ERISA PREEMPTION AND OTHER MYSTERIES
by Jayne Elizabeth Zanglein*
I.
734
PREEMPTION CASES . . . . . . . . . . . . . . . ..
A. Negligence Claims for Occupational Injuries Are
Not Preempted
. . . . . . . . . . . . . . 734
B. Preemption of Fraudulent Inducement and DTPA
Claims
.
740
II.
742
TAKING BACK BENEFITS . . . . . . . . . . . . . . .
A. The Anti-cutback Rule as Applied to Benefit
Accrual
B. The Anti-cutback Rule as Applied to Vested
Benefits
C. The Anti-alienation Provision . . . . . . . . . . ..
D. Reversion of Plan Assets on Partial Termination
III.
VI.
VII.
.
INTERFERENCE WITH PENSION BENEFITS .
A. The Case of the Contentious Divorce .
B. Termination of Medical Benefits
C. Failure to Exhaust Internal Remedies
IV.
V.
. 742
.
RELEASES
.
BENEFIT DENIAL CASES . . . . . . . . . . . . . .
751
753
753
756
756
759
760
762
764
A. The Case of the Unorthodox Cancer Treatment
B. Accidental Death by Asphyxiation
..
C. Death of a Felon
' .
D. The Case of the False Disability Claim ..
E. The Case of the Missing Money . . . . . . .
F. The Case of the Defamatory Claims Denial
G. The Case of the Cavalier Participant .....
777
778
PENSION BENEFITS IN BANKRUPTCY
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
782
784
764
768
770
773
775
This term brought many interesting and unusual employee benefit cases.
In a bevy of cases, the court was a champion of participants' rights. I Yet,
* Professor of Law. Texas Tech University School of Law; J.D. 1980, State University of New
York at Buffalo.
\. See Todd v. AIG Life Ins. Co., 47 F.3d 1448 (5th Cir. Mar. 1995) (holding that death by
autoerotic asphyxiation is 'accidental'); Texas Health Enter., Inc. v. Reece, 44 F.3d 243 (5th Cir. Dec.
1994) and Hook v. Morrison Milling Co., 38 F.3d 776 (5th Cir. Nov. 1994) (both holding that ERISA
does not preempt an employee's suit against an employer for failure to provide a safe workplace);
Stephen Allen Lynn, P.C. Employee Profit Sharing Plan and Trust v. Stephen Allen Lynn, P.C., 25
F.3d 280 (5th Cir. July), amend. in pan, 1994 U.S. App. LEXIS 20219 (5th Cir. 1994) (broadly
731
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732
TEXAS TECH LAW REVIEW
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the court was unsympathetic to participants who seemed to be taking
advantage of the plan. 2 Employers fared well in the big money cases,3
employees wort the big preemption cases,4 a husband who tried to cheat his.
wife out of pension money in a divorce was chastised,S a doctor who
engaged in fraud on a health fund was criticized, 6 and a participant who
was too "cavalier" to make sure he timely paid his COBRA premiums was
castigated. 7 In short, the good guys won and the bad guys lost, with some
exceptions, of course.
Employees scored major victories against their employers in two
preemption cases. s Both cases involved employees who sued employers for
occupational injuries. 9 The employers alleged that the negligence action
was preempted by ERISA because the employer provided workers'
compensation-like benefits through an ERISA plan. lO In both cases, the
Fifth Circuit held that ERISA did not preempt the negligence claim. II
Cases heard this term are still affected by corporate downsizing and cost
containment. In Izzarelli v. Rexene Products Co., the Fifth Circuit
considered the application of the anti-cutback rule under the Employee
Retirement Income Security Act (ERISA) to benefit accrual;12 and in
Williams v. Plumbers and Steamfitters Local 60 Pension Plan, the court
considered the effect of this rule on vested benefits. 13
interpreting Section 510 rights).
2. See SWitzer v. Wal-Mart Stores, Inc., 52 F.3d 1294 (5th Cir. May 1995) (participant cannot
take a cavalier "do nothing" attitude and then sue the plan because his coverage lapsed); Williams v.
Plumbers and Steamfitters Local 60 Pension Plan, 48 F.3d 923 (5th Cir. Apr. 1995) (participant
perceived to be trying to backdate a disability); Sweatman v. Commercial Union Ins. Co., 39 F.3d 594
(5th Cir. Dec. 1994) (participant's disability denied where she did not have signs of any disability);
Wittorf v. SheIl Oil Co., 37 F.3d 1151 (5th Cir. Nov. 1994) (participant trying to invalidate a release
voluntarily entered into with employer); James v. Louisiana Laborers Health & Welfare Fund, 29 F.3d
1029 (5th Cir. Aug. 1994) (participant injured during commission of a crime).
3. See Chevron Chern. Co. v. Oil, Chern. & Atomic Workers Local 4-447, 47 F.3d 139 (5th
Cir. Feb. 1995) (plan was not required to pay back benefits to union members. It is unclear if this is
a "big money" case, but the potential amount could be high.); Borst v. Chevron Corp., 36 F.3d 1308
(5th Cir. Oct. 1994), cert. denied, 115 S. Ct. 1699 (1995) (holding that participants are not entitled to
a pro rata portion of the plan's surplus assets on termination); Izzarelli v. Rexene Prod. Co., 24 F.3d
1506 (5th Cir. June 1994) (employer won case involving a $7.2 million dispute).
4. See Hook, 38 F.3d at 783-86; Reece, 44 F.3d at 245.
5. Lynn, 25 F.3d at 282-83.
6. Trustees of the Northwest Laundry & Dry Cleaners Health & Welfare Trust Fund v.
Burzynski, 27 F.3d 153, 158-59 (5th Cir. July 1994).
7. Switzer, 52 F.3d at 1301.
8. See Hook v. Morrison Milling Co., 38 F.3d 776 (5th Cir. Nov. 1994); Texas Health Enter.,
Inc. v. Reece, 44 F.3d 243 (5th Cir. Dec. 1994).
9. Reece, 44 F.3d at 244; Hook, 38 F.3d at 779.
10. Reece, 44 F.3d at 244; Hook, 38 F.3d at 778.
11. Reece, 44 F.3d at 245; Hook, 38 F.3d at 778.
12. 24 F.3d 1506, 1513 (5th Cir. June 1994).
13. 48 F.3d 923, 925 (5th Cir. Apr. 1995).
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ERISA PREEMPTION AND OTHER MYSTERIES
733
The court heard several discrimination cases brought under ERISA
section 510. 14 Of these cases, the most interesting case was Stephen Allen
Lynn, P. C. Employee Profit Sharing Plan and Trust v. Stephen Allen Lynn,
P. c., in which the court held that a wife stated a valid claim under ERISA
section 510 when she alleged that her husband, as administrator of a profitsharing plan, amended the plan to prevent her from receiving immediate
benefits under the plan. IS In another husband-wife case, Wittorj v. Shell
Oil Company, the Fifth Circuit held that a release signed by the husband
validly waived his wife's right to dictate how severance benefits should be
paid. 16
As usual, the Fifth Circuit addressed the appropriate standard of review
in a number of benefit denial cases. 17 These cases recited the traditional
Firestone standard of review, 18 but a few also addressed other fascinating
issues. In Todd v. AIG Life Insurance Co., the Fifth Circuit held that a
denial of benefits for autoerotic asphyxiation could not be a breach of
fiduciary duty. 19 In Trustees of the Northwest Laundry & Dry Cleaners
Health & Welfare Trust v. Burzynski, the court held that a physician had a
duty to disclose the fact that the cancer treatments he rendered were
illegal. 20 The Fifth Circuit also held that communicating a denial of
benefits to a patient afflicted with a skin disorder was not a defamatory
statement. 21
In a per curiam opinion, the court held that a plan
administrator properly denied a claim for medical benefits under the plan's
exclusion for injuries sustained during the commission of a felony, even
though the participant was never charged with or arrested in connection
with a crime. 22
14. See Hines v. Mass. Mut. Life Ins. Co., 43 F.3d 207 (5th Cir. Feb. 1995); Chailland v.
Brown & Root, Inc., 45 F.3d 947 (5th Cir. Feb. 1995); Stephen Allen Lynn P.C. Employee Profit
Sharing Plan and Trust v. Stephen Allen Lynn P.C., 25 F.3d 280 (5th Cir. July), amend. inpan, 1994
u.s. App. LEXIS 20219 (5th Cir. Aug. 1994); see also 29 U.S.C. § 1140 (1988).
15. 25 F.3d 280, 282-83 (5th Cir. Aug. 1994).
16. 37 F.3d 1151, 1155 (5th Cir. N:ov. 1994).
17. See Todd v. AIG Life Ins. Co., 47 F.3d 1448 (5th Cir. Mar. 1995); Chevron Chern. Co.
v. Oil, Chern. & Atomic Workers Local 4-447, 47 F.3d 139 (5th Cir. Feb. 1995); Sweatman v.
Commercial Union Ins., 39 F.3d 594 (5th Cir. Dec. 1994); Gulf South Medical and Surgical Inst. v.
Aetna Life Ins. Co., 39 F.3d 520 (5th Cir. Nov. 1994), cen. denied, 116 S. Ct. 67 (1995); James v.
Louisiana Laborers Health & Welfare Fund, 29 F.3d 1029 (5th Cir. Aug. 1994); Trustees of the
Northwest Laundry & Dry Cleaners Health & Welfare Trust Fund v. Burzynski, 27 F.3d 153 (5th Cir.
July 1994).
18. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 112-15 (1989).
19. Todd, 47 F.3d at 1457-58.
20. Burzynski, 27 F.3d at 158-59.
21. Gulf South Medical and Surgical [nst., 39 F.3d at 522.
22. James v. Louisiana Laborers Health & Welfare Fund, 29 F.3d 1029, 1033-34 (5th Cir. Aug.
1994).
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The last set of interesting cases involves the status of employee benefits
upon plan termination and in bankruptcyY In Borst v. Chevron Corp.,
the Fifth Circuit held that participants were not entitled to a pro-rata share
of surplus assets upon plan termination. 24 In Esco Manufacturing Co. v.
Pension Benefit Guaranty Corp., the court withdrew its prior opinion and
held that a bankruptcy trustee did not have power to terminate the plan
because the employer, who was not the plan administrator, lacked power
to terminate the plan. 25
I. PREEMPTION CASES
A. Negligence Claims for Occupational Injuries Are Not Preempted
Participants usually lose against a preemption argument. This term was
unusual because participants in four cases successfully evaded preemption
claims. In the first and most notable case, Hook v. Morrison Milling Co.,
the Fifth Circuit held that ERISA does not preempt a negligence claim for
an occupational injury against an employer who did not subscribe to the
Texas Workers' Compensation System and instead provided these benefits
through an ERISA plan. 26
Roxanne Hook's employer, Morrison Milling Company (MMC) , had
opted out of the Texas Workers' Compensation Act and instead sponsored
the Interim Employee Welfare Benefit Plan, an ERISA-governed plan that
compensates participants for workplace injuriesY To enroll in the plan,
Hook was required to waive her rights to sue the company for any
workplace injury. 28 Roxanne Hook was injured when she fell down a
flight of stairs at work. 29 The plan reimbursed Hook for her medical
benefits relating to the workplace accident and paid her salary continuation
benefits. 30
Seven months later, Hook left her job. 31 She filed a suit in state court
alleging that she was wrongfully discharged in retaliation for filing a claim
under the ERISA plan and that her employer was negligent in failing to
provide her with a safe workplace. 32 MMC removed the case to federal
23. Please note that not all Fifth Circuit cases have been reviewed in this article. Only the most
significant cases were reviewed.
24. 36 F.3d 1308, 1322 (5th Cir. Oct. 1994).
25. 50 F.3d 315,316 (5th Cir. Sept. 1994).
26. 38 F.3d 776, 786 (5th Cir. Nov. 1994).
27. [d. at 778.
28. [d. at 778-79.
29. [d. at 779.
30.
31.
32.
[d.
[d.
[d. The court sometimes referred to Hook's wrongful discharge case as relating to filing
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1996]
ERISA PREEMPTION AND OTHER MYSTERIES
735
court, contending that ERISA preempted the wrongful discharge claim. 33
Hook moved to remand back to state court. 34 The federal court denied the
motion, and Hook amended her petition to delete the wrongful discharge
claim. 3s Once again she moved to remand. This time, the federal court
granted her motion and held that the negligence action was not preempted
by ERISA. 36 MMC appealed the district court's order to remand. 37
The Fifth Circuit affirmed. 38 As a preliminary matter, the court held
that the lower court had properly refused to remand the wrongful discharge
claim. 39 The court noted that in Ingersoll-Rand Co. v. McClendon, the
Supreme Court held that ERISA preempts a "Texas wrongful discharge
claim to the extent that the claim is dependent upon the existence of an
ERISA plan."4O The court held that Hook's claim that she was wrongfully discharged for filing a claim under the ERISA plan "necessarily asserts
a claim that is dependent upon the existence of such a plan;" therefore, the
court concluded that removal was proper. 41 Removal remained proper
even after Hook deleted her wrongful discharge cause of action because a
"post-removal amendment to a petition that deletes all federal claims,
leaving only pendent state claims, does not divest the district court of its
properly triggered subject matter jurisdiction. "42 To determine subject
matter jurisdiction, the court examines the original complaint, not the
amended complaint. 43
Next, the court addressed preemption. The Supreme Court has
consistently interpreted the preemption clause broadly. 44
ERISA's
a workers' compensation claim, but ultimately treated it as relating to her claim under the ERISA plan.
Id. at 779-80 n.6.
33. Id. at 779.
34. Id.
35. [d.
36. [d. The court held that the claim was not preempted by ERISA for two reasons: 1) the
negligence claim did not relate to the ERISA plan, and 2) the waiver of Hook's right to sue did not
"trigger preemption because it is incidental to her negligence action, and ... alternatively, such waivers
are void under Texas law." Id.
37. [d.
38. Id.
39. [d.
40. [d. at 780 (citing Ingersoll-Rand Co. v. McClendon, 498 U.S. 133,137-41 (1990».
41. [d.
.
42. [d. (citing Brown v. Southwestern Bell Tel. Co., 901 F.2d 1250, 1254 (5th Cir. 1990); In
re Carter, 618 F.2d 1093, 1101 (5th Cir. 1980».
43. Hook, 38 F.3d at 780 (citing Anderson v. Electronic Data Sys. Corp., 11 F.3d 1311, 1316
n.8 (5th Cir. 1994». The court also held that it had appellate jurisdiction based on the district court's
decision to remand the case to state court because" 'a federal district court has discretion to remand a
properly removed case to state court when all federal-law claims have been eliminated and only pendent
state-law claims remain,''' Id. (quoting Jones v. Roadway Express, Inc., 936 F.2d 789, 792 (5th Cir.
1991) (citing Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343 (1988))).
44. See District of Columbia v. Greater Washington Bd. of Trade, 113 S. Ct. 580, 583 (1992);
Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46 (1987).
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preemption clause, section 514(a), provides that ERISA "shall supersede
any and all State laws insofar as they may now or hereafter relate to any
employee benefit plan" governed by ERISA. 45 The Supreme Court has
held, "A law 'relates to' an employee benefit plan, in the normal sense of
the phrase, if it has a connection with or reference to the plan.' '46 Yet,
the Supreme Court has recognized that "[s]ome state actions may affect
employee benefit plans in too tenuous, remote, or peripheral a manner to
warrant a finding that the law 'relates' to the plan. "47
The Fifth Circuit has established a two-prong test to determine if a
claim is preempted. 48 A state law claim is preempted if "(1) the claim
addresses areas of exclusive federal concern, such as the right to receive
benefits under the terms of an ERISA plan, and (2) the claim directly
affects the relationship among the traditional ERISA entities (Le. plan
administratorslfiduciaries and plan participants/beneficiaries). "49
The Fifth Circuit held that Hook's negligence claim did not "relate to"
the employer's ERISA plan; the negligence claim involved only the
employer/employee relationship, not the ERISA plan. 50 More specifically,
the negligence suit "stems from [MMC's] failure to maintain a safe
workplace and not from a dispute over the administration of MMC's plan
or the disbursement of benefits from the plan. •'51 The court reiterated that
"ERISA's preemptive scope may be broad but it does not reach claims that
do not involve the administration of plans, even though the plan may be a
party to the suit or the claim relies on the details of the plan. "52
The court also rejected the employer's argument that the negligence
claim relates to the ERISA plan because the court must look to the plan to
determine whether Hook waived her right to sue the employer for
workplace injuries. 53 The court criticized MMC's argument for standing
"ERISA preemption analysis on its head."54 MMC's argument focused
on whether the waiver contained in the plan related specifically to Hook's
claim. 55 The proper inquiry is whether the state negligence law relates to
45.
46.
29 U.S.C. § 1144(a) (1995).
Shaw v. Delta Air Lines. Inc., 463 U.S. 85,96-97 (1983).
47. [d. at 100 n.21.
48. Memorial Hasp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 244 (5th Cir. 1990);
Sommers Drug Stores v. Corrigan Enter., 793 F.2d 1456, 1467-68 (5th Cir. 1986), cert. denied, 479
U.S. 1034 (1987).
49. Hook v. Morrison Milling Co., 38 F.3d 776,781 (5th Cir. Nov. 1994) (citing Memorial
Hosp. Sys., 904 F.2d at 245.)
50. [d. at 783.
51. [d. at 781-82.
52. [d. at 784.
53. [d. at 786.
54. [d. at 785.
55.
[d.
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ERISA PREEMPTION AND OTHER MYSTERIES
1996]
737
the ERISA plan. 56 To hold otherwise "would enable employers to avoid
any state law simply by referring to that law in its ERISA plan. Congress
clearly did not intend to vest employers with such authority.' '57
Although the Supreme Court has not defined when a claim is so tenuous
or remote as to warrant preemption, 58 the Fifth Circuit said that a line
must be drawn somewhere: "ERISA was not meant to consume everything
in its path. "59 The Fifth Circuit clearly drew the line, holding that, "a
common law negligence claim which alleges only that an employer failed
to maintain a safe workplace does not 'relate to' an ERISA plan merely
because the employer has inserted a waiver of the right to bring such a
claim into its ERISA plan. "60
Judge Jones dissented. She condemned the employees for "try[ing] to
have their cake and eat it [too] by collecting benefits and then suing. "61
She described the plan as a "substitute for, not a vehicle to finance,
employee litigation. "62 Judge Jones also criticized the majority for
ignoring the Supreme Court's mandate to broadly construe the preemption
clauseY The waiver is "economically essential" to the ERISA plan, and
the employee's claim relates to the plan by challenging the enforceability
of the waiver. 64 Judge Jones expressed discomfort with the conclusion
that the negligence claim was preempted by ERISA and felt bound by the
Supreme Court's broad interpretation of the preemption clause. 65
One month after the Fifth Circuit decided Hook, the court issued a per
curiam opinion based on a similar case. In Texas Health Enter. v. Reece,
the court broadly reiterated its holding in Hook: "[A]n employee's state
common law claims against his employer are not preempted by federal
ERISA law.,'66
The Fifth Circuit's holdings in Hook and Reece are especially surprising
in light of recent Fifth Circuit cases. In its last term, the court held that a
common law fraud claim was preempted "because the only damages
recoverable under the claim 'relate[d] to' the value of severance benefits"
under an employee benefit plan. 67 In another case last term, the Fifth
Circuit noted that "[w]hen a court must refer to an ERISA plan to
56.
[d.
57.
58.
59.
60.
[d.
See Sh~w v. Delta Air Lines, Inc., 463 U.S. 85, 100 n.21 (1983).
Hook, 38 F.3d at 786.
[d.
[d. at 787 (Jones, J., dissenting).
[d. (Jones, J., dissenting).
[d. (Jones, J., dissenting).
[d. Jones, J., dissenting).
[d. at 788 (Jones, J., dissenting).
44 F.3d 243, 244 (5th Cir. Dec. 1994).
Perdue v. Burger King Corp., 7 F.3d 1251, 1255-56 (5th Cir. 1993).
61.
62.
63.
64.
65.
66.
67.
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determine the plaintiff's ... benefits and compute the damages claimed, the
claim relates to an ERISA plan," and is thus preempted. 68 One might
easily have applied these cases to Hook's situation and have concluded that
damages recoverable by Hook under the unsafe workplace claim are directly
affected by the ERISA plan in which Hook waived her right to sue her
employer and, therefore, Hook's claim must be preempted.
The Fifth Circuit quickly cleared up this confusion in Rozzell v. Security
Services, Inc., citing dicta in Cefalu v. B.F. Goodrich Co. as the cause of
the confusion. 69 In Cefalu, the Fifth Circuit held that an employee's claim
that his employer breached an oral agreement to maintain level benefits was
preempted by ERISA. 70 The court noted in dicta, "To compute [plaintiff's] damages, the court must refer to the pension plan under which
[plaintiff] was covered when he worked for [defendant]. "71
In Rozzell, the court clarified this dicta by noting, "This statement does
not, and cannot, mean that any lawsuit in which reference to a benefit plan
is necessary to compute plaintiff's damages is preempted by ERISA ...
. "72
The court overruled a district court case, Addison v. Sedco Forex,
U.S.A. /3 to the extent it was inconsistent. 74
The court then turned to the facts of the dispute. Rozzell sued his
employer for retaliatory discharge under the Texas Workers' Compensation
Act. 75 In his complaint he alleged that his employer wrongfully terminated
him "to willfully deprive [him] of the compensation and benefits of [his]
job. "76 The court held that this allegation was not stated as a separate
claim but was made to support a claim for punitive damages. 77 The court
held that Rozzell's only claim was for retaliatory discharge, a claim' 'that
is governed exclusively by state law.' >78
.
The Fifth Circuit distinguished Burks v. Amerada Hess Corp.79 Burks
alleged that his employer intentionally inflicted emotional distress on him
by wrongfully denying his benefits under a plan. 80 The Fifth Circuit held,
"This is not a case in which the loss of benefits is merely an element in
68.
69.
1294 (5th
70.
71.
Epps v. NCNB Texas, 7 F.3d 44, 45 (5th Cir. 1993).
38 F.3d 819, 822 (5th Cir. Nov. 1994)(citing Cefalu v. B.F. Goodrich Co., 871 F.2d 1290,
Cir. 1989».
Cefalu, 871 F.2d at 1294.
72.
Rozzell, 38 F.3d at 822 (citing Burks v. Amerada Hess Corp., 8 F.3d 301, 306 (5th Cir.
1993».
73.
[d.
~
798 F. Supp. 1273 (N.D. Tex. 1992).
74.
Rozzell, 38 F.3d at 822.
75.
76.
77.
78.
79.
80.
[d.
[d. at 821.
[d. at 821-22.
[d.
8 F.3d 301 (5th Cir. 1993); Rozzell, 38 F.3d at 822-23.
[d. at 302.
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ERISA PREEMPTION AND OlliER MYSTERIES
739
damages related to a claim for wrongful discharge. Burk's complaint
expressly says that-independently of the wrongful discharge-his denial of
benefits is illegal under state law.' '81
The court contrasted Burks with Rozzell by stating, "Rozzell makes no
independent chiim that the denial of his benefits was illegal under state law.
Rather, the loss of benefits is 'merely an element in damages related to a
claim for wrongful discharge. "'82 Thus, Rozzell's claim was not preempted.
It appears that the Fifth Circuit is attempting to make its present rulings
consistent with its past rulings. However, the cases are not easy to
reconcile. In Rozzell, the court seems to try too hard. In order to make
Rozzell fit into its scheme, the court has to read the allegation in Rozzell's
complaint that his employer wrongfully "deprive[d] him of the compensation and benefits of [his] job" as a justification for punitive damages, not
as a separate claim for relief. 83 The court was not as willing last term to
interpret Perdue's claim against Burger King Corporation for common law
fraud so as to avoid preemption. 84 Perdue sued Burger King for fraud,
breach of fiduciary duty, and discrimination under section 510. 85 The
court held that his fraud claim was preempted "because the only damages
recoverable under the claim 'relate to' the value of severance benefits
waived by Perdue upon acceptance of [his new] position."86
Perhaps, the court is trying, in a backhand manner, to show plaintiffattorneys the way to avoid preemption. If so, the rules are:
(1) Do not allege that your client was fired to interfere with his
pension or medical benefits. 87 This is too close to an ERISA
section 510 claim and will be preempted. Also, it is preempted .
because it refers to and is premised on the existence of a plan.
(2) Do not allege that the denial of your client's benefits was an
intentional infliction of emotional distress. 88 Any claim that would
cease to exist if "stripped of [its] link to the ... plan" is preempted. 89
(3) Do not allege improper denial of benefits because that claim
"relates to" a plan. 90
81.
82.
83.
[d. at 305.
Rozzell, 38 F.3d at 823 (citing Burks, 8 F.3d at 305).
[d. at 821.
84.
Perdue v. Burger King Corp., 7 F.3d 1251, 1255 (5th Cir. 1993).
85.
86.
87.
[d. at 1253.
[d. at 1255.
See Ingersoll-Rand Co. v. McClendon. 498 V.S. 133, 140 (1990); Hook v. Morrison Milling
Co., 38 F.3d 776, 783 (5th Cir. Nov. 1994).
88.
89.
90:
See Burks v. Amerada Hess Corp.• 8 F.3d 301, 304-05 (5th Cir. 1993).
Christopher v. Mobil Oil Corp., 950 F.2d 1209, 1220 (5th Cir. 1992).
See Pilot Life Ins. Co. v. Dedeaux, 481 V.S. 41.47-48 (1987); Metropolitan Life Ins. v.
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(4) Do not allege misrepresentation made by a plan administrator
with respect to the terms of the plan. 91 However, you can allege
fraudulent conduct by a third party, non-fiduciary if it does not
involve the administration of the plan. 92
(5) You can allege that your client's employer failed to provide her
with a safe workplace even if the plan precludes her from suing the
employer for workplace injuries. 93
B. Preemption of Fraudulent Inducement and DTPA Claims
In the last real preemption case decided this term, Hubbard v. Blue
Cross & Blue Shield Ass 'n, the court held that a participant's claim that her
insurer fraudulently induced her to join the plan by "generat[ing] and
disseminat[ing] secret policy interpretation 'guidelines' which were" used
to deny her claim was preempted by ERISA. 94 The court also held that
the employee's claim that her insurer violated the Texas Deceptive Trade
Practices Act95 was not preempted. 96
Hubbard alleged that the Blue Cross & Blue Shield Association ("the
Association") established secret guidelines which were distributed to her
insurer Blue Cross of Texas. 97 The guidelines allegedly set standards for
the interpretation of the terms "experimental" and "medically necessary. "98 Hubbard contended that "in effect, [the Association] added
verbiage to the definitions of the . . . terms found in the insurance
policy. "99 The court held that this claim was preempted by ERISA
because it is "intricately bound up with the interpretation and administration
of an ERISA plan. "100 The court noted that "ERISA provides no
remedy, " and therefore, summary judgment in favor of the Association was
proper. 101
Hubbard's DTPA claim alleged that the Association's advertisements
depicted Blue Cross "as an honest and forthright company that would never
Taylor, 481 U.S. 58, 62-63 (1987); Memorial Hosp. Sys. v. Nonhbrook Life Ins. Co., 904 F.2d 236,
244 (5th Cir. 1990); Ramirez v. Inter-Continental Hotels, 890 F.2d 760, 762-63 (5th Cir. 1989); Cefalu
v. B.F. Goodrich Co., 871 F.2d 1290, 1292-95 (5th Cir. 1989); Degan v. Ford Motor Co., 869 F.2d
889, 893-95 (5th Cir. 1989).
91. See Lee v. E.I. DuPont de Nemours & Co., 894 F.2d 755,756-58 (5th Cir. 1990).
92. See Perkins v. Time Ins. Co., 898 F.2d 470, 473 (5th Cir. 1990).
93. See Hook, 38 F.3d at 784.
94. 42 F.3d 942, 944-46 (5th Cir. Jan.), em. denied, 115 S. Ct. 2276 (1995).
95. TEx. Bus. & COM. CODE ANN. §§ 17.41-17.63 (Vernon 1987 & Supp. 1996).
96. Hubbard, 42 F.3d at 946-47.
97. Id. at 944.
98. Id. at 946.
99. Id.
100. Id.
101. Id.
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ERISA PREEMPTION AND OTHER MYSTERIES
741
engage in deceptive trade practices. "102 llubbard alleged that these
advertisements induced her to participate in the Blue Cross plan and
discouraged her from attempting to procure supplemental insurance. 103
Although the Fifth Circuit has held that some DTPA claims are
preempted by ERISA!04 the court held that Hubbard's fraudulent inducement claim was not preempted. lOS The court relied on Perkins v. Time
Insurance Co. in holding "that a state law fraudulent inducement claim
against a third party other than an ERISA entity is not preempted by ERISA
if it does not implicate the plan's administration of benefits or 'affect the
relations among the principal ERISA entities (the employer, the plan
fiduciaries, the plan and the beneficiaries).'" 106 In Perkins, the plaintiff
alleged that his insurance agent fraudulently induced him to discontinue his
prior insurance and enroll in an ERISA plan. 107 The agent knew that the
plaintiff's daughter required treatment for a congenital eye defect but falsely
told the plaintiff that the treatment would be covered under the new
plan. 108 The plan denied the benefits under the preexisting condition
exclusion. I09 Perkins' suit against the insurer was preempted by ERISA,
but the claim against the agent was not preempted. 110 The court said:
While ERISA clearly preempts Perkins' claims as they relate to Time, the
same cannot be necessarily said, however, as regards [the insurance
agent's] solicitation of Perkins, which allegedly induced him to forfeit an
insurance policy that covered his daughter's condition for one that did
not. While ERISA clearly preempts claims of bad faith as against
insurance companies for improper processing of a claim for benefits
under an employee benefit plan, and while ERISA plans cannot be
modified by oral representations, we are not persuaded that this logic
should extend to immunize agents from personal liability for their
solicitation of potential participants in an ERISA plan prior to its
formation. III
Based on Perkins, the Fifth Circuit held that the false advertising claim
against the Association, a third party who played no role in the issuance of
the policy or the determination of benefits under the plan, was not preempted. 112
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
ld.
ld.
Ramirez v. Intercontinental Hotels, 890 F.2d 7fJJ, 762-63 (5th Cir. 1989).
Hubbard, 42 F.3d at 947.
ld. (quoting Perkins v. Time Ins. Co., 898 F.2d at 470,473 (5th Cir. 1990».
Perkins, 898 F.2d at 473.
ld. at 472.
[d.
[d. at 473.
[d. at 473 (citations omitted).
Hubbard v. Blue Cross & Blue Shield Ass 'n, 42 F.3d 942, 947 (5th Cir. Jan.), em. denied,
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TEXAS TECH LA W REVIEW
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II. TAKING BACK BENEFITS
A. The Anti-cutback Rule as Applied to Benefit Accrual
In Izzarelli v. Rexene Products Co., the Fifth Circuit held that a plan
administrator did not violate ERISA's anti-cutback rules when it valued
stock contributed to a stock bonus plan as of the date the stock was
transferred to the trustee, rather than as of the last day of the plan year. 113
Rexene Products was caught in a no-win situation when it authorized a
contribution of stock before it valued the shares. 114 Once the shares were
valued, it became clear that the contribution exceeded the limitation on
contributions established by the Internal Revenue Code. 115 Rexene tried
to amend the plan to avoid disqualification. 116 Seven million two hundred
thousand dollars were at stake. II? The facts are complicated but essential
to a clear understanding of the case.
Rexene Products authorized an employer ,contribution of 101,794
shares of company stock to its stock bonus plan for the 1986 plan year. 118
The shares were not appraised at the time of the authorization. 119 . A
subsequent appraisal with a valuation date of December 31, 1986, showed
an increase of $76.34 per share, an astonishing increase over the prior
year's valuation of one dollar per share. 12o Rexene notified employees of
this increase in value and advised them how to calculate the amount to be
contributed to their individual account. 121
When the accountants started to allocate the contributions, they realized
that the contribution of 101,794 shares, valued at $76.34 per share,
exceeded the limitation on annual contributions imposed by section 415 of
the Internal Revenue Code. 122 This over-contribution could cause the plan
to be disqualified. l23
Rexene's counsel suggested that the over-contributions be '" allocated
and reallocated' to [ ] other [participant] accounts, until all participants
115 S.Ct. 2276 (1995). See also Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 247
(5th Cir. 1990); Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enter., Inc., 793
F.2d 1456, 1467 (5th Cir. 1986), cen. denied, 479 U.S. 1034 (1987).
113. 24 F.3d 1506,1521 (5th Cir. June 1994).
114. [d. at 1509.
115. [d.
116. [d.,at 1511.
117. !d. at 1508.
118. [d. at 1509.
119. [d. Under the plan, the employer had discretionary authority to decide whether to
contribute to the plan, and if so, how much. [d.
120. [d.
121. [d. at 1509 n.4.
122. [d. at 1510; see 26 U.S.C. § 415(a)(I)(B) (1988).
123. [zzareili, 24 F.3d at 1510.
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ERISA PREEMPTION AND OTHER MYSTERIES
743
reached their [section] 415 limits. ,,124 Any excess contributions would
be placed in a suspense account for allocation in future years for those
employees who were participants at the time of the over-contribution. 125
This procedure complied with the terms of the plan as closely as possible;
however, an IRS determination letter was required on the suspense
account. 126
Rexene rejected this alternative for two reasons. First, a probable six
month delay in receiving an IRS determination letter was unattractive to
Rexene because the corporation was anticipating a sale or merger. 127
Second, the allocation and reallocation scheme did not comport with
Rexene's desire to keep happy its highly compensated employees-employees who had the right to vote on the prospective sale or merger. 128 Under
the allocation and reallocation proposal, the highly compensated employees
would receive a smaller allocation than the non-highly compensated
employees because the highly compensated employees were closer to the
section 415 limitation. 129 The proposal was skewed in favor of the nonhighly compensated employees.
After Rexene rejected the allocation-reallocation proposal, "[C]ounsel
suggested that the 1986 contribution be allocated to take all participants up
to their [section] 415 limits, with those who, but for [section] 415, would
have received more stock, being given an additiot;lal cash bonus outside the
[p]lan equivalent to the value of the stock they would have received. "130
Any further excess would be placed in a suspense account to be allocated
in future years to all plan participants, not just those who were participants
at the time of the over-contribution. 131
Rexene rejected this alternative because Rexene was not in a financial
position to pay large bonuses outside of the plan. 132 Rexene also objected
to this alternative because it still penalized the highly compensated
employees. 133
Instead, Rexene decided to amend the plan to "allocate to each
participant shares valued at 6.32 % of his or her 1986 considered compensation. "134 This would have allowed Rexene to contribute only 25 % of the
124.
125.
126.
127.
128.
129.
[d.
[d.
[d.
[d.
[d.
[d.
130. [d. at 1511.
131. [d.
132. [d.
133. [d.
134. [d. The 6.32 % percent was chosen because it allowed Rexene to allocate ·up to the § 415
limitation for most of the highly compensated employees. [d. at 1511 n.7. Those employees who
would exceed their § 415 limits would be given a cash bonus outside of the plan. [d.
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TEXAS TECH LAW REVIEW
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original contribution. 13s The remaining 75 % would revert to Rexene. 136
This reversion was justified by a plan provision that permitted reversion in
the event of a mistake of faCt. 137 Counsel advised Rexene that the IRS
might not permit an amendment that required a reversion. 138 In response,
"Rexene authorized further amendment as necessary to allow the [p]lan to
maintain its qualified status. "139
The IRS did not approve the reversion but allowed a plan amendment
which would contribute shares equal to 6.32 % of considered compensation
for each employee with the remainder to be placed in a suspense account
to be allocated in future years to all employees. l40
Before Rexene received the IRS's determination letter, Rexene
authorized another appraisal, this time with a May 31, 1987 valuation
date. 141 The date was chosen because it was the last day of the month in
which the stock certificate was delivered to the trustee. 142 This appraisal
valued the shares at $158.27 per share. 143 Therefore, only 11,775 shares
could be allocated and the remaining 90,019 would be placed in the
suspense account. l44 Rexene advised the participants of the revised
valuation and informed employees that the IRS had changed the allocation
method. 14s
In early 1988, the shares were allocated and statements were distributed
to the plan participants. l46 Rexene was sold in April 1988. 147 The
90,019 shares remaining in the suspenSe account were sold for $203.95 per
share. l48 The proceeds were allocated to plan participants between 1987
and 1991. 149 The 1986 participants received 82,248 of the 101,794
shares. ISO
The 1986 participants sued Rexene alleging that Rexene, its successor,
and the trustee-bank breached their fiduciary duties "by failing to follow
the [p]lan, amending the [p]lan, and re-valuing the 1986 contribution."lsl
135.
136.
[d. at 1511.
[d.
137.
[d.
138.
139.
140.
[d.
[d.
[d.
141. [d. at 1511-12.
142. [d. at 1512.
143. [d.
144. [d. Under the December 31, 1986 valuation, 26,000 shares could have been allocated.
[d. at 1511. Rexene had jumped out of the frying pan and into the fire with the new valuation date.
145. [d. at 1512.
146. [d.
147. [d.
148. [d.
149. [d.
150. [d.
151. [d.
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ERISA PREEMPTION AND OTHER MYSTERIES
745
Plaintiffs claimed that this had the effect of reducing the accrued benefits
of the 1986 participants. ls2 The district court ruled in favor of the plan
participants with respect to the anti-cutback and breach of fiduciary duty
arguments. IS3
The Fifth Circuit first addressed the anti-cutback rule. ERISA section
204(g)(1) prohibits plan amendments which decrease a participant's accrued
benefits. ls4 The court ruled that the lower court erred in holding that
Rexene's contributions accrued when they were contributed and, therefore,
were subject to the anti-cutback rule. ISS
The court noted that ERISA does not define when a benefit accrues. IS6 ERISA defines an accrued benefit in a defined contribution plan
as "the balance of the individual's account."157 It does not define when
a contribution becomes part of the balance. Very few courts have
addressed this issue. 158
The court looked to the plan to determine how and when benefits are
allocated. Under the plan, allocation was made according to a specified
formula after the contribution was made. 159 However, the court noted
that "the mere fact that the 101,794 shares were contributed to the plan
does not . . . mean that their allocation was either automatic or simultaneous with that contribution." 160
To the contrary, the contributions were initially held in an "Unprorated Fund" defined as "that portion of the assets or property in the [plan]
... which at any particular time, has not been allocated to a particular
Member's Account . ... "161· The plan further provided that the contribution be allocated by the end of the plan year in which it was made. 162
The plan gave "Rexene 'complete discretion' to control the 'time and
manner of allocating [s]tock among [participants'] Accounts.'''163
The court concluded that a benefit in a defined contribution plan
accrues when the contribution is allocated to the participant's account. l64
152.
153.
[d.
[d. at 1512-13.
154. 29 U.S.C. § 1054(g)(l) (1988).
155. [zzarelli, 24 F.3d at 1514-17.
156. [d. at 1514.
157. 29 U.S.C. § l002(23)(B) (1988).
158. See Hickerson v. Velsicol Chern. Corp., 778 F.2d 365,376 (7th Cir. 1985), em. denied,
479 U.S. 815 (1986); Rummel v. Consol. Freightways, Inc., No. C-91-4168 DU, 1992 WL 486913,
at *3 (N.D. Cal. Sept. 17, 1992).
159. [zzarelli, 24 F.3d at 1515.
160. [d.
161. [d.
162. [d. at 1516.
163. [d.
164. [d. at 1515 n.16.
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Allocation did not occur when Rexene contributed the stock to the plan. 165
Because of the over-contribution, allocation to a suspense account was
permissible under the plan only if the IRS agreed with the creation of the
suspense account. 166 The court noted that the IRS was not likely to
approve the suspense account. 167 Therefore, it was impossible for Rexene
to allocate the contribution in accordance with the terms of the plan. 168
Thus, the Fifth Circuit held that the lower court erred when it determined
that the benefits accrued when the contribution was made. 169
The court rejected the 1986 participants' alternative claim that the
contribution accrued when Rexene notified the participants about the
allocation. 170 The Fifth Circuit interpreted this argument to be an
estoppel claim and noted that ERISA has traditionally disfavored promissory
estoppel and oral modification claims. 17l Despite this traditional hostility
to promissory estoppel, the court surprisingly assumed "arguendo that an
estoppel argument based on these [notices] could succeed" and examined
the content of the notices. In
The original notice told employees that they would receive one share
for every $303 they had earned in 1986 straight-time earnings. 173 A
contribution in this amount would have exceeded section 415 limitations. 174 Therefore, the court concluded, "Plaintiffs cannot base a 'de
facto allocation' argument on a strategy which, if followed, would have
resulted in [p]lan disqualification. "175
In later notices, Rexene advised employees (1) that account statements
would be delayed, (2) that the entire 1986 contribution could not be
allocated, (3) that contributions would be allocated in amounts equal to the
section 415 limits of the highly compensated employees, (4) that plan
amendments had been submitted to the IRS for approval, and (5) that the
new stock appraisal was $158.37 per share. 176
at 1515.
at 1516.
165.
166.
167.
168.
169.
170.
171.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
173.
174.
175.
176.
[d.
[d.
[d.
[d. at 1517-18.
at 1517.
at 1517-18.
at 1517; see Williams v. Bridgestone/Firestone, Inc., 954 F.2d 1070, 1072-73 (5th Cir.
1992); Degan v. Ford Motor Co., 869 F.2d 889, 895 (5th Cir. 1989); Rodrique v. W. & S. Life Ins.
Co., 948 F.2d 969, 971 (5th Cir. 1991).
172. [zzarelli, 24 F.3d at 1517. Clearly, the court did not have to address this issue. It could
have just rejected the argument and cited the multitude of cases in which the Fifth Circuit has not
permitted estoppel claims.
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ERISA PREEMPTION AND OTHER MYSTERIES
747
These notices made clear that the 1986 contributions had not been
allocated, and therefore, the participants could not have relied on the
original notification. 177 Moreover, since the contributions did not accrue
until allocated, the plan amendment could not have violated the anti-cutback
rule. 178 The court noted, "'ERISA simply does not prohibit a company
from' eliminating previously offered benefits that are neither vested nor
accrued. '" 179 .
Next, the court turned to the issue of valuation. The plan required a
contribution to be valued as of the "date it [was] contributed to the
plan. "180 The district court found that the stock was deemed contributed
on December 31, 1986. 181 Because the plan administrator had discretion
to interpret the terms of the plan, the Fifth Circuit reviewed the lower
court's decision using an abuse of discretion standard. l82 This standard
requires the court to determine the legally correct interpretation of the plan
by considering "(1) 'uniformity of construction,[i.e., previous construction
of the same provisions]; (2) fair reading and reasonableness of that reading;
and (3) unanticipated costs'" to the plan under the interpretation. 183 If
the court determined that the administrator's decision was not legally
correct, then the court would have to decide whether the administrator acted
arbitrarily or capriciously.
The plan provided that if Rexene made a contribution after December
31, but before filing its tax return, then the contribution would be deemed
to have been received on December 31, if Rexene designated the contribution for the taxable year ending December 31, or if Rexene claimed the
contribution on its tax return for that year. 184 Rexene argued that this
provision only determined the date of the contribution to the plan for tax
purposes, not the date for valuation purposes.1 8S Rexene contended that
the valuation date should be the "date the shares were actually contributed
to the [pllano "186
177.
[d.
178.
179.
[d.
[d. at 1518 (quoting Wise v. EI Paso Natural Gas Co., 986 F.2d 929, 935 (5th Cir.),
em.
denied, 114 S. Ct. 196 (1993)).
180.
181.
182.
183.
[d.
[d.
[d. at 1519.
[d. (quoting Bathelor v. Int'I Bhd. of Elec. Workers Local 861 Pension and Retirement
Fund, 877 F.2d 441, 444 (5th Cir. 1989)).
184. [d. This language regarding the deductibility of contributions followed I.R.C. § 404(a)(6)
(1988).
185. [zzarelli, 24 F.3d at 1520.
186. [d. (citing Rev. Rul. 73-583, 1973-2 C.B. 146 and Treas. Reg. § 1.415-6(b)(4) (as
amended in 1992) in suppon of its argument).
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In order to determine if Rexene's interpretation was uniform and fair,
the court looked to prior contributions. 187 Prior years offered little
guidance because "the [p]lan was in only its second year when the
contribution for 1986 was made. "188 The 1985 contribution was appraised at $1 per share as of December 31, 1985"89 The court did not
find the 1985 appraisal date controlling because it was erroneous. l90
Next, the court turned to the second factor, a "fair reading" of the
plan. 191 The court held, "[A] fair reading of the [p]lan indicates that
[section] 3.3 is concerned with the contribution date only for purposes of
applying the contribution to a particular taxable year. "192 The court
found that, for valuation purposes, the plan defined a contribution's value
as "[m]arket [v]alue as of the date of contribution. "193 Thus, the court
interpreted this definition to require valuation as of the date the contribution.
was actually made, not deemed to be made. 194
The court then turned to the last factor of the three-pronged test,
consideration of "any unanticipated costs to the [p]lan which would result
from the administrator's Y1terpretations. "195 The court stated,
It is unclear whether Rexene's interpretation would have resulted in such
costs. What is clear is that Rexene was attempting to avoid the substantial unanticipated costs to participants that would have resulted if the
[p]lan had been disqualified. That is, had the stock been allocated at a
value of $76.34, and that value later had been determined by the IRS to
be erroneous-with the result that the [p]lan was disqualified (because,
at the correct, higher valuation, e.g., $158.37, the [p]lan would have far
exceeded its § 415 limit}-the participants would have had stock in the
company, and corresponding tax liability, but no corresponding income
to pay it. 196
'
The court concluded that Rexene had correctly interpreted the plan to mean
that the actual date of contribution controls valuation, rather than the date
it was claimed as a tax deduction. 197
Next, the court analyzed the value of the shares. The court found that
the decision to reappraise the shares from $76.34 to $158.37 was an
187.
188.
189.
190.
191.
192.
193.
194.
195.
196.
197.
[d. at 1520.
[d.
[d.
[d. The error was immaterial because the value remained constant. [d.
[d.
[d.
[d.
[d.
[d.
[d. at 1521.
[d.
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ERISA PREEMPTION AND OTHER MYSTERIES
749
informed decisIun made on the advice of counsel. 198 It recognized that
the decision was based on the possible disqualification of the plan if the
lower value was used. l99 Thus, the court held that Rexene's valuation of
shares as of the date of actual contribution was correct and did not violate
the anti-cutback rules. 200
Finally, the court rejected the plaintiffs' argument that the Rexene
fiduciaries breached their fiduciary duties by using the higher valuation
because the 1986 participants did not receive their full 1986 contribution. 201 The plaintiffs claimed this violated ERISA Section 404(a)(I)(A),
which requires a fiduciary to administer the plan "for the exclusive purpose
of . . . providing benefits to the participants.' '202 Plaintiffs attributed the
use of this higher valuation to the impending sale, pointing out that,
"[B]ecause the shares in the suspense account were included in Rexene's
value, the greater their value, the greater the company's value, and the
larger the deduction a buyer could take for the shares ... 203
The court deferred to the district court's assessment of witness
credibility.204 The district court agreed with plaintiffs' assertion that Rexene
was motivated by concern "for the heavy savers . . . and the imminent
sale.' '205
The court rejected the plaintiffs' argument that Rexene committed a
breach of fiduciary duty. 206 The court acknowledged that fiduciaries must
act solely in the interest of all participants and beneficiaries, not just the
1986 participants and their beneficiaries. 207 However, the court reasoned
that although Rexene may have been motivated by the impending sale, it
"acted out of concern for the long-term viability of the [p]lan, including its
continued status as an ERISA-qualified plan. "208
The court further held that Rexene did not violate the exclusive benefit
rule by taking action which incidentally benefitted Rexene. 209 Appellate
courts have taken two approaches to incidental benefit and dual motivation
198.
199.
200.
201.
202.
203.
204.
205.
206.
207.
208.
209.
[d.
[d.
[d.
[d.
[d.
al
at
at
at
1521-22.
1522.
1522-24.
1522. See 29 U.S.C. § 1100(a)(I)(A) (1988).
[zzarelli. 24 F.3d at 1522.
[d. at 1523.
[d. at 1522.
[d. at 1525.
[d. at 1523.
[d.
[d. This is a reverse of the incidental benefit argument. "Moreover, even if Rexene's
decisions with regard to the [p]lan were made with the primary motive of benefitting Rexene. those
. decisions had the secondary purpose of benefitting (or at least, not harming) the [p]Ian as a whole."
[d. Usually. the incidental benefit argument applies when the primary purpose of the investment is to
benefit the plan, but incidentally also benefits other parties in interest.
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TEXAS TECH LAW REVIEW
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cases. The first approach.is exemplified in Deak v. Masters, Mates &
Pilots Pension Plan, where the Eleventh Circuit held:
It is difficult to conceive of a situation .where a benefit to the Union
would not have incidental benefit to the [p]lan .. "
However, the
statute requires the Trustees to act for the sole benefit of the [pilan
beneficiaries. The District Court was entitled to find from the evidence
at trial that the actions of the Trustees were for the benefit of the Union.
The benefit to the [pilan cannot legitimize their motives, especially in light
of the findings of fact that the [p]lan was underfinanced at the time and
that the Trustees made no actuarial investigation of [the amendment]. 210
Under this analysis, "Rexene's decision to amend the [p]lan would be a
breach of fiduciary duty under § [404](a)(l)(A) because-in the view of the
district court-it was not enacted primarily, or solely, for the benefit of the
participants. ,'211
Hozier v. Midwest Fasteners, Inc. represents a second approach to
addressing incidental benefit and dual motivation issues. 212 The Fifth
Circuit referred to the Hozier decision, where the Third Circuit held that
when an employer serves as a fiduciary for an ERISA plan, the employer
is acting in its fiduciary capacity' 'only when and to the extent" it functions
as a plan administrator. 213 When an employer makes a business decision
with respect to a plan, it is not acting in its fiduciary capacity. 214 Business decisions include the employer's decision to amend or terminate a
plan. 215 The Fifth Circuit cited with approval a recent Seventh Circuit
decision:
An employer can wear two hats: one as a fiduciary administering a
pension plan and the other as the drafter of a plan's terms. . .. [A]n
employer does not act as a fiduciary when it amends or otherwise sets the
terms of the plan. 216
This employer discretion is not unfettered. Although benefits that
accrued and vested are considered sacrosanct, a contribution such as the
1986 contribution, which was neither vested nor accrued, may be reduced
210. 821 F.2d 572, 579-81 & n.12 (11th Cir. 1987), cen. denied, 484 U.S. 1005 (1988).
211. Izzarelli, 24 F.3d at 1524.
212. See 908 F.2d 1155, 1158 (3d Cir. 1990).
213. Izzarelli, 24 F.3d at 1524 (quoting Hozier. 908 F.2d at 1158).
214. Id.
215. Id. Congress intended "employers [to] remain free to create, modify and tenninate the
tenns and conditions of employee benefit plans without govenunenta1 interference." McGann v. H &
H Music Co., 946 F.2d 401, 407 (5th Cir. 1991), cen. denied, 113 S. Ct. 482 (1992).
216. Izzarelli, 24 F.3d at 1524 (citing McGath v. Auto-Body North Shore, Inc., 7 F.3d 665,
670-71 (7th Cir. 1993)).
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ERISA. PREEMPTION AND OTHER MYSTERIES
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751
or eliminated without breaching the fiduciary standards of ERISA. 217
Accepting this second approach, the court in Izzarelli held that Rexene did
not violate the exclusive benefit rule by using the higher valuation because
that decision was made by Rexene acting as an employer, not a fiduciary.218
B. The Anti-cutback Rule as Applied to Vested Benefits
The' Fifth Circuit looked again at the anti-cutback rule nine months
later in Williams v. Plumbers & Steamfitters Local 60 Pension Plan. 219
James Williams was a participant in the Plumbers & Steamfitters Local 60
Pension Plan ("Plumbers Pension Plan"). He earned 6.5 years of service
before he was injured in 1986. 220 At the time of -his injury, Williams
apparently was not working for a contributing employer. 221 Moreover,
he did not file for disability benefits even though the plan only required five
years of service to receive a disability benefit. 222 In 1987, the vesting
schedule was amended to increase the minimum service credits for disability
benefits from five to ten years. 223 The participants were notified of the
plan amendment and the amendment was incorporated into the summary
plan description distributed to new participants. 224
Williams was injured a second time in 1988. 225 He applied for and
received Social Security disability benefits. 226
The Social Security
Administration determined that Williams was disabled in 1988. 227 In
1990, Williams applied for disability benefits under the Plumbers Pension
Plan. 228 His application was denied "because, although he was disabled in
1988, he did not have the required 10 years of service credits. "229
Williams filed suit alleging that he was vested in 1986 at the time of
his original disability and that the trustees wrongfully eliminated his
disability benefits. 230 He further alleged that the unamended summary
217.
218.
219.
220.
221.
222.
223.
224.
225.
226.
227.
228.
229.
230.
[d.
[d. at 1525.
48 F.3d 923,923 (5th Cir. Apr. 1995).
[d. at 924.
See id.
See id.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
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plan description governed the dispute. 231 The district court granted
summary judgment in favor of the plan and Williams appealed. 232
On appeal, the Fifth Circuit first addressed the anti-cutback rule. The
court noted that Williams failed to appeal the district court's ruling that
"[t]he disability benefit provision of the [plumbers Pension] Plan was an
'employee welfare benefit plan' rather than an 'employee pension benefit
plan' and consequently, it was not subject to the vesting, accrual, or
nonforfeiture provisions of ERISA.' '233 In dicta, the court agreed with
the district court that ERISA Section 204(g) is not applicable to welfare
plans. 234
The court noted that Williams would not prevail even if Section 204(g)
applied because, "Section 204(g) prohibits plan amendments that eliminate
or reduce inter alia, retirement-type subsidies or early retirement benefits. "235 According to ERISA's legislative history, a retirement-type
benefit "does not include disability benefits . . . . A qualified disability
benefit . . . (that does not continue after retirement age) will not be
considered a retirement-type subsidy. ,,236 The court summarily rejected
Williams' argument that the disability benefits "are retirement-type
subsidiaries because they are payable for life and calculated in a manner
similar to retirement subsidies in general. "237
Perhaps Williams would have fared better if he had argued in the
lower court that the benefits were an early retirement benefit protected
under section 204(g) and the Plumbers Pension Plan designated the
disability benefits as a pension benefit. 238 The court refused to hear these
issues because they were not raised until appeal. 239
The court also rejected Williams' argument that he was disabled in
1986, not in 1988. 240 The Plumbers Pension Plan allowed the trustees to
accept a Social Security determination' as to disability as evidence of
disability. 241 The court held that the trustees did not abuse their discretion
by determining Williams' date of disability to be 1988. 242
231. Id.
232. Id. at 925.
233. Id.
234. Id.
235. Id. (construing 29 U.S.C. § 1054(g)(1988».
236. Id. (quoting S. REP. No. 575, 98th Cong., 2d Sess. 30 (1984), reprinted in 1984
U .S.C.C.A.N. 2547,2576). See also Hanns v. Cavenham Forest Indus., 984 F.2d 686, 692 (5th Cir.),
cert. denied, 114 S. Ct. 382 (1993).
237. Williams, 48 F.3d at 925.
238. See id.
239. Id.
240. Id. at 927.
241. Id.
242. Id.
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ERISA PREEMPTION AND OTHER MYSTERIES
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The court seemed unsympathetic to Williams. Perhaps the court
suspected that Williams fabricated his disability because he was injured at
a time when he was not working and he did not claim disability benefits
until four years after his first injury. Williams claimed for the first time
during trial that the Social Security determination of a 1988 disability date
did not preclude the plan from adopting an earlier date. 243 Clearly, the
court did not. find Williams' arguments to be convincing. 244
C. The Anti-alienation Provision
In Shanbaum v. United States, the Fifth Circuit held that ERISA section
206(d)(l), which states that plan benefits may not be alienated or assigned,
did not preclude the IRS from levying on Shanbaum's pension benefits to
pay for back taxes. 245 Internal Revenue Code section 6321 "creates a lien
for unpaid taxes in favor of the United States .... ' '246 The IRS may levy
on any property belonging to the taxpayer to collect back taxes. 247
Internal Revenue Code Section 6334 exempts certain property from levy,
but does not exempt pension benefits. 248 Moreover, ERISA's preemption
clause provides that ERISA .shall not be "construed to alter, amend,
modify, invalidate, or supersede any law of the United States . . . .' .249
The Fifth Circuit concluded that ERISA's anti-alienation provision is
superseded by the IRS's right to levy.250
D. Reversion of Plan Assets on Partial Termination
In Borst v. Chevron Corp., the Fifth Circuit held that plan participants
are not entitled to a pro rata portion of the plan's surplus assets on termination. 251 The facts relating to the dispute began in 1984, when Gulf Oil
Corporation learned that "T. Boone Pickens planned a hostile takeover of
the company.' '252 Gulf sought Chevron as a white knight and negotiated
243. [d.
244. The coun also rejected Williams' other arguments: 1) that the plan failed to advise
panicipants that the notification of plan amendments' •should be read and retained for future reference";
2) that the plan failed to prove that Williams received the notification letter; 3) that the plan failed to
file the summary of material modification with the Depanment of Labor; and 4) that the 1987
amendment was never fonnally adopted into the plan and, therefore, was ineffective. [d. at 926-27.
, 245. 32 F.3d 180, 183 (5th Cir. Sept. 1994). See 29 U.S.C. § 1056(d)(I) (1988).
246. Shanbaum, 32 F.3d at 183.
247. [d.
248. [d.
249. 29 U.S.C. § I 144(d) (1988).
250. Shanbaum, 32 F.3d at 183.
251. 36 F.3d 1308, 1317 (5th tiro Oct. 1994), een. denied, 115 S. Ct. 1699 (1995).
252. [d. at 1312.
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a friendly merger with Chevron. 253 The two companies eventually
merged. 254
After the corporate merger, the existing Gulf and Chevron plans
merged into a new Chevron plan. 255 The Gulf plan was partially terminated and was amended to provide that upon termination of the merged
plan, the surplus assets would revert to Chevron. 256
Even though the plan had not been fully terminated, participants in the
Gulf plan asked Chevron to confirm the partial termination of the plan and
requested their pro rata share of the surplus assets. 257 Chevron refused
to allocate the surplus, and the plaintiffs sued. 258
The Fifth Circuit rejected plaintiffs' contention that "ERISA prohibits
reversion of any plan assets unless the plan language contains an explicit
reversion provision.' '259 The court stated that plaintiffs' reliance on
ERISA section 403(c)(1) was misplaced.260 Section 403(c)(1) provides
that "the assets of a plan shall never inure to the benefit of any employer
and shall be held for the exclusive purposes of providing benefits to
participants in the plan and their beneficiaries and defraying reasonable
expenses of administering the plan. "261 However, the court noted that
ERISA section 4044(d)(1) overrides section 403(c)(1). 262
Section
4044(d)(1) relates to the allocation of surplus assets upon final plan
termination. Surplus assets may revert to the employer under this section
if all liabilities to plan participants and beneficiaries have been paid, the
distribution does not violate the law, and the plan permits distributions. 263
The court held that an employer who sponsors a defined benefit plan
is required only to pay the benefit, not the surplus, to plan participants. 264
The employee has a right to his or her pension benefits, but has no right to
the general plan assets. 265 "Surplus" is defined as any assets remaining
after all benefits have been paid. 266 The surplus reverts to the employer,
unless the employer has agreed to the contrary. 267
253.
254.
255.
256.
257.
258.
[d.
[d.
[d.
[d. at 1312-13.
[d. at 1312.
[d.
259.
[d. at 1314.
260.
[d. at 1315.
29 V.S.C: § 1103(c)(I) (1988 & Supp. V 1993).
Borst, 36 F.3d at 1315. See 29 U.S.C. § 1344(d)(I) (1988).
29 V.S.C. § 1344(d)(I).
261.
262.
263.
264.
265.
266.
267.
Borst, 36 F.3d at 1315-16.
[d. at 1316.
[d. at 1315.
[d. at 1316.
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ERISA PREEMPTION AND OTHER MYSTERIES
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The court rejected plaintiffs' contention that the participants are entitled
to the surplus unless the plan has a reversion provision. 268 The court
explained that reversions are permitted only upon full termination because
the surplus cannot be calculated until the plan is completely terminated. 269
The term "accrued benefit" as used in I.R.C. section 411(d)(3) does not
"encompass a right, not specified in the plan itself, to a share of surplus
assets in a defined benefit employer funded plan. ' '270
The Fifth Circuit held that plaintiffs would only be entitled to a pro
rata share of the surplus if the plan so provided. 271 The court examined
the plan to determine if such a provision was present. 272 The plan
provided:
In no event shall any part of the Plan assets held in trust or any income
on it, prior to the satisfaction of all liabilities under the Plan, revert to
the Company or be used other than for the members, pensioners,
spouses, beneficiaries and joint pensioners. 273
The court interpreted this clause to mean that the plan assets cannot revert
to the employer until full termination, Le., the point at which all liabilities
to the plan can be satisfied. 274 This is an implied reversion clause. 275
Reversion does not violate the plan provision that contributions to the plan
must be irrevocable. The court held, "When all-liabilities are satisfied, the
Plan may terminate, and surplus assets revert to Chevron, without causing
a revocation of the Plan.' '276
The court rejected plaintiffs' argument that reversion is inconsistent
with the exclusive benefit rule. 277 The court pointed out that although
ERISA contains an exclusive benefit rule, it "also contemplate[s] employer
reversion. ,,278 "[T]he ERISA 'exclusive benefit' provision is expressly
made subject to the exception that when the plan finally terminates, surplus
assets may revert to the employer if three conditions are met, including that
the plan provide for such a distribution.' '279 Therefore, the court held
268.
269.
[d.
[d. (citing Walsh v. Great Ad. & Pac. Tea Co., 96F.R.D. 632, 652 (D.NJ. 1983), affd,
726 F.2d 956 (3d Cir. 1983». See 26 U.S.C. § 401(a)(2) (1988).
270. Borst, 36 F.3d at 1316 (citing 26 C.F.R. 1.411 (a)-7(a». See 26 U.S.C. § 411(d)(3)
(1988).
271. Borst, 36 F.3d at 1317.
272.
273.
274.
275.
276.
277.
278.
279.
[d.
[d.
[d. at 1318.
[d.
[d. at 1320.
[d. at 1321.
[d. at 1320.
[d. (citing 29 U.S.C. § 1344(d)(1».
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that the exclusive benefit provision in the plan "does not preclude reversion
of the surplus assets to Gulf.' '280 Neither does the exclusive benefit rule
prevent the company from amending the plan to allow reversions to the
plan. 281
Finally,the court addressed plaintiffs' allegation that Chevron breached
its fiduciary duty of loyalty by failing to abide by its agreement made
during merger negotiations-to' 'set aside assets of the Gulf Plan to provide
sufficient reserves for then-existing retiree pensions."282 The court noted
that a plan cannot be orally modified and that written promises which are
not formal plan amendments are not enforceable. 283 Chevron's representation was not a plan amendment and its failure to abide by this promise is
not a breach of fiduciary duty. 284
III. INTERFERENCE WITH PENSION BENEFITS
A. The· Case of the Contentious Divorce
In Stephen Allen Lynn, P. c., Employee Profit Sharing Plan and Trust
v. Stephen Allen Lynn, P. c., the Fifth Circuit held that a wife had standing
to sue when her husband, in his capacity as plan administrator, amended the
plan to prevent her from receiving immediate benefits. 28S This alleged
discrimination occurred when the Lynns were "[i]n. the midst of a
contentious divorce. "286
During the divorce proceedings, the state court ordered Mr. Lynn to
pay $44,000 to cover Mrs. Lynn's interim expenses. 287 The court
ordered Mr. Lynn to withdraw the necessary funds from his retirement
account. 288 Mr. Lynn served as the trustee for his profit sharing
plan. 289
Between the time the Court Master made the recommendation and the
date of the court's order, Mr. Lynn, as plan administrator, amended the
profit sharing plan to delete three provisions. 290 These provisions would
have "(1) ... permitted pre-retirement distributions to participants, (2) .
. . allowed advances against distributions by reason of hardship, and (3) .
280.
281.
282.
283.
284.
285.
286.
287.
288.
289.
290.
[d. at 1321.
[d. at 1322.
[d.
[d. at 1323.
[d.
25 F.3d 280 (5th Cir. July 1994).
[d.
[d.
[d. at 281.
[d.
[d.
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757
.. authorized loans to plan participants and beneficiaries. .. "291 Mr.
Lynn also amended the plan to prohibit the termination of the plan, the
complete distribution of plan assets, or the removal of the plan trustee
"without the 'voluntary written consent of the Participant with the largest
account,'" that person being Mr. Lynn. 292 The amendments were
retroactive to a date four years earlier, and a bank was designated as the
trustee ("the Bank").293 The court noted, "The sum of these changes
was to disable Mr. Lynn, or anyone else, from paying out any [p]Ian funds
as required by the state court. "294
When Mr. Lynn did not pay his wife the money, Ms. Lynn moved to
hold Mr. Lynn in contempt of court. 29S Mr. Lynn, apparently confident
that his scheme would work, requested the Bank-Trustee to release funds
to pay the sums owed. The Bank, of course, refused because under the
plan amendments Mr. Lynn could not withdraw funds until he reached age
65, in twenty years.296
The Bank and plan sued the plan sponsor in federal court and "sought
a declaratory judgment pronouncing the [p]Ian amendments valid and the
refusal to ~isburse the funds proper. "297 Ms. Lynn asserted that the plan
amendments violated ERISA section 510, which prohibits a person from
discriminating against a "participant or beneficiary for exercising any right
to which he is entitled under the provisions of an employee benefit plan,
[or] this subchapter . . . or for the purpose of interfering with the
attainment of any right to which such participant may become entitled under
the plan, [or] this subchapter. "298
The district court held that the plan amendments were valid and that
the bank properly denied Mr. Lynn's request for payment. 299 With
respect to the section 510 claim, the ~ourt held that Ms. Lynn had no
standing to sue "because she was neither a participant nor a beneficiary at
the time the amendments were effected. "300
On appeal, the Fifth Circuit strongly stated: "Ms. Lynn is precisely the
sort of claimant who Congress intended to protect through the enactment of
the anti-discrimination provisions. "301 The court reversed and remanded
291.
[d.
292.
[d.
[d.
[d.
/d.
[d.
[d.
[d. See 29 U.S.C. § 1140 (1974).
Lynn, 25 F.3d at 281-82.
[d. at 282.
[d.
293.
294.
295.
296.
297.
298.
299.
300.
301.
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"to determine whether the amendments . . . should be invalidated and the
administrator forced to disburse the ordered funds. "302
The court held that, as a beneficiary, Ms. Lynn had standing to sue to
enforce her rights under the plan. 303 The court looked at Ms. Lynn's
status at the time she brought the section 510 counterclaim, not at the time
she was discriminated against. 304 Ms. Lynn became a beneficiary when
her divorce became final and she was designated as an alternate payee under
the qualified domestic relations order. 305 As a beneficiary, Ms. Lynn was
entitled to sue to enforce her rights under the plan. 306
The court refused to deny Ms. Lynn standing to sue simply because
there was a one year delay between the discriminatory plan amendment and
the date of the final divorce decree. 307 The court refused to read into the
statute "[a] requirement of contemporaneity between the time the discriminatory actions are executed and the attainment of beneficiary status . . . to
preclude [Ms. Lynn's] . . . claim. "308 The court commented that Mr.
Lynn's actions "come perilously close to a sham on the divorce court as
well as the federal system of enforcing the rights of pension plan participants and beneficiaries. "309 The court described Mr. Lynn's actions as
a "thinly veiled attempt to cheat [Ms. Lynn] and avoid complying with a
state divorce court order. "310 The court analogized Mr. Lynn's actions
to a "mad terrorist who plants a time bomb in a school which explodes
after ten years, killing a classroom full of second-graders. Although none
of the lives existed at the time the bomber placed the explosives, once the
bomb detonates, the crime is no less murder. "311
After comparing Mr. Lynn to a mad terrorist, it is not surprising that
the court held that Ms. Lynn's injury "became actionable at the moment
she attained beneficiary status. "312 The court broadly stated its holding,
"Where the discriminatory actions are not contemporaneous with the
victim's status as a participant or beneficiary, a cause of action under
ERISA will lie if the actions generate their intended effect at the time the
victim attains proper status under ERISA."313
302. [d.
303. [d.
304. [d. (citing Yancy v. American Petrofina, Inc., 768 F.2d 707, 708 (5th Cir. 1985)
(" [Q]uestions of standing must be resolved on the facts existing when the challenge is raised."))
305. [d.
306. See 29 U.S.C. § 1056(d)(3)(J) (1994).
307. Lynn, 25 F.3d at 283.
308. [d.
309. [d.
310. [d.
311. [d.
312. [d.
313.
[d.
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759
In a final note, the court advised the Bank that it had misinterpreted the
court's prior ruling in McGann v. H&H Music CO. 314 In McGann, the
court held that an employer's desire to avoid the cost of insuring employees
with AIDS was not specific discriminatory intent against McGann since the
benefit reduction was applied to all participants who had AIDS. 315
The Fifth Circuit rejected the Bank's contention that Ms. Lynn had no
cause of action because the plan amendments affected all plan participants
and beneficiaries. 316 The court said that the Bank's interpretation of
McGann' 'would nullify the protections embodied by the anti-discrimination
provisions of ERISA. "317 The court believed that Ms. Lynn had demonstrated ample evidence of Mr. Lynn's specific discriminatory intent against
her to survive a motion to dismiss. 318 The court remanded to the district
court to determine whether Mr. Lynn's actions were discriminatory.319
B. Termination of Medical Benefits
In another section 510 action heard this term, the Fifth Circuit held
that the plaintiff, Mary Nell Hines, a guardian, did not prove the specific
intent of her ward's employer, GECO, to discriminate against her ward for
exercising his rights under the pension plan. 320 Ms. Hines' facts were not
as compelling as Ms. Lynn's facts.
Mary Nell Hines was the guardian of Bobby Alan Parker. 321 Parker.
worked for GECO in 1982 and was a participant in a group medical plan
underwritten by Massachusetts Mutual Life Insurance Company ("Massachusetts Life") when he was totally disabled in a car accident in April of
1982. 322 Five months later, GECO cancelled the Massachusetts Life
policy and replaced it with another policy. 323 Parker's disabling condition
was excluded under the second policy because it was a preexisting condition. 324 Massachusetts Life continued to pay Parker's medical expenses for
. one year after the policy was cancelled, and thereafter, GECO paid his
medical expenses for another six years. 325
314. [d. (citing McGann v. H & H Music Co., 946 F.2d 401,407 (5th Cir. 1991), em. denied,
113 S. Ct. 482 (1992».
315. McGann, 946 F.2d at 407.
316. Lynn, 25 F.3d at 284.
317.
318.
319.
[d.
[d.
[d.
320.
Hines v. Mass. Mut. Life Ins. Co., 43 F.3d 207,209 (5th Cir. Feb. 1995).
321.
322.
323.
324.
325.
[d. at 208.
[d.
[d.
[d.
[d.
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When GECO stopped paying Parker's medical bills, Hines, as Parker's
guardian, sued GECO alleging wrongful denial of benefits and discrimination under ERISA section 510. 326 The lower court granted summary
judgment in favor of GECO, and Hines appealed. 327
The Fifth Circuit affirmed, holding that Hines must prove that GECO
and Massachusetts Life specifically intended to discriminate against Parker
when they terminated his benefits. 328 The court held that "Hines offer[ed] no positive evidence to prove a specific intent to discriminate against
Parker. "329 Without evidence of specific intent to discriminate, a section
510 action "cannot withstand summary judgment. "330 Therefore, the
court held that the district court properly granted GECO's motion for
summary judgment. 331
The court also rejected Hines' claim for breach of fiduciary duty.332
The court reasoned that when GECO amended the plan, GECO was not
acting as a fiduciary and, therefore, could not breach its fiduciary
duties. 333 An employer has the right to change policies and plan design
without running afoul 0(ERISA. 334 Because Parker had no vested rights
in the policy at the time the policy was changed, "[t]he switch in policies
did not violate ERISA. "335 The court likewise rejected Hines' claim that
Parker had been wrongfully denied benefits because, "Parker received all
the benefits to which he was entitled under the Mass[achusetts] policy.
Hines hard] not shown that Parker [was] entitled to any further benefits. "336 Because the plan permitted amendment or termination of the
policy at any time, GECO was not obligated to continue paying Parker's
benefits. ERISA does not require the vesting of medical benefits. 337
C. Failure to Exhaust Internal Remedies
Another discrimination case decided this term was resolved on a
completely different issue. In Chail/and v. Brown & Root, Inc., the Fifth
Circuit held that an employee was not required to exhaust his internal
326. [d.
327. [d. at 209.
328. Id. at 209-to.
329. Id. at 209.
330. Id.
331. [d. at 210.
332. Id.
333. Id.
334. Exceptions exist where benefits which are reduced or eliminated are accrued or vested, or
the amendment violates ERISA or the plan. [d.
335. Id. at 211.
336. [d.
337. Id. (citing McGann v. H & H Music Co., 946 F.2d 401,405 (5th Cir. 1991), cert. denied,
113 S. Ct. 482 (1992».
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ERISA PREEMPTION AND OTHER MYSTERIES
761
remedies before suing his employer under section 510 where the decision
contested was an employer decision, not a plan decision. 338
Donald Chailland worked for Brown & Root for fourteen and a half
years. 339 At fifteen years, he would "become entitled to substantially
greater benefits."340 Chailland was fired about six months before he
would have accrued fifteen years of service.341 Without exhausting his
administrative remedies under the plan, Chailland sued Brown & Root
alleging that he was fired to prevent him from accruing the higher
benefits. 342 . Brown & Root. moved to dismiss on the grounds that Chailland failed to exhaust his internal remedies as required by the plan.343
The lower court denied Brown & Root's motion to dismiss and the
employer appealed. 344
The court noted that "ERISA ... is silent on the question of exhaustion of administrative remedies under ERISA § 510. "345 Furthermore,
the court held that ERISA does not require exhaustion of remedies. 346
Looking to other jurisdictions, the court noted that the Third, Ninth, and
Tenth Circuits do not require exhaustion,347 while the Eleventh Circuit
requires exhaustion,348 and in the Seventh Circuit, trial courts have
discretion to require exhaustion.349 The Fifth Circuit previously held,
"[A] plaintiff generally must exhaust administrative remedies afforded by
an ERISA plan before suing to obtain benefits wrongfully denied. "350
However, the Fifth Circuit regarded the exhaustion of remedies as a
moot issue in Chailland's caseYI Brown & Root, in its capacity as
employer, fired Chailland. 352 The plan did not fire Chailland. 353 This
led the court to conclude that "the lawsuit ... [did] not involve any action
of a plan covered by ERISA.' '354 Moreover, the court concluded that the
338. 45 F.3d 947, 950-51 (5th Cir. Feb. 1995).
339. Id. at 948.
340. Id.
341. Id.
342. Id. at 948-49.
343. Id. at 949.
344. Id.
345. Id. at 950.
346. Id.
347. Id. at 950 n.7. See Zipfv. American Tel. & Tel. Co., 799 F.2d 889, 891-94 (3d Cir.
1986); Amaro v. Continental Can Co., 724 F.2d 747,750-52 (9th Cir. 1984); Held v. Manufacturers
Hanover Leasing Corp., 912 F.2d 1197, 1204-05 (10th Cir. 1990).
348. Mason v. Continental Group, Inc., 763 F.2d 1219, 1225-27 (11th Cir. 1985), cen. denied,
474 U.S. 1087 (1986).
349. Kross v. Western Elec. Co., 701 F.2d 1238, 1243-45 (7th Cir. 1983).
350. Denton v. First Nat'l Bank, 765 F.2d 1295, 1300-03 (5th Cir. 1985).
351. Chailland v. Brown &: Root. Inc., 45 F.3d 947, 950 (5th Cir. Feb. 1995).
352. Id.
353. Id.
354. Id.
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plan could not provide the remedy sought by Chailland,355 and the court
implied that Brown & Root was improperly raising a defense that was not
its own. 356 The court held that the "exhaustion doctrine is simply
inapplicable . . . . Indeed, to remit Chailland's claim to the [plan] would
make absolutely no sense and would be a hollow act of utter futility.' '357
The court affirmed the lower court's decision to deny Brown & Root's
motion to dismiss. 358
IV. RELEASES
In Wittoif v. Shell Oil Company, the Fifth Circuit held that a release
signed by a husband validly waived his wife's right to dictate how his
severance benefits should be paid. 359 The court affirmed the lower
court's ruling that the wife did "not have a valid claim of damages to her
community property interest in her husband's" benefits. 360
Mr. Wittorf was employed by Shell Offshore, Inc. 361 Shell decided
to downsize and offered certain employees, including Mr. Wittorf, the right
to resign and receive benefits under a special severance plan. 362 Mr.
Wittorf was required to sign a release and waiver of claims in return for
enhanced severance benefits. 363 Wittorf signed a for:rn in which he agreed
to resign in return for the enhanced benefits and agreed to sign the
release. 364 He also signed the release and settlement agreement. 365
Wittorf received almost $48,000 in enhanced severance benefits, three
times more than he would have received under the regular severance
355. [d.
356. [d. at 951 n.9.
357. [d. at 950-51.
358. [d. at 951.
359. 37 F.3d 1151,1155 (5th Cir. Nov. 1994).
360. [d. at 1153.
361. [d.
362. [d.
363. [d. The release said:
I have had an opportunity to fully consider all aspects of my employment relationship with the
Company. I have also had an opportunity to seek counsel from anyone I choose and I have
been advised in writing to consult with an attorney, should I desire, prior to signing this
Agreement. After full consideration I represent that I have not asserted and agree that I will
not assert against the Company ... ,any claim or action, of any kind, nature, or character
whatever, with respect to any matter pertaining to or arising from my employment or
termination of employment with the Company . . . I understand that I may revoke the
Agreement for seven (7) days after the date I sign it, and the Agreement will not become
enforceable until this seven (7) day period has expired. Any revocation must be made in
writing.
[d.
364.
365.
[d.
[d.
HeinOnline -- 27 Tex. Tech L. Rev. 762 1996
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ERISA PREEMPTION AND OTHER MYSTER,IES
763
plan. 366 One year later, Wittorf and his wife sued Shell, alleging violations of the Age Discrimination in Employment Act, the Americans with
Disabilities Act, and ERISA. 367 The district court granted Shell's motion
for summary judgment and dismissed the complaint because Wittorf had
signed and ratified the release and settlement agreement. 368 . The Fifth
Circuit affirmed. 369
Wittorf argued that although he signed the release, he delivered it to
the Company with a letter saying he might revoke the release within the
seven day period allowed for revocation in the settlement agreement. 370
Although he did not revoke his decision, Wittorf alleged that he negotiated
with Shell over the severance benefits beyond the seven day period. 371
The court noted, "The Older Workers Benefit Protection Act
[(OWBPA)] contains very strenuous requirements that must be met for a
waiver and release to be found knowing and voluntary."372 Wittorf did
not dispute that the requirements of OWBPA were met. Even if these
requirements were not met because Shell continued to negotiate with Wittorf
after the expiration of the seven day revocation period required by
OWBPA, this would only make the agreement voidable, not void. 373 The
court held that when Wittorf accepted the enhanced severance benefits, "he
manifested his intention to be bound by the release and settlement
agreement, thus making a new promise to abide by Shell's terms. "374
The court, therefore, held thatWittorf was bound by the release and
settlement agreement. 375
The court also rejected Mrs. Wittorf's claim that her rights to "her
husband's severance benefits cannot be extinguished simply because her
husband signed the Release and Settlement Agreement. "376 She argued
that because the severance benefits are community property under Louisiana
law, her right to those benefits cannot be waived without her consent. 377
While the court acknowledged that Louisiana recognizes that retirement
benefits are community property, either spouse can independently dispose
of community property until the marriage is dissolved. 378 Louisiana
366.
367.
368.
369.
370.
371.
372.
373.
ratified by
374.
375.
376.
377.
378.
[d.
[d.
[d. at 1154.
[d. at 1155.
Id. at 1153.
[d. at 1154.
[d. (citing 29 U.S.C. § 626(f)(l)(A)-(H) (Supp.V 1993)).
[d. The court noted that "[a] voidable waiver and release can still be enforced if it is
the employee." [d.
[d.
[d.
[d.
[d.
[d. at 1155.
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TEXAS TECH LAW REVIEW
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courts have not "recognize[d] a non-employee spouse's right to dictate how
severance benefits are invested or paid.' '379 Thus, the court held that
Mrs. Wittorf did not state a valid claim against Shell because she was not
required to consent to the distribution. 380
V. BENEFIT DENIAL CASES
This term's benefit denial cases raise some interesting issues. Because
the cases are so eclectic and defy reasonable categorization, the cases will
be introduced in random order.
A. The Case of the Unorthodox Cancer Treatment
In Trustees of the Northwest Laundry and Dry Cleaners Health &
Welfare Trust Fund v; Burzynski, the Fifth Circuit held that antineoplastons
cancer treatments were not medically necessary, were illegal, and that the
doctor had a duty to disclose to the patient that the treatment was unlawful. 381 The court's opinion, like a high-tech medical thriller, began,
"Today we write the latest chapter in a medical iconoclast's long history
of litigation over an unorthodox cancer treatment. "382 One can almost
hear Judge Wisdom or his clerk scratching out the changes to this
wonderful sentence, working to get the perfect word choice-iconoclast-unorthodox-and then regretfully deciding that this was only the
"latest" not the "final" chapter about Dr. Stanislaw Burzynski's exploitation of patients. The court's second footnote chronicles the Fifth Circuit's
seven year history of cases involving Dr. Burzynski. 383
Dr. Burzynski "developed an unorthodox treatment for cancer called
'antineoplastons. "'384 The treatment was not approved by the Food and
Drug Administration or the Texas Department of Health. 385 In 1984, the
District Court of the Southern District of Texas permanently enjoined Dr.
Burzynski from distributing his antineoplastons in interstate commerce;
however, the court did not forbid the doctor from engaging in intrastate
distribution of antineoplastons. 386
The reader quickly finds out the doctor's motivation for distributing the
antineoplastons-not surprisingly, Dr. Burzynski was motivated by money.
379.
[d. (citing Cutting v. Cutting, 625 So.2d 1112, 1121 (La. Ct. App. 1993».
380.
381.
382.
383.
384.
385.
386.
[d.
27 F.3d 153 (5th Cir. Jul. 1994).
[d. at 154 (emphasis added).
[d. at 155 n.2.
[d. at 155.
[d.
[d.
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ERISA PREEMPTION AND OTHER MYSTERIES
765
Dr. Burzynski submitted a $90,000 claim to an Oregon medical plan for
treatment rendered to Huey Roberts at the doctor's Houston office, and at
Roberts' home in Oregon. 387 The treatments in Texas violated Texas
law ,388 and the treatments in Oregon violated the permanent injunction. 389
Only after the Oregon medical plan paid for the treatment did it find
out that the treatments were illegal. 390 The plan. sued Dr. Burzynski for
fraud and violations of ERISA and RICO. 3!H The district court ruled in
favor of Dr. Burzynski on the RICO claims and against him on the ERISA
and fraud claims. 392 Dr. Burzynski appealed, and the Fifth Circuit affirmed. 393
The court addressed the ERISA claim first. The plan required that
"[w]hen medically necessary treatment is provided by a legally qualified
physician for an illness or injury, and that physician is practicing within the
scope of his license, payment will be made for expenses incurred for
Hospital, Home and Office visits as shown in the Schedule of Benefits. "394 The plan also required that "[t]o be 'medically necessary,'" the
treatment must be "appropriate and consistent with the diagnosis (in accord
with accepted standards of community practice). "395 Additionally, the
treatment "could not be omitted without adversely affecting the covered
person's condition or the quality of medical care. "396 The court held that
the treatment was not medically necessary because it "was not in accordance with accepted medical standards" and had not been approved by the
FDA or the Texas Department of Health. 397
The court upheld the lower court's ruling that Dr. Burzynski committed fraud by misrepresenting the legality of the treatment. 398 Dr. Burzynski conceded that he did not notify the plan that the treatment by antineoplastons had not been approved by the fDA. 399
The court recited "some basic principles" of fraud. 400 A person is
not required to disclose a material fact unless the person "has a duty to
387.
388.
389.
390.
391.
392.
393.
394.
395.
396.
397.
398.
399.
400.
[d.
See TEx. HEALTH & SAFETY CODE ANN. § 431.114 (Vernon 1992).
Burzynski, 27 F.3d at 155.
[d. at 156.
[d.
[d.
[d.
[d.
[d.
[d.
[d. at 156-57.
[d. at 159.
[d. at 157.
[d.
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TEXAS TECH LA W REVIEW
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disclose that fact.' '401 A duty to speak can arise by reason of a special
relationship between the parties, if the speaker has "knowledge of the facts
it withheld."402 However, the court noted, "Even without a 'special
relationship, there is always a duty to correct one's own prior false or
misleading statement.' ,403
The court first rejected Dr. Burzynski's contention that he did not
know the antineoplastons treatment was illegal. 404 Dr. Burzynski argued
that the injunction allowed the use of antineoplastons in Texas. 405 The
court responded, "Although the injunction did not forbid intrastate
distribution, neither did it excuse Dr. Burzynski from compliance with state
laws governing intrastate distribution of antineoplastons. "406 The treatment violated state law which "bar[s] the use of any non-FDA-approved
drug in Texas.,,407 Next, the court rejected Dr. Burzynski's contention
that he was permitted to distribute antineoplastons, even if the treatment
was illegal under the Texas Health & Safety Code, because section 5.09 of
the Texas Medical Practice Act supersedes the Code by providing, "A
physician licensed to practice medicine under this Act may supply patients
with any drugs, remedies, or clinical supplies as are necessary to meet the
patients' immediate needs. "408 Dr. Burzynski contended that the phrase
"any drug" includes illegal drugs. 409 The court held that this provision
"does not clearly authorize anyone to dispense illegal drugs. ,,410
The court said, "Two things [were] clear. "411 Those two things
were that the treatments were illegal and "Dr. Burzynski knew or should
have known it. "412 The third element was not as clear-whether the
doctor had a duty to tell the plan that the treatments were illegal.
The court held that Dr. Burzynski had such a duty because of his
confidential relationship with the medical plan. 413 The court explained,
"Obviously, Dr. Burzynski had superior knowledge concerning the legality
of his treatment, and knew that the Fund would have acted differently had
401.
402.
403.
404.
405.
406.
407.
408.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
at 158.
at 157.
at 158.
at 155. See TEx. HEALTH & SAFETY CODE ANN. § 431.114 (Vernon 1992).
Burzynski. 27 F.3d at 158. See TEx. REV. CIV. STAT. ANN. art 4495b. § 5.09 (Vernon
1995).
409.
410.
411.
412.
413.
Burzynski. 27 F.3d at 158.
[d.
[d.
[d.
[d.
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ERISA PREEMPTION AND OTHER MYSTERIES
1996]
767
it been aware that antineoplastons therapy was illegal. In such circumstances, Dr. Burzynski's duty to disclose .[was] clear. "414
The court concluded that "Dr. Burzynski's failure to disclose the
illegality of" the treatment was a breach of his confidential relationship
with the Fund and was fraudulent. 41s Furthermore, Dr. Burzynski had a
duty to correct his misleading statements.416 Dr. Burzynski submitted
claim forms stating that Huey Roberts was being treated with chemotherapy.417 Specifically, the claim form said "High Dose ANPA chemotherapy
N drip. ,,418 Dr. Burzynski claimed the abbreviation "ANPA" was a
direct disclosure of the antineoplastons treatment. 419 The court rejected
this argument saying, "Try as we might, we are unable to read those words
to make a sufficient disclosure that Dr. Burzynski sought reimbursement for
the knowing illegal use of an unapproved drug, not ordinary 'chemotherapy. "'420 The court finally observed that "at the risk of laboring the
obvious~" Dr. Burzynski is a physician who must hold himself to a high
standard of ethics.421
Perhaps what is most interesting about the case is that the word
"preemption" never occurs. Apparently Dr. Burzynski did not argue that
ERISA preempts state law fraud claims and the court did not consider this
issue on its own. Perhaps the concluding paragraph gives us insight into
why the court might not wish to preempt the claim:
Cancer victims, such as Huey Roberts, often are understandably eager to
pursue any course of treatment, whatever its cost or efficacy, that offers
the faintest hope of preserving life. Their plight commands sympathy,
but also attracts opportunists. The State of Texas and the Federal Food
and Drug Administration have stepped in to protect cancer patients from
those who would prey on their vulnerability. While we do not impute
evil motives to Dr. Burzynski, neither can we conclude that he is beyond
the laws written to protect his patients. When he oversteps their bounds,
the resulting costs are his to bear. 422
414.
415.
416.
417.
418.
419.
420.
421.
422.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
at 159.
o
at 1590.28.
at 159.
at 159-60.
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[Vol. 27:731
B. Accidental Death by Asphyxiation
The next case involves an unusual medical question-whether death
resulting from autoerotic activity is 'accidental. 423 The court also summarily addressed the increasingly more common question of whether a
denial of benefits is a breach of fiduciary duty.
Richard Todd died of "autoerotic asphyxiation, the practice of limiting
the flow of oxygen to the brain during masturbation in an attempt to
heighten sexual pleasure. ,,424 While in Burzynski, Judge Wisdom sounded
like an aspiring intellectual novelist, this case reads like a trashy dime
novel:
Todd was lying on his bed with a studded dog collar around his neck; the
collar, in tum was attached to two leather leashes of differing lengths ..
425
The autopsy stated the cause of death as ~'asphyxia due to ligature strangulation" and concluded the death was accidental. 426
Mrs. Todd submitted a claim under her husband's accidental death
policy.427 Her claim was denied because "[a] death [cannot] be considered
accidental ... [i]f from the viewpoint of the Insured, his conduct was such
that he should have anticipated that in all reasonable probability he would be
killed. ' ,428 Mrs. Todd sued the insurer and the third party administrator for
various state law claims. 429 Once she realized that her state law claims
would be preempted, she amended her claim to sue for failure to pay
insurance benefits and for breach of fiduciary duty.430 The district court
ruled in favor of Mrs. Todd and the insurance company and fiduciaries
appealed. 431
The Fifth Circuit began its analysis by stating that clearly "Congress,
in adopting ERISA, expected that 'a federal common law of rights and
obligations under ERISA-regulated plans would develop. ",432 The court
was guided by analogous state law "to the extent that state law is not
inconsistent with congressional policy concerns. ' '433 The court also agreed
423.
424.
425.
426.
427.
428.
429.
430.
431.
432.
433.
Todd v. AlG Life Ins. Co., 47 F.3d 1448 (5th Cir. Mar. 1995).
[d. at 1450.
[d.
[d.
[d.
[d.
[d. at 1450·51.
[d. at 1451.
[d.
[d. (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56 (1987».
[d. (quoting Thomason v. Aetna Life Ins. Co., 9 F.3d 645, 647 (7th Cir. 1993».
HeinOnline -- 27 Tex. Tech L. Rev. 768 1996
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ERISA PREEMPTION AND OTHER MYSTERIES
769
that the doctrine of contra proferentem requires that ambiguous tenus must
be construed in favor of the insured.434
The court turned to the plan. The plan defined "injury" as "bodily
injury caused by an accident.' '435 The plan excluded suicide but did not
exclude other self-inflicted injuries.436
The insurer argued that as a matter of federal common law, the Fifth
Circuit "should announce a per se rule that death or other bodily injury
caused by autoerotic activity is never the result of an accident within the
meaning of an accidental death or injury policy."437 The insurer's
argument is based on the premise that autoerotism requires "intentional
strangulation for the purpose of inducing asphyxia.' '438 Therefore, under
this view, the asphyxiation was intentionally inflicted and the policy was
unambiguous. 439
The court refused to announce a per se rule. Although Mr. Todd
intentionally strangled himself to create asphyxiation, the court held Todd
did not die from the "loss of consciousness from the temporary lack of
oxygen in his brain," but from the "further injury to the brain and other
bodily functions caused by the prolonged lack of oxygen-laden blood."44O
The court admitted that "[p]erhaps bodily injuries 'intentionally' inflicted by
the insured are not caused by accident," but Mr. Todd's injuries were not
intentionally inflicted.441
This still left the central issue: "[W]hether, even though Todd did not
intend or expect to die, the injury that killed him was or was not an
'accident' within the meaning of the policy. ' '442 This was is the first time
the Fifth Circuit squarely addressed this issue with respect to death from
autoeroticism. 443 The Fourth Circuit has denied recovery in similar
cases,444 and the Wisconsin Court of Appeals and the Texas Court of Civil
Appeals have ruled that death from autoerotic asphyxiation is accidental.445
434.
435.
436.
437.
438.
439.
Id. at 1451-52.
Id. at 1452.
Id. The policy covered accidental death and dismembennent. Id.
Id.
Id.
Id.
440. Id. at 1453.
441. Id.
442. Id.
443. In Sims v. Monumental Gen. Ins. Co., 960 F.2d 478 (5th Cir. 1992), a non-ERISA case,
the Fifth Circuit carefully avoided this issue, holding that the death was not covered by the plan which
excluded deaths resulting from self-inflicted injuries. Id. at 480.
444. International Underwriters, Inc. v. Home Ins. Co., 662 F.2d 1084, 1087 (4th Cir. 1981);
Runge v. Metropolitan Life Ins. Co., 537 F.2d 1157, 1159 (4th Cir. 1976).
445. Kennedy v. Washington Nat'l Ins. Co., 401 N.W. 2d 842, 846 (1987); Connecticut Gen.
Life Ins. Co. v. Tommie, 619 S.W.2d 199.203 (Tex. App.-Texarkana 1981, writ refd n.r.e.).
HeinOnline -- 27 Tex. Tech L. Rev. 769 1996
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After reviewing these cases, the court held that Todd's death was
accidental. 446 In the court's opinion, Todd did not intend or expect to
die. 447 The insurer did not invoke the policy's exclusion for death by
suicide. 448 The court concluded that Todd's autoerotic activity was not
substantially certain to result in death. 449 As a postscript, the court
suggested that insurance companies could avoid liability for autoerotic
asphyxiation by excluding it from plan coverage. 450
The court reversed the lower court's ruling that the denial of benefits
was a breach of fiduciary duty because the plan administrator acted
arbitrarily and capriciously in light ofthe "overwhelming ... evidence that
Mr. Todd's death was 'accidental. '''451 The court disagreed with the
lower court's conclusion but not its analysis, stating, "Every erroneous
benefits determination does not rise to the level of a breach of fiduciary
duty. "452
C. Death of a Felon
In James v. Louisiana Laborers Health and Welfare Fund, the court
reviewed a case per curiam in which the plan had a more careful exclusion
of benefits clause than the Todd policy. 453 The court held that the plan
administrator properly denied benefits for injuries sustained during the
commission of a felony. 454
.
Ollie James, a participant in the Laborers Health & Welfare Plan,
suffered injuries after his common-law wife shot him in the chest. 455 The
police report indicated that his common-law wife, Irma Jackson, confessed
that she shot James. 456 She also told the police that she and James had
been arguing and drinking. 457 James became abusive and assaulted
her. 458 Jackson's grandfather intervened, holding a gun. 459 Jackson
"jumped up, grabbed the gun from her grandfather," and shot James as he
446.
447.
448.
449.
450.
451.
452.
453.
454.
455.
456.
457.
458.
459.
Todd, 47 F.3d at 1456.
[d.
[d.
[d.
[d. at 1457.
[d.
[d. at 1458.
29 F.3d 1029 (5th Cir. Aug. 1994).
[d. at 1034.
[d. at 1031.
[d.
[d.
[d.
[d.
HeinOnline -- 27 Tex. Tech L. Rev. 770 1996
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ERISA PREEMPTION AND OTHER MYSTERIES
771
tried to grab her. 460 James followed Jackson as she ran across the street,
but he soon collapsed. 461
James was hospitalized and recovered. 462 . He incurred mediCal claims
of more than $359,000. 463 The plan denied the claims based on the plan's
exclusion of "injuries sustained in the course of the commission of a
felony. "464
James was never "arrested, charged, [o]r convicted as a result of the
incident. "465 Jackson pled guilty to aggravated battery and was released on
parole. 466 Eight months later, while on parole, Jackson stabbed and killed
James. 467 The executor of James' estate internally appealed the plan's
denial of benefits but the trustees denied the appeal. 468 The denial stated:
In this case, two witnesses and Ms. Jackson stated that Mr. James kicked
Ms. Jackson during the incident. Jurisprudence has established that
kicking a victim may constitute an aggravated battery. The courts have
reasoned that shoes are considered a dangerous weapon within the meaning
of the aggravated battery statute if it were found that in the manner they
were used it is calculated or likely to produce great bodily harm. 469
James' executor sued the plan. The district court held that the plan had
not adequately investigated the incident and remanded the case to the
plan. 470 The plan's further investigation was apparently confined to
drawing inferences from the police report. 471 The district court remanded
again and ordered the plan "to undertake a more rigorous and thorough
investigation, in keeping with the fiduciary duty owed to the plaintiff. ' '472
The plan hired a private investigator and again denied the claim, stating:
The Board of Trustees finds that Ollie James kicked Irma Jackson, while
standing above her and brandishing a knife, with hard-soled shoes, either
dress shoes or steel-toed work boots, in a manner that was calculated and
did result in great bodily harm to Irma Jackson who sustained bruises from
460.
461.
462.
463.
464.
465.
466.
467.
468.
469.
470.
471.
472.
[d.
[d.
[d. at 1032.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
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approximately her breastbone to her hips on her left side, complicated by
her diabetic condition. 473
This time the court was satisfied with the plan's investigation and granted
summary judgment for the plan. 474
Because the plan gave the trustees discretion to determine benefit
claims, the Fifth Circuit reviewed the plan's decision under the abuse of
discretion standard as required by Firestone Tire and Rubber Co. v.
Bruch. 47S However, the court never addressed the abuse of discretion
because' 'where the administrator is acting under a possible or actual conflict
of interest, that factor must ... be weighed in determining whether there is
an abuse of discretion. ' '476 In such a situation the court applies a two step
test: "First, [the] Court must determine whether the Fund's decision was
legally correct .... If the answer to this question is no, then the court must
determine whether, even though legally incorrect, the decision amounts to
an abuse of discretion. "477 Because the court found that the plan's
conclusion was legally eorrect, it did not determine whether there was an
abuse of discretion. 478
The court applied a three-pronged test to determine if the interpretation
was legally correct. Under this test the court considered "(1) whether the
interpretation is consistent with a fair reading of the plans; (2) whether there
has been uniformity in construction of the plans; and (3) whether the
interpretation results in any unanticipated costs to the plans. ' '479
Because no evidence was presented with respect to the second and third
prongs, the court confined its analysis to the first prong-whether the
trustees' interpretation of the plan was fair. 480 The court held that the
trustees' interpretation of the plan was fair. 481 The plan excluded coverage
for injuries sustained in the commission of a felony. 482 Under Louisiana
state law aggravated battery is a felony. 483 Aggravated battery is defined
as "battery committed with a dangerous weapon.,,484 A dangerous
weapon is any "substance or instrumentality, which, in the manner used, is
473.
474.
475.
476.
477.
478.
479.
Cir. 1992».
480.
481.
482.
483.
484.
[d.
[d.
[d. (citing Firestone Tire & Rubber Co. v. Bruch. 489 U.S. 101. 115 (1989».
[d. (citing Firestone. 489 U.S. at 115).
[d. at 1032-33.
[d. at 1033.
[d. (citing Kennedy v. Electricians Pension Plan. ffiEWNo. 955. 954 F.2d 1116.1124 (5th
[d. at 1033.
[d.
[d.
[d. (citing LA. REv. STAT. ANN. § 14:34 (West 1986».
[d. (quoting LA. REv. STAT. ANN. §14:34).
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ERISA PREEMPTION AND OTHER MYSTERIES
773
calculated or likely to produce death or great bodily harm.,,485 The court
held that the trustees fairly concluded that James had kicked Jackson with his
shoe and had' 'used his shoes in a manner calculated or likely to cause death
or great bodily harm . . . ."486
The court also rejected the executor's argument that "James' conduct
cannot be considered a 'felony' since the legal authorities did not prosecute
the matter.,,487 The court commented, "[T]he State has neither the
resources nor the obligation to prosecute a suspect in connection with each
and every felony . ',' ."488 Furthermore, if a plan were not permitted to
deny benefits based on the felony exclusion, this would lead to the illogical
conclusion that a plan could not deny benefits to a person who is killed
during the commission of a felony because "the state cannot prosecute a
dead man. ' '489
,
The court refused to apply a heightened standard of care where the plan
administrator is acting under a conflict of interest-it is in the administrator's
interest to deny the claim to save the plan money. 490 The court considered
the potential conflict of interest as one factor' 'to be weighed in determining
whether there is an abuse of discretion. ' '491
D. The Case of the False Disability Claim
In the next case, Sweatman v. Commercial Union Insurance Co., the
court reiterated that a conflict of interest does not warrant heightened
scrutiny by the district court. 492 Cynthia Sweatman worked for Commercial Union Insurance Co. for nineteen years as a claims adjuster. 493 Her
job "required her to climb ladders, inspect roofs, and crawl under houses. "494 When Sweatman's rheumatoid arthritis made it impossible for her
to perform her job, she filed for total disability benefits under the plan. 495
The plan defined "total disability" as inability, during the first two years of
485. [d. at 14:2(3).
486. James, 29 F.3d at 1033. Louisiana case law supports this interpretation. See State v.
Taylor, 485 So.2d 117,119 (La. Ct. App. 1986); Interest of Ruschel, 411 SiJ.2d 1216, 1217 (La. Ct.
App. 1982).
487. James, 29 F.3d at 1034.
488. [d.
489. [d. Of course, a man killed during a felony most likely will incur no medical expenses.
The disturbing aspect of the court's decision is that the court seems unconcerned with the possibility that
James might have acted in self-{jefense.
490. [d. at 1033-34.
491. [d. at 1032.
492. 39 F.3d 594, 599 (5th Cir. Dec. 1994).
493. [d. at 596.
494. [d.
495. [d.
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disability, to perform your job. 496 Thereafter,' "total disability' [meant]
the inability to perform any occupation for which you are fitted by training,
education, or experience. ' '497
Sweatman's application for total disability was denied after a lengthy
investigation. 498 The investigation included review of Sweatman's medical
records by an independent doctor and his peer review board which both
independently determined that Sweatman's medical records did "not support
limitations on work or physical activity.' '499 This same procedure was
repeated with a different doctor and the insurer received all of Sweatman's
medical records. 5OO The second reviewer's opinion was checked by a peer
review board which "found that Sweatman's lab work refuted a diagnosis of
rheumatoid arthritis. "501
The insurer also hired Equif<\X to investigate Sweatman's claim. 502
The investigator found that no one "knew of Sweatman's disability. "503
Additionally, the investigator discovered that Sweatman was taking care of
her wheelchair-bound husband full-time. 504 The investigator interviewed
Sweatman and did not notice any signs of disability. 505 Based on all of this
information, Sweatman's claim was denied. 506 Sweatman sued. The
district court held that the insurer did not abuse its discretion by denying
Sweatman's claim. 507
.
On appeal, the Fifth Circuit affirmed, holding that the lower court had
properly reviewed the claim denial for abuse of discretion. 508 In the Fifth
Circuit, a plan administrator's factual determinations are always reviewed
under an abuse of discretion standard. 509
496.
497.
498.
499.
500.
501.
502.
503.
504.
505.
506.
507.
508.
509.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
[d.
at
at
at
at
597.
596.
596-97.
597.
[d.
[d.
[d.
[d. at 603.
[d. at 597-98. See Pierre v. Connecticut Gen. Life Ins. Co., 932 F.2d 1552, 1562 (5th
Cir.), em. denied, 112 S. Ct. 453 (1991).
The court also analyzed in detail, the proper standard of review under ERISA § 502(a)(1)(B). The
court stated:
The Supreme Court's decision in Brueh and our decision in Pierre determine the proper
standard of review in a § 1132(a)(1)(B) action for review of a plan administrator's
determination of benefits. On appealfrom a district court's judgment in a § 1132(a)(1)(B)
case, our traditional standards of review apply, and we review de novo the district court's
holding on the question of whether the plan administrator abused its discretion or properly
denied a claim for benefits. However, we will set aside the district court's factual findings
HeinOnline -- 27 Tex. Tech L. Rev. 774 1996
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ERISA PREEMPTION AND OTHER MYSTERIES
775
The court rejected Sweatman's argument that a "full and fair review"
means a review "by someone other than the various people who initially
denied the claim. "510 The court found that '''review' does not connote
examination by a second party. Instead 'review' means 'to view, look at, or
look over again. "'511 However, the court noted that even if ERISA section
503(2) required independent review, the insurer satisfied this requirement. S12
E. The Case of the Missing Money
In Chevron Chemical Co. v. Oil, Chemical and Atomic Workers Local
Union 4-447, the court held that the district court should have applied the
abuse of discretion standard to a benefit determination, rather than reviewing
the decision de novo. S13
In 1989, Chevron established a Mental Health/Substance Abuse Plan
(MH/SA Plan).sI4 Chevron agreed to contribute a certain amount for
health benefits on behalf of its employees, "with the first dollars earmarked
for the MH/SA Plan. "SIS Oil, Chemical and Atomic Workers (OCAW)
members became covered by the· plan when the collective bargaining
agreement was signed in April, 1990. 516
In June, 1990, several OCAW members stopped participating in the
Chevron medical plan and decided to participate in a new OCAW plan. Sl7
Chevron began paying a portion of its health care contributions into the
OCAW plan, "but continued to direct the first dollars ... into the MH/SA
Plan. "518
In November, OCAW claimed that its members were entitled to the
"first dollars" that Chevron paid into the MH/SA Plan. S19 OCAW drew
support for its position from the MH/SA Plan which provided, '''If [a]
Member participates in a health care plan sponsored by or offered through
[Chevron],' his coverage under the MH/SA Plan does not terminate until the
date that his coverage under the other plan also terminates. "520
underlying its review of the plan administrator's determination only if clearly erroneous.
Id. at 601.
510. Sweatman, 39 F.3d at 598.
511. Id.
512. Id. at 599. See 29 U.S.C. § 1133(2) (1988).
513. 47 F.3d 139, 140 (5th Cir. Feb. 1995).
514. Id. at 141.
515. Id.
516. Id.
517. Id.
518. [d.
519. Id.
520. Id.
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The question, then, was whether the DCAW Plan was "'sponsored by
or offered through' Chevron. "521 If so, the first dollars could be paid to
the MH/SA Plan. If not, the DCAW members would be entitled to the
money. The plan administrator denied DCAW's claims, stating that DCAW
had agreed, under the collective bargaining agreement, to participate in the
MH/SA plan. 522 . DCAW filed an internal appeal which was denied by
Chevron's benefits review board because the DCAW plan was sponsored
through Chevron. S23
DCAW and its members sued Chevron to recover their benefits and to
clarify their rights to future benefits under the plan. The district court held
that the OCAW Plan was not sponsored through Chevron and ordered
Chevron to pay the DCAW members for the first dollars. 524 Chevron
appealed and the Fifth Circuit reversed. 52S
The Fifth Circuit held that the district court erroneously reviewed the
plan administrator's interpretation of the plan de novo. 526 Under Firestone
Tire & Rubber Co. v. Bruch, the court should have reviewed the plan
administrator's decision for abuse of discretion. S27 Although the plan did
not specifically state that the administrator had discretion to interpret the
plan, "the Supreme Court 'surely did not suggest that 'discretionary
authority' hinges on incantation of the word 'discretion' or any other 'magic
word. ''''528 The court held that because the plan administrator clearly had
discretionary authority to interpret the plan, the appropriate standard of
review was abuse of discretion. 529
Next, the court addressed DCAW's contention that because of a conflict
of interest, a heightened standard of review is appropriate. 530 The court
assumed arguendo that a conflict existed and applied the abuse of discretion
standard, giving due consideration to the alleged conflict.m The conflict
is one factor to be weighed in determining if there was an abuse of
521. [d.
522. [d.
523. [d.
524. [d.
525. [d.
526. [d. at 142.
527. [d. at 142. See 489 U.S. 101, 115 (1989).
528. Chevron, 47 F.3d at 142 (quoting Wildburv. ARCa Chern. Co., 974 F.2d 631,637 (5th
Cir. 1992) (quoting Block v. Pitney Bowes Inc., 952 F.2d 1450, 1453 (D.C. Cir. 1992), modified on
other grounds, 979 F.2d 1013 (5th Cir. 1992))).
529. [d. at 143. The court rejected aCAW's contention that the standard for review should be
determined by examining the authority of the Review Authority (the entity that actually made the
decision), rather than the administrator. [d. The court held that the plan administrator delegated
authority to the Review Authority, and therefore inherited the administrator's discretionary authority.
[d. at 143-44.
530. [d. at 144.
531. [d. See Duhon v. Texaco, Inc., 15 F.3d 1302, 1306 (5th Cir. 1994).
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ERISA PREEMPTION AND OTHER MYSTERIES
777
discretion. However, after analyzing the evidence presented by OCAW, the
court held that no conflict was proven. 532
The court noted that application of an incorrect standard of review does
not require the court to remand. S33 Instead, the court "review[ed] the
Review Authority's decision under the abuse of discretion standard" and
held that the Review Authority' 'concluded correctly that coverage continued
under the MH/SA Plan for OCAW Plan participants. "534 The court
applied the two-step test and concluded that under the first prong, the
Review Authority's determination was legally correct. 535 Therefore, it was
unnecessary for the court to proceed with the second prong. 536
F. The Case of the Defamatory Claims Denial
In Gulf South Medical and Surgical Institute v. Aetna Life Insurance
Co., the court held that a plan administrator, Aetna, did not abuse its
discretion in denying plaintiff's medical benefits and did not defame the
plaintiff by notifying him that the claim was denied. 537
Edwin Delaney, Jr. was treated for skin disorders. 538 His physician
excised several lesions and performed skin grafts. 539 The plan administrator denied eighty percent of the claims. S40 Delaney assigned his claims to
his doctors who sued the insurer under ERISA and for defamation. 541 The
lower court granted summary judgment in favor of the administrator and the
doctors appealed. 542
The Fifth Circuit held that there was no evidence that Aetna, as plan
administrator, abused its discretion in denying the claim. 543 Aetna had
referred the claim to an independent company that had the claim evaluated
by a nationally certified dermatologist and had accepted the doctor's
recommendation. S44 In fact, Aetna paid some of the claims that the
532. Chevron, 47 F.3d at 144. 'SeeFirestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, liS
(1989).
533. Chevron, 47 F.3d at 144.
534. [d. at 144-45.
535. [d. at 145-46.
536. [d. at 146. The second prong is reached only "[i]fthe administrator did not give the plan
the legally correct interpretation . . . ." [d. at 145. In that case, "the court must then determine
whether the administrator's decision was an abuse of discretion." [d. See Wildbur v. Areo Chern. Co.,
974 F.2d 631, 637 (5th Cir.), modified on other grounds, 979 F.2d 1013 (5th Cir. 1992).
537. 39 F.3d 520,522 (5th Cir. Nov. 1994).
538. [d. at 521.
539. [d.
540.
[d.
541. [d.
542. [d.
543. [d.
544.
[d. at 521-22.
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TEXAS TECH LAW REVIEW
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independent review company contested. 545 The court also held that Aetna
did not err by failing to consult a dermatopathologist, as recommended by
the independent review company. 546 The court held that this was not an
abuse of discretion since Aetna had accepted the diagnoses of the treating
physician. 547
The court summarily rejected the defamation claim. 548 The court
noted that communication of the disallowance of claims to the patient is
qualifiedly privileged and that there was' 'no evidence of malice required to
overcome this privilege.' '549 The court' said it was not deciding whether
the defamation claim was preempted by ERISA. 550
G. The Case of the Cavalier Participant
In Switzer v. Wal-Mart Stores, Inc. the Fifth Circuit held that WalMart's gratuitous notice to Switzer of this impending lapse ofcoverage under
the Consolidated Omnibus Budget Reconciliation Act (COBRA), did not
estop Wal-Mart from denying reimbursement for claims made during a gap
in coverage. 55l Switzer was employed by Wal-Mart until September
1990. 552 He elected and paid for continuation coverage under COBRA
through August 1991. 553
On June 21, 1991, Switzer returned to work at Wal-Mart. 554 As a
new hire, he was required to wait ninety days before he would be covered
by Wal-Mart's medical plan. 555 Switzer understood that he would have to
continue to make COBRA payments until he became eligible under the
plan. 556
Switzer made COBRA payments for coverage through August 31,
1991. 557 Without further payments, his COBRA coverage would automatically expire on September 27, retroactive to August 31. 558
545.
546.
547.
548.
549.
550.
551.
552.
553.
554.
555.
556.
[d. at 522.
5~.
M.
[d.
[d.
[d.
[d.
[d. at 522 n.6.
52 F.3d 1294, 1302 (5th Cir. May 1995).
[d. at 1295.
[d.
[d. at 1296.
[d.
[d.
_
558. [d. There was a 30 day grace period. The coupon book said that if payment is not made
by the thirty day grace period, "coverage will be cancelled on date 'Iast paid." [d.
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ERISA PREEMPTION AND OrnER MYSTERIES
779
On October 4, Wal-Mart made Switzer's first payroll deduction to cover
September 21 through October 4, 1991. 559 C?n the same day,' Wal-Mart
sent Switzer a letter advising him that "his COBRA coverage would be
canceled retroactively, effective to August 31, 1991, if he did not remit by
. October 16, 1991, the $82.46 premium payment '... that had been due on
August 28, 1991 .... "560 Switzer took no action and apparently assumed
that the delinquent payment had been paid by his October 4 payroll '
deduction. 561
In February, 1991, Switzer had a heart attack. 562 The plan administrator denied Switzer's claim based on the gap in coverage from August 31
to September 21. 563 If Switzer had maintained continuous coverage (by
paying a premium of about $60), his medical expenses would have been
paid. 564 However, the plan contained a provision that excluded all coverage for preexisting conditions until the' 'participant had been continuously
covered for twelve consecutive months. "565 This clause was triggered by
the gap.566
Switzer sued Wal-Mart for denial of his medical benefits. 567 The
district court held that' 'by voluntarily assuming a duty to inform Switzer of
his impending lapse of COBRA coverage in a manner that . . . [was]
ineffective and confusing," Wal-Mart had breached its fiduciary duty to
provide Switzer' 'with clear and accurate information. "568 Because a legal
remedy is not directly available to a plan participant for breach of fiduciary
duty, "the district court crafted an 'equitable' remedy: It ordered Wal-Mart
to accept a late payment from Switzer, thereby retroactively curing his
failure to pay the final COBRA premium and eliminating the gap between his
COBRA and Wal-Mart Plan coverages .... "569 The court also ordered
the plan to reconsider Switzer's medical benefits. 570 Wal-Mart appealed. 571
The Fifth Circuit reviewed the district court's decision that the plan had
acted arbitrarily and capriciously. 572 First, the court noted that the plan
administrator had no duty to advise Switzer that his final COBRA premium
559.
560.
561.
562.
563.
564.
565.
566.
567.
568.
569.
570.
571.
572.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
September was prorated. Id.
at 1296-97.
at 1297.
at 1298.
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TEXAS TECH LAW REVIEW
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was late. S73 And, perhaps as a hint that the court might someday follow
other circuits that have held that a plan administrator has a duty to speak
correctly,574 the court said:
[W]e do not necessarily disagree with the implication that if and when a
plan administrator thus elects to act as a Good Samaritan and-without
prior inquiry from the participant-gratuitously communicate with a plan
participant about such a matter, the administrator must do so in a manner
calculated to avoid confusion and misunderstanding, whether by omission
or commission. S7S
However, the court disagreed with the district court that Switzer's
situation was "other than routine. "S76
Wal-Mart is not exactly your typical Mom and Pop operation; we
speculate that among its tens of thousands of employees, many miss such
payments every month-some intentionally and others inadvertently. Only
by computer can the myriad employee benefit matters of such a giant
employer be monitored. Thus by definition, Wal-Mart could not possibly
give personalized attention to each and every employee. To conclude that
Wal-Mart should have known, in the absence of an inquiry from Switzer,
that he did not want his COBRA coverage to .lapse before his coverage
under the Wal-Mart Plan recommenced is to ignore the realities of the
situation. 577
The court reiterated that Switzer never bothered to ask about the
"[A]bsent a specific participant-initiated inquiry~ a plan
premium.
administrator does not have any fiduciary duty to determine whether
confusion about a plan term or condition exists. "S78 The court clarified
that "[i]t is only after the plan administrator does receive an inquiry that it
has a fiduciary obligation to respond promptly and adequately in a way that
is not misleading.',s79
573. ld.
574. See Anweiler v. American Elec. Power Servo Corp., 3 F.3d 986, 991 (7th Cir. 1993)
(holding that fiduciaries may not "mislead plan participants or misrepresent the tennsor administration
of a plan"); Fischer v. Philadelphia Elec. Corp., 994 F.2d 130, 135 (3d Cir.), cerr. denied, 114 S. Ct.
622 (1993) (holding that "when a plan administrator speaks, it must speak truthfully"); Bixler v.
Central PA. Teamsters Health & Welfare Fund, 12 F.3d 1292, 1302-03 (3d Cir. 1993) (holding that
a fiduciary has an obligation to "convey complete and accurate information"); Eddy v. Colonial Life
Ins. Co. of America, 919 F.2d 747, 750 (D.C. Cir. 1990) (stating that "a fiduciary must convey
complete and correct materiil1 information to a beneficiary").
575. Switzer, 52 F.3d at 1298-99.
576. ld. at 1299.
577. old.
578. ld.
579. ld. (citing Electro-Mechanical Corp. v. Ogan, 9 F.3d 445, 451 (6th Cir. 1993). See also
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ERISA PREEMPTION AND OTHER MYSTERIES
781
The court ruled that the district court clearly erred in finding that WalMart did not convey "clear and accurate information to Switzer concerning
the status of his COBRA coverage .... "580 He understood when his new
coverage would begin. 581 He had a coupon book which reflected the
period covered by the coupon. 582 He had a summary plan description. 583
In sum, the court found that Switzer had ample notification with respect to
the lapse in his coverage and that Switzer "made a conscious decision" not
to approach Wal-Mart about his confusion. 584
The court waxes poetic about how Wal-Mart went above and beyond its
call of duty to Switzer. It stated, "It was a pure act of grace, then, for WalMart to allow life to be breathed into Switzer's moribund COBRA policy,
thereby avoiding a gap between that coverage and Switzer's Wal-Mart Plan
coverage .... "585
The court concluded that "[n]ot only did Wal-Mart act as a prudent
fiduciary by furnishing, gratis, an extra notice and an extra couple of weeks
. . . to remit that all-important, final COBRA premium, it did so in a
factually faultless manner.' '586 According to the court, it was Switzer who
was remiss with his "cavalier 'do nothing' behavior," who was operating
under' 'a self-induced misconception," and it was Switzer that must accept
responsibility for his own inaction. 587 Once Switzer created the gap, WalMart was legally obligated to deny Switzer's claim. 588
Finally, the court commented in dicta that "the district court's reliance
on equity in the absence of an available legal 'remedy may well have
constituted impermissible overreaching. "589 ERISA sections 502(a)(3)(A)
and (B) do not authorize a "roving commission to do equity. "590 The
district court had no authority to resurrect Switzer's COBRA coverage in a
.
"Lazurus-like" fashion. 59l
Although the court may have opened the door for possible claims of
breach of fiduciary duty for participants who are wrongly advised by a plan
administrator, the court slammed the door (and locked it) to bar these
Anweiler v. American Elec. Power Servo Corp., 3 F.3d 986, 991-92 (7th Cir. 1993).
580. Switzer, 52 F.3d at 1299.
581. Id.
582. Id.
583. See id.
584. Id. at 1300.
585. Id.
586. Id. at 1301.
587. Id. at 1301-02.
588. Id. at 1302. The court explained, "Wal-Mart would have breached its duty as plan
administrator if it had paid Switzer's claim! That truly would have been arbitrary and capricious." Id.
589. Id.
590. Id. (quoting In re Sadkin, 36 F.3d 473, 478 (5th Cir. 1994».
591. Id.
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potentially wronged participants from obtaining any remedy for the
breach. 592
VI. PENSION BENEFITS IN BANKRUPTCY
The Fifth Circuit decided two cases this term concerning the status of
pension benefits in bankruptcy. In re Youngblood was a case in which the
Fifth Circuit considered whether a rollover contribution was made from a
qualified plan. 593
William Youngblood, Jr. was the sole shareholder of Youngblood
Builders, Inc. (YBI) , a Texas corporation. 594 YBI established a defined
benefit plan which was qualified by the Internal Revenue Service in 1978 and
again in June 1987. 595 The plan was terminated in December 1987 and its
assets were distributed. 596 Mr. Youngblood rolled over his distribution
into an IRA. 597 Shortly before the plan was terminated, the IRS audited
the plan and imposed some excise taxes based on two excessive loans to plan
participants. 598
In 1989, the Youngbloods filed a Chapter VII bankruptcy petition,
listing the rollover property as exempt under Texas Property Code section
42.0021. 599 A creditor objected to the exemption and argued that because
the plan had violated ERISA's exclusive benefit rule in making the excessive
loans, the plan was not qualified at the time of termination, and therefore,
the IRA rollover was not exempt. 600 The bankruptcy court agreed and held
that the plan was not qualified, and the rollover was not exempt. 601 The
district court affirmed. 602
IRC section 402(c)(5) governs the taxability of rollover contributions. 603 In order for a distributee to avoid tax liability, the distribution
. must be rolled over into the IRA from a qualified plan. 604 . Texas Property
Code section 42.0021(b) provides, "Amounts qualifying as nontaxable
rollover contributions ... are treated as exempt amounts.,,605 Thus, the
592. Another late COBRA case decided this tenn was Gann v. Fruehauf Corp., 52 F.3d 1320
(5th Cir. May 1995).
593. 29 F.3d 225, 226 (5th Cir. Aug. 1994).
594. [d.
595. [d.
596. [d.
597. [d.
598. [d. at 227.
599. [d.
600.
601.
[d.
[d.
602.
603.
604.
605.
[d.
See I.R.C. § 402(c) (1995).
[d.
TEx. PROP. CODE ANN. § 42.oo21(b) (Vernon Supp. 1995).
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ERISA PREEMPTION AND OTHER MYSTERIES
783
court viewed "the tax treatment ofMr. Youngblood's rollover" as "the key
to determining whether the IRA is exempt property in the . . . bankruptcy
proceeding."606 The court held that "[t]he answer to that question depends
on whether the YBI Plan was 'qualified' when Mr. Youngblood's distribution from that plan was rolled over into the IRA.,,607
The court noted that because Texas has not enacted rules relating to
federal taxation, the legislature must have contemplated that Texas' 'courts
would be required to look to federal tax law to determine whether a plan
was qualified under the Internal Revenue Code.' '608 The Internal Revenue Service distinguishes between violations of the exclusive benefit rule
which justify excise taxes and violations which are serious enough to
warrant disqualification. 609
The court concluded that the legislature intended for' 'state courts ...
to defer to the IRS in determining whether a retirement plan is qualified
under the Internal Revenue Code. "610 The court bluntly stated:
.
We see no reason that the legislature would want its courts, which are
inexperienced in federal tax matters, to second-guess the IRS in such a
complex, specialized area. We find it much more reasonable to assume
that the legislature contemplated creating an exemption from seizure for
a debtor's retirement funds that could be simply and readily determined
by referring to the federal tax treatment of those funds. Moreover, we
do not believe that the legislature wanted to adopt a scheme that invites
frequent, unseemly, conflicting decisions between the state court or
bankruptcy court, and the IRS, such as occurred in this case. 611
The court reversed and remanded. 612
In In re Esco Manufacturing Co., on a petition for rehearing, the court
reversed its prior ruling and held that the employer did not have authority
to terminate the plan. 613 ERISA section 1341 authorizes only the plan
administrator and the Pension Benefit Guaranty Corporation to terminate a
plan. 614 This is true, "even if there is 'an inconsistent plan provision to
the contrary." '615 Although the employer could refuse to make further
606.
607.
Youngblood, 29 F.3d at 228.
[d.
608.
[d.
609.
610.
611.
612.
[d.
[d. at 229.
[d.
[d.
613. 50 F.3d 315,316 (5th Cir. Apr. 1995).
614. 29 U.S.C. § 1341(a)(2) (1988); see also Esco v. Pritchard, 50 F.3d 315, 316 (5th Cir.
Apr. 1995).
615. Esco, 50 F.3d at 316 (quoting Delgrosso v. Spang & Co., 769 F.2d 928, 938 n.12 (3d Cir.
1985), cen. denied, 476 U.S. 1140 (1986)).
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contributions to the plan, "this would neither end its l~ability nor work a
statutory termination . . . .' '616 Because the employer did not have the
power to terminate the plan, the bankruptcy trustee could not inherit this
power to terminate. 617
•
VII. CONCLUSION
This was an interesting year for employee benefits. The court allowed
more preemption claims than before and implied that participants may have
a breach of fiduciary duty in benefit denial claims. Hopefully, next year
the court will give us more guidance in these areas.
616.
617.
[d.
[d.
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