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Howrey LLP
Morton
Engineering and Construction, Inc. was hired by Stanley
Patscheck as concrete subcontractor on a project for the
El Tejon Unified School District. Patscheck failed to pay
Morton for its work, claiming that it was suffering from
financial problems caused by another subcontractor. When
Patscheck received the retention proceeds from the public
agency, he offered Morton $42,800 as full and final settlement
of all claims arising out of the project. This was the amount
Patscheck admitted was due Morton under the contract but
excluded the cost of extra work, interest and penalties.
Morton rejected the offer.
Morton
obtained a judgment that included penalties for failure
to make progress payments and to pay retention within the
time required by California Business and Professions Code
§7108.5 and California Public Contract Code §7107.
Patscheck appealed, asserting that the penalty in §7108.5
only can be awarded in a disciplinary action before the
Contractors State License Board and that the trial court
miscalculated the interest and penalties. The appeal was
rejected. Morton Engineering and Construction, Inc. v.
Stanley Douglas Patscheck, 2001 DAR 2413 (2001)
Section 7108.5 provides that upon receipt of a progress
payment, the contractor must pay subcontractor within 10
days the amounts allowed the contractor for the work performed
by the subcontractor. The contractor may withhold from a
progress payment up to 150 percent of any amount over which
a good faith dispute exists.
Two
sanctions are provided if the contractor fails to pay the
subcontractor as required: 1.) a disciplinary proceeding
and 2.) a penalty of 2 percent a month on the balance payable
to the subcontractor.
Patscheck
argued that only CSLB and not a court could impose the 2
percent a month penalty on a contractor. The court held
that because §7108.5 does not limit recovery of the
2 percent penalty only to disciplinary proceedings, the
plain meaning of the statute allows recovery of the 2 percent
penalty in either a disciplinary proceeding or a civil action.
Patscheck
also argued that allowing recovery of prejudgment interest
pursuant to Civil Code §3287 and the 2 percent penalty
would result in a double recovery for the subcontractor.
The court disagreed, holding that both interest and penalties
are recoverable. Prejudgment interest is intended to compensate
the subcontractor for loss of use of the funds. The 2 percent
penalty is intended to penalize the contractor for failing
to comply with statutory requirements. The court held that
"to preclude recovery of both the 2 percent penalty
and prejudgment interest would defeat the purpose of the
statute and reduce the impact of the 2 percent penalty."
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2001 Howrey LLP
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