Piercing the Veil – The
Kentucky Court of Appeals
Discusses Choice of Law and Applies Inter-Tel
A November 2, 2012 decision of
the Kentucky Court of Appeals has provided helpful guidance with respect to (i)
the question of the applicable law as to piercing the veil of a limited
liability entity and (ii) the application of the Kentucky Supreme Court’s Inter-Tel decision on piercing the
veil. Howell Contractors, Inc. v. Berling, ___ S.W.3d ___, 2012 WL
5371838 (Ky. App. Nov. 2, 2012).
Howell Contractors, Inc.
contracted with Westview Development, LLC, an Ohio limited liability company,
to perform certain services in connection with a subdivision development. Howell ultimately billed Westview for
$1,103,569.63, of which Westview paid $923,902.06, leaving an outstanding
balance of $179,666.67. When the
arrearage was not satisfied, Howell filed suit against Westview, Charles
Berling (Westview’s sole member), and Charles Berling Land Corporation, and
Berling Homes, Inc., it being implied in the opinion that they were either
partially or wholly owned by Berling.
As part of competing motions
for summary judgment, Charles Berling, Berling Land and Berling Homes moved for
dismissal on the basis of absence of liability, they not being parties to the
contract with Howell. In addition, “They
further argued the doctrines of veil-piercing, instrumentality and alter-ego do
not apply to LLCs ….” Summary judgment was granted to Charles Berling and the
Berling entities, while summary judgment against Westview was denied. Ultimately, an agreed judgment was entered in
the amount of $179,666.97 against Westview.
Choice of Law as to Piercing
Initially, the Court noted that
the proper law to apply in determining whether the defendants other than Westview
could be held liable to Howell is that of Ohio (and not that of Kentucky). Referencing the Restatement (2nd) of
Conflicts of Laws § 307 (1971), the Court wrote that “By analogy to corporate
law, the rights, duties, and obligations of an LLC and its members are governed
by Ohio law”, the court going on to then cite a number of cases from various
jurisdictions standing generally for the proposition that piercing analysis
involves the application of the law of the jurisdiction of organization (rather
than the law of the situs of the dispute) should be applied. The application of Restatement (2nd) of
Conflicts § 307 to LLCs is a topic I explored in To Boldly Go Where You Have Not Been Told You May Go, 58 Baylor L. Rev. 205 (2006).
The court went on to reject the
notion that Ohio law does not address piercing of LLCs, citing Ossco Props, Ltd. v. United Commercial Prop
Group, LLC, 968 N.E.2d 535 (Ohio App. 2011) for the test to be there
applied. Applying that law, the Kentucky
Court of Appeals determined that the plaintiffs had not made out a case to
justify piercing, writing that:
In the case at bar, while Howell has
demonstrated Berling’s control over Westview and his other entities, but the
conduct complained of does not rise to the level of fraud, illegality or
unlawfulness. A careful review of the record discloses that Westview has merely
failed to pay an entity debt. The facts are that Westview purchased a tract of
land for approximately $287,000. Westview, presumably through Berling, secured
a loan in the amount of $1,000,000 from Bank of Kentucky to develop the
property. Berling further loaned over $485,000 to Westview, personally and
through other entities, some controlled by Berling and others not controlled.
The property in question is still owned by Westview. While this development has
not quite panned out as planned, and Howell's preference is to be paid a little
more promptly, it has a judgment which can undoubtedly be domesticated in Ohio.
And, presumably, Howell exercised diligence in maintaining its security in the
property by resort to Ohio’s mechanic’s lien statute. Ohio Rev. Code Ann. §§
No Piercing Even if Kentucky Law Applied
Having disposed of the case
under the properly applicable Ohio law, the court went on to consider whether
the result would be any different were Kentucky law applied, ultimately
determining it would not. While
obviously dicta, the Court of Appeals summarized the expanded test set forth in
Inter-Tel Technologies, Inc. v. Linn
Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), observing:
Again, Howell has established its
present inability to collect a debt owed. It has not established fraud or
unjust enrichment of the type demonstrated in Inter-Tel., i.e., the “squirrel[ing of]
assets into a liability-free corporation while heaping liabilities upon an
asset-free corporation [.]” Id. The record does not disclose that
Berling siphoned money or assets out of Westview. To the contrary, Berling put
money into Westview, primarily his own, in the form of unsecured loans. As
noted, Westview has assets in the form of a real estate development, and
Howell, as a judgment creditor of Westview, will presumably be able to collect
its judgment, with interest, as and when Westview’s property in Ohio is sold.
The Court of Appeals, in a
footnote, observed that “No reported Kentucky decision discusses the piercing
of an LLC entity.” While the aspects of
this decisions applying the Inter-Tel
analysis to these facts is obviously dicta, the Court of Appeals has at minimum
undercut the validity of its statement.
Rather, it might have been more accurate for it to state that “Prior to
this decision, no reported Kentucky decision discussing the piercing of an
LLC.” Regardless, this statement
obviously ignored (perhaps further evidencing its consignment to the dustbin of
history?) the decision rendered in Rednour
Properties, LLC v. Spangler Roofing Services, LLC, 2011 WL 2535330 (Ky.
App. 2011). Still, it bears noting that
in an unpublished trial court ruling written by now Justice Abramson of the
Kentucky Supreme Court, it was stated that:
While it is true that the foregoing
represents the law with respect to the liability of corporate officers and shareholders, equity and fairness require
that those same theories of liability [piercing and personal responsibility for
personally committed torts] should extend to managers and members of limited
liability companies as well.
Fabing v. E Concepts, LLC, Jef. Cir. Ct. (Div. 3) No. 01-CI-06835, Order Granting Plaintiff’s
Motion for Partial Summary Judgment entered June 9, 2003 (emphasis in original).
Obviously, much more remains to
be done with respect to clarifying how the Inter-Tel
analysis will be applied to LLCs.