Judge Rules State Can’t Force FHP Officers to Make Larger Donation

A Superior Court judge has ruled that the state attorney general cannot order officers of FHP, a Fountain Valley-based health maintenance organization, to donate $80 million to charity.

The state attorney general’s office filed a lawsuit in December, 1986, charging that FHP managers failed to donate a reasonable amount to charity when they bought the nonprofit organization in November, 1985, for $38.6 million in cash and notes.

Under state law, trustees of a charitable health maintenance organization can convert it to a for-profit status if they donate to charity an amount equal to the fair value of the company.

In the case of FHP, the managers donated $38.6 million to the FHP Foundation. The company was valued at well in excess of $100 million in a public stock offering in June, 1986.

The state attorney general valued the company at more than $100 million and demanded that the managers pay an additional $80 million to charity.

Judge Edward M. Ross said in his ruling that the attorney general lacked jurisdiction in the case because the Legislature had placed responsibility for health maintenance organizations with the state Department of Corporations, which approved FHP’s conversion.

“(This ruling) cheats the public,” said Jim Shultz, a policy analyst with Consumers Union, a nonprofit San Francisco-based group that has been active in the fight against FHP.

“The problem is the judge ruled on a jurisdictional ground. Not on the facts. These health maintenance organizations were set up as a public trust. And the public did not get the full value,” Shultz said.

The attorney general’s office said it will appeal the ruling “to the court of last resort,” according to Carol Kornblum, senior assistant attorney general.

“We have jurisdiction over a charity by common law. We have to convince the court of that,” Kornblum said.

Named in the suit were three members of FHP’s board of directors--Chairman Robert Gumbiner, W.W. Price and David LeSuer, who is no longer with the firm. The suit also named the accounting firm of Ernst & Whinney. FHP was not named.

FHP plans to file court papers to obtain a dismissal of the attorney general’s suit, according to Anna Marie Dunlap, an FHP spokeswoman.