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Lawyers for the U.S. Department of Labor and a Kenilworth, N.J., foundry last Tuesday asked the New Jersey Appellate Division to rule that the federal ERISA statute does not pre-empt state claims that an insurance agent committed fraud in the sale of a group life coverage plan to an employer. The foundry, Alloy Cast Products Inc., claims that it purchased the plan a decade ago upon the agent’s promise that employer contributions would be tax-deductible and that employees would get tax-free retirement income. A few years later, when the Internal Revenue Service ruled the contributions were not tax-deductible, the company’s owners entered into what they call a hefty settlement with the tax collectors. In 1999, they sued agent James Barrett and others, charging racketeering, fraud, negligent misrepresentation, breach of fiduciary duty, conspiracy and aiding and abetting. The other defendants include the carrier, Lincoln National Life Insurance Co., and the plan administrator, Tri-Core Inc. Alloy Cast Products Inc. v. Barrett, A-5028-00T5. The defendants, arguing the claims are pre-empted by the Employment Retirement Income Security Act of 1974, moved the case to federal court. But U.S. District Judge John Lifland in New Jersey ruled the claims were not necessarily preempted and sent the case back to Superior Court. Union County, N.J., Judge John Boyle ruled that the claims are expressly pre-empted by ERISA and he dismissed the case on summary judgment. Last Tuesday, lawyers representing the plaintiffs and the U.S. Department of Labor told the Appellate Division that if the ruling stands, victims of agent fraud have no form of redress. “The federal ERISA statute has been turned on its head,” plaintiffs’ lawyer Steven Fram told Judges Stephen Skillman, Steven Lefelt and Michael Winkelstein. “The federal court held that the plaintiffs had no claims under ERISA and the state courts held that the plaintiffs had no claims in state court. That leaves them without a remedy and leaves the defendants without liability.” Fram, a partner at Haddonfield, N.J.’s Archer & Greiner, said federal courts have ruled in recent years that ERISA is not an all-encompassing bar to state claims against federally regulated benefits plans. He cited New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995), where the Supreme Court said ERISA preemption should not be presumed. “The mere presence of ERISA does not mean that [state] claims are pre-empted,” Fram said. “It is not a fully insulated world. Immunizing insurance agents does not promote the role of ERISA.” Ellen Beard, a lawyer for the intervenor Department of Labor, agreed, saying the defendants should be treated like anyone who is marketing and selling a product. “There is no pre-emption for fraud,” she said. In a brief, Department of Labor senior trial attorney Dennis Kade echoed Fram’s arguments. “The Superior Court … held, erroneously in our opinion, that ERISA preempts the state common law and statutory causes of action in this case, thereby leaving plan sponsors without remedies when financial planners or insurance agents commit misrepresentation or fraud while marketing employee benefit plan products,” wrote Kade. On the other hand, allowing suits such as this to proceed in state court “would promote certainty, understanding, and fair dealing in the marketing and selling of employee benefit plans, and thus would serve, rather than undercut, the ERISA scheme.” ERISA’s goal of protecting the interests of benefit plan participants is undermined if suits like Alloy’s are dismissed, she said. As expected, attorneys representing the defendants argued that the state claims are pre-empted by ERISA. If they prevail, it is unlikely a federal suit could go forward because Lifland already ruled that the plaintiffs had no ERISA claims. “All you need is a single employee trust to invoke ERISA,” said Barrett’s lawyer, Christopher Leise. Life-insurance plans such as the one marketed by Barrett are benefit plans as construed under ERISA and, therefore, state claims against his client and the other defendants are pre-empted, said Leise, a partner at Westmont’s White & Williams. Lincoln National’s lawyer, John Pendleton Jr., said Fram was reading too much into the Supreme Court’s Travelers decision. “There was not a whole new world created after Travelers,” said Pendleton, a partner at Newark, N.J.’s McCarter & English.

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