950 F.2d 294 (6th Cir. 1991), 91-5523, International Resources, Inc. v. New York Life Ins. Co.

Docket Nº:91-5523, 91-8527
Citation:950 F.2d 294
Party Name:INTERNATIONAL RESOURCES, INC.; Larry E. Smith, Plaintiffs-Appellees, v. NEW YORK LIFE INSURANCE COMPANY, Defendant-Appellant.
Case Date:November 26, 1991
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 294

950 F.2d 294 (6th Cir. 1991)

INTERNATIONAL RESOURCES, INC.; Larry E. Smith, Plaintiffs-Appellees,



Nos. 91-5523, 91-8527

United States Court of Appeals, Sixth Circuit

November 26, 1991

Argued Sept. 24, 1991.

Rehearing and Rehearing En Banc

Denied Jan. 15, 1992.

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Danny C. Reeves, Anne Adams Chesnut (Argued and Briefed), James G. LeMaster, Greenebaum, Doll & McDonald, Lexington, Ky., for plaintiffs-appellees.

Robert G. Breetz, Stites & Harbison, Louisville, Ky., A.J. Harper, II, (Argued and Briefed), Nancy L. Patterson (Briefed), Fulbright & Jaworski, Houston, Tex., for defendant-appellant.

Before MARTIN and JONES, Circuit Judges, and WELLFORD, Senior Circuit Judge.

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BOYCE F. MARTIN, Jr., Circuit Judge.

International Resources, Inc. and its president, Larry E. Smith, allege New York Life Insurance Company violated Kentucky contract and tort law when the insurance company proposed cancellation of a group health insurance policy issued to the plaintiffs.

We must resolve the following questions: (1) does the Employment Retirement Income Security Act preempt all of the plaintiffs' state law claims; and, (2) did the district court abuse its discretion by granting a preliminary injunction that compels New York Life to continue making payments under the disputed coverage. For the reasons given below, we affirm the district court's decision with regard to the preliminary injunction and we affirm in part and reverse in part the district court's determination that ERISA preempts the plaintiffs' state law claims. We remand this case for further proceedings not inconsistent with this opinion.


In 1982, International Resources purchased group medical insurance coverage arranged by Group Marketing Services, Inc., a multi-employer trust. The insurance was administered by Group Marketing Services trust administration and underwritten by the Life Insurance Company of North America. International Resources, in its arrangement with Group Marketing Services, selected both the terms and the price for its employee coverage. All International Resources' employees were automatically covered by the plan and the company paid the insurance premiums. At the time International Resources first obtained coverage, the company had six employees; it now has two employees. On April 1, 1983, Trans Pacific Life Insurance Company succeeded the Life Insurance Company of North America as underwriter.

Larry Smith owns 75% of International Resources' stock. Smith and his dependents were insured for major medical expenses under the plan arranged by International Resources with Group Marketing Services. On May 8, 1983, Smith's son, Mark, was severely injured in an automobile accident. Mark Smith is now a mute quadriplegic and requires nursing care twenty-four hours a day.

On March 1, 1986, New York Life succeeded Trans Pacific as the underwriter for International Resources' policy. In October, 1988, New York Life announced cancellation of the group policy provided through Group Marketing Services; continuation of benefits under the policy were to cease on October 1, 1989. International Resources and Smith brought suit against New York Life in federal district court, seeking declaratory and other relief for injuries arising out of the proposed cancellation. The district court granted an injunction compelling New York Life to continue paying for Mark Smith's medical care. As part of the injunction, the court ordered International Resources to provide an escalating bond equivalent to the amount paid by New York Life for Mark Smith's treatment. Subsequently, the district court ruled that ERISA preempted all of International Resources' and Smith's state law claims.

Both New York Life and the plaintiffs first appealed this matter in December, 1990. New York Life appealed the preliminary injunction requiring it to continue providing payments under the disputed coverage. At the same time, International Resources and Smith appealed the district court determination that ERISA preempted the plaintiffs' state law claims. The 1990 appeals were heard within days of two Supreme Court decisions relevant to the parties' claims. These two cases, FMC Corp. v. Holliday, 498 U.S. ----, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990) and Ingersoll-Rand v. McClendon, 498 U.S. ----, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990), provide further instruction on how we should interpret ERISA's preemption provisions. Accordingly, we remanded both parties' claims to the trial court for re-consideration in light of the new case law. Upon remand, the district court reaffirmed its earlier decision giving rise to the present appeal.

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  1. Establishment Of An ERISA Fund

    We must first determine whether International Resources established an ERISA plan. The two cases that we requested the district court to consider upon remand, FMC and Ingersoll-Rand, do not aid us in this initial determination. Both cases, however, are helpful to our analysis of other issues and will be discussed below.

    According to the statute, ERISA "plans" include:

    [A]ny plan, fund, or program, which ... is ... established or maintained by an employer ... 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, or benefits in the event of sickness, accident, disability, death or unemployment....

    29 U.S.C. § 1002(1) (1991). We find that, "In determining whether a plan, fund or program [exists] a court must determine whether from the surrounding circumstances a reasonable person could ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving benefits." Donovan v. Dillingham, 688 F.2d 1367, 1373 (11th Cir.1982), quoted in Brown v. Ampco-Pittsburgh Corp., 876 F.2d 546, 551 (6th Cir.1989).

    The facts in Donovan, 688 F.2d at 1367, are similar to those now before us. In Donovan, small corporations and employee organizations purchased insurance from a group trust similar to Group Marketing Services. The trust, in turn, obtained the group policy from a life insurance company. The Donovan court determined that the companies and organizations subscribed to the trust "with the intent to provide health insurance." Donovan, 688 F.2d at 1374. All the parties involved in the Donovan trust determined the terms and conditions applicable to the trust by looking to the insurance policy and the insurer to formulate the eligibility requirements. Id. The participating employers and organizations required no more of the employees covered by the plan than was required by the insurer. Id. The Donovan court concluded that such employers or organizations that furnished health insurance through trusts established ERISA plans. Id.

    International Resources and Smith attempt to rebut application of Donovan by relying on Taggart Corp. v. Life & Health Benefits Admin., Inc., 617 F .2d 1208, 1211 (5th Cir.1980), cert. denied, 450 U.S. 1030, 101 S.Ct. 1739, 68 L.Ed.2d 225 (1981). In Taggart, the Fifth Circuit established that "bare purchases of health insurance" that involve no owner control, administration, or responsibility for the policy or benefits, were insufficient to create an ERISA plan. Under Taggart, the plaintiffs argue, they did not create an ERISA plan and the Donovan analysis is inapplicable.

    We find that the plaintiffs mistake the true relevance of Taggart and Donovan to their case. Admittedly, Taggart stands for the proposition that "ERISA does not regulate purchases of health insurance when there is no welfare plan." Donovan, 688 F.2d at 1375. However, Taggart does not hold that any employer who merely purchases a group health insurance policy or subscribes to a trust has not established or maintained an employee welfare benefit plan. Such a construction of Taggart is expressly rejected by the Donovan court. Id. We agree with the Donovan analysis and find that the Donovan court's construction of ERISA is more consistent with the Act's broad scope than Taggart. Employers can establish ERISA plans "rather easily." Credit Managers Ass'n of Southern California v. Kennesaw Life and Accident Ins. Co., 809 F.2d 617, 625 (9th Cir.1987). The ERISA definition of "employee welfare benefit plan" specifically allows that ERISA plans may be established "through the purchase of insurance or otherwise." 29 U.S.C. § 1002(1); see also Brundage-Peterson v. Compcare Health Services Insurance Corp., 877 F.2d 509, 511 (7th Cir.1989) ("barebones plan" for medical insurance coverage is "a common method by which employers provide health and other welfare benefits to their employees, and not one that has heretofore been

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    thought to take a benefits plan out of ERISA").

    Under the Donovan and Brundage analyses, International Resources has established an ERISA plan. Several of International Resources' actions are persuasive: 1) the company contracted with Group Marketing Services for the purpose of providing insurance to its employees; 2) the company obtained the coverage for its employees; 3) the coverage was automatic and applied to all employees; and, 4) the company paid the insurance premiums. International Resources did not merely advertise alternate plans and then refrain from making any contributions on behalf of its employees. Compare with Taggart, 617 F.2d at 1211. Instead, International Resources chose the plan, paid the premiums, and gave this coverage to all its employees as an employee benefit. Even though Larry Smith is presently International Resources' only full-time employee, the mere fact the company no longer has several employees does not transform what was...

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