Idaho’s Contractor Registration Act requires that construction contractors register with the state, and bars unregistered contractors from placing a mechanic’s lien on the property they worked on or suing to collect compensation for their work. Registration after the contractor’s work is done does not cure the defect. Many other states have similar laws.
Earlier this year the Idaho Supreme Court had to decide whether an LLC member’s contractor registration satisfied the registration requirement for the LLC, a general contractor. Stonebrook Constr., LLC v. Chase Home Fin., LLC, 277 P.3d 374 (Idaho 2012). The court held that the member’s registration was not sufficient to satisfy the LLC’s registration requirement. Id. at 380.
Background. In 2006 Tyler Schwendiman and Brandon Burton began operating a construction company under the name “Stonebrook Construction,” and Schwendiman registered as a contractor in his own name. Then in 2007 Schwendiman and Burton formed Stonebrook Construction, LLC as an Idaho LLC. They did not register it as an Idaho contractor because they believed Schwendiman’s registration satisfied Idaho’s Contractor Registration Act, Idaho Code ch. 54-52 (ICRA). Stonebrook,277 P.3d at 376.
In 2007 and 2008, Stonebrook Construction, LLC entered into a contract to build a home and provided labor and materials for the residence, but it was not paid the agreed-upon amount. Stonebrook recorded a claim of lien against the property and then brought an action to foreclose its lien. Chase Home Finance held a deed of trust against the property, however, and intervened in the LLC’s foreclosure action. Id.
Chase moved for summary judgment on the ground that Stonebrook was barred from claiming a lien on the property because it had not registered as required by the ICRA. The trial court granted Chase’s motion and dismissed Stonebrook’s lien claim. Stonebrook appealed.
The Appeal. Stonebrook’s major argument was that it was not out of compliance with the ICRA because the ICRA applies to any “person,” and “person” is defined as “any individual, firm, partnership, limited liability company, … or any combination thereof acting as a unit.” Idaho Code § 54-5203(6) (emphasis added). Stonebrook contended that Schwendiman (who had registered under the ICRA) and Stonebrook were a combination acting as a unit, and therefore formed a unit that had registered.
This was a clever argument, and it resonates with the partnership-like characteristics of LLCs. But it didn’t work. The court conceded that “it may be possible to construct an interpretation that supports this contention,” but concluded that “a plain reading of the statute leads us to conclude that the Act requires the listed entities, including combinations of those entities, to register.” The court said it could not accept the proposition that Schwendiman and Burton formed an LLC and then worked as individuals in combination with their own LLC to perform the very services the LLC was created to do. Stonebrook, 277 P.3d at 378-79.
The court pointed out that Stonebrook’s arguments were inconsistent with the separate entity nature of the LLC and the members’ insulation from the LLC’s debts and obligations. Id. at 379. Idaho’s LLC Act provides that a limited liability company is an entity distinct from its members, and that the debts and liabilities of an LLC are solely its own and do not become the members’ liabilities merely because of their status as members. Idaho Code § 30-6-104(1), § 30-6-304(1).
The court also dismissed Stonebrook’s argument that it had substantially complied with the ICRA, because Stonebrook made no effort at all to comply. Stonebrook also argued that Schwendiman’s personal contractor registration should be recognized to avoid an unreasonably harsh result. The court found the ICRA’s plain language to be unambiguous, and concluded that “[a]lthough the result for Stonebrook is harsh, it is the result the Legislature intended.” Stonebrook, 277 P.3dat 379-80. The court accordingly affirmed the trial court’s grant of summary judgment in favor of Chase.
Perhaps the only ray of light for Stonebrook was that the court denied Chase’s request for attorneys’ fees, finding that Stonebrook had made a good-faith argument for substantial compliance with the ICRA, which was a legitimate issue of first impression for the court.