Source: http://kentuckybusinessentitylaw.blogspot.com/2012/07/
Timestamp: 2017-07-24 02:34:53
Document Index: 697620220

Matched Legal Cases: ['§ 34', '§\n275', '§ 34', '§ 34', '§ 34', '§ 271', '§\n271', '§ 271', '§ 258', '§ 14', '§ 14', '§ 14', '§ 83']

Kentucky Business Entity Law: July 2012
to Kentucky’s Business Entity Statutes
Law Journal Online has released The
2012 Amendments to Kentucky’s Business Entity Statutes. This article reviews the various statutory
updates set forth in 2012 H.B. 341. The article
can be accessed through the KLJ’s website – here is a LINK
Ky LLC Act
Forthcoming from the Kentucky Supreme Court – Director Fiduciary
On August 15 the Kentucky
Supreme Court will hear oral arguments in 1400
Willow Council of Co-Owners, Inc. v Ballard. As previously reviewed (see posting on
September 29, 2011), one issue in the case is whether the statutory formula in
the statute as to a director’s fiduciary obligations, including the
determination of the beneficiary of the obligations (namely the corporation),
is exclusive of any conflicting common law or simply cumulative to it. My views on the matter are set
forth in Is the Statutory Fiduciary Duty
of Corporate Directors Exclusive?, available on SSRN, abstract 20644923. Here is a link to the piece. LINK
can be found at 2010 WL 2010521, 2010 Ky. App. LEXIS 94, No. 2008-CA-001155-MR (Ky.
Supreme Court Addresses “Adverse” Interest Against LLC
Under the Connecticut Limited
Liability Company Act (Conn. Gen. Stat. § 34-187(b)), “The vote of any member
of manager who has an interest in the outcome of the suit that is adverse to
the interest of the [LLC] shall be excluded” from any vote as to whether the
LLC should bring suit, with the authorization to bring suit generally being
made by a majority of interest of the members. Kentucky has a similar provision in its LLC Act, specifically KRS §
275.335. The statutes do not, however,
identify the standards to apply to determining whether there is such an
“adverse” interest. That is the issue
recently addressed by the Connecticut Supreme Court in 418 Meadow Street Associates, LLC v. Clean Air Partners, LLC, SC
18699 (Conn. May 22, 2012).
418 Meadow Street Associates,
LLC (“Meadow”) was, at the time relevant to this action, owned 50% by Barbara
Levine, 33.33% by Michael Weinshel and 16.67% by Mark Wynnick. Meadow owned a building that was in part
leased to Clean Air Partners, LLC (“Clean Air”). While Barbara Levine had no direct ownership
interest in Clean Air, her husband Steven was a 20% owner thereof. A dispute arose between Meadow and Clean Air
regarding the lease. Weinshel and
Wynnick proposed that Meadow bring suit against Clean Air. Barbara Levine, on the other hand, expressly
objected to bringing the suit.
And there arose the
conflict. If Barbara Levine’s interest
in Meadow was to be counted, on the basis that she did not have an interest
adverse to that of the LLC, Meadow would not have the necessary majority
approval to bring suit. Alternatively,
if Barbara’s interest in the LLC were excluded from the calculation, that
exclusion being based upon her having an interest adverse to that of the LLC,
majority approval was in place. Both the
trial court and the intermediate court of appeals determined that Barbara
Levine’s interest was not adverse to that of Meadow, finding she lacked a
“proprietary interest” in the defendant. In turn, the case was appealed to the Supreme Court, which would
ultimately reverse both the trial court and the Court of Appeals.
The Supreme Court characterized
the determinations below as follows:
According the trial court, “Barbara
Levine is not a party to the action, and she does not have a proprietary
interest in [the defendant]. She cannot
be assigned an interest in the case simply because she is the wife of a
co-owner of the defendant.” In upholding
the trial court’s conclusion, the Appellate Court stated that “the record
support[ed] the [trial] court’s finding that … [Barbara Levine’s] husband’s
ownership interest was not significant enough to assign her with an interest
adverse to the outcome of the action based on their personal relationship
alone.” 418 Meadow Street Associates, LLC v. Clean Air Partners, LLC, supra, 123 Conn. App. 422. Thus, the Appellate Court’s conclusion is
slightly different from the conclusion that the trial court reached. The trial court’s decision suggests that,
under the facts of this case, § 34-187(b) would not have excluded Barbara
Levine’s vote because she did not have a direct, proprietary interest in the
defendant. Furthermore, the trial court
stated that the spousal relationship alone was not enough to support a claim
that a member has an interest adverse to the interest of the limited liability
company. The Appellate Court’s decision,
on the other hand, suggests that a spousal relationship may be sufficient to
support an adverse interest claim in some circumstances, depending on the
extend of the spouse’s interest in the defendant company. In other words, the Appellate Court
apparently accepted the proposition that a member’s interest could be
considered adverse by virtue of his or her spouse’s interest but that, in the
present case, Steven Levine’s interest in the defendant was too minor to
Barbara Levine. We need not address the
differences between the trial court’s and the Appellate Court’s decision,
however, because our decision turns solely on a matter of statutory
Looking to several dictionary
entries for “adverse,” the Court found that:
The term “adverse” in § 34-187(b)
encompasses any interest of a member that in contrary or opposed to the [LLC’s]
interest in the outcome of the litigation ….
We also conclude that when a spouse
of a [LLC] member holds an interest or maintains a position of control in a
defendant company, as in the present case, that member’s interest properly is
considered adverse to the outcome of a lawsuit that the [LLC] brings against
the defendant company …. Simply put,
under § 34-187(b), the sweeping scope of the term “adverse” requires that the
interests of a member’s spouse be imputed to the member. The Court went on to note that
this bright line rule is effective to preclude subsequent recourse to
litigation based upon issues such as the magnitude of the spouse’s interest and
as well provide clarity against which a contrary rule may, in the operating
agreement, be adopted.
A second marriage has been described as the triumph of hope over experience. On that basis Henry VIII must have been among the most hopeful of men known to history. Today is the anniversary of his SIXTH wedding, that to Katherine Parr in 1543. She, along with fourth wife Ann of Cleve's, would outlive Henry.
Katherine was a pretty positive person herself. Henry was her third husband, the first two having predeceased her. She would ultimately marry again, that to Thomas Seymour (uncle to Edward VI and brother of Edward Seymour, protector of the realm during Edward's minority).
Shareholder Held Not To Fairly and Adequately Represent Corporation in
On June 29, the Court of Appeals
issued an important decision regarding standing to bring a derivative action,
there affirming the trial court’s summary judgment and order of dismissal in
favor of the various defendants. Watkins v. Stock Yards Bank & Trust Co.,
No. 2011-CA-000228-MR, 2012 WL 2470692 (Ky. App. June 29, 2012) (To Be Published).
Under the law governing
business corporations, it is the board of directors that is charged to oversee
the corporation’s management and affairs. KRS § 271B.8-010(2). In
exceptional circumstances, where the board of directors is not pursuing the interests of the
corporation, a shareholder may bring a derivative action pursuant to which, on
the corporation’s behalf, the shareholder litigates in its name. There exist, however, substantive
requirements for bringing a derivative action including, in most instances,
that the shareholder may a demand upon the board of directors that it act, that
the shareholder have been in that status at the time of the actions complained
of, and that they remain a shareholder throughout the pendency of the
action. In addition, KRS §
271B.7-400(1), provides that:
A derivative proceeding shall not be
maintained if it appears that the person commencing the proceeding does not
fairly and adequately represent the interests of the shareholders in enforcing
the right of the corporation.
an individual, was one of the four living beneficiaries of the NIB Trust, it being in turn a 40%
shareholder of Beargrass, a Kentucky corporation that had been the owner of the
Oxmoor Shopping Center. In 2003, Oxmoor
had been sold by Beargrass for $72.4 million, which sale received the unanimous
approval of Beargrass’ directors and shareholders. Seventeen months after that sale, the
purchasers from Beargrass sold Oxmoor for $123 million. After that second sale, Watkins requested
that the trustee of the trust commence a shareholder derivative action challenging
the initial sale. Being apparently
unsatisfied with the investigation made at that time and the determination,
concurred in by the other beneficiaries of the trust, to not proceed with the
derivative action, Watkins, on behalf of Beargrass, filed a combined derivative
and individual action asserting breaches of fiduciary duty in the
recommendation of the sale of the Oxmoor property for an inadequate price. An additional derivative action was
subsequently filed against the prior managers of the Oxmoor property, they
having been the acquirer from Beargrass.
Ultimately, the appellees moved
for summary judgment, which was granted by the trial court, whereupon all of
Watkins claims (both individual and derivative) were dismissed. He appealed. Certain of the defendants filed motions for attorney fees against
Watkins, which motions were denied by the trial court, and they filed a
The court relied primarily upon
Davis v. Comed, Inc., 619 F.3d 585,
593-94 (6th Cir. 1980), a decision interpreting the analogous FRCP
23.01, in assessing whether Watkins did or did not fairly and adequately
represent the interests of the shareholders. Applying its analysis, the court noted that all of the other
shareholders of Beargrass had filed affidavits opposing the lawsuit and as well
had voted to indemnify Osborn and Maynard, respectively the chairman and
president of Beargrass, from any liability incurred in the lawsuit:
In this case, there are similarly
situated shareholders, and Watkins is opposed by them all. Further, all of the beneficiaries of the NIB
and TWB Trusts, except Watkins, opposed this action. Watkins has no support from any of the shareholders
or beneficiaries he purports to represent. Accordingly, we conclude that Watkins does not fairly and adequately
represent the interests of the shareholders as required by KRS
271B.7-400(1). Slip op. at 11.
In addition, there was evidence
that Watkins sought to personally gain from the action notwithstanding the fact
that it was brought as a derivative action for which any recovery would be a
corporate asset:
As correctly noted by the trial
court, a month after Watkins filed this suit, Watkins’s counsel sent a letter to
[the trustee of the NIB Trust] and counsel for Osborn, Maynard and Stock Yards
Bank, offering to dismiss all claims, including the derivative ones, in
exchange for a payment $2.2 million to Watkins personally.
Watkins argues that the settlement
letter was proper because it was a settlement of only his individual claims and
that the parties knew the trial court would have to approve the
settlement. However, we note that
Watkins’s settlement letter clearly states that he is willing to dismiss all
claims, including the derivative ones, if he personally received $2.2
million. We believe that Watkins’s
willingness to settle all claims at the expense of the shareholders and
beneficiaries reflects that his self-interests were in conflict with the
interests of those he purports to represent. Slip op. at 9-10.
As for Watkins’s individual
claims, they were dismissed on the basis that he asserted no individual injury,
distinct from that suffered by the other shareholders of Beargrass, and further
that the asserted injury was nothing more than the loss of the value of his
We note that the violations of
duties Watkins claimed Stock Yards Bank owed directly to him and the NIB Trust
are the same duties he claims Stock Yards Bank owed to the other
shareholders. Moreover, Watkins failed
to demonstrate a specific injury to himself outside the diminution in the value
of the corporate assets and his stock. Therefore, we conclude that the trial court did not err in dismissing
his direct claims. See Sahni v. Hock, ___ S.W.3d __, 2007-CA-001785-MR (Ky. App. 2010)
(concluding that depreciation and the value of the shareholder’s stock was not a
sufficient type of direct personal injury necessary to sustain a direct cause
of action). Slip op. at 13.
As for the denial of award of
attorney fees against the plaintiff (see KRS § 271B.-400(4)), the court noted
that the statute is discretionary with the trial court, and that there existed
no basis for setting aside that determination on an abuse of discretion
This decision is important for
a variety of reasons. First, we have
here the affirmance of a determination, on summary judgment, that a shareholder
does not adequately represent the interests of the corporation. This ruling should go a long way to support the
dismissal, on similar bases, of other unjustified derivative actions. Second, the court has here confirmed that
opposition from other similarly situated shareholders is a basis for denying
standing and as well confirmed that a plaintiff shareholder who seeks to appropriate
to themselves the benefit of the action is not an adequate shareholder
representative. Similar claims were brought
in the Sahni v. Hock action; in that
case, the plaintiff, Hock, offered to settle all actions, including the
derivative claims, for a payment to herself as an individual, but no dismissal
resulted. Third, there has again been
confirmed the rule that diminution in value of stock is a derivative and not an
attorney fees, while the court’s ruling may be consistent with the statute as
it currently exists, the question must be raised as to whether reform is needed
in this area, especially in light of the prior direction from the Court of
Appeals in Sahni v. Hock to the
effect that an award of attorney fees is not appropriate if the plaintiff
prevails even slightly in the action. It
needs to be recognized that a derivative action imposes significant costs and
expenses upon the corporation in violation of the general applicable rule that
it is the board of directors that has control of the corporation’s management
and affairs. When a plaintiff
shareholder seeks to act in place of the directors, there exist a significant
policy basis for requiring that they proceed in a reasoned and informed
manner. For example, the bringing, on an
individual basis, of claims that are clearly derivative would seem to be, of
itself and to the extent thereof, a basis of the award of attorney fees. Second, bringing a derivative action on
behalf of a corporation and then, for individual benefit, seeking to
appropriate the fruits thereof should of itself be a basis for the award
attorney fees. Third and last, the
statute should be amended to provide for proportionate analysis, on a claim by
claim basis, of the award of attorney fees, in effect overruling that portion
of Sahni v. Hock that held that
recovery on even a minor point by the plaintiff protected them from an award of
attorney fees to the corporation and the defendants. While there is an obvious policy basis for
the derivative action, the exceptional costs they incur justify constraints
upon those who might bring them without due investigation of both the facts and
I really must question the reasoning of the Delaware court as to there not being a fiduciary obligation to have in place a succession plan. I see that as one of the primary obligations of the Board, especially in light of the actuarial certainty that every CEO will die and all are at any time at risk of death by accident. In the same manner as does the British Monarchy, "an heir and a spare" should be at all times on hand. A board that does not do so risks gaps in oversight.
ABA Business Law Section Actively Opposes Low-Profit LLCs
Rather than repeat what has already been well said, see this post from Doug Batey regarding opposition to the L3C.
This is an interesting decision, especially its holding a to the absence of an obligation to minimize taxes; it may have some bearing on the Sullivan v. Sullivan case that is currently brewing here in Louisville.
Fractured Kentucky Supreme Court Addresses Dog Bite Liability
Kentucky Supreme Court Addresses Dog Bite Liability
In a remarkably fractured
decision, the Kentucky Supreme Court has recently addressed the law as to when
a landlord can be liable for dog bite liability. Benningfield
v. Zinsmeister, 2009-SC-000660-DG (Ky. June 21, 2012).
Brandon Benningfield, an eight
year old boy, was approached by a Rottweiler owned by Dominic Harrison. Brandon ran, at which point the dog gave
chase and attacked him, resulting in numerous injuries to Brandon. The dog in question had been kept in the
fenced pen of the yard of Dominic’s parents. His parents in turn leased their residence from the Zinsmeisters. As recounted by the Kentucky Supreme Court,
“The attack occurred on the sidewalk across the street from the rented property
after the dog somehow escaped from the back yard.” Slip op. at 2. Brandon’s mother, Laurie Benningfield, filed
suit against the Harrisons, as the owner of the dog, and against the
Zinsmeisters, asserting that they bore strict liability for the dog
attack. Ultimately, the Harrisons
settled, and suit proceeded against the Zinsmeisters under KRS § 258.095(5),
which defines the owner of a dog as including “every person who keeps or
harbors the dog, or has it in his care, or permits it to remain on or about
premises owned or occupied by him.” The
trial court granted summary judgment and the Court of Appeals affirmed on the
basis that liability did not extend to the landlord when the attack does not
take place on the leased premises.
The Supreme Court would hold
that, while the landlord may be treated as a statutory owner of the dog,
focusing on the statutory reference to the dog being “on or about” the leased
We read this to mean that a landlord
is only an owner when the dog is
within the landlord’s permission that is, when it remains on or about the
premises. Because liability depends on
ownership, which under the statute depends on permission, then a landlord’s
liability is limited by the scope of the permission so that it exists only when
the attack occurs “on or about” the premises. Slip op. at 12.
determined that “on or about” requires that the attack take place “on the
property or so close to it as to be within the immediate physical reach. Thus, it would include an attack that occurs
immediately adjacent to the property – for example, on the sidewalk or just off
the curb – but nothing further away.” Slip op. at 12. On that basis,
the court determined that an attack taking place across the street was not “on
or about” and, for that reason, the Zinsmeisters, as landlords, were not liable
under the dog bite statute.
This decision led to no less
than four separate opinions from the seven members of the court.
For the perspective of business
law, it is important for all landlords to appreciate that Kentucky law does
provide that, in least in certain circumstances, a landlord can be held
responsible for dog bites that take place “on or about” their property if they
have consented (which consent may be either explicit or implicit) to permitting
dogs to be maintained at the property. Landlords would be well advised to confirm the availability of insurance
coverage in these events and to as well mandate that tenants maintain
appropriate insurance coverage for which the landlord is identified as an
Administrative Dissolution + Reinstatement = No Personal Liability of Officers
Dissolution + Reinstatement = No Personal Liability of Officers
The wisdom of the 2012
amendments to the Kentucky statutes providing that, upon reinstatement after
administrative dissolution, the liability of any agents of the entity will be
determined as if the dissolution had never taken place, has been confirmed by
a recent decision of the Kentucky Court
of Appeals. Harshman Construction & Electric, Inc. v. Witte, No.
2011-CA-000609-MR, 2012 WL 2471445 (Ky. App. June 29, 2012) (Not To Be Published).
The Wittes contracted with
Harshman Construction & Electric, Inc. to build a home. They ultimately had a falling out over
failures by Harshman to conform the construction to the plans and excessive
delays in construction, and the decision reviews the measure of damages
available to them. In addition, the
Wittes asserted that certain of the officers and Harshman’s sole shareholder
should be held personally liable on the basis that, during part of the
construction phase, Harshman Construction was administratively dissolved. Specifically, while the contract was entered
into in March 2007 and construction began in May 2007, Harshman Construction
was administratively dissolved in November 2007, one month before the final
break in their relationship leading to the Complaint being filed in February
2008. Harshman was reinstated in March
2010. In January 2011, three years after
the filing of the Complaint, the individual defendants moved to dismiss the
claims against them.
dismiss stating that: (1) the
corporation was dissolved at the time work was being performed; therefore, the
Wittes were dealing with individuals at that time and not agents of the
corporation; (2) dismissing [the individual defendants] could be prejudicial
because the motion to dismiss was filed nearly three years after the action was
commenced; and (3) the [individual defendants] actively engaged in litigation
and individually raised counterclaims against the Wittes. Slip Op. at 4.
Ultimately, two of the
individual defendants were found liable on the Witte’s claims. Needless to say, that decision was appealed.
Reversing the determination that
the individuals were personally liable, the Court parsed KRS 271B.14-22(3), the
predecessor to now applicable KRS § 14A.7-030, both of which provide that upon
the reinstatement of a dissolved entity, the reinstatement shall “related back
to and take effect as of the effective date of the administrative dissolution
or revocation” and the organization shall proceed forward as if the
administrative dissolution “had never occurred.” Slip Op.
at 5. Noting that the statute does not
impose a time limitation for seeking reinstatement after administrative
dissolution, it relied upon the 2005 ruling of the Court of Appeals in Fairbanks Arctic Blind Co. v. Prather &
Associates, Inc., the Harshman
Court writing that:
As reinstatement of a corporation
relates back to the effective date of dissolution and operates as if
dissolution never occurred, it naturally follows that the shareholders and
officers of such corporation are not individually liable for actions undertaken
on behalf of the corporation during its dissolution. Slip Op. at 6.
The Court of Appeals did remand
to the trial court the argument, not previously addressed, that the corporate
veil of Harshman Construction should be pierced.
As to the effect of the
reinstatement, this ruling of the Court of Appeals is normatively accurate for
the reasons previously reviewed in section 9.5 of Dissolution of a Limited Liability Company, that being Chapter 9 of
(UK/CLE 2011). The holding is as well
consistent with both eServices, L.L.C. v.
Energy Purchasing, Inc., 2012 WL 404957 (E.D. Ky. Feb. 6, 2012) and Pannell v. Shannon, No.
2010-CA-001172-MR (Ky. App. Aug. 26, 2011). Further, it is consistent with the statutory amendments approved by the 2012
Kentucky General Assembly. By means of
that amendment, it creating KRS § 14A.7-030(3)(c), it is now express that upon
The liability of any agent shall be
determined as if the administrative dissolution or revocation had never been
KRS § 14A.7-030 as amended by
2012 Ky. Acts, ch. 81, § 83.
This is an interesting, and in my mind not entirely even-handed, article. The function of the registered agent is not explained, and neither is the fact that the law does not even suggest that a company is located at/doing business from its registered office. In addition, there is no consideration given to the immense transactional costs that would be imposed upon everyday businesses were the Levin proposal to be enacted. Some of those issues I reviewed in Requiring Disclosure of Business Entity Ownership: Proposed New Laws are Burdensome, But With the Benefit of Being Ineffective, 13 J. Passthrough Entities 47 (July/Aug., 2010).
Here is a link to that article LINK