Wednesday, August 5, 2009

New California Decision: Unlicensed Contractor Required To Return All Compensation For Unlicensed Services With No Offset For Materials

A recent California Court of Appeal decision reminds us why being unlicensed can cause severe consequenses in many professions. In White v. Cridlebaugh, F053843 (5th Dist., Jul. 29, 2009) ("White"), it was determined that a corporation which acted as the building contractor on a project but which violated California’s licensure requirements was required to return to the homeowner all compensation paid for the unlicensed work, without offset for materials or services provided in connection with the unlicensed work.

The decision in the White case notes a departure from prior law due to a 2001 amendment to Business and Professions Code (BPC) section 7031. Before the amendment, unlicensed contractors were prohibited from filing an action to collect compensation for unlicensed services but were not required to return compensation already collected from the property owner. The 2001 amendment addressed this loophole, adding a provision which allowed a property owner to sue an unlicensed contractor to recover all compensation paid to the unlicensed contractor.

A summary of the law and the facts of the case are set forth below.

The CSLL is a comprehensive legislative scheme governing the construction business in California, designed to protect the public from incompetent or dishonest providers of building and construction services. The CSLL provides that contractors (whether an individual, firm, partnership, corporation, or other association) performing construction work must be licensed unless exempt. BPC §§ 7026 et seq. and 7040 et seq.

To obtain a contractor's license, a corporation must qualify through either a “responsible managing officer” (RMO) or “responsible managing employee” (RME), who is, him or herself, eligible for the same license qualification. BPC § 7068(b)(3). The “qualifier” RMO or RME must be a bona fide officer or employee of the corporation and actively engaged in work encompassed by the license. BPC § 7068(c).

Under section 7068.2, if the qualifier is disassociated from the licensed entity, the entity has 90 days to replace the qualifier. If the qualifier is not replaced, the contractor’s license issued to the entity is automatically suspended. BPC § 7068.2. The CSLL encourages licensure by subjecting unlicensed contractors to criminal and civil penalties.

The criminal provisions state it is a misdemeanor for a person without a license or an exemption to act in the capacity of a contractor. BPC § 7028(a). The civil penalties affect the unlicensed contractor’s right to receive or retain compensation for unlicensed work. Thus, an unlicensed contractor who has not "substantially complied" with the licensure requirement may not maintain an action to collect compensation for work performed for which a licensed was required. BPC § 7031(a).

Further, a person utilizing the services of an unlicensed contractor who has not "substantially complied with the licensure requirement may bring an action to recover "all compensation paid to the unlicensed contractor for performance of any act or contract.” BPC § 7031(b) (emphasis added).

Notably, section 7031(b) makes no exception for a property owner who hired a contractor with knowledge of his or her unlicensed status. An April 2001 Assembly Committee analysis of the bill which enacted section 7031(b) (Stats. 2001, ch. 226, § 1 (Assem. Bill No. 678)), stated:

"AB No. 678 . . . specifically [recognizes] the capacity of an owner to recover money already paid an unlicensed contractor, even if the person knew the contractor was unlicensed.” (Assem. Com. on Judiciary, Analysis of Assem. Bill No. 678 (2001-2002 Reg. Sess.), as introduced Feb. 22, 2001, pp. 2-3, [as of July 28, 2009].)


The Project. In March 2006, Robert White (White) contracted entered into a written time and materials contract with Terry Cridlebaugh (Cridlebaugh) to build a retirement home. Although the contract listed White as the general contractor, White understood that Cridlebaugh would do the actual work on the site and was responsible for reading the plans and doing the work on the drawings.

After the rough grading was completed, White and Cridlebaugh disputed whether the excavation was in accordance with the plans. White also contended that the JC Master Builders, Inc. (a general engineering and building contractor operated by Cridlebaugh) had substantially exceeded the budget for site preparation and presented him with convoluted invoices.

Eventually, White terminated the project. JC Master Builders filed a mechanic’s lien in the amount of $13,561.62 against the White's lot. The Contractor’s License Robert Diani ("Diani") was the "qualifying" RMO for the corporation. Diani testified that had been an absentee officer of the corporation since August 2004, when he turned over all management and supervisory responsibilities of JC Master Builders to Cridlebaugh. Cridlebaugh had never held a California contractor’s license.

The Trial Court Proceedings. White filed a complaint against Cridlebaugh and JC Master Builders alleging breach of contract and other counts. JC Master Builders filed a separate action against White on its mechanic's lien for $13,561.62.

White filed a motion for a directed verdict on JC Master Builders' mechanic's lien claim under BPC § 7031. The trial court granted White's motion. However, the trial court found that White was not entitled to reimbursement of $84,621.45 in compensation previously paid to JC Master Builders. White appealed that portion of the verdict.


The appellate court determined that, at the time JC Master Builders performed services for White, it was not qualified for a contractor’s license because:

(1) its qualifying RMO (Diani) was not actively engaged in its construction business after August 2004,

(2) Cridlebaugh did not have a contractor’s license, and

(3) no replacement RMO was ever qualified in Diani’s place.

Therefore, JC Master Builders’ contractor’s license was suspended by operation of law. BPC § 7068.2. The court of appeal then considered whether JC Master Builders was entitled to retain any portion of the $84,621.45 for materials and services provided or by claims for indemnity and contribution. The court concluded that it was not. The court interpreted BPC section 7031(b) – authorizing recovery of “all compensation paid to the unlicensed contractor for performance of any act or contract” (italics added) – as as meaning that unlicensed contractors are required to return all compensation received without reductions or offsets for the value of material or services provided.


Unless an unlicensed contractor has "substantially complied" with licensure requirements, it faces the prospect of recovering no compensation for its work, no matter how competently it is performed and no matter if the property owner is fully informed of the contractor's unlicensed status. This case illustrates the need for those in the construction business to understand the regulatory aspect of the industry.

Construction firms considering a change in operations are wise to invest the services of an attorney with knowledge of licensing laws to ensure that they are managed and staffed appropriately. Better to undertake a small expenditure of legal fees than to lose one's entire income.

Any questions or comments should be directed to: at at 213-233-2260

Tracy Green is a principal at Green and Associates in Los Angeles, California. They focus their practice on the representation of individuals, licensed professionals and businesses in civil, business, administrative and criminal proceedings. The firm's website is at:


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