John McGill
One of the legal issues that the trades are going to need to address, sooner rather than later hopefully, is the well intentioned but typically wrongly applied Business and Professions Code statute that provides if you are not properly licensed at all times during the work, then you cannot come to court to obtain compensation that you may be owed. (§7031(a)) This part seems fair enough. The follow on provision though requires, or at least the courts interpret it as requiring, that if you are not properly licensed the whole time, then you must disgorge all payments you’ve received as well. There should be more required before taking such a draconian measure but there isn’t; and that is simply not fair and defeats the purpose of the legislation.
Business and Professions Code section 7031(b) provides “Except as provided in subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”
The way the court’s are interpreting section 7031(b) is to hold that if the contractor is not properly licensed at all times, then the contractor must return any money paid for the work, regardless the unfairness. The courts acknowledge the reasons for the rule in the first place- to deter the unlicensed from contracting- but nevertheless bring the hammer hard against anyone that is caught with a lapsed license. Interestingly too, attorneys that represent contractors and belong to trade related organizations are the ones bringing these claims on behalf of Owners who then end up getting a free project. This does nothing to protect against unlicensed activity and provides a windfall on a technicality that often puts the unfortunate but otherwise qualified contractor out of business
In Judicial Council of CA v Jacobs Facilities etal. the court of appeals ruled that because Jacobs Facilities was not licensed the entire time it performed the work, that it must disgorge over $18+M back to the State. Jacobs Facilities was properly licensed at the start of the project but then through reorganization it became part of a larger Jacob’s organization. The same group performed the work and the project turned out fine, except that Jacobs Facilities sued to get paid for extra work. As the court noted: “Jacob’s failure of licensure was a result of the manner in which it carried out its corporate reorganization, which had no apparent impact on the manner in which it performed services under the contract.” (Fn 14)
Judicial Council raised the licensure defense and the court of appeals held that Jacobs was not properly licensed the entire time, notwithstanding that all of the construction team was the same before the corporate reorganization as after. Rather than look at the purpose behind the law, the court looked to the remedy to be applied- disgorgement. The fact that disgorgement served no purpose other than to give the State a free building was of no consequence.
The problem here is that the court in Judicial Council of CA apparently assumed that because a party can sue to recover from an unlicensed contractor that they automatically win if they can show the unlicensed condition. This is not what the Code says and it avoids the key role that courts typically play in these situations- determining the fairness and/or legality of the legislation. The Judicial Council court disclaimed any ability to make such a determination and relied on a strict reading of the Code. But the Code does not say that disgorgement is automatic, it merely says that the Owner can sue for that remedy. Presumably when the Owner does, the court will review the bases for the claim and the facts that give rise to claim for disgorgement. In the right circumstances, disgorgement is proper, but not always and not automatically.
In the case of Jeff Tracy Inc v City of Pico Rivera, the contractor bid on a public contract landscape project. The bid documents required the contractor have an A license. Tracy, dba Land Forms, bid and alleged it complied with the license requirement. Tracy/LandForms had a C-27 license and hired an RMO/RME with an A license. The problem was that the RMO/RME went to the project only 3 times, did not have an office at Land Forms, did not know any of the subcontractors, and was paid a modest monthly stipend, among other problems.
The court found that Tracy/LandForms was not properly licensed. The qualifier was not involved in the business and the license that Tracy/LandForms itself held was not the required license. At issue in the case was the fact that Tracy/LandForms was entitled to a jury trial but the trial court denied the request and held a bench trial. The case was remanded for the jury trial, but the result seems a foregone conclusion. There was no dispute that the company did not have the correct license and that, in and of itself, means it performed the work without a license. In this instance, Buss. & Prof. Code §7031 is appropriately applied. The result is harsh to be sure, but the end run on the license requirement was a gamble that did not pay off.
The Judicial Council of CA court determined disgorgement based on facts that it recognized were inconsistent with the legislation’s express purpose. Jacobs Facilities was not unlicensed, it was reorganized. It had the appropriate licenses and it performed and completed the contract. Disgorgement should not have been predetermined, but instead based on a complete review of the evidence. That’s what happened in Tracy/LandForms because in that case the court recognized the subterfuge: the contractor was not qualified to do the A license work and so should not have bid, let alone taken, the contract. The courts do have the right to review a claim for disgorgement against the backdrop of the license requirements- and they should.
This issue will raise its head again and again. Attorneys are looking closely at the license of contractors to see if there is a basis for disgorgement. These cases are being decided more by fiat than on the facts and that is something that contractors and contractor organizations should be very concerned about. The consequences are significant and draconian and for a simple oversight you give back all the money you were paid and the Owner gets a free project.
Judicial Council of CA is going before the California Supreme Court. Hopefully the Court looks at the statute and the unfairness that is included and how its present application does nothing to advance the purpose of the licensing law. If the Court does not acknowledge that lower courts have discretion to consider all facts before ordering disgorgement, then it may be time for contractors to get in touch with Sacramento and get those folks to clarify when disgorgement is the appropriate remedy, and more importantly, when it is not.
Bio: John McGill is an attorney and represents contractors and suppliers throughout the Bay Area and Northern California in both private and public work disputes and transactional, matters. He is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law. Second Ed. Contact: 925-952 5403 or 707-337-1932. Email johnmcgill310@gmail.com
***
Category