West Virginia Record

Thursday, April 2, 2020

Justices restore $1 million trust to UMWA

By Steve Korris | Oct 13, 2006

CHARLESTON – Justices of the West Virginia Supreme Court of Appeals unanimously restored a $1 million trust fund that the United Mine Workers of America lost in the financial collapse of Blue Cross Blue Shield of West Virginia.

In an unsigned decision Oct. 5, Justices ordered Kanawha Circuit Judge Charles King to move the union to the head of the line in the distribution of the last $2,449,000 in Blue Cross assets. For 15 years, eight insurance commissioners, as receivers of Blue Cross assets, kept the union at the back of the line with a worthless claim as an unsecured creditor.

For 15 years, the union argued that Blue Cross held the money in trust. No one listened until their plea reached the state Supreme Court

In oral arguments last month, Justices rejected Insurance Commissioner Jane Cline's argument that the trust was destroyed.

They attacked the argument so harshly that Cline's attorney, Christopher Smith of Charleston, told them he did not represent Blue Cross and that he did not like Blue Cross.

In their decision, the Justices wrote, "Blue Cross violated its duty to earmark UMWA's trust fund and to keep it separate from its own funds."

They not only agreed with the union, but also added more than $140,000 to the union's claim by recalculating its portion of a Blue Cross bond sale.

The insurance commissioner loses nothing as a result of the decision. Hospitals, doctors and former Blue Cross subscribers lose, because they would have shared the money the Justices gave to the union.

The union gave Blue Cross $1 million in 1986 to earn interest that would subsidize a health plan for members without jobs or on layoff.
Blue Cross did not segregate the money, but kept it in its general operating account. Blue Cross regularly deposited millions into the account and removed millions for security investments.

In 1987, Blue Cross paid the union $69,909.87 in interest. In 1988, it paid $87,078.72.

They did not renew their written agreement in 1989, but they agreed to continue the program and Blue Cross kept the $1 million.

By the end of 1989, Blue Cross was insolvent, but the business carried on.

In 1990, Blue Cross proposed to return the million, but the union refused.

Blue Cross prepared to return it anyway. It set up a sinking fund and built it to $710,748.49 on Oct. 9, 1990. Two weeks later, Blue Cross collapsed. The insurance commissioner applied for a liquidation order estimating the negative balance at $33 million.

The insurance commissioner found an investment portfolio with seven bonds worth $1 million each and rolled all assets into a general fund, including the sinking fund and the bonds.

The union filed a claim with the insurance commissioner in 1991 for the $1 million, plus $88,148.13 interest.

In separate action, the union, the insurance commissioner and others sued Blue Cross officers and directors. They settled, and the union received $225,000.

The insurance commissioner in 1992 ruled that the union held a general unsecured claim, presumably worthless. The union objected, and in 1993, a Kanawha County judge appointed a referee.

Seven years later, after what Justices called "an experience period of discovery," the insurance commissioner asked the referee to recommend summary judgment against the union.

The union answered with its own motion for summary judgment. The referee recommended in favor of the insurance commissioner.

King adopted the referee's recommendation in 2005, finding that commingling of funds in the general operating account destroyed the trust. He wrote that the union's effort to trace its $1 million to the bonds in the investment portfolio was conjecture and speculation.

He wrote that the sinking fund negated any argument that the parties intended to create a trust.

In reversing King, the Justices wrote that he was wrong about the sinking fund. They wrote that the union did not agree to reacquire the $1 million in a sinking fund.

Quoting a 1919 decision, the wrote that a trust exists when a person possesses money or other personal property with the express or implied understanding that he is not to hold it as his own, but to apply it for certain specific purposes or for the benefit of specified persons.

They wrote that the lack of a formal written agreement was not relevant because West Virginia and most other states permit creation of a trust in writing, orally or by conduct.

They wrote that only five states require a written trust.

Even a written trust does not end, they wrote, until the trustee has accounted for it and conveyed it.

They wrote that prior West Virginia cases and decisions of other states have made clear that a trustees' commingling of trust funds with its own funds will not destroy a trust.

They agreed that tracing the $1 million was conjecture and speculation.

"However," they wrote, "we do not believe that, under the unique facts of this case, UMWA was required to trace a specific bond.

"We believe that requiring UMWA to trace its trust fund to a specific bond in Blue Cross' investment portfolio is the equivalent of requiring UMWA to locate the exact dollars it wired to Blue Cross to establish the trust."

They wrote, "It is not important that the commingled money bore no mark, and cannot be identified. It is sufficient to trace it into the bank's vaults and find that a sum equal to it, and presumably representing it, continuously remained there until the receiver took it."

The Justices added three chunks of cash to the package.

First, the union had contended that it deserved one-seventh of the purchase price of the seven bonds. That would have equaled $901,902.187.

The Justices disagreed. The insurance commissioner received $1,035,592.62 from selling the bonds, so the Justices ruled the union was entitled to every penny. That added $133,690.45 to the claim.

Second, the Justices awarded interest that the insurance commissioner has earned on the proceeds from the bond sale.

Finally, they ruled that the union will deduct its $225,000 settlement from its original claim of $1,088,148.13.

Insurance Commissioner Cline had proposed to deduct the settlement from the proceeds of the bond sale.

By siding with the union on this point, Justices added $52,555.51 to the claim.

Bradley Pyles of Logan represented the UMWA before the court.

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West Virginia Supreme Court of Appeals