Geller v. Prudential Ins. Co. of America

• Decision Date: 08 October 2002
• Docket Number: No. 96-CV-0976 (FB).,96-CV-0976 (FB).
• Parties: Leon GELLER, Eli Bloom, Irwin Katz, James E. Farley and Mark Herrmann, Trustees of GNY Automobile Dealers Health & Welfare Trust, formerly known as Greater New York, Long Island, and Westchester Automobile Dealers Association Insurance Fund, Plaintiffs, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant.
• Court: U.S. District Court — Eastern District of New York

237 F.Supp.2d 210

Leon GELLER, Eli Bloom, Irwin Katz, James E. Farley and Mark Herrmann, Trustees of GNY Automobile Dealers Health & Welfare Trust, formerly known as Greater New York, Long Island, and Westchester Automobile Dealers Association Insurance Fund, Plaintiffs, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant.

No. 96-CV-0976 (FB).

United States District Court, E.D. New York.

October 8, 2002.

Terrence P. O'Reilly, Foley, Hickey, Gilbert & O'Reilly, New York, NY, for the Plaintiffs.

Kenneth J. Kelly, Epstein, Becker & Green, P.C., New York, NY, for the Defendant.

MEMORANDUM AND ORDER

BLOCK, District Judge.

Plaintiffs are the trustees of the Greater New York Automobile Dealers Health & Welfare Trust ("Trust").¹ "The Trust is a multiple employer welfare benefit plan providing payment and/or reimbursement for certain hospital, surgical and medical expense benefits" to participating members of the Greater New York Automobile Dealers Association. Am. Compl. ("complaint") at ¶ 1. As such, it is governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Defendant, Prudential Insurance Company of America ("Prudential"), is a mutual insurance company, and insured the Trust under a group contract ("Contract") that provided for, among other things, coverage of major medical expenses. The complaint alleges sixteen claims for monies due from Prudential, totaling approximately $3 million dollars, related to the termination of the Contract as of January 1, 1994. Prudential's answer asserts two counterclaims, totaling approximately $850,000. The Trust has moved for summary judgment on the First through Sixth, Ninth and Tenth claims; Prudential has cross-moved for summary judgment on each of these claims, as well as its two counterclaims.²

The First, Third, Fifth and Ninth claims are common law state claims, and plaintiff's complaint sought to invoke the Court's supplemental jurisdiction under 28 U.S.C. § 1367 for the resolution of these claims. Primary federal question jurisdiction was invoked under 28 U.S.C. 1331 because each of these claims was also alleged, in separate sequential claims (the Second, Fourth, Sixth and Tenth claims), to constitute a breach of fiduciary duty by Prudential under ERISA.

On April 9, 2002, the Court issued a memorandum sua sponte raising "considerable concerns regarding the basis for original jurisdiction over all of the claims alleged," Geller v. Prudential Insur. Co. of Am., No. 96-CV-0976, 2002 WL 539046, at *1 (E.D.N.Y. April 9, 2002), and ordered the parties to address these concerns in separate submissions. Id., at *3. Thereafter, the parties submitted a joint response asking the Court to consider diversity jurisdiction as an "alternative basis for subject matter jurisdiction." Joint Ltr. Def. and Pl. (May 6, 2002). In a memorandum dated June 5, 2002, the Court construed this letter as "a concession by both parties that there is no basis for asserting federal question jurisdiction," Geller v. Prudential Insur. Co. of Am., No. 96-CV-0976, 2002 WL 1285538, at *1 (E.D.N.Y. June 5, 2002), and dismissed all of plaintiff's ERISA claims;³ however, it deemed the complaint to be amended to plead diversity jurisdiction over the state law claims. Id. The parties subsequently satisfied the Court in a further submission that it indeed had diversity jurisdiction over those claims. Presently before the Court, therefore, is the Trust's motion for summary judgment on Claims 1, 3, 5 and 9, and Prudential's cross-motion for summary judgment on these claims and its two counterclaims.⁴

Briefly, those claims and counterclaims concern the following. Claim 1: Whether Prudential was entitled to a credit, at the time of payment of dividend monies due to the Trust upon termination of the Contract, for a premium deficit during the 1991 policy year that Prudential carried forward until the Contract was terminated; Claims 3 and 5 and Counterclaim 1: Whether Prudential was entitled to deduct from dividend payments due to the Trust, or recoup from the Trust, certain disputed amounts of monetary contributions made to New York State insurance stabilization pools by Prudential on behalf of the Trust; Claim 9: Whether the Trust is entitled to reimbursement from Prudential for costs incurred by the Trust for a bone marrow transplant on behalf of a Trust participant; Counterclaim 2: Whether Prudential was entitled to reimbursement for unpaid (or "runout") claims that were discovered by Prudential after the Contract terminated.⁵

For the reasons set forth below, the motions are denied in part and granted in part.

GENERAL FACTUAL BACKGROUND

The following facts are gleaned from the parties' submissions, as amplified and explained by the statements of counsel during oral argument. They are undisputed, except as otherwise noted.

From January 1, 1989 until March 1992, the Contract provided for a "fully insured" plan for the Trust. Hayes Cert. ¶ 5; Payton Aff. ¶ 5. Under this plan, the Trust paid premiums, at a rate determined by Prudential, for coverage of the medical expenses of the Trust's participants. The premiums were calculated by Prudential based on three factors. The first component was for anticipated bills for medical services (both for claims paid and claims incurred but unpaid). On a yearly basis, a portion of the premium relating to the incurred but unpaid claims was carried over to the following year — referred to as the "reserve." As the reserve was carried over yearly, it built up on behalf of the Trust. The second component of the premium was the cost of doing business (including administrative expenses, state premium taxes, risk charges, profit and interest). The third component was a margin (an amount to cover the possibility that actual claims may exceed anticipated claims). See Hayes Cert. ¶ 6. In addition to including a margin amount, the Contract contained an Additional Premium Clause ("APC"). The APC permitted Prudential to request payment of additional money at the end of a policy year to cover that year's unanticipated claims. At times, a deficit would occur when the paid and incurred but unpaid claims, plus Prudential's cost of doing business, exceeded the premiums collected. This could occur even after the payment of an additional premium pursuant to the APC.

Beginning March 1, 1992, the Contract was amended from a fully-insured plan to a partially self-insured plan. As a practical matter, the change in policy type did not significantly alter the relationship between the parties. The Trust continued to pay premiums to Prudential, and "claims were paid out of a custodian account maintained by Prudential and funded with regular payments from the Trust." Hayes Cert. ¶ 9. Prudential retained responsibility for paying claims that exceeded the benefit maximum. Premiums were still set by Prudential, and paid every month by the Trust, largely for the purpose of covering Prudential's administrative expenses (cost of doing business). Extra premiums were assessed, as necessary, at the end of each year.

Invariably, in those policy years when paid premiums exceeded expenses, and Prudential realized the profit it expected to make as part of the administration of the Contract, the balance of any excess was returned to the Trust by operation of a dividend formula. Payment of dividends was governed by the following Contract provision:

Prudential will determine the share, if any, of its divisible surplus allocable to the Group Contract as of each Contract Anniversary, if the Group Contract stays in force by the payment of all premiums to that date. The share will be credited to the Group Contract as a dividend as of that date.

Complaint, Ex. 1. The dividend formula was a complicated formula that was approved each year by Prudential's Board of Directors. See Hayes Cert. ¶ 14 and Ex. D (dividend formula for 1992).

The Contract provided that it may be terminated by either party as of any anniversary date. See Hayes Cert. ¶ 14 and Ex. A, at § 2-8 (Contract). The decision to terminate was Prudential's; the reason, apparently, was because of certain legislation enacted by the New York State Legislature the prior year which Prudential believed was inimical to its business interests. See Def.'s 56.1 Statement ¶ 30. Upon termination, Prudential, applying its dividend formula, paid a dividend to the Trust of approximately $1.17 million dollars after deducting various sums in two installments, the first on June 30, 1995 for $ 647,162, the second on September 5, 1995 for $520, 383. See Hayes Cert. ¶ 25, Def. Ltr at 4, June 14, 2002. The propriety of these deductions, as well as various other claims by the parties as a consequence of the termination, is the subject matter of all but one of the disputes now before the Court.

RESOLUTION OF CLAIMS AND COUNTERCLAIMS

Summary judgment is required where "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law," Fed.R.Civ.P. 56(c), "i.e., `[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party.'" Regional Economic Community Action Program, Inc. v. City of Middletown, 294 F.3d 35, 45 (2d Cir. 2002) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). "A fact is `material' for these purposes if it `might affect the outcome of the suit under the governing law.'" Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). "An issue of fact is genuine if the evidence is such that a reasonable [fact finder] could return a verdict for the non-moving party." Id. (internal quotation marks and citation omitted).

I. Claim 1: 1991 Deficit

For the 1991 policy year, the Trust's claims and administrative expenses exceeded premiums paid, creating a deficit of $1,672,983. To prevent a deficit from occurring again the...