Conn Feamster v. Mountain State BC&BS

Opinion

AMENDED OPINION

UNPUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 11-2256

CONN FEAMSTER; SANDRA FEAMSTER; JOHN DOES 1-25,

Plaintiffs - Appellants,

v.

MOUNTAIN STATE BLUE CROSS & BLUE SHIELD, INCORPORATED; RELATIONAL MANAGEMENT SERVICES, LLC; HIGHMARK WEST VIRGINIA INCORPORATED, doing business as Mountain State Blue Cross & Blue Shield; SOLACIUM HOLDINGS, LLC; L. JAY MITCHELL; BART MITCHELL; CHERYL MITCHELL; SHARON FINDLAY,

Defendants - Appellees.

Appeal from the United States District Court for the Southern District of West Virginia, at Parkersburg. Joseph R. Goodwin, Chief District Judge. (6:10-cv-00241)

Argued: October 24, 2012 Decided: December 28, 2012

Amended Opinion Filed: January 29, 2013

Before DAVIS and FLOYD, Circuit Judges, and Catherine C. EAGLES, United States District Judge for the Middle District of North Carolina, sitting by designation.

Affirmed by unpublished opinion. Judge Davis wrote the opinion, in which Judge Floyd and Judge Eagles joined. ARGUED: Roy Franklin Harmon, III, HARMON & MAJOR, PA, Greenville, South Carolina, for Appellants. Sara Ellen Hauptfuehrer, STEPTOE & JOHNSON, LLP, Bridgeport, West Virginia, for Appellees. ON BRIEF: Jeffrey V. Mehalic, LAW OFFICES OF JEFFREY V. MEHALIC, Charleston, West Virginia, for Appellants. Jan L. Fox, STEPTOE & JOHNSON PLLC, Charleston, West Virginia, for Appellees Relational Management Services, LLC, L. Jay Mitchell, Bart Mitchell, Cheryl Mitchell, and Sharon Findlay; Erin E. Magee, Richard G. Ford, Jr., JACKSON KELLY PLLC, Charleston, West Virginia, for Appellee Solacium Holdings, LLC; Jill E. Hall, BOWLES RICE MCDAVID GRAFF & LOVE LLP, Charleston, West Virginia, Robert J. Kent, BOWLES RICE MCDAVID GRAFF & LOVE LLP, Parkersburg, West Virginia, for Appellee Highmark West Virginia Incorporated.

Unpublished opinions are not binding precedent in this circuit.

2 DAVIS, Circuit Judge:

This dispute arises from the failure of Relational

Management Services, LLC (“RMS”) to provide continuation health

care coverage under the Consolidated Omnibus Budget

Reconciliation Act of 1985 (“COBRA”) to one of its former

employees, Sandra Feamster, and her husband, Conn Feamster (“the

Feamsters”). Appellees include RMS, Mountain State Blue Cross &

Blue Shield, and several other individuals and entities

affiliated with RMS and its health-plan provider (collectively,

“Appellees”). The Feamsters were denied COBRA coverage because

Appellees claimed that RMS was a “small employer” of fewer than

20 employees, and was thus not obligated to provide it. The key

issue on appeal is whether RMS and Solacium Holdings, LLC

(“Solacium”) should have been considered a single employer in

2007; if so, the employer had 20 or more employees, obligating

it to provide COBRA coverage. For the reasons that follow, we

hold that even if RMS and Solacium were a single employer for a

portion of 2007, they were not a single employer on a “typical

business day” during that year, as prescribed by 29 U.S.C. §

1161(b). Accordingly, we affirm the district court’s grant of

summary judgment to Appellees.

3 I.

A.

We begin by providing some background on the complicated

network of business entities involved in this case. RMS was

formed in 2005 to operate a therapeutic boarding school for

teenagers in West Virginia. RMS’s sole member was the Teri Ann

Mitchell Family Irrevocable Trust (“the Family Trust”). Teri Ann

Mitchell is married to L. Jay Mitchell, RMS’s founder. The

Family Trust also held a controlling membership interest in TAS

Development, LLC, which organized TAS Greenbrier Properties,

LLC. TAS Greenbrier Properties, LLC, entered into a lease and

option to purchase property for the school. The school’s

founders also established the Greenbrier Academy Trust (“the

Greenbrier Trust”). RMS and the Greenbrier Trust contracted for

RMS to provide management services to the school. Tuition was

paid to the Greenbrier Trust, and the Greenbrier Trust paid over

the funds to RMS as management fees. Of the above entities, only

RMS and TAS Greenbrier Properties, LLC, ever had any employees.

The school -- called the Greenbrier Academy for Girls (“the

Academy”) -- opened in September 2007. Appellees L. Jay

Mitchell, Bart Mitchell, Cheryl Mitchell, and Sharon Findlay

were involved in its operation. Appellee Highmark West Virginia,

Inc., provided RMS with its group health plan.

4 Solacium is a holding company for entities that operate

schools for troubled youth. In 2006, Solacium, through an

affiliate entity, bought the assets of Alldredge Academy, a

school co-founded by L. Jay Mitchell in 1999. Also in 1999,

Solacium New Haven, LLC, hired L. Jay Mitchell as Chief Program

Officer. L. Jay Mitchell also acquired an ownership interest in

Solacium at that time.

An August 2007 magazine article based on an interview with

L. Jay Mitchell and others noted that Solacium would be opening

a new school in West Virginia. In his deposition, however, L.

Jay Mitchell disputed that characterization and speculated that

it was likely based on the view that “Solacium hoped to be able

to buy” the Academy in the future. J.A. 366. 1

On September 1, 2007, Solacium and RMS entered into an

agreement (“the 2007 Agreement”) whereby Solacium agreed to

provide administrative services (including payroll, benefit

administration, personnel, accounting, and marketing) to RMS.

The 2007 Agreement also gave Solacium an option to purchase

RMS’s assets. Specifically, under the 2007 Agreement, Solacium

could exercise the option during the one-year period beginning

approximately on September 1, 2011, four years after the

1 Citations to the “J.A.” refer to the Joint Appendix filed by the parties in this appeal.

5 execution of the 2007 Agreement. The 2007 Agreement was short-

lived, however, as the parties terminated it (as well as L. Jay

Mitchell’s employment agreement with Solacium) a mere four

months later, on January 1, 2008. Thereafter, Solacium had no

involvement in the operation or management of the Academy. In

2009, RMS was authorized to use the trade name Greenbrier

Academy for Girls, and the Greenbrier Trust was dissolved.

Meanwhile, RMS hired Ms. Feamster in September 2007. She,

along with her husband, received health insurance through RMS’s

group plan. Ms. Feamster took a medical leave of absence in

March 2008, and her health insurance coverage ended on June 1,

2008. Ms. Feamster then sought COBRA coverage, but RMS told her

that it did not provide such coverage; her insurance provider

explained that this was because RMS had fewer than 20 employees.

As a result, the Feamsters incurred hundreds of thousands of

dollars in medical expenses, a portion of which would have been

covered by health insurance if Ms. Feamster had received COBRA

coverage.

B.

The Feamsters filed a complaint in the United States

District Court for the Southern District of West Virginia in

March 2010. Following discovery in the federal case and in a

6 related state case, 2 they filed their third amended complaint on

February 11, 2011. It contained four counts: (1) that RMS, Bart

Mitchell, Cheryl Mitchell, and Sharon Findlay misrepresented

that the group health plan was subject to the small-employer

exemption and unlawfully failed to provide the Feamsters with

COBRA coverage, thus entitling the Feamsters to reimbursement of

medical expenses; (2) that RMS, Bart Mitchell, Cheryl Mitchell,

and Sharon Findlay failed to provide notice of COBRA coverage to

the Feamsters, and the administrator is liable to plan

participants in the amount of $110 per day and reimbursement of

medical expenses; (3) that one or more of the Appellees breached

their fiduciary duties and are personally liable to the plan for

the misuse of plan assets; and (4) that Appellees breached their

fiduciary duties, and the Feamsters are entitled to appropriate

equitable relief.

A number of motions to dismiss and motions for summary

judgment followed. Before ruling on the motions to dismiss, the

district court granted Appellees’ cross-motion for summary

judgment for two alternative reasons. First, it determined that

RMS was a “small employer” in the 2007 calendar year, and thus

2 In March 2009 the Feamsters had filed suit in West Virginia state court under various state law theories, also with the goal of recovering medical expenses. Those claims were dismissed on summary judgment on April 21, 2011.

7 was not obligated to provide COBRA coverage. J.A. 920-25.

Second, it determined that “even if the court had found that RMS

was an affiliated service group with Solacium, that group would

have had more than twenty employees for only four months of the

2007 calendar year,” which it deemed insufficient to move it out

of the “small employer” category such that it would have been

obligated to provide COBRA coverage. J.A. 925-26. The Feamsters

timely appealed.

II.

The central question on appeal is whether, by virtue of

Solacium’s option to purchase RMS’s assets, RMS and Solacium

should have been considered a single employer for purposes of

COBRA continuation health coverage in 2007. The parties agree

that RMS had fewer than 20 employees during that time, but that

combined with Solacium, there were more than 20. 3 As a result, if

the two organizations are considered a single employer, the

3 Appellees conceded in the district court that the following entities should be considered the same employer under 26 U.S.C. § 414(c): the Family Trust; the Greenbrier Trust; RMS; TAS Development, LLC; TAS Greenbrier Properties, LLC; L. Jay, Inc.; and L. Jay Mitchell Group. Defs.’ Mem. in Opp’n to Pls.’ Mot. for Summ. J. and in Supp. of Cross-Mot. for Summ. J. 14 (Dist. Doc. No. 340). Most of these entities had no employees, however, and in any case, their combined employees did not add up to 20 during the relevant time period.

8 employer would have 20 or more employees, obligating it to

provide COBRA coverage to Ms. Feamster. But if they are

considered separate employers, RMS permissibly denied Ms.

Feamster that coverage, and the district court properly granted

summary judgment to Appellees.

“Whether a party is entitled to summary judgment is a

question of law we review de novo using the same standard

applied by the district court.” Henry v. Purnell, 652 F.3d 524,

531 (4th Cir. 2011) (en banc). Summary judgment is appropriate

when there is no genuine dispute as to any material fact and the

moving party is entitled to judgment as a matter of law. Fed. R.

Civ. P. 56(a).

Through COBRA, “Congress required ERISA plan sponsors to

provide terminated employees and[/]or their dependents with the

option of purchasing continuation health coverage without regard

to insurability.” Johnson v. Reserve Life Ins. Co., 765 F. Supp.

1478, 1479 (C.D. Cal. 1991). See 29 U.S.C. § 1161(a) (“The plan

sponsor of each group health plan shall provide, in accordance

with this part, that each qualified beneficiary who would lose

coverage under the plan as a result of a qualifying event is

entitled, under the plan, to elect, within the election period,

continuation coverage under the plan.”). However, COBRA rules do

not apply to employers with “fewer than 20 employees on a

9 typical business day during the preceding calendar year.” 29

U.S.C. § 1161(b).

Because Ms. Feamster took medical leave from RMS in March

2008, we must determine whether during the preceding calendar

year -- 2007 -- her employer had 20 or more employees on a

typical business day. This inquiry gives rise to the two

questions on appeal: (1) whether RMS and Solacium should be

considered a single employer by virtue of the 2007 Agreement’s

provision granting Solacium an option to purchase all of RMS’s

assets; and (2) if so, whether RMS and Solacium were a single

employer on a typical business day during 2007. Assuming without

deciding that the option gave Solacium constructive ownership of

RMS, we conclude that such ownership existed for fewer than half

of the employer’s typical business days in 2007, and, thus, that

Appellees were not obligated to provide COBRA coverage to the

Feamsters.

III.

The district court held that even if the option conferred

constructive ownership of the Academy on Solacium, that

constructive ownership did not exist for a long enough time to

require the employer to offer COBRA continuation coverage. The

court reasoned that because the 2007 Agreement was in effect for

only four months (from when it was executed on September 1,

10 2007, until it was terminated on January 1, 2008), RMS and

Solacium were not a single employer on a typical business day in

2007. Consequently, the court concluded, the employer had fewer

than 20 employees during the relevant time period, and was thus

not obligated to provide COBRA continuation coverage.

Under the applicable Treasury Regulation, “[a]n employer is

considered to have normally employed fewer than 20 employees

during a particular calendar year if, and only if, it had fewer

than 20 employees on at least 50 percent of its typical business

days during that year.” 26 C.F.R. § 54.4980B–2, Q&A-5(b). 4 The

Feamsters argue that “[b]ecause the Greenbrier facility only

opened on September 1, 2007, the court should have taken into

account [only the] days following that date as ‘typical business

days.’” Feamster Br. 32.

4 The district court mistakenly relied on a proposed version of this regulation, under which the inquiry is described as follows: “An employer is considered as having normally employed fewer that 20 employees during a particular calendar year if, and only if, it had fewer than 20 employees on at least 50 percent of its working days during that year.” Prop. Treas. Reg. § 1.162-26, 52 Fed. Reg. 22716-01, Q&A 9(b) (June 15, 1987) (emphasis added). The final regulation quoted above uses the language “typical business days” rather than “working days,” see 26 C.F.R. § 54.4980B–2, Q&A-5(b), rendering the district court’s reliance on the proposed regulation problematic; if, for some reason, the calculation of working days is not coextensive with the calculation of typical business days, the resulting conclusion could differ. Appellees’ assertion that “the district court unquestionably applied the right standard, even though it relied upon authority that is not directly controlling,” is therefore wrong. See Appellees’ Br. 39.

11 The Feamsters make the following arguments to support their

position. First, they argue that “[a] day in which a business is

not open cannot be a typical business day.” Feamster Br. 32. But

RMS had existed since 2005, and TAS Greenbrier Properties, LLC,

which was part of the RMS controlled group, had employees

throughout 2007. See J.A. 552-72. Because “all employees of

trades or business[es] (whether or not incorporated) which are

under common control shall be treated as employed by a single

employer,” 26 U.S.C. § 52(b)(1), 5 the fact that TAS Greenbrier

Properties, LLC, had employees and functioned throughout the

year undermines the Feamsters’ argument that the “business” was

not open until September 1, 2007.

Second, the Feamsters point to Kidder v. H & B Marine Inc.,

932 F.2d 347 (5th Cir. 1991), also a case involving COBRA

claims. In Kidder, two corporations, each with fewer than 20

employees, merged. Id. at 349. Together, the two corporations

had more than 20 employees. Id. at 350. The court held that the

two corporations were properly treated as the same “employer”

because the corporations were “owned entirely by the same four

individuals,” id. at 355; in other words, they were commonly

5 We cite 26 U.S.C. § 52(b)(1) not because it is directly controlling, but because it provides a helpful articulation of the controlled-group principle that is the foundation on which the Feamsters’ otherwise unsupported argument rests.

12 controlled before the merger. Here, by contrast, there are no

allegations that Solacium and RMS were commonly controlled until

September 1, 2007. The Feamsters’ reliance on Kidder is

therefore misplaced.

Third, the Feamsters argue that if the employees of other

RMS-controlled entities are factored into the analysis to

determine a typical business day, “the same principle would

serve as justification for attributing Solacium’s component

employee groups to RMS during the prior period.” Feamster Br.

34. This argument is unpersuasive. The employees of other

entities in the RMS controlled group are relevant because 26

U.S.C. § 52(b)(1) requires that “all employees of trades or

business[es] (whether or not incorporated) which are under

common control shall be treated as employed by a single

employer.” The Feamsters cite no similar authority that would

require including the number of employees of a second

organization (here, Solacium) before that organization

affiliates with the first organization (here, RMS).

Finally, the Feamsters cite to the language of the statute

itself, which refers to “all employers.” 29 U.S.C. § 1161(b)

(emphasis added). The Feamsters cite no authority inferring from

the word “all” that the inquiry should include employees of an

entity that maintains constructive ownership of the direct

employer for just a few months of the relevant calendar year; if

13 that were so, a large company’s purchase of a small one on

December 31 would render the small company’s employees eligible

for COBRA continuation coverage in the following year as if they

had worked for the large employer for all of the prior year.

Such a situation would lead to the absurd result that a small

company acquired on December 31 would be treated differently

from a single company that merely expands and increases the

number of its employees throughout the year, such that it has 19

employees for six months and a day, and 20 or more for the

remainder of the year. There is no reason to believe that

Congress intended such a distinction between individual

companies and companies acquired by other entities. 6

IV.

For the reasons set forth, the judgment of the district

court is

AFFIRMED.

6 Moreover, the interpretation the Feamsters propose lacks a coherent limiting principle. What if, for example, the Academy opened on December 1, rather than September 1 –- would typical business days be only those business days in the month of December? And if the Academy had opened in the final week of December, would typical business days include only that week? Such a result is clearly not contemplated by § 1161(b)’s insistence that we look to “typical business days.”