In what could lead to a draconian result, the Court of Appeal for the First Appellate District held that a contractor who performs work without a valid license can be required to disgorge all payments received, even if the contractor perfectly performed its work. The case, Judicial Council of California v. Jacobs Facilities, Inc. (Ct. of Appeal, 1st App. Dis., Div. One, A140890, A141393), involved an $18,000,000 contract between Jacobs Facilities, Inc. (“Jacobs Facilities”) and the Judicial Council of California (“Judicial Council”). In April 2006, Jacobs Facilities, a wholly owned subsidiary of Jacobs Engineering Group, Inc. (“Jacobs Engineering”) entered into a three year contract with the Judicial Counsel to maintain 121 courthouses and other judicial branch buildings throughout Southern California (the “Contract”). Jacobs Facilities contracted to provide maintenance and oversight services, while retaining subcontractors to perform the actual maintenance and repair work.
In December 2006, as part of a corporate reorganization, Jacobs Engineering started winding up Jacobs Facilities and transferred its employees to Jacobs Engineering and then subsequently to another wholly owned subsidiary called Jacobs Project Management Co. (“Jacobs Management”). The work that was performed by Jacobs Facilities was taken over by Jacobs Management. As part of the windup, Jacobs Facilities’ Contractor’s State License Board license was allowed to lapse and the license expired by operation of law in November 2008. Although Jacobs Management was now performing the work, it was not added as a party to the contract. Although it appears Judicial Council was aware of the corporate changes, it was not until November 2009 that the parties assigned the contract to Jacobs Management.
In December 2009, the Judicial Council sued Jacobs Facilities and Jacobs Management. The complaint alleged causes of action for breach of contract, disgorgement under Business and Professions code section 7031(b), and breach of guaranty.
Section 7031(b) allows a person who has employed an unlicensed contractor to bring an action for disgorgement of “all compensation paid to the unlicensed contractor.” The Judicial Council contended that because Jacobs Facilities was not licensed for a portion of the contract (even though Jacobs Management was), the Judicial Council was entitled to the return of $18,331,811 in contract payments. The trial court entered a defense verdict in favor of the Jacobs entities. The trial jury found that Jacobs Facilities “had maintained a contractor’s license at all times while performing the contract; [Jacobs] Facilities had ‘internally assigned’ the contract to [Jacobs] Management prior to the expiration of the [Jacobs] Facilities license; [and] the [Judicial Counsel] was not ‘adversely affected’ by the internal assignment.”
The Court of Appeal reversed. It held the trial court did not have discretion to permit a jury to decide whether or not to enforce the penalties prescribed by section 7031(b). Even if the evidence showed Jacobs Facilities’ work was perfectly performed, the “determination that the importance of deterring unlicensed persons from engaging in the contracting business” is more important than the draconian remedy of requiring the disgorgement of all payments. According to the Court, an “unlicensed contractor is subject to forfeiture even if the other contracting party was aware of the contractor’s lack of a license, and the other party’s bad faith or unjust enrichment cannot be asserted by the contractor as a defense to forfeiture.” Since it was undisputed Jacobs Facilities was a party to the contract, and that work was performed (albeit by Jacobs Management) while Jacobs Facilities was not properly licensed, the court was required to order disgorgement pursuant to section 7031(b).
The Court of Appeal did offer a small window of hope to Jacobs Facilities. In the second portion of its opinion, the Court discussed Business and Professions code section 7031(e) which allows an unlicensed contractor to avoid disgorgement if it can prove to a trial judge that: “the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.”
The Court of Appeal remanded the case to the trial court for an evidentiary hearing on the issue of “substantial compliance.” However, as if to enforce the draconian nature of 7031(b), the Court writes: “If the [Jacobs entities] are unsuccessful [in proving substantial compliance] the trial court shall enter judgment against defendants in the amount of $18,331,911, plus taxable costs and interest.”
Judicial Council of California v. Jacobs Facilities, Inc. illustrates the harsh and seemingly unfair effects of section 7031(b). The section requires the disgorgement of all compensation received by the contractor, not merely compensation for the period when the contractor was unlicensed. While there is an equitable component provided by section 7031(e), the holding of this case seems to indicate that “substantial compliance” will not be routinely found. The Court recognized the harshness of the penalty prescribed by section 7031(b) but held that it had to take “its cue from the Legislature in enforcing the letter of the law, consoled by the Legislature’s ‘determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.” The case reinforces the consequences of complying with the CSLB requirements, and the tremendous importance of maintaining a contractor’s license and keeping it in good standing.
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