A ruling by the Kentucky Court of Appeals this summer upheld a trial court finding that the sole member of a Kentucky LLC was personally liable for debts that the sole member claimed should be classified only as debts of the LLC.  This case, Tayloe v. Sellco Two Corporation, reinforced the notion that claimants may pierce the limited liability veil of Kentucky LLCs just as they have been able to historically do with respect to Kentucky corporations and also considered three particular factors that were initially cited by the Kentucky Supreme Court in another Kentucky veil-piercing case, Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC.  These three factors from Inter-Tel  that were also found to be present in Tayloe  were:

  • diversion of assets by the corporation by or to a stockholder or other person or entity to the detriment of creditors;
  • commingling of funds; and
  • failure to maintain arm's-length relationships among related entities.

While these three factors were not the only expanded factors suggested by the Kentucky Supreme Court in the Inter-Tel  case as relevant,  the Court of Appeals in Tayloe  noted that the trial court did properly consider these three factors in the Tayloe  case and did find that they were applicable in that case and further determined that Tayloe had "unjustly enriched himself at the expense of the company's creditors by spending company money for his personal expenses."   The Court of Appeals found this to be sufficient support for upholding the trial court's order granting summary judgment in favor of Sellco.

The Tayloe case serves as a reminder to members of Kentucky LLCs that in order to successfully preserve the limited liability protection that Kentucky LLCs can provide, the members must refrain from diverting company assets to the detriment of creditors, maintain separate banking accounts so as to keep personal funds and LLC funds cleanly segregated, and take appropriate measures to insure that relationships among related entities stay at arm's-length.  Failure to comply with any of these requirements could result in members of a Kentucky LLC  becoming personally liable for debts that they had intended to keep at the company level.

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