Business and Professions Code Section 7031, Demurrers, and Just How Much You Can Dance



Fights between owners and contractors under Business and Professions Code section 7031 can get nasty and detailed. An owner’s remedy under Section 7031, as courts have stated, can be “harsh[ ],” “draconian” and even “unjust” and damages can be significant. Panterra GP, Inc. v. Superior Court, 2022 WL 289216 (2022), a case decided this past month, is no different. It even involved a disagreement between the very justices deciding the case.


The Panterra GP Case


Panterra GP, Inc. was a licensed general contractor. Rosedale Bakersfield Retail VI, LLC and Movie Grill Concepts XX, LLC intended to hire Panterra GP to perform renovation work at the Studio Movie Grill in Bakersfield, California, but drafted a construction contract mistakenly listing Panterra Development Ltd., LLP as the contractor on the project. Panterra GP was the general partner of Panterra Development.


Despite the mistake in the construction contract, Rosedale and Movie Grill “knew, intended and agreed” that Panterra GP would be the contractor on the project not Panterra Development. And that is exactly what happened. Panterra GP performed work on the project, including submitting permit applications under its name and receiving building permits issued under its name. A certificate of occupancy for the project also reflected that Panterra GP was the contractor.


After Panterra GP completed its work, Rosedale refused to pay over $2.6 million owed under the construction contract. Panterra Development in turn recorded a mechanics lien identifying itself as the contractor on the project. However, it was Panterra GP who later filed suit, alleging claims for recovery under a mechanics lien release bond, breach of contract, account stated and open book account.


What followed was a series of three amended complaints, all of which were demurrer to by Rosedale and Movie Grill which argued that Panterra GP could not sue to enforce a contract to which it was never a party. After the third demurrer, the Court finally sustained Rosedale and Movie Grill’s demurrer without leave to amend.


Panterra GP appealed.


The Appeal


On appeal, the 5th District Court Appeal explained that when a trial court sustains a demurrer, the Courts of Appeal review the complaint de novo to determine whether it contains sufficient facts to state cause of action and are not bound by construction placed by the trial court on the pleadings.


The Limitation of Demurrers


As an initial matter, the Court of Appeal explained that Business and Professions Code section 7031(a) prohibits a contractor from bringing or maintaining an action to collect compensation “for the performance of any act or contract where a license is required.” And, here, held the Court, the party bringing the action was Panterra GP which is a licensed contractor.


While the Court acknowledged that Rosedale and Movie Grill might prevail at trial and show that Panterra Development rather than Panterra GP performed work on the project, they could not do so on demurrer, since the complaint was brought by Panterra GP, a licensed contractor, not Panterra Development.


Further, in response to Movie Grill’s contention that the exhibits attached to Panterra GP’s compliant – the construction contract in which Panterra Development was a party and Panterra Development’s mechanics lien – negated Panterra GP’s allegation that it was the contractor on the project, the Court of Appeal explained:

The complaint’s allegation that Panterra GP was the actual agreed upon contractor is not wholly and necessarily negated by the fact that some documents – created after the formation of the contract and its subsequent performance – identify another entity as the contractor. Instead, the exhibits cited by Movie Grill merely create a dispute as to the ultimate fact of whether Panterra GP indeed was the agreed upon contractor. On the one hand, the lien and related documents may support inferences contrary to the allegations of the complaint. On the other hand, the building permit, certificate of occupancy and, most importantly, the allegations of the complaint, support Panterra GP’s case. It is for a finder of fact to consider all the evidence to determine whether the complaint’s allegations are true. That determination cannot be made at the pleadings stage, it must be made following summary judgment proceedings or a trial.

Further, explained the Court of Appeal, certain exhibits attached to Panterra GP’s complaint supported its allegation that it was it was contractor on the project. For example, stated the Court of Appeal, “while the lien states Panterra Development was the contractor, the building permit states Panterra GP was the contractor. Thus, even if we accepted the legal premise underlying Movie Grill’s argument – which we do not – it would merely lead to a stalemate of conflicting ‘admissions.'”


Reformation and its Applicability


Finally, explained the Court of Appeal, Panterra GP’s complaint alleged a prima facie case for reformation. Under Civil Code section 3399, explained the Court, “[w]hen through . . . mutual mistake of the parties, or a mistake of one party, which the other at the time knew or suspected, a written contract does not truly express the intention of the parties, it may be revised on the application of a party aggrieved, so as to express that intention . . . .”


In response to Rosedale and Movie Grill’s contention that equitable remedies, such as reformation, are unavailable under Business and Professions Code section 7031(a), the Court of Appeal, while agreeing that Section 7031(a) precludes equitable remedies, explained that it only does so with respect to equitable remedies “sought by an unlicensed entity” and that “Panterra GP is not an unlicensed entity.”


The Court of Appeal also disagreed with Movie Grill’s contention that reformation is not available to wholly substitute one party for another. Under Civil Code section 3399, explained the Court, “‘[t]he right to reformation of an instrument is not restricted to the original parties to the transaction'” and “‘the proposition that a person cannot be made a party to a written instrument by reformation is an overstatement.'”


Finally, in response to Movie Grill’s contention that permitting Panterra GP to reform the contract would open the floodgates of litigation because “every unlicensed contractor would sue for reformation to add the name of a licensed contractor to the construction contract,” the Court of Appeals disagreed, for two reasons. “First,” explained the Court, “bringing a suit for reformation in the name of a licensed contractor will only be an option to those unlicensed contractors who control or can sufficiently influence a licensed contractor. “Second,” explained the Court, “reformation would only be available to those plaintiffs who subsequently prove that the written contract fails to express the true intention of the parties to hire the licensed entity as contractor due to ‘mutual mistake of the parties, or a mistake of one party, which the other at the time knew or suspected.'”


The Dissent


This appeal was interesting in that, unlike most, there was a dissent. The dissent in this appeal came from Justice M. Bruce Smith. According to Justice Smith, “[t]he majority, in this rather straightforward case, has gone to great lengths to reverse the trial judge, when the latter correctly resolved this case in accordance with settled pleading rules, well-established tenants of the Contractors State License Law, and binding California Supreme Court precedent.”


The majority, in reaching its decision, explained Justice Smith, did not consider Panterra GP’s first and second amended and only relied on its third amended complaint. “When a complaint contains allegations that are fatal to a cause of action,” stated Justice Smith, “a plaintiff cannot avoid those defects by simply filing an amended complaint that omits the problematic facts or pleads facts inconsistent with those alleged earlier.” And, here, “[t]he majority opinion focuses on Panterra GP, Inc.’s third amended compliant, without appropriately considering it in relation to the prior complaints or exhibits attached to the prior complaints, all of which are subject to judicial notice and are properly considered in evaluating the validity of the operative complaint.”


According to Justice Smith:


The sham pleading doctrine applies here and requires us to disregard the inconsistent allegations added to the third amended complaint in support of the contract reformation claim added therein. Panterra GP, Inc. cannot avoid the defects in the allegations contained in the second amended complaint by filing a third amended complaint encompassing factual allegations that are inconsistent with the allegations in the prior complaint.

Panterra GP’s third amended complaint, explained Justice Smith, conflicted with Panterra GP’s previous complaints and exhibits which revealed that:

  1. Panterra Development, not Panterra GP, recorded a mechanics lien and partial release of mechanics lien.

  2. Movie Grill’s mechanics lien release bond identified Panterra Development not Panterra GP as the obligee.

  3. Yet, Panterra GP sought recovery based on a mechanics lien recorded by Panterra Development.

Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, explained Justice Smith, “establishes that, at the demurrer stage, where the factual allegations in a complaint conflict with the allegations contained in a mechanics lien attached to the complaint, the allegations in the mechanics lien, which are made under oath, must be accepted as true.” And, here, the mechanics lien was recorded by Panterra Development not Panterra GP as the contractor on the project.


Further, stated Justice Smith:


Notably, it was only after Movie Grill and Rosedale pointed out that Panterra Development Ltd., L.L.P. was unlicensed, thereby precluding recovery through the mechanics lien release bond (as the trial court sustained defendants’ demurrer on this cause of action without leave to amend), that Panterra GP, Inc. advanced the allegation that the contract incorrectly listed Panterra Development Ltd., L.L.P. as the contracting party and general contractor for the project and sought reformation of the contract on the theory of unilateral or mutual mistake. Previously, Panterra GP, Inc. sought to rely on the very facts asserted in the mechanics lien and mechanics lien release bond that later became highly inconvenient. Panterra GP, Inc. cannot have it both ways.

Panterra GP did not provide the trial court with any explanation as to the “stark inconsistency between its prior allegations and exhibits on the one hand, and its new allegations to the effect the contract did not reflect the correct parties, on the other,” explained Justice Smith.


Finally, Justice Smith argued that the majority’s decision ignored “binding” California Supreme Court precedent, namely, Mabb v. Merriam (1900) 129 Cal. 663, in which the Supreme Court held that “[w]hile a court of equity will reform contracts under many varying circumstances, still it has no power to make a new contract. It’s power is simply to reform a contract already made” and that “a court of equity can neither add additional parties nor substitute other parties for those already appearing upon the face of the writing.”


Conclusion


Panterra GP is an interesting case in which I’m a bit torn, in part, because I’m about to begin a trial involving Business and Professions Code section 7031. As an attorney, I hear what the majority, as well as what the due process side of me is saying: A demurrer is a motion of limited application, constrained to the four corners of the complaint, in which the facts alleged are taken as true, even if improbable. At the same time, as an attorney with clients who have to pay my bills, there’s another side of me that says, “come on, let’s just get it over and be done with!,” which, of course, Justice Smith would probably never say, although it may perhaps find a bit of an echo in his dissent.

6 views0 comments