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Hinerfeld-Ward, Inc. v. Lipian

September 1, 2010

HINERFELD-WARD, INC., PLAINTIFF, CROSS-DEFENDANT, AND RESPONDENT,
v.
MARK LIPIAN ET AL., DEFENDANTS, CROSS-COMPLAINANTS, AND APPELLANTS.



APPEALS from a judgment of the Superior Court of Los Angeles County, David Minning, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC365866).

The opinion of the court was delivered by: Epstein, P. J.

CERTIFIED FOR PARTIAL PUBLICATION*fn1

The appellants in this litigation are homeowners who embarked on a major residential home improvement project. They appeal from a judgment in these cross-actions in favor of their general contractor which awarded them only $1,000 in damages on their negligence cause of action. They contend the trial court erred in enforcing an oral contract in violation of statutory requirements that the contract be in writing; that the contractor was not entitled to an award of statutory attorney fees; and that the trial court erred in striking testimony by one of the homeowners about damages.

In the published portion of this opinion, we conclude that the oral contract was enforceable and that the contractor is entitled to attorney fees for the homeowners' delay in making progress payments. In the unpublished portion of our opinion we conclude that the trial court's error in striking the homeowner's lay testimony was harmless.

FACTUAL AND PROCEDURAL SUMMARY

Appellants Mark and Mary Lipian purchased a single family home in Los Angeles, intending to undertake a major remodel of that property. They retained an architect, Michael Folonis, who began design of the project in early 2000. After the initial design phase, Cameron Aston, a general contractor, was retained. Aston eventually became frustrated with repeated design changes and left the project in 2004. Folonis recommended that the Lipians retain respondent Hinerfeld-Ward, Inc. as the new general contractor, based on prior experience with that firm and its reputation for high-end construction work. Hinerfeld-Ward (Hinerfeld) is the only respondent on appeal. Neither Folonis nor a lawyer assisted the Lipians in negotiating an agreement with Hinerfeld.

It is undisputed that the Lipians and Hinerfeld never entered into a written contract which included the scope of the work to be done. The work began without a final agreement, but as negotiations continued, the parties entered into a memorandum of understanding and the remodeling and construction work continued. Over the course of the next two years, Hinerfeld submitted 19 payment applications for work which had been completed. All of these were approved by Folonis and paid by the Lipians.

In April 2006, the Lipians disputed some of the charges in payment application 20, which included project management and supervision charges. They agreed to a partial payment for work done by subcontractors. The relationship between the Lipians and Hinerfeld deteriorated over the next several months. A dispute arose regarding commencement of work on a separate building the Lipians planned to build on their property to house a theater, gym, and office. The Lipians terminated Hinerfeld's services in September 2006. At that time, there was an unpaid balance owed Hinerfeld of approximately $200,000.

Hinerfeld sued the Lipians for breach of oral contract, quantum meruit, wrongful withholding of progress payments, and related causes of action. The Lipians cross-complained for breach of contract, negligence, fraud, violation of Business and Professions Code section 17200, negligent misrepresentation, recovery on bond, and for a declaration that the oral construction contract was void. In addition to Hinerfeld-Ward, the Lipians named Tom Hinerfeld, its principal, and the firm's indemnity company, American Contractors Indemnity Company.*fn2

The case was tried to a jury which returned a special verdict. It found the parties had a contract and that Hinerfeld had substantially complied with its terms. It found the Lipians had breached the contract and that their breach was not justified, and that Hinerfeld had not breached the contract. The jury found Hinerfeld's damages for breach of the contract to be $202,181.58 and that the Lipians had withheld an amount more than 150 percent from a progress payment. On the causes of action for quantum meruit and foreclosure of a mechanics lien, the jury found the reasonable value of the services rendered by Hinerfeld to be $820,000, and that the Lipians failed to pay that amount. The jury found Hinerfeld negligent, but only $1,000 in damages was awarded the Lipians on their cross-action. The jury rejected the Lipians' causes of action for fraud and negligent misrepresentation, finding no false representations were made by Tom Hinerfeld.

The trial court entered judgment for Hinerfeld for $202,181.58, plus prejudgment interest of $36,232.01 and costs of $38,953.19. The Lipians were given judgment for $1,000. The Lipians' motion for new trial was denied. Hinerfeld's post-trial motion for a monthly two percent charge on the amount wrongfully withheld by the Lipians was granted and $54,736.36 was assessed against them. The trial court awarded Hinerfeld $200,000 in attorney fees. Timely appeals by the Lipians from the judgment, the attorney fee award, and from the award of $54,736.36 were filed and consolidated.

DISCUSSION

I.

The Lipians argue the court erred in enforcing the oral home improvement contract with Hinerfeld because Business and Professions Code section 7159 (section 7159) requires that such contracts be in writing. The statute applies to "'home improvement contracts' between a contractor and an 'owner or tenant' for 'work upon a building or structure for proposed repairing [or] remodeling' where the aggregate contract price exceeds $500." (Asdourian v. Araj (1985) 38 Cal.3d 276, 289 (Asdourian).) The definition of "'home improvement contract[]'" includes an agreement between a contractor and an owner for the performance of a home improvement. (§ 7159, subd. (b).)

The statute, part of a larger consumer protection statutory scheme, has been revised and reorganized repeatedly since first enacted in 1969. (See Asdourian, supra, 38 Cal.3d at p. 292; Historical and Statutory Notes, 3D West's Ann. Bus. & Prof. Code (2010 ed.) foll. § 7159, pp. 162-166.)*fn3 The requirement that such contracts be in writing has been a part of the law for decades. In Calwood Structures, Inc. v. Herskovic (1980) 105 Cal.App.3d 519, 522 (Calwood), disapproved in part on other grounds in Asdourian, supra, 38 Cal.3d at page 293, footnote 11, the court identified the primary purpose of section 7159 to be "a protection for consumers in an economic area which otherwise might well provide opportunity for abuse by contractors."

The issue is whether an oral contract for home improvements, in violation of section 7159, is void or merely voidable. The general rule is that "a contract made in violation of a regulatory statute is void. [Citation.] Normally, courts will not '"lend their aid to the enforcement of an illegal agreement or one against public policy . . . ."' [Citations.]" (Asdourian, supra, 38 Cal.3d at p. 291.) But as the Supreme Court recognized in Asdourian, "'the rule is not an inflexible one to be applied in its fullest rigor under any and all circumstances. A wide range of exceptions has been recognized.' [Citation.]" (Ibid.)

In Calwood, the court reversed an order sustaining a demurrer to a complaint for unpaid fees brought by a contractor on an oral home improvement contract. The trial court had reasoned that the contract was void because it did not comply with section 7159. The Calwood court noted that "section 7159 contains no express prohibition respecting the enforceability of contracts made contrary to its terms, but is limited in its specification of penalty to criminal fine or imprisonment." (Calwood, supra, 105 Cal.App.3d at p. 521.) The oral contract was enforceable because the work had been completed, was performed under authority granted by the owners, and was ratified by them. The court reasoned that the violation of section 7159 did not involve serious moral turpitude. The policy of consumer protection would not be furthered by finding the contract before it to be unenforceable, since the transaction was completed. If the contract was not enforced, the owners would be unjustly enriched at the expense of the contractor, a penalty disproportionately harsh in relation to the violation. (Calwood, supra, 105 Cal.App.3d at p. 522.)

Asdourian involved oral contracts for home improvements between homeowners and their contractor. The court found "[n]othing in the statute [which] declares that an oral contract entered into in contravention of section 7159 shall be void." (Asdourian, supra, 38 Cal.3d at p. 291.) While the court concluded that the Legislature did not intend the express penalty provisions of section 7159 to be exclusive, it found "no indication that the Legislature intended that all contracts made in violation of section 7159 are void." (Id. at p. 292.) Absent an express legislative prohibition, the Asdourian court concluded it could apply exceptions to the general rule that illegal contracts are unenforceable. (Ibid.)

The contracts in Asdourian were held enforceable because as real estate investors, the owners were not within the class of unsophisticated consumers the statute was designed to protect. The Supreme Court concluded that in this context, the misdemeanor penalties provided in section 7159 were sufficient and that the policy underlying the statute would not be defeated if the contractor was allowed to recover for work performed. (Asdourian, supra, 38 Cal.3d at p. 292.) The court also concluded that a contract in violation of section 7159 does not present the type of illegality that automatically renders a contract void. Instead, the contracts were found merely "voidable depending on the factual context and the public policies involved." (Id. at p. 293.) Citing Calwood, supra, 105 Cal.App.3d at page 522, the Asdourian court reasoned that the failure to observe strict statutory formalities was understandable because the contractor and owners were friends and had prior business dealings. In addition, it was significant that the contractor fully performed according to the oral agreements and the owners accepted the benefits of those agreements. "If [the owners] are allowed to retain the value of the benefits bestowed by [the contractor] without compensating him, they will be unjustly enriched." (Asdourian, supra, at p. 293; see also Davenport & Co. v. Spieker (1988) 197 Cal.App.3d 566 [contractor's noncompliance with section 7159 did not preclude recovery from owners, one of whom was experienced in real estate investment and development, where many informal changes and additions were made to contract].)

The Lipians argue the trial court erred by requiring them to prove the Asdourian exception does not apply. This was not error. A defendant who "advances an affirmative defense to the plaintiff's claims bears the burden of proof on the defense." (Seltzer v. Barnes (2010) 182 Cal.App.4th 953, 969.) The Lipians assert that section 7159 is designed to protect inexperienced home improvement consumers like themselves who are unlike the sophisticated owners in the cases we have discussed. They acknowledge that they are well-educated; Mark Lipian is a psychiatrist with an M.D. and a Ph.D. in psychology, and Mary Lipian has masters degrees in both education and clinical psychology. But they argue this background is not related to home improvement projects. Each has some experience with contracts. Mary Lipian negotiates rate increases with hospitals as part of her work with an insurance company and sometimes reviews contracts. Mark Lipian has entered into employment contracts and office leases, one of which included remodeling work paid for by the landlord. They argue they lacked training or experience in home construction or home improvement projects since they had never before been involved in a home improvement project. Their only involvement in the real estate business was as homeowners. Since their inexperience with home improvements distinguishes them from the homeowners in the Asdourian line of cases, the Lipians argue Hinerfeld should not be allowed to enforce the oral contract.

The Lipians recognize that in Arya Group, Inc. v. Cher (2000) 77 Cal.App.4th 610 (Arya), the court held that a statute similar to section 7159 did not bar enforcement of an oral contract for construction of a single-family residence. Business and Professions Code section 7164, the statute applied in Arya, was intended to extend the protections of section 7159 to consumers who contract to construct a single-family residence. (Arya, at p. 614.) Like section 7159, section 7164 requires the contract to be in writing with specified notices and disclosures. Applying the analysis of Asdourian, the Arya court concluded that the owner was a highly sophisticated homeowner with previous experience in residential construction who was assisted by her lawyer in negotiating the oral agreements with the contractor. A substantial part of the work had been completed before the contractor was terminated and therefore failure to enforce the oral contract would have unjustly enriched the owner. (Arya, at pp. 615-616.)

In contrast, the Lipians argue that they did not have legal assistance in negotiating with Hinerfeld, that Hinerfeld did not explain that the contract had to be in writing despite his extensive experience in construction, and that they were not involved in the day-to-day construction activities, having only visited the site occasionally.

Hinerfeld argues the enforcement of an oral home improvement contract depends on the particular facts of the case and whether the circumstances for enforcement are "compelling" under Asdourian, supra, 38 Cal.3d at page 292. That analysis, it contends, does not turn solely on whether the owner is "sophisticated" in terms of experience in real estate development or home improvements. Instead, Hinerfeld argues, the question is ...


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