Tuesday, November 26, 2013

An LLC and Its Solitary Member Are Not Legally Interchangeable

An LLC and Its Solitary Member Are Not Legally Interchangeable
      A recent decision of the Kentucky Supreme Court provides important guidance with respect to a number of issues, including the absolute legal distinction between an LLC and its members, even a sole member, and an unwillingness by the Court to permit members to at a whim ignore the legal reality of the LLC through insider reverse piercing.  Turner v. Andrew, ___ S.W.3d ___, 2013 WL 6134372 (Ky. Nov. 21, 2013).
       Andrew operated a trucking business under the name “Billy Andrew, Jr. Trucking, LLC” even as the individual trucks were in his own name.  One of those trucks was damaged in a collision with a truck belonging to M&W Milling Co., Inc.  Andrew then brought suit against M&W for both the damage to the truck as well as the lost profits suffered as a consequence of the truck being out of service.  Notably, the LLC through which the trucking business was operated was not a party to the action.  Thereafter, Andrew seems to have ignored the case, missing numerous discovery deadlines and even, apparently, ignoring a court order compelling him to produce documents.  Ultimately, the trial court entered an order in limine excluding from evidence any claim for property damages in excess of the amount estimated by M&W’s expert and as well granted M&W judgment on the pleadings with respect to the claim for lost business profits, that on the grounds that any lost profits were suffered by the LLC, a stranger to the action.
      The Court of Appeals reversed that determination, “concluding that Andrew could properly pursue the lost business claim in his own name because he is the sole owner of the LLC.”  2013 WL 6134372, *2.  The Kentucky Supreme Court would ultimately and resoundingly reject that suggestion.
       The Supreme Court began by reciting the law that a limited liability company is a legal entity distinct from its members, citing therefore KRS § 275.010(2).  Noting that:
The Court of Appeals reasoned that because Andrew was the sole owner of the business he was necessarily the real party in interest, a status that allowed him to properly advance the lost profits claim in his own name rather than in the name of the LLC.  2013 WL 6134372, *3.

the Supreme Court stated that this position was long ago rejected in Miller v. Paducah Airport Corp., 551 S.W.2d 241 (Ky. 1977).  From there the Supreme Court wrote:

The LLC and its solitary member, Andrew, are not legally interchangeable.  Moreover, an LLC is not a legal coat than one slips on to protect the owner from liability but then discards or ignores altogether when it is time to pursue a damage claim.

       The Court went on to then discuss the notion of piercing the veil, noting that traditional piercing is not here available, and likewise this does not constitute a “outsider reverse” piercing instance.  Rather, this is in effect an “insider reverse” pierce, i.e., Andrew sought to claim for himself the personal benefit of a company asset.  The Court as well noted that there exists a question as to whether Kentucky will recognize insider reverse piercing, but not making a ruling one way of the other.  What is clear is that in this case an insider reverse pierce was not allowed. 
       Separately, the trial court’s dismissal of the action for discovery abuse was reversed on the grounds that the court had not made findings of fact and conclusions of law with respect thereto.   For that reason, the case was remanded for consideration of those issues.

       My quibble with this decision is that it failed to cite the statute that most directly addresses the point in contention.  The Court properly cited KRS § 275.010(2) for the rule that the LLC is a legal entity distinct from its members, a statute that does support the Court’s reasoning.  Still, it could (and should) have as well cited KRS § 275.240(1), it providing that the assets of the LLC are not the assets of its members.  In that it was the LLC that had lost the profits, and not the member thereof, this statute clearly supports the determination that the claim for lost profits belonged to the LLC and not it's member.

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