Case Name: Steve Smith Enterprises, Inc. v. East Side Union High School District, et al.
Case No.: 17CV312817

I. Background

This case brought by Steve Smith Enterprises, Inc. (“Plaintiff”) against East Side Union High School District (“District”), Governing Board of the East Side Union High School District (“the Board”), and Marcus Battle in his capacity as Associate Superintendent of Business Services (collectively “Defendants”) the nonpayment of fees purportedly owed to Plaintiff under a contract with District.

According to the allegations of the First Amended Complaint (“FAC”), Plaintiff and District entered into a contract whereby Plaintiff was to prepare and maintain documentation for District. This documentation would eventually be submitted to the State of California to allow District to obtain reimbursement from the state for monies spent on state-mandated programs.
The contract required District to pay an annual maintenance fee during the contract period. In addition, District was to pay Plaintiff a contingency fee of 9% of claims reimbursed by the state, settlements in lieu of a paid claim, and interest payments on initial claims. The contingency fee was “due upon payment” of the claim by the state. (FAC, ¶ 14.)

The parties anticipated there would be a significant delay between the filing of a claim for reimbursement, and payment of the claim by the state. The parties understood payment by the state could take years, such that the contingency fee may not come due for years after Plaintiff provided services.

Plaintiff performed its duties under the contract. District paid the annual maintenance fee, and made at least one contingency fee payment to Plaintiff. However, District subsequently refused to pay contingency fees to Plaintiff.

The FAC alleges causes of action for (1) Breach of Contract; (2) Anticipatory Breach of Contract; (3) Breach of the Covenant of Good Faith and Fair Dealing; (4) Unjust Enrichment; (5) Common Counts for Services Rendered; and (6) Declaratory Relief. The first through fifth causes of action are asserted against District and the Board only. The sixth cause of action is brought against all Defendants.

Currently before the Court is a demurrer by Defendants to each cause of action.

II. Merits of the Demurrer

Defendants demur to each cause of action on the ground of failure to state sufficient facts to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).) Defendants advance several arguments common to each cause of action, and make others specific to the fourth and fifth causes of action.

A. First, Second, and Third Causes of Action

The first, second, and third causes of action are all predicated upon the contract between Plaintiff and District. The first cause of action alleges District and the Board breached the contract by failing to pay contingency fees. The second cause of action alleges anticipatory breach based on statements District would not pay a 2016 invoice or future invoices for contingency fees. The third cause of action alleges breach of the implied covenant of good faith and fair dealing. Defendants argue these claims are not actionable because the contract expired and is therefore unenforceable for two reasons.

Defendants first assert the contract expired and is unenforceable because it explicitly states the contract period ran from 2005 to 2008. Defendants contend they need not pay for contingency fees after 2008. Plaintiff responds that the contract’s term may have ended in 2008, but “that ‘Contract Period’ limited only the time during which Steve could deliver services and earn fees, not the time in which the District could pay[.]” (Opp., p. 10:8-11.)

The parties’ disagreement raises an issue of contract interpretation. Where a contract is ambiguous, a plaintiff’s reasonable interpretation is accepted on demurrer. (Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 CA3d 232, 239.) A contract is ambiguous if it is susceptible to more than one reasonable interpretation. (Baldwin v. AAA Northern Calif., Nevada & Utah Ins. Exch. (2016) 1 CA5th 545, 553, 204 CR3d 433, 439.) “So long as the pleading does not place a clearly erroneous construction upon the provisions of the contract” the Court must accept Plaintiff’s allegations regarding its meaning. (Marina Tenants Assn. v. Deauville Marina Development Co. (1986) 181 Cal.App.3d 122, 128.)

Here, the contract does not state whether the obligation to pay is limited to the contract period. Per the terms of the contract, payment was allegedly “due upon payment of claims[.]” (See FAC, Exhibit B, ¶ 3.) The contract’s language could be reasonably interpreted as either limited to the contract period or extending beyond it. Thus, the contract is ambiguous as to whether Defendants’ obligation to pay Plaintiff survived the contract period.

Plaintiff alleges both parties expected a delay between Plaintiff providing its services, and District paying any contingency fees. With such a delay in mind, Plaintiff’s interpretation that the contract period only limited its performance but not Defendants’ payment obligation is not clearly erroneous. Rather, it is consistent with the parties’ understanding and intent. (See Civ. Code, § 1636 [contract interpretation is based upon assessing the parties intent].) Therefore, the FAC does not reveal that the contract is necessarily unenforceable.

Defendants additionally assert the contract is unenforceable because it expired pursuant to Education Code section 17596, which prohibits contracts longer than five years. Education Code section 17596 states: “Continuing contracts for work to be done, services to be performed, … may be made with an accepted vendor as follows: for work or services, or for apparatus or equipment, not to exceed five years[.]” (Ed. Code, § 17596.) Defendants assert the contract was executed in May 2005, and thus Defendants should not have to pay contingency fees after May of 2010. Plaintiff contends Education Code section 17596 is inapplicable here.

Defendants’ argument is based on the language of the statute, rather than any case interpreting or applying it. Yet, the language of the statute does not support Defendants’ argument. The statute prohibits contracts lasting longer than five years. In interpreting a statute the Court ordinarily adheres to its plain language. (People v. Birkett (1999) 21 Cal.4th 226, 231.) The plain language of Education Code section 17596 prohibits contracts for work or services lasting longer than five years. Plaintiff alleges its services were provided in less than five years. Contingency payments for those services came due more than five years later. Section 17596 does not limit when payment can or must be tendered for contracts lasting less than five years. Nor does it state that any contractor not compensated within five years shall not be compensated. Defendants’ argument stretches the language of section 17596 well beyond its plain meaning, and does so without adequate citation to authority.

Defendants go on to argue “[t]he Complaint alleges only two facts which could conceivably allow Plaintiff to escape the Contract’s stated June 30, 2007 expiration date.” (Dem., p. 4:15-16.) These alleged facts are “a District representative … signed an acknowledgement that the District was responsible for the payment” of some contingency fees on or about April 15, 2010, and “Defendant Battle told Smith Enterprises that the District would honor its commitments to Smith Enterprises” on May 15, 2017. (FAC at ¶¶ 18, 25.)

Defendants state these actions do not “create a claim to contingency amounts allegedly earned after the SSE Contract’s expiration, because California law unequivocally prohibits the enforcement of any agreement that has not been ratified by a school district’s governing board.” (Id. at p.4:22-25.) Defendants rely upon Education Code section 17604, which provides “no contract made pursuant to the delegation and authorization shall be valid or constitute an enforceable obligation against the district unless and until the same shall be approved of or ratified by the governing board, the approval or ratification to be evidenced by a motion of the board duly passed and adopted.” (Ed. Code, § 17604.)

Defendants implicitly reason that because these actions occurred after the approved contract had expired, they were either unapproved modifications of the expired contract or a distinct unapproved contract. This is not an independent argument per se, as it is premised upon Defendants successfully arguing in the first instance that the contract expired and is unenforceable by its own terms. However, having concluded the face of the FAC does not reveal the contract is unenforceable, this additional argument does not independently support the demurrer.

Lastly, in the demurrer itself Defendants state the first, second and third causes of action fail because a public entity cannot be liable on a quasi-contract theory. It appears this argument really pertains to the non-contract causes of action because causes of action predicated on an express contract cannot be characterized as quasi-contractual in nature. (See Hedging Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410, 1419 [quasi-contract actions concern contracts implied by law].) Thus, the argument Defendants cannot be liable on a quasi-contract theory is not a basis for sustaining the demurrer.

Accordingly, the demurrer to the first, second, and third causes of action is OVERRULED.

B. Fourth Cause of Action

The fourth cause of action alleges unjust enrichment in that Defendants accepted and benefited from Plaintiff’s services without paying for them. Defendants advance the same arguments in support of their demurrer to the unjust enrichment claim as the demurrer to the previous contract causes of action. In addition, Defendants argue unjust enrichment is not a cause of action. Finally, Defendants argue that insomuch as Plaintiff pleads a quasi-contract theory, such a theory cannot be asserted against a public entity.

Defendants are technically correct that “[u]njust enrichment is not a cause of action, however, or even a remedy, but rather ‘a general principle, underlying various legal doctrines and remedies[.]’” (See McBride v. Boughton (2004) 123 Cal.App.4th 379, 387.) Unjust enrichment is synonymous with restitution. (Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, 1138.) Likewise, restitution is also not a cause of action, but a remedy. (Munoz v. MacMillan (2011) 195 Cal.App.4th 648, 661.) Since unjust enrichment is not a cause of action, the arguments Defendants advanced with respect to the first three causes of action are generally inapplicable.

However, the label of a cause of action as “unjust enrichment” is not dispositive of whether a cause of action has been stated. (McBride v. Boughton, supra, 123 Cal.App.4th at 387.) A court deciding a demurrer must look to the gravamen of the complaint to determine if any cause of action is stated. (Ibid.) “The nature and character of a pleading is to be determined from the facts alleged, not the name given by the pleader to the cause of action.” (Ananda Church of Self-Realization v. Massachusetts Bay Ins. Co. (2002) 95 Cal.App.4th 1273, 1281.)

Defendants apparently concede the Court is not bound by the label, admitting that some cases have looked past the label of an unjust enrichment claim to find “such a count could possibly state a cause of action for quasi-contract or constructive trust.” (Dem., p. 6:17-20.) Plaintiff more or less agrees, arguing that a claim for unjust enrichment is in essence a claim for restitution or quasi-contract.

Here, Plaintiff alleges in the unjust enrichment cause of action, that Plaintiff provided services to District under a contract in expectation of being paid contingency fees, District received a benefit from those services, Plaintiff was not fully compensated for the services, and District will be unjustly enriched if it does not have to pay for Plaintiff’s services.

Plaintiff has already separately pleaded causes of action for breach of contract and common count for services provided. As such, it is not clear what additional cause of action Plaintiff’s unjust enrichment claim could support, apart from one based on a quasi-contract theory such as quantum meruit. (See Huskinson & Brown, LLP v. Wolf (2004) 32 Cal.4th 453, 458 [“Quantum meruit refers to the well-established principle that ‘the law implies a promise to pay for services performed under circumstances disclosing that they were not gratuitously rendered’”].)

The parties dispute whether Plaintiff can pursue a quasi-contract theory against a public entity. Defendants rely upon Janis v. California State Lottery Com. (1998) 68 Cal.App.4th 824 (“Janis”) for the proposition that recovery under a quasi-contract theory is unavailable where a private party sues a public entity.

As a general rule, Defendants are correct, the principle is “well-established … that private parties may not recover against a public entity on a quantum meruit or quasi-contract theory.” (See Fairview Valley Fire, Inc. v. California Department of Forestry (2015) 233 Cal.App.4th 1262, 1271; Lundeen Coatings Corp. v. Department of Water & Power (1991) 232 Cal.App.3d 816, 831.) For purpose of background, quasi-contract actions are generally not permitted against any party where the parties’ rights on a particular subject matter are governed by an enforceable agreement. (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1388; California Medical Ass’n, Inc. v. Aetna U.S. Healthcare of California, Inc. (2001) 94 Cal.App.4th 151, 172.)

In Janis players of the state lottery sued the California State Lottery Commission for money they had lost playing a particular game under a restitution and unjust enrichment theory. (Janis, supra, 68 Cal.App.4th at 830.) The court held playing the lottery did not create a contract between the players and the defendant. (Ibid.) Furthermore, the court stated “generally a private party cannot sue a public entity on an implied-in-law or quasi-contract theory, because such a theory is based on quantum meruit or restitution considerations which are outweighed by the need to protect and limit a public entity’s contractual obligations. … Here, then, Janis cannot point to a contractual promise to support this claim.” (Id. at 830–831.) The court found no contract, and rejected the players’ restitution based claim.

Plaintiff attempts to distinguish Janis, pointing out there was no contract between the plaintiff and the public entity. Plaintiff insists cases prohibiting a quasi-contract claim against a public entity have done so only where there was no express contract. Here, in contrast, Plaintiff had a written contract with District.

Plaintiff analogies the instant case to Russell City Energy Company, LLC v. City of Hayward (2017) 14 Cal.App.5th 54 (“Russell”). In Russell, a city agreed not to impose any taxes or fees upon a plaintiff who was building a power plant in exchange for ten million dollars. (Id. at 57-8.) The agreement was finalized and the plaintiff paid the sum. (Ibid.) Voters later passed a measure imposing a utility tax on all utility users, including the plaintiff, which the plaintiff paid. (Ibid.) The court struck down as unconstitutional the provision of the contract which prevented the city from taxing the plaintiff, but it permitted a quasi-contract action against the city to recover some consideration for the tax imposed. (Id. at 73.) The court discussed and distinguished Janis on the basis that in Janis there had been no contract, whereas in Russell there was one. (Russell, supra, 14 Cal.App.5th at 73.) The court reasoned the purpose of forbidding implied contracts was that implied contracts had not been formally approved by the government entity. (Ibid.) The court stated permitting recovery on quasi-contract theories would be contrary to laws limiting the government’s ability to contract, which were designed to protect the public. (Id. at 72-3.) The court held “[u]nder the unique set of circumstances here,” the plaintiff should be given a chance to amend its pleading to state a quasi-contractual restitution claim. (Id. at 73.)

The Russell court did not make a sweeping ruling, instead basing its holding on unique circumstances. The court did not define what made those particular facts unique. In Russell, part of the benefit the city was to provide to the plaintiff was a promise not to impose taxes or fees. Once that term was removed, the contract remained, but the plaintiff was placed in a much worse position. The plaintiff could not pursue a contract claim because the specific provision of the contract which the defendant had breached was invalid. (Russell at 64-5, 69; see Cal. Const., art. XIII, § 31.)

Allowing contractual recovery was consistent with the principle limiting contracts with the government to those formally approved so as to protect the public interest (see Janis, supra, 68 Cal.App.4th at 830), but was inconsistent with the general rule prohibiting quasi-contract claims where an enforceable agreement governed the subject matter (see Klein v. Chevron U.S.A., Inc., supra, 202 Cal.App.4th at1388). The departure from the norm, the unique facet of Russell, was therefore the application of a quasi-contract theory to a subject governed by an express contract. The court had unusual facts justifying the application, namely that the contract governing the subject matter had been judicially modified in a way that denied the plaintiff contract based compensation.

Here the facts are similar to Russell in that an express agreement exists, but dissimilar in that an express agreement covers the entire subject matter of the quasi-contract claim. Plaintiff’s argument based upon Russell does not convince the Court these facts require a departure from the general principle that quasi-contract actions are not available against the government. The facts here are distinct from the unique circumstances presented in Russell.

Accordingly, because unjust enrichment is not a cause of action, and the other causes of action which the facts support are either pled elsewhere or not available against the government, the demurrer to the fourth cause of action for unjust enrichment is SUSTAINED with 10 days leave to amend.

C. Fifth Cause of Action

Plaintiff asserts a claim for common counts for services rendered, alleging Defendants accepted Plaintiff’s services but did not pay for them. Defendants advance the same arguments in support of their demurrer to the unjust enrichment claim as the demurrer to the previous contract causes of action. In addition, Defendants argue a common count is a quasi-contractual theory, which cannot be brought against a public entity.

Both Defendants and Plaintiff treat the fifth causes of action as a quasi-contract theory, and argue the same logic applies to the fourth and fifth causes of action. As stated in section II, B, Plaintiff may not bring a quasi-contract claim against a public entity. (See Fairview Valley Fire, Inc. v. California Department of Forestry, supra, 233 Cal.App.4th at 1271.)

Common counts are quasi-contract actions, and they may not be asserted against public entities. (See Katsura v. City of San Buenaventura (2007) 155 Cal.App.4th 104, 109 [prohibiting common counts against government entities based upon implied contracts]; North Bay Const., Inc. v. City of Petaluma (2006) 143 Cal.App.4th 552, 555 [affirming demurrer including argument common counts may not be asserted against public entities].)

Defendants additionally argue the relief sued upon is not alleged pursuant to a statutorily authorized means of contracting with the public entity Defendants. “As such, Plaintiff cannot possibly state a common count against Defendants[.]” (Dem., p. 8:6-9.) Defendants do not support this argument with citation to authority. An unsupported contention requires no discussion by the court. (See People v. Dougherty (1982) 138 Cal.App.3d 278, 282.) The demurrer is not sustainable on the basis of this cursory argument.

Furthermore, the argument is inconsistent with the facts in the FAC. Plaintiff alleges he entered into a contract with District, and the contract was approved by the Board. (FAC, ¶¶ 10, 11.) The Court must accept these allegations as true. (See Ramsden v. Western Union (1977) 71 Cal.App.3d 873, 879.)

In sum, Plaintiff cannot bring a cause of action based upon an implied contract, such as common count, against a public entity. Accordingly, the demurrer to the fifth cause of action for common counts for services rendered is SUSTAINED with 10 days leave to amend.

D. Sixth Cause of Action

Plaintiff seeks a declaration of its rights for the purpose of clarifying whether it is entitled to future contingency fees, and seeks a declaration of its rights under the contract. Thus, the sixth cause of action is predicated upon the contract. Defendants consequently base their demurrer to this cause of action on the same reasons they advanced with regard to the proceeding contract claims. For the reasons already discussed the demurrer is not sustainable on those bases.

The Court observes that so long as a party pleads a controversy regarding the rights and duties of the parties, he or she is entitled to declaratory relief. (Qualified Patients Ass’n v. City of Anaheim (2010) 187 Cal.App.4th 734, 751.) Therefore, Plaintiff does not need to plead facts showing that it is entitled to a favorable judgment to obtain declaratory relief. (See ibid.)

Accordingly, the demurrer to the sixth cause of action for declaratory relief is OVERRULED.