Provident Life & Accident Insurance v. Sharpless

                                                      United States Court of Appeals
                                                               Fifth Circuit
                                                            F I L E D
              IN THE UNITED STATES COURT OF APPEALS
                                                              April 9, 2004
                      FOR THE FIFTH CIRCUIT
                      _____________________             Charles R. Fulbruge III
                                                                Clerk
                           No. 03-30566
                      _____________________

PROVIDENT LIFE & ACCIDENT INSURANCE CO.,

                        Plaintiff - Counter Defendant - Appellee,

                              versus

MARY ELLEN SHARPLESS, M.D.,

                        Defendant - Counter Claimant - Appellant.

_________________________________________________________________

          Appeal from the United States District Court
              for the Middle District of Louisiana

_________________________________________________________________

Before JOLLY, DUHÉ, and STEWART, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

     Mary Ellen Sharpless, M.D. (“Sharpless”)1 appeals from a

declaratory judgment finding that a disability insurance policy

issued to her by Provident Life & Accident Insurance Company

(“Provident”) was void from its inception.         As part of that

judgment, Sharpless was ordered to repay all of the benefits that

she had collected under the policy, less the amount that had been

paid in premiums, for a total payment of $918,577.64, plus costs.

On appeal, Sharpless contends the district court erred in finding


     1
     Sharpless is also referred to as Mary Ellen Cory or Dr. Cory
in some of the court records.

                                 1
that: 1) her policy with Provident was governed by the Employee

Retirement Income Security Act of 1974 (“ERISA”); 2) she was not

entitled to a jury trial; 3) her claims under 29 LA. REV. STAT. §

22:619   were   preempted   by   ERISA;   and   4)   she   made   fraudulent

misstatements in her policy application.

                                    I

     On August 1, 1988, Sharpless, an anaesthesiologist, was hired

by Anaesthesia Research Specialists of Baton Rouge (“ASBR”), a

professional medical corporation composed of five physicians -- who

owned all of the corporation’s shares -- and their support staff.

ASBR provided two disability insurance plans.              The first plan,

which covered all employees (including the shareholders), was

issued by Fortis Insurance Company and provided disability benefits

of up to $5,000.00 per month.          The second plan, which was only

available to shareholding employees, was issued by Provident (the

“Provident   Plan”)   and   provided    disability    benefits    of   up   to

$12,000.00 per month.

     In January 1991, ASBR’s shareholders decided to increase their

benefits under the Provident Plan to $15,000.00 per month.              They

applied for the increased benefits in February 1991. Sharpless did

not become an ASBR shareholder until March 1, 1991; however,

because she had been informed she would soon be a shareholder, she

filled out the policy applications for the Provident Plan in

February 1991 along with the other doctors.



                                    2
     Each doctor was issued an individual policy by Provident, and

ASBR added the premium amounts for that policy to the doctors’ W-2

forms   as   salary    earned.      Nevertheless,         all    of    the    doctors,

including    Sharpless,        indicated       on     their     disability      policy

applications that ASBR would be paying their premiums.                       Both ASBR

and Provident treated the policies as if they were part of a group

plan:     Provident     gave     ASBR    its    10%    employer-sponsored           plan

discount, and ASBR paid Provident a lump sum each month to cover

all of the monthly premiums.

     Sharpless    filled    out    two     questionnaires         as   part    of    the

application for the Provident Plan.             Both questionnaires asked if

the applicant had ever been treated for, or ever had any known

indication of, a mental or emotional disorder. Both questionnaires

also asked if the applicant had ever sought help or treatment for

alcohol use.     The second questionnaire asked if the applicant had

ever used barbiturates.          Sharpless answered “no” to all of these

questions.       The   first     questionnaire         explicitly      stated       that

Provident would base the issuance of the policy on the applicant’s

answers to the questions.         Both questionnaires were incorporated

into the disability insurance policy issued to Sharpless (the

“Policy”). The Policy allowed for cancellation two years after the

Policy’s inception, but only if the applicant had made a fraudulent

misstatement in the application.




                                         3
      Sharpless’s medical records, presented at trial, revealed that

she   had   been   hospitalized   as   a   teenager   for   an   overdose   of

barbiturates.      They also showed that between 1992 and 1998, she

consistently reported that she had had depressed feelings since

adolescence, had seen a psychiatrist in 1984 during her previous

marriage, and had begun seeing a new psychiatrist, Dr. Breeden, in

January 1991 due to alcohol use.

      On December 3, 1997, Sharpless voluntarily stopped practicing

with ASBR due to severe depression.         She applied to Provident for

disability benefits and was awarded $15,000.00 per month, effective

December 3, 1997.      Provident does not contest that Sharpless was

fully disabled under the Policy terms as of December 3, 1997, or

that she continued to be so at the time of trial.

      On March 3, 2000, Provident filed a declaratory judgment

action in federal district court seeking both cancellation of the

Policy as void since its inception, and restitution for benefits

paid. Provident alleged that the Policy was void because Sharpless

had fraudulently made material misstatements in her application.

Sharpless denied the allegations and filed a counterclaim, alleging

defamation and bad faith breach of contract.           Sharpless requested

a jury trial on all claims.

      Initially, the district court found that the policy was not

covered by ERISA, but this finding was based on an incorrect

statement by an ASBR employee that the doctors were partners rather



                                       4
than shareholders.   The district court later vacated that ruling

when it became clear that the doctors were in fact shareholders.

The district court went on to conclude that the Policy should be

rescinded and that the benefits paid reimbursed with a credit for

premiums paid.    On May 19, 2003, the court entered judgment

accordingly, and Sharpless appealed.

                                 II

     The issues we will address are: 1) whether Sharpless’s Policy

was governed by ERISA; 2) whether Sharpless was entitled to a jury

trial; 3) whether Sharpless’s claims under 29 LA. REV. STAT. § 22:619

were preempted by ERISA; and 4) whether Sharpless made fraudulent

misstatements in her application.     We take these up in order.

                                  A

     ERISA’s applicability to the Policy is a factual question we

review for clear error.    See Reliable Home Health Care, Inc. v.

Union Central Ins. Co., 295 F.3d 505, 510 (5th Cir. 2002); FED. R.

CIV. P. 52(a).

     Sharpless contends that the Provident plan is exempt from

ERISA because the only people covered by the plan, the shareholding

doctors, were employers rather than employees.     ERISA only covers

employee welfare benefit plans that are “established or maintained

for the benefit of employees.”   Gahn v. Allstate Life Ins. Co., 926

F.2d 1449, 1451 (5th Cir. 1991); 29 U.S.C. § 1002(1).     To qualify

as an employee welfare benefit plan, a plan must cover at least one


                                  5
employee.   29 C.F.R. § 2510.3-3(b); Meredith v. Time Ins. Co., 980

F.2d 352, 358 (5th Cir. 1993).

     ERISA defines an employee as someone who is employed by an

employer.    29 U.S.C. § 1002(6).       The Supreme Court, noting that

this definition provides little guidance, held that, in the absence

of textual clues, courts should look to the federal common law in

order to determine who is an employee.        Nationwide Mutual Ins. Co.

v. Darden, 503 U.S. 318, 323 and 323 n.3 (1992).2          As the Supreme

Court recently clarified, however, here there is no need to look

outside ERISA itself.     Yates v. Hendon, 124 S.Ct. 1330, 1339 (2004)

(“ERISA’s text contains multiple indications that Congress intended

working owners to qualify as plan participants”).

     The Department of Labor’s interpretation of employee status

under    ERISA   also   provides   guidance    in   this   case.   ERISA

interpretations by the Department of Labor (“DOL”) are given great

deference. Meredith, 980 F.2d at 358; Robertson v. Alexander Grant

& Co., 798 F.2d 868 (5th Cir. 1986).      DOL regulations specify that


     2
      In particular, courts are to rely on the general common law
of agency. Darden, 503 U.S. at 323. Among other factors to be
considered in applying the right to control test are: the skills
required; the source of the instrumentalities and the tools; the
location of the work; the duration of the relationship between the
parties; whether the hiring party has the right to assign
additional projects to the hired party; the extent of the hired
party’s discretion over when and how long to work; the method of
payment; whether the work is part of the regular business of the
hiring party; whether the hiring party is in business; the
provision of employee benefits; and the tax treatment of the hiring
party. Id. These factors are to be considered together, with no
one factor being dispositive. Id.

                                    6
partners who wholly own a business are not normally employees of

that business under ERISA.     29 C.F.R. § 2510.3-3(b); Yates, 124

S.Ct. at 1344 (“Plans that cover only sole owners or partners and

their spouses . . . fall outside [ERISA’s] domain.”).   The same is

not true, however, of multiple shareholders who wholly own a

corporation.    See DOL Advisory Opinion 76-67, 1976 ERISA Lexis 58

(May 21, 1976).   In Advisory Opinion 76-67, the DOL explained that

a plan covering only corporate shareholders was exempt from ERISA

only if the company was wholly owned by one shareholder or by the

shareholder and his or her spouse.    Id.

     Moreover, “a working owner may have a dual status, i.e., he

can be an employee entitled to participate in a plan and, at the

same time, the employer . . . who established the plan.”    Yates,

124 S.Ct. at 1341-43 (also relying on DOL Advisory Opinion 99-04A,

26 BNA Pension and Benefits Rptr. 559, which clarified 29 C.F.R. §

2510.3-3(b)).

     The advisory opinions, in accord with Yates, lead to the

conclusion that shareholders in a multiple-shareholder corporation,

such as Sharpless, are employees under ERISA.3   The Provident Plan


     3
     Other courts have reached similar conclusions. See Leckey v.
Stefano, 263 F.3d 267, 271 (3d Cir. 2001) (shareholders were
employees when corporation was wholly owned by an individual, his
spouse, and his stepdaughter); Santino v. Provident Life & Accident
Ins. Co., 276 F.3d 772 (6th Cir. 2001) (joint shareholder who did
not either solely, or with his spouse, own all the stock of the
corporation was not an employee); In Re Baker, 114 F.3d 636, 640
(7th Cir. 1997) (majority shareholder was an employee where
corporation was not owned solely by shareholder or by shareholder

                                  7
was further covered by ERISA as an employer-sponsored plan in which

at least one employee participated, and the district court did not

err in holding that ERISA governed Sharpless’s Policy.

                                       B

      Whether Sharpless was entitled to a jury trial on Provident’s

claim for return of the amounts paid her under the Policy is a

legal question that this Court reviews de novo.              See Reliable Home

Health Care, Inc., 295 F.3d at 510.

      An ERISA restitution claim is equitable in nature and does not

provide a right to a jury trial.           Borst v. Chevron Corp., 36 F.3d

1308, 1323 (5th Cir. 1994); Calamia v. Spivey, 632 F.2d 1235, 1237

(5th Cir.      1980).     Sharpless   contends,    however,     that   she   was

entitled to a jury trial because Provident’s claim was legal rather

than equitable.

      Provident sought a judgment that the Policy was void since its

inception, and that Provident was therefore entitled to a return of

the   money    it   had   wrongly   paid   to   Sharpless.      It   based   its

contention on the Policy provision that allowed Provident to void

a contract in the event of a fraudulent misstatement by the

insured.      We agree and hold that because this action is based on a

Policy provision, seeking rescission of a contract instead of

monetary damages, it is an equitable action authorized by ERISA.


and his spouse); McDonald v. Metz, 225 B.R. 173 (9th Cir. B.A.P.
1998) (former spouses were employees of a corporation they had
wholly owned while married).

                                       8
See Borst, 35 F.3d at 1323; Calamia, 632 F.2d at 1237.   As there is

no right to a jury trial in such equitable actions, the district

court did not err in denying one.

                                 C

     Turning next to the preemption question, we review ERISA

preemption of state law de novo.      See Frank v. Delta Airlines,

Inc., 314 F.3d 195 (5th Cir. 2002).   ERISA preempts state laws that

“relate” to employee benefit plans. 29 U.S.C. § 1144(a); Tingle v.

Pacific Mutual Ins. Co., 996 F.2d 105, 108 (5th Cir. 1993).

However, state laws that “regulate” insurance are exempted from

ERISA preemption.   Id.

     Sharpless contends that the district court erred in finding

that her state law claims under 29 LA. REV. STAT. § 22:619 were

preempted by ERISA.   Sharpless bases her contention on a Supreme

Court opinion that was issued after the decision in this case,

Kentucky Assn. of Health Plans, Inc. v. Miller, 123 S.Ct. 1471

(2003).

     In Miller, the Supreme Court provided a new, simplified test

for ERISA preemption.     Miller, 123 S.Ct. at 1478.4     Under the


     4
       Before Miller, ERISA preemption was determined through a
two-part inquiry. Miller, 123 S.Ct. at 1478. The first part of
the inquiry was whether under a common-sense approach the statute
in question was a statute that regulated insurance.     Id.    The
second part of the inquiry was taken from the test used to
determine if a statute regulated the “business of insurance” and
asked whether the practice: 1) has the effect of transferring or
spreading a policy holder’s risk; 2) is an integral part of the
policy relationship between the insurer and the insured; and 3) is

                                 9
Miller guidelines, ERISA does not preempt a state statute if 1)

that statute is specifically directed towards entities engaged in

insurance, and 2) the statute substantially affects the risk

pooling arrangement between the insurer and the insured.                         Id.   The

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 insurer.”                   Id.   This change,

while significant in certain situations, does not affect our

analysis of ERISA’s preemption of § 22:619.

     Section      22:619      bars    insurance      companies    from      cancelling

insurance    contracts           because     of      innocent    or     non-material

misrepresentations by the insured party.                    Neither party contests

that § 22:619 is specifically directed towards entities engaged in

insurance.        We    are   then    left      to   consider    whether     §    22:619

substantially affects the risk pooling arrangement between the

insurer and the insured.             See Miller, 123 S.Ct. at 1478.

     This Court previously examined § 22:619 and concluded that

“although    [§        22:619]    does     shift      the    burden    of    innocent

misrepresentations (the legal risks) onto the insurer, it does not

spread the risk of insurance (health) coverage for which the

parties contracted.”          Tingle, 996 F.2d at 108.          The Tingle opinion

also noted that “[a]s we appreciate the term ‘spreading of risk’ in



limited to entities within the insurance industry.                     Id.

                                           10
the context of an insurance policy, the risk focused upon is that

risk for which the insurance company has specifically contracted to

reimburse the insured.”    Id. at 323 n.13.    Section 22:619 cannot be

said to substantially affect the risk pooling arrangement when

Tingle found that § 22:619 does not even address the risk for which

the insurance company contracted.

     Thus, we find no error in the district court’s conclusion that

Sharpless’s § 22:619 claims are preempted by ERISA.

                                    D

     Finally we come to the merits of the district court’s ruling.

We review the factual findings supporting the conclusion that

Sharpless made a fraudulent misstatement in her Policy application

for clear error.   See St. Martin v. Mobil Exploration & Prod. U.S.,

Inc., 224 F.3d 402, 408 (5th Cir. 2000).           Federal common law

governs rights and obligations stemming from ERISA-regulated plans,

including the interpretation of the Policy provisions at issue

here.   Wegner v. Standard Ins. Co., 129 F.3d 814, 818 (5th Cir.

1997) (citing Todd v. AIG Life Ins., 47 F.3d 1448, 1452-53 (5th

Cir. 1995).   When construing ERISA plan provisions, courts are to

give the   language   of   an   insurance   contract   its   ordinary   and

generally accepted meaning if such a meaning exists.          Id.

     Sharpless contends that the district court erred in its

finding that she made fraudulent misrepresentations on her Policy

application. The Policy provision at issue allows for cancellation



                                    11
due to “fraudulent misstatements” by the applicant.         Under federal

common law, a plaintiff claiming fraudulent misstatement must

prove:     1) that the defendant made a false statement; 2) that the

statement was material; 3) that the defendant knew the statement

was false at the time it was made, or that it was made recklessly

without any knowledge of its truth; and 4) that the false statement

was made with the intent to deceive.        Massachusetts Cas. Ins. Co.

v. Reynolds, 113 F.3d 1450, 1455-56 (6th Cir. 1997).

     The record is clear that Provident established that some of

Sharpless’s answers on her policy application were false, and

Sharpless knew they were false at the time she made them.            On her

policy application, Sharpless indicated that she had never had any

known indication of a mental or emotional disorder, had never

sought treatment for alcohol use, and had never used barbiturates.

Sharpless’s medical records showed that she had, in fact, once

overdosed on barbiturates in an attempted suicide and had seen a

psychiatrist in 1984.      Those records also showed that Sharpless

consistently told her health care providers that she had sought

treatment for alcohol use in January 1991, which was before she

filled out the Policy application. Sharpless only contradicted the

January 1991 date after Provident began its action against her.

     The    district   court   reasonably   concluded    that    Sharpless’s

statements to her health care providers, when she was seeking their

treatment, were more likely to reflect the truth than her later

testimony.       The   district   court’s   conclusion    that    Sharpless

                                    12
knowingly made false statements is fully supported by the record,

and thus is not clearly erroneous.

       Further, Sharpless knew that the application questionnaires

were going to be used by Provident to determine if it should issue

her a disability insurance policy. The district court’s conclusion

that Sharpless intended to deceive was supported by the evidence.

       Finally, Provident established that Sharpless’s fraudulent

misstatements were material to Provident’s decision to issue her

Policy.        Provident’s     policy       guidelines   call      for   policy

administrators to take into account all relevant information about

drug    and   alcohol   use    and   mental     impairments.       Provident’s

administrator testified that he would not have issued Sharpless a

policy if he had known of her prior suicide attempt, her continuing

history of depression, or her continuing treatment for alcohol use.

The    district   court’s     conclusion      that   Sharpless’s    fraudulent

misstatements are material was well-supported by the evidence.

       In sum, the district court’s factual findings with respect to

Sharpless’s fraudulent misstatements are not clearly erroneous.

                                      III

       For the foregoing reasons, the judgment of the district court

is

                                                                     AFFIRMED.




                                      13