Midwest Comm Health v. American United Life ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2360
Midwest Community Health
Service, Inc., now known as
silver cross health system, et al.,
Plaintiffs-Appellants,
v.
American United Life Insurance Co.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 6128--James F. Holderman, Judge.
Argued November 6, 2000--Decided June 21, 2001
Before Kanne, Diane P. Wood, and Williams,
Circuit Judges.
Williams, Circuit Judge. The appellants,
members of the Illinois Hospital
Association ("IHA"), filed this suit
alleging that American United Life
Insurance Co. ("AUL") breached its
fiduciary duties under sec. 409(a) of the
Employee Retirement Income Security Act
("ERISA") by failing to disclose material
information about the appellants’ rights
under a group annuity contract. Both
parties moved for summary judgment. The
district court denied the appellants’
motion but granted AUL’s, holding that as
a matter of law, AUL was not an ERISA
fiduciary with respect to the conduct al
leged by the appellants because AUL was
exempt from liability under sec. 401(c)(5)
of ERISA. We reverse and remand for
further proceedings.
I
The IHA designated AUL as its "preferred
vendor" for tax-qualified employee
benefit plans and recommended that its
member hospitals use AUL to fund their
employee pension plans. The IHA entered
into a group annuity contract issued by
AUL (hereinafter referred to as the "IHA
Contract"), which permitted any IHA
member to become an additional contract
holder. The appellants, members of the
IHA, accepted the IHA Contract and became
bound by the contract’s terms. Pursuant
to the IHA Contract, the appellants
deposited funds with AUL. These funds
were allocated by AUL to its general
investment account as opposed to a
separate account specifically
attributable to the IHA Contract.
Under the IHA Contract, AUL reserved the
right to make certain changes in the
future without approval by the IHA or the
appellants. The IHA Contract also
provided that in the event the appellants
elected to cash out, i.e., transfer
assets away from AUL, AUL would assess a
withdrawal or "surrender charge" and make
an "investment liquidation adjustment" to
the amount of money withdrawn. The
investment liquidation adjustment
reflected the change in value of the
investments due to current investment
yields that were different from those
prevailing at the time the funds were
invested by AUL. Thus, the adjustment
could be positive or negative depending
upon changes in interest rates.
In 1992, AUL asked the appellants to
transfer their funds on deposit under the
IHA Contract to a new type of group
annuity contract, an AUL-Star Contract.
The appellants claim that AUL and its
agents failed to disclose: 1) the amount
of the positive liquidation adjustment
that the appellants could have received
under the IHA Contract if it had cashed
out at that time instead of converting to
the AUL-Star Contract; and 2) the
difference between the IHA Contract’s
positive or negative investment
liquidation adjustment and the AUL-Star
Contract’s negative-only adjustment. If
the appellants had cashed out, they would
have been entitled to a $1.2 million
investment liquidation adjustment that
would have greatly offset the surrender
charge. The appellants contend that they
would not have agreed to convert to the
AUL-Star Contract if they knew of the
$1.2 million investment liquidation
adjustment and the loss of the right to a
positive investment liquidation
adjustment once they accepted the AUL-
Star Contract. Significantly, the
appellants do not claim that AUL
misappropriated or misused the funds that
were deposited under the IHA Contract and
held in AUL’s general account.
AUL denies that it failed to disclose
material information to the appellants.
AUL contends that it provided all
relevant information to the appellants,
including a detailed explanation of the
meaning of each of the provisions of, and
the differences between, the IHA Contract
and the AUL-Star Contract. AUL moved for
summary judgment on the grounds that: 1)
under sec. 401(c)(5) of ERISA, AUL was
exempt from liability as a fiduciary with
respect to the conduct alleged by the
appellants; 2) even if AUL was a
fiduciary, it did not breach its duty
because it disclosed material information
to the appellants; and 3) AUL was
released from liability by the appellants
under a Settlement Agreement that
accompanied the conversion to the AUL-
Star Contract.
The appellants also moved for summary
judgment arguing that: 1) AUL was an
ERISA fiduciary because AUL had
discretionary authority and control over
the IHA Contract, which is an asset of
the plan separate and apart from the
funds supporting the contract; and 2) AUL
breached its fiduciary obligation when it
failed to fully and completely disclose
material facts affecting the appellants’
interests. The district court granted
AUL’s motion on the basis that
sec. 401(c)(5) of ERISA, which provides
that "[n]o person shall be subject to
liability" for breach of an ERISA duty
"on the basis of a claim that the assets
of an insurer (other than plan assets
held in a separate account) constitute
assets of the plan," exempts AUL from
liability. 29 U.S.C. sec. 1101(c) (5)(B).
Because the court found that as a matter
of law AUL was not an ERISA fiduciary
with respect to the conduct complained of
by the appellants, it denied the
appellants’ motion for summary judgment
and did not need to reach AUL’s other
arguments.
On appeal, the appellants challenge the
district court’s holding and argue in the
alternative that even if AUL cannot be
held liable as an ERISA fiduciary, AUL is
still liable as a "party in interest"
that participated in a transaction
prohibited by ERISA. See Harris Trust &
Sav. Bank v. Salomon Smith Barney Inc.,
530 U.S. 238 (2000). In the event that we
find AUL is an ERISA fiduciary, AUL
renews its arguments that were not
decided by the district court.
II
We review a district court’s grant of a
motion for summary judgment de novo,
drawing all inferences in favor of the
non-moving party. Larsen v. City of
Beloit, 130 F.3d 1278, 1281 (7th Cir.
1997).
The dispute in this case centers on
whether AUL is subject to ERISA fiduciary
liability for exercising discretionary
control over the IHA Contract. ERISA
provides that "a person is a fiduciary
with respect to a plan to the extent (i)
he exercises any discretionary authority
or discretionary control respecting
management of such plan or exercises any
authority or control respecting
management or disposition of its assets .
. . ." 29 U.S.C. sec. 1002(21)(A)
(emphasis added). We have twice held that
an insurer’s discretionary authority or
control over group insurance contracts
purchased by employee benefit plans
subjects the insurer to ERISA fiduciary
standards. See Ed Miniat, Inc. v. Globe
Life Ins. Group, Inc., 805 F.2d 732, 738
(7th Cir. 1986); Chicago Bd. Options
Exch., Inc. v. Connecticut Gen. Life Ins.
Co., 713 F.2d 254, 260 (7th Cir. 1983).
In Ed Miniat, the plaintiffs were
participating employers in a retirement
life reserve insurance policy issued by
the defendants. 805 F.2d at 733. They
brought suit alleging that the defendants
breached their fiduciary duties under
ERISA by retaining more than one half of
the premiums paid by the plaintiffs when
the plaintiffs withdrew their accumulated
contributions. We reversed the district
court and found that the plaintiffs had
stated a claim that the defendants were
ERISA fiduciaries. Id. at 738. We looked
to the terms of the policy that gave the
defendants the unilateral right to change
the rate of return and annual premiums,
and found that their power to amend the
policy and alter its value constituted
the requisite authority over an asset of
the plan. Id.
Similarly, in Chicago Board Options
Exchange, we held that the insurer’s
ability to amend a group annuity contract
and alter its value subjected the insurer
to ERISA fiduciary obligations. 713 F.2d
at 260. In that case, the plaintiffs
entered into a group annuity contract
with the defendant that was designed to
fund retirement benefits for the
plaintiffs’ employees. They sought to
discontinue the contract and withdraw the
funds deposited under the contract after
the defendant notified the plaintiffs of
its intent to amend certain provisions of
the contract, which would have had the
effect of locking in the plaintiffs for
the next ten years. In reversing the
district court’s dismissal for failure to
state a claim, we found that the group
annuity contract itself was an asset of
the plan and the insurer’s ability to
alter its value constituted discretionary
"’control respecting . . . disposition of
[plan] assets.’" Id. at 260 (quoting 29
U.S.C. sec. 1002(21)(A)) (alteration in
original).
Under the principles of Ed Miniat and
Chicago Board Options Exchange, AUL is an
ERISA fiduciary. The IHA Contract, like
the group annuity contract in Chicago
Board Options Exchange was issued by an
insurer in favor of the employee pension
plans. As such, it is an asset of
theemployee pension plans./1 Id. at
259-60. And because AUL had discretionary
authority over the contract in its
ability to amend the value of the
contract, AUL is an ERISA fiduciary. Ed
Miniat, Inc., 805 F.2d at 738; Chicago
Bd. Options Exch., Inc., 713 F.2d at 260.
AUL asserts, however, that the IHA
Contract is not an asset of the plan and
contends that sec. 401(c)(5) shelters it
from ERISA fiduciary liability because
the funds supporting the IHA Contract
were held in AUL’s general investment
account. In support, AUL relies on two
district court cases. See Adkins v. John
Hancock Mutual Life Ins. Co., 957 F.
Supp. 211 (M.D. Fla. 1997); Tool v. Nat’l
Employee Benefit Serv., Inc., 957 F.
Supp. 1114 (N.D. Cal. 1996). In both
cases, the plaintiffs brought suit
alleging that the insurers stole or
misappropriated their pension plan
contributions. Adkins, 957 F. Supp. at
212; Tool, 957 F. Supp. at 1116. Those
courts found that prior to the passage of
sec. 401(c)(5), the insurers may have been
considered fiduciaries because they had
discretionary authority over the rate of
return on the assets. However, the courts
held that sec. 401(c)(5) excluded the
insurers from the definition of fiduciary
because the insurers held the pension
funds in the insurer’s general accounts.
Adkins, 957 F. Supp. at 213; Tool, 957 F.
Supp. at 1119. AUL’s reliance on these
cases effectively asks us to hold that
sec. 401(c)(5) erodes our holdings in Ed
Miniat and Chicago Board Options
Exchange. We decline to do so in this
case.
Section 401(c)(5) provides:
No person shall be subject to liability
under this part [for breach of ERISA
fiduciary duties] for conduct which
occurred before [December 31, 1998] on
the basis of a claim that the assets of
an insurer (other than plan assets held
in a separate account) constitute assets
of the plan . . . .
29 U.S.C. sec. 1101(c)(5)(B). Here, the
appellants’ claim is not premised on a
finding that assets of AUL held in AUL’s
general account are assets of the plan.
Instead, the basis of the appellants’
claim is that AUL failed to disclose the
amount of the investment liquidation
adjustment if they cashed out instead of
converting and that the package of rights
under the IHA Contract (with the
potentially positive investment
liquidation adjustment) was more valuable
than the package of rights provided under
the AUL-Star Contract. Unlike the cases
relied upon by AUL, the appellants are
not claiming that AUL misappropriated or
illegally converted the funds deposited
under the group annuity contract. Cf.
Adkins, 957 F. Supp. at 212 (plaintiffs
claimed insurer mismanaged or
misappropriated pension plan assets);
Tool, 957 F. Supp. at 1116 (plaintiffs
claimed insurer stole pension plan
contributions). Therefore, where AUL held
the funds supporting the IHA Contract,
i.e., in its general account or in a
separate account, is irrelevant because
the appellants’ claim has nothing to do
with the (mis)management of the funds.
This reading of sec. 401(c)(5) is also
consistent with the events leading to its
enactment. Prior to John Hancock Mutual
Life Ins. Co. v. Harris Trust & Savings
Bank, 510 U.S. 86 (1993), the insurance
industry operated under the assumption
that assets held in insurers’ general
accounts were not regarded as plan
assets, and therefore, insurers were not
subject to ERISA’s fiduciary
responsibility provisions with respect to
those funds. See 29 C.F.R. sec. 2509.75-
2(b) (1992); Department of Labor Proposed
Class Exemption for Certain Transactions
Involving Insurance Company General
Accounts, 59 Fed. Reg. 43,134 (proposed
August 22, 1994). In Harris Trust, the
Supreme Court found that certain assets
held in an insurer’s general account
could be considered plan assets subject
to ERISA’s fiduciary standards. 510 U.S.
at 101. The effect was that, after Harris
Trust, an insurer could potentially be
subject to ERISA fiduciary standards for
"general operational business decisions
relating to salaries and benefits for the
employees of the insurer, the provision
of office space and materials,
advertising expenses, charitable
contributions," and all sorts of internal
transactions "due to the pooled nature of
general account assets." Department of
Labor, 59 Fed. Reg. at 43,136. In
response, Congress enacted legislation
authorizing the Department of Labor to
issue regulations to determine whether
assets held in an insurer’s general
account could be considered plan
assets./2 Pending the issu-ance of the
regulations, Congress added sec. 401(c)(5)
as a "safe-harbor" for insurers holding
assets that supported insurance contracts
in their general investment accounts.
The events behind sec. 401(c)(5)’s
enactment, then, also show that
sec. 401(c)(5) is not implicated in this
case because the appellants’ claim is not
aimed at finding that assets of the
insurer held in the insurer’s general
account are assets of the plan. Here, AUL
exercised its discretionary authority to
amend the IHA Contract and altered the
contract’s value. Accordingly, AUL is
subject to ERISA fiduciary standards. See
Ed Miniat, Inc., 805 F.2d at 738; Chicago
Bd. Options Exch., Inc., 713 F.2d at 260.
We therefore reverse the district court’s
grant of summary judgment in favor of
AUL.
Because we find that AUL can be held
liable as an ERISA fiduciary with respect
to the conduct alleged in the complaint,
we need not determine if AUL was a
"party-in-interest" to a prohibited
transaction. Furthermore, we do not reach
AUL’s remaining arguments because they
were not addressed by the district court
in the first instance. Accordingly, we
remand those determinations to the
district court.
III
For the foregoing reasons, the judgment
of the district court is REVERSED and the
case REMANDED for further proceedings.
FOOTNOTES
/1 The Department of Labor has published regula-
tions, to be effective July 5, 2001, supporting
our finding in Ed Miniat, Inc., 805 F.2d at 737-
38 and Chicago Bd. Options Exch., Inc., 713 F.2d
at 260, that a group annuity contract is itself
an asset of the ERISA plan:
[W]hen a plan has acquired a Transition Policy
(as defined in paragraph (h)(6) of this section),
the plan’s assets include the Transition Policy,
but do not include any of the underlying assets
of the insurer’s general account if the insurer
satisfies [certain] requirements [set forth in
the regulations.]
The term Transition Policy means: (i) A policy or
contract of insurance (other than a guaranteed
benefit policy) that is issued by an insurer to,
or on behalf of, an employee benefit plan on or
before December 31, 1998, and which is supported
by the assets of the insurer’s general account.
29 C.F.R. sec. 2550.401c-1(a)(2) and (h)(6)(i).
/2 The statute, entitled "Clarification of applica-
tion of ERISA to insurance company general ac-
counts," provides:
[T]he Secretary shall issue proposed regulations
to provide guidance for the purpose of determin-
ing, in cases where an insurer issues 1 or more
policies to or for the benefit of an employee
benefit plan (and such policies are supported by
assets of such insurer’s general account), which
assets held by the insurer (other than plan
assets held in its separate accounts) constitute
assets of the plan . . . .
29 U.S.C. sec. 1101(c)(1)(A).