Released for Publication April 10, 2014
ON REVIEW FROM COURT OF APPEALS. CASE NO. 2010-CA-001172-MR. FAYETTE CIRCUIT COURT NO. 06-CI-03131.
FOR APPELLANT: Carroll Morris Redford, III, Susan Yuk Wo Chun, Michelle Lynn Hurley, Miller Griffin & Marks, P.S.C., Lexington, Kentucky.
FOR APPELLEES: Dan M. Rose, Christopher L. Thacker, Stoll Keenon Ogden, PLLC, Lexington, Kentucky.
This case presents two primary questions. First, is the sole member of a limited liability company liable under a lease expressly stating that the company is the tenant even though the lease is the product of a release that does not mention the member's company capacity or the company in any direct way? Second, assuming the member has not directly obligated herself, can she be held personally liable if the lease was entered into while the company was administratively dissolved and was subsequently reinstated? Based on the facts in this case, the member did not directly obligate herself because she clearly signed the lease in her representative capacity and the lease was expressly with the company. And because Kentucky's Limited Liability Company Act provides
for retroactive effect of the reinstatement of an administratively dissolved company, the member continues to enjoy statutory immunity and cannot be personally liable solely by reason of being a member, manager, or agent of the company. Moreover, she cannot be personally liable under the theory that she exceeded her authority as an agent of the company during the dissolution.
Ann Shannon organized Elegant Interiors, LLC in 2000 under the Kentucky Limited Liability Company Act, KRS Chapter 275, and was the company's sole member. In February 2004, Elegant Interiors, LLC entered into a lease for 3,645 square feet of commercial space with Rick Pannell, who owned the property. Shannon signed the lease on behalf of Elegant Interiors, LLC.
In 2005, Elegant Interiors, LLC failed to file its annual report as was then required by KRS 275.190 and to pay the $15 filing fee. As a result, on November 1, 2005, the Kentucky Secretary of State administratively
dissolved Elegant Interiors LLC, as was then allowed by KRS 275.295, by issuing a certificate of dissolution.
In March 2006, the parties negotiated new leasing terms, entering into a release of the old lease and a new lease for less than half the previous space. The release was prepared by Shannon, and was signed on March 2, 2006. It stated:
I agree to release 1991 SF of my current space and all responsibility of payment for the 1991 SF, located at 148 W. Tiverton Way, STE 140, beginning today, Mar. 2, 2006. The purpose of this release is to grant Rick Pannell the right to lease STE 140 (consisting of 1991 SF) to Dr. Mike Nemastil. It is agreed upon that the signing of this document by both parties assures that Ann Shannon will not be held responsible for the building of any walls, construction, cam costs, or any expenses pertaining to STE 140, beginning today, March 2, 06, and will only be responsible for payment of the remaining 1654 SF @ 18.00 SF [18.856 written by hand above 18.00 and initialed by both parties] and known as STE 150, located at the same address. Upon acceptance of this document, a new lease will be signed by Ann Shannon, for the changes in SF (1654 SF @ 18.00 SF [18.856 written by hand above 18.00 and initialed by both parties]) and cam costs only for the STE 150. All other stipulations will remain the same as in the initial lease.
The release was signed by both Ann Shannon and Rick Pannell. It does not mention Elegant Interiors, LLC.
The new lease was also signed on March 2, 2006. Rather than using a new document, the parties used a copy of the original lease and simply wrote new terms over some of the old ones (such as the length of the lease, square footage, and amount of rent) and initialed the changes. The amended lease, like the original lease, stated that the tenant was Elegant Interiors, LLC. Shannon and Pannell signed the document at the end a second time, just above their original signatures. Shannon did not indicate her company title, despite a line for it, but her original signature line was preceded by the word " By."
Despite the reduced cost, the rent payments for June and July of 2006 were not made. Pannell sued for breach of the lease agreement on July 21, 2006. He named both the LLC and Shannon individually, seeking to hold her personally liable for the rent through various theories, including that she had no authority to enter into the lease for the LLC and that the corporate veil of the LLC should be pierced because the company was simply the " alter ego" of Shannon.
Shortly after, Shannon sought to reinstate the administratively dissolved LLC, as was then allowed by KRS 275.295. On August 11, 2006, the Secretary of State issued a certificate of existence for the LLC that, by its own terms, " cancel[led] the certificate of dissolution issued on November 1, 2005."
Shannon then sought summary judgment on the basis that she could not be held personally liable for the breach of the lease because the tenant on the lease was Elegant Interiors, LLC, which had been reinstated. She argued that because she was a member of the LLC, she was shielded from personal liability by KRS 275.150, the statute granting immunity to LLC members for acts of the LLC.
Pannell argued that despite the LLC being named the tenant in the lease, Shannon personally executed the lease, as evidenced by her signature on the release without any reference to the LLC, and thus she entered into the lease in her individual capacity. He also argued that Shannon could not have acted on behalf of the LLC because there was no such entity in existence at the time.
The circuit court disagreed. It held that the LLC, not Shannon individually, had entered into the lease, noting that the lease specifically described the tenant as " Elegant Interiors, a LLC corporation [sic]." As a result, according to the circuit court, the LLC was " the party assuming the obligations of Tenant." As to the secondary argument, the court cited KRS 275.295(3), which stated in part that an LLC's " reinstatement shall relate back to and take effect as of the effective date of the administrative dissolution, and the limited liability company shall resume carrying on business as if the administrative dissolution had never occurred." KRS 275.295(3)(c). The court held that since the lease specifically named the LLC and the reinstatement of Elegant Interiors, LLC occurred before entry of judgment, actions taken in the name of the company in entering into the 2006 lease were effective as if the dissolution had not occurred. As a result, Shannon was entitled to immunity from personal liability. The circuit court then awarded Pannell damages against Elegant Interiors, LLC under the lease.
The Court of Appeals affirmed unanimously, holding that the lease was with the
LLC and that the administrative dissolution had no effect once the LLC was reinstated. In reaching this conclusion, the court relied in part on one of its own published decisions, Fairbanks Arctic Blind Co. v. Prather & Associates, Inc., 198 S.W.3d 143, 146 (Ky. App. 2005), which stated that " reinstatement validates any action taken by a corporation between the time it was administratively dissolved and the date of its reinstatement."
This Court granted discretionary review.
This case presents two broad legal questions. First, did Shannon sign the release and lease in her individual capacity, thereby making her personally liable? Second, did the administrative dissolution of the LLC and Shannon's signing the lease during the period of dissolution, regardless of whether she signed in her company-member or individual capacity, make her personally liable?
A. Shannon did not sign the lease or release in her individual capacity.
Pannell's initial argument is that regardless of the status of Elegant Interiors, LLC, Shannon signed the release and the second lease in her individual capacity. To support this argument, he notes that the lease states on its cover page that it is " for Ann Shannon," and that Shannon failed to indicate that her signature was in a representative capacity for the LLC. This, he claims, makes the document ambiguous, and thus subject to clarification through parol evidence. He also argues that the release, which was prepared by Shannon, mentions only Shannon and not the LLC, which would make her personally liable. This Court agrees with the Court of Appeals that Shannon did not sign the March 2006 lease in her personal capacity.
As to the claim that the lease states it is " for Ann Shannon," it suffices to say that the lease defines the " Tenant" as Elegant Interiors, LLC, and throughout its terms refers to the " Tenant" as the party to the lease. The only reference to the lease agreement being " for Ann Shannon" appears on the cover page of the lease, which also states that the " tenant" is Elegant Interiors, LLC.
The cover page is but " introductory or prefatory" material. It had less substance than even the traditional recitals of a contract, which are " not an essential part of the operative portions of the contract." Jones v. City of Paducah, 283 Ky. 628, 142 S.W.2d 365, 367 (1940). Like recitals, the statement on the cover page is not an essential part of the operative terms of the lease.
As for the claim that Shannon did not include her title or otherwise indicate her representative capacity along with her signature, it is worth noting that her signature line was preceded by the word " By," which indicates that the signature is in a representative capacity. See 7 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 3032 (rev. vol. 2012) (noting that a representative signature is ideally " preceded by the word 'For' or 'By' or some equivalent" ). And the simple fact is that Shannon did not have to list her title, though clearly the better practice is to include it. " [F]ailure of the officers signing to add the title of their office is not ordinarily fatal to the validity of a corporate contract where the contract on its face is a contract of the corporation and the other parties have notice of the officer's relation to the corporation." Id. § 3035; see also Star Supply Co. v. Jones, 665 S.W.2d 194, 198 (Tex. App. 1984) (" The signature of a corporate officer on a contract does not render it his personal contract, where in the body of the
contract, it is purported to be a corporation contract. " ).
There appears to be no Kentucky case stating this rule. The only cases addressing who is bound by the signature of a business entity's officer or agent are those where the body of the document does not state that the business entity is a party to the agreement and only the signature could so indicate. See, e.g., Simpson v. Heath & Co., 580 S.W.2d 505, 506 (Ky. App. 1979) (construing agreement binding " the undersigned" and signed by corporation's president with " Pres." after his signature). But that is not the situation before this Court, given that the lease expressly states it binds the LLC.
This Court sees no reason to depart from the rule that if the body of the contract states that the agreement is with a corporation or other entity, then the officer or agent signing the agreement has not signed in her individual capacity and cannot be held personally liable solely because of her signature. This makes sense in light of the cases noting that " [i]t is ... fundamental that an officer of a corporation will not be individually bound when contracting as an agent of that corporation within the scope of his employment." Potter v. Chaney, 290 S.W.2d 44, 46 (Ky. 1956). As long as the third party has notice that the agent is acting on behalf of a principal, " the agent is not liable, generally speaking, for his own authorized acts, or for the subsequent dealings between the third person and the principal." Id.
Again, as noted above, the lease describes Elegant Interiors, LLC as the party to be bound as the tenant. This identified Elegant Interiors, LLC as the principal and gave Pannell notice that he was dealing with Shannon as an agent of the company.
There is no ambiguity in the lease, at least none based on the cover-page statement or the fact that Shannon did not indicate that her signature was on behalf of the limited liability company. It is thus clear that the lease was a contract of the limited liability company, not Shannon individually, and therefore Shannon cannot be liable as having signed the lease in her personal capacity.
Pannell also claims that the release, by stating that the bound party was " Ann Shannon" without mentioning Elegant Interiors, LLC, made Shannon personally liable or, at the very least, created ambiguity as to the overall agreement when read with the second lease by misleading him. While the release does state that " Ann Shannon ... will only be responsible for payment of the remaining" square footage, it is equally clear that the release was aimed primarily at giving up some of the rights to occupy commercial space under the original lease, which was with Elegant Interiors, LLC. This is evinced by the use of the word " only," to suggest that the release reduces an existing obligation. The release clearly related to the first lease in that it allowed Pannell to rent some of the space to a third party, reduced the rent to be paid, and put the burden of paying for any construction costs on Pannell.
The last sentence of the terms of the first (and second) lease stated that " [n]o modification to this lease shall be binding unless such modification shall be in writing and signed by the parties hereto." The parties to the original lease were unquestionably
Elegant Interiors, LLC and Pannell, and the release was entered into because of this no-modifications-except-in-writing provision. By operation of this provision, Shannon could not have executed the release personally and could only do so on behalf of the LLC. The release cannot be read in a vacuum to be an independent agreement that personally obligated Shannon. In fact, the release said that a " new lease" would be signed and that " [a] 11 other stipulations w[ould] remain the same as in the initial lease." This would necessarily include the provision that the lease was with Elegant Interiors, LLC.
Ultimately, the release and the second lease must be read in light of the statutory preference for maintaining an LLC member's limited liability. KRS 275.150(2) states that the immunity provision, KRS 275.150(1), can give way " under a ... written agreement," in which " a member or manager may agree to be obligated personally for any of the debts, obligations, and liabilities of the limited liability company." But as this Court has stated, allowing personal liability is " antithetical to the purpose of a limited liability company." Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654, 659 (Ky. 2010). The business statutes of this Commonwealth disfavor personal liability, and even when a member of the company intends to take on such liability, it " must be stated in unequivocal terms leaving no doubt that the member or members intended to forego a principal advantage of this form of business entity." Id. The release and second lease do not state in unequivocal terms that Shannon was binding herself personally and foregoing her statutory immunity.
As to the notion that the release and second lease could or should be read together to create ambiguity, it suffices to point out that the second lease included what is known as an integration or merger clause. The very last clause of the lease states that " [t]his writing contains the entire agreement of the parties hereto."  At least as to items contained in the terms of the lease--such as the amount of rent and who is a party to the agreement--the lease contains the entire agreement. Parol evidence as to the " actual" terms of the lease agreement would not be permissible because " [w]hen the negotiations are completed by the execution of the contract, the transaction, so far as it rests on the contract, is merged in the writing." Bryant v. Troutman, 287 S.W.2d 918, 920 (Ky. 1956). There is no allegation of fraud or mistake here that would justify reforming the agreement. See id.; Morguelan v. Nat. Levy Realty Co., 311 Ky. 845, 847, 226 S.W.2d 20, 21 (1950). Thus, the second lease is the controlling document with regard
to who is responsible for paying rent and who is otherwise bound under it.
Pannell also suggests that the second lease's provision stating that the tenant is Elegant Interiors, LLC was " scrivener's error" and that the intent of the parties was for Ann Shannon to be listed as the tenant. While scrivener's error can be grounds for reforming a contract as the result of mutual mistake, " it is the well-established rule in this state that reformation of an executed contract on the ground of mistake will not be decreed unless the mistake be established by full, clear, and decisive evidence," and " [t]he ground of relief must appear beyond reasonable controversy." Nichols v. Nichols, 182 Ky. 18, 205 S.W. 953, 954 (1918); see also Abney v. Nationwide Mut. Ins. Co., 215 S.W.3d 699, 704 (Ky. 2006) (" The mutual mistake must be proven beyond a reasonable controversy by clear and convincing evidence ." (quoting Campbellsville Lumber Co. v. Winfrey, 303 S.W.2d 284, 286 (Ky. 1957), brackets omitted)). ...