Ted R. Gropman, Pepper Hamilton LLP, Partner
Pacific Caisson & Shoring, Inc. v. Bernards Brothers Inc., 236 Cal. App. 4th 1246 (Cal. Ct. App. 2015)
In California, a contractor must be licensed by the Contractors State License Board (Board) in order to lawfully perform construction operations. The Board issues three types of licenses: an “A,” or general engineering license; a “B,” or general building license; and a series of “C” specialty licenses for trade contractors (e.g., concrete, electrical, glass and glazing, structural steel, drywall, tile, etc.). California Business & Professions Code (B&P) §§ 7056–7058. In order to qualify for a license, a contractor must provide a responsible managing officer (RMO) or a responsible managing employee as its qualifier. B&P § 7068.
The consequences of contracting without the proper license can be severe. An unlicensed contractor may not sue to recover for the value of its work. B&P § 7031(a). Even more damaging, an owner can seek disgorgement of all monies paid to a contractor, even if there was nothing wrong with the contractor’s construction of the project. B&P § 7031(b); Alatriste v. Cesar’s Exterior Designs, Inc., 183 Cal. App. 4th 656 (Cal. Ct. App. 2010). As the California Supreme Court has observed, B&P § 7031 “represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state.” MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., 36 Cal. 4th 412, 423; 115 P.3d 41 (Cal. 2005).
Not only must a contractor be licensed when the work begins, but the license must be maintained “at all times during performance” of the work. B&P § 7031(a). The California Legislature, however, has, over the years, created an ever-changing “substantial compliance” test. This test seeks to avoid the harsh result that would occur if a contractor was properly licensed when the work began, but the license lapsed before completing the work.
In order to qualify for protection under the substantial compliance test, the contractor must establish that it:
(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.
B&P § 7031(e).
In the recent case of Pacific Caisson & Shoring, Inc. v. Bernards Brothers Inc., 236 Cal. App. 4th 1246 (Cal. Ct. App. 2015), the Court of Appeal had an occasion to address the second prong of the four-prong test.
In that case, the plaintiff shoring subcontractor (Pacific) was licensed at the time construction began on a hospital project, but the license was suspended in 2003 for approximately 2.5 months of Pacific’s 18-month performance on the project. The Board suspended the license because the license of Pacific’s related company, Gold Coast Drilling, Inc., had been suspended for failure to satisfy a judgment against it. Pacific and Gold Coast were both owned by Jerry and Delma McDaniels, and Jerry McDaniels served as the qualifier (i.e., the RMO) for both companies. When an individual serves as the RMO for two contractor companies, the license suspension of one contractor results in the automatic suspension of the other. B&P § 7071.17(j).
As explained by the court in Pacific Caisson, in 2000, Gold Coast had entered into a stipulated court judgment with a pension plan administrator (ABPA) for failing to pay employee benefits. The stipulated judgment, which was not reported to the Board by Gold Coast, called for Gold Coast to make monthly payments to ABPA. In March 2003 — approximately 11 months after Pacific had commenced construction on the hospital project, and due to Gold Coast’s repeated failures to stay current with its monthly payment obligations under the 2000 stipulated judgment — ABPA reported the judgment to the Board. In turn, the Board notified Pacific — who shared a qualifying RMO with Gold Coast — that its license was suspended under the mandate of B&P § 7071.17. (Gold Coast’s license was also suspended by the Board.)
The first question addressed by the Court of Appeal, which affirmed the trial court’s judgment against Pacific, was whether entering into a stipulated judgment was a reportable event under B&P § 7071.17(b). That section provides that:
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.
B&P § 7071.17(b) (emphasis added).
At trial, and on appeal, Pacific argued that Gold Coast’s stipulated judgment with ABPA was not an “unsatisfied final judgment” under section 7071.17(b) and, therefore, not a reportable event. The court disagreed, noting that a “stipulated judgment is as conclusive as to the matters in issue it determines as a judgment after trial.”
Having concluded that B&P § 7071.17(b) requires a contractor to report stipulated judgments it has entered into (even if the stipulated judgment calls for future payments), the court then analyzed whether the trial court had properly concluded that Gold Coast’s failure to report the stipulated judgment was a failure to comply with the second prong of the substantial compliance test, i.e., whether the contractor “(2) acted reasonably and in good faith to maintain proper licensure.” In affirming the trial court’s finding that the second prong had not been met, the Court of Appeal held:
If the McDaniels’ failure to notify the Board was the result of ignorance of the notification requirement, then they acted unreasonably. The McDaniels have been in the contracting business for decades and in any event, they are presumed to know the law’s requirements…. 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 to ignore the statute. Their failure to notify the Board on that ground would likewise be unreasonable. Lastly, if the McDaniels did not notify the Board for fear the licenses would be suspended, then they did not act in good faith. The substantial compliance exception to the forfeiture rule is “extremely narrow” and applies “only where a contractor was without a license owing to circumstances truly beyond his control…. (Citations omitted.)
The Court of Appeal also rejected collateral arguments advanced by Pacific, including (i) the contention that the financial inability to pay a judgment meets the second prong’s “good faith” requirement and (ii) the second prong of the test only applies to post-suspension conduct, not pre-suspension conduct.
The Pacific Caisson case highlights the importance of a contractor either satisfying a judgment against it or, at a minimum, reporting the judgment to the Board within 90 days after the judgment becomes final. Also, if a contractor simply does not have the financial wherewithal to satisfy a judgment, it may be able to avoid suspension of its license by filing for bankruptcy protection. In that regard, B&P § 7071.17(f) provides that the license suspension provisions “shall not apply to an applicant or licensee when the financial obligation covered by this section has been discharged in a bankruptcy proceeding.”
Note: The author represented the prevailing party in the Pacific Caisson case discussed in this article. To view the full text of the court’s decision in Pacific Caisson, courtesy of Lexis ®, click here.
 “A general engineering contractor is a contractor whose principal contracting business is in connection with fixed works requiring specialized engineering knowledge and skill, including the following divisions or subjects: irrigation, drainage, water power, water supply, flood control, inland waterways, harbors, docks and wharves, shipyards and ports, dams and hydroelectric projects, levees, river control and reclamation works, railroads, highways, streets and roads, tunnels, airports and airways, sewers and sewage disposal plants and systems, waste reduction plants, bridges, overpasses, underpasses and other similar works, pipelines and other systems for the transmission of petroleum and other liquid or gaseous substances, parks, playgrounds and other recreational works, refineries, chemical plants and similar industrial plants requiring specialized engineering knowledge and skill, powerhouses, powerplants and other utility plants and installations, mines and metallurgical plants, land leveling and earthmoving projects, excavating, grading, trenching, paving and surfacing work and cement and concrete works in connection with the above-mentioned fixed works.” B&P § 7056.
 “Except as provided in this section, a general building contractor is a contractor whose principal contracting business is in connection with any structure built, being built, or to be built, for the support, shelter, and enclosure of persons, animals, chattels, or movable property of any kind, requiring in its construction the use of at least two unrelated building trades or crafts, or to do or superintend the whole or any part thereof.” B&P § 7057(a).