Opinion
NOT FOR PUBLICATION
Argued and Submitted at Las Vegas, Nevada: July 21, 2011
Appeal from the United States Bankruptcy Court for the District of Nevada. Bk. No. 07-51126-GWZ. Honorable Gregg W. Zive, Bankruptcy Judge, Presiding.
Martin G. Crowley, Esq. of American Legal Services argued for Appellant Bear Air Mechanical, Inc.
John J. Gezelin, Esq., argued for Appellee Eugene C. Canepa.
Before: KWAN, HOLLOWELL, and JURY, Bankruptcy Judges.
The Hon. Robert N. Kwan, Bankruptcy Judge for the Central District of California, sitting by designation.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value. See 9th Cir. BAP Rule 8013-1.
This appeal arises from the bankruptcy court's order disallowing the claim of Bear Air Mechanical, Inc., in its entirety. For the reasons stated herein, we AFFIRM the order of the bankruptcy court.
I. FACTS
The debtor, French Quarter, Inc., filed a Chapter 11 petition on August 3, 2007. The debtor owns and operates The Men's Club in Las Vegas, Nevada.
Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and all " Rule" references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
On October 15, 2007, Bear Air Mechanical, Inc., filed proof of claim #34-1, alleging an unsecured nonpriority claim of $52,936.78 for work performed on the installation and service of refrigeration and HVAC systems at The Men's Club between September and December of 2006. The proof of claim was supported by five invoices that were simultaneously issued by Bear Air on January 28, 2007.
Eugene C. Canepa, a creditor and principal of the debtor, filed a motion to disallow Bear Air's claim. Without stating specific facts, the motion generally argued that Bear Air's claim must be disallowed because its work was " substandard, " it had billed for services it did not perform, and its accounting was " overstated."
It is peculiar that Canepa, rather than the debtor, objected to Bear Air's claim. We recognize that the bankruptcy court explicitly held that " Canepa has standing as a creditor and party in interest to object to Bear Air's Claim." Findings of Fact and Conclusions of Law at 2. Bear Air did not raise the issue of Canepa's standing on appeal, and accordingly we state no opinion on whether the bankruptcy court erred in this regard.
Bear Air opposed the motion but did not present any evidence to substantiate the quality of its work or its billing methods. In a reply Canepa argued for the first time that Bear Air was estopped by Nevada Revised Statute (" NRS") 624.320 from seeking payment on its claim because it did not hold a contractor's license at the time the work was performed.
Because the issue of the effect of NRS 624.320 was raised for the first time in the reply, the bankruptcy court continued the hearing on the motion for an evidentiary hearing and allowed Bear Air an opportunity to file a supplemental memorandum of points and authorities.
At the continued hearing, the court heard testimony from Canepa and Darrell Barker, the principal of Bear Air. Barker testified that Bear Air was not a licensed contractor and could not post a bond at any time that it performed work for the debtor. However, Barker also testified that he had informed Canepa that Bear Air was unlicensed. Canepa testified to the contrary and stated that he did not learn Bear Air was unlicensed until after the contract was terminated in December 2006. Canepa further testified that Bear Air's work was substandard, and that the debtor was forced to make repairs at a cost of $16,000.
On July 20, 2010, the bankruptcy court entered its findings of fact and conclusions of law. The court explicitly held that because Bear Air " did not comply with NRS 624.320 and NRS [624.270], it is not entitled to enforce its Claim against the Debtor." Findings of Fact and Conclusions of Law at 3. The court also held that Bear Air's billing statements were overstated by $16,000. Bear Air appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. §§ 157(b)(2)(B) and 1334. We have jurisdiction under 28 U.S.C. § 158.
III. Issues
1. Whether the bankruptcy court erred in determining that the claim must be disallowed in its entirety because Bear Air did not hold a contractor's license and was not bonded as required by Nevada law.
2. Whether the bankruptcy court erred in determining that Bear Air's work was substandard and its claim (if allowed) was overstated by $16,000.
IV. Standards of Review
The Bankruptcy Appellate Panel reviews de novo a bankruptcy court's conclusions of law, including its interpretations of state law. Hopkins v. Cerchione (In re Cerchione), 414 B.R. 540, 545 (9th Cir. BAP 2009).
Findings of fact are reviewed for clear error. Fed.R.Bankr.P. 8013. Whether a proof of claim's prima facie validity has been rebutted is a question of fact reviewed for clear error. See Garner v. Shier (In re Garner), 246 B.R. 617, 619 (9th Cir. BAP 2000).
V. Discussion
A. Bear Air Cannot Maintain a Claim for Payment Because It Was Not a Licensed Contractor.
There is no dispute that Bear Air did not hold a contractor's license and was not bonded. Citing the doctrines of unjust enrichment and estoppel, Bear Air argues that it should be excepted from the statutory requirements because Canepa had notice at the time the work was performed that Bear Air was not in compliance with the statutes. However, the case law has recognized only two narrow exceptions--one legal and one equitable--to the licensing requirements. Because Bear Air does not meet either exception, it cannot state a claim for payment against the debtor in law or equity. Therefore, we affirm the bankruptcy court.
1. Nevada's Licensing Statutes.
Section 502(b)(1) provides that a claim must be disallowed to the extent it is unenforceable under applicable law. Here, the applicable state law is NRS 624.320, which states:
No person, firm, copartnership, corporation, association or other organization, or any combination of any thereof, engaged in the business or acting in the capacity of a contractor shall bring or maintain any action in the courts of this State for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that such person, firm, copartnership, corporation, association or other organization, or any combination of any thereof, was a duly licensed contractor at all times during the performance of such act or contract and when the job was bid.
An applicant cannot obtain a contractor's license unless and until it posts a surety bond or cash deposit with the Nevada State Contractors' Board. NRS 624.270.
" The primary purpose of Nevada's licensing statutes is to protect the public against both faulty construction and financial irresponsibility." Interstate Commercial Bldg. Services, Inc. v. Bank of Am. Nat'l Trust and Sav. Ass'n, 23 F.Supp.2d 1166, 1173 (D. Nev. 1998) (quoting MGM Grand Hotel v. Imperial Glass Co., 533 F.2d 486, 489 (9th Cir. 1976)). For this reason, courts have only recognized a few narrow exceptions to the licensing requirements. See id. at 1173-75.
An unlicensed contractor can maintain a legal claim on the contract only if it substantially complied with the licensing statutes. Interstate Commercial Bldg. Services, 23 F.Supp.2d at 1173. For example, in Day v. West Coast Holdings, Inc., 101 Nev. 260, 265, 699 P.2d 1067 (1985), the contractor was not in strict compliance with NRS 624.320 because it had not obtained a specialty landscaping license prior to commencing the work. Nonetheless, the Nevada Supreme Court held that the contractor had " substantially complied" because it held a general contractor's license, its application for a specialty license was pending, the defendant had full knowledge of the contractor's noncompliance, the job had been completed to the defendant's satisfaction and benefit, and the defendant would otherwise be unjustly enriched. Id .; see also Nev. Equities, Inc. v. Willard Pease Drilling Co., 84 Nev. 300, 303, 440 P.2d 122 (1968) (stating that a licensed well-driller, though it did not hold a specialty license, had substantially complied with the licensing statutes).
Similar to the exception for a contract claim at law, an unlicensed contractor may only state a claim to recover in equity under two exceptions: where either (1) there has been substantial compliance with the statute, or (2) the weight of a four-factor test balances in the claimant's favor such that the doctrine of in pari delicto should not be applied. Interstate Commercial Bldg. Services, 23 F.Supp.2d at 1174 (citing Magill v. Lewis, 74 Nev. 381, 386, 333 P.2d 717 (1959)). The Nevada Supreme Court delineated the second equitable exception and its four-factor balancing test in Magill:
The rule that the courts will not lend their aid to the enforcement of an illegal agreement or one against public policy is fundamentally sound. The rule was conceived for the purposes of protecting the public and the courts from imposition. It is a rule predicated upon sound public policy. But the courts should not be so enamored with the latin phrase `in pari delicto' that they blindly extend the rule to every case where illegality appears somewhere in the transaction. The fundamental purpose of the rule must always be kept in mind, and the realities of the situation must be considered. Where, by applying the rule, the public cannot be protected because the transaction has been completed, where no serious moral turpitude is involved, where the defendant is the one guilty of the greatest moral fault, and where to apply the rule will be to permit the defendant to be unjustly enriched at the expense of the plaintiff, the rule should not be applied.
74 Nev. at 386 (citation omitted). However, " [i]n cases of 'blatant, substantial, and repeated' violations of Nevada law, neither exception will protect the equitable claims of unlicensed contractors." Interstate Commercial Bldg. Services, 23 F.Supp.2d at 1175 (quoting Loomis v. Lange Fin. Corp., 109 Nev. 1121, 1129, 865 P.2d 1161 (1993)).
2. Bear Air Cannot Maintain an Action at Law on the Contract.
First and foremost, Bear Air did not substantially comply with NRS 624.320 or 624.270. Barker testified that Bear Air did not have a contractor's license at any time during the billed periods. Hr'g Tr., 28:11-18, March 29, 2010 (The Court: " Well, the point that I see is that neither you nor Bear Air Mechanical has had a license at any time?" The Witness: " Correct." The Court: " Neither you nor Bear Air Mechanical ever had a bond posted as required by statute at any time; is that correct?" The Witness: " That's correct."). Barker further testified that he did not even apply for a license until after the work was completed and invoiced. Bear Air's noncompliance is unlike that of the plaintiff in Day, where a general license had been obtained and a specialty license application was pending during the work period. Bear Air did not substantially comply with NRS 624.320.
Bear Air argues that because Canepa knew Bear Air was not licensed, the debtor should be estopped from denying payment. Specifically, Bear Air contends that the court erred in finding that " [t]here is no evidence that either Canepa or the Debtor had notice that Bear Air was not a licensed contractor." Findings of Fact and Conclusions of Law at 2. It is true that the bankruptcy court was technically incorrect. While Canepa testified he was unaware that Bear Air was not licensed, Barker testified to the contrary that he fully disclosed Bear Air's status to Canepa before the work began. However, the court's error was harmless. See Fed.R.Bankr.P. 9005; see also Litton Loan Servicing, Inc. v. Garvida (In re Garvida), 347 B.R. 697, 704 (9th Cir. BAP 2006) (" Moreover, we do not reverse for reasons that do not affect the substantial rights of parties."). Even if Barker's testimony were accepted as true, Bear Air does not meet the substantial compliance exception. In Day, 101 Nev. at 265, the defendant's knowledge of the plaintiff's noncompliance was only one of several factors that the court considered in finding that the plaintiff had substantially complied with the licensing statutes. There, as in Nevada Equities, 84 Nev. at 303, the far more significant factor was the plaintiff's mere failure to obtain a specialty license before commencing the work. Accordingly, even had Canepa or the debtor known that Bear Air was unlicensed, the substantial compliance exception could not be applied.
Because the substantial compliance exception does not apply, Bear Air is precluded by NRS 624.320 from stating a legal claim to enforce its contract with the debtor.
3. Bear Air is Not Entitled to Equitable Relief.
Second, Bear Air cannot state a claim in equity because it does not satisfy the Magill exception. As discussed further herein, the invoices attached to the proof of claim demonstrate that Bear Air worked as a contractor on a daily basis over a four-month period. Barker did not even apply for a license until after the work was completed and invoiced. This is not a case where the unlicensed contractor's violation of NRS 624.320 is only nominal or technical; nor is this a case where, as stated in Magill, 74 Nev. at 386, the illegality merely " appears somewhere in the transaction, " such that the doctrine of in pari delicto should be disregarded. Instead, like the plaintiff in Interstate Commercial Building Services, 23 F.Supp.2d at 1175, Bear Air's conduct amounts to a repeated and blatant violation of NRS 624.320, and consequently the Magill balancing test cannot be applied to allow Bear Air any equitable relief.
4. Bear Air's Contention that NRS 624.320 Does Not Apply is Without Merit.
Alternatively, Bear Air argues on appeal that NRS 624.320 does not apply because it was not, in the language of the statute, " engaged in the business or acting in the capacity of a contractor" and the job was not a " bid" job. This argument may be dispelled for two reasons.
First, Bear Air raised this argument for the first time in its appeal brief. Bear Air does not assert the existence of any exceptional circumstances that would allow us to consider an issue not raised below, and the issue is therefore waived. See Concrete Equip. Co. v. Virgil Bros. Constr., Inc. (In re Virgil Bros. Constr., Inc.), 193 B.R. 513, 520 (9th Cir. BAP 1996) (" The rule is well established that an issue not raised by a party in the court below will not be considered on appeal, absent exceptional circumstances.").
Second, even if the argument could be considered, Bear Air's interpretation of NRS 624.320 lacks merit. Pursuant to NRS 624.020(2), a contractor is defined as
any person . . . who in any capacity . . . undertakes to, offers to undertake to, purports to have the capacity to undertake to, or submits a bid to, or does himself or herself by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement, or to do any part thereof . . .
This is a broad definition. Here, the invoices attached to the proof of claim demonstrate that Bear Air installed, tested, and repaired HVAC systems. Bear Air fabricated condensing units, laid and assembled refrigeration piping and coils, and installed an irrigation system and electrical fixtures, among other things. Based on this evidence, Bear Air fits within the definition of a contractor.
Last, Bear Air does not cite any authority, and we could not locate any authority, in which a court considered whether a job was a " bid job" as grounds to not apply NRS 624.320. The language of the statute does not state that bidding on a contract is a necessary prerequisite to its applicability. Instead, it only requires that the contractor be licensed " when the job was bid." Considering the broad definition of a contractor, and the public policy of requiring any person performing work to obtain a license, the fact that a job was procured without soliciting bids hardly seems an appropriate grounds to not apply NRS 624.320.
For these reasons, NRS 624.320 applied to Bear Air.
B. The Court's Determination that the Claim was Overstated by $16,000.
As an alternative to disallowing Bear Air's claim in its entirety by operation of NRS 624.320, the bankruptcy court held that the claim was overstated by $16,000. Because we affirm the bankruptcy court's disallowance of the claim in entirety, it is not necessary for us to consider whether the court erred in determining that the claim was overstated.
VI. Conclusion
For the reasons stated above, Bear Air is not entitled to payment on its claim. Accordingly, we AFFIRM the bankruptcy court's disallowance of Bear Air's claim in its entirety.