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I N T HE UNI T ED ST AT ES DISTRI CT C OURT


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.
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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
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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.
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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.
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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

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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.
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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.
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NCBH cannot rationally argue
that payment of its tax liability from the Common Fund would benefit any Class
Member.

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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.
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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
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(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
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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.
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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.

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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)).

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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
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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


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