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STEWART v. NATIONAL EDUCATION ASSOCIATION

September 16, 2005.

MICHAEL STEWART AND ILENE BERGENFELD, Trustees of the Philip A. Stewart Irrevocable Trust, Plaintiffs,
v.
NATIONAL EDUCATION ASSOCIATION, et. al., Defendants.



The opinion of the court was delivered by: COLLEEN KOTELLY, District Judge

MEMORANDUM OPINION

The present dispute involves proceeds derived from the privatization of Prudential Life Insurance Company ("Prudential"). Currently before the Court is a Motion to Dismiss by Defendants National Education Association ("NEA") and National Education Members Insurance Trust ("NEA Trust") for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendants administer a group life insurance contract ("Group Contract") through its Members' NEA Insurance Plan ("Plan"). The Plan is underwritten by Prudential. Plaintiffs Michael Stewart and Irene Bergenfeld are trustees of the Philip A. Stewart Irrevocable Trust, which is the owner of a Group Life Insurance Contract ("Group Contract") administered through the Plan.*fn1 Plaintiffs contend that they were denied money they were entitled to from the privatization of Prudential.

The Group Contract is an "employee welfare benefit plan" under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et. seq. Plaintiffs filed an eleven count amended complaint seeking damages and/or restitution against Defendants for the loss of conversion privileges and demutualization consideration received by the NEA Trust after Prudential converted from a participating mutual insurance company to a non-participating stock company in December 2001. Defendants maintain that Plaintiffs' rights under the contract were not violated and that no special rights were created when the conversion took place.

  After reviewing Defendants' Motion ("Defs.' Mot."), Plaintiff's Opposition ("Pls.' Opp'n"), Defendant's Reply ("Defs.' Reply"),*fn2 and the applicable law, the Court finds that Defendant's Motion to Dismiss must be granted.

  I. Statutory Framework

  The Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et. seq., was enacted as a comprehensive regulation of private employee benefit plans for the purpose of protecting their participants and beneficiaries. See Aetna Health Inc. v. Davila, 542 U.S. 200, 124 S. Ct. 2488 (2004); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987). ERISA regulates employee welfare benefit plans ("welfare plans") that "through purchase of insurance or otherwise, provide medical, surgical, or hospital care, or benefits in the event of sickness, accident, disability, or death. Id. (quoting 29 U.S.C. § 1002(1) (internal quotations omitted)). ERISA applies to all employee benefit plans established or maintained by an employer engaged in, or affecting, commerce. 29 U.S.C. § 1003(a)(1). An employee benefit plan is defined as "an employee welfare benefit plan or an employee pension benefit plan or a plan which is both. . . ." 29 U.S.C. § 1002(3).

  There are regulations that cover both the fiduciary responsibilities of welfare plans, 29 U.S.C. §§ 1101-1104, and the disclosure of information to plan participants and beneficiaries. 29 U.S.C. §§ 1021-1022. Under ERISA, participants or beneficiaries of welfare plans can enforce their rights under the terms of their plan in a civil suit. See 29 U.S.C. § 1132(a). Should a welfare plan terminate, ERISA dictates that the assets of the plan shall be distributed "in accordance with the terms of the plan. . . ." 29 U.S.C. § 1103(d). ERISA also has an "anti-inurement" provision that prevents the assets of a plan from inuring to "the benefit of any employer," and requires benefits be held "for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expense of administering the plan." 29 U.S.C. § 1103(c)(1).

  Congress intended for ERISA to be expansive. With minor exceptions, state law relating to employee benefit plans is pre-empted by ERISA. Pilot Life Ins. Co., 481 U.S. at 54. ERISA section 514(a) explicitly states that "[e]xcept as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. . . ." 29 U.S.C. § 1144(a). The Supreme Court strictly construes the preemption provision in ERISA, opining that the "federal scheme would be completely undermined if ERISA-plan participants and beneficiaries were free to obtain remedies under state law that Congress rejected in ERISA." Aetna Health Inc., 124 S. Ct. at 2500 (quoting Pilot Life Ins. Co., 481 U.S. at 54). Any state-law cause of action that "duplicates, supplements, or supplants the ERISA civil enforcement remedy" is preempted. Id. at 2495. II. Factual Background

  Plaintiffs and other members of the NEA ("Member-Insureds") enrolled in the Group Contract, originally as "participants," before Prudential changed its ownership structure in 2001 from a mutual insurance company to a publicly owned, stock-based insurance company. Am. Compl. ¶ 12. The life insurance benefit under the Group Contract was one of several programs the NEA established under its Members' NEA Insurance Plan ("Plan"). Id. ¶ 6. Defendant NEA Trust is a trust established by the NEA for the purposes of holding the assets of the Plan. Id. ¶ 7.

  A. The Group Contract

  Member-Insureds made monetary contributions to the NEA Trust or the National Education Association Members Benefit Corporation ("NEA MBC"), a wholly owned subsidiary of the NEA, for the purposes of obtaining the benefits of the Group Contract. Id. ¶ 9. The NEA Trust in turn paid the premiums to Prudential from the fund. Id. ¶ 18. This arrangement was stipulated for in the Plan. Id. Defendant NEA established the Plan in or around September 1978. Id. ¶ 6. Designated Trustees have served the Plan since it became effective. Id. ¶ 7.

  The Plan provides group insurance to participants from its membership of approximately 2.7 million school teachers nationwide. Id. ¶ 6. The Plan's purpose is to

 
establish, maintain, and operate, on a voluntary and self-sustaining basis, one or more programs to provide benefits in the event of death, accident, sickness, disability, or other occurrence affecting participants and their family either on a self-funded basis or through one or more insurance policies acquired and maintained by the Trustees.
Id. Ex. D at 6.

  The ERISA statute supplies a definition of an "employee benefit plan" that includes an "employee welfare benefit plan," which is an employee benefit plan "established or maintained by an employer or by an employee organization, or by both, to the extent that such plan . . . was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise . . . benefits in the event of sickness, accident, disability, death [or other occurrences]." 29 U.S.C. §§ 1002(1), 1002(3).

  The Amended Complaint makes it clear that the NEA Members Insurance Plan is covered by ERISA. The NEA is an "employee organization" under 29 U.S.C. § 1002(4). See Am. Compl. ¶ 6 (stating that the "NEA is a national organization of school teachers"). The Plan was established or maintained by that organization. See id. ¶¶ 6, 42 (stating that "the NEA established the Members Insurance Plan"). Finally, the Plan's language, quoted infra, conforms to the definition of an "employee welfare benefit plan" under ERISA.*fn3 Plaintiffs are participants and/or beneficiaries under 29 U.S.C. § 1002(B)(7) & (8). As participants and beneficiaries in the Plan, Member-Insureds were entitled to certain rights under ERISA. Am. Compl. Ex. B. at 20.

  Pursuant to the Plan, the NEA offered a life insurance benefit to its members through the Group Contract, underwritten by Prudential. Id. ¶ 8. Since the Group Contract is a Plan document, it is also covered by ERISA. See id. Ex. B at 20 ("The terms of the Plan are currently contained in a Trust agreement and operating document governing the Plan, in the insurance policies issued to the Trust . . ."). The Group Contract consists of (1) the group contract itself, along with any attachments and endorsements, Am. Comp. Ex. A; (2) a Group Insurance Certificate, Am. Compl. Ex. B; and (3) the individual applications of Member-Insureds, Compl. Ex. C. The group contract contains a provision integrating these documents as the applicable contract:
The entire group contract consists of: (1) the Group Insurance Certificate(s) listed in the Schedule of Plans, a copy of which is attached to the Group Contract; (2) all modifications and endorsements to such Group Insurance Certificates which are attached to and made a part of the Group Contract by amendment to the Group Contract; (3) the forms shown in the Table of Contents as of the Contract Date; (4) the Contract Holder's application, a copy of which is attached to the Group Contract; (5) any endorsements or amendments to the Group Contract; and (6) the individual applications, if any, of the persons insured.
Id. ¶ 14 (citing Ex. A, `General Rules' at (7-1)C).
  The NEA Trust's published "Summary Plan Description," Am. Compl. Ex. B, makes it clear that the Group Contract was administered through the Plan:
GENERAL INFORMATION
Plan Name. The plan is generally known as the NEA Member Insurance Plan.
Trust Name. The Trust is generally known as the NEA Member Insurance Trust.
Program Name. The Program is generally known as the NEA Life Insurance Plan.
. . .
Termination and Amendment of Plan or Trust. The NEA and the Trustees reserve the right to modify or terminate the Plan, any Program, or the Trust at any time.
Am. Compl. Ex. B. at 20 (emphasis in original). The Summary Plan Description also alerts members of their rights regarding programs within the Plan under ERISA. Id. at 22. B. Prudential Conversion

  Members of a mutual insurance company own "participating life insurance contracts" and have a beneficial right to participate in the insurer's surplus. Id. ¶ 21. Should the expected value of the premium payments charged by the mutual insurer exceed costs, the mutual company's board may return a portion of the members' premiums in the form of dividends. Id. ¶ 23. This ownership structure allows policy owners to obtain insurance protection at cost. Id. In contrast, the price of a "non-participating policy" is set, and policy holders are not entitled to any surplus created by their premiums. Id. ¶ 22.

  Plaintiffs allege that the Member-Insureds were "members" of the insurance company with a proportional beneficial interest in Prudential's surplus as a result of the Group Contract, which was a "participating" policy. Id. ¶ 28. In support of their position, Plaintiffs point to the fact that Prudential directly determined the premiums for each Member-Insured and that the NEA did not pay any portion of the premiums. Id. ¶ 25. Furthermore, Plaintiffs claim that they are the beneficiaries of the Group Contract and that they specifically allocated their surplus dividends toward reducing the cost of their insurance. Id. ¶ 26. Plaintiffs claim, however, that in contrast to the provision for dividends there is no affirmative agreement in the Group Contract that would allow the NEA Trust to take or use the Member-Insureds membership interest for anyone other than the Member-Insureds. Id. at ¶ 27.

  In December 2001, the Prudential ownership structure changed and the company was converted into a stock-based life insurance company. Id. ¶ 8. The process of conversion from a mutual insurance company to a stock company is referred to as demutualization. By reason of the conversion, the Group Contract was terminated and replaced by a "non-participating" policy underwritten by Prudential Financial Inc. ("PFI"). Id. ¶ 32, 35. The old Group Contract provided a "Conversion Privilege":
Prudential will give an individual certificate to each insured Member. It will describe the Member's coverage under the Group Contract. It will include (1) to whom Prudential pays benefits, (2) any protection and rights when the insurance ends, and (3) claim rights and requirements.
Id. ¶ 35 (citing Ex. A, p. 5) (emphasis omitted). The Conversion Privilege also provided the Member-Insureds the right to convert their Group Contract rights to individual contracts for insurance. Id. ¶ 36.

  For the conversion to take place, the company had to terminate its existing "participating" policies. Id. ¶ 29. Prudential's parent company, Prudential Financial Inc. ("PFI"), underwent its initial public offering on December 13, 2001, and on that date the "participating" contracts were dissolved. Id. ¶ 31. Prudential compensated members for the loss of their membership interests with cash, insurance policy credits or stock in the newly created PFI. The resulting compensation is known as "demutualization interest" or consideration. The consideration was paid to the NEA Trust, which Plaintiffs assert was required by the New Jersey Conversion Law and given on behalf of the Member-Insureds as the beneficiaries of the Group Contract. Id. ¶ 39.

  On September 1, 2002, after receiving the demutualization consideration, the NEA Trust and the Trustees amended the Plan to redefine "Trust Fund" in section 1.9 of the Plan and "Surplus Fund" in section 12.2 of the Plan. Id. ¶ 44. Plaintiffs claim the new definitions, which include "any equity shares or proceeds from insurance company demutualization," are an attempt to retroactively redefine the terms in the Plan to give NEA and the NEA Trust control and ownership of the consideration. Id. (quoting Ex. D-1, p. 15). Plaintiffs claim that Article Thirteen (13) of the Plan prohibits retroactive amendments that result ...


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