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How a Judgment Can Result in Suspension of California Contractor's License

If you are a licensed contractor in California who's been sued and has lost the lawsuit, it's likely that your contractor license will get suspended, and quite quickly. This blog post discusses the circumstances that would occur, and what you can do to prevent it.

HOW DOES A JUDGMENT AGAINST YOU RESULT IN A CONTRACTOR LICENSE SUSPENSION?

If you're a contractor, California law requires you to report an unpaid final judgment against you related to your construction activities. (See Cal. Bus. & Prof. Code §7071.17(b)(1).) You have 90 days from the date of the judgment to so inform the Contractors State License Board (CSLB).

If you don't tell the CSLB on your own within that time period, your contractor license gets suspended immediately when the CSLB finds out about the judgment. The law specifically requires suspension "upon notification by any party having knowledge of the outstanding judgment upon a showing of proof of the judgment." (Cal. Bus. & Prof. Code §7071.17(h).) Indeed the CSLB has made it easy for a judgment creditor to provide the information through a form called a Request for Suspension of Contractor's License and Proof of Unsatisfied Final Judgment.

You cannot continue to legally operate as a contractor with a suspended license.

WHAT HAPPENS IF YOU DO INFORM THE CSLB IN TIME?

If you tell the CSLB about a judgment against you within the 90 days after that judgment becomes final, the CSLB will then give you notice that you have another 90 days to deal appropriately with the judgment. There are a number of ways to do so. You can:

1. pay off the entire judgment

2. enter into an agreement to pay off the judgment over time

3. seek to dismiss the judgment, or appeal it

4. pay for a special bond to cover the judgment amount

5. convince the CSLB that the judgment against you was not construction or license related

6. file a bankruptcy case to discharge (legally write off) the judgment debt and prevent your license from being suspended

Failure to do any of these on time, along with providing the necessary documentation to the CSLB, will result in the suspension of your license. Let's look at each of these ways to prevent suspension.

1. JUDGMENT PAY-OFF

As you can guess, unless the judgment is resolved in some other way it must be paid in full and proof thereof provided to CSLB within its 90 days of its notice to you. As stated in the CSLB's detailed California Contractors License Law & Reference Book (p.33):

Any of the following are satisfactory proof of payment:

● An acknowledgment of Satisfaction of Judgment;

● A notarized, signed statement from the judgment creditor which confirms the judgment has been paid in full; or

● A copy of the front and back of a canceled payment check. CSLB will contact the judgment creditor to verify payment, so include that person's telephone number.

2. PAYMENT AGREEMENT

Your judgment creditor does not need to allow you to pay the judgment over time but this may be the most practical way for it to get paid. Assuming such an agreement is struck before your license is suspended, the threat of suspension gives the creditor tremendous leverage. That's because immediately upon you missing a single payment the creditor can inform the CSLB which will then suspend your license right away. "[F]ailure to abide by the [agreement] shall result in the automatic suspension of [your contractor] license. . . ." (Cal. Bus. & Prof. Code §7071.17(c))

Having this sword being over your head would probably be nerve-wracking but it may be better than your other options.

Make sure that the agreement with your creditor is in writing, clearly showing the total dollar amount owed, the monthly payment amount, the monthly due date, when the payments are contractually late, and when the final payment is due. Send it by certified mail with return receipt to:

Contractors State License Board

Attn: Judgment Unit

P.O. Box 26000

Sacramento, CA 95826

3) FIGHT THE JUDGMENT BY DISMISSAL OR APPEAL

The CSLB does not second-guess the legitimacy of a judgment. It must respect the authority of the court which entered it. But that does not mean that might not be able to challenge the judgment at the court or by appealing it.

However, getting a judgment dismissed or successfully overturned on appeal can be difficult and very expensive to pull off. And time is absolutely of the essence. See a lawyer right away if you did not get timely notice of the lawsuit or you believe you were treated unfairly in some fundamental way.

4) COVER THE JUDGMENT AMOUNT WITH A BOND

Another option is simply to post a bond in the amount of the judgment entered against you. California law (Cal. Bus. & Prof. Code §7071.17(b)(3)) says that the contractor

licensee shall, as a condition to the continual maintenance of the license, file or have on file with the board a bond sufficient to guarantee payment of an amount equal to all unsatisfied judgments . . .

You must file the bond with the CSLB within 90 days of its notice to you or your license will be suspended. If you don't keep the bond in force that also results in automatic suspension. (Cal. Bus. & Prof. Code §7071.17(b)(4) and (c))

5) JUDGMENT NOT RELATED TO CONSTRUCTION OR YOUR LICENSE

Not every judgment against you necessarily exposes you to license suspension. The judgment must be "substantially related to the construction activities of a licensee licensed under this chapter, or to the qualifications, functions, or duties of the license." (Cal. Bus. & Prof. Code §7071.17(e))

So what judgments does that include and exclude? According to the CSLB's California Contractors License Law & Reference Book (pp.33-34):

CSLB broadly interprets this section of law to mean that if the judgment relates to your construction business in any way, it is considered construction-related. It does not mean that you had to necessarily contract with the judgment creditor to build something. If you did not pay your office rent, your office utility bills, your material supplier, subcontractor, employee, or any other bill incurred by your business, CSLB will consider it construction-related. Very few judgments received by CSLB are not construction-related. If you feel confident that your judgment is not construction-related, you should provide CSLB with documentation that will support your statement.

Be aware that an adversary's Request for Suspension of Contractor's License and Proof of Unsatisfied Final Judgment specifically includes a statement about how the judgment is related to the contractor's "construction activities" or "the qualifications, functions, or duties of the contractor's license."

6) FILE BANKRUPTCY TO DISCHARGE THE JUDGMENT DEBT AND PREVENT LICENSE SUSPENSION

The California statute that I've been referencing throughout this blog post explicitly states that it "shall not apply to an applicant or licensee when the financial obligation covered by this section has been discharged in a bankruptcy proceeding." (Cal. Bus. & Prof. Code §7071.17(f))

Furthermore, this protection against license suspension is even more strongly enforced through federal bankruptcy law, which provides as follows:

a governmental unit may not . . . suspend, or refuse to renew a license . . . , condition such a grant to, discriminate with respect to such a grant against . . . a person that is or has been a debtor . . . solely because such . . . debtor is or has been a debtor under this [bankruptcy] title . . . or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title . . . .

(Section 525(a) of the U.S. Bankruptcy Code.) So discharging (legally writing off) a construction- or contractor license-related debt in bankruptcy prevents your license from being suspended.

However, bankruptcy is not necessarily a "silver bullet" for dealing with risks to your license from a judgment. Here are just a few on the most pressing issues raised:

  1. What happens if my creditor is asserting that the debt at issue cannot be discharged in bankruptcy?
  2. What are the special circumstances that the CSLB can get bankruptcy court permission to suspend my contractor license in spite of my bankruptcy filing?
  3. What, if any, effect would filing bankruptcy have on my contractor license bond or on any other pertinent bonds.

I'll address these important questions in one or more upcoming blog posts.

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