Workers Drop Claim Against Hospital Chain

OAKLAND, Calif. (CN) - A federal judge dismissed without prejudice a proposed class action that claimed one of the Bay Area's oldest hospital chains "betrayed" workers by shorting them for $229 million in erroneously classified retirement funds.

U.S. District Judge Vince Chhabria on Monday signed the voluntary dismissal of Lynn Morris et al. v. Daughters of Charity Health System et al.

The proposed class of 8,800 hospital nurses, housekeepers and technicians claimed the hospital chain was short $229 million in funds needed for promised retirement benefits, which it "erroneously" classified as a "church plan" exempt from the Employee Retirement Income Security Act.

Daughters of Charity was created in 2002 when its six member hospitals spun off from nonparty Catholic Healthcare West, a multi-hospital health system, which is not a church.

The plaintiffs claimed the chain bled financially for years while underfunding their plans, and did not filed annual reports with the Labor Department.

According to the complaint: "In every year since at least 2002, the health system has failed to file an annual report with respect to the plan with the Secretary of Labor in compliance with ERISA § 103, 29 U.S.C. § 1023, or a Form 5500 and associated schedules and attachments which the Secretary has approved as an alternative method of compliance with ERISA § 103, 29 U.S.C. 21 § 1023."

Nonparty suitors Prime Healthcare Services and Prime Healthcare Foundation aimed to purchase the hospital chain in 2014 for $843 million, before pulling out of the deal amid concerns over requirements of Attorney General Kamala Harris.

The plaintiffs said their "financially distressed" plan was among the liabilities that Daughters of Charity were to transfer as part of the sale, and that Prime "raised the possibility of putting the health system into bankruptcy, which would further endanger the pensions of plaintiffs and the other plan participants."

The "betrayed" plaintiffs sought declaration that the plan was subject to ERISA protections and an order removing the health system and its executives as plan fiduciaries.

Los Altos Hills-based Daughters of Charity, now known as Verity Health System, agreed to a separate $260 million deal with New York City-based hedge fund BlueMountain Capital Management in December 2015.

That deal was the largest nonprofit hospital transaction in state history.

"Verity will proudly continue the mission of care begun by the Daughters of Charity more than 150 years ago," Verity Health System CEO Mitchell Creem said in a statement. "I am extremely pleased and grateful for the opportunity to carry on this tradition of excellence, with new leadership and significant investments."

Plaintiffs' counsel, Catha Worthman with Feinberg, Jackson, Worthman & Wasow of Oakland, celebrated an agreement to fund the plan without further disclosing specifics.

"We are pleased that the plan has become an ERISA plan and is being funded as required under ERISA at this point," Northman told Courthouse News on Tuesday.

Verity and BlueMountain representatives did not immediately respond to requests for comment.

Starla Rollins, a former billing coordinator of nonparty Dignity Health, filed a separate class action against the insurer in 2013, claiming its pension benefits plan was underfunded, in violation of ERISA.

Dignity, formerly Catholic Healthcare West, claimed that its plan was a "church plan" that need not conform to ERISA standards.

U.S. District Judge Thelton Henderson found in 2014 that Dignity did not have statutory authority to establish its own plan and must follow ERISA.

Catholic Healthcare West was founded in 1986 by the Sisters of Mercy, which Catholic women founded as a religious institute in Dublin, Ireland, in 1831.

BlueMountain, as part of the Daughters of Charity acquisition, must maintain the embattled system's essential services for at least 10 years.

The hedge fund is also obligated to continue operating the hospitals as nonprofit health centers for three years before exercising an option to convert them to for-profit centers.

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