Where Does Kentucky Stand on Piercing LLCs?

Where Does Kentucky Stand on Piercing LLCs?

 

In Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), the Kentucky Supreme Court updated the law on when the corporate veil may be pierced.  Left unresolved was the question of whether and how the veil of a limited liability company (LLC) may be pierced.

 

While the Kentucky Court of Appeals has applied veil piercing to LLCs, the Kentucky Supreme Court has for now (maybe?) reserved judgment as to whether and how LLCs may be pierced.  Specifically, in Pannell v. Shannon,  __ S.W.3d __, 2014 WL 1101472, *14 fn. 15 (Ky. 2014), the Court wrote:

 

This, of course, assumes the doctrine of veil piercing even applies to limited liability companies under Kentucky law. While several decisions have assumed that it does, see Stettenbenz v. Butch's Rod Shop, LLC, 2012–CA–001405–MR, 2013 WL 4779862 (Ky.App. Sept. 6, 2013) (unpublished), the question appears to have been raised in only one case, Howell Contractors, Inc. v. Berling, 383 S.W.3d 465, 466 (Ky.App.2012), which ultimately avoided the question by applying Ohio law, which does allow veil piercing of LLCs. There are, of course, strong arguments for why LLC veil piercing should not be allowed, see generally Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. Ill. L.Rev. 77 (2005), even when corporate veil piercing is viable in the jurisdiction, see Thomas E. Rutledge & Lady E. Booth, The Limited Liability Company Act: Understanding Kentucky's New Organizational Option, 83 Ky. L.J. 1, 17 n. 73 (1995) (“An issue to be considered is the degree to which the common law doctrine of piercing the corporate veil should apply to LLCs. While the use of the LLC's liability shield should not be permitted to protect wrongdoers, the application of the law that has developed in this area is questionable.”).

Other Court of Appeals decisions involving the piercing of an LLC include Mountain Paving and Construction, LLC v. Workman, No. 2012-CA-001822-MR, 2014 WL 272463 (Ky. App. Jan. 24, 2014) (Not to be Published) (veil of LLC pierced in order to hold one member liable on LLC debt) and Rednour Properties, LLC v. Spangler Roof Services, LLC No. 2009-CA-001159-MR, 2011 WL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) (LLC pierced on basis including that it was a single member LLC and was set up for tax purposes and to achieve limited liability).  Subsequent to the Rednour decision the LLC Act as well as the business corporation act were amended to make express that being a SMLLC or single shareholder corporation are not basis for piercing.  Ky. Rev. Stat. Ann. § 271B.6-220(3) (“That a corporation has a single shareholder is not a basis for setting aside the rule recited in subsection (2) of this section.”), id. § 275.150(1) (“That a limited liability company has a single member or a single manager is not a basis for setting aside the rule otherwise recited in this subsection.”). See also Rutledge, The 2012 Amendments to Kentucky’s Business Entity Statutes, 101 Kentucky Law Journal Online 1, 3-4 (2012).

 

            Further, the Supreme Court has recognized that LLCs are statutory constructs that are strangers to the common law. 

 

In fact, “limited liability companies are creatures of statute,” controlled by Kentucky Revised Statutes (KRS) Chapter 275,” not primarily by the common law. To the extent that common law doctrines could arguably govern limited liability companies, the Kentucky Limited Liability Company Act “is in derogation of common law,” KRS 275.003(1), and the traditional rule of statutory construction that “require[s] strict construction of statutes which are in derogation of common law shall not apply to its provisions.” Id. Thus, to the extent the statutes conflict with common law, the common law is displaced.

This Court must therefore first look at the controlling statutory law. The obvious place to start, then, is the source of limited liability in the LLC context, KRS 275.150.  Pannell v. Shannon, supra at *7 (citations omitted).

, thereby distancing LLCs from the roots of piercing jurisprudence.  But see Ky. Rev. Stat. Ann. § 275.003(1) (“Unless displaced by particular provisions of this chapter, the principles of law and equity shall supplement this chapter.”).

 

            Unfortunately, the apparent categorical reservation of the question of piercing the LLC veil set forth in Pannell v. Shannon stands in contradiction to another recent decision of the Supreme Court.  In Turner v. Andrew, the Court wrote:

 

The doctrine [of veil piercing] can also apply to limited liability companies.  413 S.W.3d 272, 277 (Ky. 2013). 

The Turner decision was written by Justice Abramson, and this language is consistent with an unpublished trial court ruling written by now Justice Abramson when she was on the Circuit Court, she then stating:

While it is true that the foregoing represents the law with respect to the liability of corporate officers and shareholders, equity and fairness required that those same theories of liability [piercing and personal responsibility for personally committed torts] should extend to managers and member of limited liability companies as well.  Fabing v. E Concepts, LLC, Jeff. Cir. Ct. (Div. 3) No. 01-CI-06835, Order Granting Plaintiff’s Motion for Partial Summary Judgment entered June 9, 2003 (emphasis in original).

It remains to be seen whether the acceptance of LLC veil piercing (Turner v. Andrew) or the reservation of the question (Pannell v. Shannon) will be determined to be controlling.