Blue Shield of Florida, Inc. v. Weiner,

543 So.2d 794 (Fla. Dist. Ct. App. 1989), review de-

nied, 553 So.2d 1164 (Fla. 1989), cert. denied, 494

U5. MOR (TG: os sca sco vais eeree eee 14

Brundage-Peterson v. Compcare Health Services Ins.

Corp., 877 F.2d S09 (7th Cir. 1989)............... 13, 28

Cathey v. Metropolitan Life Ins. Co.,

805 S.W.2d 387 (Tex. 1991) ............... 17, 21, 26, 28

Carter v. Aetna Life Ins. Co.,

272 Ky. 392, 114 S.W.2d 496 (1938)................ 22

Centennial Life Ins. Co. v. Robey-Barber Insurance

Services Corp., No. 90-2342-V (D. Kan. July 31,

1001) (2001 WL. LBD nc 45s ccickshake eee 27

Clark v. Golden Rule Insurance Company,

737 F. Supp. 376 (W.D. La.), affd on other

grounds, 887 F.2d 1276 (9th Cir. 1989) ............. 12

Cote v. Durham Life Ins. Cer,

(34 F. Supp. 18 (@D. Conn. 1981) «... 5.6.4 5620... 13

Vil

Page

Curry v. Fireman’s Fund Insurance Co..,

784 S.W.2d 176 (Ky. 1989) .22, 25

Donovan v. Dillingham,

688 F.2d 1367 (11th Cir. 1982) (en banc) .... 11, 12. 13. 20

FMC Corp. v. Holliday,

498 U.S. __, 111 S. Ct. 403 (1990) .........4, 23, 24, 25

Gahn vy. Allstate Life Ins. Co.,

926 F.2d 1449 (5th Cir. 1991).... om ..8, 9, 11, 24

Ft. Halifax Packing Co. v. Coyne,

Oe a ONIN ae ee eee es 16, 17, 19, 2, 3

Ingersoll-Rand Co. v. McClendon,

498 U.S. __., 111 S. Ct. 478 (1990) ............4, 17, 19

Jordan v. Reliable Ins. Co.,

604 fF. Supp. 622 (N.D. Ala. 1988) ................. 17

Kanne v. Connecticut General Life Insurance Com-

pany, 867 F.2d 489 (9th Cir. 1988), cert. de-

nied, 100§. Ct. 3818 (1080)..... 2.00.00... cece. 10

Kidder v. H&B Marine, Inc.,

932 F.2d 347 (5th Cir. 1991) . 8

Matthew 25 Ministries, Inc. v. Corcoran,

771 F.2d 21 (2d Cir. 1985) ..... eee 13

MD Physicians & Associates, Inc. v. Wrotenbery,

762 F. Supp. 695 (N.D. Tex. 1991), aff'd. No. 91-

1469 (5th Cir. April 1, 1992) (1992 U.S. App.

LEXIS 5608) 13

Metropolitan Life Ins. Co. v. Massachusetts.

471 U.S. 724 (1985) . 16, 17

National Business Conference Employee Benefit As-

sociation v. Anderson, 451 F. Supp. 458 (S.D. Iowa

il) Saree 26

Pilot Life Ins. Co. v. Dedeaux,

481 U.S. 41 (1987) = 16, 20, 21, 22, 23, 24

Vill

Page

Plot%in v. Assoc. of Eye Care Centers, Inc.,

70 F. Supp. 156 (E.D.N.C. 1969) ............ eras

Prudential Ins. Co. of America v. Brown,

No. B14-00695-CV (Tex. Ct. App. August 9, 1990)

Ce ee WU nce ies crn Siekins wh Rene ae ee 27

Rizzi v. Blue Cross of So. California,

206 Cal. App. 3d 380 (1988), cert. denied, 493 U.S.

IN Snr oto ebb OT Gea ba eau sic Dean wae 14

Rizzo v. Travelers Ins. Co..,

549 N.E.2d 810 (Ill. App. 1989) ................... 14

Sayble v. Blue Cross of So. California,

208 Cal. App. 3d 1108 (1969) ..................... 27

State Farm Mutual Automobile Ins. Co. v. Reeder,

We se ee A Cs BE oo Ske op bv ne es tas tase 25

Tageart Corporation v. Life and Health Benefits Ad-

ministration, Inc., 617 F.2d 1208 (5th Cir. 1980),

cert. denied, 450 U.S. 1020 (1981) ............ 7, 8, 9, 11,

12, 13, 14. 28

Turnbow v. Pacific Mutual Life Ins. Co.,

765 P.2d 1160 (Nev. 1988), cert. denied, 490 U.S.

Re I sok eee ok ce Oe ie ee ae ee nets 14

Wayne Chemical, Inc. v. Columbia Agency Service

Corporation, 567 F.2d 692 (7th Cir. 1977) .......... 13

Wisconsin Educ. Ass’n Ins. Trust v. lowa State Board,

Oe Fe FO Ct Cie. TD oi ce cic ncas 10

Statutory Provisions

ae ae og ee ee ee ree eee passim

se ID oo ceed ss heed aa ko eke ee ie 20

has UD fb eth kak Cheated 8

29 U.S.C. § 1144(b)(2)(A) ...... CS hak saa ee peeks ate Ae

Page

KRS 304. 12-230

(From Kentucky's Unfair Claims Settlement Prac-

Se fe reird on hte wi dea etnies Face emer 3

KRS 304.12-010 and 304.12-020

(From Kentucky's Trade Practices and Frauds

Ae Ae aa RAL NS AAP, een Sl bra 3

KRS 304.018-110(5)

(From Kentucky’s Insurance Code)................. 3

KRS 367.170 and 367.220

(From Kentucky’s Consumer Practices Act).......... 3

of) 8, SP ererrrerr rer rurirer: rors rc ere 25

No.

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1991

INTERNATIONAL RESOURCES, INC.

and LARRY E. SMITH,

Petitioners,

VS.

NEW YORK LIFE INSURANCE COMPANY.

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

The petitioners International Resources, Inc., and Larry E.

Smith respectfully pray that a writ of certiorari issue to

review the judgment and opinion of the United States Court

of Appeals for the Sixth Circuit, entered November 26, 1991.

OPINIONS BELOW

The opinion of the Court of Appeals for the Sixth Circuit is

officially reported at 950 F.2d 294 and is reprinted in appen-

dix A.

The memorandum decision of the United States District

Court for the Eastern District of Kentucky (Hood, D.J.) has

not been reported. It is attached in appendix D.

The Sixth Circuit’s Order of remand in earlier consolidated

appeals of this same case was not reported but is included in

]

appendix E. The memorandum decisions of the district court

which led to those first appeals were also unreported and are

reprinted in appendices G, H, and I.

JURISDICTION

The judgment sought to be reviewed was entered

November 26, 1991. An order denying a petition for rehear-

ing was entered January 15, 1992. This petition is filed within

90 days of that date. The Court has jurisdiction to review the

judgment by writ of certiorari under 28 U.S.C. § 1254(1).

Jurisdiction below was based on diversity under 28 U.S.C.

§ 1332.

STATUTES INVOLVED

The following provisions of ERISA are involved in this

case:

(1) Definition of “employee welfare benefit plan” under

29 U.S.C. § 1002(1), set forth in appendix J; and

(2) The three clauses relating to pre-emption: 29 U.S.C.

§ 1144(a) (pre-emption clause), appendix K; 29 U.S.C.

§ 1144(b)(2)(A) (saving clause), appendix L; and 29 U.S.C.

§ 1144(b)(2)(B) (deemer clause), appendix M.

Specific provisions of several Kentucky statutes are also in-

volved:

(1) Kentucky's Unfair Claims Settlement Practices Act,

KRS 304.12-230, appendix N;

(2) Kentucky's Consumer Protection Act, KRS 367.170

and 367.220, appendix O;

(3) Kentucky's Trade Practices and Frauds Statute, KRS

304.12-010 and 304.12-020, appendix P;

(4) Kentucky's Insurance Code, KRS 304.018-110(5), ap-

pendix Q; and -

(5) Kentucky's civil action statute, KRS 446.070, appen-

dix R.

STATEMENT OF THE CASE

This case arises from a dispute over the purported cancella-

tion of health insurance by respondent New York Life In-

surance Company (“New York Life”) under a policy promis-

ing “$1 million in lifetime benefits.” New York Life

unilaterally cancelled the policy long before the $1 million

maximum was reached — and after the insured’s son had

become quadriplegic and thus uninsurable by any other com-

pany.

Petitioners International Resources, Inc. (“International

Resources”) and Larry E. Smith (“Mr. Smith”) brought suit

against respondent New York Life in the district court on the

basis of diversity jurisdiction under 28 U.S.C. § 1332. The

claims were in 10 counts, for (1) declaratory relief; (2) breach

of contract; (3) bad faith, tortious breach of insurance con-

tract; (4) breach of fiduciary duty; (5) breach of implied

covenant of good faith and fair dealing; (6) violation of Ken-

tucky’s Unfair Claims Settlement Practices Act (appendix N);

(7) violation of Kentucky's Consumer Protection Act (appen-

dix O); (8) violation of Kentucky’s Trade Practices and

Frauds Statute (appendix P); (9) violation of Kentucky’s com-

mon law and public policy against illusory insurance prac-

tices; and (10) violation of specific provisions of Kentucky's

insurance code requiring an insurance company to issue an in-

dividual conversion policy with substantially similar benefits

upon the cancellation of group coverage (appendix Q).

Damages, including punitive damages under Kentucky law,

were sought against the insurance company in counts 11 and

12 of the complaint.

Respondent New York Life defended by moving to dismiss

the complaint on the grounds that the state law claims were

pre-empted by the Employee Retirement Income Act of 1974,

29 U.S.C. § 1001 et seg. (“ERISA”). Petitioners resisted ap-

plication of ERISA because the case involved nothing but the

bare purchase of insurance. Petitioners also argued that, even

if ERISA applied, several of their state law claims survived by

virtue of ERISA’s saving clause, 29 U.S.C. § 1144(b)(2)(A).

ee ne. tee eee oe

The motion to dismiss was granted, with leave to amend to

state an ERISA claim, but the district court also granted peti-

tioners leave to seek an interlocutory appeal (appendix G).

The Sixth Circuit accepted the appeal (appendix F) and the

issue of ERISA pre-emption was argued on December 3,

1990. Just as the case was being argued, however, this Court

decided two ERISA cases, FMC Corp. v. Holliday, 498 U.S.

___, 111 S. Ct. 403 (1990), and Ingersoll-Rand v. McClen-

don, 498 U.S. ___, 111 S. Ct. 478 (1990). The Sixth Circuit

remanded the present case to the district court for recon-

sideration in light of the new Supreme Court authority.

Upon remand, the district court again found that ERISA

pre-empted all twelve counts of petitioners’ complaint. But

the district court and the Sixth Circuit also permitted the

petitioners to proceed on a second interlocutory appeal (ap-

pendices C and D). The Sixth Circuit ultimately reversed the

district court as to one count of the complaint which it found

survived under the saving clause of ERISA (the count based

on conversion rights under Kentucky’s Insurance Code), but

otherwise affirmed the finding of ERISA pre-emption.

The facts material to the consideration of the questions

presented are relatively straightforward:

Mr. Smith formed International Resources in 1982 and has

been president of the closely-held corporation since that time.

Mr. Smith and his wife have been the sole or majority

shareholders of the corporation since its formation. The only

other shareholder is a gentleman named John Bowersmith,

who purchased a 25 percent interest in the corporation to

help the Smiths financially after their son was severely in-

jured in an automobile accident in 1983.

in November 1982, International Resources (then wholly

owned by the Smiths) contacted a local insurance agent to ob-

tain medical insurance. The agency arranged for comprehen-

sive group medical insurance coverage through Group

Marketing Services, Inc. (“GMS”), a multiple employer trust

whereby small employers could combine together to obtain a

more favorable rate offered to larger groups. The insurance

was underwritten by Life Insurance Company of North

America (“INA”). Mr. Smith was the insured and his family

members were covered dependents under the insurance

policies described herein.

On May 8, 1983, Mr. Smith’s son and dependent, Mark

Smith, was severely injured in an automobile accident which

left him completely immobile, unable to speak, and in need

of 24-hour nursing and home health care.

On March 1, 1986, New York Life succeeded previous

underwriters on the insurance coverage. The letter advising

petitioners of this change assured them there would be no

change or interruption in coverage. The booklet distributed

by New York Life at the time promised the same $1 million in

lifetime benefits and recognized the prior plan’s coverage.

Mr. Smith was assured this benefit would not change.

New York Life paid the costs and expenses of medical care

for Mark, subject to applicable deductibles and co-payments,

until October 1, 1989. Beginning on that date, New York Life

refused to pay the expenses for Mark’s medical treatment,

which costs approximately $100,000 per year.!

Petitioners received notice by letter dated August 29, 1988,

that the group insurance would be cancelled effective

September 30, 1989. This notice had been preceded by

numerous and significant increases in the premiums, and

petitioners had paid over $30,000 in premiums before the

purported cancellation. As to Mark Smith specifically, New

York Life’s internal notes referred to him as a “vegetable” and

indicated it was “looking at 50 years of liability” on the claim.

1! While New York Life relied upon certain language in its policy as

authorizing the purported cancellation, the district court did not find the

argument persuasive as it granted injunctive relief against respondent

below. (Memorandum Opinion at appendix I). Respondent took appeals as

a matter of right from the injunctive relief awarded against it, but the Sixth

Circuit affirmed the injunction (appendix A}. Those issues are not part of

the questions presented.

C—O

Upon receiving notice of New York Life’s intention to ter-

minate coverage, Mr. Smith offered premium payments and

made repeated demands that New York Life honor the in-

surance contract by either continuing the existing coverage or

by converting the coverage to an individual policy with

substantially the same coverage, all of which New York Life

refused to do. As of the date New York Life ceased payments,

approximately $425,000 in benefits remained to be supplied

in accordance with the insurance contract.

In summary, New York Life paid for what it recognizes is

medically necessary care for Mark during the period March

1986 to October 1989. Now it has unilaterally cancelled the

coverage and none other is available. Mark is uninsurable

because of his physical condition. His care costs $8,000 or

more per month.

For most of the corporation’s existence, Larry Smith has

been the only full-time employee. The company never had

more than six workers, several of which were family

members. Neither Larry Smith nor International Resources

has ever owned, directly or indirectly, any part of GMS or

New York Life Insurance Company. Neither Larry Smith nor

International Resources has ever had any participation in the

management or day-to-day operation of GMS or New York

Life Insurance Company.

ERISA was applied as a legal fiction to these facts, with the

insurance deemed by the courts below to be an “employee

welfare benefit plan” although it was undisputed that there

was no actual “plan” or any “plan assets,” but only the in-

surance itself.

REASONS FOR GRANTING THE WRIT

The Sixth Circuit’s application of ERISA to the bare pur-

chase of insurance by a small, closely-held employer is in con-

flict with decisions by the former Fifth Circuit and the pres-

ent Fifth Circuit on the same issue and is even in conflict with

the reasoning of the Eleventh Circuit case upon which the

Sixth Circuit relied.

The former Fifth Circuit addressed facts virtually identical

to those presented here in Taggart Corporation v. Life and

Health Benefits Administration, Inc., 617 F.2d 1208 (5th Cir.

1980), cert. denied, 450 U.S. 1030 (1981). In Taggart, a small

family business employed only the owner and his wife. The

owner/employer had similarly contracted with a private in-

terest marketing group, set up specifically to obtain group

health insurance for small employers. The owner brought suit

under ERISA to obtain health insurance benefits due under

an insurance policy.

The facts of Taggart are almost identical to the present

facts because in both cases the employer was too small to af-

ford group insurance for his employees and was forced to go

to an insurance marketing group which solicited, collected

and pooled all employer funds. The marketing group, or con-

duit, then contracted with insurance companies to under-

write the group policies for each employer. No employer had

any control over the conduit.

The term “employee welfare benefit plan” is defined in

ERISA as:

any plan, fund, or program . . . established or main-

tained by an employer or by an employer organization

.. . for the purpose of providing for its participants or

their beneficiaries, through the purchase of insurance

or otherwise, medical, surgical, or hospital care or

benefits, or benefits in the event of sickness, accident,

disability, death or unemployment. . .

29 U.S.C. § 1002(1)(A). In dismissing the employer's ERISA

claims against the insurance carrier and the marketing

association, the Taggart court held that clearly this was not a

“plan, fund or program” within the meaning of ERISA. Jd.

at 1211. The court emphasized the fact that none of the

employers participated nor had any control in the marketing

group's day-to-day operations, administration, or selection of

insurance carrier. The same facts are true in the present case.

In examining the legislative history, H.R. Rep. No.

94-1785, 94th Cong., 2d Sess. 48 (1977), the Taggart court

concluded it showed ERISA’s drafters were principally con-

cerned with abuses occurring with respect to private pension

assets, and not with private insurance. Id.

Considering the history, structure, and purposes of

ERISA, we cannot believe that that Act regulates bare

purchases of health insurance where, as here, the pur-

chasing employer neither directly nor indirectly owns,

controls, administers or assumes responsibility for the

policy or its benefits.

Id. at 1211. The present case similarly involves nothing more

than the “bare purchase” of health insurance and is complete-

ly outside the scope ot ERISA.

The Fifth Circuit recently followed the Taggart rationale

in Gaim vy. Allstate Life Ins. Co., 926 F.2d 1449 (5th Cir.

1991). See also, Kidder v. H&-B Marine, Inc., 932 F.2d 347,

353 (5th Cir. 1991) (rejecting “district court’s apparent

reasoning that the payment of [insurance] premiums alone is

sufficient to create a plan,” although finding one did exist on

the specific facts presented therein). In Gahn, a woman

employed in her husband’s business was diagnosed as having

liver cancer. Allstate responded (as has New York Life) by

raising the premiums and ultimately cancelling the policy.

The cancer victim sued Allstate for violations of Louisiana

law, but the district court entered summary judgment for

Allstate based on ERISA pre-emption. The Fifth Circuit

reversed, finding the record inadequate to support applica-

tion of ERISA,? and citing Taggart with approval on two

points: (1) that a multiple employer trust is not an ERISA

plan, and (2) that “ERISA does not regulate the purchase of

health insurance if ‘the purchasing employer neither directly

nor indirectly owns, controls, administers, or assumes respon-

sibility for the policy or its benefits.” ” 926 F.2d at 1452,

quoting from Taggart, supra. The court further noted that

the only relevant facts in the record supported Mrs. Gahn’s

argument that there was no ERISA plan because her husband

testified:

That he did not play any part whatsoever in the

formulation of the policy, held no monies in trust, but

merely forwarded premium payments to Allstate. He

did not own, control, administer nor [sic] assume any

responsibility for the policy or its benefits. He merely

purchased insurance for his family.

Id. at 1452-53, quoting from affidavit. Although the Fifth

Circuit remanded the case to the district court for further

development of the facts, it suggested if these were all the

facts, “the plan was not an ERISA plan.” Id. (emphasis sup-

plied by the court).

The same facts are true in the present case, yet the Sixth

Circuit inexplicably reached a different result. Petitioners did

not formulate the insurance policy; they just bought it. They

held no monies in trust, but merely paid premiums to New

York Life. They did not own, control, administer, or assume

responsibility for the policy or its benefits.

Although the Sixth Circuit recited a litany of supposedly

separate steps taken by International Resources that evi-

denced the establishment of a “plan” (950 F.2d at 298) (ap-

pendix 6a), that litany is just several different ways of saying

2 The Fifth Circuit held that even if ERISA were applied, plaintiff's state

law remedies based on state insurance statutes were not pre-empted. 926

F.2d at 1454. See discussion at 24 infra.

the same thing: that International Resources purchased

health insurance for its employees. Specifically, the Sixth Cir-

cuit noted that “International Resources chose the [insurance]

plan, paid the premiums, and gave this coverage to all its

employees as an employee benefit.” Jd. That is nothing more

than the bare purchase of insurance. A company cannot pur-

chase insurance without choosing an insurance plan; it cannot

purchase insurance without paying the premiums; and it can-

not purchase insurance for its employees without giving them

that coverage, which is certainly a benefit. This is not the

establishment of an ERISA plan, either in fact or by applica-

tion of law. What happened in fact is that this company pur-

chased a policy of insurance; what happened as a matter of

law is that the Sixth Circuit over-reached in applying the

legal fiction of ERISA to come to a result which conflicts with

the law of other circuits and with Congressional intent.®

An “overly broad interpretation of the term ‘employee

welfare benefit plan’ ignores congressional intent.” Wisconsin

Educ. Ass'n Ins. Trust v. Iowa State Board, 804 F.2d 1059,

1064 (8th Cir. 1986). The court in that case noted that Con-

gress never intended ERISA to include group marketing plans

such as the GMS plan here:

Certain entrepreneurs have undertaken to market in-

surance products to employers and employees at large,

claiming these products to be ERISA covered plans.

. . . These programs are not ‘employee benefit’ plans

as defined in [the Act]. As described to us, these plans

are established and maintained by entrepreneurs for

the purpose of marketing insurance products or ser-

vices to others. They are not established or maintained

3 Petitioners also argued below that the existence of an ERISA plan “is a

question of fact, to be answered in light of all the surrounding facts and cir-

cumstances” which, of course, had not been fully developed prior to the in-

terlocutory appeals, citing Kanne v. Connecticut General Life Insurance

Company, 867 F.2d 489, 491 (9th Cir. 1988), cert. denied, 109 S.Ct. 3218

(1989). This issue is within the questions presented and is not waived.

by the appropriate parties to confer ERISA jurisdic-

tion, nor is the purpose for their establishment or

maintenance appropriate to meet the jurisdictional

prerequisites for the Act. They are no more an ERISA

plan than is any other insurance policy sold to an

employee benefit plan. . .. We do not believe that

[ERISA] and legislative history will support the inclu-

sion of what amounts to commercial products within

the umbrella of the definition [of an ERISA plan].

Id. at 1063-64, quoting from H.R. Rep. No. 1785, 94th

Cong., 2d Sess. 48 (1977) (emphasis added).

New York Life finally conceded below that the GMS Trust

was not an ERISA plan, but it continued to argue that Inter-

national Resources nevertheless created some separate ERISA

plan by joining the multiple-employer trust. This argument

was expressly rejected by the Taggart court, 617 F.2d at

1210-11 (neither the multiple employer trust nor an

employer's subscription to it establish an ERISA plan). Yet,

the Sixth Circuit adopted this circular reasoning, even though

the only thing petitioners did in this case was to purchase in-

surance. They simply called an insurance agent who enrolled

them in a multiple-employer trust. For all of the foregoing

reasons, that is not the establishment of an ERISA plan. As in

Taggart:

The supposed . . . ‘plan’ has no assets and is liable tor

no benefits. There is nothing to be placed in trust, so

there is no trust. The corporation did no more than

make payments to a purveyor of insurance. . . . There

simply exist no assets for ERISA’s statutory safeguards

to protect.

617 F.2d at 1211.

The Sixth Circuit in the present case declined to follow

Taggart and Gahn and found “the construction of ERISA [in

Donovan v. Dillingham, 688 F.2d 1367, 1373 (11th Cir.

1982) (en banc) to be] more consistent with the Act’s broad

scope... .” 950 F.2d at 297. Donovan, however, arose in

very different circumstances, with the Secretary of Labor

suing to enforce fiduciary responsibilities against the trustees

of a multiple-employer trust. More importantly, the Donovan

court expressly stated that it “agree{[d] with the holding and

reasoning” of Taggart that the multiple-employer trust itself

was not an ERISA plan and with the finding that there was

no employee welfare benefit plan in Taggart. Donovan, 688

F.2d at 1375.

[N]o single act in itself necessarily constitutes the

establishment of [an ERISA plan]. For example, the

purchase of insurance does not conclusively establish

[an ERISA plan]... .

Donovan, 688 F.2d at 1373.

Since Taggart’s facts are virtually indistinguishable from

those presented here, it follows that even the Donovan court

would not go so far as the Sixth Circuit has gone to apply

ERISA here. This conclusion is buttressed by the attention

paid in Donovan to the entrepreneurial nature of a business:

To be an employee welfare benefit plan ..., an

employer or employee organization, or both, and not

-individual employees or entrepreneurial businesses,

must establish or maintain the plan, or program.

Id., 688 F.2d at 1373 (emphasis added). The Sixth Circuit

erred in ignoring the entrepreneurial nature of petitioners’

family business, which even Donovan would not find to have

established an “employee welfare benefit plan” under ERISA.

Other courts have harmonized Taggart and Donovan. See,

e.g., Clark v. Golden Rule Insurance Company, 737 F.Supp.

376, 382-83 (W.D. La. 1989), aff'd on other grounds, 887

F.2d 1276 (9th Cir. 1989) (“{b]ecause the facts in this case are

virtually indistinguishable from those in Taggart, the holding

in Donovan . . . does not require a different result’). Here,

the Sixth Circuit similarly could have followed Taggart

without doing violence to Donovan. But to the extent that

Taggart and Donovan are in conflict, that is all the more

reason to grant the petition for certiorari in the present case.

Decisions not directly on point but which illustrate the

same conflict and confusion among other circuits include

Matthew 25 Ministries, Inc. v. Corcoran, 771 F.2d 21, 22 (2d

Cir. 1985) (group marketing service with “mixed bag group of

enrollees” not covered by ERISA); Brundage-Peterson v.

Compcare Health Services Ins. Corp., 877 F.2d 509 (7th Cir.

1989) (employer's establishment of system whereby employees

could choose between different insurers was an ERISA plan).

Indeed, this confusion appears to exist among various panels

within the same circuit. An example is the failure of the

Seventh Circuit in Brundage-Peterson to cite or discuss the

decision in Wayne Chemical, Inc. v. Columbia Agency Ser-

vice Corporation, 567 F.2d 692, 699 (7th Cir. 1977), which

held:

An employer does not become a participant in, or

establish or maintain, [an ERISA] plan by applying

for insurance and paying premiums for what it under-

stands to be insurance without any knowledge that the

plan exists.

This conflict exists among federal courts at the district

court level as well. Compare, e.g., Plotkin v. Assoc. of Eye

Care Centers, Inc., 710 F. Supp. 156 (E.D.N.C. 1989)

(health insurance for employees purchased through insurance

marketing association set up for small optometry employers

was not subject to ERISA), and MD Physicians & Associates,

Inc. v. Wrotenbery, 762 F. Supp. 695 (N.D. Tex. 1991)

(following Taggart and finding no ERISA plan), with Cote v.

Durham Life Ins. Co., 754 F. Supp. 18, 20-21 (D. Conn.

1991) (health coverage acquired by small employer through

multiple-employer trust was subject to ERISA).

The petition should be granted in order for the Court to

give guidance to all the circuits and district courts on this im-

portant issue.

II.

State courts are similarly split on this issue, creating a need

for Supreme Court guidance at every level.

Many state courts faced with facts similar to those

presented here have followed Taggart or have otherwise

reached the same result as was reached in Taggart, contrary

to the result reached here. See, e.g., Turnbow v. Pacific

Mutual Life Ins. Co., 765 P.2d 1160 (Nev. 1988), cert.

denied, 490 U.S. 1102 (1989) (liquor store’s purchase of

health insurance coverage for store owner and three full-time

employees through multi-employer trust held not to be the

establishment of an ERISA pian), Blue Cross/Blue Shield of

Florida, Inc. v. Weiner, 543 So.2d 794 (Fla. Dist. Ct. App.

1989), review denied, 553 So.2d 1164 (Fla. 1989), cert.

denied, 494 U.S. 1028 (1990) (service station retailer's

purchase of health insurance coverage, through an indepen-

dent marketing company in cooperation with the national

and state service station dealer associations, held not to be an

ERISA plan).

Some state courts, however, have reached a different

result. E.g., Rizzi v. Blue Cross of California, 206 Cal. App.

3d 380 (1988), cert. denied, 493 U.S. 821 (1989). Thus the

state courts deciding this threshold issue concerning ERISA’s

application are just as much in need of guidance from this

Court as are the federal district courts and circuit courts of

appeal.

Because state courts do not consider themselves bound by

federal decisions other than those of the United States

Supreme court (see, e.g., Rizzo v. Travellers Ins. Co., 549

NE.2d 810 (Ill. App. 1989)), this situation adds a potential for

forum-shopping to this entire dispute. If the state courts of

Kentucky, for example, decide to follow Taggart even though

the Sixth Circuit has not, plaintiffs may decide to file in

federal court to seek the advantage of ERISA’s attorney fees

provisions or may choose state court if the potential for

punitive damages seems strong. The possibility of removal

cannot stop such forum-shopping in every instance and, in

fact, only encourages the defendant to do the “shopping” in

cases where such removal is authorized.

The petition should be granted to resolve the same split

that exists among the state courts as is found among the

federal courts.

III.

The “statutory complexity” of ERISA and the “wide varie-

ty of state statutory and decisional law arguably affected by

federal pre-emption” warrant the further guidance of this

Court.

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

Court observed:

Given the ‘statutory complexity’ of ERISA’s three pre-

emption provisions, . . . as well as the wide variety of

state statutory and decisional law arguably affected by

the federal pre-emption provisions, it is not surprising

that we are again called on to interpret these provi-

sions.

Id. at 47 (citations omitted). These same factors warrant a

grant of the present petition.

The statutory complexity of ERISA continues to baffle

federal and state courts, as they struggle with “tautological”

definitions (see Ft. Halifax Packing Co. v. Coyne, 482 U.S. 1,

(1987)), as well as the pre-emption provisions. As the Court

has observed more than once, parts of ERISA “perhaps are

not a model of legislative drafting.” Pilot Life, 481 U.S. at 46,

quoting from Metropolitan Life Ins. Co. v. Massachusetts,

471 U.S. 724, 739 (1985).

As to the “the wide variety” of state laws arguably affected

by federal pre-emption, the present case illustrates that point

well. Of 10 counts in the complaint alleging claims ranging

from breach of contract to violations of Kentucky's Insurance

Code, the Sixth Circuit found that only one, the count requir-

ing substantially similar insurance coverage to be issued, sur-

vived pre-emption.‘

4 The Sixth Circuit did hold, however, that some of the other counts in-

volving state statutory claims “are enforceable in an ERISA action.” 950

F.2d at 300 (appendix 10a).

This is happening all over the United States, as state laws

governing issues ranging from wrongful discharge to in-

surance subrogation continue to disappear into “the quick-

sand” of ERISA. Jordan v. Reliable Ins. Co., 694 F. Supp.

822, 835 (N.D. Ala. 1988). As one Texas Supreme Court

justice recently observed:

For the over 56 million Americans who are enrolled in

group health insurance plans . . ., ERISA has become

more than mere quicksand; it has become a black

hole.

Cathey v. Metropolitan Life Ins. Co., 895 S.W.2d 387, 392

(Tex. 1991) (Doggett, J., concurring and “join{ing] with the

growing number of courts and commentators who express

. concern [about] continued misconstruction” of ERISA).

As this Court has already explained in numerous cases, this

may be for good reason in cases where compelling public

policy requires that ERISA be given broad effect to avoid sub-

jecting employers to conflicting state law. E.g., Ingersoll-

Rand Co. v. McClendon, 111 S. Ct. at 484. But “[t]his con-

cern only arises . . . with respect to benefits whose provision

by nature requires an ongoing administrative program to

meet the employer's obligation.” Ft. Halifax, 482 U.S. at 11

(emphasis added). “It is for this reason that Congress pre-

empted state laws relating to plans, rather than simply to

benefits,” Id. (emphasis supplied by the Court). The concern

is not present here, where only the insurance company’s (not

the employer's) obligations are invoked and where only a

benefit (not a plan) has been provided.

In the recent FMC decision, this Court again acknow]l-

edged that its ERISA decisions sometimes result in distinctions

“ ‘between insured and uninsured plans, leaving the former

open to indirect regulation while the latter are not’.” 410 S.

Ct. at 111, quoting from Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724, 747 (1985).

Our interpretation . . . makes clear that if a@ plan is in-

sured, a state may regulate it indirectly through

regulation of its insurer and its insurer's insurance

contracts; if the plan is uninsured, the state may not

regulate it. As a result, employers will not face “con-

flicting or inconsistent state and local regulation of

employee benefit plans.”

111 S. Ct. at 411 (citations omitted) (emphasis added). Such a

distinction is needed in the present context to recognize that

ERISA concerns simply are not implicated by the purchase of

insurance by small, entrepreneurial business.

ERISA is so complex and so broad that it presents a contin-

uing danger that the lower courts will find it easier to deem

everything pre-empted than to engage in careful analysis. Its

complexity and breadth warrant this Court’s further guidance

to prevent this from occurring.

IV.

The Sixth Circuit’s decision thwarts Congressional intent,

which the Court has instructed m st be the ultimate touch-

stone in every ERISA case, by extending the reach of ERISA

to “employee benefits” even where no “employee benefit

plan” exists.

This Court has recently instructed that ERISA pre-

emption, “[n]otwithstanding its breadth,” is not unlimited.

Ingersoll-Rand Co. v. McClendon, 111 S. Ct. 478, 483

(1990). One of the limits on ERISA is that only state laws

which “relate to benefit plans are pre-empted.” Id. (dictum)

(emphasis supplied by the Court), citing Ft. Halifax Packing

Co. v. Coyne, 482 U.S. 1, 23 (1987). ERISA does not pre-

empt laws relating to employee benefits where no plan is in-

volved. Id. at 7-8. Otherwise “the word ‘plan’ [w]ould in ef-

fect be read out of the statute.” Id. at 8.

The words “benefits” and “plan” are used separately

throughout ERISA, and nowhere in the statute are

they treated as the equivalent of one another. Given

the basic difference between a “benefit” and a “plan,”

Congress’ choice of language is significant in its pre-

emption of only the latter.

Id.

The Sixth Circuit's decision in this case has extended the

reach of ERISA past employee benefit plans to cover an

employee benefit (i.e., health insurance) even where no

ERISA plan exists. Factually, nothing occurred in this case

except the bare purchase of insurance by a small closely-held

corporation. The employer did not undertake to determine

eligibility, calculate benefit levels, make disbursements,

monitor the availability of funds for benefit payments, or any

of the other “administrative realities’ that accompany

employee benefit plans. Jd., 482 U.S. at 9. It just purchased

insurance. As in Ft. Halifax, “[t]o do little more than write a

check hardly constitutes the operation of a benefit plan.” 482

U.S. at 134."

This case is also similar to Ft. Halifax in that it “fails to im-

plicate the regulatory concerns of ERISA itself.” Id., 482 U.S.

at 15. There are no opportunities for “self-dealing, imprudent

investing, and misappropriation of plan funds” on the part of

the employer. Jd. And the insurance company’s activity is

already heavily regulated by state law (unless deemed to be

pre-empted). Accordingly, such “pre-emption would in no

way serve the overall purpose of ERISA.” Id., 482 U.S. at 16.

The Sixth Circuit’s holding in the present case reaches too

far and is contrary both to this Court’s explanation of ERISA’s

purposes in Ft. Halifax and to Congress’ stated intent:

to protect . . . participants in employee benefit plans

and their beneficiaries, by . . . establishing standards

of conduct, responsibility, and obligation for fiduciar-

ies of employee benefit plans... .

29 U.S.C. § 1001(b) (emphasis added). While petitioners

readily acknowledge that insurance benefits can be part of an

ERISA plan,® there is nothing in the statutory scheme that at-

tempts to reach benefits alone, when no plan is involved.

This result is not only beyond Congressional intent, it is at

cross-purposes with it. The people being hurt by decisions

such as the one in this case are the very employees Congress

was trying to protect. Permitting insurance companies to hide

5 Significantly, in Ft. Halifax the Court cited Donovan, supra, tor this

proposition and quoted its statement that “[a] decision to extend benefits is

not the establishment of a plan or program.” Jd. at n.6, citing 688 F.2d at

1373. This would indicate the Ft. Halifax Court to read Donovan in a way

that can be harmonized with Taggart, supra, rather than as applied by the

Sixth Circuit here.

6 This is what distinguishes Pilot Life, supra, from the present case, since

in Pilot Life there was a “long term disability employee benefit plan”. 481

U.S. at 43. Here, there is insurance but no plan.

behind ERISA thwarts, rather than furthers, the clear Con-

gressional intent and concerns that led to ERISA in the first

place.

Through peculiar federal judicial interpretation, a

statutory addition to workers’ rights has been con-

verted into a statutory removal of those rights. The

law has been reshaped into a form that achieves the

converse of its original purpose.

Cathey, supra, 805 S.W.2d at 392 (Doggett, J., concurring).

This Court has repeatedly instructed that the “purpose of

Congress is the ultimate touchstone” in an ERISA case. E.g.,

Pilot Life, supra, 481 U.S. at 45, 107 S. Ct. at 1552, quoting

Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 208 (1985)

(other citations omitted). This instruction bears repeating

with emphasis in the present case, where Congressional intent

has been not only disregarded, but severely undermined as

well.

¥.

The Sixth Circuit’s decision carries this Court’s decision in

Pilot Life to an extreme never intended, and is contrary to

Congressional intent.

As noted above, this case is distinguishable from Pilot Life

because the threshold issue — i.e., whether there there is any

benefit plan even involved here — was not addressed in Pilot

Life. In Pilot Life, this Court expressly stated that there was

“no dispute that the common law causes of action asserted

. ‘relate to’ an employee benefit plan... .” 481 U.S. at

47. The issue in Pilot Life was whether those state law claims

were “saved from pre-emption by § 514(b)(2)(A),” 29 U.S.C.

§ 1144(b)(2)(A), the “saving clause” of ERISA (appendix L).

In addition to the Sixth Circuit’s initial error of finding an

ERISA plan where none ever existed, the Sixth Circuit further

erred by carrying the Pilot Life decision on the “saving

clause” issues in this case to an extreme never intended. The

Sixth Circuit not only found the breach of contract count of

the complaint to be pre-empted, but also found pre-emption

of the following: (1) Kentucky cases forbidding the cancella-

tion of an insurance policy once liability has attached; and (2)

Kentucky case law forbidding illusory insurance practices.

The Sixth Circuit cited Pilot Life in reaching this part of its -

decision, but the Mississippi cases at issue in Pilot Life in-

volved “only general principles of Mississippi tort and con-

tract law.” 481 U.S. at 50. Here, the Kentucky cases at issue

were entirely restricted to, aimed at, and focused on in-

surance practices. E.g., Curry v. Fireman’s Fund Insurance

Co., 784 S.W.2d 176 (Ky. 1989) (forbidding illusory in-

surance practices); Aetna Life Ins. v. Gullett, 253 Ky. 544, 69

S.W.2d 1068 (1934)) (insurance policy cannot be cancelled

once liability has attached); Carter v. Aetna Life Ins. Co.,

272 Ky. 392, 114 S.W.2d 496 (1938) (same).

The Court stated in Pilot Life that decisional case law, as

well as statutory law, may be “saved” under ERISA. 481 U.S.

at 48 n.1. The Kentucky cases relied upon here pass both the

“common sense” test and “business of insurance” test ap-

proved in Pilot Life. The Sixth Circuit’s decision on the “sav-

ing clause” issue thus extends Pilot Life to find pre-emption

even of state laws regulating insurance. This is contrary to the

reasoning of Pilot Life and, again, to the expressed intent of

Congress.

This Court reaffirmed the vitality of ERISA’s saving clause

in the recent FMC decision, when it directed that state laws

regulating insurance (such as the laws involved here) continue

in full force and are not pre-empted:

An insurance company that insures a plan remains an

insurer for purposes of state laws “purporting to

regulate insurance” ... The insurance company is

therefore not relieved from state insurance regulation.

The ERISA plan is consequently bound by state in-

surance regulations insofar as they apply to the plan’s

insurer.

111 S. Ct. at 409. The Sixth Circuit erred in failing to

recognize that New York Life “remains an insurer for pur-

poses of state laws ‘purporting to regulate insurance.’ ”» New

York Life is “not relieved from state insurance regulation.”

And the policy of insurance (which New York Life claims is

an ERISA “plan’”) is bound by state insurance regulations “in-

sofar as they apply to” New York Life.

The reasoning of the Sixth Circuit cannot be correct

because its view makes the saving clause meaningless. The

Court made very clear in FMC that a meaningless saving

clause is not what either it, in its previous opinions, or Con-

gress ever intended.

The saving clause returns to the State the power to en-

force those state laws that “regulat[e] insurance... .”

[A law which] does not merely have an impact on the

insurance industry . . . [but] is aimed at it. . . returns

the matter . . . to state law.

111 S.Ct. at 407, 409. The state laws relied upon by peti-

tioners in this case are such laws, with not merely an impact

on the insurance industry, but aimed at it.

Other courts have reached a similar conclusion. In Gahn,

supra, the Fifth Circuit held that Louisiana’s Insurance Code

prohibited Allstate from terminating insurance coverage after

discovering the plaintiff had liver cancer and held that

“ERISA does not preempt Mrs. Gahn’s [state] statutory

remedy.” 926 F.2d at 1454. The court explained that because

the insurance code “regulates insurance, . . . it is not super-

seded by ERISA.” Id.

Similarly, Blue Cross & Blue Shield of Alabama v. Lewis,

754 F. Supp. 849 (N.D. Ala. 1991), involved what was agreed

by both sides to be an ERISA plan, administered by Blue

Cross. Blue Cross filed an action in the Northern District of

Alabama to enforce its subrogation rights under the express

terms of the policy. The insured family argued that the policy

terms were forbidden and unenforceable under state law.

Blue Cross argued that state was law pre-empted. The district

court disagreed, based upon FMC v. Holliday:

It is clear that FMC, if is stands for anything, stands

for the proposition that the rights of an insurance

company like Blue Cross, even though it is the

fiduciary or administrator of an ERISA-governed

plan, remains [sic] under the regulation of the state.

The Sixth Circuit’s decision in the present case fails to give

the same credence to FMC and, in doing so, carries Pilot Life

to an extreme never intended by the Court. The petition

should be granted before the decision of the Sixth Circuit,

already widely-cited, is adopted by other courts.

Vi.

The Sixth Circuit’s decision defeats both the judicial and

legislative efforts of the Commonwealth of Kentucky to pro-

tect its citizens from illusory insurance practices.

As this Court has previously directed:

ERISA pre-emption analysis “must be guided by re-

spect for the separate spheres of governmental author-

ity preserved in our federalist system.”

Ft. Halifax, 481 U.S. at 19, quoting from Alessi v. Raybestos-

Manhattan, Inc., 451 U.S. 504, 522 (1981). Yet the Sixth Cir-

cuit’s decision in the present case shows little regard for the

traditional sphere of state authority in regulating insurance.

Kentucky has said it will not tolerate illusory insurance

practices. It said that by judicial decision back in the 1930s

when similar abuses first arose in the industry and again as

recently as its December 1989 decision in Curry, supra. But

the Sixth Circuit has ruled that all of those cases are pre-

empted. Kentucky’s legislature has passed numerous acts to

protect Kentucky citizens from unfair and deceptive in-

surance practices. The Sixth Circuit, however, has said in this

decision that all those statutes are also preempted. Kentucky

has, by both statute and judicial interpretation, expressly

ruled that a person harmed by the violation of a statute regu-

lating insurance has a private cause of action. State Farm

Mutual Automobile Ins. Co. v. Reeder, 763 S.W.2d 116 (Ky.

1989) (interpreting KRS 446.070). But the Sixth Circuit has

said in this case that those determinations are pre-empted as

well. The Sixth Circuit has effectively “overruled” most of

Kentucky statutory and judicial law protecting against il-

lusory insurance.

The FMC case decided by this Court directs that the

federal courts be “respectful of the presumption that Congress

does not intend to pre-empt areas of traditional state regula-

tion.” 111 S. Ct. at 410. Other courts have long recognized

the importance of this issue in the context presented here.

E.g., National Business Conference Employee Benefit Asso-

ciation v. Anderson, 451 F. Supp. 458, 462 (S.D. Iowa 1977)

(“court does not believe Congress intended to deprive the

state of the right to protect its individual citizens from possi-

ble loss by regulating this type of insurance plan”); Cathey,

supra, 805 S.W.2d at 393 (Doggett, J. concurring) (“expan-

sive pre-emption ... upsets the equilibrium between the

federal government and the states that Congress intended to

preserve by enacting the saving clause ..., thereby

eviscerating this once-important provision”).

The Sixth Circuit’s decision in the present case disregarded

for the most part the presumption that Congress did not in-

tend to pre-empt this area of traditional state regulation,

which is the regulation of insurance. The petition should be

granted to give effect to this presumption and to restore the

Commonwealth’s right to continue its regulation in this tradi-

tional sphere of state government.

VIL.

The Sixth Circuit has decided an important question of

federal law which has not been, but should be, settled by this

Court.

Many of the reasons set forth above in support of this peti-

tion are overlapping, and all reflect the importance of the

threshold issue, which is whether an ERISA plan is estab-

lished by the mere purchase of insurance. From a practical

standpoint, small businesses need to know which circuit is

correct. If the Sixth Circuit's decision stands, those businesses

would do their employees a favor by not providing health in-

surance coverage through work; a bonus to allow employees

to purchase their own insurance independently of their

employers and free of the constraints of ERISA would provide

greater protection against insurance company abuses.

Also, from a practical standpoint, there is a need for the

judiciary at all levels to be able to answer this question in the

same way. The purchase of insurance by a small en-

trepreneurial business in Kentucky should not subject that

employer to the burdens of ERISA and the loss of rights

against an insurance company when the same act in Texas or

Louisiana does not invoke ERISA at all. The Court’s full ap-

preciation of the problem may be hampered by the fact that

so many decisions in this area are not officially reported.

E.g., Ballay v. General American Life Insurance Company,

No. 89-4671 (E.D. La. August 2, 1990) (1990 U.S. Dist.

LEXIS 10345); Centennial Life Ins. Co. v. Robey-Barber In-

surance Service Services Corp., No. 90-2342-V (D. Kan. July

31, 1991) (1991 WL 152819); Prudential Ins. Co. of America

v. Brown, No. B14-89-00695-CV (Tex. Ct. App. August 9,

1990) (1990 WL 113682); Sayble v. Blue Cross of So. Califor-

nia, 208 Cal. App. 3d 1108 (1989); all contrary to the result

reached in this case.

Perhaps the most important reason the Court should settle

this question is to stop not only the various circuits and states

from reaching conflicting decisions, but also to stop the

judiciary from acting at cross-purposes with Congress. Nearly

every court that has ever had to decide one of these cases has

recognized how strange it is to let insurance companies hide

behind ERISA. See, e.g., Brundage-Peterson v. Compcare

Health Service Ins. Corp., surpa, 877 F.2d at 512 (noting

“the strangeness ... of transforming disputes between

employees and insurance contracts into suits under ERISA”).

The entire concurring opinion in Cathey, 805 S.W.2d at

391-94, is devoted to this “paradox,” “incongruous result,”

and “disturbing disregard for Congress’ overriding intent.

. . ..’ Some courts have blamed Congress for the incongruity,

but it is the judiciary, not Congress, which has strained to

reach what have become absurd results.

These are the kinds of rulings that make our legal system

impossible to explain or defend to lay persons. Even lay per-

sons know Congress never intended to protect insurance com-

panies by enacting ERISA. Congress did not intend that the

simple purchase of insurance be transformed somehow into

the establishment of an ERISA plan. And Congress certainly

never intended that all the carefully crafted state law de-

signed to regulate insurance companies and prohibit their il-

lusory practices, all within the traditional sphere of state

regulation, be thrown out by the federal judiciary under the

guise of ERISA enforcement.

This Court has never decided a Taggart-type case. Eleven

years have passed since certiorari was denied in Taggart

itself. These important and recurring issues have never been

addressed by this Court. It is respectfully urged that the

Court settle these questions by issuing the writ prayed for

here.

CONCLUSION

For all these reasons, a writ of certiorari should issue to

review the judgment and opinion of the Court of Appeals fce~

the Sixth Circuit.

Respectfully submitted,

Danny @

Counsel of Record

James G. LeMaster

Anne Adams Chesnut

GREENEBAUM DOLL &

McDONALD

333 West Vine Street. Suite 1400

Lexington, KY 40507

(606) 281-8500

Counsel for Petitioners

APPENDIX A

RECOMMENDED FOR FULL TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 24

No. 91-5523/8527

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

INTERNATIONAL RESOURCES, INC.;

LARRY E. SMITH,

Plaintiffs-Appellees.

NEW YORK LIFE INSURANCE COMPANY,

Defendant-Appellant.

ON APPEAL from the United District Court for the Eastern

District of Kentucky

Decided and Filed November 26, 1991

Before: MARTIN and JONES, Circuit Judges; and

WELLFORD, Senior Circuit Judge.

MARTIN, Circuit Judge, delivered the opinion of the

court, in which JONES, Circuit Judge, joined. WELLFORD,

Senior Circuit Judge (pp. 17-23), delivered a separate opinion

concurring in part and dissenting in part.

BOYCE F. MARTIN, Jzr., Circuit Judge. International

Resources, Inc., and its president, Larry E. Smith, allege

New York Life Insurance Company violated Kentucky con-

tract and tort law when the insurance company proposed

cancellation of a group health insurance policy issued to the

plaintiffs.

We must resolve the following questions: (1) does the

Employment Retirement Income Security Act preempt all of

the plaintiffs’ state law claims; and (2) did the district court

abuse its discretion by granting a preliminary injunction that

compels New York Life to continue making payments under

the disputed coverage. For the reasons given below, we af-

firm the district court’s decision with regard to the

preliminary injunction and we affirm in part and reverse in

part the district court’s determination that ERISA preempts

the plaintiffs’ state law claims. We remand this case for fur-

ther proceedings not inconsistent with this opinion.

I. BACKGROUND

In 1982, International Resources purchsed group medical

insurance coverage arranged by Group Marketing Services,

Inc., a multi-employer trust. The insurance was administered

by Group Marketing Services trust administration and under-

written by the Life Insurance Company of North America.

International Resources, in its arrangement with Group

Marketing Services, selected both the terms and the price for

its employee coverage. All International Resources’ employees

were automatically covered by the plan and the company

paid the insurance premiums. At the time International

Resources first obtained coverage, the company had six

employees; it now has two employees. On April 1, 1983,

Trans Pacific Life Insurance Company succeeded the Life In-

surance Company of North America as underwriter.

Larry Smith owns 75% of International Resources’ stock.

Smith and his dependents were insured for major medical ex-

penses under the plan arranged by International Resources

with Group Marketing Services. On May 8, 1983, Smith's

son, Mark, was severely injured in an automobile accident.

Mark Smith is now a mute quadriplegic and requires nursing

care twenty-four hours a day.

On March 1, 1986, New York Life succeeded Trans Pacific

as the underwriter for International Resources’ policy. In Oc-

tober, 1988, New York Life announced cancellation of the

group policy provided through Group Marketing Services;

continuation of benefits under the policy were to cease on Oc-

tober 1, 1989. International Resources and Smith brought suit

against New York Life in federal district court, seeking

declaratory and other relief for injuries arising out of the pro-

posed cancellation. The district court granted an injunction

compelling New York Life to continue paying for Mark

Smith’s medical care. As part of the injunction, the court

ordered International Resources to provide an escalating bond

equivalent to the amount paid by New York Life for Mark

Smith’s treatment. Subsequently, the district court ruled that

ERISA preempted all of International Resources’ and Smith’s

state law claims.

Both New York Life and the plaintiffs first appealed this

matter in December, 1990. New York Life appealed the pre-

liminary injunction requiring it to continue providing pay-

ments under the disputed coverage. At the same time, Inter-

national Resources and Smith appealed the district court

determination that ERISA preempted the plaintiffs’ state law

claims. The 1990 appeals were heard within days of two

Supreme Court decisions relevant to the parties’ claims. These

two cases, FMC Corp. v. Holliday, 498 U.S. ___, 111 S. Ct.

403 (1990) and Ingersoll-Rand v. McClendon, 498 U.S. ___.,

111 S. Ct. 478 (1990), provide further instruction on how we

should interpret ERISA’s preemption provisions. Accordingly,

we remanded both parties’ claims to the trial court for recon-

sideration in light of the new case law. Upon remand, the

district court reaffirmed its earlier decision giving rise to the

present appeal.

Il. ERISA ANALYSIS

A. Establishment Of An ERISA Fund

We must first determine whether International Resources

established an ERISA plan. The two cases that we requested

the district court to consider upon remand, FMC and

Ingersoll-Rand, do not aid us in this initial determination.

Both cases, however, are helpful to our analysis of other issues

and will be discussed below.

According to the statute, ERISA “plans” include:

[A]ny plan, fund, or program, which ... is ...

established or maintained by an employer . . . for the

purpose of providing for its participants or their

beneficiaries, through the purchase of insurance or

otherwise . . . medical, surgical, or hospital care or

benefits, or benefits in the event of sickness, accident,

disability, death or unemployment. . . .

29 U.S.C. § 1002(1) (1991). We find that, “In determining

whether a plan, fund or program [exists] a court must deter-

mine whether from the surrounding circumstances a

reasonable person could ascertain the intended benefits,

beneficiaries, source of financing, and procedures for receiv-

ing benefits.” Donovan v. Dillingham, 688 F.2d 1367, 1373

(llth Cir. 1982), quoted in Brown v. Ampco-Pittsburgh

Corp., 876 F.2d 546, 551 (6th Cir. 1989).

The facts in Donovan, 688 F.2d at 1367, are similar to

those now before us. In Donovan, small corporations and

employee organizations purchased insurance from a group

trust similar to Group Marketing Services. The trust, in turn,

obtained the group policy from a life insurance company.

The Donovan court determined that the companies and

organizations subscribed to the trust “with the intent to pro-

vide health insurance.” Donovan, 688 F.2d at 1374. All the

parties involved in the Donovan trust determined the terms

and conditions applicable to the trust by looking to the in-

surance policy and the insurer to formulate the eligibility re-

quirements. Jd. The participating employers and organiza-

tions required no more of the employees covered by the plan

than was required by the insurer. Id. The Donovan court

concluded that such employers or organizations that fur-

nished health insurance through trusts established ERISA

plans. Id.

International Resources and Smith attempt to rebut ap-

plication of Donovan by relying on Taggart Corp. v. Life &

Health Benefits Admin., Inc., 617 F.2d 1208, 1211 (5th Cir.

1980), cert. denied, 450 U.S. 1030 (1981). In Taggart, the

Fifth Circuit established that “bare purchases of health in-

surance” that involve no owner control, administration, or

responsibility for the policy or benefits, were insufficient to

create an ERISA plan. Under Taggart, the plaintiffs argue,

they did not create an ERISA plan and the Donovan analysis

is inapplicable.

We find that the plaintiffs mistake the true relevance of

Taggart and Donovan to their case. Admittedly, Taggart

stands for the proposition that “ERISA does not regulate pur-

chases of health insurance when there is no welfare plan.”

Donovan, 688 F.2d at 1375. However, Taggart does not hold

that any employer who merely purchases a group health in-

surance policy or subscribes to a trust has not established or

maintained an employee welfare benefit plan. Such a con-

struction of Taggart is expressly rejected by the Donovan

court. Id. We agree with the Donovan analysis and find that

the Donovan court’s construction of ERISA is more consistent

with the Act’s broad scope than Taggart. Employers can

establish ERISA plans “rather easily.” Credit Managers Ass’n

of Southern California v. Kennesaw Life and Accident Ins.

Co., 809 F.2d 617, 625 (9th Cir. 1987). The ERISA definition

of “employee welfare benefit plan” specifically allows that

ERISA plans may be established “through the purchase of in-

surance or otherwise.” 28 U.S.C. § 1002(1):; see also,

Brundage-Peterson v. Compcare Health Services Insurance

Corp., 877 F.2d 509, 511 (7th Cir. 1989) (“barebones plan”

for medical insurance coverage is “a common method by

which employers provide health and other welfare benefits to

their employees, and not one that has heretofore been

thought to take a benefits plan out of ERISA”).

Under the Donovan and Brundage analyses. Internationai

Resources has established an ERISA plan. Several of Interna-

tional Resources’ actions are presuasive: 1) the company con-

tracted with Group Marketing Services for the purpose of

providing insurance to its employees; 2) the company ob-

tained the coverage for its employees; 3) the coverage was

automatic and applied to all employees; and, 4) the company

paid the insurance premiums. International Resources did not

merely advertise alternate plans and then refrain from mak-

ing any contributions on behalf of its employees. Compare

with Taggart, 617 F.2d at 1211. Instead, International

Resources chose the plan, paid the premiums, and gave this

coverage to all its employees as an employee benefit. Even

though Larry Smith is presently International Resources’ only

full-time employee, the mere fact the company no longer has

several employees does not tranform what was already an

ERISA plan into a non-ERISA plan. This is particularly true

where there is no indication that the plan would not have

been offered to another full-time employee if such were hired

in the future. The combination of all these facts demonstrate

that International Resources established an employee benefit

plan under 29 U.S.C. § 1002(1) (1991).

B. Preemption Of State Law Claims

Because we have found an ERISA plan exists, we must now

determine whether the plaintiffs’ state law claims are

preempted by the Act. ERISA will not preempt state law

claims based on wrongs for which ERISA provides no

remedy. Perry v. P*I*E Nationwide, Inc., 872 F.2d 157, 162

(6th Cir. 1989), cert. denied, 110 S. Ct. 1166 (1990).

However, where rights are guaranteed by ERISA, the remedy

for such rights under ERISA is exclusive. Ingersoll-Rand, 11]

S. Ct. at 485-86; see also, Pilot Life Insurance Co. v.

Dedeaux, 481 U.S. 41, 41 (1987); Varhola v. Doe, 820 F.2d

809, 817 (6th Cir. 1987). Moreover, Congress constructed

ERISA so that the statute will preempt most state law claims.

Ingersoll Rand, 111 S. Ct. at 483; FMC, 111 S. Ct. at

407-408.

The Supreme Court in FMC discusses in detail 29 U.S.C.

§ 1144(a) (1991), ERISA’s “pre-emption clause.”! This clause

' The FMC Court sets forth the three ERISA provisions — commonly

Iiaiaceinestarreaitaaateieaaacaaaeaianeenaniimaainennnaiiaile

provides that all state law claims which “relate to” employee

benefit plans are preempted. The FMC Court reaffirmed that

this clause “is conspicuous in its breadth.” 111 S. Ct. at 407.

The Court also reiterated its finding in Shaw v. Delta

Airlines, 463 U.S. 85, 98 (1983), that Congress used the words

“relate to” in this provision “in their broad sense.” Id. at 408.

Ingersoll-Rand, 111 S. Ct. at 478, demonstrates a similarly

expansive reading of ERISA, and the Court’s holding that the

plaintiffs’ state law claim was preempted by ERISA rests on

anaylsis of the preemption clause. The Supreme Court in

Ingersoll-Rand found that a claim for wrongful termination

was preempted by ERISA because the inquiry for this cause

of action would be dependent upon — “relate to” — the ex-

istence of an ERISA plan. Jd. at 483. The claim was based on

an allegation that the employer fired the plaintiff as a way to

avoid contributing to the plaintiffs pension fund. Ingersoll

referred to as “the preemption clause,” “the saving clause,” and “the deemer

clause” — which instruct when a state law claim is preempted:

“Except as provided in sub-section (b) of this section [the saving

clause], the provisions of this subchapter and subchapter III of this

chapter shall supersede any and all State laws insofar as they may

now or hereafter relate to any employee benefit plan.” § 514(a), as

set forth in 29 U.S.C. § 1144(a) (pre-emption clause).

“Except as provided in sub-paragraph (B) [the deemer clause],

nothing in this subchapter shall be construed to exempt or relieve

any person from any law of any State which regulates insurance,

banking, or securities.” § 514(b)(2)(A), as set forth in 29 U.S.C.

§ 1144(b)(2)(A) (saving clause).

“Neither an employee benefit plan .. . nor any trust established

under such a plan, shall be deemed to be an insurance company or

other insurer, bank, trust company, or investment company or to

be engaged in the business of insurance or banking for the purposes

of any law of any State purporting to regulate insurance com-

panies, insurance contracts, banks, trust companies, or investment

companies.” § 514(b)(2)(B), as set forth in 29 U.S.C.

§ 1144(b)(2)(B) (deemer clause).

111 S. Ct. at 407. The holdings in both FMC, 111 S. Ct. at 403. and

Ingersoll-Rand, 111 S. Ct. at 478, hinged on the Court's analysis of these

three provisions and are relevant to our analysis.

Rand and FMC both emphasize, as well, the larger policy ra-

tionales for a broad interpretation of ERISA’s preemption

powers and the importance of avoiding conflicting state rules

on ERISA-related matters. Ingersoll Rand, 111 S. Ct. at 483;

FMC, 111 S. Ct. at 408.

The saving clause, 29 U.S.C § 1144(b)(2)(A) (1991),

qualifies the preemptive force of 29 U.S.C. § 1144(a). Under

the saving clause, state laws regulating insurance are not

preempted by ERISA when they are “saved” by the express

terms of this provision. FMC, 111 S. Ct. at 407. The saving

clause “returns to the States the power to enforce those state

laws that ‘regulate insurance’ except as provided in the

deemer clause.” Id. at 408. The deemer clause,

§ 1144(b)(2)(B) thus qualifies the qualification made in the

saving clause by requiring that “an employee benefit plan

governed by ERISA shall not be ‘deemed’ an insurance com-

pany, an insurer, or engaged in business of insurance for the

purposes of state laws purporting to regulate insurance com-

panies or insurance contracts.” Id. at 407. Analysis of the

“deemer clause” was the root of the Supreme Court decision

in FMC. There, the Court concluded that ERISA, through its

deemer clause, preempted a Pennsylvania anti-subrogation

statute. 111 S. Ct. at 403.

International Resources and Smith argue that four of their

state law claims are not preempted but rather are saved by

the saving clause. Following our remand of the issues raised

by the first set of appeals, the district court rejected this argu-

ment by the plaintiffs and dismissed all of their state law

claims. The court, which did not address the merits of each of

the four claims individually, simply held that all the plain-

tiffs’ state law claims were preempted “because they relate to

the administration of an employee welfare benefit plan.”

After applying the latest Supreme Court analysis on the sub-

ject of preemption, we find that at least one of International

Resources’ claims has merit and is not preempted by ERISA.

Thus, we partially reverse the district court determination.

International Resources’ first claim is that Kentucky law,

which forbids the cancellation of an insurance policy once

liability has attached, is not preempted by ERISA. In support

of this claim, International Resources cites to Aetna Life Ins.

v. Gullett, 253 Ky. 544 (1934), and Carter v. Aetna Life Ins.

Co., 272 Ky. 392 (1938). These cases, however, are based on

the common law of contracts as applied to agreements to pro-

vide insurance. Because the Kentucky law relied upon merely

states a rule of general applicability, rather than a rule

specifically directed toward the insurance industry and to in-

surance policy matters, International Resources’ first state

law claim is not rescued by the savings clause. See Pilot Life,

481 U.S. at 50-51. In McMahan v. New England Mutual Life

Insurance Co., 888 F.2d 426 (6th Cir. 1989) we articulated

the test for determining when the saving clause applies:

[W]e must consider whether the applicable state law:

(1) has the effect of tranferring or spreading policy-

holders’ risk; (2) constitutes an integral part of the

policy relationship between the insurer and the in-

sured; and (3) is limited to entities within the in-

surance industry.

Id. at 429. Under this test, which does not conflict with either

FMC or Ingersoll-Rand, International Resources’ first state

law claim cannot survive.

Second, International Resources suggests that its claim for

the tort of bad faith in insurance practice survives under the

saving clause. International Resources relies upon Curry v.

Fireman's Fund Insurance Co., 784 S.W.2d 176 (Ky. 1989),

which limits recognition of this cause of action to the tort of

illusory insurance practices. Despite the Curry court’s restric-

tion of this tort to insurance cases, this tort is not directed to

the insurance industry any more than it is directed to the law

of contracts generally. The Supreme Court has taken a nar-

row view of the factors that shall be deemed “integral” to in-

surance law, finding that the law in question must affect

specific terms of the insurance policy. See Pilot Life, 481 U.S.

at 50-51; see also, McMahan, 888 F.2d at 426. According to

the Pilot Life Court:

10a

Certainly a common-sense understanding of the

phrase ‘regulates insurance’ does not support the argu-

ment that the Mississippi law of bad faith falls under

the saving clause... Even though the Mississippi

Supreme Court has identified its law of bad faith with

the insurance industry, the roots of this law are firmly

planted in the general principles of Mississippi tort

and contract law.

Id. at 50. Thus, International Resources’ state law claim

under Curry is preempted and not saved by the saving clause.

International Resources attempts a third state law claim

based on Kentucky insurance code provisions that prohibit

unfair and deceptive practices in the insurance business. See

Ky. Rev. Stat. § 304.12-010, 020. The remedy for violation of

these laws is created by Ky. Rev. Stat. § 446.070, which is a

law of general applicability. See State Farm Mutual Auto In-

surance Co. v. Reeder, 763 S.W.2d 116 (Ky. 1988). These

statutes are enforceable in an ERISA action, see, e.g., Ruble

v. UNUM Life Insurance Company of America, 913 F.2d

295, 297 (6th Cir. 1999) (“nothing in ERISA would prevent

the insurance policy from being enforced in its statutorily

modified form”). Because, then, the remedy is one of general

applicability and conflicts with § 1132 of ERISA, it must be

superceded by the remedy provided under the Act.

International Resources’ fourth and final state law claim,

that the conversion policy issued by New York Life did not

conform with Ky. Rev. Stat. § 304.18-110(5), has merit and

survives preemption. This Kentucky statute requires that

substantially similar policies be issued by successor insurers.

Id. As our preceding analysis demonstrates, most state law

claims are not “saved” by the saving clause because such

claims do no reflect statutory or common law rules that are

specifically aimed at regulating the insurance industry. Here,

however, and in contrast to the district court, we find the

conversion statute qualifies as a state law specifically aimed at

regulating the insurance industry and so is not preempted.

Our determination is based upon a common-sense under-

lla

standing of the phrase “regulates insurance,” see McMahan,

888 F.2d at 429, and by our belief that this statute meets the

three-prong test of McMahan, described supra. We note as

well that, as a general rule, state insurance law applies to in-

surance policies purchased by ERISA plans. Michigan United

Food & Commercial Workers Unions v. Baewaldt, 767 F.2d

308, 313 (6th Cir. 1985), cert. denied, 474 U.S. 1059 (1986).

Several key Supreme Court cases influence our determina-

tion that International Resources’ fourth claim survives

ERISA preemption. In Metropolitan Life Insurance Co. v.

Massachusetts, 471 U.S. 724, 735 n. 14 (1985), the Court

found that a Massachusetts “mandated benefit law” —

whereby insurers were required to provide specific medical

benefits whenever a Massachusetts resident purchased a cer-

tain form of insurance — survived preemption under ERISA.

The Pilot Life Court, 481 U.S. at 41, made express reference

to Metropolitan Life, seemingly greatly limiting the degree to

which state law claims may be deemed to have survived

ERISA preemption under the saving clause. The Pilot Life

Court held that § 1132 of ERISA — the remedies provision —

provides the “exclusive vehicle for actions” if a court construes

Congress intended ERISA to apply. Jd. The Pilot Life Court's

reading of § 1132 as a broad preemption remedial provision is

based upon Congress’s explicit remarks that § 1132 was in-

tended to be analagous to the National Labor Relations Act’s

broadly preemptive remedies provision. Id.

Admittedly, the Kentucky conversion statute does not

qualify as a “mandated benefit law.” Nonetheless, we find

the principles of Metropolitan Life, as well as other Supreme

Court cases, are applicable and that the plaintiffs’ conversion

claim survives preemption in spite of Pilot Life. The recent

decision of Ingersoll-Rand directly bears upon this under-

standing of Pilot Life. In Ingersoll-Rand, 111 S. Ct. at 485,

the Court found that the plaintiffs state law claim conflicted

with 29 U.S.C. § 1140 because this provision was directed at

employers who would otherwise “circumvent the provision of

promised benefits.” The Ingersoll-Rand Court addressed the

potentially conflicting analyses of Pilot Life and Metropolitan

l2a

Life and found that the Pilot Life analysis of 502 (a) showed

“Congress intended 502(a) to be the exclusive remedy for

rights guaranteed under ERISA.” Ingersoll-Rand, 111 S. Ct.

at 485 (emphasis added). Thus, because we cannot fairly

assume the activity Kentucky is regulating through its conver-

sion statute is protected or guaranteed by an ERISA remedy,

the Pilot Life analysis is inapplicable and the Kentucky

statute survives preemption. See id.

This determination is further buttressed by FMC. There,

the Court considered the effect the deemer clause may have

on state law claims. The FMC Court found that “the saving

clause retains the independent effect of protecting state in-

surance regulation of insurance contracts purchased by

employee benefit plans.” id. at 411. The Court then ob-

served:

We have identified laws governing the “business of in-

surance” in the Act to include not only direct regula-

tion of the insurer but also regulation of the substan-

tive terms of insurance contract . . . [citation omit-

ted]. By recognizing a distinction between insurers of

plans and the contracts of those insurers, which are

subject to direct state regulation, and self-insured

employee benefit plans governed by ERISA, which

are not, we observe Congress’ presumed desire to

reserve to the States the regulation of the “business of

insurance.”

Id. at 410. By distinguishing between insured and uninsured

plans, leaving the former open to indirect regulation though

not the latter, the FMC Court indicates that an insurance

company such as New York Life, that insures a welfare

benefit plan like that purchased by International Resources,

“remains an insurer for purposes of state laws purporting to

regulate insurance after application of the deemer clause.”

FMC, 111 S. Ct. at 409. The FMC Court's analysis not only

enhances our understanding of what the phrase “regulates in-

surance” means, the Court clarifies that plans such as the one

l3a

at issue here do not fail under deemer clause analysis. Because

the standards we announced in McMahan, 888 F.2d at 426.

are not abrogated by current Supreme Court analysis, we

find that plaintiffs’ claim under the Kentucky conversion

statute survives preemption by ERISA.

C. Vesting Of Welfare Benefits

Finally, we come to a matter aot addressed by the district

court though raised by the parties on appeal. That is,

whether or not the plaintiffs’ rights have “vested” for the pur-

pose of bringing the instant claims. We have held that pen-

sion plans are subject to statutory vesting requirements under

29 U.S.C. § 1053, although welfare plans are not. Armistead

v. Venitron, slip op. 89-6405, at 18 (6th Cir. Sept. 24, 1991).

New York Life would have us believe that a welfare plan will

never vest, because there is no statutory vesting requirement,

or that such a welfare plan can only vest if it has explicit pro-

visions providing for vesting in the plan documents. New

York Life, however, misstates the law of In re White Farm

Equipment Co., 788 F.2d 1186, 1193 (6th Cir. 1986). There,

we found that we will not construe ERISA as providing a

mandatory point for welfare benefits to vest. Nonetheless, a

court may look to the parties’ intent to determine when

vesting should occur. Such intent may be demonstrated by

“agreement or by private design.” Id. See also, Armistead,

slip. op. 89-6405, at 18. There may be sufficient evidence for

the district court to find plaintiffs’ claims have vested.

However, because this point was not addressed by the district

court and because we feel that it merits further development,

we direct that this issue by considered upon remand.

III. PRELIMINARY INJUNCTION

We must also determine whether the preliminary injunc-

tion should continue against New York Life. Our determina-

tion requires consideration of: (1) the likelihood of success on

l4a

the merits; (2) whether irreparable injury will result without

the injunction; (3) the probability of substantial harm to

others; and (4) whether the public interest is advanced by the

injunction. See Christian Schmidt Brewing Co. v. G.

Heileman Brewing Co., 753 F.2d 1354, 1356 (6th Cir.), cert.

dismissed, 469 U.S. 1200 (1985). Our review is limited to a

determination of whether the district court abused its discre-

tion. Tate v. Frey, 735 F.2d 986, 990 (6th Cir. 1984).

The trial court’s grant of injunction was based on a finding

of “substantial likelihood of success on the merits from within

the four corners of the insurance contract, notwithstanding

application of ERISA.” The court’s finding derived from

several factors: 1) the contract of insurance guaranteed

lifetime benefits of up to $1,000,000 of which only about half

had been distributed by the time of the lawsuit; 2) the New

York Life certificate stated that “if a person is totally disabled

when coverage ends, benefits may continue for covered ex-

penses due to the condition which caused the disability;” and,

3) the New York Life policy stated that it would continue

benefits under which Mark Smith had been receiving

payments and that “an Individual’s insurance with respect to

[a] dependent child shall not terminate as long as the In-

dividual’s insurance remains in force and as long as [the

dependent’s physical] incapacity continues.” Although New

York Life alléges the district court’s findings are erroneous,

our review reveals no abuse of the court’s discretion and that

it acted reasonably.

The district court properly examined the remaining factors

necessary for a grant of preliminary injunction. The court

considered the irreparability of injury to the parties, the

potential for harm to others, and the broader policy implica-

tions, should it impose the injunction. The court’s determina-

tion regarding these issues was influenced by several factors:

1) the loss of the funds would adversely affect the proper

maintenance of Mark Smith’s health; 2) the litigation was

making the retention of qualified medical caretakers difficult;

3) interruption of the care might cause irreversible physical

harm to Mark Smith; 4) a bond posted by the plaintiff would

l5a

protect New York Life’s financial outlay; and 5) only the par-

ties to this litigation are at risk of any substantial harm.

The district court's determination that there was a

likelihood of substantial harm due to interrupted care is a fac-

tual finding that we will not disturb unless clearly erroneous.

United States v. United States Gypsum Co., 333 U.S. 364.

394 (1948). Contrary to New York Life’s assertions, the dis-

trict court’s finding that Smith was having difficulty attrac-

ting medical care was supported by evidence in the form of

Smith’s affidavit and thus is not clearly erroneous. There are

no significant public policy concerns weighing against the in-

junction; in fact, public policy weighs in favor of an injunc-

tion. The factors relied upon by the district court remain

unaffected by our determination that the bulk of plaintiffs’

claims are governed by ERISA, although one state law claim

may survive. Accordingly, we find there was no abuse of

discretion by the district court and the grant of preliminary

injunction is upheld.

For the foregoing reasons, the determination of the district

court with regard to the preliminary injunction is affirmed.

The district court's judgment regarding the preclusion of state

law claims is affirmed in part and reversed in part. This mat-

ter is remanded to the trial court for further proceedings not

inconsistent with this opinion.

WELLFORD, Senior Circuit Judge, concurring in part

and dissenting in part:

I concur in parts I and IIA of Judge Martin’s opinion. I also

concur in that portion of part IIB that concludes that ERISA

pre-empts three of plaintiffs’ state law claims.!

I dissent, however, from the conclusion in part IIB that the

fourth state claim, “that the conversion policy issued by New

' Judge Martin states that ERISA pre-empts: 1) the claim that cancella-

tion of the policy is forbidden “once liability has attached;” 2) “the tort of

bad faith in insurance practice;” and 3) the claim of “unfair and deceptive

practices in the insurance business.”

l6a

York Life did not conform with [Ky. Rev. Stat.]

§ 304.18-110(5), has merit and survives pre-emption.” This

segment of the opinion reverses the district court’s decision

after a prior remand in which we stated, “While not disagree-

ing with the district court’s judgment, we remand. . . so

that the district court may consider . . . this case in light of

FMC Corp. v. Holliday, {111 S. Ct. 403] (1990), and

Ingersoll-Rand v. McClendon, 111 S. Ct. [478] (1990).” (Em-

phasis added). The district court found nothing compelling in

either recent Supreme Court decision to change its pre-

emption decision. I continue to agree. and I would affirm the

defendant's judgment.

The Supreme Court has indicated that “[ERISA’s] ‘careful-

ly integrated’ civil enforcement scheme... ‘is one of the

essential tools for accomplishing the stated purposes of

ERISA.” © Ingersoll-Rand, 111 S. Ct. at 482, quoting Pilot

Life Ins. Co. v. Dedeaux, 481 U.S. 41, 52 (1987).? As stated

by the majority, “where rights are guaranteed by ERISA, the

remedy for such rights under ERISA is exclusive.” This is not

to say, however, that enforcement of rights under “a com-

prehensive statute such as ERISA” need to be as extensive or

encompassing as a pre-empted state remedy. Ingersoll-Rand,

111 S. Ct. at 482; see Pilot Life, 481 U.S. at 53-54 (indicating

that ERISA pre-empts a state claim for improper processing

even though ERISA, unlike the state claim, does not allow

punitive damages).

Under the civil enforcement provisions of § 502(a) [29

U.S.C. § 1132(a)], a plan participant or beneficiary

may sue to recover benefits due under the plan, to en-

force the participant’s rights under the plan, or to

clarify rights to future benefits. Relief may take the

form of accrued benefits due, a declaratory judgment

2 Justice O'Connor was the author of FMC Corp., Ingersoll-Rand, and

Pilot Life, the latter holding tha? state laws on tortious breach of contract

and “bad faith” of the insurance carrier, which allowed punitive damages,

were pre-empted.

17a

on entitlement to benefits, or an injunction against a

plan administrator's improper refusal to pay benefits.

A participant or beneficiary may also bring a cause of

action for breach of fiduciary duty, and under this

cause of action may seek removal of the fiduciary.

§§ 502(a)(2), 409. In an action under these civil en-

forcement provisions, the court in its discretion may

allow an award of attorney’s fees to either party.

Pilot Life, 481 U.S. at 53.

Thus the Pilot Life court implied that although ERISA did

not provide for punitive damages, ERISA pre-empted the

plaintiffs’ more beneficial state law claims. The Ingersoll-

Rand opinion cites Pilot Life no less than five times in holding

that a Texas wrongful discharge action would not lie even if

the claimed reason for discharge was the “employer's desire to

avoid contributing to or paying benefits under the employee's

pension fund.” Ingersoll-Rand, 111 S. Ct. at 479 (Syllabus).

In this case, plaintiffs may sue under ERISA for “accrued

benefits due,” “to enforce [Smith's] rights under the plan,”

“for an injunction [for] improper refusal to pay benefits,” and

“for breach of fiduciary duty” as set out in Pilot Life. If suc-

cessful under ERISA on their wrongful termination of in-

surance benefits and “improper refusal to pay” claims, then

plaintiffs have no need to seek what seem to me to be unclear

“conversion” rights under Ky. Rev. Stat. § 304.18-110(5)

which the majority holds are not pre-empted:

The insurer shall not be required to issue a converted

policy covering any person if such person is or could

be covered by medicare (Title XVIII of the United

States Social Security Act as added by the Social

Security Amendments of 1965 or as later amended or

superseded). Furthermore, the insurer shall not be re-

quired to issue a converted policy covering any person

if (a) such person is covered for similar benefits by

another hospital or surgical or medical expense in-

surance policy or hospital or medical service

18a

subscriber contract or medical practice or other

prepayment plan or by any other plan or program of

(b) similar benefits are provided for, or available to,

such person pursuant to, or in accordance with the re-

quirements of, any statute, and the benefits provided

or available under any of the sources referred to in (a)

and (b) above for such person, together with the con-

verted policy, would result in over insurance accord-

ing to the insurer’s standards relating to policies con-

verted from group policies. A converted policy made

available pursuant hereto shall provide substantially

similar benefits but in no event be less than the

minimum standards contained in KRS 304.18-120 if

delivery of such converted policy is to be made in this

state; and if delivery of such converted policy is to be

made elsewhere, it may be on such form as the insurer

may then be offering for such conversion in the

jurisdiction where such delivery is to be made and

which provides substantially in compliance with that

required by KRS 304.18-120.

Ky. Rev. Stat. § 304.18-110(5).°

The majority indicates that because they “cannot fairly

assume” that ERISA provides the plaintiffs with a similar

remedy, then the claimed conversion rights are not pre-

empted. Plaintiffs cite, as a basis for this argument, Perry v.

3 Ky. Rev. Stat. § 304.18-1103(3) provides for conversion of a group

“hospital or surgical benefits” policy “if coverage terminates for any

reason.” Whether Mark Smith’s policy came within the meaning of the Ken-

tucky statute is unclear. It is likewise unclear whether he is “covered by

Medicare” or may have “similar benefits” under another policy or policies.

The cost of an individual “converted” policy to provide substantially similar

benefits to Mark Smith is covered by the terminated group policy is aiso

unknown. Plaintiffs’ supplemental brief at p. 18, refers to a “conversion

policy offered [which] did not provide for 24-hour private duty nursing care

at home.” Defendant apparently offered a conversion policy, but plaintiffs

question whether it provided substantially similar benefits to the group in-

surance coverage.

0, EEE

19a

P*I*E Nationwide, Inc., 872 F.2d 157 (6th Cir. 1989). Perry,

however, involved fraud in the inducement in “obtaining par-

ticipation” in the plan. Id. at 158. If the claim in Perry were

pre-empted, then the plaintiff would not have been able to

prove fraud and no plan would have existed justifying, among

other things, drastic pay cuts despite preexisting collectively-

bargained rates of pay. Perry is not analogous to this case

where a plan, unchallenged for many years, was carried out

to plaintiff's great benefit and the issue relates to a right to

terminate. Another case relied on by the majority, Michigan

United Food & Commercial Workers Unions v. Baerwaldt.

767 F.2d 308 (6th Cir. 1985), cert. denied, 474 U.S. 1059

(1986), simply held, pursuant to Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724 (1985), that Michigan’s similar

“mandated benetit law” was not pre-empted. The majority

concedes that Ky. Rev. Stat. § 304.18-110(5) “does not

qualify as a ‘mandated benefit law’.” I find no basis,

therefore, to conclude that Metropolitan Life mandates “that

the plaintiff's conversion claim survives pre-emption in spite

of Pilot Life.” Ingersoll-Rand fully supported the rationale of

Pilot Life.

Nor is the majority’s reasoning somehow buttressed by

FMC Corp. Plaintiffs’ counsel conceded in a December 14,

1990 letter to the court, “because the employer in FMC was

self-insured, the case did not involve any purchase or regula-

tion of insurance and the result in that case instead turned on

ERISA’s ‘deemer’ clause, which all parties recognize is inap-

plicable here.” (Emphasis in original). FMC holds that “[t}he

pre-emption clause is conspicuous for its breadth. It

establishes as an area of exclusive federal concern the subject

of every state law that ‘relate[s] to’ an employee benefit plan

governed by ERISA.” Id. at 407. That language is quoted in

Ingersoll-Rand. See Ingersoll-Rand, 111 S. Ct. at 482. FMC

held only that the “deemer clause” exempts “self-funded

ERISA plans from state laws that ‘regulat[e] insurance’

within the meaning of the saving clause.” FMC. 111 S. Ct. at

409.

Under McMahan v. New England Mut. Life Ins. Co., 888

20a

F.2d 426 (6th Cir. 1989), it is a close question whether Ky.

Rev. Stat. § 304.18-110(5), unlike the Kentucky law involved

in that case, is a law which “regulates insurance within the

meaning of ERISA’s saving clause,” id. at 430, but I would

conclude that McMahan is not a basis for avoiding ERISA

pre-emption of this claim.

I would hold that plaintiffs must proceed on the basis of an

ERISA claim to enforce their asserted rights under the policy

for the alleged improper refusal to pay and for wrongful ter-

mination. I cannot conclude or assume that ERISA provides

no potential remedy to plaintffs on their claim that New York

Life failed to make benefit payments under the policy. That

ERISA may provide to plaintiffs a lesser remedy than state

law, is not a basis to deny pre-emption. Even if the district

court were ultimately to decide that the plaintiffs do not have

an ERISA claim under the circumstances, that would also not

be a basis to allow plaintiffs to proceed on a pre-empted state

law claim merely because “we cannot fairly assume the ac-

tivity Kentucky is regulating through its conversion statute is

protected ... by an ERISA remedy.‘ In fact, it appears

that New York Life offered plaintiffs a conversion right to a

private policy upon termination of the group major medical

policy.

In any event, it is clear that plaintiffs cannot claim punitive

damages in this case. This is quintessentially a contract case.

To the extent vesting of benefits in this dispute must be de-

cided, I would remand that issue to the district court with

directions to determine the parties’ intentions in light of the

policy language, status of the plaintiffs, commitments made

to continue benefits, if any, and the actions of the parties.

The district court should consider Armistead v. Venitron,

F.2d , Slip op. 89-6405/06 (6th Cir. Sept. 24, 1991);

Anderson v. Alpha Portland Indus., Inc., 836 F.2d 1512 (8th

Cir. 1988), cert. denied, 489 U.S. 1051 (1989): In re White

4 The plan has provided a New York Life major medical reimbursement

policy. It is unclear whether the Kentucky statute relied upon by plaintiffs,

and by the majority, applies to such a policy.

2la

Farm Equip. Co., 788 F.2d 1186 (6th Cir. 1986); Implement

Workers v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983),

cert. denied, 465 U.S. 1007 (1984).

ERISA divides benefit plans into two classes: “wel-

fare benefit plans” and “pension plans.” See 29 U.S.C.

§§ 1002(1) & (2)(A). The group insurance plan in

White Farm and the one at issue here are welfare

benefits plans. White Farm, 788 F.2d at 1187; Musto

v. American General Corp., 861 F.2d 897, 901 n.2

(6th Cir. 1988). Pension plans are subject to statutory

vesting requirements, 29 U.S.C. § 1053, but welfare

plans are not. The question the White Farm court

decided was whether welfare benefits had vested at

retirement as a matter of federal common Jaw under

ERISA.

Venitron, slip op. at 9.

On the question of the preliminary injunction discussed in

part III, I agree that the injunction should continue, but, on

remand to the district court, both parties should have the op-

portunity for a prompt hearing to determine, in light of pres-

ent circumstances, whether: (1) “loss of [insurance] funds

would adversely affect” Mark Smith's care; (2) litigation

makes “retention of qualified medical caretakers difficult;”

(3) other resources for health care are available; and (4) there

might be some interruption in necessary care, and, if so, the

effect on Mark Smith.

In summary, I concur in the conclusion that this case con-

cerns an ERISA plan and that three of the four stated state

law claims are pre-empted. I dissent in respect to the fourth,

so-called Kentucky “conversion” right claim, because I con.

clude it is also pre-empted.

I concur in the remand for a determination. if necessary,

whether Smith’s rights under the plan were “vested.” I would

also remand for another prompt hearing on the propriety of

the preliminary injunction.

22a

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No: 91-5523: 91-8527 Civil 90-32

INTERNATIONAL RESOURCES, INC.;

LARRY E. SMITH;

Plaintiffs- Appellees,

NEW YORK LIFE INSURANCE COMPANY,

Defendant-Appellant.

Before: Martin and Jones, Circuit Judges; Wellford, Senior

Circuit Judge

JUDGMENT

(Filed November 26, 1991)

ON APPEAL from the United States District Court for the

Eastern District of Kentucky at Pikeville.

THIS CAUSE was heard on the record from the district

court and was argued by counsel.

ON CONSIDERATION WHEREOPF,, it is ordered that the

judgment of the district court with regard to the preliminary

injunction is affirmed; the judgment regarding the preclusion

of state law claims is affirmed in part and reversed in part.

The case is remanded for further proceedings not inconsistent

with the opinion.

Entered By Order Of The Court

s/ LEONARD GREEN,

Clerk

A True Copy.

Attest:

s/ Diane Schnur

Deputy Clerk

23a

APPENDIX B

Nos. 91-5523/91-8527

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

INTERNATIONAL RESOURCES. INC.; LARRY SMITH:

Plaintiffs- Appellees, (91-5523),

Petitioners (91-8527),

NEW YORK LIFE INSURANCE COMPANY,

Defendant- Appellant. (91-5523),

Respondent (91-8527)

BEFORE: MARTIN. and JONES, Circuit Judges;

WELLFORD, Senior Circuit Judge

ORDER

(Filed January 15, 1992)

The court having received a petition for rehearing en banc,

and the petition having been circulated not only to the

original panel members but also to all other active judges of

this court, and no judge of this court having requested a vote

on the suggestion for rehearing en banc, the petition for

rehearing has been referred to the original hearing panel.

The panel has further reviewed the petition for rehearing

and concludes that the issues raised in the petition were fully

considered upon the original submission and decision of the

case. Accordingly, the petition is denied.

Entered By Order Of The Court

is) LEONARD GREEN

Clerk

24a

APPENDIX C

Nos. 91-5523/91-8527

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

INTERNATIONAL RESOURCES, INC.;

LARRY E. SMITH;

Petitioners (91-8527),

Plaintiffs-Appellees, (91-5523),

NEW YORK LIFE INSURANCE COMPANY,

Respondent (91-8527)

Defendant-Appellant. (91-5523),

BEFORE: MARTIN and JONES, Circuit Judges;

WELLFORD, Senior Circuit Judge

ORDER

(Filed July 8, 1991)

The plaintiffs seek permission to appeal, pursuant to 28

U.S.C. § 1292(b), the district court’s decision entered upon

remand from this court. (Case No. 91-8527). The defendant

appeals the injunction entered by the district court. (Case No.

91-5523). The parties jointly move to consolidate these cases

and to adopt the briefs previously filed in the prior appeals

before this court.

Upon consideration, it is ORDERED that Case No.

91-5523 and the petition in Case No. 91-8527 are con-

solidated. The motion to adopt the prior briefs and joint ap-

pendix is granted. Additionally, the following schedule for

any supplemental briefing, including briefing on the merits of

the petition pending in Case No. 91-8527, is adopted:

a a

25a

Defendant-Appellant/Respondent’s brief due: August 8,

1991.

Plaintiffs-Appellees/Petitioner’s brief due: September 9,

1991.

Defendant-Appellant/Respondent’s reply brief and sup-

plemental joint appendix due: September 18, 1991.

Oral argument on all pending matters in these consolidated

cases shall be on September 24, 1991, at 9:00 a.m.

ENTERED BY ORDER OF THE COURT

/s) LEONARD GREEN.

Clerk

26a

APPENDIX D

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

CIVIL ACTION NO. 90-32

INTERNATIONAL RESOURCES, INC.;

and LARRY E. SMITH;

PLAINTIFFS,

Vv.

NEW YORK LIFE INSURANCE COMPANY,

DEFENDANTS,

MEMORANDUM OPINION AND ORDER

(Filed March 28, 1991)

This diversity action is before the Court on remand from

the Sixth Circuit Court of Appeals to consider for the first

time the facts of the present case in light of FMC Corp. v.

Holliday, U.S. ___, 111 S.Ct. 403 (1990), and Ingersoll-

Rand v. McClendon, 498 U.S. ____, 111 S.Ct. 478 (1990).

[Record No. 94]. Fully briefed and argued, the matter is ripe

for decision.

INTRODUCTION

This case presents two issues for the Court’s consideration.

First, the court must consider whether the order granting

summary judgment in favor of the defendant was appropriate

in light of new and relevant case law. Second, is an inquiry

into whether the court should reconsider the propriety of its

injunctive order requiring the defendant to continue paying

benefits while this action is pending, even if ERISA applies.

27a

[Record No. 72]. Based upon the memoranda submitted by

the parties and oral arguments heard on these matters, sum-

mary judgment is appropriate in the defendant's favor, and

the preliminary injunction shall remain in effect.

PROCEDURAL HISTORY

The plaintiffs, International Resources, Inc. [Interna-

tional], and Larry Smith [Smith], brought this action alleging

violations of Kentucy contract and tort law by the defendant,

New York Life Insurance [NYL], stemming from its attempt

to cancel coverage under a group health insurance policy

issued to Smith. On March 5, 1990, the court entered a

preliminary injunction requiring the defendant to continue

paying medical expenses of Paul Markham Smith and, in ad-

dition, requiring the plaintiffs to post a bond equal to the

funds expended by the defendant. [Record No. 34]. On

August 6, 1990, the court entered an order granting summary

judgment in favor of the defendant, finding that the plain-

tiffs’ state law causes of action in contract and tort were

preempted by the Employee Retirement Income Security Act

of 1974 [ERISA], 29 U.S.C. § 1001 et seg. [Record No. 59].

Upon interlocutory appeal of the court’s summary judgment

ruling, the Sixth Circuit, while not disagreeing with the

court's judgment, remanded this case for consideration of the

facts in light of FMC Corp. v. Holliday, ___ U.S. ___. 111

S.Ct. 403 (1990), and Jngersoll-Rand v. McClendon. 498 U.S.

——., 111 S.Ct. 478 (1990). [Record No. 94].

STATEMENT OF FACTS

For the sake of brevity, the court will refrain from recount-

ing the relevant facts in their entirety, but will simply refer to

them as recited in the previous memorandum opinion and

order entered on August 6, 1990. [Record No. 59].

DISCUSSION

As a preliminary matter, the court will refrain from a

detailed analysis of why the group insurance plan in the pres-

iia aaa aaa

28a

ent action is an employee welfare benefit plan within the

terms of ERISA. Instead, the court will simply refer to its

analysis as stated in the previous order of August 6, 1990, as

the still applicable rationale for this finding. Neither FMC

nor Ingersoll-Rand dictates finding to the contrary, and the

court will now choose to focus its attention on the issue of

whether the plaintiff's state law claims are pre-empted under

ERISA.

Three clauses of ERISA bear distinct applicability to the

facts of the present case: the preemption clause, the saving

clause and the deemer clause. The Supreme Court, in FMC,

clearly explained the relationship of the three by stating that:

We indicated in Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724, 105 S.Ct. 2380, 85

L..Ed.2d 728 (1985), that these provisions are not a

model of legislative drafting.’ (citations omitted).

Their operation is nevertheless discernible. The pre-

emption clause is conspicuous for its breadth. It

establishes as an area of exclusive federal concern the

subject of every state law that ‘relate[s] to’ an

employee benefit plan governed by ERISA. The sav-

ing clause returns to the States the power to enforce

those state laws that ‘regulat{e] insurance, except as

provided in the deemer clause. Under the deemer

clause, an employee benefit plan governed by ERISA

shall not be ‘deemed’ an insurance company, an in-

surer, or engaged in the business of insurance for the

purposes of state laws ‘purporting to regulate’ in-

surance companies or insurance contracts.

FMC, 111 S.Ct. at 407.

As discussed above, ERISA pre-empts any state law that

“relates to” an employee welfare benefit plan governed by

ERISA. FMC, 111 S.Ct. at 407. “A law ‘relates to’ an

employee benefit plan, in the normal sense of the phrase, if it

has a connection or reference to such a plan.” Cathey v.

Metropolitan Life Ins. Co., No. C-8323, slip op. at 5-6 (Texas

™ -

29a

Supreme Court Jan. 30, 1991) (citing Shaw v. Delta Air

Lines, Inc., 463 U.S. 85, 96-97 (1983)). The language “relates

to” was construed rather broadly in Ingersoll-Rand to include

a cause of action for wrongful termination where it was based

on the allegations that the employer fired the employee to

avoid paying benefits under a pension plan. Ingersoll-Rand

Co. v. McClendon, 111 S.Ct. 478 (1990).

In the present case, the plaintiffs brought this action assert-

ing violations of Kentucky contract and tort law in the ad-

ministration of funds under Smith's employee benefit plan.

Thus, the plaintiffs’ causes of action “relate to” an employee

benefit plan governed by ERISA and are subject to pre-

emption. See FMC, 111 S.Ct. at 407. This finding is war-

ranted regardless of the saving clause of ERISA, which in

other cases allows the state of Kentucky to retain authority

over the state law claims.

In FMC the Supreme Court clearly discussed both the sav-

ing clause and the deemer claim. teaching that a party might

avoid pre-emption of state law claims. In that case the

Supreme Court stated that:

We read the deemer clause to exempt self-funded

ERISA plans from state laws that ‘regulat[e] in-

surance’ within the meaning of the saving clause. By

forbidding States to deem employee benefit plans ‘to

be an insurance company or other insurer... or to

be engaged in the business of insurance.’ the deemer

clause relieves plans from state laws ‘purporting to

regulate insurance.’ As a result, self-funded ERISA

plans are exempt from state regulation insofar as that

regulation ‘relates to’ the plans. State laws directed

toward the plans are pre-empted because they relate

to an employee benefit plan but are not ‘saved’

because they do not regulate insurance. State laws

that directly regulate insurance are ‘saved’ but do not

reach self-funded employee benefit plans because the

plans may not be deemed to be insurance companies,

other insurers, or engaged in the business of insurance

for purposes of such state laws.

30a

FMC, 111 S.Ct. at 409.

Although the present case does not involve a self-funded in-

surance plan, the language of FMC still applies. The state

law claims brought by the plaintiffs are pre-empted because

they relate to the administration of an employee welfare

benefit plan. Because the deemer clause specifies that suchi a

plan cannot be considered insurance, the state law claims are

not saved since they do not regulate an insurance plan as

described in FMC.

Thus, based on the law as discussed in FMC and Ingersoll-

Rand, the court concludes that the defendant is entitled to

summary judgment in this matter.

CONCLUSION

Having considered the record in light of the “new era”

criteria applicable to summary judgment, see Street v. J.C.

Bradford and Company, 886 F.2d 1472 (6th Cir. 1989);

Darnell v. Campbell County Fiscal Court, 731 F. Supp.

1309, 1311-12 (E.D. Ky. 1990), the court concludes that the

defendant is entitled to summary judgment on the issue of

pre-emption of the state law claims.

Accordingly, IT IS ORDERED:

(1) That the defendant’s motion for summary judgment

be, and the same hereby is, GRANTED.

(2) That the plaintiffs shall be granted until April 29,

1991, to file an amended complaint.

(3) That the preliminary injunction previously entered in

this action will remain in effect pending resolution of this ac-

tion.

This the 27th day of March, 1991.

s/ JOSEPH M. HOOD,

JUDGE

Date of Entry and Service: Mar. 28, 1991

3la

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

Civil Action No. 90-32

Judge Joseph M. Hood

INTERNATIONAL RESOURCES, INC.:

and LARRY E. SMITH:

Plaintiffs

NEW YORK LIFE INSURANCE COMPANY.

Defendant.

ORDER

(Filed May 7, 1991)

Upon motion of the Plaintiffs and the court being suffi-

ciently advised, it is hereby

ORDERED that the Memorandum Opinion and Order

entered herein on March 28, 1991. be and is hereby amended

to include the following additional paragraph:

This Order involves controlling questions of law as to

which there is substantial ground for difference of

opinion, and an immediate appeal from this Order

may materially advance the ultimate termination of

the litigation. This determination is made pursuant to

28 U.S.C. § 1292 (b) to permit application for an im-

mediate interlocutory appeal from this Order.

Entered this 7th day of May, 1991].

s/ JOSEPH M. HOOD

JUDGE, UNITED STATES

DISTRICT COURT

ac i nit i’ iS i ah

32a

APPENDIX E

NOT RECOMMENDED FOR FULL-TEXT

PUBLICATION

Sixth Circuit Rule 24 limits citation to specific situations.

Please see Rule 24 betore citing in a proceeding in a court in

the Sixth Circuit. If cited, a copy must be served on other

parties and the Court.

This notice is to be prominently displayed if this decision is

reproduced.

Nos. 90-5434, 90-6411

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

INTERNATIONAL RESOURCES, INC.;

LARRY E. SMITH,

Plaintiffs- Appellees,

NEW YORK LIFE INSURANCE COMPANY,

Defendant-Appellant.

Before: MARTIN, JONES, and WELLFORD, Circuit Judge

ON APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE EASTERN DISTRICT OF KENTUCKY

(Filed January 22, 1991)

PER CURIAM. While not disagreeing with the district

court’s judgment, we remand this case so that the district

court may consider for the first time the facts of this case in

light of FMC Corp. v. Holliday, 110 S. Ct. 2203 (1990), and

—

33a

Ingersoll-Rand v. McClendon, 498 U.S. 115.2. 3

(1990).

Pending that resolution the temporary injunction entered

by the district court shall remain in effect.

34a

APPENDIX F

Nos. 90-5434 90-8562

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

INTERNATIONAL RESOURCES, INC.;

LARRY E. SMITH;

Plaintiffs-Appellees,

¥.

NEW YORK LIFE INSURANCE COMPANY,

Defendant-Appellant.

INTERNATIONAL RESOURCES, INC.;

LARRY E. SMITH

Plaintiffs-Petitioners

NEW YORK LIFE INSURANCE COMPANY

Defendant-Respondent

ORDER

(Filed November 9, 1990)

Upon consideration of the plaintiffs’ motions to consolidate

the above-styled actions, to expedite their interlocutory ap-

peal and for leave to file supplemental briefs.

It is therefore ORDERED that the petition for permission

to appeal be, and it hereby is, granted.

It is further ORDERED that the remaining relief being

sought be, and it hereby is, granted. The parties are directed

to file supplemental briefs as soon as possible, but no later

than November 28, 1990.

ENTERED BY ORDER OF THE COURT

is)’ LEONARD GREEN,

Clerk

35a

APPENDIX G

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

Civil Action No. 90-32

INTERNATIONAL RESOURCES, INC., ET AL.,

Plaintiffs

VS.

NEW YORK LIFE INSURANCE COMPANY,

Defendant.

ORDER

(Filed September 4, 1990)

The plaintiff, by counsel, having moved the court to recon-

sider its Memorandum Opinion and Order dated August 6,

1990, [Record No. 62}. Fully briefed [Record Nos. 63, 65 and

67] and ably argued, the matter is ripe for decision.

The pertinent facts are set forth in the Memorandum Opin-

ion and Order dated August 6, 1990 [Record 59]. For the sake

of brevity, they need not be recounted here.

The first question is whether the group health insurance

plan issued by New York Life Insurance Company [New York

Life] is an employee welfare benefit plan and, as such,

covered by the Employee Retirement Income Security Act of

1974 [ERISA], 29 U.S.C. § 1001, et seq. This issue was fully

discussed and considered earlier, the court holding that the

plan in question is an ERISA welfare plan. The Fifth Circuit's

recent decision in Memorial Hospital System v. Northbrook

Life Insurance Company, 904 F.2d 236, 239-243 (5th Cir.

1990), serves to reinforce that holding.

36a

The second issue is whether some of the plaintiffs’ claims

fall with the savings clause of ERISA, 29 U.S.C.

§ 1144(B)(2)(A). Again, this issue was fully discussed and con-

sidered earlier, the court holding that they were not. See,

e.g., Pilot Life Insurance Company v. Dedeaux, 481 U.S. 41,

51-52, 54 and 56-57 (1987); Varholla v. Doe, 820 F.2d 809,

816-17 (6th Cir. 1987). Nothing further be said.

The court is aware that Kentucky law provides policy-

holders various remedies in disputes with their insurance

companies. See, e.g., Curry v. Fireman’s Fund Insurance

Company, 784 S.W. 2d 176 (Ky. 1989); State Farm Mutual

Auto Insurance Company v. Reeder, 763 S.W. 2d 116 (Ky.

1989); Stevens v. Motorists Mutual Insurance Company, 759

S.W. 2d 819 (Ky. 1988). The court is equally aware that

ERISA does not provide remedies of the same breadth, see,

e.g., Varholla, 820 F.2d at 816-817, but believes that it is up

to the legislative branch to expand the remedies available to

persons who establish an ERISA violation.

Accordingly, the plaintiffs’ motion for reconsideration is

granted, but the defendant’s motion for summary judgment is

granted nevertheless. The plaintiffs shall file an amended

complaint, one setting forth an ERISA claim, within ten days

from the date of entry of this order.

IT IS SO ORDERED this the 4th day of September, 1990.

/s) JOSEPH M. HOOD,

JUDGE

Date of Entry and Service: Sept. 4, 1990

37a

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

No. 90-32

Judge Joseph M. Hood

INTERNATIONAL RESOURCES, INC.::

and LARRY E. SMITH;

Plaintiffs,

NEW YORK LIFE INSURANCE COMPANY.

Defendant.

ORDER

(Filed October 25, 1990)

Upon the motion of the Plaintiffs, and the court being duly

advised, it is hereby

ORDERED that the Memorandum Opinion and Order

entered herein on August 6, 1990 and the Order entered

herein on September 4, 1990, be and are hereby amended to

include the following additional paragraph:

This Order involves controlling questions of law as to

which there is substantial ground for difference of

opinion, and an immediate appeal from this Order

may materially advance the ultimate termination of

the litigation. This determination is made pursuant to

28 U.S.C. § 1292(b) to permit application for an im-

mediate interlocutory appeal from this Order,

Entered this 25th day of October, 1990.

/s/) JOSEPH M. HOOD,

JUDGE, UNITED STATES

DISTRICT COURT

harem

38a

APPENDIX H

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE

CIVIL ACTION NO. 90-32

INTERNATIONAL RESOURCES, INC., ET AL.,

Plaintiffs

VS.

NEW YORK LIFE INSURANCE COMPANY,

Defendant

MEMORANDUM OPINION AND ORDER

(Filed August 6, 1990)

The plaintiffs, International Resources, Inc. [International

Resources| and Larry Smith [Smith], have brought the above-

styled diversity action alleging violations of Kentucky con-

tract and tort law by the defendant, New York Life Insurance

[New York Life], stemming from its attempt to cancel

coverage under a group health insurance policy issued to

Smith. New York Life has moved to dismiss the plaintiffs’

claims, asserting that they are preempted by the Employee

Retirement Income Security Act of 1974 [ERISA], 29 U.S.C.

§ 1001 et seq. As later noted by the defendant, both parties

have relied upon evidence outside the pleadings. The motion

will, accordingly, be construed by the court as one for sum-

mary judgment.

International Resources was incorporated in Tennessee in

1982 by Smith and his wife as a small coal brokerage business.

Smith is the corporation’s president and has been the sole full-

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time employee at least since 1986. Although his wife initially

owned shares in the corporation, Smith now holds all of that

stock. [Deposition of Larry Smith at 27]. The only other

shareholder is an investor who was allowed to purchase

twenty-five percent of the corporation’s stock in 1983 after

Smith’s son, Paul Markham Smith [Mark], was involved in a

serious automobile accident. [Depo. at 25-26]. The substan-

tial continuing medical bills for Mark, who was left a

quadriplegic by the accident, are at the center of this

coverage dispute.

New York Life provided medical insurance to Smith and

his dependents under a group coverage plan offered through

Group Marketing Services Trust Administration [GMS]. GMS

was a multiple employer trust which arranged with pro-

viders, such as New York Life, to offer discounted group in-

surance to a “group” of small, unrelated companies which

would not otherwise be eligible for such coverage. Interna-

tional Resources first obtained employee health insurance, as

well as life and disability coverge, through GMS in 1982. At

that time, International Resources had six employees, in-

cluding Smith, whose insurance was paid by the company as

an automatic employee benefit. [Depo. at 33-36].

After Mark’s accident, Smith was unable to sustain business

at International Resources, resulting in the eventual exodus of

all other employees. [Depo. at 87-88]. Four employees left by

February, 1984. [Depo. at 49], The fifth, Pamela Raines,

worked as a secretary on a part-time basis through Septem-

ber, 1987. [Depo. at 88]. Smith’s daughter was, as of

February, 1990, employed on a part-time basis. [Depo. at

86-87]. It is unclear when Ms. Raines ceased to be included

under the group health insurance policy or whether Smith’s

daughter was insured individually through International

Resources.

New York Life became the GMS insurance provider begin-

ning on March 1, 1986. [Depo., Defendant’s Exhibit 12]. In

August or September, 1988, Smith was notified that New

York Life was terminating its coverage through GMS. Inter-

national Resources terminated its GMS trust participation in

ok uno a oma aera

40a

December, 1988. The plaintiffs, apparently unable to obtain

comparable coverage, brought this action against New York

Life seeking continued insurance benefits for Mark under the

policy’s terms for totally disabled persons and its one million

dollar maximum lifetime benefit.

The court is limited at this point to review of the defen-

dant’s assertion that the insurance coverage provided through

International Resources is a “plan” under ERISA, thus

preempting the plaintiffs’ state law claims. The plaintiffs

argue that International Resources’ act of purchasing in-

surance is insufficient to establish an ERISA plan. Regardless,

the plaintiffs believe their claims are not preempted by the

Act.

Where ERISA is applicable, it supercedes, with few excep-

tions, all state law relating to employee beneift plans. 29

U.S.C. § 1144; Metropolitan Life Ins. v. Taylor, 481 U.S. 58

(1987). The Act covers “employee welfare benefit plans,”

which are defined as:

[A]ny plan, fund, or program which .. . is

established or maintained by an employer or by an

employee organization, or by both, . . . for the pur-

pose of providing for its participants or their

beneficiaries, through the purchase of insurance or

otherwise, (A) medical, surgical, or hospital care or

benefits, or benefits in the event of sickness, accident,

_disability, death, or unemployment... .

29 U.S.C. § 1002(1).' The central question in this case is

whether the insurance obtained by International Resources

for its employees through GMS constitutes “establishing or

maintaining’ a plan of insurance, or whether obtaining

! The federal Act is further limited to those employers “engaged in com

merce or in any industry or activity affecting commerce” which establish or

maintain benefit plans. 29 U.S C. § 1003(a)(1). This prerequisite is not in

question here.

4la

coverage from a group marketing plan is simply the purchase

of a policy of insurance not within the federal Statute.?

The plaintiffs’ position against ERISA coverage is grounded

in the fact that International Resources had nothing to do

with the insurance plan but to write a check to GMS. The

company had no voice in management and operation of the

plan. It is argued that ERISA was not intended to extend such

circumstances.

The plaintiffs primarily rely on Taggart Corp. v. Life and

Health Benefits Administration, Inc., 617 F.2d 1208 (5th Cir,

1980), cert. denied, 450 U.S. 1030 (1981). The Taggart court

held that neither the group market service itself, nor the

employer's subscription to such a service constitute the

establishment of an ERISA “plan”. Id. at 1211. “[W]e cannot

believe that that Act regulates bare purchases of health in-

surance where, as here, the purchasing employer neither

directly nor indirectly owns, controls. administers or assumes

responsibility for the policy or its benefits.” Taggart, 617 F.2d

at 1211.

The Taggart court reasoned that the purpose of ERISA was

to deter abuses of trust assets. particularly in private pension

plans. It was further noted that Congress has elsewhere,

specifically under tax law, treated health insurance as distinct

from health plans. Thus, the court concluded that the use of

the word “plan” under ERISA, in light of the Act's protective

purpose, involves a broader concept than the pure insurance

2 The parties separately briefed the issue of whether Smith, as majority

shareholder, president, and sole full-time employee could be considered an

“employee” in analyzing whether an ERISA plan existed. Kwatcher vy.

Massachusetts Service Employees Pension Fund. 879 F.2d 957 (Ist Cir.

1989); Dodd v. John Hancock Mutual Life Ins. Co., 688 F.Supp. 564 (E.D.

Cal. 1988). The defendant has pointed out that the Sixth Circuit recognizes

the corporation to be the “employer” distinct from its owner-chief executive.

See Scarbrough v. Perez, 870 F.2d 1079, 1083 (6th Cir. 1989) (holding that

owner-executives are not personally liable for delinquent contributions to an

ERISA plan). This analysis is consistent with the holding in Dodd. Thus,

Smith must be considered an “empioyee™ for this analysis.

42a

transactions involving no more than “making payments to a

purveyor of insurance”. Taggart, 617 F.2d at 1211.

This conclusion in Taggart was rejected by the court in

Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en

banc), the principle case relied upon by the defendant.

Although the Donovan court agreed that the group marketing

service itself does not qualify as an ERISA “plan”, it went on

to hold that surrounding circumstances may prove a plan

under ERISA to have been “established” by an employer's

subscription to a group marketing plan. Jd. at 1373.

The court recognized, consistent with Taggart, that no

single act, such as the purchase of insurance, conclusively

establishes a plan. See also Terry v. Protective Life Ins. Co.,

717 F. Supp. 1303, 1205 (S.D. Miss. 1989) (insufficient facts

to show employer's purchase of group insurance established a

plan). In fact, an employer may be involved in a plan, such as

permitting an insurer to publicize a program, collecting

premiums through payroll deduction, and remitting those

premiums to the insurer, without “establishing” a plan. 29

C.F.R. § 2510.3-1(j); Donovan, 688 F.2d at 1373 n.11.

The Donovan rule requires a determination of “whether

from the surrounding circumstances a reasonable person

could ascertain the intended benefits, beneficiaries, source of

financing, and procedures for receiving benefits.” Donovan,

688 F.2d at 1373. The court went on to point out that “[s]ome

essentials of a plan . . . can be adopted, explicitly or implicit-

ly, from sources outside the plan, fund, or program — e.g.,

an insurance company’s procedure from_ processing

claims. . . .” Donovan, 688 F.2d at 1373.

The result in Donovan, and subsequent cases adopting its

view, indicates that an employer can establish an ERISA plan

“rather easily.” See Credit Managers Ass'n v. Kennesaw Life

& Accident Ins. Co., 809 F.2d 617, 625 (9th Cir. 19&7). The

Donovan court found numerous subscribers to the multiple

employer trust in that case to have established ERISA plans.

Some employers had furnished insurance for employees pur-

suant to an agreement or a continuing practice, and others

purchased benefits for a substantial percentage of a class of

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employees under circumstances tending to show an an-

ticipated continuing furnishing of health benefits. Donovan.

688 F.2d at 1274-75.

Although Taggart has been accepted by other courts for its

conclusion as to the ERISA status of multiple employer in-

surance trusts, see, e.g., Matthew 25 Ministries, Inc. v. Cor-

coran, 771 F2d 21 (2nd Cir. 1985), it is the Donovan analysis

which this court finds compelling in the establishment of an

ERISA plan by employers. The Donovan test promotes an

analysis of the employer's actions, rather than the blanket

preclusion called for in Taggart. More importantly, the in-

clusive approach of Donovan is consistent with the broad

scope of ERISA.

In Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46 (1987),

the United States Supreme Court stressed that the “express

preemption provisions of ERISA are deliberately expansive,”

noting Representative Dent's remark that “ ‘reservation to

Federal authority [of] the sole power to regulate the field of

employee benefit plans’ as ERISA’s ‘crowning achievement.” ”

The intent to invoke broad federal preemptive power over

benefit plans would be meaningless if the “establishment” of

an ERISA plan was limited. In fact, the type of insurance

plan in which International Resources enrolled is “a common

method by which employers provide health and other welfare

benefits to their employees, and not one that has heretofore

been thought to take a benefits plan out of ERISA.”

Brundage-Peterson v. Compcare Health Services Ins. Corp.,

877 F.2d 509, 511 (7th Cir. 1989).

In Brundage-Peterson, the employee argued that a medical

insurance plan offered by her employer to virtually all

employees, paid for by the employer, was not an ERISA plan.

The employer contracted with two insurance providers to of-

fer health insurance at terms specified in the contracts, in-

cluding the price. The employees were given the option be-

tween insurance plans and the employer paid the employee's

individual premium. The court held this “rather barebones

plan” to be an ERISA plan, finding that:

44a

[a]n employer who creates by contract with an in-

surance company a group insurance plan and

designates which employees are eligible to enroll in it

is outside the safe harbor created by the Department

of Labor regulation [29 C.F.R. § 2510.3-1(j)]. This is

especially clear when in addition, as was done here,

the employer helps defray the employee's insurance

COM wn ss

Brundage-Peterson, 877 F.2d at 511.

The court in Brundage-Peterson particularly noted that the

statute “by its express terms encompasses the provision of such

benefits by means of insurance.” 877 F.2d at 511. The ERISA

definition of “employee welfare benefit plan” specifically

allows that the plan for providing health benefits may be

established “through the purchase of insurance or otherwise.”

29 U.S.C. § 1002(1).

The circumstances of this case nearly parallel those in

Brundage-Peterson and Donovan. International Resources

contracted with a provider for employee insurance coverage,

including selection of terms and price. All employees were

automatically covered and the company paid the insurance

premiums. The intended benefits, the class cf beneficiaries,

the source of financing, and the procedure for receiving

benefits are all easily ascertainable. Thus, International

Resources established an ERISA plan by contracting with

GMS.

The plaintiffs believe that since Smith is now the sole full-

time employee, the “plan” was merely the purchase of in-

surance by an individual. However, there is no authority for

the proposition that a health insurance plan, once covered by

ERISA, ceases to be within the scope of the Act because the

number of employees dwindled under adverse economic cir-

cumstances. The company did not drop the insurance plan, it

lost the employees. Continued enrollment through Interna-

tional Resources sustained the plan. There is ne indication in

the record that the same insurance plan would not have been

offered to another full-time employee if hired.

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The plaintiffs contend that, regardless of the existence of an

ERISA plan, certain of their claims are not preempted

because the claims relate to “benefits” as opposed to the

“plan.” They point out that this distinction in terminology

was recognized by the United States Supreme Court in Fort

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

the interpretation of Fort Halifax urged by the plaintiffs has

been rejected by the Sixth Circuit. McMahan v. New

England Mutual Life Ins. Co., 888 F.2d 426 (6th Cir. 1989).

The court, quoting Fort Halifax, noted that even state laws

relating to benefits have been held preempted by ERISA

“where the state law created the prospect that an employer's

administrative scheme would be subject to conflicting re-

quirements.” McMahan, 888 F.2d at 428 (quoting Fort

Halifax, 482 U.S. at 10.)

The McMahan court went on to hold that “[wle think it

clear that subjecting an ERISA fiduciary to the vagaries of

state contract law regarding its benefits decisions would

create the very real prospect that the fiduciary’s ad-

ministrative scheme would be subject to conflicting re-

quirements in the various states.” 888 F.2d at 429. The same

principle is applicable to the plaintiffs’ claims in this instance.

The plaintiffs plead that the ERISA preemption leaves

them with less protection against the insurer’s refusal to pay

benefits than under state law, despite the remedial purpose of

the Act. Regardless, preemption is the intended result of Con-

gress in circumstances such as this. The court is constrained

by the Act and regulations thereunder to rule in conformity

with them, despite what the court in Brundage-Peterson

terms the “strangeness” of transforming such contract

disputes into suits under ERISA.

The defendant agrees that the plaintiffs can restructure

their complaint on these facts to conform with ERISA. Fur-

ther, such an amendment will appropriately frame the merits

under ERISA of this insurance coverage dispute. Accordingly,

IT IS ORDERED HEREIN AS FOLLOWS:

(1) that the defendant’s motion for summary judgment

be, and the same hereby is, GRANTED.

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(2) that the plaintiffs shall be granted until August 24,

1990 to file an amended complaint.

This the 6th day of August, 1990.

/s/ JOSEPH M. HOOD

JUDGE

Date of Entry and Service: August 6, 1990

47a

APPENDIX I

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE

CIVIL ACTION NO. 90-32

INTERNATIONAL RESOURCES, ING. ET AL..,

PLAINTIFFS,

NEW YORK LIFE INSURANCE COMPANY.

DEFENDANT.

MEMORANDUM OPINION

(Filed March 5, 1990)

This matter is before the court on the motion of plaintiffs

for preliminary injunction. The defendant has filed a

response objecting to the motion, to which the plaintiffs have

filed a reply. The Court conducted a hearing in this matter on

March 2, 1990.

FACTUAL BACKGROUND

The plaintiffs filed this action seeking declaratory and

other relief for injuries arising out of the attempted cancella-

tion of a group policy issued by defendant, New York Life In-

surance Company [“New York Life”]. Plaintiff Larry Smith

and his dependents (including his quadriplegic son, Mark

Smith) are insured under the policy for major medical! ex-

penses. The plaintiffs seek a declaration that the purported

cancellation of the group policy does not relieve New York

Life of liability for subsequent hospital, medical, nursing and

home health care expenses incurred on behalf of Mark as a

48a

result of a condition that occurred and existed prior to the

purported cancellation of the polity.

The plaintiffs also seek compensatory and_ punitive

damages from New York Life for breach of its insurance con-

tract, for bad faith and breach of fiduciary duty, for breach

of an implied covenant of good faith and fair dealing, for

various statutory violations, and for violation of the public

policy against illusory insurance contracts.

This Court previously sustained the plaintiffs’ motion for a

temporary restraining order, and an agreed order was entered

whereby New York Life was to pay the medical expense in-

curred for Mark during the period up through the hearing on

March 2, 1990.

The plaintiff Mr. Smith is president of the plaintiff Inter-

national Resources, Inc. [“International Resources”]. In

November 1982, International Resources contracted with Life

Insurance Company of North America [“INA”] for com-

prehensive group medical insurance coverage for Interna-

tional Resources’ employees effective December 1, 1982. This

insurance was arranged by Group Marketing Services, Inc.

(“GMS”"], adminsitered by Group Marketing Services Trust

Administration [“GMS Trust”] and underwritten by INA.

The coverage provided by INA was described in a cer-

tificate or booklet given to the plaintiffs. On April 1, 1983,

Trans Pacific Life Insurance Company [Trans Pacific” | suc-

ceeded INA as the underwriter on the insurance provided

through GMS. Trans Pacific did not supply a separate booklet

but continued to provide coverage as described in the initial

booklet from INA.

On May 8, 1983, Smith’s son and dependent, Mark, was

severely injured in an automobile accident which left him

completely immobile, unable to speak, and in need of

24-hour nursing and home health care.

On March 1, 1986, New York Life succeeded Trans Pacific

as the underwriter on the insurance coverage provided

through GMS. New York Life mailed the Certificate of In-

surance to International Resources. All premiunw were paid

at that time to New York Life.

49a

New York Life paid the costs and expenses of medical care

for Mark, subject to applicable deductibles and co-payments,

until October 1, 1989. Since that time, New York Life had

refused to pay the expenses for Mark’s medical treatment,

which costs approximately $100,000 per year. New York

Life’s refusal to pay is based on its cancellation of the group

policy, purportedly effective October 1, 1988, with continua-

tion benefits through October 1, 1989.

Plaintiffs argue that the insurance contract issued by New

York Life promised lifetime benefits of up to $1,000,000. As

of the date New York Life ceased payments, approximately

$425,000 in benefits remained to be supplied toward the one

million dollar figure. The current issue before the Court

essentially focuses on the $1,800-$2,000 per week cost of car-

ing for Mark while this litigation is pending.

Various affidavits, depositions, testimony and exhibits have

been offered as to the pertinent facts of this matter. The

Court has reviewed this matter and concludes that plaintiffs

have demonstrated entitlement to a preliminary injunction.

In this regard, the Court preliminarily finds that qualified

home nursing care is difficult to find and Smith is not able to

compete with other potential employers because of the cir-

cumstances in which New York Life has placed him.

One nurse has already left her position in caring for Mark

and his other nurses are expected to seek more secure employ-

ment shortly. Currently, Mark’s care is down to two nurses

(an LPN and an RN). Since one nurse had been ill recently,

Smith’s wife and one nurse have been caring for Mark. Mark’s

care entails a great deal of work since Mark is unable to per-

form any task for himself. In fact, Mark must be moved

around and exercised approximately every 12 hours to avoid

sores associated with long-term bed confinement.

The state of North Carolina has provided some limited

Medicaid benefits, called Home Health Aid. This consists of

assistants who visit mark only Monday through Friday. They

can only bathe and dress Mark but apparently cannot ad-

minister food, water or some medications. Medicare will ap-

parently not pay any bills for private duty nursing. Mr. Smith

a ace eee

50a

testified that his experience has shown that $8,000 per month

for private duty nursing is cheaper than employment of nurs-

ing services.

Plaintiffs have submitted the affidavit of Mark’s attending

physician, Dr. Jacqueline K. DuSold. Dr. DuSold states that

Mark “requires individualized nursing and medical attention

on a daily and routine basis.” The defendant does not appear

to contest that the home nursing care is medically necessary.

Dr. DuSold also emphasizes the problems generated by turn-

over in Mark’s caretakers, which can result from insecurity as

to financial resources.

D.SCUSSION

The issuance of a preliminary injunction centers on a well-

known four-prong test:

1) Whether the movant has shown a strong or

substantial likelihood or probability of success on the

merits;

2) Whether the movant has shown irreparable harm

or injury;

3) Whether the preliminary injunction would cause

substantial harm to others; and

4) Whether the public interest would be served by

issuing the preliminary injunction.

USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 98

(6th Cir. 1982). These factors are to be balanced by the Court

in arriving at its decision. .

A. Plaintiffs Have Shown Substantial Likelihood

of Success on the Merits

The defendant argues in its response to the motion that this

matter is controlled by the provisions of ERISA. However,

although this Court is not certain that ERISA applies to the

circumstances of this insurance policy, the Cou:t feels the

5Sla

plaintiffs have shown a substantial likelihood of success on the

merits from within the four corners of the insurance contract,

notwithstanding application of ERISA. Therefore, the Court

does not find it necessary to treat the ERISA issues at this

time.

Plaintiffs appear to be entitled to relief against New York

Life for breach of the express provisions of the insurance con-

tract. The New York Life insurance contract provides that

New York Life will pay to Smith lifetime benefits for covered

medical expenses up to $1,000,000. As of the date New York

Life ceased paying, approximately $575,000 had been paid,

leaving an additional $425,000 in benefits to be supplied in

accordance with the insurance contract.

The New York Life Certificate states on page 6 under the

heading “When Does Coverage End?,” as follows:

All coverage ends when you cease to be eligible.

Coverage for any of your insured dependents ends

when that person ceases to be eligible. However, if a

person is totally disabled when coverage ends, benefits

may continue for covered expenses due to the condi-

tion which caused the disability. [Emphasis added].

The New York Life Certificate also states on page 48 under

the heading “Effect of Prior Plan Coverage” that “the main

purpose is to avoid gaps in coverage that might otherwise oc-

cur because of the change in plans.” It goes on to explain at

page 50 that for a dependent (such as Mark) who is confined

at home on the Plan’s effective date, New York Life will pay

benefits as follows: “MAJOR MEDICAL AND HOSPICE

CARE INSURANCE — The amount the prior plan would

have paid.”

New York Life’s Certificate provided that benefits were

continued under its policy. The coverage continued by New

York Life can be found in the booklet provided by INA,

' The defendant has filed a motion to dismiss regarding the application of

ERISA.

52a

under which INA and Trans Pacific? had paid benefits for ap-

proximately three years before New York Life took over, and

which similarly promised a “maximum lifetime benefit” of $1

million. The INA coverage, incorporated by the New York

Life booklet’s reference to what “the prior plan would have

paid,” also provided:

If an unmarried dependent child . . . is physically in-

capable of self-sustainiig employment on the date he

would otherwise cease to be a “dependent” as defined

herein, an Individual’s insurance with respect to such

dependent child shall not terminate as long as the In-

dividual’s insurance remains in force and as long as

such incapacity continues.

INA Booklet, at 7 (emphasis added).

Given these express terms of the New York Life contract

(and the INA certificate it incorporated by reference), New

York Life appears obligated to provide the coverage suggested

by the plaintiffs. Therefore, the plaintiffs have met their

burden of demonstrating a probability of success on the

merits. Furthermore, to the extent defendant argues that

other language in the insurance contract allows for complete

cancellation of the policy, the plaintiffs are entitled to have

such ambiguity resolved in their favor pursuant to well-

accepted principles of contract construction.

B. Plaintiffs Have Shown Irreparable Injury

The plaintiffs have clearly shown that irreparable injury

will occur if New York Life is not enjoined from refusing to

pay Mark’s medical expenses. Mark’s health demands

generate a great deal of expenses. The loss of these funds

would impose substantial detriment to the maintenance of

Mark’s medical needs.

2 Trans Pacific did not issue its own booklet but continued to provide

coverage under the terms of the INA certificate.

53a

Even more important is the effect that New York Life's

failure to pay for Mark's care is having on Smith's ability to

attract and retain quaiified nurses to care for Mark. The

employment to care for Mark is no longer perceived as being

stable or secure because of the lack of insurance coverage, and

has made it difficult for Mr, Smith to compete with other

potential employers for the same nurses.

Dr. DuSold’s affidavit demonstrates that interruption of

this medically necessary care can be expected, within a

reasonable medical probability, to cause Mark to suffer ir-

reversible physical care due to his fragile state. If New York

Life's conduct is not enjoined, it will shortly result in a total

lack of home nursing care for Mark, either through lack of

financial resources or through unavailability of nurses. Thus.

the need is crucial for the Court's injunction at this stage to

prevent irreparable harm for which there is no adequate

remedy at law.

C. Ne Harm Imposed on the Defendant

The isstiance of a preliminary injunction will not impose a

serious burden on the defendant in this case. The primary

reason is because even if the Court is incorrect regardiny the

probability of success on the merits. and the injunction is im-

providently granted, the defendant will be protected by the

posting of a bond by the plaintiffs for an amount equal to that

paid by the defendant pursuant to the injunction. Any loss

would only be monetary loss which can be fully protected by

a bond.

The injunction will only direct the defendant to continue

paying the amounts it has been paying since it assumed the

policy. The parties have previously discussed an incremental

bond where the plaintiffs would continually increase the

posted bond commensurate with the amount paid by the

defendants. The Court favors this approach in protecting the

rights of the defendant in the event the injunction is im

providently granted.

S4a

D. Other Considerations Do Not Militate Against Issuance

The issuance of a preliminary injunction is not hindered by

other considerations. For example, the issuance of a

preliminary injunction will not cause substantial harm to

others. The injunction will only affect the immediate parties

to this action. Furthermore, the public interest is not an issue

in this case. If anything, the public interest weighs heavily in

favor of issuing the preliminary injunction.

There is an obvious need in this case to expeditiously

resolve the merits. The type of harm posed in this case, in

conjunction with the likelihood of success on the merits, all

suggest the need for the injunctive relief requested. Further-

more, no public interests suggest otherwise.

CONCLUSION

For the foregoing reasons, it is hereby ORDERED that the

plaintiffs: motion for preliminary injunction is GRANTED. A

Preliminary Injunction in conformity with this Memorandum

Opinion shall be entered contemporaneously herewith.

This 5th day of March, 1990.

/s) KARL S. FORESTER,

JUDGE

Date of Entry and Service: March 6, 1990

55a

APPENDIX J

STATUTORY PROVISIONS

29 USC § 1002 Definitions

For purposes of this title:

(1) The terms “employee welfare benefit plan” and

“welfare plan” mean any plan, fund, or program which

was heretofore or is hereafter established or maintained by

an employer or by an employee organization, or by both,

to the extent that such plan, fund, or program was

established or is maintained for the purpose of providing

for its participants or their beneficiaries, through the pur-

chase of insurance or otherwise, (A) medical. surgical, or

hospital care or benefits, or benefits in the event of

sickness, accident, disability, death or unemployment, or

vacation benefits, apprenticeship or other training pro-

grams, or day care centers, scholarship funds, or prepaid

legal services, or (B) any benefit described in section 302(c)

of the Labor Management Relations Act, 1947 [29 USC

§ 186(c)] (other than pensions on retirement or death. and

insurance to provide such pensions).

56a

APPENDICES K, L, M

29 U.S.C. § 1144. Other laws

(a) Supersedure; effective date. Except as provided in

subsection (b) of this section, the provisions of this title and

title IV shall supersede any and all State laws insofar as they

may now on: hereafter relate to any employee benefit plan

described in section 4(a) [29 USC § 1003(a)] and not exempt

under section 4(b) [29 0 § 1003(b)]. This section shall take

effect on January 1, 1975.

(b) Construction and application. (1) This section shall not

apply with respect to any cause of action which arose, or

any act or omission which occurred, beiore January 1,

1975.

(2)(A) Except as provided in subparagraph (B), nothing in

this title shall be construed to exempt or relieve any per-

son from any law or any State which regulates in-

surance, banking, or securities.

(B) Neither an employee benefit plan described in sec-

tion 4(a Po USC § 1003(a)], which is not exempt under

section 4(b) [29 USC § 1003(b)] (other than a plan

snahiiaied simile for the purpose of providing death

benefits), nor any trust established under such a plan,

shall be deemed to be an insurance company or other in-

surer, bank, trust company, or investment company or

to be engaged in the business of insurance or banking for

purposes of any law of any State purporting to regulate

insurance companies, insurance contracts, banks, trust

companies, or investment companies.

Jia

APPENDIX N

[KRS] 304.12-230. Unfair claims settlement practices. — It

is an unfair claims settlement practice for any person to com-

mit or perform any of the following acts or omissions:

(1) Misrepresenting pertinent facts or insurance policy

provisions relating to coverages at issue.

(2) Failing to acknowledge and act reasonably promptly

upon communications with respect to claims arising under in-

surance policies:

(3) Failing to adopt and implement reasonable standards

for the prompt investigation of claims arising under insurance

policies;

(4) Refusing to pay claims without conducting a reason-

able investigation based upon all available information;

(5) Failing to affirm or deny coverage of claims within a

reasonable time after proof of loss statements have been com-

pleted;

(6) Not attempting in good faith to effectuate prompt,

fair and equitable settlements of claims in which liability has

become reasonably clear:

(7) Compelling insureds to institute litigation to recover

amounts due under an insurance policy by offering substan-

tially less than the amounts ultimately recovered in actions

brought by such insureds:

(8) Attempting to settle a claim for less than the amount

to which a reasonable man would have believed he was en-

titled by reference to written or printed advertising material

accompanying or made part of an application:

(9) Attempting to settle claims on the basis of an applica-

tion which was altered without notice to. or knowledge or

consent of the insured:

(10) Making claims payments to insureds or beneficiaries

not accompanied by statement setting forth the coverage

under which the payments are being made:

(11) Making known to insureds or claimants a policy of

appealing from arbitration awards in favor of insureds or

58a

claimants for the purpose of compelling them to accept set-

tlements or compromises less than the amount awarded in ar-

bitration;

(12) Delaying the investigation or payment of claims by

requiring an insured, claimant, or the physician of either to

submit a preliminary claim report and then requiring the

subsequent submission of formal proof of loss forms, both of

which submissions contain substantially the same informa-

tion;

(13) Failing to promptly settle claims, where liability has

become reasonably clear, under one portion of the insurance

policy coverage in order to influence settlements under other

portions of the insurance policy coverage; or

(14) Failing to promptly provide a reasonable explanation

of the basis in the insurance policy in relation to the facts or

applicable law for denial of a claim or for the offer of a com-

promise settlement. (Enact. Acts 1984, ch. 171, § 2, effective

July 13, 1984; 1988, ch. 225, § 19, effective July 15, 1988.)

59a

APPENDIX O

[KRS} 367.170. Unlawful acts. — (1) Unfair, false,

misleading, or deceptive acts or practices in the conduct of

any trade or commerce are hereby declared unlawful.

(2) For the purposes of this section, unfair shall be con-

strued to mean unconscionable. (Enact. Acts 1972. ch. 4. § 7:

1976, ch. 221, § 1.)

* * ” *

[KRS] 367.220. Action for recovery of money or property —

When action may be brought. — (1) Any person who pur-

chases or leases goods or services primarily for personal, fami-

ly or household purposes and thereby suffers any ascer-

tainable loss of money or property, real or personal, as a

result of the use or employment by another person of a

method, act or practice declared unlawful by KRS 367.170,

may bring an action under the Rules of Civil Procedure in the

circuit court in which the seller or lessor resides or has his

principal place of business or is doing business, or in the cir-

cuit court in which the purchaser or lessee of goods or services

resided, or where the transaction in question occurred, to

recover actual damages. The court may, in its discretion,

award actual damages and may provide such equitable relief

as it deems necessary or proper. Nothing in this subsection

shall be construed to limit a person’s right to seek punitive

damages where appropriate.

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APPENDIX P

[KRS] 304.12-010. Unfair competition — Unfair, deceptive

practices prohibited. — No person shall engage in this state in

any practice which is prohibited in this subtitle, or which is

defined therein as, or determined pursuant thereto to be, an

unfair method of competition or any unfair or deceptive act

or practice in the business of insurance. (Enact. Acts 1970,

ch. 301, subtitle 12, § 1.)

[KRS] 304.12-020. Advertisements in general. — No person

shall make or disseminate orally or in other manner any

advertisement, information, matter, statement or thing:

(1) Misrepresenting the terms of any policy or the benefits

or advantages thereof or dividends or share of surplus to be

received thereon, or setting forth false or misleading informa-

tion or estimates as to dividends or share of surplus previously

paid on similar policies.

(2) Using any name or title of any policy or class of

policies misrepresenting the true nature thereof.

(3) Setting forth any misleading representation or any

misrepresentation as to the financial condition of an insurer,

or as to the legal reserve system upon which any life insurer

operates.

(4) Containing any assertion, representation, or state-

ment with respect to the business of insurance or with respect

to any person in the conduct of his insurance business, which

is untrue, deceptive, or misleading. (Enact. Acts 1970, ch.

301, subtitle 12, § 2.)

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APPENDIX Q

[KRS] 304.18-110:

‘ ‘ ‘

(5) Group members have the right upon termination of

coverage under a group policy for any reason to have a con-

version health insurance policy providing substantially similar

benefits issued to the group member by the insurer upon

meeting the following conditions:

(a) The group member has been covered by the group

policy or any policy it replaced for at least three (3) months:

(b) The group member must make written application to

the insurer for conversion health insurance coverage not later

than thirty-one (31) days after notice pursuant to subsection

(9) of this section; and

semiannual, or annual premium, at the option of the appli-

cant, to the insurer not later than thirty-one (31) days after

notice pursuant to subsection (9) of this section.

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APPENDIX R

[KRS] 446.070. Penalty no bar to civil recovery. — A person

injured by the violation of any statute may recover from the

offender such damages as he sustained by reason of the viola-

tion, although a penalty or forfeiture is imposed for such

violation. (466).

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