General American Life Ins. Co. v. Castonguay

Decision Date01 February 1993
Docket NumberNo. 91-16072,91-16072
Citation984 F.2d 1518
Parties, 16 Employee Benefits Cas. 2013 GENERAL AMERICAN LIFE INSURANCE COMPANY, Plaintiff-Appellant, v. Lee CASTONGUAY, Jerry Fitzpatrick, Charles Kilmer, et al.; Alex G. Sieben, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Andrew W. Lafrenz, William R. Hill, and Michael D. Alexander, Donahue, Gallagher, Thomas & Woods, Oakland, CA, for plaintiff-appellant General American Life Ins. Co.

James A. Carter, Jay P. Hendrickson, and Karen T. Dutton, Hendrickson, Higbie & Carter, San Francisco, CA, for defendants-appellees Lee Castonguay, Jerry Fitzpatrick, Charles Kilmer, Royal Miller, Jr., Charles P. Niles, Glenn Cornelius, Morris Landy, Harold W. Beaune, James E. Burney, Richard Kane, individually and as trustees of the Northern California Motor Car Dealers Ass'n Trust Fund.

Mark T. Mitchell, McClintock & Quadros, San Mateo, CA, for defendant-appellee Alex G. Sieben.

Appeal from the United States District Court for the Northern District of California.

Before KOZINSKI and THOMPSON, Circuit Judges, and von der HEYDT, District Judge. *

KOZINSKI, Circuit Judge:

The Northern California Motor Car Dealers Association Trust, an ERISA trust, is obligated by its contract with General American Insurance Company to reimburse General over four million dollars. Unfortunately, it looks like the trust will come up three million dollars short. We are faced with two questions: First, can General sue not only for breach of contract but also for fraud, based on misrepresentations the trust's agent allegedly made when he was negotiating an extension of the contract? And, second, are the trustees personally liable for the trust's obligations?


The trust provides health and other benefits to participating car dealers and their employees. In March 1987, it bought an insurance policy from General, under which General was to pay part of the claims made by the trust's plan members. The trust was to pay the remainder, but if it couldn't, General would protect the plan members by paying on their behalf and then seeking reimbursement from the trust. This meant, of course, that if the trust were to become insolvent General might have to pay but not get paid back.

Aware of this risk, General took steps to protect itself. It drafted the agreement to let either party cancel on a month's notice; to let General periodically demand audited financial statements; and to let General cancel immediately if the trust didn't provide these statements. ER 21-22. General was, however, less vigilant in exercising these rights than in acquiring them. By the end of 1987, the trust was in deep trouble--an audit revealed it was $1.7 million in the red, SER 429--but General didn't realize this until Fall 1989. When General renewed the policy in Fall 1988, it didn't look at any financial statements. Instead, it relied on representations by Alexander Sieben (the trust's agent in the renewal negotiations) that the trust was solvent but that no financial statements were available, and on a document provided by Sieben listing only the trust's assets but not its liabilities.

When General finally realized the trust was insolvent, it canceled the policy and brought suit. It sued the trust for breach of contract, the trust and Sieben for fraud and negligent misrepresentation, and the trustees in their individual capacities under both theories. Defendants moved for partial summary judgment, and the district court entered final judgment for them on everything but the first claim. General appeals.


To recover for fraud under California law, it's not enough that General have relied on Sieben's false statements. General's reliance must also have been reasonable in light of its "intelligence and experience." Wagner v. Benson, 101 Cal.App.3d 27, 36, 161 Cal.Rptr. 516, 522 (1980) (fraud); see also Wilhelm v. Pray, Price, Williams & Russell, 186 Cal.App.3d 1324, 1332-33, 231 Cal.Rptr. 355, 359 (1986) (negligent misrepresentation); Chicago Title Ins. Co. v. Superior Court, 174 Cal.App.3d 1142, 1151, 220 Cal.Rptr. 507, 513 (1985) (fraud); Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1031, (9th Cir.1992) (both). Defendants were entitled to summary judgment if no rational trier of fact could find that General's reliance on the statements was reasonable.

General is a sophisticated insurance company which deals with large insurance transactions day in and day out. It knew to make the trust promise to provide audited financial statements on request, and it reserved the right to cancel the agreement on the spot if the trust failed to comply. ER 21-22. It knew the trust had an accountant--in fact, it was paying the accountant's fees, ER 266, presumably to make sure the trust's financial status would be well documented. It had the documents that established the trust, which required that the trust get annual financial audits. General could easily have checked Sieben's claim that the trust was solvent; any sensible business entity in its place would have done so. Indeed, any sensible business entity would have questioned Sieben's statement that this multi-million-dollar trust had no financial documents. The very absence of current financial data should have set off bells, and made General investigate more carefully before renewing the policy.

Often it's reasonable for one party to rely on the other's representations without verifying them. But this isn't a case where the relying party is ignorant or inexperienced, or views the other party as an expert. See Hartong v. Partake, Inc., 266 Cal.App.2d 942, 966, 72 Cal.Rptr. 722, 737 (1968); Hefferan v. Freebairn, 34 Cal.2d 715, 719-20, 214 P.2d 386, 388-90 (1950). Neither is this a case where the other party's statements seem reasonable on their face or are especially hard to check. See Mariani v. Schonfeld, 126 Cal.App.2d 187, 189-90, 271 P.2d 940, 942 (1954). Given General's sophistication, the amount of money at stake, the tell-tale danger signals that should have alerted General to the need for further investigation and the ease with which General could have discovered the truth, no rational jury could have found that General behaved reasonably. See Atari Corp., 981 F.2d at 1032. The district court was correct in granting summary judgment to defendants on the fraud and negligent misrepresentation counts.


A. General contends the trustees are personally liable for the three million dollar shortfall. By entering into the deal on the trust's behalf, General argues, the trustees bound themselves personally as well as binding the trust. Questions concerning a trustee's liability for a trust's debts are normally determined by state law. Here, this would be Cal.Prob.Code § 18000, which makes the trustees liable for contracts entered into before July 1, 1987, but not for those entered into later. 1

But this is no ordinary trust. It's an employee benefit plan trust, and under ERISA "any and all State laws" are preempted "insofar as they ... relate to any employee benefit plan." 29 U.S.C. § 1144(a); see also Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97-99, 103 S.Ct. 2890, 2900-2901, 77 L.Ed.2d 490 (1983). ERISA's preemption clause is one of the broadest ever enacted by Congress, PM Group Life Ins. Co. v. Western Growers Assurance Trust, 953 F.2d 543, 545 (9th Cir.1992), and it preempts even generally applicable laws, not just laws aimed exclusively at employee benefit plans, see Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47-48, 107 S.Ct. 1549, 1552-1553, 95 L.Ed.2d 39 (1987).

The difficulty is that ERISA doesn't preempt all generally applicable laws whenever they happen to affect an employee benefit plan. The Supreme Court has explained that much of state tort and contract law isn't preempted. See Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 832-33, 108 S.Ct. 2182, 2186-87, 100 L.Ed.2d 836 (1988). Likewise, state law isn't preempted when an employee benefit plan acts as employer, Shaw, 463 U.S. at 97 n. 17, 103 S.Ct. at 2900 n. 17; Lane v. Goren, 743 F.2d 1337, 1339-40 (9th Cir.1984), or as stockholder, Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 1465-70 (5th Cir.1986), cert. denied, 479 U.S. 1034, 107 S.Ct. 884, 93 L.Ed.2d 837 (1987). It's far easier to make "I know it when I see it" decisions in this field than to come up with a general rule, but we must nonetheless try.

The key to distinguishing between what ERISA preempts and what it does not lies, we believe, in recognizing that the statute comprehensively regulates certain relationships: for instance, the relationship between plan and plan member, between plan and employer, between employer and employee (to the extent an employee benefit plan is involved), and between plan and trustee. See J. Daniel Plants, Note, Employer Recapture of ERISA Contributions Made by Mistake, 89 Mich.L.Rev. 2000, 2017 (1991). Because of ERISA's explicit language, see PM Group, 953 F.2d at 545, and because state laws regulating these relationships (or the obligations flowing from these relationships) are particularly likely to interfere with ERISA's scheme, these laws are presumptively preempted. 2

But ERISA doesn't purport to regulate those relationships where a plan operates just like any other commercial entity--for instance, the relationship between the plan and its own employees, or the plan and its insurers or creditors, or the plan and the landlords from whom it leases office space. State law is allowed to govern these relationships, because it's much less likely to disrupt the ERISA scheme than in other situations. Moreover, if these relationships were governed by federal law, federal courts would have to invent a federal common law of contracts, torts, property, corporations--something that would run against the grain of our federal system. Cf., e.g., Federal Tort Claims Act, ...

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