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2013's Biggest Court Rulings, Lane Report, February 2014

Attorneys

Lane Report, February 2014

Year in Review: Court Rulings Impacting Business

In 2013, Courts across the Commonwealth, like those around the nation, certainly had their fair share of work to do. It was a time of change and challenge as well with the launch of the Fayette County Veterans Treatment Court, the installation of a new Fayette Family Court judge, the first electronic case filings in pilot projects around the state, a devastating flood in Fayette Circuit Court and a national furlough that briefly threatened to shut down the federal courts. With all these news-worthy headlines, cases affecting business owners may have not been on the radar. Here is recap of a few of the 2013 cases that reiterate the dangers of sloppy business keeping and a few that could change "business as usual":

Employment Discrimination

Pennington v. Wagner's Pharmacy, Inc., 2013 WL 3480307, No. 2012-CA-000573-MR (Ky. Ct. App. July 12, 2013)

Pennington, a food truck operator for Wagner's Pharmacy, suffered from morbid obesity for much of her life. After ten years of working for Wagner's, a supervisor was allegedly instructed by the pharmacy manager to fire Pennington due to her "personal appearance." Pennington filed suit alleging that her employer had discriminated against her due to her disability of morbid obesity. The employer answered by stating the termination was due to Pennington's failure to generate sales. Summary judgment was granted to the employer because, according to the trial court, Pennington was unable to present proof of a protected disability under state law.

On appeal, the Appeals Court wrestled with the question of whether Pennington's obesity was caused by an underlying physiological condition(s), and therefore not a qualifying disability. Rejecting the trial court's analysis and instead, relying on expert testimony, the Court found that Pennington's obesity was indeed caused by physiological conditions. The Court went on to find that Pennington was entitled to a trial. The employer, however, has requested that the Kentucky Supreme Court review this decision and thus whether the holding in this case, stands, remains to be seen.

What it means to you: Regardless of whether the Supreme Court reviews the case, employers should take heed that that Kentucky courts appear quite willing to view the disability protections in the Kentucky Civil Rights Act broadly and will allow employees ample opportunity to prove discrimination based on conditions not always associated with stereotypical disabilities.

Business Dissolution and Legal Representation

Tony Smith and Smith Services, Inc. v. Bear, Inc. d/b/a Lake Express, 2013 WL1352148, No. 2010-CA-001803-MR (Ky. Ct. App. April 5, 2013)

Smith was the sole shareholder of Smith Services, a Kentucky corporation. The corporation had an open account with Lake Express, a gas station in London, for the purchase of fuel. There was no written agreement between Smith Services and Lake Express and shareholder Smith did not personally guarantee the corporation's fuel account debt.

In 2002, after Smith Services account became $26,000 in arrears, Lake Express closed the account and forced Smith Services to pay monthly for ongoing fuel purchases. However, Smith Services never made good on the $26,000 closed account. Though shareholder Smith ceased doing business as Smith Services in 2003, critically, he never bothered to follow the formalities of filing articles of dissolution and notifying creditors, such as Lake Express. In 2006 Lake Express sued shareholder Smith and Smith Services. The trial court found against both, holding Smith liable for Smith Services' debt as a constructive trustee. The Court of Appeals upheld that ruling. In a twist, however, the Court vacated the judgment (likely worthless anyway) against Smith Services, citing the impropriety of permitting Smith to purport to represent the corporation, Smith Services. In Court - a lawyer was required. Much like the Pennington matter, a request has been made with the Kentucky Supreme Court to review this decision and thus whether the holding in this case, stands, remains to be seen.

What it means to you: If you go the time and trouble of incorporating your business at the beginning, at least partly to avoid personal liability, you should take the same modest time and trouble at the end when you close the business or you may inadvertently unwind the very protections you sought and find yourself personally liable for what should be corporate debts.

UCC & Security Interests

Bishop v. Alliance Banking Company, 412 S.W.3d 217 (Ky. Ct. App. 2013)

Timothy and Candace Elkins borrowed $122,000.00 from Alliance Bank, partially secured by a valuable 1999 Case backhoe. The bank attempted to perfect its security interest by filing a financing statement with the Kentucky Secretary of State's Office. The financing statement correctly described the backhoe and included a ten-digit serial number.

When the Elkins later defaulted on the loan, the bank sued and obtained judgment against the Elkins, including an order of possession of the backhoe. Unfortunately for the bank, however, the Elkins had long ago sold the backhoe to Defendant Bishop. Bishop claimed he was a bona fide purchaser because there was a typo in the serial number rendering the description technically (barely) inconsistent. The Court found against Bishop, holding that the description of the backhoe was sufficient to have placed Bishop on notice. Had Bishop inquired further, he could have easily learned the backhoe was subject to the bank lien.

What it means to you: Courts will not tolerate turning a blind eye to the rights of secured creditors. If it's too good to be true, it probably is. Do your due diligence and be guided by what you find.

Premises Liability

Shelton v. Kentucky Easter Seals Society, Inc., 2013 WL 6134212, No. 2011-SC-000554-DG (Ky. Nov. 21, 2013)

Dick's Sporting Goods, Inc. v. Betty C. Webb, 2013 WL 6134186, No. 2011-SC-000518-DG (Ky. Nov. 21, 2013)

In two cases decided on the same day, the Supreme Court meaningfully limited the ability of property owners to defend against slip and fall and trip and fall claims by severely limiting the impact of the well-known "open and obvious" defense as a bar to Plaintiffs ability to get these type of cases to trial, completing an arc begun several years ago when the Court initially re-defined the open and obvious defense. In Shelton, the plaintiff became entangled in wires that connected her husband's hospital bed to adjacent medical equipment. Though the plaintiff admitted she knew of the wires' presence, but argued the facility should have done more to prevent such accidents. The facility claimed they owed no duty because the wires were open, obvious, and necessary to patients' treatment. The Supreme Court, however, said that every premises owner owes a general duty of reasonable care to every invitee and the existence of an open and obvious hazard is irrelevant to the question of duty, leaving resolution of these types of cases to the question of breach of the duty - a subject rarely appropriate for summary judgment. The open and obviousness of the hazard is now relegated to the status of one of the facts to be considered in connection with the analysis of whether the property owner breached the general duty of care - not whether there was a duty in the first place.

In the companion case, Webb, the Court applied Shelton, finding inappropriate the summary dismissal of a claim arising when theplaintiff slipped on wet tile in the entrance of a sporting goods store. Plaintiff observed that floor mats at the entrance were saturated with standing water between them. In an attempt to avoid the mats, she stepped onto an area she thought was dry, but was actually wet. She slipped, fell and was injured. Rejecting both, the trial court's determination that the allegedly open and obvious condition alleviated Dick's of a duty, and the trial court's determination that there was in fact was an open and obvious condition to begin with, the Supreme Court remanded the matter for trial on the question of whether Dick's breached its duties.

What it means to you: Premises owners will now have a much harder time defending against slip-and-fall cases and will rarely, if ever, succeed on a motion for summary judgment. Great care should be taken to warn invitees when hazardous conditions, such as wires or wet floors, exist - no matter how "open and obvious" the danger appears to the land owner.

Principal and Agent

Southern Financial Life Insurance Company v. Combs, 2013 WL 6145234, No. 2012-SC-000642-MR (Ky. Nov. 21, 2013)

In a class action brought against Southern Financial by purchasers of its credit life and disability policies in Kentucky, the trial court entered a discovery order compelling Southern Financial to produce certain loan information and documents regarding the putative class members and the insurance sold to them. Southern Financial objected to the discovery, arguing that the requested loan information and documents were not in its "possession, custody or control," within the meaning of Civil Rule 34.01. According to Southern Financial, this information was in the possession of individual lenders, who refused to turn over the information. After failing to comply with the order, the trial court ordered that Southern Financial subpoena the records from the lenders, who were found by the court to be agents of Southern Financial.

Southern Financial then proceeded to the Court of Appeals, seeking a writ of prohibition to stop the discovery order. The Court of Appeals denied the writ and the Supreme Court affirmed.

The Supreme Court held that the trial court did not abuse its discretion in determining that information the life insurance company was ordered to disclose from its agent-lenders was within the scope of agency. According to the Court, "An agent refusing to turn over information that falls squarely within the scope of agency does not make a principal any less entitled to possession of the sought-after information."

What it means to you: Businesses often have many agents with whom they conduct business. Based on this Supreme Court decision, a principal is in "control" of all information that is in the possession of its agents and to which it is entitled to receive under agency law principles. A lack of physical custody or possession of an agent's information does not negate the principal's duty to turn over such information if requested in the discovery process. What information can be considered to fall within the agency scope is fact-intensive and is determined on a case-by-case basis.

Stephen G. Amato is a Member of McBrayer, McGinnis, Leslie & Kirkland PLLC and is located in the firm's Lexington office. Mr. Amato focuses his practice on civil litigation and administrative law with a litigation emphasis in employment law and an administrative emphasis in hospitality law and alcoholic beverage licensing and enforcement issues. He can be reached at samato@mmlk.com or (859) 231-8780.

This article is intended as a summary of state and federal law and does not constitute legal advice.

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