Unlicensed Contractor Required to Disgorge All Money Received

Money on hookMost 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.

10 Responses to “Unlicensed Contractor Required to Disgorge All Money Received”

    • amanda stanley

      Question: Can a subsequent purchaser of a home maintain an action for Disgorgement of Payments Made to Unlicensed Contractor 10 years after he purchased the home. It seems that B & P code only addresses the liability of the payor to bring such action.

      Reply
      • Garret Murai

        Hi Amanda. Business and Professions Code section 7031 provides that “a person who utilizes the services of an unlicensed contractor may bring an action,” so a subsequent purchaser since he/she did not “utilize the services of an unlicensed contractor” would not be able to bring a disgorgement claim against an unlicensed contractor with whom they did not contract with.

  1. Rob

    I have a case where a lawyer wanted to hire me a trucking company for a water truck on a grading project and did.when his grader quit he asked if I knew a grading contractor I said yes he asked if I would get him to finish the already started project because he t(the lawyer )was out of the area could I sign the contract with the grader and he singed a contract of mine that included the water truck and grading .and hurry with the completion of the grading now he will not pay the final phase of the grading . So I started a small claims against the lawyer and he is counter suing me for all the money paid for the water truck and grading under the 7031b code any advice

    Reply
    • Garret Murai

      I hate to be the bearer of bad tidings, but if you were doing work which required a contractor’s license, but didn’t hold a license, you can be sued to disgorge all compensation paid to you.

      Reply
  2. joeandolina

    I have been a contractor for over 20 years and customers ask me all the time, “are you licensed and insured?” I proudly answer yes, because I am. At the end of the project I sometime ask the customer if they had checked to see if I was indeed licensed and insured. I am always amazed at how many of them say no? I always help educate my customers on the importance of checking their contractor before hiring. Most consumers do not even realize that they can get sued if an employee or even the contractor himself gets injured on your property. If someone just happen to fall from a ladder and break their back on your property, and they are not licensed and insured, you could loose your home.
    My workman’s compensation rates went up 17% this month. In real monies, this ends to be $1235 per month per employee. ( I have 7 employees) If an unlicensed contractor was bidding a project, he could bid a lot lower than I could since he would not be paying these insurance, that as a contractor, I have to pay.
    I recently became A+ Certified contractor, through the Verified Contractor Service. They are an independent company that perform contractor screening for license and insurance along with actual customer reference checks of my work-credentials annually. I simply direct my customers to my contractor profile page on the website, so they can see all of my verified credentials. I also have A+ Certified stickers on my work trucks so people can identify me as being verified. It has actually helped me sell more jobs and I am proud to show them off. If you are not sure about who you are hiring, you can go to: checkacontractor.us this company will send you a free contractor report card on anyone with a business name and tell you if they are register contractors.

    Reply

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