Opinion
C073534
08-04-2017
KIM HOOVEN KALBAUGH, Plaintiff and Respondent, v. JAMES D. COREY, Defendant and Appellant.
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. CV0900027)
This is a judgment roll appeal of a judgment in favor of a general contractor based on the owner's anticipatory breach of a fixed-price contract. The owner's attempt to undermine the trial court's findings on damages, the validity of the contractor's license, and fraud is to no avail. Because the trial court's findings are presumed to be supported by substantial evidence, are binding on a judgment roll appeal, and we can find no error on the face of the record as a matter of law (Kruger v. Bank of America (1983) 145 Cal.App.3d 204, 207), we affirm.
FACTS
In June 2008 a fire significantly damaged a building owned by defendant James D. Corey in which he operated an automobile repair business. Allied Insurance Company insured the building. Corey entered into a fixed-price construction contract for $150,629 with plaintiff Kim Hooven Kalbaugh for the reconstruction and repair of the building. As a result, "[i]f the repairs had restored the building to its pre-fire condition and nothing more, Corey was obligated to pay the contract price to Kalbaugh. If the actual costs to Kalbaugh had exceeded the contract price, he would have suffered those losses since this was presented as a fixed bid contract."
Although the contract provided for all change orders to be in writing, Corey and Kalbaugh orally agreed to a number of change orders. They also agreed to an accelerated progress payment schedule to front-load the payments because Kalbaugh did not have the money to pay the daily expenses of a project of this magnitude. The contract was signed at the end of July, and Corey paid Kalbaugh a total of $100,000 in August. Time was of the essence for both parties.
Damages
Because Corey does not challenge the trial court's finding that he breached the contract, we need not describe the conflicting testimony the parties, and their experts and witnesses, gave at trial. Suffice it to say, the trial court found much of Corey's evidence incredible and held him responsible for an anticipatory breach of contract. The court concluded that Corey "unlawfully prevented Kalbaugh from fully performing his obligations" by repeatedly insisting on conditions that increased the scope of work and, whether or not he locked Kalbaugh out, conveying "to any reasonable person" that he was terminating the contract as of January 15, 2009.
Much of the dispute involved Corey's addition of new electrical circuits to the electrical work completed by Kalbaugh's subcontractor. Despite the delay caused by Corey's addition and the city's demand for an upgraded main panel, the county completed the required 4-R, or rough-in, inspection in November 2008. The contract provided that 85 percent of the contract price was due upon successful completion of the 4-R inspection.
The central issue on appeal is not liability, but damages. The trial court found that Kalbaugh was entitled to his expectation interest; that is, the profit he would have earned had the job been completed. The trial court explained: "[S]ince the Court has found that Corey breached the contract by repudiating it and the contract was a 'fixed bid' as opposed to a time and materials contract, Quantum Meruit is not the measure of damages. As found in the Tentative Decision, Kalbaugh was entitled to the contract price plus extras that increased his costs minus credits due Corey for work under the contract he either performed or paid for directly after his breach. See Connell v. Higgins (1915) 170 Cal. 541. This included punch list repairs but not expenses Corey paid for work outside the scope of the contract."
The court's calculation of damages was premised on finding that Kalbaugh was entitled to 85 percent of the contract price at the time he passed the rough-in inspection, or $128,034.65. Kalbaugh was awarded $9,981 for extra work and $5,519 for subcontractor materials and expected profit from after the rough-in inspection. The award was reduced by the amount he had already been paid ($100,000), credits identified by Kalbaugh as amounts he owed Corey ($12,856), and the cost of completion of the job ($10,000) for a total damage award to Kalbaugh of $20,678.15.
License
Corey also objected to the trial court's finding in the tentative decision and the amended statement of decision that Kalbaugh sustained his burden of proving he was duly licensed by the Contractors State License Board during his performance of the contract. Kalbaugh produced evidence he had been licensed for over 25 years, there was no evidence his license had ever been revoked or suspended, and he held a workers' compensation insurance policy during his tenure as a contractor.
Nevertheless, Corey argued his license had been revoked as a matter of law because he paid his employees cash under the table. At trial, Corey offered six time cards for three employees, two of which contained the word "cash" on them. In total the cards reflected $4,625 in wages.
The trial court rejected Corey's argument that Kalbaugh had paid all of his employees in cash and found the evidence was to the contrary. The legal issue, as framed by the trial court, was whether Corey's evidence, at most, of $4,625 in cash payments to fewer than all of Kalbaugh's employees overcame Kalbaugh's showing of proper licensure. The court concluded that Kalbaugh had met his burden of proof and that "Corey's evidence of cash payments to 3 employees was insufficient evidence to cause Kalbaugh to have to offer additional evidence regarding his licensure."
Fraud
The trial court found that Corey did not sustain his burden of proving fraud by clear and convincing evidence; in fact, he did not prove the claim even by a preponderance of the evidence. Corey's evidence consisted of a comparison between the estimate of costs Kalbaugh provided Corey's insurer and the bids he received from his subcontractors. In essence, he complains that Kalbaugh padded his bid and he would never have entered into the contract if he realized Kalbaugh added an additional 17 percent to subcontractors' bids when the bids submitted to his insurer already included a 17 percent markup.
The trial court denied Corey's request for a new trial and to vacate the judgment. Corey appeals.
DISCUSSION
I
Damages
Because this is a judgment roll appeal, the sufficiency of the evidence to support the court's findings on damages is unassailable.
" 'In a judgment roll appeal every presumption is in favor of the validity of the judgment and any condition of facts consistent with its validity will be presumed to have existed rather than one which will defeat it.' " (Estate of Kievernagel (2008) 166 Cal.App.4th 1024, 1031.) "In a judgment roll appeal based on a clerk's transcript, every presumption is in favor of the validity of the judgment and all facts consistent with its validity will be presumed to have existed. The sufficiency of the evidence is not open to review. The trial court's findings of fact and conclusions of law are presumed to be supported by substantial evidence and are binding on the appellate court, unless reversible error appears on the record." (Bond v. Pulsar Video Productions (1996) 50 Cal.App.4th 918, 924.)
Civil Code section 3358 states: "Except as expressly provided by statute, no person can recover a greater amount in damages for the breach of an obligation, than he could have gained by the full performance thereof on both sides." In contract parlance, a party is limited to the benefit of his bargain. (Coughlin v. Blair (1953) 41 Cal.2d 587, 603.) Recall that the trial court equated the benefit of the bargain to Kalbaugh's contractual right to recover his "expectation interest." Because, as the trial court emphasized, the contract was based on a fixed price, Kalbaugh's expectation was both knowable and unknowable at the time he entered the contract; he knew the fixed price he would receive when he completed the project, but he would not know his profit margin until all his subcontractors were hired and paid. The trial court emphasized the risk Kalbaugh assumed when he executed a fixed-price contract. "Human experience would tell any reasonable person that you can't know actual construction costs on a job of this kind until the work is finished. [¶] . . . If the repairs had restored the building to its pre-fire condition and nothing more, Corey was obligated to pay the contract price to Kalbaugh. If the actual costs to Kalbaugh had exceeded the contract price, he would have suffered those losses since this was a fixed bid contract."
The court found that under the terms of the contract, Kalbaugh was entitled to be paid 85 percent of the total contract price when the project passed a 4-R inspection, a milestone Kalbaugh reached in November 2008. Moreover, the court also found that by the time Corey anticipatorily breached the contract in January 2009, the project was 85 percent completed. As a result, the court premised its calculation on an award of 85 percent of the contract price and made adjustments from there. As quantified above, the court added the cost of add-ons requested by Corey, added various additional costs that were outside the scope of the agreement, added costs related to subcontractor materials and profits due, subtracted what Kalbaugh had been paid, and subtracted the costs Corey had incurred throughout the project and in finishing the punch list of items Kalbaugh had not completed. The net damage award to Kalbaugh, based on this formula, was $20,678.15. As a judgment roll appeal, we accept the sufficiency of the evidence to support the trial court's findings.
Corey registers several complaints about the damage award. He begins, not with the fixed-contract price, but with an estimate of profits Kalbaugh had provided Corey's insurer before they executed the construction contract. In a letter sent to Allied Insurance Company, Kalbaugh listed his subcontractors' bids, some of which he testified he merely estimated, and added $21,886 for overhead and profit. Corey defines the estimated amount of $21,118.79 as Kalbaugh's expectation interest and the cap on any damage award. His argument conflicts with the evidentiary findings made by the trial court with respect to the estimate. The court rejected the notion that in this fixed-price contract, a mere estimate of subcontractor's bids before the contract is signed, provides an accurate and binding prediction of profit, and therefore, an expectation interest that limits the damage award.
Corey, in one part of his opening brief, calculates Kalbaugh's expectation interest at $21,118.79. This calculation appears to include an arithmetic mistake. In another part, he alleges the expectation interest as $21,138.34. Either way, his argument is that Kalbaugh's award surpasses his expectation interest. For all the reasons explained herein, we reject Corey's argument and therefore need not figure out his math.
The trial court's rulings in this regard, however, are ambiguous. The court explained that because the contract was for a fixed price, Kalbaugh bore the risk of the costs rising and his profit diminishing. Thus, the court seemed to indicate that his expectation interest could not be quantified at the time he executed the contract. Yet in the amended statement of decision, the court determined that the damage award could not exceed the difference between the contract price and the amount he had been paid, or slightly over $50,600. Later, in ruling on the motions to vacate the judgment and to grant a new trial, the court stated yet another quantification of the expectation interest. Despite its findings that the letter to the insurer represented only an estimate of the subcontractors' costs, the trial court, in its third ruling on the issue, found that the estimated profit provided the insurer plus 17 percent of the extras Corey asked him to do, represented Kalbaugh's expectation interest and, in the absence of evidence that the actual costs exceeded the amount he was paid, capped his recovery. On a judgment roll appeal, our ability to resolve any ambiguities in the trial court's factual findings is extraordinarily limited. We do not have the benefit of a reporter's transcript to make sense of it all. Here our review extends only as far as the sufficiency of the findings to support the judgment. --------
The court explained: "Kalbaugh testified that when he sent the letter estimating his costs to Allied he had to guess on some of the items based upon his experience not on actual bids from his subs. He also testified that he never represented to anyone that he guaranteed the amounts in the letter or the contract were going to be actual costs." The court went on to state, as we quoted above, that human experience teaches that construction costs cannot be determined until a job is completed and that it was Kalbaugh who bore the risk of the fixed-price contract. Indeed, he risked making no profit at all.
The flaw in the court's reasoning, Corey argues, is that it failed to account for the actual costs Kalbaugh incurred. At the time Corey breached the contract Kalbaugh admitted he had incurred costs of $77,340. Since Kalbaugh had already been paid $100,000, Corey insists he had already realized a net profit of $22,660 ($100,000-$77,340). Under this scenario, Corey argues the $22,660 profit Kalbaugh realized surpassed his expectation interest of $21,118.79. But more significantly, he contends that Kalbaugh has been awarded an improper windfall, having been awarded not only his net profit of $22,660, but also the damage award of $20,678.15 for a total of $43,338.15.
Corey objected to the trial court's award as a violation of Civil Code section 3358's cap on contract damages. Corey specifically requested the trial court make a finding on what Kalbaugh's actual costs on the project were. The court did not make a finding on costs.
In this case, as Kalbaugh emphasizes, the contract was a fixed-bid contract. Thus, no matter his costs, whether he overestimated or underestimated them, he would have been entitled to the full contract price for work performed within the scope of work contemplated by the contract. If Kalbaugh estimated high, but was able to perform the work under those estimates, he would have made a larger profit. If he estimated low, and was unable to perform the work within those estimates, he would have made a much smaller profit, if he profited at all. As a consequence, irrespective of costs, Kalbaugh could earn no more than $150,629 if the contract had been fully performed.
To argue, as Cory does, that upon breach of a fixed-cost contract a court must calculate the contractor's actual costs and determine profits anticipated at the time of contracting is to ignore the nature of a fixed-cost contractual arrangement. The "benefit of the bargain" in the present case is set forth in the agreement struck by the parties and reflected in the contractual language. It recognizes, implicitly, that costs and profits are variable but, ultimately, the contractor must bear whatever costs are required and must be satisfied with whatever profits are produced.
On this judgment roll appeal, our review is limited. Here the trial court's findings support the judgment. Kalbaugh was entitled to 85 percent of the contract price or $128,034.65 as well as $5,519 for subcontractor materials and profit due at the finish of the project and verbal change orders of $9,981. Corey was entitled to credits for the $100,000 he paid Kalbaugh and as well as the $10,000 he incurred to repair the punch list items and the $12,856 Kalbaugh identified as credits due to Corey. Kalbaugh's net damages caused by Corey's breach, the trial court concluded, amounted to $20,678.15. Because those findings support the trial court's judgment, we must affirm.
II
License
Corey urges us to reverse the judgment because, applying the logic of Wright v. Issak (2007) 149 Cal.App.4th 1116 (Wright), Kalbaugh was unlicensed as a matter of law, despite the trial court's factual findings he was licensed, he carried workers' compensation insurance, and he had only paid a small percentage of his payroll in cash. The limited scope of appellate review of a judgment roll appeal precludes an examination of the sufficiency of the evidence to support the trial court's factual findings and the egregious facts presented in Wright render the case distinguishable and more recent, more analogous authority dispositive.
Business and Professions Code section 7125.2 states in relevant part, "The failure of a licensee to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law in accordance with the provisions of this section." Corey's automatic suspension of Kalbaugh's license argument is based solely on Kalbaugh's alleged underreporting of the income of three employees on his payroll during the repair of the auto shop.
As we described above, the trial court found that Kalbaugh carried his burden of proving he was licensed and carried workers' compensation insurance for his employees during his tenure as a licensed contractor. The court rejected Corey's evidence that Kalbaugh had paid all of his employees in cash and concluded that, while he possibly had underreported a small percentage of his payroll, Corey's evidence was insufficient to shift the burden of proof to Kalbaugh. "Since this appeal was taken on the clerk's transcript alone, we are not concerned with evidence taken in the trial court; we presume that such evidence was sufficient to support the findings of fact." (Garson v. Juarique (1979) 99 Cal.App.3d 769, 771; Estate of Grimble (1974) 42 Cal.App.3d 741, 744-745.)
Nor is Corey correct on the law. The linchpin of his argument is Wright, supra, 149 Cal.App.4th 1116, a case in which the contractor reported a payroll of just $312 to the State Compensation Insurance Fund (SCIF) while having an actual payroll of $135,000. (Id. at p. 1119.) Indeed, the SCIF's records showed the contractor reported zero or next to zero payroll for every payroll period between his initial application in May of 2002 until the end of 2004. (Ibid.) The Court of Appeal was clear: "Plaintiff's underreporting was not inadvertent. It was his pattern and practice from the first moment he applied for workers' compensation insurance." (Id. at p. 1119.) Interestingly, the trial court in Wright found the contractor was not licensed because his license had been automatically suspended by operation of Business and Professions Code section 7125.2 for failure to obtain and maintain workers' compensation insurance. (Wright, at p. 1119.) The contractor, like Corey, brought a judgment roll appeal and the court of appeal affirmed the trial court ruling. (Id. at p. 1124.) Although he too brings a judgment roll appeal, Corey urges us to reverse the trial court, which in this case, unlike in Wright, found the contractor duly licensed and insured.
Wright, supra, 149 Cal.App.4th 1116, stands quite alone in its application of an automatic suspension for underreporting but given the egregious facts and the trial court's factual findings on the judgment roll appeal, the outcome is understandable. In Loranger v. Jones (2010) 184 Cal.App.4th 847, 857 (Loranger), on facts far closer to the facts before us, we distinguished Wright and rejected the notion that any underreporting triggered an automatic suspension of a contractor's license. Loranger, the contractor, paid his 13-year-old son and his son's friend to help on a small project. Neither boy had a work permit and Loranger failed to report their earnings, which was less than $400. Loranger also hired a subcontractor who, unbeknownst to him, was unlicensed. (Loranger, at p. 851.) The homeowners refused to pay for extras and, citing Wright, claimed they were entitled to a complete refund because the contractor's license had been suspended as a matter of law. (Loranger, at pp. 851-852.) We rejected the Wright analogy.
We explained: "In Wright, supra, 149 Cal.App.4th at page 1119, the limited facts before the court strongly suggest the contractor there did not have and never had a policy of workers' compensation insurance, that he intentionally underreported the wages he was paying (reporting zero or next to zero payroll), and that he did so to be excluded from the requirement of obtaining such insurance. (See [Bus. & Prof. Code,] § 7125, subd. (b); Lab. Code, § 3352, subd. (h); see generally Heiman v. Workers' Comp. Appeals Bd. (2007) 149 Cal.App.4th 724, 734-735; Cedillo v. Workers' Comp. Appeals Bd. (2003) 106 Cal.App.4th 227, 235-236.) It is in this factual context that we understand the language of the opinion that 'underreporting payroll is, by definition, a failure-to-obtain case . . . .' (Wright, supra, at p. 1122.) The facts before the court in Wright are not the facts of the case before us.
"Further, to the extent Wright can be read more broadly, we state our disagreement with the application of its reasoning to conclude that 'any' underreporting of payroll is a failure to 'obtain' workers' compensation insurance even though the contractor has in effect a policy of workers' compensation insurance covering his/her employees. [Fn omitted.] Other than the implication in Wright, supra, 149 Cal.App.4th at page 1122 and footnote 2, we neither have been cited to nor have we found any authority for the proposition that a worker found to be an employee of a contractor (by virtue of Lab. Code, § 2750.5 or otherwise) will not be covered by the contractor's existing workers' compensation insurance policy if there is any discrepancy in the contractor's reporting of payroll. In the absence of any legal authority or evidence supporting such a conclusion, we will not reach it." (Loranger, supra, 184 Cal.App.4th at pp. 857-858.)
The facts in Loranger are far more similar to the facts before us than those presented in Wright. Loranger, like Kalbaugh, specifically testified he had a policy of workers' compensation coverage in effect for his construction employees during the period of construction of the Joneses' home. Like the trial court below, the Court of Appeal in Loranger held that this evidence was sufficient to meet Loranger's burden of proof to show his license was not suspended for failing to obtain workers' compensation insurance coverage pursuant to Business and Professions Code section 7125.2. (Loranger, supra, 184 Cal.App.4th at p. 858.)
The court in Castillo v. Toll Bros., Inc. (2011) 197 Cal.App.4th 1172 came to the same conclusion. The plaintiffs argued the contractor should be treated as unlicensed because the contractor misreported the nature of the payroll to reduce the workers' compensation payments. (Id. at p. 1211.) The trial court found the contractor had maintained workers' compensation insurance throughout the project. (Ibid.) The Court of Appeal, echoing Loranger, found: "While we recognize language in Wright v. Issak can be construed as supporting their argument for revocation as a result of misreporting, Wright makes clear that its contractor defendant reported 'zero or next to zero' payroll and therefore had no insurance. (Wright v. Issak, supra, 149 Cal.App.4th at p. 1119.) For purposes of Business and Professions Code section 7125.2, the type of misreporting of wage classifications alleged by plaintiffs is not comparable to a complete failure to obtain or maintain insurance. (See Loranger v. Jones (2010) 184 Cal.App.4th 847, 857.)" (Castillo v. Toll Bros., Inc., supra, 197 Cal.App.4th at p. 1211.)
Here too the trial court found that in Kalbaugh's 25 years as a licensed contractor there is no evidence he had failed to obtain or maintain his workers' compensation insurance. On a judgment roll appeal, we cannot scrutinize those findings but we can say, as a matter of law, that the facts are not analogous to those presented in Wright where an abject failure to abide by the law led the court to conclude that the contractor's license had been suspended as a matter of law.
Moreover, Corey's reliance on our opinion in Buzgheia v. Leasco Sierra Grove (1997) 60 Cal.App.4th 374 is misplaced. Buzgheia did not involve either a judgment roll appeal or Business and Professions Code section 7125.2. To the contrary, Buzgheia involved a jury trial and the issue on appeal was instructional error on the burden of proof. We concluded the jury should not have been instructed the owner bore the burden of proving the contractor's license had been suspended once the contractor's evidence had been controverted. (Buzgheia, at p. 393.) Here the trial court's factual findings are impervious to challenge and there was no jury to be misled. Nothing in Buzgheia undermines the trial court's findings on this judgment roll appeal.
III
Fraud
The trial court, weighing the evidence before it, found that Kalbaugh had not defrauded Corey by increasing the amount of his costs over the subcontractor bids he had received before he sent his estimate to the insurer. The court explained: "Kalbaugh testified that when he sent the letter estimating his costs to Allied he had to guess on some of the items based upon his experience not on actual bids from his subs. He also testified that he never represented to anyone that he guaranteed the amounts in the letter or the contract were going to be actual costs. Human experience would tell any reasonable person that you can't know actual construction costs on a job of this kind until the work is finished. [¶] . . . The estimates submitted were presented to obtain money from Allied Insurance to reimburse Corey for expenses Corey expected to ultimately pay. Corey got more money from Allied based on Kalbaugh's estimated costs, not less. The subcontractors gave Kalbaugh estimates in the form of bids. Allied paid Corey based upon the estimate it received from Kalbaugh. If the repairs had restored the building to its pre-fire condition and nothing more, Corey was obligated to pay the contract price to Kalbaugh. If the actual costs to Kalbaugh had exceeded the contract price, he would have suffered those losses since this was presented as a fixed bid contract."
Corey rejects the trial court's findings for two principal reasons: (1) Kalbaugh had received the subcontractor's bids before he submitted his letter to the insurer, and therefore, the bids were not estimates but support for his fixed bid contract, and (2) he was in fact damaged by Kalbaugh's misrepresentation of his costs because the reimbursement he received from his insurer was subject to reduction for depreciation and Kalbaugh's inflation of costs caused him additional damages. Corey's arguments are nothing more than a challenge to the trial court's factual finding that he had not been defrauded. We, therefore, are impotent to review the sufficiency of the trial court's factual finding on this judgment roll appeal.
DISPOSITION
The judgment is affirmed.
RAYE, P. J. We concur: BLEASE, J. MURRAY, J.