Opinion
C077272 C078730 C079752
02-17-2017
COOPER CRANE & RIGGING, INC./WEST COAST WELDING INC. JOINT VENTURE, Plaintiff, Cross-defendant and Appellant, v. PAVEX-MYERS JOINT VENTURE, Defendant, Cross-complainant and Appellant; SAFECO INSURANCE COMPANY OF AMERICA, INC., Defendant and Appellant;
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 34200900042196CUMCGDS)
This consolidated appeal arises generally from a construction project to widen portions of the State Route 1 and State Route 17 interchange in Santa Cruz County. Defendant and Cross-complainant Pavex-Myers Joint Venture was the contractor on the project (the Contractor). It entered into a contract with the California Department of Transportation (Caltrans) and then subcontracted with Plaintiff and Cross-defendant Cooper Crane & Rigging, Inc./West Coast Welding, Inc. Joint Venture (the Subcontractor) to perform certain items specified in the general contract, including cast-in-drilled-hole piling. Defendant Safeco Insurance Company of America, Inc. (the Surety) issued a payment bond on behalf of the Contractor as required by statute. (Civ. Code, § 9550.)
As a threshold matter, the Contractor and the Surety contend the trial court erred in determining the Subcontractor substantially complied with licensing requirements, therefore permitting the Subcontractor to proceed to trial with its lawsuit against the Contractor and the Surety. We conclude the trial court abused its discretion by applying the wrong legal analysis to this pivotal question, and remand for a new hearing and further proceedings. This consolidated appeal also challenges the trial court's decisions regarding attorneys' fees and its refusal to award either prejudgment interest on the Subcontractor's damages proven at trial or prompt payment penalties based on the work performed on contested contract items. Because we reverse on the threshold licensure issue, we need not reach the other issues raised by the parties at this time.
I. BACKGROUND
The Subcontractor's operative complaint alleges two causes of action: (1) breach of contract against the Contractor, and (2) enforcement of the public works payment bond against the Contractor and the Surety. The Contractor cross-complained against the Subcontractor for breach of contract.
Prior to trial, the court held an evidentiary hearing on whether the Subcontractor substantially complied with licensure requirements under Business and Professions Code section 7031, subdivision (e).
Undesignated statutory references are to the Business and Professions Code.
The evidence presented at the June 2014 hearing established that in January 2000, a judgment for $18,502.81 including attorneys' fees and costs was entered in an action brought by Developers Insurance Company against Mejia Steel Welding and Jesse Mejia. Mejia subsequently founded and became the responsible managing officer (RMO) for West Coast Welding, Inc. (West Coast Welding), meaning that his knowledge and experience met the prerequisites for its license. (See § 7068.)
Under California's Contractors' State License Law (§ 7000 et seq.), contractors must demonstrate "the degree of knowledge and experience in the classification applied for, and the general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business that the board deems necessary for the safety and protection of the public." (§ 7068, subd. (a).) To accomplish this, corporations "qualify by the appearance of a responsible managing officer or responsible managing employee who is qualified for the same license classification as the classification being applied for." (Id., subd. (b)(3).)
On July 11, 2005, Cooper Crane & Rigging, Inc. (Cooper Crane) and West Coast Welding signed a joint venture agreement. Mejia signed the agreement as the president of West Coast Welding.
The joint venture signed the subcontract on June 12, 2006. Four months later, the Contractors State License Board (State License Board) sent a letter to West Coast Welding notifying it of the suspension of its license effective August 31, 2006, under section 7071.17, based on the failure to satisfy the 2000 judgment.
Section 7071.17, subdivision (b) generally requires licensees to notify the State License Board of any unsatisfied final judgments against them and also file a bond sufficient to guarantee payment in order to maintain licensure. Section 7071.17, subdivision (j) suspends related licenses in certain situations: "The qualifying person and any partner of the licensee or personnel of the licensee named as a judgment debtor in an unsatisfied final judgment shall be automatically prohibited from serving as an officer, director, associate, partner, owner, manager, qualifying individual, or other personnel of record of another licensee. This prohibition shall cause the license of any other existing renewable licensed entity with any of the same personnel of record as the judgment debtor licensee to be suspended until the license of the judgment debtor is reinstated or until those same personnel of record disassociate themselves from the renewable licensed entity."
On October 20, 2006, Developers Insurance Company signed an acknowledgment of satisfaction of judgment. West Coast Welding's license was reinstated effective as of that date. The Subcontractor's license was also suspended and reinstated on the same dates.
The RMO is responsible for securing compliance with the licensing laws and the rules and regulations of the State License Board. (§ 7068.1, subd. (a).) Mejia, West Coast Welding's RMO, did not testify at the evidentiary hearing on the substantial compliance issue. Anthony Will did. Will joined West Coast Welding in the beginning of 2005 while employed with Cooper Crane. Will "did [his] own analysis to see what license that Jesse [Mejia] had carried at the time and that it was active." When the joint venture was formed, Will and another individual from Cooper Crane looked at the State License Board website "to verify their license, because it was going to be used as the primary license on the [joint venture] for the work [they] were going to entertain." Will also testified that Cooper Crane was the managing entity of the joint venture. Will was the Subcontractor's project manager for the project that ultimately led to this appeal. The work on the subcontract was completed in December 2007. Will testified regarding West Coast Welding's receipt of the October 2006 letter regarding its license suspension and explained that his "understanding was it was only a couple of days before [they] were able to research what the issue was, and address it." He said that before receiving the letter, West Coast Welding did not have any notice that its license had been suspended. When asked whether West Coast Welding or Mejia paid the judgment, Will responded that he did not know.
B.K. Cooper, the president and RMO for Cooper Crane, also testified. Cooper said that in order to maintain the joint venture's license, Cooper Crane "did the appropriate tax returns and paid the appropriate fees." He also stated generally that "[Cooper Crane] checked out West Coast Welding's staff" through the State License Board's website.
At the close of the hearing, the court concluded West Coast Welding "acted reasonably and in good faith to maintain licensure. [¶] Although there is substantial merit to Defendants' position about whether someone leaving a judgment untended for seven years is really acting promptly to do much of anything, the key is maintaining a licensure; and the point of the statute is not to unduly punish contractors for hypertechnical violations, but to ensure the contractors' license laws requirements are complied with. This is not a case where there was work out of the scope of the license. [¶] In any event, the Court determines that given the facts that existed when the job started, that [West Coast Welding] was licensed and did not [lose] the license out of any failure itself to satisfy the requirements and [was] not put on notice of this until the letter in question. [¶] The Court further finds that [West Coast Welding] was duly licensed when performance of the agreement commenced and that [West Coast Welding] acted promptly and in good faith to reinstate the license once the disability was made known to it; therefore, the defense . . . assertion that the plaintiff is barred from proceeding with the remainder of the case is overruled."
After trial, the jury determined the Contractor breached the terms of the subcontract and awarded the Subcontractor $123,618.42 in damages based on its claims for unpaid amounts not already awarded in an earlier arbitration with Caltrans. The jury also found the Subcontractor did not breach the terms of the subcontract. Rather than giving the jury any instructions or special verdict forms related to the Surety, the parties stipulated that the Surety's liability under the bond would be the same as what the jury found with respect to the Contractor. Judgment was entered on July 1, 2014, against the Contractor and the Surety accordingly, and then amended on June 10, 2015, to reflect that the court awarded the Subcontractor $87,102.20 in attorneys' fees against the Surety and $18,343.02 in costs against both defendants. The parties then filed the series of notices of appeal that led to this consolidated appeal.
II. DISCUSSION
A. Business and Professions Code Section 7031
Section 7031, subdivision (a) prohibits a contractor from maintaining an action for compensation for the performance of any act or contract requiring a license "without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract" except as provided in subdivision (e) of section 7031. During the trial court proceedings, subdivision (e) provided, in relevant part, that "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." (§ 7031, subd. (e).)
The Legislature recently amended section 7031, subdivision (e) (effective January 1, 2017) by deleting the third requirement that the contractor did not know or should not reasonably have known that he or she was not licensed and amending the fourth to be that the contractor "acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure." (Stats. 2016, ch. 244, § 1.) Neither change has any impact on our analysis.
The burden was on the Subcontractor to demonstrate it satisfied all of the statutory elements in order to be entitled to recovery. (Pacific Caisson & Shoring, Inc. v. Bernard Bros. Inc. (2015) 236 Cal.App.4th 1246, 1252 (Pacific Caisson); Pac. Custom Pools v. Turner Constr. Co. (2000) 79 Cal.App.4th 1254, 1262.) "While application of the substantial compliance exception is a question of fact [citations], '[c]onstruction of a statute is a question of law which appellate courts review de novo' [citation]." (Pacific Caisson, supra, at p. 1253.) B. "Acted Reasonably and in Good Faith to Maintain Proper Licensure"
Counsel for the Subcontractor appeared to misunderstand who bore the burden and argued at the hearing, "there is no evidence that Mr. Mejia ignored this judgment. There is no evidence that's been presented that Mr. Mejia or anyone else failed to notify the CSLB, as required." --------
The Contractor and the Surety challenge the trial court's determination regarding the second requirement for showing substantial compliance—that the contractor "acted reasonably and in good faith to maintain proper licensure." (§ 7031, subd. (e).) They assert the trial court's ruling was based on a mistaken reading of the statute. The Subcontractor disagrees. During the evidentiary hearing, the trial court explained the issue presented a question of statutory interpretation the answer to which was "not clear to the Court from the cases:" "[T]here are a number of ways [of] interpreting the statute. You could look back and focus on the disabling factor, which is the judgment against him, against Mr. Mejia, or the disabling factor is the suspension by the board." In other words, the trial court questioned whether the statutory elements for substantial compliance require the subcontractor to demonstrate a reasonable and good faith effort to maintain the relevant license before suspension, or whether acting promptly after a suspension was adequate. Almost one year after the trial court's decision in this case, the Court of Appeal for the Second District, Division 3, addressed the same question in Pacific Caisson by explaining that "acted reasonably and in good faith to maintain proper licensure" "pertains to conduct prior to suspension. 'Maintain' means to 'continue; . . . hold or preserve . . . keep in existence or continuance; keep in force; keep in good order. . . .' (Black's Law Dict. (6th ed. 1990) p. 953, col. 2.) By contrast, prong four, 'acted promptly and in good faith to reinstate his or her license upon learning it was invalid' (§ 7031, subd. (e), italics added), clearly relates to postsuspension conduct." (Pacific Caisson, supra, 236 Cal.App.4th at pp. 1257-1258.) We agree that the second prong relates to the time prior to license suspension, and the Subcontractor does not argue otherwise on appeal. Accordingly, the question presented is what impact this holding from Pacific Caisson has on our review of the trial court's decision in this action.
"A trial court abuses its discretion when it applies the wrong legal standards applicable to the issue at hand." (Paterno v. State of California (1999) 74 Cal.App.4th 68, 85.) The general rule is that, " 'in the absence of contrary evidence, we are entitled to presume that the trial court . . . properly followed established law.' " (Ross v. Superior Court of Sacramento County (1977) 19 Cal.3d 899, 913.) In this action, the trial court explained that the law was not well established, and the record affirmatively demonstrates the court applied the wrong legal standard.
During the evidentiary hearing, the trial court asked, "it's true, though, is it not, that the license was maintained and in effect until the notice from the license board came out?" And, as set forth above, the trial court later concluded, "[a]lthough there is substantial merit to Defendants' position about whether someone leaving a judgment untended for seven years is really acting promptly to do much of anything, the key is maintaining a licensure . . . ." This strongly suggests the court ultimately adopted an incorrect interpretation of the statute—one that did not focus appropriately on what happened before West Coast Welding's license was suspended but mistakenly emphasized what happened after. Indeed, the court continued, "In any event, the Court determines that given the facts that existed when the job started, that [West Coast Welding] was licensed and did not [lose] the license out of any failure itself to satisfy the requirements and [was] not put on notice of this until the letter in question." (Italics added.) This statement again suggests that the trial court believed substantial compliance could be established without consideration of West Coast Welding's actions prior to receiving notice of the license suspension from the State License Board. On this record, it is inappropriate for us to assume the trial court applied the correct law or imply it made all the necessary factual determinations.
We agree with respondent that Pacific Caisson is instructive and correctly explains the appropriate legal and factual inquiry in a case involving similar facts. Jerry McDaniel and his wife owned two corporations, Pacific Caisson & Shoring, Inc. and Gold Coast Drilling, Inc. (Pacific Caisson, supra, 236 Cal.App.4th at p. 1250.) Jerry was the RMO and sole qualifier for both companies' licenses. (Ibid.) Gold Coast was sued and entered into a stipulated judgment. (Ibid.) Eventually, the State License Board was notified of the unsatisfied stipulated judgment and suspended Gold Coast's license. (Id. at p. 1251.) The State License Board also suspended the associated license for Pacific Caisson & Shoring, Inc. (Ibid.) The trial court found the license suspensions were caused by the McDaniels' failure to notify the State License Board of the unsatisfied stipulated judgment, and that they failed to report it either because they knew the licenses would be suspended or because of ignorance of the law. (Id. at pp. 1251-1252.) The court found the first explanation was not in good faith and the second was not reasonable given the McDaniels' experience. (Id. at p. 1252.) The appellate court concluded the evidence supported the trial court's finding that Gold Coast did not act reasonably and in good faith to maintain its license. (Id. at pp. 1256-1258.) "Had Gold Coast notified the [State License] Board of the stipulated judgment in 2000, as it was required to do, it could have avoided the suspension by posting the appropriate bond. [Citation.] If the McDaniels' failure to notify the [State License] Board was the result of ignorance of the notification requirement, then they acted unreasonably. . . . Lastly, if the McDaniels did not notify the [State License] Board for fear the licenses would be suspended, then they did not act in good faith. The substantial compliance exception to the forfeiture rule is 'extremely narrow' and applies 'only where a contractor was without a license owing to circumstances truly beyond his control.' " (Id. at pp. 1256-1257.)
In this case, the evidence regarding the judgment that led to the suspension of the license was minimal. Developers Insurance Company filed a notice of a lien pursuant to Code of Civil Procedure section 708.410 in November 2001 based on the January 2000 judgment. The court took judicial notice of these documents. Again, Mejia never testified. Anthony Will did not know whether West Coast Welding or Mejia paid the judgment. The Subcontractor contends its "evidence and argument suggested, and [the] trial court apparently determined, that the unusual interpleader judgment was satisfied by an agreement and a filed judgment lien but that documentation of [] such agreement was simply not filed, such that a later collection law firm—one previously not involved in the underlying case—presumptively acted to enforce a judgment that was actually already resolved." But the lack of support in the record for this alleged finding illustrates that this inquiry (and the resultant finding) was never made.
After the trial court identified as one issue whether the second requirement of section 7031, subdivision (e) should focus on the judgment against Mejia or the suspension by the State License Board, the court indicated it also had a question based on the documentary evidence. Before it could articulate the question, the Subcontractor's trial counsel represented to the court that the action was an interpleader and offered to "reopen and, as I mentioned, take the stand" or obtain a certified copy of the complaint in interpleader. The Contractor's counsel countered, "These records show that the license bond company paid out on the license and brought an action for indemnity on having paid on the license bond, got a judgment and attorney's fees. You wouldn't get attorney's fees in an interpleader action. Clearly they had a basis for judgment." On appeal, the Subcontractor relies on this exchange and the following response from the trial court to argue that we should imply the trial court made a factual determination that West Coast Welding had acted reasonably and in good faith before the license was suspended: "Well, I don't think we're ever going to get enough records out of that to fully determine the story, but you would get attorney fees out of an interpleader if you were the one interpleading. [¶] On the other hand, seeing a notice of lien by the party that was interpleading kind of makes me wonder what was going on, because if you're really properly interpleading, you're asserting that you don't have any interest in the funds; otherwise, you would be doing a deposit in court, or something else, not an interpleader. [¶] But cases in that price range, sometimes it's a little bit like the Wild West. Let's move on from that point. I don't think that that's a terribly significant thing, other than looking at the documents again." (Italics added.) This quotation again indicates the trial court did not employ the correct legal analysis. It dismissed as insignificant the most relevant evidence and argument that was presented pertaining to whether the Subcontractor "acted reasonably and in good faith to maintain proper licensure," before suspension and ignored the Subcontractor's attempt to introduce further evidence on this point. For this reason, the record and the state of the evidence persuade us that the trial court used the wrong legal analysis to decide the substantial compliance issue.
The Contractor and the Surety contend the Subcontractor did not satisfy its burden of proof to demonstrate substantial compliance under section 7031, subdivision (e), and that its claims are barred accordingly. Because the trial court did not analyze this question using the proper legal analysis, we cannot review its decision for substantial evidence. (Dyer v. Dept. of Motor Vehicles (2008) 163 Cal.App.4th 161, 174.) "Where the trial court decides the case by employing an incorrect legal analysis, reversal is required regardless of whether substantial evidence supports the judgment." (Ibid.)
III. DISPOSITION
The judgment is reversed and the cause is remanded to the trial court for further proceedings consistent with the views stated herein. The Contractor and the Surety shall recover their costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1) & (3).)
/S/_________
RENNER, J. We concur: /S/_________
RAYE, P. J. /S/_________
BLEASE, J.