Heritage Healthcare Services, Inc. v. The Beacon Mutual Insurance Co.

Supreme Court
No. 2013-102-Appeal.
(PB 02-7016)
Heritage Healthcare Services, Inc., et al. :
v. :
The Beacon Mutual Insurance Co., et al. :
NOTICE: This opinion is subject to formal revision before publication in
the Rhode Island Reporter. Readers are requested to notify the Opinion
Analyst, Supreme Court of Rhode Island, 250 Benefit Street, Providence,
Rhode Island 02903, at Tel. 222-3258 of any typographical or other
formal errors in order that corrections may be made before the opinion is
published.
Supreme Court
No. 2013-102-Appeal.
(PB 02-7016)
Heritage Healthcare Services, Inc., et al. :
v. :
The Beacon Mutual Insurance Co., et al. :
Present: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia, JJ.
OPINION
Justice Flaherty, for the Court. We are called upon to determine whether a dismissal
pursuant to Rule 12(c) of the Superior Court Rules of Civil Procedure in favor of the state-
chartered workers’ compensation insurance provider, The Beacon Mutual Insurance Company
(Beacon), and against the plaintiffs, a certified class of approximately 14,000 Beacon
policyholders, was properly granted. 1 In the proceedings below, a justice of the Superior Court
found that the plaintiffs’ claims were derivative in nature and, as a consequence, were subject to
1
The named plaintiffs include Heritage Healthcare Services, Inc. (Heritage), Vito’s Express,
Inc., Swimming Pool Specialist, Inc., J. Broomfield and Sons, Inc., Sterling Investigative
Services, Inc., and Leonelli and Vicario, Ltd. In addition to the named plaintiffs, suit was filed
on behalf of the following class of plaintiffs, “[a]ll Beacon policyholders who held a Beacon
Workers Compensation & Employers Liability Policy (‘the Policy’) during the period from
September 26, 2001 to March 22, 2006 and did not receive a consent-to-rate discount during that
time.” On January 19, 2011, the Superior Court certified the class and appointed the named
plaintiffs, excluding Heritage, to serve as the class representatives. See Heritage Healthcare
Services, Inc. v. The Beacon Mutual Insurance Co., No. PB-02-7016, 2011 WL 202299 at *10
(R.I. Super. Ct. Jan. 19, 2011).
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the procedural requirements set forth in G.L. 1956 § 7-1.2-711(c) 2 and Rule 23.1 of the Superior
Court Rules of Civil Procedure. 3 There was no dispute with the hearing justice’s finding that the
plaintiffs had failed to file suit in accordance with § 7-1.2-711(c) and Rule 23.1. As a result, he
dismissed the complaint and entered judgment on behalf of Beacon. On appeal, the plaintiffs
insist that their claims met the requirements of a direct, and not a derivative, action.
Accordingly, the plaintiffs argue that the Superior Court erred in dismissing their complaint. In
contrast, Beacon argues that dismissal of the complaint was proper because the plaintiffs’ claims
are classically derivative in nature and thus subject to the procedural prerequisites of such cases,
prerequisites that were not satisfied before suit was commenced. For the reasons set forth in this
opinion, we affirm the judgment of the Superior Court.
I
Facts and Travel
Beacon was created as a legislative response to a growing workers’ compensation
insurance crisis in the state. 4 P.L. 2003, ch. 410, § 3(f). The General Assembly’s stated purpose
for enacting the legislation that created Beacon was “to ensure that all employers in the state of
Rhode Island have the opportunity to obtain workers’ compensation insurance at the lowest
2
General Laws 1956 § 7-1.2-711(c)(1) provides in pertinent part that a corporate shareholder
may not initiate suit against the corporation until “[a] written demand ha[s] been made upon the
corporation to take suitable action.”
3
Rule 23.1 of the Superior Court Rules of Civil Procedure provides in pertinent part that “[t]he
complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain
the action the plaintiff desires from the directors or comparable authority * * * and the reasons
for the plaintiff’s failure to obtain the action or for not making the effort.”
4
Public Laws 2003, ch. 410, §§ 23 and 24 repealed G.L. 1956 chapter 7.2 of title 27 while
expressly recognizing and intending that “there shall be full continuity between chapter 27-7.2 of
the general laws and passage of this act.” P.L. 2003, ch. 410, § 23.
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possible price.” 5 Id. at § 3(a). Accordingly, Beacon was established to act as the “workers’
compensation insurance carrier of last resort.” Id.
Beacon’s charter provides that the company is to be “operated as a domestic mutual
insurance company.” 6 P.L. 2003, ch. 410, § 3(b). The charter further specifies that the
“management and control of [Beacon] is vested solely in the board.” Id. at § 5. As such,
Beacon’s board has been granted the authority to exercise certain enumerated powers. Id. at §
10. Specifically, Beacon has the discretion to “[d]eclare dividends to its policyholders when
there is an excess of assets over liabilities, and minimum surplus requirements” have been
attained. Id. at § 10(6). Further, Beacon’s charter says that Beacon “may” declare dividends,
evidencing that this power is discretionary. Id. In addition, Beacon and “any workers’
compensation insurance policyholder may mutually consent to modify the rates for that
policyholder’s workers’ compensation insurance policy, provided [Beacon] files notice of the
modification with the director of the department of business regulation.” Id. at § 11(d)(2).
Finally, Beacon’s charter provides in part that “[a]ll premiums and other money paid to [Beacon]
* * * are the sole property of [Beacon] and shall be used exclusively for the operation and
obligations of [Beacon].” Id. at § 14. With Beacon’s statutory framework as a background, we
turn our attention to the allegations set forth in plaintiffs’ complaint.
In December 2002, Heritage Healthcare Services, Inc. (Heritage) initiated litigation
against Beacon, seeking to recover under the theories of breach of contract and breach of
fiduciary duties. Since that time, this case has traveled what this Court has previously described
5
We have previously determined that the statutory phrase “lowest possible price” does not create
a private cause of action. Heritage Healthcare Services, Inc. v. Marques, 14 A.3d 932, 938 (R.I.
2011).
6
A mutual insurance company “issues no capital stock and is cooperatively owned by its
policyholders, who are both the insurers and the insureds.” 3 Steven Plitt et al., Couch on
Insurance 3d § 39:15 at 39-26 (2011).
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as a “serpentine journey.” Heritage Healthcare Services, Inc. v. Marques, 14 A.3d 932, 933 (R.I.
2011). During the somewhat Methuselah-like life of this case, numerous motions to amend have
been granted that have altered the nature of plaintiffs’ complaint as well as the composition of
the parties thereto. 7
The plaintiffs allege that, from September 2001 to March 2006, Beacon “engaged in a
systematic scheme to divert over $101 million to a small percent of its policyholders rather than
distributing it equitably to all its policyholders.” The plaintiffs contend that to advance this
scheme, Beacon ceased formally declaring and distributing annual dividends from 2002 until
2004. The plaintiffs further contend that Beacon “charg[ed] inequitable and unauthorized lower
premiums,” referred to as consent-to-rate discounts, to certain of its largest policyholders, instead
of filing lower rates for all its policyholders. The plaintiffs maintained that the consent-to-rate
discounts were “unauthorized and illegal” because Beacon lacked the authority to consent to a
lower rate for certain of its policyholders to the exclusion of the other policyholders. As a result,
plaintiffs in essence conclude that because of the consent-to-rate discounts, they were denied
money that should have been equitably distributed to all policyholders as dividends.
In addition, plaintiffs allege that Beacon breached its fiduciary and implied duties of good
faith and fair dealing because the company was “systematically operated in a corrupt, improper
and unlawful manner.” Similarly, plaintiffs allege that Beacon “breached its duty to treat all its
policyholders fairly and equally by distributing significant profits (in the form of lower net
premiums) to [its largest p]olicyholders at the expense of all its other policyholders.” Moreover,
7
In September 2008, a justice of the Superior Court granted plaintiffs’ motion to file a ninth
amended class action complaint. It is well established that the filing of an amended complaint
supersedes the original complaint and becomes the operative pleading for purposes of Rule 12 of
the Superior Court Rules of Civil Procedure. See Hall v. Insurance Co. of North America, 666
A.2d 805, 806 (R.I. 1995). Accordingly, we shall confine our review to plaintiffs’ ninth
amended class action complaint.
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plaintiffs contend that Beacon engaged in “favoritism and bias in pricing” as well as
“inappropriate and lavish spending.” Finally, plaintiffs allege that “Beacon was not operated
soundly and with customary prudence, appropriate checks and balances, accountability or
transparency.” As a result, plaintiffs filed suit seeking “an accounting, restitution and/or
damages, and an injunction prohibiting [Beacon] from engaging in [similar conduct] in the
future.”
On February 17, 2012, Beacon filed a motion for judgment on the pleadings, arguing that
plaintiffs’ claims were derivative and therefore subject to the procedural prerequisites contained
in § 7-1.2-711(c) and Rule 23.1. 8 The plaintiffs objected to Beacon’s motion. After hearing
argument on the motion and objection thereto, on June 11, 2012, the Superior Court issued a
written decision, wherein it applied the test articulated in Tooley v. Donaldson, Lufkin, &
Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004), and determined that plaintiffs’ claims were
derivative, not direct, in nature. The Superior Court reached this conclusion after making two
findings: (1) it was Beacon that primarily suffered the harms alleged by plaintiffs; and (2)
Beacon would receive the benefit of any recovery in this matter. Because the hearing justice
determined that plaintiffs’ claims were derivative in nature, he concluded that they were
governed by § 7-1.2-711(c) and Rule 23.1. The hearing justice then found that plaintiffs had
failed to satisfy the procedural prerequisites set forth in the statute and the rule, and he dismissed
the complaint. On December 17, 2012, after the hearing justice denied plaintiffs’ motion to
8
Rule 12(c) of the Superior Court Rules of Civil Procedure provides:
“After the pleadings are closed but within such time as not to delay the
trial, any party may move for judgment on the pleadings. If on a motion for
judgment on the pleadings, matters outside the pleadings are presented to and not
excluded by the court, the motion shall be treated as one for summary judgment
and disposed of as provided in Rule 56, and all parties shall be given reasonable
opportunity to present all material made pertinent to such a motion by Rule 56.”
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reconsider, judgment entered, granting Beacon’s motion for judgment on the pleadings and
dismissing plaintiffs’ complaint in its entirety. The plaintiffs filed a timely notice of appeal to
this Court.
II
Standard of Review
“A Rule 12(c) motion for judgment on the pleadings provides a trial court with the means
of disposing of a case early in the litigation process when the material facts are not in dispute
after the pleadings have been closed and only questions of law remain to be decided.” Haley v.
Town of Lincoln, 611 A.2d 845, 847 (R.I. 1992) (citing 5A Wright & Miller, Federal Practice
and Procedure, Civil 2d § 1367 at 509-10 (1990)). “A Rule 12(c) motion is tantamount to a Rule
12(b)(6) motion, and the same test is applicable to both, that is, is it clearly apparent that the
plaintiff can prove no set of facts to support the complaint.” Collins v. Fairways Condominiums
Association, 592 A.2d 147, 148 (R.I. 1991). The standard to be applied to a Rule 12(c) motion is
“restrictive,” particularly when “the questions of law applicable to the controversy are fact
intensive.” Haley, 611 A.2d at 847, 848. The court must accept that “[t]he factual allegations
contained in the nonmovant’s pleadings are admitted as true for purposes of the motion,” and
“[a]ll proper inferences * * * are to be drawn in favor of the nonmovant.” Id. at 847. Thus, to
prevail on a Rule 12(c) judgment on the pleadings, the defendant must “demonstrate to a
certainty that the plaintiff will not be entitled to relief under any set of facts that might be proved
at trial.” Haley, 611 A.2d at 847.
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III
Discussion
On appeal, plaintiffs argue that the hearing justice erred when he held that their claims
were derivative in nature and when he dismissed their complaint for not satisfying the procedural
requirements associated with a derivative action. To the contrary, plaintiffs contend that their
claims are direct, because governing law entitles them to an equitable distribution of the excess
surplus of the company and because they suffered disproportionate harm as compared to other
policyholders. 9 Further, plaintiffs argue that Beacon’s failure to formally declare a dividend
does not transform the nature of their claims from direct to derivative. Finally, plaintiffs insist
that the hearing justice erred in holding that Beacon was authorized to distribute consent-to-rate
discounts to its policyholders. In contrast, Beacon argues that the hearing justice properly ruled
that plaintiff’s claims were derivative and therefore subject to the statutory procedural
9
In addition, plaintiffs argue that their claims are direct because Beacon’s board abdicated its
responsibilities; however, a review of the record reveals that plaintiffs failed to timely raise this
argument during the lower-court proceedings. Pursuant to this Court’s time-honored raise-or-
waive rule, issues not properly presented before the trial court may not be raised for the first time
on appeal. Federal National Mortgage Association v. Malinou, 101 A.3d 860, 865 (R.I. 2014)
(citing Peloquin v. Haven Health Center of Greenville, LLC, 61 A.3d 419, 430 (R.I. 2013)). The
plaintiffs raised their abdication argument for the first time in their motion to reconsider. This
Court has previously stated that arguments raised for the first time in a motion to reconsider are
not timely, and should not be considered, because it would permit “two bites at the apple.”
Flanagan v. Blair, 882 A.2d 569, 574 (R.I. 2005). However, and even in the face of plaintiffs’
waiver, the cases cited in support of their abdication argument are readily distinguishable from
the situation before the Court at this time. In Parnes v. Bally Entertainment Corp., 722 A.2d
1243, 1244 (Del. 1999), the court was presented with a corporate stockholder’s challenge to the
fairness of a corporate merger, a claim that is clearly distinguishable from this case. Further, in
Grimes v. Donald, 673 A.2d 1207, 1213 (Del. 1996), the court relied primarily upon the
plaintiff’s desired remedy, a declaration that certain employment agreements were void, to find
the claims were direct. Here, plaintiffs do not seek a declaration; rather, they seek “an
accounting, restitution and/or damages, and an injunction prohibiting [Beacon] from engaging in
[similar conduct] in the future.”
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prerequisites because it was Beacon that suffered the harm and because the remedy, therefore,
belongs to Beacon alone, and not to any individual policyholder.
The parties agree that the test articulated by the Supreme Court of Delaware in Tooley,
845 A.2d at 1033, should be applied to this case to determine whether plaintiffs’ claims are
derivative or direct in nature. 10 The relevant inquiry, as enunciated in Tooley, is two-fold: “(1)
who suffered the alleged harm ([Beacon] or the suing [policyholders], individually); and (2) who
would receive the benefit of any recovery or other remedy ([Beacon] or the [policyholders],
individually)?” Id. at 1033. If Beacon suffered the harm and would be entitled to receive the
requested relief, the claim is derivative. See id. at 1039; see also Halliwell Associates, Inc. v.
C.E. Maguire Services, Inc., 586 A.2d 530, 533 (R.I. 1991) (explaining that a claim seeking “to
redress a wrong done to the corporation, or if the claim arises solely as a consequence of a
corporate wrong,” is derivative in nature). Conversely, the claim is direct if plaintiffs can
demonstrate that they have suffered harm “independent of any alleged injury to [Beacon]” that
would entitle them to an individualized recovery. Tooley, 845 A.2d at 1039. “Such a claim is
distinct from an injury caused to [Beacon] alone * * * [because] the recovery or other relief
flows directly to [plaintiffs], not to [Beacon].” Id. at 1036.
At the outset, plaintiffs argue that their claims should be determined to be direct for two
reasons. First, plaintiffs argue that governing law entitles them to an equitable distribution of
Beacon’s excess surplus; therefore, they say, their claims are direct. However, plaintiffs’
argument is at odds with their complaint. The gravamen of plaintiffs’ complaint is that Beacon
engaged in a scheme whereby it ceased formally declaring dividends in favor of all policyholders
10
See Bove v. Community Hotel Corp. of Newport, Rhode Island, 105 R.I. 36, 42, 249 A.2d 89,
93 (1969) (explaining that Delaware case law is the leading authority in the field of corporate
law).
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so that it could give consent-to-rate discounts to its largest policyholders. The plaintiffs contend
that, through this artifice, Beacon was able to funnel $101 million in excess surplus to its largest
policyholders rather than equitably distributing it to all policyholders via a dividend. However,
by distributing the $101 million in the form of consent-to-rate discounts, those assets were
entirely diverted from Beacon. Therefore, Beacon never collected the $101 million because it
was distributed in the form of lower premiums charged to its largest policyholders; that money
never became excess surplus that could have been distributed equitably. Put simply, because the
$101 million was never collected by Beacon, it never ripened into an excess surplus that could be
subject to a distribution.
It is true that, in a mutual insurance company, “the premium exacted is necessarily
greater than the expected cost of the insurance, as the redundancy in the premium furnishes the
guaranty fund out of which extraordinary losses may be met * * * .” Penn Mutual Life Insurance
Co. v. Lederer, 252 U.S. 523, 525 (1920). Generally, “[i]t is of the essence of mutual insurance
that the excess in the premium over the actual cost as later ascertained shall be returned to the
policyholder.” Id. However, in this case, pursuant to Beacon’s charter, the decision to return
excess surplus was entirely discretionary. P.L. 2003, ch. 410, § 10(6). Therefore, until the board
declares an excess surplus, Beacon was under no duty to issue dividends to all policyholders. Id.
In other words, even if the $101 million had been collected, that would not have
necessarily entitled plaintiffs to an equitable distribution of those funds because Beacon’s charter
is clear that the board has the discretion, but is not required, to “[d]eclare dividends to its
policyholders when there is an excess of assets over liabilities, and minimum surplus
requirements” are satisfied. P.L. 2003, ch. 410, § 10(6). Thus, we are not persuaded by
plaintiffs’ argument that they have a direct claim under governing law. Even viewing the
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allegations set forth in the complaint in the light most favorable to plaintiffs, it is our opinion that
it was Beacon, not the plaintiffs individually, which suffered the harm when $101 million in
prospective premiums were diverted as consent-to-rate discounts. See Tooley, 845 A.2d at 1033.
As a result, it “logically follow[s]” that Beacon, not plaintiffs, would benefit by any recovery.
Id. at 1036.
Second, plaintiffs argue that they suffered disproportionate harm as compared to other
policyholders; therefore, their claims should be considered to be direct. To support this
argument, plaintiffs rely upon Kramer v. Western Pacific Industries, Inc., 546 A.2d 348 (Del.
1988), and Gatz v. Ponsoldt, No. Civ.A. 174-N, 2004 WL 3029868 (Del. Ch. Nov. 5, 2004).
However, we find these cases to be of no assistance to plaintiffs. In Kramer, 546 A.2d at 352,
the plaintiffs challenged several corporate transactions that occurred shortly before a buyout
merger. The plaintiffs argued that their claims were direct in nature because their respective
portions of the proceeds from the merger had been reduced by the corporate transactions. Id.Nonetheless, the court found that the plaintiffs’ claims were derivative, because the corporation,
not the individual shareholders, had suffered the harm of decreased corporate value. Id. at 352-
53.
Likewise, in Gatz, the plaintiffs filed what was styled as a direct action, challenging four
separate corporate transactions. Gatz, 2004 WL 3029868 at *6. The court found that three of the
claims were derivative, and the fourth, alleging that the board benefitted a specific class of stock
over others, was indeed direct. Id. at *7-8. The court reasoned that the fourth claim was direct
because the overall value of the corporation was unaffected by the transaction, while at the same
time a certain class of shareholders had been harmed. Id. at *8. This is distinguishable from the
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present case because Beacon was clearly harmed when it did not collect $101 million in
premiums that had been absorbed as consent-to-rate discounts.
Next, plaintiffs argue that, notwithstanding the fact that Beacon never formally declared a
dividend, their claims are direct because they seek to remedy an inequitable distribution of
excess surplus. In support, plaintiffs rely upon Kimberly-Clark Corp. v. Factory Mutual
Insurance Co., 566 F.3d 541, 547 (5th Cir. 2009), for the proposition that mutual insurance
companies are required to distribute their excess surplus to policyholders. In our opinion, that
case does not buttress plaintiffs’ argument. The court in that case was clear that policyholders
have an equitable right to a mutual insurance company’s surplus only when the company
announces a surplus. Id. at 548. The court held that “when a distribution is declared, the
company becomes liable to pay the policyholders because they collectively own any announced
distribution from the surplus.” Id. at 549. Therefore, policyholders are entitled to an equitable
distribution only when a declaration of surplus has been declared. Id.Here, plaintiffs concede that Beacon never declared a dividend or distribution. Instead,
plaintiffs alleged that Beacon, in a surreptitious maneuver, gave consent-to-rate discounts to
select policyholders. However, because Beacon never declared a distribution or surplus, we
conclude that plaintiffs had no entitlement to a distribution. Kimberly-Clark, 566 F.3d at 549.
Finally, plaintiffs insist that the hearing justice erred in holding that Beacon was
authorized to distribute consent-to-rate discounts to its policyholders. Instead, plaintiffs contend
that, consistent with a finding made by the Department of Business Regulation, Beacon’s charter
provides only for consent-to-rate increases. However, even assuming that plaintiffs are correct
that, in the absence of authority to do so, Beacon provided consent-to-rate discounts, that does
not transform their claims from derivative to direct. Indeed, it is our opinion that it would be
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Beacon, not plaintiffs individually, that would suffer any harm occasioned by the inappropriate
premium discounts because Beacon necessarily would have collected less money in premiums
than it should have collected. Therefore, because Beacon suffered the harm, it is Beacon that
would be entitled to any recovery. Accordingly, under the tenets set forth in Tooley, plaintiffs’
claims are derivative in nature.
Because we have determined that the plaintiffs’ claims are derivative in nature, it
necessarily follows that they were required to comply with the procedural requirements set forth
in § 7-1.2-711(c) and Rule 23.1 before they commenced this suit. Section 7-1.2-711(c)(1)
provides, in pertinent part, that a corporate shareholder may not initiate suit against the
corporation until “[a] written demand ha[s] been made upon the corporation to take suitable
action.” Further, Rule 23.1 requires that “[t]he complaint shall also allege with particularity the
efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or
comparable authority and, if necessary, from the shareholders or members, and the reasons for
the plaintiff’s failure to obtain the action or for not making the effort.” Failure to satisfy these
prerequisites mandates the dismissal of a derivative action. See Giuliano v. Pastina, 793 A.2d
1035, 1037 (R.I. 2002); Hendrick v. Hendrick, 755 A.2d 784, 793-94 (R.I. 2000). Here, a review
of the record reveals that the plaintiffs made no such demand on Beacon before they initiated this
action. Additionally, the plaintiffs’ complaint is silent as to what efforts they took to obtain their
desired remedy before they filed suit. Based upon these facts, the Superior Court’s dismissal for
noncompliance with § 7-1.2-711(c) and Rule 23.1 was proper.
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IV
Conclusion
For the foregoing reasons, we affirm the judgment of the Superior Court, to which the
papers in the case may be remanded.
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RHODE ISLAND SUPREME COURT CLERK’S OFFICE
Clerk’s Office Order/Opinion Cover Sheet
TITLE OF CASE: Heritage Healthcare Services, Inc., et al. v. The Beacon Mutual
Insurance Co., et al.
CASE NO: No. 2013-102-Appeal.
(PB 02-7016)
COURT: Supreme Court
DATE OPINION FILED: February 6, 2015
JUSTICES: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia, JJ.
WRITTEN BY: Associate Justice Francis X. Flaherty
SOURCE OF APPEAL: Providence County Superior Court
JUDGE FROM LOWER COURT:
Associate Justice Michael A. Silverstein
ATTORNEYS ON APPEAL:
For Plaintiffs: Jason B. Adkins, Pro Hac Vice
For Defendants: Jordan D. Hershman, Pro Hac Vice