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.

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

  1. Liz Price

    My example is, I hire a husband and wife designer/contractor team. The customer writes the check to the designer who doesn’t have a license, but whose husband and his crew are a licensed, bonded insured. Where are the lines here?

    • Garret Murai

      It depends on who the contract is with. If the contract is with the licensed husband then the disgorgement statute wouldn’t apply. If the contract is with the unlicensed wife the wife would have had to have been licensed to “sub” the work out to her husband.

  2. Liz Price

    May I ask a question? When the disgorgement is ordered, is it for the profits? Or is it for the materials and appliances?

    Say for example you remodel a kitchen and bath for a customer. Must that contractor (the one without the license) disgorge payments for delivery of items like ranges, microwaves, refrigerators, appliances, countertop stuff? Much of that doesn’t require a license for installation. I can see how Section 7031 applied to skilled trade work, like for the electrical, plumbing, structural, license-required work. But some types of work don’t require licensing, and repaying a customer for a $7,000 Sub Zero fridge, or a $10,000 hot tub itself—that seems unbelievable. And what if the subcontractors are all licensed and the work is good?

    • Garret Murai

      Hi Liz. The disgorgement statutes require disgorgement of all monies paid to a contractor for work which a license is required. Courts have even gone so far as to say that even where some work wouldn’t have required a license, so long as some of the work required a license, disgorgement of all monies paid means just that. Similarly, courts have held that even where subcontractors are properly licensed, if the direct contractor is not properly licensed (I use the term “direct contractor” because to call them a “general contractor” would be inaccurate since it applies that they have a Class B General Contractors license), the direct contractor must disgorge all monies paid. This is why courts have called Business and Professions Code section 1031 “harsh,” “draconian” and even “unfair” … but, importantly, enforceable.

  3. Mike

    Public utilities are exempt when working under specified conditions… Are public utilities required to use licensed contractors or are the contractors they use exempt from public utility projects?

    • Garret Murai

      Hi Mike. Thanks for reading. You’re correct. Public utilities in certain circumstances are not required to used licensed contractors. There are several Business and Professions Codes which apply. The first is Business and Professions Code section 7042 which provides that the Licensing Law “does not apply to public utilities operating under the regulation of the State Railroad Commission on construction, maintenance and development work incidental to their own business.” The second is Business and Professions Code section 7042.1 which provides that the Licensing Law does not apply to:

      [G]as, heat, or electrical corporations and their subsidiaries that are regulated as public utilities by the Public Utilities Commission shall not conduct work for which a contractor’s license is required, except under any one or more of the following conditions:
      (1) The work is performed upon the gas, heat, or electrical corporation’s properties.
      (2) The work is performed through a contract with a contractor or contractors licensed pursuant to this chapter or the work is
      performed for low-income citizens pursuant to a program authorized by order of the Public Utilities Commission.
      (3) The work is undertaken by the gas, heat, or electrical corporation in furtherance of the generation, transmission, or
      distribution of electricity, gas, or steam, whether within or without the service area of the corporation, if any work performed within a
      structure and beyond a customer’s utility meter is necessary to protect the public safety or to avoid interruption of service.
      (4) The work is otherwise exempt from the provisions of this chapter.
      (5) The work is performed to comply with programs or procedures ordered or authorized by the Public Utilities Commission not
      inconsistent with the objectives expressed in Chapter 984 of the Statutes of 1983.
      (b) For the purposes of this section, the following terms have the following meanings:
      (1) “Gas, heat, or electrical corporation properties” means properties which a gas, heat, or electrical corporation owns or
      leases, or over which it has been granted an easement for utility purposes, or facilities which a gas, heat, or electrical corporation
      owns or operates for utility purposes.
      (2) “Subsidiaries” means subsidiaries of a gas, heat, or electrical corporation regulated as public utilities by the Public
      Utilities Commission which carry out activities solely for utility purposes.
      (c) It is the intention of the Legislature in enacting this section that public utility regulations be clearly based on the
      principle that the energy conservation industry should be allowed to develop in a competitive manner, as declared in Chapter 984 of the
      Statutes of 1983.

      And, finally, Business and Professions Code section 7042.5 provides that the Licensing Law “does not apply to public utilities operating under the regulation of the Public Utilities Commission on construction, maintenance, and development work incidental to their own business, or to those activities of a cable television corporation subject to regulation pursuant to Section 768.5 of the Public Utilities Code, except underground trenching by a cable television corporation within the public streets, other than that necessary solely for the connection of its distribution system to, or within the properties of, subscribers or potential subscribers.”

      • Mike

        Thank you Garret. Does this apply to any contractor hired by the public utility to perform work as stated above?

      • Garret Murai

        Hi Mike. Correct, so long as it falls within one of the exceptions of the Business and Professions Code a contractor’s license is not required.

  4. 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.

  5. 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

    • 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.

    • 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.

      • 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.

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