IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 6, 2009
No. 07-10951 Charles R. Fulbruge III
Clerk
MARY KAY HOLDING CORP; MARY KAY INC; NEW ARROW CORP
Plaintiffs-Appellants
v.
FEDERAL INSURANCE COMPANY
Defendant-Appellee
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:06-CV-896
Before DAVIS, CLEMENT, and ELROD, Circuit Judges.
PER CURIAM:*
Mary Kay Holding Corporation, Mary Kay Inc., and New Arrow
Corporation (collectively, “Mary Kay”) filed this diversity action against Federal
Insurance Company (“FIC”) in response to FIC’s refusal to indemnify or defend
Mary Kay in a suit brought against it by Marketing Specialists Corporation and
others (collectively, “MSC”) for alleged violations of the Employee Retirement
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 07-10951
Income Security Act of 1974, 29 U.S.C. § 1001 (“ERISA”), and the Consolidated
Omnibus Budget Reconciliation Act of 1985, 29 U.S.C. § 1161 (“COBRA”). FIC
moved for summary judgment; Mary Kay moved for partial summary judgment.
The district court granted FIC’s motion and denied Mary Kay’s motion. For the
reasons provided below, we AFFIRM.
I. FACTS AND PROCEEDINGS
Mary Kay is a domestic cosmetics company that, from time to time, has
purchased insurance policies from FIC. Mary Kay bought the policy at issue, No.
8146-1317 (the “Policy”), from FIC in the summer of 2002. The Policy was a
renewal of a previous policy that offered similar coverage terms. Among other
things, the Policy covered the “Sponsored Organization” of “Mary Kay Holding
Corporation and its subsidiaries” for employee benefit claims filed against one
or more such entities from August 1, 2002 to August 1, 2003.
Relevant terms of the Policy’s “Fiduciary Liability” section—the section at
issue in this case—are as follows:
• [FIC] shall pay . . . all Loss . . . on account of any Claim first
made against the Insured during the Policy Period . . . for a
Wrongful Act committed, attempted, or allegedly committed
or attempted, before or during the Policy Period by an Insured
or by any person for [whom] the Insured is legally responsible.
• [FIC] shall have the right and duty to defend any Claim
covered by this coverage section.
• Insureds . . . means . . . [Mary Kay Holdings and its
subsidiaries]; . . . [any Sponsored Plan]; . . . [an] Insured
Person, or . . . any other [entity] so designated . . . .
• Wrongful Act means . . . any breach of the responsibilities,
obligations or duties imposed upon fiduciaries of the
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Sponsored Plan by [ERISA or] . . . any negligent act, error or
omission in the Administration of any Sponsored Plan . . . .
• Sponsored Plan means . . . an [ERISA plan] which is operated
solely by [Mary Kay Holding Corporation or its subsidiaries]
. . . for the benefit of the[ir] employees . . . and which existed
at the Inception Date of this coverage section or of any policy
. . . of which this coverage section is a renewal . . . .
• Subsidiary . . . means any [entity] in which more than 50% of
the outstanding securities or voting rights representing the
present right to vote for election of directors is owned or
controlled, directly or indirectly . . . by [Mary Kay].
• Administration means giving advice to employees, handling
records, or effecting enrollment, termination or cancellation
of employees under a benefit plan.
• [FIC] shall not be liable . . . in consequence of the failure of
the Insured to comply with any law governing workers’
compensation, unemployment, social security or disability
benefits or any similar law, except [COBRA] . . . .
On May 15, 2003, a group led by then-bankrupt Marketing Specialists
Corporation filed suit against Mary Kay in the United States District Court for
the Eastern District of Texas (Case No. 5:03-CV-95) (the “MSC Suit”). Through
a series of amended complaints, the MSC Suit made several claims against Mary
Kay—which had apparently supported MSC financially at one time—and related
corporate and individual defendants. Pertinently, among the claims in the MSC
Suit were “Breach of ERISA Fiduciary Duties, Prohibited Transactions and
Failure to Comply with COBRA.” The district court summarized the claims at
issue as follows:
[T]he MSC Plaintiffs alleged that officers of Mary Kay, while acting
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as ERISA fiduciaries with respect to MSC’s employee benefits plans,
misused and diverted plan assets to pay general corporate
obligations in violation of the fiduciary duties imposed by ERISA.
The MSC Plaintiffs further alleged that these officers failed to
disclose material information to participants of the MSC benefits
plans and misrepresented the status of those plans and their rights
to continuation coverage under COBRA. The complaint alleged that
Mary Kay was vicariously liable for these alleged breaches of
fiduciary duty. Additionally, the MSC Plaintiffs alleged that Mary
Kay was directly liable for failing to provide COBRA continuation
coverage to MSC plan participants upon the termination of their
employment with MSC.
Mary Kay Holding Corp. v. Fed. Holding Co., No. 3:06-CV-0896, 2007 WL
4179313, at *1 (N.D. Tex. Aug. 14, 2007) (footnote omitted).
The MSC Suit’s complaint alleged that “Mary Kay was a member of a
controlled group . . . which included [MSC],” and it is this “control group”
relationship that Mary Kay contends exposes it to liability for failing to abide by
COBRA for MSC employees. Nevertheless, the complaint never alleges that
MSC was a subsidiary of Mary Kay during the Policy term—i.e., August 2002 to
August 2003—which is a status required of MSC for coverage. This is
understandable given that any subsidiary stake that Mary Kay may have had
in MSC was gone by virtue of an April 4, 2002 approval by a federal bankruptcy
court of MSC’s reorganization which included cancellation of “all of the existing
stock of [MSC]” and its reissue to a reorganization trust separate and apart from
Mary Kay, effective May 26, 2002. Only the fact—and not the details—of the
MSC bankruptcy are included in the MSC Suit’s complaint.
Despite the MSC reorganization, Mary Kay sought Policy coverage for the
MSC Suit and notified FIC of the claims on or about May 29, 2003. FIC denied
coverage on November 29, 2004, stating that “[b]ecause MSC is not a Subsidiary
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of Mary Kay, the Policy provides no coverage in connection with alleged
misconduct involving benefit plans provided or sponsored by MSC.” On June 13,
2005, FIC stated that, as to Mary Kay plan claims, the Policy covers fiduciary
breaches, not failures to sponsor the plan benefits at issue in the MSC Suit. In
any event, Mary Kay entered into a settlement in the MSC Suit on September
28, 2005, which the court in that case then approved on January 18, 2006.
Mary Kay first filed the present action on May 18, 2006.1 In its complaint,
Mary Kay seeks to recover the defense and settlement costs that it incurred as
a result of the MSC Suit, as well as damages and penalties for failure to
promptly pay the claim. Although the original complaint made claims for both
indemnity and a duty to defend, only the duty to defend is before this court on
appeal. In short, Mary Kay argues that the MSC Suit is covered by the Policy
because the suit involved (1) vicarious ERISA fiduciary breaches and COBRA
violations relating to benefit plans of MSC, and/or (2) direct COBRA violations
relating to benefit plans of Mary Kay as a control group member. FIC denies
that the MSC Suit is covered, because (1) there is no liability with respect to
MSC plans because MSC was not a covered Mary Kay subsidiary, either under
the Policy’s terms or as a result of reorganization, and (2) any liability regarding
Mary Kay plans is barred because any such claim would be made against it as
a sponsor, not as a covered fiduciary.
After a period of discovery, Mary Kay filed a motion for partial summary
judgment on February 23, 2007 on its central claim of FIC’s liability under the
Policy for Mary Kay’s “reasonable and necessary defense costs” in the MSC Suit.
1
On April 3, 2007, Mary Kay obtained leave to file an amended complaint. There are
no substantive differences from the original complaint for purposes of this appeal.
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FIC then filed a motion for full summary judgment on all claims. On August 14,
2007, the district court granted FIC’s motion and denied Mary Kay’s motion. As
to MSC plans, it found that given its bankruptcy, “as of August 1, 2002 [i.e., the
Policy’s effective date], MSC was not a subsidiary of Mary Kay, as defined in the
Policy, and the MSC employee benefit plans were not sponsored plans,” and,
thus, MSC plan-based claims “do not allege wrongful acts within the scope of the
Policy.”2 The court noted that the bankruptcy order constituted evidence outside
the “eight-corners rule” that looks only to the policy and complaint for finding a
duty to defend in Texas. See Lincoln Gen. Ins. Co. v. Reyna, 401 F.3d 347, 350
(5th Cir. 2005). Nevertheless, it found that a “coverage” exception to the rule
should apply because subsidiary status under the Policy only concerns coverage
and does not implicate the merits of the underlying action. See GuideOne Elite
Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308–09 (Tex. 2006). As
to Mary Kay plans, the court found that any failure to offer COBRA coverage
was a sponsorship issue, and did not fit the Policy’s coverage of fiduciary acts.
Mary Kay filed a notice of appeal on September 6, 2007. In its brief, Mary
Kay notes six issues for review. These issues, however, come down to two basic
questions: (1) whether the district court erred in finding that MSC was not a
“subsidiary” under the Policy, and (2) whether the district court erred in finding
that the claims against Mary Kay under COBRA relating to Mary Kay’s plans
were not “wrongful acts” under the Policy.3
2
The district court’s finding that MSC’s plans were not “sponsored” under the Policy
also applied in its analysis of alleged COBRA misrepresentation over such plans.
3
Mary Kay also appeals the dismissal of state insurance code and “bad faith” denial
claims, yet given the lack of briefing (no cases or statutory provisions are cited in support), any
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II. STANDARD OF REVIEW
This court reviews grants of summary judgment de novo. Ford Motor Co.
v. Tex. Dep’t of Transp., 264 F.3d 493, 498 (5th Cir. 2001). Summary judgment
is proper “if the pleadings, the discovery and disclosure materials on file, and
any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(c).
This court “may affirm summary judgment on any legal ground raised below,
even if it was not the basis for the district court’s decision.” Performance
Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847, 853 (5th Cir. 2003).
Finally, as to the duty to defend, “[u]nder the eight-corners . . . rule, an insurer’s
duty to defend is determined by the third-party plaintiff’s pleadings, considered
in light of the policy provisions, without regard to the truth or falsity of those
allegations.” Gomez v. Allstate Tex. Lloyds Ins. Co., 241 S.W.3d 196, 202 (Tex.
2007). And, in making this determination, “allegations against the insured are
liberally construed in favor of coverage.” GuideOne, 197 S.W.3d at 308.
III. DISCUSSION
A. MSC Plan Claims
The first ground for Mary Kay’s alleged Policy coverage in the MSC Suit
concerns certain ERISA and COBRA claims relating to benefit plans of MSC,
which Mary Kay submits was covered as its “subsidiary” under the Policy.
These claims include breaches of fiduciary and co-fiduciary duty, 29 U.S.C. §§
1104, 1105, prohibited transactions, id. § 1106, and failures to offer plan benefit
appeal of the relevant findings is dismissed pursuant to Federal Rule of Appellate Procedure
28(a). See Yohey v. Collins, 985 F.2d 222, 225 (5th Cir. 1993).
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No. 07-10951
continuation and related information to participants, id. §§ 1161, 1166. As
described above, the district court found in favor of FIC based on its adoption of
a “coverage” exception to the “eight-corners rule” and, thereafter, its invocation
of the bankruptcy order. We affirm the district court’s finding, although we do
so on alternative grounds.
While appreciating the arguments for a limited “coverage” exception to the
“eight-corners rule,” we recognize that Texas has yet to adopt such an exception.
See, e.g., Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 497 (Tex. 2008)
(observing that “Texas has not” recognized an exception to the “eight-corners
rule”); GuideOne, 197 S.W.3d at 308–09 (acknowledging, without adopting, a
“coverage” exception to the rule); see also Northfield Ins. Co. v. Loving Home
Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004) (predicting, without applying, a
limited exception that the Texas Supreme Court might adopt). Nevertheless, it
is unnecessary for us to adopt it here because the district court’s finding can be
alternatively, and more directly, affirmed based on the fact that the MSC Suit’s
complaint—which is in the “eight corners”—fails to include any specific
allegations from which Mary Kay subsidiary status during the Policy term can
be discerned. See Northfield Ins. Co., 363 F.3d at 531 (“If all the facts alleged in
the underlying petition fall outside the scope of coverage, then there is no duty
to defend.”); King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002) (“If a
petition does not allege facts within the scope of coverage, an insurer is not
legally required to defend a suit against its insured.” (quotation omitted)).
The only possible allegation in the MSC Suit’s complaint relating to Mary
Kay’s position in MSC is through reference to an arguable Mary Kay subsidiary,
“MS Acquisition, Ltd.,” and a March 2001 Form 10-K stating that this entity
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No. 07-10951
“owned approximately 81.9% of the outstanding common shares of [MSC].” Yet,
not only does this assertion pre-date the Policy term, it pre-dates the bankruptcy
of MSC. Bankruptcy, by its very nature, “causes fundamental changes in the
nature of corporate relationships.” Commodity Futures Trading Comm’n v.
Weintraub, 471 U.S. 343, 355 (1985). This pre-Policy term timing is perhaps not
surprising given that the chief focus of the MSC Suit was on events surrounding
MSC’s bankruptcy, which occurred well before the Policy term. In any event,
stretching arguable ownership allegations from well before to after bankruptcy
in order to impose a duty to defend is simply a bridge too far, particularly given
the Policy’s present-tense definition of subsidiary—the Policy defines
“subsidiary” as any entity “in which more than 50% of the outstanding securities
or voting rights representing the present right to vote for election of directors is
owned or controlled, directly or indirectly . . . by [Mary Kay].” Thus, we hold
that the MSC plan-based claims in the MSC Suit are not covered by the Policy.4
Of course, the foregoing assumes that it is the Policy term, and not any
other prior point in time, that matters for coverage purposes. Mary Kay argues
that by the Policy’s references to “renew[ed]” policies—which would include the
2000–2002 policy—in its definition of “sponsored plan,” and to acts “before or
during the Policy period” in its coverage provision, the Policy “provides residual
coverage to Mary Kay.” Mary Kay’s argument is misguided. First, the operative
Policy term “subsidiary” is defined in the present tense. Second, language
4
It should be noted that, at least on appeal, Mary Kay seeks only a duty to defend from
FIC, and not indemnity. This is perhaps understandable given that, “[u]nlike the duty to
defend, the duty to indemnify is not based on the eight corners of the policy and the underlying
petition, but on the actual facts that form the underlying claim”—a situation that would likely
call for the bankruptcy order and, thus, doom an indemnity claim. Gomez, 241 S.W.3d at 205.
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No. 07-10951
elsewhere in the Policy indicates—at least during a term—that it only covers
new subsidiaries with further agreement (and a likely premium adjustment),
and does not cover divested subsidiaries. Third, although pre-existing act
coverage is understandable, particularly on a renewal, “perpetual coverage of
former subsidiaries,” as the district court put it, would likely present complex
underwriting issues. We cannot impose such risks on FIC without supporting
policy language. See King, 85 S.W.3d at 187 (observing that the duty to defend
depends upon “the language of the insurance policy”).
B. Mary Kay Plan Claims
Turning to the second ground for Mary Kay’s alleged entitlement to FIC
coverage—i.e., direct claims against Mary Kay under COBRA—we agree with
the district court. In asserting its entitlement to coverage, Mary Kay cites the
following language from the MSC Suit’s complaint: “Mary Kay was a member of
a controlled group of corporations . . . which included [MSC] . . . [and] Mary Kay
has failed to provide continuation coverage to the terminated [MSC] employees
and to otherwise satisfy any of the other obligations imposed upon [it] by
COBRA.” The relevant COBRA obligations—at least as alleged—concern the
provision of access to Mary Kay plan benefits under the relevant plan(s). See 29
U.S.C. § 1161. The problem for Mary Kay, however, is not its status as a covered
entity—indeed, whether as a control group member or not, the MSC Suit has
Mary Kay (which is an “insured”) and its plans (which are “sponsored”) clearly
in its sights—but whether the relevant COBRA claims are “wrongful acts” under
the Policy. We conclude that they are not.
The relevant Policy provisions, which are expressly described as providing
“fiduciary liability coverage,” only insure against claims of “wrongful acts.” The
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No. 07-10951
Policy defines “wrongful acts” as “any breach of the responsibilities, obligations
or duties imposed upon fiduciaries of the Sponsored Plan by [ERISA], as
amended, . . . or any negligent act, error or omission in the Administration of any
Sponsored Plan.” The district court properly found that the COBRA allegations
were not covered “wrongful acts” because any alleged failure to offer continuing
benefits under its plans rests on Mary Kay as a plan sponsor, and sponsorship
acts or omissions are not fiduciary in nature. See 29 U.S.C. § 1161(a); Lockheed
Corp. v. Spink, 517 U.S. 882, 890–91 (1996).
One is a “fiduciary” under ERISA only “to the extent . . . he exercises any
discretionary authority or discretionary control respecting management . . . or
disposition of [plan] assets . . . .” 29 U.S.C. § 1002(21)(A). Though some circuits
have allowed fiduciary-based relief for failure to advise participants of COBRA
rights, e.g., Bixler v. Cent. Pa. Teamsters Health & Welfare Fund, 12 F.3d 1292,
1301 (3d Cir. 1993), this court has taken care to distinguish between fiduciary
and statutory ERISA duties. Cf. Lopez v. Premium Auto Acceptance Corp., 389
F.3d 504, 509 & n.9 (5th Cir. 2004) (holding that the COBRA notice rule, 29
U.S.C. § 1166, is a statutory rule, not a contractual duty). More importantly, the
offer of such benefits in themselves—i.e., the core of the relevant claim in the
complaint—would require inclusion of new participants in Mary Kay’s plans,
and, as such, would be a settlor, not a fiduciary, function in any event. See
Spink, 517 U.S. at 890 (“sponsors who alter the terms of a plan [are not]
fiduciaries”); see also Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444 (1999)
(“ERISA’s fiduciary duty requirement simply is not implicated . . . [in] a decision
regarding the form or structure of the Plan such as who is entitled to receive
Plan benefits . . . .”). COBRA relief may have been available in the MSC Suit,
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No. 07-10951
but not as a fiduciary breach, as required for coverage under the Policy.
Mary Kay argues that even if the provision (or not) of COBRA benefits was
a settlor function, the MSC Suit “allege[s] negligent administration by Mary Kay
of its own benefits plan.” Mary Kay cites complaint allegations that it “failed to
otherwise satisfy any of the other obligations imposed on [it] by COBRA,” and
that MSC “sues” various agents of Mary Kay “for failing to disclose material
information, and making knowing and intentional misrepresentations to
participants in the Benefit Plans regarding . . . their rights to continuation
coverage under COBRA . . . .” The complaint defined “Benefit Plans” as “various
employee Benefit Plans that covered [MSC] employees, including without
limitation the [MSC] Employee Group Benefit Plan.”
Mary Kay’s claim of non-sponsor duties fails for two reasons. First, the
allegations that Mary Kay generally failed to comply with obligations of COBRA
cannot support a duty to defend, because the MSC Suit’s complaint only states
them in a conclusory fashion. See Cornhill Ins. PLC v. Valsamis, Inc., 106 F.3d
80, 85 (5th Cir. 1997) (“Texas courts do not look to conclusory assertions of a
cause of action in determining a duty to defend . . . [but to] the facts giving rise
to the alleged actionable conduct . . . .” ). Second, Mary Kay’s only other basis
for COBRA rights vis-a-vis Mary Kay plans—i.e., its alleged “fail[ure] to disclose
material information, and making knowing and intentional misrepresentations
to participants in the Benefit Plans”—excludes such plans because “Benefit
Plans” includes only those that “covered [MSC] employees.” The MSC Suit’s
complaint allegations regarding workers “los[ing] health coverage when their
employment was terminated shortly after [MSC] filed [for] bankruptcy” and
Mary Kay “fail[ing] to provide continuation coverage” defeat any claim that the
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complaint thought of Mary Kay’s plans as having “covered [MSC] employees,”
absent any theory of new enrollment via COBRA. MSC employees were never
so covered.5 Therefore, we affirm the district court on the Mary Kay plan claims.
IV. CONCLUSION
For the reasons stated above, we AFFIRM the district court’s grant of
summary judgment to FIC.
5
In support of its claim for Policy coverage, Mary Kay also invokes the Policy’s express
exception of COBRA from a list of certain statutory “wrongful act” exclusions. As the district
court found, however, exceptions to exclusions do not, in themselves, yield insurance coverage.
13