Does your LLC protect you from tort claims?

Individuals starting out in business may misperceive and exaggerate the protections that an LLC offers.  A Limited Liability Company (“LLC”) may not protect you from ‘torts’ or ‘negligence’ claims.   An LLC may offer significantly greater protections from ‘contract’ claims, i.e. ensuring that business owners do not become personally liable for debts of the company.  Take for example a commercial lease agreement, which is a contract.  You decide to open a small business selling goods or services.  You form a single-member (owner) LLC.  You approach a perspective landlord who has an appropriate space.  Your intent is to rent the space, allowing customers onto the premises to buy goods or services from you.    A lease is signed, and the LLC is identified as the tenant.  You, personally, do not sign as a party or guarantor of the lease agreement.  Here, if the LLC goes out of business and doesn’t pay the rent, the landlord will have difficulty collecting against you personally (attaching your wages, bank accounts, or other property) unless the landlord can ‘pierce the corporate veil’, which can be quite difficult.  However, if you personally guarantee the lease payments to the landlord, then you can be made responsible if the LLC does not pay the rent.  In this case the LLC may offer protections depending on how the contract is written.  Always look to see if there is a personal guarantee!

Tort / negligence claims are quite different from contract claims.  A director or officer who commits a tort, or directs the tortious act done, or participates or operates therein, is liable to third persons injured, even though liability may also attach to the corporation for the tort.  (See for example Sacred Heart University v. Voll, FBT-CV15-6048244, Hon. Michael P. Camp, Connecticut Superior Court J.D. Bridgeport.)  For example if an engineer operates an LLC, and he or she commits malpractice, causing a structure to collapse causing injury, then the injured will seek out damages for negligence or malpractice against the engineer.  The LLC may offer no protection, and insurance may be the engineer’s best defense. The same liability could attach to an owner of a restaurant whose poor sanitation practices cause illness.

An experienced attorney will tell you why an LLC is important, and why its protections are sometimes inadequate.  You must also maintain certain ‘business formalities’ to maximize the afforded protections of the LLC.  An LLC is just one tool to protect yourself.   As illustrated above, insurance is another significant tool.  What type of insurance you need, will depend in large part on the nature of your business and you should discuss this with a qualified commercial insurance agent.

If you are starting out in business you should speak with an experienced attorney to understand these nuances.  If you elect to form an LLC online, with no attorney consultation, you may be doing yourself a significant disservice.

Breach of Contract Claims:  Must the Agreement be in writing?

Some agreements, but not all agreements, must be in writing, to be enforceable.  Your state’s “statute of frauds” laws might apply to the type of agreement at issue.

For example, in Connecticut agreements / contracts conveying real estate, must be in writing, per the statue of frauds.

“Any contract whose purpose is to transfer to one of the parties an interest in land for a price paid or to be paid to the other party is within the Statute [and should be in writing].”  (Citation omitted.)  Zipp v. JFC Endeavors, Inc., CV10-5014884, March 18, 2011 (Hon. Cynthia Swienton).  (Note that Connecticut has other statutory requirements, governing the number of witnesses and acknowledgments, on real estate deeds.)

Although seemingly simple, this is potentially a very confusing area of the law, and factual and legal arguments pertaining to the statute of frauds, might be made in litigation that are pivotal to the success or failure of claims.

Connecticut’s Statute of Frauds, General Statutes Section 52-550 is set forth below.

 

Connecticut Statutes

Title 52. CIVIL ACTIONS

Chapter 923. STATUTE OF FRAUDS

Current through the 2015 Second Special Session

  • 52-550. Statute of frauds; written agreement or memorandum
(a) No civil action may be maintained in the following cases unless the agreement, or a memorandum of the agreement, is made in writing and signed by the party, or the agent of the party, to be charged:

(1) Upon any agreement to charge any executor or administrator, upon a special promise to answer damages out of his own property;

 

(2) against any person upon any special promise to answer for the debt, default or miscarriage of another;

 

(3) upon any agreement made upon consideration of marriage;

 

(4) upon any agreement for the sale of real property or any interest in or concerning real property;

 

(5) upon any agreement that is not to be performed within one year from the making thereof; or

 

(6) upon any agreement for a loan in an amount which exceeds fifty thousand dollars.

 

(b) This section shall not apply to parol agreements for hiring or leasing real property, or any interest therein, for one year or less, in pursuance of which the leased premises have been or are actually occupied by the lessee, or any person claiming under him, during any part of the term.

 

 

 

 

 

Contractors & the Connecticut Home Improvement Act

A Contractor who works on a residential home, but who violates the Connecticut Home Improvement Act (HIA), may lose rights to recover (collect payment) against the Homeowner, who does not pay the Contractor.

“Home improvement”, as the term is defined by the HIA “includes, but is not limited to, the repair, replacement, remodeling, alteration, conversion, modernization, improvement, rehabilitation or sandblasting of, or addition to any land or building, or that portion thereof which is used or designed to be used as a private residence…” §20-419(4).

The HIA provides for exceptions to the “home improvement” definition; certain trades may be exempt, and the HIA will not generally apply to new home construction.

Contract language, for home improvement contracts, are governed by Section 20-429(a) of the HIA.  This statute, set forth below, identifies components required to be included in a Home Improvement Contract, in order for that contract to be valid or enforceable against the Homeowner.

“[C[ompliance with the act is mandatory in order for a contractor to recover on a home improvement contract . . . Nevertheless . . . that does not mean, however, that the noncomplying contractor is not entitled to payment when the homeowner, for whose benefit the act’s prophylactic provisions were enacted, does not seek the protection of the act, and agrees that the contractor has done the work and should be paid. The act is for the benefit of the consumer, and compliance with its terms may be waived by the consumer, either explicitly or by nonassertion.” (Citations omitted; internal quotation marks omitted.) Gagne v. Vaccaro, 255 Conn. 390, 410 (2001).

Disputes between Homeowners and Home Improvement Contractors are always fact-specific.  Review these facts with an attorney who is familiar with the Connecticut Home Improvement Act.

If you are a Home Improvement Contractor, discuss with your attorney if your existing contract complies with the HIA.

 

 

Connecticut Statutes

Title 20. PROFESSIONAL AND OCCUPATIONAL LICENSING, CERTIFICATION, TITLE PROTECTION AND REGISTRATION, EXAMINING BOARDS

Chapter 400. HOME IMPROVEMENT CONTRACTORS

  • 20-429. Required contract provisions. Negative option provisions prohibited. Contract considered home solicitation sale. Contractor-financed contract. Recovery of payment for work performed
a) No home improvement contract shall be valid or enforceable against an owner unless it:

(1) Is in writing,

 

(2) is signed by the owner and the contractor,

 

(3) contains the entire agreement between the owner and the contractor,

 

(4) contains the date of the transaction,

 

(5) contains the name and address of the contractor and the contractor’s registration number,

 

(6) contains a notice of the owner’s cancellation rights in accordance with the provisions of chapter 740,

 

(7) contains a starting date and completion date,

 

(8) is entered into by a registered salesman or registered contractor, and

 

(9) includes a provision disclosing each corporation, limited liability company, partnership, sole proprietorship or other legal entity, which is or has been a home improvement contractor pursuant to the provisions of this chapter or a new home construction contractor pursuant to the provisions of chapter 399a, in which the owner or owners of the home improvement contractor are or have been a shareholder, member, partner, or owner during the previous five years. Each change in the terms and conditions of a contract shall be in writing and shall be signed by the owner and contractor, except that the commissioner may, by regulation, dispense with the necessity for complying with the requirement that each change in a home improvement contract shall be in writing and signed by the owner and contractor.

 

(b) No home improvement contract shall be valid if it includes any provision obligating the owner to instruct the home improvement contractor, by a date determined by such contractor, that periodic home improvements are not to be performed unless it also includes a provision requiring the contractor to remind the owner of that obligation by means of a card or letter mailed to the owner and postmarked not earlier than twenty days, and not later than ten days, prior to such date.

 

(c) The contractor shall provide and deliver to the owner, without charge, a completed copy of the home improvement contract at the time such contract is executed.

 

(d) The commissioner may, by regulation, require the inclusion of additional contractual provisions.

 

(e) Each home improvement contract entered into shall be considered a home solicitation sale pursuant to chapter 740 and shall be subject to the requirements of said chapter regardless of the location of the transaction or of the signing of the contract. Each home improvement contract in which the owner agrees to repay the contractor an amount loaned or advanced to the owner by the contractor for the purposes of paying for the goods and services provided in such contract, or which contains a finance charge, (1) shall set forth the information required to be disclosed pursuant to the Truth-in-Lending Act, sections 36a-675 to 36a-685, inclusive, (2) shall allow the owner to pay off in advance the full amount due and obtain a partial refund of any unearned finance charge, and (3) may contain a finance charge set at a rate of not more than the rate allowed for loans pursuant to section 37-4. As used in this subsection, “finance charge” means the amount in excess of the cash price for goods and services under the home improvement contract to be paid by the owner for the privilege of paying the contract price in installments over a period of time.

 

(f) Nothing in this section shall preclude a contractor who has complied with subdivisions (1), (2), (6), (7) and (8) of subsection (a) of this section from the recovery of payment for work performed based on the reasonable value of services which were requested by the owner, provided the court determines that it would be inequitable to deny such recovery.

Cite as Conn. Gen. Stat. § 20-429