N.Y. Workers' Comp. Bd. v. Madden, 2988–11.

• Decision Date: 01 March 2013
• Docket Number: No. 2988–11.,2988–11.
• Citation: 38 Misc.3d 1229,2013 N.Y. Slip Op. 50337,967 N.Y.S.2d 870
• Parties: STATE OF NEW YORK 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 New York Healthcare Facilities Workers' Compensation Trust, Plaintiff, v. Cathy MADDEN, Linda Villano, Phyliss Ettinger, Patricia Huber, Rosa Barksdale, Susan Olivet, Elizabeth Rosenberg, Sam Harte, Daniel Mushkin, Timothy Ferguson, Scott Lockwood, Lynn Edmonds, Berenson & Co., LLP, James Mcgarrity, Lorette Belgraier and Steven Glaser, Defendants.
• Court: New York Supreme Court

38 Misc.3d 1229
967 N.Y.S.2d 870
2013 N.Y. Slip Op. 50337

STATE OF NEW YORK 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 New York Healthcare Facilities Workers' Compensation Trust, Plaintiff,
v.
Cathy MADDEN, Linda Villano, Phyliss Ettinger, Patricia Huber, Rosa Barksdale, Susan Olivet, Elizabeth Rosenberg, Sam Harte, Daniel Mushkin, Timothy Ferguson, Scott Lockwood, Lynn Edmonds, Berenson & Co., LLP, James Mcgarrity, Lorette Belgraier and Steven Glaser, Defendants.

No. 2988–11.

Supreme Court, Albany County, New York.

March 1, 2013.

Rupp, Baase, Pfalzgraf, Cunninghan & Coppola LLC, (Daniel E. Sarzynski and Charles D.J. Case, of counsel), Buffalo, Attorneys for Plaintiff.

Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, (Peter A. Lauricella, and Benjamin F. Neidl, of counsel), Albany, Attorneys for Cathy Madden, Linda Villano, Phyliss Ettinger, Patricia Huber, Elizabeth Rosenberg, Sam Harte, Timothy Ferguson and Lynn Edmonds.

Watson Bennett Colligan & Schechter LLP, (Scott M. Lupiani, of counsel), Buffalo, Attorneys for Daniel Muskin.

Landman Corsi Ballaine & Ford, P.C., (Louis G. Corsi, of counsel), New York, Attorneys for Lorette Belgraier.

Hiscock & Barclay, LLP, (David B. Cabaniss, of counsel), Albany, Attorneys for Steven Glaser.

Jaeckle Fleischmann & Mugel, LLP, (Charles C. Swanekamp, of counsel), Buffalo, Attorneys for Berenson & Co.

RICHARD M. PLATKIN, J.

This is a commercial action brought by plaintiff 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 New York Healthcare Facilities Workers' Compensation Trust (“the Trust”). Five separate motions to dismiss the complaint pursuant to CPLR 3211 are pending before the Court.

BACKGROUND

As alleged in the WCB's complaint, the Trust was a group self-insured trust (“GSIT”) formed pursuant to Workers' Compensation Law (“WCL”) § 50–a. Its members were home health-care employers that conducted business in New York State and were required to provide workers' compensation insurance to their employees.

The Trust was formed on or about May 30, 1997 when the initial employer-members and board of trustees (“Board of Trustees” or “Board”) approved the trust agreement (“Trust Agreement”). On or about June 3, 1997, the Board approved by-laws (“By–Laws”). The WCB authorized the Trust to operate as a GSIT on or about July 1, 1997.

From December 15, 1997 to July 31, 2006, The Hamilton Wharton Group, Inc. (“HWG”) and Walter B. Taylor, its managing director, sole shareholder and sole employee, served as the Trust's group administrator and program administrator. On or about December 15, 1997, HWG and the Trust entered into a service agreement (“Service Agreement”) setting forth their respective obligations.

According to the complaint, the Trust operated at a loss every year between 1997 and 2006. As of July 31, 2006, the Trust had an accumulated deficit of approximately $33 million. It is the WCB's contention that defendants' actions and inactions caused the Trust to become underfunded and/or insolvent. As a result of the deficit, the WCB assumed administration and final distribution of the Trust's assets and liabilities on July 31, 2006. As of the date of the complaint, the remaining assets and available security of the Trust have been exhausted, and the Trust is insolvent within the meaning of 12 NYCRR § 317.20. As a result, the WCB meets the Trust's financial obligations and its own expenses of administering the Trust with monies from the WCB administrative fund. In accordance with 12 NYCRR § 317.20, the WCB is the successor in interest to the Trust.

While the specific factual allegations lodged against particular defendants will be detailed below, the complaint generally alleges that the trustees failed to devise and implement an appropriate strategy or policy for levying assessments on Trust members. According to the complaint, the Trust's governing documents required the trustees to levy assessments in the event that the Trust's assets actuarially were insufficient to discharge the Trust's legal liabilities ( see12 NYCRR § 317.9). However, an actuary was not retained until 2000, when the Trust already was operating at a deficit. Also in 2000, HWG retained the services of Ernst & Young (“E & Y”) to assist in the preparation of audited financial statements for 1997 through 1999.

On or about October 9, 2002, the WCB directed the Board of Trustees to suspend the addition of new members due to the Trust's underfunded status. The WCB also directed the Board to engage the services of outside audit consultants to examine the Trust's finances. By letter dated August 15, 2002, the Trustees, HWG and Taylor, detailed a multi-year plan of action to bring the Trust to a fully funded status. Subsequently, in several conversations and through correspondence with the WCB, the Board of Trustees continued to take the position that the Trust's underfunded status was not severe enough to imperil its continuation as a going concern.

In or about July 2003, the WCB retained PricewaterhouseCoopers (“PwC”) to conduct a fiscal and actuarial audit of the Trust. The audit found a deficiency of approximately $7.3 million as of the fiscal year ending 2002. In reviewing the Trust's audited financial statements for the fiscal year ending 2003, the WCB found a deficit of approximately $15.5 million.

By letter dated June 23, 2004, the WCB provided the Board of Trustees with a copy of PwC's report. This letter directed the Board and Taylor to submit a corrective action plan that addressed the deficit. By letter dated October 19, 2004, the WCB again directed the Board to supply the WCB with a corrective action plan.

On or about November 3, 2004, the WCB met with HWG and the Board of Trustees to discuss the Trust's deficit of more than $15 million. During this meeting, the WCB reiterated the need for the Board of Trustees and HWG to develop a plan to correct the Trust's underfunded status. The WCB recommended that the Board and HWG consider levying an immediate assessment on current and former Trust members. However, the Board of Trustees did not develop such a plan until April 2005.

The complaint alleges that defendants Madden, Villano, Ettinger, Huber, Barksdale, Olivet, Rosenberg, Harte, Mushkin, Ferguson, Lockwood, and Edmonds, all of whom are alleged to have been members of the Board of Trustees at pertinent times, breached their contractual and fiduciary duties to the Trust and its members. It is the WCB's contention that the numerous and persistent breaches of contract and fiduciary duty by the trustee defendants—including failures and deficiencies with respect to payroll audits, annual financial audits, safety programs, claims administration, underwriting and premium discounts—exacerbated the Trust's deficit of approximately $33 million (as of the date of the complaint).

The complaint further alleges that HWG and Taylor retained defendant McGarrity as the Trust's accountant in 2000. According to the complaint, McGarrity failed to perform certain of the work for which he was hired, including advising the Board of Trustees and Trust members of the Trust's financial status. Additionally, the WCB alleges that E & Y was poised to issue a qualified or going concern opinion letter that would have called into question the Trust's ability to meet its ongoing financial obligations, including the payment of workers' compensation benefits, and that McGarrity was instrumental in terminating the services of E & Y and substituting a different auditor before the letter could be issued. The complaint alleges that McGarrity's termination of E & Y was a deliberate act intended to conceal the Trust's true financial condition from the Trust, its members, and the WCB. Further, McGarrity is alleged to have knowingly withheld from the WCB annual reports that accurately portrayed the Trust's financial condition.

The complaint goes on to allege that McGarrity, HWG, and Taylor hired defendant Berenson & Co., LLP (“Berenson”) to replace E & Y to prepare the Trust's audited financial statements for the years 1997, 1998, and 1999. HWG and Taylor also are alleged to have hired defendant Belgraier to perform accounting functions for the Trust, including posting entries, preparing checks for issuance, and preparing schedules and internal financial statements. Finally, in or about 2000, HWG and Taylor retained Glaser as The Trust's counsel. The wrongful actions and inactions of these professional defendants all are alleged to have contributed to the Trust's deficits and underfunded status.

LEGAL STANDARD

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., 69 A.D.3d 1203, 1205, 893 N.Y.S.2d 668 [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...