Judge: Anne Richardson, Case: 22STCV02147, Date: 2023-07-10 Tentative Ruling

Case Number: 22STCV02147    Hearing Date: January 23, 2024    Dept: 40

Superior Court of California

County of Los Angeles

Department 40

Background

Plaintiff Mission City Community Network, Inc. (MCCN), which operates non-profit community health centers throughout Southern California, sues Defendant Department of Health Care Services (DHCS) pursuant to an April 7, 2023 Third Amended Complaint (TAC) alleging three claims, only one of which remains operative: the TAC’s second cause of action for Negligence.

The negligence claim generally arises from allegations that DHCS has failed to compensate MCCN $9.9 million for services rendered to California Medi-Cal beneficiaries during an 18-month period in which DHCS had suspended MCCN from participation in the Medi-Cal program. The negligence claim more specifically arises from allegations that (1)-(2) DHCS negligently shared faulty information with the California Department of Justice (Cal DOJ) related to alleged fraudulent billing by MCCN that led the Cal DOJ to investigate MCCN, (3) DHCS negligently relied on the Cal DOJ investigation to suspend MCCN’s Medi-Cal provider status because the Cal DOJ investigation was based on a search warrant affidavit that relied on the deposition testimony of a former MCCN employee in a federal action against MCCN that was resolved in MCCN’s favor one year prior to the warrant’s issuance, and (4) DHCS failed to correct information in the Cal DOJ affidavit.

On August 15, 2023, MCCN filed a motion for leave of court to file a Fourth Amended Complaint (4AC).

On January 9, 2024, DHCS opposed MCCN’s motion.

On January 16, 2024, MCCN replied to DHCS’s motion.

MCCN’s motion for leave is now before the Court.

Request for Judicial Notice

Per DHCS’s request, the Court takes judicial notice of the online, State-published biography of DHCS Director Michelle Baass. (See Opp’n, RJN; see also Evid. Code, § 452, subd. (h), 453, subds. (a)-(b); Julian Volunteer Fire Co. Assn. v. Julian-Cuyamaca Fire Protection Dist. (2021) 62 Cal.App.5th 583, 600 (Julian) [judicial notice may be taken as to existence of document and legal effects deriving therefrom].)

Per MCCN’s request, the Court takes judicial notice of online, State-published employment history of Director Michelle Baass and the CGGSA webpage containing the departmental organization of the California Health and Human Services Agency. (See Reply, RJN; see also Evid. Code, § 452, subd. (h), 453, subds. (a)-(b); Julian, supra, 62 Cal.App.5th 583, 600 [judicial notice may be taken as to existence of document and legal effects deriving therefrom].)

Motion for Leave of Court to File Fourth Amended Complaint

Legal Standard

California Code of Civil Procedure section 473, subdivision (a)(1) provides, in relevant part: “The court may, in furtherance of justice, and on any terms as may be proper, allow a party to amend any pleading or proceeding by adding or striking out the name of any party, or by correcting a mistake in the name of a party, or a mistake in any other respect; and may, upon like terms, enlarge the time for answer or demurrer. The court may likewise, in its discretion, after notice to the adverse party, allow, upon any terms as may be just, an amendment to any pleading or proceeding in other particulars; and may upon like terms allow an answer to be made after the time limited by this code.”

Under California Rules of Court Rule, rule 3.1324, subdivision (a), a motion to amend a pleading shall:

(1) Include a copy of the proposed amendment or amended pleading, which must be serially numbered to differentiate it from previous pleadings or amendments;

(2) State what allegations in the previous pleading are proposed to be deleted, if any, and where, by page, paragraph and line number, the deleted allegations are located; and

(3) State what allegations are proposed to be added to the previous pleading, if any, and where, by page, paragraph, and line number, the additional allegations are located.

Under California Rules of Court, rule 3.1324, subdivision (b), a separate declaration must accompany the motion and must specify:

(1) The effect of the amendment;

(2) Why the amendment is necessary and proper;

(3) When the facts giving rise to the amended allegations were discovered; and

(4) The reasons why the request for amendment was not made earlier.

“This discretion should be exercised liberally in favor of amendments, for judicial policy favors resolution of all disputed matters in the same lawsuit.” (Kittredge Sports Co. v. Superior Court (1989) 213 Cal.App.3d 1045, 1047 (Kittredge).) Ordinarily, the court will not consider the validity of the proposed amended pleading in ruling on a motion for leave since grounds for a demurrer or motion to strike are premature; however, the Court does have discretion to deny leave to amend where a proposed amendment fails to state a valid cause of action as a matter of law and the defect cannot be cured by further amendment. (See California Casualty General Ins. Co. v. Superior Court (1985) 173 Cal.App.3d 274, 281 (California Casualty), overruled on other grounds by Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 403-406 (Kransco); see also Kittredge, supra, at p. 1048 [“[E]ven if the proposed legal theory is a novel one, ‘the preferable practice would be to permit the amendment and allow the parties to test its legal sufficiency by demurrer, motion for judgment on the pleadings or other appropriate proceedings,’” quoting California Casualty, supra, at p. 280].)

However, leave to amend may also be properly denied when “the insufficiency of the proposed amendment is established by controlling precedent and . . . [can]not be cured by further appropriate amendment.” (California Casualty, supra, 173 Cal.App.3d at pp. 280-281; see, e.g., Foxborough v. Van Atta (1994) 26 Cal.App.4th 217, 231 (Foxborough) [not an abuse of discretion to deny leave to amend when “proposed amendment would have been futile because it was barred by the statute of limitations” with no indication of relating back to the original complaint].)

Further, if a good amendment is proposed in proper form, a long, unwarranted and unexcused delay in presenting it may be a good reason for denial. (Roemer v. Retail Credit Co. (1975) 44 Cal.App.3d 926, 939-940 (Roemer).) In most cases, the factors for timeliness are: (1) lack of diligence in discovering the facts or in offering the amendment after knowledge of them; and (2) the effect of the delay on the adverse party. (Id. at p. 940.) If the party seeking the amendment has been dilatory, and the delay has prejudiced the opposing party, the judge has discretion to deny leave to amend. (Hirsa v. Superior Court (1981) 118 Cal.App.3d 486, 490 (Hirsa).) Prejudice exists where the amendment would require delaying the trial, resulting in loss of critical evidence, or added costs of preparation such as an increased burden of discovery. (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 486-488 (Magpali).)

Order Granting Leave to Amend: GRANTED.

I. Briefing Before the Court

Plaintiff MCCN has filed a motion for leave to file a 4AC. The proposed 4AC alleges ten new causes of action against four newly proposed individual Defendants, adds some of the individual Defendants to the existing negligence claim, and adds facts to reframe the lawsuit from being based on a negligence claim to three new federal law claims, four breach of contract and quasi-contract claims, two interference with contract claims, the previously stated negligence claim, reframed and expanded to include individual Defendants, and one declaratory relief claim. MCCN has attached a clean copy of the proposed 4AC and a redlined copy of the 4AC showing differences with the operative TAC. (See Mot., p. 2 [“There are facts, causes of action, and parties that need to be added to the complaint”]; Mot., Senelick Decl., Exs. A-B.)

The additional Defendants are described as individuals who “were involved in the actions that led to the improper temporary suspension [of MCCN’s Medi-Cal provider status]: (1) Michelle Baass, Director of DHCS, who failed to provide even minimum supervision for referrals to DOJ; (2) Deborah Manduca, Chief of the DHCS Special Investigation Unit, who, for example, made a referral knowing it would trigger an investigation and suspension without any effort to validate the allegations; (3) Daniel Ibarra, a California Department of Justice Special Agent who, for instance, knew the impact of the inadequate and dilatory investigation yet caused the suspension to remain; and (4) and Bruce Lim, Deputy Director of DHCS’s Audits and Investigations Division, who approved the suspensions with knowledge there was no factual support for the allegations to make the referral to DOJ.” (Mot., p. 3.)

The new causes of action are: (1) Violation of Due Process as to Defendants Baass, Lim, Manduca Ibarra, as individuals; (2) Violation Of U.S. Constitution Contracts Clause/Supremacy Clause/42 U.S.C. § 1983 as to Defendants Baass, Lim, Manduca, and Ibarra; (3) Violation of U.S. Constitution Takings Clause/Supremacy Clause/42 U.S.C. § 1983 as to Defendants Baas, Lim, Manduca, and Ibarra; (4) Breach of Written Contract as to DHCS and Director Baass in her official capacity; (5) Breach Implied in Fact Contract as to DHCS and Director Baass in her official capacity; (6) Quantum Meruit as to DHCS and Defendant Baass in her official capacity; (7) Breach of Implied in Law Contract as to DHCS and Defendant Baass in her official capacity; (8) Intentional Interference with Contractual Relations as to all Individual Defendants; (9) Negligent Interference with Contract as to all Individual Defendants; and (11) Declaratory Relief – DHCS and Defendant Baass in her official capacity. The proposed 4AC retains its negligence claim but alleges it as (10) Negligence as to DHCS and Defendants Baas, Lim, Manduca, and Ibarra as individuals and modified the factual allegations supporting the claim. (Mot., Senelick Decl., Exs. A-B; cf. TAC [single operative claim of Negligence against DHCS alone].)

The proposed 4AC prays for: damages in an amount to be proven at trial; for a declaration that MCCN’s temporary suspension—suspension of provider status under Medi-Cal, as opposed to a temporary payment suspension, which involves suspension only of ability to collect monies from Medi-Cal program and ability to recover monies after suspension favorably lifted—as well as DHCS’s refusal to reimburse MCCN were invalid and unlawful, unconstitutional, or have been erroneously applied to MCCN; costs and attorneys’ fees; punitive damages; and other and further legal remedies and equitable relief as this Court deems appropriate and just. (Mot., Senelick Decl., Exs. A-B; cf. TAC, Prayer [“1. For restitution in amount of approximately $9.9 million, plus applicable interest and costs; [¶] 2. For other such relief as this Court deems appropriate and just.”].)

MCCN argues that in September 2023, it obtained new counsel in this action, who discovered that facts in this case gave rise to additional causes of action and defendants that were not asserted by former counsel and that MCCN reached out to DHCS to stipulate to a 4AC, which DHCS declined, leading to this motion. (Mot., p. 2, citing Mot., Senelick Decl., ¶¶ 2, 5-6.)

MCCN also argues that California courts liberally allow amendments to add new causes of action and routinely grant new counsel leave to amend, citing California authorities in support. MCCN adds that DHCS will not experience prejudice for the amendment because “the parties have not exchanged discovery responses, depositions have not been noticed, no documents have been produced, and the Court has not even set a trial date.” (Mot., pp. 4-6.)

MCCN attaches a declaration from new counsel explaining the circumstances leading to the filing of this motion and the proposed 4AC. (Mot., Senelick Decl., ¶¶ 1-7.)

In opposition, DHCS argues that MCCN’s motion does not comply with California Rules of Court, rule 3.1324 and that the proposed amendments are futile for at least 12 reasons, e.g., untimeliness, improper addition of Director Baass, applicability of immunities, and individual arguments directed at specific causes of action. (Opp’n, pp. 9-21.)

In reply, MCCN argues that the proper standard of review is not futility, but rather, prejudice to DHCS. MCCN also addresses various arguments for why the proposed 4AC’s causes of action are not time barred, untimely, insufficiently alleged, or improperly directed at newly proposed Defendants (e.g., Director Baass). (Reply, pp. 2-11.)

II. California Rules of Court Requirements

After review, the Court finds that MCCN’s motion and the Senelick declaration satisfy the relevant rules of Court.

MCCN satisfies California Rules of Court, rule 3.1324, subdivision (a)(1) by attaching a clean copy of the proposed 4AC. (Mot., Senelick Decl., Ex. A.)

MCCN satisfies California Rules of Court, rule 3.1324, subdivisions (a)(2)-(3) by attaching a redlined copy of the proposed 4AC, showing the additions and deletions from the operative TAC. (Mot., Senelick Decl., Ex. B.)

MCCN satisfies California Rules of Court, rule 3.1324, subdivisions (b)(1)-(4) because the declaration makes evident that: (1) the effect of the amendment is to (a) add ten new causes of action, directed at four new Defendants, (b) amend the negligence claim, and (c) reframe the constitutional, statutory, and contractual basis for this action (Mot., Senelick Decl., ¶¶ 5-7, Exs. A-B); (2) the “amendment is necessary and proper as it brings forth meritorious causes of action that former counsel did not assert in the original complaint or in subsequent amendments” (Mot., Senelick, ¶ 5); (3) “[a]fter substituting into this matter and replacing former counsel [on September 8, 2023], MCCN’s [new] counsel “discovered that the facts at issue in this case give rise to additional causes of action that were not asserted by former counsel” (Mot., Senelick Decl., ¶ 5); and (4) MCCN’s new counsel promptly met and conferred with DHCS’s counsel regarding stipulating to a proposed 4AC, to which DHCS did not assent, leading to this motion being filed on October 13, 2023, where counsel represents that it filed this motion “at the earliest possible opportunity following the substitution.” (Mot., Senelick Decl., ¶¶ 6-7).

III. Futility, Prejudice, and Delay

The Court begins by noting that it sees potential issues with MCCN’s proposed amendments, as outlined in DHCS’s opposition, and including but not limited to the statute of limitations being triggered at injury and not at the denial of the government claim, and applicable immunities.

The Court also recognizes that leave to amend may be properly denied when “the insufficiency of the proposed amendment is established by controlling precedent and . . . [can]not be cured by further appropriate amendment.” (California Casualty, supra, 173 Cal.App.3d at pp. 280-281; see, e.g., Foxborough, supra, 26 Cal.App.4th at p. 231 (Foxborough) [not an abuse of discretion to deny leave to amend when “proposed amendment would have been futile because it was barred by the statute of limitations” with no indication of relating back to the original complaint].)

However, here, the Court finds that in light of the policy of liberally granting leave to amend, the preferable procedure here would be to allow the amendment and permit a challenge to the amended pleadings on demurrer, motion for judgment on the pleadings, or otherwise. (Kittredge, supra, 213 Cal.App.3d at p. 1048 [“[E]ven if the proposed legal theory is a novel one, ‘the preferable practice would be to permit the amendment and allow the parties to test its legal sufficiency by demurrer, motion for judgment on the pleadings or other appropriate proceedings,’” quoting California Casualty, supra, 173 Cal.App.3d at p. 280].) Here, the merits (or lack thereof) of the proposed amendments are vigorously disputed by the parties and the Court cannot determine at this time without targeted briefing whether any of the proposed amendments should in fact be rejected as futile. Whether they will survive a demurrer is another question.

To the extent that there has been significant delay between the filing of the original Complaint in this action on January 19, 2022 and the filing of this motion on October 13, 2023, the Court finds that any such delay is not fatal based on the lack of insufficient prejudice to DHCS. The negligence claim ultimately survived the challenges to the initial four pleadings. The merit of the claims in the proposed 4AC is in question. No written discovery, depositions, or production of documents appear to have taken place in this action (Mot., Senelick, ¶ 4), and the Court has not set a trial date. The Court may thus exercise its discretion to permit the amendment despite MCCN’s possible prior knowledge of some of the newly proposed individual Defendants or possible prior reframing of the pleadings as proposed in the 4AC. (Hirsa v. Superior Court, supra, 118 Cal.App.3d at p. 490.)

MCCN’s motion is GRANTED. 

Conclusion

Plaintiff Mission City Community Network, Inc.’s Motion for Leave of Court to File a Fourth Amended Complaint is GRANTED.

Plaintiff Mission City Community Network, Inc. shall file the proposed Fourth Amended Complaint within five court days of service of this order.