Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-07021/USCOURTS-cand-4_06-cv-07021-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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United States District Court

For the Northern District of California

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Docket No. 8.

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Docket No. 37.

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Docket No. 41.

United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

REGINA MONACO,

 Plaintiff,

 v.

LIBERTY LIFE ASSURANCE CO,

Defendant. /

No. C06-07021 MJJ

ORDER GRANTING DEFENDANTS’

MOTION TO DISMISS; GRANTING

PLAINTIFF’S MOTION TO AMEND;

AND DENYING DEFENDANTS’

MOTION TO STRIKE

INTRODUCTION

Before the Court is Defendant Liberty Life Assurance Company of Boston (“Liberty Life”)

and Defendant Liberty Mutual Insurance Company’s (“Liberty Mutual”) (collectively,

“Defendants”) Motion to Dismiss Liberty Mutual from this action.1

 Plaintiff Regina Monaco

(“Plaintiff” or “Monaco”) opposes the motion and alternatively moves for leave to file an Amended

Complaint.2

 Also before the Court is Defendants’ Motion to Strike Plaintiff’s Request for Judicial

Notice.3

 For the following reasons, the Court GRANTS Defendants’ Motion to Dismiss; the Court

GRANTS Plaintiff’s Motion to Amend; and the Court DENIES Defendants’ Motion to Strike

Plaintiff’s Request for Judicial Notice as moot.

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According to Plaintiff, Liberty Life is a wholly owned subsidiary of Liberty Mutual. (Id. at ¶ 4.) Liberty Life’s

operations, including its claims operation, was controlled and managed by Liberty Mutual. (Id.) 

2

FACTUAL BACKGROUND

This action arises from the alleged wrongful denial of disability benefits to which Plaintiff

claims she is entitled under a group disability income policy. On October 4, 2006, Plaintiff filed the

Complaint in the Superior Court for the State of California for the County of Alameda. On

November 9, 2006, Defendants removed the action to this Court. The material allegations taken

from Plaintiff’s Complaint are as follows.

Plaintiff was employed at the University of California Lawrence Livermore Laboratories

(“Lawrence Livermore”) and later employed at the University of California at Santa Cruz (“U.C.

Santa Cruz”), during which time Plaintiff was eligible for short and long-term disability benefits

under a Group Disability Income Policy (“the Policy”) issued by Defendants. (Complaint

(“Compl.”) at ¶¶ 9-11.) While employed at Lawrence Livermore, Plaintiff sustained an injury for

which she claimed disability benefits under the Policy. (Id. at ¶ 13.) Defendants4

 wrongfully denied

Plaintiff’s initial claim for benefits, and subsequently denied Plaintiff’s appeal. (Id. at ¶¶ 16-17.) 

Plaintiff later submitted a second claim for disability benefits to Defendants under the Policy. 

(Id. at ¶¶ 18-20.) Plaintiff’s second claim arose from a “new and different injury” sustained while

employed at U.C. Santa Cruz. (Id. at ¶ 18.) Plaintiff alleges that Defendants wrongfully denied her

second claim for benefits, and subsequently denied her appeal. (Id. at ¶¶ 20-23.) 

Plaintiff asserts four causes of action against Liberty Life and Liberty Mutual. Plaintiff’s

first and second causes of action are against both Defendants for breach of contract and breach of the

implied covenant of good faith and fair dealing arising from Plaintiff’s initial claim for benefits for

her injury sustained at Lawrence Livermore. (Id. at ¶¶ 24-34.) Plaintiff’s third and fourth causes of

action are against both Defendants for breach of contract and breach of the implied covenant of good

faith and fair dealing arising from Plaintiff’s second claim for benefits for her injury sustained at

U.C. Santa Cruz. (Id. at ¶¶ 35-44.) 

Defendants now move to dismiss each of Plaintiff’s causes of action against Liberty Mutual.

 

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LEGAL STANDARD

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal

sufficiency of a claim. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Because the focus of a

12(b)(6) motion is on the legal sufficiency, rather than the substantive merits of a claim, the Court

ordinarily limits its review to the face of the complaint. See Van Buskirk v. Cable News Network,

Inc., 284 F.3d 977, 980 (9th Cir. 2002). Generally, dismissal is proper only when the plaintiff has

failed to assert a cognizable legal theory or failed to allege sufficient facts under a cognizable legal

theory. See SmileCare Dental Group v. Delta Dental Plan of Cal., Inc., 88 F.3d 780, 782 (9th Cir.

1996); Balisteri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988); Robertson v. Dean

Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984). Further, dismissal is appropriate only if it

appears beyond a doubt that the plaintiff can prove no set of facts in support of a claim. See

Abramson v. Brownstein, 897 F.2d 389, 391 (9th Cir. 1990). In considering a Rule 12(b)(6) motion,

the Court accepts the plaintiff’s material allegations in the complaint as true and construes them in

the light most favorable to the plaintiff. See Shwarz v. United States, 234 F.3d 428, 435 (9th Cir.

2000). However, “[t]he court need not accept as true conclusionary allegations or legal

characterizations. Nor need it accept unreasonable inferences or unwarranted deductions of fact.” 

Hon. William W. Schwarzer, et al., California Practice Guide: Federal Civil Procedure Before Trial

§ 9:221 (2006) (citations omitted); see also Halkin v. VeriFone Inc., 11 F.3d 865, 868 (9th Cir.

1993) (stating “[c]onclusory allegations of law and unwarranted inferences are insufficient to defeat

a motion to dismiss for failure to state a claim.”) 

In the context of a motion to dismiss, when matters outside the pleading are presented to and

accepted by the court, the motion to dismiss is converted into one for summary judgment. However,

matters properly presented to the court, such as those attached to the complaint and incorporated

within its allegations, may be considered as part of the motion to dismiss. See Hal Roach Studios,

Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1989). Where a plaintiff fails to

attach to the complaint documents referred to therein, and upon which the complaint is premised, a

defendant may attach to the motion to dismiss such documents in order to show that they do not

support the plaintiff’s claim. See Pacific Gateway Exchange, 169 F. Supp. 2d 1160, 1164 (N.D.

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Plaintiff also alternatively requests additional time to conduct discovery regarding the relationship between Liberty

Life and Liberty Mutual. Plaintiff claims that given the early stage of this litigation, the parties have not yet engaged in any

formal discovery. 

4

Cal. 2001); Branch v. Tunnell, 14 F.3d 449, 44 (9th Cir. 1994) (overruled on other grounds). Thus,

the district court may consider the full texts of documents that the complaint only quotes in part. See

In re Stay Electronics Sec. Lit., 89 F.3d 1399, 1405 n.4 (1996), cert denied, 520 U.S. 1103 (1997). 

This rule precludes plaintiffs “from surviving a Rule 12(b)(6) motion by deliberately omitting

references to documents upon which their claims are based.” Parrino v. FHP, Inc., 146 F.3d 699,

705 (9th Cir. 1998). 

Motions to dismiss for failure to state a claim are generally disfavored. See Gilligan v.

Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997); United States v. City of Redwood City, 640

F.2d 963, 966 (9th Cir. 1981). In dismissing for failure to state a claim, “a district court should grant

leave to amend even if no request to amend the pleadings was made, unless it determines that the

pleading could not possibly be cured by the allegation of other facts.” Doe v. United States, 58 F.3d

494, 497 (9th Cir. 1995) (citations omitted).

ANALYSIS

Defendants first argue that Plaintiff’s causes of action against Liberty Mutual must be

dismissed because Liberty Mutual is not a party to the insurance contract at issue. Next, Defendants

contend that each of Plaintiff’s alternative theories of liability against Liberty Mutual also fail. 

Plaintiff responds that Liberty Mutual is liable even though it is not a party to the insurance contract. 

Plaintiff further insists there is a unity of interests between Liberty Mutual and Liberty Life to

support liability against Liberty Mutual under alter-ego, joint venture, partnership, and/or agency

theories of liability. Plaintiff avers that if the Court does not allow her to proceed against Liberty

Mutual then it would defeat her ability to recover her full amount of potential damages.5

Alternatively, Plaintiff requests leave to file an Amended Complaint. The Court now turns to the

allegations against Liberty Mutual as contained in Plaintiff’s operative Complaint. 

 I. Liberty Mutual is Not a Party to the Contract

Defendants’ first argument is that Plaintiff is unable to state a cause of action against Liberty

Mutual because Liberty Mutual is not a party to the insurance contract. Defendants argue that the

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Because this case was removed to federal court on the basis of diversity jurisdiction, California law governs the

substantive issues of the case. Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1163 (9thCir. 1995) (citing Intel Corp. v. Hartford

Acc. & Indem. Co., 952 F.2d 1551, 1556 (9th Cir. 1991)). 

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contract at issue is between Liberty Life and the University of California, therefore Liberty Mutual

cannot be liable because it was not a consenting party, and because it owed no legal duty to Plaintiff. 

In opposition, Plaintiff asserts that an insured may state a cause of action against an insured’s parent

company even though the parent company was not a contracting party.

An insurer is said to act in “bad faith” when it not only breaches its policy contract but also

breaches its duty to deal “fairly” and “in good faith” with its insured. Generally, “[c]ontract law

exists to enforce legally binding agreements,” whereas “tort law is designed to vindicate social

policy,” and thus “[c]onduct amounting to a breach of contract becomes tortious only when it also

violates an independent duty arising from principles of tort law.” Applied Equipment Corp. v. Litton

Saudi Arabia Ltd., 7 Cal.4th 503, 514, 515 (1994).6

 However, an exception to these general

principles “has developed in the context of insurance contracts,” and “for a variety of policy reasons,

courts have held that breach of the implied covenant [of good faith and fair dealing] will provide the

basis for an action in tort.” Foley v. Interactive Data Corp., 47 Cal.3d 654, 684, 690 (1988). 

In the insurance context, an insurer that fails to pay benefits owing to an insured may be

liable for “bad faith” breach of contract. Hon. H. Walter Croskey, et al., California Practice Guide:

Insurance Litigation § 12:806 (2006)(citations omitted); Foley, 47 Cal. 3d at 682-85. In order to be

liable for breach of contract a defendant must be a consenting party to the contract. Cal. Civ. Code §

1550. In order to be liable for breach of the implied covenant of good faith and fair dealing a

defendant must engage in some conduct that frustrates the other party’s rights to the benefits of the

agreement. Foley, 47 Cal. 3d at 684. The same privity of contract requirement applies in

determining who is liable for breach of the implied covenant. See Hon. H. Walter Croskey, et al.,

supra, § 12:91 (citing Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (1973). The general rule is that a

“bad faith” action lies only against the insurer as the party to the contract which gives rise to the

implied covenant. Id. at § 12:92 (citing Gruenberg, 9 Cal 3d at 576; Tran v. Farmers Group, Inc.,

104 Cal. App. 4th 1202, 1216 (2002) (citations omitted)); see also Waller v. Truck Ins. Exchange,

Inc., 11 Cal. 4th 1, 36 (1995). 

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7

California Insurance Code section 1303. “Reciprocal or interinsurance exchange defined: The organization under

which such subscribers so exchange contracts is termed a reciprocal or interinsurance exchange, and shall be deemed the

insurer while each subscriber shall be deemed an insured.” See id. at 651-52. 

6

Here, in applying the general rule, the Complaint reveals that Liberty Mutual is not liable for

breach of contract because it is not a party to the insurance contract. (Compl., Ex. A.) The parties

agree that Liberty Mutual was not a party to the insurance contract. (Plaintiff’s Opposition to

Defendants’ Motion to Dismiss (“Opp.”) at 1:19-22.) Additionally, when a plaintiff seeks damages

for commission of a tort that flows from an alleged breach of contract, the defendant does not have a

duty to the plaintiff unless the defendant was a party to the contract. Gruenberg, 9 Cal. 3d at 576. 

Plaintiff’s cause of action for breach of the implied covenant fails because it flows from Plaintiff’s

alleged breach of contract. Because Liberty Mutual did not agree to provide disability benefits, it

cannot be held liable for breach of a contract to provide those benefits to Plaintiff. See Canine, 2006

U.S. Dist. LEXIS 11073 at * 12. 

Plaintiff argues that the decisions in Delos v. Farmers Ins. Group, Inc., 93 Cal. App. 3d 642

(1979) and Tran v. Farmers Group, Inc., 104 Cal. App. 4th 1202 (2002) compel a different result. 

The Court disagrees. 

In Delos, the plaintiffs sued the insurer, Farmers Insurance Exchange (“the Exchange”), and

the management company, Farmers Insurance Group (“the Group”), for failure to pay claims based

on breach of the implied duty of good faith and fair dealing and for breach of statutory duties under

California Insurance Code § 790.03, among other claims. Delos, 93 Cal. App. 3d at 647. The

Exchange was a party to the insurance contract but the Group was not. Id. at 651. Departing from

the general rule, the California Supreme Court allowed the cause of action for breach of the implied

covenant against the Group, a non-party to the contract. Delos, 104 Cal. App. 4th at 653. The court

noted that the relationships among the parties made the factual and legal matrix far different from

the traditional relationship between an insured and an insurer. Id. at 651. In particular, the court

explained that statutory7

 interinsurance Exchange consisted of policyholders who pooled premiums

as a means to insure one another, whereas the management Group acts as the appointed attorney-infact for each policyholder. Id. at 651-51. As the fiduciary attorney-in-fact, the management Group,

and not the Exchange, is the entity that handles all monetary and other affairs for the policyholders. 

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Subsequent to Delos, the California Supreme Court held that there was no private right of action under § 790.03,

therefore some California courts have stated it is questionable if the basis for Delos still exists. See Filippo Industries, Inc.

v. Sun Ins. Co., 74 Cal. App. 4th 1429, 1443 (1999); Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287, 304

(1988).

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Tran v. Farmers Group, Inc., 104 Cal. App. 4th 1202 (2002) is similarly inapposite. Tran involved a similar fact

pattern to Delos. Id. at 1218. In Tran, the plaintiff sued entities that were non-parties to the insurance contract. Id. at 1213.

Like Delos, the defendants were organized as an interinsurance exchange. Id. at 1210-11. The court found plaintiff’s claims

against the non-contracting parties were proper because the non-contracting parties, as plaintiff’s appointed attorney-in-fact,

owed plaintiff a fiduciary duty. Id. at 1213. The court stated, “We believe respondents, having chosen to conduct their

insurance business through interinsurance exchanges that require the appointment of attorneys-in-fact to execute contracts

on behalf of subscriber/insureds, are bound by the ordinary rule that an attorney-in-fact is an agent owing a fiduciary duty

to the principal.” Id. As explained above, in contrast to Tran, Plaintiff here does not allege the existence of a statutory

interinsurance exchange or a breach of any duty predicated on an attorney-in-fact relationship. Therefore, the Court finds

that Tran does not support application of the exception to the general rule. 

7

Id. at 652. As a result, in cases of bad faith denial of claims like this, an insured would be without

redress unless it could sue the management group. See id. at 652-53. The court stated, “[i]f we were

to accept the Group’s argument and adhere to the general rule that ‘bad faith’ liability may be

imposed only against a party to an insurance contract, we would not only permit the Insurer to

insulate itself from liability by the simple technique of forming a management company, but we

would also deprive a plaintiff from redress against the party primarily responsible for damages.” Id.

at p. 652. In further support of its decision to depart from the general rule, the court noted that §

790.01’s statutory regulation of persons engaged in the insurance business supported the conclusion. 

Id. at 653.8

The current case is distinguishable from Delos. Here, the Complaint contains no allegations

that Liberty Mutual acted as an interinsurance exchange, no allegations that Liberty Mutual acted as

an appointed attorney-in-fact for Plaintiff, and no allegations that Plaintiff would be without redress

unless she is permitted to proceed against Liberty Mutual. Unlike the unique relationship between

the parties in Delos, the relationship between Defendants and Plaintiff is similar to the traditional

relationship between an insured and an insurer. Although Liberty Life is alleged as a wholly-owned

subsidiary of Liberty Mutual, Liberty Mutual is not the only entity from which Plaintiff may seek

redress. See Filippo Industries Inc., 74 Cal. App. 4th at 1444. Accordingly, the exception to the

general rule which the Delos court found necessary to apply, does not exist in this case.9 

The Court finds that Plaintiff’s allegations are insufficient to state a cause of action against

Liberty Mutual under the exception to the general rule described above. The Court now turns to

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Plaintiff’s alternate theories of liability to determine if Plaintiff has otherwise stated a cause of

action against Liberty Mutual in the operative Complaint.

II. Alternative Theories of Liability Against Liberty Mutual

A. Alter-Ego

Defendants contend that Plaintiff’s Complaint is insufficient to support the theory that

Liberty Mutual is the alter-ego of Liberty Life such that the Court must disregard Defendants’

corporate formalities. Defendants further contend that amendment of the complaint would be futile

because there are no circumstances under which Plaintiff can plead sufficient facts to support an

alter-ego theory of liability. Plaintiff responds that the Complaint sufficiently alleges an alter-ego

theory of liability, and alternatively seeks leave to file an Amended Complaint.

In the insurance context, bad faith liability may be imposed on a person or entity shown to be

a corporate insurer’s “alter-ego.” To justify piercing the corporate veil on an alter-ego theory in

order to hold a parent corporation liable for the acts or omissions of its subsidiary, a plaintiff must

establish two elements: “(1) that there be such unity of interest and ownership that the separate

personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated

as those of the corporation alone, an inequitable result will follow.” See Hon. William W.

Schwarzer, et al., supra § 12:97.5 (citing Mesler v. Bragg Management Co., 39 Cal. 3d 290, 300

(1985)); Laird v. Capital Cities/ABC, Inc., 68 Cal. App. 4th 727, 737 (1998). “To put it in other

terms, the plaintiff must show ‘specific manipulative conduct’ by the parent toward the subsidiary

which ‘relegate[s] the latter to the status of merely an instrumentality, agency, conduit or adjunct of

the former ....’” Laird, 68 Cal. App. 4th at 742 (citing Institute of Veterinary Pathology, Inc. v.

California Health Laboratories, Inc., 116 Cal. App. 3d 111, 119-120 (1981)). In order to

successfully plead liability for an underlying cause of action under the alter-ego theory, the plaintiff

must make allegations of facts from which it appears that recognition of the corporate entity would

sanction a fraud or promote injustice. See Meadows v. Emett & Chandler, 99 Cal. App. 2d 496, 499

(1950); Judelson v. Am. Metal Bearing Co., 89 Cal. App. 2d 256, 263 (1948). Conclusory

allegations of alter-ego status are not sufficient. See Hokama v. E.F. Hutton & Co., Inc., 566 F.

Supp. 636, 647 (C.D. Cal. 1983) (citation omitted). There is a general presumption in favor of

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10Plaintiff submitted a proposed Amended Complaint in support of her motion to amend. The Court declines to rule

on the sufficiency of that proposed pleading and GRANTS Plaintiff leave to file an amended pleading not later than 20 days

from the filing of this Order.

9

respecting the corporate entity. Calvert v. Huckins, 875 F. Supp. 674, 678 (1995).

The Court finds that Plaintiff’s current Complaint fails to sufficiently allege that Liberty

Mutual is the alter-ego of Liberty Life. Plaintiff’s Complaint does not specifically allege that

Liberty Mutual is the alter-ego of Liberty Life, or allege facts from which the Court could find a

basis to disregard the corporate formalities. Instead, Plaintiff’s Complaint alleges liability against

Liberty Mutual only under the particular theories of agency, partnership, and joint venture. (Compl.

¶¶ 4, 8.) Accordingly, the Court GRANTS Defendants’ Motion to Dismiss to the extent it is based

on Plaintiff’s failure to sufficiently allege alter-ego liability in the original Complaint. 

B. Agency, Partnership, and Joint Venture

Here, Plaintiff has only alleged legal conclusions that Liberty Mutual and Liberty Life are an

agency, a partnership, and/or a joint venture. (Compl. ¶ 4, 8.) Plaintiff has not alleged any

supporting facts to support the existence of an agency, partnership, or joint venture. “The court need

not accept as true conclusionary allegations or legal characterizations. Nor need it accept

unreasonable inferences or unwarranted deductions of fact.” Hon. William W. Schwarzer, et al.,

supra § 9:221; see also VeriFone Inc., 11 F.3d at 868 (stating “[c]onclusory allegations of law and

unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim”)

(citation omitted). Accordingly, the Court GRANTS Defendants’ Motion to Dismiss as to

Plaintiff’s agency, partnership, and joint venture allegations contained in the original Complaint.10 

C. Liberty Mutual’s Direct Liability

 Plaintiff also contends that Liberty Mutual is a proper Defendant because Liberty Mutual is

independently liable for its direct involvement in the handling of Plaintiff’s claim. Defendants

respond that Liberty Mutual cannot be held liable for its handling of Plaintiff’s claim because it was

not a party to the contract.

It is well established that claims supervisors and other insurance company personnel

involved in investigating or evaluating an insured’s claims are not parties to the insurance contract,

and thus are not subject to the implied covenant. Hon. H. Walter Croskey, et al., supra, § 12:100

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(citing Iversen v. Super.Ct., 57 Cal. App. 3d 168, 172 (1976); Hale v. Farmers Ins. Exch., 42 Cal.

App. 3d 681, 702 (1974), disapproved on other grounds in Egan v. Mutual of Omaha Ins. Co., 24

Cal. 3d 809, 822 (1979)). Therefore, to the extent Liberty Mutual was involved in the handling of

Plaintiff’s claim, it cannot be directly liable for bad faith claims because Liberty Mutual was not a

party to the underlying insurance contract.

D. Punitive Damages

Defendants argue that there is no basis for Plaintiff’s claim for punitive damages. However,

a complaint is not subject to a motion to dismiss for failure to state a claim under Rule 12(b)(6)

because the prayer seeks relief that is not recoverable as a matter of law. Hon. William W.

Schwarzer, et al., supra at § 8:171; Bontkowski v. Smith, 305 F.3d 757, 762 (7th Cir. 2002).

CONCLUSION

For the foregoing reasons, the Court GRANTS Defendants’ Motion to Dismiss; the Court

GRANTS Plaintiff’s Motion to Amend; and the Court DENIES Defendants’ Motion to Strike

Plaintiff’s Request for Judicial Notice as moot. Plaintiff shall file an Amended Complaint not later

than 20 days from the filing of this Order.

IT IS SO ORDERED.

Dated: February___, 2007 

MARTIN J. JENKINS

UNITED STATES DISTRICT JUDGE

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