When is a “Willful” Violation Willful (or Not) Under California’s Contractor Enforcement Statutes?

Garret Murai | California Construction Law Blog | March 4, 2019

The enforcement statutes applicable to the California Contractors’ State License Board aren’t exactly models in clarity. A few examples:

  1. Business and Professions Code Section 7107:  Abandonment without legal excuse of any construction project or operation engaged in or undertaken by the license as a contractor constitutes a cause for disciplinary action.
  2. Business and Professions Code Section 7109: A willful departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, unless the departure was in accordance with plans and specifications prepared by or under the direct supervision of an architect.
  3. Business and Professions Code Section 7110: Willful or deliberate disregard and violation of the building laws of the state, or any political subdivision thereof, . . . or of the safety or labor laws or compensation insurance laws or Unemployment Insurance Code of the State, or of the Subletting and Subcontracting Fair Practice Act, or violation by any licensee of any provision of the Health and Safety Code or Water Code, relating to the digging, boring, or drilling of water wells, constitutes a cause for disciplinary action.

We’ve had lively, late-evening debates in my office over what constitutes “abandonment without legal excuse” under Business and Professions Code Section 7107, what a “willful departure” and  “in any material respect” under Business and Professions Code Section 7109 are, and what “willful or deliberate disregard” under Business and Professions Code Section 7110 really means.

The exciting lives of construction attorneys. At least, on occasion, it’s followed by a beer.

While it’s the job of a lawyer to argue over what a statute means and how it should be applied, it’s the judiciary’s job to play referee and actually make those calls. And the judiciary has made a call, at least with respect to one of these code sections.

In ACCO Engineered Systems, Inc. v. Contractors State License Board, 2nd District Court of Appeals, Case No. B282944 (Nov 15, 2018), the Court of Appeal wrestled with the meaning and intent of the term “willful” under  Business and Professions Code Section 7110 and whether a violation required “specific” or “general” intent.

ACCO Engineered Systems, Inc. v. Contractors State License Board

In 2014, ACCO Engineered Systems, Inc. received notification of a complaint filed with the California Contractors State License Board alleging that ACCO had replaced a boiler at a commercial building in Los Angeles, California without obtaining the required permits. Upon receiving notification of the complaint, ACCO conducted its own investigation and determined that permits should have been obtained for the boiler under Los Angeles’ municipal building code, belatedly obtained the necessary permits in July 2014, and informed the CSLB that the failure to obtain the necessary permits was due to the inadvertence of a lower-level employee.

The CSLB later issued a citation imposing a $500 civil penalty against ACCO for violating Business and Professions Code Section 7110, which provides, in pertinent part, that the “[w]illful or deliberate disregard and violation of the building laws . . . constitutes a cause for disciplinary action.” ACCO appealed the decision and an administrative hearing was held in September 2015.

Following the administrative hearing, the administrative law judge issued his decision finding that ACCO’s failure to obtain a permit before replacing the boiler was not “deliberate” within the meaning of Business and Professions Code Section 7110, but that ACCO’s conduct was “willful” under the statute, notwithstanding ACCO’s argument that its failure to obtain necessary permits was an inadvertent mistake. Noting that ACCO took efforts to immediately remedy the situation, however, the administrative law judge reduced the penalty from $500 to $200.

Legal fees apparently being no impediment, ACCO filed a petition for writ of administrative mandamus, appealing the decision to the Superior Court. ACCO’s petition, however, didn’t fall on kind ears. The Superior Court denied the petition finding that the term “willful” as used in Business and Professions Code Section 7110 only requires a showing of “general,” not “specific,” intent and that when ACCO’s project manager made the decision to proceed without a permit without first consulting with ACCO’s in-house permitting coordinator, as company policy required, he acted with general intent.

ACCO appealed.

The Appeal

The 2nd District Court of Appeal, while noting that the term “willful” is not defined in Business in Professions Code Section 7110, explained that it must be construed in harmony with similar statutes and the intent of those statutes, which with respect to the enforcement statutes applicable to the CSLB is to “protect the public against dishonesty and incompetency in the administration of the contracting business.”

Under a similar statute, Business and Professions Code Section 7109, which provides that a “willful” departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, earlier cases have “require[d] only a general intent to perform an act, not a specific intent to violate a law,” explained the Court of Appeal.

Further, rejecting ACCO’s argument that such an application turns the statute into a strict liability statute, the Court of Appeal stated that it does not:

We can imagine the absence of willful or deliberate disregard of building laws occurring in the following scenario: A contractor attempts to obtain a building permit but is unable to obtain one because the local permitting authority incorrectly believes no permit is required. Even if it is later established that the permit should have been issued, the contractor’s failure to obtain the required permit cannot be considered a “willful’ violation of the applicable laws, and therefore discipline under section 7110 would not be warranted. We can also imagine the absence of willful or deliberate disregard of building laws where a city’s permitting requirements are ambiguous or subject to interpretation.

Finally, the Court of Appeal rejected ACCO’s argument that by interpreting the term “willful” under Business and Professions Code Section 7110 to encompass even actions involving general intent it precludes a contractor from being able to show that it acted in good faith. The Court held that unlike under criminal statutes “moral blameworthiness is not a necessary element of willful misconduct” under Section 7110, since the purpose of the law is not to punish but rather “toprotect the public against dishonesty and incompetency in the administration of the contracting business.”

Conclusion

So there you have it. Except in very limited circumstances, a contractor’s actions will be considered “willful” under the enforcement statutes of the CSLB irrespective of whether the contractor intended the result or not. I think someone owes me a beer.

Condominium Conversions Defect Actions Under California Law: Not Your Run-of-the-Mill Defect Case

Brendan P. Bradley | Gordon Rees Scully Mansukhani | February 28, 2019

Condominium conversions may present developers and contractors with both additional defenses and potential liability pitfalls when a defect action is subsequently alleged by an HOA. On the plus side for the converter, unlike new residential construction projects, California Civil Code Section 896, which is commonly referred to as “SB 800,” or the “Right to Repair Act,” does not apply. This means that violation of the performance standards for construction components contained in SB 800 is not an independent basis for recovery in a suit brought by the HOA.

Further, statute of limitations defenses are commonly available to developers and contractors in conversion cases where the original construction is more than ten years old. California Code of Civil Procedure Section 337.15 sets forth a ten-year statute of repose limiting claims for latent defects. In many, if not most cases, the converted project will have been used as rental property for several years before its conversion to condominiums. This means that often, while any construction associated with the conversion may only be a couple years old when the HOA sues, the original construction may have been completed more than ten years prior. If the HOA’s claims relate to the ten-plus year old original construction, as opposed to conversion work, they are likely barred.

HOA counsel often try to skirt this statute of limitations defense by alleging that the converting developer should have identified and remedied or disclosed defects in original construction during pre-conversion investigation. Likewise, they argue that contractors who see defects in original construction while performing conversion work have an obligation to point out the defects, not cover them up. However, this requires the HOA to show that the condition actually existed such that it could have been identified at the time of conversion, which is often difficult for the HOA to prove.

On the other hand, conversion cases may pose a hornet’s nest of potential risks for developers, particularly where the developer (or its proxy) maintains control over the HOA board of directors for a period of time following conversion. If a suit for defects related to original construction was actionable during the period when the developer controlled the HOA board, it could be held accountable for failing to take action against the original builder, where the claims have subsequently been barred by the statute of limitations. Likewise, the HOA will commonly allege that defects which would otherwise be barred by the ten-year statute of limitations are actually related to the developer-controlled HOA’s failure to properly maintain the project, or provide adequate reserve budget funding to replace aging components after the conversion. Such claims can create serious insurance coverage concerns for the converter.

This is just the tip of the iceberg when it comes to potential conversion defect claim pitfalls for developers and contractors. HOA claims brought as to condominium conversion projects pose much more complex legal issues than seemingly similar cases related to new construction, even where the two projects may have identical defects. Therefore, it is vital that developers and contractors act with extra vigilance when faced with a claim by the HOA on a conversion project. Failure to do so can result in the developer or contractor facing serious insurance coverage issues, and waiving defenses which might otherwise have been available.

Summary of California Property Insurance Legislation Enacted in 2018

Victor Jacobellis | Property Insurance Coverage Law Blog | February 20, 2019

California residents were not spared from disaster in 2018. Instead, devastating wildfires continued, which included the biggest and most devastating wildfires to ever ravage California. The continued disasters were more frequent and begun much earlier during California’s prolonged dry period. The number and size of the wildfires along with insurance carriers’ claim handling have brought insurance issues to the legislature and governor’s attention. This has resulted in new laws benefitting policyholders. Some of the important legislation enacted into law in California in 2018 is summarized below.

California Insurance Code § 530.5 requires that when loss or damage is caused by a combination of perils, one of which is a landslide, then coverage must be provided when an insured peril is the efficient proximate cause of the loss or damage. Although the efficient proximate cause can be confusing, it is generally held to be the predominant cause of the loss when there is more than one independent contributing cause of loss. The efficient proximate cause does not have to be the initiating cause or the immediate cause. Instead, the efficient proximate cause is viewed as the most important cause of a loss.1 Under the insurance code’s new language, an insurer will be barred from relying on policy language that excludes losses “contributed to or aggravated by” a landslide when a landslide was triggered by wildfire or rainstorm, which have been found by courts to be the efficient proximate cause of a landslide.2

California Insurance Code § 2051.5 extends new benefits to policyholders when they decide to buy a new home rather than rebuild after a total fire loss. First, the law clarifies that a policyholder who chooses to relocate to a different location to rebuild or replace is entitled to receive the benefits of:

  1. Extended replacement cost, and
  2. Building upgrade coverage

Thus, a homeowner can still receive code upgrade coverage if such code upgrades were required had the the insured opted to rebuild the destroyed home. The new law also extends, from 24 months to 36 months, the period of time a policyholder is entitled to collect full replacement benefits under a replacement cost fire insurance policy. Language with this new requirement must be contained in all insurance policies issued after July 1, 2019.

California Insurance Code § 2071 was amended to extend the existing statute of limitations for a homeowner to sue their insurer from twelve to 24 months when a loss is related to a declared state of emergency. In 2018, there were twelve separate federal states of emergency declared in California. All the declarations arose out of the devastating series of wild fires.

California Insurance Code § 10103.4 requires an insurer to provide, at the time an offer to renew a policy of residential property insurance is made to the policyholder and on a bi-yearly basis, an estimate of the cost necessary to rebuild or replace the insured building that complies with specified existing regulations. This law will take effect by July 1, 2019.

California Insurance Code § 671 was amended to prohibit an insurer from canceling or refusing to renew a homeowners’ insurance policy for one year from the date of a declaration of a state of emergency. This law also requires an insurer to renew a residential insurance policy for at least two annual renewal periods or 24 months.

California Insurance Code § 10095.7 will require, by July 2020, the California Department of Insurance to establish a home insurance finder on its website that helps homeowners find insurers that offer homeowner’s policies in their area.
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1 Garvey v. State Farm Fire & Cas. Co. (1989) 48 Cal.3d 395, 412.
2 Howell v. State Farm Fire & Cas. Co. (1990) 218 Cal.App.3d 1446, 1452.

Coyness is Nice. Just Not When Seeking a Default Judgment

Garret Murai | California Construction Law Blog | February 4, 2019

As Morrissey of the Smith’s sang: Coyness is nice, but Coyness can stop you, from saying all the things in life you’d like to.

It’s not uncommon in litigation to see a complaint asking for “damages according to proof.” Call it laziness. Call it hiding the ball. Call it coy, even. I call it risky.

And here’s why: If a defendant doesn’t appear and you need to seek a default judgment against him, her, or it, you are barred from doing so, since you are limited to recovering the amount you sought. And last I checked, something of nothing is nothing.

In Yu v. Liberty Surplus Insurance Corporation, California Court of Appeals for the Fourth District, Case No. G054522 (December 11, 2018), one plaintiff found this out the hard way, although perhaps not quite in the way they expected it.

Yu v. Liberty Surplus Insurance Corporation

In Yu, Bann-Shiang Liza Yu hired Automatic Teller Modules, Inc. (ATMI) to design and build a hotel. Not judging, but with a name like that, one might expect problems. And problems there were.

After the hotel opened, Yu filed a complaint against ATMI alleging various construction defects and seeking damages of “not less than $10 million dollars.” ATMI in turn filed a cross-complaint against various subcontractors on the project, including Fitch Construction and Fitch Plastering (collectively, “Fitch Entities”). ATMI’s cross-complaint sought “compensatory damages according to proof.”

While the case was pending Yu and ATMI settled. Pursuant to the settlement, ATMI assigned its cross-complaint to Yu who, stepping into the shoes of ATMI, obtained a default judgment against the Fitch Entities in the amount of $1.2 million. Yu then sued the insurance carriers of the Fitch Entities to collect on the default judgment, but the trial court voided the underlying default judgment finding that ATMI’s cross-complaint did not state an amount of damages.

Yu appealed.

The Court of Appeal Decision

On appeal, the 4th District Court of Appeal noted that:

Procedural due process requires that a defendant be given notice of the existence of a lawsuit and notice of the specific relief which is sought in the complaint served upon him. The law underlying this principal is simple: a defendant who has been served with a lawsuit has the right, in view of the relief which the complaint is seeking from him, to decide not to appear and defend. However, a defendant is not in a position to make such a decision if he or she has not been given full notice.

While there are exceptions to this rule, such as in cases involving personal injury or wrongful death, or when the a plaintiff is seeking punitive damages (in which case, no punitive damage amount may be stated), this rule is so generally accepted, explained the Court of Appeal, that it has been codified in numerous statutory provisions. Code of Civil Procedure Section 425.10 requires that complaints and cross-complaints state :the amount demanded.” Similarly, Code of Civil Procedure Section 580 states that “[t]he relief granted to the plaintiff, if there is no answer, cannot exceed the amount demanded in the complaint.” And, Code of Civil Procedure Section 585 provides that, in an action arising upon contract or judgment for the recovery of money or damages only, a default judgment is limited to “the principal amount demanded in the complaint.”

In response to Yu’s argument that the cross-complaint “incorporated by reference” the $10 million alleged in the complaint, the Court of Appeal disagreed. “The phrase ‘incorporation by reference’ is almost universally understood, by both lawyers and nonlawyers,” explained the Court, “to mean the inclusion, within body of a document, of text which, although physically separate from the document, becomes as much a part of the document as if it had been typed directly” (emphasis in original). And here, held the Court, ATMI’s cross-complaint did not clearly and unequivocally incorporate Yu’s complaint and, in fact, contradicted the complaint by stating that damages were “in an amount precisely unknown.”

Moreover, held the Court of Appeal, the fact that a final defect list and cost of repair report were allegedly served on the Fitch Entities also did not provide adequate notice since due process requires “formal notice” to a defendant of its potential liability, namely, compliance with the Code of Civil Procedure, not “actual notice.”

Conclusion

So, there you have it. If you’re going to sue, state the amount you are suing for. Don’t be coy about it.


California Court of Appeal Holds That the Right to Repair Act Prohibits Class Actions Against Manufacturers of Products Completely Manufactured Offsite

Gus Sara | The Subrogation Strategist | January 10, 2019

In Kohler Co. v. Superior Court, 29 Cal. App. 5th 55 (2018), the Second District of the Court of Appeal of California considered whether the lower court properly allowed homeowners to bring class action claims under the Right to Repair Act (the Act) against a manufacturer of a plumbing fixture for alleged defects in the product. After an extensive analysis of the language of the Act, the court found that class action claims under the Act are not allowed if the product was completely manufactured offsite. Since the subject fixture was completely manufactured offsite, the Court of Appeal reversed the lower court’s decision. The court’s holding establishes that rights and remedies set forth in the Right to Repair Act are not available for class action claims alleging defects in products completely manufactured offsite.

In Kohler Co., homeowners instituted a class action against Kohler, the manufacturer of water pressure and temperature regulating valves that were installed into their homes during original construction. The class action was filed on behalf of all owners of residential dwellings in California in which these Kohler valves were installed as part of original construction. The complaint asserted, among other claims, a cause of action under the Act. Kohler filed a motion for anti-class certification on the ground that causes of actions under the Act cannot be certified as a class action. The trial court denied the motion with respect to the Act but certified its ruling for appellate review. Kohler filed a petition with the Court of Appeals, arguing that certain sections of the Act explicitly exclude class action claims under the Act.

The Act revised and codified the laws applicable to construction defect claims related to newly constructed homes. The Act sets forth the standards for home construction, as well as rights and remedies for homeowners. When the Act was passed, it essentially became the exclusive remedy to individual homeowners for losses resulting from construction defects within their homes. The Act also established a builder’s right to attempt to repair a defect before a homeowner can file an action in court.

One of the essential purposes of the Act is to have construction defect disputes resolved expeditiously, and, if possible, to avoid litigation. The Act is specific as to the types of claims that fall under its purview and explicitly excludes certain types of claims. Section 896 of the Act states that the “title does not apply in any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.” The Act defines a “manufactured product” as “a product that is completely manufactured offsite.” In addition, section 931 identifies certain claims that are not covered by the Act, which include class actions. However, the last sentence of that section states that for “any class action claims that address solely the incorporation of a defective component into a residence, the named and unnamed class members need not comply with this chapter.”

The court acknowledged that while section 931 excludes class actions generally, the last sentence of that section sets forth an exception for class actions pertaining “solely [to] the incorporation of a defective component into a residence.” However, the court found that this provision needed to be reconciled with section 896, which excluded claims solely for defects within manufactured products. The court noted that a manufactured product qualifies as a defective component. Thus, in an effort to harmonize the two sections, the court held that the class action exception applies only to those claims related solely to the incorporation into the home of a defective component other than a product that is completely manufactured offsite. Based on this interpretation of the statute, the court reversed the lower court’s decision and granted Kohler’s motion for anti-class certification.

The Kohler Co. case narrowed plaintiffs’ ability to use the Act to pursue class action claims. The court’s interpretation of the Act establishes that plaintiffs cannot use the Act to assert class action claims for defects in manufactured products. Thus, the Kohler Co. decision reminds us that a cause of action under the Act is not permitted for any claims, whether individual or class actions, against manufacturers for alleged defects of products completely manufactured offsite. On the flipside, this decision also reminds us that product manufacturers are not afforded the defenses of the Act.