East West Bank v. Rio School District
235 Cal. App. 4th 742
| Cal. Ct. App. | 2015Background
- FTR International (contractor) built a school for Rio School District (District) under a contract retaining 10% of progress payments; District held $676,436.49 retention after completion and stop notices delayed release until September 28, 2004.
- After completion (notice of completion Aug. 7, 2001), District refused to pay most of ~150 proposed change orders (PCOs), refused to release retention after stop notices cleared, and denied delay/disruption claims.
- FTR sued for breach, unpaid contract balance, extra work, delay/disruption, §7107 penalties (2%/month on withheld retention in lieu of interest), attorney fees and prejudgment interest; District counterclaimed under California False Claims Act (FCA).
- After a 243‑day bench trial, the court awarded FTR >$9.3 million (damages, §7107 penalties, fees, interest); District appealed.
- The Court of Appeal affirmed most rulings but (1) rejected Martin Brothers' broad reading of §7107, holding a price dispute alone does not justify withholding retention once retention’s security purpose ends; (2) held unclean hands is not a defense to a §7107 claim as a matter of law; (3) found error in requiring prejudice to enforce contract time‑limits for claims and in awarding attorney fees not limited to §7107‑related work.
Issues
| Issue | Plaintiff's Argument (FTR) | Defendant's Argument (District) | Held |
|---|---|---|---|
| Whether a dispute over contract price/PCOs permits a public entity to withhold retention under §7107 | Retention must be released once its security purpose ends; PCO dispute is not a valid ground to keep retention after stop notices cleared | Any bona fide dispute between public entity and contractor justifies withholding up to 150% of disputed amount (relying on Martin Brothers) | Rejected Martin Brothers; price dispute alone does not justify continued withholding once security purpose (liens/defects) has ended; §7107 penalty applies when retention improperly withheld |
| Applicability of unclean hands defense to a §7107 claim | N/A for plaintiff — FTR argued defense inapplicable; contended unclean hands cannot defeat statutory protections | District invoked unclean hands to defeat §7107 relief and to require broader defenses, arguing equitable bar | Court held as a matter of law unclean hands does not apply to §7107 claims because the statute protects contractors; unclean hands cannot bar recovery under §7107 |
| Enforceability of contract clauses imposing short notice/forfeiture periods for claims (Articles 10 and 37D) | FTR: contract claims procedures applied but some claims excused (breach prevented compliance); time rules should not be read to require showing of prejudice | District: strict enforcement; many awarded claims were untimely under Articles 10/37D, so forfeited | Court held forfeiture clauses are enforceable under Gov. Code §930.2; trial court erred by adding prejudice requirement; Article 37D governs extra‑work PCOs; some claims may be untimely and must be reconsidered on remand |
| Award and apportionment of attorney fees under §7107 | FTR: entitled to fees incurred in securing release of retention; no apportionment required where issues intertwined | District: award ($3.85M) was excessive, not limited to §7107 work, and unclean hands defense made many issues intertwined so fees should be apportioned | Court held fee award must be limited to fees incurred solely for the §7107 claim (issues not "inextricably intertwined"); remanded to apportion fees accordingly; trial court erred in relying on unclean hands to justify broad fee award |
Key Cases Cited
- Martin Brothers Constr., Inc. v. Thompson Pacific Constr., Inc., 179 Cal.App.4th 1401 (Cal. Ct. App.) (held any good‑faith dispute between GC and subcontractor can justify withholding retention)
- FEI Enterprises, Inc. v. Yoon, 194 Cal.App.4th 790 (Cal. Ct. App.) (statutory purpose of prompt release of retention funds)
- S & S Cummins Corp. v. West Bay Builders, Inc., 159 Cal.App.4th 765 (Cal. Ct. App.) (remedial nature of retention statute; liberal construction)
- Fassberg Constr. Co. v. Housing Authority of City of Los Angeles, 152 Cal.App.4th 720 (Cal. Ct. App.) (submission of PCOs alone does not automatically create an FCA claim)
- Thompson Pacific Constr., Inc. v. City of Sunnyvale, 155 Cal.App.4th 525 (Cal. Ct. App.) (apportionment not required when work is common to fee‑eligible and non‑fee causes only if truly inseparable)
- Mendoza v. Ruesga, 169 Cal.App.4th 270 (Cal. Ct. App.) (unclean hands inapplicable as matter of law to statutory causes intended to protect a class)