BILL ANALYSIS Ó
AB 1793
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Date of Hearing: April 26, 2016
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Rudy Salas, Chair
AB 1793
(Holden) - As Amended April 18, 2016
NOTE: This bill is double-referred, and if passed by this
Committee, it will be referred to the Assembly Committee on
Judiciary.
SUBJECT: Contractors: license requirements: recovery actions.
SUMMARY: Requires a court to find that a contractor is in
substantial compliance with licensure requirements if prescribed
evidentiary standards are met; clarifies that action can be
brought against a contractor during the performance of any act
or contract for which compensation is sought; deletes the
requirement for a contractor to be licensed at all times to
receive compensation, and instead authorizes a contractor to
retain compensation for the portion of work performed while he
or she was duly licensed.
EXISTING LAW:
1)Establishes the Contractors State License Board (CSLB) within
the Department of Consumer Affairs (DCA) to implement and
enforce the Contractors State License Law (CSLL); the laws and
regulations related to the licensure, practice and discipline
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of the construction industry in California. All businesses
and individuals who construct or alter, or offer to construct
or alter, any building, highway, road, parking facility,
railroad, excavation, or other structure in California must be
licensed by the CSLB if the total cost (labor and materials)
of one or more contracts on the project is $500 or more.
(Business and Professions Code (BPC) Section 7000, et seq.)
2)Requires the CSLB to investigate complaints and enforce the
provisions of the CSLL, prohibit all forms of unlicensed
activity, and enforce the obligation to secure the payment of
valid and current workers' compensation insurance in
accordance with Labor Code Section 3700.5. (BPC Sections
7011.4, 7011.7)
3)Defines "contractor" to include any person , consultant to an
owner-builder, firm, association, organization, partnership,
business, trust, corporation, or company, who or which
undertakes, offers to undertake, purports to have the capacity
to undertake, or submits a bid to construct any building or
home improvement project, or part thereof. (BPC Section
7026.1(a)(2)(A))
4)Provides that no person engaged in the business or acting in
the capacity of a contractor may bring or maintain any action
for the collection of compensation for the performance of any
act or contract where a license is required without alleging
that he or she was duly licensed; provides that action can be
brought against a contractor during the performance of any act
or contract during which the contractor was unlicensed. (BPC
Section 7031(a) and (b))
5)Provides that proof of licensure is made by producing a
verified certificate of licensure from the CSLB that is valid
during all times of the performance of any act or contract;
provides that the burden of proof to establish licensure or
proper licensure is on the licensee. (BPC Section 7031(d))
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6)Authorizes a court to determine at an evidentiary hearing that
a contractor has substantially complied with licensure
requirements if the contractor: 1) had been duly licensed as a
contractor prior to performing 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 commencing the act or contract;
and, 4) acted promptly and in good faith to reinstate his or
her license upon learning it was invalid. (BPC Section
7031(e))
7)Provides that no license shall be issued to a corporation,
partnership, limited liability company, or other combination
or organization if a responsible officer or director of the
corporation, or other combination or organization, or a
partner of the partnership, or a manager or officer of the
limited liability company, or any member of an organization
seeking licensure does not meet the qualifications required of
an applicant other than those qualifications relating to
knowledge and experience. (BPC Section 7071)
8)Provides that no license, regardless of type or
classification, can be transferred to any other person or
entity under any circumstances; provides that a license number
may be reissued after cancellation, revocation, suspension, or
expiration beyond the renewal period only under specified
circumstances; provides that a license number may be reissued
or reassigned to a different entity only under specified
conditions, including when a parent corporation, or limited
liability company has merged or created a subsidiary, the
subsidiary has merged into the parent corporation or limited
liability company, or the corporation or limited liability
company has changed its filing status with the Secretary of
State from a domestic entity to a foreign entity or from a
foreign entity to a domestic entity, and the new entity is
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being formed to continue the business of the formerly licensed
corporation; or when a limited liability company is formed by
a corporation to continue the business of the corporation
subsequent to the cancellation of the corporate entity's
license, provided the personnel listed for each entity are the
same. (BPC Section 7075.1)
THIS BILL:
9)Clarifies that an act or contract performed by a contractor is
subject to action by a court of competent jurisdiction,
including providing evidence of licensure, during the time
that the act or contract would be compensated.
10)Specifies that action may be brought against a contractor for
the period of time that the contractor was unlicensed;
provides that a person's right to recover compensation paid to
a contractor is not subject to action for the period of time
that the contract was duly licensed.
11)Replaces the requirements for providing evidence that shows
the contractor did not know or reasonably should not have
known that he or she was not duly licensed when commencing an
act or contract and that he or she acted promptly and in good
faith to reinstate his or her license upon learning it was
invalid; instead, a contractor must provide evidence that he
or she acted promptly and in good faith to remedy the failure
to comply with licensure requirements upon learning of the
failure, in addition to other specified requirements.
12)Requires a court to determine at an evidentiary hearing that
a contractor has substantially complied with licensure
requirements, as specified.
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FISCAL EFFECT: None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS:
Purpose. This bill is author-sponsored. According to the
author, "[This bill] aims to protect licensed contractors from
the harsh disgorgement provisions of the [CSLL]. This bill
requires the court to determine if a contractor substantially
complied with the law when a contractor inadvertently, and in
good faith, falls out of compliance and makes immediate
corrective action."
Background. The CSLL permits an individual that hires a
contractor, and later discovers the contractor to be unlicensed,
to seek recovery for the cost of all construction-related work
performed by the unlicensed contractor. In cases in which a
previously valid contractors' license simply expired, the
contractor may assert in defense that they made a "good faith"
effort to comply with the licensing requirements and corrected
their licensure status immediately upon discovering a lapse.
In the CSLB's 2014 Sunset Review Report, submitted as part of
its sunset review by the Legislature, the CSLB stated, "existing
law requires that a contractor must be a 'duly licensed
contractor at all times' while working on a contracted project
in order to receive compensation (BPC Section 7031). The CSLB
indicates that the courts have interpreted the provisions of BPC
Section 7031 to deny all compensation to contractors who are in
violation of the licensing requirements even though the failure
to comply occurred during a brief period during which work was
performed."
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The terms "duly licensed" (as used in subdivision (a)) and
"unlicensed" are not defined in CSLL, but are decisive terms
under BPC Section 7031. Consequently, the legal profession
lacks clear guidelines when judging the license status of a
contractor, and the disgorgement provisions authorized by
subdivision (b) are being misinterpreted and maliciously applied
for personal gain, even when there is no issue regarding the
quality of work performed.
CSLB claims that the application of this statute in this manner
may facilitate "unjust enrichment" to public agencies, prime
contractors, and/or commercial/industrial project owners, an
unacceptable outcome within the spirit of the law.
The CSLB sponsored SB 263 (Monning) of 2013 to modify BPC
Section 7031, which would have provided that a contractor may
pursue payment for any work on the contract while duly licensed,
but preclude payment for work performed in a classification in
which the contractor was not licensed, was under license
suspension, or was under an expired or inactive license when the
work was performed. The amendments to BPC Section 7031 were
removed in part because of the Senate Committee on Judiciary's
concerns about weakening the consumer protection provided by
this section. That bill was substantially amended to address an
unrelated topic.
The 2008 Housing Crisis. As a result of the 2008 housing crisis
in California, large segments of the state's construction
industry underwent a period of mergers, acquisitions and
corporate reorganizations. Oftentimes, the newly merged or
reorganized firms would internally shift or obtain new
contractors' licenses while allowing the valid license for the
defunct entity to lapse upon its expiration. Through the normal
course of construction related payment disputes, customers
started challenging the validity of contractor licenses
following mergers or corporate reorganizations. Plaintiffs
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sought to force construction firms to disgorge millions of
dollars in revenue despite a firm's maintaining a valid license
at all times, albeit not the license listed on the contract when
the contract first commenced.
According to the author, "A California appellate court ruled
that although a reorganizing construction firm internally
transferred construction work from one subsidiary with a valid
contractors' license to another, the failure to maintain or
explicitly transfer the original license of the entity listed on
the construction contract violated the CSLL. Although no
construction work was performed without a valid license and the
parent company remained consistent, the court ordered the firm
to disgorge all revenue from the contract."
State Litigation. In MW Erectors, Inc. v Niederhauser Ornamental
and Metal Works Co., Inc., et al., the California Supreme Court
held, in relevant part: "The words 'at all times' convey the
Legislature's obvious intent to impose a stiff all-or-nothing
penalty for unlicensed work by specifying that a contractor is
barred from all recovery for such an 'act or contract' if
unlicensed at any time while performing it." (Refer MW Erectors,
Inc. v. Niederhauser Ornamental and Metal Works Co., Inc., et
al., Supreme Court of California, 30 Cal.Rptr.3d 755 (2005)]
In Judicial Council of California v. Jacobs Project Management,
Co., the appellate court acknowledged that penalizing
construction firms for "a technical transgression only
indirectly serves the CSLL's larger purpose of preventing the
delivery of services by unqualified contractors." As a result of
this decision the firm nearly lost nearly $20 million in revenue
resulting from the work performed between the lapse of the
license and a renewal of the construction contract under the new
subsidiary's name."
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Related Prior Legislation. SB 263 (Monning) of 2013 sought to
modify BPC Section 7031 and would have provided that a
contractor may pursue payment for any work on the contract while
duly licensed, but preclude payment for work performed in a
classification in which the contractor was not licensed, was
under license suspension, or was under an expired or inactive
license when the work was performed. This bill was substantially
amended to address a different jurisdiction.
AB 1386 (Horton), Chapter 289, Statutes of 2003, sought to
clarify the meaning of substantial compliance as it related to
the disgorgement provisions of the CSLL.
POLICY ISSUES FOR CONSIDERATION:
Subdivision (c) of Section 7031 states that a security interest
(i.e. a lien) taken to secure any payment for the performance of
any act or contract for which a license is required is
unenforceable if the person performing the act or contract was
not a duly licensed contractor at all times during the
performance of the act or contract. It is unclear if this
provision can be interpreted in a way that makes the security
interest void in situations that this bill is attempting to
mitigate. The author may need to work with the Legislative
Counsel to clarify the language and provide consistency in
throughout this section.
ARGUMENTS IN SUPPORT:
The Construction Employers' Association (CEA) writes in support,
"Mandates that a court determine substantial compliance with
licensure requirements under this section if it is shown at an
evidentiary hearing that the contractor (1) had been duly
licensed as a contractor in this state prior to the
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performance of the act or contract, (2) acted reasonably and
in good faith to maintain proper licensure, (3) acted promptly
and in good faith to remedy the failure to comply with
licensure requirements upon learning of the failure. We
believe that this gives contractors who experience an
inadvertent lapse of license, a reasonable remedy given their
prior good standing."
The California Professional Association of Specialty Contractors
(CALPASC) writes in support, "Federal and state laws and
regulations are myriad, and keeping in perfect compliance at
all times is the goal, but is very hard to achieve. There are
times when a contractor inadvertently is temporarily in
violation of a law or regulation. [This bill] brings important
clarity to an area of contractors' license laws, whereby an
unintentional and inadvertent act should not have large
financial consequences. This proposed law would provide a fair
remedy for all parties, when an unexpected issue with a
contractor's state license has been resolved in good faith, in
a reasonable and timely manner."
ARGUMENTS IN OPPOSITION:
None on file.
REGISTERED SUPPORT:
The Construction Employers' Association (CEA)
California Professional Association of Specialty Contractors
(CALPASC)
REGISTERED OPPOSITION:
None on file.
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Analysis Prepared by:Gabby Nepomuceno / B. & P. / (916) 319-3301