Bankruptcy Creates Complications with Contractor Licensing
Decision to file
Bankruptcy laws exist to assist business owners, including Nevada contractors, with reorganization. When contractors encounter financial problems, the typical course of action is to consult a business or bankruptcy attorney and a CPA regarding the best plan to preserve the assets or to move clearly away from the growing debt and start over. Sometimes bankruptcy appears to be a viable solution for contractors struggling to cope with financial dilemmas. However, a common question that arises for contractors pertains to a bankruptcy’s relationship with a state-issued contractor’s license.
Many bankruptcy attorneys in Nevada are neither informed nor understand the implications of a contractor’s bankruptcy with the Nevada State Contractors Board (the “Board”) and the potential problems a bankruptcy creates relating to the contractor’s “financial responsibility,” a statutory requirement for licensing. Specifically, a licensee or an applicant for a contractor’s license must prove financial responsibility by demonstrating past and current financial solvency and expectations for financial solvency. Business debt in a bankruptcy can negatively affect a business and the Board may limit or revoke licenses in order to provide public protection. Ironically, the contractor involved in filing may believe a bankruptcy will resolve financial issues and can be blind-sided by financial review and investigations by the Board. The Board’s review can result in substantive changes in the license monetary limits or bonding or, even possibly, in a revocation of the very license required to continue conducting business. The same applies if a contractor fails to report a bankruptcy or disclose as required by NRS 624.263. A contractor’s personal bankruptcy may play a role in the company’s license even if the contractor personally indemnifies that license.
Contractors are sometimes apprehensive to discuss financial issues proactively with the Board, and, understandably, do not want to inspire scrutiny of their financial stability during a difficult period for the business. However, it is important for contractors to strategize up front regarding bankruptcy in order to determine the most effective course of action, including payment of claims, preservation of specific assets, bond claim payments, and overall public responsibility to complete projects and pay claimants.
Of course, there is not a simple answer that applies to every contractor since projects and payables can be vastly different and other circumstances can apply as well. Partner theft, divorce, health care, and other contributions can play a large role in the financial woes that lead to bankruptcy. Therefore, it is advisable to consult with an attorney who is willing to work to preserve a contractor’s licensing status and reputation in relation to the bankruptcy or to undertake other measures to preserve the contractor’s license and business. Advanced planning and sharing of information with the Board through counsel can prevent an unnecessary revocation and preserve a contractor’s ability to move forward. A licensee is not permitted to drive the business into bankruptcy and just “start over” with a clean slate. At this time, there is no “7 year” clean slate rule for licensees, and a party may never be permitted to obtain a license again if they fail to properly comply with statutory requirements.
Contractors should never make assumptions when it comes to a license. It is important to ask questions and get solid answers regarding bankruptcy issues.
How a bankruptcy is handled: put the best foot forward
If a bankruptcy occurs, the Board will require factual information from contractors regarding the following:
- Who filed the bankruptcy?
- Why did the bankruptcy occur?
- What steps did the licensee take to avoid bankruptcy and pay parties owed?
- What is the licensee’s current financial picture, including disclosure of financial statements and personal
The Board considers these factors and other information when determining whether a licensee should be permitted
to continue doing business in Nevada. The Board will typically review the bankruptcy schedules carefully, inquire as to specific debt, and investigate the financial information provided, especially inconsistencies in testimony. Therefore, it is important for contractors to insist on clean schedules in a bankruptcy rather than lumping costs and not carefully reviewing the information. The Board’s analysis is based upon the financial picture the schedules provide. Importantly, attorneys should never include “phantom debt” or duplicate claims because this will harm accounting projections and the Board’s outlook on a licensee’s status.
Other failures to disclose information timely and properly appear deceitful and cannot be easily unwound in a Board hearing if they are part of the bankruptcy records. The Board’s process, which is completely separate from the bankruptcy court proceedings, can be delayed and time consuming. Therefore, planning is essential for a smooth transition if a contractor must file bankruptcy.
Other issues related to bankruptcy: purchase of assets in a bankruptcy sale
New purchasers of a prior contractor’s assets in Nevada should be wary of buying items, such as names, phone numbers, and other specifically identifiable commodities at auctions and other sales. Generally, the Board will not permit use of these items by a new licensee and for good reason. Use of a prior contractor’s information creates confusion to the public and the Board with regard to new consumer complaints, contracts, and other issues. The public must know who they are dealing with when they enter a contract for new work.
When considering the purchase of such items, a new owner should consult with the Board or a competent attorney to determine viability. Just because a purchaser pays for an item does not mean it will be usable. This mistake has resulted in large costs to many new businesses who failed to plan ahead.
In sum, the reorganization or the winding down of a contractor requires significant care and experience with a goal of first avoiding licensing issues to preserve future business. Again, this is why it is important for contractors or their counsel to consult with an attorney familiar with bankruptcy implications to licensing to assist in either reorganizing or winding down the business fairly and effectively.
Shemilly Briscoe is a Managing Partner at the firm Briscoe Law Group. She provides guidance to contractors with all administrative licensing and disciplinary issues involving the Nevada State Contractors Board, as well as commercial and construction-related litigation and prosecuting and defending mechanic’s liens.
This article was originally published in the Communiqué, the official publication of the Clark County Bar Association (March 2015).