Prospect Chartercare Faces Lawsuit Over DB Plan Funding

A newly filed challenge to a health care system’s retirement plan church plan status claims the plan at some point failed to be a church plan, and entities administering or associated with the plan hid this to keep from adhering to funding rules as defined by the Employee Retirement Income Security Act (ERISA).

Plaintiff Stephen Del Soto filed the lawsuit on behalf of the plan and its participants, in his capacity as Receiver for and Administrator of the Plan, appointed by the Rhode Island Superior Court.

Named as defendants in the suit are Prospect Chartercare, a limited liability company, which directly and through its 100%-owned subsidiaries owns and operates health care facilities in Rhode Island, including but not limited to two hospitals, Roger Williams Hospital and Our Lady of Fatima Hospital, having acquired them in connection with an asset sale that closed on June 20, 2014.

Also named are Prospect Medical Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware; St. Joseph Health Services of Rhode Island (SJHSRI), which prior to the 2014 asset sale, owned Fatima Hospital; and Roger Williams Hospital (RWH), the survivor of a merger in 2010 with Roger Williams Medical Center, sometimes doing business under that name.

According to the complaint, since the 2014 asset sale, SJHSRI no longer operates a hospital or otherwise provides health care. Instead, SJHSRI’s business consists of defending lawsuits and workers’ compensation claims, collecting certain debts and receivables, paying or settling certain liabilities which were excluded from the 2014 asset sale, and, until the Receiver was appointed, administering the plan. The same is true of the business of RWH.

Also named as defendants are Prospect Chartercare St. Joseph, which has owned Fatima Hospital since the 2014 asset sale; Rhode Island Community Foundation, which holds and invests funds on behalf of CC Foundation to which the plaintiffs claim to be entitled, and is named in the suit solely as a stakeholder of property claimed by the plaintiffs, so that they may be accorded complete relief; the Roman Catholic Bishop of Providence, a corporation sole, created by an act of the Rhode Island General Assembly; Diocesan Administration Corporation, which aids in administering the affairs of the Roman Catholic Diocese of Providence; Bishop Tobin, president and chief executive officer of Diocesan Administration; Diocesan Service Corporation; which aids in administering the affairs of and services provided by the Diocese of Providence; and The Angell Pension Group, Inc., which provided actuarial services in connection with the plan, and, at least since 2011, provided administrative services which included dealing directly with and advising plan participants, initially on behalf of and as agents for SJHSRI and CCCB, and later on behalf of and as agents for SJHSRI, CCCB, and the Prospect entities.

The case concerns an insolvent defined benefit (DB) retirement plan, The St. Joseph Health Services of Rhode Island Retirement Plan, with more than 2,700 participants. The participants learned in August of 2017 that the plan had not been adequately funded. The disclosure occurred when the plan was placed into receivership by SJHSRI, with the request that the Rhode Island Superior Court approve a virtually immediate 40% across-the-board reduction in benefits.

The complaint says that for nearly 50 years, SJHSRI promised employees and prospective employees that SJHSRI made 100% of the necessary contributions and that they had no investment risk, leading employees and prospects to “mistakenly but justifiably” conclude that SJHSRI was making the necessary contributions and their pensions were safe. However, the lawsuit says for most of at least the past 10 years, SJHSRI stopped making necessary contributions with the result that the plan was grossly underfunded, and it alleges that SJHSRI and other defendants conspired to conceal it from plan participants through fraudulent misrepresentations and material omissions regarding the Plan;

According to the complaint, SJHSRI, the Prospect entities, and other defendants violated ERISA, committed fraud, breached their contractual obligations, violated their duty of good faith and fair dealing, and otherwise acted wrongfully. The lawsuit asks that they must be required to compensate losses to the plan and remedy such violations, including returning all assets improperly diverted from the plan, and to otherwise fully fund the plan.

Loss of church plan status

In 1984, the predecessor to the plan, which at the time was considered a church plan, elected not to be covered under ERISA, but this was not disclosed to plan participants. At various times during the period from 1995 to the present, SJHSRI did not fund the plan in accordance with the requirements of ERISA and the recommendations of the plan’s actuaries, with the result that the plan is grossly underfunded, the complaint says.

The plaintiffs argue that there came a time when the plan no longer qualified as a church plan under ERISA, but SJHSRI, RWH, CCCB, Angell, the Prospect entities, and the Diocesan defendants all fraudulently conspired to misrepresent that the plan remained qualified as a church plan, in violation of federal tax laws and ERISA.

According to the complaint, at various times since 2009, the plan did not qualify as a church plan because it was not maintained by a qualifying “principal-purpose” organization as defined in ERISA, and it did not qualify as a church plan because SJHSRI was no longer “controlled by or associated with a church or a convention or association of churches,” according to the ERISA definition. In addition, the lawsuit alleges that “at various times since 2009, and certainly after the 2014 Asset Sale and the Plan being put into receivership in August of 2017, the Plan did not qualify as a Church Plan because SJHSRI was no longer entitled to tax exempt status under the group exemption issued tothe United States Conference of Catholic Bishops, and therefore was no longer properly included in the Catholic Directory because it was no longer “operated, supervised or controlled by or in connection with the Roman Catholic Church in the United States.”

In 2013, Bishop Tobin issued a resolution ratifying a 2011amendment of the plan, which confirmed that SJHSRI’s Board of Trustees was the Retirement Board. The Board of Trustees was primarily responsible for direction of all of the activities of SJHSRI, including the operation of Old Fatima Hospital, and, therefore, was not a principal-purpose organization. Moreover, the Board of Trustees delegated administration of the plan to the “wholly-secular” CCCB Finance Committee, which directed financial matters for CCCB, including management of Old Fatima Hospital and Old Roger Williams Hospital, and, therefore, was not controlled by or associated with any church, and was not a principal-purpose organization.

After the closing of the 2014 asset sale, the lawsuit noted, the Board of Trustees and the CCCB Finance Committee ceased any administration of the plan. By resolution dated December 15, 2014, CCCB caused SJHSRI to delegate “the administration, management and potential wind-down” of the plan to SJHSRI’s president and to one of SJHSRI’s attorneys, “each acting alone.” Neither of these individuals was an organization, much less a principal-purpose organization, or associated with a church.