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Failure to Report Judgments to the CSLB Will Result in Severe Consequences.

A new case, Pacific Caisson & Shoring, Inc. v. Bernards Bros., Inc. (2015) 236 Cal.App.4th 1246 held that a contractor, whose license was suspended for failing to notify the California Contractors State License Board ("CSLB") of a judgment against it, was not entitled to recover for compensation owed to it, under the substantial compliance exception found in California Business & Professions Code §7031(e).

Pacific Caisson signed a subcontract with Bernards Brothers for construction on a hospital project. At the time the subcontract was entered Pacific Caisson had a valid license. However, in 2000, a related company called Gold Coast Drilling, Inc. ("Gold Coast"), entered into a Stipulated Judgment with a Union for failing to pay union employee benefits. Gold Coast and Pacific Caisson are owned by the same parties and share the same RMO. In 2003, during the Pacific Caisson subcontract with Bernard Brothers, Gold Coast defaulted on the Stipulated Judgment. Gold Coast never informed the CSLB of the Stipulated Judgement, but the Union notified CSLB of the Judgment after Gold Coast's default. The CSLB suspended Gold Coast's license for failure to satisfy a judgment and for failing to notify the CSLB within ninety (90) days of the date of the judgment. Due to the fact that Gold Coast and Pacific Caisson share the same qualifier, Pacific Caisson's license was also suspended pursuant to Business & Professions Code §7071.17(j). Pacific Caisson's license was suspended for 77 days.

Pacific Caisson subsequently sued Bernard Brothers for non-payment on their subcontract. Bernard Brothers defended on the grounds that as Pacific Caisson's license had been suspended during the course of the project they were barred from maintaining an action to recover compensation under California Business & Professions Code § 7031. The Trial Court agreed with Bernard Brothers and Pacific appealed.

Pacific argued on appeal that the substantial compliance exception found in California Business & Professions Code §7031(e) should apply and that they should not be barred from maintaining an action to recover compensation. Pacific specifically argued that Gold Coast substantially complied with licensing laws and thus their license and by extension Pacific's should not have been suspended. The relevant part of California Business & Professions Code §7031(e) states:

"However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid."

The Court first ruled that a Stipulated Judgment must be reported to the CSLB pursuant to California Business & Professions Code §7071.17(b). The Court then found that Gold Coast did not act reasonably or in good faith under part two (2) of the test for the substantial compliance exception. The Court stated that if the failure to notify the CSLB of the stipulated judgment was the result of ignorance of the notification requirement, then Gold Coast acted unreasonably. If the failure was due to fear that if they did so their license would be suspended then, they did not act in good faith. The Court stated that "the substantial compliance exception to the forfeiture rule is "extremely narrow" and applies "only where a contractor was without a license owing to circumstances truly beyond his control." Gold Coast should have reported the judgement, because it did not its license was properly suspended, as was Pacific's as they share the same RMO.

This case illustrates the importance of strict compliance with reporting requirements, and the adverse consequences of failing to do. It is also important to note that a judgment is against the license. If you have multiple businesses and those businesses' licenses use the same qualifying individual, the licenses for each of those businesses will be tainted by judgments against any of the other business.

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