United States District Court, S.D. New York
UNITED TEAMSTER FUND et al. and LOCAL 522 WELFARE FUND OF NEW YORK AND NEW JERSEY et al., Plaintiffs,
MAGNACARE ADMINISTRATIVE SERVICES, LLC and MAGNACARE, LLC, Defendants
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For Plaintiffs: Richard M. Asche, Esq., Russell M. Gioiella, Esq., Litman, Asche Lupkin, Gioiella & Bassin, LLP, New York, NY; Howard L. Pierce, Esq., Mueller Pierce LLC, West Hartford, CT.
For Defendants: John William Cook, Esq., Daly D.E. Temchine, Esq., Epstein, Becker & Green, P.C. (New York), New York, NY.
MEMORANDUM & ORDER
WILLIAM H. PAULEY III, United States District Judge.
This case involves a dispute between ERISA funds and their third-party plan administrator over compensation and the quality of services rendered. MagnaCare Administrative Services, LLC and MagnaCare, LLC (collectively " MagnaCare" ) move to dismiss the Complaint. The Trustees of the United Teamster Fund (UTF) and Local 522 Welfare Fund of New York and New Jersey (collectively " The Funds" ) move to dismiss MagnaCare's Counterclaim. Alternatively, the Trustees move for summary judgment dismissing the Counterclaim. For the reasons that follow, MagnaCare's motion to dismiss is granted in part and denied in part, the Trustees' motion for summary judgment is granted, and the Trustees' motion to dismiss is denied as moot.
The Funds are self-insured health benefit plans. In 2001, UTF's trustees hired MagnaCare to serve as UTF's third-party plan administrator. Local 522's trustees engaged MagnaCare on the same terms in 2005. The Trustees terminated the contracts in early 2014. (Charles Pergue Aff. Ex. B, at 1, ECF No. 25; Pergue Aff. Ex. D, at 1.). For its services, MagnaCare received administrative fees--based on the number of eligible employees and management fees in an undisclosed amount for processing laboratory diagnostic services claims.
A diagnostic fee schedule developed by MagnaCare set the aggregate rate the Funds paid for each laboratory diagnostic service. According to the parties' Service Agreements (" Agreement" ), each diagnostic fee included both MagnaCare's management fee and the provider's fee. But,
without the Trustees' knowledge, MagnaCare negotiated better rates with providers and kept the difference. As a result, it retained over 65% of the diagnostic fee schedule payments without the Trustees' knowledge. The Funds paid over $8.5 million in management fees between 2005 and 2013. These management fees were of a similar magnitude to the administrative fees paid by the Funds. Unbeknownst to the Trustees, MagnaCare also began adding a $l-$2 management fee to each durable medical equipment claim in late 2001, a charge absent from the Agreement. The Agreement provided that management fees and provider fees were to be paid from the Funds' Health Benefit Claim Accounts, (Compl. Ex. 1 § 4.2(B),) and in practice all but UTF's laboratory diagnostic provider fees were paid directly from the Health Benefit Claim Accounts, (Compl. ¶ ¶ 33). Although MagnaCare submitted monthly claims reports to the Funds, these reports never itemized or mentioned any management fee.
Under the Agreement, MagnaCare had a duty to adjudicate claims with the care, skill, prudence and diligence that a competent professional administrator, consistent with industry standards, would exercise with regard to an employee benefit fund subject to ERISA. (Compl. ¶ 69 & Ex. 1 § 6(a)(i).) The Trustees point to five failures in MagnaCare's adjudication of claims, including (1) authorizing payment of laboratory test claims submitted piecemeal that improperly maximize a provider's fees, (2) permitting rampant overuse of claims for extended office visits, (3) authorizing payment of laboratory services not supported by the physician's diagnosis, (4) failing to use a quality control technique known as " code pairing edits" to prevent improper payment of duplicative medical procedure claims, and (5) authorizing reimbursement of double billed claims. These errors caused the Funds to overpay claimants by more than $2.6 million.
In particular, the federal government developed " code pairing edits as a quality control technique to improve the adjudication of Medicare claims. Certain, " global medical procedures encompass other, minor medical procedures incident to the global procedure. When a provider seeks reimbursement for the global procedure and the subsumed, minor procedure at the same time, the code pairing edits prevent the provider from receiving double reimbursement. Fifty-nine of the code pairing edits have been adopted widely by third-party plan administrators. MagnaCare applied none of these code pairing edits to its adjudication of claims for the Funds, causing the Funds to overpay providers by more than $600,000.
Costs covered by the Workers Compensation Program are not covered by the Funds. When the Funds pay a provider for a claim that should have been covered by the Workers Compensation Plan, the Funds are entitled to a refund from the provider, But MagnaCare kept 25% of approximately 100 workers compensation
claims refunded to UTF without consulting UTF's trustees.
MagnaCare purports to offer discounted provider rates in the Agreement. But it reimburses its network hospitals approximately 36% more for inpatient costs than the average commercial payer. This reimbursement rate caused the Funds to pay $1.3 million more than the average commercial payor.
In sum, the Funds allege that MagnaCare's secret optimization of its fees violated MagnaCare's fiduciary and contractual duties.
MagnaCare responds with a counterclaim alleging that the Trustees breached their fiduciary duties under ERISA by waiting thirteen years to assert their claims. MagnaCare contends the Trustees' derelictions cost the Funds millions of dollars and that it would be inequitable to hold MagnaCare accountable for any of the Trustees' breaches.
I. Legal Standard
To survive a motion to dismiss, " a complaint 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 A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). To determine plausibility, courts follow a " two-pronged approach." Iqbal, 556 U.S. at 679. " First, although a court must accept as true all of the allegations contained in a complaint, that tenet is inapplicable to legal conclusions, and [t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009) (alteration in original) (internal quotation marks and citation omitted). Second, a court determines " whether the ' well-pleaded factual allegations,' assumed to be true, plausibly give rise to an entitlement to relief.'" Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal, 556 U.S. at 679).
II. MagnaCare's Motion to Dismiss the Funds' Complaint
The Funds bring an ERISA claim for breach of fiduciary duty and New York state law claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, conversion, unjust enrichment, and violation of the New York Deceptive Acts and Practices. MagnaCare moves to dismiss the Complaint in its entirety.
A. ERISA Claim
ERISA protects employee pension and retirement plans by creating " strict standards of [fiduciary] conduct, also derived from the common law of trusts--most prominently, a standard of loyalty and a standard of care."
Cent. States, Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 570, 105 S.Ct. 2833, 86 L.Ed.2d 447 (1985). " [T]he duty of loyalty is expressed as follows: '(1) [a] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and--(A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries . . . .'"
Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co., 302 F.3d 18, 26 (2d Cir. 2002) (quoting 29 U.S.C. § 1104(a)(1)(A)(i)). The statute supplements the duty of loyalty with an express prohibition on self-dealing. 29 U.S.C. § 1106(b) (" A fiduciary with respect to a plan shall not--(1) deal with the assets of
the plan in his own interest or for his own account. . . ." ).
(1) Whether MagnaCare Acted as an ERISA Fiduciary
MagnaCare contends it was not an ERISA fiduciary. A third-party plan administrator is a fiduciary of an ERISA plan if it " exercises any authority or control respecting management or disposition of [the plan's] assets."  29 U.S.C. § 1002(21)(A); see Harris Trust, 302 F.3d 18, 26 (2d Cir. 2002). In the context of contractors' fees, courts consider: (1) whether the money from which the fees were taken constitute plan assets and (2) whether the contractor has any authority or control over those assets.
United States v. Glick, 142 F.3d 520, 527 (2d Cir. 1998). " [A] person may be an ERISA fiduciary with respect to certain matters but not others, for he has that status only 'to the extent' that he has or exercises the described authority or responsibility." Harris Trust, 302 F.3d 18, 28 (citations omitted). But " [t]he fiduciary provisions of ERISA derive from the common law of trusts and should, as a general matter, be broadly construed." Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (citing, inter alia, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989)).
i. Whether the Fees Were Taken From Plan Assets
" 'The assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law.' Assets will 'include any property, tangible or intangible, in which the plan has a beneficial ownership interest.'" In re Halpin, 566 F.3d 286, 289 (2d Cir. 2009) (quoting U.S. Dep't of Labor, Advisory Op. No. 93-14A (May 5, 1993)). Parties are free to provide contractually that certain assets are not plan assets. Sheet Metal Workers' Nat'l Pension Fund v. AUL Sheet Metal Works Inc., 10 Civ. 1371 (KBF), 2012 WL 32237, at *4 (S.D.N.Y. Jan. 5, 2012) (citing In re Halpin, 566 F.3d at 290-91).
The Complaint asserts MagnaCare took the management fees " directly out of The Benefit Plans' assets." (Compl. ¶ 46.) But this Court need not accept legal conclusions as true. Harris, 572 F.3d at 72. The Agreement implies the management fees ...