General Facilities v. Claude E. Atkins Enterprises

Filed 10/23/06 General Facilities v. Claude E. Atkins Enterprises CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEAL from a judgment of the Superior Court of Los Angeles County, J. Stephen Czuleger. Affirmed.

Law Offices of Marshall E. Rosenbach and Marshall E. Rosenbach for Cross-Complainant and Appellant.

Braun & Melucci and Kerri M. Melucci for Cross-Defendants and Respondents.

______________________________________________

A subcontractor on a project had its license suspended due to an unpaid judgment. The subcontractor obtained reinstatement of its license, but still found itself in dire financial straits, and sought assistance from the contractor. The subcontractor executed a promissory note by which it agreed to repay, with interest, any amounts advanced by the contractor. The promissory note expressly provided that the contractor had no obligation to advance funds and that any advance of funds would be solely at the contractor’s discretion. Some months later, the subcontractor’s license was suspended for failure to resolve outstanding liabilities. The relationship between the contractor and the subcontractor deteriorated, and they brought cross-actions against each other for breach of the subcontract. The subcontractor also alleged the contractor had fraudulently induced it to execute the promissory note by falsely promising to advance the funds necessary for it to remain afloat.

The contractor successfully demurred to the subcontractor’s cross-complaint. As to the cause of action for breach of the subcontract, the demurrer was sustained on the basis that the subcontractor’s license had been suspended during its performance of the work. (Bus. & Prof. Code, § 7031.) As to the promissory fraud cause of action, the demurrer was sustained on the basis that a contracting party cannot sue on a promise that was superseded by, and is inconsistent with, the written contract the promise allegedly induced. The subcontractor appeals; we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Claude E. Atkins Enterprises (“Atkins”) was the general contractor on a project to construct a Physical Sciences Building for UC Santa Cruz. In July 2001, it entered into a subcontract with General Facilities, Inc., dba Commerce Systems (“Commerce”) for Commerce to install the heating, ventilation and air conditioning systems for the building. While the subcontract set forth the scope of Commerce’s work, the contract also provided that Atkins could “at any time during the progress of said project order in writing: deviations, additions or omissions; and the same shall not void this [s]ubcontract, but the value thereof as agreed upon in such written authorization shall be added to or deducted from the contract price hereof.”

Pursuant to the subcontract, Commerce agreed “to maintain a valid Contractor’s License as required by the State of California and/or the appropriate governing authority.” Commerce had been issued a license in 1982. On July 21, 2002, after work had commenced on the subcontract, Commerce’s license was suspended due to an unsatisfied judgment (Bus. & Prof. Code, § 7071.17).^[1] It does not appear that Commerce stopped working on the project. Commerce’s license was reinstated on October 3, 2002.

In March 2003, Commerce was apparently experiencing cash flow difficulties, and sought assistance from Atkins. In April 2003, Commerce entered into a written agreement with Atkins. Commerce refers to this document as an “advance agreement,” yet the agreement itself is attached to Commerce’s pleadings and it is, in fact, a promissory note.^[2] Pursuant to the note, Commerce (and its sole shareholder) agreed to repay “all sums advanced by Atkins” not to exceed $800,000 under specified terms. The promissory note expressly provided, “Nothing herein shall obligate Atkins to advance funds to [Commerce] to complete the work on the Project, and Atkins’[s] advance of said funds is solely discretionary and made at Atkins’[s] sole and exclusive discretion.” Atkins advanced funds to Commerce, but apparently not as quickly or as much as Commerce would have liked. Commerce repeatedly requested specific advances, but they were not made.

On September 16, 2003, Commerce’s contractor’s license was again suspended for an unsatisfied judgment. The license was reinstated on October 6, 2003. Commerce’s license was suspended for a third time on November 10, 2003. The reason for this suspension is not entirely clear. The Contractors State License Board record indicates Commerce’s license was suspended pursuant to Business and Professions Code section 7145.5 for a failure to resolve an outstanding final liability. Commerce takes the position that its license was suspended for failure to pay its commercial general liability insurance premiums -- a failure which occurred because Atkins had failed to advance such sums. Yet, at one point, Commerce asserted its license was suspended “solely due to [Atkins]’s failure to live up to its written agreement to pay for payroll taxes related to this project.” In any event, upon the third suspension of Commerce’s license, Atkins terminated the subcontract.

On November 12, 2003, Atkins brought suit against Commerce for breach of contract. On February 11, 2004, Commerce filed its cross-complaint against Atkins, alleging breach of the subcontract and the purported “advance agreement.”

On March 17, 2004, Atkins filed its demurrer to Commerce’s cross-complaint.^[3] Atkins argued that, as to the claim of breach of the subcontract, Commerce could not recover because Commerce could not allege that it had been licensed during the entire period for which it claimed compensation (Bus. & Prof. Code, § 7031). As to the claim of breach of the purported “advance agreement,” Atkins relied on the language of the promissory note which expressly stated Atkins had no obligation to advance funds.

The trial court sustained the demurrer with leave to amend. Relying on recent appellate authority, the court concluded that Commerce could recover for the work performed pursuant to the subcontract during the times that its license was in effect. The trial court granted Commerce ten days in which to file its amended cross-complaint omitting claims for compensation for work performed while its license was suspended.

On May 3, 2004, Commerce filed its first amended cross-complaint,^[4] asserting four causes of action. First, Commerce alleged a cause of action for breach of the subcontract. In order to comply with the trial court’s ruling, Commerce added a paragraph stating, “[Commerce] was a duly licensed contractor at all times during which it is seeking damages from [Atkins] for [its] breach of the [s]ubcontract, and [Commerce] is only seeking damages from [Atkins] for acts performed by [Commerce] under the [s]ubcontract while [Commerce] was duly licensed therefor.” Commerce alleged Atkins “specifically breached the [s]ubcontract in the following particulars” and then identified seven specific ways in which the subcontract was allegedly breached, including, among others: Atkins’s “repeated failures to issue contract change[] orders, and/or to pay for/fund the change orders”; Atkins’s failure to “provide properly prepared coordination drawings”; and Atkins’s “micro-management” of Commerce’s field crew. Commerce sought recovery of its attorney’s fees incurred in defending and prosecuting this action, pursuant to an attorney’s fee clause in the subcontract, and otherwise sought $1,000,000 in damages.

Commerce’s second cause of action alleged breach of the purported “advance agreement,” which, again, referred to the written promissory note attached to the cross-complaint and incorporated it by reference. Commerce alleged that the agreement “provided that [ ] in exchange for the issuance of a promissory note and the granting of a security interest . . . [Atkins] would advance to [Commerce] up to $800,000,” even though the referenced document was, in fact, a promissory note which contained no such promise. Commerce alleged that it had repeatedly advised Atkins of the necessity of certain advances, and Atkins (and its attorney) had represented those advances would be made. Commerce alleged that not all necessary advances were made, which resulted in its failure to pay its liability insurance premiums, the ensuing suspension of its contractor’s license, and its ultimate termination from the subcontract. Finally, Commerce alleged causes of action for fraud and negligent misrepresentation on the basis that Atkins “fraudulently induced” it to execute the promissory note by leading it to believe that Atkins “would make the discretionary payments, from time to time.”

Atkins demurred to the first amended cross-complaint.^[5] By the time of the hearing on the demurrer, the California Supreme Court had granted review in the case on which the trial court had relied in initially granting Commerce leave to amend. Without that authority, there was no legal basis to permit Commerce to proceed on its cause of action for breach of the subcontract, as Business and Professions Code section 7031 prohibits a contractor from maintaining an action to recover compensation for performance of a contract when the contractor was not licensed at all times during performance of the contract. As to the causes of action based on the so-called advance agreement, the trial court concluded the language of the promissory note, which explicitly provided that Atkins was not required to advance any funds, defeated Commerce’s causes of action for breach of contract, fraud and negligent misrepresentation. The court therefore sustained the demurrer without leave to amend. Judgment of dismissal of the cross-complaint was entered. Subsequently, Atkins voluntarily dismissed its complaint. Commerce filed a timely notice of appeal.

CONTENTIONS ON APPEAL

On appeal, Commerce raises several arguments to avoid the bar of Business and Professions Code section 7031. It argues: (1) its license was merely suspended, not revoked; (2) it can recover damages for breach of the change orders, as it was licensed during the entire performance of each individual change order; (3) it substantially complied with the requirements of Business and Professions Code section 7031; (4) it can recover damages and attorney’s fees unrelated to income it would have received under the subcontract; and (5) Business and Professions Code section 7031 should not apply as Atkins caused the suspension of Commerce’s license.^[6] We disagree and affirm.

DISCUSSION

1. Standard of Review

“In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.’ [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

2. Business and Professions Code section 7031

Business and Professions Code section 7031, subdivision (a) provides: “Except as provided in subdivision (e)[^[7]], 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 . . . .”

This section “represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of the state.” (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 151.) The purpose of California’s licensing law is to protect the public from incompetence and dishonesty. (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995.) Business and Professions Code section 7031 advances this purpose “by withholding judicial aid from those who seek compensation for unlicensed contract work.” (Ibid.) “[I]t is well settled that section 7031 applies despite injustice to the unlicensed contractor.” (Ibid.) Indeed, the reason unlicensed contractors may not seek compensation in court “is not that the courts are unaware of possible injustice between the parties, and that the defendant may be left in possession of some benefit he should in good conscience turn over to the plaintiff, but that this consideration is outweighed by the importance of deterring illegal conduct.” (Lewis & Queen v. N.M. Ball Sons, supra, 48 Cal.2d at p. 150.)

The bar is absolute. It “bars a person from suing to recover compensation for any work he or she did under an agreement for services requiring a contractor’s license unless proper licensure was in place at all times during such contractual performance.” (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 419.) There can be no recovery for individual acts performed while the contractor’s license was in force if the license was not in force for the performance of the entire contract.^[8] (Ibid.)

It is undisputed that Commerce’s license was suspended and reinstated twice during the time it was performing work on the subcontract for which it seeks to recover compensation. Commerce is therefore barred from maintaining its suit by Business and Professions Code section 7031. Commerce raises several bases on which it seeks to avoid the application of this rule; they are all foreclosed by the law or undisputed facts.

First, Commerce claims the statute is no bar as its license was merely suspended, not revoked. California courts have repeatedly applied Business and Professions Code section 7031 to bar lawsuits by contractors whose licenses were suspended. (Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th 1254, 1258; Bierman v. Hagstrom Construction Co. (1959) 176 Cal.App.2d 771, 776-777.)

Second, Commerce asserts that it may recover for the work performed under each change order, as the change orders constitute separate contracts. The contention is belied by the language of the subcontract itself, which provides that change orders are simply modifications of the subcontract and “the value thereof as agreed upon in such written authorization shall be added to or deducted from the contract price.” Moreover, the allegations of the operative cross-complaint allege that breaches of the change orders constitute breaches of the written subcontract. Commerce cannot be heard to argue the change orders were separate contracts in contradiction to the language of the subcontract and its pleading.

Third, Commerce argues it substantially complied with the requirements of Business and Professions Code section 7031. Business and Professions Code section 7031, subdivision (e) provides a limited exception in which a court may find substantial compliance. This may occur only if the contractor “(1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.” (Bus. & Prof. Code, § 7031, subd. (e).) Commerce argues that the first amended cross-complaint “unambiguously asserts sufficient facts to establish substantial compliance under subsection (e) of Section 7031,” yet it does no such thing. Commerce did not, and cannot, assert that it was unlicensed when performance under the contract commenced,^[9] nor did it allege it was unaware of its three license suspensions and acted promptly and in good faith to reinstate its license when it learned of the suspensions. Substantial compliance is thus inapplicable.

Fourth, Commerce contends it may recover its attorney’s fees and damages “resulting from breaches unrelated to [its] right to earn income on the project” such as damages to its business “caused by micro-management and poor general contractor work.”^[10] Yet the absolute bar of Business and Professions Code section 7031 applies to all “matters arising out of the contractual relationship,” including costs associated with delay or lost profits from third parties allegedly resulting from breach of the contract. (Pacific Custom Pools, Inc. v. Turner Construction Co., supra, 79 Cal.App.4th at pp. 1265-1266; see also Bierman v. Hagstrom Construction Co., supra, 176 Cal.App.2d at pp. 772, 777 [applying Business and Professions Code section 7031 to preclude an unlicensed subcontractor’s claims against the general contractor for the contractor’s mismanagement of the job].)

Finally, Commerce suggests equity requires that it be allowed to proceed, as Atkins caused the suspension of its license.^[11] Given the authority indicating that Business and Professions Code section 7031 applies regardless of the inequities that may result, we have serious reservations about judicially creating such an exception. In any event, the undisputed facts to do not support the creation of such an exception in this case. In 2002, Commerce’s license was suspended for two months due to an unsatisfied judgment. This was long before any alleged promise by Atkins to advance funds to Commerce.^[12] Commerce suggests that it was Atkins’s failure to pay it as required on the subcontract that left Commerce in the position where it could not satisfy the judgment against it, rendering Atkins responsible for Commerce’s license suspension. We disagree. If Atkins was not properly making timely payments to Commerce under the subcontract, Commerce should have pursued its remedies against Atkins, such as filing a stop notice (Civ. Code, §§ 3179 et seq.); it could not do nothing, allow a judgment entered against it to remain unsatisfied, and then blame Atkins when its license was suspended. While working on the project, Commerce twice allowed its license to lapse for unsatisfied judgments; it therefore cannot maintain an action against Atkins for compensation for the work it performed on the project.

DISPOSITION

The judgment is affirmed. Atkins shall recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

CROSKEY, J.

We Concur:

KLEIN, P. J.

ALDRICH, J.

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^[1] Atkins requested the trial court take judicial notice of a certification of records from the Contractors State License Board setting forth the history of Commerce’s license. The record on appeal does not indicate the court’s ruling on this request. Commerce does not contest the accuracy of this document or its admissibility; indeed, Commerce cites to it as setting forth its “licensure history.” We therefore take judicial notice of it. (Evid. Code §§ 452, subd. (c), 459, subd. (a).)

^[2] “Where written documents are the foundation of an action and are attached to the complaint and incorporated therein by reference, they become a part of the complaint and may be considered on demurrer.” (City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793, 800.) “[F]acts appearing in exhibits attached to the complaint . . . , if contrary to the allegations in the pleading, will be given precedence.” (Dodd v. Citizens Bank of Costa Mesa (1990) 222 Cal.App.3d 1624, 1627.)

^[3] Commerce did not designate for inclusion in the appellate record the memorandum of points and authorities filed in support of Atkins’s demurrer, nor Atkins’s reply memorandum. Commerce did, however, designate its own memorandum in opposition.

^[4] The first amended cross-complaint was untimely. Atkins would ultimately move to strike it on this basis. The trial court ultimately dismissed the cross-complaint on its merits, but noted that it would grant the motion to strike were it not mooted by the ruling on the merits.

^[5] Again, Commerce did not designate Atkins’s memorandum of points and authorities as part of the record on appeal.

^[6] On appeal, Commerce initially argued that the trial court also erred in sustaining the demurrer with respect to the causes of action for promissory fraud and negligent misrepresentation. It withdrew that portion of its appeal at oral argument.

^[7] Business and Professions Code section 7031, subdivision (e) contains a limited substantial compliance exception. We discuss it below.

^[8] The appellate opinion in the MW Erectors case had reached a contrary conclusion. This was the case on which the trial court relied when initially allowing Commerce to proceed.

^[9] After Atkins had argued, in its respondent’s brief, that substantial compliance was unavailable for this reason, Commerce cited to two cases in its reply brief suggesting that substantial compliance is available when the contractor had a valid license when the contract began, but lost it thereafter. The authority on which Commerce relies predates Business and Professions Code section 7031, subdivision (e) by a number of years. In 1989, the Legislature first amended Business and Professions Code section 7031 to limit the application of the judicial doctrine of substantial compliance. (Pacific Custom Pools, Inc. v. Turner Construction Co., supra, 79 Cal.App.4th at p. 1261.) Cases applying substantial compliance decades prior to that date can be of no assistance to Commerce.

^[10] Preliminarily, we note the first amended cross-complaint alleges no such damages. The only attorney’s fees sought were those related to Commerce’s attempt to defeat Atkins’s complaint and pursue its own cross-complaint for breach of the subcontract in this action. Commerce did not allege any other damages, such as harm to its business, that it claims in its opening brief.

^[11] Commerce also argues Atkins should be estopped from relying on Business and Professions Code section 7031 because it knew of the suspensions and allowed Commerce to continue working. The statutory bar applies even “where the person for whom the work was performed knew the contractor was unlicensed.” (Hydrotech Systems Ltd. v. Oasis Waterpark, supra, 52 Cal.3d at p. 997.)

^[12] In its Reply brief on appeal, Commerce overlooks this suspension entirely, asserting it “maintained its contractor’s license for the first 2 years of the job” and only began having financial problems in “March 2003.”