Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-02231/USCOURTS-caed-2_07-cv-02231-0/pdf.json

Parties Involved:
Joe Burgess
Defendant
CHSI of California, LLC
Defendant
CHSI of Nevada, LLC
Defendant
DRS Quest LLC
Defendant
Silas Knudsen
Plaintiff
James Leftwich
Defendant
Craig McCarty
Defendant

Document Text:

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 Unless otherwise specified, all six defendants will be 1

referred to collectively as “Defendants.”

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

SILAS KNUDSEN, No. 2:07-cv-02231-MCE-KJM

Plaintiff,

v. MEMORANDUM AND ORDER 

CHSI OF CALIFORNIA, LLC, a

California business entity;

CHSI OF NEVADA, LLC, a Nevada

business entity; DRS QUEST

LLC, a Nevada business entity;

JAMES LEFTWICH, an individual

citizen of Nevada; CRAIG

McCARTY, an individual citizen

of Nevada; and JOE BURGESS, an

individual citizen of Nevada,

Defendants.

----oo0oo----

On October 17, 2007, Silas Knudsen (“Plaintiff”) filed the

instant action against CHSI of California, LLC; CHSI of Nevada,

LLC; DRS Quest LLC; James Leftwich; Craig McCarty; and Joe

Burgess . 

1

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 Unless otherwise stated, all further references to a Rule 2

are to the Federal Rules of Civil Procedure.

 The factual assertions in this section are based on the 3

allegations in Plaintiff’s Complaint unless otherwise specified.

2

Plaintiff alleges breach of contract, wrongful termination,

intentional misrepresentation, failure to pay earned wages, and

other violations of the California Labor Code. Plaintiff’s

claims arise out of his employment with CHSI of California, LLC. 

Presently before the Court is Defendants’ Motion to Dismiss for

failure to state a claim upon which relief can be granted under

Federal Rule of Civil Procedure 12(b)(6) . For the reasons set 2

forth below, Defendants’ motion is granted in part and denied in

part.

BACKGROUND3

From January through March 2005, Plaintiff, then living in

Laguna Niguel, California, performed consulting work as an

independent contractor for CHSI of California. In or about the

first week of March 2005, CHSI of California’s Chief Executive

Officer, James Leftwich (“Leftwich”), extended an oral offer of

full-time employment to Plaintiff, who was charged with creating

a new company comprised of a medical provider network. Plaintiff

accepted the offer and moved to Roseville, California around the

middle of March, 2005.

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3

Leftwich memorialized the employment offer, in writing, by

sending Plaintiff a letter, dated March 16, 2005, informing him

he would serve as Vice President of Medical Management Services

for CHSI of California, earn $96,000 per year in basic

compensation and up to $10,000 per year in bonuses, and receive

an ownership interest of two percent each year for five years in

the company he was creating. The letter indicated Plaintiff

would receive a separate document in the second quarter of 2005

explaining the performance benchmarks for the $10,000 bonus and

further details as to the ownership interest. The letter

directed Plaintiff to initial a copy and return it to Leftwich to

signify Plaintiff’s acceptance of the offer. Plaintiff did so.

Plaintiff began working full-time for CHSI of California in

Roseville on or around April 14, 2005. In or around December

2005, Plaintiff presented Leftwich, CHSI Senior Executive Vice

President Joe Burgess (“Burgess”), and CHSI President Craig

McCarty (“McCarty”) with a comprehensive business plan for DRS

Quest LLC. At a January 2006 meeting, Defendants Leftwich,

Burgess, and McCarty agreed to increase Plaintiff’s ownership

interest in the new company, DRS Quest LLC, from a maximum of ten

percent to a maximum of twenty-five percent over five years. On

February 1, 2006, Leftwich presented Plaintiff with an agreement

detailing the ownership interest vesting schedule. Plaintiff

signed the agreement.

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4

Leftwich formed DRS Quest LLC as a Nevada entity in January

2006. In the papers he had submitted to the Nevada Secretary of

State, Leftwich listed Plaintiff, and no one else, as a manager. 

Leftwich later informed Plaintiff that he was DRS Quest’s

president and chief operating officer.

Plaintiff continued working on behalf of DRS Quest 

throughout the year. In December 2006, in recognition of

Plaintiff’s efforts, Defendants Leftwich, McCarty, and Burgess

rewarded Plaintiff with a Lincoln Town Car and increased his

salary from $96,000 to $144,000 annually.

On or about March 14, 2007, Plaintiff attended a meeting in

Nevada with Defendants Leftwich, McCarty, and Burgess. At this

meeting, the three informed Plaintiff they were planning to

change his title to Vice President, Provider Relations and reduce

his annual compensation from $144,000 to $80,000. Dissatisfied

with the proposal, Plaintiff presented a proposed severance and

release agreement to the three Defendants, and told them to have

their attorneys contact Plaintiff’s attorney. According to

Plaintiff, Defendants subsequently terminated Plaintiff and

escorted him out of the building. Defendants claim Plaintiff

resigned.

STANDARD

On a motion to dismiss for failure to state a claim under

Rule 12(b)(6), all allegations of material fact must be accepted

as true and construed in the light most favorable to the

nonmoving party. 

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5

Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir.

1996). Rule 8(a)(2) requires only “a short and plain statement

of the claim showing that the pleader is entitled to relief” in

order to “give the defendant fair notice of what the...claim is

and the grounds upon which it rests.” Conley v. Gibson, 355 U.S.

41, 47 (1957). While a complaint attacked by a Rule 12(b)(6)

motion to dismiss does not need detailed factual allegations, a

plaintiff's obligation to provide the “grounds” of his

“entitlement to relief” requires more than labels and

conclusions, and a formulaic recitation of the elements of a

cause of action will not do. Bell Atl. Corp. v. Twombly, ---

U.S. ---, 127 S. Ct. 1955, 1964-65 (2007) (internal citations and

quotations omitted). Factual allegations must be enough to raise

a right to relief above the speculative level. Id. at 1965

(citing 5 C. Wright & A. Miller, Federal Practice and Procedure

§ 1216, pp. 235-36 (3d ed. 2004) (“The pleading must contain

something more...than...a statement of facts that merely creates

a suspicion [of] a legally cognizable right of action”)).

A court granting a motion to dismiss a complaint must then

decide whether to grant leave to amend. The court should “freely

give[]” leave to amend when there is no “undue delay, bad

faith[,] dilatory motive on the part of the movant,...undue

prejudice to the opposing party by virtue of...the amendment,

[or] futility of the amendment....” Fed. R. Civ. P. 15(a); Foman

v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is

denied only when it is clear the deficiencies of the complaint

cannot be cured by amendment. DeSoto v. Yellow Freight Sys.,

Inc., 957 F.2d 655, 658 (9th Cir. 1992).

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6

ANALYSIS

1. Alter Ego Claims

The law of the forum state determines whether a corporation

is the alter ego of an individual. Towe Antique Ford Found. v.

IRS, 999 F.2d 1387, 1391 (9th Cir. 1993). California recognizes

alter ego relationships, permitting a corporation’s liabilities

to be imposed on an individual or entity, when two conditions are

satisfied: (1) “there is such a unity of interest and ownership

that the individuality, or separateness, of the said person and

corporation has ceased,” and (2) “an adherence to the fiction of

the separate existence of the corporation would...sanction a

fraud or promote injustice.” Wood v. Elling Corp., 20 Cal. 3d

353, 365 n.9 (1977). “Conclusory allegations of ‘alter ego’

status are insufficient to state a claim. Rather, a plaintiff

must allege specifically both of the elements of alter ego

liability, as well as facts supporting each.” Neilson v. Union

Bank of Cal., N.A., 290 F. Supp. 2d 1101, 1116 (C.D. Cal. 2003).

Plaintiff has failed to allege any facts supporting his

“alter ego” claims against the three individually named

Defendants. Rather, his conclusory allegations amount to little

more than a “formulaic recitation of the elements.” Twombly,

127 S. Ct. at 1964-65. That he “is informed and believes” that

the “individuality and separateness of Defendants have ceased to

exist” is insufficient to satisfy the test. (Compl. 3:24-26.) 

Plaintiff has conceded this point. (Pl.’s Opp’n to Def.’s Mot.

to Dismiss 3:4-8.) 

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7

Accordingly, Defendants’ Motion to Dismiss the alter ego

liability of Defendants James Leftwich, Craig McCarty, and Joe

Burgess is GRANTED.

2. Particularity of Fraud Claims

Rule 9(b) requires that “[i]n all averments of fraud or

mistake, the circumstances constituting fraud or mistake shall be

stated with particularity.” To satisfy this standard, the

allegations must identify the time, place, and content of the

alleged misrepresentation. Miscellaneous Serv. Workers, Drivers,

& Helpers, Teamsters Local # 427 v. Philco-Ford Corp., 661 F.2d

776, 782 (9th Cir. 1981). A plaintiff must also plead facts

explaining what was false about the statement and why. Fecht v.

Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995). Rule 9(b)’s

particularity requirement applies to fraud claims under state

law. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th

Cir. 2003).

Plaintiff has pled facts sufficient to satisfy Rule 9(b)’s

requirement as to the first claim of fraud in violation of

California Labor Code § 970, and as to the fourth claim of

intentional misrepresentation. Plaintiff identifies the time,

place, and content of the alleged misrepresentations. In

February 2005, Leftwich and McCarty told plaintiff he would

receive partial ownership of the company. (Compl. 4:20-24.) 

Leftwich made Plaintiff an oral offer in March 2005. (Compl.

4:20-5:9.) Leftwich mailed Plaintiff a letter dated March 16,

2005 to memorialize the offer. (Compl. 5:13-28.) 

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8

On February 1, 2006, Leftwich presented Plaintiff with the DRS

Quest Incentive Ownership Agreement, specifying Plaintiff’s

ownership interest. (Compl. 6:24-7:10.)

Plaintiff also explains what was false about Defendants’

statements and why. Defendants promised but did not deliver

“[t]he position promised to him for the length of time promised;

...[t]he annual salary promised to him for the amount and length

of time promised;...[t]he bonus promised to him for the amount

promised; nor...[t]he promised ownership interest in DRS Quest.” 

(Compl. 10:3-11.) Plaintiff further states that the owner

interest Defendants promised in the DRS Quest Incentive Ownership

Agreement was false because he “never received any ownership

interest in DRS Quest.” (Compl. 14:15, 14:21-22.) Taken

together, these allegations suffice to satisfy Rule 9(b)’s

particularity requirement.

3. Fraud Claims Under California Law

Plaintiff has also pled facts sufficient to satisfy all

elements of fraud under California law as to the First Cause of

Action, violation of California Labor Code § 970. This statute

prohibits employers from inducing employees to move to, from, or

within California “by means of knowingly false representations”

regarding the nature, length, or conditions, including

compensation, of employment. Cal. Lab. Code § 970 (West 2008). 

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To establish such a claim, a plaintiff must allege

(1) misrepresentation, (2) knowledge of falsity, (3) intent to

defraud, (4) justifiable reliance, and (5) resulting damage. 

Lazar v. Superior Court, 12 Cal. 4th 631, 638 (1996).

As already discussed, Plaintiff cites four separate

instances of alleged misrepresentation, which he claims Defendant

Leftwich made for purposes of inducing Plaintiff to move from

Southern California to Roseville. In support of his claim that

the alleged misrepresentations were false, Plaintiff states he

did not receive the position and annual salary for the

contemplated period of time, the bonus he was promised, or the

promised ownership interest in DRS Quest. (Compl. 10:3-11.) 

Moreover, Plaintiff alleges intent, stating that “Defendants...

influenced, persuaded or otherwise engaged Knudsen to move from

southern to northern California for the purpose of working in

Roseville...by means of knowingly false representations.” 

(Compl. 9:14-16.) Leftwich made an oral offer to Plaintiff in

the first week of March 2005. (Compl. 4:25-5:9.) In reliance on

this offer and the March 16, 2005 letter, Plaintiff moved to

Roseville in or about mid-March. (Compl. 5:11-12.) These

allegations, which must be presumed true for purposes of a motion

to dismiss, adequately plead a violation of California Labor Code

§ 970.

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Plaintiff’s Fourth Cause of Action, however, for intentional

misrepresentation fails because he has failed to adequately

allege resulting damage. The intentional misrepresentation claim

focuses on Plaintiff’s failure to receive an ownership interest

in DRS Quest LLC – a different harm than that alleged in the

First Cause of Action, which is predicated on Defendants’ alleged

falsities inducing Plaintiff to move.

Plaintiff claims he was harmed “in that [he] never received

any ownership interest in DRS Quest” (Compl. 14:21-22), and that

Defendants’ allegations promising such an interest were false. 

The DRS Quest LLC Incentive Ownership Agreement, attached to the

Complaint as Exhibit “B,” states that the “Owner Interest may be

exercised only while Associate remains an employee of CHSI or DRS

Quest.” The agreement further states that “[a]ny question as to

whether and when there has been a termination of such employment,

and the cause of such termination, shall be determined by CHSI

senior management, as appropriate, and such determination shall

be final.” Id. 

At the March 14, 2007 meeting in Nevada, Defendants

terminated Plaintiff. (Compl. 8:21-22.) Under the terms of the

contract, as attached to the Complaint, Plaintiff’s ownership

interest ceased at that moment. In a motion to dismiss, a court

is not required to “accept as true allegations that contradict

matters...by exhibit.” Sprewell v. Golden State Warriors, 266

F.3d 979, 988 (9th Cir. 2001). “It is a well-settled rule that

when a written instrument contradicts allegations in the

complaint to which it is attached, the exhibit trumps the

allegations.” 

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N. Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163

F.3d 449, 454 (7th Cir. 1998). Here, the allegations of the

complaint, which allege that Plaintiff failed to receive the

ownership interest to which he claims he was entitled, contradict

the attached Incentive Ownership Agreement itself, which states

that any ownership interest ceases at the cessation of ownership. 

Given that language, Plaintiff has failed to show damages for

purposes of his Fourth Cause of Action, despite his argument to

the contrary in the body of his complaint. Accordingly,

Defendants’ Motion to Dismiss the Fourth Cause of Action is

GRANTED.

4. Breach of Contract Claims

To prove breach of contract under California law, a party

must demonstrate the existence of a contract, plaintiff’s

performance of the contract or excuse for nonperformance,

defendant’s breach, and the resulting damage to plaintiff. See,

e.g., McDonald v. John P. Scripps Newspaper, 210 Cal. App. 3d

100, 104 (Cal. Ct. App. 1989). Under California law, an

employment relationship affords no expectation employment will

continue unless the parties have actually adopted such terms. 

See Guz v. Bechtel Nat. Inc., 24 Cal. 4th 317, 350 (2000).

Plaintiff’s second claim is based on the letter Defendant

Leftwich sent to Plaintiff on March 16, 2005. (Pl.’s Ex. A.) 

The letter establishes the existence of a contract between

Plaintiff and CHSI of California. 

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The letter also states that the grant of ownership would be

“outlined more specifically in a separate document to be provided

in the 2nd quarter 2005.” Id. In performance of the contract,

Plaintiff worked for CHSI of California from April 2005 through

at least December 2005. (Compl. 6:2-7.)

Leftwich’s letter did not promise Plaintiff a position for

five years; the grant of an ownership interest was “based upon

continuing employment with CHSI of California.” (Pl.’s Ex. A.) 

Plaintiff and CHSI of California did not adopt terms fixing the

length of his employment in the contract. Plaintiff’s claim that

CHSI of California “promised” him an ownership interest is belied

by the statement that the interest was contingent upon

“continuing employment with CHSI of California.” Accordingly, on

the basis of Plaintiff’s Complaint, CHSI of California did not

breach its contact by failing to guarantee Plaintiff’s position

for five years.

The contract did, however, promise a salary of $96,000 per

year and a bonus of up to $10,000 per year. In the Complaint,

Plaintiff states he did not receive “the annual salary promised

to him for the amount and length of time promised” and the “bonus

promised to him for the amount promised.” (Compl. 11:11-13.) 

Inasmuch as Plaintiff claims he did not receive the salary and

bonus during the period of his employment, his pleading satisfies

the requisite showing of a breach and resulting damages. 

Accepting all allegations as true, Plaintiff’s statements that he

received a Lincoln Town Car and an increased salary in December

2006 are not inconsistent with a failure to receive the full

salary and bonus he was promised. 

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Additionally, Defendants’ alleged failure to provide “the

separate document...explaining the performance benchmarks for the

$10,000 bonus and further details as to the ownership interest”

constituted a breach of their promise to do so. (Compl. 5:21-

22.)

Having established all elements of a breach of contract,

Defendants’ Motion to Dismiss Plaintiff’s Second Cause of Action

is DENIED.

5. Wrongful Termination in Violation of Public Policy

California Labor Code § 923 protects the right of an

“individual workman” to “full freedom of association,

self-organization, and designation of representatives of his own

choosing.” Cal. Lab. Code § 923 (West 2008). A worker may

exercise this right “to negotiate the terms and conditions of his

employment,” and “shall be free from the interference, restraint,

or coercion of employers...in the designation of such

representatives....” Id. Termination of an at-will employee who

threatens to sue if the employer does not offer a more lucrative

severance package, however, does not violate public policy under

§ 923, and cannot sustain a wrongful discharge claim. Salstein

v. Ha-Lo Indus., Inc., 82 F. Supp. 2d 1080 (N.D. Cal. 1999).

Plaintiff has presented a colorable claim that Defendants’

actions violated California Labor Code § 923. Unlike the

plaintiff in Salstein, who threatened to sue to obtain a more

substantial severance arrangement, Plaintiff did not threaten to

sue Defendants. 

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Rather, unsatisfied with the proposed demotion and reduction in

compensation, he “presented a proposed severance and release

agreement to Defendants.” (Compl. 12:12-13.) Because Plaintiff

had not yet resigned, the agreement could have been a tactic to

“negotiate the terms and conditions of his employment,” in the

hope that Defendants would have responded with a more favorable

position and compensation package. Only after Plaintiff had

presented the agreement and “told Defendants to have their

attorneys contact [his] attorney,” did Defendants terminate

Plaintiff. (Compl. 12:13-15.)

Because Plaintiff has presented a plausible claim that

Defendants violated California Labor Code § 923, Defendants’

Motion to Dismiss as to the third claim is DENIED.

6. Breach of Contract - Incentive Ownership Agreement

The DRS Quest LLC Incentive Ownership Agreement begins by

stating the contract is between CHSI of Nevada and Plaintiff. 

(Pl.’s Ex. B.) DRS Quest LLC was not a party to the contract. 

The agreement does indicate its purpose is to “build DRS Quest

into a profitable, growing business.” Id. At most, DRS Quest

LLC was a third party beneficiary, which would have allowed it to

enforce the contract between CHSI of Nevada and Plaintiff.

Plaintiff offers no authority to support his claim that he may

sue a third-party beneficiary for breach of contract. 

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Nor, as discussed above, has Plaintiff successfully pled an alter

ego theory to preserve a claim against both CHSI of Nevada and

other entities, including DRS Quest LLC, for breach of the

Incentive Ownership Agreement. Accordingly, Defendants’ Motion

to Dismiss DRS Quest LLC as a party to the contract is GRANTED.

7. Failure to Pay Earned Wages

Plaintiff claims DRS Quest LLC did not compensate him for

any work performed between January 2006 and March 14, 2007. 

(Compl. 16:14-17.) Yet Plaintiff also states CHSI of CA was his

primary employer from April 1, 2005, through March 14, 2007. 

(Compl. 3:8-10.) He also states Defendants rewarded him with a

Lincoln Town Car and an annual salary increase from $96,000 to

$144,000. (Compl. 8:3-6.) That CHSI of CA compensated Plaintiff

does not preclude the possibility that DRS Quest LLC also owed

Plaintiff wages. Accordingly, Defendants’ Motion to Dismiss the

Sixth and Seventh Causes of Action is DENIED.

CONCLUSION

For the foregoing reasons, Defendants’ Motion to Dismiss is

granted in part and denied in part as follows: 1) With respect to

the alter ego liability of the individual Defendants, the Motion

to Dismiss is GRANTED. Defendants James Leftwich, Craig McCarty,

and Joe Burgess are DISMISSED as parties to this action. 

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Leave to amend the Complaint to assert a viable alter ego claim,

however, will be GRANTED; 2) Plaintiff has satisfied Rule 9(b)’s

particularity requirement as to the First and Fourth Causes of

Action. Defendants’ assertion that these claims should be

rejected on that basis is accordingly DENIED; 3) Defendants’

Motion is DENIED as to the First Cause of Action; 4) Defendant’s

Motion is GRANTED, with leave to amend, as to the Fourth Cause of

Action for failing to allege the requisite damage; 5) The Motion

to Dismiss DRS Quest LLC as a Defendant to the Fifth Cause of

Action is also GRANTED with leave to amend; and 6) Defendants’

Motion is DENIED as to the Second, Third, Sixth, and Seventh

Causes of Action.

Should he choose to do so, Plaintiff may file an amended

complaint not later than ten (10) court days following the date

of this Order.

IT IS SO ORDERED.

Dated: March 14, 2008

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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