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Maryland Ins. Com'r v. Kaplan

Court of Appeals of Maryland

August 16, 2013


Reconsideration Denied Oct. 18, 2013.

Page 299

J. Van Lear Dorsey, Asst. Atty. Gen. (Douglas F. Gansler, Atty. Gen. of Maryland,

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Baltimore, MD), on brief, for appellant/cross-appellee.

Ward B. Coe, II (Mark S. Saudek of Gallagher, Evelius & Jones, LLP, Baltimore, MD), on brief, for appellee/cross-appellant.



[434 Md. 283] CareFirst has a unique public and charitable mission under State law to ensure affordable and adequate health care for [434 Md. 284] Maryland residents. In light of that mission it enjoys a variety of tax and other benefits under the law. State law confers broad authority on the Maryland Insurance Commissioner (" Commissioner" ) to oversee its operation and its adherence to its mission.

As this Court noted in 1994, because CareFirst has no shareholders, the Commissioner has an enhanced role in preventing abuses and misuse of corporate funds. One concern is the payment of excessive executive compensation from corporate assets that would otherwise be devoted to its public and charitable purposes. In 2003, while reforming the governance and oversight of Carefirst, the Legislature entrusted the Commissioner with ensuring that executive compensation at CareFirst is " fair and reasonable" and " for work actually performed for the benefit of the corporation."

This case arises from the termination of Leon Kaplan, a former executive of CareFirst. At that time, CareFirst declined to pay part of the post-termination compensation set forth in Mr. Kaplan's employment contract on the basis that it was not " for work actually performed," as that standard had been interpreted by the Commissioner. In a subsequent administrative proceeding, the Commissioner affirmed the decision not to pay those benefits on the ground that the payments would violate the statute. We are asked to decide whether the Commissioner's determination is preempted in part by the federal Employee Retirement Income Security Act of 1974 (" ERISA" ) and, if not, whether the Commissioner has mis-applied the Maryland statute.

For the reasons outlined below, we hold that the Commissioner's determination is not preempted by ERISA, that the Commissioner's construction of the insurance code is legally correct, and that there was substantial evidence to support the Commissioner's determination in this case.



Carefirst, Inc. (" CareFirst" ), a nonstock, nonprofit Maryland corporation, is a holding company with two subsidiaries [434 Md. 285] that provide health insurance for millions of Maryland residents. Each entity is licensed as a nonprofit health service plan under Maryland Code, Insurance Article (" IN" ), § 14-101 et seq. Such entities are designated as " public benefit corporations" exempt from taxation. IN § 14-102(b). The statutory mission of a nonprofit health service plan is to " provide affordable and accessible health insurance," to " assist and support public and private health care initiatives" for uninsured individuals, and to " promote the integration of a health care system that meets the health care needs of all the residents" of the areas in which it operates. IN § 14-102(c).

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Because it has no shareholders and because it has an important public mission, CareFirst has long been subject to special regulation by the State. In particular, the law provides for close oversight by the Commissioner to ensure that its officers and directors carry out their fiduciary duties and that its assets are devoted to the statutory mission. In O'Donnell v. Sardegna, 336 Md. 18, 646 A.2d 398 (1994), this Court held that CareFirst subscribers could not bring a " derivative action" against former officers of CareFirst for dissipating the company's assets for the executives' own benefit. Rather, the Court held, Maryland law relies on oversight by State authorities, including the Commissioner, to prevent the waste of corporate assets of CareFirst through the payment of " excessive perquisites, salaries, and bonuses" to those who have charge of the company. 336 Md. at 37-44, 646 A.2d 398.

Regulation of Executive Compensation at CareFirst

Conversion statute— anti-inurement and anti-bonus provisions

Following the Sardegna decision, the General Assembly enacted a statute governing the acquisition and conversion of nonprofit health care entities such as CareFirst into for-profit entities. Chapters 123, 124, Laws of Maryland 1998, codified at Maryland Code, State Government Article (" SG" ), § 6.5-101 et seq. Under that law, conversion of a nonprofit health [434 Md. 286] service plan like CareFirst into a for-profit company, or its sale or merger, requires the approval of the Commissioner.

A key concern of that legislation is to ensure that the " public or charitable assets" of such an entity are not redirected to the private benefit of its managers or others. Any such transaction is to be scrutinized to, among other things, " ensure that no part of the public or charitable assets ... inure directly or indirectly to an officer, director, or trustee" of the organization. SG § 6.5-301(b)(4). In addition, steps must be taken to ensure that " no officer, director, or trustee of the [organization] receives any immediate or future remuneration as the result of an acquisition ... except in the form of compensation paid for continued employment...." SG § 6.5-301(b)(5). These restrictions are sometimes referred to as the " anti-inurement" and " anti-bonus" provisions of the law governing acquisitions of nonprofit health care entities.[1]

Anti-inurement and anti-bonus provisions applied to proposed Carefirst transaction

In 2002, the management of CareFirst sought approval from the Commissioner [2] for a proposed conversion of CareFirst to for-profit status and the sale of the company to a private health insurer, Wellpoint Health Networks, Inc., for approximately $1.37 billion. As part of the deal, CareFirst executives were slated to receive $119.6 million in merger incentives and severance pay, including $39.4 million in retention bonuses, severance, and tax benefits for CareFirst's then-CEO William L. Jews. When word of the proposed deal broke, there was considerable outcry among both the public and State legislators.[3]

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[434 Md. 287] The Commissioner reviewed the application and, after conducting 15 days of hearings, issued a report and an order in March 2003 concluding that the proposed conversion and acquisition was not " in the public interest" and that it was being driven by the anticipated payments of multi-million dollar bonuses to CareFirst executives. Accordingly, the Commissioner concluded that the proposed transaction violated Maryland law in a number of respects, including the anti-inurement and anti-bonus provisions. Stating that " the critical inquiry is whether any sums that an officer or director receives constitute reasonable or fair compensation for work actually performed," the Commissioner concluded that the proposed payments to CareFirst executives would violate both provisions.

Commissioner's construction of conversion statute incorporated in IN § 14-139

In response to the Commissioner's report, the General Assembly enacted extensive legislation during its 2003 and 2004 sessions to reform CareFirst and refocus its management on its nonprofit mission. Chapters 356, 357, Laws of Maryland 2003; Chapters 257, 330, Laws of Maryland 2004.[4] Among the reforms were additional measures to govern executive compensation at nonprofit health service plans. That legislation incorporated into IN § 14-139(c) the general standard that the Commissioner had developed in applying the anti-inurement and anti-bonus provisions of the conversion statute in the Wellpoint transaction:

A director, trustee, officer, executive, or employee of a [nonprofit health service plan] may only approve or receive from the assets of the corporation fair and reasonable compensation in the form of salary, bonuses, or perquisites [434 Md. 288] for work actually performed for the benefit of the corporation.

To ensure that only " fair and reasonable" compensation is paid " for work actually performed," the statute requires that the board of directors approve and adhere to compensation guidelines for board members and officers. IN § 14-139(d). Those guidelines are to be developed by comparison with similar nonprofit health service plans— as opposed to private corporations. Id. On an annual basis, the Commissioner is to review the compensation actually paid and, if it exceeds the guidelines, prohibit the payment. Id.

The William Jews case

In November 2006, the board of directors of CareFirst terminated William L. Jews, who had served as its CEO since 1993. In accordance with the severance terms of Mr. Jews' employment contract, the board approved the payment to Mr. Jews of approximately $18 million in post-termination benefits comprised of various

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components of his compensation package.[6] Part of the amount approved consisted of a payment based on the terms of CareFirst's Supplemental Executive Retirement Plan (" SERP" )— an unfunded executive pension [434 Md. 289] plan that is also a subject of this case. Pursuant to IN § 2-205, [7] THE COMMISSIONER CONDUCTED AN EXAMINATION OF CAREFIRST TO REVIEW THE compensation and benefits to be paid to Mr. Jews following his termination.

The Commissioner examined the post-termination payments due Mr. Jews under his employment contract with CareFirst and determined that the amount violated the requirements that compensation be " fair and reasonable" and " for work actually performed for the benefit of the corporation." In reaching that conclusion, the Commissioner reasoned that these two requirements of IN § 14-139(c) imposed substantive obligations on the officers and directors of CareFirst that were independent of the procedural guidelines for setting compensation that are set forth in IN § 14-139(d). The Commissioner also concluded that whether proposed compensation satisfies the criteria of IN § 14-139(c)— i.e., whether it is " fair and reasonable" and for " work actually performed" — is a question of fact to be determined on the circumstances of each case.

On July 14, 2008, the Commissioner ordered that Mr. Jews' total post-termination compensation be reduced by half— from approximately $18 million to approximately $9 million— although the order did not specify how the reduction was to be allocated across the various components of the compensation package. [8]

[434 Md. 290] Revision of CareFirst executive compensation guidelines

After the Commissioner's order was issued in the Jews case, the compensation committee of the CareFirst board revised CareFirst's executive compensation guidelines and, on September 28, 2008, approved a revision to be submitted to the board. The revised guidelines were adopted by the board in December 2008. These revised guidelines acknowledge that IN § 14-139 requires CareFirst to propose compensation guidelines consistent with that law. The guidelines included recognition of the obligation on the CareFirst Board to make " a separate ...

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