Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims that is not Subject to the Discovery Rule

Timothy L. Pierce, Hector H. Espinosa and Samira F. Torshizi | K&L Gates

In a recently published case dealing with issues of first impression, the California Court of Appeal Second Appellate District in Los Angeles held that the disgorgement penalty under Business and Profession Code § 7031(b) must be made within one year of completion or cessation of the performance of the project, and that time is not extended by the discovery rule.  Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Cal. Ct. App., Aug. 26, 2020).  BPC § 7031(b) permits a party who uses the services of an unlicensed contractor to recover any and all money paid to the contractor for its work—regardless of the quality of the work (indeed, even if the construction was flawless).  The purpose of this harsh forfeiture provision is to deter unlicensed contractors from performing construction.

The case arises from the construction of a 108-unit assisted living facility in Reseda, California.  In 2007, Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) engaged Suffolk Construction Company, Inc. (“Suffolk”) as the contractor to build the project, which was completed in 2010.  Eisenberg initially filed a complaint alleging defects at the project.  In 2015, Eisenberg amended its complaint to assert an entirely new cause of action under BPC § 7031(b) against Suffolk for disgorgement of every penny of the more than $49 million it was paid to construct the project.  The trial court granted summary adjudication of the disgorgement claim and that ruling was the subject of the appeal.

The factual circumstances of the case are interesting in that Suffolk held a valid California contractor’s license at all relevant times.  Eisenberg nonetheless pursued its disgorgement claim by seeking to retroactively strip Suffolk of its contractor’s license.  Eisenberg alleged that the full-time employee whom Suffolk had designated as the “responsible managing employee” or “RME” did not adequately perform his oversight duties under BPC § 7068.1 simply because he had relocated to Suffolk’s Boston office during the term of the project.  Eisenberg also argued that it could not have known the RME allegedly fell short of its BPC § 7068.1 duties during construction and that it first discovered potential issues regarding the status of Suffolk’s RME in 2015.  The court of appeal affirmed the trial court’s holding that Eisenberg’s claims were time-barred and did not address whether a BPC § 7031(b) claim provides an automatic suspension of a contractor’s license for a violation of section 7068.1.

The appellate court held the applicable limitation statute to be one-year under CCP § 340(a) given that the disgorgement remedy provided by BPC § 7031(b) represents a “penalty” and a “forfeiture.”  The court reasoned that BPC § 7031(b) “provides a windfall to the plaintiff, at the expense of the unlicensed contractor, since the plaintiff also retains the work completed by the contractor.”  The court held:

When viewed in this context, it is clear that the disgorgement provided in section 7031(b) is a penalty. It deprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction. And, because the plaintiff may bring a section 7031(b) disgorgement action regardless of any fault in the construction by the unlicensed contractor, it falls within the Supreme Court’s definition of a penalty: ‘a recovery without reference to the actual damage sustained.’

Having determined the one-year statute of limitations applied, the appellate court next addressed the accrual date.  In light of the equitable basis for the discovery rule, the appellate court held the discovery rule does not apply because “the disgorgement mandated by section 7031(b) is not designed to compensate the plaintiff for any harm, but instead is intended to punish the unlicensed contractor.”  The court did observe that “[t]o the extent a plaintiff does suffer any injury caused by an unlicensed contractor that is not easily or immediately discoverable, the discovery rule would continue to apply to other claims seeking recovery for any damages the plaintiff suffered.”

The court also highlighted the rather absurd possible application of a discovery rule to a disgorgement claim that can arise ten years after completion, with no other basis for a claim against the contractor.  That is, a plaintiff, who after ten years randomly “discovers” that the license had lapsed, could bring a section 7031(b) claim and get back all the compensation paid for the construction of a building the plaintiff has used without any problems for ten years. “An absurd result, to be sure, but there would be no principled way to avoid it under the discovery rule[.]” As such, the appellate court held “[t]o avoid such absurd results, and because there is no reason in equity to apply it, we hold that the discovery rule of accrual does not apply to section 7031(b) claims.”  The cause of action is complete when an unlicensed contractor completes or ceases performance of the act or contract at issue.

The published opinion is instructive regarding at least two matters of first impression in California.  It is now clear that the time limitation for a BPC § 7031(b) disgorgement claim is one year from completion of the project or cessation of the performance.

Remote Trials Can Control Prejudgment Risk

Robert G. Devine, Victor J. Zarrilli and Kimberly M. Collins | White and Williams

While courts across the country are largely unavailable to litigants demanding a jury trial, pre-judgment interest rules present an increasing penalty risk to a defendant wanting its day in court and may not always make a plaintiff whole. The COVID-19 pandemic has altered the manner in which people and industries operate across the board. In light of the need to maintain social distancing whenever possible, the use of technology to replace in-person appearances is becoming more commonplace. As more attorneys become comfortable with the remote platform, the willingness to consider a remote trial grows.

With in-person jury trials suspended until further notice, it is important for attorneys and parties to consider the attendant consequences of the indefinite delay in waiting for a traditional jury trial. Aside from general inconvenience, continued delays may have a substantial financial impact, particularly with regard to the accumulation of pre-judgment interest.

Prejudgment interest is essentially additional money the court can award to the prevailing party based on the interest that the judgment would have earned over the course of the litigation. A number of factors influence the amount a court may award in prejudgment interest, including what the interest rate is, when interest begins to accrue, and the type of dispute. Moreover when the prejudgment interest attaches varies and may not always compensate for having had access to the funds during the litigation. A sampling of how prejudgment interest is treated in different contexts illustrates the impact these factors have on the ultimate judgment.

In Pennsylvania, for instance, a plaintiff in a tort action may seek delay damages calculated at “the prime rate” as listed by The Wall Street Journal, for each year the damages are sought, plus 1%. Pa..R.Civ..P. 238(a)(3). In other actions, unless otherwise specified, the legal rate of interest is calculated at 6% annually. 41 P.S. § 202. For New Jersey tort actions, judgments not exceeding the monetary limit of Special Civil Part at the time of entry will earn annual interest at “the average rate of return,” and for those cases exceeding the monetary limit, an additional 2% annually. N.J. Court Rules, R. 4:42-11. The amount awarded in contract matters in New Jersey remains in the court’s discretion.

The fluctuations in prejudgment interest rates are important to consider when assessing the resolution of a case under any circumstance. The backlog of trial-ready cases, however, is increasing as the pandemic continues, prompting the need to reevaluate the best outcome for clients. This is particularly true in jurisdictions that impose a particularly high rate of interest. In New York, for example, prejudgment interest is set at 9% in certain circumstances unless otherwise provided by statute. N.Y. C.P.L.R. § 5004. As an example, in a New York wrongful death action, the application of this rate resulted in an additional $1,190,747 awarded to the plaintiff. See Toledo v. Iglesia Ni Christo, 18 N.Y.3d 363 (2012). Moreover, a number of jurisdictions impose interest rates of up to 12% in certain actions. Our chart outlines the different rules on prejudgment interest among the states. Given the likelihood of increased costs as well as delay in ultimate resolution if parties opt to await a time when in-person jury trials resume, parties would do well to consider alternatives not otherwise requiring consideration. Although previously not the norm, summary trials, shorter trials with relaxed rules of evidence, may become more prevalent. Another option may be to forgo a jury trial in favor of a bench trial. Summary trials, where rules of evidence may be relaxed to permit the expert’s opinion to be introduced through a report reconfigured as a PowerPoint presentation, as well as bench trials, where additional flexibility is typical in regard to presentation of proof, can be conducted remotely. An overview of these options and others were recently explored in our articles “Evaluating Alternative Avenues to Verdict in the COVID-19 Legal Atmosphere” and “Virtual Jury Trials: The Next Wave of Remote Legal Practice.” Considering formats available in the more immediate future compared to awaiting a traditional trial can promote earlier resolution and control the pre-judgment interest risk.

Is There a Downside to Virtual Trials?

Alaina Lancaster | Law.com

What’s Wrong With Virtual Jury Trials?

Jurors in some of the country’s first online trials faced tech issues and waning attention spans. But Cooley’s Litigation Chair Michael Attanasio says there are more problems with a virtual jury trial to be skeptical about.

Attanasio said one of the constitutional issues that remote jury trials could raise is that defendants didn’t get a jury of their peers, because every person must have a steady WiFi connection.

“You’re creating a class of jurors who happen to have secure internet connections and nice computers,” Cooley said. “I don’t think that’s very workable either. That’s a real issue. It’s not unlike the debate about how schools are being managed and conducted right now with these challenges and the difference between socioeconomic groups when it comes to remote learning. You would have the same thing with remote court, and that’s not how juries are supposed to be constructed.”

The San Diego partner said the trials could raise challenges based on the U.S. Supreme Court’s Batson decision, which spoke to the principal that jury service is a right as a citizen.

“So you are taking the right to be a juror and you are excluding the class of people who don’t have computers and internet connections that would allow them to be in court on a screen for five or six hours a day,” he said. “That raises some real interesting issues.”

Keep an eye on your Legal Speak podcast feeds for the full interview with Attanasio to find out the Cooley litigation team’s quarantine ritual for staying sharp amid trial backlogs. Warning: You might not be able to “handle the truth.”

Six Key Questions When Settling and Releasing Legal Claims

Louise C. Stoupe and Keiko Rose | Morrison & Foerster

Most disputes settle, so it is important for legal teams to be aware of the key issues involved in drafting a settlement agreement. This is particularly true now, as companies around the world grapple with the COVID-19 pandemic and the resulting strain on supply chains and business relationships.

When businesses decide to resolve issues amicably, the settlement agreement should accurately reflect the compromise that the parties have reached. Too often, the focus is only on the amount to be paid in exchange for the release of claims, but there are other, equally important considerations that need to be addressed.

Below are six questions that business and in-house legal teams should ask themselves when pursuing settlement negotiations and finalizing settlement and release agreements.

1. Do you want a broad or narrow release of claims?

Parties should carefully consider which claims they want to release as part of a settlement agreement and whether the language in the settlement agreement captures those precise claims. Releases may cover different categories of claims, including:

  • Claims asserted in pending litigation or arbitration;
  • Claims arising out of or related to a particular agreement;
  • Claims arising out of or related to a particular subject matter or event; or
  • Claims arising out of or related to the relationship between the parties.

In deciding which option is best for you, consider whether you want to foreclose all potential litigation (which is attractive if you would be the defendant in any future litigation) or whether you may want to retain certain claims to assert in the future.

It is also important to clarify in the settlement agreement whether the release of claims is mutual. For example, if only one party has asserted claims in pending litigation, you may want the settlement agreement to release not only claims asserted in the litigation but also any claims that the defendant may have related to the same underlying events.

2. Do you want to release unknown claims?

Put differently, do you intend to release claims that are not yet known to exist but may later be discovered? If so, then the settlement agreement should explicitly release all known and unknown claims. A general release of claims is not always sufficient to release claims that were unknown at the time of settlement.

For example, California Civil Code Section 1542 provides that a general release of claims does not extend to claims that the releasing party “does not know or suspect to exist” at the time of the release and that, if known, “would have materially affected” the settlement. If your settlement agreement is governed by California law or has another nexus to California, a provision stating that the parties agree to waive Section 1542 must be included in order to release unknown claims.

3. Who should be covered by the settlement agreement?

Normally, the parties to a settlement agreement would be the parties to the contracts at issue or the parties to the pending litigation or arbitration. But should the agreement cover anyone else? Consider whether you would benefit from adding a provision stating that entities with a legal relationship to the parties also agree to release claims. For example, you may want to ensure that the release covers a party’s “parent, subsidiaries, assignees, transferees, representatives, principals, agents, shareholders officers or directors, and all persons acting by, through, under, or in concert with them.” You may also want to include a release covering downstream customers in certain circumstances.

If you are the defendant, then you will want to ensure that all of the opposing party’s related entities are covered by the release of claims to broaden the reach of the agreement. However, even if you are in the position to assert claims, you may be willing to include such a provision if none of your related entities would have a viable claim in any event.

4. Who should bear fees and costs?

Parties to a settlement agreement often agree to bear their own legal fees, but are there any particular costs the parties should share?

5. How and when will the settlement payment occur?

The settlement agreement should be clear as to the date of any settlement payment, any conditions precedent to payment, and the means of transferring such payment. Additional considerations include whether you want the ability to assign the right to receive the payment to affiliates and, if so, whether that assignment can occur with or without the consent of the other party.

6. Who is allowed to know about the settlement agreement?

The settlement agreement will include a provision explaining confidentiality obligations, and parties typically agree that the terms of the settlement agreement must remain confidential. But consider whether you want to be able to share the existence of the settlement agreement with anyone besides the parties to the agreement. For example, you may want your customers or certain business partners to be aware of the settlement. Confidentiality provisions also normally allow disclosures to the extent required by law, regulation, or court order.

Virtual Depositions are as Easy as One, Two… Can You Hear Me, Now?

Michelle Ronan | Jaburg Wilk

For cost containment – or other reasons – attorneys are trying fewer civil cases to juries. Years ago, trial attorneys would easily try dozens of cases per year. Now, it is not uncommon for a “trial attorney” to try one or two cases per year. For good or bad, the nature of civil practice has shifted and discovery, particularly depositions, has, in many ways, become the trial. Attorneys now invest hours into their deposition strategy – what witnesses they will depose and in what order, whether to impeach the witness during the deposition or save it for trial, or to what extent they should question their own witnesses.

When the pandemic caused shelter in place orders and many employers shifted to remote work models, how that affected the courts, clients, and attorneys was, at first, chaotic. We fairly quickly adapted and adopted video conferencing as our replacement for in-person communications, including depositions.

However, that created many questions relative to virtual depositions. Are they as effective as in-person depositions? Does an attorney, and therefore their client, lose the element of surprise when forced to identify the exhibits before the deposition? What steps do you take to virtually prepare your witness?

Fortunately, we are all learning, adapting, and getting answers to these questions. With each deposition we conduct and every witness we prepare, we improve ourselves and the process. Here are five tips I use to not only survive but also thrive, when I virtually prepare for and take virtual video depositions:

1. Patience 

No matter what type of case you are handling, when it is time to prepare your witness or conduct a virtual deposition, bring a lot of patience.

2. Break It Up 

One of the benefits of virtual deposition preparation is that the attorney no longer has to fly to the out-of-state deponent and cram all the deposition preparation into a single day. Breaking up the preparation sessions into smaller sessions over several days will help your witnesses stay fresh and be able to process what you tell them more effectively.

3. Use the Technology 

The technology may be complicated but spend the time learning it, and then use it! Most video conferencing platforms have a “Share Screen” feature. This feature allows you and your witness to examine a document as if you were in person. Also, don’t forget about the record feature which allows you to record a mock deposition and play it back to the witness as you critique her presentation. Depending on your local rules, the record feature may also provide you with a more affordable option for recording the deposition for use at trial.

4. Make the Witness Work 

It is easier for a witness to tune you out when you are talking over a screen than if you were talking to them in person. Be mindful that while you may have done everything to reduce the distractions around you, the witness may be bombarded with distractions you may not see or hear. One way to keep the witness engaged is to make her do the work. Make her read the document. Make her tell the story. Make her use the technology.

5. Get Creative 

Often it is too costly to fly two attorneys across the country to prepare a witness. However, if you can conduct the depositions remotely, why not engage the rest of your team to help prep the witness? Have another attorney log in for an hour and conduct a mock deposition. Have a fresh pair of eyes and ears look at and listen to the witness to help you evaluate their quality as a witness.

Virtual depositions, remote working, and less in-person meetings are likely here to stay. Mastering new techniques and embracing new processes are necessities in the virtual legal world. Just like trying anything new, be patient with yourself, be open to learning, and incorporate the challenge of navigating in this new virtual legal world as part of your career development plan.