Gibbs, Giden, Locher, Turner & Senet, LLP has been a construction industry legal services leader for over thirty (30) years. We provide ongoing legal education to the construction industry and are currently offering seminars concerning the new statutory remedy laws in California to clients, prospective clients, and friends of the firm.

Our 18th Annual Review Preview Construction Law Seminar, held on January 26, 2012, will provide attendees with an overall California legislative and case law update including the changes outlined above.

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GGLTS is pleased to have been recognized again in the 2011 edition of Chambers USA Directory of Leading Lawyers as a Top California Construction Law Firm. The Chambers USA report has been published for eight years; in each of those years, the report has consistently recognized Gibbs, Giden, Locher, Turner & Senet LLP as among California's elite construction law firms based on its research and investigation of the prevailing opinion of the market, which includes qualities valued by the client, technical legal ability, professional conduct, client service, commercial awareness, diligence and commitment.

2011 Chambers USA – California Construction Editorial Comments:

THE FIRM This firm operates from offices in California and Nevada, and it continues to advise on the full range of public and private construction law. It has a particular focus on the planning, building and closeout of projects and has recently been handling a number of bid protests and delay, disruption and cost overrun claims. Clients include airports, power plants, hospitals and major sports venues, and they appreciate the team's ability to provide excellent service at a cost-effective rate. Sources say: “It is a team of extremely knowledgeable and reliable practitioners whose client service and level of skill cannot be faulted."

KEY INDIVIDUALS Trial attorney Glenn Turner continues to work on major litigation, and interviewees agree that he is "a litigator extraordinaire, and one of the leading names in the industry." Barbara Gadbois excels at bid protest and government contract work. She is praised as “an expert in her field who takes that crucial user-friendly approach.”



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Under the existing law, a contract for public works is awarded to the contractor who submits the best bid. A contractor may then qualify for a 5 point preferential credit in bidding on a public work if a contractor submits proof to the Nevada Contractors’ Board has paid certain taxes to the State for the past 5 years. 

Recently, on April 27, 2011, Governor Brian Sandoval signed into law Assembly Bill (AB) No. 144, which created significant changes in NRS Chapter 338 and NRS 408.3886 relating to preferential bidding on state and local public works projects. 

AB 144 now requires that in order to receive the preferential 5 percent-bidder credit for public works, a contractor, an applicant, or a design-build team must submit, to the public body sponsoring or financing a public work, a signed affidavit attesting that it will meet the 5 new requirements for the duration of the project, namely:

1) At least 50 percent of the workers on the public work have a Nevada driver’s license or identification card;

2) All of the non-apportioned vehicles primarily used on the public work are registered in Nevada;

3) At least 50 percent of the design professionals who work on the public work have a Nevada driver’s license or identification card;

4) At least 25 percent of the suppliers of the materials used in the public work are located in Nevada; and

5) Certain payroll records related to the public work are maintained and available within this State

Section 2 of the bill requires that any contract for public work awarded to a contractor, an applicant, or a design-build team who receives a preference in bidding, must incorporate the 5 requirements in the contract. The contract must also state that failure to comply with any of the above 5 requirements is a material breach entitling the public body to 10 percent of the cost of contract as liquidated damages. 

Section 2 also requires that each contractor, applicant, or design-build team who receives a preference in bidding and a subcontractor to include a provision that apportions the liability for damages for material breach between the contractor and subcontractor in proportion to each party’s liability.

Section 9 and 10 of the bill provide that a contractor who breaches any of the 5 requirements for a public work the cost of which exceeds $5,000,000.00 loses his or her certification for a preference in bidding for 5 years. 

Section 3, 6-8, and 14 of the bill provide that a contractor who breaches any of the 5 requirements for a public work the cost of which exceeds $25,000,000.00, loses his or her ability to bid on any contracts for public works for 1 year. 

Section 17 of the bill declares that any contracts for such a public work that fails to comply with AB 144 is void. 

Finally, Section 5 of the bill revises the records that a contractor or subcontractor engaged in public work must keep relating to their workers. 

AB 144 seeks to address the high unemployment rate in Nevada and to funnel Nevada public works to Nevada contractors. Whether AB 144 will accomplish its goals or ultimately hinder Nevada contractors by creating more bureaucratic hurdles, remains to be seen. AB144 is effective as of April 27, 2011. 

Priority, n.: (1) The status of being earlier in time or higher in degree or rank; precedence. (2) An established right to such precedence; esp., a creditor’s right to have a claim paid before other creditors of the same debtor receive payment.

Q: How does priority affect my mechanics’ lien on a property when a foreclosure happens?

A: At the peak of the economic boom, the issue of mechanics’ lien priority on a construction project was hardly a concern. However, as property values continue to decline, priority becomes critical when a property is foreclosed and the money from foreclosure sale is not enough to pay off all the project’s creditors – i.e. bank lenders and contractors. The pertinent question then becomes: who gets paid first? Choice A: the bank lender who recorded a deed of trust on the property, or Choice B: the contractors who properly recorded a lien on the property and timely foreclosed on the project? The answer lies on timing.

In Nevada, a mechanics’ lien claimant who properly records a lien and timely forecloses on the property gets to stand in the foreclosure sale distribution line first over any other lien, mortgage or other encumbrance, that was recorded after the commencement of construction. See NRS 108.225. Gibbs, Giden, Locher, Turner & Senet LLP recently won a lien foreclosure case for a general contractor on a priority claim against the bank for a $800,000 mechanic’s lien when it proved that the general contractor had 20 tons of aggregate delivered the day before the bank recorded its deed of trust.

Thus, a valid mechanics’ lien has priority over any mortgage or deed of trust "which may have attached to the property after the commencement of construction of the work on improvement." NRS 108.22112 defines "Commencement of construction" to mean any work per-formed, or materials or equipment delivered that is visible from a reasonable inspection of the site. In other words, if lien claimant performs visible, on-site construction before the lender records its deed of trust, then that lien claimant stands first in line in front of the lender on the foreclosure proceeds.

Finally, to win on the priority issue, it is not necessary that a lien claim¬ant be the one that actually performed the work. If anyone performed work that would have been "visible from a reasonable inspection of the site," then all of the mechanic's lien claimants are entitled to priority ahead of the secured lender.

It is important for any mechanics lien claimant who is seeking recovery of amounts due for work performed, to analyze the existence of any other indebtedness and determine the date wherein work was commenced on the project in relation to the date of recordation of any other encumbrance against the property.

LLCs had always been the one type of business entity that was precluded from holding a contractors license. The legislature finally changed this anomaly in 2010. Starting in 2012, an LLC can hold a license and the qualifier shall either be a Responsible Managing Officer (RMO), a Responsible Managing Manager, Responsible Managing Member or Responsible Managing Employee (RME). Bus. & Prof. Code §7068(a)(4). But the requirements of LLCs to hold a contractors license are more rigorous than what is required of the other traditional business entities such as corporations. For example, as a condition precedent to the issuance of a contractor’s license, the licensee must have on file a surety bond in the sum of $100,000 for damages arising out of employee wage and benefit claims. Bus. & Prof. Code § 7071.6.5. Corporations are not required to hold such a bond.

An LLC must also maintain liability insurance for errors and omissions and requires licensees to give notice of this policy to homeowners. The liability policy shall be issued for not less than $1,000,000 and not more than $5,000,000; for LLC’s of five or fewer members, a limit of not less than $1,000,000 is required. Bus. & Prof. Code §7017.19(b)(1). For an LLC of five or more, an additional $100,000 for each member with a maximum of $5,000,000. Bus. & Prof. Code § 7017.19(b)(2). And once the LLC is dissolved, the company shall be required to maintain a three-year extension of the liability policy. Bus & Prof. Code § 7017.19(e). No such insuring limits are required of corporations.

With all the new requirements, it will be interesting to see how many entities take advantage of the LLC option. Corporations can transfer its license to an LLC. An individual can change to an LLC or corporation and have the license number reassigned. Bus. & Prof. Code §7051.1(c)(5). The license can also be reassigned with the transfer of a corporate license to an LLC following the cancellation of the corporate license provided personnel are the same. Bus. & Prof. Code §7071.1(c)(7). Also, transfer pursuant to an asset sale provided there is a qualifier allowed as when an LLC creates a subsidiary to continue the business.

But with the new requirements coupled with the ease of transfer, it is questionable whether using an LLC a cost effective option for contractors. Further it opens up LLC licensee to more possibilities of license suspension if the requirements are not met risking exposure to §7031 liability. In the end, contractors wanting to convert to an LLC need to evaluate the risks and costs contrasting the benefits when deciding on using an LLC for its business entity.

2. License not required for indemnity action

In UDC-Universal Development, L.P. v. CH2M Hill (2010) 181 Cal. App. 4th 10, the developer on a residential condominium complex hired an engineer to provide services on the project, and the parties entered into a contract that obligated the engineer to indemnify and defend the developer against any suit, action or demand brought against the developer on any claim or demand covered by the contract. The condominium homeowners association eventually sued the developer seeking damages for soil instability, erosion, unsettling and drainage problems. When the developer filed a cross-complaint against the engineer for equitable, comparative, and express contractual indemnity, the engineer filed a motion for summary judgment, asserting that the developer’s failure to be properly licensed barred its claims against the engineer.
Ultimately, the appellate court denied the engineer’s summary judgment motion and held that a cause of action that does not seek compensation for construction work is beyond the scope of Business and Professions Code section 7031. When an unlicensed contractor files an action for indemnity and not for compensation for its services, then it is not barred by section 7031. However, for obvious reasons, contractors should still maintain proper licensure at all times.

3. License may not be required for part of contract for which license is not required

The absence of a contractor’s license also does not necessarily preclude the recovery of payment for those services for which no license is required. See MKB Management, Inc. v. Melikian (2010) 184 Cal.App.4th 796. MKB Management (“MKB”) and Melikian entered into a New Management Agreement (“Agreement”) in which Melikian, the owner, granted MKB the exclusive right to rent, lease, operate, and manage several apartment buildings. MKB filed a complaint against Melikian alleging that it failed to pay amounts due under the contract. Melikian demurred, arguing that MKB failed to allege possession of a real estate broker’s license and, without such a license, MKB could not recover payment for the alleged services. Melikian further argued that a contractor’s license was required for some of the services and, without such license, MKB could not recover payment. The trial court sustained Melikian’s demurrer, finding that MKB’s claims were barred because it was seeking to recover for services that required a license. The appellate court reversed.

Business and Professions Code §10136 states that a plaintiff seeking to recover compensation for which a real estate license is required must allege that she or she possessed the requisite license at the time the cause of action arose. However, Section 10136 does not prevent a plaintiff from recovering for acts for which no real estate license is required. For the same reason, while §7031 requires a plaintiff to possess a contractor’s license in order to recover compensation for certain work, it does not prevent a plaintiff from recovering for acts for which no contractor’s license is required.
In this case, the court of appeal found that some of the services provided under the Agreement required either a real broker’s license or a contractor’s license, while others did not. Therefore, MKB’s claims were not barred as a matter of law and MKB could proceed in attempting to recover for the services which did not require a broker’s or contractor’s license.
It is questionable that this holding will be extended beyond this case. Contractors perform services that do not require a license such as supplying materials. Will courts extend this to unlicensed contractors for recovery of materials supplied to a project? Doubtful, considering that §7031 requires a proper license for recovery of any “act” or “contract” and since materials are normally part of a contract then it would be considered precluded from recovery. One way to hedge against any preclusion of recovery due to §7031 is to separate contracts – one for labor, the other for material. But considering that no one generally plans for a §7031 action, this is not very practical.

4. Disgorgement awards dischargeable in bankruptcy

The only dim light at the end of the tunnel for an unlicensed contractor suffering from a disgorgement award under section 7031(b) is that such awards are dischargeable in bankruptcy. In re Sabban (9th Cir. 2010) 600 F.3d 1219. However, contractors should note that any monetary awards to penalize the unlicensed contractor for obtaining money by fraud, false pretenses or false representations are not dischargeable in bankruptcy.
In Sabban, Homeowner entered into a remodeling contract with Sabban, a general contractor, who falsely represented that he was a licensed contractor. Homeowner paid $123,000 to Sabban for the work performed. Sabban in turn paid $129,000, for the homeowner’s benefit, to licensed subcontractors and other material and labor providers. Homeowner sued Sabban, alleging violations of Business and Professions Code sections 7061 and 7031(b). The trial court found that the homeowner had been induced to sign the contract in reliance upon false and fraudulent representations made by Sabban and awarded the homeowner the $500 penalty provided by section 7061. The trial court also awarded the homeowner $123,000 as disgorgement of compensation paid, pursuant to section 7031(b). Sabban subsequently filed for bankruptcy and the homeowner filed an action to determine whether the award was dischargeable in bankruptcy. The United States Bankruptcy Court ruled that the $500 penalty was not dischargeable, but that the $123,000 debt was dischargeable. The Court of Appeals confirmed.

Section 523(a)(2)(A) of the Bankruptcy Code prohibits the discharge of any enforceable obligation for money to the extent that that money was obtained by fraud, false pretenses or false representations. Liability under section 7031(b) requires only that compensation have been paid to an unlicensed contractor. Fraud and actual harm are irrelevant to an award under section 7031(b). Because of this, the court of appeals held that the award of $123,000 is not a debt for money obtained by fraud within the meaning of the Bankruptcy Code. Therefore, the court found that the award under section 7031(b) was dischargeable bankruptcy.

5. Hiring of unlicensed subcontractor does not automatically suspend license due to worker compensation issue.

Where a contractor presents sufficient evidence showing he obtained worker’s compensation insurance, his contractor’s license will not be automatically suspended for hiring unlicensed subcontractors. See Loranger v. Jones (2010) 184 Cal. App. 4th 847.
In Loranger, homeowners hired a licensed contractor to build a single family residence on their property. When the homeowners failed to pay the contractor’s final billing, the contractor brought suit for breach of contract. The homeowners filed a cross-complaint, alleging that: (1) the contractor hired unlicensed subcontractors; (2) said subcontractors are treated as de facto employees under Labor Code section 2750.3; (3) the contractor failed to provide worker’s compensation coverage to these subcontractor employees; (4) such failure resulted in the suspension of the contractor’s license under Business and Professions Code section 7125.2; and (5) without a license, the contractor could not recover for his construction services and had to disgorge all money paid to him under section 7031.

While the contractor admitted that he employed subcontractors without proper licenses and they would be considered his employees, the contractor also testified that he was a licensed contractor and had obtained a worker’s compensation policy for his construction employees. Since the contractor provided sufficient evidence to show his subcontractors and employees were covered by his worker’s compensation insurance, the contractor’s license was not automatically suspended and he could recover for his construction services.

LOS ANGELES, CALIFORNIA, December 9, 2010 — The City of Victorville recovers virtually all damages incurred from the failed Foxborough Cogeneration Power Plant in which Carter and Burgess acted as the Design Engineer, Owner’s Engineer and Construction Manager. The $52.1 Million Verdict included a first time Breach of Fiduciary Duty verdict against a California engineering firm. Gibbs, Giden, Locher, Turner & Senet LLP (‘GGLTS’) one of California’s top Construction Law Firms led the effort for the City of Victorville (“City”) in its fight against Carter & Burgess (now Jacobs Engineering Group Inc.), a $10 billion dollar worldwide corporation. The City of Victorville was awarded $52.1 million after Carter and Burgess was found liable for professional negligence, negligent misrepresentation, breach of contract, breach of express warranty and breach of fiduciary duty. The amount awarded does not include recoverable attorney fees and costs estimated to be $2 million. The jury found that Carter and Burgess negligently misrepresented key facts to the City that turned out to be untrue and which the City relied upon to make their decision to build Foxborough. A seven week trial concluded on December 8, 2010 in Riverside County Superior Court, Judge Ronald Taylor presiding. Glenn E. Turner III, Esq. and Marion T. Hack, Esq. led the GGLTS litigation team to victory with the help of Associate Victor F. Luke, Esq. and assistance of expert testimony from Exponent, engineering and scientific consultants.

The outcome of this trial is good news for all project owners. The GGLTS litigation team was aggressive in their litigation approach and for the first time in California history were able to establish and prove an engineer acted in the capacity as a fiduciary to an owner.

Marion T. Hack, Esq. is a partner at Gibbs, Giden, Locher, Turner & Senet LLP. She is part of a small percentage of female attorneys that practice and litigate construction law matters. GGLTS congratulates her on this victory.

Founded in 1978, GGLTS is a 40 attorney law firm with the majority of those attorneys having significant experience in construction transactions and litigation matters. (http://www.gglts.com)