{"id":895716,"date":"2019-04-10T12:00:18","date_gmt":"2019-04-10T18:00:18","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=895716"},"modified":"2019-04-10T12:00:27","modified_gmt":"2019-04-10T18:00:27","slug":"california-case-that-reads-like-russian-novel-results-in-less-than-satisfying-result-for-both-project-owner-and-contractors","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/california-case-that-reads-like-russian-novel-results-in-less-than-satisfying-result-for-both-project-owner-and-contractors\/","title":{"rendered":"California Case That Reads Like Russian Novel Results in Less Than Satisfying Result for Both Project Owner and Contractors"},"content":{"rendered":"\n

Garret Murai | California Construction Law Blog<\/a> | April 3, 2019<\/p>\n\n\n\n

Sometimes you can see a train wreck coming a mile away. The next case,\u00a0Design Built Systems v.\u00a0Sorokine<\/em>, Court of Appeal for the First District, Case Nos. A151264 and A152059 (February 26, 2019), is one of those cases. It also happens to read like a Tolstoy novel.<\/p>\n\n\n\n

The Beginning of the Train Wreck<\/h3>\n\n\n\n

Alexei Sorokine and Elena Koudriavtseva, husband and wife, owned a single family home in San Rafael, California. Sorokine had acquired the house prior to his marriage to Koudriavtseva.  In 2010, he traveled to Russia and, for reasons unexplained, has not been able to return.<\/p>\n\n\n\n

Following a landslide on the property in 2006, Sorokine entered into a construction contract with Design Built Systems to design and build a series of retaining walls.  DBS was also retained to remedy a stop work notice issued by the City of San Rafael following work performed by others.<\/p>\n\n\n\n

In 2011, DBS entered into another contract, this time with Koudriavtseva, for installation of concrete retaining walls and a driveway. The contract price was $175,000. However, after DBS had completed most of its work, Koudriavtseva fired DBS and hired PA Builders, Inc. to complete the project and, according to Koudriavtseva, to remedy defects caused by DBS. PA Builders, however, was unlicensed. More on that later.<\/p>\n\n\n\n

During this same time, a gentleman named Dmitriy Kornach and his company Kornach Construction Company (collectively \u201cKornach\u201d), performed significant remodeling work at the property, much of it himself, but at times with his sons Alexi and Oleg. Kornach, a longtime friend of Sorokine, agreed to purchase materials for the project because he was able to obtain wholesale prices by virtue of his general contractor\u2019s license. \u00a0However, Kornach too was later fired by Koudriavtseva who fired him in the fall of 2011.<\/p>\n\n\n\n

This Tolstoyesque saga, of course, ended in litigation.<\/p>\n\n\n\n

The Train Wreck<\/h3>\n\n\n\n

In 2012, DBS sued Sorokine and Koudriavtseva alleging claims for breach of contract, foreclosure of mechanics\u2019 lien, common counts and account stated.<\/p>\n\n\n\n

Sorokine and Koudriavtseva in turn filed a cross complaint against DBS, as well as Kornach, and Kornach\u2019s license bond surety, American Contractors Indemnity Company. The cross-complaint alleged 11 causes of action for: (1) breach of written contract; (2) breach of oral contract; (3) breach of implied warranty; (4) negligence; (5) disgorgement; (6) intentional misrepresentation; (7) negligent misrepresentation; (8) rescission and restitution; (9) violation of the Unfair Business Practices Act; (10) breach of the covenant of good faith and fair dealing; and (11) recovery under contractor\u2019s license bond.<\/p>\n\n\n\n

Kornach in turn filed a cross-complaint against Sorokine and Koudriavtseva alleging claims for indemnity, contribution, declaratory relief, and an unusual one entitled \u201cfraudulent filing,\u201d based on Kornach\u2019s claim that Sorokine and Koudriavtseva violated Internal Revenue Code section 7434 by inter alia<\/em> borrowing money from Kornach but failing to repay it, filing fraudulent IRS 1099 forms indicating that they had<\/em>repaid Kornach, and that the fraudulent 1099 forms caused Kornach to have his tax returns audited resulting in additional tax liability.<\/p>\n\n\n\n

And, with that, this mess of a case went to trial. A jury trial five years later.<\/p>\n\n\n\n

At the beginning of trial, Kornach\u2019s counsel filed several motions in limine seeking to exclude evidence and testimony. One of them, Motion in Limine No. 17, sought to preclude Sorokine and Koudriavtseva\u2019s counsel from introducing evidence and testimony regarding work performed by unlicensed contractors, namely PA Builders, on the ground that Business and Professions Code section 7031 bars all actions that seek compensation for work performed by unlicensed contractors. The trial court granted the motion.<\/p>\n\n\n\n

On the twelfth day of trial, the trial court heard and ruled on several motions for directed verdict filed by the parties, two of which were appealed:<\/p>\n\n\n\n

  1. The trial court granted a motion for directed verdict filed by Kornach arguing that Sorokine and Koudriavtseva\u2019s claims for breach of written contract, breach of oral contract, breach of implied warranty, and breach of the covenant of good faith and fair dealing failed because Sorokine and Koudriavtseva could not show proof of damages as a result of the trial court\u2019s earlier granting of Kornach\u2019s Motion in Limine No. 17 pertaining to work performed by PA Builders. The trial court granted  Kornach\u2019s motion for directed verdict.<\/li>
  2. The trial court also granted a motion for directed verdict filed by Kornach on his Internal Revenue Code section 7434 fraudulent filing claim. This was unusual, because it is typically defendants, rather than claimants, who file motions for directed verdict. In any event, Kornach\u2019s counsel argued that Sorokine and Koudriavtseva had failed to introduce evidence controverting Kornach\u2019s \u201cfraudulent filing\u201d claim. The trial court granted this motion as well.<\/li><\/ol>\n\n\n\n

    Following the results of the directed verdicts, the only claim remaining was DBS\u2019 claim against Sorokine and Koudriavtseva, upon which the jury rendered a verdict in favor of DBS in the less than impressive amount of $32,190.<\/p>\n\n\n\n

    Following trial, the trial court awarded Kornach $20,000 in penalties under Internal Revenue Code section 7434, $122,956.50 in attorney\u2019s fees and costs, and $113,196.50 in costs of proof based on previously served requests for admissions. In addition, the trial court awarded DBS $120,749.50 in costs of proof also based on previously served requests for admissions. Grand total: $376,902.50 on what amounted to a $32,190 claim.<\/p>\n\n\n\n

    But, of course, it wasn\u2019t over.  Sorokine and Koudriavtseva appealed.<\/p>\n\n\n\n

    The Appeal<\/h3>\n\n\n\n

    On appeal, Sorokine and Koudriavtseva asserted three claims of error by the trial court: (1) granting Kornach\u2019s motion for directed verdict on its IRS \u201cfraudulent filing\u201d claim; (2) granting Kornach\u2019s motion for directed verdict on Sorokine and Koudriavtseva\u2019s inability to prove damages; and (3) awarding $113,196.50 to Kornach for costs of proof.<\/p>\n\n\n\n

    Kornach\u2019s Fraudulent Filing Claim<\/strong><\/p>\n\n\n\n

    For some reason, unusual claims often accompany unusual facts. As discussed above, Kornach\u2019s \u201cfraudulent filing\u201d claim alleged that Sorokine and Koudriavtseva issued false or \u201cfraudulent\u201d 1099s, when in fact they never paid Kornach, which was a violation of Internal Revenue Code section 7434. Internal Revenue Code section 7434 permits a private cause of action against anyone who \u201cwillfully files a fraudulent information return with respect to payments purported to be made to any other person.\u201d The section provides for a civil penalty of $5,000 per violation, plus costs, and an award of reasonable attorney\u2019s fees. However, the section also provides, that if a court determines that there is a violation, its decision must identify the correct amount that should have been reported.<\/p>\n\n\n\n

    Kornach prevailed on this claim by filing a motion for directed verdict, which, as also discussed above, is unusual in that such motions are typically brought by defendants arguing that the claimant failed to prove one or more elements of its claim.  Here, however, Kornach successfully argued to the trial court that Sorokine and Koudriavtseva had failed to introduce evidence controverting Kornach\u2019s claim under Internal Revenue Code section 7434 thereby flipping the burden of proof.<\/p>\n\n\n\n

    The Court of Appeals, while acknowledging that there are \u201ca few cases\u201d addressing motions for directed verdict filed by a party that has the burden proof, and while noting that it is possible to do so, held that the directed verdict rendered in favor of Kornach was in error because: (1) the evidence showed that the 1099s were not completely wrong, and importantly not \u201cfraudulent,\u201d because Kornach testified that he made three loans to Sorokine for $200,000, $100,000 and $100,000 and that Sorokine paid back $280,000 of these amounts; (2) Koudriavtseva testified that she was unaware at the time the 1099s were issued by her accountant that any were in error and Sorokine was unavailable at trial to testify whether he knew that any of the 1099s were issued in error; and (3) issues of a witnesses\u2019 knowledge and belief are characteristically questions for the fact finder, which, in this case, was the jury.<\/p>\n\n\n\n

    Sorokine and Koudriavtseva\u2019s Inability to Prove Damages<\/strong><\/p>\n\n\n\n

    We\u2019ve written before about Business and Professions Code section 7031. For contractors it\u2019s like the\u00a0Death of Ivan Ilyich(I\u2019m a fan of Russian literature as you can tell). Everything is going fine when something seemingly inconsequential occurs (e.g.<\/em>, a short lapse in your contractor\u2019s license). You think nothing about it at first, then suddenly you\u2019re in a world of hurt, questioning the fairness of it all. In short, under Business and Professions Code section 7031, if you\u2019re a contractor performing work requiring a valid contractor\u2019s license, and you don\u2019t have one: (1) you cannot make a claim for compensation for work performed; and (2) the property owner can sue you to disgorge all compensation paid to you. In short, to use a Cold War analogy, it\u2019s the nuclear option of remedies.<\/p>\n\n\n\n

    The manner in which Kornach used Section 7031, however, was unusual. Rather than use the section as a shield against a payment claim by PA Builders (who was unlicensed) or as a sword to recover compensation paid to PA Builders, Kornach used it as a shield against Sorokine and Koudriavtseva\u2019s construction defect claim, arguing that because PA Builders was unlicensed, Sorokine and Koudriavtseva could not use the amounts they paid to PA Builders to correct the work performed by Kornach to show the value of their damages.<\/p>\n\n\n\n

    The Court of Appeals didn\u2019t buy it. \u201cThere is no authority for the proposition that a person who unwittingly hires an unlicensed contractor to repair work not properly performed by someone else is precluded from introducing evidence of the cost of repair,\u201d explained the Court. \u201cThe purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services,\u201d further explained the Court, \u201cnot to punish the innocent people who hire them.\u201d<\/p>\n\n\n\n

    The Award of $113,196.50 for Costs of Proof<\/strong><\/p>\n\n\n\n

    In civil cases, parties are permitted to conduct \u201cdiscovery\u201d to learn more about an opposing party\u2019s claims or defenses in a case. This includes serving written questions that must be answered by opposing parties. One form of discovery is the use of Requests for Admissions, which asks an opposing party to \u201cadmit\u201d or \u201cdeny\u201d under penalty of perjury leading questions posed by the other side, such as \u201cAdmit that contractor XYZ performed work on the project that was not paid for.\u201d<\/p>\n\n\n\n

    Code of Civil Procedure section 2033.420 provides:<\/p>\n\n\n\n

    If a party fails to admit the genuineness of any document of the truth of any matter when requested to do so under this chapter, and if party requesting that admission thereafter proves the genuineness of that document or the truth of that matter, the party requesting the admission may move the court for an order requiring the party them the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney\u2019s fees.<\/p><\/blockquote>\n\n\n\n

    Section 2033.420 provides that a Court is required to make such an order unless if finds any of the following:<\/p>\n\n\n\n

    1. An objection to the request was sustained or a response to it was waived;<\/li>
    2. The admission sought was of no substantial importance;<\/li>
    3. The party failing to make the admission had reasonable ground to believe that that party would prevail on the matter; or<\/li>
    4. There was other good reason for the failure to admit.<\/li><\/ol>\n\n\n\n

      The decision doesn\u2019t provide, let alone describe, the specific request for admission. However, what apparently occurred, is that Sorokine and Koudriavtseva denied a request for admission that was later shown at trial to be true. But here\u2019s the kicker. Kornach was awarded $113,196.50 in costs of proof expenses under Civil Code section 2033.420 for proving the truth of a request for admission, not of requests for admission that Kornach had sent to Sorokine and Koudriavtseva, but based on requests for admissions that another party had sent to Sorokine and Koudriavtseva, namely Kornach\u2019s license bond surety ACIC.<\/p>\n\n\n\n

      The Court of Appeals made quick work Kornach\u2019s argument, citing Section 2033.420\u2019s language that \u201cthe party requesting the admission,\u201d not a different party, may thereafter seek cost of proof of expenses in proving the truth of a request for admission. \u201cKornach offers no authority for the proposition that a party may recover cost of proof expenses based upon requests for admission propounded by someone else,\u201d explained the Court, \u201c[a]nd the authority he does cite . . . says nothing of the sort.\u201d<\/p>\n\n\n\n

      Conclusion<\/h3>\n\n\n\n

      Design Built Systems<\/em> is an interesting case if only for the twists and turns of the facts and the unusual claims and arguments made by counsel at trial. For parties and their counsel, however, the case  stands for at least two propositions: (1) While Business and Professions Code section 7031 is a powerful remedy, it can\u2019t be used as a shield against proof of repair costs, even if the repairs are made by an unlicensed contractor; and (2) You can\u2019t seek proof of expenses under Code of Civil Procedure section 2033.420 for proving the truth of a request for admission unless the request for admission was one that you yourself served on the opposing party.<\/p>\n\n\n\n


      <\/p>\n","protected":false},"excerpt":{"rendered":"

      Garret Murai | California Construction Law Blog | April 3, 2019 Sometimes you can see a train wreck coming a mile away. The next case,\u00a0Design Built Systems v.\u00a0Sorokine, Court of Appeal for the First District, Case Nos. A151264 and A152059 (February 26, 2019), is one of those cases. It also happens to read like a… Continue reading California Case That Reads Like Russian Novel Results in Less Than Satisfying Result for Both Project Owner and Contractors<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[9,10772],"tags":[9895,158,224,184],"class_list":["post-895716","post","type-post","status-publish","format-standard","hentry","category-construction-contracts","category-mechanics-lien-law","tag-advise-consult","tag-breach-of-contract","tag-construction-contract","tag-mechanics-lien-law","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nCalifornia Case That Reads Like Russian Novel Results in Less Than Satisfying Result for Both Project Owner and Contractors - 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