O’Connor Constructors, Inc. v. HVAC Compensation Corporation, et al. (Lawyers Weekly No. 12-099-17)

NO. 15-0205-BLS1
In this action, the plaintiff, O’Connor Constructors, Inc. (O’Connor), seeks to recover sums paid by the defendant HVAC Compensation Corporation (HVAC), a non-profit corporation established as a workers compensation self-insurance group or SIG, to purchase a loss portfolio transfer (LPT) insurance policy. O’Connor withdrew from HVAC at the end of 2009. It asserts that a substantial portion of the surplus that HVAC used to purchase the LPT policy should have been distributed to it as dividend. O’Connor also seeks to set aside an assessment that HVAC issued against O’Connor for additional funds to cover a liquidity deficit created by the purchase of the LPT policy. The additional defendants are the trustee/directors of HVAC (hereafter referred to as the Directors), each of whom are representatives of the companies that comprise the SIG, as well as the member companies themselves. While O’Connor’s complaint initially pled seven counts, four were previously dismissed. Three counts remain: breach of contract (Count I), breach of fiduciary duty (Count VI), and violation of G.L. c. 93A (Count VII). The
1 (i) Richardd Donohoe, William J. Lynch, Kevin R. Gill, James Morgan, Paul M. Level, Jr., and Shane B. Hamel, each sued individually and as Trustee/Director of HVAC, and (ii) Harrington Bros. Corporation, William V. Lynch Co., Inc., McCusker-Gill co., Inc., Worcester Air Conditioning, LLC, Le Bel, Inc., and Hamel & McAlister, Inc.
case is now before the court on the defendants’ motion for summary judgment. For the following reasons, the motion is DENIED as to Counts I and VI and ALLOWED as to Count VII.
The following facts are either undisputed or viewed in the light most favorable to O’Connor, the non-moving party.
In 1992, HVAC was organized to operate as a workers’ compensation SIG pursuant to G.L. c. 152, §§25E – 25U. Its members were companies principally engaged in the heating, ventilation, and air conditioning trades in Massachusetts. While a SIG is permitted to organize itself in various forms, HVAC was organized as a not-for-profit corporation under G.L. c. 180, § 4(n). Each HVAC member is required to enter into an Application and Indemnity Agreement (Indemnity Agreement) and is bound by HVAC’s by laws. Material to this case is a provision in G.L. c. 180, § 3 which provides that not-for-profit corporations, like HVAC, may not through their articles of organization or bylaws eliminate the personal liability of its directors “ (i) for any breach of the . . . director’s duty of loyalty to the corporation or its members, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the . . . director derived an improper personal benefit.” HVAC’s organizational documents do not purport to limit its Director’s liabilities in a manner inconsistent with this statutory requirement.
The Board of Directors of HVAC directs the management of its affairs including determining the contributions ( i.e., premiums) to be paid by the members each year for their workers’ compensation coverage in accordance with rates established by the Division of Insurance, administering and managing HVAC’s funds, including its reserves, and, of note in this
case, purchasing insurance and reinsurance. In practice, the Board retained a professional, third-party administrator, FutureComp, to manage its business and affairs.
Of importance to this case is the manner in which HVAC distributed its surplus, i.e., funds maintained by HVAC in excess of the reserves that its actuaries determined would be needed to pay claims that have been asserted by covered employees, as well as claims that are estimated to be asserted for incidents occurring during a “fund year” but which have not yet been reported, so-called IBNR. To the extent that premiums collected from members for a given year exceed claims paid and actuarially estimated claims that will have to be paid in the future, plus expenses incurred in operating the SIG, that year has a surplus. If claims paid and estimated to be paid and operating expenses with respect to a fund year exceed the premium collected, that year is running a deficit. According to Section 12 of the Indemnity Agreement (as amended),
Any Positive Balance of the Group resulting from overall loss experience may be available as a policyholder dividend . . . or used as a reserve in accordance with a Positive Balance Provisions Plan as set forth in Schedule 3 or as adopted and amended from time to time by the Board of Directors of the Group in its sole discretion. In accordance with Section 25P of Chapter 152 of the Massachusetts General Laws, a refund for any Fund Year shall be paid only to those employers who remain participants in the group until December 31st of the Fund year. Payment of a refund based on a previous Fund Year shall not be contingent on continued membership in the group after that Fund Year.
The Division of Insurance has issued regulations that create a formula pursuant to which a SIG may distribute surplus from any fund year to its members. In general, it permits the surplus to be distributed ratably in four installments over five years with the first distribution made two years after the close of the fund year. For a fund year with a surplus, each HVAC member receives a percentage of the surplus determined by the amount of the premium that it paid that year multiplied by that member’s loss ratio for that year—this is referred to as the member’s “combined ratio.” In consequence, the amount, if any, that any member receives for a surplus year is dependent on that member’s own premium amount and loss experience for that year.
If a fund year has a deficit, HVAC assesses the deficit to its members for that year using the same statutory formula that is used to calculate distributions. As with distributions, deficits begin to be collected two years after the close of a fund year. Once a year, usually in November or December, HVAC members who are in a negative position receive an invoice for payment due; members who have a net surplus are issued a dividend check in January. The amount of surplus or deficit for any given fund year may change from year to year as claims develop and are paid and IBNR recalculated. Surplus calculations vary most in the first two years following the end of the fund year, but they may continue to change in subsequent years.
HVAC has always calculated and paid dividends or assessed deficits based on individual fund year results. As noted above, a former member is entitled to the distribution of surplus for any year in which it was a member, if there is surplus available to distribute. Similarly, a former member could be required to contribute additional amounts to cover a deficit with respect to any period in which it was a member of the SIG. HVAC has also purchased reinsurance and charged its costs to its members on a fund year by fund year basis.
O’Connor became a member of HVAC in 1993, at that point HVAC had six members. By 2004, it had increased to ten members. Effective December 31, 2009, O’Connor withdrew from HVAC, at which point HVAC had only seven members. For the last several years that O’Connor was a member of HVAC, it paid significantly higher premiums than any other member. For example, in 2009 when HVAC had eight members, O’Connor’s premium was almost four times that of the next highest premium and amounted to approximately 44% of all premiums paid that year. After 2009, O’Connor no longer had a representative on the HVAC Board of Directors and, therefore, no vote on any matter affecting HVAC’s management or affairs.
In the years 2007 through 2010, O’Connor was required to pay substantial deficit
assessments in respect of earlier years, approximately $ 1 million in the aggregate. Thereafter, its accounts moved to surplus status, and it received a dividend in January, 2012. An internal memorandum prepared in May, 2012 suggested that O’Connor was in a surplus position of $ 450,000, a number which is, in effect, a snapshot of surplus at a given moment and was principally based on favorable development for 2008 and 2009, although these fund years were not then fully available for distribution under the formula described above. At the same time, the 2010 and 2011 fund years were developing adversely to the continuing HVAC members such that they reflected deficits of nearly $ 400,000 and $ 261,000, respectively, as of the end of 2011.
O’Connor’s departure and the deficits for 2010 and 2011 placed HVAC in a difficult situation in which its continuing viability was at issue. In consequence, it began to explore the option of purchasing an LPT to insure all additional claim exposure for HVAC. Quotes were received from Safety National Casualty Corporation (Safety) to purchase LPT for various years. “Option 1” sold off fund years 1992 through 2009. The cost of this policy was $ 1,899,104. HVAC, however, was holding reserves for those years only in the amount of $ 1,433,120. Therefore, this LPT would cost $ 465,984 in excess of the reserves determined by its actuaries as necessary to cover anticipated claims for those years. An analysis was done that determined the cost of the LPT for each fund year being sold, the amount by which that cost exceeded the reserves for that year, and then assigned a percentage of that cost to each member based on a fraction, the numerator of which was that member’s premium for that year and the denominator was the aggregate premiums collected for that year. The surplus for any year was left untouched and therefore available for distribution as dividends. One Director expressed concern that this approach would be very costly, essentially causing HVAC to incur an immediate expense of $ 465,984 (the cost of the LPT in excess of reserves for the years sold off) without addressing the
deficits that existed for fund years 2010 and 2011. FutureComp then requested additional quotes for LPTs that covered 2010 and 2011.
At a September, 2012 HVAC Board meeting, FutureComp presented the additional quotes and a new method for paying for the LPT policy. Under this payment approach, all of the surplus held in HVAC’s accounts would be used to purchase the policy, without regard to the fund year in which the surplus was accrued. Because this would effectively eliminate nearly all of HVAC’s assets, all members and former members for the years “sold off” would be assessed a liquidity deficit. No consideration was given to the fact that operating costs and payment of current claims would be with respect to years in which members who terminated prior to January 1, 2011 had no possible liability, as all of the years in which they had been members had been sold off. FutureComp referred to this method of purchasing the LPT policy as the “All Assets” approach, to be distinguished from the approach that looked at the costs of purchasing the LPT policy on a year by year and member by member basis, which it called the “Strict Assessment” approach.
On November 14, 2012, the Directors voted to purchase an LPT from Safety selling off fund years 1992 to 2010 using the “All Assets” approach, the policy to cover all claim payments due in respect of those years after July 27, 2012. The cost of the LPT was $ 1,855,938. Because this transaction was financed with surplus funds, it created a liquidity deficit of $ 164,750 for fund years 2011 and 2012 (which had not been sold). The Directors therefore assessed a liquidity deficit pro rata to members and former members. O’Connor’s assessment was $ 55,931. Because the LPT covered all claims paid after July 27, 2012 for fund years 1992-2010 and the policy could not be made operational until May 22, 2013, the LPT carrier refunded to HVAC $ 504,332 for claims that HVAC paid during that period in respect of claims now covered by the LPT.
O’Connor received no credit for that refund.
On January 13, 2013, the Division of Insurance approved the transaction. O’Connor was not informed about the transaction prior to its closing and was not given the opportunity to present its position to the Division concerning the inclusion of fund year 2010 in the LPT or the use of the All Asset method to purchase it. But for the purchase of the LPT, O’Connor would have been due a dividend of $ 185,647 in January, 2013 closing out all fund years through 2007, 50% of its surplus for 2008 and 33% of its surplus for 2009. If the LPT had been purchased using the Strict Assessment Approach, O’Connor would have been entitled to $ 290,000 return of its surplus, net of assessments for the cost of the LPT in excess of reserves for the years in which it had been a HVAC member. Conversely, in December, 2012, continuing HVAC members would have been assessed deficits because fund year 2010 was, as noted above, in a substantial deficit position. Following the transaction, an employee of FutureComp wrote in an email: “Overall, there is still a great story. The members were going to assess themselves anyway, with the end result of O’Connor getting a large dividend. This way, they are only assessing themselves to meet the payment of the LPT to get rid of all the ‘bad years.’”
Breach of Contract
O’Connor argues that while the By Laws authorized the Board to purchase insurance, and it concedes that the LPT is a form of insurance, the Indemnity Agreement effectively required that the cost of that insurance be charged to members on a fund year by fund year basis, which is the way reinsurance had been purchased by HVAC in the past. Furthermore, when the concept of purchasing the LPT was first investigated, the cost to each member was actually calculated
using the “Strict Assessment” method, i.e., year-by-year and member-by-member. It was only when one Director questioned the value of the proposed LPT to HVAC and his company that FutureComp asked for quotes that covered the “bad years” and came up with the “All Asset” option. O’Connor contends that use of the All Asset approach, and using those assets to purchase LPT for a year in which O’Connor was not a member, breached the Indemnity Agreement.
At oral argument on this motion, the court asked counsel for O’Connor to identify the contract provision that HVAC breached in purchasing the LPT using the All Asset approach. O’Connor pointed to Section 12 of the Indemnity Agreement (quoted above) and Schedule 3 appended to it. Schedule 3 states, in relevant part,
The Board of Directors of HVAC . . . will, after the end of each Fund Year, determine the Positive Balance available for distribution to the Members as a return of premium . . . . The Positive Balance shall be determined after appropriate allowance is made for contingency reserves.
The Positive Balance shall be distributed to Members based upon each Member’s combined ratio (losses and expenses/earned premium).
According to O’Connor, the Directors voted on the amount of surplus to be distributed for fund years through 2009, and were therefore contractually obligated to pay that surplus to O’Connor, when they decided to use the surplus to purchase the LTP, without regard to the cost of the LPT for each year being sold off. O’Connor argued that the language in Section 12 of the Indemnity Agreement that expressly stated that “Any Positive Balance of the Group resulting from overall loss experience may be available as a policyholder dividend, . . . or used as a reserve in accordance with a Positive Balance Provisions Plan as set forth I Schedule 3 or as adopted and amended from time to time by the [Directors] in its sole discretion,” did not authorize the Directors to decide to use surplus from one fund year to cover claim expenses with respect to another year, when the Directors had previously voted to distribute that surplus to the members
according to each member’s combined ratio. (emphasis added)
The court finds that the Indemnity Agreement and By Laws, which constitute the contract among the members, is ambiguous with respect to the question presented. See Citation Ins. Co. v. Gomez, 426 Mass. 379, 381 (1998). In particular, it is ambiguous when applied to the circumstances presented by this case in which LPT insurance was purchased in late 2012 with respect to all of HVAC’s years of operation through 2010. See, e.g., Nelson v. Cambridge Mut. Fire Ins. Co., 30 Mass. App. Ct. 671, 673-674 (1991) (Where the court noted that words that are otherwise clear may be ambiguous as applied to certain subject matter.) For example, it may be that the Directors have the authority to use all available surplus to respond to a catastrophic loss, but not to take surplus from one year to pay claims associated with another year that are not out of the ordinary. In this case, the purchase of the LPT created a substantial expense for HVAC, but it was the result of a business decision not, as this court understands the facts, a unique and unanticipated loss. While the court doubts that evidence exists as to the intention of the members when the Indemnity Agreement was drafted, evidence of the manner in which these provisions of the Indemnity Agreement were applied in the past or are being applied in a manner which is consistent with industry practices might elucidate contract meaning. See Browning-Ferris Ind. Inc., v Casella Waste Management of Mass., Inc. 70 Mass. App. Ct. 300, 309 (2011) (“There is no surer way to find out what the parties meant, than to see what they have done”).
Moreover, while the question of whether HVAC’s purchase of the LPT using the All Assets method constitutes a breach of contract is a very close question, as discussed below, the claim for breach of fiduciary duty clearly involves disputed questions of fact and must proceed to trial. The evidence to be presented on this breach of contract claim is very much the same as that which will be presented on the breach of fiduciary duty claim. The court finds that while
questions of law rather than fact are more predominant and central to this breach of contract claim, it is better resolved after the court has had the benefit of a trial addressing questions of how the Directors came to choose this approach to resolving the issues confronting HVAC by O’Connor’s decision to withdraw from the SIG.
Breach of Fiduciary Duty
As noted, HVAC is a not-for-profit corporation organized under Chapter 180 of the General Laws and, therefore, each Director may be liable to a member “ (i) for any breach of the . . . director’s duty of loyalty to the corporation or its members, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the . . . director derived an improper personal benefit.” Although, effective December 31, 2009, O’Connor ceased to be a member of HVAC, the Directors still controlled funds in which O’Connor had an interest under Section 12 of the Indemnity Agreement. (“Payment of a refund based on a previous Fund Year shall not be contingent on continued membership in the group after that Fund Year.”) Additionally, their management of HVAC had the capacity to cause O’Connor to incur additional liabilities with respect to matters relating to fund years in which O’Connor was a member. (“A member of a group, . . . , who elects to terminate its membership . . . shall remain jointly and severally liable for the workers’ compensation obligations of the group and its members which were incurred during the . . . terminated member’s period of membership;” and, “[a] group member is not relieved of its workers’ compensation liabilities incurred during its period of membership except through payment by the group or the member of required workers’ compensation benefits.” G.L. c. 152, § 25K (3) and (4).) In consequence, the Directors continue to owe fiduciary duties of loyalty to a
departed member and an obligation not to take action to benefit their own interests at the expense of terminated member, to the extent their actions implicate the former member’s interest in surplus or the creation of additional liabilities for the former member.2
Whether, in this case, the course of action adopted by the Directors breached their fiduciary obligations to O’Connor involve a number of disputed issues of fact. Certainly, Directors owe fiduciary duties to all members and HVAC, as well as O’Connor. They may adopt a course of action, in good faith, which is a reasonable approach to a business problem and in the best interests of the enterprise and its members, generally. See, e.g., Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 851-852 (1976). Whether they did that in this case when they purchased the LPT using the All Assets approach, and included fund year 2010 in the liabilities sold off, involves a number of disputed issues of fact that can only be resolved after trial.3
Chapter 93A
It has long been recognized that intra-enterprise disputes will not support claims of violation of Chapter 93A. See Linkage Corp. v. Trustees of Boston University, 425 Mass. 1 n.33, cert. denied 522 U.S. 1015 (1997) and cases there cited. This case involves quintessentially intra-corporate action. It does not arise out of an arms-length commercial transaction between O’Connor and HVAC or its Directors. Rather, the issue is whether HVAC’s decision to purchase an LPT policy using the All Assets method constituted a breach of its internal, organizational documents or a breach of fiduciary duty on the part of the Directors to treat O’Connor fairly. See
2 Indeed, in this case the purchase of the LPT led to the assessment of a liquidity assessment against O’Connor.
3 For example, for reasons that are not well explained, it seems that the LPT covering 2010 was less expensive than that which ended with 2009. This could be because the quote for the 2009 LPT was received well before the quote for the LPT that was purchased and might have cost much less (claims are constantly being paid and reducing the exposure to the insurer issuing the LPT policy) if the quotes were as of the same date. Issues such as these require factually development.
Ray-Tek Services, Inc. v. Parker, 64 Mass. App. Ct. 165, 170-171 (2005). In consequence, the claim for violation of Chapter 93A must be dismissed.4
For the foregoing reasons, HVAC’s motion for summary judgment is ALLOWED, in part, and DENIED, in part. Count VII is dismissed; Counts I and VI shall proceed to trial.
Mitchell H. Kaplan
Justice of the Superior Court
Dated: July 27, 2017
4 HVAC argues that the claims asserted against it should be dismissed because the Division of Insurance approved the transaction. There is, however, no indication that the Division gave any thought to whether the transaction was fair to all members or former members or breached a contractual obligation among the members. There is no suggestion that it had statutory authority to do that. Presumably, the Division was only concerned with whether HVAC would be financially able to meet its workers’ compensation benefit obligations following the transaction. The court finds that the Division’s approval of the transaction is not relevant to the claims asserted by O’Connor against HVAC or the Directors.

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