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Nazay v. Miller

filed: December 6, 1991; As Corrected.


On Appeal from the United States District Court for the Middle District of Pennsylvania. (D.C. Civil No. 90-1641)

Before: Greenberg, Alito, and Higginbotham, Circuit Judges

Author: Greenberg


GREENBERG, Circuit Judge.

Appellants, Bethlehem Steel Corporation ("BSC"), Larry Miller, an employee benefits administrator at BSC, and Michael Dopera, Secretary of the Insurance Board of BSC, appeal from the district court's order for summary judgment of April 19, 1991, in favor of appellee Richard Nazay, a retired employee of BSC in this action under the Employee Retirement and Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a)(1)(B), to recover the balance due for Nazay's hospitalization.*fn1 In its opinion, the district court relied on Northeast Dept. ILGWU Health and Welfare Fund v. Teamsters Local Union No. 229 Welfare Fund, 764 F.2d 147 (3d Cir. 1985), to hold that a penalty provision in BSC's health benefit plan, imposed upon Nazay for his failure to certify according to the terms of the plan, was arbitrary and capricious. Further, the court held that it would not enforce any provision in a benefit plan that denied benefits unless the employer could establish prejudice to the plan by reason of the failure of the participant to comply with the provision.

We disagree with the district court's interpretation of Northeast and find the court's prejudice rule at odds with our jurisprudence on this subject. Accordingly, we will reverse the court's order for summary judgment and will remand the case with directions that the district court enter summary judgment in favor of appellants.


The facts in this case are not in dispute. Nazay is a retired employee of BSC and a participant in BSC's Comprehensive Medical Program for Eligible Nonrepresented Salaried Pensioners and Surviving Spouses ("the Plan"), an ERISA plan subject to 29 U.S.C. § 1002. In the spring of 1989, Nazay experienced dyspnea, a shortness of breath associated with heart disease. On June 15, 1989, Dr. Conner, his internist, examined him for this condition and referred him to Dr. Pease, a cardiologist who examined him on June 20, 1989. On June 21, 1989, Dr. Conner phoned Nazay and told him that, after consulting with Dr. Pease, he recommended that Nazay be hospitalized for treatment with Dobutamine, a drug which stimulates and improves heart muscle contraction. The doctors agreed that it was imperative that Nazay's hospitalization take place within a few days.

On June 22, 1989, pursuant to Dr. Conner's instruction, Nazay admitted himself to the Harrisburg Hospital through its admission desk for progressive cardiac decompensation with a severe, congestive cardiac myopathy. Although Nazay had been provided a Blue Cross card indicating that the Plan required certification, and he knew of the Plan's certification requirements before his hospitalization, he did not notify a BSC administrator before admitting himself to the hospital. Moreover, Nazay had mistakenly retained his outdated Blue Cross card that did not contain the certification requirements; thus, when he gave this outdated card to the hospital employees upon his arrival, they were not alerted to contact a BSC administrator. Further, neither Nazay, his doctor, a family member nor a hospital staff employee notified or attempted to notify BSC of Nazay's hospitalization during his stay. Indeed, Nazay admits that he did not think about the certification requirements until he received his bill.

BSC's certification procedure requires that either the participant, his doctor, the hospital or a family member contact a "health benefits coordinator" and provide information concerning the proposed medical care prior to the participant's admission to a hospital. This policy enables the administrator to review the merits of the proposed hospitalization and to discuss alternatives to hospitalization with the participant. Importantly, it also permits the patient and provider to ascertain how much of the proposed hospitalization will be reimbursed. Where the hospitalization is deemed necessary, 100% of the expenses will be reimbursed; if the hospitalization is deemed unnecessary, the provider will grant no reimbursement. If the participant does not obtain certification, a penalty, which was 30% of the otherwise covered expenses at the time of Nazay's hospitalization, is imposed. The Plan, however, contains a proviso which permits certification to take place within 48 hours of hospitalization when the patient is admitted on an emergency basis.*fn2 While the Plan refers to certification in advance of admission as precertification and certification following an emergency admission as simply certification, as a matter of convenience we will refer to both procedures as certification.

BSC instituted the certification requirement in February 1984, in an effort to reduce unnecessary hospitalizations and to ensure that there would be informed decisions concerning hospitalization. Although the Plan administrator forgave the 30% penalty (by waiving the certification requirement) incurred by participants for a break-in period of approximately one year, the administrator has enforced the certification requirement and imposed the penalty consistently since 1985. Notably, the administrator has waived the certification requirement in only 14 cases since 1985, each of which involved extraordinary circumstances where compliance with the requirement was virtually impossible.

On the basis of Nazay's non-compliance with the Plan's procedure, he was billed $2,231.51 by Blue Cross reflecting the 30% penalty.*fn3 In response, Nazay wrote to Miller, a benefits administrator, on November 17, 1989, and requested, for the first time, that he waive the certification requirement. In a letter dated February 12, 1990, the assistant secretary of the board replied to Nazay's letter and denied a waiver on the ground that the Plan required a 30% reduction for hospitalization not properly certified. In the assistant secretary's words, "we are bound by the contract language and cannot, therefore, rescind the penalty imposed by Blue Cross for this service." Id.

On February 28, 1990, Nazay appealed from the assistant secretary's decision but on June 20, 1990, Dopera, the secretary of the insurance board, affirmed the assistant secretary's determination, holding that a complete review provided no basis on which to waive the certification requirement.*fn4 On July 3, 1990, Nazay's counsel submitted a further appeal on his behalf but by letter of August 9, 1990, Dopera again denied Nazay's request to waive the certification requirement.

Following his unsuccessful appeals within BSC, Nazay commenced this action on August 23, 1990, in a Pennsylvania state court, alleging that appellants violated 29 U.S.C. § 1132(a)(1)(B)*fn5 by denying him health benefits to which he was entitled under the Plan. Appellants filed a petition to remove the case to the United States District Court for the Middle District of Pennsylvania on September 10, 1990, pursuant to 28 U.S.C. § 1441(b), asserting that the district court had jurisdiction under 29 U.S.C. §§ 1132(e)(1) and (2).

In his argument to the district court on cross-motions for summary judgment, Nazay claimed that appellants violated ERISA in two respects: first, BSC unlawfully included a penalty provision in the Plan for failure to comply with its certification requirements; second, Miller and/or Dopera unjustifiably refused to waive the penalty imposed upon Nazay when he did not certify according to the terms of the Plan.*fn6 Nazay argued that this case was governed by Northeast Dept. ILGWU Health and Welfare Fund v. Teamsters Local Union No. 229 Welfare Fund, 764 F.2d at 147, which held, inter alia, that the incorporation of an "escape" clause by trustees of a multi-employer health benefit plan governed by ERISA constituted arbitrary and capricious conduct as a matter of law. He contended that the inclusion of a penalty provision by BSC, the employer, for the failure to properly certify similarly constitutes arbitrary and capricious conduct in violation of ERISA.*fn7

The district court accepted Nazay's argument and took the opportunity to create a far-reaching rule concerning judicial review of benefit plans. It analogized the certification requirement to notice provisions in liability insurance policies, which Pennsylvania state courts have refused to enforce absent a showing of prejudice to the insurance carrier by reason of non-compliance with the notice provisions. In the same way, the district court declined to enforce the certification requirement in this case because it believed there was no prejudice to the Plan from Nazay's failure to obtain certification. It held that its "rule requiring prejudice before benefits can be denied is consonant with ERISA's goal of providing coverage which the participant reasonably anticipates receiving."

We find that the district court's reliance on Northeast was misplaced. In our view, BSC, as an employer, is free to develop an employee benefit plan as it wishes because the creation of a benefit plan is a corporate management decision unrestricted by ERISA's fiduciary duties. Therefore, the arbitrary and capricious standard which may attach to fiduciary decisions does not apply. Moreover, Dopera, who appellants concede was acting as a fiduciary when he refused to waive the certification provision, did not act in an arbitrary or capricious manner because Nazay could easily have complied with the Plan's procedure. Finally, the district court's admonition that it will not deny any benefit provision unless the employer can establish prejudice to the Plan by reason of the participant's failure to comply with the certification provisions, constitutes an unauthorized usurpation of BSC's management authority and would hamper BSC's legitimate effort to reduce the rising costs of healthcare.


Because we are only authorized to review final judgments of the district court, 28 U.S.C. § 1291, denials of summary judgment are ordinarily not appealable. Chinchello v. Fenton, 805 F.2d 126, 129 (3d Cir. 1986); Metex Corp. v. ACS Industries, Inc., 748 F.2d 150, 153 (3d Cir. 1984). However, when an appeal from a denial of summary judgment is raised in tandem with an appeal of an order granting a cross-motion for summary judgment, we have jurisdiction to review the propriety of the denial of summary judgment by the district court. Beck v. Reliance Steel Products Co., 860 F.2d 576, 581 (3d Cir. 1988); First National Bank v. Lincoln National Life Insurance Co., 824 F.2d 277, 281 (3d Cir. 1987).

In most cases, an appellate court reversing a grant of summary judgment will not direct the district court to enter a summary judgment order in favor of the appellant because a genuine issue of material fact will remain. First National, 824 F.2d at 281. However, where the facts are uncontroverted, as in this case, we are free to enter an order directing summary judgment in favor of the appellant. Id. See also Morgan Guaranty Trust Co. v. Martin, 466 F.2d 593, 599-600 (7th Cir. 1972) (per curiam). Indeed, 28 U.S.C. § 2106 dealing with our authority on disposition of an appeal provides that we "may remand the cause and direct the entry of such appropriate judgment, decree, or order. . . ." This rule is consonant with the important policy of conserving scarce judicial resources because it avoids remanding for trial where factual development is not required.



On this appeal, appellants contend that the district court improperly relied upon Northeast to hold that BSC breached its fiduciary duty under ERISA by including in the Plan a penalty provision to be imposed upon participants who fail to comply with the Plan's certification requirements. Although conceding that in Northeast we held an escape clause to be invalid as a matter of law when incorporated in a liability policy by trustees of a multi-employer fund, appellants argue that the trustees in that case were obligated to comply with ERISA's fiduciary standards whereas BSC, as an employer and sponsor of the Plan, is not. In addition, appellants argue that, even if we were to review BSC's conduct in accordance with the standards governing conduct by fiduciaries, BSC did not act in an arbitrary and capricious manner. Appellants further argue that, unlike our opinion in Northeast, the district court's determination will not further the policies underlying ERISA.

Nazay maintains that the district court properly relied on Northeast to hold that the substantive provisions in benefit plans governed by ERISA are subject to the "arbitrary and capricious" standard of judicial review, and that the blanket 30% penalty in this case was both arbitrary and capricious. He asserts that the imposition of the penalty denied him a benefit he reasonably ...

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