Dakavia Mgmt. Corp. v. Bigelow

• Decision Date: 10 January 2022
• Docket Number: 1:20-cv-00448-NE-SKO
• Court: U.S. District Court — Eastern District of California
• Parties: DAKAVIA MANAGEMENT CORP., et al., Plaintiffs, v. CURTIS BIGELOW, et al., Defendants.

DAKAVIA MANAGEMENT CORP., et al., Plaintiffs,
v.
CURTIS BIGELOW, et al., Defendants.

No. 1:20-cv-00448-NE-SKO

United States District Court, E.D. California

January 10, 2022

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS AND DENYING MOTION FOR SANCTIONS (DOC. NOS. 41, 57)

This action relates to two nursing home facilities: Monte Vista Estates and Lamar Estates (“Facilities”). Plaintiff Dakavia Management Corp. (“Dakavia”) owns plaintiffs Monte Vista Estates, LLC and Lamar Estates, LLC (“Facility Entities”), which operate the Facilities. The case currently proceeds on plaintiffs' second amended complaint (“SAC”) filed on September 1, 2021. (Doc. No. 68.)^[1] The SAC alleges California-law contract and tort claims against various defendants in connection with a failed business transaction. Defendants LTC Management Holdings, LLC (“LTC”), SNF Payroll, LLC (“SNF Payroll”), SNF Management, LLC (“SNF Management”) and Chaim Raskin (“Raskin” and cumulatively “SNF Defendants”) filed a motion

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to dismiss on July 10, 2020. (Doc. No. 41.) SNF Defendants, other than SNF Payroll (“Sanctions Defendants”), filed a motion for sanctions on August 5, 2020. (Doc. No. 57.) Plaintiffs filed oppositions to the motions on August 20, 2020 (Doc. Nos. 58 & 59), to which SNF Defendants filed replies on August 27, 2020 (Doc. Nos. 60 & 61). For the following reasons, the motion dismiss will be granted in part and denied in part and the motion for sanctions will be denied.^[2]

BACKGROUND

In relevant part, the SAC alleges as follows. Initially, Dakavia managed the Facilities pursuant to management agreements with the Facility Entities. (SAC, Ex. A at Recital B, and Ex. B at Recital B.) Dakavia wished to sell its stake, so in April 2017 it entered into consulting agreements (“Consulting Agreements”) with defendant Invigorate Healthcare, Inc. (“Invigorate Healthcare”), which was run by its CEO Brandon Bigelow, who was previously a defendant in this action (Doc. No. 72 (notice of voluntary dismissal)). Under the Consulting Agreements, Invigorate Healthcare assumed operational control of the Facilities. Invigorate Healthcare's obligations included billing, accounting, and running the Facilities. The long-term goal was for defendants to purchase the Facilities in full, and Invigorate Healthcare retained options for doing so. Plaintiffs loaned Bigelow $469, 655 for start-up costs, and Bigelow and other fellow investors executed personal guarantees.

Each Facility Entity entered into an administrative services agreement with SNF Payroll in 2018 (“Payroll Agreements”). Under the Payroll Agreements, which are not attached as exhibits to plaintiffs' SAC, SNF Payroll was paid for various payroll activities and accounting.

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In May 2019, plaintiffs received written termination notices from a bank regarding the accounts for the Facility Entities. Plaintiffs contacted Invigorate Healthcare, Bigelow and defendant James Christian Hansen. Bigelow assured plaintiffs that the issue concerning the notices would be taken care of and there would be no adverse effects. However, on June 6, 2019, Bigelow informed plaintiffs that Invigorate Healthcare and its affiliates were out of money, could no longer operate or purchase the Facilities, and would not be able to meet their payroll obligations. Defendants allegedly had concealed and withheld information from plaintiffs, including that Bigelow and defendants were commingling federal funds specified for the Facility Entities for unrelated matters in violation of federal and state law.

SNF Payroll's chief financial officer informed plaintiffs that SNF Payroll had not been paying payroll taxes for several months with respect to the Facilities, in violation of federal and state law and in breach of the Consulting Agreements. Defendants, including three of the SNF Defendants (LTC, SNF Payroll and Raskin), deliberately concealed this information from financial disclosures and cost reports presented to plaintiffs. In light of these activities, plaintiffs took immediate actions to terminate Invigorate Healthcare's role under the Consulting Agreements. Certain defendants had obtained equity interests in the Facility Entities, and those interests were transferred to Dakavia. Plaintiffs have since incurred losses after resuming control as a result of defendants' fraudulent actions and failure to perform duties, including through unpaid payroll taxes.

LEGAL STANDARDS

A. Motion to Dismiss

The purpose of a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) is to test the legal sufficiency of the complaint. N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). A dismissal may be warranted where there is “the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). A plaintiff must allege “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). A claim is plausible on its face “when the plaintiff pleads factual content that allows

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the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court accepts as true the allegations in the complaint and construes the allegations in the light most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1989). However, the court will not assume the truth of legal conclusions cast in the form of factual allegations. United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th Cir. 1986). “A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.” Fed.R.Civ.P. 10(c). While Federal Rule of Civil Procedure 8(a) does not require detailed factual allegations, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” to survive dismissal under Rule 12(b)(6). Iqbal, 556 U.S. at 676. A complaint must do more than allege mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555.

B. Leave to Amend

When, as here, more than 21 days after service of a responsive pleading or motion under Rule 12(b), “a party may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2). Although “Rule 15(a) is very liberal and leave to amend shall be freely given when justice so requires . . . a district court need not grant leave to amend where the amendment: (1) prejudices the opposing party; (2) is sought in bad faith; (3) produces an undue delay in litigation; or (4) is futile.” AmerisourceBergen Corp. v. Dialysist W., Inc., 465 F.3d 946, 951 (9th Cir. 2006) (internal quotation marks and citations omitted). Repeated failures to cure deficiencies by amendment can also justify withholding leave to amend. See Sonoma Cty. Ass'n of Retired Employees v. Sonoma Cty., 708 F.3d 1109, 1117 (9th Cir. 2013).

“[I]t is the consideration of prejudice to the opposing party that carries the greatest weight”-prejudice being the “touchstone of the inquiry under Rule 15(a)”-but the opposing party bears the burden of demonstrating prejudice. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (internal quotation marks and citations omitted). “Leave to amend may [also] be denied if the proposed amendment is futile or would be subject to

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dismissal, ” Wheeler v. City of Santa Clara, 894 F.3d 1046, 1059 (9th Cir. 2018) (citation omitted), but only if there are “no set of facts [that] can be proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense.” Missouri ex rel. Koster v. Harris, 847 F.3d 646, 656 (9th Cir. 2017) (quotation marks and citation omitted). “Absent prejudice, or a strong showing of any of the remaining [ ] factors, there exists a presumption under Rule 15(a) in favor of granting leave to amend.” Eminence Capital, 316 F.3d at 1052.

C. Motion for Sanctions

In relevant part, Rule 11 of the Federal Rules of Civil Procedure provides:

(b) Representations to the Court. By presenting to the court a pleading, written motion, or other paper-whether by signing, filing, submitting, or later advocating it-an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances:

(1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation;

(2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law;

* * *

(c) Sanctions.

(1) In General. If, after notice and a reasonable opportunity to respond, the court determines that Rule 11(b) has been violated, the court may impose an appropriate sanction on any attorney, law firm, or party that violated the rule or is responsible for the violation.

Fed. R. Civ. P. 11.

“Rule 11 is an extraordinary remedy, one to be exercised with extreme caution.” In re Keegan Management Co., Securities Litigation, 78 F.3d 431, 437 (9th Cir. 1996) (quoting Operating Engineers Pension Trust v. A-C Co., 859 F.2d 1336, 1345 (9th Cir. 1988)). “[T]he central purpose of Rule 11 is to deter baseless filings in district court and . . . streamline the administration and procedure of the federal courts.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990).

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When a “complaint is the primary focus of Rule 11 proceedings,...