Court of Appeals Avoids the Question of Whether Kentucky Will Allow for the “Reverse Pierce” of an LLC

Court of Appeals Avoids the Question of Whether Kentucky Will Allow for the “Reverse Pierce” of an LLC

In a decision rendered last Friday, the Kentucky Court of Appeals determined, on the facts presented to the trial court, to affirm the granting of summary judgment to all the defendants on the question of whether the veil of an LLC could be pierced in order to hold it liable on a claim against the person who, at least at one time, had been the sole member. Unfortunately, the decision raised as many questions as it provided answers. Rector v. Calvert, Case No. 2013-CA-002057-MR, 2018 WL 2460361 (Ky. App. June 1, 2018).

Danny Calvert was the son of James Calvert. After the death of James, Rector, his Executor, brought claims against Danny for disposing of certain items of James’ property pursuant to a power of attorney. Over the course of this litigation, Danny would himself die, and Linda Calvert was appointed as his Executrix.

Some years prior to the time that Danny misused James’ power of attorney, Danny had organized an LLC under the name Lindan, LLC. Apparently at various undocumented times, Danny had conveyed to his wife, Linda and to their children interests in the LLC, perhaps all of the interests in the LLC. After James’ death, his estate brought an action against Danny Calvert and Lindan. The estate was awarded damages of $343,636.96. In seeking to collect, the Estate sought to reach Lindan’s assets by means of a “reverse pierce.” The trial court granted summary judgment to the defendants, and this appeal followed.

Ultimately, the Court of Appeals would avoid the entire question, writing:

Although Kentucky has not yet recognized a claim for reverse piercing, we agree with the trial court that James’ Estate failed to present sufficiently strong equities in support of such an extraordinary remedy.

In another place it wrote:

“We conclude that the current case is not the appropriate means of recognizing such a [reverse piercing] claim.”

Acknowledging that various courts either have or have not recognized outside reverse piercing, it was found that the plaintiff’s presentation to the trial court was not sufficient to support a pierce. Rather, while it was agreed that certain formalities had not been satisfied, including allowing Lindan to be administratively dissolved in 2008 (and only reinstated in 2015), there was a failure to bring forth evidence with respect to the other factors identified in Inter-Tel Technologies. Also, the court noted that reverse veil piercing cases must consider the impact thereof on the entity’s creditors and other innocent shareholders.

There are, however, a number of unanswered questions that still result from this opinion, namely:

(1) As is noted in the concurring opinion, it appears that the original judgment was against not only Danny individually but also Lindan LLC. If Lindan is a judgment-debtor to James’ Estate, why is piercing an issue at all?;

(2) As is mentioned in both the opinion and the concurring opinion, why was no charging order sought against Danny’s interest in Lindan?; 

(3) While, in footnote 6, the California decision Postal Instant Press, Inc. v. Kaswa Corp. was a case cited for the proposition that reverse veil piercing is not permissible, the opinion failed to acknowledge that, in Curci Investments, LLC v. Baldwin, 2017 WL 3431457 (Ca. App. 4^th Dist., Aug. 8, 2017), the possibility of reverse veil piercing was recognized;

(4) The repeated references to the “corporate veil” and the piercing of a “corporation” indicate a lack of attention to the appropriate nomenclature of an LLC. As Professor Jonathan Fershee of West Virginia Law oft points out, an LLC does not have a “corporate” veil; and

(5) As piercing is a remedy, rather than an independent cause of action, is the denial of that remedy necessarily subject to the same standard of review as is a grant of summary judgment with respect to a claim on the merits?

There is quite a bit happening with respect to the law of piercing the veil both in Kentucky and, across the country.

My thanks to Jay Adkisson for his email pointing out the Kaswa / Curci issue in this case.