Monday, November 7, 2011

Rednour Properties, LLC v. Spangler Roof Services, LLC – A Rant in Three Parts (Part I)

Rednour Properties, LLC v. Spangler Roof Services, LLC
A Rant in Three Parts (Part I)

      A recent decision of the Kentucky Court of Appeals has thrown into doubt whether a single-member LLC (SMLLC) is effective in providing limited liability to its sole member, a decision equally applicable to single shareholder corporations.
       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) (“To Be Published”) involved a dispute over payment for roofing and related refurbishment work on an apartment complex.  Ritchie Rednour was the sole member and registered agent at Rednour Properties, LLC and Rednour Blake, LLC, both Kentucky LLCs.  On June 6, 2007 Rednour Blake, LLC purchased an apartment complex.  Rednour Properties, LLC managed the apartment complex.  On July 12, 2007 Rednour, signing as the “general/owner,” entered into a contract between Rednour Properties, LLC and Spangler Roof Services, LLC (“Spangler”) whereunder Spangler agreed to perform certain repairs to the apartment complex.  Thereafter, three change orders dated August 12, 2007, August 20, 2007 and January 2, 2008 were agreed upon.  On September 20, 2007, Rednour Blake, LLC transferred title to the apartment complex to
250 Oxford Drive
, LLC, a Kentucky LLC.  A judgment for $48,531.83 plus $15,000 in attorney fees was entered.  Although the opinion does not address whether the judgment against Rednour Properties, LLC was or was not collectable, the Court of Appeals affirmed the trial court’s refusal to dismiss Rednour, an individual and the sole member of Rednour Properties, LLC, from the action and holding him personally liable on the judgments.
       In affirming the trial court’s determination that the separate existence of Rednour Properties, LLC would be ignored and that Rednour, an individual, would be held liable on the LLC’s debts, the Court of Appeals recited the following facts:
·                    That one of the LLCs at issue transferred the apartment complex to its own wholly-owned subsidiary;
·                    Trial court testimony (the nature of this testimony is not recited in the trial court’s opinion, order and judgment of May 20, 2009) “showing a lack of distinction between the various LLCs which Rednour owned, and Ritchie Rednour, the individual”;
·                    The identification in the contract for repair work of one LLC as the owner of the property when in fact it was owned by the other LLC (the contract was prepared by Spangler); and
·                    All three of the LLCs were owned by Rednour and he signed the contract with Spangler “without specifying that he was acting in a corporate capacity.”
The Court of Appeals noted Rednour’s argument that Spangler had not established “any evidence of fraud or injustice,” but said nothing more beyond that.
In its holding, the Court of Appeals wrote:
[W]e hold that there is substantial evidence to support the Circuit Court’s decision to pierce the corporate veil in this action.  While the record establishes the corporate existence of the entities at issue (Rednour Blake and Rednour Properties, which both list Rednour as the registered agent), it is obvious that these entities were “dummy” corporations [throughout, the Court of Appeals refers to LLCs as “corporations”] designed to protect Rednour from personal liability.  Rednour is the sole member and agent of these companies as well as several others, at least one of which is a subsidiary of another LLC, and Rednour admits to having set up the LLCs for tax purposes.  Under these circumstances, we aren’t able to discern any difference between Rednour and his various LLCs.  Accordingly, we must hold that the Circuit Court did not commit any error when it held Ritchie Rednour individually liable for the corporate debts and declined to dismiss him as a defendant.
      Needless to say, if this decision stands, it is a body blow to single-member LLCs as well as single-shareholder corporations in Kentucky; it may be extended as well to multiple owner entities.  Without here reciting the myriad analytic failures of this decision, it must be recognized that:
·                    Every choice of entity decision is going to have a tax component, and if having engaged in tax planning is a reason for setting aside a limited liability entity, then every limited liability entity should be pierced because its election was at least in part for tax purposes; and
·                    It is unclear whether the court is referring to Rednour being the registered agent or rather the apparent agent (see KRS § 275.135(1)) of the LLCs, but it appears more likely that the reference is to the position of registered agent.  If that is the case, the sole owner may never be the registered agent of a business organization without thereby supporting an argument that the veil should be pierced; and
·                    The fact that one elected a limited liability entity with the intention of reducing one’s personal liability (and is there any other reason for doing so?) will be a basis for setting aside that limited liability shield.

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