Alpha v. Travelers Cas. & Sur. Co.

• Decision Date: 04 November 2005
• Docket Number: No. D044616.,D044616.
• Citation: 133 Cal.App.4th 1319,35 Cal.Rptr.3d 496
• Court: California Court of Appeals Court of Appeals
• Parties: ALPHA MECHANICAL, HEATING & AIR CONDITIONING, INC., Plaintiff and Respondent, v. TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA, Defendant and Appellant.

35 Cal.Rptr.3d 496

133 Cal.App.4th 1319

ALPHA MECHANICAL, HEATING & AIR CONDITIONING, INC., Plaintiff and Respondent, v. TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA, Defendant and Appellant.

No. D044616.

Court of Appeal, Fourth District, Division One.

November 4, 2005.

Watt, Tieder, Hoffar & Fitzgerald, Ali Salamirad, Robert C. Niesley, Irvine, and John A. Elworth for Defendant and Appellant.

McAteer & McAteer, Theresa C. McAteer and Christopher E. McAteer, San Diego, for Plaintiff and Respondent.

O'ROURKE, J.

Travelers Casualty and Surety Company of America (Travelers) appeals from a judgment in favor of respondent Alpha Mechanical, Heating and Air Conditioning, Inc, (Alpha) following a bench trial on Alpha's complaint seeking payment from Travelers as surety on a payment bond for R.A.S. Builders, Inc. (RAS). The parties had earlier settled a cross-complaint filed by RAS against Alpha, which RAS had dismissed with prejudice before trial. At trial on Alpha's complaint, the trial court granted Alpha's motion in limine to preclude RAS, on res judicata grounds, from introducing any of the facts related to RAS's dismissed cross-complaint. Travelers contends the court's in limine ruling deprived RAS of its right to defend itself and was error because (1) principles of res judicata and collateral estoppel are inapplicable in that for purposes of res judicata or claim preclusion, the primary rights involved in Alpha's complaint and RAS's cross-complaint are separate and distinct, and for purposes of collateral estoppel or issue preclusion, none of the issues in RAS's cross-complaint were actually litigated; (2) the authority relied upon by the trial judge, Torrey Pines Bank v. Superior Court (1989) 216 Cal.App.3d 813, 265 Cal.Rptr. 217 (Torrey Pines Bank), was wrongly decided and provides no basis for the trial court's in limine order; (3) Alpha agreed in the settlement agreement that RAS's dismissal would not affect its rights in presenting its case at trial and thereby waived its right to challenge RAS's evidence before trial by way of its motion; and (4) policy considerations in furtherance of judicial efficiency militate against applying the holding of Torrey Pines Bank to this case. Travelers further contends the trial court erred as a matter of law by awarding Alpha prompt payment penalties, which also requires that we reverse the attorney fee award in Alpha's favor.

As to Travelers' latter claim, we agree the evidence does not support imposition of penalty interest, and modify the judgment to strike that portion of the award. We affirm the judgment as so modified.

FACTUAL AND PROCEDURAL BACKGROUND

The essential facts are not in dispute. Alpha entered into a subcontract with RAS to install plumbing and perform other mechanical work for construction of a new hotel. Travelers issued a payment bond on RAS's behalf. RAS did not pay Alpha a final installment of approximately $199,000, telling Alpha it was withholding payment because Alpha had caused damage to other trades' work on the project.

Alpha sued RAS and Travelers (as well as other entities not involved in this appeal) demanding payment of the balance of the subcontract. Its complaint included causes of action for breach of contract, open book account, account stated, quantum meruit, foreclosure of a mechanic's lien and enforcement of mechanic's lien release and payment bonds against RAS, and enforcement of a contractor's license bond against Travelers. In part, Alpha alleged it had performed all covenants and conditions of its subcontract and various modifications (change orders) to the subcontract excluding obligations it was prevented or excused from performing, that RAS breached the subcontract and change orders by refusing to pay for labor and materials furnished by Alpha and also by causing Alpha delay and disruption in its work, and that Alpha had suffered damages of not less than approximately $199,000 as a result of RAS's breach.

RAS and Travelers answered, generally denying the allegations in Alpha's complaint and asserting 23 affirmative defenses. In the sixth and eighth affirmative defenses, RAS and Travelers alleged that Alpha's own negligence or unlawful conduct proximately caused in whole or in part the damages alleged in its complaint. In the eleventh affirmative defense, RAS and Travelers alleged Alpha "materially breached its agreement and further failed and refused to comply with the contractual conditions precedent to this action, thereby extinguishing its right to maintain this action...." In the twelfth affirmative defense, RAS and Travelers alleged Alpha was "indebted to them in a sum not yet ascertained and that said sums are an offset against" any of Alpha's claims. RAS concurrently filed a cross-complaint against Alpha and other entities, in part alleging that Alpha breached the subcontract by refusing to correct work that had been deemed defective by the hotel's owner, and breached its duty to use reasonable care in performing the subcontract by negligently installing materials and failing to perform as required under the subcontract. RAS sought over $800,000 in damages consisting of over $300,000 in costs to correct Alpha's assertedly defective work and over $500,000 in "delay damages."

Alpha, RAS and Alpha's indemnitors eventually entered into a settlement agreement and mutual release (the settlement agreement) in which RAS agreed to dismiss its cross-complaint with prejudice in exchange for payment of $162,500. The settlement agreement contained terms preserving Alpha's right to prosecute, and RAS's ability to defend against, Alpha's complaint: "The payment of $162,500 to RAS from Alpha [and its indemnitors], and RAS' [sic] acceptance of said money, in no way affects Alpha's ability to prosecute its lawsuit against RAS or RAS' [sic] ability to defend against the lawsuit pursuant to its general denial filed on or about October 21, 2001, by refuting elements of Alpha's causes of action." This term was included at several points in the settlement agreement as an exclusion to the various waivers under Civil Code section 1542.¹

Before trial, Alpha moved in limine to exclude "all evidence, allegations and claims" related to RAS's affirmative defenses and cross-complaint. Relying on Torrey Pines Bank, supra, 216 Cal.App.3d 813, 265 Cal.Rptr. 217, Alpha argued that the settlement and RAS's receipt of consideration in exchange for the dismissal with prejudice of its cross-complaint as a matter of law prevented RAS from introducing evidence regarding the subject matter of the cross-complaint or its sixth, eighth and eleventh affirmative defenses because those affirmative defenses involved the same nucleus of operative facts and raised the same legal issues (Alpha's breach of contract and asserted negligence) as those presented in RAS's cross-complaint. RAS opposed the motion, arguing evidence of Alpha's defective or negligent performance was an issue raised by the filing of Alpha's complaint and put into controversy by RAS's general denial, and thus evidence of such matters was admissible under Walsh v. West Valley Mission Community College Dist. (1998) 66 Cal.App.4th 1532, 78 Cal.Rptr.2d 725 (Walsh). RAS further argued the settlement agreement expressly reserved RAS's right to defend against Alpha's complaint.

The trial court "reluctantly" granted Alpha's motion under the authority of Torrey Pines Bank. It ruled RAS's evidence of Alpha's assertedly defective performance was inadmissible under principles of res judicata and common law retraxit because it was new matter based on the same facts put in issue by RAS's cross-complaint.

The trial court's evidentiary ruling resulted in an abbreviated trial on the matter.² Alpha presented the testimony of its president, chief executive officer and chief financial officer, Borris Barshak, and RAS presented that of its Southern California regional vice president, Walter Clark. Barshak testified that Alpha performed all of its obligations, but still had a balance due of $199,164.77 under the subcontract with RAS. Barshak admitted that at some point, RAS notified Alpha that it had decided to withhold the subcontract balance based on the fact Alpha had caused damage to other trades' work on the project. Clark testified that RAS had spent $280,000 to pay other subcontractors to repair work that was damaged by Alpha's own work, and for that reason withheld payment to Alpha under a provision in the subcontract that allowed RAS to correct defaults of a subcontractor and deduct the cost of such correction from the subcontract sum.

The court entered a joint and several judgment in Alpha's favor, awarding it the principle sum in the amount of $199,164.44, as well as statutory prompt payment penalties of $70,268.04, prejudgment interest, attorney fees and costs. Travelers appeals.

DISCUSSION

I. Effect of RAS's Dismissal of Its Cross-Complaint with Prejudice

Travelers contends res judicata was not a bar to RAS's ability to present evidence relating to damages and delay caused by Alpha's negligence on the project, even despite RAS's dismissal of its cross-complaint with prejudice. It urges us to reject Torrey Pines Bank as wrongly decided; in part Travelers maintains the majority's reasoning is flawed because it omits the critical elements of collateral estoppel analysis that an issue be actually litigated or necessarily decided in a later proceeding. To address these contentions, we first set out the relevant legal principles and discuss the holding of Torrey Pines Bank. We review the questions presented in this matter de novo, as the decisive facts are undisputed. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799, 35 Cal.Rptr.2d 418, 883 P.2d 960.)

A. Principles of Res Judicata

The doctrine of res judicata "describes the preclusive effect of a final judgment on the merits." (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896, 123 Cal.Rptr.2d 432, 51 P.3d 297 (Mycogen).) It...