BUSINESS LAW / SOL – Adverse domination and tolling of shareholder suits against directors; equitable tolling: John R. Wilson, Trustee for Franklin Career Services, LLC v. David B. Paine & John Newton (SC 6/25/2009)

John R. Wilson, Trustee for Franklin Career Services, LLC v. David B. Paine & John Newton
2008-SC-000905-CL June 25, 2009
Opinion by Justice Cunningham. All sitting; all concur.

The U.S. Bankruptcy Court for the Western District of Ky. certified the following question to the Kentucky Supreme Court: Does the equitable doctrine of adverse domination apply to toll the statute of limitation on lawsuits against corporate directors for unlawful distributions (KRS 271B.8-330)? The Court answered this question in the affirmative. The doctrine of adverse domination provides that a cause of action by a corporate plaintiff against the board of directors will be tolled during the period that the corporation is under the control of wrongdoers.

Equitable tolling is based upon a lack of knowledge of an injury. Accordingly, a corporate plaintiff cannot be deemed to have knowledge until such time that the individuals who control the corporation are aware of the injury and are willing to act upon the knowledge. The Court adopted the “disinterested majority” test for adverse domination, wherein the plaintiff is required to show that a majority (not all) of the board members engaged in intentional wrongdoing (not mere negligence) in order to toll the statute of limitation.