## Facts

- Millie C. Williams owned a six-unit Los Angeles residential property, the principal estate asset.
- Williams’s daughter, Naomi Williams, held a general power of attorney and managed the property.
- Naomi contracted with Michael Jackson & Associates, an unlicensed contractor, to refurbish the property for $28,047.
- To fund the work, Naomi obtained a construction loan from a savings and loan association secured by a first deed of trust; escrow paid the contractor in progress payments, but the work remained largely incomplete.
- On the date of the contractor’s final escrow payment, Naomi executed a second promissory note and second deed of trust (power of sale), naming an entity associated with the contractor as trustee and the contractor’s daughter as beneficiary.
- The second note and deed of trust were later assigned to Ronald and Ken Steele, who paid consideration and cured the existing default on the first deed of trust.
- After Millie Williams died, the estate’s special administrator sued to cancel the Steeles’ note and second deed of trust and to quiet title, asserting illegality because the contractor was unlicensed.

## Issues

1. Whether an unlicensed contractor’s contract is void and illegal such that its illegality may be asserted as a defense against an assignee claiming holder-in-due-course status on a related note and deed of trust.
2. Whether the trial court made the necessary factual finding that the second note and deed of trust were related to construction work so the illegality defense would apply.

## Decision

- The Court of Appeal reversed the judgment for the Steeles and remanded.
- The court held that a contract by an unlicensed contractor is void and illegal.
- The court held that, under California Uniform Commercial Code § 3305(2)(b), even a holder in due course takes subject to illegality that renders the obligation a nullity.
- The court remanded for fact-finding on whether the second loan transaction was related to the unlicensed construction work; the illegality defense would apply only if that nexus existed.

## Legal Principles

- Contracts for work requiring a contractor’s license, when made by an unlicensed contractor, are treated as void and illegal under California’s contractor-licensing public policy.
- Holder-in-due-course protections do not bar the defense of “illegality of the transaction, as renders the obligation of the party a nullity” under Cal. U. Com. Code § 3305(2)(b).
- The illegality defense applies to a note and deed of trust only if the specific instrument is factually related to the illegal unlicensed construction transaction.

## Conclusion

The court held that the illegality of unlicensed contracting can defeat enforcement of a related note and deed of trust even against an assignee claiming holder-in-due-course status, but reversed and remanded because the trial court had not determined whether the second loan transaction was connected to the unlicensed construction work.


Wilson v. Steele, 211 Cal. App. 3d 1053 (Cal. Ct. App. 1989)