Wednesday, January 25, 2012

Kentucky Court of Appeals Addresses Unjust Enrichment, Piercing the Veil

Kentucky Court of Appeals Addresses Unjust Enrichment, Piercing the Veil
            In a recent opinion, the Court of Appeals addressed two important issues, namely the availability of recovery under the theory of unjust enrichment in the context of a written agreement and piercing the veil.  Killian v. Tunacakes Properties, Inc., ___ S.W.3d ___, 2012 WL 162717 (Ky. App. Jan. 20, 2012).
            Dennis Browning and Michael Brown owned Tunacakes, a Kentucky corporation.  In 2003, they agreed to sell its assets to Killian, who subsequently assigned his acquisition rights to a single-member LLC, SK Development, LLC, and SKJ Properties, Inc., a corporation he owned jointly with his wife.  Tunacakes provided seller financing in the amount of $150,000 pursuant to which no payments would be made over the initial five years as required pursuant to the bank funding component of the transaction.  Over those five years, however, Tunacakes was to be paid a portion of the gross sales derived from the property, that payment being made pursuant to a Consulting Agreement.  Apparently no payments were made under the Consulting Agreement of 2004, resulting in the initial Complaint being filed in 2005.  Ultimately that Complaint was amended to note that no Consulting Agreement payments had been made through 2007 and that, by 2008, the buyers were in default under the $150,000 promissory note, an event of default that resulted in acceleration of the entire amount due.  After a jury trial, the LLC was held liable for breach of the Consulting Agreement in the amount of $42,391.67, and both the LLC and the corporation were found guilty on the seller financing promissory note in the amount $150,000.  The jury also found that the LLC, the corporation and Killian were unjustly enriched and were jointly and severally liable for the full amount of the judgment in favor of Tunacakes.
            The judgment based upon a theory of unjust enrichment was reversed for a pair of independent reasons.  Initially, recovery under unjust enrichment was rejected on the basis that it was determined by the jury where is should have been determined by the Court.
First, we note that any jury instruction on unjust enrichment is improper because unjust enrichment is an equitable doctrine, ... and the application of an equitable doctrine to the facts of the case is a question of law.  (citations omitted).
Second, the Court rejected the notion that there could be recovery under a theory of unjust enrichment in the face of an express contract. 
The doctrine of unjust enrichment “is applicable as a basis of restitution to prevent one person from keeping money or benefits belonging to another.”  However, when “an express contract is made defining the circumstances under which an obligation may arise with reference to a certain subject matter such contract excludes the possibility of an implied contract concerning the same matter.”  Therefore, any recovery must be under the terms of the express contract.  In this case, there was a written contract that set forth the obligations of SK Development and SKJ Properties to Tunacakes.  Thus, unjust enrichment was not an available remedy for Tunacakes as to SK Development and SKJ Properties. (citations omitted).
            Turning to the question of piercing, the Court of Appeals found that the already rejected claim for unjust enrichment had the effect of imposing on Killian personal liability for the debts and obligations of the LLC and the corporation, in effect piercing the veil.  Quoting Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 213 (Ky. App. 2009), the Court observed that:
[T]he decision as to whether to pierce the corporate veil is an equitable one to be decided by the trial court and not the jury.
In effect, just as the unjust enrichment claim was reversed for having been determined by the jury, so too was what was effectively a pierce by reason of an unjust enrichment verdict.  In that the trial court had not determined that piercing the corporate veil was appropriate, the de facto piercing against Killian was reversed with instructions that the trial court make a determination as to the appropriateness (or not) of a pierce.

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