Law Review: Contractors must be licensed at all times to be paid
Eisenberg Village v. Suffolk Construction Co. Inc. is a scary case if you are a contractor in California. Suffolk built Eisenberg’s 108-unit assisted living facility in Reseda, California, then was sued for return of all of the money it was paid. Now if that ain’t scary, I don’t know what is.
CONSTRUCTION LAW 101
Business and Professionals Code 7031, one of the few codes I can recite by heart, prevents unlicensed contractors from filing suit to collect compensation for performance of any work done when a license is required. You must be licensed to get paid even if the owner knew you were unlicensed – which occasionally happens.
Section 7031(b) remarkably, allows an owner who hires an unlicensed contractor to file suit for disgorgement, return of all money paid, to the unlicensed contractor, regardless of whether there was any fault in the contractor’s work. Ouch.
The Law Review has featured a few cases of disgorgement, which I consider unfair, at least if the failure to be licensed is due to a technicality or minor oversight, which is often the case.
CONTRACTOR BUILDS 108-UNIT ASSISTED LIVING FACILITY
Suffolk, who was licensed as a corporation, completed construction of the assisted living facility in June 2010 and was paid over $49 million. As a corporation, Suffolk is required to have a “qualifier” for the license in the form of a responsible managing officer or responsible managing employee (RME). A person with a license.
An RME is “an individual that is a bona fide employee of the [corporation]…and shall be responsible for exercising direct supervision and control of …construction operations as is necessary to secure full compliance…with the rules and regulations of the (contractors) board.”
As it turns out, Suffolk Construction’s RME moved out of the state and was no longer actively supervising Suffolk’s operations. Oops.
SUIT FOR DISGORGEMENT OF ALL PAYMENTS
Eisenberg claimed Suffolk was not properly licensed and sued for its $49 million. If you are a licensed contractor doing business as a corporation you should be nervous, especially if you are a major construction company with hundreds or thousands of projects, and your RME is spread thin and not “exercising direct supervision and control of construction operations.”
RULING FOR CONTRACTOR
As it turns out, because Eisenberg did not discover that Suffolk’s RME was not actively involved with the corporation until years later, its suit for disgorgement was filed years after the assisted living facility was completed. The Second Appellate District Court of Appeal concluded that Eisenberg had to file the suit for disgorgement within one (1) year after the project was completed. Its claim under Section 7031(b) was barred by a 1-year statute of limitations. Suffolk Construction wins.
It seems to me disgorgement is an improper remedy when an RME does not meet the “supervision and contract” criteria required for an RME. Corporate construction companies take note.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOAs, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at firstname.lastname@example.org or http://www.portersimon.com.
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