Smith v. TX Children's Hosp ( 1996 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 95-20415
JACKIE SMITH,
Plaintiff-Appellee,
versus
TEXAS CHILDREN'S HOSPITAL,
Defendant-Appellant,
and
UNUM LIFE INSURANCE COMPANY,
Defendant.
Appeal from the United States District Court
for the Southern District of Texas
May 15, 1996
Before POLITZ, Chief Judge, and HIGGINBOTHAM and SMITH, Circuit
Judges.
HIGGINBOTHAM, Circuit Judge:
Texas Children's Hospital appeals the district court's order
remanding to state court a state-law fraudulent-inducement claim.
We must decide whether Smith has preserved a fraudulent-inducement
claim, and, if so, whether it is nevertheless preempted by the
broad federal reach of ERISA. We conclude that Smith's claim may
escape ERISA preemption if preserved, but vacate and remand because
of uncertainties in the proceedings below as to whether Smith has
actually preserved it.
I.
Jackie Smith alleges the following. She started working at
St. Luke's Hospital in February 1991 and qualified for insurance
benefits with St. Luke's by May 1991, after the elimination period
for preexisting conditions. Later that year, Texas Children's
Hospital, a sibling corporation of St. Luke's, persuaded Smith to
transfer her employment to Texas Children's by promising more pay,
a supervisory position, and the transfer of all of her employment
benefits, including long-term disability benefits. According to
Smith, Texas Children's made such assurances both orally and in
certain written documents. Smith transferred to Texas Children's
on October 1, 1991.
In October 1991, Smith was diagnosed with multiple sclerosis.
She was disabled by September 1992. Around August or September of
1992, Smith's supervisor suggested to Smith that it was unsafe for
her to continue working at Texas Children's, and that she would not
have trouble acquiring long-term disability benefits from UNUM Life
Insurance Company, the claims adjuster for Texas Children's. Smith
stopped working and was put on long-term disability in September
1992. She was terminated from employment in April 1993.
In January 1993, Smith received her first benefit check for
the period of December 11, 1992, to January 1, 1993. Immediately
thereafter, UNUM called Smith and told her not to cash the check.
UNUM had determined that the last day of Smith's elimination period
was December 31, 1991. UNUM found that Smith's multiple sclerosis,
which was diagnosed in October 1991, was a preexisting condition as
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of December 31. Hence, UNUM determined that Smith did not qualify
for benefits from Texas Children's.
Smith sued Texas Children's in Texas state court, alleging
state-law claims of fraudulent inducement and breach of contract.
Texas Children's removed the case to federal court on the ground
that Smith's claims arose under ERISA. Texas Children's then moved
for summary judgment, whereupon the district court ordered Smith to
amend her complaint to conform to an ERISA claim and to join any
additional parties. Smith complied and filed her First Amended
Complaint, asserting ERISA claims and naming UNUM as a defendant.
In their answers to this amended complaint, Texas Children's and
UNUM asserted the affirmative defense of ERISA pre-emption and
argued that Smith's claims were not cognizable under ERISA.
In April 1995, the district court entered final judgment for
Texas Children's on Smith's ERISA and common law estoppel claims,
but remanded her fraudulent-inducement claim to state court. Texas
Children's filed a motion under Rule 59(e) seeking reconsideration
of the order of remand and dismissal of Smith's suit against Texas
Children's in its entirety. The district court denied this motion.
The defendants now appeal the district court's remand order.
II.
We first address our jurisdiction. The district court's
Summary Judgment Memorandum explained its order as follows:
[T]he Court remands the case to state court because the
plaintiff's claims for damages for fraudulent inducement
survives the ERISA defense. This is so because the plaintiff
was entitled to rely upon the representation that benefits
3
were available to her, if such representations were made.
Because she did not qualify for the benefit that was promised,
she is entitled to maintain her suit against Texas Children's
Hospital separate and apart from ERISA.
We interpret this explanation to say that the district court was
exercising its discretion not to retain jurisdiction over Smith's
pendent state claims after having granted summary judgment for
Texas Children's on her federal ERISA claims. We therefore have
jurisdiction to review the district court's remand order. See
Burks v. Amerada Hess Corp., 8 F.3d 301, 303-04 (5th Cir. 1993).
III.
Texas Children's argues that Smith's First Amended Complaint
did not restate a fraudulent-inducement claim, and, alternatively,
that any such claim is preempted by ERISA. As we will explain, we
are persuaded that Smith's amended complaint alleges facts that may
give rise to a fraudulent-inducement claim that is not preempted by
ERISA. However, since it is not clear whether Smith has adequately
preserved her state-law fraudulent-inducement claim, we remand this
case to the district court for a decision on whether to allow Smith
to amend her complaint to clarify her allegations.
A.
While a district court may exercise its discretion to remand
a case if it determines that federal jurisdiction has disappeared,
it "has no discretion to remand a case in which a federal claim
still exists." Burks, 8 F.3d at 304. We review as a matter of law
the question whether ERISA preempts Smith's fraudulent-inducement
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claim. See id. Remand is appropriate only if a set of facts can
be adduced under the allegations in Smith's First Amended Complaint
that give rise to a state-law claim not preempted by ERISA.
ERISA by its terms expressly "supercede[s] any and all State
laws insofar as they may now or hereafter relate to any employee
benefit plan." 29 U.S.C. § 1144(a). "A state law `relates to' an
employee benefit plan `if it has a connection with or reference to
such plan.'" Rozzell v. Security Servs., Inc., 38 F.3d 819, 821
(5th Cir. 1994) (quoting Shaw v. Delta Air Lines, 463 U.S. 85, 96-
97 (1983)). Thus, ERISA preempts a state law claim "if (1) the
state law claim addresses an area of exclusive federal concern,
such as the right to receive benefits under the terms of an ERISA
plan; and (2) the claim directly affects the relationship between
the traditional ERISA entities — the employer, the plan and its
fiduciaries, and the participants and beneficiaries." Hubbard v.
Blue Cross & Blue Shield Ass'n, 42 F.3d 942, 945 (5th Cir. 1995).
ERISA's preemption language "is deliberately expansive, and
has been construed broadly by federal courts." Id. "Nevertheless,
the reach of ERISA preemption is not limitless." Rozzell, 38 F.3d
at 822. "[S]ome state actions may affect employee benefit plans in
too tenuous, remote, or peripheral a manner to warrant a finding
that the law `relates to' the plan." Shaw, 463 U.S. at 100 n.21.
Thus, if Smith's fraudulent-inducement claim is based upon a state
law that "has a connection with or reference to" her ERISA plan
with Texas Children's, ERISA preempts it. On the other hand, if
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her claim affects that plan "in too tenuous, remote, or peripheral
a manner," it is not preempted.
To the extent that Smith is claiming that she is entitled to
disability benefits under Texas Children's ERISA plan, her claim is
preempted. Our case law teaches that a state-law claim by an ERISA
plan participant against her employer is preempted when based upon
a denial of benefits under the defendant's ERISA plan. See Cefalu
v. B.F. Goodrich Co., 871 F.2d at 1292-97; Christopher v. Mobil Oil
Corp., 950 F.2d 1209, 1217-20 (5th Cir. 1992); Perdue v. Burger
King Corp., 7 F.3d 1251, 1255-56 (5th Cir. 1993).
Here, however, Smith's fraudulent-inducement claim is not
based solely upon Texas Children's denial of benefits to her under
its ERISA plan. Rather, Smith also alleges that she gave up her
accrued benefits at St. Luke's in reliance upon Texas Children's
alleged misrepresentations. Though ERISA preempts Smith's claim
seeking benefits under Texas Children's ERISA plan, she may have a
separate claim based upon the benefits that she had at St. Luke's
and relinquished by leaving. The difficulty here arises in that
Texas Children's allegedly promised that Smith would have the same
benefits at Texas Children's as she had at St. Luke's, so the
measure of her injury is the same regardless of whether she pursues
recovery of benefits relinquished or of benefits denied. Stated
another way, because of the nature of Texas Children's alleged
assurance — that she would keep the same disability benefits after
she transferred to St. Luke's — the value of the benefits that she
gave up by leaving St. Luke's is equal to the value of any benefits
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that she could claim under Texas Children's ERISA plan. But, to
the extent that Texas law permits a plaintiff asserting fraudulent-
inducement to recover for value relinquished in addition to value
not received, Smith may also have a claim based upon the disability
benefits relinquished, separate from her claim for benefits under
Texas Children's ERISA plan. The Texas state court can decide the
grounds for relief available to Smith under Texas law; we need only
decide whether ERISA preempts such a claim for recovery based upon
the benefits that Smith gave up by leaving St. Luke's.
We are persuaded that ERISA preemption would not apply to such
a claim. Smith alleges that, because she relied upon
misrepresentations by Texas Children's, she lost a quantifiable
stream of income that she would now be receiving had she never left
St. Luke's. Such a claim escapes ERISA preemption because it does
not necessarily depend upon the scope of Smith's rights under Texas
Children's ERISA plan. For example, if Texas Children's did not
have any benefits plan, ERISA would not apply, leaving Smith with
a non-preempted claim based upon the benefits relinquished. That
Texas Children's has such an ERISA plan does not alter the nature
of her claim, which is based upon benefits given up for purposes of
ERISA preemption. The ultimate question of Texas Children's
liability for fraudulently inducing Smith to leave St. Luke's turns
not on the quantum of benefits available at Texas Children's, but
on the question whether Texas Children's misled Smith when it told
her that she would keep what she had.
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Though Cefalu illustrates the difficulty of preemption issues
under ERISA, we are persuaded that Cefalu does not mandate that
ERISA preempts Jackie Smith's fraudulent-inducement claim against
Texas Children's. Roy Cefalu was terminated from his employment
with B.F. Goodrich Company after Tire Center, Inc., purchased that
division. Because Cefalu had participated in Goodrich's retirement
benefits plan, a qualified ERISA plan, accepting a job with Tire
Center meant that, under the terms of Goodrich's ERISA plan, he
would have been entitled to a continuation of his benefits under
the Tire Center's ERISA plan. Cefalu, 871 F.2d 1290. According to
Cefalu, however, he instead chose to become an franchised operator
of a Goodrich retail center in reliance upon Goodrich's oral
assurance that he would receive the same benefits as a franchisee
as he would as a Tire Center employee. But while Cefalu did retain
some retirement benefits under Goodrich's Special Deferred Vested
Pension Plan, made available in connection with his termination,
Goodrich later informed him that he would not be entitled to the
additional benefits
Cefalu sued Goodrich for breach of contract. We found that
ERISA preempted his claim, emphasizing:
[Cefalu's] claim has a definite connection to an employee
benefit plan. [He] concedes that if he is successful in this
suit his damages would consist of the pension benefits he
would have received had he been employed by TCI. To compute
these damages, the Court must refer to the pension plan under
which [Cefalu] was covered when he worked for Goodrich. Thus,
the precise damages and benefits which [Cefalu] seeks are
created by the Goodrich employee benefit plan. To use any
other source as a measure of damages would force the Court to
speculate on the amount of damages.
8
Cefalu, 871 F.2d at 1294. In short, Cefalu sought recovery from
Goodrich based upon retirement benefits that he claims he should
have received as a Goodrich franchisee, which allegedly equaled the
benefits that he would have received had he accepted a job with
Tire Center. The amount of those benefits not received could only
be measured by reference to the benefits that Cefalu did have under
his original ERISA plan with Goodrich, his former employer. We
concluded that his breach-of-contract claim against Goodrich was
related to Goodrich's ERISA plan and therefore preempted.
Significantly, Cefalu sought recovery pursuant to an allegedly
valid oral contract; he sought to bind Goodrich to its oral
contract to extend him benefits that he would have received had he
accepted a job with Tire Center. Cefalu could not have asserted a
claim based upon benefits given up, since his termination, not
Goodrich's misrepresentation, caused the loss of additional
benefits that he previously had under Goodrich's plan. Put another
way, Cefalu was no longer entitled to the continuation of full
benefits under Goodrich's original ERISA plan the moment he was
terminated from Goodrich as part of the Tire Center purchase, since
the cessation of benefits occurred regardless of what Goodrich did
next. Rather, ERISA preempted Cefalu's claim because he sought to
hold Goodrich liable in contract for additional benefits beyond
what he had under Goodrich's ERISA plan, on the ground that
Goodrich had allegedly promised him that his benefits as a
franchisee would equal what he could have received had he joined
Tire Center. Since Tire Center employees received a continuation
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of the benefits that they had under Goodrich's ERISA plan, Cefalu's
claim was for a like continuation of the benefits that he had under
Goodrich's original ERISA plan. See, e.g., Rozzell, 38 F.3d at 822(cautioning that Cefalu "does not, and can not, mean that any
lawsuit in which reference to a benefit plan is necessary to
compute plaintiff's damages is preempted by ERISA and is removable
to federal court"). ERISA thus preempted Cefalu's claim because he
sought recovery of retirement benefits that Goodrich allegedly owed
him as a continuation of its ERISA plan.
Here, by contrast, Smith's fraudulent-inducement claim leaves
open the possibility that she may obtain recovery from her second
employer, Texas Children's, based upon her relinquishment of the
payments that she would now be receiving had she remained with a
different first employer, St. Luke's. Smith is not suing for
disability benefits that Texas Children's owes her under its ERISA
plan. Nor is she suing St. Luke's for benefits that St. Luke's
allegedly owes her under its benefits plan. Rather, Smith is suing
Texas Children's for vested benefits that she had acquired while
employed with her original employer, but then relinquished in
reliance upon Texas Children's alleged misrepresentations.
Thus, for example, had Smith had no benefits before joining
Texas Children's, she could only claim relief based upon benefits
to which she was entitled under Texas Children's ERISA plan. ERISA
would preempt such a claim. But, on the other hand, suppose that
Smith turned down a $10,000 annual bonus by leaving St. Luke's, and
that she could show that she left St. Luke's in reliance upon Texas
10
Children's promise that she would be qualifying for benefits under
Texas Children's ERISA plan valued at approximately $12,000. Then,
though a claim for $12,000 in benefits would again be preempted by
ERISA, she still might have a non-preempted claim for the $10,000
relinquished bonus if her allegations indicated that Texas
Children's either had no plan or otherwise knew that Smith could
not possibly have been covered under whatever plan it did have.
Thus, Smith's entitlement to benefits under Texas Children's ERISA
plan can be considered separately from the question whether Texas
Children's misled her into believing that she would be entitled to
benefits under that plan; the former question requires reference to
Texas Children's plan, while the latter focuses on what Texas
Children's told her.
B.
Though we conclude that Smith's allegations leave room for a
fraudulent-inducement claim that is not preempted by ERISA, we are
not certain at this time whether she has adequately preserved such
a claim in her First Amended Complaint. Because there are some
ambiguities regarding the course of the proceedings below as well
as the nature of Smith's state-law claims, and given the possible
relevance of the Supreme Court's recent decision in Varity Corp. v.
Howe, 116 S. Ct. 1065 (1996) (decided March 19, 1996), we vacate
the district court's remand order and remand to the district court.
On remand, Smith may move for leave to amend her complaint to
clarify her allegations and assert her fraudulent-inducement claim,
11
whereupon, if the district court grants leave to amend, it can
consider the issue of ERISA preemption and the Supreme Court's
decision in Varity Corp.
IV.
For the foregoing reasons, we VACATE the district court's
order remanding a fraudulent-inducement claim to state court and
REMAND for proceedings consistent with this opinion.
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