Kidder v. H & B Marine, Inc.

• Decision Date: 12 April 1991
• Docket Number: No. 90-3340,90-3340
• Citation: 932 F.2d 347
• Parties: 14 Employee Benefits Ca 1379 Oreste KIDDER and Thelma Kidder, Plaintiffs-Appellees, v. H & B MARINE, INC., et al. Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 347

932 F.2d 347

14 Employee Benefits Ca 1379

Oreste KIDDER and Thelma Kidder, Plaintiffs-Appellees, v. H & B MARINE, INC., et al. Defendants-Appellants.

No. 90-3340.

United States Court of Appeals, Fifth Circuit.

April 12, 1991.

Fred W. Davis, Paul J. Hebert, Sonnier, Hebert, Cabes & Hebert, Abbeville, La., for Blue Cross & Blue Shield, et al.

Kevin D. Conner, Brian J. Waid, Bubrig & Waid, Buras, La., for H & B Marine, Inc.

Owen M. Goudelocke, William P. Rutledge, Lafayette, La., Domengeaux & Wright, for plaintiffs-appellees.

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

Before JOHNSON, WILLIAMS, and HIGGINBOTHAM, Circuit Judges.

PER CURIAM:

The opinion and judgment entered in this cause on March 8, 1991, has been withdrawn, and the following opinion has been entered in its place.

Oreste and Thelma Kidder bring this action under the Comprehensive Omnibus Budget Reconciliation Act of 1985, Pub.L No. 99-272, 100 Stat. 222 (1986) ["COBRA"] (codified at 29 U.S.C.A. Secs. 1161-68 (West 1990 Supp.)). ¹ The Kidders allege that, following Mr. Kidder's termination, the defendants--the company that had employed Mr. Kidder and that company's insurer--failed to notify the Kidders of, and failed to provide them with, the continuation-insurance coverage required by COBRA. The district court held in favor of the plaintiffs, finding that a qualified employee-welfare-benefit plan existed, that the small-employer exemption from COBRA did not apply, and that the defendants violated COBRA's requirements to provide continuation coverage and to notify the plaintiffs of their continuation rights. The court, however, denied the Kidders' request for attorney fees on the ground that the Kidders failed to show bad faith on the part of any of the defendants. We affirm all elements of the district court's judgment except one. We reverse the portion of the district court's judgment holding Blue Cross liable for 25% of the Kidders' damages, and hold instead that H & B Construction is responsible for the entire damage award.

I.

In 1983 Oreste Kidder began working for H & B Marine, Inc., ["H & B Marine"] as a dredge captain on one of the company's barges. For a number of years--at least since 1983--H & B Marine operated in close cooperation with another company, H & B Construction of Louisiana, ["H & B Construction"] which was owned by the same four individuals who owned H & B Marine. The degree of cooperation and overlap between the two companies was extensive. Although the companies had separate post-office boxes and telephone numbers, they operated out of the same office and shared an officer manager. The two companies complemented each other: H & B Marine worked on waterways, doing such things as dredging channels; whereas H & B Construction worked on land, doing such things as building levies. The companies were so close, in fact, that they had a practice of exchanging employees as workloads varied. On June 30, 1986, the two companies merged, leaving a single corporation with the name H & B Construction.

After the merger Mr. Kidder continued to work for H & B Construction until the company terminated him in February of 1987. By the time of Kidder's termination, H & B Construction had purchased a group health-insurance policy to cover its employees. The underwriter of the policy was Blue Cross and Blue Shield of Louisiana. It is undisputed that, when Blue Cross began underwriting the policy for H & B Construction on September 1, 1986, it had no knowledge of the company's previous practice of exchanging employees with H & B Marine or of the merger and did not know that COBRA might apply. ² The reason for Blue Cross's ignorance was that, on its "Participating Employer Application" with Blue Cross and Blue Shield of Louisiana Multiple Employer Trust, H & B Construction mentioned nothing about a merger and listed only 19 employees, 18 of whom were to be enrolled in the insurance program. ³ In addition, all of the 1986 premium statements received from H & B listed fewer than 20 employees. However, Blue Cross eventually received a premium statement from H & B, dated January 1, 1987, that listed more than 20 employees.

H & B Construction terminated Kidder in February of 1987, and Blue Cross removed him from the insurance program as of March 1, 1987. To indicate to Blue Cross that Kidder had been terminated, the office manager of H & B Construction struck through and wrote "cancel 3/1/87" beside Kidder's name on the monthly premium statement. After Kidder was terminated, several H & B Construction representatives told him that he was not eligible for continuation of the group coverage but that he was eligible for conversion coverage--that is, the right to purchase an alternative individual insurance policy that would provide him with some coverage, but less coverage than had been provided under the group plan. Then, someone at H & B Construction prepared Kidder's application for conversion coverage and sent it to Blue Cross, presumably on Kidder's instruction. Blue Cross subsequently issued the conversion policy to Kidder. In March 1987 Mrs. Kidder incurred substantial medical expenses, some of which were covered under the Blue Cross conversion policy.

The Kidders sued H & B Marine, H & B Construction, Blue Cross and Blue Shield of Louisiana, Louisiana Health Service and Indemnity Company, and Blue Cross and Blue Shield of Louisiana Multiple Employer Group Insurance Trust, seeking recovery under COBRA. ⁴ The Kidders sought $23,890.24, which represents the difference between the amount received under the individual conversion policy and the amount that would have been received under the group plan. At trial the issues were whether COBRA applies to H & B Construction's health plan and, if so, whether H & B Construction or Blue Cross (or both) violated the duties imposed by COBRA to provide continuation of group coverage and to notify the Kidders of their right to that continuation coverage.

The district court concluded that H & B Construction's group health-insurance was subject to COBRA for two reasons. First, the court held that H & B Construction's insurance program was an "employee welfare benefit plan" as that term is defined in the relevant statutes and regulations. Second, the court held that H & B Construction's insurance plan did not fall within COBRA's small-employer exemption, 29 U.S.C.A. Sec. 1161(b), which exempts companies that have fewer than twenty employees on a typical day during the preceding calendar year. The court concluded that this exemption did not apply because, for the purposes of the exemption, entities under common control are considered a single employer. And since H & B Construction and H & B Marine had been under common control throughout 1986, they were considered a single employer whose total number of employees exceeded twenty on a typical day. ⁵ Having found COBRA applicable, the court went on to hold that all the defendants had notification duties under COBRA and that all defendants were liable since none had properly notified the Kidders. Then, based on the comparative degrees of fault among the defendants, the court held H & B Construction liable for 75% and held Blue Cross liable for 25% of the damage award.

The issues on appeal are (i) whether H & B Construction's insurance scheme qualifies as a "group health plan" under ERISA; (ii) assuming the answer to (i) is yes, whether COBRA's small-employer exemption applies; and (iii) assuming the answer to (ii) is no and thus that COBRA applies, whether the district court correctly found both H & B Construction and Blue Cross liable under COBRA.

II.

The general statement in COBRA requiring employers sponsoring group health plans to provide continuation insurance coverage reads as follows:

The plan sponsor of each group health plan shall provide ... that each qualified beneficiary who would lose coverage under the plan as a result of a qualifying event is entitled, under the plan, to elect ... continuation coverage under the plan.

29 U.S.C.A. Sec. 1161(a) (West Supp.1990). Thus COBRA applies to "group health plan[s]." A group health plan is defined as "an employee welfare benefit plan providing medical care ... to participants or beneficiaries directly or through insurance, reimbursement, or otherwise." 29 U.S.C.A. Sec. 1167(1) (West Supp.1990) (emphasis added). ERISA in turn defines an employee welfare benefit plan as

any plan, fund or program ... established or maintained by an employer ... to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, ... medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment....

29 U.S.C.A. Sec. 1002(1) (West 1985).

The district court held that "since HB Construction, as a participating employer, paid a percentage of the premiums, the plan constitutes an 'employee welfare benefit plan' under ERISA, and thus, a 'group health plan' under COBRA." Kidder v. H & B Marine, Inc., 734 F.Supp. 724, 729 (E.D.La.1990). The court based its decision on its interpretation of the Department of Labor's regulations further defining employee welfare benefit plan. These regulations refine the definition by setting out four conditions the joint presence of which is sufficient to disqualify a plan from being an employee welfare benefit plan. Hence an employee welfare benefit plan does not include a group-insurance program offered by an insurer to employees under which

(1) No contributions are made by an employer or employee organization;

(2) Participation [in] the program is completely voluntary for employees or members;

(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the...