N.Y. State Workers' Comp. Bd. v. Sgrisk, LLC
| Decision Date | 01 March 2013 |
| Docket Number | No. 4620–11.,4620–11. |
| Citation | 967 N.Y.S.2d 868,38 Misc.3d 1229,2013 N.Y. Slip Op. 50338 |
| Parties | The NEW YORK STATE WORKERS' COMPENSATION BOARD, in its capacity as the governmental agency charged with administration of the Workers' Compensation Law and attendant regulations, and in its capacity as the successor in interest to The Healthcare Industry Trust of New York, The Wholesale and Retail Workers' Compensation Trust of New York, Transportation Industry Workers' Compensation Trust, Trade Industry Workers' Compensation Trust for Manufacturers, The Real Estate Management Trust of New York, The Public Entity Trust of New York, The New York State Cemeteries Trust and Elite Contractors Trust of New York, Plaintiff, v. SGRISK, LLC and UHY, LLC, Defendants. |
| Court | New York Supreme Court |
OPINION TEXT STARTS HERE
Rupp, Baase, Pfalzgraf, Cunninghan & Coppola LLC, (Daniel E. Sarzynski and Charles D.J. Case, of counsel), Buffalo, attorneys for plaintiff.
Vedder Price, P.C., (John H. Eickenmeyer and Roy P. Salins, of counsel), Hitchcock & Cummings Attorneys for SGRisk, LLC, (Terry Cummings, of counsel), New York, attorneys for UHY, LLP.
This is a commercial action commenced on July 8, 2011 by the State of New York Workers' Compensation Board (“WCB”) in its capacities as the governmental entity charged with the administration of the Workers' Compensation Law and as successor in interest to the Healthcare Industry Trust of New York (“HITNY”), the Wholesale and Retail Workers' Compensation Trust of New York (“WRWCT”), the Transportation Industry Workers' Compensation Trust (“TRIWCT”), the Trade Industry Workers' Compensation Trust for Manufacturers (“TIWCT”), the Real Estate Management Trust of New York (“REMTNY”), the Public Entity Trust of New York (“PETNY”), the New York State Cemeteries Trust (“NYSCT”) and the Elite Contractors Trust of New York (“ECTNY”) (collectively “the Trusts”). Defendants UHY LLP (“UHY”) and SGRisk, LLC (“SGRisk”) move pursuant to CPLR 3211 to dismiss the complaint.
As alleged in the WCB's complaint, each of the Trusts is a group self-insured trust (“GSIT”) formed pursuant to Workers' Compensation Law (“WCL”) § 50–a. Members of the Trusts were employers within a particular industry that conducted business in New York State and were required to provide workers' compensation insurance to employees.
The Trusts were authorized to operate as GSITs by the WCB during the period from September 1999 through January 2002. Due to their substantial accumulated deficits, ranging from $4 million for NYSCT up to $170 million for HITNY, and the inability of the Trusts to properly manage their deficits, the WCB assumed the administration of, and became successor in interest to, each Trust between October 2007 and January 2010.1
Compensation Risk Managers, LLC (“CRM”) served as group administrator and third-party administrator for the Trusts from their inception through September 2008. CRM is a wholly-owned subsidiary of CRM USA, which, in turn, is a wholly-owned subsidiary of CRM Holdings. The complaint alleges that CRM had a financial incentive to influence, control and manipulate the Trusts' actuarial estimates and audited financial statements in order to bolster the initial public offering (“IPO”) of CRM Holdings. The more favorable the Trusts' financial statements appeared, the better the chance for CRM to persuade new employers to join the Trusts and to retain existing members, thereby bringing more profits to CRM and increasing the return on the IPO. Conversely, maintaining adequate reserve levels for the Trusts allegedly would have resulted in increased member contributions, which would have made the Trusts a less financially attractive option for workers' compensation coverage, decreased CRM's revenues and reduced the IPO price. Further, CRM allegedly had a financial incentive to accept Trust applicants and maintain existing Trust members with poor loss histories and high experience modifiers due to the manner in which it received fees.
Pursuant to WCB regulations, GSITs are required to submit an audited financial statement and an actuarial report to the WCB each year. CRM was responsible for choosing a certified public accountant and an actuary to prepare these reports and for delivering the reports to the WCB. CRM contracted with UHY to provide independent, audited financial statements and with SGRisk to provide actuarial reports.
The WCB claims that SGRisk and UHY knowingly and intentionally manipulated the Trusts' actuarial estimates and independent financial audits to conceal CRM's wrongdoing and to allow CRM to keep member contribution rates artificially low. Defendants allegedly engaged in this manipulation of actuarial estimates and financial statements so that CRM would continue to retain them to perform services for the Trusts. In connection with the foregoing allegations, the WCB observes that the Trusts' annual reports for 2006 (and thereafter) reported dramatically increased deficits as compared with pre–2006 reports. For example, HITNY reported a deficit of almost $76 million for the year ending December 31, 2006, whereas its reported deficit was under $6 million for the preceding year.
The complaint alleges that the manipulation of actuarial estimates by SGRisk caused the Trusts to become underfunded and/or insolvent, and the manipulation of the Trusts' annual financial statements by UHY obscured the Trusts' true financial conditions, all of which perpetuated CRM's improper administration and led to the Trusts' insolvency. Five causes of action are alleged against each defendant: (1) breach of fiduciary duty; (2) breach of contract; (3) aiding and abetting breaches of duty by CRM and others; (4) fraud; and (5) unjust enrichment. Defendants move separately to dismiss each of these causes of action.
Under CPLR 3211(a)(1) dismissal is warranted if documentary evidence conclusively establishes a defense as a matter of law” (Haire v. Bonelli, 57 A.D.3d 1354, 1356, 870 N.Y.S.2d 591 [3d Dept 2008], citing Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324 [2007];see Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 [2002];Angelino v. Michael Freedus, D.D.S., P.C., 9 AD3d 1203, 1205 [3d Dept 2010] ). On such a motion, “affidavits submitted by a defendant do not constitute documentary evidence upon which a proponent of dismissal can rely” (Crepin v. Fogarty, 59 A.D.3d 837, 838, 874 N.Y.S.2d 278 [3d Dept 2009] ).
On a motion to dismiss made pursuant to CPLR 3211(a)(7), “the Court must afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference” (EBC 1, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 19 [2005] ). The Court's “sole criterion is whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail” (Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46, 54 [2001] [internal quotations omitted] ). The test is whether the plaintiff “has a cause of action, not whether he has stated one” (Leon v. Martinez, 84 N.Y.2d 83, 88 [1994];see also Matter of Niagara Mohawk Power Corp. v. State of New York, 300 A.D.2d 949, 954, 753 N.Y.S.2d 541 [3d Dept 2002] ). However, the Court need not “accept as true legal conclusions or factual allegations that are either inherently incredible or flatly contradicted by documentary evidence” (1455 Washington Ave. Assoc. v. Rose & Kiernan, 260 A.D.2d 770, 771, 687 N.Y.S.2d 791 [3d Dept 1999] [internal citations omitted] ).
Finally, dismissal is warranted under CPLR 3211(a)(5) where the movant establishes that a cause of action may not be maintained due to the expiration of the statute of limitations.
UHY is a certified public accounting (“CPA”) firm that was retained to provide independent auditing services to the Trusts. WCB regulations require GSITS to annually submit an audited financial statement prepared in accordance with generally accepted accounting principles and certified by an independent CPA (12 NYCRR § 317.19). The WCB alleges that UHY prepared audited financial statements for fiscal years 2002 through 2006 for all Trusts and audited financial statements for fiscal year 2007 for NYSCT.2
The complaint explains that the most significant item on the Trusts' financial statements were estimates of future claims liabilities, also known as loss reserves. The WCB alleges that UHY knew that the Trusts' future claims liabilities posed significant risks to their financial viability. Building upon the allegation that the Trusts' actuary, SGRisk, consistently and substantially underestimated these future claims liabilities, the WCB asserts that UHY failed to implement proper audit procedures to detect these material misstatements, including the use of actual experience data and review of independent analyses of loss reserves. The WCB further alleges that UHY had actual knowledge that SGRisk knowingly and consistently underestimated future claims liabilities. Additionally, it is alleged that “once actual claims liability could no longer be suppressed by SGSRisk's inappropriate methodologies, UHY implemented new accounting procedures designed to artificially inflate the Trusts' reported funding levels.”
The WCB contends that UHY allowed its audit approach to be influenced by other considerations, including its professional relationship with CRM and SGRisk and its desire to conceal CRM's mismanagement of the Trusts so as to continue collecting auditing fees. Thus, the WCB alleges that UHY knowingly manipulated its audit reports, intentionally misstated the Trusts' financial condition, knowingly participated in and facilitated CRM's submission of inaccurate financial statements and failed to implement proper audit procedures-all of which allegedly contributed to the substantial accumulated...
To continue reading
Request your trial