Assembly Bill 1278 Prevents "Dead Beat" Contractors from Starting New Companies

Effective January 1, 2018, Business & Professions Code section 7071.17 has undergone a subtle revision intended to close a loophole that previously allowed contractors and their personnel to avoid having to satisfy judgments.

Under previous law, a licensed contractor faced with a final judgment (rendered in either a court proceeding or binding arbitration) was obligated to both notify the Contractor’s State License Board of the judgment and satisfy the judgment within 90 days of its issuance.  Failure by the contractor to do either of these things would result in an automatic suspension of the contractor’s license until the judgment was satisfied. 

The former law also prohibited the qualifying individuals and personnel of record that were employed by the contractor at the time the final judgment was rendered from working for another contractor until the judgment was satisfied.  Any contractor employing such personnel would also face suspension until the judgment was satisfied.  Thus, any personnel of the contractor in receipt of a final judgment could not try to avoid the debt by “jumping ship” and either starting a new company or joining another. 

Despite its good intentions, the former law encouraged unsavory practices.  Specifically, contractors wishing to avoid satisfying a judgment or having their new companies suspended would simply disassociate from the contractor faced with litigation before a final judgment could be entered, thereby avoiding any suspension of their new company.  New companies were often started in the brief window of time before a trial or arbitration concluded and the judge or arbitrator entered a final judgment.

For consumers and responsible contractors alike, the notion that unscrupulous contractors could avoid responsibility for previous bad acts while continuing to operate under a new company name, was untenable.  Thus, the introduction of Assembly Bill 1278 (codified in the amended B&P Code §7071.17), which now requires the suspension of any license held by a qualifying individual or personnel that were associated with the company at the time the activities on which the judgment is based occurred until such time as the judgment is satisfied. 

As an example, if ABC Contractor is found liable for breaching its contract with a customer and Person A was the qualifying individual for ABC Contractor at the time of the breach, then Person A can no longer avoid liability by forming a new company prior to entry of final judgment against ABC Contractor.  If Person A was with the contractor when the breach occurred, any company subsequently formed or joined by Person A will be suspended until the judgment against ABC Contractor is satisfied.

Of course, the new law may have unintended consequences that could potentially penalize otherwise innocent companies and personnel.  Assume that ABC Contractor built a home for a customer in 2009.  At the time, Person A was the qualifying individual for ABC Contractor but in 2011 left ABC Contractor to start his own company, XYZ Builders.  In 2017, the customer discovers latent defects in the home and sues ABC Contractor.  ABC Contractor is found liable and a judgment is entered.  Although Person A left ABC Contractor without knowledge of a claim, let alone a judgment, because Person A was technically the qualifying individual of ABC Contractor at the time the activities on which the judgment is based took place, XYZ Builders’ license can be suspended until the judgment against ABC Contractor is satisfied.  Person A now faces the potential of having his or her construction company suspended unless ABC Contractor pays the judgment.

Daniel Nevis is a partner at the law firm of Miller Morton Caillat & Nevis, LLP, located in San Jose, California.  If you have questions for Daniel about this article, please email him at djn@millermorton.com