Opinion
CV 22-05716-RSWL-SKx
03-13-2023
MORROW-MEADOWS CORPORATION, Plaintiff, v. HONEYWELL INTERNATIONAL INC., Defendant.
DEFENDANT'S MOTION TO DISMISS [22]
HONORABLE RONALD S.W. LEW SENIOR U.S. DISTRICT JUDGE
Plaintiff Morrow-Meadows Corporation (“Plaintiff”) brought the instant Action against Defendant Honeywell International Inc. (“Defendant”) alleging breach of contract and violation of statutory prompt payment penalties (pursuant to Business & Professions Code § 7108.5 and Public Contract Code §§ 7107, 10262, and 10262.5). Currently before the Court is Defendant's Motion to Dismiss [22] (“Motion”).
In the First Amended Complaint, Plaintiff refers to Business & Professions Code section 7108.8. See FAC ¶ 29, ECF No. 20. No such statute exists. Given the circumstances, Plaintiff likely meant to refer to Business & Professions Code section 7108.5. See Pl.'s Opp'n. to Mot. (“Opp'n”) 13:24-25 n.17, ECF No. 23.
Having reviewed all papers submitted pertaining to the Motion, the Court NOW FINDS AND RULES AS FOLLOWS: the Court GRANTS in part and DENIES in part Defendant's Motion WITHOUT LEAVE TO AMEND.
I. BACKGROUND
A. Factual Background
The First Amended Complaint (“FAC”) alleges: Plaintiff, a subcontractor, and Defendant, a general contractor, entered into a master subcontract agreement (the “MSA”). FAC ¶ 4. Prior to signing the MSA, Defendant contracted with the City of Los Angeles (the “City”) to perform work on the Wastewater Information Network System Project (the “WINS Project”). Id. ¶¶ 5-6. The Parties amended the MSA to incorporate certain terms and conditions from Defendant's WINS Project contract. Id. ¶¶ 7-8.
Defendant issued to Plaintiff Purchase Order No. 4402186019 on or about May 17, 2012, and Purchase Order No. 4408556431 on or about July 14, 2016 (collectively “Purchase Orders”). Id. ¶¶ 9-10. The former provided that for $6,961,710, Plaintiff would supply and install the WINS Project's Hyperion Facility's electrical and controls systems with an estimated completion date of December 31, 2018. Id. ¶ 9. The latter provided that for $1,686,970, Plaintiff would supply and install the WINS Project's Terminal Island site's electrical system with an anticipated completion date of December 29, 2017. Id. ¶ 10.
During its performance of the Purchase Orders, Plaintiff suffered substantial delays, and provided Defendant with written notice regarding those delays. Id. ¶¶ 12, 15. Defendant contacted the City to complain about the delays and to seek compensation from the City for the resulting losses that Plaintiff and Defendant suffered while working on the WINS Project. Id. ¶¶ 13-14. Defendant filed claims against the City in part based on the delays that Plaintiff suffered. Id. ¶ 16.
An amendment to the MSA (the “Amendment”) provided that Plaintiff would receive compensation for delays suffered. Id. ¶ 19.
After filing claims regarding the delays on the WINS Project, Defendant recovered $11,075,901 from the City. Id. ¶¶ 28-29.
B. Procedural Background
Plaintiff filed a complaint in the Superior Court of California, County of Los Angeles, on July 6, 2022. Defendant removed [1] this Action to this Court based on diversity jurisdiction on August 12, 2022. Plaintiff filed its FAC on November 21, 2022.
Defendant filed the instant Motion [22] on December 5, 2022. Plaintiff opposed [23] on December 30, 2022. Defendant replied [24] on January 10, 2023.
II. DISCUSSION
A. Legal Standard
Federal Rule of Civil Procedure (“Rule”) 12(b)(6) allows a party to move for dismissal of one or more claims if the pleading fails to state a claim upon which relief can be granted. A complaint must “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation omitted). Dismissal is warranted for a “lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988) (citation omitted).
In ruling on a 12(b)(6) motion, a court may generally consider only allegations contained in the pleadings, exhibits attached to the complaint, and matters properly subject to judicial notice. Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007). A court must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the non-moving party. Klarfeld v. United States, 944 F.2d 583, 585 (9th Cir. 1991). “[T]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Jackson v. Birmingham Bd. of Educ., 544 U.S. 167, 184 (2005) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). While a complaint need not contain detailed factual allegations, a plaintiff must provide more than mere “labels and conclusions” or “a formulaic recitation of the elements of the cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). However, a “well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and “that a recovery is very remote and unlikely.” Id. at 556 (quoting Scheuer, at 236).
B. Discussion
1. Judicial Notice
Before turning to the merits of Defendant's Motion, the Court firsts address Defendant's request for judicial notice. A court may take judicial notice of an adjudicative fact that is “not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). Under the judicially created incorporation-by-reference doctrine, “[a] court may consider evidence on which the complaint ‘necessarily relies' if: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion.” Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006).
Here, Defendant requests the Court take judicial notice of the Purchase Orders. Def.'s Mot. to Dismiss (“Mot.”) 5:23-6:4, ECF No. 22. Plaintiff alleged a breach of contract claim because Defendant “breached the two Purchase Orders.” FAC ¶ 21. Thus, the claim necessarily relies on the Purchase Orders' contractual provisions, and the Purchase Orders are central to the FAC. See Marder at 448. Moreover, Plaintiff did not question the authenticity of the documents attached to the Motion. See generally Opp'n. Therefore, it is appropriate for the Court to consider the Purchase Orders under the incorporation-by-reference doctrine, rather than take judicial notice. Accordingly, the Court DENIES Defendant's request for judicial notice and instead considers the Purchase Orders under the incorporation-by-reference doctrine.
2. Plaintiff Properly Stated a Breach of Contract Claim a. Elements of a Breach of Contract Claim
A claim for breach of contract requires the plaintiff to prove four elements: (1) existence of a contract; (2) plaintiff's performance; (3) defendant's breach; and (4) damage to plaintiff because of the breach. Body Jewelz, Inc. v. Valley Forge Ins. Co., 241 F.Supp.3d 1084, 1090 (C.D. Cal. 2017) (internal citation omitted). To survive a motion to dismiss, a complaint must include more than mere “labels and conclusions” or a “formulaic recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The complaint must offer a cognizable legal theory under the facts alleged. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988) (citation omitted).
Here, Plaintiff adequately alleges the elements of a breach of contract claim. Plaintiff states that a contract existed when Plaintiff signed the MSA with Defendant on September 28, 2010. FAC ¶ 4. Next, Plaintiff contends it performed all work mandated by the Purchase Orders except for any work prevented or excused by Defendant. Id. ¶ 18. Plaintiff also argues that it was damaged by delays due to paying extended performance costs. Id. ¶ 17. Section 2.2.2 of the Amendment (“Section 2.2.2”) provided Plaintiff with a claim for relief for delay damages. Id. ¶ 19. Finally, Plaintiff asserts that Defendant breached the contract by failing to compensate Plaintiff for the damages it suffered due to project delays. Id. ¶ 21. In sum, Plaintiff has sufficiently alleged a breach of contract claim.
b. The Limitation of Liability Clause
Defendant argues that the Purchase Orders “Section 28: Limitation of Liability” limits Defendant's liability from “indirect, incidental, [and] consequential” damages. See Def.'s Exhibits, Ex. 1, ECF No. 22. Defendant further argues that Plaintiff's breach of contract claim is a claim for delay damages, and therefore a claim for consequential or incidental damages. See Mot. at 7:16-24. Defendant asserts that the Limitation of Liability Clause causes Plaintiff's claim for delay damages to “fail as a matter of law.” See id. at 7:25.
As the Court's decision rests on other grounds, the Court does not decide whether a claim seeking damages for “delays” is a claim for “consequential or incidental damages.”
When contracting, Plaintiff and Defendant signed the Purchase Orders, the MSA, and the Amendment. Section 2.2.2 enabled Plaintiff to make claims and be compensated for delay damages. See FAC ¶ 19. Upon inspection, it appears that Section 2.2.2 and Section 28 of the Purchase Orders conflict with or contradict each other. Section 2.2.2 enables Plaintiff to recover delay damages while Section 28 of the Purchase Orders may limit Plaintiff from recovering such damages. Plaintiff asserts that the terms in the Amendment control over the terms in the Purchase Orders. Opp'n at 8:4-7. Defendant asserts the opposite, that the terms in the Purchase Orders take precedence. Def.'s Reply to Pl.'s Opp'n. (“Reply”) 5:14-20, ECF No. 24.
Looking at the Purchase Orders, it becomes clear that the Amendment controls. The Purchase Orders contain terms and conditions that establish an order of precedence when there is conflict between contractual documents. See Def.'s Exhibits, Ex. 1. They state the following:
In the event of any conflict among provisions
. . . the following order of precedence applies: a) any consignment agreement; then b) any supply agreement; then c) any contract for labor services; then d) the face of the Purchase Order and any supplemental terms included or incorporated by reference; then e) these general Purchase Order provisions; and finally f) other contract documents agreed to in writing by the parties.See id.
Defendant asserts that the Amendment should be treated as “other contract documents agreed to in writing” (sixth in the order of precedence) and therefore the Purchase Orders (fifth in the order of precedence) should control. Reply at 5:14-20. However, Defendant offers no support for the contention that the Amendment would qualify as “other contract documents” rather than a “supply agreement” (second in order of precedence) or a “contract for labor services” (third in the order of precedence). The MSA uses the title “Master Service Agreement” while both the MSA and Amendment refer to Plaintiff as “Supplier.” Furthermore, the Amendment contains headings such as “Length of Workday and Work Week,” “Covered Work,” and “Non-Conforming Work.”
Therefore, it follows that the Amendment would qualify as a “supply agreement” or “contract for labor services” rather than “other documents” as Defendant claims. See Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd's, No. 1:14-953 WBS SAB, 2016 U.S. Dist. LEXIS 7629, at *8 (E.D. Cal. Jan. 20, 2016) (“An unambiguous contract provision is enforced according to the plain meaning of its terms, and courts commonly refer to the dictionary to ascertain a provision's plain and ordinary meaning.”)
Whether the Amendment is a “supply agreement” or “contract for labor services,” Section 2.2.2 takes precedence over the Limitation of Liability Clause.Given that if there is a conflict, Section 2.2.2 takes precedence, Plaintiff can recover delay damages as prescribed by Section 2.2.2.
Section 2.2.2 and the Limitation of Liability Clause may not conflict with or contradict each other. 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”); Fernandez v. K-M Indus. Holding Co., 646 F.Supp.2d 1150, 1160 (N.D. Cal. 2009) (“inconsistent terms should be ‘reconciled, if possible, by such an interpretation as will give some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract.'”). The Court does not need to decide whether the two terms are in conflict however, because if they are, Section 2.2.2 would take precedence as discussed above. See Def.'s Exhibits, Ex. 1.
c. Contractual Condition
Defendant argues that to recover under Section 2.2.2, Plaintiff must have given Defendant a detailed statement of the costs of the delays “within seven calendar days after the termination thereof.” Mot. at 8:4-8. Defendant further argues that “the FAC does not allege that Plaintiff satisfied this condition.” Id. at 8:10.
“In order to state a claim for breach of contract, . . . the performance of conditions precedent must be alleged either generally or specifically.” Challenge Printing Co., Inc. v. Elecs. for Imaging Inc., 500 F.Supp.3d 952, 963 (N.D. Cal. 2020). Notably, on a motion to dismiss, a court must “draw all reasonable inferences in favor of the nonmoving party.” Retail Prop. Tr. v. United Bhd. of Carpenters & Joiners of Am., 768 F.3d 938, 945 (9th Cir. 2014). Here, Plaintiff has generally alleged compliance with Section 2.2.2's contractual condition. See generally FAC. Plaintiff has alleged that it “repeatedly provided written notice to [Defendant] that Plaintiff was being delayed due to the actions or inaction of others.” Id. ¶ 15. Furthermore, Plaintiff “has performed all things on its part to be performed under” the Purchase Orders. Id. ¶ 18. Defendant was also “aware of the delays and resulting damages being suffered by Plaintiff,” while writing to Plaintiff to quantify its delay damages. Id. ¶ 16. Therefore, given the motion to dismiss standard, it can be reasonably inferred that Plaintiff complied with Section 2.2.2's conditional notice requirement.
Defendant argues that New York law applies to Plaintiff's breach of contract claim. See generally Mot. Like California courts, New York courts “have repeatedly found general allegations that the plaintiff satisfied the condition precedent to be sufficient.” Superior Site Work, Inc. v. NASDI, LLC, No. 14-cv-1061 (ADS) (SIL), 2016 U.S. Dist. LEXIS 15793, at *22 (E.D.N.Y. Feb. 9, 2016); see also Mendez v. Bank of Am. Home Loans Servicing, LP, 840 F.Supp.2d 639, 650 (E.D.N.Y. 2012) (“[A]t the motion to dismiss stage, ‘[t]he issue is not whether a plaintiff will . . . prevail on [his or] her claim but whether [he or] she is entitled to offer evidence in support of the allegations in the complaint.'”) Here, either under New York or California law, Plaintiff has pled compliance with Section 2.2.2's condition. The Court therefore does not need to and does not decide whether New York or California law applies to Plaintiff's claims.
In sum, the Court DENIES Defendant's Motion to Dismiss as to Plaintiff's breach of contract claim.
3. Prompt Payment Statute Claim
a. Statutes Not Applicable Under the Facts Offered by Plaintiff
Plaintiff alleged that Defendant violated four California “prompt payment statutes” (collectively, the “Statutes”). See FAC ¶ 17. The first statute is California Business and Professions Code section 7108.5, which provides that within seven days of receiving progress payments, a “prime contractor” must pay its subcontractors according to their interest in the payment. Cal. Bus. & Prof. Code § 7108.5. The next two statutes, California Public Contract Code Sections 10262 and 10262.5, impose the same requirement. Cal. Pub. Cont. Code § 10262 (“The contractor shall pay to his or her subcontractors, within seven days of receipt of each progress payment, the respective amounts allowed the contractor on account of the work performed by his or her subcontractors, to the extent of each subcontractor's interest therein”); Cal. Pub. Cont. Code § 10262.5. The final statute cited is California Public Contract Code section 7107, which holds that contractors must pay their subcontractors their share of retention proceeds within the same seven-day timeframe. Cal. Pub. Cont. Code § 7107.
Here, because of delays, Defendant served the City with various claims for compensation, including Claim No. 004. FAC ¶¶ 17, 26. Plaintiff alleged Defendant violated the Statutes by refusing to pay Plaintiff any portion of its Claim 004 “recovery.” Id. ¶ 29. However, Plaintiff failed to allege that it possessed any contractual interest in the recovery, and the Statutes all presuppose a contractual payment obligation. See, e.g., Cal. Bus. & Prof. Code § 7108.5 (“to the extent of each subcontractor's interest therein”); see generally FAC. Instead, Plaintiff merely alleged that because Claim No. 004 included compensation requests based off Plaintiff's delays, it was entitled to a portion of the recovery. Id. ¶ 31. Nowhere in the FAC does Plaintiff allege that the City or Defendant intended for Claim No. 004 to compensate Plaintiff. See generally id. Therefore, Plaintiff's Statutes claim is insufficiently pled.
Plaintiff's Statutes claim is insufficiently pled for other reasons as well. California prompt payment statutes distinguish between payment types; thus, as a threshold matter, courts must evaluate the type of payment involved to determine what statutes apply. Harry D. Miller & Marvin B. Starr, Ch. 31. Construction Law and Contracting, in Miller and Starr Cal. Real Est. (4th ed. 2015) § 31:92. Both “progress payments” and “retention proceeds” are defined terms in the construction trade. Id. “A progress payment is a . . . periodic payment, paid over the length of a project . . . typically on a percentage of work during a defined time period.” Id. “Retention proceeds” refer to payment withheld by an owner or contractor until project completion to secure full contract performance. Id.; see also Yassin v. Solis, 108 Cal.Rptr.3d 854, 861 (2010) (noting that “retention occurs when the owner retains a percentage from each progress payment as a form of security”) (citing Kenneth C. Gibbs et al., Cal. Construction Law (16th ed. 2000) § 3.02[A][5] at 103).
Here, Plaintiff alleges that it requested “extended performance costs incurred as a result of the repetitive and pervasive delays on the projects.” FAC ¶ 24. The Purchase Orders appear to contain no provisions that would compensate Plaintiff's extended performance costs. See generally Def.'s Exhibits. The only provision that would compensate Plaintiff for extended performance costs, is Section 2.2.2. See generally FAC. This provision does not define the extended performance costs as “progress payments” or “retention proceeds,” but instead as delay damages. See id. Therefore, given that Plaintiff is requesting “extended performances costs,” Plaintiff is neither requesting progress payments nor retention proceeds, but instead is requesting delay damages. See FAC ¶¶ 21, 24. Given that the Statutes only apply to progress payments and retention proceeds, Plaintiff's request for delay damages should have been exclusively brought under its breach of contract claim.
The Purchase Orders appear to have explicitly established “Terms of payment” - “90% Net, 10% Retention.” See Def.'s Exhibits. These provisions likely entitled Plaintiff to 90% of the Purchase Orders' payment within ninety days of the invoice receipt and enabled Defendant to retain 10% of the cost until project completion. The latter 10% would qualify as “retention proceeds” under California Public Contract Code § 7107.
Furthermore, Plaintiff does not allege that Defendant failed to pay Plaintiff the full contract price of the two Purchase Orders. See generally FAC; see also Murray's Iron Works, Inc. v. Boyce, 158 Cal.App.4th 1279, 1297 (2008) (“Progress payments . . . are payments of portions of the contract price based upon the progress of the contract work.”); Blois Constr., Inc. v. FCI/Fluor/Parsons, 245 Cal.App.4th 1091, 1096 (2016) (holding that retention proceeds are payments of part of a contract price that are withheld). Delay damages are “damages due to construction being completed later than anticipated.” Chinese Hosp. Ass'n v. Jacobs Eng'g Grp., Inc., No. 18-cv-05403-JSC, 2019 U.S. Dist. LEXIS 198635, at *11 (N.D. Cal. Nov. 15, 2019).
In its FAC, Plaintiff did not allege that Defendant failed to timely proffer any of the contractually owed payment. See generally FAC. Furthermore, Plaintiff did not allege that Plaintiff possessed a contractual interest in Defendant's Claim No. 004 recovery. The Court therefore GRANTS Defendant's Motion on Plaintiff's statutory prompt payment penalties claim.
4. Leave to Amend
“Where a motion to dismiss is granted, a district court must decide whether to grant leave to amend.” Winebarger v. Pennsylvania Higher Educ. Assistance Agency, 411 F.Supp.3d 1070, 1082 (C.D. Cal. 2019). “The court should give leave [to amend] freely when justice so requires.” Fed.R.Civ.P. 15(a)(2). In the Ninth Circuit, “Rule 15's policy of favoring amendments to pleadings should be applied with ‘extreme liberality.'” United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981). Against this extremely liberal standard, the Court may consider “the presence of any of four factors: bad faith, undue delay, prejudice to the opposing party, and/or futility.” Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001) (citation omitted).
Here, allowing Plaintiff to amend the FAC would be futile because there is no indication that any additional facts exist that would establish a statutory prompt payment penalties claim. Given that the provided contracts do not give Plaintiff an interest in Defendant's settlement with the City, Plaintiff's claim cannot be cured through amendment. Because the defective prompt payment penalties claim cannot be cured through amendment, leave to amend would be futile. See \Nat'l Funding, Inc. v. Com. Credit Counseling Servs., Inc., 817 Fed.Appx. 380, 385 (9th Cir. 2020) (affirming district court's denial of leave to amend because no additional facts are available that would support plaintiff's claim to cure its deficiencies). Therefore, the Court GRANTS Defendant's Motion to Dismiss Plaintiff's prompt payment penalties claim WITHOUT LEAVE TO AMEND.
III. CONCLUSION
Based on the foregoing, the Court DENIES in part Defendant's Motion as to Plaintiff's breach of contract claim and GRANTS in part as to Plaintiff's statutory prompt payment penalties claim WITHOUT LEAVE TO AMEND.
IT IS SO ORDERED.