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Protect Your California Contractor License by Filing Bankruptcy

My last blog post addressed how a lawsuit and the resulting judgment against a California contractor can result in the quick suspension of the contractor's license. I also covered six ways to prevent license suspension, the final one being to file bankruptcy to discharge (legally write off) the judgment debt. Under both California and federal bankruptcy statutes it's illegal for the Contractors State License Board (CSLB) to suspend a contractor's license for nonpayment of a judgment when that judgment debt has been discharged in bankruptcy. See Cal. Bus. & Prof. Code §7071.17(f) and Section 525(a) of the U.S. Bankruptcy Code.

DO I HAVE TO WAIT FOR THE DEBT TO BE DISCHARGED IN BANKRUPTCY?

No. You get two major benefits from filing bankruptcy as far as your license is concerned.

One is the benefit mentioned above that protects your license from suspension once bankruptcy has discharged the debt at issue. But a discharge is not entered in a Chapter 7 case for 3-4 months after it's filed. And a discharge is not entered in a Chapter 13 case usually for 3 to 5 years after it is filed.

So it's crucial that the other major benefit from filing bankruptcy kicks in the moment you file your case. The "automatic stay" goes into effect immediately, protecting you from virtually all potential collection efforts against you.

HOW DOES THE AUTOMATIC STAY PROTECT A CONTRACTOR LICENSE?

The moment you file a bankruptcy case your creditor is legally stopped from enforcing the judgment. Under the automatic stay a creditor cannot start or continue "a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before" the filing of your bankruptcy case. Section 362(a)(1) of the Bankruptcy Code.)

This provision of the automatic stay stops the creditor from filing a lawsuit if it hasn't already been filed. And if you file bankruptcy before the lawsuit has turned into a judgment the automatic stay stops the creditor from getting a judgment. In both of these circumstances, without a judgment there is no clear trigger beginning the SCLB's procedure to suspend your contractor license.

WHAT IF THE CREDITOR'S JUDGMENT IS ENTERED BEFORE YOU FILE BANKRUPTCY?

Assuming your license has not already been suspended, when you file bankruptcy the automatic stay stops the enforcement of the judgment. Specifically, a creditor may not enforce, "against the debtor or against property of the estate, . . . a judgment obtained before" the filing of your bankruptcy case. Section 362(a)(2) of the Bankruptcy Code.

So once a judgment creditor receives notice of your bankruptcy case arguably the creditor cannot even inform the CSLB about a recent judgment if the purpose of doing so is to induce you to pay the debt.

DOES THE AUTOMATIC STAY APPLY TO THE CSLB ITSELF?

Yes, the CSLB itself must stop its procedure for suspending your contractor license to avoid violating the automatic stay. However, this is less clear in the bankruptcy statutes than regarding actions by the creditor directly. But pertinent appellate court rulings do indicate that the automatic stay does apply to the CSLB in these situations.

First, the automatic stay imposes an affirmative duty to discontinue collection actions. The Ninth Circuit Court of Appeals (the highest appellate court in California below the U.S. Supreme Court) has emphatically ruled that, "[c]onsistent with the plain and unambiguous meaning of the statute, and consonant with Congressional intent, we hold that [the automatic stay] imposes an affirmative duty to discontinue post-petition collection actions." Eskanos & Adler, PC v. Leetien, 309 F. 3d 1210, 1215 (9th Cir. 2002). The creditor and its law firm had to pay damages for having willfully violated the automatic stay by failing to dismiss a pending lawsuit against the debtor for more than a month after she filed a Chapter 7 case.

Second, the California CSLB itself has been held to have violated the automatic stay by failing to reinstate a contractor license after suspending it before debtor's Chapter 13 filing. The appellate court determined that this was a violation of the automatic stay even though the CSLB did reinstate the license 24 days after the bankruptcy filing.

[T]he issue is whether [CSLB's] refusal to reinstate the suspended license, after notice of [debtor's] Chapter 13 petition, is a continuation of an action against a debtor to recover a claim that arose before the bankruptcy filing. See 11 U.S.C. §362(a)(1). In these circumstances, the answer is a clear yes.

The automatic stay provision, § 362(a)(1), plainly states that "the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the [bankruptcy] case" falls under the automatic stay. 11 U.S.C. §362(a)(1) (emphasis added). It is undisputed that the pre-petition suspension of [debtor's] contractor's license was based on [his] failure to pay employment taxes. The Bankruptcy Court found, and it is also uncontested, that [debtor's] license would have been promptly reinstated had he paid the taxes owed . . . . By denying [debtor's] request for reinstatement of his license, [the CSLB] affirmatively acted in continuation of an action to recover on a claim, and thus violated the automatic stay provision.

California Contractors State License Board v. Bertuccio, (Distr. Ct. N.D. Cal. 2011)(consolidated with two related appeals, affirming the bankruptcy court's opinion at In re Bertuccio, 414 B.R 604 (Bankr. N.D. Cal, 2008).

If it is a violation of the automatic stay for the CSLB to fail to reinstate a previously suspended license, it would be all the more a violation to affirmatively act to suspend a license act after a bankruptcy filing. So, based on case law the California CSLB will respect the automatic stay. Upon receiving notice of a contractor's bankruptcy filing, it will stop its procedure to suspend a contractor license when that suspension is based on a creditor's judgment against the contractor.

CAN THE CSLB GET "RELIEF FROM THE AUTOMATIC STAY" AND STILL SUSPEND THE LICENSE UNDER SOME CIRCUMSTANCES?

Any "party in interest" can ask for permission to continue pursuing a debtor after a bankruptcy case is filed, by filing a motion with the bankruptcy court asking for "relief from stay." The creditor or other "party in interest"—such as the CSLB—just needs to show "cause" appropriate to justify "terminating, annulling, modifying, or conditioning [the automatic] stay." Section 362(d) of the Bankruptcy Code.

WHAT WOULD BE AN APPROPRIATE "CAUSE" TO JUSTIFY GIVING THE CSLB "RELIEF FROM STAY" TO SUSPEND A CONTRACTORS LICENSE?

If the CSLB has legal grounds to suspend your license for just about any reason other than for non-payment of a business- or license-related debt or judgment, it would likely be able to get bankruptcy court permission to do so.

The CSLB can suspend a contractor's license for many reasons other than failure to pay a judgment. CSLB 's website lists 13 of the major reasons, only two of which pertain to civil judgments. The other reasons involve issues with bonding, workers' compensation insurance, and changes in company personnel.

Another one of the listed reasons—"You violate the Contractors License Law."—itself includes numerous potential reasons for suspension. That reference is presumably to the "Contractors' State License Law," statutorily defined as Chapter 9 of Division 3 of the California Business and Professions Code. Cal. Bus. & Prof. Code § 7000. This Chapter includes 15 "Articles," each of which contains many statutory sections. The Article on "Licensing" itself, presumably the most pertinent, contains more than 50 Sections totaling more than 13,000 words! It contains many, many ways to "violate the Contractors License Law."

The automatic stay stops collection of debts, including debts that got converted into judgments. So it stops the CSLB's license suspensions resulting from the nonpayment of debts and judgments. The automatic stay does not stop license suspensions resulting from any other legal grounds that the CSLB may have.

DOES THE AUTOMATIC STAY EVEN COME INTO EFFECT IN A LICENSE SUSPENSION BASED ON OTHER THAN NONPAYMENT OF A JUDGMENT?

Likely not. Bankruptcy's automatic stay protection applies to actions to collect a debt or enforce a judgment. There is an explicit exception for governmental actions taken for other purposes—the police powers exception. A governmental unit—such as the CSLB—can start or continue

an action or proceeding . . . to enforce [its] police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce [its] police or regulatory power . . . .

Section 362(b)(4) of the Bankruptcy Code.

The Ninth Circuit Bankruptcy Appellate Panel (which hears appeals from California bankruptcy courts) has interpreted the police power exception as follows:

This exception is intended to allow governmental units to sue a debtor "to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law...." In re Dunbar, 235 B.R. 465, 471 (9th Cir. BAP 1999), aff'd, 245 F.3d 1058 (9th Cir.2001), quoting, House and Senate Reports (Reform Act of 1978) (H.Rep. No. 595, 95th Cong., 1st Sess. 343 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 52 (1978)).

Bertuccio, supra.

Although the police power exception is to be narrowly interpreted, the CSLB could likely make a good argument that most of the other statutory reasons for suspending a contractor license are intended to further consumer protection or public safety, and would thus fall within the "police power" exception.

Therefore, filing bankruptcy will not likely stop the CSLB from starting or continuing to suspend your contractor license if its grounds for doing so are something other than your failure to pay a judgment. So even if you have failed to pay a business- or license-related judgment, make sure that the CSLB does not have any other grounds for license suspension.

WILL THE CSLB ALWAYS FILE A MOTION FOR RELIEF FROM STAY BEFORE ACTING TO SUSPEND A LICENSE AFTER A BANKRUPTCY FILING?

Even when it believes it has "police power" justification to act, the CSLB may well first file a motion for relief from stay as a precaution. But strictly speaking the automatic stay does not come into force at all when its action falls clearly into the police powers exception. So it is possible that the CSLB would just proceed to suspend your license without getting permission from the bankruptcy court. All the more reason for you and your lawyer to be very clear that the CSLB's only basis for suspension is you non-payment of a debt or judgment.

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