California Court of Appeals, First District, Second Division
Superior Court Contra Costa County No. JCCP4706, Hon. Judith Craddick Trial Judge:
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Leonidou & Rosin, Janette G. Rosin, A. Robert Rosin and David L. Ashby. for Defendant and Appellant.
Fagen Friedman & Fulfrost, Roy A. Combs, Mark S. Williams, Cynthia M. Smith and David Mishook for Plaintiff and Respondent.
This case involves a dispute between a contractor (S.J. Amoroso Construction Co, Inc. (Amoroso)) and school district (the District) about a construction project the contractor did not complete. The parties disagree as to whether Amoroso defaulted on the contract, and that issue is
not before us. Rather, this appeal concerns the District’s withdrawal of funds from an escrow account in which it had deposited “retention, ” meaning a percentage of the installment payments made to Amoroso. The purpose of retaining a percentage of the funds otherwise due the contractor until completion of the contract work is to encourage the contractor to complete the work in a timely and competent manner and to protect the owner against the risk of having to pay a replacement contractor to repair or complete defective or unfinished work. The District here attempted, after hiring a replacement contractor to complete the work and while its litigation with Amoroso was pending, to withdraw retention funds from the escrow account. Amoroso sought a preliminary injunction to prevent that withdrawal, arguing the District could not withdraw retention funds until a court determined Amoroso had defaulted.
The rule Amoroso urges us to adopt—that a public project owner must await judicial resolution of the underlying contract dispute before it can withdraw retention funds—would undermine the entire purpose for retention. It would deny an owner the funds to complete its project until long after the intended completion date for the project. Amoroso’s position is unsupported by logic or law. Our colleagues in this District and the Fifth District have already squarely rejected it. Joining them, we reject it as well.
This case arises from the reconstruction and modernization of Pittsburg High School. The Pittsburg Unified School District was the owner of the project and Amoroso was the general contractor, under a contract entered into on December 10, 2008 (the Construction Contract).
Pursuant to Public Contract Code section 22300, Amoroso elected to have the retention held in an escrow account in the form of securities, with the interest earned on those securities going to Amoroso. The District and Amoroso entered into an escrow agreement (Escrow Agreement) which provided that “District shall have the right to draw upon the securities and/or withdraw amounts from the Escrow Account in event of default by Contractor as determined solely by District.”
Disputes between the District and Amoroso began to arise in 2010. The District gave written notice of material breach of the Construction Contract on March 30, 2011, based on Amoroso’s failure to complete, timely or at all,
any of the three phases of the project. The letter requested that Amoroso cure the deficiencies by April 4, 2011, and threatened termination of the contract if it failed to do so. Amoroso contested the assertions of material breach in a letter dated April 1, 2011. The District sent a notice of termination to Amoroso on April 18, 2011, based largely on the same (still unremedied) breaches listed in its earlier letter and filed suit against Amoroso the next day. Numerous related cases were filed, and many have been coordinated with this action. These cases involve claims of incomplete and defective work and failure to make payments due to Amoroso and subcontractors.
On April 28, 2011, the District and Amoroso entered into an “Exit and Demobilization Agreement” (Exit Agreement). The stated purpose of that agreement was to provide for “the prompt and orderly exit and demobilization of [Amoroso] from the Project Site in lieu of any final termination or statement of default under the [Construction] Contract.”
On February 1, 2013, the District sent a letter to City National Bank, the escrow agent, requesting withdrawal of $3.5 million from the escrow account and attaching a memorandum from the District’s counsel as to why such a withdrawal was permissible.
Amoroso filed an ex parte application for a temporary restraining order (TRO) and an order to show cause why a preliminary injunction should not issue. The parties stipulated to an order directing that no funds would be disbursed until the court ruled on the motion for preliminary injunction. On April 16, 2013, the court issued a tentative ruling denying the motion for preliminary injunction. On May 9, 2013, the court affirmed that tentative ruling.
Amoroso timely filed a notice of appeal on May 22, 2013.
I. Standard of Review
“In determining whether to issue a preliminary injunction, the trial court considers: (1) the likelihood that the moving party will prevail on the merits and (2) the interim harm to the respective parties if an injunction is granted or denied. The moving party must prevail on both factors to obtain an
Injunction. Thus, where the trial court denies an injunction, its ruling should be affirmed if it correctly found the moving party failed to satisfy either of the factors. [Citation.]
“Where the evidence before the trial court was in conflict, its factual determinations, whether express or implied, are reviewed for substantial evidence. We interpret the facts in the light most favorable to the prevailing party. [Citations.]
“Generally, the standard of review for denial of a preliminary injunction is whether the trial court committed an abuse of discretion. However, a party’s likelihood of prevailing on the merits sometimes can be determined as a matter of law. [Citation.] In that case, de novo review as to that factor is proper. [Citation.]” (Sahlolbei v. Providence Healthcare, Inc. (2003) 112 Cal.App.4th 1137, 1145-1146 [5 Cal.Rptr.3d 598].)
A. Legal Background Concerning Retention Funds
“[I]t is common for construction contracts to contain terms that protect an owner’s construction funds. Owners and contractors generally structure their contracts to provide for installment payments to the contractor as the work progresses, typically as the work reaches specified stages of completion. [Citation.] ‘This payment system adds incentive for the contractor to complete the work and reduces the risk of nonperformance for the owner. A percentage of funds held until completion of all of the work is called retainage and is intended both to reduce the risk of nonperformance by the contractor and to assure the completion of the work in accordance with the contract terms.’ ” (Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 55 [86 Cal.Rptr.2d 855, 980 P.2d 407] (Cates), fn. omitted.) If the contractor defaults on the construction contract “then the owner is entitled to use the retained funds to complete the contract. In fact, this is one of the primary reasons for which the owner insists on retainage in the first place.” (2 Stein, Construction Law, (2014) Conflicting Claims to Retainage, ¶ 7.11, p. 7-92 (rel. 81-6/2014) fn. omitted; see Cates, supra, 21 Cal.4th at p. 55 [“if an owner avoids overpaying the contractor as the project progresses, then the owner should have funds available to apply toward completion of project in event of contractor’s default”]; Westamerica Bank v. City of Berkeley (2011) 201 Cal.App.4th 598, 610-611 [133 Cal.Rptr.3d 883] (Westamerica) [retention funds are under control of owner who can use them if contractor defaults on its obligations].)
A retention fund typically consists of cash that is a percentage of each progress payment, which the owner retains to ...