Case Name: Top Gun Drywall Supply, Inc. v. Layton Construction Co., Inc., et al.
Case No.: 1-14-CV-265278

Defendant/cross-complainant/cross-defendant Layton Construction Co., Inc. (“Layton”) demurs to the cross-complaint (“Cross-Complaint”) filed defendant/cross-complainant/cross-defendant Champion Construction, Inc. dba Champion Construction Services (“Champion”).

This is an action for breach of contract, indemnity and fraud arising out of a payment dispute in a construction protect. In March of 2012, Champion bid on a project making various improvements on the property located at 19800 Vallco Parkway in Cupertino (the “Project”) and was selected by general contractor Layton to perform the drywall and metal framing. (Cross-Complaint, ¶ 9.)

In August 2012, Layton required that another drywall contractor be brought in to split the work on the project and selected defendant Mission Drywall Systems (“Mission”) to fulfill that role. (Cross-Complaint, ¶¶ 10, 11.) In October 2012, Layton executed separate drywall/metal framing subcontracts with Mission and Champion which allocated work on the drywall/metal framing and required the subcontractors to supply all materials and labor. (Id., ¶ 12.) The subcontracts also provided that if either Mission or Champion did not perform, Layton was responsible for completion of the Project. (Id., ¶ 13 and Exhibits A and B.)

Following the execution of the contract and at Layton’s request, Champion ordered the materials up front for the entire project through plaintiff Top Gun Drywall Supply, Inc. (“Top Gun”) and began billing the materials as they were delivered for the initial phase of drywall installation. (Cross-Complaint, ¶¶ 14, 15.) Layton demanded that Top Gun’s invoices be split between Mission and Champion, regardless of the phase for which the materials were provided, and withheld payment until this was done. (Id., ¶ 16.) Champion acquiesced to the demand. (Id.)

On July 22, 2013, having concluded its work, Champion advised Top Gun that all remaining materials were to be billed to Mission. (Cross-Complaint, ¶ 19.) Layton paid Champion and Top Gun via joint checks for the full amount of materials billed under Champion’s subcontract; in turn, Top Gun received payment in full for all materials billed under Champion’s subcontract and as a result, issued an unconditional final waiver and release to Champion on October 10, 2013. (Id., ¶ 20.)

Champion alleges that Layton subsequently failed to pay Mission and Top Gun for all materials billed through Mission’s subcontract. (Cross-Complaint, ¶ 20.) Upon learning that Mission no longer had a construction license and that Top Gun did not pre-lien Mission’s materials, Layton took over all of Mission’s remaining subcontractor work and asked Champion to complete the remaining drywall and framing. (Cross-Complaint, ¶¶ 21-23.) Pursuant to an oral agreement, Champion agreed to perform labor and Layton assumed the obligation for payment of the materials under Mission’s subcontract. (Id., ¶ 23.) As part of the agreement, Layton also represented that it would be solely responsible for the remaining materials to Top Gun and therefore Champion would not be required to invoice them. (Id., ¶ 24.)

Champion alleges that Layton falsely and intentionally represented that it would be paying for the remaining materials so as to induce it to continue working on the Project. (Cross-Complaint, ¶ 26.) It further alleges that Layton never had any intention of paying for the materials. (Id.) In reliance on these representations, Champion performed all remaining labor on the Project and executed waivers and releases to Layton. (Id., ¶ 27.) Layton directed Champion to obtain a different materials supplier for additional materials needed to complete work in order to further avoid paying Top Gun. (Id., ¶ 28.)

Top Gun filed an action against Cupertino, Layton, Mission and Champion regarding unpaid materials. Top Gun alleges, in pertinent part, that it entered into a series of written and verbal agreements with Champion whereby Top Gun agreed to furnish labor, materials, services and/or equipment to Champion for the Project and that Champion breached those agreements by failing to pay for the remaining materials supplied. (Cross-Complaint, ¶¶ 30, 31.)

On December 5, 2014, Champion filed the Cross-Complaint against Layton asserting the following causes of action: (1) implied contractual indemnity; (2) equitable indemnity- comparative fault; (3) declaratory relief; (4) intentional misrepresentation; (5) false promise; (6) negligent misrepresentation; (7) breach of contract; and (8) breach of implied covenant of good faith and fair dealing. Champion seeks indemnification from Layton for its alleged failure to pay all sums owed to Top Gun.

On January 9, 2015, Layton filed the instant demurrer to the Cross-Complaint and each of the eight causes of action asserted therein on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).)

Champion’s request for judicial notice is GRANTED. (Evid. Code, § 452, subd. (d).)

Layton’s demurrer to the first (implied contractual indemnity) and second (equitable indemnity- comparative fault) causes of action on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED. In demurring to these causes of action, Layton asserts that these claims cannot be maintained because (1) Layton cannot be a joint tortfeasor which is required to state a claim for implied contractual indemnity and (2) the written indemnification agreement does not require Layton to indemnify Champion. Neither of these arguments is persuasive.

As a general matter, California recognizes two types of indemnity: express and implied (equitable). (Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012, 1030.) The former arises “by virtue of express contractual language” while the latter is “premised on a joint legal obligation to another for damages.” (Prince v. Pacific Gas & Electric Co. (2009) 45 Cal.4th 1151, 1120.)

It is true, as Layton asserts, that the doctrine of equitable indemnity “applies only among defendants who are jointly and severally liable to the plaintiff.” (BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc., et al. (2004) 119 Cal.App.4th 848, 852 [internal citations omitted].) However, in the context of equitable indemnity, joint and several liability is “fairly expansive” and, contrary to Layton’s argument, is “not limited to the old common term ‘joint tortfeasor’ …. It can apply to acts that are current or successive, joint or several, as long as they create a detriment caused by several actors.” (Id., citing Yamaha Motor Corp. v. Paseman (1990) 219 Cal.App.3d 958, 964 [internal quotations omitted, emphasis added].) Moreover, while equitable indemnity generally requires that there be some basis for tort liability against the proposed indemnitor, implied contractual indemnity between the indemnitor and the indemnitee can itself provide a basis for equitable indemnity.” (Id., citing Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012, 1028-1035.)

Implied contractual indemnity, in turn, has been described as:

a form of equitable indemnity, arising from equitable considerations either by contractual language not specifically dealing with indemnification or by the equities of the specific matter. The right to implied contractual indemnity is predicated on the indemnitor’s breach of contract …. [and] is applied to contract parties and [] designed to apportion loss among contract parties based on the concept that one who enters a contract agrees to perform the work carefully and to discharge foreseeable damages resulting from that breach. As a form of equitable indemnity, the doctrine rests on the equities apparent from the surrounding circumstances, because contracting parties should share loss in proportion to their breach. An implied contractual indemnity claim does not amount to a claim for contribution from joint tortfeasors because it is founded neither in tort not on any duty that the indemnitor owes to the injured party. Rather, it is predicated on the indemnitor’s breach of duty owing to the indemnitee to properly perform its contractual responsibilities.

(Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp. (2003) 111 Cal.App.4th 1328, 1350-1351 [internal quotations and citations omitted].)

The foregoing authorities establish that Layton need not be a joint tortfeasor in order for Champion to maintain a claim against it for some form of equitable indemnity; it is enough that Champion has pleaded that it had a contractual relationship with Layton to perform drywall and framing on the Project, that Layton did not perform its obligations under that agreement (i.e., provide payment to Top Gun for materials provided), and that it incurred damages (the lawsuit asserted against it by Top Gun) as a result.

Champion’s second argument regarding the terms and conditions of the written subcontract between the parties ignores Champion’s allegations regarding a subsequent oral agreement between the parties that was executed after it finished the work that it was originally contracted to do. While Champion alleges that the oral agreement to perform specified portions of Layton’s subcontract with Mission was subject to the written subcontract between Layton and Mission, Layton ignores the effect that the terms of the oral agreement, specifically its promise to pay for remaining materials provided by Top Gun, had on the contractual arrangement between the parties. As articulated above, implied contractual indemnity can arise ¬either from “contractual language not specifically dealing with indemnification” or “the equities of the specific matter.” (Sehulster Tunnels/Pre-Con, supra, 111 Cal.App.4th at 1350-1351.) Moreover, the right to implied contractual indemnity is predicated on the indemnitor’s breach of contract. (Id.) Here, Layton is alleged to have breached the oral agreement between itself and Champion by failing to pay Top Gun. This is sufficient.

Layton’s demurrer to the third cause of action (declaratory relief) on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED. Layton’s insistence that no claim for declaratory relief has been stated because no actual controversy exists is unavailing. “A cross-complaint for equitable indemnity may properly take the form of an action for declaratory relief.” (Allen v. Southland Plumbing, Inc. (1988) 201 Cal.App.3d 60, 64 [internal citations omitted].) For the reasons set forth above, Champion has sufficiently pleaded claims for equitable indemnity.

Layton’s demurrer to the fourth (intentional misrepresentation), fifth (false promise) and sixth (negligent misrepresentation) causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. “Fraud must be pleaded with specificity rather than with general and conclusory allegations. The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made.” (West v. JP Morgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792 [internal citations and quotations omitted].) Here, Champion fails to plead fraud with the requisite particularity in failing to set forth specific allegations regarding where, when, to whom, and by what means the purported misrepresentations were made. Champion’s allegations regarding who specifically was responsible for making the misrepresentations, which are based on information and belief, suffer from an additional deficiency in that they are not supported by the particular facts upon which the allegations are based. (See Dowling v. Spring Val. Water Co. (1917) 174 Cal. 218, 221 [“[i]t is not sufficient to allege fraud or its elements upon information and belief unless the facts upon which the belief is founded are stated in the pleading”]; see also Findley v. Garrett (1952) 109 Cal.App.2d 166, 176-179.)

While Champion’s fraud claims are deficient as currently pleaded due to the lack of specificity, the Court disagrees with Layton’s contentions that Champion has not sufficiently pleaded proximate cause and that the fraud claims are barred by the economic loss rule.

First, proximate cause is “normally a question of fact” (Parker City & County of San Francisco (1958) 158 Cal.App.2d 597, 607) and the allegations of the Cross-Complaint, read in toto, set forth that Champion’s role as a defendant in Top Gun’s lawsuit is the result of its continued involvement in the Project, which was induced by Layton, and Layton’s failure to pay for materials provided by Top Gun as promised.

Second, while the economic loss rule generally “prevents the law of contract and the law of tort from dissolving into one another” and “requires a purchaser to recover in contract for purely economic loss due to disappointed expectations,” tort damages “have been permitted in contract cases where a breach of duty directly causes physical injury; for breach of the covenant of good faith and fair dealing in insurance contracts; for wrongful discharge in violation of fundamental public policy; or where the contract was fraudulently induced.” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988-990 [internal citations omitted] [emphasis added].) Here, Champion alleges that it was fraudulently induced to enter into the oral agreement with Layton to complete Mission’s phase of the drywall and metal framing on the project. Consequently, the economic loss rule does not bar Champion’s tort claims.

Layton’s demurrer to seventh cause of action (breach of contract) on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. Damages suffered by a plaintiff as a result of the defendant’s breach is a required element of a cause of action for breach of contract. (See Lortz v. Cornell (1969) 273 Cal.App. 286, 290.) Here, Champion alleges that Layton’s purported breach of the parties’ oral agreement resulted in the following damages: (1) attorneys’ fees incurred defending itself against Top Gun’s lawsuit for payment for drywall materials provided; and (2) any potential recovery by Top Gun against Champion. (Cross-Complaint, ¶ 89.) Neither of these items suffices as recoverable damages. First, attorneys’ fees are generally not considered “damages” and instead are controlled by statute or contract. (See, e.g., Woodward v. Bruner (1951) 104 Cal.App.2d 83, 86 [stating that law of damages does not include within its scope attorney fees].) Though Champion argues that there is a contractual basis for attorneys’ fees via Layton and Mission’s agreement and Civil Code section 1717, this is not pleaded in the Cross-Complaint and the agreements referred to are not attached to the pleading as indicated therein. Second, ordinarily a plaintiff cannot recover compensatory damages for a liability incurred regarding a third party. (Pacific Pine Lumber Co. v. W.U. Tel. Co. (1898) 123 Cal. 428.) The limited exception to this rule is that attorney fees incurred as a direct result of another’s tort may be recoverable as damages. (See Jordache Enterprises, Inc. v. Brobeck Phleger & Harrison (1998) 18 Cal.4th 739, 751.) Here, however, there is no allegation of Layton having committed a tort against Top Gun.

Layton’s demurrer to the eighth cause of action (breach of the implied covenant of good faith or fair dealing) on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. As currently pleaded, this cause of action is duplicative of Champion’s breach of contract claim. If a plaintiff’s breach of the covenant of good faith allegations “do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as no additional claim is actually stated.” (Careau & Co. v. Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395.)