Gilbert v. Alta Health & Life Ins. Co.

• Decision Date: 16 November 2000
• Docket Number: No. CV 00-J-1703-J.,CV 00-J-1703-J.
• Citation: 122 F.Supp.2d 1267
• Parties: Bill GILBERT, Plaintiff, v. ALTA HEALTH & LIFE INSURANCE COMPANY, et al., Defendants.
• Court: U.S. District Court — Northern District of Alabama

Page 1267

122 F.Supp.2d 1267

Bill GILBERT, Plaintiff, v. ALTA HEALTH & LIFE INSURANCE COMPANY, et al., Defendants.

No. CV 00-J-1703-J.

United States District Court, N.D. Alabama, Jasper Division.

November 16, 2000.

J. Mark Hart, Barbara F. Olschner, Olschner & Hart, Birmingham, AL, for plaintiff.

Michael L. Bell, Wynn M. Shuford, Lightfoot Franklin & White LLC, Birmingham, AL, for Defendants.

MEMORANDUM OPINION

JOHNSON, District Judge.

This cause comes before this court on defendants' motion to dismiss state law claims (doc. 7). This case was originally filed in the Circuit Court of Marion County, Alabama. Defendants removed the case to this court alleging both diversity and federal question jurisdiction (doc. 1).

FACTUAL BACKGROUND

In a light most favorable to plaintiff the facts are as follows. Plaintiff Bill Gilbert is the sole shareholder of Winfield Monument Company, Inc. (Winfield Monument). He obtained the insurance policy "Group Plan No. L 50815" to provide health coverage for himself and for his wife and son who are employees of Winfield Monument. The policy was issued to Winfield Monument and premiums were paid by Winfield Monument.

Plaintiff was hospitalized at Carraway Northwest Hospital in October, 1999. He incurred $10,729.00 in medical bills. Plaintiff properly filed claims for coverage under the policy. The defendants denied plaintiff's claims. Carraway Northwest Hospital has entered suit against plaintiff to collect the amount owed and has informed plaintiff that the account has been referred to a collection agency or lawyer. The plaintiff has suffered mental distress as a result of defendants refusal to pay.

Plaintiff filed suit in Marion County Circuit Court alleging breach of contract and bad faith refusal to pay. Defendants removed the case to this Court under both diversity and federal question jurisdiction (doc. 1). Defendants then filed a motion to dismiss plaintiff's state law claims due to ERISA¹ preemption. A hearing was held on this motion.

LEGAL ANALYSIS

Defendants argue plaintiff's state law claims are preempted by the Employee Retirement Income Security Act of 1974 (ERISA) and are therefore due to be dismissed. ERISA preempts state laws "insofar as they may ... relate to any covered employee benefit plan." 29 U.S.C. § 1144(a). An "employment benefit plan" is "(1) a plan, fund or program (2) established or maintained (3) by an employer ... (4) for the purpose of providing ... benefits ... (5) to participants or their beneficiaries." Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir.1982).

Plaintiff offers three theories why his state law claims should not be dismissed. He claims res judicata bars this court from deciding whether ERISA preempts the state law claims. His second argument is that he is not an "employee" for purposes of ERISA preemption. Plaintiff's final contention is that the state law claim for bad faith refusal to pay benefits is not preempted due to ERISA's savings clause found in 29 U.S.C. § 1144(b)(2)(A).

Res Judicata

The first issue to address is whether the court can decide if ERISA preempts the present state law claims. Plaintiff argues that res judicata bars this court from the ERISA issue. The doctrine of res judicata, or claim preclusion, bars claims which were or could have been adjudicated in a previous action. Dairyland Insurance Company v. Jackson, 566 So.2d 723, 725 (Ala.1990). The requisite elements to establish res judicata are: "(1) a prior judgment on the merits, (2) rendered by a court of competent jurisdiction, (3) with substantial identity of the parties, and (4) with the same cause of action presented in both suits." Jackson, 566 So.2d at 725.

The res judicata elements are met, according to plaintiff, because the plan for Winfield Monument has been the subject of a prior ERISA preemption attempt. In Barbara Venita Gilbert v. Alta Health & Life Ins. Co. the present plaintiff's wife sued the current defendants for coverage under the plan. The case was removed to federal court. The Honorable Seybourn H. Lynne then remanded the case to state court. CV-99-2837-S (N.D. Ala. June 30, 2000). According to plaintiff, Judge Lynne implicitly held that the plan was not subject to ERISA preemption.

Plaintiff is apparently confusing res judicata or claim preclusion, with collateral estoppel or issue preclusion.² The elements of collateral estoppel or issue preclusion are: "(1) the issue in question is identical to one presented in a prior action; (2) the issue was litigated in the prior action; (3) the issue was determined in the prior action; (4) the determination of the issue was necessary to the judgment in the prior action; and (5) there is a substantial identity of parties in the two actions." Ex parte Ford Motor Credit Co., 2000 WL 641115 at *3 (Ala.2000). This is the more appropriate argument for plaintiff in light of his position that Judge Lynne implicitly found that ERISA did not preempt state law claims made in relation to the Winfield Monument plan. If Judge Lynne did in fact make such an implicit finding this finding would regard an issue and not a claim.

Regardless of which doctrine is the appropriate argument, neither will bar this court from determining if ERISA preempts these claims. Res judicata does not apply because Judge Lynne's remand order is obviously not a "prior judgment on the merits" as is required to establish the res judicata bar. See Jackson, 566 So.2d at 725. Collateral estoppel will not bar this court from determining whether ERISA preemption applies to this plan because it is unclear whether the ERISA preemption issue was actually determined in Barbara Venita Gilbert v. Alta Health & Life Ins. Co.

Plaintiff argues that by remanding the case to state court Judge Lynne must have held that ERISA did not preempt the Winfield Monument plan. However, other arguments for remand were offered in Barbara Venita Gilbert v. Alta Health & Life Ins. Co. One additional argument was that the case was due to be remanded because the case had been improperly removed by a third-party defendant. Judge Lynne's remand order does not specify the ground or reason for remanding the action. Therefore it is unclear whether the ERISA preemption issue was actually "determined in the prior action". Because an independent ground for remand existed, it can not be stated that Judge Lynne actually ruled on the ERISA issue. Plaintiff's argument for a preclusive bar must fail. Ex parte Ford Motor Credit Co. at *3.

ERISA Application to Plaintiff

The court must now determine whether ERISA relates to the Winfield Monument plan and preempts the plaintiff's state law claims. ERISA preempts state laws "insofar as they may ... relate to any covered employee benefit plan." 29 U.S.C. § 1144(a). An "employment benefit plan" is "(1) a plan, fund or program (2) established or maintained (3) by an employer ... (4) for the purpose of providing ... benefits ... (5) to participants or their beneficiaries." Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir.1982). "[I]n order to establish an ERISA employee welfare benefit plan, the plan must provide benefits to at least one employee, not including an employee who is also the owner of the business in question." Slamen v. Paul Revere Life Ins. Co., 166 F.3d 1102, 1104 (11th Cir.1999).

Plaintiff does not dispute that the plan at issue is an ERISA plan. He argues that ERISA does not apply to the claims of a sole stockholder of a corporation that sponsors an ERISA plan. The basis for plaintiff's argument is 29 C.F.R. § 2510.3-3(c)(1): "For purposes of this section: An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse." (1998). Plaintiff argues that ERISA only preempts employee claims and not claims made by employers.

The problem with plaintiff's argument is that 29 C.F.R. § 2510.3-3(c)(1) does not stand for the proposition that sole shareholders or owners of businesses are not subject to ERISA preemption or that they can not be participants in an ERISA employee benefits welfare plan. That regulation's purpose is for determining whether an ERISA plan exists. Slamen 166 F.3d at 1105, 1106 quoting Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 407 (9th Cir.1995) ("Neither an owner of a business nor a partner in a partnership can constitute an `employee' for purposes of determining the existence of an ERISA plan"). 29 C.F.R. § 2510.3-3(b) (1998) limits what is an "employee benefit plan" by excluding plans which do not have any employees as participants. 29 C.F.R. § 2510.3-3(c)(1) (1998) then defines who are employees in order to establish an "employee benefit plan".

The reason for the employee benefit plan limitation goes to the very purpose of ERISA. "ERISA excludes employer benefit plans from its broad scope because `when the employee and employer are one and the same, there is little need to regulate plan administration.'" Slamen 166 F.3d at 1105, 1106 quoting Meredith v. Time Ins. Co., 980 F.2d 352, 358 (5th Cir.1993). This is why a plan must provide benefits to at least one employee in addition to those who are owners of the business, in order to establish an ERISA employee welfare benefit plan. See Slamen, 166 F.3d at 1105.

The Slamen decision illustrates how an employer or sole owner, once an ERISA plan is established, can be a participant in an ERISA plan and subject to ERISA preemption. 166 F.3d 1102. In Slamen, the plaintiff was the sole shareholder of a business which had an employee welfare benefits plan. Id., at 1103-04. He purchased a separate benefits policy for himself with the business' funds. Id. The court held that because this policy was separate from the plan for the employees, the separate policy was not an ERISA welfare benefits plan and was not subject to ERISA preemption. Id., at 1106. If this...