Important New Reporting Requirement for Some Construction Defect Settlements

In response to a tragic balcony collapse incident where the public later learned the contractor had paid millions to settlement defect cases in the preceding years, the California legislature passed, the state contractor’s license board is now implementing, a public disclosure requirement for certain construction defect claims. The disclosure requirement is triggered by a judgment (which is not a new requirement), an arbitration award, or a settlement of certain construction defect claims. These requirements are codified at California Business & Professions Code sections 7071.20-22.

What types of Projects: This requirement applies only if all of the following apply:

A) Residential
B) Multi-Family; and
C) Rental property

Limitations on Claims – The reporting requirement only applies if all of the following are true:

A) The claim is against a CSLB licensee (not a design professional) acting in the capacity of a contractor;
B) The claim is for a structural defect;
C) The total claim is valued at $1 million (not including investigation costs);
D) SB800 does not apply;
E) The action was filed after January 1, 2019; and
F) If a lawsuit, the case was designated complex by the courts (which may not apply if only contractor is sued).

Who has to report: Any licensee (general or sub-contractor) and any insurer for a licensee is required to report the settlement, in writing. If any particular licensee is found to owe $15,000 or less, they are not required to individually report.

When to report: Within 90 days of judgment or arbitration award or within 30 days of payment of a settlement.

Consequences of Reporting: The CSLB will automatically open an investigation into the licensee’s license utilizing their existing complaint process. The license board may take further action but it also has the option of determining that the civil case resolution was sufficient to protect the public and take no further action.

Consequences of Not Reporting: The licensee is in violation of their license requirements and is subject to licensure discipline.

Unanswered Questions:

If the gross settlement for a licensee exceeds $1 million but no individual insurer’s share exceeds $1 million, are the insurers still obligated to report? Section 7071.21 can be read to require that an insurer is obligated to report if they pay any portion of a reportable settlement. [Notably the licensee has to report the settlement either way.]

The CSLB is still developing its implementation protocols. Exactly how to report is not clear but at this time, it would appear that a minimum requirement would be written notice to the CSLB’s complaint intake processing office.

Legislative Update – The CSLB’s Study Under SB465

Following the tragic Berkeley balcony collapse in 2015, the Legislature enacted California Senate Bill 465 which commissioned the Contractors State License Board (“CSLB” or “Board”) to perform a study regarding the efficacy of having contractors report settlements to the Board. In December 2017 the CSLB released their findings in a report. The ultimate conclusion of the report is to recommend to the Legislature that the ability of the CSLB to protect the public “would be enhanced by regulations requiring licensees to report judgments, arbitration awards, or settlement payments of construction defect claims for rental residential units.” Senator Jerry Hill authored SB465, and his office is presently now drafting legislation on settlement reporting based in part on this study.

The most troubling concern about the study is transparency. The report references nine exhibits, all of which have been withheld from publication under purposes of confidentiality. Therefore, much of the CSLB’s study must be taken at face value because much of the data they rely on to formulate their conclusions cannot be independently verified.

One of the factors that the CSLB undertook in its study was to determine criteria for when a settlement was “nuisance value,” and therefore less important for reporting purposes. The CSLB acknowledged there was no industry-wide definition for “nuisance value,” whether it be in the insurance industry, construction industry, or otherwise. Insurer survey respondents reached a general consensus on aspects of what can constitute a “nuisance value” settlement, including the amount of the settlement and the size of the case. However, the response rate to the insurer survey was only 3.3 percent. In general, the concern with using settlement amount and size of the case as indicative factors is the fact that a large settlement size, for instance, may still constitute a “nuisance value” settlement. One example would be a large settlement figure in a case involving hundreds of homes in multiple subdivisions.

The CSLB also raised another concern in that, presently, any implementation of mandatory settlement reporting would not be fully aligned with statutes of limitation. The Board noted that under present regulations (in particular, Business & Professions Code section 7090), it cannot impose discipline on a licensee without first undertaking an investigation. Yet, under Business & Professions Code section 7091, the CSLB has 4 years from the date of violation to commence a disciplinary action from the date of violation; 10 years if the alleged violation is a latent defect that specifically concerns structural defects. (With regard to the exception for latent structural defects, the CSLB admits that to “prove up” such an exception would require expenditure of resources such as retaining experts and issuing subpoenas.) Moreover, the burden of proof between the civil action that resulted in a settlement (preponderance of the evidence) is lower than the burden of proof the CSLB must establish to impose discipline on a licensee (clear and convincing evidence). The CSLB estimated that such an investigation by itself would take 6 months to 1 year to establish a case under clear and convincing evidence. Because it is common for construction defect actions to be filed close to the 10-year statute of repose, and sometimes years before such an action to reach settlement, it would not be surprising for a settlement to be reported to the Board after the time has passed for which it can prosecute for a disciplinary action. It is presently unclear whether any forthcoming bill mandating settlement reporting will address these statute of limitations or burden of proof issues.

The more practical concern for licensees is that they are already exposed for a decade following substantial completion of their projects under Code of Civil Procedure section 337.15. Presuming it takes at least 1 to 2 years minimum to settle such an action filed close to the expiration of the statute of repose, licensees would then be obligated to report their settlement to the Board, thereby potentially exposing them to an entirely new investigation, which in turn may take in excess of a year to complete. Under this scenario, a licensee can face penalties for a project it left around a decade and a half prior. The CSLB implicitly acknowledged the possibility of engaging in “fishing expeditions,” noting that from the facts of studied cases, other “conceivable” violations of the Contractor’s Law could be present that are separate and distinct from the settled defect claims, and that such new potential violations could warrant further investigation. In other words, the Board could use a reported settlement as the basis to start an investigation of defects that would spread out to other areas which may not even be encompassed in the underlying lawsuit.

The CSLB also noted a logistical difficulty with settlement reporting. If two contractors are involved on a single project, the Board would need to receive settlement information simultaneously and not separately in order to perform a proper analysis and assign responsibility “without having to conduct undue additional research.” The concept of simultaneous settlement reporting will undoubtedly be difficult to implement in situations such as when one party to a defect suit settles but the other does not. Similarly, what if one party to a defect suit settles, the other does not, and after trial the settling party is found mostly at fault? What about joint ventures and other single purpose entities? The CSLB’s study does not address these concerns.

The CSLB noted that the Board of Professional Engineers, Land Surveyors, and Geologists (BPELSG) contains a case reporting requirement embodied in Business & Professions Code sections 6770, and pursuant to that section, the BPELSG opens cases on all settlement reports they receive. The BPELSG stated that a majority of the reports they receive arise out of settlement, not judgment. Similarly, the CSLB acknowledged that the California Architects Board (CAB) also contains a reporting requirement, embodied in Business and Professions Code section 5588. CAB reported that, of their licensed population, they receive reports relating to approximately 0.14% of their licensees per year. Both boards reported that the utility in case reporting is mostly a consumer protection device for the public good. It can thus be inferred that the reporting requirement is not necessarily meant to produce results (i.e., more findings of violations or imposition of discipline).

In contrast, the CSLB licenses more than twice the amount of entities that the BPELSG and CAB do, combined. Moreover, BPELSG and CAB license individuals, while the CSLB licenses both individuals and entities with qualifying individuals. Further complicating this matter is that on a typical construction project, the number of individuals licensed by BPELSG and CAB are minimal compared to the numbered of CSLB-licensed entities. This is logical, given the presence of multiple contracting trades on a given project, as opposed to the number of designers.

The CSLB assumes that the percentage of licensed individuals who would be disciplined should a reporting requirement be instated would be similar to BPELSG and CAB, around 11 to 15%. But this assumption is based on the CSLB’s present complaint versus discipline figure, where around 15% of claims result in disciplinary action. Of course, the two figures are not necessarily correlative, as the BPELSG and CAB base their figure on actual settlement reporting, while the CSLB’s figure is based on present disciplinary actions in a setting without mandated reporting.

It is understood that Senator Hill, author of the SB465 study bill, is presently drafting legislation that would impose a mandatory settlement reporting requirement for construction defect cases involving rental residential units. As discussed above, there are multiple hurdles with developing a reporting requirement that actually empowers the Board and protects the public while not imposing undue potential exposure to licensees beyond the statute of repose, and which utilizes public resources and taxpayer money wisely. It can be said that more investigation and enforcement will always benefit the public good. The difficulty, however, is balancing the interests of all stakeholders, and determining where to “draw the line” between judicious expenditure of limited resources and safety enforcement for public welfare.

Assembly Bill No. 1793: A Step in the Right Direction, But Much More Can Be Done to Protect Contractors from Abuses of §7031’s Draconian Penalties

The Current Law

The Contractors’ State License Law (CSLL), Business and Professions Code §7000 et seq., comprises a series of statutes governing contractor licensing in California. The statutory scheme imposes strict requirements and harsh penalties in an effort to “protect the public from incompetence and dishonesty” in the industry by assuring that construction contractors have requisite skill, character, and knowledge. Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995.

The statute governing civil penalties, §7031, institutes a dual “shield and sword” scheme that affects an unlicensed contractor’s right to receive or retain compensation for unlicensed work.  White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 518.

70319(a), the defensive “shield” provision, prohibits a contractor from suing to collect compensation for any work requiring a contractor’s license unless proper licensure was in place at all times during such contractual performance. MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 419.

In 2001, legislature enacted §7031(b), the offensive counterpart to §7031(a). The so-called “sword” provision allows persons who hire unlicensed contractors to recover all compensation paid to the unlicensed contractor for performing any act or contract. Cal Bus & Prof Code § 7031(b); White v. Cridlebaugh at 519. The provision permits reimbursement even if the hiring party knew the contractor was unlicensed. Alatriste v. Cesar’s Exterior Designs, Inc. (2010) 183 Cal.App.4th 656, 668.

However, these draconian suit-preclusion and disgorgement penalties can be counteracted by a showing of substantial compliance, requiring that the 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.” Cal Bus & Prof Code § 7031(e).

Owner/Developer Abuse of §7031 and Assembly Bill No. 1793

The stiff application of §7031 obviously inured to the benefit of developers and owners, who could exploit even the smallest instances of noncompliance. Brief licensure lapses and complications arising from internal license transfer (during mergers, acquisitions, and corporate reorganizations) became the subject of abuse by unscrupulous owners, who withheld payment or sought disgorgement from noncompliant contractors even when there was no issue with the work performed.

The California legislature began to notice the injustice afforded by such a rigid and unforgiving scheme. In response, it passed Assembly Bill No. 1793, which will take effect in 2017, and will soften the substantial compliance requirements by removing the condition that the contractor did not know or should not have reasonably have known that he or she was unlicensed during performance of the contract.

Suggestions for Further Amendment

Although the amendment posed by AB 1793 will prevent some of the most blatant abuses of the §7031, much more can be done to create an evenhanded statute that protects the interests of both owner/developers and contractors alike. The following suggestions should be considered in instituting a fairer penalty provision.

a.  Provide definitions to “duly licensed” and “unlicensed.”

As stated in AB 1793’s Senate Floor Analysis, these terms “are not defined in the [CSLL], but are decisive terms under BPC Section 7031. Consequently, the legal profession lacks clear guidelines when judging the license status of a contractor, and the disgorgement provisions authorized by subdivision (b) are being misinterpreted and maliciously applied for personal gain, even when there is no issue regarding the quality of work performed.”

b.  Hold evidentiary rulings to determine if owner/developer knew, or should have known that contractor was unlicensed.

The current rules place absolutely no responsibility on owner/developers to ensure that they hire properly licensed contractors. While the statutes purport to protect the public from incompetence and dishonesty, they overlook the fact that many owner/developers are sophisticated business entities that have the resources to ensure that their contractors maintain proper licensure. Therefore, before imposing the harsh penalties of §7031, courts should hold evidentiary rulings to determine whether owners/developers knew or should have known that they hired unduly licensed contractors. The determination of whether an owner/developer “should have known” would likely take several factors into consideration, including: 1) the wealth and sophistication of the owner/developer 2) the extent of the owner/developer’s involvement in the construction industry, 3) the owner/developer’s knowledge of licensing laws, and 4) whether the owner/developer is a business entity that can properly allocate risk. If the court finds that the owner/developer knew or should have known that it hired unlicensed contractors, it should mitigate the §7031 penalties by permitting actions for partial compensation, or by allowing only partial disgorgement.

c.  Partial compensation or disgorgement when there are no issues with the quality of the work.

If an owner/developer does not allege any problems with the quality of the contractors work or the court determines that the work itself (i.e. not licensure) complies with statutory, regulatory, and contractual requirements, then it should likewise mitigate the §7031 penalties by permitting actions for partial compensation, or by allowing only partial disgorgement.

d.  Institute the prorated or partial compensation scheme proposed by the CSLB.

In 2013, the Contractors State Licensing Board sponsored SB 263, which proposed to modify BPC Section 7031 by providing that a contractor may pursue payment for any work on the contract while duly licensed, but preclude payment for work performed in a classification in which the contractor was not licensed, was under license suspension, or was under an expired or inactive license when the work was performed. This scheme is obviously more just that the current “all-or-nothing” approach.

Update on The Fallout From The Berkeley Balcony Collapse

Approximately one year ago, six people were killed in Berkeley, California when an apartment building balcony collapsed during a party attended by exchange students form Ireland. As we have previously reported on this blog – Berkeley Balcony Collapse Raises Questions; Bill in Response to Berkeley Balcony Collapse; Berkeley Balcony Collapse Update; and Builder Segue Construction’s Temporary Restraining Order, the legal fallout from this tragedy continues to reverberate.

Most recently, the Alameda County District Attorney decided not to press criminal charges because the investigation determined that it would be difficult to establish evidence sufficient to meet the legal threshold for manslaughter resulting from criminal negligence. No evidence could support a finding that any firm or individual involved with construction and design of the balcony acted with gross negligence or reckless conduct “akin to a disregard to human life…” such that there would be reasonably foreseeable deadly consequences.

Meanwhile, the California State License Board has just completed a nine month long investigation into the five construction companies that were involved in building the balcony and apartment complex in which it was located.

The License Board found that the collapse was caused by “…water incursion that caused dry rot” and that the contractors did not perform their work to “trade standards”. Those five companies are Segue Construction, Etter and Sons Construction, R. Brothers Waterproofing, North State Plastering and the Energy Store of California. They were the general, framing, plastering and waterproofing contractors and also the material supplier of ventilation equipment, respectively.

The License Board has decided to forward its results to the California Justice Department for further proceedings. Punishment could range from an infraction to a license suspension. The Justice Department’s investigation results and findings will not be released until or unless charges are formally filed and no further information about those proceedings is available.

Meanwhile the status of Senate Bill 465, a bill initiated in the California State Senate intended to require all contractors to disclose past felonies or lawsuits alleging defects brought against them for negligence or fraud, was being considered by Committee members for potential action, but lacking a consensus, the bill stalled in Committee.

Stay tuned to this blog site for further updates on these proceedings.

Effective January 1, 2016 California Contractor License Bonds Will Increase

As of January 1, 2016, the required amount of a contractor’s bond will again increase from $12,500 to $15,000. Contractor bonds are required for the issuance of an active license, reactivation of a license, and for the maintenance of any actively renewed license. The $2,500 increase is the result of Senate Bill 467, which was approved by the Governor on October 8, 2015. Previously, an applicant was also required to provide evidence of financial solvency. However, this requirement has been removed and instead, the amount of the bond was increased to $15,000. Although the amount of the contractor’s bond will increase, the amount of a qualifying individual will remain at $12,500.

For contractors whose bonds do not expire on December 31, 2015, the Board is requiring an endorsement authorizing the increase that must be signed by an attorney-in-fact for the surety company. This endorsement will have no bearing on the effective date of the bond, so contractors should remain aware of the date that the bond expires, at which point it will need to be renewed. As a result of the increase, applicants should expect to pay a slightly higher premium for their bond. Failure to file a bond or increase endorsement timely may lead to suspension or revocation of current licenses. As such, contractors should allow plenty of time for the Contractors State License Board to process the bonds and endorsements to ensure that there is no lapse in coverage.

Builder Segue Construction’s Temporary Restraining Order Against The Alameda County District Attorney’s Office Denied

Segue Construction, the builder of the apartments where the balcony collapsed in Berkeley, CA killing six people, sought to obtain a temporary restraining order against the Alameda County District Attorney’s office from investigating the condition of the collapsed deck without Segue’s participation. The Alameda County District attorney is investigating the remnants of the collapsed deck, and another one similar to it, located on the same building and immediately underneath it, as part of a criminal investigation into the accident. Segue’s attorneys argued that crucial evidence in the collapse would be jeopardized by any “destructive testing” of the decks’ remnants and requested that its team be given access to any testing that the Alameda County District attorney’s investigators perform.

In its moving papers Segue argued that allowing it access to observe the deck materials and remnants would not prevent the district attorney from performing its investigations. Segue contended that it was merely requesting the opportunity for its own consultants to be present during any testing of the deck materials and remnants. The district attorney argued that the proposed temporary restraining order would violate section 526 of the California Code of Civil Procedure because it would interfere with the execution of the district attorney’s investigation and prosecution of potential criminal activity. The district attorney further offered that the evidence gathered as part of an ongoing criminal investigation is by its nature confidential and that such confidentiality of the investigation would be destroyed and would compromise the “integrity and viability of the investigative process.”

The district attorney argued that Segue failed to demonstrate that it had any rights with regard to this balcony because it did not own the balcony, and was not part of any formal lawsuit filed against it. The district attorney also contended that if such a temporary restraining order were granted by the court, it could impede future criminal investigations, setting a precedent that would allow “a bank robber …to participate in the fingerprinting of a teller’s station.” The balcony was not its property and other third parties would be denied the same opportunities as Segue would get if it were allowed to participate in the investigation.

More legislative and legal activity is sure to follow.

Berkeley Balcony Collapse Update: New, Stricter City Ordinances; State Bill Narrowly Defeated

As expected, the response to the tragic balcony collapse in Berkeley, California that killed six people has been swift but with mixed results. On the local level, the Berkeley City Council voted Tuesday to make several immediate changes to their local building requirements. First, all new balconies must be made of corrosion-resistant materials and be ventilated to prevent the buildup of moisture. While the investigation into the cause of the collapse is still ongoing, investigators have been pointing to the lack of any venting mechanism on these balconies as a potential cause for the alleged dry rot that is believed to be the cause of the collapse. As well, the council mandated that all balconies in Berkeley be inspected within the next six months and every three years after that. No details were given as to what those inspections would entail (visual or destructive) or who would be conducting the inspections. It will be interesting to see whether the city puts the onerous on the owners or whether this will be a city-run initiative.

Meanwhile, on the state level, a bill that would require contractors to disclose past felonies or lawsuits alleging defects, negligence, or fraud to the California State License Board (SB465) died in committee by a vote of 7-3. Only 8 votes were required for the bill to leave committee and be brought to the floor of the state senate for debate. Four of the committee members abstained from voting citing their concerns that the bill was “half-baked” and that there had not been enough time given to work out the specific details with the state licensing board. Supporters of the bill believe that this defeat in committee likely means that the bill has no chance of passing this year.

While there is mounting public pressure for the legislature to do something in response to this tragedy, passing a “half-baked” bill is not the solution. While there may be some logic in reporting requirements for contractors in certain situations, some significant thought must be given into exactly how that will happen and how the CSLB will treat such reports. Simply reporting the total value of a settlement in a construction defect case does not tell the whole story as to the quality of construction or the negligence of the parties involved. Given the relative ease with which construction defect cases are filed in California and the low threshold required for making allegations of negligence and even fraud, some thought has to be given to how the claims will be treated once they are reported to the CSLB and whether the CSLB has the resources available to conduct an evaluation of each claim for purposes of determining which cases warrant any action against a given contractor. It will be interesting to see how this bill evolves over the next few months before it is brought to the floor for debate.

Bill in Response to Berkeley Balcony Collapse Dies in Committee

Legislation written in response to last month’s deadly balcony collapse in Berkeley failed to advance July 14th in the Assembly Business and Professions Committee and is therefore stalled until next year. It fell one vote short of passage. Senate Bill 465 would have required contractors, and their insurers, to report to the Contractors State License Board settlements in excess of $50,000, or a binding arbitration resulting in an award of more than $25,000 involving cases of defects, fraud, negligence or incompetence. The bill would have made the provisions operative only if the Legislature appropriated money and granted hiring authority to the board for the purpose of acting on the information. The bill was opposed by the California Building Industry Association.

Berkeley Balcony Collapse Raises Questions About Reporting Requirements for Contractors

In the wake of the recent balcony collapse that killed six people in Berkeley, California, questions have been raised regarding past claims made against the general contractor of that building, Segue Construction, particularly those regarding improperly waterproofed balconies at previous projects. Several news stories have discussed past lawsuits from personal injury lawyer firms and settlements involving Segue in which allegations of improperly waterproofed balconies were made on several projects in the bay area. While it is difficult to draw any conclusions as to what occurred in Berkeley from any of these past claims, the question that is now being raised in the media is whether the California State License Board (CSLB) should be tracking claims made against contractors in an effort to keep events like these from occurring in the future.

Currently, there are no reporting requirements in California for contractors who are named as defendants in construction defect litigation matters. The only construction-related entities who have reporting requirements in California are architects (settlements, arbitration awards, or civil judgments in excess of $5,000; California Business and Professions Code section 5588, et seq.) and engineers (settlements in excess of $50,000, or judgments/arbitration awards in excess of $25,000; California Business and Professions Code sections 6770, et seq, and 8776, et seq.).

The real question is whether reporting requirements for all contractors will have the desired effect of reducing defective construction on future projects. Unlike design professionals whose design, if defective, could be used/repeated on multiple, future projects, contractors are generally faced with an entirely new set of circumstances on each new project. From location, to design drawings, to the subcontractors utilized to perform the work, to the materials used and/or specified, each project presents an entirely new set of facts to work within. For general contractors in particular, who more often than not do not self-perform any of the work on a given project, the question is whether a reporting requirement will have the desired effect of deterring defective workmanship when they are not the party actually performing the work.

For the subcontractors who actually perform the work, it’s possible that a reporting requirement may be justified, particularly if a given subcontractor is shown to have a history of defective workmanship. From a practical standpoint, however, one issue will be exactly what each subcontractor is required to report. Unlike design professionals, most contractors do not have a consent clause in their insurance policies, and therefore the insurance carrier defending the claim can resolve the case anyway it sees fit, which may mean paying more money to resolve a case to avoid the uncertainties of trial. As well, there may be numerous non-defect related components to a given settlement such as contractual defense and indemnity obligations as well as the potential threat of joint and several liability with other joint tortfeasors who may have no assets and no insurance. As such, the amount a subcontractor pays to resolve a case may have little correlation to the overall quality of their work. Given the complexity of any potential contractor reporting requirement, for such a requirement to be effective and not negatively impact the building industry, significant resources would need to be added to CLSB to allow the degree of investigation that would be necessary to assure that contractors are treated fairly.

The question has also been posed regarding how confidentiality provisions that appear in many settlement agreements in construction defect cases may affect potential reporting requirements for contractors where the terms of the settlement are to remain confidential. In light of the tragedy that occurred in Berkeley, the media has questioned whether the legislature should ban such confidentiality provisions under to the guise of a greater public safety concern. However, unlike in the narrow situations where the legislature has taken such a drastic step (i.e. medical device claims), it is the rarest of circumstances where construction defects result in significant personal injury, and therefore the public safety argument may not be as strong. In the event the legislature or CSLB does take action to require reporting requirements for contractors, however, a simple carve out in the confidentiality provision allowing the contractor to report only the information required may still allow for the use of such provisions.

Given the international attention the Berkeley balcony collapse has received, the debate is just beginning on this subject and it is likely that the state legislature will have the final say on whether reporting requirements will be extended to contractors.

The Significance of Reporting Judgments

Contractors beware! Pursuant to the recent findings of the California Court of Appeal in Pacific Caisson & Shoring, Inc. v. Bernards Bros Inc., in the event there is a judgment imposed on a contractor, the contractor must notify the Contractors’ State Licensing Board within 90 days of the judgment as to any unsatisfied portion of the judgment or face an automatic suspension of the contractor’s license pursuant to Business & Professions Code 7071.17. Further, as a condition to continual maintenance of the license, a contractor must file a bond with the CSLB sufficient to guarantee payment of any unsatisfied judgments. Keep in mind that Business & Professions Code 7071.17 is broadly interpreted by the CSLB to mean that if the judgment relates in any way to your construction business, it is considered “construction related” and thus, even a stipulated judgment for failure to pay pension and other benefits (which is considered a failure to pay wages to employees) would fall into the reporting requirement of Business & Professions Code 7071. This is a type of judgment that the CSLB considers “substantially related to the construction activities of a licensee.”

In Pacific Caisson & Shoring Inc. v. Bernards Bros Inc., the California Court of Appeal confirmed that failure to report judgments to the CSLB will in fact result in a suspended license. Pacific filed suit against Bernards for compensation for work it performed on a project to build a medical center for Ventura County. Bernards raised an affirmative defense that Pacific was not properly licensed at all times during the project, and cross-complained against Pacific to seek reimbursement for the money owed. During the project, the CSLB suspended Pacific’s license as a sanction for its failure to notify the CSLB that a judgment had been entered against it. The trial court found that Pacific failed to substantially comply with the requirement that contractors be licensed while performing work under Business & Professions Code 7031. Pacific appealed contending that the judgment was not “substantially related” to its construction activities within the meaning of Business & Professions Code 7071.17, thus Pacific’s license should not have been suspended. The Court of Appeal disagreed and held that the judgment falls precisely within the ambit of section 7071.17, affirming judgment against Pacific.

In short, and when in doubt, report any judgments related to the business promptly to the CSLB to avoid suspension. Failing to do so could be costly. Moreover, it could serve as a basis for the hiring entity to later seek reimbursement for money paid on a project.