The opinion
Filed 8/18/15; pub order 9/15/15 (see end of opn.)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
JEFF TRACY, INC., B258563
(c/w B258648)
Plaintiff and Appellant,
(Los Angeles County
v. Super. Ct. No. VC063151)
CITY OF PICO RIVERA,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Thomas I. McKnew, Jr., Judge. Reversed.
John L. Dodd & Associates, John L. Dodd, Benjamin Ekenes; and Darryl J. Paul
for Plaintiff and Appellant.
Call & Jensen, Wayne W. Call and Todd C. Bouton for Defendant and
Respondent.
_________________________
This appeal follows a bench trial in which the trial court found that a general
contractor, appellant Jeff Tracy, Inc. doing business as Land Forms Construction (Land
Forms), did not have a valid license while performing work on a project for respondent
City of Pico Rivera (the City). The court thus ordered Land Forms to disgorge all
compensation paid to it by the City—the amount of $5,487,370.05. Land Forms
contends the judgment must be reversed because the trial court improperly denied it a
jury trial on the issues of whether it had a valid license and the amount of disgorgement.
We agree that Land Forms was entitled to a jury trial on these issues, and therefore
reverse the judgment. However, we find that Land Forms is not entitled to any
apportionment as a matter of law.
FACTUAL AND PROCEDURAL BACKGROUND
The Bid and Contract
In 2011, the City bid out a public works project for the renovation of a city park
known as Rivera Park (the Project). The renovation included landscaping, irrigation, and
the construction of baseball fields, bleachers, a backstop, a children’s playground, and
electrical and concession buildings. The “Notice Inviting Bids” for the Project specified
that “Each bidder shall possess at the time this contact is awarded a Class ‘A’ license
(General Engineering), pursuant to Public Contract Code Section 3300.” Land Forms
submitted a bid, stating that it had a class A license and a class C-27 license (general
landscaping).
Land Forms was awarded the contract for the Project. The City eventually paid
Land Forms $5,487,370.05 over the course of the Project.
The FAC
On December 18, 2013, Land Forms filed a first amended complaint (FAC)
against the City alleging a single cause of action for breach of contract. Land Forms
alleged that the City improperly withheld $518,154.73 in liquidated damages. Land
Forms sought general damages “in excess of $1,000,000.”
The City filed an answer, including a general denial.
2
The Cross-Complaint
On April 30, 2014, about a month before an estimated 25-day jury trial was
scheduled, the City filed a motion for leave to file a cross-complaint seeking
disgorgement of all the money it had paid to Land Forms pursuant to Business and
Professions Code section 7031, subdivision (b),1 on the ground that recent information
revealed Land Forms had “used a sham Responsible Managing Employee (‘RME’),
James Nale, to obtain a Class A license for the park project that the City contracted with
Land Forms to complete . . . , and that this sham RME, who was never a bona fide
employee of Land Forms, failed to supervise the Project and to be actively involved in
Land Forms’ business such that Land Forms’ Class A license was void and invalid.”
The trial court granted the motion five days before trial. Land Forms declined to
continue the trial and filed an answer to the cross-complaint.
Bench Trial—Phase One
In its trial brief, the City urged the trial court to proceed by holding a bench trial
on the issue of the validity of Land Forms’ class A license, since resolution of the issue
would be dispositive on both Land Forms’ FAC and the City’s cross-complaint. Land
Forms objected, insisting it had a right to a jury trial. Pursuant to Code of Civil
Procedure section 597, the trial court held a bench trial on May 29 and 30, 2014, on the
issue of whether Land Forms held a valid class A license during the Project.
The City presented documentary evidence and witness testimony. The City’s
evidence showed that Land Forms obtained a class A license from the Contractors’ State
License Board based on the representations in both its initial application and renewal
application for the license that James Nale, who held a class A license, was acting as the
RME for Land Forms. The applications were signed under penalty of perjury by
Mr. Nale and Mr. Jeff Tracy (Chief Executive Officer of Land Forms).
Mr. Nale, however, testified that he was never an employee of Land Forms. He
was supposed to have been designated instead as a Responsible Managing Officer
1
All further statutory references are to the Business and Professions Code unless
otherwise indicated.
3
(RMO). He received stock worth 20 percent of Land Forms, but this stock had to be
returned upon demand. He was paid by check $2,500 per month, which was eventually
reduced to $1,000 per month. He could not recall if the checks were on Land Forms’
bank account. No taxes were withheld from the money he received, he was not aware of
any payroll records regarding his pay, and he never received 1099 or W-2 forms from
Land Forms. Land Forms never provided him with an office, computer, e-mail address
or business cards. He never saw the Project plans. He visited the Project site three times.
He could not name a single subcontractor on the Project. He did not know if the Project
had a superintendent. And he could not recall giving any direction or advice to Land
Forms as to what needed to be done on the Project.
At the close of evidence, the trial court ruled in favor of the City. In its statement
of decision, the court set forth numerous reasons for its conclusions that “James Nale was
neither a Responsible Managing Officer, nor a Responsible Managing Employee” of
Land Forms during its work on the Project, and that Land Forms had failed to carry its
burden of proving that it was duly licensed with a valid class A license. The court also
concluded that Land Forms had not demonstrated substantial compliance with the
licensing requirements under section 7031, subdivision (e). Accordingly, Land Forms
was barred from bringing its breach of contract claim against the City and was required to
disgorge all compensation the City paid Land Forms for work on the Project.
Bench Trial—Phase Two
After Phase One, the trial court noted that an issue remained regarding the amount
of disgorgement, which had not been put into evidence. Although Land Forms had not
previously contested the amount paid by the City, it refused to stipulate to any amount. It
also argued for the first time that the trial court should make an apportionment of (or
reduction in) the disgorgement amount for any portion of the work on the Project that
Land Forms could have properly performed using only its C-27 landscaping license.
Land Forms demanded a jury trial on these issues, which the court refused. The court
asked for further briefing and set a briefing schedule.
4
The City filed a Motion to Determine Amount of Disgorgement, which established
that Land Forms had already admitted in verified discovery responses that the City had
paid Land Forms $5,487,370.05 for work on the Project. The City also argued that there
could be no apportionment as a matter of law. Land Forms filed an opposition, but
presented no evidence to dispute the amount it had already acknowledged receiving from
the City.
Before Phase Two of the evidentiary hearing could proceed, Land Forms filed a
petition for writ of mandate to grant it a jury trial on the licensing issues that had already
been decided and requested a stay of all proceedings in the trial court. On June 18, 2014,
we stayed proceedings in the trial court until further order. On July 15, 2014, we denied
Land Forms’ petition for a writ of mandate and dissolved the stay. The next day, Land
Forms filed a petition for review with the California Supreme Court and requested
another stay. The California Supreme Court denied the petition and the stay request.
Phase Two of the evidentiary hearing/bench trial was reset for August 20, 2014.
On August 20, 2014, the City introduced further documentation establishing the
amount of compensation it had paid to Land Forms for its work on the Project, and also
introduced contract documents showing that the City required the contractor for the
project to have a class A license. This evidence was uncontested.
After hearing the evidence and argument from the parties, the trial court entered a
judgment in the City’s favor against Land Forms. The judgment stated that Land Forms
would take nothing on the FAC, which was dismissed in its entirety and with prejudice,
and awarded the City the amount of $5,487,370.05 as disgorgement. Land Forms filed
this appeal.
5
DISCUSSION
Land Forms contends that the trial court abused its discretion in denying it a jury
trial, and instead holding a bench trial, on the issues of whether Land Forms held a valid
class A license during its work on the Project and the amount of disgorgement.
I. Standard of Review
A trial court abuses its discretion when it “‘exceeds the bounds of reason’” after
considering all the circumstances before it. (Denham v. Superior Court (1970) 2 Cal.3d
557, 566. A trial court therefore abuses its discretion when it transgress the confines of
the applicable principles of law. (Horsford v. Board of Trustees of California State
University (2005) 132 Cal.App.4th 359, 393.) “‘The scope of discretion always resides
in the particular law being applied, i.e., in the “legal principles governing the subject of
[the] action . . .”’” (City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297.) “If
the trial court is mistaken about the scope of its discretion, the mistaken position may be
‘reasonable’, i.e., one as to which reasonable judges could differ. [Citation.] But if the
trial court acts in accord with its mistaken view the action is nonetheless error; it is wrong
on the law.” (Id. at pp. 1297–1298.)
II. Validity of License
The trial court denied Land Forms’ request for a jury trial on the issue of whether
it held a valid class A license, and instead conducted a bench trial on the issue, pursuant
to Code of Civil Procedure section 597. This statute provides in part: “When the answer
. . . sets up any other defense not involving the merits of the plaintiff’s cause of action but
constituting a bar or ground of abatement to the prosecution thereof, the court may, either
upon its own motion or upon the motion of any party, proceed to the trial of the special
defense or defenses before the trial of any other issue in the case, and if the decision of
the court, or the verdict of the jury, upon any special defense so tried . . . is in favor of the
defendant pleading the same, judgment for the defendant shall thereupon be entered and
no trial of other issues in the action shall be had unless that judgment shall be reversed on
appeal or otherwise set aside or vacated.” (Code Civ. Proc., § 597.)
6
Land Forms argues that Code of Civil Procedure section 597 does not apply here
because “licensure is not a ‘special defense,’ but is a required element of a contractor
plaintiff’s case in chief.” We agree.
By statute, a contractor seeking damages must allege and prove it held a valid
license before it can prosecute any claim for damages. Section 7031, subdivision (a)
states: “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, …” (Italics added.) Section 7031, subdivision (d) places the burden of proof on
the contractor: “When licensure or proper licensure is controverted, the burden of proof
to establish licensure or proper licensure shall be on the licensee.” (§ 7031, subd. (d); see
also Advantec Group, Inc. v. Edwi’s Plumbing Co., Inc. (2007) 153 Cal.App.4th 621,
626–630 [contractor’s license is by statute an element of contractor’s claim for
compensation, and thus defendant’s general denial put proper licensing at issue, without
the need to assert it as an affirmative defense].)2
Accordingly, by finding the issue of licensure to be a special defense rather than
an element of Land Forms’ breach of contract claim, the trial court abused its discretion
2
It is well established that the right to a jury trial is the same today as it existed at
common law in 1850, when the Constitution was adopted. Because a plaintiff had a
common law right to jury trial for a breach of contract cause, so too does such a right
exist today. (Ceriale v. Superior Court (1996) 48 Cal.App.4th 1629, 1634.) The current
legislative requirement that a contractor plaintiff must, in addition to proving the
traditional elements of a contract claim, also prove that it was duly licensed at all times
during the performance of the contract does not change this historical right to a jury trial.
To the contrary, “‘Any act of the Legislature attempting to abridge the constitutional right
is void.’” (People v. One 1941 Chevrolet Coupe (1951) 37 Cal.2d 283, 286–287,
fn. omitted.)
7
in relying on Code of Civil Procedure section 597 to deny Land Forms a jury trial on this
issue.
This conclusion is buttressed by the fact that, here, the determination of whether
Land Forms’ held a valid class A license involved questions of fact. “[W]here there is a
conflict in the evidence from which either conclusion could be reached as to the status of
the parties, the question must be submitted to the jury. [Citations.] This rule is clearly
applicable to cases revolving around the disputed right of a party to bring suit under the
provisions of Business and Professions Code section 7031.” (Dahl-Beck Electric Co. v.
Rogge (1969) 275 Cal.App.2d 893, 900.)
In most cases, a contractor can establish valid licensure by simply producing “a
verified certificate of licensure from the Contractors’ State License Board which
establishes that the individual or entity bringing the action was duly licensed in the proper
classification of contractors at all times during the performance of any act or contract
covered by the action.” (§ 7031, subd. (d).) Land Forms concedes that if this was the
only evidence at issue, “then—perhaps—the issue could be decided by the court without
a jury.” But as Land Forms points out, the City was challenging Land Forms’ license by
going behind the face of the license to prove that James Nale was a sham RME or RMO.
(See Buzgheia v. Leasco Sierra Grove (1997) 60 Cal.App.4th 374, 385 [“It is possible for
a party in a civil action to attack a contractor’s license by going behind the face of the
license and proving that a required RME is a ‘sham’”].)
In California, a corporation qualifies for a contractor’s license “by the appearance
of a responsible managing officer or responsible managing employee who is qualified for
the same license classification as the classification being applied for.” (§ 7068,
subd. (b)(3); see also § 7065, subd. (c)(3) [corporation qualifies for contractor’s license
“upon the appearance of a qualifying individual appearing either as a responsible
managing officer or a responsible managing employee on behalf of the corporation”].)
The qualifying individual must be “a bona fide officer or employee of the corporation and
must be actively engaged in the work covered by the license. [Citation.] The qualifier
must exercise direct supervision over the work for which the license is issued to the
8
extent necessary to secure full compliance with the provisions of the law. (§ 7068.1.)”
(Wright v. Issak (2007) 149 Cal.App.4th 1116, 1123; § 7068.1, subd. (a) [qualifier “shall
be responsible for exercising that direct supervision and control of his or her employer’s
or principal’s construction operations to secure compliance with this chapter and the rules
and regulations of the board”].)
A variety of activities can constitute direct supervision and control, including
“‘one or any combination of the following activities: supervising construction, managing
construction activities by making technical and administrative decisions, checking jobs
for proper workmanship, or direct supervision on construction job sites.’” (Acosta v.
Glenfed Development Corp. (2005) 128 Cal.App.4th 1278, 1299, citing Cal. Code Regs.,
tit. 16, § 823, subd. (b).) All of these are factual questions that should have been
submitted to a jury for determination.
The City relies on section 7031, subdivision (e) to argue that the court, and not a
jury, should decide the issue of valid licensure. But this section only comes into play
after a determination has already been made that a contractor did not have a valid license.
Accordingly, the trial court should have granted Land Forms’ request to have a
jury determine whether Land Forms held a valid license.
III. Disgorgement
Land Forms argues that the amount of disgorgement should also have been tried to
a jury rather than the trial court.
The City counters that the issue of disgorgement was a matter of law to be decided
by the trial court. Specifically, the City asserts that the amount of disgorgement (i.e., the
compensation it paid to Land Forms for its work on the project) was undisputed because
Land Forms had agreed to the amount in its verified interrogatory responses, and thus
there was no need to waste a jury’s time on the issue. Rightly or wrongly, Land Forms
did not stipulate to the amount paid to it by the City. Because the amount of
disgorgement was an element to be proved by the City on its cross-complaint, Land
Forms was entitled to require the City to meet its burden of proof on the amount of
compensation paid and to have this factual issue decided by a jury. If upon retrial, a jury
9
determines that Land Forms did not have a valid class A license during its work on the
project, then it is entitled to have a jury determine the amount of disgorgement, if it so
desires.
In reaching this conclusion, we reject Land Forms’s argument that a disgorgement
action under section 7031, subdivision (b) is not permissible here. Land Forms argues
that regardless of whether it had a valid class A license, it was still licensed at all times
because it had a valid class C-27 license, and was therefore not an “unlicensed”
contractor under section 7031, subdivision (b). This statute provides: “Except as
provided in subdivision (e), a person who utilizes the services of an unlicensed contractor
may bring an action in any court of competent jurisdiction in this state to recover all
compensation paid to the unlicensed contractor for performance of any act or contract.”
(§ 7031, subd. (b).) Additionally, section 7031, subdivision (a) provides that a contractor
must allege that “he or she was a duly licensed contractor at all times during the
performance of that act or contract.” And section 7031, subdivision (d) provides that the
contractor must prove that it “was duly licensed in the proper classification of contractors
at all times during the performance of any act or contract covered by the action.” Here,
Land Forms was performing under a public works contract that specifically required the
general contractor to have a valid class A license at all times during the project. We
therefore hold that when a contractor does not have the specific license specified in the
contract under which the work is performed, the contractor is “unlicensed” for purposes
of section 7031, subdivision (b).
This conclusion comports with public policy. As stated in Vallejo Development
Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, 942: “The Legislature has
determined that ultimate responsibility for construction work must rest with a licensed
contractor—in this case, a licensed general engineering contractor—who has
demonstrated the requisite competence in the construction business. This policy ensures
that all subcontractors and materialmen on a project will be answerable to and directed by
someone whose knowledge and experience meet uniform requirements. In addition, this
policy protects consumers of the contractor’s services by making all persons who are
10
responsible for construction projects subject to the regulatory powers of the CSLB
[Contractors’ State License Board].”
IV. Apportionment
Finally, Land Forms contends that the trial court erred in finding as a matter of law
that there can be no apportionment or offset in the amount of disgorgement. Specifically,
Land Forms argues that it is entitled to have a jury determine which portions of the work
were performed under the class C-27 license versus the class A license, because “[i]t is
only the ‘A’ portion of the work . . . which should be subject to disgorgement. Anything
Land Forms did itself which would be authorized under its C-27 license and any work
completed by a properly-licensed subcontractor must not be subject to disgorgement.”
We agree with the trial court that section 7031, subdivision (b) does not allow
apportionment as a matter of law.
As noted, section 7031, subdivision (b) allows a person who utilizes the services
of an unlicensed contractor to bring an action “to recover all compensation paid to the
unlicensed contractor for performance of any act or contract.” (§ 7031, subd. (b).) This
section was added to the Contractors’ State License Law (§ 7000 et seq.) in 2001 to
provide a “sword” to consumers against unlicensed contractors. (White v. Cridlebaugh
(2009) 178 Cal.App.4th 506, 519.) Since that time, the word “all” in the statute has been
interpreted to mean just that, all compensation without any offsets. (See White v.
Cridlebaugh, supra, 178 Cal.App.4th at pp. 520–521 [“We conclude the authorization of
recovery of ‘all compensation paid to the unlicensed contractor for performance of any
act or contract’ (§ 7031[, subd.] (b), italics added) means that unlicensed contractors are
required to return all compensation received without reductions or offsets . . . [¶] Our
interpretation . . . is consistent with the usual meaning of the word ‘all,’ which signifies
the whole number and does not admit of an exception or exclusion not specified.
[Citation.] In short, ‘all compensation paid’ does not mean all compensation less
reductions for offsets”]; Alatriste v. Cesar’s Exterior Designs, Inc. (2010) 183
Cal.App.4th 656, 672–673 [same].)
11
“[T]he legislative committee reports show that, in enacting section 7031[, subd.]
(b), the Legislature was specifically aware that permitting reimbursement may result in
harsh and unfair results to an individual contractor and could result in unjust enrichment
. . . , but nonetheless decided that the rule was essential to effectuate the important public
policy of deterring licensing violations and ensuring that all contractors are licensed.”
(Alatriste v. Cesar’s Exterior Designs, Inc., supra, 183 Cal.App.4th at p. 673.) This is
especially true where, as here, a public works contract is at issue.
Thus, in the event it is determined upon retrial that Land Forms must reimburse
the City, Land Forms is not entitled to any apportionment or offsets.
DISPOSITION
The judgment is reversed. The parties are to bear their own costs on appeal.
__________________________, Acting P. J.
ASHMANN-GERST
We concur:
_____________________________, J.
CHAVEZ
____________________________, J.
HOFFSTADT
12
Filed 9/15/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
JEFF TRACY, INC., B258563
(c/w B258648)
Plaintiff and Appellant,
(Los Angeles County
v. Super. Ct. No. VC063151)
CITY OF PICO RIVERA, ORDER CERTIFYING OPINION
FOR PUBLICATION
Defendant and Respondent.
THE COURT:*
The opinion in the above-entitled matter filed on August 18, 2015, was not
certified for publication in the Official Reports.
For good cause it now appears that the opinion should be published in the Official
Reports and it is so ordered.
*
ASHMANN-GERST, Acting P. J., CHAVEZ, J., HOFFSTADT, J.