BLUE CROSS AND BLUE SHIELD OF KANSAS INC.,    )
                                Plaintiff,    )
                                              )
vs.                                           )    Case No. 97CV 608
                                              )
CARLA STOVALL KANSAS ATTORNEY GENERAL,        )
                                Defendant.    )
______________________________________________)

Plaintiff Blue Cross Blue Shield of Kansas (BCBSK) filed a motion for partial summary judgment on October 15, 1999. The defendant, Carla Stovall, Kansas Attorney General (AG) filed her response on November 8, 1999 and BCBSK filed its reply on November 18, 1999. The court deems the motion as ready for ruling since there has been no request for oral argument on the motion. The court, after thoroughly reviewing the motion and memoranda and the court file in this matter and being fully informed regarding the premises, grants BCBSK's motion for partial summary judgment for the reasons set forth below.

BCBSK's motion for partial summary judgment alleges that there is no genuine issue as to any material fact and that it is entitled to summary judgment as to Count Six of the Attorney General's Amended Counterclaim.

This court concurs with BCBSK that there is no genuine issue as to any material fact necessary to the resolution of this motion. While the AG does controvert a number of the Statements of Uncontroverted Facts, none of the controverted facts were material to the court's decision on this issue. The controverted facts were in the nature of background information and other nonmaterial facts.

For the purpose of this motion, BCBSK stated that it would assume that BCBSK is a charitable trust. This court, for the purpose of this motion only, will look at the facts in the light most favorable to the nonmoving party and assume that BCBSK is a charitable trust. If the court, on the other hand, assumes that BCBSK is not a charitable trust, charitable corporation, or impressed with a charitable obligation, then BCBSK would have no fiduciary duty to any beneficiaries and therefore Count 6 would fail as well since there would have been no breach.

I. Did BCBSK breach any fiduciary duty by seeking judicial clarification regarding its alleged status as a charitable trust?

BCBSK argues that it did not breach any fiduciary duty by seeking judicial clarification regarding its alleged status as a charitable trust.

The AG on the other hand argues that BCBSK, as Trustee, has certain responsibilities that it has breached. The AG concedes there is no written agreement or indenture setting out BCBSK's duties, however the AG cites the Restatement of Trusts (Second) §164 which provides that duties are determined "b) in the absence of any provision in the terms of the trust by the rules stated in §§ 169-196." The AG specifically sets out three duties that she believes applies in this case: the duty to administer the trust (§169); a duty of loyalty (§170); and a duty to exercise reasonable care and skill (§174).

The AG argues that those duties are breached when BCBSK denies that it has the duties. However, that argument seems to boil down to an allegation that BCBSK breached the duty of loyalty.

BCBSK cites case law that supports its contention that a trustee should seek guidance from the court when the trustee has doubt as to the scope of its duties or the proper course of action. Moore v. Adkins, 2 Kan. App. 2d 139, 150-51, 576 P.2d 245, 254-55 (Kan. Ct. App. 1978). In addition, a trustee is entitled to expend trust assets to pay litigation expenses. Jennings v. Murdock, 220 Kan. 182, 214, 553 P.2d 846 (1976); Restatement (Second) of Trusts, §178.

Given the history of BCBSK including the statutory mandate for BCBSK to become a mutual insurance company coupled with the AG's failure to raise the issue regarding BCBSK's status either prior to the legislature's enactment of the mutualization legislation or during the conversion by BCBSK, this judicial clarification is essential to the future of BCBSK and ultimately the alleged beneficiaries. It is clear that the Attorney General has the duty to enforce a charitable trust [Restatement (Second) of Trusts §391)]. Indeed, if this issue of charitable trust had been raised prior to the mutualization legislation, this lawsuit might not have been necessary.

If BCBSK had not sought a judicial clarification once the issue was raised by the AG and had instead capitulated that the AG was correct and that BCBSK was a charitable trust, etc., it may have subjected itself to suit by subscribers who contest the AG's interpretation of BCBSK's history and its impact on the legislative mandate to mutualize. If the subscribers would have brought suit, the trust would have incurred litigation expenses on this same issue.

This court does not find that BCBSK breached any fiduciary duty of loyalty or any other duty by seeking judicial clarification given the uncertainty regarding its status. Furthermore, even if there was a breach, it was one of timing (the AG argues that BCBSK should have initiated a cy pres proceeding subsequent to the legislative enactment requiring mutualization) and there would be no damages since the attorneys' fees for the litigation arguably would have been incurred anyway.

II. Did BCBSK abandon any alleged charitable purpose?

The AG first contends that BCBSK breached its fiduciary duty by abandoning relevant portions of its articles of incorporation which indicate the charitable nature of the corporation and its predecessors and failing to consult with subscribers prior to seeking mutualization legislation.

BCBSK argues that the changes in corporate form (both those mandated by the legislature and those instituted by BCBSK) cannot have caused any damages.

BCBSK amended its Articles of Incorporation in 1992 by deleting the provision that BCBSK was to be operated "exclusively for the promotion of social welfare within the meaning of the Internal Revenue Codes of 1954, as amended" and by deleting the dissolution clause which provided for the disposition of its assets to another social welfare organization or in the alternative that the disposition was to be made by the Shawnee County District Court upon dissolution of the corporation. However, if BCBSK is a charitable corporation of trust, etc., the amendments deleting the language would have no effect because BCBSK would continue to have a charitable purpose (with or without the language) and its assets would have to be dedicated to a charitable purpose even if the corporation dissolved. Hence there may have been a breach of loyalty to beneficiaries but there have been no damages to any beneficiaries since there has been no dissolution and no distribution of assets or dividends due to the change in the Articles of Incorporation. BCBSK contends that it is doing business as it always has done and one can infer that if it was fulfilling a charitable purpose prior to mutualization it continues to do so. Apparently, the Insurance Commissioner takes exactly that position.

If BCBSK still is a charitable trust or charitable corporation, there has been no conversion of charitable assets to private ownership. It is uncontroverted that no dividends or assets have been distributed to subscribers (Plaintiff's statement of uncontroverted facts #22). The AG concedes that "the mere mutualization of BCBSK does not stop or prevent it from carrying out its charitable purposes." (AG's Response to Plaintiff's Motion for Partial Summary Judgment p.13.)

The only allegation of damages that the court finds can be inferred from the AG's counterclaim would be that BCBSK's assets are now owned by the subscribers rather than being held for the benefit of the beneficiaries. However, the AG states that K.S.A. 40-19c12 does not specify ownership of the company or its assets and that the mere mutualization does not change or prevent the carrying out of charitable purposes. Therefore, there are no current damages due to any alleged breach for abandonment of charitable purposes.

III. Did BCBSK's merger discussions breach BCBSK's fiduciary duties?

The AG alleges that BCBSK breached its fiduciary duty by participating in discussions with BCBS/KC regarding a possible merger and that in lieu of either mutualization or merger discussions with BCBS/KC, BCBSK failed to consider a merger with or acquisition of another Blue Cross Blue Shield plan that acknowledges its charitable status or some other nonprofit charitable institution.

The allegation boils down to one in which BCBSK breached its fiduciary duty by discussing merger with one entity and/or failing to discuss (consider) merger with other entities. The AG has not identified how any of the discussions or lack of discussions breached any specific duty or if they did, how the discussions or lack thereof caused any damages to any beneficiaries.

Discussions without action or lack of discussions hardly rise to a level in which there would be a breach let alone any discernible damages.

IV. If the court finds that a breach of fiduciary duty occurred, has the AG failed to name a defendant capable of providing the relief?

This question is really moot due to the court's finding that there has been no breach.

For the reasons set out above, the court grants BCBSK's motion for partial summary judgment on Count 6.

IT IS SO ORDERED.

Dated this 7th day of January, 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 January , 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