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Racing Inv. Fund 2000, LLC v. Clay Ward Agency, Inc., Not Reported in S.W.3d, 2008 WL 5102151

Facts

RIF, created for the purchase and racing of thoroughbred horses, had a history of business dealings with Clay Ward, an equine insurance firm. After terminating Clay Ward due to disputes over insurance policies, RIF owed $61,243.30 in unpaid premiums. Following a series of legal actions, RIF executed an agreed judgment acknowledging its debt of $69,858.96 but only partially paid $12,719.28. When RIF failed to pay the remaining balance, Clay Ward sought a contempt ruling, leading to the court's order for RIF to pay the full amount.

RIF was an entity created for the purchase, breeding, and racing of thoroughbred horses. It was one of several limited liability companies, which had as the managing member Gaines–Gentry Thoroughbreds, LLC. For six years, Gaines–Gentry and its partners (including RIF) did business with Clay Ward, an insurance firm that specializes in equine insurance. Each company, including Gaines–Gentry, had separate accounts with Clay Ward.

Issue

Whether RIF must pay the remaining balance of the agreed judgment plus post-judgment interest based on its operating agreement and the implications of its dissolution.

The issue is whether RIF must pay Clay Ward the remaining balance plus post-judgment interest of the agreed judgment based on the RIF Operating Agreement, Section 4.3(a), which provides for routine capital calls of its members 'to pay operating, administrative, or other business expenses of the Company, which have been incurred, or which the Manager reasonably anticipates will be incurred' or whether the dissolution of the RIF forestalls payment of the judgment in light of both the language of the operating agreement and the limited liability statutes of the Commonwealth.

Rule

Under KRS 275.150(2), members of a limited liability company can agree to personal liability for the company's debts in a written operating agreement, which can include provisions for capital calls to cover business expenses.

While KRS 275.150(1) provides that members and managers are not personally liable for limited liability companies' debts, obligations, and liabilities, pursuant to KRS 275.150(2), members and managers can agree to personal liability in a written operating agreement or another written agreement.

Analysis

The court analyzed RIF's operating agreement, particularly Sections 4.3(a) and 4.4, which allowed for capital calls to cover operating expenses. It concluded that RIF's members had agreed to be liable for the company's debts, including the unpaid insurance premiums, despite the company's dissolution. The court emphasized that the transformation of the debt into a judgment did not negate RIF's obligation to pay.

In sum, notwithstanding the Act (Limited Liability Statutes), RIF members agreed through the operating agreement to be liable, through capital calls, for payment of operating, administrative and business expenses. That is the situation here—an outstanding debt for insurance premiums.

Conclusion

The court affirmed the contempt ruling, ordering RIF to pay the remaining balance of the judgment, as it had the ability to make a capital call to satisfy the debt.

We agree with the court that it is reasonable and possible for it to obtain the funds necessary to pay Clay Ward's outstanding debt.

Who won?

Clay Ward Agency, Inc. prevailed because the court found that RIF was still liable for the debt under its operating agreement, despite its dissolution.

Clay Ward filed, on November 30, 2004, an ex parte motion for entry of a rule under Fayette Circuit Court Rule 27. Clay Ward contended that RIF should make full payment and is capable of doing so.

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