Agrawal v. Paul Revere Life ( 2000 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
12 Agrawal, et al. v. Paul No. 98-4260 Pursuant to Sixth Circuit Rule 206
Revere Life Ins. Co. ELECTRONIC CITATION: 2000 FED App. 0062P (6th Cir.)
File Name: 00a0062p.06
employees will have a unique advantage: the self-employed
individual can pursue a parade of state law claims that are UNITED STATES COURT OF APPEALS
withheld from his employees by preemption.
FOR THE SIXTH CIRCUIT
III. _________________
In conclusion, we reverse the judgment of the district court
;
regarding Agrawal’s state law claims under the business

expense policy because this policy is not part of an ERISA SATENDRA K. AGRAWAL;

plan and, therefore, the claims are not preempted. SATENDRA K. AGRAWAL,

Furthermore, although Dr. Agrawal’s individual policy and M.D., INC.,

the group policy may jointly constitute an ERISA plan, we No. 98-4260
Plaintiffs-Appellants,

adhere to precedent and reverse the district court’s judgment
>

as to the state law claims under the individual policy because
v.

Dr. Agrawal does not have standing to bring an ERISA

action.

PAUL REVERE LIFE
Defendant-Appellee. 
INSURANCE COMPANY,

1
Appeal from the United States District Court
for the Northern District of Ohio at Toledo.
No. 97-07575—James G. Carr, District Judge.
Argued: November 2, 1999
Decided and Filed: February 18, 2000
Before: MARTIN, Chief Judge; DAUGHTREY, Circuit
Judge; HILLMAN, District Judge.*
*
The Honorable Douglas M. Hillman, United States District Judge for
the Western District of Michigan, sitting by designation.
1
2 Agrawal, et al. v. Paul No. 98-4260 No. 98-4260 Agrawal, et al. v. Paul 11
Revere Life Ins. Co. Revere Life Ins. Co.
_________________ “under which no employees are participants” and provides
this illustration:
COUNSEL
For example, a so-called “Keogh” or “H.R.-10" plan
ARGUED: William H. Bartle, MURRAY & MURRAY, under which only partners or only a sole proprietor are
Sandusky, Ohio, for Appellants. Carl J. Schmidt, WOOD & participants covered under the plan will not be covered
LAMPING, Cincinnati, Ohio, for Appellee. ON BRIEF: under Title I. However, a Keogh plan under which one
William H. Bartle, Margaret M. Murray, W. Patrick Murray, or more common law employees, in addition to the self-
MURRAY & MURRAY, Sandusky, Ohio, for Appellants. employed individuals, are participants covered under the
Carl J. Schmidt, William C. Price, William R. Ellis, WOOD plan, will be covered under Title I.
& LAMPING, Cincinnati, Ohio, for Appellee.
29 C.F.R. § 2510.3-3(b). For purposes of the definition of
_________________ “employee benefit plan” the regulation defines “employee,”
stating that “[a]n individual and his or her spouse shall not be
OPINION deemed to be employees with respect to a trade or business,
_________________ whether incorporated or unincorporated, which is wholly
owned by the individual or by the individual and his or her
BOYCE F. MARTIN, JR., Chief Judge. Dr. Satendra K. spouse.” 29 C.F.R. § 2510.3-3(c)(1).
Agrawal and Satendra K. Agrawal, M.D., Inc. appeal the
district court’s grant of summary judgment in favor of Paul This limiting definition of employee addresses the threshold
Revere Life Insurance Company. The district court held that issue of whether an ERISA plan exists. It is not consistent
the plaintiffs’ state law claims arising from multiple disability with the purpose of ERISA to apply this limiting definition of
insurance contracts were preempted by the Employee employee to the statutory definitions of participant and
Retirement Income Security Act and that the plaintiffs had beneficiary. When self-employed individuals are excluded
standing to pursue civil remedies under ERISA. For the from classification as participant or beneficiary, the self-
following reasons, we reverse. employed lack standing to enforce their rights under ERISA
and can sue under state law theories. ERISA was originally
I. put into place to protect the interests of employees by
imposing duties on those who fund and administer the
On September 16, 1991, Dr. Satendra K. Agrawal and employee benefit plans; with these protections come
Satendra K. Agrawal, M.D., Inc. acquired three long-term limitations on employees’ rights to recover state law
disability insurance policies from Paul Revere Life Insurance remedies. Although self-employed individuals may not need
Company. Dr. Agrawal is the sole shareholder of Agrawal, the protections offered by ERISA, because they are likely to
Inc. Dr. Agrawal’s occupation is that of a cardiovascular and look out for themselves in the administration of the plan, it
thoracic surgeon. At the time of coverage, Agrawal, Inc. had does not follow that once a self-employed person chooses to
at least two employees other than Dr. Agrawal. participate in an ERISA plan and gain benefits thereunder, she
Of the three policies purchased, two were individual should be free from the limitations imposed upon her
policies. The first policy was an individual disability policy employees. Under Fugarino, a self-employed individual who
that listed Dr. Agrawal as both the insured and the owner. It participates in a disability plan that covers him and all of his
10 Agrawal, et al. v. Paul No. 98-4260 No. 98-4260 Agrawal, et al. v. Paul 3
Revere Life Ins. Co. Revere Life Ins. Co.
Because the sole proprietor and his family members were also stated that all coverage would be paid for by Dr.
neither participants nor beneficiaries under an ERISA plan, no Agrawal’s employer. The second individual policy was a
preemption occurred and they enjoyed the broader relief disability income policy for business overhead expenses.
provided by state tort and contract law. See id. This policy insured Dr. Agrawal, but was owned and paid for
by Agrawal, Inc.
The district court erred in ignoring Fugarino. Because Dr.
Agrawal is the sole shareholder of Agrawal, Inc., he is neither The third policy purchased by Agrawal, Inc. was a group
a participant nor a beneficiary under an ERISA plan. See id. disability policy that covered Dr. Agrawal and other
As neither a participant nor a beneficiary, Dr. Agrawal is not employees. Paul Revere canceled this group policy in 1995
an ERISA entity; likewise, he does not have standing under because the policy required a minimum of two covered
the ERISA enforcement mechanisms. See Smith, 170 F.3d at employees and no employees other than Dr. Agrawal were
616-17. Because Congress did not intend to create an eligible for coverage.
enforcement mechanism to bind non-ERISA parties, we hold
that Dr. Agrawal does not have standing to enforce his rights On February 15, 1992, Dr. Agrawal sustained a knee injury
under ERISA and his state law claims arising under any while skiing and had to undergo medical treatment. Dr.
ERISA plan that may exist are not preempted. Agrawal’s activities as a surgeon were limited because he was
unable to stand through prolonged surgeries. From August
Although the decision in the present case is preordained by 1992 until January 1993, Dr. Agrawal and Agrawal, Inc.
the Fugarino holding, we note that the reasoning underlying received total disability benefits from Paul Revere. Plaintiffs
the Fugarino decision is not thoroughly consistent with the then informed Paul Revere that Dr. Agrawal would return to
goals of ERISA. The statutory and regulatory definitions of work on a part-time basis. Paul Revere began to limit
“employee,” “participant,” and “beneficiary” cause confusion. payments to residual disability benefits. Paul Revere paid
The statute defines “employee” as “any individual employed residual disability benefits for a period of more than two
by an employer.” 29 U.S.C. § 1002(6). The statute further years. In January 1996, Paul Revere determined that Dr.
defines “participant” as “any employee or former employee of Agrawal was no longer residually disabled and discontinued
an employer . . . , who is or may become eligible to receive a payments under the insurance policies.
benefit of any type from an employee benefit plan . . .”, 29
U.S.C. § 1002(7), and defines “beneficiary” as “a person On July 14, 1997, Dr. Agrawal and Agrawal, Inc. filed a
designated by a participant, or by the terms of an employee complaint in Ohio state court based on the two individual
benefit plan . . . .” 29 U.S.C. § 1002(8). These are the only policies. Paul Revere properly removed the case to federal
definitions provided for the terms “participant” and court, filed a counterclaim based on the group policy, and
“beneficiary.” However, another definition of “employee” later moved for summary judgment. The district court
exists and creates confusion as to who is an employee and for granted Paul Revere’s motion for summary judgment on the
what purposes. basis that plaintiffs’ state law claims relate to an employee
benefit plan and, therefore, are preempted by the Employee
Section 2510.3-3 of Title 29 of the C.F.R. attempts to Retirement Income Security Act.
clarify the term “employee benefit plan.” The regulation
states that “employee benefit plan” does not include any plan
4 Agrawal, et al. v. Paul No. 98-4260 No. 98-4260 Agrawal, et al. v. Paul 9
Revere Life Ins. Co. Revere Life Ins. Co.
II. We are not required, however, to determine whether these
two policies constitute an ERISA plan that was established
We review the district court’s grant of summary judgment with the intent to provide benefits, because we hold that Dr.
de novo. See Smith v. Wal-Mart Stores, Inc., 167 F.3d 286, Agrawal does not have standing to bring a civil action under
289 (6th Cir. 1999). Summary judgment is proper if there is ERISA and therefore his claims are not preempted.
no genuine issue of material fact and the moving party is
entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). ERISA Standing
ERISA Preemption Plaintiffs claim their state law claims are not preempted
because they do not have standing to sue under the ERISA
The Employee Retirement Income Security Act, 29 U.S.C. civil enforcement provisions. Those provisions allow a
§§ 1001 et seq., is the comprehensive federal law governing participant or beneficiary to bring suit to recover benefits due,
employee benefits. If an insurance policy is part of an to enforce or clarify rights under the plan, or to obtain
employee welfare benefit plan governed by ERISA, then a appropriate equitable relief. See 29 U.S.C. § 1132(a)(1)-(4).
plaintiff’s state law claims relating to that policy are Specifically, Dr. Agrawal asserts that he is neither a
preempted and federal law applies to determine recovery. See participant nor a beneficiary because he is the sole
Thompson v. American Home Assurance Co., 95 F.3d 429, shareholder of Agrawal, Inc.
434 (6th Cir. 1996) (citing Pilot Life Ins. Co. v. Dedeaux, 481
U.S. 41, 56-57 (1987)). As a general rule, the absence of a remedy under ERISA
does not mean that state-law remedies are preserved. See
In the present case, we must decide whether the three Zuniga v. Blue Cross & Blue Shield of Michigan, 52 F.3d
policies sold by Paul Revere to the plaintiffs satisfy the 1395, 1401 (6th Cir. 1995). When Congress has designed a
definition of an ERISA plan. The parties agree that the group mechanism to enforce rights or duties of ERISA entities, the
disability policy was an employee welfare benefit plan under broad preemption of ERISA will prevent the application of
ERISA. The parties, however, dispute whether the business state law. See Smith v. Provident Bank, 170 F.3d 609, 616-
overhead expense policy and Dr. Agrawal’s individual policy 17 (6th Cir. 1999). However, state law claims involving non-
were ERISA plans. ERISA entities are not preempted. See id. at 617.
An “employee welfare benefit plan” is defined as “any plan, Because one’s status as an ERISA or non-ERISA entity
fund, or program . . . established or maintained by an determines whether or not the lack of standing affects
employer . . . for the purpose of providing for its participants preemption, we must first address Dr. Agrawal’s contention
or their beneficiaries, through the purchase of insurance or that he is neither a participant or a beneficiary under ERISA.
otherwise, (A) medical, surgical, or hospital care or benefits, In light of this Court’s decision in Fugarino v. Hartford Life
or benefits in the event of sickness, accident, disability, death & Accident Insurance Co., 969 F.2d 178 (6th Cir. 1992), we
or unemployment . . . .” 29 U.S.C. § 1002(1). In Thompson must agree with Dr. Agrawal’s assertion. In Fugarino, having
v. American Home Assurance Co., 95 F.3d 429 (6th Cir. found an ERISA plan to exist, we held that a sole proprietor
1996), we set out a three-step factual analysis for determining could not be a participant under an ERISA plan. See id. at
whether a benefit plan satisfies the statutory definition. First, 185-86. We further held the sole proprietor’s dependent
we apply the Department of Labor “safe harbor” regulations could not be a beneficiary under the plan. See id. at 186.
to determine whether the program is exempt from ERISA.
8 Agrawal, et al. v. Paul No. 98-4260 No. 98-4260 Agrawal, et al. v. Paul 5
Revere Life Ins. Co. Revere Life Ins. Co.
(9th Cir. 1998), a doctor, who was the sole shareholder of his See id. at 434. Second, we determine if a “plan” existed by
practice, established one pension plan of which he was the inquiring whether “‘from the surrounding circumstances a
sole beneficiary and a separate pension plan for his reasonable person [could] ascertain the intended benefits, the
employees. The Ninth Circuit held the doctor’s pension plan class of beneficiaries, the source of financing, and procedures
was not an ERISA plan and stated that “even if the plans were for receiving benefits.’” Id. at 435 (quoting International
created simultaneously or shared other common Resources, Inc. v. New York Life Ins. Co., 950 F.2d 294, 297
characteristics, they are independent plans under ERISA.” Id. (6th Cir. 1991)). Third, we ask whether the employer
at 596 n.4. established or maintained the plan with the intent of providing
benefits to its employees. See id.
The Eleventh Circuit has also addressed whether multiple
insurance policies constitute an ERISA plan. In Slamen v. In the present case, the first factor is satisfied. The parties
Paul Revere Life Insurance Co., 166 F.3d 1102, 1103 (11th agree that the policies are not exempt from ERISA via the
Cir. 1999), a dentist established a health plan for himself and “safe harbor.” Two of the policies satisfy the second factor,
the employees of his solely-owned dental practice by because the delivery of disability benefits to Agrawal, Inc.
purchasing health and life insurance. Four years later, the employees, as funded by Agrawal, Inc., is evident from the
dentist purchased an individual disability insurance policy group policy and Dr. Agrawal’s individual policy.
from Paul Revere. See id. The dentist’s professional
corporation paid the premiums for all of the insurance The final policy, the business overhead expense policy, fails
policies. See id. at 1103-04. The Eleventh Circuit held, in the this second requirement. The policy does not fit neatly into
absence of evidence showing that the two policies were a plan for providing disability benefits to employees. The
related, the disability policy was not part of an ERISA plan. purpose of the overhead policy was to provide the corporation
See id. at 1106. with monthly operating expenses (i.e. rent, wages, fixed costs)
in the event that Dr. Agrawal was disabled. This differs from
In Massachusetts Casualty and Peterson, the policies the goal of the other policies and the nature of the benefits
categorized together as an ERISA plan were purchased at the provided through them. In Stanton v. Paul Revere Life
same time in an effort to create a benefit plan for employees. Insurance Co., 37 F. Supp. 2d 1159 (S.D. Cal. 1999), the
In both cases, all of the covered employees were covered in district court examined the exact same business overhead
the same manner: each had an individual policy or all were expense policy in a factual setting very similar to the present
originally part of a group policy. In contrast, in Watson and case. That court concluded that the overhead policy was not
Slamen, the employers established the policies or pension an ERISA plan because the policy did not provide employee
plans at different times and created one plan for the exclusive welfare benefits, 37 F. Supp. 2d at 1161-62:
benefit of the sole owner of the medical practice. The
policies in the present case do not fit within either set of Plaintiff asserts that he purchased the [business
cases. Dr. Agrawal and Agrawal, Inc. purchased the policies overhead expense] policy because his ability to conduct
on the same day. Both the group policy and Dr. Agrawal’s a profitable business turned on his ability to perform
individual policy provided disability benefits; however, the surgery. Should he suffer a disability grave enough to
individual policy was for the sole benefit of Dr. Agrawal. prevent him from performing surgery, [plaintiff] knew
certain expenses — leases, medical malpractice
insurance, medical supplies, salaries, and office
6 Agrawal, et al. v. Paul No. 98-4260 No. 98-4260 Agrawal, et al. v. Paul 7
Revere Life Ins. Co. Revere Life Ins. Co.
equipment — would be ongoing. Two undisputed facts Inc., this policy, standing alone, cannot be an ERISA plan.
support these assertions. First, [plaintiff] has other To counter this position, Paul Revere asserts that the plan at
personal disability insurance through another insurance issue is broader than the individual disability policy; Paul
company. Second, the [business overhead expense] Revere defines the ERISA plan as an umbrella of disability
policy was only for a two-year period. Common coverage consisting of all three policies purchased by the
experience adds credibility to these factual assertions. plaintiffs.
Such an insurance arrangement is not uncommon for a
corporation to have for key employees. Finally, on its We must determine what constitutes the “plan” at issue.
face, a “business income overhead policy” has very little Because we have eliminated the business overhead expense
to do with employee welfare. policy as not providing employee benefits, we shall limit our
examination to the group policy and Dr. Agrawal’s individual
The overhead policy did not provide employees or their policy. Typically, an ERISA plan is a single benefit plan or
beneficiaries with welfare benefits; rather, it provided insurance policy. The district court correctly stated that
operating expenses to the corporation. Providing the courts have recognized that an employee welfare benefit plan
corporation with funds to pay wages differs from providing may be funded by group or individual policies. We cannot,
income directly to an employee who is unable to work. however, summarily assume the plan encompasses all
Accordingly, we hold that the business overhead policy was insurance policies owned by the plaintiffs.
not part of an ERISA plan.
In Massachusetts Casualty Insurance Co. v. Reynolds, 113
To determine whether Dr. Agrawal’s individual policy is an F.3d 1450, 1453 (6th Cir. 1997), we acknowledged that an
ERISA plan, we must examine the final Thompson factor. In ERISA plan can consist of individual disability insurance
Thompson, we did not explain or apply this requirement that policies covering each of the employer’s employees, rather
the employer established or maintained the plan with the than a group policy. The Ninth Circuit, in Peterson v.
intent of providing benefits to its employees. This factor American Life & Health Insurance Co., 48 F.3d 404, 407 (9th
closely tracks the statutory language of 29 U.S.C. § 1002(1). Cir. 1995), found that one individual health insurance policy
It requires an initial showing that the employer established a and a group policy together formed an ERISA plan. In
plan meeting the definition of an “employee benefit plan” and Peterson, the individual policy was originally purchased as a
a showing that the employer established the plan with the group policy covering both partners of the business and one
intent of providing welfare benefits to the employees. employee. See id. at 404. When the business changed group
insurance carriers, one partner was denied coverage by the
An employee benefit plan exists only when employees new group carrier and maintained individual coverage with
other than the sole owner of a business are covered under the the first insurer. See id. The Ninth Circuit held that because
plan. See 29 C.F.R. § 2510.3-3(b)-(c)(1). See also Fugarino the individual policy was originally purchased as part of an
v. Hartford Life & Accident Ins. Co., 969 F.2d 178, 185 (6th ERISA plan, the first group policy, it remained a part of that
Cir. 1992). As stated above, the parties do not dispute that ERISA plan. See id. at 408.
the group policy is an employee benefit plan; they do dispute,
however, whether Dr. Agrawal’s individual policy is an The Ninth Circuit, however, recognizes that a non-ERISA
employee benefit plan. Because Dr. Agrawal’s individual plan cannot be altered merely because the employer also
policy covers only Dr. Agrawal, the sole owner of Agrawal, sponsors an ERISA plan. In In re Watson, 161 F.3d 593, 595