Proving Contractor Licensure in California. The Tribe Has Spoken

Survivor tribal council

As I mentioned in an earlier post, in California you must “prove” you’re a licensed contractor in a construction case. But in whose hands are you entitled to place your fate  – the judge or the jury?

Well, the tribe has spoken.

Jeff Tracy, Inc. v. City of Pico Rivera

In Jeff Tracy, Inc. v. City of Pico Rivera, Case Nos. B258563 and B258648, California Court of Appeals for the Second District (September 15, 2015), general contractor Jeff Tracy, Inc. doing business as Land Forms Construction (“Land Forms”) was walloped with a nearly $5.5 million judgment for being improperly licensed on a park project owned by the City of Pico Rivera (“City”). The judgment followed a bench trial over Land Form’s objection that it was entitled to a jury trial.

Note: As I’m sure you noticed, Land Forms was the plaintiff, and it initiated the action claiming that the City had improperly withheld approximately $500,000 in liquidated damages under the parties’ construction contract. The bidding documents for the project required that bidders hold a Class A Engineering contractor’s license, which Land Forms did have. However, about a month before trial, the City filed a motion to file a cross-complaint against Land Forms on the ground that recently discovered information revealed that Land Forms used a “sham” Responsible Managing Employee (“RME”) for its Class A license, James Nale, when Mr Nale was never a bona fide employee of Land Forms, failed to adequately supervise the Project, and was not actively involved in Land Forms business. I mention this because I probably get two to three calls a month from individuals and companies asking me to review agreements, variously called “consulting agreements,” “shareholder agreements,” etc., in which an individual with a contractor’s license is trying to associate his or her contractor’s license with another company, for a fee of course. I’ve declined to review these types of agreements, and this case is a good example, of why.

At trial, Mr. Nale, Land Form’s RME for its Class A license, testified that he was never an employee of Land Forms. Rather, he said, he was supposed to have been a Responsible Managing Officer (“RMO”). He received stock worth 20% of Land Forms, but the stock had to be returned on demand. He was paid $2,500 per month, which was later reduced to $1,000, and he never received a W-2 or 1099 from Land Forms. Moreover, Land Forms never provided him with an office, computer, email address, or business cards. And while he had visited the site three times, he never saw the project plans, could not name a single subcontractor on the project, did not know if the project had a superintendent, and could not recall directing or advising Land Forms as to what needed to be done on the project. At the close of evidence, the trial court ruled in favor of the City, finding that Land Forms was not properly licensed, and ordered that Land Forms disgorge the nearly $5.5 million it had been paid by the City pursuant to Business and Professions Code section 7031.

Land Forms appealed.

The Court of Appeal Decision

On appeal, Land Forms argued that it should have been entitled to a jury trial on the issue of whether it held a valid Class A license. The trial court had denied Land Forms’ request for a jury trial finding that Code of Civil Procedure section 597 applied. Section 597 provides:

When the answer . . . sets up any other defense not involving the merits of the plaintiff’s cause of action but constituting a bar or ground of abatement to the prosecution thereof, the court may, either upon its own motion or upon motion of any party, proceed to the trial of the special defense or defenses before the trial of any other issue in the case, and if the decision of the court, or the verdict of the jury, upon any special defense so tried . . . is in favor of the leading the same, judgment for the defendant shall thereupon be entered and no trial of other issues in action shall be had unless that judgment shall be reversed on appeal or otherwise set aside of vacated.

However, argued Land Forms, “proof” of licensure is not a “special defense” but is a required element of a claimant’s case under Business and Professions Code section 7031 which provides:

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, regardless of the merits of the causes of action brought by the person . . . (emphasis added).

The Court of Appeals agreed. “[T]he determination  of whether Land Forms’ held a valid class A license involved questions of fact,” held the Court, and “‘where there is a conflict in the evidence from which either conclusion could be reached as to the status of the parties, the question must be submitted to the jury. This rule is clearly applicable to cases revolving around the disputed right of a party to bring suit under the provisions of Business  and Professions Code section 7031.'” (quoting Dahl-Beck Electric Co. v. Rogge, 275 Cal.App.2d 893, 900 (1969)).

Importantly, explained the Court of Appeals, a RME or RMO is required to exercise “direct supervision and control of his her employer’s or principal’s construction operations,” and “a variety of activities can constitute direct supervision and control, including ‘one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites'” (citing 16 CCR 823(b)), and because there are a variety of activities that can constitute direct supervision and control these are factual questions that are to be determined by a jury. Moreover, held the Court, in addition to proper licensure, Land Forms was also entitled to a jury on the issue of the amount of disgorgement.

Note: Although the Court of Appeals did not devote significant attention to it, one of Land Forms arguments was that, even if it didn’t hold a valid Class A license, it held a Class C-27 landscaping contractors license, and was therefore not unlicensed. The Court, however, gave Land Forms’ argument short shrift concluding that “Land Forms was performing under a public works contract that specifically required the general contractor to have a valid class A license at all times during the project. We therefore hold that when a contractor does not have the specific license specified in the contract under which the work is performed, the contractor is ‘unlicensed’ for purposes of section 7031, subdivision (b).” But see our earlier post Scope of Work, Not Contract, Governs License Requirements.

However, the Court of Appeal disagreed with Land Forms’ argument that because it held a Class C-27 landscaping contractor’s license, that any disgorgement should be apportioned between work which required a Class A license (for which disgorgement would be proper) and work which could be performed with a Class C-27 license (for which disgorgement would not be proper). Business and Professions Code section 7031(b) provides that a person who utilizes the services of an unlicensed contractor may bring an action to “recover all compensation paid to the unlicensed contractor for performance of any act or contract” (emphasis added), and “all” means “all,” so “[S]ection 7031, subdivision (b) does not allow apportionment as a matter of law.”

Conclusion

Jeff Tracy is an interesting case. There’s some oldies but goodies like you need to prove you’re a licensed contractor in California and just because you have a RMO or RME doesn’t necessarily mean you’re properly licensed. There’s also some new ones like you’re entitled to a jury on the issue of proper licensure and disgorgement. And, finally, there’s some potentially controversial ones as well like the contract not the scope of work governs proper licensure and, therefore, apportionment is unavailable under Business and Professions Code section 7031.

This is one of those cases where there’s a bit of something for everyone . . . no matter which tribe you’re from.

2 Responses to “Proving Contractor Licensure in California. The Tribe Has Spoken”

  1. nutritionevolved

    Hi Garrett, I apologize for this clearly misplaced question.. I am new to the site and have been searching for hours (ok, days) for an answer to what seems such a simple question.
    For a person specializing in stairs, all things stairs (interior, residential) what licensure is appropriate? C-6 seemed the closest yet, sooo not at the same time. Upon reading, literally, every c-61 D category, I’ve kinda of began thinking the D-64 may be the way to go (for now)?? It just seems so odd that there literally isn’t any license that specifies stairs?? I mean.. STAIRS?! LOL. Thought maybe walking up and down something with factors like handrails, baluster spacing,… Gravity… That maybe a specific license would be warranted..
    (i hope this all reads as humorous.. My brain 2 cells i have left are fighting an– Oops one just kicked the other down the stairs.. 😂

    Any info / advice is MUCH appreciated!!
    Thank you so much!
    Summer

    Reply
    • Garret Murai

      Hi. I suggest you talk with someone from the Contractors State License Board, but it sounds like you would need a Class B or C-6 finish carpentry license, or if you’re only doing exterior stairs, a C-5 rough carpentry license.

      Reply

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