Court: District Court, M.D. Pennsylvania; March 17, 2015; Federal District Court
Plaintiff Martin J. Hayes, a self-employed general contractor and member of the Pennsylvania Builders Association (PBA), applied for short-term disability (STD), long-term disability (LTD), and life insurance through policies brokered by JRG Advisors LLC and issued by Reliance Standard Life Insurance Company. After sustaining a rotator cuff injury, Hayes received STD benefits but was later denied LTD benefits due to a lack of evidence proving his membership in the PBA, as the policy specifically covered PBA employees. Reliance stated that both Hayes and the PBA failed to provide necessary documentation confirming his membership in an eligible class for LTD coverage. Following this denial, Hayes initiated a lawsuit for breach of contract, bad faith, and negligence in state court. However, the defendants removed the case to federal court, citing that the policies are governed by the Employee Retirement Income Security Act (ERISA), which raises questions about the court's subject matter jurisdiction. Reliance informed Hayes of his right to request a review of the LTD claim denial within 180 days of receiving the denial letter.
The letter informs the plaintiff of his rights under the Employee Retirement Income Security Act of 1974 (ERISA) regarding a civil action following an adverse benefit determination. It emphasizes the necessity for the plaintiff to request a review within 180 days of receiving the letter to avoid failing to exhaust administrative remedies, which could impede his ability to pursue a civil action. The plaintiff, having been disabled and without disability benefits since October 2013, filed a state court action against Reliance, JRG, and the PBA for breach of contract, bad faith, negligence, and detrimental reliance concerning his long-term disability (LTD) claim denial. Counts I and II specifically target Reliance for breach of contract and bad faith, with the plaintiff seeking both compensatory and punitive damages. This case was removed from the Court of Common Pleas of Lackawanna County with the consent of all defendants. Reliance contends that the breach of contract claim is essentially a denial of benefits under an employee benefits plan, thus preempted by ERISA. Both parties have filed motions—Reliance to dismiss and the plaintiff to remand the case to state court—leading to oral arguments and a request for supplemental briefing. JRG has filed an answer with affirmative defenses, including failure to state a claim.
Under 28 U.S.C. § 1441(a), defendants may remove civil actions from state to federal court if the federal court has original jurisdiction. The burden rests on the removing party to justify the removal, and any doubts about jurisdiction are resolved in favor of remand. The court has the authority to remand if it finds a lack of federal subject matter jurisdiction. The standard for removal is that a civil action can be removed if it falls under federal jurisdiction, and ERISA preemption applies if any state law claims relate to an employee benefit plan governed by ERISA. If the defendant cannot demonstrate that a state law claim is preempted, the case must be remanded to state court.
The defendant's motion to dismiss is based on Fed. R. Civ. P. 12(b)(6), which allows for dismissal if the plaintiff fails to state a plausible claim for relief. The burden is on the moving party to demonstrate that the complaint lacks sufficient facts to support a claim, and the court must accept all allegations as true. It evaluates the motion using the complaint, attached documents, and public records, while it may also consider authentic documents attached by the defendant. The court is generally expected to grant leave to amend the complaint unless there is evidence of bad faith, undue delay, prejudice, or futility.
The plaintiff acknowledges that if the insurance policies from Reliance fall under ERISA, his claims for long-term disability (LTD) are preempted. Conversely, if ERISA does not apply, the court lacks federal jurisdiction and must remand the case to state court. The court's first task is to determine if ERISA governs the LTD benefits under the PBA members Plan purchased by Mr. Hayes. The plaintiff cites the Third Circuit's ruling in Matinchek v. John Alden Life Ins. Co., asserting that ERISA does not apply to plans that are solely insurance policies for the company's owners, claiming that as a self-employed sole proprietor, he cannot have an ERISA-covered plan.
ERISA aims to protect the interests of employees and their beneficiaries in benefit plans, covering employee welfare and pension plans. The relevant definition of an employee welfare benefit plan encompasses any program established by an employer or employee organization for providing various benefits, including those related to health, disability, or unemployment. The Third Circuit's test for determining the existence of an ERISA plan hinges on the employer's expressed intention to provide benefits consistently and long-term, with criteria including ascertainable intended benefits, a class of beneficiaries, funding sources, and benefit claim procedures. The determination of whether a plan exists under ERISA is fact-specific and viewed through the lens of a reasonable person considering all relevant circumstances.
A court may find that a plan is covered by ERISA, but "safe harbor" provisions exempt certain practices from being classified as employee welfare benefit plans under Title I of ERISA. Specifically, such plans do not include group insurance programs where: (1) no contributions are made by the employer or employee organization; (2) participation is completely voluntary; (3) the employer or organization merely facilitates the program without endorsing it, such as allowing publicity and collecting premiums; and (4) the employer or organization receives no financial benefits beyond reasonable compensation for administrative services. Regulations by the Secretary of Labor clarify that an individual and their spouse are not considered employees of a business they wholly own. The Supreme Court has stated that these regulations pertain to whether an ERISA plan exists, rather than defining participants or beneficiaries.
ERISA defines a 'participant' as any employee or former employee who may receive benefits from an employee benefit plan provided by their employer or organization. For the Pennsylvania Builder’s Association (PBA) members Plan to qualify as an ERISA plan, it must be established or maintained by an employer or employee organization. Since the PBA is not the plaintiff's employer, the court must first ascertain if the PBA qualifies as an employee organization. The plaintiff argues that his non-employee status means he cannot belong to any employee organization. However, the classification of the PBA as an employee organization and its role in establishing the plan cannot be determined solely by the plaintiff's employment status. Employee organizations can establish benefit plans independently of an employer. Thus, the crucial question is whether the PBA, which sponsored the plan, qualifies as an employee organization under ERISA.
Reliance contends that the PBA plan qualifies as an employee welfare benefit plan under ERISA, asserting that the PBA is an employee organization. The definition of 'employee organization' encompasses labor unions and various associations that represent employees in dealings with employers regarding employee benefit plans and employment-related matters. However, the PBA is not classified as an 'employees’ beneficiary association.' The court must assess whether the PBA engages with employers concerning employment matters.
Key factors for determining if an organization meets the statutory definition include membership composition, activities related to employers, and whether it interacts with multiple employers. In the case of Papale, the court examined the National District Attorney’s Association (NDAA) and concluded it did not qualify as an employee organization under ERISA. The NDAA failed to advocate on behalf of its prosecutor members regarding employment matters with district attorney offices, similar to how the PBA does not act as the plaintiff's employer.
The court noted that although the NDAA marketed a Voluntary Group Term Life Insurance Policy, it did not engage in dealings with employers about employee benefits, an essential element for ERISA classification. Reliance's marketing to NDAA members did not equate to employer-sponsored plans, as membership was voluntary and independent of the employer's offerings. The core ERISA definitions indicate that a plan must cover participants based on their employment status, and an employer or employee organization must establish or maintain the plan for it to be considered ERISA-compliant. Thus, the existence of a plan alone does not suffice for ERISA classification.
The decedent’s role as a prosecutor did not connect his membership in the NDAA to his employer, aligning with the Papale court’s conclusion that the NDAA lacked sufficient engagement with members' employers and employment matters. Citing Mandala v. Ca. Law Enforcement Ass’n, the Papale court determined that the NDAA was not an 'employee organization' under ERISA due to its lack of involvement with employers or shared interests among members. The current case requires examination of the PBA’s activities related to employment matters and its relationships with employers. The court must assess whether the PBA is a 'bona fide' association of employers with a common economic interest that is not merely a vehicle for benefits qualification. The PBA's function in enrolling members into its Plan differs significantly from the NDAA's role concerning individual insurance purchases. Reliance highlighted the PBA's responsibility to ensure eligibility for its Plan, noting that all active, full-time employees must enroll, with employers covering 100% of premiums. Individual PBA members cannot enroll independently; only employer members can enroll their employees. Reliance asserts that the PBA consists of employers in the home building and remodeling sector, sharing a common interest, as evidenced by the PBA’s bylaws and its status as a non-profit trade association affiliated with the National Association of Home Builders. The PBA also provides leadership on regulatory issues and training for its members.
Reliance references Kanne v. Connecticut General Life Ins. Co. to argue that a builders’ association like the PBA qualifies as an employee organization under ERISA. The court confirms Reliance's interpretation of PBA’s website and agrees that a strong bond exists among employers in the PBA members Plan, all involved in the construction and remodeling sector in Pennsylvania. Membership in the PBA is required for participation in the PBA members Plan, which involved interaction between the PBA and member employers regarding employment issues. Reliance is not responsible for enrolling participants in this plan, and the plaintiff lacks an individual LTD policy, instead being covered under a group policy maintained by the PBA.
The plaintiff alleges membership in the PBA but is not employed by it or its affiliates. Unlike the situation in Matinchek, where only the owners were covered under an individual policy, the LTD policy in question covers multiple individuals through the PBA members Plan. Reliance argues that the entire Plan should be evaluated, emphasizing that the policy was issued to the PBA for its member employees. The PBA, as an employee organization under ERISA, consists of employers with similar business interests who collectively support their members. Employers are responsible for enrolling their full-time employees in the policy and paying the premiums. The plaintiff was enrolled in the LTD policy through his employer, a member of the PBA, and paid his own premiums.
The LTD policy in question was issued to the PBA (Pennsylvania Builders Association) for its employee organization members, rather than being an individual policy for the plaintiff. Reliance asserts that despite the plaintiff paying premiums and owning a construction business, his coverage is part of the collective PBA policy, which must be evaluated in its entirety. Reliance cites ERISA (Employee Retirement Income Security Act) definitions, indicating that since the PBA is an employee organization, ERISA governs claims under the PBA members Plan, including the plaintiff's claim.
Reliance references the case Chao v. PBA, highlighting a consent judgment from August 2008, wherein the Department of Labor (DOL) did not dispute ERISA's applicability to the PBA’s plans. The DOL determined that the PBA managed an employee welfare benefit plan under ERISA, which provided various benefits, including health and disability coverage. Reliance points out that its Standard Policy is part of this Trust and that the DOL's complaint focused on short-term disability (STD) benefits, as the LTD policy was issued later. The DOL identified Builder Services, Inc. as the Plan administrator and fiduciary, indicating that the LTD coverage is included within the ERISA-governed Trust/Plan. Reliance urges the court to defer to the DOL’s interpretation of ERISA’s applicability to the PBA members Plan and references a related ERISA action involving the PBA.
The Court identified the PBA Trust as a multi-employer health and welfare fund under ERISA, affirming that it has a legitimate organizational relationship among its members and qualifies as an employee organization. Consequently, the PBA members Plan is categorized as an employee welfare benefit plan, granting the Court subject matter jurisdiction. The Court concluded that the plaintiffs’ claims are preempted by ERISA, as they pertain to the Plan's existence and interpretation, justifying Reliance’s removal of the case and denying the plaintiff's motion to remand.
Under ERISA's broad preemption clause, all state laws relating to employee benefit plans are superseded, and the PBA members Plan does not qualify for ERISA's safe harbor protection due to failure to meet two critical criteria. Specifically, employers must contribute to the premiums, and participation is mandatory for all full-time employees. Therefore, the Plan falls outside the safe harbor provisions. Reliance's motion to dismiss the plaintiff's claims for breach of contract and bad faith was granted because these claims were preempted by ERISA, particularly as the plaintiff did not exhaust administrative remedies mandated by ERISA before initiating the lawsuit.
In Barber v. Unum Life Ins. Co. of America, the Third Circuit remanded a case to the district court to dismiss the plaintiff's bad faith claim, determining it was preempted by the Employee Retirement Income Security Act (ERISA). Additional cases, such as Kirshy v. Life Ins. Co. of North America, reinforced that claims of breach of contract, bad faith, and violations of the Unfair Trade Practices and Consumer Protection Law (UTPCPL) are similarly preempted by ERISA under 29 U.S.C. § 1144(a), which invalidates any state laws related to employee benefit plans. Furthermore, any claim for punitive damages is also preempted, as established in Menkes v. Prudential Ins. Co. of America, due to ERISA's exclusive civil remedy scheme.
Reliance argued that the plaintiff failed to exhaust administrative remedies as required by ERISA, which the plaintiff conceded, believing his long-term disability (LTD) policy was not governed by ERISA. The court referenced Harding v. Provident Life and Acc. Ins. Co., stating that the exhaustion requirement is a judicially-created affirmative defense, upheld by the Third Circuit. Courts necessitate exhaustion to reduce frivolous lawsuits and promote consistent claim treatment. In this case, the plaintiff failed to exhaust administrative remedies, allowing Reliance to assert a valid defense against the plaintiff’s claim for benefits and damages.
The court concluded by denying the plaintiff's motion to remand and granting Reliance’s motion to dismiss the complaint, thereby closing the case. The plaintiff claimed membership in the Pennsylvania Builders Association (PBA), but the PBA was dismissed from the case, and it was clarified that the policy in question was specifically for PBA members, with Reliance having a separate policy for PBA employees not relevant to this case. The court noted discrepancies in Reliance's assertions regarding the plaintiff's membership status.
