Fifth Circuit Court Cases - Case Law and Opinions from the 5th Circuit Federal Court - Court of Appeals

	ROMINGER LEGAL
		Fifth Circuit Court of Appeals Opinions - 5th Circuit
					Need Legal Help?
					Need Legal Help?
LEGAL RESEARCH CENTER
LEGAL RESEARCH CENTER			LEGAL HEADLINES - CASE LAW - LEGAL FORMS	NOT FINDING WHAT YOU NEED? -CLICK HERE

This opinion or court case is from the Fifth Circuit Court or Appeals. Search our site for more cases - CLICK HERE

LEGAL RESEARCH

COURT REPORTERS

PRIVATE INVESTIGATORS

PROCESS SERVERS

DOCUMENT RETRIEVERS

EXPERT WITNESSES

Find a Private Investigator

Find an Expert Witness

Find a Process Server

Case Law - save on Lexis / WestLaw.

Legal News - Legal Headlines

United States Court of Appeals,
Fifth Circuit.
No. 93-7362.
Nathan and Sharyl McDONALD, Individually and as Next Friend and
Guardians of Nathan Neil McDonald, a Minor, and J.N. McDonald, Jr.,
Individually and d/b/a McDonald Equipment, Plaintiffs-Appellants,
v.
PROVIDENT INDEMNITY LIFE INSURANCE COMPANY, et al., Defendants-
Appellees.
Aug. 9, 1995.
Appeal from the United States District Court For the Southern
District of Texas.
Before POLITZ, Chief Judge, EMILIO M. GARZA and STEWART, Circuit
Judges.
POLITZ, Chief Judge:
McDonald Equipment Company and employee-beneficiaries of its
health insurance plan appeal an adverse summary judgment in their
action complaining of excessive--and unaffordable--premium increases.
We affirm.
Background
In 1986, McDonald Equipment, a sole proprietorship owned by
J.N. McDonald, Jr., subscribed to the Business Insurance Trust to
obtain group health insurance for its employees and their
dependents. The BIT, a multiple employer trust, was organized by
Arden O. French, Jr., who served as trustee and also owned
Insurance Resources Management Corporation, the third party
administrator of the group health plan. When McDonald subscribed
in 1986, the BIT plan was underwritten by a policy issued by
Northern Carolina Mutual. In 1988 North Carolina Mutual ceased
1

providing health insurance and French selected Provident Indemnity
Life Insurance Company as the replacement insurer. IRM continued
as administrator until taken over by Provident in November 1989.
French then resigned as trustee and the trusteeship was transferred
first to three Provident employees and then to TrustMark Bank.
Nathan McDonald, the son of J.N. McDonald Jr., managed the
McDonald business. In September 1989, Nathan's son Neil suffered
a tragic, near-fatal swimming accident, resulting in a permanent
spastic quadriplegic condition. Provident paid $360,000 in medical
claims and raised McDonald Equipment's premium by 50 percent in
April 1990 (McDonald changed its deductible from $100 to $500 to
avoid a 150 percent increase), by 100 percent in November 1990, and
by still another 100 percent in April 1991. As a result,
McDonald's initial monthly premiums of $2000 were increased to
$15,208. The company could not afford continued coverage and the
policy lapsed.
The McDonalds and McDonald Equipment brought suit against
Provident, the BIT and French, asserting various state law claims
and alternatively invoking the Employee Retirement Income Security
Act of 1974, 29 U.S.C. 壯 1001 et seq. Granting the defendants'
motion for partial summary judgment, the district court found that
McDonald's health coverage constituted an ERISA plan and preempted
the state law claims. Following a bench trial on the remaining
issues, the district court rendered judgment in favor of the
defendants. This appeal timely followed.
Analysis
2

1. Was there an ERISA plan?
In reviewing the grant of summary judgment, we may affirm
only if there is no dispute of material fact, and the movant is
entitled to judgment as a matter of law.1 The existence vel non of
an ERISA plan is a question of fact.2 Therefore, our initial
inquiry focuses on whether the summary judgment evidence would have
allowed a reasonable trier-of-fact to find that an ERISA plan did
not exist.
ERISA defines an employee welfare benefit plan in pertinent
part as:
any plan, fund, or program which was ... established or
maintained by an employer or by an employee organization, or
by both, to the extent that such plan, fund, or program was
established or is maintained for the purpose of providing for
its participants or their beneficiaries, through the purchase
of insurance or otherwise ... medical, surgical, or hospital
care or benefits....3
Relying on MDPhysicians & Associates, Inc. v. State Board of
Insurance,4 the McDonalds contend that the BIT was not such a plan.
The BIT was established by French in association with an insurance
company as an entrepreneurial venture, not by employers seeking to
provide employee benefits and, further, it had no relationship with
1Fed.R.Civ.P. 56(c).
2Gahn v. Allstate Life Ins. Co., 926 F.2d 1449 (5th
Cir.1991).
329 U.S.C. � 1002(1).
4957 F.2d 178 (5th Cir.), cert. denied, --- U.S. ----, 113
S.Ct. 179, 121 L.Ed.2d 125 (1992).
3

the employee-participants apart from the provision of benefits.5
The BIT's status, however, is not dispositive. In determining
whether an ERISA plan exists, we must focus on the employer and its
involvement with the plan. The dispositive issue is whether
McDonald Equipment's subscription to the BIT constituted an ERISA
plan.6
That inquiry is tripartite. First we apply the safe-harbor
provisions established by Department of Labor regulations to
determine whether the program was exempt from ERISA. Because
McDonald Equipment paid the insurance premiums, it was not.7 Next
we look to see if there was a "plan" by inquiring whether "from the
surrounding circumstances a reasonable person [could] ascertain the
intended benefits, a class of beneficiaries, the source of
financing, and procedures for receiving benefits."8 Under this
standard a plan clearly existed. The benefits provided by the
McDonald plan were described in the Provident policy; the
beneficiaries were the McDonald employees and their dependents;
McDonald Equipment paid the entire premiums for coverage of its
employees and a portion of the premiums for coverage of the
5Id.; see also Donovan v. Dillingham, 688 F.2d 1367 (11th
Cir.1982) (en banc).
6Gahn; Meredith v. Time Ins. Co., 980 F.2d 352 (5th
Cir.1993); Memorial Hospital System v. Northbrook Life Ins. Co.,
904 F.2d 236 (5th Cir.1990). Unlike the case at bar, the status
of the multiple employer trust was dispositive in MDPhysicians
because the issue was whether the state could regulate the MET.
729 C.F.R. � 2510.3-1(j).
8Memorial Hospital, 904 F.2d at 240 (quoting Dillingham, 688
F.2d at 1373).
4

dependents; and the procedures for recovering benefits were
explained in the policy manual. Finally, we ask whether the
employer "established or maintained" the plan for the purpose of
providing benefits to its employees. McDonald Equipment did so,
purchasing the insurance, selecting the benefits, identifying the
employee-participants, and distributing enrollment and claim
forms.9 A reasonable fact-finder could have reached but one
conclusion: McDonald's subscription to the BIT constituted an
ERISA plan.
2. Standard of Review.
The McDonalds first contend that the district court erred in
applying the arbitrary and capricious standard of review rather
than a de novo standard in reviewing French's actions as a
fiduciary. In Firestone Tire & Rubber Company v. Bruch,10 the
Supreme Court recognized that when a fiduciary is granted
discretion in the performance of a duty the review is for an abuse
of discretion. In the instant action the trust agreement creating
the BIT gave French the absolute discretion to contract with an
insurance provider. French acted under this authority in selecting
PILIC and the district court correctly reviewed the decision under
the arbitrary and capricious standard which is the equivalent of
the abuse of discretion standard in this circuit.11
9Cf. Memorial Hospital.
10489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989).
11Penn v. Howe-Baker Engineers, Inc., 898 F.2d 1096 (5th
Cir.1990) (equating arbitrary and capricious standard with abuse
of discretion standard in ERISA context).
5

3. Did French breach his fiduciary duties in selecting PILIC?
At the outset, we note that as trustee of the BIT and
principal of IRM, the third-party administrator, French was a
fiduciary of the McDonald plan.12 The plaintiffs contend that
French breached his fiduciary duty by not disclosing Provident's
schedule for the re-rating of premiums, by selecting PILIC to
underwrite the BIT policy, and by benefitting personally from the
increased level of premiums. We review these claims under a three
step analysis. To establish a claimed breach of fiduciary duty, an
ERISA plaintiff must prove a breach of a fiduciary duty and a prima
facie case of loss to the plan.13 "Once the plaintiff has satisfied
these burdens, "the burden of persuasion shifts to the fiduciary to
prove that the loss was not caused by ... the breach of duty.' "14
In ruling on the McDonalds' nondisclosure claim, the district
court held that French breached his fiduciary duty by failing to
disclose PILIC's re-rating schedule for its group health coverage
premiums to McDonald Equipment. We perceive no error in this
holding. Section 404(a) imposes on a fiduciary the duty of
undivided loyalty to plan participants and beneficiaries, as well
as a duty to exercise care, skill, prudence and diligence.15 An
obvious component of those responsibilities is the duty to disclose
12Donovan v. Mercer, 747 F.2d 304 (5th Cir.1984).
13Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th
Cir.1994).
14Id. at 917.
1529 U.S.C. � 1104.
6

material information.
Shortly after the effective date of the plan, PILIC advised
French of a new rate schedule which French later conceded would
have resulted in prohibitive premiums for any small employer
experiencing a single catastrophic claim. French, however, failed
to inform either McDonald Equipment or its employee-beneficiaries
of the schedule, at least in part due to marketing considerations.
Considering the impact that this rate schedule would have had on
McDonald Equipment or any other small employer, this information
was material to PILIC's suitability as a replacement insurer and
McDonald's decision to remain in the BIT. Accordingly, French had
an obligation to disclose.
The nondisclosure claim falters, however, at the second step
of our analysis, specifically, the plaintiffs failed to prove a
loss to the plan as required by 29 U.S.C. 1109(a).16 In
Massachusetts Mut. Life Ins. Co. v. Russell,17 the Supreme Court
interpreted the "loss to the plan" language in � 1109 to limit
claims under this section to those which inure to the benefit of
the plan as a whole rather than to individual beneficiaries. The
court noted that this interpretation reflected ERISA's primary
concern with the possible misuse or mismanagement of plan assets.18
A close examination of the McDonalds's claim does not disclose
16The plaintiffs assert that the defendants are liable under
� 409 of ERISA, codified at 29 U.S.C. � 1109.
17473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985).
18Id. at 140-42 & n. 8, 9, 105 S.Ct. at 3089-90 & n. 8, 9,
87 L.Ed.2d at 102-03 & n. 8, 9 (discussing legislative history).
7

how it involved the requisite "loss to the plan" as described in
Russell. The resulting harm of the breach of French's fiduciary
duties was the payment of higher premiums which ultimately lead to
the decision, albeit under economic duress, to discontinue
insurance coverage with the BIT. The relief sought is the balance
of the benefits due for the treatment of Neil McDonald. This
relief, unfortunately in this legal analysis, inures to the benefit
of the McDonalds, not the plan, and thus has no impact on plan
assets. Were we to consider the prohibitive increases in premiums
as the injury or loss, these increases actually made the plan
itself healthier and more likely to survive the catastrophic claims
of other beneficiaries, including other McDonald Equipment
employees.19 We must therefore conclude that the McDonalds failed
to establish a loss to the plan.20 Further, because the showing of
a loss to the plan is required for any breach of fiduciary duty
claim under � 1109, the McDonalds' other breach claims also fail.
4. Other claims.
The remaining claims have no merit. The state law civil
conspiracy and fraud claims are preempted by ERISA.21 The district
19The plaintiffs also failed to provide any evidence that
coverage was available from other companies under better terms.
20See Total Plan Services v. Texas Retailers Assoc., 932
F.2d 357 (5th Cir.1991) (dismissing claim for failure to allege a
loss to the plan); Physicians HealthChoice, Inc. v. Trustees of
Automotive Employee Benefit Trust, 988 F.2d 53 (8th Cir.1993).
21See Christopher v. Mobil Oil Corp., 950 F.2d 1209 (5th
Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 68, 121 L.Ed.2d 35
(1992).
8

court did not err in denying a jury trial on the ERISA claims.22
Finally, we find no abuse of discretion in the district court's
termination of discovery.23
AFFIRMED.

22Borst v. Chevron Corp., 36 F.3d 1308 (5th Cir.1994);
Calamia v. Spivey, 632 F.2d 1235 (5th Cir.1980).
23See Wichita Falls Office Assoc. v. Banc One Corp., 978
F.2d 915 (5th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct.
2340, 124 L.Ed.2d 251 (1993) (according great deference to
judge's decision to curtail discovery).
9