United States v. Joel Kennedy Constructing Corp.

• Decision Date: 07 February 2022
• Docket Number: 17 C 03062
• Citation: 584 F.Supp.3d 595
• Parties: UNITED STATES of America, State of Illinois, and City of Chicago ex rel. Angelo Milazzo, Plaintiff-Relator, v. JOEL KENNEDY CONSTRUCTING CORP., and Joel W. Kennedy, Defendants.
• Court: U.S. District Court — Northern District of Illinois

584 F.Supp.3d 595

UNITED STATES of America, State of Illinois, and City of Chicago ex rel. Angelo Milazzo, Plaintiff-Relator,

v.JOEL KENNEDY CONSTRUCTING CORP., and Joel W. Kennedy, Defendants.

No. 17 C 03062

United States District Court, N.D. Illinois, Eastern Division.

Signed February 7, 2022

AUSA, Linda A. Wawzenski, United States Attorney's Office, Chicago, IL, for Plaintiff-Relator United States of America.

Cornel Hershel Kauffman, Fiona A. Burke, Christina Chung, City of Chicago Department of Law, Chicago, IL, for Plaintiff-Relator City of Chicago.

Michael I. Kanovitz, Frank T. Newell, Scott R. Rauscher, Loevy & Loevy, Chicago, IL, for Plaintiff-Relator Angelo Milazzo.

Leonard A. Gail, Suyash Agrawal, Massey & Gail LLP, Chicago, IL, Matthew Miles Collette, Massey & Gail LLP, Washington, DC, for Defendant Joel Kennedy Constructing Corp.

MEMORANDUM OPINION AND ORDER

John J. Tharp, Jr., United States District Judge

Relator Angelo Milazzo and the City of Chicago collectively allege that Joel Kennedy Constructing Corp. and its owner and president, Joel Kennedy, misrepresented the corporation's status as a city-based business and obfuscated JKCC's non-compliance with worker residency provisions in hundreds of millions of dollars’ worth of public works contracts performed for the City over the course of at least a decade. Milazzo's second amended complaint asserts federal, state, and municipal causes of action against JKCC for the submission of false claims. Milazzo Second Am. Compl, ECF No. 68. The City-Intervenor's complaint alleges claims under the municipal false claims, false statements, and consumer fraud ordinances against JKCC and Kennedy, as an individual, and for breach of contract against JKCC. City Compl., ECF No. 45. The defendants have moved to dismiss both complaints under Rule 12(b)(6) for failure to state a claim. Defs.’ Mot. Dismiss, ECF No. 59. That motion is granted in part and denied in part. Milazzo's second amended complaint and Counts I and II of the City's complaint are dismissed without prejudice; the plaintiffs have inadequately pleaded that the defendants presented false or fraudulent claims to the City and that the defendants’ alleged misrepresentations regarding their compliance with the relevant ordinances were material, and the City has inadequately pleaded Kennedy's individual involvement in the CRO scheme. The City's other claims survive.

I. BACKGROUND

For purposes of evaluating the motion to dismiss, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the plaintiffs. Joel Kennedy Constructing Corporation is an Illinois corporation with its principal place of business in Waukegan, Illinois. City Compl. ¶¶ 7, 80; ECF No. 45. The company has a long history of doing construction work with the city of Chicago. Id. at ¶¶ 12-13. Joel Kennedy is the president and owner of JKCC; he has been president of JKCC since at least 1982. Id. at ¶ 8. Relator Angelo Milazzo was a JKCC employee from approximately 1987 to 2015, and a ten percent owner of JKCC until 2011. Milazzo Second Am. Compl. ¶ 5, ECF No. 68. He held a variety of senior positions at JKCC, including corporate secretary/treasurer, project manager, engineer, and head estimator. City Compl. at ¶ 9.

Milazzo filed this qui tam action in 2017. The City of Chicago intervened in November 2019. Together, Milazzo and the City allege that JKCC engaged in fraud relating to six contracts with the City of Chicago:

• JKCC Project/Job No. 1141, Contract (PO) Number 19367, Specification Number 68904: contract between JKCC and the City of Chicago Department of Water Management entitled "Private Drain Repair – North Area/DWM Project 6220A," which was awarded on or around March 3, 2009, and was set to end on or around March 3, 2011, but was extended for at least another year. (Dkt. No. 45-1). The final contract value was more than $8,000,000.

• JKCC Project/Job No. 1154, Contract (PO) Number 26407, Specification Number 104069: contract between JKCC and the City of Chicago Department of Water Management entitled "North District Water Construction," which was awarded on or around May 10, 2012, and ended on or around February 3, 2013. (Dkt. No. 45-2). The final contract value was more than $26,400,000.

• JKCC Project/Job No. 1157, Contract (PO) Number 27739, Specification Number 112101: contract between JKCC and the City of Chicago Department of Water Management entitled "Water Main Construction – District One," which was awarded on or around January 31, 2013, and was set to end on or around January 27, 2016, but was extended through at least the end of 2016. (Dkt. No. 45-4). The final contract value was more than $77,000,000.

• JKCC Project/Job No. 1158, Contract (PO) Number 27738, Specification Number 112102: contract between JKCC and the City of Chicago Department of Water Management entitled "Water Main Construction – District Two," which was awarded on or around January 30, 2013, and was set to end on or around January 27, 2016, but was extended through at least the end of 2016. (Dkt. No. 45-3). The final contract value was more than $79,600,000.

• JKCC Project/Job No. 1159, Contract (PO) Number 28325, Specification Number 115457: contract between JKCC and the City of Chicago Department of Water Management entitled "Damen Avenue Sewer Improvement – N. Damen Ave & W. Albion Ave.," which was awarded on or around July 24, 2013 and ended on or around July 27, 2017. (Dkt. No. 45-5). The final contract value was more than $4,000,000.

• Contract (PO) Number 43252, Specification Number 127995: contract between JKCC and the City of Chicago Department of Water Management entitled "Augusta Boulevard Sewer Improvement," which was awarded on or around October 19, 2016, and ended on or around February 13, 2018. (Dkt. No. 45-6). This contract was federally funded with money allocated by the United States Department of Housing and Urban Development. The final contract value was more than $1,900,000.

There are now two operative complaints: The City-Intervenor's complaint (Dkt. 45) and Milazzo's second amended complaint ("SAC"; Dkt. 68). In the SAC, Milazzo brings federal (Counts I and II), state (Counts III and IV), and city (Counts V and VI) false claims act claims predicated on JKCC's fraudulent noncompliance with the Chicago Residency Ordinance ("CRO"), as incorporated into each of JKCC's contracts with the City. The City's complaint raises claims based on the municipal false claims ordinance (Count I); the municipal false statements ordinance (Count II); the municipal consumer fraud ordinance (Count III); and breach of contract (Count IV), predicated on JKCC's fraudulent noncompliance with the CRO and, in addition, allegedly false attestations that it qualified for the Chicago Business Preference. The City alleges Counts I, II, and III against both JKCC and Joel Kennedy, in his individual capacity, and Count IV against JKCC only.

The plaintiffs’ complaints describe two fraudulent schemes JKCC allegedly engaged in to avoid its obligations under City contracts. Those schemes are examined in turn.

A. The Chicago Residency Requirement (Milazzo and City)

Each of JKCC's contracts with the City required that at least fifty percent of the total number of labor hours worked under the contract be performed by Chicago residents. Milazzo SAC ¶ 10. Milazzo alleges that JKCC did not comply with those residency requirements, despite its certifications to the contrary. Per the City contracts, JKCC was required to provide certified payroll documentation on a weekly basis. Id. at ¶ 14. The submitted payrolls, each of which JKCC was required to certify was "correct and complete," included each worker's address information, so that the City could verify that JKCC was complying with the residency requirements. Id. ; see also City Compl. Ex. A at 33, ECF No. 45-1 ("Certified payroll reports (U.S. Department of Labor Form WH-347 or equivalent) must be submitted weekly to the Commissioner of the supervising department in triplicate, shall identify clearly the actual residence of every employee on each submitted certified payroll."). Compliance with the residency requirement was not optional—the contract books expressly state that "[g]ood faith efforts on the part of the contractor to provide utilization of actual Chicago residents shall not suffice to replace the actual, verified achievement of the requirements of this section concerning the worker hours performed by actual Chicago residents." Id. The contract papers were similarly clear that non-compliance with the residency requirement would result in a financial penalty—contractors were informed that "[w]hen work is completed, in the event that the City has determined that the contractor failed to ensure the fulfillment of the requirement of this section ... the City will thereby be damaged in the failure to provide the benefit of demonstrable employment to Chicagoans to the degree stipulated" and "1/20 of 1 percent (.05%) of the approved contract value for this contract shall be surrendered by the contractor to the City in payment for each percentage of shortfall toward the stipulated residency requirement." Id. If a contractor failed to report employees’ residency "entirely and correctly," the contractor would "surrender the entire liquidated damages as if no Chicago residents were employed" in fulfilling the contract. Id. Contractors were warned that they were required to keep personnel data for at least three years; that affidavits or other supporting documentation may be asked for to verify the submitted data; and that the willful falsification of statements and certification of payroll date may expose the contractor to criminal prosecution. Id.

Milazzo alleges that the residency fraud was carried out in two ways. First, JKCC "routinely" omitted non-City employees from the payroll documentation to artificially inflate the City-resident to non-City resident employee ratio. Milazzo Second Am....