Supreme Court
No. 2013

- 102

- Appeal. (PB 02

- 7016)

Heritage Healthcare Services, Inc., et al. :

v. : The Beacon Mutual Insurance Co., et al. :

NOTICE : This opinion is subject to formal revision before publication in the Rhode Island Reporter. Readers are requested to notify the Opinion Analyst, Supreme Court of Rhode Island, 250 Benefit Street, Providence, Rhode Island 02903, at Tel. 222

- 3258 of any typographical or other formal errors in order that c orrections may be made before the opinion is published.- 1

- Supreme Court
No. 2013

- 102

- Appeal. ( PB 02

- 7016 )

Heritage Healthcare Services, Inc. , et al. :

v. : The Beacon Mutual Insurance Co. , et al

. :

Pres ent: Sut tell, C.J., Goldberg, Flaherty, Rob i nson, and Indeglia, JJ.
O P I N I O N Justice Flaherty, for the Court
. W e are called upon to determine whether a dismissal pursuant to Rule 12(c) of the Superior Court Rules of Civil Procedure in favor of the state

chartered workers’ compensation insurance provider, The Beacon Mutual Insurance Company (Beacon), and against the plaintiffs , a certified class of approximately 14,000 Beacon policyholders , was properly granted. 1 In the proceedings below , a justice of the Superior Court found that the plaintiffs’ claims were derivative in nature and , as a consequence, were subject to

1 The named plaintiffs include Heritage Healthcare Services, Inc. (Heritage), Vito’s Express, Inc., Swimming Pool Specialist, Inc., J. Broomfield and Sons, Inc., Sterling Investigative Services, Inc., and Leonelli and Vicario, Ltd. In addition to the named plaintiffs, suit was filed on behalf of the following class of plaintiffs, “[a]ll Beacon policyho lders who held a Beacon Workers Compensation & Employer s Liability Policy ( ‘ the Policy ’ ) during the period from September 26, 2001 to March 22, 2006 and did n ot receive a consent

- to

- rate discount during that time.” On January 19, 2011, the Superior Court certified the class and appointed the named plaintiffs, excluding Heritage, to serve as the class representatives. See Heritage Healthcare Services, Inc. v. The Beacon Mutual Insurance Co. , No. PB

- 02

- 7016, 2011 WL 202299 at *10 (R.I. Super. Ct. Jan. 19, 2011).- 2

- t he procedural requirement s set forth in G.L. 1956 § 7

- 1.2

- 711 (c) 2 and Rule 23.1 of the Superior
Court Rules of Civil Procedure. 3 Ther e was no dispute with t he hearing justice ’s f inding that the plaintiffs had failed to file suit in accordance with § 7

- 1.2

- 711(c) and Rule 23.1 . A s a result, he dismissed the complaint and entered judgment on behalf of Beacon

. On appeal, the plaintiffs
insist that their claims met the requirements of a direct, and not a derivati ve , action

. Accordingly, the plaintiffs argue that the Superior Court erred in dismissing their complaint. In contrast, Beacon argues that dismissal of the complaint was proper because the plaintiffs’ claims are classically deriv ative in nature and thus subject to the procedural prerequisites of such cases , prerequisites that were not satisfied before suit was commence d

. For the reasons set forth in thi s opinion, we affirm the judgment of the Superior Court.
I
Facts and Travel
Beacon was creat ed as a legislative response to a growing workers’ compensation
insurance crisis in the state. 4 P.L. 2003, ch. 410, § 3(f). The General Assembly’s stated purpose
for enacting the legislation that creat ed Beacon was “to ensure that all employers in the state of Rhode Island have the opportunity to obtain workers’ compensation insurance at the lowest

2 General Laws 1956 § 7

- 1.2

- 711(c) (1) provides in pertinent part that a corpora te shareholder may not initiate suit against the corporation until “[a] written demand ha[s] been made upon the corporation to take suitable action.” 3 Rule 23.1 of the Superior Court Rules of Civil Procedure provides in pertinent part that “[t]he complaint shall also allege with partic ularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority * * * and the reasons for the plaintiff ’ s failure to obtain the action or for not making the effort.” 4 Public Laws 200 3, ch. 410, §§ 23 and 24 repealed G.L. 1956 chapter 7.2 of title 27 while expressly recognizing and intending that “there shall be full continuity between chapter 27

- 7.2 of the general laws and passage of this act.” P.L. 2003, ch. 410, § 23

.- 3

- possible price.” 5 Id. at § 3(a). Accordingly , Beacon was established to act as the “workers’ compensation insurance carrier of last resort.” Id.
Beacon ’s char ter provides that t he company is to be “ operated as a domestic mutual insurance company

. ” 6 P.L. 2003, ch. 410, § 3(b). The charter further specifi es that the “management and control of [Beacon] is vested solely in the board.” Id. at § 5. As such,
Beacon’s board has been granted the authority to exercise certain enumerated powers. Id. at § 10. Specifically, Beacon has t he discretion to “[d]eclare dividends to its policyholders when there is an excess of assets over liabilities, and minimum surplus requirements” have been
attained

. Id. at § 10(6). Further , Beacon’s charter say s that Beacon “may” declar e dividends , evide ncing that this power is discretionary. Id. In addition, Beacon and “any workers’ compensation insurance policyholder may mutually consent to modify the rates for that policyholder’s workers’ compensation insurance policy, provided [Beacon] files notice of the modification with the director of the department of business regulation.” Id. at § 11(d)(2). Finally, Beacon’s charter provides in part that “[a]ll premiums and other money paid to [Beacon] * * * are the sole property of [Beacon] and shall be used exclusively for the operation and obligations of [Beacon].” Id. at § 14. With Beacon’s statutory fram ework as a background, we turn our attention to the allegations set forth in plaintiffs’ complaint. In December 2002, Heritage Healthcare Servi ces, Inc. (Heritage) initiated litigation against Beacon , seeking to recover under the theories of breach of contract and breach of fiduciary duties. Since that time, this case has traveled what this Court has previously described

5 We have previously determined that the statutory phrase “lowest possible price” does not create a private cause of action. Heritage Healthcare Services, Inc. v. Marques , 14 A.3d 932, 938 (R.I. 2011). 6 A mutual insurance company “ issues no capital stock a nd is cooperatively owned by its policyholders , who are both the insurers and the insured s
. ” 3 Steven Plitt et al., Couch on Insurance 3d § 39:15 at 39

- 26 (2011).- 4

- as a “serpentine journey

. ” Heritage Healthcare Services, Inc. v. Marques , 14 A.3d 932, 933 (R.I. 2011) . D uring the somewhat Methuse lah

- like life of this case, numerous motions to amend have been granted that have altered the nature of plaintiffs’ complaint as well as the compos ition of the parties thereto. 7 The plaintiffs allege that , from September 2001 to March 2006, Beacon “engaged in a systematic scheme to divert over $101 million to a small percent of its policyholders rather than distributing it equitably to all its pol icyholders.” The p laintiffs contend that to advance this scheme, Beacon ceas ed formally declaring and distributing annual dividends from 2002 until
2004. The plaintiffs further cont e nd that Beacon “charg[ed] inequitable and unauthorized lower premiums,” referred to as consent

- to

- rate discounts, to certain of its largest policyholders , instead
of filing lower rates for all its policyholders. The plaintiffs maintained that the consent

- to

- rate
discounts were “unauthorized and illegal ” because Beacon lacked the authority to consent to a
lower rate for certain of its policyholders to the exclusion of the other policyholders

. As a result, plaintiffs in essence conclude that because of the co nsent

- to

- rate discounts, they were denied
money that should have been equitably distributed to all policyholders as dividends.
In a ddition , plaintiffs allege that Beacon breached its fiduciary and implied duties of good faith and fair dealing because t he company was “systematically operated in a corrupt, improper
and unlawful manner.” Similarly, plaintiffs allege that Beacon “ breached its duty to treat all its policyholders fairly and equally by distributing significant profits (in the form of lower net premiums ) to [its largest p]olicyholders at the expense of all its other polic yholders. ” Moreov er,

7 In September 2008, a justice of the Superior Court grante d plaintiffs’ motion to file a ninth amended class action c omplaint . It is well established that t he filing of an amended complaint supersedes the original complaint and becomes the operative pleading for purposes of Rule 12 of the Superior Court Rules of Civil Procedure. See Hall v. Insurance Co. of North America , 666 A.2d 805, 806 (R.I. 1995). Accordingly, we shall confine our review to plaintiffs’ ninth amended class action c omplaint

.- 5

- plaintiffs contend that Beacon engaged in “favoritism and bias in pricing ” as well as

“ inappropriate and lavish spending.” Finally, plaintiffs allege that “Beacon was not operated soundly and with customary prudence, appropriate checks and balances, accountability or transparency.” As a result, plaintiffs filed suit seeking “an accounting, restitution and/or damages, and an injunction prohibiting [Beacon] f rom engaging in [similar conduct] in the
future

. ” On February 17, 2012, Beacon filed a motion for judgment on the pleadings , arguing that plaintiffs’ claims were derivative and therefore subject to the procedural prerequisites contained
in § 7

- 1.2

- 711(c) and Rule 23.1

. 8 The plaintiffs objected to Beacon’s motion. After hearing argument on the motion and objection thereto , o n June 11, 2012, the Superior Court issued a
written decision , wherein it appli ed the test articulated in Tooley v. Donaldson, Lufkin , & Jenrette, Inc. , 845 A.2d 1031, 1039 (Del. 2004), and determine d that plaintiffs’ claims were derivative, not direct, in nature. The Superior Court reached this conclusion after making two findings: ( 1) it was Beacon that primarily suffered the harms alleged by plaintiffs ; and ( 2)
Beacon would receive the benefit of any recovery in this matter

. B e cause the hearing justice
determined that plaintiffs’ claims were derivative in nature , he concluded that they were governed by § 7

- 1.2

- 711(c) and Rule 23.1

. The hearing justice then found that plaintiffs had
fail ed to satisfy the procedural prerequisite s set forth in the statute and the rule, and he dismissed the complaint. O n December 17, 2012, after the hearing justice denied plaintiffs’ motion to

8 Rule 12(c) of the Superior Court Rule s of Civil Procedure provides:

“ A fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings. If on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treate d as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56. ”- 6

- reconsi der, judgment entered , granting Beacon’s motion for judgment on the pleadings and dismissing plaintiffs’ complaint in its entirety. The plaintiffs filed a timely notice of appeal to
this Court.
II
Standard of Review “A Rule 12(c) motion for judgment on the pleadings provides a trial court with the means of disposing of a case early in the litigation process when the material facts are not in dispute after the pleadings have been closed and only questions of law remain to be decided.” Haley v.
Town of Lincoln , 611 A.2d 845, 847 (R.I. 1992) ( citing 5A Wright & Miller, Federal Practice
and Procedure , Civil 2d § 1367 at 509

- 10 (1990) ). “ A Rule 12(c) motion is tantamount to a Rule 12(b) (6) motion, and the same test is app licable to both , that is, is it clearly apparent that the plaintiff can prove no set of facts to support the complaint

. ” Collins v. Fairways Condominiums
Association , 592 A.2d 147, 148 (R.I. 1991)

. T he standard to be applied to a Rule 12(c) motion is
“re strictive,” particularly when “the questions of law applicable to the controversy are fact
intensive.” Haley , 611 A.2d at 847, 8 48. The court must accep t t hat “[t]he factual allegations contained in the nonmovant’s pleadings are admitted as true for purp oses of the motion,” and

“ [ a ] ll proper inferences * * * are to be drawn in favor of the nonmovant.” Id. at 847. Thus, to prevail on a Rule 12(c) judgment on the pleadings, the defendant must “demonstrate to a certainty that the plaintiff will not be enti tled to relief under any set of facts that might be proved
at trial.” Haley , 611 A.2d at 847.- 7

- III
Discussion On appeal, plaintiffs argue that the hearing justice erred w hen he held that their claims

were derivative in nature and when he dismissed their complaint for not satisfy ing the procedural requirements associated with a derivative action

. To the contrary , plaintiffs contend that their
claims are direct , because governing law entitle s them to an equitable distribution of the excess surplus of the company an d because they suffered disproportionate harm as compared to other policyholders

. 9 Further, plaintiffs argue that Beacon’s failure to formally declare a d ividend
does not transform the nature of their claims from direct to derivative. Finally, plaintiffs insist
that the hearing justice erred in holding that Beacon was authorized to distribute consent

- to

- rate
discounts to its policyholders

. In contrast, Beacon argues that the hearing justice properly ruled that p laintiff’s claims were derivative and therefore subject to the statutory procedural

9 In addition, plaintiffs argue that their claims are direct be cause Beacon’s board abdicated its responsibilities ; however, a review of the record reveals that plaintiffs failed to timely raise this argument during the lower

- court proceedings. Pursuant to this Court’s time

- honored raise

- or
waive rule, issues not pro perly presented before the trial court may not be raised for the first time on appeal. Federal National Mortgage Association v. Malinou , 101 A.3d 860, 865 (R.I. 2014) (citing Peloquin v. Haven Health Center of Greenville, LLC , 61 A.3d 419, 430 (R.I. 2013) ). The plaintiffs raised their abdication argument for the first time in the ir moti on to reconsider. This Court has previously stated that arguments raised for the first time in a motion to reconsider are not timely, and should not be considered, because it would permit “two bites at the apple.” Flanagan v. Blair , 882 A.2d 569, 574 (R.I. 2005). However, and even in the face of plaintiffs’ waiver, the cases cited in support of the ir abdication argument are readily distinguishable from the situation before the C ourt at this time . In Parnes v. Ball y Entertainment Corp. , 722 A.2d 1243, 1244 (Del. 1999), the court was presented with a corporate stockholder’s challenge to the fairness of a corporate merger, a claim that is clearly dis tinguishable from this case. Further, in Grimes v. Donald , 673 A.2d 1207, 1213 (Del. 1996), the court relied primarily upon the plaintiff’s desired remedy, a declaration that certain employment agreements were void, to find the claims were direct. Here, plaintiffs do not seek a declaration; rather, they seek “an accounting, restitution and/or damages, and an injunction prohibiting [Beacon] from engaging in [similar conduct] in the future.”- 8

- prerequisite s because it was Beacon that suffered the h arm and because the remedy , therefore, belongs to Beacon alone, and not to any individual policyholder

. T he parties agree that the test articulated by the Supreme Court of Delaware in Tooley , 845 A.2d at 1033 , should be applied to this case to determine whether pl aintiffs’ claims are
derivative or direct in nature. 10 The releva nt inquiry , as enunciated in Tooley , is two

- fold: “ (1) who suffered the alleged harm ( [Beacon] or the suing [policyholders], individually); and (2) who would receive the benefit of any recovery or other remedy ( [Beacon] or the [policyholders], individually)? ” Id. at 1033

. If Beacon suffered the harm and would be entitled to receive the requested relief, the claim is derivative. See i d

. at 1039 ; see also Halliwell Associates, Inc. v. C.E. Maguire Services, Inc. , 586 A.2d 530, 533 (R.I. 1991) ( explaining that a claim seeki ng “ to redress a wrong done to the corporation, or if the claim arises solely as a consequence of a corporate wrong, ” is derivative in nature ). Conversely , the claim is direct if plaintiffs can demonstrate that they have suffered harm “independent of any alleged injury to [Beacon] ” that would entitle them to an individualized recovery. Tooley , 845 A.2d at 1039

. “Such a claim is distinct from an injury caused to [Beacon] alone * * * [because] the recovery or other relief flows directly to [plaintiffs], no t to [Beacon].” Id. at 1036. At the outset, plaintiffs argue that their claims should be determined to be direct for t wo reasons. Fir st, plaintiffs argue that governing law e ntitle s them to an equitable distribution of Beacon’s excess surplus ; therefore, they say, their claims are direct

. However, plaintiffs’ argument is at odds with their complaint. T he gravamen of plaintiffs’ complaint is that Beacon engaged in a scheme whereby it ceased formally declaring dividends in favor of all policyhol ders

10 See Bove v. Community Hotel Corp. of Newport, Rhode Island , 105 R.I. 36, 42, 249 A.2d 89, 93 (1969) (explaining that Delaware case law is the leading authority in the field of corporate law).- 9

- so that it could gi ve consent

- to

- rate discounts to its largest policyholders. The plaintiffs contend
that , through th is artifice , Beacon was able to funnel $101 million in excess surplus to its largest policyholders rather than equitably distributing it to all policyholders via a dividend . However, by distributing the $101 million in the form of consent

- to

- rate discounts, those assets were entirely diverted from Beacon

. Therefore, Beacon never collect ed the $101 million because it
was distributed in the form of lower premiums charg ed to its largest policyholders; that money never became excess surplus that could have been distributed equitably. Put simply , because the $101 million was never collected by Beacon , it never ripened into an excess surplu s that could be subject to a distribution

. It is true that , in a mutual insurance company, “the premium exacted is necessarily greater than the expected cost of the insurance, as the redundancy in the premium furnishes the guaranty fund out of which extraordinary losses may be met * * * .” Penn Mutual Life Insurance
Co. v. Lederer , 252 U.S. 523, 525 (1920). Generally, “[i]t is of the essence of mutual insurance that the excess in the premium over the actual cost as later ascertained shall be returne d to the policy holder.” Id. However, in this case, pursuant to Beacon’s charter, the decision to return excess surplus was entirely discretion ary . P.L. 2003, ch. 410, § 10(6). Therefore, until the board declares an excess surplus, Beacon was under no d uty to issue dividends to all policyholders. Id.
In other words , even if the $ 101 million had been collected, that would not have necessarily entitle d plaintiffs to an equitable distribution of those funds because Beacon’s charter
i s clear that the boar d has the discretion, but is not required, to “[d]eclare dividends to its policyholders when there is an excess of assets over liabilities, and minimum surplus requirements” are satisfied. P.L. 2003, ch. 410, § 10(6). Thus, we are not persuaded by plaint iffs’ argument that they have a direct claim under governing law. Even viewing t he- 10

- allegations s e t forth in the complaint in the light most favorable to plaintiffs , it is our opinion that
it was Beacon, not the plaintiffs individually , which suffered the harm when $101 million in prospective premiums were diverted as consent

- to

- rate discounts. See Tooley , 845 A.2d at 1033. As a result, it “logically follow[s]” that Beacon, not plaintiffs, would benefit by any recovery.
Id. at 1036.
Second , plaintiffs argue that they suffered disproportionate harm as compared to other policyholders; therefore, their claims should be considered to be direct. To support this argument , plaintiffs rely upon Kramer v. Western Pacific Industries, Inc. , 546 A.2d 348 (Del.
198 8), and Gatz v. Ponsoldt , No. Civ. A. 174

- N, 2004 WL 3029868 (Del. Ch. Nov. 5, 2004).
H owever, we find these cases to be of no assistance to plaintiffs. In Kramer , 546 A.2d at 352, the plaintiffs challenged several corporate transactions tha t occurred sho rtly before a buy out merger. The plaintiffs argued that their claims were direct in nature because their respective portions of the proceeds from the merger had been reduced by the corporate transactions. Id. Nonetheless, t he court found that the plaint iffs’ claims were derivative , because the corporation, not the individual shareholders, had suffered the harm of decreased corporate value

. Id. at 352

- 53. Likewise, in Gatz , the plaintiffs filed what w a s styled as a direct action , challenging four
separ ate corporate transactions. Gatz , 2004 WL 3029868 at *6. The court found that three of the
claims were derivative, and the fourth , alleging that the board benefitted a specific class of stock over others, was indeed direct. Id. at *7

- 8. The court reaso ned that the fourth claim was direct because the overall value of the corporation was unaffected by the transaction, while a t the same
time a certain class of shareholders had been harmed. Id. at *8. This is distinguishable from the- 11

- present case because Beacon was clearly harmed when it did not collect $ 101 million in premiums that had been absorb ed as consent

- to

- rate discounts.
Next , plaintiffs argue that , notwithstanding the fact that Beacon never formally declared a dividend, their claims are direct because they seek to remedy an inequitable distribution of excess surplus. In support, plaintiffs rely upon Kimberly

- Clark Corp. v. Factory Mutual
Insurance Co. , 566 F.3d 541 , 547 (5th Cir. 2009), for the proposition that mutual insurance companie s are required to distribute their excess surplus to policyholders. In our opinion, that case does not buttress plaintiffs’ argument. T he court in that case wa s clear that policyholders
have an equitable right to a mutual insurance company’s surplus only when the company announces a surplus. Id. at 548. The court held that “when a distribution is declared, the company becomes liable to pay the policyholders because they collectively own any announced distribution from the surplus.” Id. at 549. Therefo re, policyholders are entitled to an equitable
distribution only when a declaration of surplus has been declared. Id. Here, plaintiffs concede that Beacon never declared a dividend or distribution. Instead, plaintiffs alleged that Beacon , in a surreptit ious maneuver, gave consent

- to

- rate discounts to select policyholders. However , because Beacon never declared a distribution or surplus, we conclude that plaintiffs had no entitlement to a distribution. Kimberly

- Clark , 566 F.3d at 549. Finally, plaintiffs insist that the hearing justice erred in holding that Beacon was
authorized to distribute consent

- to

- rate discounts to its policyholders. Instead, plaintiffs contend
that , consistent with a finding made by the Department of Business Re gulation, Beacon’s charter provide s only for consent

- to

- rate increases. However, even assuming that plaintiffs are correct
that , in the absence of authority to do so, Beacon provide d consent

- to

- rate discounts, that does
not transform their claims from der ivative to direct

. Indeed , it is our opinion that it would be- 12

- Beacon, not plaintiffs individually, that would suffer any harm occasioned by the inappropriate premium discounts because Beacon necessarily would have collected less money in premiums
than it should have collected . Therefore, b e cause Beacon suffered the harm, it i s Beacon that
would be entitled to any recovery. Accordingly, under the tenets set forth in Tooley , plaintiffs’
claim s are derivative in nature.
Because we have determined that the plaintiffs’ claims are derivative in nature, it necessarily follows that they were required to comply with the procedural requirements set forth in § 7

- 1.2

- 711(c) and Rule 23.1 before the y commence d this suit. Section 7

- 1.2

- 711(c) (1) provides , in pertine nt part , that a corporate shareholder may not initiate suit against the corporation until “[a] written demand ha[s] been made upon the corporation to take suitable
action.” Further, Rule 23.1 requires that “[t]he complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reason s for the plaintiff ’ s failure to obtain the action or for not making the effort.” Failure to satisfy these prerequisites mandates the dismissal of a derivative action. See Giuliano v. Pastina , 793 A.2d 1035, 1037 (R.I. 2002) ; Hendrick v. Hendrick , 755 A. 2d 784, 793

- 94 (R.I. 2000). Here, a review
of the record reveals that the plaintiffs made no such demand on Beacon before they initiated this
action . Additionally, the plaintiffs’ complaint is silent as to what efforts they took to obtain their
desired r emedy before they fil ed suit. Based upon these facts, the Superior Court’s dismissal for noncompliance with § 7

- 1.2

- 711(c) and Rule 23.1 was proper.- 13

- IV
Conclusion For the foregoing reasons, we affirm the judgment of the Superior Court, to which the papers in the case may be remanded.

### R HODE 

### I SLAND 

### S UPREME 

### C OURT 

### C LERK 

### ’ S 

### O FFICE


### Clerk’s Office Order/O pinion Cover Sheet

TITLE OF CASE: Heritage Healthcare Services, Inc., et al. v. The Beacon Mutual Insurance Co., et al.
CASE NO : No. 20 1 3

- 102

- Appeal

. ( PB 02

- 7016 )
COURT: Supreme Court
DATE OPINION FILED: February 6, 2015
JUSTICES: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia , JJ.
WRITTEN BY: Associate Justice Francis X. Flaherty
SOURCE OF APPEAL: Providence County Superior Court
JUDGE FROM LOWER COURT : Associate Justice Michael A. Silverstein
ATTORNEYS ON APPEAL :
For Plaintiff s : Jason B. Adkins, Pro Hac Vi ce
For Defendant s : Jordan D. Hershman, Pro Hac Vice