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

This lawsuit is brought by Plaintiff 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”) and arises from the nonpayment of fees purportedly owed to Plaintiff under a consulting contract with the District which called for Plaintiff to aid the District in getting the proper documentation to support mandated cost claims to be filed with the State.

The operative First Amended Complaint (“FAC”) filed October 18, 2017 alleges that 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 mandate claims reimbursed by the state, settlements in lieu of a paid mandate claim, and interest payments on initial claims. Payment of the contingency fee was subject to a condition precedent. The contingency fee was “due upon payment” of the mandate claim by the state. (FAC at ¶14.) Attached as Exhibit B to the FAC is a document the FAC describes as “an unexecuted specimen that served as the basis for the executed Agreement. Plaintiff is informed and believes and thereon alleges that the only difference between the written terms of Exhibit B and the written terms of the Agreement as presented to the District is that the contract period in paragraph 8 was adjusted to run through June 30, 2008, rather than June 30, 2007, in order to account for a delay in approving the contract.” (FAC at ¶10.)

A signed copy of the parties’ contract has been submitted by Defendants as exhibit 1 to the declaration of District Finance Director Silvia Pelayo. It was signed May 6, 2005 and expired June 30, 2008. It states in pertinent part in Paragraph 3 (“Payment”) that Plaintiff was to be paid a $9,000 maintenance fee each year of the contract as “an advance against future contingency fees owed.” Plaintiff also is to receive a “Contingency fee of 9% of paid claims, due upon payment of claims.” The fee is based on “claims paid by the State as well as claim settlements reached between the State and claimants in lieu of a mandated cost claims submission. Interest payments for initial claims are considered a paid claim for purposes of determining contingency fees due contractor.” (Court’s emphasis.)

The FAC originally stated claims for (1) Breach of Contract (based on the District’s alleged refusal to pay the contingency fee despite having received “funding” from the State); (2) Anticipatory Breach of Contract (based on the District’s alleged statement that it would continue to not pay contingency fees on “funding” received from the State that it maintains does not trigger the contingency fee provision of the 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 fourth and fifth causes of action were abandoned in 2018 when Plaintiff did not amend after a demurrer was sustained. A motion for summary adjudication of the sixth cause of action brought by Plaintiff was denied by the Court (Hon. Zayner) in December 2018.

Currently before the Court is the Defendants’ motion for summary judgment/adjudication of the FAC’s four remaining causes of action (the first through third and the sixth).

Request for Judicial Notice
In support of their motion Defendants have submitted three documents (copies of spreadsheets submitted jointly as exhibit 1 to the request) that they request the Court to take notice of pursuant to Evidence Code §452(h) only. This request is DENIED. (See Gould v. Md. Sound Indus. (1995) 31 Cal.App.4th 1137, 1145 [“Judicial notice under Evidence Code section 452, subdivision (h) is intended to cover facts which are not reasonably subject to dispute and are easily verified. These include, for example, facts which are widely accepted as established by experts and specialists in the natural, physical, and social sciences which can be verified by reference to treatises, encyclopedias, almanacs and the like or by persons learned in the subject matter.”].)

The submitted spreadsheets are not comparable to the Purchase and Assumption Agreement noticed by the Court of Appeal in Scott v. JPMorgan Chase, N.A. (2013) 214 Cal.App.4th 743, cited by Defendants. Notice there was primarily taken under Evidence Code §452(c) as the Agreement in question was clearly an official act of the FDIC. Notice was taken under §452(h) to the extent the already noticeable official act of a government entity, the Agreement, was also posted on the official web site of the FDIC, a “source of reasonably indisputable accuracy,” under those circumstances. Otherwise the general rule remains that information on government websites is not an appropriate subject of judicial notice, as judicial notice is a substitute for proof. (See Searles Valley Minerals Operations, Inc. v. State Bd. of Equalization (2008) 160 Cal.App.4th 514, 519 [refusing to take notice of web site pages of the American Coal Foundation and the U.S. Dept. of Energy]; Duronslet v. Kamps (2012) 203 Cal.App.4th 717, 737 [refusing to take judicial notice of information on the Cal. Bd. of Registered Nursing web site].)

Motion for Summary Judgment/Adjudication
The pleadings limit the issues presented for summary judgment or adjudication and such a motion may not be granted or denied based on issues not raised by the pleadings. (See Government Employees Ins. Co. v. Sup. Ct. (2000) 79 Cal.App.4th 95, 98; Laabs v. City of Victorville (2008) 163 Cal.App.4th 1242, 1258; Nieto v. Blue Shield of Calif. Life & Health Ins. (2010) 181 Cal.App.4th 60, 73 [“the pleadings determine the scope of relevant issues on a summary judgment motion.”].) The moving party bears the initial burden of production to make a prima facie showing that there are no triable issues of material fact. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty. (See CCP §437c(f)(1); McClasky v. California State Auto. Ass’n (2010) 189 Cal.App.4th 947, 975 [“If a cause of action is not shown to be barred in its entirety, no order for summary judgment—or adjudication—can be entered.”]; Palm Spring Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal.App.4th 268, 288.) Summary adjudication of general “issues” or of facts is not permitted. (See Raghavan v. The Boeing Company (2005) 133 Cal.App.4th 1120, 1136.)

The moving party’s declarations and evidence will be strictly construed in determining whether they negate or disprove an essential element of a plaintiff’s claim “in order to resolve any evidentiary doubts or ambiguities in plaintiff’s (or opposing party’s) favor.” (Johnson v. American Standard, Inc. (2008) 43 Cal.4th 56, 64, parentheses added.) While the same standards of admissibility govern both, the opposition declarations are liberally construed while the moving party’s evidence is strictly scrutinized. (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768.) The evidence must be liberally construed in support of the opposing party, resolving any doubts in favor of that party. (Yanowitz v. L’Oreal USA, Inc. (2005) 36 Cal.4th 1028, 1037.) The moving party may generally not rely on additional evidence filed with its reply papers. (See Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537-38 [“The general rule of motion practice . . . is that new evidence is not permitted with reply papers. This principle is most prominent in the context of summary judgment motions . . .”]; see also Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243, 252.)

The opposing party may be bound by admissions made in deposition testimony or responses to written discovery. (See Whitmire v. Ingersoll-Rand Co. (2010) 184 Cal.App.4th 1078, 1087 [“Where a declaration submitted in opposition to a motion for summary judgment clearly contradicts the declarant’s earlier deposition testimony or discovery responses, the trial court may fairly disregard the declaration and ‘conclude there is no substantial evidence of the existence of a triable issue of fact.’”])

“Summary judgment is properly granted when no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. A defendant moving for summary judgment bears the initial burden of showing that a cause of action has no merit by showing that one or more of its elements cannot be established or that there is a complete defense. Once the defendant has met that burden, the burden shifts to the plaintiff ‘to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto.’ ‘There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.’” (Madden v. Summit View, Inc. (2008) 165 Cal.App.4th 1267, 1272 [internal citations omitted].)

Defendants’ motion for summary judgment should be GRANTED. The outcome of the motion is essentially dictated by determining the proper interpretation of the contract between Plaintiff and Defendant District, particularly Paragraph 3 (“Payment”). This is a question of law for the Court.

Generally, “It is . . . solely a judicial function to interpret a written instrument unless the interpretation turns on the credibility of extrinsic evidence.” (Consolidated Theatres, Inc. v. Theatrical Stage Employees Union (1968) 69 Cal.2d 713, 724.) “Courts must interpret contractual language in a manner which gives force and effect to every provision, and not in a way which renders some clauses nugatory, inoperative or meaningless.” (Hemphill v. Wright Family LLC (2015) 234 Cal.App.4th 911, 915, quoting City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473.) Civil Code section 1636 states, “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Emphasis added.) Civil Code section 1638 states, “The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.” Civil Code section 1639 states, in pertinent part, “When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible.” Civil Code section 1644 states, “The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed.” “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the contract. The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’, controls judicial interpretation. Thus, if the meaning a layperson would ascribe to contract language is not ambiguous, we apply that meaning.” (Santisas v. Goodin (1998) 17 Cal.4th 599, 608; emphasis added, internal citations omitted.)

Here the plain language of paragraph 3 of the contract states that Plaintiff is only entitled to a contingency fee of 9% “of paid claims, due upon payment of claim.” Money received from the State has to be a “paid claim,” a “payment” on a specific mandate reimbursement claim made by the District or a payment stemming from a mutual settlement between the State and the District on a specifically identified mandate claim in order to trigger the obligation to pay the contingency fee. Defendants have shown that Plaintiff cannot establish that the condition precedent for payment of contingency fees “due upon payment of claims” has occurred. The contact unambiguously states that the contingency fees are payable upon “claims paid by the State as well as claim settlements reached between the State and claimants in lieu of a mandated cost submission.” Neither has occurred since 2011 because the State has ceased paying mandate claims in the manner contemplated by the contract. One-time allocations of funds from the State to school districts calculated on the basis of the schools’ average daily attendance (rather than actual mandate claims) that the State has declared will “offset” any mandate claims cannot be reasonably construed as “paid [mandate] claims.” Interpreting the parties’ contract in such a way (as Plaintiff urges) would render the express language limiting contingency fees to 9% “of paid claims, due upon payment of claim” inoperative or meaningless.

The deposition testimony of Plaintiff’s President Steve Smith (submitted by Defendants as exhibit 1 to the declaration of Rogelio Ruiz) confirms that at the time of contracting neither party contemplated or even considered the possibility that the State would alter then existing system and claim to “reimburse” school district mandate claims through “apportionment offsets.” Mr. Smith’s testimony establishes that there was no “mutual intention of the parties” at the time the contract was drafted that any distribution of funds from the State to school districts that the State unilaterally declared would “offset” mandate claims would trigger the obligation to pay contingency fees. The contract language, which Mr. Smith drafted, is inextricably intertwined with, and dependent upon, a system for the resolution of mandate claims that effectively no longer exists, in which individual mandate claims were submitted to the State (more specifically the Commission on State Mandates) by school districts for determination or where school districts and the State reached settlements on specifically identifiable mandate claims.

Since Defendants have shown through admissible evidence (the declarations of Rogelio Ruiz and Silva Pelayo and the attached exhibits-particularly the copy of the signed contract submitted as exhibit 1 to the Pelayo declaration and the excerpts from the deposition testimony of Steve Smith submitted as exhibit 1 to the Ruiz declaration) that the condition precedent for the payment of contingency fees to Plaintiff under the terms of the contract Steve Smith drafted has not occurred since 2011 they are entitled to judgment on the FAC’s first cause of action for breach of contract as Plaintiff cannot show that their refusal to pay contingency fees until the condition precedent occurs is a breach of Paragraph 3 (“Payment”) of the Contract..

Defendants have also shown that they are entitled to judgment on the FAC’s second cause of action for anticipatory breach of contact. The FAC at ¶40 alleges that Defendants’ April 2017 refusal to pay Plaintiff’s September 2016 invoice for a contingency fee “or future invoices for contingency fees” was an anticipatory breach. As already stated, Defendants have established that the State’s unilateral determination that portions of funds transferred to school district should be deemed to “offset” mandate claims does not trigger the requirement to pay Plaintiff an contingency fees under Paragraph 3 of the contract. Accordingly, Defendants’ refusal to pay contingency fees based on the State’s current practice of declaring offsets is not a breach of the contract, let alone an anticipatory breach of the contract. “Repudiation of a contract, also known as ‘anticipatory breach,’ occurs when a party announces an intention not to perform prior to the time due for performance.” (Stephens & Stephens XII, LLC v. Fireman’s Fund Ins. Co. (2014) 231 Cal.App.4th 1131, 1150. Emphasis added.) The FAC does not allege that Defendants have announced an intention to refuse pay a contingency fee if the conditions set forth in Paragraph 3 of the contract are satisfied. Until those conditions are satisfied, no contingency fee is owed.

Defendants are also entitled to judgment on the FAC’s third cause of action for breach of the implied covenant of good faith and fair dealing, which is solely based on Defendants’ refusal to pay contingency fees (see FAC at ¶¶43-46.) The implied covenant cannot be extended to “create obligations not contemplated in the [express terms of the] contract.” (Racine & Laramie, Ltd. v. Dept. of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1032.) As Defendants are not required to pay Plaintiff a contingency fee until the conditions set forth in Paragraph 3 of the contract are met, their refusal to do until those conditions are met cannot be framed as a breach of the implied covenant.

Finally, Defendants are entitled to judgment on the FAC’s sixth cause of action for declaratory relief. “When seeking summary judgment on a claim for declaratory relief, the defendant must show that the plaintiff is not entitled to a declaration in its favor by establishing ‘(1) the sought-after declaration is legally incorrect; (2) [the] undisputed facts do not support the premise for the sought-after declaration; or (3) the issue is otherwise not one that is appropriate for declaratory relief.’ If this is accomplished, the burden shifts to the plaintiff to prove, by producing evidence of, specific facts creating a triable issue of material fact as to the cause of action or the defense.” (Cates v. California Gambling Control Com. (2007) 154 Cal.App.4th 1302, 1307-1308, citing Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1402.)

Plaintiff’s sixth cause of action in essence asks the Court to declare that Plaintiff is entitled to contingency fees simply because the State has unilaterally declared the money transferred to school districts shall be deemed to “offset” any mandate claims. (See FAC at ¶59 “Plaintiff seeks . . . a judicial declaration that Plaintiff is entitled to future contingency fees for funding that the District receives and is deemed cleared.”) Defendants have demonstrated that the sought-after declaration is legally incorrect as Paragraphs 3 of the contact cannot be reasonably interpreted as requiring Defendants to pay Plaintiff a contingency fee simply because the State’s current practice (unanticipated when the contract was drafted and signed) is to declare that general purpose funding “offsets” mandate claims.