Tuesday, November 8, 2011

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

Rednour Properties, LLC v. Spangler Roof Services, LLC
A Rant in Three Parts (Part II)
Substantive Failures
On the facts of this case, piercing could well have been proper.  What is more important, however, is the fact that the opinions rendered do not of themselves justify piercing.  Rather, to suggest that the Rednour decision is unsupported by either the facts recited or the law applied would be generous.  Without intending to address every issue:
·                    Selecting a form that provides limited liability is not only entirely permissible but intended – did the General Assembly adopt numerous statutes for organizational forms that provide limited liability expecting they would never be utilized?;
·                    Electing to be organized as a corporation (or other form that affords limited liability) for the purpose of achieving limited liability is entirely permitted.  Anderson v. Abbott, 321 U.S. 349, 361 (1944);
·                    Corporate law has long recognized the permissibility of a single-shareholder corporation.  As the Court of Appeals recently observed in Thomas v. Brooks, 2007 WL 1378510 (Ky. App. May 11, 2007), “it is perfectly legal for a corporation to be owned by a single shareholder”;
·                    Were the 1998 Amendments to the LLC Act affirmatively providing for a single-member LLC intended by the General Assembly to be a trap for the unwary?;
·                    In that the role of the registered agent is defined as being to accept legal process and notices tendered to the entity and to retain information as to the entity’s communications contact (KRS § 14A.4-050), there is no basis for the argument that the sole owner being the registered agent justifies piercing the entity;
·                    There exist models, each employing various elements, for piercing the veil of a business corporation, a path of analysis exemplified in Kentucky in White v. Winchester Land Development, 584 S.W.2d 56 (Ky. App. 1979).  That model applies to a corporation.  An LLC is not a corporation.  See, e.g., Cook v. Patient EDU, LLC, 2011 WL 3276679 (Mass. Super. 2011).  A court that is considering piercing an LLC must first articulate a model for when piercing an LLC is appropriate.  That an independently justified analytic framework is needed for LLCs, as contrasted with corporations, has been recognized by the Court of Appeals.  See Welty v. Sexton, No. 2000-CA-002847-MR (Ky. App. 2002), slip op. at 6-7;
·                    In the context of an analytic model, an explanation of the facts of the case that do and do not justify piercing needs to be set forth – that was not done in Rednour;
·                    It is and has been the law of Kentucky that piercing may not take place absent “a showing of fraud or injustice separate and apart from the corporation’s failure to pay its debt.”  Scarbrough v. Perez, 870 F.2d 1079, 1084 (6th Cir. 1989).  See also, e.g., Sudamax Industria e Comercio de Cigarros, LTDA v. Buttes & Ashes, Inc., 516 F. Supp.2d 841, 849 (W.D. Ky. 2007) – that was not done in Rednour; and
·                    A failure to identify the capacity, as a principal or as an agent, on a document goes at best to the question of whether “corporate” formalities have been maintained, but more importantly goes to the question of the disclosed or undisclosed principal.  Agency law has its own protocols for when an agent may be held liable on an obligation, and those protocols should not be mixed with those for piercing.

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