Pa. class action lacks standing

Jessica M. Karmasek Jul. 6, 2011, 10:40am


HARRISBURG, Pa. (Legal Newsline) - The Pennsylvania Supreme Court, in a ruling last month, said a construction company and its owner lack standing under state law to challenge a health insurer's corporate actions.

Robert Petty is the sole owner of construction company R.G. Petty Masonry. Petty Masonry contracts with Blue Cross of Northeastern Pennsylvania to provide health insurance coverage for its employees.

Petty and his company filed a four-count class action lawsuit against Blue Cross on behalf of Blue Cross policyholders, subscribers and members. The action asserted four separate theories of relief.

In the first count, the appellants alleged Blue Cross violated 15 Pa.C.S. § 5545 of the Nonprofit Law by accumulating excessive profits and surplus well beyond the "incidental profit" permitted by the statute. The second count alleged Blue Cross breached its contract with appellants by violating the Nonprofit Law, which was incorporated into the contract, and also breached its inherent duty of good faith and fair dealing by amassing the excess surplus. The third count contended Blue Cross owed appellants a fiduciary duty by virtue of their status as subscribers and policyholders, and the insurer breached this duty when it accrued the excess surplus. The fourth count requested an inspection of Blue Cross' business records and bylaws.

A trial court found appellants lacked standing to challenge Blue Cross' alleged violations of the Nonprofit Law, as they did not fall within the standing limitations set by 15 Pa.C.S. § 5793(a).

In reaching this conclusion, the court examined Blue Cross' incorporating documents and concluded appellants possessed no particular governance rights bringing them within § 5793(a)'s parameters.

The trial court then conducted what it termed a "traditional" standing analysis, and found appellants could not establish common law standing since they could not show they were aggrieved by either a breach of contract or breach of fiduciary duty by Blue Cross.

The court reasoned the parties had a contractual relationship for insurance for payment of health care services, and appellants were not alleging any breach of that contractual relationship. It said the appellants had no protected property rights in their particular rates and had the remedy of shopping elsewhere if dissatisfied.

The court also rejected the notion that appellants adequately articulated a breach of fiduciary duty claim since Blue Cross' only fiduciary duty to appellants specifically related to the performance of its duties under the insurance contract.

The commonwealth court affirmed the trial court's decision, holding that the appellants were mere Blue Cross customers. The court said nothing in the articles of incorporation or bylaws afforded them rights equivalent to "a member, officer or member of another body."

The state's highest court granted allocatur to consider the following questions:

- Whether policyholders and subscribers who have purchased medical insurance from a nonprofit corporation have standing under 15 Pa.C.S. § 5793(a) of the Non Profit Corporation Law of 1988 to challenge the corporation's actions in court?

- Whether policyholders and subscribers who have purchased medical insurance from a nonprofit corporation have standing to maintain a breach of contract claim for the nonprofit corporation's alleged violation of other provisions of the Non Profit Corporation Law of 1988, such as 15 Pa.C.S. § 5545?

- Also, whether policy holders who have purchased medical insurance from a nonprofit corporation may maintain a claim for breach of fiduciary duty against that corporation for its alleged excess accumulation of surplus profits?

Justice J. Michael Eakin authored the Court's June 20 opinion.

Eakin said Petty and his construction company do not exhibit the "necessary characteristics" required by the Legislature.

The Court found that the appellants lack standing to maintain a breach of contract claim for Blue Cross' alleged Nonprofit Law violation. It also found that the appellants may not maintain a claim for breach of fiduciary duty against the insurer.

Blue Cross' fiduciary duty under the contract, the Court said, does not include a duty to "make proper business decisions."

"Again, we note appellants do not seek to address Blue Cross' breach of the insurance contract, but rather seek to attack corporate actions outside of the contractual terms to reach behavior at the core of the corporation's business functions," the Court wrote.

"Appellants' attempt to assert a breach of fiduciary duty is simply another attempt, be it under a different name, to attack Blue Cross' business-making actions and decisions."

The Court affirmed the commonwealth court's ruling.

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