Judge William A. Crowfoot, Case Number: 19GDCV00389, Date: 2024-08-30 Tentative Ruling

Judge: William A. Crowfoot, Case: 19GDCV00389, Date: 2024-08-30 Tentative Ruling

On March 27, 2019, this action was filed by James P. Murphy Construction against T.B. Penick & Sons (“Penick”), Paseo Pasadena Hotel Investment, LLC (“Paseo”), and CAPREF Paseo LLC (“CAPREF”). This action arises from a dispute related to the construction of the Hyatt Place Pasadena Hotel (“Hotel”) located at 399 East Green Street in Pasadena. This action was later deemed related to 15 other cases and consolidated with 13 of the 15 related cases involving subcontractors for the Hotel as the parties disputed who bore liability for additional costs which were incurred during construction. After a series of settlements and dismissals, the only parties remaining in this litigation are Penick, the general contractor, and Paseo, the ground leaseholder for the Hotel.

The operative pleadings are Paseo Pasadena’s cross-complaint (“XC”), filed on May 6, 2019, and Penick’s First Amended Cross-Complaint (“FACC”) filed on July 29, 2024. In its cross-complaint against Penick, Paseo alleges that on or around July 6, 2017, it entered into a prime contract with Penick for the construction of the Hotel (“Prime Contract”) with a Guaranteed Maximum Price (“GMP”) of $28.15 million, which was later increased to $30,214,540.55 in a change order approved on January 1, 2019. Paseo asserts causes of action for declaratory relief, breach of contract, bad faith, negligence, and breach of fiduciary duty.

As for Penick’s FACC, Penick alleges that Paseo breached the Prime Contract by failing and refusing to pay invoices, change orders, claims, and requests for monies due. Penick also asserts quasi-contract claims for quantum meruit, open book account, and account stated, along with the foreclosure of a mechanics lien recorded on the Property and recovery on a mechanics lien bond.

Paseo previously brought a motion for summary adjudication which was heard and granted by the Honorable Teresa Sanchez-Gordon in this department. As stated in Judge Sanchez-Gordon’s order, dated February 18, 2022, Paseo sought and obtained summary adjudication as to the following issue: “Penick has no, and cannot obtain, written approved change orders increasing the GMP above $30,214,540.55 and is thus financially responsible for any additional subcontractor costs.” (2/18/2022 Order, p. 2.) Judge Sanchez-Gordon added, “[T]he issue here is from which party may the subcontractors seek payment for services rendered,” noting that “[u]nder the Prime Contract, Paseo is responsible for payment of subcontractor work up to the GMP” and work without prior written authorization from Paseo is Penick’s responsibility. (Order, p. 5.) Due to the limited scope of the issue presented by the motion, Judge Sanchez-Gordon rejected Penick’s argument that the GMP was increased due to additional subcontractor costs because written notice prior to performing work was required if Penick wanted to increase the GMP and there was no evidence that Penick provided such written notice.

On December 21, 2022, the Honorable Colin P. Leis issued an order pursuant to stipulation that Judge Gordon-Sanchez’s ruling did not resolve several issues raised by Penick in its opposition brief. (12/21/2022 Order, p. 7.) These issues include: waiver, Penick’s claims due to Paseo’s allegedly misleading plans and specifications, and whether the contract between Paseo and Penick was abandoned.

On June 13, 2024, Paseo filed a motion for summary judgment against Penick on Penick’s FACC. Paseo argues that Penick is not entitled to any additional payment over and above the GMP because no written notice was provided before the work at issue was performed.

On June 21, 2024, Penick filed a motion for summary adjudication of Paseo’s noncontract claims as well as Paseo’s claims for consequential damages.

In reviewing a motion for summary judgment, courts must apply a three-step analysis: “(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent’s claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.) “Once the defendant . . . has met that burden, the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to the cause of action or a defense thereto.” (Code Civ. Proc., § 437c, subd. (p)(2).) The plaintiff may not merely rely on allegations or denials of its pleadings to show that a triable issue of material fact exists, but instead, “shall set forth the specific facts showing that a triable issue of material fact exists as to the cause of action.” (Ibid.) “If the plaintiff cannot do so, summary judgment should be granted.” (Avivi v. Centro Medico Urgente Medical Center (2008) 159 Cal.App.4th 463, 467.)

“A party may move for summary adjudication as to one or more causes of action within an action, one or more affirmative defenses, one or more claims for damages, or one or more issues of duty, if that party contends that the cause of action has no merit or that there is no affirmative defense thereto, or that there is no merit to an affirmative defense as to any cause of action, or both, or that there is no merit to a claim for damages . . . or that one or more defendants either owed or did not owe a duty to the plaintiff or plaintiffs. A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty.” (Code Civ. Proc., § 437c, subd. (f)(1).) A motion for summary adjudication shall proceed in all procedural respects as a motion for summary judgment. (Id., subd. (f)(2).)

Penick and Paseo do not dispute the general events underlying this action. The parties agree that on or about July 6, 2017, Paseo retained Penick to act as the general contractor on the Project by entering into an American Institute of Architects (“AIA”) Form A102- 2007 and A201-2007 written contract (“Prime Contract”). (UMF No. 1.) The parties also agree that pursuant to the Prime Contract, all change order work must be approved by Paseo in writing prior to the commencement of the work. (UMF No. 3.) Additionally, the parties agree that the GMP for the Prime Contract was initially $28,150,000 but, as of the last executed Prime Contract Change Order (PCCO) No. 15, dated December 17, 2018, the GMP was increased to $30,214,540.55. (UMF Nos. 2, 18.) Last, the parties do not dispute that Penick does not have any executed PCCOs other than PCCO No. 15. (UMF No. 19.)

The Court disregards Paseo’s objections to the Declarations of Tim Penick, Rich Petersen, Tony Lee, Michelle Mangan because those declarations were not submitted with Penick’s opposing papers. The Court OVERRULES Paseo’s objections to the declarations of Matt Adams and Phillip McDowell. Both experts premise their opinions on admissible documents including construction documents, change orders, and construction schedules.

“To prevail on a cause of action for breach of contract, the plaintiff must prove (1) the contract, (2) the plaintiff’s performance of the contract or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damage to the plaintiff.” (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.)

Penick alleges that Paseo breached the Prime Contract by “failing and refusing to pay Penick’s invoices, change orders, claims and requests for monies incurred by Penick which are due and owing to Penick as required by the Prime Contract.” (FACC, ¶ 12.) Penick contends that it has incurred at least $5,215,836 in damages. (FACC, ¶ 13.)

First, Paseo argues that Penick’s breach of contract claim fails because it is not required to pay Penick anything over and above the GMP, which was already determined to be $30,214,540.55 by Judge Sanchez-Gordon. Paseo submits the declaration of Conrad Garner, its “representative” who states that Paseo’s business records show that Paseo paid Penick $26,552,066, in addition to paying $3,262,942 to subcontractors who should have been paid by Penick but were not. (Paseo’s Ex. O, ¶¶ 2-3.) Therefore, Paseo states, a total of $30,295,818 has been paid to Penick and subcontractors, which exceeds the GMP. Paseo contends that Penick is not entitled to additional money due to any “Claims” because Judge Sanchez-Gordon already found that no written approval was obtained before the work at issue in those “Claims” was performed, and prior written approval was necessary to increase the GMP.

Second, Paseo argues that Penick cannot recover under quantum meruit or the asserted common counts because there was no understanding or expectation that Penick would be compensated for more than the GMP, nor was there any relationship other than the Prime Contract. “To recover in quantum meruit, a party need not prove the existence of a contract [citations], but it must show the circumstances were such that ‘the services were rendered under some understanding or expectation of both parties that compensation therefor was to be made.’ [Citation.] (E. J. Franks Construction, Inc. v. Sahota (2014) 226 Cal.App.4th 1123, 1127–1128.)

Last, Paseo argues that the Prime Contract establishes the amount it is obligated to pay Penick and therefore precludes Penick’s mechanic’s lien or any recovery on the Mechanic’s Lien Release Bond.

In opposition, Penick contends that an issue of fact remains as to whether the plans and specifications provided by Paseo breached the implied warranty that the plans are correct. (Opp., p. 8.) Penick claims that the factfinder must determine whether Paseo breached its implied warranty of correctness, and whether this breach of contract entitles Penick to additional compensation.

The Court finds this argument unavailing, however. As previously determined by Judge Sanchez-Gordon, the Prime Contract establishes a procedure by which Penick was supposed to submit a request for an increase to the GMP and which required prior written approval. Accordingly, if Penick determined that there were issues with the plans and specifications which would have increased its costs, Penick would be able to assert a claim for an increase in the GMP. It is undisputed that none of the work for which Penick requests compensation was performed with prior written authorization. Therefore, Penick’s claim for damages pursuant to the terms of the Prime Contract fails.

As an alternate theory of recovery, however, Penick argues that it may recover under quantum meruit because triable issues of fact exist as to whether Paseo abandoned the Prime Contract’s scope and provisions for extra work, and consequently, the GMP. (Opp., p. 10.) In C. Norman Peterson Co. v. Container Corp. of Am. (1985) 172 Cal.App.3d 628, 640 (“Peterson”), the Court of Appeal affirmed the trial court’s finding that the owner had breached a construction contract and, as a result of the owner’s breach and abandonment of the contract, the contractor was entitled to recover the reasonable value of the work it performed on a quantum meruit basis, without being limited by the original contract amount. The Peterson court stated: “In the specific context of construction contracts . . ., it has been held that when an owner imposes upon the contractor an excessive number of changes such that it can fairly be said that the scope of the work under the original contract has been altered, an abandonment of the contract properly may be found. [Citations.] In these cases, the contractor, with the full approval and expectation of the owner, may complete the project. [Citations.] Although the contract may be abandoned, the work is not. Under this line of reasoning, the trial court was well justified in determining that, by their course of conduct, the parties had abandoned the terms of the written contract while proceeding to complete the [] project.” (Peterson, 172 Cal.App.3d at p. 640.) The Peterson court cited to Opdyke & Butler v. Silver (1952) 111 Cal.App.2d 912 (“Opdyke”), in which the parties disputed whether, during the course of performance, the written agreement with a maximum limit as to costs had been an abandoned and an oral agreement substituted for it. (Peterson, supra, 172 Cal.App.3d at p. 640.) The Peterson court noted that in Opdyke, the owner “constantly changed his mind concerning the construction, and the completed project differed markedly from the original plans and specifications.” (Ibid.) The Peterson court further noted that the appellate court in Opdyke “enumerated 20 changes which materially increased the contractor’s costs and caused performance of the work to be done under disadvantageous circumstances.” (Id. at p. 641.) Turning to the case before it, the Peterson court drew comparisons to the facts in Opdyke, pointing out that there was “evidence of hundreds of changes, many of them significant, resulting in extra work having to be performed by [the contractor].” (Ibid.) Additionally, “as in Opdyke, the requirement for written change orders was ignored during most of the project period, and it was completely abandoned during the critical shutdown stage.

Similarly, in Daugherty Co. v. Kimberly-Clark Corp. (1971) 14 Cal.App.3d 151, 155, an owner’s changes resulted in a nearly $3 million dollar increase to a contract price because the project was “completely redesigned” and an experienced manager stated “he had never seen anything comparable to the changes ordered by the owner, the project was the most poorly engineered he had ever seen, and this resulted in the enormous change orders.” The Daughterty court concluded that due to numerous changes, a triable issue existed “as to whether the contract had been abandoned by the parties.”

Relying on this collection of cases, Penick argues that Paseo abandoned the contract. Penick cites to various potential change orders and applications for payment in support of its claim that on multiple occasions, Paseo approved change orders for work and paid for work that was performed prior to written authorization being obtained from Paseo. (AMF Nos. 35-36.) Penick also cites to the deposition testimony of Rogers Stevenson, who identifies himself as Paseo’s representative and testified in deposition that it was customary for him to approve work over the phone and have Penick send emails afterwards to keep a record of the authorization. (Penick’s Ex. 3, p. 121:10-20.) Rich Peterson, Penick’s PMQ, testified that as project manager, he had an understanding that all change orders had to be approved by Paseo in writing before work commenced, but that this understanding changed when Paseo’s management “gave [him] direct verbal [sic] on certain items to just get them done and submit the paperwork to avoid delay of the project.” (Paseo’s Ex. 3, 30:14-25.)

Penick also submits the declaration of Matt Adams (“Adams”). Adams identifies himself as the principal of Devcon CPM LLC and states that he has: (1) 40 years of experience with respect to construction management services and (2) significant experience consulting as an owner’s representative in connection with construction projects. (Adams Decl., ¶ 3.) Adams states that at least 179 of Penick’s claims were based on changes to the original scope of work with a value of approximately $1.3 million and that these changes affected nearly every trade involved in the project from drywall to mechanical to electrical. (Adams Decl., ¶¶ 8-9.) Adams opines that scope changes of this quantity, type and magnitude are “excessive” and “have the effect of fundamentally impacting both a contractor’s costs and its time for performance of work.” (Adams Decl., ¶ 10.)

Penick also submits the expert declaration of Phillip McDowell, who declares that he has significant experience with the forensic analysis of construction schedules and evaluation of project delays. (McDowell Decl., ¶ 3.) He states that he has analyzed the project delays that occurred during the construction project and determined that there were at least 141 days of excusable delays for which Penick was owed extensions of time to complete its work, and that Penick managed to mitigate at least 105 days, which amounts to a 75% reduction in project delay, despite a 33% increase in project duration. (McDowell Decl., ¶¶ 12, 14.) McDowell states that the increase in project duration, followed with acceleration to reduce any resulting delays by 75% is a significant change that fundamentally affects a contractor’s costs. (McDowell Decl., ¶ 15.)

In its reply brief, Paseo argues that Penick is precluded from arguing that the Prime Contract was abandoned because the issue was not raised in its original cross-complaint, or FACC. (Reply, pp. 3-4.) However, Penick asserted a claim for quantum meruit, which would only apply if the contract was abandoned. Paseo also claims that Penick has never raised the issue of abandonment in this litigation, which is a patently untrue statement. In 2022, Penick argued on pages 12 and 13 of its brief in opposition to Paseo’s previous MSA that Paseo waived the requirement for prior written authorization for additional work. Also, on page 15 of Penick’s brief, the heading for Section IX states: “THERE ARE TRIABLE ISSUES OF MATERIAL FACT REGARDING WHETHER THE CONTRACT WAS ABANDONED.” The parties additionally stipulated that the issues of waiver or abandonment were not encompassed by Judge Sanchez-Gordon’s ruling; therefore, Paseo’s argument that Penick is not entitled to additional payment under the Prime Contract due to a prior ruling is unavailing. Paseo’s argument that the terms of the Prime Contract prohibit recovery on the theory of abandonment is also unpersuasive because the theory of abandonment would render the terms of the Prime Contract irrelevant. Furthermore, the Court additionally notes that Paseo’s “response” to Penick’s additional material facts appears to be responding to an entirely different document because its responses do not correspond with any of the additional material facts listed in Penick’s Separate Statement.

Based on the evidence submitted by Penick, triable issues of material fact exist regarding whether the Prime Contract was abandoned and whether Penick is entitled to recover the reasonable value of its services under quantum meruit. Accordingly, Paseo’s motion for summary judgment is DENIED.

Penick moves for summary adjudication on Paseo’s noncontract claims and Paseo’s claim for consequential damages. As an initial matter, Penick cannot seek summary adjudication on a claim for consequential damages. Code of Civil Procedure section 437c(f)(1) states, in relevant part: “A party may move for summary adjudication as … one or more claims for damages, … if the party contends that … there is no merit to a claim for damages, as specified in Section 3294 of the Civil Code.” In DeCastro West Chodorow & Burns, Inc. v. Superior Court (1996) 47 Cal.App.4th 410, 412, the court of appeal affirmed a trial court’s denial of a motion for summary adjudication of the plaintiff’s “lost opportunity” damages. The appellate court stated that a “single item of compensatory damage which does not dispose of an entire cause of action” is not a proper subject for summary adjudication. (Id. at p. 422.) Here, Penick concedes that it is not seeking to summarily adjudicate Paseo’s contract claim and does not identify any particular breach of contract which could be a deemed a basis for summary adjudication as a separate cause of action. (See Lilienthal & Fowler v. Superior Court (1993) 12 Cal.App.4th 1848.) Therefore, the motion is DENIED as to Paseo’s claims for consequential damages.

The remainder of Penick’s motion addresses Paseo’s noncontract claims for bad faith, negligence, and breach of fiduciary duty. Penick essentially argues that Paseo cannot assert a basis for tort liability because all of Paseo’s claims arise from their contractual relationship under the Prime Contract. However, as stated above, the Court finds that Penick raises a triable issue of fact as to whether the Prime Contract was abandoned. Therefore, Penick cannot bar Paseo’s tort claims by hiding behind a contract that it claims was abandoned by both parties. Accordingly, Penick’s motion for summary adjudication is DENIED.

In light of the foregoing, Paseo’s motion for summary judgment is DENIED. Penick’s motion for summary adjudication is DENIED.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.