402 F.3d 1267 (11th Cir. 2005), 02-12409, Cotton v. Massachusetts Mut. Life Ins. Co.

Docket Nº:02-12409.
Citation:402 F.3d 1267
Party Name:James P. COTTON, Jr., Gerald Eickhoff, Plaintiffs-Appellees Cross-Appellants, v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, a Massachusetts Corporation, Defendant-Appellant Cross-Appellee.
Case Date:March 16, 2005
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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402 F.3d 1267 (11th Cir. 2005)

James P. COTTON, Jr., Gerald Eickhoff, Plaintiffs-Appellees Cross-Appellants,


MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, a Massachusetts Corporation, Defendant-Appellant Cross-Appellee.

No. 02-12409.

United States Court of Appeals, Eleventh Circuit.

March 16, 2005

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[Copyrighted Material Omitted]

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William A. Clineburg, Jr., David Tetrick, Jr., King & Spalding, Atlanta, GA, for Massachusetts Mut. Life Ins. Co.

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James J. Leonard, Caroline W. Spangenberg, Kilpatrick & Stockton, LLP, Atlanta, GA, for James P. Cotton, Jr. and Gerald Eickhoff.

Appeals from the United States District Court for the Northern District of Georgia.

Before TJOFLAT and ANDERSON, Circuit Judges, and STAFFORD [*], District Judge.

TJOFLAT, Circuit Judge:

Defendant Massachusetts Mutual Life Insurance Co. appeals the judgment of the district court in favor of the plaintiffs, James Cotton and Gerald Eickhoff, on their claim for breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001 et seq. The district court entered judgment for the plaintiffs after striking Mass Mutual's answer and entering a default as a sanction for discovery violations. On appeal, Mass Mutual makes three arguments: first, that the entry of a default was an abuse of discretion; second, that the well-pleaded factual allegations in the amended complaint fail to establish liability under ERISA; and, third, that the district court impermissibly awarded individualized, extra-contractual damages that are not available under ERISA. We agree with Mass Mutual that the amended complaint fails to establish liability under ERISA. Accordingly, we reverse and remand with instructions that the plaintiffs' ERISA claims be dismissed with prejudice. As we explain in Part II, infra, the plaintiffs are unable to establish liability under ERISA because Mass Mutual simply is not a fiduciary for any purpose related to the misconduct they allege. 1 Indeed, as we explain in Part III, infra, our review leads us to conclude that this was never really an ERISA case at all, that it never should have been litigated in federal court, and that the plaintiffs' motion to remand should have been granted at the outset. In Part IV, infra, we briefly address the other discovery-related sanctions that the district court imposed in its order entering a default.


After entering a default, the district court adopted as true the well-pleaded factual allegations contained in the amended complaint. Our statement of the case is, in turn, drawn primarily from the district court's summary of these allegations.

Cotton and Eickhoff were executive officers of BEI Holdings, Inc. (now known as AMERSCO, Inc.). In 1982, Cotton and Eickhoff entered into a "Wealth-Op Deferred Compensation Agreement" with BEI. Under the agreement, BEI agreed to pay Cotton and Eickhoff, or their beneficiaries, $250,000 annually for fifteen years beginning at age 65 or upon their death.

In December 1986, Mass Mutual agents Ronald Hilliard and Gary Martin 2 proposed arrangements between Cotton and BEI and between Eickhoff and BEI whereby BEI and the employee would split premiums and death benefit proceeds on a permanent whole life insurance policy issued on the employee. Under the proposal,

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BEI would pay all premiums on each policy. A portion of the premiums would be taxable as compensation to Cotton and Eickhoff, while the remainder would be treated as loans from BEI to Cotton and Eickhoff. According to the proposal, the cash value of each whole life policy would continue to grow until it would cover the annual premium payments--that is, until the premiums would "vanish." This was projected to occur after only seven years in Eickhoff's case and only ten years in Cotton's case. Cotton and Eickhoff are required to repay the portion of the premiums treated as loans at a certain time from the cash value of the policies. This was referred to as the "rollout." At the rollout, the cash values of the policies will be reduced by the amount of premiums repaid to the employer. Based on this proposal, Cotton, Eickhoff, and BEI agreed to establish what the amended complaint and the district court refer to as the "Split-Dollar Employee Welfare Benefit Plan Sponsored by AMRESCO, Inc."

As part of the plan, Mass Mutual issued two whole life insurance policies to Cotton in early 1987. Each had a face amount of $5,715,500 and a stated annual premium of $119,697. Eickhoff was also issued two policies, one of which was later divided into two, leaving him with three policies, one with a face amount of $5,327,500 and a stated annual premium of $76,426, one with a face amount of $3,350,729 and a stated annual premium of $48,079, and one with a face amount of $1,976,771 and a stated annual premium of $28,376. BEI and its successor, AMRESCO, paid the premiums on the policies.

In 1990, the plan's primary objective was changed to use the insurance policies as the primary source of retirement income for the plaintiffs and to provide greater cash and payout values by committing BEI to continue to pay premiums for additional periods of time--seventeen years, beginning in 1990, in Cotton's case, and eighteen years, also beginning in 1990, in Eickhoff's case. In return, Cotton and Eickhoff relieved BEI of its obligations under the "Wealth-Op Deferred Compensation Agreement." The plaintiffs claim that in making these amendments they relied substantially on the policy projections Mass Mutual and its agents provided, as well as the agents' similar oral representations. These analyses projected significant death benefits and cash surrender values and annual retirement income of $250,000.

In 1992, Cotton and Eickhoff took out substantial loans against their policies. Cotton borrowed $910,000, and Eickhoff borrowed $571,000--the maximum amounts the two were permitted to borrow against their policies. They allege that they did so in reliance upon representations made by Mass Mutual and its agents that the policies were sufficiently strong and had sufficient value to support the loans while still generating retirement income after the rollout. Cotton and Eickhoff also changed the policies' dividend option at this time so that dividends would be used to pay interest and principal on the loans rather than to purchase additional insurance, as had been the case previously.

In February 1996, Alexander & Alexander Benefit Services, another Mass Mutual agent, 3 notified Cotton and Eickhoff that the policy illustrations provided in December 1995 overstated their policies' cash surrender values and death benefits because

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they did not take into account the rollout-- i.e., the repayments due AMRESCO in 2006 in Cotton's case and in 2007 in Eickhoff's case. The plaintiffs allege that illustrations provided to them in 1986, 1990, 1992, 1993, and 1994 included the same error. Whereas analyses provided in 1994 and 1995 projected death benefits of several million dollars and annual retirement income of at least $200,000, new analyses predict that Cotton would receive only nominal retirement income and death benefits of less than $600,000, and that Eickhoff would receive virtually no retirement income and death benefits of no more than $1,000,000. Moreover, the new analyses project that Cotton and Eickhoff will have to pay post-rollout premiums in order to keep the policies in force. In other words, premiums have not "vanished." 4 In addition, the plaintiffs allege that Mass Mutual (a) concealed the existence of "modal penalties" that resulted from their employer paying premiums on a monthly rather than annual basis; (b) used methods of allocating premium payments between income to the plaintiffs and loans from their employer that were less favorable to the plaintiffs than those used in policy projections; (c) understated the policies' sensitivity to changes in interest and dividend rates; and (d) generally obscured actual policy performance by consistently

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presenting reports in different and misleading formats.

In August 1998, Cotton and Eickhoff filed suit in the Superior Court of Dekalb County, Georgia. The state-court complaint asserted state-law claims of innocent misrepresentation, negligent misrepresentation, fraud, and promissory estoppel and sought equitable relief requiring the defendants to ensure that their policies performed as described in policy analyses. All defendants-- i.e., Mass Mutual, Martin, Hilliard, Alexander & Alexander, and several other alleged Mass Mutual agents--joined in removing the case to federal court on the theory that the plaintiffs' claims were completely preempted by ERISA. The plaintiffs moved to remand the case to state court, arguing that the claims were not completely preempted because the policies and agreements did not constitute an ERISA plan and because the complaint did not seek relief available under ERISA.

On May 1999, the district court denied the plaintiffs' motion to remand. It first held that an ERISA plan existed under the test established in Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir.1982) (en banc). Relying primarily on our decision in Engelhardt v. Paul Revere Life Ins. Co., 139 F.3d 1346 (11th Cir.1998), it also held that the complaint sought relief available under ERISA. As such, it determined that the plaintiffs' state-law claims were completely preempted so that removal based on federal question jurisdiction was permissible.

In a subsequent order, the court granted the plaintiffs' motion to file an amended complaint asserting claims under ERISA. The plaintiffs' amended complaint asserted four ERISA claims: a § 502(a)(1)(B) claim to enforce the terms of the plan, a § 502(a)(2) claim for breach of fiduciary duty, a § 502(a)(3) claim for appropriate equitable relief, 5 and a claim under the ERISA federal common law...

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