Matthew T. Porter | Smith Currie & Hancock
Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. (2020) 53 Cal.App.5th 1201.
Under California Business and Professions Code section 7031(b), “a person who utilizes the services of an unlicensed contractor may bring an action … to recover all compensation paid to the unlicensed contractor for performance of any act or contract.” The Court of Appeal held that such disgorgement claims against unlicensed contractors are (1) subject to a one-year statute of limitations and (2) accrue upon the completion or cessation of the performance of the act or contract at issue.
Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) hired Suffolk Construction Company, Inc. (“Suffolk”) to construct a 108-unit assisted living facility. During construction, Suffolk’s responsible managing employee (“RME”) moved to another state, no longer supervising anyone at Suffolk connected with the project. As a part of its claim for construction defects against Suffolk, Eisenberg included a claim for disgorgement under section 7031(b), alleging that Suffolk was not a duly licensed contractor at all times during the project because Suffolk was out of compliance with RME requirements. Suffolk argued Eisenberg’s disgorgement claim was barred by the statute of limitations. The Court of Appeal agreed.
Statute of Limitations for Section 7031(b) Disgorgement Claim
Because section 7031(b) does not set forth a limitation period, the court looked to the California Code of Civil Procedure (“CCP”) to determine the applicable statute of limitations for Eisenberg’s disgorgement claim. The question turned on whether section 7031(b) disgorgement was a “penalty or forfeiture.” The court noted that section 7031(b) disgorgement “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.” It also noted that a plaintiff may bring such a claim “regardless of any fault in the construction by the unlicensed contractor.” For these reasons, the court held that a section 7031(b) disgorgement claim is a penalty and is, therefore, subject to CCP § 340(a)’s one-year statute of limitations.
Accrual of Section 7031(b) Disgorgement Claim
After determining that the one-year statute of limitations applies, the court turned to the question of when Eisenberg’s disgorgement claim accrued. Eisenberg argued that the “discovery rule” applied and that the statute of limitations did not begin to run until Eisenberg discovered the potential issue with Suffolk’s licensing, which was well after completion of the project. The court rejected this argument. The court reasoned that a contractor’s unlicensed status does not in itself cause harm to a plaintiff, so delaying accrual of the statute of limitations until discovery of harm would leave accrual of the limitations period open ended. The court also sought to avoid what it considered the “absurd result” of plaintiffs bringing disgorgement claims long after the successful completion of a project based on a lapse or suspension of a contractor’s license during the project.
This case significantly reduces the power of section 7031 to protect the public from unlicensed contractors. The burden is now on project owners and other participants to investigate and uncover any licensure issues of participating contractors and bring section 7031(b) claims against those contractors within one year of the contractor’s ceasing performance on the project. In some cases, this may prove to be impracticable, and in many cases—especially where subtle automatic license suspension issues are involved—this will necessitate aggressive litigation action by counsel to preserve potential disgorgement claims.
This ruling may also affect the litigation strategy of contractors in their disputes with owners. For example, contractors who are aware of potential licensure issues during the course of a project may want to consider delaying the pursuit of their claims against an owner until after the one-year statute of limitations has run on the owner’s potential disgorgement claim. Of course, this strategy may require the contractor to forego its lien rights by declining to bring an action within 90 days to perfect its lien rights.
Finally, this case is plowing new ground, and there is much room for other courts to disagree with the Eisenberg Court’s ruling. Expect further litigation of these statute of limitations issues.