Prior posts on this blog have discussed the remedies available to those dealing with unlicensed contractors. One available remedy is an action pursuant to California Business and Professions Code section 7031(b) to obtain a refund of all amounts paid to the unlicensed contractor. A recent decision by the Ninth Circuit Court of Appeals held that an unlicensed contractor may obtain a bankruptcy discharge of a section 7031(b) claim or judgment.
In re Sabban discussed the dischargeability of a judgment for the return of compensation paid to an unlicensed contractor. In the underlying case, a homeowner sued an unlicensed contractor under California Business and Professions Code section 7031(b), seeking the return of $123,000 paid to the unlicensed contractor. The homeowner alleged that the unlicensed contractor falsely represented that the contractor was licensed. The unlicensed contractor acknowledged receiving the homeowners’ money and used the money to pay licensed subcontractors and to buy materials used during construction. Nonetheless, because section 7031(b) requires an unlicensed contractor to refund all amounts received for work requiring a license, the trial court entered judgment in favor of the homeowner and against the unlicensed contractor.
The unlicensed contractor was unable to pay the judgment and, therefore, filed bankruptcy. The homeowner alleged that the claim was not dischargeable because the Bankruptcy Code prohibits the discharge of any obligation to repay money obtained by fraud, false pretenses, or false representations. The policy behind the exception to discharge is that debtors in bankruptcy should not be able to retain funds obtained through dishonest means.
The Sabban Court found that an obligation to refund money pursuant to California Business and Professions Code 7031(b) was dischargeable. The Court reasoned that fraud was not a necessary element of a 7031(b) claim. All that was necessary was for the property owner to prove: a) that the contractor did not have a license; and b) that the owner paid money to the unlicensed contractor. Since fraud was not a necessary element of the claim, the fraud exception to bankruptcy discharge does not apply.