United States District Court, N.D. California
September 2, 2005.
SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT, Plaintiff,
WILLIAM D. SPENCER, et al., Defendants.
The opinion of the court was delivered by: SUSAN ILLSTON, District Judge
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO
DISMISS PLAINTIFF'S FIRST AMENDED COMPLAINT; AND DENYING
DEFENDANTS' MOTION TO STRIKE
On Friday, September 2, 2005, the Court heard argument on
defendants' Motion to Dismiss and Motion to Strike Plaintiff's
First Amended Complaint. Having carefully considered the parties'
arguments, and for good cause appearing, the Court hereby GRANTS
defendants' Motion to Dismiss plaintiff's claims under California
Business & Professions Code § 17200 with leave to amend, and
DENIES the remainder of defendants' Motion to Dismiss. The Court
further DENIES defendants' Motion to Strike.
Plaintiff, San Francisco Bay Area Rapid Transit District
("BART"), seeks to recover from William D. Spencer ("Spencer"),
his companies, and their employees, for damages it claims were
caused by the defendants' fraudulent practices in connection with
work performed under BART construction subcontracts. BART alleges
that the defendants charged it for thousands of dollars in fees
that were used to pay "kickbacks" to another construction firm.
According to BART's Complaint, Spencer is the sole owner of two
San Francisco Bay Area construction firms: F.W. Spencer and Son, Inc. ("FWS"); and
Brisbane Mechanical Co. ("BMC").*fn1 In 1996, Spencer met
with Virgilio Talao ("Talao"), the owner and operator of San Luis
Gonzaga Construction Company ("SLG"). At this meeting, Spencer
proposed that the two enter into a joint venture to bid on
The purported rationale for this joint venture was SLG's status
as a minority-owned company. Because government contracts usually
contain a requirement that prime contractors make good faith
efforts to use disadvantaged business enterprises ("DBEs") in
performing construction contracts,*fn2 partnering with SLG
would generally make a company more attractive to a prime
contractor for subcontracting work. With this goal in mind,
Spencer and Talao formed a joint venture between SLG and BMC,
which they called SLG/Brisbane Mechanical JV ("SLG/BMC").
The Complaint alleges that, while nominally a joint venture
that qualified for DBE participation credit, SLG/BMC did not
operate as such.*fn3 Instead, Spencer and Talao agreed to an
arrangement in which Spencer would pay SLG for the use of its
name and DBE status, while Spencer's company would perform the
actual construction work. Talao's only responsibility under the
agreement was to convince the awarding agency that SLG/BMC was a
legitimate DBE joint venture. He was to attend all pre-bid
meetings and speak as if he were the controlling partner of
SLG/BMC. In return, Talao received 1-3% of the amount of the
subcontract 3% of subcontracts worth up to $1 million, 2% of
subcontracts worth between $2 and $3 million, and 1% of
subcontracts for more than $3 million.
Spencer's role in the joint venture was to perform the
construction work. His company provided the financing, labor, and equipment for the construction job, and
received progress payments under the subcontract. When Spencer's
company received these payments, Talao would create an
after-the-fact invoice for "Engineering Services" for the agreed
upon percentage of the payment. He would then submit the invoice
to either FWS or BMC and Spencer would pay SLG from a bank
account held in the name of SLG/BMC.
In 1999, Spencer and Talao agreed to use SLG/BMC to bid on
subcontracts for planned construction at San Francisco
International Airport ("SFO"). Those plans included expanding and
modernizing the airport through the construction of a new
international terminal and new parking garages. They also
included the construction of a BART line extension to SFO,
covering both design and construction of the line as well as
design and construction of the South San Francisco, San Bruno,
and Millbrae BART stations. All told, the prime contracts for the
BART extension initially totaled over $700 million, and the total
cost of the project has now reached $1.5 billion.
Two separate prime contractors, Tutor-Saliba/Slattery JV
("Tutor") and Sverdrup-Conco AJV ("Sverdrup"), were ultimately
awarded the contracts for the principal projects at issue. Both
of these prime contractors, in turn, awarded SLG/BMC subcontracts
now valued at over $10 million. SLG/BMC also was awarded an
additional subcontract for the expansion of BART's Concord Shop.
Tutor and Sverdrup eventually sought DBE credit from BART for
work performed by SLG/BMC on the contracts. In response, BART's
Office of Civil Rights ("OCR") conducted an examination of
SLG/BMC to determine if it met BART's DBE criteria. As part of
this examination, OCR requested a copy of the SLG/BMC joint
venture agreement. After receiving this request, William McGahan
("McGahan"), the in-house counsel for FWS, drafted a joint
venture agreement that would meet BART's DBE requirements. This
agreement represented that: (1) SLG made an initial contribution
of $5,000 to the joint venture, when, in fact, SLG had
contributed no funds; (2) SLG had a 51% interest in the joint
venture, when SLG did not have such an interest; and (3) revenue
from the joint venture would be distributed according to the
respective interests of the joint venturers, when, in fact, SLG
received only 1-3% of the revenue, as discussed above.
In February 1999, OCR made the determination that SLG/BMC did
not qualify for DBE participation credit under BART's guidelines.
Spencer continued to fight this determination until August 1999.
At that time, Spencer disassociated SLG from the joint venture,
nominally because SLG's contractors license had been suspended by the California State Labor Board ("CSLB"). In
September 1999, the CSLB allowed BMC to continue to operate the
joint venture without SLG's participation. BMC continued as a
subcontractor on the projects, submitting invoices to the prime
contractors through 2003.
In 2003, for the first time, BART learned from the San
Francisco City Attorney's Office that the BART projects had been
a target of the fraudulent scheme perpetrated by the defendants.
BART subsequently conducted an investigation and filed this
lawsuit in November 2004. Now before the Court is defendants'
Motion to Dismiss.*fn4
Under Federal Rule of Civil Procedure 12(b)(6), a district
court must dismiss a complaint if it fails to state a claim upon
which relief can be granted. The question presented by a motion
to dismiss is not whether the plaintiff will prevail in the
action, but whether the plaintiff is entitled to offer evidence
in support of the claim. See Scheuer v. Rhodes, 416 U.S. 232,
236 (1974). In answering this question, "[a]ll allegations of
material fact in the complaint are taken as true and construed in
the light most favorable to the plaintiff." McGary v. City of
Portland, 386 F.3d 1259, 1261 (9th Cir. 2004). "Dismissal of the
complaint is appropriate only if it appears beyond doubt that the
claimant can prove no set off acts in support of the claim which
would entitle him to relief." ARC Ecology v. United States Dept.
of the Air Force, 411 F.3d 1092, 1096 (9th Cir. 2005).
Federal Rule of Civil Procedure 12(b)(7) provides that a party
may move to dismiss a case for "failure to join an party under
Rule 19." Fed.R.Civ.P. 12(b)(7). In applying Rule 19, a court
must conduct three separate inquiries. "First, the court must
determine whether a non-party should be joined under Rule 19(a)."
EEOC v. Peabody Western Coal Co., 400 F.3d 774, 779 (9th Cir.
2005). If the court determines that a non-party should be joined,
"the second stage is for the court to determine whether it is
feasible to order that the absentee be joined." Id. "Finally,
if joinder is not feasible, the court must determine at the third
stage whether the case can proceed without the absentee, or
whether the absentee is an `indispensable party' such that the action must be dismissed." Id.
Under Federal Rule of Civil Procedure 12(f), a court "may order
stricken from any pleading . . . any redundant, immaterial,
impertinent, or scandalous matter." Fed.R.Civ.P. 12(f).
I. Motion to Dismiss
Defendants raise a host of challenges to plaintiff's First
Amended Complaint. The Court addresses each in turn.
A. RICO Claims
Defendants raise a number of challenges to BART's civil RICO
claims. For the following reasons, the Court DENIES defendants'
Motion to Dismiss the RICO claims.
(1) Res Judicata
The doctrine of res judicata "is central to the purpose of
which civil courts have been established, the conclusive
resolution of disputes within their own jurisdiction."
Headwaters, Inc. v. United States Forest Service,
399 F.3d 1047, 1052-53 (9th Cir. 2005). The doctrine provides that a final
judgment on the merits bars further claims by parties or their
privies based on the same cause of action. Id. at 1052. Thus,
to establish res judicata, a defendant must establish three
elements: (1) an identity of claims; (2) a final judgment on the
merits; and (3) privity between parties. Id. at 1053.
Defendants argue that a lawsuit brought in this district by the
city of San Francisco in 2002, and ultimately dismissed with
prejudice, is res judicata to BART's RICO claim. See City and
County of San Francisco, et al. v. Spencer, et al., No. 02-5086
Defendants have failed to establish, however, that San
Francisco and BART were in privity with each other. Rather than
arguing that the two entities had a traditional privity
relationship, defendants argue that San Francisco was BART's
"virtual representative." See generally Irwin v. Mascott,
370 F.3d 924, 929 (9th Cir. 2004) (detailing when a party may be
bound by its "virtual representative"). In support of their
position, defendants have requested that the Court take judicial
notice of a "Common Interest Agreement" executed between San Francisco and BART in connection with the previous
As an initial matter, the Court finds that the Common Interest
Agreement is not a matter of public record and is therefore
inappropriate for consideration on a motion to dismiss. See Lee
v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001)
(holding that extrinsic evidence may be considered on a motion to
dismiss only where it is material submitted with the complaint or
where it is a "matter? of public record"). Defendant's arguments
in support of privity are likewise premature. Virtual privity
requires two elements: identity of interests and adequate
representation. Headwaters, 399 F.3d at 1054. The Ninth Circuit
has cautioned, however, that "the requisites for finding
nontraditional forms of privity . . . are not readily determined
from the pleadings." Id. Rather, "the pertinent `virtual
representation' privity factors . . . require factual development
beyond the bare record." Id. at 1055. Thus, at this stage of
the proceedings, the Court cannot find that privity has been
established, and the Motion to Dismiss the RICO claims based
on res judicata must be DENIED.
(2) Statute of Limitations
Although RICO does not provide an express statute of
limitations for actions brought under its civil enforcement
provision, the Supreme Court has held that RICO actions must be
brought within four years of the time the RICO claim accrued.
Agency Holding Corp. v. Malley-Duff Assoc., Inc., 483 U.S. 143,
156, 107 S. Ct. 2759, 2767 (1987). Defendants argue that, on the
face of its Complaint, BART's RICO claims accrued in early 1999,
and that the statute of limitations had therefore expired by the
time BART filed its Complaint in November 2004.*fn5
Under federal law, a claim accrues "when a plaintiff knows or
should know of the injury that underlies his cause of action."
Pincay v. Andrews, 238 F.3d 1106, 1109 (9th Cir. 2001).
"[W]here the issue of limitations requires determination of when
a claim begins to accrue, the complaint should be dismissed only
if the evidence is so clear that there is no genuine factual
issue and the determination can be made as a matter of law." Sisseton-Wahpeton Sioux Tribe v. United States,
895 F.2d 588, 591 (9th Cir. 1990).
As above, the Court finds defendants' statute of limitations
argument to be premature. While BART's Complaint admits that it
discovered that SLG/BMC was not a bona fide DBE in 1999, it is
not fully clear that such a discovery was sufficient to put BART
on notice of its injury. Certainly there could be situations in
which contractors fail to qualify for DBE status that do not
involve fraud or illegal kickback payments. And nothing in BART's
Complaint suggests that it had reason to believe in 1999 that the
joint venture was fraudulent, rather than a legitimate venture
that was simply unable to qualify for DBE status. Thus, at this
stage of the proceedings, the Court cannot find that defendants
have met their burden of proving the statute of limitations
(3) Adequacy of Pleading
Defendants also argue that BART has failed to plead adequately
a violation of 18 U.S.C. § 1962(c). Defendants point to two
perceived shortcomings in BART's First Amended Complaint. First,
defendants argue that BART failed to allege the existence of a
RICO enterprise that had some existence beyond that which was
necessary to commit the predicate racketeering offenses. Second,
defendants argue that BART has failed to allege concrete
financial loss to business or property.
As to the former argument, RICO defines the term "enterprise"
to include "any individual, partnership, corporation,
association, or other legal entity." 18 U.S.C. § 1961(4). In its
Complaint, BART alleges that SLG/BMC was a joint venture licensed
by the State of California. First Amended Complaint ¶¶ 42-46.
This is a sufficient to establish an enterprise under the
statute. See Battlefield Builders, Inc. v. Swango,
743 F.2d 1060, 1064 (4th Cir. 1984) (allegations of joint real estate
venture sufficiently alleged existence of an enterprise).
Defendants also cannot prevail with their related argument that
SLG/BMC was not an enterprise because it was created for wholly
illegitimate reasons. The Supreme Court soundly rejected that
argument in United States v. Turkette, 452 U.S. 576, 587,
101 S. Ct. 2524, 2531 (1981) ("[N]either the language or the
structure of RICO limits its application to legitimate
Defendant's second argument that BART has failed to allege
concrete financial loss to business or property also fails.
Defendants' main contention is that BART was required by law to
award contracts to the lowest bidder. Thus, because SLG/BMC performed under its
contract at the agreed upon price, defendants argue that BART was
not injured by the alleged kickback payments to SLG. While this
argument may eventually have merit, it would be inappropriate to
accept it, at the pleading stage, without further elaboration of
the factual record. To survive a Rule 12(b)(6) motion, BART must
make only a very minimal showing of possible injury. See
National Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 256,
114 S. Ct. 798, 803 (1994) ("At the pleading stage, general
factual allegations of injury from the defendant's conduct may
suffice."). Its general allegations of harm are sufficient for
the minimal requirements of Rule 12(b)(6). E.g., First Amended
Complaint ¶¶ 68 (alleging that BART was injured by the amounts
Spencer paid to Talao), 122 (alleging that BART "paid to prime
contractors amounts that were excessive" based on defendants'
fraud). In addition, the First Amended Complaint, construed in
the light most favorable to BART, suggests that the overall price
of a construction contract is by no means fixed; through change
orders and other mechanisms the price of a construction contract
can increase substantially. See First Amended Complaint ¶¶ 41
(alleging that Spencer told Talao that in general a $3 million
contract would likely become a $5 million contract after change
orders), 58 (alleging that cost of BART extension increased from
$700 million to $1.5 billion). At a minimum, BART should have the
opportunity to establish that SLG/BMC passed on the costs of the
kickback payments through changes to its original subcontract
(4) RICO Claims Against McGahan
Defendants also argue that the claims against McGahan,
corporate counsel for FWS, must be dismissed because "furnishing
a client with ordinary professional assistance . . . does not
rise to the level of participation sufficient" to create
liability. In Reves v. Ernst & Young, 507 U.S. 170,
113 S. Ct. 1163 (1993), the Supreme Court adopted the "operation and
management" test for RICO liability: "In order to `participate,
directly or indirectly, in the conduct of [an] enterprise's
affairs,' one must have some part in directing those affairs."
Id. at 179, 113 S. Ct. at 1170. Defendants argue that McGahan,
as corporate counsel for FWS, had no role in directing the
SLG/BMC joint venture.
BART's Complaint, however, adequately alleges that McGahan had
a part in directing the affairs of SLG/BMC to survive the Reves
standard. BART alleges that, at the creation of the joint
venture, McGahan took responsibility for "handling all legal documentation and
responding to all of the legal requirements of the joint
venture." First Amended Complaint ¶ 42. McGahan thereafter filled
out "the application for a joint venture license and submitted it
to the Contractors State License Board's office." First Amended
Complaint ¶ 43. BART further alleges that, when OCR began
investigating SLG/BMC, McGahan drafted a false joint venture
agreement in order to prevent OCR's detection of the fraudulent
joint venture. First Amended Complaint ¶ 76-77. Finally, BART
alleges that McGahan instructed Talao to meet with OCR to attempt
to convince it that SLG/BMC was legitimate. First Amended
Complaint ¶¶ 86-88.
Thus, this case is distinguishable from Baumer v. Pauchl,
8 F.3d 1341 (9th Cir. 1993), in which the Ninth Circuit held that
an outside attorney was not liable under RICO. The attorney in
that case did not become involved in the fraudulent scheme until
six years after it was formed and "his role thereafter was at
best sporadic." Id. at 1344. In contrast, BART alleges that
McGahan was involved throughout the entire existence of the
SLG/BMC joint venture, and was an active participant in directing
the fraudulent scheme.
(5) RICO Conspiracy Claims
Defendant's final point of contention with BART's RICO claim is
that BART has failed to allege adequately the existence of a RICO
conspiracy. Specifically, defendants argue that BART has failed
to allege a tacit understanding or agreement between the
defendants. BART's Complaint, however, includes multiple
allegations that the defendants agreed to use the SLG/BMC joint
venture to fraudulently obtain subcontracting work. See, e.g.,
First Amended Complaint ¶¶ 38-42 (alleging agreement between
Spencer, Talao, and McGahan to form joint venture), 53 (alleging
agreement on method for paying kickbacks), 54-57 (alleging
agreements to bid on SFO subcontracts), 84-88 (alleging agreement
to submit falsified legal documentation to OCR).
B. State-Law Claims
Defendants also move to dismiss BART's state law claims. For
the reasons provided below, the Court GRANTS defendants' motion
with respect to BART's claims under California Business and
Professions Code § 17200, and DENIES the motion with respect to
the remainder of BART's state law claims. (1) California Business and Professions Code § 17200
Defendants maintain that BART's claims under California
Business and Professions Code § 17200 must be dismissed because
BART is not authorized to bring suit for a violation of section
17200. In response, BART claims that it is a "person" and is
therefore authorized to bring suit by Business and Professions
Code § 17204. The Court finds that BART is not a person within
the meaning of section 17204.
Section 17204 authorizes "any person who has suffered injury in
fact and has lost money or property as a result of . . . unfair
competition" to sue for relief. Cal. Bus. & Prof. Code § 17204.
"Person," in turn, is defined as "natural persons, corporations,
firms, partnerships, joint stock companies, associations, and
other organizations of persons." Cal. Bus. & Prof. Code § 17201.
With one exception, the California Courts of Appeal have
uniformly held that governmental agencies do not fit within the
definition of "person" in section 17201. See, e.g., Santa Monica
Rent Control Bd. v. Bluvshtein, 230 Cal. App. 3d 308, 318 (1990)
(holding rent control board could not bring suit because "[it] is
a government agency; it is none of the things included in the
definition of a person."); see also Cal. Med. Ass'n v. Regents
of the Univ. of Cal., 79 Cal. App. 4th 542, 550-51 (2000)
(holding that University could not be sued under section 17200
because, as a public entity, it was not a "person" within the
meaning of section 17201); Trinkle v. Cal. State Lottery,
71 Cal. App. 4th 1198, 1203 (1999) (holding that lottery commission
could not be sued because it was not a "person").
BART attempts to call the above cases into doubt by citing to
Nortica v. State Comp. Ins. Fund, 70 Cal. App. 4th 911 (1999),
in which the court found the State Compensation Insurance Fund
("SCIF"), a public entity, to be a "person" within the meaning of
section 17201. Id. at 943-44. The holding in that case,
however, was based upon the specific statutory provisions that
governed SCIF's existence; SCIF was statutorily empowered to act
as a private insurer and was subject to suit "in all actions
arising out of any act or omission in connection with its
business or affairs." Id. at 943. In such circumstances, the
court found SCIF to qualify as a person under section 17201.
There is no dispute that BART is a public entity. Nor has BART
demonstrated that the California legislature intended that it act
as a private entity to the same degree as SCIF. Thus, the Court
finds that BART does not qualify as a "person" under section 17201, and is
therefore not authorized by bring suit under section
(2) Statute of Limitations
Defendants also move to dismiss plaintiff's claims for fraud
and those it brought under the California False Claims Act, Cal.
Gov. Code § 12654, arguing that both actions are precluded by the
relevant statutes of limitations. For the reasons provided above,
the Court finds that further factual development is needed to
determine precisely when BART's state-law causes of action
accrued. It is therefore premature to dismiss those claims on
statute of limitations grounds.
C. Claims Against McGahan and Bonar
Defendants also argue that all claims against McGahan and
Bonar*fn7 should be dismissed because, as employees of FWS,
BMC, and SLG/BMC, they are incapable of conspiring with their
employer. In support of this argument, defendants cite a number
of state-law cases holding that "[a]gents and employees of a
corporation cannot conspire with their corporate principal or
employer where they act in their official capacities on behalf of
the corporation." Doctor's Co. v. Superior Court,
49 Cal. 3d 39, 45 (1989).
As an initial matter, the intracorporate conspiracy doctrine
covers only causes of action for conspiracy, and thus does not
relieve McGahan and Bonar of liability for the torts they
personally committed or participated in. See Cedric Kushner Promotions, Inc. v. King, 533 U.S. 158,
163-64, 121 S. Ct. 2087, 2091-92 (2001) (RICO action may include
a corporation and its employees); Coastal Abstract Serv., Inc.
v. First Am. Title Ins. Co., 173 F.3d 725, 734 (9th Cir. 1999)
("A corporate officer or director is, in general, personally
liable for all torts which he authorizes or directs or in which
he participates, notwithstanding that he acted as an agent of the
corporation and not on his own behalf.").
As for the single conspiracy claim alleged in the Complaint a
claim of civil RICO conspiracy in violation of
18 U.S.C. § 1962(d) the Ninth Circuit has squarely held that the
intracorporate conspiracy doctrine does not insulate civil RICO
conspiracies. See Webster v. Omnitrition Int'l, Inc.,
79 F.3d 776, 787 (9th Cir. 1996) ("We agree with the reasoning of our
sister circuit, and hold that § 1962(d) applies to intracorporate
For the foregoing reasons, defendants' motion to dismiss BART's
claims against McGahan and Bonar is DENIED.
D. Failure to Join an Indispensable Party
Finally, defendants argue that this case must be dismissed
because BART has failed to join Talao and SLG, both of which it
claims are indispensable parties under Rule 19. Even assuming
Talao and SLG are necessary parties, however, defendants have
provided no reasons why their joinder in this matter is not
feasible. See EEOC v. Peabody Western Coal Co., 400 F.3d 774,
779 (9th Cir. 2005) ("Rule 19(a) sets forth three circumstances
in which joinder is not feasible: when venue is improper, when
the absentee is not subject to personal jurisdiction, and when
joinder would destroy the subject matter). Nor is it readily
apparent to the Court why defendants could not join Talao and SLG
if they desired. Thus, defendants' motion to dismiss under Rule
12(b)(7) is DENIED.
II. Motion to Strike
"Motions to strike are generally not granted unless it is clear
that the matter to be stricken could have no possible bearing on
the subject matter of the litigation." LeDuc v. Kentucky Cent.
Life Ins. Co., 814 F. Supp. 820, 830 (N.D. Cal. 1992). In
particular, "allegations supplying background or historical
material . . . will not be stricken unless unduly prejudicial to defendant."
Id. Defendants seek to strike various paragraphs of BART's
Complaint: paragraphs 26-28, 31-38 and 48-57. The challenged
paragraphs, however, generally provide a description of the
origins of the fraudulent scheme that was later used in BART's
construction contracts, or a description of the evolution of the
fraudulent scheme and the beginnings of the SLG/BMC joint
venture. This information may be included in the Complaint as
Defendant's motion to strike is DENIED.
For the foregoing reasons and for good cause shown, the Court
GRANTS defendants' Motion to Dismiss with respect to plaintiff's
claims under the California Business and Professions Code §
17200, and DENIES the remainder of the motion and the Motion to
Strike. Plaintiff may file an amended complaint on or before
October 14, 2005. [Docket ## 19, 21.]
IT IS SO ORDERED.
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