Wanke, Industrial, Commercial, etc. v. AV Builder Corp. ( 2020 )

Filed 2/19/20
CERTIFIED FOR PARTIAL PUBLICATION*
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
WANKE, INDUSTRIAL, COMMERCIAL, D074392
RESIDENTIAL, INC.,
Plaintiff and Respondent,
(Super. Ct.
v. No. 37-2016-00023774-CU-EN-CTL)
AV BUILDER CORP.,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of San Diego County,
Timothy B. Taylor, Judge. Affirmed.
Greco Traficante Schulz & Brick and Peter J. Schulz, and Williams Iagmin and
Jon R. Williams for Defendant and Appellant.
Lindborg & Mazor, Peter F. Lindborg and Irina J. Mazor for Plaintiff and
Respondent.
* Pursuant to California Rules of Court, rule 8.1110, this opinion is certified for
publication with the exception of the discussion section, part 4.
Wanke, Industrial, Commercial, Residential, Inc. (Wanke) obtained a judgment
against Scott Keck and WP Solutions, Inc. (WP Solutions). To collect, Wanke filed a
creditor's suit against third party AV Builder Corp. (AVB) to recover $109,327 that AVB
owed WP Solutions in relation to five construction subcontracts. Following a bench trial,
the court entered judgment in Wanke's favor for $83,418.94 after largely rejecting AVB's
setoff claims.
Invoking assignment principles, AVB contends that Wanke lacked the ability to
sue given judgment debtor WP Solutions's corporate suspension. Next, it claims Wanke's
suit was untimely under section 708.230 of the Code of Civil Procedure.1 Finally, it
challenges the court's denial of its request for warranty setoffs under section 431.70.
Rejecting each of these contentions, we affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
Wanke is a company that installs waterproofing systems. It sued Keck and
another of its former employees in 2008 for trade secret misappropriation after they left
Wanke to form a competing business, WP Solutions.2 The parties entered into a
stipulated settlement and later litigated Keck's alleged breach of that settlement
agreement. (See Wanke, Industrial, Commercial, Residential, Inc. v. Keck (2012) 209
Cal.App.4th 1151, 1156−1162.) In 2013, the court entered judgment in favor of Wanke,
holding Keck and WP Solutions jointly and severally liable for $1,190,929.
1 Further statutory references are to the Code of Civil Procedure unless otherwise
indicated.
2 Keck later bought out his partner and became the sole owner.
2
Meanwhile, general contractor AVB had hired WP Solutions as a waterproofing
subcontractor on five residential and commercial construction projects.3 Keck completed
his work around June 2014 when, facing the sizable judgment, he declared bankruptcy
and dissolved WP Solutions. Wanke served a writ of execution and notice of levy on
AVB that month. In examination proceedings of AVB's president, Wanke learned that
AVB owed WP Solutions $109,327 under the subcontracts. Wanke filed this creditor's
suit in July 2016 seeking to recover that amount toward its outstanding judgment.
The case proceeded to a two-day bench trial in June 2018. The parties stipulated
as follows: Wanke obtained a judgment of $1,190,929 against WP Solutions and Keck;
Keck discharged his debts in bankruptcy; and after serving a notice of levy on third-party
AVB, Wanke learned that AVB owed $109,327 to WP Solutions. The sole issues
presented to the court were AVB's setoff claims (§ 431.70) and Wanke's ability to collect
given WP Solutions' incapacity.
Wanke presented no affirmative evidence, resting on the stipulated facts. AVB
presented four witnesses. Employee Robert Canup described the scope of his repairs at
the Point Loma project, where Keck's waterproofing system failed due to his use of
incompatible materials. Keck testified about warranty obligations built into the
3 WP Solutions entered into the following subcontract agreements with AVB: Point
Loma Tennis Club (June 11, 2012), Oxford Court (December 23, 2013), 133 Promenade
(April 25, 2013); Saratoga West (November 16, 2009); and the Taitz Residence
(September 9, 2013). Four of the subcontracts concerned work for homeowners'
associations, while the fifth was for a private residence.
3
subcontracts that WP Solutions could not perform after its 2014 suspension.4 As AVB
was Keck's largest customer, Keck continued to honor warranty calls through his new
company for minor repairs.
Antonio Madureira, AVB's president and founder, testified that any money AVB
owed should be offset by the value of bargained-for warranty work that WP Solutions
could no longer perform. Although AVB had received warranty calls on each project,
Madureira was unsure what repairs were needed or how much AVB had spent. He did
know that AVB spent $57,055.95 to repair damage from Keck's use of incompatible
materials on the Point Loma project.
AVB's final witness was Jan Bagnall, a Pli-Dek representative. By stipulation of
the parties, the court read deposition excerpts indicating that damage at the Point Loma
project was caused by an installation issue that would not have been covered under its
manufacturer's warranty.
After AVB rested, Wanke presented one rebuttal witness. Forensic architect Paul
Kushner offered expert testimony on AVB's setoff claims. As relevant here, Kushner
concluded AVB's warranty setoff claims were inflated by an overestimation of the years
remaining on each warranty.
The court entered judgment in Wanke's favor. In a detailed statement of decision,
it concluded AVB was entitled to offset moneys expended to repair the pool deck at Point
4 To avoid repetition, we discuss specific evidence pertaining to AVB's warranty
setoff claim in the discussion.
4
Loma but otherwise rejected AVB's setoff claims. After offsetting the allowed amount,
the court entered judgment in favor of Wanke and against AVB for $83,418.94.
DISCUSSION
AVB appeals the entry of judgment in Wanke's creditor's suit. We provide a brief
outline of the legal framework before turning to the standing, statute of limitations, and
setoff claims it raises on appeal.
1. Enforcement of Judgments Law
"Detailed statutory provisions govern the manner and extent to which civil
judgments are enforceable. In 1982, following the recommendations of the California
Law Revision Commission, the Enforcement of Judgments Law (EJL) was enacted. The
EJL appears in sections 680.101 through 724.260 and is a comprehensive scheme
governing the enforcement of all civil judgments in California." (Imperial Bank v. Pim
Electric, Inc. (1995) 33 Cal.App.4th 540, 546 (Imperial Bank).)
After entry of a money judgment, the judgment creditor may obtain a writ of
execution requiring the levying officer to enforce the judgment. (§ 699.510, subd. (a);
Vinyard v. Sisson (1990) 223 Cal.App.3d 931, 939.) If property subject to levy is in a
third party's possession, the levying officer serves a copy of the writ of execution and
notice of levy on that person, who may not refuse to comply absent a showing of good
cause. (§§ 700.040, subd. (a), 701.010.) A third party's failure to deliver property
without good cause renders it directly liable to the judgment creditor for the lesser of the
judgment debtor's interest in the property or debt, and the amount required to satisfy the
money judgment. (§ 701.020, subd. (a).) "[A] judgment creditor may enforce the
5
liability imposed by section 701.020 either pursuant to examination proceedings . . . or by
way of a separate creditor's suit . . . ." (National Financial Lending, LLC v. Superior
Court (2013) 222 Cal.App.4th 262, 271.)
Examination proceedings (§§ 708.110‒708.205) "permit the judgment creditor to
examine the judgment debtor, or third persons who have property of or are indebted to
the judgment debtor, in order to discover property and apply it toward the satisfaction of
the money judgment." (Imperial Bank, supra, 33 Cal.App.4th at pp. 546‒547; see Evans
v. Paye (1995) 32 Cal.App.4th 265, 280 (Evans).) Pursuant to section 708.120, a
judgment creditor may "discover and specify property of the judgment debtor in the third
person's possession, and [] obtain an order, on motion, determining any claim of
exemption asserted by the judgment debtor." (Ilshin Investment Co., Ltd. v. Buena Vista
Home Entertainment, Inc. (2011) 195 Cal.App.4th 612, 626 (Ilshin).) "When the third
person claims no interest in the property or debt, such a motion procedure may be all that
is required in order for the judgment creditor to obtain satisfaction of its judgment in
whole or in part." (Ibid.)
However, "[w]hen the claims require a contested adjudication, the parties are
entitled to have the issues determined in an independent creditor's action, rather than by
the motion procedure under section 708.120, subdivision (d)." (Ilshin, supra, 195
Cal.App.4th at p. 626.) Pursuant to section 708.210, "[i]f a third person has possession or
control of property in which the judgment debtor has an interest or is indebted to the
judgment debtor, the judgment creditor may bring an action against the third person to
have the interest or debt applied to the satisfaction of the money judgment." "This action
6
commonly is referred to as a creditor's suit." (Evans, supra, 32 Cal.App.4th at p. 276; see
generally, §§ 708.210‒708.290.) A creditor's suit may be filed in the first instance
without resorting to other procedures. (See Cal. Law Revision Com. com., 17 West's
Ann. Code Civ. Proc. (2009 ed.) foll. § 708.210, p. 348.)
In this case, Wanke filed a notice of levy on AVB in June 2014. Thereafter it
conducted examination proceedings and learned from AVB's president that AVB owed
WP Solutions $109,327. Both the levy lien and examination lien expired. (§§ 697.710
[two-year lien from issuance of writ of execution], 708.120, subd. (c) [one-year lien from
examination order].) In July 2016, Wanke filed a creditor's suit against AVB, seeking to
recover $109,327. The trial court's judgment for Wanke and its denial of certain setoff
claims form the basis for AVB's appeal.
2. Standing and Capacity
AVB argues Wanke lacks standing because it stands in the shoes of WP Solutions,
a suspended corporation. Although AVB did not raise this argument below, a lack of
standing is a jurisdictional defect and may be claimed for the first time on appeal.
(Common Cause of Calif. v. Board of Supervisors of Los Angeles County (1989) 49
Cal.3d 432, 438.)
"Every action must be prosecuted in the name of the real party in interest, except
as otherwise provided by statute." (§ 367.) "A 'real party in interest' is generally defined
as 'the person possessing the right sued upon by reason of the substantive law.' "
(Windham at Carmel Mountain Ranch Assn. v. Superior Court (2003) 109 Cal.App.4th
1162, 1172.) In other words, it is the person " 'who has title to the cause of action, i.e.,
7
the one who has the right to maintain the cause of action.' " (Ibid.) Section 708.210
confers statutory standing on a "judgment creditor" to bring a creditor's suit against a
"third person [who] has possession or control of property in which the judgment debtor
has an interest or [who] is indebted to the judgment debtor." As the judgment creditor,
Wanke has standing as the entity that "may bring" a creditor's suit.
Although framed as a lack of standing, AVB's claim instead goes to capacity. " 'A
corporation that has had its powers suspended "lacks the legal capacity to prosecute or
defend a civil action during its suspension." ' " (Casiopea Bovet, LLC v. Chiang (2017)
12 Cal.App.5th 656, 662 (Casiopea); see Rev. & Tax. Code, § 23301.) Such suspension
"results in a lack of capacity to sue, not a lack of standing to sue." (Color-Vue, Inc. v.
Abrams (1996) 44 Cal.App.4th 1599, 1603−1604.) Because WP Solutions was at all
times a suspended corporation, it is undisputed that it lacked capacity to sue.
Citing the statutory requirement that a third person possess or control property "in
which the judgment debtor has an interest" (§ 708.210), AVB argues Wanke's standing
was derivative of WP Solution's interest. Upon WP Solutions' suspension, AVB
maintains it no longer had the right to payment under its subcontracts. Invoking
assignment principles, AVB argues that Wanke stood in WP Solutions' place and likewise
could not maintain a creditor's suit against AVB.
AVB relies on two assignment cases in making this argument. In Cal-Western
Business Services, Inc. v. Corning Capital Group (2013) 221 Cal.App.4th 304 (Cal-
Western), Pacific West One held a judgment against Corning Capital. The Franchise Tax
Board suspended Pacific West One for failing to pay taxes. While suspended, Pacific
8
West One assigned its rights to Cal-Western. (Id. at p. 307.) Cal-Western sued to
enforce the judgment. (Ibid.) The trial court struck the complaint, finding Cal-Western
lacked capacity to sue as the assignee of a suspended corporation. (Id. at p. 308.)
Affirming this ruling, the appellate court explained that as an assignee, Cal-Western's
rights were derivative of Pacific West One's. (Id. at p. 312.)
In the second case, this court relied on Cal-Western in deciding whether an
assignee of a suspended corporation could claim that corporation's escheated property
under the Unclaimed Property Law. (Casiopea, supra, 12 Cal.App.5th 656.) The
assignment was made pursuant to section 708.510, a separate procedure within the EJL
that allows a judgment creditor to receive an involuntary assignment of a judgment
debtor's interest. As we explained, although the assignment was an involuntary judicial
assignment, it nevertheless followed the same assignment rules. (Id. at pp. 662−663.) As
the assignee of a right belonging to a suspended corporation, Casiopea lacked capacity to
sue to recover its judgment debtor's unclaimed property. (Ibid.)
AVB first presented this argument in its trial brief.5 In rejecting it, the trial court
explained:
"Here, of course, there was no 'assignment' (either while WP
Solutions was suspended, or at any other time). Beyond this
5 As Wanke argues "where the lack of capacity to sue does not appear on the face of
the complaint, lack of capacity to sue must be raised in the answer or that objection is
waived." (V&P Trading Co. v. United Charter, LLC (2012) 212 Cal.App.4th 126, 134.)
But AVB's claim is not that Wanke lacks capacity to sue but rather that assignment
principles prevent it from maintaining its suit. Such a claim is not forfeited by AVB's
failure to raise incapacity in its answer. (See id. at p. 135 [no forfeiture although statute
of limitations defense turned on plaintiff's alleged incapacity].)
9
chasmal factual distinction, it also strikes the court that disqualifying
a judgment creditor on standing or capacity grounds because of an
action taken solely by a judgment debtor (i.e., failing to remain
current with the FTB) would frustrate the legislative purpose behind
[] section 708.210."
Wanke urges us to affirm, arguing against application of assignment principles in a
creditor's suit. AVB responds that there is no practical difference—like section 708.510,
which allows a judicial assignment under the EJL, the statutes pertaining to creditor's
suits (§§ 708.210‒708.290) are akin to an express assignment whereby the judgment
creditor's rights should derive from the judgment debtor's.
These competing claims present a question of statutory interpretation, subject to
independent review. (Bruns v. E-Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724.)
At the outset, provisions applicable in one kind of enforcement mechanism under the EJL
do not necessarily apply to others. (See Ilshin, supra, 195 Cal.App.4th at pp. 628‒630
[no right to attorney's fees in creditor's suit, even though fees are recoverable from
execution of a levy].) To evaluate whether assignment principles apply in the manner
AVB suggests, we start with the language of the governing statutes, " 'giving it a plain
and commonsense meaning.' " (Bruns, at p. 724.)
The statute at issue in Casiopea was section 708.510, subdivision (a), which
authorizes a court on a noticed motion by the judgment creditor to order the judgment
debtor to assign to it "all or part of a right to payment due or to become due." As
Casiopea explained, a judicial assignment under this procedure was subject to general
principles governing assignments codified in section 368. (Casiopea, supra, 12
Cal.App.5th at p. 664.) Pursuant to section 368, "[i]n the case of an assignment of a thing
10
in action, the action by the assignee is without prejudice to any set-off, or other defense
existing at the time of, or before, notice of the assignment . . . ." The statute codifies the
general rule that an assignee stands in the shoes of its assignor. (Id. at p. 663; Cal-
Western, supra, 221 Cal.App.4th at pp. 310‒311.) Because the judgment creditor in
Casiopea was assigned the rights of a suspended corporation, it could not recover from
the third person through the assignment. We expressly left open whether it "may have
other avenues of relief through other provisions of the Enforcement of Judgments Law."
(Casiopea, at p. 663.)
The creditor's suit statute is worded differently. "If a third person has possession
or control of property in which the judgment debtor has an interest or is indebted to the
judgment debtor, the judgment creditor may bring an action against the third person to
have the interest or debt applied to the satisfaction of the money judgment." (§ 708.210.)
After resolving any exemption claims by the judgment debtor, the court renders judgment
in the judgment creditor's favor if it establishes its claim against the third person.
(§ 708.280, subds. (a)−(b).)6
By its plain language, the creditor's suit statute considers solely whether the
judgment debtor has an "interest" in property held by the third person or is owed a debt
by the third person. There is no requirement for the judgment debtor to have present
capacity to collect against the third person. And because no assignment is created,
6 The third person may claim a right to setoff (§ 431.70), as AVB did here.
11
section 368 is not triggered and any incapacity by the judgment debtor does not present a
bar to the judgment creditor's recovery.
As the trial court suggested, this result makes sense. "The purpose of Revenue
and Taxation Code section 23301 'is to "prohibit the delinquent corporation from
enjoying the ordinary privileges of a going concern" [citation], and to pressure it to pay
its taxes [citation].' " (Cal-Western, supra, 221 Cal.App.4th at p. 310.) This goal is
served by subjecting the assignee to the same incapacity defense as the assignor at the
time of assignment. (Id. at p. 312.) Otherwise, "a suspended corporation simply could
sell its claim to a third party without ever having to cure the default that caused the
suspension," thereby circumventing tax law restrictions and removing the statutory
incentive to make the corporation pay its delinquent taxes. (Id. at p. 314.) Requiring an
assignee to ensure at the time of assignment that its assignor is not a suspended
corporation is not unduly burdensome. (Ibid.) By contrast, these same motivations do
not apply in a creditor's suit. Tax code restrictions serve as a penalty on the suspended
corporation to incentivize payment of delinquent taxes. Foreclosing a creditor's suit
against a third person based on unilateral action taken by a suspended judgment debtor
would not further that goal.
In short, Wanke could bring a creditor's suit against third party AVB under section
708.210 even though judgment debtor WP Solutions was a suspended corporation that
lacked capacity to sue AVB.
12
3. Statute of Limitations
AVB argues next that Wanke's action is untimely. A creditor's suit must be
commenced before the later of the following: "(1) The time when the judgment debtor
may bring an action against the third person concerning the property or debt [¶] [and] (2)
One year after creation of a lien on the property or debt pursuant to this title if the lien is
created at the time when the judgment debtor may bring an action against the third person
concerning the property or debt." (§ 708.230, subd. (a).) The levy and examination liens
expired long before Wanke filed this creditor's suit. (§ 708.230, subd. (a)(2).)
Accordingly, it is undisputed that Wanke's suit is timely only if it was filed within the
time that WP Solutions "may bring an action" against AVB to recover the $109,327.
(§ 708.230, subd. (a)(1).)
In a creative argument first presented on appeal, AVB contends that the period in
which WP Solutions "may bring an action" expired when its contractor's license was
suspended in July 2014. Thereafter, WP Solutions was statutorily precluded from
pursuing a collection action against AVB.7 Because Wanke sued two years after that
date, AVB maintains Wanke's action is time-barred. Wanke makes several threshold
arguments, which we address first before turning to the merits of AVB's claim.
First, Wanke contends AVB is precluded from raising a statute of limitations
defense based on its statement in a prior brief that "WANKE has now timely filed suit."
7 Subject to certain limitations, Business & Professions Code section 7031,
subdivision (a) prevents unlicensed contractors from pursuing a collection action for any
work requiring a contractor's license.
13
But as AVB points out, the entire sentence reads, "WANKE has now timely filed suit to
apply its Judgment Debtor's asset to its Judgment but it does so standing in the shoes of
Judgment Debtor (WP Solutions)." This sentence is not wholly inconsistent with AVB's
argument on appeal that the statute of limitations elapsed once WP Solutions lost
capacity to sue. Moreover, the sentence pertained to an unrelated argument in AVB's
motion to strike. It neither constitutes a judicial admission nor triggers judicial estoppel.
(See Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 187−188 [defining and applying both
concepts].)
Next, Wanke asserts that AVB forfeited its defense by not specifically pleading
section 708.230 in its answer. (See § 458; Martin v. Van Bergen (2012) 209 Cal.App.4th
84, 91; Davenport v. Stratton (1944) 24 Cal.2d 232, 246−247.) AVB responds that
section 708.230 incorporates by implied reference code sections it did plead. We have
not located a case addressing whether the failure to specifically plead a code section
number is fatal to a statute of limitations defense when the omitted section refers to a
different section that was specifically pleaded. Assuming AVB did properly plead a
statute of limitations defense, Wanke suggests that it nevertheless forfeited it by failing to
pursue it at trial. Ultimately, we need not decide whether AVB forfeited its defense
based on its pleadings or presentation. Assuming the defense is preserved, AVB does not
meet its burden to establish the merits.
The foundational premise of AVB's statute of limitations claim is flawed. AVB
misconstrues the "may bring an action" language in section 708.230, subdivision (a)(1).
The statute's language deals with the accrual of a judgment debtor's claim against a third
14
party, not whether the judgment debtor has present capacity to enforce that claim. (See,
e.g., Mays v. City of Los Angeles (2008) 43 Cal.4th 313, 323 ["Limitations statutes
ordinarily establish the period in which an action must be initiated [citations], but the
outcome of the claim or charges generally remains to be adjudicated"].) Reasonably
construed, section 708.230, subdivision (a)(1) requires a creditor's suit to be brought
within the time that the judgment debtor could have brought an action against the third
party, without regard to factors like incapacity or licensure that would prevent it from
bringing suit. The statute effectively borrows the statute of limitations governing a
judgment debtor's underlying claim against a third party.8
WP Solutions could bring a collection action against AVB within four years of
when AVB failed to meet its payment obligations under the waterproofing subcontracts.
(§§ 337, subd. (a) [four-year limitations period for an "action upon any contract,
obligation, or liability founded upon an instrument in writing"], 343 [four-year catchall
period].) Thus, Wanke's suit is timely under section 708.230, subdivision (a)(1) if it was
filed within four years of when WP Solutions' collection action accrued.
The problem for AVB is that the record does not establish as a matter of law when
that occurred. Wanke argues the $109,327 due pertained solely to WP Solutions' work
on two projects, Oxford Court and the Taitz residence. Indeed, Keck testified based on
exhibit No. 13 that those were "the only project[s] where there's open money due." The
8 By analogy, section 335 provides: "The periods prescribed for the commencement
of actions other than for the recovery of real property are as follows[.]" The various
limitations periods that follow (§§ 335.1−343) do not depend on whether a party may
commence an action.
15
subcontracts for both projects were signed in 2013, within four years of Wanke's 2016
creditor's suit. Payments were due once certain conditions were met. Even in the
unlikely event that AVB owed WP Solutions the day those subcontracts were signed,
Wanke claims its creditor's suit was timely under section 708.230, subdivision (a)(1).
AVB responds by challenging whether Wanke's action related solely to Oxford
Court and the Taitz residence. But it cites no evidence that would permit us to find as a
matter of law that Wanke sued more than four years after any actionable nonpayment by
AVB. AVB does not identify which projects had payments due, how much was due per
project, or when those obligations became overdue so as to trigger accrual of the statute
of limitations.
As the party asserting a statute of limitations defense, AVB bore the burden of
proving what portion of Wanke's claims were time-barred. (Ladd v. Warner Bros.
Entertainment, Inc. (2010) 184 Cal.App.4th 1298, 1310; Evid. Code, § 500.) Even if we
consider its statute of limitations argument first raised on appeal, AVB fails to meet its
burden of proof. "Although [it] faults [Wanke] for not presenting evidence to establish
what portion of damages may have been barred by [AVB's] statute of limitations
. . . defense[], the burden of producing such defense evidence rested with [AVB], not
with [Wanke]." (Ladd, at p. 1310.)
4. Warranty Setoffs
We turn finally to AVB's argument that the trial court applied the wrong legal
standard and overlooked undisputed evidence in denying its warranty setoff claim. As
16
we explain, the court gave several independent reasons for its ruling. We affirm based on
one of those stated reasons—AVB's failure to establish the value of those setoffs.
a. Legal Principles
"The right to offset is a long-established principle of equity." (Carmel Valley Fire
Protection Dist. v. State of California (1987) 190 Cal.App.3d 521, 550; see Kruger v.
Wells Fargo Bank (1974) 11 Cal.3d 352, 363.) As early as the 17th century, English
chancery courts permitted a defense of setoff "founded on the equitable principle that
'either party to a transaction involving mutual debts and credits can strike a balance,
holding himself owing or entitled only to the net difference.' " (Granberry v. Islay Inv.
(1995) 9 Cal.4th 738, 743–744; Jess v. Herrmann (1979) 26 Cal.3d 131, 142 (Jess).)
Codifying this principle, section 431.70 provides, in part:
"Where cross-demands for money have existed between persons at
any point in time when neither demand was barred by the statute of
limitations, and an action is thereafter commenced by one such
person, the other person may assert in the answer the defense of
payment in that the two demands are compensated so far as they
equal each other, notwithstanding that an independent action
asserting the person's claim would at the time of filing the answer be
barred by the statute of limitations."
Traditional setoff rules "operate as an accounting mechanism to avoid a payment
and repayment from one party to another," "simply eliminat[ing] a superfluous exchange
of money between the parties." (Jess, supra, 26 Cal.3d at pp. 134, 137.) Section 431.70
"permits a defendant in a civil action to assert a claim for relief in its answer and allege,
in effect, that the defense claim constituted prior payment for the plaintiff's claim and
therefore should be set off against any award in the plaintiff's favor." (Construction
17
Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 192.) "[R]elief
by way of a section 431.70 setoff is limited to defeating the plaintiff's claim." (Id. at
p. 195.) "[A] defendant may not obtain an award of affirmative relief against a plaintiff
by way of section 431.70" and may instead "only assert the setoff defensively to defeat
the plaintiff's claim in whole or in part." (Id. at p. 198.)
Section 431.70 requires "cross-demands for money." Mutuality is key—the
demands must exist "between the same parties in the same right." (Harrison v. Adams
(1942) 20 Cal.2d 646, 649‒650.) Although the statute refers to demands "for money,"
such demands need not be liquidated. (See Legis. Com., com. 14C West's Ann. Code
Civ. Proc. (2009 ed.) foll. § 431.70, p. 226 ["It is not necessary under Section 431.70, as
it was not necessary under [former] Section 440, that the cross-demands be liquidated."],
citing Hauger v. Gates (1954) 42 Cal.2d 752, 755 ["[Former] [s]ection 440 does not
require that the cross-demands be liquidated."].) Likewise, the fact that a demand has not
been reduced to judgment is not an obstacle to setoff. (Harrison, at p. 649.)
From these authorities we derive a general rule. A setoff may be applied pursuant
to section 431.70 between parties who owed each other mutual debts or credits at a time
when neither claim was time-barred. By reducing or eliminating a defendant's obligation,
setoff serves as an "innocuous accounting mechanism" to eliminate a superfluous
exchange between the parties. (Jess, supra, 26 Cal.3d at pp. 137−138.)
b. Additional Background
AVB sought a total setoff of $179,230 against the amount it owed WP Solutions.
This amount was allegedly attributable the lost value of warranty work ($43,929), a resin
18
layer not installed at two project sites ($78,246), and necessary pool deck repairs at the
Point Loma site ($57,055). The trial court accepted a smaller setoff of $25,908 for pool
deck repair at Point Loma but otherwise rejected AVB's setoff claims. AVB challenges
only the denial of its warranty setoff on appeal, so we limit our summary to that claim.
Each of WP Solutions' subcontracts required it to perform ongoing warranty
repairs for a given number of years after it received final payment. As Keck explained at
trial, WP Solutions built the warranty obligation into its bid price for each subcontract.
The warranties covered miscellaneous repairs of cracks, nicks, or chips of coating, as
well as inspections and water tests. Once WP Solutions went insolvent in 2014, it could
no longer do warranty work. AVB argues it was entitled to withhold funds necessary to
cover anticipated warranty work from that point forward.
In its trial brief, AVB valued the warranty setoffs at five to seven cents per square
foot multiplied by the square footage for each project and the number of years remaining
on each warranty.9 As AVB's president Madureira would testify at trial, those per-
square-foot cost benchmarks derived from Keck's estimates in 2014, when AVB received
Wanke's notice of levy and investigated possible setoff claims. However, Keck offered a
different benchmark at trial, upwards of 12 cents per square foot. Wanke's rebuttal expert
9 AVB used a five-cents-per-square-foot benchmark for Oxford Court, and a seven-
cents benchmark for each of the remaining four projects.
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Paul Kushner did not challenge the per-square-foot benchmarks but testified that AVB
had overestimated the years remaining under each warranty.10
The trial court rejected AVB's warranty setoff claim on multiple grounds. First, it
determined that AVB did not carry its burden to establish the value of the warranty
setoffs. It rejected the simplistic calculation based on the square footage and years
because: (1) it lacked confidence in Keck's testimony providing the basis for his five to
seven cents benchmark, and (2) Wanke's rebuttal expert revealed errors in the years
estimated under each warranty. The court faulted AVB for failing to do an actuarial
analysis of the warranty claims or discount the claimed amounts to their net present
value. Moreover, it agreed with Kushner that as to one property, any warranty obligation
had expired when WP Solutions went insolvent.
In articulating other grounds, the trial court stated the warranty setoffs were
"unmatured, inchoate, speculative and contingent" and failed for lack of mutuality. As a
factual matter, the court believed any warranty claims were unlikely to arise in practice
because Keck was addressing calls through his successor company.
c. Analysis
AVB takes issue with the court's finding that the claimed setoffs "were unmatured,
inchoate, speculative and contingent." It argues the court applied the wrong standard in
10 Kushner explained that depending on the project, even 12 cents per square foot
could be reasonable. For purpose of analysis, Kushner further assumed that AVB had
complied with maintenance requirements under the warranties, though only one project
had such documentation. Nevertheless, because there were fewer years left on each
warranty than alleged in AVB's trial brief, Kushner believed the warranty setoff claims
were overstated.
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requiring the value of warranty work to be liquidated and certain. AVB also claims the
court erred in rejecting undisputed evidence estimating the value of those warranties at
seven cents per square foot.
Even if AVB is correct that the court applied the wrong standard in articulating
one stated ground, any error does not affect the court's independent factual basis for
rejecting AVB's warranty setoff claim—i.e., that AVB did not carry its burden to prove
the value of those setoffs. AVB offered conflicting valuation evidence. At trial, Keck
based his estimates off a benchmark of 12 cents per square foot. But AVB's president
relied on Keck's earlier benchmark of five to seven cents per square foot. Wanke's
rebuttal expert applied the five-to-seven-cents benchmark solely for purposes of analysis
to highlight a separate calculation error.
Ultimately, the trial court did not find any of Keck's benchmarks credible, citing
"the lack of confidence the court had in Mr. Keck's testimony generally, and specifically
the testimony which provided the basis for the 5-7 cents figure." It explained that
"inasmuch as AVB has the burden of proof, it was required to offer sufficient evidence
for the court not only to conclude that there were valid warranty offsets, but also to form
an evidence-based, non-speculative determination of the value of those claims. This
AVB failed to do."
A defendant seeking setoff pursuant to section 431.70 bears the burden to establish
a nonspeculative value of its demand. (See Evid. Code, § 500.) AVB asks us to adopt
the seven-cents benchmark that the court specifically found not credible. But "it is not
our role to reweigh the evidence, redetermine the credibility of the witnesses, or resolve
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conflicts in the testimony, and we will not disturb the judgment if there is evidence to
support it." (Morgan v. Imperial Irrigation Dist. (2014) 223 Cal.App.4th 892, 916.) And
we cannot simply pick a different number. Absent any other basis to evaluate how much
the warranty setoffs were worth, we uphold the trial court's conclusion that AVB failed to
meet its burden.
DISPOSITION
The judgment is affirmed. Wanke is entitled to its costs on appeal.
DATO, J.
WE CONCUR:
BENKE, Acting P. J.
O'ROURKE, J.
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