Eia Props., LLC v. Fenwick Equestrian, LLC

EIA PROPERTIES, LLC, Plaintiff, v. FENWICK EQUESTRIAN, LLC, et al., Defendants.

No. 5:14-CV-328-REW

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY CENTRAL DIVISION LEXINGTON

September 28, 2015

MEMORANDUM OPINION AND ORDER*** *** *** ***

Plaintiff, EiA Properties, LLC ("EiA"), moved for summary judgment. DE #31. Defendants, Fenwick Equestrian, LLC, and Fenwick Farm, Inc. (collectively, "the Fenwick entities"), responded. DE ##34, 35 (identical save for party name and descriptions). EiA replied. DE #40 (combined Reply and Response) (identical). The Fenwick entities moved for judgment on the pleadings. DE ##36, 37 (identical). EiA responded. DE ##41, 42 (identical). The Fenwick entities replied. DE ##45, 46 (identical). The matters are fully briefed and ripe for consideration. For the reasons that follow, the Court DENIES EiA's motion for summary judgment (DE #31) and GRANTS the Fenwick entities' motions for judgment on the pleadings (DE ##36, 37). South Carolina law applies and provides EiA no avenue to obtain the particular relief it seeks.

I. BACKGROUND

This case represents EiA's endeavor to enforce a state court judgment adverse to Wilhelmina McEwan ("McEwan") against the Fenwick entities. EiA, in the state action, sought to collect on a $150,000 promissory note and foreclose on a mortgage on certainFayette County real estate, known as the Snow Goose Property. The Fayette Circuit Court entered final judgment in the amount of $351,418.31 (according to the Complaint)¹ and an order confirming the sale of the Snow Goose Property. DE ##1-1 (Final Judgment and Order of Sale). The Master Commissioner sold Snow Goose to bidder EiA for $182,667.00. DE #1-2 (Report of Sale), at 1. The sale amount was credited against the final judgment, leaving a deficiency balance of $168,751.37 (again, according to the Complaint),² plus post-judgment interest and other costs and expenses.

EiA states that "[t]his is an action seeking to recover on an outstanding state court judgment against [McEwan] from her alter egos, [the Fenwick entities], by piercing the corporate veils of the alter egos." DE #1 (Complaint), at 1. EiA is a Kentucky LLC whose sole member is a citizen of Virginia. DE #48 (curative pleading), at 1. Both Fenwick entities are creatures of South Carolina law, and the LLC's two members are citizens of South Carolina. Id. at 1-2. EiA "seeks to enforce a judgment obtained in a state-court foreclosure action[.]" DE #1, at 2. EiA requests "a judicial piercing of the corporate veil as necessary to hold [the Fenwick entities] liable for the Deficiency Balance[,]" compensatory damages equivalent to the Deficiency Balance, and costs and expenses, including attorney fees. Id. at 6.

II. CHOICE OF LAW

In this diversity case,³ the Court first must make a choice of law determination. EiA argues that South Carolina law applies (or that the "question is superfluous"). DE #31-1, at 3 (citing Restatement (Second) of Conflict of Laws § 307 and Howell Contractors, Inc. v. Berling, 383 S.W.3d 465, 467-68 (Ky. Ct. App. 2012)). The Fenwick entities contend that "[n]o choice of law analysis is necessary" to determine that Kentucky law applies. DE #34, at 2-3 (factually distinguishing Howell and cataloguing Kentucky ties). To determine which state's substantive law applies, a federal court sitting in diversity applies the choice of law rules of the forum state (here, Kentucky). Town of Smyrna, Tenn. v. Mun. Gas Auth. of Ga., 723 F.3d 640, 645 (6th Cir. 2013); Miller v. State Farm Mut. Auto. Ins. Co., 87 F.3d 822, 824 (6th Cir. 1996) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 61 S. Ct. 1020, 1021-22 (1941)).

Determining and applying the applicable choice of law rule is the Sixth Circuit's normal approach in these circumstances. See, e.g., In re Dow Corning Corp., 778 F.3d545, 548-52 (6th Cir. 2015) (applying North Carolina choice of law rules to determine North Carolina substantive law applies without first determining if the potentially applicable substantive laws conflict); Bahr v. Tech. Consumer Prods., Inc., 601 F. App'x 359, 365 (6th Cir. 2015) (applying Ohio choice of law rule to determine Minnesota law applies without first analyzing possible conflict); Sun v. CM Prods., Inc., 393 F. App'x 283, 286 (6th Cir. 2010) (applying Kentucky choice of law rule to determine District Court did not err in applying Illinois law without previously determining if substantive laws conflict); Miller, 87 F.3d at 824-25 (holding Pennsylvania law applies under Ohio choice of law rules without first deciding if the Pennsylvania and Ohio substantive laws conflict); but see CenTra, Inc. v. Estrin, 538 F.3d 402, 409 (6th Cir. 2008) (grappling with "some important questions as to the appropriate choice of law" concerning "matters of professional responsibility" and ultimately not deciding what Michigan's choice of law principles would dictate because "Michigan's standards of professional conduct are consistent with the other possible sources of law"); Dow Corning, 778 F.3d at 555 (Sutton, J., dissenting) ("The first imperative of a conflict-of-laws problem is: a conflict. When all roads lead to the same result, there is no conflict to resolve.").

Here, it is far from clear whether applying South Carolina and Kentucky law would end in the same result, and the analytical approach under each state's law—when neither state has spoken with clarity (if at all) on the relevant legal issue—would most certainly vary. In this context—with the states' respective legal posture sufficiently different, and with the variety of related issues the Court faces—the Court resolves the choice of law question and applies the appropriate state's law. See also Williams v. Toys "R" Us, 138 F. App'x 798, 803 (6th Cir. 2005) (District Court did not err in applyingMichigan state law where there was no conflict of laws.). Even if both roads might lead to the same result, they would traverse wholly different unblazed paths in so reaching. See also infra note 19.

In the usual case, characterization of the cause of action determines the applicable choice of law rule.⁴ For example, "Kentucky articulates two different choice of law rules with respect to contract and tort actions. Kentucky precedent dictates that the 'any significant contacts' test applies to tort actions, whereas the Restatement's 'most significant contacts' test applies to contract disputes." Weingartner Lumber & Supply Co., Inc. v. Kadant Composites, LLC, No. 08-181-DLB, 2010 WL 996473, at *3 (E.D. Ky. Mar. 16, 2010) (citing Saleba v. Schrand, 300 S.W.3d 177, 181 (Ky. 2009)). Determining Kentucky's choice of law approach here is somewhat theoretically complicated—although the difficulty falls away in practice—because "piercing the corporate veil . . . [is] not—standing alone—[a] cause[] of action." Weingartner, 2010 WL 996473, at *4 (holding Kentucky law applies). To add another layer of (at least abstract) complexity, this is not a straightforward veil piercing case; instead, it seeks reverse veil piercing (a concept explored later).

The Court, conceptually, sees three possibilities: applying (1) Kentucky's veil piercing / corporate choice of law rule (Howell / § 307), (2) Kentucky's contractual choice of law rule (because the underlying adjudged matter concerns contract, keeping in mind the Commonwealth's background preference for its own law), or (3) the traditional property rule where the law of the situs state controls (because the adjudged matter involves real estate), see, e.g., Barber, 85 F. Supp. 3d at 1316 ("[T]he legal issue in this case sounds in property. In Florida, the law of the situs of the property controls."); Mazza v. Mazza, 475 F.2d 385, 388 & 388 n.6 (D.C. Cir. 1973); In re Barrie's Estate, 35 N.W.2d 658, 661, 663 (Iowa 1949). Facing this uncertainty, the Court perceives Kentucky's veil piercing / corporate choice of law approach to be most appropriate and thus applies it. See, e.g., Milliken & Co. v. Haima Grp. Corp., No. 08-22891-MC, 2010 WL 1286462, at *3 (S.D. Fla. Mar. 1, 2010) (applying Florida's choice of law rule governing "claims involving corporations" to a reverse veil piercing claim); In re Friedlander Capital Mgmt. Corp., 411 B.R. 434, 442 (Bankr. S.D. Fla. 2009) (applying Florida's choice of law rule governing corporate internal affairs to a reverse veil piercing claim and determining the local law of Connecticut, the state of incorporation, applies). The present dispute solely concerns the propriety of reverse veil piercing as remedy; it does not directly implicate the underlying contract / mortgage or threaten to affect the subject real estate.

In a traditional corporate veil piercing case, Kentucky courts apply Restatement (Second) of Conflict of Laws § 307, which states that "[t]he local law of the state of incorporation will be applied to determine the existence and extent of a shareholder's liability to the corporation for assessments or contributions and to its creditors forcorporate debts." See Howell, 383 S.W.3d at 467 (quoting § 307 and applying Ohio law to a veil piercing claim against an Ohio LLC, but, in dicta, reaching the same result under Kentucky law).⁵

Howell determined that "the rights, duties and obligations of an Ohio LLC and its members are governed by Ohio law." Id. (citing § 307 and cases from the Second Circuit, the District of Columbia, Louisiana, Oklahoma, and Wisconsin).⁶ True, as the Fenwick entities point out, Howell and this case differ factually. There, Howell, a Kentucky corporation, sued Berling (an individual) and Westview (an Ohio LLC) in Kentucky court for breach of contract concerning Ohio real estate development. Howell asked the court to disregard LLC status and hold Berling personally liable for Westview's debt. Here, on the other hand, EiA, a Kentucky LLC, sued the Fenwick entities, a South Carolina LLC and corporation, to collect on a judgment against McEwan, a South Carolina citizen, concerning a foreclosure on Kentucky real estate....