Lum Enterprises, LLC v. Ruth Mitchell ( 2022 )

RENDERED: DECEMBER 22, 2022; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2021-CA-1126-MR
LUM ENTERPRISES, LLC APPELLANT
APPEAL FROM SPENCER CIRCUIT COURT
v. HONORABLE CHARLES R. HICKMAN, JUDGE
ACTION NO. 21-CI-00005
RUTH MITCHELL AND
JOHN MITCHELL APPELLEES
OPINION
AFFIRMING IN PART AND
VACATING IN PART
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BEFORE: CLAYTON, CHIEF JUDGE; ACREE AND TAYLOR, JUDGES.
CLAYTON, CHIEF JUDGE: Lum Enterprises, LLC (“Lum LLC”) appeals from
the Spencer Circuit Court’s grant of default judgment to Ruth and John Mitchell.
Upon review, we affirm the judgment as to Lum LLC and vacate that portion of
the judgment piercing the corporate veil and imposing liability on the principal of
the LLC.
Lum LLC has a single member, John W. Lum. On October 13, 2018,
Lum LLC contracted with the Mitchells to build a house on their property in
Taylorsville, Kentucky. Lum LLC began construction on March 23, 2019, and
stopped on December 5, 2019. According to Lum LLC, the Mitchells breached the
contract by failing to pay for materials and labor. On January 10, 2020, Lum LLC
filed a statement and notice of a mechanic’s and materialman’s lien against the
property. On January 8, 2021, Lum LLC filed a complaint against the Mitchells
and The Peoples Bank, Taylorsville, seeking the sale of the property and judgment
in the amount of $47,752 plus interest and attorney’s fees. The Mitchells filed an
answer and counterclaim on January 19, 2021. In their counterclaim, they alleged
that Lum LLC had breached the contract by failing to complete the work on their
house in a timely and workmanlike manner and had wrongfully and intentionally
filed the lien against their property. They alleged slander of title and violations of
the Kentucky Consumer Protection Act. Their counterclaim sought a declaration
that Lum LLC had no claim to their property, a release of the lien, and
compensatory and punitive damages. Lum LLC was represented by counsel but
failed to file an answer to the counterclaim. Shortly thereafter, the Mitchells
served written interrogatories and requests for production of documents on Lum
LLC through counsel. Lum LLC again did not respond.
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On April 2, 2021, the Mitchells filed a motion for default judgment
and to deem the requests for admissions admitted pursuant to Kentucky Rules of
Civil Procedure (CR) 36.01(2). The motion for default judgment stated that the
“Plaintiff, Lum Enterprises, LLC was administratively dissolved on October 8,
2020. As a result, the LLC owner, John W. Lum, is responsible for all claims
relating to the LLC pursuant to [Kentucky Revised Statutes] KRS 275.150 because
the immunity is extinguished, which entitles the Defendants to judgment against
Lum, individually.” The motion requested default judgment against the LLC and
John W. Lum, individually, jointly, and severally. Neither John W. Lum nor Lum
LLC responded to the motion for default judgment.
The trial court entered an order on April 8, 2021, releasing the lien
and granting default judgment to the Mitchells. On April 21, 2021, the trial court
ordered the admissions admitted and set the case for a trial on damages on May 19,
2021.
On May 19, 2021, counsel for the Mitchells tendered a folder of
exhibits as their proof of damages. Counsel for Lum LLC was present and asked
for time to review the exhibits. The trial court granted a continuance and the
hearing on damages was held via Zoom on June 9, 2021. The trial court thereafter
entered findings of fact, conclusions of law, and judgment in favor of the Mitchells
in the amount of $96,857.34 plus $8,513.20 in attorney’s fees.
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In its judgment, the trial court held John W. Lum personally liable for
all the damages, stating: “In view of the fact that the Plaintiff [the LLC] is not a
legal entity and has never been reinstated, the protections of [Kentucky Revised
Statutes] KRS 275.150 are unavailable and the principal, John W. Lum, is
responsible for all damages to the Defendants, John and Ruth Mitchell.” This
conclusion was based on the history of Lum Enterprises, LLC, which was
administratively dissolved by the Kentucky Secretary of State in October 2018 (it
is unclear whether this dissolution occurred before or after the formation of the
contract with the Mitchells) and reinstated in May 2019. It was administratively
dissolved again on October 8, 2020, and reinstated on August 6, 2021. Thus, the
LLC was in good standing at the time Lum LLC filed the lien, but was not active
on the date of the filing of the complaint.
Lum LLC thereafter filed a series of motions, including a motion to
set aside the default judgment, arguing that the failure to respond to the requests
for admissions and the failure to answer the counterclaim were wholly attributable
to counsel’s incompetence; that the Mitchells would not suffer prejudice if they
had to litigate their claims; and that Lum LLC had valid claims and defenses that
were never heard on the merits. Lum LLC also filed a motion to alter, amend, or
vacate the judgment, specifically to strike the portion of the judgment finding John
W. Lum personally liable for damages. The motion argued that “the acts and
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omissions which formed the basis of liability were undertaken by John Lum acting
as member/manager of Lum Enterprises, LLC as he was in good standing with the
Secretary of State at all times relevant to those acts.” The motion further argued
that the fact the LLC was later administratively dissolved had no bearing on his
immunity from liability for those acts undertaken while the company was active.
The trial court summarily denied the motions and this appeal followed.
A judgment by default may be obtained against a party who “has
failed to plead or otherwise defend” as provided by the rules. CR 55.01. CR 55.02
provides that a default judgment may for “good cause” be set aside in accordance
with CR 60.02. To show good cause, a party must demonstrate “(1) a valid excuse
for the default; (2) a meritorious defense to the claim; and (3) absence of prejudice
to the non-defaulting party.” Statewide Environmental Services, Inc. v. Fifth Third
Bank, 352 S.W.3d 927, 931 (Ky. App. 2011) (citations omitted). “Although
default judgments are not favored, a trial court is vested with broad discretion
when considering motions to set them aside, and an appellate court will not
overturn the trial court’s decision absent a showing that the trial court abused its
discretion.” PNC Bank, N.A. v. Citizens Bank of Northern Kentucky, Inc., 139
S.W.3d 527, 530 (Ky. App. 2003). The test for abuse of discretion is whether the
trial court’s decision was “arbitrary, unreasonable, unfair or unsupported by sound
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legal principles.” First Horizon Home Loan Corp. v. Barbanel, 290 S.W.3d 686,
688 (Ky. App. 2009).
In reference to the first factor, the LLC contends that the failure to
respond to the Mitchells’ counterclaim and discovery requests was entirely
attributable to the LLC’s attorney and therefore it has shown a valid excuse for the
default. But “[c]arelessness by a party or his attorney [in responding to a
complaint and summons] is not reason enough to set an entry [of default judgment]
aside.” Statewide Environmental Services, Inc. v. Fifth Third Bank, 352 S.W.3d
927, 931 (Ky. App. 2011) (quoting Perry v. Central Bank & Trust Co., 812 S.W.2d
166, 170 (Ky. App. 1991)). The LLC commenced this litigation by filing the lien
against the property and then the complaint against the Mitchells. The Mitchells
timely filed an answer and counterclaims. The LLC claims that good faith
attempts were made to check on the litigation and trust was placed in the LLC’s
attorney to provide updates and to respond to the filings, but no tangible evidence
is offered to support this contention. In any event, “[n]egligence of an attorney is
imputable to the client and is not a ground for relief under CR 59.01(c) or CR
60.02(a) or (f).” Vanhook v. Stanford-Lincoln County Rescue Squad, Inc., 678
S.W.2d 797, 799 (Ky. App. 1984). “A litigant may not employ an attorney and
then wash his hands of all responsibility. The law demands the exercise of due
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diligence by the client as well as by his attorney in the prosecution or defense of
litigation.” Gorin v. Gorin, 292 Ky. 562, 167 S.W.2d 52, 55 (Ky. 1942).
As to the second factor, the LLC claims that a meritorious defense to
the Mitchells’ counterclaims is evidenced by the fact that the LLC initiated the
litigation by seeking to foreclose on the mechanic’s lien, and that the position and
defenses of the LLC were made offensively and defensively clear. The nature of
these defenses is not specified, however, nor how these defenses would justify
setting aside the default judgment.
Finally, the third factor requires a showing that setting aside the
default judgment would not prejudice the Mitchells. The LLC relies on a federal
opinion which states that a mere delay in satisfying the plaintiffs’ claim does not
constitute sufficient prejudice to require the denial of a motion to set aside the
default judgment. Keegel v. Key West & Caribbean Trading Co., Inc., 627 F.2d
372, 374 (D.C. Cir. 1980). In Keegel, the plaintiff did not inform the court that he
had indicated in a letter to the defendants a willingness to accept as timely a late
answer. The court entered a default judgment based on its ignorance of this
agreement. There was no such understanding or agreement between the LLC and
the Mitchells nor did the trial court enter default judgment based on a mistake. If
the default judgment was set aside, the Mitchells would incur the prejudice of
additional costs, attorney’s fees, and delay in a matter that was initiated by the
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LLC filing the lien against their property over fourteen months before the entry of
the default judgment.
In sum, the LLC has not demonstrated the presence of the three
factors necessary to show good cause to set aside the default judgment.
Additionally, the LLC argues that the trial court erred when it denied
its motion to withdraw the admissions deemed admitted under CR 36.01. The LLC
contends that because Lum was not personally served with the admissions, which
were served on counsel who failed to notify him or to respond, the trial court
abused its discretion in denying the motion.
[Lum] voluntarily chose this attorney as his
representative in the action, and he cannot now avoid the
consequences of the acts or omissions of this freely
selected agent. Any other notion would be wholly
inconsistent with our system of representative litigation,
in which each party is deemed bound by the acts of his
lawyer-agent and is considered to have notice of all facts,
notice of which can be charged upon the attorney.
Link v. Wabash R. Co., 370 U.S. 626, 633-634, 82 S. Ct. 1386, 1390, 8 L. Ed. 2d
734 (1962) (internal quotation marks omitted). The trial court acted in full
accordance with the provisions of CR 36.01 and did not abuse its discretion in
denying the motion to withdraw the admissions.
The trial court did err as a matter of law, however, in holding John W.
Lum individually liable for the damages. It pierced the corporate veil based on its
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determination that the LLC was not a legal entity because it was administratively
dissolved and never reinstated.
But the trial court’s legal conclusion that Lum LLC is not a legal
entity, based on these facts, is erroneous. Administrative dissolution of an LLC,
which now occurs pursuant to KRS 14A.7-020, does not mean the entity no longer
exists. “An entity administratively dissolved continues its existence but shall not
carry on any business except that necessary to wind up and liquidate its business
and affairs. . . .[and t]he administrative dissolution of an entity shall not terminate
the authority of its registered agent.” KRS 14A.7-020. The same principle of law
is repeated in KRS Chapter 275 governing LLCs: “A dissolved limited liability
company shall continue its existence but shall not carry on any business except that
appropriate to wind up and liquidate its business and affairs, including . . . (a)
Collecting its assets; . . . and (e) Doing every other act necessary to wind up and
liquidate its business and affairs.” KRS 275.300(2).
Was the LLC’s action against the Mitchells brought to liquidate its
business and affairs? There appears to be no proof one way or the other.
However, if not, there is still time for John W. Lum to reinstate the LLC. “[A]
member of a limited liability company enjoys statutory immunity from liability
under KRS 275.150 for actions taken during a period of administrative dissolution
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so long as the company is reinstated before a final judgment is rendered against the
member.” Pannell v. Shannon, 425 S.W.3d 58, 67 (Ky. 2014).
Because the trial court erred as a matter of law in piercing the
corporate veil to impose liability on John W. Lum individually, that portion of its
judgment is void.
For the foregoing reasons, the Spencer Circuit Court did not abuse its
discretion in denying the motion to set aside the default judgment in favor of the
Mitchells, and its findings of fact, conclusions of law, and judgment are affirmed
as to the LLC. Insofar as the judgment pierces the corporate veil to impose
liability on John W. Lum individually, it is vacated.
ALL CONCUR.
BRIEF FOR APPELLANT: BRIEF FOR APPELLEE:
Georgia L. Hensley Gregg Y. Neal
Louisville, Kentucky Shelbyville, Kentucky
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