ASD Specialty Healthcare Inc. v. New Life Home Care Inc. et al
MEMORANDUM AND ORDER granting in part and denying in part 33 Motion to Dismiss; denying 29 Motion to Dismiss for Lack of Jurisdiction. IT IS HEREBY ORDERED that:1. Defendant Gregory Malias motion to dismiss the amended complaint is DENIED.2. Pla intiff has failed to properly serve Defendant Gregory Malia. Plaintiff must perfect service within twenty-one (21) days of this order.3. Plaintiffs motion to dismiss Defendant New Life Home Care Inc.s counterclaims is GRANTED in part and DENIED in p art. Counts I and III alleging fraudulent concealment and fraud, misrepresentation and deceit are DISMISSED without prejudice. Defendant is granted leave to amend in order to specify timely fraud allegations and/or allege with particularity any price inflation fraud claims. Defendant has twenty-one (21) days to amend or the claims will be dismissed with prejudice.Signed by Honorable A. Richard Caputo on 11/29/11 (jam, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
ASD SPECIALTY HEALTHCARE INC.,
d/b/a ASD HEALTHCARE,
CIVIL ACTION NO. 3:11-CV-068
NEW LIFE HOME CARE INC. and
Presently before the Court are Defendant Gregory Malia’s Motion to Dismiss the
Amended Complaint and Plaintiff ASD Specialty Healthcare Inc.’s Motion to Dismiss
Counterclaims Filed by New Life Home Care Inc. Mr. Malia’s motion will be denied because
ASD may plead inconsistent claims and has sufficiently alleged facts supporting corporate
veil-piercing and fiduciary duty theories. But because ASD has not sufficiently served Mr.
Malia, it must perfect service within twenty-one days. ASD’s motion will be granted in part
because New Life did not plead its fraud claims with particularity and the statute of
limitations has run on its claims that ASD fraudulently billed it for goods it did not receive.
The motion will be denied in part, however, because New Life may plead inconsistent
claims and assert a cause of action for accounting.
A. ASD’s Amended Complaint
The facts as alleged in ASD’s Amended Complaint are as follows:
Defendant New Life Home Care is a company that provides pharmaceutical and
related services to assist individuals with bleeding disorders such as hemophilia. In
August of 2005 and 2006, New Life entered into an open account with Plaintiff ASD
Healthcare, a pharmaceutical supplier, for the purchase of antihemophilic drugs. To
establish the account, New Life signed business applications with ASD, agreeing to pay
all debts, accounts, and invoices.
New Life’s controlling shareholder is Defendant Gregory Malia. He controlled
New Life’s finances and made all significant decisions for the company. Mr. Malia has
treated New Life as his alter ego, using New Life funds to help pay for his lavish and
opulent lifestyle, even while New Life was insolvent or nearing insolvency. Mr. Malia
paid himself approximately $300,000 a year as New Life’s president and CEO, in
addition to $80,000 for pastoral care he provides to New Life’s patients. He charged
personal expenses to his corporate credit card, including $8,000 for the monthly rent on
his Manhattan apartment and the payments on his luxury cars. Mr. Malia also issued
approximately $300,000 worth of checks to his attorney, a personal friend, without any
invoices describing services rendered by the attorney. Further, he paid the rent on New
Life’s operating space to an entity of which he was the sole owner.
In early 2010, ASD requested that New Life make payment for the
pharmaceuticals it had purchased. New Life failed to make any payments. In April
2010, New Life signed a promissory note in the amount of $1,119,759.65 with ASD.
New Life represented that it would make payments under the note and timely pay for
any future pharmaceutical purchases. At that time, New Life also executed a security
agreement granting ASD a security interest in New Life’s personal property. ASD
perfected the security interest on June 7, 2010 by filing a UCC-1 financing statement
with the Secretary of State of the Commonwealth of Pennsylvania.
New Life failed to make payments to ASD and is now in default of its obligations
under the business applications, note, and security agreement. As of January 7, 2011,
the aggregate principal balance due to ASD from New Life equaled $2,558,586.83 plus
interest of eighteen percent per annum on each outstanding invoice.
ASD instituted this action against New Life and Mr. Malia on January 10, 2011.
After the complaint was dismissed for jurisdictional defects, ASD filed an amended
complaint on January 19, 2011. The complaint contains seven counts: (1) breach of the
business applications; (2) breach of the note; (3) unjust enrichment; (4) replevin; (5)
breach of fiduciary duty; (6) conversion; and (7) piercing the corporate veil. Mr. Malia
moved to dismiss the complaint on July 15, 2011. The motion is fully briefed and ripe for
B. New Life’s Counterclaims
The facts as alleged in New Life’s answer are as follows:
ASD provides pharmaceuticals to New Life. The price of these pharmaceuticals
constantly fluctuates based on changing contractual relationships and government
In July of 2009, New Life reviewed the copies of all purchase orders placed with
ASD and the corresponding invoices for the year 2009. Based on its review, New Life
determined that ASD had been overbilling it. Specifically, the review showed that ASD
had billed New Life for goods that it did not receive and that ASD had inflated the prices
on goods that it did provide to New Life.
New Life filed its answer on July 15, 2011. The answer asserts four
counterclaims: (1) fraudulent concealment; (2) unjust enrichment; (3) fraud,
misrepresentation, and deceit; and (4) accounting. New Life seeks damages in the
amount of $650,000. ASD moved to dismiss the counterclaims on July 29, 2011. The
motion has been fully briefed and is ripe for disposition.
A. Legal Standard on a Motion to Dismiss
Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a complaint,
in whole or in part, for failure to state a claim upon which relief can be granted.
Dismissal is appropriate only if, accepting as true all the facts alleged in the complaint, a
plaintiff has not pleaded “enough facts to state a claim to relief that is plausible on its
face,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), meaning enough factual
allegations “‘to raise a reasonable expectation that discovery will reveal evidence of’”
each necessary element, Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir.
2008) (quoting Twombly, 550 U.S. at 556). The pleading standard of Federal Rule of
Civil Procedure 8 does not require “detailed factual allegations,” but “[a] pleading that
offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of
action will not do.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1959 (2009) (quoting Twombly,
550 U.S. at 555). “While legal conclusions can provide the framework of a complaint,
they must be supported by factual allegations.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950
Thus, when determining the sufficiency of a complaint, a court must undertake a
three-part inquiry. See Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011). The
inquiry involves: “(1) identifying the elements of the claim, (2) reviewing the complaint to
strike conclusory allegations, and then (3) looking at the well-pleaded components of the
complaint and evaluating whether all of the elements identified in part one of the inquiry
are sufficiently alleged.” Id.
B. Dismissal of ASD’s Amended Complaint
1. Sufficiency of Service of Process
Mr. Malia first moves to dismiss the amended complaint for insufficient service of
process. A court may only render judgment where it has personal jurisdiction over the
parties, and personal jurisdiction is obtained by properly serving a summons and
complaint upon a party. Lampe v. Xouth, Inc., 952 F.2d 697, 700-01 (3d Cir. 1991). If a
party has not been properly served within 120 days after the complaint is filed, Federal
Rule of Civil Procedure 4(m) states that a court “must dismiss the action without
prejudice against that defendant or order that service be made within a specified time.”
“[T]he party asserting the validity of service bears the burden of proof on that issue.”
Grand Entm’t Grp., Ltd. v. Star Media Sales, Inc., 988 F.2d 476, 488 (3d Cir. 1993)
(citing 4A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1083
(2d ed. 1987)).
ASD fails to meet its burden of showing that it properly served Mr. Malia within
120 days of the filing of the complaint. ASD argues that it served Mr. Malia in
accordance with Federal Rule of Civil Procedure 4(e)(1) and Pennsylvania Rule of Civil
Procedure 403. Rule 4(e)(1) allows for service following the law of the state where the
district court is located. Fed. R. Civ. P. 4(e)(1). Rule 403 states that service by mail is
proper where there is “a receipt signed by the defendant or his authorized agent.” Pa.
R. Civ. P. 403. Here, ASD submitted documentation that the summons and complaint
were delivered to 75 Wall Street in New York, New York and signed for by a person
named “Colon.” But Mr. Malia argues that 75 Wall Street is not his address and that
Colon is not his authorized agent, and ASD has not presented any evidence to the
contrary. Because ASD has not shown that the receipt was signed by Mr. Malia’s
authorized agent, service was improper under Rule 403. See, e.g., Lampe, 952 F.2d at
701; Ignition Media Grp., LLC v. Pantel Sys., Inc., No. 07-0439, 2007 WL 2728662, at *1
(E.D. Pa. Sept. 14, 2007); McKinnis v. Hartford Life, 217 F.R.D. 359, 361 (E.D. Pa.
2003). ASD argues that service was proper because Mr. Malia had actual notice of the
suit, as evidenced by his communicating with opposing counsel and filing motions. The
Third Circuit has emphasized, however, that notice is necessary but not sufficient to
effect service. Grand Entm’t Grp., 988 F.2d at 492 (“[N]otice cannot by itself validate an
otherwise defective service.”). ASD also argues that a similar form of service was
accepted by the Pennsylvania Superior Court in Aquilino v. Philadelphia Catholic
Archdiocese, 884 A.2d 1269, 1283 (Pa. Super. 2005), but that case is inapposite as it
dealt with in-person service under Rule 402 and not service by mail under Rule 403.
Therefore, ASD has failed to properly serve Mr. Malia within the 120 days required under
Although service was improper, Mr. Malia’s motion to dismiss will be denied.
Dismissal of a complaint for insufficient service “is inappropriate when there exists a
reasonable prospect that service may yet be obtained.” Umbehauer v. Woog, 969 F.2d
25, 30 (3d Cir. 1992). Under Rule 4(m), a court has the discretion to extend time for
service. Fed. R. Civ. P. 4(m). Because Mr. Malia had notice of the suit and there is a
reasonable prospect of proper service, ASD will have twenty-one days to perfect service
on Mr. Malia.
2. Piercing the Corporate Veil
Mr. Malia also moves to dismiss on the grounds that ASD has not sufficiently
alleged facts that would support a corporate veil-piercing theory. ASD’s complaint does
not allege that Mr. Malia personally breached any contracts, was unjustly enriched, or
took or interfered with another’s property. Instead, ASD asserts in its complaint that the
Court should pierce the corporate veil in order to hold Mr. Malia liable for the New LIfe’s
actions. Piercing the corporate veil “is an equitable remedy whereby a court disregards
the existence of the corporation to make the corporation’s individual principals and their
personal assets liable for the debts of the corporation.” Trustees of Nat’l Elevator Indus.
Pension, Health Benefit and Educ. Funds v. Lutyk, 332 F.3d 188, 192 (3d Cir. 2003).
The remedy is used “when the court must prevent fraud, illegality, or injustice, or when
recognition of the corporate entity would defeat public policy or shield someone from
liability for a crime.” Pearson v. Component Tech. Corp., 247 F.3d 471, 484-85 (3d Cir.
2001) (quoting Zubik v. Zubik, 384 F.2d 267, 272 (3d Cir. 1967)).
The Third Circuit has set out an eight-factor test to determine whether it is
appropriate to pierce the corporate veil. Pearson v. Component Tech. Corp., 247 F.3d
471, 484-85 (3d Cir. 2001). The factors for consideration are: “gross undercapitalization,
failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor
corporation, siphoning of funds from the debtor corporation by the dominant stockholder,
nonfunctioning of officers and directors, absence of corporate records, and whether the
corporation is merely a facade for the operations of the dominant stockholder.” Id. The
test is not rigid and not every factor need be present in order to justify veil-piercing.
Lutyk, 332 F.3d at 194. “However, the act of piercing the corporate veil is an
extraordinary remedy and will only be employed in exceptional circumstances.” Best v.
Romec, Inc., No. 3:10-CV-2335, 2011 WL 3206828, at *3 (Jul. 28, 2011) (citing Village
at Camelback Property Owners Ass’n Inc. v. Carr, 371 Pa. Super. 452, 461 (1988)).
Here, ASD has adequately established that it may be appropriate to pierce the
corporate veil and hold Mr. Malia liable for New Life’s debts. Although it does not satisfy
every factor of the veil-piercing test, ASD’s amended complaint asserts that Mr. Malia
siphons funds from New Life for his own personal use, that he has total control over the
decisions of New Life, and that New Life is insolvent. These allegations are sufficient to
withstand a motion to dismiss.
3. Pleading in the Alternative
Mr. Malia’s motion to dismiss also argues that ASD has asserted contradictory
claims. In particular, he argues that ASD cannot assert a breach of contract claim
alongside tort causes of action like conversion and replevin; he further asserts that an
action for unjust enrichment cannot stand with a breach of contract claim. Mr. Malia is
correct that these claims may be conflicting. “Under Pennsylvania law, tort claims
allegedly committed in the course of carrying out a contract are dismissible if the ‘gist’ of
them sounds in contract instead of tort.” Berger & Montague, P.C. v. Scott & Scott, LLC,
153 F. Supp. 2d 750, 753 (E.D. Pa. 2001). Thus, if the alleged contracts here are the
gist of the action, ASD cannot proceed on its tort claims. Additionally, the doctrine of
unjust enrichment does not apply “when the relationship between the parties is founded
on a written agreement or express contract.” Schott v. Westinghouse Electric Corp., 436
Pa. 279, 290 (1969). Thus, if it is determined that ASD had a contract with New Life,
then its unjust enrichment claim cannot stand.
Plaintiffs may, however, plead inconsistent claims or alternative statements of a
claim under Federal Rule of Civil Procedure 8(d). Based on that rule, courts have
rejected motions to dismiss on grounds of inconsistency where plaintiffs alleged both
breach of contract and conversion, Berger & Montague, 153 F. Supp. 2d at 754, breach
of contract and unjust enrichment, 18 KT.TV, LLC v. Entest Biomedical, Inc., No. 3:11CV-244, 2011 WL 5374515, at *6 (M.D. Pa. Nov. 7, 2011), and breach of contract and
replevin, Gov’t Guarantee Fund v. Hyatt Corp., 166 F.R.D. 321, 324 (D.V.I. 1996). Mr.
Malia may revisit his objections at the summary judgment stage, but his motion to
dismiss based on contradictory claims will be denied.
4. Breach of Fiduciary Duty
Mr. Malia’s motion to dismiss the breach of fiduciary duty claim will be denied.
Mr. Malia argues that he did not owe any fiduciary duty to ASD. Generally, directors of a
corporation do not owe a fiduciary duty to corporate creditors, but there is an exception
where a corporation becomes insolvent. In re Insulfoams, Inc., 184 B.R. 694, 703-04
(Bankr. W.D. Pa. 1995); see also In re Lemington Home for the Aged, 659 F.3d 282,
290 (3d Cir. 2011). Mr. Malia objects that New Life is not insolvent, but on a motion to
dismiss, a court must accept as true all allegations in the complaint. ASD alleges in its
complaint that New Life was insolvent and that ASD was its creditor, and therefore it has
sufficiently pleaded a breach of fiduciary duty claim.
C. Dismissal of New Life’s Counterclaims
1. Fraud Claims
ASD first argues that New Life’s counterclaims for fraudulent concealment and
fraud, misrepresentation, and deceit must be dismissed. Specifically, ASD asserts that
these claims are precluded by the gist of the action doctrine, fall beyond the statute of
limitations, and fail to meet the pleading standards under Federal Rule of Civil
Dismissal based on the gist of the action doctrine is inappropriate. As noted
above, the gist of the action doctrine “precludes a party from raising tort claims where
the essence of the claim actually lies in a contract that governs the parties’ relationship.”
Sullivan v. Chartwell Inv. Partners, LP, 873 A.2d 710, 718 (Pa. Super. 2005). New Life,
however, claims that there was no valid contract between it and ASD, creating a
disputed issue of law that cannot be determined at the motion to dismiss stage. Further,
just as ASD pleaded inconsistent claims in its complaint, New Life may assert tort
counterclaims alongside contract counterclaims. See Fed. R. Civ. P. 8(d). Based on
this, it is inappropriate to dismiss the claims.
Turning next to the statute of limitations issue, a review of the complaint
demonstrates that New Life’s fraud counterclaims are time barred. A court may dismiss
a claim under Rule12(b)(6) where a statute of limitations bar is “apparent on the face of
the complaint.” Robinson v. Johnson, 313 F.3d 128, 135 (3d Cir. 2002) (citing Bethel v.
Jendoco Constr. Corp., 570 F.2d 1168, 1174 (3d Cir. 1978)). Pennsylvania law provides
a two-year statute of limitations for any fraud claims. 42 Pa. C.S.A. § 5524(7). Thus,
New Life’s claims will be time barred if the alleged fraud occurred more than two years
prior to July 15, 2011, when New Life filed its answer. New Life’s complaint states that it
discovered in July of 2009 during an invoice review that past 2009 billings by ASD had
been fraudulent. The date of New Life’s discovery suggests that the alleged fraud must
have occurred prior to July 2009–and therefore outside of the limitations period. New
Life attached several sample invoices to support its counterclaim; each one of these was
dated prior to July 2009. It is possible, of course, that New Life reviewed its invoices at
the end of July, and that review showed an instance of fraud stemming out of a billing
that occurred within the limitations period. But New Life did not allege in its complaint
any specific instance of fraud occurring between July 15 and 31, and thus its fraud
claims will be dismissed. It may, however, amend its claim to specifically assert any
timely fraud claims.
The untimeliness of New Life’s fraud claims can be partially, but not entirely,
cured by its assertion of fraudulent concealment.
“Fraudulent concealment is an
equitable doctrine [that] is read into every federal statute of limitations.” Mathews v.
Kidder, Peabody & Co., 260 F.3d 239, 256 (3d Cir. 2001) (internal quotations omitted)
(quoting Davis v. Grusemeyer, 966 F.2d 617, 624 (3d Cir. 1993)). Under the doctrine,
acts of fraudulent concealment by a defendant will toll a statute of limitations “until the
time of discovery or the date when with reasonable diligence one would have been led to
discovery.” Urland v. Merrell-Dow Pharm, Inc., 822 F.2d 1268 (3d Cir. 1987). Here,
New Life argues that ASD concealed two facts: (1) that it billed New Life for goods it did
not provide to New Life; and (2) that it inflated prices for goods it did send to New Life.
The fraudulent concealment doctrine cannot apply to the first alleged concealment,
because if New Life had done its due diligence, it would have known at the time of billing
that ASD had charged it for goods it did not receive. Due diligence might not have
revealed price inflation, however, and therefore any claims of fraud based on price
inflation might fall under the doctrine of fraudulent concealment. Although ASD may
submit evidence at summary judgment that New Life could have learned of the alleged
price inflation fraud with reasonable diligence, New Life has successfully pleaded that
the statute of limitations for the price inflation fraud claims was tolled under the doctrine
of fraudulent concealment.
New Life’s claims still must be dismissed, however, for failure to meet the
heightened pleading standards of Rule 9(b). Under that rule, a party alleging fraud
“must state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b).
The particularity requirement may be satisfied “if the complaint describes the
circumstances of the alleged fraud with ‘precise allegations of date, time, or place’ or by
using some means of ‘injecting precision and some measure of substantiation into their
allegations of fraud.’” Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown,
Inc., 296, F.3d 164, 173 n.10 (3d Cir. 2002) (quoting Naporano Iron & Metal Co. v.
Amer. Crane Corp., 79 F. Supp. 2d 494, 511 (D.N.J. 1999)). The purpose of the
heightened pleading standard is to “place defendants on notice of the precise
misconduct with which they are charged, and to safeguard against spurious charges of
immoral and fraudulent behavior.” Seville Indus. Mach. Corp. v. Southmost Mach.
Corp., 742 F.2d 786, 791 (3d Cir. 1984). Here, New Life’s counterclaim alleges that
ASD inflated prices and billed for goods not received between January and July of 2009.
It does not specify whether every single invoice during that period was fraudulent, or
whether only some were. Further, it does not make clear which billings involved price
inflation as opposed to goods not received. Therefore, New Life did not satisfy the
pleading standard under 9(b). Its fraud claims will be dismissed, but it will be granted
leave to amend in order to plead its price inflation fraud allegations with more
2. Unjust Enrichment
ASD’s motion to dismiss New Life’s unjust enrichment counterclaim will be
denied. ASD argues, much as Mr. Malia did, that a party may not recover under a
theory of unjust enrichment claim where a contract governed the parties’ relationship.
See Curley v. Allstate Ins. Co., 289 F. Supp. 2d 614, 619-20 (E.D. Pa. 2003). As noted
above in the discussion of the gist of the argument doctrine, New Life disputes the
existence of the contract and further is permitted to plead in the alternative under Rule
8(d). Thus, New Life may proceed with its unjust enrichment claim.
ASD’s motion to dismiss New Life’s accounting claim will be denied. ASD asserts
that accounting is an equitable remedy and not a cause of action, citing ClubCom, Inc. v.
Captive Media, Inc., No. 02:07-cv-1462, 2009 WL 249446, at *14 (W.D. Pa. Jan. 31,
2009). Several other Pennsylvania district courts, however, have allowed plaintiffs to
assert accounting as a separate cause of action where a valid contract exists. See, e.g.,
Mendicino v. Lotus Orient Corp., No. Civ. A. 10-1867, 2010 WL 4104580, at *10 (E.D.
Pa. Oct. 19, 2010) (citing Alpart v. Gen. Land Partners, Inc., 574 F. Supp. 491, 508 (E.D.
Pa. 2008); Berger & Montague, P.C. v. Scott & Scott, LLC, 153 F. Supp. 2d 750, 754
(E.D. Pa. 2001)); Bernardo v. Continental Serv. Grp., Inc., No. Civ. A. 10-1388, 2010 WL
2649942, at *3 (E.D. Pa. Jun. 30, 2010) (citing Binary Semantics Ltd. v. Minitab, Inc.,
No. Civ. A. No. 07-1750, 2008 WL 763575, at *13 (E.D. Pa. Mar. 20, 2008)). Based on
this precedent, New Life may proceed with its accounting claim.
For the reasons stated above, Mr. Malia’s motion to dismiss will be denied and New
Life’s motion to dismiss will be granted in part and denied in part. An appropriate order
November 29, 2011
/s/ A. Richard Caputo
A. Richard Caputo
United States District Judge
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
ASD SPECIALTY HEALTHCARE
INC., d/b/a ASD HEALTHCARE,
CIVIL ACTION NO. 3:11-CV-068
NEW LIFE HOME CARE INC. and
day of November, 2011, IT IS HEREBY ORDERED that:
1. Defendant Gregory Malia’s motion to dismiss the amended complaint is
2. Plaintiff has failed to properly serve Defendant Gregory Malia. Plaintiff must
perfect service within twenty-one (21) days of this order.
3. Plaintiff’s motion to dismiss Defendant New Life Home Care Inc.’s
counterclaims is GRANTED in part and DENIED in part. Counts I and III
alleging fraudulent concealment and fraud, misrepresentation and deceit are
DISMISSED without prejudice. Defendant is granted leave to amend in order
to specify timely fraud allegations and/or allege with particularity any price
inflation fraud claims. Defendant has twenty-one (21) days to amend or the
claims will be dismissed with prejudice.
/s/ A. Richard Caputo
A. Richard Caputo
United States District Judge
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