Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-00583/USCOURTS-caed-2_05-cv-00583-52/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Contract Dispute

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

FRU-CON CONSTRUCTION

CORPORATION, a Missouri

corporation,

NO. CIV. S-05-583 LKK/GGH

Plaintiff,

v. O R D E R

SACRAMENTO MUNICIPAL UTILITY

DISTRICT, a municipal utility

district; UTILITY ENGINEERING

CORPORATION, a Texas 

corporation,

Defendants.

 /

On March 24, 2005, Fru-Con Construction Corporation(“FruCon”), a foreign corporation, filed this federal action against the

Sacramento Municipal Utility District (“SMUD”), the owner of the

Consumnes Power Plant (“CPP”). The complaint alleged several

causes of action related to breach of contract. SMUD subsequently

filed a counterclaim against Fru-Con. 

Pending before the court are three motions for partial summary

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26 Undisputed unless otherwise noted. 1

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judgment filed by Fru-Con. The first pertains to the counterclaims

for wrongful termination, the second pertains to SMUD’s claim

against Fru-Con for money paid to Dick Corporation and the third

pertains to SMUD’s claim against Fru-Con under the California False

Claims Act. For the reasons discussed herein, the motions

regarding wrongful termination and the money paid to the Dick

Corporation are denied and the motion regarding the California

False Claims Act is granted. 

I.

FACTS1

A. Facts Related to Fru-Con’s Motion for Partial Summary

Judgment Regarding Wrongful Termination 

1. The Contract 

Sacramento Municipal Utility District (“SMUD”) entered into

a contract with Fru-Con Construction Corporation (“Fru-Con”) under

which Fru-Con was to construct the Cosumnes Power Plant ("CPP")

located in Herald, California for a contract price of

$106,843,527.00. Fru-Con’s Statement of Undisputed Facts (“Fru-Con

SUF”) ¶ 1. The contract required substantial completion on May 3,

2005. Fru-Con SUF ¶ 3. 

There are several contract terms that are relevant to the

pending motions. First, General Condition 36 of the contract

provided that SMUD may terminate the contract on the following

basis: 

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3

If the Contractor refuses or fails to prosecute the work,

or any separable part thereof with such diligence as will

insure its completion within the time specified in this

Contract, or any extension thereof, or fails to complete

said work within such time, the Contracting Officer may,

by written notice to the Contractor, terminate

Contractor's right to proceed with the work or such part

of the work to which there has been a delay.

Fru-Con SUF ¶ 5. 

Second, the contract provided for certain specified

“intermediate milestones.” Special Condition 10 and Appendix G set

forth these milestones, which were essentially deadlines for the

completion of specified stages of the construction. To the extent

that Fru-Con failed to meet these milestones, SMUD was entitled to

a predetermined amount of liquidated damages. See Contract, SC-10,

Ex. 32, Decl. of Robert C. Nelson (“Nelson Decl.”). 

Finally, General Condition 29 provided that the “contract may

be changed only by duly executed Change Orders issued by the

District.” Contract, GC-29, Ex. 32, Nelson Decl. 

2. The Delay 

It is undisputed that over time, Fru-Con fell behind schedule.

SMUD’s May 2004 internal monthly progress report reflects that it

believed Fru-Con to be three months behind schedule. See SMUD

Report, Ex. F, Decl. of Robert Moore (“Moore Decl.”). 

On October 7, 2004 Fru-Con presented to SMUD a power-point

presentation that described the extent of the construction delays.

Fru-Con estimated that the project was five to seven months behind

schedule. Fru-Con’s Oct. 7, 2004 Presentation to SMUD, Ex. J,

Moore Decl. Fru-Con stated that there were two ways of addressing

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the delay: (1) SMUD could accept the delay, or (2) SMUD could

direct Fru-Con to accelerate. Fru-Con explained that the

acceleration option could cost SMUD approximately $26 million. Id.

Internal SMUD documents revealed that soon after October 7,

2004, SMUD began considering alternative ways of proceeding with

the construction and one such option included terminating Fru-Con.

See Fru-Con SUF ¶¶ 25-28. SMUD wrote to Fru-Con expressing deep

concern with the construction delay. In a October 14, 2004 letter,

SMUD wrote: “SMUD believes there is a complete disconnect between

Fru-Con’s project schedule and actual progress . . . Your schedule

remains deficient when compared to contract requirements . . . .”

Oct. 14, 2004 Letter from SMUD to Fru-Con, Ex. 38, Nelson Decl. 

Meanwhile, Fru-Con’s October 2004 monthly schedule update

(submitted after the October 7, 2004 presentation) projected a new

substantial completion date: October 3, 2005. Fru-Con SUF ¶ 33.

Then, in Fru-Con’s November 2004 monthly schedule update, Fru-Con

changed the substantial completion date to August 10, 2005. FruCon SUF ¶ 37. 

In a November 14, 2004 e-mail from SMUD to Fru-Con, SMUD made

the following request: "Fru-Con to provide key

benchmarks/assumptions and exclusions (if any) to accomplish Aug.

10th completion date." Fru-Con SUF ¶ 50. In a November 16, 2004

letter, SMUD's Project Director stated that "it appears that

Fru-Con is not working efficiently and in a manner which will allow

you to achieve your revised to-go (forecast) progress numbers and

completion on August 10, 2005 as stated in the November 12, 2004

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 SMUD objects to any evidence of the global settlement 2

discussions on the grounds that this evidence is inadmissable under

Federal Rule of Evidence 408. As will be discussed, the court need

not rely on this evidence in resolving the pending motion. The

5

schedule revision." Fru-Con SUF ¶ 51.

SMUD’s concerns with the delay were evident. Beginning in

December 2004 and continuing through February 2005, SMUD issued

eight notices to Fru-Con, alleging that Fru Con failed to meet

certain intermediate milestones set forth in the contract and

accordingly, that SMUD would be entitled to certain liquidated

damages. Notices, Ex. 37, Nelson Decl. Similarly, on December 22,

2004 Jim Shetler of SMUD wrote to Fru-Con CEO Matti Jaekel

expressing concern about the delay: “As we approach 2005, SMUD

believes that there will be several major milestone dates that FruCon will not meet, which in turn will initiate liquidated damages.”

E-mail from Shetler to Jaekel, Dec. 22, 2004, Ex. 23, Decl. of

Brian Becker (“Becker Decl.”). This email also conveyed SMUD’s

concern about Fru-Con laying off 100 craft workers. Id. It is

undisputed that during this time, Fru-Con continued to work on the

project, albeit on delayed schedule. Fru-Con SUF ¶ 76.

Beginning in January, the parties began “global settlement”

discussions about how to resolve the delay in the construction and

other related problems. See E-mail from Shetler to Jaekel, Jan.

7, 2005, Ex. JJ, Moore Decl. On January 18, 2005, SMUD’s Board of

Directors passed a resolution that should negotiations with Fru-Con

fail, the General Manager could terminate the contract. See Board

Resolution 5-01-01 CS, Ex. LL, Moore Decl. On January 25, Fru-Con 2

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discussion of the on-going negotiations is included here merely for

background purposes. 

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submitted a term sheet, proposing, among other things: (1) an

increase in the contract price of $16.5 million; and (2) a time

extension of the substantial completion date to August 10, 2005.

SMUD submitted a counter proposal that included the August 10, 2005

completion date and $7.1 million in additional compensation

(instead of $16.5 million). Fru-Con SUF ¶¶ 71-73. 

Fru-Con asserts that SMUD accepted Fru-Con’s proposal but the

evidence does not support this assertion. Rather, the evidence

cited to by Fru-Con demonstrates that Fru-Con and SMUD were

attempting to negotiate a price. SMUD’s counter proposal was just

that – SMUD agreed to the completion date but only if the

additional compensation was $7.1 million, not the $16.5 million

requested by Fru-Con. There is nothing in the evidence cited to

by Fru-Con that establishes that SMUD accepted Fru-Con’s proposal.

See Exs. NN and OO, Moore Decl. 

3. SMUD’s Termination of the Contract

On February 11, 2005, SMUD terminated Fru-Con for default. 

The letter of termination stated: 

Fru-Con has refused or failed to prosecute the work

(construction of the CPP) . . . with such diligence as

will insure its completion within the time specified in

the contract. Therefore, SMUD is exercising its right

under General Condition 36 of the Contract to take over

the work and prosecute the same to completion . . . .

Letter of Termination, Ex. D, Moore Decl. The letter listed twelve

grounds for termination. Of those, eight reasons pertained to FruCase 2:05-cv-00583-LKK -GGH Document 406 Filed 06/15/07 Page 6 of 45
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Con’s failure to meet the milestones set forth in Appendix G of the

contract and referenced in the notice letters sent from SMUD to

Fru-Con. Two of the reasons pertained to the project completion

date: 

By its own admission, as evidenced by Fru-Con’s schedule

dated November 10, 2004 which was presented to SMUD on

November 12, 2004, Fru-Con has conceded that the Project

will not be completed within the time specified in the

Contract, and anticipates project completion to be

delayed by at least three months.

Because of Fru-Con’s consistently poor workmanship, as

evidenced by its excessive pipe weld rejection rate of

nearly 15 percent (which is several times higher than

industry standards), and Fru-Con’s decision to lay off

approximately 100 pipefitters during the height of the

pipe assembly process this winter, it is no longer

possible for Fru-Con to meet the Project Substantial

Completion Milestone.

Letter of Termination, Ex. D, Moore Decl. 

B. Facts Relevant to Fru-Con’s Motion for Partial Summary

Judgment Regarding SMUD’s Claim for Monies Paid to Dick

Corporation 

After SMUD terminated the contract with Fru-Con, SMUD entered

into a separate contract with Dick Corporation (“Dick Corp.”) for

construction services for the CPP. Fru-Con SUF ¶ 237. In this

lawsuit, SMUD seeks to recover $9,534,976.00 from Fru-Con for

monies SMUD paid to Dick Corp. Fru-Con SUF ¶ 239. In its motion,

Fru-Con contends that this payment to Dick Corp. was improper as

the contractors who performed the work at the CPP were unlicenced.

It is undisputed that Dick Corp. entered into a contract with

SMUD for construction services for the CPP on June 9, 2004. SMUD’s

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Response to Fru-Con’s Statement of Undisputed Facts (“SMUD RSUF”)

¶ 447. Dick Corp. possessed a valid California contractors license

at all times it provided services with respect to the CPP. SMUD

RSUF ¶ 449. Work performed under the contract was done pursuant

to task orders which set forth an agreed upon scope of work and

total compensation for that work. SMUD RSUF ¶ 450. Task orders

were issued from SMUD directly to Dick Corp. SMUD RSUF ¶ 451.

Dick Corp. was responsible for completing the work agreed upon in

the task orders and was responsible for any problems that occurred

in performing those services. SMUD RSUF ¶ 453. Dick Corp. was

required to and did post a bond in connection with its work on the

Project. SMUD RSUF ¶ 456. All invoices for work performed

pursuant to Dick Corp.'s contract with SMUD were sent from Dick

Corp. to SMUD. SMUD RSUF ¶ 457. SMUD paid Dick Corp. directly for

those invoiced services. SMUD RSUF ¶ 458.

It is also undisputed that Dick Corp. is related to a company

known as Dick Environmental Services, LLC (“DES”). DES is not

licensed in the state of California. The extent of DES’

relationship to Dick Corp. is not completely clear. Ron Terry, the

Project Manager for the CPP project explained in his declaration:

I am a Project Manager employed by DES, a related company

to Dick Corp. Since DES and Dick Corp are related

companies, Dick Corp. occasionally utilized my services

for Dick Corp. projects. Indeed, Dick Corp. utilized my

services as project supervisor on the Consumnes Power

Plane construction project. 

Decl. of Ronald Terry (“Terry Decl.”).

SMUD avers that the majority of the work performed at the CPP

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 The court notes that SMUD filed suit against Fru-Con in 3

state court as well. Fru-Con sought removal to this court based

on a claim of fraudulent joinder, but the case was remanded on May

31, 2005. Soon thereafter, SMUD filed a motion to stay in favor

of the state court action pursuant to Colo. River Water

Conservation Dist. v. United States, 424 U.S. 800 (1976). The

court denied SMUD’s motion on August 11, 2005. 

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was done by DES and not by Dick Corp. However, the facts are not

clear. When asked what entity performed services on the Project,

Mr. Terry testified in his deposition: "Dick Corporation . . .Can

I clarify? . . .On this particular project, I worked for Dick

Environmental Services, LLC, in Jacksonville; but when we bid this

job, we bid it as Dick Corporation. So it was Dick Environmental

Services acting as Dick Corporation, just for the record." Fru-Con

SUF ¶ 242. 

C. Procedural History 

Fru-Con brought suit against SMUD on March 24, 2005. The 3

complaint alleged causes of action for breach of contract, breach

of the implied covenant of good faith and fair dealing, breach of

the implied warranty, professional negligence, and breach of the

California Prompt Payment Act. On April 18, 2005 SMUD filed an

answer and counterclaim against Fru-Con. SMUD’s counterclaim

alleged causes of action for declaratory relief, breach of

contract, violation of the California False Claims Act, negligence

and equitable indemnity. 

II.

STANDARD FOR SUMMARY JUDGMENT 

Summary judgment is appropriate when it is demonstrated that

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there exists no genuine issue as to any material fact, and that the

moving party is entitled to judgment as a matter of law. Fed. R.

Civ. P. 56(c); see also Adickes v. S.H. Kress & Co., 398 U.S. 144,

157 (1970); Sicor Ltd. v. Cetus Corp., 51 F.3d 848, 853 (9th Cir.

1995).

Under summary judgment practice, the moving party

[A]lways bears the initial responsibility of informing

the district court of the basis for its motion, and

identifying those portions of "the pleadings,

depositions, answers to interrogatories, and admissions

on file, together with the affidavits, if any," which it

believes demonstrate the absence of a genuine issue of

material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "[W]here the

nonmoving party will bear the burden of proof at trial on a

dispositive issue, a summary judgment motion may properly be made

in reliance solely on the 'pleadings, depositions, answers to

interrogatories, and admissions on file.'" Id. Indeed, summary

judgment should be entered, after adequate time for discovery and

upon motion, against a party who fails to make a showing sufficient

to establish the existence of an element essential to that party's

case, and on which that party will bear the burden of proof at

trial. See id. at 322. "[A] complete failure of proof concerning

an essential element of the nonmoving party's case necessarily

renders all other facts immaterial." Id. In such a circumstance,

summary judgment should be granted, "so long as whatever is before

the district court demonstrates that the standard for entry of

summary judgment, as set forth in Rule 56(c), is satisfied." Id.

at 323.

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If the moving party meets its initial responsibility, the

burden then shifts to the opposing party to establish that a

genuine issue as to any material fact actually does exist.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

586 (1986); see also First Nat'l Bank of Ariz. v. Cities Serv. Co.,

391 U.S. 253, 288-89 (1968); Sicor Ltd., 51 F.3d at 853.

In attempting to establish the existence of this factual

dispute, the opposing party may not rely upon the denials of its

pleadings, but is required to tender evidence of specific facts in

the form of affidavits, and/or admissible discovery material, in

support of its contention that the dispute exists. Fed. R. Civ.

P. 56(e); Matsushita, 475 U.S. at 586 n.11; see also First Nat'l

Bank, 391 U.S. at 289; Rand v. Rowland, 154 F.3d 952, 954 (9th Cir.

1998). The opposing party must demonstrate that the fact in

contention is material, i.e., a fact that might affect the outcome

of the suit under the governing law, Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986); Owens v. Local No. 169, Ass’n of

Western Pulp and Paper Workers, 971 F.2d 347, 355 (9th Cir. 1992)

(quoting T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n,

809 F.2d 626, 630 (9th Cir. 1987)), and that the dispute is

genuine, i.e., the evidence is such that a reasonable jury could

return a verdict for the nonmoving party, Anderson, 477 U.S. 248-

49; see also Cline v. Indus. Maint. Eng’g & Contracting Co., 200

F.3d 1223, 1228 (9th Cir. 2000). I n t h e e n d e a v o r t o

establish the existence of a factual dispute, the opposing party

need not establish a material issue of fact conclusively in its

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favor. It is sufficient that "the claimed factual dispute be shown

to require a jury or judge to resolve the parties' differing

versions of the truth at trial." First Nat'l Bank, 391 U.S. at

290; see also T.W. Elec. Serv., 809 F.2d at 631. Thus, the

"purpose of summary judgment is to 'pierce the pleadings and to

assess the proof in order to see whether there is a genuine need

for trial.'" Matsushita, 475 U.S. at 587 (quoting Fed. R. Civ. P.

56(e) advisory committee's note on 1963 amendments); see also Int’l

Union of Bricklayers & Allied Craftsman Local Union No. 20 v.

Martin Jaska, Inc., 752 F.2d 1401, 1405 (9th Cir. 1985).

In resolving the summary judgment motion, the court examines

the pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any. Rule

56(c); see also In re Citric Acid Litig., 191 F.3d 1090, 1093 (9th

Cir. 1999). The evidence of the opposing party is to be believed,

see Anderson, 477 U.S. at 255, and all reasonable inferences that

may be drawn from the facts placed before the court must be drawn

in favor of the opposing party, see Matsushita, 475 U.S. at 587

(quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)

(per curiam)). Nevertheless, inferences are not drawn out of the

air, and it is the opposing party's obligation to produce a factual

predicate from which the inference may be drawn. See Richards v.

Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985),

aff'd, 810 F.2d 898, 902 (9th Cir. 1987).

Finally, to demonstrate a genuine issue, the opposing party

"must do more than simply show that there is some metaphysical

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doubt as to the material facts. . . . Where the record taken as a

whole could not lead a rational trier of fact to find for the

nonmoving party, there is no 'genuine issue for trial.'"

Matsushita, 475 U.S. at 586-87 (citation omitted).

III.

Analysis 

Pending before the court are three motions for partial summary

judgment filed by Fru-Con. For the reasons explained herein, the

motions regarding wrongful termination and monies paid to the Dick

Corp. are denied, and the motion on SMUD’s claim pursuant to the

California False Claims Act is granted. Each motion is addressed

in turn.

A. Fru-Con’s Motion for Partial Summary Judgment On The Issue of

Wrongful Termination 

Fru-Con seeks partial summary judgment on Counts I (Breach of

Contract) and II (Breach of the Implied Covenant of Good Faith and

Fair Dealing) of its complaint, and on Count I (Declaratory Relief

on the Propriety of the Default Termination) of SMUD's Amended

Counterclaim.

Fru-Con makes three general arguments. First, Fru-Con argues

that SMUD failed to provide Fru-Con with an opportunity to cure the

delays and failed to complete a scheduling analysis prior to

termination. Second, Fru-Con argues that SMUD waived its

objections to Fru-Con’s schedule. And third, Fru-Con asserts that

SMUD’s termination based on Fru-Con’s failure to meet certain

deadlines and alleged failure to remove defective concrete was

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 Fru-Con fails to discuss its claim for breach of the implied 4

covenant of good faith and fair dealing. The court assumes, but

does not know, that this claim is premised solely on Fru-Con’s

allegation that SMUD wrongfully terminated the contract. 

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improper and wrongful.4

1. Opportunity to Cure & Scheduling Analysis

Fru-Con’s primary argument is that SMUD’s termination of the

contract was improper because SMUD failed to provide Fru-Con with

an opportunity to cure the delays and failed to conduct a “proper

schedule analysis” prior to termination. Fru-Con’s argument must

fail since the contract plainly does not require that SMUD take

either of these actions. 

a. The Wording of the Contract 

In California, "[t]he fundamental goal of contractual

interpretation is to give effect to the mutual intention of the

parties. If contractual language is clear and explicit, it

governs." Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1264

(1992). 

Here, the contract language is clear and explicit. General

Condition 36 of the contract provides that SMUD may terminate the

contract on the following basis: 

If the Contractor refuses or fails to prosecute the work,

or any separable part thereof with such diligence as will

insure its completion within the time specified in this

Contract, or any extension thereof, or fails to complete

said work within such time, the Contracting Officer may,

by written notice to the Contractor, terminate

Contractor's right to proceed with the work or such part

of the work to which there has been a delay.

Fru-Con SUF ¶ 5. Pursuant to this provision, SMUD issued a notice

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of termination. Fru-Con SUF ¶ 4. As discussed in the facts

section of this order, the notice set forth twelve grounds for

termination, the majority of which related to Fru-Con’s

construction delay. Fru-Con fails to cite to any provision of the

contract which supports its position that SMUD should have provided

Fru-Con with an opportunity to cure and conducted a scheduling

analysis. Instead, Fru-Con suggests that the court look to nonbinding federal law construing United States government contracts.

Fru-Con argues that the language of General Condition 36 mirrors

the default language in the Federal Acquisition Regulation (“FAR”)

provision that applies to United States government contracts. See

Fru-Con Mot. for Partial Summ. J. at 10. 

Fru-Con’s suggestion that the court look to federal law is

unpersuasive. There is simply no indication that the contract at

issue here was intended to mirror or reflect the FAR provision.

SMUD is a municipal entity created under the Municipal Utility

District Act, California Public Utilities Code section 11501, et

seq. Case law governing contracts entered into with the federal

government is therefore inapplicable. This case involves a classic

contracts dispute and therefore, under Erie, the court looks to

California contract law.

Under California law, a court is “bound to give effect to the

plain and ordinary meaning of the language used by the parties."

Coast Plaza Doctors Hosp. v. Blue Cross of Cal., 83 Cal. App. 4th

677, 684 (2000). Thus, where "contract language is clear and

explicit and does not lead to absurd results, we ascertain intent

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from the written terms and go no further." Shaw v. Regents of

Univ. of Cal., 58 Cal. App. 4th 44, 53 (1997). Moreover, in the

absence of substantial parol evidence tending to solve an

ambiguity, the terms of a contract will not be extended by

implication. Apra v. Aureguy, 55 Cal. 2d 827 (1961). 

In the case at bar, General Condition 36 clearly sets forth

the specific grounds on which SMUD may terminate the contract and

there is no evidence to suggest that the terms of the contract

should be extended by implication. Indeed, in California, a

“contract may contain a valid provision giving one or the other

party an option to terminate it on specified conditions.” Call v.

Alcan Pac. Co., 251 Cal. App. 2d 442, 447 (1967); see also R. J.

Cardinal Co. v. Ritchie, 218 Cal. App. 2d 124, 143 (1963)

(“contract may contain a valid provision giving one or either of

the parties thereto an option to terminate it within a certain time

or on specified conditions.”) As one California court explained:

[A] contract which provides that it may be terminated on

specified notice cannot reasonably be interpreted to

require good cause as well as notice for termination,

unless extrinsic evidence establishes that the parties

used the words in some special sense. 

Bionghi v. Metro. Water Dist. of S. Cal., 70 Cal. App. 4th 1358,

1369 (1999). Here, the wording of General Condition 36 clearly

sets forth the grounds for termination. Neither party cites to

extrinsic evidence which would suggest that the provisions of

General Condition 36 be extended by implication to include

additional requirements.

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b. The Delay Giving Rise to Termination 

It is undisputed that Fru-Con was behind schedule. It is also

undisputed that the contract set forth specific time frames for the

completion of certain “milestones” as well as a deadline for the

completion of the project. See Contract, Special Condition 10

(“SC-10") and Appendix G, Ex. 32, Nelson Decl. The contract also

provided that changes to the terms of the contract would be by

change orders. Contract, GC-29, Ex. 32, Nelson Decl. There were

no finalized change orders that reset the deadlines in the

contract. Instead, in the fall of 2004 and into 2005, SMUD and

Fru-Con engaged in extensive discussions about how to address the

delay. 

Fru-Con cites to various construction law treatises for the

principle that prior to terminating a contractor for default, an

owner "must be extremely careful when making a determination to

terminate a contractor for cause. Records must be carefully

documented to demonstrate . . . that the owner has given the

contractor an opportunity to cure the breach [and] that the

contractor has failed to do so . . . ." Gibbs & Hunt, California

Construction Law § 6:04 (16th ed. 2007). Not only is this treatise

not binding, but it is undisputed that Fru-Con had constructive

notice that SMUD might terminate the contract. 

In a November 16, 2004 letter, SMUD's Project Director stated

that "it appears that Fru-Con is not working efficiently and in a

manner which will allow you to achieve your revised to-go

(forecast) progress numbers and completion on August 10, 2005 as

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 This section provides: 5

[If] a contractor has failed to supply an adequate working

force, or material of proper quality, or has failed to comply

with Section 10262, or has failed in any other respect to

prosecute the work with the diligence and force specified by

the contract, the [public owner] may: . . . (b) If he

considers that the failure is sufficient ground for such

action, he may give written notice of at least five days to

the contractor and the contractor's sureties, that if the

defaults are not remedied the contractor’s control over the

work will be terminated.

Cal. Pub. Cont. Code § 10253 (West 2004).

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stated in the November 12, 2004 schedule revision." Fru-Con SUF

¶ 51. Moreover, beginning in December 2004 and continuing through

February 2005, SMUD issued eight notices to Fru-Con, alleging that

Fru-Con failed to meet certain intermediate milestones set forth

in the contract and accordingly, that SMUD would be entitled to

certain liquidated damages. Notices, Ex. 37, Nelson Decl.

Similarly, on December 22, 2004 Jim Shetler of SMUD wrote to FruCon CEO Matti Jaekel expressing concern about the delay: “As we

approach 2005, SMUD believes that there will be several major

milestone dates that Fru-Con will not meet, which in turn will

initiate liquidated damages.” E-mail from Shetler to Jaekel, Dec.

22, 2004, Ex. 23, Becker Decl. In short, even though there was no

notice requirement in the contract, Fru-Con was effectively on

notice that contract termination was a real possibility.

In support of its position, Fru-Con also relies on the

California Contract Code, section 10253. However, this section 5

of the Contract Code does not apply to SMUD. Section 10253 falls

under Part 2 of the Public Contracts Code and applies to state

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agencies only. Municipal Utility Districts are covered in Part 3

of the Code that addresses contracting by local agencies. 

There is no matching notice of default and opportunity to cure

requirement in the section covering SMUD. 

In sum, the contract is clear. General Condition 36 provided

that SMUD could terminate the contract if Fru-Con failed to perform

the work in a manner that would insure completion within the time

specified in the contract. It is undisputed that Fru-Con fell

behind schedule and, without obtaining any change orders, adjusted

the completion date of the contract. Therefore, on February 11,

2005, SMUD terminated the contract according to the terms of

General Condition 36. There is nothing in the contract, nor any

requirement under California law, that obligated SMUD provide FruCon with an opportunity to cure or to perform a “schedule analysis”

prior to termination.

2. Waiver 

Fru-Con also argues that SMUD waived its right to terminate

the contract. As part of this argument, Fru-Con avers that SMUD

was aware of the delay and, through its actions, accepted the

delay. See Fru-Con Mot. for Partial Summ. J. at 22, 37. This

argument fails based on both the law and the facts.

a. Applicable Law 

It is “well settled that a contracting party may waive

provisions placed in a contract solely for his benefit.” Wesley N.

Taylor Co. v. Russell, 194 Cal. App. 2d 816, 828 (1961). In

California, the question of waiver is a question of fact and not

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law, “hence the intention to commit a waiver must be clearly

expressed.” Moss v. Minor Props., Inc., 262 Cal. App. 2d 847, 857

(1968). Waiver may be established as a matter of law “only when

it is proved by the express declaration of the party charged with

waiver, or by undisputed words or conduct so inconsistent with a

purpose to stand upon the contractual right allegedly waived as to

leave no possibility of any reasonable inference to the contrary.”

Lord, Williston on Contracts § 39:21 (2007).

b. Whether SMUD Waived Its Right to Terminate the Contract

Relying on non-binding case law, Fru-Con argues that a waiver

of the right to terminate occurs when the owner allows “a

delinquent contractor to continue [substantial] performance past

a due date.” DeVito v. United States, 413 F.2d 1147, 1153 (Ct. Cl.

1969)(per curiam). Even if this court were bound by the cases

relied on by Fru-Con, the cases are clearly distinguishable. In

each of the cases cited to, the original deadline had passed and

it was only after that point in time that the owner terminated the

contract. See Id. But see Fla., Dep’t of Ins. v. United States,

81 F.3d 1093, 1097 (Fed. Cir. 1996)(waiver doctrine was

inapplicable because the Postal Service terminated the contractor

before the deadline passed and did not indicate any forbearance of

the contractual time requirements). Here, the contract was

terminated in February 2005, three months before the original

completion deadline. Accordingly, the cases cited to by Fru-Con

are inapplicable.

Fru-Con also asserts that the facts undisputedly demonstrate

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that SMUD “accepted” the delay, thereby waiving its right to

terminate. Fru-Con makes two general arguments.

First, Fru-Con argues that at its October 7, 2004 presentation

to SMUD, Fru-Con stated that SMUD could either accept the delay or

direct Fru-Con to accelerate. See Fru-Con SUF ¶ 17. This much is

undisputed. Fru-Con goes on to argue, however, that because SMUD

never directed Fru-Con to accelerate the work, SMUD, by default,

accepted the delay. Fru-Con does not cite to any evidence that

supports the specific factual conclusion that SMUD accepted the

delay. Instead, Fru-Con appears to argue that by virtue of not

terminating the contract in October of 2004, SMUD agreed to the

delay. 

SMUD disputes this factual conclusion and cites to numerous

pieces of evidence to suggest that SMUD did not in fact accept the

delay. Most obviously, from December 2004 to February 2005, SMUD

sent eight letters to Fru-Con about Fru-Con’s failure to meet

intermediate milestone deadlines set forth in the contract. SMUD

RSUF ¶ 260. Similarly, in a November 14, 2004 e-mail from SMUD to

Fru-Con, SMUD made the following request: "Fru-Con to provide key

benchmarks/assumptions and exclusions (if any) to accomplish Aug.

10th completion date." Fru-Con SUF ¶ 50. In a November 16, 2004

letter, SMUD's Project Director stated that "it appears that

Fru-Con is not working efficiently and in a manner which will allow

you to achieve your revised to-go (forecast) progress numbers and

completion on August 10, 2005 as stated in the November 12, 2004

schedule revision." Fru-Con SUF ¶ 51. This evidence suggests that

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SMUD did not accept the delay.

Fru-Con also argues that SMUD accepted Fru-Con’s proposed term

sheet, which was presented to SMUD on January 25, 2005 and

contained a proposed project completion date of August 10, 2005.

Again, the evidence does not support Fru-Con’s assertion. It is

undisputed that Fru-Con submitted a term sheet proposing, among

other things: (1) an increase in the Contract Price of $16.5

million; and (2) a time extension of the Substantial Completion

date to August 10, 2005. It is also undisputed that SMUD submitted

a counter proposal that included the August 10, 2005 completion

date and $7.1 million in additional compensation (instead of $16.5

million). Fru-Con SUF ¶¶ 71-73. Fru-Con asserts that SMUD

accepted Fru-Con’s proposal and cites to an e-mail sent by SMUD to

Fru-Con as well as Mr. Shetler’s deposition. These two pieces of

evidence do not reveal that SMUD accepted Fru-Con’s proposal.

Instead, the evidence demonstrates that Fru-Con and SMUD were

attempting to negotiate a settlement to avoid litigation. SMUD

RSUF ¶ 278. In short, there is nothing in the evidence cited to

by Fru-Con that establishes that SMUD accepted Fru-Con’s proposal.

Moreover, SMUD presents evidence which directly contradicts FruCon’s factual conclusion that SMUD accepted the proposal. 

Taken together, and drawing all reasonable inferences in favor

of SMUD, material factual disputes preclude partial summary

judgment as to Fru-Con’s assertion that SMUD waived the May 3, 2005

completion deadline. 

This conclusion is in keeping with California law that views

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the question of waiver as a question of fact and not law, “hence

the intention to commit a waiver must be clearly expressed.” Moss,

262 Cal. App. 2d at 857. Here, the intention to commit waiver was

not clearly expressed and factual disputes abound. 

3. Defective Concrete & Failure to Meet Intermediate

Milestones

Fru-Con’s third and final argument is that there was no

material breach justifying termination. Specifically, Fru-Con

argues that any failure to achieve the intermediate milestones was

not a material breach. See Fru-Con’s Mot. for Partial Summ. J. at

31. Similarly, Fru-Con argues that its failure to remove certain

defective concrete was not a material breach. See id. at 33. 

a. Failure to Achieve Intermediate Milestones 

FRU-Con argues that because the contract provided for

liquidated damages, the remedy for delay was liquidated damages

only and delay could not be construed as a material breach

justifying termination. 

The contract, however, was terminated pursuant to General

Condition 36 which does not contain a requirement that the breach

be material. In forming the contract, the parties already

bargained for what circumstances would give rise to the right to

terminate. Thus, the relevant inquiry is not whether there was a

material breach, but whether the conditions giving rise to a right

to terminate occurred.

As previously explained, it is well established that a

“contract may contain a valid provision giving one or the other

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 Even if the court were to determine the materiality of Fru- 6

Con’s breach, it is well established that “when time is made of

the essence of a contract, a failure to perform within the time

specified is a material breach of the contract.” Gold Mining &

Water Co. v. Swinerton, 23 Cal. 2d 19, 27 (1943).

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party an option to terminate it on specified conditions.” Call,

251 Cal. App. 2d at 447. Moreover, as SMUD points out, the very

treatise cited to by Fru-Con states that: 

Some construction contracts contain termination causes

that allow one party to terminate the other upon the

occurrence of a specifically stipulated default or

failure of performance. Such contract provisions define

the grounds for termination thereunder. Thus, if

termination meets those specific contractual criteria, it

need not otherwise satisfy the legal criteria for

materiality. 

Gibbs & Hunt, California Construction Law §6.04. General Condition

36 was this type of provision -- it explicitly provided the grounds

upon which SMUD could terminate the contract. Delay was one such

ground. 

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b. Defective Concrete 

In its February 11, 2005 default termination letter, SMUD

alleged that Fru-Con "refused to remove portions of the concrete

cooling tower foundation that do not comply with contract

specifications." Fru-Con SUF ¶ 121. Fru-Con asserts that the

allegedly defective concrete is not a viable basis for default

under General Condition 36. Fru-Con also argues that the allegedly

defective concrete did not constitute a material breach. These

arguments are unavailing. 

////

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 Fru-Con disputes this fact yet fails to cite to any 7

admissible evidence in support of its dispute. 

 Again, Fru-Con disputes this point but fails to cite to any 8

supporting evidence. 

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i. Facts Regarding the Defective Concrete 

It is undisputed that the contract required Fru-Con to

construct the CPP in accordance with plans and specifications

prepared by SMUD’s Design Engineer, UEC. SMUD RSUF ¶ 287. The UEC

engineering drawings and specifications for the CPP included a

cooling water tower and a related cooling water tower foundation.

SMUD RSUF ¶ 288. The foundation is comprised of seven separate

steel reinforced concrete slabs for holding the cooled hot water.

SMUD RSUF ¶ 290. Each of the seven sections of the cooling water

foundation was given a letter designation. SMUD RSUF ¶ 291. The

slab at issue here is Section C.

Fru-Con poured the concrete for Section C on May 3, 2004 and

prepared Non-Conformance Report (“NCR”) # 72 on the same date. 

The NCR explained that the air entrainment was only 2.25%, when the

specifications required air entrainment of 4% to 6%. SMUD RSUF

¶ 302. On June 8, 2004, Fru-Con issued another NCR, this one 7

pertaining to the compression test cylinders. Apparently, the 12

compression test cylinders failed to reach the minimum required

compressive strength. SMUD RSUF ¶¶ 304-05. In short, by Fru- 8

Con’s own reports, the concrete in Section C was defective.

On September 9, 2004, SMUD wrote to Fru-Con explaining that

the concrete in Section C did not meet the project specifications.

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SMUD directed Fru-Con to “submit a plan to replace the unacceptable

concrete in the cooling tower.” Letter from Disney to McPherson,

Ex. 12, Decl. of Kevin Alan Disney (“Disney Decl.”). Additional

letters to Fru-Con followed. See SMUD RSUF ¶¶ 316-21. By letter

dated December 10, 2004 to Fru-Con's Project Director, Earle

Hardgrave, SMUD notified Fru-Con that it was in default of the

contract by failing to remove and replace Section C. SMUD RSUF ¶

321. 

Fru-Con responded by letter dated December 22, 2004:

Fru-Con will not remove Section C of the cooling tower

foundation as directed by your [December 10, 2004]

letter. Such directive is inconsistent with the prior

course of conduct between the parties, commercially

unreasonable and motivated by claims made by Fru-Con

against SMUD. A declaration of default or withholding of

payment as a result of such directive would be considered

made in bad faith and just another indication of SMUD's

abandonment of the contract.

SMUD RSUF ¶ 324. On February 2, 2005 Fru-Con wrote again, stating

that removal of Section C was not required and instead recommended

the application of a specific epoxy coating to the surface of

Section C. SMUD RSUF ¶ 327. This proposal was reviewed and

rejected by the Engineer of Record. SMUD RSUF ¶ 328. He

determined that Section C needed to be removed and replaced. On

February 4, 2005, SMUD sent a letter to Fru-Con stating that

Fru-Con remained in default of its obligations through its failure

to remove and replace the Section C concrete. SMUD RSUF ¶ 329. 

ii. Contract Provision

The contract provided a mechanism by which Fru-Con could have

protested SMUD’s direction to replace the defective concrete.

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General Condition 32 provided that a contractor could dispute work

orders within ten days after such demand is given. Pending

resolution of the protest, the contractor “shall proceed with the

work in accordance with the determination or instructions of the

Engineer.” Contract, GC-32, Ex. 32, Nelson Decl. 

The contract also provided that “[i]f the Contractor fails to

proceed at once with the replacement of rejected material or the

correction of defective work . . . the District may exercise the

remedies set forth under GC-36 DISTRICT’S RIGHT TO TERMINATE RIGHT

TO PROCEED.” Contract, GC-24, Ex. 32, Nelson Decl. As discussed

previously, General Condition 36 provided that SMUD could terminate

the contract under certain circumstances. 

iii. Grounds for Termination

As evidenced by Fru-Con’s Non-Conformance Reports, the

concrete in Section C was defective. It is undisputed that on

September 9, 2004, SMUD specifically informed Fru-Con that the

concrete did not comply with the contract specifications and that

it would need to be replaced. SMUD RSUF ¶ 315. A follow up letter

was sent on September 29, 2004. Pursuant to General Condition 32,

Fru-Con had ten days to protest SMUD’s request, however, no protest

was lodged. Instead, Fru-Con wrote a letter to SMUD on December

22, 2004 informing SMUD that it would “not remove Section C . . .

as directed by your [December 10, 2004] letter.” SMUD RSUF ¶ 324.

This course of action failed to comply with the express provision

of General Condition 32 which set forth the procedure for protest.

General Condition 24 provided that if the contractor fails to

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proceed "at once" with the replacement of defective work, SMUD

could exercise its remedy of termination pursuant to General

Condition 36. 

In light of these undisputed facts, the court cannot find

that, as a matter of law, SMUD acted wrongfully in invoking its

right to terminate the contract under General Condition 36.

Similarly, the court rejects Fru-Con’s argument that the defective

concrete was not a material breach. For the reasons discussed in

reference to the scheduling delays, there is simply no materiality

requirement in either General Condition 24 or 36. The parties

previously bargained for what grounds could give rise to

termination. Failing to prosecute the work in a timely fashion and

failing to correct or replace defective work are two such grounds.

In conclusion, it is evident that Fru-Con’s motion for partial

summary judgment must be denied. First, under the contract’s

provisions, SMUD provided Fru-Con with ample notice that it was

dissatisfied and that termination was a distinct possibility. 

Second, both the scheduling delays and the defective concrete were

valid grounds for termination under the provisions of the contract.

Third, whether SMUD waived its right to terminate the contract is

an issue of fact that is disputed. For these reasons, the motion

must be denied.

B. Fru-Con’s Motion for Partial Summary Judgment on SMUD’s Claim

for Monies Paid to Dick Corporation

Fru-Con seeks partial summary judgment on SMUD’s claim for

monies paid to Dick Corporation (“Dick Corp.”). After SMUD

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terminated the contract with Fru-Con, SMUD entered into a contract

with Dick Corp. for construction services for the CPP. Fru-Con SUF

¶ 237. In this lawsuit, SMUD seeks to recover $9,534,976.00 from

Fru-Con for monies SMUD paid to Dick Corp. Fru-Con SUF ¶ 239. In

its motion, Fru-Con contends that SMUD’s payment to Dick Corp. was

improper as the contractors who performed the work at the CPP were

unlicensed. 

Because the contractors were unlicensed Fru-Con argues, the

contract between SMUD and Dick Corp. was void and therefore, SMUD

cannot recover for money paid under an invalid contract. Fru-Con

also argues that since the Dick Corp. contract was void, there is

a risk of double recovery. The arguments are unavailing.

1. The Scope of Section 7031 of the California Business and

Professions Code

Relying on section 7031 of the Business and Professions Code,

Fru-Con argues that Dick Corp. was not entitled to compensation and

therefore, SMUD cannot seek to recover from Fru-Con for money paid

to Dick Corp. Even assuming that the court accepts as true FruCon’s contention that the contractors who performed the work were

unlicensed, the law does not support Fru-Con’s position. 

Section 7031 provides: 

[N]o person engaged in the business or acting in the

capacity of a 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

for the performance of any act or contract where a

license is required by this chapter without alleging that

he or she was a duly licensed contractor at all times

during the performance of that act or contract . . . .

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Cal. Bus. & Prof. Code § 7031 (West 1995). In other words, this

section prohibits suits when a person is “engaged in business or

acting in the capacity of a contractor . . . without alleging and

proving that he was a duly licensed contractor . . . .” Id. FruCon argues that since unlicensed contractors cannot sue, owners are

not obligated to pay those contractors and therefore, third parties

(such as Fru-Con) are not liable for damages. Nothing in the plain

language of the code supports this interpretation. 

In American Sheet Metal, Inc. v. EM-Kay Engineering Co., this

court concluded that California case law limited the scope of

section 7031 to only reach suits between the contractor and his

principal. 478 F. Supp. 809, 813-14 (E.D. Cal. 1979) (Karlton,

J.). Accordingly, this court held that section 7031 did not apply

to a suit by an unlicensed contractor for recovery of the allegedly

defective work of a subcontractor. The court reasoned that the

purpose of the statute was to protect the “public” (i.e., the

principal) by essentially “clos[ing] the door” of the courthouse

to unlicensed contractors who attempt to bring suit. Id. at 812-

14. Since the general public did not appear to be directly

involved in the dispute between the contractor and the

subcontractor, section 7031 did not apply. Id. (citing Davis v.

Superior Court, 1 Cal. App. 3d 156 (1969)).

Other courts have similarly found that the purpose of the

statute is to protect the public from incompetence and dishonesty

in those who provide building and construction services. Lewis &

Queen v. N.M. Ball Sons, 48 Cal. 2d 141, 149-50 (1957). “Section

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7031 advances this purpose by withholding judicial aid from those

who seek compensation for unlicensed contract work. The obvious

statutory intent is to discourage persons who have failed to comply

with the licensing law from offering or providing their unlicensed

services for pay.” Hydrotech Sys., Ltd. v. Oasis Waterpark, 52

Cal. 3d 988, 995 (1991).

Given the statute’s purpose, it has been applied only to those

situations in which an unlicensed contractor seeks compensation

from the owner. "Regardless of the equities, section 7031 bars all

actions, however they are characterized, which effectively seek

'compensation' for illegal unlicensed contract work.” Ranchwood

Communities Ltd. P’ship v. Jim Beat Constr. Co., 49 Cal. App. 4th

1397, 1409 (1996)(citations omitted). 

Fru-Con argues that under section 7031, the contract is void

and thus, Fru-Con should not be liable. Fru-Con cites to no

authority for the proposition that section 7031 should be read

broadly so as to protect parties in Fru-Con’s situation. Indeed,

courts have held just the opposite: “The effect of section 7031

is not to render the contract with the unlicensed contractor void,

but simply to bar the unlicensed contractor from bringing an action

for compensation based on the contract.” K & K Servs., Inc. v. City

of Irwindale, 47 Cal. App. 4th 818, 826 (1996). In the case at

bar, SMUD has already paid Dick Corp. and Dick Corp. is not seeking

“compensation” for unlicensed contract work. The suit before this

court is between Fru-Con and SMUD. Dick Corp. is not a party to

the suit. Put simply, the plain wording of section 7031 does not

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 The court notes that this provision is not completely 9

consistent with case law interpreting section 7031, as courts have

routinely held that “[t]he effect of section 7031 is not to render

the contract with the unlicensed contractor void, but simply to bar

the unlicensed contractor from bringing an action for compensation

based on the contract.” K & K Servs., Inc., 47 Cal. App. 4th at

826. This ambiguity in the law, however, does not preclude the

court from adjudicating the pending motion. 

32

address the situation at issue here. Accordingly, Fru-Con cannot

avail itself of the protections set forth in section 7031.

2. Whether the Contract was Void Based on Other

Provisions of the California Business and

Professions Code 

Citing to section 7028.15 of the California Business and

Professions Code, Fru-Con argues that the contract between Dick

Corp. and SMUD was void and therefore, SMUD cannot recover any

payments it made to Dick Corp. This argument is also unavailing.

Section 7028.15 provides in pertinent part: 

Unless one of the foregoing exceptions applies, a bid

submitted to a public agency by a contractor who is not

licensed in accordance with this chapter shall be

considered nonresponsive and shall be rejected by the

public agency . . . Any contract awarded to, or any

purchase order issued to, a contractor who is not

licensed pursuant to this chapter is void.

Cal. Bus. & Prof. Code § 7028.15 (emphasis added). Moreover, 9

subsection (b) of section 7031 provides: “[A] person who utilizes

the services of an unlicensed contractor may bring an action in any

court of competent jurisdiction in this state to recover all

compensation paid to the unlicensed contractor for performance of

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Subsection 7031(b) was added by amendment to the Business 10

and Professions Code in 2001. See Deering's California Codes

Annotated, Cal. Bus. & Prof. Code § 7031 (Deering 2006). It

applies to all contracts entered into after the effective date of

the amendment, January 1, 2002. Lee William Dev. Corp. v. Chalker,

No. G033804, 2005 WL 1100646 (Cal. Ct. App. May 9, 2005).

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any act or contract.”10

Fru-Con cannot seek protection under this statute. As

previously discussed, the licensing statute’s purpose is to protect

the public from unlicensed contractors. Here, Dick Corp. is not

a party in the pending case and Fru-Con fails to cite to any legal

basis for how Fru-Con, a third-party, can take advantage of the

licensing laws.

Moreover, even if the licensing laws could be construed so

that Fru-Con could take advantage of them, factual disputes

preclude summary judgment. Although under § 7028.15 a contract

with an unlicenced contractor is considered void, the undisputed

facts do not establish that SMUD entered into a contract with an

unlicensed contractor.

Fru-Con argues that although Dick Corp.’s name is on the

contract, the work was actually performed by DES, an unlicenced

contractor. In essence, Fru-Con argues that DES was using Dick

Corp. as a corporate front. 

Under the California Business and Professions Code, a

“contractor” is defined as: 

any person who undertakes to or offers to undertake to,

or purports to have the capacity to undertake to, or

submits a bid to, or does himself or herself or by or

through others, construct, alter, repair, add to,

subtract from, improve, move, wreck or demolish any

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building . . . . "Contractor" includes subcontractor and

specialty contractor.

Cal. Bus. & Prof. Code § 7026. Fru-Con argues that the majority

of people who worked on the CPP contract were actually unlicensed

DES employees, not employees of Dick Corp. See Fru-Con SUF ¶¶ 242-

43, 247-48, 251. Without more, however, these facts do not support

a finding that the contract between Dick Corp and SMUD was void.

SMUD submits evidence which suggests that Dick Corp. was not

a corporate front. For example, task orders for work were issued

from SMUD to Dick Corp. SMUD RSUF ¶ 451. Dick Corp. was

responsible for completing the work agreed upon in the task orders

and was responsible for any problems that occurred or might have

occurred in performing those services. SMUD RSUF ¶ 453. Dick

Corp. was required to and did post a bond in connection with its

work on the Project. SMUD RSUF ¶ 456. All invoices for work

performed pursuant to Dick Corp.'s contract with SMUD were sent

from Dick Corp. to SMUD. SMUD RSUF ¶ 457. Finally, SMUD paid Dick

Corp. directly for those invoiced services. SMUD RSUF ¶ 458.

Ron Terry, the Project Manager for the CPP project, explained

in his declaration:

I am a Project Manager employed by DES, a related company

to Dick Corp. Since DES and Dick Corp are related

companies, Dick Corp. occasionally utilized my services

for Dick Corp. projects. Indeed, Dick Corp. utilized my

services as project supervisor on the Consumnes Power

Plane construction project. 

Terry Decl.

In sum, the relationship between DES and Dick Corp. as far as

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the CPP project is concerned, is far from clear. What is clear is

that SMUD entered into a contract with a licensed contractor, Dick

Corp. It is also evident that Dick Corp. played a significant role

in the CPP project and assumed responsibility for the completion

of the work. In drawing all reasonable inferences in SMUD’s favor,

the court cannot conclude, that, as a matter of fact, SMUD entered

into a contract with an unlicensed contractor and that therefore

the contract is void. 

For these reasons, Fru-Con’s motion for partial summary

judgment with respect to SMUD’s claim for monies paid to Dick

Corporation must be denied. 

C. Fru-Con’s Motion for Partial Summary Judgment on SMUD’s Claim

under the California False Claims Act

Fru-Con seeks partial summary judgment with respect to SMUD’s

third claim for relief pursuant to the California False Claims Act

(“CFCA”). Although SMUD presents evidence of the multitude of

contractual disputes that exist this case, SMUD does not cite to

any evidence which disputes Fru-Con’s assertion that it never

submitted a claim that it knew was false. In short, even when

drawing all reasonable inferences in SMUD’s favor, there is no

evidence that Fru-Con knowingly submitted false claims. For the

reasons explained herein, the motion must be granted.

1. Applicable Law 

The legislature designed the California False Claims Act

(“CFCA”) to prevent fraud on the public treasury, and the ultimate

purpose of the CFCA is to protect the public finances. State v.

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Altus Fin., S.A., 36 Cal. 4th 1284, 1296-97 (2005). Because

California's False Claims Act is patterned on a similar federal

statutory scheme, it is appropriate to turn to federal cases for

guidance in interpreting the state act. State ex rel. Grayson v.

Pac. Bell Tel. Co., 142 Cal. App. 4th 741, 747 n.3 (2006); see also

United States v. Shasta Servs., Inc., 440 F. Supp. 2d 1108, 1111

(E.D. Cal. 2006) (England, J.).

The CFCA imposes liability on any person who “knowingly

presents or causes to be presented to an officer or employee of the

state or of any political subdivision thereof, a false claim for

payment or approval.” Cal. Gov’t Code § 12651. In order to

establish liability under the CFCA, a plaintiff must prove three

elements: (1) a “false or fraudulent” claim; (2) which was

presented, or caused to be presented to the government entity; (3)

with knowledge that the claim was false. See United States v.

Mackby, 261 F.3d 821, 826 (9th Cir. 2001).

In California, a “claim” is defined as including: 

any request or demand for money, property, or services

made to any employee, officer, or agent of the state or

of any political subdivision, or to any contractor,

grantee, or other recipient, whether under contract or

not, if any portion of the money, property, or services

requested or demanded issued from, or was provided by,

the state (hereinafter "state funds") or by any political

subdivision thereof (hereinafter "political subdivision

funds")

Cal. Gov’t Code § 12650; see also Costner v. URS Consultants, Inc.,

153 F.3d 667, 677 (8th Cir. 1998) (“[O]nly those actions by the

claimant . . . [calculated to] caus[e] the United States to pay out

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money it is not obligated to pay . . . are properly considered

‘claims' within the meaning of the FCA.”).

Claims are not "false" under the FCA when reasonable persons

can disagree regarding whether the service was properly billed to

the government. See United States ex rel. Lamers v. City of Green

Bay, 168 F.3d 1013, 1018 (7th Cir. 1999) (holding that "errors

based simply on faulty calculations or flawed reasoning are not

false under the FCA. . . . [a]nd imprecise statements or

differences in interpretation growing out of a disputed legal

question are similarly not false under the FCA" (citations

omitted)); see also United States ex rel. Butler v. Hughes

Helicopters, Inc., 71 F.3d 321, 329 (9th Cir. 1995)(allegedly

improper interpretation of a contract “without more, does not

constitute a false claim for payment”). 

The requisite intent is the knowing presentation of what is

known to be false. “In short, the claim must be a lie.” Hindo v.

Univ. of Health Sciences/The Chi. Med. Sch., 65 F.3d 608, 613 (7th

Cir. 1995). Under California law, 

knowing and ‘knowingly’ mean that a person, with respect

to information, does any of the following: (A) Has actual

knowledge of the information; (B) Acts in deliberate

ignorance of the truth or falsity of the information; (C)

Acts in reckless disregard of the truth or falsity of the

information.

Cal. Gov’t Code § 12650.

2. SMUD’s Specific Allegations 

SMUD cites to numerous claims that Fru-Con submitted. For the

reasons discussed herein, there is a want of evidence from which

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a jury could reasonably infer that Fru-Con knowingly asserted false

claims. The court addresses each alleged false claim in turn.

a. Fru-Con’s October 7, 2004 Powerpoint Presentation

In its counterclaim, SMUD alleged that the October 7th

powerpoint presentation constituted a claim under the FCA: “Fru-Con

claimed that [it] was entitled to an increase of over $25 Million

to the lump sum price agreed upon in the contract.” Countercl. ¶

23. There are two problems with SMUD’s position.

First, it is not entirely clear that a powerpoint presentation

constitutes a “claim” under the FCA. As previously noted, in

California, a “claim” is “any request or demand for money,

property, or services.” Cal. Gov. Code § 12650; see also Costner,

153 F.3d at 677 (“[O]nly those actions by the claimant . . .

[calculated to] caus[e] the United States to pay out money it is

not obligated to pay . . . are properly considered ‘claims' within

the meaning of the FCA.”). 

It is undisputed that at the October 7th presentation, Fru-Con

explained that it was behind schedule and gave SMUD two options:

accept the delay or direct Fru-Con to accelerate. Fru-Con

explained that acceleration would involve a cost of roughly $25

million. Here, SMUD was given options – albeit not ideal options.

Accordingly, the court is hesitant to catagorize the presentation

as a “claim.”

The second problem with SMUD’s position is more fundamental.

Even if the powerpoint presentation could constitute a claim, there

is simply no evidence that Fru-Con knowingly presented a “false”

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claim. Although SMUD avers that the claims made at the

presentation were false, it cites to no evidence which suggests

that Fru-Con knowingly presented false information. The only

evidence cited to by SMUD are two expert reports – one of which

does not even mention the presentation. The other report is that

of Robert A. Dieterle, who merely states, “Fru-Con knew it was not

entitled to the additional revenue that it was claiming that day.”

Dieterle Report, Ex. 89, Becker Decl. This statement is made

without any explanation of how Mr. Dieterle knows this to be true.

Moreover, this statement does not speak to whether Fru-Con was

presenting what it knew to be “false.” 

As previously noted, claims are not "false" under the FCA when

reasonable persons can disagree regarding whether the service was

properly billed to the government agency. See Lamers, 168 F.3d

1013, 1018 (7th Cir. 1999) (holding that "errors based simply on

faulty calculations or flawed reasoning are not false under the

FCA. . . . [a]nd imprecise statements or differences in

interpretation growing out of a disputed legal question are

similarly not false under the FCA" (citations omitted)).

As this court recently noted, “it is well established in this

Circuit and elsewhere that imprecise statements or differences in

interpretation growing out of a disputed legal question are not

false under the FCA.” United States ex rel. Englund v. Los Angeles

County, No. CIV S-04-282, 2006 WL 3097941 (E.D. Cal. Oct. 31,

2006)(Karlton, J.)(citing Hagood v. Sonoma County Water Agency, 81

F.3d 1465, 1477 (9th Cir. 1996) (“Even viewing [plaintiff’s]

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evidence in the most favorable light, that evidence shows only a

disputed legal issue; that is not enough to support a reasonable

inference that the allocation was false within the meaning of the

False Claims Act.”)).

In the case at bar, Fru-Con’s October 7th presentation

apparently set forth what Fru-Con believed to be the cause of the

delay and proposed two alternative courses of action. Fru-Con SUF

¶¶ 16-17. SMUD disagreed with the content of the presentation and

was dissatisfied with the proposals. See, e.g., SMUD RSUF ¶ 17

(disputing any implication that the project delay was caused by

anything or anybody other than Fru-Con). This type of dispute does

not constitute a “false claim.” The parties were - and are –

disputing whether the other party breached the contract. Divergent

interpretations of a contract “without more, do[] not constitute

a false claim for payment”. Butler, 71 F.3d 321 (9th Cir. 1995).

In order to survive Fru-Con’s motion, SMUD must produce

sufficient evidence to support an inference of Fru-Con knowingly

making a false statement. See United States ex rel. Anderson v.

N. Telecom, Inc., 52 F.3d 810, 815 (9th Cir. 1995), cert. denied,

516 U.S. 1043 (1996). As one District Court remarked, “[a]t a

minimum, the FCA requires proof of an objective falsehood . . . .

Expressions of opinion, scientific judgments, or statements as to

conclusions about which reasonable minds may differ cannot be

false.” United States ex rel. Roby v. Boeing Co., 100 F. Supp. 2d

619, 625 (S.D. Ohio 2000). Even when drawing all reasonable

inferences in favor of SMUD, there is simply no evidence to suggest

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that Fru-Con knowingly presented a false claim. 

b. Fru-Con’s Payment Applications 

In its counterclaim, SMUD also alleges that Fru-Con “submitted

payment requests to the District falsely certifying that Fru-Con

had accomplished various contract milestones.” Countercl. ¶ 20.

Similarly, SMUD alleges that Fru-Con submitted “false or inflated

Pay Applications.” Id. ¶ 36. 

Under the construction contract, Fru-Con was paid on the basis

of achieving certain milestones. SMUD argues that on several

occasions, Fru-Con submitted pay applications based on milestones

that had not, in fact, been achieved. “When [SMUD] confronted FruCon on the inclusion of the subject milestones in payment

applications, Fru-Con sent revised applications removing those

milestones without protest.” SMUD Opp’n to Fru-Con’s Partial Mot.

for Summ. J. at 6.

Even assuming SMUD’s version of the facts are undisputed, SMUD

again fails to offer any evidence suggesting that Fru-Con knowingly

made false claims. The only evidence cited to by SMUD is an

internal Fru-Con email which lists certain milestones and notes

next to them. See Ex. 85, Becker Decl. The notes are not

comprehensible and the email does not, as SMUD avers, demonstrate

that Fru-Con knowingly submitted false claims for milestones not

completed. Rather, the evidence as a whole suggests that Fru-Con

and SMUD disputed the extent to which Fru-Con had completed certain

tasks. That Fru-Con submitted revised payment applications does

not, without more, suggest that Fru-Con knowingly submitted false

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claims. 

As previously noted, claims are not "false" when reasonable

persons can disagree regarding whether the service was properly

billed. See Lamers, 168 F.3d at 1018. With respect to knowingly

making a false claim, the Ninth Circuit has explained: 

The requisite intent is the knowing presentation of what

is known to be false, as opposed to innocent mistake or

mere negligence. Bad math is no fraud, proof of mistakes

is not evidence that one is a cheat, and the common

failings of engineers and other scientists are not

culpable under the Act. The statutory phrase known to be

false does not mean ‘scientifically untrue’; it means ‘a

lie.’

Anderson v. N. Telecom, Inc., 52 F.3d at 815-16. Here, there is

proof of mistake, and possibly negligence – there is no evidence

that Fru-Con presented what it knew to be false. Although the

court is to draw all reasonable inferences in SMUD’s favor,

inferences are not drawn out of the air, and it is SMUD’s

obligation to produce a factual predicate from which the inference

may be drawn. See Richards v. Nielsen Freight Lines, 602 F. Supp.

1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir.

1987). There is simply no factual predicate from which one can

infer that Fru-Con submitted claims it knew to be false. 

SMUD also argues that the payment applications were false

because Fru-Con certified on each application that “to the best of

the Contractor’s knowledge, information and belief the Work covered

by this Application has been completed in accordance with the

Contract documents . . . .” SMUD RSUF ¶ 358. This argument is

also unavailing.

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Both parties cite to this court’s unpublished decision in El

Dorado Irrigation District v. Traylor Brothers, Inc., October 5,

2005 Order. There, this court concluded that implied certification

does not suffice to support a cause of action under the False

Claims Act: 

It seems unlikely that the legislature intended to make

construction contractors on periodic payments potentially

liable under the FCA for all deviations from contract

specifications. Under such a regimen, the parties would

litigate whether vague provisions in the contract and

ambiguous statements in the claim for payment add up to

a false claim. There appears to be no reason to elaborate

simple contract violations into potential claims for

compensation under the state’s False Claims Act,

especially given California’s broad fraud jurisprudence.

El Dorado Irrigation Dist. v. Traylor Bros., Inc., Oct. 5, 2005

Order at 32. 

The same logic applies with equal force to the case at bar.

Taken together, the undisputed facts reveal that SMUD and Fru-Con

disagreed about Fru-Con’s payment applications. As previously

noted and discussed, disagreements over contract provisions do not,

without more, constitute false claims for payment. See Butler, 71

F.3d at 329.

c. Boiler Weld Certification 

SMUD also alleges that Fru-Con billed SMUD for overtime and

double time costs that Fru-Con never incurred in working on the

boiler weld certification. Again, SMUD fails to cite to any

evidence suggesting that the claims were knowingly false. 

The facts surrounding this issue are somewhat convoluted.

After Fru-Con was terminated, SMUD hired Fru-Con to complete

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certification of certain welds. SMUD and Fru-Con agreed that SMUD

would pay Fru-Con based upon agreed set rates. Citing to a string

of email exchanges, SMUD avers that Fru-Con stated that it would

pay its workers overtime. See Ex. 50, Disney Decl. Upon review,

the email is not as clear as SMUD purports. The email discusses

the employee base rate but does not specifically discuss over time.

After the work was completed and SMUD paid Fru-Con, Fru-Con

in turn, paid its workers and gave them bonuses (not overtime).

Dep. of Rory R. Riedy (“Riedy Dep.”), Ex. 87, Becker Decl. SMUD

claims that since the workers were not paid overtime, Fru-Con made

a false claim in asking SMUD to pay for overtime. 

SMUD once again fails to cite to any evidence suggesting that

Fru-Con presented claims that it knew to be false or fraudulent.

As previously noted, on a motion for summary judgment, inferences

are not drawn out of the air, and it is the opposing party's

obligation to produce a factual predicate from which the inference

may be drawn. See Richards, 602 F. Supp. at 1244-45. Here, the

only evidence cited to by SMUD is the email exchange about the rate

Fru-Con employees would be paid. As previously noted, however,

this email does not demonstrate that Fru-Con was falsely asking for

overtime. 

d. Change Order Requests 

SMUD also argues that certain Change Order Requests (CORs)

submitted by Fru-Con represented false claims. First, SMUD argues

that COR No. 139 was false because Fru-Con had already been

compensated in COR No. 1 for certain damages included in COR 139.

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Second, SMUD claims that CORs No. 361 and No. 362 were false

because Fru-Con requested more than a 20% mark-up for costs other

than direct costs. And third, SMUD argues that COR No. 270 was

false because Fru-Con changed the amount requested.

The details of the COR are not important as SMUD’s arguments

suffer from the same fatal flaw, namely, the disputes over the CORs

are classic contract disputes. Evidence of disagreements over

contract provisions, without more, does not constitute a claim

under the FCA. In short, SMUD has failed to come forth with any

evidence to suggest that when submitting the CORs, Fru-Con

presented claims it knew to be false or fraudulent. For these

reasons, the court finds that there is a want of evidence from

which a jury could infer that the Fru-Con knowingly asserted a

false claim to SMUD and summary judgment must be entered for FruCon.

IV.

CONCLUSION

1. Fru-Con’s Motion for Partial Summary Judgment Regarding

Wrongful Termination is DENIED.

2. Fru-Con’s Motion for Partial Summary Judgment on SMUD’s

counterclaim for monies paid to Dick Corporation is DENIED.

3. Fru-Con’s Motion for Partial Summary Judgment on SMUD’s

claim under the California False Claims Act is GRANTED. 

IT IS SO ORDERED. 

DATED: June 15, 2007.

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