Business Entity Does Not Always Protect You From Personal Liability

In In re Advanced Custom Builders LLC, Jeffrey Noack was a general contractor conducting business as a sole member of a company called Advanced Custom Builders LLC (ACBLLC).  Noack contracted to build a custom home through ACBLLC and he did not finish the home on time and many parts of the home were left uncompleted.

Noack told the homeowners that he had paid the subcontractors and that their liens had been released. But some of these subcontractors began to contact the homeowners and notify them that they had not been paid by ACBLLC or the checks that Noack/ACBLLC gave them had bounced. The homeowner ended up paying $250,000 to get their home fixed and another $22,000 in attorney’s fees to handle the contractors who had filed mechanics’ liens for $133,591.

Noack, his wife, and ACBLLC filed for bankruptcy and sought a discharge. The homeowners argued against the discharge because Noack falsely represented to them that the subcontractors had been paid and the liens had been released. Noack tried to say that the homeowners contracted with ACBLLC, not with Noack personally.

The Court found Noack personally liable though and the court excepted the homeowner’s claims for $242,379 from discharge by ACBLLC and for $133, 519 against Noack personally.

The main lesson to take from this holding is that a business entity does not provide more protection than it is treated as an independent commercial operation. The best way to mess this up is to mix business and personal obligations together.

See In re Advanced Custom Building, 2011 WL 3608004 (Bkrtcy.N.D.Iowa, Aug. 16, 2011)See also Jay Adkisson, Noack: The Single Member LLC, Alter Ego, and Undercapitalization, Forbes, Aug. 19, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.