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Class A (General Engineering) licensed subcontractor deemed duly licensed even though the contract required C-12 license (Earthwork and Paving)
Posted by: Jonathan Bowne
November 03, 2011

Any contractor seeking to assert a claim for payment in a lawsuit or arbitration must show that it was "duly licensed" to perform its work. In Pacific Caisson & Shoring Inc. v. Bernards Brothers, Inc., 198 Cal.App. 681 (2011) (published August 19, 2011) the question was whether a subcontractor was "duly licensed" when it held only a Class A license (General Engineering) even though the contract documents required a C-12 license (Earthwork and Paving).

The case arose from a public works project to construct a medical center. The claimant subcontracted to perform temporary excavation and support work. The subcontractor also agreed to provide certain engineering calculations and design parameters. The prime contract documents (which were incorporated into the subcontract) provided that this work was to be performed by a C-12 (Earthwork and Paving) licensed contractor. The subcontractor did not have a C-12 license but it did have a Class A license (General Engineering).

Eventually the subcontractor filed a lawsuit to collect allegedly unpaid amounts due for its work. At trial the prime contractor sought to invalidate the claim on the basis that the subcontractor was not "duly licensed" because it did not hold the specified C-12 license. The trial court agreed, judgment was entered in favor of the prime contractor, and the subcontractor appealed.

On appeal, the subcontractor argued that the specified C-12 license was essentially a "lesser" license, and would have been superfluous on this project as it is fully encompassed within the Class A license requirements. The prime contractor none of that mattered because the C-12 license was explicitly specified in the contract documents.

The court of appeals agreed with the subcontractor and vacated the trial court's judgment. The court focused its analysis on the formal license classification descriptions for each license (see them here: Class A and C-12), and how they each qualified the subcontractor to perform the scope of work. The court essentially determined that the activities required in the subcontract fell beyond the purview of the C-12 license. The subcontract required specialized engineering knowledge and skill, along with the provision of calculations and temporary shoring work. The court concluded that these tasks were not the expertise of a C-12 contractor, but could be performed by a Class A contractor. Accordingly, the court held that the subcontractor was duly licensed notwithstanding its lack of the specified C-12 license.

The court also addressed the prime contractor's argument that the contract document requirement of a C-12 license should control the analysis. The court discarded this theory, noting that the laws allowing public entities to specify license classifications in contract documents were meant to facilitate the evaluation of bidder qualification not determine proper licensure in third-party payment claims.

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A sole proprietor contractor who uses wrong business name on contract is not barred from seeking payment under license laws
Posted by: Jonathan Bowne
June 21, 2011

As all contractors should know, Business and Professions Code section 7031 bars unlicensed contractors from seeking payment for work they have performed.  Cases interpreting this law are very strict, and courts have shown little mercy for even seemly small abnormalities in licensure.

For example, a contractor is not deemed licensed unless absolute unity exists between the party who holds the license and the party who enters into the construction contract at issue.  In one instance a court barred an unlicensed corporation from seeking payment even though its president and owner held a license in his own name, and manned the project regularly.  Opp v. St. Paul Fire & Marine Ins. , 154 Cal.App.4 ^th 71 (2007).  In this situation, the licensed president should have either contracted in his own name or had his license reissued to the corporation.  This would have created the requisite unity.         

Recently, a project owner sought to have that outcome extended to a sole proprietor contractor who accidently used a wrong business name on his contract.  The court refused to do so. 

 In David E. Ball v. Steadfast-BLK , Case No. C064357 (CA Dist. 3 Ct. App., Jun. 14, 2011) contractor David E. Ball, a sole proprietor, had a “sole owner” license in the name “Clark Heating and Air Conditioning”.  The CSLB allows sole owner contractors to put their individual license in the name of a “d.b.a.”.  He then contracted to perform work using the name “Clark Air Conditioning and Heating”, apparently accidently transposing the last four words.

Eventually Mr. Ball filed a collection lawsuit.  The project owner challenged the claim on the basis that Mr. Ball was unlicensed and therefore barred from seeking payment pursuant to Business and Professions Code section 7031.  The trial court agreed, and Mr. Ball appealed.

On appeal the owner pointed to the discrepancy between the names in the contract and on the license, asserting that “Clark Air Conditioning and Heating” (the name in the contract) could not rely on the “Clark Heating and Air Conditioning” license.  

The owner argued that this was akin to a corporation entering into a contract in reliance on its owner’s individual license, citing to the Opp case noted above.  They also cited code sections mandating that contractors shall not conduct business in more than one name, and must notify the CSLB if they change names.  The owner was implying that by using a different business name Mr. Ball was creating a new entity and therefore was obligated to transfer his license to that new name/entity.               

The court dismissed these arguments, and reversed the trial court’s decision, to the benefit of Mr. Ball.  The court recognized that a fictitious business name (or "d.b.a.") is not a separate legal entity apart from the individual holding the name, and that while the license was in the name of “Clark Heating and Air Conditioning”, it was in actuality held by Mr. Ball.  Accordingly, while the contract was entered into as “Clark Air Conditioning and Heating”, it was in actuality entered into by Mr. Ball.  Therefore, sufficient unity existed between the contracting party and the license holder.

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Path cleared for CSLB to issue contractor's licenses to limited liability companies
Posted by: Jonathan Bowne
February 01, 2011

In September 2010 the governor signed into law Senate Bill 392, which amended contractor's license law to authorize the CSLB to issue contractor's licenses to limited liability companies ("LLC"). The law took effect on January 1, 2011, and mandates that the CSLB begin processing applications from LLC's before the end of this year.

An LLC is a fictitious business entity which combines some of the properties of a corporation and a partnership. Its relative ease of formation, flexibility, and tax treatment have made it a preferred entity for many small businesses.

Yet, previously, the CSLB could not issue contractor's licenses to an LLC and therefore contractors could not operate using this favored entity. Instead, contractors were limited to operating as a sole proprietorship, partnership, joint venture, or corporation. The LLC will be added to this list of options once the CSLB implements the SB 392 mandate.

The formation of an LLC is a relatively simple process, which begins with the filling of Articles of Organization with the California Secretary of State. Once the LLC is properly formed, and the CSLB is ready to accept applications, the LLC would apply for its own contractor's license.

SB 392 provides for heightened bonding and insurance requirements for LLC licensees. They must file a surety bond in the amount of $100,000 for the benefit of employees claiming damages for unpaid wages and fringe benefits. LLC's will also be required to carry liability insurance in an amount between $1,000,000 and $5,000,000 (depending on the number of persons listed as personnel of record for the LLC.). 

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California Appellate Court Holds That Contractor Must Return All Payments When Qualifier is Not Acting as a Manager
Posted by: William Last
August 11, 2009

Both California statutes and appellate courts have clearly set forth that if your contractor license is not in effect at the time you perform work you are not going to recover amounts that are due from the owner. In recent decisions, the California appellate courts have been expanding the definition of when a contractor's license is not in effect.

In a case which should be a caution to many contractors, the Fifth District Court of Appeal recently held that where the Responsible Managing Officer was no longer actively managing the business, the contractor's license was automatically suspended and the contractor was required to repay all money collected on a contract without deduction for the value of labor or materials.

The Case

The facts of the case, White v. Cridlebaugh 2009 WL 2245823, 09 Cal. Daily Op. Serv. 9586 (5th Dist. 2009) http://www.courtinfo.ca.gov/opinions/documents/F053843.PDF involved a time and materials contract between the plaintiffs and JC Master Builders, Inc. to build a new house in Kern County. The contract was entered into in March of 2006. Within a few months, the relationship soured both over White's concerns about the quality of the work and the contractor's failure to document its costs. White terminated the contract and JC Master Builders recorded a mechanic's lien against the property. The Whites reacted by suing JC Master Builders, its officers, and its license bond surety for breach of contract, breach of warranty, negligence, strict liability, fraud, and license violations. JC Master Builders filed suit for breach of contract, for the reasonable value of goods and services, and to foreclose its lien. The two suits were consolidated and went to trial before a jury.

Contractors State License Board records showed the responsible managing officer ("RMO") for the contractor as Robert Paul Diani. At trial, however, Mr. Diani testified that in 2004 he had turned over all dealings and daily work of the business to Terry E. Harper Cridlebaugh. Since that time Mr. Diani had been living in Peru. Diani also testified that he had given all the stock to Cridlebaugh. Cridlebaugh had never held a contractor's license.

The trial court granted the Whites' motion for a directed verdict under Business and Professions Code section 7031. Section 7031 provides that an unlicensed contractor is barred from recovering any payment for contracting work and further requires the unlicensed contractor can be sued for a refund all payments it does receive for such work.

The court's ruling terminated all the contractor's claims and ordered the contractor to repay all money collected from the Whites. The jury returned verdicts for the contractor on all the remaining claims against it. After trial, however, the court partially granted the contractor's motion for judgment notwithstanding the verdict. This order vacated the award of money to the Whites. The Whites appealed.

The court of appeals reversed and reinstated the award to the Whites. The court noted that under Business & Professions Code section 7068, a corporation must qualify for a contractor's license through a "responsible managing officer" (RMO) or "responsible managing employee" (RME) who is him/herself eligible for the same class of license. The court went on to note that under section 7068.2, if the qualifier leaves the corporation, the corporation has 90 days to replace the qualifier; otherwise, the license is automatically suspended. The court found that Diani had not been actively engaged in the business since August of 2004 and that no replacement had been qualified in his place.

Because JC Master Builders' license was automatically suspended, the court ruled that it was not only barred from suing to recover for its work, but that under section 7031, it must repay "all compensation paid to the unlicensed contractor..."

Discussion

Before 2001, section 7031(a) prevented contractors from suing to recover for their services without proving that they had been duly licensed at all times of performing the contract, but the courts would still allow them to raise the reasonable value of services as an offset against suits against them. In 2001, however, the Legislature added subdivision (b) to section 7031. Subdivision (b) provides that anyone who uses an unlicensed contract can recover all compensation already paid to the unlicensed contractor. An Assembly committee report on the bill explained that under the existing statute, unlicensed contractors could avoid the effect of the law by collecting money before performing their work. The report noted that the new provision would prevent this by allowing consumers to recover payments.

The stated reason for the amendment was to place the owner who had paid in the same legal position as the owner who had not.

In 2005 the California Supreme Court held that the statute would be enforced according to its terms and that a subcontractor who began performance before receiving its license was barred from recovery even for work performed after it was licensed. (MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co., Inc. (2005) 30 Cal.Rptr.3d 755, 36 Cal.4th 412, 115 P.3d 41).

In Goldstein v. Barak Construction (2008) 164 Cal.App.4th 845, 79 Cal.Rptr.3d 603, the Court of Appeal extended this rule to subdivision (b) by holding that owners suing a contractor who had obtained a license after beginning work, could recover not only payments made before the contractor was licensed, but those paid after the contractor had been licensed despite the fact that the "at all times" provision is only contained in the provision relating to the contractor's ability to recover.

Business and Professions Code section 7068.2 provides that a licensee must replace an RMO or RME within 90 days after the RMO or RME "disassociates" from the licensee. Replacement requires filing a form designating a new qualifier. If the form is not filed, the license is automatically suspended 90 days after disassociation whether or not the CSLB has received notice. Failure to give notice, however, can result in disciplinary action against both the licensee and the qualifier. Moreover, the qualifier remains responsible for violations of the licensee.

A qualifying individual is responsible for exercising "direct supervision and control" of the licensee's construction operations as needed to assure compliance with the license law. (Bus. & Prof. Code § 7068.1). In White it was obvious that Mr. Diani's prolonged absence from the country resulted in disassociation and triggered the need for a new RMO or RME.

Conclusion

All too often contractors believe the licensing regulations are "technical" matters with little effect on their day-to-day business. This is apparent in the White case in which Mr. Diani basically abandoned the business to Mr. Cridlebaugh without informing the CSLB in order that Mr. Cridlebaugh could make a living from it.

It is fairly common for a licensed person to "loan" the license by using it to qualify a partnership or corporation as an RMO or RME without actually intending to supervise its activities. The courts, however, view the licensing laws to be consumer protection statutes and will allow owners to look beyond the bare fact that a license was issued to examine whether it was properly issued and maintained. It is a violation of the license laws to "loan" a license and such a license has no effect. (Buzgheia v. Leasco Sierra Grove (1997) 60 Cal. App. 4th 374, 386, 70 Cal. Rptr. 2d 427, reh'g denied; Rushing v. Powell (1976) 61 Cal. App. 3d 597, 605-606, 130 Cal. Rptr. 110 (5th Dist. 1976).

This issue may also arise in partnerships and "family" businesses where the qualifying individual becomes sick, incapacitated, or enters into a semi-retirement. Even if not fully "disassociated" from the business, once the qualifier is no longer supervising the work, a court is likely to conclude that the license has been suspended.

The White case demonstrates that the courts will interpret the technical requirements of the licensing laws strictly and will readily impose harsh results on contractors who fail to adhere to them regardless of the equities between the parties. On that point it is notable that the jury found that JC Master Builders, though negligent, had caused no damage to the Whites and that, in fact, the Whites had breached their contract with the company. Nevertheless, the Court of Appeal determined that section 7031 applied and that the company would have to refund them everything they paid. Contractors should be prepared to show that their qualifying personnel are properly licensed and actively engaged in supervising operations in case their bona fide status is questioned in litigation.

©2009 Frederick Northrop and William C. Last, Jr. wrote this article. Mr. Last is an attorney who has been specializing in Construction Law for over 30 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-696-8350. A number of his past articles can be found on his website (lhfconstructlaw.com). Mr. Northrop is an attorney at Last & Faoro who specializes in construction law. This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.

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