Heritage HealthCare Servs., Inc. v. Beacon Mut. Ins. Co.

• Decision Date: 11 June 2012
• Docket Number: C.A. No. PB 02-7016
• Court: Rhode Island Superior Court
• Parties: HERITAGE HEALTHCARE SERVICES, INC., VITO'S EXPRESS, INC., SWIMMING POOL SPECIALIST, INC., J. BROOMFIELD & SONS, INC., STERLING INVESTIGATIVE SERVICES, INC., LEONELLI AND VICARIO, LTD., individually and on behalf of all those similarly situated v. THE BEACON MUTUAL INSURANCE COMPANY, JOSEPH ARTHUR SOLOMON, MICHAEL DENNIS LYNCH, and JOHN DOES 1-100

HERITAGE HEALTHCARE SERVICES, INC., VITO'S EXPRESS, INC.,SWIMMING POOL SPECIALIST, INC., J. BROOMFIELD & SONS, INC.,STERLING INVESTIGATIVE SERVICES, INC.,LEONELLI AND VICARIO, LTD., individually and on behalf of all those similarly situated

v. THE BEACON MUTUAL INSURANCE COMPANY, JOSEPH ARTHUR SOLOMON,MICHAEL DENNIS LYNCH, and JOHN DOES 1-100

C.A. No. PB 02-7016

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS PROVIDENCE, SC. SUPERIOR COURT

FILED - JUNE 11, 2012

DECISION

SILVERSTEIN, J. Before the Court is Defendant The Beacon Mutual Insurance Company's (Beacon) Motion for Judgment on the Pleadings, pursuant to Super. R. Civ. P. 12(c). Beacon requests the Court grant judgment in its favor on the grounds that all Counts of the Ninth Amended Complaint (Complaint) are derivative claims that were not brought in accordance with G.L. 1956 § 7-1.2-711(c) and Super. R. Civ. P. 23.1. Plaintiffs¹ object to the Motion, arguing that the claims set forth in the Complaint are not derivative in nature, but rather, are direct claims.

IFacts and Travel

The basic facts of this matter have been presented by this Court and the Rhode Island Supreme Court in the past.² As such, only the facts set forth in the pleadings that are pertinent to this Motion are presented below.

By Order of this Court dated September 17, 2008, Plaintiffs' Ninth Amended Complaint is the controlling pleading in this litigation. As noted in the Court's Decision, the Ninth Amended Complaint modified considerably the Plaintiffs' claims for relief in this matter. See Heritage Healthcare Servs., Inc. v. Beacon Mut. Ins. Co., No. PB 02-7016, 2008 WL 4376187 (R.I. Super. Sept. 4, 2008) (noting Complaint would "represent a shift in legal theories" and "focuses on the allegation that Beacon diverted over $101 million in profits to a small percent of its policyholders in the form of lower insurance rates rather than distributing these premiumsavings equally among all policyholders"). The class action Complaint now stands as including counts for Breach of the Implied Covenants of Good Faith and Fair Dealing (Count I), Breach of Fiduciary Duty (Count II), and Unjust Enrichment (Count III).

The crux of Plaintiffs' claims are that Beacon "engaged in a systematic scheme to divert over $101 million to a small percent of its policyholders rather than distributing it equitably to all its policyholders" by charging "consent-to-rate discounts" to select policyholders from 2001 to 2006. See Compl. ¶ 28; see also Pls.' Opp'n to Def.'s Mot. for J. on the Pleadings 4, Mar. 30, 2012. Particularly, the Complaint alleges "favoritism and bias in pricing; inappropriate and lavish spending . . ." as well as the issuance of "'unauthorized' and illegal" consent-to-rate discounts. See id. at ¶¶ 25, 29. Plaintiffs claim Beacon "operated in a corrupt, improper and unlawful manner" and without "customary prudence, appropriate checks and balances, accountability or transparency." See id. at ¶¶ 32-33.

Overall, Plaintiffs claim the actions of Beacon resulted in "distributing significant profits (in the form of lower net premiums) to the Select Policyholders at the expense of all its other policyholders." See id. at ¶ 30. Plaintiffs acknowledge, however, that Beacon paid no annual dividends to all of its policyholders from 2002 to 2004. See id. at ¶ 31; see also Pls.' Opp'n to Def.'s Mot. for J. on the Pleadings 4. The improper distributions alleged by Beacon were apparently made in the form of the consent-to-rate discounts to select policyholders.

Beacon's charter provides it with the authority to issue consent-to-rate discounts to its policyholders. See 2003 R.I. Pub. Law ch. 410 §§ 11(d)(2) ("Notwithstanding any law to the contrary, the fund and any workers' compensation insurance policyholder may mutually consent to modify the rates for that policyholder's workers' compensation insurance policy, provided the fund files notice of the modification with the director of the department of business regulation."),11(d)(4) ("discretion of the fund to apply discounts and surcharge multipliers of up to three (3) times the premiums that would otherwise be applicable under the rates").³ Separately and independently, the Board of Directors of Beacon has the authority to declare dividends equitably among its policyholders and may do so when there is an excess of assets over liabilities and minimum surplus requirements. See id. at §§ 6, 10(6); Compl. ¶¶ 19-20.

Plaintiffs' causes of action seek "an accounting, restitution and/or damages, and an injunction prohibiting Defendants from engaging in the unlawful activity . . . in the future." See Compl. ¶¶ 54, 61, 64. However, this Court has recognized in its prior decisions that policyholders of Beacon are not entitled to a dividend until one is declared by the Board, and "[e]ven if the Plaintiffs were successful in establishing that the Defendants had breached their fiduciary duty and implied duties of good faith and fair dealing . . . they would still have no right to compel the payment of dividends." See Heritage Healthcare Servs., Inc. v. Beacon Mut. Ins. Co., No. PB 02-7016, 2011 WL 202299, slip op. at 19-20 (R.I. Super. Jan. 19, 2011). First, the Board would have to "convene and consider whether, in light of their fiduciary and implied duties, a dividend should have been declared . . . ." Id. Accordingly, this Court has found that "the actual relief sought by the Plaintiffs is a declaration that the Defendants have breached their fiduciary and implied duties, and an injunction compelling Beacon's board to convene and consider whether, in light of their fiduciary and implied duties, a dividend should have been declared in each or any of the years 2002-2005." Id.

On February 17, 2012, Beacon filed this Motion for Judgment on the Pleadings. Plaintiffs objected on February 28, 2012, and oral arguments were heard before this Court on May 23, 2012.

IIStandard of Review

A Rule 12(c) motion for judgment on the pleadings "is tantamount to a Rule 12(b)(6) motion, and the same test is applicable to both, that is, is it clearly apparent that the plaintiff can prove no set of facts to support the complaint." Collins v. Fairways Condo. Ass'n, 592 A.2d 147, 148 (R.I. 1991). Accordingly, the standard to be applied is "restrictive," and the facts presented in the pleadings are to be construed "in the manner most favorable to the nonmoving party." Haley v. Town of Lincoln, 611 A.2d 845, 847 (R.I. 1992). "The factual allegations contained in the nonmovant's pleadings are admitted as true for the purposes of the motion," and proper inferences are to be "drawn in favor of the nonmovant." Id. To prevail on a motion for judgment on the pleadings, the defendant must "demonstrate to a certainty that the plaintiff will not be entitled to relief under any set of facts that might be proved at trial." Id.

The Superior Court Rules of Civil Procedure provide for judgment on the pleadings "[a]fter the pleadings are closed but within such time as not to delay trial." Super. R. Civ. P. 12(c). While many defenses may be waived, "the defense of failure to state a claim upon which relief can be granted . . . may also be made by a later pleading . . . or by motion for judgment on the pleadings or at the trial on the merits." Super. R. Civ. P. 12(h).

IIIDiscussion

Beacon argues that based on the pleadings, Plaintiffs' claims are derivative in nature and should be dismissed for failing to comply with the requirements for filing a derivative claim, as set forth in § 7-1.2-711(c) and Super. R. Civ. P. 23.1. Plaintiffs counter that the claims were properly brought directly and need not comply with the derivative claim demand and pleading requirements.

ADerivative or Direct

This Court has held that whether a suit is derivative in nature is a question for the court. See Marsh v. Billington Farms, LLC, No. 04-3123, 2006 WL 2555911, at *9 (R.I. Super. Aug. 31, 2006) (Silverstein, J.) (citing Dowling v. Narragansett Capital Corp., 735 F. Supp. 1105, 1113 (D.R.I. 1990)); Dunn v. Shannon, No. 99-2533, 2005 WL 1125315, at *4 (R.I. Super. May 11, 2005) (Silverstein, J.). To determine whether a claim is derivative or direct, the Court applies the Tooley test, set forth by the Delaware Supreme Court. See Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004); Marsh, 2006 WL 2555911 at *9 (applying Tooley test); cf. Lawton v. Nyman, 327 F.3d 30, 50 (1st Cir. 2003) (stating general Rhode Island law on derivative versus direct claims prior to Tooley decision).⁴ Although this case concerns amutual insurance company, policyholders in a mutual insurance company are equivalent to stockholders in a corporation. See Heritage Healthcare Servs., Inc. v. Beacon Mut. Ins. Co., No. PB 02-7016, 2005 WL 2101412, at *5 (R.I. Super. Aug. 29, 2005) ("policy holders have an ownership interest in the corporation akin to that of a shareholder"); Heritage Healthcare Servs., Inc. v. Beacon Mut. Ins. Co., No. PB 02-7016, 2004 WL 253547, at *4-5 (R.I. Super. Jan. 21, 2004); 3 Steven Plitt et al., Couch on Insurance 3d § 39:15 (2011). The proper remedy for claims that are derivative in nature but did not comply with the requirements for bringing a derivative action is dismissal. See Giuliano v. Pastina, 793 A.2d 1035, 1037 (R.I. 2002) (affirming dismissal of direct claims that were "in reality a derivative action that had not been filed in accordance with Rule 23.1"); Dunn, 2005 WL 1125315 at *7; see also Krupinski v. Deyesso, No. PB 07-3484, 2012 WL 1360869, slip op. at 5-6 (R.I. Super. Apr. 12, 2012) (Silverstein, J.) (noting prior dismissal of counts that were derivative in nature but brought directly for failure to comply with requirements for derivative actions).

Under the basic Tooley standard, "a court should look to the nature of the wrong and to whom the relief should go." Tooley, 845 A.2d at 1039. Therefore, the test turns solely on two parts: "(1) who suffered the alleged harm (the corporation or the...