United States Court of Appeals
Fifth Circuit
F I L E D
REVISED JANUARY 13, 2005
November 19, 2004
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 03-20623
LINDA ELLIS,
Plaintiff - Appellee - Cross-Appellant,
versus
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON,
Defendant - Appellant - Cross-Appellee,
--------------------
Appeal from the United States District Court
for the Southern District of Texas
--------------------
Before JOLLY, WIENER, and PICKERING, Circuit Judges.*
WIENER, Circuit Judge:
Defendant-Appellant-Cross-Appellee Liberty Life Assurance
Company of Boston (“Liberty”) appeals the district court’s denial
of its motion for summary judgment and that court’s grant of
summary judgment in favor of plaintiff-appellee-cross-appellant
Linda Ellis (“Ellis”). The district court concluded that no
genuine issue of material fact existed as to Ellis’s claim under
the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §
1001, et seq., and that she was entitled to summary judgment. The
*
Judge Pickering, whose dissent follows, participated in the
original panel process before he resigned.
court ultimately ruled that Liberty in its role as plan fiduciary
abused its discretion when it terminated Ellis’s long-term
disability (“LTD”) benefits because substantial evidence did not
demonstrate a change in her medical condition after Liberty
initially determined that Ellis qualified for LTD benefits. The
district court dismissed Ellis’s state-law claims, however, holding
that they are preempted by ERISA; and Ellis cross-appeals that
ruling. For the reasons that follow, we (1) affirm the district
court’s dismissal of Ellis’s state-law claims, (2) reverse the
district court’s grant of summary judgment and award of costs and
fees in favor of Ellis, and (3) grant summary judgment in favor of
Liberty, rendering a take-nothing judgment on Ellis’s ERISA claim.
I. FACTS AND PROCEEDINGS
A. The Policy
Liberty is a nationwide insurance carrier that issued a
disability insurance policy (“the Policy”) to Chase Manhattan Bank
(“Chase”) in January 1997. The Policy, which is an integral part
of an employee welfare benefits plan governed by ERISA, provides
LTD benefits to eligible Chase employees.
The Policy specifies that LTD benefits are payable for the
first 24 months of disability to a covered employee who is “unable
to perform all of the material and substantial duties of his
occupation on an Active Employment basis because of an Injury or
2
Sickness.”1 The Policy further provides that after 24 months, LTD
benefits continue to be payable if the disabled employee “is unable
to perform with reasonable continuity, all of the material and
substantial duties of his own or any other occupation for which he
is or becomes reasonably fitted by training, education, experience,
age and physical and mental capacity.”2 As the plan fiduciary,
Liberty is expressly vested with discretionary authority to make
all coverage, eligibility, and interpretation decisions with regard
to the Policy: “Liberty shall possess the authority, in its sole
discretion, to construe the terms of this policy and to determine
benefit eligibility hereunder.”3
1
Emphasis added.
2
Emphasis added.
3
Liberty urges that it is not the “plan administrator” as
defined in 29 U.S.C. § 1002(16)(A), but the “claims administrator”
or “claims fiduciary,” as defined in 29 U.S.C. § 1105(c). Although
our standard of review could hinge on which title is applicable to
Liberty, independent research satisfies us that Liberty is a
“fiduciary” as defined under 29 U.S.C. § 1002(21)(A) and thus
entitled to the deferential “abuse of discretion” standard of
review, irrespective of whether it is the plan administrator,
claims administrator, or plan fiduciary.
Another thorough review of the plan reveals no specific
designation of a “plan administrator.” Chase, however, is
specifically designated as the “plan sponsor.” Thus, under the
ERISA’s default provision, Chase is also the plan administrator.
See 29 U.S.C. § 1002(16)(A)(ii) (“The term ‘administrator’
means...if an administrator is not so designated, the plan
sponsor....”). Contrary to Liberty’s assertion, though, we cannot
conclude that it is the “claims administrator” under Section
1105(c) because in neither the plan nor any other document in the
record does Chase expressly delegate any authority to Liberty
(regrettably, the record does not contain, inter alia, the Summary
Plan Description). See 29 U.S.C. § 1105(c)(1) (stating that the
plan may “expressly” provide for procedures allocating fiduciary
3
B. Ellis’s Claim
In 1997, Chase hired Ellis as a mortgage loan officer. Ellis
worked at Chase until 1999, when she applied for short-term
disability (“STD”) benefits —— under a different Liberty policy ——
because she could no longer perform her job duties as a loan
officer. Although the exact nature of Ellis’s medical condition
remains somewhat unclear from the evidence in the record on appeal,
her medical records indicate that she might suffer from
fibromyalgia, a rheumatic syndrome that causes pain in muscles,
tendons, and fibrous and other connective tissues. Liberty
reviewed Ellis’s STD claim, approved it, and started paying her STD
benefits in January 2000.4
When Ellis’s STD benefits expired later that year, her claim
automatically converted into one for LTD benefits under the Policy.
responsibilities). Thus, without more, we would be required to
review Liberty’s interpretation of the plan de novo. See, e.g.,
Rodriguez-Abreu v. Chase Manhattan Bank, 986 F.2d 580, 584 (1st
Cir. 1993) (holding that because there was no express delegation of
fiduciary duty in plan documents to person or entity who made
termination of benefits decision, district court correctly applied
de novo standard of review); Madden v. ITT Long Term Disability
Plan, 914 F.2d 1279, 1283-84 (9th Cir. 1990) (same).
Nevertheless, we conclude —— and there is no dispute —— that
Liberty is a “fiduciary” under 29 U.S.C. § 1002(21)(A) because
Liberty is vested with “discretionary authority or discretionary
responsibility in the administration of [the] plan.” See 29 U.S.C.
§ 1002(21)(A)(iii). Accordingly, because Liberty is a fiduciary
that the plan vests with discretionary authority, we review
Liberty’s determinations under the abuse of discretion standard.
See Baker v. Metro. Life Ins. Co., 364 F.3d 624, 629-30 & n.12 (5th
Cir. 2004).
4
Liberty’s grant of STD benefits to Ellis for the maximum
period of six months is not before us on appeal.
4
Liberty then began to investigate whether Ellis’s claim fell within
the Policy’s definition of LTD. In June 2000, Liberty informed
Ellis by letter that it had reviewed her file and determined that
she was eligible for LTD benefits. Liberty also informed Ellis
that it would periodically require updated medical information “to
support total disability as defined by the Policy.” Liberty
continued its investigation, and, in light of additional medical
evidence that it subsequently gathered, Liberty determined that
Ellis was not eligible for LTD benefits. In December, Liberty
wrote to Ellis:
While it is apparent you were ill and met the criteria
for your policy’s definition of disability initially,
based on the medical information received, you no longer
meet your Long Term Disability Policy’s definition of
disability. Therefore, we must close your claim for
benefits, effective December 31, 2000.
The following month, Ellis administratively appealed Liberty’s
decision to terminate her LTD benefits. Ellis submitted further
medical information to Liberty, which forwarded her file to its
Managed Disability Services Unit (“MDSU”). The MDSU concluded that
no objective medical findings existed that would render Ellis
“disabled” within the contemplation of the Policy. Liberty then
affirmed its decision to terminate Ellis’s LTD benefits. (Liberty
has made no effort, however, to recoup the LTD benefits previously
paid to Ellis.)
In October, Ellis sued Liberty in Harris County, Texas. Ellis
asserted Texas statutory and common law claims for violations of
5
the state insurance code, breach of contract, and breach of the
duty of good faith and fair dealing. Liberty timely removed the
suit to the district court pursuant to 28 U.S.C. § 1441(b) on the
basis of ERISA preemption.
The following fall, after the close of discovery, Liberty
filed a motion for summary judgment seeking dismissal of Ellis’s
state-law claims. In response, Ellis filed a cross-motion for
summary judgment and sought to amend her complaint to state an
ERISA claim. The district court granted Ellis leave to amend her
complaint, and Liberty filed a supplemental motion for summary
judgment to dismiss her ERISA claim.
The district court eventually denied Liberty’s motion for
summary judgment and granted summary judgment to Ellis on her ERISA
claim. The court dismissed Ellis’s state-law claims, however,
holding that they were preempted by ERISA. The district court
subsequently issued a supplemental memorandum and order clarifying
its award of attorneys’ fees and prejudgment interest to Ellis,
ultimately entering final judgment in favor of Ellis.
Two days later, Ellis filed a motion to alter or amend the
judgment on the amount of damages, attorneys’ fees, and prejudgment
interest. The district court granted the motion in part,
increasing the quantum of Ellis’s future disability benefits and
6
clarifying the rate of prejudgment interest. Liberty timely filed
its notice of appeal.5
II. ANALYSIS
A. Leave to Amend Complaint
Liberty first argues that the district court erred when it
granted Ellis leave to amend her complaint to state an ERISA claim.
We review a district court’s decision to grant leave to amend a
complaint for abuse of discretion.6 Federal Rule of Civil
Procedure 15 states that leave to amend pleadings “shall be freely
given when justice so requires.”7 In determining whether to grant
leave, a district court may consider such factors as (1) undue
delay; (2) bad faith; (3) dilatory motive on the part of the
movant; (4) repeated failure to cure deficiencies by any previously
allowed amendment; (5) undue prejudice to the opposing party; and
(6) futility of amendment.8 Although the district court assigned
no reasons on the record for granting Ellis leave to amend her
5
On June 16, 2003, Liberty had prematurely appealed the
district court’s order of June 3, 2003, which granted Ellis’s
motion for summary judgment. The parties do not dispute that we
have jurisdiction because the appeal is now timely. See FED. R.
APP. P. 4(a)(2) (“A notice of appeal filed after the court announces
a decision or order —— but before the entry of the judgment or
order —— is treated as filed on the date of and after the entry.”).
6
Wimm v. Jack Eckerd Corp., 3 F.3d 137, 139 (5th Cir. 1993).
7
FED. R. CIV. P. 15.
8
Wimm, 3 F.3d at 139.
7
complaint, we are satisfied that it did not abuse its discretion
when it did so.
Although Liberty argues that Ellis’s amendment demonstrates
undue delay, bad faith, and dilatory motive, we find no evidence in
the record to support such an argument. Liberty’s strongest
argument concerns the potential prejudice that it may have suffered
as a result of Ellis’s filing of her amendment so late in the
proceedings in district court. We reject this argument. Liberty
removed Ellis’s state-court suit on the basis of ERISA preemption.
Ultimately, and as Liberty argued in its Notice of Removal, the
district court concluded that ERISA preempted all of Ellis’s state-
law claims.9 We have previously held that “ERISA’s preemptive and
civil enforcement provisions operate to ‘recharacterize’ such
claims into actions arising under federal law.”10 Thus, for removal
purposes, ERISA’s preemptive power recharacterized Ellis’s state-
law breach of contract claim as a claim arising under federal law,
specifically ERISA. Liberty might not have known with certainty
that Ellis’s breach of contract claim would be recharacterized as
an ERISA claim and that Liberty would ultimately have to litigate
such a claim. Having removed on the basis of ERISA preemption,
9
It is unclear whether the district court ruled that ERISA
preempted Ellis’s state-law claims through complete or conflict
preemption. Here, we assume that the district court found that
ERISA completely preempted only Ellis’s breach of contract claim
for removal purposes. See infra, note 26.
10
Ford v. Degan, 869 F.2d 889, 893 (5th Cir. 1989).
8
however, Liberty cannot now be heard to complain about the district
court’s grant of leave for Ellis to amend her complaint to include
an ERISA claim. There was no prejudice to Liberty, and the
district court did not abuse its discretion when it granted Ellis
leave to amend her complaint to state an ERISA claim.
B. Erisa Claim
1. Standard of Review
We review a district court’s grant of summary judgment de
novo.11 “Whether the district court employed the appropriate
standard in reviewing an eligibility determination made by an ERISA
plan administrator is a question of law.”12 We thus review this
decision de novo.13 When the ERISA plan vests the fiduciary with
discretionary authority to determine eligibility for benefits under
the plan or to interpret the plan’s provisions, “our standard of
review is abuse of discretion.”14 As the Policy vests Liberty, as
plan fiduciary, with the “sole discretion” to construe the terms of
11
Tolson v. Avondale Indus., Inc., 141 F.3d 604, 608 (5th Cir.
1998) (citing FDIC v. Myers, 955 F.2d 348, 349 (5th Cir. 1992)).
12
Lynd v. Reliance Standard Life Ins. Co., 94 F.3d 979, 980-81
(5th Cir. 1996) (citing Chevron Chem. Co. v. Oil, Chem. & Atomic
Workers Local Union 4-447, 47 F.3d 139, 142 (5th Cir. 1995)).
13
See id. at 981.
14
Tolson, 141 F.3d at 608.
9
and to award benefits under the Policy, we review Liberty’s
interpretation of the Policy for abuse of discretion.15
2. Plan Interpretation
We have previously explained in detail the appropriate two-
step process to review a plan fiduciary’s interpretation of its
plan:
First, a court must determine the legally correct
interpretation of the plan. If the administrator did not
give the plan the legally correct interpretation, the
court must then determine whether the administrator’s
decision was an abuse of discretion. In answering the
first question, i.e., whether the administrator’s
interpretation of the plan was legally correct, a court
must consider:
(1) whether the administrator has given the plan a
uniform construction,
(2) whether the interpretation is consistent with a fair
reading of the plan, and
(3) any unanticipated costs resulting from different
interpretations of the plan.16
If we determine that the fiduciary’s interpretation of the plan was
legally correct, the inquiry is over, pretermitting any need to
consider whether a legally incorrect interpretation of the
fiduciary was not an abuse of discretion.17
15
When the ERISA plan fiduciary is vested with discretionary
authority under the plan, our standard of review is the same as if
the fiduciary were the plan administrator under 29 U.S.C. § 1002.
See, e.g., Estate of Bratton v. Nat’l Union Fire Ins. Co. of
Pittsburgh, 215 F.3d 516, 520-21 (5th Cir. 2000) (noting that same
standard of review applies to plan administrators and fiduciaries).
16
Wildbur v. ARCO Chem. Co., 974 F.2d 631, 637-38 (5th Cir.),
modified, 979 F.2d 1013 (1992).
17
See id.; see also Tolson, 141 F.3d at 608 (“A determination
that a plan administrator’s interpretation is legally correct
pretermits the possibility of abuse of discretion.”).
10
We have also held that when a complaining participant or
beneficiary shows that the plan fiduciary has a conflict of
interest, we apply a sliding scale to the Wildbur standard: “The
greater the evidence of conflict on the part of the administrator,
the less deferential our abuse of discretion standard will be.”18
“The degree to which a court must abrogate its deference to the
administrator depends on the extent to which the challenging party
has succeeded in substantiating its claims that there is a
conflict.”19 In its Objections and Responses to Plaintiff’s Request
for Admissions, Liberty acknowledges that it has a financial
interest in the dollar value of the claims that are paid under the
Policy. This is enough to satisfy us that a legal conflict of
interest exists here. Accordingly, we apply the sliding-scale
standard of review articulated in Vega to Liberty’s interpretation
of its Policy provision.
As noted above, the LTD Policy provides that benefits are
initially payable only to an employee who is “unable to perform all
of the material and substantial duties of his occupation on an
18
Vega v. National Life Ins. Servs., Inc., 188 F.3d 287, 297
(5th Cir. 1999) (en banc) (discussing Wildbur).
Unlike the dissent, we will not read into Vega a presumption
that a conflict exists ipso facto merely because the plan fiduciary
both insures the plan and administers it. See MacLachlan v.
ExxonMobil Corp., 350 F.3d 472, 479 n. 8 (5th Cir. 2003). That an
ERISA plaintiff must come forward with evidence that a conflict
exists —— and that any reduction in the degree of our deference
depends on such evidence —— belies any duty on our part to make
such an assumption. See id.
19
MacLachlan, 350 F.3d at 479.
11
Active Employment basis because of an Injury or Sickness.”20 The
district court concluded that, under this language, Ellis would be
eligible to receive LTD benefits if she “could not perform any one
of the material duties of her occupation.”21
The district court erred when it interpreted the phrase
“unable to perform all” —— the language in the policy —— as
synonymous with “unable to perform any one.” We interpret “unable
to perform all” as synonymous with “not able to perform every.” In
other words, “unable” is synonymous with “not able,” and “all” is
synonymous with “every.” Applying the Wildbur methodology, we hold
that Liberty gave a legally correct interpretation to this
provision of the plan.
The first Wildbur factor —— whether the fiduciary has given
the plan a uniform construction —— weighs in favor of Liberty’s
interpretation. The district court mistakenly relied solely on the
deposition testimony of Liberty’s litigation manager, Paula McGee,
as support for crediting Ellis’s proffered interpretation that she
is entitled to LTD benefits if she is unable to perform “any one”
of the material and substantial duties of her occupation. McGee
testified:
Q. Under that definition, if Ms. Ellis could not perform
one of the material duties of her occupation, she would
be disabled?
A. Yes.
20
Emphasis added.
21
Emphasis added.
12
In a subsequent affidavit, however, McGee explained that counsel’s
question at the deposition confused her and that the company had
consistently interpreted “Disability” to mean a person who is
unable —— not able —— to perform all —— each and every one —— of
the material and substantial duties of her own occupation:
Liberty has consistently interpreted the Policy.
Specifically, when evidence reveals that during the first
24 months of disability, an employee is capable of
performing the material and substantial duties of her own
occupation, the Company has denied benefits. In my five
years of employment with Liberty, I cannot recall an
instance where this Policy provision was interpreted
differently.
McGee’s post-deposition affidavit is buttressed by the testimony of
Liberty’s disability claims consultant and its appeals consultant.
Both testified in depositions that Liberty decided to terminate
Ellis’s benefits by virtue of its interpretation that a disabled
person under the LTD Policy is a person who is not able to perform
every material and substantial duty of her occupation. All this
tips the scale in favor of Liberty on the first Wildbur factor.
The next Wildbur factor —— whether Liberty’s interpretation is
“consistent with a fair reading of the plan” —— also supports
Liberty’s interpretation. For Ellis to qualify for LTD benefits
under the Policy, Liberty determined that she had to show that she
could not perform “each” of the material and substantial duties of
her occupation; in other words, “each and every duty” or “every
single duty.” This is consistent with a fair reading of the plain
wording of the plan. There is no dispute that the Policy language
13
requires that Ellis be unable to perform all of the material and
substantial duties of her occupation to receive LTD benefits. We
conclude that in the context of the Policy as a whole, a fair
reading of the term “unable to perform all” is that Ellis is not
disabled for purposes of LTD if she can perform “at least one” of
the material and substantial duties of her occupation. Ellis’s
proffered interpretation, that she is disabled if she cannot
perform one (“any one”) of the material and substantial duties of
her occupation —— i.e., “unable to perform all” means “not able to
perform any one” —— cannot be squared with the Policy’s language.
Our conclusion that Liberty’s interpretation is legally
correct is strengthened by consideration of the third Wildbur
factor —— whether a different interpretation of the plan would
result in unanticipated costs to the plan. A comparison of the
Policy provisions that define “Disability” and “Partial Disability”
in pari materia leads inescapably to the conclusion that adoption
of Ellis’s proffered interpretation would lead to Liberty’s
incurring of unanticipated costs. Section 4 of the Policy defines
Partial Disability:
“Partial Disability” or “Partially Disabled” means as a
result of the Injury or Sickness, the Covered Person is:
1. able to perform one or more, but not all, of the
material and substantial duties of his own or any other
occupation on an Active Employment or a part-time basis
. . .22
22
Emphasis added.
14
Liberty reasons with irrefutable logic that if we were to credit
Ellis’s interpretation of “Disability,” the definitions of
“Disability” and “Partial Disability” would conflate these separate
categories into one, i.e., there would be no difference between the
eligibility prerequisites for total disability and those for
partial disability. It follows that if that were the case, Liberty
would be required to provide both LTD and partial disability
benefits to a covered employee if he could not perform “any one” of
the material and substantial duties of his occupation, a patently
absurd result. If the definition of long term disability were
interpreted to mean “unable to perform just one,” as Ellis urges,
“unable to perform all” in the definition of Disability would be
synonymous with “unable to perform one or more” in the definition
of Partial Disability. That simply cannot be: Such a reading
would render partial disability’s phrase “but not all” meaningless
surplusage, not to mention putting it in direct conflict with
Ellis’s proffered interpretation of “all” in the phrase “unable to
perform all” in the definition of Disability. Obviously, this
cannot be the intended result under the Policy and —— just as
obviously —— unanticipated costs would be incurred by Liberty.
Ellis attempts to counter by asserting that Liberty’s
interpretation is legally incorrect because “[u]nder this contorted
interpretation, virtually no person could ever satisfy the
definition of ‘Disability.’” Ellis offers the example of a
secretary who is rendered paraplegic, contending that this employee
15
would not be disabled under Liberty’s interpretation if she could
sit at her desk in a wheelchair and answer a speaker phone.
Ellis’s argument ignores, however, the two adjectives that modify
“duties” —— “material and substantial.” Merely because a disabled
employee can perform a minor, collateral duty of his job, e.g.,
answering a speaker phone, would not justify the plan fiduciary’s
considering such an employee ineligible for benefits under
Liberty’s interpretation of the LTD Policy. In such a situation,
the disabled employee would be disabled under Liberty’s
interpretation, despite his ability to perform minor duties, as
long as he could not —— was “unable to” —— perform any of the
material and substantial duties of his occupation. We conclude
that Ellis would have to demonstrate that she cannot perform
“every single” or “each and every” “material and substantial duty
of her occupation” —— which she could not prove —— to obtain LTD
benefits. Liberty gave a legally correct interpretation of the
plan provision in question.23
23
Even if we were to assume, arguendo, that Liberty, as a plan
fiduciary with a Vega conflict, was not legally correct, we would
hold that Liberty did not abuse its discretion vested by the
Policy, and that Ellis could not recover. To determine whether the
plan fiduciary abused its discretion, we consider: (1) the internal
consistency of the plan under the administrator’s interpretation;
(2) any appropriate regulations formulated by the appropriate
administrative agencies; and (3) the factual background of the
determination and any inferences of lack of good faith. Wildbur,
974 F.2d at 638.
The first Wildbur factor for determining abuse of discretion
—— the internal consistency of the plan under the plan fiduciary’s
interpretation —— weighs in favor of Liberty’s interpretation, as
our discussion on the relationship between “Disability” and
16
Among the rest of Ellis’s arguments, we perceive that two
merit brief consideration. The first concerns the burden of proof
under ERISA. Ellis insists that substantial record evidence
supports her claim of total disability, in light of which Liberty
abused its discretion when it determined that she was not disabled.
This argument misapprehends the burden of proof under ERISA. The
law requires only that substantial evidence support a plan
fiduciary’s decisions, including those to deny or to terminate
benefits, not that substantial evidence (or, for that matter, even
a preponderance) exists to support the employee’s claim of
disability.24 Substantial evidence is “more than a scintilla, less
than a preponderance, and is such relevant evidence as a reasonable
“Partial Disability” demonstrates. Adoption of Ellis’s proffered
interpretation would render the language in the “Partial
Disability” provision superfluous and inconsistent with that in the
“Disability” provision. The second Wildbur factor —— any relevant
administrative agency regulations —— is neutral as we have found
none that apply here. The third Wildbur factor also weighs in
favor of Liberty. Although Ellis may urge that Liberty made its
decision in bad faith, the fact that Liberty initially granted her
LTD benefits under the Policy supports a finding of good faith on
Liberty’s part. Further, as we note below, merely because Liberty
initially granted Ellis benefits, it is not estopped from
terminating those benefits when substantial evidence supports its
decision. A careful and thorough review of the administrative
record eschews a conclusion of abuse of discretion in Liberty’s
decision to terminate Ellis’s benefits.
24
See, e.g., Meditrust Fin. Servs. Corp. v. Sterling Chem.,
Inc., 168 F.3d 211, 215 (5th Cir. 1999) (“When reviewing for
arbitrary and capricious actions resulting in an abuse of
discretion, we affirm an administrator’s decision if it is
supported by substantial evidence.”).
17
mind might accept as adequate to support a conclusion.”25 We are
aware of no law that requires a district court to rule in favor of
an ERISA plaintiff merely because he has supported his claim with
substantial evidence, or even with a preponderance. If the plan
fiduciary’s decision is supported by substantial evidence and is
not arbitrary and capricious, it must prevail.
The second argument that we address is more problematic, as it
tangentially concerns the degree or level of proof that is needed
to sustain a plan fiduciary’s interpretation of its policy
provision. The crux of the dispute here is whether —— as Ellis
contends and the district court ruled —— a plan fiduciary’s
decision to terminate LTD benefits once it has initially agreed to
provide them must be supported by evidence that a substantial
change in the covered employee’s medical condition occurred after
the initial grant of benefits. The parties dispute whether a
higher standard of proof is required to sustain a plan fiduciary’s
decision to terminate benefits once granted than is needed to
sustain a plan fiduciary’s initial denial of benefits. Ellis
argues that because Liberty initially determined that she qualified
for LTD benefits, it abused its discretion when it terminated her
LTD benefits months later, without medical evidence reflecting that
a substantial change in her condition had occurred in the interim.
25
Deters v. Secretary of Health, Educ. & Welfare, 789 F.2d
1181, 1185 (5th Cir. 1986) (citing Richardson v. Perales, 402 U.S.
389, 401 (1971)).
18
The district court accepted Ellis’s evidentiary dichotomy and ruled
that the absence of credible, substantial, or positive evidence in
the record to demonstrate that Ellis had become medically
ineligible for permanent disability benefits after having been
found eligible initially precluded Liberty from terminating the
benefits previously granted.26
We disagree with the district court’s view of the applicable
law. We have found no statutory, regulatory, or jurisprudential
authority —— and neither Ellis nor the district court has cited any
to us —— that would heighten the level of the proof needed for a
plan fiduciary to determine entitlement or non-entitlement to LTD
benefits simply because the fiduciary previously had approved
entitlement and paid benefits to the employee in question. The
district court committed legal error when it concluded that, once
the fiduciary approves entitlement to LTD benefits, subsequent
termination of those benefits would have to be supported by
substantial evidence of a change in the employee’s condition. We
have never articulated such an evidentiary distinction or imposed
such a requirement on the plan fiduciary: All that ERISA requires
is that substantial evidence support a plan fiduciary’s benefits
decision —— whether it be to deny benefits initially or to
terminate benefits previously granted —— when, as here, the plan
26
We note that the district court still reviewed Liberty’s
interpretation of the LTD Policy provisions for abuse of
discretion.
19
fiduciary is vested with the discretion to determine, inter alia,
both initial and continued eligibility for benefits. In the
investigation that continued following its initial grant of LTD
benefits to Ellis, Liberty acquired subsequent medical evidence
that supported termination of her LTD benefits months after it had
approved Ellis’s entitlement to them on the basis of the evidence
that it had before it at that time.
We hold that when a plan fiduciary initially determines that
a covered employee is eligible for benefits and later determines
that the employee is not, or has ceased to be, eligible for those
benefits by virtue of additional medical information received, the
plan fiduciary is not required to obtain proof that a substantial
change in the LTD recipient’s medical condition occurred after the
initial determination of eligibility. Indeed, evidence could exist
—— as it did here —— at the time that the plan fiduciary initially
granted benefits that demonstrates that the ERISA plaintiff is not
totally disabled. In addition, a plan fiduciary could receive
evidence that an ERISA plaintiff is not totally disabled months
after it has made the initial grant of benefits. A contrary
holding would basically prohibit a plan fiduciary from ever
terminating benefits if it later discovered evidence that the ERISA
plaintiff was not disabled at the time of the initial grant of
benefits.27 More importantly to plan participants and
27
This is especially true in a case such as this, where some
of the evidence on which Liberty relied to deny LTD benefits to
20
beneficiaries, such a rule would have a chilling effect on the
promptness of granting initial benefits in the first place. This
we are unwilling to do. A plan fiduciary that has granted plan
benefits to a participant or beneficiary is not estopped from
terminating those benefits merely because there is no evidence that
a substantial change in the covered employee’s medical condition
occurred after the original grant of benefits.
3. Attorneys’ Fees and Costs
As we reverse the district court’s grant of summary judgment
in favor of Ellis, we vacate the award of costs and attorneys’ fees
to Ellis.
4. Preemption
Ellis cross-appeals the district court’s ruling that ERISA
preempts her state-law claims. She sued Liberty for violations of
Texas Insurance Code (“TIC”) articles 21.21 and 21.55 and for
breaches of the common law duty of good faith and fair dealing. TIC
article 21.21 prohibits unfair competition and unfair practices by
insurance companies and subjects them to civil liability for
violations.28 TIC article 21.55 subjects insurance companies to
civil liability if they unfairly and untimely process and treat a
claim.29 With respect to Ellis’s common-law claim, the courts of
Ellis arose in May and June 2000, before it initially granted her
LTD benefits.
28
See TEX. INS. CODE § 21.21.
29
See TEX. INS. CODE § 21.55.
21
Texas have held that “[a] cause of action for breach of the duty of
good faith and fair dealing is stated when it is alleged that there
is no reasonable basis for denial of a claim or delay in payment or
a failure on the part of the insurer to determine whether there is
any reasonable basis for the denial or delay.”30 Ellis argues that
the United States Supreme Court’s holding in Kentucky Association
of Health Plans, Inc. v. Miller31 brings her claims under ERISA’s
savings clause.32 We review ERISA preemption of state law de novo.33
Under conflict preemption,34 ERISA preempts state laws
30
Arnold v. Nat’l County Mut. Fire Ins. Co., 725 S.W.2d 165,
167 (Tex. 1987).
31
538 U.S. 329, 341-42 (2003).
32
29 U.S.C. § 1144(b)(2)(B) (“Neither an employee benefit plan
described in section 1003(a) of this title, which is not exempt
under section 1003(b) of this title (other than a plan established
primarily for the purpose of providing death benefits), nor any
trust established under such a plan, shall be deemed to be an
insurance company or other insurer, bank, trust company, or
investment company or to be engaged in the business of insurance or
banking for purposes of any law of any State purporting to regulate
insurance companies, insurance contracts, banks, trust companies,
or investment companies.”).
33
Provident Life & Accident Ins. Co. v. Sharpless, 364 F.3d
634, 640 (5th Cir. 2004).
34
There are two types of preemption under ERISA. ERISA may
occupy a particular field, which results in complete preemption
under 29 U.S.C. § 1132(a). See Metropolitan Life Ins. Co. v.
Taylor, 481 U.S. 58, 66 (1987). “Section 502 [1132(a)], by
providing a civil enforcement cause of action, completely preempts
any state cause of action seeking the same relief, regardless of
how artfully pleaded as a state action.” Giles v. NYLCare Health
Plans, Inc., 172 F.3d 332, 337 (5th Cir. 1999). Complete
preemption permits removal to federal court because the cause of
action arises under federal law. See id. The parties do not
dispute, and the district court properly concluded, that for
22
“insofar as they may now or hereafter relate to any employee
benefit plan.”35 As an exception, however, ERISA’s so-called
savings clause allows state laws “which regulate insurance,
banking, or securities” to survive ERISA preemption.36 In Miller,
the Supreme Court simplified the test for ERISA conflict preemption
when it made a clean break with the McCarran-Ferguson factors that
it traditionally applied to determine whether a state statute
regulated insurance and thus survived preemption under ERISA’s
saving clause.37 After Miller, for a state law to be deemed a “law
purposes of removal, Ellis’s state law breach of contract claim
arose under federal law because it is one for the recovery of
benefits under Section 1132(a). See Arana v. Ochsner Health Plan,
338 F.3d 433, 438 (5th Cir. 2003) (en banc) (noting that a claim
“to recover benefits . . . under the terms of [a] plan” or a claim
“to enforce . . . rights under the terms of [a] plan” is
completely preempted under Section 1132(a)). Accordingly, the
district court properly exercised supplemental jurisdiction over
Ellis’s remaining state-law claims under 28 U.S.C. § 1367. See
Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 187 (4th
Cir. 2002).
In contrast, ERISA preempts a state law action under 29 U.S.C.
§ 1144(a) when it conflicts with the state law. Bullock v.
Equitable Life Assur. Soc. of U.S., 259 F.3d 395, 399 (5th Cir.
2001). Conflict preemption does not allow removal to federal court
but is an affirmative defense against claims that are not
completely preempted under Section 1132(a). Giles, 172 F.3d at 337.
We assume for purposes of this appeal, and because the parties
dispute Miller’s applicability to the claims here, that the
district court found that Ellis’s three remaining state-law claims
were preempted under Section 1144(a), ERISA’s conflict preemption
provision. We therefore do not consider whether Section 1132(a)
completely preempts Ellis’s state-law claims.
35
29 U.S.C. § 1144(a).
36
Id. § 1144(b)(2)(A).
37
538 U.S. at 339. Under the McCarran-Ferguson factors, the
Court considered whether (1) the practice had the effect of
23
. . . which regulates insurance” under Section 1144(b)(2)(A) and
thus be exempt from traditional ERISA preemption, such law must (1)
be directed toward entities engaged in insurance, and (2)
substantially affect the risk pooling arrangement between the
insurer and the insured.38
On the one occasion that we considered Miller’s change to
ERISA preemption, we observed that “[t]he only pertinent difference
between the Miller analysis and the previous test is that in place
of the second Miller inquiry, the previous test asked whether the
statute in question ‘transfers or spreads the risk from the insured
to the insurer.’”39 Also, prior to Miller, we held that ERISA
preempts TIC articles 21.2140 and 21.5541 as well as the Texas common
law duties of good faith and fair dealing.42 Thus, we need only
answer whether the “simplified” Miller analysis affects our prior
holdings. We conclude that it does not with respect to Ellis’s
state-law claims. Thus, ERISA preempts Ellis’s common law claim
transferring or spreading a policyholder’s risk; (2) the practice
is an integral part of the policy relationship between the insured
and the insurer; and (3) whether the practice is limited to
entities within the insurance industry. See id.
38
Id. at 341-42.
39
Sharpless, 364 F.3d at 640.
40
Hogan v. Kraft Foods, 969 F.2d 142, 144-45 (5th Cir. 1992)
(and cases cited therein).
41
McNeil v. Time Ins. Co., 205 F.3d 179, 191-92 (5th Cir.
2000).
42
Hogan, 969 F.2d at 144-45 (and cases cited therein).
24
for breach of the duties of good faith and fair dealing.
Specifically, this common law doctrine fails the first prong of the
Miller analysis because it is not directed toward entities engaged
in insurance.43
Regarding Ellis’s two statutory claims, Liberty contends that
TIC articles 21.21 and 21.55 likewise fail the first prong of the
Miller analysis because they address the misconduct of insurers and
thus do not regulate insurance. This argument misses the mark. As
the Supreme Court noted in Rush Prudential v. Moran, to determine
whether a law “regulates insurance,” “we start with a ‘common-sense
view of the matter,’ . . . under which ‘a law must not just have an
impact on the insurance industry, but must be specifically directed
toward that industry.’”44 In Moran, the Supreme Court went on to
hold that “when insurers are regulated with respect to their
insurance practices, the state law survives ERISA.”45 In Sharpless,
we analyzed the effect of the Miller decision on our ERISA
preemption analysis, noting that Miller had not changed this
factor.46 Indeed, whereas the McCarran-Ferguson analysis required
that we determine whether the practice “is limited to entities
43
See Miller, 538 U.S. at 334 (“[L]aws of general application
that have some bearing on insurers do not qualify.”).
44
536 U.S. 355, 365-66 (2002) (quoting Pilot Life Ins. Co. v.
Dedeaux, 481 U.S. 41, 50 (1999)).
45
Id. at 366.
46
364 F.3d at 640.
25
within the insurance industry,”47 the Miller analysis merely
requires that we determine whether the “statute is specifically
directed towards entities engaged in insurance.”48 TIC articles
21.21 and 21.55 are undeniably directed toward entities engaged in
insurance, as they regulate any possible unfair practices and
expose the insurer to civil liability for violations of the
statutes. We are satisfied therefore that articles 21.21 and 21.55
satisfy the first prong of the Miller analysis.
To survive ERISA preemption, however, TIC articles 21.21 and
21.55 must also satisfy Miller’s second prong; they must
“substantially affect the risk pooling arrangement between the
insurer and the insured.”49 We hold that these two articles do not.
In Miller, the Supreme Court explained that, to affect the
risk-pooling arrangement, a statute must “alter the scope of
permissible bargains between insurers and insureds” and thus
substantially affect the risk-pooling “arrangements that insurers
may offer.”50 TIC articles 21.21 and 21.55 are remedial in nature
—— they provide remedies “to which the insured may turn when
injured by the bad faith of the insurer.”51 Being remedial, these
47
Id. at 640 n. 4 (emphasis added).
48
Id. at 640 (emphasis added).
49
538 U.S. at 342.
50
538 U.S. at 338-39.
51
Barber v. UNUM Life Ins. Co. of Am., 383 F.3d 134, 143 (3d
Cir. 2004).
26
two articles cannot possibly affect the bargain that an insurer
makes with its insured ab initio. They provide only that “whatever
the bargain struck,” the insured may recover additional damages if
thereafter the insurer acts in bad faith or unfairly.52 As TIC
articles 21.21 and 21.55 provide remedies above and beyond those
provided in ERISA, they are remedial in nature and do not affect
the risk —— here, the covered employee’s disability —— for which
the insured contracted with the insurer.53
Within the insurance industry, “risk” signifies “the risk of
occurrence or injury or loss for which the insurer contractually
agrees to compensate the insured.”54 Here, the risk pooled is that
of long-term disability, and this risk is reflected in the terms of
the Policy itself. The remedies that TIC articles 21.21 and 21.55
provide for unfair practices and bad faith are not risks identified
in the Policy as a risk of loss that Liberty agrees to bear for
52
See id. at 143; see also Pilot Life, 481 U.S. at 49-51
(holding that “the common law of bad faith does not define the
terms of the relationship between the insurer and the insured; it
declares only that, whatever terms have been agreed upon in the
insurance contract may in certain circumstances allow the
policyholder to recover punitive damages”).
53
See, e.g., TEX. INS. CODE § 21.21(16)(b)(1) (providing treble
damages for violations of article 21.21; Stewart Title Guaranty Co.
v. Sterling, 822 S.W.2d 1, 9 (Tex. 1991) (noting that treble
damages under article 21.21 are punitive in nature).
Article 21.55 also provides a statutory penalty of 18%
interest for an insurance company’s failure to comply with its
provision. See Evergreen Nat’l Indem. Co. v. Tan It All, Inc., 111
S.W.3d 669, 678 (Tex. Ct. App. 2003).
54
Barber, 383 F.3d at 143.
27
Chase or for Ellis and other similarly situated Chase employees.
As a basic tenet of insurance law, the insurance policy “defines
the scope of risk assumed by the insurer from the insured.”55 Here,
Liberty did not contract with Chase or Ellis to assume the risk of
any unfair practices or bad faith violations. As TIC articles
21.21 and 21.55 fail Miller’s second prong, Ellis’s claims grounded
in violations of those articles are preempted by ERISA.
III. CONCLUSION
We affirm the district court’s dismissal of Ellis’s state-law
claims and that court’s grant of leave to Ellis to amend her
complaint. We reverse the district court’s grant of summary
judgment and award of costs and fees in favor of Ellis, and we
grant summary judgment in favor of Liberty, rendering a take-
nothing judgment against Ellis on her ERISA claim.
AFFIRMED IN PART, REVERSED AND RENDERED IN PART.
55
Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 131
(1982).
28
Pickering, Circuit Judge, dissenting:
I respectfully dissent.
As an initial matter, I disagree with the majority’s conclusion that “unable to perform all of
the material and substantial duties of his occupation” can only mean unable to perform “each and
every one” of the material and substantial duties of an occupation, so that if an employee can perform
even one material and substantial duty of his or her occupation, the employee is not disabled.
Although this is a reasonable interpretation of the policy language, the policy language is ambiguous
and susceptible to more than one reasonable interpretation. I would interpret the policy provision
differently. If there are ten material and substantial duties of an occupation and the employee can
perform only six of those ten duties, then the employee is by definition “unable to perform all of the
material and substantial duties” of the occupation. That too is a reasonable interpretation. The
ambiguity should be construed against the insurer. See Wegner v. Standard Ins. Co., 129 F.3d 814,
818 (5 th Cir. 1997). But to construe the policy differently than the administrator would create an
internal inconsistency between the policy provisions for total disability and partial disability.
Consequently, though I disagree with the majority’s interpretation of the policy, this issue is not
outcome determinative.
However, I do respectfully dissent from the majority’s conclusion that when a plan
administrator initially determines that a covered employee is eligible for benefits and later determines
that the employee is not eligible for those benefits, the plan administrator may terminate benefits
without demonstrating that its initial decision was erroneous, or without substantial evidence of a
change in the claimant’s medical condition.
29
Because this case involves an insurer who is also the plan administrator, producing a direct
conflict of interest on the part of the administrator, we apply a sliding-scale standard of deference to
the administrator’s decision. See Vega v. Nat’l Life Insur. Servs., 188 F.3d 287, 294-99 (5th Cir.
1999). Under such circumstances, this court still applies the abuse of discretion standard, “but gives
less deference to the administrator in proportion to the administrator’s apparent conflict.” Id. at 296.
Where there is a conflicted administrator, “the administrator has a financial incentive to deny the claim
and often can find a reason to do so.” Id. The court must “focus on whether the record adequately
supports the administrator’s decision.” Id. at 298. “[W]e are less likely to make forgiving inferences
when confronted with a record that arguably does not support the administrator’s decision.” Id. at
299.
At the summary judgment stage, it is the movant who has the burden of showing that there
is no genuine issue of material fact. The parties agree that this claim involves a policy of insurance
issued by Liberty. Liberty is the administrator. All reasonable inferences are to be drawn in favor of
Ellis. If Liberty pays a claim it is not unreasonable to infer that every penny of the claim comes
directly out of Liberty’s coffers. Any argument that the administrator did not have a direct and total,
or almost total conflict of interest in this situation is to ignore reality. The fox guarding the chicken
30
house is not entitled to great deference.56 Thus, in analyzing the administrator’s decision to terminate
benefits, I would give little deference to the administrator’s exercise of discretion.
It is undisputed that the administrator initially determined that Ellis was entitled to disability
benefits based on the medical evidence, and later reaffirmed that fact in the letter of termination.
I would hold as a matter of law, that once the administrator determined Ellis was entitled to disability
benefits, a subsequent termination of those benefits would be an “arbitrary and capricious” decision
by the administrator, and hence an abuse of discretion, unless there is substantial evidence to support
either (1) that the initial decision to grant benefits was incorrect; or (2) that there has been a change
in condition that would justify the termination of benefits. Once the administrator has exercised its
discretion and determined that a claimant is entitled to benefits, a later decision to terminate those
vested disability benefits without justification is by definition arbitrary and capricious and an abuse
of discretion. See Meditrust Financial Servs. v. Sterling Chemicals, 168 F.3d 211, 215 (5th Cir.
1999) (holding that administrator’s decision is arbitrary if made without rational connection between
known facts and the decision or between found facts and the evidence).
In the termination letter of December 22, 2000, the administrator acknowledged that “it is
apparent” that Ellis “met the criteria for [her] policy’s definition of disability initially.” Thus, in the
opinion of the administrator the initial decision to grant disability benefits was correct. The
56
The majority in a footnote contends that MacLachlan v. ExxonMobil Corp., 350 F.3d 472,
479 n.8 (5th Cir. 2003), demonstrates that there should be no ipso facto presumption of a conflict.
No such presumption is required. The parties admit to the conflict. As this court stated in
MacLachlan:
this court’s decisions, following Vega, that have found an apparent conflict of interest
are ones in which a claim was denied by the insurance company that did not employ
the claimant, but instead was contractually obligated to make payments under the
employer’s plan. . . .This is a significant distinction. . . .
Id. at 479 n.8. This is precisely the factual situation in this case.
31
administrator made no effort to show that the initial decision was wrong, but to the contrary,
reaffirmed the initial determination. The question then becomes whether there was a change in
condition that would justify the later termination of benefits. The majority opinion fails to answer this
question.
In the termination letter, the administrator listed (with little explanation of its relevance) the
medical evidence used in support of the decision to terminate benefits. The district court analyzed
this evidence and found that it did not support the administrator’s conclusion to terminate benefits.
I agree. I would affirm the district court for basically the same reasons given in the district court’s
opinion. The record does not adequately support the administrator’s decision to terminate benefits
because the administrator admitted that the plaintiff was not initially disabled and because there was
no substantial evidence of a subsequent change in condition. Thus, the administrator abused its
discretion.
The majority contends that the dissent argues that a plan administrator cannot reverse an
initial erroneous decision to pay benefits. Contrary to the majority’s characterization, I certainly
would agree that an insurer can correct an erroneous initial decision to pay benefits, but only if there
is substantial evidence to support that decision. But in this case the administrator, Liberty,
acknowledged, even in its letter of termination, that the initial determination to award benefits was
appropriate.
For the above reasons, I respectfully dissent.
32