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Jones v. Singing River Health Services Foundation

United States Court of Appeals, Fifth Circuit

July 27, 2017

THOMAS JONES, on behalf of themselves and others similarly situated; JOSEPH CHARLES LOHFINK, on behalf of themselves and others similarly situated; SUE BEAVERS, on behalf of themselves and others similarly situated; RODOLFOA REL, on behalf of themselves and others similarly situated; HAZEL REED THOMAS, on behalf of themselves and others similarly situated, Plaintiffs - Appellees
v.
SINGING RIVER HEALTH SERVICES FOUNDATION; SINGING RIVER HEALTH SYSTEM FOUNDATION; SINGING RIVER HOSPITAL SYSTEM FOUNDATION, INCORPORATED; SINGING RIVER HOSPITAL SYSTEM EMPLOYEE BENEFIT FUND, INCORPORATED; SINGING RIVER HOSPITAL SYSTEM; MICHAEL J. HEIDELBERG; MICHAEL D. TOLLESON; TOMMY LEONARD; LAWRENCE H. COSPER; MORRIS G. STRICKLAND; IRA POLK; STEPHEN NUNENMACHER; HUGO QUINTANA; GARY C. ANDERSON; STEPHANIE BARNES TAYLOR; MICHAEL CREWS; SINGING RIVER HEALTH SYSTEM; ALLEN CRONIER; MARTIN BYDALEK; WILLIAM DESCHER; JOSEPH VICE; ERIC WASHINGTON; MARVA FAIRLEY-TANNER; GRAYSON CARTER, JR, Defendants - Appellees
v.
CYNTHIA N. ALMOND; FRANCISCO C. AGUILAR; KITTY PATRICIA AGUILAR; TANYA R. ARDOIN; RAY J. BARBOUR, ET AL Appellant REGINA COBB, on behalf of themselves and others similarly situated, ET AL Plaintiffs
v.
SINGING RIVER HEALTH SYSTEM; BOARD OF TRUSTEES FOR THE SINGING RIVER HEALTH SYSTEM; MICHAEL J. HEIDELBERG, in their individual and official capacities; MICHAEL D. TOLLESON, in their individual and official capacities; ALLEN L. CRONIER, in their individual and official capacities; TOMMY L. LEONARD, in their individual and official capacities; LAWRENCE H. COSPER, in their individual and official capacities; MORRIS G. STRICKLAND, in their individual and official capacities; IRA S. POLK, in their individual and official capacities; STEPHEN NUNENMACHER, in their individual and official capacities; HUGO QUINTANA, in their individual and official capacities; MARVA FAIRLEY-TANNER, in their individual and official capacities; WILLIAM C. DESCHER, in their individual and official capacities; JOSEPH P. VICE, in their individual and official capacities; MARTIN D. BYDALEK, in their individual and official capacities; ERIC D. WASHINGTON, in their individual and official capacities; G. CHRIS ANDERSON, in their individual and official capacities; KEVIN HOLLAND, in their individual and official capacities, Defendants-Appellees
v.
CYNTHIA N. ALMOND; FRANCISCO C. AGUILAR; KITTY PATRICIA AGUILAR; TANYA R. ARDOIN; RAY J. BARBOUR, ET AL Appellants

         Appeal from the United States District Court for the Southern District of Mississippi

          Before HIGGINBOTHAM, JONES, and HAYNES, Circuit Judges.

          EDITH H. JONES, Circuit Judge:

         The Singing River Health System (SRHS), a community hospital owned by Jackson County, Mississippi, created a defined benefits pension fund into which employees have recently been paying three percent of their paychecks and to which SRHS was obliged to contribute whatever additional amounts were actuarially required to fund the Plan's promised benefits. From 2009-14, however, the hospital fell into serious financial difficulties and made only one plan contribution. The Plan was "frozen" in late November 2014. This appeal considers objections to the settlement of class actions that arose in the wake of the financial crisis. The most troubling issues center on the extraordinarily long-term, unsecured, and unpredictable proposed payout of the settlement amount and the release of the County, a non-party, from liability. We vacate and remand for further consideration of issues concerning the settlement's consequences for Plan beneficiaries.

         BACKGROUND

         As described by its CEO, SRHS "is a community-owned not-for-profit health system owned by Jackson County. [Miss. Code Ann. § 41-13-10(c).] It consists of two hospitals . . . [and] five primary care clinics . . ., [and] [i]t employs about 2, 400 people." SRHS is the largest employer in Jackson County. County Supervisors appoint seven of the nine members of the SRHS Board; the Chief of Staff and Chief-elect of SRHS occupy the other two seats. See Miss. Code. Ann. § 41-13-29. SRHS created the Employees' Retirement Plan and Trust (the "Plan") in 1983 as a successor to the Public Employees' Retirement System of Mississippi.

         Since 2008, the most recent version of the Plan has required employees to contribute three percent of their salaries to the Plan. Further, SRHS "shall have the sole responsibility for making the [actuarially determined] contributions necessary to provide benefits under the Plan, as administered by the Board of Trustees of [SRHS]." Finally, although the Plan states that it was established in confidence that it would continue indefinitely, SRHS "reserve[s] the right to terminate the Plan . . ., in whole or in part, at any time."

         SRHS's finances became increasingly imperiled during the 2008 recession and with the reduction of federal assistance. Consequently, and without informing the employees, SRHS failed to make all but one of its contributions needed to maintain the Plan's fiscal integrity from 2009 to 2014. In late November 2014, the hospital Board, together with executives and counsel, decided to liquidate the Plan. On December 1, 2014, SRHS announced it was freezing the Plan and, "[i]n the coming months, the Plan will be officially liquidated." At that point, there were over three thousand Plan participants, both current and past employees, of whom approximately 600 were retirees receiving monthly payments.

         Counsel for retirees, many of whom have become Objectors to the proposed settlement, immediately sought injunctive relief in the Jackson County Chancery Court, which ordered SRHS not to terminate the Plan. Since that date, however, the Plan has remained "frozen" in that no contributions have been made by employees or SRHS. Plan assets are being steadily depleted, however, because benefit payments to retirees have continued without interruption. In August 2015, the Chancery court held SRHS indebted as a matter of law to the Plan for the missed contributions plus lost earnings, a sum exceeding $55 million.

         Numerous lawsuits were soon filed in state and federal court after the announced termination of the Plan. Pertinent here are three Rule 23 class actions commenced and later consolidated in the federal district court, styled as the Jones, Cobb, and Lowe cases.[1] The operative complaint in the lead case, Jones, names as defendants the Singing River Health Services Foundation, Singing River Health System Foundation, Singing River Hospital System Foundation, Inc., Singing River Hospital System Employee Benefit Fund, Inc., and Singing River Hospital System (collectively, "SRHS Defendants"), along with various individual SRHS executives and members of SRHS's Board of Trustees. KPMG, LLP, and Transamerica Retirement Solutions Corporation, advisers and administrators of the Plan, also were joined as defendants. See Jones v. Singing River Health Sys., No. 1:14-CV-447, 2016 WL 6106521 (S.D.Miss. June 2, 2016).[2] The Jones complaint alleged multiple causes of action for, inter alia, state and federal constitutional violations, federal law breaches of ERISA, and state law claims for breach of contract, fraud, and breach of fiduciary duty. See id.

         Expedited discovery led to the production of "thousands of pages of SRHS financial documents" that enabled the plaintiffs' retained CPA expert to calculate the missed contributions and associated lost Plan earnings. The district court appointed former Chief United States Bankruptcy Judge for the Northern District of Mississippi, David M. Houston, as a mediator, and several mediation sessions, open to various counsel including those of the Objectors, occurred over the next several months.

         When the Jones Plaintiffs moved for preliminary approval of a settlement, the court granted the motion, conditionally certified the class, and approved procedures for notifying class members, who include all current and former employee Plan participants, their spouses, alternate payees, death beneficiaries, or "any other person to whom a plan benefit may be owed."

         On April 1, 2016, the Plaintiffs moved for approval of the final settlement (the "Settlement Agreement"). The Settlement Agreement contains the following terms specifically touted in the district court opinion:

• SRHS must deposit a total of $149, 950, 000 into the retirement trust under a thirty-five year schedule. According to the testimony of the Plaintiff's accountant, the present value of this sum equals the $55 million sum owed by SRHS to the Plan for missed contributions and lost earnings from 2009-14, calculated with a six percent discount rate.
• Jackson County, Mississippi, will pay SRHS $13, 600, 000 over eight years "[t]o support the indigent care and principally to prevent default on a bond issue by supporting the operations of SRHS." Jackson County earlier guaranteed the bond issue;
• SRHS will pay attorneys' fees of $6.45 million and expenses up to $125, 000 of all Plaintiffs' counsel;
• SRHS will pay incentive awards to the individual class representatives in an amount totaling $12, 500;
• The parties will jointly petition the Chancery Court of Jackson County for an order that requires the Plan to be monitored by that court for the duration of the payment schedule;
• SRHS's CFO will give quarterly reports to Stephen Simpson, the Special Fiduciary appointed by the Chancery Court to oversee the Plan;
• Any adjustment to the Plan can only be made with the recommendation of the Special Fiduciary and approval of the Chancery Court after 60 days' notice to Class Members and an opportunity for hearing;
• Plan distributions can only be changed or terminated with the approval of Simpson and the Chancery Court;
• If SRHS recovers money from other entities or individuals, e.g., KPMG or Transamerica, Simpson can petition the Chancery Court to accelerate SRHS's payments;
• In the event of SRHS's default on its payment obligations, there will be a proceeding in the Chancery Court, and that court can enter judgment on ten days' notice for the unpaid balance.

See Jones, 2016 WL 6106521, at *3-5 (district court opinion summarizing the Settlement Agreement). The Settlement Agreement preserves the rights of "all parties, " the plaintiffs and SRHS, to pursue claims against corporate entities like KPMG and Transamerica. However, the SRHS entities, all individual defendants associated with those entities, and Jackson County (although not a party to the lawsuits) are released broadly from any possible claims. Jones, 2016 WL 6106521, at *5. Further, as a result of the settlement negotiations, a majority of the SRHS Board resigned, and Jackson County retained a turnaround firm to improve SRHS operations and long term financial stability.

         Additional important features of the Settlement Agreement not mentioned in the court's opinion are the following:

• There is no collateral or security for the payments owed the Plan by either SRHS or Jackson County; these are wholly unsecured promises to pay.
• The schedule of payments, Ex. A to the settlement agreement, calls for SRHS to make full payout of the Plaintiffs' attorney fees and expenses (over $6.5 million) by the end of September 2018.
• According to the Ex. A payment schedule, SRHS must pay the Plan $6.4 million by September 2017. Then SRHS commits to pay annual amounts totaling $2.4 million for the next two years (through 2019), escalating to $4.2 million from 2020 to 2023. Payments totaling $5.7 million are due in 2024, and annual payments of $4.5 million follow until completion of the payout in 2051. Id.
• Jackson County owes, under Ex. A, $5.2 million through September 2017, followed by annual payments of $1.2 million through 2024.
• If SRHS obtains payments in litigation against KPMG, Transamerica, or insurers in connection with these matters, Simpson "may petition the Chancery Court to accelerate the payment schedule, " and SRHS may oppose that request. Any such recoveries, in other words, do not automatically accrue to the benefit of the Plan, nor will they benefit the Plan in addition to the amounts SRHS must pay.
• Although approval of any changes in distribution, Plan restructuring and/or Plan termination require approval of Simpson and the Chancery Court, that paragraph of the settlement agreement begins by stating: "The payment of the SRHS Consideration may require modification of the Plan to equitably distribute the benefits paid."

         Attorneys Earl L. Denham and W. Harvey Barton represent 245 Objectors to the settlement agreement, about 200 of whom are retirees currently receiving benefits under the Plan and, in many cases, substantially depending on those benefits. Their clients comprise about one-third of the Plan's current beneficiaries. The Objectors argued the "settlement is illusory, provides no real protection for class members, and lacks any specificity as to how different class members will be treated should the class be certified and the settlement approved." They also maintained the class did not meet the requirements for certification, and a release of Jackson County was improper. The SRHS Defendants and Plaintiffs supported the Settlement Agreement as the only alternative to lengthy, costly litigation; the only vehicle for obtaining a contribution from Jackson County; and the only feasible way to obtain some reimbursement from the still-financially precarious SRHS.

         The district court held a fairness hearing on the Settlement Agreement on May 16-17, 2016 ("Fairness Hearing"), at which thirteen live witnesses testified. Lee Bond, CFO of SRHS, testified about the financial stability of SRHS, the Settlement Agreement, and how the settlement will affect the Singing River hospital system. Wayne Allen Carroll, Jr., an accountant with experience auditing employee benefit plans, testified about how he calculated the value of the missed annual required contributions between 2009 and 2014. Carroll valued the missed contributions at $55, 714, 784. Because the hospital did not have the present ability to make that payment, the settlement sets forth a payment ...


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