United States District Court, S.D. New York
DR. HENRY ERLE CHILDERS IV, ET AL., Plaintiffs,
THE NEW YORK AND PRESBYTERIAN HOSPITAL, ET AL., Defendants, DR. LORI SIMON, ET AL., Plaintiffs,
THE NEW YORK AND PRESBYTERIAN HOSPITAL, ET AL., Defendants,
ORDERED Filed: July 11, 2014
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For DR. Henry Erle Childers, IV, On behalf of themselves individually and all others similarly situated, DR. George Bino Rucker, On behalf of themselves individually and all others similarly situated, Plaintiffs (1:13-cv-05414-LGS): Steven Karl Barentzen, The Law Office of Steven Barentzen, Washington, DC.
For The New York and Presbyterian Hospital, Defendant (1:13-cv-05414-LGS): Maura Barry Grinalds, LEAD ATTORNEY, Skadden Arps Slate Meagher & Flom LLP, New York, NY; Daniel William Joseph Becker, Erin Ashley Simmons, Robert Lynch Dunn, Skadden Arps Slate Meagher & Flom LLP (NYC), New York, NY.
For Dr. Lori Simon, on behalf of themselves and others similarly situated, Dr. Bezalel Dantz, on behalf of themselves and others similarly situated, Dr. Peter Hahn, on behalf of themselves and others similarly situated, Dr. Tracey Marks, on behalf of themselves and others similarly situated, Plaintiffs (1:13cv5899): David A Lebowitz, Katherine R. Rosenfeld, Matthew D. Brinckerhoff, Zoe Antonia Salzman, Emery Celli Brinckerhoff & Abady, LLP New York, N.Y. USA.
For New York And Presbyterian Hospital, Defendant (1:13cv5899): Maura Barry Grinalds, LEAD ATTORNEY, Skadden Arps Slate Meagher & Flom LLP, New York, N.Y. USA; Daniel William Joseph Becker, Erin Ashley Simmons, Robert Lynch Dunn, Skadden, Arps, Slate, Meagher & Flom LLP (NYC), New York, N.Y. USA.
OPINION AND ORDER
LORNA G. SCHOFIELD, UNITED STATES DISTRICT JUDGE.
Before the Court is New York and Presbyterian Hospital's (the " Hospital" ) Motion to Dismiss the complaints filed in two cases, which have been consolidated for pre-trial purposes. Drs. Henry Earle Childers, IV and George Bino Rucker, on behalf of themselves and others similarly situated (the " Childers Plaintiffs" ), brought the first action against the Hospital for (1) fraud; (2) constructive fraud; (3) breach of fiduciary duty; (4) negligent misrepresentation; (5) negligence; (6) breach of contract; and (7) unjust enrichment. Drs. Lori Simon, Bezalel Dantz, Peter Hahn and Tracey Marks, on behalf of themselves and others similarly situated (the " Simon Plaintiffs" ), brought the second action against the Hospital for (1) breach of fiduciary duty and (2) unjust enrichment.
The Hospital moves to dismiss both complaints in their entirety under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction and, in the alternative, under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. For the reasons discussed below, the Hospital's motion is denied as to all claims, except the breach of contract claim, which is dismissed.
The facts are taken from the respective complaints filed in each action. The factual allegations in the complaints are substantively the same except as otherwise noted. As is required on this motion, the factual allegations contained in the complaints are assumed to be true.
The Hospital is a large not-for-profit institution that is the successor by merger of two former hospitals. The Hospital employs medical residents and fellows from both Cornell Medical School and Columbia Medical School. Plaintiffs in both actions were medical residents and fellows from Cornell Medical School in the Hospital's Weill Cornell Residency Program during all or part of the time period from 1995 through June 30, 2001.
Under the Federal Insurance Contributions Act (" FICA" ), both employers and
employees must pay FICA taxes, which consist of contributions to Social Security and Medicare, on all wages paid to employees by the employer. Employers are obligated to withhold the employees' share of FICA taxes from the employees' paychecks and pay both the employees' and the employer's shares to the government. A statutory provision known as the " Student Exemption" exempts students employed by a college or university from FICA tax requirements.
Historically, the Internal Revenue Service (" IRS" ) interpreted the Student Exemption to exclude medical residents and fellows. Therefore, the IRS required all hospitals to withhold FICA taxes from the paychecks of their residents and fellows. Beginning in the late 1990s, some medical schools and hospitals challenged the IRS, claiming that medical residents and fellows should be covered by the Student Exemption. These organizations stood to save millions of dollars on the employer portion of FICA taxes if the Student Exemption were to apply to residents and fellows.
While the challenges regarding the Student Exemption were underway, many medical schools and hospitals filed FICA refund claims with the IRS on behalf of themselves and their medical residents and fellows. For example, Mount Sinai Hospital/School of Medicine filed FICA refund claims on behalf of its medical residents beginning in 1995 and ending in 2005. The FICA refund claims filed by medical schools and hospitals were routinely denied by the IRS.
Nevertheless, these claims were considered " protective" because they tolled the statute of limitations and preserved the right to future FICA tax refunds should the IRS change its position on including medical residents and fellows under the Student Exemption. While medical residents and fellows could file individual protective FICA refund claims, they rarely did so, and the majority of individuals who did file were instructed to do so by their medical training institutions. The standard practice in the industry was that medical schools and hospitals would file protective refund claims to preserve the rights of both the institution and the individual residents and fellows.
In response to the denial of their FICA refund claims, many medical schools and hospitals filed suit. In 1998, the Eight Circuit Court of Appeals held that the Student Exemption applied to medical residents. See State of Minn. v. Apfel, 151 F.3d 742 (8th Cir. 1998). Despite this ruling, the IRS continued to require medical schools and hospitals to pay FICA taxes for their medical residents and fellows.
On April 1, 2005, the IRS issued new regulations regarding the Student Exemption, stating that any employee who works forty hours or more for a college or university is not eligible for the exemption. Then, in 2008 and 2009, a series of decisions by the U.S. Courts of Appeals again held that medical residents were not categorically ineligible for the Student Exemption. See, e.g., United States v. Mt. Sinai Med. Ctr. of Fla. Inc., 486 F.3d 1248 (11th Cir. 2007). In 2010, in accordance with those rulings, the IRS agreed that medical residents and fellows were exempt from paying FICA taxes for tax periods before April 1, 2005.
The IRS then announced that medical schools and hospitals that had filed timely protective FICA refund claims could now apply for refunds of FICA taxes paid. As a result, the IRS refunded FICA taxes, with interest, to those medical schools and hospitals that had timely filed protective FICA refund claims and then applied for refunds. Those institutions then passed on the employee portions of those refunds to their medical residents and fellows.
For those medical residents and fellows for whom protective FICA refund claims had not been filed, however, it was too late to apply for a refund, as the statute of limitations had run.
C. Facts Specific to the Claims
When Plaintiffs worked for the Hospital as residents and fellows during the period from 1995 through June 30, 2001, the Hospital withheld FICA taxes from their paychecks and paid those amounts to the government. The exact amounts withheld varied from person to person, but were generally several thousand dollars per year.
By the late 1990s, the Hospital was aware of the changing legal landscape regarding medical residents and fellows being covered by the Student Exemption. The Hospital filed protective FICA refund claims starting in 1995 on behalf of its medical residents and fellows from Columbia Medical School and continued to do so every year (other than 1996) through 2005. In contrast, the Hospital did not file protective FICA refund claims on behalf of its residents and fellows from Cornell Medical School until July 1, 2001 through 2005.
In 1999, the Hospital entered into a confidential settlement with the IRS that resolved an unrelated tax dispute (the " Settlement" ). As part of the Settlement, the Hospital agreed to give up its right to seek refunds for both the employer and employee portions of all FICA taxes paid on behalf of its medical residents and fellows from Cornell Medical School through June 30, 2001. In exchange for giving up this right, the Hospital gained valuable consideration. The affected medical residents and fellows received no consideration.
The Hospital never sought or obtained consent from any Plaintiff before entering into the Settlement, nor did the Hospital notify any Plaintiff after entering into the Settlement. The Hospital also never notified Plaintiffs that they could file their own protective FICA refund claims. The Hospital knew that absent its own action to protect these claims, Plaintiffs would not do so because they knew nothing of the issue or the right to file a protective claim.
After the IRS's decision in 2010 that medical residents were exempt from FICA taxes for tax periods before April 1, 2005, some Plaintiffs contacted the Hospital seeking information about their entitlement to FICA refunds. For example, Dr. Dantz contacted the Hospital about his right to a FICA refund, and the Hospital informed Dr. Dantz that it would file for a refund on his behalf. The Hospital did not inform Dr. Dantz that it had failed to file a protective claim on his behalf and therefore he would not be eligible for a refund. Later, Dr. Dantz heard that his peers from other medical schools were receiving FICA refunds, and he contacted the Hospital again. This time, the Hospital informed Dr. Dantz that it had not filed a protective claim on his behalf.
Had Plaintiffs known of the Settlement in time, they would have filed individual protective FICA refund claims. By the time Plaintiffs did learn of the Settlement, however, the time to file FICA refund claims had already expired. Accordingly, no Plaintiff is eligible to receive FICA tax refunds for the time period from 1995 through June 30, 2001.
The Childers Plaintiffs filed their complaint against the Hospital on August 2, 2013, alleging fraud, constructive fraud, breach of fiduciary duty, negligent misrepresentation, negligence, breach of contract and unjust enrichment (" Childers Complaint" ). The Simon Plaintiffs filed their complaint against the Hospital on August 21, 2013, alleging breach of fiduciary duty and unjust enrichment (" Simon Complaint" ).
On October 9, 2013, the two cases were consolidated for pre-trial purposes.
II. Standard of Review -- Motions to Dismiss
A. Subject Matter Jurisdiction
" A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it." Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000). " A plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Id. However, all that a plaintiff must show at this stage is a " colorable pleading of subject matter jurisdiction." Aurecchione v. Schoolman Transp. Sys. Inc., 426 F.3d 635, 638 (2d Cir. 2005). The Court must construe all ambiguities and draw all inferences in the plaintiff's favor. See id.
B. Failure to State a Claim
On a motion to dismiss for failure to state a claim under Rule 12(b)(6), a court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the non-moving party. See Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106, 108 (2d Cir. 2010). To withstand dismissal, a pleading " must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
" Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. While " 'detailed factual allegations'" are not necessary, the pleading must be supported by more than mere " 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action.'" Id. (quoting Twombly, 550 U.S. at 555). " Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id. (alteration in original) (quoting Twombly, 550 U.S. at 557).
Rule 8 of the Federal Rules of Civil Procedure " requires factual allegations that are sufficient to 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Anderson News, L.L.C. v. Am. Media, Inc., 680 F.3d 162, 182 (2d Cir. 2012) (alteration in original) (quoting Twombly, 550 U.S. at 555), cert. denied, 133 S.Ct. 846, 184 L.Ed.2d 655 (2013). Moreover, " where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged -- but it has not shown -- that the pleader is entitled to relief." Iqbal, 556 U.S. at 679 (internal quotation marks omitted); see also Fed.R.Civ.P. 8(a)(2).
C. Statute of Limitations
" The statute of limitations is . . . an affirmative defense . . . on which the defendant has the burden of proof." Bano v. Union Carbide Corp., 361 F.3d 696, 710 (2d Cir. 2004) (internal citation omitted). Thus, on a motion to dismiss, a claim may be dismissed as time-barred " only if a complaint clearly shows the claim is out of time." Harris v. City of New York, 186 F.3d 243, 250 (2d Cir. 1999).
" [P]leading requirements . . . do not compel a litigant to anticipate potential affirmative defenses, such as the statute of limitations, and to affirmatively plead facts in avoidance of such defenses." Abbas v. Dixon, 480 F.3d 636, 640 (2d Cir. 2007). " 'Where it does not conclusively appear that a plaintiff had knowledge of facts from which the injury could reasonably be
inferred, the complaint should not be dismissed on motion and the question should be left to the trier of fact.'" Bano, 361 F.3d at 710 (quoting Glod v. Morrill Press Div. of Engraph, Inc., 168 A.D.2d 954, 564 N.Y.S.2d 905, 908 (4th Dep't 1990)).
A. Subject Matter Jurisdiction
The Hospital argues that the Court lacks subject matter jurisdiction because the Internal Revenue Code (the " Code" ) bars any suit to recover a tax unless a timely refund claim has been made. The Hospital further argues that it is an improper party because the Code permits tax refund suits only against the United States, and not against private parties. These arguments are misplaced because these actions do not seek to recover a tax, but seek damages under state law as a result of the Hospital's tortious conduct.
The relevant statute, 26 U.S.C. § 7422, provides:
No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed . . .
26 U.S.C. § 7422(a) (1998). " Duly filed" has been interpreted to mean timely filed. See Erdheim v. Comm'r., 661 F.Supp.2d 405, 411 (S.D.N.Y. 2009) (citing United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 14-15, 128 S.Ct. 1511, 170 L.Ed.2d 392 (2008)). Federal courts therefore have held that where plaintiffs have not filed timely refund claims with the IRS, they do not have jurisdiction over suits for a tax refund. See, e.g., id ; Matthew v. RCN Corp., No. 12 Civ. 0185, 2012 WL 5834917, at *4 (S.D.N.Y. Nov. 14, 2012).
In addition, 26 U.S.C. § 7422 mandates that " [a] suit or proceeding referred to in subsection (a) may be maintained only against the United States." 26 U.S.C. § 7422 (f)(1) (1988). Thus, courts have held that " tax refund suits can be brought only against the United States, not against employers." Mills v. M.A.B.S.T.O.A. - N.Y.C.T.A., No. 87 Civ. 8497, 1988 WL 132848, at *2 (S.D.N.Y. Dec. 8, 1988); see also ' El Bey v. MTA/New York, No. 00 CV 2504, 2001 WL 487410, at *2 (S.D.N.Y. May 8, 2001) (" An employer cannot be held liable for withholding taxes in compliance with federal law as the duty to withhold is mandatory, not discretionary." ).
The Supreme Court has described 26 U.S.C. § 7422 as having an " expansive reach." Clintwood Elkhorn Min. Co., 553 U.S. at 1. And " courts interpreting Section 7422 have construed its language broadly." Matthew, 2012 WL 5834917, at *4. Specifically, " courts have made clear that the statute applies to any tax refund suit, whether or not labeled as such and whether or not under federal law." Id. Therefore, courts have held that § 7422 preempts state law claims filed by plaintiffs where those claims sought tax refunds. See, e.g., Brennan v. Sw. Airlines Co., 134 F.3d 1405, 1409 (9th Cir. 1998) (" It is well established that the IRC [the Code] provides the exclusive remedy in tax refund suits and thus preempts state-law claims that seek tax refunds" ); Lehman v. USAIR Grp. 930 F.Supp. 912, 916 (S.D.N.Y. 1996) (" The state law claims . . . are expressly pre-empted by § 7422 which prohibits such suits for disguised refunds of the taxes." ).
The public policy reason behind limiting suits for tax refunds to those against the Government is to excuse the employer
from liability when it is acting as the Government's collection agent, i.e., an intermediary between the taxpayer and the Government in the collection of taxes. Otherwise, the employer could be squeezed in the middle, with potential liability to the taxpayer without necessarily having recourse from the Government. See Brennan, 134 F.3d at 1411 (observing that employers " would be placed in the position of having to collect taxes at their peril" because they " would be required to refund taxes to the taxpayer but could not recover them from the government" ); see also Mills, 1988 WL 132848, at *2 (" By withholding tax, [the employer] would risk being sued by the employee without recourse to a government refund in the event the limitation period had run; by not withholding, he would risk being held liable by the government." ).
Here, § 7422 does not apply to Plaintiffs' claims because these are not suits for a tax refund. A corollary is that these actions do not arise out of the Hospital's collection of taxes, and therefore do not implicate the rationale for excusing the employer as tax collector from liability for tax refunds. The Hospital's alleged liability here stems not from its collection of FICA taxes but from later, independent actions and omissions, such as agreeing in the Settlement not to file protective refund claims on behalf of Plaintiffs, keeping the Settlement secret from Plaintiffs, not filing refund claims on behalf of Plaintiffs and not informing Plaintiffs that they should file refund claims for themselves. Of course, whether any of these actions and omissions actually occurred and whether they created liability for the Hospital are separate questions to be answered later.
The Hospital argues that the instant actions are disguised tax refund suits, citing cases. However, the instant actions are distinguishable from the cases cited by the Hospital, because in all of those cases, the defendants' alleged liability arose directly from their collection of the taxes at issue, while here, the Hospital's alleged liability does not. Cf. Matthew, 2012 WL 5834917, at *1, *5 (deeming state law claims to be for " disguised refunds of taxes" where the plaintiffs sued a telephone provider for allegedly collecting taxes on calls that were not taxable); Umland v. Planco Fin. Servs.., 542 F.3d 59, 65, 67-68 (3d Cir. 2008) (holding that a claim was for a tax refund where the plaintiff alleged that her employer withheld its own portion of FICA taxes from her paychecks); Brennan, 134 F.3d at 1408, 1410, 1414 (holding that the suits were for tax refunds where passengers sued airlines under state laws based on their alleged collection of expired excise taxes); Kaucky v. Sw. Airlines Co., 109 F.3d 349, 350-51, 353 (7th Cir. 1997) (same); Lehman, 930 F.Supp. at 915-16 (same).
Bringing state law claims simply to recover taxes paid may constitute an improper end-run around § 7422, but that is not what is happening here. Moreover, contrary to arguments made by the Hospital, the stated purpose behind § 7422 of not allowing an independent tax collector, such as an employer, to be placed between a rock and a hard place does not ...