{"id":898074,"date":"2020-10-13T14:05:43","date_gmt":"2020-10-13T20:05:43","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=898074"},"modified":"2020-10-13T14:05:47","modified_gmt":"2020-10-13T20:05:47","slug":"disgorgement-claims-unlicensed-contractors","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/disgorgement-claims-unlicensed-contractors\/","title":{"rendered":"Owner Disgorgement Claims Against Unlicensed Contractors Given Short Statute of Limitations"},"content":{"rendered":"\n<p>Matthew T. Porter | <a rel=\"noreferrer noopener\" href=\"https:\/\/www.smithcurrie.com\/publications\/california-law-notes\/owner-disgorgement-claims-against-unlicensed-contractors-given-short-statute-of-limitations\/\" target=\"_blank\">Smith Currie &amp; Hancock<\/a><\/p>\n\n\n\n<p><strong><em>Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc.<\/em>&nbsp;(2020)<\/strong>&nbsp;<strong>53 Cal.App.5th 1201.<\/strong><\/p>\n\n\n\n<p>Under California Business and Professions Code section 7031(b), \u201ca person who utilizes the services of an unlicensed contractor may bring an action \u2026 to recover all compensation paid to the unlicensed contractor for performance of any act or contract.\u201d The Court of Appeal held that such <a href=\"https:\/\/www.myconstructionexpert.com\/blog\/disgorgement-remedy-in-california\/\" target=\"_blank\" rel=\"noreferrer noopener\">disgorgement claims<\/a> 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.<\/p>\n\n\n\n<p>Eisenberg Village of the Los Angeles Jewish Home for the Aging (\u201cEisenberg\u201d) hired Suffolk Construction Company, Inc. (\u201cSuffolk\u201d) to construct a 108-unit assisted living facility. During construction, Suffolk\u2019s responsible managing employee (\u201cRME\u201d) 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\u2019s disgorgement claim was barred by the statute of limitations. The Court of Appeal agreed.<\/p>\n\n\n\n<p><strong>Statute of Limitations for Section 7031(b) Disgorgement Claim<\/strong><\/p>\n\n\n\n<p>Because section 7031(b) does not set forth a limitation period, the court looked to the California Code of Civil Procedure (\u201cCCP\u201d) to determine the applicable statute of limitations for Eisenberg\u2019s disgorgement claim. The question turned on whether section 7031(b) disgorgement was a \u201cpenalty or forfeiture.\u201d The court noted that section 7031(b) disgorgement \u201cdeprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction.\u201d It also noted that a plaintiff may bring such a claim \u201cregardless of any fault in the construction by the unlicensed contractor.\u201d For these reasons, the court held that a section 7031(b) disgorgement claim is a penalty and is, therefore, subject to CCP \u00a7 340(a)\u2019s one-year statute of limitations.<\/p>\n\n\n\n<p><strong>Accrual of Section 7031(b) Disgorgement Claim<\/strong><\/p>\n\n\n\n<p>After determining that the one-year statute of limitations applies, the court turned to the question of when Eisenberg\u2019s disgorgement claim accrued. Eisenberg argued that the \u201cdiscovery rule\u201d applied and that the statute of limitations did not begin to run until Eisenberg discovered the potential issue with Suffolk\u2019s licensing, which was well after completion of the project. The court rejected this argument. The court reasoned that a contractor\u2019s 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 \u201cabsurd result\u201d of plaintiffs bringing disgorgement claims long after the successful completion of a project based on a lapse or suspension of a contractor\u2019s license during the project.<\/p>\n\n\n\n<p><strong>Comment<\/strong><\/p>\n\n\n\n<p>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\u2019s ceasing performance on the project. In some cases, this may prove to be impracticable, and in many cases\u2014especially where subtle automatic license suspension issues are involved\u2014this will necessitate aggressive litigation action by counsel to preserve potential disgorgement claims.<\/p>\n\n\n\n<p>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\u2019s 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.<\/p>\n\n\n\n<p>Finally, this case is plowing new ground, and there is much room for other courts to disagree with the&nbsp;<em>Eisenberg&nbsp;<\/em>Court\u2019s ruling.&nbsp; Expect further litigation of these statute of limitations issues.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Matthew T. Porter | Smith Currie &amp; Hancock Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc.&nbsp;(2020)&nbsp;53 Cal.App.5th 1201. Under California Business and Professions Code section 7031(b), \u201ca person who utilizes the services of an unlicensed contractor may bring an action \u2026 to recover all compensation paid to&hellip; <a class=\"more-link\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/disgorgement-claims-unlicensed-contractors\/\">Continue reading <span class=\"screen-reader-text\">Owner Disgorgement Claims Against Unlicensed Contractors Given Short Statute of Limitations<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[11015],"tags":[9895,11302,187],"class_list":["post-898074","post","type-post","status-publish","format-standard","hentry","category-construction-claims","tag-advise-consult","tag-disgorgement-claims","tag-statute-of-limitations","entry"],"jetpack_publicize_connections":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Owner Disgorgement Claims Against Unlicensed Contractors Given Short Statute of Limitations - Advise &amp; 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