Conn Feamster v. Mountain State BC&BS ( 2013 )

AMENDED OPINION
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-2256
CONN FEAMSTER; SANDRA FEAMSTER; JOHN DOES 1-25,
Plaintiffs - Appellants,
v.
MOUNTAIN STATE BLUE CROSS & BLUE SHIELD, INCORPORATED;
RELATIONAL MANAGEMENT SERVICES, LLC; HIGHMARK WEST VIRGINIA
INCORPORATED, doing business as Mountain State Blue Cross &
Blue Shield; SOLACIUM HOLDINGS, LLC; L. JAY MITCHELL; BART
MITCHELL; CHERYL MITCHELL; SHARON FINDLAY,
Defendants - Appellees.
Appeal from the United States District Court for the Southern
District of West Virginia, at Parkersburg. Joseph R. Goodwin,
Chief District Judge. (6:10-cv-00241)
Argued: October 24, 2012 Decided: December 28, 2012
Amended Opinion Filed: January 29, 2013
Before DAVIS and FLOYD, Circuit Judges, and Catherine C. EAGLES,
United States District Judge for the Middle District of North
Carolina, sitting by designation.
Affirmed by unpublished opinion. Judge Davis wrote the opinion,
in which Judge Floyd and Judge Eagles joined.
ARGUED: Roy Franklin Harmon, III, HARMON & MAJOR, PA,
Greenville, South Carolina, for Appellants. Sara Ellen
Hauptfuehrer, STEPTOE & JOHNSON, LLP, Bridgeport, West Virginia,
for Appellees. ON BRIEF: Jeffrey V. Mehalic, LAW OFFICES OF
JEFFREY V. MEHALIC, Charleston, West Virginia, for Appellants.
Jan L. Fox, STEPTOE & JOHNSON PLLC, Charleston, West Virginia,
for Appellees Relational Management Services, LLC, L. Jay
Mitchell, Bart Mitchell, Cheryl Mitchell, and Sharon Findlay;
Erin E. Magee, Richard G. Ford, Jr., JACKSON KELLY PLLC,
Charleston, West Virginia, for Appellee Solacium Holdings, LLC;
Jill E. Hall, BOWLES RICE MCDAVID GRAFF & LOVE LLP, Charleston,
West Virginia, Robert J. Kent, BOWLES RICE MCDAVID GRAFF & LOVE
LLP, Parkersburg, West Virginia, for Appellee Highmark West
Virginia Incorporated.
Unpublished opinions are not binding precedent in this circuit.
2
DAVIS, Circuit Judge:
This dispute arises from the failure of Relational
Management Services, LLC (“RMS”) to provide continuation health
care coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985 (“COBRA”) to one of its former
employees, Sandra Feamster, and her husband, Conn Feamster (“the
Feamsters”). Appellees include RMS, Mountain State Blue Cross &
Blue Shield, and several other individuals and entities
affiliated with RMS and its health-plan provider (collectively,
“Appellees”). The Feamsters were denied COBRA coverage because
Appellees claimed that RMS was a “small employer” of fewer than
20 employees, and was thus not obligated to provide it. The key
issue on appeal is whether RMS and Solacium Holdings, LLC
(“Solacium”) should have been considered a single employer in
2007; if so, the employer had 20 or more employees, obligating
it to provide COBRA coverage. For the reasons that follow, we
hold that even if RMS and Solacium were a single employer for a
portion of 2007, they were not a single employer on a “typical
business day” during that year, as prescribed by 29 U.S.C. §
1161(b). Accordingly, we affirm the district court’s grant of
summary judgment to Appellees.
3
I.
A.
We begin by providing some background on the complicated
network of business entities involved in this case. RMS was
formed in 2005 to operate a therapeutic boarding school for
teenagers in West Virginia. RMS’s sole member was the Teri Ann
Mitchell Family Irrevocable Trust (“the Family Trust”). Teri Ann
Mitchell is married to L. Jay Mitchell, RMS’s founder. The
Family Trust also held a controlling membership interest in TAS
Development, LLC, which organized TAS Greenbrier Properties,
LLC. TAS Greenbrier Properties, LLC, entered into a lease and
option to purchase property for the school. The school’s
founders also established the Greenbrier Academy Trust (“the
Greenbrier Trust”). RMS and the Greenbrier Trust contracted for
RMS to provide management services to the school. Tuition was
paid to the Greenbrier Trust, and the Greenbrier Trust paid over
the funds to RMS as management fees. Of the above entities, only
RMS and TAS Greenbrier Properties, LLC, ever had any employees.
The school -- called the Greenbrier Academy for Girls (“the
Academy”) -- opened in September 2007. Appellees L. Jay
Mitchell, Bart Mitchell, Cheryl Mitchell, and Sharon Findlay
were involved in its operation. Appellee Highmark West Virginia,
Inc., provided RMS with its group health plan.
4
Solacium is a holding company for entities that operate
schools for troubled youth. In 2006, Solacium, through an
affiliate entity, bought the assets of Alldredge Academy, a
school co-founded by L. Jay Mitchell in 1999. Also in 1999,
Solacium New Haven, LLC, hired L. Jay Mitchell as Chief Program
Officer. L. Jay Mitchell also acquired an ownership interest in
Solacium at that time.
An August 2007 magazine article based on an interview with
L. Jay Mitchell and others noted that Solacium would be opening
a new school in West Virginia. In his deposition, however, L.
Jay Mitchell disputed that characterization and speculated that
it was likely based on the view that “Solacium hoped to be able
to buy” the Academy in the future. J.A. 366. 1
On September 1, 2007, Solacium and RMS entered into an
agreement (“the 2007 Agreement”) whereby Solacium agreed to
provide administrative services (including payroll, benefit
administration, personnel, accounting, and marketing) to RMS.
The 2007 Agreement also gave Solacium an option to purchase
RMS’s assets. Specifically, under the 2007 Agreement, Solacium
could exercise the option during the one-year period beginning
approximately on September 1, 2011, four years after the
1
Citations to the “J.A.” refer to the Joint Appendix filed
by the parties in this appeal.
5
execution of the 2007 Agreement. The 2007 Agreement was short-
lived, however, as the parties terminated it (as well as L. Jay
Mitchell’s employment agreement with Solacium) a mere four
months later, on January 1, 2008. Thereafter, Solacium had no
involvement in the operation or management of the Academy. In
2009, RMS was authorized to use the trade name Greenbrier
Academy for Girls, and the Greenbrier Trust was dissolved.
Meanwhile, RMS hired Ms. Feamster in September 2007. She,
along with her husband, received health insurance through RMS’s
group plan. Ms. Feamster took a medical leave of absence in
March 2008, and her health insurance coverage ended on June 1,
2008. Ms. Feamster then sought COBRA coverage, but RMS told her
that it did not provide such coverage; her insurance provider
explained that this was because RMS had fewer than 20 employees.
As a result, the Feamsters incurred hundreds of thousands of
dollars in medical expenses, a portion of which would have been
covered by health insurance if Ms. Feamster had received COBRA
coverage.
B.
The Feamsters filed a complaint in the United States
District Court for the Southern District of West Virginia in
March 2010. Following discovery in the federal case and in a
6
related state case, 2 they filed their third amended complaint on
February 11, 2011. It contained four counts: (1) that RMS, Bart
Mitchell, Cheryl Mitchell, and Sharon Findlay misrepresented
that the group health plan was subject to the small-employer
exemption and unlawfully failed to provide the Feamsters with
COBRA coverage, thus entitling the Feamsters to reimbursement of
medical expenses; (2) that RMS, Bart Mitchell, Cheryl Mitchell,
and Sharon Findlay failed to provide notice of COBRA coverage to
the Feamsters, and the administrator is liable to plan
participants in the amount of $110 per day and reimbursement of
medical expenses; (3) that one or more of the Appellees breached
their fiduciary duties and are personally liable to the plan for
the misuse of plan assets; and (4) that Appellees breached their
fiduciary duties, and the Feamsters are entitled to appropriate
equitable relief.
A number of motions to dismiss and motions for summary
judgment followed. Before ruling on the motions to dismiss, the
district court granted Appellees’ cross-motion for summary
judgment for two alternative reasons. First, it determined that
RMS was a “small employer” in the 2007 calendar year, and thus
2
In March 2009 the Feamsters had filed suit in West
Virginia state court under various state law theories, also with
the goal of recovering medical expenses. Those claims were
dismissed on summary judgment on April 21, 2011.
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was not obligated to provide COBRA coverage. J.A. 920-25.
Second, it determined that “even if the court had found that RMS
was an affiliated service group with Solacium, that group would
have had more than twenty employees for only four months of the
2007 calendar year,” which it deemed insufficient to move it out
of the “small employer” category such that it would have been
obligated to provide COBRA coverage. J.A. 925-26. The Feamsters
timely appealed.
II.
The central question on appeal is whether, by virtue of
Solacium’s option to purchase RMS’s assets, RMS and Solacium
should have been considered a single employer for purposes of
COBRA continuation health coverage in 2007. The parties agree
that RMS had fewer than 20 employees during that time, but that
combined with Solacium, there were more than 20. 3 As a result, if
the two organizations are considered a single employer, the
3
Appellees conceded in the district court that the
following entities should be considered the same employer under
26 U.S.C. § 414(c): the Family Trust; the Greenbrier Trust; RMS;
TAS Development, LLC; TAS Greenbrier Properties, LLC; L. Jay,
Inc.; and L. Jay Mitchell Group. Defs.’ Mem. in Opp’n to Pls.’
Mot. for Summ. J. and in Supp. of Cross-Mot. for Summ. J. 14
(Dist. Doc. No. 340). Most of these entities had no employees,
however, and in any case, their combined employees did not add
up to 20 during the relevant time period.
8
employer would have 20 or more employees, obligating it to
provide COBRA coverage to Ms. Feamster. But if they are
considered separate employers, RMS permissibly denied Ms.
Feamster that coverage, and the district court properly granted
summary judgment to Appellees.
“Whether a party is entitled to summary judgment is a
question of law we review de novo using the same standard
applied by the district court.” Henry v. Purnell, 652 F.3d 524,
531 (4th Cir. 2011) (en banc). Summary judgment is appropriate
when there is no genuine dispute as to any material fact and the
moving party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(a).
Through COBRA, “Congress required ERISA plan sponsors to
provide terminated employees and[/]or their dependents with the
option of purchasing continuation health coverage without regard
to insurability.” Johnson v. Reserve Life Ins. Co., 765 F. Supp.
1478, 1479 (C.D. Cal. 1991). See 29 U.S.C. § 1161(a) (“The plan
sponsor of each group health plan shall provide, in accordance
with this part, that each qualified beneficiary who would lose
coverage under the plan as a result of a qualifying event is
entitled, under the plan, to elect, within the election period,
continuation coverage under the plan.”). However, COBRA rules do
not apply to employers with “fewer than 20 employees on a
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typical business day during the preceding calendar year.” 29
U.S.C. § 1161(b).
Because Ms. Feamster took medical leave from RMS in March
2008, we must determine whether during the preceding calendar
year -- 2007 -- her employer had 20 or more employees on a
typical business day. This inquiry gives rise to the two
questions on appeal: (1) whether RMS and Solacium should be
considered a single employer by virtue of the 2007 Agreement’s
provision granting Solacium an option to purchase all of RMS’s
assets; and (2) if so, whether RMS and Solacium were a single
employer on a typical business day during 2007. Assuming without
deciding that the option gave Solacium constructive ownership of
RMS, we conclude that such ownership existed for fewer than half
of the employer’s typical business days in 2007, and, thus, that
Appellees were not obligated to provide COBRA coverage to the
Feamsters.
III.
The district court held that even if the option conferred
constructive ownership of the Academy on Solacium, that
constructive ownership did not exist for a long enough time to
require the employer to offer COBRA continuation coverage. The
court reasoned that because the 2007 Agreement was in effect for
only four months (from when it was executed on September 1,
10
2007, until it was terminated on January 1, 2008), RMS and
Solacium were not a single employer on a typical business day in
2007. Consequently, the court concluded, the employer had fewer
than 20 employees during the relevant time period, and was thus
not obligated to provide COBRA continuation coverage.
Under the applicable Treasury Regulation, “[a]n employer is
considered to have normally employed fewer than 20 employees
during a particular calendar year if, and only if, it had fewer
than 20 employees on at least 50 percent of its typical business
days during that year.” 26 C.F.R. § 54.4980B–2, Q&A-5(b). 4 The
Feamsters argue that “[b]ecause the Greenbrier facility only
opened on September 1, 2007, the court should have taken into
account [only the] days following that date as ‘typical business
days.’” Feamster Br. 32.
4
The district court mistakenly relied on a proposed version
of this regulation, under which the inquiry is described as
follows: “An employer is considered as having normally employed
fewer that 20 employees during a particular calendar year if,
and only if, it had fewer than 20 employees on at least 50
percent of its working days during that year.” Prop. Treas. Reg.
§ 1.162-26, 52 Fed. Reg. 22716-01, Q&A 9(b) (June 15, 1987)
(emphasis added). The final regulation quoted above uses the
language “typical business days” rather than “working days,” see
26 C.F.R. § 54.4980B–2, Q&A-5(b), rendering the district court’s
reliance on the proposed regulation problematic; if, for some
reason, the calculation of working days is not coextensive with
the calculation of typical business days, the resulting
conclusion could differ. Appellees’ assertion that “the district
court unquestionably applied the right standard, even though it
relied upon authority that is not directly controlling,” is
therefore wrong. See Appellees’ Br. 39.
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The Feamsters make the following arguments to support their
position. First, they argue that “[a] day in which a business is
not open cannot be a typical business day.” Feamster Br. 32. But
RMS had existed since 2005, and TAS Greenbrier Properties, LLC,
which was part of the RMS controlled group, had employees
throughout 2007. See J.A. 552-72. Because “all employees of
trades or business[es] (whether or not incorporated) which are
under common control shall be treated as employed by a single
employer,” 26 U.S.C. § 52(b)(1), 5 the fact that TAS Greenbrier
Properties, LLC, had employees and functioned throughout the
year undermines the Feamsters’ argument that the “business” was
not open until September 1, 2007.
Second, the Feamsters point to Kidder v. H & B Marine Inc.,
932 F.2d 347 (5th Cir. 1991), also a case involving COBRA
claims. In Kidder, two corporations, each with fewer than 20
employees, merged. Id. at 349. Together, the two corporations
had more than 20 employees. Id. at 350. The court held that the
two corporations were properly treated as the same “employer”
because the corporations were “owned entirely by the same four
individuals,” id. at 355; in other words, they were commonly
5
We cite 26 U.S.C. § 52(b)(1) not because it is directly
controlling, but because it provides a helpful articulation of
the controlled-group principle that is the foundation on which
the Feamsters’ otherwise unsupported argument rests.
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controlled before the merger. Here, by contrast, there are no
allegations that Solacium and RMS were commonly controlled until
September 1, 2007. The Feamsters’ reliance on Kidder is
therefore misplaced.
Third, the Feamsters argue that if the employees of other
RMS-controlled entities are factored into the analysis to
determine a typical business day, “the same principle would
serve as justification for attributing Solacium’s component
employee groups to RMS during the prior period.” Feamster Br.
34. This argument is unpersuasive. The employees of other
entities in the RMS controlled group are relevant because 26
U.S.C. § 52(b)(1) requires that “all employees of trades or
business[es] (whether or not incorporated) which are under
common control shall be treated as employed by a single
employer.” The Feamsters cite no similar authority that would
require including the number of employees of a second
organization (here, Solacium) before that organization
affiliates with the first organization (here, RMS).
Finally, the Feamsters cite to the language of the statute
itself, which refers to “all employers.” 29 U.S.C. § 1161(b)
(emphasis added). The Feamsters cite no authority inferring from
the word “all” that the inquiry should include employees of an
entity that maintains constructive ownership of the direct
employer for just a few months of the relevant calendar year; if
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that were so, a large company’s purchase of a small one on
December 31 would render the small company’s employees eligible
for COBRA continuation coverage in the following year as if they
had worked for the large employer for all of the prior year.
Such a situation would lead to the absurd result that a small
company acquired on December 31 would be treated differently
from a single company that merely expands and increases the
number of its employees throughout the year, such that it has 19
employees for six months and a day, and 20 or more for the
remainder of the year. There is no reason to believe that
Congress intended such a distinction between individual
companies and companies acquired by other entities. 6
IV.
For the reasons set forth, the judgment of the district
court is
AFFIRMED.
6
Moreover, the interpretation the Feamsters propose lacks a
coherent limiting principle. What if, for example, the Academy
opened on December 1, rather than September 1 –- would typical
business days be only those business days in the month of
December? And if the Academy had opened in the final week of
December, would typical business days include only that week?
Such a result is clearly not contemplated by § 1161(b)’s
insistence that we look to “typical business days.”
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