Filed 12/22/2014
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
PITTSBURG UNIFIED SCHOOL
DISTRICT,
Plaintiff and Respondent, A138825
v. (Contra Costa County
S.J. AMOROSO CONSTRUCTION CO., Super. Ct. No. JCCP4706)
INC.,
Defendant and Appellant.
This case involves a dispute between a contractor (Amoroso) and school district
(the District) about a construction project the contractor did not complete. The parties
disagree as to whether Amoroso defaulted on the contract, and that issue is not before us.
Rather, this appeal concerns the District’s withdrawal of funds from an escrow account in
which it had deposited “retention,” meaning a percentage of the installment payments
made to Amoroso. The purpose of retaining a percentage of the funds otherwise due the
contractor until completion of the contract work is to encourage the contractor to
complete the work in a timely and competent manner and to protect the owner against the
risk of having to pay a replacement contractor to repair or complete defective or
unfinished work. The District here attempted, after hiring a replacement contractor to
complete the work and while its litigation with Amoroso was pending, to withdraw
retention funds from the escrow account. Amoroso sought a preliminary injunction to
prevent that withdrawal, arguing the District could not withdraw retention funds until a
court determined Amoroso had defaulted.
1
The rule Amoroso urges us to adopt—that a public project owner must await
judicial resolution of the underlying contract dispute before it can withdraw retention
funds—would undermine the entire purpose for retention. It would deny an owner the
funds to complete its project until long after the intended completion date for the project.
Amoroso’s position is unsupported by logic or law. Our colleagues in this District and
the Fifth District have already squarely rejected it. Joining them, we reject it as well.
BACKGROUND
This case arises from the reconstruction and modernization of Pittsburg High
School. The Pittsburg Unified School District was the owner of the project and S.J.
Amoroso Construction Co., Inc. was the general contractor, under a contract entered into
on December 10, 2008 (the Construction Contract).
Pursuant to Public Contract Code1 section 22300, Amoroso elected to have the
retention held in an escrow account in the form of securities, with the interest earned on
those securities going to Amoroso. The District and Amoroso entered into an escrow
agreement (Escrow Agreement) which provided that “District shall have the right to draw
upon the securities and/or withdraw amounts from the Escrow Account in event of
default by Contractor as determined solely by District.”
Disputes between the District and Amoroso began to arise in 2010. The District
gave written notice of material breach of the Construction Contract on March 30, 2011,
based on Amoroso’s failure to complete, timely or at all, any of the three phases of the
project.2 The letter requested that Amoroso cure the deficiencies by April 4, 2011, and
threatened termination of the contract if it failed to do so. Amoroso contested the
assertions of material breach in a letter dated April 1, 2011. The District sent a notice of
termination to Amoroso on April 18, 2011, based largely on the same (still unremedied)
1
Further statutory references are to the Public Contract Code, unless otherwise
indicated.
2
The District’s notice letter detailed many specific items it contended Amoroso
had not completed, ranging from repair of window leaks in multiple sets of windows to
finishing incomplete work on the heating, ventilating and air conditioning system, the
lighting, the fencing, and other items.
2
breaches listed in its earlier letter and filed suit against Amoroso the next day. Numerous
related cases were filed, and many have been coordinated with this action. These cases
involve claims of incomplete and defective work and failure to make payments due to
Amoroso and subcontractors.
On April 28, 2011, the District and Amoroso entered into an “Exit and
Demobilization Agreement” (Exit Agreement). The stated purpose of that agreement was
to provide for “the prompt and orderly exit and demobilization of [Amoroso] from the
Project Site in lieu of any final termination or statement of default under the
[Construction] Contract.”
On February 1, 2013, the District sent a letter to City National Bank, the escrow
agent, requesting withdrawal of $3.5 million from the escrow account and attaching a
memorandum from the District’s counsel as to why such a withdrawal was permissible.
Amoroso filed an ex parte application for a temporary restraining order (TRO) and
an order to show cause why a preliminary injunction should not issue. The parties
stipulated to an order directing that no funds would be disbursed until the court ruled on
the motion for preliminary injunction. On April 16, 2013, the court issued a tentative
ruling denying the motion for preliminary injunction. On May 9, 2013, the court
affirmed that tentative ruling.
Amoroso timely filed a notice of appeal on May 22, 2013.
DISCUSSION
I. Standard of Review
“In determining whether to issue a preliminary injunction, the trial court considers:
(1) the likelihood that the moving party will prevail on the merits and (2) the interim
harm to the respective parties if an injunction is granted or denied. The moving party
must prevail on both factors to obtain an injunction. Thus, where the trial court denies an
injunction, its ruling should be affirmed if it correctly found the moving party failed to
satisfy either of the factors. [Citation.]
3
“Where the evidence before the trial court was in conflict, its factual
determinations, whether express or implied, are reviewed for substantial evidence. We
interpret the facts in the light most favorable to the prevailing party. [Citations.]
“Generally, the standard of review for denial of a preliminary injunction is
whether the trial court committed an abuse of discretion. However, a party’s likelihood
of prevailing on the merits sometimes can be determined as a matter of law. [Citation.]
In that case, de novo review as to that factor is proper. [Citation.]” (Sahlolbei v.
Providence Healthcare, Inc. (2003) 112 Cal.App.4th 1147, 1145-1146.)
II. Analysis
A. Legal Background Concerning Retention Funds
“[I]t is common for construction contracts to contain terms that protect an owner’s
construction funds. Owners and contractors generally structure their contracts to provide
for installment payments to the contractor as the work progresses, typically as the work
reaches specified stages of completion. [Citation.] ‘This payment system adds incentive
for the contractor to complete the work and reduces the risk of nonperformance for the
owner. A percentage of funds held until completion of all of the work is called retainage
and is intended both to reduce the risk of nonperformance by the contractor and to assure
the completion of the work in accordance with the contract terms.’ ” (Cates
Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 55 (Cates), fn. omitted.) If
the contractor defaults on the construction contract “then the owner is entitled to use the
retained funds to complete the contract. In fact, this is one of the primary reasons for
which the owner insists on retainage in the first place.” (2 Stein, Construction Law,
(2014) Conflicting Claims to Retainage, ¶ 7.11[1]; see Cates, supra, 21 Cal.4th at p. 55
[“if an owner avoids overpaying the contractor as the project progresses, then the owner
should have funds available to apply toward completion of project in event of
contractor’s default”]; Westamerica Bank v. City of Berkeley (2011) 201 Cal.App.4th
598, 610-611 (Westamerica) [retention funds are under control of owner who can use
them if contractor defaults on its obligations].)
4
A retention fund typically consists of cash that is a percentage of each progress
payment, which the owner retains to be paid at the completion of the project. By statute,
retention withheld from payments made by a public entity must be released to the
contractor within 60 days after completion of the project. (§ 7107, subd. (c).) A public
entity may withhold from such payment up to 150 percent of any amount that is in
dispute between it and the contractor. (Ibid.) Failure to pay retention as required by this
section exposes the public entity owner to penalty interest on amounts improperly
withheld and an award of attorneys’ fees. (§ 7107, subd. (f).)
In 1981,3 the Legislature adopted a statute enabling contractors to substitute
securities of equivalent value in lieu of cash retention amounts or, if retention is held in
an escrow account, to direct that the escrow agent invest retention funds in such
securities. (§ 22300, subds. (a), (b).) This enables contractors to earn interest on retained
funds, while in turn requiring contractors to offer the same option to subcontractors from
whom the contractor withholds a retention. (See § 22300, subds. (b), (c), & (d);
Westamerica, supra, 201 Cal.App.4th at p. 602.) Section 22300 prescribes a form escrow
agreement (§ 22300, subd. (f)), which provides, among other things, that the public entity
owner agrees, to the extent there are securities in the escrow account equal in value to the
retention amounts that would otherwise be withheld, not to withhold retention from
progress payments (§ 22300, subd. (f)(2)) and that the contractor may withdraw interest
earned on the securities or interest earned on interest at any time. (§ 22300, subd. (f)(5).)
The agreement also provides that the owner has “a right to draw upon the securities in the
event of a default by the Contractor” and requires the escrow agent, “[u]pon seven days’
written notice . . . from the owner of the default,” to “immediately convert the securities
to cash and [to] distribute the cash as instructed by the Owner.” (§ 22300, subd. (f)(7).)
3
Section 22300 was enacted in 1988. (Stats. 1988, ch. 1408, § 11.). However,
the legislation was not a substantive change but simply a recodification of law previously
set out in the Government Code. (Legis. Counsel’s Dig., Assem. Bill No. 4351 (1987-
1988 Reg. Sess.); Westamerica, supra, 201 Cal.App.4th at pp. 611-612 [discussing
former Govt. Code § 4590].)
5
The key issue raised by Amoroso is whether a public entity owner that has entered
into an agreement providing for a retention may unilaterally determine that a contractor
has defaulted on its obligations under the construction agreement as a prelude to drawing
on funds or securities held in a retention account. Two cases have addressed that issue,
albeit in slightly different contexts.
B. Westamerica and Opinski Permit Owners Unilaterally to Declare a Default for
Purposes of Accessing Retention Funds, Prior to Any Judicial Determination
Our colleagues in Division Four recently addressed the precise issue we consider
here, in Westamerica. Justice Rivera’s opinion in that case is particularly helpful. In
Westamerica, the City of Berkeley had entered into a construction agreement with Arntz
Builders (Arntz) to build a public library, and the agreement provided for a retention
escrow account to ensure completion of the work. (Westamerica, supra, 201 Cal.App.4th
at pp. 602-603.) The terms of the escrow agreement were as prescribed by Section
22300, and the escrow account contained securities. (Id. at pp. 600, 603.) In the midst of
litigation between the city, Arntz, and subcontractors, Arntz sought a TRO and
preliminary injunction to prevent the city from withdrawing securities from the account.
(Id. at pp. 603-604.) While Arntz’s motion was pending, the city sent a seven-day notice
to the bank stating Arntz was in default and demanding that the bank immediately
liquidate the securities and distribute the cash to the city. (Id. at p. 604.) The trial court
denied the motion, “reject[ing] Artnz’s contentions (1) that the securities are Arntz’s
property because the City had not paid Arntz in full for the work done under the Library
contract, (2) the City must first prove its own contractual performance and its right to the
securities, and (3) that Arntz would be irreparably harmed if the securities were converted
to cash and distributed to the City.” (Ibid.)
In the meantime, Arntz wrote to the bank objecting to the city’s demand,
disagreeing with the city’s claims that it was in default and threatening to sue the bank if
it released the securities to the city. (Westamerica, supra, 201 Cal.App.4th at p. 604.)
Instead of releasing the funds, the bank, at Arntz’s urging, filed a complaint in
interpleader. (Id. at pp. 604-605.) The city demurred. (Id. at p. 605.) The trial court
6
sustained the demurrer, and on appeal, Division Four of this Court affirmed. (Id. at p.
615.)
The bank claimed that, under the escrow agreement, it “face[d] ‘conflicting
instructions’ regarding whether the securities should be released to the City, and therefore
it [was] entitled to interplead the funds and to force Arntz and the City to litigate this
issue.” (Westamerica, supra, 201 Cal.App.4th at p. 609.) It argued that “ ‘the City and
Arntz each claim[ed] rights to the securities, and have provided [the bank] with
conflicting instructions, which the bank is contractually obligated to comply with.’ ” (Id.
at p. 610.)
The Court disagreed: “[T]he Bank cites to no provision in the escrow agreement
that would contractually obligate it to accede to Artnz’s request to halt the liquidation and
disbursement of the securities in the face of the City’s demand. Indeed, any claim by
Arntz that it has a contractual right to demand that the securities be withheld would
constitute a unilateral change in the terms of the escrow agreement, which is not
permitted, either under common law [citation], or by statute (§ 22300, subd. (f) [‘The
escrow agreement . . . shall be null, void, and unenforceable unless it is substantially
similar to the [prescribed] form’].) [¶] Our conclusion that the escrow agreement
authorizes the City unilaterally to declare a default and to receive a distribution of the
escrowed securities comports fully with the fundamental purpose of retentions. As we
have discussed, retained earnings serve as an incentive for timely completion of the
contract. They are effective for this purpose precisely because they are under the control
of the owner who can use them if the contractor defaults on his obligations. ([Cates],
supra, 21 Cal.4th at pp.55-56 . . . .) Of course, the owner does so at its peril and can be
subject to hefty penalties and attorney fees if it is shown that all or part of the retention
should have been released to the contractor. (§ 7107.) The statutory scheme thus
provides to the contractor a powerful remedy for wrongful withholding of the retention
fund, but it does not allow the contractor to obstruct the public entity’s control over it.
The Bank’s theory would require a different result for escrowed retention funds, viz., the
mere threat of suit by the contractor could force the owner into litigation in order to
7
access its own retention fund. We do not think the Legislature intended that public
entities be disadvantaged in this way when it adopted the law requiring that contractors
be allowed to substitute escrowed funds for retentions.” (Westamerica, supra, 201
Cal.App.4th at pp. 610-611.)4
The same year our Division Four decided Westamerica, the Fifth District
addressed the same question in another context, and reached the same conclusion. In
Greg Opinski Construction, Inc. v. City of Oakdale (2011) 199 Cal.App.4th 1107
(Opinski), the city and contractor had litigated, and the city had prevailed, in a dispute
over a construction project. (Id. at p. 1109.) The trial court had awarded the city contract
damages and prejudgment interest on those damages. (Ibid.) The Court of Appeal
affirmed the judgment except as to the award of prejudgment interest, which it reversed.
(Id. at p. 1122.) In overturning the award of prejudgment interest, the court relied on the
rule that a party who “has dominion and control over money that is awarded to it as
damages . . . is not entitled to prejudgment interest for that period.” (Id. at p. 1119.) The
parties’ escrow agreement conformed to the model agreement prescribed in section
22300, subdivision (f), and thus provided that “the owner is entitled to convert the
securities to cash and withdraw the cash ‘in the event of default by the Contractor.’ ” (Id.
at pp. 1119-1120.) Although the escrow agreement in that case held only cash and not
securities, the court held that the owner could “withdraw the principal in the escrow
account regardless of its form.” (Id. at p. 1120.)
4
In interpreting section 22300 and its required form of escrow agreement, Justice
Rivera noted that the bill adding that form initially “did not include the paragraph
authorizing the public agency to make a demand on the escrow holder to liquidate and
distribute the escrowed securities,” which was added after a number of public entities
“wrote letters opposing the bill, because it lacked any provision by which the public
agencies could access the escrowed funds.” (Westamerica, supra, 201 Cal.App.4th at p.
611.) Thereafter, “[t]he bill was amended to include the paragraph proposed by [one of
the objecting parties]” allowing public entity owners to demand liquidation and
distribution upon written notice of default. (Id. at 612.). As Justice Rivera observed, the
amendment reflects “lawmakers’ intent to ensure that public agencies have expeditious
access to the substituted retention funds.” (Ibid.)
8
“The purpose of the practice of withholding retention payments is to give the
owner security in case of breach by the contractor. Nothing in . . . section 22300 evinces
a legislative intent to limit an owner’s recourse. Although paragraph 7 of the model
escrow agreement (and the parties’ actual escrow agreement) does not expressly state that
an owner can withdraw cash if the contractor defaults and the account never contained
securities, the inclusion of that paragraph presupposes that the owner has a right to
possession of the retention when the owner deems the contractor to be in breach. The
purpose of withholding retention would be undermined if this were not the case, and
there is no reason why the form of the retention—securities or cash—would make a
difference in this regard. For these reasons we conclude that the city had the power to
withdraw the money from the escrow account when it determined that Opinski had
breached the contract. Therefore, it had dominion and control over the money from the
time of the breach and was not entitled to prejudgment interest.” (Opinski, supra, 199
Cal.App.4th at p. 1120. )
Amoroso argues that, despite the authority of Westamerica and Opinski, a public
agency may not unilaterally declare a default and demand that the escrow holder liquidate
securities and distribute funds. It first contends “[t]he trial court fundamentally
misconstrued Opinski and Westamerica, by stating that ‘[i]n neither Westamerica nor
Opinski was there any judicial determination as to whether a default had occurred.’ ”
Amoroso contends that “[i]n each of those cases, a court made a judicial determination
prior to the request for withdrawal from the escrow agent.” The trial court was correct.
It is Amoroso that has “fundamentally misconstrued” these cases.
In Westamerica, the city demanded that the bank liquidate and release the
retention at a time when there had been no final resolution of the pending construction
litigation between the city and the contractor. At that time, in July 2008, an appeal was
pending from “Phase I” of the trial—in which the trial court had decided only that the
contractor’s action “was barred for failure to comply with Government Code claim
requirements.” (Westamerica, supra, 201 Cal.App.4th at p. 604.) Thus, not even the trial
court had addressed whether the contractor had defaulted on the contract. In its July 15,
9
2008 letter to the bank, 10 days before the hearing on the request for a TRO to enjoin the
bank from disbursing the retention funds to the city, the contractor denied it was in
default and claimed the project had been deemed complete in 2003. (Ibid.) The entire
thrust of the bank’s interpleader action filed on July 28, 2008, was that there was “a
dispute” between the city and the contractor regarding, among other things, the
“ ‘existence of a default.’ ” (Id. at 605.) These facts simply cannot be squared with
Amoroso’s characterization of the case as involving “judicial determination [that the
contractor had defaulted on the contract] prior to the request for withdrawal from the
escrow agent.”
Not only does Amoroso seriously misstate the facts in Westamerica, it also ignores
the court’s reasoning. In affirming the trial court’s ruling sustaining the city’s demurrer
to the bank’s interpleader complaint, the court necessarily rejected the bank’s (and
contractor’s) contention that the city was not entitled to make, and the bank therefore
could not honor, a demand for the disbursement of the retention funds to the city before
judicial resolution of whether the contractor was in default. The language of the court’s
opinion leaves no ambiguity on this point: “Our conclusion that the escrow agreement
authorizes the City unilaterally to declare a default and receive a distribution of the
escrowed securities comports fully with the fundamental purpose of retentions.”
(Westamerica, supra, 201 Cal.App.4th at p. 610, italics added.) “If the City gives notice
of the contractor’s default and demands liquidation of the securities and distribution of
the funds, the Bank must ‘immediately convert the securities to cash and . . . distribute
the cash as instructed by the City.’ ” (Id. at p. 612.) Amoroso’s attempt to deny this
aspect of the Westamerica holding is inexplicable.
Amoroso’s similar attempt to distinguish Opinski is no more persuasive. It is true
that by the time the appellate court decided whether the trial court properly awarded
prejudgment interest to the City of Oakdale, the trial court had issued (and the Court of
Appeal had decided to affirm) a decision in favor of the city on its claims for delay
damages and construction defects. But the primary issue in that case was prejudgment
interest, and the rule the court applied was that “if, during any prejudgment period, a
10
party has dominion and control over money that is awarded to it as damages, it is not
entitled to prejudgment interest for that period.” (Opinski, supra, at p. 1119, italics
added.) The court denied prejudgment interest because it concluded that the city had
dominion over the retention funds well prior to the judgment: “[W]e conclude that the
city had the power to withdraw the money from the escrow account when it determined
that Opinski had breached the contract. Therefore, it had dominion and control over the
money from the time of breach and was not entitled to prejudgment interest.” (Id. at p.
1120, italics added.) The court thus squarely decided that the city had the right to
withdraw escrowed funds immediately upon its own determination that the contractor had
defaulted; it did not have to wait for a judicial decision on that issue.
C. Neither Civil Code Section 1670 Nor Due Process Compel a Different Result
Amoroso next argues that, notwithstanding the Westamerica and Opinski courts’
interpretation of section 22300 to grant project owners authority to withdraw retention
funds immediately upon a contractor’s default, Civil Code section 1670 and the Due
Process Clause prevent public agencies from exercising that authority. This argument
was not raised by the parties in Westamerica or Opinski, and the courts in those cases
therefore did not address it. It raises an issue of statutory construction, to which we now
turn.
In 1978, the Legislature enacted Civil Code section 1670, which provides: “Any
dispute arising from a construction contract with a public agency, which contract contains
a provision that one party to the contract or one party’s agent or employee shall decide
any disputes arising under that contract, shall be resolved by submitting the dispute to
independent arbitration, if mutually agreeable, otherwise by litigation in a court of
competent jurisdiction.” (Stats. 1978, ch. 1374, § 1, p. 4556.) This legislation was
enacted in response to Zurn Engineers v. State of California ex rel. Dept. Water
Resources (1977) 69 Cal.App.3d 798 (Zurn), which held that a construction contract that
“contained provisions authorizing the State Engineer, or his designated representative, to
decide disputes including claims for extra compensation between Contractor and State
and making his decision ‘Final and conclusive unless it is fraudulent or capricious or
11
arbitrary or so grossly erroneous as necessarily to imply bad faith,’ ” deprived the
contractor of due process (id. at p. 802, fn. omitted, 833). (See Sen. Com. on Judiciary,
Rep. on Sen. Bill No. 2197 (1977-1978 Reg. Sess.), p. 2 [“The bill stems from
a recent appellate decision which dismayed the construction industry: Zurn
Engineers v. The State of California (1977), 69 Cal. App. 798.”]; Assem. Com. on
Judiciary, Bill Digest on Sen. Bill No. 2197 (1977-1978 Reg. Sess.) Aug. 17, 1978, p. 2
[“Senate Bill 2197 was introduced in response to . . . (Zurn Engineers v. State of
California ex Rel. Department Water Resources 69 CA 3d 798 at page 828.)”].) At
minimum, the Zurn court held, the contractor was entitled to notice of the matters on
which the State Engineer intended to rely and an opportunity to refute or supplement that
information. (Zurn, at p. 833.)
Amoroso contends that allowing a public entity owner to access retention funds
based on its own determination that there has been a default runs afoul of Civil Code
section 1670 and the due process clause in that it allows the owner to make a unilateral
decision on a dispute with a contractor. We disagree with Amoroso’s argument that the
Escrow Agreement here or the form escrow agreement embodied in section 22300 are in
conflict with Civil Code section 1670 or violate due process.
The first problem with Amoroso’s argument is that Civil Code section 1670 by its
terms applies only to “construction contract[s].” The dispute at issue here concerns the
parties’ rights and obligations under the Escrow Agreement, not those governed by the
Construction Contract. True, the parties disagree whether Amoroso defaulted on the
Construction Contract. But that dispute will not be resolved by the District unilaterally.
On the contrary, that dispute, insofar as it arises under the Construction Contract, is the
subject of ongoing litigation between these parties in the Superior Court. Here, the only
question is whether the Escrow Agreement allows the District to determine there has
been a default for the limited purpose of providing the notice to withdraw retention funds
under the Escrow Agreement. That dispute concerns the Escrow Agreement, which is
not governed by Civil Code section 1670. But even if the dispute about whether there
12
was a default within the meaning of the Escrow Agreement could be said to arise from
the Construction Contract, Amoroso’s argument fails for other reasons.
The form escrow agreement prescribed by section 22300, subdivision (f),
expressly permits an owner to “draw upon the securities” in a retention account “in the
event of a default by the Contractor”— with the only prerequisite being “seven days’
written notice to the Escrow Agent.” On receiving such notice, the escrow agent “shall
immediately” (and thus without having to wait for litigation) “convert the securities to
cash and shall distribute the cash as instructed by the Owner.” (§ 22300, subd. (f)(7),
italics added.) As we have previously discussed, this Court in Westamerica and the Fifth
District in Opinski, interpreted the statutory agreement in accord with its plain meaning:
to authorize a public entity owner “unilaterally to declare a default and to receive a
distribution of the escrowed securities” on seven days’ notice. (Westamerica, supra, 201
Cal.App.4th at p. 610.) Thus, Amoroso asks us to hold that Civil Code section 1670 bars
the very same contract provision that the Legislature prescribed for public entities three
years later in Public Contracts Code section 23300.5
In construing Civil Code section 1670, we must attempt to harmonize that section
with Public Contracts Code section 22300. As our Supreme Court recently observed:
“ ‘A court must, where reasonably possible, harmonize statutes, reconcile seeming
inconsistencies in them, and construe them to give force and effect to all of their
provisions. [Citations.] This rule applies although one of the statutes involved deals
generally with a subject and another relates specifically to particular aspects of the
subject.’ [Citation.] Thus, when ‘ “two codes are to be construed, they ‘must be
regarded as blending into each other and forming a single statute.’ [Citation.]
Accordingly, they ‘must be read together and so construed as to give effect, when
5
The Legislature enacted section 1670 in 1978, three years before it adopted what
is now Public Contracts Code section 22300 in 1981, and eight years before it added the
form contract in 1986. (Westamerica, supra, at p. 611, citing Stats. 1981, ch. 866, § 1,
pp. 3322-3323 and Stats. 1986, ch. 1167, § 1, pp. 4155-4158.)
13
possible, to all the provisions thereof.’ [Citation.]” ’ ” (Pacific Palisades Bowl Mobile
Estates, LLC v. City of Los Angeles (2012) 55 Cal.4th 783, 805 (Pacific Palisades).)
As discussed above, subdivision (f)(7) of section 22300 specifically permits public
entity owners to withdraw retention funds or securities immediately upon determining
that the contractor is in default. In order to read the broad and general language of
section 1670 to require a public entity owner to submit the issue of the contractor’s
default to litigation (or arbitration) and to obtain a final ruling on that issue before
withdrawing retention amounts under an escrow agreement governed by section 22300,
we would have to conclude that the more recently enacted section 22300 partially
repealed section 1670 by implication. However, as our high Court also noted in Pacific
Palisades, “ ‘ “ ‘[a]ll presumptions are against a repeal by implication. [Citations.]’
[Citation.] Absent an express declaration of legislative intent, we will find an implied
repeal ‘only when there is no rational basis for harmonizing the two potentially
conflicting statutes [citation], and the statutes are “irreconcilable, clearly repugnant, and
so inconsistent that the two cannot have concurrent operation.” ’ [Citation.]” ’ ” (Pacific
Palisades, supra, 55 Cal.4th at p. 805.)
Further, Amoroso’s is not a plausible interpretation of section 1670. If it were
adopted, a public project owner could not reject a proposed change order, demand that a
contractor replace defective work, terminate a contract, or call on the surety to complete
the work without first arbitrating or litigating each disagreement to conclusion. The
parties would be required to stop and arbitrate or litigate first, before the owner could
take any action in regard to any of the hundreds of disagreements that arise in the course
of constructing any significant public works project. Projects would be delayed
repeatedly to litigate or arbitrate disputes and could take decades to complete, and project
funds would be depleted by the expenses of serial litigation or arbitration.
A more plausible reading of Civil Code section 1670, and one that harmonizes it
with section 22300, can be derived by reading the phrase “decide any disputes” in the
context of the Zurn case and the due process concerns it addressed. Civil Code
section 1670 can be understood to require litigation or arbitration to finally resolve
14
disputes that affect a contractor’s entitlement to compensation. To “decide” something
means “to bring [it] to an end; to determine, as a question, contest, controversy, or
struggle, by some recognized authority; to settle in favor of one side or the other; to
determine the issue or result of; as the court decided the case for the plaintiff.”
(Webster’s New Twentieth Century Dict., Unabridged (2d ed. 1975) p. 470, col. 2.)
These definitions imply finality.
As described above, the state construction contract in Zurn permitted a state
official to finally resolve a claim by the contractor that it was entitled to extra
compensation for additional work requested by the owner subject only to a requirement
that the official not act fraudulently or in bad faith. (Zurn, supra, 69 Cal.App.3d at
p. 802.) Before making that decision, the state official had failed to advise the contractor
of the evidence upon which he intended to rely and failed to give the contractor a
reasonable opportunity to refute or supplement that evidence. (Id. at p. 833.) Zurn thus
stands for the proposition that a public entity cannot, consistent with due process, make a
final decision about a contractor’s right to payment without at least affording adequate
notice and an opportunity to be heard. Civil Code section 1670, to be sure, goes further,
requiring the government to submit disputes to arbitration or litigation. But in responding
to Zurn, it is likely that the Legislature intended Civil Code section 1670 to address
situations such as that in Zurn, in which the State was allowed to make a final decision in
regard to a contractor’s compensation.
A demand for a distribution from a retention escrow account is not a final
resolution of whether a contractor defaulted the contract, such as by failing to perform or
by performing defective work; nor does it permanently resolve whether and what amount
the owner owes and must pay the contractor. The owner does not “decide” a dispute in
the sense of resolving it with finality, permanently taking funds or securities claimed by
the contractor. The owner may withdraw retention funds or securities and use them to
repair or complete the project, but this does not preclude the contractor from challenging
that decision thereafter. If litigation (or arbitration) under the construction contract is
ultimately resolved in favor of the contractor, the court (or arbitrator) will require the
15
owner to pay the amount owed, including returning any improperly withheld retention.
Indeed, if the owner’s withholding of retention is ultimately found unjustified, it will also
be liable for penalty interest and attorney fees. (§ 7107, subd. (f) [“In the event that
retention payments are not made within the time periods required by this section, the
public entity . . . 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 attorney’s fees and costs.”].)
Because a distribution to the owner from a retention escrow fund does not
“decide” the issue of whether the contractor is in default (and because it does not raise a
dispute under the construction contract but only the escrow agreement), section 22300
and Civil Code section 1670 are not in conflict.
Amoroso also argues that such a distribution violates its rights to due process. We
reject that argument because retention funds are not akin to contract payments either for
contract work or extra work as was the issue in Zurn. Unlike a progress payment or
payment for extra or change order work, a contractor has no claim to retention funds until
the project is completed. In Harsco Corporation v. Department of Public Works (1971)
21 Cal.App.3d 272 (Harsco), the court held that retention funds are not earned by the
contractor until the project is completed within the project price and thus that a stop
notice filed by an unpaid subcontractor did not reach the retention. (Id. at pp. 276-278.)
Harsco interpreted the public works retention statute, former Gov. Code section 14402.6
(Id. at p. 278.) Harsco also relied on Dorris v. Alturas School District (1914) 25
Cal.App. 30, 32-33 (Alturas School District), which interpreted contract terms to mean
retention was not due until completion and thus was not “due” to the contractor within
the meaning of the stop notice statute. (Harsco at p. 277.) The current retention statutes
similarly reflect that completion is a condition to earning payment of retention funds.
6
Government Code section 14402, interpreted in Harsco is the predecessor to
current Public Contracts Code section 10261. (East Quincy Services Dist. v. General
Accident Ins. Co. of Am. (2001) 88 Cal.App.4th 239, 244, fn. 18.)
16
(See § 7107, subd. (c) [within 60 days after date of completion of work]; § 10261
[department shall withhold amount not exceeding 5 percent, or higher amount if project is
substantially complex, “until final completion and acceptance of the project”].) Further,
as in Alturas School District, in this case the terms of the Construction Contract make
plain that Amoroso had no right to the retention funds (or the securities provided in lieu
of funds) until the project was completed.
Amoroso points out that even nonfinal judicial determinations may in some
instances constitute a taking that implicates due process protections. Amoroso cites cases
involving garnishment of wages (Sniadach v. Family Fin. Corp. of Bay View (1969) 395
U.S. 337, 342) and recording of mechanics’ liens. (Connolly Development, Inc. v.
Superior Court (1976) 17 Cal.3d 803, 813-814; Lambert v. Superior Court (1991) 228
Cal.App.3d 383, 388.) However, until a project has reached final completion, retention
funds—unlike a worker’s wages or a property owner’s title—are not property of the
contractor over which it exercises control. (Harsco, supra, 21 Cal.App.3d at pp. 276-
280; see Westamerica, supra, 201 Cal.App.4th at pp. 611 [referring to “public entities’
control” over retention funds, with which section 22300 was not intended to interfere].)
Thus, an owner’s declaration of default to receive a distribution from escrowed retention
funds, pursuant to section 22300, does not constitute a prejudgment taking of a
contractor’s own funds or other property, such as occurs with wage garnishment or a
mechanic’s lien, and does not raise due process concerns.
When an owner declares a default and requests a distribution from the escrowed
retention, the contractor is deprived of no funds or property over which it could have
exercised any control. If the owner wrongfully declares a default and the contractor is
due payment of the retention, then the contractor may obtain that payment through
litigation or arbitration (along with the heavy penalties on the owner provided by section
7107), but in the meantime, the contractor suffers no deprivation of an interest in property
over which it had control prior to the litigation. In such circumstances, the judgment and
section 7107 penalties ensure that the contractor will be made whole. Nothing in this
scheme violates due process.
17
D. The Escrow Agreement was Not Null, Void, and Unenforceable
Section 22300, subdivision (f), provides that a retention fund escrow agreement is
“null, void, and unenforceable” if it is not “substantially similar” to the form escrow
agreement provided in the statute. Subdivision (f)(7) of the form escrow agreement
provides: “The Owner shall have a right to draw upon the securities in the event of
default by the Contractor.” The Escrow Agreement between the District and Amoroso
provides: “District shall have the right to draw upon the securities and/or withdraw
amounts from the Escrow Account in the event of default by Contractor as determined
solely by District.”
Amoroso argues that the Escrow Agreement is null, void, and unenforceable
because the actual agreement is not substantially similar to the model agreement. We
disagree. Because we agree with Westamerica and Opinski that the form agreement
allows a public entity owner to make a unilateral determination of default for purposes of
withdrawing retention, there is no material difference between the Escrow Agreement
and the statutory form agreement.
E. The Exit Agreement Did Not Prevent the District from Exercising its Rights under
the Escrow Agreement
Recital G of the Exit Agreement states: “The Parties desire to enter into this Exit
Agreement for the prompt and orderly exit and demobilization of [Amoroso] from the
Project Site in lieu of any final termination or statement of default under the
[Construction] Contract.” Amoroso argues that recital G precludes the District from
giving the escrow agent notice of a default and, thus, from obtaining a distribution of
retention funds from the escrow account.
In addressing this argument, the trial court’s ruling states: “This argument
confuses two different contractual requirements. Under the [Construction] Contract,
there are procedural requirements for [the District] to terminate the contract and make a
statement of default. The Exit Agreement, entered into by the parties to allow
[Amoroso’s] ‘prompt and orderly exit’ from the project, was signed after [the District]
18
had already given [Amoroso] written notice of material breach, served a Notice of
Termination, and filed suit. [Citation.] Clearly ‘in lieu of . . . a statement of default,’ did
not mean that the exit agreement waived [the District’s] right to assert that [Amoroso]
was in default, but only that the parties had decided on procedures for [Amoroso’s] exit
from the project to apply ‘in lieu of’ the requirements in the [Construction] Contract for
termination and statement of default. Moreover, the Escrow Agreement does not require
[the District] to make a ‘statement of default’ but rather says that [the District] can
withdraw funds ‘in event of default by Contractor as determined solely by District.’
[Citation.] [¶] All [the District] had to do to withdraw funds was make a determination
that [Amoroso] was in default. This it has clearly done, as evidenced by the Notice of
Material Breach, the Notice of Termination, and the filing of the lawsuit.”
The trial court’s ruling turned on a distinction between what was meant by a
“statement of default under the [Construction] Contract” in the Exit Agreement and the
notice of default that the District must provide to the escrow agent, pursuant to the
Escrow Agreement, to receive a distribution from the escrow account. Whether the trial
court erred involves a question of contract interpretation, which we review de novo.
(Crosby v.HLC Properties, Ltd. (2014) 223 Cal.App.4th 597, 602.) When interpreting a
contract, we endeavor “to give effect to the mutual intention of the parties as it existed at
the time of contracting, so far as the same is ascertainable and lawful.” (Civ. Code,
§ 1636.) In doing so, we “consider the ‘ “clear and explicit” meaning of [the contract]
provisions, interpreted in their “ordinary and popular sense,” unless “used by the parties
in a technical sense or a special meaning is given to them by usage.” ’ ” (Hartford
Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 288.)
Recital G employs the term “statement of default under the [Construction]
Contract.” Neither party cites a definition of “statement of default” in the Construction
Contract. Instead, the parties refer to Article 24.1.2.1 of the general conditions of the
Construction Contract which provides, in relevant part: “Upon the occurrence at
District’s sole determination of any of the above conditions, District may, without
prejudice to any other right or remedy, serve written notice upon Contractor and its
19
Surety of District’s termination of this Contract and/or the Contractor’s right to perform
the work of the Contract. This notice will contain the reasons for termination. Unless,
within three (3) days after the service of the notice, any and all condition(s) shall cease,
and any and all violation(s) shall cease, or arrangement satisfactory to District for the
correction of the condition(s) and/or violation(s) be made, this Contract shall cease and
terminate.”7 Article 24.1.2.1 does not employ the phrase “statement of default,” but
because both parties cite this article in the Construction Contract, it appears they agree
that a “statement of default under the [Construction] Contract” is the District’s notice to
the contractor that certain “conditions” have been determined that can lead to contract
termination if they are not promptly corrected and suspension of further payment until the
project is completed.8
As interpreted by both parties, a “statement of default under the [Construction]
Contract” is a communication from the District to Amoroso that has specified
consequences under the Construction Contract. This is clearly not the same as the notice
of default required by the Escrow Agreement, which is a communication from the
District to the escrow agent that has, in and of itself, no consequences pursuant to the
Construction Contract; its consequences, that the District becomes entitled to a
distribution of retention, flow from the Escrow Agreement. Accordingly, we agree with
the trial court that if the “in lieu of” language prevents the District from issuing a
“statement of default under the [Construction] Contract,” it does not also prevent the
7
The record before this Court, and apparently in the court below, contains only
excerpts of the general conditions portion of the Construction Contract, which do not
include section 24.1.2.1. However, as both parties cite to a letter that quotes this section,
and neither party has objected to its omission, we rely on it as well.
8
Amoroso’s counsel stated at the hearing in the trial court that Amoroso had
“never been called in default for termination” and that “if a public entity actually goes
through formal termination, it would affect [the contractor’s] ability to bid [on] other
work.” This, too, suggests that the exchange described in recital G was that the District
gave up the right to proceed with termination under the Construction Contract in
exchange for Amoroso agreeing to exit and demobilize from the project in an orderly
way.
20
District from providing a notice of default under the Escrow Agreement. The Exit
Agreement does not prevent the District from asserting that Amoroso is actually in
default of the Construction Contract in contexts not “under the [Construction] Contract,”
such as in a notice of default to the escrow agent. Indeed, the District’s claim that
Amoroso so defaulted is the essence of the District’s suit against Amoroso.
In short, we agree with the trial court’s ruling on Amoroso’s argument based on
the Exit Agreement.
F. The District Determined that Amoroso was in Default
Amoroso contends that the District had not made a “formal declaration of a
default, much less an actual default by Amoroso that would permit a demand to be made
on the [funds] held in escrow.”
The trial court’s ruling stated: “All [the District] had to do to withdraw funds was
make a determination that [Amoroso] was in default. This it has clearly done, as
evidenced by the Notice of Material Breach, the Notice of Termination, and the filing of
the lawsuit.”
Whether the District determined that Amoroso was in default is a question of fact,
which we review for substantial evidence. We agree with the trial court that the notice of
material breach, the notice of termination, and the filing of the lawsuit provide substantial
evidence that the District determined Amoroso to be in default.
Amoroso relies on the letter that the District sent to the escrow agent requesting a
distribution from the escrow account—a letter that failed to contain a notice of default.
Instead, the letter was accompanied by a memorandum from counsel for the District that
Amoroso argues “admitted that [the District] had made no formal determination of
default by Amoroso.”
The memorandum from the District’s counsel states: “The District’s position is
that [Amoroso] defaulted by failing to perform the work consistent with the specifications
under the contract.” A footnote to the sentence states: “While we do not believe further
Board action is necessary to authorize drawing upon the securities and/or escrow account,
the District’s Board may wish to make a formal ‘determination’ that [Amoroso] has
21
defaulted consistent with the Public Contract Code, the [E]scrow [A]greement, based
upon the Exit and Demobilization Agreement. That step would eliminate any procedural
argument [Amoroso] might make to challenge the draw upon escrow.” Contrary to
Amoroso’s argument, the memorandum clearly states that the District had determined
Amoroso to be in default, but recognizes that the determination had not been formalized
by a District board action. Because section 22300 requires only a notice of the default to
the escrow agent and not a formal determination of default by the governing board of the
public agency prior to such notice, the memorandum is not an admission that the District
had not determined Amoroso to be in default.9
G. The Retention Funds Were Not Held by the District in Trust for Subcontractors
A preliminary injunction may issue to enforce obligations that arise from a trust.
(Code Civ. Proc., § 526, subd. (a)(7).) Amoroso maintains that “the funds in the escrow
account are impressed with an express trust.” Amoroso relies on Chang v. Redding Bank
of Commerce (1994) 29 Cal.App.4th 673 (Chang) and People v. Clemmons (1955) 136
Cal.App.2d 529 (Clemmons). Neither case supports Amoroso’s position.
In Chang, the owner made payments to the general contractor for the purpose of
paying subcontractors. (Chang, supra, 29 Cal.App.4th at p. 677.) The contractor issued
checks to the subcontractors, but the bank reversed the transactions and seized the money
to set off money the contractor owed to the bank. (Ibid.) The court concluded that
“progress payments received by a general contractor pursuant to a contract which
requires that they be paid to subcontractors are held by the contractor in trust for the
benefit of the subcontractors” and that a bank with inquiry notice that the funds were paid
in trust cannot seize the funds to cover an indebtedness of the contractor to the bank. (Id.
at p. 678.)
9
The trial court did rule that the District had not complied with the Escrow
Agreement in its request for a distribution from the escrow account, but that deficiencies
in the notice provided to the escrow agent “are not legal grounds for the Court to enjoin
the distribution of funds to [the District].” Amoroso does not challenge this ruling.
22
In Clemmons, a contractor was convicted of grand theft for misappropriating funds
from a construction loan obtained by the owners of the project. (Clemmons, supra, 136
Cal.App.2d at pp. 530-534.) When the contractor received the loan proceeds, he signed a
“trust receipt” stating that he received the funds “in trust, and as bailee, for the express
use” of paying construction-related expenses. (Id. at p. 532.)
Amoroso argues that the escrowed retention funds are subject to an express trust in
favor of the subcontractors because the Construction Contract requires that “the
Contractor shall pay to each Subcontractor, out of the amount paid to the Contractor on
account of such Subcontractor’s portion of the Work, the amount to which said
Subcontractor is entitled.” Amoroso maintains: “Under Chang and Clemmons, this
language impresses payments made to Amoroso with an express trust.”
Amoroso’s argument conflates progress payments with retention. Funds held as
retention are not “amount[s] paid to [Amoroso].” Unlike progress payments, which are
payments made to the contractor as the work progresses, retention is money withheld
from payment to a contractor, who is not entitled to receive it until he has successfully
completed the project. Harsco and Alturas School District, discussed above,
unequivocally reject the argument that contractors or subcontractors have any right in
retention funds prior to final completion of the project, as does Westamerica.
III. Costs and Attorney Fees
As the District notes in its reply brief, it is entitled to its costs on appeal by
operation of California Rules of Court, rule 8.278(a). The District also requests “an
Order awarding the District’s fees in defending this appeal,” citing California Rules of
Court, rules 8.276(a) and 8.278(d)(2). The latter rule simply states that an award of costs
does not preclude a party from seeking an award of attorney fees under rule 3.1702 in the
trial court. The former rule concerns attorney fees awarded as a sanction “[o]n motion of
a party or [the Court of Appeal’s] own motion.” Here the District has not filed a motion
for sanctions and we decline to impose sanctions on our own motion.
23
DISPOSITION
The order of the trial court denying Amoroso’s motion for a preliminary injunction
is affirmed.
STEWART, J.
We concur.
KLINE, P.J.
RICHMAN, J.
24
Trial Court: Contra Costa County Superior Court
Trial Judge: Hon. Judith Craddick
Counsel for Defendant and Appellant: Leonidou & Rosin
Janette G. Rosin
A. Robert Rosin
David L. Ashby
Counsel for Plaintiff and Respondent: Fagen Friedman & Fulfrost, LLP
Roy A. Combs
Mark S. Williams
Cynthia M. Smith
David Mishook
25