S&S CUMMINS CORPORATION v. WEST BAY BUILDERS

Filed 1/31/08

CERTIFIED FOR PARTIAL PUBLICATION*

THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

Story continues from Part I .

C. Substantial evidence supports the jurys finding that WestBays withholding of retention proceeds was not based on a bona fide dispute.

Public Contract Code section 7107, subdivision (e) permits a contractor to withhold retention proceeds from a subcontractor if a bona fide dispute exists between the contractor and the subcontractor. If no bona fide dispute exists, the original contractor is subject to a statutory 2 percent per month charge on any retention proceeds improperly withheld. (Pub. Contract Code,  7107, subd. (f).)

West Bay contends the evidence is insufficient to support the jurys finding that its withholding of retention proceeds from Cummins was not based on a bona fide dispute. West Bay asserts that the evidence demonstrated it withheld retention proceeds based on its good faith belief that Cummins had delayed the project, causing West Bay to incur liquidated damages and additional general condition costs. West Bay claims that Cummins failed to offer any competent evidence to suggest West Bay intended to defraud Cummins or asserted its position in bad faith.

In Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers Casualty & Surety Co. of America (2005) 133 Cal.App.4th 1319 (Alpha Mechanical), the court considered the application of Civil Code section 3260 and Business and Professions Code section 7108.5, which are prompt payment provisions analogous to Public Contract Code section 7107. Although Business and Professions Code section 7108.5 uses the term good faith dispute, while Civil Code section 3260, subdivision (e) uses the term bona fide dispute, the court in Alpha Mechanical treated the terms as synonymous.[1] (Alpha Mechanical, supra, 133 Cal.App.4th at pp. 1338-1339.) The court stated: We have found no authority expressly interpreting the good faith dispute standard in [Business and Professions Code] section 7108.5 or Civil Code section 3260. However, the phrase good faith does have a distinct meaning and purpose in the law. . . . [G]ood faith suggests a moral quality; its absence is equated with dishonesty, deceit or unfaithfulness to duty. [Citation.] Another authority has stated: Good faith, or its absence, involves a factual inquiry into the plaintiffs subjective state of mind. [Citations]: Did he or she believe the action was valid? What was his or her intent or purpose in pursuing it? A subjective state of mind will rarely be susceptible of direct proof; usually the trial court will be required to infer it from circumstantial evidence. [Citation.] (Alpha Mechanical, supra,133 Cal.App.4th at p. 1339.)

Here, there is circumstantial evidence in the record supporting an inference West Bay did not act in good faith when it withheld retention proceeds from Cummins. Among other things, West Bay never submitted any kind of written accounting, statement, or analysis to Cummins to demonstrate how it delayed the critical path of the project. While no such statement is required, its absence nonetheless supports an inference that West Bay did not have a good faith belief in its position. In addition, West Bay first claimed Cummins had delayed the project by 90 days based on a best guess. At trial, it contended the delay was actually only 65 days. The jury could have concluded that West Bays best guess was not made in good faith, given that it substantially revised its position when called upon to prove the delay at trial.

After Cummins had completed its portion of the work on the project, West Bay sent Cummins a standard form of release offering to pay Cummins one-half of its share of the retention proceeds. West Bay directed Cummins to sign the release in anticipation of the District releasing to West Bay one-half of the retention proceeds received through April 2001. At the time, West Bay did not indicate it intended to claim an offset against the amount of released retention proceeds as a result of Cumminss delay. Cummins refused to sign the release until the parties agreed on a final contract price, taking into account modifications during the course of the project. Because West Bay was willing to release one-half of Cumminss retention proceeds without any offset for Cumminss delay, the jury could draw an inference that West Bay acted in bad faith when it later withheld the entire sum of Cumminss retention proceeds based on a purported dispute over Cumminss delay.

It is also notable that, despite West Bays claim that it had suffered liquidated damages as a result of Cumminss delay, it was ultimately assessed only $100,000 in liquidated damages, and that amount was offset by a settlement with the District that awarded West Bay roughly $92,000 more than its adjusted contract price. By West Bays own calculations, Cummins was responsible for just 65 days of delay, leaving 265 days of delay attributable to parties other than Cummins. The jury could have easily concluded that West Bay acted in bad faith when it withheld retention proceeds from Cummins exceeding the total amount of liquidated damages assessed by the District.

In sum, there is substantial evidence in the record to support an inference that West Bays withholding of retention proceeds from Cummins was not based on a bona fide dispute.

II. WestBay is not entitled to relief under the indemnity and damages caused by delay provisions of the Cummins subcontract.

West Bay contends a proper application of indemnity and damages caused by delay provisions in the Cummins subcontract compels reversal of the judgment. We disagree.

The indemnification provision in the Cummins subcontract provides in relevant part as follows: SUBCONTRACTOR shall, with respect to all work which is covered by or incidental to this Agreement, indemnify and hold CONTRACTOR harmless from and against all of the following: [] 1) Any claim, liability, loss, damage, costs, expenses, including actual attorneys fees and consultants fees incurred in good faith, awards, fines or judgments arising by reason of the death or bodily injury to persons, injury to property, design defects (if design originated by SUBCONTRACTOR), SUBCONTRACTORS work, SUBCONTRACTORS performance or non-performance of any and all of the obligations of this Agreement, or other loss, damage or expense, including any of the same resulting from CONTRACTORS alleged or actual negligent act or omission, regardless of whether such act or omission is active or passive . . . . [] . . . [] . . . However, SUBCONTRACTOR shall not be obligated under this Agreement to indemnify CONTRACTOR with respect to the sole negligence or willful misconduct of CONTRACTOR, his agents or servants.

West Bay asserts that, under the parties indemnification provision, West Bay did not need to establish fault on the part of Cummins. Rather, according to West Bay, the duty to indemnify arose from Cumminss performance or non-performance of its work. Thus, West Bay claims that Cummins is responsible for all damages West Bay suffered as a result of Cumminss performance, whether delayed or not.

West Bays argument is unpersuasive. The indemnity provision applies when a loss arises by reason of a subcontractors work or the performance or non-performance of the subcontractors obligations under the contract. Here, the only loss West Bay purportedly suffered was due to delay. If Cummins did not cause or contribute to the delay, then West Bays loss did not arise from anything Cummins did or failed to do. Because the jury found that Cummins satisfactorily completed its obligations under the Cummins subcontract, including complying with the project schedules, any losses West Bay may have suffered as a result of delay did not arise from Cumminss work. In short, West Bay cannot invoke the indemnity provision to recover damages unrelated to Cumminss work.[2]

Like the indemnity provision, the damages caused by delay provision of the Cummins subcontract does not entitle West Bay to any offset. That provision provides in relevant part: Should SUBCONTRACTOR default in the proper performance of its work, thereby causing delay to the prime contract work, SUBCONTRACTOR shall be liable for any and all loss and damages, including consequential damages and liquidated damages, sustained by CONTRACTOR as a result thereof.

For Cummins to be liable for damages for delay, it must have defaulted in the performance of its work and thereby caused delay to the project. Because the jury found that Cummins satisfactorily performed its contractual obligations, the damages caused by delay provision of the Cummins subcontract is inapplicable.

Nevertheless, West Bay contends that this court should decide the issue as a matter of law because West Bays expert testimony was conclusive that Cummins delayed the projects critical path. In essence, West Bay asserts that lay testimony offered by Cumminss witnesses was insufficient to rebut West Bays critical path analysis, because critical path analysis is sufficiently beyond common experience so as to require expert testimony.

We do not agree that Cummins was required to perform its own critical path analysis to rebut West Bays assertions of delay. Critical path analysis is not required under California law to prove or disprove a delay damages claim. (See Howard Contracting, Inc. v. G.A. MacDonald Construction Co. (1998) 71 Cal.App.4th 38, 51-52.) Further, expert testimony is not necessarily required to rebut a critical path analysis. Cummins effectively attacked the experts opinion by questioning his assumptions and presenting lay testimony that undercut the foundation of the analysis. The lay witnesses did not question the analysis itself but instead addressed the facts on which it was based. Even if expert testimony were required to rebut the critical path analysis, Cummins presented such an expert, who questioned the assumptions and project schedules contained in West Bays expert analysis. Although Cumminss expert did not offer his own critical path analysis, there is no suggestion he lacked the qualifications to evaluate and counter the analysis offered by West Bays expert. In short, the trial court was not bound as a matter of law to accept the testimony of West Bays expert.

III. The trial court properly calculated the statutory prompt payment charges imposed under Public Contract Code section 7107.

In its cross-appeal, Cummins challenges two aspects of the trial courts calculation of statutory prompt payment charges imposed under subdivision (f) of Public Contract Code section 7107 (hereafter section 7107(f)).[3] First, Cummins contends the court erred by concluding the 2 percent per month charge is not applied on a compounded basis. Second, it claims the court erroneously found the 2 percent per month charge stops accruing upon entry of judgment such that the retention proceeds withheld plus any statutory charges accumulated through judgment bear interest at the 10 percent per annum postjudgment rate. Because these arguments raise issues of statutory construction, we apply a de novo standard of review. (People v. Morris (2005) 126 Cal.App.4th 527, 535.)

Section 7107 is one of a number of prompt payment statutes that subject project owners and prime contractors to charges or penalties for failing to timely remit progress payments or retention proceeds, absent adequate good faith justification.[4] (See  7107, 10262.5; Bus. & Prof. Code,  7108.5; Civ. Code,  3260, 3320.) The purpose of the various prompt payment statutes is to serve a remedial purpose: to encourage general contractors to pay timely their subcontractors and to provide the subcontractor with a remedy in the event that the contractor violates the statute. (Morton Engineering & Construction, Inc. v. Patscheck (2001) 87 Cal.App.4th 712, 720.)

Section 7107(f) provides: In the event that retention payments are not made within the time periods required by this section, the public entity or original contractor withholding the unpaid amounts shall be subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due. Additionally, in any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to attorneys fees and costs.

Our primary task in construing a statute is to determine the Legislatures intent. [Citation.] We first turn to the words themselves for the answer. [Citation.] When statutory language is clear and unambiguous there is no need for construction, and we will not indulge in it. [Citation.] We will not speculate that the Legislature meant something other than what it said. Nor will we rewrite a statute to posit an unexpressed intent. [Citation.] If the intent of the Legislature cannot be gleaned from the language of the statute, we may consider the legislative history of the statute. [Citations]. (Morton Engineering & Construction, Inc. v. Patscheck, supra,87 Cal.App.4th at p. 716.)

With these principles in mind, we consider Cumminss contentions.

A. The 2 percent per month charge on unpaid retention proceeds is not compounded on a monthly basis.

Cummins contends the plain language of section 7107(f) requires compounding of the prompt payment charges on a monthly basis because the 2 percent charge is applied per month. According to Cummins, for every month that improperly withheld retention is not paid, the amount of the total debt increases by 2 percent, with the statutory charge applied to the total amount of the unpaid retention plus the accrued charges. Cummins asserts that the trial courts interpretation of section 7107(f) essentially omits the reference to per month and rewrites the statute to conform to per annum language found in prejudgment and postjudgment interest statutes.

The plain language of the statute does not support Cumminss interpretation. Section 7107(f) requires a charge of 2 percent per month on the improperly withheld amount, in lieu of interest otherwise due. (Italics added.) The statutes reference to the improperly withheld amount is plainly to the sum improperly withheldi.e., the withheld retention payments. Nothing in the statute suggests, much less requires, that the prompt payment charge becomes a part of, or is added to, the improperly withheld amount. For example, the statute does not refer to the total amount due or similar language that would indicate that the improperly withheld amount includes accrued prompt payment charges.

We are aware of no reported cases addressing whether prompt payment charges in statutes analogous to section 7107 are calculated on a compounding monthly basis. The issue appears to be one of first impression. However, we are guided in our analysis by the decision in Schuhart v. Pinguelo (1991) 230 Cal.App.3d 1599 (Schuhart), in which Division One of this court addressed a dispute over the amount of penalties owed on unpaid and delinquent assessment bonds.

At issue in Schuhartwas whether former Streets and Highways Code section 6442, which at the time imposed a 1 percent per month penalty on the total amount of such delinquency, also authorized compounding.[5] (Schuhart, supra, 230 Cal.App.3d at p. 1607.) The appellate court found the statute did not authorize compounding, explaining that the statute scrupulously maintains a distinction between penalties and delinquent payments, contains no expression of an intent to compound penalties, and instead indicates the Legislatures intent to impose a 1 percent penalty on the amount of delinquent principal and/or interest each month. (Id. at p. 1608.) The court reasoned that merging the monthly penalty charges into the delinquent amount would change the meaning of the term such delinquency once penalty charges were added to the original amount of the delinquency. The court could find no basis on which to attribute a different meaning to the statutory term after penalty charges were imposed. (Ibid.)

Even though the statutes language was arguably ambiguous, the Schuhartcourt continued, it did not authorize compounding. (Schuhart, supra, 230 Cal.App.3d at pp. 1608-1609.) The court noted that the plaintiff had failed to cite a single statute or case that authorizes compounding of penalties, and explained that [p]enalties and forfeitures are not favored by the courts, and statutes imposing penalties or creating forfeitures must be strictly construed. [Citations.] (Id. at p. 1610.) Thus, the court held that the Legislature could not have intended compounding, because its intention  should not be presumed to include harsh or absurd results unless the language is so clear as to admit of no doubt. [Citations]. [Citation.] (Id. at p. 1609.)

Here, the term improperly withheld amount in section 7101(f) refers to retention payments that a contractor or owner fails to make within the time periods elsewhere discussed in section 7101. As in Schuhart, the statute scrupulously maintains a distinction between the withheld amount and the charge, and contains no expression of an intent to compound or to increase the improperly withheld amount by the amount of the charge on a monthly basis. The statute contains no indication that the term improperly withheld amount has a changed meaning with each successive month that prompt payment charges are applied. Thus, section 7101(f) authorizes a charge only for the improperly withheld amount rather than that amount plus any accrued but unpaid charges.

Our conclusion would remain the same even were we to think the statute ambiguous as to whether to apply charges on a compounding basis. Reading section 7107(f) to permit compounding would produce harsh and absurd results without any indication that the Legislature intended them. Here, the non-compounded charge was $114,139 by the time of judgment. Compounding the charges would have produced a total charge of $170,029.38, adding nearly $56,000 to the charges the trial court imposed. This additional sum is close to half of the total amount improperly withheld. In cases where complex construction litigation extends for years until a judgment is rendered, the discrepancy caused by compounding would be even greater. Because the language of section 7101(f) is hardly so clear as to admit of no doubt that the Legislature intended such harsh results, we will not read the statute to permit compounding of the 2 percent prompt payment charge.

B. The 2 percent per month charge does not accrue after entry of judgment.

Cummins claims the 2 percent per month charges continues to accrue after entry of judgment, asserting that the plain language of section 7107(f) imposes the charge in lieu of any interest otherwise due. Cummins points out the statute does not distinguish between prejudgment interest and postjudgment interest, and does not indicate the charges cease accruing upon entry of judgment.

West Bay argues that the charge is in the nature of interest, which under the California Constitution is capped at a rate of 10 percent after entry of judgment. (Cal. Const., art. XV,  1; see also Code Civ. Proc.,  685.010, subd. (a).) We agree.

The California Constitution specifies that [t]he rate of interest upon a judgment rendered in any court of this State shall be set by the Legislature at no more than 10 percent per annum. (Cal. Const., art. XV,  1.) This section is a limitation on the power of the Legislature to set postjudgment interest rates [and] sets a ceiling that the Legislature cannot exceed. [Citation.] (Westbrook v. Fairchild (1992) 7 Cal.App.4th 889, 893, fn. omitted.)

Whenever possible, statutes are to be interpreted as consistent with applicable constitutional provisions so as to harmonize both. [Citation.] Thus, legislation is presumptively constitutional and all doubts are to be resolved in favor of its validity. [Citations.] [Citation.] A statute should be judicially construed in such a manner to avoid unconstitutional results. [Citations] [Citation.] (Mendez v. Kurten (1985) 170 Cal.App.3d 481, 485 (Mendez).)

In Mendez, the appellate court considered whether it was appropriate to award interest on a judgment pursuant to both Code of Civil Procedure section 685.010, subdivision (a), which allows for postjudgment interest to accrue at 10 percent per annum, and Civil Code section 3291, which also allows for interest to accrue at 10 percent per annum if the conditions of the statute are met. (Mendez, supra, 170 Cal.App.3d at pp. 484-485.) Civil Code section 3291 generally provides that, when a personal injury plaintiff obtains a judgment more favorable than a statutory offer to compromise made pursuant to Code of Civil Procedure section 998 but rejected by the defendant, the ensuing judgment bears an interest rate of 10 percent per annum calculated from the date of the first statutory offer to compromise that is exceeded by the judgment. Notably, like Code of Civil Procedure section 685.010, Civil Code section 3291 provides that interest accrues under the statute until the judgment is satisfied. Applying both statutes, the trial court in Mendez permitted the plaintiff to obtain 20 percent interest on the judgment following its entry. (Mendez, supra, 170 Cal.App.3d at p. 484.)

The appellate court reversed, holding that the Legislature did not intend, and the California Constitution does not allow, interest to be cumulatively awarded pursuant to both sections between entry of judgment and its satisfaction. (Mendez, supra,170 Cal.App.3d at p. 483.) Even when Civil Code section 3291 applies, interest on a judgment is limited to 10 percent simple interest calculated from the date of the judgments entry until its satisfaction. (Mendez, supra, 170 Cal.App.3d at p. 487.) The plaintiff in Mendez sought to avoid the limitation on postjudgment interest, arguing that the interest allowed by Civil Code section 3291 was  in the nature of damages  and was therefore unaffected by the constitutional provision limiting postjudgment interest. (Mendez, supra, 170 Cal.App.3d at p. 486.) The appellate court disagreed, pointing out that such an interpretation would mean that damages would continue to accrue until the judgment was satisfied, a result in conflict with Code of Civil Procedure section 577.5, which requires that a judgment be expressed as a specific sum of money.[6] (Mendez, supra, 170 Cal.App.3d at p. 487.)

Here, the question is whether the section 7101(f) charge is subject to the constitutional limitation on the interest rate that may be assessed on a judgment. Section 7101(f) does not describe the 2 percent per month charge as interest, although it does clarify that the charge is imposed in lieu of any interest otherwise due. While not denominated as interest, the section 7101(f) charge is assessed in the same manner as interest, i.e., as a cost that is calculated on a periodic basis as a percentage of a principal amount. The section 7101(f) charge plainly becomes the equivalent of postjudgment interest to the extent it is assessed on all or any portion of a judgment in lieu of statutory postjudgment interest. As such, to the extent section 7101(f) applies after entry of judgment, it is subject to the constitutional 10 percent limitation on postjudgment interest. (Cal. Const., art. XV,  1.)

If we were to endorse Cumminss interpretation of section 7101(f), we would essentially be adopting a position that permits the Legislature to skirt the limitations of article XV, section 1 of the California Constitution by denominating a usurious postjudgment interest rate as either a penalty or a prompt payment charge. By allowing prompt payment charges to accrue after entry of judgment here, we would in effect be allowing Cummins to receive 24 percent per annum interest on a substantial portion of the judgment, an amount more than twice that permitted by the Constitution. Such a result is in plain contravention of the Constitutions limitation on interest that may be imposed after judgment, even though the Legislature chose to call the 2 percent per month rate a charge instead of interest.

An interpretation of section 7101(f) allowing postjudgment accrual of charges also cannot be reconciled with statutes governing the calculation and satisfaction of judgments. Code of Civil Procedure section 695.210 provides that the amount required to satisfy a money judgment is (1) the amount of the judgment as entered, (2) plus costs pursuant to Code of Civil Procedure section 685.090, (3) plus postjudgment interest pursuant to Code of Civil Procedure sections 685.010 through 685.030, (4) minus any amounts already paid or no longer enforceable. The postjudgment accrual of section 7101(f) charges does not fit into any of these categories. It is not part of the judgment as entered, nor is it appropriate to add the charges to the judgment as additional damages after entry of the judgment. (See Mendez, supra, 170 Cal.App.3d at p. 487; Code Civ. Proc.,  577.5.) The section 7101(f) charge is also not a cost that may be recovered by statute. (Code Civ. Proc.,  685.070.) And, it is not postjudgment interest as described in Code of Civil Procedure sections 685.010 through 685.030.[7] Thus, as reflected in statutes governing the calculation and satisfaction of judgments, the Legislature did not anticipate that statutory penalties or charges would continue to accrue after a judgment is entered, except to the extent such charges are specifically recoverable as costs pursuant to Code of Civil Procedure section 685.070.

We conclude that the 2 percent per month charge assessed under section 7101(f) ceases to accrue upon entry of judgment. Not only is this interpretation of section 7101(f) consistent with other statutes governing judgments, but it also allows us to harmonize the statute with the constitutional restriction on postjudgment interest. Cummins is entitled to receive interest on the amount of its judgment, but not at a rate exceeding 10 percent simple interest.

Disposition

The judgment is affirmed. Each party shall bear its own costs on appeal.

_________________________

McGuiness, P.J.

We concur:

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Pollak, J.

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Horner, J.*

Trial Court: Alameda County Superior Court

Trial Judge: Harry R. Sheppard

McInerney & Dillon, Timothy L. McInerney and LeCarie S. Whitfield; Reed Smith, Paul D. Fogel for Defendant and Appellant

Thurbon & McHaney, Robert E. Thurbon, Jacqueline S. McHaney, Erin E. Holbrook for Plaintiff and Respondent

Publication Courtesy of California attorney directory.

Analysis and review provided by Oceanside Property line attorney.

* Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this opinion is certified for publication with the exception of parts I and II of the Discussion.

[1] Bona fide is Latin for in good faith. (Blacks Law Dict. (7th ed. 1999) p. 168, col. 2.)

[2] In its reply brief, West Bay conceded that the indemnity provision would not be triggered unless West Bays damages arose out of or otherwise had some connection to Cumminss work. At oral argument, West Bays counsel contended undisputed evidence established that Cummins was responsible for at least one day of delay, citing the testimony of Cumminss office manager, who stated when cross-examined that Cummins contributed to at least one day of the delay. According to West Bay, this admission triggered the indemnity provision. Even if we were to agree with West Bay that a one-day delay attributable to Cummins would entitle West Bay to be indemnified for all damages suffered as a result of delay, we cannot agree with the premise that it was undisputed Cummins caused delay. Notwithstanding the office managers supposed concession, there was substantial evidence refuting each of the claimed delays attributable to Cummins, as discussed above. Further, there was no showing that the office manager, who handled matters such as invoicing and paying bills, was competent to assess whether and to what extent Cummins caused delays to the project as a whole. There was also no suggestion that her begrudging admission represented the position of Cummins or any of its principals. In short, it was hardly undisputed that Cummins caused delay that would have triggered the indemnity provision of the Cummins subcontract.

[3] All further statutory references are to the Public Contract Code unless otherwise specified.

[4] West Bay points out that section 7101(f), unlike some other prompt payment statutes, does not include reference to a penalty but instead imposes a charge. Although West Bay attempts to exploit this difference by arguing that a charge is more in the nature of interest than a penalty, it concedes the difference in terminology has limited significance. Our analysis does not turn on whether the 2 percent per month prompt payment fee is characterized as a penalty or a charge.

[5] The statute presently allows for a 2 percent per month penalty. (Sts. & Hy. Code  6442.)

[6] Code of Civil Procedure section 577.5 provides: In any judgment, or execution upon such judgment, the amount shall be computed and stated in dollars and cents, rejecting fractions.

[7]Of course, to the extent the charge is characterized as postjudgment interest, it would be subject to the constitutional limitation on the interest rate applied after entry of judgment.

* Judge of the Alameda County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.