EDWARD J. DAVILA, District Judge.
Plaintiffs Burton Richter, Linda Collins Cork, Georgia L. May, Thomas Merigan, Alfred Spivack, and Janice R. Anderson (collectively, "Plaintiffs") bring this suit individually, on behalf of a proposed class, and derivatively as creditors, against CC-Palo Alto, Inc. ("CC-PA"), CC-Development Group, Inc. ("CC-DG"), and Classic Residence Management Limited Partnership ("CRMLP") (the "Corporate Defendants"), as well as CC-PA's board of director members Penny Pritzker, Nicholas J. Pritzker, John Kevin Poorman, Gary Smith, Stephanie Fields, and Bill Sciortino (the "Director Defendants") (collectively, "Defendants"). Plaintiffs' initial Complaint was dismissed with leave to amend, and Plaintiffs timely filed a Verified First Amended Direct Class Action and Creditor Derivative Complaint ("FAC"). Dkt. No. 56.
Presently before the Court are Defendants' Motions to Dismiss Plaintiffs' FAC. Dkt. Nos. 68, 73 (collectively, "Mots."). Having fully reviewed the relevant papers submitted by the parties, the court finds Defendants' arguments meritorious. As such, Defendants' motions are GRANTED for the reasons stated below.
Plaintiffs are senior citizens who presently reside at the Vi at Palo Alto ("the Vi" or "the Community") — a continuing care retirement community ("CCRC") in Palo Alto, California. FAC ¶ 1. The proposed class consists of all individuals who resided at the Vi between January 1, 2005 and the present. FAC ¶ 1.
CC-PA is the entity that owns and operates the Vi. FAC ¶ 35. CC-PA is a Delaware corporation with its principle place of business in Palo Alto, California.
CRMLP is a general partner of CC-DG and provides the "day-to-day management and operation at the Vi at Palo Alto and sets its budgets with input from CC-DG." FAC ¶ 46. CRMLP is also based in Chicago, Illinois.
The Director Defendants are individuals who are, or previously were, members of CC-PA's Board of Directors during the time period relevant to this action. FAC ¶¶ 37-45. Plaintiffs contend that all named Director Defendants "participated in the management of CC-PA, and conducted and culpably participated, directly and indirectly, in the conduct of CC-PA's business affairs." FAC ¶¶ 38-43. By virtue of their positions as directors and/or officers, Plaintiffs contend the Director Defendants "have, and at all relevant times had, the power to control and influence and did control and influence and cause CC-PA to engage in the practices complained of herein." FAC ¶ 44. All Director Defendants are believed to be residents of the state of Illinois. FAC ¶¶ 38-43.
CCRCs are a specialized kind of residential retirement community, offering elderly residents a flexible "continuum of care" as they age. FAC ¶ 4. Incoming residents typically live independently in their own apartment when they first enter the community. However, should a resident come to require a greater degree of care, CCRCs also provide on-site assisted living and skilled nursing facilities ("SNF").
To live at the Vi, residents enter into a Continuing Care Residency Contract with CC-PA ("the Residency Contract" or "the Contract"). FAC ¶ 15. Pursuant to the terms of the Contract, residents are required to pay a one-time entrance fee and recurring monthly fees.
The Residency Contract requires that all residents pay a one-time entrance fee to CC-PA, which ranges from several hundred thousand to several million dollars.
Since the Vi's opening in 2005, Plaintiffs have collectively loaned Defendants over $450 million in entrance fees. FAC ¶ 15. Instead of safeguarding these fees in a reserve, Plaintiffs allege that as of December 2013, CC-PA collected and transferred over $219 million acquired from the entrance fees to its parent company, CC-DG, without obtaining security or any repayment promise. FAC ¶ 21. As a result, Plaintiffs allege that CC-PA will be financially incapable of honoring its debts when they become due.
The Residency Contract also requires that residents pay continuing monthly fees to CC-PA. These fees are intended to cover the "costs of operating the Community," which is expressly addressed by the terms of the Residency Contract. FAC ¶ 25; see Ex. 8, Residency Contract § 3.3. The Contract itself details a non-exhaustive list of expenses that are considered "operating costs" of the Community, including everything from services and amenities, to taxes and employee salaries. Ex. 8, Residency Contract § 3.3.3.
Plaintiffs allege that the monthly fees they pay have been artificially inflated due to three improper charges levied by Defendants: (1) increased property taxes; (2) earthquake insurance; and (3) improper marketing expenses. FAC ¶ 24-29. First, with respect to the increased property taxes, Plaintiffs contend that CC-PA has been assessed a higher tax liability as a result of the transfer of funds to CC-DG. FAC ¶ 27. Plaintiffs believe CC-PA will pass along the increased tax liability to Plaintiffs in the form of higher monthly fees.
On February 19, 2014 Plaintiffs filed the initial complaint in this action against CC-PA, CC-DG, and CRMLP, alleging claims of (1) Concealment; (2) Negligent Misrepresentation; (3) Breach of Fiduciary Duty and Constructive Trust; (4) Financial Abuse of Elders in violation of California Welfare And Institutions Code §§ 15600, et seq.; (5) Violation of the California Consumer Legal Remedies Act, California Civil Code §§ 1750, et seq.; (6) Violation of California Business and Professions Code §§ 17200, et seq.; and (7) Breach of Contract. Dkt. No. 1. In March 2014, Defendants moved to dismiss and the Court granted Defendants' motion with leave to amend. Dkt. Nos. 13, 55.
On December 10, 2014, Plaintiffs filed the FAC, reasserting causes of action for (1) Financial Abuse of Elders in violation of California Welfare and Institutions Code §§ 15600, et seq.; (2) Concealment; (3) Negligent Misrepresentation; (4) Breach of Fiduciary Duty and Constructive Trust; (5) Violation of the California Consumer Legal Remedies Act ("CLRA"), California Civil Code §§ 1750, et seq.; (6) violation of the Unfair Competition Law ("UCL"), California Business and Professions Code §§ 17200, et seq. (Restitution and Discouragement); (7) violation of the UCL (Injunctive Relief); and (8) Breach of Contract. Plaintiffs also alleged new causes of action for (9) Breach of the Implied Covenant of Good Faith and Fair Dealing; (10) Declaratory Relief; (11) Creditor Claim for Breach of Fiduciary Duties Against the Director Defendants; (12) Creditor Claim for Breach of Fiduciary Duties or in the alternative Aiding and Abetting the Director Defendants' Breach of Fiduciary Duties; (13) Payment of Unlawful Dividends; (14) Fraudulent Transfer of Assets; and (15) Corporate Waste. Dkt. No. 56.
On February 20, 2015 Defendants' filed two Motions to Dismiss Plaintiffs' FAC. Dkt. Nos. 68, 73. Corporate Defendants filed a motion to dismiss, reasserting the argument that Plaintiffs lack standing and have failed to state a claim.
A Rule 12(b)(1) motion challenges subject matter jurisdiction and may be either facial or factual.
Standing is properly challenged through a Rule 12(b)(1) motion.
Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient specificity to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests."
At the motion to dismiss stage, the court must read and construe the complaint in the light most favorable to the non-moving party.
Claims that sound in fraud are subject to a heightened pleading standard. Fed. R. Civ. Proc. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.");
When deciding whether to grant a motion to dismiss, the court generally "may not consider any material beyond the pleadings."
In the event that a motion to dismiss is granted, "leave to amend should be granted `unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.'"
Plaintiffs' allege that they suffered harm as a result of Defendants' improper management and assessment of the two fees residents are required to pay in order to live at the Vi: (1) the initial entrance fee and (2) the continuing monthly fees. Defendants move to dismiss all of Plaintiffs' claims on Article III standing grounds, arguing Plaintiffs have not suffered an injury in fact and do not face the threat of a concrete injury in the immediate future. Corp. MTD at 1.
Because Article III standing is a threshold jurisdictional question, the Court will address Defendants' 12(b)(1) motion prior to the analysis of any individual claims.
Federal courts are courts of limited jurisdiction, adjudicating only matters that present an actual "case or controversy" under Article III of the U.S. Constitution.
To satisfy the "injury in fact" element, "the plaintiff must show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant."
Here, while Plaintiffs' make numerous allegations in connection with their fifteen causes of action, the primary injuries alleged concern Vi's one-time entrance fee and its recurring monthly fees. With respect to the entrance fees, Plaintiffs allege that CC-PA failed to establish and otherwise maintain a "refund reserve" of these fees, as required by California statute, and instead illegally distributed — or "upstreamed" — hundreds of millions of dollars of its liquid reserves to CC-DG. FAC ¶¶ 2, 15. With respect to the monthly fees, Plaintiffs contend that Defendants allocated improper expenses to residents of Vi in the form of artificially inflated monthly fees. FAC ¶ 24. The Court will address each of these alleged injuries, beginning with the monthly fees.
Plaintiffs allege they have suffered an injury in fact because they paid and continue to pay sizable monthly fees that "have been artificially inflated due to improper charges levied by Defendants" and CC-PA's failure to maintain the necessary reserves. FAC ¶ 24. Plaintiffs identify three kinds of charges they contend are improper: (1) increased property taxes; (2) earthquake insurance premiums; and (3) marketing charges that did not solely benefit Vi's current residents.
Plaintiffs make two related arguments regarding their alleged injuries with respect to property taxes. First, Plaintiffs allege that as a result of the "illegal upstreaming" of the entity's cash reserves, "CC-PA has been assessed millions of dollars of increased property taxes," which it "indicated" it will allocate to Plaintiffs and the Class in the form of higher monthly fees. FAC ¶ 27. CC-PA is presently in the process of challenging the tax assessment with the Assessment Appeals Board. Corp. MTD at 12. If unsuccessful, Defendants would be liable for approximately $12 million in "back taxes" and an additional tax assessment of $1.9 million annually. FAC ¶ 119. Defendants have stated that they will pay the back taxes if the appeal is unsuccessful, but Plaintiffs contend that residents will nevertheless bear the ultimate responsibility for the taxes.
This argument fails in two respects. First, no increased property tax has been allocated to Plaintiffs as of yet. The fact that CC-PA indicated it may allocate them in the future is speculative at best. Moreover, Defendants have agreed to pay the amount due in back taxes if the appeal proves unsuccessful. FAC ¶ 119; Corp. MTD at 12.
And second, even if Defendants had allocated some of CC-PA's increased tax burden to residents by increasing monthly fees, this may well be permissible under the terms of the Residency Contract. According to the Contract's language, "real estate taxes, special taxes or assessments, and any other taxes [CC-PA] believes may be levied by the City of Palo Alto, County of Santa Clara, or State of California . . . will be included in the determination of [residents'] Monthly Fee." Ex. 8, Residency Contract § 2.1.15. While this does not give Defendants license to unreasonably offload self-inflicted tax obligations or penalties on residents, the Contract clearly provides for considering and including tax liabilities and assessments when determining monthly fees.
Plaintiffs further allege that as a result of the increased tax liability, CC-PA refused to credit or return surplus funds to residents, functionally increasing their monthly fees. FAC ¶ 27. Previously, monthly fees collected in excess of the operating costs of the Community would be held as part of the "Cumulative Operating Surplus" ("COS") and then credited back to residents.
The terms of the Residency Contract provide that a surplus of the community operating revenues may be retained or credited to the residents at CC-PA's discretion. See FAC Ex. 8, Residency Contract, Appendix D at 2.
Plaintiffs make no credible allegation that the Proposed Guidelines were meant to supplant the terms of the Residency Contract. But even if the Court accepted Plaintiffs' contention that the Proposed Guidelines control here, the Guidelines' language still affords discretion to withhold surplus funds when CC-PA deems necessary.
Finally, even if the Court found that the policy clearly mandated that the operating surplus be credited to residents, Plaintiffs still fail to allege an injury because they admit that Defendants reinstated the practice as of December 8, 2014. FAC ¶ 27;
Next, Plaintiffs contend that CC-PA misallocated earthquake insurance premiums to residents, leading to higher monthly fees. Plaintiffs believe that it is "wrong for CC-PA to allocate to the residents [the] costs of insuring its buildings and improvements, in which the residents have no ownership, leasehold or other interest." FAC ¶ 28. Plaintiffs admit that under section 3.3.3 the Residency Contract, monthly fees are intended to cover the operating costs of the Community, including "the costs of insurance policies." FAC ¶ 125;
Plaintiffs' argument is unpersuasive based on a plain reading of the language in the Residency Contract. The enumerated subsections that Plaintiffs contend define, and thus limit, what qualifies as "operating costs" are non-exhaustive. Section 3.3.3 explicitly states that the monthly fees are intended to "include, but are not limited to," the costs identified in the succeeding subsections. Ex. 8, § 3.3.3. Additionally, the clause that specifically refers to insurance policies provides that the "operating costs" include "property, casualty and liability insurance policies."
Aside from the Residency Contract, the Policy for Capital Expenditure Responsibility lends no additional support to Plaintiffs here. While this policy contains a list delineating certain costs as CC-PA's exclusive responsibility, the policy specifically states that the "list is intended to be illustrative and not exhaustive in providing guidance to determine whether costs of a capital nature are the responsibility of the Provider or the residents."
Based on the plain meaning of the Residency Contract, insurance premiums — specifically, premiums for property insurance — are considered part of the Community's operating costs. Pursuant to the terms of the Contract, these operating costs are included in residents' monthly fees. Plaintiffs have therefore suffered no harm in paying monthly fees that include premiums for earthquake insurance. Accordingly, there is no injury in fact.
Finally, Plaintiffs' allege that they were injured when Defendants improperly characterized certain "marketing costs" as operating costs of the Community, inflating their monthly fees. Plaintiffs' acknowledge that the Residency Contract expressly includes "marketing costs" as an operating cost of the Community to be paid by the monthly fees. FAC ¶ 128; see Ex. 8, § 3.3.3(viii). However, Plaintiffs argue that the term "marketing costs" is not defined, and in fact a significant portion of marketing expenses paid for with the monthly fees should not be considered operating costs of the Community because they were designed to benefit CC-DG. FAC ¶ 29. Plaintiffs allege that they paid "in excess of $5.5 million of marketing costs from March 2006 through 2013," some of which was allocated "to CC-DG's national marketing campaign." FAC ¶ 129. They believe that their fees should only pay for "marketing costs that are necessary to operate the Community," not corporate expenses for CC-DG "incurred solely to line Defendants' pockets with Entrance Fees that do not benefit the Community." FAC ¶ 29.
Defendants again contend that Plaintiffs position directly contradicts the terms of the Residency Contract, which provides that marking expenses are an operating cost of the Community. Corp. MTD at 14. Defendants argue that all marketing costs — including national marketing costs — relate to the operations of the Community and benefit Plaintiffs by maintaining ongoing sales and waiting list of prospective residents.
Looking again to the plain language of the Residency Contract, Plaintiffs fail to allege any valid harm. The Contract provides that "any marketing costs incurred" after certain occupancy conditions are met is an operating cost to be paid from the monthly fees. FAC at Ex. 8, § 3.3.3(viii) (emphasis added). As stated in the Court's previous ruling, although Plaintiffs may believe that these marketing costs were or should be specific to the Vi, "there are no such representations in the contract." Order Granting Defs.' Mot. to Dismiss ("Prior Order") at 12, Dkt. No. 55;
In sum, the Residency Contract signed by each Plaintiff clearly states that monthly fees will be used to pay for general operating costs — including taxes, insurance premiums, and marketing costs. Because these costs were expressly provided for by the plain language of the Contract, Plaintiffs have not alleged an injury arising from their monthly fees. Accordingly, to the extent that Plaintiffs' claims are based on a purported injury related to these fees, Plaintiffs lack standing under Article III.
Plaintiffs also contend they have suffered an injury as a result of CC-PA's failure to maintain a "refund reserve" of the entrance fees, as required by California law. They argue that "CC-PA's failure to maintain sufficient cash reserves to refund the Entrance Fees, and non-disclosure of this fact, is a direct and ongoing violation of [California] Health & Safety Code §§ 1972.6 and 1973, an impairment of Plaintiffs' security interest, and a breach of the implied reserve requirement term of the Refundable Residence Contracts and Promissory Notes." FAC ¶ 87.
Defendants respond that Plaintiffs have not suffered any injury in fact with respect to the entrance fees and therefore do not have standing to bring this action. First, Defendants maintain that the entrance fee is a "general unsecured obligation" in which Plaintiff has no cognizable security interest. Second, Defendants argue that even if residents do have a security interest in the entrance fees, there are no allegations that any resident was denied — or is presently awaiting — a refund. Corp. MTD at 6-11. And because CC-PA has always satisfied its repayment obligations pursuant to the Residency Contracts, Plaintiffs have not suffered an injury.
In an effort to establish an injury in fact and thus establish standing, Plaintiffs argue that they have a "vested security interest in the entrance fees created by statute." Opp. at 6. Although Article III's injury requirement cannot be displaced by statute, when a statute creates a legal right, the invasion of that legal right can create standing.
Here, Plaintiffs allege that the Residency Contract at issue is a "refundable contract" under California Health & Safety Code Section 1771(r)(2). FAC ¶ 18; Opp. at 7. And as a refundable contract, sections 1792.6 and 1793 require companies operating continuing care communities — such as the Vi — to maintain a cash reserve for the repayment of these contracts. FAC ¶¶ 18-19. Plaintiffs argue that "[t]his reserve requirement constitutes a security interest" for residents, that Defendants breached their obligations by failing to maintain such a reserve, and that Plaintiffs were injured as a result. FAC. ¶¶ 18-19. The elements of this argument will be addressed in turn.
The first issue is whether the Vi's Residency Contract is a "refundable contract." If it is, then Section 1792.6 would apply and CC-PA would be required to maintain a refund reserve in accordance with its statutory provisions. A refundable contract is defined as:
Cal. Health & Safety Code § 1771(r)(2).
Section 1792.6(a) of the California Health & Safety Code directs that "[a]ny provider offering a refundable contract, or other entity assuming responsibility for refundable contracts, shall maintain a refund reserve in trust for the residents." Section 1793(a) similarly states that a "provider offering a refundable contract, or other entity assuming responsibility for refundable contracts, shall maintain a refund reserve fund in trust for the residents." Section 1793(f) further requires that "[a]ll continuing care retirement communities offering refundable entrance fees that are not secured by cash reserves . . . clearly disclose this fact in all marketing materials and continuing care contracts."
Defendants argue that the Residency Contract is not a "refundable contract" under Section 1771, and therefore is not subject to the refund reserve requirements of Section 1792.6. Defendants attempt to distinguish the Vi's Residency Contract by arguing that "CC-PA's repayment obligations are primarily conditioned on resale of the unit," making the contracts "contingent on resale" contracts, as opposed to refundable contracts. Corp. MTD at 8;
The Court disagrees. According to the plain language of Residency Contract, a refund is due to the resident either fourteen days after the unit is resold, or ten years after the termination of the Contract, whichever occurs first.
The standing inquiry does not end with the determination that the Residency Contract is a refundable contract. Rather, the Court must still resolve whether Defendants' failure to comply with the California Health & Safety Codes governing refundable contracts injured Plaintiffs' legally protected right.
In order for Plaintiffs to have standing with respect to the entrance fees, a security interest must exist and Plaintiffs must have sufficiently alleged injury to that security interest. A security interest is "an interest in personal property or fixtures which secures payment or performance of an obligation." Cal. Com. Code § 1201(b)(35). For the purpose of demonstrating Article III standing, the Ninth Circuit has instructed that "a concrete risk of harm to the plaintiffs" and "a credible threat of harm" can be sufficient for injury in fact.
Here, it is not clear that Plaintiffs have established that they hold a security interest in the entrance fees or the refund reserve intended to secure such fees. However, it is unnecessary for the Court to make such a finding in this case, because even if Plaintiffs do have a security interest, they have suffered no injury to that interest. That is, even assuming that Plaintiffs' entrance fees constitute a security interest, in order to have standing, Plaintiffs' interest must have been harmed. Plaintiffs again fail to allege any such harm.
The basic premise of Plaintiffs' argument regarding their entrance fees is that because Section 1792.6 requires CCRCs like the Vi to maintain a cash reserve account, in failing to do so Defendants breached their obligations under the California Health & Safety Code.
In opposition to this Motion, Plaintiffs challenge Defendants' claim that no plaintiff has terminated a contract or is awaiting repayment. Opp. at 17. Plaintiffs respond that they "have alleged that several residents of the Care Center have, in fact, terminated their contracts (either by death or departure from the facility), and that C-PA has been unable to pay its obligations on their Entrance Fees without financing from CC-DG."
At most, these paragraphs establish that CC-PA was at times unable to afford the repayment from its individual funds. But in such instances, Plaintiffs concede that CC-DG voluntarily provided sufficient funds to cover these obligations.
The language of pertinent California Health & Safety Code provisions further makes clear that these sections were not intended to create a private right of action for residents in the event of a CCRC's non-compliance. As a general matter, the California Health & Safety Code regulates the operation of CCRCs in California. The Code further provides that these communities should be "monitored and regulated by the State Department of Social Services" (the Department" or "DSS"). § 1770(d). In the event that a community violates the regulations, the "department, in its discretion, may condition, suspend, or revoke" the CCRC's certificate of authority or licensing certificate, or subject the community to fines. § 1793.21. In relevant part, this enforcement authority is expressly applicable where a provider has, inter alia: "Failed to maintain at least the minimum statutory reserves required by Section 1792.2;" "Failed to comply with the refund reserve requirements stated in Section 1793;" "Materially changed or deviated from an approved plan of operation without the prior consent of the department;" "Failed to fulfill his or her obligations under continuing care contracts;" or "Made material misrepresentations to depositors, prospective residents, or residents of a continuing care retirement community." § 1793.21(k)(m)(r)-(t). The legislature recognized the need for regulatory oversight of CCRCs and designed such oversight authority to the DSS.
The legislature further authorized explicit mechanisms of enforcement in the event of non-compliance, specifying:
Cal. Health & Safety Code § 1793.29.
Here, the statutory violations complained of fall squarely within the express purview of the DSS. Accordingly, the DSS is the appropriate entity to assess the Vi's compliance with the relevant statutes and, if necessary, bring an action against some or all of the defendants for any violation(s) thereof. Thus, a continuing care community cannot simply flout its statutory responsibilities with abandon — evading repercussion because the individual residents cannot yet point to a direct harm. Rather, the DSS is charged with ensuring such communities comply with the statutory protections.
Only one section of the Code provides that an entity may be directly liable to an injured resident. Section 1793.5 states
Cal. Health & Safety Code § 1793.5(d). Violation of this section is a per se act of unfair competition under the UCL. Cal. Health & Safety Code § 1793.5(h). Accordingly, a private right of action does exist for residents of a CCRC, but only where the entity has abdicated its responsibilities to the community in such an egregious manner that it rises to the level of criminal liability.
Here, Plaintiffs continue to reside at the Vi and have not alleged that CC-PA or any named defendant has "abandoned" the community or contravened its contractual obligations to the community. At best, Plaintiffs' allegations suggest that Defendants may be unable to meet these obligations in the future. Thus, Plaintiffs' contentions fall far short of the severe circumstances contemplated by Section 1793.5.
Based on the foregoing, Plaintiffs fail to plead an injury to any legally protected interest. Although the Residency Contracts are refundable contracts pursuant to the California Health & Safety Code, and thus subject to the refund reserve requirements, no plaintiff has been denied a repayment to which they were entitled under the Contract. The alleged statutory violation, in and of itself, is insufficient to confer standing. Rather, the DSS is the proper entity to enforce the non-compliance with the refund reserve requirement or other provisions of the statutes governing CCRCs. Thus, to the extent that Plaintiffs' claims are based on Defendants' non-compliance with the refund reserve requirement, Plaintiffs lack standing.
For the foregoing reasons, Plaintiffs have not alleged the injury in fact necessary for standing as to either the monthly fees or the entrance fees. Plaintiffs' claims that rely on these fees as the basis for injury or damages therefore fail. Consequently, Defendants' Motions to Dismiss are GRANTED with respect to the following claims:
The Court now turns to whether Plaintiffs state a plausible claim with respect to any other cause of action. In addition to challenging Plaintiffs' claims on the basis of standing, Defendants also move to dismiss each of Plaintiffs' substantive claims for failure to state a claim upon which relief can be granted.
Plaintiffs Second Cause of Action alleges Concealment based on the failure to disclose important facts related to CC-PA's assessment of the monthly fees and management of the entrance fees.
To state a claim for concealment, a plaintiff must allege: (1) the concealment or suppression of a material fact; (2) by a defendant with a duty to disclose the fact to the plaintiff; (3) that the defendant intended to defraud the plaintiff by intentionally concealing or suppressing the fact; (4) that the plaintiff was unaware of the fact and would have acted differently if he or she had known of the concealed or suppressed fact; and (5) that the plaintiff sustained damage as a result of the concealment or suppression of the fact.
Here, Plaintiffs identify seven "facts" related to the monthly fees and the entrance fees that they contend Defendants had a fiduciary duty to disclose to them. FAC ¶¶ 203-204(a)-(g). Specifically, Plaintiffs contend that Defendants allocated improper costs to residents by way of the monthly fees, as well as concealed their intention to upstream the entrance fees and keep CC-PA "dangerously underfunded." FAC ¶ 204. With respect to the monthly fees, the Residency Contract's language directly contradicts Plaintiffs' claim of concealment. As discussed above, given the comprehensive explanation of the fee structure provided in the Contract, Plaintiffs cannot plausibly allege that Defendants failed to disclose important facts regarding the monthly fees residents would be required to pay.
With respect to the entrance fees, Plaintiffs fail to allege how they would have behaved differently had the purportedly omitted information been disclosed to them. That is, had Plaintiffs known that CC-PA would transfer a sizable portion of their entrance fees to its corporate parent, Plaintiffs do not state they would have rejected the Residency Contract or declined to reside at the Vi. Rather, Plaintiffs merely claim that they "reasonably relied on Defendants actions," which they echo with no further explanation in their Opposition. FAC ¶ 205; Opp. at 15. This is insufficient for a concealment claim.
Moreover, Plaintiffs also do not demonstrate in what way they sustained any injury as a result of not knowing the allegedly concealed facts. Instead, Plaintiffs contend that they "have been damaged because their security interest has been impaired and they have been overcharged." Opp. at 15. For the reasons discussed above with respect to standing, this fails to satisfy the damages requirement and Plaintiffs therefore have not stated a claim for concealment.
Plaintiffs Third Cause of Action alleges Defendants' negligent misrepresentation of important facts related to CC-PA and the Vi.
To state a claim for negligent misrepresentation, a plaintiff must plead: (1) the defendant misrepresented a past or existing material fact; (2) without reasonable ground for believing it to be true; (3) with intent to induce the plaintiff's reliance on the misrepresented fact; (4) the plaintiff's actual reliance on the misrepresentation; and (5) resulting damage.
Here, Plaintiffs offer two primary examples of Defendants' alleged misrepresentations.
FAC ¶ 210. Plaintiffs allege that Defendant CC-PA represented to Plaintiffs that "their Entrance Fees would be used to provide services" and that these statements are not true. FAC ¶¶ 211-212.
Defendants contend that Plaintiffs fail to allege an actual misrepresentation or reliance. Corp. MTD at 18. Defendants argue that the FAC is "devoid of any alleged facts to demonstrate (1) each plaintiff received the letter, (2) when he or she received it, (3) why the statement was untrue, (4) that they relied on the alleged misrepresentation contained therein, (5) why that reliance was reasonable, and (6) that each individual plaintiff would not have entered the community but for the alleged misrepresentation."
The Court agrees with Defendants because Plaintiffs have not plausibly alleged that the identified statements are false. As to the marketing brochure, Plaintiff does not allege that the DSS does not monitor and regulate CCRCs or that CC-PA somehow marketed itself as being subject to this monitoring when it in fact is not. To the contrary, as Plaintiffs own statements indicate, the DSS expressly engaged CC-PA in the course of monitoring the Vi and its financials.
Moreover, as was the case with respect to the concealment claim, Plaintiffs have failed to allege actual reliance or damages. There are no particular allegations as to what Plaintiffs actually relied on in these statements or how Plaintiffs would have acted differently but for the misrepresentation. As Defendants point out, four of the six plaintiffs entered the community before the October Letter was even published in 2008.
Plaintiffs' Fifth Cause of Action alleges violations of the CLRA, which prohibits "unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer." Cal. Civ. Code § 1770(a);
Under California Civil Code Section 1780(a), "CLRA actions may be brought by a consumer `who suffers any damage as a result of the use or employment' of a proscribed method, ct, or practice."
Here, Plaintiffs' CLRA claim seems to rely on the same information set forth in connection with their negligent misrepresentation cause of action. Plaintiffs allege that Defendants' "practices in connection with the marketing and sales of CCRC residential and financial management services . . . violate the CLRA" by knowingly misrepresenting and falsely advertising the character and quality of the services offered. FAC ¶ 234; Cal. Civ. Code § 1770(a)(5), (7), (9), (14).
These allegations lack the particularity required by Rule 9(b) and fail to state a CLRA claim. Plaintiffs do not contend that the quality of services they were promised were materially different from what they ultimately received at the Vi.
In addition to claims for damages and injunctive relief, Plaintiffs also request "a declaration of the rights and responsibilities of the parties" with respect to the California Health & Safety Code and the Delaware Corporations Code. FAC ¶ 200(a)-(g).
A complaint for declaratory relief is legally sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties and requests that these rights and duties be adjudged by the court. Cal. Code Civ. Proc. § 1060;
However, a claim for declaratory relief "may be refused in the discretion of the trial court if it appears that the determination is not necessary or proper at the time and under all the circumstances."
Here, Plaintiffs argue that "only an order of declaratory relief will prevent Defendants from relying on the same legal misinterpretations and therefore engaging in the same illegal conduct in the future." Opp. at 33. Defendants contend that this claim should be dismissed because there is no actual controversy and, even if there were, resolution of the other claims clarifies the legal relationships at issue. Corp. MTD at 26.
The Court agrees that Plaintiffs' claim for declaratory relief should be dismissed for three reasons. First, because Plaintiffs do not have standing for claims underlying the alleged "illegal conduct," there is no controversy relating to the "legal rights and duties of the respective parties." Cal. Code Civ. Proc. § 1060. That is, given that Plaintiffs have not alleged a legal protected interest or right, there is no controversy relating to their legal rights. At most, Plaintiffs allege a controversy over the legal duties of Defendants under laws that do not provide a private right of action, which is insufficient.
Second, to the extent that a justiciable controversy existed, the Court's earlier finding that the Residency Contract is a refundable contract under California law clarifies any ambiguity as to Defendants statutory obligations, rendering this claim unnecessary and duplicative.
Third and finally, even if Plaintiffs alleged a more concrete controversy regarding the rights and duties of Defendants, the Court may nonetheless exercise its discretion to dismiss this claim on the grounds that that such a determination by this Court is "not necessary or proper at the time and under all the circumstances."
Accordingly, Plaintiffs' Tenth Cause of Action for a declaratory judgement is dismissed.
Plaintiffs' Eleventh, Twelfth, Thirteenth, Fourteenth and Fifteenth causes of action assert derivative claims on behalf of CC-PA against the Director Defendants and/or Defendant CC-GD.
There is no dispute between the parties that under controlling law, "equitable considerations give creditors of a corporation standing to pursue derivative claims, but only if the company is insolvent." Opp. to Director MTD at 8; Director MTD at 2-3;
A plaintiff may plead insolvency by either showing "(1) a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the face thereof, or (2) an inability to meet maturing obligations as they fall due in the ordinary course of business."
Citing a 2012 actuarial study commissioned by Defendant CRMLP, Plaintiffs here contend that CC-PA has "liabilities far in excess of assets and that CC-PA's expected income stream will not cover liabilities." Opp. to Director MTD at 12. Plaintiffs rely on
Defendants respond that Plaintiffs fail to plead insolvency because Plaintiffs' own documents demonstrate that CC-PA has a positive cash flow and is otherwise financially stable. Director Reply at 8 (referencing FAC, Ex. 2 at 4 and Ex. 5 at 1-2). Defendants distinguish
The Court agrees with Defendants. Neither the DSS letter nor the actuarial study make specific finding as to insolvency. Rather, upon review of the actuarial study, the DSS frames the issue as "whether CC-PA's distributions of cash to its non-provider parent have weakened CC-PA's financial position so that it is (or the Department may have reason to believe that it is) insolvent, is in imminent danger of becoming insolvent, is in a financially unsound or unsafe condition, or that its condition is such that it may otherwise be unable to fully perform its obligations pursuant to continuing case contracts." Opp. to Director MTD at 12. This letter suggests that DSS has concerns about CC-PA's present financial circumstances, but an expression of concern does not rise of the level of establishing insolvency. If anything, the letter may show that DSS oversight is functioning as intended under the California Health & Safety Code — that DSS is taking seriously its responsibility to monitor CCRC financial reports and making efforts to address potential issues before irreparable harm, such as insolvency, occurs.
Moreover, as previously discussed at length, Plaintiffs have not alleged that any entrance fee loan is presently due to any resident under the Contract. Rather, all named plaintiffs currently live at the Vi and no plaintiff has terminated his or her Contract at the time of this action. Thus, there is no plausible suggestion that CC-PA is incapable of meetings its current financial obligations. With respect to future obligations, the facts alleged indicate CC-PA's business model provides for multiple potential sources of funding through which CC-PA may reasonably be able to satisfy prospective debts that come due. Consequently, even under the most generous reading of the FAC, Plaintiffs' allegations fail to demonstrate that CC-PA has "no reasonable prospect" of continuing in the face of its present asset deficiency, or that it has "an inability to meet maturing obligations as they fall due in the ordinary course of business."
Without alleged facts to establish insolvency, Plaintiffs lack standing to bring a derivative suit as creditors of CC-PA and the Eleventh, Twelfth, Thirteenth, Fourteenth and Fifteenth causes of action must be dismissed.
For the foregoing reasons, Defendants' Motions to Dismiss are GRANTED as follows:
1. The claims for (1) Financial Abuse of Elders; (2) Concealment; (3) Negligent Misrepresentation; (4) Breach of Fiduciary Duty and Constructive Trust; (5) violation of the CLRA; (6) violation of the UCL seeking restitution and discouragement; (7) violation of the UCL injunctive relief; and (8) Breach of Contract are DISMISSED WITHOUT LEAVE TO AMEND. At this point, allowing for further amendment would be futile because Plaintiffs have failed to establish standing in either of their pleadings.
2. Similarly, because they rely on the same alleged injuries that do not to confer standing with respect to the above claims, the claims for (9) Breach of the Implied Covenant of Good Faith and Fair Dealing and (10) declaratory relief are also DISMISSED WITHOUT LEAVE TO AMEND because allowing for the amendment would be futile.
3. The newly-asserted claims for (11) Creditor Claim for Breach of Fiduciary Duties Against the Director Defendants; (12) Creditor Claim for Breach of Fiduciary Duties or in the alternative Aiding and Abetting the Director Defendants' Breach of Fiduciary Duties; (13) Payment of Unlawful Dividends; (14) Fraudulent Transfer of Assets; and (15) Corporate Waste are DISMISSED WITH LEAVE TO AMEND.
Any amended complaint must be on or before
Plaintiffs are advised that, although leave to amend has been permitted with respect to these claims, Plaintiffs may not add new claims or new parties to this action without first obtaining Defendants' consent or leave of Court pursuant to Federal Rule of Civil Procedure 15. Plaintiffs are further advised that failure to timely file an amended complaint or failure to amend the complaint in a manner consistent with this Order may result in the dismissal of this action without further leave to amend.
On previous versions of the Residency Contract, the non-occupancy provision was for twenty five years, instead of ten.
Paragraph 74 specifies the facilities located at the Vi.
Paragraph 97 (and 98) allege that based on the Stanford Ground Lease (the property on which Vi sits), the ability to require new entrance fees will gradually reduce over time, therefore limiting the ability to raise the necessary funds to issue repayments to earlier residents. Again, however, this involves a potential for future harm and is neither imminent nor certain.
Paragraph 102 contends that from 2005-1013, CC-PA "has had insufficient funds" to repay residents, and "its obligations to such residents have matured upon death or departure." However, this same paragraph admits that CC-DG advanced the funds necessary to cover these obligations.
Paragraph 105 alleges that "CC-PA's distribution of its liquid assets to CC-DG . . . (d) have caused CC-PA to be unable to pay its obligations to Care Center residents as they matured without financial assistance from CC-DG." However, this allegation is not only conclusory, but implies that with the assistance from CC-DG, residents could indeed receive the refunds owed to them.
Paragraph 116 addresses the Vi's physical property and the allegedly increased tax liability assessed to CC-PA.
