Opinion
NO. CIV. S-05-583 LKK/GGH.
June 15, 2007
ORDER
On March 24, 2005, Fru-Con Construction Corporation ("Fru-Con"), a foreign corporation, filed this federal action against the Sacramento Municipal Utility District ("SMUD"), the owner of the Consumnes Power Plant ("CPP"). The complaint alleged several causes of action related to breach of contract. SMUD subsequently filed a counterclaim against Fru-Con.
Pending before the court are three motions for partial summary judgment filed by Fru-Con. The first pertains to the counterclaims for wrongful termination, the second pertains to SMUD's claim against Fru-Con for money paid to Dick Corporation and the third pertains to SMUD's claim against Fru-Con under the California False Claims Act. For the reasons discussed herein, the motions regarding wrongful termination and the money paid to the Dick Corporation are denied and the motion regarding the California False Claims Act is granted.
I. FACTS
Undisputed unless otherwise noted.
A. Facts Related to Fru-Con's Motion for Partial Summary Judgment Regarding Wrongful Termination
1. The Contract
Sacramento Municipal Utility District ("SMUD") entered into a contract with Fru-Con Construction Corporation ("Fru-Con") under which Fru-Con was to construct the Cosumnes Power Plant ("CPP") located in Herald, California for a contract price of $106,843,527.00. Fru-Con's Statement of Undisputed Facts ("Fru-Con SUF") ¶ 1. The contract required substantial completion on May 3, 2005. Fru-Con SUF ¶ 3.
There are several contract terms that are relevant to the pending motions. First, General Condition 36 of the contract provided that SMUD may terminate the contract on the following basis:
If the Contractor refuses or fails to prosecute the work, or any separable part thereof with such diligence as will insure its completion within the time specified in this Contract, or any extension thereof, or fails to complete said work within such time, the Contracting Officer may, by written notice to the Contractor, terminate Contractor's right to proceed with the work or such part of the work to which there has been a delay.
Fru-Con SUF ¶ 5.
Second, the contract provided for certain specified "intermediate milestones." Special Condition 10 and Appendix G set forth these milestones, which were essentially deadlines for the completion of specified stages of the construction. To the extent that Fru-Con failed to meet these milestones, SMUD was entitled to a predetermined amount of liquidated damages. See Contract, SC-10, Ex. 32, Decl. of Robert C. Nelson ("Nelson Decl.").
Finally, General Condition 29 provided that the "contract may be changed only by duly executed Change Orders issued by the District." Contract, GC-29, Ex. 32, Nelson Decl.
2. The Delay
It is undisputed that over time, Fru-Con fell behind schedule. SMUD's May 2004 internal monthly progress report reflects that it believed Fru-Con to be three months behind schedule. See SMUD Report, Ex. F, Decl. of Robert Moore ("Moore Decl.").
On October 7, 2004 Fru-Con presented to SMUD a power-point presentation that described the extent of the construction delays. Fru-Con estimated that the project was five to seven months behind schedule. Fru-Con's Oct. 7, 2004 Presentation to SMUD, Ex. J, Moore Decl. Fru-Con stated that there were two ways of addressing the delay: (1) SMUD could accept the delay, or (2) SMUD could direct Fru-Con to accelerate. Fru-Con explained that the acceleration option could cost SMUD approximately $26 million.Id.
Internal SMUD documents revealed that soon after October 7, 2004, SMUD began considering alternative ways of proceeding with the construction and one such option included terminating Fru-Con. See Fru-Con SUF ¶¶ 25-28. SMUD wrote to Fru-Con expressing deep concern with the construction delay. In a October 14, 2004 letter, SMUD wrote: "SMUD believes there is a complete disconnect between Fru-Con's project schedule and actual progress . . . Your schedule remains deficient when compared to contract requirements. . . ." Oct. 14, 2004 Letter from SMUD to Fru-Con, Ex. 38, Nelson Decl.
Meanwhile, Fru-Con's October 2004 monthly schedule update (submitted after the October 7, 2004 presentation) projected a new substantial completion date: October 3, 2005. Fru-Con SUF ¶ 33. Then, in Fru-Con's November 2004 monthly schedule update, Fru-Con changed the substantial completion date to August 10, 2005. Fru-Con SUF ¶ 37.
In a November 14, 2004 e-mail from SMUD to Fru-Con, SMUD made the following request: "Fru-Con to provide key benchmarks/assumptions and exclusions (if any) to accomplish Aug. 10th completion date." Fru-Con SUF ¶ 50. In a November 16, 2004 letter, SMUD's Project Director stated that "it appears that Fru-Con is not working efficiently and in a manner which will allow you to achieve your revised to-go (forecast) progress numbers and completion on August 10, 2005 as stated in the November 12, 2004 schedule revision." Fru-Con SUF ¶ 51.
SMUD's concerns with the delay were evident. Beginning in December 2004 and continuing through February 2005, SMUD issued eight notices to Fru-Con, alleging that Fru Con failed to meet certain intermediate milestones set forth in the contract and accordingly, that SMUD would be entitled to certain liquidated damages. Notices, Ex. 37, Nelson Decl. Similarly, on December 22, 2004 Jim Shetler of SMUD wrote to Fru-Con CEO Matti Jaekel expressing concern about the delay: "As we approach 2005, SMUD believes that there will be several major milestone dates that Fru-Con will not meet, which in turn will initiate liquidated damages." E-mail from Shetler to Jaekel, Dec. 22, 2004, Ex. 23, Decl. of Brian Becker ("Becker Decl."). This email also conveyed SMUD's concern about Fru-Con laying off 100 craft workers. Id. It is undisputed that during this time, Fru-Con continued to work on the project, albeit on delayed schedule. Fru-Con SUF ¶ 76.
Beginning in January, the parties began "global settlement" discussions about how to resolve the delay in the construction and other related problems. See E-mail from Shetler to Jaekel, Jan. 7, 2005, Ex. JJ, Moore Decl. On January 18, 2005, SMUD's Board of Directors passed a resolution that should negotiations with Fru-Con fail, the General Manager could terminate the contract. See Board Resolution 5-01-01 CS, Ex. LL, Moore Decl. On January 25, Fru-Con submitted a term sheet, proposing, among other things: (1) an increase in the contract price of $16.5 million; and (2) a time extension of the substantial completion date to August 10, 2005. SMUD submitted a counter proposal that included the August 10, 2005 completion date and $7.1 million in additional compensation (instead of $16.5 million). Fru-Con SUF ¶¶ 71-73.
SMUD objects to any evidence of the global settlement discussions on the grounds that this evidence is inadmissable under Federal Rule of Evidence 408. As will be discussed, the court need not rely on this evidence in resolving the pending motion. The discussion of the on-going negotiations is included here merely for background purposes.
Fru-Con asserts that SMUD accepted Fru-Con's proposal but the evidence does not support this assertion. Rather, the evidence cited to by Fru-Con demonstrates that Fru-Con and SMUD were attempting to negotiate a price. SMUD's counter proposal was just that — SMUD agreed to the completion date but only if the additional compensation was $7.1 million, not the $16.5 million requested by Fru-Con. There is nothing in the evidence cited to by Fru-Con that establishes that SMUD accepted Fru-Con's proposal. See Exs. NN and OO, Moore Decl.
3. SMUD's Termination of the Contract
On February 11, 2005, SMUD terminated Fru-Con for default. The letter of termination stated:
Fru-Con has refused or failed to prosecute the work (construction of the CPP) . . . with such diligence as will insure its completion within the time specified in the contract. Therefore, SMUD is exercising its right under General Condition 36 of the Contract to take over the work and prosecute the same to completion. . . .
Letter of Termination, Ex. D, Moore Decl. The letter listed twelve grounds for termination. Of those, eight reasons pertained to Fru-Con's failure to meet the milestones set forth in Appendix G of the contract and referenced in the notice letters sent from SMUD to Fru-Con. Two of the reasons pertained to the project completion date:
By its own admission, as evidenced by Fru-Con's schedule dated November 10, 2004 which was presented to SMUD on November 12, 2004, Fru-Con has conceded that the Project will not be completed within the time specified in the Contract, and anticipates project completion to be delayed by at least three months.
Because of Fru-Con's consistently poor workmanship, as evidenced by its excessive pipe weld rejection rate of nearly 15 percent (which is several times higher than industry standards), and Fru-Con's decision to lay off approximately 100 pipefitters during the height of the pipe assembly process this winter, it is no longer possible for Fru-Con to meet the Project Substantial Completion Milestone.
Letter of Termination, Ex. D, Moore Decl.
B. Facts Relevant to Fru-Con's Motion for Partial Summary Judgment Regarding SMUD's Claim for Monies Paid to Dick Corporation
After SMUD terminated the contract with Fru-Con, SMUD entered into a separate contract with Dick Corporation ("Dick Corp.") for construction services for the CPP. Fru-Con SUF ¶ 237. In this lawsuit, SMUD seeks to recover $9,534,976.00 from Fru-Con for monies SMUD paid to Dick Corp. Fru-Con SUF ¶ 239. In its motion, Fru-Con contends that this payment to Dick Corp. was improper as the contractors who performed the work at the CPP were unlicenced.
It is undisputed that Dick Corp. entered into a contract with SMUD for construction services for the CPP on June 9, 2004. SMUD's Response to Fru-Con's Statement of Undisputed Facts ("SMUD RSUF") ¶ 447. Dick Corp. possessed a valid California contractors license at all times it provided services with respect to the CPP. SMUD RSUF ¶ 449. Work performed under the contract was done pursuant to task orders which set forth an agreed upon scope of work and total compensation for that work. SMUD RSUF ¶ 450. Task orders were issued from SMUD directly to Dick Corp. SMUD RSUF ¶ 451. Dick Corp. was responsible for completing the work agreed upon in the task orders and was responsible for any problems that occurred in performing those services. SMUD RSUF ¶ 453. Dick Corp. was required to and did post a bond in connection with its work on the Project. SMUD RSUF ¶ 456. All invoices for work performed pursuant to Dick Corp.'s contract with SMUD were sent from Dick Corp. to SMUD. SMUD RSUF ¶ 457. SMUD paid Dick Corp. directly for those invoiced services. SMUD RSUF ¶ 458.
It is also undisputed that Dick Corp. is related to a company known as Dick Environmental Services, LLC ("DES"). DES is not licensed in the state of California. The extent of DES' relationship to Dick Corp. is not completely clear. Ron Terry, the Project Manager for the CPP project explained in his declaration:
I am a Project Manager employed by DES, a related company to Dick Corp. Since DES and Dick Corp are related companies, Dick Corp. occasionally utilized my services for Dick Corp. projects. Indeed, Dick Corp. utilized my services as project supervisor on the Consumnes Power Plane construction project.
Decl. of Ronald Terry ("Terry Decl.").
SMUD avers that the majority of the work performed at the CPP was done by DES and not by Dick Corp. However, the facts are not clear. When asked what entity performed services on the Project, Mr. Terry testified in his deposition: "Dick Corporation . . . Can I clarify? . . . On this particular project, I worked for Dick Environmental Services, LLC, in Jacksonville; but when we bid this job, we bid it as Dick Corporation. So it was Dick Environmental Services acting as Dick Corporation, just for the record." Fru-Con SUF ¶ 242.
C. Procedural History
Fru-Con brought suit against SMUD on March 24, 2005. The complaint alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of the implied warranty, professional negligence, and breach of the California Prompt Payment Act. On April 18, 2005 SMUD filed an answer and counterclaim against Fru-Con. SMUD's counterclaim alleged causes of action for declaratory relief, breach of contract, violation of the California False Claims Act, negligence and equitable indemnity.
The court notes that SMUD filed suit against Fru-Con in state court as well. Fru-Con sought removal to this court based on a claim of fraudulent joinder, but the case was remanded on May 31, 2005. Soon thereafter, SMUD filed a motion to stay in favor of the state court action pursuant to Colo. River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). The court denied SMUD's motion on August 11, 2005.
II. STANDARD FOR SUMMARY JUDGMENT
Summary judgment is appropriate when it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); see also Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970); Sicor Ltd. v. Cetus Corp., 51 F.3d 848, 853 (9th Cir. 1995).
Under summary judgment practice, the moving party [A]lways bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "[W]here the nonmoving party will bear the burden of proof at trial on a dispositive issue, a summary judgment motion may properly be made in reliance solely on the `pleadings, depositions, answers to interrogatories, and admissions on file.'" Id. Indeed, summary judgment should be entered, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. See id. at 322. "[A] complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Id. In such a circumstance, summary judgment should be granted, "so long as whatever is before the district court demonstrates that the standard for entry of summary judgment, as set forth in Rule 56(c), is satisfied." Id. at 323.
If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist.Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see also First Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968); Sicor Ltd., 51 F.3d at 853.
In attempting to establish the existence of this factual dispute, the opposing party may not rely upon the denials of its pleadings, but is required to tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. Fed.R.Civ.P. 56(e); Matsushita, 475 U.S. at 586 n. 11; see also First Nat'l Bank, 391 U.S. at 289; Rand v. Rowland, 154 F.3d 952, 954 (9th Cir. 1998). The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Owens v. Local No. 169, Ass'n of Western Pulp and Paper Workers, 971 F.2d 347, 355 (9th Cir. 1992) (quoting T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987)), and that the dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the nonmoving party,Anderson, 477 U.S. 248-49; see also Cline v. Indus. Maint. Eng'g Contracting Co., 200 F.3d 1223, 1228 (9th Cir. 2000). In the endeavor to establish the existence of a factual dispute, the opposing party need not establish a material issue of fact conclusively in its favor. It is sufficient that "the claimed factual dispute be shown to require a jury or judge to resolve the parties' differing versions of the truth at trial." First Nat'l Bank, 391 U.S. at 290; see also T.W. Elec. Serv., 809 F.2d at 631. Thus, the "purpose of summary judgment is to `pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.'" Matsushita, 475 U.S. at 587 (quoting Fed.R.Civ.P. 56(e) advisory committee's note on 1963 amendments); see also Int'l Union of Bricklayers Allied Craftsman Local Union No. 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1405 (9th Cir. 1985).
In resolving the summary judgment motion, the court examines the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any. Rule 56(c); see also In re Citric Acid Litig., 191 F.3d 1090, 1093 (9th Cir. 1999). The evidence of the opposing party is to be believed, see Anderson, 477 U.S. at 255, and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party, see Matsushita, 475 U.S. at 587 (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam)). Nevertheless, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. See Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987).
Finally, to demonstrate a genuine issue, the opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'"Matsushita, 475 U.S. at 586-87 (citation omitted).
III. Analysis
Pending before the court are three motions for partial summary judgment filed by Fru-Con. For the reasons explained herein, the motions regarding wrongful termination and monies paid to the Dick Corp. are denied, and the motion on SMUD's claim pursuant to the California False Claims Act is granted. Each motion is addressed in turn.
A. Fru-Con's Motion for Partial Summary Judgment On The Issue of Wrongful Termination
Fru-Con seeks partial summary judgment on Counts I (Breach of Contract) and II (Breach of the Implied Covenant of Good Faith and Fair Dealing) of its complaint, and on Count I (Declaratory Relief on the Propriety of the Default Termination) of SMUD's Amended Counterclaim.
Fru-Con makes three general arguments. First, Fru-Con argues that SMUD failed to provide Fru-Con with an opportunity to cure the delays and failed to complete a scheduling analysis prior to termination. Second, Fru-Con argues that SMUD waived its objections to Fru-Con's schedule. And third, Fru-Con asserts that SMUD's termination based on Fru-Con's failure to meet certain deadlines and alleged failure to remove defective concrete was improper and wrongful.
Fru-Con fails to discuss its claim for breach of the implied covenant of good faith and fair dealing. The court assumes, but does not know, that this claim is premised solely on Fru-Con's allegation that SMUD wrongfully terminated the contract.
1. Opportunity to Cure Scheduling Analysis
Fru-Con's primary argument is that SMUD's termination of the contract was improper because SMUD failed to provide Fru-Con with an opportunity to cure the delays and failed to conduct a "proper schedule analysis" prior to termination. Fru-Con's argument must fail since the contract plainly does not require that SMUD take either of these actions.
a. The Wording of the Contract
In California, "[t]he fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. If contractual language is clear and explicit, it governs." Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1264 (1992).
Here, the contract language is clear and explicit. General Condition 36 of the contract provides that SMUD may terminate the contract on the following basis:
If the Contractor refuses or fails to prosecute the work, or any separable part thereof with such diligence as will insure its completion within the time specified in this Contract, or any extension thereof, or fails to complete said work within such time, the Contracting Officer may, by written notice to the Contractor, terminate Contractor's right to proceed with the work or such part of the work to which there has been a delay.
Fru-Con SUF ¶ 5. Pursuant to this provision, SMUD issued a notice of termination. Fru-Con SUF ¶ 4. As discussed in the facts section of this order, the notice set forth twelve grounds for termination, the majority of which related to Fru-Con's construction delay. Fru-Con fails to cite to any provision of the contract which supports its position that SMUD should have provided Fru-Con with an opportunity to cure and conducted a scheduling analysis. Instead, Fru-Con suggests that the court look to non-binding federal law construing United States government contracts. Fru-Con argues that the language of General Condition 36 mirrors the default language in the Federal Acquisition Regulation ("FAR") provision that applies to United States government contracts. See Fru-Con Mot. for Partial Summ. J. at 10.
Fru-Con's suggestion that the court look to federal law is unpersuasive. There is simply no indication that the contract at issue here was intended to mirror or reflect the FAR provision. SMUD is a municipal entity created under the Municipal Utility District Act, California Public Utilities Code section 11501, et seq. Case law governing contracts entered into with the federal government is therefore inapplicable. This case involves a classic contracts dispute and therefore, under Erie, the court looks to California contract law.
Under California law, a court is "bound to give effect to the plain and ordinary meaning of the language used by the parties."Coast Plaza Doctors Hosp. v. Blue Cross of Cal., 83 Cal. App. 4th 677, 684 (2000). Thus, where "contract language is clear and explicit and does not lead to absurd results, we ascertain intent from the written terms and go no further." Shaw v. Regents of Univ. of Cal., 58 Cal. App. 4th 44, 53 (1997). Moreover, in the absence of substantial parol evidence tending to solve an ambiguity, the terms of a contract will not be extended by implication. Apra v. Aureguy, 55 Cal. 2d 827 (1961).
In the case at bar, General Condition 36 clearly sets forth the specific grounds on which SMUD may terminate the contract and there is no evidence to suggest that the terms of the contract should be extended by implication. Indeed, in California, a "contract may contain a valid provision giving one or the other party an option to terminate it on specified conditions." Call v. Alcan Pac. Co., 251 Cal. App. 2d 442, 447 (1967); see also R.J. Cardinal Co. v. Ritchie, 218 Cal. App. 2d 124, 143 (1963) ("contract may contain a valid provision giving one or either of the parties thereto an option to terminate it within a certain time or on specified conditions.") As one California court explained:
[A] contract which provides that it may be terminated on specified notice cannot reasonably be interpreted to require good cause as well as notice for termination, unless extrinsic evidence establishes that the parties used the words in some special sense.Bionghi v. Metro. Water Dist. of S. Cal., 70 Cal. App. 4th 1358, 1369 (1999). Here, the wording of General Condition 36 clearly sets forth the grounds for termination. Neither party cites to extrinsic evidence which would suggest that the provisions of General Condition 36 be extended by implication to include additional requirements.
b. The Delay Giving Rise to Termination
It is undisputed that Fru-Con was behind schedule. It is also undisputed that the contract set forth specific time frames for the completion of certain "milestones" as well as a deadline for the completion of the project. See Contract, Special Condition 10 ("SC-10") and Appendix G, Ex. 32, Nelson Decl. The contract also provided that changes to the terms of the contract would be by change orders. Contract, GC-29, Ex. 32, Nelson Decl. There were no finalized change orders that reset the deadlines in the contract. Instead, in the fall of 2004 and into 2005, SMUD and Fru-Con engaged in extensive discussions about how to address the delay.
Fru-Con cites to various construction law treatises for the principle that prior to terminating a contractor for default, an owner "must be extremely careful when making a determination to terminate a contractor for cause. Records must be carefully documented to demonstrate . . . that the owner has given the contractor an opportunity to cure the breach [and] that the contractor has failed to do so. . . ." Gibbs Hunt, California Construction Law § 6:04 (16th ed. 2007). Not only is this treatise not binding, but it is undisputed that Fru-Con had constructive notice that SMUD might terminate the contract.
In a November 16, 2004 letter, SMUD's Project Director stated that "it appears that Fru-Con is not working efficiently and in a manner which will allow you to achieve your revised to-go (forecast) progress numbers and completion on August 10, 2005 as stated in the November 12, 2004 schedule revision." Fru-Con SUF ¶ 51. Moreover, beginning in December 2004 and continuing through February 2005, SMUD issued eight notices to Fru-Con, alleging that Fru-Con failed to meet certain intermediate milestones set forth in the contract and accordingly, that SMUD would be entitled to certain liquidated damages. Notices, Ex. 37, Nelson Decl. Similarly, on December 22, 2004 Jim Shetler of SMUD wrote to Fru-Con CEO Matti Jaekel expressing concern about the delay: "As we approach 2005, SMUD believes that there will be several major milestone dates that Fru-Con will not meet, which in turn will initiate liquidated damages." E-mail from Shetler to Jaekel, Dec. 22, 2004, Ex. 23, Becker Decl. In short, even though there was no notice requirement in the contract, Fru-Con was effectively on notice that contract termination was a real possibility.
In support of its position, Fru-Con also relies on the California Contract Code, section 10253. However, this section of the Contract Code does not apply to SMUD. Section 10253 falls under Part 2 of the Public Contracts Code and applies to state agencies only. Municipal Utility Districts are covered in Part 3 of the Code that addresses contracting by local agencies. There is no matching notice of default and opportunity to cure requirement in the section covering SMUD.
This section provides:
[If] a contractor has failed to supply an adequate working force, or material of proper quality, or has failed to comply with Section 10262, or has failed in any other respect to prosecute the work with the diligence and force specified by the contract, the [public owner] may: . . . (b) If he considers that the failure is sufficient ground for such action, he may give written notice of at least five days to the contractor and the contractor's sureties, that if the defaults are not remedied the contractor's control over the work will be terminated.
Cal. Pub. Cont. Code § 10253 (West 2004).
In sum, the contract is clear. General Condition 36 provided that SMUD could terminate the contract if Fru-Con failed to perform the work in a manner that would insure completion within the time specified in the contract. It is undisputed that Fru-Con fell behind schedule and, without obtaining any change orders, adjusted the completion date of the contract. Therefore, on February 11, 2005, SMUD terminated the contract according to the terms of General Condition 36. There is nothing in the contract, nor any requirement under California law, that obligated SMUD provide Fru-Con with an opportunity to cure or to perform a "schedule analysis" prior to termination.
2. Waiver
Fru-Con also argues that SMUD waived its right to terminate the contract. As part of this argument, Fru-Con avers that SMUD was aware of the delay and, through its actions, accepted the delay.See Fru-Con Mot. for Partial Summ. J. at 22, 37. This argument fails based on both the law and the facts.
a. Applicable Law
It is "well settled that a contracting party may waive provisions placed in a contract solely for his benefit." Wesley N. Taylor Co. v. Russell, 194 Cal. App. 2d 816, 828 (1961). In California, the question of waiver is a question of fact and not law, "hence the intention to commit a waiver must be clearly expressed." Moss v. Minor Props., Inc., 262 Cal. App. 2d 847, 857 (1968). Waiver may be established as a matter of law "only when it is proved by the express declaration of the party charged with waiver, or by undisputed words or conduct so inconsistent with a purpose to stand upon the contractual right allegedly waived as to leave no possibility of any reasonable inference to the contrary." Lord, Williston on Contracts § 39:21 (2007).
b. Whether SMUD Waived Its Right to Terminate the Contract
Relying on non-binding case law, Fru-Con argues that a waiver of the right to terminate occurs when the owner allows "a delinquent contractor to continue [substantial] performance past a due date." DeVito v. United States, 413 F.2d 1147, 1153 (Ct. Cl. 1969) (per curiam). Even if this court were bound by the cases relied on by Fru-Con, the cases are clearly distinguishable. In each of the cases cited to, the original deadline had passed and it was only after that point in time that the owner terminated the contract. See Id. But see Fla., Dep't of Ins. v. United States, 81 F.3d 1093, 1097 (Fed. Cir. 1996) (waiver doctrine was inapplicable because the Postal Service terminated the contractor before the deadline passed and did not indicate any forbearance of the contractual time requirements). Here, the contract was terminated in February 2005, three months before the original completion deadline. Accordingly, the cases cited to by Fru-Con are inapplicable.
Fru-Con also asserts that the facts undisputedly demonstrate that SMUD "accepted" the delay, thereby waiving its right to terminate. Fru-Con makes two general arguments.
First, Fru-Con argues that at its October 7, 2004 presentation to SMUD, Fru-Con stated that SMUD could either accept the delay or direct Fru-Con to accelerate. See Fru-Con SUF ¶ 17. This much is undisputed. Fru-Con goes on to argue, however, that because SMUD never directed Fru-Con to accelerate the work, SMUD, by default, accepted the delay. Fru-Con does not cite to any evidence that supports the specific factual conclusion that SMUD accepted the delay. Instead, Fru-Con appears to argue that by virtue of not terminating the contract in October of 2004, SMUD agreed to the delay.
SMUD disputes this factual conclusion and cites to numerous pieces of evidence to suggest that SMUD did not in fact accept the delay. Most obviously, from December 2004 to February 2005, SMUD sent eight letters to Fru-Con about Fru-Con's failure to meet intermediate milestone deadlines set forth in the contract. SMUD RSUF ¶ 260. Similarly, in a November 14, 2004 e-mail from SMUD to Fru-Con, SMUD made the following request: "Fru-Con to provide key benchmarks/assumptions and exclusions (if any) to accomplish Aug. 10th completion date." Fru-Con SUF ¶ 50. In a November 16, 2004 letter, SMUD's Project Director stated that "it appears that Fru-Con is not working efficiently and in a manner which will allow you to achieve your revised to-go (forecast) progress numbers and completion on August 10, 2005 as stated in the November 12, 2004 schedule revision." Fru-Con SUF ¶ 51. This evidence suggests that SMUD did not accept the delay.
Fru-Con also argues that SMUD accepted Fru-Con's proposed term sheet, which was presented to SMUD on January 25, 2005 and contained a proposed project completion date of August 10, 2005. Again, the evidence does not support Fru-Con's assertion. It is undisputed that Fru-Con submitted a term sheet proposing, among other things: (1) an increase in the Contract Price of $16.5 million; and (2) a time extension of the Substantial Completion date to August 10, 2005. It is also undisputed that SMUD submitted a counter proposal that included the August 10, 2005 completion date and $7.1 million in additional compensation (instead of $16.5 million). Fru-Con SUF ¶¶ 71-73. Fru-Con asserts that SMUD accepted Fru-Con's proposal and cites to an e-mail sent by SMUD to Fru-Con as well as Mr. Shetler's deposition. These two pieces of evidence do not reveal that SMUD accepted Fru-Con's proposal. Instead, the evidence demonstrates that Fru-Con and SMUD were attempting to negotiate a settlement to avoid litigation. SMUD RSUF ¶ 278. In short, there is nothing in the evidence cited to by Fru-Con that establishes that SMUD accepted Fru-Con's proposal. Moreover, SMUD presents evidence which directly contradicts Fru-Con's factual conclusion that SMUD accepted the proposal.
Taken together, and drawing all reasonable inferences in favor of SMUD, material factual disputes preclude partial summary judgment as to Fru-Con's assertion that SMUD waived the May 3, 2005 completion deadline.
This conclusion is in keeping with California law that views the question of waiver as a question of fact and not law, "hence the intention to commit a waiver must be clearly expressed."Moss, 262 Cal. App. 2d at 857. Here, the intention to commit waiver was not clearly expressed and factual disputes abound.
3. Defective Concrete Failure to Meet Intermediate Milestones
Fru-Con's third and final argument is that there was no material breach justifying termination. Specifically, Fru-Con argues that any failure to achieve the intermediate milestones was not a material breach. See Fru-Con's Mot. for Partial Summ. J. at 31. Similarly, Fru-Con argues that its failure to remove certain defective concrete was not a material breach. See id. at 33.
a. Failure to Achieve Intermediate Milestones
FRU-Con argues that because the contract provided for liquidated damages, the remedy for delay was liquidated damages only and delay could not be construed as a material breach justifying termination.
The contract, however, was terminated pursuant to General Condition 36 which does not contain a requirement that the breach be material. In forming the contract, the parties already bargained for what circumstances would give rise to the right to terminate. Thus, the relevant inquiry is not whether there was a material breach, but whether the conditions giving rise to a right to terminate occurred.
As previously explained, it is well established that a "contract may contain a valid provision giving one or the other party an option to terminate it on specified conditions." Call, 251 Cal. App. 2d at 447. Moreover, as SMUD points out, the very treatise cited to by Fru-Con states that:
Some construction contracts contain termination causes that allow one party to terminate the other upon the occurrence of a specifically stipulated default or failure of performance. Such contract provisions define the grounds for termination thereunder. Thus, if termination meets those specific contractual criteria, it need not otherwise satisfy the legal criteria for materiality.
Gibbs Hunt, California Construction Law § 6.04. General Condition 36 was this type of provision — it explicitly provided the grounds upon which SMUD could terminate the contract. Delay was one such ground.
Even if the court were to determine the materiality of Fru-Con's breach, it is well established that "when time is made of the essence of a contract, a failure to perform within the time specified is a material breach of the contract." Gold Mining Water Co. v. Swinerton, 23 Cal. 2d 19, 27 (1943).
b. Defective Concrete
In its February 11, 2005 default termination letter, SMUD alleged that Fru-Con "refused to remove portions of the concrete cooling tower foundation that do not comply with contract specifications." Fru-Con SUF ¶ 121. Fru-Con asserts that the allegedly defective concrete is not a viable basis for default under General Condition 36. Fru-Con also argues that the allegedly defective concrete did not constitute a material breach. These arguments are unavailing.
i. Facts Regarding the Defective Concrete
It is undisputed that the contract required Fru-Con to construct the CPP in accordance with plans and specifications prepared by SMUD's Design Engineer, UEC. SMUD RSUF ¶ 287. The UEC engineering drawings and specifications for the CPP included a cooling water tower and a related cooling water tower foundation. SMUD RSUF ¶ 288. The foundation is comprised of seven separate steel reinforced concrete slabs for holding the cooled hot water. SMUD RSUF ¶ 290. Each of the seven sections of the cooling water foundation was given a letter designation. SMUD RSUF ¶ 291. The slab at issue here is Section C.
Fru-Con poured the concrete for Section C on May 3, 2004 and prepared Non-Conformance Report ("NCR") # 72 on the same date. The NCR explained that the air entrainment was only 2.25%, when the specifications required air entrainment of 4% to 6%. SMUD RSUF ¶ 302. On June 8, 2004, Fru-Con issued another NCR, this one pertaining to the compression test cylinders. Apparently, the 12 compression test cylinders failed to reach the minimum required compressive strength. SMUD RSUF ¶¶ 304-05. In short, by Fru-Con's own reports, the concrete in Section C was defective.
Fru-Con disputes this fact yet fails to cite to any admissible evidence in support of its dispute.
Again, Fru-Con disputes this point but fails to cite to any supporting evidence.
On September 9, 2004, SMUD wrote to Fru-Con explaining that the concrete in Section C did not meet the project specifications. SMUD directed Fru-Con to "submit a plan to replace the unacceptable concrete in the cooling tower." Letter from Disney to McPherson, Ex. 12, Decl. of Kevin Alan Disney ("Disney Decl."). Additional letters to Fru-Con followed. See SMUD RSUF ¶¶ 316-21. By letter dated December 10, 2004 to Fru-Con's Project Director, Earle Hardgrave, SMUD notified Fru-Con that it was in default of the contract by failing to remove and replace Section C. SMUD RSUF ¶ 321.
Fru-Con responded by letter dated December 22, 2004:
Fru-Con will not remove Section C of the cooling tower foundation as directed by your [December 10, 2004] letter. Such directive is inconsistent with the prior course of conduct between the parties, commercially unreasonable and motivated by claims made by Fru-Con against SMUD. A declaration of default or withholding of payment as a result of such directive would be considered made in bad faith and just another indication of SMUD's abandonment of the contract.
SMUD RSUF ¶ 324. On February 2, 2005 Fru-Con wrote again, stating that removal of Section C was not required and instead recommended the application of a specific epoxy coating to the surface of Section C. SMUD RSUF ¶ 327. This proposal was reviewed and rejected by the Engineer of Record. SMUD RSUF ¶ 328. He determined that Section C needed to be removed and replaced. On February 4, 2005, SMUD sent a letter to Fru-Con stating that Fru-Con remained in default of its obligations through its failure to remove and replace the Section C concrete. SMUD RSUF ¶ 329.
ii. Contract Provision
The contract provided a mechanism by which Fru-Con could have protested SMUD's direction to replace the defective concrete. General Condition 32 provided that a contractor could dispute work orders within ten days after such demand is given. Pending resolution of the protest, the contractor "shall proceed with the work in accordance with the determination or instructions of the Engineer." Contract, GC-32, Ex. 32, Nelson Decl.
The contract also provided that "[i]f the Contractor fails to proceed at once with the replacement of rejected material or the correction of defective work . . . the District may exercise the remedies set forth under GC-36 DISTRICT'S RIGHT TO TERMINATE RIGHT TO PROCEED." Contract, GC-24, Ex. 32, Nelson Decl. As discussed previously, General Condition 36 provided that SMUD could terminate the contract under certain circumstances.
iii. Grounds for Termination
As evidenced by Fru-Con's Non-Conformance Reports, the concrete in Section C was defective. It is undisputed that on September 9, 2004, SMUD specifically informed Fru-Con that the concrete did not comply with the contract specifications and that it would need to be replaced. SMUD RSUF ¶ 315. A follow up letter was sent on September 29, 2004. Pursuant to General Condition 32, Fru-Con had ten days to protest SMUD's request, however, no protest was lodged. Instead, Fru-Con wrote a letter to SMUD on December 22, 2004 informing SMUD that it would "not remove Section C . . . as directed by your [December 10, 2004] letter." SMUD RSUF ¶ 324. This course of action failed to comply with the express provision of General Condition 32 which set forth the procedure for protest. General Condition 24 provided that if the contractor fails to proceed "at once" with the replacement of defective work, SMUD could exercise its remedy of termination pursuant to General Condition 36.
In light of these undisputed facts, the court cannot find that, as a matter of law, SMUD acted wrongfully in invoking its right to terminate the contract under General Condition 36. Similarly, the court rejects Fru-Con's argument that the defective concrete was not a material breach. For the reasons discussed in reference to the scheduling delays, there is simply no materiality requirement in either General Condition 24 or 36. The parties previously bargained for what grounds could give rise to termination. Failing to prosecute the work in a timely fashion and failing to correct or replace defective work are two such grounds.
In conclusion, it is evident that Fru-Con's motion for partial summary judgment must be denied. First, under the contract's provisions, SMUD provided Fru-Con with ample notice that it was dissatisfied and that termination was a distinct possibility. Second, both the scheduling delays and the defective concrete were valid grounds for termination under the provisions of the contract. Third, whether SMUD waived its right to terminate the contract is an issue of fact that is disputed. For these reasons, the motion must be denied.
B. Fru-Con's Motion for Partial Summary Judgment on SMUD's Claim for Monies Paid to Dick Corporation
Fru-Con seeks partial summary judgment on SMUD's claim for monies paid to Dick Corporation ("Dick Corp."). After SMUD terminated the contract with Fru-Con, SMUD entered into a contract with Dick Corp. for construction services for the CPP. Fru-Con SUF ¶ 237. In this lawsuit, SMUD seeks to recover $9,534,976.00 from Fru-Con for monies SMUD paid to Dick Corp. Fru-Con SUF ¶ 239. In its motion, Fru-Con contends that SMUD's payment to Dick Corp. was improper as the contractors who performed the work at the CPP were unlicensed.
Because the contractors were unlicensed Fru-Con argues, the contract between SMUD and Dick Corp. was void and therefore, SMUD cannot recover for money paid under an invalid contract. Fru-Con also argues that since the Dick Corp. contract was void, there is a risk of double recovery. The arguments are unavailing.
1. The Scope of Section 7031 of the California Business and Professions Code
Relying on section 7031 of the Business and Professions Code, Fru-Con argues that Dick Corp. was not entitled to compensation and therefore, SMUD cannot seek to recover from Fru-Con for money paid to Dick Corp. Even assuming that the court accepts as true Fru-Con's contention that the contractors who performed the work were unlicensed, the law does not support Fru-Con's position.
Section 7031 provides:
[N]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract. . . .
Cal. Bus. Prof. Code § 7031 (West 1995). In other words, this section prohibits suits when a person is "engaged in business or acting in the capacity of a contractor . . . without alleging and proving that he was a duly licensed contractor. . . ." Id. Fru-Con argues that since unlicensed contractors cannot sue, owners are not obligated to pay those contractors and therefore, third parties (such as Fru-Con) are not liable for damages. Nothing in the plain language of the code supports this interpretation.
In American Sheet Metal, Inc. v. EM-Kay Engineering Co., this court concluded that California case law limited the scope of section 7031 to only reach suits between the contractor and his principal. 478 F. Supp. 809, 813-14 (E.D. Cal. 1979) (Karlton, J.). Accordingly, this court held that section 7031 did not apply to a suit by an unlicensed contractor for recovery of the allegedly defective work of a subcontractor. The court reasoned that the purpose of the statute was to protect the "public" (i.e., the principal) by essentially "clos[ing] the door" of the courthouse to unlicensed contractors who attempt to bring suit.Id. at 812-14. Since the general public did not appear to be directly involved in the dispute between the contractor and the subcontractor, section 7031 did not apply. Id. (citing Davis v. Superior Court, 1 Cal. App. 3d 156 (1969)).
Other courts have similarly found that the purpose of the statute is to protect the public from incompetence and dishonesty in those who provide building and construction services. Lewis Queen v. N.M. Ball Sons, 48 Cal. 2d 141, 149-50 (1957). "Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay." Hydrotech Sys., Ltd. v. Oasis Waterpark, 52 Cal. 3d 988, 995 (1991).
Given the statute's purpose, it has been applied only to those situations in which an unlicensed contractor seeks compensation from the owner. "Regardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek `compensation' for illegal unlicensed contract work."Ranchwood Communities Ltd. P'ship v. Jim Beat Constr. Co., 49 Cal. App. 4th 1397, 1409 (1996) (citations omitted).
Fru-Con argues that under section 7031, the contract is void and thus, Fru-Con should not be liable. Fru-Con cites to no authority for the proposition that section 7031 should be read broadly so as to protect parties in Fru-Con's situation. Indeed, courts have held just the opposite: "The effect of section 7031 is not to render the contract with the unlicensed contractor void, but simply to bar the unlicensed contractor from bringing an action for compensation based on the contract." K K Servs., Inc. v. City of Irwindale, 47 Cal. App. 4th 818, 826 (1996). In the case at bar, SMUD has already paid Dick Corp. and Dick Corp. is not seeking "compensation" for unlicensed contract work. The suit before this court is between Fru-Con and SMUD. Dick Corp. is not a party to the suit. Put simply, the plain wording of section 7031 does not address the situation at issue here. Accordingly, Fru-Con cannot avail itself of the protections set forth in section 7031.
2. Whether the Contract was Void Based on Other Provisions of the California Business and Professions Code
Citing to section 7028.15 of the California Business and Professions Code, Fru-Con argues that the contract between Dick Corp. and SMUD was void and therefore, SMUD cannot recover any payments it made to Dick Corp. This argument is also unavailing.
Section 7028.15 provides in pertinent part:
Unless one of the foregoing exceptions applies, a bid submitted to a public agency by a contractor who is not licensed in accordance with this chapter shall be considered nonresponsive and shall be rejected by the public agency . . . Any contract awarded to, or any purchase order issued to, a contractor who is not licensed pursuant to this chapter is void.
Cal. Bus. Prof. Code § 7028.15 (emphasis added). Moreover, subsection (b) of section 7031 provides: "[A] person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract."
The court notes that this provision is not completely consistent with case law interpreting section 7031, as courts have routinely held that "[t]he effect of section 7031 is not to render the contract with the unlicensed contractor void, but simply to bar the unlicensed contractor from bringing an action for compensation based on the contract." K K Servs., Inc., 47 Cal. App. 4th at 826. This ambiguity in the law, however, does not preclude the court from adjudicating the pending motion.
Subsection 7031(b) was added by amendment to the Business and Professions Code in 2001. See Deering's California Codes Annotated, Cal. Bus. Prof. Code § 7031 (Deering 2006). It applies to all contracts entered into after the effective date of the amendment, January 1, 2002. Lee William Dev. Corp. v. Chalker, No. G033804, 2005 WL 1100646 (Cal.Ct.App. May 9, 2005).
Fru-Con cannot seek protection under this statute. As previously discussed, the licensing statute's purpose is to protect the public from unlicensed contractors. Here, Dick Corp. is not a party in the pending case and Fru-Con fails to cite to any legal basis for how Fru-Con, a third-party, can take advantage of the licensing laws.
Moreover, even if the licensing laws could be construed so that Fru-Con could take advantage of them, factual disputes preclude summary judgment. Although under § 7028.15 a contract with an unlicenced contractor is considered void, the undisputed facts do not establish that SMUD entered into a contract with an unlicensed contractor.
Fru-Con argues that although Dick Corp.'s name is on the contract, the work was actually performed by DES, an unlicenced contractor. In essence, Fru-Con argues that DES was using Dick Corp. as a corporate front.
Under the California Business and Professions Code, a "contractor" is defined as:
any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building. . . . "Contractor" includes subcontractor and specialty contractor.
Cal. Bus. Prof. Code § 7026. Fru-Con argues that the majority of people who worked on the CPP contract were actually unlicensed DES employees, not employees of Dick Corp. See Fru-Con SUF ¶¶ 242-43, 247-48, 251. Without more, however, these facts do not support a finding that the contract between Dick Corp and SMUD was void.
SMUD submits evidence which suggests that Dick Corp. was not a corporate front. For example, task orders for work were issued from SMUD to Dick Corp. SMUD RSUF ¶ 451. Dick Corp. was responsible for completing the work agreed upon in the task orders and was responsible for any problems that occurred or might have occurred in performing those services. SMUD RSUF ¶ 453. Dick Corp. was required to and did post a bond in connection with its work on the Project. SMUD RSUF ¶ 456. All invoices for work performed pursuant to Dick Corp.'s contract with SMUD were sent from Dick Corp. to SMUD. SMUD RSUF ¶ 457. Finally, SMUD paid Dick Corp. directly for those invoiced services. SMUD RSUF ¶ 458.
Ron Terry, the Project Manager for the CPP project, explained in his declaration:
I am a Project Manager employed by DES, a related company to Dick Corp. Since DES and Dick Corp are related companies, Dick Corp. occasionally utilized my services for Dick Corp. projects. Indeed, Dick Corp. utilized my services as project supervisor on the Consumnes Power Plane construction project.
Terry Decl.
In sum, the relationship between DES and Dick Corp. as far as the CPP project is concerned, is far from clear. What is clear is that SMUD entered into a contract with a licensed contractor, Dick Corp. It is also evident that Dick Corp. played a significant role in the CPP project and assumed responsibility for the completion of the work. In drawing all reasonable inferences in SMUD's favor, the court cannot conclude, that, as a matter of fact, SMUD entered into a contract with an unlicensed contractor and that therefore the contract is void.
For these reasons, Fru-Con's motion for partial summary judgment with respect to SMUD's claim for monies paid to Dick Corporation must be denied.
C. Fru-Con's Motion for Partial Summary Judgment on SMUD's Claim under the California False Claims Act
Fru-Con seeks partial summary judgment with respect to SMUD's third claim for relief pursuant to the California False Claims Act ("CFCA"). Although SMUD presents evidence of the multitude of contractual disputes that exist this case, SMUD does not cite to any evidence which disputes Fru-Con's assertion that it never submitted a claim that it knew was false. In short, even when drawing all reasonable inferences in SMUD's favor, there is no evidence that Fru-Con knowingly submitted false claims. For the reasons explained herein, the motion must be granted.
1. Applicable Law
The legislature designed the California False Claims Act ("CFCA") to prevent fraud on the public treasury, and the ultimate purpose of the CFCA is to protect the public finances.State v. Altus Fin., S.A., 36 Cal. 4th 1284, 1296-97 (2005). Because California's False Claims Act is patterned on a similar federal statutory scheme, it is appropriate to turn to federal cases for guidance in interpreting the state act. State ex rel. Grayson v. Pac. Bell Tel. Co., 142 Cal. App. 4th 741, 747 n. 3 (2006); see also United States v. Shasta Servs., Inc., 440 F. Supp. 2d 1108, 1111 (E.D. Cal. 2006) (England, J.).
The CFCA imposes liability on any person who "knowingly presents or causes to be presented to an officer or employee of the state or of any political subdivision thereof, a false claim for payment or approval." Cal. Gov't Code § 12651. In order to establish liability under the CFCA, a plaintiff must prove three elements: (1) a "false or fraudulent" claim; (2) which was presented, or caused to be presented to the government entity; (3) with knowledge that the claim was false. See United States v. Mackby, 261 F.3d 821, 826 (9th Cir. 2001).
In California, a "claim" is defined as including:
any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision, or to any contractor, grantee, or other recipient, whether under contract or not, if any portion of the money, property, or services requested or demanded issued from, or was provided by, the state (hereinafter "state funds") or by any political subdivision thereof (hereinafter "political subdivision funds")
Cal. Gov't Code § 12650; see also Costner v. URS Consultants, Inc., 153 F.3d 667, 677 (8th Cir. 1998) ("[O]nly those actions by the claimant . . . [calculated to] caus[e] the United States to pay out money it is not obligated to pay . . . are properly considered `claims' within the meaning of the FCA.").
Claims are not "false" under the FCA when reasonable persons can disagree regarding whether the service was properly billed to the government. See United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir. 1999) (holding that "errors based simply on faulty calculations or flawed reasoning are not false under the FCA. . . . [a]nd imprecise statements or differences in interpretation growing out of a disputed legal question are similarly not false under the FCA" (citations omitted)); see also United States ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321, 329 (9th Cir. 1995) (allegedly improper interpretation of a contract "without more, does not constitute a false claim for payment").
The requisite intent is the knowing presentation of what is known to be false. "In short, the claim must be a lie." Hindo v. Univ. of Health Sciences/The Chi. Med. Sch., 65 F.3d 608, 613 (7th Cir. 1995). Under California law,
knowing and `knowingly' mean that a person, with respect to information, does any of the following: (A) Has actual knowledge of the information; (B) Acts in deliberate ignorance of the truth or falsity of the information; (C) Acts in reckless disregard of the truth or falsity of the information.
2. SMUD's Specific Allegations
SMUD cites to numerous claims that Fru-Con submitted. For the reasons discussed herein, there is a want of evidence from which a jury could reasonably infer that Fru-Con knowingly asserted false claims. The court addresses each alleged false claim in turn.
a. Fru-Con's October 7, 2004 Powerpoint Presentation
In its counterclaim, SMUD alleged that the October 7th powerpoint presentation constituted a claim under the FCA: "Fru-Con claimed that [it] was entitled to an increase of over $25 Million to the lump sum price agreed upon in the contract." Countercl. ¶ 23. There are two problems with SMUD's position.
First, it is not entirely clear that a powerpoint presentation constitutes a "claim" under the FCA. As previously noted, in California, a "claim" is "any request or demand for money, property, or services." Cal. Gov. Code § 12650; see also Costner, 153 F.3d at 677 ("[O]nly those actions by the claimant . . . [calculated to] caus[e] the United States to pay out money it is not obligated to pay . . . are properly considered `claims' within the meaning of the FCA.").
It is undisputed that at the October 7th presentation, Fru-Con explained that it was behind schedule and gave SMUD two options: accept the delay or direct Fru-Con to accelerate. Fru-Con explained that acceleration would involve a cost of roughly $25 million. Here, SMUD was given options — albeit not ideal options. Accordingly, the court is hesitant to catagorize the presentation as a "claim."
The second problem with SMUD's position is more fundamental. Even if the powerpoint presentation could constitute a claim, there is simply no evidence that Fru-Con knowingly presented a "false" claim. Although SMUD avers that the claims made at the presentation were false, it cites to no evidence which suggests that Fru-Con knowingly presented false information. The only evidence cited to by SMUD are two expert reports — one of which does not even mention the presentation. The other report is that of Robert A. Dieterle, who merely states, "Fru-Con knew it was not entitled to the additional revenue that it was claiming that day." Dieterle Report, Ex. 89, Becker Decl. This statement is made without any explanation of how Mr. Dieterle knows this to be true. Moreover, this statement does not speak to whether Fru-Con was presenting what it knew to be "false."
As previously noted, claims are not "false" under the FCA when reasonable persons can disagree regarding whether the service was properly billed to the government agency. See Lamers, 168 F.3d 1013, 1018 (7th Cir. 1999) (holding that "errors based simply on faulty calculations or flawed reasoning are not false under the FCA. . . . [a]nd imprecise statements or differences in interpretation growing out of a disputed legal question are similarly not false under the FCA" (citations omitted)).
As this court recently noted, "it is well established in this Circuit and elsewhere that imprecise statements or differences in interpretation growing out of a disputed legal question are not false under the FCA." United States ex rel. Englund v. Los Angeles County, No. CIV S-04-282, 2006 WL 3097941 (E.D. Cal. Oct. 31, 2006) (Karlton, J.) (citing Hagood v. Sonoma County Water Agency, 81 F.3d 1465, 1477 (9th Cir. 1996) ("Even viewing [plaintiff's] evidence in the most favorable light, that evidence shows only a disputed legal issue; that is not enough to support a reasonable inference that the allocation was false within the meaning of the False Claims Act.")).
In the case at bar, Fru-Con's October 7th presentation apparently set forth what Fru-Con believed to be the cause of the delay and proposed two alternative courses of action. Fru-Con SUF ¶¶ 16-17. SMUD disagreed with the content of the presentation and was dissatisfied with the proposals. See, e.g., SMUD RSUF ¶ 17 (disputing any implication that the project delay was caused by anything or anybody other than Fru-Con). This type of dispute does not constitute a "false claim." The parties were — and are — disputing whether the other party breached the contract. Divergent interpretations of a contract "without more, do not constitute a false claim for payment". Butler, 71 F.3d 321 (9th Cir. 1995).
In order to survive Fru-Con's motion, SMUD must produce sufficient evidence to support an inference of Fru-Con knowingly making a false statement. See United States ex rel. Anderson v. N. Telecom, Inc., 52 F.3d 810, 815 (9th Cir. 1995), cert. denied, 516 U.S. 1043 (1996). As one District Court remarked, "[a]t a minimum, the FCA requires proof of an objective falsehood. . . . Expressions of opinion, scientific judgments, or statements as to conclusions about which reasonable minds may differ cannot be false." United States ex rel. Roby v. Boeing Co., 100 F. Supp. 2d 619, 625 (S.D. Ohio 2000). Even when drawing all reasonable inferences in favor of SMUD, there is simply no evidence to suggest that Fru-Con knowingly presented a false claim.
b. Fru-Con's Payment Applications
In its counterclaim, SMUD also alleges that Fru-Con "submitted payment requests to the District falsely certifying that Fru-Con had accomplished various contract milestones." Countercl. ¶ 20. Similarly, SMUD alleges that Fru-Con submitted "false or inflated Pay Applications." Id. ¶ 36.
Under the construction contract, Fru-Con was paid on the basis of achieving certain milestones. SMUD argues that on several occasions, Fru-Con submitted pay applications based on milestones that had not, in fact, been achieved. "When [SMUD] confronted Fru-Con on the inclusion of the subject milestones in payment applications, Fru-Con sent revised applications removing those milestones without protest." SMUD Opp'n to Fru-Con's Partial Mot. for Summ. J. at 6.
Even assuming SMUD's version of the facts are undisputed, SMUD again fails to offer any evidence suggesting that Fru-Con knowingly made false claims. The only evidence cited to by SMUD is an internal Fru-Con email which lists certain milestones and notes next to them. See Ex. 85, Becker Decl. The notes are not comprehensible and the email does not, as SMUD avers, demonstrate that Fru-Con knowingly submitted false claims for milestones not completed. Rather, the evidence as a whole suggests that Fru-Con and SMUD disputed the extent to which Fru-Con had completed certain tasks. That Fru-Con submitted revised payment applications does not, without more, suggest that Fru-Con knowingly submitted false claims.
As previously noted, claims are not "false" when reasonable persons can disagree regarding whether the service was properly billed. See Lamers, 168 F.3d at 1018. With respect to knowingly making a false claim, the Ninth Circuit has explained:
The requisite intent is the knowing presentation of what is known to be false, as opposed to innocent mistake or mere negligence. Bad math is no fraud, proof of mistakes is not evidence that one is a cheat, and the common failings of engineers and other scientists are not culpable under the Act. The statutory phrase known to be false does not mean `scientifically untrue'; it means `a lie.'Anderson v. N. Telecom, Inc., 52 F.3d at 815-16. Here, there is proof of mistake, and possibly negligence — there is no evidence that Fru-Con presented what it knew to be false. Although the court is to draw all reasonable inferences in SMUD's favor, inferences are not drawn out of the air, and it is SMUD's obligation to produce a factual predicate from which the inference may be drawn. See Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987). There is simply no factual predicate from which one can infer that Fru-Con submitted claims it knew to be false.
SMUD also argues that the payment applications were false because Fru-Con certified on each application that "to the best of the Contractor's knowledge, information and belief the Work covered by this Application has been completed in accordance with the Contract documents. . . ." SMUD RSUF ¶ 358. This argument is also unavailing.
Both parties cite to this court's unpublished decision in El Dorado Irrigation District v. Traylor Brothers, Inc., October 5, 2005 Order. There, this court concluded that implied certification does not suffice to support a cause of action under the False Claims Act:
It seems unlikely that the legislature intended to make construction contractors on periodic payments potentially liable under the FCA for all deviations from contract specifications. Under such a regimen, the parties would litigate whether vague provisions in the contract and ambiguous statements in the claim for payment add up to a false claim. There appears to be no reason to elaborate simple contract violations into potential claims for compensation under the state's False Claims Act, especially given California's broad fraud jurisprudence.El Dorado Irrigation Dist. v. Traylor Bros., Inc., Oct. 5, 2005 Order at 32.
The same logic applies with equal force to the case at bar. Taken together, the undisputed facts reveal that SMUD and Fru-Con disagreed about Fru-Con's payment applications. As previously noted and discussed, disagreements over contract provisions do not, without more, constitute false claims for payment. See Butler, 71 F.3d at 329.
c. Boiler Weld Certification
SMUD also alleges that Fru-Con billed SMUD for overtime and double time costs that Fru-Con never incurred in working on the boiler weld certification. Again, SMUD fails to cite to any evidence suggesting that the claims were knowingly false.
The facts surrounding this issue are somewhat convoluted. After Fru-Con was terminated, SMUD hired Fru-Con to complete certification of certain welds. SMUD and Fru-Con agreed that SMUD would pay Fru-Con based upon agreed set rates. Citing to a string of email exchanges, SMUD avers that Fru-Con stated that it would pay its workers overtime. See Ex. 50, Disney Decl. Upon review, the email is not as clear as SMUD purports. The email discusses the employee base rate but does not specifically discuss over time.
After the work was completed and SMUD paid Fru-Con, Fru-Con in turn, paid its workers and gave them bonuses (not overtime). Dep. of Rory R. Riedy ("Riedy Dep."), Ex. 87, Becker Decl. SMUD claims that since the workers were not paid overtime, Fru-Con made a false claim in asking SMUD to pay for overtime.
SMUD once again fails to cite to any evidence suggesting that Fru-Con presented claims that it knew to be false or fraudulent. As previously noted, on a motion for summary judgment, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. See Richards, 602 F. Supp. at 1244-45. Here, the only evidence cited to by SMUD is the email exchange about the rate Fru-Con employees would be paid. As previously noted, however, this email does not demonstrate that Fru-Con was falsely asking for overtime.
d. Change Order Requests
SMUD also argues that certain Change Order Requests (CORs) submitted by Fru-Con represented false claims. First, SMUD argues that COR No. 139 was false because Fru-Con had already been compensated in COR No. 1 for certain damages included in COR 139. Second, SMUD claims that CORs No. 361 and No. 362 were false because Fru-Con requested more than a 20% mark-up for costs other than direct costs. And third, SMUD argues that COR No. 270 was false because Fru-Con changed the amount requested.
The details of the COR are not important as SMUD's arguments suffer from the same fatal flaw, namely, the disputes over the CORs are classic contract disputes. Evidence of disagreements over contract provisions, without more, does not constitute a claim under the FCA. In short, SMUD has failed to come forth with any evidence to suggest that when submitting the CORs, Fru-Con presented claims it knew to be false or fraudulent. For these reasons, the court finds that there is a want of evidence from which a jury could infer that the Fru-Con knowingly asserted a false claim to SMUD and summary judgment must be entered for Fru-Con.
IV. CONCLUSION
1. Fru-Con's Motion for Partial Summary Judgment Regarding Wrongful Termination is DENIED.
2. Fru-Con's Motion for Partial Summary Judgment on SMUD's counterclaim for monies paid to Dick Corporation is DENIED.
3. Fru-Con's Motion for Partial Summary Judgment on SMUD's claim under the California False Claims Act is GRANTED.
IT IS SO ORDERED.