EMPIRE BLUE CROSS v. Consolidated Welfare Fund

• Decision Date: 02 September 1993
• Docket Number: No. CV 92-4294.,CV 92-4294.
• Citation: 830 F. Supp. 170
• Parties: EMPIRE BLUE CROSS AND BLUE SHIELD, Plaintiff, v. CONSOLIDATED WELFARE FUND, etc., et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

830 F. Supp. 170

EMPIRE BLUE CROSS AND BLUE SHIELD, Plaintiff, v. CONSOLIDATED WELFARE FUND, etc., et al., Defendants.

No. CV 92-4294.

United States District Court, E.D. New York.

September 2, 1993.

Gibson, Dunn & Crutcher, by Randy M. Mastro, New York City, for plaintiff.

Bower & Gardner, by Victor Starsia, New York City, for defendants Consol. Welfare Fund and Finiguerra.

Meiselman, Boland, Reilly & Fugazzi, by John Reilly, Jr., Mineola, NY, for defendants Evergreen Adm'rs, Sussman and Keiles.

MEMORANDUM AND ORDER

WEXLER, District Judge.

Empire Blue Cross and Blue Shield ("Empire"), plaintiff in the above-referenced action, brought suit against the Consolidated Welfare Fund of the Journeymen Production Allied Services of America and Canada International Union Local 157 (the "Fund"), Henry Finiguerra, the Fund's Administrator; Evergreen Administrators, Inc. ("Evergreen"), the Fund's broker; and Martin Sussman and Leonard Keiles vice presidents and principal shareholders of Evergreen (collectively "defendants") for breach of contract, common law fraud, rescission of contract, violation of § 3105 of New York State Insurance Law, quantum meruit, money had and received, quasi-contract and RICO violations. Presently before the Court is defendants' motion for partial judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure seeking dismissal of all the state claims on the ground that they are preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. For the reasons stated below, defendants' motion is denied.

I. BACKGROUND

For many years, Empire, a not-for-profit health services corporation, organized and operating pursuant to Article 43 of the New York State Insurance Law, contracted with the Fund to provide major medical, hospitalization and other welfare benefits to active members of Local 157 and their beneficiaries. The Fund purports to be an employee welfare benefit plan ("EWBP") and was created by Local 157 to provide its members health benefits.

Plaintiff alleges that Local 157 is a small New York journeymen union with approximately 500 members. Beginning in 1990, the Fund, with Evergreen acting as its broker, began enrolling for Empire coverage thousands of people who were not "active members" of Local 157 and indeed, had nothing to do with that union. Plaintiff alleges that the new enrollees were required to pay a fee, split between the Fund and the broker as a commission, in order to receive health insurance through the Fund's Empire policy. The defendants did this without informing Empire of the true status of the new subscribers, whom the union denominated as "associate members" but whom the Fund simply passed on to Empire for enrollment as "active union members."

The Fund enrolled more than 2,000 "associate members." These individuals were not covered by any collective bargaining agreement negotiated on their behalf by Local 157, nor did they look to Local 157 to conduct any such negotiations. Indeed, the "Associate Membership Fee Deduction Authorization" explicitly stated that the "associate member" understood that Local 157 was not "my collective bargaining representative for any matters other than my status and eligibility for benefits as a participant in the Consolidated Welfare Fund...." Furthermore, "associate members" cannot hold union office, nominate anyone for union office, vote in union elections or be subject to any disciplinary action by the union. Moreover, although not alleged in the complaint, plaintiff now asserts that Evergreen solicited the "associated members" from a wide range of geographic locations and employment backgrounds. It is even alleged that some of the "associate members" are self-employed.

This case first came to the attention of this Court when certain "associate member" enrollees sued to compel Empire to pay their claims. This Court denied their motion for a preliminary injunction and Empire then filed the instant action.

II. DISCUSSION

On this motion for partial judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), this Court must "assume the truth of all facts" alleged in Empire's complaint and "draw all reasonable inferences in Empire's favor." Falls Riverway Realty, Inc. v. City of Niagara Falls, 754 F.2d 49, 54 (2d Cir.1985). Moreover, in order to prevail on the motion, defendants must show that "no material issue of fact remains to be resolved" and that they are entitled to judgment as a matter of law. Juster Ass'n v. City of Rutland, 901 F.2d 266, 269 (2d Cir. 1990), quoting, 5 C. Wright & A. Miller, Federal Practice & Procedure § 1368 at 690 (1969).

ERISA is a statutory scheme designed to promote the interests of employees and their beneficiaries. Shaw v. Delta Airlines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 2896, 77 L.Ed.2d 490 (1983). As a means of effecting this policy, Congress established comprehensive and exclusive rules governing the administration of EWBPs. Thus, Congress preempted the field and denied the states the ability to regulate these plans. Congress did not intend, however, to deny the states the right to regulate insurance schemes that are not EWBPs.

Defendants argue that plaintiffs' state statutory and common law claims must be dismissed on the grounds that they are preempted by section 514(a)¹ of ERISA and that plaintiff has no standing to assert such claims under ERISA. Plaintiff, on the other hand, contends that the Fund, as it is currently constituted, is not an EWBP, but rather an insurance scheme amenable to state regulation.² Whether the Fund is an EWBP subject to the provision of ERISA is determined by section 3 thereof. Section 3(1) defines "employee welfare benefit plan" as:

Any plan, fund or program which was heretofore or is hereafter established by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or maintained for the purpose of providing for the participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits....

In Bell v. Employee Security Benefits Ass'n, 437 F.Supp. 382, 391 (D.Kansas 1977), the court, after examining ERISA's legislative history, set forth the characteristics of an EWBP. In order to fall within the ambit of ERISA, plans in question should: (1) be provided by an employer or homogenous employee organization; (2) be non-commercial in nature; (3) not involve solicitation; (4) not necessarily be actuarially sound; (5) have rates that are substantially lower than insurance rates. The Bell court concluded that

while it is obvious ... that Congress intended to give as broad a definition as possible to EWBPs, it is also clear that it did not intend to allow companies, motivated by profit, to escape insurance regulations by setting up a program that is an EWBP in name only.

Id. at 392.

The Fund at issue in this case, lacks the indicia of an EWBP. The Fund is not currently maintained by a homogenous union.³ Rather, the so-called "associate members" are drawn from a variety of trades, sharing no common employment interests. In fact, it is alleged that some of the "associate members" are self-employed. Furthermore, the Fund's broker solicited the "associate members" to join the Fund and both the Fund and broker benefitted financially from this solicitation. Under facts such as these, the current Fund cannot be said to be an EWBP within the intended meaning of ERISA.

An examination of the specific wording of the ERISA provisions also leads to the conclusion that the Fund is not a qualified ERISA plan. There is no dispute that the Fund provides to its members the benefits described in ERISA section 3(1). Rather, the issue in this case is whether the Fund is presently maintained by an employee organization. ERISA section 3(4) defines an employee organization as:

any labor union or any organization of any kind, or any agency or employee representation committee, association, group or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employment benefit plan, or other matters incidental to employment relationships; or any employees' beneficiary association organized for the purpose in whole or in part, of establishing such a plan.

29 U.S.C. § 1002(4).

Defendants claim that the Fund is maintained by an employee organization, Local 157. At the outset, a persuasive argument can be made that the "associate members" are not truly members of Local 157 and thus at least with respect to those individuals, that organization cannot be deemed to be an employee organization. In National Ass'n of Postal Supervisors v. United States, 944 F.2d 859, 861 (Fed.Cir.1991), the court found that dues collected from "limited benefit members" of the National Association of Postal Supervisors ("NAPS"), a tax-exempt labor organization which sponsors a health plan, are subject to taxation. NAPS invited any federal employee to join the union for the sole purpose of obtaining health insurance. These limited benefit members could neither vote nor hold office. Id. at 860. Upholding the lower court, which had found that "limited benefit members were not really members of NAPS," the court refused to extend tax-exempt status to the collected dues. Accord, American Postal Workers Union v. United States, 925 F.2d 480, 483 (D.C.Cir.1991).

Although the courts in these cases were not called on to determine whether the health plans at issue were ERISA-qualified, the underlying rationale of the cases, that individuals cannot be considered true members of a union if their sole connection with the union is the opportunity to buy union-sponsored health insurance, is relevant to the issue at hand. This Court can think of...