UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PAUL F. X. RISTEEN,
YOUTH FOR UNDERSTANDING, Inc.
and YOUTH FOR UNDERSTANDING USA, Inc.,
Civil Action No. 02-0709 (JOB]
Before the Court is plaintiff Paul
Risteen's motion seeking a preliminary injunction
against defendants Youth for Understanding, Inc. ("YFU")
and Youth for Understanding USA, Inc. ("YFU USA"] to
enjoin them from denying him continuation health
insurance coverage under the Employment Retirement
Income Security Act ("ERISA"), 29 U.S.C. §1 140 et seq.,
as amended by the Consolidated Omnibus Budget
Reconciliation Act ("COBRA"), 29 U.S.C. § 1161 et seq.
Risteen, a former employee of YFU, alleges that YFU USA
is the successor employer to YFU following YFU's
corporate reorganization, and therefore that YFU USA
must assume YFU's
obligation to provide Risteen his remaining COBRA continuation health benefits. The Court is able to reach and decide the merits of Risteen's claims laid out in his motion for preliminary injunction and upon consideration of plaintiffs motion, the submissions of the parties, and oral]
argument, the Court grants Risteen's motion.
Located in Washington, D.C., YFU was a non—profit corporation that specialized in high school student exchange programs matching American Students with foreign families and schools, as well as foreign students with American families and high schools. Complaint 1 4. Since 1951, more than 200,000 students have participated in YFU exchanges; in the 2001 academic year more than 3,000 students in the United States participated in YFU programs. YFU USA Opp., Ex. 1 at 3. Each participating country has its own national organization that coordinates the exchange of students; YFU served as the national organization in the United States. Q at ¶ 4.
YFU hired Risteen as a Regional
Director on December 12, 1994, and promoted him in
January 1997 to Vice President for Programs, effectively
the number two position in the YFU hierarchy just below
the president. Complaint at ¶’¶ 5—6. Risteen found the
environment under McNally hostile and intolerable, and
tendered his resignation in April 2001. Ld, at ¶ 17.
YFU's Board of Trustees met in late April 2001 and
accepted Risteen’s resignation. ld, at 1¶ 22-23.
However, the Board offered Risteen a contract as a
temporary employee to work from home,
paying Risteen the equivalent of six months of his former salary, and it bought out his benefits package. ID at 24. in September 2001, the Board informed Risteen that they had decided not to continue his employment with YFU after the expiration of his contract. Id at ¶ 28.
A. Risteen's Action
Raising claims of employment
discrimination, failure to pay wages, and ERISA
violations, Risteen tiled this action in the Superior
Court of the District of Columbia on February 25, 2002,
and YFU then removed the case to this Court. Notice of
Removal ¶ 1. On March 8, 2002, Risteen found out from
his pharmacy that YFU was no longer providing health
insurance for him. Risteen Motion, Ex. 1 at1¶ 1-5. As a
result, Risteen was left with $1,832 of unpaid medical
expenses related to heart complications. g at ¶¶ S-9.
After repeated inquiries to YFU, he was told that all
further communications must go through YFU's attorney. g
at1§ 13. On April 22,
2002, Risteen was hospitalized through an emergency room admission to George Washington University Hospital with a preliminary diagnosis of congestive heart failure and possibly a pulmonary embolism. Ld, at 1 i4. Because he no longer had health insurance, Risteen asked to be discharged on April 24, 2002 — against his doctors’ medical advice. ld, at ¶ 15. The medicine prescribed on his release cost $629 for a two week. supply, which, Risteen claims, he was instructed to take "for the rest of my life." Q, at ( 16. The cost of Risteen's hospital stay and medical tests exceeded $17,000. Q, at¶ 17. Moreover, Risteen's urologist refused to perform necessary prostate surgery on Risteen until his heart and lungs could withstand anesthesia. Id at ¶ 1S. Risteen had follow—up appointments with his cardiologist, urologist, pulmonologist, and
psychiatrist, each paid out of his own pocket. Q, at ¶ 19. Risteen claims that he is being denied (Le., is denying himself) critical medial attention because he has no health insurance. Q at ¶ 20.
H. Motion to Amend the Complaint
Risteen has moved to amend his complaint to include two additional counts under COBRA. The proposed Count V of Risteen's amended complaint claims that YU failed to pay benefits it owed Risteen before it ceased operations. Motion for Leave at pp. 5-7. Risteen maintains that YFU attempted to escape its COBRA liability to Risteen, and that YFU USA is "a mere continuation of the enterprise formerly known as YFU." Id. at p. S. He contends that YFU has avoided its obligations under COBRA by "establishing a new corporate shell for the purpose of receiving the benefits, assets, and goodwill of YFU, Inc., thereby liquidating the assets of YFU, Inc. and leaving it unable to pay for its lawful obligations." Ld, at p. 6. Therefore, Risteen claims, pursuant to 29 U.S.C. § 1 l32(a), "[a]s a successor entity, YFU USA, is obligated under every theory of successor liability to assume the obligations of YFU, Inc., including its ERISA obligations? Li; at pp. 6-7. He seeks to recover the benefits for which be would have been eligible —-approximately seven (7) months of COBRA continuation benefits —- as well as his costs and attorney's fees. Q Amended Complaint, at ¶ 44. Under the proposed Count VI, Risteen seeks to add a claim for YFU USA's failure "to enroll Risteen into its health care plan, pursuant to COBRA, for the remainder of his eligibility period" Ld, at ¶ 52. He maintains that YFU's "cessation of activities on March S, 2002, and its subsequent transfer of its assets, employees, equipment, facilities, databases, clients, sponsors, and good will to Defendant YFU USA is a transaction to evade liability."' Id at ¶ SO. Risteen claims that "YFU USA is a mere continuation of the enterprise formerly known as YFU, Inc." Motion for Leave at p. 12.
Risteen may bring an action to recover and reinstate COBRA continuation benefits and allow for continuation health insurance coverage under 29 U.S.C. § li32.' The statute states:
Civil enforcement: (a) Persons
empowered to bring a civil action
A civil action may be brought — (1) by a participant or beneficiary -— (A) for the relief provided for in subsection (c) of this section, or (B] to obtain benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or; to clarify his rights to future benefits under the terms of the plan; . . . or (3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate: equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.
29 U.S.C. § 1132 (emphasis added); see
also 26 C.F.R.§ 54.4980B-1, A-l(b) (beneficiaries may
"file a lawsuit to redress the noncompliance"). As the
Supreme Court stated in Fomag v. Davis, "[i]f the
underlying facts or circumstances relied upon by a
plaintiff may be a proper subject of
relief, he ought to be afforded an opportunity to test his claim on the merits." 37l U.S. 178, 182 [1962).
Under Fed.R.Civ.P. l5(a), "[a] party
may amend the party's pleading . . . by leave of court
or by written consent of the adverse party; and leave
shall be freely given when justice so requires." The
Court in Foman; stated:
In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.— the leave sought should, as the rules require, be 'freely given)
37l U.S. at 182. Here, Risteen moved
to amend his complaint roughly livc weeks after he
learned that his health insurance benefits had been cut
off- and hence without "undue delay" or "dilatory
motive." Discovery had not yet begun, and there is no
scheduling order in place setting a
discovery cutoff] a pretrial conference, or a trial date; thus there would be no prejudice to defendants if the amendment is permitted. Given that this action is in an early stage, and there are no allegations of bad faith or prejudice to the defendants, the Court grants Risteen's motion to amend his complaint.
Il. The COBRA Framework
ERISA, as amended by COBRA, requires that an "employer" who sponsors a group health insurance plan must offer employees and "qualified beneficiaries," including spouses and dependent children, the opportunity to continue their health insurance coverage, at group rates but at their own expense, for at least I8 months aIter tl·1e occurrence of a "qualifying event" — such as a layoff or termination. g 29 U.S.C. §§ 1161-1168. Congress enacted COBRA so that employees who lose their jobs through layoffs and terminations can purchase continuation health insurance at a rate approximately equal to the employer's group rate, which is normally far lower than the rate for individual coverage. g Lgg 2] Z, Hotel Q Rest. Empl. Union v. MI-IM, [nga 976 F.2d 305, 809 (2d Cir.l992). These employees thus may continue their health insurance through their former employer's group plans by paying no more than 102 percent of the monthly premium that the employer had paid. 29 U.S.C.§ ll62(3)(A).
On January 10, 2001, the Internal
Revenue Service ("IRS") promulgated final regulations to
provide guidance on issues regarding COBRA continuation
coverage. _$g; 66 Fed. Reg. 1843 (Jan. 10, 2001); 26
C.F.R. § 54.498013-l through -i0. The regulations
specifically address who
has the obligation to provide COBRA continuation health coverage following a business reorganization. § 26 C.F.R. §54.4980B-9. The regulations relevant here have not to date been the subject of judicial examination or application.
In determining responsibility for
providing COBRA continuation coverage, these regulations
define an "employer" as "[a] person for whom services
are performed," as well as a "successor" to such a
person. 26 C.F.R. § 54.4930B-2, A—2(a)( l)·(3). "An
employer is a successor employer if it results from a
consolidation, merger, or similar restructuring of the
employer or if it is a mere continuation of the
employer." Q, at A-2(In).
In certain circumstances, a successor employer resulting from a business reorganization will have "the obligation to make COBRA continuation coverage available to affected qualified beneficiaries." 26 C.F.R, § 54.4980B-9. Under the regulations, "[a] business reorganization is a stock sale or an asset sale." ld, at A-l(a). An "asset sale" —- which is at issue here — "is a transfer of substantial assets, such as a plant or division or substantially all the assets of a trade or business" hi; at A-l(c). To determine the obligations of a "successor employer," the regulation states:
In the case of an asset sale. if the
selling group ceases to provide any group health plan to
any employee in connection with the sale and if the
buying group continues the business operations
associated with the assets purchased from the selling
group without interruption or substantial change, then
the buying group is a successor employer to the selling
group in connection with that asset sale .... If the
buying group is a successor employer, a group health
plan maintained by the buying group
has the obligation to make COBRA continuation coverage available to M&A
qualified beneficiaries with respect to that asset sale.
Id. at A8(c)[l). At issue, therefore, is whether YFU USA is a successor employer to YFU following YFU's business reorganization and its asset sale to YFU USA, such that YFU USA is obligated to extend COBRA continuation coverage to "qualified beneficiaries" like Risteen.
III. YFU's Business Organization
In 2000 and 200l, YFU was experiencing
cash flow problems and facing insolvency. YFU Opp., Ex.
1 at ¶ 6. By October 2001, YFU had an overdraft of
roughly S 4 million on an American Express credit card
used for student travel in 2001. Q at ¶ 8. American
Express instituted legal proceedings against YFU, and
moved to attach a property in Washington owned by
YFU known as the Rosedale Estate. Id. YFU also owed $3.5 million in secured bank debt, and over $2 million in unsecured debt to YFU international organizations. These international YFU organizations examined alternatives to YFU's debt problems, including selling the Rosedale Estate, thought to be worth $l0 million. ¶ At the time, several international YFU organizations discussed the possibility of "founding
a new organization in the U.S. which would continue to support the 2001-02 students in the United States as well as place and support a possibly downscaled number of 2002-03 YFU students to the United States." Id. at ¶ 9. The primary objective of the new organization would be to "support a
smaller group of 2,800 to 2,l0U students for 2002~03." Id; at ¶ 10. Ulrich Zahiten, the president of YFU USA, explained;
It was clear all along that this
alternative would not be possible if the new
organization were a total legal successor to YFU, Inc., assuming all its assets and liabilities, because then the new organization would be in the same situation of insolvency in which YFU, Inc. would be in creating this situation. As a result, on January 3l , 2002, the international YFU organizations from Japan, Germany, and Denmark created and incorporated YFU USA "to be prepared, in the event of YFU's insolvency, to care for and support the students currently in the program as well as those students selected and contracted for the 2002—2003 program." Id. It became apparent that YFU would become insolvent by February 28, 2002, but in order to resolve a number of outstanding issues, additional payroll funding was needed through March 8, 2002. Id. at ¶ 12. To obtain this funding, YFU sold its trademarks, copyrights, and logos to YFU International Educational Services, Inc., ("YFU [ES"], an organization also recently incorporated to provide services to the international YFU network. Q at ¶ I3. Although YFU IES owns these trademarks and logos, YFU USA has used them since it came into being, through an agreement with YFU IES. SQ Risteen Supp. Br., Ex. 2 at pp. 15-20; YFU USA Supp. Br., Ex. 3 at ¶ 5. YFU sold these rights to YFU IES for $314,000. YFU USA Supp. Br. at Ex. 1.
On March 7, 2002, three members were appointed to YFU USA's Board of Trustees, all with previous ties to the YFU organization. On March 8, 2002, YFU ceased operations, released its entire staff, and stopped offering health benefits. YFU Opp., Ex. [ at ¶]] l5—l6. YFU USA took over for YFU at 5:00 pm. on March 8, 2002, when YFU ceased operations. The next day, YFU USA rehired 77 of the approximately 100 former YFU employees, including the entire YFU field staff] at their same salaries, Ld, at ¶ 15; Motion, Ex, 2 (email from Jordan to Kopplinger dated April 30, 2002). These employees continue to work in their former offices at the Rosedale Estate (e building that YFU still owns). S; Motion, Ex. 4 at ¶ 4; YFU Opp., Ex. l at ¶ 19 ("YFU USA has offices in the building owned by YFU").
HI. The Assets "Transferred"
Under the regulations, "[a]n asset sale is a transfer of substantial assets, such as a plant or a division or substantially all the assets of a trade or business." 26 C.F.R. § 54,4980B—9, A-l(e) (emphasis added). The Court must determine, therefore, whether, as a result of this business reorganization, there was "a transfer of substantial assets" from YFU to YFU USA. Upon careful analysis of the various assets involved -—·— individually and as a whole — the Court finds that YFU transferred "substantial assets."
A. Databases and Other Marketing/Training/Operational Materials
On March 26, 2002, YFU sold to YFU USA
six databases containing names, information, and key
data for managing the organization.2 The
databases included (a) the Student-Incoming Database,
with each incoming student's data used to manage student
progress; (b) the School Database, which contains
information on participating schools and the quality of
their programs; (c) the Host Family Database, which
stores information on who has hosted students in the
past; (d) the Alumni Database of former participants who
are key to fundraising campaigns; (e) the Donor
Database, which stores information on all individuals or
corporations who have donated in the past and thus
serves as a major source of revenue for the non-profit
organization; and (in the Student
Support Database, which is maintained for the U.S. Department of State and contains all volunteer and staff contacts with host families and students. Se; Risteen Supp. Br., Exs. 4—6; see eg YFU USA Supp. Br., Ex. 2 at p. l. Along with the databases, YFU sold certain intellectual property —— including marketing and promotional materials, training materials and handbooks, an inventory of other publications, software, and YFU's website and domain name — to YFU USA in the agreement that was signed on March 26, 2002. SQ YFU USA Supp. Br., Ex. 2. These assets were first used shortly after 5:00 p.m., March S, 2002, through permission of YFU until a formal agreement could be worked out. USA Supp. Br., Ex. 2 at ¶ 3. No sales price for these items has yet been determined,
B. Rosedale Estate and Office Equipment
YFU did not sell Rosedale Estate,
which is reportedly worth $10 million, to YFU USA.
However, YFU USA is working out of the YFU's offices,
and most of YFU's former employees continue to report to
their offices at the Rosedale Estate. YFU Opp., Ex. l at
11 8. Before YFU sells Rosedale Estate, YFU USA will
obtain other office space to rent. Id. at ¶ 19.
YFU USA is also using YFU's office equipment, computers, copy machines, furniture, and phone system. See Motion, Ex. 5 at p. 2; YFU Opp., Ex. 1 at 119. YFU USA states that this equipment is being used "under a hosting agreement with YFU," although that agreement still had not been finalized more than two months after YFU ceased operations. YFU Opp., Ex. 1 at ¶ 19.
C. Trademarks, Logos, and Company Name
In a sales agreement finalized on
March 26, 2002, YFU sold its trademarks, corporate and
company names, and logos to YFU IBS for $314,000. YFU
USA Supp. Br., Ex. 1. Before the sale was finalized,
however, YFU IES permitted YFU USA to use these assets
understanding that a licensing agreement would be reached; that use has continued since March 11, 2002. S5; Risteen Supp. Br., Ex. 2 at pp. 17-20; YFU USA Opp., Ex. 1 at ¶ 13. The Court has not been informed that a licensing agreement has yet been reached. G1'ooms—Cowal, the former YFU
president, pointed out that "a company like YFU, Inc. relies heavily on its trademarks and name recognition in order to generate business," and YFU's "trademarks are of particularly high value, that value having been built over the 50 years since its founding? Risteen Supp. Br., Ex. 5 at ¶ I3.
D. Same Employees
The fact that most of YFU's employees
were rehired at their same positions by YFU USA also
supports the conclusion that YFU USA is a successor
employer to YFU. YFU USA rehired 77 of the approximately
100 former YFU employees, in their former positions,
including the entire
YFU field staff of 50 employees. See YFU Opp., Ex. I at ¶ 15. For example, YFU's human resources director, Jim Teleford, was rehired by YFU USA to do the same job he performed at YFU. $5; Motion, Ex. 4 at *1 3; Risteen Supp. Br., Ex. 7. Moreover, Margaret Uelner Ott, who was the Director of Contracts for YFU, was rehired by YFU USA as the Director of Programs and Contracts. YFU USA's Supp. Br., Ex. 3 at ¶*,] l~2. In an e-mail exchange, a former YFU employee who was rehired by YFU USA told a former YFU employee that "so far, we were all rehired with the new company at the same salaries." Motion, Ex. 2 (e-mail from Jordan to Koepplinger dated April 30, 2002).
E. The Volunteer Network
It is also noteworthy that YFU
provided YFU USA with its lists and data on volunteers.
Id, eg Motion, Ex. 3 at ¶ 1; Motion, Ex. 5, Grooms-Cowal
emphasized the importance of YFU's database of its
volunteers, which contains information on between 4,000
and i2,000 volunteers. Motion, Ex. 5; Risteen Supp. Br.,
Ex. 5 at 1¶ 3-6. Without the database and lists of
volunteers, "the company: a) would not be able to communicate with this essential workforce; b) would be required to recruit an equivalent workforce of thousands of volunteers or hire paid staff to work in lieu of volunteers; and e) would be critically impeded in operating its business."
Risteen Supp. Br. at ¶ 6.
The Court finds that the sale, transfer, and use of these assets — the databases, trademarks, office equipment and furniture, volunteer network, website and domain name, company goodwill and the use of Rosedale Estate — constitutes a "transfer of substantial assets" under the new COBRA regulations.
Three former officers with direct
knowledge of YFU's operations have submitted affidavits
asserting that YFU USA could not operate without the
databases and other assets transferred from YFU. Former
ambassador Sally Grooms—Cowal, who was the president and
chief executive officer
of YFU from l999 through 2001, stated that without YFU's Student-Incoming Database, YFU USA "would be unable to operate its business due to lack of information regarding the students for which it is responsible," Q, at ¶ T. She described the Alumni Database as "vital to the YFU business model," and stated that the "Student Support Database" contained "critical information . . . because exchange organizations require State Department approval to remain in business." Q at
ml 10-12, YFU USA could not operate, she has stated, without these assets transferred from YFU: These assets, individually and in combination, are critical to implementing the volunteer-based business model of YFU; Without them it would be Impossible to operate without investing extensive capital and time in developing them. A
company desiring to enter the field of international student exchange and to effectively compete and provide service to 1,500 students or more, could not operate without these, and other of the assets. Id. at ¶*1 I4-15 (emphasis added).
Similarly, both Alex Plinio, who is
currently the president of a large international student
exchange organization comparable to YFU, and Peter
Engebretson, a former vice president, executive vice
president, and interim president of YFU, agree with
ec; Risteen Supp. Br., Exe. 4—6. Plinio reiterated Grooms-Cowal's assertion that an international exchange organization could not operate without these assets: The importance of these assets to an organization like YFU, inc. are essential. In fact, to reconstruct or rebuild such databases, or to develop the same reputation, a company would have to expend great resources and capital, which could take years to realize. A company desiring to enter into the field of international student
exchange and to effectively complete or provide services to 2500 students or more, could not operate without each of they items.
Risteen Supp. Br., Ex. 4 at1¶ 15-] 6
(emphasis added]. Engebretson reiterated the same
points: these assets "are critical to implementing the
volunteer-based business model of YFU," and without
them, "it would be impossible to operate without
investing extensive capital and time in
developing them." Id. Ex. 6 at ¶ 14. in short, Engebretson concluded, a company like YFU "could not operate without each, and aId. of these assets." gi, at ¶ 15. This evidence is particularly helpful and deserving of credence. The fact that these individuals agreed that YFU USA could not operate without receiving these assets from YFU underscores the importance and value of the assets. These officers — who have no stake in the outcome of this case — have been either been officials at YFU with a deep understanding of the business, or work For another student exchange organization that is comparable to YFU. In Fact, even the president of YFU USA, Ulrich Zahiten, recognizes the importance of these databases: "[i]t is clear that the acquisition of these items, especially the data bases, is necessary if YFU USA is to be successful in continuing to support students, host families and volunteers, rather than leave them stranded when YFU, Inc. failed to meet its payroll." YFU Opp., Ex. 1 at ¶ 25. If YFU USA could not operate its student exchange business without these databases, then it would seem they are "substantial" assets.
YFU USA argues that because YFU did not sell to YFU USA its most valuable asset, the Rosedale Estate, there was not a transfer of "substantially all the assets.“ However, there is more than one way of valuing an asset. A building may be a “substantial asset" to a company, for example, if that building is a plant, factory, warehouse, gas station, or restaurant —— businesses highly dependent on the particular building or site. YFU's former interim president and former executive vice president, Peter Engebretson, stated that "YFU could operate from virtually any
physical plant or location." Risteen Supp. Br., Ex. 6 at ¶ 16. More importantly, however, the regulation only requires a transfer of "substantial assets" —- tl·1e term "substantially all the assets" is
simply illustrative of what might constitute an of example of a transfer of "substantial assets.“ YFU USA has been working out of YFU's offices at the Rosedale Estate since the reorganization, and the YFU employees who were rehired by YFU USA (almost 80% of the workforce) continue to report to those same offices. Although YFU USA did not buy the Rosedale
Estate, YFU is still allowing YFU USA to use the offices at the Rosedale Estate, without paying rent, while YFU USA looks for additional space to rent elsewhere. That is, in a way, a transfer of the right to use this space. The IRS has noted that an "asset sale includes not only sales but other
transfers as well." 66 Fed, Reg. at 1846. YFU USA also claims that it "did not sell any equipment, real property or other tangible assets from YFU." YFU Opp., Ex. l at ¶ 19 [emphasis added). But even though YFU USA did not buy equipment from YFU, the use of the equipment nonetheless has been l.l'8I`lSf`Bl`I'Ed -— through a "hosting agreement" — to YFU USA. In fact, YFU USA concedes that it may elect to purchase this equipment. ld, Nonetheless, whether this equipment and furniture was "acquired" is not
determinative because asset sales under the regulations include "other transfers as well." The fact that YFU sold its trademarks, corporate names, and logos to YFU IES — and not directly to YFU USA —— also does not mean that those assets were not transferred to YFU USA. After aId. YFU USA has the full right to use, and has been using, these trademarks and
through an agreement with YFU IES. Ld, And clearly these assets are valuable (having been sold for $314,000) and thus arguably "substantial." Again, under the regulations the touchstone is not whether these assets were "sold" to YFU USA, since asset sales include other transfers as well as sales. In the end, even though there was no "sale," YFU USA still ended up with the use of these assets from YFU, albeit through YFU IES.
Furthermore, aIthough there was a
concrete valuation for the trademark rights, there was
no valuation for the goodwill FU buiIt up over the past
50 years in the student exchange business. When
students, parents, teachers, and donors hear about YFU
USA, they may well associate it with
YFU. Thus, YFU USA benefits from YFU's goodwill established over 50 years. That is an important intangible asset, partially reflected in the trademarks, given the reputation and name that YFU buiIt as a leader in the field of student exchange programs. YFU's goodwill must therefore
be considered as part of the overall transfer of assets from YFU to YFU USA.
Finally, the COBRA regulations explain that if the employer who purchased the assets hires most of the same employees to work in their same jobs and continues the business operations, that employer is a "successor employer":
Selling Group S provides group health
plan coverage to employees at each of its operating
divisions. S sells substantially all of the assets of
all of its divisions to Buying Group P, P hides most of
S's employees on the dgge gj th; purchase of Ss assets,
retains those employees in the same positions that they
had with § before the purchase, and continues the
business operations of those divisions without
substantial change or interruption .... [Because P
continued the business operations associated with those
assets without substantial change or interruption, P is
a successor employer to S with respect to the asset
sale. 26 C.F.R. § 54.4-98t)B-9, Example S(i)—(ii)
(emphasis added). Hence, the fact that YFU USA
rehired T'? of l0(I former YFU employees — at the similar positions and same salaries is additional evidence that YFU USA is the "successor employer" to YFU. It;
As the comments to the regulations
state, "[t]his definition [of asset sale] is intended to
be flexible enough to apply reasonably to the myriad
situations in which this issue arises," and "[t]he
application of this rule in any particular case depends
on all the relevant facts and circumstances."
66 Fed. Reg. at 1346. Under this "fiexib1e" standard, the Court must consider the fact that YFU USA is a non—profit service organization, in which context the databases of information and volunteer network are critical. Particularly for a small non—profit organization like YFU USA, a
database of past contributors and donors is vitally important for access to the names of former donors for raising funds to help sustain the organization Similarly, YFU's network of volunteers is a critical workforce for a non-profit organization on a limited budget. Furthermore, with YFU's 50 years of experience, the importance of its name and reputation for leadership in the field makes its trademarks and goodwill indispensable.
The fact that YFU did not transfer the
$10 million Rosedale Estate does not change this
analysis, because that fact does not mean that YFU did
not transfer or sell other "substantial assets” to YFU
USA. That property, although perhaps more valuable in
terms of dollars, is not necessarily
the most important asset needed for running this particular business. YFU USA could effectively operate out of any office space. YFU USA, however, would have a very difficult time operating without the databases and other materials YFU sold to YFU USA, or without the former YFU
employees it hired. Thus, under the regulations "flexible" standard, the conclusion that substantial assets have been transferred to YFU USA is not changed by the fact that the Rosedale Estate was not also transferred.
V. Continuing the Business Operations
For a successor employer to be
required to assume the COBRA operations of the former
employer, the successor employer must "continue the
business operations associated with the assets purchased
from the selling group without interruption or
substantial change." 26 C .F.R. §
54.4930H-9, A-8(c)(l). Here, there is little doubt that YFU USA is "doing precisely the same work that [YFU] had been doing for the past fifty years." Motion, Ex. 3 at ¶ l. YFU USA's own literature states that it is virtually the same organization as YFU and continues the business
operations associated with the assets —— only the corporate structure has changed. Just days after YFU ceased operations, Mary Alvey, a YFU USA district director, sent a letter to former YFU volunteers informing them of the corporate reorganization:
You may have heard that Youth For Understanding, Incorporated, has ceased to exist and perhaps you have been worried about where that leaves you and the students and families you represent. There is a kernel of truth in that statement, but it doesn't tell you enough. Youth for Understanding did cease to exist as a corporation on Friday, March 8, 2002. Youth for Understanding, USA, was incorporated before then and this new organization (while distinct from YFU, Inc.] began to operate immediately. The mission is unchanged. The Field Staff remains the same. The students continue, just as before. They will leave on time, and their tickets still exist The Host Families will continue to care for their students as they have in the past. Student insurance continues, unchanged. YFU USA will operate with you, with the students, host families, and schools just like YFU, Inc did in the past. Staff are available to you an the same phone numbers, the same email addresses in the past.
Risteen Motion, Ex. 5 (emphasis added). A newsletter in April 2002 also underscored that the change from YFU to YFU USA was largely in corporate structure:
Youth for Understanding USA, Inc. is alive and well. It began doing business on Saturday, March 9, 2002. It is working with our YFU partners and the present and future students, families, volunteers, and staff who transitioned into YFU USA .... Most of the change is corporate, and will not effect you. District staffs are intact, and will be available to work with you as they always have. YFU USA continues to honor some of the vendor contracts that YFU used because it wanted to continue to work with those same vendors. YFU Opp., Ex. l at 1 20. It has also accepted close to $100,000 in corporate funds and donations —— after donors were informed of the organizational change —- that were originally intended for YFU. jgl, at ¶ 21. Even YFU USA's Board of Trustees are from the YFU organization. Mary Coffey, a YFU USA director, sent out a letter to volunteers stating that the "new Board of Trustees consists of a small crew of people who have a long history with YFU," Motion, Ex. S (letter from Coffey dated March 25, 2002). Finally, there was no interruption of the business when YFU sold its assets to YFU USA.
As the regulation states, "if the
buying group continues the business operations . . .
without interruption or substantial change, then the
buying group is the successor employer." 26 C.F.R, §
$4.49808-9, A·8(c)(l). YFU USA is essentially running
the same business that YFU did, although
with a somewhat smaller staff, and hence YFU USA is continuing the business operations that are associated with the assets and is a "successor employer" to YFU.
VI. Supporting Case Law
Given that no other courts have had an opportunity to apply the IRS COBRA regulations, it is useful to consider the case law discussing "asset sale" cited in the IRS's summary of the regulations. The summary states:
Business Reorganization: . . . The
asset sale rules, including the definition of asset
sale, are similar to the various formulations of
successor employer rules that have been fashioned by the
courts for various labor law purposes, adapted to the
peculiar circumstances that the COBRA continuation
coverage requirements create. In those cases, as in the
final rule, a case-by-ease approach is favored. (see, eg.,
Golden State; Bottling Co. v. NLRB, 414 U.S. 168 (1973];
Howard Johnson Co. v. Detroit Local Joint Executive
Boart, 417 U.S. 249 (1974); John Wiley &; Sons, Inc.
, 376 U.S. 543 (1964); NLRB v. Burns International Security Services,
g, 406 U.S. 272 (1972); Fall River Dyeing & Finishing Corp, y, §l,B(3_, 482 U.S. 27 (1987); EEQC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6"' Cir. 1974); In re National Airlines, Inc., 700 F.2d 695 (1 l"' Cir. l983); Upholsterers' International Union Pension Fund v. Artistic. Furniture of Pontiac, 920 F.2d 1323 (7'“ Cir. 1990); Central States , Southeast & Southwest Areas Pension Fund v. PYA/Monarch of Texas, Inc., 851 F.23d 780 (5"' Cir. 1988).
66 Fed. Reg. at 1846.
The conclusion that YFU USA is a "successor employer" to YFU is reinforced by this body of law. For example, in Fall River Dyeing Q Finishing §Qg;g. v, 1\Il,B§, 482 U.S. 27 (1987), the Supreme Court stated:
[We have] approved the approach taken by the Board and accepted by courts with respect to determining whether a new company was indeed the successor to the old. This approach, which is primarily factual in nature and is based upon the totality of the circumstances of a given situation, requires that the Board focus on whether the new company has "acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessors business operations."
Hence, the focus is on whether there
is "substantial continuity" between the enterprises.
Under this approach, the Board examines a number of
factors: whether the business of both employers is
essentially the same; whether the employees of the new
company are doing the same jobs in the same working
conditions under the same supervisors; and whether the
new entity has the same production process, produces the
same products, and basically has the same body of
customers. 482 U.S. at 43 (citations omitted). All the
factors noted in Fall River are present in YFU's
business reorganization. The business of YFU and YFU USA
is essentially the same; the production process has not
changed and, indeed, YFU USA is still providing the
"same product"; and YFU USA certainly still has the
"same body of customers" — students and families
interested in student
exchange and study abroad.
Moreover, most of the former employees
of YFU are doing the same jobs in the same working
conditions, which is further evidence that YFU USA. is a
successor employer. §e; Eau _ , 482 U.S. at 43; see also
Howard Johnson Co. v. Detroit Local Joint Executive
Board, 417 U.S. 249, 263 (1974) ("This continuity of
identity in the business enterprise necessarily
includes, we think, a substantial continuity in the
identity of the work force across the change in
ownership. .. . [M]ost of the lower courts have placed
[emphasis] on whether the successor employer hires a
majority of the predecessors employees in determining the legal obligations of the successor."); Golden State Bottling Co. v. NLBQ, 414 U.S. 158, 182 n. 5 (1973) ("[s]uccessorship has been found where the new employer purchases a part or ali of the assets of the predecessor employer"); N[,g§ v. Burns international Security Systems, [nc., 406 U.S. 272, 229 (1972) [noting the obligations of a successor employer "if a majority of employees after the change of ownership or management were employed by the preceding employer").
There was no hiatus between the end of
YFU and the start up of YFU USA — another factor noted
in Fall River as evidence of "substantial continuity."
Q2; 482 U.S. at 45; Q gId. Upholsters Int'l Pension Fund
v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1326 ('fth
(employer who "substantially assumes a predecessor's assets [and] continues the operations without interruption or substantial change" assumes liabilities of predecessor). YFU ceased operations at
5:00 p.m. on Friday, March 8, 2002 and YFU USA stated at that same moment -— a seamless transition between the two organizations. Indeed, shortly after the reorganization, YFU USA informed YFU's employees and volunteers that the reorganization was simply a corporate change:
"Most of the change is corporate, and
will not effect you." Risteen Motion, Ex. 5 [letter from
Alvey dated April 2002). A YFU USA letter to volunteers
stated: The mission is unchanged. The Field Staff
remains the same .... The Host Families will continue to
care for their students as they have in the past ....
YFU USA will operate with you, with the students, host
families, and schools just like YFU, Inc. did in the
past. Risteen Motion, Ex. S (letter to YFU volunteers
from Alvey dated March Id. 2002]. Finally, the
fact that YFU USA is still working out of YFU's Rosedale Estate and still using YFU's office equipment, computers, and furniture also suggests that it is the successor employer to YFU. g EEOC v. MacMillan Bloegel Containers, Inc.., 503 F,2d l086, i094 [6th Cir. l9'.'¤t) (factors for successorship include "whether the new employer uses the same plant" and "whether he uses the same machinery, equipment and methods of production"). Simply put, the case law cited in the regulations strongly supports the conclusion that YFU transferred substantial assets to YFU USA, and that YFU USA is therefore the successor employer to YFU. As a successor employer under the regulations, YFU USA is responsible for the COBRA obligations of its predecessor.
VII. YFU USA's health Plan
YFU USA contends that because it did
not have a health plan in place at the time of the asset
sale on March S, 2002, it is not liable, under the
language of the regulations, for Risteen's COBRA
continuation coverage. The regulation states: A group
health plan of the buying group has [the obligation to
make COBRA continuation coverage available] beginning on
the later of the following two dates and continuing as
long as the buying group continues to maintain a group
health plan . . . - (i) The date the selling group
ceases to provide any group health plan to any employee;
or (ii) The date of the asset sale. 26 C.F.R. §
54.4980B—9, A—8(c)(l). When YFU ceased operations on
March B, 2002, it also ended its health plan. YFU USA
Supp. Br., Ex. 4 at Q 3. YFU USA's health plan, however,
not go into effect until May l, 2002 —- seven weeks after YFU ceased operations and transferred assets to YFU USA. g Q, at 1 10. YFU USA contends that by its language the regulation only obligates a buying group to provide COBRA continuation coverage "as long as the buying group continues to maintain a group health plan," and that if there is no health plan —— as was the case for seven weeks — there is no obligation to provide COBRA continuation coverage.
YFU USA quotes the applicable
regulatory language —— "as long as the buying group
continues to maintain a group health plan" —— out of
context. The language actually pertains to how long the
buyer must provide insurance. In other words, on the
date a buying group providing a group health plan for
its own employees, its obligation to provide COBRA
continuation coverage to the selling group's former employees would end as well.
The regulation does speak as well to a buying group maintaining a health plan: "If the buying group is a successor employer, a group health plan maintained by the buying group has the obligation to make COBRA continuation coverage available .... " 26 C.F.R. § 54.498033, A8(c)(1) (emphasis added). The Court finds that YFU USA has "maintained" (Lg, provided) a group health plan, and thus YFU USA must provide COBRA continuation benefits to Risteen.
The fact that there was a seven-week
gap between the sale of the assets (or start of YFU
USA's operations) and the date YFU USA's group health
plan became effective does not aider that conclusion.
Employees were told to buy their own temporary insurance
until YFU USA could set
up a health plan. Risteen Supp. Br., Ex. 7 at pp. S?-58. Teleford, YFU USA's human resources director, sent out a series of c-mails to employees beginning on March 25, 2002, instructing employees that YFU USA "wants to help you with your temporary insurance that you have obtained on your own." Risteen Supp. Br., Ex. 7 at p. 58; F'l.'s Reply, Ex. 5. Te e-mail stated that "[w]e will formulate a plan for reimbursing you for the costs you have incurred." It; This decision by YFU USA to reimburse employees for their health insurance just two weeks after YFU USA began operations reinforces the conclusion that YFU USA "maintained" a health plan.
Thus, under the regulations, YFU USA's
obligation to provide COBRA continuation coverage to a
former YFU employee like Risteen would typically begin
on the date of the asset sale (March 8, 2002, or later),
or on the date that YFU ceased to provide any group
health plan to any
employee (March B, 2002), whichever is later. & 26 C.F.R..§ 54.49BOB—9, A·8(c)(l)(i) and (ii). However, YFU USA did not have an actual group health insurance plan in place until May l, 2002, and perhaps it should be from that date that YFU USA must provide Risteen with his remaining
COBRA continuation coverage. Moreover, there is some uncertainty as to when precisely the "asset sale" occurred. In any event, the COBRA continuation coverage obligation will run until YFU USA ceases to provide a group health plan to its employees, or until Risteen's COBRA continuation coverage eligibility ends, whichever is First. & 26 C.F.R.§ 54.4980B—9, A·8(c](1). Given the uncertainty as to the proper commencement date for YFU USA's obligation for Risteen's COBRA continuation coverage (and as to Risteen' current health insurance status), the Court will require the panics to submit a proposed order implementing this decision. Of course, YFU (or its group health plan) presumably was responsible for Risteen's covered medical expenses incurred prior to March 8, 2002, when YFU ceased operations, because such coverage was part of YFU's COBRA continuation coverage obligations before it ceased operations and terminated any group health plan for its employees.;
VIII. Preliminary Injunction Standards
In order to prevail on his motion for
preliminary injunctive relief, plaintiff must
demonstrate (1) a substantial likelihood of success on
the merits; (2] that he will suffer irreparable harm
absent the relief requested; (3) that other parties will
not be harmed if the requested relief is granted; and
(4) that the public interest supports granting the
requested relief. Taylor v. Resolution Trust Corp. 56
F.3d 1497, 1505-06 (D.C. Cir. 1995); Washington Area
Metro. Transit Comm'n v. Holiday Tours, Inc., 559 F.2d
841, 843 (D.C. Cir. 1977). In determining whether to
grant urgent rclieti the Court must "balance the
strengths of the requesting party's arguments in each of
the four required areas." Cityfed Fin., Corp, v. Office
of Thrift Supervision, 58 F.3cl 738, 747 (D.C. Cir.
1995). "If the arguments for one factor are particularly
strong, an injunction may issue even if the
arguments in other areas are rather weak." Id.
It is particularly important for a
plaintiff to demonstrate a substantial likelihood of
success on the merits. Morgan Stanley DW Inc., v. Rothe,
[50 F.Supp.2d 67, 73 (D.D.C. 2001). Where a plaintiff
cannot show a likelihood of success on the merits, "it
would take a very strong showing with respect to the
other preliminary injunction factors to turn the tide in
Davenport v. Int'l Brotherhood of Teamsters, AFL-CIO, 166 F.3d 356, 367 (D.C. Cir. 1999). Here, as explained in detail above, Risteen has demonstrated an overwhelming likelihood of success on the merits of his claim that YFU USA must provide him continuation COBRA benefits.
Moreover, Risteen has shown that,
absent relief, he will suffer irreparable harm. He is
already foregoing critical medical attention because he
has lost his health insurance. He remains unemployed,
has no other income, and, besides his home and car, has
no other assets of significant
value. The loss of health insurance benefits -— particularly for those who are unemployed -— constitutes irreparable ham; for purposes of a preliminary injunction) At the same time, requiring YFU USA to provide continuation coverage would have less of an impact on YFU USA, Under COBRA, YFU USA is only obligated to allow Risteen to in its group health plan. Risteen must pay the premiums each month. In fact, Risteen
has already exhausted roughly 1 1 months of his COBRA benefits, and has only roughly seven months of benefits remaining. Fulfilling a legal obligation to provide COBRA continuation benefits over such a period is hardly irreparable harm.3
Finally, the public interest is served
here by requiring YFU USA to provide Risteen
continuation health coverage. The underlying purpose of
COBRA is to ensure that employees who lose their jobs
still receive limited health insurance benefits, and an
injunction would further that legislative goal. See
Phjllips v. Saratoga Harness Racing, Inc., 240 F.3d 173,
179 (2"' Cir. 2001) ("COBRA was enacted as a legislative
response to the growing number of Americans without
health insurance and the reluctance of hospitals to
treat the uninsured."); National Cos. health Ben. Plan
v. St. Josggh'5 Hogg., [ne,, 929 F.2d 1558, 1569-70 (1st
Cir. 1991) ("the goal of COBRA . . . is to provide
continuation coverage until group plan participants are
able to obtain other coverage"). An injunction is
consistent with the legislative purpose of COBRA, and
the public interest. See e.g. Comcast Sch. Holdings, Inc. v. City of Lake-Sumter, Inc. 168 F.Supp.2d 1338, l35l (M.D. Fla. 2001) (injunction consistent with purpose of statute is in the ' YFU USA's Director of Human Resources, James Teleford, maintains that he contacted The Guardian, YFU USA's health provider, to inquire about coverage for former employees of YFU. He states that Guardian "would not cover any former YFU employee who had not been an employee of YFU USA." YFU USA Supp. Br., Ex. 4 at ¶ 13. YFU USA's health plan was rated and priced by Guardian on the basis of the employee census provided by YFU USA. ld,
Additions to YFU USA's health plan are therefore "permitted under certain restricted circumstances, like a new hire" [Q, This does not alter the Court's analysis. The COBRA regulations make no allowance for
the financial ability of a successor employer or its insurance plan to assume the continued coverage of a former employee. In fact, the regulations the former employees of the predecessor company who were not hired by the successor company would be covered under that
successor employers health plan. see, e.g. 26 C.F,R, § 54.498039, Example 5(ii); Example 6(iii]; Example 3(ii). Guardian is only purportedly unable to add Risteen because YFU USA did not initially include him on the original census of employees to be covered by Guardian public interest).
Accordingly, for these reasons, the Court grants plaintiff Risteen's motion for a preliminary injunction. The Court concludes that YFU USA is -— under the IRS COBRA regulations — a successor employer to YFU. As such, YFU USA has the obligation to provide Risteen COBRA continuation health benefits. However, given the unique circumstances of this case, the Court will require the panics to discuss when YFU USA's obligation to provide COBRA continuation coverage should commence, and to submit a proposed order, or separate proposed orders if necessary, by no later than September 20, 2002, A separate order will be issued.
Signed this 12th day of September, 2002.
John D. Bates
United States District Judge
1See, e.g., Haskgll v. Harvard Coop. Society, 3 F.3d 495, 498 (l“' Cir. l993); Burgess v. Adams Tool & Engineering, Inc,, 903 F.Supp. 473, 476 (WD. Mich. 1995).
2 This "sale" was for an amount to be determined, with the assistance of an outside party, by June 30, 2002. YFU USA Supp. Br., Ex. 2 at 1 3. As of this date, the sale amount still apparently has not been determined.
3There is no doubt that
Risteen is a "qualified beneficiary" under these
regulations, and the parties do not dispute this. The
regulations define a qualified beneficiary as an
individual who is a "covered employee whose last
employment prior to the qualifying event was associated
with the assets being sold." Risteen's resignation became effective in late April 2001, see Comp]. at ¶ 22, and his COBRA continuation benefits began from that point; YFU was responsible for those benefits from April 2001 through March 8, 2002.
4See, e.g., Communication
Workers of America, District 1, AFL-CIQ v. NXNQ Corp.,
898 F,2d 887, 891 (2d Cir. 1990) (the threat of
termination of medical benefits to striking workers
constitutes irreparable harm); United Steel Workers of
America; v. Textron, Inc. 836 F.2d 6, 8 8: 9 (1st
Cir.1987) (loss of insurance benefits to retired workers
constitutes irreparable harm); Whelan v. Colgan, 602 F
.2d 1060, 1062 (2d Cir.l9?9) ("the threatened
termination of benefits such as medical coverage for
workers and their families obviously raised the specter
of irreparable injury"); Caboal v. Olsten Corp., 843
F.Supp. 701, 703 (M. D. Florida I994) (in a
COBRA case, threat of termination of health insurance
benefits for uninsured breast cancer patient constituted
irreparable harm); Hinkley v. Kelsey-Hayes co., 866
F.St1pp. 1034, 1045 (ED. Mich. 1993) (retirees
established irreparable harm if the court did not order
reinstatement of health insurance benefits); UAW. v.
Exide Corp., 688 F,Supp. 174, 186-87 (E.D.Pa.), aff'd
mem., 857 F.2d 1464 (3d Cir.1988); Howe v. Vavrity
Corp., 1989 WL 95595, * 13 (SD. Iowa) ("As a matter of
law, the termination of health insurance benefits,
particularly to those on a fixed income, constitutes a
threat of irreparable harm sufficient to warrant a
preliminary injunction"); Johnson v., Plainville Casting
Corp., 1988 WL 167346, * 2 (D. Conn. 1988) ["It is
well-settled that the termination of health insurance
benefits presents a threat of irreparable harm
sufficient to support temporary equitable relief ").
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