Receivership Mgmt., Inc. v. AEU Holdings, LLC

RECEIVERSHIP MANAGEMENT, INC.,IN ITS CAPACITY AS INDEPENDENT FIDUCIARY OF THE AEU HOLDINGS, LLC EMPLOYEE BENEFIT PLAN Plaintiff, v. AEU HOLDINGS, LLC, STEPHEN M. SATLER,STEVEN GOLDBERG, and BILLIE KATHRYN WHEELER WRAY Defendants.

Case No. 18 C 8167

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

September 4, 2019

Judge Joan H. Lefkow

OPINION AND ORDER

The independent fiduciary this court appointed to oversee a group of failed health benefit plans has sued, under a negligence theory, several defendants allegedly involved in the set-up and administration of those plans. The defendants—AEU Holdings, LLC, Stephen Satler, Steven Goldberg, and Billie Wray (collectively, "Defendants")—now move to dismiss the complaint and move to strike a declaration the independent fiduciary submitted in the course of briefing the motion to dismiss. (Dkts. 19, 41.) For the reasons below, the court denies the motions.¹

BACKGROUND²

This case arises from the failure of a large group of employee health benefit plans and a "self-funded health benefits program platform"³ designed to serve them. (Dkt. 8 ¶¶ 16-18.) The program comprised a base level of at least 261 employer-sponsored, self-funded plans (the "Participating Plans"). (Id. at 1 n.1; ¶ 11.) The Participating Plans were part of or participated in an overarching health benefits plan called the AEU Holdings, LLC Employee Benefit Plan (the "AEU Plan").⁴ (Id. at 1 n.1.) This court previously entered a preliminary injunction appointing plaintiff Receivership Management, Inc., as the independent fiduciary (the "IF") to administer the AEU Plan and the Participating Plans. Pizzella v. AEU Benefits, LLC, No. 17-cv-7931, Dkt. 49 at 3 (N.D. Ill. Dec. 13, 2017). The allegations of the IF's complaint, taken as true for purposes of the motions, are as follows:

Before 2015, the program was operated by ALLInsurance Solutions Management, LLC ("AISM"). (Dkt. 8 ¶ 16.) In July 2015, AISM engaged AEU Holdings, LLC, and its wholly-owned subsidiary AEU Benefits, LLC, to manage the AISM program platform. (Id. ¶ 17.) The IF alleges Defendants used the names AEU Holdings and AEU Benefits interchangeably, so it uses the term "AEU" to refer to the two entities collectively. (Id. ¶ 15.) Where appropriate,⁵ the court does so as well.

On April 26, 2016, AEU acquired the AISM program platform via an asset purchase agreement. (Id. ¶ 18.) At that time, AEU "took over the sales, marketing, underwriting, rating, claims handling, and program administration and advisory functions." (Id.) AEU continued in that role until this court issued a temporary restraining order appointing the IF on November 3, 2017. (Id. ¶¶ 10, 11.)

Defendant Stephen Satler was the CEO of AEU Holdings and a member of its Board of Managers. (Id. ¶ 3.) Satler owned approximately 22% of AEU Holdings. (Id.) Defendant Steven Goldberg was the COO of AEU Holdings and a member of its Board of Managers. (Id. ¶ 4.) Goldberg also owned approximately 22% of AEU Holdings. (Id.) Defendant Billie Wray was General Counsel of AEU Holdings from approximately June 2015 through July 1, 2017. (Id. ¶¶ 5, 37.)

AEU Holdings engaged entities called "aggregators" to solicit employers to form employee benefits plans that would participate in the AEU Plan.⁶ (Id. ¶ 20.) Each employer's plan was to be established as a voluntary employees' beneficiary association ("VEBA") trust, an entity exempt from federal income tax under Internal Revenue Code section 501(c)(9). (Id. ¶ 23.)

AEU Holdings controlled the marketing materials that aggregators provided to solicited employers. (Id. ¶ 28.) For example, AEU Holdings authored a "VEBA Tool Kit Presentation" to describe how contributions would be collected from employers, how claims would be paid, and the benefits of self-funded plans versus fully-insured plans. (Id. ¶ 29.) AEU Holdings marketed its program as including "stop loss" insurance—designed to cover claims that exceeded the contributions made to the plan—that would be purchased by a single Bermuda purchasing trust ("BPT") as named insured, with all Participating Plans being co-beneficiaries of the trust. (Id. ¶¶ 29, 31.)

Black Wolf Consulting, Inc. was the main aggregator for the AEU Program. (Id. ¶ 97.) During 2016 and 2017, Black Wolf enrolled more than 75 percent of the Participating Plans that enrolled in the AEU Program. (Id. ¶¶ 20, 97; Dkt. 34 ¶ 7.) Black Wolf operated out of Frankfort,Illinois, and approximately 39 percent of the Participating Plans Black Wolf enrolled were organized in Illinois, as of April 2017. (Dkt. 8 ¶¶ 97, 98.)

Defendants provided five documents to each employer that they knew "were required to be completed, executed, and/or received by each Participating Plan": (1) a VEBA trust agreement; (2) a program advisory services agreement; (3) a collection agreement with an aggregator; (4) a certificate from a BPT; and (5) a plan administrator services agreement. (Id. ¶ 25.)

Of particular note, the VEBA trust agreements for each Participating Plan required each plan's contributions to be placed in separate deposit accounts, or at least to be accounted for separately. (Id. ¶¶ 32, 58.) The VEBA trust agreements also provided that the trustee for each VEBA trust, "or the Plan Administrator as designee,"⁷ was "specifically authorized to determine the required amount of contributions to pay the expected cost of benefit provided . . . " (Id. ¶ 32.) Defendants were not parties to any VEBA trust agreement, but they "owed duties" to Participating Plans to ensure that the requirements of the VEBA trust agreements were followed. (Id. ¶ 33.)

Defendants caused, approved, or tolerated multiple failings in the implementation of the Program that ultimately led to there being insufficient funds to pay all claims. First, Defendants "negligently failed to ensure the proper set up of the AEU Program." (Id. at p. 10.) Specifically, "almost none" of the Participating Plans set up separate bank accounts, obtained certificates of coverage from the BPT, or obtained approvals of their VEBA trusts from the IRS. (Id. ¶¶ 43-46.)

Second, Defendants "were negligent in allowing/not prohibiting the improper commingling of the Participating Plans' funds." (Id. at p. 15.) Defendants knew, at least as of April 2017, that aggregators were putting contributions they received from employers into the aggregators' own bank accounts rather than a bank account for the corresponding plan and/or VEBA trust. (Id. at ¶¶ 61, 64.) Aggregators then took a portion of the employers' contributions to pay themselves and brokers working for them before forwarding the remaining balance to "the AEU Program's designated administrative representative's bank account."⁸ (Id. at ¶ 61.) The administrative representative then withdrew fees for itself, AEU, and third-party administrators. (Id. at ¶ 62.) The remaining funds were "pooled in the Bermuda accounts." (Id. at ¶ 62.)

Third, and related to the above, Defendants "negligently allowed aggregators to deduct their fees from Participating Plan contributions." (Id. at 17.) In this regard, Defendants knew that all contributions from each employer were required (seemingly under the VEBA trust agreements, although the complaint does not make that clear) to go into the Participating Plans' accounts. (Id. ¶¶ 32, 62.)

Fourth, Defendants "negligently allowed associations and one-person groups to be Participating Plans." (Id. at p. 18.) "Covering single individuals is risky, and the AEU Program was rated and underwritten for group, rather than individual coverage." (Id. at ¶ 74.) Permitting single individuals contravened underwriting guidelines that Defendants themselves had adopted, which required each Participating Plan to have at least five full-time employees enrolled. (Id. at ¶¶ 30, 74.)

Fifth, Defendants "negligently allowed the AEU Program to be marketed improperly." (Id. at 20.) In this regard, Defendants told Participating Plans that "the employer's monthlycontribution/premium payment was the maximum cost to a Participating Plan and its employees." (Id. ¶¶ 81, 82.) This marketing was "improper" because the Participating Plans were to be self-funded plans, in which an employer "is responsible for all claims incurred in excess of the employer/employee contributions and stop-loss payments." (Id. ¶ 81.) In essence, the IF alleges that Defendants allowed the AEU Program to be marketed as a fully-insured plan that would pay all covered claims in exchange for the payment of monthly premiums. (Id.)

Sixth, Defendants "negligently failed to ensure that the plans in the AEU Program were properly underwritten." (Id. at 22.) "[A]s operated by Defendants, the AEU Program was to charge sufficient premiums from Participating Plans and to pool those premium contributions in order that the total would be sufficient to cover all medical claims for all Participating Plans." (Id. at ¶ 86.) Defendants did not charge sufficient premiums for multiple reasons, including that "[c]ompanies were underwritten as a group and then additional employees were accepted regardless of health status," and that Defendants allowed numerous one-person "groups" in the program. (Id. ¶¶ 85-87.)

The facts as set out above comprise a single negligence claim against all Defendants.. Defendants have moved to dismiss on grounds of lack of personal jurisdiction, improper venue, claim splitting, and failure to state a claim upon which relief can be granted. (Dkt. 19.) AEU Holdings and the individual defendants have submitted separate memoranda in support of the motion. (Dkts. 20, 21.) The IF submitted a response that included a declaration from Robert Moore, Jr., the President of Receivership Management, Inc. (Dkts. 33-35.) Defendants have moved to strike parts of the declaration. (Dkt. 41.)

ANALYSIS

I. Personal Jurisdiction

Because this is a diversity case personal jurisdiction is governed by the law of the forum state. Tamburo v. Dworkin, 601 F.3d 693, 700 (7th Cir. 2010); ...