Disgorgement is when an unlicensed contractor is forced to pay all compensation the unlicensed contractor received from the property owner, back to the property owner. However, the time limit to file a claim for disgorgement was never clearly established until the Court’s decision in Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. (“Eisenberg v. Suffolk”) which established a ONE YEAR deadline.
Courts Agree! Disgorgement Has A 1 Year Statute of Limitations!
In 2007, Suffolk Construction Company, Inc. (“Suffolk”) contracted (“Contract”) with Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) to build an assisted living facility (“Project”), which was completed in June 2010. However, there were countless issues that Suffolk attempted to correct until it was named in Eisenberg’s construction defect lawsuit in March 2014. During the case, Eisenberg learned that Suffolk was unlicensed during the Project and revised its complaint in May 2015 to include disgorgement.
The Disgorgement Issue
Contractors license law requires licensed contractors must have a qualifying individual (a responsible managing officer (RMO) or employee (RME)) with construction experience to actively work in the state and supervise the contractor’s work. Suffolk’s RME worked in state when the Contract was signed in 2007, transferred out of state in 2008, but still remained as Suffolk’s RME on its California license. As a result, Eisenberg correctly claimed that Suffolk was not duly licensed as a contractor throughout the Project and must disgorge ALL payments Eisenberg made to Suffolk.
Statute of Limitations
In gauging whether or not Eisenberg had a valid claim, the Court determined that because the property owner did not need to suffer any injury to claim disgorgement as disgorgement was originally designed to be a penalty for the unlicensed contractor, disgorgement was therefore subject to the ONE YEAR statute of limitations.
As to when the statute of limitations for disgorgement began to run, the Court found that (1) Suffolk’s licensure information was public information and was easily accessible through a website and (2) that the restrictive purpose of a statute for limitations would be moot as anyone could file a disgorgement claim at any time as the plaintiff was not required to suffer any injury.
As a result, when Suffolk was named in March 2014 as a defendant in Eisenberg’s lawsuit, Eisenberg should have alleged its disgorgement cause of action against Suffolk by March 2015. However, since Eisenberg filed its disgorgement claim in May 2015 and not in March 2015, Eisenberg’s disgorgement claim was not valid.
This case is an important victory for contractors as it finally specified the limitations for disgorgement claims, which are one of the most severe penalties for licensed contractors. When disgorgement is discovered, the claim must be prosecuted within a year. While this is good news for contractors, it also serves as a stark reminder that the disgorgement penalty is designed to severely punish unlicensed contractors. Contractors should periodically review their designated qualifier’s information for their contractor’s license to ensure that the Licensing Board has the most updated information or seek counsel for advice.