Lane Report, March 2012
By David Cohen
In business cases, Kentucky courts clarify contract law-tort law claims, LLC capital calls and bank-borrower responsibility
Whether in good or bad economic times, the evolving state of the law presents unique challenges for Kentucky businesses large and small. Commonwealth courts (at both the trial and appellate level) have lately addressed a wide variety of issues that may be of interest to, and affect, Kentucky business owners. The following cases may not have caught your attention, but nevertheless may impact on how your business operates, now and in times to come:
Giddings & Lewis Inc. vs. Industrial Risk Insurers Inc., 348 S.W.3d 729 (Ky. 2011)
A series of decisions stretching back to 1990 hinted at this result, and in Giddings, the Kentucky Supreme Court confirmed Kentucky’s adoption of the economic loss rule, in the context of the failure of a custom-manufactured piece of manufacturing equipment.
The rule provides that a commercial buyer of a product cannot recover in tort for purely economic losses if the product fails. Thus, while the buyer retains its tort claims for non-economic losses (like damages for personal injury or for harm to property other than the product), economic losses can be redressed only through claims sounding in contract.
As a practical matter, what this means is that if a commercial party suffers only economic losses and these losses are caused by a party with which it does not have a contract, there is no direct avenue for recovery – though the buyer might sue an entity with which it does have a contract, such as a supplier or installer.
While the result and effect of the economic loss rule may appear unduly harsh, it is the law now in a majority of states. It has been widely adopted on the public policy basis that where parties have a contract pertaining to a commercial purchase and sale, their disputes pertaining to the subject of the contract are best addressed by reference to the contract and contract law, and not tort law.
Cincinnati Insurance Co. v. Motorists Mutual Insurance Co., 306 S.W.3d 69 (Ky. 2011)
In this case, the Kentucky Supreme Court addressed the question of whether a claim of faulty workmanship in construction qualifies as an “occurrence” for purposes of triggering coverage under a commercial general liability (“CGL”) policy. Adhering the majority rule across the country and the underlying public policy, the court found that faulty workmanship is not an “occurrence” because to find that something in the nature of an accident occurred in the event of faulty workmanship would, in effect, be to transform the CGL policy into a performance bond or guarantee.
Racing Investment Fund 2000 LLC v. Clay Ward Agency Inc., 320 S.W.2d 654 (Ky. 2010)
This case addresses the issue of when (and if) the manager of a limited liability company that has a written operating agreement providing for capital calls can be compelled to make such a call. During the course of litigation, the LLC and the insurance agency entered into an agreed judgment for the collection of unpaid insurance premiums and the LLC (which was in dissolution) partially satisfied the judgment from its funds on hand. The agency took the position that the LLC’s manager could compel the company’s members to make a final capital contribution to satisfy the remainder of the judgment.
While the lower courts concurred, the Kentucky Supreme Court adamantly disagreed. The court found that the entire purpose of a limited liability entity such as an LLC is to shield the members from personal liability for obligations of the company, and that absent some express indication that the members had agreed to be personally liable, no capital call could be compelled merely to satisfy the judgment against the company.
Branch Banking and Trust Co. v. Thompson, 2011 WL 255149 (Ky. App. 2011) (unpublished)
An all-too-common situation in current economic conditions is a work-out effort by a commercial lender with a non-performing borrower who is striving to cure a default. In Thompson, the borrower (a commercial real estate investor) alleged that his loan officer made numerous representations about various means to cure the default, none of which the bank ever acted upon but which the borrower relied upon to his detriment. This resulted in a several million-dollar fraud verdict at trial, including a substantial award of punitive damages.
In vacating the award, the Kentucky Supreme Court noted that the borrower’s testimony supported a finding that at the time the key representations were allegedly made by the bank, he already did not trust the bank and believed they were lying to him about principal attributes of the banking relationship. Therefore, any reliance by the borrower on the representations (a key element of fraud) was not reasonable.
Thompson is instructive for all parties to a banking relationship because it serves to remind lenders that all disclosures must be truthful and accurate; and borrowers that they must always act to protect their own interest and not merely rely upon the lender to do so.
Government relations/ procurement
Laurel Construction Co. v. Paintsville Utility Commission, 336 S.W.3d 903 (Ky. App. 2011)
This case presents the unique situation of a procurement contract that was properly awarded to the high bidder. The Commission, a municipal utility operating in Johnson and Lawrence Counties, solicited bids for a water tank. Laurel Construction submitted the lower of two bids presented, but the other bidder was awarded the contract. Laurel Construction challenged the award as contrary to Kentucky’s Model Procurement Code.
In affirming a summary judgment dismissing the claim, the Court of Appeals noted that the code applies to local governments only when they affirmatively adopt it and neither the Paintsville Utility Commission nor the City of Paintsville had done so. Therefore, as a disappointed bidder, Laurel Construction had no ability to make a challenge under the code.
The court further found that because of differences in the types of tanks bid, the commission’s decision to accept the high bid did not violate contract law principles.
In 2010 and 2011, the Jefferson Circuit Court was the site of a series of significant jury awards in employment law cases:
Snyder v. EPI Corporation
John Snyder served as CEO of Louisville-based nursing home operator EPI for 32 years. During negotiations to sell the company, Snyder (a 19 percent shareholder) objected to a proposed deal on the basis that the assets were being undervalued. When Snyder refused to acquiesce to the board’s demand to proceed with transaction, he was fired. In the lawsuit, he sought lost wages of three times his annual salary (totaling $900,000) along with an unpaid bonus representing 6 percent of the pre-tax profits on the sale (amounting to roughly $7.3 million). EPI asserted that Snyder committed knowing malfeasance by opposing the sale and failing to obey the board and that he was terminated in accordance with a corresponding provision of his employment contract. A Louisville jury sided with Snyder and awarded him damages of $8.46 million.
Oliver v. Hilliard Lyons
Robert Oliver headed investment banking at Hilliard Lyons in Louisville for roughly 10 years. In 1998, when Hilliard Lyons was purchased by PNC Financial, Oliver was offered a $275,000 retention bonus, to be paid in back-loaded increasing shares over five years. Oliver asserted that he bypassed other employment opportunities in reliance on receiving the bonus. In 2001, Oliver was terminated, and never received the bulk of the money. In the lawsuit, he claimed that Hilliard Lyons had manufactured a performance-based reason to terminate him, to avoid paying the remaining bonus. He sought $238,333 and prevailed at trial. The case has been heavily litigated at the appellate level and remains before the Court of Appeals.
Banker v. University of Louisville
Mary Banker was a college track star and joined the coaching staff at Louisville in 2007. While coaching both the men’s and women’s track team, she encountered an allegedly hostile work environment replete with sexist language and innuendo, and disparate job duties compared to her male counterparts. When Banker complained, she received poor evaluations and her contract was not renewed. She sued the university on grounds of sexual harassment and retaliation. The jury returned a mixed verdict, denying the hostile work environment claim but awarding damages for retaliation of $300,000 for emotional distress and $71,875 for lost wages. The case remains before the Court of Appeals.
Boyle v. Ohio Valley Aluminum
Michael Boyle joined Ohio Valley in 2008, signing a contract providing for a $300,000 annual salary and clearly specifying grounds for termination (with liquidated damages for termination without cause of 18 months’ salary). Boyle was terminated after one year, for missing budget goals, a ground for termination with cause under the contract. He sued, offering proof at trial that the parent company to Ohio Valley had in fact attempted to remove several highly compensated executives solely as a costsavings. The jury awarded Boyle the full amount of liquidated damages, in the amount of $750,000.
Another case, from federal court in Bowling Green, similarly provides that employers must be cautious in end-ofemployment-relationship dealings:
Thompson v. Quorum Health Resources LLC
Mark Thompson served as CEO of the Monroe County Hospital but was actually employed by Quorum Health. During his employment, he developed a concern as to possible Medicare fraud at the hospital and filed a qui tam claim in federal court. After learning that Thompson was the qui tam relater, it fired him on the basis that although he had suspected misconduct as early as 1999, he did not report it until 2004, in contravention of his contract. Being that he was fired a month after the qui tam suit was unsealed, Thompson sued Quorum Health for retaliation.
Ironically, Quorum Health defended on the basis that Thompson had himself engaged in actionable conduct, by failing to report the possible fraud each year starting in 1999. A federal jury disagreed and awarded Thompson more than $400,000 for back pay, $70,000 in front pay and $30,000 for emotional distress. In addition, by statute the back pay was subject to being doubled. The total verdict was in excess of $900,000. The case was appealed and remains pending before the Sixth Circuit Court of Appeals.
David Cohen is an attorney with McBrayer, McGinnis, Leslie & Kirkland, PLLC.
Two recent decisions from the Sixth Circuit Court of Appeals highlight the importance of record-keeping in defending discrimination claims. In each of these two cases, the plaintiffs raised claims of age discrimination, but were unsuccessful in their claims largely due to the fact that their performance reviews and other documents in their personnel files supported the employers’ legitimate reasons for the employment decisions.
In Provenzano v. LCI Holdings, Inc., 663 F.3d 806 (6th Cir. 2011), the plaintiff claimed that she was passed over for a promotion to assistant manager in favor or a less-qualified, younger person. The plaintiff brought forth evidence that she had worked for the employer for a longer period of time and that she had a higher level of education than the other applicant. The plaintiff also testified that she had performed the duties of assistant manager from time-to-time when needed to fill in at other store locations. As part of the plaintiff’s case, she introduced an email from management that raised an inference in the plaintiff’s mind that the company (a retail store) wanted to portray a “younger image” to the public. In response the employer relied upon the fact that the other applicant had similar qualifications as the plaintiff, but was a better choice because of the plaintiff’s performance history rendered her “not promotable.” The applicant who received the job had a much stronger performance record than the plaintiff. More importantly, the plaintiff had also received disciplinary warnings whereas the other applicant had not. The Court relied, in part, upon the performance issues as documented in the plaintiff’s personnel file to affirm summary judgment in the employer’s favor.
In Lefevers v. GAF Fiberglass Corporation, Case No. 00-5667, (6th Cir. 2012), the plaintiff, age 58, alleged that he was the target of age discrimination. To support his claim, the plaintiff pointed to comments in the workplace directed to him about when he was going to “retire” and comments about the “elderly employees” in the company. The company defended the case by stating that its decision to fire the plaintiff was a as result of a reduction-in-force, and that he was selected for termination because of poor performance reviews. Also in support of its decision, the employer cited to several other individuals who were retained that held similar positions to the plaintiff and were substantially over the age of 40. The Sixth Circuit affirmed summary judgment in the employer’s favor. As part of its reasoning, the Sixth Circuit stated that although the plaintiff disputed the assessment of his performance, that dispute could not render the reason for termination pretextual.
The plaintiffs’ performance reviews played a critical role in the Court’s analysis in each of these cases despite the fact that each case contained testimony that could be categorized as direct evidence of discrimination. This should serve as a reminder to employers to be candid in evaluating employees in all aspects of the job. It is not only good practice for the day-to-day operations of the business, but may also be beneficial if faced with defending a claim that there was a discriminatory reason for an adverse employment action. Performance reviews and disciplinary records, if properly kept, can make a difference between obtaining a summary judgment in the employers favor and leaving the decision up to a jury.
Cynthia L. Effinger, an Associate of the firm, joined McBrayer, McGinnis, Leslie & Kirkland, PLLC in 2012. Ms. Effinger has a broad range of legal experience gained through 13 years of practice throughout the Commonwealth of Kentucky where her clients conduct business. Ms. Effinger’s practice is concentrated in the areas of employment law and commercial litigation. She also has experience with First Amendment litigation, securities litigation and complex litigation. Ms. Effinger can be reached at firstname.lastname@example.org or at (502) 327-5400, ext. 316.
Recently, the U.S. Equal Employment Opportunity Commission (“EEOC”) issued an Informal Discussion Letter (“EEOC Letter”) which opined that employers who require high school diplomas as a minimum standard for job applicants, and who often advertise as such, may be in violation of the Americans with Disabilities Act, because they screening out individuals who are unable to graduate because of a learning disability. Though Informal Discussion Letters give guidance regarding a particular inquiry and are not binding precedent, this letter serves as a wake-up call for employers of skilled and unskilled workers alike, who have long considered a high school diploma requirement to be a minimal, achievable and useful standard to ensure that its workforce possesses basic reading, writing and math skills.
The Americans with Disabilities Act of 1990, 42 U.S.C. 12101 et seq. (“ADA”), is applicable to employers who employ more than fifteen (15) employees, and prohibits employers from discriminating against a qualified individual – those who can perform the essential functions of the employment position with or without reasonable accommodation — on the basis of his or her disability, during all stages of the employment relationship, including throughout “job application procedures;” during the “the hiring, advancement, or discharge of employees;” and with regard to “employee compensation, job training, and other terms, conditions, and privileges of employment.” 42 U.S. C. 12111(8) and 12112. A disability is defined with the ADA as a “physical or mental impairment that substantially limits one or more major life activities of such individual” [generally including caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, and working]; or “a record of such an impairment; or “being regarded as having such an impairment”. 42 U.S.C. 12102.
According to the recent EEOC Letter, an employer may still apply the high school diploma requirement (and presumably other degree or certification requirements) if it can demonstrate that such a requirement is “job related and consistent with business necessity,” which essentially requires a showing that the functions of the particularly job position cannot be easily be performed by someone who does not have a high school diploma. For example, for a legal secretary, who must possess significant reading, writing, word processing, and math skills to perform such a job, a high school diploma requirement may be deemed “job related and consistent with business necessity,” but the same may not be true for a grocery bagger, hair stylist or delivery driver, who may not utilize the same skills taught in high school as a part of his or her job functions.
In light of this letter, and the reality that the EEOC may soon be inclined to apply this new position in the right case, it is prudent for employers to take another look at its job advertisements and applications to determine: (1) whether a high school diploma is actually essential to the job position; (2) what skills taught in high school are actually required for the position; and (3) how they can revise their job advertisements and applications to reflect the skill requirements necessary to the particular job, rather than a threshold diploma requirement. It is also advisable to re-train management to ensure that they are not discriminating against applicants with learning disabilities who can perform the essential job requirements with or without reasonable accommodation, but who have not been able to achieve a high school diploma. While an employer is not required to prefer the learning disabled applicant over other better qualified applicant, it must consider the applicants true ability to perform essential job functions through demonstration of skills, work history considerations, etc., in lieu of a strict high school diploma requirement.
 A copy of the letter can be viewed at: http://www.eeoc.gov/eeoc/foia/letters/2011/ada_qualification_standards.html.