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Court of Appeal, Second District, Division 5, California.

D.R. GALLO BUILDERS, INC., Plaintiff and Appellant, v. TRAVELODGE INTERNATIONAL, INC., et al., Defendants and Respondents.

No. B035868.

Decided: March 29, 1990

Ben Adelman, Pasadena, for plaintiff and appellant. Quinn, Kully and Morrow and Laurence J. Hutt, Los Angeles, for defendants and respondents.

Upon reconsideration following grant of a petition for rehearing, the operative facts in this matter still remain that this is an appeal from the judgment of dismissal entered after sustaining a demurrer without leave to amend to plaintiff's fourth amended complaint in an “unlicensed contractor case.”   In this opinion “the complaint” will refer to the fourth amended complaint.

The complaint alleges three causes of action;  judgment is reversed as to the first and second cause of action and affirmed as to the third cause of action.

The three causes of action in the complaint are for:  First, fraud;  second, “negligent misrepresentation” and;  third, for breach of the implied covenant of good faith and fair dealing.

Plaintiff and appellant, D.R. Gallo Builders, Inc. (Contractor), is a New York corporation and is licensed in New York as a general building contractor.

Defendants and respondents are Travelodge International, Inc., a California corporation, and defendant Knott Hotels Corporation, a Delaware corporation.   Santa Monica Travelodge is alleged to be a California corporation and the Monterey California Travelodge is alleged to be operated by the Travelodge Corporation.   Because there is an identity of interests, the defendants will be referred to collectively as “Owner” or as “Travelodge.”

The complaint alleges that Contractor was induced by one Ben Mammina, an alleged authorized agent of Travelodge, to come from the east coast to the west coast and undertake three jobs of work in California for Travelodge.

The preceding complaints and respondent's demurrers thereto had eliminated Contractor's claims for breach of the express written construction contracts entered into and executed in New York between Owner and Contractor.   Mammina, Contractor's agent, is alleged to have executed the agreements in New York on Travelodge's behalf.   The reasons for the excision and exclusion of such claims were that, although validly licensed in New York as a contractor, appellant did not have a valid California general contractor's license when the three jobs of work contractor was hired to perform in California were done.

In opposition to the demurrer to the fourth amended complaint, Contractor cited Grant v. Weatherholt (1954) 123 Cal.App.2d 34, 266 P.2d 185 and Pickens v. American Mortgage Exchange (1969) 269 Cal.App.2d 299, 74 Cal.Rptr. 788.   Both such cases dealt with unlicensed contractors suing the parties who had hired them to do certain construction work for claims of fraud notwithstanding the lack by each plaintiff of a general contractor's license.   A third cited case, R.D. Reeder Lathing Co. v. Cypress, Ins. Co. (1970) 3 Cal.App.3d 995, 84 Cal.Rptr. 98, is analogously on point in that it was held that a cause of action for fraud would lie despite the fact the subject of the contract in question was unenforceable because it was an unlawful insurance premium rebating agreement which was violative of express statutory prohibition against such rebating practices as were contained in the California Insurance Code.

It therefore requires closer scrutiny of Contractor's fraud cause of action to determine whether a viable cause of action has been stated.

In the complaint the first cause of action for fraud alleges in paragraph 16 in essence that Mammina, Travelodge's “director of technical services” knew of, and was unconcerned about, Gallo's lack of a California license;  that Travelodge knew of California's contractor's licensing requirements;  that Travelodge “would waive” any problems of Gallo's lack of a California license;  that Gallo could be hired “on a time and materials” basis to avoid the necessity of a license, if such was warranted;  that Gallo was to furnish all labor and materials and that Gallo would be paid for same and, implicitly, Gallo's lack of a license would not be asserted to avoid payment.

Thereafter, in paragraphs 18 through 22 of the complaint, appellant alleged Travelodge's knowledge of the falsity of such representation, Gallo's reliance upon the performance by Gallo to its detriment, and consequential damages sustained by Gallo.

Grant v. Weatherholt, supra, 123 Cal.App.2d at pages 42–43, 266 P.2d 185 states:  “The fact that plaintiff was unlicensed [as a general contractor] did not operate to bar him from the prosecution of his cause of action for fraud by which he was induced to enter the contract with the corporation.  [¶]  The sections of the Business and Professions Code which require the licensing of contractors and declare the contracts of unlicensed persons to be invalid, and bar actions based thereon, relate only to obligations which arise out of contracts under which express promises are made․  [¶]  Plaintiff's cause of action for fraud is not ‘for the collection of compensation for the performance of any act or contract for which a license is required.’   Plaintiff's right is the outgrowth of the deceit practiced upon him by the defendants.   The validity or invalidity of his contract does not affect that right.   Proof of the contract under the cause of action for fraud was merely proof of the circumstances under which plaintiff's services were rendered and his money expended.  [¶]  Plaintiff's action for fraud is not barred․”

The Grant case holds further that the Business and Professions Code non-licensure sections should come into play only if necessary to protect the public from incompetent and untrustworthy unlicensed contractors (123 Cal.App.2d at p. 43, 266 P.2d 185).

Citing the Grant case, Pickens v. American Mortgage Exchange, supra, 269 Cal.App.2d at page 303, 74 Cal.Rptr. 788, states:  “While the plaintiffs could not recover on the contract, nor for the breach of it, nor for the value of the work or for monies expended therein (Bus. & Prof.Code, § 7031), the fact that they were unlicensed did not bar them from the prosecution of their cause of action for fraud by which they were induced to enter the contract.”

The R.D. Reeder Lathing Co. case, supra, 3 Cal.App.3d at page 999, 84 Cal.Rptr. 98 observes:  “Plaintiff is not seeking to enforce an illegal contract, but rather to recover damages suffered when defendants fraudulently induced it to enter into the illegal transaction․  [¶]  Since plaintiff's complaint sounds in tort rather than contract, its sufficiency must be tested by the general rules of tort law.   So tested, it adequately states a cause of action for fraud ․ when he shows that by reason of a defendant's misrepresentations he has sustained some pecuniary damage or injury by reason of having been put in a position worse than he would have occupied had there been no fraud.  (Fowler v. Fowler [1964] 227 Cal.App.2d 741 [39 Cal.Rptr. 101].)”

 Gallo's allegations of misrepresentation, falsity, reliance, and damages sustained sufficiently states a cause of action for fraud notwithstanding the lack by Gallo of a California general contractor's license.

Gallo's second cause of action for “negligent misrepresentation” appears to be mislabelled.   It would appear to be, in fact, that the second cause of action pleads a species of deceit under either Civil Code section 1710, subdivision (1) or subdivision (2), e.g., that when Mammina prevailed on Gallo to enter into the construction contracts in New York, Mammina either suggested that the allegations made in paragraph 16 of the complaint, as above paraphrased, were not believed to be true by Mammina when he stated them or that, if Mammina asserted the representations to be true, he had no reasonable ground for believing them to be true.

 Although deceit, as statutorily quantified by Civil Code section 1710, is a species of fraud it can be pleaded alternatively to the first cause of action.   As pleaded, the second cause of action, like the first, alleges a tort for which tort damages are sought.   No general contractor's license is a prerequisite to the statement of such a cause of action and lack of such a license is not a bar to tort recovery for deceit.

 The third cause of action seeks damages on the contracts entered into in New York for “breach of covenant of good faith and fair dealing.”   While it is true plaintiff alleged in paragraph 14 of the complaint that a confidential relationship between Mammina and appellant existed, perusal of the third cause of action concretely discloses damages on the formal contracts that were entered into in the State of New York are sought.   If Business and Professions Code section 7031 bars the suit on the express contracts for Gallo's lack of a California license by precluding resort to any court in California enforcement, then it must follow that if the enforcement of the express contract is barred so must the enforcement be barred of any implied covenant which could arise only out of the legal viability in the express contracts.

Travelodge waxes eloquent about the splendor and sanctity of the scheme in the Business and Professions Code barring resort to California courts by unlicensed contractors, but this is really so much sanctimony on Travelodge's part in the context alleged in the facts of this case.

No incompetent and unlicensed California contractor sought Travelodge out and forced its services on Travelodge to do the work that was in fact done.   Instead, it was Travelodge who went all the way to New York to induce Gallo to come all the way to California to work on Travelodge's jobs and then Travelodge decided to hide behind the fact Gallo did not have a California license in order to refuse payment for the work which was done.

The judgment is reversed as to the first and second causes of action, but affirmed as to the third cause of action for breach of implied covenant of good faith and fair dealing.   Costs are awarded to appellant on this appeal and upon the petition for rehearing.



SUTTON, Associate Justice.* FN* Under appointment by the Chairperson of the Judicial Council.

ASHBY, Acting P.J., and BOREN, J., concur.