Homeowner sued my contracting company and me individually! What can I do?

Angry homeowner wants to collect from your personal assets? How to show that the "corporate veil" against liability should not be pierced.

Question

I own a small contracting business. It’s a limited liability company, or LLC. I’ve run the business for years, and have never been sued before.

Last week, however, a former customer whose kitchen I remodeled last summer served me with a Summons and Complaint – but the lawsuit names both the LLC and me personally. Someone told me that this could put my personal assets and credit rating at risk. Is this true? What should I do about it?

Answer

One of the primary benefits to incorporation of your small business is that it shields you from personal liability. The corporation (or the LLC) is a unique legal entity. It has its own bank account, its own assets, and its own liabilities. If a plaintiff is able to get a judgment against the corporation, it is the corporation that must pay that judgment –not the officers, directors, members, shareholders, or employees.

Nevertheless, there are some situations where courts will allow “piercing of the corporate veil.” This typically occurs when:

  1. the company is undercapitalized
  2. the company’s assets are commingled with the owner’s assets, or
  3. the company has committed wrongful or fraudulent acts.

A court might consider a company to be undercapitalized when it has extremely low bank accounts to cover basic liabilities. For example, a large construction company might be considered undercapitalized if it had only $100 in a bank account, since the company should expect a certain level of liability and legal expenses in the normal course of business.

A court might consider a company’s assets to be commingled if its owner uses corporate accounts to pay his own rent, or buy personal items for himself without reimbursement.

And a court might allow the corporate veil to be pierced if the company is clearly engaging in fraud, for example by hiding one LLC inside another, intentionally sidestepping creditors.

If you are sued individually, your first question should be whether you had a written contract with the homeowner. A written contract should, if prepared by someone with knowledge of construction law, explicitly say that the agreement was between the LLC and the homeowner, and not you personally.

This would provide clear evidence to the court that, to the extent that there is any liability, that liability belongs squarely to the LLC, not to you.

Your next question should be whether any of the factors above for piercing the corporate veil might be met. Could the plaintiff homeowner establish any of these factors as a reason to attack your personal assets? Courts are generally hesitant to pierce the corporate veil, absent some real wrongdoing.

If you think that the contract was clearly with your LLC, and that none of the piercing factors can be met, ask the court clerk whether you can make a motion to dismiss. A motion is an application for an order, which is just a fancy way of saying that you would submit a form briefly explaining why you should not personally be made a defendant in the proceedings. The court might grant this motion before the trial date, or might ask you to speak about the motion on the trial date itself.

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