Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-00583/USCOURTS-caed-2_05-cv-00583-44/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Contract Dispute

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

FRU-CON CONSTRUCTION

CORPORATION, a Missouri

corporation,

NO. CIV. S-05-583 LKK/GGH

Plaintiff,

v. O R D E R

SACRAMENTO MUNICIPAL UTILITY

DISTRICT, a municipal utility

district; UTILITY ENGINEERING

CORPORATION, a Texas 

corporation,

Defendants.

 /

On March 24, 2005, Fru-Con Construction Corp. (“Fru-Con”), a

foreign corporation, filed this federal action against the

Sacramento Municipal Utility District (“SMUD”), the owner of the

Consumnes Power Plant (“CPP”). The complaint alleged several

causes of action related to breach of contract. SMUD filed a

counterclaim against Fru-Con. Pending before the court is SMUD’s

motion to file an amended counterclaim adding Bilginger Berger AG

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 SMUD avers that Fru-Con is wholly owned by Fru-Con Holding, 1

a Delaware corporation, which in turn is wholly owned by Bilfinger

Berger, a German corporation. 

 The court notes that SMUD’s motion contained over 25 pages 2

of facts. The court only summarizes the facts which bear on the

pending motion. 

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(“Bilfinger”) and Fru-Con Holding Company (“Fru-Con Holding”) as

defendants. The amended complaint seeks to impose liability 1

against these additional parties based on the legal theories of

alter ego and agency. 

I.

Background & Procedural History

A. Summary of Factual Allegations Regarding Bilfinger and FruCon Holding 2

Sacramento Municipal Utility District (“SMUD”) entered into

a contract with Fru-Con under which Fru-Con was to construct the

Cosumnes Power Plant (the "CPP"), a 500 megawatt combined cycle

power plant. SMUD alleges that Fru-Con breached its contract.

SMUD maintains that the management of Fru-Con is controlled

by Bilfinger and Fru-Con Holding. Bilfinger exercised control by

requiring approval of many relatively routine Fru-Con business

activities by the Fru-Con Holding Board. The Fru-Con Holding Board

is comprised of three members of the Executive Board of Bilfinger

Berger, including the Chairman of the Bilfinger Berger Executive

Board, and has also included at least one senior executive officer

from Fru-Con. 

Because the contract to construct the CPP was estimated to

cost in excess of $50 million, Fru-Con needed the Fru-Con Holding

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Board's approval to bid on SMUD’s Requests for Proposals (“RFPs”).

By a letter dated March 13, 2003, Fru-Con sought approval to submit

a proposal to SMUD to construct the CPP at an estimated cost of

$150 million and an estimated construction schedule duration of 24

months. 

Fru-Con stated in its Statement of Qualifications submitted

in connection with its bid on the CPP project that Fru-Con alone

carried a bonding capacity of $750,000,000 through Travelers

Casualty & Surety Company of America (“Travelers”). The

performance bond was a material issue to SMUD. Through discovery,

SMUD now believes that Fru-Con's statement regarding its bonding

capacity was fraudulent. The $750,000,000 capacity reflects FruCon's capacity together with the capacity of Bilfinger. Further

discovery indicated that Bilfinger provided indemnities for all the

public jobs upon which Fru-Con obtained performance bonds. 

The contract between Fru-Con and SMUD was signed in August

2003. The agreed contract price was $106.84 million. Fru-Con was

to complete construction within 573 calendar days. In order to

obtain the performance bond Fru-Con was required to deliver for the

full amount of the contract price, SMUD avers that Bilfinger

provided an indemnity to Travelers. 

Mr. Jaekel, former CEO of Fru-Con and a Bilfinger employee,

recalls that in 2004, Fru-Con had fewer than five projects where

the contract price was in excess of $50 million, and SMUD’s CPP

project was one of them. According to Mr. Jaekel, Bilfinger

monitored those Fru-Con projects where the contract price was $50

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million or more by sending a senior level representative to the

project site to observe the progress of construction, review

documents and interview Fru-Con's project management team.

SMUD avers that through recent discovery it learned the extent

to which Bilfinger was involved in monitoring and supervising the

CPP project. For example, in September of 2004, Peter Ophoven, a

Bilfinger supervisor, audited the CPP project and noted many

problems with Fru-Con’s progress. Ophoven concluded that the

project was significantly behind schedule, that Fru-Con would not

make any margin, and instead would lose at least $6 million. The

audit also stated that Fru-Con would be assessed liquidated damages

for schedule delay, that Fru-Con's project management was

disorganized, that Fru-Con's construction schedule was "very

unrealistic" and that it was time to develop, "for internal

purposes," a realistic schedule. 

There is additional evidence that Ophoven visited the CPP site

numerous times to review the CPP's financial status, ultimately

staying on at the CPP site for several months. Near the end of the

contract, Ophoven was deeply involved in the CPP project. SMUD

maintains that the extent of Ophoven’s involvement in the CPP was

first revealed during discovery. 

Similarly, as problems at the CPP site worsened, SMUD

maintains that Bilfinger infused capital into Fun-Con as needed.

SMUD learned of this arrangement on July 27, 2006, when it took the

deposition of Fru-Con's former cash manager, Brian Ellsworth. His

testimony allegedly revealed the commingling of funds between

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 The court notes that SMUD filed suit against Fru-Con in 3

state court as well. Fru-Con sought removal to this court based

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Bilfinger and Fru-Con. 

When SMUD terminated its contract with Fru-Con, it promptly

notified Travelers that it had terminated Fru-Con. Travelers took

more than six months to evaluate SMUD’s claim and then flatly

denied any liability for Fru-Con's failure to perform the work.

SMUD avers that the decision was likely made by Bilfinger. 

In addition to the foregoing evidence of Bilfinger’s

involvement in the contract, SMUD avers that recent discovery also

revealed that Bilfinger and Fru-Con Holding agreed to indemnify

Travelers for any losses suffered by Travelers as a result of FruCon's work on the CPP. Travelers bears no financial exposure as

a consequence of these indemnity agreements. Moreover, Travelers'

witnesses have testified that Travelers thinks of Bilfinger and

Fru-Con as one and the same, and reports to them concerning this

litigation. 

SMUD also avers that through discovery it learned that

Bilfinger maintains a $1.5 billion credit through Travelers and

that it can be used by any of the Bilfinger entities around the

world, including Fru-Con and Fru-Con Holding. SMUD maintains that

since any settlement by Travelers will come dollar-for-dollar

directly out of Bilfinger's pocket, Traveler's positions are likely

being directed by Bilfinger.

B. Procedural History 

Fru-Con brought suit against SMUD on March 24, 2005. The 3

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on a claim of fraudulent joinder, but the case was remanded on May

31, 2005. Soon thereafter, SMUD filed a motion to stay in favor

of the state court action pursuant to Colorado River Water

Conservation Dist v. United States, 424 U.S. 800 (1976). The court

denied SMUD’s motion on August 11, 2005. 

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complaint alleged causes of action for breach of contract, breach

of the implied covenant of good faith and fair dealing, breach of

the implied warranty, professional negligence, and breach of the

California Prompt Payment Act. On April 18, 2005 SMUD filed an

answer and counterclaim against Fru-Con. SMUD’s counterclaim

alleged causes of action for declaratory relief, breach of

contract, violation of the California False Claims Act, negligence

and equitable indemnity. 

A scheduling order was issued on July 21, 2005. Per the

scheduling order, discovery is to be completed by January 18, 2007.

The deadline for law and motion practice is March 18, 2007. A

forty to sixty day jury trial is set for September 18, 2007.

II.

Rule 16 (b) Standards

Because the court has filed a pretrial scheduling order

Federal Rule of Civil Procedure 16 governs the procedure for

amending the pleadings. Unlike Rule 15(a)'s liberal amendment

policy which focuses on the bad faith of the party seeking to

interpose an amendment and the prejudice to the opposing party,

Rule 16(b)' s "good cause" standard primarily considers the

diligence of the party seeking the amendment. Johnson v. Mammoth

Recreations, Inc., 975 F.3d 604 (9th Cir. 1992); see 6A Wright,

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Miller & Kane, Federal Practice and Procedure § 1522.1 at 231 (2d

ed. 1990) ("good cause" means scheduling deadlines cannot be met

despite party's diligence). 

Moreover, carelessness is not compatible with a finding of

diligence and offers no reason for a grant of relief. Cf. Engleson

v. Burlington Northern R.R. Co., 972 F.2d 1038, 1043 (9th Cir.

1992) (carelessness not a ground for relief under Rule 60(b));

Martella v. Marine Cooks & Stewards Union, 448 F.2d 729, 730 (9th

Cir. 1971) (same), cert. denied, 405 U.S. 974 (1972). Although the

existence or degree of prejudice to the party opposing the

modification might supply additional reasons to deny a motion, the

focus of the inquiry is upon the moving party's reasons for seeking

modification. See Gestetner Corp. v. Case Equip. Co., 108 F.R.D.

138, 141 (D. Me. 1985). If the moving party was not diligent, the

inquiry should end.

III.

ANALYSIS

In interpreting the "good cause" requirement under Rule 16,

the court considers, primarily, "the diligence of the party seeking

the amendment." Johnson, 975 F.2d at 609. As a secondary

consideration, the court considers the degree of prejudice to the

opposing party. Id. The court finds that SMUD acted diligently

and that the degree of prejudice to Bilfinger and Fru-Con Holding

is minimal. 

A. Diligence 

SMUD maintains that its motion to amend was prompted by new

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evidence obtained through the discovery process. Mot. to Amend at

3 (“through discovery. . . [SMUD] learned that overwhelming

evidence exists to impose liability on Bilfinger . . . and Fru-Con

Holding as the alter egos of Fru-Con or, in the alternative, on the

ground that Fru-Con is the mere agent of Bilfinger . . . and/or

Fru-Con Holding.”).

Specifically, SMUD explains that the evidence obtained in

discovery revealed the many ways in which Bilfinger and Fru-Con

Holding were actively involved in the CPP project. For example,

Bilfinger and Fru-Con Holding gave financial support to Fru-Con,

Bilfinger personnel were involved in monitoring the CPP project,

and controlled part of the decision to initially bid on the SMUD

contract. SMUD also maintains that discovery revealed that Fru-Con

had made misrepresentation regarding its bonding capacity by

claiming that Bilfinger’s bonding capacity was its own. 

The court agrees with SMUD that this information is new

evidence which might constitute the factual basis for liability

under either an alter ego or agency theory. 

It is well established California law that two conditions must

be met before the alter ego doctrine may be invoked. First, there

must be such a unity of interest and ownership between the

corporation and its equitable owner that the separate personalities

of the corporation and the shareholder do not in reality exist.

Second, there must be an inequitable result if the acts in question

are treated as those of the corporation alone. Sonora Diamond

Corp. v. Superior Court, 83 Cal. App. 4th 523, 538 (5 Dist. 2000).

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Indeed, Fru-Con spends only two pages addressing the 4

requirements of Rule 16(b) and instead focuses the majority of its

44 page brief addressing the merits of SMUD’s claims. 

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The information obtained during discovery is clearly relevant to

a claim of alter ego. 

The newly obtained information is also relevant to a claim of

agency. Under state law, “the principal/agent theory is a

fact-driven inquiry that requires examination of whether the parent

exercises a sufficient degree of control over its subsidiary to

establish that the subsidiary can be described as a means through

which the parent acts, or is nothing more than an incorporated

department of the parent.” Virtualmagic Asia, Inc. v. Fil-Cartoons,

Inc., 99 Cal. App. 4th 228, 245 (4 Dist. 2002). Here again, the

information obtained during discovery relates to this claim.

In its opposition, Fru-Con argues that SMUD cannot establish

either claim against Bilfinger or Fru-Con Holding. While this may 4

be the case, the motion before the court is a motion to amend, not

a motion on the merits. As noted previously, the standard for a

motion to amend is whether the moving party was diligent, not

whether the moving party will ultimately succeed on the merits.

Here, it appears that SMUD acted diligently.

The discovery process in this case has been a massive

undertaking for both parties. According to SMUD, over four million

pages of documents have been exchanged and 100 depositions have

been taken. Both parties contend that the other party complicated

discovery and made it more difficult than necessary. Regardless

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of which party is more or less responsible, it is undisputed that

discovery has been marked by delay and complication. The first

deposition occurred on April 2, 2006 and the last deposition was

set for November 14, 2006. 

SMUD maintains, and Fru-Con does not dispute, that it received

information regarding Bilfinger and Fru-Con holding over the summer

of 2006 and into the fall. For example, several key witnesses who

were able to speak to Bilfinger and Fru-Con Holding’s involvement

in the CPP were deposed recently. The deposition of Peter Ophoven

was taken on August 21, 2006, Earle Hardgrave’s deposition was

taken September 5 through September 8, 2005 and Matti Jaekel’s

deposition took place on September 12 and September 13, 2006. SMUD

filed the motion to amend roughly two months after the deposition

of Jaekel and prior to the close of discovery. There has been no

substantive law and motion practice to date. Taken together these

facts suggest that SMUD acted with reasonable diligence. 

Fru-Con also suggests that SMUD knew of Fru-Con’s relationship

to Bilfinger and Fru-Con Holding well before this lawsuit was even

filed. Even if this is true, SMUD maintains that simply knowing

that there is a relationship between the three entities is

insufficient information on which to bring a counterclaim naming

two new defendants. SMUD maintains that it was only through

discovery that SMUD learned the details on which it now bases its

amended counterclaim.

Allowing parties to amend based on information obtained

through discovery is common and well established. For example, in

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 The court cannot help but notice that although Fru-Con 5

filed a 44 page brief, only two paragraphs (not even a full page)

are dedicated to the question of prejudice. 

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Safeway, Inc. v. Sugarloaf Partnership, LLC., 423 F. Supp. 2d 531

(D. Md. 2006), the court granted leave to amend based on “new

information revealed in discovery.” Id. at 539. See also 

Pumpco, Inc. v. Schenker Intern., Inc., 204 F.R.D. 667 (D. Colo.

2001) (learning through discovery of new information which is

necessary for the assertion of a claim constitutes good cause under

Rule 16); Sithon Maritime Co. v. Holiday Mansion, 177 F.R.D. 504

(D. Kan. 1998) (no knowledge of factual basis for new fraud claims

until after discovery constituted good cause under Rule 16). 

For these reasons, the court concludes that SMUD acted with

diligence in seeking leave to file an amended counterclaim. 

B. Prejudice 

Fru-Con argues that it will be prejudiced by the amendment.5

Fru-Con maintains that the discovery deadline (set for January 18,

2007) will have to be extended and that the trial will be made

substantially more complicated with two additional parties. The

court is unpersuaded that these facts constitute the type of

prejudice which precludes amendments under Rule 16.

The majority of facts relating to the corporate relationship

between the three entities appear to have already been revealed in

discovery. Moreover, information about how the three entities are

related is information which Bilfinger and Fru-Con Holding posses.

That said, should Fru-Con, Bilfinger or Fru-Con Holding want to

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extend the discovery deadline and the other deadlines set forth in

the scheduling order, the court will be amenable to such requests.

The fact that the amended counterclaim may cause more work

does not constitute prejudice. This is especially true in light

of "Rule 16(b)' s ‘good cause’ standard which primarily considers

the diligence of the party seeking the amendment." Johnson, 975

F.2d at 609. Given that SMUD has met the diligence standard

discussed above, any considerations regarding the extra labor

required of Bilfinger or Fru-Con Holding are outweighed.

Accordingly, the court orders as follows: 

1. Sacramento Municipal Utility District’s Motion to Amend

its Counterclaim to add Bilfinder Berger AG and Fru-Con Holding

Corporation as counterdefendants is GRANTED. 

2. Fru Con has informed the court that it does not desire

to alter the present dates but that the new defendants do not, as

yet, have counsel for the instant case. Those parties shall, at

the time they file their answers, inform the court and the present

parties, in writing, of their desire in that regard.

 IT IS SO ORDERED. 

DATED: December 15, 2006.

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