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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1992
- **Citation:** 504 U.S. 973

## Text

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.

bo

16

19

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

A.

G.

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

VI

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

ix

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

]

2

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.

3
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

4

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

5

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

6

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.

7
REASONS FOR GRANTING THE WRIT

I.

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. . .

8

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-

9

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.

10

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.

1]

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

~~

12

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

a

13

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.

14
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

15

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.

16

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).

17

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

18

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.

19

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

20

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.

21

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.

22
¥.

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

a

23

“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.

24

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.

25

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.

26

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.

27
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

28

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.

29
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.
v.
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-

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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.

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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

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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.

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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

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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

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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.

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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

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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:

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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-

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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

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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

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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

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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

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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.”

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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.

a

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,
v.
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),
v.
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),
v.
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
7.
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,
v.
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
v.
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,
v.
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

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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-

39a

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_0509%3A1. Public record. Not legal advice.