Equal Protection of Grocery Stores in the Sale of Alcoholic Beverages

Equal Protection of Grocery Stores in the Sale of Alcoholic Beverages

 

      Kentucky has had, since the end of Prohibition, a statute providing, inter alia, that a package license for the sale of wine and spirits may not be issued to any retailer whose business is otherwise comprised primarily of the sale of either staple groceries or gasoline and lubricating oil.  KRS § 274.230(7).  The effect of this statute is that while grocery stores and gas stations/convenience stores may sale beer, they are precluded from selling wine and spirits.  It is because of this statute that you all can see, for example, a Kroger grocery store immediately adjacent to a Kroger wine and spirits shop, they each having separate entrances.  In that the separate store does not derive a significant portion of its sales from staple groceries, the separate store being considered distinct from the grocery store, this statutory prohibition is satisfied.

      In 2011 Maxwell’s Pic-Pac, a Louisville based grocery store and the Wine With Food Coalition asserted that this statutory distinction lacks a “rational basis,” and as such violates the Equal Protection rights of the impacted groceries and gas stations.  In 2012 Judge Heyburn issued his ruling on that challenge, determining that, irrespective of distinctions that may have existed shortly after the repeal of Prohibition between grocery stores and pharmacies (during Prohibition, pharmacies were still allowed to distribute “medicinal” alcohol), those distinctions have long since ceased.  Rather, today, grocery stores often contain pharmacies while pharmacies often sell staple groceries.  His decision was in turn appealed to the Sixth Circuit.

      On January 15, 2014, the Sixth Circuit issued its decision in this case, reversing the determination of Judge Heyburn and finding that the statute satisfied the Equal Protection clauses rational basis standard.  The basis of this determination is not, however, entirely clear.  With respect to grocery stores, the Court noted that certain individuals have objections to either alcoholic beverages in general or to, in particular, wine and spirits.  Reasoning that everyone is obligated to regularly purchase groceries, the Court found that precluding grocery stores from selling wine and spirits preserves that environment as one in which Kentuckians with those objections are not forced to confront wine and spirits.  As to gas stations/convenience stores, the court’s reasoning is even less clear, never really explaining how they are distinct from other retailers who are permitted to sell wine and spirits.

      Ultimately, the decision of the Sixth Circuit Court of Appeals is rather unsatisfactory.  Judge Heyburn’s decision contained a detailed analysis of Equal Protection law and a careful review of each of the proffered basis that would support the existence of a rational basis for the statute.  The Sixth Circuit neither explained its rational basis analytic paradigm nor detailed exactly what theory or theories applied to distinguish grocery stores and gas stations/convenience stores from other retailers.  As of this writing a motion for reconsideration or rehearing en banc is pending before the Sixth Circuit.

      My law partner Stacy Kula and I have written an article reviewing this decision and in particular criticizing the analysis (or specifically, the lack of analysis) utilized by the Sixth Circuit.  That article has been accepted for publication by The Kentucky Law Journal Online and is available on both SSRN and on the SKO website. Here is a LINK to the article.

The Fifth Circuit Court of Appeals Confirms What We All Feared, Namely That We Do Not Understand Series

The Fifth Circuit Court of Appeals Confirms What We All Feared,

Namely That We Do Not Understand Series

A recent decision of the Fifth Circuit Court of Appeals considered and largely remanded to the trial court a dispute turning in part on the characteristics of the series of a limited liability company.  In doing so the Fifth Circuit confirmed that many important questions with respect to series remain unresolved.  That lack of clarity cautions against the use of the series structure in all but the most highly-lawyered environments.  Alphonse v. Arch Bay Holdings, L.L.C., No. 13-30154, 2013 WL 6490229 (5^th Cir. Dec. 11, 2013). 

The suit began simply enough, a “plain vanilla” foreclosure action.  Alphonse’s home was foreclosed upon pursuant to a “confession of judgment” clause that was enforceable under Louisiana law.  Arch Bay Holdings, L.L.C. – Series 2010B, the holder of the mortgage note, filed a petition to enforce under the confession of judgment clause.  Ultimately, Alphonse’s house was sold at a sheriff’s auction.  Alphonse did not participate in or otherwise challenge the foreclosure action.  He did, however, after the completion of the foreclosure, bring this action in federal court against Arch Bay Holdings, L.L.C., of which Series 2010B was a component, and Specialized Loan Servicing, LLC (“SLS”), the mortgage servicing agent, charging violations under the Louisiana Unfair Trade Practices Act and the federal Fair Debt Collection Practices Act, those suits being based upon alleged irregularities arising out of “robo-signing.”  In response, Arch Bay Holdings and SLS moved to dismiss on the basis of the Rooker-Feldman doctrine and res judicata.  Alphonse argued that his claims were separate from an objection to the foreclosure itself and that the res judicata effect thereof did not bar his claims.

The trial court granted that motion to dismiss on the basis that the Rooker-Feldman doctrine precluded the federal court from reviewing the state court foreclosure action.  Alternatively, the district court also found that res judicata barred the claims against Arch Bay.  Last, the district court determined as well that the claims against Arch Bay based upon the Louisiana Unfair Trade Practices Act should be dismissed on the basis that Delaware law determines the liability for Arch Bay for the activities of Series 2010B, the latter being the real party in interest and the separate juridical entity from Arch Bay.  With respect to this analytic path, in the words of the Court of Appeals, “Alfonse sued the wrong defendant.”  This appeal followed.

With respect to the District Court’s reasoning as to res judicata, an intervening decision of the Fifth Circuit, Truong v. Bank of America, NA, 717 F.3d 377, 381 (5^th Cir. 2013), directed that res judicata should not attach, and for that reason this panel of the Firth Circuit reversed that of the trial court as to  Rooker-Feldman abstention.  Still, Arch Bay and SLS asserted that the trial court’s dismissal should be upheld on additional grounds of res judicata and the separate legal status of Series 2010B from Arch Bay.

Those arguments would ultimately be unavailing.

The District Court had found, without any apparent factual investigation, that Arch Bay and Series 2010B had a similar identity of interest.  Distinguishing another Fifth Circuit case in which a subsidiary and parent were found, for purposes of res judicata, to effectively be alter egos of one another, the Fifth Circuit wrote:

The court’s analysis in Zatarain [v. WDSU-Television, Inc., 1995 WL 295317, at *3 (E.D. L.A. May 8, 1995), aff’d on other grounds, 70 F.3d 1143 (5^th Cir. 1996)] turned on facts such as the common CEO/President, which were particularly pertinent to the plaintiff’s discrimination claim.  In contrast, here the court dismissed Alphonse’s claims and found an identity of interest without any factual development.  2013 WL 6490229, *4.

Further, the Court noted that the legally distinct status of Series 2010B from Arch Bay requires additional investigation.  To that end:

However, as discussed below, the separate juridical status of a Series LLC with respect to third-party plaintiffs remains an open question.  We remand because there are insufficient facts in the record to determine whether the Series LLC in this case is truly separate.  The important question is that the res judicata identity of parties questioned – whether a Series 2010B and its parent Arch Bay have identical interests – ought in fairness be considered together of whether the question of whether Series 2010B is in fact a distinct juridical entity.  Id.

Before returning to the question of analyzing a series, the Court also dismissed the assertion that res judicata should attach to bar any claim against SLS on the basis that SLS, even while an agent of Series 2010B, may not have shared the same interest as it did. 

Returning to the question of the legal relationship between Arch Bay and Series 2010B, the Court first reviewed Delaware’s law of LLCs (incorrectly stating that it was reviewing “the Delaware Corporate Code”, specifically § 215 of the Delaware LLC Act and there emphasizing the fact that a series “shall have the power and capacity to, in its own name … sue and be sued.”  While noting that Louisiana law provides that “the laws of the state or other jurisdiction under which a foreign [LLC] is organized shall govern its organization, its internal affairs, the liability of its managers and members that arose solely out of their positions as manager and members.”  [La. Rev Stat. Ann. § 12:1342], the Court noted that the District Court failed to consider:

The possibility that liability to a third party like Alphonse constitutes external rather than internal affairs.  2013 WL 6490229, *6.

From there, the Court of Appeals wrote:

In light of the fact that the district court failed to consider the external-internal affairs conflict-of-law question under Louisiana law, dismissal under Federal Rule of Civil Procedure 12 without leave to amend what is error.  We remand to the district court to consider this question, perhaps with the benefit of factual development.

I have otherwise written (Again, For the Want of a Theory: The Challenge of the “Series” to Business Organization Law, 46 American Business Law Journal 311 (2009); The Man Who Tells You He Understands Series Will Lie To You About Other Things As Well, 16 J. Passthrough Entities 53 (Mar./Apr. 2013))  that the number of issues involving LLCs that are not yet understood is significant.  As has been repeatedly stated, whether the limited liability shield afforded in a state of organization will be respected in a state that does not similarly provide for series remains to be resolved and how that analysis should be undertaken is open to dispute.  The Alphonse case expands upon that caution, reminding us that irrespective of the structuring of the relationship between a series and the parent organization and the rights between them vis-à-vis those members and managers associated with the series, there is the additional question of how a third party to that relationship should be treated.  While, all things being equal, the application of res judicata as applied to business entities in a group would be expected, it remains to be seen whether a more loose or more strict variant thereof will be applied.  Essentially, this is the “Wild Wild West” of business organization laws, and almost every conceivable question remains still to be addressed.

The Affordable Care Act, Grandfathered Plans, and the Contraceptive Mandate

The Affordable Care Act, Grandfathered Plans,

and the Contraceptive Mandate

 

            The many challenges being brought by for-profit ventures they being exemplified by Hobby Lobby and Conestoga Wood, to the “contraceptive mandate” will be heard by the U.S. Supreme Court on March 25.  Those companies assert that the requirement that employee health insurance plans cover, on a no cost sharing basis, FDA approved contraceptives lack a “compelling interest” because so many plans, those that are “grandfathered,” are exempt.  For that reason it is important to understand what is and is not the effect of grandfathering. 

            Initially, the ACA requires that employer health insurance plans provide, on a no cost sharing basis, a variety of preventative care services. One, and only one, of those preventative care services is the coverage of FDA approved contraceptives.  There is no particular requirement that the plans cover contraceptives, but rather there is a requirement that the plans cover a class of goods and services of which contraception is a component.

            Plans which are grandfathered are exempt from a variety (albeit not all) of the requirements of the ACA  One of those exemptions is that grandfathered plans are not required to, on a no cost sharing basis, cover the same preventative services as are required of plans subject to the ACA.  In order for a plan to be grandfather it must essentially have not been amended or altered (e.g., reduced coverage, increased premiums) since the enactment of the ACA.  See Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34,538, 34,540 (June 17, 2010) (listing requirements for maintaining grandfathered status).  See also 26 C.F.R. § 54.9815-2714T(g) (2010)) (limited exemption of grandfathered plans from requirement to cover children to the age of 26).  The exact number of grandfathered plans as of any point in time is unknown.  Hence, while the possibility of grandfathered status is real, its actual utilization is unknown as to either the number of plans or the number of plan beneficiaries. 

            Even were reliable data as to the number of either grandfathered plans or the number of beneficiaries of grandfathered plans available, it would not follow that they do not provide/are not provided preventative care benefits, including contraception.  Many states have for years required that insurance policies issued in that state cover contraception.  See, e.g., State Policies in Brief: Insurance Coverage of Contraceptives, Guttmacher Inst., http://www.guttmacher.org/pubs/spib_ICC.pdf.  Hence, it must be expected that a grandfathered plan in one of those states will cover contraception.  True, that coverage might not be on a no cost sharing basis as is required by plans subject to the ACA, but there is coverage none the less.  Recall that Hobby Lobby, Conestoga Wood et al. are objecting not to contraceptive coverage on a no cost sharing basis, but to providing contraceptive coverage ab initio.

          Further, even in those states that do not by state law mandate coverage of contraception, there has been in place since 2000 an Equal Employment Opportunity Commission (EEOC) pronouncement that employers must cover the expenses of prescription contraceptives to the same extent they cover the expenses of other types of drugs and preventive care.  See EEOC Decision on Coverage of Contraception (Dec. 14, 2000), available at http:// www.eeoc.gov/policy/docs/decision-contraception.html. It must be expected that many employers (as well as insurers) structured their plans to comply with this directive.  Other employers will have added contraceptive coverage to their sponsored plans for purely economic reasons.

            Consequently, even a complete listing of the grandfathered plans and a counting of the plan beneficiaries would not identify those without contraceptive coverage. Rather, from that unknown universe there would need to be deleted those beneficiaries who are any of:

(i)         resident in a state mandating contraception coverage;

(ii)        provided, consequent to either the EEOC direction or a court ruling, contraceptive coverage; or

(iii)       consequent to individual plan structure otherwise provided contraceptive coverage.

            Until the various plaintiffs who cite the scope of the grandfathering exemption are able to actually quantify its impact, a task that likely is impossible, they should not be permitted to rely upon a naked assertion of its wide scope in order to in turn argue the government does not have a compelling interest in enforcing the ACA as written.  As applied grandfathering of certain plans may have little if any impact.

Barrels of Fish and the Rise of Joan of Arc

Barrels of Fish and the Rise of Joan of Arc

 

Today marks the anniversary in 1429 of the so called "Battle of the Herring," of itself an unimportant event in that misnamed contest of wills identified as the 100 Years War (by the accepted measure it lasted 116 years).

 

English forces were laying siege to Orleans (they already held Paris), and a supply convoy was brings additional armaments and food. A joint French and Scottish force attempted to intercept, but in the ensuing battle they took significant casualties. In that the food supplies were made up in part of herring, the battle received its rather non-illustrious name. Crecy and Agincourt have come down thru history as momentous events; not so Herring.

 

Still, this small battle would have a significant impact upon the path of the war. It was at this time that the young woman who would come down through his tory under the name Joan of Arc was first seeking an introduction that would lead to meeting the Dauphin. She was making little headway, and the illiterate peasant was not likely to have found her way through the byzantine rules of the French court. That is, until, one of her visions allowed her to tell of the losses at the Battle of the Herring, news that had not yet reached that part of France. With that revelation she began her journey to the head of the French army and the ultimate relief of Orleans.

Kentucky Supreme Court Addresses of Scope of Corporate Director’s Statutory Fiduciary Duties

Kentucky Supreme Court Addresses the Scope of Corporate Directors Fiduciary Duties and Limitations on Culpability

 

 

      Earlier today the Kentucky Supreme Court issued its long-awaited decision in the case now styled Baptist Physicians Lexington, Inc. v. The New Lexington Clinic, P.S.C., which case had previously been styled The New Lexington Clinic, P.S.C. v. Cooper.  Therein, the Kentucky Supreme Court provided useful guidance with respect to when the statutory formula for a director’s fiduciary duties, as well as the limits upon culpability, set forth in KRS § 271B.8-300 are and are not applicable.  Baptist Physicians Lexington, Inc. v. The New Lexington Clinic, P.S.C., 2012-SC-000242-DG, 2013 WL 6700209 (Ky. Dec. 19, 2013).  This opinion, which is designated for publication, was a unanimous decision of the Supreme Court.  The author of the opinion was Justice Abramson.

      Drs. Cooper, McKinney and Winkley, each a shareholder in and director of The New Lexington Clinic, P.S.C. (the “NLC”), were recruited to join a competing healthcare provider.  After agreeing to join the new venture, however, they did not immediately tender their resignations, but remained for a significant period of time directors able to access the financial information of NLC, and it is asserted, provide that information to their new employer.  Also, after having agreed to leave NLC, but before giving notice of doing so, some or all of the physicians solicited other employees of NLC to ultimately depart with them.  After those departures, NLC brought suit against the physicians alleging breach of fiduciary duties, but without making any reference to KRS § 271B.8-300.  Rather, they relied upon common law fiduciary duties owed a corporation, duties previously accepted to be part of Kentucky law under the Aero Drapery and Steelvest decisions.  The trial court granted summary judgment, primarily (at least for these purposes) on the basis that the complaint failed to cite and therefore state a claim under KRS § 271B.8-300.  That decision was affirmed by the Court of Appeals.

      The Supreme Court granted discretionary review and heard oral arguments on March 14 of this year.  As I here summarized on March 19, on behalf of the Defendants, it was argued that:

·                     KRS § 271B.8-300 sets forth the only fiduciary duties of a director of a Kentucky business corporation and also specifics the threshold of culpability for asserting damages against a director for breach thereof; and

·                     There is no causal linkage between any violation that may have occurred and the damages now claimed by the Plaintiff.

      In contrast, the Plaintiffs argued that:

·                     Under the modern Rules of Civil Procedure, it is not necessary to cite the statutory basis of the claim;

·                     Even if KRS § 271B.8-300 is the exclusive statement of a director’s fiduciary duty and the limits on a monetary claim for breach of those duties, the limits do not apply when the violation of duty does not take place in the course of discharging the duties of a director.

      Essentially, the Supreme Court has here agreed with the arguments of The New Lexington Clinic stating:

Contrary to the lower courts’ conclusions, KRS 271B.8-300 does not abrogate common law fiduciary duty claims against directors in Kentucky but essentially codifies a standard of conduct and a standard of liability for directors that is derived from business judgment rule principles.  As it explicitly states, the statute applies to “any action taken as a director” and “any failure to take any action as a director.”  Preparing for and participating in a competing venture does not constitute the internal corporate governance conduct addressed in KRS 271B.8-300 and consequently the statute does not apply.  Slip op. at 2.

       With respect to the standards applicable to a corporate director in the discharge of their obligations on behalf of the corporation, the Court held, inter alia, that the statutory formula is the exclusive standard, writing:

[KRS 271B.8-300] codifies both the standard of conduct applicable to a director and the circumstances in which the director can be held liable for monetary damages or subjected injunctive relief.  Significantly, subsection (5) limits a corporate director’s liability but it does so only in the context of “any action taken as a director or any failure to take any action as a director.”  In short, when acting in his or her directorial capacity, a director must comply with the statutory standard of conduct.  If he fails to do so, injunctive relief is available and if the conduct at issue is willful, misconduct or reflects wanton or reckless disregard for the corporation and its shareholders, then monetary damages may also be recovered.

Looking at the other side of the coin, the Court wrote:

But just as clearly, [271B.8-300(5)] does not purport to address circumstances where a director is acting, not in his capacity as a director, but in his own individual interest with respect to a matter beyond the conduct of the corporation’s business, even if that extra-corporate matter may have some impact on the corporation.  If a director is acting on his own accord in anticipation of competing with the corporation which he still serves, that conduct implicates the director’s common law fiduciary duties, not KRS 271B.8-300.

            I do have one small quibble with this decision based upon a small apparent conflict with the Supreme Court’s decision in Ballard v. 1400 Willow (Nov. 21, 2013).  Specifically, the decision rendered in Baptist Physicians Lexington provides:

Kentucky Courts have long recognized that corporate directors owe fiduciary duties to the corporation and its shareholders, duties emanating from common law.  Slip op. at 7, 2013 WL 6700209, *4.

In support thereof, there was cited the decision rendered in Urban J. Alexander Co. v. Trinkle, 224 S.W.2d 923, 926 (1949).  My concern is that the statement that corporate directors owe fiduciary duties to the “shareholders” may create an undesirable conflict with the decision rendered in Ballard v. 1400 Willow wherein the Kentucky Supreme Court interpreted the provision of the Nonprofit Corporation Act that is identical to KRS § 271B.8-300(1) to the effect that the director’s fiduciary duties are owed to the corporate entity and not to the individual shareholders.  Ballard v. 1400 Willow, slip op. at 20, 21.  That said, accepting that the statement in Baptist Physicians Lexington as to who is the beneficiary of the board’s fiduciary duty is dicta, while it is Ballard v. 1400 Willow a core component of the case as holding, the apparent conflict may be avoided.  That being the case, there is preserved the distinction between the two decisions, namely Ballard v. 1400 Willow addressing to whom the director’s fiduciary duties are owed while Baptist Physicians Lexington addresses when the statutory definition of the fiduciary duties owed and the application of the limitations on culpability for breach thereof are applicable.

Delaware Chancery Court Addresses Status as a Member of LLC, “Corporate” Opportunity Doctrine and Breach of Fiduciary Duty

Delaware Chancery Court Addresses Status as a Member of LLC,

“Corporate” Opportunity Doctrine and Breach of Fiduciary Duty

 

      A Delaware Chancery Court decision from this summer addresses an all too common situation, namely the break down in an equally-owned LLC with each of the opposing sides then seeking to protect what they think to be their rights.  Grove v. Brown, 2013 WL 4040495 (Del. Ch. Aug. 8, 2013).

      Marlene and Larry Grove entered into an operating agreement with Melba and Hubert Brown for Heartfelt Home Health, LLC, a Delaware limited liability company.  The operating agreement provided that each would be a 25% member and that each was obligated to make a $10,000 contribution to the LLC.  While the business was initially successful, at the end of the first year, in the course of working on the tax returns, a dispute arose because neither Larry Grove nor Melba Brown had yet satisfied the full $10,000 capital contribution.  Ultimately, Melba would contribute the full $10,000 while Larry would contribute an additional $3,657, asserting that the balance was satisfied by furniture and equipment he contributed to the LLC.  The Browns contested that valuation.  As this dispute was simmering, Marlene Grove, even as she continued her employment with the LLC, formed a new Maryland LLC for the purpose of engaging in that jurisdiction in a similar line of business as that of Heartfelt.  The place of business of this new LLC was less than ten miles from that of Heartfelt, the original LLC.  Ultimately the Groves would form as well another Delaware LLC, it engaging in a similar line of work in Delaware as that undertake by Heartfelt.

      Ultimately, the Groves decided to sever their relationship from the Browns, requesting a buyout in the amount of $941,000.  In addition, they stated an intention, presumably in the alternative, to move for the dissolution and liquidation of Heartfelt.  In response, the Browns first suggested an independent appraisal of the company, which offer was rejected.  Thereafter, the Browns sought to merge the Heartfelt Home Health LLC into another company, freezing out the Groves, this action taken on the purported basis that they held a 63% interest in the company based upon the capital contributions actually made.  Under Delaware law, the merger of an LLC may be approved by the members holding more than 50% of the current interest in the profits of the LLC.  See Del. Code Ann. tit. 6, § 18-209(b).

      The first question analyzed by the Chancery Court was whether or not the Groves and the Browns were equal owners of the company or, as asserted by the Browns, they had a majority position based upon the capital contributions made.  The Court directed that “the ownership of Heartfelt is governed by the Operating Agreement, which identifies Hubert Brown, Melba Brown, Larry Grove and Marlene Grove as the sole members of the LLC.”  2013 WL 4041495, *5.  The Court went on to note that the Operating Agreement provided that each of the four members had a capital interest of $10,000, and that “the Operating Agreement further provides that the profits and losses shall be divided among the members ‘in proportion to each Member [sic] relative capital interest in the company’.”  Id.  From there, the Court found that:

Nothing in the Operating Agreement indicates that the allocation of relative ownership interests was contingent on the Member’s actions post-signing.  Though the Operating Agreement imposes an obligation on the Members to provide capital to Heartfelt, the Operating Agreement does not provided that one member’s failure to do so divests that Member of his or her share of the company.  2013 WL 4041495, *5.   

      In that the Operating Agreement said that each of the four was an equal 25% member of the company, the Browns were 50% owners of Heartfelt, not 63% owners based upon a greater capital contribution to the company.  As such, “the purported merger transaction, in which Heartfelt merged into a company wholly owned by the Browns was a legal nullity” in that the Browns “never owned more that 50% of Heartfelt.”  2013 WL 4041495, *7.  

      Although obviously in dicta, with respect to the suggestion that  the supposed threat from the Groves to dissolve Heartfelt justified the Brown’s action in effecting the merger, the Court noted that “tit for tat is not a justification for breach for fiduciary duty under Delaware law,” and that there was no threat of dissolution in that the Groves, as 50% members, had no authority to unilaterally dissolve the company. 

      The Court then turned its attention to the breach of fiduciary duty and the usurpation of business opportunities, by Marlene and Larry Grove in setting up the LLCs that were engaged in the same line of business as Heartfelt.  Finding that both Marlene and Larry owed fiduciary duties to the LLC and the other members {note that the Delaware LLC Act, unlike the Kentucky LLC Act, does not define either what are the fiduciary duties owed by the members or to whom they are owed; rather, those duties have been developed primarily through case law and only in 2013 enacted, in at best skeletal form, into the Delaware LLC Act.  This is in contrast to the Kentucky LLC Act, which at KRS § 275.170 defines who owes fiduciary duties, to whom the duties are owed and what those duties are}, the Court reviewed Delaware law on business opportunity and determined that the companies set up by Marlene and Larry Grove in competition with Heartfelt constituted a breach of fiduciary duty.  With respect to that issue, the Court found much of the testimony to be not credible and focused on the fact that there was no “express grant of permission” from the LLC for Marlene Grove to open those other companies.  Highlighting as well the legal separation between an LLC and its members, the Court wrote:

It is unclear to what extent Marlene’s testimony, even if I accepted it as true, supports a finding that Heartfelt waived a corporate opportunity.  Marlene did not testify she presented the opportunity to expand to nearby markets to Heartfelt; she avers that she invited the Browns in their individual capacity to join her in creating new, competing entities.  Presenting an opportunity to the Browns is not the same as presenting an opportunity to Heartfelt….  In any event, as mentioned above, the Groves had the burden of proving that they had the right to pursue the opportunities which would otherwise belong to Heartfelt.  I find that they failed to meet that burden.  2013 WL 40414945, *10.

      Finding that all of the parties had engaged in some inappropriate conduct, the Court ordered that all of them account to the Heartfelt LLC for any profits they have derived that should have been earned by and paid to it, and invited the parties to come to an agreement with respect to dissolution of the company.

No Claim for Promissory Estoppel in Withdrawing Offer of At-Will Employment

No Claim for Promissory Estoppel in Withdrawing Offer of At-Will Employment

      A recent decision by Judge Hood saw him apply Kentucky’s law of employment-at-will to reject a claim for promissory estoppel while at the same time rejecting a claim for violation of the Americans With Disabilities Act (“ADA”).  McDonald v. Webasto Roof Systems, Inc., 2013 WL 5676223 (E.D. Ky. Oct. 18, 2013). 

      McDonald, then an employee of Washington Penn, applied for a position at Webasto.  At the end of the interview he was offered the position, and he advised that he needed to give two weeks’ notice.  A week after giving that notice McDonald was called by Webasto and told that a criminal background check, a drug test and a medical exam would be required.  He agreed to each.  A medical exam reported a herniated disc in McDonald’s back, but did not indicate he was unsuited for the job.  Webasto then sent McDonald to another medical facility for further investigation of his back.  Based upon that second examination and a report from a physician thereat that he could not recommend McDonald for the job, it appears (it is certainly implied but never expressly stated in the opinion) that Webasto withdrew the offer of employment.

      McDonald brought suit for violation of the ADA, asserting that Webasto withdrew the offer of employment because it regarded him as having a disability.  He also sued for breach of the employment contract and for promissory estoppel.  All these claims would be dismissed on summary judgment. 

      With respect to the claim under ADA, while acknowledging that McDonald could make out a prima facie case of unlawful discrimination, it found that McDonald would still lose.  Notwithstanding the fact that the medical assessment was open to objective questioning:

Defendant Webasto has come forward with a legitimate, non-discriminatory reason for not hiring him:  it concluded that he was not qualified based on the results of the examination of the Kentucky Back Center as reported by Dr. Lester and which stated McDonald could not perform the work required in the position for which he had been hired.  2013 WL 5676223, *4.

      The court rejected McDonald’s suggestion that this was proforma in that he was sent to the Kentucky Back Center in an effort to disqualify him from the position.  Rather:

McDonald does not dispute that Webasto could rightfully require and even condition his employment on the results of the medical examination.  Nor does McDonald suggest that the physical requirements contained in Webasto’s position description, against which his ability to perform job-related functions was measured, for anything other than job-related and consistent with business necessity.  He has provided the Court with no citation to relevant statute, regulation or case law to support his argument that an employer cannot seek a second opinion or that his pre-employment inquiry is per se limited once an initial evaluation is received.

      With respect to the charge of breach of contract, Judge Hood noted that Kentucky follows the rule of employment-at-will, stating that to be the rule unless there is a “clearly manifested intent” to the contrary.  There being no showing of a contract of employment other than on terms of at-will, the Court found there could be no action for breach of any such contract. 

      The Court went on to note that an at-will employee cannot assert promissory estoppel as the basis for damages.  2013 WL 5676226, *6.