F OR T HE MI DDL E DISTRI CT OF NORT H CAROLI NA John and Jane Does 1-5 ON BE HAL F OF T HE MSE L VES AND AL L OT HERS SI MI L ARL Y SI TUAT ED Plaintiffs,
v.
NORT H CAROLI NA BAPTIST HOSPI T AL AND T HE NORT H CAROLI NA BAPTIST HOSPI T AL AND APPLI CABL E AF F I LI A T ES GROUP HE AL T H PL AN Defendants. : : :: : : : : : : : : : : :
Civ. Action No. 1363:09-cv-12
ME MORANDUM I N SUPPORT OF MOTI ON T O BAR NORTH CAROLINA BAPTIST HOSPI T A L F ROM DI VERTI NG PROC E EDS OF T HE COMMON F UND F OR I TS OWN USE I. INTRODUCTION Late in the afternoon of March 8, 2012 Counsel for North Carolina Baptist Hospital ('NCBH) inIormed Class Counsel that NCBH intends to deduct Irom the net proceeds of the Common Fund amounts necessary to satisfy certain tax liabilities that are NCBH`s responsibility alone. The Settlement Agreement does not provide for such a deduction and neither Class Counsel nor the Class Members ever agreed that the Class would pay NCBH`s tax liability out oI the Common Fund. This is 1&%+V obligation to the IRS as an employer and does not represent payment by NCBH of any liability incurred by any current or former NCBH employee who is a Class Member. Such Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 1 of 9 2
payment would benefit NCBH exclusively and have no beneIit Ior the Class. NCBH`s intended actions are essentially a 'raid on the Common Fund for its own benefit as well as repudiation of the Settlement Agreement in this case and the representations made to Class Members. As set forth below, it was contemplated and specifically stated that the settlement payments to Class Members would be considered W-2 'wages and thereIore employees would be subject to the applicable withholding. This would encompass both federal income tax withholding and the employee portion of the payroll tax under the Federal Income Contributions Act ('FICA) which must be withheld from wages under the Internal Revenue Code ('Code). In the Notice of Phase II Class Action Settlement and Deadline for Objections (Docket No. 37-1,'Phase II Notice) Class Members were specifically informed of this tax treatment of the settlement payments. Nowhere in the Phase II Notice or in the Settlement Agreement was it ever mentioned that the Class or the Common Fund would be responsible for the HPSOR\HUVportion of FICA which is not deducted or withheld from the payment of wages. Neither does the Settlement Agreement nor the Phase II Notice contain a deduction from the Common Fund for the tax under the Federal Unemployment Tax Act ('FUTA) which is the HPSOR\HUV sole responsibility (and again not deducted or withheld from wages). The amounts in the Common Fund exist for the benefit of the Class, not NCBH, and the Common Fund was established as a settlement oI NCBH`s liability to the Class and not NCBH`s liability to the IRS. Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 2 of 9 3
II. TAX LIABILITIES FOR WAGES The Code imposes two separate FICA taxes for wagesone tax on employees and one tax on employers. These taxes are contained in separate provisions of the Code. Code Section 3101 imposes the FICA tax on employees and Code Section 3102 then requires employers to deduct the employee`s FICA tax from their wages. The Class has not disputed that since the settlement payments will be classified as wages that Class Members will be responsible for the employee share of FICA and these amounts should be withheld from any distributions. 1
On the other hand, Code Section 3111 imposes a FICA tax on employers. These amounts are not deducted or withheld from wages but are taxes 'imposed on every employer. having individuals in his employ. Similarly Section 3301 of the Code imposes the FUTA tax solely on employers and those amounts are not deducted or withheld Irom an employee`s wages. Thus NCBH`s share of the FICA tax and the FUTA tax were in no way a liability of Class Members, would not be deducted or withheld from wages; and in no way benefit any Class Member. NCBH should not be allowed to deduct its liability for taxes from the Common Fund which exists for the benefit of the Class unless there is a clear and
1 The rationale for this treatment of the settlement payments as wages was the Independent Fiduciary`s determination that the vast majority oI damages resulting Iorm NCBH`s Iiduciary breach was that Class Members paid more for health care coverage than they would have if NCBH had been prudent. Except for certain COBRA payments, Class Members paid for coverage on a pre-tax basis. II the employees` share oI premiums would have been lower there would have been less in pre-tax deductions and wages would have been higher. Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 3 of 9 4
unambiguous provision in the Settlement Agreement for this payment. There is no such provision. III. TERMS OF THE SETTLEMENT AGREEMENT AND PHASE II NOTICE The Third Amendment to the Settlement Agreement (attached as Exhibit 1) has been reIerred to by the Parties as the 'Phase II Settlement. Paragraph one of the Phase II Settlement provides for the creation of a Common Fund as part of a global settlement with the Class. The Phase II Settlement makes no reference that it purports to also be a settlement of any NCBH liability to any other party other than the Class-- including any responsibility that NCBH has to the IRS. Paragraph one of the Phase II Settlement is then specific not only as to what is to be deducted from the Common Fund but also as to how the net proceeds after those deductions are to be applied. Thus, paragraph one specifically provides for the deduction from the Common Fund oI 'reasonable attorneys' Iees, litigation costs and remuneration to Class Representatives. There is no provision Ior deduction of NCBH`s tax liability. Paragraph one then provides that the 'UHPDLQLQJDPRXQWVmust be allocated 'in such a manner that will benefit every Class Member who was a participant of the Plan for the period March 6, 2002 through December 31, 2008. 2 NCBH cannot rationally argue that payment of its tax liability from the Common Fund would benefit any Class Member.
2 There was an exception that if the amount of the distribution would otherwise be $15 or less, that Class Member will not share in an allocation. Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 4 of 9 5
In sum, under the terms of the Phase II Settlement there would only be two ways which NCBH`s tax liability could be paid Ior by the Common Fund: 1) If such payment was expressly listed as a deduction; or 2) If such payment would benefit every Class Member who was a participant in the Plan for the period March 6, 2002 through December 31, 2008. NCBH cannot plausibly argue that payment of its tax liability falls under either of these categories. NCBH`s position is also contrary to the Phase II Notice. That Notice, as it must, specifically informed the Class Members with regard to what was to be deducted from the Common Fund prior to distribution ('net proceeds) as well as the tax treatment of payments. That Phase II Notice was specifically reviewed, edited and approved by NCBH`s counsel and was part oI the Joint Motion for Preliminary Approval of the Phase II Class Action Settlement, Approval of the Phase II Class Notice, and Setting a Date for the Phase II Fairness Hearing. (Docket No. 23). In that Notice, Class Members were provided with a chart containing the following calculation oI the 'net proceeds oI $4,072,000.00: Settlement Proceeds
Common Fund $5,376,500
Attorney's Fees $1,234,500
$ 4,000 per Class Member (x 5) $20,000
Additional Expenses (tentative figure) $50,000
Net Proceeds $4,072,000
Year 2002 2003 2004 2005 2006 2007 2008 Sum Allocation of Net Proceeds
% of Sum 4.5064% 7.0956% 11.8345% 11.9706% 16.0310% 20.4138% 28.1482% 100.0000% Allocation for Year $183,501.67 $288,933.09 $481,898.93 $487,441.83 $652,783.45 $831,248.33 $1,146,192.69 $4,072,000.00 Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 5 of 9 6
(Phase II Notice p. 14) The use oI the term 'net proceeds was intended to tell the Class what would be deducted from the Common Fund prior to distribution to them. Nowhere in the Class Notice is there a reIerence that NCBH`s own tax liability would be an additional deduction from the Common Fund that would further reduce 'net proceeds. Great efforts were also taken to make sure that Class Members had an accurate estimate of the amount that they would receive under the Phase II Settlement with the construction of the database and internet site where Class Members could obtain such an estimate. As described in earlier pleadings, NCBH selected Aon/Hewitt to construct this database and provided Aon/Hewitt with the data to calculate those estimates. In providing this data NCBH did not include any information with respect to its own tax liability or direct Aon/Hewitt to make adjustments to those estimates that were based on its liability. The estimates provided on the website were an essential part of the Phase II Notice. Further it was always contemplated that the payments would be considered 'wages and the Class Members were fully informed that they would have to pay their taxes since the payment would be wages. The Phase II Notice told Class Members that: 'The payment you will receive represents taxable wages to you and applicable withholding rules apply. You will also receive a W-2 Form regarding any payment. (Phase II Notice p. 15). As stated above, the emplo\HUVshare of FICA and the entire amount of FUTA are not deducted or withheld from wages and Class Members were Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 6 of 9 7
never inIormed oI NCBH`s current intention that the Class should pay NCBH`s tax liability. NCBH participated in the drafting of the Class Notice, and therefore was well aware of the treatment of settlement payment of wages and should have been aware of the tax liability that it was creating for itself. NCBH, however, never took any action to contract away its tax liabilities to the Class through the Common Fund. 3 NCBH`s stated intention to take amounts from the Common Fund for its own tax liabilities is a unilateral attempt to not only change the terms of the Phase II Settlement but to renege on the representations it made to its current and former employees in the Phase II Notice. IV. CONCLUSION We are now over six months from the date that the Phase II Settlement was executed and the Phase II Notice was jointly submitted for Court approval. We are now approaching four months since the Phase II Notice was distributed to the Class. Under the terms of the Phase II Settlement, initial distributions must be completed by April 24, 2012. NCBH cannot be allowed, at this late date, to change the terms of the Phase II Settlement or to change the amount allocated to the Class as specifically set forth in the Phase II Notice.
3 Neither was it ever contemplated that the 'payor oI the settlement and wages would be anyone other than NCBH. Indeed the Phase II Settlement provided that for active employees in the Class, NCBH would directly deposit the settlement checks into their accounts. (Phase II Settlement 4(a)). As to former employees there was no escrow agent or third party responsible Ior issuing the checks it was simply Firm Logic`s Iunction to 'deliver those checks. (Phase II Settlement 4(b)).
Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 7 of 9 8
Payment oI NCBH`s tax liability was not a provision contained in the Phase II Settlement and such payment would not benefit Class Members. Under the specific terms of the Phase II Settlement, therefore, such a deduction is not permitted. Accordingly, NCBH`s eIIorts to 'claw back a portion oI the Common Fund Ior its own benefit is unsupportable and must be rejected. Dated: March 9, 2012 Respectfully submitted,
______/s/______________________ __________/s/____________________ Kenneth M. Johnson Robert Zaytoun N.C. State Bar No.: 27150 N.C. State Bar No.: 6942 Tuggle Duggins & Meschan, P.A. Zaytoun Law Firm, PLLC 100 N. Greene Street, Suite 600 3130 Fairhill Drive, Suite 100 Greensboro, NC 27401 Raleigh, NC 27612 Telephone: (336) 378-1431 Telephone: (919) 832-6690 Fax: (336) 274-6590 Fax: (919) 831-4793 E-mail: kjohnson@tuggleduggins.com E-mail: rzaytoun@zaytounlaw.com Counsel for Class Representatives And Class Members Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 8 of 9 9
CERTI F I CAT E OF SERVI CE
I hereby certify that on March 9, 2012, I electronically filed the foregoing ME MORANDUM I N SUPPORT OF MOTI ON T O BAR NORT H CAROLI NA BAPTIST HOSPI T A L F ROM DI VERTI NG PROC E EDS OF T HE COMMON F UND F OR I TS OWN USE with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following:
W.R. Loftis, Jr. N.C. State Bar No.: 2774 Constangy, Brooks, & Smith, LLC 100 N. Cherry Street, Suite 300 Winston-Salem, NC 27101 Telephone: (336) 721-1001 Fax: (336) 748-9112 E-mail: rloftis@constangy.com
Robert Zaytoun N.C. State Bar No.: 6942 Zaytoun Law Firm, PLLC 3130 Fairhill Drive, Suite 100 Raleigh, NC 27612 Telephone: (919) 832-6690 Fax: (919) 831-4793 E-mail: rzaytoun@zaytounlaw.com
Respectfully submitted,
________/s/_____________________ Kenneth M. Johnson N.C. State Bar No.: 27150 Tuggle Duggins & Meschan, P.A. 100 N. Greene Street, Suite 600 Greensboro, NC 27401 Telephone: (336) 378-1431 Fax: (336) 274-6590 E-mail: kjohnson@tuggleduggins.com
Case 1:09-cv-00012-JAB-LPA Document 55 Filed 03/09/12 Page 9 of 9
Good Faith Settlement Re Shell and Kinder Judge Scheindlin Https Ecf Nysd Uscourts Gov Cgi Bin Show - Doc PL Caseid 4606 de - Seq - Num 5753284 DM - Id 9303897 Doc - Num 3475