A California contractor learns a harsh lesson

A California contractor that failed to pay benefits under an employee pension plan has learned a harsh lesson for its failure to notify the Contractors State License Board (CSLB) of the resulting judgment.

Pacific Caisson & Shoring Inc. (Pacific) sued Bernards Brothers Inc. (Bernards) for payment on its subcontract. Bernards asserted as a defense that Pacific’s contractor’s license was suspended for 77 days during the project, and that Pacific’s claim was barred under California Business & Professions Code § 7031. Section 7031 precludes a contractor from maintaining any action to recover compensation for the performance of work which requires a license unless it was duly licensed at all times during the performance of the work. The trial court agreed with Bernard and the Court of Appeal affirmed.

Nothing new or surprising here, right? Standard California law, right? But here is where it gets interesting, complex and troublesome for California contractors. The reason that Pacific’s license was suspended was because of a judgment against a completely separate company: Gold Coast Drilling, Inc. (Gold Coast). How does that happen?

Pacific and Gold Coast were sister companies, both owned by Jerry and Delma McDaniel. Jerry was the RMO (responsible managing officer) for both Pacific and Gold Coast. Gold Coast, a union shop, failed to properly pay pension benefits for its employees and was sued by the plan fiduciary. Gold Coast stipulated to a judgment and then failed to pay the judgment pursuant to the agreed payment schedule. The plan fiduciary notified the CSLB, and the CSLB wrote Jerry and advised him that because Gold Coast had not notified the CSLB of the outstanding judgment within 90 days as required by Business and Professions Code § 7071.17, Gold Coast’s license was suspended. Further, the CSLB also suspended Pacific’s license as an “associated license” of Gold Coast under Business & Professions Code § 7071.17, former subd. (j) since Jerry was the RMO of both companies.

Pacific raised several arguments why Pacific’s license should not be considered to have been suspended and why Pacific’s claim against Bernard should not be barred. First, Pacific asserted that the stipulated judgment against Gold Coast was not an unsatisfied judgment that falls within the ambit of section 7071.17 because it did not represent a refusal “to pay a contractor, subcontractor, consumer, materials supplier or employee”. The Court of Appeal disagreed stating that the payment of employee wages is a condition of a contractor’s license and the term “wages” includes benefits to which employees are entitled including … deferred compensation such as pension and retirement benefits. Pacific next argued that section 7071.17 applies only to unsatisfied judgments that are substantially related to the construction activities of a licensee, and failure to pay pension benefits under a collective bargaining agreement was not something that was substantially related to Pacific’s construction activities. The Court dispensed with this argument, stating:

The reference book, available to contractors, explains with respect to section 7071.17, subdivision (e) that the Board “broadly interprets this section of law to mean that if the judgment relates to your construction business in any way, it is considered construction-related. It does not mean that you had to necessarily contract with the judgment creditor to build something. If you did not pay your office rent, your office utility bills, your material supplier, subcontractor, employee, or any other bill incurred by your business, [the Board] will consider it construction-related. Very few judgments received by [the Board] are not construction-related. If you feel confident that your judgment is not construction-related, you should provide [the Board] with documentation that will support your statement.”

Pacific then argued that section 7071.17 applies only to 1) unsatisfied 2) final judgments, and the stipulated judgment was neither. The Court disagreed and held that a stipulated judgment requiring future periodic payments is an unsatisfied final judgment within the meaning of section 7071.17. Pacific’s final argument was its claim against Bernard should not be barred because Gold Coast substantially complied with the licensing requirement under 7031, subdivision (e) because it “(1) had been duly licensed … prior to… performance… (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.” The Court rejected this argument, stating that the substantial compliance exception to the forfeiture rule is “extremely narrow” and applies “only where a contractor was without a license owing to circumstances truly beyond his control.” (Construction Financial v. Perlite Plastering Co. (1997) 53 Cal.App.4th 170, 182.) In this case, Gold Coast, and by extension Pacific, knew or should have known to report the stipulated judgment to the CSLB.

Implications of the Court’s Decision

The law can be a harsh task master, indeed. For contractors, the lessons to be learned from this case are 1) if you want to keep your license, pay your employees including the union pension funds; 2), most everything about your business is “construction related” for licensure purposes and don’t assume otherwise; 3) if you have a judgment against you, even a stipulated judgment, tell the CSLB; 4) a judgment against your business is also against your license and will infect every other business that you operate using that license; and 5) the law and the courts look harshly on unlicensed contractors. Don’t take any chances with your license.

The case is Pacific Caisson & Shoring Inc. v. Bernards Brothers, Inc., California Court of Appeal, Second Appellate District, May 18, 2015, No. B248320.

If you have any questions regarding the impact of this decision on contractors’ rights, please contact Ralph R Rhoades rrhoades@partonsell.com, who has 30+ years of experience representing contractors, owners and design professionals.

A California contractor that failed to pay benefits under an employee pension plan has learned a harsh lesson for its failure to notify the Contractors State License Board (CSLB) of the resulting judgment. Pacific Caisson & Shoring Inc. (Pacific) sued Bernards Brothers Inc. (Bernards) for payment on its subcontract. Bernards asserted as a defense that […]