American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assur. Soc. of U.S.

• Citation: 841 F.2d 658
• Decision Date: 08 April 1988
• Docket Number: No. 87-3199,87-3199
• Parties: , 9 Employee Benefits Ca 1769 AMERICAN FEDERATION OF UNIONS LOCAL 102 HEALTH & WELFARE FUND, et al., Plaintiffs-Appellants, v. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, et al., Defendants- Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 658

841 F.2d 658

56 USLW 2616, 9 Employee Benefits Ca 1769

AMERICAN FEDERATION OF UNIONS LOCAL 102 HEALTH & WELFARE FUND, et al., Plaintiffs-Appellants, v. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, et al., Defendants- Appellees.

No. 87-3199.

United States Court of Appeals Fifth Circuit.

April 8, 1988.

George S. King, Emile C. Rolfs, III, Broadhurst, Brook, Mangham & Hardy, Baton Rouge, La., for plaintiffs-appellants.

Michael W. Brody, New York City, Glenn D. Holden, Baton Rouge, La., for defendants-appellees.

Appeal from the United States District Court for the Middle District of Louisiana.

Before CLARK, Chief Judge, REAVLEY and HUNTER, ^* Circuit Judges.

CLARK, Chief Judge:

A union, its health and welfare fund, and two plan participants sued an insurance company and its agent for violations of fiduciary duties imposed by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. Sec. 1001 et seq. The district court held the agent liable to the fund for health benefit payments made to ineligible persons but not liable for commissions he earned as administrator of the fund, 647 F.Supp. 947. The agent was also held liable to the insurance company for commissions earned on the conversion from term to whole life insurance policies. Because we determine that the agent did not become an ERISA fiduciary until after he was appointed fund administrator, we affirm the finding that he was liable for payments made to inelgible claimants but reverse the finding that he was not liable for commissions earned after he became fund administrator. We affirm the finding that the agent was liable to the insurance company for commissions paid on the life insurance conversion. Finding that the insurance company was not an ERISA fiduciary, we affirm the dismissal of claims against it.

I.

In April 1976, the Equitable Life Assurance Society hired Glen Holden to solicit applications for life and health insurance policies and annuity contracts on a salary plus commission basis. In the summer of 1977, Holden solicited and then issued a group life insurance policy to the American Federation of Unions, Local 102, Health and Welfare Fund (the Fund) providing coverage for term life insurance, dependent life insurance and weekly indemnity benefits. Soon thereafter, Holden issued a policy to the Fund providing group coverage for major medical and dental expenses. Under the terms of the policies, the Fund's Board of Trustees was responsible for administering the Fund and for providing final review of any denied claims.

In late 1978, Equitable advised the Fund that its health insurance premiums would increase substantially. Equitable and Holden advised the Fund that it could reduce its costs by adopting a self-insured health benefits program. The Fund took this advice, cancelled its group coverage and instituted a self-insured program bolstered by a "stop-loss" major medical policy providing for payment of claims in excess of $25,000.00. After the Fund became self-insured, Equitable owed it over $280,000.00 in claims reserves from the old plan which were due 90 days after the conversion. Equitable didn't refund the reserves until February 1981 after the Fund filed a lawsuit to recover them.

Holden, as Equitable's agent who had sold insurance to the Fund, was aware that the Fund needed someone to administer health benefit claims and proposed that he be selected to act as Fund administrator. The Fund's trustees contracted with "Glen Holden Associates" to become its administrator for the health insurance benefits program. Holden was compensated at a rate of 12% of claims plus administrative expenses. The Fund made out its premium checks to "Glen Holden & Associates." Holden remained an Equitable agent while he was acting as Fund administrator. He apparently concealed this information from the Fund's trustees. Several Equitable employees were aware of Holden's dual role as agent and administrator. However, Equitable's general counsel advised Holden that it was proper to proceed in two capacities, so he did. Holden continued to receive commissions as an Equitable agent on insurance policies sold to others while he was serving as Fund administrator.

While acting as administrator, Holden accepted numerous late health insurance payments and extended coverage to non-covered persons. ¹ As a result, the Fund estimates that it suffered a net loss of $190,296.30 in health payments to non-covered persons and $8,746.00 for additional insurance that it acquired from Equitable for the non-covered persons.

In May 1979, Holden recommended that the Fund replace its $10,000.00 group term life insurance policy with $5,000.00 whole life policies on each of its members. Holden filled out and signed 1350 applications for whole life policies without consulting the individuals who were purportedly covered. The monthly premium on the whole life policies was approximately twice what it had been on the group term policies. Holden received $65,000 in commissions from Equitable for acting as the agent who processed the applications.

By March of 1980, the Fund had become insolvent. The trustees concluded that Holden's actuarily unsound advice had largely caused the problems and terminated Holden as Fund administrator. Soon thereafter, Equitable learned that Holden had forged the signatures on the individual whole life policies and fired Holden from his position as an agent.

The Fund and the union filed suit against Equitable and Holden claiming that they had breached fiduciary duties imposed by ERISA. Lloyd Leger and Harry Breeden, Jr., two Fund participants, were later added as plaintiffs. The Fund sought to recover $277,143.00 transferred from the union's pension fund to the health and welfare fund, ² $190,296.30 for the health benefit payments made to non-covered persons, $83,000 in commissions and $43,000 in administrative expenses paid to Holden during his tenure as administrator, $8,746 for additional insurance purchased for the non-covered persons, $5,000 in fees paid to an actuary to examine the insolvent Fund, and damages resulting from Equitable's late payment of the $280,000 in claims reserves. Equitable cross-claimed against Holden to recover the $65,000 of commissions it had paid in the switch from term to whole life policies. The Fund brought pendent state claims against Holden and Equitable.

The district court found that Holden was an ERISA fiduciary while he was Fund administrator and held him liable for the $190,296.30 in health benefits paid to non-covered claimants. It dismissed all other claims against Holden. The court dismissed all claims against Equitable holding that it was not an ERISA fiduciary. The court granted Equitable's $65,000 cross-claim against Holden. It dismissed the state law claims because they were not properly pled. The Fund appeals. We affirm in part and reverse, and remand in part.

II.

A) Holden's Liability

ERISA imposes a prudent man standard of care upon anyone acting as a fiduciary with respect to an employee welfare benefit plan as defined in the Act. ³ 29 U.S.C. Sec. 1104(a) (1985). A person is considered an ERISA fiduciary if:

"(i) he 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) he 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) he has any discretionary authority or discretionary responsibility in the administration of such plan."

29 U.S.C. Sec. 1002(21)(A) (1985).

Any fiduciary who violates Sec. 1104(a)'s duty to act in the best interests of participants and beneficiaries or engages in prohibited transactions listed in 29 U.S.C. Sec. 1106 (1985) is subject to liability under 29 U.S.C. Sec. 1109(a) (1985). Section 1109(a) provides:

"Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary."

Section 1109(b) goes on to state that no fiduciary shall be liable for a breach of fiduciary duty that occurred before he became a fiduciary or after he ceased to be a fiduciary.

This court gives the term fiduciary a liberal construction in keeping with the remedial purpose of ERISA. Donovan v. Mercer, 747 F.2d 304, 309 (5th Cir.1984). A person is a fiduciary only with respect to those portions of a plan over which he exercises discretionary authority or control. Sommers Drug Stores Co. Employees Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 1459-60 (5th Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 884, 93 L.Ed.2d 837 (1987).

Using these standards, the district court correctly held that Holden became a fiduciary only after he was appointed administrator of the Fund. Under the terms of the contract making him Fund administrator, Holden was empowered to investigate, process, resolve and pay claims to eligible members of the Fund, to maintain a claims file on members of the Fund, to create a trust in the Fund's account to facilitate disbursements of health benefits and to maintain a check register accounting for disbursements. Holden's authority to grant or deny claims, to manage and disburse fund assets and to maintain claims files clearly qualifies as discretionary control respecting management of a plan or its assets within the meaning of Sec. 1002(21)(A). See, e.g., Carroll L. Wood, III, D.D.S. v. CNA...