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LOCAL 144 v. C.N.H. MANAGEMENT ASSOC.

December 11, 1990

LOCAL 144, HOTEL, HOSPITAL, NURSING HOME AND ALLIED SERVICES UNION, SEIU, AFL-CIO, PLAINTIFF,
v.
C.N.H. MANAGEMENT ASSOCIATES, INC., MARVIN NEIMAN, INDIVIDUALLY AND AS SOLE PROPRIETOR OF CONCOURSE NURSING HOME, DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

OPINION

THE PARTIES

Plaintiff Local 144, Hotel, Hospital, Nursing Home and Allied Services Union, SEIU, AFL-CIO ("Local 144" or the "Union") has since 1977 represented licensed practical nurses, nurses' aids, orderlies, laundry workers, and kitchen staff at the Concourse Nursing Home ("Concourse"), a facility in the Bronx licensed by New York State (the "State").

Defendant CNH is a management company providing labor services to Concourse. Defendant Marvin Neiman ("Neiman") has been the proprietor of Concourse since 1974.

PRIOR PROCEEDINGS

On March 19, 1987, Arbitrator John Sands (the "Arbitrator") issued an Interim Opinion and Award (the "Interim Award") finding that Neiman, as nursing home operator, had received more than six million dollars from the State to be directed towards bringing employee wages up to industry-wide levels. The Arbitrator found that failure to disburse the monies to the employees was an intentional and egregious breach of contract. In accordance with this determination, Sands directed CNH to pay "the minimum amount due — $6,271,240 — plus interest" into an escrow account. CNH and Neiman failed to comply with the award.

On April 24, 1987, Local 144 filed its complaint alleging four causes of action. The first and second causes of action sought enforcement of the Interim Award against CNH and Neiman, respectively. The third cause of action stated a claim of equitable subrogation against defendant Neiman; the fourth cause of action set forth a RICO claim against Neiman.

Local 144 moved for an order confirming the award and directing CNH to comply with it. CNH cross moved for an order dismissing Local 144's motion on the ground that the Interim Award was not final and therefore not subject to judicial confirmation, or, alternatively, that the Arbitrator had exceeded his powers and fashioned an award beyond his authority.

On September 16, 1987, the court granted in part and denied in part both the motion and the cross motion. On November 9, 1987, a judgment was signed dismissing the case pursuant to the opinion of September 16. Local 144 subsequently moved to amend the judgment and to reduce the judgment to a specific dollar amount to be paid into the escrow account. Defendants cross-moved for relief from the judgment on the grounds that new evidence had turned up since the arbitration. The motions were heard on December 16, 1987; the court stayed its direction that CNH pay the specified amount due pending the Arbitrator's Final Award, and reinstated the remaining causes of action. The parties went ahead with discovery.

On January 6, 1988 the Arbitrator conducted further hearings and issued a Final Award. On December 14, 1988, Local 144 filed for an order confirming the Final Award in all respects. On January 23, 1989, Local 144 filed for leave to amend its complaint. On March 30, 1989 Neiman and CNH moved to quash and for a protective order preventing Local 144 from obtaining access to Neiman's financial records. That motion was denied on May 5, 1989. By opinion of May 23, 1989 the Final Award was confirmed to the extent it ordered payments totaling $8,757,709 plus interest for 1981 to 1985 but vacated as to amounts awarded for 1986 and 1987. Local 144's motion to amend the complaint was granted except for the proposed claim for an accounting. On June 8, 1989 Local 144 filed its first amended complaint.

On July 16, 1989 Local 144 moved to compel discovery in response to the sixth request for documents, and Neiman later moved to quash the subpoena served in connection with the document demand. At a pre-trial conference the parties agreed to defer disposition in view of an anticipated ruling from the Arbitrator in a related matter considered relevant to settlement. On December 27, 1989 Neiman filed his Answer and Counterclaims and Third-Party Complaint ("Third-Party Complaint").

On January 15, 1990 the Arbitrator rendered a decision, and Local 144, at the pre-trial conference of January 24, renewed its request on the pending motions. On February 15, the court granted both motions in part (the "February 15 Order").

On January 19, Local 144 made a motion to dismiss Neiman's Third-Party Complaint and counterclaims and on February 7, 1990 Neiman cross moved for an order pursuant to Rule 14(a) for leave to serve and file the Third-Party Complaint and on March 16, 1990 Neiman moved for reconsideration of the February 15 Order. On May 5, 1990, the court denied Neiman's motion to reconsider the February 15 Order. In an opinion of June 1, 1990, 741 F. Supp. 415 (S.D.N.Y.), the court dismissed Neiman's Third-Party Complaint as well as Neiman's counterclaims based on violations of 42 U.S.C. § 1983, breach of contract and fraud. The court granted Neiman leave to replead the fraud claim.

On June 15, 1990, Neiman filed an amended answer reflecting the court's June 1 opinion. In Neiman's amended answer, he included the alleged § 1983 violations as his sixteenth affirmative defense.

On July 12, 1990, the court denied Neiman's motion on the pleadings dismissing Local 144's fourth and fifth causes of action in the first amended complaint based on common-law fraud and RICO.

On July 16, Neiman moved for summary judgment of Local 144's second and third causes of action, to enforce the arbitration award against Neiman and for equitable subrogation, respectively. Neiman also moved for summary judgment of his first counterclaim for indemnification. Local 144 moved to strike Neiman's sixteenth affirmative defense (the alleged § 1983 violations) and second counterclaim (fraud) and to dismiss the amended answer. On August 31, 1990 Neiman filed a motion for summary judgment on plaintiff's common-law fraud (fourth cause of action) and RICO (fifth cause of action) causes of action. Oral argument on these motions was heard on September 6, 1990.

As Local 144 has withdrawn its third cause of action for equitable subrogation, Plaintiff's Memorandum of Law, n. 1, there remains for consideration before the court on motions for summary judgment on Local 144's cause of action based on enforcement of the arbitration award against Neiman, its action based on RICO, and that based on common-law fraud. Also pending under Rule 56 is Neiman's first counterclaim for indemnification based on the provisions of the 1978 contract between CNH and Local 144. In addition, the court must consider Local 144's motion to strike the sixteenth affirmative defense and second counterclaim and for sanctions pursuant to Rule 11, Fed.R.Civ.P.

THE FACTS

At issue in this action is the parties' 1981-84 collective bargaining agreement, which governs wages, hours, and working conditions of covered CNH employees represented by Local 144 and its relation to the State's Medicaid reimbursement system.

1.  The Medicaid Reimbursement System

Under the Medicaid reimbursement system, the State pays health care facilities for caring for patients qualifying for Medicaid benefits. During the period at issue here, approximately 95% of Concourse's patients qualified for Medicaid; Concourse, therefore, received about 95% of its revenues from Medicaid reimbursement.

The State reimburses nursing homes according to a per diem rate for each Medicaid patient day. Until 1986, the State calculated the per diem rate using a cost-based formula. First, the State designated a base year for determining the facility's total reimbursable costs. For example, in 1981 the State selected 1978 as a base year; in 1982 it chose 1980 as the base year. Next, the State calculated the facility's reimbursable base year costs, including labor costs (union and non-union expenses for wages and benefits), operating costs, property costs (rental or mortgage expenses), and so forth. The State did not approve and pay automatically all costs a facility incurred. For example, the State imposed "discrete" ceilings on particular costs, such as salaries paid to administrators and relatives of facility owners. If a facility exceeded the discrete ceiling, the State would exclude the excess from its base year cost calculation.

Once the State had determined the allowable base year costs, it reckoned the reimbursable costs for any given year by multiplying base year costs by a "trend factor" to account for inflation. The State then divided this amount by the facility's total patient days to arrive at the per diem rate.

Within this system, the State allowed for periodic adjustments for specific items. If a facility persuaded the State that it needed additional reimbursement to cover a particular cost, the State would reimburse monies for that item, denoting those particular funds on the rate sheets for the given year. For reimbursement provided in this manner, the facility had to spend the funds for that particular purpose or face recoupment by the State.

In 1982, the State modified the Medicaid reimbursement system by imposing "peer group ceilings." Peer group ceilings reflected a norm determined by comparing total costs at similar facilities. To the extent an individual facility's total costs exceeded the norm, the State denied reimbursement for the excess, and the facility was out of pocket for that amount.

A facility whose costs exceeded the peer group ceilings could appeal to demonstrate that such excess expenditures were necessary to operate properly when, for example, the facility's patients required specialized medical care. If the facility's appeal succeeded, the State would retroactively adjust that facility's reimbursement rate.

On January 1, 1986, the State changed its reimbursement methodology from a cost-based system to a pricing system called "Resource Utilization Group" ("RUGS"). Rather than reimbursing a facility for costs incurred, RUGS essentially set a price the State would pay for a facility to treat a certain type of patient.

2.  Parity

When Local 144 first began its representation of workers at Concourse, the workers received wages and benefits on the whole lower than those paid to Local 144's members working at other health care facilities. To remedy the disparity, Local 144 negotiated clauses in its collective bargaining agreements that required Concourse workers' benefits gradually to be brought up to par with those of other workers in the area. In the collective bargaining agreements, this process became known as "parity."

a) The 1978 Agreement

CNH and Local 144 signed their first collective bargaining agreement on August 10, 1978, (the "1978 Agreement"). The 1978 Agreement included the following parity clause:

  The difference between the minimum provided for
  under the Metropolitan Agreement [of Greater New
  York] and that currently being paid by the
  Employer shall be implemented during the three
  year agreement in equal one-third (1/3)
  installments provided the Cost Review Panel
  approves increases in rates and the State actually
  reimburses the Employer to offset all Labor Costs.

On that same day, Neiman incorporated CNH, transferring all stock in the company to his wife to hold in trust for their children. Effective that date, all former employees of Concourse became employees of CNH.

On July 23, 1979, as part of the 1978 agreement, Local 144 entered into an agreement with CNH to protect any principal, officer, or stockholder of CNH in the event that the union might attempt to enforce an arbitral award relating to "fund obligations" against the officers, principals or stock holders of CNH (the "Indemnification Provision"). The Indemnification Provision reads as follows:

  In the event the employer fails to make payments
  pursuant to any of the provisions relating to fund
  obligations of this agreement then in that event
  the union may submit to arbitration for such
  monies then owed by the employer.
  In the event it becomes necessary to enforce any
  award under this provision against the principals,
  officers, or stockholders of the employer either
  jointly or individually which shall in any award
  exceed four months of liability, in the event any
  such action or actions are commenced, the union
  shall indemnify and hold the principals, officers
  or stockholders harmless against any judgement
  that exceeds 4 months of accrued indebtedness in
  any separate action. Any payments made hereunder
  shall be first credited against the liability of
  the individuals, officers, stockholders and
  principals.

On December 31, 1980, CNH and Concourse executed a management agreement providing that CNH would make the parity payments. The management agreement stated:

  Notwithstanding anything to the contrary in this
  agreement, no retroactive award of any kind or
  nature made or awarded against the Corporation
  [CNH] shall obligate Concourse ...

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