Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-02199/USCOURTS-caed-2_07-cv-02199-2/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

MEDICAL DEVELOPMENT

INTERNATIONAL, a Delaware

corporation,

 NO. CIV. S-07-2199 WBS EFB

Plaintiff,

ORDER RE: MOTION TO DISMISS

v.

CALIFORNIA DEPARTMENT OF

CORRECTIONS AND REHABILITATION;

ROBERT SILLEN, in his individual

capacity; J. CLARK KELSO, in his

official capacity as Receiver;

and DOES 1 through 20,

inclusive,

Defendants.

----oo0oo----

Defendants Robert Sillen, J. Clark Kelso, and the

California Department of Corrections and Rehabilitation (“CDCR”)

move to dismiss this action for lack of subject matter

jurisdiction, pursuant to Rule 12(b)(1) of the Federal Rules of

Civil Procedure.

///

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1 When ruling on a motion to dismiss, the court generally

may not consider materials other than the facts alleged in the

complaint and documents that are made a part of the complaint. 

Anderson v. Angelone, 86 F.3d 932, 934 (9th Cir. 1996); Branch v.

Tunne11, 14 F.3d 449, 454 (9th Cir. 1994), overruled on other

grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th

Cir. 2002). A court may, however, consider materials if (1) the

authenticity of the materials is not disputed and (2) the

plaintiff has alleged the existence of the materials in the

complaint or the complaint “necessarily relies” on the materials. 

Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001)

(citation omitted); Branch, 14 F.3d at 454. Because the

authenticity of Judge Henderson’s opinions in the Plata line of

cases is not disputed and plaintiff repeatedly relies on them,

the court will properly consider these rulings. 

2

I. Factual and Procedural Background

On October 3, 2005, in Plata v. Schwarzenegger, No.

01-1351, 2005 WL 2932253 (N.D. Cal. Oct. 3, 2005),1 a class

action challenging the constitutional adequacy of medical care

provided to CDCR inmates with serious medical needs, United

States District Judge Thelton E. Henderson established a

Receivership to manage the health care systems at the CDCR’s

various institutions in an attempt to bring the medial care up to

constitutional standards. Judge Henderson subsequently appointed

defendant Sillen as the Receiver on February 14, 2006 (effective

April 17, 2006) and charged him with the “duty to control,

oversee, supervise, and direct all administrative, personnel,

financial, accounting, contractual, legal, and other operational

functions of the medical delivery component of the CDCR.” Plata

v. Schwarzenegger, No. 01-1351, slip op. at 2 (N.D. Cal. Feb. 14,

2006) (“Order Appointing Receiver”) (hereinafter “OAR”). 

In a subsequent order on March 30, 2006, Judge

Henderson directed the CDCR, now under the control of Sillen, to

begin developing new processes for medical contract management. 

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2 During the preliminary contract negotiations, plaintiff

proposed that its services would consist of

(a) Enter[ing] agreements with physicians and hospitals

to perform medical services at the request of prison

medical staff; (b) Assist[ing] prison staff in locating

medical specialists outside [plaintiff’s] referral

network; (c) Implement[ing] a centralized system for

scheduling and tracking in and outpatient care; and (d)

Implement[ing] a centralized billing system for payment

health-care providers. 

(Compl. ¶ 21.)

3 California’s statute codifying the “corporate practice

of medicine” doctrine provides:

Corporations and other artificial legal entities shall

have no professional rights, privileges, or powers.

However, the Division of Licensing may in its discretion,

after such investigation and review of such documentary

evidence as it may require, and under regulations adopted

by it, grant approval of the employment of licensees on

a salary basis by licensed charitable institutions,

foundations, or clinics, if no charge for professional

3

Plata v. Schwarzenegger, No. 01-1351, slip op. at 5-7 (N.D. Cal.

Mar. 30, 2006). Around this same period, the CDCR entered into

negotiations with plaintiff--an administrator of prison health

care systems--to provide specialty medical services for inmates

at two California correctional facilities as part of a pilot

program.2 (Compl. ¶¶ 8, 20-21.) In early September 2006, CDCR

officials permitted plaintiff to begin performing services at the

two institutions notwithstanding the absence of a final executed

contract. (Id. at ¶¶ 25-27.) 

Shortly after plaintiff began providing its services,

the CDCR staff--noting that plaintiff was not licensed to

practice medicine in California--questioned whether plaintiff was

functioning in violation of California’s prohibition on the

corporate practice of medicine.3 (Id. at ¶¶ 33-34.) By December

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services rendered patients is made by any such

institution, foundation, or clinic.

Cal. Bus. & Prof. Code § 2400.

4

26, 2006, plaintiff purportedly composed a restructured agreement

designed to eliminate this concern and sent it to the CDCR’s

Division of Correctional Health Care Services for signature. 

(Id. at ¶ 35.) Plaintiff claims that Sillen then intercepted the

agreement before it reached its destination, and thus it was

never signed. (Id. at ¶¶ 36-37.)

In January 2007, amid the ongoing concerns regarding

the legality of plaintiff’s services, Sillen called for a halt to

the CDCR’s processing of plaintiff’s final contract and ordered

the CDCR to stop further payments on plaintiff’s invoices. (Id.

at ¶¶ 36-37.) Plaintiff nonetheless continued providing services

without compensation. (Id. at ¶ 42.) During a February 16, 2007

meeting, Sillen renewed his concerns to plaintiff regarding the

legality of its services and indicated that plaintiff could be

paid only if it was determined that it could lawfully provide

services in California. (Id. at ¶ 44.) Plaintiff again

continued to provide services to the two institutions,

purportedly in reliance on “Mr. Sillen’s representations

regarding future payment.” (Id. at ¶ 45.)

On March 7, 2007, plaintiff provided Sillen with a

legal memorandum--drafted by its counsel--that concluded its

services were being lawfully provided. (Id. at ¶ 46.) Sillen

“refused to accept the opinion,” ultimately demanding that

plaintiff obtain an official opinion from the Medical Board of

California. (Id. at ¶¶ 47-48.) When plaintiff failed to

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4 Section 1442(a)(1) allows for removal of civil actions

commenced in state court against “any officer (or any person

acting under that officer) of the United States or of any agency

thereof, sued in an official or individual capacity for any act

under color of such office.” 28 U.S.C. § 1442(a)(1). 

5

promptly comply with his demand, Sillen effectively ended their

relationship when he allegedly “physically expelled Plaintiff[’s]

personnel” from the two CDCR pilot program institutions on April

7, 2007. (Id. at ¶¶ 50-51.)

On September 17, 2007, plaintiff filed a complaint in

Sacramento Superior Court against Sillen and the CDCR. In its

Complaint, plaintiff alleges fifteen state law causes of action

arising from its purported reliance on certain misrepresentations

that Sillen and the CDCR made throughout the preliminary contract

negotiations. On October 16, 2007, Sillen removed the action to

this court pursuant to 28 U.S.C. § 1442(a)(1).4

On January 23, 2008, Judge Henderson dismissed Sillen

as Receiver, simultaneously appointing J. Clark Kelso as the new

Receiver. Pursuant to Federal Rule of Civil Procedure 25(d)(1),

Kelso, in his official capacity as Receiver, was “automatically

substituted as a party” in place of Sillen. Fed. R. Civ. P.

25(d)(1). This substitution was effective only to the extent

that Sillen was sued as the Receiver, and thus the individual

causes of action against Sillen still remain. Collectively,

defendants now move to dismiss the complaint for lack of subject

matter jurisdiction.

II. Discussion

Because federal courts are courts of limited

jurisdiction only authorized to adjudicate those cases which the

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6

Constitution and Congress permit, Kokkonen v. Guardian Life Ins.

Co. of Am., 511 U.S. 375, 377 (1994), Federal Rule of Civil

Procedure 12(b)(1) allows a court to dismiss cases

inappropriately brought before it based on a lack of subject

matter jurisdiction. Fed. R. Civ. P. 12(b)(1). “A federal court

is presumed to lack jurisdiction in a particular case unless the

contrary affirmatively appears.” Stock W., Inc. v. Confederated

Tribes of the Colville Reservation, 873 F.2d 1221, 1225 (9th Cir.

1989) (citing Cal. ex rel. Younger v. Andrus, 608 F.2d 1247, 1249

(9th Cir. 1979)). On a motion to dismiss an action for lack of

subject matter jurisdiction, the plaintiff bears the burden of

establishing that subject matter jurisdiction exists. Kokkonen,

511 U.S. at 377. 

1. The Barton Rule

The United States Supreme Court has held that federal

common law bars suits against receivers in courts other than the

court charged with the administration of the estate. Barton v.

Barbour, 104 U.S. 126, 127 (1881). Thus, “a party must first

obtain leave of the [appointing] court before it initiates an

action in another forum” against a receiver. Beck v. Fort James

Corp. (In re Crown Vantage, Inc.), 421 F.3d 963, 970 (9th Cir.

2005) (citing Muratore v. Darr, 375 F.3d 140, 147 (1st Cir.

2004); Carter v. Rodgers, 220 F.3d 1249, 1252 (11th Cir. 2000);

In re Linton, 136 F.3d 544, 546 (7th Cir. 1998); Lebovits v.

Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir.

1996); Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d

1236, 1240 (6th Cir. 1993)); see also Davis v. Gray, 83 U.S. 203,

218 (1872) (holding that the court appointing a receiver “will

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7

not allow him to be sued touching the property in his charge, nor

for any malfeasance as to the parties, or others, without [the

court’s] consent”).

This doctrine, known as the Barton Rule, ensures that

the appointing court maintains appropriate control over the

administration that is the subject of the receivership. In re

DeLorean, 991 F.2d 1236, 1240 (6th Cir. 1993). When presented

with a party that has failed to secure the appointing court’s

consent, the nonappointing court lacks subject matter

jurisdiction and must dismiss the action. See In re Kashani, 190

B.R. 875, 884 (B.A.P. 9th Cir. 1995) (“[N]onappointing court may

not entertain suits against the [receiver] for acts done in the

[receiver’s] official capacity without leave from the appointing

court because the other court lacks subject matter

jurisdiction.”).

2. Limited Statutory Exception to the Barton Rule

Plaintiff concedes that it did not seek Judge

Henderson’s permission prior to suing Sillen, and now Kelso. In

an effort to avoid dismissal, plaintiff asserts that it is not

obligated to request leave because the Receiver’s alleged conduct

fits the statutory exception to the Barton Rule--codified under

28 U.S.C. § 959(a), which provides that leave of the appointing

court is not required when receivers are sued “with respect to

any of their acts or transactions in carrying on the business

connected with [receivership] property.” 28 U.S.C. § 959(a). 

Despite its seemingly expansive language, § 959(a) is

rarely employed and--when actually utilized by courts--even more

narrowly applied. See Beck v. Fort James Corp. (In re Crown

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8

Vantage, Inc.), 421 F.3d 963, 971-72 (9th Cir. 2005) (“By its

terms, this limited exception applies only if the trustee or

other officer is actually operating the business, and only to

‘acts or transactions in conducting the debtor’s business in the

ordinary sense of the words or in pursuing that business as an

operating enterprise.’” (quoting Muratore v. Darr, 375 F.3d 140,

144 (1st Cir. 2004))). In fact, the relatively small handful of

cases interpreting § 959(a) restrict its application to instances

where a receiver or trustee has been sued in his/her capacity as

an employer, or for torts committed by agents of the

estate/business in receivership during the course of routine or

day-to-day operations distinct from the receiver’s official

responsibilities. See id. at 972 (noting that “[t]he few

examples of suits that have been allowed under § 959(a) include a

wrongful death action filed against an operating railroad trustee

and suits for wrongful use of another’s property”).

Unlike the cases where leave was not required,

plaintiff’s causes of action against Sillen do not arise from

tortious conduct or negligent acts pursuant to day-to-day,

routine, or ordinary business operations unrelated to his

official responsibilities. Rather, plaintiff challenges the very

core of Sillen’s authority and administration of the CDCR medical

services system--i.e., duties explicitly prescribed in Judge

Henderson’s creation of the receivership. See id. (noting that

“[a]ctions taken in the mere continuous administration of

property under order of the court do not constitute an ‘act’ or

‘transaction’ in carrying on business connected with the estate”

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9

under § 959(a)) (internal quotations and citations omitted)

(emphasis added). 

In Plata, Judge Henderson charged the receivership with

the “duty to control, oversee, supervise, and direct all

administrative, personnel, financial, accounting, contractual,

legal, and other operational functions of the medical delivery

component of the CDRC.” OAR at 2 (emphasis added). Judge

Henderson supplemented this responsibility by explicitly

providing that, in deployment of the aforementioned duties and

directives, “the Receiver and his staff shall have the status of

officers and agents of this Court, and as such shall be vested

with the same immunities as vest with this Court.” Id. at 6.

Because plaintiff’s lawsuit challenges Sillen’s conduct

in terminating whatever quasi-contractual relationship may have

existed when he suspected illegality on the part of plaintiff,

the lawsuit challenges Sillen’s conduct in performing the very

duties Judge Henderson set up the receivership to perform. Thus,

absent Judge Henderson’s permission, the Receiver cannot be sued

in any jurisdiction other than that of the appointing court. See

Carter v. Rodgers, 220 F.3d 1249, 1254 (8th Cir. 2000) (section

959 does not apply when a party contests the receiver’s general

management and control of the receivership, thus interfering with

the receiver’s mandate to realize his judicial directive). 

Significant interests of public policy support the

conclusion that Judge Henderson should have be apprised of the

instant matter and be given the initial option to hear the

allegations. Specifically, the importance of this matter cannot

be separated from its critical backdrop. Unlike typical

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receiverships or trusts employed in bankruptcy courts, this is a

receivership over a public entity involving matters of

constitutional significance. In his original Plata decision,

Judge Henderson identified an “unconscionable degree of suffering

and death sure to continue if the system is not dramatically

overhauled.” Plata v. Schwarzenegger, No. 01-1351, 2005 WL

2932253, at *1 (N.D. Cal. Oct. 3, 2005). In an effort to

catalyze reform and rehabilitate this “institutional paralysis,”

id., Judge Henderson charged the receivership with the express

duties that the instant matter now challenges. Judge Henderson

would thus be in the best position to evaluate the Receiver’s

conduct. 

Moreover, all of the funds in the hands of the Receiver

are public funds. (Def’s Reply Mem. in Supp. of Mot. 11:9-11). 

How those funds should be spent, and the manner in which medical

services contracts are awarded and administered in prisons, are

all questions appropriate for the appointing court administering

the property in receivership. See Barton v. Barbour, 104 U.S.

126, 136 (1881) (allowing party to proceed without appointing

court’s perspective on the impact of the litigation could result

in the “usurpation of the powers and duties which belonged to

another court”). 

3. Causes of Action Against the CDCR

The bulk of plaintiff’s allegations against the CDCR

arise from the CDCR’s compliance with Sillen’s orders to

discontinue payments to plaintiff and withhold the processing of

a finalized contract. Because Judge Henderson suspended the

CDCR’s authority over “the administration, control, management,

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5 In an attempt to highlight separate liability as to the

CDCR, plaintiff claims that Sillen, subsequent to his designation

as Receiver, delegated contractual authority back to the CDCR by

allowing then-CDCR director to “retain direct management over the

daily operation of the prison medical delivery system.” (Compl.

¶ 18.) Not only is this allegation thoroughly unsupported and

thus conclusory, see Clegg v. Cult Awareness Network, 18 F.3d

752, 754-55 (9th Cir. 1994) (“[T]he court is not required to

accept legal conclusions cast in the form of factual allegations

if those conclusions cannot reasonably be drawn from the facts

alleged.”), but the proffered language itself does not support

the interpretation that Sillen intended to delegate his official

authority to control CDCR contracts.

6 Because the court grants defendants’ motion to dismiss,

it need not consider the parties’ cross-motions to strike

extrinsic evidence and exhibits. The subject of the crossmotions–-various declarations and party briefs from the Plata

line of cases–-were not integral to the legal disposition of this

matter and thus were not considered.

11

operation, and financing of the California prison medical health

care system” for the duration of the receivership and transferred

that authority to Sillen, OAR 4, the CDCR’s projects and

activities were exclusively under the control of Sillen.5

 See

OAR 8 (mandating that all agents and employees of the CDCR are to

“fully cooperate with the Receiver in the discharge of his

duties”) (emphasis in original). Thus, due to the significant

overlap in plaintiff’s allegations, the interests of judicial

economy also support the accompanying dismissal of plaintiff’s

causes of action with respect to the CDCR.

Accordingly, because plaintiff did not obtain leave

from the appointing court before initiating this action, the

court will grant defendants’ motion to dismiss for lack of

subject matter jurisdiction.6 

///

///

///

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IT IS THEREFORE ORDERED that defendants’ motion to

dismiss plaintiff’s complaint be, and the same hereby is,

GRANTED.

DATED: February 14, 2008

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