United States District Court, Central District of Illinois, Springfield Division
February 28, 2000
MYERSCOUGH, INC., A CORPORATION, D/B/A MURPHY RUG & FURNITURE COMPANY, THOMAS R. MYERSCOUGH AND RAGAN MYERSCOUGH, PLAINTIFFS,
FORTIS BENEFITS INSURANCE COMPANY AND PAT ROGERS ASSOCIATION, INC., DEFENDANTS.
The opinion of the court was delivered by: Richard Mills, District Judge.
Does a minority shareholder have standing to maintain a suit
based on the denial of medical benefits under ERISA?
Motion to remand to state court is DENIED.
The eight count complaint in this case was originally filed in
the Circuit Court for the Seventh Judicial Circuit of Sangamon
County, Illinois. In the complaint, Plaintiffs brought several
claims against Defendants, including breach of contract and
several tort claims, based on the alleged denial of insurance
Defendants filed a notice of removal on September 1, 1999. In
the notice of removal, Defendants state that this Court has
jurisdiction over the case because it is based on the denial of
insurance benefits under the terms of a group health plan that
constitutes an employee welfare benefits plan under ERISA,
29 U.S.C. § 1001 et. seq.
Plaintiffs contest this Court's subject matter jurisdiction
over the case and seek remand. Plaintiffs argue that this case
is not governed by ERISA because Plaintiff Thomas Myerscough is
a part-owner of Myerscough, Inc., and as such he is not a
"participant" or a "beneficiary" in any welfare plan governed by
ERISA. Rather, Plaintiffs argue, as a part owner of Myerscough,
Inc., Mr. Myerscough is an "employer" and hence not covered by
The parties were ordered to submit supplemental briefing as to
the legal and factual issues raised by this motion to remand.
The briefing has now been submitted and the motion is ready for
The burden to show the existence of federal subject matter
jurisdiction is generally on the party seeking to remove a case
to federal court. See, e.g., Chase v. Shop 'N Save Warehouse
Foods, Inc., 110 F.3d 424, 427 (7th Cir. 1997).
In order to come within the coverage of ERISA, a plaintiff
must be either a "participant" or a "beneficiary" of a plan.
29 U.S.C. § 1132(a). A participant is defined as an "employee or
former employee of an employer . . . who is or may become
eligible to receive a benefit. . . ." 29 U.S.C. § 1002(7). A
beneficiary is defined as "a person designated by a participant,
or by the terms of an employee benefit plan, who is or may
become entitled to a benefit thereunder." 29 U.S.C. § 1002(8).
Beneficiaries who are also deemed to be "employers," however,
may not come within the scope of ERISA due to the antiinurement
provisions at 29 U.S.C. § 1002(5), which provides that "the
assets of a plan shall never inure to the benefit of any
employer. . . ." 29 U.S.C. § 1103(c)(1). An employer is defined
as "any person acting directly as an employer, or indirectly in
the interest of an employer, in relation to an employee benefit
plan." 29 U.S.C. § 1002(5). This definition is mostly circular
and rather uninformative, but it is rather broad and thus likely
includes most of those persons usually thought of as employers.
If a person is deemed to be an employer under this provision,
the anti-inurement provision may take away his standing. In
determining whether the anti-inurement provision applies to a
given situation, courts often appropriately focus on the express
language and purposes of the provision. See Giardono v. Jones,
867 F.2d 409, 412 (7th Cir. 1989). This provision is
designed to prevent those who exercise control over the funds of
a plan from selfdealing or improper investment of the funds.
See Engelhardt v. Paul Revere Life Ins. Co., 139 F.3d 1346,
1351 (11th Cir. 1998) (citations omitted).
In Giardono, the Seventh Circuit held that the sole
proprietor of a contracting business was an employer under
ERISA. The Court reasoned that ERISA's antiinurement provisions
prohibit the benefits of a plan from benefitting employers, so
the contractor was denied standing under ERISA. Id. at 412.
But the Giardono court did not consider the definition of
"beneficiary" under ERISA.
The Circuits are split on the issue of whether a sole
shareholder may be covered under ERISA as either plan
participants or beneficiaries. For example, in Prudential Ins.
Co. of America v. Doe, 76 F.3d 206, 209 (8th Cir. 1996), the
United States Court of Appeals for the Eighth Circuit held that
a controlling shareholder of a law firm had standing to sue
under ERISA for the denial of medical benefits. The Court noted
that the anti-inurement provision was designed to keep fund
assets from being mismanaged or wrongfully diverted, 76 F.3d at
209, and that the shareholder in that case had no control over
plan assets. The Court further noted that "[t]o hold otherwise
would create the anomaly of requiring some insureds to pursue
benefit claims under state law while requiring others covered by
the identical policy to proceed under ERISA." 76 F.3d at 210
(quoting Robinson v. Linomaz, 58 F.3d 365, 369 (8th Cir.
1995)) (quoting Peterson v. American Life & Health Ins. Co.,
48 F.3d 404, 409 (9th Cir. 1995))
In accord with these cases from the Eighth and Ninth Circuits
is Engelhardt v. Paul Revere Ins. Co., 139 F.3d 1346 (11th
Cir. 1998). In Engelhardt, the Eleventh Circuit relied on both
Prudential and Robinson in determining that a
shareholder/beneficiary could recover under an ERISA plan since
he was named as an insured under the Plan. See 139 F.3d at
1351. The Engelhardt panel noted that the anti-inurement
provision did not apply so as to preclude the shareholder from
being a beneficiary under the Plan. This was because the plan at
issue was not controlled by the shareholder, but instead was a
plan administered and controlled by an outside insurance
company. In such circumstance, there was no risk of selfdealing
or misappropriation of "plan assets." See 139 F.3d at 1351;
See also Vega v. Nat. Life Ins. Services, Inc., 188 F.3d 287,
294 (5th Cir. 1999) and Madonia v. Blue Cross & Blue Shield of
Virginia, 11 F.3d 444, 449-50 (4th Cir. 1993) (sole shareholder
could be "employee" under ERISA).
Other Circuits hold that a sole proprietor or sole shareholder
would be an employer under ERISA because such persons "dominate"
the business. See Fugarino v. Hartford Life & Accident Ins.
Co., 969 F.2d 178, 186 (6th Cir. 1992) (sole proprietor not an
employee); Kwatcher v. Massachusetts Service Employees Pension
Fund, 879 F.2d 957, 960 (1st Cir. 1989) (sole shareholder not
an employee); Pechkham v. Board of Trustees of Int'l Bhd. of
Painters and Allied Trades Union, 653 F.2d 424, 427-28 (10th
Cir. 1981) (sole proprietor not covered under ERISA plan). These
cases also broadly interpret the anti-inurement provision to
categorically prevent employers from maintaining suit as
participants or beneficiaries under ERISA. This interpretation
relies on the purported broad policy expressed in ERISA that
employers and employees are always distinct and that ERISA was
not meant to benefit employers. It should be noted, however,
that in Kwatcher, the Court did not consider whether the
shareholder was a beneficiary, but focused on his status as a
participant in the Plan.
The United States Court of Appeals for the Seventh Circuit has
not directly addressed this situation, where a minority
shareholder is listed as an insured under an ERISA plan and
seeks to recover benefits as a beneficiary. The court has,
however, indicated that the purposes of the anti-inurement
provision is to prevent the
type of abuses that could occur if a person with control over
plan assets was also covered under the terms of the plan. See
Giardono v. Jones, 867 F.2d 409, 411 (7th Cir. 1989). However,
Giardono did not involve a minority shareholder's status as a
beneficiary and did not involve a suit to recover medical
benefits from a third party insurer.
One Court of Appeals has addressed a factual scenario more
akin to the facts of this case. See Vega v. Nat. Life Ins.
Services, Inc., 188 F.3d 287, (5th Cir. 1999). In Vega, one
of the two shareholders of a small corporation sought to recover
for the denial of medical benefits. The Court adopted a rather
categorical approach, and determined that the corporation was
the "employer" and the partial owner was an employee of the
corporation. See Id. at 294. The Vega Court paid little
attention to the specific purposes of the anti-inurement
provision in reaching this decision. Other cases have rejected
this formalistic approach in favor of a focus on the language
and purposes of the anti-inurement provision. See, e.g.
Spurlock v. Employers Health Ins. Co., 13 F. Supp.2d 884, 887
The latter approach is the proper one to use in addressing
this issue of statutory construction, see K Mart Corp. v.
Cartier, Inc., 486 U.S. 281, 291, 108 S.Ct. 1811, 100 L.Ed.2d
313 (1988), and the Court finds that the plain language and
purposes of the statute compel the conclusion that Plaintiff is
a beneficiary of the Plan at issue. He is listed as an insured
in the Plan, as shown by the documents submitted in the
In addition, even if Plaintiff could be thought of as an
"employer" (as broadly defined at 29 U.S.C. § 1002(5)), the
antiinurement provision would not prevent Plaintiff from having
standing because of Plaintiffs role in the plan at issue here.
The facts presented in response to the Court's request for
supplemental briefing demonstrates that Plaintiff has no control
over the Plan assets in this case. Though Plaintiff is involved
in some aspects of the Plan, such as selecting the coverages
that are purchased and determining when employees could
participate, there is no risk of self-dealing or
misappropriation of Plan assets under the circumstances present
here. Plaintiff does not determine which claims are properly
paid and he does not retain any of the funds from which claims
are paid. His involvement with the Plan is much more akin to
that of someone who is simply insured by an outside insurance
company. There are no risks of self-dealing or misappropriation
or imprudent investment of fund assets in this case. Thus, the
anti-inurement provision provides no reason to find that despite
his status as a beneficiary, he lacks standing to maintain this
suit under ERISA.
The parties do not dispute that the Plan in this case is an
ERISA plan. In addition, as analyzed above, the plain language
and the purposes of the relevant provisions of ERISA weigh in
favor of concluding that Plaintiff has standing to maintain this
suit under ERISA.
Ergo, Plaintiffs motion to remand is DENIED. Plaintiffs'
response to Defendants' motion to dismiss shall be filed on or
before March 13, 2000.
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