Childers v. N.Y. & Presbyterian Hosp.
| Decision Date | 11 July 2014 |
| Docket Number | Nos. 13 Civ. 5414(LGS), 13 Civ. 5899(LGS).,s. 13 Civ. 5414(LGS), 13 Civ. 5899(LGS). |
| Court | U.S. District Court — Southern District of New York |
| Parties | Dr. Henry Erle CHILDERS IV, et al., Plaintiffs, v. The NEW YORK AND PRESBYTERIAN HOSPITAL, et al., Defendants, Dr. Lori Simon, et al., Plaintiffs, v. The New York and Presbyterian Hospital, et al., Defendants. |
Dr. Henry Erle CHILDERS IV, et al., Plaintiffs,
v.
The NEW YORK AND PRESBYTERIAN HOSPITAL, et al., Defendants,
Dr. Lori Simon, et al., Plaintiffs,
v.
The New York and Presbyterian Hospital, et al., Defendants.
Nos. 13 Civ. 5414(LGS), 13 Civ. 5899(LGS).
United States District Court, S.D. New York.
Signed June 23, 2014
Order Denying Reconsideration July 11, 2014
Ordered accordingly.
[36 F.Supp.3d 298]
Jason Hartley, Stueve Siegel Hanson LLP, San Diego, CA, Malik K. Cutlar, PCT Law Group, PLLC, Alexandria, VA, Steven Karl Barentzen, The Law Office of Steven Barentzen, Washington, DC, for Plaintiffs.
Maura Barry Grinalds, Daniel William Joseph Becker, Erin Ashley Simmons, Robert Lynch Dunn, Skadden Arps Slate Meagher & Flom LLP, New York, NY, for Defendants.
LORNA G. SCHOFIELD, 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.
I. FactsThe 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
[36 F.Supp.3d 299]
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.
[36 F.Supp.3d 300]
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.
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...
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