Los Angeles Memorial Coliseum Commission v. Insomniac, Inc. , 182 Cal. Rptr. 3d 888 ( 2015 )

Filed 1/27/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
LOS ANGELES MEMORIAL B252838
COLISEUM COMMISSION et al.,
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BC472814)
v.
INSOMNIAC, INC., et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of the County of Los Angeles,
Terry A. Green, Judge. Affirmed in part, reversed, in part and remanded with
instructions.
Burke, Williams & Sorensen, Charles E. Slyngstad, Brian S. Ginter for Plaintiffs
and Appellants.
The Kaufman Law Group, Gary J. Kaufman, Colin A. Hardacre, Natasha L. Hill
for Defendants and Respondents Insomniac, Inc. and Pasquale Rotella.
Mennemeier Glassman, Eric J. Glassman for Defendants and Respondents Go
Ventures, Inc. and Reza Gerami.
INTRODUCTION
Plaintiffs and appellants Los Angeles Memorial Coliseum Commission
(Commission) and Los Angeles Memorial Coliseum Association (Association)1 appeal
from a judgment and order of dismissal entered following the sustaining without leave to
amend of demurrers by defendants and respondents Insomniac, Inc. (Insomniac);
Pasquale Rotella (Rotella); Go Ventures, Inc. (Ventures); and Reza Gerami (Gerami).2
According to plaintiffs, the judgment and order of dismissal should be reversed because
each of the causes of action as to which the demurrers were sustained stated facts
sufficient to constitute a cause of action against defendants. Plaintiffs alleged that
defendants, which or who promoted and staged music events at the Coliseum and other
related venues, paid an employee of the Commission for services related to those music
events and that such payments were inappropriate and not disclosed to plaintiffs.
Plaintiffs‟ causes of action related to these undisclosed arrangements between defendants
and the employee.
Based on our de novo review of the operative complaints, we conclude that
plaintiffs adequately stated causes of action under the conflicts of interest prohibition in
Government Code section 1090 (section 1090), conspiracy to defraud, violation of the
Unfair Competition Law (UCL),3 and accounting. We further conclude that the trial
court properly sustained without leave to amend defendants‟ demurrers to the causes of
1
The Commission operates the Los Angeles Memorial Coliseum (Coliseum) and,
apparently, the Los Angeles Sports Arena (Sports Arena). Commission and Association
are sometimes collectively referred to as plaintiffs.
2
Insomniac, Rotella, Ventures, and Gerami are sometimes collectively referred to
as defendants.
3
Business and Professions Code section 17200 et seq.
2
action for violation of the False Claims Act,4 fraud, and negligence. We therefore reverse
the judgment and order of dismissal and remand the matter with instructions.
FACTUAL BACKGROUND
We set forth below the allegations of the complaints in issue. 5
A. First Amended Complaint
1. General Allegations
Patrick Lynch was the general manager of the Commission and an officer of the
Association. For years, he profited personally by abusing his position of trust and
responsibility, receiving more than his substantial lawful wages and benefits from the
Commission.
Todd DeStefano was an employee of the Commission who worked as an event
coordinator, senior event and sales manager, director of events, and assistant general
manager of events. For years, DeStefano and his wife Carisse profited personally by
improperly diverting revenue to themselves and related entities that should have been
paid to plaintiffs by, inter alia, Insomniac and Ventures, including money from various
promotions, electronic music festivals, film productions, and other events. Insomniac
and Ventures manipulated contract terms and accountings of events, thereby diverting
material revenue from the services provided by plaintiffs, which revenue Insomniac and
Ventures kept for themselves.
Since 1998, the Coliseum and Sports Arena hosted 37 electronic music festivals,
with more than one million attendees pursuant to contracts with Insomniac and Ventures.
4
Government Code section 12650 et seq.
5
As explained in detail below, defendants‟ demurrers were sustained without leave
to amend as to certain causes of action in the first, fourth, and fifth amended complaints.
Therefore, the factual allegations relevant to each order sustaining the demurrers without
leave to amend are taken from the pleadings to which the orders were applied.
3
Plaintiffs worked with Insomniac and Ventures on these events and grossed a significant
percentage of revenue from them. Despite the rapid growth in popularity of these
festivals beginning in or about 2006 and 2007, and continuing to 2010, DeStefano did not
maximize rent or other revenue from them. Instead, he used the growing popularity and
increased revenue from these events to benefit himself. Between 2006 and 2010,
DeStefano approved contractual arrangements in which he and his wife had a financial
interest with Insomniac and Ventures, both of which had information that DeStefano was
plaintiffs‟ employee and public servant.
Between October 2005 and December 2010, Ventures entered into 17 contracts
with one or both plaintiffs, the purpose of which was to hold music festivals. Between
August 2005 and June 2010, Insomniac entered into seven contracts with one or both
plaintiffs, the purpose of which was to hold music festivals.
During the three-year period prior to February 2012, Lynch, DeStefano, and
others, including promoters, made or caused cash payments of $955,000 to be paid to a
union shop steward of a theatrical stage employees local in connection with events held at
plaintiffs‟ public facilities. The purposes of those cash payments included wage
payments to the shop steward and stage hands, which payments were outside the ordinary
and usual employment compensation practices of plaintiffs and the union.
Plaintiffs identified $557,710 in cash payments made in connection with events
promoted by Ventures and $209,581 in cash payments made in connection with events
promoted by Insomniac. The practice of paying cash wages resulted in Insomniac and
Ventures paying approximately 29 percent less for employee-related costs and, as a result
of the effect of all payroll taxes and federal and state withholding taxes, exposed
plaintiffs to liability in an amount of 60 percent more than the cash paid.
2. First Cause of Action for Violation of the False Claims Act
In the first cause of action of the first amended complaint for violation of the False
Claims Act, as to which the trial court sustained the demurrers of Insomniac and
Ventures without leave to amend, plaintiffs alleged that between 2006 and 2010,
4
Insomniac and Ventures, among others, submitted or conspired to submit claims for
money for services or work relating to plaintiffs. In the course of such conduct, and in
violation of the False Claims Act, Insomniac and Ventures submitted or conspired to
submit false claims for payment (i) that they presented to an officer, employee, or agent
of plaintiffs or (ii) that they made to a contractor, grantee, or recipient, where the money
claimed was to be spent or used on a program or interest of plaintiffs from funds provided
by plaintiffs or from funds that plaintiffs would use to reimburse others.
B. Fourth Amended Complaint
1. General Allegations
In the general allegations of the fourth amended complaint, plaintiffs named as
individual defendants Rotella and Gerami6 in addition to Insomniac and Ventures. The
general allegations were similar to those in the first amended complaint set forth above,
but incorporated as exhibits copies of the rental agreements entered into between
plaintiffs, on the one hand, and Insomniac and Ventures, on the other hand. In addition,
plaintiff alleged that the contracts between plaintiffs and Insomniac and Ventures were
entered into by and through the efforts of Rotella and Gerami, each of whom, on behalf
of Insomniac and Ventures, communicated with officers, employees, or agents of
plaintiffs or conspired with Lynch and DeStefano to enter into those contracts.
2. Fifth Cause of Action for Violation of Section 1090
In support of the fifth cause of action for violation of section 1090, as to which the
trial court sustained defendants‟ demurrers without leave to amend, plaintiffs alleged that
Lynch and DeStefano, as public employees, participated in making the contracts with
Insomniac and Ventures. Insomniac and Ventures knew that DeStefano had structured
his business arrangements with them so that he was financially interested in their
6
As discussed below, Rotella and Gerami were originally named in the third
amended complaint.
5
contracts with plaintiffs and that DeStefano‟s companies, LAC Events and Private Event
Management, were receiving money from public contracting activity. Both Lynch and
DeStefano knew that DeStefano and his companies would receive money arising out of
public contracts.
DeStefano, his wife, his companies, and Lynch participated in making the
contracts with Insomniac and Ventures and had a financial interest in those contracts.
Revenues received by plaintiffs from events held at their public facilities were public
funds that were subject to a final accounting and, for each such event, a settlement
statement prepared by plaintiffs‟ employees and provided to the promoter and licensee of
the event. The compensation paid to plaintiffs‟ employees, including managers, event
coordinators, stage hands, and other reasonable and necessary personnel working at the
events was paid with public funds. Insomniac and Ventures received payments directly
and indirectly under their contracts from public funds of plaintiffs and from the millions
of dollars in revenue and profits derived from the contracts with plaintiffs.
Insomniac and Ventures received substantial public funds through their use of
plaintiffs‟ public facilities, generated revenue and earned profits on their music festivals,
and saved costs through cash payments to union workers who were employees of
plaintiffs on the dates of events, thereby deriving additional excessive net proceeds from
the public funds generated by the event. Insomniac and Ventures gave DeStefano
“kickbacks” for allowing them to enter into their contracts with plaintiffs and as quid pro
quo for their receipt of public funds from plaintiffs.
Insomniac‟s and Ventures‟s records showed that Insomniac unlawfully received at
least $400,000 from plaintiffs‟ public funds in connection with the Electric Daisy
Carnival in June 2009, and that Ventures received plaintiffs‟ public funds from the
following events: $170,000 in connection with Monster Massive in October 2008;
$10,000 in connection with the Love Festival in August 2009; $20,970 in connection
with Monster Massive in October 2009; and $171,200 in connection with Together As
One in December 2009.
6
Ventures paid at least $716,680 of diverted public funds to DeStefano by making
at least 10 payments to him through his companies from January 2009 through April
2010. Insomniac paid at least $1,175,000 of diverted public funds to DeStefano by
making at least five payments to him through his companies from August 2008 through
September 2010. In addition, plaintiffs identified cash payroll payments of $557,710
made in connection with events promoted by Ventures and at least $209,581 made in
connection with events promoted by Insomniac.
3. Tenth Cause of Action for Negligence
In support of the tenth cause of action in the fourth amended complaint for
negligence, as to which the trial court sustained the demurrers of Insomniac and Ventures
without leave to amend, plaintiffs alleged that Insomniac and Ventures foreseeably
induced plaintiffs into believing that Insomniac and Ventures would perform their duties
under the contracts with plaintiffs and carry out their actions in furtherance of the
contracts in a lawful manner. Plaintiffs reasonably expected that Insomniac and Ventures
would do so because those entities knew at the time of the making of the contracts that
plaintiffs were public entities. Insomniac and Ventures breached their duty of care owed
to plaintiffs by engaging in the acts alleged in the fourth amended complaint, including
entering into public contracts with public officials who would receive a financial benefit
from those contracts, causing public officials to violate their duties as public employees,
and making cash payments to a union shop steward and stage hands that were outside the
ordinary and usual employment compensation practices of plaintiffs.
7
C. Fifth Amended Complaint
1. General Allegations
In the fifth amended complaint, plaintiffs included general allegations that were
substantially similar to the general allegations of the first and fourth amended complaints
set forth above.
2. Third Cause of Action for Conspiracy to Defraud
In the third cause of action for conspiracy to defraud in the fifth amended
complaint, as to which the trial court sustained defendants‟ demurrers without leave to
amend, plaintiffs repeated certain of the general allegations and specifically alleged that
DeStefano committed fraud, did not make basic policy decisions as an officer or
employee of plaintiffs, and acted in furtherance of the conspiracy to defraud plaintiffs
when he entered into an agreement with Insomniac and Ventures through his company,
LAC Events, Inc.7
In or about June 2008, DeStefano, Insomniac, Rotella, Ventures, and Gerami
entered into a plan, conspiracy, and design to pay at least 10 percent of gross ticket sales
to DeStefano through his alter ego, LAC Events, in exchange for Insomniac‟s and
Ventures‟ use of the plaintiffs‟ public facilities and DeStefano‟s commitment to keep
building expenses limited. DeStefano kept the stated rent in the contractual
documentation at a falsely stated flat fee to deceive plaintiffs into believing that the rent
was a flat fee. Plaintiffs and plaintiffs‟ management employee, Lynch, did not know and
could not have known that the stated rent in the contracts was false, nor did they know,
nor could they have known, that DeStefano and his alter ego had entered into the plan,
conspiracy and design with Insomniac, Rotella, Ventures, and Gerami. Those defendants
knew that the plan to which they agreed included payments to an employee of a
7
DeStefano deleted his agreement with Insomniac and Ventures from his office
computer‟s hard drive before January 19, 2011.
8
governmental organization in exchange and as a quid pro quo for the “corruption” of his
loyalty to his employer and the unlawful diversion of public funds to defendants.
An executive producer for Insomniac and Rotella testified under immunity to the
Los Angeles Grand Jury that DeStefano‟s job involved politicking or lobbying for the
benefit of defendants. DeStefano‟s politicking and lobbying took place without
plaintiffs‟ knowledge. In that role, in planning sessions for events, and during and after
events, DeStefano spoke on behalf of the interests of Insomniac, Rotella, Ventures, and
Gerami to Los Angeles Police Department personnel, Los Angeles Fire Department
personnel, private security company personnel, off-duty police officers, emergency
medical technicians and medical personnel, and plaintiffs‟ employees, without those
persons knowing that DeStefano owed allegiance to the promoters and was being paid by
them to support their interests when he spoke.
Representatives of Insomniac and Ventures gave DeStefano advice and direction
regarding how to represent facts to authorities. DeStefano in his role for defendants also
limited expenses at electronic music festivals for private security, off-duty police, and
medical personnel, to the detriment of plaintiffs‟ interests. He also provided defendants
with confidential information that they were not entitled to know, including attorney-
client information and internal communications by plaintiffs and their representatives.
DeStefano‟s wife knew that he received improper payments from Insomniac and
Ventures for their use of the facilities of DeStefano‟s governmental employer in conflict
with his duties to that employer, and she received payments for her assistance in the
continuing plan through DeStefano‟s alter egos, LAC Events and Private Events
Management. During the relevant periods of time, DeStefano approved contractual
arrangements in which he and his wife had a financial interest with Insomniac and
Ventures with the knowledge of defendants. Insomniac and Ventures also knew that
DeStefano was an employee and public servant of plaintiffs.
The plan and conspiracy continued for more than two years, as shown by
documents that explained the means by which DeStefano appropriated to himself through
the company he owned, LAC Events, a consulting fee, representing 10 percent of gross
9
ticket sales and other compensation that should have been paid to or retained by
plaintiffs. Some of the consulting fee paid to De Stefano through LAC Events explicitly
was noted as “venue rent” on checks issued by Ventures and as a “venue use fee” and a
“venue fee” on a check and documentation of a wire transfer, respectively, by Insomniac,
pursuant to the unlawful agreement.
Lynch learned of DeStefano‟s conflicting use of a company DeStefano owned and
controlled to make money unlawfully performing plaintiffs‟ event coordinator business
for DeStefano‟s personal gain. Specifically, DeStefano told Lynch in early 2010 that
DeStefano had set up a company to work with promoters on his own time and that
DeStefano‟s work would have no financial impact on the Commission or the Coliseum or
the Sports Arena. DeStefano did not disclose to Lynch that DeStefano had been paid to
that date at least $999,000 by Insomniac and Ventures, DeStefano‟s work had financially
affected plaintiffs, and DeStefano‟s work for defendants directly related to the events
being held at plaintiffs‟ public facilities. Lynch, despite knowing that DeStefano as a
public employee could not serve two masters, condoned the continuation of the
conflicting and unlawful conduct by DeStefano and did not stop DeStefano from
profiting from it, thereby unlawfully aiding in the plan and conspiracy with knowledge of
its unlawful purpose. Lynch did not inform any of the Commission‟s commissioners, or
anyone else, regarding DeStefano‟s conflicting work as an event coordinator for
defendants until January 2011. On January 19, 2011, the conflict was terminated at the
direction of the commissioners when DeStefano chose to resign from the Commission
and work solely for the promoters. DeStefano‟s wife knew in 2009 that DeStefano was
taking unlawful advantage of his public employment and breaching his fiduciary duties to
plaintiffs for the benefit of DeStefano and his wife by engaging in conduct for their
personal gain, and she knowingly received payments and proceeds of the unlawful
activity from LAC Events in 2009 and from LAC Events and Private Event Management
in 2010, thereby unlawfully aiding in the plan and conspiracy with knowledge of its
unlawful purpose.
10
Plaintiffs were induced to pay from their public funds Insomniac‟s and Ventures‟s
net proceeds for events from 2008 into 2010 that were excessive due to (i) the building-
related expenses kept to a minimum by DeStefano to the detriment of plaintiffs; and (ii)
the difference between the stated false fixed rent in the written agreements and the rental
or use fees based on gross receipts that Insomniac and Ventures subsequently paid to the
DeStefanos through LAC Events and Private Event Management.
3. Fourth Cause of Action for Fraud
In the fourth cause of action for fraud in the fifth amended complaint, as to which
the trial court sustained defendants‟ demurrers without leave to amend, plaintiffs alleged
facts substantially similar to those alleged in support of the third cause of action for
conspiracy to defraud. In addition, plaintiffs alleged that defendants Insomniac, Rotella,
Ventures, and Gerami deceived plaintiffs by concealing their agreement with DeStefano
and by paying DeStefano‟s companies money to use plaintiffs‟ public facilities, which
monies defendants knew should have been paid to plaintiffs and retained by plaintiffs in
the public funds generated by the events at the public facilities. In furtherance of their
fraud, defendants kept the stated rent in the contractual documentation at a falsely stated
flat fee to deceive plaintiffs into a continuing belief that the rent was a flat fee, thereby
concealing defendants‟ fraudulent dealings with DeStefano. Plaintiffs and plaintiffs‟
management employee, Lynch, did not know and could not have known that the stated
rent in the contracts was false, nor did they know, nor could they have known, that
DeStefano and his alter ego had an agreement with Insomniac, Rotella, Ventures, and
Gerami. Defendants‟ payments to an employee of a governmental organization and his
alter ego company were in exchange and as a quid pro quo for the corruption of his
loyalty to his employer and the unlawful diversion of public funds to defendants.
Defendants represented in each contractual document that the rent for their events
was a flat fee when in truth the rent was being calculated based on a percentage of gross
receipts that was taken from the public funds generated by the events and distributed to
defendants for subsequent payoffs to DeStefano and his wife through DeStefano‟s
11
companies. Defendants concealed their fraudulent activity—including that defendants
entered into an agreement with DeStefano to pay him through his companies money that
should have been paid to plaintiffs and retained by plaintiffs in the public funds generated
by the events at the public facilities—with the intent that plaintiffs would proceed with
the events by defendants to take place at the plaintiffs‟ venues—thereby enriching
defendants. Defendants knew that their events would not have been held if plaintiffs
knew that defendants had “bribed” plaintiffs‟ public employee. Defendants knew
plaintiffs were unaware of their fraudulent activity, including that defendants entered into
an agreement with DeStefano to pay him through his companies money that should have
been paid to plaintiffs and retained by plaintiffs in the public funds generated by the
events at the public facilities, and that the truth was not readily accessible to plaintiffs.
4. Sixth Cause of Action for Violation of the UCL
In their sixth cause of action for violation of the UCL in the fifth amended
complaint, as to which the trial court sustained defendants‟ demurrers without leave to
amend, plaintiffs alleged that Insomniac and Ventures entered into an agreement with
DeStefano under which they would pay less than market value for the rent of plaintiffs‟
public venues. Although DeStefano could have charged rent on a receipts basis, he
instead provided for Insomniac and Ventures to pay rent on a flat fee basis, which
provision resulted in less than fair market value rent being paid to the Commission.
Insomniac‟s and Venture‟s conduct was anticompetitive and injured the public because
defendants obtained use of plaintiffs‟ public facilities on a preferential basis and at less
than market value. As a result, others who were unwilling to pay a kickback to a public
official could not obtain the right to use plaintiffs‟ public facilities on the same terms
enjoyed by Insomniac and Ventures.
5. Ninth Cause of Action for an Accounting
In their ninth cause of action for an accounting in the fifth amended complaint, as
to which the trial court sustained defendants‟ demurrers without leave to amend,
12
plaintiffs alleged that Insomniac and Ventures misappropriated and misused funds that
were held in trust by them or paid to them for a specific purpose. Each of the defendants
was either a fiduciary or acted in concert with a fiduciary in breaching their obligations to
plaintiffs as alleged in the other causes of action in the fifth amended complaint. The
exact amount of money misappropriated was unknown to plaintiffs and could only be
determined by an accounting. There were both unliquidated and unascertained sums
owed by Insomniac and Ventures to plaintiffs. Insomniac and Ventures remained in
possession of public funds.
PROCEDURAL BACKGROUND
Plaintiffs filed an original complaint in this action, asserting 12 causes of action
against eight defendants, including Insomniac and Ventures. As to Insomniac and
Ventures, the plaintiffs alleged causes of action for violation of the False Claims Act,
violation of section 1090, violation of the UCL, breach of the implied covenant of good
faith and fair dealing, accounting, and negligence.
In response to demurrers filed by Insomniac, Ventures, and others, plaintiffs filed
a first amended complaint. It asserted the same causes of action against the same
defendants. Insomniac, Ventures, and others filed demurrers to the first amended
complaint. After argument, the trial court, Judge Gregory Alarcon, sustained the
demurrers of Insomniac and Ventures with leave to amend each claim, except the False
Claims Act cause of action, as to which the trial court sustained the demurrers without
leave to amend.8
In their second amended complaint, plaintiffs alleged the same causes of action
against Insomniac and Ventures as they had in the first amended complaint. Plaintiffs
8
Plaintiffs filed a petition for a writ of mandate challenging the ruling on their False
Claims Act cause of action, which petition this court denied because plaintiffs had an
adequate remedy at law.
13
attached as exhibits the rental agreements with Insomniac and Ventures and the
consulting agreement with DeStefano. In response to the second amended complaint,
Insomniac and Ventures filed demurrers. Plaintiffs then moved for leave to file a third
amended complaint, which motion the trial court granted
In a third amended complaint, plaintiffs named Rotella and Gerami as defendants.9
In addition to asserting all of the causes of action that had been asserted against
Insomniac and Ventures in the second amended complaint, plaintiffs added causes of
action for fraud and conspiracy to defraud against defendants. The trial court sustained
defendants‟ demurrers as to all causes of action with leave to amend, except as to the
False Claims Act cause of action10 as to which the court sustained the demurrer without
leave to amend.
Plaintiffs filed a fourth amended complaint against defendants and others. As
against defendants, plaintiffs alleged all of their prior causes of action, except their False
Claims Act cause of action.11 The trial court, Judge Terry Green, sustained without leave
to amend defendants‟ demurrers to the causes of action for violation of section 1090,
negligence, and breach of the implied covenant of good faith and fair dealing. The trial
court granted leave to amend the remaining causes of action against defendants for
conspiracy to defraud and fraud and against Insomniac and Ventures for violation of the
UCL and an accounting.
Plaintiffs filed a fifth amended complaint asserting the causes of action as to
which the trial court had granted leave to amend—conspiracy to defraud, fraud, violation
of the UCL, and an accounting. The trial court sustained defendants‟ demurrers to the
9
Rotella and Gerami were only named in the causes of action for violation of the
False Claims Act, conspiracy to defraud, and fraud.
10
Notwithstanding the trial court‟s prior ruling on their False Claims Act cause of
action, plaintiffs realleged it in the third amended complaint.
11
Rotella and Gerami were only named in the causes of action for conspiracy to
defraud and fraud.
14
fifth amended complaint without leave to amend. The trial court thereafter entered a
judgment and order of dismissal in favor of defendants. Plaintiffs filed a timely appeal.
DISCUSSION
A. Standard of Review
On review of a trial court‟s order sustaining a demurrer, we examine the complaint
de novo to determine if it states a cause of action. (Committee for Green Foothills v.
Santa Clara County Bd. of Supervisors (2010) 48 Cal. 4th 32, 42.) As the Supreme Court
has observed, “In reviewing the sufficiency of a complaint against a general demurrer, we
are guided by long-settled rules. „We treat the demurrer as admitting all material facts
properly pleaded, but not contentions, deductions or conclusions of fact or law.
[Citation.] We also consider matters which may be judicially noticed.‟ [Citation.]
Further, we give the complaint a reasonable interpretation, reading it as a whole and its
parts in their context. [Citation.] When a demurrer is sustained, we determine whether
the complaint states facts sufficient to constitute a cause of action. [Citation.] And when
it is sustained without leave to amend, we decide whether there is a reasonable possibility
that the defect can be cured by amendment: if it can be, the trial court has abused its
discretion and we reverse; if not, there has been no abuse of discretion and we affirm.
[Citations.] The burden of proving such reasonable possibility is squarely on the
plaintiff. [Citation.]” (Blank v. Kirwan (1985) 39 Cal. 3d 311, 318.)
B. Cause of Action for Violation of False Claims Act
In sustaining defendants‟ demurrers to the cause of action for violation of the
False Claims Act, the trial court ruled that plaintiffs lacked standing to sue under the Act
because Government Code section 12652 provides that claims under the Act can only be
brought by the Attorney General, the prosecuting authority of a political subdivision, or a
15
private party in a qui tam action.12 The trial court concluded that plaintiffs, who sued in
their own names and were represented by private counsel and did not file a qui tam
action, were not authorized under the False Claims Act to maintain the action for its
violation.
1. Background
In the operative first amended complaint, plaintiffs alleged that the Coliseum was
“a public entity organized and operating under the California Joint Exercise of Powers
Act . . .” and that the Association was “a California non-profit public benefit corporation,
which was created by the Commission, and is controlled by and under the direction of the
Commission. It is operated as a public entity . . . .” Plaintiffs did not allege that either
the Coliseum or the Association was a “prosecuting authority” or “person” for purposes
of being a qui tam plaintiff, as those terms are used in Government Code section 12652
discussed below.
At the hearing on the demurrer to the first amended complaint, plaintiffs argued
that they had standing to bring an action under the False Claims Act because Government
Code section 12651, subdivision (a) created an implied right of action in any public entity
harmed by the submission of a false claim, which right of action was independent of and
in addition to the rights of action created in the Attorney General, a prosecuting authority,
and a qui tam plaintiff under Government Code section 12652. Plaintiffs also stipulated
on the record that neither the Coliseum nor the Association was “bringing a qui tam
12
“A qui tam action has been defined as follows, „An action brought under a statute
that allows a private person to sue for a penalty, part of which the government or some
specified public institution will receive.‟ (Black‟s Law Dict. (7th ed. 1999) p. 1262, col.
1; United States ex rel. Aflatooni v. Kitsap Physicians Service (9th Cir. 2002) 314 F.3d
995, 997, fn. 1.) The term „qui tam‟ comes from the Latin expression „qui tam pro
domino rege quam pro se ipso in hac parte sequitur,‟ which means, “„who pursues this
action on our Lord the King‟s behalf as well as his own.”‟ (Vermont Agency of Natural
Resources v. United States ex rel. Stevens (2001) 529 U.S. 765, 768, fn. 1 [146 L. Ed. 2d
836, 120 S. Ct. 1858]; City of Pomona v. Superior Court (2001) 89 Cal. App. 4th 793, 797,
fn. 1 [107 Cal. Rptr. 2d 710].)” (People ex rel. Allstate Ins. Co. v. Weitzman (2003) 107
Cal. App. 4th 534, 538.)
16
action now or ever regarding these facts in this lawsuit.” Specifically, plaintiffs conceded
that the Association did not have standing to assert a claim as a qui tam plaintiff because
it was operated as a public entity. Similarly, plaintiffs emphasized that “there is no
requirement for [plaintiffs] to go under a qui tam statute . . . for a claim [plaintiffs
themselves] have. There‟s no requirement for [plaintiffs] to have original source
information. That‟s a qui tam standard. Those are qui tam procedures. This is not that
kind of case. It was never said to be. [Plaintiffs] stipulated that it‟s not. It‟s not a qui
tam case. [¶] [Plaintiffs] are directly able to collect monies that were either defrauded
from [them] by one means or another as charged under the False Claims Act . . . .”
2. Analysis
Plaintiffs contend that the trial court misconstrued Government Code section
12652. According to plaintiffs, Government Code section 12651, subdivision (a)13
13
Government Code section 12651, subdivision (a) provides: “(a) Any person who
commits any of the following enumerated acts in this subdivision shall have violated this
article and shall be liable to the state or to the political subdivision for three times the
amount of damages that the state or political subdivision sustains because of the act of
that person. A person who commits any of the following enumerated acts shall also be
liable to the state or to the political subdivision for the costs of a civil action brought to
recover any of those penalties or damages, and shall be liable to the state or political
subdivision for a civil penalty of not less than five thousand five hundred dollars ($5,500)
and not more than eleven thousand dollars ($11,000) for each violation: [¶] (1)
Knowingly presents or causes to be presented a false or fraudulent claim for payment or
approval. [¶] (2) Knowingly makes, uses, or causes to be made or used a false record or
statement material to a false or fraudulent claim. [¶] (3) Conspires to commit a violation
of this subdivision. [¶] (4) Has possession, custody, or control of public property or
money used or to be used by the state or by any political subdivision and knowingly
delivers or causes to be delivered less than all of that property. [¶] (5) Is authorized to
make or deliver a document certifying receipt of property used or to be used by the state
or by any political subdivision and knowingly makes or delivers a receipt that falsely
represents the property used or to be used. [¶] (6) Knowingly buys, or receives as a
pledge of an obligation or debt, public property from any person who lawfully may not
sell or pledge the property. [¶] (7) Knowingly makes, uses, or causes to be made or
used a false record or statement material to an obligation to pay or transmit money or
property to the state or to any political subdivision, or knowingly conceals or knowingly
17
expresses a clear legislative intent “to have „persons‟ held liable to the state or political
subdivision for acts in violation of the [False Claims Act].” Therefore, plaintiffs argue,
the Act does not limit them to using only prosecutorial authorities to pursue their claims.
Under the False Claims Act, any person who submits a false claim to the state or a
political subdivision may be sued for damages and civil penalties. (Gov. Code, § 12651,
subd. (a); State Ex Rel. Harris v. PricewaterhouseCoopers, LLP (2006) 39 Cal. 4th 1220,
1227.) Government Code section 12652, however, provides, in pertinent part: “(a) (1)
The Attorney General shall diligently investigate violations under Section 12651
involving state funds. If the Attorney General finds that a person has violated or is
violating Section 12651, the Attorney General may bring a civil action under this section
against that person. [¶] . . . [¶] (b) (1) The prosecuting authority[14] of a political
subdivision shall diligently investigate violations under Section 12651 involving political
subdivision funds. If the prosecuting authority finds that a person has violated or is
violating Section 12651, the prosecuting authority may bring a civil action under this
section against that person. [¶] . . . [¶] (c) (1) A person may bring a civil action for a
violation of this article for the person and either for the State of California in the name of
the state, if any state funds are involved, or for a political subdivision in the name of the
political subdivision, if political subdivision funds are exclusively involved. The person
bringing the action shall be referred to as the qui tam plaintiff. . . .” (Italics added.)
It is undisputed that this action was not brought by either the Attorney General or
a prosecuting authority, such as County Counsel or the City Attorney, nor do the
and improperly avoids, or decreases an obligation to pay or transmit money or property to
the state or to any political subdivision. [¶] (8) Is a beneficiary of an inadvertent
submission of a false claim, subsequently discovers the falsity of the claim, and fails to
disclose the false claim to the state or the political subdivision within a reasonable time
after discovery of the false claim.”
14
In Government Code section 12650, subdivision (b)(8), a “prosecuting authority”
is defined as “the county counsel, city attorney, or other local government official
charged with investigating, filing, and conducting civil legal proceedings on behalf of, in
the name of, a particular political subdivision.”
18
allegations of the operative first amended complaint suggest or imply that either the
Coliseum or the Association were otherwise “charged with the investigating, filing, and
conducting civil legal proceedings on behalf of, or in the name of, a particular political
subdivision.” (Gov. Code, § 12650, subd. (b)(8).)15 Moreover, plaintiffs stipulated that
the action was not brought by a “person” as a qui tam action. We therefore agree with
the trial court that because plaintiffs were not alleged to be among the governmental
persons or entities specifically authorized to bring suit under the False Claims Act,
plaintiffs lacked standing to prosecute a cause of action against defendants for violation
of that law. Accordingly, the trial court did not err in sustaining defendants‟ demurrers to
that cause of action.
Plaintiffs, in their reply brief, argue that the trial court should have granted them
leave to amend their complaint to cure the standing defect. It does not appear, however,
that plaintiffs requested such leave from the trial court or that they specified for the trial
court the amendment they proposed. Similarly, they have not proposed a specific
amendment on appeal, if one could even be made. Moreover, because plaintiffs raised
the amendment issue for the first time in their reply brief, we may reject it on that basis.
(See Shimmon v. Franchise Tax Bd. (2010) 189 Cal. App. 4th 688, 694 fn. 3.)
C. Cause of Action for Violation of Section 1090
In their cause of action for violation of section 1090,16 plaintiffs contend that the
trial court “made a fundamental error by ruling that Insomniac and Ventures must have
15
We do not have to deal with whether attorneys working in a government agency or
subdivision are or can be “charged with the investigating, filing, and conducting civil
legal proceedings” on behalf of or in the name of such a government agency or
subdivision for purposes of the False Claims Act because that is not what occurred here.
16
Section 1090 provides, in pertinent part, “Members of the Legislature, state,
county, district, judicial district, and city officers or employees shall not be financially
interested in any contract made by them in their official capacity, or by anybody or board
of which they are members. Nor shall state, county, district, judicial district, and city
19
received „public funds‟ in order to be reached by the conflict of interest statutes at issue
here.” According to plaintiffs, “case law dictates that persons who receive any benefit
flowing from a contract that was gained through bribing a public official must disgorge
those profits.” As explained below, we agree that the trial court erred in sustaining
defendants‟ demurrers to plaintiffs‟ cause of action for violation of section 1090.
1. Legal Principles
As stated by the court in Carson Redevelopment Agency v. Padilla (2006) 140
Cal. App. 4th 1323, 1329-1330 (Carson), “[T]here has long been a common law
proscription against public officials having a financial interest in contracts created by
them in their official capacities. [Citation.] In 1951, the Legislature codified the
proscription when it enacted section 1090 to curb conflicts of interest with respect to
contracts, purchases and sales made by public officials. [Citation.] Section 1090 is
triggered when a public official has a direct financial interest in a contract. Even when a
public official‟s financial interest is indirect, section 1090 will still apply unless the
interest is too remote and speculative. [Citation.]”
The court in County of San Bernardino v. Walsh (2007) 158 Cal. App. 4th 533,
549-551 (San Bernardino), further amplified on the purpose and application of section
1090 as follows: “In order to fulfill the fundamental public policy underlying section
1090, the County may obtain a forfeiture of the proceeds of a tainted contract, even when
the proceeds were received from a third party rather than the public entity itself. [¶]
Section 1090 prohibits public officials from being financially interested in any contract
made by them in their official capacity. [Citation.] Section 1090 embodies the principle
that the duties of public office demand the absolute loyalty and undivided allegiance of
the individual who holds the office. [Citations.] More basically, section 1090 applies
„[t]he truism that a person cannot serve two masters simultaneously.‟ [Citation.] [¶]
officers or employees be purchasers at any sale or vendors at any purchase made by them
in their official capacity.”
20
Section 1090 has been interpreted liberally to prohibit any form of self-dealing.
[Citations.] The statute cannot be given „a narrow and technical interpretation that would
limit [its] scope and defeat the legislative purpose.‟ [Citations.] Section 1090 is
triggered when a public official receives any profit from a public contract and includes
the acceptance of a bribe in return for influencing the public entity to enter into a
particular contract. [Citations.]” (Italics added.)
The court in San Bernardino, supra, 158 Cal. App. 4th 533 added, “[c]ourts also
have liberally interpreted the remedies available for a violation of section 1090 to permit
the public entity to recover compensation without restoring the benefits it received under
the contract. [Citations.] Because contracts in violation of section 1090 are against
fundamental public policy, parties who participate in the unlawful making of the contract
should forfeit all interest flowing from the contract to avoid the prospect of unjust
enrichment. [Citations.] An actual loss to the public entity is not necessary. [Citations.]
[¶] . . . [¶] As with the principle of unjust enrichment, section 1090 focuses on the
wrongdoer rather than the victim. Disgorgement of profits is a logical extension of the
rationale of section 1090 that public officials cannot profit by a breach of their duty or
take advantage of their own wrongdoing. [¶] In Thomson [v. Call (1985) 38 Cal. 3d 633
(Thomson)], the Supreme Court stated that the facts of that case „represent but one of
endless permutations generated by the basic conflict-of-interest situation, and a different
remedy could be tailored for each.‟ (Thomson, supra, 38 Cal.3d at p. 652.) The court
emphasized that there must be a policy of strict enforcement to create „a strong
disincentive for those officers who might be tempted to take personal advantage of their
public offices.‟ (Ibid.)” (Id. at pp. 550-551, italics added.)
2. Analysis
Plaintiffs alleged that their employee, DeStefano—in his official capacity—
negotiated on their behalf the rental agreements with Insomniac and Ventures that are at
issue in this action. Plaintiffs also alleged that, by virtue of DeStefano‟s consulting
agreement with Insomniac and Ventures—under which DeStefano would receive 10
21
percent of the revenues from the events held pursuant to the rental agreements—
DeStefano had a financial interest in the rental agreements. Plaintiffs therefore
adequately pleaded a violation of section 1090.
The issue on appeal is whether the violation of section 1090 entitled plaintiffs to
void the rental agreements under Government Code section 1092 (section 1092)17 and to
compel Insomniac and Ventures to disgorge the profits that they earned on events held
under the rental agreements. Referring to, inter alia, Thomson, supra, 38 Cal. 3d 633, San
Bernardino, supra, 158 Cal. App. 4th 533, and Carson, supra, 140 Cal. App. 4th 1323,
plaintiffs contend that sections 1090 and 1092 are not limited in scope to transactions in
which a private party defendant received public funds directly from a plaintiff that is a
public entity. Based on these authorities, plaintiffs argue that they are entitled to recover
from Insomniac and Ventures any and all benefits those defendants derived from the
rental agreements because the agreements were made by DeStefano, a public employee,
in his official capacity while he had a financial interest in them, i.e., the agreements were
tainted with corruption in violation of section 1090. As our analysis of plaintiffs‟
authorities demonstrates, plaintiffs‟ construction of sections 1090 and 1092 is correct.
In Thomson, supra, 38 Cal. 3d 633, the defendant city council member sold a
parcel of land to an intermediary, which thereafter sold the parcel to the city. (Id. at p.
637.) The plaintiffs filed a taxpayers suit challenging the validity of the transaction.
(Ibid.) The trial court found, inter alia, that the city council member was interested in the
transaction in violation of section 1090, that the city council member was liable to the
city for the purchase price, and that the city was entitled to retain title to the parcel.
(Thomson, supra, 38 Cal.3d at p. 637.) In affirming the trial court‟s judgment, the
Supreme Court in Thomson explained that “the trial court‟s remedy—allowing the city to
keep the land and imposing a money judgment against the [the city council member]—is
17
Section 1092, subdivision (a) provides, in pertinent part, “Every contract made in
violation of any of the provisions of Section 1090 may be avoided at the instance of any
party except the officer interested therein. No such contract may be avoided because of
the interest of an officer therein unless the contract is made in the official capacity of the
officer, or by a board or body of which he or she is a member.”
22
consistent with California law and with the primary policy concern that every public
officer be guided solely by the public interest, rather than by personal interest, when
dealing with contracts in an official capacity. Resulting in a substantial forfeiture, this
remedy provides public officials with a strong incentive to avoid conflict-of-interest
situations scrupulously.” (Id. at p. 650.)
In San Bernardino, supra, 158 Cal. App. 4th 533, the defendants, a corporation and
its owner, entered into a lease transaction with the plaintiff county granting them a
leasehold interest in billboard sites along certain county highways and requiring them to
complete construction of billboards on the sites within 12 months. (Id. at p. 548.) After
three extensions of the 12-month construction time limit, the defendants completed 12
billboards at a cost to them of $600,000. (Ibid.) The defendants thereafter agreed to
assign the lease and sell five of the billboards to a third party for $4.4 million, which
assignment required the approval of the county. (Ibid.) In return for a $20,000 bribe
from the defendants, the county‟s chief administrative officer expedited the issuance of
the county‟s consent to the assignment of the lease. (Ibid.) The defendants received $4.4
million as a result of the assignment, $3.8 million of which was profit. (Ibid.) The
county sued the defendants for, inter alia, violation of section 1090. (San Bernardino,
supra, 158 Cal.App.4th at p. 549.) Following a trial, the trial court found the defendants
liable for violation of section 1090 and awarded the county $3.8 million in damages
representing the proceeds from the lease assignment to the third party, less the cost of
constructing the billboards. (San Bernardino, supra, 158 Cal.App.4th at p. 549.)
In affirming the trial court‟s ruling on the cause of action for violation of section
1090, the court in San Bernardino, supra, 158 Cal. App. 4th 533 concluded that “under the
circumstances of this case, an award of damages representing the price paid by a third
party to obtain benefits under a contract that violates section 1090 is warranted. Such a
remedy is consistent with the purpose of section 1090 to prevent an offending party from
benefiting from a contract that involves self-dealing by a public official. (See Carson,
supra, 140 Cal.App.4th at pp. 1335-1336.) [¶] . . . [¶] This is not a situation where the
County bought something and could be made whole by a judgment requiring defendant to
23
return the money paid by the County. Under the facts of the instant case, the goal of the
statute cannot be achieved with a lesser remedy that would provide no disincentive to the
misconduct. As the trial court stated, the absence of a judgment requiring [the
defendants] to disgorge the profits [they] received from [the third-party assignee of the
lease] would leave „a powerful incentive to pay small bribes for big public contracts.‟ [¶]
The only remedy that would redress the injury to the people of the County is to unravel
the deceit and require [the defendants] to pay the County the profit from their and [the
chief administrative officer‟s] misdeeds. (See Carson, supra, 140 Cal.App.4th at pp.
1335-1336.)” (Id. at pp. 550-551.)
In Carson, supra, 140 Cal. App. 4th 1323, the defendants, owners of a senior
housing complex, entered into an agreement with a municipal redevelopment agency
under which the defendants would receive rental assistance. (Id. at p. 1327.) When the
defendants thereafter requested an extension of the agreement and an increase in the
rental assistance, the agency proposed instead making a low-interest loan to the
defendants that would be used by them to pay down the mortgage on their senior housing
complex. (Id. at pp. 1327-1328.) The defendants were told by a city official—the
mayor—that they would need to pay him $50,000 if they wanted the city council to
approve the loan. (Id. at p. 1328.) The defendants paid the mayor $50,000 for city
council approval, plus another $25,000 to have the agency sign the agreement. (Ibid.)
The municipal redevelopment agency sued the defendants to void the loan
agreement pursuant to sections 1090 and 1092. (Carson, supra, 140 Cal.App.4th at p.
1328.) The trial court granted summary adjudication in favor of the agency and entered a
judgment requiring the defendants to pay the agency the entire amount of the loan
proceeds. (Ibid.)
In affirming the trial court‟s ruling on the cause of action for violation of section
1090, the court in Carson, supra, 140 Cal. App. 4th 1323 reviewed the authorities on the
appropriate remedy for a violation of section 1090 and concluded that the disgorgement
remedy was “automatic.” (Id. at pp. 1335-1336.) According to the court, “Our holding
sends a message. If a corrupt public official demands an extortion payment in exchange
24
for a public contract, the victim should not pay. Instead, the victim should report the
corrupt public official to local, state or federal law enforcement. If the victim pays and
the extortion is discovered, the victim will not be permitted to retain any consideration
received. The reason is simple. A public contract obtained through an extortion payment
is not valid, and no one should believe that it is valid. A bright-line rule is required.” (Id.
at p. 1337, italics added.)
These authorities suggest that the equitable remedy for a violation of section 1090
is not limited to cases in which the defendant receives public funds directly from the
plaintiff public entity. As the Supreme Court in Thomson, supra, 38 Cal. 3d 633
emphasized, the policy goals underlying section 1090 mandate strict enforcement of the
conflict of interest statutes and justify harsh remedies, such as the result in that case—
forfeiture to the city of the title to the city council member‟s parcel of land and
disgorgement of the purchase price. (Thomson, supra, 38 Cal.3d at p. 652 [“because of
the significant public policy goals which mandate strict enforcement of conflict-of-
interest statutes such as section 1090, we conclude that the remedy applied by the trial
court was justified, supported by both California case law and public policy”].)
Moreover, the Court of Appeal in San Bernardino, supra, 158 Cal. App. 4th 533
explicitly rejected the “public funds” limitation on the remedy for a violation of section
1090 when it affirmed the remedy imposed by the trial court there—disgorgement of the
profits the defendants had derived from the lease assignment, which assignment was
tainted by the bribery of a public official. As the court in that case observed, “The
remedy fashioned by the trial court is an equitable form of forfeiture that is utilitarian in
its design and serves the community by strongly discouraging the avarice of corrupt
politicians and the burden of contracts tainted by conflicts of interest. [Citation omitted.]
The damages may reflect money paid by [the third-party assignee of the lease] and not
from the County treasury, but the County‟s residents were harmed by the corruption and
self-dealing and, in a broader sense, the lease and lease assignment were made „at the
expense‟ of those residents.” (San Bernardino, supra, 158 Cal.App.4th at pp. 551-552,
italics added.)
25
In addition, the court in Carson, supra, 140 Cal. App. 4th 1323 left no doubt about
whether disgorgement for a violation of section 1090 was an appropriate remedy.
According to the court in that case, once a violation of section 1090 is shown to have
occurred, disgorgement is “automatic” because, “as a policy matter, it is the most
effective way to give section 1090 all the teeth that it needs.” (Carson, supra, 140
Cal.App.4th at p. 1336.)
Here, as in San Bernardino, supra, 158 Cal. App. 4th 533, Insomniac and Ventures
entered into agreements with plaintiffs to use public property for commercial purposes,
and they derived significant profits from that use. Because plaintiffs adequately alleged
that DeStefano, a public official, had violated section 1090 by making those contracts
with Insomniac and Ventures when he held an economic interest in them, the contracts
were tainted with the alleged bribery scheme. Therefore, under the reasoning of San
Bernardino, it does not matter that the profits to be disgorged came from ticket sales to
the public,18 as opposed to the “public funds” of plaintiffs. In either case, disgorgement
of profits made from the tainted agreements is necessary and appropriate to serve the
policies underlying sections 1090 and 1092, including deterring the corruption of public
officials and avoiding the appearance of impropriety.
Insomniac nevertheless maintains that the disgorgement remedy for violations of
section 1090 is only triggered if a defendant who has contracted with a public entity has
received “public funds” under the contract. According to Insomniac, because the profits
it made from the events it staged under its rental agreements with plaintiffs were paid by
private ticket purchasers, the disgorgement remedy sought by plaintiffs was not available.
In a related argument, Ventures contends that the profits it made from events held under
the rental agreements were not the product of those agreements. Rather, Ventures argues,
its profits were derived solely from its promotional, planning, and staging efforts.
In support of its contention, Insomniac relies on the decision in Klistoff v. Superior
Court (2007) 157 Cal. App. 4th 469 (Klistoff). In that case, the complaint alleged that
18
Actually, the ticket sale proceeds went to the Coliseum or Sports Arena and then,
after an accounting, a portion of those proceeds was remitted to Insomniac and Ventures.
26
Michael Klistoff and his company, All City Services, bribed a city official in exchange
for the official‟s efforts to ensure that another company in which Klistoff was vice
president and manager, Klistoff & Sons, obtained a lucrative, long-term franchise
agreement19 from the city to provide refuse collection and recycling services. (Id. at p.
474.) The city‟s complaint alleged in the first cause of action that Klistoff had violated
section 1090 because he had a financial interest in and received benefits from the contract
between the city and Klistoff & Sons. (Klistoff, supra, 157 Cal.App.4th at p. 476.) In the
second cause of action, the city alleged that Klistoff and his shell company, All City
Services, conspired to violate section 1090. (Klistoff, supra, 157 Cal.App.4th at p. 476.)
When the trial court overruled the demurrers of Klistoff and All City Services to
the second cause of action for conspiracy to violate section 1090, those defendants filed a
petition for writ of mandate directing the trial court to enter a new order sustaining the
demurrer. (Klistoff, supra, 157 Cal.App.4th at pp. 477-478.) The Court of Appeal in
Klistoff granted the petition on the grounds that (i) Klistoff and All City Services were
not legally capable of violating section 1090 because they were not public officials or
employees and, therefore, could not be liable for conspiracy to violate that section
(Klistoff, supra, 157 Cal.App.4th at p. 479); and (ii) the remedy in section 1092,
avoidance of the tainted contract, did not apply to Klistoff and All City Services because
they were not parties to the agreement20 and did not receive payments from the city under
the agreement. (Klistoff, supra, 157 Cal.App.4th at p. 481.)
Although the decision in Klistoff, supra, 157 Cal. App. 4th 469 made references to
the receipt of “public funds” in analyzing the conspiracy theory before it, that case did
not state or imply that when a private party to an agreement made in violation of section
1090 does not receive public funds under the contract directly from a public entity,
disgorgement is not available. Rather, because in that case the benefit derived from the
19
The franchise agreement had a contract value of $48 million over a 10-year period,
and between 2002 and 2005, the city paid Klistoff & Sons “substantial sums” under the
agreement. (Klistoff, supra, 157 Cal.App.4th at p. 476.)
20
As noted, Klistoff & Sons was the party to the agreement with the city.
27
tainted franchise agreement—the “substantial sums” paid by the city under it to a
separate entity—came from public funds, the court analyzed the issue within that
framework. Thus, the proposition for which Insomniac claims Klistoff stands was not
even before the court, i.e., the court was not called upon to decide whether profits from a
tainted contract could be disgorged when they were paid to the defendant from a private
source. Because the facts in Klistoff did not require the court to decide the issue, Klistoff
does not support Insomniac‟s “public funds” limitation on the disgorgement remedy
under sections 1090 and 1092.
Ventures‟ related argument—that its profits from events held under the rental
agreements were unrelated to those agreements—fares no better than Insomniac‟s “public
funds” contention. Ventures‟ profits, like the profit the defendants received from the
tainted lease assignment in San Bernardino, supra, 158 Cal. App. 4th 533, were the direct
result of Ventures‟ use of plaintiffs‟ public property under the tainted rental agreements.
To the extent Ventures expended time and effort promoting, planning, and staging its
events, the costs related thereto, as the $600,000 billboard construction cost incurred by
the defendants in San Bernardino, would not be included in the profits to be disgorged
under sections 1090 and 1092.
D. Cause of Action for Negligence
Plaintiffs contend that Insomniac and Ventures were aware that DeStefano was a
Commission employee at the time they made cash payments to a union shop steward and
at the time they entered into the consulting agreement with DeStefano. According to
plaintiffs, it was reasonably foreseeable that their cash payments and performance under
the consulting agreement could damage plaintiffs. Plaintiffs therefore conclude that they
adequately pleaded all the necessary elements of a negligence cause of action, including
duty of care.
“In order to establish liability on a negligence theory, a plaintiff must prove duty,
breach, causation and damages. [Citations.]” (Ortega v. Kmart Corp. (2001) 26 Cal. 4th
1200, 1205.) “„The threshold element of a cause of action for negligence is the existence
28
of a duty to use due care toward an interest of another that enjoys legal protection against
unintentional invasion. [Citations.] Whether this essential prerequisite to a negligence
cause of action has been satisfied in a particular case is a question of law to be resolved
by the court.‟ [Citations.]” (Artiglio v. Corning Inc. (1998) 18 Cal. 4th 604, 614.) “„To
say that someone owes another a duty of care “„is a shorthand statement of a conclusion,
rather than an aid to analysis in itself. . . . “[D]uty” is not sacrosanct in itself, but only an
expression of the sum total of those considerations of policy which lead the law to say
that the particular plaintiff is entitled to protection.‟ [Citation.]” [Citation.] “[L]egal
duties are not discoverable facts of nature, but merely conclusory expressions that, in
cases of a particular type, liability should be imposed for damage done.” [Citation.]‟
[Citation.]” (Paz v. State of California (2000) 22 Cal. 4th 550, 559.)
The operative complaint alleged commercial agreements to rent public facilities
for private use, but did not allege specific facts or circumstances that might give rise to a
duty of care based on the relationship arising out of those agreements. Thus, the facts
pleaded by plaintiffs were not sufficient to give rise to a duty of care. Although
Insomniac and Ventures allegedly knew DeStefano was employed by the Commission,
that fact, by itself, did not expand the parties‟ contractual relationship and impose duties
on Insomniac and Ventures beyond those voluntarily assumed in the rental agreements.
(See Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal. 4th 979, 992 [“„“[c]ourts
should be careful to apply tort remedies only when the conduct in question is so clear in
its deviation from socially useful business practices that the effect of enforcing such tort
duties will be . . . to aid rather than discourage commerce”‟”].) Thus, the trial court
correctly concluded that plaintiffs had not stated a negligence cause of action.
E. Fraud-Based Causes of Action
1. Fraud
Plaintiffs contend that they adequately pleaded common law fraud causes of action
against defendants. According to plaintiffs, defendants misrepresented in the rental
29
agreements that the rent would be a flat fee when, in fact, the rent included the additional
10 percent of gross revenues paid to DeStefano under the consulting agreement.
Therefore, plaintiffs argue, that allegation was sufficient to state a fraud cause of action
based on an affirmative misrepresentation. Also, plaintiffs assert that their allegation that
defendants “hid” their consulting agreement with DeStefano from plaintiffs was
sufficient to state a fraud cause of action based on concealment.
“„“The elements of fraud, which give[] rise to the tort action for deceit, are (a)
misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of
falsity (or „scienter‟); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance;
and (e) resulting damage.”‟ [Citation.]” (Small v. Fritz Companies, Inc. (2003) 30
Cal. 4th 167, 173.) To allege fraud based on an affirmative misrepresentation, a plaintiff
must allege a misrepresentation—normally an affirmation of fact. (Lonely Maiden
Productions, LLC v. Golden Tree Asset Management, LP (2011) 201 Cal. App. 4th 368,
375.)
To maintain a cause of action for fraud through nondisclosure or concealment of
facts, there must be allegations demonstrating that the defendant was under a legal duty
to disclose those facts. (OCM Principal Opportunities Fund, L.P. v. CIBC World
Markets Corp. (2007) 157 Cal. App. 4th 835, 845.) “„There are “four circumstances in
which nondisclosure or concealment may constitute actionable fraud: (1) when the
defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had
exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant
actively conceals a material fact from the plaintiff; and (4) when the defendant makes
partial representations but also suppresses some material facts. [Citation.]”‟ (LiMandri
v. Judkins (1997) 52 Cal. App. 4th 326, 336 [60 Cal. Rptr. 2d 539], quoting Heliotis v.
Schuman (1986) 181 Cal. App. 3d 646, 651 [226 Cal. Rptr. 509].) Where . . . there is no
fiduciary relationship, the duty to disclose generally presupposes a relationship grounded
in „some sort of transaction between the parties. [Citations.] Thus, a duty to disclose
may arise from the relationship between seller and buyer, employer and prospective
30
employee, doctor and patient, or parties entering into any kind of contractual agreement.
[Citation.]‟ (LiMandri, at p. 337, fn. omitted.)” (Id. at p. 859.)
The affirmative representation upon which plaintiffs rely was stated in the rental
agreements, each of which was approved by Lynch—the general manager of Coliseum—
who presumably gave such approval in reliance on the amount of rent stated. Plaintiffs
did not allege that the flat fee rent amount was the result of the tainted consulting
agreement with DeStefano or that it was otherwise below market value for similar venues
and facilities. Therefore, that stated amount was not, on its face, false or misleading.
Insomniac and Ventures represented that they would pay that stated amount and,
presumably, they performed in accordance with that representation. According to
defendants, that amount only became a misrepresentation by virtue of the additional fact
that defendants had agreed to pay DeStefano 10 percent of the gross revenues from
events held pursuant to the rental agreements—a fact that defendants failed to disclose to
plaintiffs. Thus, the facts pleaded by plaintiffs do not state a fraud claim based on an
affirmative misrepresentation, but rather attempt to state a claim for fraud by
concealment.
In order to state a claim based on concealment, plaintiffs were required to allege
facts that showed defendants were under an affirmative duty to disclose the concealed
fact to plaintiffs. As discussed above, ordinarily, such a duty arises only from fiduciary
or fiduciary-like relationships. The facts alleged here, however, show only a commercial
relationship between Insomniac and Ventures,21 on the one hand, and plaintiffs, on the
other hand, without more. Because there is nothing alleged about that relationship that
would give rise to fiduciary-like duties, plaintiffs have failed to state a claim against
defendants for fraud by concealment. Accordingly, the trial court did not err by
sustaining the demurrers to plaintiffs‟ fraud causes of action against defendants.
21
According to the operative complaint, Insomniac and Ventures were in a
contractual relationship with plaintiffs. Individual defendants Rotella and Gerami had no
cognizable legal relationship with plaintiffs, making the fraud by concealment claim
against them even more attenuated than the claim against Insomniac and Ventures.
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2. Conspiracy to Defraud
In support of plaintiffs‟ cause of action against defendants for conspiracy to
defraud, plaintiffs alleged the same essential facts as they alleged in support of their fraud
claims. In addition, they alleged that defendants conspired with DeStefano to defraud
plaintiffs by agreeing to conceal DeStefano‟s consulting agreement with Insomniac and
Ventures. According to plaintiffs, those facts were sufficient to state a theory of liability
against defendants based on conspiracy.
The California Supreme Court has stated, “Conspiracy is not a cause of action, but
a legal doctrine that imposes liability on persons who, although not actually committing a
tort themselves, share with the immediate tortfeasors a common plan or design in its
perpetration. [Citation.] By participation in a civil conspiracy, a coconspirator
effectively adopts as his or her own the torts of other coconspirators within the ambit of
the conspiracy. [Citation.] In this way, a coconspirator incurs tort liability co-equal with
the immediate tortfeasors. [¶] Standing alone, a conspiracy does no harm and engenders
no tort liability. It must be activated by the commission of an actual tort. „“A civil
conspiracy, however atrocious, does not per se give rise to a cause of action unless a civil
wrong has been committed resulting in damage.”‟ [Citations.] „A bare agreement among
two or more persons to harm a third person cannot injure the latter unless and until acts
are actually performed pursuant to the agreement. Therefore, it is the acts done and not
the conspiracy to do them which should be regarded as the essence of the civil action.‟
[Citation.] [¶] We have summarized the elements and significance of a civil conspiracy:
„“The elements of an action for civil conspiracy are the formation and operation of the
conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the
common design. . . . In such an action the major significance of the conspiracy lies in the
fact that it renders each participant in the wrongful act responsible as a joint tortfeasor for
all damages ensuing from the wrong, irrespective of whether or not he was a direct actor
and regardless of the degree of his activity.”‟ [Citation.]” (Applied Equipment Corp. v.
Litton Saudi Arabia Ltd. (1994) 7 Cal. 4th 503, 510-511.)
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Unlike Insomniac and Ventures, who were only in a contractual relationship with
plaintiffs, DeStefano—as an employee and agent of plaintiffs—was in an employment
and agency relationship with them. Thus, the issue becomes whether his relationship
with plaintiffs was the type that would give rise to an affirmative duty to disclose
material facts. (See Weiner v. Fleischman (1991) 54 Cal. 3d 476, 483 [to show fraud by
concealment, the plaintiff “had to establish the existence of some type of legal
relationship giving rise to a duty to disclose. „Although material facts are known to one
party and not to the other, failure to disclose them is ordinarily not actionable fraud
unless there is some fiduciary relationship giving rise to a duty to disclose‟”].)
In negotiating the rental agreements with defendants, DeStefano was acting on
behalf of plaintiffs as their authorized agent, a relationship that can give rise to fiduciary
responsibilities. “[B]efore a person can be charged with a fiduciary obligation, he must
either knowingly undertake to act on behalf and for the benefit of another, or must enter
into a relationship which imposes that undertaking as a matter of law.” (Committee on
Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal. 3d 197, 221.) “A
fiduciary relationship is „“any relation existing between parties to a transaction wherein
one of the parties is in duty bound to act with the utmost good faith for the benefit of the
other party. Such a relation ordinarily arises where a confidence is reposed by one person
in the integrity of another, and in such a relation the party in whom the confidence is
reposed, if he voluntarily accepts or assumes to accept the confidence, can take no
advantage from his acts relating to the interest of the other party without the latter‟s
knowledge or consent. . . .”‟ (Herbert v. Lankershim (1937) 9 Cal. 2d 409, 483 [71 P.2d
220]; In re Marriage of Varner (1997) 55 Cal. App. 4th 128, 141 [63 Cal. Rptr. 2d 894]; see
also Rickel v. Schwinn Bicycle Co. (1983) 144 Cal. App. 3d 648, 654 [192 Cal. Rptr. 732]
[„“A „fiduciary relation‟ in law is ordinarily synonymous with a „confidential relation.‟ It
is . . . founded upon the trust or confidence reposed by one person in the integrity and
fidelity of another, and likewise precludes the idea of profit or advantage resulting from
the dealings of the parties and the person in whom the confidence is reposed.”‟].)” (Wolf
v. Superior Court (2003) 107 Cal. App. 4th 25, 29-30.)
33
A “traditional” example of a fiduciary relationship in the commercial context is
one of an agent and principal. (Wolf v. Superior Court, supra, 107 Cal.App.4th at p. 30.)
Moreover, officers of corporations who participate in the management of the corporation
are considered fiduciaries as a matter of law. (See GAB Business Services, Inc. v.
Lindsey & Newsom Claim Services, Inc. (2000) 83 Cal. App. 4th 409, 421.)
DeStefano‟s employment and agency relationship with plaintiffs was fiduciary in
nature because he had voluntarily undertaken to act on their behalf and for their benefit in
negotiating the rental agreements with defendants. Based on that relationship, he was
required to disclose to his principals the consulting agreement with Insomniac and
Ventures, and his alleged failure to do so was sufficient to state a fraud by concealment
as to him.
Given that the alleged facts showed the commission of an underlying tort by one
of the alleged coconspirators, the allegations that defendants conspired with DeStefano to
conceal the existence of the consulting agreement from plaintiffs were sufficient to state a
cause of action against defendants for fraud based on a conspiracy theory of liability.
Thus, the trial court erred by sustaining the demurrers to the conspiracy to defraud claim
against defendants.
F. Cause of Action for Violation of the UCL
Plaintiffs maintain that they adequately stated facts constituting violations of the
UCL by alleging that Insomniac and Ventures made cash payments to a union shop
steward for employee wages without paying payroll taxes in violation of state and federal
law, and that Insomniac and Ventures engaged in a fraud and a conspiracy to defraud.
The California Supreme Court has said, “The UCL defines „unfair competition‟ as
„any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue
or misleading advertising.‟ (Bus. & Prof. Code, § 17200.) By proscribing „any unlawful‟
business act or practice (ibid.), the UCL „“borrows”‟ rules set out in other laws and
makes violations of those rules independently actionable. [Citation.] However, a
practice may violate the UCL even if it is not prohibited by another statute. Unfair and
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fraudulent practices are alternate grounds for relief. [Citation.] . . . [¶] We have made it
clear that „an action under the UCL “is not an all-purpose substitute for a tort or contract
action.” [Citation.] Instead, the act provides an equitable means through which both
public prosecutors and private individuals can bring suit to prevent unfair business
practices and restore money or property to victims of these practices. As we have said,
the “overarching legislative concern [was] to provide a streamlined procedure for the
prevention of ongoing or threatened acts of unfair competition.” [Citation.] Because of
this objective, the remedies provided are limited.‟ [Citation.] Accordingly, while UCL
remedies are „cumulative . . . to the remedies or penalties available under all other laws of
this state‟ (Bus. & Prof. Code, § 17205), they are narrow in scope.” (Zhang v. Superior
Court (2013) 57 Cal. 4th 364, 370-371.) The Supreme Court has also explained that
“[v]iolations of federal statutes, including those governing the financial industry, may
serve as the predicate for a UCL cause of action. [Citations.]” (Rose v. Bank of America
(2013) 57 Cal. 4th 390, 394.) “[U]nder the unlawful prong, the UCL ““„borrows‟
violations of other laws and treats them as unlawful practices” that the unfair competition
law makes independently actionable.‟ [Citation.] Depending upon which prong is
invoked, a UCL claim may most closely resemble, in terms of the right asserted, an
action for misrepresentation [citations], or any of countless other common law and
statutory claims.” (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal. 4th 1185,
1196.)
Plaintiff‟s allegations that Insomniac and Ventures made cash payments of wages
without paying the payroll taxes associated with those wages were sufficient to state a
violation of the UCL under the unlawful prong of that statutory scheme. Those
allegations, when fairly construed, describe a violation of an underlying federal law, i.e.,
26 U.S.C. sections 3101 and 3102,22 which violation can serve as a predicate for a UCL
22
Section 3101 of title 26 of the United States Code provides in pertinent part,
“Old-age, survivors, and disability insurance. In addition to other taxes, there is hereby
imposed on the income of every individual a tax equal to the following percentages of the
wages (as defined in section 3121(a) [26 USCS § 3121(a)]) received by him with respect
35
cause of action seeking restitution of the amount of unpaid tax liability to which plaintiffs
were allegedly exposed.23 Similarly, because we have concluded that plaintiffs have
adequately alleged that defendants engaged in a conspiracy to defraud, plaintiffs have
also adequately alleged a cause of action for violation of the UCL under the fraud prong
seeking restitution of the amounts Insomniac and Ventures paid to DeStefano under the
undisclosed consulting agreement.
G. Cause of Action for Accounting
The parties agree that because plaintiffs‟ accounting cause of action is derivative
of their other causes of action, the viability of that claim is dependent upon whether
plaintiffs have adequately pleaded one or more of their other claims. Therefore, we
conclude that plaintiffs accounting cause of action is adequately stated as to the causes of
action that were adequately pleaded, i.e., the causes of action for violation of section
1090, conspiracy to defraud, and violation of the UCL.
H. Proposed Cause of Action for Inducing Breach of Fiduciary Duties
Although plaintiffs did not plead a cause of action for inducing a breach of
fiduciary duties, they argue that they alleged sufficient facts to support such a claim.
Because we are reversing the judgment of dismissal and remanding the matter to the trial
court, we do not need to resolve this issue. (See Genesis Environmental Services v. San
Joaquin Valley Unified Air Pollution Control Dist. (2003) 113 Cal. App. 4th 597, 603 [in
ruling on a demurrer, “our inquiry ends and reversal is required once we determine a
complaint has stated a cause of action under any legal theory”].) Instead, the issue should
to employment (as defined in section 3121(b) [26 USCS § 3121(b)]) . . . .” Section 3102
provides in pertinent part: “The tax imposed by section 3101 [26 USCS § 3101] shall be
collected by the employer of the taxpayer, by deducting the amount of the tax from the
wages as and when paid.”
23
Defendants do not contend that the pleadings fail to state adequately what amounts
are subject to restitution based on the alleged violation of federal law.
36
be raised with the trial court in a motion for leave to amend the operative complaint to
state a cause of action for inducing a breach of fiduciary duties.
DISPOSITION
The judgment of dismissal in favor of defendants is reversed and the matter is
remanded to the trial court with instructions to enter new orders overruling defendants‟
demurrers as to the causes of action for violation of section 1090, conspiracy to defraud,
violation of the UCL, and an accounting. The orders sustaining without leave to amend
defendants‟ demurrers to the causes of actions for violation of the False Claims Act,
negligence, and fraud are affirmed. No costs are awarded on appeal.
CERTIFIED FOR PUBLICATION
MOSK, J.
We concur:
TURNER, P. J
GOODMAN, J.

Judge of the Superior Court of the County of Los Angeles, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.
37