In March, the Kentucky Supreme Court issued a ruling in Pannell v. Shannon and Elegant Interiors, LLC (2011-SC-000587-DG) reinforcing that under Kentucky law, the administrative dissolution of a Kentucky LLC does not necessarily permanently terminate the personal liability shield that Kentucky LLCs can offer their members. One of the questions considered by the Court in this case was whether the personal immunity that members of an LLC enjoy from liability regarding claims against that LLC ceases to apply once that LLC is adminstratively dissolved and continues to conduct business, even though it is later reinstated pursuant to the Kentucky LLC Act. Administrative dissolution of a Kentucky LLC generally occurs when the LLC fails to file its required annual report in a timely fashion with the Kentucky Secretary of State.
The facts in Pannell generally involved a Kentucky LLC which was owned by a single member and had been adminstratively dissolved at the time when a lease was entered into by its sole member, purportedly on behalf of that LLC (and not in her individual capacity). After the landlord filed a claim for breach of the lease, the LLC was reinstated by its sole member with the Kentucky Secretary of State pursuant to the applicable provisions of the Kentucky LLC Act, with that sole member claiming immunity from any personal liability with respect to the landlord's claims. The Court ruled in this case that when a Kentucky LLC is successfully reinstated following administrative dissolution, that reinstatement takes effect retroactively as of the date of such dissolution. This is important because administrative dissolution can be a common and overlooked occurrence, resulting in an often unintended termination of the company's legal existence. However, as the Court held in Pannell, administrative dissolution does not have to cause the permanent termination of the LLC members' shield from personal liability if the LLC is subsequently reinstated, in which case that personal liability shield will be deemed effective during the time of suspension between administrative dissolution and reinstatement, leaving no gap in this valuable protection to the members of the LLC.
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