Law School Case Brief
Racing Inv. Fund 2000, LLC v. Clay Ward Agency, Inc. - 320 S.W.3d 654 (Ky. 2010)
The hallmark of the limited liability company (LLC) is its combination of the income tax advantages of a partnership with the business advantages of a corporation. The "centerpiece" of an LLC is its provision for limited liability of its members and managers in regard to the debts and obligations of the LLC. The most important feature of an LLC is its limited liability protection. It is this limited liability that makes an LLC such a valuable entity. One indicia of the strength of that limited liability protection is the Internal Revenue Service's recognition that federal employment tax liabilities incurred by an LLC cannot be collected from the LLC's members.
Appellant Racing Investment was a limited liability company created to purchase, train and race thoroughbred horses. Racing Investment entered into an agreed judgment with its former equine insurance firm, Clay Ward Agency, Inc., for past-due insurance premiums. Shortly thereafter, Racing Investment partially paid the judgment by tendering all of the remaining assets of the then defunct limited liability company. When it failed to pay the remainder of the amount owed, Clay Ward succeeded in having Racing Investment held in contempt of court for its failure to pay the entire judgment amount. The trial court ruled that a provision in Racing Investment's Operating Agreement which allowed the limited liability company's Manager to call for additional capital contributions, as needed, from all members on a pro rata basis for "operating, administrative or other business expenses" provided a means of satisfying the Clay Ward judgment. The Court of Appeals affirmed. The Supreme Court of Kentucky granted review to consider the capital call provision of the LLC's operating agreement.
Was the trial court correct when it ordered that the capital call provision can be used to obtain funds from the limited liability company members to satisfy a judgment against it?
The court reversed the judgment of the appellate court and remanded the case to the trial court. The court first determined that the LLC failed to meet its burden of proof regarding its dissolution, as contemplated in Ky. Rev. Stat. Ann. §§ 275.285 and 275.300(2). The court next decided that if the members of the LLC were legally responsible for their pro rata share of the LLC's business debt, that would in effect mean that the shield of limited liability had been lifted. Ky. Rev. Stat. Ann. § 275.150, however, emphatically rejected personal liability for an LLC's debt unless the members clearly agreed in writing to assume personal liability, which the LLC's members had not done. The provision designed to provide on-going capital infusion as necessary was simply not a post-judgment collection device by which any legitimate business debt of the LLC could be transferred to individual members by a court-ordered capital call.
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