THOMPSON PACIFIC CONSTRUCTION INC v. LOS ANGELES UNIFIED SCHOOL DISTRICT

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Court of Appeal, Second District, California.

THOMPSON PACIFIC CONSTRUCTION, INC., Plaintiff and Respondent, v. LOS ANGELES UNIFIED SCHOOL DISTRICT, Defendant and Appellant,

B209938

Decided: January 27, 2010

Roberta Fesler, General Counsel, Mark Fall, Associate General Counsel, Los Angeles Unified School District;  Orbach, Huff & Suarez, David M. Orbach, Jeffrey F. Kagan for Defendant and Appellant. Booth, Mitchel & Strange, Craig E. Guenther, Stacie L. Brandt for Plaintiff, Respondent and Real Parties in Interest.

Thompson Pacific Construction, Inc. (Thompson) and its sureties, Western Surety Company and Continental Casualty Company (the sureties), petitioned the trial court for a writ of mandamus to review the actions of the Los Angeles Unified School District (the District or LAUSD) in imposing penalties on these three entities under Public Contract Code section 4110 for violations of the Subletting and Subcontracting Fair Practices Act. The trial court granted the writ, finding that the LAUSD was without jurisdiction to conduct hearings against Thompson, and had no authority under section 4110 to assess penalties against the sureties.   The court entered separate judgments in favor of Thompson and the sureties.

The LAUSD timely appealed.   It contends that it had jurisdiction to impose penalties against Thompson in connection with its use of subcontractors on the various projects, notwithstanding that the LAUSD had approved those subcontractors, and further submits that the Act permits it to assess statutory penalties against the prime contractor's sureties.   We affirm the judgments.

FACTUAL AND PROCEDURAL BACKGROUND 1

The Subletting and Subcontracting Fair Practices Act, Public Contract Code 2 §§ 4100 et seq. (the Act) mandates that a prime contractor which intends to subcontract portions of a public works project to others must list the name and scope of each such subcontractor who will perform work in excess of one half of one percent of the total amount of the bid. (§ 4104.)   After a public works contract is awarded, the prime contractor must use only those subcontractors listed, unless it obtains the consent of the awarding authority to substitute different subcontractors for its listed subcontractors, which requests are limited to specific statutory circumstances, such as the bankruptcy or refusal to perform of the listed subcontractor.  Section 4110 of the Act authorizes a public entity which awards a public works contract to conduct an administrative hearing to address possible violations of the Act;  if it finds that the prime contractor has violated the Act, the public entity may either cancel the contract or assess a penalty of up to 10 percent of the subcontractor's bid.

In 2003 and 2004, Thompson submitted bids to the LAUSD to act as prime contractor on three separate school construction projects:  Banning New Elementary School, Southeast Area Learning Center, and the upgrades at nine existing schools pursuant to the 1997 Bond Air Conditioning Group III and New Electrical Service Project.   Each bid included a list of subcontractors who would perform specified work on the projects.  Section 4107, subdivision (a)(1) provides that a prime contractor may not substitute an alternate subcontractor in place of a listed subcontractor “except that the awarding authority, or its duly authorized officer, may ․ consent to the substitution of another person as a subcontractor in any of the following situations:  [¶] (1) When the subcontractor listed in the bid, after having had a reasonable opportunity to do so, fails or refuses to execute a written contract for the scope of work specified in the subcontractor's bid and at the price specified in the subcontractor's bid, when that written contract, based upon the general terms, conditions, plans, and specifications for the project involved or the terms of that subcontractor's written bid, is presented to the subcontractor by the prime contractor.”

In 2004 and 2005, after its bids were accepted, Thompson submitted requests to the LAUSD for consent to substitute alternate subcontractors on the projects.   After notifying the listed subcontractors of the proposed substitutions, and receiving no objections thereto, the LAUSD consented to the replacement subcontractors.   Thereafter, construction on the projects continued with the subcontractors approved by the LAUSD.

On November 3, 2005, the District terminated two of its three contracts with Thompson (Banning Elementary and Southeast Area Learning Center).   Litigation between the parties soon followed.   In June 2007, Thompson completed the third construction project, consisting of upgrades to nine schools.

By letter dated July 30, 2007, the District gave notice to Thompson and its sureties that it intended to conduct hearings on whether to impose monetary sanctions pursuant to section 4110 for improprieties in subcontractor substitutions.

Separate hearings concerning the three projects were held on August 24, 2007.   The District's evidence consisted of copies of the bid documents, correspondence between Thompson and the LAUSD, and the declarations of Yvette Merriman-Garrett, the District's Senior Manager of Facilities Construction Contracts who handled the subcontractor substitution requests for the District;  Adam Coll, a former employee of Thompson;  and Peter Thompson in his capacity as person most responsible for KKG, a substituted subcontractor.   Obviously, as no live testimony was presented, Thompson had no opportunity to cross-examine the witnesses.

On August 31, 2007, the LAUSD submitted its “closing briefs” to the hearing officer.   The District maintained that Thompson had violated the Act by listing with its prime contractor bid “placeholder” subcontractors (that is, subcontractors who had not submitted a bid for the work for which they were listed) or “captive” subcontractors (owned and controlled by Thompson).   After Thompson was awarded the prime contract, the District argued, Thompson sought to find the lowest price it could from other subcontractors, and then requested permission to substitute the newly-found subcontractor with the placeholder or captive subcontractor on the grounds that the listed subcontractor had failed or refused to sign a subcontract.3

On September 7, 2007, Thompson submitted its responsive briefs.   Thompson denied the allegation that it used placeholders in its list of subcontractors.   It maintained that in every instance of a subcontractor substitution, the listed subcontractor was offered the work but declined the job.   Consequently, Thompson found a substitute contractor, or proposed to do the work itself.   The District agreed to each substitution.   There was no bid shopping, and no violation of the Act.

Thompson also objected to the proceedings on numerous grounds.   It argued that there were substantial due process violations, including improper notice, denial of its right to cross-examine witnesses as well its right to an impartial decisionmaker; 4  that the District presented no admissible evidence, as the documents presented by the District were not authenticated and the declarations were hearsay;  the District failed to exhaust its administrative remedies;  the statute of limitations on imposition of a penalty had expired;  and the District was without jurisdiction to impose a penalty for Thompson's use of substituted subcontractors since the District had consented to their use.

The hearing officer issued his decisions on September 12, 2007.   He found that Thompson violated the Act in connection with its requests for substitution of certain of its listed subcontractors, and imposed a penalty of $1,677,711.63 against Thompson and its sureties.

Thompson filed a Petition for Writ of Administrative Mandamus against the District on October 12, 2007, and an amended petition on February 6, 2008;  the sureties filed their Petition-in-Intervention for Writ of Mandate on November 13, 2007.   The petitions requested the trial court to set aside and vacate the District's September 12, 2007 decision, and to enjoin any future proceedings.

On May 5, 2008, the trial court rendered its decision in favor of Thompson and the sureties.   The court found that the administrative hearings were unfair and did not meet due process requirements.   Moreover, the court found that there was no substantial evidence to support the hearing officer's findings, since the hearsay statements on which the District relied to prove its case were not corroborated.   The court also questioned whether the District had jurisdiction to impose a penalty on a prime contractor for failure to complete the contract using only listed subcontractors when the District had approved the requests to substitute new subcontractors for those originally listed on the bid.   However, the court concluded that it “need not decide that question for even if [the hearing officer had no jurisdiction], the hearing actually conducted violated Petitioner's due process rights and was unfair.”   The court denied the District's request that the matter be remanded for a fair hearing.

The court almost immediately reconsidered its ruling denying the District the opportunity to conduct a second hearing, and set a status conference, sua sponte, for May 7, 2007.   On that date, the court indicated that it believed that it had erred in concluding that the district could not conduct a subsequent hearing:  “I don't think it is correct to say [the District] wouldn't be entitled to a remand and to conduct an additional hearing․”  That conclusion, however, meant that the court was required to rule on the issue of the District's jurisdiction to conduct the hearing given that it had consented to the substituted subcontractors.   The court requested additional briefing on this issue.

In addition, the sureties requested that the court enter judgment as to them, contending that the Act did not authorize the District to impose penalties on them, and that they were therefore entitled to judgment regardless of the outcome of Thompson's writ petition.   The trial court agreed, and on June 3, 2008, entered judgment on the petition in favor of the sureties.

On June 11, 2008, the court held a hearing on the jurisdictional issue on which supplemental briefing had been sought.   In its tentative decision, which it adopted as its final decision, after discussing the purposes of the Act, the court stated:  “The Act's plain language on the timing of hearing suggests that it must take place before consent to substitution is given.  Section 4110 plainly states that the agency can either cancel the contract or require that the penalty be paid into the ‘fund out of which the prime contract is awarded.’   That language indicates that the agency's investigation and decision will occur before any substitution has been approved, and will be limited to the reasons for a listed subcontractor's refusal and the existence of a new subcontractor without evaluation of the prime contractor's intent in fraudulently failing to disclose information and the agency's reliance on that information.”   The court then noted the language of Thompson Pacific Construction, Inc. v. City of Sunnyvale (2007) 155 Cal.App.4th 525, which stated that the plain language of the Act suggests that enforcement will occur while the project is underway, not after it has been completed.   The court concluded that the District lost jurisdiction to proceed against Thompson for subcontractor substitution violations when it approved Thompson's requested substitutions, and that the District had no jurisdiction to reconsider that decision.   Accordingly, the court entered judgment for Thompson on July 23, 2008 and, on July 28, 2008, issued a writ of mandamus directing the LAUSD to vacate the penalties assessed against Thompson and its sureties.

The LAUSD timely appealed the two judgments entered against it.

DISCUSSION

The District challenges two rulings of the trial court:  First, that it had no jurisdiction to conduct an administrative hearing regarding Thompson's violation of the Act because it had given its consent to the requested subcontractor substitutions, and second, that it had no authority to assess a penalty against the sureties.   We concur with the trial court in its conclusion that the District had no authority to penalize Thompson for completing the projects using substituted subcontractors previously approved by LAUSD.

1. Jurisdiction to conduct hearing

Section 4110 of the Act provides:  “A prime contractor violating any of the provisions of this chapter violates his or her contract and the awarding authority may exercise the option, in its own discretion, of (1) canceling his or her contract or (2) assessing the prime contractor a penalty in an amount of not more than 10 percent of the amount of the subcontract involved, and this penalty shall be deposited in the fund out of which the prime contract is awarded.   In any proceedings under this section the prime contractor shall be entitled to a public hearing and to five days' notice of the time and place thereof.”

The District held a hearing, purportedly pursuant to section 4110 of the Act, based on its belief that Thompson violated section 4107 of the Act when it requested the substitution of certain subcontractors during the pendency of the construction projects.   As Thompson noted, however, the District had given its express written consent to the very substitutions which it now complains were violative of the Act. Thompson argued that, because the substitutions had already been approved (and the substituted subcontractors had completed the work without incident), the District had no jurisdiction to reconsider its approval or withdraw its consent.   The trial court concurred, and so issued a writ of mandate.

Relying on Autopsy/Post Services, Inc. v. City of Los Angeles (2005) 129 Cal.App.4th 521, 526, the District argues that “A public agency has the right to revoke an approval if the applicant fails to provide the public agency with material facts which, if previously disclosed, would have resulted in the public agency withholding its approval or consent.”   We do not find the cited case apposite.

In Autopsy/Post Services, Inc., the plaintiff obtained various building permits from the Department of Building and Safety in connection with its proposed conversion of a commercially zoned building into a medical laboratory, a use allowed by the property's commercial zone.   Sometime thereafter, the City informed plaintiff that the building was located within the Foothill Boulevard Corridor Specific Plan, which imposed limitations on the use of the property.   Plaintiff applied for an exception to the Specific Plan, during which process plaintiff revealed that the proposed business would include the performance of autopsies, a fact not previously revealed to the various authorities.   The Planning Department denied the exception, and the Department of Building and Safety consequently revoked plaintiff's permits.

Plaintiff appealed the latter decision to the Board of Building and Safety Commissioners, arguing that, based upon the issuance of the building permits and his expenditure of substantial sums of money in reliance thereon, he had a vested right to proceed with the project.   The Board determined that there was no vested right, since “the autopsy use in the establishment was never made explicitly or implicitly clear” prior to issuance of the building permits.   (129 Cal.App.4th at p. 525.)

Plaintiff filed a petition for writ of mandate.   The trial court denied the petition, ruling that the plaintiff had no vested right to complete the project because he did not proceed in good faith in applying for the building permits, having “artfully concealed” his intention to perform autopsies.   The Court of Appeal affirmed this ruling.

The District cites Autopsy/Port Services to argue that “A public agency has the right to revoke an approval if the applicant fails to provide the public agency with material facts which, if previously disclosed, would have resulted in the public agency withholding its approval or consent.”   We question whether this is a fair summary of the holding of the case.5  In any event, the case provides no useful analogy which, when applied to the facts before us, aids in our resolution of the legal issues presented.   In Autopsy/Post Services, the revocation of the building permits prevented the plaintiff from constructing the project, which was deemed inconsistent with the Specific Plan. Here, “revocation” of the District's approval did not halt construction of the projects.   In fact, the construction contracts in this case were either terminated or completed before the District raised any objection to Thompson's use of the substituted subcontractor procedures of the Act. Thus, the only meaningful consequence of the reversal of the District's prior decision approving the substituted subcontractors was to declare Thompson in violation of the Act for using unapproved subcontractors.

As the Court of Appeal in Thompson Pacific Construction, Inc. v. City of Sunnyvale, supra, 155 Cal.App.4th 525 noted, “It does appear from the statutory scheme that the Legislature expected the awarding authority to enforce the provisions of the [Act] while the project is underway - not after it is completed.”  (At p. 540.)   For instance, section 4110 of the Act sets the penalty for a contractor's violation to be either cancellation of the contract, or a penalty of up to 10 percent of the amount of the subject subcontract, with the proviso that “this penalty shall be deposited in the fund out of which the prime contract is awarded.”   The awarding agency may not cancel a contract which has already been completed nor, in that situation, can the assessed penalty “be deposited in the fund out of which the prime contract is awarded.”   As the Thompson Pacific court noted, the Act provides that “the contracting agency has a right to investigate any proposed subcontractor, to reject the prime bid if any subcontractor is unacceptable, and to veto any proposed substitution after the bid is accepted” (ibid., internal citation omitted).  “This scheme plainly contemplates that the awarding authority will monitor the project during construction to ascertain the contractor's compliance with its contractual and statutory obligations.”  (Ibid.) While the Thompson Pacific court stopped short of ruling that an awarding agency's jurisdiction to impose a penalty ends upon completion of the project, we conclude that in this case, the LAUSD had no jurisdiction to invoke the penalty provisions of section 4110 of the Act in July 2007, since the construction contracts at issue had terminated as of that date.

In sum, in 2004 and 2005, when Thompson requested substitutions of six of its listed subcontractors, the District clearly had the authority to investigate the reasons for the substitutions, to determine whether Thompson had violated the Act, and to cancel the contract or impose penalties if it found such a violation.   The District declined to exercise this authority, for the perfectly sound reason that no listed subcontractor objected to the proposed substitutions.   Instead, the District consented to Thompson's requested substitutions.   Thompson's completion of the Project with the use of the substituted subcontractors approved by the District did not violate the Act. To hold otherwise would empower the District to create Thompson's violation of the Act by rescinding the consent which rendered the substitutions proper - a patently inequitable result.

2. Penalties assessed against sureties

Having concluded that the District was without jurisdiction to impose penalties on Thompson for its purported violation of the Act, the District necessarily was without authority to impose penalties on the sureties.   We therefore need not and do not address the question of whether the District would have had jurisdiction to impose a penalty directly on the sureties had it properly penalized Thompson in accordance with the Act.

DISPOSITION

The judgments are affirmed.   Respondents are to recover their costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

We concur:

FOOTNOTES

FN1. The LAUSD requests that we take judicial notice of the General Conditions portions of each of three contracts between Thompson and the District:  the 1997 Bond Air Conditioning Group III & New Electrical Service Project contract;  the Banning New Elementary School Project contract;  and the Southeast Area Learning Center Project contract.   We deny the request.   These documents were not judicially noticed by the trial court, and are not relevant to any issue before this court.   The LAUSD also requests that we judicially notice three pages of a report prepared by Legislative Research Incorporated, together with a cover sheet, which the LAUSD describes as “relevant materials from the Legislative History in support of Assembly Bill 2536, which are the 1974 Amendment to Public Contract Code section 4107.”   Although presented to the trial court, these materials were not judicially noticed by that court.   In addition, one page is illegible, and the relevance of the materials is not readily apparent.   We deny the request..  FN1. The LAUSD requests that we take judicial notice of the General Conditions portions of each of three contracts between Thompson and the District:  the 1997 Bond Air Conditioning Group III & New Electrical Service Project contract;  the Banning New Elementary School Project contract;  and the Southeast Area Learning Center Project contract.   We deny the request.   These documents were not judicially noticed by the trial court, and are not relevant to any issue before this court.   The LAUSD also requests that we judicially notice three pages of a report prepared by Legislative Research Incorporated, together with a cover sheet, which the LAUSD describes as “relevant materials from the Legislative History in support of Assembly Bill 2536, which are the 1974 Amendment to Public Contract Code section 4107.”   Although presented to the trial court, these materials were not judicially noticed by that court.   In addition, one page is illegible, and the relevance of the materials is not readily apparent.   We deny the request.

FN2. Further statutory references are to this code unless otherwise indicated..  FN2. Further statutory references are to this code unless otherwise indicated.

FN3. The District describes this practice as “bid-shopping.”   Bid shopping has been defined as “the use of the low bid already received by the general contractor to pressure other subcontractors into submitting even lower bids.”  (Southern California Acoustics Co. v. C.V. Holder, Inc. (1969) 71 Cal.2d 719, 726, fn. 7.) It was this practice which the Act was intended to prevent.  (Ibid ;  see also, § 4101 [“The Legislature finds that the practices of bid shopping and bid peddling in connection with the construction, alteration, and repair of public improvements often result in poor quality of material and workmanship to the detriment of the public, deprive the public of the full benefits of fair competition among prime contractors and subcontractors, and lead to insolvencies, loss of wages to employees, and other evils.”].) While Thompson's alleged conduct of listing subcontractors who had not submitted bids is problematic, it does not precisely fit the definition of bid shopping, and is not, standing alone, a direct violation of the Act. That is to say, the statute does not mandate that a prime contractor have bids in hand from all of its subcontractors prior to submitting its prime contract bid..  FN3. The District describes this practice as “bid-shopping.”   Bid shopping has been defined as “the use of the low bid already received by the general contractor to pressure other subcontractors into submitting even lower bids.”  (Southern California Acoustics Co. v. C.V. Holder, Inc. (1969) 71 Cal.2d 719, 726, fn. 7.) It was this practice which the Act was intended to prevent.  (Ibid ;  see also, § 4101 [“The Legislature finds that the practices of bid shopping and bid peddling in connection with the construction, alteration, and repair of public improvements often result in poor quality of material and workmanship to the detriment of the public, deprive the public of the full benefits of fair competition among prime contractors and subcontractors, and lead to insolvencies, loss of wages to employees, and other evils.”].) While Thompson's alleged conduct of listing subcontractors who had not submitted bids is problematic, it does not precisely fit the definition of bid shopping, and is not, standing alone, a direct violation of the Act. That is to say, the statute does not mandate that a prime contractor have bids in hand from all of its subcontractors prior to submitting its prime contract bid.

FN4. The hearing officer was provided counsel to assist him in conducting the hearings.   The counsel provided was Mark Fall, the LAUSD's in-house counsel and attorney of record for the District in its litigation against Thompson..  FN4. The hearing officer was provided counsel to assist him in conducting the hearings.   The counsel provided was Mark Fall, the LAUSD's in-house counsel and attorney of record for the District in its litigation against Thompson.

FN5. The plaintiff in Autopsy/Post Services did not argue that the public agency was without jurisdiction to revoke the permits, but only that the agency's action impermissibly interfered with his vested right to proceed with the construction project..  FN5. The plaintiff in Autopsy/Post Services did not argue that the public agency was without jurisdiction to revoke the permits, but only that the agency's action impermissibly interfered with his vested right to proceed with the construction project.

ARMSTRONG, J.

TURNER, P.J. KRIEGLER, J.