The (Not So New) Home Improvement Contract Requirements

Starting in January 2006, California dramatically increased the requirements for Home Improvements Contracts – regulating everything from how the contract looks to the terms in the contract and where the terms are to be located in the contract. For starters, all text on the contract must be at least 10­point typeface, with some 12­point, and the first page of the contract must include the date the homeowner signed the contract and the Contractor’s name and address to which the homeowner can mail a "Notice of Cancellation." In addition, the contract must contain certain statements and disclosures mandatory.

Failure to comply with these requirements exposes a contractor to discipline by the Contractors State License Board and the possibility that a court may find the contract void and unenforceable, thus preventing a contractor from collecting amounts owed.

Proper drafting of a home improvement contract is therefore essential. For advice on drafting home improvement contracts, contact the author at the number or address listed at the bottom of this article.

Perfecting Mechanics’ Liens

After recording a mechanic’s lien, a lien claimant must file a lawsuit to foreclose upon the lien within 90 days; otherwise the mechanic’s lien statute provides that "the lien automatically shall be null and void and of no further force and effect." Thus, it is essential to file a lawsuit to foreclose upon the lien within 90 days of recording the lien.

In addition to filing the lawsuit, a lis pendens should be recorded so that the lien is enforceable against purchasers or other lien claimants who subsequently acquire an interest in the property.

Further, in some situations, such as when there is confusion about the identity of the property owners or adversaries on the issue of lien priority, a claimant should consider purchasing a mechanics’ lien guaranty from a title company. A lien guaranty warrants the accuracy of information provided by the title company about the property against which foreclosure is intended.

Avoiding Personal Liability Under The Corporate Alter Ego Doctrine

Ordinarily, a corporation is regarded as a legal entity separate and distinct from its shareholders. As such, the liability of its shareholders for corporate debts and obligations is limited to their investment in the corporation. This limited liability, however, may be lost and shareholders may be personally liable for more than their investment, if a court determines that the corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute or accomplish some other wrongful or inequitable purpose.

This loss of limited liability is known as the "alter ego doctrine." In general, the two requirements for invoking the alter ego doctrine are that (1) there is such a unity of interest and ownership between the corporation and the individual or organization controlling it that their separate personalities no longer exist and (2) the failure to impose personal liability would sanction a fraud or promote injustice.

A common reason for invoking the doctrine is that, if not invoked, maintaining the corporate fiction would work an injustice on the corporation’s creditors. Factors which have led courts to invoke the doctrine are:

 

  • commingling of personal and corporate funds or assets;
  • failure to segregate funds of separate entities;
  • unauthorized diversion of corporate funds or assets to non­corporate uses;
  • failure to adequately capitalize the corporation;
  • treatment by an individual of corporate assets as his own;
  • failure to issue or obtain authority to issue stock;
  • failure to hold director and shareholder meetings;
  • failure to follow corporate formalities; and
  • failure to properly maintain written corporate minutes and adequate corporate records.

 

To help maintain the limited liability of your corporation, the following practices should be adhered to:

 

  • sign all contracts in the name of the corporation;
  • keep corporate and personal interests, assets and monies separate;
  • hold annual director and shareholder meetings;
  • hold special director meetings for important matters such as undertaking loans or
  • funding commitments, entering into leases and significant contractual agreements, and changing an officer’s salary;
  • hold special shareholder meetings for removing directors or filling director vacancies;
  • carry reasonable insurance on the corporation and its officers and directors; and
  • have your attorney prepare written minutes and consents, and maintain your corporate records.

 

Following these procedures also will help to establish good practices for doing business in the corporate form.

For advice on avoiding alter ego liability, maintaining corporate formalities and preparation of corporate minutes and consents, contact the author at the number or address listed below.

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Weiss Beat is published by Michael R. Weiss, an attorney with the firm Epstein, Turner & Song, P.C. Mr. Weiss’ practice focuses on business and insurance litigation, insurance insolvency, reinsurance and counseling California corporations and business entities. Mr. Weiss can be reached at Epstein, Turner & Song, 777 S. Figueroa Street, Suite 4950, Los Angeles, California, 90017, Tel: (213) 861­7487, mrw@etslaw.com.

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