Tuesday, November 6, 2012

More on Piercing - The Ky. Ct. App. Discusses Choice of Law and Inter-Tel

Piercing the Veil – The Kentucky Court of Appeals
Discusses Choice of Law and Applies Inter-Tel

      A November 2, 2012 decision of the Kentucky Court of Appeals has provided helpful guidance with respect to (i) the question of the applicable law as to piercing the veil of a limited liability entity and (ii) the application of the Kentucky Supreme Court’s Inter-Tel decision on piercing the veil.  Howell Contractors, Inc. v. Berling, ___ S.W.3d ___, 2012 WL 5371838 (Ky. App. Nov. 2, 2012).
      Howell Contractors, Inc. contracted with Westview Development, LLC, an Ohio limited liability company, to perform certain services in connection with a subdivision development.  Howell ultimately billed Westview for $1,103,569.63, of which Westview paid $923,902.06, leaving an outstanding balance of $179,666.67.  When the arrearage was not satisfied, Howell filed suit against Westview, Charles Berling (Westview’s sole member), and Charles Berling Land Corporation, and Berling Homes, Inc., it being implied in the opinion that they were either partially or wholly owned by Berling.
      As part of competing motions for summary judgment, Charles Berling, Berling Land and Berling Homes moved for dismissal on the basis of absence of liability, they not being parties to the contract with Howell.  In addition, “They further argued the doctrines of veil-piercing, instrumentality and alter-ego do not apply to LLCs ….” Summary judgment was granted to Charles Berling and the Berling entities, while summary judgment against Westview was denied.  Ultimately, an agreed judgment was entered in the amount of $179,666.97 against Westview.
Choice of Law as to Piercing
      Initially, the Court noted that the proper law to apply in determining whether the defendants other than Westview could be held liable to Howell is that of Ohio (and not that of Kentucky).  Referencing the Restatement (2nd) of Conflicts of Laws § 307 (1971), the Court wrote that “By analogy to corporate law, the rights, duties, and obligations of an LLC and its members are governed by Ohio law”, the court going on to then cite a number of cases from various jurisdictions standing generally for the proposition that piercing analysis involves the application of the law of the jurisdiction of organization (rather than the law of the situs of the dispute) should be applied.  The application of Restatement (2nd) of Conflicts § 307 to LLCs is a topic I explored in To Boldly Go Where You Have Not Been Told You May Go, 58 Baylor L. Rev. 205 (2006).
      The court went on to reject the notion that Ohio law does not address piercing of LLCs, citing Ossco Props, Ltd. v. United Commercial Prop Group, LLC, 968 N.E.2d 535 (Ohio App. 2011) for the test to be there applied.  Applying that law, the Kentucky Court of Appeals determined that the plaintiffs had not made out a case to justify piercing, writing that:

In the case at bar, while Howell has demonstrated Berling’s control over Westview and his other entities, but the conduct complained of does not rise to the level of fraud, illegality or unlawfulness. A careful review of the record discloses that Westview has merely failed to pay an entity debt. The facts are that Westview purchased a tract of land for approximately $287,000. Westview, presumably through Berling, secured a loan in the amount of $1,000,000 from Bank of Kentucky to develop the property. Berling further loaned over $485,000 to Westview, personally and through other entities, some controlled by Berling and others not controlled. The property in question is still owned by Westview. While this development has not quite panned out as planned, and Howell's preference is to be paid a little more promptly, it has a judgment which can undoubtedly be domesticated in Ohio. And, presumably, Howell exercised diligence in maintaining its security in the property by resort to Ohio’s mechanic’s lien statute. Ohio Rev. Code Ann. §§ 1311.01-1311.22.
No Piercing Even if Kentucky Law Applied

      Having disposed of the case under the properly applicable Ohio law, the court went on to consider whether the result would be any different were Kentucky law applied, ultimately determining it would not.  While obviously dicta, the Court of Appeals summarized the expanded test set forth in Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), observing:
Again, Howell has established its present inability to collect a debt owed. It has not established fraud or unjust enrichment of the type demonstrated in Inter-Tel., i.e., the “squirrel[ing of] assets into a liability-free corporation while heaping liabilities upon an asset-free corporation [.]” Id. The record does not disclose that Berling siphoned money or assets out of Westview. To the contrary, Berling put money into Westview, primarily his own, in the form of unsecured loans. As noted, Westview has assets in the form of a real estate development, and Howell, as a judgment creditor of Westview, will presumably be able to collect its judgment, with interest, as and when Westview’s property in Ohio is sold.
Piercing Kentucky LLCs
      The Court of Appeals, in a footnote, observed that “No reported Kentucky decision discusses the piercing of an LLC entity.”  While the aspects of this decisions applying the Inter-Tel analysis to these facts is obviously dicta, the Court of Appeals has at minimum undercut the validity of its statement.  Rather, it might have been more accurate for it to state that “Prior to this decision, no reported Kentucky decision discussing the piercing of an LLC.”  Regardless, this statement obviously ignored (perhaps further evidencing its consignment to the dustbin of history?) the decision rendered in Rednour Properties, LLC v. Spangler Roofing Services, LLC, 2011 WL 2535330 (Ky. App. 2011).  Still, it bears noting that in an unpublished trial court ruling written by now Justice Abramson of the Kentucky Supreme Court, it was stated that:
While it is true that the foregoing represents the law with respect to the liability of corporate officers and shareholders, equity and fairness require that those same theories of liability [piercing and personal responsibility for personally committed torts] should extend to managers and members of limited liability companies as well.

Fabing v. E Concepts, LLC, Jef. Cir. Ct. (Div. 3) No. 01-CI-06835, Order Granting Plaintiff’s Motion for Partial Summary Judgment entered June 9, 2003 (emphasis in original).
      Obviously, much more remains to be done with respect to clarifying how the Inter-Tel analysis will be applied to LLCs.

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