CORPORATIONS (fraud, duties): Bear, Inc. v. Smith (COA 1/22/2010)

Bear, Inc. v.
Smith

2008-CA-001556 01/22/2010 2010 WL 199416

Opinion by Judge Moore; Judges Keller and Taylor concurred. The Court affirmed in part, reversed in part, and remanded a summary judgment of the circuit court dismissing the appellant corporation’s action to collect unpaid fuel charges from appellees, a sole corporate shareholder and an unrelated company organized by the shareholder’s son. The Court first held that the trial court did not err in granting summary judgment on appellant’s fraud claims. First, the claim for fraud in the inducement failed as there was no evidence in the record demonstrating that alleged representations were made to induce appellant to act or refrain from acting and there was no evidence that at the time the debt was incurred that the shareholder never intended to pay the charges at the time they were incurred. Further, appellant was owed no statutory duty to disclose the fact of the company’s dissolution. The language in KRS 271B.14-060 was permissive, rather than mandatory and therefore, did not prescribe the exclusive means of making adequate provision for the debts and liabilities of a dissolved corporation. Therefore, appellant’s claim for fraud by omission failed. The Court next held that the trial court did not err in granting summary judgment to the corporation formed by the shareholder’s son. There was no evidence that the newly formed LLC was a successor entity of the dissolved corporation, that it was a shareholder of the dissolved corporation, that it had agreed or represented to assume the debts, or that a novation occurred. The Court finally held that the trial court erred in granting summary judgment to the individual shareholder. There was a genuine issue of material fact as to whether he received corporate assets for which he could be held personally liable and there was some evidence in the record of abuse of the corporate form and the justification of a wrong to allow the corporate veil to be pierced.

CONTRACTS (bank, deficiency judgment, covenant of good faith and fair dealing): Harvest Homebuilders LLC v. Commonwealth Bank and Trust Company (COA 1/29/2010)

Harvest Homebuilders LLC v. Commonwealth Bank and Trust Company
2008-CA-001897 01/29/2010 2010 WL 323186

Opinion by Judge Taylor; Chief Judge Combs and Senior Judge Henry concurred. The Court affirmed a judgment of the circuit court awarding the appellee bank a deficiency judgment against appellants. The Court held that the trial court did not err by awarding the deficiency judgment as the record clearly established that the bank did not breach the implied covenant of good faith and fair dealing. The Court distinguished the holding in Pearman v. West Point National Bank, 887 S.W.2d 366 (Ky. App. 1994), in that appellee neither entered into a contract to sell the real property during the foreclosure proceedings nor actually sold the real property to a third party. Further, its lack of consent to a sale of the property prior to foreclosure was based on appellants’ insistence that the sale be conditioned upon their release from liability for any resulting deficiency.

CONTRACTS: Barnett v. Community Trust Bank, Inc. (COA 12/18/2009)

Barnett v. Community Trust Bank, Inc.
2009-CA-000164 12/18/2009 2009 WL 4877691

Opinion by Judge Lambert; Senior Judge Harris concurred; Judge VanMeter dissented by separate opinion. The Court vacated and remanded a summary judgment entered by the circuit court dismissing appellant’s claims of negligence, breach of contract and unjust enrichment filed against the appellee bank and appellant’s brother’s ex-wife. The claims arose after a bank employee changed the death beneficiary on a CD jointly owned by appellant and his brother without inquiring as to whether the brother wished to remove appellant as a joint owner and did not follow bank policy by cashing out the jointly-owned CD and opening a new individually-owned CD. The Court held that there was a genuine issue of material
fact as to whether the brother would have actually consented to or authorized the transaction in question if the bank employee had verified ownership of the CD and then properly discerned the brother’s intent by adhering to bank policies. The bank’s acknowledgment that it failed to follow its own policies and procedures, as well as the employee’s testimony that he would have executed the transaction differently had he known about the joint ownership, supported the conclusion that the bank breached its duty of care. The Court then held that the record was sufficient to allow a jury to decide whether appellant’s brother intended to completely divest him of any ownership or beneficial interest in the CD. The Court also held that if a jury should find in appellant’s favor and then erroneously distributed the funds to his brother’s ex-wife, then viable claims for breach of contract and unjust enrichment still existed.

CONTRACTS: Barber Cabinet Company, Inc. v. Sparks (12/4/2009 COA)

Barber Cabinet Company, Inc. v. Sparks
2008-CA-001948 12/04/2009 2009 WL 4406079

Opinion by Senior Judge Lambert; Chief Judge Combs and Judge Moore concurred. The Court reversed and remanded an order of the trial court finding that no contract was formed between a cabinetry company and a homeowner and dissolving the cabinet company’s liens on the residential property. The Court first held that the trial court erred in not enforcing the contract between the cabinetry company and the homeowner when it unambiguously showed that the homeowner personally obligated himself to make payment in the event the contractor failed to make payment. The Court then held that under KRS 376.010(4), if payment from the homeowner to the contractor was identifiable as payment for the cabinetry, the homeowner was entitled to a dollar-for-dollar credit for such sums and the cabinetry company could have a lien only to the extent the homeowner failed to pay the contractor for the cabinetry.

TAXATION – Corporations, physical presence: Revenue Cabinet v. Ashworth Corporation (COA 11/20/2009)

Revenue Cabinet v. Ashworth Corporation
2007-CA-002549 11/20/09 2009 WL 3877518

Opinion by Judge VanMeter; Judges Clayton and Nickell concurred.

The Court affirmed in part and reversed in part and remanded an order of the circuit court reversing an order of the Kentucky Board of Tax Appeals holding that KRS 141.040 did not reach the distributive shares paid to the appellee/cross-appellant corporations by partnerships doing business in Kentucky because the corporations did not have a physical presence in Kentucky.

The Court first held that the circuit court did not err by finding that the corporations were subject to taxation pursuant to KRS 141.206(5). The plain language of the statute subjected the corporations to taxation and the words “are taxable,” instead of “shall pay,” were sufficient to impose tax liability.

The Court next held that KRS 141.206 was not void for vagueness as the legislative will expressed in the statute intelligibly expressed the policy that nonresident corporations, which are partners in a partnership doing business within and without Kentucky, are taxable on their proportionate share of distributive income passed through the partnership attributable to business done in Kentucky.

The Court next held that subjecting the corporations to tax under KRS 141.206(5) did not violate the Commerce Clause. The corporations owned up to a 99% limited and/or general partnership interest in, and received distributive shares of partnership income from the profits of, the partnership doing business in Kentucky, the partnership received protection and benefits from Kentucky, thereby enabling distribution of income to the corporations. This connection gave rise to a substantial nexus with, and/or physical presence within, Kentucky. For the same reason, the Court held that subjecting the corporations to tax under the statute did not violate the Due Process Clause of the Fourteenth Amendment.

The Court next held that the circuit court erred in applying the three-factor formula found in KRS 141.120(8) to calculate the amount owed because KRS 141.206(5) contained the proper formula. The Court further held that the application of the formula in KRS 141.206(5) was constitutional and did not result in the taxation of extraterritorial values.
The Court next held that the circuit court erred by granting the corporations’ motion seeking immediate payment of their refunds. Under KRS 131.340 a refund payment is not due until the matter is finally adjudged by either the Board or a court.

The Court next held that the amendment of a number of Bills did not render them unconstitutional. The Court held that since the Bills rationally furthered the legitimate governmental purpose of raising revenue, they satisfied the rational basis test and the retroactive period extending to outstanding claims as of the Bills’ effective dates did not violate the due process clause. For the same reason, the Court held that the corporations’ equal protection claim was without merit. Further, the application of the Bills did not constitute an unconstitutional taking because the adjustment of the interest rate on tax refunds was not such an exertion of the legislative taxing power so as to constitute a taking. The Court also held that the Bills did not contain more than one subject or insufficiently express the subject matter contained therein in violation of Ky. Const. § 51.

The Court next held that the Bills were not impermissible special legislation in violation of Ky. Const. § 59.

GARNISHMENT: Brooks v. Lexington-Fayette Urban County Housing Authority (COA 11/13/2009)

Brooks v. Lexington-Fayette Urban County Housing Authority
2008-CA-001677 11/13/09 2009 WL 3786367

Opinion by Judge Nickell; Judges Keller and Moore concurred.

The Court affirmed orders of the circuit court granting appellee’s costs and expenses incurred in the successful bid to quash enforcement of a non-wage garnishment and denying appellant’s request for attorney fees.

The Court first held that the trial court did not err in granting legal fees to appellee for amounts incurred in challenging the enforcement of the non-wage garnishment. Appellant’s reliance on the law of the case doctrine was misplaced. The record and the earlier published opinions rendered in the matter did not hold that the Housing Authority was not a state agency and in light of precedent, the Housing Authority, created under KRS Chapter 80, enjoyed the status of a state agency. Therefore, the trial court correctly found that it was not subject to levy or execution by garnishment.

The Court then held that the trial court did not abuse its discretion in awarding the Housing Authority its reasonable attorney fees pursuant to CR 54.04 and KRS 411.080.
The Court finally held that the trial court did not err in denying appellant’s request for additional attorney fees for her attempt to enforce the judgment through non-wage garnishment as CR 54.04 and KRS 344.450 only allowed for awarding attorney fees to the prevailing party.

CORPORATIONS – Corporate Veil: Inter-Tel, Inc. v. Linn Station Properties, LLC (COA 11/20/2009)

Inter-Tel, Inc. v. Linn Station Properties, LLC
2008-CA-002266 11/20/09 2009 WL 3878099

Opinion by Senior Judge Henry; Judges Caperton and Dixon concurred.

The Court affirmed an opinion and order of the circuit court granting a motion for summary judgment in favor of a property owner against a parent corporation of a corporation which was in turn the corporation parent of a defunct corporation against which a default judgment was obtained for the breach of a lease of an office building. The Court held that the circuit court correctly determined that the corporate veil could be pierced and that the parent and sub-parent corporations were liable for the default judgment. There were no disputed issues of material fact that the breaching corporation was undercapitalized; that its owners did not observe corporate formalities; that it had no employees, bank accounts or assets; that it did not pay its own bills; and that it was essentially maintained for the tax advantages it provided to its parent corporations.

CONTRACTS – Public employment: Waters v. City of Pioneer Village (COA 11/20/2009)

Waters v. City of Pioneer Village
2008-CA-000837 11/20/09 2009 WL 3877596
Opinion by Judge Clayton; Judges Moore and VanMeter concurred.

The Court affirmed an order of the circuit court granting a judgment to the appellee city on its claim against appellant for breach of an employment contract.

The Court first held that KRS 70.290, which allows a law enforcement agency to require a newly appointed officer to enter into an employment contract for no longer than three years from the date of graduation from the Criminal Justice Training Academy, did not prohibit the city from seeking repayment of the amounts owed under the contract. The statute did not provide the sole means of reimbursement to the City for expended training costs. While the statute placed a duty on an agency to pay the agency that paid for the training, it did not place a duty on the first agency to obtain the payment from the second.

The Court then held that because the City was entitled to be reimbursed under the employment contract, rather than under the statute, the amount recovered was properly calculated pursuant to the contract.

PROPERTY – Equitable subrogation, liens: Roberts v. Mortgage Electronic Registration Systems, Inc. (COA 10/30/2009)

Roberts v. Mortgage Electronic Registration Systems, Inc.
2008-CA-000262 10/30/09 2009 WL 3486594
Opinion by Judge Thompson; Chief Judge Combs concurred; Senior Judge Buckingham dissented by separate opinion.

The Court reversed and remanded an order of the circuit court granting a motion for default and summary judgment. The circuit court applied the doctrine of equitable subrogation and found that appellee’s lien had priority over appellant’s lien in a foreclosure action. The Court held that the trial court erred in applying the doctrine of equitable subrogation in reordering lien priorities to appellant’s detriment and that the liens should have been prioritized in accordance with KRS 382.280. The Court distinguished the narrow holding in Louisville Joint Stock Land Bank v. Bank of Pembroke, 225 Ky. 375, 9 S.W.2d 113 (1928), and held that the facts did not justify the relief sought when appellee lacked diligence in discovering appellant’s lien and appellant’s interest could be entirely or partially defeated if the property was sold for an amount insufficient to repay both appellant and appellee.

BUSINESS, Noncompete Clause: Kegel v. Tillotson (COA 10/30/2009)

Kegel v. Tillotson
2008-CA-001938 10/30/09 2009 WL 3486739
Opinion by Judge Caperton; Judges Dixon and Taylor concurred.

The Court reversed and remanded an order of circuit court granting a motion for summary judgment in favor of appellee and denying a motion for summary judgment in favor of appellants on appellants’ complaint alleging that appellee violated, and continued to violate a non-compete clause she signed with the prior owner of the business for which she worked selling promotional products and advertising merchandise. The Court first held that the trial court erred in finding that the non-compete clause was not assignable. The contract was not one of personal confidence as appellee’s resignation letter showed that her relationship was with the company, not with the former owner, and evidenced an implicit acknowledgment that appellants stood in the former owner’s shoes insofar as their contractual rights were concerned. The Court further held that appellee’s status as an independent contractor did not alter the applicability of prior precedent that a successor employer may enforce an employee’s restrictive covenant as an assignee of the original covenantee. The Court next held that the trial court’s finding that the non-compete clause was unconscionable was prematurely entered. Whether or not the particular non-compete clause was conscionable was highly fact specific and the trial court could apply the “blue pencil” rule to reform or amend restrictions that are overly broad or burdensome.