Appeals Court Finds Employer Liable for Diverted Employee Contributions, Unpaid Health Claims

The U.S. 5th Circuit Court of Appeals affirmed on October 6 a district court’s summary judgment against an employer for withholding employees’ health plan contributions from their paychecks without remitting them to insurers and for failing to pay employee claims billed under the company’s self-funded health plan. The court also ruled that the company’s owner was “was acting as a fiduciary” when he decided not to remit employee contributions or pay Blue Cross Blue Shield of Louisiana’s invoices.

According to a three-judge panel’s ruling on Sonderling v. Sills, at least 78 participants had claims denied in 2019, leaving $172,351.35 in unpaid medical expenses. As ordered in the original decision in U.S. District Court for the Middle District of Louisiana, Kelly Sills, the president and sole owner of Coastal Bridge LLC, was ordered to pay $209,466, plus interest, in damages for breaching fiduciary duty under the Employee Retirement Income Security Act.

The 5th Circuit, which hears appeals from federal courts in Louisiana, Mississippi and Texas, also affirmed a permanent fiduciary ban against Sills.

Case Background

According to the complaint—originally called Walsh v. Sills when it was filed by then-Secretary of Labor Martin Walsh in January 2023, but now filed under Secretary of Labor Keith Sonderling—Coastal Bridge Company LLC sponsored an employee welfare benefit plan that offered fully-insured dental and vision coverage through Ameritas Life Insurance Corp.; full-insured cancer, accident and critical illness coverage through the Guardian Life Insurance Co. of America; and self-insured medical coverage administered by Blue Cross under an administrative services agreement.

Under the agreement, according to the complaint, Blue Cross processed and paid employee medical claims, then billed Coastal each month for reimbursement and administrative fees. Employees paid for their shares of the coverage through payroll withholdings.

In 2019, Coastal stopped forwarding employee contributions to Ameritas and Guardian, the complaint stated. The insurers terminated coverage in August 2019 and November 2019, respectively, but Coastal continued withholding employee contributions through December 27, 2019.

The DOL alleged Coastal also “sporadically” failed to reimburse Blue Cross for employee medical claims, which resulted in suspensions and denied claims, according to the complaint. In December 2019, Coastal withheld $19,618.23 in employee contributions for medical coverage, but failed to forward that amount to Blue Cross. Blue Cross suspended claim payments effective December 20, 2019.

On January 6, 2020, Sills terminated the plan’s coverage, retroactive to December 27, 2019. The complaint stated that Sills did not timely execute a “run-out” agreement, through which Blue Cross would have processed employee health claims incurred before December 27 but received after that date.

Months later, Sills signed a $78,119.85 check to Blue Cross to reimburse it for medical expenses Blue Cross had paid. However, that amount did not cover the run-out claims or other claims that had been denied during one of the agreement’s other sporadic suspensions.

5th Circuit Deems Sills a Fiduciary

Middle District of Louisiana Chief District Judge Shelly Dick on March 12 granted summary judgment for the DOL.

According to Roberts Disability Law P.C., a law firm, the 5th Circuit upheld the district court decision that found Sills’ “professed delegation of Plan-related tasks did not absolve him of his fiduciary obligations.” The district court held—and the 5th Circuit upheld—that Sills not having signed the administrative agreement and the company being identified as plan sponsor and named fiduciary also did not absolve him of ERISA fiduciary duties.

In addition, the appeals court rejected Sills’ claim that decisions by a third-party surety that controlled Coastal’s receivables caused the plan’s losses.

“The insolvency of a plan sponsor, or a third party’s control of a sponsor’s receivables, does not excuse a fiduciary’s failure to remit employee contributions,” the panel stated. “Moreover, it is undisputed that the surety in this case played no role in the plan’s medical claims.”

Neither the Department of Labor nor Sills responded to requests for comment.