Court Opinion

ID: 816275
Source: CourtListenerOpinion
Date Created: 2013-01-29 20:00:12.704042+00
Date Added: 2024-06-11T15:09:31.895141
License: Public Domain

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                               UNPUBLISHED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Affirmed by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.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.”

                                           14