Estate of Damon, Matter of, 94SC558

• Citation: 915 P.2d 1301
• Decision Date: 29 April 1996
• Docket Number: No. 94SC558,94SC558
• Parties: Pens. Plan Guide (CCH) P 23921U In the Matter of the ESTATE OF Edith DAMON, Protected Person. UNISYS CORPORATION, Petitioner, v. James R. DAMON, Conservator of the Estate of Edith Damon, and Colorado State Hospital, Respondents.
• Court: Supreme Court of Colorado

Page 1301

915 P.2d 1301

Pens. Plan Guide (CCH) P 23921U

In the Matter of the ESTATE OF Edith DAMON, Protected Person.

UNISYS CORPORATION, Petitioner, v. James R. DAMON, Conservator of the Estate of Edith Damon, and Colorado State Hospital, Respondents.

No. 94SC558.

Supreme Court of Colorado,

En Banc.

April 29, 1996.

Rothgerber, Appel, Powers & Johnson, Michael D. Nosler, Brian J. Spano, JoAnn L. Vogt, Denver, for Petitioner.

Peter Smith & Susan Young Law Offices, P.C., Peter M. Smith, Englewood, for Respondent James R. Damon.

Machol, Johannes & Vanstrom, P.C., James A. Kaplan, Denver, for Respondent Colorado State Hospital.

Justice KIRSHBAUM delivered the Opinion of the Court.

In Damon v. Unisys Corp., 892 P.2d 350 (Colo.App.1994), the court of appeals affirmed the trial court's conclusion that a decision by petitioner Unisys Corporation (Unisys) to deny continued benefits to beneficiary Edith Damon (Damon) under an employee benefits plan established pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 (1994) (ERISA), was arbitrary and capricious. Damon, 892 P.2d at 357. Having granted Unisys' petition for certiorari review of the court of appeals' decision, we affirm.

I

On August 6, 1986, Damon's husband, Robert, died from gunshot wounds inflicted by Damon. Damon was subsequently charged with the murder of her husband. On October 23, 1987, a jury in the criminal proceeding determined that Damon was not guilty of the murder by reason of insanity. Pursuant to section 16-8-105, 8A C.R.S. (1986 & 1995 Supp.), Damon was immediately committed to the custody of the Colorado State Hospital (the Hospital) for medical care and treatment. The Jefferson County District Court (the trial court) appointed Damon's son James Damon conservator of the estate of Damon (the Estate).

At the time of his death, Robert Damon was a participant in a post-retirement medical plan maintained by Unisys (the Plan). The parties agree that the Plan is governed by ERISA. Damon was a beneficiary of the Plan. Unisys paid the costs of Damon's care and treatment at the Hospital from the date of her admission until June 1, 1989, when Unisys discontinued such payments.

At the time here pertinent, Unisys had entered into a contract with Aetna Insurance Company (Aetna), located in Minneapolis, Minnesota, to establish the "Unisys Benefits Payment Office" (UBPO), an office staffed entirely by Aetna personnel for administrative services associated with the Plan. The Plan itself provided that the UBPO had the "exclusive right and responsibility to interpret the provisions of the Plan" and listed the UBPO as the "party for appeals." However, during the applicable time period Jay W. Brubaker was employed by Unisys in Blue Bell, Pennsylvania, as Director of Welfare Plans/Financial Administrator. Pursuant to Unisys' contract with Aetna, Aetna was Unisys' agent but Unisys was the plan administrator for purposes of ERISA. Brubaker was responsible for supervising the UBPO and retained final authority to decide benefit payment questions.

In March of 1989, the UBPO unilaterally initiated a review of the care being provided to Damon to determine whether such services constituted care that was not medically necessary or constituted custodial or maintenance care. ¹ The UBPO obtained Damon's medical records from the Hospital and forwarded those records to Lynn Zimmerman, a member of the UBPO staff. Zimmerman, a nurse without expertise in psychological disorders like Damon's, submitted the records to Philippa Coughlan, Ph.D. (Coughlan), a consulting psychologist hired by Aetna but not a member of the UBPO staff, for an opinion concerning whether Damon's care was medically necessary.

On or about April 4, 1989, Coughlan drafted a memorandum to Zimmerman opining that Damon's condition did not require the acute level of treatment being provided by the Hospital. Zimmerman did not receive that memorandum until April 26, 1989. On April 18, 1989, Coughlan informed Zimmerman by telephone of Coughlan's opinion that Damon's treatment at the Hospital was not medically necessary. Coughlan also told Zimmerman that "we do not provide coverage in lieu of a sentence for a crime."

On April 19, 1989, Zimmerman telephoned Brubaker and advised him that Coughlan's review of Damon's medical records indicated that the care being provided by the Hospital was not medically necessary and constituted maintenance or custodial care. Brubaker stated that he agreed and determined that Unisys should deny benefits to Damon.

On April 21, 1989, Zimmerman sent a letter to Damon informing her that after June 1, 1989, she would no longer be entitled to benefits under the Plan because the care being provided by the Hospital "has become custodial or maintenance in nature."

Zimmerman did not consult the Plan before drafting her April 21, 1989, letter, and she never reviewed Damon's records. In a deposition Zimmerman admitted that she did not participate in the determination that Damon's care had become custodial or maintenance care, but simply transmitted pertinent documents.

On June 17, 1989, James Damon wrote a letter as conservator of the Estate to Zimmerman requesting review and reconsideration of the decision to terminate Damon's benefits. Zimmerman submitted this letter together with Damon's medical records to Coughlan for further review and asked Coughlan whether Unisys could sustain its decision to deny medical benefits to Damon. Coughlan responded that while Damon was emotionally disturbed, the type of care Damon was receiving at the Hospital was not medically necessary. Coughlan's findings were communicated to James Damon through a letter prepared on July 31, 1989. While a copy of this letter was sent to Brubaker, there is no evidence that Brubaker was contacted prior to the mailing thereof to James Damon.

On May 16, 1990, the Hospital sent Unisys a letter indicating that Damon had made considerable progress under a new treatment plan and requesting review of the denial of benefits. Included with this letter were copies of Damon's medical records and a letter from Damon's treating psychiatrist. The UBPO forwarded this material to Coughlan for review. On June 11, 1990, Coughlan drafted a memorandum confirming the denial of benefits after her review of the new materials. Zimmerman communicated Coughlan's conclusion to the Hospital in a letter dated July 10, 1990, a copy of which letter was sent to Brubaker. However, there is no evidence that Brubaker was contacted prior to the time this decision was made. The trial court found that during the entire benefits review process Brubaker never saw any of Coughlan's reports or other written materials and that Brubaker's participation in the decision to deny benefits to Damon consisted of "a phone call from Ms. Zimmerman who passed on Dr. Coughlan's yet to be written findings."

On September 10, 1990, and July 25, 1991, the Hospital filed a claim against the Estate in the trial court seeking payment plus statutory interest for services provided to Damon subsequent to June 1, 1989. James Damon disallowed the claim, and in December of 1990 moved for permission to file a third party complaint against Unisys for all sums claimed by the Hospital as well as for future services performed by the Hospital allegedly covered as benefits under the Plan. The trial court granted the motion and the Estate then filed a third party complaint against Unisys alleging that the actions of Unisys in terminating benefits to Damon constituted breach of contract and a "violation of the [P]lan" enforceable under ERISA's civil enforcement provision, 29 U.S.C. § 1132(a)(1)(B). The complaint alternatively alleged common law claims for lack of good faith and fair dealing and tortious bad faith termination of coverage, and sought compensatory damages, punitive damages, and a declaratory judgment for future benefits under the Plan.

In February of 1992, Unisys moved for partial summary judgment, alleging that the Estate's state law claims were preempted by ERISA. The trial court granted the motion and dismissed the state law claims. ²

Following a bench trial, the trial court concluded that Unisys acted arbitrarily and capriciously in discontinuing benefits to Damon and that the Estate was denied a "full and fair review" of the denial of benefits as required by 29 U.S.C. § 1133(2). The trial court entered judgment for the Hospital on the Hospital's claim against the Estate in the amount of $302,348.34, plus interest, costs, and attorney fees. The trial court also set aside Unisys' denial of benefits, ordered Unisys to reinstate Damon's benefits under the Plan, and ordered Unisys to pay all benefits to which Damon would have been entitled absent the arbitrary and capricious denial.

Unisys appealed the trial court's judgment against it and the Estate cross-appealed the trial court's dismissal of its state law claims against Unisys. The court of appeals authorized the Hospital to join the cross-appeal. The court of appeals first determined that the Plan was " 'established or maintained by an employer for the purpose of providing medical benefits for its participants,' " Damon, 892 P.2d at 355 (quoting 29 U.S.C. § 1002(1) (1988)), ³ and was therefore governed by ERISA and regulations promulgated thereunder. The court of appeals affirmed the trial court's determination that the Estate's state law claims were preempted by ERISA and concluded that the trial court had no jurisdiction to consider the issue of whether the Estate was afforded a full and fair review of the denial of continued benefits pursuant to 29 U.S.C. § 1133(2). Damon, 892 P.2d at 357-58. ⁴ In addition, the court of appeals held that the trial court appropriately applied ERISA's "arbitrary and capricious" standard of review and affirmed the trial court's conclusion that the denial of benefits violated that standard.

II

Unisys contends that the court of appeals...