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Supreme Court Clears the Way for Residential Building Construction Companies to Dissolve and Avoid Continuing Liability

By David J. Meyers and Stefanie L. Brown

In its recent decision in the case of Camacho v. Todd and Leiser Homes, the MinnesotA Supreme Court determined that a residential construction corporation that was properly dissolved cannot be sued for home warranty claims. This is an important decision for long time residential construction companies who face unlimited warranty claims for homes they built prior to August, 2004.

You might recall that a few years ago, decisions from the Minnesota Court of Appeals and Minnesota Supreme Court determined that the homeowner warranties under Minnesota Statutes Chapter 327A had no bar on the length of time a Contractor could be sued. The current owners of homes built as long as 20 or 25 years ago have the right to sue the construction contractor for defective construction. In January 2004, BAM successfully convinced the legislature to change the law so that homes built after August 1, 2004, have a ten to twelve year time limit in which the construction company may be sued for faulty construction. If you run a construction company that built homes prior to August, 2004, there is no time limit for an owner to sue you for construction defects under Chapter 327A.

Given the Court of Appeals and Supreme Court decisions determining that there would be an unlimited time in which to sue a construction company for certain warranty claims, many companies have considered dissolving their company and starting new companies in an attempt to isolate this long-term liability. While we never advise any builder to walk away from a valid consumer complaint, corporate contractors should evaluate dissolution as a possible method of protecting themselves from old claims, which could potentially ruin their company.

In the Camacho decision, the Minnesota Supreme Court determined that a residential construction corporation that was properly dissolved cannot be sued for warranty claims after two years from the date of the dissolution. This case seems to provide that if you properly dissolve a corporate construction company and the two years pass before a claim is brought, the owner generally cannot pursue the claim in Court.

In the Camacho case, the former corporation had no assets, but it did have an insurance policy. By determining that the corporation could not be sued, the Supreme Court also said that the insurance company could not be held responsible.

Under the Contractor Licensing Law, the qualified person for a corporation could be held accountable by the Minnesota Department of Commerce if a judgment is obtained against a corporation, and the homeowner uses the Judgment to get paid from the Contractor Recovery Fund. In that case, the qualifying person could lose their license. The Camacho decision also indicates that the property owner cannot get a judgment against the corporation to collect from the Contractor Recovery Fund after those two years. The qualified person who held the license for the dissolved corporation would not risk losing their license because there would be no claim against the recovery fund.

Residential construction companies that were doing business prior to August 2004, should carefully consider whether it would make sense to dissolve the company. Given the recent nature of the Camacho decision, contractors considering dissolution should be aware that the scope of Camacho’s protection has not been tested. Dissolving a company can have tax implications and raise other legal questions which must be worked out with a good corporate lawyer who understands construction law. It has been our experience that many tax and legal risks may be overcome with good timing and advice.

Contractors should attempt to limit this long-term exposure by selling their business to their children or employees through an asset sale, rather than selling the stock of the existing company. If they buy an existing company, they are buying all of the liability which the company has accumulated under the warranty law for all of the years the company has built homes. Contractors can also limit their exposure to some extent by using separate companies to engage in various activities within the industry. For example, one company can be used for development activities and a separate company for building operations.

It is regrettable that the legislatures and courts have brought matters to this point, but builders need to protect themselves. To be clear once again, we do not advocate walking away from valid consumer complaints. At the same time, it seems fundamentally unfair that the construction industry should be singled out to be responsible for homes constructed 20 to 25 years ago which that same time length is not required of any other industry.

If you were in the residential construction business prior to August 2004, we strongly encourage you to consider options for limiting liability for your company before a claim arises. If the claim arises, it will be too late.

David J. Meyers is an attorney licensed to practice in the Minnesota State and Federal Court. He is a former BAM President and former member of the BAM Board of Directors.

Stefanie L. Brown is a member of the Rinke Noonan Business and Transaction Department. She has extensive experience working in the corporate, residential construction field.