Cypress Fairbanks v. Pan-American Life ( 1997 )

United States Court of Appeals,
Fifth Circuit.
No. 96-20850
Summary Calendar.
CYPRESS FAIRBANKS MEDICAL CENTER INC., Plaintiff-Appellant,
v.
PAN-AMERICAN LIFE INSURANCE COMPANY; National Insurance
Services, Inc., Defendants-Appellees.
April 17, 1997.
Appeal from the United States District Court for the Southern
District of Texas.
Before DAVIS, EMILIO M. GARZA and STEWART, Circuit Judges.
STEWART, Circuit Judge:
This case requires us to determine the scope of our decision
in Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236
(5th Cir.1990), in which we held that a third-party provider's
state-law claim for misrepresentation of medical coverage was not
preempted by the Employee Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. §§ 1001-1461. Because we find that the district
court erred in concluding that the plaintiff's state-law claim for
misrepresentation was preempted, we reverse. In addition, because
this case was removed to federal court on the ground that the
plaintiff's claim implicated ERISA—thereby giving rise to federal
question jurisdiction—and because we conclude that ERISA is not
implicated, we remand this case to the district court with
instructions to remand the plaintiff's state-law claim to Texas
state court.
1
BACKGROUND
In December 1993, Deborah J. Meyer established an employee
welfare benefit plan which provided group health insurance for
Meyer's employees and their dependents. The insurance plan was
funded through insurance purchased from the defendant Pan-American
Life Insurance Company. National Insurance Services acted as Pan-
American's agent. Both parties agree that the health insurance
plan is an ERISA plan.
Jack Schwartz, one of Meyer's full-time employees, was
admitted to Cypress Hospital and ran up a bill of $178,215.44 in
medical services related to a respiratory ailment. Prior to
admitting Schwartz, Cypress on two occasions was informed by Pan-
American's agent, National Insurance Services, that Schwartz was
covered by Meyer's health insurance plan. It is undisputed that
Cypress extended health services in reliance on National's
representations, that Schwartz was in fact not covered by the
health insurance plan, and that National therefore incorrectly
informed Cypress about Schwartz's status under the health plan.
Cypress eventually submitted a bill for services to National, who
refused to pay on the ground that Schwartz's "coverage [was]
rescinded as of [the] effective date."1
Cypress then brought suit against Pan-American and National
(defendants) in Texas state court alleging a violation of § 21.21
1
The meaning of this phrase is not altogether clear. Nor does
the record reveal the precise reasons for National's denial of
coverage. For our purposes, however, Cypress has claimed, and the
defendants appear to agree, that National denied coverage because
Schwartz was not covered at all under the ERISA plan.
2
of Texas's Insurance Code. Specifically, Cypress argued that the
defendants negligently misrepresented Schwartz's coverage under the
health insurance plan, and as such, were liable for deceptive and
unfair trade practices. The case was eventually removed to federal
court on the basis of federal question jurisdiction. The
defendants then filed a motion to dismiss, or in the alternative,
a motion for summary judgment, arguing that Cypress's claim was
preempted by ERISA. The district court agreed with the defendants
and entered a take-nothing judgment against Cypress. This appeal
followed.
DISCUSSION
This case requires us to revisit our holding in Memorial Hosp.
Sys. v. Northbrook Life Ins. Co., 904 F.2d 236 (5th Cir.1990), in
which we held that a state-law cause of action for negligent
misrepresentation brought pursuant to Texas Insurance Code § 21.21
was not preempted by ERISA. Id. at 245-50. Cypress claims
Memorial controls this case. The defendants, on the other hand,
argue that Memorial is distinguishable because "this Court [in
Memorial ] distinguished between a situation involving an alleged
misrepresentation as to the extent of coverage, and one as to the
existence of coverage at the time of the misrepresentation." Red
Brief, at 5 (citing Memorial, 904 F.2d at 2462). The district
2
The defendants erroneously cited to page 25 6 of Memorial.
Because our opinion in Memorial does not extend to page 256, we
assume that the defendants are directing our attention to page 24
6, which allegedly contains language that supports the defendants'
position.
3
court did not rely on or cite our decision in Memorial.3 Instead,
the district court concluded that Cypress's
claims are indistinct from a participant's claim that his
employer misrepresented the plan benefits. ... It does not
matter whether it was the employee or his hospital that was
misled by the benefit plan-related entities. Extensions of
coverage however sought are not the plan; the preemption
works like a [sic ] omnipotent parole evidence rule to block
all extension of amounts recoverable from entities whose
involvement is related to plan benefits.
Blue Brief, Appendix, at 5 (emphasis added). Because we find that
the defendants have erroneously concluded that Memorial is
inapplicable to this case and that the district court erred in not
applying Memorial, we reverse the district court's holding that
Cypress's claims are preempted by ERISA.
I. ERISA PREEMPTION AND OUR DECISION IN MEMORIAL
We begin with a brief review of the logic and reasoning of our
decision in Memorial because that decision controls our disposition
of Cypress's claims in this case. ERISA preempts "any and all
State laws insofar as they now or hereafter relate to an employee
benefit plan." 29 U.S.C. § 1144(a) (emphasis added). In Memorial,
we set out to define the meaning of "relate to" in cases involving
independent, third-party providers of medical services, who assert
state-law causes of action for misrepresentation against insurance
companies that have misrepresented the existence of health coverage
to the detriment of the third-party provider.
3
The district court incorporated by reference its preemption
opinion "in a parallel case" as the basis for decision in this
case. Rec. at 133 (referring to Hermann Hosp. v. Pan Am. Life Ins.
Co., 932 F. Supp. 899 (1996)). Our analysis of the district court's
reasoning is therefore based on the district court's opinion in
Hermann.
4
Memorial Hospital was incorrectly informed by Northbrook
Insurance Company that an employee of Noffs, Incorporated was
covered under Noffs's health insurance plan. The benefit plan came
within ERISA's scope. After tendering the employee's hospital bill
to Northbrook, Memorial was informed that the employee in fact was
not covered under Noffs's plan. Memorial sued, alleging, among
other things, negligent misrepresentation in violation of § 21.21
of Texas's Insurance Code. The district court held that Memorial's
state-law cause of action for misrepresentation was preempted by
ERISA.
We reversed. In reaching our conclusion that Memorial's
state-law claim for negligent misrepresentation was not preempted,
we initially made a distinction between hospitals who assert a
derivative claim for benefits (i.e., the hospital stands in the
shoes of the beneficiary of the plan) and independent, third-party
claims brought by health care providers such as Memorial. 904 F.2d
at 243-44. To determine on which side of the line Memorial fell,
we looked to our prior cases in which we found ERISA preemption had
two unifying characteristics: (1) the state law claims
address areas of exclusive federal concern, such as the right
to receive benefits under the terms of an ERISA plan; and (2)
the claims directly affect the relationship among the
traditional ERISA entities—the employer, the plan and its
fiduciaries, and the participants and beneficiaries.
904 F.2d at 245 (footnotes omitted).4 We concluded that Memorial
4
We have since followed this two-part inquiry in ERISA cases.
See Hook v. Morrison Milling Co., 38 F.3d 776, 781 (5th Cir.1994);
Weaver v. Employers Underwriters, Inc., 13 F.3d 172, 176 (5th
Cir.), cert. denied, 511 U.S. 1129, 114 S. Ct. 2137, 128 L. Ed. 2d 866
(1994).
5
fit into neither category and was therefore asserting its state-law
claim for misrepresentation as an independent, third-party provider
of medical services.
We asserted three justifications for our conclusion. First,
we recognized the "commercial realities" facing third-party
providers of health care services, noting that in situations in
which it is not clear whether a patient is covered by a health
insurance plan, "the provider wants to know if payment reasonably
can be expected. Thus, one of the first steps in accepting a
patient for treatment is to determine a financial source for the
cost of care to be provided." 904 F.2d at 246.
Second, when an insurance company erroneously informs a health
care provider such as Memorial that a patient is covered by health
insurance, state law, which "allocat[es] ... risks between
commercial entities that conduct business in a state," normally
provides a remedy. Id. at 246-47. This is so, we reasoned,
because "[a] provider's state law action under these circumstances
would not arise due to the patient's coverage under an ERISA plan,
but precisely because there is no ERISA plan coverage." Id. at
246.
Third, depriving an independent third-party provider of a
state-law cause of action in no way furthers, but rather defeats,
Congress's purpose behind enacting ERISA. We recognized in
Memorial that third-party providers would be less likely to accept
the risk of nonpayment, and as a result, may require patients to
make up-front payments or subject those patients to other
6
unnecessary inconveniences before treatment is offered. Id. at
247. Nor, we reasoned, could Congress have wanted to "shield
welfare plan beneficiaries from the consequences of their acts
toward non-ERISA health care providers when a cause of action ...
would not relate to the terms or conditions of a welfare plan, nor
affect—or affect only tangentially—the ongoing administration of
the plan." Id. at 250.
In short, in Memorial, we staked out the policy arguments
which support the conclusion that ERISA does not preempt a
third-party provider's state-law claims if that third party's claim
is premised on a finding that the beneficiary is not covered at all
by an existing ERISA plan. As such, we defined what it meant for
a third party's state-law claims to "relate to" an ERISA plan,
premising our conclusion on the commercial realities faced by
third-party providers, basic notions of federalism, and Congress's
intent behind enacting ERISA.
II. POST-MEMORIAL TENSION IN OUR CASE LAW
After we decided Memorial, some lower courts within our
Circuit encountered a tension in our cases between Memorial and
Hermann Hosp. v. MEBA Medical & Benefits Plan, 845 F.2d 1286 (5th
Cir.1988) (Hermann I ) and Hermann Hosp. v. MEBA Medical & Benefits
Plan, 959 F.2d 569 (5th Cir.1992) (Hermann II ).5 In Hermann I and
5
See Metroplex Infusion Care v. Lone Star Container, 855
F. Supp. 897, 900-01 (N.D.Tex.1994); Oaks Psychiatric Hosp. v.
American Heritage Life Ins. Co., 814 F. Supp. 553, 555
(W.D.Tex.1993); Forest Springs Hosp. v. Illinois New Car & Truck
Dealers Ass'n Employees Ins. Trust, 812 F. Supp. 729, 732-33
(S.D.Tex.1993); Brown Schs., Inc. v. Florida Power Corp., 806
F. Supp. 146, 150 (W.D.Tex.1992).
7
Hermann II, we held that a third-party provider's state-law claims
were preempted by ERISA. It therefore became unclear whether our
holding in Memorial applied to all third-party providers of medical
services (contra to Hermann I and Hermann II ) or whether Memorial
invited lower courts to conduct a fact-sensitive inquiry into
whether the third-party provider, under the unique circumstances of
each case, could properly be characterized as an independent,
third-party provider or as an assignee asserting a derivative claim
for ERISA benefits. Accordingly, we take this opportunity to
clarify the scope of Memorial in light of Hermann I and Hermann II
and conclude that the cases are consistent with another.
In Hermann I, 845 F.2d 1286, Hermann Hospital provided a
patient medical services after Hermann was informed by MEBA (the
insurance company) that the patient was covered by a health plan
governed by ERISA. The patient, who had died, assigned her rights
to the benefits of the health plan to Hermann. MEBA neither
declined nor tendered payment, but told Hermann that the claim was
being "investigated." Hermann then filed suit, alleging state-law
causes of action for breach of fiduciary duty, negligence,
equitable estoppel, breach of contract, and fraud. Hermann did not
assert violations of Texas's Insurance Code. We held that Hermann's
claims were preempted by ERISA. Id. at 1290. An important element
of our holding in Hermann I was our reading of the Supreme Court's
decisions in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S. Ct.
1549, 95 L. Ed. 2d 39 (1987) and Metropolitan Life Ins. Co. v.
Taylor, 481 U.S. 58, 107 S. Ct. 1542, 95 L. Ed. 2d 55 (1987). These
8
cases, we reasoned, stood for the proposition that where a claim
relates to an employee benefit plan governed by ERISA and are
"based upon state law of general application and not a law
regulating insurance," that state-law cause of action is preempted
by ERISA. Hermann I, 845 F.2d at 1290.
In Hermann II, 959 F.2d 569, we did nothing more than hold
that our preemption determination in Hermann I was the law of the
case in Hermann II. Id. at 578. Accordingly, Hermann II adds
nothing to our understanding of ERISA preemption.
However, we did clarify the meaning of Hermann I in Memorial.
In footnote 20, we distinguished Hermann I on the ground that "the
hospital was aggrieved over a plan's delay in processing its claim
and was seeking recovery of plan benefits allegedly owed to its
assignor." 904 F.2d at 249 n. 20. We further suggested that
Hermann I did not control the situation faced by Memorial Hospital
because the claims in Hermann I were "dependent on, and derived
from, the rights of the plan beneficiaries to recover benefits
under the terms of the plan." Id. Stated differently, Hermann
Hospital was not an independent, third-party provider of medical
services, but rather more akin to a first-party beneficiary whose
causes of action are normally preempted by ERISA.6 Because Hermann
I was decided before Memorial, Hermann II did not discuss ERISA
preemption, and because we have never questioned the holding or
analytical underpinnings of Memorial, our understanding of Hermann
6
See, e.g., Hogan v. Kraft Foods, 969 F.2d 142, 144-45 (5th
Cir.1992); Ramirez v. Inter-Continental Hotels, 890 F.2d 760, 763-
64 (5th Cir.1989).
9
I as expressed in Memorial is the law of this Circuit.
As such, the difference between Hermann I and Memorial has
nothing to do with the bare existence of an ERISA plan. Rather,
the proper inquiry is whether the beneficiary under the ERISA plan
was covered at all by the terms of the health care policy, because
if the beneficiary was not, the provider of health services acts as
an independent, third party subject to our holding in Memorial.
This is no doubt what our district courts have understood Memorial
to mean.7
III. APPLICATION OF MEMORIAL TO CYPRESS'S STATE-LAW CAUSE OF ACTION FOR
MISREPRESENTATION
Pan-American and National argue that Memorial does not control
this case because in its pleadings, Cypress admitted that it was
7
See Jefferson Parish Hosp. Dist. No. 2 v. Principal Health
Care of La., Inc., 934 F. Supp. 206, 208 (E.D.La.1996) ("The
patient's assignment of right in this action is irrelevant to the
hospital's right to recover from the plan in its independent status
as a hospital."); Cornett v. Aetna Life Ins. Co., 933 F. Supp. 641,
644 (S.D.Tex.1995) ("A careful distinction was drawn [in Memorial
] between plan participants, on the one hand, and independent,
third-party health providers, on the other...."); Metroplex
Infusion Care, 855 F. Supp. at 901 ("The apparent contradiction
between the Hermann cases and Memorial may be resolved in light of
their underlying factual differences: whereas there was no ERISA
coverage in Memorial, so that the hospital would have had no
recourse under either ERISA or state law had its state law claims
been preempted, in Hermann ERISA coverage did not exist but had
allegedly been improperly denied."); Forest Springs, 812 F. Supp.
at 732 ("The facts in Hermann differed from that of Memorial ...
because the dispute in Hermann centered around an alleged
misrepresentation as to the extent of coverage, not a situation
where, like here and in Memorial ..., the defendant contends there
is no coverage at all."); Brown Schools, 806 F. Supp. at 150 ("The
apparent reason for the discrepancy between the cases is that in
Memorial there was no ERISA coverage and therefore the hospital
would have "no recourse under either ERISA or state law' if the
hospital's state law claims were preempted ..., whereas in the
Hermann cases, ERISA coverage existed but was allegedly improperly
denied.").
10
inquiring about the extent rather than the existence of coverage
for Schwartz. In addition, Pan-American and National argue that
because an ERISA plan was in place and Schwartz was enrolled in the
plan, Cypress's state-law claim should be preempted by ERISA.
The defendants' position is unavailing because Schwartz,
although enrolled in the plan, was not covered by the health care
plan insured by Pan-American and National. It is undisputed that
National refused to pay Cypress because "coverage [was] rescinded
as of [the] effective date." Admittedly, because no discovery took
place in this case, the record is unclear as to the meaning of this
phrase. Nor does the record reveal the precise reasons behind
National's refusal to pay for Schwartz's services. Nonetheless,
Cypress has asserted, and the defendants do not dispute, that
coverage was denied because Schwartz was not covered by the health
plan. Indeed, neither National, Pan-American, nor the record
suggest that "coverage rescinded" means anything else than Schwartz
was not covered by the plan at the time of his hospitalization. As
such, Cypress's cause of action does not relate to ERISA, but
rather arises under state law. Memorial is therefore triggered.
Cypress's state-law claim under § 21.21 for misrepresentation is
not preempted by ERISA.
Finally, the district court's reasoning is of no help to the
defendants.8 As we have pointed out, the district court concluded
that for ERISA purposes, third-party providers such as Cypress are
8
We note that the defendants do not rely on or attempt to
justify the district court's reasoning in this case.
11
on no better footing than first-party beneficiaries. We rejected
that premise in Memorial, where we reasoned as follows:
We have held under different circumstances that ERISA
preemption may occur even though ERISA itself could not offer
an aggrieved employee a remedy for alleged misrepresentations.
That principle should not be extended, however, to encompass
third-party providers, particularly when to do so would run
counter to one of Congress's overriding purposes in enacting
ERISA.
904 F.2d at 248 (emphasis added) (footnote omitted). The district
court's reasoning to the contrary is foreclosed by Memorial.
CONCLUSION
Because the district court erroneously determined that
Cypress's state-law cause of action for violating § 21.21 of
Texas's Insurance Code was preempted by ERISA, we REVERSE the
district court's decision. In addition, the district court's
jurisdiction to hear this case was based on the federal question
presented by ERISA preemption, and because we hold that ERISA is
not implicated, we REMAND this case to the district court with
directions to remand Cypress's § 21.21 claim to Texas state court.
REVERSED AND REMANDED.
12