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.
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