Wilson v. Steele
| Decision Date | 26 June 1989 |
| Docket Number | No. B034090,B034090 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Frances WILSON, Special Administrator for the Estate of Millie C. Williams, Plaintiff and Appellant, v. Ronald STEELE, Ken Steele, Defendants and Respondents. Civ. |
Stephanie J. Sartoris and Robert S. Davis, for defendants and respondents.
Plaintiff and appellant Frances Wilson (Wilson), special administrator for the estate of Millie C. Williams (decedent), appeals a judgment in favor of defendants and respondents Ronald Steele and Ken Steele (collectively, the Steeles).
The issue presented is whether a contractor's unlicensed status is a defect which may be asserted against the contractor's assignee who is a holder in due course.
We conclude: A contract by an unlicensed contractor is void and illegal. An unlicensed contractor's assignee, although a holder in due course, does not take a note and deed of trust related to such illegal contract free from the defense of "illegality of the transaction, as renders the obligation of the party a nullity[.]" (Cal.U.Com.Code, § 3305, subd. (2)(b).)
However, the trial court failed to make a factual finding as to whether the second loan transaction was related to construction work. If it were, the contractor's unlicensed status would preclude its assignee from enforcing the second note and second deed of trust. The judgment is therefore reversed and the matter remanded for further proceedings.
The subject real property was the sole asset of the estate of the decedent, who died in December 1985. The property is located on West 42nd Street in Los Angeles In 1979, Williams obtained a general power of attorney from the decedent. On August 12, 1983, Williams contracted with Michael Jackson & Associates, an unlicensed contractor, to refurbish the property. The cost of the job was to be $28,047. Williams obtained a $31,053 construction loan from Broadway Federal Savings and Loan Association (Broadway Federal) and executed a promissory note and first deed of trust on the property in favor of Broadway Federal.
and comprises six dwelling units, four in the front and two in the rear. Naomi Williams (Williams), Wilson's sister, lived at 323 West 42 nd Street with their mother, the decedent. Wilson lived with her children at 325 1/2 West 42nd Street. In 1985, the property was valued at $120,000.
Broadway Federal disbursed $31,053.80 to the escrow, which made $28,047 in progress payments to Michael Jackson & Associates and $3,006 to Williams.
The final payment to Michael Jackson & Associates was disbursed on December 7, 1983. The remodeling work, however, remained largely uncompleted. The same day, Williams obtained another loan and executed a second trust deed with power of sale, naming Home Budget Improvement Service (Home Budget), a Michael Jackson construction company, as trustee, and Shelia B. Jackson, Michael Jackson's (Jackson) daughter, as beneficiary. The second trust deed secured a promissory note in the sum of $11,064 to Home Budget, and purportedly was notarized by Jackson.
The Broadway Federal loan went into default.
The Steeles were in the business of purchasing foreclosed homes. They learned of the pending trustee's sale on the first trust deed through a newspaper ad, investigated the property title through the title company, and thereafter viewed the property. The Steeles then contacted Jackson to discuss acquiring the second trust deed. Jackson told Ronald Steele the consideration for the note was a cash loan to Williams. They agreed on a discounted price of $7,000, and Jackson assigned the note to the Steeles. Ronald Steele later assigned his interest in the note to his brother, Ken.
The default on the first loan was cured and the trustee's sale was cancelled.
On January 22, 1986, Wilson, as special administrator for the estate, filed suit against Williams, Shelia B. Jackson, Jackson, Michael Jackson & Associates, Home Budget, and the Steeles, for, inter alia, cancellation of written instrument.
Wilson had not seen Williams since September 1984, and investigators failed to locate her or Jackson. The matter proceeded to trial only as to the Steeles.
The case was tried on January 11, 1988, to the court sitting without a jury. Wilson, her attorney, Walter Luostari, and the Steeles testified. At the conclusion of trial, the trial court observed:
The trial court granted judgment in favor of the Steeles and dissolved a preliminary injunction restraining the Steeles from foreclosing on the property. The statement of decision provided in substance: Pursuant to the power of attorney from her mother, Williams entered into a remodeling contract with Jackson and others. None was a licensed contractor. The work was never completed and all the money for construction was disbursed to Jackson and others. Broadway Federal, the holder of the first trust deed, commenced foreclosure. The Steeles became interested in purchasing the property from the trustee. In investigating title, the Steeles learned of the Jackson second trust deed and note, and entered into an arms length, good faith transaction to purchase the note and deed of trust at a customary discount. They paid adequate consideration and were not party to any of the Jackson activities.
The note and trust deed were complete and regular on their face. The Steeles are holders in due course of a negotiable instrument and free of any defenses that the maker has against Jackson or the Steeles' transferor. 1
Wilson appealed.
Wilson contends: (1) Home Budget's unlicensed status gives rise to an illegality defense which may be asserted against the Steeles; (2) the Steeles cannot be holders in due course because (a) they had notice the note was overdue, (b) the instruments were irregular on their face, and (c) they paid inadequate consideration.
The Steeles submit the judgment is supported by the evidence, as Wilson failed to show the promissory note and second trust deed were in any way connected to the construction on the property, and they paid value and were without notice.
As indicated, the trial court found Home Budget was an unlicensed contractor.
Business and Professions Code section 7031 provides in relevant part: "No person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action in any court of this state for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he was a duly licensed contractor at all times during the performance of such act or contract, ..." The severe sanction of the statute prevents enforcement of an illegal contract and protects the public from the perils incident to contracting with incompetent or untrustworthy contractors. (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 152, 308 P.2d 713; Asdourian v. Araj (1985) 38 Cal.3d 276, 282, 289, 211 Cal.Rptr. 703, 696 P.2d 95.) 2
"[W]hen the object of the statute or ordinance in requiring a license for the privilege of carrying on a certain business is to prevent improper persons from engaging in that particular business, or is for the purpose of regulating it for the protection of the public ..., the imposition of the penalty amounts to a prohibition against doing the business without a license and a contract made by an unlicensed person in violation of the statute or ordinance is void." (Wood v. Krepps (1914) 168 Cal. 382, 386, 143 [211 Cal.App.3d 1060] P. 691; accord California Chicks, Inc. v. Viebrock (1967) 254 Cal.App.2d 638, 641, 62 Cal.Rptr. 269; see 1 Witkin, Summary of Cal.Law (9th ed. 1987) Contracts, §§ 491, 492, pp. 436-438.)
The question becomes whether a contractor's unlicensed status is a defense which may be asserted against a holder in due course.
California Uniform Commercial Code section 3302 defines a holder in due course as one who "takes the instrument [p] (a) For value; and [p] (b) In good faith; and [p] (c) Without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person."
California Uniform Commercial Code section 3305 provides: "To the extent that a holder is a holder in due course he takes the instrument free from [p] (1) All claims to it on the part of any person; and [p ] (2) All defenses of any party to the instrument with whom the holder has not dealt except ... [p] (b) ... incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity; ..."
Paragraph 6 of the Uniform Commercial Code Comment following section 3305 explains that if, under the local law, the effect of an illegality is to render the obligation entirely null and void, such defense may be asserted against a holder in due course. (23B West's Ann.Com.Code (1964) § 3305, para. 6, p. 215.)
Thus, because a contract by an unlicensed contractor is void and illegal pursuant to Business and Professions Code section 7031, the contractor's transferee would be subject to the illegality defense. 3
Initially, the courts held a note secured by a mortgage was nonnegotiable. (Helmer v. Parsons (1912) 18 Cal.App. 450, 452, 123 P. 356; Kelly v....
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