Source: http://kentuckybusinessentitylaw.blogspot.com/2013_08_01_archive.html
Timestamp: 2017-06-25 22:28:10
Document Index: 562958436

Matched Legal Cases: ['§ 14', '§ 275', '§\n14', '§ 275', '§ 14', '§\n34', '§ 275', '§ 1332', '§ 158']

Arbitrate Entered into Through Power of Attorney Held Enforceable
There has been in Kentucky,
over the last year, a significant string of cases in which reference of a
matter to arbitration was avoided on the basis that the arbitration agreement
was entered into by a purported agent who did not have the authority to bind
the principal to arbitration. See, e.g.,
Kindred Nursing Centers Limited
Partnership v. Leffew, 2013 WL 1688361 (Ky. App. April 19, 2013), reviewed
HERE on April 23, 2013; LP Pikeville,
LLC, v. Pinson, 2013 WL 3335013 (Ky. App. June 28, 2013), reviewed HERE on
July 11, 2013, and Kindred Hospitals L.P.
v. Clark, No. 2011-CA-001663-MR (Ky. App. Feb. 15, 2013), reviewed HERE on
March 11, 2013. There are now decisions
from both the Eastern and Western Districts of Kentucky in which the opposite result
was achieved, namely arbitration was ordered. The first of those decisions is Oldham
v. Extendicare Homes, Inc., 2013 WL 1878937 (W.D. Ky. May 3, 2013), and the
second GGNSC Vanceburg LLC v. Taublee,
2013 WL 4041174 (E. D. Ky. Aug. 7, 2013).
In both of these decisions, the
plaintiff sought to avoid arbitration by reference to the Kentucky Supreme
Court’s decision in Ping v. Beverly
Enterprises, Inc., 376 S.W.3d 581 (Ky. 2012), wherein the Court held that
there was no agreement to arbitrate where the power of attorney did not enable
the agent to enter into contracts on behalf of the principal, being restricted
rather to financial and health-care decisions. In these two cases, in contrast, the power of attorney at issue
expressly allowed the agent to bind the principal to a contract. In part, the power of attorney in the Oldham decision included the power to
“make contracts” and “generally to do and perform for me and in my name all
that I might do if present.” From there,
the Court was able to conclude that:
The arbitration agreement to
participate in alternative dispute resolution for any tort, negligence, or
gross negligence is undoubtedly a “contract” or “agreement” that [the agent]
had authority “make and sign.” 2013 WL
1878937, *3.
The GGNSC Vanceburg, LLC decision also included an extensive discussion
of Colorado River abstention and the
question whether the federal court should be involved in ordering arbitration in
that was already pending a state court action, in this instance the federal court
determining it could act. The power of
attorney at issue allowed the agent “make contracts,” “make and sign in my name
any and all contracts or agreements,” “institute or defend suits concerning my
property or rights” and “generally to do and perform for me and in my name all
that I might do if present.” In reliance
upon this language, the court had no problem determining that the agent could
property bind the principal to arbitration of an agreement.
Clearly the language of the
instrument designating the agent and the agent’s authority is crucial.
Before closing, a small quibble
must be raised with respect to the GGNSC
Vanceburg, LLC decision. It is
stated therein that:
LLCs are required to file annual
reports in order to comply with KRS 275.115, which in turn requires that LLCs
maintain a registered office in Kentucky. With
due respect to Judge Forester, this statement, obviously dicta, is
incorrect. LLCs are required to file
annual reports because every LLC is subject to the Kentucky Business Entity
Filing Act, and subject to certain exceptions therein, every entity so subject
is required to file an annual report with the Kentucky Secretary of State. See
KRS § 14A.6-010(1). The requirement to
name a registered agent is an independent duty; the LLC Act, at KRS § 275.115
requires each LLC to name a registered office and agent that comply with KRS §
14A.4-010. Even without KRS § 275.115
the obligation to appoint a registered office and agent would exist by reason
of KRS § 14A.4-010. As such, the obligation
to file an annual report and the obligation to designate a registered office
and agent are independent of one another; there is nothing about the annual
report requirement that requires an entity to designate a registered
office/agent, or vice versa.
Court Denies Review of Decision on Standing to Pursue Derivative Action
On July 11, 2012, I reported on
the decision of the Kentucky Court of Appeals in Watkins v. Stockyards Bank Trust Co., 2012 WL 2470692 (Ky. App.
June 29, 2012), an opinion designated as “To Be Published.” Therein, the Court of Appeals determined that
the beneficiary of a trust that was itself a shareholder of a corporation did
not have standing to bring this particular derivative action. Specifically, the Court determined that the
plaintiff did not “fairly and adequately represent the interest” of the
similarly situated shareholders for a variety of reasons including the
universal opposition of the shareholders to the suit and the fact that the
plaintiff had requested settlement of the claims in return for a payment to
himself as contrasted with recovery by the corporation. Here is a LINK to that review.
By Order dated August 21, 2013,
the Kentucky Supreme Court denied discretionary review. Unfortunately, however, the Supreme Court,
without other explanation, ordered that the decision of the Court of Appeals
That Feeds You; New Jersey Court Rejects Effort by General Partners to Sue
Limited Partners Who Brought a Derivative Action Against Those Same General
A recent New Jersey decision
considered the curious facts of, in response to a suit brought by the limited
partners against the general partners of a failed real estate venture, those
general partners counter-suing the limited partners alleging breach of
fiduciary duty, waste and violation of the covenant of good faith and fair dealing. The court, on sound grounds, rejected the
viability of that counterclaim. Baratta v. Deerhaven, LLC, 2013 WL
3486743 (N.Y. Super. L. July 12, 2013). After the failure of a real
estate venture in which they had invested $1.9 million, the limited partners
brought suit against the general partners asserting that they had usurped
certain partnership opportunities. In
response, those general partners filed a counterclaim asserting that the
limited partners’ suit constituted waste, breach of fiduciary duty and breach
of the covenant of good faith and fair dealing. Ultimately, that entire counterclaim was dismissed. On the motion to reconsider the
dismissal of the counterclaim, the court noted that the defendant general
partners had been unable to identify a single case in which an investor was
successfully sued for filing lawsuit to
recover his or her investment. As to the
claim of breach of fiduciary duty, while noting that partners generally owe
such duties to one another, such is imposed upon the majority/control
partner. In that the limited partners
were not majority owners nor in any position of dominance, they were not bound
by any fiduciary duty to not bring suit. Because the counterclaim was so
lacking in merit, the trial court's award of sanctions was affirmed.
A recent decision from Connecticut
highlights the nitty-gritty, as well as the problems that come about from
imprecise agreements, of a partnership dissolution. Estate
of Richard L. Goldblatt v. Cuselias, 2013 WL 4056528 (Conn. Super. July 25,
2013). This decision sets forth the
resolution of accounts upon the dissolution of a partnership. The partnership at issue extended over only
two and one-half years, ending in December 2003. The complaint was not filed until 2005, and shortly thereafter the plaintiff attorney
passed away; the suit was continued by his estate. Trial did not take place until 2010.
The primary value of this
decision would appear to be its explanation of the laborious task that is
involved in recreating accounting records after the fact and the application of
an dissolution agreement that was less precise than it might have been,
especially in that it did not require each of the partners to promptly remit
funds and account for actions with respect to individual files. Ultimately, the judgment against the
defendant was relatively nominal; it is clear that a significant expense was
incurred in order to recreate the accounting records. A carefully written agreement might have
avoided this and similar problems. In
addition, that agreement should be drafted by independent counsel – as goes the
adage “The lawyer who represents himself has a fool for a client.”
Prior Liens Are Not
a Defense to the Entry of a Charging Order
In a recent decision from
Nevada, there was rejected the suggestion that charging orders should not be
issued with respect to interest in a company on the basis that federal tax
liens are already pending against those assets. Renteria v. Canepa, No. 3:cv-00534-RCJ-CWH
(D. Nev. June 19, 2013).
In this case, Canepa executed a
series of promissory notes to a trust of which, it would appear, Renteria was
the trustee. When those notes went into
default, judgment was rendered against Canepa. Seeking to collect on the judgment, Renteria sought charging orders
against Canepa’s interest in two Nevada corporations, FQ Men’s Club, Inc. and
Monkey Bars, Inc., as well as his interest in a Nevada LLC, Western Properties
Initially, with respect to the
charging orders sought against the corporations, Nevada has a unique statute
that, with respect to certain closely-held corporations, imposes charging order
protections. As such, at least under
Nevada law, a judgment-creditor cannot seize the stock of a Nevada corporation.
Substantively, Canepa stated
that federal tax liens were already recorded against him individually and
against FQ Men’s Club, Inc., asserting, in the words of the Court, that in
light of these superior tax liens “execution on the judgment [in favor of
Renteria] against those assets would be inappropriate.” The Court did not agree. Rather, it found that:
It is only for this Court to
determine whether the charging order requested is available under state law,
which it is. If the IRS or the entities
to be charged wish to challenge Plaintiff’s subsequent attempts to enforce the
charging orders under federal priority statutes, that is a separate matter.
Another case involving the
question of how a charging order would interface with federal tax liens was Cadle Company v. Ginsberg, 2002 WL
725500 (Conn. Supr. Mar. 28, 2002). Therein, the Court first considered and rejected the notion that the LLC
must be a party to the action in which a charging order is requested,
determining that “An action seeking a charging order does not impact the rights
or interests of a [LLC] to the degree necessary to require that it made a party
in order for the action to proceed.” Likewise,
the Cadle Company Court dismissed the
assertion that the IRS be made a party on the basis that it has or may claim a
lien on the interest in the LLC, as “any charging order will be subject to any
superior rights that the [IRS] may have in the defendant’s interest in the
[LLC].”
Still, the scope of the
charging order entered in Renteria is
open to questions (the text of the charging order is part of the Court’s
decision). Specifically, it precluded
the LLC from making any loans to the defendants. In addition, the charging order required the
subject companies to supply the holder of the charging order with copies of the
company’s operating agreement, federal and state tax returns and financial
statements. The Court’s authority to
make these orders, especially with respect to the inspection of company books
and records, is at best questionable.
Court Will Not Be Reconsidering the Cinelli Rule
On October 23, 2012, I reviewed
the decision of the Kentucky Court of Appeals in Spears v. Kentucky Insurance Agency, Inc., 2012 WL 4839015 (Ky.
App. Oct. 12, 2012), wherein a highly fractured court (the three-judge panel
issued three separate opinions) considered the application of Kentucky’s “all
or nothing” rule as embodied in Cinelli
v. Ward, 997 S.W.2d 474 (Ky. App. 1998). Spears, who argued that a letter of intent was sufficient to create a
binding contract, that position being rejected by the Court of Appeals, applied
to the Kentucky Supreme Court for discretionary review.
On August 21, the Kentucky Supreme Court denied
discretionary review. As such, the Cinelli Rule remains in place.
Charging Order Rejected
In a recent decision from a
Connecticut Court, numerous challenges to the entry of a charging order,
including an assertion that the court did not have necessary jurisdiction over
a foreign LLC, were rejected. Rockstone Capital, LLC v. Marketing
Horizons, Ltd., 2013 WL 4046597 (Conn. Supr. July 17, 2013).
This action arose out of a
post-judgment effort to collect upon a stipulated judgment. Rockstone Capital sought charging orders
against the interest that Ashton Edwards owned in two LLCs, Marketing Ventures
Worldwide, LLC and Nonprofit Solutions, LLC. With respect to the charging order sought against Nonprofit Solutions,
Edwards asserted that the court could not enter the charging order on the basis
it was a foreign, not a Connecticut, entity, and that the court lacked personal
jurisdiction over it. With respect to the first
jurisdictional argument, the court (correctly) noted that it is not an issue of
whether it has jurisdiction over the entity in which the interest is to be
charged, but whether it has jurisdiction over the holder of that interest. In this instance, and setting aside the
question that Edwards could not, of himself, challenge jurisdiction over
Nonprofit Solutions, LLC, such was simply not necessary:
Defendant Edwards offers no
authority for his assertion that a court must have jurisdiction over a [LLC] in
order to enforce a judgment against an individual who is a member of that
Secondly, the court determined
that its ability to issue a charging order pursuant to the Connecticut LLC Act
applied equally to an LLC organized under New York law. This Court finds no constraints in §
34-171 [the charging order provision of the Connecticut LLC Act] which limit
application solely to domestic limited liability companies.
This opinion is useful on both
of these grounds, especially the latter. With respect to those states that do not specify in their charging order
statutes that the entity is not a necessary party to the proceeding, this
decision answers the question of whether it need be. A ruling to similar effect is Bank of America, N.A. v. Freed, 2012 WL
6725894 (Ill. App. I Dist., Dec. 28, 2012), which decision was reviewed here on
January 4, 2013. Kentucky is an
exemption to this ambiguity – all of the Kentucky charging order provisions
expressly provided that the entity is not a necessary party to the proceeding
in which a charging order is sought. See, e.g.,
KRS § 275.260(6). Of greater import is the
court’s determination that it may issue a charging order, in accordance with
domestic law, against an interest in a foreign entity. Some have argued, typically without citation
to any authority, that a charging order may only be issued in accordance with
the laws of the jurisdiction of organization, and it is even suggested that
only the courts of the jurisdiction of organization have the capacity to enter
a charging order. From there arises the
claim that those states that have restricted the scope of their charging order
laws are effective as asset protection
vehicles in other jurisdictions. For
example, the 2012 Ohio and 2013 Delaware amendments to those LLC acts aim to
preclude equitable remedies for enforcement of the charging order lien. Decisions such Rockstone Capital undercut that assertion. Rather, if a judgment is issued in another
jurisdiction, it may apply its charging order law even if that law would give
the judgment-creditor more rights than would be afforded under the law of the
LLC’s jurisdiction of organization. As
we have been reminded by my friend Jay Adkisson, “All remedies law is local,”
and the charging order is a remedy.
A Horse, a Horse,
Battle of Bosworth, the final major battle of that English civil war titled The
War of the Roses. It was at this battle
that King Richard III, variously identified as the last King from the House of Plantagenet
or the House of York, fell, he being the last English King to die in
battle. Henry Tudor, the victor, then
became King Henry VII.
Henry’s victory in battle was
if anything surprising. Richard’s forces
outnumbered those of Henry. Meanwhile,
Lord Stanley held his own force; if combined with that of Henry, that of
Richard would have been out-numbered. At
the same time, Richard held Stanley’s son as a hostage. As battle was about to commence, Richard sent
word to Stanley that if Stanley did not join with him, he would execute
Stanley’s son. Stanley replied, “I have
other sons.” Richard’s attack upon
Henry’s position nearly succeeded, Henry’s standard-bearer William Brandon
being killed at Henry’s side. Richard’s
fate was sealed when the Stanley family and its retainers, having until then
not committed to either side, rode against Richard’s infantry as his cavalry
was separately moving against Henry.
William Brandon’s son Charles,
ultimately Duke of Suffolk, would become the best friend of Henry VIII.
Earlier this year Richard’s
remains were located in the course of excavations under a parking lot that now
covers part of what was the Greyfriars (Franciscian) Church in Leicester,
England. In sad testimony to the modern
age, litigation is now pending in England as to whether Richard should be
re-buried in Leicester Cathedral, apparently consistent with the terms of the
agreement by which the archaeological work was performed and other British law,
or in York where certain claimed descendants of Richard assert he would want to
have been buried. A resolution of that
dispute under the rules of trial by combat might well have merit.
Claim for Judicial Dissolution
In a decision from the Superior
Court of Pennsylvania, it has been held that notwithstanding a comprehensive (i.e., “all dispute”) agreement to
arbitrate in an LLC’s operating agreement, a member’s action for judicial
dissolution of the LLC on the basis that it is “not reasonably practicable to
carry on the business of the LLC in conformity with the agreement” is not
subject to arbitration. In re: L & S IBC, LLC, No. 639-WDA 12 (Supp. Ct. Pa. Jan. 23, 2013). Stephen Kovac and Laura Ebbert
were the two members of L & S, a Pennsylvania LLC. Ebbert held a 51% in the LLC while Kovac held
the balance of a 49%. After a breakdown
in their romantic relationship, Kovac filed suit for judicial dissolution of
the LLC on the basis that it was no longer reasonably practicable to operate
the company in accordance with its operating agreement, he alleging that she
had barred him from the company facilities and refused his involvement in
company decision making. She moved to
have the action for judicial dissolution set aside in favor of arbitration,
that being provided for in the operating agreement with respect to “all
disputes.” The trial court denied
arbitration, and she appealed.
The Superior Court upheld the
determination of the trial court. Essentially, while the arbitration clause of the operating agreement
would be upheld with respect to any disputes under the operating agreement, an
action for judicial dissolution arises outside of its confines. Rather, the mechanism for judicial dissolution
under the statute provides “an independent mechanism for the judicial
dissolution of a limited liability company.” Posted by
Jurisdiction and a Very Foreign Entity
A recent decision of a
Wisconsin Federal District Court reviewed several issues with respect to
alienage jurisdiction, including the troubling question of how to classify
non-U.S. entities. Principle Solutions LLC v. Feed.Ing BV, Case No. 13-C-223 (Ed.
Wisc. June 25, 2013).
On the basis of alienage
jurisdiction (28 USC § 1332(a)(2)), Principle Solutions LLC brought suit
against Feed.Ing BV. Ultimately,
Principle got nearly everything wrong in its allegation of jurisdiction.
With respect to itself,
Principle pled that it was organized and had its principal place of business in
Wisconsin, and that all of its members are considered citizens of Wisconsin for
purposes of assessing jurisdiction. With
respect to the assertion of the LLC's principal place of business, the court
noted that issue is “irrelevant.” Rather, Principle was directed to “allege each member of the [LLC] and
its citizenship.”
With respect to the defendants,
Principle asserted in the complaint:
Defendant Feed is, upon information
and belief, a limited liability company located in The Netherlands and
organized in accordance with Dutch law. Upon information and belief, no member of Feed is a resident of the
With respect to the assertions
as to Feed, first, they were criticized for being based upon “information and
belief,” the court writing that “It is well-settled that a plaintiff claiming
diversity jurisdiction may not do so on the basis of information and belief,
only personal knowledge is sufficient.” Second, the court directed that an amended complaint be filed that as
well provides factual information regarding the nature of a Dutch Besloten Vennootschap
and whether it should, for purposes of jurisdictional analysis, be treated as a
corporation or as an unincorporated entity, and from there set forth the
necessary allegations as to citizenship. Posted by
Notwithstanding that it is
manifestly unconstitutional as a violation of the Establishment Clause,
Kentucky has a statute, KRS § 158.170, which mandates that a portion of the
Bible is to be read daily in every classroom in Kentucky’s public schools. This statute has been
unconstitutional since the 1963 decision of the United States Supreme Court in Abington School District v. Schempp, 374
U.S. 203, but it remains on the books.
Non-Party to
Arbitration Agreement Able to Require Arbitration of Related Dispute
Court of Appeals held, inter alia,
that a person, not a party to an agreement calling for arbitration of disputes,
does have the right to compel arbitration. In this instance, the individual controlled an unincorporated
association that was alleged to be his alter-ego. While he was ultimately held liable for the
organization’s obligations, he did initially have the right to resist that
determination on the basis of an arbitration clause. Scott
v. Louisville Bedding Co., ___ S.W.3d ___ , 2013 WL 3480312 (Ky. App. June
12, 2013). Louisville Bedding entered into
certain agreements with United Re Trusts and United Re AG dealing with certain
aspects of the self-insured health insurance plan maintained by Louisville
Bedding. Scott, an individual, was the
president of United Re AG; on its behalf he signed the relevant
agreements. There arose a dispute as to
whether the United Re Trust or United Re AG committed to purchase or otherwise
put in place reinsurance with respect to certain Louisville Bedding healthcare
exposures. Ultimately, Louisville
Bedding brought suit naming both of the United Re companies and Scott as
defendants; it was alleged that the United entities were themselves simply
alter-egos of Scott. While Scott did
file an answer asserting that the dispute was subject to arbitration, neither
of the United entities filed an answer, and default judgments were entered
against them. Scott moved to have the
dispute referred to arbitration. After
some back and forth as to whether the Kentucky or the Federal Arbitration Act
would control, it was ultimately held by the trial court that:
Because Scott signed the Agreement
in his capacity as “President” of United Re AG, he was not a party to the
Agreement; therefore, he could not enforce the arbitration provisions. Scott then
For the Court of Appeals, the
question came down simply to whether or not Scott was either a party to or
beneficiary of the contract:
[W]e first address whether Scott was
a party to the agreement or at least a beneficiary of its terms entitled to
enforce the arbitration provisions. Bedding
admits that it entered into an agreement to arbitrate any claims it has against
the United Re Entities; however, [Louisville Bedding] argues it did not enter
into an agreement to arbitrate any claims it might have against Scott. Scott argues that even though he was not a
signatory to the Agreement, he is entitled to enforce it in his capacity as an
employee of United Re AG. 2013 WL
3480312, *3. The Court of Appeals would ultimately
agree with Scott. First, in its complaint, Bedding
alleges that Scott and United Re AG are one and the same.… In short, Bedding treats Scott and the United
Re Entities as if they are one and the same. Bedding cannot, on the one hand
seek the benefit of the Agreement and, on the other hand, disavow the
arbitration provisions that are part of the Agreement.
The Court of Appeals as well
applied several federal decisions to the effect that an employee may enforce
the arbitration agreement entered into between the employer and a third party. Ultimately, however, Scott did
not prevail. Under the Kentucky
Arbitration Act, agreements to arbitrate with respect to insurance are not
enforceable, and the Court found that the products sold by the United Re entities
were in fact insurance. Being
unenforceable under the Kentucky Arbitration Act, the Court considered whether
the agreement to enforce should alternatively be enforced under the Federal
Arbitration Act. There, engaging in an
analysis of the McCarran-Ferguson Act, it was determined that there was no
preemption. Ultimately, Scott was
afforded the right to enforce the terms of an arbitration provision that was
No Charging Order
for Subsequently Acquired Interest
Michigan, the court denied an application for a charging order that would
attached to interests in LLCs or limited partnerships subsequently acquired by
the judgment-debtor. Presidential Facility, LLC v. Debbas,
Case No. 09-12346 (Ed. Mich. April 12, 2013).
A judgment of $9.5 million was
entered against the defendants, including Campbell. The plaintiff then sought a charging order
against Campbell, seeking to “encumber any interest in limited partnerships or
limited liability companies in which Defendant Campbell has or may subsequently
acquire.” Reviewing the Indiana charging
order statute as set forth in its LLC Act, the court, while certainly agreeing
that a charging order could be placed against an interest currently held by a
judgment-debtor, did not find that it provided for a similar order against a
to-be-acquired interest. Rather, the
plaintiff was invited to apply for a charging order if and when Campbell
acquires an interest in an LLC or LP that he did not hold at the time this
order was requested.
The story of the battle was well documented by Caesar in The Gallic Wars. Caesar and the legions trapped the Gaul's army in Alesia. In order to enforce the blockade they built a wall around nearly the entire town (some geography kept that walls from being complete). Fearing the arrival of a relieving army, the Romans then built another wall around their siege lines (again nearly complete except where limited by geography). Hence the Romans were intentionally in the space between the two walls. A relieving army did arrive, and the Romans had to fight both the army on the outside of the fence as well as the forces in Alesia that were trying to break out. The battles were bloody, and the outcome was a Roman victory. Vercingetorix was brought back to Rome to be paraded at a Triumph held for Caesar. He was then killed (likely strangled). Posted by