The opinion of the court was delivered by: SPRIZZO
Plaintiffs, trustees of an employees' union fund, bring the above-captioned action Soanes, et al. v. Empire Blue Cross/Blue Shield, 91 Civ. 8698 (JES) ("Empire I "), against defendant Empire Blue Cross/Blue Shield ("Empire"), a not-for-profit health insurer. Plaintiffs claim, inter alia, that Empire breached a health insurance contract ("contract 82079") and a written stipulation, violated N.Y. Ins. Law §§ 2402 and 2403, engaged in deceptive acts and practices prohibited by N.Y. Gen. Bus. Law § 349, and breached certain fiduciary duties. See Amended Complaint ("Am. Compl. I") PP 15, 19, 31, 34, 37. Plaintiffs seek enforcement of contract 82079 or, in the alternative, return of the insurance premiums paid thereunder. See id. P 27; Plaintiffs' Supplemental Post-Trial Memorandum of Law ("Pltf. Memo.") at 10.
In Empire I, Empire filed counterclaims based in fraud, breach of contract and alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961(1), (5), 1962(a)-(d). In addition, Empire brings a third-party action against the employees' union, Retail Local 906 AFL-CIO ("Local 906"), Nemiah Soanes ("Soanes") in his capacity as president of Local 906, and three corporations: The Associated Members Brokerage Group, Inc. ("AMBGI"), The American Employee Group Benefits Administrator, Inc. ("AEGBA"), and The Greater Northeast Business Group, Inc. ("GNEBG"). Empire also asserts counterclaims and third-party claims against three individual defendants, Solomon Sprei ("Sprei"), Herbert Lieber ("Lieber"), and Soanes. In the third-party action, Empire asserts claims sounding in fraud, breach of contract, tortious interference with contract, and violation of and conspiracy to violate RICO. See Empire I Amended Answer and Counterclaims ("Am. Ans. I") PP 139, 142, 145, 167-74, 178, 182-83, 187-88, 192-93, 197-98. On December 27, 1991, pursuant to 28 U.S.C. § 1441, the third-party defendants therein removed Empire I to this Court from the New York State Supreme Court.
Plaintiffs Morton Nathan, Peter Janis and Lorinda Thomas (collectively, the "individually insured plaintiffs") bring the instant related case, Nathan, et. al. v. Empire Blue Cross/Blue Shield, 92 Civ. 0223 (JES) ("Empire II "), claiming that Empire violated §§ 404, 406, and 409 of the Employee Retirement Income Security Act ("ERISA"), and breached its fiduciary duties in violation of 29 U.S.C. §§ 1104, 1106, and 1109 by refusing to pay out claims filed under contract 82079. See Pretrial Order ("PTO") P 1 at 6. The individually insured plaintiffs seek payment of all valid claims under contract 82079, or, in the alternative, the return of premiums paid thereunder. See id. PP 2-4 at 6. In addition, the individually insured plaintiffs request, inter alia, an accounting of all funds received and all claims paid by Empire related to contract 82079. See id. PP 5-9 at 6-7.
Plaintiff AEGBA brings the above-captioned related action, AEGBA v. Empire Blue Cross/Blue Shield, 92 Civ. 0422 (JES) ("Empire III ") against Empire. In Empire III, Empire brings third-party claims against Local 1-J, Sprei, Lieber and others. Sprei and Steven Adler bring a fourth related action, Sprei, et al. v. Blue Cross/Blue Shield, 92 Civ. 0423 (JES) ("Empire IV "), against Empire.
The four above-captioned actions were consolidated for a bench trial. After summations and post-trial briefing, the Court resolved several issues on the Record. As to the remaining issues, for the reasons set forth below, the Court holds that Empire established RICO and fraud liability as to Sprei, Lieber, AMBGI, AEGBA and GNEBG. However, Empire's claims against Soanes, Local 906 and the Local 906 Fund are dismissed. In addition, Empire is directed to return a portion of the premiums collected under contract 82079 with interest to be deposited with the Clerk of the Court pending the commencement of an appropriate action for distribution to the individual insureds thereunder.
AMBGI, AEGBA, and GNEBG (collectively, the "corporate defendants"), through its principals and officers Solomon Sprei and Herbert Lieber, acted as administrators of various labor unions' health insurance programs. See Transcript of Trial Record dated April 25, 26, 27 and May 5, 1994 ("Tr.") at 471; Trial Exh. A PP 3-7. As administrators, these entities collected premiums from unions or individual insureds, made premium payments to their insurers, oversaw the processing of claims and certifications of eligibility, and attended to various other ministerial financial matters. See Tr. at 471-73, 481, 502-03.
On behalf of AMBGI, AEGBA, and GNEBG, Sprei approached insurers to arrange for health insurance coverage of union members. See Tr. at 21-23, 481-82, 498, 553-56. AMBGI acted as a "finder" of individuals who would become members of a union for the sole purpose of obtaining insurance through that union's group coverage. See Tr. at 343-47. As finder, AMBGI would allocate customers to different unions depending on whether the customer was seeking individual or family coverage. Id. at 234. AMBGI, through Lieber, executed agreements with a number of "subfinders" who recruited membership from the general public to join a health insurance plan. See Tr. at 471-73. These members of the general public made premium payments to the subfinder, who reserved a portion of that payment as his fee. Id. at 347; PTO, Undisputed Facts P 35. The subfinder would then forward the balance to AMBGI. See Tr. at 347; PTO, Undisputed Facts P 35. After taking its fee, AMBGI paid the remaining funds either to the union directly in the form of dues, or to the union administrator who, in turn, paid membership dues. See Tr. at 344-49.
Local I-J is the Service Employees' International Union of New York, New York ("Local 1-J"), see Trial Exh. CM at 2, an affiliate of the Jewelry Manufacturers Association and its welfare fund ("the Local 1-J Fund"). See Trial Exh. BS; PTO P 2 at 7. In 1988, the trustees of the Local 1-J Fund attempted unsuccessfully to procure a suitable health insurance contract for its members, all of whom were at that time engaged in the trade. See Tr. at 549-50, 553. As a result, these Local 1-J members continued to be insured through the union's Taft-Hartley self-insurance plan. See Tr. at 563.
In early 1990, Sprei approached the Local 1-J Fund about recruiting "associated members" from the general public, who would receive family health insurance coverage from Empire.
See Tr. at 553. In soliciting coverage from Empire, however, Local 1-J, through Sprei, submitted to Empire claims histories reflecting only regular members who were engaged in the union trade. Id. at 392-95, 560-62. Based upon evidence elicited at the trial, it appears that Empire was unaware of the scheme to recruit associated members when it issued coverage of all Local 1-J members under group health insurance contracts 82074 and 82075 from April 1, 1990 through May 1, 1991.
After obtaining these group health insurance contracts from Empire, Local 1-J agreed to allow Sprei, Lieber, and AEGBA to administer the contracts and to recruit associated members for insurance under these contracts. See Am. Ans. I PP 98-100; Trial Exh. A PP 8, 11-12. When Empire requested certification of claimants' eligibility under contracts 82074 and 82075, the Local 1-J Fund, Sprei and Lieber falsely reported them to Empire as regular members of Local 1-J, when, in fact, they were associated members. See Trial Exh. Y.
Local 906 is the Retail Drug, Cigar, Soda and Luncheonette Store Employees Union. See Trial Exh. D. The Retail Local 906 AFL-CIO Welfare Fund ("Local 906 Fund") was created in 1956 as a jointly administered Labor Management Trust Fund. See Tr. at 13, 29; PTO, Undisputed Facts P 11. At all times relevant to the instant actions, Nemiah Soanes, Arthur Hawke,
Vincent Fuentes, George Schwartz, George Rosenfeld and John Economos served as Trustees of the Local 906 Fund (collectively the "Local 906 Trustees"). See PTO, Undisputed Facts P 1. Soanes also acted as an administrator of the Local 906 Fund and had served as president of Local 906 since 1979. See Tr. at 12-14.
As a part of its union practice, Local 906 trustees allocated employer contributions to the Local 906 Fund to pay for premiums on various group insurance policies for its members, including group life, accident and health insurance. See Am. Ans. I P 45. Through its trustees, the Local 906 Fund negotiated and entered into contracts to provide group insurance policies at discounted rates. Id. PP 51, 58.
In July 1965, Empire first issued group contract number 80542 ("contract 80542") providing hospitalization insurance for Local 906 members, all of whom were at that time employed in the retail drug, soda, cigar and luncheonette industry (hereinafter referred to as "regular members"). See Tr. at 17; PTO, Undisputed Facts P 13. Contract 80542 was renewed annually for twenty-five years and was last renewed in June 1990. See PTO, Undisputed Facts P 13.
Beginning in or about 1988, Local 906 membership began to decline, resulting in diminishing union dues, revenues and depleting union assets. See Tr. at 77-78; Trial Exhs. AK-1 to AK-3. Soanes realized that unless he found a way to reverse this trend, his position and salary as Local 906 President would be in jeopardy. See Tr. 79-80. In the summer of 1990, Sprei contacted Soanes and offered to find new members for Local 906. See id. at 80-81; Trial Exh. A P 55. Soanes viewed Sprei's offer as a possible solution to the problem of dwindling union assets. See Tr. at 19, 72, 77-78, 80-81. Sprei proposed that these new members would become "associated members" of Local 906. Id. at 22-23. On October 17, 1990, apparently without the knowledge of the Local 906 Trustees, Soanes caused the constitution of Local 906 to be amended to include a membership provision for associated members. See id. at 23, 128-29; PTO, Undisputed Facts P 27.
Thereafter, Sprei, Lieber, and AMBGI recruited Local 906 associated members from the general public. See Am. Ans. I PP 60-61; Trial Exh. A P 21. Associated members joined Local 906 solely to obtain health insurance under a group policy in the Local 906 Fund's name.
See Tr. at 22-23, 499. Soanes, Sprei and Lieber knew that, unlike regular members of Local 906, the new associated members were not required to work in the retail drug, soda, cigar and luncheonette industry or even to be employed at all. See Am. Ans. I P 64; Tr. at 108, 117-18, 243-44, 257.
In September 1990, Soanes contacted Empire and requested information about expanding the Local 906 Fund's health insurance to include both hospitalization and major medical coverage for a new group of 282 people. See Tr. at 144-45, 278-79; PTO, Undisputed Facts P 18. Soanes did not disclose to Empire that this new group consisted of associated members only, rather than regular members, or that his estimate of 282 enrollees was pure conjecture. See Tr. at 145; Transcript of Trial Record dated September 23, 1994 ("Sept. 1994 Tr.") at 11-13. Nor did Soanes reveal the fact that contract 82079, the policy to be issued relating to this coverage, would insure only associated members whereas Empire had up until that time insured only regular members.
See Sept. 1994 Tr. at 11-12, 130, 137-138; Trial Exh. N.
On October 12, 1990, Soanes prepared the application for contract 82079 on behalf of the Local 906 Fund, in which he falsely represented that employer contributions would be 100% of premium payments, even though the members themselves, and not their employers, paid premiums directly to the finders. See Tr. at 127, 131-32; Trial Exh. 4 at 1. The employers of associated members, if any, neither contributed to the Local 906 Fund nor entered into a collective bargaining agreement with Local 906, as employers of regular members were required to do. See Trial Exh. D. Moreover, while regular members had equal privileges in Local 906, associated members were not entitled to vote on union affairs, hold union offices or otherwise participate in the union. See Tr. at 87-88; Trial Exh. D.
Contract 82079 provided for coverage from November 1, 1990 until June 30, 1991. See PTO, Undisputed Facts P 21. The monthly premiums under contract 82079 were $ 147.79 for individual coverage and $ 364.30 for family coverage. See id. P 24. AEGBA administered union dues and premium payments from the new associated members and, after deducting commissions, tendered the payments to Local 906 and the Local 906 Fund.
See id. P 35; Trial Exh. A PP 27, 61.
Soanes affirmatively concealed the existence of the associated members from Empire and government agencies. Thus, in regular sworn filings with the Internal Revenue Service and the Department of Labor relating to membership, Soanes reported only regular membership figures and withheld all information and statistics relating to associated members of Local 906. See Tr. at 90-97. Specifically, Soanes listed the number of active participants in the Local 906 Welfare Fund as 201 as of January 1991. See id. at 100-01; Exh. I at 2. Nevertheless, for that same month, Soanes represented to Empire in a group contract remittance form accompanying premium checks that 2,080 members participated in the Local 906 Fund. See Tr. at 100-01; Trial Exhs. FT, FU.
In addition, Sprei, Lieber and the corporate defendants interchangeably used the Local 1-J and Local 906 contracts with Empire to maximize revenues. Through its principals, AMBGI allocated its customers to either Local 906 or Local 1-J based on whether the customer was seeking individual or family coverage. Sprei offered coverage through Local 1-J under contracts 82074 and 82075 only to families. Under those contracts, the monthly premium for either individual or family coverage was $ 253.35. See Trial Exh. CP at 1-3. However, the monthly premium for individual coverage under contract 82079 through Local 906 was $ 147.79. See PTO, Undisputed Facts P 24. Therefore, Sprei sold coverage under contract 82079, with its lower individual coverage rate, to individual associated members and Sprei sold coverage under contracts 82074 and 82075, with their lower family coverage rate, to associated members who desired family coverage. See Tr. at 234;
Deft. Brief at 20.
From November 1, 1990 through June 30, 1991, Empire mailed forms to the Local 906 Fund requesting eligibility certification for each person submitting a claim to Empire under contract 82079. See PTO, Undisputed Facts PP 37-40. A clerical employee at Local 906 processed and mailed hundreds of forms to Empire certifying that claimants under contract 82079 were eligible for coverage, even though they were associated members. See Tr. at 172; Trial Exh. Y; PTO, Undisputed Facts PP 40-41. At trial Soanes testified ...