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Central Valley Ag Cooperative v. Anasazi Medical Payment Solutions, Inc.

United States District Court, D. Nebraska

May 13, 2018

CENTRAL VALLEY AG COOPERATIVE, and CENTRAL VALLEY AG COOPERATIVE HEALTH CARE PLAN, Plaintiffs,
v.
ANASAZI MEDICAL PAYMENT SOLUTIONS, INC., et. al; Defendants.

          FINDINGS AND RECOMMENDATION

          CHERYL R. ZWART UNITED STATES MAGISTRATE JUDGE

         Plaintiff Central Valley Ag Cooperative (“CVA”) provides farm planning, supplies, and services to members in Nebraska, Kansas, and Iowa. CVA is the sponsor, plan administrator, and fiduciary of Plaintiff Central Valley Ag Cooperative Health Care Plan (the “Plan”), a group employee health and welfare plan.

         Defendants Daniel K. Leonard, Susan Leonard, and GMS Health Benefits, Inc. (collectively “Broker defendants”) brokered an Administrative Services Agreement between CVA and Defendant The Benefit Group, Inc. (“TBG”), acting by and through its President, Defendant Linus G. Humpal (“Humpal”). Under the Administrative Services Agreement, TBG agreed to provide services for administering the Plan, including claim processing. CVA designated Defendant Claims Delegate Services, LLC (“CDS”), a subsidiary of Defendant Anasazi Medical Payment Solutions, Inc. (“AMPS”), as a Plan fiduciary to review and make benefit determinations on all post-service hospital and facility claims.

         Plaintiffs seek recovery under the Employee Retirement Income Security Act of 1974, (ERISA), and the Racketeering Influenced and Corrupt Organization Act (RICO), claiming Defendants failed to properly review and pay claims, and unlawfully profited from their misconduct. Plaintiffs request an order granting injunctive relief, and for payment of damages, treble damages under RICO, disgorgement of profits, costs, and attorney fees.

         PROCEDURAL BACKGROUND ..................................................................................... 3

         STANDARD OF REVIEW ............................................................................................... 5

         PLAINTIFFS' PROPOSED THIRD AMENDED COMPLAINT ......................................... 6

         ANALYSIS ..................................................................................................................... 19

         I. Standing to Assert ERISA and RICO Claims ..................................................... 19

         A. Plaintiffs' Article III Standing .......................................................................... 19

         B. Plan's Right to Recover under ERISA ........................................................... 21

         C. Plan's Right to Recover under RICO ............................................................. 23

         II. ERISA Claims .................................................................................................... 25

         A. Claims for Breach of Fiduciary Duty and Prohibited Transactions ................ 25

         1. AMPS: Breach of Fiduciary Duty and Prohibited Transactions .................. 25

         a. Breach of Fiduciary Duty: 29 U.S.C. § 1109 ........................................... 25

         b. Prohibited Transactions: 29 U.S.C. § 1106 ............................................ 28

         2. CDS: Breach of Fiduciary Duty .................................................................. 29

         3. TBG: Breach of Fiduciary Duty and Prohibited Transactions ..................... 30

         a. Breach of Fiduciary Duty: 29 U.S.C. § 1109 ........................................... 30

         b. Prohibited Transactions: 29 U.S.C. § 1106 ............................................ 33

         4. Humpal: Breach of Fiduciary Duty ............................................................. 33

         B. Non-Fiduciary ERISA Claims ......................................................................... 34

         1. The Leonards: Non-Fiduciary Liability for Aiding Fiduciary Violations ....... 34

         2. GMS and the Leonards: Prohibited Transactions by Non-Fiduciaries ....... 36

         III. RICO Claims ...................................................................................................... 37

         IV. Claim for Injunctive Relief .................................................................................. 41

         V. Claim for Attorney Fees ..................................................................................... 41

         RECOMMENDATION ................................................................................................... 42

         PROCEDURAL BACKGROUND

         Plaintiffs filed their initial complaint and a motion for temporary restraining order against Defendants on October 11, 2017. (Filing Nos. 1-4). After the motion for TRO was denied on October 26, 2017, (Filing No. 33), Plaintiffs filed an Amended Complaint on October 31, 2017, (Filing No. 34), and a Second Amended Complaint on November 15, 2017. (Filing No. 35).[1]

         Defendants filed motions to dismiss the Second Amended Complaint. (Filing Nos. 36, 38, and 40). Plaintiffs did not respond to the motions to dismiss. Instead, they filed a motion for leave to file a Third Amended Complaint, explaining that in all relevant respects, the proposed Third Amended Complaint includes the allegations within the prior complaint but adds allegations based on information obtained after the Second Amended Complaint was filed. Plaintiffs further request additional time to respond to Defendants' motions to dismiss so the court can first consider Plaintiffs' motion for leave to file the Third Amended Complaint. (Filing No. 43). Defendants argue that despite the additional allegations, CVA's motion for leave to file the Third Amended Complaint should be denied as futile. Defendants opposition to the motion to amend raises substantially the same arguments presented in support of their motions to dismiss the Second Amended Complaint.

         Under the unique procedural posture presented, and in the interest of preserving the resources of the parties and the court, the undersigned magistrate judge will determine whether Plaintiffs' proposed Third Amended Complaint fails to state a claim, addressing not only Defendants' arguments opposing Plaintiffs' motion to amend, but any additional arguments in favor of their motions to dismiss the Second Amended Complaint.

         For the reasons discussed below, Plaintiffs' motion to file a Third Amended Complaint, (Filing No. 43), should be granted in part and denied in part. Plaintiff CVA should be granted leave to file the proposed Third Amended Complaint, provided it is revised to remove the following claims:

• The RICO or ERISA claims filed by Plaintiff Central Valley Ag Cooperative Health Care Plan;
• Plaintiffs' RICO claims against all Defendants;
• Plaintiffs' ERISA claims against Humpal in his personal capacity;
• Plaintiffs' ERISA claim against the Leonards for falsely stating the 2016 Plan complied with the Affordable Care Act (ACA); and
• Plaintiffs' independently and separately alleged claims for attorney fees and for injunctive relief.

         And with the filing of the proposed Third Amended Complaint as revised, Defendants' motions to dismiss the Second Amended Complaint, (Filing Nos. 36, 38, and 40) should be denied as moot.[2]

         STANDARD OF REVIEW

         Fed. R. Civ. P. 15(a)(2) provides that once the time for pleading as a matter of course has expired, amendments to pleadings are allowed only with the written permission of the opposing party or leave of the court. Courts are encouraged to allow amendments liberally. (Shen v. Leo A. Daly Co., 222 F.3d 472, 478 (8th Cir. 2000).

[A] district court can refuse to grant leave to amend a pleading only where it will result in undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of the amendment.

Dennis v. Dillard Dept. Stores, Inc., 207 F.3d 523, 525 (8th Cir. 2000) (internal citations omitted); see also K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 899 (8th Cir. 2002) (noting futility constitutes a valid reason for denial of leave to amend).

         Leave to amend should be denied as futile “where the proposed amendment would not cure the defect the party sought to correct.” Asbury Square, L.L.C. v. Amoco Oil Co., 218 F.R.D. 183, 195 (S.D. Iowa 2003); see also Mississippi River Revival, Inc. v. City of Minneapolis, 319 F.3d 1013, 1018 (8th Cir. 2003); K-tel, Int'l, Inc., 300 F.3d at 899; Wiles v. Capitol Indemnity Corp., 280 F.3d 868, 871 (8th Cir. 2002); Ingrim v. State Farm Fire & Cas. Co., 249 F.3d 743, 745-46 (8th Cir. 2001). That is, “a court may deny a motion for leave to amend for futility if the proposed amendments would not save the party's claim In the end, the court will not order Plaintiffs to pay Defendants' fees and costs for filing their motions to dismiss. But Plaintiffs are cautioned that for any future motions to amend, the court will entertain Defendants' fee applications if Plaintiffs' proposed amendments could have been known and raised in their Third Amended Complaint. from dismissal.” Asbury Square, L.L.C., 218 F.R.D. at 195 (citing Mississippi River Revival, Inc., 319 F.3d at 1018).

         PLAINTIFFS' PROPOSED THIRD AMENDED COMPLAINT

         Plaintiffs' proposed Third Amended Complaint, the allegations of which are considered true when deciding whether leave to amend would be futile, Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007), alleges:

         The Plan is an employee benefit plan within the meaning of ERISA and is sponsored by CVA. The Plan covers over 700 participants who rely upon the Plan's benefits to cover the costs of their health care in the same manner as a group health insurance policy. It is self-funded through participant contributions deducted from employee wages, with stop-loss coverage purchased yearly to limit the maximum potential liability with regard to aggregate claims. (Filing No. 43-2, at CM/ECF pp. 4-5, ¶¶ 10, 12, 15-17).

         In exchange for compensation received from Plaintiffs, the Broker defendants assisted CVA as insurance brokers, employee benefits consultants, and trusted advisors regarding the Plan's design, legal compliance aspects, and administration, and in procuring stop-loss insurance coverage for the Plan. The Broker defendants did not disclose to Plaintiffs the compensation they received for influencing CVA and the Plan to engage in the transactions outlined in the Complaint. (Filing No. 43-2, at CM/ECF p. 7, ¶¶ 22-26).

         Defendant Humpal is an owner and officer of TBG, and TBG is a partner of AMPS. TBG was the Plan's third party administrator, drafting the group health plan documents provided to CVA for 2013 through 2016 and adjusting, reviewing, and paying claims under the Plan from January 1, 2013 through December 31, 2014.

         As reflected in the website information posted by TBG and AMPS, TBG and Humpal, AMPS and CDS (a shell entity of AMPS), and the Broker defendants were members of a partnership (the Enterprise) and an association-in-fact which was separate and distinct from their collective actions related to CVS or the Plan. (Filing No. 43-2, at CM/ECF pp. 12, 14-15, ¶¶ 54, 66). The Enterprise exists to lure companies, like CVA, to offer employee health and welfare benefit plans administered using Medical Based Review (“MBR”)[3] and a Reference Based Review (RBR)[4] pricing scheme that, in effect, converts Plan assets to the Enterprise rather than properly paying employee health care bills. (Filing No. 43-2, at CM/ECF pp. 17, 35-36, ¶¶ 69, 105-06). Defendants arbitrarily depress the amount of money paid to health care providers on individual participant claims; claim “savings amounts” on individual claims; and then pay themselves out of Plan assets based upon the claimed “savings.” (Filing No. 43-2, at CM/ECF p. 66, ¶ 192).

         The Enterprise operated in interstate commerce, causing damage to participants in eight states, including Nebraska. (Filing No. 43-2, at CM/ECF p. 15, 69, ¶¶ 66, 67, 199). Its conduct was carried out repeatedly and continuously beginning in at least 2012 and continuing through the present for a common goal, by similar means, with similar results and a common victim. These acts, as part of the Enterprise's regular way of doing business-not only with Plaintiffs, but also for other group health plans-were part of a “pattern of racketeering activity.” (Filing No. 43-2, at CM/ECF p. 67, 69, ¶ 194, 198).

         During a telephone conference on October 21, 2014, Humpal, acting as an agent and/or the alter ego of TBG and AMPS, along with the Broker defendants, contacted CVA and suggested that CVA hire CDS to review the Plan's medical claims. Unbeknownst to CVA, CDS had already agreed to perform this service for CVA, beginning with the 2015 Plan year. (Filing No. 43-2, at CM/ECF pp. 7, 29, ¶¶ 29, 89).

         For the 2015 Plan year, CVA was committed to PPO contracts for Plan payments, so as to that year, CDS's review would be limited to resolving errors. In reliance on Humpal's advice, CVA began its relationship with CDS and ultimately AMPS. But Humpal did not disclose the full nature and scope of AMPS' and CDS' business methodologies. In addition to receiving compensation from both CVA and the Plan, Humpal and TBG also received compensation from AMPS and CDS, but they did not disclose this income source to Plaintiffs. (Filing No. 43-2, at CM/ECF pp. 8-10, 29, ¶¶ 32-37, 41, 43, 89).

         During a meeting in April of 2015, the Broker defendants told CVA's representatives that CDS had uncovered numerous billing errors and had saved the Plan more than $1 million. This claim, also conveyed by email, was developed by TBG and the Broker defendants and was false. The Plan's appearance of financial health and liquidity was actually the result of CDS' and TBG's failure to timely process pending claims. (Filing No. 43-2, at CM/ECF pp. 29-30, 69, ¶¶ 90, 199).

         CDS and AMPS forwarded invoices to Humpal and TBG for payment, and without providing any notice to Plaintiffs, Humpal and TBG determined whether the claims would be paid from Plan assets and in what amount. (Filing No. 43-2, at CM/ECF p. 10, ¶ 44). AMPS instructed TBG to ignore PPO contract rates, and to deeply discount hospital claims for payment based on AMPS' determination of what medical care was appropriate, and it was paid for doing so, while never advising Plaintiffs of the claim or how the hospitals and AMPS were paid, (Filing No. 43-2, at CM/ECF pp. 21-23, ¶ 74(c-d)). In August 2015, CVA received notice from First Health, the Plan's network provider, that it would no longer work with the Plan because it was discounting or re-pricing the amounts paid to providers in violation of the Plan's PPO contracts. (Filing No. 43-2, at CM/ECF p. 30, ¶ 91). When confronted by CVA, Humpal and TBG did not disclose the re-pricing and payment delays, instead explaining the providers were angry because CDS found so many billing errors. The Enterprise conveyed this false information to Plaintiffs and the Plan participants by email and posted it on AMPS' and TBG's websites. (Filing No. 43-2, at CM/ECF p. 31, ¶ 93). CVA believed Humpal and TBG, and it continued to rely on their services to the Plan.

         Without Plaintiffs' knowledge, in late 2015, AMPS was repricing the Plan's claims and creating conflicts with health providers through the services that CDS was rendering to the Plan. (Filing No. 43-2, at CM/ECF p. 36, ¶ 107). For claims under $10, 000, CDS paid according to the fee schedule, but in all claims over $10, 000, CDS paid a commercially unreasonable amount. CDS and AMPS used complete discretion in deciding what claims would be paid and in what amount. (Filing No. 43-2, at CM/ECF p. 31, ¶ 94).

         In September and October 2015, CVA had discussions with the Broker defendants, Humpal, and TBG regarding the Plan for 2016. Humpal represented that the Plan could not contract with customary provider networks because of disagreements over payments for services. Humpal, TBG, and the Broker defendants suggested implementing AMPS' RBR pricing model as the best option for CVA, with its “guaranteed savings, ” and payments based on the fair market value of services rendered being the “wave of the future.” (Filing No. 43-2, at CM/ECF pp. 19, 31-33, ¶¶ 74, 95-97, 98(g)). The statements explaining the RBR pricing closely tracked AMPS' posted website information. (Filing No. 43-2, at CM/ECF p. 32, ¶¶ 97-98). Although federal agencies had warned against the broad use of such programs in self-funded plans, (Filing No. 43-2, at CM/ECF p. 18, ¶ 73), Plaintiffs were unaware of these warnings at the time. (Filing No. 43-2, at CM/ECF p. 19, ¶ 74).

         Humpal, on behalf of himself, TBG and AMPS, represented that based on his investigations of the RBR pricing method, health care providers and hospitals would “love” to receive 185% of the Medicare reimbursement amount, and he agree to negotiate new agreements with the providers to that effect. But Humpal never explained that by using a 185% reimbursement rate, CVA was foregoing the flat fee and bundled cost arrangements typically used by insurers and group plans to save money, and he did not explain that Plan participants would bear the responsibility of finding a doctor who would accept the RBR-defined rate or face paying any sum in excess of that amount. The communications regarding use of the RBR pricing method, which were made by telephone, email and indirectly through AMPS' website, boasted health care savings that were inflated, false and misleading. (Filing No. 43-2, at CM/ECF pp. 33-35, 57, ¶¶ 98-99, 101-02, 190(a-d)).

         Plaintiffs believed the representations of AMPS, Humpal and TBG, and the Broker defendants regarding not only the anticipated RBR savings for the 2016 Plan year, but also the savings CDS had secured from reviewing the Plan's 2015 claims processing. In reliance on those representations, Plaintiffs agreed to implement the RBR pricing option and to retain AMPS and CDS for all of AMPS' described services for the 2016 plan year. (Filing No. 43-2, at CM/ECF pp. 19-20, ¶¶ 75-76). On January 19, 2016, CVA signed the RBR Program Services Agreement (the “RBR Agreement”) with AMPS and CDS for the January 1, 2016 to December 31, 2016 Plan year. (Filing No. 43-2, at CM/ECF p. 34-35, ¶ 100, 104). The RBR Agreement implemented “Required Modifications” to its employee health plan which changed the “structure, design, concepts, definitions, terms and provisions” applicable to all health benefit claims submitted to the Plan, and afforded AMPS and CDS abusive discretionary authority over Plan payments. (Filing No. 43-2, at CM/ECF p. 24, ¶ 77). Defendants disclosed the 2016 Plan document to Plaintiffs and the Plan participants, and the purported 2016 Plan savings to Plaintiffs, by mail and email. (Filing No. 43-2, at CM/ECF p. 25-26, 69, ¶¶ 80, 82, 199).

         Under the RBR agreement, in exchange for their services to the Plan, AMPS was paid 10 percent, and TBG was paid 2.5 percent (in addition to its administration fees) of all gross hospital claims. AMPS and CDS applied deep and unsupported discounts to the health provider claims to create the illusion of savings and increase their compensation. As to 30% of small claims, AMPS, CDS and TBG caused the Plan to pay more than the retail price to health care providers (without any review) and billed and collected fees for “savings” they did not earn. AMPS' MBR and RBR programs were applied to all health services irrespective of the choice of providers or the quality of care, served to irrationally and abusively discount services while increasing the compensation owed to Defendants, and resulted in a remaining balance owed and billed directly to the Plan participants on virtually every health claim. (Filing No. 43-2, at CM/ECF pp. 20, 24-25, ΒΆΒΆ 76(a) ...


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