Darr v. Sutter Health
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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
No. C 04-02624 WHA
Consolidated with case
No. C 04-02837 WHA
ORDER GRANTING MOTION
TO DISMISS AND DECLINING
TO EXERCISE
SUPPLEMENTAL
JURISDICTION OVER
STATE CLAIMS
DUANE DARR and LINDA ARRONA, on
behalf of themselves and all others similarly
situated,
Plaintiffs,
v.
SUTTER HEALTH; and DOES 1–50,
inclusive,
Defendants.
/
KARRIEM MUHAMMAD, on behalf of
themselves and all others similarly situated,
Plaintiffs,
v.
SUTTER HEALTH; and DOES 1–50,
inclusive,
Defendants.
/
INTRODUCTION
In these consolidated cases, plaintiffs allege, among other things, that defendant
Sutter Health’s tax-exempt status pursuant to 26 U.S.C. 501(c)(3) creates a contract for the
benefit of the medically indigent. In turn, plaintiffs allege that defendant has breached the terms
of that contract by charging uninsured patients allegedly inflated rates for medical services.
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Defendant moves to dismiss plaintiffs’ complaint. Finding that Section 501(c)(3) does not
contain an implied right of action, this order GRANTS the motion to dismiss plaintiffs’ federal
claims and dismisses plaintiffs’ state-law claims without prejudice to refiling in state court.
STATEMENT
The complaint in the Darr action alleges that, on or about May 17, 2004, plaintiff
Duane Darr was taken to the Alta Bates Summit Medical Center, a Sutter hospital. Mr. Darr
had slipped and fallen at a local grocery store. At the time of treatment, Mr. Darr was
uninsured. He was transported to the emergency room by ambulance. Over several hours,
Mr. Darr underwent basic testing including blood tests, a hip x-ray and an EKG. He was also
given a pharmaceutical. He did not stay at the hospital overnight, and has not had any
follow-up treatment. For this hospital visit, Mr. Darr was billed $4,599.10.
On or about September 12, 2003, Jose Arrona, Jr. the minor son of plaintiff Ms. Linda
Arrona, was taken to Sutter Tracy Community Hospital, a Sutter hospital, for treatment of a
head laceration after he was attacked and beaten in the streets of Tracy. He was taken by his
friends to the emergency room for treatment. Jose received several stitches for his laceration,
had blood taken for lab tests, and was given two CT scans.
At the time of treatment, Jose and his family, including his mother, were uninsured. He
was released after approximately three hours. Ms. Arrona, as the parent of Jose Arrona,
received multiple bills for this medical treatment, including a bill for $4,660.60 from
Sutter Tracy Community Hospital. Ms. Arrona’s account was sent to the collections department
from which she received letters that demanded payment and threatened to forward the account
to a collection agency.
The named plaintiffs in the Muhammad action were taken to the Alta Bates Summit
Medical Center, a Sutter hospital, for treatment after being rear-ended in an automobile
accident. At the time of treatment, plaintiffs were uninsured. Over several hours, plaintiffs
underwent basic physical and diagnostic examinations and testing including blood tests. They
were also given pharmaceuticals. They did not stay at the hospital overnight. Plaintiff Tanori
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had some follow-up treatment. In connection with this incident, plaintiffs were billed over
$6,000 in the aggregate.
The named plaintiffs in both cases are bringing the action on behalf of themselves and
all other persons similarly situated. The prospective class is defined as follows:
All individuals (or their guardians or representatives) residing in
the United States who, from June 30, 2000 through the date of
judgment received any form of medical treatment at a Sutter
hospital or affiliate and were uninsured at the time of treatment.
Excluded from the Class are Defendants, any entity in which any
Defendant has a controlling interest, and any officers or directors
of Defendants, the legal representatives, heirs, successors, and
assigns of Defendants, and any judicial officer assigned to this
matter and his or her immediate family.
* * *
Plaintiffs in the Darr action allege seven claims. The Muhammad action is a “copy-cat”
case and its complaint contains essentially identical allegations. Plaintiffs’ first claim is that
they are the third-party beneficiaries of an agreement between defendant and the United States
government pursuant to Section 501(c)(3) (First Amended Compl. ¶ 60). In return for a
substantial federal income tax exemption, plaintiffs argue, defendant agreed to “(a) operate
exclusively for charitable purposes; (b) provide affordable medical care to plaintiffs and the
class; and (c) not pursue outstanding medical debt from plaintiffs and the class by engaging in
aggressive, abusive, and humiliating collection practices” (ibid.). Plaintiffs further allege that
defendant breached that contract by (ibid.):
(a) charging Plaintiffs and the Class the highest and full
undiscounted cost of medical care; (b) charging Plaintiffs and the
Class significantly more than its insured patients for the same
medical services; (c) failing to use its net assets and revenues in
the billions of dollars to provide affordable medical care to the
Plaintiffs and the Class; and (d) utilizing aggressive, abusive and
humiliating collection practices such as lawsuits, liens, and
garnishments to collect such inflated and unreasonable medical
debt from Plaintiffs and the Class.
The second count alleges that, by “admitting Plaintiffs and the Class into its hospitals
for medical care, Defendant Sutter undertook an express and/or implied contractual obligation
to charge Plaintiffs and the Class no more than a fair and reasonable charge for such medical
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care” (Compl. ¶ 65). Plaintiffs allege that defendant breached its contract “by charging
Plaintiffs and the Class the highest and full undiscounted cost for medical care” (id. ¶ 66).
The third count alleges a violation of the Fair Debt Collection Practices Act, and alleges
that “Sutter’s and the collection agencies’ conduct constitute aggressive, abusive and
humiliating and unfair collection practices” (id. ¶ 70). The fourth count alleges a breach of the
duty of good faith and fair dealing. Plaintiffs allege that they entered into a contractual
relationship with defendant and that defendant breached its duty of good faith and fair dealing
by:
(a) charging Plaintiffs and the Class the highest and full
undiscounted cost of medical care; (b) charging Plaintiffs and the
Class a higher amount for medical services than it charged its
insured patients for the same services; (c) charging Plaintiffs and
the Class unreasonable charges for medical care; and (d) utilizing
aggressive, abusive, and harassing collection practices such as
collection lawsuits, liens, and garnishments to collect such
outstanding grossly-inflated medical debt from Plaintiffs and the
Class.
The fifth count is for a breach of a charitable trust allegedly created when defendant
accepted federal tax-exemptions under Section 501(c)(3) (id. ¶ 79). The sixth count alleges that
defendant has violated Section 17200 of the California Business and Professions Code in which
plaintiffs’ re-allege their proceeding claims. Plaintiffs also allege that defendant’s conduct
constitutes fraudulent business practices insofar as plaintiffs “are likely to be deceived by
Sutter’s advertising tag line that it is ‘Community Based. Not for Profit’” (id. ¶ 88).
The seventh count alleges a violation of the Consumers Legal Remedies Act. Plaintiffs
allege that defendant violated the CLRA by engaging in deceptive practices, including:
(a) In violation of Civil Code § 1790(a)(5), Sutter represents that
the goods and services it provides have characteristics and/or
benefits that they do not have;
(b) In violation of Civil Code § 1770(a)(9), Sutter advertised its
services with intent not to sell them as advertised; and
(c) In violation of Civil Code § 1770(a)(16), Sutter represents that
the subject of a transaction has been supplied in accordance with a
previous representation, when it has not.
The eighth and final count alleges that defendant has been unjustly enriched at the
expense of plaintiffs. “Sutter has failed to provide affordable medical care to Plaintiffs and the
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Class despite receiving millions of dollars in federal tax exemptions for such purpose. Contrary
to Sutter’s charitable, nonprofit, tax-exempt status, Sutter has failed to use its substantial assets
and revenues to provide affordable medical care to Plaintiffs” (Compl. ¶ 99).
ANALYSIS
RIGHTS OF ACTION.
1.
Acknowledging that the statute contains no express right of action, plaintiffs argue that
Section 501(c)(3) contains an implied right. As a preliminary matter, plaintiffs cite to no case
holding that the statute contains such a right. Plaintiffs instead make arguments under the
four-factor test used to determine whether a private remedy is implicit in a statute not expressly
providing one. This test is set forth in Cort v. Ash, 422 U.S. 66, 78 (1975):
(1) “is the plaintiff one of the class for whose special benefit the
statute was enacted;” (2) “is there any indication of legislative
intent, explicit or implicit, either to create such a remedy or to
deny one?” (3) “is it consistent with the underlying purposes of the
legislative scheme to imply such a remedy for the plaintiff?” and
(4) “is the cause of action one traditionally relegated to state law,
in an area basically the concern of the States, so that it would be
inappropriate to infer a cause of action based solely on federal
law?”
As plaintiffs acknowledge, the Supreme Court has made clear that a court’s central task is
identifying congressional intent to create a private right of action within the text of the statute.
Alexander v. Sandoval, 532 U.S. 275, 286–87 (2001).
Plaintiffs contend that Section 501(c)(3) evinces congressional intent to create such an
implied right of action because “courts properly imply that when a statute permits the formation
of a contract with the government . . . it is proper to imply that congress intended contractual
remedies” (Opp. 6). This argument, however, merely assumes what plaintiffs need to prove.
Plaintiffs do not establish that Section 501(c)(3) provides for the creation of contracts with the
government. Indeed, a presumption exists against construing a statute as creating or authorizing
a contract, Nat’l R. R. Passenger Corp. v. Atchinson, Topeka and Santa Fe Ry. Co., 470 U.S.
451, 465-66 (1985):
[a]bsent some clear indication that the legislature intends to bind
itself contractually, the presumption is that a law is not intended to
create private contractual or vested rights but merely declares a
policy to be pursued until the legislature shall ordain otherwise . . .
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This well-established presumption is grounded in the elementary
proposition that the principal function of a legislature is not to
make contracts, but to . . . establish the policy of the state.
A party who asserts a contractual right must “overcome this well-founded presumption,”
and must do so by “identifying a contract within the language of the regulatory statute and [by]
defining the contours of any contractual obligation.” Ibid. Plaintiffs fail to make this showing.
Plaintiffs do not point to any contractual provisions appearing within Section 501(c)(3), nor any
language within the statute that defines the contours of a contractual obligation. Instead,
plaintiffs argue that Section 501(c)(3) is “similar to other federal laws that create actionable
contracts” (Opp. 7).
To prove the existence of an implied right of action, plaintiffs also point to the
Hill-Burton Act, 42 U.S.C. 291(c). As a threshold matter, the Hill-Burton Act is not a tax
statute but a series of spending grants regulated by the Surgeon General. As such, a private
party seeking to enforce Hill-Burton obligations is not barred by the multiple provisions of the
tax code limiting standing to the IRS and the taxpayer whose tax burden is at issue. Nor are the
instant plaintiffs suing under the Hill-Burton Act.
2.
STANDING.
Presumably as a matter of federal common law, plaintiffs argue that they have standing
to assert third-party beneficiary claims. “Parties that benefit from a government contract are
generally assumed to be incidental beneficiaries, and may not enforce the contract absent a clear
intent to the contrary.” Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d 1206,
1211 (9th Cir. 1999). See also Restatement (Second) of Contracts Section 313(2) (“[A]
promisor who contracts with a government or governmental agency to do an act for or render a
service to the public is not subject to contractual liability to a member of the public for
consequential damages resulting from performance or failure to perform.”)
The decisions cited by plaintiffs only serve to demonstrate the difficulty of establishing
standing under a third-party beneficiary theory. In Schuerman v. United States, 30 Fed. Cl. 420,
433 (Fed. Cl. 1994), the contract at issues was made for the “specific benefit of plaintiffs and
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not one else,” and the documents “identif[ied] plaintiffs.” The court was careful to distinguish
the plaintiffs from “incidental and indirect beneficiaries” and stated:
This is not a case where the Government entered into a contract for
the benefit of the public at large and where two members of the
public seek[] to sue for breach of contract. Instead, this is a case
where the Government specifically identified plaintiffs as the
intended beneficiaries in the Contract of Guarantee, and it is upon
this contract plaintiffs are suing for breach.
Ibid. Similarly, the court in Montana v. United States confirmed the rule that “when members
of the public bring suit against promisors who contract with the government to render a public
service,” they “are considered to be incidental beneficiaries unless they can show a direct right
to compensation.” 124 F.3d 1269, 1273 n.6 (Fed. Cir. 1997).
Plaintiffs also cite to a Seventh Circuit decision granting current tenants of a Section 8
housing project standing as third-party beneficiaries to a contract with HUD. See Holbrook v.
Pitt, 643 F.2d 1261 (7th Cir. 1981). Plaintiffs do not mention, however, that the Seventh
Circuit subsequently limited that holding. The circuit found that applicants for subsidized
housing do not have standing to sue on such contracts. Price v. Pierce, 823 F.2d 1114, 1121
(7th Cir. 1987).
3.
FAIR DEBT COLLECTION PRACTICES ACT.
At hearing, plaintiffs acknowledged that the complaint fails to state a FDCPA claim
because defendant is neither a creditor nor a debt collector, and is thus not governed by the
FDCPA. The FDCPA governs the conduct of “debt collectors,” a term defined to mean “any
person who uses any instrumentality of interstate commerce or the mails in any business the
principal purpose of which is the collection of any debts, or who regularly collects or attempts
to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”
15 U.S.C. 1692a(6). The term also “includes any creditor who, in the process of collecting his
own debts, uses any name other than his own which would indicate that a third person is
collecting or attempting to collect such debts.” Ibid.
Congress enacted the FDCPA to target independent debt collectors, considering them to
be the “prime source of egregious collection practices.” Pavone v. Citicorp Credit Servs., Inc.,
60 F. Supp. 2d 1040, 1046 (S.D. Cal. 1997). Thus, “[t]he Fair Debt Collection Practices Act
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creates causes of action against debt collectors, not creditors.” Transamerica Fin. Servs., Inc. v.
Sykes, 171 F.3d 553, 554 n.1 (7th Cir. 1999). “Creditors who collect in their own name and
whose principal business is not debt collection, therefore, are not subject to the Act.” Aubert v.
American Gen. Fin., Inc., 137 F.3d 976, 978 (7th Cir. 1998). Indeed, the FDCPA expressly
excludes from the “debt collector” definition “any officer or employee of a creditor while . . .
collecting debts for such creditor.” 15 U.S.C. 1692a(6)(A)1.
The facts pled in the complaint show that defendant is (at most) a creditor, not a “debt
collector.” “[I]n order to state a clam [under the FDCPA] Plaintiffs have to allege either (1) that
the principal purpose of the Defendants’ business is the collection of debts, (2) that the
Defendants regularly collect debts on behalf of others, or (3) that if the Defendants are
creditors, they are using a name other than their own indicating to Plaintiffs that a third person
is collecting the debts.” Kerr v. Wanderer & Wanderer, 211 F.R.D. 625, 629 (D. Nev. 2002).
Here, the complaint fails to plead any of the required facts. Instead, the complaint
merely states “Arrona and the Class were, and are, pursued by collection departments and/or
agencies for debts allegedly owed by Sutter patients” (Compl. ¶ 69). Plaintiffs thus fail to state
a claim under the FDCPA.
4.
DISMISSAL OF STATE-LAW CLAIMS.
As described above, plaintiffs’ complaint also seeks relief for various violations of
state law. This court declines to exercise jurisdiction over plaintiffs’ state-law claims under
28 U.S.C. 1367(c)(3). Section 1367(c) provides that:
The district courts may decline to exercise supplemental
jurisdiction over a claim under subsection (a) if (1) the claim raises
a novel or complex issue of State law, (2) the claim substantially
predominates over the claim or claims over which the district court
has original jurisdiction, (3) the district court has dismissed all
claims over which it has original jurisdiction, or (4) in exceptional
circumstances, there are other compelling reasons for declining
jurisdiction.
To decline jurisdiction in circumstances like this, a district court must first identify the
dismissal that triggers the exercise of discretion and then explain how declining jurisdiction
serves the objectives of economy, convenience and fairness to the parties, and comity. See
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Executive Software N. Am., Inc. v. United States Dist. Court, 24 F.3d 1545, 1557 (9th Cir.
1994).
The Supreme Court has indicated, however, that “[i]n the usual case in which all
federal-law claims are eliminated before trial, the balance of the factors to be considered under
the pendent jurisdiction doctrine — judicial economy, convenience, fairness, and comity — will
point toward declining to exercise jurisdiction over the remaining state-law claims.”
Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 n.7 (1998); see also San Pedro Hotel Co.,
Inc. v. City of Los Angeles, 159 F.3d 470, 478 (9th Cir. 1998) (district court not required to
provide explanation when declining jurisdiction under Section 1367(c)(3)).
At all costs unlike other cases this Court has not invested substantial time in supervising
this case. In fact, other than ruling on the federal claims in this order, the Court has invested no
time on the case. Therefore, there will be no duplication of effort to remit the remaining claims
to state court. This order thus dismisses plaintiff’s state-law claims without prejudice to refiling
in state court.
CONCLUSION
For the reasons stated above, defendant’s motion is GRANTED. The Court is convinced
that any stab at amendment of the federal claims would be futile. Therefore leave to amend is
denied. Given that supplemental jurisdiction will not exercised, a final judgment will be
entered now. The Clerk shall close the file.
IT IS SO ORDERED.
Dated: November 30, 2004.
S/ WILLIAM ALSUP
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE
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