Court Opinion

ID: 9750917
Source: CourtListenerOpinion
Date Created: 2023-08-28 15:47:44.674737+00
Date Added: 2024-06-11T09:13:05.602755
License: Public Domain

VOGEL, J.
I agree that the appeal is timely, and agree that the order revoking Armenia’s leave to file her second amended complaint should be reversed, but I disagree with the majority’s unsupported conclusion that, on these facts, a parent, grandparent, or great-grandparent corporation can be liable for its subsidiary’s alleged violations of the False Claims Act.
A.
James Jones Company, which manufactures and sells waterworks parts for use in municipal drinking water systems, represented in its catalogues and sales literature that all of its products complied with American Water Works Association (AWWA) standards. Under AWWA standard C-800-89, all materials in contact with potable water must be “85 metal” (meaning the materials must contain 85 percent copper and 5 percent each of tin, lead, and zinc).
Nora Armenta was Jones’s purchasing manager. In August 1991, Jones’s president allegedly directed Armenta to purchase raw metal with less copper and more lead and zinc. Although Jones continued to represent in its sales *650materials that it was using 85 metal, it thereafter allegedly manufactured and sold waterworks using “81 metal” (comprised of 81 percent copper, 9 percent zinc, 3 percent tin, and 7 percent lead). Armenta allegedly expressed concerns about the switch from 85 metal to 81 metal but was rebuffed by her supervisors.
In reliance on Jones’s representations in its sales materials, numerous cities and water districts purchased Jones’s products.
B.
In 1997, Armenta initiated this qui tarn action on behalf of the State of California, naming Jones and its parent and grandparent corporations, Mueller Co. and Tyco International (US), Inc., as defendants and alleging violations of the False Claims Act (Gov. Code, § 12650 et seq.).1 Defendants’ demurrers were sustained with leave to amend and (in 1998) Armenta filed a first amended complaint in which she added 33 governmental entities as plaintiffs and elaborated on her allegations of fraud. Defendants’ demurrers were overruled and their motions to strike denied.
In September 2000, Armenta sought leave to file a second amended complaint. In her proposed first cause of action, Armenta alleged that Jones and its related corporations “knowingly presented] and cause[d] to be presented]” a false claim, or “knowingly made . . . and caused to be made and used false records” within the meaning of subdivisions (a)(1) and (a)(2) of section 12651. In her second proposed cause of action, she alleged that, in violation of subdivision (a)(8) of section 12651, Jones and its related corporations are liable as beneficiaries of Jones’s false claims. Armenta was allowed to file her second amended complaint.2
Defendants demurred to all causes of action, contending (among other things) that Armenta had failed to state a cause of action under the False Claims Act. In January 2001, over Armenia’s opposition, the demurrers were sustained without leave to amend and those causes of action were dismissed. *651The City of Pomona, one of the interveners, sought our assistance by way of a petition for a writ of mandate, which we granted in May 2001, at which time we found the pleading sufficient and directed the trial court to overrule the demurrer. (City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793, 805 [107 Cal.Rptr.2d 710].)3
C.
In September 2003, Mueller moved for summary judgment, contending that Jones is a separate corporate entity, that Mueller’s only relationship with Jones was as its corporate parent (which it became in September 1996 when it acquired all of Jones’s stock from Watts), and that Armenta could not establish that Mueller had any liability — either based on its participation in Jones’s alleged misconduct or on an alter ego theory. In its accompanying separate statement of undisputed facts and supporting evidence, Mueller established the following facts:
Tyco, a publicly traded holding company, is the parent of hundreds of subsidiaries in diversified manufacturing and service industries around the world. Tyco is the direct parent of Mueller Holdings Corporation, which is the direct parent of Mueller Co., an Illinois corporation that is one of the largest suppliers of flow control products used in distribution systems for municipal potable water and natural gas. From the late 1980’s until 1999, Mueller Co. was an indirect subsidiary of Tyco.
Jones employs about 166 people and since 1996 has had annual gross sales averaging about $18 million. From 1986 to 1996, Jones was a wholly owned subsidiary of Watts. In a September 1996 transaction, Mueller acquired from Watts the stock of three Watts subsidiaries, including Jones. In 1999, Tyco sold the common stock of Mueller Holdings Corporation so that Mueller and Jones were not thereafter related to Tyco. Before, during and after the acquisition, Jones’s board of directors transacted business by unanimous consent in lieu of meetings (Corp. Code, § 307, subd. (b)).
During the period when Mueller was Jones’s parent, Mueller treated Jones as a typical subsidiary and did not exert extensive control over Jones’s management, operations, or finances for the purpose of obtaining an unfair advantage for itself, and Jones was reported as a separate entity by Dun & Bradstreet. Jones’s funds were not commingled with the other entities and were the subject of separate accounting. Jones was adequately and independently capitalized, was not dependent on Mueller for financing, and did not *652require Mueller’s guaranty to obtain loans. No one from Mueller was assigned or hired to manage Jones. Mueller never represented to Jones’s vendors or customers that it would stand behind Jones’s debts.
Mueller did not make any of the representations or claims at issue in this litigation, and Armenia testified at her deposition that she never disclosed to anyone at Mueller her concerns about the parts manufactured by Jones or about “fraud going on” at Jones.
Tyco separately moved for summary judgment on similar grounds, the distinction being that Tyco never had any direct ownership interest in Jones and was only its corporate great-grandparent, a position it assumed in 1996 when Mueller Co., Tyco’s indirect subsidiary, acquired the stock of Jones. In its separate statement and supporting evidence, Tyco established the same facts summarized above.
B.
Armenia, the City of Burbank, the City of Pomona, and the Alameda County Water District opposed the motions, contending among other things that Mueller and Tyco are the “beneficiaries” of Jones’s false claims. (§ 12651, subd. (a)(8).) Although the trial court rejected this argument, the majority opinion buys into it because some of Jones’s officers were also officers of Tyco, Mueller, or other Tyco subsidiaries. In my view, the majority opinion is wrong.
The majority ignores the rule that the only basis on which the parent and grandparent could be liable for the subsidiary’s wrongdoing is under an alter ego theory based on evidence that would permit Armenia to pierce the corporate veil. (U.S. ex rel. Piacentile v. Wolk (E.D.Pa. 1995) 1995 WL 20833 at *4.)
The majority ignores the rule that alter ego liability can never be based on the mere fact of the parent-subsidiary relationship (United States v. Bestfoods (1998) 524 U.S. 51, 61-62 [141 L.Ed.2d 43, 118 S.Ct. 1876]), or on the mere existence of common directors and officers. Indeed, it “is well recognized that ‘[t]he law permits the incorporation of businesses for the very purpose of isolating liabilities among separate entities’ — i.e., parent and subsidiary corporations.” (Friedman, Cal. Practice Guide: Corporations (The Rutter Group 2006) ¶ 2:52.7, quoting Cascade Energy and Metals Corp. v. Banks (10th Cir. *6531990) 896 F.2d 1557, 1576.) And, of course, that is all there is, notwithstanding the majority’s suggestion that there is more.4
The majority ignores the rule that alter ego liability will be imposed on a parent corporation only if (1) there is such a unity of interest and ownership between the parent and subsidiary that their separate personalities no longer exist, and (2) an inequitable result would otherwise occur. (Laird v. Capital Cities/ABC, Inc. (1998) 68 Cal.App.4th 727, 741-742 [80 Cal.Rptr.2d 454]; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1285 [31 Cal.Rptr.2d 433]; M/V American Queen v. San Diego Marine Const. (9th Cir. 1983) 708 F.2d 1483, 1489-1490.) In other words, there must be some “ ‘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 v. Capital Cities/ABC, Inc., supra, 68 Cal.App.4th at p. 742; see also Tomaselli v. Transamerica Ins. Co., supra, 25 Cal.App.4th at p. 1285.)
E.
Then, of course, there is the majority’s whimsical interpretation of “beneficiary” as that word is used in subdivision (a)(8) of section 12651.
For Mueller or Tyco to be liable under subdivision (a)(8) of section 12651, there would have to be evidence that they are the “beneficiarles] of an inadvertent submission of a false claim to the [government entities],” that they “subsequently discovered] the falsity of the claim, and fail[ed] to disclose the false claim to the [government entities] within a reasonable time after discovery of the false claim.” (Italics added.) In other words, there would have to be evidence that Mueller and Tyco (not Jones) inadvertently submitted a false claim, later discovered their mistake, and failed to inform their victims. There is no such evidence.
On the issue of knowledge, the majority’s simplistic formula — that a triable issue of fact exists because “the right hand (Mueller and Tyco) knew what the left hand (Jones) was doing” (maj. opn., ante, at p. 647) — is based primarily on the majority’s mistaken belief that dual directorships in and of themselves translate to imputed knowledge.5 That simply isn’t true — and the *654fact that Jones’s directors were also directors of Mueller and half of them were also directors of Tyco cannot by itself support an inference of imputed knowledge. (United States v. Bestfoods, supra, 524 U.S. at pp. 61-62 [alter ego liability can never be based on the mere fact of the parent-subsidiary relationship].)
Of course, there is also the fact that, by its plain language, subdivision (a)(8) of section 12651 does not apply to third persons who do not themselves submit claims. To the contrary, it applies to a person who inadvertently submits a false claim to a government entity, receives a benefit (hence the use of the word “beneficiary”), then discovers the falsity of the claim and fails to disclose it. The only difference between the California and federal acts is that, for liability to attach under the federal act, the person submitting the claim must know at the time of submission that the claim is false (U.S. ex rel. Grynberg v. Ernst & Young LLP (D.Wyo. 2004) 323 F.Supp.2d 1152, 1155; U.S. ex rel. Piacentile v. Wolk, supra, at *4; U.S. v. President and Fellows of Harvard College (D.Mass. 2004) 323 F.Supp.2d 151; U.S. v. Safe Environment Corp. (N.D.Ill. 2002) 2002 WL 976033; Boese, Civil False Claims and Qui Tam Actions 2d ed. & 2005-1 Supp. § 2.01 [A] [2], p. 2-12, [mere inaction does not constitute a violation of the False Claims Act, and the government must prove more than that a defendant was aware of an alleged fraud]), whereas liability can attach under the California False Claims Act if the submission is inadvertently false and the beneficiary later learns of the falsity and fails to report it to the victim. (§ 12651, subd. (a)(8); Sen. Com. on Judiciary, Rep. on Assem. Bill No. 1441 (1987-1988 Reg. Sess.) as amended July 14, 1987.)
Because neither Mueller nor Tyco submitted a false claim (or caused one to be submitted) (United States v. Bornstein (1976) 423 U.S. 303, 311 [46 L.Ed.2d 514, 96 S.Ct. 523] [the False Claims Act imposes liability only for the commission of acts which caused false claims to be submitted]; U.S. ex rel. Shaver v. Lucas Western Corp. (8th Cir. 2001) 237 F.3d 932, 933-934), and because subdivision (a)(8) of section 12651 was enacted to apply only to the “negligent claimant,” not to a third party (Sen. Com. on Judiciary, Rep. on Assem. Bill No. 1441, (1987-1988 Reg. Sess.) as amended July 14, 1987, p. 5), neither Mueller nor Tyco can be liable under section 12651, subdivision (a)(8).
*655In sum, I dissent because the majority opinion eviscerates corporate law and opens a supersize can of worms by attaching liability to parent, grandparent, and great-grandparent corporations for the acts of their direct and indirect subsidiaries based solely on status — the existence of the relationships.6
A petition for a rehearing was denied September 28, 2006, and on September 1, 2006, and September 28, 2006, the opinion was modified to read as printed above. Vogel, J., was of the opinion that the petition should be granted. Respondents’ petition for review by the Supreme Court was denied November 29, 2006, S147225.
Corrigan, J., did not participate therein.

 Subsequent undesignated section references are to the Government Code. The False Claims Act is a whistleblower statute authorizing any person (a “relator”) with knowledge of fraud against a California governmental entity to file a qui tarn action on behalf of the entity. When the action is filed, the governmental victim of the fraud may intervene and take primary responsibility for prosecution of the action. If the entity does not intervene, the relator has the same right to prosecute the action as the entity would have had if it had intervened. (§ 12652.) Watts Industries, Inc. is also a named defendant and a respondent on this appeal but is not directly involved in the issue addressed by this dissent.

 The second amended complaint and the majority opinion treat Tyco and Mueller as a single entity. As explained below, they are separate legal entities and the evidence about Mueller has nothing to do with Tyco.

 The case was before us again in 2002, that time on a discovery issue. (Armenta v. Superior Court (2002) 101 Cal.App.4th 525 [124 Cal.Rptr.2d 273].)

 It is true that Mueller performed its own sample testing shortly after it became Jones’s parent in 1996. (Maj. opn., ante, at p. 646.) In one test, four ball valves manufactured by Jones were below the 85 metal standard. So what? How can that isolated factoid create a triable issue of material fact about whether Mueller knew a company it had just acquired was involved in the sort of fraudulent scheme alleged by Armenta. Of course, none of this evidence.has anything at all to do with what Tyco knew or didn’t know.

 Subdivision (a)(8) of section 12651 applies only to inadvertently submitted false claims. In her first cause of action, Armenta alleges that all of the defendants knowingly presented false *654claims. In her second cause of action, Armenta does not say whether defendants acted knowingly or inadvertently but simply alleges that they were all “beneficiaries of the inadvertent submission of false claims” (she doesn’t say by whom) and that they are, by reason of their status as beneficiaries, liable to her for treble damages and forfeitures. While she is certainly entitled to plead inconsistent theories of recovery, the summary judgment motions put her to her proof — and I do not believe she raised a triable issue of material fact under either of these theories.

 The two bases for the majority’s decision to reverse the summary judgment are (1) that there is a “triable issue of material fact as to whether Mueller and Tyco had knowledge that Jones was selling substandard pipes,” and (2) “a triable issue of fact as to whether Mueller and Tyco may be held liable under section 12651, subdivision (a)(8), as beneficiaries of Jones’s submission of false claims.” (Maj. opn., ante, at pp. 647, 649.) For this reason, I see no need to discuss the other issues raised in Armenta’s briefs.