• Wooley v. Lucksinger
  • July 14, 2011 | Authors: Justin Gundlach; Arthur N. Lerner
  • Law Firm: Crowell & Moring LLP - Washington Office
  • The Supreme Court of Louisiana reinstated a trial court's judgment against Health Net, Inc. ("Health Net"), the prior owner of three HMOs, and awarded approximately $180 million in aggregate damages to the Commissioners of Insurance in three different states.  According to the court, the state-approved sale of the three HMOs occurred as a result of deceptive and misleading submissions to the state which failed to disclose financial risks inherent to the sale, including an $8.4 million cash sweep from funds reserved for paying out policyholder claims.

    The sale took place as an alternative to the winding down of the business of the HMOs, which had been struggling.  According to the court, Health Net, then owner of the HMOs, sold the HMOs to a newly incorporated holding company, AmCareco, Inc. ("AmCareco"), despite the company's lack of any substantial assets with which it could make the purchase.  Because regulatory approval of the sale under these conditions, was unlikely, the court said, Health Net and AmCareco arranged a "cash sweep" by re-characterizing funds from the PDR reserve, intended for the payment of insurance liabilities, as a restructuring reserve.  According to the court, this action inaccurately inflated the assets of the company, leading regulatory authorities in three states to allow the sale to go forward and leaving the HMOs in financial distress and their associated policy members at risk.  Health Net retained a substantial minority interest and stock rights in the HMOs following the sale.

    According to the court, after the sale, the three HMOs experienced serious cash flow problems, and receivers were appointed in Louisiana, Texas, and Oklahoma, ultimately resulting in the filing of three lawsuits against various involved entities and individuals, including claims against Health Net as the former owner, seeking enforcement of a 1996 contractual guarantee and recovery of damages, attorneys fees, and other equitable relief.  Claims against all parties other than Health Net were settled prior to the commencement of litigation.  A jury found Health Net liable for breach of fiduciary duty, fraud, knowing unfair and deceptive acts or practices, conspiracy, and malice or gross negligence and granted compensatory and punitive damages.  On initial appeal, the court reversed all judgments with the exception of enforcement of the contractual guarantee, limiting the damages award to $2 million.  The Supreme Court of Louisiana reversed on all but one issue, reinstating the trial court's judgment and damages.

    First, the Supreme Court affirmed the appeals court's determination of contract damages of $2 million, rejecting the Louisiana Receiver's arguments for more substantial damages.

    Next, the court rejected claims by Health Net of prejudicial procedural error regarding faulty jury instructions, among other things.  On the issue of the jury instructions relating to fiduciary duty, the court found Health Net owed a common law fiduciary duty, holding that "a wholly-owned subsidiary's directors owe a fiduciary duty to the subsidiary corporation itself, as well as to the parent corporation which owns 100% of its shares."  Alternatively, Texas insurance law was held to apply so as to provide specific fiduciary duty "for those entrusted with the financial affairs of HMOs."  On jury instructions relating to unfair or deceptive practices, the court held that the omission of the word "shareholder" from the list of entities that qualify as "persons" to which the unfair or deceptive acts or practices provisions of Texas insurance law apply did not preclude Health Net from qualifying as such person.

    Finally, the Court reinstated tort and fiduciary duty liability and damages against Health Net, reviewing the factual record under a manifest error standard.