Unlicensed/Uninsured Contractors

By: Michael Sullivan, Attorney

During these trying times, my office has seen a significant up-tick in claims and litigation arising out of questions of licensing and related "triggering" issues. Owners and contractors alike are looking to the Contractor's Licensing Law generally, and Bus. And Prof. Code sec. 7031 in particular to (1) avoid payment to a contractor, or (2) and/or defeat collection attempts by contractors.

For those unfamiliar with dreaded sec. 7031, it provides a substantial "sword and shield" approach to licensing requirements. Its intentionally draconian provisions include, among other things, (1) an unlicensed contractor is denied access to the Courts to collect from an owner, (2) an owner who has paid an unlicensed contractor may sue for discouragement of all sums paid to the contractor, not just profit, but "all sums", and (3) there is very little, and specifically addressed, from the application of the doctrine of "substantial compliance" (the kind of stuff where your license expired yesterday and the new one comes in the mail three days later).

This has always been a heavily litigated area of the law, but just as in my office, 2010 has already provided us with a couple of interesting Court Appeals decisions in Loranger vs. Jones (2010) 184 Cal.App. 4th 847, and Alatriste vs. Ceasar's Exterior Designs (2010) Cal.App. 4th 656.

Everything that could go wrong, went wrong in Loranger. Loranger (contractor) sues Jones (owner) for the last payment after building the owner a new single family home. Owner tries to not only avoid payment by alleging that Loranger's license was invalid, but wants, as well, all of the money back that they had paid to have Loranger build their home.

The allegations centered around Bus. and Prof. Code sec 7125.2 which states that if a contractor does not have Worker's Comp insurance, his license is automatically suspended by operation of law, thus triggering 7031. Loranger did have a Worker's Comp policy, but hired a 13 year old (his son) and his son's friend and did not report them to Worker's Comp. The children did not have work permits.

Not only that, he hired an unlicensed electrical subcontractor and did not report him to Worker's Comp either. To top it off, he hired yet another person to work on the job who performed excavation with his backhoe. Labor Code 2750.5 deems them "employees" yet none were reported on Worker's Comp payroll reports, thus canceling the Worker's Comp Policy, thus triggering 7152.2 which would automatically suspend the Contractor's License which would bring into play 7031 which would require disgorgement of all sums paid to the contractor by the owner.

Result: it didn't work. Owner owes. The minors were paid less than $400.00 and didn't need work permits, the contractor "thought" that the electrician had a license, and the backhoe operator didn't need a license as an equipment operator (owner/operator). In any event, the policy was not actually cancelled and would not necessarily be cancelled due to under reporting of labor. The policy could remain in force and the under reporting corrected at the time of audit.

In another case, Alatriste hires Cesar for landscaping work. The two had know each other for 12 years and were friends. Alatriste knew that Cesar had no license and that Cesar's son was preparing to take the contractor's test for their license. Alatriste says "no problem", let's get started and your son's license will come. Besides we're friends for 12 yeas and I need this work done now. Trust me.

Alatriste paid approximately $57,000.00 and owed another payment of $57,000.00 when Alatrise sues not only to get out of the 57k, but to get back his prior 57k. Cesar loses it all.

Cesar could not plead "substantial compliance" because he had never been licensed before so this could not be an accidental "lapse" in the license. It does not matter that the son's license arrived two weeks into the job as a contractor must be "licensed at all times" during the work.

Cesar tried to get paid for work after the license came, but no good per above. Cesar tried to get offsets for 20k worth of material he had purchased for the job as opposed to labor. No good, "all sums" paid to an unlicensed contractor - "Gross".

The best part is that knowledge of unlicensed sure does not count. It doesn't matter that Alatriste said "no problem" and knew of the situation. It doesn't matter if Alatriste commits fraud. That is based upon the infamous hydrotech case where the California water park builder buys a wave machine from a New York company, and says "please come out and install it for me". New York company says they have no California license and builder says "no problem, you can use mine".

Turns out that the water park builder set the New York guy up and knew of 7031. He figured that if he talked the guy into doing this, he would not only have to pay for the installation but not have to pay for the wave machine either. It worked. A total knowing fraud.

Fraud is also one of the things which are not a defense to 7031.

Companies Brace for Powerful Impact of Lease Accounting Changes

Proposed new accounting standards have been drafted in order to push lease liabilities back onto corporate balance sheets. Such change will represent a major shift for companies that have typically favored the off-balance-sheet treatment of operating leases, and it could have a significant impact on corporate decisions to lease or purchase real estate in the future.

Another key component is that companies would be required to record the lease value or rent commitment over the entire lease term, including renewal options. Although the intent is to stop off-balance-sheet activity, the changes would add significant weight onto corporate balance sheets.

Crux of the matter

What makes commercial real estate industry professionals nervous is that it is not clear to what extent the new accounting guidelines would influence tenants' decision-making process. Based on the universe of leased space, the potential impact is enormous.

Although FASB cites data that values leasing activity at $640 billion in 2008, other industry sources estimate that current volume as high as 1.3 trillion in operating leases for U.S. firms alone. Once the guidelines go into effect, which many in the industry believe will occur in 2013, both new and existing leases would be immediately affected.

One fear is that the new accounting practices could deter companies from signing long-term leases, or encourage firms to own rather than lease facilities. Both of those factors could be a detriment to the sale-leaseback and net-lease finance niche where leases typically extend 15 years and beyond.

Ultimately, the impact of the new accounting changes on the commercial real estate industry is going to depend on the reaction by lenders, rating agencies and the companies themselves.

New Steps for Mechanic's Lien Claim

Effective January 1, 2011, California contractors, suppliers and project owners will be required to take additional steps in order to make and enforce a mechanic's lien clam. As of the New Year, all claimants must comply with the following new and additional requirements for a valid and enforceable mechanic's lien:

1. The mechanic's lien form will change, and require the service of a mandatory "Notice of Mechanic's Lien" by certified mail, return receipt requested.

2. At the time of recording the mechanic's lien, the lien claimant will be required to also serve a copy of the mechanic's lien and formal Notice of Mechanic's Lien on the owner(s) for the property by certified mail, return receipt requested, so that the owner(s) can take action to free their property of the lien. If the lien and Notice of Mechanic's Lien are not served on the owner(s) by certified mail, return receipt requested, the lien may be unenforceable.

3. Within twenty (20) days of filing a lawsuit to foreclose a mechanic's lien, the lien claimant will be required to record a Notice of Pending Action ("Lis Pendens") which until now had been optional.

4. The recording of a mechanic's lien will not prevent a property owner from selling and refinancing its property until a lawsuit has been filed to foreclose on the mechanic's lien and the Notice of Pending Actions is recorded.

These changes to the mechanic's lien requirements are effective January 1, 2011. For more information please contact your legal representative.

Tax Incentives for Green Improvements

Of course check with your own tax specialist, but in a recent article published in theregistry.com the federal code also allows for a deduction of up-to $1.80 a square foot for improvements to make commercial property more energy-efficient. The upgrades must improve interior lighting systems, heating, cooling, ventilation, and hot water systems of the building envelope. The savings can be substantial. A landlord with a 50,000 square foot commercial building who upgrades lighting, building envelope and HVAC systems could achieve a $90,000 tax deduction.

We specialize in retrofit projects for companies such as Lockheed Martin, BAE Systems and others. Let us show you how to save some "green".

Protech

The latest updates for Protech, our web-based construction management software, include apps for the iPhone, Blackberry and Android. Protech makes it easy to manage our construction projects....24/7.

Dialysis: An Experiment in Universal Health Care

Every year, more than 100,000 Americans start dialysis treatment, a form of chronic care given to people with failing kidneys. And for many, the cost is completely free. Since 1972, when Congress granted comprehensive coverage under Medicare to any patient diagnosed with kidney failure, both dialysis and kidney transplants have been covered for all renal patients.

A new joint investigation between The Atlantic and ProPublica found many problems with dialysis in the U.S. The cost of treatment is among the world's highest, while the U.S. mortality rate for dialysis patients is one of the world's worst. One in four patients will die within 12 months of starting treatment.

Investigative reporter Robin Fields, who spent the past year reviewing thousands of documents and interviewing more than 100 patients, doctors, policymakers and experts, found systematic failures in the way dialysis centers are set up in the United States.

A Growing Industry

The Kidney dialysis industry, Fields tells Fresh Air's Terry Gross, is now "hugely larger than anyone could have imagined."

"There are far more patients. There are far more complicated patients. And the expense of this is wildly beyond the expectations of the architects of the program." she says.

The program that initially cost the taxpayers $135 million a year is now a multi-billion dollar industry. The two chains that dominate the dialysis industry, DaVita and Fresenius, make about $2 billion combined in operating costs per year, she explains. And the industry is expected to increase by 3 percent.

"When the program started, the original estimates thought there could be perhaps 35,000 patients," she says. "Then as that became clear that wasn't going to be true, they thought maybe 50,000 patients - then 90,000. What's really happening is the patient community has continued to grow because of conditions like diabetes and obesity becoming so much more common in the larger health care system."

Six percent of all Medicare money, Fields writes, goes toward treating people with kidney failure. But Medicare doesn't set staffing rations for dialysis clinics. Fields explains that clinics are required to have medically licensed physician, but the physician is not always present for all dialysis treatments. Some nurses and licensed technicians juggle far more patients than what standards recommend. And some clinics turn over three to four shifts of patients a day.

Transitioning To Private Care

Today more than 80 percent of the 5,000 dialysis centers operating in the United States are private, a major change from the mainly hospital-based care patients received in the 1970's and 1980's. Fields says transition happened because the payment policies for dialysis treatment helped create financial incentives that allowed corporations to enter the market.

"The payment policies at the beginning were said to be quite generous and to draw providers into create the desperately needed access that the [dialysis] program was based on, " she says. "And the people who float into create that access were mostly for-profit providers. Ultimately, as the payment policies evolved to somewhat suppress the price of each treatment, what you found happening was that sort of favored providers who had economies of scale are could have purchasing power that lowered their cost. And the product of that has been a vast changeover in who provides the care."

She says that some reforms are in the works to improve patient care, including Medicare's plan to offer a set payment for patients' combined treatments and drugs, instead of paying for each separately. The combined payment, says Fields, removes the incentive for clinics to overuse drugs to generate profits.

"I think that mostly people in the dialysis world view these things as incremental improvements and not the things that could vault us forward in a major way," she says. "And they're hoping for further changes that lead to different definitions of quality and performance."

Green Building

Most smaller tenant improvement projects, usually named "market ready" or "clean and show" projects, present an excellent opportunity to "go green". ALL of our carpeting is now recycled (and has been since earlier this year) off-site by an independent contractor. This is at no additional cost to you and is one easy way to KNOW that WE are "saving the planet".

Closing

Many of you know that old age started for me earlier this year......at the ripe old age of 48 years. Thanks to my expert surgeon and prayers of friends and family, I made it! Late November marked the third surgery of the year (and my life) for me. I received a "clean bill of health" in early December of this year, so hopefully I won't be seeing my surgeon for quite some time.

It's true what you read in the papers and what you've probably heard a time or two. The body just begins to wear out.......nothing you can do but preventative maintenance, including lots of exercise! I've also heard that red wine is beneficial........HA HA!

Happy New Year and thank you again for a terrific 2010.