PG&E Corporation v. AECOM Technical Services, Inc..

District Court, N.D. California·Decided January 21, 2022·No. 4:20-cv-05381·Unknown

Opinion

1 2 3 6 7 JH KELLY, LLC, Case No. 20-cv-05381-HSG

8 Plaintiff, ORDER GRANTING IN PART AND DENYING IN PART MOTION TO 9 v. DISMISS JH KELLY, LLC’S SECOND AMENDED COMPLAINT et al., Re: Dkt. No. 98 11 Defendants. 12 13 Before the Court is Defendant and Counter-Claimant AECOM Technical Services, Inc.’s 14 (“AECOM”) motion to dismiss certain claims in JH Kelly LLC’s (“JH Kelly”) Second Amended 15 Complaint. Dkt. No. 98 (“Mot.”). The motion is fully briefed. See Dkt. Nos. 105 (“Opp.”) and 16 110 (“Reply”). The Court finds this matter appropriate for disposition without oral argument and 17 the matter is deemed submitted. See Civil L.R. 7-1(b). For the following reasons, the motion is 18 GRANTED IN PART and DENIED IN PART. 20 This construction dispute arises out of the Burney K2 Replacement Project (“Project”), 21 which involved the replacement of a natural gas compressor unit and various upgrades at the 22 compressor station near Burnley, California. Dkt. No. 102 (JH Kelly’s Second Amended 23 Complaint or “SAC”) ¶ 1. The Burney Compressor Station is part of Pacific Gas & Electric 24 Company’s (“PG&E”) natural gas distribution system. Id. ¶ 11. That system supplies natural gas 25 to the surrounding area and allows compressed gas to travel through pipelines from Oregon to 26 consumers in California. Id. In all, PG&E’s natural gas distribution system provides service to 27 around 4.2 million customers from Bakersfield, California to the Oregon border. Id. 1 On February 11, 2016, AECOM entered into an agreement (the “EPC Agreement”) with 2 PG&E for the Project. Id. ¶ 19. Under the EPC Agreement, AECOM agreed to act as the design- 3 builder and prime contractor for the Project. Id. On October 21, 2016, AECOM and Kelly 4 entered into an agreement (the “Subcontract”) for the construction portion of the work. Id. ¶¶ 25- 5 27. 6 Various issues on the Project led to disputes between JH Kelly, AECOM and PG&E, and 7 JH Kelly filed the First Amended Complaint on January 29, 2021. Dkt. No. 18. PG&E moved to 8 dismiss JH Kelly’s First Amended Complaint and prevailed as to JH Kelly’s first claim for 9 foreclosure of mechanic’s lien. Dkt Nos. 24, 56. On March 8, 2021, AECOM filed its First 10 Amended Counterclaim against PG&E and JH Kelly. Dkt. No. 38. PG&E moved to dismiss 11 AECOM’s First Amended Counterclaim, including AECOM’s quantum meruit claim based on an 12 abandonment theory. Dkt. No. 48. On June 28, 2021, the Court granted PG&E’s Motion to 13 Dismiss as to AECOM’s quantum meruit claim based on an abandonment theory but gave 14 AECOM leave to amend its claim. See Dkt. No. 64. AECOM then filed its Second Amended 15 Counterclaim on July 19, 2021. Dkt. No. 65. AECOM and PG&E reached a settlement on 16 October 18, 2021 and ultimately agreed to dismiss their claims against one another with prejudice. 17 See Dkt. Nos. 93, 127. 18 In light of the Court’s order dismissing AECOM’s original quantum meruit claim based on 19 an abandonment theory, JH Kelly sought and was granted leave to also amend its First Amended 20 Complaint, which also stated a quantum meruit abandonment claim. See Dkt. Nos. 82, 100. JH 21 Kelly then filed the operative SAC, which is the subject of AECOM’s present motion to dismiss. 22 Dkt. No. 102. 24 Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a short and plain 25 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A 26 defendant may move to dismiss a complaint for failing to state a claim upon which relief can be 27 granted under Rule 12(b)(6). “Dismissal under Rule 12(b)(6) is appropriate only where the 1 Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). To survive a Rule 2 12(b)(6) motion, a plaintiff need only plead “enough facts to state a claim to relief that is plausible 3 on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible 4 when a plaintiff pleads “factual content that allows the court to draw the reasonable inference that 5 the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 6 In reviewing the plausibility of a complaint, courts “accept factual allegations in the 7 complaint as true and construe the pleadings in the light most favorable to the nonmoving party.” 8 Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Nevertheless, 9 courts do not “accept as true allegations that are merely conclusory, unwarranted deductions of 10 fact, or unreasonable inferences.” In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 11 2008) (quoting Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001)). 12 If the court concludes that a 12(b)(6) motion should be granted, the “court should grant 13 leave to amend even if no request to amend the pleading was made, unless it determines that the 14 pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 15 1122, 1127 (9th Cir. 2000) (en banc) (quotation omitted). 17 JH Kelly’s SAC alleges eight causes of action against AECOM. Dkt. No. 102. AECOM 18 moves to dismiss the SAC’s (1) Fifth Claim for Breach of the Implied Covenant of Good Faith 19 and Fair Dealing; (2) Sixth Claim for Quantum Meruit/Abandonment of Contract; and (3) Eighth 20 Claim for Quantum Meruit/Reasonable Value. See Mot. at 6. 21 As an initial matter, JH Kelly contends that the Court should deny AECOM’s motion to 22 dismiss its claim for breach of the implied covenant of good faith and fair dealing as untimely. 23 Opp. at 19-20. JH Kelly argues that AECOM raised its motion after the dispositive motion 24 deadline even though the claim is “materially unchanged” from previous versions of JH Kelly’s 25 complaint. Id. The Court agrees that AECOM waived its right to bring a 12(b)(6) challenge to JH 26 Kelly’s claims for implied covenant of good faith and fair dealing and quantum meruit for 27 reasonable value because AECOM previously answered JH Kelly’s First Amended Complaint, 1 12(b)(6); Elvig v. Calvin Presbyterian Church, 375 F.3d 951, 954 (9th Cir. 2004) (“A Rule 2 12(b)(6) motion must be made before the responsive pleading . . . . Here, the Defendants filed their 3 motion to dismiss after filing their answer.”) (emphases added). 4 Perhaps recognizing this waiver, AECOM asks the Court to consider its Motion as a 5 motion for judgment on the pleadings.1 Mot. at 15. Such a motion may be brought after the 6 pleadings are closed but only if it is “early enough not to delay trial[.]” Fed. R. Civ. P. 12(c). 7 Because AECOM’s motion may narrow the issues for trial, and because it can be addressed 8 without delaying trial, the Court construes it as a motion for judgment on the pleadings and finds 9 good cause to address its merits. 10 A. Implied Covenant of Good Faith and Fair Dealing 11 AECOM first moves to dismiss JH Kelly’s claim for breach of the covenant of good faith 12 and fair dealing on the ground that it is duplicative of the breach of contract claim. See Mot. at 13- 13 14.

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1 2 3 6 7 JH KELLY, LLC, Case No. 20-cv-05381-HSG

27 1 Oddly, AECOM asks the Court for judgment with respect to JH Kelly’s First Amended 1 1645 n. 3, 1 Cal. Rptr. 3d 374, 378 (2003). But several federal district courts have read Guz to 2 allow simultaneous breach of contract and implied covenant claims when the plaintiff alleges that 3 the defendant exercised a right under the contract in bad faith to frustrate the contract’s benefits. 4 See, e.g., Daly v. United Healthcare Ins. Co., No. 10-CV-03032-LHK, 2010 WL 4510911, at *5 5 (N.D. Cal. Nov. 1, 2010); Celador Intern. Ltd. v. Walt Disney Co., 347 F. Supp. 2d 846, 853 (C.D. 6 Cal. 2004); Lamke v. Sunstate Equip. Co., LLC, 387 F. Supp. 2d 1044, 1048 (N.D. Cal. 2004); 7 see also Guz, 24 Cal. 4th at 318 n.18 (“We do not suggest the covenant of good faith and fair 8 dealing has no function whatever in the interpretation and enforcement of employment contracts . . 9 . . [T]he covenant prevents a party from acting in bad faith to frustrate the contract’s actual 10 benefits.”) (alterations omitted). 11 AECOM argues that JH Kelly’s claim for breach of the implied covenant should be 12 disregarded as superfluous because it “relies on the same alleged facts and seeks the same 13 damages claimed in a contract claim.” Mot. at 14. The Court is not entirely convinced by 14 AECOM’s argument. As the Celador court noted, courts analyzing whether a claim for breach of 15 the implied covenant is duplicative of a breach of contract claim “should not mechanically inquire 16 whether the same facts are alleged and whether the same remedy is sought” because only a limited 17 set of circumstances can give rise to a contract lawsuit, and the same remedies are available for 18 both claims. Celador, 347 F. Supp. 2d at 853. In other words, a finding that the claims involve 19 the same set of facts and seek the same remedy is a necessary but not sufficient condition of a 20 superfluous implied covenant claim. 21 Rather, the fundamental problem with JH Kelly’s SAC is that it does not sufficiently 22 distinguish its implied covenant claim from its breach of contract claim. The SAC does little more 23 than allege that AECOM breached the implied covenant by the same course of conduct that 24 underlies JH Kelly’s claim for breach of contract.2 Compare SAC ¶ 55 with ¶ 70. These 25 2 Specifically, the SAC alleges the following: 26

As alleged herein, AECOM breached the covenant of good faith and 27 fair dealing by, among other things, its failure and refusal to timely 1 allegations “do not go beyond the statement of a mere contract breach and, relying on the same 2 alleged acts, simply seek the same damages or other relief already claimed in a companion 3 contract cause of action.” Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371, 4 1377, 272 Cal. Rptr. 387 (1990). The Court accordingly finds that JH Kelly’s fifth claim for 5 breach of the implied covenant “may be disregarded as superfluous” and GRANTS AECOM’s 6 motion to dismiss as to that claim. Id. 7 B. Quantum Meruit/Abandonment of Contract 8 AECOM moves to dismiss JH Kelly’s Sixth Claim for Quantum Meruit, which is based on 9 allegations that AECOM abandoned the Subcontract by subsequently demanding a materially 10 different scope of work. See SAC ¶¶ 74-8. AECOM similarly alleged in its counterclaim that 11 PG&E abandoned the EPC Agreement by demanding excessive changes to the Project. See Dkt. 12 No. 38 ¶¶ 135-143. The Court dismissed AECOM’s quantum meruit claim because AECOM 13 failed to allege, as required, that both parties agreed that the contract was terminated and of no 14 further force and effect. See Dkt. No. 64 at 6; Amelco Elec. v. City of Thousand Oaks, 27 Cal. 4th 15 228, 236 (2002) (“[A]bandonment requires a finding that both parties intended to disregard the 16 contract.”) (alteration and emphasis in original). AECOM now contends that JH Kelly’s Sixth 17 Claim for Quantum Meruit fails for the same reason. See Mot. at 9-10. The Court disagrees. 18 Under the abandonment doctrine, a construction contract is deemed “abandoned” once the 19 parties (1) fail to follow the contract’s change order process, and (2) when the final project is 20 “materially different” from the terms of the original contract. 3 Amelco Elec., 27 Cal. 4th at 235, 21 respond to CORs; its refusal to pay Kelly for both its original and 22 extra work that was directed by AECOM; its refusal to provide Kelly with timely updates regarding changes to the Project Schedule, 23 including, but not limited to, changes to the delivery dates for the IFC drawings, and the delivery dates for materials; its failure to pay even 24 undisputed amounts owing to Kelly in an effort to financially burden Kelly and in an attempt to interfere with Kelly’s relationships with its 25 subcontractors; and its general failure and refusal to negotiate or deal in good faith with Kelly. 26 SAC ¶ 70. 27 3 A construction contract with a firm price often includes a “change order” provision, which 1 239. “Abandonment requires a finding that both parties intended to disregard the contract.” Id. at 2 236 (citations and internal punctuation omitted). That is, abandonment occurs “only where both 3 contracting parties agree that the contract is terminated and of no further force and effect.” Ben– 4 Zvi v. Edmar Co., 40 Cal. App. 4th 468, 474 (1995) (internal punctuation omitted). 5 There is no dispute that JH Kelly’s SAC at least alleges that the final project was 6 “materially different” from the terms of the Subcontract. See SAC ¶ 43 (detailing how “Kelly was 7 forced to perform massive additional, changed and re-sequenced work, forced to work for a far 8 longer period than planned, and forced to incur substantial damages as a result.”). The only 9 question is whether the SAC plausibly alleges that both parties intended to abandon the 10 Subcontract’s change order process. 11 As to AECOM, the SAC alleges that of 273 total change order requests ultimately issued 12 by JH Kelly to AECOM, there are 199—valued at over $9.5 million—that are “unresolved” by 13 AECOM and are “still pending years after the Project was completed.” SAC ¶ 44. The SAC 14 further alleges that AECOM never responded to $7,073,527 worth of requests. Id. Accepting 15 these factual allegations as true and construing them in the light most favorable to JH Kelly, as the 16 Court must at this stage, the Court can reasonably infer that AECOM never resolved millions of 17 dollars’ worth of change order requests because it ultimately abandoned the Subcontract’s change 18 order process. Manzarek, 519 F.3d at 1031. 19 AECOM’s primary argument to the contrary is that the SAC itself acknowledges that 20 AECOM provided a response to 205 of JH Kelly’s 273 requests—96 that AECOM reduced in 21 value, 9 that AECOM rejected, and 26 that AECOM approved (but did not pay). See Mot. at 8-9. 22 If AECOM intended to abandon the contract, it argues, it would make no sense for it to address 23 over 200 requests. See Reply at 9. But the fact that AECOM responded to or executed some 24 change order requests does not render JH Kelly’s quantum meruit claim under the abandonment 25 theory fundamentally implausible as a matter of law at the pleading stage—particularly since the 26 SAC alleges that AECOM ultimately never responded to several million dollars’ worth of 27 1 requests. SAC ¶ 44; see also C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. 2 3d 628, 641, 218 Cal. Rptr. 592, 599 (1985) (finding abandonment where the requirement for 3 written change orders was only “completely abandoned” during the project’s critical shutdown 4 stage). While evidence that AECOM addressed over 200 requests may undermine Plaintiff’s 5 abandonment theory at trial, the Court does not weigh the evidence at this stage in the litigation. 6 See Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011) (“If there are two alternative explanations, 7 one advanced by defendant and the other advanced by plaintiff, both of which are plausible, 8 plaintiff’s complaint survives a motion to dismiss under Rule 12(b)(6).”). The Court therefore 9 finds that the SAC plausibly alleges that AECOM abandoned the Subcontract’s change order 10 process. 11 As to JH Kelly, the SAC alleges that, as a result of AECOM’s abandonment, JH Kelly was 12 also forced to abandon the Subcontract’s change order process. SAC ¶¶ 77-78. The SAC further 13 alleges that, based on JH Kelly’s understanding that the Project, as materially changed, would 14 necessarily proceed on a quantum meruit basis, JH Kelly nevertheless completed the work despite 15 the lack of payment. Id. 16 AECOM contends that these allegations are inconsistent with other parts of the SAC where 17 JH Kelly alleges that it “performed all conditions, covenants, and promises required on its part to 18 be performed in accordance with the terms and conditions of the Subcontract,” “timely submitted 19 CORs for all of the foregoing additional work, changed work, and resulting damages,” and 20 complied with its obligations to ensure that the project was completed. Mot. at 11. 21 But the Court does not find these allegations inherently contradictory. To begin with, JH 22 Kelly’s allegation that it timely submitted change order requests is entirely consistent with its 23 allegation that, due to AECOM’s failure to resolve those requests, JH Kelly subsequently 24 abandoned the Subcontract’s change order process and completed the work despite the lack of 25 payment. See SAC ¶¶ 77-78. 26 Nor is it inconsistent for JH Kelly to maintain that it both ultimately abandoned the change 27 order process and complied with its obligations under the Subcontract to ensure that the project 1 deemed abandoned, the contractor may properly opt to complete the work and recover in quantum 2 meruit afterwards. Peterson, 172 Cal. App. 3d at 640; see also Daugherty Co. v. Kimberly-Clark 3 Corp., 14 Cal. App. 3d 151, 156-57, 92 Cal. Rptr. 120, 123 (1971) (“Performing the work 4 prescribed by the contract and the changes does not preclude the possibility that the labor and 5 materials furnished were outside the contemplation of the parties when the bid was made and the 6 contract signed.”). Under these circumstances, the terms of the written contract are deemed 7 abandoned, but the work is not. Peterson, 172 Cal. App. 3d at 640. JH Kelly’s SAC advances this 8 theory and therefore plausibly alleges that JH Kelly abandoned the Subcontract’s change order 9 process. See SAC ¶¶ 77-78. 10 Because the SAC plausibly alleges that both parties ultimately failed to follow the 11 Subcontract’s change order process, and that the final project is “materially different” from the 12 terms of the original contract, the Court finds that JH Kelly has plausibly stated a quantum meruit 13 abandonment claim and DENIES AECOM’s motion to dismiss as to that claim. 14 C. Quantum Meruit/Reasonable Value 15 Finally, AECOM contends that JH Kelly’s Eighth Claim for Quantum Meruit for 16 Reasonable Value should be dismissed because it is unavailable as a matter of law where, as here, 17 a valid agreement exists between the parties. See Mot. at 12. The Court agrees. 18 Quantum meruit is an equitable theory which supplies, by implication and in furtherance of 19 equity, “implicitly missing contractual terms.” Hedging Concepts, Inc. v. First All. Mortg. Co., 41 20 Cal. App. 4th 1410, 1419, 49 Cal. Rptr. 2d 191 (1996). But contractual terms are not “implicitly 21 missing” when the parties have agreed on express terms regarding that subject. Id. Put 22 differently, “[a] quantum meruit analysis cannot supply ‘missing’ terms that are not missing.” Id. 23 It is therefore “well settled” that there is “no equitable basis for an implied-in-law promise to pay 24 reasonable value when the parties have an actual agreement covering compensation.” Id.; see also 25 Mosier v. Stonefield Josephson, Inc., 815 F.3d 1161, 1172 (9th Cir. 2001) (“[A]s a matter of law, a 26 quasi-contract action for unjust enrichment does not lie where . . . express binding agreements 27 exist and define the parties’ rights.”) (quoting Cal. Med. Ass'n, Inc. v. Aetna U.S. Healthcare of 1 AECOM contends that because the Subcontract specifically contains provisions under 2 which JH Kelly can seek additional compensation for additional work, changed work, and 3 resulting damages, JH Kelly’s claim to seek such compensation through quasi-contract fails to 4 state a claim upon which relief can be granted. See Mot. at 13. In response, JH Kelly points to 5 California case law holding that a party “can pursue and even recover on both claims for breach of 6 contract and for quantum meruit on an abandonment theory.” Opp. at 16 (emphasis added). 7 That is true, but irrelevant.4 JH Kelly’s claim for quantum meruit based on an 8 abandonment theory is its sixth cause of action. SAC ¶¶ 72-78. JH Kelly’s rebuttal does not 9 address AECOM’s argument that JH Kelly cannot maintain its eighth cause of action, which is a 10 claim for quantum meruit for reasonable value. Id. ¶¶ 83-85. 11 The Court agrees with AECOM that the Subcontract governs JH Kelly’s claims for 12 compensation against AECOM. See, e.g., SAC ¶¶ 25, 33, 39, 44. And while California law 13 authorizes quantum meruit despite the existence of an applicable contractual provision when the 14 underlying contract was procured by fraud or is otherwise unenforceable, ineffective, or expired, 15 see McBride v. Boughton, 123 Cal. App. 4th 379, 388, 20 Cal. Rptr. 3d 115, 121-22 (2004); 16 Lectrodryer v. SeoulBank, 77 Cal. App. 4th 723, 726, 91 Cal. Rptr. 2d 881, 883 (2000), the SAC 17 does not allege that any of those exceptions apply here. See SAC ¶¶ 83-85. Accordingly, the 18 Court GRANTS AECOM’s motion to dismiss as to JH Kelly’s Eighth Claim for Quantum Meruit 19 for Reasonable Value. 21 The Court GRANTS IN PART and DENIES IN PART AECOM’s motion to dismiss JH 22 Kelly’s SAC. Specifically, the motion is granted as to JH Kelly’s Fifth Claim for Breach of the 23 Implied Covenant of Good Faith and Fair Dealing and Eighth Claim for Quantum 24 Meruit/Reasonable Value. The Court will address whether JH Kelly will be given leave to amend 25 these claims at the Pretrial Conference. The motion is denied as to JH Kelly’s Sixth Claim for 26

27 4 See Amelco Elec., 27 Cal. 4th at 237 (“[W]e conclude the trial court could properly find both a 1 Quantum Meruit for Abandonment of Contract. 3 Dated: 1/21/2022 Ataspureed 5, Sub HAYWOOD S. GILLIAM, JR. 5 United States District Judge 6 7 8 9 10 11 12 15

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PG&E Corporation v. AECOM Technical Services, Inc.., (N.D. Cal. 2022).

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