Wilson v. Paine, No. 2008-SC-000905-CL.

• Decision Date: 25 June 2009
• Docket Number: No. 2008-SC-000905-CL.
• Citation: 288 S.W.3d 284
• Parties: John R. WILSON, Trustee for Franklin Career Services, LLC, Petitioner v. David B. PAINE and John Newton, Respondent.
• Court: United States State Supreme Court — District of Kentucky

288 S.W.3d 284

John R. WILSON, Trustee for Franklin Career Services, LLC, Petitioner v. David B. PAINE and John Newton, Respondent.

No. 2008-SC-000905-CL.

Supreme Court of Kentucky.

June 25, 2009.

John Rollin Wilson, Ruck, Wilson, Helline & Brockman, PLLC, Louisville, KY, Counsel for Appellant.

John H. Dwyer, Jr. Pedley, Zielke, Gordinier & Pence, PLLC, Louisville, KY, Counsel for Appellee, David B. Paine.

Jan Charles Morris, Louisville, KY, Counsel for Appellee, John Newton.

Opinion of the Court by Justice CUNNINGHAM.

Pursuant to CR 76.37(1), this Court granted the certification request of the United States Bankruptcy Court for the Western District of Kentucky to answer the following question of Kentucky law:

I. Whether the equitable rule of adverse domination applies to toll the statute of limitations set forth in KRS §§ 271B.8-330(3) and 271B.6-400?

In certifying the question of law to this Court, the United States Bankruptcy Court for the Western District of Kentucky provided a brief explanation of the facts of the case.

On January 4, 2006, Franklin Career Services, Inc., fdba Franklin Career Services, LLC, fdba DDH, INC. ("hereinafter FCS") filed a Chapter 7 petition for relief under Title 11 of the United States Code. On December 21, 2007, Appellant, John R. Wilson, as Trustee in Bankruptcy for FCS and on behalf of the Bankruptcy estate, filed suit against Capital Steel Ventures, Inc., a former parent company of FCS, and former officers and directors of FCS. The Complaint alleged several counts of corporate malfeasance and sought recovery of property as preferences and fraudulent transfers.

In Count Seven of his Complaint, Appellant alleged that unlawful distributions were made to various officers and directors pursuant to KRS § 271B.8-330. Appellant seeks to void those distributions on behalf of the corporation using Trustee's equitable powers provided under the Bankruptcy Code. Appellees, David B. Paine and John Newton, each filed Motions to Dismiss Count Seven on the grounds that the actions were barred by the statute of limitations in KRS § 271B.8-330(3). Appellant responded to this defense by raising the equitable tolling doctrine of "adverse domination."

Because this issue involves a question of Kentucky law that has not been addressed previously by this Court, the United States Bankruptcy Court for the Western District of Kentucky requested certification of the aforementioned question of law pursuant to CR 76.37(1).

KRS § 271B.8-330 provides in pertinent part: "A proceeding under this section shall be barred unless it is commenced within two (2) years after the date on which the effect of the distribution was measured under subsection (5) or (7) of KRS 271B.6-400." It does not appear that Appellant filed his claim against Appellees within the two-year limitations period.

Ordinarily, lack of knowledge of one's rights is insufficient to prevent operation of statutes of limitation. Wilcox v. Sams, 213 Ky. 696, 281 S.W. 832 (1926). However, when the complained of injury is not immediately discoverable, courts steer away from the unfairness inherent in charging a plaintiff with slumbering on rights not reasonably possible to ascertain. The discovery rule, a means by which to identify the "accrual" of a cause of action when an injury is not readily ascertainable or discoverable, was first enunciated in Tomlinson v. Siehl, 459 S.W.2d 166 (Ky. 1970), and later refined in Hackworth v. Hart, 474 S.W.2d 377 (Ky.1971). "[T]he statute begins to run on the date of the discovery of the injury, or from the date it should, in the exercise of ordinary care and diligence, have been discovered." Id. at 379. This rule entails knowledge that a plaintiff has a basis for a claim before the statute of limitations begins to run. The knowledge necessary to trigger the statute is two-pronged. One must know: (1) he has been wronged; and (2) by whom the wrong has been committed. Drake v. B.F. Goodrich Co., 782 F.2d 638, 641 (6th Cir. 1986). See also Hazel v. General Motors Corp., 863 F.Supp. 435, 438 (W.D.Ky.1994) ("Under the `discovery rule,' a cause of action will not accrue until the plaintiff discovers, or in the exercise of reasonable diligence should have discovered, not only that he has been injured but also that his injury may have been caused by the defendant's conduct."). As such, the discovery rule works as a "savings" clause or a "second bite at the apple." Queensway Financial Holdings Ltd. v. Cotton & Allen, P.S.C., 237 S.W.3d 141, 148 (Ky.2007).

The doctrine of adverse domination shares the same theoretical underpinnings as the discovery rule. Michael E. Baughman, Defining the Boundaries of the Adverse Domination Doctrine: Is There Any Repose for Corporate Directors?, 143 U. Pa. L.Rev. 1065, 1093 (1995). It has been described as "merely a corollary of ... [the] discovery rule, applied in the corporate context." Resolution Trust Corp. v. Farmer, 865 F.Supp. 1143, 1154 n. 11 (E.D.Pa.1994) (citing In re Lloyd Securities, 153 B.R. 677, 685 (E.D.Pa.1993)).

It is the `inherently unknowable' character of the injury that is the critical factor that governs the applicability of the discovery rule A corporate plaintiff does not have `knowledge' of an injury to itself until those individuals who control it know of the injury and are willing to act on that knowledge. (Emphasis added.)

Id. at 1155. Moreover, "a corporate plaintiff cannot `discover' injuries to the corporation caused by those who control the corporation." Clark v. Milam, 192 W.Va. 398, 452 S.E.2d 714, 718 (1994). Therefore, adverse domination provides that the "cause of action will be tolled during the period that a plaintiff corporation is controlled by wrongdoers." Resolution Trust Corp. v. Gardner, 798 F.Supp. 790, 795 (D.D.C.1992).

The doctrine of adverse domination has not heretofore been considered by this Court, but has been widely applied by federal courts in cases involving corporate causes of action against directors and officers.¹ See, e.g., Farmers & Merchants Nat. Bank v. Bryan, 902 F.2d 1520 (10th Cir.1990); IIT, an Intern. Inv. Trust v. Cornfeld, 619 F.2d 909 (2d Cir.1980); International Railways of Central America v. United Fruit Co., 373 F.2d 408 (2d Cir.1967), cert. denied, 387 U.S. 921, 87 S.Ct. 2031, 18 L.Ed.2d 975 (1967); Resolution Trust Corp. v. Kerr, 804 F.Supp. 1091 (W.D.Ark.1992); Resolution Trust Corp. v. Gallagher, 800 F.Supp. 595 (N.D.Ill.1992); Resolution Trust Corp. v. Gardner, 798 F.Supp. 790 (D.D.C.1992); Federal Deposit Ins. Corp. v. Howse, 736 F.Supp. 1437 (S.D.Tex.1990); Federal Deposit Ins. Corp. v. Greenwood, 739 F.Supp. 450 (C.D.Ill. 1989); Federal Deposit Ins. Corp. v. Carlson, 698 F.Supp. 178 (D.Minn.1988); Federal Sav. and Loan Ins. Corp. v. Burdette, 696 F.Supp. 1196 (E.D.Tenn.1988); Federal Deposit Ins. Corp. v. Hudson, 673 F.Supp. 1039 (D.Kan.1987); Federal Sav. and Loan Ins. Corp. v. Williams, 599 F.Supp. 1184 (D.Md.1984); Federal Deposit Ins. Corp. v. Bird, 516 F.Supp. 647 (D.P.R.1981); Saylor v. Lindsley, 302 F.Supp. 1174 (S.D.N.Y.1969).

The doctrine is rooted in the long-established principles of agency law. Adverse domination is premised on the notion that knowledge is not imputed if the agent is acting in a manner adverse to the interests of the principal. This rule is consistent with Kentucky agency law. Owsley County Deposit Bank v. Burns, 196 Ky. 359, 244 S.W. 755 (1922). Thus, "[t]he knowledge of the agent is the knowledge of the corporation he serves when the knowledge relates to some matter over which the agent has control and with which his duties are connected and when they relate to matters over which he has authority...." Warfield Natural Gas Co. v. Anderson, 249 Ky. 586, 61 S.W.2d 27, 28 (1933). In the corporate context, the corporation is the principal and the board of directors as a whole is the agent. When the board of directors is accused of breaching its duty to the corporation, it necessarily is accused of acting adversely to the principal's interests. See Resolution Trust Corp. v. Farmer, 865 F.Supp. at 1155-56.

"Because, in most cases, defendants' control of the corporation will make it impossible for the corporate plaintiff independently to acquire the knowledge and resources necessary to bring suit," the adverse domination rule "presumes that actual notice will not be available until the corporate plaintiff is no longer under the control of the erring directors." Hecht v. Resolution Trust Corp., 333 Md. 324, 635 A.2d 394, 405 (1994). "This prevents the culpable directors from benefiting from their lack of action on behalf of the corporation." Id. at 408.

While courts which have been confronted with the question have almost uniformly embraced adverse domination,² there still exists some variation in its application. Notably, courts have differed on the degree of domination of the board required in order for the corporation to claim protection of the doctrine, as well as the degree of culpability that the plaintiff must allege against the directors.

Each shall be discussed in turn.

A majority of jurisdictions follow the "disinterested majority test," whereby a plaintiff is required to show that a majority of the board members were wrongdoers during the period the plaintiff seeks to toll the statute of limitations. See, e.g., Fed. Deposit Ins. Corp. v. Dawson, 4 F.3d 1303, 1310 (5th Cir.1993); Fed. Deposit Ins. Corp. v. Howse, 736 F.Supp. 1437, 1441 (S.D.Tex.1990); Fed. Sav. and Loan Ins. Corp. v. Williams, 599 F.Supp. 1184, 1195 (D.Md.1984); Fed. Deposit Ins. Corp. v. Bird, 516 F.Supp. 647, 651 (D.P.R.1981). This standard is premised on the notion that "the mere existence of a culpable majority on the board is so likely to preclude the corporation from filing suit against the wrongdoers that tolling is thereby justified." Dawson, 4 F.3d at 1310 (internal citations omitted). Courts have given two rationales to justify this assumption. First, a culpable majority can...