United States: The 2017 Amendments To Kentucky's Business Entity Statutes

Kentucky did not see significant changes to its business entity laws in 2017, but it did see a series of changes that incrementally addressed existing ambiguities, provided additional clarity, and created additional capabilities. Specifically, one bill addressed a number of technical points across the range of business entity statutes,¹ while a second bill effected amendments to the Kentucky Business Corporation Act to provide for public benefit corporations.² This article will review these developments in the same order, concluding with a few observations as to other bills of interests. Both of these bills became effective on June 29, 2017.³

I. VENUE FOR UNINCORPORATED ENTITIES

Kentucky has long had a statute providing, inter alia, that a corporation is subject to venue in the county in which it maintains its registered office.⁴ There was not, however, similar clarity with respect to unincorporated business organizations. An argument could be made that the statute governing venue for corporations extended to LLCs and other business forms that are not incorporated,⁵ but the application is less than obvious. A new provision addresses that lacuna, providing that unincorporated business organizations required to maintain a registered agent and officer are subject to venue in the county in which the registered officer is maintained.⁶

II. CHARGING ORDERS

Across all of the charging order statutes, parallel amendments have been made in order to address aspects of this often misunderstood remedy.⁷ The respective charging order statutes⁸ provide, in order to satisfy a judgment, that a charging order may be issued with respect to a member's or partner's interest in the LLC, partnership, etc. However, when one parses the statute, it becomes clear that "limited liability company," "partnership," etc. refers to a domestic organization, i.e., one organized in Kentucky.⁹ There then arises the question as to whether a Kentucky court may apply any of the charging order statutes to issue a charging order with respect to an interest in a partnership or LLC organized outside of Kentucky. If the answer to that question is "no," what then would be the remedy that a Kentucky court could issue with respect to an interest in a foreign partnership or LLC?

This question is exactly the problem addressed by the Heather Apartments decision.¹⁰ Andrew Grossman was the judgment-debtor to Fannie Mae.¹¹ Grossman alleged he could not satisfy the judgment because his funds were invested in an LLC, and further argued that the only remedy Fannie Mae was entitled to vis-à-vis his interest in that LLC was a charging order.¹² That LLC was organized in the Cook Islands.¹³ The Heather Apartments court determined that the "sole and exclusive remedy" language of the Minnesota LLC Act's charging order provision¹⁴ did not apply vis-àvis a foreign (i.e., non-Minnesota) LLC.¹⁵

Finally, Grossman argues that Fannie Mae's only remedy is to obtain a charging order under Minn. Stat. § 322B.32 (2012). But this argument fails because that statute only applies to Minnesota limited liability companies. Chapter 322B defines a "limited liability company" as "a limited liability company, other than a foreign limited liability company, organized or governed by this chapter." Minn. Stat. § 322B.03, subd. 28 (2012). Because LSPG Shoreline was organized in, and is governed by, the laws of the Cook Islands, chapter 322B does not apply.¹⁶

Footnotes

1 S.B. 235, 2017 Leg., Reg. Sess. (Ky. 2017). This proposal was submitted by Senator Morgan McGarvey as S.B. 235 on February 16, 2017. S.B. 235, KY. LEGIS., http://www.lrc.ky.gov/record/17RS/SB235.htm (last visited Nov. 30, 2017). The bill was assigned to the Senate Economic Development, Tourism, and Labor Committee, and was favorably reported therefrom on February 28th. Id. It passed the Senate on a unanimous vote on March 1st. Id. When presented on the floor by Senator McGarvey, Senate President Stivers asked if there were any questions. Responding to the resulting silence, he chuckled and observed, "I didn't think so." Morgan McGarvey, Recap of the Legislative Week, MORGANMCGARVEY.COM (March 3, 2017), http://www.morganmcgarvey.com/news/2017/3/3/wvpwubclbvfab6dd0x6chcb9mtyt29. In the House it was assigned to the Small Business and Information Technology Committee, where it was heard on March 15th, and approved. S.B. 235, supra. The bill was approved, with a floor amendment, by the House on March 29th. Id. The Senate concurred. Id. On April 12, the bill became effective notwithstanding never having been signed by the governor. Id.

2 H.B. 35, 2017 Leg., Reg. Sess. (Ky. 2017). This legislation was introduced by Representative Jerry Miller as H.B. 235, the bill having been pre-filed. HB 35, KY. LEGIS., http://www.lrc.ky.gov/record/17RS/HB35.htm (last visited Nov. 30, 2017). It was reported favorably on February 9, 2017 by the House State Government Committee, and passed out of the House on February 13th. Id. In the Senate, the bill was assigned to the Agriculture Committee, from which it was favorably reported on February 28th. Id. The bill came before the entire Senate on March 7th. Id. This legislation was signed by the governor on March 20, 2017. Id.

3 See Ky. Att'y Gen. Op. OAG 17-007 (Apr. 7, 2017).

4 See KY. REV. STAT. ANN. § 452.450 (West 1942); see also Kem Mfg. v. Ky. Gem Coal Co., 610 S.W.2d 913, 913 (Ky. Ct. App. 1980) ("[A] corporation may not defeat venue in an action brought in the court in which its registered agent is located."). For an admittedly dated review of venue in Kentucky, see William H. Fortune, Venue of Civil Actions in Kentucky, 60 KY. L.J. 497 (1972).

5 See KY. REV. STAT. ANN. § 446.010(11) (West 2017) (stating that the definition of "corporation" includes a "company, person, partnership, joint stock company, or association").

6 See Act of Apr. 12, 2017, ch. 193, § 1, 2017 Ky. Acts (codified at KY. REV. STAT. ANN. § 14A.4- 060 (West 2017)). Note that this provision is not intended to be exclusive as to any other provision that would give rise to venue in any particular court. Rather, this statute only affirms that venue is appropriate in this particular county. See also KY. REV. STAT. ANN. § 452.450 (West 1952).

7 With respect to the charging order generally, see Thomas E. Rutledge & Sarah S. Wilson (now Reeves), An Examination of the Charging Order under Kentucky's LLC and Partnership Acts (Part I), 99 KY. L.J. ONLINE 85 (2011); Thomas E. Rutledge & Sarah S. Wilson, An Examination of the Charging Order under Kentucky's LLC and Partnership Acts (Part II), 99 KY. L.J.ONLINE 107 (2011).

8 See KY. REV. STAT. ANN. § 275.260 (West 2017) (LLCs); KY. REV. STAT. ANN. § 362.285 (West 2017) (partnerships governed by the Kentucky Uniform Partnership Act); KY. REV. STAT. ANN. § 362.1- 504 (West 2017) (general partnerships governed by the Kentucky Revised Uniform Partnership Act (2006)); KY. REV. STAT. ANN. § 272A.6-050 (West 2017) (limited cooperative associations); KY. REV. STAT. ANN. § 362.481 (West 2017) (limited partnerships governed by the Revised Uniform Limited Partnership Act); KY. REV. STAT. ANN. § 362.2-703 (West 2017) (limited partnerships governed by the Kentucky Uniform Limited Partnership Act (2006)); KY. REV. STAT. ANN. § 386A.6-060 (West 2017) (statutory trusts governed by the Kentucky Uniform Statutory Trust Act).

9 See, e.g., § 275.260(1) ("This section provides the exclusive remedy by which the judgment creditor of a member or the assignee of a member may satisfy a judgment out of the judgment debtor's limited liability company interest.") (emphasis added); KY. REV. STAT. ANN. § 275.015(12) (West 2017) (defining "limited liability company" as organized "under this chapter"); § 275.015(9) (defining "foreign limited liability company").

10 See Fannie Mae v. Heather Apartments Ltd. P'ship., No. A13-0562, 2013 WL 6223564 (Minn. Ct. App., Dec. 2, 2013).

11 Id. at *2.

12 Id. at *15–16.

13 Id. at *16.

14 See MINN. STAT. § 322B.32 (1992).

15 Fannie Mae, 2013 WL 6223564, at *16.

16 Id. at *6; see also Arayos, LLC v. Ellis, Misc. Act. No. 15-0027-WS-M, 2016 WL 1642676 (S.D. Ala. April 25, 2016) ("More importantly, as noted supra, plaintiff's filings reflect that Lodge Entertainment is a Wyoming limited liability company, and that Jonesboro Investments is a Nevada limited liability company. Plaintiff has presented no argument explaining why it contends a provision of the Alabama Business and Nonprofit Entities Code would empower this Court to issue a charging order as to a judgment debtor's membership interest in Wyoming and Nevada limited liability companies, as part and parcel of the judgment creditor's efforts to enforce a judgment entered by a federal court in Maine. On its face, Alabama Code § 10A-5-6.05(a) does not appear to authorize issuance of charging orders relating to foreign limited liability companies.").

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Originally published on Kentucky Business Entity Law

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