Thursday, September 6, 2012

An LLC and Its Members Are Distinct

Idaho Supreme Court Confirms That An LLC and Its Members Are Distinct

      In a recent decision, the Idaho Supreme Court has confirmed that an LLC and its members are legally distinct from one another.  Stonebrook Constr., LLC v. Chase Home Fin., LLC, 277 P.3d 374 (Idaho 2012).
      Idaho has a Contractor Registration Act requiring that construction contractors register with the state.  Contractors that do not register with the state are barred from filing mechanics liens on property upon which they worked and are as well precluded from initiating suit claiming compensation for work performed.  The statute goes on to provide that subsequent registration will not cure the prior failure to do so.  Obviously, it behooves a contractor to register with the Idaho authorities prior to performing any work.
      In 2007, Schwendiman and Burton organized Stonebrook Construction, LLC as an Idaho LLC.  This company was the successor to a partnership between Schwendiman and Burton that had done business as “Stonebrook Construction.”  In connection with those pre-LLC activities, Schwendiman registered as a contractor under his own name.  After its organization, Stonebrook Construction, LLC contracted to build a house.   Ultimately, it was not paid, whereupon the LLC recorded a lien on the property and filed a lawsuit to foreclose on it.  Chase Home Finance held the deed of trust against the property; it intervened in opposition to the LLC’s foreclosure action.  Chase moved for summary judgment on Stonebrook’s claim, asserting that the lien was invalid in that the LLC had not registered under Idaho’s Contractor Registration Act.  The trial court agreed, dismissing the action, whereupon the LLC appealed.
      Schwendiman and the LLC argued that Schwendiman’s individual registration should be sufficient.  In effect, they sought to argue that Schwendiman and the LLC were jointly performing the work upon a provision in the statute addressing a “combination” of various “persons” working as a unit.
      This argument was ultimately unavailing.  The Idaho Supreme Court noted that an LLC is an entity separate and distinct from its members and that the members are not personally responsible for the LLC’s debts and obligations.  Ergo, there was not a “combination” between Schwendiman and the LLC in the performance on this agreement.  Rather, it was an obligation of the LLC.
      The Court also rejected an argument of substantial compliance, noting that the LLC had not made any effort to satisfy the statutory requirement of registration.
      In response to the argument that the Court’s interpretation of the statute was harsh, it wrote that “Although the result for [the LLC] is harsh, it is the result the Legislature intended.”

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