Naumann v. Benefit Strategies

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

ROGER NAUMANN, et al., Plaintiffs/Appellants,

v.

BENEFIT STRATEGIES WEST, INC., et al., Defendants/Appellees.

No. 1 CA-CV 20-0537
FILED 4-21-2022

Appeal from the Superior Court in Maricopa County
No. CV2019-096473
The Honorable Daniel G. Martin, Judge

VACATED AND REMANDED

COUNSEL

Gordon Rees Scully Mansukhani, LLP, Phoenix
By Daryl R. Wilson
Counsel for Plaintiffs/Appellants

Evans Dukarich LLP, Tempe
By Steven L. Evans, Gary Dukarich, Nicholas J. Kuntz, Michael D. Malin
Counsel for Defendants/Appellees
 NAUMANN, et al. v. BENEFIT STRATEGIES, et al.
Opinion of the Court

OPINION

Judge Brian Y. Furuya delivered the opinion of the Court, in which Chief
Judge Kent E. Cattani and Judge Samuel A. Thumma joined.

F U R U Y A, Judge:

¶1 Plaintiffs Roger and Cheryl Naumann (the “Naumanns”)
appeal the dismissal of their three common law claims, which the superior
court found were preempted by the federal Employee Retirement Income
Security Act of 1974 (“ERISA”), codified at 29 U.S.C. §§ 1001–1461. For the
following reasons, we vacate the dismissal of their complaint and remand.

FACTS AND PROCEDURAL HISTORY

¶2 The Naumanns own and operate the Second Home Pet
Resort, L.L.C. (the “SHPR”). They retained David Rosenthal to provide
investment advice for SHPR. Rosenthal recommended creation of a pension
plan (the “Plan”) for the benefit of the Naumanns and SHPR employees.
Rosenthal recommended the Naumanns hire Janet Odenwald, the principal
owner and professional of Benefit Strategies West, Inc. (“BSW”), to set up
and administer the Plan. The Naumanns hired BSW and established the
Plan effective January 2013.

¶3 The Naumanns served as trustees of the Plan, while BSW
(with Odenwald as the primary service provider) served as the third-party
administrator. The Naumanns relied upon calculations performed by
Odenwald and BSW to determine the contributions to be made to the Plan
and to protect Plan participants’ interests. The Naumanns also relied on
recommendations by Odenwald and BSW to maximize tax benefits. By
mid-2018, the Naumanns had contributed over $235,000 to the Plan.

¶4 After Odenwald died, the Naumanns learned that the Plan
was underfunded by at least $460,000. In 2019, the Naumanns sued
Odenwald’s estate (the “Estate”) and others, but not BSW, in federal district
court, alleging Odenwald breached a fiduciary duty under ERISA by failing
to provide accurate Plan contribution calculations, which resulted in
underfunding of the Plan. The Estate moved to dismiss, claiming
Odenwald and BSW provided ministerial services and thus owed no
fiduciary duty under ERISA. Relying on a stipulation of the parties that

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Opinion of the Court

neither Odenwald nor BSW were fiduciaries under ERISA, the district court
dismissed the complaint against the Estate with prejudice, adding that the
personal representative of the Estate, BSW “and any other related persons
or parties not named in this case are dismissed with prejudice as to any
federal law claims that have been or could have been brought and without
prejudice to any state law claims.”

¶5 The Naumanns then filed this case in superior court against
the Estate and BSW (the “Defendants”). The Naumanns alleged three
Arizona common law claims: (1) BSW breached its contract “by providing
inaccurate calculations of Plan contributions”; (2) the Defendants breached
an implied warranty “to perform the contract with care and diligence and
in a reasonable, non-negligent manner . . . by failing to perform their
contractual obligations in a reasonable and non-negligent manner”; and (3)
the Defendants committed professional negligence by failing to provide
accurate Plan contribution calculations.

¶6 The Defendants moved to dismiss, arguing the Naumanns’
claims were barred by express and conflict preemption under ERISA.
Attaching the federal court stipulation, the Defendants argued the
Naumanns’ claims “are inextricably bound to the ERISA framework and
are inherently swept aside by the exclusive authority of ERISA.” After
briefing and oral argument, the superior court found ERISA preempted the
Naumanns’ claims and dismissed the complaint.

¶7 Following entry of final judgment, the Naumanns timely
appealed, and we have jurisdiction pursuant to Arizona Revised Statutes
(“A.R.S.”) §§ 12-120.21(A)(1) and -2101(A)(1).

DISCUSSION

I. Standard of Review

¶8 We review the dismissal of a complaint for lack of subject
matter jurisdiction de novo. Satterly v. Life Care Ctrs. of Am., Inc., 204 Ariz.
174, 177, ¶ 5 (App. 2003). Whether ERISA preempts a state law claim is a
legal issue also subject to de novo review. Id. We assume the truth of the
well-pled factual allegations in the complaint and indulge all reasonable
inferences therefrom. Cullen v. Auto-Owners Ins. Co., 218 Ariz. 417, 419, ¶ 7
(2008).

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II. ERISA Overview & Preemption

¶9 It is undisputed that the Plan is governed by ERISA. See 29
U.S.C. § 1003. ERISA is an “intricate, comprehensive” statute governing
employee benefit plans, including pension and welfare plans. Boggs v.
Boggs, 520 U.S. 833, 839, 841 (1997); see 29 U.S.C. § 1001. ERISA’s regulatory
scheme is designed to safeguard the establishment, operation, and
administration of employee benefit plans by setting forth minimum
standards to assure the “equitable character of such plans and their
financial soundness.” Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 364
(2002) (citing 29 U.S.C. § 1001(a)). ERISA provides “appropriate remedies,
sanctions, and ready access” to federal courts when ERISA administrators
fail to comply with such standards. See Aetna Health Inc. v. Davila, 542 U.S.
200, 208 (2004); Boggs, 520 U.S. at 839; 29 U.S.C. § 1001(b).

¶10 In order “to afford employers the advantages of a uniform set
of administrative procedures governed by a single set of regulations,” Fort
Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 11 (1987), ERISA contains
“expansive pre-emption provisions, . . . which are intended to ensure that
employee benefit plan regulation [be] ‘exclusively a federal concern,’”
Aetna Health Inc., 542 U.S. at 208 (quoting Alessi v. Raybestos-Manhattan, Inc.,
451 U.S. 504, 523 (1981)). Although broad, ERISA preemption is not limitless
and does not apply to every instance where ERISA and state law happen to
intersect. Rather, preemption of state law occurs when a state law claim
expressly relates to an ERISA employee benefit plan, known as “express
preemption,” or when it conflicts with ERISA’s prescribed civil
enforcement regimes, known as “conflict preemption.” See Rutledge v.
Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474, 476, 479–83 (2020); Rush Prudential
HMO, Inc., 536 U.S. at 364, 375–80; Paulsen v. CNF Inc., 559 F.3d 1061, 1081
(9th Cir. 2009). As such, we must determine whether the Naumanns’ three
Arizona common law claims, based on the allegation that the Defendants
improperly calculated the amount needed to properly fund the Plan, are
preempted by ERISA under express or conflict preemption.

¶11 When evaluating whether Arizona law is preempted by
ERISA, we must consider “ERISA’s objectives ‘as a guide to the scope of the
state law that Congress understood would survive.’” Rutledge, 141 S. Ct. at
480 (quoting Cal. Div. of Lab. Standards Enf’t v. Dillingham Constr., N.A., Inc.,
519 U.S. 316, 325 (1997)). Thus, “congressional intent is relevant to the
preemption analysis.” Bafford v. Northrop Grumman Corp., 994 F.3d 1020,
1031 (9th Cir. 2021); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45 (1987).

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III. ERISA Does Not Expressly Preempt the Naumanns’ State Law
Claims

¶12 ERISA expressly preempts “any and all State laws insofar as
they may now or hereafter relate to any employee benefit plan” covered by
ERISA. 29 U.S.C. § 1144(a) (emphasis added). “‘A state law relates to an
ERISA plan if it has a connection with or reference to such a plan.’” Rutledge,
141 S. Ct. at 479 (quoting Egelhoff v. Egelhoff, 532 U.S. 141, 147 (2001)).

A. The Naumanns’ State Law Claims Do Not Have “an
Impermissible Connection With” the Plan.

¶13 Not every potential connection with a state law will run afoul
of ERISA’s express preemption provision. As the United States Supreme
Court observed in Rutledge, ERISA is:

primarily concerned with pre-empting laws that require
providers to structure benefit plans in particular ways, such
as by requiring payment of specific benefits, or by binding
plan administrators to specific rules for determining
beneficiary status, [or] . . . if acute, albeit indirect, economic
effects of the state law force an ERISA plan to adopt a certain
scheme of substantive coverage.

Rutledge, 141 S. Ct. at 480 (citations and internal quotation marks omitted).
Accordingly, a state law claim has “an impermissible connection with” an
ERISA plan if the applicable state law “governs a central matter of plan
administration or interferes with nationally uniform plan administration.”
Id. at 476, 480 (citing Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 320 (2016)).
“Crucially, not every state law that affects an ERISA plan or causes some
disuniformity in plan administration has an impermissible connection with
an ERISA plan.” Id.

¶14 Here, the Naumanns’ state law claims do not “govern[] a
central matter of plan administration” but rather concern a professional
services contract with a third-party administrator to perform, in relevant
part, non-discretionary, ministerial tasks; namely, calculating contributions
“according to the Plan terms” to guide the Naumanns in sufficiently
funding the Plan. See Rutledge, 141 S. Ct. at 480; Bafford, 1024–1028, 1032.

¶15 Likewise, there is nothing in the record indicating the
Naumanns’ state law claims would “interfere[] with nationally uniform
plan administration.” Rutledge, 141 S. Ct. at 480. The Naumanns’ Arizona
common law claims against the Defendants regarding calculation of

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contributions to fund the Plan would not in any way affect (let alone
interfere with) ERISA-related plan administration, nationally, locally, or
otherwise.

¶16 The Ninth Circuit additionally employs a “relationship test”
in analyzing the “connection with” inquiry, under which ERISA preempts
a state law claim where that “claim bears on an ERISA-regulated
relationship.” Paulsen, 559 F.3d at 1082–83. Such relationships include, for
example, those between a (1) plan and plan member, (2) plan and employer,
(3) employer and employee, and (4) plan and trustee. Id. (citations omitted).

¶17 Here, no such relationship exists between the Naumanns and
the Defendants. Instead, the Naumanns are suing a third-party service
provider that performed, as relevant here, the non-discretionary,
ministerial task of calculating Plan contributions according to Plan terms.
See Bafford, 994 F.3d at 1031–32. ERISA does not “purport to regulate those
relationships where a plan operates just like any other commercial entity—
for instance, the relationship between the plan and its own employees, or
the plan and its insurers or creditors, or the plan and the landlords from
whom it leases office space.” Paulsen, 559 F.3d at 1083. As in Paulsen, the
state law claims here may “[a]t most . . . interfere with a relationship
between the plan and its third-party service provider,” meaning they are
not preempted by ERISA. Id. Therefore, the Naumanns’ state law claims
bear no impermissible connection with their Plan under either Rutledge or
Paulsen.

¶18 The Ninth Circuit’s recent decision in Bafford v. Northrop
Grumman Corp. supports this conclusion. 994 F.3d 1020 (9th Cir. 2021). In
Bafford, Northrop Grumman Corporation sponsored an employee pension
plan governed by ERISA. Id. at 1024. Hewitt Associates L.L.C. (“Hewitt”),
in turn, provided “outside administrative services” for the plan, including
providing plan participants estimates of what their monthly pension
benefits would be upon retirement. Id. at 1024–25. Hewitt’s estimates,
however, overestimated the benefits certain participants would receive
upon their retirement. Id. After the Bafford plaintiffs, who were plan
participants, retired, they learned Hewitt’s estimates were wrong. Id. The
Bafford plaintiffs sued Hewitt for breach of fiduciary duties under ERISA
and professional negligence and negligent misrepresentation under state
law for the miscalculation of their benefits, with the district court
dismissing all claims. Id. at 1024–28, 1030–32.

¶19 On appeal, the Bafford court found that calculation of benefits
pursuant to a plan formula is not a fiduciary function, but a “ministerial

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Opinion of the Court

function that does not have a fiduciary duty attached to it,” and thus
affirmed the dismissal of the plaintiffs’ breach of fiduciary duty claim. Id.
at 1024–28, 1032. But it further held that ERISA did not expressly preempt
the plaintiffs’ state law claims against Hewitt. Id. at 1030–32.

¶20 Analyzing the “connection with” prong, the Bafford court
explained that a state law claim is preempted under that ground if it “bears
on an ERISA-regulated relationship,” such as the relationship between the
plan and its members, between the plan and the employer, or between the
employer and its employees. Id. at 1031–32; see Paulsen, 559 F.3d at 1082–83.
Because Hewitt’s duty giving rise to the negligence claims did not arise out
of any of those relationships but rather “from a third-party actuary, i.e., a
non-fiduciary service provider, to the plan participants as intended third
party beneficiaries of the actuary’s service contract,” the claims did not have
an impermissible connection with the ERISA plan. Bafford, 994 F.3d at 1031–
32 (citing Paulsen, 559 F.3d at 1083).

¶21 Here, as in Bafford, the Naumanns, acting as trustees for the
Plan, engaged an outside administrative service provider—BSW—to assist
with calculating Plan contributions. As in Bafford, BSW provided incorrect
calculations regarding contributions to be made to sufficiently fund the
Plan. This failure resulted in a substantial underfunding of the Plan, which
in turn allegedly caused loss of retirement and tax benefits. The Naumanns
sued the Estate in federal court, alleging breach of fiduciary duty, but
ultimately were compelled to abandon that claim because, as explained in
Bafford, third-party administrators do not generally owe fiduciary duties
under ERISA for ministerial actions, such as performing calculations
according to a plan formula. See id. at 1024–1028, 1032. Also parallel to
Bafford, the superior court dismissed the Naumanns’ state law claims
against the third-party administrator as preempted by ERISA. But Bafford
clarifies that asserting state law claims against those performing a
ministerial function does not impact any fiduciary relationship or duty that
would invoke ERISA’s express preemption as intended by Congress. See id.

¶22 To the contrary, the Bafford court observed that “[h]olding
both that Hewitt’s calculations were not a fiduciary function and that [the
plaintiffs’] state-law claims are preempted would deprive [p]laintiffs of a
remedy for the wrong they allege without examination of the merits of their
claim.” Id. at 1031. As in Bafford, “there is no ‘ERISA-related purpose that
denial of a remedy would serve’ in this instance.” Id. at 1031 (quoting Varity
Corp. v. Howe, 516 U.S. 489, 515 (1996)). Thus, the Naumanns’ state law
claims have no impermissible connection with the Plan that would warrant
express preemption under ERISA.

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B. The Naumanns’ State Law Claims Do Not Have an
Impermissible “Reference To” the Plan.

¶23 A state law claim has an impermissible “reference to” an
ERISA plan if the state law at issue “acts immediately and exclusively upon
ERISA plans” or “the existence of ERISA plans is essential to the law’s
operation.” Rutledge, 141 S. Ct. at 478, 481, 483 (citation omitted); accord Cal.
Div. of Lab. Standards Enf’t, 519 U.S. at 325; Bafford, 994 F.3d at 1031.

¶24 Where state laws regulate “areas where ERISA has nothing to
say,” even when they have “incidental effect on ERISA plans,” those state
law claims are not preempted by ERISA. Egelhoff, 532 U.S. at 147–48. Here,
the Naumanns’ state law claims do not necessarily turn on the Plan itself
but on whether the Defendants provided accurate contribution calculations
to the Naumanns.

¶25 Bafford is again instructive. Analyzing the “reference to”
inquiry, the Bafford court explained that because the plaintiffs’ negligence
claims against Hewitt were based on state common law negligence
principles and state statute, which did not act immediately and exclusively
on ERISA plans, nor was the existence of an ERISA plan essential to the
operation of those laws, the claims did not have an impermissible reference
to the ERISA plan. Bafford, 994 F.3d at 1031–32 (citing Paulsen, 559 F.3d at
1082).

¶26 Similarly, the Naumanns’ contract and negligence claims here
do not immediately or exclusively act upon the Plan. Instead, they are based
on Arizona law that long pre-dates ERISA and is not reliant on an ERISA
plan or ERISA itself for its operation. See, e.g., Kain v. Ariz. Copper Co., 14
Ariz. 566, 569–73 (1913) (breach of contract); Bartlett-Heard Land & Cattle Co.
v. Harris, 28 Ariz. 497, 504 (1925) (common law breach of warranty); Butler
v. Rule, 29 Ariz. 405, 416 (1926) (common law malpractice/professional
negligence claims). As such, the Naumanns’ state law claims make no
impermissible reference to their Plan.

¶27 Because the Naumanns’ three state law claims have neither an
impermissible “connection with,” nor an impermissible “reference to,” the
Plan, we conclude that those claims are not expressly preempted by ERISA.

IV. The Naumanns’ State Law Claims Are Not Subject to Conflict
Preemption

¶28 The civil enforcement provisions in ERISA list those entities
that may file civil actions, see 29 U.S.C. § 1132(a)(1)–(11), and include

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thirteen avenues of relief that plan participants or beneficiaries may
specifically seek in court, see 29 U.S.C. § 1132(a)(1)(A)–(B), (c)(1)–(12).
Where state law claims would conflict with any of the prescribed
enforcement provisions, conflict preemption applies. See Rush Prudential
HMO, Inc., 536 U.S. at 375–80; Paulsen, 559 F.3d at 1081. “Conventional
conflict pre-emption principles require pre-emption where compliance
with both federal and state regulations is a physical impossibility, or where
state law stands as an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress [in enacting ERISA].” Boggs, 520
U.S. at 844 (internal quotation omitted).

¶29 Here, there is no such conflict. ERISA’s civil enforcement
scheme does not provide relief for any of the state law claims asserted by
the Naumanns. As the Naumanns have conceded, the Defendants do not
owe any ERISA-derived fiduciary duties to the Naumanns concerning the
calculation of Plan contributions according to Plan terms. See Bafford, 994
F.3d at 1024–1028, 1032. Similarly, ERISA’s civil enforcement provisions do
not directly provide relief for breach of a third-party administrator’s
professional services contract or negligent performance of a non-fiduciary
service under that contract. See 29 U.S.C. § 1132. As a result, federal and
state law do not conflict, and compliance with both is the norm, not a
“physical impossibility.” Boggs, 520 U.S. at 844 (citation omitted). For these
same reasons, Arizona’s common law is not an obstacle to the full and
complete implementation of ERISA. Indeed, dismissal of the Naumanns’
ERISA claims because the Defendants’ calculations were not a fiduciary
function and also holding that the state law claims were preempted “would
deprive [the Naumanns] of a remedy for the wrong they allege without
examination of the merits of their claim[,] . . . [which] would be inconsistent
with ERISA’s purpose.” Bafford, 994 F.3d at 1031. Therefore, the Naumanns’
three state common law claims are not precluded by conflict preemption
under ERISA.

V. Attorneys’ Fee Award

¶30 In light of our decision, we vacate the superior court’s award
of attorneys’ fees to the Defendants because they are no longer necessarily
the successful party in the litigation. See A.R.S. § 12-341.01(A).

¶31 Both parties request an award of their attorneys’ fees on
appeal pursuant to 29 U.S.C. § 1132(g)(1), A.R.S. § 12-349, and A.R.S. § 12-
341.01(A)(1). The ERISA attorneys’ fees provision is inapplicable because
this action was brought pursuant to Arizona state law and is not an ERISA
civil enforcement action. See 29 U.S.C. § 1132(g)(1) (authorizing a

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discretionary fee award in “any action under this subchapter,” referring to
ERISA’s civil enforcement scheme). Further, A.R.S. § 12-349 is inapplicable
as a basis to justify a fee award in this appeal. Finally, in our discretion, we
deny the fee requests pursuant to A.R.S. § 12-341.01(A)(1) as premature.
However, we commend to the discretion of the superior court to consider
awarding to the successful party reasonable attorneys’ fees, including, but
not limited to, those fees expended in this appeal after a final decision on
the merits of the Naumanns’ claims. Murphy Farrell Dev., LLLP v. Sourant, 229 Ariz. 124, 134, ¶ 38 (App. 2012).

¶32 As the successful party in this appeal, the Naumanns are
entitled to their taxable costs incurred on appeal upon compliance with
ARCAP 21.

CONCLUSION

¶33 For the foregoing reasons, neither express preemption nor
conflict preemption pursuant to ERISA bars the Naumanns’ three Arizona
state law claims against the Defendants. Accordingly, we vacate the
dismissal of the complaint and the related attorneys’ fees award in favor of
the Defendants, reinstate the Naumanns’ complaint, and remand to the
superior court for proceedings upon the merits of the Naumanns’ state law
claims consistent with this opinion.

AMY M. WOOD • Clerk of the Court
FILED: JT

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