Alcoa Concrete & Masonry, Inc. v. Stalker Bros.

LAWRENCE F. RODOWSKY, Judge (Retired, Specially Assigned). We are called upon here to construe the Maryland Home Improvement Law (the Act), Maryland Code (1975, 2004 Repl. Vol.), §§ 8-101 through 8-702 of the Business Regulation Article. 1 At issue is whether a home improvement general contractor is contractually obligated to pay a subcontractor who was not licensed under the Act, either at the time of entering into the subcontract or when the subcontract was properly performed, but who was licensed when this suit was brought. 2 The subcontractor is the appellant, Alcoa Concrete and Masonry, Inc. (Alcoa or the Subcontractor). The general ⁵⁹⁹ contractor is Stalker Brothers, Inc. (Stalker or the General Contractor), one of the appellees.

The other appellees are the principals of Stalker, Robert N. Stalker and Donald C. Stalker (the Brothers). Alcoa initiated this action on September 30, 2008, in the Circuit Court for Montgomery County. Summary judgment was granted to the appellees on a record consisting of Alcoa’s complaint, verified by its president, Mario J. Ezequiel, an affidavit by Donald C. Stalker, and a certified record from the Maryland Home Improvement Commission (the HIC) reflecting that Alcoa was first licensed as a contractor by the HIC on March 26, 2008. The president of Alcoa affirmed that Alcoa and Stalker had done business from 2004 through 2007.

In 2004, all of Alcoa’s invoices were fully and timely paid. When payments in 2005 became less regular, Stalker promised to pay Alcoa when a building owned by the Brothers was sold, but full payment was not made. Alcoa continued to perform subcontract work for Stalker based on an agreement that the General Contractor would pay Alcoa $1,500 per week against invoices for past work and new work. In November 2006, Alcoa performed the cement and masonry work for Stalker on the “Cahill” job, in which Stalker represented there was sufficient profit to pay Alcoa for that subcontract and for the entire past due balance, but an indebtedness remained.

In the summer of 2007, Stalker ceased paying Alcoa entirely. 3 Alcoa claims $53,000 plus interest and attorney’s fees. Appellees, through Donald Stalker’s affidavit, assert that every subcontract performed by Alcoa for Stalker was “residential home improvement work” in Maryland, i.e., done pursuant to a home improvement contract between the owner(s) of a residence and Stalker. Alcoa does not dispute that statement of fact. Appellees moved for summary judgment on a number of grounds, but the circuit court granted the motion solely on the ⁶⁰⁰ ground that the series of subcontracts were illegal and could not be enforced.

The circuit court accepted appellees’ argument that was based upon a venerable line of Maryland cases dealing with licensing and that is illustrated in the home improvement field principally by Harry Berenter, Inc. v. Berman, 258 Md. 290 , 265 A.2d 759 (1970). In essence, these cases initially inquire whether the purpose of a business licensing statute is to raise revenue or to protect the public. If the purpose is the former, courts will enforce a contract for compensation for business activity that requires a license, even if made by an unlicensed person. But, if the purpose of the licensing requirement is to protect the public, then the Maryland cases relied upon by the appellees do not enforce contracts made by unlicensed persons who seek compensation for business activity for which a license is required.

Harry Berenter applied the latter rule in the home improvement field against a contractor who was unlicensed when he made the home improvement contract with the homeowners on which the claim was based. The contractor could not enforce a mechanic’s lien against the improved property, because the license requirement was for the benefit of the public. 258 Md. at 295-96 , 265 A.2d at 762-63 . Nor could the contractor recover on the basis that the homeowner was unjustly enriched. “ ‘The court’s refusal is not for the sake of the defendant, but because it will not aid such a plaintiff,’ ” and because to grant that relief would nullify the statute. Id. at 296 , 265 A.2d at 763 (quoting 2 Restatement, Contracts § 598, cmt. a).

Alcoa argues that the rule that distinguishes between revenue and regulation does not apply to the facts here, where the agreement was between two businesses engaged in contracting. The contracts sought to be enforced were not between Alcoa and the various homeowners with whom Stalker had contracted. The Subcontractor notes that the Act defines a home improvement contract as an “agreement between a contractor and owner for the contractor to perform a home improvement.” § 8-101(h). Further, a “[cjontractor means a person, other than an employee of an owner, who performs or ⁶⁰¹ offers or agrees to perform a home improvement for an owner.” § 8-101 (e).

Alcoa posits that the revenue/regulatory cases in Maryland do not involve the contractor/subcontractor relationship so that the issue is whether the General Assembly intended that a subcontract to perform work covered by the Act be branded illegal and unenforceable when an unlicensed subcontractor for a licensed contractor has fully performed. Alcoa answers that question “No,” arguing that the Act was not intended to be a shield for contractors to elude paying their just debts. Discussion I. The Revenue/Regulation Rule A. Maryland Cases Maryland appellate decisions have applied the revenue/regulation rule in a number of contexts. All of the cases under the Act have dealt with the contractor-owner relationship.

The members of the public who were protected by the regulatory licensing requirement were the owners of the home. This Court recently again has held, applying Harry Berenter, that a contract between the owner of the improved premises and an unlicensed contractor would not be enforced. See Baltimore Street Builders v. Stewart, 186 Md.App. 684 , 975 A.2d 271 (2009). The contract was signed by an unlicensed individual in the name of an LLC that did not exist, that was not formed until near the end of the work, and that was never licensed.

Id. at 688 , 975 A.2d at 273 . The contract was tainted by illegality despite the fact that a fifty percent owner of the LLC employed a licensed contractor that was proffered to have acted as construction manager on the subject home improvement. Donmar Maryland Corp. v. Hawkesworth, 46 Md.App. 575 , 420 A.2d 295 (1980), finding that the Act applies to improvements of mobile homes, held unenforceable a contract between an unlicensed contractor and an owner. Similarly, Suggs v. State, 52 Md.App. 287 , 449 A.2d 424 (1982), holding that the contractor must be licensed at the time of contracting, af ⁶⁰² firmed convictions of unlicensed persons who made agreements subject to the Act with a number of owners.

In support of their position that contractors are embraced within the “public” that is contemplated by the rule, so that contractors are intended to be protected from unlicensed subcontractors, appellees cite Snodgrass v. Immler, 232 Md. 416 , 194 A.2d 103 (1963). The case involves the licensing of architects. 4 The plaintiff, who was not licensed as an architect, agreed with an owner to design a building. The owner then agreed with a licensed architect that the latter would employ the plaintiff to design the building, and the owner would pay the licensed architect who, in turn, would pay the plaintiff. When the licensed architect did not pay, the plaintiff sued him on their contract and sued the owner, alleging that he was a third-party beneficiary of the owner-licensed architect contract.

The defendants prevailed on an illegal contract defense. Appellees here submit that the plaintiff in Snodgrass is analogous to the Subcontractor in the case at bar. That is not our reading of Snodgrass . There, the Court held that the owner-licensed architect contract was intended to circumvent the licensing requirement.

Under the facts, the plaintiff was in substance, if not in form, the owner’s architect and the licensed architect was a mere “strawman.” Id. at 422 , 194 A.2d at 106 . Thus, Snodgrass is but another case applying the rule between an owner, as the party to be protected, and an unlicensed person with whom the owner, in substance, had agreed. Thorpe v. Carte, 252 Md. 523 , 250 A.2d 618 (1969), is similar to Snodgrass . A licensed real estate broker contracted with an owner to pay a six percent commission, divided sixty-five percent to the broker and thirty-five percent to the owner’s engineers, who were not licensed as real estate brokers.

The broker could not recover on that contract with the owner. It was an illegal fee-splitting arrangement. Id. at 528 , 250 A.2d 618 , 250 A.2d at 621 . See also Glaser v. Shostack, 213 Md. ⁶⁰³ 383, 388, 131 A.2d 724, 726 (1957) (licensed real estate broker cannot recover against owner on listing contract obtained by broker’s unlicensed salesperson).

In Foster v. Panoramic Design, Ltd., 376 Md. 118 , 829 A.2d 271 (2003), homeowners sought a declaratory judgment that, under their contract with the unlicensed respondent, the latter acted as a home improvement contractor, so that the contract was unenforceable. The respondent, inter alia, was to “bid or negotiate the complete project to individual subcontractors, vendors and suppliers,” id. at 121 , 829 A.2d at 273 , and coordinate the subcontractors. The Court, applying principles of primary jurisdiction, held that whether the Act applied to respondent was to be decided first by the HIC. An earlier Maryland decision on which the Court in Harry Berenter placed considerable reliance is Goldsmith v. Manufacturers’ Liability Ins.

Co., 132 Md. 283 , 103 A. 627 (1918). There, the plaintiff, an insurance broker, unlicensed in Maryland when the services were rendered, sued an insurer for commissions on a workers’ compensation policy placed with the insurer on behalf of an ammunition manufacturer. The Court affirmed denial of the commission by applying the rule that the licensing statute was for the protection of the public and to prevent improper persons from engaging in the insurance profession. Id. at 286 , 103 A. at 628 .

Protection of the public may have a double aspect in the Goldsmith context. The protected class certainly included the insured who was paying the commission indirectly through the premium charged by the insurer. The protected class may also include the insurer. Goldsmith arose in the era before direct billing by insurers.

In 1918 (and later), the broker collected the premium from the insured and remitted to the insurer. Financial integrity of brokers was important to insurers as well as to insureds. Although Goldsmith may be viewed as involving an implied in fact contract between two businesses, it is not analogous to the case before us. The money at issue here was not to flow from Alcoa to Stalker; it was supposed to flow from Stalker to Alcoa. ⁶⁰⁴ There was an aspect to the statutes considered in Goldsmith beyond the requirement for licensing.

The Court also cited Maryland Code (1911), Article 23, § 185, which in relevant part, provided: “No corporation or association ..., whether such person be a licensed broker or otherwise, shall, directly or indirectly, pay, except to ... an insurance broker licensed by the State of Maryland, any commission, reward or rebate in consideration of procuring ... insurance from such company____” 5 We shall return to this type of statute in our discussion under the heading, “Section 8-315,” infra. Our review fails to disclose any Maryland appellate decision directly answering whether the regulatory license rule applied in Harry Berenter, declaring unenforceable a home improvement contract between an owner and an unlicensed contractor, applies to a subcontract between a licensed contractor and an unlicensed subcontractor. Harry Berenter does recognize that, pursuant to provisions of the Act now found in § 8-501, the failure to comply with certain formal contractual requirements in a home improvement contract does not invalidate the contract. Harry Berenter, 258 Md. at 297 , 265 A.2d at 763 .

The Court of Appeals has applied Harry Berenter and the § 8-501 savings clause to reject an illegality defense raised by a homeowner to the claim of the licensed contractor with which the owner was in privity, although the contract was oral and the contractor had received payments prior to signing a written contract. See Gannon & Son v. Emerson, 291 Md. 443 , 435 A.2d 449 (1981). See also Citaramanis v. Hallowell, 328 Md. 142 , 613 A.2d 964 (1992) (denying restitution, under Consumer Protection Act, of rent paid to unlicensed landlord who had not been unjustly enriched); DeReggi Constr. Co. v. Mate, 130 Md.App. 648 , 747 A.2d 743 (2000) (applying substan ⁶⁰⁵ tial compliance doctrine to permit mechanics’ lien enforcement by contractor of contract with landowners, where, at the time of contracting, contractor had no license under the Montgomery County Custom Homes Protection Act, but was licensed before work began, and where there was no actual injury to landowners); and Pacific Indemnity Co. v. Whaley, 560 F.Supp.2d 425, 429 , reconsideration denied, 572 F.Supp.2d 626 (D.Md.2008) (holding that a subcontractor’s lack of a license under the Act does not bar a claim for indemnity or contribution by the contractor in a suit by the homeowner against the contractor, because “the public policy embodied in the [Act] and Berenter is to protect the public, not unlicensed contractors”).

B. Other Authorities The authors of Corbin on Contracts, after reviewing the revenue/regulatory rule, state: “Even when the purpose of a licensing statute is regulatory, courts do not always deny enforcement to the unlicensed party. The statute clearly may protect against fraud and incompetence. Yet, in very many cases the situation involves neither fraud nor incompetence. The unlicensed party may have rendered excellent service or delivered goods of the highest quality.

The noncompliance with the statute may be nearly harmless. The real defrauder may be the defendant who will be enriched at the unlicensed party’s expense by a court’s refusal to enforce the contract. Although courts have yearned for a mechanically applicable rule, most have not made one in the present instance. Justice requires that the penalty should fit the crime.

Justice and sound policy do not always require the enforcement of licensing statutes by large forfeitures going not to the state but to repudiating defendants. “In most cases, the statute itself does not require such forfeitures. The statute fixes its own penalties, usually a fine or imprisonment of a minor character with a degree of discretion in the court. The added penalty of unenforceability of bargains is a judicial creation. In many cases, the ⁶⁰⁶ court may be wise to apply this additional penalty.

When nonenforcement causes great and disproportionate hardship, a court must avoid nonenforcement.” 15 Corbin on Contracts § 88.3, at 577-78 (rev. ed. 2003). The approach espoused by Corbin is illustrated in the contractor-subcontractor relationship by Dow v. United States u/o Holley, 154 F.2d 707 (10th Cir.1946). This Miller Act case was brought by the footings subcontractor, Holley, who had not been paid by the