Administrative Dissolution + Reinstatement = No Personal Liability of Officers

Administrative Dissolution + Reinstatement = No Personal Liability of Officers

      The wisdom of the 2012 amendments to the Kentucky statutes providing that, upon reinstatement after administrative dissolution, the liability of any agents of the entity will be determined as if the dissolution had never taken place, has been confirmed by a  recent decision of the Kentucky Court of Appeals.  Harshman Construction & Electric, Inc. v. Witte, No. 2011-CA-000609-MR, 2012 WL 2471445 (Ky. App. June 29, 2012) (Not To Be Published).

      The Wittes contracted with Harshman Construction & Electric, Inc. to build a home.  They ultimately had a falling out over failures by Harshman to conform the construction to the plans and excessive delays in construction, and the decision reviews the measure of damages available to them.  In addition, the Wittes asserted that certain of the officers and Harshman’s sole shareholder should be held personally liable on the basis that, during part of the construction phase, Harshman Construction was administratively dissolved.  Specifically, while the contract was entered into in March 2007 and construction began in May 2007, Harshman Construction was administratively dissolved in November 2007, one month before the final break in their relationship leading to the Complaint being filed in February 2008.  Harshman was reinstated in March 2010.  In January 2011, three years after the filing of the Complaint, the individual defendants moved to dismiss the claims against them.

The trial court denied the motion to dismiss stating that:  (1) the corporation was dissolved at the time work was being performed; therefore, the Wittes were dealing with individuals at that time and not agents of the corporation; (2) dismissing [the individual defendants] could be prejudicial because the motion to dismiss was filed nearly three years after the action was commenced; and (3) the [individual defendants] actively engaged in litigation and individually raised counterclaims against the Wittes.  Slip Op. at 4.

Ultimately, two of the individual defendants were found liable on the Witte’s claims.  Needless to say, that decision was appealed.

      Reversing the determination that the individuals were personally liable, the Court parsed KRS 271B.14-22(3), the predecessor to now applicable KRS § 14A.7-030, both of which provide that upon the reinstatement of a dissolved entity, the reinstatement shall “related back to and take effect as of the effective date of the administrative dissolution or revocation” and the organization shall proceed forward as if the administrative dissolution “had never occurred.”  Slip Op. at 5.  Noting that the statute does not impose a time limitation for seeking reinstatement after administrative dissolution, it relied upon the 2005 ruling of the Court of Appeals in Fairbanks Arctic Blind Co. v. Prather & Associates, Inc., the Harshman Court writing that:

As reinstatement of a corporation relates back to the effective date of dissolution and operates as if dissolution never occurred, it naturally follows that the shareholders and officers of such corporation are not individually liable for actions undertaken on behalf of the corporation during its dissolution.  Slip Op. at 6.

      The Court of Appeals did remand to the trial court the argument, not previously addressed, that the corporate veil of Harshman Construction should be pierced.

      As to the effect of the reinstatement, this ruling of the Court of Appeals is normatively accurate for the reasons previously reviewed in section 9.5 of Dissolution of a Limited Liability Company, that being Chapter 9 of Limited Liability Companies in Kentucky (UK/CLE 2011).   The holding is as well consistent with both eServices, L.L.C. v. Energy Purchasing, Inc., 2012 WL 404957 (E.D. Ky. Feb. 6, 2012) and Pannell v. Shannon, No. 2010-CA-001172-MR (Ky. App. Aug. 26, 2011).  Further, it is consistent with the statutory amendments approved by the 2012 Kentucky General Assembly.  By means of that amendment, it creating KRS § 14A.7-030(3)(c), it is now express that upon reinstatement:

The liability of any agent shall be determined as if the administrative dissolution or revocation had never been heard.

KRS § 14A.7-030 as amended by 2012 Ky. Acts, ch. 81, § 83.