1st District Joins 2nd District Court of Appeals and Holds that One-Year SOL Applies to Disgorgement Claims

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We’re beginning to see a trend.

This past year, the 2nd District Court of Appeals, in Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, 53 Cal.App.5th 1201 (2020), held for the first time that a one (1) year statute of limitations period beginning upon substantial completion of a project applies to disgorgement claims under Business and Professions Code section 7031. In San Francisco CDC LLC v. Webcor Construction L.P., the 1st District Court of Appeals became the second Court of Appeals in the state to hold that a one (1) year statute of limitations beginning upon completion or cessation of work on a project applies to disgorgement claims under Business and Professions Code section 7031.

The San Francisco CDC LLC Case

The Defect Action

In September 2005, San Francisco CDC LLC entered into a $144 million construction contract with Webcor Construction, Inc. doing business as Webcor Builders to build the InterContinental Hotel in San Francisco, California.

In July 2007, Webcor Construction, Inc. merged into Webcor Construction, L.P. The new entity, Webcor Construction, L.P., obtained a contractor’s license before the merger on June 26, 2007. Later that year, Webcor Construction, L.P. was acquired by Obayashi Corporation.

In October 2013, SF CDC tendered a warranty claim alleging defects with the windows of the hotel. The parties entered into a tolling agreement tolling SF CDC’s claim from the date of discovery of defects on October 4, 2013.

In June 2015, SF CDC filed a lawsuit against “Webcor Builders, Inc.” and others alleging claims with the windows. After it was discovered that Webcor Builders, Inc. was a separate entity unrelated to Webcor Construction, L.P., the parties agreed to substitute Webcor Construction, L.P. for Webcor Builders, Inc.

Suspecting that Webcor Construction, L.P. might not have been properly licensed as a contractor during construction of the hotel, SF CDC tried to allege that the licensure issue during trial, however, the trial court refused to hear the claim. The parties later settled and the defect action was dismissed. Presumably, the parties’ settlement reserved claims with respect to disgorgement as the next series of events suggest.

The Disgorgement Action

In June 2017, SF CDC filed a second lawsuit, alleging that Webcor Builders, L.P. (Note: It’s a little confusing here. I think the Court meant to say Webcor Construction, L.P.), Webcor Construction, Inc., and Obayashi Corporation were not properly licensed and subject to disgorgement under Business and Professions Code section 7031. Specifically, SF CDC alleged that Webcor Construction, Inc.’s contractor’s license expired in December 2007 and was never transferred.

In response, the defendants filed a demurrer and requested judicial notice of records of the Contractors State License Board showing that Webcor Construction, L.P. obtained its own contractor’s license in June 2007, prior to the merger, and thus did not need Webcor Construction, Inc. to transfer its license. Rather than respond to the demurrer, SF CDC filed a first amended complaint.

In its first amended complaint, SF CDC continued to allege a claim of disgorgement under Business and Professions Code section 7031 but also added a claim for conversion and fraudulent concealment. According to the first amended complaint, defendants were not properly licensed during construction of the hotel and “executed a series of mergers to conceal their licensing violations.” The defendants filed a second demurrer.

In January 2018, the trial court sustained the demurrer with leave to amend. In sustaining the demurrer, the trial court found that all three claims related to disgorgement and that a one (1) year statute of limitations period applied under Code of Civil Procedure section 340(a) which applies to actions based “upon a statute for a penalty or forfeiture.”

In May 2018, SF CDC filed a second amended complaint. In its second amended complaint, SF CDC continued to allege the same three causes of action, but also alleged that Webcor Construction, L.P.’s contractor’s license automatically terminated during construction when its general partner disassociated from the partnership, and that work continued to be performed after June 23, 2016 and through the beginning of 2017, within one (1) year of when SF CDC filed its disgorgement action. The defendants filed a third demurrer.

The trial court sustained the demurrer with leave to amend. In sustaining the demurrer, the trial court found that SF CDC had not identified the contractor who allegedly performed work after June 23, 2016 and through the beginning of 2017, did not adequately allege any misrepresentation or concealment concerning the licensing violations that could not have been identified through public records, and rejected SF CDC’s contention that Webcor Construction, L.P.’s contractor’s license had been “automatically terminated” through the disassociation of its general partner.

In October 2018, SF CDC filed a third amended complaint. In its third amended complaint, SF CDC alleged that on several occasions, “Webcor Builders, Inc.” had been identified as the hotel’s general contractor in change orders, permits prepared by subcontractors, and other documents. SF CDC also alleged that between October 2016 and January 2017, defendants had prepared “scopes, schedules and sequences of work and obtain[ed] and present[ed] proposals and bids . . . to perform the original contract scope of work with trade contractors who would repair and improve the windows and curtain wall components. The defendants demurred a fourth time.

In their demurrer, defendants argued that SF CDC’s belief that “Webcor Builders, Inc.” had built the hotel, was undermined by the publicly recorded notice of completion which identified “Webcor Construction L.P., dba Webcor Builders” as the original contractor, and that obtaining and presenting proposals and bids, did not require a contractor’s license and would not be actionable under Business and Professions Code section 7031.

The trial court sustained the demurrer without leave to amend, finding that SF CDC was unable to allege a claim that was not time-barred, that documents prepared by third-party subcontractors identifying the general contractor as “Webcor Builders, Inc.” could not provide a basis for equitable estoppel because the statements were not made by defendants, that the notice of completion undermined SF CDC’s claim that it did not become aware of the identity of the general contractor until 2017, and that the preparation of bids and proposals did not require a contractor’s license.

Judgment was later entered against SF CDC. SF CDC appealed.

The Court of Appeals Decision

Providing an overview of Business and Professions Code section 7031, the Court of Appeal noted that the purpose of Section 7031 is “to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay,” that “[d]isgorgement is permitted even when the project owner knows that that the contractor is unlicensed,” that disgorgement applies even if “the contractor is only unlicensed for part of the time it performed work requiring a license” and even “when the work performed by the unlicensed contractor is free of defects.” Section 7031, explained the Court, is “‘truly a strict liability statute'” and ‘”represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.”

With respect to the statute of limitations, the Court of Appeal held that the one-year statute of Code of Civil Procedure section 340 “governs actions brought under section 7031(b) because disgorgement is a statutory penalty for work performed by an unlicensed contractor” and noted that this is consistent with the Eisenberg decision. 

Although not directly addressing whether the statute of limitations could be equitably tolled, the Court of Appeal held that equitable estoppel or delayed discovery did not apply, because SF CDC knew or should have known that Webcor Construction L.P. built the hotel when the notice of completion was recorded in February 2009, which was more than eight (8) years before SF CDC filed its disgorgement action in 2017.

As to SF CDC’s allegation that preparing bids requires a contractor’s license, the Court of Appeal held that such argument ran counter to MS Erectors Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 38 Cal.4th 412, in which the California Supreme Court held that the preparation of bids and proposals is a pre-contractual activity for which a contractor’s license is not needed.

Conclusion 

So there you have it. We now have a trend with the 1st District and 2nd District Court of Appeals both holding that a one-year statute of limitations beginning upon completion or cessation of work on a project applies to disgorgement claims under Business and Professions Code section 7031.

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