Most contractors are generally aware their license with the California
Contractors State License Board must be in the name of the legal entity doing the
contracting.
The importance of this rule
was recently highlighted, however, by the Fourth District Court of Appeal in
Twenty-Nine
Palms Enterprises Corporation v. Paul Bardos (2012) case no. E051769,
issued for publication on November 8, 2012.
Twenty-Nine Palms (“Palms”) was a tribal corporation, who
hired Cadmus Construction Co. (“Cadmus”), a sole proprietorship wholly owned by
Paul Bardos (“Bardos”), to construct a temporary access road and parking lot
for the Palms’ casino. The underlying
lawsuit filed by Palms in essence sought to recover all funds paid to Cadmus
pursuant to Business & Professions Code § 7031, alleging Cadmus was unlicensed. Section 7031 bars unlicensed contractors from
bringing actions in state court to recover compensation, and further provides
that anyone who utilizes the services of an unlicensed contractor may bring an
action to recover all compensation paid to that contractor. This is commonly referred to as “disgorgement.”
The trial court granted summary judgment in favor of Palms,
ordering Cadmus to disgorge the entire contract balance of $751,995. Ouch.
By way of background, Palms contracted with Cadmus in March
2007. Bardos was the 100% owner of
Cadmus, and alleged Cadmus was operating under the Bardos Construction, Inc. (“BCI”)
license issued in 1987, for which Bardos was the RMO.
Cadmus applied for its contractor’s license on June 25,
2007, in an application signed by Bardos.
Under the contract between Cadmus and Palms, construction was completed by May 2007, almost one month
before Cadmus applied for its own license.
It was undisputed that Palms knew Cadmus was a sole proprietorship
operated by Bardos, and BCI had done inspection and construction work for Palms
in the past.
Cadmus argued civil regulatory laws do not apply on tribal
lands, and therefore, Section 7031 (the licensing statute), as a regulatory
licensing rule, would not apply and require the contractor to be licensed. Cadmus also argued there was an issue of fact
to be determined by a jury as to whether Palms waived the licensing
requirement, which it could do pursuant to its sovereign immunity. Cadmus argued that because Palms had
performed an extensive background check on Bardos, including a review of BCI’s
contractor’s license status, it should be barred from recovering disgorged funds
due to the doctrine of unclean hands:
Palms knew of BCI’s dual role. Finally,
even if the Court determined Cadmus was unlicensed, it argued it had “substantially
complied” with the licensing requirement, a statutory defense to technical
noncompliance.
The Court ruled the unlicensed contractor statute (Section 7031)
was enforceable on tribal lands because Cadmus was not entitled to assert Palms’
sovereign immunity for them. The
sovereign immunity defense is reserved for the tribe and its entities; “thus,
if a tribe or a tribal entity seeks to sue a non-tribal entity in state court,
then the non-tribal entity cannot assert a sovereign immunity defense.” (Twenty-Nine Palms Enterprises Corporation
v. Paul Bardo, supra, at p. 15.) The sovereign immunity defense belongs only
to the tribe. Because the Court held
Cadmus was not entitled to assert the sovereign immunity defense, it did not
embark upon an analysis of the merits of Cadmus’ civil regulatory argument.
As to Cadmus’ licensure, Cadmus argued it had always been a
sole proprietorship, and Bardos had always been 100% owner. Bardos asserted his role as the RMO of BCI made
BCI the equivalent of an individual license for Bardos, and thus, permitted
Bardos to work under Cadmus’ name. The
problem with Cadmus’ argument is that BCI, as a corporation, is a separate
legal entity from Bardos and Cadmus.
Cadmus, in an intriguing argument raised for the first time on appeal,
contended the corporate identity of BCI should be disregarded via the alter ego
doctrine or “piercing the corporate veil” (traditionally, an argument used as a
sword by a plaintiff, not a shield by the defendant). The Court declined to extend this argument to
Cadmus’ benefit, holding the alter ego doctrine was not created to circumvent
regulatory requirements.
Lastly, Cadmus contended that if it were not properly
licensed, then there was evidence Cadmus fulfilled the substantial compliance
requirements. Section 7031(e) allows a
court to find there has been “substantial compliance with licensure
requirements…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.” The Court
disagreed, again based upon the separate and distinct corporate status of BCI,
the fact Cadmus had never had a license issued in its name, and Bardos’
admission he knew Cadmus was not licensed when he filed the license application
in March 2007.
So, to make a long story short, the Court of Appeal upheld
the trial court ruling, and Cadmus had to learn a very costly lesson about California’s
licensing statutes. Profit from Cadmus’
mistake, and don’t make the same mistake yourself. It is a relatively simple, straight-forward
process to ensure your license is properly in the name of your
business/contracting entity.
Questions? Concerns
about how to protect your business interests?
Comment, or send me an email. I’m
here to help!
Nothing in this blog is
intended to create an attorney-client relationship. This article is intended to provide a general
overview of the current status of the law for informational purposes only, and
is not intended to constitute, or serve as a substitute for, a professional
legal consultation. Laws change every
day; please consult an attorney regarding the current status of the law, and
how the law affects your specific circumstances. Thank you.
