Smith v. Blue Cross & Blue Shield United of Wisconsin

• Decision Date: 27 March 1992
• Docket Number: 90-1378,Nos. 89-3523,s. 89-3523
• Parties: Jackson B. SMITH and Vivian E. Smith, Plaintiffs-Appellants, v. BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN and Delco Electronics Corporation, Defendants-Appellees. Jackson B. SMITH and Vivian E. Smith, Plaintiffs-Appellants, and Marjan R. Kmiec, one of the Attorneys for Plaintiffs, Appellant, v. BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN and Delco Electronics Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 655

959 F.2d 655

22 Fed.R.Serv.3d 812

Jackson B. SMITH and Vivian E. Smith, Plaintiffs-Appellants, v. BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN and Delco

Electronics Corporation, Defendants-Appellees.

Jackson B. SMITH and Vivian E. Smith, Plaintiffs-Appellants, and Marjan R. Kmiec, one of the Attorneys for Plaintiffs, Appellant, v. BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN and Delco

Electronics Corporation, Defendants-Appellees.

Nos. 89-3523, 90-1378.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 14, 1991.

Decided March 27, 1992.

Marjan R. Kmiec (argued), Christopher A. McConville (argued), Milwaukee, Wis., for plaintiffs-appellants.

Kim M. Cafaro (argued), Laurel Barnes, Blue Cross & Blue Shield of Wisconsin, Susan R. Maisa (argued), George D. Cunningham, Foley & Lardner, Milwaukee, Wis., for defendants-appellees.

Christopher A. McConville, Marjan R. Kmiec, Milwaukee, Wis., for appellant.

Before WOOD, Jr. ¹ and POSNER, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge.

In March 1989, the Smiths filed a complaint against Delco Electronics and Blue Cross and Blue Shield in a Wisconsin court. The complaint alleged that Mr. Smith was employed by Delco Electronics and that he and his wife were beneficiaries of Delco's group insurance plan, which was insured by Blue Cross. It alleged in an introductory portion that the plan provided remedies both under the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. and state law. Because of Mr. Smith's arthritis and Mrs. Smith's diabetes, they undertook a weight loss program under medical supervision and submitted the bills to Blue Cross for payment. On August 20, 1987, Blue Cross denied the Smiths' claims. Although the complaint asserted plaintiffs' entitlement to ERISA remedies, it set forth as separate claims for relief state law claims that the denial was a breach of contract, was done in bad faith, that the denial was a breach of Delco and Blue Cross removed the case to federal court on the ground that the action arose under the constitution and laws of the United States, including ERISA. See Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987) (exception to well-pleaded complaint rule when ERISA preemption is a defense). Delco and Blue Cross then moved to dismiss the case on grounds that the state causes of action were preempted by ERISA and that the constitutional claims could be based only on actions by government entities. In the alternative, they moved for summary judgment on the ground that if the complaint be construed as an ERISA claim for benefits, it must be dismissed because the Smiths did not exhaust their internal remedies under the plan. Delco and Blue Cross also moved for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure. The district court dismissed the action and imposed sanctions against the plaintiffs' attorneys, awarding defendants their costs and reasonable attorneys' fees. Smith v. Blue Cross & Blue Shield United of Wisconsin, 724 F.Supp. 618 (E.D.Wis.1989). Delco and Blue Cross requested fees and costs of $17,244.32, and the district court awarded $12,874.32. The Smiths and Mr. Kmiec, one of their attorneys, have appealed. The issues before us are whether the Smiths' state law claims are preempted by ERISA, whether they exhausted their internal remedies under the plan, and whether the court erred by awarding sanctions.

fiduciary duty, caused emotional distress, and deprived them of constitutional rights to life, liberty and property.

ERISA PREEMPTION

ERISA preempts all state laws which "relate to any employee benefit plan," 29 U.S.C. § 1144(a) (preemption clause), unless the state law "regulates insurance, banking, or securities," 29 U.S.C. § 1144(b)(2)(A) (saving clause). However, self-funded plans are exempt from state laws that regulate insurance. 29 U.S.C. § 1144(b)(2)(B) (deemer clause); FMC Corp. v. Holliday, --- U.S. ----, 111 S.Ct. 403, 409, 112 L.Ed.2d 356 (1990). The Supreme Court has held that ERISA preempts state common law tort and contract actions, including bad faith claims, "asserting improper processing of a claim for benefits under an ERISA-regulated plan." Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 57, 107 S.Ct. 1549, 1558, 95 L.Ed.2d 39 (1987). In Pilot Life, the Court said that the bad faith common law cause of action asserted there relates to an employee benefit plan. The cause of action therefore comes under the preemption clause, and is not saved because the state (Mississippi) law of bad faith does not regulate insurance.

Although the Smiths' state common law tort and contract claims are the same as those brought by the plaintiffs in Pilot Life, the Smiths argue that Pilot Life does not apply to Wisconsin's bad faith common law. They argue that in Pilot Life, the Court considered Mississippi's law of bad faith, and that Mississippi's law applies generally while Wisconsin's law of bad faith is applied only to insurance contracts. That distinction cannot be maintained. In Pilot Life, the Court said,

Even though the Mississippi Supreme Court has identified its law of bad faith with the insurance industry, the roots of this law are firmly planted in the general principles of Mississippi tort and contract law. Any breach of contract, and not merely breach of an insurance contract, may lead to liability for punitive damages under Mississippi law.

Id. at 50, 107 S.Ct. at 1554. Wisconsin's law of bad faith is similarly "planted in the general principles of [Wisconsin] tort and contract law." In Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368, 371 (1978), the Wisconsin Supreme Court recognized "a cause of action in tort against an insurer for the bad faith refusal to honor a claim of the insured." The court analyzed the bad faith action as a typical tort case:

By virtue of the relationship between the parties created by the contract, a special duty arises, the breach of which duty is a tort and is unrelated to contract damages.

This tort of bad faith or malicious and intentional harassment by one party to a contract directed toward the other party, who seeks to assert his contract claim, has been referred to as a "tortious breach of contract."

Id. 271 N.W.2d at 374. The court also relied on standard contract principles: " 'Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.' " Id. at 375 (quoting Restatement of Contracts, Second, § 231 (tentative drafts Nos. 1-7, rev. and edited, 1973)). Thus, under Pilot Life the Smiths' claims are clearly preempted by ERISA. This court has found preemption of the same and comparable state law causes of action in two cases decided since oral argument of the Smiths' appeal. Tomczyk v. Blue Cross & Blue Shield, 951 F.2d 771, 775 (7th Cir.1991); Maciosek v. Blue Cross & Blue Shield, 930 F.2d 536, 538-40 (7th Cir.1991). Attorneys for the plaintiff were the same in all three cases.

The Smiths argue that even if their claims are preempted by ERISA, ERISA applies only to plan fiduciaries, and there is no evidence that Delco and Blue Cross are both fiduciaries. The Smiths, however, have waived this claim because they presented it for the first time on appeal. Maciosek, 930 F.2d at 540 n. 2. Moreover, in their complaint, the Smiths alleged, "the defendants have various fiduciary duties to the plaintiffs."

EXHAUSTION

The Smiths next argue that even if state law claims are preempted, their complaint also asserts claims under ERISA. The complaint sets forth as separate claims for relief only state law causes of action, and the claim alleging deprivation of constitutional rights. The complaint, in describing the employee benefit plan, says the plan provides remedies under both state law and under ERISA. The complaint would not ordinarily be treated as sufficient pleading of a claim under ERISA. This court has recently considered whether a complaint filed by the same lawyer representing the Smiths could be construed to include ERISA claims. The court held,

Their decision here to file only state claims in state court, thereby ignoring ERISA, can only be seen as a strategic attempt to avoid removal to federal court. The [plaintiffs] never sought to amend their complaint to add ERISA counts, even after their strategy failed and the case was removed to federal court. They are bound by those decisions.

Maciosek, 930 F.2d at 540-41. See, however, Bartholet v. Reishauer, 953 F.2d 1073 (7th Cir.1992) holding that a pleading which gives sufficient notice of a claim showing that the pleader is entitled to relief under ERISA should not be dismissed for failure expressly to invoke ERISA.

Even construing the complaint as stating an ERISA claim, we affirm. The district court wrote that summary judgment would then be appropriate because plaintiffs had not exhausted their internal plan remedies. Smith, 724 F.Supp. at 622. A district judge may so decide, and we would disturb this decision only if there has been a clear abuse of discretion. Powell v. A.T. & T. Communications, Inc., 938 F.2d 823, 925 (7th Cir.1991); Kross v. Western Electric Co., 701 F.2d 1238, 1244 (7th Cir.1983). Judgment on this theory will not prevent plaintiffs from exhausting their plan remedy, assuming they are not barred by lapse of time, and then suing upon the merits.

The Smiths argue that requiring exhaustion would be an abuse of discretion because although they did not exhaust their internal plan remedies, ² two exceptions to The second exception to the exhaustion requirement is that claimants are not required to appeal when there is a lack of meaningful access to the review procedures. Carter, 688 F.Supp. at 1287-88 (there is a lack of meaningful access if claimant attempts to initiate higher levels of review procedure, but a party has denied claimant access to higher levels of review); Boesl...