California Business & Professions Code section 7031(a) requires a party to have contractor’s license in order to maintain an action for compensation for services performed for which a contractor’s license is needed. In Phoenix Mechanical Pipeline, Inc. v. Space Exploration Technologies Corp., No. B269186 (2017 WL 2544856) (Cal. Ct. App. June 13, 2017), the Court of Appeal for the Second Appellate District considered the scope of this statute in denying, in part, Phoenix Mechanical Pipeline, Inc.’s (“Phoenix Pipeline”) appeal of a trial court ruling granting Space Exploration Technologies Corporation’s (“SpaceX”) demurrer to Phoenix Pipeline’s second amended complaint, without leave to amend.
Phoenix Pipeline filed the underlying lawsuit for, among other claims, breach of contract and breach of the duty of good faith and fair dealing arising from an agreement with SpaceX for Phoenix Pipeline to perform various plumbing, concrete removal and electrical services. Phoenix Pipeline alleged SpaceX paid for such services from 2010 to October 2013, but failed to pay Phoenix for services performed from October 2013 to August 2014, totaling just over $1,000,000. According to Phoenix Pipeline, this work was performed pursuant to a series of invoices, which constituted individual agreements between SpaceX and Phoenix Pipeline.
SpaceX demurred to the initial complaint on the ground that Phoenix Pipeline was not licensed. In response Phoenix Pipeline elected to file a first amended complaint, which contained virtually the same factual allegations, but added allegations that it had a licensed “responsible managing employee” on the job who was the owner of another corporate entity, Phoenix Mechanical Plumbing, Inc., who “oversaw all services” provided by Phoenix Pipeline.
In response, SpaceX filed another demurrer arguing the employee’s license was not sufficient to satisfy the requirements of section 7031(a). The trial court sustained SpaceX’s demurrer with leave to amend.
Phoenix Pipeline then filed a second amended complaint making two changes. It relabeled the licensed “responsible managing employee” as a “responsible managing officer” and expanded the definition of the employee’s role of the project. The new complaint also distinguished between “subcontracting services” performed, for which a license was required, and “non-contracting services” for which no license was needed.
SpaceX again demurred based on Phoenix Pipeline’s failure to allege it held a contractor’s license. The trial court sustained the demurrer, but provided no leave for Phoenix Pipeline to amend the complaint a third time and entered judgment against it. Phoenix Pipeline then appealed the trial court’s ruling.
On appeal, the Second Appellate District weighed whether Phoenix Pipeline’s allegations, admitting all material facts properly plead in the second amended complaint, were sufficient to overcome the requirement in section 7031 that it must have had a valid license to recover in an action for payment for services for which a contractor’s license is necessary. With one minor exception, the Court of Appeal found Phoenix Pipeline’s allegations as pled failed to meet that standard.
First, the Court held that Phoenix Pipeline’s second amended complaint failed to allege that Phoenix Pipeline itself held a contractor’s license, and cited various case law interpreting section 7031 which indicated that the failure to comply with the licensing requirements of the statute bars a person or entity from recovering compensation for any work performed under a contract that requires a contractor’s license.
Second, the Court held that Phoenix Pipeline’s allegation that it had a licensed “responsible managing officer” was not sufficient to meet the condition of section 7031 that Phoenix Pipeline hold a contractor’s license to pursue its claim. The Court cited several cases which ruled that contractor’s licenses held by partners, managing officers and/or owners of contracting entities were not sufficient under section 7031. Thus, the fact that Phoenix Pipeline alleged it had a licensed “responsible managing officer” at the scene, without more, did not meet the requirements of the statute.
Third, however, the Court held Phoenix Pipeline did plead sufficient allegations to maintain a cause of action for recovery for services it performed (including maintenance, repair, clean-up, hauling, disposal, etc.) which did not require a license, pursuant to various invoices. Since each of those invoices was alleged as constituting an individual contract between Phoenix Pipeline and SpaceX, the Court overruled the trial court’s decision to the extent that it seeks compensation under those alleged invoices for tasks performed for which no contractor’s license is required.
This opinion makes clear the Court of Appeal will interpret the conditions of section 7031 quite strictly, as the statute represents a “legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business…can best be realized by denying violators the right to maintain any action for compensation” in the courts of California. Contractors are further put on notice by this ruling that the license must be held by the contracting entity itself and that licenses held by employees, partners, individual owners, or other ancillary individuals are not sufficient to support a claim for recovery of payment.
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