:: Personal Liability Claims Based Upon Unpaid Plan Contributions Advance
On May 8, 2003, United States magistrate Judge Roanne L. Mann issued a report and Recommendation (”R&R”), finding damages in favor of the plaintiffs in the amount of $ 2,272,647.80 On February 22, 2006, this Court adopted Judge Mann’s R&R in its entirety and entered judgment for the plaintiffs. However, by the time, both LMG and All Pro had declared bankruptcy. The judgment remains unsatisfied.
Calemine v. Gesell, 2008 U.S. Dist. LEXIS 78042, 1-17 (E.D.N.Y. Oct. 2, 2008)
In difficult economic times, a case like Calemine resonates more than it would otherwise. Here, the plaintiffs obtained a judgment, but the defendant employers declared bankruptcy. Unpaid plan contributions lay at the center of the dispute. This recent opinion illustrates that judgments against the bankrupt employer may not be worthless after all.
Posture Of The Case
It is important to note that the facts were all assumed to be true and provable since the issues arose in the context of the defendants’ motions to dismiss.
Dismissal under Rule 12(b)(6) is appropriate if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80, (1957). Furthermore, when considering a motion to dismiss a complaint under Rule 12(b)(6), a court “must accept as true all of the factual allegations set out in plaintiff’s complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally.” Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001).
With that caveat in mind, the legal arguments presented are recapped below.
Breach Of Fiduciary Duty Claims
The defendants, corporate officers of the defunct company, asserted that the plaintiff’s claims based upon alleged breaches of fiduciary duty were time-barred. The Court agreed.
A couple of points are still worth noting here.
First, the court, for the purposes of this motion, assumed that the missing contributions were assets of the Fund’s plan. The supporting authorities are noted in this excerpt:
Pension Benefit Guaranty Corp. v. Solmsen, 671 F. Supp. 938 (E.D.N.Y. 1987), is among the regularly-cited cases in which “courts have consistently held that employers who exercise discretionary control over funds that are designated for deposit into an ERISA fund qualify as fiduciaries, including individuals managing corporations obliged to mare fund contributions. NYSA-ILA Med. & Clinical Servs. Fund By & Through Capo v. Catucci, 60 F. Supp. 2d 194, 202 (S.D.N.Y. 1999). See also Connors v. Paybra Mining Co., 807 F. Supp 1242, 1246 (S.D.W.V. 1992) (individuals who, as officers, directors, and sole shareholders of corporations in debt to ERISA funds, “exercised broad personal discretion and control over the assets and spending practices of the corporat[ions], … [and] decisions on which bills to pay and … which of those bills were being delayed to pay…. Contributions due and owing the funds were withheld and directed elsewhere and such spending decisions were the personal, conscious choices of these Defendants.”)
Second, the court held that the plaintiffs made out a sufficient case that the individual defendants were fiduciaries:
Plaintiffs allege that Defendant [*9] Robert Gesell was an LMG shareholder and President of LMG. Robert Gesell ran LMG Air Corporation, and he was the president and the officer in charge. Id. at 7. He also signed the collective bargaining agreements with Local Union 295. Id. Defendant Ronald Gesell was an LMG shareholder, the Secretary-Treasury of LMG and the general manger of All Pro. Id. At trial, Ronald Gesell verified that he was “primarily in charge of All Pro . . . .” Id. Defendant Eileen Gesell was an All Pro shareholder and held the office of President. At trial, Ronald Gesell confirmed that that Eileen Gesell supervised the bookkeeping and accounting for All Pro. Id. at 7. Under these circumstances, for the purposes of the Rule 12(b)(6) and 12(b)(1) motions, Defendants do qualify as fiduciaries.
Statute Of Limitations
The breach of fiduciary duty claims ran afoul of the statute of limitations, however, as the court rejected a “continuing violation” theory advanced by the plaintiffs:
I. . . as late as 1998, the Plaintiffs’ were aware that the corporations were operating illegally as “alter-ego” companies and that therefore the Defendants, as controlling corporate officials, were also responsible for delinquent contributions to their Fund. This claim is not “inherently susceptible to being broken down into a series of independent and distinct events or wrongs, each having its own associated damages.” . . . Indeed, the gravamen of the Plaintiffs’ complaint is grounded in facts known to them since the entry of the 1998 judgment. The instant action was filed August 29, 2006, and this date exceeds the six-year applicable statute of limitations. Therefore, the Court grants Defendants’ motion to dismiss Plaintiffs’ claim for breach of fiduciary duty.
Enforcement Of Judgment Against Plan Fiduciaries
The plaintiffs were not finished, however, as they had an argument based upon enforcement of the judgments against the bankrupt corporation. The plaintiffs sought to hold the Defendants personally liable for the corporations’ judgment of liability to the Fund “pursuant to ERISA and federal common law.”
The plaintiff’s theory gave them a important advantage in view of the limitations period issue.
Plaintiffs rely on the 20-year stature of limitations to enforce judgments, found in N.Y. C.P.L.R. § 211(b). For the purposes of deciding this motion, based on the allegations of the Amended Complaint, this Court accepts Plaintiffs’ allegations that Defendants (1) are controlling officers, and (2) defrauded and conspired to defraud the Fund’s plan of required contributions.
. . . .
The outstanding judgment for damages owed to the Fund’s plan by the corporation is dated February 17, 2006 in the amount of $ 2,272,647. Therefore, the Plaintiffs’ claims to hold the Defendants’ personally liable for the corporation’s judgment are well within the 20 year limitations window. Defendants’ motion to dismiss Plaintiffs’ second claim is denied.
Action For An Accounting
The plaintiffs’ fortunes improved as well on their claim for an accounting.
As corporate controlling officials of All Pro and LMG, the Defendants are required to provide a financial accounting based on the actions taken in their capacity as corporate officers. Thus Defendant’s motion to dismiss the Plaintiffs’ third claim is denied.
Piercing the Corporate Veil
The plaintiff’s advanced yet another state law claim that found favor with the court in their bid to peirce the corporate veil”. The defendants met this argument with jurisdictional defenses that were rebuffed by the court.
As noted supra, this Court found that the Plaintiffs have adequately demonstrated the possibility that Defendants’ may bear personal liability under ERISA for defrauding or conspiring to defraud a benefit fund of contributions, while acting in their role as corporate officers. Such fraud is explicitly recognized as the type that can expose corporate officers to personal liability under ERISA. Therefore, contrary to the Defendants’ argument, the Plaintiffs have established subject matter jurisdiction based upon an underlying violation of ERISA.
Note: It is important to note that the claim attempting to enforce the judgment was based upon ERISA and federal common law. This theory has a lineage that must be carefully considered in evaluating the viability of the claim. The Second Circuit caselaw begins with Leddy v. Standard Drywall, Inc., 875 F.2d 383, 388 (2d Cir. 1989). The district court commented on that case as follows:
There [in Leddy], the Court relied on Fair Labor Standards Act precedents that imposed liability on “a corporate officer with operational control who [was] directly responsible for a failure to pay statutorily required wages.” Id. The court held that “at least to the extent that a controlling corporate official defrauds or conspires to defraud a benefit fund of required contributions, the official is individually liable under Section 502 of ERISA, 29 U.S.C. § 1132.” Id. at 388.
In this case, Defendants were corporate officials and exercised control & power over entities deemed to have been operated illegally as “alter-egos.” It is argued that the Defendants, in their capacity as corporate officers are exposed to liability for judgments entered against the corporation. These facts fit squarely within the exception to the rule wherein a corporate official defrauds or conspires to defraud a benefit fund of required official might be held personally liable under ERISA.
As noted at the outset, the alleged facts were assumed to be true for purposes of the motion. As the case develops, the plaintiffs have a substantial proof burden to meet in order to impose liability on the theories alleged in their Amended Complaint.
The General Rule - As a general rule, individuals are not liable for corporate ERISA obligations solely by virtue of his and her role as officer, shareholder or manager. Cement & Concrete Workers Dist. Counsil Welfare Fund, Pension Fund, Legal Servs Fund & Annuity Fund v. Lollo, 148 F.3d 194, 195 (2d Cir. N.Y.1998) laid the groundwork for the exception invoked above, stating:
“one circumstance pertinent to this matter in which a corporate official might be personally liable under ERISA — namely where a controlling corporate official defrauds or conspires to defraud a benefit fund of required contributions.”
The Second Circuit appears to be a trailblazer on this issue, incidently, as noted in IUE AFL-CIO Pension Fund v. Locke Machine Co., Div. of U.S. Components Corp., 726 F. Supp. 561, 567 (D.N.J. 1989)
Only one circuit has suggested a corporate official may be personally liable for delinquent contributions without piercing the corporate veil. In Leddy v. Standard Drywall, Inc., 875 F.2d 383 (2d Cir. 1989), the Second Circuit held the president of the defendant corporation liable for delinquent contributions despite the finding of the lower court that there was insufficient evidence to pierce the corporate veil. Id. at 387. However, in Leddy, the president of the corporation had been indicted, along with other corporate officials, for defrauding the pension fund from contributions. Id. at 385.
The Scope Of The Exception - In my view, the success of such claims will typically require that the defendant be required to make the contributions, e.g., under the terms of a CBA plus a successful alter ego argument, and this in the context of fraudulent or deceptive conduct. A personal guarantee of corporate obligations in the course of a workout might raise interesting possibilities beyond this context, but I am not aware of any cases on this point.
See also - COMMENT: PIERCING THE CORPORATE VEIL TO RECOVER PENSION PAYMENTS: IT’S TIME TO ADDRESS THE ISSUE, 33 J. Marshall L. Rev. 497 (2000)
:: Health Care Provider Using False Provider Number Gets 41 Month Sentence
Even though Habeeb and Jayman knew that C.O.G. was suspended and that Medicare supplier numbers are nontransferable, both agreed to participate in the venture. By using OrthoCare’s Medicare supplier number to bill Medicare for services C.O.G. actually provided, Wiszowaty successfully circumvented the suspension and cheated Medicare out of over $139,000. This figure grew so large in part because Wiszowaty, amazingly, continued the same billing practice that originally attracted the scrutiny of Medicare investigators: tacking on “accessory kits†to orthosis orders. U.S. v. Wiszowaty, — F.3d —-, 2007 WL 3053515 (C.A.7 (Ind.)) (October 22, 2007)
This case illustrates a fundamental principle of Medicare fraud and abuse avoidance. Health care providers are assigned a number which is personal to the provider and non-transferable.
:: Benefits Fraud & Abuse: Ten Danger Signs
The inherent delay between beginning participation in an employee benefit plan and the delivery of benefits can give rise to substantial delays before plan participants realize that the plan is not working. Nonetheless, warning signs usually precede the onset of troubles and several lists have been compiled to assist.
Here are some simple lists that identify important warning signs.
:: Fraud Claims Against Pharmaceutical Companies Advance
This case involves a qui tam action brought by relator-plaintiff Ven-A-Care of the Florida Keys, Inc., a pharmacy licensed to dispense prescriptions drugs and pharmaceutical products, on behalf of the State of California against thirty-nine defendant pharmaceutical companies, alleging that these defendants violated the California False Claims Act, Cal. Gov’t Code § 12650 et seq. (2006). In re Pharmaceutical Industry Average Wholesale Price Litigation, — F.Supp.2d —-, 2007 WL 861178 (D.Mass.) (March 22, 2007)
In this recent opinion, the district court denied the defendants’ motion to dismiss, thus permitting the plaintiff-relator’s case to go forward on all but one count of California’s False Claims Act. This case serves to illustrate several points.
First, it provides an overview of how state False Claims Act statutes may be employed to challenge costs imposed on Medicaid programs. Second, the case serves as an object example of why specific attention to pharmaceutical company business practices must be a central component of any serious health care reform proposal.
Third, the case sheds light on the often clandestine profit vectors associated with the sale of pharmaceuticals.
:: Employer’s Mutual, LLC Principal Sentenced To 25 Years In Federal Prison
U.S. District Court Judge Margaret Morrow sentenced former Canyon Lake resident James Graf to a 25-year federal prison term and ordered restitution of more than $20 million be paid for his involvement in the operation of a bogus health insurance provider . . . California state law requires insurance companies to obtain a certificate of authority prior to offering coverage; however Employers Mutual skirted that law by claiming to operate pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), which allows employers and certain organizations, such as unions, to offer health care coverage plans.
Local newspaper report, February 9, 2007
The wrongdoing of a western trio finally comes to closure in this report. Graf, his girlfriend, Hanson, and William Kokott of Burbank, purported to offer health benefits through a Carson City-based company Employers Mutual, LLC. [Note: a frequent ploy of of fraudulent operators is to choose a popular name to confuse and gain credence - be careful to distinguish several legitimate companies that may have similar names. "Employer's Mutual LLC" has been shut down for years.] Read more
:: Whistle Blower Rewards Increased For Reporting Tax Violations
Under the newly amended IRS statute, the whistleblower generally would submit information relating to violations of the internal revenue laws to the office of an IRS district director, preferably to a representative of the Criminal Investigation Division. The informant should also, at that time, file a formal claim with the IRS seeking the reward.
The Tax Relief and Health Care Act of 2006 amended the Internal Revenue Code to provide more incentives for private citizens to turn in tax evaders. The new law requires the Internal Revenue Service to establish a “Whistle Blower Office”. This office will report on an annual basis to the Secretary of the Treasury and Congress.
Unlike the False Claims Act, the statute does not contemplate any private cause of action by whistleblowers. If the IRS decides to pursue the matter, upon its successful conclusion, the IRS Whistleblower Office would notify the informant of his or her reward. If he or she is not satisfied, the informant can appeal the amount by filing a lawsuit in the United States Tax Court. Read more
:: Court Permits Antitrust and RICO Claims To Go Forward Based Upon UCR Database Allegations
The calculation of reimbursement rates under a “usual, customary and reasonable” standard lies at the center of a significant case on the docket in the United States District Court, Southern District of New York. Judge Lawrence M. McKenna handed down a ruling last week that allows the plaintiffs to amend their complaint to state antitrust and RICO claims against the defendants. See, American Medical Ass’n v. United Healthcare Corp. Slip Copy, 2006 WL 3833440 S.D.N.Y. 2006 (December 29, 2006)
The complex case, originating in 2000, involves multiple plaintiffs and defendants. The district court has deftly managed the litigation and, in the most recent ruling, set the stage for a full consideration of all allegations against the defendants.
The Core Dispute
Certain health care plans either directly insured or administered by United Healthcare permitted plan subscribers to obtain health care services from “out-of-network†or “non-participating†physicians. Under the plan United Health Care agreed to reimburse these physicians a certain percentage of the “usual, customary and reasonable†(“UCRâ€) fees for such services based on United Healthcare’s calculation of the UCR rates.
The plaintiffs allege misconduct in the use of the UCR rates. Initially, the plaintiffs asserted violations of the Employee Retirement Income Security Act (ERISA), as well as, breach of contract and implied covenant of good faith and fair dealing, and deceptive acts and practices in violation of New York law. After initial discovery, the plaintiffs sought to add additional claims of antitrust and RICO violations. In large measure, the district court permitted the plaintiffs to amend their complaint to add these claims in its decision last week. Read more
:: DOJ Fraud & Abuse Cases & Settlements
Item 1: The Boston Globe reports that Merck KGaA’s U S generic-drug unit was accused by the Department of Justice of overcharging government health-insurance programs for medicines in a lawsuit filed in the U S District Court in Massachusetts. The DOJ says Merck’s unit, called Dey, inflated prices to Medicare and Medicaid by more than five times since at least the beginning of January 1993.
Item 2: GlaxoSmithKline PLC reimbursed New Jersey $472,382 from the company’s $149 million national settlement with the Department of Justice. According to an article on Newsday, Glaxo engaged in a scheme to inflate the price of Zofran and Kytril for the Medicare and Medicaid programs, drugs, typically administered in doctors’ offices or hospitals to counter nausea brought on by chemotherapy and radiation.
The company charged health care providers less for the drugs, knowing the providers would get to pocket the difference and would be more likely to prescribe them again, the Justice Department said. As a part of the settlement, the company admitted no wrongdoing. (See also, Glaxco settlement with Kansas for inflating average wholesale price of these drugs.)
Item 3: “The HHS Office of Inspector General often negotiates compliance obligations with health care providers and other entities as part of the settlement of Federal health care program investigations arising under a variety of civil false claims statutes. A provider or entity consents to these obligations as part of the civil settlement and in exchange for the OIG’s agreement not to seek an exclusion of that health care provider or entity from participation in Medicare, Medicaid and other Federal health care programs.” Entities entering into these agreements have their names posted on the OIG website. This list can be viewed here.
:: A Short Course In MEWA’s (Unit 3) “Regulation of MEWAs Under State Insurance Laws”
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“Small employers and their employees are often victims of fraudulent schemes that promise low-cost health coverage. Many of these arrangements are multiple employer welfare arrangements (MEWAs). MEWAs are arrangements that provide health benefits to employees of two or more unrelated employers who are not parties to collective bargaining agreements. MEWAs are subject to a complex mix of state and federal laws and regulations. Unfortunately, unscrupulous promoters have exploited MEWAs complex regulatory and oversight structure to operate Ponzi schemes that collect premiums but intentionally default on benefit obligations.”
TESTIMONY OF ELAINE L. CHAO SECRETARY OF LABOR
BEFORE THE SENATE COMMITTEE ON SMALL BUSINESS AND
ENTREPRENEURSHIP (April 20, 2005)
Though the foregoing excerpt is taken from testimony offered in support of “association health plans” (the Secretary’s impression of a new and improved MEWA), the testimony rings true enough in describing the past troubled history of MEWA’s. One of the stock misrepresentations used by “unscrupulous promoters” described by Secretary Chao will be addressed in this Unit, i.e., the ruse that ERISA preempts application of State laws to MEWA’s. Read more
:: Pharmacy Benefit Manager Pays For Non-Disclosure
The U.S. Department of Labor announced a consent judgment requiring Pharmaceutical Care Network (PCN), a pharmacy benefits manager headquartered in Sacramento, to restore $721,323 to 24 health plan clients and pay civil monetary penalties to the department. The consent judgment resolved a lawsuit against PCN for allegedly retaining the assets of health plan clients in connection with rebates from drug manufacturers and payments to pharmacies for prescription drug claims.
The suit filed simultaneously with the consent judgment alleged that PCN:
- improperly retained a portion of drug rebate amounts belonging to multiemployer health plan clients
- received undisclosed additional compensation from the plans by retaining the difference between drug prices established by health plan clients and the lower drug prices established between PCN and certain chain pharmacies; and
- retained an undisclosed transaction fee for each pharmaceutical claim processed.
:: Fraud Case Against Marsh & McClennan Advances
On October 14, 2004, the New York Attorney General Eliot Spitzer filed suit against Marsh & McClennan Companies, Inc. (â€Marshâ€) alleging that it “steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.†See, NY Office of Attorney General news release. The investigation preceding this suit and the controversy that ensued in the financial press guaranteed broad publicity to what had heretofore been an ingenious means of maximizing insurance brokerage firm’s profits while creating an appearance of cost savings to clients.
Following the actions of General Spitzer, the stock market adjusted for the perceived loss of value in Marsh securities. Thereafter, aggrieved shareholders pursued remedies in securities litigation for the loss of value of their shares.
In a continuing legacy of that dispute, we now have the decision in In re Marsh & McLennan Companies, Inc. Securities Litigation, Slip Copy, 2006 WL 2057194 (S.D.N.Y. 2006) (Jul 20, 2006) In that decision, the United States District Court denied Marsh’s motion to dismiss a plethora of securities claims. The opinion, while bristling with factual issues germane to the securities litigation, nonetheless provides a good overview of the practices challenged by the New York Attorney General.
The allegations include the following:
- Marsh rated insurance companies based on how advantageous their contingent commission agreements were to the Company, rather than on the quality of the insurer’s services or the price competitiveness of its policies.
- In addition to rating carriers based on contingent commission contracts, Marsh instituted a “pay-to-play†system through which Marsh would refuse to place business with a provider unless it entered a contingent commission agreement.
- Marsh encouraged its employees to place contracts with friendly insurance carriers by praising and promoting employees who placed business with those providers that had entered into the most favorable contingent commission agreements with MMC.
- Marsh MMC engineered a system of bid-rigging whereby it steered business to preferred insurers in order to maximize its contingent commission revenues.
The scheme is described as follows:
Marsh created three types of quotes, known as “A,†“B,†and “C†quotes. When an insurance provider’s existing coverage of a [Marsh] client was up for renewal, Marsh would solicit an “A†quote from that provider, informing the provider of the target premium and policy terms for the quote. If the incumbent provider agreed to bid the “A†quote, it would keep the business, regardless of whether it was capable of providing more favorable terms. Marsh would then create the appearance of a competitive bidding process by soliciting higher, “B†or “C†quotes from competing insurance providers. By agreeing to provide less favorable quotes to Marsh, the other providers would receive assurances that they would be protected by the Company when they were the incumbent provider.
The opinion demonstrates the complexity of the due diligence required to adequately assess the true cost of service providers to group health plans. Obviously, a comparison of quotes would be insufficient to uncover the practices outlined in the allegations set forth above. Adequate due diligence in evaluating service providers requires persistence and skepticism in accordance with a fiduciary standard of care.
