December 2020

One-Year Statute of Limitations Held to Apply to Disgorgement Under California Business & Professions Code § 7031

A recent decision by the Court of Appeal for the Second Appellate District should draw the attention of contractors (as well as project owners and developers) statewide.  In Eisenberg Village etc. v. Suffolk Construction Co., Inc. (2020) 53 Cal. App. 5th 1201, the Court of Appeal ruled that the disgorgement remedy provided in Business & Professions Code § 7031(b) is a penalty and therefore subject to a one-year statute of limitations pursuant to Code of Civil Procedure § 340(a).  The Court of Appeal further held that such claims accrue upon the completion or cessation of work and the delayed discovery rule does not apply. 

            Relevant Facts

            In 2007, Eisenberg Village of the Los Angeles Jewish Home for the Aging (Eisenberg) contracted with Suffolk Construction Company, Inc. (Suffolk) for the construction of a $49 million facility, designed by DLR Group (DLR).  Under the contract, Suffolk represented and warranted that all contractors and subcontractors performing work on the project would be licensed by the Contractors State License Board (as required by law).  The project was completed in 2010.  As residents began moving into the facility, problems arose with hot water supply, and Suffolk returned to fix the problems.  After receiving a citation from the State Department of Social Services in March 2012 for supplying hot water to units above the legal temperature, Eisenberg contacted both Suffolk and DLR; although Suffolk agreed to again try to remedy the issue, DLR refused.

            Procedural History

            In June 2013, Eisenberg filed a complaint against DLR for breach of contract and negligence, alleging that problems including hot water delivery, plumbing and the HVAC system were caused by DLR.  In March 2014, Eisenberg amended its complaint to assert the same causes of action against Suffolk.  After a failed mediation, Eisenberg contended that it first discovered Suffolk’s potential violation of contractor licensing requirements and again amended its complaint to assert a cause of action for disgorgement under Business & Professions Code § 7031(b). Suffolk’s statutory violation arose from its oversight in the reporting of its responsible managing employee (RME) – if a contractor is a company, it must have qualified for its Contractors State License Board license through a designated RME (or “responsible managing officer”), whom is responsible for supervising the company’s work.  Suffolk’s RME at the time of construction had previously moved out of state but remained the designated RME on Suffolk’s license.

           Suffolk demurred to the disgorgement claim, arguing that it was barred by the one-year statute of limitations.  The trial court overruled Suffolk’s demurrer, stating that it was unclear when Eisenberg was or should have been put on notice of facts supporting its cause of action.  The trial court subsequently granted Suffolk’s motion for summary adjudication, finding that the one-year statute of limitations applied, and that Eisenberg could have discovered facts supporting its claim more than one year prior to asserting it.

            Disposition

            On appeal, the Court of Appeals affirmed the trial court’s ruling, holding that disgorgement is a penalty, not restitution, and the one-year statute of limitations under Code of Civil Procedure § 340(a) therefore applied.  The Court of Appeal also held that delayed discovery of the contractor’s unlicensed status does not operate to toll the one-year statute of limitations because the contractor’s statutory violation does not, on its own, cause the owner any harm.  Rather, the purpose of the disgorgement penalty is to punish the unlicensed contractor (and, as other cases have held, act as a deterrent to such persons from offering their services or accepting solicitations of their work).  In support of its holding, the Court of Appeal described a hypothetical scenario in which an unlicensed contractor builds a project, without any problems.  Subsequently, but within the ten-year statute of limitations for latent defects, the owner runs into financial trouble and is educated about Section 7031(b).  Theoretically, the Court of Appeal opined that the financially-strapped owner could file a disgorgement claim, have all construction compensation returned by the unlicensed contractor, and walk away with a free building, an “absurd result.”

            Conclusion

           Although this opinion will largely eliminate the possibility of the punitive hypothetical scenario outlined by the Court of Appeal, for contractors, this will serve as yet another reminder of the utmost importance of ensuring compliance with licensing requirements, without interruption.  Eisenberg Village removes an arrow in the quiver of project owners afflicted with defective work, as many problems will simply not arise within one year of project completion.  Owners should take care to conduct a license history check for retained contractors, both prior to the commencement of work and again before final payment.  Because it can take some time for the Contractors State License Board to process, requests should be submitted sixty days in advance of deadlines.

For more information contact:

Christopher K. Trembley

ctrembley@gibbsgiden.com

424-317-6861

Christopher K. Trembley’s practice encompasses a wide range of commercial, construction, real estate and insurance matters on behalf of corporate, public entity and individual clients.  Mr. Trembley specializes in representing owners, developers, general contractors and subcontractors in disputes and complex litigation involving public and private construction projects.  He also has extensive experience in transactional matters including corporate formations, sale agreements and legal compliance issues. 

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