Monterey Peninsula Horticulture v. Employee Benefit Management Services

Background

Monterey Peninsula Horticulture, Inc. and its employee benefit plan sued Employee Benefit Management Services, Inc. (EBMS), alleging that EBMS failed to properly administer the plan. Monterey Peninsula Horticulture had implemented a self-funded health benefit plan and entered into an Administrative Services Agreement and a Claims Delegate Service Agreement with EBMS for third-party administrative services.

The agreements required EBMS to help prepare plan documents and benefit materials, process and pay provider claims according to the plan document, perform the first level of review for provider appeals, and cooperate in defending lawsuits arising from related matters. The complaint also alleged that EBMS controlled plan assets by determining the recipients and amounts of benefit payments, including by issuing checks from an account funded by the plan.

The complaint alleged that EBMS failed to prepare a summary plan description that complied with federal law, failed to administer the plan according to that description, and misrepresented benefit levels to health-care providers. After providers sued Monterey Peninsula Horticulture over allegedly underpaid services, Monterey Peninsula Horticulture sued EBMS for indemnity. The current complaint asserted claims for breach of fiduciary duty, breach of written contract, indemnification, and negligence.

EBMS’s Motion to Dismiss

EBMS moved to dismiss, arguing that Monterey Peninsula Horticulture had not satisfied the parties’ contractual mediation requirement and that EBMS was not a fiduciary. The court considered the motion under Rule 12(b)(6), which tests whether a complaint alleges enough facts to support a legally recognized claim. At this stage, the court generally accepts the complaint’s factual allegations as true and views them in the light most favorable to the party opposing dismissal.

Mediation Requirement

EBMS argued that Monterey Peninsula Horticulture had not mediated in good faith because it sent only legal counsel, rather than a corporate representative, to the mediation. The complaint alleged that the parties met before a mediator in Billings, Montana, and continued the mediation process after the initial meeting, although it was unsuccessful.

The court held that these allegations plausibly showed that Monterey Peninsula Horticulture satisfied its contractual obligation to mediate. EBMS’s assertions about who attended and whether the mediation was conducted in good faith involved facts outside the complaint that the court could not decide on a motion to dismiss. The court added that, even if it treated the motion as one for summary judgment, disputed facts about whether EBMS had agreed to telephone participation and whether counsel had full settlement authority would prevent judgment at that stage. The court therefore denied EBMS’s motion to dismiss based on the mediation argument.

Fiduciary-Duty Claim

The Employee Retirement Income Security Act (ERISA) recognizes, among others, a “functional fiduciary”—a person or entity that exercises discretionary authority or control over management of a benefit plan or over the disposition of its assets. A third-party administrator that performs only ministerial, or routine administrative, functions is not necessarily a fiduciary. But the court explained that any control over the disposition of plan money can establish fiduciary status.

The complaint did not allege that EBMS was a fiduciary formally named in the plan documents. It instead alleged that EBMS was a functional fiduciary because it had authority and control over plan assets, including the authority under the parties’ agreement to issue checks from Monterey Peninsula Horticulture’s account to pay approved claims.

The court held that these allegations plausibly suggested EBMS exercised control over the disposition of plan assets. The agreement’s disclaimer that EBMS lacked final discretionary authority did not require dismissal because the allegations, which the court had to accept as true at this stage, suggested that EBMS had practical control over plan payments. The court therefore denied EBMS’s motion to dismiss the breach-of-fiduciary-duty claim.

Disposition

The court denied EBMS’s motion to dismiss. EBMS had to answer the complaint by June 26, 2020. The court also ordered the parties to file a joint status report by June 5, 2020, including proposals for global mediation involving this case and a related case identified in the order.