Titan Elec. v. L.A. Unified School Dist.

Citation72 Cal.Rptr.3d 570,160 Cal.App.4th 188
Decision Date19 February 2008
Docket NumberNo. B194748.,B194748.
CourtCalifornia Court of Appeals
PartiesTITAN ELECTRIC CORPORATION, Plaintiff and Appellant, v. LOS ANGELES UNIFIED SCHOOL DISTRICT and Kemp Bros. Construction, Inc., Defendants and Respondents.

Ross, Dixon & Bell, Kevin F. Kieffer and Lindsay J. Reese, San Diego, for Plaintiff and Appellant.

Orback, Huff & Suarez, David M. Huff, Colin E. Barr, Los Angeles, and Marley S. Fox, for Defendant and Respondent Los Angeles Unified School District.

Carroll, Kelly, Trotter, Franzen & McKenna, Richard D. Carroll, David P. Pruett, Long Beach; Benedon & Serlin, Gerald M. Serlin and Douglas G. Benedon, Los Angeles, for Defendant and Respondent Kemp Bros. Construction, Inc.

WILLHITE, Acting P.J.

Public Contract Code section 41071 provides that the prime contractor on a public works project cannot "[substitute a person as subcontractor in place of the subcontractor listed in the original bid" unless any of nine listed circumstances exists and the awarding authority consents. (§ 4107, subd. (a).) The statute further provides that absent the awarding authority's consent, the prime contractor cannot "allow [a subcontract] to be performed by anyone other than the original subcontractor listed in the original bid." (§ 4107, subd. (b).)

In the instant case, Kemp Bros. Construction, Inc. (Kemp) was the prime contractor for the Los Angeles Unified School District (the District) on two public works construction projects: the Huntington Park Elementary School (the Huntington Park project) and the Los Angeles Center for Enriched Studies (the LACES project). Titan Electric Corporation (Titan) was Kemp's electrical subcontractor on the projects.

During construction, Kemp petitioned under section 4107 to replace Titan with another subcontractor on both projects, alleging inter alia that Titan had failed or refused to perform its subcontracts (id., subd. (a)(3)) and substantially delayed or disrupted the progress of work (id., subd. (a)(7)). Titan opposed the substitution requests and demanded an administrative hearing. Following several continuances to accommodate the parties' settlement talks, the District held separate hearings on each substitution request. By that time, another electrical subcontractor hired by Kemp had completed the subcontract work on both projects.

Following the hearings, the District issued decisions on each project (initial decisions, followed by amended decisions) granting Kemp's request for substitution. The District also denied Titan's request for rehearing. Titan filed petitions for writ of administrative mandate in the superior court challenging the District's decisions permitting substitution. The superior court denied the petitions, and Titan now appeals.

Titan contends that section 4107, subdivision (b), prohibited Kemp from replacing Titan before the District consented to the substitution, and that the District had no authority to consent to substitution after another subcontractor had completed the work. Titan asks us to hold that Kemp's substitution of Titan was wrongful as a matter of law and that LAUSD's ex post facto consent was unauthorized.

We hold that section 4107 contemplates that the awarding authority's consent to substituting out a listed subcontractor and substituting in a proposed replacement will occur before the prime contractor permits the replacement to perform any work. However, a deviation from this chronology, such as in the instant case, is permissible so long as the procedure used actually complies with the substance of the reasonable objectives of the statute: namely, the prevention of bid peddling and bid shopping after the award of a public works contract, and the providing of an opportunity to the awarding authority to investigate the proposed replacement subcontractor before consenting to substitution.

PROCEDURAL AND FACTUAL BACKGROUND2
Titan's Subcontracts

In March 2003, Kemp entered prime contracts with the District for the Huntington Park and LACES projects. In April 2003, it entered subcontracts on both projects with Titan under which Titan was to perform the electrical work. Titan's subcontracts obligated Titan to "furnish all labor, materials, equipment and other facilities required to perform the work to' complete" the electrical work on the projects, and to "prosecute its work ... in accordance with [Kemp's] progress schedule." Construction of the two projects proceeded concurrently.

Kemp's Agreement to Advance Payroll to Titan

Beginning in early February 2004, Kemp became dissatisfied with Titan's progress on the Huntington Park project. On February 2, 2004, Kemp sent the first of a series of letters (13 in all) complaining that Titan was behind schedule and insisting that Titan put additional workers on the job.

Kemp's CEO Greg Solaas received a telephone call from Titan's owner John Nelson and Titan's vice-president Don Quillao. Nelson and Quillao explained that Titan could obtain more workers from the International Brotherhood of Electrical Workers (IBEW), but that Titan was in a "cash crunch" and could not fund the extra payroll. Solaas agreed that Titan would cover the payroll for eight workers on the Huntington Park project, and that Kemp would pay weekly advances to Titan to cover the payroll for every other worker that Titan supplied. The agreement was oral and separate from Kemp's subcontracts with Titan. Titan continued to be responsible for the entire payroll on the LACES project.

Kemp's Continued Dissatisfaction with Titan's Progress

In the weeks leading up to April 28, 2004, Kemp made weekly payroll advances to Titan totaling $371,341 for the Huntington Park project. However, in Kemp's view, Titan was still understaffing the job and was behind schedule at the critical stage of the electrical work—a view reiterated in ten letters to Titan through April 8, 2004, in which Kemp demanded additional workers and additional shifts. Finally, on April 19, 2004, Kemp wrote: "This last week we were given a revised schedule by Titan Electric for the completion of the low voltage systems so we could again set up the [District] inspections. As of today it appears that Titan and First Fire [a subcontractor of Titan] will again not be ready. [The District] has inspectors set up to start testing the various electrical systems this coming Thursday 04/22/04.... We can not again reschedule these inspections. We are out of time. Titan and First Fire need to work around the clock if need be to complete all work for the Thursday 04/22/04 inspections."

Kemp's Concern Over Titan's Solvency

Kemp's practice had been to pay the weekly advances to Titan on Tuesdays, and Titan would pay the IBEW union employees on Wednesdays. As of Wednesday, April 28, 2004, Kemp had not yet advanced Titan the payroll for the extra workers on the Huntington Park project, a sum which totaled $86,000.

Before making the advance, Kemp's controller, Pat Sullivan, spoke by telephone with Nelson (Titan's owner) and Quillao (Titan's vice president). In the conversation, Sullivan asked why Kemp still had to advance payroll and whether Nelson had a line of credit for the company. Nelson responded that his line of credit was gone and that he had no cash to cover Titan's checks. Sullivan asked for information on Titan's expected profit on the Huntington Park and LACES projects. He later received a fax from Titan stating that Titan expected to lose money on the Huntington Park project, and to make only $30,000 to $40,000 on the LACES project.

Sullivan then reviewed the invoices submitted by Titan to Kemp. He discovered that in April Titan submitted conditional releases and invoices from a material supplier, Main Electric, reflecting that it was owed $200,000 for materials supplied in February and March. Sullivan did not expect the $200,000 debt, because the releases and invoices should have been submitted in the month that the materials were supplied.

Sullivan briefed Solaas, Titan's CEO. They contacted Titan's supplier Main Electric and inquired why the conditional releases in the amount of $200,000 for February and March had not been submitted until April. Main Electric told them that Titan had instructed Main Electric not to supply Kemp with the releases.

Solaas became concerned that if Kemp paid the $86,000 advance, it might not have enough collateral to pay Titan's suppliers (others of whom might not have submitted invoices) and payroll taxes if Titan truly had insufficient funds. He was also concerned that given Titan's apparent financial difficulties, Titan might use the payroll advance to pay other debts. Solaas therefore decided not to make the advance until Kemp sorted out Titan's situation.

Kemp's Withholding of the April 28 Payroll Advance

Quillao (Titan's vice-president) had called several times on April 28 asking when the $86,000 advance would be paid. Late in the afternoon on April 28 Solaas ultimately returned the calls and told Quillao that Kemp would not issue the check until it was able to sort out Titan's situation. Quillao warned that if Titan did not receive the advance, Titan's workers "weren't going to get paid on both jobs and ... were going to stop" work. Solaas asked whether Titan had an available line of credit to cover the payroll. Quillao replied that the credit line was "maxed out," that Titan had no cash, and that Titan could not give Kemp a note on a house in exchange for the advance. Under these circumstances, Solaas refused to issue the advance.

Titan's April 29 Failure to Staff the Projects

Having been informed late on April 28 that Kemp would not make the $86,000 advance on the Huntington Park project, Nelson (Titan's president) instructed Titan's workers on both the Huntington Park and LACES projects to stay home. The next day, April 29, 2004, the only Titan employees who appeared at the Huntington Park and LACES projects were the project manager for the projects,...

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