Van de Kamp v. Gumbiner

• Decision Date: 29 June 1990
• Docket Number: No. B035505,B035505
• Citation: 270 Cal.Rptr. 907,221 Cal.App.3d 1260
• Court: California Court of Appeals Court of Appeals
• Parties: John K. VAN de KAMP, Attorney General of the State of California, Cross-Complainant and Appellant, v. Robert GUMBINER, M.D., et al., Cross-Defendants and Respondents. Civ.

Page 907

270 Cal.Rptr. 907

221 Cal.App.3d 1260

John K. VAN de KAMP, Attorney General of the State of California, Cross-Complainant and Appellant, v. Robert GUMBINER, M.D., et al., Cross-Defendants and Respondents.

Civ. No. B035505.

Court of Appeal, Second District, Division 5, California.

June 29, 1990.

John K. Van de Kamp, Atty. Gen., Andrea Sheridan Ordin, Chief Asst. Atty. Gen., Carole Ritts Kornblum, Sr. Asst. Atty. Gen., James R. Schwartz, Yeoryios C. Apallas, H. Chester Horn, Jr., Deputy Attys. Gen. for cross-complainant and appellant.

Skadden, Arps, Slate, Meagher & Flom, Frank Rothman, James E. Lyons, Jeffrey T. Makoff, Los Angeles, for cross-defendants and respondents Gumbiner, Price, LeSueur, Klaus, Sweeney, Schmid, Hood, FHP, Inc., Laguna Hills Associates, Plaza Land Corp., Medical Center Bldg. Co., Anaheim Bldg. Associates, Downtown Associates, Physicians Equipment Rental Co., Fountain Valley Land Development Co., HMO Health Group, Inc.

Donald M. Wessling, Brian S. Currey, Scott L. Landsbaum, O'Melveny & Myers, Los Angeles, for cross-defendant and respondent Ernst & Whinney.

Jan S. Raymond, Keller & Stallard, Woodland, for amicus curiae Legislative Intent Service.

TURNER, Associate Justice. ^*

I. INTRODUCTION

The Attorney General of the State of California, John K. Van de Kamp, appeals from a judgment of dismissal entered by Superior Court Judge Edward M. Ross following the sustaining of demurrers to the Attorney General's third amended cross-complaint without leave to amend. The Attorney General's action, brought in his own name, was for breaches of a settlement agreement and conspiracy to breach fiduciary duties against FHP, Inc., a health maintenance organization, ¹ and for negligent undervaluing of assets and conspiracy to undervalue assets against Ernst & Whinney, an accounting firm. The superior court held that the Attorney General had no authority to maintain the action. Because the Attorney General's authority to supervise and regulate FHP, Inc. under the settlement agreement and the common law was superseded by legislative action, the judgment of dismissal is affirmed. The Attorney General also appeals from Superior Court Judge John Zebrowski's denial of a motion to tax costs. There was no abuse of discretion by the trial court in denying the motion to tax costs and the order is therefore affirmed.

II. SUBSTANTIVE AND PROCEDURAL FACTS

A. The Allegations of the Third Amended Cross-Complaint

1. Introduction

The third amended cross-complaint involved three general areas of allegations. First, it was alleged that various cross-defendants breached a 1977 settlement agreement. These allegations were contained in the first nine causes of action which were each entitled "Breach of Contract." Second, the Attorney General alleged that several individual cross-defendants had conspired to breach their fiduciary duties to FHP. These fiduciary duty claims were contained in the tenth and twelfth causes of action which were entitled "Conspiracy to Breach Fiduciary Obligations." Third, an accounting firm was the subject of a negligence claim in the eleventh cause of action.

2. The Allegations

Because this is an appeal from a dismissal order following the sustaining of a demurrer without leave to amend, we accept as true the allegations of the third amended cross-complaint, except contentions, deductions or conclusions of fact or law. (Serrano v. Priest (1971) 5 Cal.3d 584, 591, 96 Cal.Rptr. 601, 487 P.2d 1241.) FHP, Inc. (FHP) was, prior to November 1985, a California corporation created and existing under the General Non-profit Corporation Law. FHP held funds and other assets in trust for charitable purposes. The officers and directors of FHP, most of whom were also owners of or partners in various ventures named as cross-defendants, ² engaged in nine separate self-dealing transactions between 1980 and 1985 resulting in a loss to the charitable corporation and its beneficiaries of over 80 million dollars. These self-dealing transactions were entered into without prior notice to or the written approval of the Attorney General as required under the terms of a settlement agreement of a 1977 lawsuit and therefore constituted a breach of that settlement agreement.

In February 1977, then-Attorney General Evelle J. Younger on behalf of the People of the State of California filed suit against FHP, PLC, PERCO, FVLDC, MCBC, DA, Gumbiner, Klaus, and Sweeney, among others, for restitution, damages, surcharge and removal of trustees, enforcement of a charitable trust, and for injunctive and other equitable relief. (People v. Gumbiner, Los Angeles Superior Court No. C 190441.) In April 1977, the parties entered into a settlement agreement resolving that lawsuit. In addition to requiring the repayment of monies to FHP by the other defendants, the settlement agreement provided that FHP would be subject to the Attorney General's supervision pursuant to the General Non-profit Corporation Law (former Corp.Code, § 9000, et seq.), specifically Corporations Code section 9505, and the Uniform Supervision of Trustees for Charitable Purposes Act (Gov.Code, § 12580 et seq.). Those statutes are discussed below.

The settlement agreement also provided as follows: "[N]o officer or director of Family Health Program, Inc., ³ nor any corporation, partnership, or business entity of any kind in which any officer or director of Family Health Program, Inc., holds any financial interest, shall contract or have any business or financial dealings with Family Health Program, Inc., without prior notice to and express written approval of the Attorney General. Said provision shall not, however, preclude any individual defendant herein from receiving reasonable compensation for services rendered solely to Family Health Program, Inc., as an officer, director, or employee thereof...." ⁴

In addition, the third amended cross-complaint alleged that beginning in 1983, the officers and directors of FHP conspired to breach their fiduciary duty to FHP by undervaluing FHP's assets and then converting from a non-profit to a for-profit corporation and making a public offering of the newly formed corporation "thereby securing the true fair market value of FHP for their own account." ⁵ It was further alleged that cross-defendant Ernst & Whinney, a partnership doing business in California, negligently appraised FHP's assets so as to substantially undervalue them to the detriment of FHP's charitable beneficiaries, or conspired to undervalue FHP's assets.

B. Procedural History of the Present Case

In 1985 FHP amended its articles of incorporation to provide for conversion of FHP from a nonprofit to a for-profit corporation and sought and obtained the requisite approval of the conversion by the Department of Corporations, hereafter referred to as the "Department". (Corp.Code, §§ 5813.5, 10821; Health & Saf.Code, § 1352, subd. (b)). A competitor, Maxicare Health Plan Inc. (Maxicare), filed a petition for peremptory writ of mandate in the superior court alleging that the conversion would allow FHP's directors to acquire ownership of FHP for a price well below the fair market value of FHP's assets, thereby diverting substantial assets pledged for charitable purposes. Maxicare further alleged that it had offered to purchase FHP's assets, but that the Department had refused to act on the offer. Maxicare sought a writ of mandate commanding that the Department withdraw its approval of the conversion, and that the Department and the Attorney General take steps to protect FHP's charitable assets.

The Attorney General filed a cross-petition for writ of mandate and a cross-complaint for breach of contract and declaratory and injunctive relief. The Attorney General alleged the conversion would violate both the law requiring approval or ratification of health plan directors' self-dealing (Corp.Code, § 5233, subd. (d)), and the 1977 settlement agreement described above. The Attorney General sought by his petition to prevent FHP from completing the conversion without the written approval of the Attorney General as required by the 1977 settlement agreement. FHP's answer to the Attorney General's cross-petition and cross-complaint alleged, in part, that the Attorney General lacked jurisdiction, standing or authority to act in connection with FHP's conversion. A temporary restraining order was issued at the request of the Attorney General, but on October 18, 1985, his application for a preliminary injunction was denied. The Attorney General later filed his third-amended cross-complaint which was dismissed after general demurrers were sustained without leave to amend. This appeal ensued. ⁶

II. LEGISLATIVE ACTION PERTAINING TO THE ATTORNEY GENERAL'S AUTHORITY TO SUPERVISE AND REGULATE HEALTH CARE SERVICE PLANS

A. Introduction

The resolution of this appeal is dependent on a fairly complex series of legislative enactments which ultimately granted the power to regulate certain charitable trusts in the health care field to the Commissioner of the Department of Corporations. This legislation, which was introduced in part at the request of former Attorney General Evelle J. Younger, abrogated the Attorney General's common law and statutory authority to supervise charitable trusts in the form of health care service plans. Additionally, various legislative enactments have legalized what the Attorney General's third amended cross-complaint labels self-dealing transactions. Given the obvious importance of these issues, which relate to the power of a state constitutional officer to intervene in the operations of an industry which is essential to the health and welfare of residents of California in order to protect the public interest and the complexity of the changes in the law, it is necessary in this opinion to trace in detail the historical development of the law relating to the power of the Attorney General to regulate health care service plans.

B. An Overview

Hist...