Wednesday, September 25, 2013

Court of Appeals Addresses Expectancy Damages, Rejects Claim to Pierce the Veil

Court of Appeals Addresses Expectancy Damages, Rejects Claim to Pierce the Veil

      A recent decision of the Kentucky Court of Appeals addresses the standards required to award expectancy damages with respect to a breach of contract action while as well rejecting a suggestion that the veil of the corporate debtor should be pierced.  Stettenbenz v. Butch’s Rod Shop LLC, 2013 WL 4779862 (Ky. App.  Sept. 6, 2013).  This opinion has been designated as “Not To Be Published.” 
      Before beginning the review of this decision, it is important to note a factual mistake that appears several times in the decision.  In both the style of the case and in the first and seventh paragraphs thereof, Butch’s Rod Shop is described as being an “LLC.”  The entirety of the decision as written, however, is in terms of the law of business corporations.  In fact, upon a review of the records of the Secretary of State, it is clear that Butch’s Rod Shop is a business corporation, and that the correct name of the entity is Butch’s Rod Shop, Inc.  This discrepancy has been communicated to Judge Dixon, author of the opinion.
      Returning to the substance of the issue, Stettenbenz hired Butch’s Rod Shop to undertake the restoration of a 1966 Chevy Nova.  That restoration extended over a period of years with Stettenbenz making progress payments as work was completed.  Ultimately, it was estimated that the work would be completed for an additional $14,000, and Stettenbenz continued to make progress payments thereon.  Finally, upon being told that $6,100 would complete the work, Stettenbenz tendered a check for that amount.  Over a year later with the work still not completed, Stettenbenz was advised that Butch’s was in financial difficulty.  Stettenbenz removed the vehicle and remaining parts and as well received a refund check for the remaining parts that had not yet been ordered against the last tendered $6,100 check.  In September of that year, Stettenbenz filed suit against Butch’s Rod Shop and as well the Whitakers, its individual shareholders.  Thereafter, the Whitakers approved and filed with the Kentucky Secretary of State articles of dissolution of Butch’s Rod Shop, Inc.   Those articles of dissolution, although such was not required by the statute, recited “that no debt of the corporation remains unpaid.”  This statement, not required by KRS § 271B.14-030, would ultimately lead to questions that, had it not been said, would not have needed to be addressed.
      Stettenbenz also asserted that the corporate veil of Butch’s Rod Shop should be pierced and the Whitakers held individually liable for the damages they had suffered.

      At a bench trial, Stettenbenz brought in an expert witness who testified that the completion of the car would cost between $50,000 and $55,000, including $3,000-$8,000 required for the completion of the interior, work that had not been undertaken by Butch’s.  However, the trial court issued its decision awarding Stettenbenz $12,901.73, that being the difference between the $14,000 paid under the last agreement for completion of the car less the $1,198.27 that was refunded (the opinion is inconsistent as to whether the refund check was in the amount $1,198.27 or $1,198.22).   The Court rejected the claims for piercing the veil and for liability consequent to the statement in the articles of dissolution that all debts had been satisfied.  This appeal followed.
      With respect to the damages awarded, the Court noted the rule that damages must not be speculative.  At the same time, it cautioned that it did not be required that the plaintiff “provide exact calculations of its damages.”  On the basis of the expert testimony provided on behalf of Stettenbenz, at least $42,000 was necessary to complete the work that had been originally undertaken by Butch’s Rod Shop. 
Thus, we are of the opinion that at least $42,000 in damages was proven with reasonable certainty.  According, we reverse on this ground and remand for a determination on the issue of expectancy damages.
      All of which may be moot in that the corporation has been now long dissolved.  For that reason, Stettenbenz argued on appeal that the grounds for piercing the veil had been satisfied.  The Court of Appeals, however, disagreed.  Reciting the various elements of piercing as set forth by the Kentucky Supreme Court in its 2012 Inter-Tel Technologies decision, the Court found that the Whitakers control of their closely-held corporation and its day-to-day operations was itself “insufficient to justify imposing personal shareholder liability unless such control is calculated to defraud or harm the corporation’s creditors.”  To that end, the trial court had found that the corporation maintained its own bank accounts, paid its corporate taxes from that bank account, paid all of its employees a salary, leased the facility from which it located and filed its annual reports with the Secretary of State.  There was, in contrast, no showing that the business was purposely undercapitalized or any indication of utilization of corporate assets to pay personal debts.  Judge Thompson would dissent from this portion of the decision, stating his view that the elements for piercing had been satisfied.
      Last, Stettenbenz sought to impose liability based upon the Whitakers based upon the allegedly false statement (curiously identified as being an “affidavit”) set forth in the articles of dissolution filed with the Secretary of State to the effect that all corporate debts had been paid.  In connection therewith, Stettenbenz relied upon KRS § 271B.140-020, it setting forth the steps to be employed when corporation dissolution is approved by both the directors and the shareholders.  Reviewing this statute, the Court found it to be purely procedural in nature.  Further, to the extent that the statement in the articles of dissolution was inaccurate, that point should be addressed through whatever administrative remedies are available through the Secretary of State’s office.  The Court also rejected the notion that allowing dissolution with an outstanding claim should not be permitted as means of avoiding liability, noting that a dissolved corporation may still be sued and “[i]f any corporate assets exist, the judgment can be collected from them.”

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