Judicial Council of Cal. v. Jacobs Facilities, Inc.

• Decision Date: 20 August 2015
• Docket Number: A140890,A141393
• Citation: 191 Cal.Rptr.3d 714,239 Cal.App.4th 882
• Court: California Court of Appeals Court of Appeals
• Parties: JUDICIAL COUNCIL OF CALIFORNIA, Plaintiff and Appellant, v. JACOBS FACILITIES, INC., et al., Defendants and Respondents. Jacobs Project Management, Co., Cross-complainant and Respondent, v. Judicial Council of California, Cross-defendant and Appellant.

239 Cal.App.4th 882

191 Cal.Rptr.3d 714

JUDICIAL COUNCIL OF CALIFORNIA, Plaintiff and Appellant

v.JACOBS FACILITIES, INC., et al., Defendants and Respondents.

Jacobs Project Management, Co., Cross-complainant and Respondent

v.Judicial Council of California, Cross-defendant and Appellant.

A140890

A141393

Court of Appeal, First District, Division 1, California.

Filed August 20, 2015

As Modified on Denial of Rehearing September 15, 2015

Reed Smith, Paul D. Fogel and Dennis Peter Maio, San Francisco; Sedgwick, Marilyn Klinger, Los Angeles, and Jonathan T. Rodriguez, San Francisco, for Plaintiff, Cross-defendant and Appellant.

Gibson, Dunn & Crutcher, Daniel M. Kolkey, San Francisco, Theane Evangelis, Los Angeles, Kimberly A. Nortman and Alexander M. Fenner ; Keesal, Young & Logan, Samuel A. Keesal, Jr., Albert E. Peacock, III, and David A. Tong, Long Beach, for Defendants, Cross-complainant and Respondents.

Opinion

Justice Margulies, Acting P.J.Plaintiff Judicial Council of California, Administrative Office of the Courts (JCC), entered into a contract with defendant Jacobs Facilities, Inc. (Facilities), a wholly owned subsidiary of defendant Jacobs Engineering Group Inc. (Jacobs). Performance of the contract required a license issued pursuant to the Contractors' State License Law (Bus. & Prof.Code,¹ § 7000 et seq. ; CSLL), and Facilities was properly licensed when it commenced work. In the ensuing months, Jacobs, as part of a corporate reorganization, transferred the employees responsible for performing the JCC contract to another wholly owned subsidiary. In the process, Jacobs caused the new subsidiary to obtain a contractor's license, while permitting the Facilities license to expire. Notwithstanding the lapse of its license, Facilities remained the signatory on the JCC contract until nearly a year later, when the parties entered into an assignment of the contract to the new, licensed subsidiary.

JCC sued Jacobs and the two subsidiaries under section 7031, subdivision (b), which requires an unlicensed contractor to disgorge its compensation. JCC sought return of all monies paid to Facilities under the contract, some $18 million. In response, defendants contended (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 section 7031, subdivision (e).

When the matter was called for trial, defendants requested a hearing on the issue of substantial compliance. The trial court deferred that hearing until after a jury trial on defendants' other defenses to JCC's claim. After the jury found for defendants, the substantial compliance hearing was never held.

JCC appeals the denial of its motion for judgment notwithstanding the verdict and the trial court's award of attorney fees to defendants. We reverse the judgment and attorney fees award entered on the jury's verdict, concluding Facilities violated the CSLL when it continued to act as the contracting party after its contractor's license expired. We decline to order entry of judgment for JCC, however, because defendants remain entitled to an opportunity to prove their substantial compliance under the statute. We remand for a hearing pursuant to section 7031, subdivision (e).

I. BACKGROUND

JCC is the administrative agency of California's judicial branch. In 2005, JCC issued a request for proposals (RFP) for the provision of maintenance and repair services to courthouses and other judicial branch buildings throughout Southern California. The successful respondent was Facilities, a wholly owned subsidiary of Jacobs, which is a publicly traded corporation.

JCC and Facilities entered into a three-year facilities maintenance and repair agreement (the contract) in April 2006. The contract anticipated Facilities would organize, supervise, and bill for building repair and maintenance, while retaining subcontractors to perform some or all of the actual repair work. Among the provisions pertinent to this lawsuit, the contract precluded its assignment by Facilities, “in whole or in part,” without JCC's written consent. Facilities also represented and warranted it held a class B contractor's license and agreed it would secure and maintain all licenses required for the performance of work under the contract.

Facilities commenced work under the contract, which covered a total of 121 buildings, in April 2006. In performing the contract, Facilities employees provided only administrative and oversight services, while retaining subcontractors to perform actual maintenance and repair work. When work was completed, Facilities recorded its completion in a dedicated computer system and generated an invoice. The invoices called for payment to Facilities, but the account to which JCC was directed to remit payment was a general Jacobs account from which Jacobs allocated payments among its subsidiaries.

In December 2006, Jacobs undertook a “branding initiative” designed, among other things, to reduce the costs associated with maintaining its many subsidiaries. As part of this initiative, Jacobs decided to dissolve Facilities and transfer its employees to Jacobs. Although the liquidation of Facilities into Jacobs was accomplished pursuant to a document effective December 2006, Facilities was not actually dissolved as a corporate entity until September 2010. The change in corporate structure did not affect performance of work under the contract, which was carried on in the same way by the same persons, but those persons appear to have become employees of Jacobs in January 2007.² Throughout the reorganization, Facilities continued to invoice for payment and execute contractual amendments as necessary, and insurance and bonds required under the contract continued to be maintained in the name of Facilities.

Defendant Jacobs Project Management, Co. (Management), was formed in January 2008 as a wholly owned subsidiary of Jacobs.³ Under a written agreement, Jacobs transferred 713 employees, including some former Facilities employees, to Management, as well as the “fixed assets use[d] by those employees.” It appears all employees providing services to JCC under the contract became employees of Management in February 2008, although the record is not wholly clear on this point.⁴ Throughout 2008, Jacobs allocated compensation received from JCC under the contract to Management, rather than Facilities. As before, actual work under the contract was unaffected, and invoices sent to JCC continued to instruct it to remit payment to “Jacobs Facilities Inc.”

When a corporation applies for a contractor's license, it must designate a “qualifying individual,” a corporate officer or employee who is qualified for the same license classification for which the corporation is applying. (See § 7068, subd. (b)(3).) Once the license issues, the qualifying individual is “responsible for exercising that direct supervision and control of his or her employer's or principal's construction operations to secure compliance with this chapter and the rules and regulations of the board.” (§ 7068.1, subd. (a).) The qualifying individual for the Facilities license was Scott McCallister. He remained in that position until August 12, 2008, at which time he voluntarily withdrew. Three days later, Management was issued a class B contractor's license, on which McCallister was the qualifying individual. Because Facilities failed to designate another qualifying individual, its contractor's license was suspended, and the license expired by operation of law in November 2008. (§ 7068.2, subd. (c).) McCallister's withdrawal as the qualifying individual on the Facilities license was not legally necessary to permit him to serve in that role for Management, since the Business and Professions Code permits such overlap. (§ 7068.1, subds. (a), (b).)

At trial, Jacobs claimed to have performed an “internal assignment” of the contract from Facilities to Management on the date the new license was issued to Management, but the internal assignment was not documented by a written contract or, it appears, any other writing. In explaining the internal assignment, Jacobs's witnesses said the company assigned performance of the “business functions” of Facilities to Management–essentially transferring responsibility for performing “the work” under the contract–as of the date of Management's licensure. If the Jacobs entities told JCC of the internal assignment, it was not until much later.

Although Facilities had begun divesting itself of assets and employees in December 2006, the Jacobs entities' first documented mention of the reorganization to JCC is an e-mail from April 2008, sent in connection with the negotiation of a different contract. At that time, a Jacobs employee told JCC that, as a result of a corporate reorganization, Facilities would not be the contracting entity on the new contract. During a subsequent exchange of e-mails, the employee explained that Jacobs intended to “novate” existing Facilities contracts to Management, once Management acquired the necessary contractor's license. In response, a JCC employee confirmed his understanding that Jacobs intended to transfer the contract to a new operating entity.

Jacobs did nothing to implement the intended novation of the contract until December 2008, when a Jacobs employee sent a copy of a proposed novation agreement to JCC under a “to whom it may concern” cover letter. Although JCC directed the letter to a responsible JCC employee, neither he nor anyone else at JCC responded to it, and Jacobs did nothing to follow up until eight months later, in August 2009, when the same Jacobs employee sent the same proposed novation agreement again, this time addressing the cover letter to a particular JCC employee. In the meantime, in February 2009, JCC...