ERISA and Life Insurance News by Smith Moore Leatherwood

Attorneys at Law

ERISA and Life Insurance News Covering ERISA and Life, Health and Disability Insurance Litigation

INSIDE THIS ISSUE

Eleventh Circuit Applies “Moench Presumption” To Dismiss ERISA “Stock Drop” Class Action

Remedies of Surcharge and Equitable Estoppel Are Available in ERISA Breach of Fiduciary Duty Action

Insurer’s Calculation of Pre-Disability Earnings Upheld, Based on Amounts Reported on Federal Tax Returns

ERISA Does Not Preempt Breach of Contract Action Against Recipient of Pension and Life Insurance Benefits

Creditor’s Claim that Policy Was Obtained with Embezzled Funds Did Not Defeat Rights of Beneficiary

Restrictions in Eye Care Insurer’s Provider Contract with Optometrists Violated Georgia Eye Care Act

AUGUST 2012

Appellate Court Rejects Majority View on ERISA Jurisdictional Issue

The federal circuit courts of appeals generally have held that ERISA preemption is an affirmative defense that can be waived by the failure to timely assert it. In Wolf v. Reliance Standard Life Insurance Company, 71 F.3d 444, 449 (1st Cir. 1995), for example, the First Circuit reasoned that “ERISA preemption in a benefits-due action is waivable, not jurisdictional, because it concerns the choice of substantive law but does not implicate the power of the forum to adjudicate the dispute.” See also Saks v. Franklin Covey Co., 316 F.3d 337 (2d Cir. 2003); Dueringer v. Gen. Am. Life Ins. Co., 842 F.2d 127 (5th Cir. 1988); Gilchrist v. Jim Slemons Imps., Inc., 803 F.2d 1488 (9th Cir. 1986). The First Circuit in Wolf was quick to note that its decision was “limited to ERISA preemption of benefits-due actions” for which the federal and state courts have concurrent jurisdiction, while ERISA permits other civil actions “subject to exclusive jurisdiction in the federal courts ....” 71 F.3d at 449 n.8. And the same court later concluded that the waivability of preemption does not extend so far as to allow the parties to voluntarily “opt out” of ERISA preemption by contract. Tompkins v. United Healthcare of New England, 203 F.3d 90 (1st Cir. 2000). To do so, would “enable plan sponsors to avoid compliance with ERISA’s regulatory structure and would subject ERISA-regulated plans to a multitude of divergent state law causes of action,” the court wrote. Id. at 98.

Anti-Assignment Provision Prohibits Participant From Assigning Plan Benefits to Treating Hospital

Any Willing Provider Law Applies to Provider Network, But Not to HMO

In ERISA Trial Involving Pro Se Parties, Court Rejects Change of Beneficiary Due to Forgery

A distinct, but related, issue was tackled by the Sixth Circuit in Daft v. Advest, Inc., 658 F.3d 583 (2011). There, the court held that “the existence of an ERISA plan is not ... a jurisdictional issue, but rather speaks to whether Plaintiffs can state a claim upon which relief may be granted.”

Social Security Award of Disability Benefits Does Not Control ERISA Claim Determination

Jurisdictional or Element of Claim? The plaintiffs in Daft sued their former employer and others in state court, claiming that the failure to pay pension benefits to them constituted a breach of contract and of the covenant of good faith CONTINUED ON PAGE 2>>

<<CONTINUED FROM PAGE 1 and fair dealing. Under the terms of the plan, accrued benefits were forfeited entirely if employment was terminated, unless the termination was due to disability or occurred after age 65. The defendants removed the case to federal court, asserting that the plan was governed by ERISA and that the plaintiffs’ state law claims were preempted. After a voluntary stay to exhaust administrative remedies, the plaintiffs filed an amended complaint and alleged that the denial of benefits violated ERISA. (During the administrative remedies process, the plan committee had determined that the plan did not violate ERISA because it was a tophat plan excluded from the substantive provisions of ERISA.) The district court ultimately entered judgment for the plaintiffs, concluding that the plan was not a top-hat plan and that the plan had failed to comply with ERISA’s vesting requirements. During briefing on post-judgment remedies, the defendants asserted for the first time that the district court lacked subject matter jurisdiction on the grounds that the plan was not an “employee pension benefit plan” covered by ERISA. The district court rejected that argument and awarded a monetary remedy to the plaintiffs under 29 U.S.C. § 1132(a)(1)(B). On appeal, the defendants repeated their argument that the plan was not an ERISA plan and that the federal court lacked jurisdiction. Based upon Supreme Court jurisprudence, the Sixth Circuit rejected the position (also assumed by the district court) that the existence of the plan was a prerequisite for jurisdiction. Sixth Circuit Departs from Majority View The court first recognized that the circuit courts are split on this issue. The Third Circuit, for example, has held that establishing the existence of an ERISA plan is not a jurisdictional requirement. Henglein v. Informal 2

Plan for Plant Shutdown Benefits for Salaried Emps., 974 F.2d 391 (3d Cir. 1992). “However,” the court noted, “most circuits have adopted the position that ‘[w]here federal subject matter jurisdiction is based on ERISA, but the evidence fails to establish the existence of an ERISA plan, the claim must be dismissed for lack of subject matter jurisdiction.” Quoting Kulinksi v. Medtronic Bio-Medicus, Inc., 21 F.3d 254, 256 (8th Cir. 1994), and also citing Tinoco v. Marine Chartering Co., 311 F.3d 617 (5th Cir. 2002); Marcella v. Capital Dist. Physicians’ Health Plan, Inc., 293 F.3d 42 (2d Cir. 2002); Delaye v. Agripac, Inc., 39 F.3d 235 (9th Cir. 1994); and UIU Severance Pay Trust Fund v. Local Union No. 18-U, United Steelworkers of Am., 998 F.2d 509 (7th Cir. 1993). The Sixth Circuit in Daft rejected the majority position because it concluded “that recent Supreme Court precedent has abrogated the conclusion ... explicitly adopted in the majority of our sister circuits, that the existence of an ERISA plan is a prerequisite to federal subject-matter jurisdiction.” In particular, the court pointed to the Supreme Court’s decision in Arbaugh v. Y & H Corporation, 546 U.S. 500, 504 (2006), in which the Court held that a numerical threshold in the definition of employer under Title VII “does not circumscribe federal-court jurisdiction” but “relates to the substantive adequacy of [the plaintiff’s] Title VII claim, and therefore could not be raised defensively late in the lawsuit.” “If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional,” the Court wrote, “then courts and litigants will be duly instructed and will not be left to wrestle with the issue.” Id. at 51516. “But,” the Court continued, “when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.” Id. at 516. Applying this “readily administrable bright line,” the Court concluded that “the threshold number of employees for application of Title VII is an element of a plaintiff’s claim for relief, not a jurisdictional issue.” Id.

The Court acknowledged that on the issue of subject matter jurisdiction versus “ingredient-of-claim-for relief,” the courts, including the Supreme Court itself, had been “less than meticulous.” Id. at 511. “Subject matter jurisdiction in federal-question cases is sometimes erroneously conflated with a plaintiff’s need and ability to prove the defendant bound by the federal law asserted as the predicate for relief – a merits-related determination.” Id., quoting Moore’s Federal Practice § 12.30[1], p. 12-36.1 (3d ed. 2005). Applying Arbaugh, the Sixth Circuit noted that the relevant sections of ERISA contain “no clear statement from Congress that the existence of an ERISA plan constitutes a jurisdictional requirement.” The jurisdictional provision of Section 502(e)(1) contains no “threshold ingredient” upon which jurisdiction depends. Nor do the civil enforcement provision of 502(a) (1)(B) or the definitions of “plan” or “employee pension benefit plan” speak in “jurisdictional terms.” As a result, “in light of Arbaugh and its progeny, the existence of an ERISA plan must be considered an element of a plaintiff’s claim under Section 502(a)(1)(B), not a prerequisite for federal jurisdiction,” the court concluded in Daft. Importantly, the court added that “[b]ecause the existence of an ERISA plan is not a jurisdictional prerequisite, federal subject-matter jurisdiction lies over Plaintiffs’ suit as long as they raise a colorable claim under ERISA.” Otherwise stated, federal jurisdiction exists over the ERISA claim unless “the claim ‘clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction or ... is wholly insubstantial and frivolous.’” Quoting Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998). Although the court held that the plaintiffs had met that standard and that the defendants had “forfeited” by its lateness the argument that the plan was not an ERISA plan, the court nonetheless reversed the district court’s judgment, concluding that the district court should have remanded to the plan committee the issue whether the plan was a top hat plan and thus exempt from the vesting requirements of ERISA.

While the plan committee had determined that the plan was a top hat plan, and the district court had properly rejected its earlier decision on that issue, the committee had not applied the proper legal standards to make its determination. Moreover, there remained “many factual gaps in the administrative record that need filling in order to allow a reasoned determination of the top-hat issue.” Under those circumstances, the plan committee “should be given the opportunity to rectify,” the court held. Implications for ERISA Defendants Are there implications arising from this decision that transcend the relatively straightforward conclusion that the existence of a plan is but an element of a plaintiff’s ERISA claim? As a practical matter, under most circumstances, the defendant in a benefits action is not going to challenge a plaintiff’s contention that his or her benefits claim arises under ERISA. To the contrary, more often than not that is the position of the defendant as well. Indeed, the Daft decision for that reason represents somewhat of a role reversal. More

significantly,

what

are

the

implications, if any, of Daft with respect to removal jurisdiction where the question of ERISA governance is a close one? Resolving doubts in favor of remand, federal courts have routinely sent cases back to state court based on the absence of subject matter jurisdiction where a defendant fails to sufficiently establish the existence of a plan. And, the issue of subject matter jurisdiction is not subject to waiver or time bars.

the removing defendants to the court’s subject matter jurisdiction. Does the identity of the party challenging jurisdiction make a difference in the outcome? These issues approach relatively uncharted territory in the ERISA context. But they are matters which may merit consideration in removal cases under the right circumstances. Conclusion

In light of Daft, however, what is the result when a plaintiff fails to seek remand during the 30-day period following removal? Under 28 U.S.C. § 1447(c), a motion to remand “on the basis of any defect other than lack of subject matter jurisdiction” must be made within thirty days. On the other hand, if “at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.” 28 U.S.C. § 1447(c). Does a close question of ERISA governance itself allow for continued federal question jurisdiction under such circumstances? Daft, after all, started out as a removal case but involved the uncommon twist of a later challenge by

The Sixth Circuit has departed from the majority view that the existence of a plan is jurisdictional in nature. The court premised its path, however, on the conclusion that recent Supreme Court precedent, including Arbaugh v. Y & H Corporation, effectively abrogated prior circuit decisions that the existence of an ERISA plan is a “prerequisite to federal subject-matter jurisdiction.” That conclusion provides practitioners elsewhere the basis upon which to argue application of Daft in their own circuits where helpful. The extent to which the rationale of Daft will be helpful to defendants in maintaining federal court jurisdiction after removal remains to be developed.

Eleventh Circuit Applies “Moench Presumption” To Dismiss ERISA “Stock Drop” Class Action Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th Cir. 2012) Home Depot sponsored a defined contribution retirement plan for certain of its employees. The plan required that one of the available investment funds be a “Company Stock Fund” invested primarily in shares of Home Depot Stock. Of the eight investment funds in the plan, the Home Depot, Inc. Common Stock Fund qualified as the “Company Stock Fund.” The value of the Common Stock Fund declined after it was disclosed that certain Home Depot officials and employees had engaged in misconduct that inflated the company’s stock price. Lanfear and others filed a putative class action, alleging that Home Depot stock

became an imprudent investment, and that the plan fiduciaries breached their duty of prudence by, among other things, “continu[ing] to offer and approve the Home Depot Stock as an investment option for the Plan.” Home Depot filed a motion to dismiss the complaint under Fed. R. Civ. P. 12(b) (6), arguing that the “prudence claim” actually was a “failure to diversify” claim that was barred by ERISA’s provisions regarding employee stock ownership plans (ESOPs). Alternatively, Home Depot argued that plaintiff’s allegations were insufficient to rebut what has become known as the Moench presumption of prudence.

ERISA fiduciaries operate under a “prudent man standard of care.” ERISA requires fiduciaries to discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries. They are to do so by, among other things, “diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.” 29 U.S.C. § 1104(a)(1)(C). However, in the case of an eligible individual account plan (EIAP) – which includes ESOPs such as the Home Depot Common Stock Fund – section 1104(a)(2) provides an exemption from CONTINUED ON PAGE 4>> 3

<<CONTINUED FROM PAGE 3 the diversification requirement. The Act states: “In the case of an [EIAP], the diversification requirement … and the prudence requirement (only to the extent that it requires diversification) … is not violated by acquisition or holding of employer securities ….” The federal district court granted Home Depot’s motion to dismiss, concluding that plaintiffs’ prudence claim was “at its core a diversification claim” that was barred by § 1104(a)(2). Alternatively, the district court held that the plaintiffs’ allegations were insufficient to rebut the Moench presumption of prudence, because they did not allege that Home Depot was in such dire financial condition that the fiduciaries were required to deviate from the plan’s requirement that it include the Common Stock Fund. What has become known as the Moench presumption – actually a standard of judicial review – originated in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), and it previously had been adopted by the Second, Fifth, Sixth, and Ninth Circuits. The Third Circuit held in Moench that “an ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision,” subject to being rebutted by the plaintiff.

In an opinion covering multiple related issues, the Eleventh Circuit affirmed the order of the district court in part and reversed in part, but ultimately held that the complaint failed to state a claim upon which relief could be granted. First, the court disagreed that plaintiffs’ claim was actually a diversification claim barred by § 1104(a)(2), and found that it was a prudence claim, as alleged. The court then held, however, that the Moench standard applied, and that the presumption of prudence had not been rebutted by the allegations of plaintiffs’ complaint. “We will review only for an abuse of discretion the defendants’ decision to continue investing in and holding Home Depot stock in compliance with the directions of the Plan,” the Eleventh Circuit said. In order for the abuse of discretion standard to apply, the court announced this test: Although a fiduciary is generally required to invest according to the terms of the plan, when circumstances arise such that continuing to do so would defeat or substantially impair the purpose of the plan, a prudent fiduciary should deviate from those terms to the extent necessary. Because the purpose of a plan is set by its settlors (those who created it), that is the same thing as saying

that a fiduciary abuses his discretion by acting in compliance with the directions of the plan only when the fiduciary could not have reasonably believed that the settlors would have intended for him to do so under the circumstances. The Eleventh Circuit acknowledged a split among the circuits concerning whether the rule announced in Moench is a pleading presumption, applicable at the motion to dismiss stage, or whether it is an evidentiary presumption, applicable only later at the summary judgment or trial stage. The court concluded that in Moench the Third Circuit “did not intend to use, and we disavow any intention of using, the word ‘presumption’ in a sense that has any evidentiary weight.” Instead, the court said, “[t]he Moench standard of review of fiduciary action is just that, a standard of review; it is not an evidentiary presumption. It applies at the motion to dismiss stage as well as thereafter.” Applying that standard of review to the plaintiffs’ complaint, the court held that the plaintiffs did not plead facts establishing that the plan fiduciaries “abused their discretion by following the Plan’s directions,” and thus, that “they have not stated a valid claim for breach of the duty of prudence.”

Remedies of Surcharge and Equitable Estoppel Are Available in ERISA Breach of Fiduciary Duty Action McCravy v. Metropolitan Life Ins. Co., 2012 U.S. App. LEXIS 13683 (4th Cir. July 5, 2012) As a participant in her employer’s ERISA plan, McCravy enrolled her daughter for dependent life insurance and accidental death insurance before the daughter’s nineteenth birthday. She continued paying premiums for the dependent coverage until her daughter was murdered at age 25. When McCravy submitted a claim for benefits under the plan, MetLife denied the claim, because the daughter no longer was eligible for dependent coverage – which was available only for unmarried, dependent children under age 19, or under age 24 if enrolled in school full-time. MetLife refunded the premiums paid for the daughter’s coverage, but McCravy refused to accept the refund and filed suit. The federal district court reluctantly held that McCravy was limited as a matter of law to a refund of the premiums withheld for her daughter’s coverage. 4

On appeal, the Fourth Circuit initially affirmed that decision, but the court granted McCravy’s petition for rehearing after the Supreme Court decided CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011).

U.S.C. § 1132(a)(3). “We therefore agree with McCravy,” the court said, “that her potential recovery is not limited, as a matter of law, to a premium refund.”

According to the Fourth Circuit, the Supreme Court made clear in Amara that both surcharge – which the court referred to as “make-whole relief” – and equitable estoppel were appropriate equitable remedies under ERISA, 29

The court remanded the case to the district court to consider the merits of McCravy’s breach of fiduciary duty claim and to decide whether surcharge or equitable estoppel would be appropriate

remedies under the circumstances of the case. The Fourth Circuit viewed Amara as bringing to an end the existence of “perverse incentives” for insurance companies “to wrongfully accept premiums” for “non-existent benefits” and “enjoy essentially risk-free windfall profits,” with the only risk being “the return of their ill-gotten gains.”

Insurer’s Calculation of Pre-Disability Earnings Upheld, Based on Amounts Reported on Federal Tax Returns Fortier v. Principal Life Ins. Co., 666 F.3d 231 (4th Cir. 2012) After Dr. Fortier became disabled in 2005, he submitted claims for disability benefits under ERISA-governed group insurance policies issued by Principal Life Insurance Company and under individual insurance policies issued by Unum Life Insurance Company of America. Principal immediately began to provide Dr. Fortier with short-term disability benefits. Two months later, however, when Dr. Fortier began receiving $15,470 in monthly benefits from Unum, Principal ceased making payments under its group policies because Dr. Fortier’s predisability income “was not sufficiently large to exceed the limits stated in the policies.” The Principal policies provided that an insured who was disabled was entitled to receive 60% of his predisability earnings, capped at $1,500 per week for shortterm disability benefits and $6,000 per month for long-term disability benefits. Benefits under the Principal policies, however, were reduced to the extent that all disability benefits – from both individual and group policies – exceeded predisability earnings. Predisability earnings under the Principal policies were determined by subtracting business expenses from gross earnings. Business expenses were defined in pertinent part as (1) “the usual and customary unreimbursed business expenses,” (2) “which are incurred on a regular basis,” (3) that “are essential to the established operation of the Policyholder,” and (4)

that “are deductible for Federal Income Tax purposes.” In calculating Dr. Fortier’s predisability earnings, Principal used the predisability business expenses that Dr. Fortier deducted on his 2003 and 2004 federal income tax returns, making his monthly predisability earnings $9,916 – less than he was receiving under the individual policies. Dr. Fortier contended, however, that Principal “erroneously deducted from his gross predisability earnings extraordinary and one-time business expenses incurred by him in 2003-04 in starting up his practice and in pursuing litigation with partners in his former medical practice.” Dr. Fortier claimed that if such “extraordinary” expenses were excluded, his predisability earnings would have been $48,913 – entitling him to 100% of the benefits under both the group and individual policies. Principal upheld its interpretation on administrative review, and Dr. Fortier brought suit in federal court. The district court, applying the deferential abuse of discretion standard, ruled that Principal’s interpretation was reasonable. The

court reasoned that because Dr. Fortier claimed his “extraordinary” expenses as deductions on his federal tax returns, he had represented that such expenses were “ordinary and necessary” business expenses under the Internal Revenue Code. The Fourth Circuit Court of Appeals affirmed the district court’s ruling, concluding that Principal’s “interpretation was a reasonable one.” The Fourth Circuit recognized, however, “that the policy language, defining those expenses that may be subtracted from gross income to arrive at predisability earnings, is somewhat confusing and, to be sure, needlessly verbose ....” Specifically, the court noted that the first three criteria for business expenses under the policies – “usual and customary,” “incurred on a regular basis,” and “essential to the established business operation” – were seemingly superfluous, because the phrase “deductible for Federal Income Tax purposes” was arguably “the only one needed to accomplish the policies’ purposes under [Principal’s] interpretation.” 5

ERISA Does Not Preempt Breach of Contract Action Against Recipient of Pension and Life Insurance Benefits Appleton v. Alcorn, 291 Ga. 107, ____ S.E.2d ____ (2012)

Alcorn and his second wife Bonnie entered into a separate maintenance agreement about a year before his death. Under the agreement, they each “waive[d] any interest they have in the other party’s life insurance proceeds,” and they also agreed “to waive and release any rights or claims they may now have to any retirement pay [or] benefits.”

behalf of his estate, sued Bonnie in state court for breach of contract, asserting that she had contractually waived her right to benefits under the life insurance policy and the retirement plan. Bonnie moved to dismiss the complaint, arguing that ERISA preempted the daughters’ state law claims and that the benefits were properly paid to her, relying on the United States Supreme Court decision in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009). The trial court agreed with Bonnie and dismissed the complaint, concluding that the “waiver executed in the settlement agreement was not ERISA compliant,” because it did not meet the requirements for a qualified domestic relations order.

After signing the agreement, Alcorn did not change the beneficiary of his employer-sponsored life insurance coverage and 401(k) retirement plan, and those benefits were paid by the ERISA plan administrator to Bonnie, who remained the beneficiary under the terms of the plan at the time of Alcorn’s death.

The Georgia Court of Appeals reversed, finding that once the ERISA plan benefits had been paid to the beneficiary, ERISA did not preclude the daughters’ state law claim challenging the beneficiary’s right to retain the funds. Alcorn v. Appleton, 308 Ga. App. 663, 708 S.E.2d 390 (2011).

Alcorn’s daughters, individually and on

The Georgia Supreme Court granted

Bonnie’s petition for certiorari, and then affirmed the decision of the court of appeals. “[O]nce funds from ERISAcovered plans are received by the proper participant or beneficiary,” the court said, “the participant or beneficiary is not judgment proof, and the funds are not sheltered from state law causes of action.” A different result was not required by the Kennedy decision, the court said. “In that case, the Supreme Court held that the estate could not maintain a state law cause of action against the employer and the plan administrator because the funds had been distributed to the beneficiary according to the plan documents …. The Supreme Court stated that it expressed no view ‘as to whether the Estate could have brought an action in state or federal court against [the beneficiary] to obtain the benefits after they were distributed.’” Citing 555 U.S. at 300 n.10. Consequently, the Georgia Supreme Court concluded that the trial court “was not precluded by Kennedy, or any other authority, from adjudicating the merits of [the daughters’] state law cause of action against [Bonnie] for any alleged breach of the Separation Agreement or purported waiver of her rights to the proceeds.”

Creditor’s Claim that Policy Was Obtained with Embezzled Funds Did Not Defeat Rights of Beneficiary McCrary v. Middle Ga. Mgmt. Services, Inc., 315 Ga. App. 247, 726 S.E.2d 740 (2012) Middle Georgia Management Services (“MGM”) sought to impose a constructive trust on the assets of McCrary and others, including the proceeds of a life insurance policy that had been obtained with funds allegedly embezzled by Barbara Morris, a former employee of MGM. Morris committed suicide after an MGM manager began investigating nearly $2 million of missing company funds. Morris’s daughter, McCrary, was the sole beneficiary of the life insurance policy. 6

Under a theory of unjust enrichment, MGM argued that because Morris used money stolen from MGM to pay the life insurance premiums with the intent to defraud MGM, and because the life insurance proceeds were paid to McCrary and shared with her brother, a constructive trust in favor of MGM should be imposed on the death benefits. MGM also defined itself as a creditor of Morris. McCrary filed a motion for summary judgment, challenging MGM’s claim to a constructive trust on the life insurance

proceeds, relying on O.C.G.A. § 33–25– 11, which provides in relevant part: (a) Whenever any person residing in the state shall die leaving insurance on his or her life, such insurance shall inure exclusively to the benefit of the person for whose use and benefit such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured unless the insurance

policy or a valid assignment thereof provides otherwise .... (c) The cash surrender values of life insurance ... shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor of the person whose life is so insured unless the insurance policy was assigned to or was effected for the benefit of such creditor or unless the purchase, sale, or transfer of the policy is made with the intent to defraud creditors. McCrary argued that MGM had failed to establish that the life insurance premiums were paid with the allegedly embezzled funds or that she was otherwise unjustly enriched. MGM responded that “as a matter of equity, co-mingling stolen funds into a bank account from which the premiums on the policy are paid is enough to create an issue of fact on the constructive trust issue.” The trial court determined, based on

Ambase Intl. Corp. v. Bank South, 196 Ga. App. 336, 340, 395 S.E.2d 904 (1990), that a constructive trust could be imposed on the life insurance proceeds for the benefit of MGM under the statutory fraud exception. The court then agreed with MGM’s position that an issue of fact existed concerning whether Morris in fact embezzled funds from MGM, and whether those funds were commingled with money she used to pay the premiums for the life insurance policy. The Georgia Court of Appeals reversed. It agreed with McCrary that, under O.C.G.A. § 33–25–11, a creditor’s claim to life insurance benefits cannot defeat the claim of a designated beneficiary, absent fraud, and that in the event of fraud, only the cash surrender value of the policy is subject to attachment, garnishment, or legal process in favor of the creditor. The court of appeals relied on Bennett v. Rosborough, 155 Ga. 265, 116 S.E.2d 788 (1923), in which the Supreme Court

of Georgia held that because a statute forbade defeating the insured’s direction as to his beneficiary, a husband who obtained a policy payable to his wife was protected, even though he paid the premiums with money stolen from his creditors. The court of appeals in McCrary determined that the trial court erred to the extent it relied on Ambase for the proposition that the fraud exception could be applied to the case at hand, because when Ambase was decided in 1990, the fraud exception provided in OCGA § 33–25–11 did not apply only to the cash value of a life insurance policy, as it does currently. Moreover, the insurance policy at issue was a term life policy, with no cash value. Consequently, the fraud exception under the current law was not triggered. In short, under the plain terms of the statute, the court of appeals held that MGM was precluded from defeating McCrary’s interest, as the designated beneficiary.

Restrictions in Eye Care Insurer’s Provider Contract With Optometrists Violated Georgia Eye Care Act Spectera Inc. v. Wilson, 2012 Ga. App. LEXIS 689 (Ga. Ct. App. July 16, 2012) Three optometrists, Wilson, McMurray, and Summers, entered into contracts with Spectera, an eye care insurer, to be members of Spectera’s panel of approved eye care providers and to provide eye care services to Spectera’s members. A fourth optometrist, Price, also applied to join the panel, but he was not accepted. Wilson and McMurray’s contract with Spectera was a “Patriot Contract,” which allowed them to prepare eyeglasses in their own laboratory and to obtain materials from any source. Summers’s contract was an “Independent Participating Provider Agreement” (“IPP agreement”), which required him to purchase materials from Spectera’s optical laboratory. In late 2010, Spectera notified Wilson and McMurray that it intended to convert the Patriot Contracts with individual eye care providers to IPP agreements. However, retail eye care providers

such as Wal-Mart which contracted with Spectera would still be allowed to purchase materials from any source. Wilson sued Spectera, asserting that the IPP agreement violated the Georgia Eye Care Act. Spectera then notified Wilson, McMurray, and Summers that it was terminating their provider agreements, and that it would “not contract with any of them in the future.” McMurray, Summers, and Price filed separate lawsuits. All of the lawsuits were consolidated into a single action, and the parties filed cross-motions for summary judgment. The trial court granted the motion of the optometrists, and Spectera appealed. On appeal, the optometrists argued that the IPP agreement violated several provisions of the Georgia Eye Care Act, which provides: A health care insurer providing a

health benefit plan which includes eye care benefits shall … (2) not preclude a covered person who seeks eye care from obtaining such service directly from a provider on the health benefit plan provider panel who is licensed to provide eye care; (3) not promote or recommend any class of providers to the detriment of any other class of providers for the same eye care service; … (5) allow each eye care provider on a health benefit plan provider panel, without discrimination between classes of eye care providers, to furnish covered eye care services to covered persons to the extent permitted by such provider’s licensure; CONTINUED ON PAGE 8>> 7

<<CONTINUED FROM PAGE 7 (6) not require any eye care provider to hold hospital privileges or impose any other condition or restriction for initial admittance to a provider panel not necessary for the delivery of eye care upon such providers which would have the effect of excluding an individual eye care provider or class of eye care providers from participation on the health benefit plan…. O.C.G.A. § 33-24-59.12(c). In a case of first impression, the optometrists argued that requiring them to purchase materials from Spectera violated subsection (c)(2) of the Act, because when a laboratory was required to provide “services and products” such as eyeglasses and contact lenses, the provider would be required to use Spectera’s “optical materials fulfillment system.” The providers would not receive co-pays from their patients or payment from Spectera for this work. Consequently, their patients effectively would be required to purchase eyeglasses directly from Spectera. The Georgia Court of Appeals determined that “[a]mong the eye care services Georgia law allows optometrists to provide is the preparation and dispensing of eyeglasses and contact lenses.” Thus, the court held, because the IPP agreement would prohibit Spectera’s insureds from obtaining at least some of these eye care services

directly from the optometrists, the IPP agreement violated subsection (c)(2) of the Act. The optometrists next argued that the IPP agreement violated subsections (c)(3) and (c)(5) of the Act, because Spectera limited the ability of individual eye care providers to procure materials from any other source, while not imposing the same restriction on retail providers. The optometrists asserted that this amounted to a discriminatory practice that served to promote retail providers, as a class, to the detriment of the class of independent providers. Spectera argued that the term “class of providers,” which is not defined by the statute, referred to the three levels of eye care providers in Georgia – ophthalmologists, optometrists, and opticians. The court of appeals found Spectera’s definition unpersuasive, and determined that the phrase, given its ordinary meaning under principles of statutory construction, should be interpreted as “a group sharing common attributes.” Applying this meaning, the court determined that the statutory language was broad enough to encompass a class of independent providers versus a class of retail chain providers. The court determined that the term “promote” in subsection (c)(3) of the Act meant to advertise, rather than to further or advance one class over another. Without any evidence suggesting that

Spectera would advertise retail providers over independent providers, the court determined that the IPP agreement did not violate subsection (c)(3). However, the IPP agreement violated subsection (c)(5) of the Act, because it limited an independent provider’s ability to prepare and dispense eyeglasses, but did not limit a retail provider’s ability to do the same. Price contended that Spectera’s refusal to allow him to become a member of the panel based on his refusal to sign the materials requirement violated subsection (c)(6) of the Act, because it imposed a restriction on admittance to the panel that was not necessary for the delivery of eye care. The court of appeals agreed, rejecting Spectera’s argument that Price had merely failed to complete the application process by refusing to agree to the materials provision. Finally, Spectera argued that the injunction preventing it from enforcing the IPP agreement with any of its providers was overly broad, because the action was not brought as a class action and its other providers were not parties to the lawsuit. The court of appeals concluded, however, that the trial court could prohibit Spectera from enforcing unlawful provisions of the IPP agreement against non-parties. Nonetheless, because the court had only considered the IPP agreement with respect to optometrists, it reversed the injunction as it applied to ophthalmologists and opticians.

Anti-Assignment Provision Prohibits Participant From Assigning Plan Benefits to Treating Hospital Medical Univ. of S.C. v. Oceana Resorts, LLC, 2012 U.S. Dist. LEXIS 27897 (D.S.C. Mar. 2, 2012) The Medical University of South Carolina (“MUSC”) hospital provided inpatient care to Stephen Showers from January 3 through March 17, 2010, and provided outpatient care to him later that year. As an employee of Oceana Resorts, Showers participated in Oceana’s selffunded employee welfare benefit plan. As part of the hospital admission process, Showers signed a “Consent for Medical Treatment” form, which MUSC 8

contended assigned his plan benefits to the hospital. However, when MUSC submitted claims for Showers’s care, the plan denied the claims based on an exclusion for experimental and/or investigational services and treatment. MUSC’s two administrative appeals were denied, and it filed suit against Oceana and the plan pursuant to ERISA, 29 U.S.C. § 1132(a), alleging that the denial of plan benefits was unreasonable.

The defendants filed a motion to dismiss, or in the alternative for summary judgment, on the ground that MUSC lacked standing under 29 U.S.C. § 1132(a)(1)(B). The parties agreed that MUSC lacked direct standing to sue for plan benefits, because it was neither a participant nor a beneficiary of the plan. MUSC claimed, however, that it had derivative standing, because Showers had assigned his benefits to MUSC when he signed the consent form.

The federal district court acknowledged that the Fourth Circuit has “never specifically addressed the question of derivative standing for ERISA benefits” in a published opinion, but that it has based at least two opinions on the presumption that a healthcare provider either did or could acquire derivative standing. See Sheppard & Enoch Pratt Hosp. v. Travelers Ins. Co., 32 F.3d 120 (4th Cir. 1994) (implicitly holding that the hospital had derivative standing to bring the claim); HealthSouth Rehab. Hosp. v. Am. Nat’l Red Cross, 101 F.3d 1005, 1008 (4th Cir. 1996) (reasoning that a hospital could have acquired derivative standing if the signatory of the consent form had been a participant or a beneficiary of the self-funded plan). Therefore, the court denied defendant’s motion to dismiss, concluding that it was possible for a medical care provider to acquire derivative standing through an assignment of benefits from a plan

participant. Thus, MUSC’s complaint stated a plausible claim for relief. As a basis for summary judgment, defendants argued that an antiassignment provision in the plan prohibited Showers from assigning plan benefits, that the alleged assignment in the consent form was therefore unenforceable, and that MUSC had no derivative standing as a matter of law. MUSC argued that the plan implicitly assigned benefits to all network medical care providers based on the payment structure of the plan, and therefore, that MUSC actually did not need the consent form to obtain derivative standing. The court ruled, however, that MUSC could not have obtained an assignment from the plan, as the plan did not contain specific language allowing an assignment to a network provider. Further, the payment structure outlined

in the plan does not give rise to an implied “assignment,” but rather, was a third-party beneficiary arrangement. The court held that ERISA does not provide statutory standing for thirdparty beneficiaries, and a hospital cannot have independent standing without an enforceable assignment from the participant, citing Dallas Cnty. Hosp. Dist. v. Assoc.’s Health & Welfare Plan, 293 F.3d 282, 289 (5th Cir. 2002). Because the plan unambiguously prohibited Showers from assigning his plan benefits, under the “universally recognized canons of contract interpretation” his attempted assignment to MUSC was ineffective and could not serve as a basis for derivative standing. Further, the terms of the consent form did not cover selffunded employee benefit plans and thus did not give MUSC derivative standing. Summary judgment was granted to the defendants.

Any Willing Provider Law Applies to Provider Network, But Not to HMO Northeast Ga. Cancer Care LLC v. Blue Cross and Blue Shield of Ga., Inc., 315 Ga. App. 521, 726 S.E.2d 714 (2012) In connection with a dispute between Northeast Georgia Cancer Care, a medical care provider, and two Blue Cross entities, the Georgia Insurance Commissioner concluded that the state’s “Any Willing Provider” (“AWP”) statute applied to both a preferred provider arrangement and a health maintenance organization. Blue Cross appealed the Commissioner’s administrative findings to the Superior Court of Fulton County – the trial court with jurisdiction over such appeals – and that court reversed both rulings. The Commissioner then appealed to the Georgia Court of Appeals. The appellate court first held that the Commissioner had correctly determined that the AWP statute applied to the preferred provider network. The Blue Cross entity maintaining the PPO network was licensed as a “health care corporation” under Chapter 20 of the Insurance Code, and such corporations are authorized by the Code to administer “health care plans.” The AWP statute is part of Chapter 20 and, according to the

court, “expressly applies to health care corporations.” Moreover, the PPO network was not a separate entity that fell outside the ambit of the AWP statute. There is “nothing in Chapter 20,” the court held, “to suggest that its provisions, including the AWP statute, do not apply to preferred provider arrangements operated by Chapter 20 health care corporations.” Nor was the position of Blue Cross aided by another statute, O.C.G.A. § 33-3025, which allows health care insurers to “place reasonable limits on the number of classes of preferred providers,” so long as they do not discriminate on the basis of factors such as race or religion. The remainder of that statute required “approval of the Commissioner” and, in addition, required that any health care provider that met the standards of the health insurer be given an opportunity to become a preferred provider. The court rejected, however, Commissioner’s application of

the the

AWP law to the health maintenance organization. HMOs are governed by Chapter 21 of the Insurance Code, and “other provisions of the Insurance Code, such as the AWP statute, are applicable to HMOs only ‘[e]xcept as otherwise provided by law’ and only if they are ‘not in conflict with [Chapter 21],’” the court wrote. No such caveat applied to the Act governing preferred provider arrangements. The AWP is inapplicable to for-profit corporations which are not also statutorily defined as “surviving corporations,” the court wrote. A “surviving corporation” was defined as a “health care corporation” which met certain other conditions. The Blue Cross HMO had always existed as a forprofit entity, it was not a “health care corporation,” and it did not fall within the statutory definition of a “surviving corporation.” As a result, the AWP did not apply to the HMO network established by the for-profit Blue Cross HMO. 9

In ERISA Trial Involving Pro Se Parties, Court Rejects Change of Beneficiary Due to Forgery Companion Life Ins. Co. v. Saddler, 2012 U.S. Dist. LEXIS 9024 (D.S.C. Jan. 26, 2012) This interpleader action involved competing claims to a $35,000 life insurance policy issued to Judith Hilton Lee, who died in December 2010. The policy was issued “through [the decedent’s] employer,” Community Housing Partners, by Companion Life. After Lee’s death, Companion learned that her daughters, Monique Kelly and Sheena Wilcher, contested a change of beneficiary allegedly made by the decedent shortly before her death. Companion filed an interpleader action, paid the death benefits into the court’s registry, and was dismissed from the case. The court informed the three defendants – each of whom was a potential beneficiary – that it would be best if they retained counsel. None of them retained counsel, and the court held a bench trial involving three out-of-state pro se parties. The sole issue was whether the signature on the change of beneficiary form was a forgery. From the testimony of the defendants, the court made the following findings of fact:

When the policy was issued in June 2008, the named beneficiary was Lee’s husband. In August 2009, Lee submitted a change of beneficiary form, changing the beneficiary from her husband to defendant Sheena Wilcher, one of her two daughters. The validity of this first change of beneficiary was not contested. In November 2010, less than a month before her death, Lee allegedly executed another change of beneficiary form, adding defendant Monique Kelly (her other daughter) and defendant Marilyn Saddler (her college roommate and longtime friend and caregiver). Under this alleged change of beneficiary, the three individuals were to share equally in the policy proceeds. Both daughters testified that the disputed change of beneficiary was a forgery. Even though Kelly would have received one-third of the death benefits if the change of beneficiary were valid, she did not desire any proceeds and testified that her mother’s intent was for Wilcher, the other daughter, to be the sole beneficiary.

The court sought testimony concerning how the request for the change of beneficiary form had been communicated to Companion. None of the defendants called any other witnesses, but the court learned from them that the individual with whom Lee had dealt was Nancy Snead, the Human Resources Manager for the employer, Community Housing Partners. With the parties’ consent, the court contacted Snead by telephone, with live audio transmission into the courtroom, so that she could testify and be subject to cross-examination. Snead testified that it was Saddler, the college roommate, not the insured, who had requested the change of beneficiary form – an account which contradicted Saddler’s prior testimony that she had never spoken to Snead. Next, the court proposed to the pro se litigants that they authorize the court to employ a forensic document examiner to examine the disputed signature and render his expert opinion. By agreement of all parties, the expert’s $520 fee was to be paid from the life insurance proceeds at issue. The defendants agreed for the expert to produce a written report, and they waived their rights of cross-examination. The expert’s report concluded that the decedent’s signature on the most recent change of beneficiary form was a forgery, which was adverse to the position of Saddler, the college roommate. Saddler requested that the court provide a second expert opinion, but the court declined to do so. Based on the trial evidence, and weighing the credibility of the witnesses, the court ruled that the November 2010 change of beneficiary request was invalid due to forgery, and that the first change of beneficiary in favor of Wilcher, one of the daughters, remained in effect.

Social Security Award of Disability Benefits Does Not Control ERISA Claim Determination Hepworth v. Life Ins. Co. of N. Am., No. 1:10-cv-01025 (N.D. Ga. Feb. 28, 2012) Hepworth, a registered nurse, sued to recover ERISA disability benefits after the insurer terminated her ongoing claim, concluding that the medical evidence did not support total disability from “any occupation.” LINA counterclaimed to recover an overpayment resulting from Hepworth’s receipt of Social Security disability benefits.

Hepworth argued that the plan did not require “clinical exam findings” and that it did “not differentiate between objective and subjective findings.” The court, however, noted that the plan required proof of continued disability and the submission of “satisfactory proof of Disability” in order to obtain benefits.

Hepworth contended that she was totally disabled as the result of injuries to her neck, back, and left shoulder. While at least one of Hepworth’s physicians supported her claim, others completed forms indicating that she retained functional ability that was not inconsistent with sedentary work. A consulting physician reviewed the medical evidence and concluded that the record lacked “documented significant quantified findings” that would support a disability claim.

Hepworth also argued that LINA failed to consider her favorable Social Security decision. The court noted the “general rule” that such decisions are “not considered dispositive on the issue of whether a claimant satisfies the requirement for disability under the ERISA-covered plan.” The Administrative Law Judge in the Social Security proceedings had determined that Hepworth was “unable to sustain an eight-hour work day because of her pain and the effects

of her pain medication.” Specifically, the ALJ had concluded that Hepworth was “markedly limited in her ability to maintain concentration, persistence and pace.” The district court found nothing in the record before LINA that supported impairment from working as the result of such issues. Indeed, a functional capacity evaluation submitted by Hepworth indicated that, at a minimum, she had the ability to perform sedentary work for a 40-hour week. The trial court granted summary judgment to LINA, concluding that the company’s decision to terminate benefits was not de novo “wrong.” The court also upheld LINA’s right to recover the overpayment and directed the parties to submit evidence concerning the amount of the overpayment.

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Sanders Carter

Kent Coppage

Aaron Pohlmann

We are pleased to publish ERISA and Life Insurance News, focusing on the latest developments in this practice area in federal and state courts within the Fourth and Eleventh Circuits. This newsletter is the result of the efforts of a number of attorneys in Smith Moore Leatherwood’s ERISA and Life Insurance Litigation Group in Georgia, South Carolina, and North Carolina. The current issue includes contributions from the attorneys pictured below.

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