Monday, March 11, 2013

Appel v. Superior Court (Cal. Ct. App. - March 11, 2013)

As I was reading it, I thought I was going to go ballistic about this case.  Fortunately, the Court of Appeal didn't do what I thought it was going to do.  But it still doesn't go far enough.

The basic facts are these:  Developer hires Construction Company to build a condo project for $65 million.  Everyone agrees lots of change orders are subsequently approved that increase the price to $81 million, but after the project is finished, Construction Company claims it is entitled to an additional $13 million, so sues Developer as well as files mechanics liens against the individual buyers of the condos.

Developer and Construction Company subsequently settle their claims in return for a $32 million stipulated judgment against Developer -- which is meaningless because it's penniless -- and the settlement agreement says (1) the $32 million won't count as an offset against the lien claims against the condo owners, and (2) that the "contract price" for the work is "officially" $95 million.  That latter part's important because under the mechanic lien's statutes, Construction Company's liens are limited to the lesser of (a) the value of the work it performed, or (b) the contract price.  And, remember, the original contract price was only $65 million, not $95 million.

Then, prior to trial, Construction Company files a motion in limine saying that the individual condo owners aren't able to contest the contract price because it's now "officially" $95 million pursuant to the settlement agreement.  Here's what the trial court says about this argument at the hearing:

"COURT: Are you saying [the unit owners] don't have a right to attack the . . . value of the contract which was agreed after the fact as part of the settlement?

WEBCOR [The Construction Company]: We don‟t believe they have a right to attack that.

COURT: Well, that is just boggling to my mind. [¶] . . .[¶] [I]t totally boggles my mind, because you could agree to anything, anything [in the settlement]."   The trial court ultimately holds that it doesn't matter what the contract price was; that the only thing that matters is the value of the services rendered.   The Court of Appeal is critical of the trial court's reasoning.  It holds that, nope, the statute still says that liens are limited to the lesser of the contract price or the value of the services.  So the trial court got it wrong by takign the contract price "off the table" as an issue for trial.  That part I agree with.  It correctly interprets the statute.   Because the Court of Appeal's opinion was so critical of the trial court, however, I thought that, in the end, they might also disagree with the trial court's view that the "official" contract price established as part of the settlement shouldn't be binding.  Had the Court of Appeal done that, I would have strongly disagreed with this conclusion.  Which is, obviously, the Construction Company's position on the writ petition.   Fortunately, Justice Zelon doesn't do that.  The Court of Appeal instead holds that whether the settlement agreement was a "sham" is an issue that the trial court should decide on remand.  Moreover, Justice Zelon says that the Court of Appeal has "serious doubts" about whether the settlement agreement is indeed binding on the contract price issue as claimed by the Construction Company.  So that's a little push that hints at what the trial court might well permissibly find.   All that's good and fine.  I'm on board for that.   But I'd have gone further, and made things crystal clear.   There's no way the settlement agreement is binding on this point.  No way.  Sham or not.   Private parties can't take away a third party's statutory rights.  At least without notice and an opportunity to be heard.  That's an essential element of due process.  Regardless of what the settlement agreement says, and regardless of whether it's a sham, nothing in that settlement agreement can take away the affirmative defense that the condo owners have under the statute.  Nothing.  As a matter of law.   The statute says that the condo owners can avoid a lien if Construction Company has already been paid (1) the reasonable value of the workit performed, or (2) the contract price.  That's right.  If the contract says that Construction Company's only entitled to $65 million (or $80 million, or $85 million, or whatever), and it's already received payment of that amount, end of lawsuit.  Doesn't matter if the value of their services was $150 million.  They should have negotiated for a better contract.  No lien.   The Developer and the Construction Company can't get around that rule by doing what they did here; i.e., entering into what's ostensibly a retroactive "change order" as part of the settlement agreement that "sets" the contract price at $95 million.  The work's already been performed.  The contract already exists.  The condo owners have a vested statutory right to avoid any lien in excess of the contract price.  Private parties can't destroy that affirmative defense without giving the condo owners notice and an opportunity to be heard, and that's exactly what they're seeking at trial -- a factual determination, based on the evidence, as to what the actual contract price was.  They're entitled to that, and nothing in the settlement agreement can change that.   So I wouldn't have remanded the case by instructing the trial court to do whatever it thought was factually and legally appropriate with respect to the contract price issue.  Because in my view, as a matter of law, as well as a matter of constitutional doctrine, there's only one right answer.  So I'd go ahead and say so.  Even if the settlement agreement wasn't a sham, it's still not binding on a third party.  The contract price is what the contract price is, and the condo owners get to produce evidence on that point at trial.  What's true for issue preclusion is equally true for settlement agreements.  You can't bind a nonparty.