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What You Should Know about Unlicensed Businesses in Small Claims Cases

Business lawsuits are one of the biggest areas that both plaintiffs and defendants make mistakes about in small claims case preparation. The most glaring mistake involves unlicensed businesses. If the business is properly licensed or is one that doesn’t need to be licensed, the case will proceed like a breach of contract case. If an unlicensed business is involved it creates procedural and proof problems both for consumer and business.

If you live in a place like New York City, there’s a very good chance that the business you’re having problems with in your case is licensed by somebody.

The licensing status of the business is an essential element of any case involving that entity, whether the business is the plaintiff or the defendant. However, if that business isn’t properly licensed, you can use that fact to defeat a claim brought against you by that business or to prevent the business from defending an action you bring against it. Governments pass two types of licensing statutes:

  • Revenue raising: These generate money for the state or local government. Revenue-raising statutes rarely generate any small claims cases as most disputes will be between the business and the government agency collecting the money — commonly called revenuers by those of you who live in flyover country.

  • Regulatory: These protect the public by ensuring that the person running a business is properly trained. They also regulate the number of people holding a license.

Many licensing statutes designed to raise revenue are also regulatory to some degree. An example of a revenue-raising statute is a fee to get a fishing license. Anyone can just come in file an application, pay a fee, and get the license. Even if you don’t know the difference between a fishing pole and a telephone pole, you can still get the license.

But it’s also regulatory if there’s a limit on the number of licenses that can be issued to prevent everyone in the state from getting licensed, going fishing at the same time, catching all of the large-mouth bass in the state, and wiping out the species.

Some licenses start out regulatory and become revenue-raising. For instance, to run a barbershop, you need to prove you’ve been trained and have a license. Let’s say the license is good for three years; after that you can renew it for additional three-year periods by just paying a fee. This starts regulatory but becomes revenue-raising, because there’s no new training needed to keep the license.

A business that doesn’t have a current revenue-raising license usually can sue someone or defend itself against a lawsuit in court as the license in this situation is irrelevant to the skill and expertise of the business operator. A business that doesn’t have a required regulatory license cannot.

When it goes to court, in most states, the business automatically loses. This is because a precondition to operating the business legally is showing that you have complied with the licensing law that protects the public.

If you’re being sued by a business that must be licensed in your locale, that business must prove — at a minimum — that it was licensed when the work was done. In some places, it must also prove it’s licensed when the lawsuit is brought.

Common regulatory licensed businesses are home improvement contractors and automobile repair shops. Also, most professionals such as lawyers and doctors must be separately licensed in each state.

If you’re sued by a business, check that the person bringing the suit is properly filed as a corporation or a d/b/a —doing business as. Why? Because many states prohibit an improperly formed or registered business from using the court system to bring a lawsuit.

Sometimes by checking with the corporate registration office of your state, you find out that the corporation has had its charter suspended or been dissolved because it failed to pay taxes or file the proper forms to continue its corporate existence. These failures may prevent the business from suing, and you’re off the hook. Much of this information is now available in your state or county.

If the plaintiff is supposed to be licensed, but can’t prove it, you can ask to have the case dismissed. But don’t be surprised if the judge grants an adjournment for the business to produce its license, especially if it’s out in the car or in the office around the corner. Small claims courts are designed to decide cases on the merits and not on a technicality.

For example, your neighbor is a home improvement contractor who also works a day job. Under your town laws, home improvement contractors are required to be licensed. Your neighbor is suing you for the last $1,000 you owe for the deck he built for your house.

If the contractor doesn’t have a license, he can’t use the courts to recover this money. It doesn’t matter that the deck is built exactly as you wanted it and that it conforms to the building code. No license, no recovery.

Quantum meruit is the Latin term for the legal principal that allows a plaintiff to recover money for the reasonable value of the services rendered and received. The idea is to prevent someone from being unjustly enriched, in this case, getting a benefit — the new deck — without having to pay for it. However, most states don’t permit an unlicensed person to recover even on this basis.

Most people would say that you got the deck, so you should pay for it. But the rule preventing the contractor from collecting is there for a reason: If an unlicensed worker can collect in court, then why bother to get licensed? The only way to protect the public and force contractors to become licensed is to deny them the right to sue.

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