BLUE CROSS AND BLUE SHIELD OF KANSAS INC., ) Plaintiff, ) ) vs. ) Case No. 97CV 608 ) CARLA STOVALL KANSAS ATTORNEY GENERAL, ) Defendant. ) ______________________________________________)
Blue Cross Blue Shield of Kansas (BCBSK) filed a motion to reconsider the court's memorandum decision and order granting the Attorney General's (AG) motion for summary judgment.
In its motion, BCBSK first argues that there cannot be a charitable trust for the benefit of non-subscribers. The court in the memorandum decision granting the AG's motion for partial summary judgment ruled that BCBSK's predecessor corporations were charitable and benevolent corporations up until 1969. However, the court in granting the AG's motion for summary judgment did not specifically rule on who the beneficiaries of the charitable and benevolent corporations were nor did this court require BCBSK to surrender the equivalent of its 1969 assets as BCBSK stated.
While the court did not rule on who the beneficiaries of the predecessor corporations were, a few observations may be instructive. The predecessor corporations, Kansas Hospital Service Association (KHSA) and Kansas Physicians Service (KPS), each had Articles of Incorporation which set out the purpose of the corporations and also for whose benefit the corporations were organized. In the original Articles of Incorporation for KHSA the stated purpose was "the purpose of the corporation is to establish, maintain and operate a nonprofit hospital service plan whereby hospitalization may be provided to subscribers of such plan by any hospital with which the corporation may contract for such hospitalization, to promote the general and social welfare of such residents of the State of Kansas as may become subscribers to the plan and to do all things necessary, proper, or convenient for the purpose of promoting, establishing and operating said nonprofit hospital service corporation." The Articles of Incorporation were filed March 23, 1942.
An amended set of Articles of Incorporation was filed on April 28, 1942, in which the stated purpose was "[t]he purpose of the corporation is to establish, maintain, and operate a nonprofit hospital service plan whereby hospitalization may be provided to subscribers of such plan by any hospital which the association may contract for such hospitalization."
The Articles of Incorporation for KPS stated "[t]he purpose of the corporation is to establish, maintain and operate a nonprofit medical service plan whereby medical care may be provided to subscribers of such plan by any doctor of medicine with which the corporation may contract for such medical care; to promote the general and social welfare to such residents of the State of Kansas as may become subscribers to the plan, and to do all things necessary, proper or convenient for the purpose of promoting, establishing and operating said nonprofit medical service corporation." These Articles of Incorporation were filed on May 28, 1945.
BCBSK argues that the legislature did not define a set of obligations to all Kansans. However, from the language in the original Articles of Incorporation for both corporations, the corporations were organized to promote the general and social welfare "to such residents of the State of Kansas as may become subscribers to the plan." This language sets out the group of individuals that the corporation is organized to benefit.
BCBSK also argues that charities do not exist in the abstract and that they must have purposes and correlated beneficiaries. However, the Restatement of Trusts, 2d § 364 states that "a charitable trust can be created although there is no definite or definitely ascertainable beneficiary designated." The property within a charitable trust is devoted to the accomplishment of purposes beneficial to the community. The beneficiaries intended by BCBSK's predecessor corporations are those residents of the State of Kansas who may become subscribers or who are subscribers. BCBSK argues that it is clear that the legislature intended that the corporations benefit only their subscribers. However, the Articles of Incorporation of KPS (and initially KHSA) set out that the purpose was to promote [ie. benefit] those residents of the State of Kansas who may become subscribers. The language in the Articles of Incorporation seems to increase the size of the pool of potential beneficiaries beyond those who are currently subscribers to those who are eligible or may become subscribers and arguably to those who were formerly subscribers.
The issue that the court ruled on was whether "BCBSK is a charity and [whether] its assets are impressed with a charitable trust or charitable obligations." The court's ruling was simply that BCBSK's predecessors were charitable and benevolent corporations. G.S. 40-1810 and G.S. 40-1910 provided that every corporation organized pursuant to the act is declared to be a charitable and benevolent corporation. KHSA organized under the enabling act of G.S. 40-1801 et seq. and KPS organized under the enabling act of G.S. 40-1901 et seq.
In addition, both of the predecessor corporations filed a lawsuit in the district court of Shawnee County, KHSA v. John Towle et al., Case No. 100,994 (hereinafter, Towle) to enjoin the Shawnee County Tax assessor from assessing the corporations any property taxes. The Honorable E. Newton Vickers, Judge in the Third Judicial District, Shawnee County ruled that "the provisions of K.S.A. 40-1810 (formerly G.S. 40-1810) and K.S.A. 40-1910 (formerly G.S. 40-1910) clearly indicate the legislative determination that the ... (there is a missing word which is illegible in the opinion) corporations, namely Kansas Blue Cross and Kansas Blue Shield, are charitable and benevolent and specifically exempt the property of such organizations used for purposes specified in the Acts from taxation." Judge Vickers also declared that the corporations were "exempt under the benevolent and charitable" provisions of the State Constitution.
As stated in the Attorney General's brief "(i)t is elementary that a corporation, being a creature of statute, is bound by the provisions of the statute under which it is created." Wilson v. Kansas Children's Home, 159 Kan. 325, 329, 154 P.2d 137 (1944). BCBSK's predecessor corporations were created under statutory provisions that declared every corporation that organized under the statutes to be a charitable and benevolent corporation. The predecessor corporations which ultimately became what is now known as BCBSK are bound by these declarations. This court in its memorandum decision ruled that although the legislature repealed the statutes, ie. K.S.A. 40-1810 and K.S.A. 40-1910, the charitable obligations remained and those predecessor corporations were impressed with a charitable trust.
BCBSK in its motion for reconsideration argues that there is no basis for impressing BCBSK's 1969 assets with a charitable trust. BCBSK argues that under trust law there can't be either an express trust or a constructive trust.
In granting the AG's motion for summary judgment, the court adopted the AG's terminology "impressed with a charitable trust." Other states' laws clearly provide that assets of nonprofit corporations organized solely for charitable purposes are impressed with a charitable trust which the Attorney General has a duty to protect, The People v. Orange County Charitable Services et al., 73 Cal. App. 4th 1054, 87 Cal. (1999) Rptr. 2d 253. See also Arthur C. Hillman et al. v. Roman Catholic Bishop of Fall River et al., 24 Mass. App. Ct. 241, 508 N.E. 2d 118 (1987) (A gift with general charitable intent imposes a trust of a sort in that grantee may not use assets for private, personal purposes, but rather, must use them for charitable purposes consistent with those of the designated charity.) and Blocker v. State of Texas, 718 S.W. 2d 409, 416 (1986) (Court holds that "by their very incorporation for purely charitable and benevolent purposes [charitable corporations] have made a contract with the state and with the beneficiaries named in the charters effectually constituting those in charge of the enterprise trustees of an express trust, and their charters in their last analysis and in their legal effect become declarations of trust.")
This court found that the predecessor corporations were charitable and benevolent corporations through 1969. The court then ruled that due to the repeal of the statute the corporations no longer were charitable corporations. However, the assets of a charitable corporation cannot be used for purposes that are not in accord with their Articles of Incorporation and the enabling statutes under which they organized. Because the corporations were charitable corporations, the boards still had obligations imposed on them. Perhaps those obligations are not technically a trust, but it is clear that the obligations remain even after the legislature no longer deemed the predecessor corporations to be charitable and benevolent corporations. Currently under K.S.A. 17-6805a, if a predecessor charitable corporation qualified for an exemption under 501(c)(3) of the internal revenue code of 1954 as amended (26 U.S.C. § 501(c)(3)), upon dissolution of the corporation, after paying all the liabilities of the corporation, the Board of Directors of the corporation would be required to dispose of all assets in accordance with the purposes of the corporation or to some other 501(c)(3) organization. If the Board of Directors or governing board of the corporation does neither, then the district court must dispose of the assets in accord with the purposes of the organization. The predecessor corporations, although organized under enabling acts that provided that they were charitable and benevolent corporations, did not seek an exemption under 501(c)(3) because the predecessor corporations already were exempt from federal income taxes under 501(c)(4).
Likewise, if the assets of the predecessor corporations were being held in a charitable trust, the court under K.S.A. 59-22a01, ie. the cy pres statute for charitable trusts, devises or bequests, could reform the charitable trust if it becomes impossible or impractical to fulfill the intent of the settlor or testator. The court upon application by trustee, executor, administrator, any interested party or the attorney general may order administration of the trust in a way which would most nearly fulfill the general charitable intention.
While BCBSK's predecessor corporations don't fit perfectly into either category, it does not mean that BCBSK is free to use the assets acquired while the predecessor corporations were charitable corporations for non-charitable purposes. BCBSK's predecessor corporations had obligations to its beneficiaries. The repeal of the statutes that declared the predecessor corporations to be charitable and benevolent did not affect the duty to provide benefits to its beneficiaries. A repeal of a statute does not "affect any right which accrued, any duty imposed, any penalty incurred or any proceeding commenced, under or by virtue of the statute repealed." K.S.A. 77-201 First.
BCBSK argues that a legislative declaration cannot transform the inherent character of an act or thing. However, in the case of the predecessor corporations, they incorporated under statutes that declared the corporations to be charitable and benevolent. The corporations held themselves out to be charitable and benevolent corporations. In addition, in the 1966 Towle case, Judge Vickers ruled that the corporations were charitable and benevolent. The history of the predecessor corporations involves more than the legislature waving a magic wand and declaring them to be "charitable and benevolent."
BCBSK also argues that this court was incorrect in stating that "[i]f these corporations were mischaracterized as charitable and benevolent as BCBSK argues the tax exempt incentives that the legislature provided were clearly unconstitutional." This court acknowledges that the above statement is not entirely accurate. The state constitution does not impose express limits on the legislative power to grant other tax exemptions in addition to those found in the Kansas Constitution. In re Appeal of University of Kansas School of Medicine, 266 Kan. 737, 750, 973 P.2d 176. However, in order to qualify for an exemption, the property had to be used exclusively for the purposes stated in the statutory or constitutional exemption provisions. In re Appeal of University of Kansas School of Medicine at 751. K.S.A. 40-1810 and K.S.A. 40-1910 would not have been unconstitutional per se if the exemptions were ones not set out in the constitution. However, the exemptions provided in K.S.A. 40-1810 and K.S.A. 40-1910 were for charitable and benevolent corporations and the state of the law at that time was that the property had to be used exclusively for those purposes as set out in the exemption. While BCBSK argues the legislature could have granted a property tax exemption as an incentive for the development of prepaid health plans, that is not what occurred. The legislature provided an exemption for organizations that incorporated under the act and the legislature declared such corporations to be charitable and benevolent. G.S. 40-1810 did not even grant a property tax exemption. Instead, the legislature declared the corporations organizing G.S. 40-1801 et seq. to be charitable and benevolent corporations. KHSA's property tax exemption was not statutory and instead was granted under the constitution because the corporation was charitable and benevolent.
BCBSK cites the legislative history of the 1969 Act which repealed K.S.A. 40-1810 and K.S.A. 40-1910 (formerly G.S. 40-1810 and G.S. 40-1910) and argues that it indicates nothing other than the intent to repeal tax exemptions. The important legislative history is not the legislative history of the repeals in 1969 but the legislative history of the enabling acts, ie. G.S. 40-1801 et seq. and G.S. 40-1901 et seq. However, legislative history only becomes essential when the statutory language is ambiguous. Here the statutory language of G.S. 40-1810 and G.S. 40-1910 is clear.
Finally, BCBSK argues in its motion for reconsideration that summary judgment cannot be granted because there are material facts in dispute. BCBSK points to several factors that the court referred to on pages 15 and 16 of the Order. However, none of the factors that were noted by the court on pages 15 and 16 of the Order were used as a basis for the court's granting of the AG's Summary Judgment Motion. The factors were mentioned in a section of the opinion in which the court was discussing whether or not BCBSK or its predecessor corporations were "arguably" common law charities. The court made no conclusion based on those facts about whether or not BCBSK or its predecessors were common law charities. "Although the court notes the early charitable characteristics, this court refrains from concluding as a matter of law that BCBSK's predecessor corporations were common law charities because that finding is not necessary due to the conclusions of law set forth in the next section." Order at page 17.
For the reasons set out above, this court denies BCBSK's Motion for Reconsideration of its Order of January 7, 2000, in which the court granted the AG's Motion for Summary Judgment.
This order shall serve as the journal entry on the Motion for Reconsideration and no further journal entry is required.
IT IS SO ORDERED.
Dated this 5th day of April, 2000.
____________________________
Nancy Parrish
Judge, Third Judicial District
Division Fourteen
I hereby certify that a copy of the above and foregoing MEMORANDUM DECISION AND ORDER was mailed this day of April , 2000, to the following:
Mark A. Buck
Fairchild, Haney & Buck P.A.
5851 SW 29th St., Suite 1
Topeka, Kansas 66614
William Pitsenberger
Blue Cross and Blue Shield of Kansas, Inc.
1133 SW Topeka Blvd.
Topeka, Kansas 66629
C. Steven Tomashefsky
Jenner & Block
One IBM Plaza
Chicago, Illinois 60611
Robert T. Stephan
14243 W. 84th Terrace
Lenexa, Kansas 66215
Robert F. Rowe, Jr.
Nancy S. Anstaett
8675 W. 96th St., Suite 210
P.O. Box 12728
Overland Park, Kansas 66282-2728
Eliehue Brunson
Assistant Attorney General
Office of the Attorney General
120 SW 10th Avenue, 2nd Floor
Topeka, Kansas 66612-1597
Margaret Gatewood
Kansas Insurance Department
420 SW 9th Street
Topeka, Kansas 66612-1678
Patrick H. Cantilo
Cantilo, Maisel & Hubbard, L.L.P.
111 Congress Ave., Suite 1700
Austin, Texas 78701
________________________________
Norma Dunnaway, Administrative Assistant