Monday, April 30, 2012

Anne Boleyn's Fall

The Beginning of the End for Anne Boleyn

      On this day in 1536 Mark Smeaton was arrested, this being the first overt step in Cromwell’s plan to bring down Anne Boleyn.  According to one source, Cromwell had Smeaton brought to his own house and there tortured him.  Eventually, Smeaton would be racked and confess to have committed adultery with Anne Boleyn.  He would ultimately, on May 17, be beheaded at the Tower of London.

Thursday, April 26, 2012

Agreement to Resell Condo for Less than FMV Upheld

Kentucky Court of Appeals Upholds Obligation to
Resell Condominium at Less than Fair Market Value

      In a recent decision, the Kentucky Court of Appeals upheld a deed covenant for a condominium requiring that it be resold to the development at less than its fair market value.  Puckett v. St. Andrews Place Retirement Community, Inc., 2012 WL 1072418 (Ky. App. Mar. 30, 2012) (not to be published). 
      The condominium complex in question is operated by St. Andrews Place Retirement Community, Inc., a nonprofit corporation.  Mary Puckett purchased a condominium for $52,065 in 1993, living in it until she passed away in 2008.  The Master Deed for the property provided that the developer would have a right to re-acquire the property upon its transfer with the price determined on a sliding scale against the original unit cost based upon the number of years of residence.  For someone holding property in excess of ten years, the repurchase would be at 75% of the original cost.  After Ms. Puckett’s death, St. Andrews notified her heirs that it would be buying the property back for $38,588, that being 75% of the original acquisition price of $52,065.  In turn, the heirs refused to sell at less than fair market value and brought a declaratory judgment action seeking the determination that the buyback provision was an unforceable restraint on alienation.  When summary judgment was granted to St. Andrews, the heirs appealed.

      The heirs’ position was based in part on Man O War Restaurant, Inc. v. Martin, 932 S.W.2d 366 (Ky. 1996), wherein the Kentucky Supreme Court invalidated a buyback provision for corporate shares pursuant to which they would be reacquired for the initial acquisition cost, holding that such constituted either an unenforceable penalty or unreasonable liquidated damages.  Curiously absent from the Court’s discussion is any recognition that the Man O War Restaurant has been legislatively overruled by the Kentucky General Assembly.  See, e.g., Rutledge, The 2002 Amendments to the Kentucky Business Corporation Act, 67 Bench & Bar 13 (May, 2003).  The heirs relied as well upon Sebastian v. Floyd, 585 S.W.2d 381 (Ky. 1979), the Court there invalidating a forfeiture clause in an installment land sales contract, it requiring a credit, at the judicial sale, for payments already made by the purchaser.
       Ultimately, the Court held that the buyback would be enforced, it being reasonable in light of the complete disclosure to Ms. Puckett and as well her ultimate heir and the objectives of St. Andrews, namely to provide affordable housing facilities.

        It remains to be seen whether a similar provision in a non-charitably focused venture would be upheld.

Wednesday, April 25, 2012

The Kentucky Uniform Cooperative Association Act

Kentucky Uniform Limited Cooperative Association Act

On March 23, Governor Beshear signed 2012 H.B. 441, it setting forth the enactment of the Kentucky Uniform Limited Cooperative Association Act. 

Tuesday, April 24, 2012

Beware Greeks Bearing Gifts

Beware Greeks Bearing Gifts

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.
      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war.  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources.  The story would not find, however, its full development until Virgil’s Aeneid.
      Some modern historians have attempted to explain the story as an analogy, suggesting actually that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes.  I, for one, would rather retain the literal interpretation.

Monday, April 23, 2012

Forleo v. American Products Overruled

Forleo v. American Products of Kentucky, Inc. Has Been Legislatively
Overruled – The Reinstatement of an Administratively Dissolved
Organization is Effective as to the Organization’s Agent

      In Forleo v. American Products of Kentucky, Inc., 2006 WL 2788429 (Ky. App. 2006), notwithstanding the reinstatement of the corporation, the Court of Appeals held that the shareholders/officers/directors who, in the period of dissolution prior to reinstatement, entered into a contract with a third-party would be held personally liable thereon.  In 2007, the statutes were amended to overrule Forleo as to corporate shareholders and LLC members, it being stated that the administrative dissolution does not deprive them of the otherwise applicable rule of limited liability.  See Thomas E. Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Kentucky Law Journal 229, 239-243 (2008-09).
      Now addressing the broader issue, namely the liability of an agent for actions undertaken during the period of administrative dissolution but prior to the reinstatement, various of the acts have been amended to expressly provide that upon reinstatement, the liability of any agent acting on behalf of the administratively organization shall be determined as if the administratively dissolution “had never occurred.”  See 2012 H.B. 341, amending KRS § 14A.7-030.
      This amendment has the effect of affirming the holdings of Judge Coffman rendered in eServices, LLC v. Energy Producing, Inc., reviewed here on February 22, 2012, and that of the Court of Appeals in Pannell v. Shannon, 2011 WL 3793415 (Ky. App. Aug. 26, 2011).

Friday, April 20, 2012

Foreign Entities Seeking Contracts with Kentucky Must Qualify to Transact Business

Foreign Entities Seeking State Contracts Must
be Qualified to Transact Business in Kentucky

      The rules for when a particular business organization must qualify to transact business are at best confusing.  See KRS § 14A.9-010.  The statute does not define what is “transacting business,” but only recites activities that of themselves do not constitute transacting business.  Foreign business entities receiving state contracts have often been able to avoid qualification by falling into one of those exemptions from what is transacting business. 

      Under amendments made by 2012 H.B. 341, any foreign business organization, as a prerequisite to receiving a state contract, must be qualified to transaction business in the Commonwealth of Kentucky.  Further, for an entity holding a state contract must maintain its qualification to transact business through the contract’s term. 

       For most business organizations, that qualification will be by means of a certificate of authority, although if the foreign entity is a limited liability partnership it will be by means of a statement of foreign qualification.  Further, for those foreign partnerships that are themselves not limited liability partnerships, they may qualify to transact business, solely for the purpose of qualifying to receive a state contract, by means of a certificate of authority.  Otherwise, it remains the law that a foreign general partnership, not an LLP, not only need not qualify to transact business, but there is no mechanism by which they may do so.  See 2012 H.B. 341, §§ 84, 85, 86 and 87.

Wednesday, April 18, 2012

Patmon v. Hobbs Overruled by Ky General Assembly

Patmon v. Hobbs is No Longer Good Law - Violation of the Duty of Loyalty in Partnerships and LLCs Not Subject to “Fairness” Defense
In Patmon v. Hobbs, 280 S.W.3d 589 (Ky. App. 2010), the Court of Appeals both permitted a “fair to the LLC” defense to the appropriation of a company asset and as well imposed on the plaintiff the burden of proving lack of fairness.  As has been previously reviewed, both these determinations went far astray from the predecessor law on the duty of loyalty in partnerships and LLCs under which the appropriation of an asset is, without informed sanction by the other participants in the venture, improper and for which “fairness” is not a defense.  See Thomas E. Rutledge and Thomas E. Geu, The Analytic Protocol for the Duty of Loyalty Under the Prototype LLC Act, 63 Ark. L. Rev. 473 (2010).
In response, amendments to the LLC and partnership acts make clear that “fairness” is not a defense to the appropriation of a partnership or LLC asset.  See Ky. Rev. Stat. Ann. § 275.170(3); id. § 362.1-404(5); and id. § 362.2-408(5), each as amended by 2012 H.B. 341.

Tuesday, April 17, 2012

Client, Not Bank, Responsible for Not Identifying Evidence of of Embezzlement

Court of Appeals Holds Client, and Not Bank, Responsible
For Not Recognizing Evidence of Embezzlement Scheme

        A recent ruling of the Kentucky Court of Appeals held that the customer of the bank, and not the bank, would bear responsibility for not recognizing the evidence of an employee’s embezzlement.   Dean v. Commonwealth Bank & Trust Co., 2012 WL 1137907 (Ky. App. April 6, 2012). 
      Mark D. Dean, PSC (“Dean”) maintained a banking account with Commonwealth Bank & Trust Co.  Both Mark Dean and his bookkeeping/secretary, Jody Willis, were signatories on the Commonwealth account; only one signature was required to effect transactions in the account.  The Deposit Account Agreement provided that the client is “responsible for promptly examining your statement each statement period and reporting any irregularities to [Commonwealth].”  Willis thereafter began a check-kiting scheme, and in furtherance thereof began diverting the monthly bank statements to preclude Mark Dean from reviewing them and thereby learning of her activities.

      Responding to indications of suspicious activity in the account, and at Commonwealth’s request, Mark Dean held a meeting with them in February 2005; activity in the account ceased the following month.  In September 2008, law enforcement contacted Mark Dean regarding Willis’ unlawful activities.  In January 2009, Dean filed suit against the bank, alleging that it aided and abetted the illegal activity, breached its duty of care, committed common law negligence and breach of contract, and violated its duty of good faith and fair dealing.  Ultimately, Commonwealth was granted summary judgment on all of the claims against it, from which Dean appealed.

      The summary judgments in favor Commonwealth were upheld.
      Dean relied upon KRS § 355.4-111, in setting forth a general three-year statute of limitations that, combined with a discovery rule, he asserted it allowed him to pursue his claims against the Commonwealth.  The Court reject that analysis, holding that KRS § 355.4-406 controlled.  Under that statute, the customer has a duty to examine bank statements in a prompt and reasonable manner and “must exercise reasonably promptness in examining the statement of the items to determine whether any payment was unauthorized” and then “the customer must promptly notify the bank of the relevant facts.”  KRS § 355.4-406(3).  The statute goes on to require that the customer act within a year or waive any right from moving against the bank with respect to a transaction effective pursuant to the unauthorized signature or alteration.  KRS § 355.4-406(6).  Citing as well Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254 (Ky. 1997), the Court found that any of Dean’s claims against the bank were barred by the failure to act within one year of the receipt of the statements from which evidence of the illegal activity could have been ascertained.  “Dean’s dilatoriness is an inadequate basis for concluding that it could not reasonably discover the unauthorized payments.”  2012 WL 1137907, *5.
      In addition, the Court of Appeals noted that from 2006, the official comments to the UCC are adopted as expressing the legislative intent of the Kentucky General Assembly.  Consequently, “it behooves both bench and bar to read these official comments in their entirety.”  2012 WL 1137907, *3, fn. 1.

Monday, April 16, 2012

Preserving Limited Liability in LLPs and LLLPs

Preserving Limited Liability in LLPs and LLLPs

The 2012 Kentucky General Assembly approved amendments to the limited liability provisions of KyRUPA and KyULPA that serve to preserve the expected rule even after the limited liability status has been, at least prospectively, forfeited.
           These changes respond to the ruling of the Fifth Circuit in Evanston Ins. Co. v. Dillard Department Stores, Inc.,  602 F.3d 610 (5th Cir. 2010). A law firm, organized as a limited liability partnership (“LLP”) in Texas, infringed on the trademark of the Dillard’s Department Stores.  Evanston, the firm’s malpractice carrier, intervened seeking a declaration that its policy did not provide coverage for Dillard’s claims.  While the litigation was pending the firm dissolved and the election of LLP status was allowed to expire.  Thereafter, judgment was extended in favor of Dillard’s against the firm.  When the judgment was not collected against the now defunct firm, Dillard’s filed a complaint seeking to hold the firm’s partners personally liable on the judgment.

The defendant partners, relying upon the liability shield provision of Texas partnership law (TRPA § 3.08(a); see also 602 F.3d at 614-15), asserted they were not personally liable on the partnership’s debts in that the grounds therefore, the trademark infringement, took place while their firm was registered as a LLP.  Ruling in favor of Dillard’s, the Court determined that the language of the statute looked to when the obligation, as contrasted with the predicate conduct, arose.  Under this analysis, as the judgment was entered when the partnership was not an LLP, the partners are personally liable on the judgment.
         With the amendments made to KRS §§ 362.1-306(3) and 362.2-404(3), the analysis will be upon whether the predicate conduct, as contrasted with the finding of liability, took place while the firm was an LLP.  2012 H.B. 341, §§ 115, 121.  It will now be a more streamlined process to dissolve an LLP, avoiding, for example, the need to keep the statement of qualification in place and effective.  It will also avoid the argument that registration as an LLP after the predicate conduct but before judgment is entered may be effective to avoid personal liability.

Friday, April 13, 2012

Effect of Assigning Entire Economic Interest in LLC Clarified

Dissociation of an LLC Member upon Having
Transferred All of Their Interest in the Venture Clarified

      A member of an LLC may unilaterally (and here assuming no contrary provision in the operating agreement) convey his economic interest in the venture.  That conveyance does not, however, convey any right to participate in the management and affairs of the LLC.  However, having conveyed his entire economic interest in the venture, the member is subject to having his right to further participate in the management and affairs of the company terminated, that termination being effected by a dissociation approved by the remaining members.
      A revision made to the LLC Act, namely the addition of “that they may unilaterally transfer,” addresses the argument that not “all” of a member’s interest has been conveyed, and therefore he cannot be dissociated, because the non-transferrable rights to participate in management have not been transferred.  See 2012 H.B. 341, amending KRS § 275.180.  Ergo, it is clear that when a member has transferred all of his economic interest in a venture, he is thereafter subject to dissociation by the other members.

Thursday, April 12, 2012

Single Shareholder Corps and Single Member LLCs are not for that Reason Subject to Piercing

Partial Codification of the Law of Piercing the Veil

In Rednour Properties, LLC v. Spangler Roof Services, LLC, No. 2009-CA-001159-MR, 2011 WL 2535330 (Ky. App. June 10, 2011, modified July 8, 2011), the Kentucky Court of Appeals justified a decision to pierce the veil of an LLC on the basis that it had a single owner who organized it for the purpose of achieving limited liability.  For a general review and criticism of this decision, see Thomas E. Rutledge, The Limited Liability Shield in Kentucky Single Member LLCs Has Been Thrown into Doubt by the Court of Appeals, kentuckybusinessentitylaw.blogspot (Nov. 7, 8 and 9, 2011).

In response to this holding, the 2012 Kentucky General Assembly amended both the business corporation act and the LLC act to provide that having only a single shareholder or a single member or manager is not of itself a basis for piercing the veil. See Ky. Rev. Stat. Ann. §§ 271B.6-220(2) and 275.155(1), each as amended by 2012 Ky. H.B. 341.   

As both single shareholder corporations and single member LLCs are permissible, being so organized is not a basis for piercing.

The First Fall of Constantinople

The First Fall of Constantinople

      Today marks the anniversary of the fall, in 1204, of Constantinople, one of the only two times that its famed walls would ever be breached.
      Constantinople, after having been re-founded by the Emperor Constantine, was protected, on at least the landside, by an initial wall.  The city subsequently expanded and it was in the early 5th century that the famous double Theodosian Wall was constructed.  Over the years, these walls would deflect attacks ranging from the army of Attila the Hun to several long-term sieges by various Muslim forces.  They would fall, ultimately, to a western Crusader army.
      The Fourth Crusade intended, by means of an assault from the sea, to capture Egypt and thereby create a land base from which to again take possession of the Holy Lands and particularly Jerusalem; the few coastal cities remaining in the Crusader’s states were simply insufficient as a logistics base from which to act.  From the start essentially nothing went to plan.  Venice had been offered a significant contract to build and equip a fleet to move the Crusader army, its price calculated on a per capita basis.  Venice, a preeminent trading venture, essentially stopped all activities for two years in order to perform its part of the agreement.  When, however, time came for the Crusader army to depart, its numbers were significantly smaller than had been planned.  Those Crusaders who were present simply did not have the wherewithal to satisfy their end of the bargain.  After significant haggling, the reduced army departed, traveling first not to Egypt but rather to Zara, a city in the Adriatic that had earlier revolted again Venetian control.  Part of the army’s debt to the Venetians would be satisfied by bringing Zara to heal.  This action earned the Crusader army an excommunication issued by the Pope.
      Having now picked up a particularly weak claimant to the Byzantine throne, one who assured the Crusaders and the Venetians that he would be welcomed with open arms if returned to Constantinople, the fleet headed for Constantinople.  Needless to say, the Emperor was not pleased to find the fleet pulled up before the walls of his city, especially accompanied by a claimant to the throne.  Relations between the Byzantine authorities and the Crusaders/Venetians started off bad and essentially only got worse.  Ultimately, the fleet and the army would attack Constantinople and breach its walls, an event that for centuries forms a major iconographic event in Venice’s history.  The city would fall and ultimately one of the Crusader chiefs, Baldwin, would be placed upon the throne of Constantinople.
      The so-called “Latin Kingdom” in Constantinople would survive for only fifty-seven years when it would fall, the throne again taken by the Greeks.  However, the Latin Kingdom seriously weakened the Byzantine Empire, setting it up for its ultimate fall in 1453 to the Islamic Ottoman forces under Mehmet II.

New Business Entity Laws in Kentucky

Governor Beshear Signs 2012 H.B. 341,
Amending and Updating Kentucky’s Business Entity Laws

            On April 11, 2012, Governor Beshear signed 2012 H.B. 341.  This legislation, which passed from both the House and the Senate on unanimous votes (receiving unanimous votes as well in the House and Senate Judiciary Committees), enacts:

·                     The Kentucky Uniform Statutory Trust Act (2012); and

·                     A variety of amendments to Kentucky’s business entity statutes.

      Kentucky is the first state (sorry, the District of Columbia simply does not count) to have enact the Uniform Statutory Trust Act.  That Kentucky enactment, however, contains a number of departures from the uniform act.