Wehlage v. EmpRes Healthcare Inc et al

Filing 79

ORDER by Judge Claudia Wilken GRANTING DEFENDANTS 55 MOTION TO DISMISS OR STRIKE NEW PLAINTIFFS AND DEFENDANTS, GRANTING EMPRES ENTITIES 56 MOTION ON ALTER EGO LIABILITY, GRANTING IN PART EVERGREEN LAKEPORTS 57 MOTION TO DISMISS AND DENYING AS MOOT EMPRES ENTITIES 54 MOTION TO DISMISS BASED ON PERSONAL JURISDICTION. (ndr, COURT STAFF) (Filed on 10/31/2011)

1
2
3
4

IN THE UNITED STATES DISTRICT COURT

5

FOR THE NORTHERN DISTRICT OF CALIFORNIA

6
7

PHYLLIS WEHLAGE, on her behalf and on
behalf of others similarly situated,

8
9

Plaintiff,
v.

United States District Court
For the Northern District of California

10

EMPRES HEALTHCARE INC., et al.,

11

Defendants.
/

12
13
14
15
16
17
18

No. 10-05839 CW
ORDER GRANTING
DEFENDANTS’ MOTION
TO DISMISS OR STRIKE
NEW PLAINTIFFS AND
DEFENDANTS (Doc. No.
55), GRANTING EMPRES
ENTITIES’ MOTION ON
ALTER EGO LIABILITY
(Doc. No. 56),
GRANTING IN PART
EVERGREEN LAKEPORT’S
MOTION TO DISMISS
(Doc. No. 57) AND
DENYING AS MOOT
EMPRES ENTITIES’
MOTION TO DISMISS
BASED ON PERSONAL
JURISDICTION (Doc.
No. 54)

Pursuant to the Court’s May 25, 2011 Order (Docket No. 46),

19

Plaintiff has filed a First Amended Complaint (1AC) re-alleging her

20

original three claims based on violation of California Health and

21

Safety Code section 1430(b); violation of California’s Unfair

22

Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 et seq.; and

23

violation of the California Consumers Legal Remedies Act (CLRA),

24

Cal. Civ. Code § 1750, et seq.

25

to remedy the deficiencies noted in the May 25, 2011 Order,

26

Plaintiff has added two new Defendants and ten individuals as named

27

Plaintiffs who reside at the individual skilled nursing facilities

28

In addition to adding allegations

1

defined in the May 25, 2011 Order as the Evergreen Entities.

2

May 25, 2011 Order at 1-2.

3

See

Defendants1 file three separate motions to dismiss under

4

Federal Rule of Civil Procedure 12(b)(6) for failure to state a

5

claim upon which relief can be granted.

6

(Docket No. 55), the EmpRes and Evergreen Entities move to dismiss

7

or strike all claims asserted against the Evergreen Entities and

8

all references to the Evergreen Entities as parties in the action,

9

all claims asserted by the newly added plaintiffs and all

In the first motion

United States District Court
For the Northern District of California

10

references to the two new “Facility Defendants” on the ground that

11

such allegations were not authorized by the Court’s May 25, 2011

12

Order.

13

In the second motion (Docket No. 56), the EmpRes Entities move

14

to dismiss based on Plaintiff’s failure to allege alter ego

15

liability.

16

moves to dismiss the three claims asserted against it and the

17

EmpRes Entities join in this motion.

18

filed a motion to dismiss under Rule 12(b)(2) for lack of personal

19

jurisdiction (Docket No. 54).

20

Court grants the EmpRes Entities’ motion to dismiss under Rule

21

12(b)(6) for failure to allege alter ego liability.

In the third motion (Docket No. 57), Evergreen Lakeport

The EmpRes Entities have also

This motion will be moot if the

See KEMA, inc.

22
1

23
24
25
26
27
28

Moving Defendants are EmpRes Healthcare, Inc.; EHC
Management, LLC; EHC Financial Services, LLC; and Evergreen
California Healthcare, LLC (collectively, EmpRes Entities) and
Evergreen Lakeport. The claims against Defendants Evergreen at
Arvin, LLC; Evergreen at Bakersfield, LLC; Evergreen at Heartwood
Avenue, LLC, erroneously sued as Evergreen at Heartwood, LLC;
Evergreen at Springs Road, LLC; Evergreen at Tracy, LLC; Evergreen
at Oroville, LLC; Evergreen at Petaluma, LLC; and Evergreen at
Gridley (SNF), LLC (collectively, Evergreen Entities) were
dismissed without leave to amend in the May 25, 2011 Order.
2

1

v. Koperwhats, 2010 WL 3464708, *8 (N.D. Cal.) (declining to

2

address Rule 12(b)(2) motion because all claims were dismissed

3

under Rule 12(b)(6)).2

4

Plaintiff has filed a consolidated opposition and Defendants

5

have filed a consolidated reply.

6

submission and decided on the papers.

7

papers filed by the parties, the Court grants the first and second

8

motions to dismiss, and grants in part and denies in part the third

9

motion to dismiss.

United States District Court
For the Northern District of California

10

The motions were taken under
Having considered all the

The fourth motion to dismiss based on lack of

personal jurisdiction is denied without prejudice as moot.

11

BACKGROUND

12

The factual background is provided in the May 25, 2011 Order.

13

In that order, the Court dismissed the section 1430(b) and the UCL

14

claims against the EmpRes and Evergreen Entities on the ground that

15

Plaintiff failed to plead a factual basis for her assertion that

16

Evergreen Lakeport, the licensee of the skilled nursing facility

17

(SNF) in which she resides, is the agent for the EmpRes or

18

Evergreen Entities, nor did her allegations support invocation of

19

the alter ego doctrine.

20

EmpRes Entities with leave to amend for Plaintiff to add alter ego

21

allegations and dismissed the claims against the Evergreen Entities

22

without leave to amend because Plaintiff did not have standing to

23

sue any entity except Evergreen Lakeport, where she resided.

The Court dismissed the claims against the

24
25

2

27

In the May 25, 2011 Order, the Court denied without prejudice
the EmpRes Entities’ Rule 12(b)(2) motion because the claims
against them were dismissed with leave to amend. The Court allowed
the EmpRes Entities to renew their Rule 12(b)(2) motion, if
Plaintiff brought claims against them in an amended pleading.

28

3

26

1

The Court dismissed the CLRA claim against the EmpRes and

2

Evergreen Entities because Plaintiff had not alleged that they had

3

deceived her in the sale of services to her or that she suffered

4

damages as a result.

5

dismissed with leave to amend, and against the Evergreen Entities

6

was dismissed with prejudice.

7

This claim against the EmpRes Entities was

In regard to the claims against Evergreen Lakeport, the Court

8

ruled that equitable abstention was not warranted and that the

9

primary jurisdiction doctrine did not apply.

The Court ruled that

United States District Court
For the Northern District of California

10

Plaintiff had stated claims under section 1430(b) and the UCL for

11

unlawful business acts, but that she had failed to identify, with

12

the required specificity, the basis of her CLRA claim.

13

was granted leave to amend the CLRA claim only.

14

Plaintiff

DISCUSSION

15

I. Motion to Dismiss or Strike New Plaintiffs and Defendants

16

Federal Rule of Civil Procedure 15(a)(1) provides:

17

A party may amend its pleading once as a matter of course
within:

18
(A) 21 days after serving it, or
19

21

(B) if the pleading is one to which a responsive pleading
is required, 21 days after service of a responsive
pleading or 21 days after service of a motion under Rule
12(b), (e), or (f), whichever is earlier.

22

In the May 25, 2011 Order, the Court granted Plaintiff leave

20

23

to amend her complaint and specified how she could do so.

24

Plaintiff was not granted leave to add new parties to her action.

25

Therefore, Plaintiff is attempting to amend her complaint without

26

leave of the Court.

27
28

Under Rule 15(a)(1), a party may amend its pleading once as a
4

matter of course.

2

twenty-one days after service of the complaint or service of a

3

motion to dismiss under Rule 12(b).

4

in 2010, and more than twenty-one days has passed since she served

5

it on Defendants.

6

on February 18, 2011, giving Plaintiff until March 11, 2011 to file

7

an amended complaint as a matter of course.

8

filed on June 8, 2011, outside of this time period.

9

time for Plaintiff to amend her complaint as a matter of course has

10
United States District Court
For the Northern District of California

1

elapsed, if she wishes to amend her complaint, she must obtain the

11

opposing parties’ written consent or leave of the Court.

12

Civ. Pro. 15(a)(2).

13

strike the claims by and against the new parties is granted.

14

Furthermore, any claims re-stated against the Evergreen Entities

15

are dismissed.

16

Entities that support Plaintiff’s claims against the remaining

17

Defendants are not stricken.

18

additional amendments to her 1AC, she must move for leave to amend.

19

II. EmpRes Entities’ Motion Regarding Alter Ego Liability

20

However, the time for doing so is limited to

Plaintiff filed her complaint

Defendants filed their first motions to dismiss

Plaintiff’s 1AC was
Because the

Fed. R.

Therefore, Defendants’ motion to dismiss or

However, the allegations referring to the Evergreen

If Plaintiff wishes to make

In paragraphs 37(a)-(h), 38(a)-(g), 39(a)-(q), and 41-44 of

21

her 1AC, Plaintiff has added allegations addressing how the EmpRes

22

Entities are subject to liability through the doctrine of alter ego

23

liability.

24

that all Defendants share the same officers and directors and that

25

the equitable member of each of the Evergreen Entities is Evergreen

26

California Healthcare; the allegations in paragraph 38 claim that

27

the Evergreen Entities are undercapitalized and rely on the assets

28

For instance, the allegations in paragraph 37 specify

5

1

and capital of the EmpRes Entities; and the allegations in

2

paragraph 39 specify how the EmpRes Entities exert substantial

3

control over the day-to-day operations of the Evergreen Entities,

4

including but not limited to decisions which directly affect each

5

entity’s hours of direct nursing care per patient per day (NHPPD),

6

which is the subject of this action.

7

The EmpRes Entities argue that Washington alter ego law

8

applies to this case, but that under the alter ego law of either

9

Washington or California, Plaintiff’s allegations are insufficient

United States District Court
For the Northern District of California

10

to establish alter ego liability.3

11

California alter ego law applies, but that under either State’s

12

law, she has sufficiently alleged alter ego liability.

13

A. Choice-of-law

14
15

Plaintiff responds that

1. Contract Choice-of-Law Provision
Plaintiff argues that California law applies because the

16

Admission Agreement between Plaintiff and Evergreen Lakeport

17

contains a choice-of-law provision stating: "This Agreement is

18

governed by and in accordance with the laws of the United States of

19

America and the state where this Facility is located."4

20

Lakeport is located in California.

21

Agreement are the individual resident, or that resident’s

Evergreen

The parties to the Admission

22
23
24
25

3

In the May 25, 2011 Order, the Court acknowledged that
Defendants are organized under Washington law, but because they did
not take the position that Washington law controls this case, the
Court applied California’s alter ego law.
4

27

Plaintiff requests that the Court take judicial notice of the
Admission Agreement because she refers to it in ¶ 58 of her 1AC and
it forms the basis of her claims under the UCL and CLRA. The Court
grants the request.

28

6

26

1

authorized representative, and Evergreen Lakeport.5

2

parties’ mutual responsibilities during the resident’s stay at

3

Evergreen Lakeport, such as Evergreen Lakeport’s monthly fee, the

4

resident’s financial responsibilities to pay the fee, financial and

5

insurance arrangements, the resident’s consent for treatment, and

6

the resident’s termination, transfer or discharge.

7

It governs the

The parties agree the Court exercises diversity jurisdiction

8

over this action.

9

state law claims, the conflicts laws of the forum state are used to

"When a federal court sitting in diversity hears

United States District Court
For the Northern District of California

10

determine which state's substantive law applies."

11

Street Partners v. Arnold, 179 F.3d 656, 661 (9th Cir. 1999).

12

California law thus determines the effect of the contractual

13

choice-of-law provision.

14

policy favoring enforcement of [choice-of-law] provisions."

15

Nedlloyd Lines B.V. v. Sup. Ct., 3 Cal. 4th 459, 464-65 (1992).

16

determine whether a choice-of-law provision is enforceable,

17

California courts follow the Restatement (Second) of Conflict of

18

Laws § 187, which provides that a choice-of-law provision will be

19

enforced unless either,

20
21
22
23

389 Orange

Under California law, there is a "strong

To

(a) the chosen state has no substantial relationship to
the parties or the transaction and there is no other
reasonable basis for the parties choice, or
(b) application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the
determination of the particular issue and which, under

24
25

5

27

Plaintiff states that the Admission Agreement is the same for
all Evergreen Entities’ facilities in California. However, because
the claims against the Evergreen Entities have been dismissed, the
only relevant agreement is the one between Plaintiff and Evergreen
Lakeport.

28

7

26

1
2
3
4

the rule of § 188, would be the state of the applicable
law in the absence of an effective choice of law by the
parties.
Restatement (Second) of Conflict of Laws § 187(2).
However, the contract containing the choice-of-law provision

5

must govern the claim that is alleged to arise from it.

6

3 Cal. 4th at 469; Schlumberger Logelco Inc. v. Morgan Equipment

7

Co., 1996 WL 251951, *2 (N.D. Cal.).

8
9

Nedlloyd,

Defendants argue that, under Schlumberger, the choice-of-law
provision in the Admission Agreement does not apply.

In

United States District Court
For the Northern District of California

10

Schlumberger, the defendants contended that a choice-of-law

11

provision in a contract for work on an oil drilling project

12

determined the law on alter ego liability.

13

found that the alter ego theory was not controlled by the choice-

14

of-law provision in the oil drilling contract because the alter ego

15

claim did not arise from or relate to the contract.

16

(citing Dassault Falcon Jet Corp. v. Oberflex, Inc., 909 F. Supp

17

345, 348-49 (M.D.N.C. 1995) (choice-of-law provision in contract

18

not applied to determine alter ego liability because that issue was

19

collateral to and not part of parties' negotiations or expectations

20

with respect to the contract); United Trade Assocs. Ltd. v Dickens

21

& Matson (USA) Ltd., Inc., 848 F. Supp. 751, 759 (E.D. Mich. 1994)

22

(same)).

Id. at *1-2.

The court

Id. at *3

23

Plaintiff responds that Washington Mutual Bank v. Sup. Ct., 24

24

Cal. 4th 906, 917 (2001), which held that contractual choice-of-law

25

provisions should be applied broadly, is controlling, and that

26

Schlumberger is not applicable because it preceded Washington

27

Mutual.

28

In Washington Mutual, the California Supreme Court
8

1

explained that the advocate of a choice-of-law clause bears the

2

burden of establishing that its alleged claims fall within its

3

scope.

4

2231790, *4 (N.D. Cal.) (Washington Mutual requires a court to

5

conduct a choice-of-law analysis for each claim or issue).

6

Estrella, the court found that a choice-of-law clause in a consumer

7

contract for debt relief applied to all of the asserted claims,

8

including claims under the CLRA and UCL.

9

2231790, at *5.

United States District Court
For the Northern District of California

10

Id. at 916; Estrella v. Freedom Fin. Network, LLC, 2010 WL

In

Estrella, 2010 WL

Neither Washington Mutual nor Estrella addressed an alter ego

11

issue; they both determined whether the plaintiff's substantive

12

claims were governed by the contract in question.

13

no disagreement that Plaintiff’s three substantive claims against

14

Evergreen Lakeport are governed by the Admission Agreement.

15

bring the EmpRes Entities under the auspices of the Admission

16

Agreement and its choice-of-law provision, Plaintiff argues that

17

"because all Defendants are closely related to the Facilities who

18

signed the agreement, the parties' choice-of-law provision applies

19

to all Defendants."

20

the alter ego issue is collateral to the Admission Agreement.

21
22
23
24

Opp. at 5.

Here, there is

This reasoning illustrates that

Therefore, the Court holds that the choice-of-law provision in
the Admission Agreement does not apply to the alter ego analysis.
2. Statutory Choice-of-Law Analysis
Where a statute dictates the choice-of-law, the court need

25

not apply a common law choice-of-law analysis.

26

Bank Ltd. v. Levy, 743 F.2d 722, 725 (9th Cir. 1984).

27
28

To

Barclays Discount

Defendants argue that California Corporations Code
9

1

section 17450(a) dictates that Washington alter ego law applies

2

to the three EmpRes Entities that are limited liability companies

3

(LLCs): EHC Management, LLC; EHC Financial Services, LLC; and

4

Evergreen California Healthcare, LLC.

5
6

Section 17450(a) provides:

the laws of the state or foreign country under which a
foreign limited liability company is organized shall
govern its organization and internal affairs and the
liability and authority of its managers and members.

7
Plaintiff argues that section 17450(a) codified only the
8
"internal affairs doctrine" for LLCs.

Plaintiff cites Butler v.

9
Adoption Media, LLC, which held that section 17450(a) did not
United States District Court
For the Northern District of California

10
apply to a choice-of-law issue regarding LLCs because it merely
11
codified the internal affairs doctrine, which governs matters
12
concerning the relationships among or between the LLC and its
13
officers, directors and shareholders and does not govern disputes
14
involving people or entities that are not part of the LLC.

2005

15
WL 2077484, *1 and n.1 (N.D. Cal.) (citing Edgar v. MITE Corp.,
16
457 U.S. 624, 645 (1982) (internal affairs doctrine recognizes
17
that only one state should have authority to regulate matters
18
peculiar to relationships among or between corporation and its
19
officers, directors, and shareholders; otherwise corporation
20
could be faced with conflicting demands)).

Plaintiff also cites

21
Milliken & Co. v. Haima Gp. Corp., 2010 U.S. Dist. LEXIS 44835,
22
*9-12 (S.D. Fla.), report and recommendation adopted, 2010 U.S.
23
Dist. LEXIS 44775 (S.D. Fla.), in which the court held that a
24
statute similar to section 17450(a) was inapplicable to a choice25
of-law issue because the substantive question was external to the
26
corporate entity.
27
28

10

1

To support the proposition that alter ego liability is a

2

matter of a LLC’s internal affairs, Defendants cite Rubbermaid,

3

Inc. v. Robert Bosch Tool Gp., Corp., 2010 U.S. Dist. LEXIS

4

100650, *15 (C.D. Ill.), which applied a law similar to section

5

17450(a) to hold that the alter ego law of the state of

6

incorporation applied to determine the liability of a Delaware

7

LLC to claims brought by a third party.

8

Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2nd

9

Cir. 1993), which applied the alter ego law of the state of

Defendants also cite

United States District Court
For the Northern District of California

10

incorporation to determine the liability of shareholders to a

11

third party.

12

creature of state law whose primary purpose is to insulate

13

shareholders from legal liability, the state of incorporation has

14

the greater interest in determining when and if that insulation

15

is to be stripped away."

16

The court stated, "Because a corporation is a

Id.

There is no definitive authority on this issue.

Defendants'

17

authority is more persuasive.

18

that the state of incorporation governs the liability and

19

authority of the LLC's managers and members, points to the

20

application of Washington's alter ego liability law to the LLCs

21

constituting the EmpRes Entities.

22

liability involves law suits brought by third parties, it

23

determines, based on the structure of the corporation, whether

24

the shareholders are liable in lieu of the LLC, which is an

25

internal affair.

26

alter ego liability of the LLCs constituting the EmpRes Entities.

First, the statutory language,

Therefore, Washington’s law determines the

27
28

Second, even though alter ego

11

1

3. Government Interest Test

2

Because no statute governs the choice of law for the alter

3

ego liability of corporations and because there is no effective

4

choice-of-law contractual provision, California’s governmental

5

interests test determines which State’s law applies to the alter

6

ego liability of EmpRes Healthcare, Inc.

7

Smith Barney, Inc., 39 Cal. 4th 95, 100 (2006); Washington

8

Mutual, 24 Cal. 4th at 919-20.

9

Supreme Court described the governmental interest test as

United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17

Kearney v. Salomon

In Kearney, the California

follows:
First, the court determines whether the relevant law of
each of the potentially affected jurisdictions with
regard to the particular issue in question is the same
or different. Second, if there is a difference, the
court examines each jurisdiction's interest in the
application of its own law under the circumstances of
the particular case to determine whether a true
conflict exists. Third, if the court finds that there
is a true conflict, it carefully evaluates and compares
the nature and strength of the interest of each
jurisdiction in the application of its own law to
determine which state's interest would be more impaired
if its policy were subordinated to the policy of the
other state.

18
39 Cal. 4th at 107-08.
19
The parties agree, and the Court finds, that the alter ego
20
liability laws of Washington and California are different.
21
Thus, the first prong of the governmental interest test is
22
satisfied.
23
Defendants argue that a true conflict does not exist because
24
Washington has an interest in applying its alter ego law to
25
business entities formed under its laws, whereas California has
26
no interest in controlling the corporate governance, organization
27
28

12

and liability of foreign business entities.

2

Ct., 11 Cal. 3d 574, 580 (1974) (“When one of two states related

3

to a case has a legitimate interest in the application of its law

4

and policy and the other has none, there is no real problem;

5

clearly the law of the interested state should be applied.”).

6

For support, Defendants cite CTS Corp. v. Dynamics Corp. of

7

Amer., 481 U.S. 69, 91 (1987), which stated that it is “an

8

accepted part of the business landscape in this country for

9

States to create corporations, to prescribe their powers, and to

10
United States District Court
For the Northern District of California

1

define the rights that are acquired by purchasing their shares.

11

A state has an interest in promoting stable relationships among

12

parties involved in the corporations it charters . . .”

13

Defendants also argue that California Corporations Code section

14

17450(a) shows that California has expressly disclaimed an

15

interest in applying California alter ego law to foreign limited

16

liability companies and the same should apply to corporations.

17

See Hurtado v. Sup.

Plaintiff, citing McCann v. Foster Wheeler LLC, 48 Cal. 4th

18

68, 95 (2010), argues that California has an interest in

19

affording its residents a remedy for an injury.

20

whether a California or Oklahoma statute would govern a

21

California plaintiff’s suit for injury from contracting

22

mesothelioma while working in an oil refinery in Oklahoma.

23

at 74.

24

statute of limitations whereas, in California, the suit was

25

timely.

26

by Plaintiff, “California has a legitimate interest in having a

27

statutory provision that affords a remedy for or a benefit to an

28

13

McCann addressed

Id.

The plaintiff’s action was barred in Oklahoma by its

Id.

In this context, the court made the statement cited

1

injured person or business applied when, as here, the injured

2

person or business is a California resident or business.”

3

95.

4

Id. at

The law in question here is the alter ego doctrine, not

5

whether Plaintiff has a substantive cause of action against a

6

proper defendant.

7

challenging the application of California law to any of

8

Plaintiff’s causes of actions.

9

in affording its resident a remedy for an injury is not directly

United States District Court
For the Northern District of California

10

As Defendants point out, they are not

Therefore, California’s interest

at issue.

11

Plaintiff also argues that California has an interest in

12

applying its alter ego law in this situation because it has a

13

long tradition of affording alter ego recovery to injured

14

consumers and has specifically included this remedy in California

15

Corporations Code section 17101, which states, in part, “A member

16

of a limited liability company shall be subject to liability

17

under the common law governing alter ego liability.”

18

the issue is not whether California has an alter ego liability

19

law applicable to its own LLCs.

20

an interest in applying its law to business entities that are

21

formed in states other than California.

22

does not indicate that it applies to a “foreign limited liability

23

company,” which is defined in California Corporations Code

24

section 17001(q) as “(1) an entity formed under the limited

25

liability company laws of any state other than this state,

26

. . .”

27

entities from escaping liability with an unwarranted corporate

28

However,

The question is whether it has

Notably, section 17101

California does have an interest in preventing corporate

14

1

shield; however, the application of Washington’s alter ego

2

liability law would mitigate this concern.

3

In sum, Washington has a strong interest in controlling the

4

liability of business entities formed under its laws, and

5

California has an interest in preventing companies from escaping

6

liability through an unwarranted corporate shield.

7

California’s interest is mitigated through the application of

8

Washington’s alter ego law.

9

is no real conflict and Washington’s alter ego law must be

United States District Court
For the Northern District of California

10

However,

Thus, the Court concludes that there

applied.

11

B. Application of Washington Alter Ego Law

12

Washington’s alter ego law consists of the following two-

13

part test:

14

to violate or evade a duty; second, disregard must be necessary

15

and required to prevent unjustified loss to the injured party."

16

Meisel v. M & N Modern Hydraulic Press Co., 97 Wash. 2d 403, 410

17

(1982).

18

that typically involves fraud, misrepresentation, or some form of

19

manipulation of the corporation to the stockholder's benefit and

20

creditor's detriment.

21

expansion of the fraudulent conveyance law to circumstances in

22

which that doctrine does not apply.

23

requires that wrongful corporate activities must actually harm

24

the party seeking relief; intentional misconduct must be the

25

cause of the harm that is avoided by disregard of the corporate

26

form.

27

is insufficient to establish an abuse of the corporate form.

28

"First, the corporate form must be intentionally used

The first prong requires abuse of the corporate form

Id.

Id.

This can be seen as a judicial

Id.

The second prong

Deliberate undercapitalization of a corporate entity

15

1

Norhawk Investments, Inc. v. Subway Sandwich Shops, Inc., 61

2

Wash. App. 395, 399-400 (1991).

3

Citing five paragraphs in her 1AC, Plaintiff argues that her

4

allegations satisfy Washington’s alter ego test.

5

42, Plaintiff alleges that the EmpRes Entities “deliberately set

6

up empty shells and agents so that [they] could deceive the

7

public and residents . . .”

8

that “Defendants have created a maze of multiple undercapitalized

9

entities--which in reality operate as a single entity--in order

In paragraph

In paragraph 43, Plaintiff alleges

United States District Court
For the Northern District of California

10

to avoid liability.”

11

for-profit nursing home corporations such as EmpRes divide into

12

many separate shell companies “in order to avoid being held

13

accountable to both the public regulatory system and residents.”

14

Plaintiff alleges that the EmpRes Entities fund, obtain licenses

15

for and guarantee the debt of Evergreen Lakeport and the other

16

Evergreen Entities.

17

control all the factors that impact Evergreen Lakeport’s and the

18

other Evergreen Entities’ staffing levels, which is at issue in

19

this case.

20

In paragraph 40, Plaintiff alleges that

She also alleges that the EmpRes Entities

The analysis in Norhawk is instructive for the determination

21

of whether Plaintiff states alter ego liability under Washington

22

law.

23

obtained a judgment against it.

24

98.

25

franchisee, it sued the franchiser under the theory of alter ego

26

liability.

27

the franchiser’s corporate structure because, at all times, the

28

In Norhawk, a franchisee abandoned its lease and the lessor
Norhawk, 61 Wash. App. at 397-

After the lessor failed to obtain payment from the

Id. at 398.

The lessor argued that it was harmed by

16

1
2
3
4

franchiser would be judgment proof.

Id.

The court stated,

Although Norhawk may have been harmed, harm alone does
not create corporate misconduct. “The absence of an
adequate remedy alone does not establish corporate
misconduct.” . . . It is also well established that
“the purpose of a corporation is to limit liability.”

5

Id. at 400 (citations omitted).

6

corporate form must be honored unless there is such “a

7

commingling of rights and interests as to render it apparent that

8

the entities are intended to function as one, and further, that

9

to regard them as separate would aid the consummation of a fraud

United States District Court
For the Northern District of California

10

or wrong upon others.”

The court explained that the

Id. at 401 (citations omitted).

11

Plaintiff’s allegations that the EmpRes Entities have

12

financial and operational authority over Evergreen Lakeport and

13

the other Evergreen Entities are not sufficient to satisfy

14

Washington’s alter ego test.

15

statements, Plaintiff fails to allege that the EmpRes Entities

16

intentionally abused the corporate form in order to engage in

17

fraud or misrepresentation.

18

first prong of the test, she fails to allege that the EmpRes

19

Entities intentionally harmed her by abusing the corporate form.

20

Plaintiff may bring her three claims against Evergreen Lakeport,

21

the residence where she lives and where she suffered the alleged

22

injury caused by its inadequate staffing.

23

alleges that Evergreen Lakeport is undercapitalized, she does not

24

allege that it was so created with the intention to harm her

25

through inadequate staffing or of avoiding paying her damages

26

caused by the inadequate staffing.

27
28

First, except for conclusory

And, even if her allegations met the

Although Plaintiff

Because Plaintiff has failed sufficiently to allege alter
17

1

ego liability, the EmpRes Entities’ motion to dismiss the claims

2

against them is granted.

3

moving to add the Empress Entities, even after judgment, if

4

Evergreen Lakeport evades its responsibility to provide relief.

5

If Plaintiff brings such a motion, she may submit it with

6

evidence in support of her alter ego claim.

7

III. Evergreen Lakeport’s Motion to Dismiss

8
9

Dismissal is without prejudice to

Evergreen Lakeport argues that Plaintiff’s CLRA claim and
UCL claim based on fraud should be dismissed for lack of

United States District Court
For the Northern District of California

10

specificity under Rule 9 of the Federal Rules of Civil Procedure.

11

Evergreen Lakeport also argues that the Court should revisit its

12

decision regarding Plaintiff’s claim under Health and Safety Code

13

section 1430(b), which provides a right of action for violations

14

of the minimum staffing requirements set forth in Health and

15

Safety Code section 1265.5(a), and the doctrines of equitable

16

abstention and primary jurisdiction.

17

A. CLRA Claim

18

As stated in the May 25, 2011 Order, the CLRA prohibits

19

“deceptive acts or practices undertaken by any person in a

20

transaction intended to result or which results in the sale or

21

lease of goods or services to any consumer.”

22

§ 1770(a).

23

the heightened pleading requirements of Federal Rule of Civil

24

Procedure 9(b).

25

(9th Cir. 2009).

26

give defendants notice of the particular misconduct which is

27

alleged to constitute the fraud charged so that they can defend

28

Cal. Civ. Code

Because the claim sounds in fraud, it is subject to

Kearns v. Ford Motor Co., 567 F.3d 1120, 1125-26
The allegations must be “specific enough to

18

1

against the charge and not just deny that they have done anything

2

wrong.”

3

Statements of the time, place and nature of the alleged

4

fraudulent activities are sufficient, id. at 735, provided the

5

plaintiff sets forth “what is false or misleading about a

6

statement, and why it is false.”

7

Litig., 42 F.3d 1541, 1548 (9th Cir. 1994).

8

based on information and belief usually do not satisfy the

9

particularity requirements of Rule 9(b); however, as to matters

Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985).

In re GlenFed, Inc., Secs.
Allegations of fraud

United States District Court
For the Northern District of California

10

peculiarly within the opposing party’s knowledge, allegations

11

based on information and belief may satisfy Rule 9(b) if they

12

also state the facts upon which the belief is founded.

13

Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987).

14

Wool v.

Evergreen Lakeport asserts that Plaintiff fails to plead the

15

substance and nature of the alleged misrepresentations made to

16

her with the required specificity.

17

¶¶ 93, and 95 through 103, of the 1AC, she adequately pleads

18

Evergreen Lakeport’s failure to disclose the material fact that

19

it was understaffed.

20

Supp. 2d 1088, 1095 (N.D. Cal. 2007), Plaintiff also argues that,

21

when a CLRA claim is based on non-disclosure or active

22

concealment of a material fact, there is no need to plead

23

specific misrepresentations.

24

CLRA claim based on failure to disclose is cognizable where:

25

(1) the defendant had exclusive knowledge of material facts not

26

known to the plaintiff and (2) the defendant actively concealed a

27

material fact from the plaintiff.

28

19

Plaintiff responds that, in

Citing Falk v. General Motors Corp., 496 F.

In Falk, the court stated that a

Id.

To show that the non-

1

disclosed information is material, a plaintiff must show that

2

“had the omitted information been disclosed, a reasonable

3

consumer would have been aware of it and behaved differently.”

4

Id.

5

In her 1AC, Plaintiff alleges that Defendants “did not

6

disclose and actively concealed that the [Evergreen Entities]

7

have failed to comply with California’s minimum and adequate

8

nurse staffing requirements as alleged herein, and continue to do

9

so”, 1AC at ¶ 93, and that Defendants knew they had inadequate

United States District Court
For the Northern District of California

10

staffing and Plaintiff did not know it, 1AC at ¶¶ 96-97.

11

Paragraph 98 is the heart of the claim, alleging Defendants’

12

fraudulent conduct as: (1) representing to state regulators that

13

they were complying with the nursing staff requirements;

14

(2) representing to the consuming public, including Plaintiff,

15

that the Evergreen Entities were in compliance with the required

16

staffing levels; (3) failing to disclose to residents or

17

prospective residents that the Evergreen Entities fell below the

18

nurse staffing requirement; (4) responding to the regulators’

19

deficiency notices by promising to improve staffing, but failing

20

to do so; (5) responding to regulators’ deficiency notices by

21

posting projected, as opposed to actual, staffing ratios; and

22

(6) responding to residents’ complaints with misleading

23

assertions that staffing shortfalls were isolated incidents or

24

that they would be addressed.

25

Plaintiff is correct that she does not have to plead

26

specific misrepresentations when the issue is concealment or non-

27

disclosure.

28

However, five of the six allegations in ¶ 98 are
20

1

that Defendants made misrepresentations.

2

failure to disclose a material fact and this allegation is

3

sufficient to state a claim.

4

¶ 98 are deficient under Rule 9(b) because they do not state who

5

made the statement, the time and place of the statement and how

6

the statement was made to Plaintiff.

7

Only ¶ 98(3) alleges

The other allegations in

Evergreen Lakeport next argues that the allegations are
insufficient because they do not indicate that Plaintiff had or

9

could have had any exposure to any representation, or that there

10
United States District Court
For the Northern District of California

8

were any circumstances in which Evergreen Lakeport should have or

11

could have provided other information to her, or that she relied

12

on these misrepresentations or non-disclosures to her detriment.

13

However, in ¶ 100, Plaintiff alleges reliance by stating that the

14

non-disclosed fact was material and, had she known it, she would

15

not have agreed to reside at Evergreen Lakeport.

16

Plaintiff alleges that she could not reasonably have been

17

expected to learn or discover by herself the non-disclosed facts

18

regarding staffing violations.

19

reliance for the non-disclosure allegation.

Also, in ¶ 101,

This is sufficient to state

20

Citing Swartz v. KPMG LLP, 476 F.3d 756, 764-64 (9th Cir.

21

2007), Evergreen Lakeport also argues that the allegations are

22

insufficient because they refer to Defendants, in general,

23

without specifying the part each Defendant played in the

24

concealment or non-disclosures.

25

“Rule 9(b) does not allow a complaint to merely lump multiple

26

defendants together but ‘requires plaintiffs to differentiate

27

their allegations when suing more than one defendant . . . and

28

In Swartz, the court stated:

21

1

inform each defendant separately of the allegations surrounding

2

his alleged participation in the fraudulent scheme.’ . . . In the

3

context of a fraud suit involving multiple defendants, a

4

plaintiff must, at a minimum, ‘identify the role of each

5

defendant in the alleged fraudulent scheme.’”

6

Moore v. Kayport Package Express, Inc., 885 F.2d 531, 541 (9th

7

Cir. 1989)).

8
9

Id. at 765 (citing

None of Plaintiff’s allegations discloses the role of any
specific Defendant in the misrepresentations or intentional non-

United States District Court
For the Northern District of California

10

disclosure or concealment of the nursing staff violations.

11

Plaintiff may amend to allege, if she truthfully can do so, that

12

Evergreen Lakeport made the misrepresentations to Plaintiff, or

13

failed to disclose material facts.

14

The CLRA claim is dismissed with leave to amend only to

15

remedy the deficiencies noted above.

16

B. UCL Claim Based On Fraud

17

Evergreen Lakeport moves to dismiss the fraud-based

18

allegations in the UCL claim on the ground that they too fail to

19

meet Rule 9(b)’s requirement for specificity.

20

The UCL prohibits “any unlawful, unfair or fraudulent

21

business act or practice and unfair, deceptive, untrue or

22

misleading advertising.”

23

practice is one in which members of the public are likely to be

24

deceived.”

25

4th 1235, 1254 (2009).

26

Rule 9(b).

27
28

Under the UCL, “a fraudulent business

Morgan v. AT&T Wireless Servs., Inc., 177 Cal. App.
UCL claims grounded in fraud must satisfy

Kearns, 567 F.3d at 1125.

Paragraph 86 of the 1AC alleges: “Defendants, and each of
22

1

them, have also engaged in fraudulent business practices by

2

virtue of their failure to disclose and active concealment of the

3

actual levels of nurse staffing at their California skilled

4

nursing facilities.”

5

general public (including . . . persons admitted to and/or

6

residing in the Facilities during the Class Period . . .) have

7

been and are likely to be deceived by the statements,

8

representations, omissions, and other conduct by Defendants as

9

alleged herein.”

United States District Court
For the Northern District of California

10

Paragraph 87 alleges: “Members of the

These allegations are sufficient to state that Plaintiff, as

11

a person admitted to one of the Facilities, was not told the

12

material facts about nurse staffing violations and that she and

13

members of the public were likely to be deceived by the

14

concealment.

15

deficiency noted above in that they do not specify the role that

16

Evergreen Lakeport played in the misrepresentations or

17

concealment.

18

she truthfully can do so, who made the misrepresentations to

19

Plaintiff, and failed to disclose material facts.

20

dismissed with leave to amend only to remedy the deficiencies

21

noted above.

22

However, these allegations suffer from the same

As stated above, Plaintiff may amend to allege, if

This claim is

C. Renewed Arguments Regarding § 1430(b) Claim, Abstention
and Primary Jurisdiction

23
In the May 25, 2011 Order, the Court denied Evergreen
24
Lakeport’s motion to dismiss Plaintiff’s UCL claim for unlawful
25
business acts, based on equitable abstention, denied the motion
26
to stay the case pursuant to the doctrine of primary
27
28

23

1

jurisdiction, and denied the motion to dismiss the California

2

Health and Safety Code section 1430(b) claim on the merits.

3

regard to the doctrine of equitable abstention, the Court stated

4

that dismissal was without prejudice to renewal if circumstances

5

changed.

6

Evergreen Lakeport seeks to renew all the arguments presented in

7

its first motion to dismiss.

8
9

See May 25, 2011 Order at 16.

In

Based on this statement,

Evergreen Lakeport’s attempts to re-litigate the primary
jurisdiction doctrine and the merits of the § 1430(b) claim are,

United States District Court
For the Northern District of California

10

in effect, motions for reconsideration, which are not properly

11

before the Court.

12

dismiss based on these arguments is denied.

See Civil L.R. 7-9.

Therefore, its motion to

13

Evergreen Lakeport argues that re-visiting equitable

14

abstention is warranted because, since the Court issued the May

15

25, 2011 Order, two other courts have applied this doctrine to

16

dismiss claims identical to those asserted by Plaintiff.

17

cases are Walsh v. Kindred Healthcare, __ F. Supp. 2d __, 2011 WL

18

2415739 (N.D. Cal. June 15, 2011) (J. White) and Shuts v.

19

Covenant Holdco, LLC, Case No. RG10551807 (Alameda County Sup.

20

Ct. May 4, 2011).6

21

The two

Neither Walsh nor Shuts is binding authority and neither

22

persuades the Court that it should reconsider its decision.

23

Therefore, Evergreen Lakeport’s renewed motion to dismiss the UCL

24

claim for unlawful business acts, based on equitable abstention,

25

is denied.

26
6

27
28

The Shuts case was decided before the Court issued the May
25, 2011 Order.
24

1
2

CONCLUSION
For the foregoing reasons, the Court: (1) grants Defendants’

3

motion to dismiss or strike the claims brought by or against new

4

parties in the 1AC; (2) grants the EmpRes Entities’ motion to

5

dismiss based on lack of alter ego liability; (3) grants in part

6

and denies in part Evergreen Lakeport’s motion to dismiss as

7

follows: (a) the CLRA claim is dismissed with leave to amend;

8

(b) the UCL fraud claim is dismissed with leave to amend; (c) the

9

motion is otherwise denied; and (4) denies without prejudice the

United States District Court
For the Northern District of California

10

EmpRes Entities’ motion to dismiss for lack of personal

11

jurisdiction as moot, with leave to refile if the alter ego issue

12

is revisited at a later date.

13

jurisdictional discovery (Docket No. 69) is denied without

14

prejudice to refiling if the Empres Entities refile their

15

jurisdictional motion.

16

time for briefing on the jurisdictional motion is also denied

17

(Docket No. 73).

18

Plaintiff’s motion to compel

Plaintiff’s motion for an extension of

If Plaintiff wishes to amend her complaint to add parties

19

and claims, she must file a motion seeking leave to amend within

20

seven days from the date of this order.

21

shall include in her proposed amended complaint the amendments

22

allowed in this order.

23

she must file an amended complaint as allowed by this order

24

within seven days.

25

motion to dismiss the amended complaint and opposition to the

26

motion for leave to amend, of no more than twenty-five pages,

27

within fourteen days from the date the motion and/or the amended

28

25

If she does so, she

If she does not move for leave to amend,

Defendants may file an answer, or a combined

1

complaint are filed.

2

file a combined reply of no more than fifteen pages.

3

will be taken under submission.

4

Plaintiff will have to serve personally the two new Defendants,

5

if she has not yet done so.

6

management conference after issuing its order.

Within seven days thereafter, Plaintiff may
The motions

If leave to amend is granted,

The Court will schedule a case

7
8

IT IS SO ORDERED.

9
United States District Court
For the Northern District of California

10

Dated: 10/31/2011
CLAUDIA WILKEN
United States District Judge

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

26