Decision of Trial
Court Reversed, Inter Alia, For Lack of Jurisdiction
A recent decision of the
Kentucky Court of Appeals discusses a variety of interesting topics including
standing to assert a claim for breach of fiduciary duty, the effectiveness of a
release given to a fiduciary with respect to undisclosed activities and whether
a secret profit earned in connection with the purchase of property by an LLC
constitutes a breach of fiduciary duty.
Ultimately, however, this is all dicta in that the Court of Appeals
determined that the trial court lacked jurisdiction to hear the dispute, it
arising out of a contract containing an exclusive venue clause referring
disputes to Cincinnati, Ohio. Ziegler v. Knock, No. 2008-CA-002160-MR,
2012 WL 5273999 (Ky. App. Oct. 26, 2012).
David Knock and Richard Knock,
members of Knock Investments, LLC and Ziegler Group, owned by Michael Ziegler,
joined together by means of a Membership Interest Purchase Agreement, to form
Knock/Ziegler LLC for the purpose of acquiring a strip mall in Ohio. The Membership Interest Purchase Agreement
contained a warranty from Ziegler that he was not being paid, directly or
indirectly, a sales commission on the transaction. It came to pass that Ziegler, through a
wholly owned LLC, did receive a sales commission on the property acquisition. The Knocks and Knock Investments filed suit
in Boone Circuit Court alleging that the commission was improper, including as
a breach of fiduciary duty. They would
largely prevail at the Boone Circuit Court, receiving a judgment roughly
equivalent to their percentage interest in the LLC multiplied by the amount of
the secret commission. Cross-appeals
were then filed with the Kentucky Court of Appeals.
In what is ultimately dicta,
the Court of Appeals upheld the rulings of the Boone Circuit Court with respect
to: (1) the capacity of the Knocks as individuals, as proper parties to the
litigation (I believe I am in disagreement, on a normative matter, with that
determination; more on it below); (2) that a release entered into between the
parties was not enforceable; (3) that Ziegler did breach his fiduciary duty in
taking the sales commission; and (4) a claim by Ziegler for reimbursement for
tax work performed on behalf of the LLC.
Ultimately, however, none of it mattered. The Membership Interest
Purchase Agreement at issue provided an exclusive venue provision calling for
any litigation to take place in Cincinnati, Ohio. Finding that, inter alia, this provision stripped the Boone Circuit Court of
jurisdiction to hear this dispute, its decision was reversed.
Choice
of Venue Upheld an Appeal
It is curious that the Court of
Appeals was able to determine that the choice of venue clause is valid and
enforceable. In Midnight Terror Productions, LLC v. Winterland, Inc., 2012 WL
5457530 (Ky. App. Nov. 9, 2012) (reviewed here in November 14), in response to
a challenge to the legitimacy of a venue clause, the Court of Appeals directed
that that determination needed to be made by the trial court and on that basis
remanded for a decision on the merits.
While the court wrote that “Nothing in the record demonstrates that Prudential Resources Corporation (v. Plunkett, 583 S.W.2d 97 (Ky. App.
1979)) should operate to void the application of the choice of venue clause in
the Membership Interest Purchase Agreement,” neither does it recite that the
various factors set forth therein have been considered by either the trial
court or the Court of Appeals.
Standing
This opinion gives far too few facts
to come any binding conclusions as to the standing, but further understanding
would be helpful. It appears that the
Knocks held their entire interest in the LLC that was the acquirer of the
property through an LLC. Normally, to
the extent there was any breach of fiduciary duty, that duty would have been
owed to the LLC that was itself a member of the purchaser LLC; the Knocks as
individuals, would not have individual standing to object. The opinion does not specify, however,
whether the Knocks individually or their LLC were the signatories to the Membership
Interest Purchase Agreement.
Breach
of Fiduciary Duty
It is unfortunate that the decision
of the Boone Circuit Court’s as supported (in dicta) by this holding of the
Court of Appeals must ultimately be ignored.
Clearly, the earning of an undisclosed commission on the LLC’s
acquisition of property, unless specifically disclosed and approved by the
disinterested members (see KRS §
275.170), is a breach of fiduciary duty.
See also Thomas E. Rutledge
and Thomas Earl Geu, The Analytic
Protocol for the Duty of Loyalty Under the Prototype LLC Act, 63 Arkansas Law Review 473 (2010). At the same time it is not clear that
recourse to fiduciary duty law was necessary.
Ziegler warranted that he was not to receive a commission when in fact
he was. Clearly he violated his
warranty, a matter that can be resolved as a straight-forward breach of
contract action.
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