1st District Joins 2nd District Court of Appeals and Holds that One-Year SOL Applies to Disgorgement Claims

Garret Murai | California Construction Law Blog

We’re beginning to see a trend.

This past year, the 2nd District Court of Appeals, in Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, 53 Cal.App.5th 1201 (2020), held for the first time that a one (1) year statute of limitations period beginning upon substantial completion of a project applies to disgorgement claims under Business and Professions Code section 7031. In San Francisco CDC LLC v. Webcor Construction L.P., the 1st District Court of Appeals became the second Court of Appeals in the state to hold that a one (1) year statute of limitations beginning upon completion or cessation of work on a project applies to disgorgement claims under Business and Professions Code section 7031.

The San Francisco CDC LLC Case

The Defect Action

In September 2005, San Francisco CDC LLC entered into a $144 million construction contract with Webcor Construction, Inc. doing business as Webcor Builders to build the InterContinental Hotel in San Francisco, California.

In July 2007, Webcor Construction, Inc. merged into Webcor Construction, L.P. The new entity, Webcor Construction, L.P., obtained a contractor’s license before the merger on June 26, 2007. Later that year, Webcor Construction, L.P. was acquired by Obayashi Corporation.

In October 2013, SF CDC tendered a warranty claim alleging defects with the windows of the hotel. The parties entered into a tolling agreement tolling SF CDC’s claim from the date of discovery of defects on October 4, 2013.

In June 2015, SF CDC filed a lawsuit against “Webcor Builders, Inc.” and others alleging claims with the windows. After it was discovered that Webcor Builders, Inc. was a separate entity unrelated to Webcor Construction, L.P., the parties agreed to substitute Webcor Construction, L.P. for Webcor Builders, Inc.

Suspecting that Webcor Construction, L.P. might not have been properly licensed as a contractor during construction of the hotel, SF CDC tried to allege that the licensure issue during trial, however, the trial court refused to hear the claim. The parties later settled and the defect action was dismissed. Presumably, the parties’ settlement reserved claims with respect to disgorgement as the next series of events suggest.

The Disgorgement Action

In June 2017, SF CDC filed a second lawsuit, alleging that Webcor Builders, L.P. (Note: It’s a little confusing here. I think the Court meant to say Webcor Construction, L.P.), Webcor Construction, Inc., and Obayashi Corporation were not properly licensed and subject to disgorgement under Business and Professions Code section 7031. Specifically, SF CDC alleged that Webcor Construction, Inc.’s contractor’s license expired in December 2007 and was never transferred.

In response, the defendants filed a demurrer and requested judicial notice of records of the Contractors State License Board showing that Webcor Construction, L.P. obtained its own contractor’s license in June 2007, prior to the merger, and thus did not need Webcor Construction, Inc. to transfer its license. Rather than respond to the demurrer, SF CDC filed a first amended complaint.

In its first amended complaint, SF CDC continued to allege a claim of disgorgement under Business and Professions Code section 7031 but also added a claim for conversion and fraudulent concealment. According to the first amended complaint, defendants were not properly licensed during construction of the hotel and “executed a series of mergers to conceal their licensing violations.” The defendants filed a second demurrer.

In January 2018, the trial court sustained the demurrer with leave to amend. In sustaining the demurrer, the trial court found that all three claims related to disgorgement and that a one (1) year statute of limitations period applied under Code of Civil Procedure section 340(a) which applies to actions based “upon a statute for a penalty or forfeiture.”

In May 2018, SF CDC filed a second amended complaint. In its second amended complaint, SF CDC continued to allege the same three causes of action, but also alleged that Webcor Construction, L.P.’s contractor’s license automatically terminated during construction when its general partner disassociated from the partnership, and that work continued to be performed after June 23, 2016 and through the beginning of 2017, within one (1) year of when SF CDC filed its disgorgement action. The defendants filed a third demurrer.

The trial court sustained the demurrer with leave to amend. In sustaining the demurrer, the trial court found that SF CDC had not identified the contractor who allegedly performed work after June 23, 2016 and through the beginning of 2017, did not adequately allege any misrepresentation or concealment concerning the licensing violations that could not have been identified through public records, and rejected SF CDC’s contention that Webcor Construction, L.P.’s contractor’s license had been “automatically terminated” through the disassociation of its general partner.

In October 2018, SF CDC filed a third amended complaint. In its third amended complaint, SF CDC alleged that on several occasions, “Webcor Builders, Inc.” had been identified as the hotel’s general contractor in change orders, permits prepared by subcontractors, and other documents. SF CDC also alleged that between October 2016 and January 2017, defendants had prepared “scopes, schedules and sequences of work and obtain[ed] and present[ed] proposals and bids . . . to perform the original contract scope of work with trade contractors who would repair and improve the windows and curtain wall components. The defendants demurred a fourth time.

In their demurrer, defendants argued that SF CDC’s belief that “Webcor Builders, Inc.” had built the hotel, was undermined by the publicly recorded notice of completion which identified “Webcor Construction L.P., dba Webcor Builders” as the original contractor, and that obtaining and presenting proposals and bids, did not require a contractor’s license and would not be actionable under Business and Professions Code section 7031.

The trial court sustained the demurrer without leave to amend, finding that SF CDC was unable to allege a claim that was not time-barred, that documents prepared by third-party subcontractors identifying the general contractor as “Webcor Builders, Inc.” could not provide a basis for equitable estoppel because the statements were not made by defendants, that the notice of completion undermined SF CDC’s claim that it did not become aware of the identity of the general contractor until 2017, and that the preparation of bids and proposals did not require a contractor’s license.

Judgment was later entered against SF CDC. SF CDC appealed.

The Court of Appeals Decision

Providing an overview of Business and Professions Code section 7031, the Court of Appeal noted that the purpose of Section 7031 is “to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay,” that “[d]isgorgement is permitted even when the project owner knows that that the contractor is unlicensed,” that disgorgement applies even if “the contractor is only unlicensed for part of the time it performed work requiring a license” and even “when the work performed by the unlicensed contractor is free of defects.” Section 7031, explained the Court, is “‘truly a strict liability statute’” and ‘”represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.”

With respect to the statute of limitations, the Court of Appeal held that the one-year statute of Code of Civil Procedure section 340 “governs actions brought under section 7031(b) because disgorgement is a statutory penalty for work performed by an unlicensed contractor” and noted that this is consistent with the Eisenberg decision. 

Although not directly addressing whether the statute of limitations could be equitably tolled, the Court of Appeal held that equitable estoppel or delayed discovery did not apply, because SF CDC knew or should have known that Webcor Construction L.P. built the hotel when the notice of completion was recorded in February 2009, which was more than eight (8) years before SF CDC filed its disgorgement action in 2017.

As to SF CDC’s allegation that preparing bids requires a contractor’s license, the Court of Appeal held that such argument ran counter to MS Erectors Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 38 Cal.4th 412, in which the California Supreme Court held that the preparation of bids and proposals is a pre-contractual activity for which a contractor’s license is not needed.

Conclusion 

So there you have it. We now have a trend with the 1st District and 2nd District Court of Appeals both holding that a one-year statute of limitations beginning upon completion or cessation of work on a project applies to disgorgement claims under Business and Professions Code section 7031.

Court Holds That One-Year SOL Applies to Disgorgement Claims Under B&P Section 7031

Garret Murai | California Constructin Law Blog

We’ve talked before about Business and Professions Code section 7031 which courts have referred to as “harsh[ ],” “unjust[ ]” and even “draconian.” Under Section 7031, a contractor performing work requiring a contractor’s license, but who doesn’t: (1) is prohibited from suing to recover payment for work performed; and (2) is required to disgorge all money paid by the project owner for work performed. This is true even if the project owner knew that the contractor was unlicensed, the contractor was only unlicensed during part of the time it performed work requiring a license, and even if the work performed by the contractor was free of defects. In short, it’s the nuclear bomb of remedies against a contractor.

However, until now, no court has addressed when a project owner is permitted to raise a Business and Professions Code section 7031 claim against a contractor. In the next case, Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., Case No B297247 (August 26, 2020), the 2nd District Court Appeal finally answers this question.

The Eisenberg Village Case

In 2007, project owner Eisenberg Village of the Los Angeles Jewish Home for the Aging entered into a construction contract for construction of a senior home with contractor Suffolk Construction Company, Inc. Suffolk completed its work in June 2010 and Eisenberg paid Suffolk just over $49 million.

After residents began to move into the senior home problems developed with the hot water supply. The hot water was above the level allowed by law and the California Department of Social Services ultimately issued a citation. Suffolk agreed to work with Eisenberg to try to fix the problem.

In June 2013, Eisenberg filed a complaint against the project architect, DLR, for breach of contract and negligence alleging issues with the HVAC system, hot water delivery system, plumbing, and plumbing fixtures. Eisenberg did not sue Suffolk because Suffolk had agreed to try to fix the problem. While Suffolk tried to fix the problem, Eisenberg and Suffolk entered into a tolling agreement. The tolling agreement expired in 2014.

In March 2014, Eisenberg amended its complaint to add Suffolk as a defendant alleging the same breach of contract and negligence claims it had alleged against DLR and in May 2015 added a claim for disgorgement against Suffolk under Business and Professions Code section 7031 on the ground that Suffolk’s qualifier, Gregory Hescock, who had moved from Suffolk’s Irvine office to Suffolk’s Boston office in 2008, did not exercise “direct supervision and control” over the project in violation of Business and Professions Code section 7068. In short, that Hescock was a “sham qualifier.”

After an unsuccessful demurrer filed by Suffolk as to the disgorgement claim and an unsuccessful motion for summary judgment filed by Eisenberg on the same claim, Suffolk filed a motion for summary judgment claiming that Eisenberg’s disgorgement claim was time barred because it was not brought within one year of the time Eisenberg filed its claim against Suffolk under Code of Civil Procedure section 340 which provides for a one-year statute of limitations for actions under a statute providing for penalties or forfeiture.

The trial court agreed and Eisenberg appealed.

The Appeal

On appeal, Eisenberg argued that Code of Civil Procedure section 340 and that a three or four-year statute of limitation should apply because:

  1. There is no statute specifying the limitation period under Business and Professions Code section 7031 and, therefore, Code of Civil Procedure section 343 which provides a “catch-all” four-year statute of limitation applies;
  2. Section 7031 is akin to a restitution claim under the unfair competition law which provides for a four-year statute of limitations;
  3. Other provisions of the Contractors License Law provide for a four or three-year statute of limitation; and
  4. Disgorgement is similar to a refund or restitution for which Code of Civil Procedure section 338 provides for a three-year statute of limitations.

Eisenberg further argued, that even if a one-year statute of limitation applied,  it was not aware that Hesckock had moved from Irvine to Boston until it received this information through discovery in 2014.

The Court of Appeal, finding that Business and Professions Code section 7031 should be construed as a statute providing for a penalty as opposed to restitution (i.e., the return of money improperly taken), and that the one-year statute of limitation under Code of Civil Procedure 340 applied to disgorgement claims under Section 7031, explained:

Eisenberg contends that section 7031(b) disgorgement is not a penalty, but rather is restitution. In making this contention, it points to the Supreme Court’s definition of restitution in Clark v. Superior Court (2010) 50 Cal.4th 605 (Clark): “The word `restitution’ means the return of money or other property obtained through an improper means to the person from whom the property was taken. [Citations.] `The object of restitution is to restore the status quo by returning to the plaintiff funds in which he or she has an ownership interest.’ The Supreme Court contrasted restitution, which it noted “is not a punitive remedy” (ibid.), with a penalty, which it described as “a recovery `”without reference to the actual damage sustained.”‘”

Eisenberg argues that, since section 7031(b) measures the recovery as “what was taken from the plaintiff,” it constitutes restitution rather than a penalty. However, contrary to Eisenberg’s characterization, recovery under section 7031(b) is not of something that was “taken”; it is recovery of compensation paid under the terms of a contract. Section 7031 does not invalidate that contract. Rather, it precludes an unlicensed contractor (but not the other party to the contract) from enforcing the contract (§ 7031, subd. (a)), and, if the other party to the contract brings a timely action, it requires the unlicensed contractor to return all compensation received from that party, regardless whether that party sustained any actual damage (§ 7031(b)). Moreover, recovery of all compensation paid to the unlicensed contractor does not—and is not intended to—”restore the status quo.” Instead, for reasons of policy (to deter contractors from operating without a valid license), it provides a windfall to the plaintiff, at the expense of the unlicensed contractor, since the plaintiff also retains the work completed by the contractor.

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.”‘” Accordingly, we hold that CCP 340(a), the one-year statute of limitation, applies to disgorgement claims brought under section 7031(b).

Having determined that the one-year statute of limitation under Code of Civil Procedure section 340 applies to disgorgement claims under Business and Professions Code section 7031, the Court of Appeal turned next to when the one-year statute of limitation begins to accrue (i.e., when the clock starts to run).

Addressing first the “discovery rule,” which provides that a statute of limitation period does not begin to accrue “until the plaintiff discovers, or has reason to discovery, the cause of action,” the Court of Appeal held that the “discovery rule” does not apply to disgorgement claims under Business and Professions Code section 7031:

In light of the equitable basis for the discovery rule, it makes little sense to apply the rule to claims for disgorgement under section 7031(b). A section 7031(b) claim does not require that the plaintiff suffer any injury, or at least an injury in the sense used by the courts to justify an equitable exception to the ordinary rules of accrual. The fact that a contractor does not have a valid license does not, by itself, cause the plaintiff harm (other than, perhaps, some sort of psychic harm in knowing that he or she hired someone who was not in compliance with the law). Moreover, 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. Thus, holding that the discovery rule does not apply to section 7031(b) claims does not produce a harsh result for plaintiffs. To the extent a plaintiff does suffer an 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.

In contrast, if we were to hold that the discovery rule applied, it would be nearly impossible to formulate rules for its application that could be consistently applied while staying true to the policies underlying statutes of limitation, i.e., “protecting parties from `defending stale claims, where factual obscurity through the loss of time, memory or supporting documentation may present unfair handicaps’ . . . [and] stimulat[ing] plaintiffs to pursue their claims diligently.” Since section 7031(b) does not require any injury to the plaintiff, what kinds of facts would give rise to a reason to suspect a factual basis for the claim? If the plaintiff has no duty to investigate whether the contractor was properly licensed absent some sort of facts that would put him or her on notice, there would be, in effect, no time limitation at all in most cases.

Having determined that the “discovery rule” does not apply, the Court of Appeal held, without much analysis, that a disgorgement claim under Business and Professions Code section 7031 accrues or begins to run “when an unlicensed contractor completes or ceases performance of the act or contract at issue.” And, here, explained the Court, Suffolk completed its work on the project in June 2010, and while it performed additional work to remedy the hot water issue in 2012, and while it is unclear “whether such work would be considered to be work under the original Contract or under a new agreement,” Eisenberg did not allege its disgorgement claim under May 18, 2015.

Conclusion

Eisenberg is a hugely important case for project owners. At present, it is the only case addressing the statute of limitations applicable to disgorgement claims under Business and Professions Code section 7031, and while there is the possibility that another court of appeal could find differently, at least for now Eisenberg is the law of the land in California. A couple of important take-aways for contractors and project owners.

  1. If you think you might be bringing a disgorgement claim under Business and Professions Code section 7031 you should do so quickly and in no event no later than one year from completion of a project; and
  2. Eisenberg applies to disgorgement claims. Arguably, and I would say logically, it would not apply to claim preclusion under Business and Professions Code section 7031 since a project owner would not be able to raise a claim preclusion defense until a contractor files a payment claim against a project owner which could be as long as four years after work is performed.

Owner Disgorgement Claims Against Unlicensed Contractors Given Short Statute of Limitations

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.

Comment

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.

Landmark Contractor Licensing Case Limits Disgorgement Remedy in California

Candace Matson | Construction & Infrastructure Law Blog

Contractors performing work in California are required to be licensed by the California State License Board (“CSLB”).  Cal. Bus. & Prof. Code §7065.  Except for sole proprietors, contractors are typically licensed through “qualifiers,” i.e., officers or employees who take a licensing exam and meet other requirements to become licensed on behalf of the contractor’s company.  Contractors who perform work in California without being properly licensed are subject to a world of hurt, including civil and criminal penalties (see, e.g., Cal. Bus. & Prof. Code §§ 7028, 7028.6, 7028.7, 7117, and Cal. Labor Code §§ 1020-1022), and the inability to maintain a lawsuit to recover compensation for their work.  Cal. Bus & Prof. Code § 7031(a); Hydra Tech Systems Ltd. v. Oasis Water Park, 52 Cal.3rd 988 (1991).

But arguably the worst ramification of not being property licensed is that established in Business & Professions Code Section 7031(b), which provides that any person who uses the services of an unlicensed contractor may bring an action for the return of all compensation paid for the performance of the work, commonly known as “disgorgement.”  This remedy is particularly harsh (often described as “draconian”) because it makes no allowance for the fact that an unlicensed contractor will likely have already paid out the bulk of its compensation to its subcontractors, suppliers and vendors, but nevertheless can be ordered to disgorge all compensation.

Given the complexity of California’s contractor license law, the disgorgement penalty threatens not just contractors who willfully evade licensing, but also those who inadvertently fail to keep their license current, those who are improperly licensed for the specific work they are performing, and those who do not meet particular underlying licensing requirements, e.g., failure to maintain workers compensation insurance unless truly exempt, and (arguably) failure of the qualifying agent to have sufficient supervision and control of his or her employer’s or principal’s construction operations.  Project owners, in particular, have used disgorgement actions as both a sword and a shield in disputes with their general contractors.

In a new opinion addressing issues of “first impression” (i.e., never ruled on previously), Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. (2d App. Dist, B297247), filed August 26, 2020, the Court makes two significant holdings.  The first is that the time in which a disgorgement action can be brought (known as the statute of limitations) is only one year.  The second is that this one-year statute of limitation starts to run (accrue) on the date contractor’s work ceases — not from the date when the license violation is discovered.  The basis for the first holding is that disgorgement is both a liability created by statute and a penalty, and therefore falls under Code of Civil Procedure Section 340(a), a one year statute of limitations.  The basis for the second holding is that the discovery rule of accrual is based in equity, whereas a disgorgement claim is not intended to compensate claimant for any injury, but to punish the unlicensed contractor, and therefore is not subject to equitable considerations.

This ruling is a huge win for contractors because it significantly limits the time during which they are exposed to possible disgorgement for non-licensure or for license violations that equate to non-licensure.  In contrast, it deprives unwary owners of the ability to assert a disgorgement claim unless they become aware of the licensing violation within one year of the project’s completion (though owners retain the ability to assert other causes of action for longer periods, e.g., two years for negligence, four years for breach of contract, etc.).

In light of Eisenberg, at the outset of a project, a prudent owner will ascertain who the license qualifier is for its general contractor and document his or her involvement in the project from beginning to end (since certain supervisorial requirements must be met by an employee qualifier in order for the license to be valid).  At the end of a project, a prudent owner will also review its contractor’s  license status from the date of the bid through final completion.  Not all owners will bring a disgorgement action against an unlicensed contractor who performed a project well.  But few will want to forfeit their right to bring such an action by waiting more than a year following final completion to ascertain whether they have the grounds to do so.

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.