Justices seem to buy into Blue Cross trust

By Steve Korris | Sep 8, 2006

CHARLESTON – For 16 years no one believed that the United Mine Workers of America owned a $1 million trust at Blue Cross Blue Shield of West Virginia, but Justices of the Supreme Court of Appeals appeared to believe it.

In oral arguments Sept. 6, Justices attacked the idea that Blue Cross Blue Shield turned the trust into something else by mixing it with other money in its general account.

Attorney Christopher Smith of Charleston, representing state insurance commissioner Jane Cline as receiver of the insolvent Blues, felt so much heat that he reminded Justices that he did not represent Blue Cross Blue Shield.

"I do not like Blue Cross Blue Shield," he said.

Smith argued that the miners union should not receive the entire trust but should stand in line with other creditors of Blue Cross Blue Shield.

Insurance commissioners have taken that position since Blue Cross Blue Shield of West Virginia declared insolvency in 1990.

They have held that because Blue Cross Blue Shield commingled the trust with other funds, no one could trace the money.

A specially appointed referee also took that position.

So did Kanawha Circuit Judge Charles King. He ruled last year that Blue Cross Blue Shield destroyed the trust.

The union appealed. Attorney Bradley Pyles of Logan presented the union's argument to the Justices on the first day of their fall term.

Pyles said, "It meets all the legal elements of a trust."

He said he could trace the trust to a treasury bond.

Chief Justice Robin Davis pointed out that the union and the insurer renewed the trust in writing for a second and third year but did not renew it in writing for a fourth year.

She asked if the absence of a written renewal destroyed the trust.

Before Pyles could answer Justice Larry Starcher snapped, "It was not a gift, was it?"

Pyles said that when a trust expires the title reverts to the beneficial owner.

Starcher asked if the union listed itself as a creditor in the insolvency. Pyles said the union did not.

Davis asked if the union would offset its claim by $225,000 that it received under a liability policy covering Blue Cross Blue Shield officers and directors. Pyles said yes.

Davis said she was confused about tracing because Blue Cross Blue Shield bought seven treasury bonds.

Pyles said, "Only one can be traced. There is one asset, that particular bond, that is subject to the trust."

Justice Brent Benjamin asked if the trust documents allowed commingling. Pyles said he did not think so.

Benjamin asked when the commingling happened. Pyles said it happened from the start.

Then came Smith's turn. Justice Joseph Albright asked him if the agreement granted the right to commingle.

Smith did not answer directly but disputed the tracing to the treasury bond. He said, "The union has kind of forced a square peg in a round hole."

Albright laid out a hypothetical case about a bank trust and asked Smith if he would agree that a trust would attach. Smith said no.

Albright said, "That is simply not the law."

Smith said, "The problem in this case is, we are not a bank."

Davis said Smith's position was totally the opposite of a Court decision in Henson v. Lamb.

Starcher said, "It is totally illogical."

Benjamin said Smith argued that the trustee unilaterally changed the trust by mishandling it.

Smith said he did not represent Blue Cross Blue Shield.

Albright said, "You don't stand in any better position than Blue Cross Blue Shield."

He asked if they should be rewarded for commingling without authority.

Smith said, "The receiver is not being rewarded for anything."

He said, "Do you want to protect the policyholders or do you want to protect the UMWA? That is the question."

Smith had argued in a brief that honoring the union claim would reduce the funds available for other creditors.

Albright said, "You did not succeed to those funds."

He said, "What statutory right do you have to void this transaction?"

Smith said the union could not trace the money. He said the union tried to elevate its claim above others.

He said, "This is a test of who gets what."

Starcher said that when a trust expires, "The money does not vanish. It doesn't go into the air and float away."

Benjamin said, "So a fiduciary is magically transformed into something else?"

Davis said cases back to 1927 have held that a trust does not need to be in writing.

Smith said the trust was terminated.

Starcher said there was no intent to terminate it.

Pyles, on rebuttal, said that at the end of a trust the holder must give it back.

The Justices will weigh the arguments and issue a decision.

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