Boilerplate Matters: The Anti-Reliance Clause

Boilerplate Matters: The Anti-Reliance Clause

      All too often the “boilerplate” section of the contract is ignored. This lack of scrutiny is ill-advised as the language therein can have a material impact upon a decision, as exemplified in a recent ruling from Delaware.

     Mid-Cap Funding X Trust v. Graebel Companies, Inc., C.A. No. 2018-0312-MTZ (Del. Ch. April 30, 2020) involved the interpretation of a settlement agreement and the after-the-fact discovery by the plaintiffs that the defendant's representations made in the course of the settlement negotiations were incorrect. On that basis, the plaintiffs brought a complaint alleging fraudulent concealment, breach of the implied covenant of good faith and fair dealing, mistake and unjust enrichment. Those claims were rejected on a motion to dismiss because the Settlement Agreement contained both anti-reliance and integration clauses. As to the former, the Settlement Agreement stated that each party thereto do “is not entering into this Agreement in reliance upon any representations, promises or assurances other than those expressly set forth in this Agreement.” As for the integration (sometimes referred to as the merger) clause, the Agreement provided that it “supersedes any prior contracts, understandings, discussions, and agreements among the parties.” For that reason, the court dismissed the assertions, holding that any negotiations leading to the settlement agreement were “outside the four corners of the Settlement Agreements” and could not be considered.

An Oral Contract Is Not Worth The Paper It Is (Not) Written On

An Oral Contract Is Not Worth The Paper It Is (Not) Written On

In a decision rendered in February of this year by a New York Court, there was again illuminated the rule that oral contracts are typically not worth the paper they are (not) written upon. In this instance, a shareholder asserted that a side oral agreement would permit him to significantly increase his holdings in the corporation. On the basis of the other agreements, they being written, precluded an oral contract, this assertion was rejected. Blobel v. Kopfli, 2018 NY Slip Op  30298(U), 2018 WL 984847 (N.Y. Sup. Feb. 20, 2018).

Dr. Günter Blobel, a recipient of the Nobel Prize in medicine, was the cofounder of Chromocell, a biotechnology company based substantially upon technology code invented by Dr. Blobel. The other founders of Chromocell were Dr. Shekdar, Dr. Blobel’s research assistant, and Christian Kopfli, an attorney. Once formed, Kopfli served as the CEO of Chromocell and Dr. Shekdar served as its chief science officer.

At the time of Chromocell’s formation, Dr. Blobel was employed by the Rockefeller University Laboratory of Cell Biology and as well held the position of Investigator at the Howard Hughes Medical Institute (HHMI). HHMI’s rules limited Dr. Blobel to owning “more than a 5% ownership interest in a company.” In light of this limitation, Dr. Blobel agreed to accept a 3.9% equity interest in Chromocell, with the balance being split equally between Dr. Shekdar and Kopfli. In connection with the organization of Chromocell, the parties, including Dr. Blobel, entered into a variety of agreements including a stock agreement and an independent contractor services agreement. Dr. Blobel would assert that there was a unwritten agreement that, to the extent that the rules of the HHMI would allow him to subsequently hold a greater ownership interest in the company, his allocation of shares would be adjusted accordingly

In 2012, HHMI revised its rules, allowing persons such as Dr. Blobel to own “less than a controlling interest” in a company. Upon this change in HHMI rules, Blobel believed that the alleged oral agreement should allow him to increase his share ownership to one-third of Chronocell, thereby rendering himself, Kopfli and Dr. Shekdar equal shareholders. After exchanging numerous emails on the point and as well a dinner, it was clear that neither Kopfli nor Dr. Shekdar would agree to increase Blobel’s ownership in the company; they even offered to buy out his interest in the company for $10,000,000. Refusing those offers, Blobel filed suit seeking, amongst other relief, specific performance on the alleged oral reallocation agreement.

Responding to the complaint, the defendants filed a motion to dismiss on the basis that there were no grounds for relief. In this decision, that motion for relief would be granted.

Each of the stock and the consulting agreements signed by Blobel, the former otherwise providing for his 3.9% ownership interest, were “fully integrated agreements.” Being fully integrated, the “merger clause thereof indicated that the agreement ‘establishes the parties’ intent to finalize all negotiated terms in the agreement.” With respect to the consulting agreement, it provided that “it constitutes the ‘entire understanding between the parties and supersedes, replaces and takes precedence over any prior or contemporaneous understanding or oral or written agreement.’” With respect to the stock agreement, it provided that “there have existed or exist no agreements or understandings, written or oral, between the company and [Dr. Blobel] or entered into by [Dr. Blobel] for the benefit of the company.” The court found that these agreements “constitute a concerted effort by the parties to finalize the terms of their agreement.”

Ultimately, the court would find:

Additionally, by executing the Agreement, Dr. Blobel sought to be bound by each Agreement’s merger clause, which expressly repudiated all prior agreements. Dr. Blobel’s argument requires the court to accept that, despite agreeing to reject all prior agreements on the issue, Dr. Blobel nevertheless believed the Allocation Agreement was exempt from those clauses’ controlling reach, even if it misrepresents the Agreements’ stated terms. This the court declines to do, particularly, when enforcing the Allocation Agreement would uproot each written Agreement’s merger clause and recital of Dr. Blow Blobel’s 3.9% equity ownership.

Additional arguments based upon, for example, unjust enrichment and equitable estoppel were rejected on the basis that they were inconsistent with the express written agreements.

Once again, the rule is clear; if you want your contract to be enforceable, it needs to be in writing.

Another Case on Contract Architecture and a Signature Not at the Bottom of the Writing

Another Case on Contract Architecture and a Signature Not at the Bottom of the Writing

      In a decision rendered on May 1, 2015, the Kentucky Court of Appeals considered the enforceability of an agreement that was signed not at the end but above the final provisions of the agreement. See C.A.R.S. Protection Plus, Inc. v. Mamrak, No. 2014-CA-000470-MR (Ky. App. May 1, 2015) (not to be published).

      Mamrak bought a used car and, in connection therewith, bought a vehicle service agreement from C.A.R.S. Protection Plus, Inc. (“CARS”).  At the time he bought the car, a used BMW, the odometer read 130,269 miles. CARS issued a “warranty coverage card” reciting (a) the coverage would begin on October 20, 2011 (nine days after the car was acquired) and end on January 20, 2012, and (b) identifying the mileage range for which coverage was provided as between 130,269 and 134,769. Essentially, the coverage period was the lesser of six months or 4,500 miles.

      The day after the car was purchased, it exhibited trouble which was, at least temporarily, resolved by a new thermostat. However, problems again arose, and the thermostat was replaced again, as was the water pump. When problems continued the vehicle was towed to a garage, where Mamrak was told that the motor would have to be replaced. Mamrak incurred cost of $7,785.93, of which CARS paid $63.48. CARS defended any additional liability on the basis that the engine problems manifested themselves on October 12, 2011, the day after the vehicle was purchased but before the service contract’s effective date of October 20. Further, CARS would rely upon the terms of the service agreement which provided: “component failures that occur before [CARS] approves this limited warranty application are not covered.” Mamrak noted that this language appeared in the contract below his signature line, and therefore the limitation did not constitute part of the agreement. In response thereto:

CARS argued that the location of Mamrak's signature on the application was irrelevant to the operation of the vehicle service contract. It contended that even if Mamrak's signature had been required to make an enforceable contract, language sufficient to incorporate all the terms of the agreement was immediately proximate or adjacent to his signature. Finally, CARS contended that if Mamrak’s position were accepted, and only those terms found above his signature are part of the agreement, then the service contract is utterly meaningless since all of the operative terms (including the coverage description) are included below his signature on the application. It argued that no agreement could exist under the circumstances.

      Initially, the Oldham Circuit Court issue partial summary judgment in Mamrak’s favor to the effect of the language under his signature was not part of the agreement. This determination was based upon KRS § 446.060(1), which requires, inter alia, that any signature on a document appear at close to the end of the document when the contract is otherwise required by law to be signed by a party thereto. In response to a second motion for summary judgment, and here limited by the prior determination striking the language below Mamrak’s signature, “CARS argued the no valid contract had been created. It claimed that the document--as redacted by the Court--lacked definite and essential terms and did not reflect any actual agreement between the parties. CARS sought summary judgment on the basis that no contract had been formed between the parties.” In turn the trial court determined that the language above Mamrak’s signature was sufficient to create a contract. After further fact-finding based on affidavits, CARS was ordered to pay $5,519.61 towards the powertrain repairs.

      In my view, unfortunately, the Court of Appeals essentially sidestepped the interrelationship of Kentucky's rules as to the formation of the contract, including as set forth in Cinelli, and the treatment of the language below a signature as being excluded from the contract. Rather, resolving the question “without reference to the location of the signature line and [the] dispute over terms appearing above or below it,” the Court found that the agreement was binding on October 20, 2011, that the car was still operating on that date and that “the bulk of the necessary repairs occurred on October 25 and again in November 2011.” From there the Court was able to determine that “[T]he vehicle service agreement standing alone was in effect and covered the cost of repairs.” Presumably this last clause was meant to apply as of the date the repair costs were incurred.

      In addition, albeit without analysis, the Court of Appeals determined that the service contract is enforceable under the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act, it being simply stated that “Mamrak is entitled to enforcement of a vehicle service contract under both the spirit and the letter of the Act.”

Kentucky Supreme Court Finds No Agreement to Arbitrate Disputes; Document Architecture Matters

Kentucky Supreme Court Finds No Agreement to Arbitrate Disputes;
Document Architecture Matters

      In a decision rendered last month, the Kentucky Supreme Court held that students enrolling at Daymar College did not agree to arbitrate their disputes with the college.  In part this decision was based on the curious architecture of the agreement at issue.  Dixon v. Daymar College Group, LLC, __ S.W.3d ___, 2012-SC-000687-DG, 2015 WL 1544450 (Ky. April 2, 2015).

      Certain students brought action against Daymar based on allegations of fraud in the enrollment process, breach of contract, etc.  They also sought class action status.  Daymar sought to refer the complaints to arbitration.  In opposition to their efforts the students asserted, inter alia, that there was no agreement to arbitrate. 

      Students enrolling at Daymar completed a variety of forms.  One of those forms contained, on its reverse side, an “agreement” to arbitrate all disputes.  The signature block appeared, however, on the front of the document, and it never provided above the signature that the language on the reverse was incorporated by reference. 

      The trial court denied arbitration.  On appeal, the Court of Appeals reversed that decision.  That ruling is reviewed HERE IS A LINK.  The Supreme Court would reverse the Court of Appeals and affirm the decision of the trial court.  Ergo, no enforceable agreement to arbitrate.

      Kentucky has a statute, KRS § 446.060, which provides that the signature of a party to an agreement must appear at or near the end of the agreement, a requirement applicable only to agreements which must be in a signed writing.  While an agreement to arbitrate need not be in a signed writing, the programs for which the students enrolled all exceeded a year in length.  As such the enrollment documents needed to satisfy the Statute of Frauds (KRS § 371.010(7)).  From there KRS § 446.060 was applicable, and the agreement to arbitrate on the reverse of the signed document would be effective only if it was incorporated by reference above the signature block.  The Supreme Court found there to be no such incorporation.  Further, each student’s acknowledgement that they had read the reverse could not be extended into an agreement to be bound by the terms set forth on the reverse.

Elemental Principles of Contract Law

Elemental Principles of Contract Law

      Last week, the Kentucky Court of Appeals issued a generally uninteresting decision with respect to a foreclosure. Of interest, however, are the elemental rules of contract formation and interpretation which the court relied upon in making that determination. Dimitrov v. PBI Bank, Inc., No. 2013-CA-002087-MR (Ky. App. March 27, 2015).

      One allegation that the Court rejected was that the bank had violated its obligation of good faith and fair dealing by failing to provide Dimitrov with information as to the outstanding balances on the subject loans. Initially noting that the information had actually been provided, the Court focused as well on the fact that those terms had been set forth in loan modification agreements. With respect thereto, the Court wrote that:

One who signs a contract is presumed to know its contents, and if he had an opportunity to read the contract he signed, he is bound by its provisions.

Slip op. at 5. In connection therewith, the court cited Hathaway v. Eckerle, 336 S.W.3d 83, 89 (Ky. 2011).

      Dimitrov also claimed that PBI had violated a duty by failing to afford him until a certain date to move the loan to another bank or work out a payment plan with PBI. Rejecting this assertion, the Court noted that:

Dimitrov has not pointed to any evidence in the record which indicates that PBI or any of its agents offered Dimitrov an extension. The only mention of this extension through October 2012 is in an email from Dimitrov to PBI’s loan officer, Joe Varner, in which Dimitrov requests an extension. Dimitrov produces no reply to indicate that an extension would be granted. This one-cited proffer is obviously insufficient.

Slip op. at 6, emphasis added.

Court of Appeals Holds Option Agreement Unenforceable for Failure to Address Material Terms

Court of Appeals Holds Option Agreement Unenforceable for

Failure to Address Material Terms

 

      In a decision rendered last week by the Kentucky Court of Appeals, it held that an option agreement o purchase a business and the related real property from which it operated was unenforceable in that it failed of itself to address all of the material terms of the purported deal.   Rose Mary Hubbs Brewer v. John M. Parsons 2007 Revocable Trust, No. 2013-CA-001309-MR (Ky. App. March 27, 2015).

      This dispute arose out of the question of whether there could be enforced in agreement “for the purchase [sic - of] all of the stock and assets of Knox Body Shop, Inc. (Knox), along with the real property that Knox was situated upon.” Consistent with other Kentucky law to the effect that only an agreement which sets forth all of the material terms will be enforcable to uncertainty (i.e., agreements to agree are not themselves enforceable; HERE IS A LINK to an earlier posting on the same topic) the court stated that an option agreement will be enforceable only if the “material terms” are “fixed with reasonable certainty. Citing Hisle v. Keltner, 495 S.W.2d, 773, 775 (Ky. 1973), it was observed that:

An option contract must be complete and certain in its terms, that is to say, the parties and its subject matter must be identified by it, and the terms and provisions of the contract must be stated in writing, if required to be in writing, or established by competent evidence, if not required to be in writing, with that certainty and definiteness which will enable a court to determine that the parties, by an election thereunder, have concluded an agreement and also what the exact terms of that agreement are.

      Turning to the language of the agreement under consideration, the court determined that the description of the real properly purportedly subject to the option was insufficient in that parole evidence would be necessary to supply its description; under Hisle, reference to parole evidence is not allowed with respect to the enforcement of an option. Further, the agreement was found to be insufficiently definite in that there was no agreement as to how the option price would be paid, including the terms of the promissory note that could be presented in payment.

      On this basis, the trial court’s determination that the option agreement was unenforceable was affirmed.

Pannell v. Shannon – A Cornicopia of Guidance on Contract Law, Statutory Interpretation and the Place of LLCs in the Law

Pannell v. Shannon – A Cornicopia of Guidance on Contract
Law, Statutory Interpretation and the Place of LLCs in the Law

      The Kentucky Supreme Court’s decision in Pannell v. Shannon is of great utility on a variety of fronts including identifying a test for when an agreement is executed by an agent versus by a principal, the effect of administrative dissolution/reinstatement upon an agent’s liability, rules for interpreting statutory amendments, and the importance on focusing upon the LLC Act over the common law in assessing LLCs.  Pannell v. Shannon, 425 S.W.3d 58 (Ky. March 20, 2014).

      The dispute arose out of a defaulted lease.  Shannon’s LLC was the tenant – that LLC was during the term of the lease administratively dissolved.  A replacement lease was entered into in the period between the administrative dissolution and the LLC’s reinstatement.  When the LLC ultimately defaulted the landlord sought to hold Shannon liable on the obligation.

Was the Lease with Shannon or the LLC?

      The lease agreement entered into during the period of the LLC’s administrative dissolution described the tenant as being the LLC, but the signature line did not specify that Shannon signed it in a representational capacity (e.g., “Ann Shannon, Sole Member, on behalf of Elegant Interiors, LLC”).  The Court held that level of specificity to not be necessary.  Rather, noting that it indicated “By:” and in reliance upon Fletchers Cyceopedia, the Court found this format, combined with the fact that the body of the lease identified the LLC as the tenant, to be sufficient to indicate she was not signing in an individual capacity.

[T]he simple fact is that Shannon did not have to list her title, although clearly the better practice is to include it.  425 S.W.3d at 64.

Scrivener Error?

      Pannell sought to argue that the identification of the LLC as the tenant was a “scrivener error” and that it was always intended that Shannon as an individual be the tenant.  This argument was rejected on the basis that “full, clear, and decisive evidence” of a mutual mistake was not presented.  425 S.W.3d at 67.

The Effect of Administrative Dissolution/Reinstatement

      The real crux of the decision is the impact of administrative dissolution and subsequent reinstatement upon each of (i) a member’s limited liability and (ii) the liability of an agent on a contract entered into after dissolution and before reinstatement.  425 S.W.3d at 68.  The Court recognized that these are distinct questions based upon distinct legal principles:

“[T]he liability of a director, officer, employee or agent of a limited liability entity during a period of administrative dissolution is technically a separate question from the liability of the owners of the entity.”  425 S.W.3d at 77.  

Member Limited Liability After Administrative Dissolution

      The Court could not have been more express about the continuity of a member’s limited liability after reinstatement:

This Court concludes that a member of an [LLC] enjoys statutory immunity from liability under KRS 275.150 for actions taken during a period of administrative dissolution so long as the company is reinstated before a final judgment is rendered against the member.  425 S.W.3d at 67.

      Distancing LLCs from the common law of corporations (more on that below), the Court looked to the statutes addressing a member’s limited liability (KRS § 275.150) and the retroactive effect of reinstatement (KRS § 275.295(3)(c); now KRS § 14A.7-030(3)) and determined that reinstatement wiped the slate clean.

The plain meaning of the relate-back language is that the company is deemed viable on reinstatement from the point of administrative dissolution onward, which necessarily includes the time of suspension between the date of administrative dissolution and reinstatement.

Reinstatement under the statute literally undoes the dissolution. This is why the Secretary of State was required to “cancel” the certificate of dissolution and issue a certificate of existence. See KRS 275.295(3)(a). And that certificate of existence took effect, by statute, retroactively on the date of dissolution.  425 S.W.3d at 68.

Hence Pannell’s argument that a member’s limited liability is suspended during the period between administrative dissolution and reinstatement was rejected.

Agent Limited Liability After Administrative Dissolution

      Turning to the question of Shannon’s liability as an agent for the LLC’s obligation undertaken while the LLC was administratively dissolved, the Court noted that the question divides into a pair of inquiries, namely:

First, can Shannon under the circumstances of this case be personally liable by reason of her merely being an agent?  Second, can she be personally liable because she acted as an agent without authority?

       In response to the first question, the Court referred to KRS § 275.175(1) and noted that its rule of limited liability extends to the LLC’s agent.  As the LLC’s existence had been reinstated and:

reinstatement is retroactive to the date of dissolution, and it is as if the dissolution never occurred, giving the company a seamless existence.  The limitation on the agent’s liability simply for being an agent is likewise seamless.  425 S.W.3d at 78.

      In that the LLC in question was subsequently reinstated, the Court found there to be no opportunity for imposing liability on an agent.  Rather, as the LLC Act protects agents from liability on the LLC’s debts (KRS § 275.150(1)), then: 

To the extent that any liability is claimed solely because Shannon was a manager or agent of the LLC, the analysis above for why she cannot be liable as a member applies.  The reinstatement is retroactive to the date of dissolution, and it is as if the dissolution never occurred, giving the company a seamless existence.  The limitation on the agent’s liability simply for being an agent is likewise seamless.  425 S.W.3d at 78. 

     Providing an appropriate critical eye to the question before it, the Court observed:

The immunity provided by KRS 275.150 extends only to liability by reason of her being an agent.  By alleging that Shannon acted without authority, Pannell is not claiming she is liable solely because of her status as an agent, but because she had no authority to act as an agent.  425 S.W.3d at 81. 

In reliance upon the statutory statement that a dissolved LLC continues to exist after its dissolution, the Court found that when combined with reinstatement, Shannon never lost the capacity of being the LLC’s agent.

In response to the argument that giving such a broad affect to the effect of reinstatement is improper, the Court observed:

The simple fact is that Kentucky’s corporation law and other business entity laws differ from those in other states ….  The existence of a majority rule can only be persuasive if the rule is based on statutes like those in Kentucky.  425 S.W.3d at 79, 80.

The Nature of LLCs

No end of confusion has resulted from efforts to force LLCs into the prior models of partnerships and LLCs and to them impose the supposed common law of these organizational forms onto the LLC.  The first decision of the Kentucky Court of Appeals in Patmon v. Hobbs, 280 S.W.3d 589 (Ky. App. 2009) is a classic example of a court trying to do so.  Why that does not work was been extensively reviewed.  See, e.g., Rutledge and Geu, The Analytic Protocol for the Duty of Loyalty Under the Prototype LLC Act, 63 Arkansas Law Review 473 (2010). 

      In Pannell, the Supreme Court, building upon prior decisions, made the rule express – LLCs are creatures of statute divorced from the common law.

[The] common law of business entities has largely been abrogated by the adoption of the various statutes like the Kentucky Business Corporation Act and the Kentucky Limited Liability Company Act.  In fact, “limited liability companies are creatures of statute controlled by Kentucky Revised Statutes (KRS) Chapter 275,” not primarily by the common law. To the extent that common law doctrines could arguably govern limited liability companies, the Kentucky Limited Liability Company Act “is in derogation of common law,” KRS 275.003(1), and the traditional rule of statutory construction that “require[s] strict construction of statutes which are in derogation of common law shall not apply to its provisions.” Id. Thus, to the extent the statutes conflict with common law, the common law is displaced.

This Court must therefore first look at the controlling statutory law.  425 S.W.3d at 67-68.  (citations omitted).

      Consequently, in assessing matters involving LLCs the court needs to focus upon the LLC Act and the operating agreement of that particular LLC.  Whether, for example, LLC members are more like partners or more like shareholders is irrelevant to the question of whether the members have fiduciary duties and what those duties are – the LLC Act expressly addresses whether the members owe fiduciary duties, what those duties are and to whom they are owed.  See KRS §§ 275.170(1), (2), (4).  At the risk of redundancy:

[F]irst look to the controlling statutory law.

Continuity in Statutory Construction

      The Kentucky LLC Act provides that a LLC’s dissolution will not “abate or suspend” the rule of limited liability set forth in KRS § 275.150.  KRS § 275.300(4)(e).  Accord KRS § 271B.14-050(2)(i).  While this statute was adopted only in 2007, the Kentucky Supreme Court found this provision was not an alteration of the law but rather “clarified the intent of the legislature as to the effect of dissolution on the liability of … corporate shareholders.”  425 S.W.3d at 72.  This application of in pari mataria, which requires a nuanced consideration as to whether the General Assembly sought to alter versus clarify the meaning of a prior enactment, stands in contrast to the far more clumsy, and typically inapplicable, rule to the effect that by each amendment the legislature seeks to alter and depart from the prior rule.  In the area of business entity law, based as it is upon typically comprehensive statutory schemes, tweaking the words employed for the purposes of providing greater clarity and precision is far more typical than is a reversal or abandonment of a principle.  That is not to say it never happens, but it is relatively rare.

Subsequent Statutes Address Liability Absent Reinstatement

      While Pannell v. Shannon limits its application to the treatment of member and agent liability after there has been reinstatement, it does not follow that member and agent liability absent reinstatement remains unresolved.  Rather, questions of member limited liability have been addressed in statutory amendments enacted subsequent to the time the Pannell v. Shannon dispute arose. 

      First, KRS § 275.300, it addressing the effects of dissolution, now provides that dissolution does not “abate or suspend” the rule of limited liability.  In consequence, it cannot be argued that a member’s/manager’s/agent’s limited liability is lost upon dissolution.  In this respect it is important to note an important distinction between the corporate and LLC Acts.  The Business Corporation Act, at KRS § 271B.6-220, affords the shareholders limited liability from the corporation’s debts and obligations.  Hence, KRS § 271B.14-050(2)(i), in preserving limited liability upon dissolution, preserves it only for the shareholders.  Put another way, KRS § 271B.14-050(2)(i) does not speak to the liability of corporate directors, officer and agents for a corporate liability undertaken post-dissolution and absent reinstatement.  In contrast, the grant of limited liability in the LLC Act, KRS § 275.150(1), applies not only to members but also managers and agents.  Hence the preservation of limited liability after dissolution as affected by KRS § 275.300(4)(e) is broader than is the equivalent provision in the Business Corporation Act.  Now, whether after dissolution and before reinstatement one was an “agent” may be in dispute, but that is resolved under other law.

      Second, it has been made express that upon reinstatement following administrative dissolution, the liability of an agent for actions undertaken during the period of dissolution “shall be determined as of the administrative dissolution or revocation had never occurred.”  KRS § 14A.7-030(3)(b).  See also 425 S.W.3d at 81, note 20.

      Third and last, in response to Martin v. Pack, the acts now provide that an agent may after dissolution enter into contracts appropriate for the entity’s winding up and liquidation.  See KRS § 275.300(2)(a); id. § 271B.14-050(1)(c).

More on Member Limited Liability

      Building upon the earlier decision in Racing Investment Fund 2000, LLC, the Court highlighted the centrality of limited liability to the LLC and imposed a high bar for setting it aside.  425 S.W.3d at 66.  As such, where it is questionable whether an agent enjoys limited liability, the presumption will be that it is available.  It remains to be seen whether and how this attitude will impact upon whether and how is developed a distinct theory for piercing LLCs.

More on the Nature of Administrative Dissolution

      In Pannell, the Kentucky Supreme Court considered the purpose of administrative dissolution and rejected an effort by a third-party to impose liability upon a dissolved LLC’s agent for an LLC obligation based upon “the temporary faltering of the relationship between the LLC and the state to [the third-parties’] advantage when [the third-party] has no interest in that relationship.”  425 S.W.3d at 84.  Administration dissolution to be little more than a speed-bump in the bilateral relationship between the Commonwealth and an entity created under the laws thereof.

More on the Source of Duties in LLCs

      The Supreme Court has directed that the first source of LLC law is the LLC Act and recognized that LLCs are strangers to the common law.  In Patmon v. Hobbs, the Court of Appeals imposed fiduciary obligations upon the “officers and members” of an LLC based upon the determination that LLCs are “similar to Kentucky partnerships and corporations.” 280 S.W.3d at 594-95.  The Pannell decision significantly undercuts (if not more) this analytic path, and directs that rather than relying upon analogy to other organizational forms the focus needs to be upon the language of the LLC Act.  In that the LLC Act defines who owes fiduciary duties, to whom they are owed and what are those duties (KRS § 275.170), there the question should end.

A Small Footfault on Member – versus – Manager-Managed

      It bears noting that the Court made a small misstep in its consideration of agency and the application of KRS § 275.135.  This statute provides, inter alia, that in a member-managed LLC each member as a member is an agent of the LLC while if the LLC is manager-managed the managers are agents and the members are not by reason of that status agents.  The Court suggested that the determination of whether the LLC is member or manager managed is determined by a factual assessment of the management employed.  See 425 S.W.3d at 76, fn. 17.  In fact, whether an LLC is member or managed is a positive law question determined by reference to the election made in the articles of organization.  See also KRS § 275.025(1)(d).  As set forth in the comment to Prototype section 401, “Irrespective of the provisions in the operating agreement, whether a LLC is ‘manager managed,’ as that phrase is used in the Act, depends on whether the articles of organization so provide.”