Hagan v. Northwestern Mutual Life Insurance Co.

Filing 17

MEMORANDUM OPINION signed by Senior Judge Charles R. Simpson, III on 2/3/2016, re 9 Northwestern Mutual Life Insurance Company's MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM. For the reasons set forth, the Court will hold in abeyance Northwestern's Motion to Dismiss, and allow Hagan thirty (30) days to amend his pleadings to include an ERISA claim. The Court will enter a separate order in accordance with this Opinion.cc: Counsel (RLK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
WILLIAM L. HAGAN, M.D.

PLAINTIFF

CIVIL ACTION NO. 3:15-cv-00298-CRS

v.

NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY

DEFENDANT

MEMORANDUM OPINION
Plaintiff William L. Hagan brought this action seeking payment of long-term disability
benefits under his employer’s group insurance policy. Hagan only asserted state law claims for
breach of contract and violation of the Kentucky Consumer Protection Act, and Kentucky Unfair
Claims Settlement Practices Act.
Defendant Northwestern Mutual Life Insurance Company (“Northwestern”) moves to
dismiss these claims under Fed. R. Civ. P. 12(b)(6) because federal law – the Employee
Retirement Income Security Act of 1974, 29 U.S.C. §1001 et seq. (“ERISA”) – preempts
Hagan’s state law claims.
For the reasons below, the Court finds that ERISA preempts Hagan’s state law claims.
However, Hagan moves unopposed to amend his pleadings to include an ERISA claim. The
Court will hold in abeyance Northwestern’s motion to dismiss and allow Hagan thirty days to
amend his complaint to include an ERISA claim.

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BACKGROUND
Hagan is a part-owner and employee of Bardstown Primary Care, PLLC (“Bardstown
Primary Care”). Bardstown Primary Care entered into several group insurance policies with
Northwestern. These policies included a Group Long-Term Disability (“LTD”) insurance policy.
Hagan filed a claim under the LTD policy. Northwestern subsequently denied the claim for LTD
benefits. Hagan requested review of the denial and Northwestern again denied his claim. Hagan
filed a written appeal of the second denial. Northwestern denied the written appeal.
Hagan filed suit in state court alleging wrongful denial of claims, breach of contract, and
bad faith in the claims process under Kentucky law. Northwestern removed the matter to this
Court.
STANDARD
When evaluating a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the Court must
determine whether the complaint alleges “sufficient factual matter, accepted as true, to state a
claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)) (internal quotation marks omitted). A
claim is plausible if “the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly,
550 U.S. at 556). Although the complaint need not contain “detailed factual allegations,” “a
plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than labels
and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Twombly, 550 U.S. at 555 (internal quotation marks and alteration omitted).
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DISCUSSION
Northwestern argues that ERISA preempts Hagan’s claims and, therefore, the Court
should dismiss the claims and strike Hagan’s jury demand. Hagan contends that (1) the relevant
plan is not an employee welfare benefit plan under ERISA; (2) that ERISA’s safe harbor
provisions apply if the plan is covered under ERISA; and (3) that, regardless, ERISA does not
preempt these particular state law claims. Hagan, unopposed, also requests this Court allow him
leave to amend the complaint if the Court finds the policy is an ERISA plan.
1. Whether the Group Insurance Policy is an ERISA Plan
The Sixth Circuit has outlined a three-part test for determining whether an ERISA
benefits plan exists:
First, the court must apply the so-called “safe harbor” regulations established by the
Department of Labor to determine whether the program was exempt from ERISA.
Second, the court must look to see if there was a “plan” by inquiring whether “from the
surrounding circumstances a reasonable person [could] ascertain the intended benefits,
the class of beneficiaries, the source of financing, and procedures for receiving benefits.”
Finally, the court must ask whether the employer “established or maintained” the plan
with the intent of providing benefits to its employees.
Thompson v. Am. Home Assur. Co., 95 F.3d 429, 434 (6th Cir. 1996) (citations omitted).
i. Safe Harbor Exemption
An employee insurance policy is excluded from ERISA coverage – and governed by state
law – if all of the following conditions are met: (1) the employer or employee organization
makes no contributions to the policy; (2) employee or member participation in the policy is
completely voluntary; (3) the employer or employee organization’s sole functions, without
endorsing the policy, are to permit the insurer to publicize the policy to employees or members,

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collect premiums through payroll deductions, and remit them to the insurer; and (4) the employer
or employee organization receives no consideration in connection with the policy other than
reasonable compensation for actually rendered administrative services in connection with payroll
deductions. 29 C.F.R. § 2510.3-1; see also Helfman v. GE Grp. Life Assur. Co., 573 F.3d 383,
388 (6th Cir. 2009).
Here, the safe harbor exemption does not exempt the plan from ERISA coverage.
Hagan’s employer – Bardstown Primary Care – does make a contribution to the policy because
the employer “pays the entire premium” for the insurance coverage. Group Policy 2, ECF No. 14; see also Pl.’s Resp. 7, ECF No. 15. “[I]f an employer contributes to any employee’s payment
of premiums, ERISA must apply to the entirety of the particular insurance program.” Helfman,
573 F.3d 383, 391 (6th Cir. 2009).
ii. ERISA Plan
An ERISA plan is defined as a plan, fund, or program that an employer established or
maintained for the purpose of providing certain benefits, including disability benefits, to its
participants. 29 U.S.C. § 1002(1). If a reasonable person could “ascertain the intended benefits,
the class of beneficiaries, the source of financing, and procedures for receiving benefits,” then
the Court will find the existence of an ERISA plan. Thompson, 95 F.3d at 434.
A review of the LTD shows that the policy satisfies the minimum requirements to
establish an ERISA plan. ERISA defines an employer as “any person acting directly as an
employer, or indirectly in the interest of an employer,” and defines person to include a
corporation or partnership. 29 U.S.C. § 1002(5) and (9). The policy identifies Bardstown Primary

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Care as the employer. Group Policy 1. The policy also identifies Bardstown Primary Care as the
policyowner, which evidences that Bardstown Primary Care established the policy. Id.
The policy includes various benefits for eligible “members.” Id. These benefits include
long-term disability insurance coverage. The policy defines members to include owneremployees and other employees. Id. While Hagan questions whether an owner-employee
qualifies as an ERISA employee, “ERISA’s text contains multiple indications that Congress
intended working owners to qualify as plan participants.” Raymond B. Yates, M.D., P.C. Profit
Sharing Plan v. Hendon, 541 U.S. 1, 12 (2004). In particular, “joint shareholders,” which would
cover co-owners, are not excluded “from the ERISA definition of ‘employee.’” Santino v.
Provident Life & Acc. Ins. Co., 276 F.3d 772, 775 (6th Cir. 2001). A plan is excluded by ERISA
only if a sole shareholder wholly owns the company and coverage is limited to the sole
shareholder and a spouse. Id.; cf. Sweeney v. Unum Life Ins. Co. of Am., No. CIV A 3:09CV-514S (W.D. Ky. Feb. 3, 2010). Thus, where, as here, multiple individuals are owner-employees
covered under the policy, the sole shareholder exception does not apply.
For the above stated reasons, the undisputed facts show that the policy is a plan Hagan’s
employer established for the benefit of employees, including Hagan, and that those benefits
include the LTD. The Court finds that the LTD is a plan under ERISA.
2. Whether ERISA Preempts Hagan’s State Law Claims
Congress enacted ERISA to “protect … the interests of participants in employee benefit
plans and their beneficiaries … by establishing standards of conduct, responsibility, and
obligation for fiduciaries” and to “provid[e] for appropriate remedies, sanctions, and ready
access to the Federal courts.” 29 U.S.C. § 1001(b). “The purpose of ERISA is to provide a
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uniform regulatory regime over employee benefit plans.” Aetna Health Inc. v. Davila, 542 U.S.
200, 208 (2004). In achieving this uniformity, ERISA includes expansive preemption provisions;
see 29 U.S.C. 1144; intended to safeguard employee benefit plans as “exclusively a federal
concern.” Davila, 542 U.S. at 208 (internal quotation and citation omitted); see also Sherfel v.
Newson, 768 F.3d 561, 564 (6th Cir. 2014) (“ERISA is a statute unique in its preemptive
effect.”).
ERISA is not, as Hagan asserts, merely an affirmative defense that cannot provide the
basis for subject-matter jurisdiction. See Pl.’s Resp. 4. ERISA “supersede[s] any and all State
laws insofar as they may … relate to any [covered] employee benefit plan.” 29 U.S.C. §1144(a).
“[A]ny state-law cause of action that duplicates, supplements, or supplants the ERISA civil
enforcement remedy conflicts with the clear congressional intent to make the ERISA remedy
exclusive and is therefore pre-empted.” Davila, 542 U.S. at 209. “As long as ERISA exclusively
regulates the activity (deciding whether to award benefits), ERISA prevents the distinct state law
tort scheme from superimposing an extra layer of regulation on top of the ERISA-regulated plan
benefit determination.” Hutchison v. Fifth Third Bancorp., 469 F.3d 583, 588 (6th Cir. 2006). If
the plan is an ERISA plan, then removal is proper and ERISA “converts an ordinary state
common law complaint into one stating a federal claim for purposes of the well-pleaded
complaint rule.” Davila, 542 U.S. 200, 209 (2004) (quoting Metro. Life Ins. Co. v. Taylor, 481
U.S. 58, 65 (1987)).
State law “relates to” an ERISA plan, and is therefore preempted, “if it has a connection
with or reference to such a plan.” Egelhoff v. Egelhoff, 532 U.S. 141, 147 (2001). State laws have
such a connection or reference if, for example, the state laws require certain employee benefit
structures; interfere with national plan administration; or create “alternative enforcement
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mechanisms for the recovery of benefits provided under an ERISA plan.” Sherfel v. Newson, 768
F.3d 561, 567 (6th Cir. 2014) (internal quotation and citation omitted).
Hagan alleges that Northwestern “wrongfully denied [Hagan’s] claims” for “long-term
disability benefits” under the LTD. Pl.’s Compl. ¶¶ 7 – 8. According to Hagan’s complaint, when
Northwestern reviewed and denied Hagan’s claims Northwestern (1) “breached its contract” with
Hagan; (2) “engaged in unfair, false, misleading and/or deceptive practice” violating the
Kentucky Consumer Protection Act; and (3) “committed bad faith against [Hagan]” violating the
Kentucky Unfair Claims Settlement Practices Act. Id. ¶¶ 9 – 11. These claims arise from
Northwestern’s alleged obligations to pay ERISA plan benefits and review ERISA plan claims
for benefits. Deciding these claims would require interpretation of the LDP and an analysis of
Northwestern’s administration of Hagan’s disability claim. The claims attempt to bypass ERISA
and use state law as an alternative to recover ERISA plan benefits. As such, ERISA preempts
Hagan’s state law claims and Northwestern properly removed the matter from state court.
3. Strike Request for Jury Trial
Northwestern also moves to strike Hagan’s jury demand as there is no right to a jury trial
under ERISA. Hagan does not oppose this motion. “[T]he Seventh Amendment does not
guarantee a jury trial in ERISA … cases.” Reese v. CNH Am. LLC, 574 F.3d 315, 327 (6th Cir.
2009); see also Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609, 616 (6th Cir. 1998). The
Court will strike Hagan’s demand for a jury trial.
4. Leave to Amend
Hagan requests this Court allow him leave to amend his claims to include an ERISA
claim. Northwestern does not oppose this request. The Court will hold in abeyance
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Northwestern’s motion to dismiss and allow Hagan thirty days to amend his pleadings to include
an ERISA claim.
The Court will enter a separate order in accordance with this opinion.

February 3, 2016

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