Opinion
No. C 02-5086 PJH
December 19, 2003
Blake P. Loebs, San Francisco, CA
Jewell J. Hargleroad, Mclnerney Dillon P.C., Oakland, CA
Timothy L. Mclnerney, Mclnerney Dillon PC, Oakland, CA
ORDER DENYING PLAINTIFFS' MOTION TO AMEND; GRANTING DEFENDANTS' MOTION TO DISMISS; AND REMANDING CASE
Before this court are defendants' motion to dismiss or strike the second amended complaint and motion for more definite statement, and plaintiffs' motion for leave to file a third amended complaint. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the court hereby rules as follows.
BACKGROUND
The City and County of San Francisco and the City Attorney on behalf of the people of California (collectively, "the City") have sued subcontractors William Spencer, F.W. Spencer Son, Brisbane Mechanical Co., William McGahan, Bruce Bonar, and Lou Thomas for allegedly defrauding the City by claiming that various of their joint ventures qualified for minority business incentives in competitive contractor bidding for construction when they in fact did not. Plaintiffs have sued for RICO violations, fraud, violations of the California and San Francisco False Claims Act, unfair competition, unjust enrichment, and declaratory relief.
Plaintiffs allege that Spencer formed joint ventures with minority-owned San Luis Gonzaga and other minority-owned businesses to take advantage of City ordinances that create incentives for contractors to hire minority or women-owned businesses for subcontracting work ("MBE/WBE regulations"). One of these ventures was known as San Luis Gonzaga/Brisbane Mechanical Co. Joint Venture ("SLG/BMC"). Once the Spencer joint ventures were hired, the minority-owned businesses would do no work on the project and instead submit fraudulent statements of work, while F.W. Spencer and other non-minority-owned subcontractors completed the work and collected all billings. Spencer would give San Luis Gonzaga or the other minority business fronts 2-5% of the billings in exchange. Complaint ¶¶ 4, 36-40. Plaintiffs allege that Spencer engaged in this type of fraud with San Luis Gonzaga, and the companies A. Answer and Troy's Contracting, id. ¶ 4, 5
Plaintiffs claim that Spencer engaged in this type of subcontracting fraud for at least six projects, including several contracts for the expansion of the San Francisco airport, the expansion of the Moscone Convention Center, and the expansion of the San Francisco jail, as well as work done on the BART subway system and the Pacific Bell ballpark. Complaint ¶¶ 2-5, 42, 52-62 (airport contracts), 63-66 (BART contracts), 67-72 (Moscone Center), 73-83 (SF jail); 84-90 (Pac Bell Park).
Plaintiffs further allege that Spencer also fraudulently hid F.W. Spencer's involvement as a joint venture partner in these bids, even though F.W. Spencer did a significant amount of the billed work, because F.W. Spencer was in the process of being debarred by the City from future contracting work for having filed false claims in another matter. Complaint ¶ 6, 48-51.
Plaintiffs' original complaint was amended as a matter of right before defendants responded. Defendants then moved to dismiss plaintiffs' first amended complaint, which was granted on June 16, 2003. Plaintiffs then filed a second amended complaint ("SAC"), which defendants now move to dismiss. In response, plaintiffs filed a cross-motion to dismiss the SAC and file a proposed third amended complaint ("TAC"). Defendants also oppose the motion to amend the third amended complaint ("TAC").
The City concedes that the SAC is defective and that dismissal would have been warranted. See City Opening Brief ISO Motion to Amend at 4 (agreeing that "inadvertent mistakes" had been made in the second amended pleading). Accordingly, the court GRANTS defendants1 motion to dismiss the SAC, and here examines only the viability of the claims stated in the proposed TAC.
DISCUSSION
Fed.R.Civ.P. 15(a) requires that a plaintiff obtain either consent or leave of court to amend its complaint once the defendant has answered, but "leave shall be freely given when justice so requires." See, e.g., Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990) (leave to amend granted with "extreme liberality"). Leave to amend is thus ordinarily permitted unless the amendment is futile, untimely, would cause undue prejudice to the defendants, or is sought by plaintiffs in bad faith or with a dilatory motive. DCP Programs. Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987); Foman v. Davis, 371 U.S. 178, 182 (1962).In complex pleadings and papers, the City claims it is entitled to leave to amend because it has fixed the obvious errors in its previous complaints, that it has suffered RICO damages based on its payment of money to the defendants that was used to finance kickback payments, that it has adequately and exhaustively pled the specifics of its mail fraud claims by referencing over 300 pieces of correspondence in the TAG, that it has standing to assert claims concerning potential fraud in the BART and Pacific Bell Park projects, and that it may properly sue defendants for violations of the San Francisco MBE/WBE regulations.
The defendants in turn respond that the City has delayed too long in amending these claims; that the City could not have been harmed by hiring defendants and their joint ventures because by definition, the City was required to accept the lowest bid on these projects so the City would have in fact spent more money to hire companies that were actually in compliance with the MBE/WBE regulations; that the MBE/WBE regulations are unconstitutional in light of California's Proposition 209 and thus defendants cannot be held liable even for flagrant violations of them; that the defendants still do not have enough information to understand the specifics of the mail fraud claims; and that the RICO and civil conspiracy claims continue to assert basic errors as a matter of law.
The court acknowledges that the factual and legal issues raised int his matter are extremely complex. However, the City's federal claims fail on basic principles of RICO pleading. To state a RICO claim under 18 U.S.C. § 1962(a), the City must, among other things, "allege facts tending to show that [it] was injured by the use or investment of racketeering income." Wagh v. Metris Direct, Inc., 348 F.3d 1102, 1109-10 (9th Cir. 2003) (noting also that merely profiting from fraud insufficient to state RICO claim). In other words, the City must show that defendants' use or investment of funds taken from the City caused the City injury, which is known as Investment injury."
Here, the City alleges only that it was defrauded into paying money to contractors who hired defendants, in response to fraudulent representations by the RICO enterprises that they were minority-owned business, which was ultimately recouped and reinvested by defendants back into the RICO enterprise. TAG ¶ 107 (RICO claim). See also TAG ¶¶ 134, 139, 151. However, allegations of reinvestment of funds into a RICO enterprise, standing alone, are insufficient to demonstrate investment injury in the Ninth Circuit. Wagh, 348 F.3d at 1110 (citations omitted). The TAC fails to plead actionable investment injury by defendants and thus fails to state a RICO claim under 18 U.S.C. § 1962(a).
These paragraphs raise allegations in the context of the City's state law claims, but the court will presume that they are intended to apply to the RICO claims as well. There appear to be no other assertions of RICO damages to the City anywhere else in the complaint.
As for the City's section 1962(c) RICO claim, it fails because the TAC repeats the error of the first amended complaint by impermissibly alleging that the RICO enterprises SLG/BMC are RICO defendants, including in the caption of the case. Caption (listing SLG/BMC as defendant); TAC ¶¶ 42(L), 42(K), 42(L), 42(M), 42(N), 42(O), 43-45, 50(C), 50(D), 108. RICO enterprises must be distinguished from RICO defendants in pleading in order to state a RICO claim. Wagh, 348 F.3d at 1111-12:see also, e.g., 6/16 Order at 6-7 (citing cases).
As for the City's final RICO claim for RICO conspiracy under section 1962(d), that claim fails based on the City's failure to plead a predicate RICO claim under § 1962(a) or (c). Howard v. America Online, 208 F.3d 741, 751 (9th Cir. 2000).
Therefore defendants are unable to state any RICO claims, and the motion for leave to file the TAC is DENIED as futile. Saul v. United States. 928 F.2d 829, 843 (9th Cir. 1991) (futility under Rule 15 defined as failing to state a claim as a matter of law). Furthermore, it appears that granting the City leave to file yet further amendments of the complaint would also be futile given that this is the City's fourth unsuccessful attempt to plead a RICO claim. Leave to file a further amended complaint is DENIED as well. Chodos v. West Publ'g Co., 292 F.3d 992, 1003 (9th Cir. 2003) (discretion to deny leave to amend "particularly broad" when plaintiff has previously been granted leave to do so).
As for the arguments raised by defendants, the court notes that while most of them (failure to plead fraud with sufficient particularity under Rule 9, undue delay in moving to amend, and that violation of the San Francisco Administrative Code or mail fraud may not serve as predicate acts for RICO liability) are without merit, the court need not reach them at this time. Similarly, the court declines to reach the questions of the sufficiency of the pleadings on the state law civil conspiracy claims.
Finally, with the dismissal of the RICO claim, there are no longer any federal question claims in the lawsuit, and the parties concede that diversity jurisdiction does not exist here. The court therefore declines to exercise supplemental jurisdiction over the state law claims and REMANDS this case to San Francisco Superior Court. 28 U.S.C. § 1367(c).
This order fully adjudicates the matters listed at nos. 85, 95, 100, and 110 on the clerk's docket for this case, and all other pending matters. The clerk is ordered to close the file.