Respondents, v. Cross-complainant and Appellant. (2010)

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

INTRODUCTION

The action in the Los Angeles County Superior Court had its inception in a construction contract pertaining to the remodeling of a residence.   The residence was owned by John S. Brandon and his wife Diane A. Golden in the form of the Brandon-Golden Trust.¹  Jorge Barajas, doing business as Serrano Construction,² was engaged to do the construction work.   Eventually, the construction company sued for work not paid for by the owners.   The owners cross complained for uncompleted and defective work.   The results of a bench trial ended in a judgment on the contractor's complaint in the amount of $45,702 and on the cross complaint of owners for $260,543 for costs to correct and complete the contract work for a net recovery to owners in the amount of $214,832.   Owners moved post judgment for attorneys fees as the prevailing parties pursuant to statutory authority contained in Civil Code section 3260,³ which the trial court found inapplicable and denied owners' motion for attorneys fees.   This appeal followed as an appealable order under section 904.1, subdivision (a)(2) of the Code of Civil Procedure and Citizens Against Rent Control v. City of Berkeley (1986) 181 Cal.App.3d 213, 223 in which owners contend they are entitled to attorneys fees in the amount of $208,865.90.

FACTUAL AND PROCEDURAL SYNOPSIS 4

The home improvement contract.

Owners had title to a home located at 17835 Castellammare Drive in Pacific Palisades, California which they desired to improve.   On or about September 25, 2006, owners signed a contract with contractor to make the improvements to the residence.   The contract was extensive, but purportedly a standard printed “Home Improvement Contract” under the authority of Business and Professions Code section 7159.   The contract contained an 11-page attachment detailing the manner in which the work was to be performed.   The contract was heavily interlineated.   The interlineations will be repeated only to the extent necessary to focus on the relevant portions of the contract in dispute.   The contract price was $352,400.

Progress payments and lien releases.

Paragraph 7.2 of the contract stated:  “Upon making payment on any completed phase of the project, and before making any further payments, the Contractor is required to provide the Owner with (or Owner receive directly from the material supplier, subcontractor, and laborer) unconditional lien release forms signed by each material supplier, subcontractor and laborer involved in that portion of the work for which payment was made.   Upon final payment Contractor shall provide a signed unconditional release form for the entire project.”

Owner's retention provision from progress payments.

The contract as interlineated stated as follows pertaining to the right of owner to retain from each progress payment an agreed upon percentage:

“Owner to pay Contractor every four weeks for that percentage of work performed of each item listed in the Progress Payment Schedule included in this Contract, reduced by 11.35%.”

Owner's contention pertaining to contractor's failure to perform.

Owners claimed contractor failed to perform in many respects and breached the contract.   Under section 3.5 of the contract, contractors promised that “(1) materials and equipment furnished under the Contract will be new and of good quality unless otherwise required or permitted by the Contract Document;  (2) the Work will be free from defects not inherent in the quality required or permitted;  and (3) the Work will conform to the requirements of the Contract Documents.”

Owners maintained that contractor delivered a poorly constructed project that was riddled with code violations and had building systems constructed contrary to the drawings and specifications, manufacturers' recommendations and applicable industry standards.   Owners further maintain that contractor's defective work extended to virtually every building system which it constructed.

Contractor's action to recover amounts allegedly wrongfully withheld by owners, plus statutory penalties and attorney's fees.

Contractor's complaint to foreclose mechanic's lien and damages.

On November 6, 2007, contractor filed its action in the Los Angeles County Superior Court against owners to foreclose mechanics lien and for damages for breach of contract.   The only named plaintiff in contractor's original complaint was Jorge Barajas.   At time of trial, however, over owner's objection, the oral motion of contractor was granted to amend the complaint to name Serrano Construction as an additional plaintiff without requiring a written amendment to the complaint.

In capsule form, contractor sought to recover retention amounts and progress payments allegedly wrongfully withheld by owners, plus statutory penalties and attorney's fees under the authority of Civil Code sections 3260 and 3260.1.   More particularly contractor alleged in its complaint that owners wrongfully retained and withheld from contractor the last of the contract proceeds due it.   Contractor further contended that in accordance with sections 3260 and 3260.1, contractor as the original contractor is entitled to additional remedies as a result of the wrongful failure and refusal of owners, and each of them, to make the last progress payment and wrongfully retained and withheld from contractor the last of the contract proceeds due company as contractor more than 45 days after completion of the work.   Contractor prayed for the remedies authorized by sections 3260 and 3260.1, including a penalty of two percent per month on unpaid final progress payment and retained portion of the money due on the contract.Contractor also prayed for reasonable attorney fees authorized by statute.

Owner's cross-complaint.

On December 28, 2007, owners filed a cross-complaint naming Barajas, Serrano Construction and Raul Domingo Serrano as cross-defendants, alleging breach of contract.   On February 7, 2008, owners filed a first amended cross-complaint

Owner's offer to compromise.

On October 9, 2008, owners made an offer to compromise to contractor pursuant to Code of Civil Procedure section 998 in which settlement of the action would be accomplished for a payment of $75,000.   Contractor did not accept the offer.

Contractor's reliance on sections 3260 and 3260.1 in support of its entitlement claim for alleged wrongful withholding of funds by owners.

A bench trial occurred on December 22, 2008, and concluded on January 7, 2009.   Contractor maintained it was entitled to recover retention proceeds and progress payments allegedly wrongfully withheld by owners under the authority of sections 3260 and 3260.1.

Quoting from contractor's trial brief dated December 16, 2008, contractor asserted its right to recover in that owners “breached the contract and violated Civil Code section 3260 by wrongfully withholding and refusing to pay monies retained for earned work and the balance of unpaid contract funds and change orders․”

Similarly, in contractor's “Trial Brief of Legal Issues on Closing” filed January 7, 2009, contractor reiterated its position that it was entitled to recover under section 3260, as “CC § 3260(d) required Brandon to distribute retained contract funds ‘within 45 days after completion. [’]  Completion was on approval of Serrano Const.   Work on Final Inspection on May 15, 2007.”

The judgment.

On March 12, 2009, the court entered judgment in the action, finding that owners were entitled to a net monetary judgment in their favor in the amount of $214,832, plus interest running from the date the trial court verbally announced its decision.   Owners served notice of entry of judgment on March 23, 2009.

At contractor's request, the court on March 12, 2009, issued a statement of decision.   In its statement of decision, the trial court found, among other things, that “Serrano Const committed material breaches of the contract by its failure to complete the Work (or even to substantially complete it), its performance of defective Work, and its failure to perform corrective work.”   The trial court found that “judgment in favor of Brandon shall be in the amount of $214,832, plus interest on such amount at the rate of 10 percent per annum running from January 7, 2009.”

Pertaining to contractor's contentions that owners had violated sections 3260 and 3260.1 by wrongfully withholding retention and progress payments, the trial court found that “Brandon did not fail to make payment to Serrano Const of any progress payment due under the Contract as to which there was no good faith dispute as to whether it was owed (Civil Code section 3260.1), nor did Brandon improperly withhold payment of any amount of ‘retention proceeds' following completion of the Work (section 3260).”   Further findings were made by the trial court as follows:

“This lawsuit was an action initiated by plaintiffs for the collection of funds allegedly wrongfully withheld.   Brandon did not wrongfully withhold payment from Serrano Const.   Brandon is the prevailing party.”

Contractor's motion for new trial.

On March 27, 2009, contractor gave notice of its intention to move for a new trial.   Contractor filed its memorandum of points and authorities in support of its motion on April 6, 2009.   Owners filed written opposition on April 21, 2009.   On May 8, 2009, the trial court held a hearing on the motion and denied same.   On May 11, 2009, owners served notice of entry of the order denying contractor's motion for a new trial.

Owner's motion for attorney's fees.

Owners filed a motion for an award of attorney's fees on March 18, 2009, on the grounds that as the action was one to recover amounts allegedly wrongfully withheld under sections 3260 and 3260.1, and owners had been declared the prevailing party by the court.  Sections 3260, subdivision (g) and 3260.1, subdivision (b) entitled owners to their attorney's fees in the action;  and as plaintiffs had failed to accept owner's Code of Civil Procedure section 998 offer to compromise, and contractor had failed to obtain a more favorable result at trial, owners were entitled to fees under the fee shifting provision of Code of Civil Procedure section 998, subdivision (c)(1)(with sections 3260 and 3260.1 providing the underlying statutory basis for the award of fees to the prevailing party).   In the motion, owners requested fees in the amount of $208,865.90.

Written opposition was filed by contractor on March 30, 2009.   No evidence was included in contractor's opposition.   Owners maintain that contractor completely reversed the position it had maintained throughout the action as to owners' liability under section 3260.   Owners maintained that despite contractor having initiated the action and contending throughout trial that contractor was entitled to recover against owners under section 3260 because owners had wrongfully withheld retention proceeds, contractor now reversed course and asserted that section 3260 had never been applicable to the case at all.   Contractor asserted that “the contract that is the subject of this action does not contain any provision for ‘retention,’ ” and claimed reliance on McAndrew v. Hazegh (2005) 128 Cal.App.4th 1563.

Owners filed reply papers on April 8, 2009.   Among other things, owners' reply attached, as Exhibit F, a copy of page 9 of the Contract, which contained the specific progress payment and retention provision which call for owners to pay contractor progress payments every four weeks “for that percentage of work performed of each item listed in the Progress Payment Schedule included in the Contract reduced by 11.35%.”

Hearing on owners' motion for attorney's fees.

On April 15, 2009, the court heard owners' motion for attorneys fees, and initially indicated its tentative ruling was to deny the motion on the ground that section 3260 was not reciprocal, and that only the contractor may recover attorney's fees under the statute.

In response to that tentative conclusion, counsel for owners explained to the trial court that section 3260 is expressly a prevailing party attorney's fees provision, and provides that “in any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney's fees and costs.”   Counsel for owners further noted that the Court of Appeal in Taylor v. Van-Catlin Const.  (2005) 130 Cal.App.4th 1061, confirmed that where the owner prevails in an action under section 3260 to recover funds wrongfully withheld, the owner is indeed entitled to recover his attorney's fees.   With respect to the amount of fees claimed by owners, the court found that the sum of $208,865.90 was reasonable.

Based upon counsel's discussion of Taylor, the trial court appeared to reconsider its tentative conclusion that the statute was not reciprocal, and stated that it would take the matter under submission.   Counsel for contractor requested an opportunity to address the Taylor decision, and the trial court granted it permission to file an additional brief addressing it.

On April 20, 2009, contractor submitted a “Supplemental and Further Opposition by Plaintiff to Defendant/Cross-Complainant Brandon's Motion for Attorney's Fees.” Whereas the trial court had given contractor permission to file an additional brief addressing Taylor, contractor's “Supplemental and Further Opposition” primarily re-argued the McAndrew v. Hazegh case which contractor had cited in its original opposition.

On April 22, 2009, without further hearing, the trial court issued an order denying owners' motion for attorney's fees.   The trial court denied the motion on the basis that the “Contract at issue here does not contain any provision for ‘retention.’   Without the provision for ‘retention,’ Section 3260 would not, as it could not, apply to allow Plaintiff to have attorneys' fees had Plaintiff prevailed on the alleged issue of wrongful withholding of final payment.”

Following notice of entry of order served by the clerk on April 22, 2009, owners filed a timely notice of appeal on June 19, 2009.

STANDARD OF REVIEW

The standard of review is accurately stated by appellant/owners in the appellant's brief on appeal.   Neither contractor/respondent nor this court takes issue with appellant's statement.  “ ‘We determine whether the trial court's factual findings were supported by substantial evidence and independently review its legal determinations.’  Frank v. BAM Building Co. [ (2009) ] 172 Cal.App.4th 224, 230.   While denial of a motion for attorney's fees is often reviewed on an abuse of discretion standard, where, as here, the issues involve construction of the contractual provisions, and legal issues, review is de novo.   See e.g., Rae[l] v. Davis [ (2008) ] 166 Cal.App.4th 1608, 1617 (issues regarding construction of contract and conclusions of law are reviewed de novo).”

DISCUSSION

Initially we note that owners argue that they are entitled to attorneys fees pursuant to the principles set for in Code of Civil Procedure section 998.   We also note that owners argued this statute in the trial court, but have failed to raise the issue in the Court of Appeal.   We therefore apply the principle that any issue not raised on appeal, even if the issue is urged in the trial court, is deemed waived and not to be considered by the appellate court.

Without applying the cost-shifting principles contained in Code of Civil Procedure section 998, we now examine the reasoning set forth in Taylor v. Van-Catlin Const.  (2005) 130 Cal.App.4th 1061, 1069-1070 in determining whether an award favors the owners in this instance.   The Taylor court held:  “Essentially the same scenario is presented where, as here, an owner prevails against a contractor's demand for the retention proceeds.   Even if the ‘bona fide’ attribute from subdivision (e) (disputes between subcontractors and contractors) is engrafted onto subdivision (b) (disputes between owners and contractors), no reasonable inference can be drawn that the Legislature intended to limit recovery of attorney fees to the prevailing contractor after the owner has withheld the retention payment in bad faith.   Such a reading of the last sentence of subdivision (g) would contravene the plain language of the provision as well as its evident intent-to enable the ‘prevailing party’-whoever that turns out to be-to recover attorney fees in ‘any action’ to collect wrongfully withheld retention funds.   The trial court therefore erred in relying on Darling to reject the fee award to the prevailing owners in this case.”  (Fn.omitted.)

There appears to be implicit acceptance by the trial court of the reasoning of the Taylor court to the effect that section 3260 is reciprocal and applies to the prevailing party under the statute regardless of who that might be.   But the statement of decision is also quite clear that the trial court was of the opinion that a condition precedent to application of the statute in this instance was missing, namely, evidence of a retention fund.   The trial court indicated in the statement of decision that owner paid in round figures the sums of $40,000, $80,000, $60,000, $70,000, $60,000 and $30,000, without any indication of an 11.35 percent reduction for any retention or any other reduction.

It appears to this court that the owners elected to breach the contract by refusing to make final payment and then followed up with a cross-complaint which resulted in owners being the net prevailing parties.   The trial court was cognizant that the contract contained provisions for “retention” but as the court correctly held, these provisions did not really come into play in this instance.

However our analysis cannot be truncated at this point and leave the application of section 3260.1 in limbo, if the facts of the case require that the section be further analyzed.   We conclude further analysis is required.   As previously stated, the facts of the case are not in dispute, so we look at section 3260.1 in a de novo posture.

Initially, we note that the legislature has deemed it necessary to enact two statutes pertaining to the issues and disputes arising in this instance.   Section 3260 pertains to “retention” proceeds and section 3260.1 applies to “progress payments.”   This delineation was clearly intended by the legislature by enacting section 3260.1 by stating “(a) This section is applicable with respect to all contracts entered into on or after January 1, 1992, relating to the construction of any private work of improvement. [¶] (b) Except as otherwise agreed in writing, the owner shall pay to the contractor, within 30 days following receipt of a demand for payment in accordance with the contract, any progress payment due thereunder as to which there is no good faith dispute between the parties.   In the event of a dispute between the owner and the contractor, the owner may withhold from the progress payment an amount not to exceed 150 percent of the disputed amount.   If any amount is wrongfully withheld in violation of this subdivision, the contractor shall be entitled to the penalty specified in subdivision (g) of Section 3260 [attorney's fees and costs to the prevailing party]. [¶] (c) Nothing in this section shall be deemed to supersede any requirement of Section 3260 respecting the withholding of retention proceeds.”

But the central question that has to be answered under section 3260.1 is the meaning of “progress payment.”  Murray's Iron Works, Inc. v. Boyce (2008) 158 Cal.App.4th 1279 states:  “In Webster's Third New International Dictionary (1993) at page 1813, progress is defined as ‘4a:  the action or process of advancing or improving by marked stages or degrees.’  [¶] ․ Business and Professions Code section 7159 defines progress payments to be ‘any payments, other than the down payment ․ made before the project is completed.’  ․ [¶] ․ The more usual types of such progress payment provisions are (a) those providing for payments in amounts to be determined by periodic estimates, computations, or reports of the amount of work accomplished;  and (b) those providing for payments of specified amounts to be made as particular stages of the work are attained or completed.'  ․ [¶] Furthermore, ․ ‘Construction contracts generally provide for payments to be made in installments, known as “progress payments.”   The owner is unwilling to pay the entire contract price at the beginning of the job without assurance that the contractor will complete the work․  Accordingly, payments from the owner to the contractor are made as the job progresses.’ ”  (Murray's Iron Works, Inc. v. Boyce, supra, 158 Cal.App.4th at pp. 1296-1297;  italics in original.)

Here, the contract provided for progress payments on completed portions of the project and for final payment upon completion of the project.   Applying the definitions given for progress payments we conclude that progress on the project had indeed stopped.   The trial court found “Serrano Const did not ever complete or substantially complete the Work” and “Brandon's payments to Serrano Const totaling $340,000 substantially exceeded the amount earned by Serrano Const under the Contract, and indeed Serrano Const owes Brandon ․ for the costs of completing and correcting the Contract Work;  and Serrano Const's numerous breaches of the Contract excused any obligation on the part of Brandon to make further payment.”   Accordingly, because the contract called for progress payments and the owner withheld a progress payment, we find that section 3260.1 applies to this case.   Furthermore, having been declared the prevailing party, we conclude the trial court erred in not awarding attorney fees to owner.

DISPOSITION

The order denying attorney fees to appellant/owner is reversed.   The matter is remanded to the trial court to enter a new judgment that includes an award of attorney fees.   Appellant to recover costs of appeal.

We concur:

FOOTNOTES

FN1. The only appellant is defendant John S. Brandon.   For convenience, all of the owners of the residence will be referred to herein as “owners” unless context otherwise requires..  FN1. The only appellant is defendant John S. Brandon.   For convenience, all of the owners of the residence will be referred to herein as “owners” unless context otherwise requires.

FN2. For convenience, respondent/plaintiff Jorge Barajas, doing business as Serrano Construction, will be referred to herein as “contractor” unless context dictates otherwise..  FN2. For convenience, respondent/plaintiff Jorge Barajas, doing business as Serrano Construction, will be referred to herein as “contractor” unless context dictates otherwise.

FN3. All statutory references are to the Civil Code unless otherwise indicated..  FN3. All statutory references are to the Civil Code unless otherwise indicated.

FN4. Following oral argument and submission of the matter, this court received notice of the filing of a Chapter 13 bankruptcy proceeding filed by Jorge Barajas.   On April 22, 2010, in view of the bankruptcy filing, this court vacated submission and the matter was stayed.   On July 8, 2010, the attorneys in bankruptcy for creditor John S. Brandon filed a “Notice of Dismissal of Bankruptcy Case” as to debtor Jorge Barajas, doing business as JB Contractors, and doing business as Serrano Construction.   By clerk's letter dated July 14, 2010, this court directed letter briefs to be filed concerning the effect of the dismissal and the bankruptcy court retaining jurisdiction under Bankruptcy Code sections 110, 329 and 362.   Letter briefs have been filed as directed, with one side (Brandon) indicating the dismissal of a bankruptcy case results in the termination of the case and of the automatic stay and that the retention of jurisdiction over ancillary, collateral matters mentioned in section 110, 329 and 362 have no applicability in this instance.   The letter brief for the other side (Barajas) takes a contrary view and maintains that the automatic stay remains in effect by implication until the issuance of a further order from the bankruptcy court.   On September 13, 2010, this court lifted the automatic stay and the matter was resubmitted..  FN4. Following oral argument and submission of the matter, this court received notice of the filing of a Chapter 13 bankruptcy proceeding filed by Jorge Barajas.   On April 22, 2010, in view of the bankruptcy filing, this court vacated submission and the matter was stayed.   On July 8, 2010, the attorneys in bankruptcy for creditor John S. Brandon filed a “Notice of Dismissal of Bankruptcy Case” as to debtor Jorge Barajas, doing business as JB Contractors, and doing business as Serrano Construction.   By clerk's letter dated July 14, 2010, this court directed letter briefs to be filed concerning the effect of the dismissal and the bankruptcy court retaining jurisdiction under Bankruptcy Code sections 110, 329 and 362.   Letter briefs have been filed as directed, with one side (Brandon) indicating the dismissal of a bankruptcy case results in the termination of the case and of the automatic stay and that the retention of jurisdiction over ancillary, collateral matters mentioned in section 110, 329 and 362 have no applicability in this instance.   The letter brief for the other side (Barajas) takes a contrary view and maintains that the automatic stay remains in effect by implication until the issuance of a further order from the bankruptcy court.   On September 13, 2010, this court lifted the automatic stay and the matter was resubmitted.

PERLUSS, P.J. JACKSON, J.