Crosno Constr., Inc. v. Travelers Cas. & Sur. Co. of Am.

• Decision Date: 17 April 2020
• Docket Number: D075562,D075561
• Citation: 261 Cal.Rptr.3d 317,47 Cal.App.5th 940
• Court: California Court of Appeals Court of Appeals
• Parties: CROSNO CONSTRUCTION, INC., Cross-Complainant and Respondent, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Cross-Defendant and Appellant.

47 Cal.App.5th 940

261 Cal.Rptr.3d 317

CROSNO CONSTRUCTION, INC., Cross-Complainant and Respondent,

v.TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Cross-Defendant and Appellant.

D075561

D075562

Court of Appeal, Fourth District, Division 1, California.

Filed April 17, 2020

SMTD Law, Jonathan J. Dunn, Teresa L. Polk, San Diego, and Ravpreet K. Bhangoo, Bakersfield, for Defendant and Appellant.

Barnick | Hodges Law Corporation, John F. Hodges and Whitney Northington Barnick, Arroyo Grande, for Plaintiff and Respondent.

Rutan & Tucker, Paul Aherne, San Francisco, and Alyssa Roy, Palo Alto, for Construction Employers’ Association as Amicus Curiae on behalf of Defendant and Appellant.

Crawford & Bangs and E. Scott Holbrook, Jr., Covina, for American Subcontractors Association as Amicus Curiae on behalf of Plaintiff and Respondent.

DATO, J.

North Edwards Water District (the District) selected Clark Bros., Inc. (Clark) as its general or direct contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction (Crosno) to build and coat two steel reservoir tanks. The subcontract contained a "pay-when-paid" provision that stated Clark would pay Crosno within a reasonable time of receiving payments from the District, but that this reasonable time "in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment ...." After Crosno completed most of its work, a dispute arose between the District and Clark halting the project. As Clark sued the District, Crosno sought to recover payments owed under the public works payment bond that Clark had obtained for the project.

This appeal involves Crosno’s payment bond claim against the bond surety, Travelers Casualty and Surety Company of America (Travelers). At issue is whether the pay-when-paid provision in Crosno’s subcontract precludes Crosno from recovering under the payment bond while Clark’s lawsuit against the District remains pending. Relying on Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882, 64 Cal.Rptr.2d 578, 938 P.2d 372 ( Wm. R. Clarke ), the trial court found the pay-when-paid provision here unenforceable because it affects or impairs Crosno’s payment bond rights in violation of Civil Code section 8122.¹ With the facts largely undisputed, the court granted Crosno’s motion for summary judgment and entered judgment in its favor for principal due plus prejudgment interest.

Travelers asserts the trial court misconstrued Wm. R. Clarke and erred in failing to enforce the pay-when-paid provision against the bond claim. After carefully considering the parties’ arguments, we agree with the trial court’s sound analysis. Enforcing the pay-when-paid provision found in Crosno’s subcontract would postpone Crosno’s right to recover under the payment bond for an indefinite time period until Clark’s litigation against the District concludes. Such a result would unreasonably affect or impair Crosno’s statutory payment bond remedy ( § 8122 ) and is unenforceable for the same reasons expressed in Wm. R. Clarke, supra , 15 Cal.4th 882, 64 Cal.Rptr.2d 578, 938 P.2d 372. Because Travelers may not invoke this particular pay-when-paid provision as a defense to payment bond liability, we affirm the judgment. Travelers raises no separate argument as to the postjudgment award of attorney’s fees; accordingly, we likewise affirm that order.

FACTUAL AND PROCEDURAL BACKGROUND

The District sought lump sum bids for a public water system improvement project funded by the State. The specifications required general contractors submitting bids to secure a payment bond providing coverage if it or any of its subcontractors failed to make payments due. Clark obtained a public works payment bond from Travelers to secure the payment of subcontractors and suppliers. As the surety, Travelers became obliged upon Clark’s failure to make payments due. In addition, the payment bond covered reasonable attorney’s fees. Clark listed Crosno as a subcontractor in its bid. The District selected Clark as its direct contractor (§ 8108).

Thereafter, Clark executed a subcontract agreement with Crosno. Crosno agreed to fabricate, erect, and coat two 250,000-gallon welded steel water reservoir tanks for the sum of $630,000. Among other terms, the subcontract required Crosno to be paid for labor and material in monthly progress payments, subject to a retention, upon receipt of payments from the District.² Critical to this case, the subcontract further contained the following pay-when-paid provision in the event the District delayed making payments to Clark:

"If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. ‘Reasonable time’ shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies."

Crosno began work in March 2014. On November 6, it was ordered to halt work because a dispute had arisen between Clark and the District. By that point, Crosno had supplied and fabricated the steel, shop-primed the steel, transported the steel to the site, erected the two 250,000-gallon tanks, and almost completed field coating work. Most of the submitted invoices remained unpaid, with a total of $562,435 owed to Crosno for the work completed to that point.

The next day (November 7) Crosno filed a stop payment notice with the District. Two weeks later, Clark told Crosno the District had terminated its contract. This meant that Clark could not pay Crosno the $562,435 owed for completed work.

On December 18, 2014, Crosno gave Travelers a written notice of its claim under the payment bond. The following month, Travelers replied by letter rejecting the bond claim as premature. Invoking the pay-when-paid provision in Crosno’s subcontract, Travelers asserted that no funds were due until Clark’s then-pending lawsuit against the District concluded. Specifically, Travelers was referring to a lawsuit filed just days before in which Clark had sued the District for breach of contract, breach of implied warranty, and declaratory relief.³

Crosno initially filed suit in Kern County to recover the $562,435 due (No. S-1500-CV-284661). The first two causes of action, alleging breach of contract as to Clark and enforcement of the stop notice as to the District, are not relevant to this appeal. Crosno’s third cause of action was against Travelers for recovery on the payment bond. Travelers filed an answer, asserting among its affirmative defenses any defense held by bond principal Clark. Crosno’s action was later transferred to San Bernardino County and consolidated for all purposes with Clark’s pending action against the District.

Roughly a year later Crosno filed a motion for summary judgment or summary adjudication as to its payment bond cause of action against Travelers. It argued that the pay-when-paid provision in the subcontract was void and unenforceable because Crosno had never executed a waiver and release required under section 8122 to validly "waive, affect, or impair" its payment bond rights. It further asserted that Travelers could not rely on the subcontract provision given the independent nature of the payment bond remedy.

Opposing the motion, Travelers did not dispute the essential facts underlying Crosno’s right to payment. It instead focused on the fact that litigation in Clark’s lawsuit against the District remained pending. Travelers argued (as it does on appeal) that section 8122 was not implicated because the pay-when-paid clause simply set the time for payment and did not waive Crosno’s bond rights. It further relied on suretyship principles to argue that the subcontract defined its obligation as surety under the payment bond.

The trial court granted Crosno’s motion. In a detailed statement of decision, it explained that although the payment clause in the subcontract was a "pay-when-paid" provision, rather than a "pay-if-paid" provision, the question remained whether applying the provision would impermissibly affect or impair Crosno’s statutory payment bond rights under the antiwaiver statute, section 8122.⁴ Based on Wm. R. Clarke and other authorities, the court found the pay-when-paid provision void because it violated the policies underlying section 8122. Accordingly, it awarded judgment in favor of Crosno against Travelers of $562,435, while staying enforcement of its ruling for 60 days to allow settlement.

After the ruling, Crosno filed a motion for prejudgment interest (§ 3287, subd. (a)). Crosno urged the court to assess statutory prejudgment interest from December 18, 2014, the date that it submitted its payment bond claim to Travelers. Accepting Crosno’s claim, in August 2017 the court entered judgment in favor of Crosno against Travelers for $562,435 in principal, together with 10 percent prejudgment interest from December 18, 2014. Travelers appealed the judgment.

Meanwhile, Clark, Crosno, and other entities continued settlement negotiations in Clark’s still-pending action against the District. The District interpleaded funds to satisfy the outstanding principal judgment in favor of Crosno on its bond claim. Crosno later requested and received an award of $22,500 from Travelers in attorney’s fees. Travelers filed a second notice of appeal from that postjudgment attorney’s fee award. The two appeals were consolidated. Because the judgment itself has since been satisfied, Travelers’s appeal concerns its liability for prejudgment interest and attorney’s fees under the payment bond.

DISCUSSION

The central question in this appeal is whether a...