Court Opinion

ID: 814514
Source: CourtListenerOpinion
Date Created: 2012-12-28 20:18:29+00
Date Added: 2024-06-11T18:00:52.219192
License: Public Domain

UNPUBLISHED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

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Affirmed by unpublished opinion.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,   PLLP,   Bridgeport,  West
Virginia, for Appellees.    ON BRIEF: Jeffrey V. Mehalic, LAW
OFFICES OF JEFFREY W. 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Unpublished opinions are not binding precedent in this circuit.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

                                           9
a 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), 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 controlled before the merger.                             Here, by contrast, there

are     no     allegations          that       Solacium           and     RMS    were        commonly

                                                    12
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 that were so, a large company’s purchase of a

small    one       on    December        31    would       render     the    small       company’s

                                                    13
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. 5

                                      IV.

            For    the   reasons    set       forth,   the     judgment     of   the

district court is

                                                                           AFFIRMED.

     5
       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