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California Appeals Court Considers RMO / RME 'Actively Engaged' License Requirement
Construction Practices Newsletter
A California Appellate Court construed the requirement that an RMO/RME must be actively engaged in a construction company to maintain its license, and also held that a contractor that violates license laws cannot set-off claims in response to a claim for disgorgement.
The California Court of Appeal, Fifth District, in discussing a contractor's license law requirement that the qualifying responsible managing officer (RMO)/responsible managing employee (RME) must be actively engaged, held that an owner's remedy of disgorgement is free from a contractor's right of set-off.
In White v. Cridlebaugh, 175 Cal.App.4th 1535, 97 Cal.Rptr.3d 504 (June 27, 2009) [5th Dist.], a homeowner, Robert D. White, sought to build a retirement home and met through church an individual named Terry E. Harper Cridlebaugh who was looking for work. White entered into a contract with Cridlebaugh's company, JC Master Builders, Inc., to construct White's retirement home. The contract listed White, the homeowner, as the general contractor, but White testified that he understood Cridlebaugh would follow the previously prepared plans and specifications and construct the home.
During the job, White had various concerns with the work, including the billings that JC Master Builders submitted to White. Cridlebaugh ran all materials through a company called Building Technology, a company that Cridlebaugh and his wife owned. The billings had no detail to indicate quantities or specific material items and Cridlebaugh did not provide evidence of payment to suppliers, despite requests. Eventually, White's concerns over billings (and payment to laborers and suppliers) came to a head, and White terminated JC Master Builders and completed the home through others. JC Master Builders filed a $13,000 mechanics' lien in response.
During litigation, White alleged various causes of action, including breach of contract, fraud and "construction and trade practice, state license law and action against surety." The evidence showed that while JC Master Builders held both A and B contracting licenses, the licenses were procured through Robert Diani as RMO and RME. In fact, Diani – another fellow church affiliate – had left the country two years before the White contract on mission and had turned over all control of JC Master Builders to the Cridlebaughs. Diani was not aware of the White contract or the lien JC Master Builders filed. Diani testified he received no compensation from JC Master Builders since he left on mission, and that no board of directors' meetings had occurred in the past few years. Diani had been back to the United States only twice in the several years since he left.
Despite an underlying jury trial that resulted in a verdict for JC Master Builders, the court found on appeal that:
When a corporation, such as JC Master Builders, Inc., applies for a contractor's license, it must qualify through either a [RMO] or [RME], who is, him or herself, eligible for the same license qualification. (§ 7068, subd. (b)(3).) The "qualifier" RMO or RME must be a bona fide officer or employee of the corporation and actively engaged in work encompassed by the license. (§ 7068, subd. (c).)
Under section 7068.2, if the qualifier is disassociated from the licensed entity, the entity has 90 days to replace the qualifier. If the qualifier is not replaced, the contractor's license issued to the entity is automatically suspended. (Ibid.; Wright v. Issak (2007) 149 Cal.App.4th 1116, 1123, 58 Cal.Rptr.3d 1.)
In this case, JC Master Builders, Inc., was not qualified for a contractor's license because (1) Diani was not actively engaged in its construction business after August 2004, (2) Cridlebaugh did not have a contractor's license, and (3) no replacement was ever qualified in Diani's place. Therefore, JC Master Builders, Inc.'s contractor's license was suspended by operation of law. (§ 7068.2.)
In 2001, the licensing law was amended under section 7031(b) to give the person contracting with an unlicensed contractor the right to recover all amounts paid. The court construed that section's reference to the recovery of "all compensation" to mean the unlicensed contractor cannot reduce the recovery authorized by asserting claims of offset, indemnity, or contribution arising out of the unlicensed work. Accordingly, White was granted judgment against J.C. Master Builders for disgorgement of all amounts paid.
The court never addressed to what degree an RMO/RME must be "actively engaged in work encompassed by the license." Section 7069 requires that:
The person qualifying on behalf of an individual or firm under paragraph (1), (2), or (3) of subdivision (b) of Section 7068 shall be responsible for exercising that direct supervision and control of his or her employer's or principal's construction operations as is necessary to secure full compliance with the provisions of this chapter and the rules and regulations of the board relating to the construction operations.
The court implies, though it did not hold, that the analysis might be applied to the project at issue in the litigation, i.e., direct oversight. For large contractors with numerous projects, proving the RMO/RME was actively engaged in the project in litigation may be problematic. Furthermore, the Court did not discuss precisely what constitutes "active engagement" to meet the minimum threshold for a RME, but found that Diani's complete absence for the entire period of the work on the White's home and his tender of all management to the Cridlebaugh's was patently insufficient. Hopefully, the fall out from this case will not be needless discovery on the issue of whether the RMO/RME management duties and supervision for most construction lawsuits.
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