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Petty v. Hospital Service Association of Northeastern Pennsylvania

February 19, 2009


The opinion of the court was delivered by: Judge Pellegrini

Argued: December 10, 2008



Robert Petty and R.G. Petty Masonry, on behalf of themselves and all others similarly situated (collectively, Petty), appeal the order of the Court of Common Pleas of Lackawanna County (trial court) sustaining the Preliminary Objections of the Hospital Service Association of Northeastern Pennsylvania, d/b/a Blue Cross of Northeastern Pennsylvania (Northeastern Blue Cross) and dismissing Petty's Complaint with prejudice. For the reasons that follow, we affirm.

R.G. Petty Masonry, a sole proprietorship in Clarks Summit, Pennsylvania, with Robert Petty as its sole proprietor, contracted with Northeastern Blue Cross to provide health insurance for its employees under a group policy. Northeastern Blue Cross is a Pennsylvania non-profit corporation that provides hospitalization insurance as an independent licensee of the Blue Cross Blue Shield Association. Petty filed this class action on behalf of all policyholders, subscribers, and members of Northeastern Blue Cross alleging that as of December 31, 2001, Northeastern Blue Cross had accumulated an excessive surplus (listed as reserves and unassigned funds) of over $403 million and established a corporate structure with a primary profit motive in violation of its charter, social mission, and the Pennsylvania Nonprofit Corporation Law of 1988 (Nonprofit Law), 15 Pa. C.S. §§5101-6162.

Count I of the Petty Complaint alleged that Northeastern Blue Cross violated Section 5545 of the Nonprofit Law,*fn2 15 Pa. C.S. §5545, because of its accumulation of excessive profits and reserves and conduct operating with a "for profit" motive. Count II included a Breach of Contract claim based on the relationship between subscribers and policyholders with Northeastern Blue Cross in a health insurance coverage contract. The third count in the Complaint alleged that Northeastern Blue Cross breached its fiduciary duty to the subscribers and policyholders while Count IV included a demand for inspection of Northeastern Blue Cross's books and records. The relief sought by Petty, among other things, requested the following: 1) the excess surplus be disgorged in a manner that the court deemed appropriate; 2) an order for an accounting and imposition of a constructive trust over the excess surplus; and 3) an award of reasonable attorneys' fees from the excess surplus.

Northeastern Blue Cross filed Preliminary Objections to the Complaint;*fn3 however, by order of the trial court and stipulation of the parties, the matter was stayed pending this Court's decision in Ciamaichelo v. Independence Blue Cross, 814 A.2d 800 (Pa. Cmwlth. 2002) (Ciamaichelo I). The parties filed a joint stipulation on January 23, 2002, in which they agreed to further stay the action pending the Pennsylvania Supreme Court's decision in Ciamaichelo v. Independence Blue Cross, 589 Pa. 415, 909 A.2d 1211 (2006) (Ciamaichelo II). A brief summation of the Ciamaichelo line of cases follows.*fn4

Ciamaichelo dealt with a declaratory judgment action filed by subscribers and a policyholder of Independence Blue Cross (Independence) in which alleged that Independence breached contractual and fiduciary duties based on its alleged accumulation of excessive surplus and reserves. In Ciamaichelo I, we held that the approval of insurer's rates and reserves were matters within the exclusive jurisdiction of the Department. We further found that the filed-rate doctrine barred the cause of action because the claims set forth in it were essentially a collateral attack upon the Department's determination of an insurer's rates, from which the amount of an insurer's reserves were a consideration, and a finding that Independence's reserves were excessive would then require the Department to recalculate its approved rates.

In Ciamaichelo II, our Supreme Court reversed our determination that the Department had exclusive jurisdiction and instead held that the trial court should refer to the Department any issue or matter lying within its regulatory jurisdiction, including any remedial action necessary that would require its special competence. The Supreme Court remanded the matter to this Court to consider whether the trial court erred in overruling Independence's preliminary objections that the matter should be dismissed because the parties lacked standing and did not state claims for relief under the Nonprofit Law.

On remand in Ciamaichelo III, we held that Independence's subscribers had standing and a right to relief under Section 5793(a) of the Nonprofit Law, 15 Pa. C.S. §5793(a),*fn5 because based on an examination of Independence's Articles of Incorporation, they placed subscribers in the same class as members, directors, other body members and officers and accorded the subscribers standing to state a claim under Section 5793(a) of the Nonprofit Law. By contrast, we found that the policyholders lacked standing because as consumers, they did not have special status, rights or duties under Independence's Articles of Incorporation. We then remanded the matter to the trial court for further proceedings.

After we issued our decision in Ciamaichelo III, the trial court sustained Northeastern Blue Cross's Preliminary Objections*fn6 and dismissed Petty's complaint with prejudice. Based on its review of the Nonprofit Law, applicable caselaw, and Northeastern Blue Cross's by-laws, the trial court found that Petty, as a subscriber, was not a member of Northeastern Blue Cross with governance rights and, as a result, lacked standing under 15 Pa C.S. §5793(a). The trial court also found that Petty lacked standing for its Breach of Contract and Breach of Fiduciary Duty claims and concluded that the allegations in the Complaint were more suitable for the Department than the trial court. It then dismissed the complaint, and this appeal followed.*fn7


Petty contends that it was improper for the trial court to sustain Northeastern Blue Cross's challenge to its standing because a preliminary objection based on the lack of a capacity to sue cannot be determined simply by the facts of record. Petty points to American Housing Trust III v. Jones, 548 Pa. 311, 696 A.2d 1181 (1997), as persuasive authority that a court may not grant preliminary objections that raise a factual issue as to "lack of a capacity to sue," but must instead resolve the dispute by receiving evidence via interrogatories, depositions, or an evidentiary hearing. We disagree.

In American Housing Trust III, the issue before the trial court was whether the corporation's activities in the Commonwealth constituted "doing business" under Section 4121(a) of the Foreign Business Corporations Law, 15 Pa. C.S. §4121(a), which would require the corporation to then obtain a certificate of authority without which it could not bring suit in the Commonwealth. Our Supreme Court found that the facts developed at the preliminary stage of the proceedings did not enable the trial court to make a determination as to factual details pertaining to the corporation's regular, repeated business contacts, which were critical in determining whether the corporation was required to obtain the certificate of authority. As a result, the Supreme Court concluded:

Where this factual dispute was raised by the pleadings, in order for the trial court to properly rule on Appellee's preliminary objections to Appellant's complaint, there must be of record, all of the facts necessary for the trial court to determine whether Appellant is statutorily excluded from the requirement to obtain a certificate of authority. This necessarily entails facts going to both the nature and the extent of Appellant's activities in this Commonwealth. The trial court may not reach a determination based upon its view of the contraverted facts, but must revolve the dispute by receiving evidence thereon through interrogatories, depositions, or an evidentiary hearing. Schmitt v. SeaspraySharkline, Inc., 366 Pa. Super. 528, 531 A.2d 801 (1987).

548 Pa. at 319, 696 A.2d at 1185.

Unlike in American Housing Trust III, there are no factual issues that would preclude consideration of Northeast Blue Cross's preliminary objection that Petty lacked standing to challenge the validity of Northeastern Blue Cross corporate actions. For example, Northeastern Blue Cross's first revised preliminary objection in the nature of a demurrer avers that Plaintiffs (Petty) are not members, directors, members of an other body, or officers of Northeastern Blue Cross, do not qualify under the "or otherwise" provision of Section 5793(a) of the Nonprofit Law, and, therefore, lack standing in this matter. In Petty's Answer, he avers that he does have standing because Northeastern Blue Cross regularly refers to Petty as "members" and that Petty stands in a "special relationship" with Northeastern Blue Cross. Neither of those averments raises factual issues but only legal conclusions that Petty claims flows from his ...

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