Protect Your California Contractor License

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Can Filing for Bankruptcy Help Protect Your California Contractor License

Can Filing for Bankruptcy Help Protect Your California Contractor License

A lawsuit and a judgment against you can result in the suspension of your contractor’s license in the state of California. Bankruptcy is a great way to get over financial issues and get a fresh start for many people. It is also one of the best ways to prevent license suspension and discharge the judgment debt. As per Los Angeles bankruptcy lawyers, Recovery Law Group, California and Federal Bankruptcy statutes state that Contractors State License Board (CSLB) cannot suspend a contractor’s license for non-payment for a judgment when that particular debt has been discharged in bankruptcy.

Is it essential to wait for the discharge of a debt in bankruptcy?

According to professionals, you are not required to wait for debt discharge. There are two benefits associated with bankruptcy filing with respect to the license:

  • Your license suspension is protected post-discharge of the concerned debt after bankruptcy. However, it is important to note that during Chapter 7 bankruptcy, debts are not discharged until 3-4 months of filing and in case of Chapter 13, the time frame is 3-5 years after the filing of papers.
  • The benefit of an automatic stay is one of the biggest advantages of filing for bankruptcy. It protects you from all types of collections attempts including repossession and foreclosure.

Can automatic stay help protect a contractor license?

One of the biggest advantages of filing for bankruptcy is the provision for the automatic stay which legally stops the creditors from taking any collection actions. They simply cannot start or continue with “a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before” post filing of the bankruptcy case as per Section 362(a)(1) of the bankruptcy code.

Another advantage is that creditors cannot file a lawsuit against you. In case one is already filed, but has not yet resulted in judgment; the automatic stay can put a hold to the creditor getting a judgment. Without the judgment, the CSLB cannot begin the procedure to suspend the contractor’s license.

Options available if creditor’s judgment is entered before you file for bankruptcy

In the situation where your license is not yet suspended (though a judgment has been awarded), filing for bankruptcy initiates the automatic stay which helps stop the execution of the judgment. Thus, per Section 362(a)(2) of Bankruptcy Code, a creditor cannot enforce “against the debtor or against the property of the estate, . . . a judgment obtained before” the filing of your bankruptcy case.

So, despite having a judgment, once the creditor receives notification of your bankruptcy filing, they cannot inform the CSLB about the recent judgment obtained, if the sole purpose of relaying the information is to get payment for the debts.

Can the automatic stay be applied on CSLB too?

Even the CSLB has to put its proceedings regarding the suspension of contractor license on hold to avoid any violation of the automatic stay. However, the guidelines about these are not as clear for the creditors, though many relevant appellate court rulings state that automatic stay applies to CSLB under these conditions:

  1. The automatic stay enforces a confirmation against any collection actions. As per the Ninth Circuit Court of Appeals (the highest appellate court in California) ruling, “consistent 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). As per this ruling, both the creditor and their law firm were found guilty of a willful violation of the automatic stay as they did not dismiss a pending lawsuit against the debtor despite the latter filing for a Chapter 7 bankruptcy case. They had to pay damages to the debtor for the same.
  2. California CSLB was found guilty of violating the automatic stay since they didn’t restore the license of a contractor, which they had previously suspended, before debtor’s Chapter 13 filing. Despite the CSLB reinstating the license 24 days post-bankruptcy filing, the appellate court found it a violation of the automatic stay. The court found CSLB’s refusal to restore the debtor’s suspended license despite being aware of the Chapter 13 petition of the latter, a willful action for collecting dues.

As per the automatic stay provision § 362(a)(1), “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. Additionally, the acknowledgment was made that suspension of contractor’s license, prior to the bankruptcy petition filing, was due to the non-payment of employment taxes. The Bankruptcy Court also approves the prompt reinstatement of the license after the taxes owed by the debtor are paid. In case the CSLB continued its action of recovering the claim by denying the reinstatement of the debtor’s license, it will be found to be in violation of the automatic stay. (California Contractors State License Board v. Bertuccio)

The CSLB failing to restore a prior suspended license is in violation of the automatic stay; if they suspend a license after the bankruptcy filing, they will worsen their case. The automatic stay has to be respected by California CSLB. Any collection procedure going on against a debtor including license suspension, need to stop immediately when a notification of bankruptcy filing of the contractor is provided to them, especially if the said actions are due to any creditor’s judgment.

Exceptions to the rule

There are some exceptions where CSLB can get relief from the automatic stay and suspend any contractor’s license. After a bankruptcy case is filed, a “party in interest” can file a motion in bankruptcy court to get “relief from stay” and pursue the debtor for dues. For this to take place, the creditor (including CSLB) should show an appropriate cause which justifies the “terminating, annulling, modifying, or conditioning [the automatic] stay” as per Section 362(d) of Bankruptcy Code.

There are as many as 13 major reasons when CSLB can suspend a contractor’s license, including two civil judgment cases. The appropriate causes which justify CSLB’s motion for “relief from stay” motion include –

  • Legal grounds apart from non-payment of any debts (business or license related) or a judgment for license suspension.
  • Issues like workers’ compensation insurance, bonding, and changes made in company people.
  • Many potential reasons for the suspension of the stay are included in the list of Contractor’s State License Law (chapter 9 of Division 3 of the California Business and Professions Code). There are 15 articles here with many statutory sections telling ways, how California state license law is being violated.

Role of the automatic stay in license suspension

The automatic stay protection provided by bankruptcy filing ceases all debt collection and judgment enforcing actions. However, police power exception is a governmental action through which any government unit like CSLB can start or continue an action to enforce a judgment. As per the 9th Circuit Bankruptcy Appellate Panel, police power exceptions allow government units to sue a debtor “to prevent or stop the 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)]

CSLB can also suspend the license of a contractor stating consumer protection, public safety, etc. as these falls under “police power” exceptions. Thus, if there are grounds other than the non-payment of dues available to the CSLB, they can easily continue to suspend your license despite filing for bankruptcy. If you wish to protect yourself, you need to make sure there are no other grounds for license suspension available to the CSLB.

Since police power justification overrules any relief available through the automatic stay provision of bankruptcy, it is not necessary that CSLB might opt to file a motion for relief. It is important that if you wish to protect your license from being suspended, your lawyer will bail you out by proving that CSLB has no other basis for license suspension other than the non-payment of debts. For any advice related to contractor’s license protection consult bankruptcy attorneys at 888-297-6023.