Court Rejects Use Of Alter Ego Doctrine To “Borrow” Contractor License

by Allen Matkins

California’s Contractors’ State License Law, Business & Professions Code Section 7000 et seq., requires contractors to be licensed unless they are exempt from licensure. Those who perform contracting work without a license run a very real risk of working for free. Section 7031(b) provides, with one exception, that a person who uses an unlicensed contractor may bring an action to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

This was exactly the situation presented in Twenty-Nine Palms Enterprises Corp. v. Bardos, 2012 Cal. App. LEXIS 1173 (Nov. 10, 2012). When sued for disgorgement, the defendant mounted an unusual defense – he claimed that the court should have applied the alter ego doctrine. Typically, alter ego claims are made by the plaintiff against the defendant in an attempt to pierce the corporate veil and reach the assets of the corporation. In this case, the defendant was an individual who performed the contracting work as a sole proprietorship. It so happened that he was the responsible managing officer of a corporation that was licensed but did not perform the work in question. This led the defendant to argue that the court should apply the alter ego doctrine to allow him to “borrow” the corporation’s license.

The Fourth District Court of Appeal rejected this novel defense. In an opinion by Associate Justice Douglas P. Miller, the court found that equitable considerations could not be applied in defiance of Section 7031 and the alter ego doctrine is equitable in nature. Thus, it would be improper to apply the alter ego doctrine to allow the defendant to borrow the corporation’s license. Justice Miller also noted that the alter ego doctrine was “not created to circumvent regulatory requirements; it was founded on equitable principles and designed to prevent an injustice.”

For a different, yet similarly unsuccessful, attempt by a contractor to use the alter ego doctrine, seePlaintiff’s Assertion of “L’état, c’est moi” Falls On Deaf Ears“.

There’s much more to this case than the alter ego doctrine and I’ll try to cover these points in a future post.

Winning The Forum Selection Fight Does Not Preclude The Application Of California Law

Yesterday, I wrote about Judge Conti’s decision in Hartstein v. Rembrandt IP Solutions, LLC, 2012 U.S. Dist. LEXIS 105984 (July 30, 2012). Briefly, the case involved a former employee’s attempt to invalidate a non-compete agreement in California’s Superior Court. The plaintiff is a resident of California and the defendant is a Delaware limited liability company with its principal place of business in Pennsylvania. The defendant removed the action to federal court on the basis of diversity jurisdiction. The defendant then was able to convince Judge Conti to dismiss the case based a Pennsylvania choice of law provision in the employment agreement. While this was a victory for the defendant, it does not necessarily mean that a Pennsylvania state court or a federal district court in Pennsylvania won’t apply California law. See, e.g., General Video Corp. v. Soule, 2000 U.S. Dist. LEXIS 3826 (E.D. Penn. March 27, 2000) (“Although the Agreements sued on provide that the laws of the Commonwealth of Pennsylvania shall govern, the Court will disregard the parties’ choice of law because it would be contrary to a fundamental public policy of the State of California, which has a materially greater interest than Pennsylvania in the determination of the issue of whether the defendants may be employed by a California-based company.”) The plaintiff sued in California because, according to Judge Conti, the plaintiff believed that he was “sure to succeed in California” and “likely to lose” in Pennsylvania. That was the plaintiff’s argument, not Judge Conti’s holding. Thus, it remains to be seen whether the plaintiff’s expectations of doom will be realized should he take his battle to the Keystone State.

California Chamber Seeks Invalidation of Greenhouse Gas Auction

Earlier this week, I wrote about California’s auction of greenhouse gas emissions allowances. The day before the initial auction, the California Chamber of Commerce filed this Petition for Writ of Mandate and Complaint for Declaratory Relief. If you are interested in the legal arguments, here is the Chamber’s Memorandum of Points and Authorities. I understand that the auction was held notwithstanding the legal challenge and that results will be available next Monday.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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