Howell Contractors, Inc. v. Berling

Citations: 383 S.W.3d 465; 2012 Ky. App. LEXIS 229; 2012 WL 5371838Docket: No. 2010-CA-001755-MR

Court: Court of Appeals of Kentucky; November 2, 2012; Kentucky; State Appellate Court

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Howell Contractors, Inc. is appealing the Kenton Circuit Court's April 2, 2010 order, which denied its motion for summary judgment against Charles Berling and his entities (Charles Berling Land Corp., Berling Homes, Inc., and Westview Development, LLC), while granting partial summary judgment in favor of the Berling appellees. Berling, as sole owner of Westview, contracted with Howell in 2005 for services related to the Westview Park Subdivision, with total charges amounting to $1,103,569.03, of which $923,902.06 was paid, leaving a balance of $179,666.97. After unsuccessful payment negotiations, Howell filed a lawsuit against Westview and the Berling appellees, seeking to hold the latter liable through veil-piercing and related doctrines. The Berling appellees contended they were not parties to the contract and argued that those doctrines do not apply to LLCs. The trial court favored the Berling appellees, concluding they were not liable for Westview's debt and identifying genuine issues of material fact regarding the amounts owed, thus denying summary judgment against Westview. Subsequently, an agreed judgment on August 23, 2010, ordered Westview to pay Howell $179,666.97 plus interest and costs. On appeal, Howell contends that the trial court improperly denied its summary judgment motion and incorrectly granted partial summary judgment to the Berling appellees regarding their liability under the contested doctrines. The standard for granting summary judgment requires that no genuine issues of material fact exist, and the appellate review is de novo, focusing solely on legal issues without deference to the trial court's findings.

Disagreement exists regarding the trial court's ruling, albeit for different reasons. Under Kentucky law, an appellate court can affirm a trial court’s correct ruling based on alternative legal reasoning. A critical but overlooked factor is that Westview was established under Ohio law, with the real estate development tied to the debt situated in Lockland, Ohio. The rights and obligations of an Ohio LLC and its members are governed by Ohio law, which applies to issues of liability for corporate debts. The principle that the law of the state of incorporation dictates liability is supported by various cases, including Kalb, Voorhis. Co. v. American Fin. Corp. and U.S. S.E.C. v. Levine. 

Moreover, while the Berling appellees assert that piercing the corporate veil does not pertain to LLCs, Ohio law contradicts this. In Ossco Props. Ltd. v. United Commercial Prop. Group, L.L.C., the court outlined a three-prong test for disregarding LLC protections: (1) complete control over the LLC by those to be held liable, making it devoid of independent existence; (2) fraudulent acts or illegal conduct facilitated by that control; and (3) resultant injury or loss to the plaintiff. The Ohio Supreme Court emphasized that only extreme shareholder misconduct warrants piercing the veil, as reiterated in Dombroski v. WellPoint, Inc., which clarified that insurer bad faith does not meet the threshold for such action.

Howell has shown that Berling controls Westview and other entities; however, the alleged conduct does not constitute fraud or illegality. Westview's failure to pay a debt is primarily due to its purchase of land for approximately $287,000 and securing a $1,000,000 loan from Bank of Kentucky for development. Berling also loaned Westview over $485,000, both personally and through other entities. Despite the development challenges, Westview still owns the property, and Howell can enforce its judgment in Ohio, potentially utilizing Ohio's mechanic’s lien statute.

Under Kentucky’s entity-piercing standards, as outlined in Inter-Tel Techs. Inc. v. Linn Station Props. LLC, two criteria must be satisfied: 1) a loss of corporate separateness due to domination, and 2) circumstances that would allow continued recognition of the corporation to sanction fraud or promote injustice. The courts may examine a broader range of factors beyond those in White v. Winchester Land Dev. Corp. The concept of injustice must extend beyond a creditor's mere inability to collect from a corporate debtor, with examples including unjust enrichment or asset manipulation.

Howell has not demonstrated the type of fraud or unjust enrichment necessary for veil-piercing, such as transferring assets to avoid liabilities. The record indicates that Berling invested his own funds into Westview rather than siphoning assets away. Westview retains its real estate assets, and Howell, as a judgment creditor, is expected to recover its judgment, including interest, upon the sale of Westview’s property in Ohio.

The Kenton Circuit Court's order is affirmed, with all judges concurring. The Kentucky Rules of Civil Procedure apply, referencing the Restatement (Second) Conflicts of Laws, which indicates that the choice-of-law rules in Chapter 13 for Business Corporations are also applicable to similar business entities. The document details several unsecured loans made to Westview, including amounts from Berling ($250,000), CHB Family 1 ($80,000), Candlewood Realty, Inc. ($80,000), and Berling Land Corp. ($75,000). Key factors indicating a lack of separateness between a parent corporation and its subsidiary, as outlined in Inter-Tel, include: majority ownership by the parent, common management, financial support from the parent, incorporation by the parent, inadequate capitalization of the subsidiary, the parent covering the subsidiary's financial obligations, exclusive business dealings between them, the subsidiary being treated as a division of the parent, shared property usage, lack of independent executive action, and non-compliance with legal requirements by the subsidiary. Notably, there is no Kentucky case law addressing the piercing of an LLC's corporate veil.