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    In The Penalty Box: Court Of Appeals Confirms One-Year Statute Of Limitations For Disgorgement Claims

    It just got a little bit harder to make a disgorgement claim against California contractors under section 7031(b) of the Business and Professions code. 

    Last week the California Court of Appeal ruled that disgorgement claims against unlicensed contractors must be made within one year of completion of the work regardless of when the owner became aware of the license lapse. Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Aug. 26, 2020).

    Perhaps the harshest penalty in California contractor license law, section 7031(b) holds that someone utilizing the services of an unlicensed contractor may sue to recover all money paid to that contractor (also known as disgorgement). The only exception is if the contractor can show it acted in substantial compliance with license requirements through the promptly and good faith remedy of any licensure issue (See Court of Appeal Affirms a Contractor’s Right To a Hearing on a Claim of Substantial Compliance With Licensing Law).  

    The case before the court involved Suffolk Construction Company, Inc. (“Suffolk”), which contracted with the Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) to build a 108-unit assisted living facility in Reseda for approximately $49 million dollars in 2007. Suffolk completed its work in 2010 but numerous issues with the Project arose almost immediately, requiring extensive repairs by Suffolk. Suffolk worked on making repairs until around 2014. When repair efforts eventually stalled, the project owner, Eisenberg, began investigating claims against Suffolk. 

    Contractor license law requires that each license holder have a qualifying individual (responsible managing officer or employee) with construction experience actively supervising the contractor’s work. Suffolk’s qualifier had moved out of state in 2008 and was no longer exercising direct supervision over Suffolk’s California construction work. Without an RME working in state to supervise the work, Eisenberg argued, Suffolk did not have a valid contractor’s license. In May 2015 (almost five years after project completion), Eisenberg filed a disgorgement claim against Suffolk seeking reimbursement for all amounts paid under Business and Professions Code §7031(b).

    Suffolk responded by filing a motion seeking to dismiss the disgorgement claim for being untimely filed. Sets of laws known as statutes of limitation identify the outside time limits to make certain types of claims, e.g. a party can sue on a written contract for four years after work is complete. In this case, Suffolk argued that disgorgement was a penalty subject to a specific one-year statute of limitations governing penalties and forfeitures. It argued that because it finished the project work back in 2010 Eisenberg’s 2015 claim was woefully late.

    Eisenberg in response argued that the disgorgement claim did not arise until it discovered facts giving rise to the claim around 2014. It also argued that disgorgement claims were subject to a three- or four-year time limit for claims and as it was not a penalty but a form of restitution.

    To determine what time limitation applied to the claim, the court examined the Supreme Court’s definition of a penalty as recovery “without reference to the actual damage sustained” and the policy basis behind the law. It found that a disgorgement claim under 7031(b) is in fact a penalty because the project owner need not suffer any injury in order to seek the remedy. As a penalty, the claim is subject to a one-year statute of limitation under California’s Code of Civil Procedure section 340(a).

    As for Eisenberg’s secondary argument about when the claim arose, the court found that Eisenberg knew Suffolk’s RME had moved out of state back in 2008 because the RME stopped attending project meetings.  Normally, a claim arises when the claim is complete in all its legal elements. Eisenberg asked the court to apply a special “discovery rule” that postpones accrual of the claim until it is discovered (in this case, around 2014). The discovery rule usually only applies when the plaintiff has a difficult time understanding the claim, or the claim is hidden in some way. To the extent Suffolk’s license information is public record and available through a website, the claim was easily discoverable upon even a cursory investigation of the license. The court reasoned that if no injury needs to occur for the claim to arise Eisenberg’s arguments could lead to absurd results, with almost no time limits on claims.

    The court’s analysis is sound. Under the disgorgement statute, a project owner can sue a contractor for being unlicensed even if the contractor did a perfect job. It is an onerous penalty that provides a windfall to the plaintiff. In order to claim it, a plaintiff must make its allegation swiftly, within one year of the unlicensed contractor completing its performance.

    Emily Kromke is an accomplished construction litigator. For more than a decade Ms. Kromke has dedicated her practice to handling the broad needs of contractors, from navigating public bidding rules to filing mechanic’s lien claims.