New California Appellate Decision Requires Entities to Maintain License Subsequent to Transfer of Contractual Obligations to New Entity


The Court of Appeal of the State of California, First Appellate District, Division One, held on August 20, 2015 that a corporation must maintain a license under the Contractors’ State License Law (“CSLL”), even after transferring contractual obligations.  In the case, Judicial Council of California v. Jacobs Facilities, Inc. (Case Nos.: A140890, A141393), the Judicial Council of California, Administrative Office of the Courts (“JCC”) entered into a contract with Jacobs Facilities, Inc. (“Facilities”) to provide maintenance and repair services to courthouses and other judicial buildings.  Facilities was a wholly owned subsidiary of Jacobs Engineering Group, Inc. (“Engineering”), and was licensed at the time it commenced work for JCC.  Months later, Engineering reorganized and transferred the employees working on the JCC contract to another wholly owned subsidiary, Jacobs Project Management Co. (“Management”).  This subsidiary obtained a contractor’s license but the Facilities license meanwhile expired.  Facilities remained the signatory on the JCC contract until nearly a year later, in November 2009, when the parties entered into an assignment of the contract to Management.

JCC later sued Engineering and its two subsidiaries (collectively “Jacobs”) under Business & Professions Code section 7031(b), which requires an unlicensed contractor to disgorge its compensation.  JCC sought return of all monies paid to Facilities under the contract, amounting to approximately $18 million.

In response, Jacobs contended that: (1) Facilities had complied with the CSLL, (2) Facilities had “internally” assigned the contract to the new subsidiary prior to expiration of its license, (3) JCC ratified the internal assignment when it consented to the assignment to the new subsidiary, and (4) Facilities had “substantially complied” with the CSLL under the provisions of Business & Professions Code section 7031(e).

The Superior Court held a trial on Jacobs’ first three defenses, and the jury returned a verdict in favor of Jacobs.  JCC moved for judgment notwithstanding the verdict (JNOV), which the trial court denied.  The court of appeal reversed, holding that the trial court erred in denying JCC’s motion for JNOV.

The court of appeal held that the evidence was essentially undisputed that Facilities contracted to perform services which required a contractor’s license, allowed its license to expire, and continued to perform the services while unlicensed.  On its face, this constituted a violation of the CSLL, mandated reversal of the jury’s verdict, and, absent a showing of substantial compliance, entitled JCC to the remedies specified in section 7031. Jacobs’s arguments to the contrary were unavailing.

Relying on Franks Construction, Inc. v. Sahota (2014) 226 Cal.App.4th 1123, Jacobs argued that section 7031 was not intended to penalize a violation resulting from a mere change in business form.  In Franks, a licensed contractor entered into a home construction contract as a sole proprietorship.  During performance of the contract, he incorporated the business, creating the plaintiff corporation, and the contractor’s license that had been issued to him in his personal capacity was reissued to his corporation.  Section 7031, the Franks court concluded, “is not intended to deter licensed contractors from changing a business entity’s status and obtaining a reissuance of the license to the new entity during a contract period.” 

The court determined Jacobs’s reliance on Franks was misplaced, finding that the broad interpretation urged by Jacobs could not be justified.   While section 7031 was not intended to deter licensed contractors from changing the form of a business entity, nothing in the statute suggests that a violation of the CSLL occurring during or as a result of such a change is excused.

Further, the contracting party, Facilities, did not change its business form, nor did it transfer its license to another entity.  Rather, an entirely new entity was created, and a new contractor’s license was issued to Management.  Following the licensure of Management, Facilities retained both its corporate existence and its license, although the license was suspended and eventually expired.  Jacobs maintained two separate business entities and two licenses for a significant period of time.

The court rejected as similarly unavailing Jacobs’s contention that Facilities internally assigned the JCC contract to Management after the latter acquired its license in August 2008, thereby avoiding a violation upon the expiration of Facilities’ license.  The internal assignment was irrelevant to the issue of CSLL compliance because Facilities continued to act in the capacity of a contractor until November 2009, when it was replaced by assignment.  Facilities was therefore required by the CSLL to maintain a contractor’s license until that time.

Finally, the court found no evidence to support Jacobs’s contention that JCC ratified the internal assignment when it later executed an assignment of the contract to Management.

The court nonetheless declined to order entry of judgment for JCC, finding that Jacobs remained entitled to an opportunity to prove substantial compliance under the statute.  The court remanded for hearing under section 7031(e), which, at the time of publication of this article, is in process.

This decision stresses the importance of an entity maintaining a license throughout the entire term of a contract.  Even where another licensed entity takes over the work, the entity named in the contract must keep valid its license until the contract has been assigned or the term ends.

Blog by: Katherine L. Pruitt, Esq.