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Levy v. Lewis

decided: November 12, 1980.


Appeal from an order of the Southern District of New York, Owen, J., dismissing the complaint for failure to state a claim under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1381. Affirmed on other grounds.

Before Lumbard, Mansfield and Mulligan, Circuit Judges.

Author: Lumbard

Appellant Levy represents a class of retired employees of the Consolidated Mutual Insurance Company (CMIC). Appellee Lewis, the New York State Superintendent of Insurance, has acted as Rehabilitator and Liquidator of CMIC under the authority of various state court orders. In his capacity as Liquidator, Lewis terminated certain retirement benefits of former CMIC employees including Levy and then sought approval of his action in the state courts. Levy subsequently filed this action for equitable relief in the District Court for the Southern District of New York alleging that termination of benefits constituted both a breach of fiduciary duty and a violation of an employee welfare benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1381 (1976 and Supp. II 1978). The district court found that no cause of action under ERISA had been stated and dismissed the complaint. We affirm dismissal of appellant's complaint because we hold first that Lewis is not an ERISA fiduciary and second that the district court should have abstained on the question of violation of the plan.


Harold Levy retired from CMIC, a mutual casualty insurer, in 1972. CMIC sponsored a number of programs providing retirees like Levy with various insurance benefits, including group life insurance, medical and health insurance (Blue Cross/Blue Shield) and major medical coverage. These benefits were provided through insurance policies held by CMIC on which premiums were paid annually out of general operating revenues.

In an attempt to salvage CMIC's worsening financial condition, beginning in November of 1978, Superintendent Lewis acted as Rehabilitator of CMIC and its subsidiary, Long Island Insurance Company, pursuant to a state court order. CMIC's position, however, further declined, and Levy instituted proceedings to liquidate CMIC as authorized by Section 526 of the New York Insurance Law.*fn1 On May 31, 1979, the New York Supreme Court ordered that CMIC be liquidated and that Lewis, as Superintendent of Insurance, be appointed Liquidator. Lewis was thereby granted title to all of CMIC's property.

In carrying out his statutory obligation to consolidate and preserve CMIC's assets for distribution to policyholders and general creditors, Lewis terminated the retirement benefits being provided to Levy and other retirees. Levy and four other retirees immediately filed with Lewis a Notice of Claim on behalf of all retirees pursuant to Section 544 of the New York Insurance Law, seeking restoration of benefits. On October 19, 1979, Lewis denied these claims and instituted special proceedings in New York Supreme Court in order to have his disallowance of the claims approved. On November 19, 1979, the Supreme Court referred the proceedings to a State Referee. A pretrial conference was held before the Referee, and discovery was begun.

Levy subsequently brought suit in the United States District Court for the Southern District of New York on behalf of all retirees. He alleged that Lewis's termination of retirement benefits violated ERISA because the provision of benefits constituted an "employee welfare benefit plan" under the statute, 29 U.S.C. § 1002(1)(A), and Lewis's termination 1) violated the terms of the plan, for which a remedy is afforded under 29 U.S.C. § 1132(a)(1)(B), and 2) amounted to a breach of fiduciary duty under 29 U.S.C. § 1104 since Lewis fell within the definition of an ERISA fiduciary, 29 U.S.C. § 1002(21). Levy asked for preliminary and permanent relief reinstating retirement benefits. After considering Levy's motion for preliminary relief and Lewis's cross-motion to dismiss for failure to state a claim, Judge Owen dismissed the suit. Judge Owen held that even if the benefits were being provided according to a qualified employee welfare benefit plan and even if Levy was a fiduciary of that plan-both of which propositions he doubted-there was nothing in ERISA which required that welfare benefits, funded year to year out of operating revenues, be continued in the event of liquidation or insolvency.


We agree with the district court that Levy's complaint should be dismissed, but we reach that result by a different route. In our opinion, Levy's first claim, that of a violation of the terms of an employee welfare fund, should have been left to the state courts for determination. Levy's claim of a breach of fiduciary duty raises a question which is exclusively a matter of federal determination, and therefore we reach that question, but decide it in favor of Superintendent Lewis.

There are three aspects of abstention doctrine relevant to this case.*fn2 In Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1943), the Supreme Court held that the federal courts should abstain from interfering with specialized, ongoing state regulatory schemes. Burford itself involved an order of the Texas Railroad Commission authorizing the drilling of oil wells. The Court found that the complex state system for regulation of the oil industry, involving administrative decision-making and judicial review, should be allowed to function without continual interference from the federal courts. "Delay, misunderstanding of local law, and needless federal conflict with the state policy" would be "the inevitable product of this double system of review." 319 U.S. at 327, 163 S. Ct. at 1104.

In keeping with Burford's concern with noninterruption of state administrative programs, the federal courts have abstained in numerous areas where state regulation involved matters of substantial state concern and where state policies were carried out in a statutorily established regulatory program by state officials. See, e. g., Alabama Public Service Commission v. Southern Railway, 341 U.S. 341, 71 S. Ct. 762, 95 L. Ed. 1002 (1951) (state regulation of intrastate railroad passenger service); Kelly Services, Inc. v. Johnson, 542 F.2d 31 (7th 1976) (state regulation of employment agencies). Most important for our purposes, Burford abstention has been applied to state regulation of insurance. See e. g., Smith v. Metropolitan Property and Liability Insurance Co., 629 F.2d 757 (2d Cir., 1980); Meicler v. Aetna Casualty & Surety Co., 372 F. Supp. 509 (S.D.Tex.1974) aff'd, 506 F.2d 732 (5th Cir. 1975); Mathias v. Lennon, 474 F. Supp. 949 (S.D.N.Y.1979).

In this case, New York State has a complex administrative and judicial system for regulating and liquidating domestic insurance companies. See note 1 supra. The Superintendent of Insurance is an experienced state official who has been involved both in rehabilitating and liquidating CMIC. Liquidation in particular is an area in which the Superintendent's expertise is critical. Liquidation proceedings involve the adjustment of thousands of claims against the insurer by policyholders and those who claim under them, as well as claims by present employees, past employees, and general creditors. Moreover, the claims must be satisfied by marshalling the existing assets of the insolvent company and by reinsuring existing policies using a state fund established for this purpose.

It is also highly significant that the state scheme has been adopted pursuant to congressional authorization. In the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, Congress mandated that regulation of the insurance industry be left to the individual states. Thus the administrative and judicial scheme erected by New York to regulate insurance companies, including that part enabling the institution and implementation of liquidation proceedings, operates pursuant to an express federal policy of noninterference in insurance matters. Federal courts have therefore been slow to interrupt such schemes unless necessary, particularly when federal court action would impinge upon the area in which Congress has recognized the overriding interest of the States.

Finally, the liquidation process would be greatly impeded by subjecting it to two authorities. The experience of our own federal bankruptcy courts evidences the importance of consolidating all of the assets of an insolvent company and gathering all those who have claims against those assets in a single forum. As noted by the Eighth Circuit in Motlow v. Southern Holding & Securities Corp., 95 F.2d 721, 725-26 (8th Cir.), cert. denied, 305 U.S. 609, 59 S. Ct. 68, 83 L. Ed. 388 (1938):

Experience has demonstrated that, in order to serve an economical, efficient, and orderly distribution of the assets of an insolvent corporation for the benefit of all creditors and stockholders, it is essential that the title, custody, and control of the assets be entrusted to a single management under the supervision of one court. Hence other courts, except when called upon by the court of primary jurisdiction for assistance, are excluded from participation. This should be particularly true as to proceedings for the liquidation of insolvent insurance companies, for the reasons adverted to by Mr. ...

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