Judge Ralph C. Hofer, Case 20GDCV00466 2022-08-19 Tentative Ruling

Plaintiff A Cut Above Building & Development Inc. (“A Cut Above”) alleges that in August of 2018 plaintiff commenced construction work at property in Monrovia, title of which is held by the Rachelle K. Stull 2014 Revocable Trust, of which defendant Rachelle K. Stull is the trustee. Plaintiff alleges that the subject property was originally purchased at the request of Stull by Michael Scott Dowell and Julia L. Dowell, who are husband and wife, and are the beneficiaries of a deed of trust recorded against the property on July 5, 2019. These Dowell parties are referred to collectively as the “Beneficiaries.” The TAC alleges that the Beneficiaries purchased the property on Stull’s behalf, and held naked title to the property, but Stull was given free and exclusive use and enjoyment of the property from the purchase of the property on June 1, 2018 until July 2, 2019. Plaintiff alleges that the Beneficiaries offered to have plaintiff A Cut Above perform renovation at the property, pursuant to Stull’s desires, at cost, with no profit to plaintiff, in exchange for which defendant Stull agreed to pay for all the costs plaintiff incurred in making the renovations. The TAC alleges that the Beneficiaries cooperated with Stull and plaintiff in this agreement and consented to the arrangement, and that the agreement was oral but was reinforced by the parties’ conduct and various elements memorialized via emails and text messages.

Plaintiff alleges that it commenced work in August of 2018, and soon identified a number of problems, which expanded the scope of the project, and that Stull agreed that the issues must be addressed, expanding the scope of work. Based on the expanded scope of work, plaintiff sent Stull an itemized budget identifying work Stull had requested to be performed thus far. The City of Monrovia then determined permits would be required to continue most of this work, and the majority of the work froze, during which period Stull made further decisions about expanding the scope of the project and made a $80,000 payment to finance the costs of the expanded scope.

The project was completed on February 6, 2020, with the total costs incurred by plaintiff of at least $424,920, and an outstanding balance to be paid at completion of $344,920, which defendants have failed and refused to pay. The TAC alleges causes of action for money due on contract, open book account, account stated, reasonable value of materials and serviced furnished, claim on mechanic’s lien release bond, and equitable lien.

Defendant Stull has filed a cross-complaint against A Cut Above and the Dowells as cross-defendants, alleging that the Dowells are the sole officers, directors and shareholders of A Cut Above, and that in June of 2018, the Dowells advised Stull they intended to purchase the subject property, which had horse stables and directly abuts the horse show jumping business operated by Stull at Bellaventage Farms, and told Stull the subject property with certain improvements was a great opportunity for Stull and her business. The cross-complaint alleges that cross-defendants were aware that Stull did not have the financial ability to purchase the subject property, as Stull was going through a difficult divorce, and advised Stull that the Dowells would assist Stull in the financing of the subject property or make the loan themselves. The Dowells purchased the subject property and advised Stull that she could use some of the horse stalls at the rear of the property in exchange for certain expenses, including the property taxes of the real property.

The cross-complaint alleges that the Dowell cross-defendants told Stull that the repairs and improvements to the house and garage would be done at their costs, and that such repairs would be beneficial to Stull and would cost approximately $150,000 and would not exceed $200,000. Stull alleges that cross-defendants are improperly attempting to charge Stull for construction work done without permits, in violation of Business & Professions Code sections 7090 and 7110. The cross-complaint alleges that in July of 2019, Stull completed the purchase of the property, that there was no contract providing for an amount claimed to be due for any improvements, or any mention of any amount due in excess of the $80,000 Stull had previously paid toward the improvements. During the period of construction, Stull repeatedly advised that she was concerned about the costs of the work and was advised by the Dowells that the costs would not be excessive and on account of their friendship, she would not be subject to any surprise or excessive costs, and that cross-defendants would work with her to finance any amounts which might be owed. In October of 2019, cross-defendants stated in an email that the work had cost them $352,000, and that she would owe $272,000, with anticipated further costs in the range of $148,950 to $171,840 to complete the remodel project. Although Stull was upset and shocked at these amounts, and she wanted the project to stop, cross-defendants advised Stull that the project was nearly complete, they had workers lined up to finish, and also again represented that they would assist in financing and would work with Stull to use the rental income from the remodeled house and outbuildings on the subject property to obtain financing.

In January of 2020, cross-defendants advised Stull that they had completed the project, and that they were owed $344,920 by Stull. In February of 2020, cross-defendants recorded a mechanic’s lien against the subject property, and subsequently a loan broker arranged by cross-defendants was unable to find a loan due to the mechanic’s lien, and cross-defendants have failed to make the loan they had said they would make to cover the costs. The cross-complaint alleges causes of action for violation of Business & Professions Code sections 7159 and 7163, violation of Business & Professions Code section 7031, violation of Business & Professions Code sections 7090 and 7110, money had and received, declaratory relief, and unfair business practices.

Stull argues that work on the project was performed by nine unlicensed contractors, for which the total amount of $178,329.92 was paid. Plaintiff argues that in its responses to requests for admissions, and interrogatories, plaintiff has acknowledged that eight of the subcontractors were unlicensed, and the amounts of the payments to each of those subcontractors are established by documentation, and, as to four of the subcontractors, by responses to Requests for Admissions.

As to the ninth subcontractor, Juan Perez, Stull argues that the deposition testimony of Perez establishes that he is unlicensed. Stull argues that although plaintiff initially contended that Perez worked through a corporation, for which he did hold a license for a short time, Perez testified in deposition that he did not work on this project or any project under that corporate license. In addition, since the corporation reported no payroll, Perez is deemed to be unlicensed.

“(a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person….”

Stull argues that the court of appeal in the recent case of Kim v. TWA Construction, Inc. (2022) 78 Cal.App.5th 808, held that a general contractor is barred from recovering from the owner for services provided by an unlicensed subcontractor, and also found that the issue could be properly addressed in a motion in limine, such as the motion now before this court.

In Kim, the court of appeal found that the trial court had appropriately interpreted Business & Professions Code section 7031 in its determination made on a motion in limine brought by the property owners to bar the general contractor from collecting compensation for services performed by an unlicensed subcontractor, effectively allowing the owners to claim the money paid for the unlicensed contractor be disgorged. Kim, at 820. The court of appeal discussed the purpose of the licensing law as developed in case law and code, treated the issue as one of first impression, and concluded that where the primary relief sought is compensation for unlicensed work, then the principles discussed support a conclusion that section 7031 bars the action:

“More generally, “[t]he purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. [Citation.] The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. [Citations.] Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995, 277 Cal.Rptr. 517, 803 P.2d 370 (Hydrotech); see also Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 151, 308 P.2d 713 (Lewis & Queen) [explaining that § 7031(a) “represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties”].)

Subcontractors are governed by the licensing law. (§ 7026.) “Both owners and general contractors are entitled to protection against illegal subcontract work by unlicensed persons. Hence, an unlicensed subcontractor may not recover compensation for his work from either the owner or the general contractor.” (Hydrotech, supra, 52 Cal.3d at p. 997, 277 Cal.Rptr. 517, 803 P.2d 370.) In one older appellate decision that construed the predecessor to section 7031(a), the court found the provision to apply “to a subcontractor as well as to a contractor” seeking relief, and the court held that the “contract between the plaintiff and his subcontractor, who was not licensed as required by law, was illegal and void,” so the general contractor was barred from seeking disgorgement based on a void contract. (Holm v. Bramwell (1937) 20 Cal.App.2d 332, 335, 67 P.2d 114.)

Our higher court, however, has explained the rationale of that statute in broad terms and detailed the policy for its application. Thus, section 7031 bars all actions, regardless of the equities and however they are characterized, which effectively seek “compensation” for illegal unlicensed contract work. (Hydrotech, supra, 52 Cal.3d at p. 997, 277 Cal.Rptr. 517, 803 P.2d 370.) Thus, if the primary “relief sought is compensation” for the unlicensed work, then “section 7031 bars the action.” (Id. at p. 1002, 277 Cal.Rptr. 517, 803 P.2d 370.) “[C]ourts may not resort to equitable considerations in defiance of section 7031.” (Lewis & Queen, supra, 48 Cal.2d at p. 152, 308 P.2d 713.)

In applying the principles to the case before it, the court of appeal found that there had been no evidence in the record that the subcontractor, in that case performing tree work, was licensed, that the general contractor had stated to the trial court that the subcontractor was not employed with the general contractor and did not contend he was employed, reviewed the statutory language and the competing public policies argued by the general contractor, and held, “we decide that section 7031 bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.” Kim, at 831.

As to each of the eight subcontractors other than Perez, Stull submits evidence, including Responses to Requests for Admissions, in which plaintiff A Cut Above admits that the subcontractors are not licensed, and that they are not employees of plaintiff. [Ex. 2, RFAs Nos. 35, 38, 41, 44; Ex. 3, Dowel Depo. pp. 141-146; Ex. 4, Responses to Form Interrogatory No. 321.13].

Stull also submits evidence that the ninth subcontractor, Perez, was working at the project performing work such as tile work, flooring, painting, cabinetry, doors, windows, and supervision. [Ex. 3, Dowell Depo., pp. 154-157; Perez Depo at p. 16]. This work required a license, and plaintiff shows that Perez and his employees were not employees of A Cut Above, and that Perez was paid individually doing business as Juan PR Services, which is not the licensed corporation which plaintiff claims was doing the work, JP Remodeling Construction, Inc. [Ex. 5, Perez Depo., pp. 14-15, 42, 43, 81-83, 87-89, 101-103; Ex. 5, Invoices 5-2 and 5-3, Ex. 8]. Perez indicated at his deposition that he never got jobs with the corporation, which has in fact never done work, but that Perez did all jobs individually dba Juan PR Services. [Ex. 5, Perez Depo., pp. 14-15, 81, 83,103]. The checks for Perez’s work were made out to Juan PR Service or Services or JPR Service or Services. [Exs. 5-2, 5-3]. The licensed corporation was “JP Remodeling Construction, Inc.,” which represented it had no employees, so was not required to have workers compensation insurance. [Ex. 5-4].

“whether a licensed contractor who has a policy of workers' compensation covering his employees, who uses a subcontractor not knowing he is unlicensed and knowingly employs his 13–year–old son and his son's friend, who do not have work permits, as well as another person who does not have a contractor's license, to help perform construction work, is likewise subject to the sanctions of section 7031, subdivisions (a) and (b), because of an automatic suspension under section 7125.2. We conclude in this situation there was no automatic suspension of the contractor's license in effect. We shall affirm the trial court's judgment awarding damages to the contractor.”

“we neither have been cited to nor have we found any authority for the proposition that a worker found to be an employee of a contractor (by virtue of Labor Code section 2750.5 or otherwise) will not be covered by the contractor's existing workers' compensation insurance policy if there is any discrepancy in the contractor's reporting of payroll. In the absence of any legal authority or evidence supporting such a conclusion, we will not reach it.

Here, Loranger specifically testified he had a policy of workers' compensation coverage in effect for his construction employees during the period of construction of the Joneses' home. We conclude this evidence was sufficient to meet Loranger's burden of proof to show his license was not suspended for failing to obtain workers' compensation insurance coverage pursuant to section 7125.2. The trial court correctly denied the Joneses' claim for the sanctions provided by section 7031.

Plaintiff argues that where a licensed contractor is directing and supervising the unlicensed subcontractor, as well as providing the worker’s compensation coverage, courts rule that the subcontractors are de facto employees of the licensed contractor, and amounts billed for their services are recoverable by the licensed contractor, which is the case here. Plaintiff argues that it is recognized that a worker is entitled to workers compensation coverage even in cases, as is the case here, where plaintiff was not reporting subcontractor wages, as noted in Loranger.

Plaintiff essentially argues that there remain questions of fact to be resolved by the trier of fact with respect to whether Juan Perez was operating and paid through his licensed corporation, and whether the other unlicensed subcontractors were in fact de facto employees of A Cut Above. Plaintiff argues that plaintiff was supervising the subcontractors and was specific as to materials to be used on the project, the work to be done, and how the work was to be done.

However, as to each of these issues, plaintiff has not submitted, or pointed to, any evidence which supports its arguments. The only material submitted by plaintiff is a Request for Judicial Notice of a licensing history for JP Remodeling and Construction, Inc., and Perez’s deposition, with citation to a short exchange. [See RFJN]. This showing does not raise issues when the evidence before the court from both sides is that (1) Perez had a corporation, JP Remodeling and Construction, Inc., but that all of the checks for his work on the project were made out to some version of his dba, Juan PR Service or Services, and not to the corporate entity, which is not even very close in wording, (2) Perez’s repeated explanation in his deposition that the corporate entity did no work, and that he was operating as a dba, and (3) the testimony of plaintiff’s principal, cited above, that Perez and his workers were not employees of A Cut Above, and never treated as such for purposes of payroll or workers compensation.

With respect to the other eight subcontractors, there is no evidence submitted, such as a declaration from the party, which would show that plaintiff retained control or supervised the subcontractors, which would be expected to be produced if it were available, particularly given the fact that plaintiff’s principal affirmatively testified in deposition that the subcontractors were not employees, a sworn representation even stronger than the one observed to have been made by the general contractor in Kim at trial, and plaintiff has indicated that these subcontractors were not included on payroll for purposes of withholding taxes or workers compensation coverage.

Plaintiff and cross-complainant A Cut Above Building & Developin, Inc. will be barred from submitting evidence of payments or recovering the payments it made to the nine unlicensed subcontractors which are the subject of this motion in support of its causes of action seeking foreclosure of a mechanic’s lien or damages in this matter. The unlicensed subcontractors at issue are: Shannon Fetters, George Vasquez, Marco Sanchez, Roberto Cruz, Kenny Padilla, Juan Martinez, Pasqual/Pasquel, Eusebrio Ortiz, and Juan Perez, individually and dba Juan PR Services/Service or JPR Services/Service.

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