Babbitt Municipalities, Inc. v. Health Care Serv. Corp.

• Citation: 408 Ill.Dec. 93,64 N.E.3d 1178
• Decision Date: 11 October 2016
• Docket Number: No. 1–15–2662.,1–15–2662.
• Parties: BABBITT MUNICIPALITIES, INC., Plaintiff–Appellant, v. HEALTH CARE SERVICE CORPORATION, an Illinois Mutual Legal Reserve Company, d/b/a Blue Cross Blue Shield of Illinois, Defendant–Appellee.
• Court: United States Appellate Court of Illinois

64 N.E.3d 1178

408 Ill.Dec. 93

BABBITT MUNICIPALITIES, INC., Plaintiff–Appellant,

v.HEALTH CARE SERVICE CORPORATION, an Illinois Mutual Legal Reserve Company, d/b/a Blue Cross Blue Shield of Illinois, Defendant–Appellee.

No. 1–15–2662.

Appellate Court of Illinois, First District, First Division.

Oct. 11, 2016.

Edelson PC, of Chicago (Jay Edelson, Rafey S. Balabanian, Ryan D. Andrews, and J. Aaron Lawson, of counsel), and Anapol Weiss, of Philadelphia, Pennsylvania (David S. Senoff, of counsel), for appellant.

Kirkland & Ellis LLP, of Chicago (Helen E. Witt, Stacey G. Pagonis, and Jeffery Lula, of counsel), for appellee.

OPINION

Justice MIKVA delivered the judgment of the court, with opinion.

¶ 1 This is an appeal from the circuit court's dismissal of claims for breach of contract and declaratory judgment brought by plaintiff, Babbitt Municipalities, Inc. (Babbitt), against defendant, Health Care Service Corporation (HCSC). Babbitt alleged that HCSC had a duty, pursuant to its originating documents, to act as a not-for-profit company for the mutual benefit of its policyholder-members. Babbitt alleged that HCSC breached this duty by accumulating a large cash surplus, rather than spending any amount exceeding a reasonable reserve for the benefit of its members. Concluding that Babbitt's second amended complaint failed to cure the defects identified in its prior pleadings, the circuit court dismissed Babbitt's claims with prejudice pursuant to section 2–615 of the Code of Civil Procedure (Code) (735 ILCS 2–615 (West 2014)). The court determined that Babbitt did not adequately allege a specific contractual provision that HCSC breached, a concrete injury, an actual controversy based on HCSC's present conduct, or facts that, if proved, would rebut the presumption of good faith afforded by the business judgment rule. For the more limited reasons that follow, we affirm the judgment of the circuit court.

¶ 2 BACKGROUND

¶ 3 Defendant, Health Care Service Corporation (HCSC), is an Illinois mutual legal reserve insurance company—a not-for-profit company owned by its policyholder-members—operating as a licensee of Blue Cross and Blue Shield (BCBS). Plaintiff, Babbitt Municipalities, Inc. (Babbitt), is one of HCSC's policyholder-members.

¶ 4 HCSC's "Amended and Restated Articles of Incorporation" (Articles) state that "[t]he object for which [HCSC] is founded is to do all things necessary, proper or convenient for the purpose of promoting, establishing, maintaining and operating a non-profit health care service plan as authorized by the laws of the State of Illinois." In accordance with this stated objective, HCSC's "Amended and Restated By–Laws" (Bylaws) set forth the companies "purposes":

"(a) To do all things necessary, proper or convenient for the purpose of promoting, establishing, maintaining and operating a mutual health care insurance company as authorized by applicable laws * * *;

(b) To do all things necessary, proper or convenient for the purpose of promoting, establishing, maintaining and operating said mutual health care insurance company and any other business activity reasonably complementary or supplementary to its insurance business; and

(c) To engage in any lawful act or activity in which a mutual insurance company may engage under applicable laws."

¶ 5 HCSC's Bylaws also state that the company "shall operate on a not-for-profit basis for the mutual benefit of its Members" and "[n]o person or entity shall receive, directly or indirectly, any profits from [HCSC]." The Bylaws further provide, however, that "[c]ompensation for services performed or reimbursement for reasonable expenses shall not be considered profit." Compensation of the company's officers is "fixed from time to time by the Board of Directors," and compensation of all other executives is determined by the president and CEO pursuant to compensation policies approved by the board's compensation committee.

¶ 6 Babbitt filed three successive complaints in this matter, asserting claims for both breach of contract and declaratory judgment based on the above provisions. Babbitt's initial complaint relied on slightly different legal theories and is not at issue in this appeal. The allegations summarized here are those contained in Babbitt's second amended complaint for declaratory judgment, as well as allegations from its first amended complaint that were incorporated by reference in its claim for breach of contract, which Babbitt preserved for review.

¶ 7 Babbitt alleged that HCSC failed to live up to its stated purpose of operating as a not-for-profit company for the benefit of its members, and in fact acted contrary to this goal, by "stockpiling (rather than using) profits." In support of this allegation, Babbitt cited HCSC's financial statements indicating that the company's combined net income from operations for the years 2009 through 2013 totaled over $4 billion. According to Babbitt, HCSC "branch[ed] out and conduct[ed] activities separate and apart from its mission" by, for example, generating "enormous fees" for the administration of its members' health care benefits and using its "ever-increasing accumulation of profits" to "expand its business operation without corresponding mutual benefit to its members." Babbitt alleged that, by the end of 2013, HCSC had accumulated $10.29 billion.

¶ 8 Babbitt further alleged that the surplus earnings retained by HCSC were excessive when compared with certain fiscal benchmarks. Babbitt alleged, for example, that "under an exceedingly conservative standard previously used by [BCBS] Plans[,] there was no need to set aside profits equal to more than three months [sic ] worth of expenses, as that amount would cover nearly any conceivable financial contingency." According to Babbitt, HCSC historically kept a surplus of about twice that amount. Babbitt also alleged that a comparison of HCSC's assets in relation to the amount and type of risk it faced resulted in "Risk Based Capital levels * * * three times higher than internal BCBS standards, four times higher than Federal Affordable Care Act and leading actuarial suggested guidelines, and over ten times higher than minimum regulatory standards" (emphasis in original), the latter of which are used to determine when control of a company should be ceded to regulators.

¶ 9 Babbitt additionally alleged that HCSC's reserves were excessive when compared with those held by other nonprofit companies like California Blue, which recently pledged to cap its net income at 2% of revenue, and Wellmark, Inc., a plan operating in Iowa and South Dakota, which recently "announced a corporate philosophy and goal of zero profit for the mutual benefit of its policyholder-owners."

¶ 10 According to Babbitt, HCSC's executives stood to gain from the company's retention of surplus earnings. Babbitt noted, for example, that HCSC's CEO Patricia Hall received total compensation of $16 million in 2012 (including $14.9 million in bonuses) and $11.2 million in 2013 (including $10 million in bonuses). Between 2011 and 2013, Babbitt alleged that "the top ten executives at HCSC ha[d] earned nearly 96 million in bonus money." Babbitt further alleged that HCSC "established a corporate structure with a primary profit motive" and incentivized the accumulation of excess profit by tying its executives' compensation to "membership growth and earnings growth," an action Babbitt claimed violated prohibitions on profit sharing in the company's Bylaws.

¶ 11 Rather than retaining excess earnings, Babbitt alleged that HCSC had a duty to use any funds in excess of a reasonable reserve for the benefit of its members by, for example, "lowering its policyholders-members' [sic ] deductibles and co-pays, providing free generic drugs, providing free or enhanced health and wellness programs, or enhancing the policyholder-members' benefits for certain critical and/or underfunded healthcare needs." As a policyholder-member of HCSC since 2009, Babbitt sought to represent a class of other, similarly situated entities that it alleged had thus been harmed in "tangible ways" and "deprived of the benefits owed to them under [HCSC's] Articles and Bylaws."

¶ 12 In support of its claim for breach of contract, Babbitt alleged that HCSC's Articles and Bylaws constitute binding contracts between HCSC and its policyholder-members, pursuant to which those members pay premiums in exchange for health insurance services. Babbitt further alleged that the Articles and Bylaws establish "three principle duties" with which HCSC is bound to comply: the duty to operate (1) "as a nonprofit entity," (2) "for the mutual benefit of its Members," and (3) "with no distribution of any profit to anyone. " (Emphasis in original.) Babbitt contended that HCSC breached these duties by "adopt[ing] a financial plan dedicated to accumulating as much excess profit as possible," pursuant to which it "regularly earned hundreds of millions, and in some cases billions, of dollars in yearly profits." As a result, Babbitt alleged, HCSC's policyholder-members were "deprived of some $5 billion worth of improved health care."

¶ 13 Babbitt also sought declarations, pursuant to section 2–701 of the Code (735 ILCS 5/2–701 (West 2014) ), that HCSC's Articles and Bylaws impose a duty on HCSC to act both "in a manner consistent with a nonprofit corporation" and "as a mutual legal reserve company for the mutual benefit of its Members;" that the Articles and Bylaws "provide standards of conduct" and "specify the manner in which HCSC must act to be in accordance with th[ese] dut [ies];" and that HCSC "[wa]s not currently operating as a nonprofit corporation" or "as a mutual legal reserve company for the mutual benefit of its Members, consistent with its Articles and Bylaws." According to Babbitt, a "current and continuing threat" existed "that HCSC w[ould] continue to ignore the terms of its Articles and Bylaws."

¶ 14 Babbitt further asserted that "HCSC's profit-seeking behavior was not...