Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_06-cv-00428/USCOURTS-azd-2_06-cv-00428-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Apache Oxy-Med, Inc., and Creative

Health Care Services, Inc.,

Plaintiffs, 

vs.

Humana Health Plan, Inc., 

Defendant. 

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No. CV 06-0428-PHX-MHM

ORDER

Currently before the Court is Defendant Humana Health Plan, Inc.'s ("Defendant" or

"Humana") Rule 12(b)(6) Motion to Dismiss. (Dkt.#7). After reviewing the pleadings and

finding oral argument to be unnecessary the Court issues the following Order. 

I. Procedural History

On December 19, 2005, Plaintiffs Apache Oxy-Med, Inc. ("Apache"), and Creative Health

Services, Inc. ("Creative"), (collectively "Plaintiffs") filed their Complaint in Maricopa

County Superior Court asserting claims of: (1) breach of contract; (2) fraud; and (3) tortious

breach of contract. On February 9, 2006, Defendant removed this case to the District of

Arizona based upon diversity jurisdiction pursuant to 28 U.S.C. § 1332. (Dkt.#1). On

February 15, 2006, Defendant filed its Answer to Plaintiffs' Complaint. (Dkt.#6). On March

3, 2006, Defendant filed the instant Motion to dismiss pursuant to Rule 12(b)(6) of the

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Federal Rules of Civil Procedure. (Dkt.#7). On March 29, 2006, the case was reassigned to

this Court. (Dkt.#5).

II. Allegations of Plaintiffs' Complaint

Plaintiffs allege that on or about December 22, 2000, Apache and Humana entered into

a three year "Ancillary Provider Agreement" whereby Apache provided certain "Durable

Medical Equipment" benefits to "Members" serviced by Humana under both fee for service

and a capitated rate depending on the coverage by the Member. (Complaint ¶ 5). Plaintiffs

also allege that Creative and Humana on or about November 3, 2000, entered into a three

year "Home Health Provider" whereby Creative provided certain services to "Members"

serviced by Humana under both fee for service and capitated rate. (Id. ¶6). Plaintiffs state

that these agreements continued until they were terminated until June 1, 2004. (Id. ¶¶5,6).

 Plaintiffs state that Defendant withheld sums due to Plaintiffs and delayed payment beyond

the provisions as stated in the contracts and used the delays in payment to force concessions.

(Id. ¶10). In addition, Plaintiffs allege that Defendant used its position to force Plaintiffs to

accept less than the contracted amounts. (Id. ¶11). Plaintiffs also allege that on many

occasions the representations of Defendant were "knowingly false" regarding the number of

"Members" covered under the capitated rates and which "Members" were subject to coverage

under fee for service. (Id. ¶22). Plaintiffs seek monetary and punitive damages. 

III. Motion to Dismiss under Rule 12(b)(6) Converted to Rule 12(c) Motion

Although not addressed by the Parties, it is apparent to the Court that Defendant's Rule

12(b)(6) motion should be converted into a Rule 12(c) Motion. A motion to dismiss for

failure to state a claim may be denied as untimely or may be treated as a motion for judgment

on the pleadings if the motion is filed after the filing of an answer. Beery v. Hitachi Home

Electronics, Inc., 157 F.R.D. 477, 479 (C.D. Cal. 1993) (citing Aetna Life Ins. Co. v. Alla

Medical Services, Inc., 855 F.2d 1470, 1474(9th Cir. 1988); Aldabe v. Aldabe, 616 F.2d

1089, 1093 (9th Cir. 1980). Here, Defendant filed its Answer to Plaintiffs' Complaint on

February 15, 2006 (Dkt.#6) and subsequently filed its instant Motion to dismiss on March

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3, 2006. (Dkt.#7). As such, the Court will convert Defendant's Motion to dismiss into a

motion for judgment on the pleadings pursuant to Rule 12(c) Fed.R.Civ.P.

Rule 12(c) of the Federal Rules of Civil Procedure provides that "[a]fter the pleadings are

closed but within such time as not to delay the trial, any party may move for judgment on the

pleadings. "Judgment on the pleadings is proper, when, taking all of the allegations in the

pleadings as true, the moving party is entitled to judgment as a matter of law." Honey v.

Distelrath, 195 F.3d 531, 532-33 (9th Cir. 1999). 

IV. Analysis 

A. Breach of Contract Claim

Humana argues that Plaintiffs' breach of contract and other claims should be dismissed

because they are precluded by certain settlement agreements entered into between the Parties.

Specifically, Defendant relies upon and offers as extrinsic evidence the affidavit of Anita

Thompson and several purported agreements between Plaintiffs and Defendant; i.e., the 2003

Agreement; the 2004 Agreement; and the 2005 Agreement. To consider such documents

outside the pleadings, the Court would be obligated to convert the Rule 12(c) motion into a

motion for summary judgment. See Rule 12(c) Fed.R.Civ.P. (stating that "[i]f, on a motion

for judgment on the pleadings, matters outside the pleadings are presented to and not

excluded by the court, the motion shall be treated as one for summary judgment and disposed

of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all

material pertinent to such a motion by Rule 56."). As contemplated in Rule 12(c), the fact

that matters outside the pleadings are presented does not require conversion. Advanced

Cardiovascular Systems, Inc., v. SciMed Life Systems, Inc., 989 F. Supp. 1237, 1242 (N.D.

Cal. 1997). Rather, the Court must affirmatively rely on such extraneous documents for

conversion to be proper. 

In the instant case, Humana requests that the Court convert the motion with respect to

Plaintiffs' breach of contract claim into a motion for summary judgment with notice so that

Plaintiffs can submit any additional materials to controvert Defendant's argument regarding

that claim. In response, Plaintiffs state that should the Court convert the motion, Plaintiffs

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request notice so they can submit affidavits and file a motion to conduct discovery on this

issue. 

The Court, in the exercise of its discretion, will not convert the Rule 12(c) motion to a

motion for summary judgment and will rely only on the allegations of the Complaint in

determining whether to grant Defendant's motion. This case is in the early stages of litigation

and no formal discovery has been performed to date. The Court finds that the better and

more efficient practice, assuming Plaintiffs' breach of contract claim survives a Rule 12(c)

inquiry, is to conduct a Rule 16 hearing and set formal discovery deadlines so that the issues

surrounding Plaintiffs' breach of contract claim can be adequately discovered and submitted

for consideration upon summary judgment, should Defendant deem such a motion

appropriate. Thus, the Court will look only to the allegations in the Complaint and will not

consider the extraneous documents. See Klingele v. Eikenberry, 849 F.2d 409, 412 (9th Cir.

1988) (stating that Ninth Circuit disfavors summary judgment where relevant evidence

remains to be discovered) (citation omitted). 

In reviewing Plaintiffs' breach of contract claim under Rule 12(c) analysis, the Court finds

that it sufficiently states a claim and survives Rule 12(c) scrutiny. For instance, Plaintiffs

allege that "[Defendant] withheld sums due to Apache and/or Creative and otherwise delayed

payment beyond the payment provisions as stated in the contracts and used the delays in

payment to force concessions that were contrary to the agreement." (Compl. ¶10). Moreover,

Plaintiffs allege that "...[Defendant] intentionally or erroneously reported certain members

as covered under the capitated rate and failed and refused to pay for them under the fee for

services portion of the contract." (Id. ¶17). Such allegations adequately allege a breach of

contract claim; thus, Defendant's Rule 12(c) Motion will be denied as to Plaintiffs' breach of

contract claim. 

B. Fraud Claim

Humana also challenges the sufficiency of the allegations of Plaintiffs' fraud claim under

Rule 9(b) of the Federal Rules of Civil Procedure. As a general matter, a complaint need

only contain a "short and plain statement of the claim showing that the pleader is entitled to

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relief." Rule 8(a)(2) Fed.R.Civ.P. However, Rule 9(b) provides that "[i]n all averments of

fraud or mistake, the circumstances constituting fraud or mistake shall be stated with

particularity..." Thus, a plaintiff alleging fraud must set forth the circumstances indicating

the falseness of the statements, including the time, place, and content of the allegedly

fraudulent representation or omission, as well as the identity of the person allegedly

perpetrating fraud. Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401

(9th Cir. 1986); In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1547-48 (9th Cir.

1994) "Mere conclusory allegations of fraud are insufficient." Moore v. Kayport Package

Express, 885 F.2d 531, 540 (9th Cir. 1989). 

In reviewing the Complaint, there are several allegations that implicate a claim of fraud.

For instance, Plaintiffs allege that "[u]pon information and belief, the number of Members

reported to Apache and/or Creative under the capitated rate was knowingly reported

incorrectly to Apache and/or Creative." (Compl.¶12). Plaintiffs further allege that "[o]n

many occasions the representations of [Defendant] regarding the number of Members

covered by the contract under the capitated rate and the coverage classification of fee per

service or coverage under the capitated rate were false." (Id.¶19). Lastly, Plaintiffs allege

that "[o]n many occasions the representations of [Defendant] were knowingly false and

Plaintiffs were ignorant of the falsity of the representations regarding the number covered

under the capitation rates to which Members were covered under fee for service." (Id.¶21).

In response to Defendant's reliance on Rule 9(b) Fed.R.Civ.P., Plaintiffs offer several

reasons justifying the allegations supporting fraud. First, Plaintiffs state that Defendant was

adequately informed of the claim of fraud by the allegations of the Complaint. Second,

Plaintiffs state that they were prohibited by privacy regulations from disclosing certain

relevant information. Third, Plaintiffs state that although much of the evidence necessary

to prove fraud lies with Defendant, they have a representative sample that will not be

disclosed until the exchange of disclosure statements because of further privacy concerns.

Finally, Plaintiffs state that should the Court direct them to do so, they will submit an

amended complaint detailing sufficient allegations supporting the fraud claim

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In light of the heightened pleading requirement governing Rule 9(b), the Court finds that

Plaintiffs' allegations of fraud are insufficient. Most notably, Plaintiffs fail to provide

sufficient information addressing the relevant issues governing a claim for fraud, such as the

time, place, and content of the allegedly fraudulent representation or omission, as well as the

identity of the person allegedly perpetrating fraud. In re GlenFed, 42 F.3d at 1547-48.

Rather, the allegations of Plaintiffs' Complaint appear to be wholly conclusory in nature.

See Moore 885 F.2d at 540. First, there is no description of the "time" element governing

the alleged fraudulent conduct. Plaintiffs' allegations of fraud state only that such conduct

occurred on "[o]n many occasions." (Compl.¶¶19,21). Such a broad reference is not

sufficient. Second, the "place" element of the alleged fraudulent conduct is overly vague and

does not inform Defendant of where such conduct took place. Third, the description of the

fraudulent conduct is deficient. For instance, in paragraph 21 of the Complaint, Plaintiffs

allege that "Plaintiffs were ignorant of the falsity of the representations regarding the number

covered under the capitation rates and which Members were covered under fee for service."

Plaintiffs refer only generally to the nature of the alleged false representation and do not meet

the requisite degree of particularity to assert such a claim. Lastly, Plaintiffs' Complaint is

vague as to who made the alleged fraudulent statement. As noted by Defendant, Plaintiffs

allege only that Defendant Humana made certain representations that were "knowingly

false." (Compl.¶21). Such a general reference to the Defendant entity rather than the speaker

him or herself is not sufficient pursuant to Rule 9(b). See Arnold & Associates, Inc., v.

Misys Healthcare, 275 F. Supp.2d 1013, 1028-29 (D.Ariz. 2003) (finding that plaintiff's

general allegations that the healthcare provider made fraudulent statements was insufficient

to adequately plead under Rule (9)(b) where plaintiff failed to identify the individual

speakers). 

In light of the above described deficiencies surrounding Plaintiffs' claim for fraud, the

Court will grant Defendant's Rule 12(c) motion as Plaintiffs have failed to plead fraud with

particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. 

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The Court must determine the future handling of Plaintiffs' claim of fraud. See Longberg

v. City of Riverside, 300 F. Supp.2d 942, 945 (C.D. Cal. 2004) (stating that although Rule

12(c) does not mention leave to amend, courts have discretion both to grant a Rule 12(c)

motion with leave to amend and to simply grant dismissal instead of entry of judgment.). 

Plaintiffs have requested leave to amend in their Response brief. Pursuant to Rule 15(a) of

the Federal Rules of Civil Procedure leave to amend shall be granted freely when justice so

requires. The Court considers four factors when determining whether a party will be

permitted leave to amend: (1) undue delay; (2) bad faith or dilatory motive; (3) futility of

amendment and (4) prejudice to the opposing party. In re Circuit Breaker Litigation, 175

F.R.D. 547, 550 (C.D. Cal. 1997) (citing Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227 (1962).

Here, the basis cited by Defendant in opposition to leave to amend is futility. Futility of

amendment is shown were plaintiff can prove no set of facts which would constitute a valid

claim. Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988). Defendant argues

that futility is evidenced by the fact that Plaintiffs have failed to fill in the particulars of its

claim of fraud even with the opportunity to do so with their Response to the Motion to

dismiss. 

In reviewing the pleadings presented and the original complaint, this Court finds that

granting Plaintiffs leave to amend to assert their claim of fraud in compliance with Rule 9(b)

is appropriate. For example, Plaintiffs relate that they have withheld relevant information

to their claim of fraud because of privacy considerations, but will disclose such relevant

information in any amended pleading if directed to do so. See 45 C.F.R. § 164.512(e)(1)(i)

(stating that "covered entity may disclose protected health information in the course of any

judicial or administrative proceeding in response to an order of the court ..."). Although it

is unclear whether any of this withheld information will be sufficient to remedy the defects

described above, the Court finds that at this stage of the litigation, leave to amend is

appropriate, especially in light of the fact no resulting prejudice has been identified by

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Plaintiffs should take note that should they file any amended pleading, the Court

seeks only information that is relevant to Plaintiffs' fraud claim. Additionally, Plaintiffs

should consider means to protect any sensitive information such as filing any amended

pleading under seal. 

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Defendant.1

 Moreover, the Court cannot say at this time that there are no set of facts that

could establish a claim of fraud. Miller, 845 F.2d at 214.

C. Tortious Breach of Contract Claim

Defendant also challenges the validity of Plaintiffs' claim for tortious breach of contract.

Specifically, Defendant argues that because the requisite "special relationship" does not exist

between Plaintiffs and Defendant, Plaintiffs' claim fails as a matter of law.

In Arizona, every contract contains an implied covenant of good faith and fair dealing.

Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 383, 710 P.2d 1025 (Ariz.

1985). The essence of the covenant "is that neither party will act to impair the right of the

other to receive the benefits which flow from their agreement or contractual relationship."

Rawlings v. Apocada, 151 Ariz. 149, 153-54, 726 P.2d 565 (1986). "A party may bring an

action in tort claiming damages for breach of the implied covenant of good faith, but only

where there is a 'special relationship between the parties arising from elements of public

interest, adhesion, and fiduciary responsibility.'" Wells Fargo Bank v. Arizona Laborers,

Teamsters and Cement Masons Local No. 395 Pension Trust, 201 Ariz. 474, 491, 38 P.2d

12 (Ariz. 2002) (quoting Burkons v. Ticor Title Ins. Co. of California, 168 Ariz. 345, 813

P.2d 710 (Ariz. 1991). Among the special relationships in which such tort damages may be

available "are those undertaken for something more than or other than commercial advantage,

such as the procurement of service, professional help, security or other intangibles."

Burkons, 168 Ariz. 345, 355 (Ariz. 1991) (citing Rawlings, 151 Ariz. at 159)). 

Based upon the allegations of the Complaint, the Court finds that Plaintiffs have

sufficiently alleged a claim for tortious breach of contract; most notably the requisite "special

relationship" existing between the Plaintiffs and Defendant. At this stage of the proceedings,

there are sufficient allegations suggesting the existence of a fiduciary relationship between

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Plaintiffs and Defendant. As noted by Plaintiffs, "[a] fiduciary relationship is a confidential

relationship whose attributes include 'great intimacy, disclosure of secrets, [or] intrusting of

power.'" Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 24, 945 P.2d 317, 335

(Ariz.App. 1997) (citing Rhoads v. Harvey Publications, Inc., 145 Ariz. 142, 700 P.2d 840

(Ariz.App. 1984). Moreover, in a fiduciary relationship, "the fiduciary holds 'superiority of

position' over the beneficiary.'" Id. Finally, this determination of a fiduciary relationship is

generally a question of fact. Eagerton v. Fleming, 145 Ariz. 289, 292, 700 P.2d 1389

(Ariz.App. 1985). In the instant case, in taking the allegations of Plaintiffs' Complaint as

true, it is possible that the requisite fiduciary relationship exists between the Plaintiffs and

Defendant based upon the alleged unequal bargaining power in the relationship as well as the

Defendant's access and alleged withholding of certain information that was crucial to the

agreement between the parties. For instance, Plaintiffs broadly allege that on many occasions

Defendant made false representations regarding the number of "Members" covered pursuant

to the Parties' agreement to the detriment of Plaintiffs. (Compl. ¶19). More importantly,

according to Plaintiffs, Plaintiffs were ignorant of these misrepresentations which damaged

Plaintiffs and Defendant expected Plaintiffs to rely on this information. (Compl. ¶¶21-23).

Finally, Plaintiffs allege that Defendant was in the superior position to know the accuracy

of the information that it was conveying to Plaintiffs and that Defendant possessed "a

superior bargaining position" with respect to payments made pursuant to the contracts.

(Compl.¶¶30-31). Based upon these allegations, the Court finds that the requisite "special

relationship" to support a claim for tortious breach of contract exists. However, this issue

may be more fully developed during discovery and if appropriate, Defendant may reurge

dismissal of this claim upon summary judgment based upon the discovered facts regarding

the relationship between the Parties. 

Accordingly,

IT IS HEREBY ORDERED converting Defendant's Motion to Dismiss pursuant to Rule

12(b)(6) to a Motion for Judgment on the Pleadings pursuant to Rule 12(c) of the Federal

Rules of Civil Procedure. (Dkt.#7). 

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IT IS FURTHER ORDERED granting in part and denying in part Defendant's Motion

for Judgment on the Pleadings. (Dkt.#7). Defendant's Motion is granted to the extent that

Plaintiffs' claim of fraud is dismissed with leave to amend. Defendant's Motion is denied

with respect to Plaintiffs' claims of breach of contract and tortious breach of contract. 

IT IS FURTHER ORDERED directing Plaintiffs to file any amended pleading

addressing the defects of their fraud claim within 20 days of the date this Order is filed. 

Should Plaintiffs choose not file any amended pleading, this matter will be set for a Rule 16

Scheduling Conference as Defendant has filed its Answer to Plaintiffs' current Complaint.

DATED this 24th day of November, 2006.

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