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Receivership Management, Inc. v. AEU Holdings, LLC

United States District Court, N.D. Illinois, Eastern Division

September 4, 2019



          Joan H. Lefkow, U.S. District Judge

         The independent fiduciary this court appointed to oversee a group of failed health benefit plans has sued, under a negligence theory, several defendants allegedly involved in the set-up and administration of those plans. The defendants-AEU Holdings, LLC, Stephen Satler, Steven Goldberg, and Billie Wray (collectively, “Defendants”)-now move to dismiss the complaint and move to strike a declaration the independent fiduciary submitted in the course of briefing the motion to dismiss. (Dkts. 19, 41.) For the reasons below, the court denies the motions.[1]

         BACKGROUND [2]

         This case arises from the failure of a large group of employee health benefit plans and a “self-funded health benefits program platform”[3] designed to serve them. (Dkt. 8 ¶¶ 16-18.) The program comprised a base level of at least 261 employer-sponsored, self-funded plans (the “Participating Plans”). (Id. at 1 n.1; ¶ 11.) The Participating Plans were part of or participated in an overarching health benefits plan called the AEU Holdings, LLC Employee Benefit Plan (the “AEU Plan”).[4] (Id. at 1 n.1.) This court previously entered a preliminary injunction appointing plaintiff Receivership Management, Inc., as the independent fiduciary (the “IF”) to administer the AEU Plan and the Participating Plans. Pizzella v. AEU Benefits, LLC, No. 17-cv-7931, Dkt. 49 at 3 (N.D. Ill.Dec. 13, 2017). The allegations of the IF's complaint, taken as true for purposes of the motions, are as follows:

         Before 2015, the program was operated by ALL Insurance Solutions Management, LLC (“AISM”). (Dkt. 8 ¶ 16.) In July 2015, AISM engaged AEU Holdings, LLC, and its wholly-owned subsidiary AEU Benefits, LLC, to manage the AISM program platform. (Id. ¶ 17.) The IF alleges Defendants used the names AEU Holdings and AEU Benefits interchangeably, so it uses the term “AEU” to refer to the two entities collectively. (Id. ¶ 15.) Where appropriate, [5] the court does so as well.

         On April 26, 2016, AEU acquired the AISM program platform via an asset purchase agreement. (Id. ¶ 18.) At that time, AEU “took over the sales, marketing, underwriting, rating, claims handling, and program administration and advisory functions.” (Id.) AEU continued in that role until this court issued a temporary restraining order appointing the IF on November 3, 2017. (Id. ¶¶ 10, 11.)

         Defendant Stephen Satler was the CEO of AEU Holdings and a member of its Board of Managers. (Id. ¶ 3.) Satler owned approximately 22% of AEU Holdings. (Id.) Defendant Steven Goldberg was the COO of AEU Holdings and a member of its Board of Managers. (Id. ¶ 4.) Goldberg also owned approximately 22% of AEU Holdings. (Id.) Defendant Billie Wray was General Counsel of AEU Holdings from approximately June 2015 through July 1, 2017. (Id. ¶¶ 5, 37.)

         AEU Holdings engaged entities called “aggregators” to solicit employers to form employee benefits plans that would participate in the AEU Plan.[6] (Id. ¶ 20.) Each employer's plan was to be established as a voluntary employees' beneficiary association (“VEBA”) trust, an entity exempt from federal income tax under Internal Revenue Code section 501(c)(9). (Id. ¶ 23.)

         AEU Holdings controlled the marketing materials that aggregators provided to solicited employers. (Id. ¶ 28.) For example, AEU Holdings authored a “VEBA Tool Kit Presentation” to describe how contributions would be collected from employers, how claims would be paid, and the benefits of self-funded plans versus fully-insured plans. (Id. ¶ 29.) AEU Holdings marketed its program as including “stop loss” insurance-designed to cover claims that exceeded the contributions made to the plan-that would be purchased by a single Bermuda purchasing trust (“BPT”) as named insured, with all Participating Plans being co-beneficiaries of the trust. (Id. ¶¶ 29, 31.)

         Black Wolf Consulting, Inc. was the main aggregator for the AEU Program. (Id. ¶ 97.) During 2016 and 2017, Black Wolf enrolled more than 75 percent of the Participating Plans that enrolled in the AEU Program. (Id. ¶¶ 20, 97; Dkt. 34 ¶ 7.) Black Wolf operated out of Frankfort, Illinois, and approximately 39 percent of the Participating Plans Black Wolf enrolled were organized in Illinois, as of April 2017. (Dkt. 8 ¶¶ 97, 98.)

         Defendants provided five documents to each employer that they knew “were required to be completed, executed, and/or received by each Participating Plan”: (1) a VEBA trust agreement; (2) a program advisory services agreement; (3) a collection agreement with an aggregator; (4) a certificate from a BPT; and (5) a plan administrator services agreement. (Id. ¶ 25.)

         Of particular note, the VEBA trust agreements for each Participating Plan required each plan's contributions to be placed in separate deposit accounts, or at least to be accounted for separately. (Id. ¶¶ 32, 58.) The VEBA trust agreements also provided that the trustee for each VEBA trust, “or the Plan Administrator as designee, ”[7] was “specifically authorized to determine the required amount of contributions to pay the expected cost of benefit provided . . . ” (Id. ¶ 32.) Defendants were not parties to any VEBA trust agreement, but they “owed duties” to Participating Plans to ensure that the requirements of the VEBA trust agreements were followed. (Id. ¶ 33.)

         Defendants caused, approved, or tolerated multiple failings in the implementation of the Program that ultimately led to there being insufficient funds to pay all claims. First, Defendants “negligently failed to ensure the proper set up of the AEU Program.” (Id. at p. 10.) Specifically, “almost none” of the Participating Plans set up separate bank accounts, obtained certificates of coverage from the BPT, or obtained approvals of their VEBA trusts from the IRS. (Id. ¶¶ 43-46.)

         Second, Defendants “were negligent in allowing/not prohibiting the improper commingling of the Participating Plans' funds.” (Id. at p. 15.) Defendants knew, at least as of April 2017, that aggregators were putting contributions they received from employers into the aggregators' own bank accounts rather than a bank account for the corresponding plan and/or VEBA trust. (Id. at ¶¶ 61, 64.) Aggregators then took a portion of the employers' contributions to pay themselves and brokers working for them before forwarding the remaining balance to “the AEU Program's designated administrative representative's bank account.”[8] (Id. at ¶ 61.) The administrative representative then withdrew fees for itself, AEU, and third-party administrators. (Id. at ¶ 62.) The remaining funds were “pooled in the Bermuda accounts.” (Id. at ¶ 62.)

         Third, and related to the above, Defendants “negligently allowed aggregators to deduct their fees from Participating Plan contributions.” (Id. at 17.) In this regard, Defendants knew that all contributions from each employer were required (seemingly under the VEBA trust agreements, although the complaint does not make that clear) to go into the Participating Plans' accounts. (Id. ¶¶ 32, 62.)

         Fourth, Defendants “negligently allowed associations and one-person groups to be Participating Plans.” (Id. at p. 18.) “Covering single individuals is risky, and the AEU Program was rated and underwritten for group, rather than individual coverage.” (Id. at ¶ 74.) Permitting single individuals contravened underwriting guidelines that Defendants themselves had adopted, which required each Participating Plan to have at least five full-time employees enrolled. (Id. at ¶¶ 30, 74.)

         Fifth, Defendants “negligently allowed the AEU Program to be marketed improperly.” (Id. at 20.) In this regard, Defendants told Participating Plans that “the employer's monthly contribution/premium payment was the maximum cost to a Participating Plan and its employees.” (Id. ¶¶ 81, 82.) This marketing was “improper” because the Participating Plans were to be self-funded plans, in which an employer “is responsible for all claims incurred in excess of the employer/employee contributions and stop-loss payments.” (Id. ¶ 81.) In essence, the IF alleges that Defendants allowed the AEU Program to be marketed as a fully-insured plan that would pay all covered claims in exchange for the payment of monthly premiums. (Id.)

         Sixth, Defendants “negligently failed to ensure that the plans in the AEU Program were properly underwritten.” (Id. at 22.) “[A]s operated by Defendants, the AEU Program was to charge sufficient premiums from Participating Plans and to pool those premium contributions in order that the total would be sufficient to cover all medical claims for all Participating Plans.” (Id. at ¶ 86.) Defendants did not charge sufficient premiums for multiple reasons, including that “[c]ompanies were underwritten as a group and then additional employees were accepted regardless of health status, ” and that Defendants allowed numerous one-person “groups” in the program. (Id. ¶¶ 85-87.)

         The facts as set out above comprise a single negligence claim against all Defendants.. Defendants have moved to dismiss on grounds of lack of personal jurisdiction, improper venue, claim splitting, and failure to state a claim upon which relief can be granted. (Dkt. 19.) AEU Holdings and the individual defendants have submitted separate memoranda in support of the motion. (Dkts. 20, 21.) The IF submitted a response that included a declaration from Robert Moore, Jr., the President of Receivership Management, Inc. (Dkts. 33-35.) Defendants have moved to strike parts of the declaration. (Dkt. 41.)


         I. Personal Jurisdiction

         Because this is a diversity case personal jurisdiction is governed by the law of the forum state. Tamburo v. Dworkin, 601 F.3d 693, 700 (7th Cir. 2010); Fed.R.Civ.P. 4(k)(1)(A). The Illinois long-arm statute permits the exercise of jurisdiction to the maximum extent permitted by the United States Constitution. Ariel Investments, LLC v. Ariel Capital Advisors LLC, 881 F.3d 520, 521 (7th Cir. 2018); 735 Ill. Comp. Stat. 5/2-209(c).[9] The Constitution, in turn, permits a defendant to be subject to either general or specific jurisdiction. Bristol-Myers Squibb Co. v. Superior Court of California, San Francisco Cty., 137 S.Ct. 1773, 1779-80, 198 L.Ed.2d 395 (2017). The IF does not argue that any of the Defendants is subject to general jurisdiction in Illinois. (Dkt. 33 at 10.)

         Specific jurisdiction lies where (1) a defendant has purposefully directed his activities at the forum state or purposefully availed himself of the privilege of conducting business in that state, and (2) the alleged injury arises out of the defendant's forum-related activities. Tamburo, 601 F.3d at 702. The exercise of specific jurisdiction also must “comport with traditional notions of fair play and substantial justice.” Id. In determining whether specific jurisdiction lies, a court must consider “the interests of the forum State and of the plaintiff in proceeding with the cause in the plaintiff's forum of choice, [b]ut the primary concern is the burden on the defendant.” Bristol-Myers Squibb, 137 S.Ct. at 1780. The fact that a defendant's out-of-state acts foreseeably caused harm to a plaintiff in the forum state is not sufficient, by itself, to subject the defendant to personal jurisdiction. Walden v. Fiore, 571 U.S. 277, 291, 134 S.Ct. 1115, 1126 (2014); Ariel Investments, 881 F.3d at 522.

         A complaint need not allege facts that would establish personal jurisdiction, but a plaintiff faced with a Rule 12(b)(2) motion bears the burden of demonstrating jurisdiction at every stage following that challenge. Purdue Research Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). If a defendant makes evidentiary submissions on a Rule 12(b)(2) motion that put material facts in dispute, those disputes ultimately must be resolved at a hearing at which the plaintiff bears the burden of proving jurisdiction by a preponderance of the evidence; if no material facts are in dispute, the court may allow the litigation to proceed where the plaintiff makes a prima facie showing of jurisdiction. Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002). In deciding a Rule 12(b)(2) motion prior to an evidentiary hearing, all factual disputes supported by evidence submitted by the plaintiff must be resolved in the plaintiff's favor, as must any disputes for which defendants do not offer evidentiary support. Purdue Research, 338 F.3d at 782; ABN AMRO, Inc. v. Capital Int'l Ltd., 595 F.Supp.2d 805, 823 (N.D. Ill. 2008). The court draws all reasonable inferences consistent with the complaint in the plaintiff's favor. ABN AMRO, 595 F.Supp.2d at 818.

         A. Defendants' Motion to Strike Certain Allegations in the Moore Declaration

         Both the IF and defendants have submitted declarations and exhibits in support of their positions on personal jurisdiction. Defendants move to strike certain allegations in the declaration of Robert Moore, Jr., the President of the IF. (Dkt. 34, the “Moore Declaration.”) Defendants argue that the allegations lack a proper foundation, are made without personal knowledge, contain hearsay, and/or are statements of opinion rather than statements of fact. (Dkt. 41 at 2.) With respect to the foundation and hearsay objections, Defendants particularly argue that Moore purports to rely on a review he and his counsel conducted of “hundreds of thousands of pages of documents” he obtained from AEU and Black Wolf. Moore attaches a selection of the documents to his declaration but does not include citations that indicate which documents support which statements, nor, Defendants argue, does he recite a foundation for the documents' admission into evidence. (Id. at 2-3; dkt. 49 at 2-3.) The IF responds that the Moore Declaration does lay a foundation for all statements therein in that Moore attests he has “personal knowledge” gained from his investigation and that the documents on which he relies are non-hearsay business records obtained from AEU and Black Wolf.[10] (Dkt. 47 at 5-6.)

         The specific statements that Defendants move to strike in the Moore Declaration are the following:

• The IF's investigation related to the AEU Plan and Participating Plans has included obtaining requested documents from AEU Holdings, LLC (“AEUH”), AEU Benefits, LLC (“AEUB”), and Black Wolf Consulting, Inc. (“BWC”). The IF and its counsel have reviewed hundreds of thousands of pages of documents produced by those entities. Certain of those documents are produced with this Declaration as Exhibit B. An index of the documents prepared by counsel is attached as Exhibit A. The factual statements in this Declaration are based on all of the documents reviewed and not just the documents attached hereto. The documents attached hereto are representative of the documents produced to the IF and show that the facts set forth herein and in Plaintiff's Opposition are supported by documents produced to the IF. (Dkt. 34 ¶ 4.)
• With Defendants' supervision and approval, BWC received and controlled millions of dollars of contributions from Participating Plans into its bank account at the Bank of Pontiac in Monee, Illinois, deducted its fees, and then sent the remaining contributions to the AEU Program's designated Plan Administrator, S.D. Trust Advisors. S.D. Trust Advisors received those contributions originating from Participating Plans (including those in Illinois) into its account at Iberia Bank and then distributed those funds as directed by Defendants Stephen Satler (“Satler”) and Steven Goldberg (“Goldberg”) including payment of fees to AEU from that bank account. Satler and Goldberg controlled the disbursement of such funds on a monthly-and sometimes even more frequent-basis. (Id. ¶ 8.)
• The attached documents show that Satler, Goldberg, and Defendant Billie Kathryn Wheeler Wray (“Wray”) had numerous contacts, electronic and otherwise, with Illinois entities and persons soliciting and discussing business related to the AEU Plan. The documents show that the Defendants repeatedly and intentionally directed emails to persons in Illinois with the knowledge that effects would be felt in Illinois. The primary Illinois contacts of Satler, Goldberg, and Wray were Rod and Anna Maynor of BWC, with whom Satler, Goldberg, and Wray had numerous contacts related to the AEU Plan. Wray sent and received numerous emails with Rod and Anna Maynor at BWC in Illinois, had numerous phone calls with them, and sent documents to them, all related to the operation of the AEU Program. In addition, Defendants sent numerous inaccurate and misleading communications to AEU Program brokers and Participating Plans in Illinois. The email domain name for Satler, Goldberg, and Wray was “” (Id. ¶ 9.)
• The documents attached hereto also show that Defendants AEUH, Satler, Goldberg, and Wray provided advisory and administrative services and managed the AEU Program and in doing so, owed duties to the AEU Plan and Participating Plans to provide accurate information and manage the AEU Program properly. (Id. ¶ 10.)

(Dkt. 34 at ¶¶ 4, 8-10.)

         As an initial matter, the court need only address the admissibility of these statements to the extent they are controverted by evidence submitted by Defendants. As set forth above, a court considering whether a plaintiff has made a prima facie showing of personal jurisdiction must credit any allegations in a plaintiff's complaint that the defendant's evidence does not controvert. ABN AMRO, 595 F.Supp.2d at 818.

         Each of the individual defendants (Satler, Goldberg, and Wray) submitted declarations with their motion to dismiss that address their contacts, or lack thereof, with Illinois. (Dkts. 20-9, 20-10, 20-11.) Those declarations do not controvert the assertions in the Moore Declaration.[11]

         Satler submitted a second declaration that arguably does controvert two of the relevant assertions in the Moore Declaration: (1) that Black Wolf deducted its fees from the Participating Plans “[w]ith Defendants' supervision and approval” and (2) that “Satler and Goldberg controlled the disbursement” of funds by the Plan Administrator, S.D. Trust Advisors. (Dkt. 20-12; Dkt. 34 ¶ 8.) In contrast to those assertions, Satler attests: “Neither I, Mr. Goldberg, nor ‘AEU' as that term has been used by [the IF] in this case, ever received, had possession of, or controlled the disbursement of any premium funds purportedly sent by an Illinois based entity associated with what [the IF] has called the ‘AEU Plan'…” (Dkt. 20-12 ¶ 29.) Satler also attests, “Neither I, Mr. Goldberg, Ms. Wray nor any AEU entity ever collected plan contributions, paid any fees to service providers, or otherwise participated in the transfer of funds that originated from employers' plan contributions.” (Id. ¶ 30.) Thus, the court must consider whether it should credit the statements in the Moore Declaration regarding Defendants' involvement in and control over the way Participating Plans' contributions were handled.

         Defendants contend that the statements are not admissible under the Federal Rules of Evidence as is required for a Rule (12)(b)(3) motion. The IF points to cases where a receiver or trustee in bankruptcy has been allowed to testify about the financial situation of the estate under its control and its investigative findings related to that estate. (Dkt. 47 at 9.) Warfield v. Byron, 436 F.3d 551, 559 (5th Cir. 2006); BDO Seidman, LLP v. Banco Espirito Santa Int'l, 38 So.3d 874, 880 (Fla. App. 2010) (a “receiver or trustee may testify from personal knowledge regarding relevant aspects of his or her own personal investigation of the business failure and liquidation or reorganization of the entity”); see also Sec. & Exch. Comm'n v. Total Wealth Mgmt., Inc., No. 15-CV-226, 2018 WL 3456007, at *3 (S.D. Cal. July 18, 2018) (concluding that court-appointed receiver had personal knowledge to support his conclusion that defendant misappropriated nearly $2 million based on his “investigation and analysis of the business and financial activities of the Receivership Entities”); Dietz v. Spangenberg, No. CIV. 11-2600, 2014 WL 537753, at *3 (D. Minn. Feb. 11, 2014) (permitting bankruptcy trustee to testify to “the circumstances he observed while fulfilling his statutory duty to investigate the financial affairs of [the debtor]… as well as to the results of his investigation”). Moore can so testify here for purposes of establishing a prima facie case of personal jurisdiction.

         Defendants also object to Moore's reliance on the documents attached to his declaration on the grounds that he fails to make clear what assertions they support and does not authenticate them or establish their admissibility. (Dkt. 41 at 4-5.) Although not ideal, Moore provides an index to the documents that provides guidance as to what he takes the documents to mean. (Dkt. 34-1.) Moore's representation that all documents were produced by parties to these related case is sufficient authentication at this stage. See Reid v. Wal-Mart Stores, Inc., 274 F.Supp.3d 817, 821 (N.D. Ill. 2017) (holding that the fact that documents were produced by a defendant was sufficient authentication at summary judgment stage). Defendants do not dispute that the documents were produced by one or more of the Defendants and presumably could not, since most of the documents are emails that on their face suggest they were sent or received by one or more of the individual defendants. See Id. (holding that court would rely on documents at summary judgment stage where there was a reasonable basis to believe they would be admissible).

         Some of the documents-construed in the light most favorable to the IF-support Moore's assertion that Satler and Goldberg issued directions to the Plan Administrator, S.D. Trust Advisors, regarding the distribution of contributions from Participating Plans. (See Dkt. 34-2 at 116 (June 2017 email from Goldberg to Thomas Stoughton of S.D. Trust Advisors asking him to “[p]lease initiate distribution to all parties today” of certain “money received from Black Wolf Consulting for May”); id. at 146 (August 2017 email from Goldberg to Stoughton “advis[ing]” him to wire $82, 078.11 because “Black Wolf Consulting mistakenly included these premiums in the $2, 000, 000 wired to you”); id. at 153 (August 2017 email from Goldberg to Stoughton saying, “You will be distributing $759, 512.03 for BPT2…”).) In addition, the IF's complaint references a June 2017 email from Wray to a Black Wolf employee in which she states that “technically” all the contributions Black Wolf collected should be placed in separate accounts for the VEBA trusts, and, “All the money collected (yes All), should be deposited in the trust.”[12] (Dkt. 8 ¶ 66.) This email arguably suggests that Wray was aware that Black Wolf had not been depositing all plan contributions in designated trust accounts but had been deducting fees from them.

         Thus, the court will credit-at this early stage in the litigation-the statements in the Moore Declaration relating to Satler and Goldberg's alleged control over the distribution of funds by S.D. Trust Advisors and Defendants' knowledge that Black Wolf was deducting its fees from Participating Plans' contributions. On the other hand, the court disregards Moore's assertions of legal conclusions, for example, that “Defendants… owed duties to the AEU Plan and Participating Plans to provide accurate information and manage the AEU Program properly, ” and “Defendants sent numerous inaccurate and misleading communications to AEU Program brokers and Participating Plans in Illinois.” (Dkt. 34 ¶¶ 9, 10.)

         A. Purposeful Availment

         The evidentiary disputes thus settled, the first question in the specific jurisdiction analysis is whether Defendants purposefully availed themselves of the privilege of conducting business in Illinois or purposefully directed their activities towards Illinois. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472, 105 S.Ct. 2174 (1985). The IF argues that Defendants' purposeful jurisdictional contacts come both from their use of a sales agent, Black Wolf, that operated in Illinois and solicited Illinois entities and from Defendants' own direct contacts with Illinois.

         i. Whether Black Wolf's Jurisdictional Contacts Are ...

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