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Lane Report, March 2012
In business cases, Kentucky courts clarify contract law-tort law claims, LLC capital calls and bank-borrower responsibility.
Whether in good or bad economic times, the evolving state of the law presents unique challenges for Kentucky businesses large and small. Commonwealth courts (at both the trial and appellate level) have lately addressed a wide variety of issues that may be of interest to, and affect, Kentucky business owners. The following cases may not have caught your attention, but nevertheless may impact on how your business operates, now and in times to come:
Giddings & Lewis Inc. vs. Industrial Risk Insurers Inc., 348 S.W.3d 729 (Ky. 2011)
A series of decisions stretching back to 1990 hinted at this result, and in Giddings, the Kentucky Supreme Court confirmed Kentucky's adoption of the economic loss rule, in the context of the failure of a custom-manufactured piece of manufacturing equipment.
The rule provides that a commercial buyer of a product cannot recover in tort for purely economic losses if the product fails. Thus, while the buyer retains its tort claims for non-economic losses (like damages for personal injury or for harm to property other than the product), economic losses can be redressed only through claims sounding in contract.
As a practical matter, what this means is that if a commercial party suffers only economic losses and these losses are caused by a party with which it does not have a contract, there is no direct avenue for recovery - though the buyer might sue an entity with which it does have a contract, such as a supplier or installer.
While the result and effect of the economic loss rule may appear unduly harsh, it is the law now in a majority of states. It has been widely adopted on the public policy basis that where parties have a contract pertaining to a commercial purchase and sale, their disputes pertaining to the subject of the contract are best addressed by reference to the contract and contract law, and not tort law.
Cincinnati Insurance Co. v. Motorists Mutual Insurance Co., 306 S.W.3d 69 (Ky. 2011)
In this case, the Kentucky Supreme Court addressed the question of whether a claim of faulty workmanship in construction qualifies as an "occurrence" for purposes of triggering coverage under a commercial general liability ("CGL") policy. Adhering to the majority rule across the country and the underlying public policy, the court found that faulty workmanship is not an "occurrence" because to find that something in the nature of an accident occurred in the event of faulty workmanship would, in effect, be to transform the CGL policy into a performance bond or guarantee.
Racing Investment Fund 2000 LLC v. Clay Ward Agency Inc., 320 S.W.2d 654 (Ky. 2010)
This case addresses the issue of when (and if) the manager of a limited liability company that has a written operating agreement providing for capital calls can be compelled to make such a call. During the course of litigation, the LLC and the insurance agency entered into an agreed judgment for the collection of unpaid insurance premiums and the LLC (which was in dissolution) partially satisfied the judgment from its funds on hand. The agency took the position that the LLC's manager could compel the company's members to make a final capital contribution to satisfy the remainder of the judgment.
While the lower courts concurred, the Kentucky Supreme Court adamantly disagreed. The court found that the entire purpose of a limited liability entity such as an LLC is to shield the members from personal liability for obligations of the company, and that absent some express indication that the members had agreed to be personally liable, no capital call could be compelled merely to satisfy the judgment against the company.
Branch Banking and Trust Co. v. Thompson, 2011 WL 255149 (Ky. App. 2011) (unpublished)
An all-too-common situation in current economic conditions is a work-out effort by a commercial lender with a non-performing borrower who is striving to cure a default. In Thompson, the borrower (a commercial real estate investor) alleged that his loan officer made numerous representations about various means to cure the default, none of which the bank ever acted upon but which the borrower relied upon to his detriment. This resulted in a several million-dollar fraud verdict at trial, including a substantial award of punitive damages.
In vacating the award, the Kentucky Supreme Court noted that the borrower's testimony supported a finding that at the time the key representations were allegedly made by the bank, he already did not trust the bank and believed the bank was lying to him about principal attributes of the banking relationship. Therefore, any reliance by the borrower on the representations (a key element of fraud) was not reasonable.
Thompson is instructive for all parties to a banking relationship because it serves to remind lenders that all disclosures must be truthful and accurate; and borrowers that they must always act to protect their own interest and not merely rely upon the lender to do so.
Laurel Construction Co. v. Paintsville Utility Commission, 336 S.W.3d 903 (Ky. App. 2011)
This case presents the unique situation of a procurement contract that was properly awarded to the high bidder. The Commission, a municipal utility operating in Johnson and Lawrence Counties, solicited bids for a water tank. Laurel Construction submitted the lower of two bids presented, but the other bidder was awarded the contract. Laurel Construction challenged the award as contrary to Kentucky's Model Procurement Code.
In affirming a summary judgment dismissing the claim, the Court of Appeals noted that the code applies to local governments only when they affirmatively adopt it and neither the Paintsville Utility Commission nor the City of Paintsville had done so. Therefore, as a disappointed bidder, Laurel Construction had no ability to make a challenge under the code.
The court further found that because of differences in the types of tanks bid, the commission's decision to accept the high bid did not violate contract law principles.
In 2010 and 2011, the Jefferson Circuit Court was the site of a series of significant jury awards in employment law cases:
Snyder v. EPI Corporation
John Snyder served as CEO of Louisville-based nursing home operator EPI for 32 years. During negotiations to sell the company, Snyder (a 19 percent shareholder) objected to a proposed deal on the basis that the assets were being undervalued. When Snyder refused to acquiesce to the board's demand to proceed with transaction, he was fired. In the lawsuit, he sought lost wages of three times his annual salary (totaling $900,000) along with an unpaid bonus representing 6 percent of the pre-tax profits on the sale (amounting to roughly $7.3 million). EPI asserted that Snyder committed knowing malfeasance by opposing the sale and failing to obey the board and that he was terminated in accordance with a corresponding provision of his employment contract. A Louisville jury sided with Snyder and awarded him damages of $8.46 million.
Oliver v. Hilliard Lyons
Robert Oliver headed investment banking at Hilliard Lyons in Louisville for roughly 10 years. In 1998, when Hilliard Lyons was purchased by PNC Financial, Oliver was offered a $275,000 retention bonus, to be paid in back-loaded increasing shares over five years. Oliver asserted that he bypassed other employment opportunities in reliance on receiving the bonus. In 2001, Oliver was terminated, and never received the bulk of the money. In the lawsuit, he claimed that Hilliard Lyons had manufactured a performance-based reason to terminate him, to avoid paying the remaining bonus. He sought $238,333 and prevailed at trial. The case has been heavily litigated at the appellate level and remains before the Court of Appeals.
Banker v. University of Louisville
Mary Banker was a college track star and joined the coaching staff at Louisville in 2007. While coaching both the men's and women's track team, she encountered an allegedly hostile work environment replete with sexist language and innuendo, and disparate job duties compared to her male counterparts. When Banker complained, she received poor evaluations and her contract was not renewed. She sued the university on grounds of sexual harassment and retaliation. The jury returned a mixed verdict, denying the hostile work environment claim but awarding damages for retaliation of $300,000 for emotional distress and $71,875 for lost wages. The case remains before the Court of Appeals.
Boyle v. Ohio Valley Aluminum
Michael Boyle joined Ohio Valley in 2008, signing a contract providing for a $300,000 annual salary and clearly specifying grounds for termination (with liquidated damages for termination without cause of 18 months' salary). Boyle was terminated after one year, for missing budget goals, a ground for termination with cause under the contract. He sued, offering proof at trial that the parent company to Ohio Valley had in fact attempted to remove several highly compensated executives solely as a cost saving. The jury awarded Boyle the full amount of liquidated damages, in the amount of $750,000.
Another case, from federal court in Bowling Green, similarly provides that employers must be cautious in end-of-employment-relationship dealings:
Thompson v. Quorum Health Resources LLC
Mark Thompson served as CEO of the Monroe County Hospital but was actually employed by Quorum Health. During his employment, he developed a concern as to possible Medicare fraud at the hospital and filed a qui tam claim in federal court. After learning that Thompson was the qui tam relater, it fired him on the basis that although he had suspected misconduct as early as 1999, he did not report it until 2004, in contravention of his contract. Being that he was fired a month after the qui tam suit was unsealed, Thompson sued Quorum Health for retaliation.
Ironically, Quorum Health defended on the basis that Thompson had himself engaged in actionable conduct, by failing to report the possible fraud each year starting in 1999. A federal jury disagreed and awarded Thompson more than $400,000 for back pay, $70,000 in front pay and $30,000 for emotional distress. In addition, by statute the back pay was subject to being doubled. The total verdict was in excess of $900,000. The case was appealed and remains pending before the Sixth Circuit Court of Appeals.
This article is intended as a summary of newly enacted federal law and does not constitute legal advice.