United States District Court, District of Columbia
D.C. HEALTHCARE SYSTEMS, INC., et al., Plaintiffs,
DISTRICT OF COLUMBIA, et al, Defendants.
MEMORANDUM OPINION [DKTS. ##53, 54, 55, 56,
RICHARD J. LEON UNITED STATES DISTRICT JUDGE
over a decade, D.C. Chartered Health Plan, Inc.
("Chartered"), contracted with the District of
Columbia to provide healthcare services to low-income
residents of the District. Then, in 2012, the District became
concerned about the financial health of Chartered and
obtained a court order from the Superior Court of the
District of Columbia placing the company into rehabilitation.
During the rehabilitation proceedings that followed, the
Superior Court entered orders approving an asset purchase
agreement and reorganization plan for Chartered, and
approving a settlement agreement between Chartered and the
District of Columbia resolving claims that the District
underpaid Chartered for certain services. Now, D.C.
Healthcare Systems, Inc. ("DCHSI"), the sole
shareholder in Chartered and an active participant in the
Superior Court proceedings, brings this suit to recover
compensatory and punitive damages resulting from the
reorganization of Chartered and the settlement of its claims
against the District. Before the Court are five motions to
dismiss. Upon consideration of the pleadings, relevant law,
and the entire record herein, the Court concludes that it is
barred from reviewing the claims asserted by DCHSI. See
generally Rooker v. Fidelity Trust Co., 263 U.S. 413
(1923); D.C. Court of Appeals v. Feldman, 460 U.S.
462 (1983). Accordingly, the Court will GRANT the motions and
DISMISS this action for lack of subject-matter jurisdiction.
District of Columbia provides healthcare coverage for
low-income adults, uninsured children, and disabled residents
through privately-owned managed care organizations
("MCOs") operating under government contracts. Am.
Compl. ¶ 1 [Dkt. #41]. Chartered, a District of Columbia
corporation, is one such MCO. From 1987 to 2013, Chartered
contracted with the D.C. Department of Health Care Finance
("DHCF") to provide services to approximately 110,
000 District residents enrolled in Medicaid or the D.C.
Healthcare Alliance Program, a locally-funded program
covering certain individuals who are not eligible for
Medicaid. Am. Compl. ¶¶ 13, 32-33. Pursuant to this
arrangement, DHCF set the reimbursement rates at which it
would pay Chartered. These rates, known as "capitation
rates, " are per-member per-month rates which, by law,
must be set at "actuarially sound" levels designed
to cover the cost of contracted services and permit the MCO
to generate a profit. Am. Compl. ¶¶ 2, 29-35.
2010, Congress enacted the Patient Protection and Affordable
Care Act, Pub. Law No. 111-148, 124 Stat. 119. Among other
things, the Act changed the federal eligibility standards for
Medicaid in a manner that enticed the District to transfer
approximately 23, 000 residents from the locally-funded
Alliance program to the federally-subsidized Medicaid
program. Am. Compl. ¶ 36. This transfer caused
Chartered's costs to skyrocket because individuals
enrolled in Medicaid are entitled to certain prescription
drug and other benefits that were not covered by the Alliance
program. Am. Compl. ¶¶ 36, 42. On more than one
occasion, Chartered notified DHCF and the District's
actuary, Mercer Government Human Services Consulting
("Mercer"),  that the transfer would have a severe
adverse financial impact on Chartered if the capitation rates
were not adjusted to accommodate the company's increased
costs. Am. Compl. ¶¶ 37- 40. These pleas,
apparently, fell on deaf ears. DHCF did not raise the rates,
and, by February 2011, Chartered was "experiencing heavy
losses." Am. Compl. ¶38. Although Chartered
continued to seek a rate increase from DHCF, none was
granted, and "Chartered's financial condition
predictably and precipitously deteriorated." Am. Compl.
April 2012, then-Commissioner of the D.C. Department of
Insurance, Securities and Banking ("DISB"), William
White, wrote to Chartered's president to inform him that
Chartered's financial statement for the previous year had
shown a level of "risk-based capital" that was
"significantly below" the threshold required by
D.C. law. Am. Compl. ¶47. Shortly thereafter,
Commissioner White retained consultant Daniel Watkins to
conduct a financial review of Chartered. Am. Compl.
¶¶ 15> 50> 55- In October 2012, White and
Watkins began working with Wayne Turnage, Director of DHCF,
to obtain consent from Chartered's board of directors to
place Chartered into rehabilitation. Am. Compl. ¶¶
16, 62. As part of that negotiation process, Watkins
represented to Jeffrey Thompson, DCHSI's owner, that if
Watkins were appointed rehabilitator, he would consult with
DCHSI in the reorganization of Chartered, cause Chartered to
bid on new Medicaid and Alliance contracts, refrain from
suing DCHSI and Thompson, and seek approval of the extension
of Chartered's Medicaid contract. Am. Compl. ¶¶
62-63. Following these representations, Thompson gave his
consent to rehabilitation. Am. Compl. ¶¶ 64-65.
October 19, 2012, Commissioner White filed an emergency
consent petition in the Superior Court of the District of
Columbia, seeking to place Chartered into rehabilitation
pursuant to D.C. Code §§31-1303, 31-1310, 31-1311,
31-1312, and 31-3420. A Superior Court judge issued an
Emergency Consent Order of Rehabilitation later that same
day. See Defs.' Mot. Dismiss First Am. Compl.
("Defs.' Mot.") [Dkt. #54], Ex. F
("Rehabilitation Order") [Dkt. #54-8]. The
Rehabilitation Order appointed Commissioner White as
Rehabilitator, authorized White to appoint deputies, and
vested him "with all appropriate and necessary
powers" under D.C. law, including "[a]ll powers of
the directors, officers and managers of Chartered, "
"[a]uthority to take possession and control of
Chartered's assets and administer them under the general
supervision of the Court, " and "[a]uthority to
take such action as deemed necessary or appropriate to reform
and revitalize Chartered." Rehabilitation Order 1-2. The
Order directed the Rehabilitator to "seek Court approval
of any compromise or settlement of Chartered's claim . .
. regarding capitation rates" and to "submit a plan
of rehabilitation of Chartered for Court approval, if one is
feasible." Rehabilitation Order 2-3. The Order also
specified that the Superior Court retained jurisdiction
during Chartered's rehabilitation. Rehabilitation Order
entry of the Rehabilitation Order, Commissioner White
appointed Watkins as Special Deputy to the Rehabilitator
("SDR"). On February 22, 2013, SDR Watkins
submitted for Superior Court approval a proposed
rehabilitation plan and a proposed asset purchase agreement
between Chartered and another D.C.-based MCO, AmeriHealth
Caritas District of Columbia, Inc. Defs.' Mot., Ex. H
(SDR's Second Status R. and Pet.) [Dkt. #54-10]. DCHSI
appeared as a "party in interest" to oppose the
plan and agreement. Defs.' Mot., Ex. I (DCHSI's Mot.
Opp'n) [Dkt. #54-11]; Am. Compl. ¶ 82. DCHSI argued
that the plan and agreement would cause it to "suffer
irreparable harm because the proposed transaction effectively
liquidates Chartered, which is DCHSI's sole source of
revenue." Defs.' Mot., Ex. H, at 1. Nevertheless, on
March 1, 2013, following a hearing, Superior Court Judge
Melvin R. Wright issued an Order Approving the Asset Purchase
Agreement, Plan of Reorganization and Related Matters.
Defs.' Mot., Ex. K ("Reorganization Order")
[Dkt. #54-13]. The court found that "the Agreement and
Plan of Reorganization are necessary and appropriate and fair
and equitable to all parties concerned." Reorganization
Order 2. It rejected due process and statutory authority
objections raised by DCHSI, stating that the Rehabilitation
Order "gave the rehabilitator the right, based upon the
statute, to marshal the assets and to seek
rehabilitation." Defs.' Mot., Ex. J (Tr. of Hr'g
before J. Wright (Mar. 1, 2013), at 35:24-36:06) [Dkt.
#54-12]. In addition, Judge Wright informed DCHSI that it
"certainly ha[s] the right to note an appeal now . . .
because this would be a final order." Id. at
days after the Superior Court entered the Reorganization
Order, DCHSI filed a motion for reconsideration or stay
pending appeal. Defs.' Mot., Ex. L (Party-in-Interest
DCHSI Mot. Stay Pending Appeal & Injunctive Relief) [Dkt.
#54-14]. The company argued, among other things, that ii was
likely to succeed on the merits of its appeal because the
Rehabilitator had "exceeded the limits of his
authority" by "effecting] a
'transformation' of Chartered" outside the scope
envisioned by the D.C. Code and the Rehabilitation Order.
Id. at 23. The Superior Court denied the motion. It
concluded that DCHSI was unlikely to succeed on the merits
because the Rehabilitator had complied with the requirements
of the D.C. Code and the Rehabilitation Order. See
Defs.' Mot., Ex. O (Order), at 2-4 [Dkt. #54-17]. The
court also found that DCHSI had not shown irreparable harm
stemming from the Reorganization Order because
"Chartered was set to lose its [existing] Medicaid
contract" and "was unqualified to receive a new
contract under the term[s] of the Medicaid RFP issued in late
2012." Id. at 4.
the District and Chartered entered into a settlement
agreement in which the District agreed to pay Chartered $48
million to settle $62.5 million in claims brought by the
Rehabilitator on behalf of Chartered for the payment of
unsound capitation rates. Am. Compl. ¶¶ 86-87, 91.
As required by the Rehabilitation Order, the Rehabilitator
sought Superior Court approval of the proposed settlement.
The Rehabilitator and SDR described the proposed settlement
as the product of arms-length negotiations by experienced
counsel, arguing that the settlement would benefit Chartered
by resulting in payment to the company without further
litigation or uncertainty. Defs.' Mot., Ex. Q
(Rehabilitators' Mem. P. & A. Supp. Mot. for Order
Approving Settlement Agreement) [Dkt. #54-19]. DCHSI opposed
the settlement on the ground that it was "unreasonable
and contrary to Chartered's best interests" because
it undervalued Chartered's claims and because litigation
of those claims was likely to be successful. Defs.' Mot.,
Ex. B (DCHSI's Mem. Opp'n to Mot. Approve Settlement
Agreement), at 2, 15 [Dkt. #54-4]; see also
Defs.' Mot., Ex. T (Suppl. to DCHSI's Mem. Opp'n
to Mot. Approve Settlement Agreement) [Dkt. #54-22].
August 21, 2013, Judge Wright held a hearing on the proposed
settlement agreement. In regard to DCHSI's objections,
Judge Wright stated:
The objections by [DCHSI] who is not a party ha[ve] been
considered by the court and the court will rule that they are
not a party to this case and really didn't have the right
to be permitted to do what they have done. The court has
permitted them to do that. Because had they filed a motion to
intervene, the court probably would have grant[ed] it, but it
did serve a purpose to have the court examine the record. I
just do not agree with [DCHSI's] calculations [regarding
the value of Chartered's claims].
Defs.' Mot., Ex. U (Tr. of Hr'g before J. Wright
(Aug. 21, 2013), at 10:20-11:3) [Dkt. #54-23]. Judge Wright
went on to acknowledge that DCHSI had a right to appeal, but
stated that any appeal "may be moot" because
"had you been a party, I would have overruled your
objection anyway. . . . I've considered all the things
that you would have raised had you been granted
standing." Id. at 21:9-17; see also
Id. at 22:5-8 ("[H]ad standing been granted, the
court would have approved the settlement anyway over your
objection."). The next day, Judge Wright issued an Order
Approving Settlement Between Chartered and the District of
Columbia. Defs.' Mot., Ex. V ("Settlement
Order") [Dkt. #54-24]. The Settlement Order
"resolve[d] all of Chartered's claims" stemming
from the allegedly ' unsound capitation rates "and
all potential related claims." Settlement Order 1.
appealed from the Reorganization Order and the Settlement
Order. The company argued that Lhe Reorganization Order was
invalid because the Rehabilitator had exceeded the limits of
his statutory authority and denied due process to DCHSI.
Defs.' Mot., Ex. W (DCHSI's Appellant's Op'g
Br.) [Dkt. #54-25]. In regard to the Settlement Order, it
argued that the settlement was "manifestly unfair."
Def. Mercer LLC's Mot. to Dismiss the First Am. Compl.
("Mercer Mot.") [Dkt. #57], Ex. 15 (Br. of
Appellant DCHSI), at 29 [Dkt. #57-16]. DCHSI also argued that
it had "standing" because it had been "treated
as a party" throughout the rehabilitation proceeding.
Id. at 28-29. The D.C. Court of Appeals set oral
argument for October 15, 2014. ...