Mandelkow v Child & Family Servs. of Erie County

[*1] Mandelkow v Child & Family Servs. of Erie County 2006 NY Slip Op 52655(U) [21 Misc 3d 1119(A)] Decided on November 27, 2006 Supreme Court, Erie County Fahey, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 27, 2006
Supreme Court, Erie County

Thomas Mandelkow, JACK K. MANGANELLO AND CHARLENE McDONALD, AS TRUSTEES OF THE UPSTATE HUMAN SERVICES SELF- INSURANCE TRUST FUND A/K/A THE HUMAN SERVICES SELF-INSURANCE TRUST, Plaintiffs

against

Child and Family Services of Erie County, Defendant



2004/9727



CHERYL GREEN, ESQ.

LUSTIG & BROWN, LLP

Attorneys for Plaintiffs

STEPHEN W. KELKENBERG, ESQ.

HODGSON, RUSS, LLP

Attorneys for Defendants

Eugene M. Fahey, J.

Plaintiffs Thomas Mandelkow, Jack K. Manganello and Charlene McDonald, as Trustees of the Upstate Human Services Self-Insurance Trust Fund, a/k/a The Self-Insurance Trust (hereinafter "Trustees" and "the Trust") bring this action for breach of contract, unjust enrichment and attorneys' fees against Defendant Child and Family Services of Erie County, a former participant in, and member of, the Trust (hereinafter "Services").

Now, Defendant Services moves for summary judgment dismissing the complaint.

Plaintiffs Trustees likewise move for summary judgment.

Defendant Services' motion is granted.

Plaintiffs Trustees' motion is denied.

Plaintiffs Trustees is a group self-insurance provider formed pursuant to Section 50 3-a of the Workers' Compensation Law in October, 1995, and designed to provide various human service agencies in New York with workers' compensation coverage and benefits. A copy of the Agreement [*2]and Declaration of the Trust is included in Defendant Services' Notice of Motion as Exhibit "R".

Pursuant to Agreement dated February 1st, 1997 (see Exhibit "S", Defendant Services Notice of Motion), the entity FCS Administrators (hereinafter "FCS") assumed the duties of day-to-day administration of the Trust.

Defendant Services, a human services agency in Erie County and an employer of approximately 450 people in 1999, joined the Trust in November of that year as a participating member to provide contributions to the Trust fund and to receive benefits for its employees.

Prior to joining the Trust, Defendant Services had been insured by American International Group [AIG].

Plaintiff Trustee, Jack K. Manganello, has testified that the applicant Defendant Services would have been required to produce a copy of the declaration page of its current workers' compensation insurance policy, five years of loss history, the last three years of audited financial statements, and the payroll classifications that the member currently had with its insurer, with FCS coordinating the gathering of all the information, whereafter the Trust would conduct an underwriting analysis and a financial analysis (Exhibit "H" of Defendant Services Motion).

The member would then be billed monthly based on payroll, with a form going out from FCS that has payroll classifications on it, to be filled out by the member [Manganello EBT, page 54]. The member was also required to undergo a year-end audit, which were self-assessments by the individual member [pages 94-97].

Such a procedure is consistent with Article IV Section 2(c) of the Trust Agreement, dealing with General Powers of the Trustees and contribution rates by members which reads:

"(The Trustees are hereby empowered) . . .(i)n so far as the Workers' Compensation covered is concerned, to establish a contribution rate or rates for each Employer which shall be sufficient to pay all of the operating expenses of the Fund and all of the operating obligations due under the Workers' Compensation Law. Such contribution rate shall be reviewed annually or more frequently at the option of the Trustees. Use of an experience modification factor shall be employed to achieve an equitable allocation of premium based on the frequency and severity of losses incurred by each member. Actual factors to be used in the experience modification formula are determined by the Trustees in conjunction with any contribution rate review."

The Court notes that at no time did either FCS or the Trust indicate that the nine employee classifications used by Defendant Services in its applications, based on the original declarations pages and the various monthly reports, were improper. Nor do Plaintiffs Trustees dispute that FCS was intimately involved with Services in initially preparing those forms.

There are two other Sections in Article IV of the Trust Agreement dealing with employee contributions:

"Section 10. Power to Assess Employers.

In the event the unreserved assets of the Trust are insufficient to meet the obligations of the Trust, the Trustees shall forthwith prepare and implement a plan to require an additional payment by the Employers in the form of an assessment which shall be sufficient to make up any deficiency as determined by the Trustees at that time. The formula and method of assessment shall be that described in Article IV, Section 11, below. Each employer who joins the Trust hereby agrees to pay such assessments to the Fund on demand regardless of whether or not they are a member of the Trust [*3]at the time the assessment is made, per Article IV, Section 11, below.

Section 11. Assessment Formula and Method.

Any assessment declared by the Trustees as necessary to assure the Trust Funds ability to meet its obligations shall be allocated among the employers as follows.

a)Assessments are determined on a fiscal year basis.

b)All employers who were members of the Trust during that fiscal year for which the assessment is being made are liable for their pro rata share of the assessment whether or not they remain members of the Trust at the time the assessment is levied.

c)The amount assessed shall be distributed among the employers in the same ratio as each employer's premium contribution to the Trust for the fiscal year during which the assessment is being made bears to the entire premium income of the Trust for that fiscal year."

The Court is persuaded that it is Article IV, Section 2(c ) that empowers the Trustees to establish a contribution rate subject to annual or more frequent review.

Conversely, it is Article IV, Sections 10 and 11, that provide for additional payments in the form of an equitably levied assessment, but then only in the most dire circumstances, where there are insufficient unreserved Trust assets to meet Trust obligations.

There is no other provision in the Agreement providing for "additional", i.e, "retroactive," contributions by members.

The First Addendum to the Agreement, that of October 16, 1995, does provide two additional definitions to Article I for "Contributions" and "Assessment".

According to Section II, "Contribution" is to mean "each member's respective share of the operating expenses of the Fund and all of the operating obligations . . . in accordance with Section 2(c) of Article IV . . .".

And as to Section 12, "Assessment" is to mean "the additional payment which may be required to the members, from time to time, to make up any deficiency in the unreserved assets of the trust."

The Court finds that there is nothing in the two definitions to disturb the Court's analysis of a breakdown of two different sorts of payments permissible under the Agreement:

(1)Section 2, "Contributions" to be established to meet operating expenses and operations; and

(2)Section 10, "Assessments" to make up deficiencies in the event the unreserved assets of the Trust prove insufficient.

By letter dated September 16, 2002, Kathleen Camp, President of FCS, wrote to Tracy Borelli of Defendant Services:

"Enclosed please find your Agency's payroll reports for July and August 2002. These reports [*4]reflect the new manual rates in effect for your Agency as a result of the plan announced by the Trustees in their letter of September 6.

The Trustees explained that part of the premium adjustment plan called for certain members to be charged additional premium if their lifetime cost of coverage'(claims and administrative expenses) exceeded the lifetime premium contributions paid to the Trust. Actuarial recommendations are also being considered when determining the additional premium to be charged. This additional premium payment will be accomplished by an adjustment to the members' experience modification factor established as of January 1, 2002. This additional adjustment will more closely align premium contributions collected with the total cost of providing coverage to these members. This adjustment is limited to a 25% annual increase." (emphasis in original).

The letter went on to state that a review of Defendant Services' experience with the Trust since November, 1999 indicated that its claims administrative expenses were some $604,590 dollars while its premium contributions were some $263,855, that the review had also calculated the impact of the 2002 rate adjustment on Services 2001 reported payrolls by employee class code and that they would receive a separate invoice for the additional premium for the first six months of 2002, a bill which turned out to be some $27,824.23.

The above review appears to have been part of a comprehensive revamping of Trust procedures prompted by various amendments to the regulations of the Workers' Compensation Board relating to group self-insurance 12 NYCRR, Part 317, although Plaintiffs Trustees do not particularize what specific provision required "that all group self-insurers engage in an independent audit process to confirm accurate payroll reporting, as well as accurate classification code assignments for each participating member (see Cheryl Green Affidavit in Support of Motion, paragraph 18)."[FN1]

The Court has reviewed Section 12 NYCRR 317.7 (Contribution rates) at subsection (a). That rule requires that "contribution rates not be inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of the group".

Plaintiffs Trustees also appear to have authorized a number of audits of a randomly selected number of its members in the latter portion of 2002 [Manganello EBT, page 97-99]. The Court is troubled by the potentially arbitrary quality of such a random selection.

These activities appear to have prompted Defendant Services to leave the Trust, an event which occurred at the end of June, 2003.

The audit of Defendant Services, which was completed in May, 2004, appears to have concluded that the classification codes first used by AIG prior to Services entering the Trust, and [*5]utilized by Services, the Trust and the Trust's agent FCS throughout Services' membership in the Trust, were incorrect. By letter dated May 24, 2004, the then-counsel for Plaintiffs Trustees submitted invoices for 11-12/1999, 2000, 2001, 2002 and 01-06/2003, a retroactive billing in the total amount of $164,975.00, and demanded payment [see Exhibit "G", Plaintiffs Trustees' Notice of Motion].

This lawsuit was commenced some four months later.

CONCLUSIONS OF LAW

The retroactive billing of May 24, 2004, reaching back to 1999, was not authorized by the terms of the contract between the Trust and Defendant Services.

Section 2(c), Article IV gave the Trustees the power to establish a contribution rate and to revise that rate annually or more frequently. The Section is completely silent concerning charging additional premiums for past periods after a recalculation of past rates.

The only address of a different method of charging is in Section 10, under circumstances where the unreserved Trust assets are insufficient to meet Trust obligations, which are not the circumstances described in Kathleen Camp's letter, which is clearly referring to a modified and retroactive contribution rate.

Without a specific reference to retroactivity in the Agreement, the Court can only return to the ordinary language interpretation of Section 2(c), that establishing a contribution rate ordinarily signifies a prospective calculation and simply does not allow for a retroactive billing.

There is no basis for Plaintiffs Trustee's claim.

Plaintiffs Trustee's motion for summary judgment is denied.

Defendant Services' motion for summary judgment dismissing the complaint is granted.

EUGENE M. FAHEY, J.S.C.

Dated:November 27, 2006 Footnotes

Footnote 1:Some of the flavor of the effect of the January, 2001 changes in the regulations can be sampled in the Trust newsletter of April, 2004, last page, Exhibit "D", Services' Notice of Motion. References to "charges unforeseen in their magnitude," "placing added financial pressure," "significantly restricted" asset definitions, etc., all appear to demonstrate a major stress upon the Trust.