Remand to the Trial Court to Assess Venue Clause

Remand to the Trial Court to Assess Venue Clause

      In a recent decision, the Kentucky Court of Appeals directed that, in response to a challenge to the legitimacy of a choice of venue clause, the matter be remanded to the trial court for specific findings.  Midnight Terror Productions, LLC v. Winterland, Inc., 2012 WL 5457530 (Ky. App. Nov. 9, 2012).

      Midnight Terror Productions, LLC, a Kentucky LLC, entered into a contract (the “JV Agreement”) with Winterland, a corporation based in Indiana.  The JV Agreement between Midnight Terror and Winterland contained a provision in the nature of a non-compete precluding Winterland from being involved in any similar lighting event within 50 miles of that planned between Midnight Terror and Winterland.  That contract, which contained a choice of law clause requiring that any dispute be resolved in Grant County, Indiana, in turn obligated Winterland to enter into a separate agreement (the “License Agreement”) with the Louisville/Jefferson County Metro Parks Department (“Metro Parks”).  That License Agreement provided, in the event of any dispute, for venue in a federal or state court within the Western District of Kentucky; Midnight Terror was not a party to the License Agreement.

      Seeking damages based upon Winterland’s alleged failure to complete delivery of the lighting displays by the JV Agreement’s contractual deadline as well as its participation in another lighting event alleged to violate the non-compete provision, Midnight Terror filed a breach of contract action in Jefferson Circuit Court.  In reliance upon the exclusive venue clause directing that all disputes would be heard in Grant County, Indiana, Winterland filed a motion to dismiss.  The trial court granted that motion, writing:

The terms of paragraph 16 of the agreement [the venue clause] are not unconscionable as defined in Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d 335, 341 (Ky. App. 2001) and (sic) therefore fully enforceable.  A fundamental rule of contract law holds that, absent fraud in the inducement, a written agreement duly executed by the party to be held, who had an opportunity to read it, will be enforced according to its terms.   Conseco at 341.

      Midnight Terror appealed on the basis that (i) the forum selection clause in the License Agreement between Winterland and Metro Parks should control over that in the Midnight Terror/Winterland JV Agreement and that (ii) the forum selection clause directing that disputes be resolved in Grant County, Indiana is unfair or unreasonable.  While Midnight Terror was unsuccessful on the first of these arguments, as to the second they at least lived to fight another day.

      As to the assertion that the Western District of Kentucky forum selection clause of the License Agreement between Winterland and the Metro Parks should control, the court noted that the License Agreement was separate and independent from the Winterland/Midnight Terror JV Agreement, and that the License Agreement made no reference to the other document.

There is no indication that the provisions of the License Agreement were intended to govern the contract dispute that has arisen between Midnight Terror and Winterland.  The subject matter of the License Agreement is distinct and separate from the substance of the dispute at issue.  Consequently, we hold that the forum-selection provision included in the License Agreement is neither superior to the provision in the [JV] Agreement nor is it relevant to these proceedings.

      Turning to the question of the validity forum selection clause, the court began by noting the general rule that “Forum selection clauses are presumed to be valid and enforceable in Kentucky unless the party opposing enforcement can demonstrate that circumstances render the clause unfair or unreasonable,” citing Prezocki v. Bullock Garages, Inc., 938 S.W.2d 888 (Ky. 1997).  In making that assessment, the trial court is to weigh a number of factors including:

·                    the inconvenience to the parties of holding the trial in the specified forum;

·                    the inconvenience to witnesses of holding the trial in the specified forum;

·                    the inconvenience of accessing other proof by holding the trial in the specified forum;

·                    the disparity in bargaining power that existed between the parties at the time the contract was executed; and

·                    whether the state in which the incident occurred has at least a minimal interest in the action.

      Midnight Terror cited a variety of justifications for the Court of Appeals setting aside the venue clause, including its small size, the residence of the witnesses in or near Louisville and its lack of ties to Grant County, Indiana.  It cited as well, consequent to its small size, its inability to “resist oppressive clauses included in Winterland’s contracts.”  Last, it asserted that Kentucky had the greatest interest in the action since the contract was to be performed there, and it was in Kentucky that the alleged breach took place.  Winterland, in contrast, asked the Court of Appeals to uphold the trial court’s determination that the forum selection clause is enforceable.

      Ultimately, neither party won.  Rather, the matter was remanded to the trial court for evaluation of the evidence vis-à-vis the factors informing whether or not a particular forum selection clause would be enforceable.

      In a dissent, Judge Thompson would have upheld the forum selection clause as a matter of substantive law, and additionally denied relief for failure by Midnight Terror to exercise its rights under Rule 52.02 for specific findings of fact.

It was incumbent upon the appellant [Midnight Terror] to request that the trial court make the required findings of fact as required by CR 52.02 and 52.04.  Under our Rules, the trial court does not have the burden of rendering findings of fact without a proper motion made by a party, and the trial court does not have the burden of practicing the case for either party.

The Pledge of Allegiance to the Kentucky Flag

Kentucky Has Some Strange Laws – The State Pledge of Allegiance

      Did you know that Kentucky has its own pledge of allegiance to the state flag?  It does.  KRS § 2.035 provides:

The following shall be the official pledge of allegiance to the flag of the Commonwealth of Kentucky:  “I pledge allegiance to the Kentucky flag and to the Sovereign State for which it stands, one Commonwealth, blessed with diversity, natural wealth, beauty and grace from on High.”

Business Corporation Act Does Not Govern Unincorporated Syndicates

6th Circuit Court of Appeals Confirms that Kentucky Business

Corporation Act Does Not Govern Unincorporated Syndicates

       In a November 8 decision, the 6^th Circuit Court of Appeals, on an almost summary basis, dismissed the suggestion that the Kentucky Business Corporation Act and specifically the provisions thereof affording shareholders the right to inspect corporate records should apply to an unincorporated syndicate.  KNC Investments, LLC v. Lane’s End Stallions, Inc., 2012 WL 5440032 (6^th Cir. 2012).

      KNC Investments, a member of an unincorporated syndicate managed by Lane’s End Stallions and managing the Thoroughbred Lemon Drop Kid, sought, under both the syndicate agreement and the Kentucky Business Corporation Act, financial information with respect to the syndicate as well as the names and contact information of the other syndicate owners.  Those efforts were rejected in a decision here reviewed on November 30, 2011 (“An Unincorporated Syndicate is Not Governed by Corporate Law.”).

      The dispute was then appealed to the 6^th Circuit.  The primary focus of this decision was an effort by Lane’s End to have the appeal set aside on the basis that the syndicate agreement had been expressly amended to preclude KNC’s claimed right to inspect the records.  The Court of Appeals directed that that dispute needed to be taken up with the trial judge and not with it.  At the same time, however, the court was able to reject the notion that the document inspection rights afforded under the Kentucky Business Corporation Act in some manner apply to an unincorporated syndicate:

We need no additional facts, however, to reject KNC’s claim that the Kentucky Business Corporations Act gives it the right to inspect and copy the syndicate’s records. Kentucky law treats owners of horse-ownership syndicates as tenants in common. See, e.g., Weisbord/Etkin/Goldberg v. Gainesway Mgmt. Corp., No. 2007-CA-000280-MR, 2008 WL 820950, at *1 (Ky. Ct. App. Mar. 28, 2008). And by its terms, the Business Corporations Act applies only to corporations, not to unincorporated syndicates. See Ky. Rev. Stat. §§ 271B.1-400(4) & (10) (distinguishing a “corporation,” which includes only incorporated for-profit corporations, from an “entity,” which includes unincorporated associations and persons sharing common economic interests); id. § 271B.16-020 (giving shareholders only of a “corporation” the right to inspect and copy corporate records). We thus need no additional facts to conclude that the district court correctly rejected KNC’s claims under the Business Corporations Act.

      Otherwise the case was remanded back to the district court.

Kentucky Has Some Strange Laws – The State Drink

Kentucky Has Some Strange Laws – The State Drink

      Did you know that Kentucky has an official drink?  It does.  Amazingly, here in the land of bourbon, bourbon is not the state drink.  Rather, it is milk.  KRS § 2.084.

More on Piercing - The Ky. Ct. App. Discusses Choice of Law and Inter-Tel

Piercing the Veil – The Kentucky Court of Appeals

Discusses Choice of Law and Applies Inter-Tel

      A November 2, 2012 decision of the Kentucky Court of Appeals has provided helpful guidance with respect to (i) the question of the applicable law as to piercing the veil of a limited liability entity and (ii) the application of the Kentucky Supreme Court’s Inter-Tel decision on piercing the veil.  Howell Contractors, Inc. v. Berling, ___ S.W.3d ___, 2012 WL 5371838 (Ky. App. Nov. 2, 2012).

      Howell Contractors, Inc. contracted with Westview Development, LLC, an Ohio limited liability company, to perform certain services in connection with a subdivision development.  Howell ultimately billed Westview for $1,103,569.63, of which Westview paid $923,902.06, leaving an outstanding balance of $179,666.67.  When the arrearage was not satisfied, Howell filed suit against Westview, Charles Berling (Westview’s sole member), and Charles Berling Land Corporation, and Berling Homes, Inc., it being implied in the opinion that they were either partially or wholly owned by Berling.

      As part of competing motions for summary judgment, Charles Berling, Berling Land and Berling Homes moved for dismissal on the basis of absence of liability, they not being parties to the contract with Howell.  In addition, “They further argued the doctrines of veil-piercing, instrumentality and alter-ego do not apply to LLCs ….” Summary judgment was granted to Charles Berling and the Berling entities, while summary judgment against Westview was denied.  Ultimately, an agreed judgment was entered in the amount of $179,666.97 against Westview.

Choice of Law as to Piercing

      Initially, the Court noted that the proper law to apply in determining whether the defendants other than Westview could be held liable to Howell is that of Ohio (and not that of Kentucky).  Referencing the Restatement (2nd) of Conflicts of Laws § 307 (1971), the Court wrote that “By analogy to corporate law, the rights, duties, and obligations of an LLC and its members are governed by Ohio law”, the court going on to then cite a number of cases from various jurisdictions standing generally for the proposition that piercing analysis involves the application of the law of the jurisdiction of organization (rather than the law of the situs of the dispute) should be applied.  The application of Restatement (2nd) of Conflicts § 307 to LLCs is a topic I explored in To Boldly Go Where You Have Not Been Told You May Go, 58 Baylor L. Rev. 205 (2006).

      The court went on to reject the notion that Ohio law does not address piercing of LLCs, citing Ossco Props, Ltd. v. United Commercial Prop Group, LLC, 968 N.E.2d 535 (Ohio App. 2011) for the test to be there applied.  Applying that law, the Kentucky Court of Appeals determined that the plaintiffs had not made out a case to justify piercing, writing that:

In the case at bar, while Howell has demonstrated Berling’s control over Westview and his other entities, but the conduct complained of does not rise to the level of fraud, illegality or unlawfulness. A careful review of the record discloses that Westview has merely failed to pay an entity debt. The facts are that Westview purchased a tract of land for approximately $287,000. Westview, presumably through Berling, secured a loan in the amount of $1,000,000 from Bank of Kentucky to develop the property. Berling further loaned over $485,000 to Westview, personally and through other entities, some controlled by Berling and others not controlled. The property in question is still owned by Westview. While this development has not quite panned out as planned, and Howell's preference is to be paid a little more promptly, it has a judgment which can undoubtedly be domesticated in Ohio. And, presumably, Howell exercised diligence in maintaining its security in the property by resort to Ohio’s mechanic’s lien statute. Ohio Rev. Code Ann. §§ 1311.01-1311.22.

No Piercing Even if Kentucky Law Applied

      Having disposed of the case under the properly applicable Ohio law, the court went on to consider whether the result would be any different were Kentucky law applied, ultimately determining it would not.  While obviously dicta, the Court of Appeals summarized the expanded test set forth in Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), observing:

Again, Howell has established its present inability to collect a debt owed. It has not established fraud or unjust enrichment of the type demonstrated in Inter-Tel., i.e., the “squirrel[ing of] assets into a liability-free corporation while heaping liabilities upon an asset-free corporation [.]” Id. The record does not disclose that Berling siphoned money or assets out of Westview. To the contrary, Berling put money into Westview, primarily his own, in the form of unsecured loans. As noted, Westview has assets in the form of a real estate development, and Howell, as a judgment creditor of Westview, will presumably be able to collect its judgment, with interest, as and when Westview’s property in Ohio is sold.

Piercing Kentucky LLCs

      The Court of Appeals, in a footnote, observed that “No reported Kentucky decision discusses the piercing of an LLC entity.”  While the aspects of this decisions applying the Inter-Tel analysis to these facts is obviously dicta, the Court of Appeals has at minimum undercut the validity of its statement.  Rather, it might have been more accurate for it to state that “Prior to this decision, no reported Kentucky decision discussing the piercing of an LLC.”  Regardless, this statement obviously ignored (perhaps further evidencing its consignment to the dustbin of history?) the decision rendered in Rednour Properties, LLC v. Spangler Roofing Services, LLC, 2011 WL 2535330 (Ky. App. 2011).  Still, it bears noting that in an unpublished trial court ruling written by now Justice Abramson of the Kentucky Supreme Court, it was stated that:

While it is true that the foregoing represents the law with respect to the liability of corporate officers and shareholders, equity and fairness require that those same theories of liability [piercing and personal responsibility for personally committed torts] should extend to managers and members of limited liability companies as well.

Fabing v. E Concepts, LLC, Jef. Cir. Ct. (Div. 3) No. 01-CI-06835, Order Granting Plaintiff’s Motion for Partial Summary Judgment entered June 9, 2003 (emphasis in original).

      Obviously, much more remains to be done with respect to clarifying how the Inter-Tel analysis will be applied to LLCs.

Does the Rednour Decision Have Any Continuing Viability?

Does the Rednour Decision Have Any Continuing Viability?

      I have on several occasions been asked whether the Rednour decision continues, after Inter-Tel, to have any continuing viability.  Cutting to the chase, I believe the Rednour decision should be now a dead letter with no continuing effect on Kentucky law. 

Rednour

      Rednour is a decision of the Kentucky Court of Appeals in which a divided panel upheld a trial court’s determination to pierce the veil of an LLC.  The decision is, at best, weak.  Without engaging in any analysis, and particularly failing to identify what fraud or injustice had taken place vis-à-vis the plaintiff, the veil of the LLC was set aside on factors including that the LLC had a single member, that the single member was the registered agent, and that the LLC had been set up for liability protection and for tax planning purposes.  A detailed exposition of the decision and its failings has been published in a three-part review available here:  LINK 1, LINK 2 and LINK 3.

Inter-Tel Technologies v. Linn Station Properties

      In February of this year, the Kentucky Supreme Court issued its unanimous decision (written by Justice Abramson) in Inter-Tel Technologies v. Linn Station Properties, 360 S.W.3d 152 (Ky. 2012), thereby adopting a new test in Kentucky for piercing the veil, and in so doing superseded White v. Winchester Land Development, 584 S.W.2d 56 (Ky. App. 1979). Under the new test, a series of eleven factors are examined as the first step in determining whether the veil of a corporation should be pierced, namely:

            (a)       Does the parent own all or most of stock of the subsidiary?

(b)        Do the parent and subsidiary corporations have common      directors or officers?

(c)        Does the parent corporation finance the subsidiary?

(d)       Did the parent corporation subscribe to all of the capital       stock of the subsidiary or otherwise cause its incorporation?

(e)        Does the subsidiary have grossly inadequate capital?

(f)        Does the parent pay the salaries and other expenses or          losses of the subsidiary?

(g)        Does the subsidiary do no business except with the parent   or does the subsidiary have no assets except those           conveyed to it by the parent?

(h)        Is the subsidiary described by the parent (in papers or           statements) as a department or division of the parent or is       the business or financial responsibility of the subsidiary referred to as the parent corporation’s own?

(i)         Does the parent use the property of the subsidiary as its       own?

(j)         Do the directors or executives fail to act independently in    the interest of the subsidiary, and do they instead take orders from the parent, and act in the parent’s interest?

(k)        Are the formal legal requirements of the subsidiary not         observed?  360 S.W.3d at 163-64.

      Assuming some subset of those factors have been sufficiently satisfied (the Supreme Court’s decision does not identify either a minimum number of the factors that must be satisfied or contain a weighting between them, although it did indicate that grossly inadequate capital, egregious failures to see to required formalities and disregard of the subsidiary’s separateness and domination of day-to-day decisions were most crucial; 360 S.W.3d at 164), the second step of the analysis can be undertaken, namely whether there has been a fraud or injustice perpetuated upon the plaintiff.  360 S.W.3d at 163-65. Only if such a fraud or injustice is shown is piercing then permitted.

Responses to Rednour

      The plaintiff applied to the Kentucky Supreme Court for discretionary review of the Rednour decision.  The Supreme Court denied discretionary review but did order that the decision of the Court of Appeal’s not be published; why the Supreme Court did not remand the case for reconsideration in light of Inter-Tel is simply beyond me, but that is a discussion for another day.  In addition, the 2012 General Assembly enacted amendments to both the business corporation and LLC acts, each amendment providing, inter alia, that the fact that a corporation has a single shareholder or that an LLC has a single member is not of itself justification for setting aside the otherwise applicable rule of limited liability.  See 2012 Ky. Acts, ch. 81, § 88 (creating KRS § 271B.6-220(3)); id. § 105 (amending KRS § 275.150(1)).

      As matters stand today as to the Rednour decision:

·                     The Kentucky Supreme Court has ordered the opinion not to be published;

·                     The General Assembly has expressly precluded (The Rednour decision was expressly identified to the Kentucky General Assembly in the course of the explanation of the need for the statutory amendments.) treating single shareholder/single member status, of itself, as a justification for piercing;

·                     The factors set forth in Inter-Tel justifying piercing do not include planning for liability protection;

·                     The factors set forth in Inter-Tel justifying piercing do not include tax planning; and

·                     The notion that piercing is justified because the sole member is as well the registered agent is so preposterous that it never should have been uttered but, again, the Inter-Tel decision did not identify that as a factor that justifies piercing.

Note, however, that there is unfortunate dicta in Inter-Tel that may be read to support tax planning as a justification for piercing.  The Supreme Court noted (although it did not otherwise expand upon the holding by the trial court) that piercing was available on the basis that ITS was the instrumentality or alter-ego of its parents “operated by them to achieve tax benefits and avoid various liabilities.” See, e.g., Slip op. at 3; id. at 9 (“[Members of company management] explained ITS was continued as a separate entity after its acquisition by Technologies so that Inter-Tel could gain a tax advantage by offsetting income from other subsidiaries against ITS’ net operating loss.”) While manifestly dicta, this language unfortunately perpetuates the view that the utilization of a distinct entity for the segregation of liabilities or for achieving desired consequences under the tax code is somehow suspect and justifies piercing. Hopefully, the point is no more than the utilization of a subsidiary to generate tax advantages for the parent even as creditors go unpaid is inequitable but not of itself sufficient to justify piercing.

 

      None the less, it is my assessment that the Rednour should be treated as an aberration having no further precedential value. 

Montana Supreme Court Interprets Judicial Dissolution Statute and Upholds Order Dissolving LLC

Montana Supreme Court Interprets Judicial Dissolution Statute and Upholds Order Dissolving LLC

Here is another as always excellent analysis from Doug Batey.
It should be noted, however, that the standard for dissolution under the Montana LLC Act is quite different from the standard employed in the Kentucky LLC Act.