RENDERED: MAY 10, 2024; 10:00 A.M. TO BE PUBLISHED
Commonwealth of Kentucky Court of Appeals NO. 2022-CA-1341-MR
MILLERS LANE CENTER, LLC, A KENTUCKY LIMITED LIABILITY COMPANY AND MILLERS LANE CENTER, LLC, A FLORIDA LIMITED LIABILITY COMPANY APPELLANTS
APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE ANNIE O’CONNELL, JUDGE ACTION NOS. 21-CI-007148 & 22-CI-001338
MORGAN & POTTINGER, P.S.C.; JAMES P. MCCROCKLIN; AND MOSLEY & TOWNES, PLLC APPELLEES
AND
NO. 2022-CA-1398-MR
JAMES P. MCCROCKLIN AND MOSLEY & TOWNES, PLLC CROSS-APPELLANTS
CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE ANNIE O’CONNELL, JUDGE ACTION NOS. 21-CI-007148 & 22-CI-001338 MILLERS LANE CENTER, LLC, A KENTUCKY LIMITED LIABILITY COMPANY; MILLERS LANE CENTER, LLC, A FLORIDA LIMITED LIABILITY COMPANY; AND MORGAN & POTTINGER, P.S.C. CROSS-APPELLEES
NO. 2022-CA-1399-MR
MORGAN & POTTINGER, P.S.C. CROSS-APPELLANT
CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE ANNIE O’CONNELL, JUDGE ACTION NOS. 21-CI-007148 & 22-CI-001338
MILLERS LANE CENTER, LLC, A KENTUCKY LIMITED LIABILITY COMPANY; JAMES P. MCCROCKLIN; MARK BREWER; MILLERS LANE CENTER, LLC, A FLORIDA LIMITED LIABILITY COMPANY; AND MOSLEY & TOWNES, PLLC CROSS-APPELLEES
NO. 2022-CA-1368-MR
MARK BREWER APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE ANNIE O’CONNELL, JUDGE ACTION NOS. 21-CI-007148 & 22-CI-001338
-2- MORGAN & POTTINGER, P.S.C.; JAMES P. MCCROCKLIN; AND MOSLEY & TOWNES, PLLC APPELLEES
NO. 2022-CA-1400-MR
JAMES P. MCCROCKLIN AND MOSLEY & TOWNES, PLLC CROSS-APPELLANTS
CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE ANNIE O’CONNELL, JUDGE ACTION NOS. 21-CI-007148 & 22-CI-001338
MARK BREWER; MILLERS LANE CENTER, LLC, A KENTUCKY LLC; MILLERS LANE CENTER, LLC, A FLORIDA LLC; AND MORGAN & POTTINGER, P.S.C. CROSS-APPELLEES
NO. 2022-CA-1402-MR
CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT v. HONORABLE ANNIE O’CONNELL, JUDGE ACTION NOS. 21-CI-007148 & 22-CI-001338
-3- MARK BREWER; JAMES P. MCCROCKLIN; MILLERS LANE CENTER, LLC A FLORIDA LIMITED LIABILITY COMPANY; MILLERS LANE CENTER, LLC A KENTUCKY LIMITED LIABILITY COMPANY; AND MOSLEY & TOWNES, PLLC CROSS-APPELLEES
OPINION AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
** ** ** ** **
BEFORE: EASTON, KAREM, AND TAYLOR, JUDGES.
EASTON, JUDGE: These appeals involve two professional negligence
(specifically legal malpractice) cases consolidated by the circuit court. Millers
Lane Center,1 LLC, a Kentucky limited liability company (“Millers KY”), filed a
malpractice suit against Morgan & Pottinger, P.S.C. (“M&P”); James P.
McCrocklin (“McCrocklin”); and Mosley & Townes, PLLC (“M&T”) (collectively
“Attorneys”). Millers Lane Center, LLC, a Florida limited liability company
(“Millers FL”), and Mark Brewer (“Brewer”), a member of both LLCs, filed a
later, separate malpractice suit against the Attorneys.
The Jefferson Circuit Court entered a Consolidated Opinion and Order
dismissing the claims of Millers KY in the first suit for lack of standing as that
1 At various points in this record, references are made to the LLCs as Millers Center or Millers Lane Center. The latter appears to be correct.
-4- entity was not represented by any of the Attorneys. The circuit court also
dismissed the claims of Millers FL because it had assigned any proceeds of its
malpractice claim, depriving it of standing to pursue such a claim. The circuit
court held Brewer lacked standing to recover damages for the alleged lost value in
his membership interest in either Millers FL or Millers KY. The circuit court
declined to dismiss Brewer’s claim for emotional distress and expenses incurred in
collateral litigation, citing a need for additional discovery for these claims.
Millers KY and Millers FL filed the first appeal (No. 2022-CA-1341-
MR), and Brewer filed a separate appeal (No. 2022-CA-1368-MR). Separate
cross-appeals were filed by M&P (Nos. 2022-CA-1399-MR and 2022-CA-1402-
MR) and McCrocklin with M&T (Nos. 2022-CA-1398-MR and 2022-CA-1400-
MR). The cross-appeals challenge the circuit court’s determination that the second
lawsuit filed by Millers FL and Brewer was not time-barred by the statute of
limitations. After extensive briefing by the parties, the matter is before this Court
for decision. Because of the overlap of the controlling issues for all these appeals,
we will enter this single Opinion in the matter. While the ultimate resolution of the
cases results from the application of the limitations period, we will see that this
case illustrates the danger in disregarding the separate legal status of corporate
entities.
-5- After a review of the record, and for the reasons which follow, we
affirm in part, reverse in part, and remand the Consolidated Opinion and Order of
the circuit court. We affirm the circuit court’s conclusion that Millers KY lacked
standing to bring a malpractice action because it did not have an attorney-client
relationship with any of the Attorneys regarding the representation which resulted
in litigation. While we affirm the circuit court’s conclusion that Millers FL’s claim
cannot proceed, we do so for different reasons. We conclude the claims of both
Millers FL and Brewer are time-barred by the applicable one-year statute of
limitations. We reverse on the cross-appeal regarding Brewer’s claims, and we
remand to the circuit court to enter an order dismissing those claims.
FACTUAL AND PROCEDURAL HISTORY
Millers FL was organized in 2005. Millers FL registered to do
business in Kentucky as a foreign LLC. Brewer and Harold Harr (“Harold”) were
the two members of this company. Harold’s son, Chris Harr (“Chris”), was not a
member but was involved with his father’s business.
Millers FL owned and operated a warehouse, storage, and distribution
center located at 2501 Millers Lane in Louisville (the “Premises”). Millers FL
leased warehouse space in the Premises to tenants for various purposes, including
storage and conducting business within the leased space. Blue Sky, Inc. (“Blue
-6- Sky”) was one such tenant, renting a 26,000 square foot warehouse in 2013 to
conduct its shredding and recycling business.
By late 2014, Blue Sky had fallen behind in its rent payments. Blue
Sky failed to pay its monthly rent on November 1, 2014. M&P provided legal
advice and representation to Millers FL regarding its dispute with Blue Sky.
Attorneys with M&P allegedly advised Millers FL that Blue Sky could be “locked
out” of the Premises for failure to pay rent and that a statutory lien could be
enforced against Blue Sky’s personal property on the Premises.
On November 10, 2014, Blue Sky was locked out of the Premises.
Two weeks later, Blue Sky’s personal property was sold. For some reason, there
were no bidders for this substantial amount of property, and Chris reported paying
$1 for all of it. Acting at the behest of Harold and Chris, an attorney for M&P
organized a new company, Millers Lane Shredding & Recycling, LLC, which
exerted ownership over Blue Sky’s property. The new company took over Blue
Sky’s recycling business, including its leased space, equipment, employees,
customers, and vendors.
In February 2015, Blue Sky filed suit against Millers FL, Millers Lane
Shredding & Recycling, LLC, Brewer, Harold, and Chris. Blue Sky alleged
numerous claims, including conversion and breach of contract. M&P initially
undertook the defense of all the defendants.
-7- On March 28, 2016, while Blue Sky’s suit was still pending, Brewer
organized and formed a new business entity: Millers KY, a third Millers LLC.
That same day, Brewer filed a Certificate of Withdrawal of Foreign Business
Entity with the Kentucky Secretary of State, advising that Millers FL was no
longer transacting business in Kentucky, although it still owned the Premises.
Millers FL and Millers KY never merged. Millers FL is still active and in good
standing with the state of Florida. Millers FL did not transfer title to the Premises
to Millers KY upon the creation of Millers KY. Millers KY was never added or
substituted as a party-defendant to the Blue Sky lawsuit. There is no evidence that
M&P had any attorney-client relationship with Millers KY, although the Attorneys
may have been aware of its creation.
In May 2016, M&P was granted leave to withdraw from the Blue Sky
case. McCrocklin took over the representation of the defendants in the Blue Sky
suit. McCrocklin did not enter an appearance for Millers KY as that entity was
never a party to the litigation. McCrocklin became affiliated with M&T during the
Blue Sky lawsuit.
The parties to the Blue Sky litigation appeared to have reached a
settlement in December 2016. Millers FL agreed to pay Blue Sky $22,500.
McCrocklin prepared the settlement agreement, which was executed by the
representative of Blue Sky. Millers FL delivered a certified check in the amount of
-8- $22,500 to McCrocklin. But Harold instructed McCrocklin to renege on the
settlement agreement and not deliver the check to Blue Sky. McCrocklin never
delivered the check or the agreement to Blue Sky’s counsel. McCrocklin did not
seek to proceed with the agreement on behalf of Millers FL or Brewer.
After this failed settlement attempt, Blue Sky’s lawsuit proceeded to
trial in April 2018. The jury awarded Blue Sky $1,578,406.66 in compensatory
damages. That is seventy times the previous settlement demand from Blue Sky.
The circuit court subsequently entered its Judgment on Jury Verdict, ordering a
judgment with interest entered against the defendants, jointly and severally. All
defendants appealed the Judgment. Millers FL and Brewer retained new counsel
for the appeal.
During the pendency of the appeal (with no supersedeas bond posted),
Blue Sky engaged in collection efforts on its Judgment. Blue Sky filed a separate
lawsuit against Brewer and his wife, seeking to set aside allegedly fraudulent
transfers of real estate to avoid creditors. Subsequently, Millers KY filed a
Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the
Western District of Kentucky under case number 19-32095. The stated reason for
Millers KY’s bankruptcy filing was the inability to pay the judgment in the Blue
Sky lawsuit (even though Millers KY was not a party to the suit and did not own
the Premises).
-9- The bankruptcy petition was filed on July 2, 2019, by Brewer as
Millers KY’s “Managing Member.” Millers KY was listed as “Debtor” while
Millers FL curiously was listed as “Petitioning Creditor,” indicating an obvious
understanding by the members that the LLCs were separate entities. Millers KY
and Millers FL were represented by separate counsel in the bankruptcy. Blue Sky
was listed as a creditor in light of its judgment against Millers FL. Millers KY
listed “contingent and unmatured malpractice claims” against McCrocklin and
Thomas Coffey (an attorney with M&P who represented the defendants in the Blue
Sky litigation before McCrocklin entered an appearance) as assets of the
bankruptcy estate.
In July 2020, this Court affirmed the Judgment from the jury trial but
remanded the case to the circuit court for a trial on punitive damages.2 In August
2020, Millers FL and Brewer filed a Motion for Discretionary Review with the
Kentucky Supreme Court.
While the Motion for Discretionary Review was pending, the
Bankruptcy Court conducted a mediation in December 2020. Millers KY reached
a global settlement (the “Settlement Agreement”) dated December 18, 2020, with
its creditors (including Blue Sky). Blue Sky was to receive $2.7 million. The
2 Blue Sky, Inc. v. Millers Lane Center, LLC, Nos. 2018-CA-001160-MR, 2018-CA-001205-MR, 2018-CA-1217-MR, 2020 WL 4500590 (Ky. App. Jul. 17, 2020).
-10- Attorneys were not signatories. Millers FL did not sign the Settlement Agreement
either, but a subsequent decision by the bankruptcy court would render that moot.
The Settlement Agreement allocated proceeds of any future legal
malpractice claims purportedly to divest Millers FL of that claim, rather than direct
Millers FL as to whom any proceeds should be paid if Millers FL prevailed on a
malpractice claim. Millers FL allocated all its assets to repay shareholder loans
and to members of Millers KY based on their percentage ownership interests.
Brewer then stood to receive his percentage ownership interest in whatever was
left of Millers KY.
On February 18, 2021, the Bankruptcy Court entered its Order
Confirming Amended Chapter 11 Small Business Plan (“Confirmation Order”).
The Confirmation Order noted Millers KY (as Debtor) and Millers FL (as
Petitioning Creditor) “disregarded their legal separateness” when dealing with
creditors prior to the filing of bankruptcy. Creditors were confused as a result.
Therefore, the Confirmation Order stipulated that the separate assets of Millers KY
and Millers FL were to be pooled for purposes of the bankruptcy.
Section 5. Substantive Consolidation of the Confirmation Order reads:
5. Substantive Consolidation. Prior to the Petition Date, the Debtor and Millers Lane Center, LLC, a limited liability company organized under the laws of the State of Florida (“MLC Florida”), disregarded their legal separateness in dealing with their creditors and their creditors relied on the Debtor and MLC Florida’s unity of
-11- interests and operations as though the Debtor and MLC Florida were a single legal entity. Accordingly, as provided for in the Plan, this Confirmation Order approves and directs the substantive consolidation of the Debtor with MLC Florida such that the distinctions between the two entities shall be disregarded upon the entry of this Confirmation Order, and all assets and liabilities of the Debtor and MLC Florida, including without limitation the real property commonly identified as 2501 Millers Lane, Louisville, Kentucky, 2551 Millers Lane, Louisville, Kentucky, and 2571 Millers Lane, Louisville, Kentucky, are deemed to be assets and liabilities of the Debtor and treated as such in implementation of the Plan and this Confirmation Order. The Debtor is authorized and directed to execute and file such instruments in appropriate jurisdictions to give effect to the substantive consolidation ordered herein.
(Emphasis added.) Despite the clear directive of the Bankruptcy Court in this
provision, Millers KY and Millers FL did nothing to effectuate a consolidation or
merger, such as filing appropriate documents with the respective Secretaries of
State.
On March 17, 2021, the Kentucky Supreme Court granted the Motion
for Discretionary Review. The bankruptcy proceedings continued. As directed by
the Settlement Agreement, the Premises was sold on March 24, 2021, for
$4,450,000. Millers KY paid its creditors (including Blue Sky in full), leaving
$290,000 in equity to be divided among its members. After the sale, the Supreme
Court was notified that the Judgment was satisfied pursuant to the Bankruptcy
Court’s Settlement Agreement. The appeal was subsequently dismissed.
-12- On December 20, 2021, Millers KY filed a lawsuit against the
Attorneys in Jefferson Circuit Court under case number 21-CI-007148 (“2021
Action”). In Paragraph 2 of this Complaint, Millers FL was mentioned only as a
“prior” LLC replaced by Millers KY. Millers KY alleged M&P committed
malpractice for the following reasons: (1) by advising the company to lock Blue
Sky out of the Premises and selling Blue Sky’s personal property; (2) by failing to
obtain from the defendants consent to multiple representation with a waiver of
conflicts of interest; (3) by failing to adequately defend Miller KY on the basis that
the LLC was not responsible for either Harold’s unauthorized, intentional acts, or
those of Chris, who was not a member of the LLC; and (4) by failing to defend
Brewer on the basis he was entitled to immunity from personally liability pursuant
to KRS3 275.150.
Millers KY also alleged McCrocklin and M&T committed legal
malpractice for the following reasons: (1) by mistakenly relying on a defense
characterizing the Premises as a “self-service storage facility”; (2) by failing to
obtain from the defendants consent to multiple representation with a waiver of
conflicts of interest; (3) by failing to raise any defense that the LLC was not liable
for any intentional and unauthorized acts of Harold; (4) by failing to argue the LLC
3 Kentucky Revised Statutes.
-13- was not responsible for the acts of non-member Chris; (5) by failing to deliver the
settlement check or settlement agreement to Blue Sky’s counsel; (6) by failing to
adequately prepare a defense for the LLC at trial, and instead focusing the defense
on the claims asserted against Harold and Chris; (7) by failing to present the
testimony of a forensic accountant whose testimony would have minimized
damages sustained by Blue Sky; (8) by not asking for an apportionment instruction
despite overwhelming evidence showing the wrongdoers were actually Harold and
Chris; and (9) by failing to tender jury instructions that would have allowed the
jury to exonerate Brewer if the jury found he had not engaged in any unauthorized
conduct.
M&P moved to dismiss the 2021 Action for failure to state a claim
pursuant to CR4 12.02(f). M&P argued it represented Millers FL, not Millers KY,
and consequently, Millers KY was not the real party in interest pursuant to CR
17.015 and had no standing to file the complaint. M&P stated Millers FL and not
4 Kentucky Rules of Civil Procedure.
5 Every action shall be prosecuted in the name of the real party in interest, but a personal representative, guardian, curator, committee of a person of unsound mind, trustee of an express trust, a person with whom or in whose name a contract is made for the benefit of another, a county, municipal corporation, public board or other such body, a receiver appointed by a court, the assignee or trustee of a bankrupt, an assignee for the benefit of creditors, or a person expressly authorized by statute to do so, may bring an action without joining the party or parties for whose benefit it is prosecuted. Nothing herein, however, shall abrogate or take away an individual’s right to sue.
-14- Millers KY was the true owner of any malpractice claim. McCrocklin and M&T
also filed a motion to dismiss the 2021 Action for the same reasons.
After these motions to dismiss were filed, Millers KY filed a motion
for leave to file an amended complaint to name Millers FL as an additional party-
plaintiff. Millers KY also filed responses to the motions to dismiss. Millers KY
did not then dispute the existence of Millers FL or that Millers FL was the actual
client of M&P, and later, of M&T and McCrocklin. Instead, Millers KY argued
the Bankruptcy Court’s Confirmation Order effectively merged the Kentucky and
Florida entities for all purposes.
On March 16, 2022, Millers FL and Brewer filed a separate complaint
against M&P, McCrocklin, and M&T in Jefferson Circuit Court under case number
22-CI-001338 (“2022 Action”). Millers FL made substantially identical claims as
those included in the 2021 Action. Brewer alleged the original Blue Sky lawsuit
had caused him emotional distress, depreciation of his membership interest in
Millers FL, and expenses incurred in collateral litigation (the litigation Blue Sky
separately filed against Brewer and his wife alleging fraudulent transfers of real
estate). Brewer did not allege that either M&P or M&T and McCrocklin
represented him in that collateral litigation. M&P filed a motion to dismiss the
2022 Action. In that same later case, McCrocklin and M&T filed a motion for
summary judgment pursuant to CR 56.
-15- In April 2022, the 2022 Action was transferred and consolidated with
the 2021 Action. A final hearing on all pending motions was held on July 25,
2022. On October 14, 2022, the circuit court entered a Consolidated Opinion and
Order as to both the 2021 and 2022 Actions. Because the motions to dismiss
referred to matters outside the pleadings, the court treated all motions to dismiss as
motions for summary judgment.
The circuit court dismissed the 2021 Action as the plaintiff in that
case, Millers KY, had no standing to bring malpractice claims against either M&P
or M&T and McCrocklin. The circuit court recognized that none of the Attorneys
ever represented Millers KY, noting that an attorney client relationship “is a
prerequisite to pursue a professional negligence claim.” The court added that,
since no judgment was entered against it, Millers KY suffered no damages
stemming from the Blue Sky litigation.
The circuit court did not agree with Millers KY’s position that the
Bankruptcy Court’s Confirmation Order effectively merged the Kentucky and
Florida entities. The circuit court ruled that the Bankruptcy Court’s decision to
“substantively consolidate” Millers KY and Millers FL for the purposes of
bankruptcy did not give Millers KY standing to bring the 2021 Action (“[A]
bankruptcy court’s determination that a malpractice claim is an asset of an entity is
not controlling as to whether that party has standing to pursue the claim in any
-16- state court litigation.”). The circuit court noted the Confirmation Order instructed
the two entities to file appropriate documents with the respective Secretaries of
State for Kentucky and Florida to effectuate the merger outside bankruptcy
proceedings – which was not done. The circuit court ruled that, since legal
malpractice claims may not be assigned, either formally or informally, under
Kentucky law, Millers FL, and not Millers KY, was the only entity that could file a
malpractice claim stemming from the Blue Sky lawsuit.
The circuit court next analyzed together Millers KY’s motion for
leave to file an amended complaint in the 2021 Action to add Millers FL as a
party-plaintiff, as well as the dispositive motions relating to the 2022 Action. The
circuit court dismissed the claims of Millers FL based on lack of standing to pursue
a claim against any of Attorneys. The circuit court held that Millers FL assigned
all its assets in the bankruptcy proceedings to repay shareholder loans and
members of Millers KY based on their percentage ownership interests. In other
words, Millers FL would receive nothing according to the Settlement Agreement.
The circuit court found, that under the Settlement Agreement, Millers KY retained
as an asset any malpractice action arising out of the Blue Sky lawsuit: “[Millers
Lane KY] agreed to this provision irrespective of whether it would have standing
to pursue a legal malpractice action given that [Millers FL] was the defendant in
the Blue Sky litigation.”
-17- The circuit court held that Brewer lacked standing to recover damages
for the alleged lost value in his membership interest in either Millers FL or Millers
KY. The circuit court also found Brewer suffered no individual loss from the
adverse judgment as corporate assets were used to satisfy the Judgment. However,
the court determined Brewer had standing to recover fees and costs he personally
paid in the Blue Sky lawsuit, as well for any injury he suffered because of Blue
Sky’s post judgment collection actions against him and his wife. The court added
the defendants could file a dispositive motion regarding Brewer’s surviving claims
after adequate discovery.
The circuit court did not dismiss Millers FL’s claims or Brewer’s
claims based on the one-year statute of limitations governing professional
negligence claims. The circuit court ruled Millers FL’s alleged damages for
professional negligence did not become “fixed and non-speculative” until March
18, 2021, the date the Bankruptcy Court authorized the sale of the Premises as
directed by the Settlement Agreement. The circuit court reckoned that, since
Millers FL and Brewer filed the 2022 Action on March 16, 2022, it was within one
year of the sale of the Premises, and thus it was not time-barred. These appeals
followed.
-18- ISSUES
We are called upon to answer several legal questions. The first
question is whether Millers KY was the real party in interest under CR 17.01, or
had “standing,” to file the 2021 Action. Next, we will determine whether the
Bankruptcy Court’s “substantive consolidation” effectively merged the Kentucky
and Florida LLCs. Then, we will determine whether the circuit court erred in
holding Millers FL had no standing to bring the 2022 Action due to its assignment
of the malpractice claim, and that Brewer had no standing to recover damages for
the alleged lost value in his membership interest. We will also analyze whether the
circuit court erred in not dismissing the 2022 Action in its entirety for being filed
outside the applicable statute of limitations period.
STANDARD OF REVIEW
In its Consolidated Opinion and Order, the circuit court considered
matters outside the pleadings when reviewing the motions to dismiss. “Where
matters outside the pleadings are considered on a motion to dismiss for failure to
state a claim, the motion must be treated as one for summary judgment.”
Harrodsburg Indus. Warehousing, Inc. v. MIGS, LLC, 182 S.W.3d 529, 533 (Ky.
App. 2005).
“The standard of review of a trial court’s granting of summary
judgment is whether the trial court correctly found that there were no genuine
-19- issues as to any material fact and that the moving party was entitled to judgment as
a matter of law. Summary judgment is proper when it appears that it would be
impossible for the adverse party to produce evidence at trial warranting a judgment
in its favor.” Andrew v. Begley, 203 S.W.3d 165, 169 (Ky. App. 2006) (internal
quotation marks and citations omitted). “Because summary judgment involves
only legal questions and the existence of any disputed material issues of fact, an
appellate court need not defer to the trial court’s decision and will review the issue
de novo.” Jenkins v. Best, 250 S.W.3d 680, 688 (Ky. App. 2007).
Although CR 56.02 permits parties to move for summary judgment at
any time, Kentucky courts are cautioned “not to take up these motions
prematurely and to consider summary judgment motions only after the opposing
party has been given ample opportunity to complete discovery.” Bowlin Group,
LLC v. Rebennack, 626 S.W.3d 177, 187 (Ky. App. 2020) (citation omitted). The
question is not whether the nonmoving party has actually completed discovery.
Instead, the question is whether the nonmoving party had an opportunity to
complete discovery. Id. at 187-88 (citation omitted).
As the preceding detailed account of dates and events reveals, the
material facts with respect to the status of the parties and the application of the
statute of limitations are not disputed. Rather, the parties argue the law as applied
-20- to those facts. In this case, summary judgment was not premature for any failure to
allow further discovery.
MILLERS KY WAS NOT THE REAL PARTY IN INTEREST PURSUANT TO CR 17.01.
Millers KY and Millers FL challenge the circuit court’s dismissal of
their claims based on lack of standing. The circuit court’s Consolidated Opinion
and Order analyzed whether the Millers entities had constitutional standing under
Commonwealth Cabinet for Health & Family Services, Department for Medicaid
Services v. Sexton, by & through Appalachian Regional Healthcare, Inc., 566
S.W.3d 185 (Ky. 2018). In that case, the Kentucky Supreme Court adopted the test
of constitutional standing as espoused by the United States Supreme Court in
Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 2136, 119 L. Ed.
2d 351 (1992). For a party to sue in Kentucky, the initiating party must have the
requisite constitutional standing to do so, defined by the following three
requirements: (1) injury, (2) causation, and (3) redressability. Sexton, supra, at
196.
Sometimes the perhaps broader question of constitutional standing to
assert claims is confused with the definition of the real party in interest under CR
17.01, which status confers upon a party the right to bring an action under the civil
rules. “The real party in interest is the party who will be entitled to the benefits of
the action upon a successful termination thereof; one who is actually and
-21- substantially interested in the subject matter.” Combs v. Richards, 63 S.W.3d 193,
194 (Ky. App. 2001). We will analyze “standing” here by evaluating whether
Millers KY is the real party in interest for the malpractice claims pursuant to CR
17.01.
As previously mentioned, the circuit court ruled Millers KY did not
have standing to bring a malpractice claim in the 2021 Action as it did not have an
attorney-client relationship with any of the Attorneys. A plaintiff in a legal
malpractice action must prove the following to prevail: (1) there was an
employment relationship with the defendant/attorney; (2) the attorney neglected his
or her duty to exercise the ordinary care of a reasonably competent attorney acting
in the same or similar circumstances; and (3) the attorney’s negligence was the
proximate cause of damage to the client. Stephens v. Denison, 64 S.W.3d 297,
298-99 (Ky. App. 2001).
Millers FL was the client of the Attorneys throughout the Blue Sky
litigation, not Millers KY. Blue Sky filed its lawsuit in February 2015. The suit
was based upon actions by Millers FL. Millers KY did not exist until March 2016,
and it was never added or substituted as a party-defendant to the Blue Sky lawsuit.
Millers FL and Millers KY never merged outside of and for the purposes of the
bankruptcy case. None of the Attorneys ever represented Millers KY. Millers KY
was not the real party in interest under CR 17.01 to file a malpractice claim against
-22- the Attorneys. The circuit court did not err in dismissing the claims of Millers KY
in the 2021 Action.
THE BANKRUPTCY COURT’S DECISION TO “SUBSTANTIVELY CONSOLIDATE” MILLERS KY AND MILLERS FL FOR THE PURPOSES OF BANKRUPTCY DID NOT MERGE THE TWO ENTITIES.
Millers KY and Millers FL argue the Bankruptcy Court directed the
“substantive consolidation” of the two entities and deemed all assets in bankruptcy
to be those of Millers KY. They argue the claims of Millers KY were not assigned
to it by Millers FL, nor was an assignment necessary, due to this ostensible merger
by the Bankruptcy Court.
Substantive consolidation is an equitable doctrine used by bankruptcy
courts pursuant to which creditors of a given corporate entity may seek to merge
assets and liabilities of a debtor with the assets and liabilities of one or more other
entities. In re New Century TRS Holdings, Inc., 407 B.R. 576, 591 (D. Del. 2009).
This remedy is to address the harms caused by debtors (and their related entities)
by disregarding their separateness or otherwise entangling their affairs. Id.
The argument that the consolidation goes further than the bankruptcy
proceeding fails for several reasons. First, the doctrine of substantial consolidation
“is uniquely a matter of bankruptcy law, and its application is limited to
bankruptcy cases.” In re Petters Co., Inc., 506 B.R. 784, 792 (D. Minn. 2013).
Substantial consolidation does not affect state law on who is the proper party to file
-23- an action. The Bankruptcy Court’s order to substantially consolidate the two
entities for the purposes of the bankruptcy proceedings did not effectively merge
the entities in a state court setting.
Substantial consolidation is punitive in nature. The Millers entities
did not address their business affairs separately. Debtors were left confused.
Millers KY used Millers FL’s federal tax identification number on documents,
ignoring the reality that every LLC is a separate corporate person with separate tax
liabilities. While substantive consolidation may be used defensively to remedy
identifiable harms to others caused by entangled affairs, it may not be used
offensively as attempted by the Millers LLCs here. See In re Owens Corning, 419
F.3d 195, 211 (3d Cir. 2005).
As directed by the Bankruptcy Court, Millers KY and Millers FL
could have followed that court’s order to “execute and file such instruments in
appropriate jurisdictions to give effect to the substantive consolidation ordered
herein.” Instead, they did nothing resulting in two separate LLCs continuing to
exist.
THE CLAIMS OF MILLERS FL AND BREWER ARE TIME-BARRED.
As previously mentioned, the circuit court found that the 2022 Action
filed by Millers FL and Brewer was not time-barred. Instead, the circuit court held
that Millers FL had no standing due to its assignment of the malpractice claim, and
-24- that Brewer had no standing to recover damages for the alleged lost value in his
membership interest in either Millers FL or Millers KY. On this last point, we
agree with the circuit court. Brewer could not claim damages for any reduction in
the value of his membership interest in an LLC because of its liability to others.
See Turner v. Andrew, 413 S.W.3d 272, 276 (Ky. 2013).
As for assignment, the Settlement Agreement required Millers FL to
allocate its remaining assets to repay shareholder loans and to members of Millers
KY. The circuit court held that because of this, Millers FL no longer owned a
malpractice claim against the law firms that represented it. The circuit court also
held that Millers KY had no standing to bring any malpractice claim Millers FL
had as Kentucky law prohibits the assignment of a legal malpractice claim. Davis
v. Scott, 320 S.W.3d 87, 90 (Ky. 2010).
We do not agree with the circuit court’s determination that Millers FL
had no standing due to that entity attempting to assign away its legal malpractice
claim. The circuit court is correct that Kentucky law prohibits the assignment of a
legal malpractice claim of Millers FL to Millers KY or anyone else. However, the
circuit court’s determination that Millers FL assigned its malpractice claim away is
erroneous. Assignment is prohibited. It has no effect. If the malpractice claim
could not be assigned to Millers KY, then Millers FL still had the claim. The
claim belonged to someone; it was not in limbo. Millers FL remained the real
-25- party in interest and had standing to bring the 2022 Action alleging the
malpractice.
Even though Millers FL and Brewer were the real parties in interest
and thus had standing for the claims asserted in 2022, they run into the barrier of
the statute of limitations. This segues into the Attorneys’ Cross-Appeals arguing
Millers FL and Brewer filed the 2022 Action after the statute of limitations period
had passed.
There is a one-year statute of limitations to bring actions alleging
malpractice in the rendering of professional services. KRS 413.245. This statute
allows for two different periods of limitation: “The first period begins one year
from the date of the negligent act or omission (the date of occurrence), and the
second period begins on the date of discovery if it is later in time.” Peoples Bank
of N. Kentucky, Inc. v. Crowe Chizek & Co. LLC, 277 S.W.3d 255, 264 (Ky. App.
2008). We should look at both periods to answer whether a lawsuit is time-barred.
We must recognize that accrual of a cause of action can determine when an
occurrence has taken place or when the party discovers the existence of the claim.
Under the “occurrence” limitation period, a cause of action accrues
when negligence and damages have both occurred. Lane v. Richards, 256 S.W.3d
581, 583 (Ky. App. 2008). The damages must be “reasonably ascertainable” –
-26- meaning they are “irrevocable [and] non-speculative[.]” Saalwaechter v. Carroll,
525 S.W.3d 100, 105 (Ky. App. 2017).
The “discovery” limitation period begins to run when the cause of
action was discovered or, in the exercise of reasonable diligence, should have been
discovered by the plaintiff. Queensway Financial Holdings Ltd. v. Cotton & Allen,
P.S.C., 237 S.W.3d 141, 148 (Ky. 2007). “The discovery rule acts to toll the
statute of limitations until the claimant knows, or reasonably should know, that
injury has occurred.” Wolfe v. Kimmel, 681 S.W.3d 7, 13 (Ky. 2023) (internal
quotation marks and citation omitted). As a result, the discovery date is only
implicated if a complaint for professional malpractice was not filed within one year
of the occurrence date, and it “often functions as a ‘savings’ clause or ‘second bite
at the apple’ for tolling purposes.” Id. (citation omitted).
In this case, the circuit court held the respective claims of Millers FL
and Brewer were not barred by the statute of limitations because the alleged
damages did not become “fixed and non-speculative” until March 18, 2021, the
date the Bankruptcy Court authorized the sale of the Premises under the terms of
the Settlement Agreement. Thus, according to the circuit court, they were within
the statute of limitations when they filed the 2022 Action on March 16, 2022.
We must disagree. We conclude that the date the alleged damages
became “fixed and non-speculative” was when the Settlement Agreement was
-27- reached on December 18, 2020, resolving the Blue Sky lawsuit. In triggering the
statute of limitations period, “fixed and non-speculative” does not mean that
damages must be translatable into a specified dollar amount. Bd. of Educ. of Estill
Cnty., Kentucky v. Zurich Ins. Co., 180 F. Supp. 2d 890, 893 (E.D. Ky. 2002), aff’d
sub nom. Estill Cnty. Bd. of Educ. v. Zurich Ins. Co., 84 F. App’x 516 (6th Cir.
2003). Instead, “the phrase is more properly interpreted as tolling the limitations
period for professional negligence claims until plaintiff is certain that damages will
indeed flow from defendant’s negligent act.” Id. at 894.
The malpractice claims in this case are for both transactional (advice
before suit) and litigation (conduct during suit) negligence. In these circumstances
we should look to the latest possible time a claim could be made. In this case, we
evaluate the litigation negligence which followed the related transactional
malpractice as the same attorney represented the client during this transition.
In Hibbard v. Taylor, 837 S.W.2d 500 (Ky. 1992), the Kentucky
Supreme Court ruled that the date of occurrence for a client’s legal malpractice
claim against his attorney for litigation negligence was the date the underlying
case’s appellate decision became final, which put the client on notice that the
adverse judgment was unalterable, and the damages were proximately caused by
alleged malpractice of his attorney, rather than by error of trial court. “Where . . .
the cause of action is for ‘litigation’ negligence, meaning the attorney’s negligence
-28- in the preparation and presentation of a litigated claim resulting in the failure of an
otherwise valid claim, whether the attorney’s negligence has caused injury
necessarily must await the final outcome of the underlying case.” Michels v.
Sklavos, 869 S.W.2d 728, 730 (Ky. 1994). Because the lawsuit may yet be
resolved in the client’s favor, a claim of malpractice may not accrue until the
lawsuit has been resolved unfavorably.
This “litigation” negligence rule is subject to a more specific
limitation which applies to this case. The general point is that when a party knows
it has suffered any damages from malpractice, the period begins to run. Wolfe,
supra, at 26. While the litigation conclusion rule may have applied here,
settlement trumps that rule, as there can be no question of knowledge of harm
when the parties acknowledge to each other the damage done by the alleged
malpractice. If parties reach a settlement agreement, the date of that agreement
begins the running of the limitation period. This is logical because the parties have
each acknowledged that damages have occurred for purposes of the limitations
period when they reach a settlement agreement, and the parties have committed
themselves to a course of action to satisfy payment owed for the underlying suit.
-29- We are unaware of any published Kentucky case6 which holds that the
date of settlement commences the limitation period. Dependance to any degree on
authorities from other states is limited by the wide variety of limitations rules for
malpractice across the country. Even so, we have found one case with some
similar facts helpful in understanding the logic of the settlement date beginning the
limitation period. In Tchorbadjian v. Western Home Insurance Company, 46 Cal.
Rptr. 2d 370 (Cal. Ct. App. 1995), the court summarized numerous California
cases and held that when a settlement was reached for an underlying case, the
statute of limitations began to run in a case involving transactional malpractice
leading to related litigation malpractice.
The underlying Blue Sky lawsuit was resolved via mediation on
December 18, 2020. There was nothing left to litigate. The very last date it could
be argued that Millers FL and Brewer were certain that damages flowed from the
alleged acts of the Attorneys would be December 18, 2020 – the date of the
Settlement Agreement. Even if we accepted the argument that the settlement
required court approval of the settlement terms, the date of such approval was no
later than February 18, 2021. The second complaint was still filed too late.
6 The parties have cited and discussed Hughes v. DeMoisey, Nos. 2010-CA-002093-MR, 2010- CA-002165-MR, 2010-CA-002166-MR, 2014 WL 2632504 (Ky. App. Jun. 13, 2014). In Hughes, a panel of this Court held that the date of an oral settlement agreement of underlying litigation began the running of the limitations period for legal litigation malpractice, regardless of a later date for executing a written agreement or filing for dismissal of the underlying case.
-30- As of December 18, 2020, Millers FL, which still existed and held any
malpractice claim, and Brewer both knew there would be damages as the
Settlement Agreement stipulated Blue Sky’s Judgment to be in the amount of $2.7
million. It did not matter who paid the settlement amount or when or how it was to
be paid through scheduled sales of assets or otherwise. The law has never required
that a plaintiff know the exact amount of damages, which may continue to mount,
before an injured person must assert a claim. As a result, the idea that no claim
existed until the first LLC assets were sold is misplaced.
It is likely no accident that the first lawsuit by Millers KY was filed
on Monday, December 20, 2021. This was the last day to file a suit for the
malpractice claims. Millers KY cannot relate back its amended complaint
essentially substituting itself with Millers FL under CR 15.03. The circuit court
properly denied this. CR 15.03 does not allow courts to relate back amended
complaints in order for a plaintiff to add another party-plaintiff, (“An amendment
changing the party against whom a claim is asserted relates back if . . .”). The rule
relates to substitution of defendants.
As the 2022 Action was filed more than a year after the execution of
the Settlement Agreement, all of the claims of Millers FL and Brewer (including
the claims not dismissed by the circuit court) are time-barred. Brewer had suffered
some of his separate damages (anguish and attorney’s fees) even before the
-31- execution of the Settlement Agreement. Brewer’s remaining claims should have
been dismissed as well as barred by the statute of limitations.
CONCLUSION
On Appeal No. 2022-CA-1341-MR, we affirm the Jefferson Circuit
Court’s orders regarding Millers KY’s lack of standing to bring a professional
malpractice claim. On Appeal No. 2022-CA-1368-MR, we affirm the Jefferson
Circuit Court’s order dismissing the claims of Millers FL; however, we do so
based on the one-year statute of limitations. Furthermore, we reverse on the cross-
appeals based on Brewer’s claims, and we remand to the circuit court to enter a
dismissal of Brewer’s claims and thus the remainder of that action because the
statute of limitations period had passed before the filing of the second suit.
ALL CONCUR.
-32- BRIEFS AND ORAL ARGUMENT BRIEF FOR APPELLEE/ FOR APPELLANTS MILLER CROSS-APPELLANT MORGAN & LANE CENTER, LLC AND MARK POTTINGER, P.S.C.: BREWER: David J. Kellerman C. Thomas Hectus Mark S. Fenzel Louisville, Kentucky Louisville, Kentucky
ORAL ARGUMENT FOR APPELLEE/CROSS-APPELLANT MORGAN & POTTINGER, P.S.C.:
David J. Kellerman Louisville, Kentucky
BRIEF AND ORAL ARGUMENT FOR APPELLEES/CROSS- APPELLANTS JAMES P. MCCROCKLIN AND MOSLEY & TOWNES, PLLC:
James P. Grohmann Louisville, Kentucky
-33-