Source: http://fauxlaw.com/2018/10/04/license-bond-claims-where-the-bond-principal-did-not-use-its-license/
Timestamp: 2019-04-19 14:46:10+00:00

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The principal engaged in deals or acts where the license was not required or involved.
This article will address each category and will provide guidelines on how to handle these claims.
1. The license was not yet in effect, was never in effect or was suspended or revoked.
There are situations where a surety issues a license bond, and where that bond is submitted as part of an application package to the state agency which issues the license. The state takes its time in issuing the license or never issues it, and the principal operates its business without a license in the meantime. A bond claim arises, and the surety is confronted with this dilemma. More often, a bond remains in effect after a license is revoked or suspended. On the one hand, working without a license is a violation of the licensing statute and in many cases even a criminal offense. As such, a claim should be covered by the bond, or should it? The state courts, which have dealt with this issue, have held that the bond goes with the license, and that therefore the bond is effective only when the license is in effect.
In our opinion the trial court was correct in so holding. The statute *459 requires and contemplates that a bond be tendered with the application for license. This tender of a satisfactory bond is a prerequisite to the granting of a license. Asa S. Agar, Inc., v. Texas Underwriters, Tex.Civ.App. 129 S.W.2d 374. This bond is one provided for by statute, and it was not contemplated that said bond should become effective until a license had been issued. In view of the applicable statutes, it cannot be said that the bonding company by furnishing a bond to accompany the application for license in accordance with the statute intended to guarantee performance on the part of a non-licensed buyer of agricultural products operating in violation of the two licensing acts here involved.
A contractor’s license is created by statute and a statutory surety bond is coterminous with the license. See United States Fidelity and Guaranty Co. v. Bross, 118 Ariz. 599, 578 P.2d 1028 (App.1978). Indeed, a contractor’s license bond cannot exist without an accompanying contractor’s license. See Watson v. Welton, 115 Ariz. 76, 563 P.2d 331 (App.1977).
In Timmerman v. Hartford Acc. & Indemnity. Co., 220 N.W. 752 (Mich., 1928), the plaintiffs obtained shares of stock from an unlicensed broker, who had, however, gotten a license bond. The Michigan Supreme Court rejected plaintiffs’ clam against the bond, holding that the bond went with the license and was never approved by the state.
The same principle, namely that the license bond goes with the license, should apply in cases where a license has been revoked and where the principal continues to work nevertheless. Where a contractor’s license has been suspended and the contractor continues to work, the picture is less clear. First, the state’s contractor’s license board may let the contractor complete a project even after a license is suspended, and second, courts will evaluate whether the licensee knew of the suspension and was in substantial compliance with the licensing statute. See, a. o., ICF Kaiser Engineers, Inc. v. Superior Court, 75 Cal. App. 4th 226 (Cal. App., 2000). In that case, a claimant may well be allowed to assert a successful claim.
2. The principal operated out-of-state, where the license was not in effect.
As the bond goes with the license, claims against a license bond for out-of-state acts of the principal should be disallowed. However, the case law on this issue is divided. The main argument against bond coverage is this: License bond are typically required by statute and their coverage is also delineated by statute. “It is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’ ” EEOC v. Arabian American Oil Co., 499 U.S. 244, 248, 111 S.Ct. 1227, 113 L.Ed.2d 274 (Aramco). The same principle applies to state stattutes. When a statute gives no clear indication of an extraterritorial application, it has none.” (Emphasis added) Ibid., p. 248 See also, Nevares v. M.L.S, 245 P.3d 719 (Utah, 2015).
The other cases involved claims against automobile dealer license bonds. Here, the state courts are split on the issue of the extraterritorial application of the statutes requiring these bonds. In line with the basic presumption against extraterritoriality as delineated above, the more reasoned cases are the ones rejecting such claims. For example, the Supreme Court of Iowa rejected the bond claim of a nonresident purchaser who suffered damages as a result of a casual out-of-state sale by an Iowa licensed automobile dealer. The court noted the general rule against the extraterritorial effect of a statute “unless the intention to have a statute operate beyond the limits of the state or country is clearly expressed or indicated by its language, purpose, subject matter or history”, and cited the Ore-Ida case, among others, in rejecting the plaintiff’s bond claim. State Surety Company v. Lensing, 249 N.W.2d 608, 611 (1977) Similarly, the Colorado Court of Appeal rejected the claim of an out-of-state auto auction company against a Colorado motor vehicle dealer’s Colorado license bond, where the alleged fraudulent acts of the dealer occurred outside of Colorado. The court noted that if the fraud had occurred in Colorado, the bond would have covered the claim. However, because the fraudulent acts occurred outside the state, the bond did not cover it. The court cited the Ore Ida case in support of its finding that unless a statute specifically provides for extraterritoriality, it does not have such an effect.
The courts, which have allowed claims against motor vehicle dealer bonds, have done so for different reasons, and did either not address extraterritoriality or distinguished the case from the basic rule against extraterritoriality. A typical case for that position is Metro Milwaukee Auto Auction v. Coulson, 604 N.W.2d 111 (Minn. App. 2000) where the court noted that the dealer committed several acts inside Minnesota to defraud the Wisconsin auctioneer.
3. The principal engaged in deals or acts where the license was not required or involved.
Often, the bond principals engages in acts and deals without using their license, and bond claims are nevertheless asserted. A California court of appeals dealt with this issue in Brown v. Surety Company of the Pacific, 122 Cal.App.3d 614 (1981). Brown, who had made a construction loan to a contractor, sued the contractor and its license surety with allegations of fraud and breach of contract because of the contractor’s failure to repay the loan. The contractor, however, did not work on the project for which the loan was given. The court noted that on appeal “the critical issue posed is whether a contractor’s license bond covers any and all misdeeds of a person who also happens to be licensed as a contractor.” In denying the claim, the court found that the contractor was not working as a contractor on the project and was not using its license, and that therefore the claim against its license bond was improper.
“Similarly, if we were to interpret A.R.S. section 6-947(M) as Employees propose, all creditors of a mortgage banker would have recourse against the license bond. This would include, for example, a seller of office supplies or a provider of telephone service, and would distort the class of persons that the Legislature intended to protect by requiring a mortgage banker license bond, i.e., those persons wrongfully injured by the licensee’s mortgage banking activities. Employees asserting their rights of employment simply do not fall within this protected class.
SUMMARY: The general rule is that license and license bond are inseparable, and that bond claims in cases where the principals did not use their license or did not have a valid license should be rejected. While there are some exceptions to this rule, they do not invalidate its general applicability.
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