Lewis et al v. Delta Health Systems, Inc. et al

Filing 41

ORDER signed by Judge Kimberly J. Mueller on 3/13/2014 GRANTING 28 Motion for Stay of Discovery for a period of three months; DIRECTING the defendants not to serve interrogatories or attempt to dipose Plaintiff Lewis during that time; DENYING 28 Motion for Stay of Discovery in all other respects; DIRECTING the plaintiffs to file a Status Report regarding the progress of the criminal case within three months. (Michel, G)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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DAVID M. LEWIS, D.M.D., et al.,

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Civ. No. S-13-0574 KJM EFB

Plaintiffs,
V.

ORDER

WILLIAM MICHAEL STEMLER, INC.,
et al.,
Defendants.

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Plaintiffs’ motion to stay proceedings pending a criminal investigation against
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plaintiff David Lewis is currently before the court. The court heard argument on January 17,
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2014. Eric Brenneman and Craig Farmer appeared for plaintiffs; John Provost appeared for
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defendants William Michael Stemler, Inc. dba Delta Health Systems (“Delta”) and Northern
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California General Teamsters Security Fund (“Fund”) (collectively “defendants”). After
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considering the parties’ argument, the court GRANTS the motion in part and DENIES it in part.
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I. BACKGROUND
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In a first amended complaint (“FAC”) filed August 15, 2013, plaintiffs David M.
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Lewis, D.M.D., individually (“Lewis”) and David M. Lewis, D.M.D., Inc. (“Corporation”;
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collectively “plaintiffs”) challenge the defendants’ alleged failure to pay for dental services
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rendered under the Teamsters’ dental plan. Plaintiffs brought nine claims for relief: (1) recovery
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of ERISA benefits, 29 U.S.C. § 1132(a)(1)(B); (2) breach of implied contract; (3) breach of an

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oral contract; (4) quantum meruit; (5) open book account; (6) unjust enrichment; (7) violation of

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California Health & Safety Code § 1371; (8) violation of California Health & Safety Code

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§ 1371.35; and (9) violation of California’s Unfair Competition Law (UCL), CAL. BUS. & PROF.

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CODE §§ 17200, et seq. ECF No. 9.

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Defendants moved to dismiss plaintiffs’ state law claims, arguing they are

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preempted by Section 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B). ECF No. 12. The

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court granted defendants’ motion as to plaintiffs’ second, third, fourth, fifth, sixth, seventh and

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eighth claims and also granted it as to the ninth claim, insofar as that claim was based on a

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violation of California Health & Safety Code §§ 1371 and 1371.5, but denied the motion insofar

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as the ninth claim alleged that defendants’ actions were unfair. ECF No. 18.

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On September 27, 2013, the Fund filed a counterclaim against Lewis and David

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Lewis D.M.D, Inc., alleging that sometime in 2007 Lewis began performing dental procedures on

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Fund members and discovered the benefits under the plan were more generous than most plans.

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ECF No. 19 ¶ 7. Thereafter Lewis began to solicit Fund members by offering cash payments for

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referrals; he ultimately performed dental services that were not medically necessary on plan

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members and misrepresented that dental work had been performed when in fact it had not been.

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Id. ¶ 9. Between 2007 and 2012, counterdefendants billed the Fund $2,500,000 for services to

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Plan members and beneficiaries, representing the services were medically necessary and

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appropriate; the Fund relied on these representations to pay the claims. Id. ¶ 10. The Fund

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alleges upon information and belief that many of the services were not medically necessary or

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were not provided. Id. ¶ 11. The counterclaim then describes services the Fund believes were

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either not performed or not necessary but for which counterdefendants billed and the Fund paid.

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The Fund, as counterclaimant, brings the following claims: (1) a violation of the Racketeering

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and Corrupt Organizations Act (“RICO”) against Lewis only; (2) a RICO violation against both

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counterdefendants; (3) common law fraud against both counterdefendants; (4) a UCL violation

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against both counterdefendants. Id. ¶¶ 18-31.

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Plaintiffs filed their Second Amended Complaint (“SAC”) on October 10, 2013.

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ECF No. 23. They allege the Fund operates a health plan that includes dental benefits for

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individual plan members under terms of their contract with the Fund. Complaint, ECF No. 22

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¶ 10. Delta administers the health plan and processes and pays claims submitted by dental

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providers who have treated plan members. Id. ¶ 12. Lewis, an out-of-network provider under the

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Teamsters’ plan, provided dental services to individual plan members, who assigned their

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contractual rights under the health plan to plaintiffs. Id. ¶¶ 13-14. After treating plan members,

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plaintiffs submitted claims for the reasonable and customary rate for services to Delta, but Delta

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failed timely to respond to the claims; unreasonably denied the claims; failed to provide proper

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information; requested information not required by the claim procedures and promised claims

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would be paid if plaintiffs provided this information, but thereafter denied the claims and/or failed

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to pay the required contractual benefits under the plan. Id. ¶ 16. They allege two claims for

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relief: (1) recovery of ERISA benefits, 29 U.S.C. § 1132(a)(1)(B) and (2) violation of

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California’s Unfair Competition Law (UCL), CAL. BUS. & PROF. CODE §§ 17200, et seq.

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On October 24, 2013, defendants filed an answer, raising numerous affirmative
defenses. ECF No. 25.

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On November 8, 2013 plaintiffs filed an answer to the counterclaim. ECF No. 27.

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In that answer, plaintiff Lewis asserted his right against self-incrimination and so declined to

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answer many of the allegations. ECF No. 27.

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The parties’ evidence in support of and opposition to the current motion shows the

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following: In October 2011, an investigator for California’s Dental Board contacted John

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Provost, the Fund’s lawyer, in connection with an investigation of plaintiffs’ possible fraud

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against the Fund. Decl. of John Provost, ECF No. 33 ¶ 2. Also in October 2011, Provost

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received a letter from Jamidi Daiess, an investigator for the United States Department of Labor

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(“DOL”), requesting Fund documents related to Lewis’s provision of dental services to Fund

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participants. Id. ¶ 3. In November 2011, the Dental Board served a search warrant on Provost,

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also seeking records related to Lewis. Id.

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In February 2012, the Dental Board’s Administrative Law Judge (ALJ) held a

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hearing seeking an interim suspension order against Lewis based on an accusation alleging Lewis

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had billed the Fund for unnecessary dental work performed on Fund participants or for

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procedures he had not performed at all. Id. ¶ 4. The ALJ issued an interim suspension order

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pending a full evidentiary hearing on revocation of the license. Id. The full evidentiary hearing

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before the Dental Board, scheduled for August 2012, was cancelled when Lewis surrendered his

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license to practice in California. Id. ¶ 6.

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In December 2012, Provost provided Fund records about Lewis and his treatment

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of Fund participants to the United States Attorney’s Office (“USAO”) for this district. Id. ¶ 7.

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Provost received another subpoena from the United States Attorney’s Office in May 2013. Id.

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After this motion was submitted, Lewis was indicted on one count of conspiracy to

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commit health care fraud and mail fraud, 18 U.S.C. § 1349; seventeen counts of health care fraud,

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18 U.S.C. § 1347; and forfeiture, 18 U.S.C. §§ 981(a)(1)(C) & 982(a)(1), 28 U.S.C. § 2461(c).

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United States v. Lewis, Cr. S-14-0045 MCE, ECF No. 1. Lewis has been arraigned on the

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indictment; a status conference is set for March 27, 2014.

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II. STANDARD

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A party has no constitutional right to a stay of civil proceedings during the

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pendency of a criminal investigation or prosecution nor does the Constitution protect a party from

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being forced to choose between the consequences of asserting or waiving his Fifth Amendment

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rights in the civil proceedings. Baxter v. Palmigiano, 425 U.S. 308, 318-19 (1976); Fed. Sav. &

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Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989) (“Molinaro”). Even so, after

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considering “the particular circumstances and competing interests involved in the case,” a court

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has discretion either to stay the entire proceeding or fashion some other, less drastic way to

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protect a party’s Fifth Amendment rights. Keating v. Office of Thrift Supervision, 45 F.3d 322,

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324 (9th Cir. 1995); see also eBay, Inc. v. Digital Point Solutions, Inc., No. C 08-4052 JF (PVT),

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2010 WL 702463, at *5 (N.D. Cal. Feb. 10, 2010) (considering plaintiff’s proposed alternatives to

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a stay, but ultimately denying the stay); In re CFS-Related Secs. Fraud Litig., 256 F. Supp. 2d

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1227, 1236 (N.D. Okla. 2003) (“A general stay is just one of several procedures available. Other
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options may be utilized in lieu of imposing a stay. These alternate tools include the imposition of

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protective orders, sealed interrogatories, a stay for a finite period of time, or a stay limited to a

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specific subject matter.”).

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In considering whether to stay the proceedings, the court “should consider ‘the

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extent to which the defendant’s fifth amendment rights are implicated.’” Keating, 45 F.3d at 324

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(quoting Molinaro, 889 F.2d at 902) (lack of capitalization as in original). In addition, the court

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should consider the following factors:

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(1) the interest of the plaintiffs in proceeding expeditiously with
this litigation or any particular aspect of it, and the potential
prejudice to the plaintiffs of a delay; (2) the burden which any
particular aspect of the proceedings may impose on defendants;
(3) the convenience of the court in the management of its cases, and
the efficient use of judicial resources; (4) the interests of persons
not parties to the civil litigation; and (5) the interest of the public in
the pending civil and criminal litigation.

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Id. at 325.

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Although most cases consider a defendant’s request to stay civil proceedings, a

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plaintiff is not absolutely barred from seeking a stay of an action he filed. Nevertheless, as a

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general rule, “[t]he plaintiff who retreats under the cloak of the Fifth Amendment cannot hope to

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gain an unequal advantage against the party he has chosen to sue” because “a civil plaintiff has no

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absolute right to both his silence and his lawsuit.” Wehling v. Columbia Broad. Sys., 608 F. 2d

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1084, 1087, 1088 (5th Cir. 1980) (“Wehling I”). If a court concludes a plaintiff’s request to stay

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the case he has filed should be granted, the court must be careful not to enter an “expansive stay”

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but rather focus only on the discovery that exposes the party to a risk of self-incrimination.

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Wehling v. Columbia Broad. Sys., 611 F.2d 1026, 1027 (5th Cir. 1980) (“Wehling II”). The

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court recognizes that in this case Lewis and the Corporation are not only plaintiffs but are

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counterdefendants in the Fund’s counterclaim alleging RICO violations and fraud. Given the

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counterclaims, the court declines to resolve the parties’ competing positions on the question

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whether plaintiff was forced to file when he did because of the statute of limitations. Moreover,

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as Wehling I recognizes, even a plaintiff may seek a stay under limited circumstances.

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III. ANALYSIS
A. Plaintiffs’ Fifth Amendment Rights/The Burden From Proceeding

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“When simultaneous civil and criminal proceedings involve ‘the same or closely

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related facts,’ the Fifth Amendment concerns may be sufficient to warrant a stay.” eBay, 2010

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WL 702463, at *3 (quoting Chao v. Fleming, 498 F. Supp. 2d 1034, 1037 (W.D. Mich. 2007)).

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There is overlap between the criminal charges and the counterclaim: the Lewis

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indictment identifies twelve patients on whom Lewis allegedly performed unnecessary dental

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work, two of whom are named in the counterclaim in this case. Indictment at 18-23 &

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Counterclaim at 13 (patients R.I. and C.M.). In addition, the conspiracy count describes a

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scheme to defraud the Plan by billing for services not performed or performed but unnecessary

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and excessive, Indictment at 4, and the Counterclaim at 3 ¶ 9.

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Nevertheless, Lewis is not the only plaintiff/counterdefendant, a fact plaintiffs do

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not address until their reply: the motion discusses the Fifth Amendment implications of the

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investigation as though Lewis alone was involved. It is well settled, however, that the

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Corporation has no Fifth Amendment rights and that Lewis can be compelled to produce

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corporate records in his capacity as corporate representative. Braswell v. United States, 487 U.S.

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99, 104-10 (1988).
Also only in the reply do plaintiffs argue that the corporation is dissolved1 and

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that, somehow, Lewis’s (former) license and the professional and specialized nature of the

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practice means he alone will be able to provide the requested records, rendering this action of

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production testimonial. Plaintiffs do not support this argument with citation to any authority.

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It is true that the act of production may have testimonial aspects. See, e.g., United

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States v. Sideman & Bancroft, LLP, 704 F.3d 1197, 1201 (9th Cir. 2013). However, in Braswell,

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the Supreme Court said “the custodian’s act of production is not deemed a personal act, but rather

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an act of the corporation. Any claim of Fifth Amendment privilege asserted by the agent would

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be tantamount to a claim of privilege by the corporation—which of course possesses no such

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The court takes notice of the fact that the California Secretary of State’s website lists the
corporation’s status as “active.”
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privilege.” Braswell, 487 U.S. at 110; Bellis v. United States, 417 U.S. 85, 90 (1974) (“[T]he

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papers and effects which the privilege protects must be the private property of the person

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claiming the privilege, or at least in his possession in a purely personal capacity”) (citation &

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internal quotation marks omitted). It does not matter “how small the corporation may be” or if it

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has been dissolved: the corporation’s records do not thereby become personal records. Braswell,

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487 U.S. at 100; Bellis, 417 U.S. at 96 n.3 (stating that “the dissolution of a corporation does not

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give the custodian of corporate records any greater claim to the Fifth Amendment privilege”)

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(citation & internal quotation marks omitted); United States v. Feng Juan Lu, 248 F. App’x 806,

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808 (9th Cir. 2007) (recognizing that a defendant’s business documents were not personal for

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Fifth Amendment purposes “because she clearly intended the businesses to be separate from her

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in the event of a lawsuit”); United States v. Amato, 450 F.3d 46, 52 (1st Cir. 2006) (a defendant’s

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choice to incorporate carries responsibilities of corporate identity, including the production of

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subpoenaed records). When asked at hearing, plaintiffs conceded they have no California

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authority suggesting that corporate records become personal if and when a corporation is

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dissolved.

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Plaintiffs also contend the Fund is seeking some of Lewis’s personal banking

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records, the production of which will have testimonial aspects. The Fund cites to United States v.

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Bright, 596 F.3d 683 (9th Cir. 2010) to argue there is no potential for incrimination when a party

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seeks records the government already has. In Bright, the Ninth Circuit said that “where ‘[t]he

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existence and location of the papers is a foregone conclusion and the [party] adds little or nothing

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to the sum total of the Government’s information by conceding that he in fact has the papers,’”

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requiring production “does not touch upon constitutional rights.” Id. at 692 (quoting Fisher v.

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United States, 425 U.S. 391, 411 (1976)). The court need not determine at this stage of the

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proceedings whether the exception applies to parties other than the government that seek the

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production of records or whether the act of producing personal bank records might be deemed

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testimonial. Given the Fund’s awareness that Delta was sending checks to plaintiffs, this aspect

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of the claimed privilege provides little support for the requested stay. See, e.g., ECF No. 28-3 at

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15 (Remittance Advice form from Delta Dental to David M. Lewis DMD).
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Finally plaintiffs argue that a corporation will be unable to defend itself if all its

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officers assert their Fifth Amendment rights. They have not shown, however, that Lewis is the

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only corporate officer or that other corporate officers and/or employees will or legitimately could

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assert Fifth Amendment rights in response to discovery.

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As Lewis has Fifth Amendment rights that may be implicated during discovery,
this factor favors a stay.
B. The Fund’s Interest in Expeditious Litigation
The Fund argues a stay will impede its ability to investigate whether more of the
approximately $2 million paid to Lewis was based on improper billing or unnecessary

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procedures. ECF No. 30 at 5. It argues it will need to obtain dental records and submit them to a

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forensic dental expert for review, a time-consuming process. Id.; see also In re CFS,

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256 F. Supp. 2d at 1239 (stating a party’s interest in a speedy discovery process is heightened in

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complex litigation, which must proceed efficiently). Plaintiffs suggest that the resolution of the

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criminal case may streamline discovery. ECF No. 25 at 8. However, as no criminal case has

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been filed or resolved, this argument is unavailing.

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Courts have also recognized that a stay may impact a party’s ability to collect any

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civil judgment it might recover, a real concern in this case as plaintiffs’ counsel has identified five

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civil actions pending against plaintiffs in Sacramento County Superior Court. Id.; Arries v. Univ.

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OB/GYN, LLC., No. CV 10-08219-PCT-NVW, 2012 WL 896355, at *2 (D. Ariz. Mar. 16, 2012)

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Decl. Craig Farmer, ECF No. 28-3 ¶ 2. Moreover, the fees plaintiffs are paying for civil and

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criminal representation continue to drain assets that could be used to satisfy any judgment.

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Plaintiffs argue this factor applies only when there is evidence of active

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concealment, but cite no binding authority so restricting this court’s consideration. This factor

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weighs against any stay.

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C. The Efficient Use of Judicial Resources
The court has an interest in managing its caseload efficiently. eBay, 2010 WL

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702463, at *6. In light of the indictment, the potentially indefinite nature of any stay implicates

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this court’s interest in managing its docket and weighs against the stay. See In re CFS, 256 F.
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Supp. 2d at 1242 (rejecting argument that resolution of criminal case might streamline civil

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issues, finding it “unrealistic to rely upon fortuitous events to manage its docket”) (citation &

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internal quotation marks omitted).

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D. Interests of Third Parties
The Fund has presented evidence that the employers’ premium and contribution

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rates and the employees’ share of those rates are determined by the amount of self-insured claims

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paid out of the Fund’s assets. Decl. of Marena Henne, ECF No. 31 ¶ 3. Given the possibility

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these rates might be reduced if the Fund recoups substantial assets from plaintiffs, the interest of

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Fund members weighs against a stay.

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Plaintiffs counter that pursuing discovery might impact the rights of the plaintiff

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Corporation’s employees, who might assert their Fifth Amendment rights in response to

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discovery. It is unclear how the employees’ rights will be negatively impacted, particularly if

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their assertion of the privilege is honored.

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This factor weighs against a stay.
E. The Public Interest
Plaintiffs argue the public’s interest is served by the protection of Fifth

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Amendment rights, while the Fund contends the public’s interest is best served by a speedy

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resolution of the instant litigation. ECF No. 28-1 at 10. This factor is essentially neutral.

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Although most of the Keating factors do not favor a stay, the application of this

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test is not mechanical. Two things in particular inform the resolution of the instant motion: the

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identity between the counterclaim and the criminal investigation on one hand and the Fund’s need

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to analyze dental records. Should the Fund be allowed to question Lewis, his Fifth Amendment

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rights will almost certainly be implicated. However, it is likely that the Fund’s analysis of the

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dental records will shape the questions it will pose to Lewis in interrogatories and at a deposition.

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Given that the analysis of the records will take some period of time, the Fund’s interest in

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questioning Lewis guided by the results of that analysis will not be unduly damaged by a stay of

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any questions directed to Lewis. A six-month stay is not warranted, however, given Lewis’s

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vague showing supporting the time sought.
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IT IS THEREFORE ORDERED:

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1. Plaintiffs’ motion for a stay of discovery is granted for a period of three months

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from the date of this order, to the extent that during that time defendants shall not serve

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interrogatories on or attempt to depose plaintiff Lewis;

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2. Plaintiffs’ motion for a stay of discovery is denied in all other respects; and

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3. Plaintiffs are directed to file a status report within three months of the date of

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this order, providing detailed information about the progress of the criminal case.

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Dated: March 13, 2014.

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UNITED STATES DISTRICT JUDGE

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