Court Opinion

ID: 4702406
Source: CourtListenerOpinion
Date Created: 2021-07-09 14:08:15.522306+00
Date Added: 2024-06-11T08:06:24.724477
License: Public Domain

RENDERED: JULY 2, 2021; 10:00 A.M.
                         NOT TO BE PUBLISHED

                Commonwealth of Kentucky
                          Court of Appeals

                             NO. 2020-CA-0042-MR

RONALD K. REEVES                                                    APPELLANT

                 APPEAL FROM WARREN CIRCUIT COURT
v.              HONORABLE STEVE ALAN WILSON, JUDGE
                        ACTION NO. 19-CI-00885

STEVEN W. REEVES; DENNIS E.
REEVES; LEON TARTER; AND
REEVES FAMILY LLC                                                    APPELLEES

                               OPINION
                       REVERSING AND REMANDING

                                  ** ** ** ** **

BEFORE: DIXON, KRAMER, AND LAMBERT, JUDGES.

LAMBERT, JUDGE: This appeal concerns the liquidation of a family-owned

business and, more specifically, the sale of certain company assets. Ronald K.

Reeves seeks review of the November 25, 2019, order of the Warren Circuit Court

denying his motion to dismiss or hold in abeyance and granting Reeves Family
LLC’s motion for summary judgment and ordering the sale of real property via a

referral to the Master Commissioner. We reverse and remand.

              Reeves Family LLC (the Company) is a manager-managed limited

liability company that was formed on December 4, 2000, with its principal office

in Louisville. Steven W. Reeves (Steve) was the Company’s managing member

and the registered agent. The members were three brothers: Steve, Dennis E.

Reeves (Dennis), and Ronald K. Reeves (Ronald).1 Each member had a one-third

ownership interest in the Company. The Company owned real estate either solely

or jointly with Leon Tarter (Tarter). It solely owned property at 2015 Barberry

Court and 3249 Cemetery Road in Bowling Green (Warren County). And it jointly

held property with Tarter on Girkin Road and Memphis Junction Road in Bowling

Green and on Robey Street in Franklin (Simpson County).

              The members held a special meeting of the Company on June 17,

2019, pursuant to notice to discuss and vote on whether to dissolve the Company

and wind up its affairs, including selling the real estate it owned and jointly

owned.2 Present at the meeting were counsel for the Company as well as Steve and

Dennis. Ronald was not present but appeared by counsel. Section 7.1.2 of the

1
 Their father, Garland Reeves, was the original managing member of the Company. He passed
away in 2005.
2
 Pursuant to the deposition testimony, this was apparently prompted by the members’ ages and
out-of-town residencies, making oversight of the properties a problem for them.

                                             -2-
Company’s Operating Agreement states that a vote of members holding 51% or

more of the Company interests is required before it may be dissolved. Steve and

Dennis both voted to dissolve the Company, and counsel for Ronald concurred.

Steve, as the managing member, indicated at the meeting that he would instruct

counsel for the Company to file a petition to seek a judgment and order to have the

Company’s real estate sold by the Master Commissioner. On June 25, 2019, the

Company filed a complaint in the Warren Circuit Court seeking to liquidate the

Company by judicial sale of real estate wholly or jointly owned in both Warren

and Simpson Counties. In their entries of appearance, Dennis, Steve, and Tarter

waived notice of further proceedings and consented to the entry of orders and a

final judgment as sought by the Company.

             Ronald, however, contested the complaint and filed an answer and

cross-claim. In his answer, Ronald raised the defenses of Kentucky Rules of Civil

Procedure (CR) 8.03 as a bar to the Company’s complaint and that pursuant to

Article X of the Operating Agreement, the members were to attempt to negotiate

and then mediate any disputes related to the Company prior to filing suit. He also

stated that a Special Commissioner should be appointed to conduct the sale of the

real property and that the proposed judicial sale did not satisfy Article 7.3 of the

Operating Agreement that liquidation should be done in an orderly fashion.

                                          -3-
             In Count I of his cross-claim, Ronald alleged that Dennis and Steve

owed him a fiduciary duty to act with utmost care, honesty, undivided loyalty, and

fidelity in the Company’s business dealings. He believed that one of the properties

that had been appraised at $1.1 million was going to be sold well below the fair

market value, causing him to suffer damages. In Count II, Ronald alleged that

Tarter aided and abetted Steve and Dennis in breaching their fiduciary duties. In

Count III, Ronald addressed his request that the Company engage a realty firm to

liquidate the real estate, noting that Steve had indicated at the special meeting that

he would be seeking liquidation via a Master Commissioner’s sale. Ronald

believed that a judicial sale would return a lower price than a private sale, which

would constitute a breach of fiduciary duties by Steve and Dennis. In Count IV,

Ronald alleged that he was owed approximately $100,000.00 in distributions from

the sale of real estate, which was being withheld by Steve and Dennis. This, he

claimed, also constituted a breach of their fiduciary duties to him. Ronald sought

compensatory and punitive damages as a result of the allegations in his cross-

claim. The other parties contested Ronald’s claims in their answers.

             On August 2, 2019, the Company filed a notice to take the depositions

of the parties later that month. These depositions were later renoticed for October

16, 2019. The record contains the depositions of Steve, Dennis, and Tarter.

                                          -4-
             On October 24, 2019, Ronald filed a motion to dismiss or to hold in

abeyance and require arbitration pursuant to the Operating Agreement. Article X

of the Operating Agreement provides for alternative dispute resolution (ADR) and

binding arbitration, and it sets forth the procedure for mediation. It provides in

part as follows:

                    10.1. Agreement to Use Procedure. The
             Members have entered into this Agreement in good faith
             and in the belief that it is mutually advantageous to them.
             It is with that same spirit of cooperation that they pledge
             to attempt to resolve any dispute amicably without the
             necessity of litigation. Accordingly, they agree that if
             any dispute arises between them relating to this
             Agreement (the “Dispute”), they will first utilize the
             procedures specified in this Article X (the “Procedure”)
             before any additional proceedings.

                    10.2. Initiation of Procedure. The Member
             seeking to initiate the Procedure (the “Initiating
             Member”) will give written notice to the other Members.
             The notice must describe in general terms the nature of
             the dispute and the [I]nitiating Member’s claim for relief.
             Additionally, the notice must identify one or more
             individuals with authority to settle the dispute on the
             Member’s behalf. The Members receiving notice (the
             “Responding Member,” whether one or more) will have
             five business days within which to designate by written
             notice to the Initiating Member, one or more individuals
             with authority to settle the dispute on the Member’s
             behalf. The individuals so designated will be known as
             the “Authorized Individuals.” The Responding Member
             may authorize himself or herself as an Authorized
             Individual. The Initiating Member and the Responding
             Member will collectively be referred to as the “Disputing
             Members” or individually as “Disputing Member.”

                                         -5-
By instructing the Company’s counsel to file this action, Ronald argued that Steve

and Dennis violated the ADR procedures in Article X. The Company, likewise,

violated the Operating Agreement by filing the action prior to following the ADR

procedures.

              Also on October 24, 2019, the Company filed a motion for summary

judgment and for the entry of an order of sale by the Master Commissioner, as well

as a response to Ronald’s motion to dismiss or hold in abeyance. The Company

argued that the Operating Agreement required mediation, not arbitration. It also

argued that there was no dispute between the members prior to the filing of the

action that would bring Article X into relevance, as neither Ronald nor his counsel

raised any objection to Steve’s statement at the conclusion of the special meeting

that he would instruct the Company’s counsel to file this petition to seek a judicial

sale. The procedures under Article X were not invoked until October 15, 2019,

more than three months after the petition was filed. In addition, the Operating

Agreement gave Steve, as the managing member, the power to sell the Company’s

assets without any type of limitation. As to its motion for summary judgment, the

Company stated that there were no genuine issues of material fact as supported by

deposition testimony, noting that Ronald refused to be deposed. It also argued that

Ronald’s request for a Special Master Commissioner would not address his

                                         -6-
concern about notice requirements and his desire to achieve the maximum sales

price for the real estate.

              In his response, Tarter supported the Company’s motion for summary

judgment and opposed Ronald’s motion. He argued that he was not a member of

the Company and was not, therefore, bound by any agreements contained in the

Operating Agreement. He also argued that he was entitled to the sale requested by

the Company.

              In reply, Ronald stated that the Company, Steve, and Dennis were on

notice of a dispute prior to the filing of the action. Once he knew of Steve’s plan

to sell the real estate via a judicial sale, Ronald communicated his objection, citing

a series of emails beginning June 24, 2019, between the attorneys related to this

issue. He stated that their claim that he did not raise the issue prior to October 15th

was false. Ronald also argued that although Tarter was not a member of the

Company, and therefore not bound by the Operating Agreement, this did not

relieve Steve and Dennis of their obligations under Article X. In the event the

court denied his motion, Ronald argued that a genuine issue of material fact existed

as to whether the judicial sale was being initiated in good faith, which would

preclude summary judgment. He wanted the opportunity to conduct discovery to

support his claims related to bad faith.

                                           -7-
             The parties argued their respective positions before the court on

November 4 and 18, 2019. And on November 25, 2019, the circuit court entered a

summary judgment in favor of the Company and denied Ronald’s motion to

dismiss or hold in abeyance. The court found that there were no genuine issues of

material fact with respect to mediation, that no dispute existed when the action was

initiated, and that the managing member had the power to seek a judicial sale.

Because the real property could not be divided without materially impairing its

value, the court ordered that it was to be sold as a whole by the Master

Commissioner of Warren Circuit Court at a judicial sale. This appeal by Ronald

now follows.

             On appeal, Ronald argues that the circuit court erred in denying his

motion to dismiss and that summary judgment was premature. The appellees

dispute these arguments in their respective briefs.

             Ronald’s first argument addresses whether the circuit court erred in

denying his motion to dismiss or hold the case in abeyance to permit the parties to

follow the ADR procedures in Article X of the Operating Agreement. Our

standard of review of a motion to dismiss filed pursuant to CR 12.02 for failure to

state a claim upon which relief may be granted is set forth in Benningfield v. Pettit

Environmental, Inc., 183 S.W.3d 567, 570 (Ky. App. 2005):

             A motion to dismiss should only be granted if “it appears
             the pleading party would not be entitled to relief under

                                         -8-
                  any set of facts which could be proved in support of his
                  claim.” Pari-Mutuel Clerks’ Union v. Kentucky Jockey
                  Club, 551 S.W.2d 801, 803 (Ky. 1977). When ruling on
                  the motion, the allegations in “the pleadings should be
                  liberally construed in a light most favorable to the
                  plaintiff and all allegations taken in the complaint to be
                  true.” Gall v. Scroggy, 725 S.W.2d 867, 868 (Ky. App.
                  1987). In making this decision, the trial court is not
                  required to make any factual findings. James v. Wilson,
                  95 S.W.3d 875, 884 (Ky. App. 2002). Therefore, “the
                  question is purely a matter of law.” Id. Accordingly, the
                  trial court’s decision will be reviewed de novo. Revenue
                  Cabinet v. Hubbard, 37 S.W.3d 717, 719 (Ky. 2000).

With this standard in mind, we shall review Ronald’s argument.

                  At the outset, we recognize that the circuit court and the appellees

have all either found or argued that no dispute existed among the parties prior to

the filing of the petition in this case and that, therefore, the ADR procedures did

not apply.3 Our review of the record, however, reveals that a dispute certainly

existed as to how the Company property was to be sold prior to the filing of the

lawsuit on June 25, 2019. We shall now set forth the evidence showing that this

dispute existed and should have been known to all parties.

3
    The following exchange took place in Steve’s deposition:

         Q: Now after this was passed and these minutes approved, did you or the LLC,
         the company, ever receive any written notice pursuant to article ten of the
         partnership agreement that Ron disputed the action taken?

         A: No.

                                                -9-
              The May 31, 2019, call of special meeting from Steve to Ronald and

Dennis stated:

                     Pursuant to § 5.2 of the Reeves Family LLC
              Operating Agreement, effective December 22, 2000 (the
              “Operating Agreement”), and the authority granted by
              Kentucky Revised Statutes § 275.175(6), the undersigned
              Managing Member calls a special meeting of the
              Members of the Reeves Family LLC (the “Company”) to
              be held at the law offices of English, Lucas, Priest &
              Owsley, LLP, 1101 College Street, Bowling Green,
              Kentucky, on June 17, 2019 at 2:00 p.m. CDT. The
              purpose of the meeting will be to consider and vote upon
              dissolution and winding up of the Company and
              liquidation of its assets, including but not limited to real
              estate wholly owned by the Company and real estate
              owned in partnership with Leon Tarter. The Members
              are hereby directed to Article VII of the Operating
              Agreement to review provisions governing the
              dissolution and liquidation of the Company. The
              Members will discuss and transact such other business as
              may properly come before the meeting.

This notice did not contain any information about how the real property was to be

sold, only that the Company assets were to be liquidated. Not until after the vote

to liquidate the Company passed did Steve express his decision to sell the property

via a judicial sale.

              Thereafter, a series of email messages was exchanged between

counsel for the parties:

   • Email from Sam Lee (counsel for Ronald) to Nathan Vinson (counsel for the

       Company) dated June 24, 2019, 1:15 p.m.:

                                         -10-
         Nathan – We have had the opportunity to discuss the
         liquidation of the Reeves Family LLC’s assets with Ron.
         He is concerned that a judicial sale will generate lower
         sales prices for the properties than could be obtained via
         a private auction. A private auction house will utilize
         their experience and contacts to cultivate as much interest
         as possible in the properties, as opposed to the master
         commission[er] merely running the statutorily required
         notice. While there will likely be additional expenses
         with a private auction firm, Ron feels that the increased
         sales revenue will more than account for the difference.
         His goal – which I’m sure is shared by Steve and Dennis
         – is to obtain the highest possible sales price for the
         LLC’s real properties.

         Please consider this a formal request to liquidate the
         LLC’s real property via private auction rather than
         proceeding with the judicial sale. Ron agrees to
         cooperate in any manner required to facilitate
         maximizing the value of the LLC’s assets. We would
         suggest engaging Kurtz Auction and Realty. They have
         an excellent reputation and serve the Bowling Green
         area.

• Email from Vinson to Lee dated June 24, 2019, 2:15 p.m.: “Thank you,

   Sam. Unfortunately, all other parties still want to file the petition, but of

   course, I will consult with them.”

• Email from Lee to Vinson dated June 24, 2019, 2:20 p.m.: “Thanks. I

   would appreciate you letting me know their decision prior to filing the

   petition.”

• Email from Vinson to Lee dated June 24, 2019, 2:45 p.m.: “Will do. I have

   forwarded your e-mail to them.”

                                      -11-
• Email from Vinson to Lee dated June 25, 2019, 9:36 a.m.:

         Sam,

         The other members and the joint owner still want to file
         the petition. I should have it e-filed today.

         Will you accept service on behalf of Ron?

         Thanks,
         Nathan

• Email from Lee to Vinson dated June 25, 2019, 3:05 p.m.:

         Nathan – Thanks for getting back to me. Ron is
         disappointed . . . in the decision to move forward with the
         judicial sale. Based on the circumstances, Ron believes
         that these actions are being taken with the intent to
         reduce the value of the company assets to allow Steve,
         Dennis, and/or Leon Tarter to purchase these properties
         at a judicial sale for a greatly reduced basis. There are a
         handful of actions that have led Ron to this assumption.

         Firstly, judicial sales have historically generated lower
         sales prices compared to actual fair market value. This is
         why they are generally considered a last resort to
         liquidate assets. The justification for using this method –
         that Ron would not cooperate – is unpersuasive. Not
         only does Ron agree with the liquidation, but even if he
         didn’t Steve and Dennis possess the necessary voting
         interests to list the properties for private sale. Investors
         as sophisticated as Steve, Dennis, and Mr. Tarter
         undoubtedly understand that the avenue they are pursuing
         will lead to a lower sales price. Ron believes that the
         only logical conclusion is that it is their intent to do so.

         Secondly, Steve and Dennis explicitly ensured that there
         would be no further distributions until after the sales.
         Upon obtaining the full financial records, we discovered
         the LLC is holding nearly $500,000 in cash assets

                                    -12-
            including funds from prior sales. It is difficult to imagine
            that there are sufficient pending liabilities to justify such
            a cash position. Ron believes that the purpose for
            holding his share of prior sales proceeds and foregoing
            additional disbursements is intended to deny him access
            to funds that he could use to bid against his partners at
            the judicial sale.

            Thirdly, Ron had 970 Lovers Lane appraised, and the
            appraiser valued the property at $1.1 million. This is
            more than double the sales price of the 2018 sale between
            the LLC/Leon Tarter and an LLC that is owned by Leon
            Tarter. In this transaction, the LLC sold company
            property far below the market value to benefit an
            interested party. This demonstrates that Dennis’s and
            Steve’s previous choices have not procured a fair market
            return on company property. It further shows that the
            property should be marketed and sold by a disinterested
            professional in the industry. We have attached a copy of
            the appraisal for your review.

            Based on the foregoing, Ron demands that the properties
            be liquidated via a neutral private realty firm. The hope
            is that a real estate professional can curtail any notion of
            a systematic, intentional, undervaluation of the remaining
            property. If the partners proceed with a judicial sale, Ron
            will consider this a breach of Dennis’s and Steve’s
            fiduciary duties and will consider all options at his
            disposal.

   • Email from Vinson to Lee dated June 25, 2019, 4:26 p.m.: “Thank you,

      Sam. I will forward this to Steve and Dennis as counsel for the LLC.”

            After the Company filed the petition, Ronald specifically cited to

Article X of the Operating Agreement as a defense in his answer, stating that the

                                        -13-
failure to abide by the provision of the article barred the complaint. A few months

later, the following series of emails were exchanged by counsel for the parties:

   • Email from Lee to Mark Alcott (counsel for Dennis and Steve), Paul

      Lawless (counsel for Tarter), and Charles English (counsel for the

      Company) dated October 10, 2019, 1:33 p.m.:

             Confidential Settlement Discussion Pursuant to KRE 408

             Counsel –

             We believe it would be beneficial to discuss a settlement
             of this matter before we get too far down the road. Ron
             is, and has always been, in agreement with liquidating the
             remaining assets and winding up the company. His
             request was that it be done in [a] commercially
             reasonable fashion rather than at the courthouse steps.
             For reasons that remain unclear, this request was
             rejected.

             In any event, Ron would be willing to release his
             counterclaims in return for an agreement to sell the
             remaining properties at auction with a qualified
             disinterested auction firm, to be completed by a certain
             date. I hope the parties agree that this would almost
             certainly result in higher sales prices and put more money
             in everyone’s pocket.

             I look forward to your responses.

   • Email from Lee to Alcott, Lawless, and English dated October 15, 2019,

      3:35 p.m.: “Insofar as we are at least discussing the possibility of a

      resolution, I suggest that we postpone the depositions. If anything, they may

                                        -14-
      be counter-productive to reaching an agreement. Please advise if this is

      agreeable.”

   • Email from Lawless to Lee, Alcott, and English dated October 15, 2019,

      4:05 p.m.:

             I have now spoken with Attorneys English and Alcott
             this afternoon following my conversation with you. The
             collective judgment is to move forward with the
             depositions tomorrow as scheduled. However, as you
             discussed with Mark today, we are more than willing to
             keep the lines of communication open as to settlement.

             I look forward to seeing everyone at ELPO tomorrow
             morning.

   • Email from Lee to Lawless, Alcott, and English dated October 15, 2019,

      4:22 p.m.:

             In that case my client intends to enforce Article 10 of the
             Reeves Family LLC operating agreement which requires
             mediation prior to litigation, as reserved in the Answer.
             Ron will not participate in the depositions or discovery
             until the mediation procedures have been observed. If
             necessary, we will file the appropriate motion to compel
             the arbitration in the agreement.

While this exchange occurred after the petition was filed, it supports the fact that

Ronald’s dispute was raised prior to its filing.

             Based upon these communications, the fact that a dispute existed

between the parties prior to the Company’s filing of the instant petition is clear,

and the circuit court’s finding that no dispute existed at the time it was initiated is

                                          -15-
simply not supported by the record. We note that the Operating Agreement does

not require that Article X must be invoked prior to the filing of litigation; it merely

states that a dispute must exist. And the record supports Ronald’s claim that a

dispute existed before the Company filed the petition in this case.

             However, we do not believe that this supports the dismissal of the

petition. Rather, the circuit court should have granted the alternative motion and

held the petition in abeyance while the parties pursued the ADR procedures set

forth in Article X of the Operating Agreement.

             Based upon this holding, the circuit court’s grant of summary

judgment in this case was premature and must be reversed. As such, we need not

address Ronald’s bad faith and breach of fiduciary duty claims. If necessary, these

issues may be revisited at a later date.

             For the foregoing reasons, the order of the Warren Circuit Court

granting the Company’s motion for summary judgment and denying Ronald’s

motion to dismiss or hold in abeyance is reversed, and this matter is remanded to

permit the parties to mediate the dispute as to how the real property should be sold

pursuant to Article X of the Company’s Operating Agreement.

             ALL CONCUR.

                                           -16-
BRIEFS FOR APPELLANT:     BRIEF FOR APPELLEES STEVEN
                          W. REEVES AND DENNIS E.
Samuel B. Lee             REEVES:
Owensboro, Kentucky
                          Mark D. Alcott
                          Bowling Green, Kentucky

                          BRIEF FOR APPELLEE LEON
                          TARTER:

                          Paul T. Lawless
                          Ian A. Loos
                          Bowling Green, Kentucky

                          BRIEF FOR APPELLEE REEVES
                          FAMILY LLC:

                          Charles E. English
                          Joye Beth Spinks
                          Bowling Green, Kentucky

                        -17-