Vahora v. Valley Diagnostic Laboratory Inc.

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 GULAMNABI VAHORA, a Pennsylvania No. 1:19-cv-00912-DAD-SKO Individual, 12 Plaintiff, 13 ORDER ADOPTING FINDINGS AND v. RECOMMENDATIONS IN PART 14 VALLEY DIAGNOSTIC LABORATORY (Doc. Nos. 11, 27) 15 INC., a California corporation,

16 Defendant. 17 18 Plaintiff Gulamnabi Vahora filed the complaint in this action on July 2, 2019, alleging 19 claims for appointment of a receiver, an accounting, breach of fiduciary duty, and breach of 20 partnership duties against defendant Valley Diagnostics Laboratory, Inc. (Doc. No. 1.) On July 21 23, 2019, defendant filed a motion to dismiss the complaint, in part on res judicata grounds. 22 (Doc. No. 11.) Specifically, defendant’s motion is premised on the preclusive effect of a 23 judgment entered in favor of plaintiff in a prior case in this district, Vahora v. Valley Diagnostics 24 Laboratory, Inc., No. 1:16-cv-01624-SKO (“Vahora I”), on the claims in this case, Vahora v. 25 Valley Diagnostic Laboratory, Inc., No. 1:19-cv-00912-DAD-SKO (“Vahora II”). (See generally 26 Doc. No. 11.) This matter was referred to a United States Magistrate Judge pursuant to 28 U.S.C. 27 § 636 and Local Rule 302. 28 ///// 1 The assigned magistrate judge issued findings and recommendations on January 3, 2020, 2 recommending that defendant’s motion to dismiss be granted without leave to amend. (Doc. No. 3 27.) The findings and recommendations provided that any objections thereto were to be filed 4 within twenty-one (21) days. Plaintiff filed objections on January 21, 2020, and defendant filed a 5 response to those objections on January 31, 2020. (Doc. Nos. 29, 30.) 6 In accordance with the provisions of 28 U.S.C. § 636 (b)(1)(C), the court has conducted a 7 de novo review of the case. Having carefully reviewed the entire file, including plaintiff’s 8 objections, (Doc. No. 29), and defendant’s response to those objections, (Doc. No. 30), the court 9 finds that the findings and recommendations are supported by the record and proper analysis, save 10 and except as to the applicable res judicata standards as explained below. 11 Plaintiff objects to the pending findings and recommendations primarily by asserting that 12 the magistrate judge should have applied the res judicata standards under California law in 13 addressing defendant’s motion to dismiss, as opposed to the federal standards.1 Relevant to 14 consideration of plaintiff’s objection is that the Ninth Circuit has held as follows: 15 This court has held that a federal court sitting in diversity must apply the res judicata law of the state in which it sits. Gramm v. 16 Lincoln, 257 F.2d 250, 255 n.6 (9th Cir. 1958). We have applied that rule even where the prior action was in federal court and 17 involved federal questions. See St. Paul Fire & Marine Ins. Co. v. Weiner, 606 F.2d 864, 868 (9th Cir. 1979) (collateral estoppel rules 18 of forum state applied where prior judgments were federal criminal convictions). Hence California’s law of res judicata dictates what 19 preclusive effect is to be accorded to the prior judgment against appellant. That California law, however, determines the res 20 judicata effect of a prior federal court judgment by applying federal standards. Therefore, those federal standards are applicable here to 21 determine the preclusive effect of the prior judgment.

22 1 The undersigned notes that plaintiff did not raise this argument before the magistrate judge. In fact, there plaintiff cited cases that applied the federal res judicata standard and did not mention 23 the standard under California law at all in his brief in opposition to defendant’s motion to dismiss. (See Doc. No. 18 at 6–7.) Thus, plaintiff hindered the magistrate judge’s ability to address the 24 argument he now raises for the first time in his objections. Where, as here, the party presenting new arguments for the first time in objections to findings and recommendations is represented by 25 counsel, the court has the discretion to decline to consider the belated arguments. See United States v. Howell, 231 F.3d 615, 621–22 (9th Cir. 2000). Moreover, plaintiff’s counsel has 26 provided no explanation for their failure to present this argument to the magistrate judge in opposing defendant’s motion to dismiss. Nonetheless, and out of an abundance of caution, the 27 court will exercise its discretion to consider and address this new argument, even though it obviously should have been presented to the magistrate judge so that it could be addressed in the 28 findings and recommendations and thereby conserve the scarce judicial resources of this district. 1 Costantini v. Trans World Airlines, 681 F.2d 1199, 1201 (9th Cir. 1982). In his objection 2 plaintiff asserts that the Ninth Circuit’s holding in Costantini on this point, “has been called into 3 question.” (Doc. No. 29 at 12–13.) Specifically, plaintiff contends that contrary to the statement 4 in Costantini, California state courts do not apply federal standards in determining the preclusive 5 effect of federal court judgments. (Id.). 6 It does appear that California courts do not generally apply federal standards to determine 7 the preclusive effect of federal court judgments in diversity actions. See Louie v. BFS Retail & 8 Commercial Operations, LLC, 178 Cal. App. 4th 1544, 1553–54 (2009); Johnson v. 9 GlaxoSmithKline, Inc., 166 Cal. App. 4th 1497, 1507 (2008), as modified on denial of reh’g (Oct. 10 14, 2008) (“Although [the prior judgments] are decisions by a federal court, because the district 11 court was exercising diversity jurisdiction, California law determines their preclusive effect.”); S. 12 California Stroke Rehab. Assocs., Inc., v. Nautilus, Inc., 782 F. Supp. 2d 1096, 1105 (S.D. Cal. 13 2011) (“California courts do not apply federal standards to determine the preclusive effect of 14 federal court judgments in diversity actions.”). Some federal and California courts have 15 described this reality as California courts being at odds with the holding in Costantini. See, e.g., 16 Prieto v. U.S. Bank Nat. Ass’n, No. CIV S-09-901 KJM EFB, 2012 WL 4510933, at *8 (E.D. Cal. 17 Sept. 30, 2012) (“California case law is not in accord [with Costantini].”). The undersigned does 18 not necessarily draw that same conclusion. Although the court in Costantini did not emphasize 19 the prior judgment’s jurisdictional basis in that case, the prior judgment at issue there was in fact 20 based on federal question jurisdiction.2 681 F.2d at 1200. It was in that context that the court 21 held federal standards were applicable to determine the preclusive effect of the prior judgment. 22 Id. at 1201. 23 Thus, in the undersigned’s view, the decision in Costantini does not answer the question 24 of whether a federal court should apply federal res judicata standards where the prior judgment is

25 2 The court in Costantini interpreted two state court decisions to support its conclusion that California courts apply federal res judicata standards in determining the preclusive effect of any 26 prior judgment rendered by a federal court. The first, Younger v. Jensen, 26 Cal. 3d 397, 411 (1980), considered a collateral estoppel argument based on a prior judgment in a federal question 27 action. The second, Levy v. Cohen, 19 Cal. 3d 165, 172–73 (1977), involved a prior judgment from a bankruptcy case. Federal district courts have original and exclusive jurisdiction over cases 28 arising under the bankruptcy code. See 28 U.S.C. § 1334(a). 1 based on diversity jurisdiction. (See Doc. No. 1-1 at 4.) This interpretation is supported by the 2 more recent decision of the Ninth Circuit in Gustafson v. U.S. Bank N.A., 618 F. App’x 921 (9th 3 Cir. 2015)3 (citing Costantini, 681 F.2d at 1201 and Semtek Int’l Inc. v. Lockheed Martin Corp., 4 531 U.S. 497, 508–09 (2001)). There, the Ninth Circuit determined that the district court— 5 exercising its diversity jurisdiction—improperly applied the federal res judicata standards because 6 it should have applied California law in determining the preclusive of a prior federal diversity 7 case. Id. at 922. That conclusion is consistent both with the undersigned’s interpretation of the 8 holding in Costantini as well as the authorities upon which plaintiff relies in support of his 9 objections. The undersigned therefore concludes that this court must apply res judicata standards 10 as governed by California law in determining the preclusive effect of Vahora I on this action. 11 The question of whether state or federal law governs this decision, however, is of no 12 significance here. Indeed, whether the undersigned’s interpretation of the Ninth Circuit’s 13 decision in Costantini set forth above is correct or not has no impact on the resolution of the 14 pending motion to dismiss. This is because: 15 California follows the primary right theory of Pomeroy; i.e., a cause of action consists of 1) a primary right possessed by the plaintiff, 2) 16 a corresponding primary duty devolving upon the defendant, and 3) a delict or wrong done by the defendant which consists in a breach 17 of such primary right and duty. Thus, two actions constitute a single cause of action if they both affect the same primary right. 18 19 Gamble v. Gen. Foods Corp., 229 Cal. App. 3d 893, 898 (1991), reh’g denied and opinion 20 modified (May 28, 1991) (internal citations omitted). “A ‘plaintiff’s primary right is defined by 21 the legally protected interest which is harmed by defendant’s wrongful act, and is not necessarily 22 coextensive with the consequence of that wrongful act.’” Fujifilm Corp. v. Yang, 223 Cal. App. 23 4th 326, 332 (2014) (quoting Henderson v. Newport–Mesa Unified School Dist. 214 Cal.App.4th 24 478, 499 (2013)). 25 Here, plaintiff asserts that under California’s primary right theory this action, Vahora II, 26 should not be dismissed because Vahora I litigated only his contractual rights, whereas in Vahora 27 3 Citation to this unpublished Ninth Circuit opinion is appropriate pursuant to Ninth Circuit Rule 28 36-3(b). 1 II it is his statutory rights that are at issue. (Doc. No. 29 at 14.) However, as the magistrate judge 2 correctly noted in the pending findings and recommendations, both Vahora I and Vahora II 3 involve plaintiff’s partnership rights “in relation to the partnership between Plaintiff and Qarni in 4 VDL.” (Doc. No. 27 at 15.) Thus, plaintiff’s “primary right” is his right to competent 5 performance of partnership obligations by defendant—regardless of whether the source of the 6 obligations is contractual in one action and statutory in the other. See, e.g., Baiul v. NBC Sports, 7 No. cv-15-05163-DDP (MRWX), 2016 WL 5842189 at *4 (C.D. Cal. Oct. 5, 2016) (rejecting the 8 plaintiff’s argument that “different primary rights are at issue because ‘a cause of action in 9 contract asserts a different primary right than a cause of action in tort’”) aff’d sub nom. Baiul v. 10 NBC Sports, a division of NBCUniversal Media, LLC, 732 F. App’x 529 (9th Cir. 2018), as 11 amended (June 13, 2018); Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers 12 Casualty & Surety Co. of America, 133 Cal.App.4th 1319, 1332 (2005) (the defendant’s “attempt 13 to distinguish . . . primary rights as sounding in tort or contract is irrelevant”; primary right was 14 “the right to competent performance,” primary duty was “to competently perform,” and injury 15 was “negligent or wrongful performance”); Burdette v. Carrier Corp., 158 Cal.App.4th 1668, 16 1674–75 (2008) (“Res judicata bars the relitigation not only of claims that were conclusively 17 determined in the first action, but also matter that was within the scope of the action, related to 18 the subject matter, and relevant to the issues so that it could have been raised.”). 19 Plaintiff cannot escape this bar by attempting to frame the harm as occurring during rather 20 than prior to the trial in Vahora I. In his complaint filed in this action (Vahora II), plaintiff 21 alleges that 22 Qarni’s testimony at trial indicates that VDL has engaged in grossly negligent and/or reckless conduct with respect to the knowingly 23 false and fraudulent declaration of 100% ownership interest VDL, since 2012, in violation of Section 16404(c) of the California 24 Corporate Code, constituting a breach of fiduciary duty owed to the partner who did not participate in the negligent and/or reckless 25 conduct. 26 (Doc. No. 1 at ¶ 79.) Ultimately, plaintiff asserts that he was harmed because VDL never 27 provided him with a Schedule K-1 form and thus he “could not employ VDL’s losses to offset is 28 [sic] taxable income for the years 2012-2019.” (Id. at ¶¶ 84–86.) However, this alleged breach of 1 fiduciary duty occurred at the same time as defendant’s alleged breach of contract, and ultimately 2 produced a single harm: deprivation of plaintiff’s partnership rights. Thus, Vahora I and Vahora 3 II involve the same primary right. 4 As to plaintiff’s objection that defendant’s motion to dismiss cannot be based on res 5 judicata grounds, plaintiff misunderstands the meaning of “disputed issue of fact” in the context 6 of the application of the res judicata doctrine.4 (See Doc. No. 29 at 11–12.) As the pending 7 findings and recommendations note, “[r]es judicata may properly be raised in a Rule 12(b)(6) 8 motion to dismiss based upon the court taking judicial notice of the record in the prior case where 9 no disputed issues of fact appear.” (Doc. No. 27 at 7) (quoting Silva v. Yosemite Community 10 College District, No. 1:19-cv-00795-LJO-EPG, 2019 WL 687837, at *5 (E.D. Cal. Dec. 17, 11 2019)). Plaintiff objects, contending that a disputed issue of fact is raised here because the parties 12 disagree as to “the extent of [plaintiff’s] ownership interest” in the defendant corporation. (Doc. 13 No. 29 at 12.) However, where a defendant argues that an action is barred on res judicata grounds 14 based solely on the complaint in the subsequent case and the record in the prior case, as defendant 15 does here, by definition, the argument “does not present any disputed issues of fact.” See Baskin 16 v. Federal Home Mortg. Corp., No. cv-12-08171-PHX-GMS, 2012 WL 6029741, at *1 (D. Ariz. 17 Dec. 4, 2012). While the parties here clearly disagree regarding the extent of defendant’s liability 18 in Vahora II, that disagreement fails to present a “disputed issue of fact” for the purposes of res 19 judicata where the analysis is confined to the complaint in Vahora II and the record in Vahora I. 20 See id. 21 The pending findings and recommendations also do not improperly characterize Mr. 22 Qarni’s trial testimony in Vahora I, as plaintiff contends. (See Doc. No. 29 at 16.) The court 23 “need not accept as true allegations ‘contradicted by facts that can be judicially noticed or by 24 other allegations or exhibits attached to or incorporated in the pleading[s].’” See Spy Optic v. 25 Alibaba.Com, Inc., 163 F. Supp. 3d 755, 764 (C.D. Cal. 2015) (citation omitted). Here, the

26 4 Plaintiff’s opposition also did not object to defendant raising res judicata in its motion to dismiss. Rather, plaintiff again has raised this argument for the first time in his objections to the 27 pending findings and recommendations. This is improper. See fn. 1, above. Nonetheless, and once again out of an abundance of caution, the court will exercise its discretion to consider and 28 address the belatedly advanced argument. 1 magistrate judge properly took judicial notice of the record in Vahora I, and thus the court need 2 not accept as true plaintiff’s allegation regarding Qarni’s testimony when the documents the court 3 has taken judicial notice of belie those allegations. See id. 4 Finally, as to plaintiff’s request to amend the complaint, where the court determines that 5 claims raised in a complaint are barred by res judicata, any amendment would normally be futile. 6 See Costantini, 681 F.2d at 1203; Johnson v. Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004); 7 Huggins v. Hynes, 117 F. App’x 517, 518 (9th Cir. 2004)5; Janis v. United States, No. 1:04-cv- 8 05812, 2011 WL 1258521, at *5 (E.D. Cal. Mar. 30, 2011). Here, the findings and 9 recommendations correctly note that even if plaintiff could plead with sufficient particularity that 10 defendant “fraudulently concealed” evidence from him, the concealment of that evidence did not 11 prevent plaintiff from bringing viable claims in Vahora I for breach of fiduciary duty, breach of 12 partnership duties, or for an accounting. (Doc. No. 27 at 12); see also Costantini, 681 F.2d at 13 1203 n.12 (noting that the fraudulent concealment exception applies only “where defendant’s 14 misconduct prevented plaintiff from knowing, at the time of the first suit, either that he had a 15 certain claim or else the extent of his injury”). In his objections, plaintiff asks 16 How could Dr. Vahora possibly have known in October of 2016 about contentions Mr. Qarni would make in a bankruptcy litigation 17 and a related Adversary Action that would be brought in the summer of 2019? How could he have protected himself in tort 18 against the repercussions of those contentions prior to receiving knowledge of them? 19 20 (Doc. No. 29 at 11.) As defendant notes in its reply, “it is not facially plausible that Vahora— 21 who alleged very specific partnership interests prior to the dissolution of the partnership—could 22 not have obtained information about ownership interests through discovery.” (Doc. No. 30 at 13– 23 14.) The undersigned agrees and concludes that the granting of leave to amend under the 24 circumstances presented here would be futile. 25 ///// 26 ///// 27

28 5 See fn. 3, above. 1 Accordingly: 2 1. The findings and recommendations issued January 3, 2020 (Doc. No. 27) are 3 adopted but-for the application of federal res judicata standards, as described 4 above; 5 2. Defendant’s motion to dismiss (Doc. No. 11) is granted without leave to amend; 6 and 7 3. The Clerk of the Court is directed to close this case. 8 | IT IS ORDERED. a 9 Li. wh F Dated: _ March 5, 2020 ASR rr 10 UNITED STATES DISTRICT JUDGE 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28