Contractor’s Assignment of Construction Contract to Newly Formed Company Before Company Was Licensed, Not Subject to B&P 7031
Add one more to the Business and Profession Code section 7031 archives. In Manela v. Stone, Case No. B302660 (July 1, 2021), the 2nd District Court of appeal held that Section 7031 did not apply to a contractor licensed as a sole proprietor who assigned his contract to his newly formed company even though, at the time of the assignment, the contractor’s individual contractor’s license had not yet been reissued to the incorporated company.
The Manela Case
On January 4, 2015, John Stone doing business as Stone Construction Company entered into a home remodeling contract with Yosef and Nomi Manela. At the time, Stone had held a contractor’s license since 1982.
On February 11, 2015, after work on the project had begun, Stone formed JDSS Construction Company, Inc., and filed a fictitious business name using the same name Stone Construction Company. Stone applied to the Contractors State License Board to have his contractor’s license issued from himself personally to his newly formed company. On March 15, 2015, while waiting for the CSLB to reissue his contractor’s license, Stone entered into an assignment agreement between himself and his new company assigning the Manela construction contract to the new company. The assignment agreement was signed by Stone in his personal capacity and as President of JDSS Construction. The assignment agreement was not signed by the Manelas.
The CSLB reissued Stone’s on June 22, 2015. During the approximate three-month period between the assignment and the CSLB’s reissuance of Stone’s contractor’s license, Stone continued to send invoices to the Manelas as a sole proprietorship doing business as Stone Construction Company. Stone also issued an unsigned change order on June 10, 2015 which listed his individual contractor’s license but was on letterhead of JDSS Construction.
In late 2018, before the project was completed, the Manelas stopped paying JDSS Construction and later filed suit against both Stone and JDSS Construction alleging that they had performed defective work and made material misrepresentations in order to induce the Manelas to sign their construction contract. In response, Stone and JDSS Construction recorded a mechanics lien on the Manela’s property and filed suit against the Manelas. The Manelas, in turn, amended their complaint to allege that Stone and JDSS Construction had performed work on the project without a contractor’s license in violation of Business and Professions Code section 7031.
In addition, during the course of the litigation, the Manelas filed a motion to remove Stone and JDSS Construction’s mechanics lien from their property on, among other grounds, that the mechanics lien was invalid because Stone and JDSS Construction were not licensed at all times while performing work on the project. In opposition to the motion, Stone and JDSS Construction argued that there was no gap in licensure. The trial court disagreed and found that the assignment on March 15, 2015 was a complete assignment from Stone to JDSS Construction Company and that because Stone’s contractor’s license was not reissued to JDSS Construction until June 22, 2015, the mechanics lien was invalid.
The removal of a mechanics lien being an appealable judgment, Stone appealed.
On appeal, the 2nd District Court of Appeal agreed with Stone.
As to the March 15, 2015 assignment, the Court of Appeals explained that under the California Supreme Court’s decision in M.W. Erectors Inc. v. Niederhauser Ornamental & Metal Works, Co., Inc. (2005) 36 Cal.4th 412, iBusiness and Professions Code section 7031 applies when a contractor is performing work requiring a license not when a contractor enters into a construction contract that may require a contractors license for work to be performed.
Relying on that reasoning, the Court of Appeals also held that the unsigned June 10, 2015 change order, which included Stone’s individual contractor’s license but was on JDSS Construction’s letterhead, “describes work to be performed in the future; it does not indicate whether or when the work was performed. Thus, a reasonable trier of fact could not infer from this document that any work had been performed at the request of or on behalf of JDSS [Construction] before [it was licensed on] June 22, 2015.”
The Court of Appeal further found that the assignment was invalid because the Manelas never consented to the assignment. Explaining that “duties ‘are not delegable in either of the following situations: (1) where in the nature or circumstances of the case, the skill, credit or other personal quality of the party was a distinctive characteristic of the thing stipulated for, namely, the personal nature of the contract itself, or (2) the personal quality of the party was a material inducement to the other party entering into the contract,” the Court of Appeal held that “the contractor services Stone agreed to provide to the Manelas in the Manela contract [were] personal services to be rendered by Stone” and could not be assigned without the consent of the Manelas.
Finally, relying on E.J. Franks Construction Inc. v. Sahota (2014) 226 Cal.App.4th 1123, in which the 5th District Court of Appeal held that Business and Professions Code section 7031 did not apply to a contractor licensed as a sole proprietor who transferred his license to a corporation he formed while performing work on a project, the Court of Appeal held that Section 7031 is intended “deter unlicensed contractors from recovering compensation for their work,” “not . . . to deter licensed contractors from changing a business entry’s status, and obtaining a reissuance of the license to the new entity[,] during the contract period.'”
However, the Court of Appeal was careful to note that it was not holding that the distinction between sole proprietorships and corporations is unimportant under Business and Professions Code section 7031. Citing Opp v. St. Paul Fire & Marine Ins. Co. (2007) 154 Cal.App.4th 71, in which the 5th District Court of Appeal held that Section 7031 applied to a corporation which was unlicensed although the company’s president held a contractor’s license, the Court of Appeal explained that here Stone did not misrepresent that JDSS Company held a contractor’s license when it didn’t.
Manela is the latest case under Business and Professions Code section 7031 and highlights the nuances of Section 7031. Under Section 7031 a contractor must be properly licensed at the time he/she/it is performing work, not necessarily when it entered into the construction contract for work to be performed. Further, Section 7031 does not apply where a contractor operating as a sole proprietor decides to incorporate his/her company during a construction project. On that last point, however, I think a bit more finessing is needed. For example, how would a court apply Section 7031 to a contractor operating as a sole proprietor, but who later incorporates, if the contractor argues that under E.J. Franks it is not subject to Section 7031, but what’s more, that the contractor can rely on the limited liability that incorporation provides. In such a scenario, when the incorporated company began performing work would, I believe, be extremely relevant, and if the incorporated company began performing work before it had a license issued, wouldn’t Section 7031 apply?
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