Feamster v. Mountain State Blue Cross & Blue Shield, Inc. , 502 F. App'x 278 ( 2012 )

UNPUBLISHED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
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Affirmed by unpublished opinion.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, PLLP, Bridgeport, West
Virginia, for Appellees. ON BRIEF: Jeffrey V. Mehalic, LAW
OFFICES OF JEFFREY W. 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Unpublished opinions are not binding precedent in this circuit.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.
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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.
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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
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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.
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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
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a 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,
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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), 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 controlled before the merger. Here, by contrast, there
are no allegations that Solacium and RMS were commonly
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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 that were so, a large company’s purchase of a
small one on December 31 would render the small company’s
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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. 5
IV.
For the reasons set forth, the judgment of the
district court is
AFFIRMED.
5
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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