2009 Brings Changes to State Laws for California Contractors

The Contractors State License Board (CSLB) is advising contractors about some of the changes in California law during the 2008 legislative session that may impact them and/or their business practices.

Increased Penalties SB 797 (Ridley-Thomas) Business & Professions Code § 490. Expands the penalties for individuals who contract without a license if they were named on a revoked license and were found to be culpable in the license revocation. (Amended Stats 2008 ch 33 § 2, effective January 1, 2009.)

Sunset Dates SB 963 (Ridley-Thomas) Business & Professions Code § 7000.5. Extends the legislative sunset date for the Contractors State License Board until January 1, 2011.The original sunset date for CSLB was July 1, 2009. (Amended Stats 2008 ch 385 §1, effective January 1, 2009.)

Contractor Bonds SB 1432 (Margett) Business & Professions Code § 7071.5, § 7071.10 and § 7071.11. Requires that a contractor's bond and the qualifying individual's bond be available to a property owner whose single-family dwelling is damaged as the result of a violation of the state Contractors License Law, if the dwelling is not intended or offered for sale at the time the damages were incurred. (Amended Stats 2008 ch 157 §1 (1), §3 (c) (2), effective January 1, 2009.)

Small Claims Code of Civil Procedure § 116.220. Increases the small claims court filing against a defendant guarantor that charges a fee for its guarantor or surety services from $4,000 to $6,500. (Amended Stats 2008 ch 157 §4 (4) (c) (3), effective January 1, 2009.)

Owner-Builder Declarations AB 2335 (Nakanishi) Health and Safety Code § 19825. Streamlines the law covering the owner-builder permit process. Expands the requirements for an owner-builder to acknowledge the risks of contracting with unlicensed contractors when obtaining permits. (Repeals Sections 19825 §1, 19830 §3, 19831 §4, and 19832 §5 of the Health and Safety Code, and Added Stat 2008 ch 66 H&S 19825 §2 (a), effective January 1, 2009.)

These laws will are included in the 2009 California Contractors License Law and Reference Book. Additional details of each legislative change is available by looking up the California code and section number on the following state Web site: http://www.leginfo.ca.gov/.

Contractors State License Board Warns Consumers to Check License Before Hiring Contractors

Suspect arrested for installing peep cameras in Rancho Cucamonga was not licensed

The Contractors State License Board (CSLB) is warning consumers to be vigilant in checking out the credentials of contractors after an unlicensed electrician was arrested for installing hidden cameras without homeowners' knowledge in Rancho Cucamonga.

David Mitchell Clark, 34, was arrested this week by Rancho Cucamonga Police after he allegedly installed hidden cameras in the bathrooms of unsuspecting customers who hired him for electrical work. There are no records of David Mitchell Clark or his company DMC Electrical with CSLB licensing. The Police Department has warned consumers, in a press release, to check their electrical outlets for possible hidden cameras, if they hired David Clark to perform work.

"We can't stress this enough, for property owners to be careful about who they hire to perform contracting work," said CSLB Registrar Steve Sands. "It only takes a few minutes to check out a contractor's license status. Ask for the contractor's plastic pocket license and photo identification, then go online or call the CSLB’s automated phone system to verify the status of the license."

Anyone with complaints about David Clark or any other unlicensed operator can file a complaint with the CSLB Statewide Investigative Fraud Team (SWIFT) in Southern California at: Office numbers (562) 345-7600 / FAX (562) 466-6065.

The CSLB urges consumers to follow these tips when dealing with any contractor:

• Don't rush into decisions and don't hire the first contractor who comes along.
• Be especially hesitant when approached by someone offering home improvement services door-to-door, especially when they will use material they claim is left over from another job.
• Verify the contractor's license by checking online at http://www.cslb.ca.gov/OnlineServices/CheckLicense/LicenseRequest.asp or via CSLB's automated phone service at 1-800-321-CSLB (2752).
• Get three references for each contractor and three bids.
• Make sure the contract for work to be done is in writing and that you understand all terms before you sign it.
• Never pay more than 10% or $1,000, whichever is less, as a down payment.
• Don't pay in cash, and don't let the payments get ahead of the work.
• Contact the CSLB if you have a complaint against a contractor.

The Contractors State License Board operates under the umbrella of the California Department of Consumer Affairs. The CSLB licenses and regulates California's 316,000 contractors, and investigates more than 20,000 complaints against contractors annually. In fiscal year 2007-08, the CSLB obtained nearly $35.2 million in ordered restitution for consumers.

Governor Vetoes SB 1691 (Mechanic's Lien Law)

Governor Schwarzenegger has vetoed SB 1691, a bill that would have made significant changes to California Mechanic's Lien law and the rules governing construction claim remedies for both private works and public works projects.

The Governor's veto message, which was sent with many of the bills he vetoed at the end of this year's session:

"I am returning Senate Bill 1691 without my signature. The historic delay in passing the 2008-2009 State Budget has forced me to prioritize the bills sent to my desk at the end of the year's legislative session. Given the delay, I am only signing bills that are the highest priority for California. This bill does not meet that standard and I cannot sign it at this time."

No License = No Payment

In 2005, the California Supreme Court decided a case that could be catastrophic for contractors working in California and a fortuitous windfall for anyone contracting with an unlicensed contractor. In MW Erectors, Inc. v. Neiderhauser Ornamental and Metal Works Company, Inc., the court held that contractors unlicensed at any time during a project cannot sue for payment, unless they satisfy a narrow statutory safe-harbor for contractors substantially complying with licensing laws. An unlicensed contractor’s forfeiture is required even if equity – principles of fundamental fairness – compels payment to the unlicensed contractor.

This year, a new case upheld a similarly harsh interpretation of Business & Professions Code section 7031. In Great West Contractors, Inc. v. WSS Industrial Construction, Inc., a subcontractor, WSS Industrial Construction (“WSS”), was barred from bringing a suit against Great West Contractors because WSS was not licensed at all times. WSS is a corporation that had applied for, but not yet obtained, their corporate contractor’s license at the time it submitted its bid. WSS had entered into the contract, ordered parts, and submitted plans before the corporation was actually licensed. However, it had not started actual construction of the site. The RMO of WSS was licensed as an individual and a partnership, but not on behalf of the corporation.

The law states that “…except as expressly otherwise provided, a contractor may not sue to collect compensation for performance of ‘any act or contract’ requiring a license without alleging that he or she was duly licensed ‘at all times during the performance of that act or contract.’ ”

Business and Professions Code section 7031(e) gives the only exception to the contractor’s licensure requirements. It states that the courts can find there is substantial compliance with the license requirements, “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) and did not know or reasonably should not have known that he or she was not duly licensed.” Just as MW Erectors failed to meet this standard, so did WSS because the corporation was not licensed.

The Appellate Court denied WSS’s case, even though the Court itself agreed that they “are cognizant of the harshness of this result. But the law is clear.”

Why Bonding Around a California Mechanics’ Lien can Unintentionally Extend the Deadline to File a Mechanics’ Lien Lawsuit by Six Months or More

by William L. Porter, Attorney at Law

Where California mechanics’ liens are concerned, there are few dates, the passages of which are more appreciated by property owners than the last day to file a lawsuit to foreclose on a mechanics’ lien. This is because unless the deadline to file a lawsuit to foreclose on the mechanics lien has been extended by a properly drafted and notarized “Notice of Credit” which has been duly recorded with the County Recorder in the county where the property is located, under California Civil Code section 3144, the deadline to file such a lawsuit will expire 90 days after the mechanics’ lien was recorded. While exceptions may possibly exist when that date falls on a holiday or weekend, for the most part the 90th day is the absolute “drop dead” date for filing a suit. After that date, the mechanics’ lien automatically expires and the property owner cannot be sued for purposes of foreclosing on a mechanics’ lien.

Often, when a mechanics’ lien is first filed by a subcontractor or supplier, the owner instantly demands that the prime contractor record a “Bond to Release Mechanics’ Lien.” While the owner often has that right under the contract to make such a request, if the prime contractor can convince the owner to exercise a little patience, such a delay will often yield a much better result. If the prime contractor can persuade the owner to wait until 90 days have passed since the lien was recorded, the lien will of course become unenforceable through the passage of time. The lien claimant will then no longer have the right to pursue the particular mechanics’ lien claim against the property.

It is well known to contractors that many subcontractors and suppliers, while extremely good at their trades, will, for a variety of reasons, ultimately fail to file suit to foreclose on their mechanics’ lien within 90 days, thereby losing their mechanics’ lien rights against the owner and his property. As far as the contractor and owner should be concerned, the mechanics lien problem is then solved.

A different rule applies, however, when the prime contractor is forced to supply a mechanics’ lien release bond. In such a case the deadline to file a lawsuit is extended by another six months. Moreover, in the event the contractor fails to properly notify the lien claimant that the release bond has been recorded, the deadline to follow suit continues, perhaps indefinitely, until six months after the notice is finally properly given. The relevant statute on the subject is Civil Code Section 3144.5, which states as follows:

“Civil Code 3144.5. Any person who obtains a lien release bond which is recorded pursuant to Section 3143 shall give notice of the recording to the lienholder by mailing a copy of the bond to the lienholder at the address appearing on the lien. Service of the notice shall be by certified or registered mail, return receipt requested. Failure to give the notice provided by this section shall not affect the validity of the lien release bond, but the statute of limitations on any action on the bond shall be tolled until the notice is given.

Any action on the lien release bond shall be commenced by the claimant within six months of the recording of the lien release bond.”

Under the statute, if the owner had simply waited until 90 days had passed, there would be no need for the lien release bond. The lien would simply have expired under Civil Code section 3144. There would also be no new right to a new claim on which to sue based on the lien release bond. There would be no need to give notice and wait an additional six months to see if the new six month deadline to file suit would be missed.

An even more unfortunate situation can arise when the contractor does not wait for the 90 days to pass and bonds around the mechanics’ lien and fails to properly inform the lien claimant that he has in fact bonded around the mechanics lien. If the lien claimant does not file its suit within 90 days after the lien was recorded, it may ultimately believe that it has missed its deadline. In truth though, it still has a right to bring suit on the mechanics’ lien release bond and will maintain its rights to sue on the lien release bond until six months after it has been notified that the lien release bond exists. This could conceivably go on indefinitely. The prime contractor may be caught in the unfortunate dilemma of choosing between notifying the lien claimant that the there is a lien release bond and that the lien claimant has six more months to sue or paying successive indefinite premiums to renew its lien release bond.

All in all, whereas a little patience could have resulted in all mechanics’ lien rights expiring after 90 days, the failure to exercise this patience and precipitously bonding around the lien can give rise to additional significant liability exposure and bonding costs for at least six months and potentially longer. The message to be gleaned from this is that it is generally more convenient, cheaper, and less troublesome to wait for the 90 day mechanics’ lien lawsuit deadline to expire than unnecessarily jumping the gun and bonding around the mechanics’ lien.

William L. Porter is a principal in Porter Law Group, Inc. in Sacramento, California. He can be reached at (916) 381-7868.

Dispute Resolution: The CSLB's Arbitration Program

From California Licensed Contractor, Summer 2008

You just received a letter from CSLB that a complaint has been filed against your license and arbitration is being provided as the resolution. Congratulations!

Your case has been determined as eligible for this unique and very fair program that is paid for by the CSLB. Arbitration is an efficient resolution tool if the dispute is about non-licensing issues, such as workmanship, the contract terms, change orders (or lack thereof), and if there are no violations or disciplinary actions required.

Complaints that meet specific criteria and include a potential financial injury of $12,500 or less may be referred to mandatory arbitration at the complainant’s request. Complaints that meet this same criteria and include a potential financial injury that is between $12,500 and $50,000 may be referred to voluntary arbitration if both parties (the complainant and the contractor) are willing to resolve the dispute within this forum.

So, what is arbitration anyway? The complainant (typically a homeowner or, in some instances, another contractor) and yourself will present your case before a neutral arbitrator who is knowledgeable in the trades. You will receive a hearing notice from the administrative agency, the Arbitration Mediation and Conciliation Center, which will provide for a time and place for the hearing. At this assigned time, both the complainant and you will have the chance to present your side of the story to the arbitrator, who will then render a decision that will serve as the final outcome of the dispute.

Is it really that easy? Yes… and no. Both the complainant and contractor have to prove their case. In other words, you must present evidence for your side of the story, such as cancelled checks, contracts, change orders, phone records, reports and any other information that will help the arbitrator get a clear view of what happened on the project. Also, the arbitrator will consider any outstanding contract balance or bond payments, so be sure to have that information as well. Remember, whatever the arbitrator decides will be final. There is no appeal process, so it is very important that you be prepared and bring everything to the hearing.

What does an Arbitration Award mean for your license? If you are required to pay the complainant, and do so within thirty (30) days, then the complaint is not disclosed on your license. But, be careful; if you are required to pay and do not within ninety (90) days, your license can be revoked. However, you might prevail in the arbitration and the complainant may owe you money, which may be confirmed in court as a judgment.

Arbitration may be the best solution to a dispute with a complainant. You are given the opportunity to tell your side of the story and be heard by an arbitrator that knows the building industry and the trades. You may or may not win, but the process is fair to both sides and the outcome will be equitable. So, if you are given the opportunity to arbitrate your dispute, congratulations!

More information about the arbitration program is available at www.cslb.ca.gov or www.AMCCenter.com.

Missed Your Deadline for Recording a Mechanic’s Lien?

The Attachment Lien: A Powerful Alternative to the Mechanic’s Lien and Stop Notice

Under California law, an unpaid contractor or material supplier is entitled to a security interest in the property improved by his or her contribution to a private works project – a mechanic’s lien. To successfully utilize this powerful remedy, however, a contractor or supplier must comply with strict deadlines for notifying the project owner, recording the mechanic’s lien, and filing in court to foreclose the lien. But, what if these deadlines have passed?

While contractors may have other options to secure payment, such as a stop notice or payment bond, these remedies have strict statutory deadlines as well, and not all private works projects have payment bonds in place.

With up to four years within which to file, and attachment lien may be a viable option. Under California law, if someone is owed money under a contract, he or she is entitled to obtain an attachment lien on the debtor’s assets to secure payment. (Code of Civil Procedure § 481.010, et seq.) If the underlying contract was verbal, the creditor has two years to file in court; if the contract was in writing, that statute of limitations is increased to four years.

To pursue this remedy, a lawsuit must be filed in the court having jurisdiction. This process requires a written application and, usually, a hearing before the judge. If the court determines that the creditor’s claim is valid, it will issue an order that enables the creditor to have the sherrif levy against the debtor’s assets. If the matter is urgent (e.g. the debtor is insolvent or trying to hide or destroy assets), the court can issue an attachment order(s) with little notice to the debtor.

The attachment lien has some advantages over the mechanic’s lien. The mechanic’s lien creates a security interest only against the real property that was improved; however an attachment lien can be levied against virtually any type of property, enabling the contractor or supplier to secure payment from the debtor’s bank accounts, equipment, inventory, stock, or other property, with certain exceptions. The method of levy depends on the type of asset. Bank accounts may be frozen or turned over to the sheriff; personal property may be confiscated; or the lien may be recorded against real property held by the debtor.

Thus, if the unpaid contractor has a direct contract with the owner, the attachment lien can be levied against the same real property on which a mechanic’s lien would be recorded. Subcontractors and suppliers who do not have a direct contractual relationship with the property owner would not be able to use the attachment lien against the owner’s property, as their contract is with another contractor so their attachment would be levied against that party’s assets.