INTRODUCTION
Appellant Mouris Ahdout appeals from a judgment entered following the superior court’s denial of his petition to vacate an arbitration award and its grant of a petition to confirm the award filed by respondents Majid Hekmatjah, also known as Michael Braum (Braum), Hekmatjah Family Limited Partnership (Hekmatjah), and Braum Investment & Development, Inc. (BIDI). Ahdout and respondent Hekmatjah were the sole members of 9315 Alcott, LLC (the Company), a limited liability company they formed for the purpose of developing a condominium project, with respondent Braum designated as manager of the Company.
Disputes between the parties were submitted to binding arbitration. Ahdout argued that BIDI, the general contractor owned by Braum that was hired to construct the project, was not licensed and thus was required to disgorge all compensation for its contracting services pursuant to Business and Professions Code section 7031, subdivision (b).
The trial court concluded that the arbitrators’ decision was not reviewable, and thus denied the petition to vacate the award. We find that Ahdout’s claims under section 7031 fall within the “public policy” exception to the general prohibition of judicial review of arbitration awards, because section 7031 constitutes a clear-cut and explicit legislative expression of public policy mandating the disgorgement of compensation received by an unlicensed contractor. Thus, the trial court erred in deferring to the arbitrators’ finding that section 7031 does not apply. We remand the matter to the trial court to conduct a de novo review.
BACKGROUND
The Operating Agreement for the Company
Ahdout and Hekmatjah owned adjoining parcels of real property, at 9311 and 9315 Alcott Avenue, respectively. In 2002, Ahdout and Hekmatjah formed the Company, the purpose of which was to acquire both parcels (the Property) and to build a 14-unit condominium project there (the Project).
For initial capital, Ahdout was to contribute the property at 9311 Alcott and Hekmatjah was to contribute the property at 9315 Alcott. A capital account for each member was credited with $565,000, based on the fair market value of each property.
Profits resulting from the Project were to be allocated in accordance with the profit and loss sharing percentages of each member. Section 3.10 of the Agreement provides for the profit and loss-sharing percentages of each members to be determined as follows: “After the Project has been completed the costs of construction (both hard and soft costs) shall be determined and HEKMATJAH shall be credited with an amount equal to 25% thereof and AHDOUT and HEKMATJAH shall each be credited with an amount equal to 50% of said construction costs. The total amount credited to both AHDOUT and HEKMATJAH shall be determined and the percentage of profits and losses of each of AHDOUT and HEKMATJAH shall be the percentage that the total amount credited to each Member bears to the total amount credited to both Members.” The Agreement provides an example, assuming that the total costs of construction were $3 million:
“HEKMATJAH “$ 565,000
750,000
1.500.000 “$ 2,815,000 “AHDOUT “$ 565,000
1.500.000 “$ 2,065,000
capital contribution 25% of construction costs 50% of construction costs
capital construction 50% of construction costs
“$2,065,000 + $2,815,000 = $4,880,000
“Percentage of profits and losses of HEKMATJAH “$2,815,000 divided by $4,880,000 = 57.7%
“Percentage of profits and losses of AHDOUT “$2,065,000 divided by $4,880,000 = 42.3%”
Braum, who was the general partner of Hekmatjah, was appointed the manager of the Company, and as such was empowered to direct, manage and control the business and affairs of the Company. He was not to receive compensation for his services as manager.
Following the execution of the Agreement, titles to the parcels of property presumably were transferred to the Company pursuant to the Agreement, although the record does not reflect evidence of such transfer. The record also does not contain any evidence that the Company entered into a written construction contract with BIDI. However, the record contains evidence that BIDI indeed performed certain construction tasks for the Project and engaged numerous subcontractors for various aspects of the Project.
Dispute Between Ahdout and Respondents
Construction on the Project “suffered numerous setbacks, including the death of [the] architect, plan revisions mandated by the City of Los Angeles Department of Building and Safety, and construction delays.” Construction was finally completed almost six years after the Company was formed, and the certificate of occupancy was received on January 29, 2008. Although the condominiums had been intended for sale, the Company, under Braum’s management, decided to wait to sell them and instead to rent them until the real estate market rebounded. Ahdout was unhappy with the construction delays and cost overruns as well as alleged mismanagement and misuse of Company funds by Braum. He also had expected high-end, luxury condominiums to be built instead of what he claimed were economy-grade units. Under the Agreement, the parties were bound to arbitrate disputes arising thereunder, and Ahdout and respondents entered into two agreements to submit Ahdout’s claims to binding arbitration before the Rabbinical Council of California.
Arbitration Proceedings
The arbitration was conducted over 27 days within an 11-month period. Ahdout made 24 separate claims before the arbitrators. Only the first and
Little of the evidence before the arbitrators appears in the record on appeal. The record contains a PowerPoint presentation that Ahdout’s counsel attests was submitted to the arbitrators and read from by Braum during his testimony before the panel. It provides, in part: “Braum acted as a General Contractor, and NEVER claimed himself as a Licensed General Contractor (Ahdout was well aware of this). [][] The partnership could have hired a licensed general contractor and charged [the Company] a substantial fee. [f] Braum instead, hired 24 licensed sub-contractors and 11 architects/engineers/inspectors who have the requisite skills and knowledge of the applicable local laws and codes and charged the [Company] a very reasonable fee.”
Braum further testified that “Ahdout agreed that Braum’s fees as a developer would be 25% of the total construction (hard cost and soft cost).” He stated that “Braum understands the California State Law that whoever builds a commercial building must be B licensed.[
Documents submitted by respondents to the arbitrators further assert that BIDI hired numerous contractors for various construction tasks at the Project,
The arbitrators issued a judgment denying Ahdout’s first claim seeking to reverse the extra economic interest awarded to Hekmatjah as compensation for BIDI’s construction costs, and instead made minor adjustments to the profit-sharing percentages. They also denied the sixth claim, finding that “[b]ased upon the evidence and the law,” respondents were not required to disgorge the cost of construction. The arbitrators later issued a supplemental judgment further elaborating as follows: “While the LLC agreement describes that [BIDI] was to be engaged as a general contractor, the Bais Din finds that in fact the Respondent functioned as the manager of the LLC and as a consultant to the LLC and neither Respondent nor [BIDI] engaged in any work typically done by general contractors. The contracting work was done by contractors that entered into direct agreement with the LLC, virtually all of whom were licensed contractors.”
Superior Court Proceedings
Ahdout brought a petition in superior court to vacate the arbitration award on the ground that the arbitrators exceeded their authority by allowing respondents to keep compensation they received for contracting work on the Project despite being unlicensed. Respondents petitioned to confirm the award.
Ahdout submitted evidence that BIDI had a C-15 flooring and floor covering license
For their part, respondents argued that section 7031 was inapplicable because they had not been paid any compensation for the construction services. Although the Agreement specified that profits would be reallocated based on final construction cost figures, respondents asserted that “[n]o amount [of Hekmatjah’s share of the profits] is attributable to any contribution by BIDI for its services to the Company.” In addition, they contended that Ahdout did not have standing under section 7031 because he did not hire or utilize the services of BIDI, and only a “person who utilizes the services of an unlicensed contractor” may sue to recover compensation paid to the contractor. Braum asserted in a declaration that “[a]ll of the costs of construction of the Project were paid by the Company.” Finally, respondents argued the arbitrators correctly found that, despite the provision of the Agreement specifying that BIDI would act as the general contractor, in fact BIDI did not provide any services for which a license was required under the Contractors’ State License Law. (§ 7000 et seq.; CSLL.)
In reply, Ahdout submitted evidence that 25 percent of the construction costs translated to $1,049,140.90, and that this amount was credited to Hekmatjah, thereby increasing his share of the profits under the profit-sharing formula. Ahdout also argued that he made direct payments to cover construction costs for the Project. His attorney declared that Ahdout had paid a total of $929,889.61 either to BIDI or to Braum for unlicensed contractor work on the Project. As an exemplar, he attached a copy of a check from his account in the amount of $150,000 made out to “9315 Alcott Construction.”
The trial court denied the motion to vacate the award and granted the petition to confirm it because it concluded it did not have the power to review the arbitrators’ decision for errors of fact or law. It found that the only possible exception permitting judicial review was dependent on the Agreement being an illegal construction contract, but it concluded the Agreement was an operating agreement for the Company, not a constmction contract. The court concluded that Ahdout “submitted the issue of the illegality of the contract to the arbitrators and they rejected his argument. This court may not second guess that decision.”
DISCUSSION
The Agreement provided that the Company “shall enter into an agreement with [BIDI] (the ‘Contractor’), a general contractor, to construct the Project.” Because BIDI was not licensed for general contractor work, and yet Ahdout asserts it performed such work on the project, Ahdout contends the arbitrators exceeded their powers by failing to order respondents to disgorge the construction costs pursuant to section 7031, subdivision (b), and by failing to adjust the profit-sharing arrangement, which partially depended on the allocation of construction costs.
I. Prohibition on Unlicensed Construction Work Under the CSLL
We begin by summarizing the relevant provisions of the CSLL (§ 7000 et seq.), which provides the basis for Ahdout’s claim.
“To protect the public, the [CSLL] imposes strict and harsh penalties for a contractor’s failure to maintain proper licensure.” (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005)
“ ‘[C]ourts may not resort to equitable considerations in defiance of section 7031.’ [Citation.] That is because the statute ‘ “ ‘represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties ....’” [Citation.]’ [Citation.]” (WSS Industrial Construction, Inc. v. Great West Contractors, Inc. (2008)
The term “contractor” is defined to include “any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct . . . any building . . . , project, development or improvement, or to do any part thereof.” (§ 7026.) A licensee classified as a class C specialty contractor “shall not act in the capacity of a contractor in any classification other than one in which he/she is classified except on work incidental or supplemental to the performance of a contract in a classification in which any contractor is licensed by the Board.” (Cal. Code Regs., tit. 16, § 834, subd. (c); see Cal. Code Regs., tit. 16, § 830, subd. (b) [“Contractors licensed in one classification shall be prohibited from contracting in the field of any other classification unless they are also licensed in that classification or are permitted to do so by Section 831 [(which covers incidental and supplemental work)].”)
“[B]oth the person who provides construction services himself and one who does so ‘through others’ qualifies as a ‘contractor.’ The California courts have also long held that those who enter into construction contracts must be licensed, even when they themselves do not do the actual work under the contract. [Citations.] Indeed, if this were not the rule, the requirement that general contractors be licensed would be completely superfluous.” (Vallejo Development Co. v. Beck Development Co. (1994)
Further, “[s]ection 7031 applies not only to formal agreements, but governs ‘any act or contract for which a license is required.’ . . . [Citation.] The statute applies whether or not a party is operating under an executed contract when performing tasks that require licensure.” (WSS, supra,
Given the protective purpose of the CSLL, the Legislature did not intend the term “compensation” as used in the statute to be narrowly construed; rather, it “should be read in its usual and ordinary sense, which imports payment or reward in any form.” (Johnson v. Mattox (1968)
II. Finality of Arbitrators’Award
The question before us is whether the trial court properly deferred to the arbitrators’ determination that respondents did not perform unlicensed contracting work on the Project, such that section 7031, subdivision (b) is inapplicable.
A. Exception for Award Enforcing Illegal Contract
One of the ways an arbitrator exceeds its powers is by enforcing an illegal contract. (Moncharsh, supra,
Ahdout chiefly relies on two cases which he maintains are controlling, Loving & Evans v. Blick (1949)
The California Supreme Court reversed the judgment. Finding that the undisputed evidence demonstrated that the contractors were unlicensed, the
Lindenstadt applied the principles set forth in Loving in a case challenging an arbitrator’s decision that the defendant owed finder’s fees to the plaintiff for his assistance in the defendant’s acquisition of certain businesses. The parties had entered into an agreement providing for the payment of such finder’s fees in the event of acquisition of particular businesses by the defendant. (Lindenstadt, supra, 55 Cal.App.4th at pp. 885-886.) During the arbitration, the defendant asserted that the plaintiff had functioned as an unlicensed real estate broker and thus was statutorily barred from seeking any compensation under the Real Estate Law (§ 10000 et seq.). (Lindenstadt, supra,
The Court of Appeal reversed and remanded the case to the trial court so that it could independently decide whether the Real Estate Law barred compensation to the plaintiff. (Lindenstadt, supra,
Ahdout essentially contends that Loving and Lindenstadt mandate judicial review of the arbitration award denying his disgorgement claim under section 7031, because they stand for the propositions that arbitrators exceed their powers when they enforce illegal contractual provisions and that arbitrators’ findings regarding the claimed illegality are not binding on the court that hears a petition to vacate the award. However, in Moncharsh, the Supreme Court limited its holding in Loving, and its analysis is equally applicable to confine the reach of Lindenstadt.
Moncharsh concerned a challenge.to an arbitration award that enforced a provision in an attorney’s employment agreement stating that if the attorney left his law firm and clients went with him, the attorney would owe the law firm 80 percent of any fees generated from work for these clients. (Moncharsh, supra,
The attorney petitioned the superior court to vacate the arbitration award, but the superior court found that the arbitrator’s findings were conclusive, and the Court of Appeal agreed. On review, the Supreme Court, after reaffirming “the general rule that, with narrow exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law” (Moncharsh, supra,
The court concluded that Loving “permitted judicial review of an arbitrator’s ruling where a party claimed the entire contract or transaction was illegal.” (Moncharsh, supra,
Similarly, in Lindenstadt, the agreement solely concerned the plaintiff’s entitlement to finder’s fees in the event that the defendant acquired businesses that the plaintiff had helped to find. (Lindenstadt, supra, 55 Cal.App.4th at pp. 885-886.) Indeed, the court in Lindenstadt noted the language in Moncharsh limiting the scope of Loving to cases where the entire contract or transaction was illegal. (Lindenstadt, supra,
As in Moncharsh, and in contrast to Loving and Lindenstadt, the alleged illegality in the instant case does not infect the entire contract. The unlicensed status of BIDI is pertinent only with respect to the provision obligating the Company to enter into a separate agreement with BIDI to act as the general contractor in the construction of the Project, and to the provision providing for an adjustment to the members’ respective profits and losses based on BIDI’s contribution of construction. Although Ahdout is correct that the overall purpose of the Company was to develop the Property and construct condominiums there, the Agreement was not a construction contract between the Company and BIDI as was the contract at issue in Loving. The Agreement has a broad scope, including provisions that set forth the structure of the Company, the capitalization requirements, the rules for distribution and management, members’ rights and interests, the procedure for the eventual dissolution and liquidation of the Company, the requirement to arbitrate disputes, as well as numerous housekeeping provisions. Therefore, the exception enunciated in Loving and Lindenstadt, as considered by Moncharsh, is not applicable.
B. Public Policy Exception
Our holding that Loving does not mandate judicial review of the arbitration award in this case does not end the inquiry. Moncharsh recognized that “there
Numerous courts have since construed Moncharsh to stand for the proposition that an arbitrator exceeds its powers within the meaning of Code of Civil Procedure section 1286.2 by issuing an award that violates a party’s statutory rights or “an explicit legislative expression of public policy.” (Cotchett, supra,
Therefore, “courts may, indeed must, vacate an arbitrator’s award when it violates a party’s statutory rights or otherwise violates a well-defined public policy.” (Department of Personnel Administration v. California Correctional Peace Officers Assn. (2007)
This exception is applicable only when there has been “ ‘a clear expression of illegality or public policy’ ” that undermines the presumption in favor of private arbitration. (Cotchett, supra,
We conclude that section 7031 constitutes an “explicit legislative expression of public policy,” that if not enforced by an arbitrator, constitutes grounds for judicial review. “The purpose of the [CSLL] licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. [Citation.] The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. [Citations.] [f] Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991)
Because section 7031 constitutes an explicit legislative expression of public policy regarding unlicensed contractors, the general prohibition of judicial review of arbitration awards does not apply. The fact that section 7031
Thus, in the instant case, the trial court should have conducted a de novo review of the evidence to determine whether disgorgement of compensation for BIDI’s construction work was required by section 7031.
DISPOSITION
The judgment is reversed. On remand, the trial court shall conduct a de novo review of the evidence to determine whether section 7031, subdivision (b) is applicable. The parties are to bear their own costs on appeal.
Epstein, P. J., and Suzukawa, J., concurred.
Notes
All subsequent undesignated statutory references herein are to the Business and Professions Code.
Ahdout’s remaining claims concerned the division of loan proceeds, liability for construction loan interest and costs, alleged misappropriation and embezzlement of Company funds by Braum, distribution of rental income, alleged breach of promises to build high-end condominiums, as well as alleged overcharging and mismanagement of construction costs by Braum. Ahdout also sought the removal of Braum as manager of the Company. Lastly, he sought attorney fees incurred in the arbitration.
A general building contractor is classified as a class B contractor. (Cal. Code Regs., tit. 16, § 830, subd. (a).)
“A flooring and floor covering contractor prepares- any surface for the installation of flooring and floor coverings, and installs carpet, resilient sheet goods, resilient tile, wood floors and flooring (including the finishing and repairing thereof), and any other materials established as flooring and floor covering material, except ceramic tile.” (Cal. Code Regs., tit. 16, § 832.15.)
At oral argument, counsel for respondents asserted that the trial court undertook a de novo review and made a finding of fact. However, the trial court limited its scope of review to the issue of whether the Agreement was a construction contract. Concluding that it was not a construction contract and therefore the court did not have the power to review the arbitrators’ decision, the trial court’s analysis went no further. Thus, the trial court did not conduct a de novo review of whether the arbitrators correctly determined that section 7031 did not apply.
Section 7031, subdivision (b) provides: “Except as provided in subdivision (e) [(which is not relevant here)], a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”
However, the court discussed other exceptions to the general prohibition on judicial review of arbitration awards, one of which is discussed further below.
Templo Calvario Spanish Assembly of God v. Gardner Construction Corp. (2011)