Wednesday, December 24, 2014
C.A. Bars Public Works Contractor’s Access to Retention Funds
Panel Rejects Contention That Judicial Order Is Necessary to Withhold Payment
By KENNETH OFGANG, Staff Writer
State law allowing government entities to place a portion of funds owed to a public works contractor in escrow, in order to assure proper completion of the work, does not require a court order for the entity to withdraw those funds after the contractor is terminated, the First District Court of Appeal has ruled.
Div. Two Monday affirmed a Contra Costa Superior Court judge’s ruling in favor of the Pittsburg Unified School District, denying an injunction to S.J. Amoroso, Inc.
Amoroso was hired in 2008 as the general contractor on the renovation of Pittsburg High School. Under relevant provisions of the Public Contract Code, the district elected to place a portion of each installment owed to the contractor in escrow as “retention” funds, while Amoroso elected to have the retention deposited in the form of securities, with Amoroso getting the interest.
The parties’ escrow agreement provided that “District shall have the right to draw upon the securities and/or withdraw amounts from the Escrow Account in event of default by Contractor as determined solely by District.”
Breach of Contract
In 2011, after a series of disagreements that began the year before, the district notified Amoroso that it was in breach of contract, having failed to complete any of the three phases of the work, which Amoroso disputed. In April of that year, the district declared the contract terminated, setting off a flurry of litigation among the district, Amoroso, and the subcontractors.
Almost two years later, the district instructed the escrow holder to remit $3.5 million in escrowed funds to it. The instructions were accompanied by a memorandum from the district’s counsel articulating the district’s right to the funds.
Amoroso moved for an injunction barring the district from removing the funds, which Judge Judith Craddick denied.
Justice Therese Stewart, writing for the Court of Appeal, said the trial judge was correct.
Stewart, emphasizing that the merits of the district’s breach-of-contract claim were not before the court, said there is nothing in the Public Contract Code or elsewhere in California law that requires a court order for the contracting public entity to withdraw retention funds after it terminates a contractor.
Two earlier Court of Appeal panels came to the same conclusion in Westamerica Bank v. City of Berkeley (2011) 201 Cal.App.4th 598, and Greg Opinski Construction, Inc. v. City of Oakdale (2011) 199 Cal.App.4th 1107, the justice noted.
Stewart rejected Amoroso’s attempt to distinguish those cases on the ground that in both cases, there were judicial proceedings underway when the public entities acted to withdraw the funds. In neither case did the court say that the pendency of such proceedings was required for funds to be withdrawn, and both cases squarely held that funds could be withdrawn without a court order.
The justice also rejected the contractor’s claim, not presented in the earlier cases, that allowing an entity to withdraw funds without a court order violates constitutional due process.
She distinguished Zurn Engineers v. State of California ex rel. Dept. Water Resources (1977) 69 Cal.App.3d 798, which held that a construction contract that “contained provisions authorizing the State Engineer, or his designated representative, to decide disputes including claims for extra compensation between Contractor and State and making his decision ‘Final and conclusive unless it is fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith,’ ” deprived the contractor of due process.
No Due Process Problem
A withdrawal of retention funds based on the public entity’s determination that a contractor has defaulted is not a final adjudication of a dispute, and thus does not implicate the due process concerns expressed in Zurn, she said.
“The owner does not ‘decide’ a dispute in the sense of resolving it with finality, permanently taking funds or securities claimed by the contractor, Stewart wrote. “The owner may withdraw retention funds or securities and use them to repair or complete the project, but this does not preclude the contractor from challenging that decision thereafter. If litigation (or arbitration) under the construction contract is ultimately resolved in favor of the contractor, the court (or arbitrator) will require the owner to pay the amount owed, including returning any improperly withheld retention.”
She further noted that under Public Contract Code §7107, Amoroso can seek penalty interest and attorney fees in connection with an ultimate finding that the district lacked justification for its actions.
The case is Pittsburg Unified School District v. S.J. Amoroso, Inc., 14 S.O.S. 5852.
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