Framingham Union Hosp., Inc. v. Travelers Ins. Co.
| Citation | 721 F. Supp. 1478 |
| Decision Date | 27 September 1989 |
| Docket Number | Civ. A. No. 89-0209-S. |
| Parties | FRAMINGHAM UNION HOSPITAL, INC., et al., Plaintiffs, v. The TRAVELERS INSURANCE COMPANY, et al., Defendants. |
| Court | U.S. District Court — District of Massachusetts |
COPYRIGHT MATERIAL OMITTED
Margaret H. Raymond, Stephen K. Ault, Sullivan & Worcester, Boston, Mass., for plaintiffs.
Alan R. Hoffman, Hoffman & Sands, Boston, Mass., for Edgar S. Murray.
Thomas Peisch, Conn, Cavanaugh, Rosenthal & Peisch, Boston, Mass., for David Player.
Jerome P. Facher, James F. Kavanaugh, Merriann M. Panarella, Hale & Dorr, Boston, Mass., for Fantasia.
Paul F. Markham, Boston, Mass., for Clasby and C.T. Garrahan Ins.
Donald B. Gould, Goodwin Procter & Hoar, Boston, Mass., Stewart T. Herrick, Catanzaro, Effren & Herrick, P.C., Ashland, Mass., for Travelers Ins.
MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS AND FOR SANCTIONS
The plaintiffs Framingham Union Hospital, Inc., ("the Hospital"), its employee benefit plan ("the Plan"), and the Plan trustees, James Kerrigan, Ross Markello and Roger Peloquin ("the Trustees"), allege that defendant insurers and others violated ERISA prohibitions against self-dealing by fiduciaries, the federal racketeering statute, and various Massachusetts state laws, by virtue of their role in the investment of Plan assets in certain insurance policies. This memorandum addresses the defendants' joint motion to dismiss; the separate motions to dismiss of defendants Clasby and C.T. Garrahan Insurance Agency ("C.T. Garrahan"), The Travelers Insurance Company ("The Travelers"), Andrew Fantasia and Fantasia & Co., P.C. (collectively, "Fantasia"), David Player and James Walckner; and Clasby and C.T. Garrahan's motion for sanctions.
Defendants are charged with breach of fiduciary duty and knowing participation in a breach of fiduciary duty under ERISA, 29 U.S.C. § 1001 et seq., racketeering in violation of RICO, 18 U.S.C. § 1961 et seq., violations of M.G.L., ch. 93A, and both federal and Massachusetts common law.1 Jurisdiction is asserted under § 502(e)(1) of ERISA, 29 U.S.C. § 1132(e)(1), RICO, 18 U.S.C. § 1964(a) and pendent jurisdiction.
This action was filed on January 31, 1989 by two of the current plaintiffs, the Hospital and the Plan. Defendants Clasby and C.T. Garrahan moved to dismiss for lack of subject matter jurisdiction, on the grounds that neither plaintiff is among those authorized to sue for breach of fiduciary duty under § 502(a)(2) of ERISA, 29 U.S.C. § 1132(a)(2). At the same time, these defendants moved for sanctions, under Fed.R. Civ.P. 11, on the grounds that the claims based on RICO and M.G.L. ch. 93A were not based on reasonable inquiry or well grounded in fact or law.
On February 27, 1989, the plaintiffs amended their complaint, adding the Trustees as plaintiffs, and allegations that since October 7, 1988, by an amendment to the Plan, the Hospital has been the Plan's administrator, and thus a fiduciary under 29 U.S.C. § 1002(21)(A) and entitled to bring an action under § 1132(a)(2).
Defendants have filed a joint motion to dismiss for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted, pursuant to Fed.R. Civ.P. 12(b)(1) and 12(b)(6). In addition to joining in the arguments made in connection with the joint motion, defendants The Travelers, Fantasia, Player, and Walckner each filed supplemental memoranda advancing separate grounds for dismissal of the claims against them.2
All of these motions, including the motion for sanctions, are dealt with in this memorandum.
For purposes of a motion to dismiss, I must take the allegations of the complaint as true, allowing dismissal only when it is plain that the plaintiffs can prove no set of facts entitling them to relief. See, e.g., Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Roeder v. Alpha Industries, Inc., 814 F.2d 22, 25 (1st Cir. 1987).
The allegations of the Amended Complaint are as follows:
The Plan was established by the Hospital in 1966, for the benefit of Hospital employees. The Plan was administered by its own board of Trustees during the events underlying this suit. On October 7, 1988, the terms of the Plan were amended to confer responsibility for its administration on the Hospital, which then appointed a committee of individuals to control its day-to-day operations.
Clasby, an insurance broker and the principal of C.T. Garrahan, was president of the Hospital's board of trustees from 1982-1988. From July 15, 1983 through August 31, 1983, Clasby was also a trustee of the Plan.
Walckner was the Hospital's Executive Vice-President at all relevant times, until his retirement in February of 1987.
In late 1981 and 1982, the Hospital considered funding the Plan through investing in insurance policies on the lives of Hospital employees, with death benefits paid to be used to pay premiums on the policies and to fund Plan benefits. The idea was allegedly originated by "either or both of" defendants Walckner and Clasby.
Clasby contacted Player and Murray, also insurance agents, to assist him in devising an insurance program for presentation to the Hospital and the Plan. Murray was employed by The Travelers, and proposed to the company that it underwrite the program. As had other insurance agencies to whom the idea was presented, The Travelers expressed concern about the suitability of the program for an ERISA plan. Murray assured his employer that the Plan need not be treated as a qualified ERISA plan, and that the proposal need not be evaluated on this basis. The Travelers agreed to underwrite the program.
Murray, Clasby, Player and Fantasia, an accountant who served as the Plan's auditor from 1982-1987, worked together to prepare the proposed insurance program — a program which the plaintiffs allege violated applicable ERISA requirements. They first described the program to Walckner, and then, on July 15, 1982, presented it to the finance committee for the Hospital's board of trustees. Also in attendance were certain Hospital management personnel, including Walckner. Clasby did not attend the meeting. The presenters falsely represented that the program would comply with applicable ERISA requirements, and that it would be "self-funding" within a few years. They failed to disclose high commissions and bonuses to be paid Clasby, Murray and Player, and the fact that several other insurers had refused to underwrite the program because of doubts as to its legitimacy. At this meeting, Fantasia submitted a memorandum on prohibited transactions under ERISA, but failed to disclose that the proposed insurance program would be a prohibited transaction.
The Hospital approved and implemented the program in August of 1982, and 147 life insurance policies on Hospital employees were issued to the Hospital, and then assigned to the Plan in September of 1982. The premiums for the initial year, 1982-83, were paid by the Hospital. Premiums for all subsequent years, 1983-88, were paid by the Plan.
In February of 1984, after discussing the matter with Walckner, Murray proposed to the Plan trustees that the policies be converted from whole life to universal life. Murray allegedly failed to disclose certain potential disadvantages of the Plan of conversion, i.e., that universal life policies offered a variable rather than fixed interest rate on accrued cash value, or that both he and Clasby would receive increased commissions and bonuses as a result of the conversion. The Plan trustees approved the conversion.
The policies were renewed annually until 1988, when a Department of Labor investigation of the Plan alerted the Hospital and the Trustees that Clasby and C.T. Garrahan had received commissions on the purchase of the insurance.
The premiums paid by the Hospital in 1982-83 amounted to $551,161. Clasby's firm, C.T. Garrahan, received commissions of $149,145 based on securing the policies, $60,000 of which was remitted to Player. Premiums paid by the Plan from August 1983 — August 31, 1988, totalled $2,217,899. C.T. Garrahan received $735,050 in commissions attributable to these payments. Murray received bonuses in unspecified amounts from The Travelers based on the policies.
The plaintiffs allege that Clasby's involvement of Player in the project and his absence from the July meeting were contrived to conceal his own interest in the deal. Walckner is alleged to have been aware of the involvement of Clasby and C.T. Garrahan, and to have failed to divulge this to the Hospital or the Plan — assertedly in exchange for Clasby's secretly executing a favorable termination agreement with him in December of 1984.
Defendants move to dismiss on the grounds that (1) the allegations of fraud which are the basis of this action, lack the requisite particularity to satisfy Rule 9(b); (2) there is no pattern of racketeering to found a RICO claim; (3) the claims based on ERISA should be dismissed for lack of standing and failure to state a claim, and (4) the state law counts are preempted by ERISA.
Defendants seek dismissal of the Amended Complaint on the grounds that the allegations of fraudulent misrepresentations are not alleged with sufficient particularity to meet the requirements of Fed. R.Civ.P. 9(b).
Rule 9(b) provides that "in all averments of fraud ..., the circumstances constituting fraud ... shall be stated with particularity." This rule is strictly construed in this circuit. See, e.g., New England Data Services, Inc. v. Becher, 829 F.2d 286, 288 (1st Cir.1987); Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir.1985); Wayne Investment, Inc. v. Gulf Oil Corp., 739 F.2d 11, 14 (1st Cir.1984).
The purposes behind the requirement of particularity are (1) to place defendants on notice and enable them to prepare meaningful defenses to charges of fraud; (2) to prevent the use of conclusory allegations of fraud as a...
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