Deed from LLC Void Where There Was No Actual or Apparent Agency Authority to Sign It on LLC’s Behalf

Deed from LLC Void Where There Was No Actual or
Apparent Agency Authority to Sign It on LLC’s Behalf

 

In a decision from Indiana, it was held that a deed of property from an LLC was void where the person who executed it on behalf of the LLC had neither apparent nor actual authority to do so. On the facts of this case, the subsequent transferees of the real property were held to not have valid title thereto. GO Properties, LLC v. BER Enterprises, LLC, 112 N.E.3d 200 (Ind. Ct. App. 2018).

GO Properties, LLC had two members, Olicorp Properties, LLC and Gracie Properties, LLC. Olicorp’s sole member was Larry Oliver while Gracie Properties’ sole member was Stacy Phillips. As described by the court, Phillips “went rogue,” holding herself out as having authority to act on behalf of GO Properties. This she did withstanding the fact that Olicorp was designated as the “Member Manager” of GO Properties with the sole authority “to sign agreements and other instruments on behalf of [the] Company.” The court noted as well that “Neither Oliver nor Phillips was authorized, as an individual, to do any business on behalf of GO Properties.”

Notwithstanding these limitations on her authority, Phillips purported to sell certain real property owned by GO Properties. For that purpose, she hired Best Title Services to examine the title and provide closing services. Best Title failed to identify a mortgage that GO Properties had granted to Maxim Alliance Group. Further, “Best Title relied on Phillips' representation that she was the owner of GO Properties and as it conducted to examination and later acted as closing agent for the transaction.” After the closing, the purchaser flipped the purchased properties.

Some 20 months later, GO Properties filed a complaint seeking to quiet title in the transferred properties in itself; BER Enterprises, the named defendant, was a subsequent purchaser of one of the parcels of real estate. While the trial court would grant summary judgment in favor of the purchasers, the Court of Appeals reversed.

Reviewing the law of the apparent agency and its requirement that the principal have made a manifestation to the third-party that would instill a reasonable belief that Phillips had authority to act on behalf of GO Properties, such a communication was found to be lacking. Rather:

Here, GO Properties made absolutely no direct or indirect statements indicating that Phillips had authority to act on its behalf. The Operating Agreement clearly states that Olicorp was the sole Member Manager. Neither Oliver and Phillips as individuals nor Gracie Properties as an entity was authorized to act on behalf of GO Properties.

Addressing the due diligence that should have been undertaken, in opposition to Phillips’ bare representation that she was an owner, the court observed:

At the trial court’s request, GO Properties provided examples of underwriting standards for title insurance. Among other things, to insure title from an LLC, it is necessary to obtain a copy of the LLC’s operating agreement, any and all amendments thereto, and a certificate that the operating agreement is a true and correct copy of the agreement in effect at the time of the sale. This practice is wise because it protects both the other members of the LLC and all future purchasers of the property. Had this practice been observed in this case, neither the original nor subsequent transactions would have occurred.

In sum, Phillips did not have actual or apparent authority to sell the Properties on behalf of GO Properties. As a result, the original sale of the Properties to Elden Investments was void. Because the deed that Phillips executed on behalf of GO Properties was void, all future conveyances of the Properties were likewise void. Therefore, the trial court erred by entering summary judgment in favor of BER Enterprises and New Field and by denying GO Properties’ summary judgment motion.

112 N.E.3d at 204 (footnotes and record citation omitted, emphasis in original).

Agency Authority and Hospital Physicians

Agency Authority and Hospital Physicians

      In a decision rendered last November, the court considered and applied the law of apparent agency with respect to certain hospital-based physicians. Where the plaintiff sought to hold the physicians liable on certain alleged malpractice, those claims were dismissed on the basis of the statute of limitations. Efforts to hold the hospital liable on the basis of vicarious liability were rejected because the plaintiff had been advised that the physicians are independent contractors, and there is no vicarious liability from the actions of independent contractors. Sneed v. University of Louisville Hospital, No. 2017-CA-001069-MR, 2018 WL 6603806 (Ky App. Dec. 14, 2018).

      Sneed, the plaintiff, delivered a baby on August 2, 2013. There was a complication in the delivery, for which an apparently significantly flawed repair effort was undertaken. She returned to the hospital several times, and ultimately required reconstructive surgery. On August 1, 2014, she filed a lawsuit alleging malpractice, but did not name as defendants either of the physicians who actually were involved in the delivery and the initial flawed repair efforts. Those physicians were added as defendants some 50 days after the filing of the complaint. The physicians moved to dismiss on the basis that the suit was not brought within the one-year statute of limitations.  The trial court granted that dismissal, that determination was affirmed by the Court of Appeals. In turn, the hospital sought to dismiss the complaint on two bases. Initially, the plaintiff did not have an expert witness to the effect that the hospital violated its standard of care. In addition, the hospital sought dismissal on the grounds that it could not be vicariously liable for the actions of the independent contractor physicians.

       With respect to the statue limitations, the plaintiff alleged that she returned several times to the University of Louisville Hospital for treatment consequent to the initial errors made on August 2, and on that basis the statute of limitations should be tolled. The Court of Appeals rejected that assertion, writing that:

[W]e agree with those jurisdictions that have concluded that the continuing course of treatment doctrine only tolls the statute of limitations until the treatment by the physician who committed the negligent act ceases and the doctor-patient relationship ends.

       Returning to the question of agency, the plaintiff asserted that the physicians were each ostensible agents of the hospital. After reviewing the rules of ostensible (apparent) agents, the Court of Appeals went on to note that the position of an apparent agent may be negated by contrary disclosure. In this instance, in March 2013, some five months before the birth that gave rise to this complaint, the plaintiff had entered the hospital and received a document reciting that the physicians are not employees and that the hospital is not responsible for their actions. In response to the argument that she should not be bound by that disclosure because she did not sign that form, it was held that no signature was required. Rather, in reliance upon Simmerman v. Fort Hartford Coal Co., 221 S.W.2d 442, 447 (Ky. 1949):

It is the rule of this state that a party who can read and has an opportunity to read the contract which he signs must stand by the words of the contract unless he is misled as to the nature of the writing which he signs or which his signature is obtained by fraud.

       Ultimately:

In this case, the Hospital took affirmative action to put patients and the public on notice that an agency relationship did not exist between the Hospital and its physicians. Like the admissions forms described in the above-cited cases, the form herein clearly expressed that physicians were independent contractors and not employed by the Hospital. Nor was there any representation or action otherwise to induce [the plaintiff] to believe that the physicians were employees or agents of the Hospital. Accordingly, there can be no valid argument that the ostensible agency doctrine would make the hospital liable for the actions of Dr. Franklin or Dr. Alan. Therefore, summary judgment in favor of the hospital was proper. 2018 WL 6603806, *6 (citation omitted).

Failure to Disclose Principal Exposes Shareholders to Personal Liability

Failure to Disclose Principal Exposes Shareholders to Personal Liability

      It is practically axiomatic that the shareholders are not liable for the debts and obligations of the corporation. The “practically” is, however, crucial. The rule of limited liability as set forth in the various business corporation statutes is that, essentially, the shareholders are not liable for the debts and obligations of the corporation merely because they are shareholders. There are, however, a variety of other ways in which a shareholder may expose themselves to personal liability. In a recent case from Nebraska, the shareholders were held liable on what would have been a corporate debt because they never adequately disclosed that it was a corporation that was incurring the obligation.  Thomas Grady Photography, Inc. v. Amazing Vapor, Ltd., 918 N.W.2d 853 (Neb. 2018).

      Calderon and Anderson formed “Amazing Vapor, Ltd.” as a corporation in March, 2014. Thereafter, Anderson contacted Thomas Grady, a commercial photographer he had met several years previously, about photographing some of the electronic vapor products being sold by Amazing Vapor. The trial court accepted “that Anderson did not inform Grady of the corporate status of Amazing Vapor.” Ultimately, Grady would submit an invoice for $2,400.00, which went unsatisfied. After Grady declined a request to pay a reduced fee in consideration for future work, Grady brought suit against Calderon and Anderson as well as Amazing Vapor. While a default judgment was entered against the corporation and Calderon, Anderson represented himself, alleging that he was the minority owner of Amazing Vapor and that “Calderon closed the business, took the inventory and started his own business at an undisclosed location.”

      The trial court imposed personal liability against Anderson on a variety of theories including piercing the veil and the fact that Anderson had taken distributions during the time when the company was indebted to Grady. Under Nebraska law, as is the law under most states, a distribution may not be made if the company is not able to pay its debts as they come due in the usual course of business. Neb. Rev. Stat. § 21-252(c)(1). In addition, there was evidence presented that Anderson had referred to Calderon as his “partner.”

      The decision of the trial court was appealed to the District Court where it was affirmed, whereupon it was appealed again to the Nebraska Supreme Court.

      The Nebraska Supreme Court, while setting aside the determination based on piercing principles, affirmed the liability of the basis of agency and the failure to identify the corporation as the party entering into the agreement. The Nebraska Supreme Court wrote:

The cases provide that it is the agent’s duty to disclose his or her capacity as an agent of a corporation if the agent is to escape personal liability for contracts made, and in the absence of such disclosure, the agent bears the burden of proof of showing that the contract was made while acting in a corporate, not individual, capacity. See, Purbaugh v. Jurgensmeier, 240 Neb. 679, 483 N.W.2d 757 (1992); 3 C.J.S. Agency § 565 (2013). The uncontradicted testimony at trial was that neither Calderon nor Anderson disclosed Amazing Vapor’s incorporated status during discussions leading up to the agreements. In text messages, Anderson referred to Calderon as his “partner.” At Anderson’s request, Grady sent the March 27, 2014, invoice to Anderson’s personal or attorney email, not an address associated with Amazing Vapor. The invoice reads, “Art Buyer: Tom Anderson & Manny Calderon Client: Amazing Vapor,” indicating that Grady believed the buyers were Calderon and Anderson for their client, Amazing Vapor. After the invoice remained unpaid after several attempts to collect on the contract, Grady texted Anderson: “You are also part owner. It’s time for you to pay and take it up with [Calderon] on your own.... [Y]ou are responsible for hiring me ... and therefore you are responsible just as much as [Calderon].” The series of communications between Grady and Anderson leading up to and following the photography services supports the county court’s finding of a breach of two oral agreements for which Anderson was liable, and we find no plain error with regard to the district court’s affirmance thereof.

      Cases such as this pop up with far more familiarity than they should. The rule is simple; the agent has the responsibility to tell the person with whom the contract is being entered into who is the principal undertaking the obligation. Handing over a business card providing the full name of the business entity and the title of the agent may be all that is necessary in order to satisfy that obligation. Also, while not directly relevant to this case as the contracts were oral, agents should be sure that the signature blocks on documents clearly identify the party to the agreement as the business entity, and that the agent signature is in that capacity. For example, “Bob Smith, as president of ABC, Inc.” makes clear who is the principal and the capacity of the signatory.”

Agency and Choice of Law

Agency and Choice of Law

      In a decision rendered in Delaware earlier this year, there was considered the question of which law would control whether the purported agent of an LLC had actual authority to bind the company. CompoSecure, L.L.C. v. Cardux, LLC f/k/a Affluent Card LLC, C.A. No. 12524-VCL (Del. Ch. Feb. 1, 2018 as corrected Feb. 12, 2018).

      In this dispute, Vice Chancellor Laster was, amongst many other issues, called upon to determine whether New Jersey or Delaware law would apply. At issue was whether a Marketing Agreement was validly entered into. That agreement provided that it would be governed by New Jersey law. However, that agreement had been entered into by a Delaware organized LLC. As such, the question was whether New Jersey or Delaware law would apply.

      Vice Chancellor Laster determined that Delaware law would control on the basis that the existence or not of actual authority to execute the agreement on behalf of the Delaware LLC was governed, pursuant to the internal affairs doctrine, by Delaware law.

Multiple Documents Held Sufficient to Satisfy Statute of Frauds, Employer Bound by Salary Continuation Agreement

Multiple Documents Held Sufficient to Satisfy Statute of Frauds, Employer Bound by Salary Continuation Agreement

      In a recent decision from the Kentucky Supreme Court, it affirmed and applied the rule that the statute of frauds may be satisfied by a combination of written instruments. Baumann Paper Co., Inc. v. Kenneth Holland, No. 2016-SC-000511-DG, 2018 WL 2979413 (Ky. June 14, 2018).

      Holland had been an employee of Baumann Paper, commencing employment in in 1971 and ending with early retirement in September 2013, his early retirement being consequent to certain heart problems. In 1987, Baumann had terminated its (apparently defined benefit) pension plan and substituted a variety of options including a salary continuation agreement (“SCA”). An SCA agreement had been signed by Holland and Baumann pursuant to the signature of the corporate secretary, Mitchell Baumann. However, Fred Baumann, the corporate president, did not sign the SCA. The agreement had, however, been approved by Baumann’s Board of Directors, and it had directed that the corporate president sign same. That resolution read:

IT is hereby resolved that Baumann Paper Co., Inc. approves the Non-qualified Salary continuation (sic) Agreement, dated August 12, 1987 which had been executed by Kenneth Holland and the president of Baumann Paper Co., Inc. on behalf of Baumann Paper Co., Inc., and subject to ratification.

      When Holland sought to collect under the SCA, Baumann Paper argued that there existed no enforceable agreement, and that the statute of frauds barred its enforcement. Holland argued that the various writings were sufficient to satisfy the statute of frauds which, generally, requires that any agreement which is not to be performed within the year must be in a signed writing. KRS § 371.010.

      The Supreme Court, affirming the Court of Appeals, held that the combination of the signed SCA and the corporate resolutions adopted in connection therewith were sufficient to satisfy the statute of frauds.

Though the SCA lacked Fred Baumann’s signature, the corporate resolution and the SCA signed by the corporate secretary satisfy the statute of frauds. Separate writings may form the memorandum of contract required by the Statute of Frauds. *3.

      The Court also found that the corporate secretary had implied authority to, on behalf of the corporation, sign the SCA.

      The case was remanded to the trial court to make findings of fact regarding the breach of contract, the extent of Holland’s disability, damages, and a fraud claim.

Mistaken Identity of Capacity Does Not Eliminate Ability to Bind LLC

Mistaken Identity of Capacity Does Not Eliminate Ability to Bind LLC

      In a decision from California, the court consider whether the failure to correctly identify the role in which a person signed a document rendered the agreement unenforceable. In this instance, the court answered “no.” Western Surety Co. v. La. Cumbre Office Partners, LLC, 2017 Cal. App. LEXIS 77 (2017).

      In this instance, there was an LLC (“Manager LLC”) that itself was the manager of another LLC (“Managed LLC”). The Manager LLC was in turn managed by a natural person (“Person”). When, however, Person signed a document on behalf of the Managed LLC, he incorrectly identified himself as its managing member rather than the managing member of its manager. The question under consideration is whether Managed LLC on whose behalf the document had been executed was bound.

A      pplying language from California's prior LLC Act (although it is worth noting that the same language appears in the current Act), the court found that Managed LLC was properly bound notwithstanding the fact that Person had incorrectly indicated that he was the manager of the LLC.

Connecticut Court Applies the Law of a Purported Agent on Behalf of an Undisclosed Principal; the Agent is Liable on the Debt

Connecticut Court Applies the Law of a Purported Agent on Behalf of an Undisclosed Principal; the Agent is Liable on the Debt

      In a recent decision from an appellate court in Connecticut, it applied the law of agency with respect to undisclosed principals and, finding there not been complete disclosure as to the principal, held the agent liable in the debt created. Pelletier Mechanical Services, LLC v. G&W Management, Inc., No. 36993, 162 Conn. App. 294 (Jan. 12, 2016).

      G&W Management, Inc., a property manager, had entered into contracts with Pelletier Mechanical Services, LLC with respect to repairs at various properties it managed, including responding to emergencies. Ultimately Pelletier would issue invoices to G&W for more than $16,000. G&W asserted, in defense to liability of those invoices, that it was acting merely as an agent for the property owners, and in consequence that it had no liability on those debts.

      Under the law of agency, when an agent acts on behalf of the principal, the agent is not liable on obligations to the third party. The condition for the application of this rule is that the agent disclose not only that there is a principal, but who is that principal. It is only with the knowledge of who is the principal that the third party is able to assess whether they are willing to extend credit with respect to the work performed.

      G&W defended on the basis that it was known that it was a property management company. Ultimately, that was not sufficient. The Court of Appeals held, inter alia, that even if it was known by Pelletier that G&W was a property management company acting on behalf of the property managers, G&W had never disclosed who are the principals. Applying settled Connecticut law as well as comment (b) to section 6.02 of the Restatement (Third) of Agency, the court had little difficulty in finding G&W liable. Also, the Court reiterated the rule that it is the obligation of the agent to effect full disclosure to the third party; the third party does not have a duty of inquiry with respect to whether there is and who is the principal.

Court of Appeal Affirms Jury Verdict of No Apparent Agency

Court of Appeal Affirms Jury Verdict of No Apparent Agency

 

In a 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 superior theory.

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.

 

Utah Court Considers Limitations on Actual Authority of LLC Manager, Reverses Summary Judgment as to Ratification

Utah Court Considers Limitations on Actual Authority of LLC Manager,

Reverses Summary Judgment as to Ratification

     
      A recent decision from Utah considered the statutory limits on actual and apparent authority to bind an LLC.  Zions Gate R.V. Resort, LLC v. Oliphant, __ P.3d __, 2014 WL 1717026 (Utah App. May 1, 2014).

      Purportedly on behalf of the LLC, Darcy Sorpold, one of its managers, executed a 99-year lease for a RV pad in favor of Oliphant, the lease purportedly being delivered in compensation for certain services rendered the LLC by Oliphant.  The LLC brought a forcible detainer action against Oliphant, alleging his rights under the purported lease to be invalid.  Oliphant, in turn, brought a quiet title action, and the trial court granted summary judgment in his favor.  This appeal followed.

      Initially, the LLC challenged the trial court’s determination that the lease was valid, noting that the LLC’s articles required the actions of both managers (the second manager being Jones) in order to bind the LLC.  Under the then applicable LLC Act (Utah adopted a new LLC act effective January 1, 2014), a manager had authority to bind the company in the ordinary course of business “unless the manager had no authority to act for the company in the particular matter and the lack of authority was expressly described in the articles of organization.”  Utah Code Ann. § 48-2-c-802(2)(c).  The LLC’s articles, in addition to providing that it would be manager-managed, expressly provided that “It shall require the agreement, approval or consent of both Managers to act on behalf of or to constitute the act of [Zions Gate].”  Based thereon, the Court of Appeals determined that Sorpold did not have actual authority to bind the LLC to the lease with Oliphant. 

      Having lost the argument that Sorpold had actual authority to enter into the lease and thereby bind the LLC, Oliphant argued that he had apparent authority to bind the LLC.  The Court noted, however, that under Utah law, it being based on § 166 on the Restatement (Second) of Agency, a third party’s knowledge that the agent lacks authority defeats a claim for apparent authority.  Horrocks v. Westfalia Systemat, 892 P.2d 14, 16 n.1 (Utah Ct. App. 1995).  Atypically, the Utah LLC Act provides that any provision set forth in the LLC’s articles of organization is notice to third parties.  Utah Code Ann. § 48-2c-121(1).  In that the limitation on Sorpold’s authority to act unilaterally on behalf of the LLC was prescribed by the articles of organization, and in that Oliphant was deemed on notice of the limitations on Sorpold’s actual authority, he could not rely upon apparent authority.  In response to Oliphant’s argument:

that it is unreasonable and unrealistic to expect individuals or companies entering into an agreement with an LLC to acquire the articles of organization for that LLC to determine if the signatory to an agreement is authorized to enter into that agreement on behalf of the LLC

, the Court noted the rule that it is the responsibility of the third party to ascertain the agent’s actual authority and further that while:

Oliphant may believe the law imposes an unrealistic burden on those doing business with LLCs, it is not the prerogative of this Court to question the wisdom of the statutory scheme enacted by the legislature.  2014 WL 1717026, *3.

       Having determined that Sorpold lacked either apparent or actual authority to enter into the lease binding the LLC to Oliphant, the Court turned its attention to the argument that the LLC had ratified the lease.  Remanding the matter to the trial court, the Court of Appeals found there to be significant factual questions involved in the question of whether or not ratification (or repudiation) had taken place.  Perhaps, however, signaling to the trial court the proper outcome once the factual record is determined, the Court noted that Utah statute of frauds “requires that any agent executing an agreement conveying an interest in land on behalf of his principal must be authorized in writing” and that “w[here] the law requires the authority to be given in writing, the ratification must also generally be in writing,” citing Bradshaw v. McBride, 649 P.2d 74, 78, 79 (Utah 1982).

      It bears noting that under the Kentucky LLC Act the outcome of this case might be different.  Initially, as to the last point, the Kentucky Statute of Frauds, while certainly requiring that conveyance of an interest in real property be in writing, does not require that any delegation of authority to execute an instrument involving real property likewise be in writing.  Such may be typically required as a matter of good practice, but the failure to do so does not implicate the Statute of Frauds.  Second and of greater import, the Kentucky LLC Act contains a different rule than that of Utah with respect to the notice effect of the articles of organization.  Rather, under Kentucky law, the articles of organization are of themselves only notice that the LLC exists, of the four primary components set forth in KRS § 275.025(1) (i.e., the LLC’s name, registered office and agent, mailing address and the statement as to whether it is member- or manager-managed), if it is a professional LLC what professions are being practiced and, if it is a nonprofit LLC, that fact.  Hence, while it is possible in the articles of organization to recite limitations upon the actual authority of the members or managers, those limitations will not be deemed to be notice to and binding upon third parties merely by being filed with the Secretary of State and available on its website.

Indiana Court of Appeals Addresses Agency on Behalf of an Administratively Dissolved LLC

Indiana Court of Appeals Addresses Agency

on Behalf of an Administratively Dissolved LLC

            In a recent decision, the Indiana Court of Appeals addressed the liability of a member of an LLC that had been administratively dissolved for legal fees incurred in connection with the LLC.  The court found that the member was no liable on those debts.  Pazmino v. Bose McKinney & Evans, LLP, 989 N.E.2d 784 (Ind. App. 2013). 

 

            Bose McKinney & Evans, LLP (“Bose”), a law firm, rendered services to Buena Vista Realty Group, LLC from February through June of 2008; the LLC was administratively dissolved in April of that year. These services were requested by Pazmino – the opinion does not address whether he was a member, a manager, or a mere agent of the LLC.  Of a total unpaid bill of $12,580.09, some $9,618.39 of that amount was incurred after the administrative dissolution.  Bose sought to hold Pazmino liable on the LLC’s debt on a pair of basis:  first, it was he who requested the work on the LLC’s behalf even after it was dissolved, and second that he was purporting to act on behalf of a non-existent principal and therefor liable on the obligation.  Bose was awarded summary judgment against Pazmino, and this appeal followed.

 

             Cutting to the chase, the summary judgment was reversed.  As to the first assertion, the Court of Appeals determined that if Pazmino was acting on behalf of the LLC in requesting that the legal work be done for it, then he was not liable for the related charges.  To that point the Court noted that the firm identified the LLC as the client in its invoices.  Therefore, Bose was not entitled to summary judgment against Pazmino.On the other hand, as Pazmino’s tender of evidence did not provide detail as to why and on whose behalf he requested the services, he was not entitled to summary judgment.

 

            Bose argued that, from the LLC’s administrative dissolution on April 24, 2009, it ceased to exist as a principal on whose behalf Pazmino could act.  There being no principal, Pazmino could not be acting on the LLC’s behalf.  In response, Pazmino pointed to section 23-18-10-3 of the Indiana Business Flexibility Act (i.e., the Indiana LLC Act) for the proposition that an LLC, after administrative dissolution, continues to exist but may not carry out on any business except that necessary for its winding up and termination.  While the Court’s language is not express – “Thus, regardless of the nature of the work performed by Bose, [the LLC] continued to exist as a principal that could be bound by the acts of its agents.” – it seems to interpret the statute as keeping in place a principal on whose behalf an agent may act, even if the principal may not properly engage in the activities for which the agent would bind it.  

 

      Treating for these purposes Pazmino as a mere employee (and not a member or manager) of the LLC, Bose argued that while members are shielded from liability post-dissolution, it follows that a mere employee does not, post-dissolution, enjoy limited liability.  Rejecting that notion, the Court of Appeals found that “[W]e do not agree that the notion that an employee who continues to act on behalf of a dissolved LLC is always personally liable on that conduct.”  Differentiating the statutory rule as to capacity to act from the common laws rules of agency allocating responsibility between the principal and the agent, the Court was not willing to interpret the statute as, by omission, imposing liability upon a mere employee:

In fact, none of the cases cited by Bose suggest that an employee properly acting on behalf of a dissolved LLC is personally liable for such acts, and nothing in the Act suggests that the Legislature intended to expose employees of a dissolved LLC acting on behalf of the LLC to personal liability while protecting members from personal liability.  Instead, we believe that reference to the personal liability of members in Indiana Code Section 23-18-9-3(b)(2) is intended to clarify that, even upon dissolution, an LLC, not its members, remains liable for the LLCs obligations.

 

      Likely the outcome of this case would not be different under Kentucky law.  Under KRS § 275.300(2), a dissolved LLC “shall continue its existence but shall not carry on any business except that appropriate to wind up and liquidate its business and affairs.”  As such, the Kentucky LLC Act has rejected the now quite dated notion that, upon dissolution, the legal existence of the business entity terminates.  Rather, upon dissolution the permissible activities of the entity are limited.  Still, there is a question as to whether an agent, on behalf of a limited principal, should be protected from liability on obligations undertaken after the dissolution that are not appropriate for winding up and termination.  While this Indiana court seems to have answered “no,” section 3.07(4) of the Restatement (Third) of Agency would answer “yes.”  Of course, the analysis changes again if the company is subsequently reinstated.

Iowa Court of Appeals Addresses Authority to Bind LLC

Iowa Court of Appeals Addresses Authority to Bind LLC

       A recent decision of the Iowa Court of Appeals considered the question as to whether the contract purportedly signed on behalf of the LLC thereby bound it, which question was raised in response to a suit asserting the LLC with breach of that same contract.  In this case, the court found that the contract at issue had not been validly signed on behalf of the LLC, and therefore, it could not be liable for breach thereof.  Three Minnows, LLC v. Cream, LLC, No. 3128/12-0591 (Iowa Ct. App. April 10, 2013).

      Three Minnows, LLC filed suit against Cream, LLC for breach of a management contract.  At trial, at the close of the plaintiff’s case-in-chief, Cream moved for and was awarded a directed verdict on the basis that the person who had purported to bind Cream on the subject agreement did not have authority to do so.

      Three Minnows, a manager-managed LLC, was owned 99% by Dean Quirk, operated a bar named “Drink.”  Cream was formed as a manager-managed LLC to purchase and operate an existing bar, “The Union Bar.”  The managers of Cream were George Wittgaff III and Jeff Maynes; Martin Maynes, Jeff’s brother, was a 30% of Cream, but was not a manager thereof at the time at issue.  Quirk, on behalf of Three Minnows, wanted to contract out the management of Drink.  After a meeting that included Martin and Jeff Maynes, Martin Maynes exchanged a number of management agreements and similar contracts with Quirk, each signed by Martin in his capacity as a member of the LLC.  In addition to the management agreements, there was a license agreement signed by George Wittgaff II, allowing the Three Minnows’ bar, formerly named Drink, to operate under the name The Union Bar.  Cream only learned of the management agreements with respect to what had been “Drink” when it received a letter from Three Minnows’ attorneys claiming breach of the management agreement and substantial damages.

      Three Minnows filed suit against Cream for breach of the management agreements.  In response to Cream’s motion for a directed verdict, the Court found that it did not “believe that any reasonable juror – there are no inferences that could be drawn from the granting of that authority [for the licensing agreement] that would lead a reasonable person to believe that Martin Mayne was authorized to execute the subsequent [management] agreement.”

      After discussing procedural matters such as the standard of review and the standard for granting a directed verdict, the Court turned itself to the question of agency.  Under Iowa’s LLC Act, which is an adoption of the Revised Uniform Limited Liability Company Act, a member, as such, is not an agent of the limited liability company.  Then drawing distinctions between actual and apparent agency authority, the Court turned to Cream’s articles of organization, which provide in part:

Unless authorized to do so by the operating agreement, or by a manager or managers of the Company, no member, agent or employee of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. 

The Court noted that these articles of organization were of public record and that Dean Quirk was aware that he could access the articles to determine whether a member, as a member, had the authority to bind the LLC.  He made no effort to do so, and that was held against him.

      Not being a manager of the LLC, Martin did not have the express authority to sign contracts on its behalf or otherwise bind it to a third party.  As such, he had no actual authority to act on the LLC’s behalf.

      Turning to the question of apparent authority, the Court found it would be impossible to infer that Martin Maynes had authority to execute the management agreements on behalf of Cream.  While he may have been granted the authority to sign the licensing agreement (the opinion is internally inconsistent as to who signed the licensing agreement, Wittgaff or Martin), that did not extend to other potential agreements between the companies.  Ultimately:

Three Minnows failed to satisfy its burden of proving an agency relationship existed regarding the management agreements and therefore the grant of a directed verdict was proper.

      Curiously, this opinion does not anywhere discuss a claim by Three Minnows against Martin Maynes for breach of warranty of authority.  See Restatement (Third) of Agency § 6.10.  That may be consequent to the fact that at one point he told Quirk that he did not have authority to bind the LLCs, and Quirk accepted the documents anyway, explaining he needed them merely to arrange financing.  As such, he may have been estopped from making a claim based upon the warranty of authority.

      The take-away from this decision and others of its nature is that LLCs have the capacity to determine, by private ordering, who will be the agents thereof.  While a corporation has officers with the capacity to bind the company, and a partnership has partners, each of whom has capacity to bind the partnership, LLCs can be set up in myriad ways that, depending upon the state law, may define the agency authority on behalf of the venture and in so doing bind third parties.  Ergo, whenever entering into a contract with an LLC, it is crucial to do an investigation of who has authority to bind that venture.  Failure to do so may preclude enforcement of that agreement.  While in most cases a claim against the purported agent for breach of their warranty of authority will be viable, seldom will the agent’s personal assets be sufficient to provide adequate remedy.

An Early Decision on the Liability of Managerial Employees versus Owners

An Early Decision on the Liability of Managerial Employees versus Owners

      Greenup and Innes v. Barbee’s executor, 4 Ky. Rep. (1 Bib) 320 (1809), is an interesting early decision addressing the distinction between the liability of owners versus the liability of non-owner managers.

      A company, not incorporated and not identified by name, was organized in Danville in 1789.  Greenup, Innes and Barbee were appointed the managers of the venture.  Barbee was not an owner in the venture.  It contracted with John Brown in Philadelphia to construct the necessary machinery, an undertaking that exhausted the initial payment made – still Brown completed the task of manufacturing the equipment.  Innes and Barbee, on behalf of the venture, delivered a note to Brown for the amount due.  The venture failed and its few assets were sold by the sheriff – most of the debt to Brown remained outstanding.  He then brought suit against Barbee, on which he prevailed by default (the opinion is not clear – Barbee may at this point have already been deceased).  The trial court then ordered Greenup and Innes, the other two managers, to pay one-third of the debt to Brown, Barbee’s estate being one-third liable thereon.

      On appeal the judgment against Barbee was reversed.  As to the liability on the note to Brown:

It is evident that the company are liable to the defendant for the amount he has been, or may be compelled to pay on their account.  As the company was not an incorporated body, the total exhaustion of the property put into common stock in the payment of demands upon the company does not exonerate the members of it from further responsibility.  They continue responsible in their individual capacities to the full amount of every debt justly due from the association.

      But as to the managers not owners of the venture, a set including Barbee:

But it does not appear that the plaintiffs in this case were members of the association, or that they were any otherwise concerned than as managers or agents for the company.  In that capacity they could make themselves personally liable only by acting fraudulently, or exceeding their authority, or by receiving money belonging to the association which they had not accounted for; but none of these charges are alleged by the defendant, nor does there appear anything in the cause by which such charges could be supported.

      Hence Barbee was not responsible in whole or in part for the debt to Brown.

      Today the same rule is recited in the Restatement (3^rd) of Agency as to the liability of an agent on a contract entered into on behalf of a disclosed principal.

Valid Power-of-Attorney Must Be Given by the Principal

Valid Power-of-Attorney Must Be Given by the Principal

      A recent decision of the Kentucky Court of Appeals ultimately addresses the simple fact that in order for a power-of-attorney to be valid, it must be given by the principal.  GGNSC Stanford LLC, v. Rowe, No. 2012-CA-002330-MR, ___ S.W.3d __, 2012 WL 4208924 (Ky. App. Sept. 21, 2012).

      Deborah Rowe, the child of Clara LaVon Rowe and William Henry Rowe, was mentally incompetent from birth.  Her parents cared and provided for her into her adulthood.  Likely crucial for this decision, however, Clara and William never obtained an order of guardianship with respect to Deborah.  In October, 2001, Clara and William executed a “power of attorney” naming Nancy Meadows as Deborah’s attorney in fact.  In that power of attorney, Clara and William identify themselves as Deborah’s “parents and guardians.”

      In 2007, Deborah was placed in a nursing home; Nancy signed Deborah’s admission papers as “PoA” and presented a copy of her power-of-attorney to the home.  Those admission papers included an arbitration agreement.  Two years later, Deborah passed away at that same home.  Thereafter, Deborah’s brothers, as co-administrators of her estate, brought a wrongful death action against that nursing home and certain of its affiliates.  The defendants sought to refer the dispute to arbitration.  In turn, the co-administrators asserted that there existed no binding agreement to arbitrate.  The trial court agreed with that ruling, which determination was appealed to the Court of Appeals. 

      With respect to assertions that Nancy had, on Deborah’s behalf, both actual and apparent authority to enter into the arbitration agreement, the court engaged in a discussion of both bodies of law.  Ultimately, the court found these arguments to fail on the simple basis that Nancy’s purported authority, whether actually granted by Clara and William or otherwise, must fail because it was Deborah, not Clara and William, who was sought to be bound:

The principal problem with the nursing home’s argument, however, that it is based upon a faulty premise:  Deborah’s parents were not and could not be the principals in this set of facts.  Nancy was purporting to act on Deborah’s behalf, not on behalf of Clara and William.  Attempts to trace Nancy’s so-called apparent authority to Deborah’s parents then, must be unsuccessful because their actions could not create a reasonable belief in [the nursing home] that Nancy had authority to act on Deborah’s behalf.

      Although not addressed by the court, it can be inferred that the opposite holding would have been rendered had Clara and William taken the step of being legally appointed as Deborah’s guardian.  Needless to say, for those adult parents and other relatives who are caring for disabled children, siblings and other relatives who have reached the age of majority, formal guardianship procedures need to be followed.

Treatment of Physicians as Hospital's Independent Contractors Upheld

Treatment of Physicians as Hospital's Independent Contractors Upheld

      In a recent decision, Kentucky Court of Appeals has given extensive consideration to the question of whether physicians rendering services at a hospital would be treated as employees (and therefore agents) or independent contractors.  In this instance, the patient in question had on repeated occasions signed a document acknowledging that the physicians are independent contractors and not employees.  An effort to challenge that characterization subsequent to his death was rejected.  Rains v. St. Joseph Healthcare, Inc., 2012 WL 4208772 (Ky. App. Sept. 21, 2012) (Not To Be Published).

      Bobby Rains was admitted to St. Joseph’s hospital in January, 2007 whereat he underwent several paracentesis procedures by Drs. Dunkle-Blatter and Estridge, which procedures (it was later alleged) were performed improperly.  Ultimately, Bobby Rains was transferred to University of Kentucky Medical Center, where he died.  Lisa Rains, as the surviving spouse and heir and as well the administratrix of Bobby’s estate, filed suit against various parties including St. Joseph Healthcare, alleging that “SJH was vicariously liable for the aforementioned doctors’ alleged negligence under a theory of ostensible agency.”  The trial court granted St. Joseph Healthcare summary judgment and this appeal followed.

      At the time of his admission and several times subsequent thereto, Bobby signed an authorization providing in part:

 I understand that physicians, surgeons, radiologists, pathologists, anestheosiologists, other doctors and physicians assistants who may render care or services in my case are not employees or agents of St. Joseph’s Healthcare, Inc. 

It was on the basis of this release that the trial court granted summary judgment.

On appeal, Lisa asserts the trial court erred by granting summary judgment in favor of SJH because a genuine issue of fact exists as to SJH’s liability under an ostensible agency theory, based upon the inadequate and improper consent form presented for Bobby’s signature.  We disagree.

      Ultimately, the Court of Appeals forged no new Kentucky law on this point, but was rather able to dispose of the argument through citation to prior authority, namely:

An apparent or ostensible agent is not an actual agent, but is “‘one whom the principal, either intentionally or by want of ordinary care, induces third persons to believe to be his agent, although he has not, either expressly or by implication, conferred authority upon him.’” Middleton v. Frances, 257 Ky. 42, 44, 77 S.W.2d 425, 426 (1934) (citation omitted). The general premise in Kentucky is that hospitals are not vicariously liable for doctors who are not its employees under an ostensible agency theory so long as the hospital makes the patient aware that the treating physician is not a hospital employee when the treatment was performed. See Paintsville Hosp. Co. v. Rose, 683 S.W.2d 255, 256 (Ky. 1985). See also Floyd v. Humana of Virginia, Inc., 787 S.W.2d 267, 270 (Ky. App. 1989) (medical malpractice plaintiff could not hold hospital liable for alleged negligence of physician on ostensible agency theory where admission forms read and signed by plaintiff indicated her knowledge that doctors were independent contractors and not agents of hospital, and no representation or action was made so as to induce plaintiff to believe that doctors were employees or agents of hospital); Roberts v. Galen of Virginia, Inc., 111 F.3d 405, 412-13 (6th Cir. 1997) (under Kentucky law, hospital is not liable under ostensible agency doctrine for alleged negligence of independent contractor physicians where hospital's patient registration and authorization form alerted the public that its physicians are not its employees or agents), rev’d on other grounds, 525 U.S. 249, 119 S. Ct. 685, 142 L.Ed.2d 648 (1999); Vandevelde v. Poppens, 552 F.Supp.2d 662, 667 (W.D. Ky. 2008) (hospital not vicariously liable under Kentucky law for alleged negligence of physicians based on an ostensible agency theory where hospital’s consent upon admission forms alerted the public that its physicians were not its employees or agents); Johnston v. Sisters of Charity of Nazareth Health Sys., Inc., 2003 WL 22681562 at *3 (Ky. App. Nov. 14, 2003) (hospital not liable under ostensible agency theory where patient signed admission forms on six different occasions which explicitly stated that pathologists and physicians at hospital were independent contractors and not employees or agents of hospital).

In this case, the record reflects that on seven separate occasions, beginning in March 2005 and ending with a final admission in January 2007, Bobby signed an SJH form entitled “Authorizations and Consents.” This one-page form, which was identical in all material respects at each admission, is not complex and is not drafted in legalistic language. Paragraph eight of the form, immediately preceding his signature, informed him that “physicians, surgeons, radiologists, pathologists, anesthesiologists, other doctors, and physicians assistants who may render care or services in [his] case are not employees or agents of Saint Joseph HealthCare, Inc.” No evidence was presented to show that SJH represented to the public that the doctors working within the confines of the hospital were its employees or agents. Thus, as a matter of law, SJH cannot be held vicariously liable for the alleged negligence of the doctors under an ostensible agency theory.

       There was a dissenting opinion by Judge Caperton wherein he reviewed cases addressing apparent agency and as well the Restatement (Third) of Agency.  In effect, he  argues that there remains a question of fact as to whether Bobby Rains, notwithstanding the signed agreement stating that all physicians are independent contractors, actually appreciated that the doctors were not employees and agents of the hospital.  Ergo, the signed consent would become only part of the evidence as to whether or not the physicians were agents of the hospital.

Failure to Disclose LLC Precludes Claim for Limited Liability

Member Who Does Not Disclose That They Are Acting

on Behalf of an LLC Does Not Benefit From Limited Liability

      A recent decision of the North Dakota Supreme Court has again confirmed the rule that, inter alia, if you do not tell people you are acting on behalf of an LLC, you cannot subsequently claim the benefit of the LLC’s liability shield.  Bakke v. D&A Landscaping Company, LLC, __ N.W.2d __, 2012 WL 3516859 (N.D. Aug. 16, 2012).

      Randall and Shannon Bakke (“Bakke”) visited a landscape supply company, Rocks and Blocks, Inc., who in turn recommended Andrew Thomas of D&A Landscaping for certain work to be done at their home.  The Rocks and Blocks representative gave the Bakkes Andrew’s business card, it reciting “D&A Landscaping” and as well including e-mail and website addresses.  Ultimately, Andrew provided the Bakkes with an estimate and a drawing “[r]espectfully submitted D&A Landscaping, 426-4982 Per Andy Thomas.”  Several months later, a second proposal was submitted, this one by “D&A Landscaping Per Andy Thomas.”  The work was subsequently performed, but in a manner not satisfactory to the Bakkes.  Thereafter, they received an invoice from “D&A Landscaping, Inc.”; in fact, the proper legal name was “D&A Landscaping Company, LLC.”

      Not being satisfied with the work performed, the Bakkes filed suit against numerous business organizations including D&A Landscaping, LLC, and against Andrew Thomas individually.  Ultimately, a jury would hold Thomas, individually, liable on the claim to the Bakkes.  On appeal, he asserted that there were insufficient facts to justify piercing the veil of D&A Landscaping, LLC.  In response, the Bakkes noted that they were not attempting to pierce the LLC’s veil, but rather seeking to enforce the jury’s determination that Andrew Thomas “was personally liable for transacting business in his individual capacity.”   2012 WL 3516859, *2.

      In considering this position, the North Dakota Supreme Court recognized that while members of an LLC enjoy limited liability:

The Bakkes’ theory of Thomas’ liability was that he acted individually and that Thomas never disclosed he was acting as an agent for D&A Landscaping, LLC.

Upholding the jury’s determination, the Court noted that:

The evidence includes a business card, an estimate, a drawing and proposals, none of which indicated that D&A Landscaping Company, LLC was a limited liability company or that Thomas was acting as an agent for the company.

      Under the rules of agency, an agent acting on behalf of a disclosed principal is not a party to the agreement and is not liable for its performance.  Where, in contrast, the agent does not disclosure the existence of the principal, the agent is himself a party to the agreement, subject to liability for its breach.  See Restatement (Third) of Agency §§ 6.02, 6.03 (2006).  Having not made clear that he was acting on behalf of his LLC, Andrew Thomas, the individual, was properly held liable to the Bakkes.

      Cases of this nature are, somewhat curiously, not rare.  In the Colorado decision Water, Waste & Land, Inc. v. Lanham, 1998 WL 1112869 (Co. March 9, 1998), the Colorado Supreme Court held Lanham, a member and manager of the LLC, personally liable for work done on behalf of the undisclosed LLC.  In Perry v. Ernest R. Hamilton Associates, Inc., 485 S.W.2d 505 (Ky. 1972), an individual retained an engineering firm to lay out a proposed subdivision but without disclosing that the proposed subdivision was owned by a corporation.  Ultimately, fees due the engineering firm were not paid, and they brought suit to collect.  In response, the individual with whom they had dealt cited the existence of the corporation as a defense to his personal liability.  Rejecting that notion, the then Kentucky Court of Appeals held the individual personally liable for the fees as he had failed to disclose the existence of the corporation or otherwise put the engineering firm on notice that it was dealing with other than him.

Principal's Agent Not the Agent of the Principal's Constituent

The Buck Stops Here:  Vicarious Liability for

Actions of Agent Limited to Actual Principal

      In a recent decision, the Kentucky Court of Appeals made clear that the vicarious liability of a principal for the actions of the agent are restricted to the actual principal.  James v. James, No. 2007-CA-001837-MR, 2012 WL 2945518 (Ky. App. July 20, 2012). 

      Donald James (“Donald”) established an irrevocable trust for the purpose of owning James Medical Equipment, Ltd. (“JME”).  This separation of ownership was necessary in order to satisfy certain requirements of the Medicare law, they otherwise being violated by cross-referral between commonly owned entities.  Ultimately, Thomas James, nephew to Donald (“Thomas”), a healthcare attorney practicing in Washington, D.C., was appointed the trustee of that irrevocable trust.  It later came to pass that Donald, still exercising operational control over JME, proposed to transfer its clients to another entity he owned for the purpose of rendering JME judgment proof against claims from Medicare for improperly paid benefits.  In response, Thomas, as trustee of the irrevocable trust controlling JME, terminated Donald’s authority to act on its behalf.  Thomas in turn hired new management for JME, Copeland, who effected a financial turn-around for JME.

      Ultimately, pursuant to other litigation, it was determined that Donald had the authority to terminate the irrevocable trust that controlled JME.  After doing so, he discovered that Copeland and another JME employee had themselves started a competing business, Breathe Easy, to which they had transferred numerous of JME’s customers.  In response, Donald filed suit against Thomas asserting a breach of fiduciary duty.  Ultimately, the jury found in favor of Thomas, the Court having rejected a proposed instruction, namely:

For purposes of this instruction, if you find that Sharon Morrison Copeland was acting within the scope of her apparent authority as an agent of the Defendant, James, then the Defendant would be liable for the fraudulent acts of his agent even if he did not know of the agent’s wrongful acts.

      The Court of Appeals, upholding the rejection of the proposed instruction, wrote:

There is no question that Thomas, as a trustee, owed Donald a duty to exercise such care and skill in administering the trust as a man of ordinary prudence would exercise in dealing with his property, or to exercise such skill as a trustee has, if greater than a man of ordinary prudence.  Bryan v. Security Trust Co., 176 S.W.2d 104 (Ky. 1943).  Further, “a [t]rustee is personally liable for torts committed by an agent or employee in the course of the administration of the trust.  The principle of respondeat superior is applied to the trustee just as though he were the owner of the trust property free of the trustee.  His liability is the same as it would be if he were not a trustee.  It is immaterial that the trustee receives no benefit from the trust.”  Cook [v. Holland], 578 S.W.2d [648] at 742 [Ky. App. 1978].

The flaw in Donald’s argument, however, is that Copeland was not an agent or employee of Thomas in his capacity as trustee.  Rather, Copeland was an employee of JME, whose stock was owned by the trust.  Copeland never worked for Thomas personally, nor was she paid by Thomas or trust proceeds.  In fact, under Donald’s interpretation of the law, every employee of JME would be Thomas’s agent, making him vicariously liable for every alleged act of every employee.  Clearly, the law as established in Cook did not expand the scope of vicarious liability to such an extreme position.

      The Court went on to explain that even were Copeland Thomas’s agent, no liability would attach.

      Ultimately, the agent of a principal is not, in turn, the agent of the principal’s constituents.

Administrative Dissolution + Reinstatement = No Personal Liability of Officers

Administrative Dissolution + Reinstatement = No Personal Liability of Officers

      The wisdom of the 2012 amendments to the Kentucky statutes providing that, upon reinstatement after administrative dissolution, the liability of any agents of the entity will be determined as if the dissolution had never taken place, has been confirmed by a  recent decision of the Kentucky Court of Appeals.  Harshman Construction & Electric, Inc. v. Witte, No. 2011-CA-000609-MR, 2012 WL 2471445 (Ky. App. June 29, 2012) (Not To Be Published).

      The Wittes contracted with Harshman Construction & Electric, Inc. to build a home.  They ultimately had a falling out over failures by Harshman to conform the construction to the plans and excessive delays in construction, and the decision reviews the measure of damages available to them.  In addition, the Wittes asserted that certain of the officers and Harshman’s sole shareholder should be held personally liable on the basis that, during part of the construction phase, Harshman Construction was administratively dissolved.  Specifically, while the contract was entered into in March 2007 and construction began in May 2007, Harshman Construction was administratively dissolved in November 2007, one month before the final break in their relationship leading to the Complaint being filed in February 2008.  Harshman was reinstated in March 2010.  In January 2011, three years after the filing of the Complaint, the individual defendants moved to dismiss the claims against them.

The trial court denied the motion to dismiss stating that:  (1) the corporation was dissolved at the time work was being performed; therefore, the Wittes were dealing with individuals at that time and not agents of the corporation; (2) dismissing [the individual defendants] could be prejudicial because the motion to dismiss was filed nearly three years after the action was commenced; and (3) the [individual defendants] actively engaged in litigation and individually raised counterclaims against the Wittes.  Slip Op. at 4.

Ultimately, two of the individual defendants were found liable on the Witte’s claims.  Needless to say, that decision was appealed.

      Reversing the determination that the individuals were personally liable, the Court parsed KRS 271B.14-22(3), the predecessor to now applicable KRS § 14A.7-030, both of which provide that upon the reinstatement of a dissolved entity, the reinstatement shall “related back to and take effect as of the effective date of the administrative dissolution or revocation” and the organization shall proceed forward as if the administrative dissolution “had never occurred.”  Slip Op. at 5.  Noting that the statute does not impose a time limitation for seeking reinstatement after administrative dissolution, it relied upon the 2005 ruling of the Court of Appeals in Fairbanks Arctic Blind Co. v. Prather & Associates, Inc., the Harshman Court writing that:

As reinstatement of a corporation relates back to the effective date of dissolution and operates as if dissolution never occurred, it naturally follows that the shareholders and officers of such corporation are not individually liable for actions undertaken on behalf of the corporation during its dissolution.  Slip Op. at 6.

      The Court of Appeals did remand to the trial court the argument, not previously addressed, that the corporate veil of Harshman Construction should be pierced.

      As to the effect of the reinstatement, this ruling of the Court of Appeals is normatively accurate for the reasons previously reviewed in section 9.5 of Dissolution of a Limited Liability Company, that being Chapter 9 of Limited Liability Companies in Kentucky (UK/CLE 2011).   The holding is as well consistent with both eServices, L.L.C. v. Energy Purchasing, Inc., 2012 WL 404957 (E.D. Ky. Feb. 6, 2012) and Pannell v. Shannon, No. 2010-CA-001172-MR (Ky. App. Aug. 26, 2011).  Further, it is consistent with the statutory amendments approved by the 2012 Kentucky General Assembly.  By means of that amendment, it creating KRS § 14A.7-030(3)(c), it is now express that upon reinstatement:

The liability of any agent shall be determined as if the administrative dissolution or revocation had never been heard.

KRS § 14A.7-030 as amended by 2012 Ky. Acts, ch. 81, § 83.