Hobson v. Robinson

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS September 23, 2003
FOR THE FIFTH CIRCUIT
_______________________ Charles R. Fulbruge III
Clerk
No. 02-60803
_______________________
BLAKE HOBSON and MASTER FINISHES, INC.,
Plaintiffs - Appellants,
v.
PAUL RAYMOND ROBINSON, JAMES ROBERT MCDANIELS,
JOE CHRESTMAN and JOHN CHRESTMAN,
Defendants - Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Mississippi
District Court No. 02-CV-94
_________________________________________________________________
Before WIENER, CLEMENT, and PRADO, Circuit Judges.1
PRADO, Circuit Judge:
Appellants Blake Hobson and Master Finishes, Inc.
(collectively “Hobson”) appeal the dismissal of their claims
against Appellees Paul Raymond Robinson (“Robinson”), James
Robert McDaniels (“McDaniels”), Joe Chrestman and John Chrestman
on the grounds that their state law claims for fraud,
misrepresentation and breach of contract, which were removed to
1
Pursuant to 5th Cir. R. 47.5, this Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5th Cir. R.
47.5.4.
1
federal court, were preempted by the Employment Retirement Income
Security Act (“ERISA”), 29 U.S.C. § 1144(a). We affirm the
dismissal as to John Chrestman for all claims and as to Robinson,
McDaniels and Joe Chrestman for the breach of contract claims,
but reverse and remand the dismissal of the fraud and
misrepresentation claims against Robinson, McDaniels, and Joe
Chrestman.
Background and Nature of the Dispute
The following facts are as alleged by Hobson. Brett Hobson,
Blake Hobson's brother, was employed by his brother’s company,
Master Finishes, Inc. (“Master Finishes”), a small business in
Tupelo, Mississippi, and acted as the company’s contact person
for obtaining insurance coverage for Master Finishes’s employees.
Joe Chrestman, sales manager for Business Partners, Inc.
(“Business Partners”), approached Master Finishes about health
insurance and other benefits acting as an agent of Business
Partners subject to the supervision and control of the owners of
Business Partners, Paul Raymond and James McDaniels. Joe
Chrestman advised Hobson that he could provide comparable health
insurance coverage for Master Finishes at rates much lower than
Master Finishes’s current insurance plan with Blue Cross/Blue
Shield. Joe Chrestman represented to Hobson that he was selling
health insurance and never informed him that he was offering a
self-funded ERISA plan that had little or no assets. Master
2
Finishes cancelled its Blue Cross/Blue Shield policy to purchase
what it believed was health insurance from Chrestman and Business
Partners. No insurance policy was ever procured.
Blake Hobson subsequently incurred approximately $15,000 in
medical bills. He and other employees of Master Finishes
attempted to make claims on the insurance policy. Hobson
contacted John Chrestman concerning his claims, who consistently
represented that someone from Business Partners would return his
call regarding the policy. No payment was ever made and
plaintiffs brought this suit.
Master Finishes and Hobson sued Robinson, McDaniels and Joe
and John Chrestman for fraud, misrepresentation and breach of
contract in Mississippi state court. Nine days after filing the
state claims, the plaintiffs filed a separate action for unpaid
benefits under ERISA in federal court. The defendants removed
the state action to federal district court, asserting that the
claims were preempted by ERISA. The defendants also moved for
dismissal under Rule 12(b)(6) of the Federal Rules of Civil
Procedure.
The district court granted the motion to dismiss after
determining ERISA preempted Hobson’s state law claims for fraud,
misrepresentation and breach of contract. Although the original
complaint did not contain allegations of wrongful conduct on the
part of John Chrestman, the plaintiffs sought to amend their
complaint to allege that John Chrestman made misrepresentations
3
to Hobson in connection with Hobson’s submitted claims and that
John Chrestman failed to communicate with Hobson about those
claims. The district court, however, found that the proposed
amendments did not contain any claims that would not be preempted
by ERISA, and denied the motion as moot. Accordingly, the
district court dismissed the case in its entirety. The
plaintiffs timely appealed.
Jurisdiction and Standard of Review
We have jurisdiction over this appeal as an appeal from a
final judgment pursuant to section 1291 of title 28. The
standard of review for an ERISA preemption is de novo. See Roark
v. Humana, Inc., 307 F.3d 298, 305 (5th Cir. 2002).
Whether ERISA Preempts Hobson’s Claims
Relying on Pilot Life Insurance Company v. Dedeaux, 481
U.S. 41, 57 (1987), the district court held that “state law
claims for fraud and gross negligence dealing with an ERISA
policy are an area of exclusive federal concern.” Pilot
Life involved state law claims for common law tort and contract
actions asserting improper processing of a claim. Pilot Life,
481 U.S. at 43. We agree that under Pilot Life, all of Hobson’s
claims for breach of contract are preempted because those claims
involve the interpretation of the ERISA policy. See Mem’l Hosp.
Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 250 (5th Cir.
1990). Pilot Life is inapposite, however, to the claims for
4
fraud and misrepresentation because the underlying conduct
occurred in the inducement of an ERISA policy, not in its
administration.
ERISA’s preemption clause states that ERISA “shall supersede
any and all State laws insofar as they may now or hereafter
relate to any employer benefit plan.” 29 U.S.C. § 1144(a)
(expressly excepting two situations not applicable here). A
state cause of action relates to an employee benefit plan
whenever it has “a connection with or reference to such plan.”
Hubbard v. Blue Cross & Blue Shield Assoc., 42 F.3d 942, 945 (5th
Cir. 1995)(citations omitted). Despite its broad construction of
ERISA’s supersedure language, the United States Supreme Court has
indicated that it will not extend the "relate to" language to its
outer limit.2 In Shaw v. Delta Air Lines, Inc., the Supreme
Court noted that "[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. We must, therefore, determine whether a state
law claim for fraud and misrepresentation “relates to” a plan and
is thus encompassed in ERISA’s preemptive sweep.
The Supreme Court has acknowledged the expansive scope of
2
See Sommers Drug Stores Co. Employee Profit Sharing Trust
v. Corrigan Enter., Inc., 793 F.2d 1456, 1465 (5th Cir. 1986)
(citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 100 n.21
(1983)).
5
ERISA.3 Courts have noted, however, that “this observation
provides little aid in actually determining whether ERISA
supersedes state law.” Woodworker’s Supply, 170 F.3d at 989
(citing N.Y. St. Conference of Blue Cross & Blue Shield v.
Traveler’s Ins. Co., 514 U.S. 645, 655 (1995)). The Supreme
Court suggests, however, “[w]e simply must go beyond the
unhelpful text and the frustrating difficulty of defining its key
term, and look instead to the objectives of the ERISA statute as
a guide to the scope of state law that Congress understood would
survive.” Traveler’s Ins. Co., 514 U.S. at 656.
Congress enacted ERISA to “protect . . . the interests of
participants in employee benefits plans and their beneficiaries .
. . by establishing standards of conduct, responsibility, and
obligation for fiduciaries of employee benefit plans, and by
providing for appropriate remedies.” 29 U.S.C. § 1001(b). State
law preemption “affords employers the advantages of a uniform set
of regulations governing plan fiduciary responsibilities and
governing procedures for processing claims and paying benefits”4
to minimize “the administrative and financial burden of complying
with conflicting directives among states or between states and
3
See Woodworker’s Supply v. Principal Mutual Life Ins. Co.,
170 F.3d 985, 989 (10th Cir. 1999)(citing Ingersoll-Rand Co. v.
McClendon, 498 U.S. 133, 138-39 (1990)); Pilot Life Ins. v.
Dedeaux, 481 U.S. 41, 47 (1983)(citations omitted).
4
Mem’l Hosp. Sys., 904 F.2d at 245; see Fort Halifax v.
Packaging Co. v. Coyne, 482 U.S. 1, 9-11 (1987).
6
the federal government.”5
In determining whether a claim is preempted by ERISA, this
Court applies a two-prong test; that is, this Court asks: 1)
whether the claim addresses areas of exclusive federal concern
and not of traditional state authority, such as the right to
receive benefits under the terms of an ERISA plan, and (2)
whether the claim directly affects the relationship among
traditional ERISA entities – the employer, the plan and its
fiduciaries,6 and the participants and beneficiaries.7 After
considering these questions, we find Hobson’s claims for fraud
and misrepresentation against Robinson, McDaniels and Joe
Chrestman are not preempted by ERISA.
The gravamen of Hobson’s claims for fraud and
5
Travelers Ins. Co., 514 U.S. at 656-57 (quoting Ingersoll-
Rand Co., 498 U.S. at 142) (citations omitted).
6
Congress defined a plan fiduciary as a person
(i) [who] exercises any discretionary authority or
discretionary control respecting management of such
plan or exercises any authority or control respecting
management or disposition of its assets, (ii) [who]
renders investment advice for a fee or other
compensation, direct or indirect, with respect to any
moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) [who]
has any discretionary authority or discretionary
responsibility in the administration of such plan.
29 U.S.C. § 1002(21)(A).
7
See Smith v. Tex. Children’s Hosp., 84 F.3d 152, 155 (5th
Cir. 1996); Hubbard, 42 F.3d at 945; Mem’l Hosp. Sys., 904 F.2d
at 245.
7
misrepresentation arise from Joe Chrestman’s alleged conduct
inducing Hobson to give up Master Finishes’s Blue Cross/Blue
Shield plan and to procure a plan with Business Partners. In
Hobson’s proposed amended complaint, he imputes Joe Chrestman’s
conduct to Robinson and McDaniels.8 Thus, if the claims against
Joe Chrestman are not preempted, the claims against Robinson and
McDaniels as Business Partners’ principals also cannot be
preempted at this stage. We agree, however, that the claims
against John Chrestman, an employee of Business Partners with no
alleged involvement in the fraudulent inducement claim, are
preempted by ERISA. Thus, the primary legal question in this
case is whether ERISA preempts Hobson’s claims for fraudulently
inducing him to surrender his insurance coverage in order to
procure coverage from Business Partners.
Hobson argues that under Perkins v. Time Insurance Company,
898 F.2d 470 (5th Cir. 1990), Hobson’s claims for fraud and
8
The proposed amended complaint states:
The statements made by Joe Crestman [sic] that
health insurance was being provided were authorized by
the Defendants, Robinson and McDaniels, since they were
principles [sic] of Business Partners, Inc. Robinson and
McDaniels, as owners and principles [sic] in Business
Partners, Inc., were in control of the affairs of
Business Partners, Inc. and had the authority to control
the activity of its agent. Upon information and belief,
Robinson and McDaniels had actual knowledge that Crestman
[sic] was making statements that insurance was being
provided. Alternatively, if Robinson and McDaniels did
not know that such statements were being made, they were
guilty of gross negligence in failing to control the
activities of Joe Crestman [sic].
8
misrepresentation do not relate to a particular ERISA plan,
rather they relate to fraud in the procurement before the plan
came into existence and thus are not preempted. In Perkins, we
held that a state law claim for fraud in the procurement against
an independent insurance agent was not preempted by ERISA. See
Perkins, 898 F.2d at 473.9 In the instant case, the district
court distinguished Perkins in that the agent in Perkins was an
independent agent while Joe Chrestman was an employee/and or
agent of Business Partners and thus an ERISA fiduciary. In
9
See also Woodworker’s Supply, 170 F.3d at 991 (state law
claim against former insurer for unfair trade practices and fraud
resulting from pre-plan conduct are not preempted by ERISA
because no plan fiduciary could exist before the plan existed);
Wilson v. Zoellner, 114 F.3d 713, 721 (8th Cir. 1997)(“[w]e hold
that ERISA does not preempt [plaintiff’s] suit against [an
insurance agent] for the Missouri state common-law tort of
negligent misrepresentation”); Coyne & Delany Co. v. Selman, 98
F.3d 1457, 1467 (4th Cir. 1996)(plaintiff’s malpractice claim
against insurance professional not preempted because it does not
“relate to” an employee benefit plan within the meaning of
ERISA’s preemption provision); Morstein v. Nat’l Ins. Serv.,
Inc., 93 F.3d 715,723 (11th Cir. 1996)(ERISA does not preempt a
fraudulent inducement claim against insurance agent, but would
preempt against insurer if the claim regarded the scope of
coverage); but see Hall v. Blue Cross/Blue Shield of Ala., 134
F.3d 1063, 1064-65 (11th Cir. 1998)(holding ERISA preempts a
fraudulent inducement claim that an insurer and its licensed
agent marketed and sold an insurance policy that allegedly
differed from the plan the agents had proposed); Reliable Home
Health Care, Inc. v. Union Cent. Ins. Co., 295 F.3d 505 (5th Cir.
2002)(ERISA preempts employer’s fraudulent inducement claim that
an insurance agent falsely represented an insurance company’s
expertise because the underlying conduct involved the creation,
operation and subsequent failure of the plan which could not be
severed from its connection to the plan); Elmore v. Cone Mills
Corp., 23 F.3d 855, 863 (4th Cir. 1994)(ERISA preempts breach of
fiduciary duty claim which seeks to enforce representations made
regarding the establishment of an ESOP).
9
Perkins, however, the agent’s status as an independent agent was
not the dispositive factor in the analysis. Rather, the critical
determination was whether the claim itself created a relationship
between the plaintiff and defendant that is so intertwined with
an ERISA plan that it cannot be separated.10 Thus, the timing of
plan formation is not the crucial factor in ERISA preemption.
Rather, the extent the claim itself relates to an ERISA plan
guides our determination.
In Perkins, we relied in part on Sommers Drug Stores Company
10
In Perkins, we found:
While ERISA clearly preempts Perkins’ claims as they
relate to Time, the same cannot necessarily be said,
however, as regards Davis’s solicitation of Perkins,
which allegedly induced him to forfeit an insurance
policy that covered his daughter’s condition for one
that did not. While ERISA clearly preempts claims of
bad faith as against insurance companies for improper
processing of a claim for benefits under an employee
benefit plan and while ERISA plans cannot be modified
by oral representations, we are not persuaded that this
logic should extend to immunize agents from personal
liability for their solicitation of potential
participants in an ERISA plan prior to its formation.
Giving the ERISA “relates to” preemption standard its
common-sense meaning, we conclude that a claim that an
insurance agent fraudulently induced an insured to
surrender coverage under an existing policy, to
participate in an ERISA plan which did not provide the
promised coverage, “relates to” that plan only
indirectly. A state law claim of that genre, which
does not affect the relations among the principal ERISA
entities . . . as such, is not preempted by ERISA.
Perkins, 898 F.2d at 473 (internal citations omitted).
10
Employee Profit Sharing Trust v. Corrigan Enterprises, Inc.11 In
Sommers Drug Stores, we determined the plaintiff’s claim for
common law breach of corporate fiduciary duty was not preempted
by ERISA, despite the fact that the corporate director was also a
plan fiduciary and that the plaintiffs were both shareholders and
plan beneficiaries. See Sommers, 793 F.2d at 1468. In other
words, the defendant corporate director was an ERISA fiduciary in
regards to some claims, but not in regards to others.12 The
critical determination was the relationship between the
11
We also relied on Perry v. P.*I.*E.* Nationwide, Inc., 872
F.2d 157 (6th Cir. 1989) (state claims alleging fraudulent
inducement to participate in an ERISA plan are not preempted by
ERISA).
12
In Sommers, we noted:
The state common law of fiduciary duty that the Trust
seeks to invoke in this case centers upon the relation
between corporate director and shareholder. The
director's duty arises from his status as director; the
law imposes the duty upon him in that capacity only.
Similarly, the shareholder's rights against the
corporate director arise solely from his status as
shareholder. That in a case such as ours the director
happens also to be a plan fiduciary and the shareholder
a benefit plan has nothing to do with the duty owed by
the director to the shareholder. The state law and
ERISA duties are parallel but independent: as director,
the individual owes a duty, defined by state law, to
the corporation's shareholders, including the plan; as
fiduciary, the individual owes a duty, defined by
ERISA, to the plan and its beneficiaries. Thus, the
state law does not affect relations between the ERISA
fiduciary and the plan or plan beneficiaries as such;
it affects them in their separate capacities as
corporate director and shareholder.
Sommers, 793 F.2d at 1468.
11
plaintiffs and defendants and what duty the law imposed upon that
relationship. Thus, the fact that the agent in Perkins was an
independent agent and not an employee of Time (the ERISA entity)
simply bolsters the point that the duty imposed upon the
relationship between Perkins and the agent did not derive from
ERISA. The agent could never have been an ERISA entity and Time
could never have been responsible for the agent’s conduct because
of the agent’s independent status. If the agent in Time had been
an employee of Time, then Time could have been liable for its
agent’s conduct.
Our decisions since Perkins have reaffirmed that the
important factor in ERISA preemption is the relationship between
the parties involved in the claim itself and whether that claim
is intricately bound with an ERISA plan. For example, in
Hubbard, the plaintiff brought state law claims against the Blue
Cross & Blue Shield Association for both fraudulent inducement
under the Texas Deceptive Trade Practices Act and for “secret
coverage guidelines.” Hubbard, 42 F.3d at 944. We held that a
state law claim for “secret coverage guidelines” was preempted by
ERISA because it required interpretation and administration of
the plan, but that the claim for deceptive trade practices
(fraudulent inducement) was not preempted. Id. at 946-47. Both
claims were against the same entity, the Blue Cross & Blue Shield
Association, yet both claims were not preempted. The critical
factor was that the fraudulent inducement claim did not require
12
interpretation and administration of the ERISA policy as did the
“secret coverage guidelines” claim. The ERISA policy defined the
duty as between the entities for the “secret coverage guidelines
claim,” but not for the fraudulent inducement claim. Likewise,
Hobson’s claims for fraud and misrepresentation do not require
interpretation or administration of the ERISA plan.
We reached a consistent determination in Smith v. Texas
Children’s Hospital. In Smith, Plaintiff Smith sued Texas
Children’s Hospital seeking damages for a state law claim of
fraudulent-inducement and seeking disability benefits under an
ERISA plan. See Smith, 84 F.3d at 155. Smith alleged Texas
Children’s promised her that if she relinquished her job and
benefits at St. Lukes and came to work for Texas Children’s,
Texas Children’s would offer her the same benefits. See Smith,
84 F.3d at 155. We held that Smith’s state law claim for
fraudulent inducement was not preempted by ERISA while her claim
for disability benefits was preempted by ERISA.13 See id.13
Specifically, we found:
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. . . . But, to the extent that Texas
law permits a plaintiff asserting fraudulent-inducement
to recover for value relinquished in addition to value
13
Smith confirms the law in this circuit that a state law claim for
fraudulent inducement is not preempted by ERISA.14 As in Smith,
Hobson’s claims are based upon benefits given up for purposes of
ERISA and thus are not preempted by ERISA.
These decisions demonstrate why Hobson's claims for fraud
and misrepresentation fail both prongs of the preemption test.
Joe Chrestman, like the agent in Perkins and Texas Children’s
Hospital in Smith, allegedly fraudulently induced Hobson to
surrender his pre-existing insurance coverage in order to obtain
an ERISA plan. Joe Chrestman’s underlying conduct relates only
indirectly to the ERISA plan. As such, the relationship between
Hobson and Joe Chrestman derives from state common-law claims,
not the ERISA plan. Moreover, this conclusion does not
contradict Congress’s intent in enacting ERISA–the simplification
of plan interpretation and administration–because Hobson’s claims
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 of recovery based
upon the benefits that Smith gave up by leaving 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.
Id. at 155-56.
14
See Erwin v. U-Haul Int’l, Inc., 2002 U.S. Dist. LEXIS
2937, *6-7 (N.D. Tex. Feb. 22, 2002)(holding that although a
state law fraudulent inducement and misrepresentation claim
against an employer “necessarily touches upon the existence of
the ERISA plan, it is related to the plan only indirectly”).
14
do not require either plan interpretation or administration.
Conclusion
As a result, Hobson’s state law claims for breach of
contract and all claims against John Chrestman are preempted, and
Hobson’s state law claims for fraud and misrepresentation against
Joe Chrestman, Robinson and McDaniels are not preempted.
Consequently, we therefore AFFIRM the district court’s entry of
judgment in favor of defendant John Chrestman for all of Hobson’s
claims and of Joe Chrestman, Robinson and McDaniels for Hobson’s
breach of contract claims. We REVERSE the entry of judgment in
favor or defendant Joe Chrestman, Robinson and McDaniels for
Hobson’s claims for fraud and misrepresentation. Accordingly, we
REMAND this case for reconsideration of the plaintiffs’ motion to
amend their complaint in light of this Court’s determination.
AFFIRMED IN PART; REVERSED AND REMANDED IN PART.
15