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FAIR CARE FOUNDATION v. DEPT. OF INS.

August 27, 1998

FAIR CARE FOUNDATION, A.G. NEWMYER, III, J. ROBERT HUNTER, STUART MCFARLAND, TIMOTHY J.H. DELANEY, SUSAN CULLMAN, AND JOSEPH MELROD, PETITIONERS/APPELLANTS,
V.
DISTRICT OF COLUMBIA DEPARTMENT OF INSURANCE AND SECURITIES REGULATION, RESPONDENT, AND GROUP HOSPITALIZATION AND MEDICAL SERVICES, INC., ET AL., INTERVENORS/APPELLEES.



APPEAL FROM THE SUPERIOR COURT, RICHARD A. LEVIE, J. [716 A2d Page 989]

Before Farrell and Reid, Associate Judges, and Gallagher, Senior Judge.

The opinion of the court was delivered by: Gallagher, Senior Judge:

The petition before us seeks review of a decision and order issued by respondent District of Columbia Department of Insurance and Securities Regulation ("the DISR" or "Agency") approving a proposed business combination agreement between Group Hospitalization and Medical Services, Inc. ("GHMSI") and Blue Cross and Blue Shield of Maryland ("BCBSMD"). We also review a clarifying and interpreting letter, which we treat as a supplemental order, issued under exceptional circumstances by the DISR after entry of the original order.

Before us on appeal is also the dismissal of a Superior Court action which sought relief substantially the same as that forming the basis of the petition for review.

Petitioners *fn1 contend that (1) the DISR violated statutorily mandated hearing procedures by denying petitioners the right to live cross-examination of witnesses; (2) the DISR incorrectly relied on the District of Columbia Hospital and Medical Services Corporation Regulatory Act to the detriment of petitioners; (3) the decision was arbitrary and capricious and an abuse of discretion because the DISR failed to consider issues related to the charitable nature of GHMSI and executive officer integrity; and (4) the DISR prejudiced petitioners by substantively altering the decision and order in a subsequent letter issued after impermissible ex parte contacts with GHMSI and BCBSMD.

In the appeal from the Superior Court judgment, appellants argue that (1) this court's exclusive jurisdiction to review administrative actions does not eliminate the trial court's jurisdiction over common law claims; (2) appellants had standing to pursue claims against GHMSI for the violation of fiduciary duties; (3) appellants have standing to pursue derivative and quasi-derivative claims against GHMSI; (4) the trial court erred in determining that appellants' claim for civil conspiracy should be dismissed for lack of alleged harm; and (5) the trial court erred by considering facts outside the record in ruling on appellees' motion to dismiss.

In relation to the administrative petition for review, we affirm the DISR's decision and order of December 23, 1997. At the same time, however, we vacate the DISR's clarification and interpretation letter of January 16, 1998, which we treat as a supplemental order, concluding that the modifications made in that order were issued without proper notice and opportunity for petitioners to be heard. In relation to the appeal from the Superior Court, we affirm the trial court's dismissal of appellants' complaint.

I. Facts

The material and undisputed facts are as follows: Group Hospitalization, Inc. ("GHI") was a non-profit, charitable corporation established by federal charter in 1939 pursuant to an Act of Congress in order to provide hospital services to residents of the District of Columbia. *fn2 In 1984, GHI merged with Medical Services of the District of Columbia to form appellee GHMSI, and Congress [716 A2d Page 990]

amended the federal charter to permit GHMSI to arrange for the provision of medical services. *fn3 In 1992, Congress again amended GHMSI's charter to provide that it would be regulated by the District of Columbia Insurance Administration, now the DISR. *fn3

GHMSI is the Blue Cross and Blue Shield licensee for the District of Columbia, Northern Virginia and Prince George's and Montgomery Counties in Maryland. BCBSMD is the Blue Cross and Blue Shield licensee for the remainder of the State of Maryland, and is regulated as a non-profit health service plan by the Maryland Insurance Administration.

On March 27, 1997, GHMSI and BCBSMD entered into a Business Combination Agreement. The agreement proposed the creation of an upstream non-profit Maryland holding company, now called CareFirst, that would be the sole voting member of GHMSI and BCBSMD. GHMSI and BCBSMD would continue to operate within their existing service areas and under their respective regulatory oversight. The combination would allow the two companies to collaborate at the business operations level without altering their corporate existences. The agreement proposed an eighteen member board of directors for CareFirst, with two-thirds representation for BCBSMD and one-third representation for GHMSI, roughly proportionate to the relative size of the two entities. The purpose of the agreement was to establish a more efficient and competitive non-profit health service plan. Specifically, the intent was to enhance the financial posture of the two companies, to maintain local control, to take advantage of the resources of the two companies, to gain efficiencies of scale and to enhance the ability of the two companies to offer health services and products to policyholders.

The two companies also drafted an Intercompany Agreement that would govern transfers of assets and services between GHMSI and BCBSMD. The agreement established four categories of transfers of assets: (1) to meet statutory or regulatory capital reserve requirements; (2) to satisfy member claims; (3) to satisfy other legally enforceable obligations, such as judgments, creditor demands and surplus notes; and (4) discretionary transfers. For all four categories of transfers of assets, GHMSI and BCBSMD would not be required to make a transfer to the extent that the transfer would cause reserves to fall below required levels or would cause a violation of any specific legal prohibitions. There were no other conditions placed on the first three categories of transfers, and the transfers could be made without any agency or board approval. The fourth category, discretionary transfers, required increasingly stringent approvals as the size of the asset transfer, or annual aggregate total of transfers, increased.

On February 6, 1997, GHMSI and BCBSMD jointly filed with the DISR a Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer. The DISR then proceeded to exercise its jurisdiction to approve or disapprove the proposed transaction pursuant to the District of Columbia Holding Company Systems Act of 1993, D.C.Code §§ 35-3701 to -3728 (1997) ("HCA"), and the District of Columbia Administrative Procedure Act, D.C.Code §§ 1-1501 to -1542 (1997). *fn4 While the DISR proceedings were pending, Congress enacted legislation that amended GHMSI's charter to allow GHMSI to have one class of members. *fn4 The amended charter permitted GHMSI to have non-profit corporate members, such as CareFirst.

The DISR conducted an extensive fact finding process in order to determine whether to approve the proposed transaction. The Agency held meetings with GHMSI and BCBSMD, obtained voluminous documentation regarding the financial and operational [716 A2d Page 991]

aspects of the transaction, consulted interested parties and outside experts, such as financial consultant Deloitte & Touche, and coordinated efforts with its Maryland and Virginia counterparts and the Office of Corporation Counsel. The Agency also held two sets of two-day hearings at which testimony was presented by GHMSI, their financial consultant, Goldman, Sachs & Co., the Agency's financial consultant, Deloitte & Touche, members of the public and other interested persons, including petitioners. The Agency also participated in the hearings held by the Maryland Insurance Administration, where testimony was adduced from BCBSMD and their financial consultant, Bear, Stearns & Co., and also from the Maryland Insurance Administration's financial consultant, KPMG Peat Marwick, and members of the public.

On December 23, 1997, the DISR issued a decision and order approving the proposed business combination. The decision determined that the proposed transaction would not convert GHMSI to a for-profit corporation, that the transaction would not pose a risk to GHMSI's charitable assets and that sufficient regulatory structures were in place for the Agency to continuously monitor the situation. The Agency declined to address, as not ripe, the question of whether GHMSI is a charitable institution with charitable set-aside obligations. The decision then analyzed the transaction in light of the factors set out in D.C.Code § 35-3703(g)(1), and determined that the transaction should be approved. *fn5 The order, however, imposed twenty-seven conditions on the merger which were designed, in part, to ensure that GHMSI's assets would be adequately protected.

After the decision and order was issued, GHMSI and BCBSMD approached the DISR with concerns and questions, *fn6 and on January 16, 1998, the Interim Commissioner of the DISR issued a letter purporting to clarify and interpret the order in some respects. It is conceded by the Agency that the clarifying letter of the Agency was engendered by the discussions between GHMSI, BCBSMD and the DISR, which took place without notice to petitioners and without their participation. On January 22, 1998, petitioners filed this petition for review of the DISR decision and the subsequent amendments by way of the letter of interpretation and clarification.

One day later, appellants filed a separate suit in the Superior Court against GHMSI and sixteen of its officers, employees and trustees. The complaint charged a breach of fiduciary duties in connection with the proposed transaction and in connection with actions taken by appellees, such as the improper payment of taxes. In a derivative and quasi-derivative capacity, the complaint sought monetary damages to compensate GHMSI for the breach of fiduciary duties alleged, and it contained a count of civil conspiracy. Appellants also sought punitive, declaratory and injunctive relief to prevent the consummation of the business combination. Appellees filed a motion to dismiss for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. Super. Ct. Civ. R. 12(b)(1) & (6) (1997). On February 17, 1998, the trial court granted appellees' motion to dismiss the complaint. The trial court concluded that it did not have jurisdiction to hear claims that overlapped with the petition for review then pending in this court because this court retains exclusive appellate jurisdiction to review [716 A2d Page 992]

agency actions under the District of Columbia Administrative Procedure Act.

The trial court went on, however, to determine that even if it could exercise jurisdiction over the claims, appellants lacked standing to bring their breach of fiduciary duty and derivative claims, including their claims for declaratory and injunctive relief. The trial court reasoned that appellants lacked standing because they were not properly situated to enforce a charitable trust and they had not alleged a sufficient injury-in-fact. Also, the trial court concluded that appellants, being non-members of GHMSI, a non-profit corporation, could not bring derivative actions on behalf of the corporation. Finally, the trial court determined that appellants could not bring a claim for civil conspiracy because they had not alleged any injury to themselves, and that appellants' allegations of ...


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