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By John W. Ralls
Howrey LLP
A
contractor installed a concrete driveway and patio at a
home and was paid in full. The contractor then filed a voluntary
Chapter 13 bankruptcy petition. After the bankruptcy petition
was filed, the homeowners discovered spalling in the concrete.
The homeowners were unsuccessful in getting the contractor
to make repairs, and the homeowners filed a complaint with
the California Contractors State License Board.
An
administrative hearing on the CSLB complaint was set. The
contractor took the position that the proceeding was barred
by the automatic bankruptcy stay. The Administrative Law
Judge found that the proceeding fell within an exception
to the automatic stay rule as "an action or proceeding
by a governmental unit… to enforce such governmental
unit's… police or regulatory power." 11 USC §362
(b) (4).
The
ALJ found that the contractor was guilty of poor workmanship
and that the concrete had to be completely removed and replaced.
The CSLB, adopting the ALJ's proposals, required the contractor
to pay restitution of $27,000 or replace the concrete work
at no expense to the homeowners. It also ordered that the
contractor pay the state its investigation expenses of $2,921.56,
which were held by the ALJ to be post-petition expenses
unaffected by the bankruptcy discharge. Finally, the contractor
was ordered to post a $30,000 contractor's bond.
The
contractor commenced a proceeding against the CSLB in U.S.
Bankruptcy Court seeking an injunction to prevent the CSLB
from enforcing its order. The Bankruptcy Court found that
it was precluded from reviewing the ALJ's judgment. After
an intermediate appeal to the Bankruptcy Appellate Panel,
the Ninth Circuit held that the Bankruptcy Court was not
precluded. Contractors' State License Board v. Dunbar,
2001 Daily Journal D.A.R. 3379 (9th Cir. 2001).
Relying
on Gruntz v. County of Los Angeles, 202 F.3d 1074,
1083 (9th Cir. 2000) (en banc), the Ninth Circuit reasoned
that Congress vested the federal courts with the final authority
to determine the scope and applicability of the automatic
stay. The Ninth Circuit directed the Bankruptcy Court to
consider, on remand, whether the CSLB's actions violated
the automatic stay.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2001 Howrey LLP
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