Memorial Hosp. System v. Northbrook Life Ins. Co.

• Decision Date: 15 June 1990
• Docket Number: No. 89-2513,89-2513
• Citation: 904 F.2d 236
• Parties: , 17 Fed.R.Serv.3d 462, 12 Employee Benefits Ca 1897 MEMORIAL HOSPITAL SYSTEM, Plaintiff-Appellant, v. NORTHBROOK LIFE INSURANCE COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 236

904 F.2d 236

59 USLW 2035, 17 Fed.R.Serv.3d 462,

12 Employee Benefits Ca 1897

MEMORIAL HOSPITAL SYSTEM, Plaintiff-Appellant, v. NORTHBROOK LIFE INSURANCE COMPANY, et al., Defendants-Appellees.

No. 89-2513.

United States Court of Appeals Fifth Circuit.

June 15, 1990.

Rehearing Denied July 16, 1990.

Mark Douglas Herbert, Sullins, Johnston, Rohrbach & Magers, Houston, Tex., for plaintiff-appellant.

Michael Kuhn, Bracewell & Patterson, Houston, Tex., for Northbrook.

Mike Johanson, Weitinger & Tucker, Houston, Tex., for Noffs.

Appeal from the United States District Court for the Southern District of Texas.

Before POLITZ, KING and WILLIAMS, Circuit Judges.

KING, Circuit Judge:

Plaintiff-appellant Memorial Hospital System appeals a summary judgment dismissing two claims against defendants-appellees, one claim for breach of contract and the other claim for deceptive and unfair trade practices based on article 21.21 of the Texas Insurance Code. The district court determined that both state law claims were preempted under the Employee Retirement Income Security Act of 1974. We affirm that portion of the district court's judgment dismissing the breach of contract claim, but we vacate that portion of the judgment dismissing the article 21.21 claim and remand the latter claim to the state court.

I. Background

Defendant-appellee Noffs, Inc. (Noffs) provides health care benefits for its employees and their dependents through a group insurance policy purchased from and administered by defendant-appellee Northbrook Life Insurance Company (Northbrook). Under the terms of the policy, all active, full-time employees of Noffs are eligible for benefits; however, employees hired after February 1, 1986, are not covered during the first thirty days of continuous employment. Upon completion of the thirty-day service requirement, coverage begins on the first day of the following month.

Noffs hired Joseph Echols on September 10, 1986. On September 26, 1986, Joseph's wife, Gloria Echols (Echols), sought treatment at Memorial Hospital. The hospital telephoned Noffs and spoke with an individual named "Sharon" to verify coverage. Sharon verified that coverage was in effect and available for Echols' hospital care. Plaintiff-appellant Memorial Hospital System (Memorial) asserts that it relied on this representation of coverage in rendering its services to Echols until her discharge on November 21, 1986, and that it would not have extended treatment to her without such an assurance of payment. The cost of treatment for Echols totaled $110,829.40.

The Echols assigned their benefits under the Northbrook/Noffs insurance policy to Memorial to cover the cost of hospital treatment. Upon request for payment, Northbrook informed Memorial that Echols was not eligible for benefits on the date of her hospitalization and denied Memorial's claim. ¹

On September 4, 1987, Memorial filed suit against Northbrook and Noffs (collectively, the defendants) in state district court in Harris County, Texas, asserting only state law causes of action: deceptive and unfair trade practices under article 21.21 of the Texas Insurance Code; breach of contract; negligent misrepresentation; and equitable estoppel. Memorial's claims against Northbrook were premised on its theory that Noffs acted as Northbrook's agent in verifying coverage.

Northbrook removed the lawsuit to federal district court based on federal question jurisdiction, alleging the existence of an employee benefit plan regulated under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Secs. 1001-1461. Northbrook then filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6), contending that ERISA preempted Memorial's state law claims, and that, under the terms of the ERISA plan in question, Memorial was not entitled to any benefits. Memorial disputed that its claims were preempted. Moreover, it filed a motion to remand, arguing that the group insurance plan in question was not an ERISA plan and that the district court therefore lacked subject matter jurisdiction and should remand the case to the state court.

The motions for dismissal and for remand were referred to a United States magistrate, who informed the parties that she would treat the motion to dismiss as a motion for summary judgment. The magistrate filed a Memorandum and Recommendation and an Amended Memorandum and Recommendation that were accepted as correct and, by order, adopted by the district court. The district court first determined that the group insurance policy purchased and implemented by Noffs for its employees constituted an ERISA welfare benefit plan. The court then held that removal of this lawsuit was proper under federal question jurisdiction.

The court dismissed Memorial's claims for breach of contract and for violation of article 21.21 of the Texas Insurance Code, determining that these causes of action related to a claim for benefits under an ERISA plan and were consequently preempted. The court also held that article 21.21 is not a statute that "regulates insurance" within the meaning of ERISA's savings clause, 29 U.S.C. Sec. 1144(b)(2)(A), and is therefore not spared from ERISA's preemptive effect.

The district court reached a different conclusion, however, regarding the claims that were based on Memorial's independent position as a third-party health care provider, rather than on its derivative status as an assignee of benefits under an ERISA plan. Finding that the claims asserting negligent misrepresentation and estoppel ² involved state common law principles that "could stand alone absent any issue regarding the application of a welfare benefit plan," the court determined that these claims were not caught in the broad net of ERISA preemption. Having dismissed the two preempted federal claims, the court remanded the pendant state law claims to state court.

Memorial now appeals. In substance, it argues that (1) the district court erred in denying Memorial's motion to remand the entire case because Noffs does not have in place an employee welfare benefit plan regulated by ERISA and, (2) ERISA does not preempt Memorial's "nonderivative" claim against Northbrook and its agents for misrepresentation of coverage under article 21.21 of the Texas Insurance Code. Memorial does not dispute that the unambiguous terms of the Northbrook policy deny coverage to Echols for the hospital treatment in question. Memorial thus concedes on appeal that, if we should determine that Noffs' insurance program constitutes an ERISA plan, the district court correctly dismissed Memorial's breach of contract claim brought in its derivative capacity as an assignee of a plan beneficiary seeking recovery of plan benefits.

II. Discussion

A. ERISA's Definition of an Employee Welfare Benefit Plan

Although Memorial's complaint purported to raise only state law causes of action defendants removed this case to federal court under 28 U.S.C. Sec. 1441(b) based on the alleged existence of an ERISA plan, and the assertion that at least one of Memorial's claims related to a claim for benefits under that plan. See Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987) (state law claims falling within scope of Sec. 502(a)(1)(B) of ERISA raise a federal question for purpose of federal court jurisdiction). Memorial maintains that the district court was without subject matter jurisdiction because the "bare purchase" of a group health insurance policy does not establish an employee welfare benefit plan within the contemplation of ERISA. Hence, our threshold question is a jurisdictional one.

ERISA applies to any employee benefit plan if it is established or maintained by an employer or an employee organization engaged in commerce or in any industry or activity affecting commerce. 29 U.S.C. Sec. 1003(a). ERISA regulates two distinct types of benefit programs that may be offered to employees, pension plans and welfare plans. We are concerned in this case only with welfare plans. Section 3(1) of ERISA, the definitional section, describes an "employee welfare benefit plan" as

any plan, fund, or program ... established or maintained by an employer or by an employee organization, or by both, 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, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services....

29 U.S.C. Sec. 1002(1). ³

Memorial does not dispute that Noffs is an employer engaged in activities affecting commerce. Nor does it contest that the benefits offered under the Northbrook group insurance policy are among the types of benefits referenced in section 3(1) of ERISA. Memorial argues, however, that the insurance policy provided by defendants cannot itself be an ERISA plan, and that there is no indication in the record of a "plan, fund or program" independent of the bare purchase of group health insurance. We disagree.

By its express terms, ERISA encompasses welfare plans provided through the purchase of insurance. 29 U.S.C. Sec. 1002(1). Moreover, it is a common practice for employers to provide health care benefits to their employees through the purchase of a group health insurance policy from a commercial insurance company. See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 727, 105 S.Ct. 2380, 2382, 85 L.Ed.2d 728 (1985).

The Eleventh Circuit, sitting en banc, has held that an ERISA plan is established "if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits." ⁴ Donovan v. Dillingham, 688 F.2d...