Opinion
NOT TO BE PUBLISHED
Appeal from a judgment and order of the Superior Court of Orange County No. 02CC17027, Jane D. Myers, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.)
Millar, Hodges & Bemis and Richard W. Millar, Jr., for Defendant and Appellant.
Keller, Weber & Dobrott, James E. Dobrott, Jr., and Jill Hunt for Plaintiff and Respondent.
OPINION
ARONSON, J.
Defendant Controlled Environments Construction, Inc. (Controlled) challenges the judgment entered after a bench trial awarding damages to plaintiff Golden West Electric, Inc. (Golden West), on its subcontract to perform electrical services, and subsequent order awarding Golden West attorney fees. Controlled contends Business and Professions Code section 7031 barred Golden West from recovering damages because it was an unlicensed contractor during the performance of the subcontract. Golden West argues, however, that it was not required to prove licensure because Controlled did not raise the issue as an affirmative defense. Golden West also contends it substantially complied with section 7031 because its principal, who performed or supervised the electrical work, was licensed during the construction project.
All statutory references are to the Business and Professions Code unless otherwise noted.
We conclude Controlled adequately raised the licensure issue when it filed its general denial to Golden West’s first amended complaint alleging it held a valid contractor’s license. We also conclude Golden West could not invoke the narrow substantial compliance provision of section 7031, subdivision (e), because it was not licensed when work commenced under the subcontract. We therefore reverse the judgment and attorney fee order, and direct the trial court to enter a judgment of dismissal in Controlled’s favor.
I
Factual and Procedural Background
Controlled was the general contractor for the construction of a 135,000 to 140,000-square-foot freezer-cooler distribution center. Controlled subcontracted with Golden West to perform certain electrical work on the project. The contract as originally drafted referred to the subcontractor as “Golden West Electric,” but Thomas Gail, Golden West’s secretary/treasurer, wrote “Inc.” after Golden West Electric on the signature line, and executed the contract in his capacity as an officer of Golden West. The contract called for Golden West to start work on May 1, 2001, and finish not later than November 30, 2001. The contract originally provided that Controlled would pay Golden West $556,217, but this amount increased through written and oral change orders as the project advanced. Through most of the project, Controlled paid the invoices Golden West issued.
In late November 2001, the parties recognized that Golden West would fail to complete the project on time. Controlled then hired Durant Electric (Durant) and, when other commitments forced Durant to leave the project, Viramontes Electric (Viramontes). Controlled hired these electrical subcontractors both to assist in completing Golden West’s work, and to undertake new work orders requested by the owner.
Controlled and Golden West disagreed on how the money Controlled paid to Durant and Viramontes should be allocated between work performed on owner-requested changes, and work performed to complete Golden West’s tasks under the contract. As a result, Controlled refused to pay some of Golden West’s invoices, and Golden West failed to pay a supplier, Action Wholesale, which filed a mechanic’s lien against the project. Action Wholesale subsequently filed a foreclosure action on its lien in Los Angeles County Superior Court (Action Wholesale lawsuit).
Golden West filed the present action, suing Controlled for breach of contract and common counts. Controlled asserted as an affirmative defense that Golden West breached its indemnity obligations under the subcontract, forcing Controlled to defend and ultimately settle the Action Wholesale lawsuit. Thus, Controlled asserted the costs of defense and settlement as offsets to any amount Golden West might recover against it.
At the close of Golden West’s case at trial, Controlled brought a motion for judgment (Code Civ. Proc., § 631.8) on the ground that Golden West was an unlicensed contractor at the time it performed its work. After argument and further evidence, the trial court denied the motion, concluding (1) Controlled waived the licensure issue because Controlled did not raise it as an affirmative defense and, alternatively, (2) Golden West could operate under the license of Gail, its owner.
After the conclusion of trial, the court issued its “Second Revised Statement of Decision” and entered judgment for Golden West in the amount of $44,982.62. The trial court determined this amount by taking the base contract amount of $556,217, adding approved change orders totaling $23,908.43 and oral change orders totaling $45,387.60, and subtracting the $424,597.45 Controlled paid to Golden West. The court then deducted $117,000 Controlled paid to settle the Action Wholesale lawsuit, $8,201 Controlled paid Durant, and $30,732 it paid Viramontes, for completing the project. The court disallowed, however, any offset for the attorney fees paid by Controlled to defend the Action Wholesale lawsuit. Finally, the court found that Golden West substantially complied with the statutory requirement it hold a valid contractor’s license when working on a construction project because Gail, Golden West’s secretary/treasurer, held a valid contractor’s license. Controlled appeals the judgment.
After the trial court entered judgment and Controlled filed its notice of appeal, Golden West moved for an award of attorney fees and statutory penalties. The trial court did not award penalties, but awarded Golden West attorney fees of $64,103.50 under Civil Code section 3680 and section 7108.5. Controlled appeals the attorney fee order, which we consolidated with Controlled’s appeal of the judgment.
II
Discussion
A. The Status of Golden West’s License Was a Controverted Issue at Trial
Section 7031, subdivision (a), provides: “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, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.” In compliance with subdivision (a), Golden West alleged in its first amended complaint that it “is a licensed electrical contractor doing business in the County of Riverside, State of California.”
Subdivision (d) of section 7031 further provides: “If licensure or proper licensure is controverted, then proof of licensure pursuant to this section shall be made by production of 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. Nothing in this subdivision shall require any person or entity controverting licensure or proper licensure to produce a verified certificate. When licensure or proper licensure is controverted, the burden of proof to establish licensure or proper licensure shall be on the licensee.”
Golden West contends it was not required to prove licensure because Controlled did not raise the issue by way of affirmative defense. Controlled, however, contends that it controverted Golden West’s licensure by its general denial to the first amended complaint. We agree with Controlled.
Code of Civil Procedure section 431.30 provides that “[t]he answer to a complaint shall contain: [¶] [] The general or specific denial of the material allegations of the complaint controverted by the defendant.” (Code Civ. Proc., § 431.30, subd. (b)(1) & (2), italics added.) Thus, “a general denial . . . puts in issue the material allegations of the complaint.” (Code Civ. Proc., § 431.30, subd. (d).) Code of Civil Procedure section 431.10, subdivision (a), defines a “material allegation in a pleading” as “one essential to the claim or defense and which could not be stricken from the pleading without leaving it insufficient as to that claim or defense.” Because section 7031, subdivision (a), expressly requires licensure to be pleaded, the allegation of licensure is a “material” allegation that a party may controvert by a general denial.
The question whether a general denial is sufficient to controvert licensure under section 7031, subdivision (d), was addressed in Advantec Group, Inc. v. Edwin’s Plumbing Co., Inc. (2007) 153 Cal.App.4th 621 (Advantec). There, a subcontractor (Edwin’s) on a plumbing project cross-complained against the general contractor (Advantec). The cross-complaint alleged Edwin’s was “‘a licensed plumbing contractor, performing work under the laws of the state of California.’” (Id. at p. 625.) Advantec’s answer to the cross-complaint denied “‘each and every allegation’” of the cross-complaint, but did not allege lack of licensure as an affirmative defense. (Ibid.) During trial, Advantec objected to a question asking a witness if Edwin’s held a contractor’s license, asserting that section 7031, subdivision (d), limited a party to proving licensure only by a verified certificate. The trial court sustained the objection, and Edwin’s requested a two-week continuance to obtain the verified certificate. The trial court refused, and granted nonsuit on the cross-complaint.
On appeal, Edwin’s argued its licensure constituted a “‘new matter’” under Code of Civil Procedure section 431.30, subdivision (b)(2), and therefore Advantec should have raised the issue as an affirmative defense. The Advantec court disagreed, holding a general denial was sufficient to controvert the tissue. (Advantec, supra, 153 Cal.App.4that p. 628.) The court also rejected Edwin’s argument that it was unfairly surprised by the issue at trial and should have been given time to obtain a verified certificate: “[T]he strong, clear policy of the law placed the burden squarely on Edwin’s as to proof of its licensure. Although we announce for the first time in this case the rule that a general denial sufficiently controverts an allegation of licensure, when read together the statutes at issue (§[] 7031 and [Code of Civil Procedure §] 431.30) plainly dictate this result. Edwin’s could have had available for trial a verified certificate of its licensure, or could have clarified by way of contention interrogatories whether Advantec intended to contest the validity of its license, but it did neither. [Fn. omitted.] It is not accurate to say, as does Edwin’s that Advantec did not raise the issue until midtrial; as we have held, Advantec’s general denial placed the issue in controversy. Nor can Advantec’s conduct be described as sandbagging, where the clear weight of the statutory burden fell on Edwin’s to prove its licensure.” (Advantec, supra, 153 Cal.App.4th at p. 631.) Following Advantec, we conclude Controlled controverted Golden West’s licensure allegation, requiring Golden West to demonstrate licensure by a verified certificate.
B. The Trial Court Erred in Applying the Doctrine of Substantial Compliance
Although section 7031 requires a verified certificate, Controlled stipulated that Golden West could use a facsimile of the certificate as evidence at trial. The certificate, however, disclosed that Gail held the license, operating under the name Golden West Electric, when the project commenced in 2001, and was not transferred to Golden West, the corporation, until 2004, well after the project was completed. Because there is no dispute that Golden West, the corporation, is the plaintiff in the action seeking to recover on the subcontract, and was unlicensed at all times when the work was performed, recovery is barred under section 7031, subdivisions (a) and (d).
The trial court, however, held that Golden West, despite being unlicensed, had substantially complied with the requirement of holding a contractor’s license. The substantial compliance doctrine as it applies to section 7031 has changed markedly over the years. In response to court decisions that relied on the substantial compliance doctrine to mitigate the statute’s often harsh effects, the Legislature amended section 7031 to provide that the doctrine “‘shall not apply to this section.’” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 996, fn. 5.) Later, the Legislature amended the section to reestablish the doctrine in a limited manner.
Presently, section 7031, subdivision (e), provides: “The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a 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.”
Thus, the substantial compliance doctrine applies only if it is shown the contractor “had been duly licensed as a contractor in the state prior to the performance of the act or contract.” There is no dispute Golden West was unlicensed when it began work on the project; therefore, the substantial compliance doctrine does not apply.
Golden West contends, however, it was entitled to bring its action because Gail, who was licensed at all times during the subcontract, was “the sole owner and [responsible managing officer] of the Corporation and the only person with whom Controlled ever had any business dealings in terms of contracting, billing and paying money . . . .” We disagree, and base our conclusion on the recent case of Opp v. St. Paul Fire & Marine Ins. Co. (2007) 154 Cal.App.4th 71 (Opp), which rejected the identical argument.
In Opp, a subcontractor, Mountain Connection, Inc. (MCI), sued on a payment bond after the general contractor declared bankruptcy. When the defendant asserted MCI was unlicensed, the plaintiff filed an amended complaint substituting as plaintiff “‘William Opp, dba Mountain Connection and Mountain Connection, Inc.’” (Opp, supra, 154 Cal.App.4th at p. 73.) After the defendant obtained summary judgment, the plaintiff argued on appeal the trial court erred because the evidence showed Opp had placed his personal contractor’s license number on the contract, supervised most of the work, and the general contractor “dealt with him as a sole proprietor, doing business under the name of Mountain Connection, Inc.” (Id. at p. 74.)
The appellate court in Opp rejected this argument, noting that section 7031 is not directed toward who actually “‘did the work,’ but who was ‘engaged in the business or acting in the capacity of a contractor.’” (Opp, supra, 154 Cal.App.4th at p. 75.) The court noted: “The evidence was undisputed that there was a valid corporation called Mountain Connection, Inc., and that it was, in this case, ‘engaged in the business or acting in the capacity of a contractor.’ [Citation.] The evidence was undisputed that the contracting party on the subcontract was MCI and that the complaint sought ‘compensation for the performance of [an] act or contract where a license is required.’ [Citation.] Accordingly, on the face of it, MCI was the contracting party and its suit should be barred by section 7031.” (Ibid.)
The Opp court explained that the plaintiff could not use MCI as a fictitious business name because MCI included the suffix “Inc.” (Opp, supra, 154 Cal.App.4that pp. 75-76.) Moreover, the court rejected the notion that the plaintiff could be considered a party to the contract simply because he used his individual license on the contract, and signed the contract as MCI’s president, observing: “Such a rule would violate at least three aspects of public policy. First, of course, it would render ineffective the contractor’s license requirement and encourage fraud if insertion of the license number of one who is not the contractor permitted a suit that otherwise was barred by section 7031. [Fn. omitted.] Second, in this case it would be tantamount to permitting an individual to adopt a prohibited fictitious business name and then to sue on a contract, when such suit would be barred for any other unregistered business. [Citation.] Finally, ‘[p]arties who determine to avail themselves of the right to do business by means of the establishment of a corporate entity must assume the burdens thereof as well as the privileges.’ [Citation.] An individual who has obtained the benefits of corporate limited liability will not be permitted to repudiate corporate existence just because the corporation has become an inconvenience.” (Id. at p. 76.)
The court next considered whether MCI, even if it had continued as the named plaintiff in the case, could have invoked the doctrine of substantial compliance. Recognizing the Legislature had narrowed the exceptions to section 7031’s licensing requirement to those expressly set forth in subdivision (e), the court concluded: “Appellant is unable to meet the threshold requirement for substantial compliance under the current version of section 7031, namely, that the contractor was ‘duly licensed as a contractor in this state prior to the performance of the act or contract.’ [Citation.] As the trial court observed, MCI was not licensed in California until after performance of the contract. The trial court did not err in concluding ‘the substantial compliance rule authorized under [section] 7031 is not available to the corporation . . . .’” (Opp, supra, 154 Cal.App.4that p. 79.)
The present situation is indistinguishable from Opp. There is no dispute that Golden West, the corporation, contracted to perform the electrical work on the project at issue, and that Golden West was not licensed until well after the work was completed. Thus, Golden West was not entitled to recover on the subcontract. That most of the work may have been performed or supervised by Golden West’s principal, who was licensed, does not change the result.
As Golden West correctly notes, the purpose of the Contractors’ State License law (§ 7000 et seq.) is to protect the public from incompetent or dishonest contractors. But we cannot enforce section 7031’s purpose at the expense of its express language. As the Supreme Court has observed: “[T]he bar of section 7031(a) applies ‘[r]egardless of the equities.’ [Citation.] Indeed, it has long been settled that ‘the courts may not resort to equitable considerations in defiance of section 7031.’ [Citation.] ‘“Section 7031 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 this state. [Citation.]’” [Citation.] [¶] . . . [¶] Section 7031(a) will be applied, regardless of equitable considerations, even when the person for whom the work was performed has taken calculated advantage of the contractor’s lack of licensure. Thus, it matters not that the beneficiary of the contractor’s labors knew the contractor was unlicensed. [Citations.] Moreover, a contractor cannot circumvent section 7031(a) by alleging the beneficiary’s false promise to pay despite the contractor’s lack of licensure. [Citation.]” (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 423-424.)
Golden West’s reliance on Knapp Development & Design v. Pal-Mal Properties, Ltd. (1985) 173 Cal.App.3d 423, is misplaced. There, the Knapp court allowed an unlicensed corporation to recover because its president had been licensed at all times during the performance of the contract. But Knapp based its decision under a different version of section 7031. As noted above, after the Knapp decisionthe Legislature amended section 7031 in 1989 to eliminate the substantial compliance doctrine formulated in previous cases and relied upon by the Knapp court. (See Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th 1254, 1261.) Knapp, decided in 1985, has been superseded by statute and therefore does not aid Golden West. Because Golden West was not a licensed contractor when the work under the subcontract was performed, it is barred under section 7031 from recovering on its claims.
III
Disposition
The judgment and attorney fee order are reversed. The trial court is directed to enter a new judgment of dismissal in Controlled’s favor.
WE CONCUR: SILLS, P. J., IKOLA, J.