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SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT v. SPENCER

September 2, 2005.

SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT, Plaintiff,
v.
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.

BACKGROUND

  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 construction subcontracts.

  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

  LEGAL STANDARD

  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).

  ...


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