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).