:: State Law Claims Against “Non-Fiduciary Service Providers” Avert Preemption

Here, plaintiffs’ claims regarding defendants’ alleged post-plan misfeasance are not preempted. As in Paulsen, plaintiffs’ state law claims run to non-fiduciary service providers and do not relate to the plan, its administration, or its benefits.  The  plan is a life insurance plan that the parties admitted at hearing is still in operation and will provide benefits to beneficiaries in the event of  Hausmann’s death. While plaintiffs obtained the plan in part because the contributions could be tax deductible, those deductions are not a ”benefit” of the plan itself.

Additionally, the IRS treatment of the tax deductions is unrelated to the administration of the plan because it was something that plaintiffs reported on their own tax filings. Accordingly, as in Marks, the state law claims have only a tenuous connection to the plan, do not affect an ERISA relationship, and do not require interpretation of the plan to adjudicate the matter.

Hausmann v. Union Bank of Cal., 2009 U.S. Dist. LEXIS 39074 (C.D. Cal. May 8, 2009)

This district court opinion describes a set of facts which touch on several features of an ERISA plan but which, based upon the claim at bar, did not sufficient engage plan administration so as to warrant preemption.  The dispute centered on representations and resulting expectations about the performance of a plan designed to meet the requirements of IRS Section 412(i).   

The Facts

The Plaintiffs wanted to obtain retirement planning and life insurance.   They met with an advisor at Union Bank of California Investment Services who put them in contact with an account executive at Hartford.  The Plaintiffs were steered toward a Section 412(i) plan. 

From the opinion: 

Plaintiffs were enticed to purchase this plan because they believed that the entire amount they contributed to the plan would be tax deductible. Plaintiffs allege that at all relevant times, [the advisors] represented that the Internal Revenue Service (”IRS”) had pre-approved this type of retirement plan. In August of 2003, plaintiffs entered into contracts and purchased the plan. 

Unfortunately, however, the IRS also took an interest in this type of plan: 

In early 2004, the IRS issued two revenue rulings that the type of 412(i) plan plaintiffs had purchased needed to be listed on tax returns as a “listed transaction.” Plaintiffs did not do so. In August 2006, the IRS notified plaintiffs that they would be audited. The IRS has not made a final decision in the matter, but plaintiffs could be subjected to hundreds of thousands of dollars in fines.

The Allegations

The Plaintiffs alleged that the defendants knew “prior to the activation of plaintiffs’ plan” that the validity of these types of plans was ”very much in question.” They further alleged that the defendants induced them to sign the plan nonetheless “because they had already invested money in those types of plans and would also receive a large commission, which was not disclosed.” Finally, the Plaintiffs alleged that after the IRS issued its revenue rulings defendants failed to notify them of the rulings and a “safe harbor” the IRS offered because defendants wanted to continue to profit from the plan.

The State Court Claims

The Plaintiffs filed suit in state court against the bank, the insurance company and the advisors, alleging (1) negligence; (2) breach of fiduciary duty; (3) fraud; (4) negligent misrepresentation; and (5) unfair competition under California Business and Professions Code § 17200.  

The case was removed to federal district court based upon a claim of federal question jurisdiction.

 Motions For Summary Judgment

The jurisdictional issue arose in the context of motions for summary judgment filed by the defendants.  

The district court was clearly influenced by the recent Ninth Circuit opinion in Paulsen v. CNF, Inc., 559 F.3d 1061, 1081 (9th Cir. 2009).  

 In that case, the Ninth Circuit left open a possible state law claim by employees against a consulting firm that provided advice to plan fiduciaries. 

ERISA contains, in section 502(a), a comprehensive scheme of civil remedies. Paulsen, 559 F.3d at 1084. Paulsen held that employees’ state law damages claim for professional negligence in valuing the benefit liabilities of the prospective plan was not conflict preempted.

Here, plaintiffs request special and compensatory damages related to their state law  claims. As Paulsen explained, these damages are unrelated to the plan and are not conflict-preempted.

The district court also found influential two other opinions, one from the Fifth Circuit and one from the Sixth:
While other circuits do not apply the “relationship test” per se, they have found that state law claims similar to those at issue in Paulsen are not preempted. See, e.g., E.I. Dupont De Nemours & Co. v. Sawyer, 517 F.3d 785, 800 (5th Cir. 2008); Marks v. Newcourt Credit Group, 342 F.3d 444, 453 (6th Cir. 2003).

[5th Circuit]  In Dupont, the Fifth Circuit held that the plaintiffs’ fraud and fraudulent inducement claims were not preempted because to prevail, “the employees need not prove that any aspect of Dupont’s administration of the employees’ ERISA plan was improper. The claims only relate to misrepresentations that Dupont is alleged to have made about its intentions to sell [a subsidiary].” Dupont, 517 F.3d at 800.  The Dupont court added that “the employees’ allegation that Dupont fraudulently induced them to transfer to [the subsidiary] does not affect an area of their relationship that is comprehensively regulated by ERISA.” Id.

[Sixth Circuit] Similarly, the Sixth Circuit in Marks found that the plaintiffs’ fraud and misrepresentation and breach of contract claims were not preempted to the extent that they had a tenuous effect on the plan. 342 F.3d at 453. Marks explained that plaintiff alleged that “without cause, [defendant] significantly altered his duties and reduced his compensation” and that the claim could proceed because it could constitute a breach of contract irrespective of the plan. Id.; see also Samaritan Health Ctr. v. Simplicity Health Care Plan, 459 F. Supp. 2d 786, 797-98 (E.D. Wis. 2006) (holding that breach of contract claim is not preempted because the claim did not rely on an interpretation of the medical plan documents).

Post-Plan Misfeasance Claims Not Preempted

The court’s reasoning turned in large part on its finding that the service providers were not ERISA fiduciaries.

As in Paulsen, plaintiffs’ state law claims run to non-fiduciary service providers and do not relate to the plan, its administration, or its benefits. The  plan is a life insurance plan that the parties admitted at hearing is still in operation and will provide benefits to beneficiaries in the event of Hausmann’s death. While plaintiffs obtained the plan in part because the contributions could be tax deductible, those deductions are not a “benefit” of the plan itself. Additionally, the IRS treatment of the tax deductions is unrelated to the administration of the plan because it was something that plaintiffs reported on their own tax filings. Accordingly, as in Marks, the state law claims have only a tenuous connection to the plan, do not affect an ERISA relationship, and do not require interpretation of the plan to adjudicate the matter.


Claims Based Upon Non-Disclosure Of Commissions Not Preempted

Likewise, the service provider status of the defendants spoiled their defense of preemption.

Defendants’ reliance on Rutledge to argue that failure to disclose the commissions is preempted is unpersuasive. In Rutledge, there was preemption because the compensation at issue affected an ERISA relationship, and the court distinguished similar claims against service providers held to be non-preempted. 201 F.3d at 1222. 

The issue appears to have been a somewhat closer call, however, as the court compared two contrary opinions in reaching its conclusion: 

The Rutledge plaintiffs sued a non-ERISA fiduciary attorney for charging excessive fees. Id. 2 The court found that the allegation of excessive fees implicated the “prohibited transaction”  provision under ERISA, 29 U.S.C. § 1106, triggering preemption. Id. In doing so, the Rutledge court distinguished Arizona State Carpenters, which involved non-ERISA fiduciaries where the claims were not preempted because they did not involve “excessive fees” claims, but, rather claims related to the failure to notify the trustees of defaults on interest and principal payments on investments. Id. (citing Ariz. State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 724 (9th Cir. 1997)). 

In Arizona State Carpenters, the court explained that as a non-fiduciary service provider, the defendant’s relationship with the plaintiff was ”no different than that between Citibank and any of its customers.” 125 F.3d at 724. Here, defendants are non-fiduciary service providers and plaintiffs’ claim is not for excessive fees but for failure to disclose a commission. 3 (FAC P 51.) Arguably, this falls between the commercial relationships in Arizona Carpenters and Rutledge, but defendants provide no explanation of how the failure to disclose commissions is a prohibited transaction under 29 U.S.C. § 1106, nor is it listed in the text of the statute as a prohibited transaction. Given that defendants  do not demonstrate ERISA’s applicability on this point, and that there are no ERISA claims in the complaint, the failure-to-disclose-commission allegation is insufficient to constitute the complete preemption required to confer jurisdiction.

Based upon the foregoing, the court held that the  plaintiffs’ state law claims were not expressly preempted by ERISA “because they are tenuous to the plan and do not effect an ERISA relationship.”

Note:  While not determinative, how claims are initially framed against service providers does have some effect.  The inclusion of ERISA causes of action will predispose a court to view the plaintiff’s case as implicating plan administration, for obvious reasons. Consider this statement by the district court:

In Chasan, the court found preemption because the case included ERISA causes of action, which is in part why the court so held. 2007 WL 173927 at *7-8. To the contrary, in Berry II, another case on which defendants rely and that is factually similar, the court found that there was no ERISA preemption because the claims related to the tax consequences of the insurance policies used to fund the plans and not the merits of the plans themselves. Berry v. Indianapolis Life Ins. Co., 08-cv-248, 2009 WL 636531, at *5 (N.D. Tex. Mar. 11, 2009). The Berry II court also found no preemption because defendants did not demonstrate that analysis of the claims would involve an evaluation of the plan itself. Id.

Additional Factors – In addition to non-fiduciary status of the defendants, the opinion highlights two other factors that may be influential in a preemption dispute (1) is the relationship one implicating the service provider/prohibited transaction rules and (2) is the relationship one indistinguishable from a commercial relationship the defendant might have with any other customer