United States v. R.J. Zavoral & Sons, Inc.
| Decision Date | 06 September 2012 |
| Docket Number | Civ. No. 12–668 (MJD/JJK). |
| Citation | 894 F.Supp.2d 1118 |
| Court | U.S. District Court — District of Minnesota |
| Parties | UNITED STATES of America, Plaintiff, v. R.J. ZAVORAL & SONS, INC.; John T. Zavoral; Peter M. Zavoral; and Craig A. Pietruszewski, Defendants. |
OPINION TEXT STARTS HERE
Limitation Recognized
31 U.S.C.A. § 3729(a)(1)(B)
David W. Fuller, Assistant United States Attorney, for Plaintiff.
Ted Roberts and Kyle E. Hart, Fabyanske, Westra, Hart & Thomson, P.A., for Defendants.
Memorandum of Law & Order
This matter is before the Court on Defendants R.J. Zavoral & Sons, John T. Zavoral, Peter M. Zavoral, and Craig A. Pietruszewski's motion to dismiss under Federal Rules of Civil Procedure 12(b)(6) and 9(b). [Docket No. 5.] The Court heard oral argument on June 22, 2012.
The Government's complaint sets forth the following facts:
A. The Joint Venture
Defendant R.J. Zavoral & Sons, Inc. (“Zavoral”), is a Minnesota corporation, of which Defendants Peter and John Zavoral are officers. Zavoral formed a joint venture with Ed's Construction (“the Joint Venture”). The Joint Venture was established for the purpose of bidding on a construction contract (“the contract”) related to the Heartsville Coulee Diversion—part of the East Grand Forks Flood Damage Reduction Project (“the project”). The United States Army Corps of Engineers (“COE”) set aside the contract for a qualified company under Section 8(a) of the Small Business Act, 15 U.S.C. § 637(a)(1)(B). The “8(a) program” is administered by the Small Business Administration (“SBA”) and is intended to promote the business development of companies owned and operated by “socially and economically disadvantaged individuals,” including women and members of minority groups. 15 U.S.C. § 631(f)(2)(A). Ed's Construction is qualified as an “8(a) concern.” Zavoral is not.
Federal regulations permit joint ventures between 8(a) concerns and non–8(a) businesses for the purpose of obtaining work set aside for 8(a) concerns, so long as a number of conditions are met.1 Such agreements are permitted only where the 8(a) concern lacks capacity to perform the contract on its own. 13 C.F.R. § 124.513(a)(2). Joint venture agreements must be approved by the SBA. 13 C.F.R. § 124.513(e). To approve the agreement, the SBA must conclude that the agreement is “fair and equitable and will be of substantial benefit to the 8(a) concern” and that the 8(a) concern will receive a majority of the profits earned by the joint venture. 13 C.F.R. § 124.513(a)(2), (c)(3). Once approved, the 8(a) concern must manage and control the joint venture's performance of the 8(a) contract, and periodic reports must be provided to the SBA to confirm that the 8(a) requirements are being met. 13 C.F.R. § 124.513(c).
The Joint Venture Agreement in this case was signed and dated on April 1, 2004 by Defendants John and Peter Zavoral and by Edward Morgan, president of Ed's Construction. The agreement recited terms which complied with the 8(a) joint venture requirements discussed above: Ed's Construction was to “provide labor, materials, and equipment necessary to complete a minimum of fifty-one percent (51%), or $2 million of the work to be completed, whichever is less,” was to be the “managing party” on the project, and was entitled to “fifty-one percent (51%) of the net before tax profits derived from the Joint Venture.” The agreement also required the parties to submit quarterly financial statements to the SBA in accordance with 13 C.F.R. § 124.513(c)(10).
B. The COE Contract
In May 2004 the COE sought bids for work on the project. The contract stated that “[o]nly those firms recognized as 8(a) by the [SBA] will be el [i]gible to bid.” The contract also specified that “the SBA ... is the prime contractor and retains responsibility for 8(a) eligibility determinations and related issues, and for providing counseling and assistance to the 8(a) Contractor under the 8(a) Program.” For payment to be made under the contract “a determination must be made that supplies or services conform to the contract requirements.” Finally, the signature page stated: “The offeror agrees to perform the work required at the prices specified below in strict accordance with the terms of this solicitation.”
The COE sought a Determination of Eligibility from the SBA before it awarded the contract to the Joint Venture, and the SBA provided that approval based on representations in the Joint Venture Agreement.
C. Defendants' Alleged Fraud
The Government alleges that Defendants violated numerous terms of the Joint Venture Agreement, operating in ways directly contrary to the SBA's 8(a) requirements, and thereby fraudulently maintained the Joint Venture's contract with the COE. To begin, John Zavoral recommended his longtime friend, Defendant Craig Pietruszewski to serve the accountant for the Joint Venture. Ed's Construction was not aware that Pietruszewski had a close business relationship with the Zavorals. Pietruszewski only nominally worked for the Joint Venture, actually worked as an agent of Zavoral, and deliberately failed to provide information to Ed's Construction, even as Ed's Construction was supposed to have been managing the project.
Defendants allegedly submitted false statements and records prepared by Pietruszewski in order to give the SBA the impression that the Joint Venture was complying with 8(a) requirements. In particular, in October 2004, a document prepared by Pietruszewski stated that Ed's Construction would complete over $2 million of work under the contract. Contrary to 8(a) requirements, a majority of the work projected to be done by Ed's Construction was actually performed by subcontractors, without Ed's Construction's input or approval. Ed's Construction made efforts to participate in the work set out in the contract but was rebuffed by Defendants. As result of its exclusion from the project, Ed's Construction actually received $1.7 million less under the contract than the $2.2 million which had been estimated.
The Government alleges that Defendants engaged in more than one scheme to create an appearance of compliance with 8(a) requirements. One scheme involved “pass through materials costs,” where Defendants claimed that $888,625 had been paid to Ed's Construction. That figure actually represented material costs plus a 2% handling fee, which was actually a kickback paid to Ed's Construction “in return for Ed's Construction submitting documentation to make it appear as if Ed's had ordered the material and as if the material was related to work performed by Ed's when in fact neither was true.” A second scheme involved “leased employees from R.J. Zavoral,” where Defendants told the SBA that $646,280 was paid to Ed's Construction when that amount actually represented payments made to Zavoral employees plus a 5% “profit” being paid to Ed's Construction. The Government alleges that the “profit” amount was actually a kickback paid by Zavoral in exchange for documentation which “made it appear as if Ed's Construction performed the work in question” when it had not done so. Defendants engaged in these schemes in an effort make it appear that the Joint Venture was operating in compliance with 8(a) requirements. Defendants did not disclose these schemes in their quarterly 8(a) compliance reports.
Defendants prevented Ed's Construction from accessing the quarterly reports submitted to the SBA, and they did not adhere to the requirement that Ed's Construction manage and approve all payments from the Joint Venture's accounts. The Government alleges that Ed's Construction performed only $531,831.65 of work on a contract which it was supposed to have been managing and supervising and which ultimately was worth more than $19.1 million.
The Government further alleges that a number of sub-contractors owned or run by Defendants were given payments by the Joint Venture for work not performed or unrelated to the project, and that Defendants created false invoices in an effort to increase the apparent costs faced by the Joint Venture to decreased the amount owed to Ed's Construction.
Defendants filed 24 requests for payment from the COE, each time certifying that the “amounts requested [were] only for performance in accordance with the specifications, terms, and conditions of the contract.” One such request was signed by Pietruszewski, while the other 23 were signed by John Zavoral. The Government further alleges that Defendants made numerous false statements to the SBA in their quarterly reports and in response to complaints made by Ed's Construction to an SBA representative.
D. Procedural History
The Government filed its complaint on March 14, 2012. The Government contends that Defendants engaged in fraud in order to secure the COE contract and to maintain the Joint Venture's performance of the contract even when SBA regulations were not being met. The complaint sets forth six counts: Count I, False or fraudulent claims; Count II, False statements; Count III, Violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”); Court IV, Unjust enrichment; Count V, Payment by mistake; and Count VI, Breach of contract.2
Defendants have now moved for dismissal under Rules 12(b)(6) and 9(b), arguing that the Government has not stated a claim upon which relief may be granted and that the fraud and payment by mistake counts have not been pled with sufficient particularity.
Plaintiffs must plead allegations of fraud with particularity. Fed R. Civ. P. 9(b). A pleading which alleges fraud or mistake must identify “who, what, where, when and how.” Bank of Montreal v. Avalon Capital Grp., Inc., 743 F.Supp.2d 1021, 1028 (D.Minn.2010) (quoting Parnes v. Gateway 2000, Inc., 122 F.3d 539, 550 (8th Cir.1997)). The facts alleged must “give Defendants notice of what conduct is complained of and [allow them] to prepare a defense to such claim of...
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