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AETNA CAS. & SUR. CO. v. RETAIL LOCAL 906 OF AFL-C

March 26, 1996

THE AETNA CASUALTY AND SURETY COMPANY, Plaintiff, against RETAIL LOCAL 906 OF AFL-CIO WELFARE FUND, et al., Defendants. MAX GOLDWEBER and MARCIA BERGER HERSHKOWITZ, d/b/u the firm name of GOLDWEBER & HERSHKOWITZ, Plaintiffs, -against- THE AETNA CASUALTY AND SURETY COMPANY, Defendant.


The opinion of the court was delivered by: WEXLER

 WEXLER, District Judge

 The above-captioned consolidated actions were tried without a jury in November and December 1995. At the conclusion of the trial, this Court reserved decision. The following is this Court's findings of fact and conclusions of law.

 FINDINGS OF FACT

 Subsequently, Aetna commenced an action in this Court (the "Aetna action") against the Welfare Fund and its trustees to rescind a Pension and Welfare Fund Fiduciary Responsibility Insurance Policy issued by Aetna to the Welfare Fund and the Retail Local 906 AFL-CIO Pension Fund (the "Pension Fund") under policy number 73 FF 100698100 BCA (the "FRIP"). In the Aetna action, and by counterclaim in the G&H action, Aetna claims that the Welfare Fund, Goldweber and others concealed from Aetna facts material to the renewal of the FRIP in 1991, in particular, that thousands of "associated members" had been admitted to Retail Local 906 AFL-CIO ("Local 906") solely for participation in the Welfare Fund in a scheme to deceive the Welfare Fund's health insurers.

 Aetna then removed the G&H action to this Court, and both the G&H and Aetna actions were consolidated by order dated July 2, 1993.

 At all relevant times, Nemiah Soanes ("Soanes") was the president of Local 906 and the administrator and a trustee of the Welfare Fund.

 The other trustees of the Welfare Fund were Vincent Fuentes ("Fuentes"), Althea Neblett ("Neblett"), John Economos ("Economos"), George Rosenfeld ("Rosenfeld"), and George Schwartz ("Schwartz"). Soanes, Fuentes and Neblett were employee trustees, and Economos, Rosenfeld and Schwartz were employer trustees.

 At all relevant times, Goldweber was the attorney for the Welfare Fund and Local 906, and had been for many years pursuant to retainer agreements. Hershkowitz was a partner of Goldweber in G&H.

 In or about the summer of 1990, Soanes and Goldweber became involved with a person named Solomon Sprei ("Sprei"), who developed a scheme to recruit persons to join Local 906 as "associated members." These "associated members" would not be required to be employed by employers who entered into collective bargaining agreements with Local 906. Associated members would pay monthly dues to Local 906 solely to obtain health insurance through the Welfare Fund, and so-called "finder's fee" would be paid to entities controlled by Sprei and to others for bringing in the associated members.

 In or before October 1990, Local 906 and Sprei began negotiations to admit associated members to Local 906. Thereafter, numerous meetings between and among Soanes, Goldweber, Hershkowitz, Sprei, and Sprei's attorney, Moshe Katlowitz ("Katlowitz"), were held to implement the scheme.

 In October 1990, the Local 906 constitution was amended to allow for associated members. Associated members were not required to be employed by employers who had collective bargaining agreements with Local 906. Indeed, they were not required to be employed, as persons "one time previously employed" were eligible for membership. However, associated members could not vote or participate in Local 906 affairs, even though the constitution of the AFL-CIO International Union (the "International Union") required that all members have equal rights and responsibilities.

 In or about October 1990, Local 906, by Soanes, and an entity called The Greater Northeast Business Group, Inc. ("GNBG") executed a document entitled, "Local 906 Collective Bargaining Agreement," dated as of September 1, 1990. Pursuant to § 9.1 and § 9.5 of that agreement, associated members--employed and nonemployed persons--could participate in the Welfare Fund. It did, however, purport to limit nonemployee membership to 10% of the total number of employees and nonemployees for whom GNBG was to make payment to the Welfare Fund for group health insurance coverage. Nevertheless, this document was not an agreement with any employer and was not a collective bargaining agreement, but was entitled as such as part of the associated member scheme. The evidence established that GNBG, although a purported association acting as an agent for various employers, never had an association with employers at that time or any time thereafter.

 Soanes, on behalf of Local 906, also executed a "Union-Finder Agreement," dated as of October 22, 1990, with The Associated Members Brokerage Group, Inc. ("AMBG"), under which AMBG was to act as "Finder" to locate and obtain associated members for Local 906. Section 1(b) of the Union-Finder Agreement defined an associated member as "any person, whether employed or at one time previously employed, who makes a monthly dues payment to [Local 906] in the amount of [twelve dollars]." Similarly, the parties to the agreement provided that "employers of Associated Members need not enter into a collective bargaining agreement with any person or entity." The agreement also provided that the finder could engage "sub-finders" and for the payment of finder's and sub-finder's fees from the money paid by the associated members. Under the agreement, G&H was to receive copies of all notices concerning the agreement.

 In addition, Soanes, on behalf of Local 906, executed an "Administration Agreement," dated as of October 22, 1990, with The American Employee Group Benefits Administrator, Inc. ("AEGBA"), under which AEGBA was to "formulate, administer and govern all rights and benefits of Associated Members [to] insurance plans." As in the Union-Finder Agreement, the Administration Agreement similarly provided that an associated member "includes any person, whether employed or not employed, who makes a monthly dues payment to [Local 906] in the amount of [twelve dollars]," and that "employers of Associated Members need not enter into a collective bargaining agreement with any person or entity." Moreover, as under the Union-Finder Agreement, the Administration Agreement provided that G&H was to receive copies of all notices concerning the agreement.

 These various agreements and the amendment of the Local 906 constitution implemented the associated member scheme by permitting enrollment of associated members into Local 906 and, eventually, their participation in the Welfare Fund. Goldweber admitted that he participated with Katlowitz in drafting the various agreements on behalf of Local 906. Moreover, Hershkowitz conceded that G&H participated in the negotiations of the terms of the agreements.

 Sprei created GNBG, AMBG and AEGBA (collectively, "Sprei's entities"), all of which were used to implement the associated member scheme. According to Soanes, Sprei said he would hire finders to recruit associated members.

 Although Soanes refused to admit that he did not care where, or even if, associated members were employed as long as Local 906 received its dues and the Welfare Fund received its monthly payment for premiums, Soanes admitted such in his testimony in the Blue Cross action.

 Soanes claimed that the practice of recruiting associated members was first brought to his attention at a convention of the International Union about 10 years ago as a means of increasing union membership. Astoundingly, Soanes maintained that the International Union approved the associated member scheme. In this respect, Soanes claimed that after Local 906 began taking in associated members, he informed the International Union; and the "[International Union] asked for a copy of the contract which I took to the International [Union's] president that she sent to her attorneys." As a result, the International Union "told" Soanes that Local 906 would have to pay part of the associated members' dues to the International Union. Thereafter, Local 906 agreed to pay $ 3.75 per month per associated member to the International Union out of the $ 12 per month dues paid by each associated member. Although Soanes told the International Union's president that Local 906 was receiving less dues from associated members than regular members, the International Union directed Local 906 to "pay full per capita tax the same as you pay for the regular members."

 The FRIP at issue in this action had an effective date of March 23, 1991. The FRIP, subject to various exclusions, terms and conditions, provided:

 
The Company [Aetna] will pay on behalf of the Insured [the Welfare Fund] all sums which the Insured shall become legally obligated to pay as Damages on account of any claim made against the Insured for any Wrongful Act and the Company shall have the right and duty to defend such claim against the Insured seeking such Damages, even if any of the allegations of the claim are groundless, false or fraudulent, and may make such investigation and settlement of any claim as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements. (Emphasis omitted.)

 The FRIP resulted from the renewal of a FRIP issued by Aetna to the Welfare Fund covering the period March 23, 1990 to March 23, 1991 (the "1990-1991 FRIP")

 As the March 23, 1991 renewal date for the FRIP approached, by letter dated February 28, 1991, Aetna issued a notice of nonrenewal of the FRIP, effective May 2, 1991, based upon the Welfare Fund's failure to submit timely renewal underwriting information.

 By letter dated April 3, 1991, Goldweber submitted to the Welfare Fund's insurance broker, Simon Paston & Sons Agency, Inc. ("Simon Paston"), the following: (1) the renewal application, dated March 15, 1991 (the "1991 renewal application"); (2) the Welfare Fund's 1989 IRS 5500 form for the fiscal plan year ending January 31, 1990; and (3) the Welfare Fund's audited financial statements as of January 31, 1990. Goldweber testified that he originally submitted the 1991 renewal application on or about March 15, 1991, but that Aetna or Simon Paston lost or misplaced it, so he resubmitted it on or about April 3, 1991.

 Goldweber prepared the 1991 renewal application and signed as attorney for the Welfare Fund. Goldweber, the Welfare Fund's accountant, and certain Local 906 ...


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