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California Court Finds that Construction Company’s Requests for Time Extensions and Change Estimates are “Claims” for Payment

Hedge-Fund-Office-BuildingOn Tuesday, the Court of Appeals of California revived Los Angeles County’s California False Claims Act case against Accent Builders, Inc. (“ABI”) and Superior Gunite Inc. (“SGI”), saying that the lower court should have ruled that the company’s requests for time extensions and change estimates constituted claims for $5 million in payments. The lower court had dismissed the complaint for failing to state a claim, maintaining that under the state’s statute, the requests did not qualify as claims for payment but instead were merely intermediate steps that had to be approved before the builders could actually bill Los Angeles County. In reaching its decision, the Court of Appeals relied on guidance from authority under the federal False Claims Act and concluded that the scope of the term “claim” encompassed the time extensions and change estimates requests as “requests or demands” for payment within the meaning of the California False Claims Act.

In September 2011, ABI filed a complaint against Los Angeles County and the La Plaza de Cultura y Artes Foundation, asserting breach of contract and other claims arising from a restoration project involving two historic buildings in downtown Los Angeles. ABI’s complaint essentially alleged that the County and the Foundation failed to pay ABI for work performed on the project. In July 2012, Los Angeles County filed a cross-complaint against ABI and SGI, asserting claims related to the contract involved in ABI’s complaint and that ABI and SGI were alter egos under common ownership. In September 2012, Los Angeles County filed an amended cross-complaint containing allegations against SGI for violations of the California False Claims Act and for interference with contract. According to the complaint, in 2004, Los Angeles County leased the historic buildings to the Foundation to establish a museum.

In December 2006, Los Angeles County and the Foundation entered into a contract with ABI for the restoration and seismic retrofitting of the buildings. The underlying contract established a “guaranteed maximum price” for the project of $19,142,248, and required completion of the project within 426 days of its commencement, absent adjustments in the price or completion date by change orders from Los Angeles County. The contract also provided for progress payments and final payment upon completion of the project. Ultimately, Los Angeles County issued change orders that increased the guaranteed maximum price to $21,258,932, and granted ABI an additional 217 days in which to complete the project. In October 2009, ABI submitted Pay Application No. 28, which stated that as of September 30, 2009, the total of work and labor completed was $21,542,557. Regarding that sum, the pay application asserted that $18,757,987 had been paid, that $1,777,349 was held as “retainage,” and that the payment due was $1,007,221. Accordingly, Los Angeles County paid that sum. In December 2009, the project was substantially completed.

After submitting Pay Application No. 28, however, ABI allegedly submitted 130 claims for payment seeking more than $5,200,000 for purported extra work performed during the project. These requests allegedly included 108 false claims for payment designated as “change estimates” and “time extension requests.” Under the contract, “change estimates” were customarily proposals tendered by ABI to Los Angeles County prior to authorization of the proposed work and materials, and prior to the completion of the proposed work. When such a change estimate involved or included an extension of the project’s completion date, the contract permitted ABI to negotiate an increase in the contract price. Instead, these post-completion claims were not proposals regarding future work and materials, but were allegedly intended in and of themselves to induce payments. And although they proposed an increase in the contract price for the work described and sought authorization to proceed, they allegedly concerned already completed work addressed in prior pay applications and relied on information provided in prior pay applications. The complaint specifically identified 50 false requests for payments. All the requests concerned completed work and of the 50 requests, 13 address work for which Los Angeles County had allegedly already made payment. Additionally, the complaint further described 59 false claims for time extensions submitted in connection with work that had allegedly already been completed.

In reversing the lower court, the Court of Appeals rejected SGI’s argument that nothing in its contract barred ABI from requesting retroactive approval for completed work, and then applying for payment for the work after the approval was granted. The argument failed because it disregarded the allegations of the complaint, that the submissions concerned work for which payment had already been requested or made, and were intended to directly induce additional payment. In view of those allegations, the submissions could not have been made to secure retroactive approval merely as a predicate for future pay applications.