HVAC Specialist, Inc. v. Dominion Mechanical Contractors, Inc.

Notice: This opinion is subject to formal revision before publication in the
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DISTRICT OF COLUMBIA COURT OF APPEALS

Nos. 16-CV-1220 & 16-CV-1278

HVAC SPECIALIST, INC., APPELLANT/CROSS-APPELLEE

V.

DOMINION MECHANICAL CONTRACTORS, INC., APPELLEE/CROSS-APPELLANT.

Appeals from the Superior Court
of the District of Columbia
(CAB-9870-15)
(Hon. Jeanette Jackson Clark, Trial Judge)
(Argued February 21, 2018 Decided February 28, 2019)
Nancy D. Greene for appellant/cross-appellee.

Stephanie M. Rochel, admitted pro hac vice, for appellee/cross-appellant.
Richard Mann and Hanna L. Blake were on the brief.

Before THOMPSON and BECKWITH, Associate Judges, and WASHINGTON,
Senior Judge.

THOMPSON, Associate Judge: These consolidated appeals are from Superior

Court orders that dismissed claims and counterclaims brought by appellant/cross-

appellee HVAC Specialist, Inc. (“HVAC”) and appellee/cross-appellant Dominion

Mechanical Contractors, Inc. (“Dominion”). All of the claims and counterclaims
 2

relate to the renovation of the Takoma Elementary School in the District of

Columbia, a project for which HVAC was a heating, ventilation, and air

conditioning subcontractor to Dominion. In a March 11, 2016, order (the “March

11 order”), the Superior Court dismissed HVAC’s claim against Dominion for

indemnification or contribution. Subsequently, through a November 17, 2016,

order (the “November 17 dismissal order”), the court dismissed all of the

remaining claims and counterclaims on the ground that the subcontract was illegal,

and therefore void, because, at all relevant times, HVAC lacked the relevant

license to do business in the District of Columbia as a refrigeration and air

conditioning contractor. We affirm the judgment of the Superior Court.

I.

The subcontract, dated August 2, 2011, required HVAC to “perform a

portion of the heating, ventilation and air conditioning work” on the project.

Specifically, HVAC was to furnish and install refrigeration piping, to receive and

install heating, ventilation, and air conditioning equipment, to charge the

equipment with gas, and to assist with the startup of equipment at the elementary

school. HVAC ran into difficulties paying its employees and suppliers, and

Dominion eventually terminated the subcontract for HVAC’s alleged default.
 3

There followed the parties’ claims and counterclaims for breach of contract and

related causes of action. HVAC, a Virginia corporation, filed its initial complaint

in December 2012, while it was an unregistered “foreign filing entity or foreign

limited liability partnership doing business in the District,” a status that precluded

it from “maintain[ing] an action in the District.” D.C. Code § 29-105.02 (b)

(2011). Dominion moved for dismissal of HVAC’s complaint on that basis, and

the Superior Court dismissed the original complaint without prejudice. HVAC

filed its new complaint on December 22, 2015. Dominion initially responded by

filing a motion to dismiss, arguing that the court should dismiss the action for lack

of subject matter jurisdiction and should additionally dismiss some of the counts

for failure to state a claim. On March 11, 2016, the trial court granted Dominion’s

motion as to Count III of HVAC’s complaint, a claim for indemnification or

contribution. 1

Thereafter, on March 25, 2016, Dominion filed its answer to the December

22, 2015, complaint, asserting counterclaims of breach of contract and termination

for default. Dominion asserted a number of affirmative defenses in its answer, but

1
The court reasoned that HVAC’s prayer for those “equitable remedies”
could not succeed because those remedies “apportion damages among [joint]
tortfeasors,” and HVAC and Dominion “are not joint tortfeasors.”
 4

did not assert illegality of the contract as a defense. 2 On August 8, 2016, however,

Dominion filed another motion to dismiss, wherein it alleged that HVAC could not

recover under the subcontract or under “a quantum meruit or quasi-contractual

basis” because HVAC “had no license” when it entered into the subcontract and

performed work under it. In particular, Dominion asserted that, at all relevant

times, HVAC lacked the refrigeration and air conditioning contractor’s license it

was required to have under District of Columbia law to perform work under the

subcontract. Opposing Dominion’s motion to dismiss, HVAC argued that

Dominion waived any illegality defense by failing to assert it in the prior case, and

for nearly 8 months after HVAC refiled its complaint, despite knowledge of

HVAC’s licensure status. To the extent Dominion did not waive the asserted

illegality defense, HVAC further argued, Dominion was “estopped” from raising

the defense after having filed a counterclaim for damages for breach of the

allegedly void contract.

In ruling on Dominion’s motion to dismiss, the Superior Court noted that

“[b]y its own admission,” HVAC “‘had no license to do business in the District of

2
Dominion represents that it became aware of HVAC’s expired licenses
only in July 2016, months after it filed its answer and asserted its affirmative
defenses and counterclaims. HVAC asserts that Dominion was aware no later than
October 2013 that HVAC was unlicensed.
 5

Columbia when it entered into the [s]ubcontract.’” The court explained that it was

“constrained to grant” Dominion’s motion “inasmuch as the statutes and

regulations requiring licenses for businesses operating in the District of Columbia

are very clear that businesses performing refrigeration or air conditioning work

must have a license to do so and there are no exceptions.” Relying primarily on

this court’s opinion in Sturdza v. United Arab Emirates, 11 A.3d 251, 257 (D.C.

2011), the court concluded that HVAC “could not recover in contract or in

quantum mer[ui]t for services rendered.” Citing this court’s opinion in Billes v.

Bailey, 555 A.2d 460, 463 (D.C. 1989), the court reasoned that even though

Dominion “was aware that [HVAC] had no District of Columbia license at the time

they entered into [the] [s]ubcontract,” “the doctrine of unclean hands does not

entitle [HVAC] to recover in the instant action.” Although recognizing that

Dominion “belatedly filed [its] Motion to Dismiss based on [HVAC’s] failure to

have the required District of Columbia licenses,” the court did not specifically

address HVAC’s argument that Dominion waived or was estopped from asserting

the defense of illegality. The court dismissed Dominion’s counterclaims because

they were “based on a void contract.”3 These consolidated appeals followed.

3
The court also reasoned — erroneously, Dominion argues, that Dominion
“acknowledged in its [a]nswer that the statute of limitations bar[red] [Dominion’s
assertion of] claims related to th[e] case.”
 6

II.

We focus on the November 17 dismissal order because our conclusion

regarding the subcontract’s unenforceability is dispositive of all of HVAC’s

claims, including those dismissed through the March 11 order.4 Our review of the

4
HVAC argues that the Superior Court erred in dismissing its Count III
claim for indemnification or contribution through the March 11 order. The
Superior Court stated that the indemnification or contribution claim “d[id] not
appear to arise out of a contract between the parties.” Disagreeing with the
Superior Court on that point, we uphold the dismissal of Count III on the ground
that the basis for Count III is what the complaint refers to as “the Payroll
Agreement” between the parties — i.e., “an additional verbal agreement whereby
Dominion would advance HVAC funds to meet its payroll and supplier obligations
until regular billings and collections started for work performed on the Project.”
Like the parties’ written subcontract, the alleged verbal contractual indemnification
agreement arose out of HVAC’s “engag[ing] . . . in the business of installing,
maintaining, repairing, or replacing refrigeration and air conditioning equipment.”
[A322; see 17 DCMR § 303.1 (2011)] As explained in the text infra, HVAC was
required to have a refrigeration and air conditioning contractor license to engage in
that business. We conclude that any agreement by Dominion to indemnify HVAC
for its project payroll expenses, or to contribute to those expenses, is as
unenforceable as the written subcontract. See Contemporary Mission, Inc. v.
Bonded Mailings, Inc., 671 F.2d 81, 83 (2d Cir. 1982) (citing authority that even if
a contract is not itself unlawful, “the bargain may still be illegal if it is closely
connected with an unlawful act”). Further, the fact of HVAC’s non-licensed
status, which was not known to the Superior Court when it declined to dismiss
HVAC’s indemnity/contribution claim as set out in the original complaint, was
new information that undermines HVAC’s argument that the viability of the
indemnity/contribution claim is the binding “law of the case.” See Kritsidimas v.
Sheskin, 411 A.2d 370, 372-73 (D.C. 1980) (explaining that the “law of the case”
(continued…)
 7

November 17 dismissal order is de novo. See Williams v. District of Columbia, 9

A.3d 484, 488 (D.C. 2010).

The various District of Columbia Code provisions and regulations cited in

the November 17 dismissal order require licensure with respect to the refrigeration

and air conditioning “occupation[] or profession[],” because it is one that has “been

determined to require regulation in order to protect public health, safety or welfare,

or to assure the public that persons engaged in such occupations or professions

have the specialized skills or training required to perform the services offered.”

(…continued)
does not control “where the first ruling is clearly erroneous in light of newly-
presented facts”).

HVAC additionally contends that dismissal of Count III was error because
HVAC and Dominion are “joint tortfeasor[s] as a matter of law” pursuant to 26
U.S.C. § 3505 (b) (establishing tax liability of a person who “supplies funds to or
for the account of an employer for the specific purpose of paying wages of the
employees of such employer” with knowledge that the employer will not be able to
make timely payment of associated withholding taxes). For the reasons set forth in
Dominion’s brief at pages 39-45, we find that argument to be without merit. We
note in particular that “[a] prerequisite to an equitable indemnity claim is that the
party seeking it . . . have discharged the liability for the party against whom it is
sought . . . .” District of Columbia v. Washington Hosp. Ctr., 722 A.2d 332, 341
(D.C. 1998). HVAC has neither alleged nor furnished evidence showing that it has
paid any taxes that were Dominion’s responsibility to pay.
 8

D.C. Code § 47-2853.04 (a) (2011); D.C. Code § 47-2853.04 (a)(29) (2011).5

Further, “[t]he rule is well-established in the District of Columbia that a contract

made in violation of a licensing statute that is designed to protect the public will

usually be considered void and unenforceable, and that the party violating the

statute cannot collect monies due on a quasi-contractual basis either.” Sturdza, 11

A.3d at 257 (internal quotation marks and brackets omitted); see also id. at 256

n.19 (declining to create an exception for commercial transactions or an exception

based on the sophistication of the parties); Saul v. Rowan Heating & Air

Conditioning, Inc., 623 A.2d 619, 621 (D.C. 1993) (“This jurisdiction has held

consistently that a contract entered in violation of a licensing statute or regulation

directed at protecting the public is void and unenforceable.”). “Although the

operation of this rule may appear to be harsh and disproportionate in some cases,

we have uniformly rejected appeals to deviate from or mitigate it; the potential

5
The Superior Court also cited inter alia D.C. Code § 47-2853.02 (a)
(2011) (“No person shall practice, attempt to practice, or offer to practice an
occupation or profession for which a license, certification, or registration is
required under this subchapter without a current valid license, certificate, or
registration in accordance with the requirements of this subchapter.”); 17 DCMR §
303.1 (2011) (“Except as specifically provided otherwise in this section, no person
shall engage in or be employed in the business of installing, maintaining, repairing,
or replacing refrigeration and air conditioning equipment, within the limits set
forth in § 301, without being licensed to do so.”); and 17 DCMR § 315.1 (2011)
(“No person shall perform work without having been issued the license under
which that work may be performed. The license must be currently valid and in full
force and effect.”).
 9

unfair applications of the rule at the margins have not persuaded us to sacrifice the

benefits of a clear-cut, unmistakable requirement, with equally clear consequences

for noncompliance.” Sturdza, 11 A.3d at 257 (internal quotation marks omitted).

That the party asserting illegality was familiar with the licensing rules and

knew of the contractor’s unlicensed status does not prevent operation of the

foregoing rule. See Billes, 555 A.2d at 462 (“[T]he doctrines of in pari delicto and

unclean hands do not entitle an unlicensed . . . contractor to recover in a suit for an

unpaid balance under a contract that is void,” because courts “must pay deference

to the legislature’s intentional exposure of unlicensed contractors, which

discourages unlicensed work[.]”).

HVAC, which acknowledges that at all relevant times it lacked a

refrigeration and air conditioning contractor’s license, does not contest the general

applicability of any of the foregoing. Instead, as its primary argument on appeal,

HVAC renews its argument that Dominion either waived the affirmative defense of

illegality when it failed to timely assert HVAC’s non-licensed status, or is estopped

from asserting the defense because of its reliance on the assertedly illegal contract

to pursue a claim against HVAC for damages for breach of the contract.
 10

HVAC is correct that, as a general rule, a defendant’s “[f]ailure to raise

affirmative defenses [in its answer] constitutes a waiver of those defenses.” Grp.

Health Ass’n, Inc. v. Reyes, 672 A.2d 74, 75 (D.C. 1996) (internal quotation marks

omitted); see also D.C. Super. Ct. Civ. R. 8 (c)(1) (2016) (“In pleading to a

preceding pleading, a party shall set forth affirmatively . . . any . . . matter

constituting an avoidance or affirmative defense,” including “illegality.”). This

court has, however, allowed “exception[s] to th[e] waiver rule” where there is no

prejudice to the non-moving party. See Group Health Ass’n, 672 A.2d at 75-76.

Prejudice will not be found where the non-moving party “has had an adequate

opportunity to respond” to the challenge. United States v. Krieger, 773 F. Supp.

580, 583 (S.D.N.Y 1991) (citing Allied Chem. Corp. v. Mackay, 695 F.2d 854, 856

(5th Cir. 1983)). Moreover, “it is not absolutely necessary to plead the illegality of

a contract which is also contrary to public policy,” and indeed a “court may, sua

sponte, step in and deny the right to any relief under an agreement without

reference to the state of the pleadings, whenever it becomes apparent that the

agreement is antagonistic to the interests of the public.” Krieger, 773 F. Supp. at

583 (internal quotation marks and brackets omitted) (considering defendant’s

illegality defense even though its was raised five years after the filing of the

complaint).
 11

HVAC asserts that both it and the court system were prejudiced by

Dominion’s belated assertion of the affirmative defense of illegality after nearly

four years of litigation.6 Whether or not that is so, we conclude that under the

public policy exception to the waiver rule, which is precedential law in our

jurisdiction, the affirmative defense of illegality is not waivable in the context of a

contract entered into in contravention of a District of Columbia law, such as a

licensing requirement, that is “designed to protect the public,” Sturdza, 11 A.3d at

257, and that “affords significant protections to the public.” Saul, 623 A.2d at 622.

The United States Court of Appeals for the District of Columbia Circuit

established long ago that “[t]he invalidity of [a] contract may not be waived ‘by

any system of pleading, or even by the express stipulation of the parties.’” Noonan

v. Gilbert, 68 F.2d 775, 776 (D.C. Cir. 1934) (quoting Oscanyan v. Arms Co., 103

U.S. 261, 267 (1881) (“[T]he law will not lend its support to a claim founded upon

6
HVAC asserts, for example, that “[h]ad Dominion timely raised [the
illegality] defense in the [o]riginal [c]ase, HVAC may have been able to assert a
fraud claim based on Dominion’s representations that HVAC did not have to hold
a separate license to perform the contract.” But the record discloses that HVAC,
which previously held a Refrigeration and Air Conditioning Contractor license and
employed an individual with a Master Mechanic license, was aware of the
licensing laws and of potential problems with its licensure status and makes it
doubtful that HVAC could reasonably have relied on any such representation by
Dominion. An email dated August 15, 2011, from Denise Brewer to Omar Brewer
(co-owners of HVAC) recognizes that HVAC “is not compliant as we discussed a
couple days ago, . . . . I am not willing to accept the possible liability for operating
any new work without compliance.”
 12

its violation.” (internal quotation marks omitted))). For the same reason, we

conclude that Dominion’s counterclaim for breach of the subcontract did not estop

it from asserting as an affirmative defense HVAC’s violation of the refrigeration

and air conditioning contractor licensing laws. Cf. Journal of Commerce, Inc. v.

United States Dep’t of Treasury, No. 86-1075, 1988 U.S. Dist. LEXIS 17610, at

*19 (D.D.C. Mar. 30, 1988) (rejecting plaintiff’s estoppel argument because

estopping the defendant from repudiating the agreement set out in certain

memoranda of understanding would “require th[e] [c]ourt to breathe life into an

illegal bargain[]”).

HVAC makes three additional arguments in support of its breach of contract

claim. First, it argues that it was not actually required to have a license because its

employees could work under Dominion’s license. It is true that under 17 DCMR

§ 303.2, there is no licensing requirement for “persons performing refrigeration or

air conditioning work under the personal supervision of, and under the authority of

a permit issued to, a validly licensed Master Refrigeration and Air Conditioning

Mechanic or Master Refrigeration and Air Conditioning Mechanic Limited, who is

responsible for the proper performance of the work.” However, as we observed in

Saul, “[t]he licensing regulations distinguish between those who ‘engage in the

business’ and those who are ‘employed in’ or who ‘perform work in’ the field,”
 13

and “[t]he exception in § 303.2 appears to be designed solely to allow individuals

to work as subordinates to a master mechanic without obtaining a license.” 623

A.2d at 621 (emphasis added); see also id. at 622 (“perceiv[ing] a clear distinction

between [the company president’s] individual license and the type of license which

[the contracting company] was required to obtain before contracting or performing

the work involved”). Under D.C. Code § 47-2853.04 (a)(29) and 17 DCMR

§ 303.6 (a), as a “corporation proposing to engage in or be employed in the

business of installing, maintaining, repairing, or replacing refrigeration and air

conditioning equipment,” HVAC was required to have a “Refrigeration and Air

Conditioning Contractor” license. See also Saul, 623 A.2d at 621-22 (explaining

that “a ‘Refrigeration and Air Conditioning Contractor’ entitles the holder to

engage in the business,” whereas a Master Mechanic license “allow[s] the holder

only to supervise or perform the type of work covered by the regulations as

distinguished from engaging in the business[]”; holding therefore that even though

the company president held a Master Mechanic license in his individual capacity,

“this could not excuse Rowan, Inc., the contracting party, from obtaining the

required license before engaging in the business[]”); Highpoint Townhouses, Inc. v.

Rapp, 423 A.2d 932, 934 (D.C. 1980) (“The mere fact that Rapp Co. was working

under a permit obtained by a master plumber does not, in itself, satisfy or excuse

Rapp Co. from the licensing requirement.”). In addition, as Dominion notes, D.C.
 14

Code § 47-2851.02 (c) (2011) prohibited Dominion, as “[a] person issued a license

under this subchapter,” from “willfully allow[ing] any other person required to

obtain a separate license to operate under [its] license.”

HVAC’s second argument is equally unavailing. It asserts that even if a

portion of the subcontract was illegal, it should be permitted to recover with

respect to the tasks performed under the contract (such as “order[ing] equipment

and materials,” for which it “was due an equipment acquisition fee,” and providing

“unspecified ‘start-up assistance’”) for which a license was not required. This

argument is not persuasive; we fail to see how entering into and performing under

a commercial contract to order heating, ventilation, and air conditioning equipment

and materials and to assist with the start-up of such equipment, do not constitute

engaging in the business of a refrigeration and air conditioning contractor, for

which a license was required under § 47-2853.04 (a)(29) and 17 DCMR § 303.6.

In its reply brief and at oral argument, HVAC advanced the additional

argument that dismissal of its complaint was premature because, with “a full

opportunity to conduct discovery,” it might have been able to prove that its work

on the Takoma Elementary School project fell within the licensing exception

established by 17 DCMR § 315.8 (2011): “No person without a license required by
 15

this chapter may perform any air conditioning or refrigeration work in the District

of Columbia except in buildings under the control of the officer in charge of Public

Buildings and Grounds or of the Architect of the Capitol” (emphasis added). Not

only does it appear that HVAC has raised this argument for the first time on appeal

and not until its reply brief, 7 but HVAC joined in a consent motion that advised the

Superior Court that Dominion’s “pending dispositive motion m[ight] dismiss the

entire case” and that a postponement of the discovery deadline and suspension of

discovery would “serve to promote efficiency and judicial economy[.]” HVAC

will not be heard now to complain that it needed additional discovery to counter

Dominion’s motion. 8

7
The court’s longstanding practice is not to address arguments raised for
the first time in a reply brief, see Union Mkt. Neighbors v. District of Columbia
Zoning Comm’n, No. 17-AA-42, 2018 D.C. App. LEXIS 489, at *6 (D.C. Dec. 13,
2018), or at oral argument, see Long v. United States, 83 A.3d 369, 381 n.17 (D.C.
2013).
8
And in any event, case law suggests that, as referred to in § 315.8, the
phrase “officer in charge of Public Buildings and Grounds” is a reference to the
Director of the National Park Service, whom Congress made responsible for the
Park Police, see Richardson v. United States, 520 A.2d 692, 694-95 (D.C. 1987);
and that the phrase “Public Buildings and Grounds” may be a reference to “federal
reservations in the District’s environs” that are under the jurisdiction of the Park
Police, id. at 695, rather than to public buildings, such as elementary schools, that
are under the control of the District of Columbia.
 16

III.

Through its breach-of-contract counterclaim, Dominion sought judgment

against HVAC “in an amount to be proved at trial, plus interest, reasonable

attorneys’ fees, costs, and any other relief the Court deems appropriate.” Through

its termination for default counterclaim, Dominion sought in addition its costs of

completing HVAC’s work and delay damages. Dominion asserts that “District

law . . . prevents only the unlicensed contractor from recovering on a contract and

does not disable the other party from a recovery.” In its briefs on appeal, however,

Dominion cites cases that support a more limited recovery. Dominion quotes, for

example this court’s statement in Saul that “[o]rdinarily, when a party sues

successfully to rescind a contract determined to be void and unenforceable because

of the contractor’s violation of licensing statutes or regulations, the appropriate

remedy is a return of the money paid.” 623 A.2d at 622 n.4. See also, e.g., Nixon

v. Hansford, 584 A.2d 597, 598-99 (D.C. 1991) (determining that appellant was

“entitled to judgment on her counterclaim” to recoup the amount paid to an

unlicensed home improvement contractor even though both parties knew the law

and the unlicensed status of the worker when entering into the contract). For its

part, HVAC relies on the principle that neither party can enforce a void contract.
 17

See, e.g., McMahon v. Anderson, Hibey & Blair, 728 A.2d 656, 658 (D.C. 1999)

(“[W]hen parties have entered into an illegal contract, such contract is

unenforceable and, typically, we leave the parties where we find them.”). HVAC

also contends that Dominion’s claims are time-barred.

We conclude that we need not consider the merits of Dominion’s

counterclaims. That is because we read Dominion’s briefs in this matter as

representing that it seeks only conditionally to recover from HVAC; that is,

Dominion seeks a set-off in the event that this court allows HVAC’s claims to

proceed. See Dominion’s Br. at 2 (“In the event that this Honorable Court reverses

the trial court’s order, Dominion’s counterclaims should also be reinstated[.]”);

Dominion’s Br. at 48 (“[S]hould the Court somehow decide that [HVAC’s] claims

should be returned to the trial court, Dominion should be allowed to assert its

contract claims as set-offs[.]”); Dominion’s Reply Br. at 2 (“Dominion’s claim

should be reinstated should this Honorable Court decide to remand the case.”);

Dominion’s Reply Br. at 3 (acknowledging that HVAC, “is defunct and in

receivership”); and Dominion’s Reply Br. at 5 (“Dominion requests partial reversal

to reinstate its counterclaim . . . should the Court somehow conclude that

[HVAC’s] unlicensed status did not disable it from resort to the courts and then

remand the case for further proceedings.”). At oral argument as well, Dominion
 18

represented that it is “willing to give up [the] counterclaim[s]” if HVAC’s claims

do not go forward. Having affirmed the dismissal of HVAC’s claims, we take

Dominion at its word and do not decide whether its counterclaims were improperly

dismissed (the issue now being moot).

Wherefore, the judgment of the Superior Court is

Affirmed.