By Glen C. Hansen

In White v. Cridlebaugh (October 20, 2009) 178 Cal.App.4th 506, the Court of Appeal for the Fifth Appellate District held that homeowners were entitled to recover all compensation paid to a contractor because the responsible managing officer had earlier abandoned the contractor without a replacement, thereby causing the license to be suspended by operation of law. Making matters worse, the unlicensed contractor cannot reduce the homeowners’ recovery by asserting claims of offset arising out of the value of the reasonable materials and services provided by the contractor to the homeowners.

In March 2006, Robert and Carole White entered into a contract to build the White’s retirement home with JC Master Builders, Inc., and Terry E. Harper Cridlebaugh (“Cridlebaugh”). When the project ran over budget, and when concerns arose over the convoluted billing practices and manner of construction, the Whites ordered the construction to stop. JC Master Builders filed a mechanics’ lien and sued the Whites to foreclose that lien. The Whites filed an action against JC Master Builders, Cridlebaugh and his wife, a materials supplier that was owned by Cridlebaugh and his wife, the surety of JC Master Builders, and Robert Paul Diani, who was the responsible managing officer of JC Master Builders listed on the records of the Contractors’ State License Board (“CSLB”). The trial court allowed certain theories of liability pled by the Whites against the JC Master Builders to go to the jury but granted non-suit and directed verdicts on the rest.  The jury then found against the Whites and for JC Master Builders. The Whites appealed. The Court of Appeal reversed, in part.

The Court first held that the Whites were entitled under Business and Professions Code section 7031, subdivision (b), to recover all compensation paid to JC Master Builders and Cridlebaugh for two reasons. First, Cridlebaugh never held a California contractor’s license. Second, JC Master Builders, Inc.’s contractor’s license was suspended by operation of law pursuant to section 7068.2 because Diani was not actively engaged in its construction business after August 2004, and no replacement was ever qualified in Diani’s place.  Even though CSLB records showed that Diani certified that he owned 10 percent or more of the voting stock of the corporation, Diani testified that he gave the stock to Cridlebaugh. Diani also testified that he did not receive any profits from the company, that Diani had turned over any dealings, management, supervision, daily work and income of JC Master Builders to Cridlebaugh, that Diani was primarily out of the country for several years before the lawsuit, and that Diani had not been aware that Cridlebaugh had used JC Master Builders to sue the Whites and place a mechanic’s lien on their property. Cridlebaugh testified that he was the chief financial officer, secretary, and employee of JC Master Builders.  For those reasons, the work that was performed for the Whites was unlicensed.

Accordingly, the Whites were entitled under section 7031(b) to recover the monies that they paid to JC Master Builders and Cridlebaugh.  The Court recognized that section 7031(b) was designed to treat persons who have utilized unlicensed contractors consistently, regardless of whether they have paid the contractor for the unlicensed work. Those who have not paid are protected from being sued for payment and those who have paid may recover all compensation delivered.  Unlicensed contractors are not able to avoid the full measure of those civil penalties by either (1) requiring prepayment before undertaking the next increment of unlicensed work or (2) retaining progress payments relating to completed phases of the construction.

Furthermore, the Court held that the Whites’ recovery of compensation could not be offset for the materials and services that JC Master Builders and Cridlebaugh provided to the Whites. The Court explained: “Section 7031(b)’s reference to the recovery of all compensation paid an unlicensed contractor means the unlicensed contractor cannot reduce the recovery authorized by asserting claims of offset arising out of the unlicensed work.”

Glen C. Hansen is a senior associate at Abbott & Kindermann, LLP.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.