Case Studies

Epstein Becker Green Wins Dismissal of Lawsuit Seeking Millions in Reimbursement of IRS Penalties, Interest, and Investment Losses

On February 25, 2013, the Supreme Court of the State of New York, New York County, dismissed on summary judgment a complaint brought by an individual whose $35 million deduction for tax shelter losses was disallowed and who sought reimbursement of more than $5 million in Internal Revenue Service ("IRS") penalties, interest on unpaid income tax, and investment losses against an Epstein Becker Green client, a trust company. The plaintiff claimed that our client, among other things, committed a fraud, breached fiduciary duties, and negligently handled his accounts by participating in the tax shelter.

The plaintiff had founded a highly successful video game company and had income of $35 million in 2001 that he wanted to shelter from taxes. He engaged accountants and advisors, and a lawyer from a prominent law firm, who together devised a complex investment structure to create paper losses that involved, among other things, engaging a trust company (Epstein Becker Green's client) simply to administer a pooled investment trust and to handle related paperwork. The structure involved borrowing $35 million from a foreign bank. After the IRS determined the loan to be a sham and the investment losses artificial, it disallowed the loss deductions, and the plaintiff had to pay $13 million in back taxes, $2 million in interest, and $1.3 million in penalties. The lawyer was jailed for tax fraud and the foreign bank entered into a deferred prosecution agreement and paid fines. Having settled with the law firm and several other participants in the shelter, the plaintiff sued our client and the foreign bank that made the "sham" loans.

After extensive discovery of all the sponsors and participants in the tax shelter scheme, the court dismissed the complaint. It held that, because the plaintiff knew or should have known that the tax shelter was risky and because he was complicit in the scheme, he could not have reasonably relied on any alleged fraudulent statements by any of the defendants. Moreover, the proximate cause of the disallowance and the penalties was not the bank's or trust company's actions, but the plaintiff's own participation in a transaction of "doubtful illegality." Hence, all of the plaintiff's breach of contract and fiduciary duty theories were rejected. The court appropriately placed the loss on the plaintiff who stood to benefit from the shelter, and not on anyone else.

Epstein Becker Green attorneys Kenneth J. Kelly and Lori A. Jordan were on the litigation team in New York. Salt Aire Trading LLC v. Enterprise Bank and Trust Corp., S.Ct., N.Y. Co. Index No. 603798/07 (2/25/13).

Epstein Becker Green Achieves Twin Victories in Investment Banking Bonus Arbitrations

Epstein Becker Green obtained awards dismissing the claims of nine investment bankers in two arbitrations for bonuses totaling more than $10 million in January and April 2013. Our client, an investment banking firm, had decided as a result of the 2008 crash to award "provisional" bonuses in December 2008 that were subject to adjustment, depending on the firm's then-undetermined audited year-end financial results. Because the firm lost several billion dollars and had to borrow TARP-like funds from the government to maintain its capital requirements, the directors reduced the provisional awards by 90 percent across the board.

The bankers commenced two arbitrations before FINRA for the unpaid balances, claiming breaches of contract and detrimental reliance, on the basis that their particular business units did not contribute to the firm's loss. The firm defended by arguing that, because the bonuses were discretionary, it could properly place decisive weight on its overall performance. Further, the firm argued that the bankers' reliance argument was undermined by layoffs and hiring freezes globally in the financial services industry—a fact confirmed in the bankers' internal emails.

The two panels independently awarded "zero" to the two groups of bankers and dismissed all of the claims. Kenneth J. Kelly and Diana C. Gomprecht led the Epstein Becker Green defense team in both cases.

Epstein Becker Green Convinces Plan Review Committee to Overturn Termination of Participating Physician Group Services Agreement

On April 29, 2013, Epstein Becker Green achieved a major victory when the Plan Review Committee of L.A. Care Health Plan ("L.A. Care") found that L.A. Care's termination of the Participating Physician Group Services Agreement ("Agreement") with Epstein Becker Green client Accountable Health Care ("AHC") was procedurally unfair.

L.A. Care terminated the Agreement under a "without cause" provision and did not contend that AHC was in breach of the Agreement. Under Potvin v. Metropolitan Life Ins. Co., 22 Cal.4th 1060 (2000), California provides a common law fair hearing right to health care providers even in the event of a "without cause" termination. Arbitrary decisions and the denial of fair procedure are prohibited by Potvin. Contractual provisions allowing termination "without cause" are unenforceable to the extent that they do not provide fair procedure. Under Potvin, the termination of a provider's agreement must be both substantively rational and procedurally fair.

Epstein Becker Green argued on behalf of AHC that L.A. Care acted contrary to its own Fair Hearing Procedure and the legal principles of Potvin by issuing a notice of termination of the Agreement prior to the fair hearing and a decision by the Plan Review Committee, even though, at the hearing, L.A. Care argued that its decision was based on a cease-and-desist order against AHC that was filed by the California Department of Managed Health Care. Although the Fair Hearing Procedure provides that the hearing process must precede any issuance of a notice of termination under a provider contract, the termination notice and related correspondence made clear that L.A. Care had already reached a decision to terminate the Agreement at the time that the notice was provided to AHC. In addition, the notice failed to include the specific reasons for the termination, a description of any policies and procedures, or any other criteria used in making the determination, as required by the Fair Hearing Procedure.

The Plan Review Committee voted unanimously in finding that the L.A. Care termination notice was procedurally unfair because it was inconsistent with the requirements of the Fair Hearing Procedure and had been issued prior to the completion of the fair hearing process.

The Epstein Becker Green team representing AHC included Los Angeles attorneys David Jacobs, Paul C. Burkholder, and J. Susan Graham.

New Jersey Appellate Court Dismisses Suit Against Medical Claims Administrators

Epstein Becker Green recently achieved a significant appellate victory for Horizon Healthcare Services Inc. ("Horizon") and Magellan Health Services Inc. ("Magellan"). On June 11, 2013, the Superior Court of New Jersey, Appellate Division, reversed a decision by the Chancery Division, Essex County, and dismissed a lawsuit brought by the New Jersey Psychological Association ("NJPA") and two patients. The complaint alleged that Horizon and Magellan had breached their agreement under the State Health Benefit Program ("SHBP"), which insures New Jersey workers, and violated the New Jersey Practicing Psychology Licensing Act ("PPLA") by requiring psychologists to disclose confidential patient treatment information before paying for the patients' mental health services.

The NJPA previously sued Horizon and Magellan in the Chancery Division, Mercer County, for violating the SHBP agreement and the PPLA. In January 2011, the Mercer judge dismissed the suit, claiming that the NJPA lacked standing to bring its claims against Horizon and Magellan because it couldn't prove that the association had suffered any harm. The NJPA filed an appeal, but then withdrew it. In July 2011, the NJPA and two patients, who were covered under SHBP plans and claimed that they were denied treatment by Horizon and Magellan because they refused to disclose confidential information, filed a second lawsuit, but, this time, in the Chancery Division, Essex County. The Essex judge declined to dismiss the suit, and Horizon and Magellan appealed.

In its decision, the Appellate Division pointed out that the plaintiffs in the Essex County suit "raise no new issues and present no new material facts that should change the decision made by the Mercer judge." Accordingly, the Appellate Division dismissed the suit, adding that the Essex judge should not have not considered the case and that the two patient-plaintiffs were required to exhaust their administrative remedies under the SHBP before seeking judicial action.

The Epstein Becker Green team included attorneys James P. Flynn and Amy E. Hatcher.

EBG Litigators Defeat Preliminary Injunction Application, Substantially Narrow Discovery, and Ultimately Prevail

Longtime client Magellan Health Services Inc. (“Magellan”) has, once again, looked to Epstein Becker Green litigators for assistance—this time, in an attempt to deflect a significant challenge to a subsidiary’s credentialing program for the reimbursement of diagnostic imaging services.

In an action filed in New Jersey state court against Magellan and its subsidiary, National Imaging Associates, the New Jersey Podiatric Society asserted claims for violations of New Jersey’s unfair insurance claims practices act and unlawful discrimination against the podiatrists in violation of New Jersey’s scope of practice statute. The society also sought preliminary injunctive relief, posing a direct threat to our client’s business operations. If granted, the injunction would have restricted Magellan’s ability during the pendency of the litigation to dictate the necessary qualifications for network providers seeking reimbursement for diagnostic imaging services.

The court denied plaintiff’s application for a preliminary injunction and adopted Epstein Becker Green’s position that plaintiff’s discovery demands should be scaled back substantially. The court ordered discovery to be completed within 60 days and directed that discovery be limited solely to confirming facts that had been already presented by affidavit. After such discovery, on September 19, 2014, the court granted summary judgment in Magellan’s favor.

The litigation team consisted of James P. Flynn and Amy E. Hatcher of the Newark office.