BILL ANALYSIS Ó
SENATE COMMITTEE ON
BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
Senator Jerry Hill, Chair
2015 - 2016 Regular
Bill No: AB 1793 Hearing Date: June 6,
2016
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|Author: |Holden |
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|Version: |May 4, 2016 |
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|Urgency: |No |Fiscal: |No |
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|Consultant|Mark Mendoza |
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Subject: Contractors: license requirements: recovery actions
SUMMARY: Provides that a contractor may pursue or obtain compensation
for any work performed on the contract while duly licensed, as
specified.
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 (Contractors Law).
(Business and Professions Code (BPC) § 7000, et seq.)
2)Requires the CSLB to investigate complaints and enforce the
provisions of the Contractors Law, 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 § 3700.5. (BPC § 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
§ 7026.1(a)(2)(A))
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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. (BPC § 7031(a))
5)Provides that action may be brought against a contractor
during the performance of any act or contract during which
the contractor was unlicensed. (BPC § 7031(b))
6)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 § 7031(d))
7)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 § 7031(e))
8)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 § 7071)
This bill:
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1)Provides that a contractor may not bring an action to recover
compensation for the performance of any act or contract
unless he or she was a duly licensed contractor during the
performance of that act or contract for which compensation is
sought.
2)Permits a person who uses the services of an unlicensed
contractor to bring an action to recover all compensation
paid to the unlicensed contractor for any performance of an
act or contract, except that this right to recover from an
unlicensed contractor shall not apply to any compensation
paid to the contractor for work performed during a time when
the contractor was duly licensed.
3)Provides that a security interest taken to secure any payment
for the performance of a contract for which a license is
required is enforceable for work performed while the
contractor was duly licensed.
4)Modifies the showing that must be made to demonstrate that a
contractor is in "substantial compliance" with licensing
requirements. Specifically, existing law requires showing
that the contractor (1) had been duly licensed prior to
performing the 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
commenced; and (4) acted promptly and in good faith to
reinstate his or her license upon learning it was invalid.
Under this bill the contractor would, instead, need to show
that he or she (1) had been duly licensed prior to performing
the contract, (2) acted reasonably and in good faith to
maintain proper licensure, and (3) acted promptly and in good
faith to remedy the failure to comply with the licensure
requirements under this section upon learning of the failure.
FISCAL EFFECT: None. This bill is not keyed "fiscal" by
Legislative Counsel.
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COMMENTS:
1. Purpose. The Author is the sponsor of this bill. According
to the Author, "[This bill] aims to protect licensed
contractors from the harsh disgorgement provisions of the
[Contractors Law]. 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."
2. Background. The Contractors Law 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."
The terms "duly licensed" (as used in subdivision (a)) and
"unlicensed" are not defined in the Contractors Law, 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.
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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.
3. 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 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
Contractors Law. 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
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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 Contractors Law'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."
4. Prior Related Legislation. SB 263 (Monning) of 2013 sought
to modify BPC § 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. ( Status: This
measure was substantially amended to address a different
issue.)
AB 1386 (Horton, Chapter 289, Statutes of 2003) clarified the
meaning of substantial compliance as it related to the
disgorgement provisions of the Contractors Law.
5. Arguments in Support. A coalition of several contracting,
construction, and building trade associations support this
bill because "AB 1793 clarifies existing law to ensure that
properly licensed and law abiding construction firms are not
placed at fatal monetary risk, by limiting the recovery time
and disgorgement amount to monies paid to the contractor for
work performed while the contractor was not properly
licensed. To be clear, nothing in this measure allows an
unlicensed contractor to seek or retain any monies paid to
them for the performance of a construction contract while
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they were not duly licensed."
The California Professional Association of Specialty
Contractors underscores that "there are times when a
contractor inadvertently is temporarily in violation of a law
or regulation. AB 1793 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."
NOTE : Double-referral to the Senate Committee on Judiciary.
SUPPORT AND OPPOSITION:
Support:
Air Conditioning Sheet Metal Association
Associated General Contractors
California Association of Sheet Metal and Air Conditioning
Contractors National Association
California Building Industry Association
California Chapters of the National Electrical Contractors
Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California Professional Association of Specialty Contractors
Construction Employers Association
Northern California Allied Trades
Southern California Contractors Association
State Building and Construction Trades Council, AFL-CIO
United Contractors
Wall and Ceiling Alliance
Western Line Constructors Chapter
Opposition:
None on file as of May 31, 2016.
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