Most California contractors are familiar with Business and Professions Code section 7031. And if you’re not, you should. Variously described by California Court’s as “draconian,” “harsh[ ]” and “[u]njust[ ]” but, nevertheless enforceable, Business and Professions Code section 7031 prohibits unlicensed or improperly licensed contractors from: (1) suing to recover compensation for work requiring a license; and (2) requiring such contractors to disgorge all compensation paid for such work.
In Twenty-Nine Palms Enterprises Corporation v. Bardos, Case No. E051769 (November 8, 2012), the California Court of Appeals for the Fourth District affirmed disgorgement by an unlicensed contractor of the entire amount paid to him under his contract – a whopping $751,995.
In Twenty-Nine Palms, Cadamus Construction Co. (“Cadamus”), a sole proprietorship owned by Paul Bardos, submitted a bid to Twenty Nine Palms Enterprises Corporation (“Palms”), to construct a temporary access road and parking lot for a casino operated by Palms for the sum of $751,995. Cadamus’ bid was accepted by Palms and Cadamus finished its work and was paid in full around May 2007. However, at the time it performed its work, Cadamus did not have a contractor’s license, which it did not obtain until October 2007.
At trial, Palms filed a summary judgment motion asserting that Cadamus, as an unlicensed contractor, was required to disgorge the entire $751,995 paid under Business and Professions Code section 7031. The trial court agreed and entered judgment in favor of Palms.
On appeal, Bardos argued that the trial court erred in finding that Cadamus was an unlicensed contractor because Bardos had another construction company – Bardos Construction, Inc. (“BCI”) – which had a license. The Court of Appeals disagreed explaining that “[t]he problem with Cadamus’s argument is that BCI, a corporation, is a separate legal entity from Bardos and Cadamus.” Thus, simply because BCI, a separate company, had a contractor’s license, did not mean that Bardos, as an individual, had a contractor’s license.
Bardos next argued that, even if Cadamus was required to hold its own contractor’s license, Cadamus had satisfied the “substantial compliance” exception of Business and Professions Code section 7031. That section, explained the Court of Appeals:
[P]ermits a court to find that there has been “substantial compliance with licensure requirements . . . if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith in maintaining proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning that it was invalid.”
As to the first factor, the Court of Appeals held that Cadamus failed to satisfy this factor because Cadamus was not licensed prior to the performance its work for Palms. As to the second and fourth factors, the Court of Appeals held that Cadamus had not acted reasonably and in good faith and promptly because it was not until after the construction project was completed that it attempted to obtain a license. And finally, as to the third factor, the Court of Appeals held that Cadamus knew that it did not have its own contractor’s license.
The obvious lesson here is – make sure you have a valid contractor’s license. However, the case also provides an important practice pointer – In California, a contractor’s license can be issued to an entity or an individual, but not both. Whether you work as a sole proprietorship, corporation, or LLC, if you contract, each entity must have its own contractor’s license.