Friday, June 23, 2017
Kentucky Court of Appeals Clarifies Statute of Limitations for Claims of Breach of Fiduciary Duty
In a decision rendered last Friday, the Kentucky Court of Appeals clarified how the statute of limitations for allegations of the breach of fiduciary duty is to be applied. Most importantly, the Court held that a discovery rule does not apply with respect to allegations of breach of fiduciary duty. Middleton v. Sampey, No. 2015-CA-001029-MR, 2017 WL 2605224 (Ky. App. June 16, 2017).
This dispute arose out of the operation and management of Hardscuffle, Inc. and its subsidiary, American Life and Accident Insurance Company of Kentucky. In August, 1999, American Life and Hardscuffle entered into a share exchange agreement consequent to which American Life became a wholly-owned subsidiary of Hardscuffle. Thereafter, in January, 2000, Nancy Lampton and James Sampey (Sampey being the then trustee of certain trust to which the plaintiff is a remaindermen beneficiary) entered into an agreement pursuant to which they would vote all of their shares as a block.
Sometime thereafter (the exact date is not detailed in the opinion), the plaintiffs filed a derivative action against Lampton and the other board members alleging mismanagement of the companies. That derivative complaint was dismissed without prejudice in July, 2013 for “failure to establish they made a pre-suit demand on the board or that a demand would have been futile.” Another suit was then filed in December, 2014. Those suits were as well dismissed on grounds of standing and collateral estoppel.
The Court of Appeals would affirm the dismissals on the basis of on the statute of limitations, never reaching the questions of standing and collateral estoppel upon which the trial court relied.
Specifically, the Court found that all of the claims for breach of fiduciary duty were barred by the five-year statute of limitations set forth in KRS § 413.120(6). In support of the application of this statute, the Court cited Ingram v. Cates, 74 S.W.3d 783, 787 (Ky. App. 2010). As the lawsuit was brought 15 years after the voting agreement was entered into, and seven years after the expiration of certain stock options that were included therein, dismissal on the basis of the five-year statute of limitations was held to be appropriate.
Responding to that argument, the plaintiffs had alleged that they did not become aware of the existence of that voting agreement until June, 2010, and that a December, 2014 filing was within the statue limitations if a discovery rule were applied. While noting that certain statutes of limitation do contain a discovery rule, such as those for medical malpractice or claims of professional negligence, the Court of Appeals observed as well that the courts are reluctant to apply a discovery rule outside of the General Assembly doing so. On that basis, no discovery rule was applied to the statute of limitations set forth in KRS § 413.120(6).
As claims against Sampey arose as well in his capacity as a trustee, the Court considered the application of the statute of limitations under the Kentucky Uniform Trust Code and under prior law, holding that the prior law applied to these claims and finding them likewise to be time-barred.
The Court as well rejected a suggestion that the “continuing violation doctrine” should toll the statute of limitations, finding it to be limited to claims under the Kentucky Civil Rights Act.