This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Stripping Member of Management Rights in LLC
Violated Automatic Stay
recent decision, it was held that stripping an LLC’s member of the right to
vote in and control an LLC after bankruptcy violated the automatic stay.This is an important decision as it responds
to the question of whether or not the right to participate in management, as
contrasted with the right to participate in the economics of the LLC, shall be
deemed part of the bankruptcy estate.Walro v. The Lee Group Holding Co., LLC (In re Lee), Case No. 12-90007-JJG-7A,
Adv. Pro. No. 14-59011 (Bankr. S.D. Ind. Dec 18, 2014).
51 of the 100 voting units in and therefore controlled The Lee Group Holding
Company, LLC.He held, however, no
economic rights in the LLC.After he
filed for bankruptcty protection the trustee asserted that Lee’s “non-economic
interest [in the voting rights] became property of the estate subject to
control by the Trustee on the filing of the petition pursuant to 11 U.S.C. § 541.”Slip op. at ¶ 9. The other members then executed a Resolution wherein they purported
to accept Lee’s withdrawal as a member or the LLC – this removal was identified
as being pursuant to section 3.7 of the operating agreement, but its language
is not recited in the opinion.They also
purported to remove him as a manager and to elect a replacement manager.
trustee brought this action challenging Lee’s removal as a member and manager
of the LLC.
the members defended their action on the basis that Lee was not really a member
in that he did not share in the economics of the LLC, a notion that was quickly
rejected by the court, it noting that the operating agreement referred to lee
as a member.The court also found that
as Lee held a majority of the voting rights in the LLC it was not possible for
the other members to alter the terms of the operating agreement.
opinion did not reference the section of the LLC Act providing, inter alia,
that a member is disassociated (and loses their voting rights) upon
bankruptcy.Likely the other members did
not rely upon that provision in light of the many decisions that have found
such statutes to violate the Bankruptcy Code’s prohibitions on ipso facto
Lee was not removed as a member and he remains the manager of the LLC; the
actions of the other members purporting a different outcome violated the
automatic stay and were void.
Appeal Affirms Jury Verdict of No Apparent Agency
recent decision, the Court of Appeals affirmed a determination by a jury that
no apparent agency existed. Jones v. Topf,
No. 2012-CA-002007-MR (Ky. App. Dec. 5, 2014).
Marika Jones purchased a multiunit residential property in
Louisville that required refurbishing. On May 28, 2008, Jones entered into an
agreement with Willie Hill, a licensed electrician, to perform the electrical
work that needed to be done as part of the rehabilitation. In connection there
with, Jones advanced to Hill a portion of the purchase price. Although there
was dispute as to when it was conveyed to Jones, Hill advised her that while he
was a licensed electrician, he is not as well an electrical contractor, and only
a licensed contractor has the capacity to pull a permit to perform electrical
work. Ultimately, at Hill’s request, Joel Topf, who does business as Topf
Ceramic Tile and Electric, pulled the permit on behalf on Jones/Hill.
Jones was unhappy with the speed and quality of Hill’s work,
and terminated the agreement. Thereafter, Topf withdrew the permit. Ultimately,
Jones brought suit against both Hill and Topf As to Topf, she sought to hold
him liable for Hill’s breach of contract under an apparent agency /respondeat
Topf testified that Hill was not his employee and that he
pulled the permit as a favor; that testimony was corroborated by Hill. The
claim under respondeat superior/apparent agency went to trial, which held in
favor of Topf. From that determination Jones appealed.
The jury instruction required a finding for the Topf unless
Jones was able to show that Hill was acting on behalf of Topf at the time the
contract for the work was signed. Jones argued that the law does not require
that the apparent agency have existed at the time the contract was entered
into, but may arise at any time during the duration of its performance.
Jones argues that the law places no requirement upon the party
asserting an apparent-agency theory to prove the existence of the relationship
at any specific time. Instead, Jones maintains all that is required is that the
harmed party justifiably rely upon the appearance that one causing the harm is
the apparent or ostensible agent of the alleged principle (sic) at some point during the period in which the party is harmed.
Slip op at 8-9.
The Court of Appeals rejected this suggestion. Rather, it
emphasized that the focus must be upon the relationship at the time the contract
was entered into.
to Pay Rent Not Sufficient to Pierce LLC Veil
In a recent decision from Ohio, it was held that the failure of a
LLC to pay certain rental payments in accordance with the lease was not, but
self, conduct sufficient to pierce the LLC’s veil and impose liability on its
members.R.L.R. Investments, LLC v. Wilmington Horsemens Group, LLC, No. CA
2013-09-017, 2014 WL 5422203 (Ohio Ct. App. Oct.. 27, 2014).
Wilmington Horsemens Group, LLC was a tenant of RLR Investments.
Each of the members of Wilmington guaranteed the obligation to RLR under the
lease.The lease provided that, in the event rent was not paid within 10 days of the due date, a late charge of $500 per day would
Wilmington fell behind on its lease payments at a time when $302,594
was due and outstanding.In addition, there was alleged to be owed a further $532500 of late fees. RLR, in addition to seeking to hold the members liable under their personal guarantees of the lease, sought as well to pierce the veil of the LLC. Presumably, although this is not provided for in the opinion, they sought to do so in order to avoid certain limitations on enforcement that are available to guarantors and other sureties.
Ultimately, RLR moved for summary judgment against
and its members on the breach of contract claims; in response the members of Wilmington moved for summary judgment
on our RLR’s attempt to pierce the LLC’s veil. Ultimately, summary judgment would be granted RLR on its claims against the LLC under the lease, while at the same time summary judgment was granted to
the members to the effect that the veil of the LLC would not be pierced. In addition, it was found that the late fee of $500 per day was unconscionable
a penalty. On appeal, RLR challenged
that the LLCs veil should not be pierced and that the late fee is unenforceable.
As to the effort to pierce the LLC’s veil, the court reviewed Ohio law as to piercing the veil of a corporation; at no point did it raise, much less expand upon, any distinctions
to be made when considering
the LLC rather than a corporate veil. That said, the court found it was improper for the trial court to require RLR to plead all the elements of fraud in making a claim for piercing. Still, the determination
to dismiss the piercing claim was upheld as there was no evidence that the members "managed Wilmington
that it committed an illegal act or similarly unlawful act. Instead, the evidence established
failed to make timely rent payments since December
2005 and owes
RLR $302,594 in unpaid rent. Breach of contract without more is
to pierce the corporate
veil.” Slip op. at ¶ 17; 2014 WL 5422203, *4.
Even as RLR lost in its effort to pierce the LLC’s veil, it was successful
in reversing the
trial court's determination
that the guarantees were
therefore unenforceable. The guarantees themselves contained
date (i.e., they
did not run the same term as did the underlying
lease). Finding no ambiguity, the Court of Appeals enforced
for all liabilities incurred
prior to the expiration
date. “While the Individuals would
not be liable under the Guaranty for any liabilities incurred
pursuant to a contract after the Guaranty expired, the Individuals’ liabilities were
to the expiration of the Lease. Therefore, the Individuals are
liable for the entire breach of contract damages.” Slip op at ¶ 26, 2014 WL 5422203, *7.
Turning to the late fees, after reciting
Ohio law with respect to the excess liquidated
damages, they were held
to be an unenforceable
penalty in part because RLR failed to put forth evidence
that the amount of the late fee had any relationship
to the additional cost
by reason of the failure to timely satisfy the obligations under the lease.
Action Dismissed for Failure to Make Demand and Adequately Represent Corporate
In a recent decision the Court of Appeals affirmed the
dismissal of a derivative action against the Gannett Company, Inc., although
the plaintiff would not accept that the action was derivative, on the basis that shareholder had not plead demand made upon the
board and failure to adequately represent the “interests of the similarly
situated shareholders in representing the rights of the corporation.”Flint v. Jackson, No. 2014-CA-000426-MR (Ky.
App. Dec. 19, 2014).
Flint filed suit against several
senior executives of the Courier-Journal (owned by Gannett) alleging a variety
of claims for failure to report on his efforts to, for example, have several
judges impeached by the General Assembly, alleging that persons in the
government have promised payments to them if they will not run stories about
Flint’s efforts to have these person’s impeached, similar allegations of blackmail,
etc.The trial court dismissed the
action under C.R. 12 for failure to state a cause of action for which relief
could be granted, this being a derivative action.
On the basis that this is a
derivative action, the court considered the elements that must be present for a
derivative action to proceed. The Court
applied Kentucky corporate law.Gannett
is a Delaware corporation, and it should have been that law applied.That said, the outcome would have been the
same. Initially it was accepted that Flint was a Gannett shareholder.Flint’s complaint was dismissed for failure
to plead either that he had made demand upon the corporation for action before
filing the complaint, or in the alternative pleading futility.Second, the trail court determined that Flint
did not adequately represent the “interests of the similarly situated
shareholders in representing the rights of the corporation.” Slip op. at 8.
As to the alleged personal injury, which if existing
would remove the action from the requirements of a derivative action, the Court
of Appeals affirmed the determination that under the First Amendment there is
not “authority to order publication of information against the paper’s
editorial discretion.”Slip op. at 8-9.
As for the failure to adequately represent the interests
of the corporation, this decision is consistent with that from earlier this
year in Watkins v. Stock Yards Bank &
Trust Co., No. 2011-CA-000228-MR, 2012 WL 2470692 (Ky. App. June 29, 2012)
(To Be Published), which decision was reviewed HERE IS A LINK.As an alternative basis for the dismissal of
the suit as a derivative action, the Court could have relied upon the
requirement that a corporation be represented by counsel, and that Flint as a
non-attorney may not represent the interests of the corporation.
concurring decision from Judge Maze provides a discussion of the limitations
that may and in his view should be imposed upon pro se plaintiffs, especially
those who like Flint file significant numbers of suits.
Shop Action Barred by Plaintiff’s Settlement with the Drunk Driver
A decision rendered last Friday by
the Kentucky Court of Appeals upheld a dismissal of a dram shop action on the
basis that the plaintiffs’ settlement with the at-fault driver’s insurer
eliminated the possibility of a recovery against the club.Butt v.
Independence Club Venture, No. 2013-CA-001400-MR (Ky. App. Dec. 19, 2014).
King, after drinking at the Electric Cowboy, was driving a car in which the
plaintiffs were passengers.An accident
ensued, and three of the plaintiffs were killed; a fourth passenger was
injured.The plaintiffs settled their
respective cases against King and his insurer, expressly reserving the right to
bring a dram shop action against Electric Cowboy on the basis that it continued
serving King after he was intoxicated, but stating inter alia that they have no
further claim against King/the insurer.
Electric Cowboy sought and was
awarded summary judgment, which was upheld by the Court of Appeals, on the
basis that (i) Electric Cowboy would have a claim for indemnification from King
to the extent that it was responsible to the plaintiffs, (ii) the plaintiffs
had released King of any further liability and therefore (iii) the plaintiffs
could have no further recovery.In
support of this determination the Court of Appeals relied upon DeStock #14 v. Logsdon, 993 S.W.2d 952
(Ky. 1999) for the proposition that under Kentucky’s dram shop statute “the
tortfeasor remains primarily liable for injuries while the dram shop is
secondarily liable with a right of indemnity against the tortfeasor. Butt, slip op. at 7, citing DeStock #14, 993 S.W.2d at 957.
In that the release deprived
Electric Cowboy of its legal capacity to demand the King make it whole should
it have any liability to the plaintiffs, the plaintiffs could not proceed
against Electric Cowboy.
Last Friday, the Kentucky Court of
Appeals issued an
opinion in a suit based upon estate planning and alleged a legal malpractice. More important from my perspective is the determination
that spouses are not, ab initio,
v. Kloiber Dynasty Trust, Case No. 2013-CA-000436-MR (Ky. App. December
5, 2014). This opinion has been designated “Not to be Published.”
arose out of certain efforts by Beth Ann Kloiber to challenge the terms of the Daniel Kloiber Dynasty Trust, PNC Delaware trust Co., Trustee, all with respect to the substantive terms thereof and related assertions that certain legal counsel either aided and abetted or conspired to deprive her of certain marital rights therein. Those interested
in those topics should
review the opinion itself.
Much of the allegations
to breach of fiduciary duty, as well as the related aiding
claims, were premised on the fact that spouses stand
in a fiduciary relationship
to one another. The trial court, in dismissing those claims, determined that spouses, as spouses, do not stand in a fiduciary relationship with
one another. The Court of Appeals upheld
noting in footnote 9 to the opinion:
argue over whether this Court should be persuaded by our sister states to adopt a fiduciary duty upon a spouse simply due to marriage. We decline to do so.
been oft referenced here
and elsewhere, fiduciary duties are atypical. While the marriage relationship
may may and certainly does
another, this decision makes clear that, upon the breakdown of the marriage relationship,
it may not be asserted that one spouse violated a fiduciary duty
to the other.
Natural Gas at a Loss Does Not Support the Claim for Waste by Land Owner
A recent decision by the six circuit Court of Appeals has
rejected the notion that the sale of natural gas at a loss, resulting in the
landowners receiving no proceeds, did not constitute “waste.”Cornett
v. Magnum Hunter Production, Inc., No. 14-5390 (6th Cit. Nov. 25, 2014).
The plaintiffs own certain real property for which they had
granted a lease to extract and sell natural gas. Under the lease, those owners
were to receive 12.5% of the net sale proceeds (after the deduction of certain
identified expenses).With the near
collapse of prices for natural gas, the sales price, after the deduction of the
expenses, resulted in no net payment to the land owners.They filed suit against the gas producer,
alleging, inter alia, that continuing to extract gas from the property and sell
it without any return to the land owners constituted "waste" of that
The trial court disagreed with this assessment and dismissed
the complaint. On appeal, the sixth Circuit Court of Appeals would affirm the
trial court's decision.
The 6th Circuit’s decision is quite short, and
simply rejects the notion that producing at no net gain to the owners was
waste.The Court did not that the right
of the producer to “shut in” the well was for the protection of the producer,
not the land owner, and that the producer had simply the right (and not the
obligation), to shut in the well.
The Court of Appeals as well rejected the plaintiff’s
invitation for either the 6th Circuit or the trial court on remand
to discern a claim for some other cause.This invitation was rejected on the basis that “the complaint is
required to state a plausible claim for relief on its face in order to survive
a motion to dismiss.”
Presumably the land owners could have, in the lease,
required minimum royalties irrespective of sales prices or required that
depletions cease when prices would not support royalties at a certain
level.Having failed to do so, they willnot be permitted to complain on the basis of