Flanking the Corporate Shield of a Home Improvement Contractor

A recent decision handed down by the Suffolk County Supreme Court (Hon. Sanford Neil Berland, J.) in the matter of Sweeney v. Waitz and Artisan Builders of the North Fork, Inc. (66 Misc.3d 384) reminds us of the rights and risks that homeowners and home improvement contractors must confront when the home improvement contractor is doing business in the corporate form.

Many are familiar with the principle that an individual who incorporates a business generally has no personal liability for the obligations of the corporation.  Incorporation creates a legal entity which is distinct from the individual incorporator.  When transacting business, the individual acts in the capacity as an agent for the corporation.  So long as the homeowner is made aware that the individual is acting as an agent on behalf of the corporate entity and the individual has not specifically agreed to personally assume any obligations, the individual cannot be held liable for the obligations of the company.

In Sweeney, the homeowner filed an action against the corporate defendant and its individual/principal in connection with a home improvement contract for the renovation of a personal residence.  The individual defendant made a motion for summary judgment asking the Court to dismiss the claims which were asserted personally against the individual based on the principle that an individual acting as an agent for a disclosed principal generally has no personal liability.  The individual defendant established that he always disclosed that he was acting as an agent for the corporate principal and that he never assumed any personal liability.

The Court denied the motion and kept the individual defendant in the case.

The individual defendant had overlooked the special provisions in the Lien Law which holds corporate agents personally liable to homeowners under trust fund principles to account for monies which are received by the home improvement contractor.  When a contract qualifies as a “home improvement contract” a homeowner is given these additional statutory protections.

In opposition to the individual defendants’ motion, the homeowners thus demonstrated that they had paid money to the corporate contractor for the performance of a “home improvement contract” and that the individual defendant, using his authority as an agent of the company, did not use the money received to pay subcontractors who had performed the work.  Under this residential homeowner exception, an agent acting on behalf of a disclosed principal may indeed be held personally liable to a homeowner for any trust fund violation committed by the corporate home improvement contractor.

These rights and obligations are often overlooked by homeowners and home improvement contractors alike until after the parties retain legal counsel and threaten litigation.  Particularly for the home improvement contractor, it is important to anticipate and prepare for these issues before the parties stake out their legal positions.

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