Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_10-cv-01079/USCOURTS-azd-2_10-cv-01079-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Design Trend International Interiors, Ltd.,

an Arizona corporation,

Appellant, 

vs.

Cathay Enterprises, Inc., an Arizona

corporation, 

Appellee. 

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No. CV10-01079-PHX-NVW

ORDER

Appellant Design Trend International Interiors, Ltd., has appealed a final judgment

entered in an adversary proceeding adjudicated by the United States Bankruptcy Court for

the District of Arizona. The bankruptcy court concluded, after a trial, that Appellee Cathay

Enterprises, Inc., was excused from further obligations under its contract with Design Trend

because Design Trend had materially breached that contract. The result of the bankruptcy

court’s conclusion is that Cathay received the full benefit of Design Trend’s services but only

had to pay a fraction of what it agreed to pay under the contract. The Court has received full

briefing and heard oral argument on March 24, 2011. For the reasons stated below, this

Court reverses the bankruptcy court’s final judgment.

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I. Background & Procedural History

A. The Hotel Renovation Project

At all times relevant to this case, Cathay owned a hotel in Tempe, Arizona. In August

2000, Cathay contracted with Candlewood Hotel Company to become a Cambridge Suites

franchisee, requiring Cathay to remodel and renovate its hotel to meet Candlewood’s

standards for Cambridge Suites. Cathay hired Design Trend, a contractor, to perform that

work, which began in the fall of 2000.

Cathay and Design Trend operated without a written agreement for several months.

Cathay asserts that, during this period, it paid Design Trend on a cost-plus basis. Then,

Design Trend used a standard form a standard form contract published by the American

Institute of Architects (AIA) to develop a written agreement. The AIA contract, which

Design Trend dated January 23, 2001, contained a complete schedule of work with a grand

total price of $1,308,681.29, plus “Arizona state remodel sales tax” at a rate of 4.875%, or

$63,798.21. (Cathay Tr. 58, 79.) The contract provided that “[t]he Contractor shall pay

sales . . . taxes which are legally enacted when bids are received or negotiations concluded.”

(Id. 65.)

Cathay’s representative signed this contract on March 14, 2001, but crossed out the

total price of $1,308,681.29 and wrote in $1,277,000 — a change initialed by both Design

Trend’s and Cathay’s respective representatives. (Id. 59.) The parties’ contract contained

a “time is of the essence” clause and required completion by June 8, 2001. Cathay claims

that, “[i]ndeed, time was of the essence” because it “needed to have the hotel completed in

time for the upcoming football season in order to accommodate ASU football fans who

historically brought a lot of business to the hotel. [Cathay] was also desperate to get the

construction completed for the upcoming ASU parent weekend.” (Cathay Br. at 3, Doc. 23

at 8.) Cathay further claims that it informed Design Trend of these upcoming business

opportunities. (Id.; see also id. at 21, Doc. 23 at 26.) Nonetheless, the contract contained a

waiver of consequential damages, specifically including damages “for rental expenses, for

losses of use, income, [and] profit.” (Cathay Tr. 69.)

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Design Trend completed some of the work, invoicing Cathay along the way for both

the cost of the work and sales tax (which Cathay paid), but Design Trend not complete the

entire job by June 8, 2001. The record does not disclose what happened that June, but on

July 11, 2001, Cathay and Candlewood terminated their franchise agreement. A few days

later, principals from Cathay and Design Trend met to discuss the construction project. This

meeting resulted in a letter agreement with new deadlines, including specified milestones on

July 31 and August 15, and a total completion deadline of August 31, 2001 (which included

“punch,” i.e., the small repairs and touch-ups that the owner typically requests after the

builder declares the project substantially complete). Design Trend and Cathay also agreed

on a reduced contract price. As discussed further below, the bankruptcy court made no

specific finding about this reduced price. However, various documents sworn to under

penalty of perjury by Cathay’s principal (also discussed further below) state that the new

contract amount was $1,209,737.45. (See Design Trend Tr. 56, 83.)

By this point, Cathay had paid Design Trend $986,707.80. Still, Design Trend did not

meet the new deadlines. Throughout August and September 2001, Cathay’s principal wrote

numerous letters to Design Trend’s principal, describing work that needed to be done and

insisting that Design Trend do it. One such letter, for example, states:

Today is September 10, 2001, for the record, I still only have 42

poolside rooms turned over from you. Nothing else. Beginning

of October we have on the book reservation [sic] of $80,000.00

and I need my hotel back to conduct my business. You are on

notice that I will hold you responsible for the monetary loss if I

do not have my rooms back at that time. You need to finish

your work and get out of here.

(Cathay Tr. 110.) Design Trend’s principal later admitted that he ignored these letters.

B. Registrar of Contractors Proceedings

The parties’ relations between September 2001 and February 2002 are not clear,

although there is some evidence that Design Trend performed work on the hotel in October

2001. Also, at some unspecified point, Cathay hired another contractor to either repair

damage caused by Design Trend or complete a few specific work items that Design Trend

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should have completed. Cathay paid $36,199.58 for that work.

In February 2002, Cathay filed a sworn complaint against Design Trend with the

Arizona Registrar of Contractors. Cathay’s Registrar complaint identified the contract with

Design Trend as a written contract, and stated that the contract date was January 23, 2001

(i.e., the printed date on the contract, rather than the date the parties signed the contract).

Cathay then listed the contract amount as $1,209,737.45, and argued, “There are total five

phases of job. Phase V was never touched. Phase I through IV was only 50% completed.”

(Design Trend Tr. 56.) Cathay attached a seven-page list containing both relatively minor

issues (e.g., “[t]ighten hardware on cabinets”) and potentially significant problems (e.g.,

“[o]ver twenty roof leaks,” “[a]ir conditioning control [in handicapped-accessible room] is

mounted on the ceiling”).

A Registrar inspector visited Cathay’s hotel on April 8, 2002. Three days later, the

inspector issued a “corrective work order,” requiring Design Trend to fix many of the

problems about which Cathay complained, including relatively minor problems such as paint

stains and relatively major problems such as roof damage. (Design Trend Tr. 20–21;

compare id. at 57.) Sometime later, the inspector returned to follow up, “but at that time

[Cathay’s principal] was not prepared to address which items he considered still uncorrected

. . . . The inspector noted that although it did not appear that all items on the [corrective work

order] had been addressed, it was apparent to him that [Design Trend] had made a very

significant effort to remedy the deficiencies it had been directed to correct.” (Id. at 21.)

However, Cathay did not pay Design Trend for any of this work.

The Registrar held a hearing before an ALJ on November 12, 2002, attended by

representatives of both Cathay and Design Trend. The parties presented testimony about the

alleged problems and Design Trend’s alleged efforts to remedy the problems. In a written

decision dated November 27, 2002, the ALJ concluded, in relevant part, that: (i) Design

Trend and Cathay had entered into a contract in January 2001 with an “original contract price

[of] $1,209,737.45”; and (ii) Design Trend still needed to complete certain repairs at

Cathay’s hotel (specifically, fixing some peeling paint and a piece of trim), and ordered the

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parties to set a time that Design Trend’s workers could return to the hotel and finish the job.

(Id. at 26–27.)

On November 13, 2002 — i.e., one day after the ALJ hearing and before the ALJ had

issued his written decision — Cathay filed a second Registrar complaint against Design

Trend, alleging deficiencies in Design Trend’s work similar to those alleged in the first

complaint (e.g., “[t]owel rack was never installed,” “closet still needs to be painted,” “the

sink needs to be caulked”). These deficiencies covered 85 different hotel rooms. (Id. at

83–90.) Cathay’s second Registrar complaint, like its first, claimed a written contract entered

into on January 23, 2001 with a price of $1,209,737.45. (Id. at 83.)

The same Registrar inspector who handled the first complaint conducted another

inspection on December 16, 2002, and issued another corrective work order on December

30, 2002, requiring repairs in 74 hotel rooms. Design Trend went to work on some of the

repairs in late January and early February 2003, but refused to perform other repairs,

claiming that they were outside the scope of its contract with Cathay. (Id. at 31–32.) Cathay

again did not pay for any of Design Trend’s work.

The Registrar held another hearing (in front of a different ALJ) on May 16, 2003.

Based on that hearing, the ALJ issued a written decision, concluding, in relevant part, that:

(i) Design Trend and Cathay had entered into a contract in January 2001 with an “original

contract price [of] $1,209,737.45”; and (ii) Cathay had not met its evidentiary burden to show

that any of the alleged remaining problems fell within the scope of the contract with Design

Trend. Thus, by implication, the ALJ concluded that Design Trend completed its work on

the hotel project in February 2003. The ALJ therefore dismissed Cathay’s second complaint.

C. Superior Court and Bankruptcy Proceedings

In January 2002, while Cathay and Design Trend were in the midst of Registrar

proceedings, an electrical subcontractor filed suit in Maricopa County Superior Court against

Cathay and Design Trend, seeking payment for work done as part of the renovation project.

Cathay and Design Trend cross-claimed against each other for breach of contract.

The record contains very little about what happened in this lawsuit until February

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2004, at which point it appears that Cathay and Design Trend were the only parties still

litigating. Design Trend then filed a motion asking the Superior Court to declare that the

Registrar proceedings had res judicata effect on certain issues in the lawsuit. The Superior

Court granted Design Trend’s motion, finding that, “in the two cases decided by the ALJ, the

issues of abandonment of the contract and refusal to perform were decided in favor of Design

Trends [sic] and thus are res judicata in the case at bar.” (Id. at 107.) The Court further

found that the Registrar’s “Conclusions of Law as to A.R.S. § 32-1154 (A) 3 [prohibiting

contractors from violating the Registrar’s rules] and 1154 (A) 7 [prohibiting contractors from

committing fraud] . . . in favor of Design Trends [sic] are also res judicata with respect to the

particular claim.” (Id.)

In August 2004, the Superior Court issued an order clarifying the effect of its previous

res judicata ruling. The Superior Court listed four issues remaining for the jury to decide,

none of which related to the timeliness of Design Trend’s performance — a question that

becomes important below.

Trial in the Superior Court was set to begin on September 8, 2004. On September 7,

2004, Cathay filed for bankruptcy. The Superior Court action was then removed to the

bankruptcy court as an adversary proceeding.

It appears that between September 2004 and September 2007, nothing of substance

happened in the adversary proceeding. However, sometime after September 2007, the

bankruptcy court reconsidered the Superior Court’s res judicata ruling and eventually

decided that “breach[] for failure to timely perform . . . may still be on the table.” (Design

Trend Opening Br. at 7, Doc. 18 at 13.) According to Design Trend, the bankruptcy court

believed that timeliness of completion was not within the Registrar’s jurisdiction, and

therefore could not be res judicata. (Id.)

The adversary proceeding went to trial in late January 2009. In the run-up to trial,

Cathay made clear that it wanted “recoupment and or set off as against amounts paid or

claimed by [Design Trend].” (Design Trend Tr. 148.) At trial, however, Cathay put on no

evidence of reasonable rental value or lost business opportunity (perhaps conceding to the

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consequential damages waiver in the contract).

In November 2009, the bankruptcy court issued its written findings and conclusions.

The bankruptcy court’s most important findings are as follows: (1) Design Trend and Cathay

entered into a construction contract in March 2001 with an agreed price of $1,277,000 (id.

at 257); (2) Design Trend and Cathay modified their contract in July 2001, changing certain

deadlines and the payment schedule, and reducing the “overall cost/price,” although the

bankruptcy court did not specify this new price (id. at 257–58); (3) by July 2001, Cathay had

paid Design Trend $986,707.80; and (4) “[Design Trend] breached its amended construction

contract with [Cathay] by not completing its work on the project timely per the scheduled

agreed to by the parties; and [Design Trend] did not complete its work within a reasonable

period of time in any event. Therefore, [Cathay] is entitled to judgment denying [Design

Trend] any recovery on its claim” (id. at 260). The Court subsequently awarded Cathay

attorneys fees under A.R.S. § 12-341.01, and costs under Fed. R. Bankr. P. 7054(b). (Id. at

266, 272.)

II. Analysis

A. Preclusive Effect of Registrar Proceedings and Superior Court

Proceedings

Design Trend believes that proceedings in front of the Registrar resolved the issue of

timely performance. Design Trend therefore argues that the bankruptcy court erred when it

allowed Cathay to rely on Design Trend’s untimely performance as a defense to Design

Trend’s breach of contract claim.

Design Trend actually asserts two errors here: (1) the bankruptcy court violated the

law-of-the-case doctrine by revisiting the Superior Court’s ruling on the preclusive effect of

the Registrar proceedings, and (2) the bankruptcy court violated 28 U.S.C. § 1738 by not

giving the Registrar proceedings the same preclusive effect that Arizona courts would give

them. Resolving the second argument informs the analysis of the first argument, and the

Court will therefore address these arguments in that order.

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1. Arizona Preclusion Based on Administrative Findings

This Court reviews questions of state-law “full faith and credit,” res judicata, and

collateral estoppel de novo. Jones v. Bates, 127 F.3d 839, 848 (9th Cir. 1997). Federal law

requires the bankruptcy court to give the Registrar proceedings “the same full faith and credit

. . . as they have by Law or usage in the courts of [Arizona].” 28 U.S.C. § 1738. In Arizona,

“[b]oth doctrines of res judicata and collateral estoppel may apply to decisions of

administrative agencies acting in a quasi-judicial capacity.” Hawkins v. State, 183 Ariz. 100,

103, 900 P.2d 1236, 1239 (Ct. App. 1995). But these doctrines operate differently:

Under the doctrine of res judicata, a judgment on the merits in

a prior suit involving the same parties or their privies bars a

second suit based on the same cause of action. This doctrine

binds the same party standing in the same capacity in

subsequent litigation on the same cause of action, not only upon

facts actually litigated but also upon those points which might

have been litigated . . . .

The doctrine of “collateral estoppel” is a doctrine of issue

preclusion. It bars a party from relitigating an issue identical to

one he has previously litigated to a determination on the merits

in another action. The elements necessary to invoke collateral

estoppel are: the issue is actually litigated in the previous

proceeding, there is a full and fair opportunity to litigate the

issue, resolution of such issue is essential to the decision, there

is a valid and final decision on the merits, and there is a common

identity of the parties.

Id. (quoting Gilbert v. Bd. of Med. Exam’rs, 155 Ariz. 169, 174, 745 P.2d 617, 622 (Ct. App.

1987) (citations omitted)). For present purposes, the major difference between res judicata

and collateral estoppel is that the former bars relitigation of every issue that might have been

litigated, but the latter precludes relitigation only of issues actually litigated. Design Trend

argues that the Registrar’s decision should be res judicata, thus barring Cathay from

relitigating any breach of contract theory.

In this case, res judicata does not apply. When Cathay complained to the Registrar

about Design Trend’s work, Cathay was not suing Design Trend for breach of contract. Nor

could Cathay sue for breach of contract in front of the Registrar. The Registrar has a

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statutory jurisdiction limited to certain powers it may exercise over contractors. This Court

could locate no authority stating that a party’s choice to file a complaint with the Registrar

substitutes for a breach of contract cause of action. The Registrar does have power to

“resolve bona fide contractual disputes, involving licensed contractors, to determine whether

or not a contractor violated A.R.S. § 32-1154(3) [prohibiting departure from plans or

specifications without consent, now codified at A.R.S. § 32-1154(A)(2)].” J.W. Hancock

Enters., Inc. v. Ariz. State Registrar of Contractors, 142 Ariz. 400, 408, 690 P.2d 119, 127

(Ct. App. 1984). This is a power “ancillary to [the Registrar’s] regulatory mission,” id. at

406, 690 P.2d at 125, and has been viewed as extending to all contractual disputes necessary

to adjudicating an alleged regulatory violation, see Sunpower of Ariz. v. Ariz. State Registrar

of Contractors, 166 Ariz. 437, 441, 803 P.2d 430, 434 (Ct. App. 1990). But resolving such

factual disputes gives rise only to collateral estoppel, not res judicata. J.W. Hancock, 142

Ariz. at 410, 690 P.2d at 129 (giving Registrar’s findings collateral estoppel effect).

The question, then, is the collateral estoppel effect of the Registrar proceedings.

When Cathay complained to the Registrar, Cathay subjected certain factual issues to the

Registrar’s adjudication, specifically, the existence of the contract, the amount of the

contract, whether Design Trend rendered a workmanlike performance, and whether it

abandoned the project. The Registrar has jurisdiction over these questions. See A.R.S. § 32-

1154(A)(1), (3), (9) (forbidding contractors from abandoning without justification, from

failing to complete a project for the stated contract price, and from disobeying the Registrar’s

rules); id. § 32-1154(B) (mandating Registrar’s investigation “on the written complaint of

any owner . . . that is a party to a construction contract who suffers a material loss or injury

as a result of a contractor’s failure to perform work in a professional and workmanlike

manner”); A.A.C. R4-9-108 (establishing workmanship standards). Through a series of

inspections and ALJ hearings, the Registrar ultimately found that a written contract existed

for a certain price, that Design Trend had not abandoned the project, and that workmanship

violations had been remedied. Thus, the Registrar adjudicated at least four factual issues,

two of which Cathay might have asserted as breaches of contract: substandard workmanship,

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and failure to complete the project. Cathay is collaterally estopped from relitigating any of

these issues.

Design Trend asserted to the Superior Court and the bankruptcy court that

adjudication of these issues necessarily adjudicated the issue of timely performance as well.

The Superior Court seemed to agree, but the bankruptcy court did not. This Court agrees

with the bankruptcy court. Design Trend appears to believe that the Registrar’s noabandonment finding equates to a finding of timely performance. This Court sees no such

equivalence. Whether Design Trend abandoned the project and whether it finished the

project on time are different questions. Timely performance was not actually litigated in the

Registrar proceedings. The bankruptcy court therefore did not err when it permitted Cathay

to raise the timely performance issue at trial.

2. Law of the Case

Design Trend argues that, at minimum, the law of the case doctrine does not allow the

bankruptcy court to depart from the Superior Court’s decision barring Cathay from arguing

untimely performance. Generally, law of the case is only applicable to lower court

proceedings after a case has been remanded from a higher court. However, to the extent it

may apply to successive judges before an appeal, the Court finds that the bankruptcy court

did not violate it.

According to the Ninth Circuit, deviations from law of the case are reviewed under

an unusually specific abuse of discretion standard:

While courts have some discretion not to apply the doctrine of

law of the case, that discretion is limited. Depending on the

nature of the case or issue and on the level or levels of the courts

or courts involved, a court may have discretion to reopen a

previously resolved question under one or more of the following

circumstances:

(1) the first decision was clearly erroneous;

(2) an intervening change in the law has occurred;

(3) the evidence on remand is substantially different;

(4) other changed circumstances exist;

(5) a manifest injustice would otherwise result.

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Thomas v. Bible, 983 F.2d 152, 155 (9th Cir. 1993). Here, the first consideration validates

the bankruptcy court’s decision to revise the Superior Court’s ruling. The Superior Court

clearly erred when it precluded Cathay from arguing that it had been injured by Design

Trend’s untimely performance. The Registrar simply had not decided that issue.

Accordingly, the bankruptcy court did not abuse its discretion in departing from the Superior

Court’s decision.

B. Breach & Waiver

Design Trend’s remaining arguments essentially revolve around whether the

bankruptcy court could excuse Cathay from paying for Design Trend’s work. This, in turn,

depends on whether Design Trend materially breached the contract, and whether Cathay

waived the breach in any event. In Arizona, materiality of breach and waiver are both fact

questions. Foundation Dev. Corp. v. Loehmann’s, Inc., 163 Ariz. 438, 446, 788 P.2d 1189,

1197 (1990) (materiality of breach); Goglia v. Bodnar, 156 Ariz. 12, 19, 749 P.2d 921, 928

(Ct. App. 1987) (waiver). This Court reviews findings of fact for clear error. Fed. R. Bankr.

P. 8013.

At first glance, this case seems to fall squarely within a typical scenario described in

the Restatement:

In an important category of disputes over failure of

performance, one party asserts the right to payment on the

ground that he has completed his performance, while the other

party refuses to pay on the ground that there is an uncured

material failure of performance. A typical example is that of the

building contractor who claims from the owner payment of the

unpaid balance under a construction contract.

Restatement (Second) of Contracts § 237 cmt. d (1981). This case differs somewhat from

the typical scenario, however, because the only alleged “material failure of performance” is

a particularly long delay in completing performance. Given what the Registrar decided,

Cathay could no longer argue that Design Trend rendered incomplete or defective

performance. Instead, Cathay could only assert that Design Trend’s delay in performing was

the single, material breach, thus excusing Cathay from its remaining contract obligations (i.e.,

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Cathay’s argument could also be analyzed under doctrine of substantial performance,

but that is really just the opposite side of the material breach coin: “In [contractor-suing-forthe-unpaid-balance] cases it is common to state the issue, not in terms of whether there has

been an uncured material failure by the contractor, but in terms of whether there has been

substantial performance by him. This manner of stating the issue does not change its

substance . . . .” Restatement (Second) of Contracts § 237 cmt. d (1981).

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paying the amount it still owed). See Ariz. Pattern Jury Inst.-Civil Contract 9 (4th ed. 2005)

(material breach by one party excuses performance by the other party).1

The Court will not address whether the delay alone constituted material breach

because the Court concludes that the question of waiver controls in any event. “Waiver is

the voluntary and intentional relinquishment of a known right or such conduct as warrants

an inference of the relinquishment of such right.” City of Tucson v. Koerber, 82 Ariz. 347,

356, 313 P.2d 411, 418 (1957). “A party to a contract waives a breach of a contract by

permitting the other party to perform.” Indep. Nat’l Bank v. Westmoor Elec., Inc., 164 Ariz.

567, 573, 795 P.2d 210, 216 (Ct. App. 1990). In the construction context specifically, “once

a material breach in a partially-performed construction contract has occurred, the

non-defaulting party must elect to . . . waive the breach and continue performance, or

terminate the contract and sue for damages; and if the innocent party elects to continue

performance he thereby waives the breach and he may not recover damages therefor.”

Hunter Contracting Co. v. Sanner Contracting Co., 16 Ariz. App. 239, 244, 492 P.2d 735,

740 (1972).

The waiver issue in this case is somewhat unusual because the bankruptcy court did

not express any finding about waiver, yet the parties argue as if it did. Nonetheless, because

the bankruptcy court could not have ruled in favor of Cathay without rejecting Design

Trend’s waiver theory, the Court will infer a no-waiver finding and review it accordingly.

See Vance v. Am. Hawaii Cruises, Inc., 789 F.2d 790, 792–93 (9th Cir. 1986) (reviewing

court may imply findings that necessarily flow lower court’s explicit findings); Carr v.

Yokohama Specie Bank, Ltd., 200 F.2d 251, 255 (9th Cir. 1953) (“Nor is it necessary that the

trial court make findings asserting the negative of each issue of fact raised. It is sufficient if

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Theoretically, one could argue that the Prof. Perillo’s phrase, “within a reasonable

time from the time of the election,” dooms Design Trend because the bankruptcy court

concluded that Design Trend “did not complete its work within a reasonable period of time

in any event.” (Design Trend Tr. 260.) However, it is not clear the bankruptcy court made

this finding in comparison to “the time of the election.” And if it did, it was clearly

erroneous. Cathay filed its second Registrar complaint on November 13, 2002. Thus, as of

at least that date, it signaled its willingness to allow Design Trend to return and complete the

work. After the inspection process — a typical part of Registrar proceedings — Design

Trend returned and finished that work by February 2003. Given the circumstances, this was

“within a reasonable time from the time of the election.”

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the special affirmative facts found by the court, construed as a whole, negat[e] each rejected

contention.”).

Here, it was clear error for the bankruptcy court to find a lack of waiver. Despite

Design Trend’s tardiness, Cathay continually asked Design Trend to come back and finish

the job. Cathay twice took Design Trend to the Registrar to ensure that Design Trend

finished the job. Design Trend certainly did not show itself to be a saint — its principal

admitted that, at one point, he began ignoring Cathay’s demands (most of which the

Registrar’s inspector validated), and Design Trend only finished the job under threat of

punishment by the Registrar. But Cathay could not continually require Design Trend to

return and finish the job and then refuse to pay. This clearly constitutes “such conduct as

warrants an inference of [waiver].” City of Tucson, 82 Ariz. at 356, 313 P.2d at 418.

In a typical delayed construction case, an owner who permits late performance must

pay the contract price but can offset some of that price with damages caused by the

contractor’s delay. See, e.g., Joseph M. Perillo, Calamari and Perillo on Contracts § 11.33

(6th ed. 2009) (“If . . . the owner allows the contractor to continue and the contractor

subsequently finishes within a reasonable time from the time of the election, the owner must

pay the price but is still entitled to damages for partial breach because of the late

completion.”).2

 Here, Cathay repeatedly claimed that Design Trend’s delay caused a loss in

business, but Cathay offered no evidence of potential lost profits or any other form of

consequential damages — possibly because the contract contained a consequential damages

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waiver. That, however, was a risk the two sophisticated parties allocated at the outset. In

any event, with no evidence of damages caused by the delay, Cathay cannot offset what it

still owes under the contract. It must therefore pay what it agreed to pay.

C. Costs & Attorneys Fees

Given the foregoing, the Court reverses the bankruptcy court’s award of costs and

attorneys fees to Cathay.

D. Amount of Damages

Some confusion exists about the amount Cathay still owes to Design Trend. This

confusion arises largely from conflicts between Registrar findings and the bankruptcy court’s

findings, as well as from the mass of evidence introduced at the trial before the bankruptcy

court. This Court could remand for further proceedings, directing the bankruptcy court to

calculate damages with specificity. However, the Court has chosen to resolve this issue now

for three reasons. First, given that the bankruptcy court is an arm of this Court, this Court

has power to retain jurisdiction over this issue. See Fed. R. Bankr. P. 8013 (giving this Court

power to “modify” the bankruptcy court’s judgment). Second, the collateral estoppel effect

of the Registrar proceedings and concessions made at oral argument appear to be enough for

this Court to calculate damages. Third, this lawsuit has been pending for nine years, and the

Court believes it is in the interests of justice to resolve it now, rather than remand for

additional proceedings.

The Registrar found that Design Trend’s written contract with Cathay arose in January

2001 with an “original contract price [of] $1,209,737.45.” These findings match Cathay’s

representations to the Registrar. The bankruptcy court, by contrast, found that the contract

arose in March 2001 with an original price of $1,277,000, adjusted downward to an

unspecified amount in July 2001. The bankruptcy court further found that Cathay had paid

Design Trend $986,707.80.

Given that both parties appeared before the Registrar and had an opportunity to argue

their respective cases, the Registrar’s findings about the date of the contract and the agreedupon price control by virtue of collateral estoppel. The January/March disparity makes no

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difference — the contract was originally dated January 23, 2001, but not signed until March

14, 2001. However, the “original contract price [of] $1,209,737.45” does present some

difficulty, because it suggests that the July 2001 price reduction was something lower than

$1,209,737.45.

The Court considers the Registrar’s characterization of “original . . . price” to be a

harmless misunderstanding. Given that: (a) the written contract plainly states a price of

$1,277,000; (b) all parties agree that the contract price was reduced in July 2001; (c) no party

has claimed that the contract price was reduced again after that; (d) Cathay’s principal

executed two sworn statements claiming that the contract amount was $1,209,737.45 (i.e.,

less than $1,277,000); and (e) each of Cathay’s sworn statement came after the July 2001

reduction, the Court concludes that the agreed upon price after July 2001 was $1,209,737.45.

Subtracting from that figure the amounts Cathay already paid ($986,707.80) yields a

preliminary damages figure of $223,029.65.

At this point, the Court must account for various additions and offsets. Cathay claims

that it should receive an offset for the other contractors it paid to fix and/or complete some

of Design Trend’s work. Cathay paid those contractors $36,199.58. At oral argument,

counsel for Design Trend conceded that Cathay deserved some amount of offset, estimated

around $27,000, but counsel also conceded that the difference between Cathay’s claim and

his own $27,000 estimate was not worth a remand. Therefore, the Court accepts Cathay’s

figure of $36,199.58, and will credit Cathay that amount, reducing damages to $186,830.07.

Design Trend’s counsel also admitted that Design Trend was responsible for

approximately $2,000 that Cathay paid for fixing certain punch list items. The Court will

accordingly credit Cathay an additional $2,000, reducing damages to $184,830.07.

Design Trend claims that Cathay should pay sales tax on the amounts it owes to

Design Trend. Cathay, by contrast, claims that it deserves to be reimbursed for the sales tax

it previously paid to Design Trend because the contracts says, “The Contractor shall pay

sales . . . taxes which are legally enacted when bids are received or negotiations concluded.”

The interpretation of a contract is an issue this Court may review de novo. County of

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Santa Clara v. Astra USA, Inc., 588 F.3d 1237, 1243 (9th Cir. 2009). The Court concludes

that Cathay misinterprets the contract. The contract’s statement that “[t]he Contractor shall

pay sales . . . taxes” does not mean that the contractor agrees to absorb the sales tax. Rather,

it allocates responsibility to the contractor for remitting taxes owed. The fact that the

contract’s cost schedule explicitly includes sales tax as a line item, that Design Trend

invoiced for sales tax, and that Cathay paid it, demonstrates the parties’ understanding that

the contract shifted the burden of those taxes ultimately to Cathay.

The contract calculated sales tax at 4.875%. At that rate, Cathay should pay an extra

$9,010.47 ($184,830.07 * 0.04875). The Court will therefore direct entry of judgment in

Design Trend’s favor for $184,830.07 + $9,010.47, or $193,840.54. If the Court has

misinterpreted Design Trend’s concessions at oral argument, or if the Court has committed

a mathematical error, the Court will entertain a concise motion under Rule 59(e) or Rule

60(a), as appropriate. Design Trend may submit its claim for attorneys fees in accord with

Fed. R. Civ. P. 54(d)(2) and LRCiv 54.2.

III. Conclusion

From a broad perspective, this case reduces to competing instances of injustice.

Design Trend wants money it perhaps does not deserve, and Cathay wants services without

paying any money. The Court believes the foregoing resolution is the lesser injustice for two

reasons. First, delay is endemic in construction projects, which is why the law provides for

consequential damages — but Cathay waived consequential damages from the outset, leaving

it only with the option to terminate for material delay. Second, Cathay had opportunity as

early as August 2001 to declare a breach, terminate Design Trend, hire a new contractor, and

sue Design Trend for the difference (if any) between what the new contractor charged and

what Cathay would have paid under the Design Trend contract. Cathay instead repeatedly

chose to bring Design Trend back. In these circumstances, Cathay cannot keep the benefit

of Design Trend’s services without paying, even if Design Trend was very late in performing

those services.

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IT IS THEREFORE ORDERED that the final decision of the bankruptcy court is

REVERSED.

IT IS FURTHER ORDERED that the Clerk enter judgment in favor of Design Trend

and against Cathay in the amount of $193,840.54, plus interest at the federal judgment rate

from the date of judgment until paid. The Clerk shall terminate this case.

DATED this 28th day of March, 2011.

Case 2:10-cv-01079-NVW Document 29 Filed 03/29/11 Page 17 of 17