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Sacramento Superior Court Supports Disgorgement from Building Contractor Lacking License During Any Part of a Construction Project; Contractor Compelled to Refund All Payments Received During Entire Project
June 8, 2009
In This Issue
Understanding, Interpreting, and Negotiating Your Construction Contract
Speakers: William L. Porter, Esq.
and Conor H. McElroy, Esq.
July 30th, 3:00pm

California Construction
Claim Remedies – Procedures,
Deadlines and Forms

Speaker: William L. Porter, Esq.
Aug. 4, Oct. 6 & Dec. 1,
3:00pm - 5:00pm


Sacramento Builders Exchange
916-442-8991 ext. 105

www.sbxchange.com

info@porterlaw.com
Tel 916-381-7868
Fax 916-381-7880
7801 Folsom Boulevard, Suite 101
Sacramento, California 95826

This is a follow-up to my August 2008 article advising that, based on a series of recent cases, California courts would be entitled to order any building contractor or subcontractor who performed construction work with a contractor’s license that was suspended during part of the project to refund all sums the contractor was paid for all work on the entire project. This rule would apply not only to work performed by the contractor while the license was suspended, but also to work performed while the license was properly in place. This follow up article is to inform you that the Sacramento Superior Court has clearly adopted this doctrine.

The names of the parties involved in the Sacramento case are not important and may only cause embarrassment to those involved. What is important is for all contractors and subcontractors to understand clearly that any contractor or subcontractor who performs work on a construction project in California without a valid contractor’s license in place during the entire time they work on the project may be compelled by Court Order to refund every penny the contractor received for working on the entire project. Here is why: As harsh as this result may seem, a series of interconnected California statutes and court cases leads to this undeniable conclusion. The analysis begins with California Business and Professions Code Section 7031(a) which provides in part:

“Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract . . .” (emphasis added)

Business and Professions Code section 7031(a) thus sets forth the rule that, subject to very limited exceptions, a contractor must be licensed at all times during its work on a construction project in order to pursue a claim for any payment as to that project. Following this section is section 7031(b) which raises the stakes for unlicensed contractors even further:

“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.” (emphasis added)

Section 7031(b) thus sets forth the additional rule that not only is the contractor who is unlicensed at any point during the construction project not entitled to payment on that contract, but the party who paid the contractor who was unlicensed is entitled to sue that contractor to recover all sums it paid to that unlicensed contractor in relation to the entire project.

Subject to very limited exceptions, the courts have supported this harsh result and it is clear that this policy is now firmly entrenched in the law. Note the following examples:

In MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Company, Inc. (2005) 36 Cal.4th 412 the contracting corporation sought payment of $1.3 million it alleged it was owed for structural steel work. Unfortunately, the corporation did not receive its C-51 Structural Steel License until three weeks after it had signed the contract to perform the structural steel work. By that time the corporation had already commenced performing the steel work. The California State Supreme Court, citing Business and Professions Code section 7031(a), ruled that where the contractor is not licensed at the time it signs the contract and it commences work under the contract before the license is issued, the contractor is barred from bringing an action to recover any payment it alleges it is owed for performing the work. The court conceded that the contractor would not be barred from recovering what it was owed if it had merely signed the contract before the license was issued but did not actually begin work on the project until after the license was issued. However, the court held that because the contractor actually began work before the license was issued it would be unable to bring a lawsuit to collect for any of the work it performed during the entire project.

In Wright v. Issak (2007) 149 Cal.App.4th 1116 the contractor significantly underreported its payroll figures to its workers compensation carrier in relation to a private project. The Court of Appeal considered the above statutes and also considered the impact of California Business and Professions Code section 7125.2(a), which states in part:

“The failure of a licensee to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law . . .”

Based on this statute the court concluded that the act of underreporting working hours to the worker’s compensation carrier was the equivalent of failure to maintain workers compensation insurance coverage. The court therefore ruled that under section 7125.2(a) this resulted in the automatic suspension of the license by operation of law beginning when the misrepresentation was made. In addition, Under sections 7031(a) and (b) since the contractor was not “duly licensed” . . . “ at all times during the performance of that act or contract” the contractor was required to pay back to the property owner all sums the owner paid to the contractor for the contractor’s work on the entire project.

In Great West Contractors, Inc. v. WSS Industrial Construction, Inc. (2008) 162 Cal.App.4th 581 the contractor wisely produced an official certification of licensure from the California Contractors’ State License Board demonstrating that it was properly licensed at the time it signed the contract to perform the work. However, on further examination it was shown that the contractor actually began work two months before it signed the contract. Thus, while the contractor was properly licensed when it signed the contract, it was not licensed when it commenced work on the project. The Court of Appeals therefore ruled that under section 7031(a) the contractor was barred from recovering any payment for work it performed on the entire project.

In Goldstein v. Barak Construction (2008)164 Cal.App.4th 845, the Court relied on section 7031(a) and (b) and the above Great Western Contractors and MW Erectors cases and held that since the contractor Barak was unlicensed during the first three months of construction work on the Goldstein residence, Barak would be required to “disgorge” or repay the entire $362,660.50 the Goldsteins had paid to Barak. The court also granted the Goldsteins a “prejudgment writ of attachment” under Code of Civil Procedure section 483.010 against Barak’s personal assets in the amount of $385,388.00, which included the principal sum paid plus attorney fees and costs. The Court of Appeal affirmed the lower court and agreed that Business and Professions Code section 7031(a) and (b) required disgorgement to the Goldsteins of all sums they had paid to Barak. The Court of Appeal also agreed that Code of Civil Procedure section 483.010 allowed the Goldsteins a prejudgment writ of attachment on Barak’s assets to secure payment of these sums, plus attorney fees and costs.

The results from these cases are clear. If a contractor is unlicensed at any point during its construction work on a project, the general rule is that not only will the contractor be unable to sue for any sum it contends it is owed for the work, but it may also be required to actually disgorge all sums it received in relation to the entire project, including for work performed while the license was properly in place. This rule may be enforced by a prejudgment writ of attachment issued by the court to encumber all of the contractor’s assets.

Despite this seemingly harsh result, the language and intent of these statutes are clear and will be enforced by the courts. Contractors and subcontractors are well advised not to perform any work on any construction project without a valid California contractor’s license in place at all times. Failure to follow this simple rule may result in the denial of the right to sue for sums owed and a disgorgement of all sums received in relation to the entire project. The order of the court in this regard can be enforced by a prejudgment writ of attachment levying on all the contractor’s assets.

Article written by William L. Porter. Mr. Porter is a shareholder in Porter Law Group, Inc. in Sacramento and can be reached at (916)381-7868 or at bporter@porterlaw.com. To learn more about Porter Law Group, Inc. visit the firm’s website at www.porterlaw.com

info@porterlaw.com
Tel 916-381-7868    Fax 916-381-7880
7801 Folsom Boulevard, Suite 101    Sacramento, California 95826
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