Gentry v. Principal Life Ins. Co.

804 F.Supp.2d 652

Paul GENTRY, Plaintiff,

v.PRINCIPAL LIFE INSURANCE COMPANY, Defendant.

Case No. 3:09–cv–0681.

United States District Court, M.D. Tennessee, Nashville Division.

March 31, 2011.

Clifton David Briley, Bone, McAllester & Norton, PLLC, Nashville, TN, for Plaintiff.

S. Russell Headrick, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Knoxville, TN, Emily H. Plotkin, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Nashville, TN, for Defendant.

ORDER

JOHN T. NIXON, Senior District Judge.

Pending before the Court is Defendant Principal Life Insurance Company's (“Defendant” or “Principal Life”) Motion to Dismiss or for Summary Judgment (“Defendant's Motion”) (Doc. No. 12) and supporting Memorandum (Doc. No. 13). Plaintiff Paul Gentry (“Plaintiff” or “Gentry”) filed a Response (Doc. No. 20), to which Defendant filed a Reply (Doc. No. 23).

Defendant's Motion, filed on September 8, 2009, asks the Court to dismiss Plaintiff's Complaint, filed on July 27, 2009 (Doc. No. 1), on the grounds that Plaintiff's claims are preempted by the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. (Doc. No. 12 at 1.) After Defendant filed its Motion, Plaintiff filed an Amended Complaint (Doc. No. 16) on September 15, 2009, alleging certain state law claims, id. at 3–5, as well as a violation of ERISA, id. at 5–6. On November 9, 2009, Plaintiff filed a Notice of Voluntary Dismissal as to all the claims in his Amended Complaint save the ERISA claim (Doc. No. 25), which the Court approved on November 12, 2009 (Doc. No. 26). While Defendant's Reply brief argues that Plaintiff's Amended Complaint is a “nullity” because Plaintiff did not seek the Court's leave to file it (Doc. No. 23 at 2–3), a plaintiff is permitted, per Federal Rule of Civil Procedure 15(a)(1)(B) to “amend its pleading once as a matter of course within ... 21 days after service of a motion under Rule 12(b) [.]” Plaintiff's Amended Complaint was filed on September 15, 2009, seven calendar days after Defendant filed its Rule 12(b) Motion to Dismiss. His Amended Complaint is thus properly before the Court. Given that Plaintiff has abandoned all claims save his ERISA claim, Defendant's Motion to Dismiss or for Summary Judgment on the grounds that Plaintiff's state law claims are preempted by ERISA is hereby DENIED as moot.

Also pending before the Court is Plaintiff's Motion for Judgment on the Record (Doc. No. 33) (“Plaintiff's Motion”) with supporting Memorandum (Doc. No. 34). Defendant filed a Response in Opposition (Doc. No. 38), requesting that the Court deny relief to Plaintiff and affirm Defendant's claim determination.

For the reasons stated herein, the Court DENIES Plaintiff's Motion.

I. BACKGROUND ¹

Plaintiff is the 100% owner of a C–Corporation known as Old Timer Log Homes and Supply, Inc. (“OTLH”). On December 22, 2004, OTLH applied for a group long-term disability insurance policy with Defendant for its employees (hereinafter referred to as “members” or “insureds”). A policy numbered GLT H16294 (“the Policy”) was issued by Defendant on January 4, 2005. OTLH is the Policyholder. The Policy states:

Primary Monthly Benefit

66 2/3% of the Member's Predisability Earnings ...

(Gentry 0254).

Predisability Earnings

A Member's Monthly Earnings in effect prior to the date Disability begins.

Id.

Monthly Earnings

For Members with no ownership interest in the business entity of the Policyholder:

On any date, a Member's basic monthly (or monthly equivalent) wage then in force, as established by the Policyholder. Basic wage does not include commissions, bonuses[,] tips, differential pay, housing and/or car allowance, or overtime pay. Basic wage does include any deferred earnings under a qualified deferred compensation plan such as contributions to Internal Revenue Code Section 401(k), 403(b) or 457 deferred compensation arrangements and any amount of voluntary earnings reduction under a qualified Section 125 Cafeteria Plan.

For Members with ownership interest in the business entity of the Policyholder, such as an owner of a sole proprietorship, a partner in a partnership, a shareholder of a corporation or subchapter S-corporation, or a member of a limited liability company or limited liability partnership, Monthly Earnings on any date are based on an average of the following earnings as reported for Federal Income Tax purposes for the last two calendar year(s), assuming the owner meets all eligibility requirements:

a. the Member's share (based on ownership or contractual agreement) of the gross revenue or income earned by the Policyholder, including income earned by the Member and others under the Member's supervision or direction; less b. the Member's share (based on ownership or contractual agreement) of the usual and customary unreimbursed business expenses of the Policyholder which are incurred on a regular basis, are essential to the established business operation of the Policyholder, are deductible for Federal Income Tax purposes, and do not exceed the expenses before Disability began; plus

c. the salary, benefits, and other forms of compensation which are payable to the Member, and any contributions to a pension or profit sharing plan made on the Member's behalf by the Policyholder.

Monthly earnings do not include any form of unearned income such as dividends, rent, interest, capital gains, income received from any form of deferred compensation, retirement, pension plan, income from royalties, or disability benefits.

(Gentry 0250–0251 (emphasis added).)

Plaintiff suffers from Parkinson's Disease, and on October 16, 2007, he initiated a claim for disability under the Policy alleging an onset date in 2007. Defendant initially denied Plaintiff's claim on February 28, 2008 because it determined that Plaintiff was not disabled per the definition in the Policy. It also questioned whether Plaintiff would be entitled to more than the Policy's $50 per month minimum benefit as a result of the Policy's “Owner's Monthly Earnings” definition because the Policyholder (OTLH) had sustained substantial net losses during the two years prior to the alleged onset of disability. Using OTLH's corporate tax returns and W–2s for 2005 and 2006 that Gentry had provided, one of Defendant's financial analysts extracted from those tax documents OTLH's gross revenue, total expenses, and the amount OTLH paid Plaintiff in salary. The financial analyst then calculated the “Owner's Monthly Earnings” or “Predisability Earnings,” as described above. This calculation showed that Plaintiff had negative “Predisability Earnings.” The Policy provides that all eligible Members, even those whose monthly earnings (calculated as described above) are negative numbers, may receive the minimum $50 per month benefit. Defendant advised Plaintiff of these calculations and detailed them for him in a letter dated January 22, 2008. (Gentry 0312–0330.)

In August of 2008, Plaintiff requested that Defendant reconsider its determination that Plaintiff did not meet the Policy's definition of “Disability.” In October of 2008, Plaintiff's counsel stated in a letter to Defendant that the “Owner's Monthly Earnings” provision only applied to “entities organized as S chapter corporations, LLCs, LLPs, sole proprietors and partners.” (Gentry 0361.)

In a letter dated November 17, 2008, Defendant concluded that Plaintiff did meet the definition of “Disability” but informed Plaintiff that he was only entitled to the minimum monthly benefit of $50 because he had no “Reported Monthly Compensation.” (Gentry 0092–0094.) When Plaintiff's counsel inquired as to how Defendant had arrived at the benefit amount, Defendant forwarded on November 20, 2008 a copy of the January 22, 2008 letter which went through the calculations of the “Owner's Monthly Earnings.” (Gentry 0310.)

After a telephone call with Plaintiff's attorney, Defendant clarified in a letter that the “Owner's Monthly Earnings” provision quoted above includes the C–Corporation Policyholder's revenues and expenses along with the controlling shareholder-insured's salary. (Gentry 0090.) Plaintiff appears to have argued that the revenues and expenses of a C–Corporation should not be included under the definition because the Internal Revenue Code does not consider a C–Corporation a pass-through entity ( i.e., OTLH's income and expenses are not treated as Plaintiff's income and expenses for tax purposes, as they would be if OTLH were an S–Corporation or a limited liability company). Defendant explained that the Policy's “Owner's Monthly Earnings” provision (requiring the consideration of revenues and expenses) was based on the level of influence that owner-insureds could have over compensation, and that the provision was not based solely on how income is classified under the Internal Revenue Code. Id.

On January 26, 2009, Plaintiff again sought reconsideration of Defendant's benefit amount decision, but presented no new argument or information. See Gentry 0301–0305. By letter dated February 25, 2009, Defendant affirmed its benefit amount decision, reiterating its previous reasoning. Plaintiff filed the instant action in this Court on July 27, 2009.

II. STANDARD OF REVIEW

When an ERISA plan grants the plan administrator discretionary authority to determine benefit eligibility, the district court must review the plan administrator's decision under the arbitrary and capricious standard. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989); McDonald v. W.-S. Life Ins. Co., 347 F.3d 161, 168 (6th Cir.2003). Here, the Plan states that the plan administrator “reserve[s] the discretion to construe or interpret the provisions of this group insurance, to determine eligibility for benefits, and to determine the type and extent of benefits, if any, to be provided.” (Doc. No. 27–1 at 14.) Plaintiff does not dispute that the Plan grants discretionary authority to Defendant's plan administrator, and...