Ohio Bill Shortening Statute Of Limitations Goes Into Effect

Alayna Bridgett and Gregory Thompson | Hahn Loeser & Parks

Yesterday, June 14, 2021, Ohio Senate Bill 13 went into effect. This bill shortens the statute of limitations for breach of written contract actions from eight years to six and, for oral contracts, from six years to four.

As we shared with readers earlier this year, while S.B. 13 amends the statute of limitations for contract claims in general, it is important for construction project stakeholders to consider provisions within their own contracts that limit contract claims periods. Nearly every construction contract will include provisions shortening the time frame in which a party may bring a claim (oftentimes to just days). These provisions provide a period much shorter than the enumerated statute of limitations. It is important to remember that, regardless of whatever appears in the Ohio Revised Code, parties must comply with the claims provisions provided in their contracts.

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.

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.

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.

A Challenge Regarding the Interpretation of a Project Condition of Approval may be Filed More than 90 Days Following the Project Approval

David Blackwell | Allen Matkins

On June 25, 2020, the Fifth Appellate District decided Honchariw v. County of Stanislaus, holding that an applicant’s challenge to a local agency’s interpretation of a project condition of approval was not barred by the Subdivision Map Act’s statute of limitations because it was not a challenge to the validity of a condition of approval. This decision is important for developers, as the 90-day statute of limitations under the Subdivision Map Act (at Gov. Code § 66499.37) and the Planning and Zoning Law (at Gov. Code § 65009(c)(1)) is extremely short, and conflicting interpretations regarding a condition may not arise until months or years later. This decision provides developers with an opportunity to challenge conflicting interpretations of a condition so long as the lawsuit is filed within 90 days after the conflict has materialized.

DISPUTED VESTING TENTATIVE MAP CONDITIONS OF APPROVAL REGARDING WATER SERVICE

In Honchariw, the County Board of Supervisors conditionally approved subdivider Honchariw’s application for a vesting tentative map in 2012. This approval followed years of litigation between Honchariw (as a prolific pro per litigant) and the County regarding this riverfront property that his family had owned for decades. A primary concern was the source of water service for the subdivided lots. The County therefore imposed four conditions to the vesting tentative map approval that sought to address this issue.

During the ensuing several years, Honchariw and County staff worked to address the property’s water supply, but in 2017, the County interpreted the subject conditions to require a fire suppression system that was contrary to Honchariw’s understanding. Honchariw argued that the County’s interpretation “came at him out of the blue” because the Community Services District’s system could not supply the required flows to make fire hydrants functional, as now required by the County. The parties continued to negotiate, with Honchariw insisting that a functional fire suppression system was not required for approval of the final map and could instead be built out as the lots were developed. The parties reached an impasse in the summer of 2017, five years after the vesting tentative map was approved.

A CHALLENGE REGARDING THE INTERPRETATION OF A CONDITION DIFFERS FROM A CHALLENGE TO THE VALIDITY OF A CONDITION

After the trial court conducted a hearing on the merits, it denied Honchariw’s petition and complaint. On appeal, the County argued that to the extent that Honchariw was challenging the project’s conditions of approval imposed in 2012, the challenge was barred by the 90-day statute of limitations set forth in Government Code section 66499.37 relating to decisions regarding subdivisions, including “the reasonableness, legality, or validity of any condition attached thereto.”

Honchariw argued, and the appellate court agreed, that his challenge was not to the validity of the subject conditions, but to the County’s “misinterpretation and misapplication” of the conditions, and that the parties’ respective stances regarding the meaning of the subject conditions were not clarified until July 2017. The court held that Honchariw’s claim did not “accrue” until then, so the filing of the lawsuit on August 25, 2017 was not time-barred by the Map Act’s 90-day statute of limitations.

NO DEFERENCE TO A LOCAL AGENCY’S INTERPRETATION OF PROJECT CONDITIONS

In the unpublished portion of the opinion, the Court sought to interpret the disputed conditions of approval, and remanded the matter to the trial court to resolve conflicting evidence in the record. In so doing, the appellate court applied the general principles for construing written instruments, provided that the principles do not undermine the purposes of the Subdivision Map Act.

The Fifth District also declared that while courts typically defer to a local agency’s interpretation of its own administrative rules, such deference was not appropriate when interpreting a subdivision’s conditions of approval, and that a court should instead “resolve any ambiguity in the conditions of approval in a manner consistent with the objectively reasonable expectations of the applicant.” Failing to do so would “undermine the purpose of the vesting tentative map statute.” The court further stated: “we are not bound to accept the local agency’s interpretation of a condition of approval simply because that interpretation is one of multiple reasonable interpretations. Such an approach would reward local agencies that draft ambiguous conditions of approval by giving them flexibility not conferred by clearly drafted conditions.”

IMPLICATIONS OF HONCHARIW

Although the facts of this case are limited to the Subdivision Map Act’s 90-day limitations period, the Planning and Zoning Law has similar language regarding actions to “determine the reasonableness, legality, or validity of any condition attached to a variance, conditional use permit, or any other permit” (Gov. Code § 65009(c)(1)(E)), thus the rationale in Honchariw would arguably be applicable to disputes regarding the interpretation of basically any project condition of approval.

This decision thus provides developers with a litigation option in the event of a dispute regarding the interpretation of one or more conditions of approval long after the project is approved.

Although the unpublished portion of the opinion cannot be cited as authority, it is provocative in its refusal to provide deference to a local agency’s interpretation of a project condition that it imposes and its admonishment of local agency attempts to impose ambiguous conditions that the agency can interpret to its advantage following the project approval.