Opinion
No. Civ. S-03-949 LKK/GGH.
October 5, 2005
ORDER
Pending before the court are three motions for summary adjudication. As I explain below, like everything in this case, the motions are complex, and the resolution less than perfectly straight-forward.
The first motion is filed by Traylor Brothers, Inc. ("TBI"). It seeks to have certain damages claimed by plaintiff, El Dorado Irrigation District ("EID"), denied on the grounds that the contract expressly limits the collection of "delay damages" to the liquidated amount of $500 per day. Plaintiff opposes this motion on the ground that the damages which they are seeking do not fall under the delay damages provision of the contract, because rather than delay damages, they are damages incurred by virtue of the need to correct defective work performed by defendant and to complete the project.
The second and third motions are cross-motions for summary adjudication on plaintiff's False Claims Act and fraud causes of action. Defendant argues that it never submitted anything to the plaintiff which meets the definition of a false claim under the Act, while plaintiff points to what they assert are false claims made to it in the form of monthly billing statements.
I. FACTS
The facts stated in the text are undisputed unless otherwise noted. EID improperly submitted a separate statement of undisputed facts with its reply, which the court will not formally consider. See Local Rule 56-260(b) and (f).
A. FACTS IN SUPPORT OF DELAY DAMAGES CLAIM
The Contract contains the following liquidated damages provisions:
General Provisions
ART 18 — LIQUIDATED DAMAGES
A. It is understood and agreed by the parties that damages for Contractor delay are expensive to litigate and difficult to ascertain. Therefore, it is agreed that as and for a separately bargained for liquidated damage, and not as a penalty, the District [EID] shall deduct or recover the amount set for the in the Contract Agreement unless extensions of time granted by Owner specifically provide for the waiving of liquidated damages.
Special Provisions
§ 18.11 Liquidated Damages/Bonus: If the Project is not Substantially Completed by Contractor and fully operational within the Contract Time, or within any period of extension authorized pursuant to section 8.10 or pursuant to a duly issued Change Order, Contractor acknowledges and admits that EID will suffer damages and that it is impracticable and infeasible to fix the amount of actual damages. Therefore, it is agreed by and between Contractor and EID that Contractor shall pay to EID, as fixed and liquidated damages and not as a penalty, Five Hundred Dollars ($500) for each calendar day of delay until the Project is Substantially Completed and fully operational, and that both Contractor and Contractor's surety shall be liable for the total amount thereof, and that EID may deduct said sums from any moneys due or that may become due to Contractor. If liquidated damages begin to accrue prior to the time for final payment, the amount accrued shall be withheld from any progress payment that would otherwise be due, in addition to any Project extension.
This liquidated damages provision shall apply to all delays or any nature whatsoever, save and except only delays found to be Excusable or Compensable pursuant to section 8.10, herein above, or time extensions granted by EID.
Agreement between EID and TBI, dated Nov. 1, 1999.
EID seeks to enforce the above-quoted liquidated damages term, asserting it is entitled to liquidated damages in the amount of $191,000.00. Compl., dated Apr. 7, 2003; EID's Initial and Supplemented Rule 26 Disclosure Statements Section C.1 (g).
EID also seeks to recover sums paid to various companies as follows:
1. $1,538,313.00 for MWH's extended project management services beyond the contractual completion date;
2. $252,485.00 for EN2's extended environmental monitoring services; and
3. $1,571,888.00 for HPT's extended water treatment services.
It also seeks to recover $1,901.333.00 in public grant funds lost allegedly due to delay in completion of the project. EID's Initial and Supplemented Rule 26 Disclosure Statements, Section C.1.(a), (b), (c) and (h).
TBI alleged as a Sixteenth Affirmative Defense that the damages specified above are barred because they are delay damages. Answer and Countercl. for Declaratory Relief, dated May 12, 2003.
B. FACTS IN SUPPORT OF FALSE CLAIMS ACT AND FRAUD CLAIMS
In November 1999, EID entered into a contract with TBI which required TBI to design and build a tunnel. Section 1 of the "Agreement" portion of the contract, page 1 of Exhibit "1," specifies that TBI's Scope of Work was to "provide complete design and construction for the Project commonly referred to as `Mill-Bull Tunnel and Associated Facilities,'. . . ."
In February of 2002, TBI wrote EID that "[w]e recognize our responsibility for the [tunnel] alignment, and of course we'll maintain our field books for the record." Deposition of John McDonald at 161:17-162:23, Ex. 9. In October 2002, TBI published its own "as-built" survey that shows a misalignment of the tunnel graphically and tabularly.
This survey constitutes an admission as to the misalignment, since TBI prepared it, and in his deposition TBI's Project manager, John McDonald, authenticated it and described the circumstances of its preparation. McDonald Dep. at 99-103, Ex. 4.
TBI's Project Manager, John McDonald, testified at deposition that the as-built tunnel exceeded the contract design tolerances "by a wide margin" and that TBI did not follow the line and grade specified in the contract. McDonald Dep. at 105:18-107:9. He further testified that the contract required the tunnel excavation to be done in a straight line.Id. at 103:10-105:16.
The Contract Drawings at Drawing No. MB-10 show the straight line and 0.07% grade for the Tunnel with tolerances established in Drawing MB-2, Note 8, of 6" vertical and 2' horizontal. Contract, Drawing MB-10, "Tunnel Plan and Profile", attached to Ex. 5 of Decl. of Waddell; Dep. of McDonald at 384-385. (TBI disputes that the design documents were properly incorporated into the contract.)
The Contract provides that TBI could earn a Guaranteed Maximum Price ("GMP") of $11,280,960, which included a fixed "Contractor's Fee" of $789,940 (essentially a profit) and `TBI's Cost of the Work up to a maximum of $10,491,020. See Section 5 of the Agreement to the Contract and see Mitteer Dec. at ¶ 7.
The contract also provides that:
7.1 Owner shall make interim progress payments in accordance with the Schedule of Values and the General Conditions in an amount equal to 90 percent of the value of work completed during the month, with the remaining percentage, if any, to be disbursed at final payment in accordance with the General Conditions. Contractor's applications for payment shall be submitted on the 25th of the month and, provided that the application is timely and complete, and is accompanied by the required waiver and release forms, payment shall be made by the 10th day of the following month.
14.01 A. Prior to submitting the first application for a progress payment, Contractor shall have obtained approval of the progress schedule, the schedule of shop drawing submission and the schedule of values of the Work. These schedules shall be satisfactory in form and substance to Engineer. The unit prices and lump sum component of the bid submittal will subdivide the Work into component parts in sufficient detail to serve as the basis for progress payments during construction. Upon acceptance of the schedule of values by Engineer, it shall be incorporated into a form of application for partial payment acceptable to Engineer.
14.03 A. At least ten (10) days before each progress payment falls due (but not more than once a month), Contractor shall submit to Engineer for review an application for partial payment completed and signed by Contractor covering the Work completed as of the date of application and accompanied by such supporting documentation as its required by the contract documents and also as Engineer may reasonably require. Each subsequent application for partial payment shall include an affidavit of Contractor stating that all previous payments received on account of the Work have been applied to discharge in full all of Contractor's obligations reflected in prior applications for partial payment. The amount of retainage with respect to progress payment will be as stipulated in the Agreement.
The "schedule of values" broke the GMP into 40 line items which are discrete construction tasks or expenses; e.g., line item 24 for "tunnel excavation" broke the $3,211,844 of the GMP allocated to that task down into 10,132 units at $317/each. The breakdown was apparently based upon the length of the Tunnel in feet.
The contract provides that if, at completion, the "Cost of the Work" plus the Contractor's fee is less than the GMP, the difference would be split between the Owner and the Contractor 50/50 (subject to an audit by the Owner of the Contractor's expenses). Mitteer Decl., ¶ 13, Sections 5.25, 6 and 6.4.2 of the Agreement to the Contract. "Costs and the like which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Contractor without reimbursement by the Owner, excepted only as set out elsewhere herein." Section 5.2.1 of the Agreement to the Contract. The Cost of the Work is to include costs incurred "in repairing or correcting damaged or nonconforming Work executed by the Contractor or the Contractor's Subcontractor or suppliers." Mitteer Dec., ¶ 14; Section 6.1.8 of the Agreement to the Contract.
TBI achieved "hole through" on September 21, 2002. Erdman Dec., ¶ 4. TBI exited the mountain too low and too far to the left of the specified exit point. McDonald Dep., Ex. 4. Exactly how much it was off is disputed, but TBI concedes that it was at least five feet too low.
Within a few weeks, TBI and the District separately surveyed the entire tunnel and confirmed that it was substantially out of tolerance for most of its length. McDonald Dep. at 99-103 Ex. 4; Erdman Dec. at ¶¶ 6 and 7. Rather than following a gradual, uniform slope from upstream to downstream, the tunnel drops to the approximate mid-point, where it dips to nearly 11.5 feet below the design grade. McDonald Dep. at 99-103 Ex. 4; Erdman Dec. at ¶ 8. TBI's Project Manager testified that a line and grade deviation by 2 feet or less is the maximum in the industry and the 9'+ deviation in this case is very unusual and something he had never seen in his experience. McDonald Dep. at 151.
TBI delegated sole responsibility for the alignment of the tunnel to its Project Engineer, David Baddgor, who operated "pretty independently" and without supervision, though he reported to John McDonald. McDonald Dep. at 134 and 369-372. Mr. Baddgor was the sole person with control over the line and grade of the machine. Baddgor Dep. at 13-15; 64-67; 72-76; McDonald Dep. at 63-73; 72-73; 76-77; 132-134; 138-142; 151. He was responsible for performing surveys and calculations in order to determine whether the bore was on the proper course needed to insure that the tunnel was within the contractual tolerances established by TBI's drawings. Baddgor Dep. at 13-15. Mr. Baddgor did this through conventional survey methods and calculations, and by adjusting the settings on a laser-guidance device that transmitted coordinates to the Tunnel boring machine operator. Baddgor Dep. at 64-76. Mr. Baddgor testified that in April of 2002 he realized that the tunnel alignment was wrong and adjusted the machine to try to bring the tunnel back up to the proper place. Baddgor Dep. at 64-72. He testified that his survey showed him that the elevation was "substantially low" and that he told the TBI Superintendent, Bert Dore, numerous times that they were off line and were trying to get back although he did not say by how much they were off. Baddgor Dep. at 72-73, 75-76. Two of TBI's workers in the Tunnel also testified in deposition that they knew the Tunnel boring machine was boring "uphill." Rodriguez Dep. at 52:17-22; 52:23-53:6; 53:11-55:25; 60:2-7; Bolle Dep. at 35:21-36:5; 37:5-8; 38:13-18; 39:23-40:2; 41:3-13; 41:22-25; 43:14-18; 51:7-52:24. MWH was EID's Engineer. Its employee, Mark Budwig, testified that he knew the Tunnel was going uphill when he observed the water flowing in the wrong direction. Dec. of Mark Budwig, Ex. 21 (Erdman Dec.).
John McDonald acknowledged that during the Spring and Summer of 2002, EID asked him for evidence of the Tunnel's alignment to the contract line and grade. McDonald Dep. at 282. He testified during this same time period the Project Engineer told him every time that Mr. McDonald asked, that the Tunnel was in fact off line and grade — but Mr. McDonald claims that he never asked "by how much?" McDonald Dep. at 63-64; 72-73; 132-133.
After completion of Mr. Baddgor's deposition, TBI located and produced Mr. Baddgor's survey book maintained during the Project, and made it available at the deposition of John McDonald. Firstman Dec. at ¶ 19. McDonald testified that if he had looked at Mr. Baddgor's survey book and compared it to the contract drawings in April of 2002 he would have known that the tunnel was low (by roughly nine feet). McDonald Dep. at 362-369.
TBI submitted a Payment Application to the District every month for work that had been performed during the prior 30-day period. Erdman Dec., Exs. A-K. Each Payment Application specified the length of tunnel excavation, in linear feet, completed during the previous month for which TBI sought payment. Erdman Dec., Exs. A-K. Under the Contract, once MWH approved the Payment Application, it became a representation of fact. Contract, Gen. Conditions, Section 14.05B, attached to Waddell Dec. as Ex. B. The District paid each payment application submitted between November 2001 and August 2002 in the amount recommended by the MWH. Pollard Dec. at ¶ 5. No deductions were ever made to the tunnel excavation request amounts on any of the payment applications. Pollard Dec. at ¶ 5; Erdman Dec. at ¶ 12. EID paid each payment request without deduction for defective tunnel excavation. Pollard Dec. at ¶ 5.
The District paid the following TBI Payment applications in the following amounts:
a. November 2001: $209,530.00 b. January 2002: $ 33,489.00 c. February 2002: $544,039.00 d. March 2002: $578,277.00 e. April 2002: $550,898.00 f. May 2002: $498,096.00 g. June 2002: $526,030.00 h. July 2002: $546,878.00 I. August 2002: $532,365.00
Pollard Dec. at ¶ 4.
At a project meeting on June 11, 2002, as confirmed in the Job Meeting Minutes circulated to all project participants, TBI informed the District that California Construction Services ("CCS") was to finish a Survey check of tunnel vertical control, and that the findings were to be confirmed "but preliminary report shows they closed loop and matched TBI survey of tunnel alignment and grade within a 1-1/4 inch." McDonald Dep. at 285-291; Ex. F to Supplemental Firstman Declaration.
It is strongly disputed whether the contract grade referred to was that in the contract or simply a comparison between the survey done by Baddgor and the survey done by CCS. TBI cites to a previous statement by EID that acknowledge that the CCS survey was compared to TBI's survey and not with the as-planned location of the tunnel. Ex. 20 to Budwig Dec. at 13:6-10.
II. STANDARDS
Summary adjudication, or partial summary judgment "upon all or any part of a claim," is appropriate where there is no genuine issue of material fact as to that portion of the claim. Lies v. Farrell Lines, Inc., 641 F.2d 765, 769 (9th Cir. 1981) ("Rule 56 authorizes a summary adjudication that will often fall short of a final determination, even of a single claim") (citations omitted); Playboy Enters., Inc. v. Welles, Inc., 78 F. Supp. 2d 1066, 1073 (S.D. Cal. 1999), aff'd in part, rev'd in part, on other grounds, 279 F.3d 796 (9th Cir. 2002); E.D. Local Rule 56-260(f).
Under summary judgment practice, the moving party always 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); Secor Limited, 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. See 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, Assoc. 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. Industrial Maintenance Engineering Contracting Co., 200 F.3d 1223, 1228 (9th Cir. 1999).
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 International 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 Litigation, 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 (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam)); See also Headwaters Forest Defense v. County of Humboldt, 211 F.3d 1121, 1132 (9th Cir. 2000). 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 587 (citation omitted).
III. ANALYSIS
A. DELAY DAMAGES
The central question raised by defendant's liquidated damages motion is whether the damages objected to by TBI are delay damages within the meaning of that provision of the contract.
The plaintiff argues that a distinction should be made between what the liquidated damages provision covers, simple delay, and damages suffered outside of that provision. They support this contention by citation to contract provisions recognizing damages recoverable outside the liquidated damages clause, even though they arguably could fall under the "delay" umbrella. 1. Corrective Work
The contract provides two different remedies to EID in the event that the Contractor performs defective work which it does not then correct. Part 13.09 of the General Contract provides that plaintiff may correct defective work, charging the cost to defendant. Additionally, if the defective work is discovered within one year of the completion of the Contract, then Section 13.07 provides that the work may be corrected by the Owner at the contractor's expense if the Contractor does not move to make the corrections after seven days written notice.
[If] Contractor fails within a reasonable time after written notice of Engineer to proceed and to correct defective Work or to remove and replace rejected Work as required by Engineer in accordance with paragraph 130.6.A, or if Contractor fails to perform the Work in accordance with the contract documents . . . Owner may, after seven (7) days written notice to Contractor, correct and remedy such deficiency . . . All direct and indirect costs of Owner in exercising such rights shall be charged against Contractor in an amount verified by Engineer, and a change order shall be issued incorporating the necessary revisions in the contract documents and a reduction in the Agreement price. Such direct and indirect costs shall include, in particular but without limitation, compensation for additional professional services required and all costs of repair and replacement of work of others destroyed or damaged by correction, removal or replacement of Contractor's defective Work. Contractor shall not be allowed an extension of the contract time because of any delay in performance of the Work attributable to the exercise by Owner of Owner's rights hereunder.
Part 13.09 A.
"Owner may have the defective Work corrected or the rejected Work removed and replaced, and all direct and indirect costs of such removal and replacement, including compensation for additional professional services, shall be paid by Contractor."
Part 13.07.
Plaintiff contends that except for the public grant claim, all the challenged damages were incurred by it while remedying the defective work performed by TBI. As to the damages sought in relation to the public grant, plaintiff maintains they are a result not of the "delay" envisioned in the liquidated damages provision of the contract, but rather due to the additional time that it took to correct and complete the defective work as envisioned by the different provisions in Part 13 of the contract. As explained below, I conclude that there is a disputed issue of fact as to whether the damages sought relative to the correction of defective work are outside the scope of the liquidated damages clause. As I also explain, the court concludes that the public grant damages are within the clause.
Basic principles of contract interpretation require that the terms of the contract are to be read together. See Cal. Civ. Code § 1641 ("The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other."); In re Crystal Properties, Ltd., L.P., 268 F.3d 743, 748 (9th Cir. 2001) ("We must interpret the contract in a manner that gives full meaning and effect to all of the contract's provisions and avoid a construction of the contract that focuses only on a single provision. . . ."). The instant contract provides that the "liquidated damages provision shall apply to all delays of any nature whatsoever" but the contract does not define what constitutes a "delay." (emphasis added). As noted above, determining the scope of the term "delay" requires review of the contract as a whole. Alperson v. Mirisch Co., 250 Cal.App.2d 84, 90 (1967) ("even if one provision of a contract is clear and explicit, it does not follow that portion alone must govern its interpretation; the whole of the contract must be taken together so as to give effect to every part.").
The broad reading of delay argued for by the defendant would, in effect, undermine, if not nullify, the ability of the plaintiff to seek recovery of correction damages as envisioned in § 13.07 and § 13.09 since every correction that extended past the original due date would be deemed a delay. Moreover, by providing a one year "correction period," part 13.07 expressly envisions that the EID may need to make repairs to the project after the completion date, implying that any extra time needed for the corrections would not be considered a delay within the meaning of the liquidated damages clause. To read the term delay as broadly as defendant maintains, would make sections 13.07 and 13.09 inoperative; a result which contract law disfavors. City of Atascadero v. Merrill Lynch, Pierce, Fenner Smith, Inc., 68 Cal.App.4th 445, 473 (1998).
It is disputed whether the Work under the contract was ever finished, and if so, when it was. Accordingly, the court cannot presently resolve whether Part 13.07 or 13.09 applies.
Part 13.09 may also suggest that the correction work was not to be considered as delay damages by providing that "if the Contractor fails to perform Work in accordance with the contract documents ( including any requirements of the progress schedule)" that the owner may then remedy the deficiency themselves and seek payment from the Contractor for that work. Section 13.09 (emphasis added).
The question is thus, what, if any, of the contested damages fall under sections 13.09 and 13.07's "direct and indirect" costs language? Section 13.09's definition of such costs is very broad.See n. 5. The provision expressly envisions the need to pay for "additional professional services required." From all that presently appears, EID is seeking compensation for "additional professional services" in the first three contested damage claims. Each of those claims are requests for damages allegedly incurred because plaintiff was required to pay for the additional services of the three companies while the correction work was done on the Tunnel.
The compensation sought for loss of public funding is more difficult to categorize. The damages sought for the first three claims allegedly are direct costs allegedly incurred by virtue of the corrections that had to be made, and, given that they are professional services, they are costs expressly contemplated by the contract. For the loss of public grant funds, however, EID is not seeking to recover for services that are directly linked to correction work. Rather, it appears EID seeks compensation for losses allegedly occasioned by the delay. As to this claim, the contract appears to be ambiguous. Part 13 allows the owner to collect damages accrued from both direct and indirect costs of making corrections, while the liquidated damages clause says that it shall apply to "all delays of any nature." The question thus hinges on what the contract intended, in this regard, to include in the "indirect" costs mentioned in 13.07 and/or 13.09.
Both part 13.07 and 13.09 leave what constitutes an "indirect" damage undefined. When looking at the contract as a whole, I conclude that the defendant has the better argument on the loss of public funds. The language in the liquidated damages clause suggests that it was to cover all costs that could be attributed to delay. Thus, where there is not a provision elsewhere in the contract which provided for recovery of a loss, the plain language in the liquidated damages clause prevails. EID would be able to collect a maximum of $191,000 under the liquidated damages clause, whereas it is seeking $1.9 million in loss of public grant funds. I conclude that the plain meaning prevails, and plaintiff may not recover the lost public funds grant as a separate damage, but is limited to the liquidated damages provision in that regard.
Part 18 specifically says that the damages for "contractor delay are expensive to litigate and difficult to ascertain."
2. Termination and Completion
An alternative argument is derived from Part 15.02 of the Contract which provides that EID may terminate the contract if the Contractor "disregards the authority of Engineer," Pt. 15.02(A)(8), or "otherwise violates in any substantial way any provisions of the contract documents." Pt. 15.02(A)(9). EID claims that it terminated TBI at some point, either prior to or during the time it was undertaking the corrective work. This contention is disputed. If there was an effective termination, Part 15.02(B) provides that the Owner may finish the work and states that if the costs of completion exceed the unpaid balance owed the contractor, the "Contractor shall pay the difference to the Owner." Part 15.02(B). It further provides that "where Contractor's services have been so terminated by Owner, the termination shall not affect any rights of Owner against Contractor then existing or which may thereafter accrue." Part 15.02(C).
"If the unpaid balance of the Agreement price exceeds the direct and indirect costs of completing the Work, including compensation for additional professional services, such excess shall be paid to the Contractor. If such costs exceed such unpaid balance, Contractor shall pay the difference to Owner. Such costs incurred by Owner shall be verified by Engineer and incorporated in a change order, but in finishing the Work, Owner shall not be required to obtain the lowest figure for the Work performed." Part 15.02(B).
This provision further appears to permit recovery for the first three contested damages. EID claims that it terminated TBI's right to proceed under the contract on July 16, 2003, or, at the latest, on March 31, 2004. The contract's plain meaning provides that any costs incurred after the termination date that are connected with completing the project work are recoverable. Thus, defendant's summary judgment motion must be denied as to the first three contested damages, and granted as to the public funds claim.
In a footnote in their reply brief, defendant argues that the damages for "lost power sales" should also be stricken. Reply papers are generally limited to matters in the opposition papers. It is improper for the moving party to "shift gears" and introduce new facts, different legal arguments and particularly new motions than were presented in the moving papers. See Lujan v. National Wildlife Federation 111 L.Ed.2d 695, 721 n. 5 (1990) (court has discretion to disregard late-filed factual matters); Ira A. Brown and Robert I. Weil, California Practice Guide: Civil Procedure Before Trial at 12:106. The court will not address the damages for lost power sales in this order.
B. FALSE CLAIMS ACT
1. The Applications for Payment and Supporting Documentation
The primary issue relative to the False Claims Act causes of action is whether TBI submitted a "false claim" within the meaning of the Act. Although plaintiff relies on the applications for payment submitted by the defendant to EID, it does not rely on any actual language in the Payment Applications themselves. Instead, EID asks the court to take a number of steps from those applications, to their attachments, to the contract and then even within the contract before the court could reach the conclusion that there was a false statement. Put directly, the path is too long, and the argument is too attenuated. Below, I follow the long road traversed by plaintiff's argument.
The applications for payment submitted by TBI contain little content. They note that a "Schedule of Values" spreadsheet for the month in question is attached. Erdman Dec., Exs. A-K. Some applications include one or two lines of "notice" about certain items which have been amended according to change orders. Id. Most say that the costs for Item 12a are based on time and material expenditures, and they all have a line that states when payment is due and that the "total amount due includes all money earned minus 10% retainage minus all payments made to date."Id. There is simply no statement on the face of the applications which specifies that the Tunnel has been constructed up to the time covered by an application to meet the line, grade and tolerances which are in the design documents.
The court notes that there is dispute about whether the design documents are actually part of the contract.
The plaintiff then turns to the schedule of values which is attached to the applications for payment. It contains a list of various construction tasks, such as "Perform Access Road and Site Improvements" and "Furnish Install Rock Bolt Supports." Id. These are then followed by columns which list the quantity, the Unit, the Unit Price, the Total Contract Amount, Percent Complete to Date, and the Total Earned to Date, along with a break down for each month of what was completed and the dollars that were earned. Id.
One of the items in the attachment, number 24, is "Excavate Tunnel" of which there is a quantity of 10,132 (apparently the expected length of the tunnel in feet) with a unit price of $317.00. Id. Rather than including a percent completed like the other listed items, the column just indicates the number of feet drilled. Id. That number appears to be multiplied by the unit price to get the total earned to date. Id. Generally, the term "work" does not appear at all in the schedule of values, and if it does it is in the sense of "road work" or "delay in work."Id.
EID then directs the court to Part 14 of the contract which addresses the "Payments to Contractors and Completion." Part 14.01 provides that prior to submitting the first application for a progress payment the "schedule of values of the Work" was to be approved by the Engineer. Part 14.03 then continues that "Contractor shall submit to Engineer for review an application for partial payment completed and signed by Contractor covering the Work completed as of the date of the application and accompanied by such supporting documentation as is required by the contract documents and also as Engineer may reasonably require." EID claims that this language, which requires the payment applications to cover the "Work completed as of the date of the application," is the certification needed to make the payment applications false claims.
The conclusion that there has been a false claim, however, requires resort to yet other part of the contract. Part 1 of the contract defines the term Work to mean: "The entire completed construction of the various separately identifiable parts thereof required to be furnished under the contract documents. Work is the result of performing services, furnishing labor and furnishing and incorporating materials and equipment into the construction, all as required by the contract documents." This, plaintiff claims, demonstrates that the payment claims certified that the tunnel excavations were in accordance with the design specifications.
To summarize, the contract defines Work to mean the performance of services "as required by the contract documents," the contract requires that the applications for payment be submitted to cover "the Work completed," and the payment applications that were thus submitted, EID claims, certified that they were for work completed as required by the contract documents. The problem with plaintiff's argument is that, despite the effort, the court simply does not find that the circumstances justify a conclusion that the Payment Applications meet the statutory definition of a false claim.
2. Was there a False Claim?
The statute defines a claim as follows:
"Claim" includes 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(b)(1). TBI argues that the claim that they submitted, i.e., the payment applications, were not false because they accurately requested payment for the number of feet excavated and nothing more. Although the excavation was conducted at the wrong angle, TBI argues that all the claim for payment asserted was that the Contractor had excavated a certain number of feet at the time the request for payment was submitted. EID, however, says that the schedule of values as defined in the contract was not meant to merely indicate the excavation of a certain number of feet, rather a certain number of feet excavated in compliance with the contract documents, which they reason includes the design documents.
As defendant maintains, the payment applications, vel non, do not state that they are seeking payment for excavations at a certain line or grade. Nonetheless, the court must determine whether these statements falsely certified that they were in compliance with the contract design documents.
Neither the parties' briefs, nor the court's own research, has revealed any authority directly addressing how far from the actual claim a court should go before finding a false statement underlying the cause of action. The cases discussed below, however, provide some guidance.
EID points to a Tenth Circuit case where the court found that there was a violation of the federal False Claims Act when the document which constituted the claim was not directly false, but was dependent upon underlying documents which were false. See Shaw v. AAA Engineering Drafting, Inc., 213 F.3d 519, 530 (10th Cir. 2000). In Shaw, the company had falsified work orders in order to make it appear that more work had been done by the company than had actually been performed. The court found that "[s]imply because the production quantities recorded on the work orders did not determine the exact amount of the settlement does not eradicate a connection between the work orders and the equitable adjustment." Id. The path from the request for an equitable adjustment in that case and the work orders was direct, however, and the path in the instant case is considerable more extended and altogether less plainly connected. In Shaw, the company had actually altered the work orders, making their "false" nature apparent. In this case, there is no proof presented of a specific act of falsification in the payment applications or in anything the company relied on. Thus, Shaw does not provide direct support for plaintiff's claim.
The California courts recognize that the state's False Claims Act is patterned on the federal statute, see City of Pomona v. Superior Court, 89 Cal.App.4th 793, 801 (2001), and thus in the absence of California authority, state courts may look to federal cases for guidance as to the proper construction of the statute.
The company sought an equitable adjustment to the contract amount they had with the government on the grounds that they were performing more work than had been expected under the contract. The primary source of proof were falsified work orders. Id. at 524-27. Prior to the fraud being discovered, the government increased funding up to the amount it would have cost the company to hire one and a half new workers to handle the asserted increased work load.
In a case from Hawaii, a district court found no "false claim" where bills were submitted for payment for medical services provided even though in providing those services the company had violated federal law by charging a co-payment to the indigent customers to whom it was providing services. Lum v. Vision Service Plan, 104 F.Supp.2d 1237, 1240-41 (2000). Although the law forbade the charging of a co-payment, the court concluded that the bills submitted to the government were not false because the billings did not impose the co-payment nor did they promise compliance with the law. Id. The court held that "violations of laws, rules, or regulations alone do not create False Claims Act liability." Id. Lum relies upon a Ninth Circuit case which holds that a violation of law without more does not rise to liability under the FCA; rather, there must be an actual false certification of compliance with the law to impose liability under a false certification theory. U.S. ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996).
Although the court's holding does not, in terms, extend to violations of a contract provision, there does not appear to be any logical reason to distinguish between the violation of the law in Lum versus the violation of a contract here. The cases and the legislative history of the federal False Claims Act indicate that the Act was not meant to be a catch-all provision for the violation of any law. The same should apply for contracts where contract law itself provides an adequate remedy. See, e.g., Lum v. Vision Service Plan, 104 F.Supp.2d at 1241-42 (holding that there are other remedies for regulatory violations and that the FCA should not be used unless there is an express false certification); and see Mikes v. Straus, 274 F.3d 687, 699 (2d Cir. 2001) (stressing that the FCA was not "designed for use as a blunt instrument to enforce compliance" with all regulations, rather only those that are a precondition to payment.); S. Rep. No. 99-345, at 9 (1986).
In the matter at bar, the section on the application for progress payments states that the applications shall cover the "[w]ork completed." Thus, there does not appear to be a requirement of direct certification that the work complied with the design documents. The lack of a requirement for direct certification in the contract thus would seem to preclude liability predicated upon presenting a false claim. Nonetheless, another premise for liability is contained in the False Claims Act.
Under sections 12651(a)(1) and (2), liability may also be predicated upon knowingly causing a false claim to be presented or made. I turn to whether there is a viable claim under this "causing" provision.
Part 14.05 of the contract requires that the Engineer review the Payment Applications prior to recommending payment. The section provides that the Engineer's recommendation "will constitute a representation by Engineer to Owner . . . that the Work has progressed to the point indicated; that, to the best of Engineer's knowledge, information and belief, the quality of the Work is in accordance with the contract documents." While the provision may be read as supporting the proposition that the applications for payment caused the Engineer to certify that the excavation was done in compliance with the contract documents, it then deviates from a true false claim predicate since it limits certification to the Engineer's knowledge rather than objective fact. Moreover, later language further qualifies the effect of the certification by providing that the Engineer's recommendation "will not be deemed to have represented that exhaustive or continuous on-site inspections have been made to check the quality or quantity of the Work, or that the means, methods, techniques, sequences, and procedures of construction have been reviewed. . . ."
Chief Judge Levi recently held that "[t]he prevailing law is that `regulatory violations do not give rise to a viable FCA action' unless government payment is expressly conditioned on a false certification of regulatory compliance." U.S. ex rel. Swan v. Covenant Care, Inc., 279 F.Supp.2d 1212, 1221 (E.D. Cal. 2002); Lum v. Vision Service Plan, 104 F. Supp. 2d 1237, 1242 (D. Haw. 2000) ("[a]bsent express false certifications upon which funding is conditioned, the False Claims Act provides no remedy"). As I indicated above, I can conceive no reason to give greater weight to contract provisons than duly-adopted regulations. Given the qualifying language, the court cannot find an express statement of compliance with the design documents, nor any clearly false information in the applications for payment themselves. a. Implied Certification
EID argues an alternate theory, "implied certification," which would impose a lower hurdle for liability. As I explain below, there is a dispute among the circuits as to whether or not an implied certification suffices to support a cause of action under the False Claims Act.
In Swan, the court included a footnote which observed that it had previously "rejected plaintiffs' implied certification theory, noting that the Ninth Circuit has not adopted the implied certification theory of FCA liability recognized by some courts." 279 F.Supp.2d at 1216, n. 3. A number of other courts have also concluded that the Ninth Circuit has not adopted an implied certification theory. See Lum v. Vision Service Plan, 104 F.Supp.2d at 1241-42; U.S. ex rel. Hopper v. Anton, 91 F.3d 1261, 1267 (9th Cir. 1996) ("For a certified statement to be `false' under the Act, it must be an intentional, palpable lie. Innocent mistakes, mere negligent misrepresentations and differences in interpretations are not false certifications under the Act." (internal citations omitted)); U.S. ex rel. Graves v. ITT Educational Services, Inc., 284 F.Supp.2d 487, 497 (S.D. Tex. 2003) ("The Fifth Circuit, with the Second, Fourth, Ninth, and District of Columbia Circuits, has held that a claim under the False Claims Act is `legally false' only where a party affirmatively certifies compliance with a statute or regulation as a condition to receiving governmental payment or property");see also Shaw v. AAA Engineering Drafting, Inc., 213 F.3d at 532 (10th Cir. 2000) (citing Ninth Circuit cases the court found that "[n]ot all courts have embraced the theory that an FCA suit may be based on an implied certification.").
Despite the weight of authority to the contrary, one case from the Central District of California has recently found that the implied certification theory was consistent with the legislative history surrounding the federal FCA. U.S. ex rel. Holder v. Special Devices, Inc., 296 F.Supp. 2d 1167, 1176 (C.D. Cal. 2003). The court found that Hopper (the only Ninth Circuit case cited in the list above and the one upon which most of the other cases rely) did not actually reach the question of implied certification. Id. at 1176. It is true that it is difficult to resolve whether the court in Hopper was focusing on the lack of a certification or the lack of a requirement for certification.Id. at 1266. Nonetheless, the Hopper court does emphasize that "[m]ere regulatory violations do not give rise to a viable FCA action" particularly where "regulatory compliance was not a sine qua non of receipt of state funding." Id. Holder distinguished Hopper's statements requiring an express certification largely on the ground that the legislative history of the federal act intended to allow implied certification claims. Without entering the thicket of debate about when it is appropriate to consult legislative history, I note that the legislative history cited is far from clear on the subject. Both Holder and Shaw rely on a Senate Committee report stating that a false claim under the FCA "may take many forms, the most common being a claim for goods or services not provided, or provided in violation of contract terms, specification, statute, or regulation." S. Rep. No. 99-345, at 9 (1986). This language may demonstrate an intent that the federal FCA address claims relating to both the number of services provided and the content of the services; it does not, however, provide any insight into the clarity required in the claim itself.
The court said that the "forms do not contain any certification concerning regulatory compliance." Hopper, 91 F.3d at 1267.
It should also be remembered that it is legislative history of the federal and not the state act. There is nothing to indicate that the state legislature was aware of the cited history and relied on it in adopting the state statute.
Moreover, this court finds persuasive the reasoning of theHopper court that there are "administrative and other remedies for regulatory violations," and of course the same may be said for contract violations as well. Contrary to plaintiff's contention at oral argument, the congressional history does not suggest that the violation of contract terms should be treated differently than violations of laws or regulations which bind those seeking payment from the government. I conclude that, even assuming the propriety of resort to legislative history, that history (upon which Holder relies) is not clear enough to require this court to depart from the weight of authority holding that the Ninth Circuit has rejected implied certification claims.
Hence, finding that no implied false certification theory exists in this circuit, the court finds that there was no false claim submitted in the applications for payment. Indeed, an implied certification doctrine has the potential to open the door to a flood of cases involving no more than breaches of contract. 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.
This finding extends to the causes of action brought under all three of the different FCA sections since they all require a false claim of some sort.
Of course, the project owner who desires exact information can require a direct and unambiguous certification.
C. FRAUD
The elements of common law fraud in California are "(a) misrepresentation (false representation, concealment or nondisclosure), (b) knowledge of falsity, (c) intent to defraud, i.e., intent to induce reliance, (d) justifiable reliance; and (e) resulting damage." B.E. Witkin, Summary of California Law, 9th Ed., Vol. 5, Torts, § 676. TBI seeks to have the fraud cause of action dismissed on the grounds that there is no false statement in the Payment Applications. EID seeks to have the court establish only the first two elements of the fraud claim at this time: misrepresentation and knowledge of falsity.
A recent decision by the California Supreme Court guides review of the instant fraud claim. In Robinson Helicopter Co., Inc. v. Dana Corp., the Court reviewed a breach of contract case in which intentional and negligent misrepresentation claims were also brought. 34 Cal.4th 979, 991-92 (2004). The Court explained that ordinarily under California's public policy tort causes of action should be disallowed where there is an available contract remedy. "Courts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies." Id. (internal quotations omitted). The court concluded, however, that fraud allegations in contract cases present a different issue since they deal with intentional misrepresentations constituting an extra layer of blameworthiness Id.
Unlike FCA claims, California's common law fraud doctrine does not require an express representation, but fraud may be implied by or inferred from the circumstances. Universal By-Products, Inc. v. City of Modesto, 43 Cal.App.3d 145, 151 (1974). All that is required is that "the misrepresentation must be a material and knowingly false representation of fact." Orient Handel v. United States Fid. Guar. Co., 192 Cal.App.3d 684, 693 (2d. Dist. 1987).
Again, in the matter at bar, the Payment Applications themselves do not state anything which is untrue on their face. Nonetheless, it is possible that a reasonable jury might conclude from the totality of the circumstances that the payment applications implied that the work was proceeding in accordance with the design documents.
Defendant at oral argument raised the need for plaintiff to have plead the specific instances of fraud. As a result, there is currently pending a motion to amend the complaint which may allow the plaintiff to specifically add the June 11th statements to their fraud cause of action. In the meantime, the court will discuss the June 11th statements as they were elucidated in the summary judgment briefing and at oral argument as they appear to raise, at a minimum, issues of disputed fact.
As noted earlier, the June 11, 2002 meeting minutes state "California Construction Services [is] to finish Survey check of tunnel vertical control. Findings [are] to be confirmed but preliminary report shows they closed loop and matched TBI survey of tunnel alignment and grade within a 1-1/4 inch." Supp. Firstman Dec., Ex. F. EID argues that this language is a misrepresentation that the tunnel was only 1 1/4 inches off, while TBI argues that the minutes clearly note only that the CCS survey confirmed the results of the TBI survey within 1 1/4 inches, not that the actual grade was within 1 1/4 inches of the as-planned alignment. EID responds pointing to the McDonald deposition where the witness testified that it was his opinion that most people in the industry would think it was a comparison to the as-planned alignment and not merely a comparison of two surveys. McDonald McDonald at 290-291. They also point to a letter from MWH dated June 18, 2002 which notes that "California Construction Services (CCS) has not completed reducing survey notes to verify TBI's horizontal and vertical alignment control survey of new tunnel. However, spot review indicates CCS is within 0.10 foot (1 1/4") of TBI's survey control." Stump Dec., Ex. C. Close reading of that language, however, suggests that it share the same ambiguity found in the June 11 minutes.
Whether or not the testimony constitutes an admission, defendant can hardly claim that McDonald was unqualified to express such an opinion, given the witness' function relative to the construction of the tunnel.
TBI points to contentions filed by EID in support of a discovery motion before Judge Hollows. There EID argued "[a]t the District's prodding, TBI hired an independent expert, California Construction Services ("CCS"), to measure grade and alignment in the Tunnel after construction was well underway. The District received only partial results from CCS's survey during construction, that compared CCS' as built survey, but did not compare either survey with the as-planned location of the Tunnel." Ex. 20 to Budgwig Dec. at 13:6-10 (emphasis added).
All the above simply demonstrates that there is a triable issue of fact regarding what the June 11, 2002 meeting minutes meant, and a dispute about whether under the circumstances the applications for payment were fraudulent. Thus, summary judgment on the fraud claim is denied for both parties.
The other question that EID would have the court resolve is whether there was sufficient knowledge of the tunnel misalignment to meet the second fraud prong. In conformity with the above analysis, there is a triable issue as to whether TBI knew that their applications for payment were fraudulent, even if they knew that the tunnel was misaligned. As the leading text on California law puts it, "ambiguous statements, with a possible true or false meaning, are fraudulent only if the false meaning was intended, or if the statement was made with either reckless indifference as to how it would be interpreted or without any belief as to how it would be understood." B.E. Witkin, Summary of California Law, 9th Ed., Vol. 5, Torts, § 704 (citing Restatement (Second) of Torts § 527). Under the present record, it is clear that they are contested issues of fact which must be resolved by the jury.
There is also a triable issue about whether EID had knowledge of the misalignment, but that would likely fall under the fourth prong of "justifiable reliance."
IV. ORDERS
For all the foregoing reasons, the court hereby ORDER as follows:1. Summary Judgment is DENIED to defendant with respect to the following damages:
A. $1,538,313.00 for MWH's extended project management services beyond the contractual completion date;
B. $252,485.00 for EN2's extended environmental monitoring services;
C. $1,571,888.00 for HPT's extended water treatment services;
2. Summary Judgment is GRANTED to defendant with respect to the $1,901.333.00 for loss of public grant funds due to delay in completion;
3. Summary judgment is GRANTED to defendant on all of the False Claims Act causes of action (second through eleventh) and DENIED to plaintiff; and
4. Summary judgment is DENIED to both parties relative to the fraud cause of action.
IT IS SO ORDERED.