Case Number: GC043394??? Hearing Date: June 08, 2016??? Dept: 310

SIGMA MECHANICAL v. MORILLO CONSTRUCTION, INC.

TENTATIVE RULING ON STIPULATED TRIAL REGARDNG WHETHER MCKINLEY WAS ADEQUATELY LICENSED OR SUBSTANTIALLY COMPLIED WITH THE LICENSURE REQUIREMENT

TENTATIVE RULING

The Court determines that McKinney was not adequately licensed during the time it performed work on the project. The Court further determines that McKinney did not substantially comply with the licensure requirement pursuant to B&P Code ?7031(e). Accordingly, McKinney lacks standing to bring suit for alleged nonpayment arising out of the Project. Further, pursuant to B&P Code ?7031(b), McKinney must disgorge funds to Morillo, representing the amount Morillo paid to McKinney.

I. BACKGROUND

This litigation arose over the construction and modernization of buildings as part of a public works project (?the project?) at property owned by the Los Angeles Community College District (?LACCD?, or ?the District?). The project was comprised of a building and modernization of two additional buildings (the G-1 Baum and E-1 Student Service). Sigma Mechanical, Inc. (?Sigma?) performed HVAC work on the project. Defendant Morillo Construction, Inc. (?Morillo?) was the general contractor for the project. The Second Amended Complaint (?SAC?) of Sigma alleges that on April 15, 2009, LACCD terminated Morillo from the project. Shortly after, Sigma filed a complaint against Morillo for monies had and owed pursuant to the subcontract between the parties. Sigma alleges that Morillo owes $1,281,689.20 (with interest) for work Sigma performed on the project. Sigma alleges claims for breach of contract, quantum meruit, account for money due, violation of California Business & Professions (?B&P Code?) ?7108.5, enforcement of bond, breach of contract for representation of Sigma at arbitration (claims for monies owed), breach of the implied covenant of good faith and fair dealing (as to the defense of LACCD?s construction defect claims in the arbitration), and breach of the implied covenant of good faith and fair dealing (as to the representation of monies owed in the arbitration). Morillo and Sigma have settled their claims against each other.

The only parties remaining in the litigation are Morillo and McKinney Drywall, Inc. (?McKinney.?) McKinney entered into a subcontract with Morillo to install all plaster anddrywall work on the project. McKinney signed a subcontract for $2,950,000 for its scope of work, and claims that it provided the majority of labor and materials it was to provide for the Project. However, McKinney says it was not paid in excess of $1,200,000. Morillo proceeded with a claim against LACCD on behalf of McKinney and received an award which approximated $1,200,000. Subsequently, Morillo settled with LACCD. However, McKinney claims that Morillo refused and continues to refuse to pay McKinney any of the funds McKinney is owed.

Pursuant to stipulation, Morillo and McKinney have filed concurrent opening briefs, and concurrent responsive briefs, seeking an order from the Court addressing whether McKinney was adequately licensed or substantially complied with the licensure requirement under b*p cOD Code ?7031, et seq.

II. MORILLO?S OBJECTION TO UNTIMELY BRIEF

Morillo objects to McKinney?s untimely filing of its opening brief. Pursuant to the stipulation, opening briefs were to be filed and served no later than April 15, 2016. McKinney filed its opening brief on April 18, 2016. While the Court has discretion to disregard McKinney?s untimely opening brief, the Court has considered the brief and all arguments raised therein.

III. EVIDENTIARY OBJECTIONS

Morillo has lodged evidentiary objections to the Declaration of Gary McKinney and Newton Kellam.

The Court?s rulings follow.

1. Objections to McKinney Declaration

Paragraph 4: Overruled.
Paragraph 5: Overruled.
Paragraph 6: Overruled.

2. Objection to Kellam Declaration

Paragraph 2: Overruled.

IV. DISCUSSION

As noted supra, the parties have stipulated to having the Court decide whether McKinney was adequately licensed or substantially complied with the licensure requirement under B&P Code ?7031, et seq.

In general, a contractor must be licensed at all times during the performance of the contract. MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Co., Inc. (2005) 36 Cal.4th 412, 431. The purpose of the Contractors’ State License Law (CSLL) is to protect the public from incompetence and dishonesty in those who provide building and construction services; the licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. Montgomery Sansome LP v. Rezai (2012) 204 Cal.App.4th 786.

B&P Code ?7031 provides in applicable part as follows:
(a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.

(b) Except as provided in subdivision person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract. (Emphasis added.)

Subsection (e), however, provides an exception to the rule set forth under ?7031(a), and sets forth the requisites for a contractor?s ?substantial compliance? with the statute. Subsection (e) states:

(e) The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing 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. (Emphasis added.)

Thus, under ?7031(a), if McKinney was not licensed at all times during the project, and otherwise did not substantially comply with the licensing requirements, McKinney cannot establish standing to seek the sums it is allegedly owed. Further, under ?7031(b), unlicensed contractors must disgorge all compensation paid to them for ?performance of any act or contract.? Morillo, in addition to disclaiming any duty to pay the amounts McKinney seeks under the subcontract, affirmatively seeks $1,674,299.26 that Morillo already had paid McKinney for its work on the project. The legislative history of ?7031 ?strongly supports the?view?that the Legislature intended to create only an extremely narrow exception to the licensure requirement, which would apply only where a contractor was without a license owing to circumstances truly beyond his control.? Construction Financial v. Perlite Plastering Co. (1997) 53 Cal.App.4th 170, 182.

Here, based on the evidence before the Court, it is apparent that McKinney was not licensed at all times during its work on the project. As is relevant to the time McKinney worked on the project, McKinney was suspended twice: from October 8, 2008 to October 21, 2008, and again from December 15, 2008 to January 14, 2009. In all, McKinney was suspended for 43 days during the time it spent on the project.

McKinney, in its opening brief, does not dispute that its license was suspended during these times. The issue is whether McKinney ?substantially complied? with the licensing statute pursuant to ?7031(e) above, so as to establish standing to seek the amounts allegedly due and owing (and to prevent Morillo from seeking the amounts paid to McKinney to date). The evidence before the Court is as follows.

The McKinney subcontract is dated January 15, 2008. McKinney?s last day on the project was April 9, 2009. The time McKinney spent on the project, under the Court?s calculation, was 450 days (or one year, two months, and twenty-five days). Morillo has submitted a Certification of Records from the Contractors State License Board showing that McKinney was suspended on October 8, 2008 for ?Outstanding Liability,? and reinstated on October 21, 2008. On December 15, 2008, McKinney was again suspended. McKinney was reinstated on January 14, 2009. McKinney?s suspension was lifted by the State Contractors Licensing Board on June 1, 2011. McKinney was paid $1,674,299.26 for its work on the project. This evidence demonstrates that McKinney did not possess a valid license, consistent with ?7031(a), during all times McKinney performed work on the project.

As such, McKinney must demonstrate substantial compliance under ?7031(e). The ?substantial compliance? doctrine is ?extremely narrow? and applies ?only where a contractor was without a license owing to circumstances truly beyond his control.? Construction Financial v. Perlite Plastering Co. (1997) 53 Cal.App.4th 170, 282.

Turning to the requirements of ?7031(e), McKinney was licensed as a contractor when it entered into the contract with Morillo and at the time work commenced. As such, McKinney satisfies the first requirement under ?7031(e).

The second requirement under ?7031(e) ? whether McKinney acted reasonably and in good faith to maintain proper licensure ? is disputed. The Contractors State Licensing Board, or CSLB, sent a Notice of Unsatisfied Final Liability to McKinney (?the notice?) for $181,651.60, dated August 8, 2008. The notice provides in applicable part:

We have been notified that there is an unsatisfied final liability against you. The outstanding liability was filed by the EMPLOYMENT DEVELOPMENT DEPARTMENT [?EDD?] on August 07, 2008 in the amount of $181,651.60.

Pursuant to Section 7145.5 of the Business and Professions Code, you must submit proof from the EMPLOYMENT DEVELOPMENT DEPARTMENT that the liability has been satisfied. This must be received by October 08, 2008.

If the outstanding liability was filed by the Contractors State License Board, this reimbursement must be in the form of a cashiers check or a money order.

Failure to comply by the above date will result in the automatic suspension of the subject license by operation of law. If the license is suspended it can only be reinstated by submitting proof of the satisfaction of the liability.

Section 7145.5 also prohibits any person who is listed on this license from BEING associated with any other license while this license is suspended because the outstanding liability remains unsatisfied. The following licenses will also be suspended on October 08, 2008, unless this outstanding liability is satisfied:

662006 MC KINNEY WALL SYSTEMS INC

NAME: MC KINNEY DRYWALL INC DATE: 08/08/2008[.]

Subsequently, the CSLB sent a notice dated October 8, 2008 to McKinney, stating that since McKinney had not complied with the August 8 notice of unsatisfied final liability, it was suspended effective that day. McKinney received a notification from the CSLB dated October 22, 2008, stating that CSLB received McKinney?s documentation indicating that the outstanding liability lien ?has been complied with through proof of satisfaction? and that the outstanding liability suspension on the license was lifted October 21, 2008 for the lien.
Based on this evidence, it is apparent that McKinney had at least two months? notice of the EDD?s unsatisfied final liability. This two month period lapsed, resulting in McKinney?s suspension.

McKinney?s second suspension stemmed from a civil court judgment entered in Orange County Superior Court in Granite State Insurance Company v. McKinney Wall Systems, Inc. against McKinney Wall Systems, Inc. Because McKinney Drywall, Inc. was also listed under McKinney Wall Systems? license, McKinney Drywall was suspended effective December 15, 2008. The December 16, 2008 notice provided that because McKinney failed to notify the Registrar within 90 days from the judgment date, the license was automatically suspended. By virtue of the CSLB?s January 15, 2009 notice and resolution of the Granite State Insurance Company judgment, McKinney?s license was reinstated effective December 29, 2008.

The Court finds that both suspensions reveal McKinney did not act reasonably and in good faith to maintain proper licensure. Pacific Caisson & Shoring, Inc. v. Bernards Bros., Inc. (2015) 236 Cal.App.4th 1246 is on point. In that case, a subcontractor (Pacific Caisson) sued the general contractor on a building project (Bernards Brothers), seeking compensation for excavation work performed. The trial court entered judgment for Bernards Brothers, finding that Pacific was precluded from maintaining the action, as it had not substantially complied with the requirement that it be licensed while performing work under ?7031 (because for two months during the project, its license was suspended). The suspension was based on the failure to inform the CSLB of an unsatisfied stipulated judgment against an equipment company (Gold Coast Drilling, Inc.) that had common qualifying personnel with Pacific. Further, both Pacific and Gold Coast had the same responsible managing officer (?RMO?)

The Court of Appeal affirmed. The Court reasoned that the stipulated judgment was the type of judgment contemplated under B&P Code ?7071.17, because the judgment against Gold Coast for failure to pay pension and other benefits was a judgment for the failure to pay ?wages? to employees, and was substantially related to construction activities or to the qualifications, functions, or duties of the license. The stipulated judgment was unsatisfied as soon as it was entered, regardless of whether the equipment company thereafter made installment payments. The Court determined the evidence supported a finding, for purposes of ?7031(e)?s substantial compliance provision, that the equipment company did not act reasonably and in good faith to maintain its license.

The Court found the common personnel between Pacific and Gold Coast acted unreasonably if they were ignorant of the notification requirement, given that they had been in the contracting business for decades and, in any event, were presumed to know the law. The Court further found that they acted unreasonably if the failure was based on a belief that the stipulated judgment was not substantially related to construction activities, as they were obligated to provide the board with support for that position; and they did not act in good faith if they did not notify the board for fear the licenses would be suspended.

Notably, in Pacific Caisson, Pacific had argued that it acted in good faith but ?simply did not have the financial ability to pay the stipulated judgment.? Pacific Caisson at 1257. Pacific also had argued that the policy behind the forfeiture of ?7031 is ?to protect the public from unscrupulous and incompetent contractors, whereas Pacific was not unscrupulous, just broke.? Pacific Caisson at 1257. The Court of Appeal rejected this argument, stating in pertinent part:

[T]he purpose of the forfeiture statute is not solely to weed out unprincipled contractors, but also to assure that contractors ?understand applicable local laws and codes, and know the rudiments of administering a contracting business.? [Citation.] The statutory disallowance of claims for payment by unlicensed subcontractors reflects a long-standing policy. [Citation.] Section 7031 ?applies despite injustice to the unlicensed contractor.? [Citation.] Section 7031 ???represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties… .? ? ? [Citation.] Pac. Caisson & Shoring, Inc. v. Bernards Bros. Inc., 236 Cal. App. 4th at 1257 (emphasis in original).
As in Pacific Caisson, the Court finds that McKinney?s two separate suspensions and unlicensed status was not due to circumstances beyond its control. With respect to the first suspension during the project, McKinney had known for two months about the notice of unsatisfied liability. While McKinney did act relatively promptly in seeking reinstatement, it does not change the fact that it had ample notice of the risk of suspension.

Similarly, with respect to the second suspension, it is evident that Gary McKinney (who is the RMO for both McKinney Drywall, Inc. and McKinney Wall) did not notify the CSLB of the Granite State Insurance Company judgment against McKinney Wall within 90 days. It bears mentioning that McKinney Wall was suspended on six separate occasions prior to the suspensions at issue in this case. There was thus a pattern by Mr. McKinney of not maintaining the license.

The Court is not unmindful of the harsh effects of its decision. According to McKinney, the reason McKinney did not pay the Employment Development Department (?EDD?) (resulting in the first suspension during the project) was because Morillo had failed to pay McKinney $108,000 that Morillo received for McKinney?s work from LACCD on August 9, 2008. However, as made clear by Pacific Caisson and the other authorities interpreting the licensure requirements, section 7031 applies despite injustice to McKinney. Pacific Caisson at 1257. Any lack of funds or inability to pay the EDD or the Granite State judgment cannot be used as excuses for failure to satisfy the substantial compliance provisions of ?7031(e). The Legislature has made the determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties. Id.

Alternatively, McKinney argues that Morillo is estopped from alleging the non-licensure as a defense because, according to McKinney, its inability to maintain its license was caused by Morillo?s failure to pay progress payments. However, the import of ?7031(a) is clear, and there is no case which permits an unlicensed contractor to assert estoppel as a reason for noncompliance with the licensing statute.

As to the third prong under ?7031(e), McKinney was duly licensed when the contract commenced, and remained licensed up until its first suspension on October 8, 2008.
The fourth prong of ?7031(e) requires a showing that the contractor acted promptly and in good faith to reinstate his or her license upon learning it was invalid. Here, it is evident that McKinney did act in good faith to reinstate the license during both instances when it learned it was invalid. The turn-around period following the first notice of suspension was 13 days, and the second period was 30 days (which fell during Christmas and New Year?s).

Nevertheless, since McKinney has not satisfied the second requirement under ?7031(e), there was not substantial compliance with the statute. Since McKinney did not substantially comply with the licensure statute during the time it performed work on the project, it has no standing to bring or maintain any action, or recover in law or equity in any action, against Morillo.

Further, pursuant to ?7031(b), Morillo, as an entity which utilized the services of McKinney (an unlicensed contractor), had a right to bring an action to recover all compensation it paid to McKinney during the project. There is no apportionment allowed as a matter of law, and no offsets are permitted. Jeff Tracy, Inc. v. City of Pico Rivera (2015) 240 Cal.App.4th 510, 521. The Court reiterates that it is not unmindful of the harsh result. However, as the Jeff Tracy court recognized, ??in enacting section 7031 [, subd.] (b), the Legislature was specifically aware that permitting reimbursement may result in harsh and unfair results to an individual contractor and could result in unjust enrichment …, but nonetheless decided that the rule was essential to effectuate the important public policy of deterring licensing violations and ensuring that all contractors are licensed.?? Jeff Tracy, Inc., 240 Cal.App.4th at 521 (citing Alatriste v. Cesar’s Exterior Designs, Inc. (2010) 183 Cal.App.4th 656, 673).

As such, under ?7031(b), Morillo is entitled to the return of the entire $1,674,299.26 sum it paid to McKinney. Morillo has submitted copies of the all checks it wrote to McKinney justifying the sum.