An interesting construction case just came out from the California Court of Appeals for the Second District this past month – Pacific Caisson & Shoring, Inc. v. Bernards Bros., Inc., California Court of Appeals for the Second District, Case No. B248320 (May 19, 2015) –  which discusses a number of intertwining issues that can be faced by contractors in California and concludes with a result that I’m not sure I quite agree with.

Among the issues discussed by the Court of Appeal were:

  • The application of the dreaded Business and Professions Code section 7031 which: (1) precludes a contractor from making a claim for payment for work performed; and (2) requires a contractor to disgorge all monies received for work performed, if the contractor was not properly licensed at all times that work was performed;
  • The impact of an unsatisfied judgment against one contractor on the license of another “related” contractor; and
  • Whether a stipulated judgment providing for payments over time is an unsatisfied final judgment under the Licensing Law.

The Original Case

Pacific Caisson & Shoring, Inc. (“Pacific”) entered into a construction subcontract with Bernard Bros., Inc. (“Bernard Bros.”) to provide temporary excavation and support work on a medical center project for the County of Ventura.

Pacific later filed suit against Bernard Bros. for non-payment.

In response, Bernard Bros. alleged that Pacific was not properly licensed at all times – the contract required Pacific to maintain a C-12 Earth Work and Paving Contractors license while Pacific held a Class A Engineering and Class B General Contractor’s license – and filed a dreaded Business and Professions Code 7031 disgorgement claim against Pacific.

At trial, Bernard Bros. won. The trial court found that Pacific did not hold a C-12 license as required under its subcontract.

However, on appeal, the California Court of Appeals for the Second District reversed, finding that Pacific’s Class A license was sufficient for it to perform the scope of work under its subcontract. But the Court of Appeals also found that because Pacific’s Class A license was suspended for a period of two months the trial court would need to determine whether Pacific substantially complied with the Licensing Law and could recover from Bernard Bros. despite its temporary lapse in licensure.

The Trial Court Decision on Remand

On remand, the trial court found that Pacific had not substantially complied with the Licensing Law on the following grounds:

  1. Pacific commenced work under its subcontract with Bernard Bros. on April 3, 2002 and completed its work on October 28, 2003.
  2. Jerry McDaniel and his wife Delma owned Pacific but also owned a related contracting company Gold Coast Drilling, Inc. (“Gold Coast”). Jerry was the Responsible Managing Officer (“RMO”) and the sole qualifier for both Pacific and Gold Coast.
  3. Gold Coast rents equipment to Pacific and to other companies and was a “union shop,” meaning that it performed union jobs for Pacific which required the use of union labor.
  4. Gold Coast was sued by American Benefit Plan Administrators, Inc. (“American Benefit”), a third-party union pension plan administrator, to recover union benefits Gold Coast owed under its collective bargaining agreement.
  5. On June 20, 2000, Gold Coast and American Benefit resolved their dispute. As part of the resolution, Gold Coast entered into a stipulated judgment in which Gold Coast agreed to pay a discounted sum on a monthly basis and to remain current on its regular employee benefit contributions.
  6. After making its September 2001 installment payment, Gold Coast made no more payments because it lacked the funds to do so. In February 2002, American Benefits notified Gold Coast that it would begin collecting the full amount owed pursuant to the stipulated judgment’s acceleration clause.
  7. On March 26, 2003, over two years after the stipulated judgment was entered into by Gold Coast and approximately 11 months after Pacific commenced work under its subcontract with Bernard Bros., American Benefits informed the California Contractors State License Board (“CSLB”) of the unsatisfied stipulated judgment.
  8. On April 2003, the CSLB sent a letter to Gold Coast notifying it that “there is a construction related judgment against you.” The letter further explained that because Gold Coast had failed to notify the Board within 90 days of the date of judgment, that Gold Coast’s license would automatically be suspended effective April 1, 2003 pursuant to Business and Professions Code section 7071.17.
  9. The CSLB also suspended Pacific’s license as an “associated” license of Gold Coast pursuant to Business and Professions Code section 7071.17, which provides that the license of a contractor with the same personnel of record as a judgment debtor shall be suspended until the license of judgment debtor is reinstated or until those same personnel of record disassociate themselves.
  10. Upon receiving the suspension notice, Jerry contacted his attorney who negotiated a resolution with American Benefit which provided that Gold Coast would pay a full satisfaction of the stipulated judgment by November 30, 2003.
  11. On June 17, 2003, the CSLB lifted the suspension of both Pacific and Gold Coast after receiving a notice of settlement from American Benefits.

As discussed, Business and Professions Code section 7031 both: (1) precludes a contractor from making a claim for payment for work performed; and (2) requires a contractor to disgorge all monies received for work performed, if the contractor was not properly licensed during all times that work was performed.

There is, however, one caveat. And, that is, Section 7031 does not apply if a contractor can show “substantial compliance” with the Licensing Law. Also known as the Substantial Compliance Doctrine, in order to show substantial compliance with the Licensing Law a contractor must show:

  1. It had been duly licensed as a contractor in California prior to performance of the act or contract giving rise to a claim under Section 7031;
  2. It had acted reasonably and in good faith to maintain proper licensure;
  3. It 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. It acted promptly and in good faith to reinstate his or her license upon learning it was invalid.

The trial court found that Pacific had failed to satisfy the second prong of the Substantial Compliance Doctrine, namely, that Pacific had failed to show that it had acted reasonably and in good faith to maintain proper licensure.

The trial court’s rationale was that Jerry, as the RMO for both Pacific and Gold Coast, was responsible for assuring full compliance with the Licensing Laws including informing the CSLB of the stipulated judgment between Gold Coast and American Benefits within 90 days of the date the stipulated judgment was entered. Because Jerry had failed to do so the trial court found that Pacific had not acted reasonably and in good faith to maintain proper licensure.

Pacific again appealed.

The Second Appeal

On the second appeal, Pacific wasn’t as lucky as it was in the first, although one could argue that Pacific wasn’t particularly lucky in the first either, as it turned out.

In the second appeal, the Court of Appeals for the Second District addressed three issues:

A.     Was the stipulated judgment between Gold Coast and American Benefits the type of unsatisfied final judgment which was supposed to be self-reported under Business and Professions Code section 7071.17(b)?

Business and Professions Code section 7071.17(b) provides:

Notwithstanding any other provision of law, all licensees shall notify the registrar in writing of any unsatisfied final judgment imposed on the licensee. If the licensee fails to notify the registrar in writing within 90 days, the license shall be automatically suspended on the date that the registrar is informed, or is made aware of the unsatisfied final judgment. The suspension shall not be removed until proof of satisfaction of the judgment, or in lieu thereof, a notarized copy of an accord is submitted to the registrar. If the licensee notifies the registrar in writing within 90 days of the imposition of any unsatisfied final judgment, the licensee shall, as a condition to the continual maintenance of the license, file or have on file with the board a bond sufficient to guarantee payment of an amount equal to all unsatisfied judgments applicable under this section. The licensee has 90 days from the date of notification by the board to file the bond or at the end of the 90 days the license shall be automatically suspended. In lieu of filing the bond required by this section, the licensee may provide the board with a notarized copy of any accord reached with any individual holding an unsatisfied final judgment.

On appeal, Pacific argued that the stipulated judgment between Gold Coast and American Benefits was not the typeof “unsatisfied final judgment” contemplated by Section 7071.17(b). However, the Court of Appeals disagreed, citing Business and Professions Code section 7071.17(a), which, it stated, “lists the unsatisfied final judgments that fall within the statute’s ambit.” They include, held the Court, judgments against a contractor “for the refusal or failure ‘to pay a contractor, subcontractor, consumer, material supplier, oremployee‘” (quoting Section 7071.17(a)). And, here, held the Court, Gold Coast’s failure to pay union contributions was a failure to pay union employees.

B.     Was the stipulated judgment an “unsatisfied final judgment”  under Business and Professions Code section 7071.17?

Pacific next argued that the stipulated judgment was not an “unsatisfied final judgment” under Business and Professions Code section 7071.17 until Gold Coast failed to make its installment payments as agreed and American Benefits informed the CSLB of the unsatisfied stipulated judgment, which it did on March 26, 2003.

Again, the Court of Appeals disagreed. Equating a “stipulated judgment” with an “unsatisfied final judgment,” the Court held that Gold Coast was required to have informed the CSLB of “any entered and unsatisfied judgments within 90 days fromfrom the date of judgment” (quoting Section 7071.17(b)) and that Gold Coast had failed to do so.

C.     Did Gold Coast act reasonably and in good faith to maintain its license under the Substantial Compliance Doctrine?

Finally, the Court of Appeals held that Gold Coast did not act reasonably or in good faith because:

  1. “The McDaniels have been in the contracting business for decades and in any event, they are presumed to know the law’s requirements.”
  2. “If the McDaniels did not think the stipulated judgment was substantially related to Gold Coast’s construction activities, such as would trigger the notification requirement, they were obligated to provide the Board with support for their position, not merely ignore the statute.”
  3. “Lastly, if the McDaniels did not notify the Board for fear the licenses would be suspended, then they did not act in good faith.”

Note: Perhaps it doesn’t matter, but the decision states that the trial court found that “Pacific did not qualify for the substantial compliance exception” but the Court of Appealsconcluded that “Gold Coast did not satisfy the second prong of the substantial compliance exception”

Conclusion

Pacific Caisson is an interesting case which raises a number of questions and some troubling issues:

Was the “stipulated judgment” really a stipulated judgment or was it a stipulation for entry of judgment?

stipulated judgment is different from a stipulation for entry of judgment. While a stipulated judgment is a judgment (i.e., it is a form of judgment which has been agreed to by the parties) a stipulation for entry of judgment is not a judgment. Rather, a stipulation for entry of judgment contains two parts: (1) a stipulation for entry of judgment in which, typically, one party (the debtor) agrees to pay another party (the creditor) a sum of money in installments; and (2) a stipulated judgment that may be filed by the creditor in the event that the debtor fails to pay as agreed to in the stipulation for entry of judgment.

A stipulation for entry of judgment, which, in some ways, is perhaps more accurately referred to as a stipulation for entry of judgment with associated stipulated judgement, since there are two parts to it, is intended to avoid the problem faced by a creditor of having to file a second lawsuit against a debtor if the debtor fails to pay as it agreed to in the stipulation for entry of judgment. However, unlike a stipulated judgment, a stipulation for entry of judgment is not filed and, hence, not entered, by a court unless and until a breach of the stipulation for entry of judgment occurs, in which event, the creditor then files the stipulated judgment with the court.

While the Pacific Caisson case refers to the agreement between Gold Coast and American Benefit as being a “stipulated judgment,” it also refers to Gold Coast making installment payments to American Benefit, which makes it sound like it was as stipulation for entry of judgment not a stipulated judgment. This is important because an “unsatisfied final judgment,” to me, means a judgment that is no longer subject to appeal. For example, a party may have a judgment entered against him or her, but it does not become “final” until: (1) the time to appeal has elapsed; or (2) the party has taken an appeal and lost and has exhausted his or her rights to further appeal.

Similarly, a stipulation for entry of judgment is not, to my mind, a final judgment. It’s simply a form of settlement agreed to by the parties. And only if, and until, a breach of that stipulation for entry of judgment occurs, and a stipulated judgment has been filed and entered and all appeal rights have been exhausted does it become a “final” judgment. By equating a stipulation for entry of judgment (or even a stipulated judgment), as an “unsatisfied final judgment” under Business and Professions Code section 7071.17, basically means that no contractor can ever enter into a stipulation for entry of judgment (or stipulated judgment) with payment terms extending beyond 90 days, or its license will be suspended. I think this would be news for most contractors and their attorneys.

Was the subsequent “stipulation” entered into between Gold Coast and American Benefits a stipulation for entry of judgment, a stipulated judgment, or simply a settlement?

According to the case, “[u]pon receiving the suspension notice, Jerry contacted his attorney who negotiated a resolution with [American Benefits]. On June 6, 2003, Gold Coast and [American Benefits] entered into a stipulation under which Gold Coast agreed to pay a full satisfaction of the judgment by November 30, 2003. The [CSLB] lifted the suspension of both licenses on June 17, 2003, after receiving [American Benefit’s] notice of the settlement.” (emphasis added).

But what kind of “stipulation” is the Court of Appeals referring to? A stipulation for entry of judgment, a stipulated judgment, or simply a settlement? Although, as discussed above, it is unclear whether the “stipulated judgment” between Gold Coast and American Benefits was truly a stipulated judgment or whether it was a stipulation for entry of judgment, under the Court of Appeal’s rationale, if the subsequent “stipulation” which  Gold Coast and American Benefits entered into was the same type of stipulation which got Pacific into trouble to begin with it appears logical that the subsequent “stipulation” would not cure Pacific’s problems since it would also be an “unsatisfied final judgment” which Pacific was required to report to the CSLB, right?

The Court of Appeal’s rationale as to why Gold Coast did not “act reasonably and in good faith” to maintain its license under the Substantial Compliance Doctrine, was  not particularly rational

The Court of Appeals raised three reasons why it felt that Gold Coast did not act reasonably and in good faith to maintain its license, namely, that:

  1. “The McDaniels have been in the contracting business for decades and in any event, they are presumed to know the law’s requirements.”
  2. “If the McDaniels did not think the stipulated judgment was substantially related to Gold Coast’s construction activities, such as would trigger the notification requirement, they were obligated to provide the Board with support for their position, not merely ignore the statute.”
  3. “Lastly, if the McDaniels did not notify the Board for fear the licenses would be suspended, then they did not act in good faith.”

However, as to point one, as discussed above, I think the law is appreciably less than clear. Indeed, I think a number of construction attorneys would be surprised to learn that a stipulation for entry of judgment (or stipulated judgment that is not final) needs to be self-reported under Business and Professions Code section 7071.17. Thus, the Court of Appeal’s    somewhat certain – “of course it means that” conclusion – is new to me at least.

As to point two, this appears to create a new requirement that a contractor, even though it may not in good faith believe they have violated the Licensing Law, send factual and legal support for their good faith belief to the CSLB. I am not aware of any statutory authority for such a requirement and I could well see such a requirement creating some thorny issues such as how “gray” does the law have to be before a contractor is required to support their position before a violation of the Licensing Law has been alleged, let alone found, to exist.

And, finally, as to point three, the reasoning is a bit (actually, a lot) circular. It’s like saying I must have known I had broken the law by crossing a red light because I said nothing about crossing the red light to the police officer who pulled me over. The other plausible explanation, of course, is that I didn’t know I had crossed a red light. Then again, who would believe me.

The impact of Gold Coast’s suspension on Pacific, while a cautionary tale, is perhaps the least controversial aspect of the decision

While it’s easy to be shocked that the violation of the License Law by one contractor resulted in the suspension of the license of another contractor, this is probably the least controversial aspect of the decision.

Business and Professions Code section 7071.17(j) provides:

The qualifying person and any partner of the licensee or personnel of the licensee named as a judgment debtor in an unsatisfied final judgment shall be automatically prohibited from serving as an officer, director, associate, partner, owner, manager, qualifying individual, or other personnel of record of another licensee. This prohibition shall cause the license of any other existing renewable licensed entity with any of the same personnel of record as the judgment debtor licensee to be suspended until the license of the judgment debtor is reinstated or until those same personnel of record disassociate themselves from the renewable licensed entity.

One Parting Note

This is one of the few cases, in fact it may be the only the case I can recall, where a  contractor as opposed to a project owner was allowed to seek disgorgement from another contractor under Business and Professions Code section 7031. Section 7031(b) does seem to allow it though and provides:

A person who utilizes the services of an unlicensed contractor may bring an action in a court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

A “person” would seem to include a contractor and not just a project owner. However, it raises some tricky issues:

  1. Presumably, it would allow a higher-tiered contractor bringing a disgorgement claim against a lower-tiered contractor to recover a windfall assuming the higher-tiered contractor was paid by the project owner, although the risk of poor workmanship by the unlicensed contractor falls on the project owner.
  2. If a lower-tiered contractor is found to be unlicensed, the lower-tiered contractor might be deemed an employee of the higher-tiered contractor seeking disgorgement, which in turn raises the question of whether a project owner could in turn assert claim preclusion or seek disgorgement from a higher-tiered prime contractor who originally sought disgorgement.
  3. For contractors who hire lower-tiered contractors who are unlicensed at the time they enter into their contracts, does this give rise to liability or disciplinary action against the higher-tiered contractor under Business and Professions Code section 7118 which makes it a violation of the License Law for a contractor to enter into a contract with an unlicensed contractor.

This case has a lot of hairs on it. It will be interesting to see if there is a push to have it depublished, or if not, how future courts will apply the case the different facts.