Summary
holding that existence of contract-formation defect "precludes the existence of any `plan' that might have been governed by ERISA"
Summary of this case from Yeckel v. AbbottOpinion
Civ. No. 03-6163-AA.
April 15, 2004
Arden J. Olson, Craig J. Capon, Harrang Long Gary Rudnick, P.C., Attorneys for plaintiff.
Scott J. Kaplan, Stoel Rives, LLP,
Virginia I. Miller, Anderson Kill Olick, P.C., Attorneys for defendants John J. Koresko, Ram Technical Services Voluntary Employees' Beneficiary Association(RAM VEBA), Regional Employers' Assurance Leagues Voluntary Employees' Beneficiary Association (REAL VEBA), Penn-Mont Benefit Services.
Roy B. Thompson, Thompson Bogran, P.C., Attorney for defendants Thomas W. Crosswhite, Corben Educational Services, Inc.
Robert B. Miller, Heather J. Van Meter, Bullivant Houser Bailey, PC, Portland, OR, Attorneys for defendant Great Southern Life Insurance Co.
OPINION AND ORDER
Plaintiffs Charles and Susan Stalnaker are officers of Ram Technical Services ("Ram Tech"), a co-plaintiff and supplier in the superconductor industry. On July 2, 2003, plaintiffs filed suit against all defendants under the Employee Retirement Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132, alleging that defendants fraudulently induced the Stalnakers to set up a benefits plan for themselves and their company that did not comply with the Stalnakers' expectations. Plaintiffs seek equitable rescission of the plan, and they ask the court to create a constructive trust for property belonging to plaintiffs in defendants' possession.
Defendants Koresko, Ram VEBA, REAL VEBA, and Penn-Mont (hereinafter, the "VEBA defendants") move for dismissal on the following grounds: failure to state a claim, failure to exhaust, failure to meet the heightened pleading requirements of Fed.R.Civ.P. 9(b), and lack of personal jurisdiction over defendant Koresko. Additionally, defendants Corben and Crosswhite filed a memorandum concurring with parts of the VEBA defendants' motion to dismiss, in which Crosswhite and Corben agree with the VEBA defendants on all matters except the position that this court lacks personal jurisdiction over Koresko, or that the "fiduciary shield" doctrine would protect Koresko if the plaintiffs stated a valid claim. On February 18, 2004, the court heard argument on defendants' motion to dismiss. For the reasons given below, the VEBA defendants' motion for dismissal is GRANTED, and the VEBA defendants' motion to dismiss cross claims of defendants Great Southern, Crosswhite, and Corben is DENIED.
FACTS
The following summary is based on the pleadings.
In early 2000, plaintiffs engaged David Pulliam to assist them as financial adviser and broker in establishing an employees' benefits plan. Pulliam assisted plaintiffs in contacting defendants Corben Educational Services, Inc. and its CEO, Thomas W. Crosswhite, Penn-Mont Benefit Services, Inc. and its president, John J. Koresko, and Great Southern Life Ins. Co., all of whom plaintiffs hired to create the benefits plan. Koresko and Crosswhite (on behalf of themselves, Corben, Penn-Mont, and Great Southern) promoted establishing a Welfare Benefit Trust, to be comprised of a benefits plan that would be funded through the Ram Technical Services Voluntary Employees' Beneficiary Association (the "REAL VEBA") and presented the idea to the plaintiffs. Defendants marketed this particular structure as a flexible plan that would not require yearly employer contributions to the VEBA.
Relying on the fact that yearly contributions were not required, the plaintiffs authorized Koresko, Crosswhite, Corben, Penn-Mont, and Great Southern to create the Ram Benefit Plan and fund it through the REAL VEBA. The plaintiffs funded the plan (through the REAL VEBA) with two life insurance policies issued by Great Southern. Plaintiffs paid $200,000 in initial premiums and $50,000 in additional premiums for the policies, and $6,000 for fees and costs associated with the maintenance and formation of the plan. The plan is administered by Penn-Mont.
Plaintiffs subsequently learned that, contrary to the representations of Koresko and Crosswhite, the plan required yearly premium payments from the employers. In June and July of 2002, Great Southern informed Penn-Mont (who, in turn, informed the plaintiffs) that the policies funding the plan would lapse effective August 11, 2002 if plaintiffs did not pay additional premiums. Great Southern first demanded $59,095.38 to make the policies current and an additional $167,624.24 to make one or more of the policies current through August 28, 2003. Plaintiffs now sue under 29 U.S.C. § 1132(a)(3), arguing that ERISA allows an action in equity to rescind the entire benefits plan and place monies wrongfully held by the defendants in a constructive trust. Plaintiffs also seek prejudgment interest under 28 U.S.C. § 1961 and attorneys' fees under 29 U.S.C. § 1132(g).
Defendants Koresko, Ram VEBA, REAL VEBA, and Penn-Mont (hereinafter, the "VEBA defendants") move for dismissal on the following grounds: failure to state a claim, failure to exhaust, failure to meet the heightened pleading requirements of Fed.R.Civ.P. 9(b), and lack of personal jurisdiction over defendant Koresko.
Defendant Great Southern denies that Koresko and Crosswhite acted on behalf of Great Southern and denies that Great Southern created the Ram Tech benefit plan. Great Southern asserts several affirmative defenses, including expiration of statute of limitations, doctrine of laches, failure to exhaust, and failure to state a claim.
Defendants Crosswhite and Corben assert four affirmative defenses. First, they assert novation, arguing that the plan referenced by plaintiffs in this suit was extinguished when plaintiffs entered into a new, replacement agreement with Great Southern, Pulliam, Penn-Mont and REAL VEBA in October, 2002. Second, they assert accord and satisfaction, stating that the replacement agreement was an accord whereby plaintiffs agreed to a different schedule of insurance premiums to be paid to the retirement plan. Third, they assert failure to state a claim upon which relief may be granted. Fourth, they assert malpractice, stating that plaintiff's lack of knowledge about the required payments is the fault of the attorneys who advised them concerning the replacement agreement.
Defendants Crosswhite and Corben filed a cross claim against Koresko, Penn-Mont, REAL VEBA, Great Southern, and Pulliam (the VEBA defendants), asserting that any misrepresentation to the plaintiffs would have been made by the VEBA defendants, and they are liable to Crosswhite and Corben in the event that Crosswhite and Corben are found liable in this suit. The VEBA defendants moved to dismiss the cross claim, arguing that cross claimants do not meet the equitable requirements for indemnity. Specifically, they argue that because indemnity cannot apply unless and until the VEBA defendants become liable to a third party, the cross claim is not ripe.
Defendant Great Southern also filed a cross claim and demands contribution or indemnification from other defendants to the extent allowed by law if Great Southern is found liable in this action. The VEBA defendants moved to dismiss this cross claim based on the same ripeness argument asserted above.
STANDARD
A motion to dismiss under Rule 12(b)(6) will be granted if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his complaint which would entitle him to relief." Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 248 (9th Cir. 1997). Review is normally limited to the complaint, and all allegations of material fact are taken as true and viewed in the light most favorable to the non-moving party. Id. The court may consider whether conclusory allegations follow from the description of facts alleged, however. Holden v. Hagopian, 978 F.2d 1115, 1121 (9th Cir. 1992). Thus, the court is not required to accept as true conclusory allegations which are contradicted by documents referred to in the complaint. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295-96 (9th Cir. 1998).
DISCUSSION
Plaintiffs bring suit under 29 U.S.C. § 1132(a)(3), which authorizes a civil action "by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan[.]"
Defendants argue that plaintiffs fail to state a claim under this statute, because the plaintiffs neither seek to "enjoin any practice" that violates ERISA or the benefits plan, nor do they request equitable relief to redress an ERISA violation or a term of the plan. Rather, plaintiffs ask this court to rescind an entire benefits plan that the plaintiffs allegedly were fraudulently induced into forming based on misrepresentations about the required payment schedule.
Defendants also argue that the Complaint does not allege that plaintiffs are within the enumerated classes authorized to enforce ERISA. However, plaintiffs respond that Ram Tech has standing as a fiduciary; Charles Stalnaker has standing as a participant, beneficiary, and fiduciary; and, Susan Stalnaker has standing as a participant and beneficiary. Plaintiffs suggest that any omissions from the Complaint regarding plaintiffs' standing are "technical," and the court should allow them leave to amend. Even if plaintiffs could cure their failure to plead facts or otherwise allege that they belong to an enumerated class under 29 U.S.C. § 1132(a)(3), they fail to state a claim.
Plaintiffs rely primarily on two cases to argue that ERISA allows rescission of a benefits plan based on fraud in the inducement: Security Life Ins. Co. of Am. v. Meyling, 146 F.3d 1184 (9th Cir. 1998) and Nash v. Trs. of Boston Univ., 946 F.2d 960 (1st Cir. 1991). Meyling allowed rescission of an individual insurance policy as a remedy under the "federal common law" of ERISA and demonstrates the narrow factual circumstances under which rescission may apply. The Meyling court held that when an insured sues an insurer for benefits under an ERISA contract, the insurer may, under ERISA common law principles, invoke the defense of fraud in the inducement to justify non-payment of benefits. Meyling, 146 F.3d at 1191. Thus, if the misrepresentation upon which the insurer relied is material, the defense is successful and rescission of the contract is appropriate. Id. at 1191-92.
The First Circuit reached a similar result in Nash. There, the plaintiff sued his employer, alleging ERISA claims predicated on an early retirement agreement. In its defense, the employer contended that the plaintiff fraudulently induced the employer into making the early retirement agreement, based on plaintiff's misrepresentation that he would not take another job if the employer would provide the early retirement package. Nash, 946 F.2d at 961-62. As in Meyling, the plaintiff sued defendant for benefits under an ERISA contract (a type of claim expressly allowed by 29 U.S.C. § 1132), and the court created, under "federal common law" of ERISA, the defense of fraud in the inducement to allow the defendant to deny the benefits and rescind the contract. Id. Notably, the court expressed substantial reservations about whether ERISA should preempt a state common law fraud in the inducement defense concerning the formation of a benefits plan, but the court assumed without deciding, for the purposes of the case, that ERISA would preempt the state law defense. Id. at 964 n. 8.
Neither Meyling nor Nash provide authority allowing a rescission claim to be brought under § 1132(a)(3). Rather, in this limited context, rescission was permitted when fraud in the inducement is successfully raised as a defense against one party's claim for benefits under ERISA. That is, the courts rescinded individual benefits contracts only when 1) the individual has stated a claim for benefits under ERISA, and 2) the benefits provider demonstrates that the agreement was based on fraudulent information provided by the plan participant. Moreover, Meyling and Nash permit only the rescission of a single policy (or other contract) between an individual and benefits provider/employer, instead of rescission of an entire benefits plan. Finally, it is important to note that in these cases, rescission is not deemed a remedy expressly permitted under the ERISA statute (e.g., 29 U.S.C. § 1132); rather, it was created as a new, "gap-filling" measure under the "federal common law" of ERISA. Meyling, 146 F.3d at 1191; Nash, 946 F.2d 996.
The key issue before the court, however, is whether § 1132, which is designed generally to enforce plan benefits and provisions of ERISA, can govern a dispute about whether a formation defect vitiates a putative agreement establishing a benefits plan. Plaintiffs attempt to persuade the court to read Meyling and Nash broadly, so as to allow § 1132 to govern the rescission of an entire benefits plan based on fraudulent inducement. I find that the type of breach alleged by plaintiffs is not the type that § 1132 seeks to redress. Because the alleged formation defect would preclude the existence of any "plan" that might have been governed by ERISA, the plaintiffs do not state a claim for enforcement of a term of their plan. See Providence Health Plan v. McDowell, 2004 WL 574982, *3 (9th Cir. Mar. 24, 2002) ( 29 U.S.C. § 1132 allows a plaintiff "to seek only equitable relief for violation of the plan. . . . [not] relief based upon contractual remedies that arise under state law.").
Moreover, plaintiffs have provided no authority demonstrating that defendants' alleged fraudulent inducement violates an "ERISA provision." To the contrary, many courts have determined that ERISA does not apply to a claim of fraud in the inducement, which occurs before the establishment of a benefits plan and may be redressed under state common law principles. See Coyne Delany Co. v. Selman, 98 F.3d 1457, 1467 (4th Cir. 1996) (claim of insurance malpractice relating to pre-formation misrepresentations concerning ERISA-governed plan did not "relate to" ERISA and was not preempted); Morstein v. Nat'l Ins. Svcs., Inc., 93 F.3d 715 (11th Cir. 1996) (holding that claim of fraudulent inducement to purchase ERISA-governed insurance policy did not "relate to" the plan and was not preempted by ERISA);Perkins v. Time Ins. Co., 898 F.2d 470, 473 (5th Cir. 1990) (holding that ERISA does not preempt a claim for alleged fraudulent inducement to an insurance contract governed by ERISA that did not cover beneficiary's health condition; such a claim is properly brought in state court); Perry v. P*I*E* Nationwide, Inc., 872 F.2d 157, 158-59 (6th Cir. 1989) (ruling that ERISA did not preempt state law claim of fraud in the inducement by employees alleging that misrepresentations of employer induced them to join plan, because ERISA lacked remedy); Daniels v. Bursey, 2003 WL 22053580, *7 (N.D. Ill. Sept. 3, 2003) (claim that defendants fraudulently induced plaintiffs to adopt and ERISA plan is not preempted by ERISA and is properly brought under state Consumer Fraud Act);see also Camp v. Pacific Financial Group, 956 F. Supp. 1541, 1547 (C.D. Cal. 1997) (stating in dicta, "this Court believes that the Ninth Circuit would join the Fourth, Fifth, Sixth, and Eleventh Circuits in recognizing a [state common law] claim for wrongful inducement [to purchase an ERISA plan]");Longoria v. Cearley, 796 F. Supp. 997, 1008 (W.D. Tex. 1992) (claim that insurance agent fraudulently induced plaintiff to purchase ERISA-governed plan did not "relate to" ERISA and "must be remanded to state court if no other basis for federal jurisdiction exists").
Finally, the plaintiffs seek a type of equitable relief that is not available under the statute. The statute allows equitable relief only to "redress [plan] violations or . . . enforce any provisions [of ERISA] or the plan." 29 U.S.C. § 1132. As explained above, plaintiffs do not seek to redress either type of breach. Nonetheless, they contend that the statute's provision for "any equitable relief" permits their claim, based on an expansive reading of the case law.
Plaintiffs mistakenly argue that the holding of Great-West Life Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) renders their claim cognizable under § 1132(a)(3). In Great-West, an insurer sued for specific performance of a reimbursement provision in an ERISA plan and for restitution of monies that the insured recovered from a third-party tortfeasor. The issue in Great-West was whether the provision under § 1132(a)(3), permitting civil actions to obtain "appropriate equitable relief," authorized the plan to sue for specific performance of the plan provision and restitution of funds to the plan. The Court found that such a remedy was essentially legal rather than equitable, and therefore not authorized as "appropriate equitable relief" under § 1132(a)(3). Thus, the focus in Great-West was whether a type of relief requested was equitable or legal, not whether the type of equitable relief permitted by § 1132(a)(3) can remedy a formation defect in a benefits plan. Great-West does not authorize the type of action that plaintiffs seek in the case at bar. Rather, the "equitable relief" authorized by the statute is only available to enforce a plan term or address violations of the ERISA statute.
Such a dismissal would be a dismissal for failure to state a claim, rather for lack of subject matter jurisdiction. Westaff (USA) Inc. v. Arce, 298 F.3d 1164, 1167 (9th Cir. 2002).
Based on the foregoing, plaintiffs cannot withstand dismissal of this action on grounds that it is not an action for equitable relief authorized under ERISA.
Plaintiffs next argue that even if § 1132(a)(3)(B) does not govern their claim, it falls under the "federal common law" of ERISA. However, to state a claim under the "federal common law" of ERISA, plaintiffs would require this court to create an entirely new cause of action for which there is only tenuous authority, and I decline to do so.
This argument appears in Plaintiffs' Memo in Opposition to Defendant's Motion to Dismiss, 6; plaintiffs failed to assert this in the Complaint.
The Ninth Circuit has delineated the circumstances under which Congress intended that federal courts create common law in interpreting ERISA:
[Congress] empowered the courts to develop, in light of reason and experience, a body of federal common law governing employee benefit plans. First, it supplements that statutory scheme interstitially . . . Second, and more generally, it serves to ramify and develop the standards that the statute sets out only in general terms . . . Third, Congress viewed ERISA as a grant of authority to the courts to develop principles governing areas of the law regulating employee benefit plans that had previously been the exclusive province of state law. Menhorn v. Firestone Tire Rubber Co., 738 F.2d 1496, 1499 (9th Cir. 1984).
Under the Menhorn standard, it is inadvisable to create a federal common law cause of action that would allow rescission of the Ram Tech Welfare Benefit Trust. To determine that plaintiffs state a cognizable claim on these facts would require the court to do much more than close an "interstitial" gap in the statute. Moreover, creating federal common law that would accommodate plaintiffs' claim would have no bearing on the general "standards" that the statute sets forth. Nor would it have bearing on the law regulating the administration of employee benefit plans. Finally, there is no case law in the Ninth Circuit interpreting ERISA in a manner that would authorize plaintiffs' cause of action on the facts alleged. "The authority of courts to develop a federal common law under ERISA is not the authority to revise the text of the statute." Mertins v. Hewitt Assocs., 508 U.S. 248, 259 (1993) (internal citation omitted). In short, to find that plaintiffs state a claim under the "federal common law" of ERISA would exceed the Mehhorn guidelines and expand the scope of ERISA-related actions.
Where courts within the Ninth Circuit have created "federal common law" to allow ERISA-related claims or interpret the statute, they have understood their role as "gap-filling," rather than recognizing new causes of action or remedies for which no legislative intent exists. See, e.g., Babakian v. Paul Revere Life Ins. Co., 63 F.3d 837, 840 (9th Cir. 1995) (interpreting benefits plan under federal common law of ERISA based on generally accepted principles of contract interpretation); Nunez v. Monterey Peninsula Eng'g, 867 F. Supp. 895, 904-05 (N.D. Cal. 1994) (under federal common law of ERISA, allowing continued standing for plaintiff despite fact that plaintiffs were no longer "participants" under ERISA at time of filing amended complaint, finding that plaintiffs were "participants" at time of filing initial complaint).
Finally, when creating "federal common law" under ERISA, the Ninth Circuit has been careful to ensure that its interpretation is "governed by a uniform body of federal law." Babakian, 63 F.3d at 840 (emphasis in original); see also Peterson v. Am. Life Health Ins. Co., 48 F.3d 404, 411 (9th Cir. 1995) (Congress authorized courts "to formulate a nationally uniform federal common law to supplement the explicit provisions and general policies set out in [ERISA]"). Thus, for example, inMeyling, the court created protections under ERISA for plan providers whose insureds lie about their health only after explaining how the new law would sensibly correspond to an already nationally uniform policy under ERISA for dealing with such situations. Meyling, 146 F.3d at 1191.
In contrast, plaintiffs do not point to a clear "nationwide" policy under ERISA that their claim (if recognized) would complement. Rather, the Ram Tech plaintiffs attempt to persuade the court to stretch the sparse existing precedent, which allows the use defense of fraud in the inducement when a plaintiff has stated a benefits claim, to allow rescission of an entire benefits plan when no benefits claim was initially brought.
In sum, plaintiffs fail to state a claim for which relief may be granted under ERISA or the federal common law of ERISA. As a result, defendants' other grounds for dismissal do not require discussion.
CONCLUSION
The motion of VEBA defendants, Crosswhite, and Corben to dismiss plaintiffs' claims (doc. 33) is GRANTED. The VEBA defendants' motion to dismiss cross claims of defendants Great Southern, Crosswhite, and Corben (docs. 36 and 39) are DENIED as moot. Plaintiffs' claims under ERISA are hereby dismissed. Plaintiffs are allowed twenty days in which to file an amended complaint should other grounds for federal jurisdiction exist.
IT IS SO ORDERED.