Design Built Sys. v. Sorokine

• Decision Date: 26 February 2019
• Docket Number: A152059,A151264
• Citation: 243 Cal.Rptr.3d 897,32 Cal.App.5th 676
• Court: California Court of Appeals Court of Appeals
• Parties: DESIGN BUILT SYSTEMS, Plaintiff and Respondent, v. Alexei SOROKINE et al., Defendants, Cross-complainants and Appellants; Dmitriy Kornach et al., Cross-defendant and Respondent.

32 Cal.App.5th 676

243 Cal.Rptr.3d 897

DESIGN BUILT SYSTEMS, Plaintiff and Respondent,

v. Alexei SOROKINE et al., Defendants, Cross-complainants and Appellants;Dmitriy Kornach et al., Cross-defendant and Respondent.

A151264

A152059

Court of Appeal, First District, Division 2, California.

Filed February 26, 2019

Attorney for Plaintiff and Respondent Design Built Systems: Haight Brown et al, LLP, Elizabeth Lawley, Sacramento; Valerie Ann Moore, Los Angeles.

Attorney for Defendants, Cross-complainants and Appellants Alexi Sorokine and Elena Koudriavtseva: Archer Norris LLC, Tiffany Ng, Walnut Creek; Newmeyer & Dillion, Joseph Ficenec.

Attorney for Cross-defendants and Respondents Dmitriy Kornach and Kornach Construction: John E. Carey, Jr., San Francisco.

Richman, Acting P. J.

These consolidated appeals assert three claims of error by the trial court. The first was directing a verdict against appellants as cross-defendants on a claim they violated an Internal Revenue Code provision and thereafter awarding $20,000 in sanctions and $122,995 in attorney fees against them. The second was directing verdicts against appellants on claims they had asserted against others, which ruling was premised on appellants’ inability to prove damage because the trial court had granted a motion in limine preventing appellants from introducing evidence of payments made to an unlicensed contractor. And the third was awarding cost of proof damages to a party based on requests for admissions propounded by a different party. We agree with appellants on all three claims, and we reverse.

BACKGROUND

Appellants are Alexei Sorokine and Elena Koudriavtseva (usually when referred to collectively, appellants). They are husband and wife. Sorokine is the owner of a home in San Rafael (the property), which he had acquired prior to their marriage. In 2010, Sorokine traveled to Russia and has not been able to return.

Respondents are Design Built Systems (DBS), and Dmitriy Kornach and his company, Kornach Construction Company (for convenience, collectively Kornach). DBS and Kornach were represented by separate counsel below, but are represented by one firm here, which has filed a single brief on behalf of both respondents. DBS and Kornach are both California licensed contractors, and both interacted over the years with Sorokine, and later Koudriavtseva, in connection with work done at the property, though in quite different ways. Specifically:

DBS began its relationship with Sorokine in 2006, following a landslide at the property, when it was hired to prepare plans for the installation and construction of retaining walls. In 2010, Sorokine entered into an agreement with DBS to prepare various drawings for the property. And DBS was also retained to remedy a stop work notice issued by the city of San Rafael as a result of prior work performed by others.

In 2011, DBS entered into another—and final—contract for work at the property, this time with Koudriavtseva, the contract giving rise to the litigation here. This contract was for the installation of concrete retaining walls and a driveway, for a price of $175,000. The contract set forth the specific scope of work for the retaining walls and driveway, and also had specific exclusions. In September 2011, after DBS had completed most of the work under the contract, Koudriavtseva fired DBS. She then hired PA Builders, Inc. (PA Builders) to complete the work and remedy what she claimed were defects caused by DBS and others. As will be seen, PA Builders was unlicensed.

As mentioned, Kornach also had significant interaction with Sorokine, but in a much different fashion—and never as a general contractor. Rather, over the years Sorokine undertook significant remodeling work on the property, doing much of the work himself, sometimes with his sons Alexi and Oleg. He also hired labor crews to do work. Kornach, a longtime friend of Sorokine’s, agreed to purchase materials for projects at the property because of the discounts afforded to holders of a general contractor’s license. Sorokine does not speak English, and Kornach, who did, often interpreted, explained things, or arranged meetings with contractors for Sorokine. Kornach never acted as a general contractor for any work at the property.

Koudriavtseva took over projects at the property after 2010, as Sorokine could not return from Russia. Kornach continued to assist Koudriavtseva through the supply of materials, retention of contractors, and translations. Then, in fall 2011, Koudriavtseva informed Kornach she did not want him on the property any longer.

THE PROCEEDINGS BELOW

The Pleadings

In February 2012, DBS filed a complaint against appellants, alleging four causes of action: (1) breach of contract; (2) foreclosure of mechanic’s lien; (3) common counts; and (4) account stated.

Appellants’ response included a cross-complaint and thereafter amended cross-complaints, the second of which is the operative pleading here. It named as cross-defendants DBS (and its principal, Daniel Owens), Kornach (and its principal Dmitriy Kornach), and American Contractors Indemnity Company (ACIC), which had issued a surety bond to Kornach. The cross-complaint alleged 11 causes of action: (1) breach of written contract; (2) breach of oral contract; (3) breach of implied warranty; (4) negligence; (5) disgorgement; (6) intentional misrepresentation; (7) negligent misrepresentation; (8) rescission and restitution; (9) violation of the California Unfair Business Practice Act 17200; (10) breach of the covenant of good faith and fair dealing; and (11) recovery on contractor’s license bonds.¹

Kornach’s response included its own cross-complaint against appellants, alleging causes of action for indemnity, contribution, declaratory relief, and "fraudulent filing." The "fraudulent filing" cause of action in the cross-complaint went through several iterations, ultimately to allege a claim based on Internal Revenue Code section 7434, 26 U.S.C. § 7434 (the section 7434 claim). The section 7434 claim essentially alleged that appellants had borrowed money from Kornach but failed to repay it; that they filed fraudulent Internal Revenue Service 1099 forms reflecting loan repayments to Kornach; that the 1099 forms caused Kornach to have his tax returns audited and incur additional tax liability; and that appellants did not respond to a letter from Kornach’s attorney asking them to correct the 1099 forms.

Requests for Admissions

The case did not proceed to trial until January 2017, almost five years after it was filed. Meanwhile, the discovery that had occurred included various sets of requests for admissions.

The Motion in Limine

At the start of trial, Kornach made numerous motions in limine, number 17 of which sought to preclude appellants from introducing testimony or documents regarding work performed by unlicensed contractors, including PA Builders. The basis of the motion was that a contract by an unlicensed contractor is void and illegal ( Wilson v. Steele (1989) 211 Cal.App.3d 1053, 1056, 259 Cal.Rptr. 851 ), and that Business and Professions Code section 7031 bars all actions, however characterized, that effectively seek compensation for illegal unlicensed contract work. ( Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 147–152, 308 P.2d 713.) The trial court granted the motion.

The Trial

Trial began on January 24, 2017. Following jury selection, testimony was taken over many days, and numerous exhibits were introduced. On February 8, the twelfth day of trial, the court heard argument on motions for directed verdicts on numerous causes of action, including on the claims asserted against appellants and also on appellants’ claims in their cross-complaint. Following relatively brief argument, the trial court granted directed verdicts on almost all of the claims, most of which rulings are not before us here.

However, appellants do contest the directed verdicts against them on their claims against Kornach for breach of oral contract and breach of the covenant of good faith and fair dealing, and their claims against DBS for breach of contract and breach of implied warranty, which directed verdicts were expressly based on appellants’ failure to produce evidence of damage. That is, the court found there was sufficient evidence to support a breach, but no evidence of damage. As the court put it in connection with its ruling for Kornach: "There could be evidence that—in that view of the facts, if the jury were to believe all of that, that the defendant—that the—in this case, the Cross-Defendants failed to do something the contract required him to do, which would be to get permits, et cetera, for the work, and that plaintiff was harmed by the failure. There is no evidence that was admitted into this case, how she was harmed, and that would be in the nature of proving damages, and there were no damages alleged. [¶] So, based on that, I do have to grant a directed verdict on breach of oral contract against Kornach and Kornach Construction Company. There was a complete failure of evidence of any damages." Or, as the court said as to DBS: "There is no evidence of any payments [for repairs], because I excluded evidence of payments to unlicensed contractors."

The trial court also granted a directed verdict against appellants in favor of Kornach on the section 7434 claim, which verdict is also contested on appeal.

As a result of the directed verdicts, nothing was left in the case except DBS’s claims against appellants. DBS’s claim for breach of contract was submitted to the jury, which returned a verdict in favor of DBS in the amount of $32,190. Judgment on the verdict was entered on February 10, 2017, and notice of entry served the same day.

Appellants filed a motion for judgment notwithstanding the verdict (JNOV), which the trial court denied. Appellants then filed a notice of appeal from the judgment on the verdict and denial of the JNOV. However, appellants are not contesting the judgment in favor of DBS or the denial...