June 2006

You've all heard it before, whether it was from your personal attorney, at a seminar for your professional association, from an industry article or even from your know it all brother-in-law: if you are a contractor and you're worried about liability (which you should be), you need a corporation. There is a lot to be said for the use of corporations and LLCs in the construction industry. During the life of the corporation, they provide a sturdy wall between the liabilities of the corporation and the personal assets you've worked so hard for. They are the reason so many contractors can still sleep through the night despite the increasing size and frequency of mold claims; and until recently, they were the reason that many people who left the construction industry felt they could move on without worry. That finality at the end of the corporations life, however, is fading.

The Minnesota legislature recently enacted amendments to the corporate and LLC dissolution statutes, as well as to the Minnesota home warranty claim statue, which say that dissolution shall not affect the validity of warranty claims. As a general rule, creditors only have a certain amount of time to bring a claim following the dissolution of a corporation or LLC. The amount of time varies based on the method used to dissolve the entity, but MN law states that following the prescribed time limits (which are generally one to two years following dissolution), claims against the corporation are barred. The legislature has carved out an exception which applies solely to warranty claims. While this statute has not yet been interpreted by the courts, it appears to say that a homeowner can recover from a corporation, regardless of how long the corporation has been out of business. This legislation has made the construction industry unique in that it is the only industry in which owners of a corporation or LLC cannot avail themselves of the finality and protection afforded by Minnesota’s dissolution statutes.

(Note: there is still the requirement that the claim be brought within the statute of limitations, which is triggered by the discovery of the breach of warranty, and the statute of repose, which bars warranty claims 10 years after the house is constructed unless the warranty breach is discovered in years 9 or 10, then the repose period is extended to 12 years. However, NO repose exists for homes completed prior to 2004 due to a legislative drafting error.)

I know what you're thinking, "Who cares if my corporation gets sued after I'm done with it. I know that corporate debts, such as judgments from lawsuits, can only be paid from the corporation's money and once I'm done with it, there will be no money in there. My personal assets are protected so I'm home free, right?" Guess again. Presumably, when its time to end your corporation, there will be assets left in the corporation, whether it be equipment with some value or just straight up cash; and you will be planning on taking that with you when you leave the corporation behind. These assets that you take from the corporation are called a shareholder distribution, and under the statute, shareholders are personally liable for claims which are validly brought against a dissolved corporation to the extent they receive these distributions. So even if you dissolve and take the money out today and the claim doesn't come up for 6 years, you may have to essentially return that money to the corporation to pay these warranty claims.

In terms of real life, it would go something like this: Jim Bob Contractor runs a remodeling LLC, called JB's LLC, for 10 years, then he decides to retire and move south for the winter. He was a good remodelor and his company was successful so when he quit the industry he had over $300,000 in the LLC. Jim pays all the bills of the LLC and takes the $300,000 and buys a nice little place in Mesa, AZ. Six years after he retires, a former customer finds mold and sues JB's LLC. If the customer wins their suit, Jim may be personally liable to the tune of $300,000, even though the suit was not against him personally and even though he has long since dissolved the corporation and spent the money. (Some of you may be thinking well Jim Bob couldn’t have been that good if he didn’t have appropriate insurance in place. Unfortunately, many carriers now exclude mold claims from the policy so insurance issues no security).

This legislation is very recent and the full impact of it is not yet known, however, it would seem that there are ways in which a contractor could take preparatory steps to a dissolution to minimize the amount they receive in a dissolution and therefore minimize the amount available to creditors arising after dissolution. Contractors considering dissolution of their business entity should consult a legal professional to discuss the current equity held in their entity and the best method for dissolution. It just may be that even after you dissolve your corporation and think that you're out, they pull you back in.

Stefanie Brown practices in the areas of corporate, real estate, and residential construction.

© 2006 Rinke-Noonan.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.