Court Bars Licensed Contractor From Seeking Compensation for Work Performed by Unlicensed Sub

Lonely Tree

It all started with a tree.

A eucalyptus tree to be exact.

What followed is one of the more important cases to be decided under Business and Professions Code section 7031 in recent years. Yes, that Section 7031. The statute variously described by the state’s courts as “harsh[ ],” draconian” and “unjust,” but, importantly, nevertheless valid.

Under Section 7031, an unlicensed contractor is barred from seeking compensation for work requiring a contractor’s license. This has been called the “shield.” However, in addition to the “shield,” project owners can also employ Section 7031’s “sword,” and seek disgorgement of all monies paid to an unlicensed contractor. Section 7031’s “shield” and “sword” applies even if the project owner knew that the contractor was unlicensed. They also apply even if the unlicensed contractor’s work was flawless. And they also apply even if a contractor was unlicensed during a portion of its work. This is because, as courts have stated, Section 7031 is a consumer protection statute intended to protect the public from unlicensed contractors and applies irrespective of the equities.

However, one issue that has never been addressed, is whether Section 7031 bars a licensed contractor from seeking compensation for work performed by an unlicensed subcontractor. That is, until now. In Kim v. TWA Construction, Inc., Case No. H045900 (May 13, 2022), the 6th District Court of Appeals finally addressed that issue.

The TWA Construction Case

In September 2015, homeowners Sally Kim and Dai Truong hired general contractor TWA Construction Inc.  to build their home in Los Gatos, California. The work included site work, bridge work and installation of retaining walls. Under the terms of the construction contract, TWA agreed that all work would be performed by licensed individuals and TWA further agreed to indemnify the homeowners from any claims arising from the negligence of TWA, its employees, or its subcontractors.

On the property was a eucalyptus tree. But not any eucalyptus tree. It was a eucalyptus tree that straddled the property between Kim-Truong and their neighbor Joan Todd although this was not known to the homeowners. A tree removal permit was obtained to remove the eucalyptus tree, and while removal of the tree was not specifically identified in the construction contract. TWA hired an individual named Marvin Hoffman to remove the tree. Hoffman, who TWA found through Craigslist, was paid a $400 check and $16,000 in cash to remove the tree. TWA never checked the license status of Hoffman.

On September 28, 2015, Hoffman and his crew began to remove the tree. Before they could finish, however, Todd told Hoffman and his workers to stop. Todd also contacted the police. Work on the tree ceased and a little over a year later, Todd filed suit against Kim-Truong and TWA for negligence, trespass and other claims related to the attempted removal of the eucalyptus tree.

Kim-Truong in turn filed a cross complaint against TWA for comparative negligence, breach of contract, express contractual indemnity, equitable indemnity and other claims. TWA in turn filed a cross-complaint against Kim-Truong for breach of contract, including lost profits, because Kim-Truong had fired them midway through the project.

Prior to trial, the homeowners filed a motion in limine requesting that TWA make an offer of proof as to Hoffman’s licensure status. According to the homeowners, Hoffman was required to hold a C-61/D-49 Tree Service Specialty license, and because he did not, TWA was required to disgorge approximately $10,000 they had paid TWA for the tree removal work under Business and Professions Code section 7031.

Unable to prove that Hoffman held a C-61/D-49 license, the trial court ruled that TWA was barred under Section 7031 from “collecting compensation for services performed by the subcontractor for the tree trimming if, in fact, the subcontractor was unlicensed at the relevant time.” The trial court’s ruling did not preclude TWA from presenting evidence that Hoffman was properly licensed at trial.

Trial proceeded by jury in two phases. The first phase addressed Todd’s complaint against Kim-Truong and TWA. The second phase addressed the cross-complaints between Kim-Truong and TWA. During the trial, Kim-Truong reached a settlement with Todd agreeing to pay her $50,000 and to remove the eucalyptus tree. Todd also settled with TWA.

Following trial, the jury found that TWA was 100 percent liable for negligence and awarded the Kim-Truong $18,196 on the homeowner’s claims for contributory negligence, indemnity and express contractual indemnity. The jury also ordered TWA to disgorge the $10,000 paid by the homeowners for the tree removal. And finally, the jury found in favor of the homeowners on TWA’s breach of contract claim. Highlighting the cost of litigation, the court later awarded the homeowners $137,821 in attorneys’ fees, $22,505 in expert witness fees, and $18,273.59 in costs.

TWA appealed.

The Appeal

On appeal, TWA raised three issues: (1) the trial court erred as a matter of law in its pretrial ruling on the application of Business and Professions Code section 7031; (2) because the construction contract did not include removal of the eucalyptus tree, the homeowner’s claims for indemnity and attorneys’ fees based on that agreement cannot stand; and (3) substantial evidence did not support the jury’s finding that the homeowners paid TWA $10,000 to remove the eucalyptus tree.

Noting that the “California Supreme Court has not directly addressed” application of Section 7031 “where a licensed general contractor seeks compensation from an owner for work performed by an unlicensed subcontractor,” the Court of Appeals looked at the Contractors State License Law “and the statutory scheme of which it is a part,” and concluded that Section 7031 bars a licensed contractor from seeking compensation for work performed by an unlicensed subcontractor:

We conclude that to narrowly construe section 7031(a) to allow TWA’s claim for compensation to proceed under the circumstances here (thus reversing the trial court’s order) would undermine certain other provisions of the statutory scheme governing contractor licensing and contravene the policy behind the statute. . . .we agree with the trial court’s observation that it would be unreasonable to permit TWA to collect compensation for work performed by an unlicensed subcontractor when all facets of the Contractors’ State License Law are directed at ensuring licensing compliance. . . .For all of these reasons, we decide that section 7031 bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required. Therefore, TWA has not satisfied its burden of demonstrating error in the trial court’s pretrial ruling applying section 7031.

As to TWA’s claim that because the construction contract did not include removal of the eucalyptus tree, the homeowner’s claims for indemnity and attorneys’ fees based on that agreement cannot stand, the Court of Appeal held that based on emails exchanged between the homeowners and TWA regarding removal of the eucalyptus tree the extrinsic evidence indicated that removal of the tree was part of the construction contract.

Finally, the Court held that substantial evidence supported the jury’s finding that the homeowners paid TWA $10,000 to remove the eucalyptus tree. While no checks were written by the homeowners to TWA for $10,000, let alone a check indicating that the payment was for removal of the tree, the homeowner’s testified that of the payments made, $10,000 accounted for approximately one-third of the cost of removing the partially removed tree.

Conclusion

So there you have it. The first appellate court decision in the state finding that Business and Professions Code section 7031 bars a licensed contractor from seeking compensation for work performed by an unlicensed subcontractor. What this case foretells is discovery during litigation by project owners on the license status of subcontractors to see if they can knock down all or a part of payment claims made by prime contractors. For prime contractors, it is yet another “check the box” administrative duty they will need to adhere to if they want to protect their payment rights.

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