Morlan v. Universal Guar. Life Ins. Co.

Decision Date26 July 2002
Docket NumberNo. 01-3795.,01-3795.
Citation298 F.3d 609
PartiesDavid A. MORLAN, Plaintiff-Appellant, v. UNIVERSAL GUARANTY LIFE INSURANCE COMPANY, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Gregory Leyh (Argued), Gladstone, MO, for Plaintiff-Appellant.

Michelle D. Wyrick, Wyatt, Tarrant & Combs, Louisville, KY, James B. Bleyer, Bleyer & Bleyer, Marion, IL, Henry E. Kinser (Argued), Wyatt, Tarrant & Combs, Lexington, KY, for Defendants-Appellees.

Before BAUER, POSNER, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

This appeal from the dismissal of a class action presents novel issues at the intersection of bankruptcy and class action law. A procedural chronology will help in framing them.

April 1999. David Morlan files this class action suit as the representative of a class of insurance agents of the defendants, affiliated insurance companies that maintain employee welfare benefit plans. 29 U.S.C. § 1002(1). Morlan's suit charges that the defendants, in breach of the fiduciary duty that ERISA imposes on fiduciaries of pension and welfare plans, see 29 U.S.C. § 1109(a), improperly treated him and the other members of the class as independent contractors, when actually they were employees of the defendants and so were entitled to the health, vacation, and other benefits to which the defendants' plans entitled the defendants' acknowledged employees.

May 1999. Morlan files for bankruptcy.

September 1999. The bankruptcy court (1) orders Morlan's debts discharged, on the basis of the trustee's report that the estate in bankruptcy has no assets and that consequently the trustee has made no distribution to the creditors, and (2) dismisses the bankruptcy proceeding.

January 2000. Morlan files an amended complaint in the class action suit.

August 2000. The suit is certified by the district court as a class action with Morlan the only named plaintiff.

September 2001. Having learned about the bankruptcy, the district judge decertifies the class in Morlan's ERISA suit and dismisses the suit without prejudice. Morlan's claim under ERISA, the judge reasons, became an asset of the estate in bankruptcy and was not abandoned by the trustee. So when the class was certified, the named plaintiff (Morlan) had no standing to sue because he did not own the claim that he was suing upon.

Morlan asks us to reverse the dismissal of his suit.

The dismissal presupposes the assignability of Morlan's ERISA claim to the trustee in bankruptcy. If it was assignable and assigned, it became property of the estate in bankruptcy, as in In re Polis, 217 F.3d 899, 901 (7th Cir.2000); if it was not assignable, Morlan rather than the trustee was entitled to sue to enforce it.

ERISA requires pension plans to include a provision forbidding the assignment or alienation (these are synonyms, Riordan v. Commonwealth Edison Co., 128 F.3d 549, 552 (7th Cir.1997), except that the addition of "alienation" to "assignment" makes crystal clear that the anti-assignment provision bars involuntary as well as voluntary assignments) of pension-plan benefits, 29 U.S.C. § 1056(d)(1); Plumb v. Fluid Pump Service, Inc., 124 F.3d 849, 863 (7th Cir.1997), and thus keeps such property out of the plan participant or beneficiary's estate in bankruptcy. 11 U.S.C. § 541(c)(2); Patterson v. Shumate, 504 U.S. 753, 760, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992); In re Weinhoeft, 275 F.3d 604, 605 (7th Cir.2001). Some types of claim are nonassignable voluntarily but assignable involuntarily, as in In re Polis, supra, 217 F.3d at 901. Tort claims, for example, normally are not assignable, but they do become property of the claimant's estate in bankruptcy by operation of bankruptcy law. ERISA's anti-assignment clause, however, as the Patterson and Weinhoeft cases make clear, bars the latter type of assignment as well.

ERISA imposes no similar requirement on welfare plans; nor do the plans at issue in this case contain a clause forbidding assignment or alienation. Since, however, Morlan's claim is in part a claim for pension benefits, in part it is indeed nonassignable; and so the dismissal of his suit was improper. But it will make a difference on remand whether he can sue on all or only the pension part of his claim; and so we proceed to a consideration of whether the part of his claim that concerns welfare benefits was assignable.

Several cases hold that welfare benefits are generally nonassignable, just as pension benefits are, despite the absence of a counterpart to section 1056(d)(1) applicable to welfare benefits. These cases reason that because ERISA authorizes suits for plan benefits only by participants, beneficiaries, fiduciaries, or the Secretary of Labor, 29 U.S.C. § 1132(a), an assignee who does not come under one of these descriptions is ineligible to maintain the suit. See, e.g., Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1080-82 (9th Cir.2000).

The cases, it is true, carve an exception for medical benefits assigned to a health-care provider in exchange for health care, a common method of financing such care. See, e.g., Principal Mutual Life Ins. Co. v. Charter Barclay Hospital, Inc., 81 F.3d 53, 55-56 (7th Cir.1996). That would not support a conclusion that Morlan's ERISA claim for welfare benefits was assignable to the trustee in bankruptcy, however, because the trustee is not a health-care provider. Our court has a case of that sort, but our opinion in that case takes no position on whether other types of welfare benefit are assignable and if so whether there is any restriction on who the assignees may be. Plumb v. Fluid Pump Service, Inc., supra, 124 F.3d at 863 and n. 15. However, in Kennedy v. Connecticut General Life Ins. Co., 924 F.2d 698, 700 (7th Cir.1991), we rejected the reasoning later adopted in cases like Simon by holding that a properly assigned ERISA claim makes the assignee a participant or beneficiary within the meaning of the Act.

Only the Fifth Circuit has actually held that claims for such benefits are assignable without restrictions. The principal case is Hermann Hospital v. MEBA Medical & Benefits Plan, 845 F.2d 1286, 1289 (5th Cir.1988), which, though it too concerned health benefits, based its holding that they are assignable on the absence of a statutory provision forbidding their assignment, a ground independent of the nature of the welfare benefits or whom they are assigned to. Another Fifth Circuit decision, Texas Life, Accident, Health & Hospital Service Ins. Guaranty Ass'n v. Gaylord Entertainment Co., 105 F.3d 210, 214-15 (5th Cir.1997), holds that claims for welfare benefits are assignable regardless of their nature, though the ground of the decision (a ground equally applicable to pension plans, by the way—and Texas Life involved a pension plan, not a welfare plan) is one we have difficulty understanding. It is that benefits, and a claim that benefits were withheld in breach of the plan administrator's fiduciary obligations, are different animals, so that the statutory anti-assignment provision is interpretable as forbidding assignment of benefits but not of benefit claims that have matured into causes of action.

Now that we must resolve the issue, we hold that claims for welfare benefits, not limited to health-care benefits, are assignable, provided of course that the ERISA plan itself permits assignment, assignability being a matter of freedom of contract in the absence of a statutory bar. Kennedy v. Connecticut General Life Insurance Co., supra, 924 F.2d at 700. The absence of a counterpart to the anti-assignment provision for pension plans is telling; and in this regard we do not understand how the courts that have held welfare benefits nonassignable square their conclusion with the Supreme Court's decision in Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 837-38, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988), which held that, precisely because there is no anti-assignment provision for welfare plans, ERISA does not prohibit a state from garnishing benefits payments due plan participants. See In re Taft, 184 B.R. 189, 191 (E.D.N.Y.1995). Garnishment and an assignment for the benefit of creditors are the same kind of animal.

Pertinent too is the general principle of the law that contractual claims (which is the essential character of claims to benefits pursuant to private pension or welfare plans) for the payment of money are assignable. In re New Era, Inc., 135 F.3d 1206, 1210 (7th Cir.1998); Citibank, N.A. v. Tele/Resources, Inc., 724 F.2d 266, 268 (2d Cir.1983); Collins Co. v. Carboline Co., 125 Ill.2d 498, 127 Ill.Dec. 5, 532 N.E.2d 834, 841 (1988); E. Allan Farnsworth, Contracts § 11.2, p. 707 (3d ed.1999). This principle, however, comes with an important exception, which turns out to be pertinent to this case, for cases in which "the personal acts and qualities of one of the parties form a material part of the contract." First Illinois National Bank v. Knapp, 246 Ill.App.3d 152, 185 Ill.Dec. 780, 615 N.E.2d 75, 77-78 (1993). If you made a contract with John Singer Sargent for him to paint your portrait, he could not assign his contractual duty to another painter without your consent. Nor could you assign your automobile liability insurance policy to another driver, since he might be in a different risk class from you. And likewise Morlan could not assign to the trustee in bankruptcy his right to participate in his employer's welfare benefits plans, thus substituting the trustee, or the creditors, for himself—that would be nonsensical.

Insofar as Morlan is seeking past monetized or monetizable benefits, this problem does not arise, because such a claim is independent of all personal differences between Morlan on the one hand and the trustee or creditors on the other, and so it is assignable. But he...

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