CALIFORNIA ATTORNEY'S FEES

Fee Clause Interpretation, Section 1717, Unlicensed Contractor: Section 1717 Fees Of $231,834 To Defendant Prevailing Against Statutory Claims Affirmed “Because Of” Broad Fee Provision In Parties’ Contract

Parties’ Fee Provision Encompassed Tort and Statutory Causes Of Action Commenced “Because Of” An Alleged Breach Of Contract.

            In San Francisco CDC LLC v. Webcor Construction L.P., Case Nos. A156669/A157650 (1^st Dist., Div. 1 March 19, 2001) (published), plaintiff paid defendants approximately $144 million for the construction of a hotel in San Francisco.  Eight years after defendants’ completion of the hotel and plaintiff’s final payment, plaintiff sued defendants under Bus. & Prof. Code § 7031(b) for disgorgement – alleging defendants were not properly licensed during construction and had concealed licensing violations through a series of mergers.  However, finding plaintiff’s claims had accrued at the time of final payment and were time-barred under a one-year statute of limitations (Code Civ. Proc. § 340(a)), the trial court sustained defendants’ demurrer to plaintiff’s third amended complaint without leave to amend – a result affirmed on appeal by the 1/1 DCA.

            After defeating plaintiff’s claims on demurrer, defendants successfully moved for $231,834 in Civil Code § 1717 attorney fees.  On appeal, plaintiff challenged the fees award by arguing that the trial court erred in its interpretation of the attorney fee provision in the parties’ construction agreement.  Plaintiff asserted that the fee provision excluded noncontract claims such as an action for statutory disgorgement – that fees were available only in an action for breach of contract.  The appellate panel concluded otherwise.

            The fee provision in the parties’ contract stated fees were recoverable “[i]f either party commences an action against the other to enforce any of the terms of the Contract Documents or because of the breach by either party of any of the terms of the Contract Documents . . .”  As the “because of” language in the provision did not include a limiting qualifier such as “solely” or “exclusively because of,”  the appellate panel concluded that it permitted the recovery of fees if the action was at least in part due to an alleged breach of contract – including an action brought “because of” a breach of contract without being an action for breach of contract. 

            Although plaintiff sued to assert a statutory disgorgement claim, the trial court’s conclusion that plaintiff’s action was at least in part “because of” an alleged breach of contract was fully supported by the record.  Plaintiff’s pleadings repeatedly claimed defendants breached their contractual obligations to be licensed, and plaintiff also argued before the trial court that its disgorgement claim arose out of a contractual obligation.

POOF!, Unlicensed Contractors: $155,008.50 Fee Award Against Unlicensed Contractor Under CCP § 1029.8(a) Reversed As A Matter Of Law

Absence Of True Injury To Owners Did Not Justify An Award Even Though Substantial Payments To Unlicensed Contractor Disgorged Under B&P § 7031(b).

            When you are dealing with fee entitlement, frequently, statutory interpretation is involved.  If that is the case, you get de novo review—which can lead to a reversal of a fee award not meeting the statutory requirements as a matter of law.  That is what happened in Kivel v. McInerney, Case No. D074173 (4^th Dist., Div. 1 Mar. 17, 2021) (unpublished).

            CCP § 1029.8(a) provides in relevant part: “Any unlicensed person who causes injury or damage to another person as a result of providing goods or performing services for which a license is required under . . . Division 3 (commencing with Section 5000) . . . of the Business and Professions Code . . . shall be liable to the injured person for treble the amount of damages assessed in a civil action in any court having proper jurisdiction. The court may, in its discretion, award all costs and attorney’s fees to the injured person if that person prevails in the action.”  (Emphasis added.)  

            Kivel involved a situation where an unlicensed contractor on an upscale residential construction was ordered to disgorge $2.732 million in payments by the owner, despite no evidence there was defective construction.  Then, to add insult to “injury” (sorry about the pun), the lower court determined owner was entitled to attorney’s fees of $155,008.50 and to costs of $52,689.13 under section 1029.8.  Contractor appealed the fee award, a good move.

            The 4/1 DCA reversed the fee award as a matter of law.  The defect in the fee award was the statutory requirement of injury.  Section 7031(b) is a statutory penalty which requires disgorgement from the unlicensed contractor for being unlicensed, untethered to whether there was any injury separate and apart such as defective construction.  In this case, there was no showing of added “injury” such that the section 1029.8 fee award went POOF!  However, contractor did get penalized—he had to disgorge $2.732 million, probably enough of a sanction if we read what the appellate court likely saw in deciding the case!

Reasonableness Of Fees, Unlicensed Contractor: $90,000 Fee Award To Construction Plaintiffs Obtaining Award Under Unlicensed Contractor Fee-Shifting Provision, Way Downwards From $287,640 Request, Was Warranted Under The Circumstances.

Overlitigation Of Case By Attorney Personally Embroiled In A Suit And Incivility Concerns Justified A Reduction Of A Requested Fee.

            Karton v. Ari Design & Construction, Inc., Case No. B298003 (2d Dist., Div. 8 Mar. 9, 2021) (published) is a case rife with so many lessons, we cannot catalogue them all.  However, it certainly was published to indicate that an attorney’s personal embroilment in a case and incivility are proper bases to reduce a fee request.

            Plaintiffs were residential owners (with the husband being an attorney) who contracted for a $163,650 construction project with contractor, which had a surety providing a contractor’s bond.  Even though the contractor admitted to owing some money once a dispute arose (which the appellate court said was a difference of $22,096 by the parties’ own admissions), the dispute escalated so as to lead to a 3 ½ day bench trial.  The trial court found that plaintiffs had overpaid $35,096 but had to add $57,555 more to the judgment based on contractor using unlicensed workers (even though no work was found to be defective), for a total sum of $92,651, plus an additional $10,000 penalty (a grand total of $102,000).  Plaintiffs then moved for about $271,000 in attorney’s fees under an unlicensed contractor fee-shifting provision as well as discovery sanctions and RFA “costs of proof” sanctions (with these last two grounds not supporting a different result).  Two hearings were held on the fees request after the lower court identified some deficiencies and asked for limited supplemental briefing, with plaintiffs engulfing the court with voluminous documents.  The trial judge eventually found $90,000 was a proper fee award, after reducing for the husband’s personal embroilment and uncivil attacks on opposing counsel, the principal reasons for the reduction.

            The 2/8 DCA affirmed.  The appellate panel initially has a good discussion about the nationwide “tug-of-war” on whether to use the lodestar versus percentage of recovery, with each having advantages and disadvantages.  (A discussion well worth reading especially for class action practitioners.)  That debate notwithstanding, the Court of Appeal found there were five good reasons to reduce the requested fees:  (1) the issues in the case were relatively simple; (2) plaintiffs had over-litigated the matter; (3) some of the over-litigation was attributable to husband plaintiff’s personal embroilment in the matter; (4) the size of the eventual judgment did not justify the fee request (a cost/benefit approach); and (5) the incivility in plaintiffs’ briefing, because “[c]ivility is an aspect of skill” and “[i]ncivility between counsel is sand in the gears.”  With that, the $90,000 fee award was affirmed, but the surety was added as being liable for the fee award because the unlicensed contractor fee-shifting statute made the beneficiary liable and bound to pay costs over beyond the bond amount under Harris v. Northwestern Nat. Ins. Co., 6 Cal.App.4^th 1061, 1067-1068 (1992). 

            OUR FAVORITE QUOTE FROM THE CASE—“Excellent lawyers deserve higher fees, and excellent lawyers are civil.  Sound logic and bitter experience support these points.”

Special Fee Shifting Statutes, Unlicensed Contractors: $4 Million Fee Award Evaporates On Appeal Because Penal Code Section 496(B) Does Not Encompass Fraudulent Diversion Of Business Funds

Also, CCP § 1029.8 Did Not Apply, Because Defendants Were Neither Unlicensed Contractors Nor Broker-Dealers.

            Appellate practice can result in a reversal of fortunes.  In Siry Investment, L.P. v. Farkhondehpour, Case No. B277750 (2d Dist., Div. 2 Mar. 3, 2020) (lead case, published), a $4 million-plus fee award based upon Penal Code section 496(b) and Code of Civil Procedure section 1029.8 went away as a matter of law on appeal.

            The 2/2 DCA determined that attorney’s fees could not be awarded in a fraudulent diversion of business funds case because Penal Code section 409(b) only applied to trafficking in stolen goods.  In doing so, it expressly parted company with the contrary reasoning in Switzer v. Wood, 35 Cal.App.5^th 116 (2019). 

            With respect to the predicate that CCP § 1029.8 allowed for fees (a section allowing fee entitlement against unlicensed persons in California), that was not applicable because defendants were not unlicensed construction contractors (they may have used unlicensed contractors, but did perform the construction services themselves) and were not unlicensed brokers-dealers (given that the limited partnership was not a “security” under the unique circumstances of the case and plaintiff’s lack of pleading of passivity in the investment). 

Section 1717/Unlicensed Contractor: $90,310.50 Fee Award Against Residential Seller Affirmed In Case Where Modified Damages Were Only $32,004.70

Fee Award Reversed Against Corporate, Nonsignatory Principal Where No Alter Ego Unfairness Shown.

            In Posada v. Stone Steps Properties, LLC, Case Nos. B271664/B277933 (2d Dist., Div. 5 Sept. 11, 2017) (unpublished), a residential property seller failed to disclose to a buyer that an unlicensed contractor performed renovations on the property, resulting in a 5-day bench trial where the trial judge eventually awarded buyer $49,520.90 in compensatory damages.  Based on a fees clause in the purchase documents, the trial court later awarded attorney’s fees against the seller and the seller’s principal to the tune of $90,310.50 (out of a requested $94,932.50).  On appeal by the selling-related litigants, the appellate court modified the compensatory damages judgment down to $32,004.70 based on the determination that some of the awarded damages were not related to the unlicensed contractor’s renovations.  However, the fee award was affirmed as to seller, but reversed against seller’s principal since he was not a signatory to the agreement and nothing showed that he was an alter ego (given that party did maintain the separateness of the corporate defendant for alter ego purposes). 

Unlicensed Contractors: Defendant Victim Of No Contest Pleading Unlicensed Contractor Properly Awarded Civil Action Attorney’s Fees As Part Of Criminal Probationary Restitution Order

Penal Code Section 1202.4(f)(3)(H) Was Basis For Fees As Restitutio

            Walker v. Appellate Division of the Los Angeles County Superior Court (People), Case No. B208100 (2d Dist., Div. 5 Aug. 22, 2017) (published) is a case where a criminal defendant pled no contest to a misdemeanor cost of contracting without a contractor’s license, ordered by the lower court to pay restitution of some losses but not ordered to pay other losses or attorney’s fees by the person who was the recipient of the unlicensed contractor services.  The Appellate Division of the superior court disagreed, ordering restitution of all “economic losses” as well as attorney’s fees incurred by the “victim” in having to defend against criminal defendant’s earlier civil lawsuit and in having to bring a cross-claim to obtain disgorgement of prior payments to unlicensed contractor.  The 2/5 DCA then refused to grant a mandate petition, but the California Supreme Court transferred back to the 2/5 DCA with an OSC to show why at least one component of the full restitution order should not be changed.  Upon the state supreme court’s transfer back, the 2/5 DCA panel found that the trial court was correct to not grant one component of the restitution order, with that aspect drawing a 2-1 split in thinking.  However, all justices agreed that the attorney’s fees component in the criminal restitution order was justified under Penal Code section 1202.4(f)(3)(H), which provides “[t]o the extent possible, the restitution order shall be prepared by the sentencing court, shall identify each victim and each loss to which it pertains, and shall be of a dollar amount that is sufficient to fully reimburse the victim or victims for every determined economic loss incurred as the result of the defendant’s criminal conduct, including, but not limited to, all of the following:  (H) Actual and reasonable attorney’s fees and other costs of collection accrued by a private entity on behalf of the victim.”

Unlicensed Contractors: Landowner Using Unlicensed Contractor To Cut Trees Cannot Be Vicariously Liable For Fee Recovery Under CCP § 1029.8

 

$50,148 Fee Award Gets Reversed.

     Code of Civil Procedure section 1029.8(a) authorizes a fee award against an “unlicensed person who causes injury or damage to another person as a result of providing goods or performing services for which a license in required.” The next case explored whether fee recovery could be had not against the unlicensed contractor, but against the person utilizing the services of the contractor in a tree cutting damages action.

     Rony v. Costa, Case Nos. A128596/A128836 (1st Dist., Div. 1 Oct. 26, 2012) (published) is a situation where one neighbor unaesthetically had an unlicensed contractor remove overhanging tree limbs from a neighboring Monterey cypress in order to make way for an outdoor pizza oven in neighbor’s back yard. Well, that proved to be a costly decision--likely eclipsing the delight of the pizzas--because a trial court awarded the impacted neighbor $22,530 in actual damages, doubled to $45,060 under a statutory double-damages provision after testimony demonstrated that the Monterey cypress was left somewhat denuded. However, the lower court also assessed $50,148 in attorney’s fees against losing neighbor, reducing the requested fees by 20%.

     Losing neighbor appealed both the merits and fee judgments, losing on the merits but winning a reversal as to the fees award.

     The reason is that the statutory language in section 1029.8 is only directed against the unlicensed contractor, who was not a party to the suit. The appellate court determined that the statutory language was clear, that the Legislature knew how to impose vicarious liability (but not do so in this area), and that the general respondeat superior statute (Civ. Code, § 2338) did not provide a basis to engraft vicarious fee liability under section 1029.8.

Unlicensed Contractors: $91,820 Fee Award Against Unlicensed Contractor Affirmed On Appeal

Fourth District, Division 3 Affirms Award Under B&P Code Section 7160, Finding No Apportionment Was Necessary.

     Under our category “Unlicensed Contractors,” we have looked at a number of decisions where unlicensed contractors do not suffer well at any level, including when it comes to assessment of attorney’s fees case. The next case is no exception.

     Unlicensed contractor, in Rambeau v. Barker, Case Nos. G041879/G041982 (4^th Dist., Div. 3 July 16, 2010) (unpublished), had to disgorge $602,000 paid to him for construction (plus assessment of a punitive award that was stricken) and was smitten with $91,820 in attorney’s fees under Business and Professions Code section 7160, authorizing a fees award to any person induced to contract for a work of improvement in reliance on false or fraudulent representations knowingly made by the contractor. Unhappy contractor appealed.

     Unhappy contractor lost on appeal with respect to the fee award.

     Contractor luckily did not contest fee entitlement; after all, the statute is there and pretty plain in meaning. The argument (which might have been waived) was that the fees were limited to the recovery incurred in pursuing specifically a fraud cause of action. Not so, said the appellate panel. The provision is not that limited and certainly does not “trump” the general rule that apportionment is not required where issues cannot be segregated and related to a common core of facts or interrelated issues. Fee award affirmed, again stressing that unlicensed contractors need to beware when they “litigate” on appeal.

     This 3-0 unpublished decision was authored by Acting Presiding Justice O’Leary.

Section 1717 And Unlicensed Contractor: No One Is Happy About $2,000 Fee Recovery

Award Is Sustained, But Winning Subcontractor Under Contract With Fees Clause Fights Back Unlicensed General Contractor’s Illegality Argument.

     Usually, under our category “Unlicensed Contractors,” we are dealing with decisions where an unlicensed contractor wins a dispute with a fees clause and attempts to obtain an award of attorney’s fees—not very successfully. In the next case we look at, the losing contractor attempts to shield off a fee recovery under a broad contractual fees clause by claiming that the contract was illegal so that no award was authorized to the victorious licensed contractor. This did not work when it came to the flip side of the coin.

     Haskell Canyon Partners, L.P. v. E&M Concrete Constr., Inc., Case No. B215200 (2d Dist., Div. 4 Apr. 5, 2010) (unpublished) concerned a situation where an unlicensed general contractor was sued along with a licensed subcontractor by plaintiffs in a construction defect suit, with general seeking equitable indemnity against sub. The general-sub contract had two broadly worded attorney’s fees clauses, one for fees to the prevailing party “in any court action arising out of the Agreement or the enforcement or breach thereof” and another for “any action brought against general by third parties, in which E&M is joined as a party.” Both sub and general eventually settled with plaintiffs, although sub settled first and with both compromises confirmed as good faith settlements. Sub sought $125,160 in fee recovery because general’s equitable indemnity cross-complaint was dismissed in the good faith settlement process (although it took sub three attempts to get there). However, it came out in the fee battle that sub’s attorneys had agreed to litigate the case for a negotiated $7,500 cap. The trial court awarded sub $2,000 in fees, with both sides appealing.

Reverse POOF!: Losing Homeowners, After Modification On Appeal, Are Entitled To Pursue Recovery Of Court Costs As Prevailing Parties

 

Fifth District Determines Unlicensed Contractors May Not Offset Reimbursement/Disgorgement Claims Under Unlicensed Contractors Law.

     Here is a spin on our category POOF!, where a reversal usually means a fee/costs award goes away for the time being. This next case is a reverse POOF!, where a denial of a costs award was reversed and the winning party on appeal gets to pursue recovery of costs for prevailing as a matter of law through an appellate modification of the judgment. In other words, reverse POOF!—costs award now in play on remand.

     White v. Cridlebaugh, Case No. F053843 (5^th Dist. Oct. 20, 2009) (certified for partial publication) is must reading for any litigants involved in cases with a reimbursement/disgorgement claim against unlicensed contractors under Business and Professions Code section 7031(b). It held that unlicensed contractors cannot obtain offsets for materials and services actually provided in reimbursement claim litigation.

     For our purposes, the trial court granted JNOV on homeowners’ reimbursement claim against an unlicensed contractor, a determination that was undone when the appellate court modified the judgment to allow the award to homeowners. It also ordered that homeowners were the prevailing parties for purposes of routine costs, which the trial court denied to either side. Based on claims in trial court proceedings, homeowners will now seek to recoup costs totaling $7,764.10 (in addition to their $84,621.45 disgorgement award). Reverse POOF!

Watching the Dice in Las Vegas.  Farm Security Administration - Office of War Information Photograph Collection.  March, 1940.  Arthur Rothstein, photographer.  Library of Congress.

Unlicensed Contractor: Court of Appeal Vacates $175,000 Fee/Costs Award To Unlicensed Contractor

Second District, Division 8 Finds Fee Fixing Award Was a Nullity or Was Mooted by Unlicensed Contractor Determination.

     Our category “Cases: Unlicensed Contractor” surveys decisions holding that attorney’s fees are not awardable to prevailing unlicensed contractors under Civil Code section 1717. The next case we discuss follows the result reached in those prior decisions, determining that the lack of licensure can cause the contractor to not only lose compensation but also lose fees awarded for pursuing the unpaid compensation.

Unlicensed Contractors in California: Can They Recover or Contest Contractual Attorney’s Fees in Litigation?

No Clear Published Decisions, Although Unpublished Decisions Offer Some Clues or Seem Divergent on the Subject.

            For anyone litigating in the construction area, a true bane is dealing with a client who is discovered to be an unlicensed contractor.  Business and Professions Code section  7031 provides that no unlicensed contractor may bring or maintain any action in California courts for the collection of “compensation for the performance of any act or contract” for which a contractor license is required “at all times during the performance of such act or contract.”  Increasingly, the California Supreme Court and California Legislature have been tough on unlicensed contractors, rejecting equitable theories of recovery (such as fraud or unjust enrichment) and reigning in the parameters of the substantial compliance doctrine.  (See, e.g., Hydrotech Systems, Ltd. v. Oasis Waterpark, 52 Cal.3d 988, 1000-1002 (1991); MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal.4^th 412, 423, 430 (2005).)  However, because we are an attorney’s fees blog, we explore the thorny issues of whether an unlicensed contractor can win or contest attorney’s fees where there is a contractual fees clause that might allow recovery except for the contractor’s licensing disability,  Surprising as it might seem, there are no published decisions that squarely answer these questions, based upon our research on the topic.  However, there are major clues or splits of opinion on the subjects, which are to be expected when a licensing prohibition runs up against a contractual fee authorization grant.  So, buckle up while we share the fruits of what we have found on these interesting questions.  (We also encourage any readers to share their experiences in this area.)

            Issue number one focuses on an unlicensed contractor who “defenses” an owner in a construction dispute.  Can the contractor recover fees where there is, say, a construction contract with a fees clause that normally is reciprocal under Civil Code section 1717?

            The Second District, Division Seven, answered “no” in a 1993 case litigated by contributor Mike Hensley.  In Builtmore Partnership v. Pham, Case No. B063499 (2d Dist., Div. 7 May 25, 1993) (unpublished), unlicensed general contractors defensed owner’s claims in a contractual arbitration under a construction contract with an attorney’s fees clause.  The arbitrator awarded contractors attorney’s fees as the prevailing party, an award that was vacated by the trial court.  The appellate court sustained the trial court’s “take” on the issue.   (BLOG BONUS COVERAGE—We surveyed Moncharsh in our July 15, 2008 post.  Although the merits of an arbitration award are not usually subject to judicial review, one of the important exceptions to arbitral finality is where transactional illegality is involved.  Moncharsh v. Heily & Blase, 3 Cal.4^th 1, 29-30 (1992); see also Loving & Evans v. Blick, 33 Cal.2d 603, 609 (1949).)  Although acknowledging some truth to the contractors’ argument that “attorney fees are not the same as labor and material costs” (so as to be distinguishable from prohibited “compensation” under section 7031), the Second District nonetheless found that Hydrotech dramatically expanded the definition of “compensation” to encompass fees, which are integrally related to the illegal contract and akin to the fraud/equitable claims that did not pass muster under Hydrotech.  The appellate panel, although not publishing the decision, found that fee recovery was not a policy it wanted to condone under the circumstances:  “The award is against respondent, the client of the unlicensed contractors—the party whom the legislature intends to protect.  Indeed, if this court were to grant such relief, a loud signal would be heard by unlicensed contractors that some recovery will still be granted, notwithstanding the statutory violation.  This is not the message this court wishes to send.”  Alternatively, the Pham court found that unlicensed contractors could not recover attorney’s fees because such a right is premised on an illegal contract, relying upon the reasoning in older cases such as Lewis v. Queen v. N.M. Ball Sons, 48 Cal.2d 141, 150 (1957); Loving & Evans, supra, 33 Cal.2d at 607; Green v. Mt. Diablo Hospital Dist., 207 Cal.App.3d 63, 65 (1989); and Bovard v. American Horse Enterprises, Inc., 201 Cal.App.3d 832, 838 (1988). 

            The California Supreme Court denied review in Pham.  We also note that Pham, although decided after Hydrotech (which was given great weight by the Second District in its decision), did not have the benefit of Business and Professions Code section 7031(b), which allows a person utilizing the services of an unlicensed contractor to bring an action to disgorge “all compensation paid to the unlicensed contractor for performance of any act or contract.”  This provision has recently been held to give a litigant the right to seek a pretrial writ of attachment against the unlicensed contractor. (See Goldstein v. Barak Construction, Case No. B196551 (2d Dist., Div. 8 July 8, 2008) (certified for partial publication).)

            That brings us to issue number two.  Can the litigation opponent to the unlicensed contractor obtain an attorney’s fees award under the “illegal contract” with a fees clause?  Three decisions offer insight.

            In Pacific Custom Pools, Inc. v. Turner Constr. Co., 79 Cal.App.4^th 1254, 1268-1269 (2000), the Second District remanded an attorney’s fees denial order where a general contractor was refused a fee award against an unlicensed subcontractor, even though there was a broadly worded fees clause in the parties’ subcontract.  Because the general contractor was the clear winner, it was held to be an abuse of discretion to refuse to award fees.  Importantly, however, this decision never explored the impact of subcontractor’s nonlicensure.

            Less than a year later, the Fourth District, Division Three confronted a similar issue in Estrada v. Estrada, Case No. G026546 (4^th Dist., Div. 3 Nov. 16, 2001) (unpublished).  Plaintiff, who successfully cancelled notes/trust deeds based on her son’s unlicensed contractor status, appealed when the trial court refused to award her attorney’s fees under Civil Code section 1717 based upon fee clauses in the underlying notes.  Acting Presiding Justice Rylaarsdam, writing on behalf of a 3-0 panel, sustained the lower court’s determination.  The panel substantially sided with the Pham’s court’s alternative basis for decision—a party cannot recover attorney’s fees under an illegal contract, principally relying on Bovard, supra, 201 Cal.App.3d at 843.  Plaintiff argued that the result was different because the contract was merely malum prohibitum (prohibited by statute) as opposed to being malum in se (contrary to public policy).  Although acknowledging that a court can grant relief in malum prohibitum situations if one of the parties is found to be relatively innocent, this rationale did not apply because plaintiff mother knew her son was unlicensed but hired him anyway.  Justice Rylaarsdam found Customs Pool unhelpful because the contract illegality issue was neither raised nor discussed in the prior decision.

            More recently, the Fourth District, Division One held that a subcontractor establishing that a developer was unlicensed could recover contractual attorney’s fees.  It affirmed a $54,726.75 fee award in favor of subcontractor and against developer.  As in Pham and Estrada, developer Shea contended that fee recovery was precluded because the contract with subcontractor was illegal, mainly banking on Bovard, supra, 201 Cal.App.3d at 838, 842-843 (the case heavily relied on in Pham and Estrada).  The San Diego based appellate court, in Shea Homes Ltd. Partnership v. Childress Concrete, Inc., 2002 WL 31521386 (4^th Dist., Div. 1 Nov. 14, 2002) (unpublished), made a distinction between the illegal contract itself and the consideration for such contract.  Where the consideration itself is not unlawful, “[p]ersons for whose benefit the statute was passed ‘cannot be regarded as being in pari delicto’  with an unlicensed contractor.”  (Id. at *4.)  Thus, the lower court properly awarded subcontractor attorney’s fees incurred in proving Shea could not enforce its contract-based claims based upon its nonlicensure.

            Although the overall trend is to be even tougher on unlicensed contractors at the present time, the lack of published decisions on the two issues we examined leaves plenty of room to make arguments as to whether attorney’s fees are akin to prohibited “compensation” or recoverable at all under an illegal construction contract.

            

            

            

UNLICENSED OR IMPROPERLY LICENSED CONTRACTORS BEWARE—REVERSAL OF UNDERLYING JUDGMENT ALSO WILL MEAN LOSS OF A FEE AWARD

Fourth District Rejects Substantial Compliance Doctrine and Strips Judgment/Fee Award From Subcontractor on Appeal.

            Business and Professions Code section 7031 bars unlicensed contractors from recovering compensation for work performed under a construction contract.  In recent years, the substantial compliance doctrine—which previously gave breaks to certain unlicensed situations where a managing agent had a license or a license was obtained into the performance—has been severely constricted.  (See Bus. & Prof. Code, § 7031(e); Opp v. St Paul Fire & Marine Ins. Co., 154 Cal.App.4^th 71 (2007).)  If the unlicensed contractor issue is raised, even appellate courts are sensitized and have no compunction in reversing a judgment and ancillary fee award if licensing status is not proven satisfactorily.  That is what occurred in the case we now discuss.

            In Golden West Electric, Inc. v. Controlled Environments Construction, Inc., Case Nos. G037556 & G038122 (4^th Dist., Div. 3 May 29, 2008) (unpublished), subcontractor won a judgment against contractor for $44,982.62.  The trial judge later awarded subcontractor attorney’s fees of $64,103.50 under Civil Code section 3260 and Business and Professions Code section 7108.5, the prompt payment statutes discussed in our May 29, 2008 post.

            Contractor appealed and won.  Result:  judgment and fee award reversed, and a dismissal ordered by the Court of Appeal.

            The trial judge determined contractor had waived the licensure issue by failing to raise it as an affirmative defense.  Contractor claimed that the issue was controverted through its filing of a general denial.  That was a winning argument, the appellate court found, based on the reasoning in the recent decision of Advantec Group, Inc. v. Edwin’s Plumbing Co., Inc., 153 Cal.App.4^th 621 (2007). 

            Secondarily, the lower court rescued subcontractor under the substantial compliance doctrine, finding the subcontractor corporate entity could operate under its owner’s license.  Not so, the Santa Ana-based court determined, because the true corporate subcontractor was not licensed until well after the work was completed.

            Contractors need to be vigilant and properly maintain their licensing status.  Otherwise, they could suffer the same fate of the winning litigant at the trial level in this case—be victorious below, only to lose on appeal, learning in the process that appellate courts give careful attention to making sure litigants are compliant with licensing laws.