In a significant decision, Judicial Council of California v. Jacobs Facilities, Inc., et al. (2015) WL4967258 (“Judicial Council case”), the California Court of Appeal, First District ruled, in a decision certified for partial publication, that a substantial compliance defense pursuant to Business and Professions Code Section 7031(e) asserted by an alleged unlicensed contractor in a disgorgement action is a matter for the Court, and not the jury, to decide.
The facts of the Judicial Council case are somewhat complicated. In that matter, the Judicial Council of California, Administrative Offices of the Courts (“JCC”) entered into an April 2006 contract with Jacobs Facilities, Inc. (“Jacobs Facilities”), a wholly owned subsidiary of Jacobs Engineering Group Inc. (“Jacobs Engineering”), to provide various maintenance and repair services for 121 courthouses and other judicial branch buildings throughout Southern California. Performance of the JCC contract required a license issued pursuant to the Contractors State License Law (“CSLL”), see, Business and Professions Code Section 7000, et seq. Jacobs Facilities was properly licensed when it commenced work under the JCC contract. However, in late 2006, Jacobs Engineering, as part of a branding initiative, transferred the employees responsible for performing the JCC contract to itself (Jacobs Engineering).
Jacobs Engineering then formed Jacobs Project Management Co. ("Jacobs Management") in January 2008. Thereafter, Jacobs Management applied for a contractor's license. In August 2008, Scott McCallister, the individual who had acted as the "qualifying individual" for Jacobs Facilities (required pursuant to Business and Professions Code Section 7068(b)(3)), withdrew, resulting in the suspension of Jacobs Facilities' license. Three days after that took place, Jacobs Management obtained its contractors license and named Mr. McCallister as its qualifying individual. In February 2009, the JCC exercised an option to extend the JCC contract with Jacobs Facilities. The option was executed by Mr. McCallister.
In November 2009, the JCC and Jacobs Management entered into an assignment agreement transferring the JCC contract to Jacobs Management. However, the JCC filed suit against Jacobs Facilities and Jacobs Management in December 2009 claiming that the Jacobs entities were not properly licensed at all times and sought disgorgement of over $18,000,000 that had been paid by the JCC under the JCC contract.1 The Jacobs entities asserted that there had been no violation of the Contractors State License Law arguing that there had only been a change in business form citing E.J. Franks Construction, Inc. v. Sahota (2014) 226 Cal.App.4th 1123 ("Franks")2 and, even if that were not the case, substantial compliance had occurred pursuant to Business and Professions Code Section 7031(e).3
The matter went to a jury trial. Before trial, the Jacobs entities requested a hearing on their substantial compliance defense. The trial court ruled that the hearing would take place but only after the case went to the jury. The jury, clearly for equitable reasons, rejected the JCC’s demand and awarded no monies based on the disgorgement claim. The JCC then filed a Motion for Judgment Not Withstanding the Verdict, which was denied. Attorney’s fees were also awarded
1 The Contractors State License Law contains a disgorgement provision, Business and Professions Code Section 7031(b), which provides that all sums paid to an unlicensed contractor may be sought in a disgorgement action by the customer of the contractor. See, MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412.
2 In Franks, an individual, licensed contractor entered into a home remodel contract. During the course of the home remodel work, the contractor incorporated his business and had his licensed reissued to his corporation. The owners then sought to avoid paying the contractor, arguing that the contractor was not licensed at all times. The Court rejected the owner's claims holding that there had only been a mere change in business form and that the CSLL had not been violated.
3 Business and Professions Code Section 7031(e) provides that a " court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid."
to the Jacobs entities. No hearing ever took place on the substantial compliance defense.
On appeal, the Court of Appeal commented that it viewed the jury’s verdict as an attempt to reach an equitable resolution given the harsh consequences to the defendants from the strict application of the Contractors State License Law. The Court of Appeal then reversed the judgment, holding that there had been a violation of the Contractors State License Law and that the jury could not excuse that (the Court of Appeal narrowly construed the Franks decision to the facts of that case). However, the Court of Appeal also ruled that the Jacobs entities had properly and timely requested a hearing in regard to substantial compliance under the Contractors State License Law. The Court of Appeal then remanded the matter for hearing on the substantial compliance defense. However, the Court of Appeal further ruled that the hearing on the substantial compliance defense, because it would be equitable in nature, would be a matter for the trial court and not the jury.
The Judicial Council case is significant for a number of reasons. The case provides some authority to limit the reach of the decision in the Franks case. However, and perhaps of more lasting import, it specifically holds that the court, not the jury, is the decider for a contractor's substantial compliance defense.
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