Filed 2/28/18 Mercer-Fraser Company v. Harsh CA3
NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.



IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
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MERCER-FRASER COMPANY,

Plaintiff and Respondent,

v.

DANIEL HARSH et al.,

Defendants and Appellants.
C082491

(Super. Ct. No. 34201300143196CUCOGDS)




The trial court found defendants Daniel Harsh and Harsh Enterprises, Inc. (collectively Harsh) liable for a malicious abuse of process in connection with the filing and service of an improper and invalid stop payment notice against plaintiff Mercer-Fraser Company (Mercer-Fraser). The trial court found by clear and convincing evidence that Harsh acted with malice in filing the stop payment notice and Mercer-Fraser suffered damages. Harsh appeals, arguing the court erred in failing to find the “litigation privilege” applied and erred in denying a request for leave to file a cross-complaint. We shall affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The Parties and Their Disagreement
Mercer-Fraser contracts to perform civil highway construction and road paving projects. In 2010 Mercer-Fraser contracted with the California Department of Transportation (Caltrans) to make improvements to Interstate 5 (the Project). Harsh did not work on the Project, nor were they contractors for Mercer-Fraser.
Harsh owns a truck stop located along Interstate 5. The dispute between the parties centered on the use of portions of the truck stop during the course of the Project to temporarily store materials before disposal.
Harsh claims the parties agreed that, in exchange for a rent of $450 per day, Mercer-Fraser could use portions of the truck stop parking lot to store the materials. Mercer-Fraser admitted the temporary storage of materials but denied the existence of the rental agreement. According to Mercer-Fraser, the materials in question were sold to Scott Simmons of S&G General Engineering Solutions, Inc. (collectively S&G). Mercer-Fraser believed S&G agreed to pay rent to Harsh for storage.
In March 2013 Harsh served a stop payment notice on Caltrans, asserting that Mercer-Fraser owed Harsh $120,750 in rent for a period of five and a half months between October 2012 and March 15, 2013, based on a daily rate of $450 per day, and requesting Caltrans to withhold $120,750 from Mercer-Fraser under the Caltrans contract. Upon receipt of the stop payment notice, Caltrans became legally obligated to withhold 125 percent of the claimed amount from payments due to Mercer-Fraser. Subsequently, Caltrans withheld $150,937.50 from payments due to Mercer-Fraser.
Subsequent Litigation
On March 15, 2013, Harsh filed an unlawful detainer complaint in Shasta County Superior Court seeking $54,000 in past due rent. Harsh dismissed the complaint after Mercer-Fraser filed a motion to quash challenging service.
On May 8, 2013, Mercer-Fraser filed a complaint in Sacramento County Superior Court seeking declaratory relief as to the validity of the stop payment notice, and moved for an order declaring its rights to the withheld funds. On June 7, 2013, following an evidentiary hearing on Mercer-Fraser’s motion, the trial court determined the stop payment notice was improper—the amount withheld was not owed by Mercer-Fraser to Harsh. Caltrans released the funds on July 5, 2013. On June 24, 2013, Mercer-Fraser filed an amended complaint alleging causes of action to recover damages suffered as a result of Harsh’s conduct. Harsh answered the complaint.
On June 6, 2013, the day before the order invalidating the stop notice, Harsh filed a second unlawful detainer complaint against S&G and Mercer-Fraser alleging a past due amount of $141,450. Mercer-Fraser successfully moved to quash the complaint based on an irreconcilable conflict between the amounts of past due rent alleged in the first verified complaint and the amount in the later verified complaint.
On May 27, 2014, Harsh filed an amended complaint for breach of oral contract in the Shasta action. Mercer-Fraser demurred to the complaint on the grounds that another action was pending regarding the same matter in Sacramento County Superior Court. The court stayed the second Shasta action pending the outcome of the present case.
Harsh attempted to file a cross-complaint, but the first effort to do so by an ex parte application filed on January 15, 2016, was denied for lack of good cause. Harsh never attempted to file an action against Caltrans to enforce the stop payment notice.
Trial and Judgment
The trial took place on February 22, 2017. On the morning of the trial, Harsh requested leave to file a cross-complaint. The court denied the request.
At trial, Mercer-Fraser presented the testimony of its president, Justin Zabel. Zabel testified Harsh did not work on the underlying Caltrans project or for Mercer-Fraser. The stop payment notice caused Mercer-Fraser damages. Harsh presented testimony by Daniel Harsh, who stated a rental agreement existed between the parties. Daniel Harsh also explained the circumstances of the stop payment notice.
The court issued a tentative decision finding Harsh had “not met their burden to show that they seriously and in good faith contemplated litigation logically related to the stop payment notice when it was filed, and are not entitled to protection under the litigation privilege.” Instead, the court stated Harsh utilized the stop payment notice provisions in an attempt to force Mercer-Fraser into paying them or having the payments withheld by Caltrans.
In making these findings, the court noted that the amount claimed in the stop payment notice far exceeded what Harsh would have been owed. In addition, the breach of contract action was filed more than a year after the claimed breach. Finally, Harsh failed to comply with the statutory requirements to bring an action against both Caltrans and Mercer-Fraser to enforce payment of the claim.
The court considered Mercer-Fraser’s fraud claim, which alleged Harsh committed fraud by overstating the amount of their claim in the stop payment notice. However, Mercer-Fraser failed to show justifiable reliance on the misrepresented claim. Mercer-Fraser also alleged Harsh committed abuse of process for an ulterior motive not proper under the Civil Code, “to interfere with and create unreasonable financial pressure and hardship upon” Mercer-Fraser. The court summarized its gloss on the evidence: “The question is whether the stop payment notice ‘process’ is improperly used for an ulterior purpose meaning tortious abuse, when the notice is issued to the public entity by a party with no colorable ground or standing as a statutorily eligible claimant, in an amount far in excess of the stated bases of the claim, with no good faith or serious intent by that party to see the claim through to its complete process, and with the intent and purpose to exact financial pressure upon the contractor to pay a debt outside the compass of the public work of improvement on which the notice is filed? The Court finds that such conduct is a tortious abuse of the stop payment notice process, and that the defendants are liable for that tort.” The court found Mercer-Fraser suffered $2,547.33 for loss of use of the amount withheld as a result of the stop payment notice.
The court considered Mercer-Fraser’s allegation that Harsh’s wrongful stop payment notice tortuously interfered with its contract with Caltrans. In rejecting the allegation, the court determined: “Plaintiff made no showing that its performance was made more costly or more burdensome.” In a similar vein, the court rejected Mercer-Fraser’s claim that the stop payment notice deprived it of its prospective economic advantage with respect to the Caltrans contract.
The court also addressed punitive damages, finding: “Although the Court finds by clear and convincing evidence that the defendants acted with malice when they filed the stop payment notice, the Court lacks actual evidence of the defendants’ financial condition at the time of trial necessary to lawfully asses the correct amount of such exemplary damages.”
An amended judgment was entered in favor of Mercer-Fraser. Harsh filed a timely notice of appeal.
DISCUSSION
Stop Payment Notice and the Litigation Privilege
Harsh argues the stop payment notice filed in conjunction with the litigation was absolutely privileged under Civil Code section 47, subdivision (b). Therefore, the trial court erred in finding the stop payment notice subject to “good faith.”
Section 47, subdivision (b) provides that a publication or broadcast made as part of a judicial proceeding is privileged. The privilege, which is absolute when applicable, applies to any communication (1) made in judicial or quasi-judicial proceedings, (2) by litigants or participants authorized by law, (3) designed to achieve the objects of the litigation, and (4) having some connection or logical relation to the litigation. (Silberg v. Anderson (1990) 50 Cal.3d 205, 212; Sylmar Air Conditioning v. Pueblo Contracting Services, Inc. (2004) 122 Cal.App.4th 1049, 1058.)
The purpose of the litigation privilege is to allow free access to the courts without fear of harassment by subsequent tort actions. In order to achieve this purpose, we give the privilege a broad interpretation. (Action Apartment Assn., Inc. v. City of Santa Monica (2007) 41 Cal.4th 1232, 1241 (Action).)
Although originally applied only to defamation actions, the litigation privilege has been extended to any communication, not just publication, having some relation to a judicial proceeding and to all torts other than malicious prosecution. In addition, the privilege is not limited to the courtroom, but includes actions by administrative bodies and quasi-judicial proceedings. (A.F. Brown Electrical Contractor, Inc. v. Rhino Electric Supply, Inc. (2006) 137 Cal.App.4th 1118, 1126 (A.F. Brown).)
The litigation privilege is absolute where applicable, however the privilege protects only prelitigation communications having some relation to an anticipated lawsuit. Courts have concluded a prelitigation statement is protected by the litigation privilege only when the statement is made in connection with a proposed litigation that is contemplated in good faith and under serious consideration. In effect, the prelitigation statement must have some connection or logical relation to the action. (Aronson v. Kinsella (1997) 58 Cal.App.4th 254, 262-263.)
As relevant here, the litigation privilege extends to statutory stop payment notices. (A.F. Brown, supra, 137 Cal.App.4th at pp. 1127-1128.) However, the stop payment notice is a prelitigation statement and is privileged only if it is contemplated in good faith and has some connection or logical relation to the action. (Id. at p 1128.) Therefore, Harsh is incorrect in stating the stop payment notice is absolutely privileged under the litigation privilege.
Harsh also argues the good faith standard applicable to prelitigation communications only applies where no litigation has been filed. According to Harsh, because the stop payment notice was filed in conjunction with litigation, it is absolutely privileged. However, a stop payment notice is not part and parcel of a litigation proceeding. Instead, a stop payment notice is a necessary precondition to the filing of a cause of action to enforce the notice. A party must serve the stop payment notice before any action to enforce it can exist. The stop payment notice is a prelitigation statement subject to the requirements of good faith and a logical connection to the action.
In the alternative, Harsh contends that, even if the trial court applied the proper standard, it erred in finding the litigation privilege inapplicable. After considering the trial court’s analysis of both the record and the law, we disagree.
First, we review the mechanics of a stop payment notice, which constitutes a lien on the property or earnings of the contractor held by the public agency. When a public entity receives a stop payment notice in connection with a public works project, it must withhold from the contractor sufficient funds due or to become due to the contractor to pay the claim stated in the stop payment notice and to provide for the public entity’s reasonable cost of any subsequent litigation. (§ 9358, subd. (a).) When the notice is filed, the claimant has a right against the earnings of the contractor held by the public agency and, in effect, imposes a trust obligation on the agency. (United States Fid. & Guar. Co v. Oak Grove Union School Dist. (1962) 205 Cal.App.2d 226, 231.)
To enforce payment of the claim stated in the stop payment notice, the claimant must have first given a preliminary notice if not exempted; and second, given the stop payment notice within the required time limits. (§ 9356.) An action against the contractor and the public entity to enforce payment shall be commenced at any time after 10 days from the date the claimant gives the stop payment notice. (§ 9502, subd. (a).) The action must be commenced not later than 90 days following the expiration of the period within which a stop payment notice must be given. (§ 9502, subd. (b).) If an action is not commenced within this timeframe, the notice ceases to be effective and the public entity must release the funds withheld pursuant to the notice. (§ 9502, subd. (d).) An enforcement action may not be brought to trial, nor may judgment be entered, before expiration of the time within which a stop payment notice may be given. (§ 9502, subd. (c).)
The trial court noted Harsh bore the burden of establishing the applicability of the litigation privilege. The court considered Daniel Harsh’s testimony that he filed the stop payment notice in anticipation of litigation over money owed his company by Mercer-Fraser. However, the court also looked at the “totality of the circumstances” in determining whether Harsh seriously and in good faith contemplated litigation logically related to the stop payment notice when it was filed. “Whether a prelitigation communication relates to litigation that is contemplated in good faith and under serious considerations is an issue of fact.” (Action, supra, 41 Cal.4th at p. 1251.)
The court pointed out that the stop payment notice stated Mercer-Fraser owed Harsh an unpaid balance of $120,750, a sum based on a daily rate of $450 and non-payment for five and one-half months. As the court observed, “this sum appears to far exceed the claimed daily rate multiplied by the number of days within a five and one-half month period.” In the initial Shasta County unlawful detainer action, alleging the same daily rate, Harsh claimed $54,000 past due. The second Shasta County unlawful detainer action alleged a past due amount of $141,450. Each of the unlawful detainer complaints was verified by Daniel Harsh.
In finding a lack of good faith by Harsh, the court determined Harsh “did not seriously and in good faith contemplate litigation, but rather utilized the stop payment notice provisions of the Civil Code in an attempt to force plaintiff into a position of paying defendants or having its payment withheld by Caltrans. The policy consideration under the litigation privilege is not advanced, where the party is not seriously considering litigation.”
In support of this conclusion, the court reiterated that the amount claimed in the stop payment notice far exceeded what would have been owed and Harsh failed to file a breach of contract action for more than a year after the claimed breach. Nor did Harsh commence the action to enforce the payment of the claim set forth in the stop payment notice as required under section 9502, subdivision (a). Finally, Harsh was “required by the very process they utilized, to commence an action against both CalTrans and [Mercer-Fraser] to enforce payment of their claim.”
The court, as required, reviewed all the evidence surrounding the stop payment notice and found the litigation privilege did not apply. A court’s determination on the matter of good faith is a question of fact, and we apply the deferential substantial evidence standard of review. We accord the court’s evaluation of this evidence deference and will not substitute our judgment for that of the trial court. (Action, supra, 41 Cal.4th at pp. 1251-1252; Chino Commercial Bank, N.A. v. Peters (2010) 190 Cal.App.4th 1163, 1169.) We find the court did not err in finding the litigation privilege did not apply.
Cross-Complaint
Harsh asserts the trial court abused its discretion in denying leave to file a cross-complaint. According to Harsh, the court did not find bad faith on its part and therefore leave must be granted.
Harsh contends the trial court abused its discretion under Code of Civil Procedure section 426.50, governing compulsory cross-complaints. Code of Civil Procedure section 426.50 provides a court “after notice to the adverse party, shall grant, upon such terms as may be just to the parties, leave to . . . file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith.” Although Harsh claims the proposed cross-complaint “contained causes of action which arguably were ‘related causes of action’ as that term is defined in Code of Civil Procedure section 426.10[, subdivision ](c),” the record before us is devoid of any proposed cross-complaint. Faced with this void, we cannot address Harsh’s claim.
What is before us is the fact that the court continued the original trial date for almost a year to allow Harsh to file a cross-complaint. Harsh did not file a motion for leave to file a cross-complaint, but instead on the morning of trial, three years after the case had been filed, requested leave to file a cross-complaint. Under these circumstances, we cannot find the court erred in denying the motion to file the cross-complaint.
DISPOSITION
The judgment is affirmed. Mercer-Fraser shall recover costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1) & (2).)



RAYE , P. J.



We concur:



MURRAY , J.



HOCH , J.