On May 18, 2015, in Pacific Caisson & Shoring, Inc. v. Bernard Brothers, Inc., the California Court of Appeal for the Second District held that a subcontractor whose license was suspended when its affiliated entity failed to report a judgment to the California Contractor's State License Board (CSLB) was barred from recovering payment for performing unlicensed work (B248320, 187 Cal. Rptr. 3d 337).

Pacific entered into a subcontract agreement with Bernard to perform excavation work on a medical center in the County of Ventura. The prime contract required the subcontractor to maintain a Class C-12 specialty license, which covers earthwork and paving contractors.

Pacific began work on the subcontract with Bernard on April 3, 2002, and finished on October 28, 2003. Pacific's license holder, or Responsible Managing Officer (RMO), was also the RMO of another company it owned (Gold Coast).

Gold Coast was sued to recover employee benefits owed under a collective bargaining agreement from a prior project. That suit resulted in a judgment against Gold Coast entered on June 20, 2000. Gold Coast defaulted on the judgment after failing to make the required payments because it lacked sufficient funds.

Under California's Business and Professional Code Section 7071.17, a contractor must notify the CSLB within 90 days of the entry of a construction-related judgment or face automatic suspension. If the contractor notifies the CSLB within the 90-day period, it must file a bond to guarantee payment of the unsatisfied judgment to prevent license suspension. Gold Coast did not notify the CSLB, nor did it post a bond. Gold Coast's license was suspended by the CSLB on April 3, 2003, during Pacific's work under its subcontract with Bernard.

Gold Coast and Pacific shared the same license-holding RMO, causing Pacific's license to be simultaneously suspended. Pacific's and Gold Coast's licenses were reinstated on June 17, 2003, after notifying the CSLB that a settlement was reached. It was uncontested that Pacific performed work for Bernard while its license was suspended.

When Pacific requested payment from Bernard, Bernard refused based on Section 7031(a) of the California Business and Professional Code, which precludes a contractor from recovering compensation for work requiring a license unless the contractor was duly licensed at all times during the performance of the work.

Pacific claimed that it was entitled to payment under an exception found in Section 7031(e), which allows for recovery if the contractor substantially complied with the licensing requirements. To qualify for this exception, a contractor must demonstrate each of the following:

The trial court held that Pacific did not qualify for the substantial compliance exception because it failed to act reasonably and in good faith to maintain its license. The RMO had decades of experience in the construction industry, which led the court to conclude that it failed to notify the CSLB either because:

On appeal, Pacific argued that it was entitled to recover for completed work because:

The court stated that the RMO for Pacific and Gold Coast was obligated to secure compliance with CSLB rules. Pacific's license was properly suspended because both companies shared the same RMO.

The court held that the judgment that led to the license suspension for failure to pay employee benefits under a collective bargaining agreement was substantially related to construction activities. Section 7071.17(a) specifically includes judgments resulting from the failure to pay employees wages and benefits. The court noted that the CSLB regulations are broadly interpreted and that almost any judgment related to the operation of a construction business is a construction-related activity. Furthermore, the regulations explain that the RMO must submit documentation to the CSLB if it believes that a judgment is not construction-related, which Gold Coast's RMO failed to do.

The court also concluded that the evidence supported the trial court's holding that the RMO did not act reasonably and in good faith to maintain its license because the RMO:

The court explained that the purpose of the CSLB regulations was not only to protect the public from unscrupulous and incompetent contractors, but also to ensure that contractors understand the applicable law. The court cited longstanding precedent that the statutory disallowance under Section 7031 applies despite injustice to unlicensed contractors.

Accordingly, the court held that Pacific did not satisfy each prong of the substantial compliance exception and was therefore not permitted to recover from Bernard for the work it performed.

Counsel for construction firms should review applicable licensing regulations to ensure good standing. Counsel should also review any notification and reporting obligations of RMOs and license holders, particularly if there are any outstanding or potential judgments.

This case highlights the significant economic consequences of performing unlicensed work and failing to comply with licensing procedures. It also emphasizes the repercussions that result from multiple companies sharing a single RMO. Counsel should be particularly mindful that the suspension of an RMO's license may affect related entities and subsidiaries that rely on that same RMO to qualify for their licenses.