Opinion of the Court by Justice NOBLE.
This case presents two primary questions. First, is the sole member of a limited liability company liable under a lease expressly stating that the company is the tenant even though the lease is the product of a release that does not mention the member's company capacity or the company in any direct way? Second, assuming the member has not directly obligated herself, can she be held personally liable if the lease was entered into while the company was, administratively dissolved and was subsequently reinstated? Based on the facts in this case, the member did not directly obligate herself because she clearly signed the lease in her representative capacity and the lease was expressly with the company. And because Kentucky's Limited Liability Company Act provides
Ann Shannon organized Elegant Interiors, LLC in 2000 under the Kentucky Limited Liability Company Act, KRS Chapter 275, and was the company's sole member. In February 2004, Elegant Interiors, LLC entered into a lease for 3,645 square feet of commercial space with Rick Pannell, who owned the property. Shannon signed the lease on behalf of Elegant Interiors, LLC.
In 2005, Elegant Interiors, LLC failed to file its annual report as was then required by KRS 275.190
In March 2006, the parties negotiated new leasing terms, entering into a release of the old lease and a new lease for less than half the previous space. The release was prepared by Shannon, and was signed on March 2, 2006. It stated:
The release was signed by both Ann Shannon and Rick Pannell. It does not mention Elegant Interiors, LLC.
Despite the reduced cost, the rent payments for June and July of 2006 were not made. Pannell sued for breach of the lease agreement on July 21, 2006. He named both the LLC and Shannon individually, seeking to hold her personally liable for the rent through various theories, including that she had no authority to enter into the lease for the LLC and that the corporate veil of the LLC should be pierced because the company was simply the "alter ego" of Shannon.
Shortly after, Shannon sought to reinstate the administratively dissolved LLC, as was then allowed by KRS 278.295.
Shannon then sought summary judgment on the basis that she could not be held personally liable for the breach of the lease because the tenant on the lease was Elegant Interiors, LLC, which had been reinstated. She argued that because she was a member of the LLC, she was shielded from personal liability by KRS 275.150, the statute granting immunity to LLC members for acts of the LLC.
Pannell argued that despite the LLC being named the tenant in the lease, Shannon personally executed the lease, as evidenced by her signature on the release without any reference to the LLC, and thus she entered into the lease in her individual capacity. He also argued that Shannon could not have acted on behalf of the LLC because there was no such entity in existence at the time.
The circuit court disagreed. It held that the LLC, not Shannon individually, had entered into the lease, noting that the lease specifically described the tenant as "Elegant Interiors, a LLC corporation [sic]." As a result, according to the circuit court, the LLC was "the party assuming the obligations of Tenant." As to the secondary argument, the court cited KRS 275.295(3), which stated in part that an LLC's "reinstatement shall relate back to and take effect as of the effective date of the administrative dissolution, and the limited liability company shall resume carrying on business as if the administrative dissolution had never occurred." KRS 275.295(3)(c). The court held that since the lease specifically named the LLC and the reinstatement of Elegant Interiors, LLC occurred before entry of judgment, actions taken in the name of the company in entering into the 2006 lease were effective as if the dissolution had not occurred. As a result, Shannon was entitled to immunity from personal liability. The circuit court then awarded Pannell damages against Elegant Interiors, LLC under the lease.
The Court of Appeals affirmed unanimously, holding; that the lease was with the
This Court granted discretionary review.
This case presents two broad legal questions. First, did Shannon sign the release and lease in her individual capacity, thereby making her personally liable? Second, did the administrative dissolution of the LLC and Shannon's signing the lease during the period of dissolution, regardless of whether she signed in her company-member or individual capacity, make her personally liable?
Pannell's initial argument is that regardless of the status of Elegant Interiors, LLC, Shannon signed the release and the second lease in her individual capacity. To support this argument, he notes that the lease states on its cover page that it is "for Ann Shannon," and that Shannon failed to indicate that her signature was in a representative capacity for the LLC. This, he claims, makes the document ambiguous, and thus subject to clarification through parol evidence. He also argues that the release, which was prepared by Shannon, mentions only Shannon and not the LLC, which would make her personally liable. This Court agrees with the Court of Appeals that Shannon did not sign the March 2006 lease in her personal capacity.
As to the claim that the lease states it is "for Ann Shannon," it suffices to say that the lease defines the "Tenant" as Elegant Interiors, LLC, and throughout its terms refers to the "Tenant" as the party to the lease. The only reference to the lease agreement being "for Ann Shannon" appears on the cover page of the lease, which also states that the "tenant" is Elegant Interiors, LLC.
The cover page is but "introductory or prefatory" material. It had less substance than even the traditional recitals of a contract, which are "not an essential part of the operative portions of the contract." Jones v. City of Paducah, 283 Ky. 628, 142 S.W.2d 365, 367 (1940). Like recitals, the statement on the cover page is not an essential part of the operative terms of the lease.
As for the claim that Shannon did not include her title or otherwise indicate her representative capacity along with her signature, it is worth noting that her signature line was preceded by the word "By," which indicates that the signature is in a representative capacity. See 7 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 3032 (rev.vol.2012) (noting that a representative signature is ideally "preceded by the word `For' or `By' or some equivalent"). And the simple fact is that Shannon did not have to list her title, though clearly the better practice is to include it. "[F]ailure of the officers signing to add the title of their office is not ordinarily fatal to the validity of a corporate contract where the contract on its face is a contract of the corporation and the other parties have notice of the officer's relation to the corporation." Id. § 3035; see also Star Supply Co. v. Jones, 665 S.W.2d 194, 198 (Tex. App. 1984) ("The signature of a corporate officer on a contract does not render it his personal contract, where in the body of the
There appears to be no Kentucky case stating this rule. The only cases addressing who is bound by the signature of a business entity's officer or agent are those where the body of the document does not state that the business entity is a party to the agreement and only the signature could so indicate. See, e.g., Simpson v. Heath & Co., 580 S.W.2d 505, 506 (Ky.App. 1979) (construing agreement binding "the undersigned" and signed by corporation's president with "Pres." after his signature). But that is not the situation before this Court, given that the lease expressly states it binds the LLC.
This Court sees no reason to depart from the rule that if the body of the contract states that the agreement is with a corporation or other entity, then the officer or agent signing the agreement has not signed in her individual capacity and cannot be held personally liable solely because of her signature. This makes sense in light of the cases noting that "[i]t is ... fundamental that an officer of a corporation will not be individually bound when contracting as an agent of that corporation within the scope of his employment." Potter v. Chaney, 290 S.W.2d 44, 46 (Ky.1956). As long as the third party has notice that the agent is acting on behalf of a principal, "the agent is not liable, generally speaking, for his own authorized acts, or for the subsequent dealings between the third person and the principal." Id.
Again, as noted above, the lease describes Elegant Interiors, LLC as the party to be bound as the tenant. This identified Elegant Interiors, LLC as the principal and gave Pannell notice that he was dealing with Shannon as an agent of the company.
There is no ambiguity in the lease, at least none based on the cover-page statement or the fact that Shannon did not indicate that her signature was on behalf of the limited liability company. It is thus clear that the lease was a contract of the limited liability company, not Shannon individually, and therefore Shannon cannot be liable as having signed the lease in her personal capacity.
Pannell also claims that the release, by stating that the bound party was "Ann Shannon" without mentioning Elegant Interiors, LLC, made Shannon personally liable or, at the very least, created ambiguity as to the overall agreement when read with the second lease by misleading him. While the release does state that "Ann Shannon ... will only be responsible for payment of the remaining" square footage, it is equally clear that the release was aimed primarily at giving up some of the rights to occupy commercial space under the original lease, which was with Elegant Interiors, LLC. This is evinced by the use of the word "only," to suggest that the release reduces an existing obligation. The release clearly related to the first lease in that it allowed Pannell to rent some of the space to a third party, reduced the rent to be paid, and put the burden of paying for any construction costs on Pannell.
The last sentence of the terms of the first (and second) lease stated that "[n]o modification to this lease shall be binding unless such modification shall be in writing and signed by the parties hereto." The parties to the original lease were unquestionably
Ultimately, the release and the second lease must be read in light of the statutory preference for maintaining an LLC member's limited liability. KRS 275.150(2) states that the immunity provision, KRS 275.150(1), can give way "under a ... written agreement," in which "a member or manager may agree to be obligated personally for any of the debts, obligations, and liabilities of the limited liability company." But as this Court has stated, allowing personal liability is "antithetical to the purpose of a limited liability company." Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654, 659 (Ky.2010). The business statutes of this Commonwealth disfavor personal liability, and even when a member of the company intends to take on such liability, it "must be stated in unequivocal terms leaving no doubt that the member or members intended to forego a principal advantage of this form of business entity." Id. The release and second lease do not state in unequivocal terms that Shannon was binding herself personally and foregoing her statutory immunity.
As to the notion that the release and second lease could or should be read together to create ambiguity, it suffices to point out that the second lease included what is known as an integration or merger clause. The very last clause of the lease states that "[t]his writing contains the entire agreement of the parties hereto."
Pannell also suggests that the second lease's provision stating that the tenant is Elegant Interiors, LLC was "scrivener's error" and that the intent of the parties was for Ann Shannon to be listed as the tenant. While scrivener's error can be grounds for reforming a contract as the result of mutual mistake, "it is the well-established rule in this state that reformation of an executed contract on the ground of mistake will not be decreed unless the mistake be established by full, clear, and decisive evidence," and "[t]he ground of relief must appear beyond reasonable controversy." Nichols v. Nichols, 182 Ky. 18, 205 S.W. 953, 954 (1918); see also Abney v. Nationwide Mut. Ins. Co., 215 S.W.3d 699, 704 (Ky.2006) ("The mutual mistake must be proven beyond a reasonable controversy by clear and convincing evidence." (quoting Campbellsville Lumber Co. v. Winfrey, 303 S.W.2d 284, 286 (Ky.1957), brackets omitted)). While a mutual mistake as to the identity of one of the parties surely would go to a material term of the agreement, there simply is insufficient proof here to justify finding a scrivener's error.
Nonetheless, "merely finding that [Shannon] signed ... in a [limited liability company capacity] rather than an individual capacity does not dispose of this appeal." White v. Winchester Land Development Corp., 584 S.W.2d 56, 60 (Ky.App. 1979), overruled on other grounds by Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012). Pannell's other arguments about the administrative dissolution and Shannon's authority as an agent of the LLC must also be addressed.
Pannell also argues that because Elegant Interiors, LLC had been administratively dissolved at the time the second lease was entered into, any liability must fall on Shannon personally, regardless of whether she signed the lease in her individual capacity. Shannon of course argues that the reinstatement of the LLC was retroactive, thus giving the company continuous existence and placing liability on the company alone. This actually presents two different questions. First, did the dissolution strip Shannon of her statutory immunity as a member of the LLC and thereby make her personally liable? Second, was Shannon liable as an agent for the LLC during its administrative dissolution, either by reason of being an agent or because she was without authority to enter into the lease?
This Court concludes that a member of a limited liability company enjoys statutory immunity from liability under KRS 275.150 for actions taken during a period of administrative dissolution so long as the company is reinstated before a final judgment is rendered against the member.
Pannell begins by claiming that the "well-established and ancient rule" in Kentucky is that shareholders and officers are personally liable for debts made in the name of a dissolved corporation. He implies that the same rule should extend to limited liability companies. This, however, was "the rule at common law," Moore v. Occupational Safety and Health Review
This Court must therefore first look at the controlling' statutory law. The obvious place to start, then, is the source of limited liability in the LLC context, KRS 275.150. That statute grants immunity from personal liability to members, managers, employees and other agents of an LLC, stating in relevant part:
KRS 275.150(1). Subsection (2) allows liability only if the operating or other written agreement allows a member or manager to agree to become personally liable, which is not the case here, as discussed above.
The question, however, is not whether this immunity exists (obviously, it does), but whether it ceases to apply when the LLC is administratively dissolved and the LLC continues to conduct its business, even though later reinstated. When the events of this case occurred, KRS 275.295 provided that when an LLC is reinstated after administrative dissolution, "the reinstatement shall relate back to and take effect as of the effective date of the administrative dissolution, and the limited liability company shall resume carrying on business as if the administrative dissolution had never occurred." KRS 275.295(3)(c) (emphasis added). The plain meaning of the relate-back language is that the company is deemed viable on reinstatement from the point of administrative dissolution onward, which necessarily includes the time of suspension between the date of administrative dissolution and reinstatement.
Reinstatement under the statute literally undoes the dissolution. This is why the Secretary of State was required to "cancel" the certificate of dissolution and issue a certificate of existence. See KRS 275.295(3)(a). And that certificate of existence took effect, by statute, retroactively on the date of dissolution.
The Court of Appeals has read the same language that appeared in KRS 255.295, albeit in KRS 271B. 14-220, the statute
The problem is that a conjunctive "and" follows this relate-back language and leads to the language that the company shall "resume carrying on its business as if the administrative dissolution or revocation had never occurred." Absent the word "resume," the meaning of the statute would be unquestionable — if a business entity is reinstated, its entity status is to be deemed seamless, with no loss of identity — just as the Court of Appeals held in Fairbanks.
Pannell, however, argues that we cannot ignore the word "resume" in the statute, claiming that it means something different from "continue" and that it necessarily requires that the entity have quit doing business while administratively dissolved. He also cites KRS 275.300, which states that a dissolved LLC "shall continue its existence but shall not carry on any business except that appropriate to wind up and liquidate its business and affairs." KRS 275.300(2).
He also cites a 2-1 unpublished opinion by the Court of Appeals, Forleo v. American Products of Kentucky, No. 2005-CA-000196-MR, 2006 WL 2788429 (Ky.App. Sept. 29, 2006), interpreting the same language construed in Fairbanks. Again, while that language was in the corporation statute, it was identical to that in the LLC statute. In Forleo, the court held that a corporation's shareholders were personally liable for business conducted during a period of administrative dissolution despite the reinstatement statute. In Forleo, judgment was entered against the shareholders finding them personally liable. After entry of the judgment, the shareholders had the corporation reinstated and moved to have the judgment set aside through the retroactive application of the reinstatement KRS 271B.14-220. Rather than applying laches or a similar theory, the Court of Appeals reasoned that the shareholders had acted in contravention of the provision allowing only "winding up" after dissolution, KRS 271B.14-210(3), making the actions non-corporate in nature. The Court reasoned that the choice of the word "resume" in the statute "necessarily implies that the corporation ceased doing business after dissolution" Id. at *2. Therefore, the court reasoned, the acts taken in the interim could not have been corporate acts. Unfortunately, Forleo apparently failed to address Fairbanks, despite being decided later in time.
With Fairbanks and Forleo, though only one was a published and therefore precedential opinion, there is an apparent split of opinion in the Court of Appeals. Indeed, another panel of the Court of Appeals has applied Fairbanks, in another unpublished decision, to mean that if "reinstatement of a corporation relates back to the effective date of dissolution and operates
The statute's inclusion of "resume" does seem to offer some ambiguity. Admittedly, "resume" is ordinarily understood to require an interruption in activities. See, e.g., Merriam-Webster's Collegiate Dictionary 999 (10th ed.1997) (defining "resume" to mean "to return to or begin again after interruption" and "to begin again something interrupted").
But in interpreting statutes, this Court is required to give effect to all the language in a statute if possible. "No single word ... is determinative, but the statute as a whole must be considered." Cosby v. Commonwealth, 147 S.W.3d 56, 58-59 (Ky.2004) (quoting County of Harlan v. Appalachian Reg'l Healthcare, Inc., 85 S.W.3d 607, 611 (Ky.2002)). Thus, all the language of KRS 275.295 must be considered, and it must be considered in relation to the other statutes in the chapter. The word "resume" must therefore be read in light of the other parts of KRS 275.295(3)(c) that clearly contemplate a seamless existence for the company.
To understand the whole statute, we must look at what happens when the Secretary of State reinstates an administratively dissolved LLC. As noted above, if the requirements of reinstatement are met, then the Secretary of State "shall cancel the certificate of dissolution." KRS 275.295(3)(b) (emphasis added). "Cancel" means "to terminate a promise, obligation, or right." Black's Law Dictionary 218 (8th ed.2004). Thus, the certificate of dissolution is undone — voided — and has no effect.
More importantly, the Secretary of State must also "prepare a certificate of existence stating the effective date of reinstatement." KRS 275.295(3)(a). This "effective date" is dictated by KRS 275.295(3)(c), which says that the reinstatement shall "take effect as of the effective date of the administrative dissolution." Thus, the Secretary of State certifies the existence of the corporation as of the date of dissolution, with the net effect that the corporation was never suspended.
So what then is the effect of reinstatement? The company, of course, "resumes" its business. But the reinstatement "relate[s] back to and take[s] effect as of the effective date of the administrative dissolution," and the company "resumes" its business "as if the administrative dissolution had never occurred." KRS 275.295(3)(c). This other language cannot be ignored, nor can "resume" be read to trump it. To do so would effectively delete this other language, which anticipates that the company has a seamless existence and functionality. Giving effect to that language, however, does not ignore or elide "resume"; rather, it suggests that "resume," as used in this
Indeed, the Court of Appeals, in Fairbanks, addressed the argument that a court should "focus solely on the word `resume' found in KRS 271B.14-220(3) and construe the statute to disavow interim corporate activities." Fairbanks, 198 S.W.3d at 147. That court declined to follow this interpretation, stating:
Id. (alteration and omission in original). Instead, the court gave effect to the language following "resume," which requires acting "as if the administrative dissolution... had never occurred" and treating the effective date of reinstatement as the date of the dissolution. Id. at 146.
That this is the proper reading of KRS 275.295 is buttressed by subsequent amendments and enactments of the General Assembly in this area. "Where a former statute is amended, or a doubtful meaning clarified by subsequent legislation... such amendment or subsequent legislation is strong evidence of legislative intent of the first statute." Kotila v. Commonwealth, 114 S.W.3d 226, 238 (Ky.2003) (quoting 2B Norman J. Singer, Sutherland Statutory Construction § 49:11, at 120-21 (6th ed.2000)), abrogated on other grounds by Matheney v. Commonwealth, 191 S.W.3d 599 (Ky.2006). This is part of the canon of construction requiring statutes to be read in pari materia. See id. ("If it can be gathered from a subsequent statute in pari materia what meaning the legislature attached to the words of a former statute, they will amount to a legislative declaration of its meaning, and will govern the construction of the first statute." (quoting California Sch. Township, Starke Cty. v. Kellogg, 109 Ind.App. 117, 33 N.E.2d 363, 366 (1941))).
This change alone undermines the claim in Forleo that actions during a period of administrative dissolution can lead to personal liability for a shareholder. The General Assembly, by making this change, has expressly stated that limited liability for shareholders is to continue despite an administrative dissolution.
The limited-liability-company analog to the corporate statute, KRS 275.305, was also changed in 2007 so that it too states that dissolution "shall not ... [a]bate or suspend KRS 275.150(1)." KRS 275.305(3)(i); see 2007 Ky. Acts ch. 137, § 120 (amending the statute). KRS 275.150(1), of course, is the provision giving immunity to a limited liability company's members, managers, and employees. This amendment of the limited-liability-company statute clarified the intent of the legislature as to the effect of dissolution on the liability of a limited liability company's members, just as the similar change did for corporate shareholders.
In fact, this matter has been further clarified by the adoption of the Kentucky Business Entity Filing Act, which replaced KRS 275.295 and similar statutes, as described above. That relevant portion of that Act states:
KRS 14A.7-030(3). This new statute substitutes "continue" where the old statute stated "resume."
Pannell argues that these changes are not evidence of what the statute formerly meant but instead show that his reading is correct, especially if the changes were necessary to correct the law in response to Forleo. That argument, however, ignores the in pari materia canon discussed above. This is not a matter of retroactive application of an entirely new statutory provision; rather, it is an application of old language, the meaning of which has been clarified by more recent amendments. The canon is a guide to meaning, not a substitute for it or a means of retroactively applying a statute. We have only used it as a guide here.
There is some concern that this reading of the statute ignores other aspects of the limited-liability laws, namely the command that a dissolved company "shall not carry on any business except that appropriate to wind up and liquidate its business and affairs." KRS 275.300(2). There is, admittedly, some apparent conflict between this language and the notion that a company's member or employee could go about non-winding-up business during an administrative dissolution and later enjoy immunity for those actions if the company has been reinstated. Nevertheless, this concern is unconvincing for several reasons.
First, this view would treat "actions after administration dissolution and prior to reinstatement that are beyond those necessary or appropriate to winding-up and liquidation as ultra vires and ... then hold the shareholders ... liable personally on ultra vires obligations." Rutledge, supra, at 240-41. But this ignores the rule that the only parties with standing to challenge an act as ultra vires are insiders (members or shareholders) and, in some circumstances, the Attorney General, not third parties doing business with the company. See KRS 271B.3-040(2). In fact, with corporations, third parties are statutorily barred from challenging a corporation's acts as ultra vires. See KRS 271B.3-040(1). While no analogous statute exists for limited liability companies, it stands to reason that third parties also should not be able to challenge an LLC's act as ultra vires as they have no interest in the dispute. Such a third party would thus have no standing.
Second, it does not make sense to enforce the winding-up-only limits on an LLC if it is not intended to be wound up and instead is meant to be a going concern. It is logical to view the language "carry on any business except that necessary to wind up and liquidate" as applying to companies that will not be seeking reinstatement. This is a sound principle, because it serves to prevent further acts by a business that does not intend to continue as a business entity. Even then, the Limited Liability Company Act allows that the LLC can be bound by non-winding-up acts under certain circumstances. See KRS 275.305(1)(b).
Additionally, there are some actions that must be taken during the dissolution before reinstatement to preserve the business of the company that plans to continue. It is a sound principle to allow ratification of acts of a company that intends to continue its entity status, so that the company may not avoid statutory and other regulation for the period of time it was under dissolution. This avoids a company purposely using dissolution to avoid legal restrictions on its conduct.
Since limited liability companies do not actually cease to exist during dissolution, it makes sense that the language about "relating back" and "as if the administrative dissolution or revocation had never occurred" is intended to create a seamless functional existence when the company wishes to continue doing business rather than closing up shop. Thus to read excessive meaning into the term "resume" would result in a poor business rule. That one word cannot mean more than the rest of the statutory language put together; it must be read to serve the business purpose intended by the legislation.
Pannell also argues that we should reject Shannon's immunity claim because the reinstatement statute is silent as to the issue of personal liability. He is correct that the statute is silent, but that silence cuts both ways. Just as the statute does not say that shareholders are still immune, it does not say they lose their immunity. Yet, as discussed above, our statutory and case law strongly favors maintaining limited liability for corporate shareholders and limited-liability-company members. See Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654, 659 (Ky.2010). Immunizing this constituency from personal liability promotes entrepreneurship, and increases the number of persons willing to engage the risks of entering into business. Additionally, there is no question that "a limited liability company is a legal entity distinct from its members," KRS 275.010(2); see also Turner v. Andrew, 413 S.W.3d 272, 275 (Ky. 2013), and that a member of a limited liability company "shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company," KRS 275.155; see also Turner, 413 S.W.3d at 275-76. This is the case "even where there is only one member." Turner, 413 S.W.3d at 276.
Statutes like KRS 275.150, 275.010, and 275.155 strongly suggest that the seeming gap in the reinstatement statute stemming from its silence on the issue of personal liability is filled by the strong policy in favor of limited liability. That the reinstatement statute does not include a provision expressly placing personal liability on various corporate dramatis personae during a period of dissolution is telling. Indeed, some other states have done exactly that. For example, Florida's administrative
To elevate the "resume" language over the rest of KRS 275.295, as happened in Forleo, undermines this strong preference for limited personal liability. It would also allow functional piercing of the corporate veil
As noted above, this analysis applies to Shannon's liability as a member of the LLC. But Pannell's objection appears to actually be that Shannon is liable as an officer or agent of the corporation who acted without authority. Indeed, this makes sense, as a corporate shareholder or LLC member, while an owner, is not necessarily an agent of the business entity, at least not simply by reason of being an owner.
Pannell's reliance on Forleo is telling in this respect, as one of the major criticisms of the analysis in that case (but not necessarily the result) is that "it conflated the role of the shareholder, who lacks the authority to act on behalf of or to bind the corporation, with the roles of a director and an officer which, respectively, has the authority to direct the management of the corporation and the authority to bind the
But the liability of a director, officer, employee or other agent of a limited liability entity during a period of administrative dissolution is technically a separate question from the liability of the owners of the entity. Indeed, as noted above, the cases Pannell relies on, and the majority rule those cases allege exists, are about the liability of directors, officers and other agents, as distinct from the owners (e.g., shareholders and members) of a business entity. Those cases sometimes also place liability on owners, but they do so because those owners were also acting as agents of the companies in question. And not only is it a separate question, it is often a different question, since the immunity from liability for these two groups often stems from different places, with the immunity for owners stemming from statute, see, e.g., KRS 271B.6.220 (limiting liability of corporate shareholders), and the immunity of directors, officers, and other agents, at least for contractual obligations, stemming from the law of agency, see, e.g., Restatement (Third) Of Agency § 6.01 (2006).
That the liability questions are separate is easily shown by a situation where the owner (member) is a different person from the agent, but the act in question was that of the agent. It is further shown by the fact that a business entity can only act through an agent. Clearly, the agent's personal liability for that act does not dictate whether the owner is personally liable. This case is analytically difficult in part because Shannon is both a member (owner) and manager (agent) of Elegant Interiors, LLC. But a member's immunity cannot be set aside solely because the "limited liability company has a single member or a single manager." KRS 275.150(1). Shannon's potential liability as an agent of Elegant Interiors, LLC is therefore addressed separately below.
This is the most difficult of the questions raised by this case, in part because it was not the focus of the litigation, or at least the decision, at the trial court. This question, however, again breaks down into multiple sub-questions. First, can Shannon under the circumstances of this case be personally liable by reason of her merely being an agent? Second, can she be personally liable because she acted as an agent without authority?
The analysis above about liability of members also applies to agents of the limited liability company, to the extent their liability is alleged to exist simply by reason of their being agents, at least under the statute in effect when the events in this case occurred. Unlike the corporation limited-liability statute, the statute granting immunity to members of a limited liability
But it is when talking about the liability of agents that Forleo offers one last objection to this reading of the LLC reinstatement statute, namely, that this interpretation will place Kentucky in a minority position with regard to the effect of reinstatement as to the liability of officers and agents. Forleo interpreted language in a corporation reinstatement statute identical to that in the LLC reinstatement statute. In construing the effect of the corporation reinstatement statute, Forleo stated: "A majority of other jurisdictions considering this issue have found that reinstatement of the corporation does not shield the officers from personal liability for debts incurred after dissolution." Forleo, 2006 WL 2788429, at * 1. In support of this conclusion, it cited Cardem, Inc. v. Marketron International, 322 Ill.App.3d 131, 255 Ill.Dec. 376, 749 N.E.2d 477 (2001), and WorldCom, Inc. v. Sandoval, 182 Misc.2d 1021, 701 N.Y.S.2d 834 (N.Y.Sup.Ct.1999). But neither of these cases stands for precisely the proposition claimed.
In Cardem, the defendant was the shareholder and president of the corporation, and was held liable. That decision was "based ... on a survey of the opinions of other jurisdictions that had addressed this question and agree[ment] with those that imposed personal liability on such an officer." Cardem, Inc., 255 Ill.Dec. 376, 749 N.E.2d at 480. It did not suggest that it followed a majority rule, only that it agreed with those cases imposing liability. Moreover, Cardem was based largely on an Illinois statute expressly making directors of a corporation liable for debts incurred during dissolution. See id. ("The directors of a corporation that carries on its business after the filing by the Secretary of State of articles of dissolution, otherwise than so far as may be necessary for the winding up thereof, shall be jointly and severally liable to the creditors of such corporation for all debts and liabilities of the corporation incurred in so carrying on its business." (quoting 805 Ill. Comp. Stat. 578.65(a)(3) (West 1998))). Kentucky does not have a statute like this one.
WorldCom at least claimed there is a "majority rule ... that `the officer may be held personally liable for debts incurred by the continuation of business of the dissolved corporation, regardless of the corporation's subsequent reinstatement.'" WorldCom, Inc., 701 N.Y.S.2d at 837. But this so-called majority rule appears to be the case only where the statutory scheme speaks specifically to the liability of the directors or other officers, as happened in Cardem, For example, WorldCom cited as one of its examples Moore v. Occupational Safety and Health Review Com'n, 591 F.2d 991, 994 (4th Cir.1979), but that case involved a Virginia statute specifically stating that "upon the entry by the Commission of an order of reinstatement, the corporate existence shall be deemed to have continued from the date of dissolution [e]xcept that reinstatement shall have no
Interestingly, the Moore court noted that there was a "contrariety of judicial opinion" on the subject, though it ultimately concluded that a majority of states had followed the common-law rule of holding directors liable for interim acts. But it then stated that "the effect of a state reinstatement statute on the interim liability of the directors of a dissolved corporation is determined by the appropriate state's interpretation or construction of the statute providing for the reinstatement or revival." Id. at 995 (citation footnote and quotation mark omitted). Thus, a different statute can dictate a different result. And, as noted above, Kentucky has largely replaced its common law of business entities with statutes, and those statutes differ from those in some other states, such as Illinois.
WorldCom is thus distinguishable from this case because it was based on New York statutes that do not provide expressly for retroactive effect of the reinstatement, though they state that reinstatement "shall have the effect of annulling all of the proceedings theretofore taken for the dissolution" and the corporation "shall thereupon have such corporate powers, rights, duties and obligations as it had on the date of the publication of the proclamation [of dissolution], with the same force and effect as if such proclamation had not been made or published." N.Y. Tax Law § 203-a(7), construed in WorldCom, Inc. 701 N.Y.S.2d at 837. WorldCom also relied heavily on Poritzky v. Wachtel, 176 Misc. 633, 27 N.Y.S.2d 316, 318 (N.Y.Sup.Ct.1941), which focused on the danger that corporate agents could use reinstatement to fraudulently shift personal debts to a corporation.
But in this light, it is not even clear that WorldCom or Poritzky correctly state New York law. First, both cases are decisions by trial courts deciding summary judgment motions, not appellate decisions. And as another, more recent New York trial court has noted, "[s]eductive though it may be, the Poritzky rationale is fallacious." Department 56, Inc. v. Bloom, 186 Misc.2d 901, 720 N.Y.S.2d 920, 922 (N.Y.Sup.Ct.2001). That court went on to describe how there are no incentives to engage in the type of behavior bemoaned in WorldCom and Poritzky, and that there were in fact several disincentives. Id. at 923. For that reason, Department 56 declined to read New York law to create personal liability, holding that "the state itself imposes no personal liability upon offending corporate officers or directors." Id.
Second, as one federal court has stated, WorldCom, and Poritzky ignored "the literal language of the statute" in question. Nigro v. Dwyer, 438 F.Supp.2d 229, 235 (S.D.N.Y.2006). At best, based on Nigro's review of the relevant case law, there appears to be "a fraud exception to the literal language of the [New York] Tax Law." Id. at 236. But there is no allegation of fraud here. (Pannell's suggestion that he was misled by the release's use only of Ann Shannon's name does not rise to the level of fraud, especially given that the lease clearly stated that the LLC was the tenant.)
The simple fact is that Kentucky's corporation law and other business entity laws differ from those in other states. Additionally, many of the decisions establishing or proclaiming the "majority rule" are older decisions, depend on statutes different from Kentucky's, and may not reflect the current statutory law in those
16A William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 8117, at 250 (rev.vol.2012).
The existence of a majority rule can only be persuasive if the rule is based on statutes like those in Kentucky. We cannot say that our statutes expressly state who is liable for a company's debts while under dissolution as is the case in some states. See, e.g., Frederic G. Krapf & Son, Inc. v. Gorson, 243 A.2d 713, 715 (Del. 1968) (interpreting statute "provid[ing] that upon reinstatement of a charter all contracts and other matters done and performed by the corporate officers during the time the charter was inoperative shall be validated, and be the exclusive liability of the corporation"). But they also do not expressly extend personal liability to officers and agents of a business entity when they act during a period of dissolution.
At best, the dissolution and reinstatement statutes are silent as to the question of personal liability. Yet we are charged with determining the effect of the reinstatement statute, which as noted above expressly makes the reinstatement retroactive, in the context of all the other statutes, such as those creating and favoring limited liability. The retroactivity of the reinstatement statute, when read with the provision making the company exist even after dissolution and the statutes creating immunity for agents, makes an agent immune if personal liability is alleged solely because the agent is an agent.
That said, the thrust of Pannell's argument is really that Shannon acted on her own behalf, not for the limited liability company, and without authority to do so. Part of this claim — that Shannon signed the lease not in her representative capacity, but in her personal capacity — has been addressed above. Whether Shannon actually
Again, this is a separate question from whether Shannon can be liable solely by reason of being an agent. The immunity provided by KRS 275.150 extends only to liability by reason of her being an agent. By alleging that Shannon acted without authority, Pannell is not claiming she is liable solely because of her status as an agent, but because she had no authority to act as an agent.
Business entities, as legal fictions, can only act through their agents, and the law of agency dictates when an agent or a principal is bound by a transaction and whether the agent is therefore personally liable.
And it is the universal law of agency that when an agent acts with authority in a transaction with a third party, and the third party is aware of the agency, the transaction is between the principal and the third party. See Restatement (Third) Of Agency § 6.01 (2006). In such circumstances, the agent is not liable. Id. The agent of a business entity (or any agent, for that matter) can be personally liable only when he or she purports to be an agent but actually acts without authority. When that happens, responsibility for the transaction falls back to the agent and does not bind the principal. Thus, when acting in the capacity of an agent for the LLC, Shannon could only be personally liable if she acted without authority. Otherwise, the contract in question was between the principal (the LLC) and the third party (Pannell), and Shannon had no personal liability for the agreement.
Pannell, of course, argues that Shannon lacked the authority to act on behalf of the LLC because there was no LLC in existence at the time the release and second lease were entered into. Pannell also argues
This line of reasoning is one argument for why Forleo reached the correct result,
Indeed, that this approach depends on the non-existence of the business entity is shown by the Restatement's claim that "[t]he classic instance of this situation arises when a person enters into a contract purportedly on behalf of an entity that has not yet been formed, such as a business or a not-for-profit corporation or a limited-liability company." Restatement (Third) of Agency § 6.04 cmt. c (2006). Obviously, that is not the case here because Shannon's company had been organized.
Of course, "[s]imilar questions arise when a person purports to take action on behalf of an entity ... when the entity has been dissolved." Id. In such instances, "[t]he organizational statute applicable to the entity may specify the circumstances under which such action will result in individual liability to third parties." Id. For example, the Restatement offers an illustration in which a business entity is dissolved and, under the applicable statutes, "the effect of the dissolution ... is to terminate [the entity's] existence." Id.
But under Kentucky law, a "dissolved limited liability company shall continue its existence." KRS 275.300(2). So Shannon's authority did not cease to exist for lack of a principal because Elegant Interiors, LLC continued to exist as a matter of statutory law.
Pannell suggests that KRS 275.300 creates another limit on Shannon's authority as an agent because the statute forbids the LLC and any erstwhile agent from doing any acts other than those necessary for winding up. By extension, this would mean that by command of the legislature, Shannon had no authority to engage in continuing business while the LLC was dissolved. This, of course, cannot be literally true because seeking reinstatement, which is clearly allowed, is not part of winding up.
More importantly, the retroactive effect of the reinstatement, which as noted above creates a seamless existence and functionality for the LLC, means there was never a failure of Shannon's authority. She was both a member and an agent of the LLC, and the reinstatement requires us to treat the LLC as though it existed the entire time. If the company never ceased to exist, and its full "corporate" powers are retroactive to the dissolution date, so too is the authority of its agent. Thus, the limits in KRS 275.300 had no applicability, since the LLC was, in fact, reinstated and had a continuous existence.
In a sense, the reinstatement was a kind of statutory ratification of Shannon's acts on behalf of the company. Ratification "supplies original authority to do the act." Kindred Nursing Centers Ltd. Partnership v. Leffew, 398 S.W.3d 463, 467-68 (Ky.App.2013) (quoting Capurso v. Johnson, 248 S.W.2d 908, 910 (Ky.1952)); see also Restatement (Third) of Agency § 4.02(1) (2006) (ratification "retroactively creates the effects of actual authority").
Reinstatement, however, is superior to traditional ratification. Ordinarily, ratification occurs either through "manifesting assent" or "conduct that justifies a reasonable assumption that the person so consents." Restatement (Third) Of Agency § 4.01(2) (2006). And "whether conduct is sufficient to indicate consent" to ratification "is a question of fact," id. § 4.01 cmt. d, which would require a jury finding. But as discussed above that the company never ceased to exist is a result of statute — a matter of law — and the effect of reinstatement is that the company's continued existence is as though there was never dissolution. If there was never dissolution, then there was never a lapse in Shannon's authority that would require traditional ratification.
Pannell complains in his brief that that the reinstatement occurred only after he filed suit and suggests that our reading of the statute has an inequitable effect. But it is not entirely clear how this reading is unfair to Pannell, except as viewed after the fact when it is clear that the LLC has no assets. But what if the circumstances were reversed, and the LLC still had assets but Shannon did not? Under Pannell's proffered reading of the statutory scheme, he would have to settle for suing Shannon because the acts were hers and not the LLC's.
The equities should be viewed from before the fact, at the time of the transaction, not after the fact once litigation is anticipated or begun. If Pannell had no notice of the dissolution and entered into the lease specifically with the LLC, then he cannot claim he is harmed or loses some bargain if the LLC is later reinstated and its agent's action are legally imputed to it. Pannell will have gotten all that he expected at the time of the transaction, including any risk and any benefit. It is only after the fact, after seeing what has happened with the LLC and seeing the risk manifest into reality, that he appears to be harmed.
The simple fact is that reinstatement is between the LLC and the state. Indeed, the primary purpose of requiring business entities to file annual reports and to pay a filing fee is "the raising of revenue for the State." Fairbanks Arctic Blind Co. v. Prather & Associates, Inc., 198 S.W.3d 143, 144 (Ky.App.2005) (quoting J.B. Wolfe, Inc. v. Salkind, 3 N.J. 312, 70 A.2d 72, 76 (1949)). Indeed, the filing fees were once called a "franchise tax." Any inequity would actually be in permitting Pannell to use the temporary faltering of the relationship between the LLC and the state to his advantage when he has no interest in that relationship. Cf. id. at 144-45 He cannot be allowed to take advantage of the LLC's failure to file its report and pay what amounts to a tax to bypass the LLC and hold its owners or agents liable, at least not once the failures have been remedied. Cf. id.
Shannon did not sign the second lease in her personal capacity, and thus liability cannot be assigned directly to her, bypassing the limited liability company in this case. Additionally, that the limited liability
All sitting. All concur.
There appears to be some confusion, however, as to whether statutes such as KRS 275.295 are presently the law. Both Westlaw and the Legislative Research Commission's website, www.lrc.ky.gov, state that KRS 275.295 has been repealed. At the same time, Michie's Kentucky Revised Statutes lists KRS 275.295 as presently the law and does not note the repeal. Yet Michie's is a "certified version" of the Kentucky Revised Statutes that has been certified by the Legislative Research Commission under KRS 7.132 to conform to the requirements of KRS 7.134 "that the particular material being certified has been prepared in a manner ... to ensure the identity of its text with the official version of the Kentucky Revised Statutes." KRS 7.134(3).
This Court's review of several bills enacted into law in the 2010 Regular Session, however, shows that KRS 275.295 and other similar statutes were fully repealed as of January 1, 2011. The laws in question are Senate Bill 150 (2010 Ky. Acts ch. 133); Senate Bill 151 (2010 Ky. Acts ch. 151); and Senate Bill 152 (2010 Ky. Acts ch. 51). Senate Bill 150 amended KRS 275.295 and other statutes. At least some of these amendments appear to have been minor, such as requiring the Secretary of State's notices to be served on an LLC's principal place of business address, rather than its registered office; this bill was enacted on April 13, 2010. Senate Bill 151 repealed KRS 275.295 and other statutes, and replaced them with KRS Chapter 14A, the omnibus business-entity filing bill described above; this bill was passed on April 13, 2010, and became effective on January 1, 2011. Senate Bill 152 repealed and reinstated KRS 275.295 and various statutes; this bill was effective July 15, 2010, and passed on March 30, 2010, a month and a half after Senate Bills 150 and 151.
That Michie's still lists the statutes repealed in Senate Bill 151 appears to be a result of the repeal-and-reinstate language in Senate Bill 152. But this ignores other provisions in Senate Bill 152, namely Section 184, which has the following language:
Under this provision, the amendments in Senate Bill 150 were to be made, even though they were passed earlier in the session — before the earlier versions were repealed and then reenacted by Senate Bill 152. And the repeals in Senate Bill 151 were also passed into law and, under Section 184, were to be made to the statutes at the proper time (i.e., January 1, 2011). While we might not initially think of a repeal as an amendment, it must be. "Amend" means "[t]o change the wording of; specif., to formally alter (a statute, constitution, motion, etc.) by striking out, inserting, or substituting words <amend the legislative bill>." Black's Law Dictionary 89 (8th ed.2004) (emphasis added). Repealing a statute is no different than the striking out of all the language in the statute. Thus, Senate Bill 152 should have taken effect on July 1, 2010, to repeal and reenact various statutes, along with the amendments made in Senate Bill 150. And Senate Bill 151 should have taken effect approximately six months later, on January 1, 2011, to repeal that which has been reenacted by Senate Bill 152 and amended by Senate Bill 150.
Senate Bill 152 appears to have been some sort of clean-up bill. It includes references to making several different amendments retroactive to 2002 or 2007. See §§ 180-183. For example, one part, section 183, states that the repeal-and-reenactment provisions elsewhere in the bill reflecting amendments that had been made in a 2007 bill are made retroactive to 2007. Why this was necessary is not self evident, but the General Assembly clearly believed it was. Similarly, it is clear that the General Assembly did not intend Senate Bill 152 to undo the amendments (including the repeals) that were to be made at various times at the command of Senate Bills 150 and 151.
Thus, despite the confusion, it is clear to this Court that the amendments made by Senate Bill 152 were only effective until January 1, 2011, at which time all those statutes were repealed by the effect of Senate Bill 151 and replaced by the omnibus Kentucky Business Entity Filing Act.
Under this clause, it is unclear whether St. Peter is an unnamed third party to the lease.
In fact, the perhaps most recent treatise on the subject agrees that it is valid, stating: "It is a logical consequence of this contextual principle [of construing statutes in pari materia] that the meaning of an ambiguous provision may change in light of a subsequent enactment." Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 254-55 (2012). The limit, of course, is that this approach is inapplicable "when the ambiguous provision has already been given an authoritative judicial interpretation ... by reason of the principle of stare decisis, which has special force in statutory cases." Id. at 255. "The legislature, naturally, can change the law whose meaning the prior judicial interpretation has established. But once the meaning has been established, the meaning cannot change `in light of' a later statute with which a different meaning would be compatible." Id. There so far has been no authoritative judicial interpretation of the meaning of this language that would suggest that, Pannell's interpretation is correct. In fact, the only published decision actually supports that idea that Shannon should be immune from liability and is in accord with the subsequent amendment to the law.
Fla. Stat. Ann. § 607.1421. Interestingly, even this statute does not extend liability to a shareholder, but instead extends the liability only to agents of the corporation. It also allows for ratification of those actions, which transfers the liability back to the corporation.
And traditionally, such language was only intended to address pre-organization actions. See, e.g., Wilburt D. Ham, Corporations, 63 Ky. L.J. 739, 745 n. 31 (1974-1975) ("the words ... `without authority so to do' presumably have reference to the existence of a certificate of incorporation"). Such language previously appeared in the corporation statute and has since been replaced by language expressly addressing liability for pre-incorporation acts. That the LLC statute has both forms of language suggests redundancy rather than intent to broaden liability.
