California Business and Professions Code section 7031 prevents unlicensed contractors from filing liens or suing to collect for their work, and as amended in 2001, entitles consumers to recover all sums paid to unlicensed contractors. The statute has been the subject of a number of Apellate cases in the past few years and has attracted attention in the construction world and from attorneys who practice construction law. The cases confirm very strict interpretations of the statute against contractors, often with financially calamitous results for the contractor.

Almost without exception, the Courts of Appeal have upheld Trial Court decisions which barred a contractor’s claims against a customer (no matter their legitimacy otherwise), and awarded customers full refunds of all sums paid, including those for labor, materials, and subcontractors, not just overhead and profit.

The Courts state that the reason for the license suspension is immaterial. The only potential “loophole” is that a suspension for a lapse in Worker’s Compensation coverage will not result in imposition of sanctions if coverage is reinstated during a grace period established by the Department of Labor.

The cases involve relatively small disputes, but by the end of litigation, the contractor not only loses his/her claim, they have to refund everything and pay the customer’s attorneys’ fees and penalties. Thus, a $30,000 dispute in one case turned into a $200,000+ judgment against the contractor, and put him out of business.

Despite the increasing publicity about the law, contractors continue to be ignorant of it. This author

has had contractors say that they do not have to deal with it because their laborers are “independent contractors” so they do not need Worker’s Comp insurance. They are wrong under the Labor Code, and if the customer finds out, they could be subject to financial devastation and license sanctions.

The most recent case demonstrating the nononsense approach the courts are taking to this statute is a San Diego County case called Alatriste v. Ceasar’s Exterior Designs, Inc. In that case, the trial court held, and the Court of Appeal affirmed that: 1) the fact that the homeowner knew the contractor was unlicensed from the start was not a defense; and 2) even though the contractor got his license in the middle of the job, he had to refund all sums paid for the entire job. He could not keep money for any of the time, labor or materials expended after he got his license.

Alatriste retained Ceasar’s Design to perform landscaping services at Alatriste’s newly-built home. After working for about 5 months, Ceasar’s stopped working because Alatriste refused to pay. Alatriste had paid Ceasar’s $57,000 by that time. Alatriste sued to recover the $57,000. He brought a motion for summary judgment to collect it, alleging that Ceasar’s did not have a viable defense since it was an unlicensed contractor.

Ceasar’s opposed the motion on the grounds that its owner had known Alatriste for 12 years, and while they were negotiating the contract, they discussed the fact that Ceasar’s did not have a license yet. The owner’s son took the exam and received his license during the project. Alatriste did not express any dissatisfaction with the work, and the work was of professional quality.

Ceasar’s expended about $12,000 in labor and materials after it got its license, and $20,000 worth of materials were built into the project.

The judge granted Alatriste’s motion for summary judgment, finding that the statutes allowed no exceptions. He granted Alastriste’s request for the $57,000 and denied Ceasar’s request for reimbursement.

The Court of Appeal affirmed the summary judgment. It discussed BPC § 7031 and recent cases applying it. Though the statute is harsh, it is clear and serves a legitimate legislative purpose – the protection of the public against unlicensed contractors. Accordingly, the Appellate Court confirmed that a homeowner’s knowledge that a contractor is not licensed does not defeat the homeowner’s claims for reimbursement nor allow the contractor to sue for balance owed. It also found that the issuance of the license during the project did not entitle the contractor to payment for labor and materials performed after that date.

The lesson here is clear and emphatic: contractors need to keep their license fully enforced from start to finish on any project; even one day with a suspended license could result in forfeiture of all money received and all rights to unpaid balances. Traditional concepts of fairness will not save the contractor, and failure to adhere to the rules could result in bankruptcy and a judgment that, unless and until satisfied, will keep a license in suspension and potentially end a contractor’s career.

Ken Gorman heads the litigation team at Lombardo & Gilles, LLP. He has practiced law in the area since 1987. Ken's areas of practice include land use, real estate and business litigation, construction defects, major personal injuries, criminal defense and missing persons.

Lombardo & Gilles, LLP
318 Cayuga Street
Salinas, California 93901
ph. (831) 754-2444
e-mail: ken@lomgil.com

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