St. Joseph pension plan receiver names Roman Catholic Diocese, Prospect CharterCare in suit

PROVIDENCE – Stephen Del Sesto, court-appointed receiver for the collapsed St. Joseph Health Services pension plan, filed suits in R.I. Superior Court and U.S. District Court Tuesday against Prospect Medical Holdings, Prospect CharterCare, the Roman Catholic Diocese of Providence and others for wrongdoing in the plan’s failure, demanding the plan be made whole.

The plan became insolvent after a business deal in 2014 left it without any employee contributions, putting the benefits of about 2,700 current and former employees of Our Lady of Fatima Hospital and Roger Williams Medical Center at risk.

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The suit asks for the court to stop the transfers in connection with the 2014 asset sale, a declaration that the plan is subject to the Employee Retirement Income Security Act, or ERISA, and unspecified attorneys’ fees and expenses.

The court appointed special counsel Max Wistow in fall 2017 to determine if a lawsuit against the parties involved in the collapse was warranted. Wistow has been working with Del Sesto, an attorney with Pierce Atwood LLP.

On Tuesday, Del Sesto filed separate lawsuits alleging state and federal violations in the management of the pension plan.

The lawsuit alleges the defendants engaged in four schemes that damaged the pension and harmed plan members:

1. For about 50 years Saint Joseph’s Health Services of Rhode Island used the plan as a marketing tool to hire and retain employees, promised employees that it made 100 percent of the necessary contributions and that they had no investment risk, “leading them to mistakenly but justifiably conclude that SJHSRI was making the necessary contributions and their pensions were safe.”
2. For most of the past 10 years, SJHSRI stopped making necessary contributions, making the plan “grossly underfunded,” but SJHSRI and other defendants conspired to conceal it from plan participants through fraudulent misrepresentations and material omissions.
3. For many years SJHSRI and other defendants secretly sought to terminate the plan without exposing SJHSRI’s substantial operating assets and charitable funds to lawsuits by plan participants for benefits, including in December 2012 when SJHSRI considered unilaterally terminating the plan and paying benefits only to employees who were already retired, which would have deprived more than 1,800 other plan participants of any pension whatsoever but reconsidered because SJHSRI feared the excluded plan participants would bring a successful class action that would end up costing SJHSRI more than it would save by terminating the plan.
4. Beginning in 2011, SJHSRI and other defendants put into operation a scheme to transfer SJHSRI’s operating assets, cash and most of its expected future charitable income to entities controlled by SJHSRI’s parent company, intending that the assets would be out of reach of a suit by the plan participants, and then terminate the plan. This scheme had four key stages:
5. 1. First, in connection with the 2014 asset sale, SJHSRI and related entities engaged in the fraudulent transfer of SJHSRI’s operating assets to the control of a for-profit limited liability company, leaving SJHSRI with the insolvent pension plan and no operating assets, in return for SJHSRI’s parent company getting a 15 percent stake in the for-profit company that they thought would be safe from the claims of plan participants, and made fraudulent misstatements and material omissions concerning the plan to the state regulatory agencies whose approval was required for the transfer to go forward.
   2. Next, to evade federal law imposing liability on control groups and successors under ERISA, SJHSRI and other defendants conspired with the Diocesan defendants to falsely claim the plan continued to qualify as a “church plan,” which if true would have exempted it from ERISA. This claim violated federal tax laws and ERISA.
   3. Then, to secure cash that should have gone to bolster the plan, SJHSRI’s parent company over the last four years stripped at least $8.2 million in charitable assets from SJHSRI and its other subsidiary, and either spent or put the money in a foundation it controlled. This was accomplished by misleading the R.I. Superior Court in 2015 into approving the “wrongful and fraudulent” transfers under the doctrine of cy pres, a principle of law that courts use to save a charitable trust from failing when a charitable objective is originally or later becomes impossible or impracticable to fulfill, according to IRS.gov.
   4. Finally, having accomplished their goal of stripping SJHSRI of virtually all value, SJHSRI and its affiliates sought to wash their hands of the problem they created, and put the plan into receivership in August 2017 and asked the state court to reduce SJHSRI’s liabilities to plan participants by 40 percent on the grounds that SJHSRI had insufficient assets to fund the plan.

The federal lawsuit alleges the schemes resulted in 21 separate violations of law, including laws requiring minimum funding of the plan, breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, fraudulent transfer, fraud through intentional misrepresentation and omissions, fraudulent scheme, conspiracy, actuarial malpractice, breach of contract, as well as breaches of state civil liability, liquidation, violation of the Rhode Island Hospital Conversion Act and fiduciary duty laws. The state lawsuit alleges 18 legal violations spanning similar charges.

Representatives of Prospect CharterCare did not immediately respond to requests for comment on the suit.

“We are not surprised that Prospect is alleged to have engaged in unlawful conduct – including conspiring to injure and defrauding plan participants, willingly and knowingly making false and misleading statements to plan participants and state regulators, along with aiding, abetting and participating in breaches of fiduciary duties to plan participants. Our union has been warning Rhode Islanders for years that Prospect is a bad corporate citizen that can’t be trusted, “ said United Nurses and Allied Professionals legal counsel Chris Callaci.

UNAP Local 5110 represents about 500 registered nurses and service employees at Our Lady of Fatima Hospital, which is part of the Prospect CharterCare system.

“Prospect, Prospect CharterCare, the Diocese of Providence and others knew this pension fund was unsustainable without continued financial support, and they said nothing. In fact, this lawsuit contends they went out of their way to deceive the hardworking bedside caregivers and health professionals at Our Lady of Fatima Hospital,” Callaci said.

Rob Borkowski is a PBN staff writer. Email him at Borkowski@PBN.com.