Court of Appeals Addresses Expectancy Damages, Rejects Claim to Pierce the Veil

Court of Appeals Addresses Expectancy Damages, Rejects Claim to Pierce the Veil

      A recent decision of the Kentucky Court of Appeals addresses the standards required to award expectancy damages with respect to a breach of contract action while as well rejecting a suggestion that the veil of the corporate debtor should be pierced.  Stettenbenz v. Butch’s Rod Shop LLC, 2013 WL 4779862 (Ky. App.  Sept. 6, 2013).  This opinion has been designated as “Not To Be Published.” 

      Before beginning the review of this decision, it is important to note a factual mistake that appears several times in the decision.  In both the style of the case and in the first and seventh paragraphs thereof, Butch’s Rod Shop is described as being an “LLC.”  The entirety of the decision as written, however, is in terms of the law of business corporations.  In fact, upon a review of the records of the Secretary of State, it is clear that Butch’s Rod Shop is a business corporation, and that the correct name of the entity is Butch’s Rod Shop, Inc.  This discrepancy has been communicated to Judge Dixon, author of the opinion.

      Returning to the substance of the issue, Stettenbenz hired Butch’s Rod Shop to undertake the restoration of a 1966 Chevy Nova.  That restoration extended over a period of years with Stettenbenz making progress payments as work was completed.  Ultimately, it was estimated that the work would be completed for an additional $14,000, and Stettenbenz continued to make progress payments thereon.  Finally, upon being told that $6,100 would complete the work, Stettenbenz tendered a check for that amount.  Over a year later with the work still not completed, Stettenbenz was advised that Butch’s was in financial difficulty.  Stettenbenz removed the vehicle and remaining parts and as well received a refund check for the remaining parts that had not yet been ordered against the last tendered $6,100 check.  In September of that year, Stettenbenz filed suit against Butch’s Rod Shop and as well the Whitakers, its individual shareholders.  Thereafter, the Whitakers approved and filed with the Kentucky Secretary of State articles of dissolution of Butch’s Rod Shop, Inc.   Those articles of dissolution, although such was not required by the statute, recited “that no debt of the corporation remains unpaid.”  This statement, not required by KRS § 271B.14-030, would ultimately lead to questions that, had it not been said, would not have needed to be addressed.

      Stettenbenz also asserted that the corporate veil of Butch’s Rod Shop should be pierced and the Whitakers held individually liable for the damages they had suffered.

      At a bench trial, Stettenbenz brought in an expert witness who testified that the completion of the car would cost between $50,000 and $55,000, including $3,000-$8,000 required for the completion of the interior, work that had not been undertaken by Butch’s.  However, the trial court issued its decision awarding Stettenbenz $12,901.73, that being the difference between the $14,000 paid under the last agreement for completion of the car less the $1,198.27 that was refunded (the opinion is inconsistent as to whether the refund check was in the amount $1,198.27 or $1,198.22).   The Court rejected the claims for piercing the veil and for liability consequent to the statement in the articles of dissolution that all debts had been satisfied.  This appeal followed.

      With respect to the damages awarded, the Court noted the rule that damages must not be speculative.  At the same time, it cautioned that it did not be required that the plaintiff “provide exact calculations of its damages.”  On the basis of the expert testimony provided on behalf of Stettenbenz, at least $42,000 was necessary to complete the work that had been originally undertaken by Butch’s Rod Shop. 

Thus, we are of the opinion that at least $42,000 in damages was proven with reasonable certainty.  According, we reverse on this ground and remand for a determination on the issue of expectancy damages.

      All of which may be moot in that the corporation has been now long dissolved.  For that reason, Stettenbenz argued on appeal that the grounds for piercing the veil had been satisfied.  The Court of Appeals, however, disagreed.  Reciting the various elements of piercing as set forth by the Kentucky Supreme Court in its 2012 Inter-Tel Technologies decision, the Court found that the Whitakers control of their closely-held corporation and its day-to-day operations was itself “insufficient to justify imposing personal shareholder liability unless such control is calculated to defraud or harm the corporation’s creditors.”  To that end, the trial court had found that the corporation maintained its own bank accounts, paid its corporate taxes from that bank account, paid all of its employees a salary, leased the facility from which it located and filed its annual reports with the Secretary of State.  There was, in contrast, no showing that the business was purposely undercapitalized or any indication of utilization of corporate assets to pay personal debts.  Judge Thompson would dissent from this portion of the decision, stating his view that the elements for piercing had been satisfied.

      Last, Stettenbenz sought to impose liability based upon the Whitakers based upon the allegedly false statement (curiously identified as being an “affidavit”) set forth in the articles of dissolution filed with the Secretary of State to the effect that all corporate debts had been paid.  In connection therewith, Stettenbenz relied upon KRS § 271B.140-020, it setting forth the steps to be employed when corporation dissolution is approved by both the directors and the shareholders.  Reviewing this statute, the Court found it to be purely procedural in nature.  Further, to the extent that the statement in the articles of dissolution was inaccurate, that point should be addressed through whatever administrative remedies are available through the Secretary of State’s office.  The Court also rejected the notion that allowing dissolution with an outstanding claim should not be permitted as means of avoiding liability, noting that a dissolved corporation may still be sued and “[i]f any corporate assets exist, the judgment can be collected from them.”

Stettenbenz v. Butch’s Rod Shop, Inc. Ordered Not To Be Published

Stettenbenz v. Butch’s Rod Shop, Inc. Ordered Not To Be Published

 

      Stettenbenz v. Butch’s Rod Shop LLC, 2013 WL 4779862 (Ky. App.  Sept. 6, 2013) the Court of Appeals addressed the standard required to award expectancy damages with respect to a breach of contract action while also rejecting rejecting a suggestion that the veil of the corporate debtor should be pierced.  The opinion, which is reviewed HERE IS A LINK, was designated as “Not To Be Published.”

 

            On February 11, 2015, the Kentucky Supreme Court denied a motion for discretionary review.  In addition, and I’m not sure as to why this was done as it appears to have been redundant, the Supreme Court ordered that the Court of Appeal’s decision not be published.

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.

Kentucky Court of Appeals Affirms Piercing the Veil of an LLC (Although it is Not Clear This is a Piercing Case)

Kentucky Court of Appeals Affirms Piercing the Veil of an LLC

(Although it is Not Clear This is a Piercing Case)

In a recent decision, the Kentucky Court of Appeals affirmed the determination to pierce the veil of an LLC and hold the members thereof liable on a pre-dissolution contract.  Mountain Paving and Construction, LLC v. Workman, 2014 WL 272463, No. 2012-CA-001822-MR (Ky. App. Jan. 24, 2014).  (Not to be Published). 

Mountain Paving and Construction, LLC was owned by Sam Doyle and James Boyd.  Workman contracted, in 2007, for Mountain Paving to pave his driveway.  The performance on that job was unsatisfactory.  Because weather and equipment problems precluded redoing the job right away, Boyd, on a “company printed proposal pad”, wrote:

I agree to come and spray and re-surface with 1½” of asphalt and 100% signed garentee (sic) for 1 yr after resurfacing.

Workman paid $8,000 for this job to be done.  Mountain Paving did not, however, in 2008 return to re-do the job.  As described by the Court of Appeals, “Mountain Paving was dissolved as a  [LLC] shortly” after this written document was presented to Workman.

As to the timing of the dissolution vis-à-vis the giving of the written document, the opinion is rather confusing.  The LLC was administratively dissolved on November 3, 2009, and was then both reinstated and affirmatively dissolved on April 6, 2010.  Either way, the dissolution appears to have occurred at least two years after the written document quoted above was presented.

Regardless, Workman filed suit against Mountain Paving, Doyle and Boyd for failure to perform upon the contract.  The opinion states that the suit was initiated on June 11, 2007, but this would appear to be an error if the earlier statement that the initial contract was entered into in 2007 is correct.  Regardless, Workman asserted that:

Doyle and Boyd transferred the assets of the [LLC] to themselves without paying its lawful debts, and that the corporate veil should be pierced to hold them individually liable.

Ultimately, a jury would award Workman $6,000 in damages.  At a subsequent bench trial, it was determined that the LLC should be pierced and Doyle held liable on the claim.  The decision of the Court of Appeals does not indicate that any liability for the LLC’s obligations was imposed upon Boyd.  This is curious in that it was Boyd who gave the “garentee” document to Workman.

The Court of Appeals began by reciting the statutory rule that the members of an LLC are protected from liability on its debts and obligations.  KRS § 275.150(1).  The Court then referenced the rule of piercing the corporate veil as applied to corporations, noting that:

There is no legal basis why this equitable doctrine should not also be applicable to LLCs. 

After reviewing the factors for piercing identified in Inter-Tel Technologies, the court recited the factual finds that it alleged support same.  Curiously, throughout the court refers to an LLC as “the corporation.”  The balance of the Court of Appeals’ decision responds to the defendant’s assertions that the individual factors that justify piercing were not in this instance satisfied.  Ultimately, the Court of Appeals would find that the decision of the trial court were sufficiently supportive of those determinations and were not clearly erroneous. 

So there you have it, the Court of Appeals applying the law applicable to piercing the veil of a business corporation to piercing the veil of an LLC.  The decision is, however, unsatisfactory on a number of bases.

First, the Court nowhere explains that why it is that Doyle should be held liable for the LLC’s debts, rather than being a joint obligation of Doyle and Boyd.

Second, the LLC Act provides rules by which an LLC may dissolve, including the distribution of assets.  Essentially, upon dissolution, company assets must first be applied to the satisfaction of creditor claims.  Clearly, Workman was a creditor of the LLC.  If and to the extent company assets were distributed to one or more of the members before the satisfaction of those claims, the members were liable to return those assets to the LCC in order that they could be properly diverted to the creditor’s claim.  See KRS § 275.310; § 275.325(4)(b).  If, as asserted by Workman, the members of Mountain Paving “transferred the assets of the [LLC] to themselves without paying its lawful debts,” then there was a statutory mechanism by which those assets could be recovered without reference to the equitable remedy of piercing.  Rather, the General Assembly having determined how this factual situation should be addressed, there should have not have been reference to other law.

Also of concern is the court’s reliance upon the fact that certain of the equipment utilized by Mountain Paving was in fact owned by Doyle.  First, with respect to the assertion that the company assets were transferred back to the members, if that equipment had never been conveyed by Doyle to the LLC, it was not the LLC’s with which to satisfy its debts or obligations.  Second, it is not uncommon that business owners will retain in their personal ownership certain assets that are utilized by the business venture.  In Stettenbenz v. Butch’s Rod Shop, 2013 WL 4779862 (Ky. App. Sept. 6, 2013), a decision involving a claim for piercing that is reviewed HERE IS THE LINK, the fact that the individual owners owned the tools used in the shop was not a basis for piercing the veil.

Piercing law is maddingly murky in that piercing is an equitable remedy that within the constraints of the various decisions is based upon the judge’s assessment of the equities.  For this reason, it is especially incumbent upon the courts to clearly and precisely identify what is and what is not the basis for a determination to pierce.  Sadly, this decision does not meet that standard.