Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc.
320 S.W.3d 654 (2010)
Rule of Law:
A provision in a limited liability company's operating agreement authorizing a manager to make capital calls on members for business expenses does not constitute a written agreement by the members to be personally liable for the company's debts. For members to waive their statutory limited liability, their agreement to assume personal liability must be clear and unequivocal.
Facts:
- Racing Investment Fund 2000, LLC was formed as a limited liability company to purchase, train, and race thoroughbred horses.
- The LLC's Operating Agreement authorized its Manager, Gaines-Gentry Thoroughbreds, LLC, to call for additional capital contributions from members to pay for 'operating, administrative or other business expenses.'
- Racing Investment purchased equine insurance through Clay Ward Agency, Inc., and subsequently failed to pay premiums it owed.
- After a judgment was entered against it for the unpaid premiums, Racing Investment tendered all of its remaining assets to Clay Ward.
- This payment only partially satisfied the judgment, and the LLC became defunct.
Procedural Posture:
- Clay Ward Agency, Inc. and Racing Investment Fund 2000, LLC entered into an agreed judgment in the Fayette Circuit Court (trial court) for unpaid insurance premiums.
- After Racing Investment made a partial payment, Clay Ward filed a motion in the trial court to hold the LLC in contempt for failure to pay the remaining balance.
- The trial court held Racing Investment in contempt, ruling that the capital call provision in its operating agreement was a viable means to satisfy the judgment, and ordered the company to use it.
- Racing Investment (appellant) appealed to the Kentucky Court of Appeals, which affirmed the trial court's decision.
- The Supreme Court of Kentucky granted discretionary review to consider the issue.
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Issue:
Does a provision in a limited liability company's operating agreement, which authorizes the manager to make capital calls on members for business expenses, constitute a written agreement by the members to be personally liable for the company's debts under KRS 275.150(2)?
Opinions:
Majority - Justice Abramson
No. A provision in an LLC's operating agreement allowing for capital calls does not, by itself, make the members personally liable for the LLC's debts. The Kentucky Limited Liability Company Act, specifically KRS 275.150, establishes that the central feature of an LLC is the limited liability of its members. While members can waive this protection in a written agreement, any such assumption of personal liability must be stated in clear and unequivocal language that leaves no room for doubt about the members' intent. The capital call provision in Racing Investment's agreement is a standard mechanism for funding ongoing business operations at the manager's discretion, not a debt-collection tool for creditors. To interpret this provision as a waiver of liability would be to improperly pierce the LLC's liability shield and would be antithetical to the purpose of the LLC business form. Therefore, a court cannot order a capital call to force members to satisfy a judgment against the now-defunct LLC.
Analysis:
This decision strongly reinforces the statutory shield of limited liability, which is the cornerstone of the LLC business entity. The court establishes a high bar for finding that LLC members have waived this protection, requiring an 'unequivocal' written agreement to assume personal liability. This ruling provides certainty for investors and entrepreneurs using the LLC form, ensuring that standard operational clauses like capital call provisions will not be judicially reinterpreted to expose them to personal liability for corporate debts. Consequently, creditors are put on notice that they generally cannot reach the personal assets of LLC members to satisfy company debts without an explicit personal guarantee.
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