• Thu. Jun 30th, 2022

Lack of Entrepreneur’s License Erases Millions of Bankruptcy Claims in Abeinsa | Saul Ewing Arnstein & Lehr LLP

This week, a bankruptcy ruling issued by the United States Bankruptcy Court for the District of Delaware in Regarding Abeinsa Holding, Inc. provided another example of the seriousness of the implications of performing work without a contractor’s license.

Debtors in Abeinsa are US subsidiaries of Abengoa SA, a global company specializing in clean energy and environmental sustainability, including solar energy development and related engineering, construction and procurement services.

The ruling at issue resulted in the complete dismissal of claims by three companies arising from work done on a power plant project undertaken by the Debtors in California: (i) Synflex Insulations, LLC (“Synflex“), which filed an $ 11 million claim against debtor Abeinsa Holding for insulation materials, supplies and services provided; (ii) Orbital Insulation Corp. (“Orbital“), which filed a claim for $ 1.1 million for its supply of labor, services, materials and equipment in connection with the project; and (iii) Crown Financial, LLC (“crown“), which filed a claim of over $ 2 million against the Debtors on the basis of a factoring agreement with Synflex and the Debtors under which it purchased Synflex’s interest in certain invoices issued by Synflex to Debtors.

Synflex, a Texas insulation company, entered into three contracts with debtors to provide insulation services for the project. A valid California contractor’s license number was not provided at the time of entering into these contracts, nor after debtors attempted to obtain this information from Synflex.

Synflex argued that although it presented itself as an entity licensed to provide services in California, it did so by fully disclosing to debtors that it was operating under a third party California contractor license and that it did not hold its own license.

This argument did not convince the Court, however, in light of the wording of the contracts between Synflex and the Debtors providing that Synflex, and not a third party, would retain the licenses required to provide services. The court also pointed to a California law (section 7031 of the California Contractors’ State License Law), which generally provides that a contractor who performs work without a license cannot sue or recover payment for his work. The law is interpreted broadly by California courts and is enforced even when the person for whom the work was performed knew that the contractor they hired was unlicensed.

The bankruptcy court, applying California law, further rejected Synflex’s remaining arguments that: (i) the Debtors induced it to work without a license by falsely promising to pay Synflex for its services; and (ii) it has “substantially complied” with California law so as to fall under an exception to the law which would allow Synflex to recoup the substantial work it has performed. On this last point, because Synflex never held a California license before its work on the site, the bankruptcy court determined that it could not benefit from the “substantial compliance” exception.

Unfortunately for Crown, because its claims arose out of a factoring agreement with Synflex, the invalidation of Synflex’s claims in turn resulted in the invalidation of Crown’s claims. More specifically, the Court treated the Crown as an “assignee putting himself in the place of the assignor; receiving neither more nor less than the assignor ”. Because Synflex ceded its payment rights to Crown under the factoring agreement, and because Synflex’s payment rights were inapplicable due to its lack of a contractor’s license, the court ruled that the Crown’s claims were also unenforceable.

Orbital’s claims were also dismissed, albeit for slightly different reasons. Orbital was not a licensed contractor in California, but never claimed to hold such a license. Orbital’s challenge was that it did not have a direct contractual relationship with the debtors and that it only acted as a supplier to Synflex on the project. Orbital’s claims were therefore ultimately dismissed due to its inability to establish a right of collection against the Debtors.

Ultimately, the bankruptcy court recognized that its ruling could be “harsh,” but nevertheless pointed out that the relevant California law is clear in prohibiting unlicensed contractors from recovering. The warning of Abeinsa is also clear: (1) make sure you have a license, and (2) at least, make sure you are familiar with the licensing laws of the state in which you work to ensure that you and / or your business do not share the same fate as the parties in Abeinsa.

A full copy of the bankruptcy court ruling is available here.

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