444 F.3d 478 (6th Cir. 2006), 05-5097, Briscoe v. Fine

Docket Nº:William BRISCOE; Laura Farley; Harold Smith; Lawrence Smith; Michael R. Straka, Plaintiffs-Appellants (05-5097)/Cross-Appellees,
Citation:444 F.3d 478
Case Date:April 13, 2006
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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444 F.3d 478 (6th Cir. 2006)

William BRISCOE; Laura Farley; Harold Smith; Lawrence Smith; Michael R. Straka, Plaintiffs-Appellants (05-5097)/Cross-Appellees,


Allan H. FINE; Martin L. Fine; Steven R. Fine (05-5104); Miriam Fine Gellar; Steven L. Fine (05-5101); Preferred Health Plan, Inc. (05-5103), Defendants-Appellees/Cross-Appellants.

Nos. 05-5097, 05-5101, 05-5103, 05-5104.

United States Court of Appeals, Sixth Circuit

April 13, 2006

Argued: February 1, 2006

Appeal from the United States District Court for the Western District of Kentucky at Louisville. No. 02-00264—Charles R. Simpson III, District Judge.

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David L. Leightty, LEIGHTTY & ASSOCIATES, Louisville, Kentucky, for Appellants.

Robert W. Bishop, BISHOP & ASSOCIATES, Louisville, Kentucky, David Domene, BLACKBURN, HUNDLEY & DOMENE, Louisville, Kentucky, William D. Roberts, HALL, RENDER, KILLIAN, HEATH & LYMAN, Louisville, Kentucky, for Appellees.


DavidL. Leightty, LEIGHTTY & ASSOCIATES, Louisville, Kentucky, for Appellants.

Robert W. Bishop, BISHOP & ASSOCIATES, Louisville, Kentucky, David Domene, BLACKBURN, HUNDLEY & DOMENE, Louisville, Kentucky, William D. Roberts, A. Courtney Guild, Jr., Jay P. Turner, HALL, RENDER, KILLIAN, HEATH & LYMAN, Louisville, Kentucky, for Appellees.

GILMAN, J., delivered the opinion of the court, in which CLAY, J., joined.

RYAN, J. (p. 501 - 502), delivered a separate concurring opinion.

Before: RYAN, CLAY, and GILMAN, Circuit Judges.



Five former employees of the M. Fine & Sons Manufacturing Co., Inc. (the Company) filed this putative class-action lawsuit against five of the Company's former officers and directors (collectively, the Fines), as well as the third-party administrator of the Company's healthcare plan. Preferred Health Plan, Inc. (PHP). The plaintiffs alleged that the defendants violated their fiduciary duties imposed by the Employment Retirement Income Security Act (ERISA) and committed various torts under Kentucky law.

Specifically, the plaintiffs maintain that the Fines and PHP (1) failed to disclose to the employees that the Company was in dire financial straits and was therefore unable to make the payments necessary to support the Company's healthcare plan, and (2) failed to devise a means of assuring adequate financing for the plan. They also allege that PHP improperly allocated plan assets to itself after the plan ceased operation and PHP's administration contract had terminated.

In granting summary judgment in favor of the defendants on the ERISA claims, the district court concluded that neither the Fines nor PHP were ERISA fiduciaries within the meaning of the statute. The district court also initially dismissed the plaintiffs' pendent state-law claims with prejudice, but, after a motion for reconsideration, changed the dismissal to one without prejudice. On appeal, the plaintiffs maintain their argument that the Fines and PHP were ERISA fiduciaries, and that they breached their duties during the months preceding the Company's bankruptcy. Both the Fines and PHP, on the other hand, cross-appeal the district court's decision to dismiss the plaintiffs' pendent state-law claims without prejudice, as opposed to with prejudice, arguing that those claims are preempted by ERISA.

For the reasons set forth below, we (1) agree with the district court that the Fines were not ERISA fiduciaries, (2) conclude that the district court erred in ruling that PHP was not an ERISA fiduciary with respect to the assets of the Company's healthcare plan over which PHP had control, and (3) hold that all but one of the plaintiffs' state-law claims are preempted by ERISA. We therefore AFFIRM the grant of summary judgment in favor of the Fines; AFFIRM the dismissal of the plaintiffs' state-law claims, but order that all but the one claiming that the Fines breached a duty by failing to disclose the

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overall financial condition of the Company be dismissed with prejudice; REVERSE the grant of summary judgment in favor of PHP; and REMAND the case for further proceedings consistent with this opinion.


A. Factual background

M. Fine & Sons Manufacturing Co., Inc. was a manufacturer of clothing products, with its principal place of business in Louisville, Kentucky. During the mid-1990s, the Company owned additional facilities in Georgia, Honduras, Indiana, Kentucky, and Tennessee, although these facilities began to close as the Company's financial condition deteriorated. Faced with decreased demand for its products and with increased operating costs, the Company hired Gary Finkel as its Chief Operating Officer in 1999. Finkel was asked "to turn the situation around, to increase sales, decrease costs, [and] therefore increase profitability." Despite Finkel's efforts, the Company's financial slide continued. It lost $4.7 million in 1999.

One of the cost-saving measures implemented by Finkel was the change from a fully insured healthcare plan with Anthem Blue Cross/Blue Shield to a self-insured plan administered by PHP. The Company initiated the new plan by entering into an "Administrative Services Agreement (Agreement) with PHP on August 1, 1999. Under the Agreement, PHP was named as both "a Third Party Administrator" responsible for "certain supervisory, administrative and general management services," and as the "Plan Administrator," thereby acquiring "certain legal responsibilities as defined by the Internal Revenue Code and ERISA." PHP now maintains that its designation as the "Plan Administrator" was an error that was later corrected in what it calls the "Plan Document," a form used by PHP and customized to establish the benefits that the Company sought to provide its employees and the eligibility requirements for the receipt of those benefits.

In contrast to the Administrative Services Agreement, the Plan Document listed the Company as the administrator of the plan and stated that the plan was to be administered through the Company's human resources office. Kim Lassiter, the vice president of human resources, was the only Company official to sign the initial Plan Document and the amendments to that document implemented in July of 2000 and March of 2001. The Plan Document also listed the Company as the "named fiduciary," and described PHP as the "plan supervisor" to whom all claims and questions regarding claims should be directed. Employees were informed, however, that they could appeal the denial of their claim directly to the Company, whose decision as to eligibility and coverage would be final.

As the supervisor of the plan, PHP performed a variety of tasks, including processing claims, determining coverage and eligibility, and making payments to eligible employees. In a typical case, PHP would receive a claim from a healthcare provider, process that claim to determine whether it was covered by the Company's plan, and, if the claim was covered, PHP would advise the Company on a weekly basis of the money that needed to be deposited into the account from which PHP paid the service providers. That account, which was in the names of both the Company and PHP, was financed from the general assets of the Company and had no minimum balance, such that the account was designed to "zero ouf after PHP dispersed the designated set of payments. In addition to its claims-handling responsibilities, PHP was charged with enrolling Company employees in the self-funded plan, a task that it

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continued to perform through March of 2001, at which time the Company became unable to meet its obligations under the plan.

The role of the Company's directors in the administration of the plan is less apparent. All of the Fines were shareholders and members of the board of directors at some point, although Steven Fine was removed from the board when Gary Finkel was hired as CEO in 1999. Finkel, in turn, replaced the three Fines who had acted as co-presidents and co-CEOS from 1989 until Finkel was hired. According to the plaintiffs, the Fines became aware in mid-2000 that the Company was suffering from cash-flow problems and was late in making critical payments. Four of the Fines sought to improve the situation by loaning the Company a total of $1.5 million in capital.

By the spring of 2001, the Company's fragile financial condition was evident, and the board of directors authorized management to use as capital the cash value (some $750,000) of life insurance policies owned by the Company. A new severance plan, which markedly reduced severance benefits to discharged employees, was promulgated a few days later. At around the same time, the Company stopped making the payments required to support the healthcare plan, and PHP was unable to write checks payable from the plan account. Retaining for itself an administrative fee of $5,793.40, PHP cancelled its contract with the Company in a letter dated May 17, 2001. PHP then sent a final letter to the Company on June 6, 2001, including in that correspondence checks that remitted the balance on hand of COBRA payments made by individuals directly to PHP ($2,849.30) and the remaining funds in the plan account ($2,036.99). The Company filed for bankruptcy later that month.

Among those adversely affected by the Company's decline and eventual bankruptcy were the five plaintiffs, all of whom were either current or former employees at the time the Company ceased operations. The plaintiffs became eligible for healthcare benefits in three different ways. Lead plaintiff William "Jack" Briscoe was an hourly employee whose contributions to the...

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