SCHEFFIELD MEDICAL GROUP INC v. ROTH

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Court of Appeal, Second District, Division 2, California.

SCHEFFIELD MEDICAL GROUP, INC., Plaintiff and Appellant, v. Bruce M. ROTH, Defendant and Respondent.

No. B115042.

Decided: May 20, 1998

Jones, Day, Reavis & Pogue, Elwood Lui, Frederick L. McKnight and Jeffrey A. LeVee, Los Angeles, for Plaintiff and Appellant. O'Melveny & Myers, James R. Asperger, Kenneth R. O'Rourke and Jess B. Frost, Los Angeles, for Defendant and Respondent.

In this appeal, we are asked to determine whether employees of State Compensation Insurance Fund (State Fund) are immunized for their prosecutorial actions under Government Code section 821.6.1  We decide they are immune and affirm the judgment entered by the trial court after it sustained a demurrer in favor of respondent Bruce Roth and against appellant Scheffield Medical Group, Inc.

CONTENTIONS

Appellant contends that (1) respondent's conduct is not protected prosecutorial activity, (2) section 821.6 does not apply to State Fund employees, and (3) respondent cannot avoid injunctive relief.

FACTS AND PROCEDURAL BACKGROUND

On September 23, 1996, appellant filed a complaint for (1) breach of contract (against State Fund);  (2) breach of the implied covenant of good faith and fair dealing (against State Fund);  (3) fraud (against State Fund);  (4) breach of fiduciary duty (against State Fund and respondent);  (5) abuse of process (against State Fund, respondent and Aura Figueroa) 2 ;  and (6) unfair business practices (against State Fund and respondent).

According to the allegations of the complaint, appellant is an industrial medical clinic which provides medical care to persons injured or made ill by their jobs.   Appellant employs doctors, specialists, physical therapists and lab technicians, to screen, diagnose, and treat patients.   In lieu of cash payment, appellant accepts a lien against its patients' workers' compensation claim and the workers' compensation insurer for the patients' employer.

Appellant's workers' compensation insurer is State Fund, which employs respondent, an attorney.   In order to increase its profits, State Fund, through respondent, allegedly planned to avoid or delay paying legitimate claims and liens by (1) fabricating a record with which to attack appellant, and (2) delaying resolution of claims, thereby creating an unfavorable claims history for appellant, resulting in higher premiums for appellant.

In January 1992, Aura Figueroa, a physical therapy supervisor for appellant, resigned her position.   She submitted a post-termination stress claim for workers' compensation against appellant on March 24, 1992.   On May 22, 1992, State Fund denied Figueroa's claim in its entirety.   Subsequently, State Fund reversed its position and settled Figueroa's claim for $39,000 in order to procure her false testimony to attack appellant and avoid paying appellant's liens.

On July 26, 1996, State Fund, through respondent, filed a petition for consolidation of 225 of appellant's lien claims, for reimbursement and/or restitution, and for disallowance of liens.

Appellant noticed that a large number of claims had remained open for over three years, resulting in unrecovered losses of premiums paid to State Fund. Appellant's request for an explanation for the large number of open claims and high premiums was ignored by State Fund.

Appellant alleged that respondent was State Fund attorney assigned to defend appellant, and that he breached his fiduciary duty to appellant “by failing to defend [appellant] from its employees' claims, by encouraging and developing false testimony by those employees, by sharing confidential information developed during the purported defense of appellant with other insurers for use against [appellant], and by using information developed during State Fund's purported defense of [appellant] to attack [appellant's] lien claims.”   Appellant further named respondent in its cause of action for abuse of process by alleging that respondent engaged in court process, namely deposition discovery, in order to develop false testimony with which to inflate workers' compensation awards against appellant, and to attack appellant's lien claims.

Respondent filed a motion for demurrer on the ground that he is immune from liability to appellant under section 821.6.   He argued that, as a public employee, he is not liable for injuries “caused by his instituting or prosecuting any judicial or administrative proceeding within the scope of his employment, even if he acts maliciously and without probable cause.”   The demurrer was sustained by the trial court without leave to amend, “on all grounds set forth [in] moving papers.”

This appeal followed.

DISCUSSION

I. Standard of Review

 The appellate court assumes the truth of all properly pleaded material allegations of the complaint, and gives “the complaint a reasonable interpretation by reading it as a whole and its parts in their context [citation].”  (Silberg v. Anderson (1990) 50 Cal.3d 205, 210, 266 Cal.Rptr. 638, 786 P.2d 365.)   When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action;  and when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment.   (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)   If the complaint can be cured, the trial court has abused its discretion.  (Ibid.)

 “To meet the plaintiff's burden of showing abuse of discretion, the plaintiff must show how the complaint can be amended to state a cause of action.  [Citation.]”  (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1386, 272 Cal.Rptr. 387.)  “However, such a showing need not be made in the trial court so long as it is made to the reviewing court.”  (Ibid.)

 Although the appellate courts take a liberal view toward curing defects by amendment, “there is nothing in the general rule of liberal allowance of pleading amendment which ‘requires an appellate court to hold that the trial judge has abused his discretion if on appeal the plaintiffs can suggest no legal theory or state of facts which they wish to add by way of amendment.’ ”   (Id., at pp. 1387-1388, 272 Cal.Rptr. 387.)   That is, “[t]he burden is on the plaintiffs to demonstrate that the trial court abused its discretion and to show in what manner the pleadings can be amended and how such amendments will change the legal effect of their pleadings.  [Citations.]”  (Id., at p. 1388, 272 Cal.Rptr. 387.)

II. Whether Respondent Is Absolutely Immune Under Section 821.6

 Section 821.6 provides that “[a] public employee is not liable for injury caused by his instituting or prosecuting any judicial or administrative proceeding within the scope of his employment, even if he acts maliciously and without probable cause.”

Our review of the complaint leads us to conclude that respondent is immune under section 821.6.   State Fund is a state agency (Gilmore v. State Comp. Ins. Fund (1937) 23 Cal.App.2d 325, 73 P.2d 640), and is organized as a public enterprise fund.  (Ins.Code, § 11773.)   The Department of Industrial Relations is part of the state government, and State Fund is a division of the Department of Industrial Relations.  (Lab.Code, §§ 50, 56.)   Thus, State Fund is a “public entity” within the meaning of section 811.2, which defines a public entity as “[including] the State, the Regents of the University of California, a county, city, district, public authority, public agency, and any other political subdivision or public corporation in the State.”  (See Maxon Industries, Inc. v. State Compensation Ins. Fund (1993) 16 Cal.App.4th 1387, 1392, 20 Cal.Rptr.2d 730 [State Fund certainly is a public entity].)

Section 811.4 defines public employee as an employee of a public entity.   According to the allegations of appellant's complaint, respondent is employed as an attorney by State Fund. The trial court took judicial notice that respondent is an attorney in State Fund's Special Litigation Unit, which was created in 1992 pursuant to state law for the purpose of investigating and prosecuting insurance fraud.

In its complaint, appellant alleges that respondent investigated appellant in order to attack its lien claims, and that respondent ultimately filed a petition for consolidation and stay of lien proceedings, before the Workers' Compensation Appeals Board.   Such conduct clearly constitutes the element of initiating or prosecuting judicial or administrative proceedings.

According to the complaint, respondent performed all acts within the scope of his employment.   Indeed, under Insurance Code section 1875.20, “Every insurer admitted to do business in this state shall maintain a unit or division to investigate possible fraudulent claims by insureds or by persons making claims for services or repairs against policies held by insureds.”   Moreover, under Insurance Code section 1877.3, subdivision (b)(1), “When an insurer knows or reasonably believes it knows the identity of a person or entity whom it has reason to believe committed a fraudulent act relating to a workers' compensation insurance claim or a workers' compensation insurance policy, including any policy application, or has knowledge of such a fraudulent act that is reasonably believed not to have been reported to an authorized governmental agency, then, for the purpose of notification and investigation, the insurer, or agent authorized by an insurer to act on its behalf, shall notify the local district attorney's office and the Bureau of Fraudulent Claims of the Department of Insurance, and may notify any other authorized governmental agency of that suspected fraud and provide any additional information in accordance with subdivision (a).   The insurer shall state in its notice the basis of the suspected fraud.”

We conclude that respondent is a public employee as contemplated by section 821.6, and initiated administrative proceedings within the scope of his employment.   As such, he is afforded absolute immunity for the acts of which appellant complains.

III. Whether Respondent Breached Duties to Appellant

 Appellant alleges in its complaint that respondent breached his fiduciary duty to provide an adequate defense to appellant by encouraging and developing false testimony on the part of appellant's employees, by sharing confidential information, and by using information developed during State Fund's defense of appellant to attack appellant's lien claims.   In doing so, appellant contends, respondent violated multiple sections of the California Rules of Professional Conduct.   Appellant claims that it did not consent to dual representation and the breaches were not immunized conduct under section 821.6.

We disagree.   As respondent points out, in Rosenthal v. Vogt (1991) 229 Cal.App.3d 69, 74-75, 280 Cal.Rptr. 1, this court affirmed the trial court's sustaining of a demurrer against a disbarred attorney's action for breach of fiduciary duty against State Bar members.   Despite plaintiff's claims that the defendants violated their fiduciary duty to conduct State Bar proceedings fairly, we held that section 821.6 applies to State Bar employees to immunize them on account of injuries caused by their instituting or prosecuting any judicial or administrative proceedings within the scope of their employment, even if they act maliciously and without probable cause.

Here, we conclude that appellant's breach of fiduciary duty claim is a similar attempt to recharacterize respondent's conduct in order to fall within the ambit of a valid cause of action.   Respondent's actions in fulfilling his duty to comply with the mandates of Insurance Code sections 1877.3, subdivision (b)(1) and 1875.20 are immunized by section 821.6, despite appellant's attempt to cast his actions as a breach of fiduciary duty.   In its reply brief, appellant poses a hypothetical involving an attorney discovering conflicting interests, claiming that if the trial court's ruling is upheld, a lawyer may pursue conflicting representations in order to bring an action against a client.   Appellant's hypothetical is inapposite, since respondent has the affirmative duty to report fraud under Insurance Code section 1877.3, subdivision (b)(1), unlike the attorney in appellant's example.

Citing Amylou R. v. County of Riverside (1994) 28 Cal.App.4th 1205, 1210, 34 Cal.Rptr.2d 319 and Scott v. County of Los Angeles (1994) 27 Cal.App.4th 125, 32 Cal.Rptr.2d 643, appellant contends that respondent is not immunized by virtue of section 821.6 because respondent's actions in breaching his fiduciary duties, violating his oath as a lawyer, and violating the ethical rules and California law are not “essential steps” in investigating or preparing for the filing of formal proceedings.

Amylou R. v. County of Riverside, supra, 28 Cal.App.4th at page 1209, 34 Cal.Rptr.2d 319 does not assist appellant's argument but, rather, supports respondent's actions.   It states that immunity extends to actions taken in preparation of institution of formal proceedings.   Thus, “[b]ecause investigation is ‘an essential step’ toward the institution of formal proceedings, it ‘is also cloaked with immunity.’  [Citations.]”  (Id., at p. 1210, 34 Cal.Rptr.2d 319.)   In Amylou R., the conduct complained of consisted of investigating officers attempting to interview the victim of a rape, and questioning her friends and neighbors.   Those actions were found to be incidental to the investigation of the crime and part of the prosecution of a judicial proceeding, and therefore immunized.  (Ibid.) Similarly, despite appellant's attempt to color respondent's conduct as violations of ethical duties, respondent investigated improprieties as part of his assignment in State Fund's Special Litigation Unit, and pursuant to Insurance Code sections 1875.20 and 1877.3, subdivision (b)(1).

Nor does Scott v. County of Los Angeles, supra, 27 Cal.App.4th 125, 144, 32 Cal.Rptr.2d 643 advance appellant's cause.   In that case, Division Three of this district found that the negligent delivery of child welfare services by social workers was not a quasi-prosecutorial function entitled to section 821.6 immunity.   Quoting the following passage, appellant argues that respondent's actions were not essential steps, necessary to the public good:  “This limitation upon immunities is manifestly just.   An immunity is, after all, a license to harm.   Thus, it should not extend beyond those functions which are so necessary to the public good that the public benefit from the free exercise of discretion in such functions plainly outweighs the private harm that may flow from misfeasance.”  (27 Cal.App.4th at p. 144, 32 Cal.Rptr.2d 643, italics omitted.)   However, as Division Three acknowledged, and as we find pertinent to the instant case:  “CSW's must be entitled to prosecutorial immunity for instituting and processing proceedings under Welfare and Institutions Code section 300, because the urgent need for the protection provided by such proceedings outweighs the harm which may flow from an erroneous decision to initiate them.  [Citation.]   The same balance of interests does not affect the separate and distinct functions of supervising the foster care of children who are the subject of dependency proceedings.   Thus, there is no policy reason for extending prosecutorial immunity to these nonprosecutorial functions and there is no immunity.”  (Ibid.) We believe the same rationale applies in the instant case.   The prosecutorial function exerted by respondent in filing the consolidation petition is that which should be entitled to prosecutorial immunity.

Neither does Sullivan v. County of Los Angeles (1974) 12 Cal.3d 710, 719, 117 Cal.Rptr. 241, 527 P.2d 865, referred to by appellant, assist it.   There, the California Supreme Court merely held that the plain meaning of section 821.6 did not reach the act of holding a person in jail beyond his term.   The case at bar is also unlike Tallmadge v. County of Los Angeles (1987) 191 Cal.App.3d 251, 254, 236 Cal.Rptr. 338, cited by appellant.   In that case, section 821.6, which refers to injuries caused by the institution or prosecution of a judicial proceeding, did not apply because the destruction of plaintiff's lawfully possessed weapons occurred after prosecution of plaintiff for unlawful possession of machine guns.

We again conclude that respondent's actions were immunized under section 821.6.

IV. Whether Insurance Code Sections 11873 and 11772

Precludes the Application of Section 821.6A. Insurance Code section 11873

 Appellant next makes the facially appealing argument that Insurance Code section 11873 precludes the application of section 821.6 to respondent.  Insurance Code section 11873, subdivision (a) provides that “[e]xcept as provided by subdivision (b), the fund shall not be subject to the provisions of the Government Code made applicable to state agencies generally or collectively, unless the section specifically names the fund as an agency to which the provision applies.”

State Fund has a special and unique character.   The Legislature was authorized by our State Constitution to create State Fund in order to establish a general system of compensation for industrial injuries, designed to be fairly competitive with other insurers.  (Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 1511, 11 Cal.Rptr.2d 161.)   In 1979, according to committee reports, amendments to the statute were enacted designed to “ ‘exempt the Fund from all provisions of the Government Code except civil service matters unless the Fund is made specifically subject to particular Government Code sections.   Since the purpose of this and earlier legislation is to make the State Fund as much like a private insurance company as possible, it is felt that many provisions of the Government Code ought not to be applicable to the Fund. For example, we have been advised by the Fund that it is not entitled to the provisions of the Government Tort Claims Act and that it may be sued in the same manner as any private carrier.’ ”  (Id., at p. 1513, 11 Cal.Rptr.2d 161, italics omitted.)

Courtesy Ambulance, supra, at page 1515, 11 Cal.Rptr.2d 161, held that Insurance Code section 11873 removed State Fund from the protection of section 818.8, which immunizes the employer public entity even if the employee's conduct was actively fraudulent, thereby allowing suit for punitive damages.   Tricor California, Inc. v. State Compensation Ins. Fund (1994) 30 Cal.App.4th 230, 241-242, 35 Cal.Rptr.2d 550 agreed with the rationale and result of Courtesy.  Maxon Industries, Inc. v. State Compensation Ins. Fund, supra, 16 Cal.App.4th 1387, 20 Cal.Rptr.2d 730 rejected State Fund's invocation of immunity of a public entity for the discretionary acts of its employees under sections 815.2 and 820.2.   In Security Officers Service, Inc. v. State Compensation Ins. Fund (1993) 17 Cal.App.4th 887, 893-95, 21 Cal.Rptr.2d 653, we rejected State Fund's contention that it was immune under provisions of the California Tort Claims Act (§ 810 et seq.), based on the previous authorities.   In those cases, the claims against State Fund, for which it was deemed State Fund was not entitled to governmental immunity, included breach of the covenant of good faith and constructive fraud based on allegations that State Fund improperly calculated premiums by overestimating the amounts necessary for reserves, and charging higher premiums by its inefficient handling of claims.

However, nothing is said in those cases or in Insurance Code section 11873 with respect to whether State Fund's employees are entitled to the protections of the tort claims act.   State Fund's employees are in a peculiar situation;  they are civil servants working for an entity which is much like a private insurer.  Insurance Code section 11873, subdivision (b) states that “[t]he fund shall be subject to the provisions of Chapter 10.3 (commencing with Section 3512) of Division 4 of Title 1 of, and Division 5 (commencing with Section 18000) of Title 2 of, the Government Code,” with certain exceptions.   As stated in the committee reports, the Legislature enacted Insurance Code section 11873 “ ‘to exempt the Fund from all provisions of the Government Code except civil service matters.’ ”  (Courtesy Ambulance, supra, 8 Cal.App.4th at p. 1513, 11 Cal.Rptr.2d 161;  italics added).   Those sections of the Government Code to which State Fund is subject concern state employer-employee relations and protection of the rights of state civil service personnel.  (Id., at p. 1514, fn. 7, 11 Cal.Rptr.2d 161.)

Thomas v. City of Richmond (1995) 9 Cal.4th 1154, 1157, 40 Cal.Rptr.2d 442, 892 P.2d 1185 instructs us.   There, the California Supreme Court concluded that the public employee may be immune, yet its employer may be subject to liability.   In that case, it was undisputed that individual police officers were immune from liability for damages sustained by a fleeing suspect under Vehicle Code section 17004.3  Section 815 exempted a public entity from liability for an injury which arises out of an act or omission of the public entity or public employee except as otherwise provided by statute.   However, the court recognized that a statutory source outside the Tort Claims Act, Vehicle Code section 17001, imposed liability upon a public entity for an employee's negligent or wrongful actions in the operation of a motor vehicle within the scope of his employment.  (Thomas v. City of Richmond, supra, at p. 1157, 40 Cal.Rptr.2d 442, 892 P.2d 1185.)   Accordingly, the court found that Vehicle Code section 17001 provided the necessary statutory exception to nonliability and held that section 845.8 4 did not provide immunity to public entities where liability was predicated on Vehicle Code section 17001.  (Id., at p. 1163, 40 Cal.Rptr.2d 442, 892 P.2d 1185;  see also Bradford v. State of California (1973) 36 Cal.App.3d 16, 20, 111 Cal.Rptr. 852 [even though the state may not have derivative liability as a result of the immunity of its employee, the state's direct statutory liability is unaffected].)

Read plainly, section 821.6 applies to public employees.   Employees of State Fund are public employees.   The terms of Insurance Code section 11873 are also unambiguous in excepting State Fund from the protections of the Government Code. Thus, it is provided by statute (Ins.Code, § 11873), that State Fund, a quasi-public entity, is not entitled to the blanket protection of the Government Code. However, the immunity of its employees is unaffected.

B. Insurance Code section 11772

 Appellant next claims that Insurance Code section 11772, a specific statute, controls the result over the more general enactment of section 821.6.   We disagree.  Insurance Code section 11772 states that “[t]here shall not be any liability in a private capacity on the part of the board of directors or any member thereof, or any officer or employee of the fund for or on account of any act performed or obligation entered into in an official capacity, when done in good faith, without intent to defraud and in connection with the administration, management or conduct of the fund or affairs relating thereto.”   Appellant thus argues that the Legislature's specific pronouncement that employees of State Fund are immune from personal liability for their good faith acts excludes from our consideration any intention on the part of the Legislature that section 821.6 applies to the employees of State Fund.

 The rule that the specific controls the general only comes into play when two statutes are irreconcilable.  (Fremont Comp. Ins. Co. v. Superior Court (1996) 44 Cal.App.4th 867, 873, 52 Cal.Rptr.2d 211.)   In Fremont, the plaintiff argued that the specific provisions of Insurance Code section 1877.5, which limited immunity of insurers to reports made to the district attorney's office or Department of Insurance in good faith, controlled over Civil Code section 47, which grants absolute immunity for reporting a crime.   The court reasoned that language in Insurance Code section 1877.5, which states:  “Nothing in this chapter is intended to, nor does in any way or manner, abrogate or lessen the existing common law or statutory privileges and immunities of an insurer, agent authorized by that insurer to act on its behalf, or any authorized governmental agency or its employees,” was a calculated product of the Legislature's attempt to enact a qualified reporting privilege, yet leave open the question of what other reporting immunities might exist.  (Fremont, supra, at p. 873, 52 Cal.Rptr.2d 211.)   The court concluded that the insurers could take advantage of the absolute immunity privilege of Civil Code section 47, in light of the fact that the general purpose of the Insurance Frauds Prevention Act (Ins.Code, § 1871 et seq.) is to deter insurance fraud.  “It would be utterly anomalous for the Legislature to seek to curtail such fraud and, in the process, create a major disincentive that did not otherwise exist for insurers to report fraud.”  (Id., at p. 875, 52 Cal.Rptr.2d 211.)

Section 821.6 and Insurance Code section 11772 are similarly reconcilable.  Insurance Code section 11772 speaks in terms of the immunity of employees of State Fund for “act[s] performed or obligation[s] entered into in an official capacity, when done in good faith, without intent to defraud and in connection with the administration, management or conduct of the fund or affairs relating thereto.”  Insurance Code section 11772, therefore, bestows a qualified immunity upon employees of State Fund for actions undertaken directly to implement duties connected with State Fund. We see nothing to prevent us from concluding that State Fund employees can also be subject to section 821.6, which gives public employees immunity for instituting or prosecuting actions in the course of their employment, especially in light of Insurance Code sections 1875.20 and 1877.3, subdivision (b)(1) which require insurers to investigate and report fraud.   Rather, as in Fremont, we believe that Insurance Code section 11772 leaves open the question of what other immunities exist for employees of State Fund. That is, the Legislature could not have intended to eviscerate the Insurance Frauds Prevention Act through the enactment of Insurance Code section 11772.

V. Injunctive Relief

At oral argument, respondent's counsel informed us that respondent no longer works on the Workers' Compensation Appeals Board cases involving appellant.   Accordingly, appellant's argument that injunctive relief should be available, even if section 821.6 grants immunity to respondent, is moot.   We conclude that the judgment of the trial court shall be affirmed.

DISPOSITION

The judgment is affirmed.

FOOTNOTES

1.   All further statutory references are to the Government Code unless otherwise indicated.

2.   State Fund and Figueroa are not parties to this appeal.

3.   That section provides:  “A public employee is not liable for civil damages on account of personal injury to or death of any person or damage to property resulting from the operation, in the line of duty, of an authorized emergency vehicle while responding to an emergency call or when in the immediate pursuit of an actual or suspected violator of the law, or when responding to but not upon returning from a fire alarm or other emergency call.”

4.   That section provides:  “Neither a public entity nor a public employee is liable for:  (a) Any injury resulting from determining whether to parole or release a prisoner or from determining the terms and conditions of his parole or release or from determining whether to revoke his parole or release. (b) Any injury caused by:  (1) An escaping or escaped prisoner;  (2) An escaping or escaped arrested person;  or (3) A person resisting arrest.”

NOTT, Associate Justice.

FUKUTO, Acting P.J., and ZEBROWSKI, J., concur.