B. C. Richter Contracting Co. v. Continental Cas. Co.

• Decision Date: 06 November 1964
• Citation: 41 Cal.Rptr. 98,230 Cal.App.2d 491
• Court: California Court of Appeals Court of Appeals
• Parties: B. C. RICHTER CONTRACTING CO., Inc., a corporation, and B. C. Richter, doing business as R. & E. Materials Co., Plaintiffs, Appellants and Respondents, v. CONTINENTAL CASUALTY COMPANY and Fidelity & Casualty Company of New York, Defendants, Appellants and Respondents. Civ. 10700.

Page 98

41 Cal.Rptr. 98

230 Cal.App.2d 491

B. C. RICHTER CONTRACTING CO., Inc., a corporation, and B. C. Richter, doing business as R. & E. Materials Co., Plaintiffs, Appellants and Respondents, v. CONTINENTAL CASUALTY COMPANY and Fidelity & Casualty Company of New York, Defendants, Appellants and Respondents.

Civ. 10700.

District Court of Appeal, Third District, California.

Nov. 6, 1964.

Rehearing Denied Dec. 2, 1964.

Rich, Fuidge, Dawson, Marsh, Tweedy & Morris, Marysville, for defendants-appellants-respondents.

Robert V. Blade, Oroville, for plaintiffs-appellants-respondents.

FRIEDMAN, Justice.

In these two consolidated actions two subcontractors have sued on the prime contractor's surety bond. The plaintiffs sought what they termed 'quantum meruit' recovery, measured by the reasonable value of unpaid labor and materials. The trial court limited their recovery to a lesser amount, the unpaid remainder of the contract price, plus interest and attorney fees. Plaintiffs appeal. Defendant surety companies appeal from that portion of the judgment awarding attorney fees.

The dispute grows out of the construction of Capehart Act ¹ housing at Beale Air Force Base. The general scheme of Capehart Act operations is described in Continental Casualty Company v. United States for Use and Benefit of Robertson Lumber Co., 305 F.2d 794 (8th Cir. 1962). The act permits contracts between the United States and private housing corporations which undertake to finance and construct rental housing for military personnel and their families. One part of the arrangement is a long-term ground lease from the government to the housing corporation, which the latter may mortgage as security for a construction loan from a financial institution. The corporation must put up performance and payment (labor and material) bonds. The government and the corporation then let a construction contract. Rental income of completed units pays off the loan principal and interest. When the mortgage is paid off, the lease to the housing corporation comes to an end and the government then holds clear title to the housing.

In August 1958 the United States Air Force and the Federal Housing Administrator entered into contracts with several housing corporations for the construction of 570 Capehart Act dwelling units at Beale Air Force Base. For convenience we refer to these corporations collectively as 'Hal B. Hayes & Associates.' In conformity with Capehart Act requirements (42 U.S.C.A. § 1594(a)), Hal B. Hayes & Associates furnished performance bonds and payment bonds with defendants Continental Casualty Company and Fidelity and Casualty Company of New York as sureties. Purpose of the payment bonds was the protection of subcontractors, laborers and materialmen participating in the construction project. Gravamen of the bonds was the following provision: 'NOW, THEREFORE, the condition of this obligation is such that if the Principal shall promptly make payment to all claimants as hereinafter defined for all labor and material furnished in the prosecution of the work provided for in the Contract, then this obligation shall be null and void; otherwise, it shall remain in full force and effect.'

Hal B. Hayes & Associates contracted the actual construction work to Hayes-Cal Builders, Inc., a related corporation. The latter in turn subcontracted site clearing, grading, street paving, installation of concrete pads and some other work to plaintiff B. C. Richter Contracting Company. Another subcontract was let to a joint venture called R. & E. Materials Company covering delivery of ready-mix concrete. (B. C. Richter, an individual, was one of the joint venturers and maintains the suit on the R. & E. Materials Company contract.) The subcontractors commenced work in September 1958.

As the work progressed, antagonisms developed between the two subcontractors and representatives of the Hal B. Hayes group. At the trial plaintiffs produced evidence designed to show mismanagement and lack of project coordination by the Hayes firm, unjustified change orders, failure to make progress payments and delays and hindrances which handicapped the subcontractors and made their work more expensive. Hayes commenced to insert a 'release clause' in the requisitions for progress payments, which would have required the subcontractors to disclaim any unpaid amounts as a condition of receiving progress payments. Plaintiffs would submit the requisitions after crossing out the release clauses. Hayes-Cal Builders then refused to make the progress payments. It withheld progress payments from B. C. Richter Contracting Company commencing in July 1959 and from R. & E. Materials Company commencing September 1959.

Notwithstanding quarrels, claims of breach and the lack of progress payments, both subcontractors continued with the work. By March 10, 1960, both subcontracts had been completed. On that date B. C. Richter Contracting Company sent Hayes a notice of rescission, purportedly rescinding its subcontract for misrepresentation, failure to make progress payments and other breaches. R. & E. Materials Company did not send a rescission notice. By the time the last payment was due following completion of the work, Hayes-Cal Builders had failed or refused to pay B. C. Richter Contracting Company contract amounts aggregating $111,961.08. The unpaid balance in the case of R. & E. Materials Company was $58,908.21.

As will become evident, it is necessary to summarize the issues as drawn in the trial court. In the B. C. Richter Contracting Company action, the pretrial conference order states that the unpaid contract balance was $111,961.08; that, because of claimed breaches, the plaintiff gave notice of rescission and claims the 'reasonable value' of all work performed, amounting to $563,138.66 after deduction of payments actually received. The material portion of the pretrial order in the B. C. Richter action (brought under the R. & E. Materials Company contract) describes an unpaid contract balance of $55,172.79 plus $3,735.42 for additional cement grout delivered at the contractor's request; but, that Richter seeks a further or alternate claim of $101,527.07 based upon 'quantum meruit' for goods sold and delivered. The pretrial orders, as well as oral statements of defense counsel in the trial court, indicate that the surety companies were not seriously attempting to defeat recovery of the unpaid contract amounts; rather, their effort was to limit recovery to those amounts.

The pretrial orders omitted a significant aspect of the pleadings. On count of each of the complaints was framed on the theory of an action for the unpaid contract balance plus the extra cost of work allegedly occasioned by the 'negligent and unworkman-like acts and conduct' of Hayes-Cal Builders. The alleged extra cost to B. C. Richter Contracting Company was $283,921.46 and to R. & E. Materials Company $53,332.77. These allegations were traversed by the answers. The pretrial orders did not describe this issue, but referred to reasonable value or 'quantum meruit' as the only theory upon which plaintiffs claimed amounts in excess of the contract balances.

After a nonjury trial, findings were rendered. The trial court found that B. C. Richter Contracting Company's allegation of rescission was untrue; that the Richter firm had waived any right to rescind by continuing to perform its subcontract after any grounds of rescission had arisen; that both plaintiffs had fully performed their work under the subcontracts and that Hayes-Cal Builders had wilfully withheld progress payments without justification. Notably, the trial court's findings (prepared and submitted by defendants) did not find one way or another on plaintiffs' allegations of breach and hindrance by the prime contractor, other than the withholding of progress payments. Judgment was entered in favor of the B. C. Richter Contracting Company and against the sureties for the actual contract balance of $111,961.08 plus interest and a $3,000 attorney fee. On the R. & E. Materials Company contract, the court gave the plaintiff judgment against the sureties for the unpaid contract balance of $58,908.21 together with interest and $2,000 as an attorney fee.

On appeal there are two primary areas of inquiry: first, whether the surety on a Capehart Act bond may be held liable for money in excess of the contract price actually owed by its principal; if so, whether plaintiffs have established their right to excess amounts.

Initially, we must fix the source of decisional law governing us in this action on a bond furnished under federal law. Both state and federal courts have concurrent jurisdiction over suits on bonds furnished for Capehart Act projects. (28 U.S.C.A. § 1352; Continental Casualty Co. v. United States for Use and Benefit of Robertson Lumber Co., supra, 305 F.2d 794; Allsop Lumber Co. v. Continental Casualty Co., 73 N.M. 64, 385 P.2d 625; Ireland's Lumber Yard v. Progressive Contractors, Inc. (N.Dak.), 122 N.W.2d 554 (1963); cf. Gypsum Contractors, Inc. v. American Surety Co., 37 N.J. 315, 181 A.2d 174.) The rights and liabilities of the parties to the contract do not vary with the forum in which adjudication is sought. Since all occurrences in this case took place in this state, California substantive law governs the contractor's liability to the subcontractors. (Beaty v. Brock & Blevins Co., 319 F.2d 43 (6th Cir. 1963); Continental Casualty Co. v. Schaefer, 173 F.2d 5 (9th Cir. 1949), cert. den. 337 U.S. 940, 69 S.Ct. 1517, 93 L.Ed. 1745.) Extent of the surety's liability on the contractor's bond turns on application of a federal statute, and on that point federal court decisions supply the controlling rules. (Continental Casualty Co. v. Schaefer, supra, 173 F.2d 5.)

When Congress adopted it in 1955, the Capehart Act lacked any special provision for contractors' bonds. In that state of the law Capehart Act contractors were required to put up performance...