SG Blocks, Inc. v. HOLA Community Partners

• Court: District Court, C.D. California
• Decided: October 12, 2022
• Docket: 2:20-cv-03432
• Status: Unknown

Opinion

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8 United States District Court 9 Central District of California

11 SG BLOCKS, INC., Lead Case №: 2:20-cv-03432-ODW (RAOx) 12 Plaintiff, Consolidated Case №: 13 v. 2:20-cv-04386-ODW (RAOx)

14 HOLA COMMUNITY PARTNERS, et al.,

15 Defendants. ORDER GRANTING THIRD PARTY DEFENDANT 16 MCINTYRE’S MOTION FOR HOLA COMMUNITY PARTNERS, 17 PARTIAL SUMMARY Plaintiff, JUDGMENT [153] 18 v. 19 SG BLOCKS, INC., et al., 20 Defendant and Third-Party 21 Plaintiff,

22 v.

23 TETON BUILDINGS, LLC, et al.,

24 Third-Party Defendants.

25 26 I. INTRODUCTION 27 This is a consolidated construction dispute involving HOLA Community 28 Partners (“HOLA”) and Heart of Los Angeles Youth, Inc. (together, “HOLA Parties”), Case 2:20-cv-03432-ODW-RAO Document 166 Filed 10/12/22 Page 2 of 9 Page ID #:2175

1 the lessors of land for a construction project; SG Blocks, Inc., a contractor for the 2 project; and several subcontractors. SG Blocks filed a Complaint against HOLA, 3 HOLA filed a Complaint against SG Blocks, and SG Blocks impleaded several 4 subcontractors by way of a Third-Party Complaint. 5 Third-Party Defendant The McIntyre Company, a subcontractor, moves for 6 partial summary judgment against SG Blocks’ claim for express indemnity in 7 SG Blocks’ First Amended Third-Party Complaint. (Mot. Summ. J. (“Motion” or 8 “Mot.”), ECF No. 153.) The Motion is fully briefed. (Stip. Lack of Contractor’s 9 License (“Stip.”), ECF No. 154; Opp’n, ECF No. 156; Reply, ECF No. 157.) As 10 explained below, the Court finds that, under California law, SG Blocks’ unlicensed 11 status during construction precludes it from asserting a claim against McIntyre for 12 express indemnity. Accordingly, the Court GRANTS McIntyre’s Motion.1 13 II. FACTUAL AND PROCEDURAL BACKGROUND 14 The HOLA Parties are non-profit organizations that provide at-risk youth with 15 free academic, art, and athletic programs. (Order Mot. Dismiss 3, ECF No. 68.) 16 HOLA operates an arts and recreation center in Lafayette Park in Los Angeles, 17 California. (Id.) The present dispute concerns construction of the center, referred to 18 herein as the “Project.” 19 In September 2017, HOLA entered into an agreement with the City of Los 20 Angeles concerning leasing the land and constructing the Project. (Compl. ¶ 11, ECF 21 No. 1.) HOLA then entered into a contract with SG Blocks to, among other things, 22 install, fabricate, and deliver modular units in connection with the Project. (Id. ¶ 16.) 23 In turn, SG Blocks hired several subcontractors to assist with construction on the 24 Project, including movant McIntyre. (First Am. Third-Party Compl. (“Third-Party 25 Compl.”) ¶ 22–34, ECF No. 79.) SG Blocks subcontracted with McIntyre to install 26 metal decking for the Project. (Id. ¶ 28; Stip. ¶ 2.) SG Blocks and McIntyre’s 27 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the 28 matter appropriate for decision without oral argument. Fed. R. Civ. P 78; C.D. Cal. L.R. 7-15.

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1 subcontract (“Contract”) includes the following indemnity provision: 2 The McIntyre Company shall indemnify, protect, defend and hold [SG 3 Blocks] . . . harmless from and against any and all claims, damages, loss, harm, and expenses, including, but without limitation to, attorneys’ fees, 4 expenses, and Court or Arbitration costs, which arise out of or result from 5 the Work rendered under this Agreement, provided, however, that such 6 claim, damage, loss, harm, or expense is attributed to bodily injury, sickness, death, or other injury to or destruction of property, which is 7 caused in whole or in party by the willful misconduct, negligent acts or 8 omissions of [McIntyre], or its employees or other agents. These obligations shall survive the completion of the Work and/or termination 9 of this Agreement. 10 11 (Third-Party Compl. ¶ 41.) 12 On April 13, 2020, SG Blocks filed this action against the HOLA Parties, 13 alleging that, among other things, HOLA failed to timely pay SG Blocks. (Compl. 14 ¶ 42.) On April 20, 2020, HOLA filed a suit against SG Blocks in Los Angeles 15 Superior Court, claiming SG Blocks’ construction on the Project was structurally 16 defective and incomplete. Compl. ¶ 8, HOLA Cmty. Partners v. SG Blocks, Inc., et al, 17 No. 2:20-cv-04386-ODW (RAOx) (C.D. Cal filed May 14, 2020) (“HOLA II”), ECF 18 No. 1-3. After SG Blocks removed HOLA II to federal court, the Court consolidated 19 the two cases. (Min. Order Consolidate, ECF No. 26); Min. Order Consolidate, 20 HOLA II, ECF No. 16. 21 On July 23, 2021, SG Blocks filed its First Amended Third-Party Complaint, 22 bringing McIntyre into the action as a Third-Party Defendant. (Third-Party Compl. 23 ¶ 28.) SG Blocks alleges that some of its liability to HOLA results from McIntyre’s 24 defective work, and accordingly, pursuant to the Contract’s indemnity provision, SG 25 Blocks is entitled to indemnity from McIntyre if the former is found liable to HOLA. 26 (Id. ¶¶ 45–46.) 27 SG Blocks did not hold a valid contractor’s license from the California 28 Contractors State License Board during its work on the Project. (Stip. ¶ 3.) Under

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1 California law, all contractors doing business in the state must be licensed. Siry Inv., 2 L.P. v. Farkhondehpour, 45 Cal. App. 5th 1098, 1139 (2020) (citing section 7031(a)), 3 rev’d in part on other grounds, 13 Cal. 5th 333 (2022). Moreover, section 7031(a) 4 imposes stark consequences for unlicensed California contractors: 5 [N]o person engaged in the business or acting in the capacity of a 6 contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation 7 for the performance of any act or contract where a license is required by 8 this chapter without alleging that they were a duly licensed contractor at all times during the performance of that act or contract regardless of the 9 merits of the cause of action brought by the person . . . . 10 11 Cal. Bus. & Prof. Code § 7031(a). 12 McIntyre now moves for summary judgment on SG Blocks’ express indemnity 13 claim on the grounds that section 7031(a) bars SG Blocks, an unlicensed contractor, 14 from seeking express indemnity. (Mot. 6.) The parties stipulate that the three facts 15 material to this Motion—that HOLA had a contract with SG Blocks, that SG Blocks 16 had a subcontract with McIntyre, and that SG Blocks was unlicensed—are undisputed. 17 (Stip.) 18 III. LEGAL STANDARD 19 A court “shall grant summary judgment if the movant shows that there is no 20 genuine dispute as to any material fact and the movant is entitled to judgment as a 21 matter of law.” Fed. R. Civ. P. 56(a). In general, when there are no factual disputes 22 and all that remain are questions of law, it is appropriate to resolve those questions by 23 way of summary judgment. See, e.g., McCoy v. Major League Baseball, 911 F. Supp. 24 454, 456 (1995). Of particular relevance here, “[w]hen . . . the only issue raised is a 25 question of statutory interpretation, for example the legislative intent behind a given 26 law, it is appropriate to decide the issue by summary judgment.” Cal. Dep’t of Toxic 27 Substances Control v. Alco Pac., Inc., 317 F. Supp. 2d 1188, 1191 (C.D. Cal. 2004). 28

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1 IV. DISCUSSION 2 Indemnification is a contract-based principle that “save[s] another from a legal 3 consequence of the conduct of one of the parties, or of some other person.” Cal. Civ. 4 Code § 2772. It creates an “obligation resting on one party to make good a loss or 5 damage another party has incurred.” Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal. 6 3d 622, 628 (1975). Claims for express indemnity are based on express contract 7 language; thus, “courts look first to the words of the contract to determine the 8 intended scope of the indemnity agreement.” Centex Golden Const. Co. v. Dale Tile 9 Co., 78 Cal. App. 4th 992, 997 (2000). 10 The parties agree that SG Blocks was unlicensed at the relevant times, (Stip. 11 ¶ 3), and dispute only the effect of section 7031(a) on the viability of SG Blocks’ 12 claim for express indemnity. McIntyre argues rather straightforwardly that 13 section 7031(a) bars SG Blocks from asserting claims for express indemnity because 14 SG Blocks was unlicensed during the construction of the Project. (Mot. 6.) 15 SG Blocks disagrees and argues that section 7031(a) refers specifically to construction 16 services, and that the statute applies only when an unlicensed contractor provides 17 construction services and then sues for “compensation” for those services. (Opp’n 4); 18 Cal. Bus. & Prof. Code § 7031(a). SG Blocks argues that that section 7031(a) 19 therefore does not apply here because SG Blocks is not pursuing payment for services 20 rendered but is instead pursuing compensation for its own liability to HOLA based on 21 McIntyre’s failure to provide construction services. (Id. at 5–6.) 22 California appellate courts are split on whether the term “compensation” in 23 section 7031(a) includes payments made pursuant to an express indemnity agreement. 24 See Ranchwood Communities Ltd. P’ship v. Jim Beat Constr. Co., 49 Cal. App. 4th 25 1397, 1418 (1996) (finding section 7031(a) prohibits unlicensed contractors from 26 asserting claims for express indemnity); but see UDC-Universal Dev., L.P. v. CH2M 27 Hill, 181 Cal. App. 4th 10, 26 (2010) (finding section 7031(a) does not apply to 28 claims for express indemnity). In the absence of a controlling California Supreme

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1 Court decision, a federal court applying California law must “predict how the 2 California Supreme Court would decide the issue, using intermediate appellate court 3 decisions, statutes, and decisions from other jurisdictions as interpretive aids.” 4 Gravquick A/S v. Trimble Navigation Int’l Ltd., 323 F.3d 1219, 1222 (9th Cir. 2003). 5 Thus, this Court must predict how the California Supreme Court would resolve the 6 split of authority regarding the reach of section 7031(a). 7 “[W]hen a federal court sitting in diversity interprets a state statute, it must 8 apply state rules of statutory construction.” Daghlian v. DeVry Univ., Inc., 461 F. 9 Supp. 2d 1121, 1140 (C.D. Cal. 2006) (citing In re First T.D. & Inv., Inc., 253 F.3d 10 520, 527 (9th Cir. 2001)). Under California law, the words of the statute itself are the 11 starting point. Pac. Gas & Elec. Co. v. County of Stanislaus, 16 Cal. 4th 1143, 1152 12 (1997) Courts first “accord words their usual, ordinary, and common sense meaning.” 13 In re Rojas, 23 Cal. 3d 152, 155 (1979). If this approach uncovers ambiguity in the 14 text of the statute, then “the court may examine the context in which the language 15 appears, adopting the construction that best harmonizes the statute internally and with 16 related statutes.” Pac. Gas & Elec., 16 Cal. 4th at 1152. 17 Here, the question is whether, under these principles, express indemnity 18 constitutes the “collection of compensation for the performance of any act or contract 19 where a license is required.” Cal. Bus. & Prof. Code § 7031(a). This language is 20 ambiguous as applied to the facts of this case; it is not clear whether “compensation” 21 includes the payment of an express indemnity in a construction contract. Given that 22 ambiguity, the Court looks to both the purpose of section 7031(a) and case law to 23 determine whether the statute bars claims for express indemnity. Gravquick, 323 F.3d 24 at 1222. 25 Section 7031(a) serves to “protect the public from incompetence and dishonesty 26 in those who provide building and construction services.” Hydrotech Sys., Ltd. v. 27 Oasis Waterpark, 52 Cal. 3d 988, 995 (1991) (citing Lewis & Queen v. N.M Ball Sons, 28 48 Cal. 2d 141, 149–50 (1957)). It represents “a legislative determination that the

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1 importance of deterring unlicensed persons from engaging in the contracting business 2 outweighs any harshness between the parties, and that such deterrence can best be 3 realized by denying violators the right to maintain any action for compensation in the 4 courts of the state.” Lewis & Queen, 48 Cal. 2d at 151. In order to enforce licensure 5 requirements and protect the public, section 7031(a) “imposes strict and harsh 6 penalties for a contractor’s failure to maintain proper licensure.” MW Erectors, Inc. v. 7 Niederhauser Ornamental & Metal Works Co., 36 Cal. 4th 412, 418 (2005). 8 In order to effectuate this purpose, the term “compensation” should not be 9 narrowly construed; rather, it should be “read in its usual and ordinary sense, which 10 imports payment or reward in any form.” Ahdout v. Hekmatjah, 213 Cal. App. 4th 21, 11 32 (2013) (citing Johnson v. Mattox, 257 Cal. App. 2d 714, 718 (1968)). Accordingly, 12 this Court reads “compensation” as including payments pursuant to an express 13 indemnity provision. 14 This conclusion is supported by the Ranchwood court’s reasoning regarding the 15 illegality of a construction contract in which one of the parties is unlicensed. 16 Ranchwood, 49 Cal. App. 4th at 1418 (“Express indemnity payments are very similar 17 to breach of contract damages in this context, and the contracts here (construction 18 subcontracts) are illegal due to the lack of a . . . license, so they may not be enforced 19 and no compensation can be sought under them.”). Here, to legally enter into a 20 subcontract with McIntyre, California law requires SG Blocks to have proper 21 licensure as a general contractor. But because SG Blocks’ ability to legally enter into 22 the Contract is contingent upon its licensure, it cannot demand that McIntyre perform 23 the indemnity clause of the contract, nor collect compensation for it. Id. (“But for the 24 illegal construction contract, there would be no subcontracts for indemnity or 25 otherwise.”). 26 Moreover, the text of section 7031(a) itself clarifies that its prohibition applies 27 “regardless of the merits of the cause of action,” indicating that the Legislature 28 considers public policy underpinning the need for licensure to outweigh any notion

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1 that such a result would be unfair to the unlicensed contractor. See Hydrotech Sys., 2 52 Cal. 3d at 996–97 (“Perhaps [the unlicensed contractor’s] good faith alters the 3 balance of equities in its favor. As we have seen, however, the deterrent purpose of 4 section 7031 outweighs any harshness in a particular case.” (footnote omitted)). 5 Although the unpublished California cases are not entirely uniform on this 6 issue, the weight of the authority appears to favor interpreting section 7031(a) as 7 barring express indemnity claims brought by unlicensed contractors. See Daniels v. 8 San Diego Grand Prix Ass’n, No. D044849, 2005 WL 2659925, at *6 (Cal. Ct. App. 9 Oct. 19, 2005) (finding an unlicensed contractor could not enforce any of the terms of 10 its contract, including the express indemnity provision); see also Maraziti v. Stone, 11 No. E047306, 2010 WL 2556891, at *6 (Cal. Ct. App. June 25, 2010) (finding express 12 indemnity claims by an unlicensed contractor were barred under section 7031(a)); 13 Cabot, Cabot & Forbes Dev. Co. v. D.W. Burhoe Const., Inc., No. B152173, 14 2002 WL 864423, at *4 (Cal. Ct. App. May 7, 2002) (same). 15 For these reasons, the Court determines that the California Supreme Court, were 16 it to examine this issue, would find that section 7031(a) bars unlicensed contractors’ 17 express indemnity claims. Gravquick, 323 F.3d at 1222. Here, because SG Blocks is 18 unlicensed, section 7031(a) renders McIntyre’s express indemnity obligation to 19 SG Blocks unenforceable. Accordingly, the Court GRANTS McIntyre’s Motion.2 20 V. CONCLUSION 21 For the reasons discussed above, the Court GRANTS McIntyre’s Motion for 22 Partial Summary Judgment. (ECF No. 153). SG Blocks’ first cause of action for 23 2 In its Separate Statement, SG Blocks adds an additional, purportedly disputed fact to the parties’ 24 stipulated facts, as follows: “HOLA entered into the direct contract with the owner, SG Blocks did 25 not, so SG Blocks cannot be the general contractor.” (Separate Statement ¶ 5, ECF No. 156-1.) Even if this fact is disputed, it is not material. The question is not whether SG Blocks was the 26 general contractor; the question is more generally whether SG Blocks was acting as a contractor, which under California law includes “a person or entity who (1) actually performs construction 27 services; [or] (2) ‘supervise[s] the performance of construction services.’” Siry Inv., L.P., 45 Cal. 28 App. 5th at 1139 (quoting Contractors Labor Pool, Inc. v. Westway Contractors, Inc., 53 Cal. App. 4th 152, 165 (1997)). No party argues that SG Blocks was not a contractor under this definition.

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1 || express contractual indemnity against McIntyre as asserted in the First Amended 2 || Third-Party Complaint is DISMISSED on the merits and with prejudice. 4 IT IS SO ORDERED. 6 October 12, 2022 =. 7 Se g Yell Yeu EE

9 OTIS D. HT, I 0 NITED STATES DISTRICT JUDGE

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