By: Eric Michael Papp, Esq.


What is the applicable Statute of Limitations for a Business & Professions Code § 7031 "Unlicensed Contractor Disgorgement" claim?

Your dream remodeling job is done. But, it's actually a nightmare. Now, you discover that your "contractor" doesn't even have a license! A quick look at your calendar reveals a lot of time has passed since your "contractor" left the job. How much time do you have to seek return of all the money you paid to your unlicensed contractor? A good question.

It is settled that the Contractor's Licensing Law is intended to protect California's citizens against dishonesty and incompetence in the operation of the contracting business and in the performance of contract services, such as is the very case here. (Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 149-150 [308 P.2d 713]; Vitek, Inc. v. Alvarado Ice Palace, Inc. (1973) 34 Cal.App.3d 586, 594 [110 Cal.Rptr. 86].) But, how long do you have to bring a claim to seek reimbursement of all monies paid to an unlicensed contractor pursuant to Business & Professions Code ("B&P") § 7031? Is it one year, three years or four years?

In this regard, California Code of Civil Procedure ("CCP") provides:

An action for relief not hereinbefore provided for must be
commenced within four years after the cause of action shall have
accrued. (CCP § 343.)

A four year statute of limitations pursuant to CCP § 343 makes sense because B&P § 7031 itself contains no statute of limitations. Additionally, B&P Code section 7000 et seq. makes it mandatory that home improvement contractors provide the following notice verbatim in at least 12-point typeface: "If you file a complaint against a licensed contractor within the legal deadline (usually four years), CSLB has authority to investigate the complaint. If you use an unlicensed contractor, CSLB may not be able to help you resolve your complaint. Your only remedy may be in civil court, and you may be liable for damages arising out of any injuries to the unlicensed contractor or the unlicensed contractor's employees." (B&P Code § 7159(e)(5).)

However, CCP § 340(a) provides that an action must be brought within one (1) year for:

An action upon a statute for a penalty or forfeiture, if the
action is given to an individual, or to an individual and the state,
except if the statute imposing it prescribes a different limitation.
(CCP § 340(a)

On its face, Business & Professions Code § 7031 could be read as a "penalty" of sorts, a "penalty" for not having a contractor's license. But, as we see below, there is a possibility that a three (3) year "limitations' might apply as well. Well, which is it?

Clearly, as stated above, the stated purpose of the contractor licensing law is the protection of the public. (B&P § 7000.6.) It makes absolutely no sense, then, that in a statute stating an intent to safe guard the public, that lawmakers would require contractors to tell consumers about a "legal deadline" of four years, but not alert the consumers about an extremely short one-year deadline (against unlicensed contractors) if one, in fact, existed. It also makes no sense that lawmakers would give an unlicensed contractor a more favorable "limitations" period than a licensed contractor. Such a conclusion is simply unjust and would reward unscrupulous contractors like the contractor here. This cannot be the law. And, if it is, it needs to be changed.

In looking at the possibility of a one-year statute of limitations to such claims, there are no cases actually applying a one year to a claim under B&P § 7031(b), at least none that we could find. The conclusion is, B&P § 7031(b) does not impose a "penalty" subject to a one-year statute of limitations. In this regard, the California Supreme Court in Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal. 4th 1094 instructively set out what is and what is not a "penalty." In Murphy, an employee made allegations regarding meal and rest period violations by the employer. (Id. at 1100-1101.) There, the trial court applied a three-year statute of limitations in awarding statutory payments of "one additional hour of pay at the employee's regular rate of compensation for each work day that the meal or rest period is not provided," pursuant to Labor Code section 226.7(b). (Id. at 1101.) However, the Appeals Court reversed the trial court, holding that the one-year statute of limitations of CCP § 340(a) applied. The Court of Appeal reasoned that its conclusion was supported first by the claim's purpose of shaping employer behavior, and second by the fact that the "additional hour of pay" is imposed without regard to the actual loss suffered, "since an hour of pay is owed whether the employee has missed an unpaid 30-minute meal period, two paid 10-minute rest periods, or some combination thereof." (Murphy, supra, 40 Cal.4th at 1112.)

The Supreme Court reversed the judgment of the Court of Appeal, holding that the claim "is not transformed into a penalty merely because a one-to-one ratio does not exist between the economic injury caused by [the violations] on the one hand and the remedy selected by the Legislature on the other hand ... Where damages are obscure and difficult to prove, the Legislature may select a set amount of compensation without converting that remedy into a penalty." (Murphy, supra, 40 Ca1.4th at 1112.) "The remedy contained in section 226.7, which provides the sole compensation for the employee's injuries, is measured by the employee's rate of pay rather than an arbitrary amount, and is not labeled a penalty." (Murphy, supra, 40 Cal.4th at 1107.) Taking it together, Business & Professions Code section 7031(b) is akin to Labor Code section 226.7. In its entirety, section 7031(b) states,

Except as provided in subdivision (e), a person who utilizes the
services of an unlicensed contractor may bring an action in any
court of competent jurisdiction in this state to recover all
compensation paid to the unlicensed contractor for performance of
any act or contract.

As with Labor Code section 226.7, B&P § 7031(b) does not provide for a fixed, arbitrary payment, but rather is measured by the "compensation paid to the unlicensed contractor;" section 7031 (b) does not label the recovery of compensation a penalty; and the recovery of compensation is the consumer's sole remedy under section 7031(b). Thus, it goes, under the reasoning of Murphy, section 7031(b) does not provide for a "penalty."

It is true, however, that there are court decisions which apply section 7031(b) and have used the word "penalty." But the California Supreme Court disregarded that reasoning: "However, neither the behavior-shaping aspect of overtime pay nor the fact that courts have referred to the remedy as a 'penalty' transforms overtime wages into a 'penalty' for the purpose of statute of limitations." (Murphy, supra, 40 Cal. 4th at 1109 (citing Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163 at 167.) Thus, the fact that courts have referred to section 7031(b) as imposing a "penalty"is not dispositive for purposes of the statute of limitations. This superficial analysis should be rejected.

Taking one step further, the case of Barry v. OC Residential Properties (2011) 194 Cal. App.4th 861 discusses B&P § 7031 in terms of "rescission":

Business and Professions Code section 7031, subdivision (a)
declares: No person engaged in the business or acting in the
capacity of a contractor, may bring or maintain any action ... for the
collection of compensation for the performance of any act or
contract where a license is required by this chapter without alleging
that he or she was a duly licensed contractor at all times during the
performance of that act or contract, regardless of the merits of the
cause of action brought by the person ....

The Barry Court goes on to state,

While generally a contract made in violation of a regulatory statute
is void and courts will not lend their aid to the enforcement of an
illegal agreement or one against public policy (citation), the rule is
not an inflexible one to be applied in its fullest rigor under any and
all circumstances. A wide range of exceptions has been recognized.
(Citation.) It is not the law that every transaction connected with
an illegal transaction is itself illegal. Each case must turn on its
own facts. The purpose of the statute which has been violated must
be considered. In that connection, the court should consider
whether a holding that the collateral transaction is illegal will tend
to assist or defeat the main purpose of the statute .... This principle
is stated ... as follows: 'If refusal to enforce or to rescind an illegal
would produce a harmful effect on parties for whose
protection the law making the bargain illegal exists, enforcement or
rescission, whichever is appropriate, is allowed.'" (Citations.) Id
at 869-870.
(Emphasis added.)

Such seems to be the very case at hand. Here, the unscrupulous unlicensed contractor is seeking to keep money from the harmed party (the plaintiff). Such a result "would produce a harmful effect on parties for whose protection the law making the bargain illegal exists."

A claim under B&P § 7031(b) has also been described as a "refund claim." (Oceguera v. Cohen (2009) 172 Cal.App.4th 783 at 786.) Thus, again, the claim is one of rescission, subject to the four-year statute of limitations of Code of Civil Procedure Section 337.3 or CCP § 343. A look at the legislative history of B&P § 7031(b) shows that it was intended to complement 7031(a) and clarify existing law regarding the application of the doctrine of offset in the context of rescission of illegal construction contracts under section 7031(a):

Bus. & Prof. Code§ 7031(b) was explained in part by an April
2001 Assembly Committee analysis of the bill, which stated:

According to the sponsor, this measure is intended to address the
recent case of Cooper v. Westbrook Torrey Hills, LP (2000) 81
Cal.App.4th 12941 [97 Cal. Rptr. 2d 742], in which the court, in an
unpublished portion of the opinion, referred to Section 7031 (a)
prohibiting an unlicensed contractor from recovering fees, but not
requiring any refund of compensation already paid to the

contractor. Cooper relied on Culbertson v.Cizek (1964) 225
Cal.App.2d 451, 473 [37 Cal. Rptr. 548], in which the court
permitted the unlicensed contractor to offset 'as a defense against
sums due the plaintiffs any amounts that would otherwise be due
Cizek under his contract.' This measure is intended to clearly state
that those using the services of unlicensed contractors are entitled
to bring an action for recovery of compensation paid.

White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 519 (citing Assem. Com. on Judiciary, Analysis of Assem. Bill No. 678 (2001-2002 Reg. Sess.), which created section 7031(b).)

Thus, the effect of section 7031(b) is not to create a statutory "penalty," but to clarify that section 7031, prohibiting unlicensed contractors from availing themselves of the courts, also encompasses a prohibition on unlicensed contractors asserting an offset defense against restitution claims. Given the above, it appears that a four-year statute of limitations should apply. (B&P Code § 7159(e)(5), CCP § 337.3 and CCP § 343.)

Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th 882

The recent case of Judicial Council of California v. Jacobs Facilities, Inc. (2015) 239 Cal.App.4th 882 has raised some interesting issues with its use of the term "forfeiture" with respect to a disgorgement claim under B&P § 7031(b). Initially, it should be pointed out that the Judicial Council of California case did not hold, as a matter of law, that the disgorgement remedy of B&P § 7031 was a "forfeiture." In dicta, the Judicial Council Court mentions that, for convenience, they (the Court) would "refer" to the remedy as a "forfeiture." (Judicial Council, 239 Cal.App.4th at 895.) Irrespective of whether the Judicial Council Court "referred" to the remedy of B&P § 7031 as a "forfeiture" or not, no Court in the State of California has ever applied a one year statute of limitations to B&P § 7031 and doing so under our facts would appear to be directly contrary to the legislative intent of the statute; the policy of the State of California; and would unjustly reward unlicensed contractors by creating a new anomalous "loop hole" which would permit, as here, compensation to unlicensed contractors (i.e. if the disgorgement remedy of B&P § 7031(b) is time barred, then the unlicensed contractor, in fact, was compensated.) This cannot be the law; such a result would not be fair to California consumers; and Judicial Council itself contains facts and authority which flies in the face of such a reading and conclusion.

Importantly, factually speaking, Judicial Council (at p. 899) noted that there was $18 Million Dollars at stake with respect to B&P § 7031. $18 Million Dollars. In this regard, Judicial Council, the plaintiff (i.e. the California Courts), was first put on "notice" of a problem with the defendant's contractor's license in an April, 2008 email. (Id. at p. 892.) And, despite the April, 2008 disclosure, and arguably despite the availability of "public records" of contractor's licenses in 2008, the plaintiff did not file suit under B&P § 7031 until December, 2009, more than a year later. (Id. at pp. 892-893.) Let us not forget that the plaintiff, the Judicial Council of California (the administrative branch of the Courts) was in litigation with a defendant, who is itself a "publically traded company." (Id. at 889-890.) If a one year statute of limitations was remotely possible over a fight for $18M, these legal titans with their numerous, top tier law firms, would surely have raised it. They did not.

Nonetheless, as Judicial Council stated, "[t]he unequivocal language of the amendment communicates unambiguously the Legislature's insistence on strict enforcement of section 7031." (Id. at 896.) In this regard, "Courts have taken their cue from the Legislature in enforcing the letter of the law, consoled by the Legislature's 'determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.'" (Id. at 896.) A one year statute of limitations does not and cannot advance this policy in anyway whatsoever. In this regard, the legislature has not placed any statute of limitations specifically on B&P §7031, though it easily could have done so. Interestingly, for our purposes, Judicial Council noted that this harsh enforcement provision is applicable even if the other party was aware, in bad faith, of the contractor's unlicensed status. (Id. at 896, citing MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412 at 424 & Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App 4th 656 at 667-668.) Therefore, despite even knowing, in bad faith, that the contractor is unlicensed, the consumer can still invoke B&P § 7031. Yet, nowhere in any of these cases or elsewhere is a one year statute of limitations mentioned. These two facts cannot be easily reconciled. This is because it is simply unnecessary to do so.

Judicial Counsel at p. 889 cites to "B&P § 7000 et seq." which itself refers to a four year statute of limitations. (See B&P Code § 7159(e)(5) ["If you file a complaint against a licensed contractor within the legal deadline (usually four years), CSLB has authority to investigate the complaint."]) By extension, a four year statute of limitations should apply to B&P § 7031 as well. There is simply no contrary authority with respect to B&P § 7031 in Judicial Counsel or otherwise. However, if the disgorgement of B&P § 7031 is viewed as a "forfeiture," then, in theory, an unlicensed contractor, after harming the public, inexplicably enjoys a one year statute of limitations and will be compensated for its unlicensed work should the statute be "blown."

In effect, this appears to be a policy conflict. Namely, a choice of a particular statute of limitation (however incorrect) verses the policy and legislative mandate of B&P § 7031. Clearly, however, a one year statue of limitations does not forward the stated policy of the legislature. As Judicial Council noted, "Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state." (Emphasis original) (Judicial Council, at p. 900, citing Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988 at p. 995.) With respect to this policy conflict, Judicial Council noted that, "Our function is to ascertain and give effect to legislative intent...[T]he choice among competing policy considerations in enacting laws is a legislative function." (Judicial Council at p. 901, citing, Alatriste, supra, 183 Cal.App.4th at p. 672.)

Here, B&P § 7031 contains no statute of limitations within itself, but B&P Code § 7159(e)(5) does refer to a "general" four year statute of limitations. Absent that, we need look no further than, "An action for relief not hereinbefore provided for must be commenced within four years after the cause of action shall have accrued." (CCP § 343.) Here, a four year statute of limitations is both fair and gives effect to the legislative intent for B&P § 7031. The Judicial Council case does not change this fact. Judicial Council does remind us, however, that the Court's role is "to ascertain and give effect to legislative intent" which here, a one year statute of limitations would not do. In fact, it would do quite the opposite by creating an anomalous "loop hole" which would permit unlicensed contractors to retain compensation contrary to the intent of the legislature. This cannot be the law. However, the question remains open and unsettled.


Eric Papp is a licensed attorney in both California and Nevada and a licensed Real Estate Broker. Mr. Papp is the principal of the Law Offices of Eric Michael Papp located at 495 East Rincon, Suite 125, Corona, CA 92879. Mr. Papp can be reached at (951) 279-6700

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