David Tillery v. Hoffman Enclosures

On August 10, 1994, sixteen-year-old David Tillery was seriously injured in
a motor vehicle accident. The accident left him a paraplegic and necessitated removal
of 30 feet of intestine and resection of his bowel. In 1995, doctors referred him to the
University of Minnesota where he was accepted as a candidate for experimental
bowel transplant surgery. A successful bowel transplant was performed at the
University of Minnesota in June, 1996. At the time of the accident, Kathy Tillery was employed by Hoffman
Enclosures, Inc. Hoffman provided an employee welfare benefit plan (Plan),
governed by the Employee Retirement Income Security Act (ERISA) 29 U.S.C. §§
1001-1461, under which David received medical benefits. Hoffman acted as plan
administrator, and Medica, Inc., was the claims administrator. Hoffman had authority
to decide all questions of eligibility, to make claims decisions, and to review appeals.
The Plan specifically granted the plan administrator discretion with respect to the
administration, operation and interpretation of the Plan. Medica had authority and
responsibility for receiving and reviewing claims for benefits, determining amounts,
making disbursements, and reviewing and determining denied claims and appeals.

Before performing the bowel transplant, the University of Minnesota sought
pre-approval of the costs from Medica, HealthPartners2 and the State of Minnesota
Medical Assistance. Medica received the request on or about August 21, 1995, and
assigned it to a transplant case manager for review and investigation. The case
manager, after conducting research into bowel transplants, determined the procedure
was experimental and recommended denial to Medica's medical director. The
medical director reviewed the findings and recommended Hoffman deny benefits based upon an exclusion in the plan covering experimental procedures. Hoffman
denied benefits and the procedure was paid for by Minnesota Medical Assistance.

The notice of denial was sent to the State of Minnesota and the University of
Minnesota. There is no evidence the Tillerys received a denial notice or were
otherwise aware of the denial until May 19, 1997. Thereafter, the Tillerys were
provided with a list of benefits denied and the basis for the denials. Approximately
two years later, the Tillerys filed this action in state court alleging Hoffman had
improperly denied medical benefits to David. Hoffman removed the action to federal
court and successfully moved for summary judgment.

On appeal, the Tillerys contend Hoffman acted under a conflict of interest
when it denied David's claim for bowel transplant surgery. The Tillerys also argue
serious procedural irregularities existed which cast doubt on the propriety of
Hoffman's denial. Finally, the Tillerys contend Hoffman's denial of benefits to David
was unreasonable.

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The Tillerys contend the less deferential standard of review enunciated in Woo
applies. A conflict of interest may trigger a less deferential standard of review. Woo,
144 F.3d at 1161. The degree of deference will decrease on a sliding scale in
proportion to the extent of the conflict, recognizing the arbitrary and capricious
standard is inherently flexible. Id. Not every funding conflict of interest, however,
warrants heightened review, id. at 1161 n.2, because ERISA itself contemplates the
use of fiduciaries who might not be entirely neutral. Farley v. Ark. Blue Cross &
Blue Shield, 147 F.3d 774 (8th Cir. 1998). The less deferential standard of review
applies when the plaintiff presents "material, probative evidence demonstrating (1)
a palpable conflict of interest or a serious procedural irregularity existed, which (2)
caused a serious breach of the plan administrator's fiduciary duty." Woo, 144 F.3d
at 1160. Only when a claimant meets the "two-part gateway requirement" does the
court apply a "sliding scale" approach to determine just how much deference should
be given the plan administrator's decision. Schatz, 220 F.3d at 947.

Under the first part of the sliding scale analysis, a claimant seeking a less
deferential standard of review must present material, probative evidence of a palpable
conflict of interest or serious procedural irregularity. Woo, 144 F.3d at 1160; see also
Barnhart v. UNUM Life Ins. Co., 179 F.3d 583, 589 (8th Cir. 1999) (holding a
claimant must do more than make unsubstantiated assertions to prove a palpable
conflict of interest or serious procedural irregularity). For example, when an entity funds a plan and is also the plan administrator there is a rebuttable presumption of a
palpable conflict of interest. Barnhart, 179 F.3d at 587-88. Not every funding
conflict, however, automatically leads to the conclusion a palpable conflict of interest
exists. See Davolt v. The Executive Comm. of O'Reilly Auto., 206 F.3d 806, 809-10
(8th Cir. 2000) (holding the district court erred by finding an automatic conflict of
interest merely because insurer and administrator were the same).

If a claimant successfully establishes either a palpable conflict of interest or
serious procedural irregularity, he must also show the conflict or irregularity caused
a serious breach of the plan administrator's fiduciary duty. Schatz, 220 F.3d at 948.
The evidence offered by the claimant must give rise to serious doubts as to whether
the result reached was the product of an arbitrary decision or the plan administrator's
whim. Id. It is not enough simply to show the plan administrator did not act in the
sole interest of the claimant. The plan administrator's fiduciary duties extend to
everyone covered by the plan, and an administrator who fails properly to investigate
a claim breaches its fiduciary duty to all beneficiaries by granting benefits to
unqualified claimants. Barnhart, 179 F.3d at 589.

The Tillerys argue Hoffman had a palpable conflict because the plan was
partially self-funded. They also claim serious procedural irregularities occurred when
Hoffman failed to provide them with (1) a summary plan description (SPD),3 (2)
timely notice of the denial of benefits, and (3) notice of their appeal rights.

Because Hoffman's plan was partially self-funded there was potential for a
conflict of interest. Further, it is undisputed the Tillerys were not provided notice of
the denial and of their appeal rights as required by ERISA. Thus, we will assume, without deciding, that the Tillerys have met the first part of the Woo test. See
Barnhart, 179 F.3d at 587-88 (holding when an entity funds a plan and is also the plan
administrator there is a rebuttable presumption of a palpable conflict of interest); cf.
McGarrah v. Hartford Life Ins. Co., 234 F.3d 1026, 1031 (8th Cir. 2000) (holding
plan administrator's failure to respond to a timely filed appeal is a serious procedural
irregularity). Next, the Tillerys must show the conflict or procedural irregularities
give rise to serious doubts as to whether the denial was the product of an arbitrary
decision or the plan administrator's whim. Schatz, 220 F.3d at 948. This they have
not done.

The Tillerys first claim Hoffman failed to prepare an SPD. Their claim,
however, is contradicted by the record. The Tillerys include in their two copies of
Hoffman's SPD. While they question whether this is the actual SPD, they provide no
evidence to contradict Hoffman's assertions to the contrary. See Barnhart, 179 F.3d
at 589 (holding a claimant must do more than make unsubstantiated assertions to
prove a palpable conflict of interest or serious procedural irregularity).

Next, the Tillerys argue the SPD conflicts with the Plan. The SPD does not
contain language excluding coverage for experimental procedures, and they contend
the broader coverage, implied by omission of the exclusion from the SPD, controls
over the Plan language. The Tillerys are mistaken. Although the provisions of an
SPD prevail over conflicting provisions contained in the actual plan, Jensen v.
SIPCO, Inc., 38 F.3d 945, 952 (8th Cir. 1994), the rule does not apply "when the plan
document is specific and the SPD is silent on a particular matter. While clear and
unambiguous statements in the summary plan description are binding, the same is not
true of silence." Id. (internal quotations and citations omitted) (emphasis in original).
Thus, the Plan's express language excluding experimental procedures controls.

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Click the case caption above for the full text of the
Court's opinion.

The district court's order granting summary judgment is affirmed.

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Kent Morlan

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