U.S. District Court of Maryland Case Summaries: October 2, 2011 [Daily Record, The (Baltimore, MD)]

Insurance Law

Disability benefits

BOTTOM LINE: Where insurer denied disability benefits for depression based on opinion of insured's psychiatric consultant and neglected to consider records and statements from insured's treating physicians and social workers, remand to insurance plan administrator for a full and fair review was appropriate.

CASE: Zhou v. Metropolitan Life Insurance Company, Civil Action No. 09-CV-01516 (filed Sept. 2, 2011) (Judge Williams).

FACTS: This case arose from the denial of coverage for long-term disability benefits after David Zhou, an employee of American Computer Technology, Inc. ("ACT"), was diagnosed with a depressive disorder and filed an insurance disability claim.

On August 25, 2005, ACT hired Zhou as a Senior Consultant. According to Zhou's job description, Zhou worked 40 hours per week, plus overtime, totaling 60 to 65 hours per week. AR at 489. His job required the ability to concentrate and think clearly to formulate and define software systems, manage projects, and create objectives for projects. Zhou, through a group policy provided by ACT, was a participant in MetLife's Long-Term Disability Insurance Plan. Zhou's coverage under the plan became effective on September 1, 2005.

In December 2005, Zhou's mother died from undiagnosed cancer. On December 23, 2005, Zhou took two weeks' leave of absence to attend the funeral in China. Although Zhou originally planned to return after two weeks, he became depressed in China and alleged that he was too sick to leave. Zhou remained in China and began seeing Dr. Wang Wei, who diagnosed Zhou with depressive disorder and prescribed several medications. Zhou remained in treatment under the care of Dr. Wei until March 30, 2006, when he returned to the United States.

In May 2006, Zhou sought treatment for his depression in the United States with Dr. David Grodsky, M.D., of Threshold Services Outpatient Mental Health Center. At that time, Zhou also began seeing Bonnie Jones, a Licensed Certified Social Worker-Clinician for Threshold Services. Over the two-year course of his treatment at Threshold Services, Zhou suffered a number of symptoms and was prescribed a number of medications to help with his depression and other related symptoms. Zhou saw Dr. Grodsky until June 13, 2006, and subsequently received treatment from several other doctors. In September of 2008, Zhou was diagnosed with bipolar attentive disorder, general anxiety disorder and paranoia.

MetLife became aware of these medical records and diagnoses supporting Zhou's condition over the course of its four reviews of Zhou's claim for disability benefits. On August 31, 2006, based on documentation provided by Zhou and a phone interview between Zhou and a psychiatric specialist from MetLife, MetLife denied Zhou's claim for long-term benefits. The denial letter stated that Zhou had the right to appeal within 180 days, or until February 27, 2007. In January of 2007, Zhou retained counsel to represent him on appeal, but on July 5, 2007, MetLife upheld the original determination to deny Zhou long-term benefits.

Shortly after receiving the denial of appeal notice, MetLife obtained a translation of certain Chinese medical records that MetLife had requested during the appeal, and submitted these records to a physician for a second review. On December 17, 2007, based on this assessment, MetLife granted Zhou long-term disability benefits for the period starting March 24, 2006, the first day Zhou became eligible, to June 14, 2006. However, MetLife did not find that the medical information supported a finding of disability after June 14, 2006. MetLife advised Zhou that he had 180 days to appeal this decision.

On January 25, 2008, Zhou's former counsel appealed MetLife'sDecember 17 decision, and MetLife again denied Zhou's claim. On April 30, 2009, Zhou's current counsel contacted MetLife to inform MetLife that he had replaced Zhou's former counsel, and also submitted new records for review dating from April 28, 2008, through April 15, 2009. Zhou's counsel advised MetLife that Zhou intended to sue MetLife under ERISA, and requested a copy of Zhou's entire claim file. MetLife complied with the request and informed Zhou's counsel that it would re-open the review process and conduct one further review of all the materials.

Before MetLife began reviewing the new records, Zhou filed a civil action claiming that MetLife failed to provide a full and fair review as required by 29 U.S.C. §1133, and seeking long-term disability benefits from June 15, 2006 until the date of trial, as well as a declaration that the benefits continue to be payable to Zhou at a rate of $5,000 per month until age 66. MetLife filed a motion for summary judgment, and Zhou filed a cross-motion for summary judgment.

The district court denied the parties' cross-motions for summary judgment and remanded Zhou's claim to the plan administrator for a full and fair review.

LAW: In this case, the court was tasked with determining whether, at each juncture where MetLife denied benefits to Zhou, MetLife's decision was reasonable and not an abuse of discretion. Based on the record, MetLife did not abuse its discretion in denying Zhou's initial claim, because at that time there was not enough objective medical information to conclude that Zhou had a serious psychiatric disorder that would prevent him from performing the essential duties of his occupation. Under MetLife's Plan, Zhou had the burden of proving that, due to his depressive disorder, he was unable to earn more than 80 percent of his pre-disability earnings, and that he was receiving appropriate care and treatment from a doctor on a continuing basis. While Zhou claimed to be totally disabled and to suffer from a serious and debilitating condition, at the initial review stage, Zhou was unable to procure any medical records from his attending physician in China. Given the information available to MetLife at the time, it was reasonable for MetLife to determine that there was insufficient evidence to support Zhou's claim of total disability, and MetLife did not abuse its discretion in denying Zhou's initial claim for benefits.

By contrast, on July 5, 2007, when MetLife upheld its initial denial of Zhou's claim for long-term benefits, the information before MetLife was much more extensive. This information included: (1) extensive information from Bonnie Jones, Zhou's social worker, suggesting that Zhou had moderately high anxiety, occasional suicidal ideation, and low energy; (2) medical records from May 24, 2006, to January 2, 2007, suggesting Zhou was taking chronic regimens of Klonopin, Ativan, and Lexipro; and (3) two additional statements in support of disability. In citing the reasons for its denial, MetLife stated that the record presented by Zhou lacked sufficient clinical medical information to support a finding of symptoms so severe that Zhou was unable to perform the duties of his occupation.

However, MetLife failed to adequately consider that a claim of disability due to depression is fundamentally different from other types of disability claims that can be proved solely through a clinical medical record. Unlike a broken bone or a heart attack, depression is a disease which relies largely on self-reported symptoms. In this context, given Zhou's reported symptoms, Zhou's doctors were able to diagnose him with major depression and found that Zhou was unable to work due to poor concentration. Thus, the overwhelming evidence available to MetLife at the time of MetLife's first review clearly suggested that Zhou continued to suffer from debilitating depression.

Moreover, in denying Zhou's claim, MetLife disregarded the medical diagnoses and conclusions of Zhou's attending physician and social worker in favor of the opinions by MetLife's independent psychiatrist, Dr. Goldman, who did not treat Zhou but merely evaluated Zhou's medical records. In fact, MetLife did not merely give more weight to objective medical findings over subjective complaints, but proceeded to wholly disregard Zhou's submissions showing that he had a GAF score of 32, as well as statements by Zhou's attending physician and social worker supporting a lack of sufficient cognitive function to return to work. As such, MetLife's denial of Zhou's claim and sole reliance on the opinion of its own psychiatrist over the medical data and opinions of Zhou's treating physicians was clearly unreasonable.

MetLife's fourth denial of Zhou's claim also contained the trappings of unreasonableness in that it failed to fully and fairly consider the medical opinions and diagnoses of Zhou's treating physicians or an independent medical examination. Although MetLife had no obligation to send Zhou for an independent medical examination, a reasonable review would have involved such an examination. Because depression is a disease that encompasses inherently subjective complaints, it was inappropriate for MetLife to continually deny Zhou's claim based solely on the opinions of psychiatrists who merely reviewed Zhou's file, to the exclusion of statements and diagnoses by Zhou's treating physicians, and without an independent medical examination supporting the view of MetLife's psychiatrists. MetLife's failure to order an independent medical exam was particularly questionable given that MetLife continually denied Zhou's claim based on a lack of objective evidence such as cognitive testing.

When, as here, a plan administrator fails to comply with ERISA's procedural guidelines to provide "full and fair review" of a claim for disability benefits, the proper course of action for the court is remand to the plan administrator to provide such review. Weaver v. Phoenix Home Life. Mut. Ins. Co., 990 F.2d 154, 159 (4th Cir.1993). Remand is most appropriate when the plan itself commits the trustees to consider relevant information which they failed to consider. Elliott v. Sara Lee Corp., 190 F.3d 601, 607 (4th Cir.1999). Given this policy of favoring resolution by the plan administrator, and MetLife's failure to adequately consider the medical records, opinions, and diagnoses presented by Zhou's treating physicians or to conduct an independent medical examination, considering the nature of the claim, remand was appropriate so that Zhou's claim could be decided after the "full and fair review" ERISA requires. See, e.g., Hardt v. Reliance Standard Life Ins. Co., 540 F.Supp.2d 656, 664 (E.D.Va.2008).

Accordingly, the parties' cross motions for summary judgment were denied, and Zhou's claim were remanded to MetLife for a full and fair consideration of the opinions and medical diagnoses of Zhou's treating physicians which MetLife failed to fully consider in its second, third, and fourth reviews of Zhou's claim.

Real Property

Constructive trust

BOTTOM LINE: Summary judgment on plaintiffs' constructive trust claim was proper because plaintiffs' investment funds that were used to purchase a parcel of land were procured by fraud, deceit, and other improper conduct.

CASE: Kim v. Nyce, Civil Action No. 8:09-CV-01572-AW (filed Sept. 2, 2011) (Judge Williams).

FACTS: Plaintiffs Eun Kim and others invested in a real estate business, Sunchase Capital Partners XI, LLC. Defendant Nyce & Co., Inc., owned by defendant Douglas Nyce, was the class B Member of Sunchase and had sole authority to appoint, remove, and replace the manager of Sunchase. Douglas Nyce was the manager of Sunchase with sole authority to make all decisions with respect to its management and operations. Defendant Parcel K-Tudor Hall Farm, LLC, ("PK-THF") was a company created in the real estate transaction underlying the parties' dispute.

Sunchase signed an agreement of sale dated April 6, 2004 agreeing to purchase property from seller Tudor Hall Farm, Inc., for $15 million. The sale agreement provided Sunchase with title to 141 acres of unimproved real property, save a 7.88 acre area, Parcel K, which was to be titled in the name of PK-THF. PK-THF's initial membership consisted of Sunchase, with an 80 percent stake, and the seller, with a 20 percent stake. In order to raise the $15 million, Sunchase created an offer and sale to investors of securities, described as Class A Membership Units in Sunchase.

The proposed investment was described in a Confidential Summary of Offering, dated April 13, 2005. One hundred shares were offered at a cost of $150,000 each, for a total of $15 million. The confidential summary represented that Class A subscription payments would be held in escrow pending acquisition of the property at closing under the sale agreement. The confidential summary defined the "Minimum Offering" as 50 Class A Membership Units, or $7.5 million. The Subscription Agreement provided that if the subscription for at least 50 Units was not received and accepted by the company on or prior to April 29, 2005, the offering would terminate and each investor's $150,000 per unit subscription payment would be returned, without interest. The confidential summary further represented that Sunchase would not acquire the property if less than the maximum offering ($15 million) was raised and Sunchase was not able to obtain additional funds, whether from the Class B Member or otherwise.

Sunchase closed on the acquisition of the Property on May 2, 2005, even though at that point Nyce had raised only $3,125,000 through the sale of Class A Membership Units. During the three months after the closing on the acquisition of the property, Sunchase sold $3,972,000 in Class A Membership subscriptions, bringing the total to $7,097,000 ($403,000 short of the Minimum Offering and $7,903,000 short of the Maximum Offering). Sunchase failed to acquire an investor or lender to make up the $7,903,000 difference. Sunchase then negotiated a modification of its sale agreement with the seller in order to acquire the property. The modification allowed Sunchase to pay the seller over time in return for a $500,000 increase in the sale price, bringing the total price to $15.5 million. Using funds from the Class A membership offering, Sunchase paid $3 million to the seller at closing, and agreed to pay the balance according to the terms of a 7 percent purchase money note which matured on May 2, 2006. Among other things, the purchase money note required Sunchase to make monthly principal and interest payments. The note was secured by a first deed of trust on the property.

Sunchase found itself unable to pay on the Purchase Money Note and obtained an investment from the 2003 Trust of the Descendants of William D. Pleasants, Jr. To manage the investment, the Pleasants Trust created Tudor Hall Funding, Inc., which was owned 95 percent by the Pleasants Trust. On April 27, 2006, prior to the final maturity date of the purchase money note, Tudor Hall Funding agreed to purchase the note from Tudor Hall Farm, Inc. to avoid default by Sunchase. At this point, the Pleasants Trust, through Tudor Hall Funding, Inc., became Sunchase's principal secured lender with a first lien on the Property (not including Parcel K). Sunchase soon defaulted on its obligation to Tudor Hall Funding, Inc., which then initiated foreclosure proceedings against the property (not including Parcel K) in circuit court.

On September 10, 2007, one day before the scheduled foreclosure sale, Sunchase filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Under the confirmed bankruptcy plan, the equity interests of the Class A Members of Sunchase, including the plaintiffs, were eliminated and received nothing on account of their equity interests in Sunchase. Under the plan, the parties agreed that Sunchase could assign Sunchase's 80 percent membership interest in PK-THF to Tudor Hall Funding. Tudor Hall Funding separately acquired the remaining 20 percent interest in PK-THF from Tudor Hall Farm. Parcel K remained in the possession of PK-THF, although Tudor Hall Funding owned all of the membership interests in PK-THF.

Plaintiffs filed suit in district court, charging that a constructive trust was created in their favor in Parcel K by defendants Nyce and Nyce & Co., Inc., and that plaintiffs had a paramount equitable claim to the Parcel K Property. The Court entered default judgments against defendants Douglas A Nyce and Nyce & Co., jointly and severally, for securities fraud in violation of 15 U.S.C. §78j(b) and 17 C.F.R. 10b-5, violations of §20(a) of the Exchange Act, common law deceit, and negligent misrepresentation. The only claim remaining was plaintiffs' constructive trust claim against Defendant PK-THF. The parties filed cross motions for summary judgment.

The court granted plaintiffs' motion and denied PK-THF's motion.

LAW: Under Maryland law, the doctrine of constructive trust is an equitable remedy, designed to convert the holder of the legal title to property into a trustee for one who in good conscience should reap the benefits of the possession of said property. Jahnigen v. Smith, 795 A.2d 234, 239 (Md.2002). The remedy is available only: (1) when property is acquired by fraud, misrepresentation, or other improper method; or (2) where the circumstances would render it inequitable for the party holding title to retain it, such as unjust enrichment. See Wimmer v. Wimmer, 414 A.2d 1254, 1258 (Md.1980)), cert. denied, 802 A.2d 439 (Md.2002). The purpose of the remedy is to prevent the unjust enrichment of the holder of the property. Id. at 1258.

In this case, summary judgment on plaintiffs' constructive trust claim was proper because: (1) plaintiffs' investment funds were used to purchase Parcel K; (2) plaintiffs' funds were procured by fraud, deceit, and other improper conduct; and (3) given that plaintiffs' funds supported the creation of PK-THF and its ownership of Parcel K, it would be unjust for PK-THF to retain the benefit. Parties requesting the imposition of a constructive trust must be able to trace their funds to the property upon which the trust is to be impressed. Bregman, Berbert & Schwartz, L. C.C. v. United States, 145 F.3d 664, 669 (4th Cir.1998). Thus, the first issue before the Court was whether plaintiffs' investment funds were traceable to Parcel K. Plaintiffs contended that Parcel K was contributed to PK- THF as part and parcel of the overall sales agreement between Sunchase and Tudor Hall Farm, Inc., the seller. The language in the April 6, 2004 agreement of sale supported plaintiffs' contention, and it was undisputed that plaintiffs' investment funds were used to pay the $15.5 million purchase price under the agreement of sale. As such, plaintiffs' investment funds were used to purchase Parcel K.

Likewise, plaintiffs' investment funds were procured by fraud, deceit, and other improper conduct. On October 1, 2009, the Court entered default judgments against Defendants Douglas Nyce and Nyce & Co. ("Nyce"), jointly and severally, in the amount of $3.12 million, for securities fraud in violation of 15 U.S.C. §78j(b) and 17 C.F.R. 10b-5 (Count I), violations of §20(a) of the Exchange Act. Although Nyce's default judgments did not operate as binding admissions on PK-THF, they did operate as final and conclusive judgments as to Nyce's fraud and deceit. Accordingly, the Court declined to reconsider whether Nyce concealed Sunchase's lack of adequate capitalization and inability to pay the $15.5 million purchase price for the Tudor Hall Farm property and found that the evidence submitted by PK-THF failed to create a genuine dispute of material fact on this issue.

Finally, because plaintiffs' fraudulently procured investment funds supported the creation of PK-THF and its ownership of Parcel K, it would be unjust for PK-THF to retain the benefit. While PK- THF itself played no role in raising funds from investors, PK-THF came into existence and received Parcel K, its only relevant asset, as part of the property sales agreement Nyce entered into as manager of Sunchase. Accordingly, PK-THF's very existence and its ownership of Parcel K were made possible by plaintiffs' purchase of Class A Membership Units and Nyce's decision to use those funds to enter into a fraudulent sales agreement. The crucial factor was not whether PK-THF itself engaged in fraudulent or deceitful conduct, but whether plaintiffs conferred a benefit on PK-THF and whether it would be unjust for PK-THF to retain that benefit. See Starleper v. Hamilton, 666 A.2d 867, 869-70 (1995). Because it would be unjust for PK-THF to retain the benefit of Parcel K, a benefit derived from a fraudulent transaction which inured to the detriment of plaintiffs, a constructive trust in favor of plaintiffs was proper here.

Accordingly, the plaintiffs' motion for summary judgment as to their constructive trust claim was granted, and defendants' motion for summary judgment was denied.

COMMENTARY: PK-THF contended that plaintiffs' constructive trust claim was barred by res judicata because plaintiffs failed to argue during the bankruptcy case that they, rather than PK-THF, were the true owners of Parcel K. The doctrine of res judicata bars successive attempts to re-litigate the same cause of action between the same parties, as well as any other claim or issue that could have been raised in the earlier action. Meekins v. United Transp. Union, 946 F.2d 1054, 1057 (4th Cir.1991). Res judicata applies when there is: (1) a final judgment on the merits in a prior suit; (2) an identity of the cause of action in both the earlier and the later suit; and (3) an identity of parties or their privies in the two suits. Pueschel v. United States, 369 F.3d 345, 345-55 (4th Cir.2004).

Claims are part of the same cause of action for res judicata purposes when they arise out of the same transaction or series of transactions. Anyanwutaku v. Fleet Mortg. Group, Inc., 85 F.Supp.2d 566,571 (D.Md.2000). In the Chapter 11 proceeding, the bankruptcy court did not consider, and had no obligation to consider, any factual dispute relating to plaintiffs' fraud or constructive trust claims, and the facts at the core of plaintiffs' constructive trust claim were neither raised nor litigated. As such, the Chapter 11 bankruptcy proceeding did not involve the same cause of action as the case now before the Court. Accordingly, plaintiffs' constructive trust claim was not barred by res judicata.

PRACTICE TIPS: A member of an LLC has no interest in property owned by the LLC. As such, a claim against an LLC member is not legally considered an indirect or a direct claim against the LLC.