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2 0 1 3 D O I N G B U S I N E S S I N K E N T U C K Y

A N I N T R O D U C T O R Y G U I D E

W YAT T TA R R A N T & C O M B S L L P

©2013 WYATT TARRANT & COMBS LLP

Wyatt, Tarrant & Combs, LLP is a regional law

firm that is both venerable and progressive.

From our six offices in Kentucky, Tennessee,

Indiana, and Mississippi with approximately 200

lawyers, we serve several thousand clients, large

and small, who reflect a wide array of business

pursuits. Our professionals offer broad experi-

ence in sophisticated litigation and transactional

matters appropriate to our clients’ needs.

FOREWORD

This Guide addresses many of the questions that concern

decision makers and advisors who are evaluating

Kentucky as a business location or who are involved in

a dispute or planning a transaction here. It does not deal

with federal laws or the laws of other states. We assume

that most readers will have some knowledge of the

subject areas and are primarily interested in how Kentucky

law may be similar to, or different from, laws elsewhere.

Finally, we assume that a general reference such as this

serves best as an introduction, not an encyclopedia.

CAUTIONARY STATEMENT

Please do not consider this Guide to constitute, or to be

a substitute for, specific legal advice. We do not intend it

to create, nor does it create, any sort of attorney-client

relationship with the reader. Because these articles are

general, they may not apply to particular legal or factual

circumstances. You should not take (or refrain from taking)

any action based on the information in this Guide without

first obtaining professional advice for your particular

situation. Also, you should not send us confidential infor-

mation without first contacting one of our attorneys and

receiving an explicit authorization to do so.

We invite you to visit our website for detailed informa-

tion about our history, practice, lawyers, capabilities,

and resources.

www.wyattfirm.com

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CONTENTS

About Kentucky .................................................................................................................................... 1

An introduction to Kentucky and a link to current comprehensive information

Civil Dispute Resolution ....................................................................................................................... 3

by Rania M. Basha

An introduction to Kentucky law and practice across the spectrum of resolution alternatives -- informal settlement, mediation, arbitration, and trials and appeals in the state and federal court systems

Business and Personal Taxes .............................................................................................................. 15

by James A. Nitsche

A description of Kentucky income taxation of business and individuals, property taxes, sales and use taxes, local occupational license and utility taxes, inheritance taxes, and some other taxes

Tax Incentives for Business Location and Expansion ....................................................................... 30

by Stephen D. Berger

A summary of the Kentucky Business Investment Program, the comprehensive economic development tax credit incentive program for business location and expansion in Kentucky, and guide to property tax abatement in Kentucky via industrial revenue bond financing

Business Organizations ...................................................................................................................... 42

by Peter G. Diakov and Mark J. Farmer

Summaries of the law concerning the formation and operation of corporations (for profit, nonprofit, professional service, and cooperatives), partnerships (general, limited, and limited liability limited), limited liability companies, sole proprietorships, business trusts, and joint ventures

Labor and Employment ..................................................................................................................... 69

by Leila G. O’Carra

Key principles of Kentucky law affecting employment relationships, from the employment-at-will doctrine to whistle-blower protection for public employees

Intellectual Property ........................................................................................................................... 76

by William H. Hollander

A brief review of Kentucky’s statutory and common law regarding various aspects of intellectual property protection, including trade secrets, trademarks, employee confidentiality, noncompetition agreements, rights of publicity, and franchises and business opportunities

Antitrust and Trade Regulation ......................................................................................................... 79

by Michelle D. Wyrick

A survey of Kentucky’s analogs to the federal Sherman Act and Federal Trade Commission Act, numerous statutes regulating particular industries and practices, and statutes and case law regarding price discrimination

Products Liability ............................................................................................................................... 88

by Ben T. Keller

An introduction to the judicial precedents and statutes that define the environment for resolving claims of liability against manufacturers and others in the production and distribution channels for goods

Environmental Protection .................................................................................................................. 96

by George L. Seay, Jr., Lesly A.R. Davis and H. Carl Horneman

A review of Kentucky’s statutory and administrative framework for protecting air and water quality, handling and disposing of solid and hazardous wastes, cleaning up Superfund sites, and mining and reclamation

Real Property .................................................................................................................................... 107

by James T. Hodge and Jonathon Melton

A survey of Kentucky law governing estates in land, conveying, mortgaging, and leasing property, easements, mechanics liens, eminent domain, and other topics

Unauthorized Transaction of Business ............................................................................................. 128

by Francis J. Mellen, Jr. and Aaron D. Zibart

Guidance to business entities organized in other states and abroad on how to comply with Kentucky’s laws requiring authority to conduct business here and the consequences of non-compliance

Unauthorized Practice of Law .......................................................................................................... 138

by Francis J. Mellen, Jr. and Aaron D. Zibart

Guidance to attorneys not licensed in Kentucky on what constitutes the practice of law here and how to satisfy applicable Supreme Court rules

ABOUT KENTUCKY

1

The name “Kentucky” is of Native American

origin and has received various translations,

among which we favor "the land of tomorrow."

Home to more than 4,300,000 people, Kentucky

is located in the central United States, within

600 miles of two-thirds of the U.S. population,

personal income, and manufacturing. This

advantage is enhanced by a moderate climate,

low cost of living, affordable housing, abundant

educational, cultural and recreational

opportunities, and friendly people. These

factors contribute to a uniquely appealing

quality of life and have made the state

increasingly attractive to business decision

makers.

Among our unique attractions are the rich

tradition of Bluegrass music and the romance

and excitement of the horse breeding and racing

industry -- epitomized by the annual running of

the Kentucky Derby on the first Saturday in

May.

In the last half century, Kentucky’s economy has

evolved from its primary dependence on

agriculture and natural resource development to

include a broad spectrum of manufacturing and

service industries. Among the most prominent

U.S. public companies that have their

headquarters here are Humana, Churchill

Downs, YUM! Brands, Brown-Forman,

Lexmark, Papa John’s, and Fruit of the Loom;

many other well-known U.S. companies have

major operations here, including UPS, Ford,

Fidelity Investments, GE, and Citicorp. In

addition, global companies like Toyota, Nestlé,

Hitachi, Mitsubishi, Itochu, and Sumitomo have

made sizeable investments in Kentucky.

Information Resources

The Kentucky Cabinet for Economic

Development (“KCED”) is an excellent

resource for existing and prospective Kentucky

businesses. Among other services, it maintains

a website with a wealth of reliable data on many

pertinent topics, including Kentucky’s

geography, climate, population, economy,

educational resources, government, and

numerous other topics. The website may be

accessed through this link:

http://www.thinkkentucky.com

Among other resources, this site contains the

Kentucky Business & Industry Information

System (“KBIIS”), a highly detailed, searchable

data base about Kentucky businesses and the

opportunities here.

The following are among the KCED’s recent

points of emphasis in presenting the

opportunities Kentucky offers:

2

Kentucky has one of the lowest overall

costs of doing business.

Kentucky workers continually outperform

the national average for productivity.

Kentucky's workforce training programs

are in the very top tier of state programs

in facilitating customized business and

industry training services for new,

expanding, and existing companies.

Kentucky has one of the lowest industrial

electric power costs in the nation.

Complementing its strategic location,

Kentucky's inter-modal freight and

passenger transportation systems provide

efficient and cost-effective access to all

points on the globe, including worldwide

hubs for UPS and DHL.

As detailed elsewhere in this Guide,

Kentucky offers an array of state

incentives including tax credits, loan

financing, training grants, and

opportunities for foreign trade zone

operations.

CIVIL DISPUTE RESOLUTION

3

Rania M. Basha Louisville, Kentucky www.wyattfirm.com

While the avenues for resolving civil disputes

are generally the same in Kentucky as they are

in other states, the available options may involve

turns and bumps particularly applicable here. In

Kentucky, as elsewhere, parties can attempt to

resolve their differences informally through set-

tlement discussions or by agreement through

mediation or arbitration. When these efforts are

unsuccessful, the state and federal court systems

are available if the parties can satisfy certain

jurisdictional and procedural requirements. If

the dispute is one involving a governmental enti-

ty, specific Kentucky statutes and/or regulations

will govern the proceeding. This section high-

lights aspects of civil dispute resolution in Ken-

tucky.

INFORMAL SETTLEMENT DISCUSSIONS

In Kentucky, the parties retain the same flexibil-

ity they enjoy in other states when trying to re-

solve a disagreement short of commencing for-

mal litigation or incurring the expense of media-

tors or arbitrators. The primary consideration,

when attorneys become involved in settlement

discussions on behalf of Kentucky residents or

businesses, lies in any differences in the ethical

rules applicable to the practice of law in Ken-

tucky versus the rules applicable in other states.

Kentucky Supreme Court Rule (“SCR”)

3.130(4.1(a)) provides that “[i]n the course of

representing a client a lawyer[] shall not know-

ingly make a false statement of material fact or

law to a third person[.]” Comment (1) to SCR

4.1 clarifies that a lawyer has no duty to inform

an opposing party of relevant facts, but “[a] mis-

representation can occur if the lawyer incorpo-

rates or affirms a statement of another person

that the lawyer knows is false.” Comment (2)

also recognizes that whether a statement is one

of fact depends on the circumstances: “Under

generally accepted conventions in negotiation,

certain types of statements ordinarily are not

taken as statements of material fact. Estimates

of price or value placed on the subject of a

transaction and a party’s intentions as to an ac-

ceptable settlement of a claim are ordinarily in

this category, and so is the existence of an un-

disclosed principal except where nondisclosure

of the principal would constitute fraud.”

Under Kentucky Rule of Evidence (“KRE”)

408, offering or accepting a compromise of a

disputed claim is not admissible to prove either

liability for, or invalidity of, the claim. Like-

wise, KRE 408 excludes evidence of conduct or

statements made during negotiations that are not

otherwise discoverable. But it does not require

exclusion when the evidence is offered for an-

other purpose, such as bias or prejudice of a wit-

ness.

4

MEDIATION

As elsewhere in the United States, mediation is a

popular choice in Kentucky for resolving dis-

putes.

Pre-litigation Mediation

A number of organizations here provide media-

tion services, either before or after litigation be-

gins. Many of these provide retired judges who

are able to give clients a meaningful idea of

what may result from a trial or an appeal from a

jury verdict. Other mediators are experienced

practitioners in specific areas of the law, such as

medical malpractice, workers’ compensation,

securities law, employment law, or construction

litigation.

A mediator in Kentucky typically charges by the

hour. A party can expect to pay between $200

and $350 an hour. A qualified mediator in Ken-

tucky will always require the parties to sign a

confidentiality agreement. All nondiscoverable

statements and offers made or rejected during

mediation must be kept confidential. See KRE

408. Before retaining the services of any media-

tor, a party should obtain recommendations as to

who would be the most appropriate choice given

the facts and legal issues in a particular case.

Experienced civil litigators in Kentucky will

know who among available mediators would be

the most effective in a specific case and, absent

a conflict of interest, will assist out-of-state at-

torneys in identifying the best alternatives.

Mediation in State Court Cases

Kentucky lower courts can, and often do, order

mediation. Some circuits have adopted local

rules that specifically provide for alternative

dispute resolution. For example, the Rules of

Practice of the Jefferson Circuit Court (“JRP”)

in Louisville allow the Court to refer a case to

mediation or another alternative dispute resolu-

tion method as agreed by the parties, “[a]t any

time on its own motion or on motion of any par-

ty[.]” JRP 1303. If the parties cannot agree up-

on a mediator, the Court will appoint one. The

judge presiding over a case will not serve as a

mediator unless the parties agree. If the parties

consent, the mediator can advise the Court of

“those matters which, if resolved or completed,

would facilitate the possibility of a settlement.”

JRP 1310. Kentucky state courts favor media-

tion and view it as an effective way to resolve

cases short of trial.

Once a case reaches the Kentucky Court of Ap-

peals, mediation may become part of the formal

proceedings. Under Kentucky Civil Rule of

Procedure (“CR”) 76.03(4), twenty days after a

notice of appeal is filed, the appellant must file a

prehearing statement, which addresses a number

of questions, including whether the appellants

want a “prehearing conference,” the primary

purpose of which is to try to settle the case. The

appellee also has the opportunity to file a pre-

hearing statement within ten days thereafter to

respond to the same questions, including wheth-

5

er the appellee wants a prehearing conference.

Even if all parties to the appeal check “no” to

whether a prehearing conference is desired, the

Court of Appeals may order a prehearing con-

ference, which is conducted by one of the

Court’s two staff attorneys, who are responsible

for holding prehearing conferences and serving

as mediators to settle cases on appeal.

Like informal mediation, the prehearing confer-

ence is confidential when it involves settlement

discussions. The staff attorneys are effective

mediators when the parties are amenable to set-

tlement discussions, particularly if the appeal is

one from a jury verdict. Clients are required

either to be present at the prehearing conference

or to be available throughout the conference by

telephone. If the client is not able to be present,

counsel should advise the conference attorney

that the client will be available by telephone.

Counsel should demonstrate courtesy and coop-

eration before the conference attorney. Out-of-

state counsel representing a client must be ac-

companied by an attorney with a valid Kentucky

license at any proceeding before the Court of

Appeals, including the prehearing conference.

See SCR 3.030(2).

Mediation in Federal Court Cases

The Joint Local Rules of Civil Practice for the

United States District Courts in Kentucky

(“LR”) expressly provide, in LR 16.2, for Alter-

native Dispute Resolution:

Upon motion of any party, or sua sponte, any judicial officer may require parties in civil cas-es to consider some form of al-ternative dispute resolution pro-cess, including but not limited to, mediation, early neutral evaluation, minitrial, or arbitra-tion. Mediation may be con-ducted under the auspices of a private professional mediator or judicial officer.

The process, as always, is confidential, and typi-

cally is conducted by one of the United States

magistrate judges. The process is somewhat

informal, usually occurring in the chambers of a

magistrate. The federal magistrates in Kentucky

enjoy a successful settlement record.

In the United States Court of Appeals for the

Sixth Circuit, to which Kentucky is assigned, the

mediation process is similar to what occurs at a

prehearing conference before the Kentucky

Court of Appeals staff attorney. The Sixth Cir-

cuit requires a conference, which is usually con-

ducted by telephone in Kentucky. The staff at-

torney assigned to the appeal will discuss the

issues with the lawyers and make an effort to

resolve the case. As in the Kentucky Court of

Appeals, the process has an informal feel with

no pressure to settle.

ARBITRATION

Arbitration agreements are enforceable in Ken-

tucky. Under Section 250 of the Kentucky Con-

stitution, the General Assembly has the duty of

enacting laws “as shall be necessary and proper

6

to decide differences by arbitrators, the arbitra-

tors to be appointed by the parties who may

choose that summary mode of adjustment.”

Kentucky Revised Statutes (“KRS”) Chapter

417 governs state arbitration proceedings, except

within the context of disputes between employ-

ers and employees or those involving insurance

contracts. KRS 336.700 prohibits an employer

from conditioning employment on the employ-

ee’s waiver of potential future claims and requir-

ing arbitration. KRS 304.20-050 provides that

an arbitration clause in an automobile liability or

motor vehicle liability insurance policy is unen-

forceable.

Similar to the Federal Arbitration Act, 9 U.S.C.

§2, KRS 417.050 provides that an arbitration

agreement is “valid, enforceable and irrevocable,

save upon such grounds as exist at law for the

revocation of any contract.” KRS 417.060 gov-

erns proceedings to compel or stay arbitration

and requires a court to “proceed summarily” to

determine whether an arbitration agreement ex-

ists if a party denies its existence. The court

cannot deny arbitration on the basis that a claim

lacks merit.

The parties’ agreed upon method of appointing

arbitrators controls, but if they do not agree, the

court has the power to appoint arbitrators under

KRS 417.070. The parties’ agreement also con-

trols the conduct of the hearing. Thus, if the

parties agree to arbitrate under FINRA or AAA

rules, that agreement will control.

If the parties’ agreement is silent, KRS 417.090

governs the hearing and dictates, for example,

that the parties are entitled “to be heard, to pre-

sent evidence material to the controversy and to

cross-examine witnesses[.]” KRS 417.110 gives

the arbitrators the power to issue subpoenas “for

the attendance of witnesses and for the produc-

tion of books, records, documents, and other

evidence[.]” Depositions may also be taken if a

witness is unable to attend the hearing.

A party may move the court to vacate an adverse

arbitration award within ninety days of receiving

it. Like 9 U.S.C. §10, KRS 417.160 provides

narrow grounds for vacating an arbitration

award. The court can vacate the award if (i) it

was procured by corruption, fraud or other un-

due means, (ii) there was evident partiality, cor-

ruption or misconduct by an arbitrator, which

prejudiced the party’s rights, and (iii) the arbitra-

tors exceeded their powers or conducted the

hearing contrary to KRS 417.090 to the party’s

prejudice. Like the federal act, KRS 417.160

does not allow the court to vacate an award

simply because the arbitrators were wrong.

KRS 417.220 allows a party to appeal an order

denying an application to compel arbitration, an

order staying arbitration, an order confirming or

denying an award, an order modifying or cor-

recting an award, and an order vacating an

7

award without directing a rehearing. An appeal

from any of these orders is subject to the same

rules governing appeals from judgments in any

civil case.

Because the grounds for vacating an arbitration

award are narrow under Kentucky law, arbitra-

tion may not represent the most desirable option

for resolving a dispute. Whether it is the best

option depends on the nature of the controversy.

If the potential issues in a business transaction

are likely to be more legal than factual, for ex-

ample, judicial proceedings may be more prefer-

able than arbitration in Kentucky. A business

should consider the procedural restrictions on

arbitration before entering into an arbitration

agreement that would be subject to Kentucky

law.

STATE COURT LITIGATION

One feature of Kentucky courts sets them apart

from some other state court systems. Judges in

Kentucky are elected. At every level of the

Kentucky judicial system, the judges run for

election as nonpartisan candidates for specific

terms of office.

District Courts

Kentucky’s lowest courts are the District Courts.

District Court judges are elected on a non-

partisan basis for terms of four years. Some dis-

tricts encompass multiple counties, while other

districts are composed of only one. A densely

populated district with a concomitant heavy

caseload may consist of one county and have

several district court judges. In more rural areas,

a district may have more than one county and

one judge who travels between counties to hear

cases.

The District Courts have limited jurisdiction,

restricted to juvenile matters, city and county

ordinance enforcement, misdemeanors, traffic

offenses, probate of wills, felony preliminary

hearings, and civil cases where the amount in

controversy is $5,000 or less. Guardianship,

conservatorship, voluntary and involuntary med-

ical commitments, and domestic violence and

abuse cases are also heard in District Court.

Circuit Courts

Significant civil disputes are likely to commence

in Circuit Courts, which are the primary courts

of general jurisdiction and hear civil matters

when more than $5,000 is at stake. There are 57

judicial circuits in Kentucky. And, like Ken-

tucky’s other state courts, judges are elected on a

non-partisan basis for eight-year terms. Circuit

Courts have jurisdiction over capital offenses

and felonies, divorces, adoptions, terminations

of parental rights, land disputes, property title

issues and contested probates of wills. Circuit

Court judges have the power to issue injunc-

tions, writs of prohibition and writs of manda-

mus. They also hear appeals from the District

Courts and administrative agencies.

8

The Kentucky Rules of Civil Procedure govern

the practice of civil cases in Kentucky state

court. While the Civil Rules generally track the

Federal Rules of Civil Procedure, there can be

significant differences in interpretation, as the

discussion of CR 56 below explains, and in the

specific requirements of the rules, such as those

applicable to appeals in state court.

Many Circuit Courts also have adopted their

own local rules applicable to civil cases, and of

them have established “motion hours,” namely

regularly occurring dates for hearing discovery

and other routine motions in civil cases. Coun-

sel for the parties must determine whether local

rules exist and, if so, become familiar with them

before a case is filed if representing the plaintiff,

or promptly thereafter if representing the de-

fendant. Even if there are no official local rules,

a Circuit Court will have its own practices re-

garding motion hour and the deadline for filing

motions to be heard at a particular motion hour.

Some Circuit Courts impose page limits on legal

memoranda and have their own special rules

regarding leave to appear pro hac vice.

Circuit Courts are bound to follow the Kentucky

Constitution, which has a number of provisions

that are particular to Kentucky. Under the Ken-

tucky Supreme Court’s current interpretation,

for instance, the Constitution limits the Legisla-

ture’s ability to diminish the civil remedies

available when the Constitution was adopted.

See Williams v. Wilson, 972 S.W.2d 260, 267-69

(Ky. 1998). This limitation, for example, pre-

vents the General Assembly from enacting stat-

utes to make the recovery of punitive damages

more difficult and from placing a ceiling on

damages recoverable in civil cases.

Circuit Courts also are bound to follow opinions

issued by the Kentucky Court of Appeals and

Kentucky Supreme Court. The latter has made

clear, for example, that Kentucky does not apply

the summary judgment standard that is applica-

ble in federal courts. Steelvest, Inc. v. Scansteel

Service Ctr., Inc., 807 S.W.2d 476, 482-83 (Ky.

1991) (refusing to follow the “more relaxed”

summary judgment standard enumerated by the

United States Supreme Court). A party can ob-

tain summary judgment in state court under CR

56, “[o]nly when it appears impossible for the

nonmoving party to produce evidence at trial

warranting a judgment in his favor should the

motion for summary judgment be granted.” Id.

at 482. This test is more difficult for a defendant

to meet than the one used in federal court.

By contrast, the Kentucky Supreme Court has

held that Kentucky trial courts will apply the

United States Supreme Court’s Daubert test for

expert witnesses. See Goodyear Tire and Rub-

ber Co. v. Thompson, 11 S.W.3d 575 (Ky.

2000). In reviewing the trial court’s ruling on

appeal, however, the appellate court will apply

an abuse of discretion standard, namely whether

9

the trial court’s decision was “arbitrary, unrea-

sonable, unfair, or unsupported by sound legal

principles.” Id. at 581. On the question of an

expert’s “reliability,” the test is “clear error,” a

standard that is even more deferential to the trial

court on appeal than abuse of discretion. See

Miller, M.D. v. Eldridge, 146 S.W.3d 909 (Ky.

2004).

The Kentucky Supreme Court also applies the

test for assessing punitive damage awards that

the Supreme Court announced in BMW of North

America, Inc. v. Gore, 517 U.S. 559, 574-75

(1996) and Cooper Industries, Inc. v. Leather-

man Tool Group, Inc., 532 U.S. 424, 121 S. Ct.

1678 (2001). While the trial court considers a

punitive award under the “first blush” rule,

which focuses on whether the amount was influ-

enced by passion or prejudice, the court on ap-

peal conducts a de novo review and will reverse

or remit an excessive punitive verdict. See Sand

Hill Energy, Inc. v. Ford Motor Co., 83 S.W.3d

483, 496 (Ky. 2002) (vacated on other grounds).

The Supreme Court has articulated a punitive

damage instruction for trial courts to use that

includes a prohibition against using out-of-state

evidence to award punitive damages for conduct

occurring outside Kentucky. Sand Hill Energy,

Inc. v. Ford Motor Co., 142 S.W.3d 153, 167

(Ky. 2004).

In addition to general jurisdiction over civil cas-

es, the Circuit Courts also have a Family Court

system, which was established as a separate di-

vision upon adoption of amendments to the Ken-

tucky Constitution in 2002. These Courts pro-

vide a dedicated forum for resolution of familial

disputes, including dissolution of marriage,

spousal support and equitable distribution, child

custody, support, and visitation, paternity, adop-

tion, domestic violence, dependency, neglect

and abuse, termination of parental rights, runa-

ways, and truancy issues.

Similarly, there is a separate Drug Court divi-

sion, which is a treatment and rehabilitation pro-

gram administered directly by the Circuit

Courts, in which most counties participate. The

program requires at least a one-year commit-

ment on the part of the offender, if eligible, in

exchange for possible avoidance of incarcera-

tion. The program involves weekly status ses-

sions in court, ongoing drug screening, and regu-

lar clinical treatment and support-group meet-

ings. The costs of administering the Drug Court

program are substantially less than the costs of

jail or prison, and the success of program partic-

ipants, after leaving treatment, is greater than

those who are sentenced in a traditional manner.

Court of Appeals

The Kentucky Court of Appeals has jurisdiction

over appeals from Circuit Court. Two judges

are elected from each of seven appellate court

districts for a total of fourteen judges, who serve

eight-year terms. The judges are divided into

10

panels of three to review and decide cases, with

the majority determining the decision.

Although based in the state capital, Frankfort,

the Court of Appeals does not sit permanently in

one location, but travels to different sites around

the state to hear cases. Cases are assigned to

panels, not based on where they are pending, but

on the availability of judges, depending on their

caseload. Therefore, a case out of Jefferson Cir-

cuit Court, for example, will not necessarily be

decided by a panel with a judge from Jefferson

County or its district.

The Kentucky Constitution gives every party the

right to one appeal. Accordingly, a case that

begins in Circuit Court can be appealed to the

Court of Appeals as a matter of right. CR 74.02

allows a party to move to transfer a civil case

directly to the Kentucky Supreme Court if the

case “is of great and immediate public im-

portance[.]” As may be expected, the Supreme

Court rarely grants such motions.

An appeal commences with the filing of a notice

of appeal in Circuit Court. In Kentucky, a notice

of appeal is jurisdictional; if the notice is un-

timely, filed more than thirty days from final

judgment, or from an order denying post-trial

motions, the Court of Appeals will dismiss the

appeal for lack of jurisdiction. The Court of

Appeals also has held that the filing fee for an

appeal, currently $160, is jurisdictional. Some

Circuit Court clerks in Kentucky impose an ad-

ditional charge, which can vary from county to

county. When appealing, counsel should be

aware of the total filing fee in the relevant Cir-

cuit Court. If the notice of appeal is filed within

the deadline, but the check for the filing fee is

late, the Court of Appeals will dismiss the ap-

peal.

The Kentucky Civil Rules set forth many specif-

ic, technical requirements for perfecting an ap-

peal. Except for the notice and the filing fee, the

requirements are not jurisdictional, but good

cause must be shown if a party fails to comply

with the Rules. As a result, counsel should pay

particular attention to the appellate rules and

consult with an attorney specializing in appellate

practice to avoid potential pitfalls for the un-

wary.

For example, parties to an appeal must request

oral argument if desired. Otherwise, the Court

of Appeals may order that no oral argument will

occur. Even if the parties request it, the Court of

Appeals has the discretion to decide the case

without oral argument. Absent circumstances

like the complexity of a case or disagreement

among the judges on its disposition, the Court of

Appeals tries to issue opinions within one month

of oral argument. Generally, the average time

for a civil appeal is eighteen months from the

notice of appeal to the issuance of an opinion.

With few exceptions, a party can only appeal

from a temporary injunction or a final judgment

11

resolving all claims or a judgment that resolves

one or more but less than all of the claims or

parties, if the court recites that the judgment is

final and appealable as to one of the parties

and/or a separable claim and there is “no just

reason for delay.” CR 54.02. While there is

scant authority holding otherwise, an order

denying a motion to dismiss or motion for sum-

mary judgment is ordinarily not appealable.

Likewise, discovery and other pretrial orders are

not appealable. An order denying or granting a

restraining order is not appealable. An order

granting or denying class certification in Ken-

tucky is not appealable.

The principal appellate avenue of relief from

these pretrial rulings are the extraordinary writs

of mandamus and prohibition, which are rarely

granted and should not be attempted if the

judgment is simply wrong. “[W]e have always

been cautious and conservative both in entertain-

ing petitions for and in granting such relief.”

Bender v. Eaton, 343 S.W.2d 799, 800 (Ky.,

1961). A writ is appropriate only when the infe-

rior court is acting without jurisdiction or acting

erroneously within its jurisdiction. If the latter,

the petitioner also must show that he or she has

no adequate remedy by appeal or otherwise and

that he or she would suffer great and irreparable

injury. Id.

Kentucky Supreme Court

As the court of last resort in Kentucky, the Su-

preme Court is the final interpreter of state law.

One Supreme Court justice is elected on a non-

partisan basis from each of the seven appellate

judicial districts. The Justices serve eight-year

terms. The Chief Justice is chosen for a four-

year term by his or her colleagues and serves as

the administrative head of the Kentucky state

court system.

The Court considers appeals in civil cases upon

motion for discretionary review or, in rare in-

stances, on motion to transfer from the Court of

Appeals. Whether the Kentucky Supreme Court

accepts a case for discretionary review lies en-

tirely within the Court’s discretion and “will be

granted only when there are special reasons for

it.” See CR 76.20. A “special reason” may ex-

ist, for example, if the case presents a legitimate

constitutional question or a significant matter of

first impression, or if it has ramifications of pub-

lic policy beyond the parties and matter at issue

in a particular case. The Supreme Court is pri-

marily responsible for the development and pro-

gress of the common law in Kentucky. It has the

power to change the common law.

The fact that the Supreme Court accepts discre-

tionary review does not, ipso facto, signify that

it will reverse the Court of Appeals. While it is

difficult to pinpoint the reversal rate with any

certainty, an examination of discretionary re-

12

view in civil cases involving only private liti-

gants indicates that the reversal rate is around

50% after review is granted.

The Supreme Court does not hear testimony or

any evidence outside the record developed at the

lower court. Counsel for the parties submit

briefs. The Court has oral arguments in the civil

cases accepted for review and usually gives each

side fifteen minutes, allowing the appellant to

divide the time and save some for rebuttal. In

civil cases, the Court issues a written opinion,

which is ordinarily for publication because the

Court decides important questions. A decision

by the Kentucky Supreme Court may only be

reviewed by the United States Supreme Court

upon writ of certiorari.

Attorneys Not Licensed in Kentucky

If an attorney is admitted to practice in another

state, but not in Kentucky, he or she must com-

ply with SCR 3.030(2) which provides:

A person admitted to practice in another state, but not in this state, shall be permitted to prac-tice a case in this state only if that attorney subjects himself or herself to the jurisdiction and rules of the Supreme Court of Kentucky, governing profes-sional conduct, pays a one time per case fee of two hundred seventy dollars ($270.00) to the Kentucky Bar Association and engages a member of the asso-ciation as co-counsel, whose presence shall be necessary at all trials and at other times when

required by the court. No mo-tion for permission to practice in any state court in this jurisdic-tion shall be granted without submission to the admitting court of a certification from the Kentucky Bar Association of receipt of this fee.

Once the attorney obtains the certification form

from the KBA, local counsel files a motion for

leave to appear pro hac vice, with the certifica-

tion attached. Thereafter, leave to appear is rou-

tinely granted. Out-of-state counsel must com-

ply with rules at each level of a proceeding,

namely at the trial court and on appeal at the

Court of Appeals and, again, at the Kentucky

Supreme Court.

FEDERAL COURT LITIGATION

Kentucky has two federal court districts, the

United States District Courts for the Western

District of Kentucky and for the Eastern District

of Kentucky. The Western District has four di-

visions: Bowling Green, Louisville, Owensboro

and Paducah. Currently, there are four active

judges and two judges on senior status. There

are four United States magistrate judges in the

Western District. The Eastern District has six

active judges, four senior judges, and five Unit-

ed States magistrate judges. It is divided into six

divisions: Ashland, Covington, Frankfort, Lex-

ington, London and Pikeville.

The Eastern and Western Districts cooperate in

promulgating local rules that provide uniformity

13

in the local federal court practice between the

Districts in Kentucky. This consistency is not

required by any federal statute and, therefore, is

especially appreciated by practitioners in the

state. As the introduction to the Joint Local

Rules states, “[i]t has long been the intent of the

federal judges in Kentucky to make the practice

of law in the federal courts as simple and under-

standable as possible for the Kentucky federal

practitioner.”

Counsel for parties to any case pending in the

Eastern or Western Districts of Kentucky must

be familiar with the Joint Local Rules. For civil

cases, the Rules contain, for example, page limi-

tations and other requirements for legal memo-

randa (LR 7.1), certain standards for discovery

disputes (LR 37.1) and bond and surety re-

quirements (LR 65.1.1).

Electronic filing is mandatory for virtually all

cases in the Eastern and Western Districts. To

file electronically, an attorney must register in

the district in which the attorney intends to file.

To register, the attorney must be admitted in that

district (pro hac vice admission is acceptable)

and the attorney must certify that the attorney

has been trained on the use of the Court’s elec-

tronic filing system. To register and learn more

about electronic filing, visit the Eastern District

website www.kyed.uscourts.gov or the Western

District website www.kywd.uscourts.gov.

Parties appeal from the Eastern and Western

Districts to the United States Court of Appeals

for the Sixth Circuit, which encompasses Ken-

tucky, Michigan, Ohio and Tennessee. The

Court sits in Cincinnati, Ohio. Currently, the

Sixth Circuit has sixteen active judges and nine

senior judges. It is not unusual for United States

District Court judges in the Sixth Circuit and

elsewhere to serve on panels. In addition to fol-

lowing the Federal Rules of Appellate Proce-

dure, the Sixth Circuit also has adopted Sixth

Circuit Rules, pursuant to FRAP 47, and internal

operating procedures. It is imperative for coun-

sel to become familiar with the local rules and

internal procedures at the outset of an appeal to

the Sixth Circuit.

ADMINISTRATIVE PROCEEDINGS

A party involved in a dispute with a Kentucky

governmental agency will need to consult the

particular statutes or regulations governing pro-

ceedings before that agency. For example, KRS

Chapter 131 governs proceedings between the

Revenue Cabinet and taxpayers and KRS

131.340 gives the Kentucky Board of Tax Ap-

peals exclusive jurisdiction over appeals from

any order of a state or county agency affecting

revenue and taxation.

In addition to any procedures and requirements

tailored to a particular agency, KRS 13B.020

applies to all administrative hearings conducted

by an agency, except those listed as exempted in

14

the statute. The process in KRS Chapter 13B

contemplates meaningful notice of a hearing and

allows interested parties to intervene. See KRS

13B.060. Under KRS 13B.090, the parties have

the right to discover the identity of witnesses in

advance of the hearing. A hearing officer pre-

sides over the hearing and must give the parties

the opportunity to file pleadings, motions, and

objections and may allow the filing of briefs and

proposed findings. KRS 13B.080 also gives the

hearing officer subpoena power and the parties

the right to present evidence and argument and

conduct cross-examination.

KRS 13B.090 provides that hearsay is admissi-

ble but cannot be sufficient in itself to support a

finding unless the hearsay would be admissible

in court over a party’s objection. Any party ag-

grieved by a final order of an agency has the

right to appeal, under KRS 13B.140, by petition-

ing to the Circuit Court in the venue provided in

the agency’s enabling statutes. The appealing

party must satisfy the requirements of KRS

13B.140 to perfect the appeal, including the thir-

ty-day deadline for an appeal.

BUSINESS AND PERSONAL TAXES

15

James A. Nitsche Louisville, Kentucky www.wyattfirm.com

INCOME TAX

Businesses

Kentucky generally follows the Internal

Revenue Code of 1986, as amended through

December 31, 2006 (the “IRC”), except when a

specific provision conflicts. For purposes of the

corporate income tax, the term “corporation” for

Kentucky tax purposes has the same meaning as

that under Section 7701(a)(3) of the IRC. KRS

141.010(24)(a). In order for Kentucky to tax a

corporation’s income, the corporation must be

“doing business in this state,” which includes:

(1) being organized under the laws of Kentucky;

(2) having a commercial domicile in Kentucky;

(3) owning or leasing property in Kentucky; (4)

having one or more individuals performing

services in Kentucky; (5) maintaining an interest

in a pass-through entity (see infra) doing

business in Kentucky; (6) deriving income from

or attributable to sources within Kentucky,

including trusts; or (7) directing activities at

Kentucky customers for the purpose of selling

them goods or services. KRS 141.010(25). This

“commercial presence” standard is a shift from

the former “physical presence” standard, but is

not intended to go beyond the limitations

imposed and protections provided by P.L. 86-

272 or the United States Constitution. Id.

Excluded from the corporate income tax are S

corporations, most banks and trust companies,

savings and loan associations, production credit

associations, insurance companies, certain

printing corporations, entities exempt under

Section 501 of the IRC, and other nonprofit

religious, charitable, and educational

corporations. KRS 141.040(1).

The corporate income tax rate is four percent

(4%) on the first $50,000; five percent (5%) on

the next $50,000; and six percent (6%) on any

income over $100,000. KRS 141.040(6).

All corporations doing business in Kentucky

must apportion their income if the entity is

required to file returns for or pay net income tax,

a franchise tax, or a corporate stock tax in

another state. KRS 141.010(14)(b). A

corporation that owns an interest in a limited

liability pass-through entity (see infra) or a

general partnership organized or formed as a

general partnership after January 1, 2006 must

include its proportionate share of the sales,

property and payroll of the limited liability pass-

through entity or general partnership in

computing its apportionment factors (as

described below). KRS 141.206(10)(b) and

141.120(11). For general partnerships organized

or formed on or before January 1, 2006, the

general partnership must apportion its income

using the standard three-factor formula and the

16

corporate partner must include its distributive

share of the apportioned partnership income

when calculating its corporation income tax.

KRS 141.206(10)(b).

Apportionment is based on the Uniform

Division of Income for Tax Purposes Act and

uses a three-factor formula (sales, property,

payroll) with sales being double weighted. The

formula is represented below:

Property (25%) + Payroll (25%) + Sales (50%) 4

If any factor equals zero, then the denominator

of the apportionment formula is reduced by one

(two if the factor is sales). The property factor is

(1) the average value of real and tangible

personal property owned or rented and used in

Kentucky during the tax period divided by (2)

the average value of all the taxpayer’s real and

tangible personal property owned or rented and

used during the tax period. KRS 141.120(8)(a).

The average value of property is determined by

averaging the values at the beginning and end of

the period. Id. Property owned by the taxpayer

is valued at its original cost while property

rented by the taxpayer is valued at eight (8)

times the net annual rental rate. Id. The payroll

factor is (1) the total amount of compensation

paid or payable in Kentucky during the tax

period divided by (2) the total amount of

compensation paid or payable everywhere

during the tax period. KRS 141.120(8)(b). The

sales factor is (1) total sales in Kentucky (based

on destination) during the tax period divided by

(2) total sales of the taxpayer everywhere during

the tax period. KRS 141.120(8)(c).

In calculating the taxable income of a

corporation, gross income is based on the federal

definition, with several exclusions and additions.

Items that are excluded include, but are not

limited to, income exempt by the Kentucky

Constitution, the US Constitution or statutory

law; all dividend income; and certain amounts

related to tobacco. KRS 141.010(12). Added to

Kentucky gross income are interest income from

obligations (bonds, notes, mortgages, etc.) of

other states and their political subdivisions;

payments received by lessors from lessees under

Section 110 of the IRC; and income from certain

related-party transactions described in KRS

141.205. Id. Net income for Kentucky purposes

is Kentucky gross income minus most of the

deductions allowed under federal law. KRS

141.010(13)(d). The following deductions are

not allowed when calculating Kentucky net

income:

Deductions for income taxes paid to other

states, U.S. territories or possessions, and

any foreign country or political

subdivision thereof;

Dividends received deductions described

in Sections 243, 244, 245, and 247 of the

IRC;

17

Any deduction directly or indirectly

allocable to income that is either exempt

from taxation or otherwise not taxed by

Kentucky (and no item can be deducted

more than once); and

Any deduction for amounts paid to any

club, organization or establishment that

has been determined by a court or

government agency to discriminate in its

membership, services, facilities, or

privileges with regard to race, color,

religion, national origin, or sex (with an

allowance for amounts paid to charitable

organizations that limit membership to

persons of the same religion to promote

the religious principles for which it was

established).

KRS 141.010(13)(d).

In addition to the above, Kentucky does not

allow the bonus depreciation enacted by the Job

Creation and Worker Assistance Act of 2002,

the Jobs and Growth Tax Relief Reconciliation

Act of 2003, and the Gulf Opportunity Zone Act

of 2005. KRS 141.010(3). Furthermore,

Kentucky does not allow net operating losses

(“NOLs”) to be carried back. KRS 141.011(2).

NOLs can be carried forward for up to twenty

years. KRS 141.011(1). In addition, income tax

credits are available for a range of activities

including, but not limited to, new and expanded

manufacturing operations in certain areas,

revitalizing certain industrial areas, certain

recycling operations, rehabilitation of certain

historic structures, and certain coal or biodiesel

operations. See generally KRS 141.0205.

In general, any corporation doing business in

Kentucky must file a separate corporation

income tax return. Entities that have nexus with

Kentucky that are not permitted to file a separate

return include (1) an includible corporation in an

affiliated group, (2) a common parent

corporation, (3) a qualified Subchapter S

subsidiary included in its parent’s return, (4) a

qualified REIT subsidiary included in its

parent’s return, and (5) a disregarded entity

(including a single-member LLC) that is

included in its parent’s (i.e., single owner)

return. KRS 141.200(10).

Consolidated return standards adopted in 2005

apply to affiliated groups on or after January 1,

2005. Such groups are required to file nexus

consolidated returns. See KRS 141.200(1), (8).

For these periods, an “affiliated group” is the

same as the federal definition under Section

1504(a) of the IRC. KRS 141.200(2)(a).

“Affiliated group” includes one or more chains

of includible corporations connected through

stock ownership with a common parent

corporation that is an includible corporation, if:

(1) the common parent directly owns at least

80% of the vote and value of at least one other

includible corporation, and (2) at least 80% of

18

the vote and value of each of the other includible

corporations is directly owned by one or more of

the other corporations in the affiliated group.

KRS 141.200(9)(b). “Includible corporation”

means any corporation doing business in

Kentucky (hence, they have “nexus”) except (1)

corporations exempt from the corporate income

tax under KRS 141.040(1)(a) to (i), (2) foreign

corporations, (3) REITs and RICs, (4) domestic

international sales companies, (5) corporations

with a net operating loss and de minimus

Kentucky apportionment factors, (6)

corporations with no Kentucky apportionment

factors, and (7) S corporations. KRS

141.200(9)(e).

An affiliated group that meets the above

requirements must file a consolidated return for

Kentucky regardless of whether or not they file a

federal consolidated return. KRS

141.200(11)(a). As a result, all transactions

between members of the affiliated group must be

eliminated when determining net income, gross

receipts, and the three Kentucky apportionment

factors. KRS 141.200(11)(b). However, prior to

this step, the net operating losses of the group

must be limited in the following manner:

members are separated into two groups:

members with losses and members with

income;

the aggregate losses of the loss members

cannot be used to offset more than 50% of

the aggregate income of the income

members; and

any remaining losses may be carried

forward in accordance with KRS 141.011.

KRS 141.200(11)(b).

While pass-through entities are exempt from the

corporate income tax, their owners pay income

tax on their distributive share of earnings of the

entity. KRS 141.206(4). Corporate owners of a

pass-through entity doing business in Kentucky

are taxable on their distributive share of the

entity’s income. KRS 141.206(10). If the

corporate owner’s only business activity in

Kentucky is being an owner of a pass-through

entity, then the corporate owner is subject to the

corporate income tax on its distributive share

determined by using the above mentioned

apportionment formula. KRS 141.206(10).

A Limited Liability Entity Tax (“LLET”)

applies for tax years beginning on or after

January 1, 2007. Under KRS 141.010(26), a

“pass-through entity” (or “PTE”) includes any

partnership, S corporation, limited liability

company, limited liability partnership, limited

partnership, or similar entity recognized by the

laws of Kentucky that is not taxed for federal

purposes at the entity level, but instead passes to

each partner, member, shareholder, or owner

their proportionate share of income, deductions,

19

gains, losses, credits, and any other similar

attributes.

In addition, a “limited liability pass-through

entity” (“LLPTE”) includes any PTE that

affords any of its partners, members,

shareholders, or other owners “protection from

general liability for actions of the entity.” KRS

141.010(28).

The LLET applies to both C corporations and

LLPTEs and is not an alternative to another tax.

The LLET is the lesser of $0.095 per $100.00 of

Kentucky gross receipts (defined below) or

$0.75 per $100.00 of Kentucky gross profits

(defined as Kentucky gross receipts less

Kentucky returns and allowances and Kentucky

cost of goods sold). KRS 141.0401(2). A

minimum tax of $175 applies regardless of the

method used. Id. Kentucky gross receipts is

generally defined as including the total amount

of consideration paid for the sale, lease, rental or

use of property. 103 KAR Section 16:270.

However, for certain entities, such as law firms

and accounting firms, the entity must calculate

gross receipts on its business income. See KRS

141.120(8)(c); 103 KAR Section 16:270.

The LLET contains relief for certain small

businesses. Taxable entities with gross receipts

or gross profits equal to or less than $3 Million

are exempt from the LLET. Taxable entities

with gross receipts or gross profits between $3

Million and $6 Million are subject to a phased

out exemption but the LLET cannot be less than

zero. KRS 141.0401(2). The exemption phase-

out is calculated as follows:

$2,850 * $6 Million-Kentucky Gross Receipts $3 Million

OR

$22,500 * $6 Million-Kentucky Gross Profits

$3 Million

No LLET relief exists for entities with gross

receipts or gross profits equal to or greater than

$6 Million. Id. In determining eligibility for the

exemption, a member of a combined group

(defined as the members of an affiliated group

and the LLPTEs that would be included if

organized as corporations) must consider the

combined gross receipts and the combined gross

profits of the entire group, including eliminating

entries from transactions within the group. KRS

141.0401(2)(b)(2).

Entities exempt from the LLET include financial

institutions, insurance companies, non-profit

organizations, public service corporations,

REITs, RICs, REMICs, certain personal service

corporations, certain cooperatives, and publicly-

traded partnerships. KRS 141.0401(6). These

entities are called “qualified exempt

organizations.” KRS 141.0401(7)(a). General

partnerships are also exempt because they do not

fit within the definition of a LLPTE due to the

lack of limited liability. See supra. In addition,

LLPTEs owned in whole or in part by a

20

qualified exempt organization must exclude the

proportionate share of gross receipts or gross

profits attributable to that ownership interest

when calculating the LLET. KRS

141.0401(7)(b). Thus, if a REIT is the single

owner of an LLPTE, the LLPTE is exempt from

the LLET as well.

Regular C corporations are subject to the LLET.

KRS 141.0401(2). However, such corporations

paying the LLET get to apply that amount as a

nonrefundable credit towards their regular

corporate income tax. KRS 141.0401(3). This

credit may not be applied against other income

and cannot be carried over to other tax years. Id.

As a result of the LLET, Kentucky added to its

list of activities that constitute “doing business.”

In addition to the items mentioned above for

corporations, “doing business in this state”

includes (1) maintaining an interest in a PTE

doing business in Kentucky, and (2) deriving

income directly or indirectly from a single-

member LLC that is doing business in Kentucky

and is a disregarded entity for federal tax

purposes. KRS 141.010(25).

Every PTE doing business in Kentucky, other

than publicly-traded partnerships, must withhold

Kentucky income tax on the distributive share,

whether distributed or not, of each nonresident

partner, member or shareholder, or each

corporate partner or member that is doing

business in Kentucky only through its

ownership interest in the PTE. KRS

141.206(5)(a). Withholding is at the maximum

tax rate. KRS 141.206(5)(b). An exemption to

the withholding requirement exists if the PTE

“demonstrates” to the Department of Revenue

that an owner has filed the appropriate return for

the prior year. If so, the PTE is not required to

so withhold until the exemption is revoked by

Kentucky. KRS 141.206(7). However, if the

owner fails to file or pay the tax due, Kentucky

may require the PTE to pay the owner’s share.

Id.

Individuals

Kentucky residents are taxed on all of their

income by Kentucky while non-residents are

taxed by Kentucky only on income received

from labor performed, business done, or other

activities in Kentucky; from tangible property

located in Kentucky; and from intangible

property that has acquired a business situs in

Kentucky. KRS 141.020(4). Neighboring

states, such as Illinois, Indiana, Ohio, Virginia,

Michigan, Wisconsin, and West Virginia, have

reciprocity agreements with Kentucky under

which their residents are not required to pay

Kentucky income taxes on salaries or wages

earned in Kentucky as long as the taxpayer does

not live in Kentucky for more than 183 days

during the tax year. 103 KAR Section 17:010.

However, because Tennessee has no income tax,

residents of that state receive no such special

treatment. The tax rate brackets are as follows:

21

Net Income Rate 0 - $3,000 2.0% $3,001 - $4,000 3.0% $4,001 - $5,000 4.0% $5,001 - $8,000 5.0% $8,001 - $75,000 5.8% $75,001 and above 6.0% KRS 141.020(2)(b).

The Kentucky personal income tax is based on

the federal income tax law in effect on

December 31, 2006, and the regulations and

rulings issued by the IRS are generally followed

where no contrary Kentucky law exists. KRS

141.050. Exempted from Kentucky income

taxes are certain employee pension

contributions; social security and railroad

retirement benefits; income exempt from

taxation pursuant to the Kentucky Constitution,

the US Constitution or statutory law; amounts

paid for health insurance of the taxpayer and his

or her family; amounts paid for long-term care

insurance; capital gains attributable to property

taken by eminent domain; and certain tobacco

payments. KRS 141.010(10). In addition, an

exclusion for pension distributions is allowed up

to $41,110 of total distributions from pension

plans, annuity contracts, profit-sharing plans,

retirement plans, or employee savings plans.

KRS 141.010(10)(i)2. Added to the federal

definition of adjusted gross income is interest

income of the obligations of other states and

their political subdivisions. KRS 141.010(10)(c).

In determining Kentucky net income from

adjusted gross income, four key deductions are

disallowed: (1) any deduction for any state

income taxes, or sales taxes used in lieu of

income taxes as provided by Section 164(b)(5)

of the IRC; (2) any deduction for estate

administration fees; (3) the federal personal

exemption; and (4) any deduction for amounts

paid to any club, organization, or establishment

that has been determined by a court or

government agency to discriminate in its

membership, services, facilities, or privileges

with regard to race, color, religion, national

origin, or sex (with an allowance for amounts

paid to charitable organizations that limit

membership to persons of the same religion to

promote the religious principles for which it was

established). KRS 141.010(11).

A variety of credits are available to taxpayers.

A credit of $20 per taxpayer and per dependent

is allowed, KRS 141.020(3), as well as a credit

up to 25% of the allowable federal credit for

qualified tuition and related expenses, as defined

in Section 25A of the IRC, paid to “eligible

Kentucky education institutions.” KRS 141.069.

Unused portions of this credit can be carried

forward for five years. Id. In addition, a credit

for rehabilitating certified historic structures is

allowed up to 20% of the cost of the

rehabilitation (30% for owner-occupied property

up to $60,000). KRS 171.397. However, a

state-wide limit of $3,000,000 in the aggregate

22

exists for the amount of credit available to all

taxpayers. Id. In addition, a nonrefundable

family size tax credit is available for residents

with a modified gross income of 133% or less of

the national poverty level. KRS 141.066(3)(a).

The amount of the credit allowed decreases as

the modified gross income approaches the 133%

threshold amount. KRS 141.066(3)(c).

Also, individual owners of LLPTEs subject to

the LLET receive a nonrefundable credit against

their individual income tax reduced by the

minimum tax of $175. KRS 141.0401(3)(b).

This credit cannot be used against other income

and cannot be carried over to other tax years. Id.

PROPERTY TAX

The Kentucky property tax is levied on the fair

cash value of all real and tangible personal

property unless exempted by the Kentucky

Constitution or, in the case of tangible property,

by statute. KRS 132.190. In general, property is

assessed as of January 1st of each year. KRS

132.220(1). Real property must be listed for

assessment with the county in which it is located

between January 1st and March 1st. Id. Tangible

property may be listed either with the county or

the Department of Revenue by May 15th. Id.

Section 170 of the Kentucky Constitution

prohibits the taxation of public property used for

public purposes; places of burial not held for

profit; property owned by religious institutions,

purely public charities, and educational

institutions; household goods used in the home;

and crops in the hands of the producer. In

addition, a “homestead exemption” is provided

for the personal residence of a person who is 65

years or older or totally disabled. The

exemption, which is adjusted every two years

based on the federal cost-of-living index, is

$34,000 for 2011 and 2012. See KRS 132.810.

Furthermore, since January 1, 2006, most

intangible property is exempt, with exceptions

for financial institutions and life insurance

companies. KRS 132.208.

State tax is imposed on taxable real estate at a

rate of 12.2 cents per $100 of assessed value.

KRS 132.020(1)(a), (2). Tangible personal

property is taxed for state purposes at various

rates under KRS 132.020(1)(b)-(r). Motor

homes are taxed as real estate unless owned by a

dealer and held for sale. KRS 132.751.

Property taxes generally are levied at the state,

county, city, and school district levels. Local

governments, such as counties, cities, school

districts, and other special taxing districts, are,

however, prohibited from taxing many types of

property -- for example, manufacturing

machinery, raw materials, and goods in process.

See KRS 132.200.

Generally, a county property valuation

administrator (“PVA”), an elected official,

assesses most classes of property for the state,

the county, most cities and all other special

23

taxing districts. KRS 132.220. The Department

of Revenue is charged with administering a

centralized assessment system for tangible

personal property. See KRS 132.486.

Depreciable tangible property is assessed using

replacement cost less accrued depreciation. A

20% salvage value is generally assigned to

property still in use past its economic life.

Business inventories are generally valued at

original value on a FIFO basis.

Personal property stored for subsequent

distribution out-of-state within six months after

the assessment date is exempt from all state and

local property taxes except for fire and special

taxing districts. KRS 132.097, 132.099. State

law allows lower rates for finished goods

inventories while local governments have the

option of exempting this type of property or

taxing it at reduced rates. In addition, private

leasehold interests in certain governmental

property financed through industrial revenue

bonds are taxed at a lower rate if approval is

obtained from the Kentucky Economic

Development Finance Authority (“KEDFA”).

KRS 132.020(1)(b), 132.195. KEDFA approval

also exempts a leasehold from local taxation.

However, if the private leasehold is for property

owned by a non-governmental, tax-exempt

owner and not financed by industrial revenue

bonds, then the leasehold is not exempt from

property taxes. KRS 132.195.

SALES AND USE TAXES

The sales and use tax is imposed at a 6% rate

and generally must be reported and paid monthly

to the Department of Revenue. The sales tax is

imposed on retailers for the privilege of making

retail sales, which include the sale, rental, or

lease of tangible personal property and the sale

of certain services. KRS 139.010(28) and

139.200. The use tax is imposed on tangible

personal property purchased outside Kentucky

for use within the state. KRS 139.310. The use

tax is also imposed on tangible personal property

that is purchased for resale (an exemption from

sales tax discussed below) but is used instead of

resold. KRS 139.290. County clerks are

authorized to collect use tax when certain

tangible personal property purchased outside

Kentucky is presented for registration in

Kentucky. Sales and use taxes are only imposed

by the state and not by local governmental

entities.

Kentucky is a party to the Streamlined Sales and

Use Tax Agreement, which provides uniform

definitions, sourcing rules, and audit procedures.

KRS 139.785 et seq. Under the agreement,

transactions are sourced to where the buyer (or

the buyer’s designee) takes possession of the

property. KRS 139.105. The use tax must be

collected by out-of-state retailers who qualify as

retailers engaged in business in Kentucky. KRS

139.340. If a representative conducts any

activities that help establish or maintain a

24

Kentucky market for the out-of-state retailer, the

retailer must collect tax on the representative’s

sales. KRS 139.340(2)(f). For 2006 and

beyond, any “remote” seller who allows

merchandise to be received and exchanged at an

affiliate or any other location in Kentucky is

treated as a retailer engaged in business in

Kentucky. KRS 139.340(2)(b).

Kentucky offers a variety of exemptions from

sales and use tax, especially to businesses. See

KRS 139.470 et seq. As previously mentioned,

items purchased for resale are not subject to the

tax. See KRS 139.260 and 139.010(25).

However, service businesses, including lawyers,

accountants, and other professional service

providers, are considered the consumers of

personal property they use in rendering services,

and generally must pay the tax at the time of

purchase. 103 KAR Section 26:010(2).

Construction contractors are also considered the

ultimate consumers of building materials,

fixtures, and other personal property

incorporated into buildings and other real estate

improvements -- for example, roads, sewers, and

sidewalks -- and must pay sales tax on their

purchases. 103 KAR Section 26:070(1).

Another major exemption applies to “machinery

for new and expanded industry.” KRS

139.480(10). To qualify, the machinery must be

used directly in a manufacturing process and

incorporated into plant facilities for the first time

in Kentucky. KRS 139.010(13). Machinery

does not qualify if it replaces other machinery

unless it increases consumption of recycled

materials by at least 10%, performs a different

function, manufactures a different product, or

has a greater productive capacity. To meet the

manufacturing requirement, the process must

take property with little or no commercial value

for its intended use and result in property with

appreciable commercial value for its intended

use. Id. A “plant facility” is a single location

dedicated exclusively to manufacturing activities

with only incidental retail activities present. Id.

Additional sales and use tax exemptions are

provided for:

raw materials, industrial supplies, and

industrial tools (KRS 139.470(11));

certified pollution control equipment

(KRS 139.480(12));

industrial machinery sold, delivered, and

used out-of-state (KRS 139.486));

containers, packaging, and wrapping

materials (KRS 139.470(2));

sales to nonprofit charitable, religious, or

educational entities (KRS 139.495(1));

sales made directly to the federal

government or its agencies,

25

instrumentalities, or corporations (103

KAR 30:235));

sales made directly to the Commonwealth

of Kentucky or local governmental

entitles located therein (KRS 139.470(7));

and

occasional sales as defined by KRS

139.010(17) (KRS 139.470(4)).

Exemptions from sales and use taxes for

individuals include, but are not limited to,

unprepared foods, prescription drugs, certain

medical supplies, residential utilities other than

telephone, and residential fuels. KRS 139.470 et

seq.

Communications services are subject to the

Kentucky sales tax. KRS 139.200(2)(e).

“Communications services” include

“telecommunication services” as defined by

KRS 139.195(28) and “ancillary services” as

defined by KRS 139.195(1). KRS

139.195(5)(a). Such services include, but are

not limited to, local and long distance telephone

services, prepaid and postpaid calling services,

data transport services, caller ID services, cell

phone services, and voice over internet protocol

(VoIP). A refundable credit is available to any

business whose interstate communications

service exceeds 5% of that business’s Kentucky

gross receipts for the prior calendar year as long

as that business’s annual Kentucky receipts are

at least $1,000,000 and the majority of interstate

communications services billed to a Kentucky

address for the year is for such services

originating outside and terminating inside

Kentucky. KRS 139.505.

Corporate officers and managers of limited

liability companies can be held personally liable

for unpaid sales and use taxes. See KRS

139.185(1) and (2). Also, whenever a retailer

transfers its business, the transferee can be held

liable for the transferor’s delinquent sales and

use taxes, unless the transferee obtains a tax

clearance letter from the Department of Revenue

or withholds from the purchase price an amount

sufficient to cover any deficiency. See KRS

139.670, 139.680.

In lieu of the sales tax, a 6% motor vehicle usage

tax is imposed when a motor vehicle is titled and

registered in Kentucky. KRS 138.450 et seq.

Credit is given for similar taxes paid to other

states when a vehicle previously registered in

another state is transferred into Kentucky.

Various exemptions from the motor vehicle

usage tax are provided by law. See KRS

138.470. The taxable value of new motor

vehicles is based on the actual purchase price

without credit for trade-ins (unless the vehicle

was purchased after August 31, 2009 and before

July 1, 2011). KRS 138.4602(1) and (3).

However, if such value is not provided in an

affidavit signed by both parties, the state will use

26

90% of the manufacturer’s suggested retail

price. KRS 138.4602(2)(b)1. The taxable value

of used vehicles is based on the total

consideration (taking into account trade-ins) as

provided in a similar affidavit. KRS

138.4602(2)(a). Absent such an affidavit, the

state will use the average retail value listed in an

automotive reference manual selected by the

Department of Revenue. KRS 138.4602(2)(b)2.

SEVERANCE TAXES

Excise taxes are levied on the severance or

processing of coal or other natural resources in

Kentucky. See KRS 143.020 (coal) and KRS

143A.020 (natural resources). The tax rate is

4.5% of the gross value of the coal or natural

resource that is severed or processed. Id.

Corporate officers are personally liable for

unpaid coal severance taxes. See KRS 143.085.

OTHER TAXES

Generally, cities, counties, and school districts in

Kentucky are permitted by state law to levy

“occupational license taxes” on the net profits of

businesses and self-employed individuals. In

addition, these occupational license taxes are

levied on the wages, salaries, commissions, and

other forms of compensation received by

individuals. The largest city in Kentucky,

Louisville, may impose an occupational license

tax on both wages and net profits at a rate of one

and one-quarter percent (1¼%). KRS 91.200.

All other cities may impose such a tax pursuant

to KRS 92.280(2). Jefferson County

(Louisville) can also impose an occupational

license tax up to one and one quarter percent

(1¼%) while all other counties with a population

of 30,000 or more are limited to a tax rate of one

percent (1%). KRS 68.180, 68.197. School

districts can impose such a tax up to ½% (or ¾%

for Jefferson County). KRS 160.607. The tax

may be levied either as a flat rate based on the

type and size of the business or as a percentage

of local net profits or gross receipts for

businesses or income earned within the

jurisdiction by individuals. Some jurisdictions

place an annual cap on the tax due or provide an

exemption up to a certain amount of profits.

The tax on net profits is generally paid annually

to the city, county or both. When the tax is

levied on payrolls, it is withheld from wages and

paid over quarterly to the applicable jurisdiction.

Kentucky law authorizes local governments to

levy utility gross receipts taxes at rates that may

not exceed 3%. KRS 160.613 et seq. The tax

may not be imposed if the utilities are to be

resold, and the consumer is liable for the tax if

the seller is exempt under state or federal law. A

utility may increase its rates by 3% in any

county in which it is required to pay this tax

(which covers most counties in Kentucky).

Kentucky also requires an unemployment

insurance tax to be paid by employers. KRS

341.005 et seq. The rates are set annually and

27

depend on the balance in the state

unemployment insurance fund. For 2012, the

rates ranged from 0.3% to 9.00% of taxable

wages. New employers generally pay at least

2.7% of taxable wages for the first three years of

operation to establish a reserve account with the

state. Construction contractors pay the

maximum rate under the statutory schedule in

effect for each year of the first three years of

operation to establish a reserve. A business is

liable for the tax if it pays at least $1,500 in

wages in a quarter, if it employs at least one

person for twenty weeks in a year, or if it

acquires an existing business that pays the tax.

These rules vary for agricultural, domestic and

non-profit businesses. Id. A business can make

voluntary payments to increase its reserve

account balance and lower its contribution rate.

Corporations that incorporate in Kentucky must

pay an organization tax to the Secretary of State

based on the number of authorized shares of

capital stock. KRS 136.060. This tax is

imposed on the shares authorized in the original

articles of incorporation as well as any

additional shares authorized by amended articles

or created by merger or consolidation. The

corporation must pay at least $10.00 and is

charged $0.01 per share for the first 20,000

shares, $0.005 per share for the next 180,000

shares, and $0.002 for any shares over 200,000.

Banks and other financial institutions have

separate tax obligations from regular

corporations. The Bank Franchise and Local

Deposit Tax requires every financial institution

regularly engaged in business in Kentucky to

pay an annual franchise tax measured by net

capital. KRS 136.505. The tax is in lieu of the

corporate income tax and most local taxes. If a

financial institution has business activity both

within and without Kentucky, the tax is

apportioned using a standard three factor

formula. KRS 136.525. A “financial

institution” includes any national bank, any state

bank or trust company other than a banker’s

bank, any corporation qualified as a foreign

bank, and any agency or branch of a foreign

depository. KRS 136.500(10). A financial

institution is subject to the tax if during the

taxable year it obtains or solicits business from

at least twenty people within Kentucky or has

receipts from Kentucky sources of at least

$100,000. KRS 136.520(1). Solicitation occurs

when an employee initiates contact with a

customer from a regular place of business that

the financial institution's employee making the

contact is regularly connected with or working

out of or the customer initiates contact at a

regular place of business of the financial

institution. KRS 136.535(1)(f). The different

types of “receipts” counted against the $100,000

limit do not include receipts from the following:

28

An interest in a real estate mortgage

investment conduit, a REIT, or a RIC;

An interest in a loan-backed security

representing ownership or participation in

a pool of promissory notes or certificates

of interest that provide for payments in

relation to payments or reasonable

projections of payments on the notes or

certificates;

An interest in a loan or other asset from

which the interest is attributable to a

consumer loan, a commercial loan, or a

secured commercial loan, and in which

the payment obligations were solicited

and entered into by an independent person

and not someone acting on behalf of the

owner;

An interest in the right to service or

collect income from a loan or other asset

from which interest on the loan is

attributed as a loan described in the

preceding item, and in which the payment

obligations were solicited and entered into

by an independent person and not

someone acting on behalf of the owner;

and

Any interest held in escrow or trust

account with respect to property described

in any of the four preceding items.

KRS 136.520(1). The bank franchise tax is

1.1% of net capital after apportionment, but a

$300 minimum payment is required. KRS

136.510. “Net capital” is determined by adding

the “value of net capital” for the current tax year

and the preceding four calendar years and

dividing the result by five. The “value of net

capital” is determined by adding the financial

institution’s book value of capital stock, surplus,

undivided profits and capital reserves, net

unrealized holding gains or losses on available

for-sale securities, and cumulative foreign

currency translation adjustments, then deducting

an amount equal to the same percentage of the

total as (i) the book value of U.S. and Kentucky

obligations held by the financial institution bears

to (ii) the book value of the total assets of the

financial institution. KRS 136.515. Of

particular concern is the fact that a president,

vice-president, secretary, treasurer, or any other

equivalent position of an entity subject to this

tax will be personally and individually liable,

jointly and severally, for the tax if the entity is

unable to make payment. KRS 136.565.

Corporate dissolution, withdrawal of the entity

from the state, or departure from an officer

position will not discharge this liability.

However, no person will be held liable if he or

she did not have authority in the management of

the business or financial affairs of the financial

institution at the time the taxes became due. A

financial institution that fails to report and pay

29

its Kentucky taxes cannot use the Kentucky

courts to enforce its loans. KRS 136.570(2).

Kentucky imposes an “inheritance tax” on the

right to receive property from an estate based on

the fair cash value of taxable property passing at

the decedent’s death. KRS 140.010 et seq.

Taxable property includes all property the

decedent owned or held an interest in as well as

life insurance proceeds payable to the decedent

or his or her estate. Like federal law, any

transfers within three years prior to the date of

death are considered taxable property. KRS

140.010, 140.020. The interest received by a

surviving spouse is exempt from the tax. Under

the inheritance tax, beneficiaries are divided into

three classes. Class A includes lineal

descendants, parents, and siblings (both whole

and half). KRS 140.080. Class B includes

nieces and nephews, aunts and uncles, children-

in-law, and certain great-grandchildren. Id.

Class C includes all other individuals and

entities. The interest inherited by a Class A

beneficiary (except that of a surviving spouse) is

exempted from tax under KRS 140.080(1)(c).

Class B and C beneficiaries have exemptions of

$1,000 and $500 respectively against the lowest

tax rate brackets for each beneficiary. KRS

140.080. The tax brackets range from four to

sixteen percent for Class B and from six to

sixteen percent for Class C. See KRS 140.070.

TAX INCENTIVES FOR BUSINESS LOCATION AND EXPANSION

30

Stephen D. Berger Louisville, Kentucky www.wyattfirm.com

THE KENTUCKY BUSINESS INVEST-MENT PROGRAM

SUMMARY

As incentives to the location or expansion of an

economic development project in the state, the

Kentucky Business Investment Program allows a

business which is engaged in manufacturing,

agribusiness, nonretail service or technology, or

national or regional headquarters operations and

which satisfies minimum investment, job crea-

tion, and wage and employee benefit require-

ments to claim for up to fifteen years a credit

against up to 100% of its state income tax liabil-

ity arising from the project and to withhold dur-

ing the same period and retain up to 5% of the

wages of its employees whose jobs are created

as a result of the project. The total amount of the

incentives claimed may not exceed the total

costs incurred to acquire, construct, and equip

the project. The amounts withheld from their

wages may be claimed by the employees as full

credit against the withholding taxes they would

otherwise owe to the state and local taxing juris-

dictions.

THE DETAILS

Introduction

A new tax incentive program for eligible busi-

nesses locating or expanding in Kentucky,

known as the Kentucky Business Incentive Pro-

gram (KBI), was enacted in 2009 and consoli-

dates several business incentives programs pre-

viously in effect.1 KBI can reduce or eliminate

the state income liability of an eligible business,

and reduce its payroll expense, for up to fifteen

years after the new or expanded business com-

mences operations in the state.

Like the previous state economic development

incentive programs which the new program re-

places, the business community and the general

public view KBI as a cost-effective means of

attracting new and expanded economic activity.

The benefits are targeted to economic develop-

ment projects that would not have been under-

taken in Kentucky but for the availability of the

state tax incentives. The state forbears tempo-

rarily from collecting tax revenues it would not

have received at all if the business had not been

induced to locate or expand within the state, to

make a substantial new capital investment with-

1 The statute is codified at KRS Chapter 154.32, available online at http://www.lrc.state.ky.us/ KRS/154-32/CHAPTER.HTM.

31

in the state, and to create a significant number of

well-paying jobs for Kentucky residents.

As was the case with the previous state econom-

ic development incentive programs, KBI is ad-

ministered by the Kentucky Economic Devel-

opment Finance Authority (KEDFA), an agency

within the Kentucky Cabinet for Economic De-

velopment (KEDC) composed of six private cit-

izens with experience in business or finance ap-

pointed by the Governor and, ex officio, the Sec-

retary of the Kentucky Finance and Administra-

tion Cabinet.

Eligible Companies and Eligible Business Ac-tivities

A company eligible for incentives under KBI

(an eligible company) includes any corporation,

limited liability company, partnership, limited

partnership, sole proprietorship, business trust,

or any other entity with a proposed economic

development project (as defined below) that is

engaged in or is planning to be engaged in one

or more of the following activities within the

Commonwealth of Kentucky (an eligible busi-

ness activity):

Manufacturing;

Agribusiness;

Nonretail service or technology; or

National or regional headquarters opera-

tions, regardless of the underlying busi-

ness activity of the company.

“Manufacturing” means any activity involving

or relating to the processing, assembling, or pro-

duction of any property and includes storage,

warehousing, distribution, and office activities

related to the manufacturing activity.

“Agribusiness” means the processing of raw ag-

ricultural products, including timber, or the per-

formance of value-added functions with regard

to raw agricultural products.

A “nonretail service or technology” activity

must be (a) designed to serve a multistate, na-

tional, or international market and more than

50% of the services must be provided to cus-

tomers outside of Kentucky or (b) provided by a

national or regional headquarters as a support to

other business activities conducted by the eligi-

ble company. Nonretail service or technology

includes but is not limited to call centers, cen-

tralized administrative or processing centers,

telephone or Internet sales order or processing

centers, distribution or fulfillment centers, data

processing centers, research and development

facilities, and other similar activities.

A company is not eligible for incentives under

KBI if its primary activity to be conducted with-

in Kentucky is forestry, fishing, mining, coal or

mineral processing, the provision of utilities,

32

construction, wholesale trade, retail trade, real

estate, rental and leasing, educational services,

accommodation and food services, or public

administration services.

Eligible Economic Development Projects

An economic development project eligible for

incentives under KBI means the acquisition,

leasing, or construction and equipping of a new

facility to be used by an eligible company for an

eligible business activity or the acquisition, leas-

ing, rehabilitation, or expansion and equipping

of an existing facility to be used by an eligible

company for an eligible business activity. Sub-

ject to the following exceptions, an eligible eco-

nomic development project does not include any

project that will result in the replacement of ex-

isting facilities in the Commonwealth.

KEDFA may approve as an eligible economic

development project a project which rehabili-

tates an existing facility used for an eligible

business activity if the facility has not been in

operation for a period of 90 or more consecutive

days or the current occupant of the facility has

advertised a notice of closure and the eligible

company proposing the economic development

project is not an affiliate of the current occupant

of the facility.

KEDFA may approve as an eligible economic

development project a project which replaces an

existing facility used for an eligible business

activity if:

the facility is sold or transferred pursuant

to a foreclosure ordered by a court of

competent jurisdiction or an order of a

bankruptcy court of competent jurisdic-

tion and title to the facility prior to the

sale is not vested in the eligible company

or an affiliate of the eligible company;

the facility has been or is being con-

demned by governmental authority and

normal operations at the facility cannot be

resumed within 12 months;

the facility has been damaged or de-

stroyed by fire or other casualty to the ex-

tent that normal operations cannot be re-

sumed at the facility within 12 months; or

the facility replaces an existing facility lo-

cated in the same county if the existing

facility cannot be expanded due to the un-

availability of real estate at or adjacent to

the facility to be replaced, but in such a

case incentives under KBI are available

only to the extent of the expansion and in-

centives are not allowed for the equivalent

of the facility being replaced.

KEDFA may not approve an economic devel-

opment project for incentives under KBI which

33

results in the abandonment or termination of an

existing lease without the consent of the lessor.

Enhanced Incentive Counties

As described below, the minimum wage re-

quirements and the extent of the available in-

centives under the Kentucky Business Incentive

Program vary according to whether an eligible

economic development project is located in an

enhanced incentive county2. A county is an en-

hanced incentive county if (a) its average annual

unemployment rate in the five preceding calen-

dar years exceeded the average annual unem-

ployment rate of the state during those years; (b)

its unemployment rate for the preceding calen-

dar year was more than 200% of the statewide

unemployment rate for such year; or (c) KEDFA

certifies that the county is one of the 60 most

distressed counties in the state (out of the state’s

total of 120 counties) based on its average rate

of unemployment during the three most recent

consecutive calendar years, the percentage of the

residents of the county 25 years of age and older

who have not attained a high school education or

the equivalent, and the quality of the roads in the

county.

2 A map of Kentucky showing which counties are currently enhanced incentive counties is available on the KEDC website at http://www.thinkkentucky.com/kyedc/pdfs/KREDA_Counties.pdf.

Once a project located in an enhanced incentives

county receives final approval for KBI incen-

tives as described below, it continues to be eligi-

ble for enhanced incentives even if the county

subsequently ceases to be an enhanced incen-

tives county. A project which has received pre-

liminary approval for KBI incentives as de-

scribed below will remain eligible for enhanced

incentives if it receives final approval by July 1

of the third year following the county’s decerti-

fication as an enhanced incentives county.

Minimum Requirements for Eligible Eco-nomic Development Projects

To be eligible for KBI incentives, an economic

development project must satisfy the following

minimum requirements:

Minimum Investment

The eligible company must incur eligible costs

(as defined below) for its economic development

project of at least $100,000.

Minimum New Employment

The economic development project must create

a minimum of 10 new, full-time (at least 35

hours per week) jobs for Kentucky residents and

must maintain an annual average of 10 new, full-

time jobs for Kentucky residents.

Minimum Wages and Benefits

For projects in enhanced incentive counties, at

least 90% of the new employees must receive

34

base hourly wages of at least 125% of the feder-

al minimum wage3. For projects in other coun-

ties, at least 90% of the new employees must

receive base hourly wages of at least 150% of

the federal minimum wage.

All the new employees must be entitled to em-

ployee benefits equal to at least 15% of the min-

imum wage target (as defined below) or, alterna-

tively, total hourly compensation (wages and

benefits) equal to at least 115% of the minimum

wage target. For purposes of KBI, employee

benefits means nonmandated payments for

health insurance, life insurance, dental insur-

ance, vision insurance, and defined benefit

plans, profit sharing plans, 401(k) plans, or simi-

lar plans, but do not include bonuses, commis-

sions, incentive pay, or any other contingent

compensation.

“But For” Requirement

For new projects locating in Kentucky, the com-

pany must certify that its economic development

project could reasonably and efficiently locate

outside of Kentucky and without the incentives

offered under KBI the project will likely locate

outside of Kentucky.

For economic development project involving the

expansion of an existing facility in Kentucky,

3 The federal minimum wage is currently $7.25 per hour.

the company must certify that the incentives are

necessary for the project to occur.

Eligible Costs

Costs incurred by an eligible company for an

eligible economic development project are eli-

gible costs and may be recovered through the

company’s receipt of KBI incentives only after

KEDFA adopts a resolution granting preliminary

approval of the company and the project.

For owned projects (as defined below), eligible

costs include (a) start-up costs (as defined be-

low) and (b) costs of acquiring land or rights in

land and related costs, including recording fees;

cost of payment and performance bonds, build-

er’s risk insurance, and other insurance required

during the construction of the project; costs of

labor and amounts paid to contractors, subcon-

tractors, builders, and materialmen in connection

with the project; costs of construction, including

site tests and inspections; subsurface site work;

excavation; removal of structures, roadways,

cemeteries, and other surface obstructions; fill-

ing, grading, and providing drainage and storm

water retention facilities; installation of utilities

such as water, sewer, sewage treatment, gas,

electric, communications, and similar facilities;

off-site construction of utility extensions to the

boundaries of the project site; construction and

installation of railroad spurs needed to connect

the project to existing railways; and similar costs

35

which KEDFA determines are necessary for

construction of the project.

For leased projects (as defined below), eligible

costs include start-up costs and 50% of the esti-

mated annual rent.

“Start-up costs” mean costs incurred to furnish

and equip a facility for an economic develop-

ment project, including costs incurred for com-

puters, furnishings, office equipment, manufac-

turing equipment, and fixtures; the relocation of

out-of-state equipment to the project site; and

nonrecurring costs of fixed telecommunications

equipment.

For all projects that are not located in enhanced

incentive counties, the cost of equipment eligible

for incentives as an eligible cost is limited to

$20,000 for each new full-time job created as of

the activation date of the project (as defined be-

low).

Economic development projects are classified

for purposes of KBI as an owned project or a

leased project. An owned project means an eco-

nomic development project owned in fee simple

by the eligible company or an affiliate, or pos-

sessed by the eligible company or an affiliate

pursuant to a capital lease. A capital lease means

a lease classified as a capital lease by Statement

of Financial Accounting Standards No. 13, Ac-

counting for Leases, issued by the Financial Ac-

counting Standards Board, November 1976, as

amended (“SFAS 13”). A leased project means

an economic development project occupied by

the company pursuant to a lease classified under

SFAS 13 as an operating lease.

Incentives

Income Tax Credits

A company approved by KEDFA for the receipt

of KBI incentives (an approved company) re-

ceives each year a 100% credit against the Ken-

tucky income tax that would otherwise be paya-

ble on the taxable income generated by its eco-

nomic development project. A company receiv-

ing KBI tax credits is exempt from the payment

of quarterly estimated state income tax.

In the case of an approved company that pays

Kentucky state corporation income tax (a C cor-

poration for federal income tax purposes) or

Kentucky limited liability entity tax (an S corpo-

ration for federal income tax purposes, or a lim-

ited liability partnership, or limited liability

company, that is not publicly traded), the credit

is claimed against the company’s state corpora-

tion income tax liability or state limited liability

entity tax liability. In the case of a company that

does not pay Kentucky state corporation income

tax or limited liability entity tax (a sole proprie-

torship, a general partnership, a publicly traded

limited partnership, or a publicly traded limited

liability company), the credit is claimed against

the Kentucky personal income tax liability of the

sole proprietor, the partners of the general part-

36

nership, the partners of the publicly traded lim-

ited partnership, or the members of the publicly

traded limited liability company.

Wage Assessments

In addition to state income tax credits, an ap-

proved company may withhold and retain up to

5% of the gross wages of each employee whose

job was created as a result of an economic de-

velopment project in an enhanced incentive

county or up to 4% (including up to 1% of any

local occupational license tax) as a result of an

economic development project in all other coun-

ties. The amounts withheld are known as wage

assessments.

Employees of a project in an enhanced incentive

county may claim the 5% withheld from their

wages as a credit against their Kentucky person-

al income tax liability. Employees of a project in

other counties may claim the 3% portion of the

amount withheld from their wages as a credit

against their Kentucky personal income tax lia-

bility and the remaining up to 1% portion of the

amount withheld from their wages as a credit

against their local occupational license tax liabil-

ity.

As a condition to the approval of incentives un-

der the Kentucky Business Investment Program

for an economic development project located in

a county other than an enhanced incentive coun-

ty, the city or county where the project is located

must agree to allow a credit against the occupa-

tional license taxes the county or city would oth-

erwise collect from the wages of the employees

whose jobs are created by the project. If the

county and city both impose an occupational

license tax, the amount withheld and the credit

allowed is prorated between them. If neither the

county nor the city where the project is located

imposes a local occupational license tax, the lo-

cal jurisdictions must provide some alternative

inducement satisfactory to KEDFA (e.g., a con-

tribution of land for the project) in order for the

project to be approved for incentives under KBI,

unless KEDFA determines that the local juris-

dictions are unable to provide a reasonable in-

ducement.

Duration of the Incentives

The approved company may claim income tax

credits and withhold wage assessments for up to

fifteen years, for projects in an enhanced incen-

tive county, or up to 10 years, for projects in all

other counties, until the sum of the income tax

credits received and the wage assessment with-

held equal the total confirmed approved costs (as

defined below) of the company’s economic de-

velopment project.

Application and Approval Process

A company seeking state incentives for the loca-

tion or expansion of a business in Kentucky

should contact the Kentucky Cabinet for Eco-

nomic Development (KEDC). A KEDC staff

37

member will be assigned as project manager to

determine the incentives for which the project

may qualify and to assist the company with its

application. The company must complete and

file with KEDFA an application form, together

with a brief history of the business and descrip-

tion of the proposed economic development pro-

ject, a letter endorsing the project from the coun-

ty judge or mayor of the county or city where

the project will be located, a financial statement

for the company’s most recent fiscal year, and a

nonrefundable application fee of $1,000. The

completed application must be received by the

last Friday of the month in order to be consid-

ered for preliminary approval at the following

month’s KEDFA meeting.

Because of the “but for” requirement described

above, any public announcement or legal com-

mitment towards the project (such as entering

into a lease, land or equipment purchase con-

tract, or construction contract), if not expressly

conditioned upon KEDFA’s approval of the

incentives, may jeopardize the eligibility of the

project for incentives under the Kentucky Busi-

ness Incentive Program.

Prior to KEDFA’s consideration of the applica-

tion, the company and KEDC staff negotiate the

annual average number of new full-time jobs (at

least 10) that the company will commit to create

and maintain at its economic development pro-

ject (the jobs target) and the average minimum

wage amount, including employee benefits, that

the company will commit to meet for all the new

full-time jobs created and maintained as a result

of the economic development project (the mini-

mum wage target), which may not be less than

125% of the federal minimum wage in enhanced

incentive counties or less than 150% of the fed-

eral minimum wage in all other counties, and the

total maximum amount and annual maximum

amount of eligible costs approved for recovery

by the company through its receipt of KBI in-

centives (the approved costs).

The criteria applied by KEDFA for reviewing

and approving the application include the cre-

ditworthiness of the company, the amount of the

proposed capital investment, the number of new

full-time jobs to be created by the project for

Kentucky residents and the wages to be paid, the

local community’s support of the project, and

the likelihood of the economic success of the

project.

If KEDFA adopts a resolution granting prelimi-

nary approval, the company and KEDFA exe-

cute a memorandum of agreement setting forth

the preliminary jobs target, minimum wage tar-

get, and approved costs for the company’s pro-

ject and the company may begin to incur ex-

penditures and hire new employees for the pro-

ject. The company has one year from the date of

the preliminary approval to negotiate a tax in-

centive agreement with KEDC setting forth the

38

final jobs target, minimum wage target, and ap-

proved costs for the project and the date (the

“activation date”), which may be no later than

two years after KEDFA’s final approval of the

project, by which the company expects to be

able to certify and document to KEDFA that it

has incurred the approved costs and reached its

jobs target and minimum wage target. KEDFA

may then adopt a resolution granting final ap-

proval of the project and authorizing its execu-

tion of the tax incentive agreement with the

company. An administrative fee equal to one-

quarter of one percent (.025%) of the approved

costs, up to a maximum of $50,000, is payable

by the company to KEDFA upon execution of

the tax incentive agreement.

Following the execution of the tax incentive

agreement, the company must certify and docu-

ment to KEDFA the approved costs it has in-

curred prior to the activation date (the “con-

firmed approved costs”), which may be less than

but not more than the approved costs set forth in

the tax incentive agreement, and the extent to

which it has reached its job target and minimum

wage target by the activation date. Subject to

possible reduction, suspension, or termination of

the incentives as described below if it has not

reached those targets by the activation date, be-

ginning on the activation date the company may

withhold the wage assessments from the wages

of its new employees at the project and may

claim KBI income tax credits against the income

generated by the project.

Each year during the term of the tax incentive

agreement (15 years for projects in enhanced

incentive counties and 10 years for projects in

other counties), the company must certify and

document to KEDFA the extent to which it has

reached or maintained its jobs target and mini-

mum wage target and, in the case of leased pro-

jects, the amount of rent paid for the lease of the

project.

The amount of incentives claimed (the sum of

the wage assessments and income tax credits)

may not in any year exceed the annual maxi-

mum amount of incentives authorized under the

tax incentive agreement nor exceed the total

maximum amount of incentives authorized un-

der the tax incentive agreement (or, if less the

confirmed costs of the project).

Termination, Suspension, or Reduction of Incentives

If the company fails to satisfy as of the activa-

tion date the minimum investment requirement,

the minimum new jobs requirement, or the min-

imum wage requirement, the tax incentive

agreement terminates and the company ceases to

be eligible for KBI incentives. If the minimum

requirements were satisfied as of the activation

date but are not satisfied upon any subsequent

annual review by KEDFA of the company’s per-

formance under the tax incentive agreement,

39

KEDFA may suspend the company’s receipt of

incentives until the minimum requirements are

again satisfied or may terminate the tax incen-

tive agreement and the company’s right to any

further KBI incentives.

A company will be entitled to receive 100% of

the annual maximum amount of the incentives

authorized under its tax incentive agreement for

the following year if it achieves 90% or more of

its jobs target and its minimum wage target upon

KEDFA’s annual review of its performance. If

the company fails to achieve at least 90% of its

jobs target or minimum wage target, the compa-

ny’s annual maximum amount of incentives for

the following year is reduced by the same per-

centage as the percentage shortfall in the jobs

target or the minimum wage target. If both tar-

gets are missed, the annual maximum amount of

incentives for the following year is reduced by

the same percentage as the percentage shortfall

in either the jobs target or the minimum wage

target, whichever was greater.

PROPERTY TAX ABATEMENT VIA AN INDUSTRIAL REVENUE BOND ISSUE4

Regardless of whether the interest on an indus-

trial revenue bond (“IRB”) issue will qualify for

exemption from federal income tax, the issuance

of an IRB to finance the establishment or expan-

sion of a manufacturing, processing, warehouse,

distribution, or other industrial facility in Ken-

tucky can be used to obtain abatement of proper-

ty taxes on the facility financed by the bond is-

sue for the duration of the bond issue. Kentucky

law allows a city or county, or KEDFA, to issue

industrial revenue bonds to finance the acquisi-

tion, construction, and equipping of an industrial

facility and to lease the land, building, and

equipment comprising the industrial facility (the

project) to a private company for use in its busi-

ness operations.

The city, county, or KEDFA, issuing the bonds

(the issuer) leases the project to the company for

a term equal to the term of the bonds (which

may be up to 30 years) in return for rental pay-

4 The Kentucky Industrial Revenue Bond Act, KRS Chapter 103, is online at www.lrc.state.ky.us/KRS/103-00/CHAPTER.HTM. Fact sheets for the Kentucky IRB program, including the procedure for approval of property tax abatement through an IRB and whom to contact for further information, is available at the KEDC website: www.thinkkentucky.com/kyedc/pdfs/IRB_2005.pdf and www.thinkkentucky.com/kyedc/pdfs/irbprocedures.pdf

40

ments by the company equal to (and applied to)

the principal and interest payable on the bonds.

The lease provides that upon the full payment

and retirement of the bonds by the company at

maturity or earlier redemption, the issuer is re-

quired to convey the project to the company for

no additional consideration other than possibly a

nominal payment to the issuer (e.g., $100) as

agreed at the outset of the lease. The lease

therefore constitutes a financing arrangement

rather than a true lease for tax purposes so that

the company may claim depreciation on the pro-

ject for federal and state income tax purposes as

well as deducting the interest the company pays

on the bonds.

Kentucky law provides that, with the approval of

KEDFA, property financed by an IRB and

leased by the issuer to the company is exempt

from state and local property tax as long as the

bonds remain outstanding and title to the proper-

ty is held by the issuer. Once the bonds are paid

and retired and title to the project is conveyed by

the issuer to the company, the property becomes

subject to full state and local property taxation.

Because only the value of the property financed

by the IRB is eligible for property tax exemp-

tion, it is to the company’s advantage to maxim-

ize the principal amount of the IRB so that the

entire cost of the project is regarded as having

been financed by the IRB. If the company does

not require external financing for all or some

portion of the cost of the project (i.e., it intends

to pay all or a portion of the cost of the project

with its own funds or funds provided by its par-

ent company or some other affiliate), full prop-

erty tax abatement through IRB financing can

nevertheless be achieved by having an affiliate

of the company (e.g., its parent corporation),

rather than a bank or other external lender, pur-

chase the bonds.

To obtain KEDFA’s approval for property tax

abatement through an IRB, the issuer (if it is not

KEDFA itself) and the company jointly file an

application with KEDFA at least 45 days prior

to the proposed issuance date of the IRB, togeth-

er with a non-refundable $500 application fee

payable by the company to KEDFA. KEDFA

applies the following criteria in evaluating the

application: the number of new full-time jobs to

be created or preserved by the project and the

average salary for those jobs; the amount of the

company’s capital investment in the project, in-

cluding the principal amount of the IRB; the un-

employment rate in the county where the project

will be located; the state tax incentives, grants or

loans applied for or obtained for the project; the

new tax revenues expected to be generated by

the project over the term of the proposed IRB

issue; the amount of state and local property tax

abatement for which KEDFA’s approval is

sought; and evidence that the city, county,

school district and any other local taxing dis-

41

tricts where the project will be located support

the project.

The city, county, school district, and any other

local taxing districts where the project will be

located may require, as a condition to their sup-

port of the project, that the company agree to

make payments in lieu of taxes (“PILOTs”)

equal to all or some portion of the property tax

payments that the company would be required to

pay were it not for the statutory exemption of the

IRB-financed property from such taxes. The

PILOT agreement most often required by the

local jurisdictions is that the company agree to

pay the school taxes that would otherwise be due

with respect to the project. However, jurisdic-

tions with high local unemployment and eager

for local economic development will often fore-

go requiring PILOTs as an additional induce-

ment to the location of the proposed project in

their jurisdiction.

If KEDFA approves the property tax abatement

requested by the issuer and the company, the

project will be subject as long as the IRB is out-

standing only to any PILOTs the company has

agreed to pay and an annual state tax at the nom-

inal rate of 0.015% on the value of the compa-

ny’s leasehold interest in the project. For a mul-

timillion dollar project, this property tax abate-

ment via an IRB issue can be a substantial in-

ducement for a company to undertake the project

within Kentucky.

BUSINESS ORGANIZATIONS

42

Peter G. Diakov Louisville, Kentucky www.wyattfirm.com and Mark J. Farmer Louisville, Kentucky www.wyattfirm.com

OVERVIEW

Generally

Kentucky recognizes and has statutory

provisions for all of the traditional forms of

business organizations, including corporations

(for profit, not-for-profit, professional service,

and cooperatives), partnerships (general, limited,

and limited liability), limited liability

companies, and business trusts. Below are

summaries of the law of Kentucky as it relates to

the formation1 and operation of such

organizations2.

1 Effective January 1, 2011, many of the various filing requirements for the organizations discussed in this summary were consolidated in the Kentucky Business Entity Filing Act, KRS Chapter 14A. 2 See “Unauthorized Transaction of Business” for a more detailed overview of Kentucky statutes applicable to foreign (i.e. non-Kentucky) business entities.

Forms and Statutes

Kentucky’s state government maintains websites

relating to business organizations:

the Secretary of State’s website which

includes extensive information regarding

the formation of business organizations,

forms relating to business organizations

and a current business database service:

http://sos.ky.gov

The Kentucky Legislative Research

Commission maintains three websites

which are useful in answering questions

with regard to business organizations in

Kentucky:

• the complete (and searchable) Kentucky

Revised Statutes:

http://www.lrc.state.ky.us/statrev/frontpg.htm

• the complete (and searchable) Kentucky

Administrative Regulations:

http://www.lrc.ky.gov/kar/frntpage.htm

• a general website with regard to other

legislative resources:

http://www.lrc.state.ky.us/

43

CORPORATIONS

Overview

The Kentucky Business Corporation Act,

Chapter 271B of the Kentucky Revised Statutes

(“KRS”), became effective in 1989. Most of the

provisions of the act are derived from the 1984

version of the Model Business Corporation Act.

The act has been updated from time to time to

incorporate some of the changes to the Model

Act.

Formation

A Kentucky corporation is formed by filing

articles of incorporation with the Secretary of

State. Mandatory and optional provisions for

the articles are set forth in KRS 271B.2-020.

Optional provisions include eliminating or

limiting the personal liability of a director to the

corporation for monetary damages, except for

certain enumerated actions.

Corporate names may be reserved in advance for

a 120-day period by filing an application with

the Secretary of State if the name is not in use

and is distinguishable from other names on file

with the Secretary of State. A preliminary name

availability check may be performed on the

Secretary of State’s website at http://sos.ky.gov.

A name reservation may be renewed for

additional 120 day periods by filing a renewal

form within 30 days prior to the expiration of the

current reservation.

Articles of incorporation must be signed by an

incorporator (individual or entity). If filed on-

line, no copies are required. If filed by mail or

in person, the Secretary of State may require that

up to two exact or conformed copies be

delivered with the document. One exact paper

copy must be filed with the county clerk of the

county where the registered office of the

corporation is located.

A filing fee of $40 must be paid at the time the

articles are filed. In addition, Kentucky imposes

an organization tax (KRS 136.060), based on the

number of shares authorized. Checks are made

payable to the Kentucky State Treasurer.

Articles are effective at the time of filing unless

a later time and date (not later than the 90th day

after filing) are specified in the document.

A corporation may conduct business under a

name other than the name set forth in its articles

of incorporation if a certificate of assumed name

(KRS 365.015) is filed with the Secretary of

State. The certificate must also be filed with the

clerk of the county in which the registered agent

of the corporation is located. The certificate is

effective for five (5) years and must be renewed

within six (6) months prior to its expiration. An

assumed name must be distinguishable from the

names of other entities on file with the Secretary

of State.

44

Recordkeeping and Filings

Each corporation must file an annual report with

the Secretary of State between January 1 and

June 30 of each year which includes the

addresses of the registered office and the

principal office, the name of the registered

agent, and the names and business addresses of

all directors and principal officers. The failure

to timely file an annual report will result in the

administrative dissolution of a corporation by

the Secretary of State.

A corporation that changes the mailing address

of its principal office must file a statement of

change form with the Secretary of State setting

forth the corporation’s name, the mailing

address of its principal office prior to the

change, and the new mailing address of its

principal office.

KRS 271B.16-010(5) describes the records a

corporation must keep at its principal office.

The required records include its articles; bylaws;

resolutions adopted by the board of directors

creating one or more class or series of shares and

fixing their relative rights, preferences and

limitations; minutes and records of actions taken

by the shareholders for the past three years;

written communications to shareholders within

the past three years, including financial

statements; a list of the names and business

addresses of the current directors and officers;

and the corporation’s most recent annual report

to the Secretary of State. The records must be

maintained in written form or a form capable of

conversion into written form within a reasonable

time.

Board of Directors

A corporation with more than 50 shareholders

must have a board of directors. If the

corporation has fewer than 50 shareholders, it

may in its articles of incorporation dispense with

the board and provide for an alternate system of

governance. Qualifications for directors may be

set forth in the articles of incorporation or the

bylaws. Directors are elected by a plurality of

votes unless cumulative voting is required by the

articles of incorporation.

The initial board of directors may be (but is not

required to be) named in the articles of

incorporation. If not so named, the incor-

porator(s) elect the directors at the organiza-

tional meeting.

The board must consist of one or more

individuals, the exact number to be specified or

fixed in accordance with the articles of

incorporation or bylaws. Regularly scheduled

meetings of the board may be held without

further notice, but special meetings must be

preceded by at least two days’ notice of the date,

time, and place of the meeting unless otherwise

provided in the articles of incorporation or

bylaws. Directors may waive notice by

45

delivering a signed waiver to the corporation.

Attendance at a meeting will waive notice unless

the director objects to the meeting and does not

vote for action taken at the meeting. Directors

may act without a meeting by written consent of

all the directors unless the articles of

incorporation or bylaws provide otherwise.

Officers

The board of directors elects the officers

described in the bylaws of the corporation. An

officer must have responsibility for preparing

minutes of directors’ and shareholders’ meetings

and for authenticating corporate records.

Shares and Shareholders

The articles of incorporation must state the class

or classes of shares and the number of shares of

each class authorized to be issued. The

corporation must have one or more classes of

shares that have unlimited voting rights and that

are entitled to receive the net assets of the

corporation upon dissolution. The articles may

authorize the board of directors to determine the

preferences, limitations and relative rights of any

class of shares or series within a class before

issuance. Shareholders have no preemptive

rights to acquire unissued shares unless provided

in the articles of incorporation, or unless the

corporation existed on January 1, 1989 and its

articles were silent at that time as to preemptive

rights.

The board of directors may authorize shares to

be issued for consideration consisting of any

tangible or intangible property or benefit to the

corporation, including cash, promissory notes,

services performed, contracts for services to be

performed, or other securities of the corporation.

The board must determine that the consideration

to be received for the shares is adequate.

Shareholders are liable to the corporation or its

creditors only for the consideration for which the

shares were authorized to be issued, absent an

agreement by the shareholder to guarantee

obligations of the corporation or unless a court

finds that the corporate form should be pierced.

Annual meetings of shareholders must be held as

provided in the bylaws. Special meetings of

shareholders may be called by the board of

directors or the persons authorized to do so in

the articles of incorporation or bylaws, or on

written demand of the holders of 1/3 of the votes

entitled to be cast on any issue proposed to be

considered (or such higher or lower number of

votes as is contained in the articles of

incorporation). Shareholders may act without a

meeting by written consent of all the

shareholders. However, the articles of

incorporation may authorize the taking of action

without a meeting by shareholders representing

not less than 80% of the votes entitled to be cast

on the action (except election of directors if by

cumulative voting), and prompt notice of the

46

taking of the action must be given to

shareholders entitled to vote who did not consent

in writing. Notice of an annual or special

meeting must be given not less than 10 nor more

than 60 days before the meeting, and notice of a

special meeting must include a description of the

purpose of the meeting. Notice by electronic

transmission is permitted and is effective when

electronically transmitted in a manner

authorized and in accordance with the

shareholder's instructions, if any. A

shareholder may waive notice before or after the

meeting by delivering a signed written waiver to

the corporation.

Change in Control; Sale of Assets; Conversion

The Kentucky Business Corporation Act

provides procedures for approving certain

fundamental corporate transactions, including

mergers, share exchanges, and sales of

substantially all of the assets of a corporation.

One or more corporations may merge into

another corporation if the board of directors of

each corporation adopts and the shareholders (if

required) approve a plan of merger. A

corporation may acquire all of the outstanding

shares of one or more classes or series of another

corporation if the board of directors of each

corporation adopts and the shareholders of the

corporation whose shares are to be acquired

approve a plan of exchange. The board must

recommend the plan to the shareholders (absent

a conflict of interest or other special

circumstances) and may condition its submission

of the plan of merger or exchange on any basis.

Unless the articles of incorporation or the board

of directors require a greater vote or a vote by

voting groups, the plan must be approved by a

majority of the votes of each voting group

entitled to vote be cast on the plan by that voting

group.

Separate voting by voting groups will be

required (a) on a plan of merger if it contains a

provision that, if contained in a proposed

amendment to the articles of incorporation,

would require action by separate voting groups,

and (b) on a plan of exchange by each class or

series of shares included in the exchange, with

each class or series constituting a separate voting

group.

No action by shareholders of the surviving

corporation is required on a plan of merger if the

number of voting shares or participating shares,

respectively, outstanding after the merger will

not exceed by more than 20% the total number

of such shares outstanding before the merger.

A parent corporation owning at least 90% of the

outstanding shares of each class of a subsidiary

corporation may merge the subsidiary into itself

without approval of the shareholders of the

parent or the subsidiary. The parent may not

deliver articles of merger to the Secretary of

47

State for filing until at least 30 days after the

date it mailed a copy of the plan of merger to

each shareholder of the subsidiary who did not

waive the mailing requirement.

One or more foreign corporations may merge or

enter into a share exchange with one or more

Kentucky corporations. A merger must be

permitted by the state or country under whose

law the foreign corporation is incorporated. In a

share exchange, the corporation whose shares

will be acquired must be a Kentucky

corporation. The exchange is permitted whether

or not the exchange is permitted under the laws

of the state or country under whose law the

acquiring corporation is incorporated.

One or more Kentucky or foreign limited

liability companies or limited partnerships may

merge with one or more Kentucky corporations

if the merger is permitted by the laws of the state

or country under whose laws each foreign

limited liability company or limited partnership

is formed.

Articles of merger or share exchange must be

filed by the surviving or acquiring corporation

with the Secretary of State and county clerk of

the county in which the corporation’s registered

office is located. A merger or share exchange

takes effect on the effective date of the articles

so filed. The articles may specify a delayed

effective time and date.

The sale, lease, exchange, or disposition of all or

substantially all of the property of a corporation

other than in the usual course of business

requires the recommendation of the board of

directors (absent a conflict of interest or other

special circumstance) and the approval of the

shareholders of the selling corporation. The

board may condition its submission of the

proposed transaction on any basis. Unless the

articles of incorporation or the board of directors

require a greater vote or a vote by voting groups,

the transaction must be approved by a majority

of the votes entitled to be cast on the transaction.

Kentucky has adopted business combination

statutes (KRS 271B.12-200 to 271B.12-230),

which limit the ability of “interested

shareholders” of a company (i.e., parties who

acquire 10% of a company’s stock) to engage in

business combinations with the company. The

statutes provide for a five-year standstill on

business combinations with interested

shareholders that are not approved by a majority

of the directors who were independent directors

at the time the interested shareholder became an

interested shareholder. In addition, any business

combination with an interested shareholder must

be approved by a majority of the independent,

continuing directors unless the business

combination is approved by a supermajority vote

of shareholders. The voting requirement does

not apply if certain conditions are met, including

conditions relating to the amount of the

48

consideration in the business combination

transaction.

Generally, Kentucky’s business combination

statutes do not apply to companies with less than

500 shareholders unless the company’s articles

of incorporation provide otherwise.

A corporation may be converted into a limited

liability company (“LLC”). A plan of

conversion must be approved by the board of

directors and the shareholders of the corporation

and must set forth, among others, the terms and

conditions of the conversion and the manner of

converting the corporation’s shares of stock into

membership interests, obligations or other

securities of the LLC, cash, or other property, or

a combination thereof.

The conversion of a corporation into an LLC is

accomplished by filing articles of organization

for the resulting LLC. A corporation converted

into an LLC is deemed to be the same entity that

existed before the conversion. All assets, rights,

liabilities, and obligations of the corporation

continue by operation of law as the assets,

rights, liabilities and obligations of the resulting

LLC.

Dissenters’ Rights

A shareholder of a Kentucky corporation is

entitled to dissent when the following corporate

actions are taken:

a merger, where shareholder approval is

required or a 90% owned subsidiary

merges into its parent;

a share exchange;

a sale of all or substantially all of a

corporation’s assets other than in the

usual and regular course of business,

except in the case of a sale pursuant to

court order or a sale for cash pursuant to a

plan by which all or substantially all of

the net proceeds of the sale will be

distributed to the shareholders within one

year;

certain amendments to the articles of

incorporation which adversely affect the

dissenting shareholders’ rights;

the conversion of the corporation into an

LLC;

certain transactions subject to Kentucky’s

business combination statutes; and

any action taken pursuant to a shareholder

vote to the extent the articles of

incorporation, bylaws or a board

resolution provides dissenters’ rights.

A corporation must provide written notice to its

shareholders that dissenters’ rights are available

in accordance with the statutes. The corporation

must send notice to the dissenting shareholder

49

no later than 10 days after the action was

authorized. A dissenting shareholder must notify

the corporation in writing of his or her intention

to demand payment and must not vote in favor

of the proposed action. The dissenter must then

demand payment, certify his beneficial

ownership of the shares, and deposit his stock

certificates in accordance with that notice. The

corporation must notify the dissenter of its

estimate of the fair value of the shares, provide

certain financial information, and pay its

estimated fair value plus accrued interest. A

dissatisfied dissenter has 30 days to notify the

corporation of his or her estimate of fair value

and demand payment of his estimate. If the

demand is not settled, the corporation must

commence judicial appraisal proceedings to

determine the fair value of the dissenter’s shares.

Dissolution

A corporation may be dissolved by action of its

board of directors and shareholders. The board

must recommend dissolution (absent a conflict

of interest or other special circumstance), and

submit it to the shareholders for their approval.

Unless the articles of incorporation or the board

require a greater vote or a vote by voting groups,

the proposal must be adopted by a majority of all

votes entitled to be cast. Articles of dissolution

must be filed with the Secretary of State and the

corporation is dissolved upon the effective date

of the articles.

A dissolved corporation continues its corporate

existence solely for the purpose of winding up

and liquidating its business and affairs. Known

claims against the corporation may be disposed

of by notifying the corporation’s known

claimants in writing of the dissolution after the

effective date. The notice must describe the

information to be included in a claim, state a

deadline by which the corporation must receive

the claim and a mailing address where the claim

can be sent and state that the claim will be

barred if not received by the deadline.

A dissolved corporation may also publish notice

of dissolution in a newspaper of general

circulation in the county of the corporation’s

principal office and request that persons with

claims present them in accordance with the

notice and state that the claim will be barred

unless a proceeding to enforce the claim is

commenced within two years after the

publication date of the notice. Notice by

publication bars claimants who did not receive

written notice, claimants whose claims are

submitted but not pursued, and contingent

claims.

Dissolution authorized by the corporation may

be revoked within 120 days after the effective

date. Revocation must be authorized in the same

manner as the dissolution, and articles of

revocation must be filed with the Secretary of

State.

50

The Secretary of State may commence a

proceeding to administratively dissolve a

corporation if the corporation fails to file its

annual report on or before the due date, it is

without a registered agent or office for 60 days

or more, it fails to notify the Secretary of State

within 60 days after the registered agent or

registered office has changed, or its period of

duration has expired. A corporation that has

been administratively dissolved may apply to the

Secretary of State for reinstatement. If the

Secretary of State determines that the

application is complete and correct, he or she

will send the corporation a copy of a certificate

of existence that recites the effective date of

reinstatement. A reinstatement will relate back

to the effective date of the administrative

dissolution. A corporation will not be reinstated

if it has taken action to wind up and liquidate its

business affairs and notify claimants.

A corporation may be dissolved by the circuit

court in a proceeding by the attorney general, a

shareholder, a creditor, or the corporation.

Foreign Corporations

No foreign corporation is entitled to transact

business in Kentucky until it has obtained a

certificate of authority from the Secretary of

State. A foreign corporation transacting

business in Kentucky without a certificate of

authority is prohibited from maintaining a

proceeding in any court in Kentucky until it

obtains a certificate of authority. In addition, it

is liable for a civil penalty of $2 for each day,

that it transacts business in Kentucky without a

certificate of authority. Each foreign

corporation authorized to transact business in

Kentucky must continuously maintain a

registered agent and registered office in

Kentucky.

NONPROFIT CORPORATIONS

The Kentucky Nonprofit Corporation Acts, KRS

273.161 et seq., govern the formation, operation,

and dissolution of nonprofit corporations. In

many respects, nonprofit corporations are

similar to for-profit corporations. However, no

part of the income or profit of a nonprofit

corporation is distributable to its members,

directors, or officers, and instead of

shareholders, a nonprofit corporation may, but is

not required to, have members.

The articles of incorporation, among other

things, must state the purpose for which the

corporation is being organized, which may be

for any lawful purpose including charitable,

scientific, religious, and educational purposes.

A nonprofit corporation must have no fewer than

three directors and the names and mailing

addresses of the initial directors must be set

forth in the articles of incorporation. If the

corporation intends to obtain exemption from

federal income taxation, the articles of

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incorporation must conform with applicable

federal statutes and regulations.

A nonprofit corporation may have one or more

classes of members or may have no members. If

the corporation has members, the qualifications

and rights of the members must be set forth in

the articles of incorporation or bylaws. The

rights of members to vote may be limited,

enlarged or denied altogether to the extent

specified in the articles of incorporation or

bylaws. Unless members’ voting rights are so

limited, enlarged or denied, each member will be

entitled to one vote on each matter submitted to

a vote of the members. Members may vote in

person or, unless the articles of incorporation or

bylaws provide otherwise, by proxy.

If a nonprofit corporation has no members or its

members have no right to vote, the directors will

have the sole voting power.

Bylaws of a nonprofit corporation must be

adopted by its board of directors, and the power

to amend the bylaws will be vested in the board

unless otherwise provided in the articles of

incorporation or bylaws.

Officers are elected in the manner and for terms

not exceeding three years as described in the

articles of incorporation or bylaws. In the

absence of such a provision, officers are elected

annually by the board of directors. The bylaws

must delegate to one officer the responsibility

for preparing minutes of directors’ and

members’ meetings and for authenticating

corporate records.

The Kentucky Nonprofit Corporation Acts

provide procedures for approval of certain

fundamental corporate transactions, including

mergers, consolidations and sales of

substantially all of the assets of a corporation.

Two or more corporations may merge into one

of the corporations or consolidate into a new

corporation if the board of directors of each

corporation adopts (and the members if required

approve) a plan of merger or consolidation, as

applicable. If members may vote on the merger

or consolidation, the plan of merger or

consolidation must be adopted by at least two-

thirds of the votes that members present at the

meeting or represented by proxy are entitled to

cast. If a nonprofit corporation has no members,

or no members are entitled to vote, the plan of

merger or consolidation must be adopted by a

majority of the directors in office.

One or more foreign nonprofit corporations may

merge or consolidate with one or more Kentucky

nonprofit corporations, if the merger or

consolidation is permitted under the laws of the

government under which the corporation is

formed.

Articles of merger or consolidation must be filed

with the Secretary of State and county clerk of

52

the county in which the corporation’s registered

office is located.

The sale, lease, exchange, mortgage, pledge, or

other disposition of all or substantially all of the

property or assets of a nonprofit corporation

requires the approval of the board of directors

and the approval of the members, if any, entitled

to vote thereon. The board must recommend the

sale and direct it to be submitted to a vote of the

members. If members may vote on the

transaction, it must be approved by at least two-

thirds of the votes that members present at the

meeting or represented by proxy are entitled to

cast. If a nonprofit corporation has no members,

or no members are entitled to vote thereon, the

transaction must be adopted by a majority of the

directors in office.

A for-profit corporation organized under KRS

Chapter 271B may be converted into a nonprofit

corporation organized under the Kentucky

Nonprofit Corporation Acts by filing amended

and restated articles of incorporation. However,

a nonprofit corporation may not be converted

into a for-profit corporation organized under

KRS Chapter 271B.

A foreign nonprofit corporation may apply for a

certificate of authority to transact business from

the Kentucky Secretary of State. Each foreign

corporation authorized to transact business in

Kentucky must continuously maintain a

registered agent and registered office in

Kentucky.

A nonprofit corporation may be dissolved by

action of its board of directors and its members

entitled to vote thereon, if any. The board must

recommend the dissolution and direct that the

dissolution be submitted to a vote of the

members, if required. If members may vote on

the dissolution, it must be approved by at least

two-thirds of the votes that members present at

the meeting or represented by proxy are entitled

to cast. If a nonprofit corporation has no

members, or no members are entitled to vote

thereon, the dissolution must be adopted by a

majority of the directors in office. Articles of

dissolution must be filed with the Kentucky

Secretary of State, and the corporation is

dissolved upon the effective date of the articles.

Upon dissolution, assets of the nonprofit

corporation must be distributed as follows: All

liabilities and obligations of the corporation

must be paid or provided for. Any assets held

by the corporation upon condition requiring

return, transfer, or conveyance must be returned,

transferred, or conveyed in accordance with such

requirements. Assets held by the corporation

subject to limitations permitting their use for

charitable, religious, eleemosynary, benevolent,

educational, or other similar purposes must be

transferred to corporations or organizations

engaged in activities substantially similar to

53

those of the dissolving corporation. Other assets

must be distributed in accordance with the

articles of incorporation or bylaws to the extent

they provide for distribution to others. Any

remaining assets may be distributed to nonprofit

organizations as specified in a plan of

distribution adopted by the board of directors or

members, as applicable.

Dissolution authorized by the corporation may

be revoked any time prior to the filing of articles

of dissolution with the Secretary of State by a

vote of the directors and members in the same

manner as approval of the dissolution was

adopted.

The Secretary of State may administratively

dissolve a nonprofit corporation if the

corporation fails to file its annual report on or

before the due date, it is without a registered

agent or office for 60 days or more, it fails to

notify the Secretary of State within 60 days after

the registered agent or registered office has

changed, or its period of duration has expired. A

corporation that has been administratively

dissolved may apply to the Secretary of State for

reinstatement. If the Secretary of State

determines that the application is complete and

correct, he will send the corporation a copy of a

certificate of existence that recites the effective

date of reinstatement. A reinstatement will

relate back to the effective date of the

administrative dissolution.

A nonprofit corporation may be dissolved by the

circuit court in a proceeding by the attorney

general when it is established that the

corporation is guilty of abuse or misuse of its

corporate powers or has become detrimental to

the interest and welfare of the Commonwealth of

Kentucky or its citizens, the corporation

procured its articles of incorporation through

fraud, the corporation failed to file its annual

report or to appoint or maintain a registered

agent, or the corporation failed to file a

statement of change of its registered agent with

the Secretary of State.

PROFESSIONAL SERVICE CORPORA-TIONS

Professional service corporations (“PSCs”) are

formed under the provisions of KRS Chapter

274, and, except as KRS Chapter 274 otherwise

provides, have the same powers, authority,

duties, and liability as corporations formed

under KRS Chapter 271B. PSCs may be

incorporated by individuals who are licensed to

render the same professional service or related

professional services. A “professional service”

is any type of personal service to the public

which requires as a condition precedent to the

rendering of the service the obtaining of a

license or other legal authorization.

The articles of incorporation of a PSC must

contain, among other things, the designation of

the profession to be practiced through the PSC,

54

the names and addresses of the original

shareholders, and a statement by the

incorporator(s) that each incorporator,

shareholder, not less than ½ of the directors, and

each officer other than the secretary and

treasurer is a “qualified person,”, i.e., a natural

person, general partnership, limited liability

company, limited liability partnership, or PSC

which is eligible to own shares issued by a PSC.

A PSC is jointly and severally liable with the

tortfeasor, to the full value of its assets, for any

negligent or wrongful acts or actionable

misconduct committed by its officers,

shareholders, agents, or employees while they

are engaged on behalf of the PSC in the

rendering of professional service; however, no

shareholder, director, officer, or employee of a

PSC will be personally liable for the negligence,

wrongful acts, or actionable misconduct of any

other shareholder, director, officer, agent, or

employee, nor shall they be personally liable for

the contractual obligations of the PSC. Any

foreign PSC granted a certificate of authority to

conduct business in Kentucky will be subject to

the same liability levels.

The articles of incorporation, bylaws or a private

agreement may provide for the purchase or

redemption of shares within a period not to

exceed one year after the death or

disqualification of a shareholder, or the purchase

of all of the shares of a shareholder desiring to

sell. If the corporation does not redeem the

stock within the one year period, then within 10

days following the end of such period the

president and/or secretary of the corporation

must give notice of the failure to redeem to the

Kentucky Secretary of State and upon receipt of

such notice by the Secretary of State, the charter

of the corporation will be immediately void. In

the absence of a provision in the articles of

incorporation, bylaws, or private agreement, a

statutory mechanism is provided for the

redemption of shares of a PSC.

COOPERATIVE CORPORATIONS AND ASSOCIATIONS

Cooperative Corporations

These corporations are formed under

KRS 272.010 to 272.044. A “cooperative

corporation” is a business concern that

distributes the net profit of its business by first

paying a fixed dividend upon its stock, if any,

and then prorating the remainder of its profits as

patronage refunds to its stockholders, members

or customers, as provided in bylaws. Except as

such statutes otherwise provide, a cooperative

corporation organized with shares is subject to

the provisions of KRS Chapter 271B, and a

cooperative corporation organized with

memberships and operated on a nonprofit basis

is subject to the provisions of KRS 273.161 to

273.390. Any three or more Kentucky residents

may organize a cooperative corporation to

conduct any agricultural, dairy, mercantile,

55

mining, manufacturing, mechanical, service, or

other lawful business except organizations

subject to Kentucky banking laws.

Other Associations

Agricultural cooperative associations are formed

under KRS 272.101 to 272.345. These

associations are deemed to be nonprofit

corporations since their primary objective is not

to make profits, pay dividends or invest capital,

but to provide service and a means whereby the

members may have the economic advantage of

cooperative action, including a reasonable and

fair return for the products or service. At least

five persons engaged in the production of

agricultural products, or one or more associates

of such producers, may form an association,

with or without capital stock. The statutes

address the preparation and filing of articles of

incorporation, the adoption of bylaws,

membership qualifications, member and director

meetings, the election of officers, mergers and

other fundamental transactions, and dissolution.

Cooperative livestock protective associations are

formed under KRS 272.360 to 272.510. These

associations are formed for the purpose of

affording protection to the farmers in a particular

locality in the raising of livestock. Any 20 or

more farmers who are residents of not more than

five Kentucky counties may form a nonprofit

livestock protective corporation without capital

stock. The statutes address the preparation and

filing of articles of incorporation, the adoption

of bylaws, member and director meetings, and

the election of officers.

PARTNERSHIPS

Note

Kentucky’s statutes governing general

partnerships, limited partnerships, and registered

limited liability partnerships were amended

effective July 12, 2006. The discussion in this

section covers the new partnership statutes, the

Kentucky Revised Uniform Partnership Act

(2006) (“KY RUPA”), KRS 362.1-101 to KRS

362.1-1205, and the Kentucky Uniform Limited

Partnership Act (2006) (“KY ULPA”), KRS

362.2-102 to KRS 362.2-1207. Consult the

prior statutes listed for each type of partnership

below for the law governing partnerships formed

before July 12, 2006 that have not elected to be

governed by the new partnership statutes.

Overview

A partnership is defined as “an association of

two (2) or more persons to carry on as co-

owners a business for profit formed under [the

new Kentucky partnership statutes], predecessor

law, or comparable law of another jurisdiction.”3

Under Kentucky law, a partnership can take the

form of a general partnership or a limited 3 KRS 362.1-101(10).

56

partnership. A general partnership may elect to

be treated as a limited liability partnership

(“LLP”), and a limited partnership may elect a

limited liability limited partnership (“LLLP”)

status. The distinction between the different

partnership forms is in the rights, duties, and

liabilities of the partners. A partnership form

might be chosen over other entity options due to

its inherent flexibility and the potential income

tax benefits arising out of the fact that

partnerships are flow-through entities for tax

purposes. With the advent of limited liability

companies, discussed below, a business can

have both the flexibility and tax benefits offered

by the partnership form as well as the liability

protection inherent in the corporate form.4

Nevertheless, and especially in the light of the

new liability protections offered by the new

Kentucky partnership statutes, the partnership

form may still be preferable if the parties want to

rely on the well-established body of case law

applicable to partnerships as opposed to the less

established body of case law applicable to

limited liability companies.

Once it is determined that a partnership is the

appropriate entity to form, it must be decided

4 See “Business and Personal Taxes” for a discussion of the Kentucky state income tax and the business entities to which it applies.

whether the partnership will be a general

partnership, limited partnership, LLP, or LLLP.

A general partnership will be an appropriate

entity choice where all partners wish to have the

right to take part in the management and control

of the partnership business, and where insulation

from the debts and obligations of the partnership

is not an important factor. In addition, the

general partnership form might be chosen to

avoid the more rigorous securities law regulation

of limited partnerships.

A limited partnership will be an appropriate

entity choice where one or more of the partners

desires to invest in the partnership without being

exposed to the debts and obligations of the

partnership.

An LLP will be an appropriate entity choice

when all partners wish to have the right to take

part in the management and control of the

partnership business but where insulation from

tort or contract liability caused by other partners

or agents of the partnership and other liabilities

of the partnership is desired.

An LLLP will be an appropriate vehicle when

the limited partnership form is appealing, but the

general partner(s) also want to be shielded from

liability for the debts and obligations of the

partnership.

57

General Partnerships

A general partnership is the basic partnership

form. As of July 12, 2006, newly-formed

Kentucky general partnerships are governed by

KY RUPA. A general partnership formed

before July 12, 2006 will continue to be

governed by and subject to prior law, the

Uniform Partnership Act of Kentucky, KRS

362.150 to KRS 362.360, unless the general

partnership makes an affirmative election to be

governed by KY RUPA. Certain filings made

by a general partnership with the Secretary of

State after July 12, 2006 will be deemed an

election to be governed by KY RUPA.

A general partnership is organized upon the

agreement of the partners. No filing with any

state or local office is required to establish a

general partnership. A partnership may make

various voluntary filings, known as statements,

with the Secretary of State. These voluntary

filings may be beneficial to the partnership by

giving notice of the occurrence of certain events.

Voluntary statements applicable to general

partnerships specifically provided for in KY

RUPA include: statement of partnership

authority, statement of denial, statement of

dissociation, statement of dissolution, and

statement of merger.

Although it is not a requirement under KY

RUPA, it is highly advisable that the partners in

a general partnership enter into a written

partnership agreement.

If a general partnership wishes to conduct its

business under an assumed name, it is required

to file a certificate of assumed name with the

Secretary of State. A separate certificate is

required for each assumed name. A certificate

of assumed name may be renewed, amended, or

withdrawn.

Subject to the provisions of the partnership

agreement, a general partnership is required to

keep its books and records at its chief executive

office. Each partner has the right to access such

books and records at any time.

Except as otherwise provided in the partnership

agreement, all partners have equal rights in the

management and conduct of the partnership

business. Each partner is considered an agent of

the partnership. All partners of a general

partnership are jointly and severally liable for

the obligations of the partnership unless

otherwise agreed.

A partner’s interest in a general partnership is

freely assignable, subject to any limitations

contained in the partnership agreement. Unless

otherwise agreed, an assignee is not entitled to

exercise the rights of a partner, but is merely

entitled to the economic benefits of the

partnership, i.e. income distributions and tax

allocations, in a manner similar to the assigning

58

partner. Unless otherwise agreed by the

partners, new partners, including previous

assignees of a partnership interest, may be

admitted as partners upon satisfaction of the

requirements for admission of new partners

contained in the partnership agreement or, if

none, KY RUPA.

A “dissociation” of a partner occurs when a

partner ceases to be associated with the carrying

on of the partnership’s business. KY RUPA

provides a list of events, the occurrence of which

cause a partner’s dissociation from a general

partnership. Such events include the withdrawal

or expulsion of a partner from the partnership,

the death or disability of a partner, or the

occurrence of an event specified in the

partnership agreement. Dissociation of a partner

does not automatically result in dissolution of

the partnership.

The consequences of a partner’s dissociation

should be thoroughly considered and anticipated

in the partnership agreement. Attention should

be given to the manner in which the dissociating

partner’s interest will be paid, the treatment of

the dissociating partner’s share of partnership

liabilities, and the manner in which the

partnership will continue and its business will be

conducted after dissociation.

A general partnership may be merged into

another general partnership or into a limited

partnership. A general partnership may be

converted into a limited partnership or a limited

liability company and then merged into other

entities pursuant to the statutes governing such

mergers.

“Dissolution” is the beginning of the process of

winding up the partnership. The partnership is

terminated when the winding up process is

complete. The events causing the dissolution of

a general partnership are listed in KY RUPA and

include, among others, the agreement of the

partners to dissolve the partnership, the

occurrence of an event specified in the

partnership agreement, or the judicial dissolution

of the partnership. The partnership continues

after its dissolution, but only for the purpose of

winding up its business.

If a dissolution is followed by a liquidation of

the partnership, any partnership assets are used

first to pay obligations to creditors (including, to

the extent allowed by law, partners who are

creditors) and any remaining assets are divided

among the partners according to their respective

distributable shares.

LLPs

LLPs are merely a form of general partnership;

therefore, LLPs are governed by the same laws

as general partnerships. If an LLP is formed on

or after July 12, 2006, it is governed by KY

RUPA. An LLP formed prior to July 12, 2006 is

governed by the Uniform Partnership Act of

59

Kentucky unless it affirmatively elects to be

governed by KY RUPA.

To form a Kentucky LLP, it is necessary to file a

statement of qualification with the Secretary of

State. Each year after its qualification an LLP

must file an annual report with the Secretary of

State. An LLP is also required to maintain a

registered office and a registered agent within

the Commonwealth of Kentucky.

The name of the LLP must contain the words

“Registered Limited Liability Partnership,”

“Limited Liability Partnership,” “RLLP,” or

“LLP.” An LLP may conduct its business under

an assumed name, and the certificate of assumed

name filing requirements are the same as those

for general partnerships.

A partnership may discontinue its LLP status by

filing a cancellation statement with the Secretary

of State. The cancellation only terminates the

partnership’s status as an LLP and does not

dissolve the partnership.

Although it is not a requirement under KY

RUPA, it is highly advisable that the partners in

an LLP enter into a written partnership

agreement which would be similar to that of a

general partnership. The LLP agreement should

include a provision whereby the partners consent

to the partnership’s LLP status and a provision

assigning to a specific partner the duty to

maintain such LLP status.

Partners in an LLP may have full and joint

management rights with respect to the LLP

business but are not jointly and severally liable

for partnership debts and obligations, regardless

of whether they arise in tort or in contract. The

partners of an LLP continue to have liability for

their own negligence, wrongful acts or

misconduct.

The recordkeeping requirements for an LLP, the

changes in LLP partner composition, the merger

or conversion of an LLP, the dissociation of a

partner in an LLP, and the dissolution of an LLP

are the same as those for general partnerships

discussed above.

Limited Partnerships

A limited partnership is a type of partnership

having one or more general partners and one or

more limited partners. Kentucky limited

partnerships formed on July 12, 2006 or later

will be subject to KY ULPA. Unless they elect

to be governed by KY ULPA, limited

partnerships formed before July 12, 2006 will be

subject to and governed by the Kentucky

Revised Uniform Limited Partnership Act, KRS

362.401 to KRS 362.546, and, to the extent not

inconsistent therewith, the Uniform Partnership

Act of Kentucky, KRS 362.150 to KRS 362.360.

Certain filings made by a limited partnership

with the Secretary of State after July 12, 2006

will be deemed an election to be governed by

KY ULPA (except with respect to certain

60

limited issues which will continue to be

governed by prior law such as the duration of the

limited partnership, dissolution of the limited

partnership, etc.).

To form a Kentucky limited partnership, it is

necessary to file a certificate of limited

partnership with the Secretary of State. Failure

to timely file a certificate of limited partnership

will likely cause the partnership to be treated as

a general partnership, thereby causing purported

limited partners to lose their limited liability

with respect to third parties. The certificate of

limited partnership may be amended as

necessary.

Each year after filing its certificate of limited

partnership a limited partnership must file an

annual report with the Secretary of State. A

limited partnership is also required to maintain a

registered office and a registered agent within

the Commonwealth of Kentucky.

The name of the partnership must contain

“Limited,” “Ltd.,” “Limited Partnership,” or

“LP.” A limited partnership may conduct its

business under an assumed name, and the

certificate of assumed name filing requirements

are similar to those for general partnerships.

Although it is not a requirement under KY

ULPA, it is highly advisable that the partners in

a limited partnership enter into a written

partnership agreement.

A limited partnership is required to keep its

books and records at its designated office.

General and limited partners have the right

access to such records upon satisfaction of

certain conditions as more particularly described

in KY ULPA.

A general partner’s rights and powers to manage

the affairs of a limited partnership are the same

as those of a partner in a general partnership.

General partners, similar to partners in a general

partnership, have joint and several liability for

all partnership obligations.

Unless otherwise agreed by the partners, a

limited partner does not have the right or the

power to act for or bind the limited partnership.

A limited partner has no personal liability,

beyond the limited partner’s capital contribution,

for obligations of the limited partnership solely

by reason of being a limited partner, even if the

limited partner participates in the management

and control of the limited partnership. The

protection from liability afforded a limited

partner extends only to the limited partnership’s

obligations and does not cover liability resulting

from the limited partner’s own negligence,

wrongful act, or misconduct.

A general or limited partner’s interest in a

limited partnership is freely assignable, subject

to any limitations contained in the partnership

agreement. Unless otherwise agreed, an

assignee is not entitled to exercise the rights of a

61

partner, but is merely entitled to the economic

benefits of the partnership, i.e. income

distributions and tax allocations, in a manner

similar to the assignor. Unless otherwise agreed

by the partners, new limited or general partners,

including previous assignees of a partnership

interest, may be admitted as partners upon

satisfaction of the applicable requirements for

admission of a new general or limited partner

contained in the partnership agreement or, if

none, KY ULPA. Transfer of a limited

partnership interest may be restricted under

federal or state securities laws.

KY ULPA provides a list of events, the

occurrence of which cause a general or limited

partner’s dissociation from a limited partnership.

Such events are similar to those causing the

dissociation of a partner in a general partnership.

Dissociation of a general or limited partner does

not automatically result in dissolution of the

limited partnership. As in the general

partnership setting, the consequences of a

partner’s dissociation should be thoroughly

considered and anticipated in the partnership

agreement. A dissociating partner in a limited

partnership does not have the right to receive a

final distribution in respect of his/her partnership

interest absent a provision in the partnership

agreement to the contrary. A limited partnership

must file an amendment to its certificate of

limited partnership upon the dissociation of a

general partner.

A limited partnership may be merged into a

general partnership, another limited partnership,

limited liability company or a corporation. A

limited partnership may be converted into a

general partnership or a limited liability

company.

The events causing the dissolution of a limited

partnership are listed in KY ULPA and are

generally similar to those for a general

partnership. The partnership continues after its

dissolution, but only for the purpose of winding

up its business.

If a dissolution is followed by a liquidation of

the limited partnership, any partnership assets

are used first to pay obligations to creditors

(including, to the extent allowed by law, partners

who are creditors) and any remaining assets are

divided among the partners according to their

respective distributable shares. When a limited

partnership is dissolved and its affairs wound up,

a statement of cancellation must be filed with

the Secretary of State.

A dissolved limited partnership may notify its

known claimants of its dissolution. If the notice

requirements are met and a claim is not received

by the limited partnership on or prior to the

deadline stated in the notice, or if the claimant

does not commence an enforcement proceeding

with respect to a claim rejected by the

partnership, then the claim against the dissolved

limited partnership is barred. KY ULPA

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outlines a similar procedure for barring other

claims against a dissolved limited partnership

through notice published in a newspaper of

general circulation in the county in which the

dissolved limited partnership’s principal or

registered office is located.

LLLPs

An LLLP is a form of limited partnership that

has elected special status under KY ULPA. An

LLLP formed on or after July 12, 2006 is

governed by KY ULPA. The prior Kentucky

partnership statutes did not provide an option for

a limited partnership to elect LLLP status.

To form a Kentucky LLLP, it is necessary to

provide in the certificate of limited partnership

that the limited partnership elects LLLP status.

Alternatively, a limited partnership that is

already in existence may amend its certificate of

limited partnership to include an LLLP status

election.

The name of the LLLP must contain “Limited

Liability Limited Partnership” or “LLLP.” An

LLLP may conduct its business under an

assumed name, and the certificate of assumed

name filing requirements are similar to those for

general partnerships.

Although it is not a requirement under KY

ULPA, it is highly advisable that the partners in

an LLLP enter into a written partnership

agreement which would be similar to that of a

limited partnership. The LLLP agreement

should include a provision whereby the partners

consent to the limited partnership’s LLLP status

and a provision assigning to a specific partner

the duty to maintain such LLLP status.

The rights and liabilities of general and limited

partners of an LLLP are generally the same as

those of a limited partnership. However, unlike

a general partner of a limited partnership, a

general partner of an LLLP is not personally

liable for obligations of the limited partnership

solely because he or she is a general partner.

Electing LLLP status allows both limited and

general partners to limit their liability while still

fully participating in the partnership business.

The recordkeeping requirements for an LLLP,

the changes in partner composition in an LLLP,

the merger or conversion of an LLLP, the

dissociation of a partner in an LLLP, and the

dissolution of an LLLP are the same as those for

limited partnerships discussed above.

LIMITED LIABILITY COMPANIES

Overview

Kentucky limited liability companies (“LLCs”)

are governed by the Kentucky Limited Liability

Company Act (the “KLLCA”).5 LLCs combine

5 KRS 275.001 to KRS 275.540.

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the benefits of both the corporate and

partnership forms into a single entity by

allowing limited liability for the owners of the

LLC as well as single level or partnership

taxation.6 One disadvantage to the use of LLCs

is that they are a fairly new type of entity, so

there is very little case law dealing with LLCs.

Organization

A Kentucky LLC is formed by filing of articles

of organization with the Secretary of State. The

LLC must appoint a registered agent for service

of process. The articles of organization must

also be filed with the office of the clerk of the

county where the LLC’s registered office is

located. The term of an LLC is perpetual, unless

the articles of organization specify otherwise.

The name of an LLC must contain the words

“Limited Liability Company” or its abbreviation

“LLC” or the words “Limited Company” or its

abbreviation “LC.” The name must also be

distinguishable from the names of other entities

on file with the Secretary of State. An LLC may

conduct its business under an assumed name and

the certificate of assumed name filing

requirements are the same as those for general

partnerships discussed above.

6 See “Business and Personal Taxes” for a discussion of the Kentucky state income tax and the business entities to which it applies.

The operating agreement of an LLC is the

agreement, oral or written, of the members of

the LLC as to the conduct of its business and

affairs. Although it is not a requirement under

the statutes, it is highly advisable that the

members enter into a written operating

agreement. The operating agreement is similar

to the bylaws of a corporation or the partnership

agreement of a partnership. Many of the

statutory provisions otherwise governing LLCs

may be modified in the operating agreement. If

an issue is not covered by the operating

agreement, KLLCA’s default provisions will

control.

Recordkeeping

An LLC is required to maintain the following

records at its principal office or other location as

specified in the operating agreement: (i) a list of

each current and past member and manager, if

any, (ii) copies of the articles of organization of

the LLC, (iii) copies of all federal, state, and

local tax returns of the LLC, and (iv) copies of

the LLC operating agreement. If the following

have not been set forth in the operating

agreement, an LLC must also keep copies of

(a) the amount of each member’s capital

contribution to the LLC, (b) events that would

trigger the LLC’s dissolution, and (c) any other

written documents prepared pursuant to a

requirement in the operating agreement. LLCs

64

must file an annual report with the Secretary of

State.

Governance

An LLC may be managed by either its members

or by managers appointed by the members.

Unless the articles of organization specify

otherwise, the management powers remain with

the members. If the LLC has managers, they are

not required to be members of the LLC, nor are

they required to be natural persons. The

management of an LLC is protected from

liability to the LLC or the members for any

action taken or failure to act on behalf of the

LLC unless the act or omission constitutes

wanton or reckless misconduct. Unless

otherwise agreed by a majority of the

disinterested managers or by a majority of the

members, management must account to the LLC

and turn over to the LLC any personal profit or

benefit it derives from transactions connected

with the conduct or winding up of the LLC or

any use of the property of the LLC.

Member(s)

A member of an LLC (or an owner of a

membership interest in an LLC) is anyone who

has been admitted to membership in the LLC.

An LLC may have a single member or multiple

members. Individuals, all types of partnerships,

other LLCs, corporations, trusts, estates,

associations, or any other legal entities may be

members of an LLC. Unlike the partnership

form, a member in a manager-managed LLC has

no duties to the LLC or the other members

solely by reason of acting in his or her

capacity as a member.

Changes in Member Composition7

A member ceases to be a member of an LLC

upon the occurrence of a number of events,

including, without limitation, his or her

withdrawal if withdrawal is permitted in the

operating agreement, removal, bankruptcy,

death, or incompetence or if the member is an

entity, upon its termination or dissolution. A

member may freely assign his or her

membership interest in an LLC to any third

party. Generally, an assignee is not entitled to

exercise the rights of a member, but is merely

entitled to the economic benefits of the LLC, i.e.

income distributions and tax allocations, in a

manner similar to the assigning member.

Assignees may be admitted as members of an

LLC by a vote of the majority of the members.

New members acquiring their interest directly

from the LLC may be admitted as members by a

vote of all the members.

7 All of the provisions described in this section are default provisions under KLLCA. They may be modified in the operating agreement of the LLC.

65

Limited Liability

No member, manager, employee or agent of an

LLC will be held personally liable for a debt,

obligation or liability of the LLC or for the acts

or omissions of any other person affiliated with

the LLC. A member, manager, employee, or

agent of an LLC remains personally liable for

his/her own negligence or misconduct.

Similarly, professionals who provide services

through an LLC will be personally liable for

their own negligence, despite the fact that the

professional services were provided through the

LLC. Liability may also arise when certain

provisions of KLLCA are violated (for example,

when members authorize distributions from the

LLC which would render the LLC unable to pay

its obligations as they become due). Finally, it is

possible for the members of an LLC to be held

personally liable for the debts of the LLC under

a theory analogous to the theory of “piercing the

corporate veil” used in the corporate context.

Mergers and Conversions

An LLC may merge with any other business

entity, whether organized under the laws of

Kentucky or any other jurisdiction regardless of

which one is the surviving entity. Such mergers

are effected pursuant to a plan of merger which

must be approved, unless otherwise provided in

the operating agreement, by a majority of the

LLC members and by the other entity. LLC

mergers are governed by KRS 275.345 to KRS

275.365.

An LLC may enter into share exchanges with a

domestic or foreign corporation pursuant to KRS

275.500.

An LLC may be converted into a limited

partnership in accordance with the procedures

set forth in KRS 362.2-1102, which include the

adoption of a plan of conversion.

Dissolution

An LLC may be dissolved and wound up

(i) upon the expiration of its term, (ii) upon the

consent of the majority of the members, unless

otherwise provided in the operating agreement,

(iii) by judicial order, and (iv) administratively

by the Secretary of State. The dissolution is

effected by filing articles of dissolution with the

Secretary of State. The dissolution does not

automatically terminate the existence of the

LLC, but, instead, dissolution requires the

members to wind up the company’s affairs.

Foreign Limited Liability Companies

An LLC organized under the laws of another

jurisdiction may do business in Kentucky as a

foreign LLC by obtaining from the Secretary of

State a certificate of authority to do business in

Kentucky. Certain activities (for example,

simply owning, without additional activity, real

or personal property, creating or acquiring

66

indebtedness, etc.) do not constitute “doing

business” in Kentucky and therefore do not

require that the LLC obtain a certificate of

authority from the Secretary of State. A foreign

LLC, having a valid certificate of authority to

conduct business in Kentucky, has the same

rights, privileges, duties, restrictions, penalties,

and liabilities as an LLC organized under

Kentucky law.

Professional Limited Liability Companies

Professional limited liability companies

(“PLLCs”) are LLCs organized for the purposes

that include, but are not limited to, the provision

of one or more professional services.8

Professional services are personal services

rendered by certain professionals such as

doctors, dentists, pharmacists, veterinarians,

engineers, architects, attorneys, accountants, and

others identified in KRS 275.015. With minor

exceptions, PLLCs are governed by the same

statutory provisions as LLCs. The limitations on

the personal liability of members, managers,

employees, or agents of a PLLC for a debt

obligation or liability of the PLLC or for the acts

or omissions of any other person affiliated with

the PLLC are the same as those for a regular

LLC.

8 KRS 275.015.

Non-profit LLCs

The KLLCA was amended in 2007 to allow for

the creation of non-profit LLCs. A nonprofit

LLCs may have members and/or managers, but

may not have or issue membership interests and

may make no distributions of any part of its

income to its members and/or managers.

Additional provisions address a nonprofit LLC’s

loans to members and/or managers, its

dissolution and liquidation, and the distributions

of its assets upon dissolution.

If the nonprofit LLC intends to obtain

exemptions from federal income taxation, its

articles of organization must conform with

applicable federal statutes and regulations.

SOLE PROPRIETORSHIPS

There are no statutory provisions governing

Kentucky sole proprietorships. No filing with

any state or local office is required to establish a

sole proprietorship. If a sole proprietor wishes

to conduct his business under a name different

from his or her real name, he is required to file a

certificate of assumed name with the Secretary

of State.9 The assumed name must be

distinguishable from the names of other entities

9 KRS 365.015.

67

on file with the Secretary of State.10 Sole

proprietors are personally liable for the

obligations of the sole proprietorship business

and could potentially be liable for the acts of

employees or agents.

BUSINESS TRUSTS

Overview

A business trust is an express trust created by a

written declaration of trust whereby property is

conveyed to one or more trustees, who hold and

manage the property for the benefit and profit of

the holders of transferable certificates

evidencing the beneficial interest in the trust

estate. One common form of a business trust is

the “real estate investment trust.” Kentucky

business trusts are governed by KRS 386.370 to

KRS 386.4434.

Establishment

A business trust is established by a declaration

of trust executed by one or more trustees for any

lawful purpose, including acquiring, managing,

improving, leasing, dealing in, selling real or

personal property of any kind, receiving the

income therefrom, and investing or distributing

the income to the beneficial owners in

accordance with the terms of the declaration of

trust. The declaration of trust must be recorded 10 KRS 365.015.

in the office of the Secretary of State and at the

office of the clerk of the county where the

business trust’s principal office is located. All

property in a business trust is held in the name

of the trustee. A business trust is required to

have certificates of beneficial ownership issued

by the trustee. The certificates of beneficial

ownership are transferable in the same manner

as stock certificates of a corporation. Business

trusts established under the laws of another

jurisdiction are valid in Kentucky as long as they

comply with the statutes governing Kentucky

business trusts.

Kentucky’s business trust statutes impose certain

legal requirements similar to those imposed

upon corporations and other business entities.

For example, a business trust is required to

continuously maintain a registered office and

registered agent in Kentucky and to file annual

reports with the Secretary of State, and may be

administratively dissolved if it fails to file its

annual report or maintain a registered agent or

registered office.

A foreign business trust must obtain a certificate

of authority before transacting business in

Kentucky. The certificate of authority of a

foreign business trust may be revoked in certain

instances, including failing to file its annual

report or to maintain a registered agent or

registered office in Kentucky.

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JOINT VENTURES

Joint ventures are not considered separate

business entities in Kentucky. A joint venture

involves two or more parties working together to

complete one or more business goals or

transactions. Generally, a joint venture will be

achieved through one of the business entity

forms discussed above, depending on the needs

of the parties involved. If no entity is chosen by

the parties they will be considered partners in a

general partnership.

LABOR AND EMPLOYMENT

69

Leila G. O’Carra Lexington, Kentucky www.wyattfirm.com

The following highlights key principles of

Kentucky statutory and decisional law affecting

employment relationships.

RIGHT TO WORK

Kentucky is not a right to work state. Federal

law authorizes states to enact right-to-work laws

to bar labor unions from requiring employees to

join or pay fees to a union. Since Kentucky has

not enacted a right-to-work law, if an employer

has a union, the union may require an employee,

as a condition of employment, to join the union

or pay fees to the union.

EMPLOYMENT AT WILL

Kentucky recognizes the doctrine of

employment at will. In an often-quoted passage

from Firestone Textile Company Division,

Firestone Tire & Rubber Company v. Meadows,

666 S.W.2d 730, 731 (Ky. 1983), Kentucky’s

Supreme Court stated that “ordinarily an

employer may discharge his at-will employee

for good cause, for no cause, or for a cause that

some might view as morally indefensible.” This

concept is consistent with the basic legal rule

that a contract that does not specify a particular

duration can be terminated at the will of either

party. E.g. Kirby v. Scroggins, 246 S.W.2d 453

(Ky. 1952).

The at-will doctrine, however, is subject to

numerous exceptions, including but not limited

to the following:

The operation of state and federal

employee-protection laws, including but

not limited to Title VII, The Americans

with Disabilities Act, the Age

Discrimination in Employment Act, the

Family and Medical Leave Act, and KRS

Chapter 344.

Express or implied contract. An express

contract for a specific term obviously

alters the at-will relationship. In addition,

implied contracts may be based upon

engagement letters, specific oral

promises, language in handbooks, and the

like.

Public policy. The at-will doctrine is no

defense to the employer if an employee

has been terminated for refusing to violate

the law during the course of employment

or for exercising other legally recognized

rights or privileges.

Handbook/Manual/Policy Statements. An

employer’s handbooks, personnel

manuals, or written policies may alter an

70

employee’s at-will status, depending upon

particular facts and circumstances.

Employers commonly use prominent

disclaimers in such documents stating that

they are not contracts and not intended to

alter the at-will relationship.

Employers in Kentucky are not required by law

to provide employees with reasons for

termination, or with prior notice of termination,

though the employer’s own written policies or

progressive discipline practices may cause the

employer to be held to the standards those

policies or practices have established. Kentucky

employers are required to furnish information

about terminated employees, including reasons

for termination, in administrative proceedings to

determine whether a terminated employee is

eligible for unemployment insurance benefits.

EMPLOYMENT DISCRIMINATION

The Kentucky Civil Rights Act, modeled after

the federal Title VII, prohibits workplace

discrimination on the basis of race, color,

religion, national origin, sex, age (over 40), and

disability. Additionally, the Act prohibits

discrimination against smokers (so long as the

smoker complies with any workplace policy

concerning smoking). The Act applies to

employers with eight or more employees in the

state during twenty or more weeks in the current

or preceding calendar year. For claims of

discrimination due to disability, the Act applies

to employers with fifteen or more employees in

the state during twenty or more weeks in the

current or preceding calendar year. Unlike

many states, Kentucky does not require an

employee to pursue an administrative claim

before filing suit. KRS 344.200 and KRS

344.450.

The Kentucky Equal Pay Act (KRS 337.423)

prohibits wage discrimination against women

who perform comparable work to that performed

by men, with similar requirements of skill,

effort, and responsibility. Additionally, the Act

prohibits an employer from retaliating against an

employee for seeking to enforce the Equal Pay

Act, or for assisting someone else in doing so.

Kentucky’s Equal Pay Act applies to employers

with two or more employees in the

Commonwealth during twenty or more weeks in

the current or preceding calendar year.

WAGES, HOURS AND BENEFITS

The state wage and hour statute (KRS Chapter

337) establishes minimum wage and overtime

standards for Kentucky employees and prohibits

reprisals against employees who have been

involved in a suit for unpaid wages. In cases

where Kentucky’s wage and hour law is more

favorable to an employee than the federal Fair

Labor Standards Act, Kentucky law controls.

The Kentucky wage and hour statute applies to

all employers with any employees in the state,

except: (i) agricultural employees; (ii) federal

71

employees; (iii) domestic help, babysitters, or

caretakers in private homes; (iv) employees of

retail stores, hotels, motels, and restaurants with

gross annual sales of less than $95,000.00 for

five preceding years or if the employee is the

parent, spouse, child, or other immediate family

member of the employer. There are several

additional exemptions to coverage, including

employees of seasonal non-profit camps or

educational centers, newspaper delivery persons,

and employees who provide round the clock

residential care in a parental role at certain

licensed childcare facilities. KRS 337.010(2).

Kentucky’s wage and hour statute requires

employers to grant employees a reasonable meal

period as close to the middle of the shift as

possible. KRS 337.355. In addition, employers

must provide a paid break of at least ten minutes

during each four hours worked. KRS 337.365.

An employer in Kentucky may not withhold

“any part of the wage agreed upon” without the

employee’s written consent, except for

deductions authorized under state, federal, or

local law, or by collective bargaining

agreements. An employer may not deduct from

an employee’s wages for fines, cash shortages in

a common till, or losses due to an employee’s

accepting a bad check. An employer may not

deduct for losses due to defective workmanship,

lost, stolen, or damaged property, default of

customer credit, or a customer’s failure to pay

for goods or services unless the employer can

establish that the losses were attributable to the

employee’s willful or intentional disregard of

the employer’s interest. KRS 337.060.

OCCUPATIONAL SAFETY AND HEALTH

The Kentucky Occupational Safety and Health

Law (“KOSHA”) protects employees from

discharge or other retaliation for exercising any

rights afforded by the Kentucky Occupational

Safety and Health Administration. KRS

338.121. KOSHA protects the right of an

employee not to be exposed to known work

hazards that could cause serious bodily harm.

The burden is on the employer to protect the

employee from known hazards. The Act applies

to all employers and employees in the state

except federal government employees and places

of employment over which other federal

agencies have statutory authority.

MANDATORY DAY OF REST

KRS 436.160 provides that any person who

works on a Sunday, whether at his own or any

other occupation, or who causes his employee to

work on a Sunday, is to be fined between $2 and

$50, with the requirement of each person asked

to work being counted as a separate offense.

There are exceptions for ordinary domestic

duties, charitable work, public service work,

sports, grocery sales, drug stores, as well as “gift

shops, souvenir shops, fishing tackle shops and

bait shops, moving picture shows, chatauquas,

72

filling stations, or opera.” Employers are also

not subject to fines if they use continuous work

scheduling and permit at least one day of rest

each calendar week for each employee.

SEVENTH DAY OVERTIME

Any employer who permits any employee to

work seven days in any one workweek shall pay

the rate of time and a half for the time worked

on the seventh day. The above shall not apply in

any case in which the employee is not permitted

to work more than forty hours during the

workweek; or to telephone exchanges having

less than five hundred subscribers;

stenographers, bookkeepers, or technical

assistants of professions such as doctors,

accountants, lawyers, and other professions

licensed under the laws of this state; employees

subject to the Federal Railway Labor Act and

seamen or persons engaged in operating boats or

other water transportation facilities upon

navigable streams; persons engaged in icing

railroad cars; common carriers under the

supervision of the Department of Vehicle

Regulation; and any officer, superintendent,

foreman, or supervisor whose duties are

principally limited to directing or supervising

other employees. KRS 337.050.

PAYMENT OF FINAL WAGES

KRS 337.055 requires employers to pay in full

all earned wages to any employee who leaves or

is discharged from employment, not later than

the next normal pay period following the date of

dismissal or voluntary leaving or fourteen (14)

days following such date of dismissal or

voluntary leaving whichever last occurs. There

are no exemptions from this requirement and

employers may not attempt to secure such

exemptions.

PAYMENT OF COST OF MEDICAL EXAM OR RECORDS

Employers cannot require any employee or

applicant for employment to pay the cost of a

medical examination or the cost of furnishing

any records required by the employer as a

condition of employment. KRS 336. 220.

NO RIGHT OF EMPLOYEE TO PERSONNEL FILE

Kentucky employers are not required to show or

share with employees copies of the employees’

own personnel files, absent discovery requests in

litigation.

ARBITRATION OR MEDIATION OF EMPLOYMENT DISPUTES

Kentucky has a statute prohibiting employers

from requiring employees to enter into

arbitration agreements. KRS 336.700. Federal

law has pre-empted Kentucky law on this point,

at least for employers operating in interstate

commerce.

Kentucky employers may require employees to

commit to mediation or other alternative dispute

73

resolution procedures before engaging in

litigation.

WORKERS COMPENSATION

KRS Chapter 342, the Commonwealth’s

workers’ compensation statute, is intended to

reduce financial losses to employees injured on

the job by requiring employers to replace a

percentage of their lost wages, to pay for

medical treatment arising from work-related

injuries, and to compensate employees for any

temporary or permanent “disability” on account

of the work-related injury. Certain employees

are exempt from coverage under the law. These

narrowly defined exclusions in general cover

domestic servants, agricultural workers, persons

employed on a temporary basis to perform home

repairs, and workers who have specifically

elected in writing not to be covered.

Under Kentucky’s workers’ compensation law,

an employer generally has the right to

communicate directly with an injured

employee’s health care provider, because the

employer is liable for the employee’s medical

bills. Health care providers treating the work-

related injury must provide the employee or the

employer or workers’ compensation carrier with

any information or written material reasonably

related to the injury or disease for which the

employee is claiming compensation, upon

written request. See KRS 342.020(8).

The employer may provide medical services

through a managed health care plan, but the

injured employee may nevertheless choose to

continue to receive treatment with the physician

who provided emergency treatment. KRS

342.020(1). Even if the employer chooses a

managed health care plan, no co-payments or

other deductibles can be required for work-

related injuries, there can be no restrictions on

the employee’s choice of emergency health care

providers, and the employee is entitled to a

second opinion at the employer’s expense if the

managed health care physician recommends

surgery. KRS 342.020(4).

Kentucky’s workers’ compensation law permits

an employer to require an employee to return to

light duty or to alternative work within his or her

restrictions. The workers’ compensation statute

does not preclude an employer from simply

terminating injured workers because they are not

available to work, although employees may

challenge such termination as illegal

discrimination or retaliation.

Employees who accept workers’ compensation

benefits are, in many cases, prohibited from

filing other claims against the employer with

regard to the injury. KRS 342.690.

The statute forbids employers to retaliate against

a person who has filed or pursued a workers’

compensation claim, or to discriminate against a

74

worker with asymptomatic coal workers’

pneumoconiosis (“black lung”). KRS 342.197.

UNEMPLOYMENT BENEFITS

Kentucky’s unemployment compensation statute

(KRS Chapter 341) requires most employers to

pay into a reserve account and to furnish

unemployment benefits for terminated

employees who worked for them for ten weeks

or more, unless the employee left the job

voluntarily, or was fired for provable

misconduct in connection with the work.

NEGLIGENT HIRING; RETENTION AND SUPERVISION

The Court of Appeals (Kentucky’s intermediate

appellate court) recognized the tort of negligent

hiring, retention, and supervision in the case of

Oakley v. Flor-Shin, Inc., 964 S.W.2d 438 (Ky.

App. 1998). In Kentucky, “an employer can be

held directly liable for injuries sustained by a

third person caused by the criminal acts of its

employee.” Id. at 439. Oakley, a discount store

employee who was attacked in the store after

hours, sued her attacker and his employer, a

floor maintenance company (Flor-Shin). Flor-

Shin had failed to investigate the employee’s

background. In this instance, minimal research

into his background would have revealed that he

had been convicted for a number of offenses,

including attempted rape. Kentucky employers

should be conscientious in conducting lawful

background checks and dealing appropriately

with employees who exhibit violent or other

questionable behavior.

GARNISHMENTS

An employer may not discharge an employee

because the employee’s wages have been

subjected to a garnishment for one indebtedness.

KRS 427.140. The statute implies, however,

that an employee may be discharged for multiple

garnishments.

JURY DUTY

Under the wage and hour statute, an employer

may not discharge an employee for making a

court-ordered appearance, including jury duty.

KRS 337.415. Employers are not required to

provide paid time off for such court

appearances.

MILITARY SERVICE

KRS 38.238 requires employers to grant

employees leaves of absence to perform active

duty or training in the National Guard, and to

reinstate an employee to his or her former

position upon completion of such service. The

leaves of absence need not be paid. KRS 38.460

proscribes preventing a person from enlisting in

the National Guard and forbids discrimination

against anyone who enlists, serves, or has served

in the National Guard.

75

LEAVE FOR ADOPTION OF A CHILD

The wage and hour statute requires every

employer, upon written request, to grant

reasonable personal leave of up to six weeks to

an employee who adopts a child under seven

years of age. KRS 337.015.

WHISTLE-BLOWER PROTECTION

KRS 61.101-103 gives public employees a cause

of action if they experience reprisals or

discrimination for reporting their employer’s

wrongdoing.

TRUTH IN HIRING

Kentucky’s “Truth in Hiring” statute, KRS

411.225 states that an employee or former

employee cannot maintain a lawsuit against an

employer who provides truthful references about

them. Employers should be mindful, however,

that “truth” can be a subjective concept, and that

the practice of giving neutral references, i.e.,

providing no information about former

employees other than job titles and dates of

employment, is still an option and still a good

practice.

FIREARMS AT WORK

In Kentucky, anyone legally entitled to possess a

firearm has the statutory right to sue an

employer who prohibits such a person from

having a firearm or ammunition in a vehicle,

even on company premises. Under this same

statute, an employer may not prevent an

employee from using the firearm, even on

company premises, in self defense, defense of

someone else, or defense of “property.” The

statute does not require employers to notify

employees of this statute, to allow firearms in

work areas, or to allow weapons of any other

kinds on the premises. See KRS 237.106.

INTELLECTUAL PROPERTY

76

William H. Hollander Louisville, Kentucky www.wyattfirm.com

The following is an introduction to Kentucky’s

statutory and decisional (or “common”) law

regarding aspects of intellectual property

protection. Federal law regarding patents and

copyrights largely pre-empts state laws and is of

far greater overall commercial significance. In

addition, many trademark and service mark

issues are decided under federal law.

Nevertheless, these Kentucky laws significantly

affect business decisions, most notably in the

employment arena.

TRADE SECRETS

Statute

In 1990, Kentucky adopted the Uniform Trade

Secrets Act, as prepared by the National

Conference of Commissioners on Uniform State

Laws, including the 1985 amendments to the

Act. KRS 365.880.

Common Law

The Uniform Trade Secrets Act replaces

conflicting tort, restitutionary, and other

Kentucky law providing civil remedies for

misappropriation of a trade secret. The law does

not affect contractual or criminal remedies.

KRS 365.892

TRADEMARKS AND SERVICE MARKS

Trademarks and service marks are protected in

Kentucky under both the state trademark

registration statute and the common law.

Statute

Registration of trademarks and service marks in

Kentucky is governed by a 1994 statute, which

is based on the 1992 revisions to the Model State

Trademark Act. KRS 365.561 et seq.

Registrations are made with the Kentucky

Secretary of State, who has posted appropriate

forms at sos.ky.gov/forms.htm. Registration of

a mark is effective for a term of five years from

the date of registration, with renewal

applications accepted in the six-month period

before the expiration of the current term. KRS

365.581(1).

Marks registered in Kentucky may be assigned,

along with the goodwill of the business to which

they relate. KRS 365.583. An assignment form

is posted on the Secretary of State’s website.

The Secretary of State will issue a certificate

showing that the assignment has been recorded.

The statute authorizes a civil action for the use

of “any reproduction, counterfeit, copy or

colorable imitation” of a registered mark, when

such use “is likely to cause confusion or mistake

or to deceive as to the source or origin of the

77

goods or services.” KRS 365.601. Remedies

include profits or damages, injunctive relief and

impoundment of the infringing items. KRS

365.603.

Kentucky did not adopt a statutory cause of

action for “dilution” or “injury to business

reputation” of “famous” marks. However, an

argument can be made that Kentucky common

law recognizes such a cause of action. See, e.g.,

Churchill Downs Distilling Co. v. Churchill

Downs, Inc., 90 S.W.2d 1041 (Ky. 1936).

Common Law

Under the common law, unfair competition in

the form of trademark infringement exists where

the defendant has injured the plaintiff by taking

his business or impairing his goodwill or by

unfairly profiting by use of the plaintiff’s name

or a similar one. Covington Inn Corp. v. White

Horse Tavern, Inc., 445 S.W.2d 135 (Ky. 1969);

Jackson v. Stephens, 391 S.W.2d 702 (Ky.

1965).

EMPLOYEE CONFIDENTIALITY

Statute

There are no Kentucky statutes expressly

governing an employee’s obligation of

confidentiality toward his or her employer.

Common Law

An employee may not use any information that

he may have acquired by reason of his

employment for the purpose of doing any act

which is in opposition to his principal’s interest.

After the termination of the employment

relationship, the former employee may compete

and may carry with him his personal experience,

enterprise, and knowledge but may not use prior

fiducial confidences to profit at the expense of

his former employer. See, e.g., Stewart v. Ky.

Paving Co., Inc., 557 S.W.2d 435 (Ky. App.

1977).

NONCOMPETITION AGREEMENTS

Statute

There are no Kentucky statutes expressly

addressing noncompetition agreements.

Common Law

Covenants not to compete are enforceable in

Kentucky so long as they are reasonable as to

territory and duration, serve to protect a

legitimate interest of the covenantee and are

supported by consideration. Borg-Warner

Protective Servs. Corp. v. Guardsmark, Inc., 946

F. Supp. 495 (E.D. Ky. 1996), aff’d. 156 F.3d

1228 (6th Cir. 1998). Continued employment in

an otherwise at-will relationship is sufficient

consideration for a covenant entered into after

employment begins. Higdon Food Serv., Inc. v.

Walker, 641 S.W.2d 750 (Ky. 1982).

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RIGHT OF PUBLICITY

Statute

A Kentucky statute recognizes that property

rights in names and likenesses are entitled to

protection from commercial exploitation. KRS

391.170 The statute also provides that this right

of publicity continues past death and that the

name or likeness of a person who is a public

figure shall not be used for commercial profit for

a period of fifty years from the date of his or her

death, without the written consent of the

executor or administrator of his or her estate.

Common Law

Kentucky case law recognizes all of the

branches of the tort of invasion of privacy: false

light, intrusion, publication of private facts, and

misappropriation of name or likeness, although

the latter branch has been modified by the

above-referenced statute. McCall v. Courier-

Journal and Louisville Times Co., 623 S.W.2d

882 (Ky. 1981); cert. den. 456 U.S. 975 (1982).

FRANCHISES AND BUSINESS OPPOR-TUNITIES

Sales of non-franchise “business opportunities”

in Kentucky are regulated by KRS 367.801 et

seq. which makes it unlawful for any person to

engage in the sale of a business opportunity

unless the seller has first registered with the

Division of Consumer Protection of the Office

of the Attorney General, filed a bond, and

disclosed specified information regarding the

business opportunity and the persons offering it.

KRS 367.805.

Violations of the Sale of Business Opportunity

Act may lead to actions for damages and

injunctive relief filed by the Kentucky Attorney

General and criminal prosecution. The Sale of

Business Opportunity Act does not apply to

offerors which have complied with Federal

Trade Commission regulations on franchises.

KRS 367.807.

ANTITRUST AND TRADE REGULATION

79

Michelle D. Wyrick Louisville, Kentucky www.wyattfirm.com

Kentucky's principal antitrust and trade

regulation statutes are contained in Chapters 365

and 367 of the Kentucky Revised Statutes.

Kentucky state government maintains an

Internet site, which provides easy, free access to

the Kentucky Revised Statutes. To determine

whether the legislature has changed the statutory

law, one should access the online version of the

Kentucky Revised Statutes, or other online

resources such as Westlaw or Lexis.

"BABY" SHERMAN ACT

Like many U.S. jurisdictions, Kentucky has a

"Baby" Sherman Act, codified at KRS 367.175.

Tracking the federal Sherman Act, the statute

prohibits both concerted action in restraint of

trade and monopolization. The analog to

Section 1 of the Sherman Act (15 U.S.C. §1)

appears in KRS 367.175(1), which is nearly a

verbatim recapitulation of the federal statute:

"Every contract, combination in the form of trust

and otherwise, or conspiracy, in restraint of trade

or commerce in this Commonwealth shall be

unlawful." Likewise, the prohibition regarding

monopolization essentially restates Section 2 of

the Sherman Act (15 U.S.C. §§2): "It shall be

unlawful or for any person or persons to

monopolize, or attempt to monopolize or

combine or conspire with any other person or

persons to monopolize any part of the trade or

commerce in this Commonwealth."

The similarity of the language between the

Kentucky statutes and its federal counterparts

allows federal precedents interpreting the

Sherman Act to guide any future interpretations

of the Kentucky statutes. Unlike some states,

however, Kentucky does not have a statutory

mandate requiring application of federal

precedent to its "Baby" Sherman Act.

Consequently, federal precedents cannot be

regarded as conclusively resolving issues that

might arise in the interpretation of the Kentucky

analogs to the Sherman Act. See Mendell v.

Golden-Farley of Hopkinsville, Inc, 573 S.W.2d

346, 349 (Ky. App. 1978).

Despite the existence of Kentucky's "Baby"

Sherman Act for several decades, case law and

opinions interpreting these provisions of

Kentucky law is sparse. See, e.g,, Brandon v.

Combs, 666 S.W.2d 755 (Ky. App. 1983);

Mendell v. Golden-Farley of Hopkinsville, Inc,

573 S.W.2d 346 (Ky. App. 1978); United States

v. Solinger, 457 F. Supp. 2d 743 (W.D. Ky.

2006); KASP, Inc. v. Adesa Lexington, LLC,

2006 WL 385310 (E.D. Ky. Feb. 17, 2006)

Louisa Coca-Cola Bottling Co. v. Pepsi-Cola

Metro. Bottling Co., Inc., 94 F. Supp. 2d 804

(E.D. Ky. 1999); Kentucky Laborers Dist.

80

Council Health & Welfare Trust Fund v. Hill &

Knowlton, 24 F. Supp. 2d 755 (W.D. Ky. 1998);

Borg-Warner Protective Servs., Inc. v.

Guardsmark, Inc., 946 F. Supp. 495 (E.D. Ky.

1996), aff’d, 156 F.3d 1228 (6th Cir. 1998);

OAG 99-9; OAG 85-70.

KRS 367.176 provides some exemptions from

the Kentucky "Baby" Sherman Act. KRS

367.176 (1) exempts the "activities" of "any

labor organization, agricultural or horticultural

cooperative organization, or consumer

organization, or of individual members thereof

which are legitimate under the laws of this

Commonwealth or the United States, or of any

utility …." In addition, KRS 367.175 (2)

exempts "activities" that are "authorized or

approved under any federal or state statute or

regulation."

Kentucky does not have a statute addressing the

United States Supreme Court's Illinois Brick

decision regarding the status of indirect

purchasers under the Sherman Act. At least one

court has opined, in an unpublished opinion, that

the Illinois Brick rationale applies to KRS

367.175. See Arnold v. Microsoft Corp., 2001

WL 1835377 at *4 (Ky. App. Nov. 21, 2001).

In terms of remedies, unlike its federal

counterpart, the Kentucky "Baby" Sherman Act

does not provide for treble damages. The

Attorney General, however, may seek civil

penalties for violation of KRS 367.175. See

KRS 367.990(8). While Chapter 367 does not

provide for private party damage actions for

violations of KRS 367.175 (1) and (2), the

generally applicable provisions of KRS 446.070

may provide an action for single actual damages.

See Kentucky Laborers Dist. Council Health &

Welfare Trust Fund v. Hill & Knowlton, 24 F.

Supp. 2d 755 (W.D. Ky. 1998).

“BABY” FEDERAL TRADE COMMIS-SION ACT AND RELATED STATUTES

Just as Kentucky's "Baby" Sherman Act

essentially tracks federal law, Kentucky

statutory law contains a "Baby" Federal Trade

Commission Act, which is a conceptual analog

to federal law. KRS 367.170 (1) provides:

"Unfair, false, misleading, or deceptive acts or

practices in the conduct of any trade or

commerce are hereby declared unlawful." In

KRS 367.170 (2), the term "unfair" is defined to

mean “unconscionable." While there is again no

statutory mandate to follow federal precedents in

interpreting the "Baby" Federal Trade

Commission Act, one can anticipate that federal

precedent will a least provide some significant

guidance. KRS 367.180 provides a limited

exemption for the media whenever there is "no

knowledge" that an advertisement "may be in

violation of KRS 367.170."

By virtue of KRS 367.190, the Kentucky

Attorney General has authority to seek

injunctive relief for violations of KRS 367.170.

In addition, pursuant to KRS 367.200, a court

81

may enter any judgment "as may be necessary"

to "restore to any person in interest any moneys

or property, real or personal, which may have

been paid out as a result of any practice declared

to be unlawful by KRS 367.130 to 367.300."

The resulting judgment may include the

appointment of a receiver or the revocation of a

license or certificate authorizing any person to

engage in business in Kentucky.

KRS 367.240 also authorizes the Attorney

General to make an "investigative demand"

regarding violations of KRS 367.110 to 367.300

whenever there is "reason to believe" that

violations are occurring or are about to occur, or

whenever there is a belief that it would be in the

"public interest" to ascertain whether such

violations are occurring or are about to occur.

Within the short deadline set by KRS 367.240

(2), a party served with an investigative demand

and providing "good cause" may petition a court

to extend the time to respond, or to modify or set

aside the demand. Furthermore, under KRS

367.260, any person may apply to court for an

"appropriate order" to "protect such person from

any unreasonable investigative action taken

pursuant to KRS 367.110 to 367.300.”

Pursuant to KRS 367.290, any person who fails

to file any statement or report, or to obey any

subpoena or investigative demand issued by the

Attorney General, becomes subject to an action

by the Attorney General seeking injunctive relief

to restrain the advertising or sale of any

merchandise or the conduct of any trade or

commerce that is involved in the alleged or

suspected violation. In addition, the Attorney

General may seek to vacate, annul, or suspend

the corporate charter of a Kentucky corporation,

to revoke the certificate of authority to do

business in Kentucky of a foreign corporation,

or to revoke or suspend any other licenses,

permits, or certificates that are used to "further

the allegedly unlawful practice."

Under KRS 367.220, consumers also have a

private right of action for violations of

Kentucky's "Baby" Federal Trade Commission

Act. A consumer is "any person who purchases

or leases goods or services primarily for

personal, family or household purposes and

thereby suffers any ascertainable loss of money

or property, real or personal ...." According to

the statute, the court may "in its discretion"

make an award of "actual damages" and may

also "provide such equitable relief" as the court

deems "necessary or proper."

There is an express statutory declaration that the

remedies available under KRS 367.220 are not

to be construed to limit the ability to seek

punitive damages "where appropriate." If the

Attorney General has obtained relief in an action

under KRS 367.190, it becomes "prima facie

evidence" of a violation in any consumer action

brought under KRS 367.220. The statute also

82

provides that the court "may" award "reasonable

attorney’s fees and costs" to the "prevailing

party."

REGULATION OF PARTICULAR INDUS-TRIES OR PRACTICES

In addition to the general provisions of the

"Baby" Federal Trade Commission Act itself,

KRS Chapter 367 contains a number of other

statutes that address particular industries or

practices. In general, these more specific

statutes address industries that face fairly

widespread regulation of their business

transactions with consumers throughout the

United States. Broadly summarized, these

additional statutes make specific practices a

violation of law under the "Baby" Federal Trade

Commission Act as an "unfair, false, misleading,

or deceptive " trade practice or, in some

instances, impose mandatory filing, procedural,

or contractual terms on those selling certain

goods or engaging in certain practices. Many of

the statutes expressly grant the Attorney General

the same remedies available for violations of the

"Baby" Federal Trade Commission Act. Many

also permit rescission, and in some cases, private

damages or other remedies to persons who are

victimized by the practice deemed unlawful.

While the terms and provisions of each of these

statutory regulations are beyond the scope of this

Guide, at least those who are engaged in the

following industries or practices should consult

the express statutory regulation of them in KRS

Chapter 367:

Loan brokers -- KRS 367.380 to 367.389

Consumer credit loans or transactions – right to

refinance – KRS 367.390

Certificates of deposit -- renewal term and rate --

KRS 367.393

Buying clubs or vacation clubs -- KRS 367.395

to 367.407

Solicitations after motor vehicle accidents –

KRS 367.409

Home solicitation sales -- KRS 367.410 to

367.460

Telephone solicitations -- KRS 367.461 to

367.46999

Recreation and retirement use land sales -- KRS

367.470 to KRS 367.486

Underground facility damage prevention -- KRS

367.4901 to 367.4917

Listing of floral business in telephone directory

– misrepresentation of geographical location

prohibited – KRS 367.500

Subscription sales of printed material -- KRS

367.510 to 367.540

83

Negative option plans -- KRS 367.570 to

367.585

Consumer credit contracts -- KRS 367.600 to

367.610

Residential roof repair or replacement contracts

– KRS 367.620 to 367.628

Charitable solicitation -- KRS 367.650 to

367.670

Sale of contact lenses -- KRS 367.680 to

367.690

Mobile home sales -- KRS 367.710 to 367.775

Sale of business opportunities – KRS 367.801 to

367.819

Health care practitioners -- KRS 367.825 to

367.826

Health discount plans -- KRS 367.828

Pyramid sales -- KRS 367.830 to 367.836

Mold remediation standards – KRS 367.83801

to 367.83807

Defective new cars -- KRS 367.840 to 367.846

Kosher meat or meat preparations -- KRS

367.850

Fresh meat or meat products produced outside

United States -- KRS 367.855 to 367.857

Informal dispute resolution system –

manufacturers of motor vehicles -- KRS 367.860

to 367.870

Gift cards – KRS 367.890

Health spas -- KRS 367.900 to 367.930

Preneed funeral service, burial or cemetery

merchandise contracts -- KRS 367.932 to

367.974

Crematoria and crematory operators – KRS

367.97501 to 367.97537

Rental -- purchase agreements -- KRS 367.976

to 367.985

KRS Chapter 367 concludes with penalty

provisions for violations of the various

individual sections of the Chapter. The

enumerated penalties vary from violation to

violation, and include criminal penalties and

fines, civil penalties, and other remedies.

Consequently, those who are interested in the

foregoing substantive violations of Chapter 367

should not only also consider any penalties

evident from the statute creating the violation

but also those penalties and remedies catalogued

at KRS 367.990 to 367.993.

Kentucky has also enacted a statute that may

trigger certain price and rent controls during a

declared state of emergency. See KRS 367.372

to 367.378. In May of 2007, the Attorney

84

General of Kentucky instituted an action

charging several defendants with violating this

provision by “selling motor fuels during the

period covered by the Kentucky Governor’s

Declaration of Emergency following Hurricane

Katrina at prices that were grossly in excess of

pre-emergency prices and that were unrelated to

any increase in costs which the defendants had

incurred.” Marathon Petroleum Company, LLC,

et al v. Stumbo, 528 F. Supp. 2d 639, 643 (E. D.

Ky. 2007). The defendants removed the

Attorney General’s action to federal court and

filed an action in federal court seeking a

declaration that the statute was unconstitutional.

See id. at 643. The federal court remanded the

Attorney General’s action to state court, and

dismissed the defendants’ declaratory judgment

suit on Younger abstention grounds. Id. at 643,

650.

Finally, one should recognize that some

industries and practices are regulated by

provisions in Chapters other than Chapter 367.

For example, the following are found in

Chapters 190, 241-244, 286, 360, and 365 and

should be consulted for those who may be

impacted:

Motor vehicle sales -- KRS Chapter 190

Sale and distribution of alcoholic beverages --

KRS Chapters 241 to 244

Banks and trust companies – KRS Chapter

286.03

Consumer loan companies – KRS Chapter

286.04

Savings and loan associations – KRS Chapter

286.05

Credit unions – KRS Chapter 286.06

Industrial loan corporations – KRS Chapter

286.07

Mortgage loan companies and brokers -- KRS

Chapter 286.08

Check casing and deferred deposit service

business -- KRS Chapter 286.09

Title pledge lending – KRS Chapter 286.10

Money transmitters -- KRS Chapter 286.11

Interest and usury -- KRS Chapter 360

Use of mailed document to inform of a prize --

KRS 365.055

Use of false brand to deceive -- KRS 365.100

Unauthorized use of manufacturer’s brand or

name -- KRS 365.110

Printing requirements for personal checks --

KRS 365.205

85

Furnishing of news without discrimination --

KRS 365.210 to 365.230

Counterfeiting intellectual property -- KRS

365.241

Unfair cigarette sales -- KRS 365.260 to 365.395

Fire, removal and other sales of merchandise --

KRS 365.410 to KRS 365.480

Advertising of sales at wholesale -- KRS

365.490 to 365.510

Transient merchants -- KRS 365.650 to 365.695

Unsolicited goods -- KRS 365.710

Destruction of customer’s records containing

personally identifiable information – KRS

365.720 to 365.730

Motion picture distribution -- KRS 365.750 to

365.765

Retail sales of equipment -- KRS 365.800 to

365.840

Consignment of fine art -- KRS 365.850 to

365.875

In some instances, remedies for violations of

these statutes are set forth along with the

substantive provisions. In addition, penalties for

violations of the statutes contained in Chapter

365 are catalogued in the concluding sections of

Chapter 365, specifically KRS 365.990 to

365.993.

PRICE DISCRIMINATION

While Kentucky does not have a precise parallel

to the federal Robinson Patman Act, its statutory

law does contain several Depression-era price

discrimination statutes. The statutes are

generally not unique to Kentucky. Many of

them appear virtually verbatim in the statutory

law of a number of states. In general, the

statutes may be described as prohibiting so-

called locality discrimination, certain payments

or allowances, and certain below-cost pricing

practices. As noted below, there have been

successful Kentucky constitutional challenges to

several of the below-cost prohibitions.

KRS 365.020 contains the locality price

discrimination provisions. While conceptually

somewhat similar to price discrimination under

the federal Robinson Patman Act, locality

discrimination as described in the statute is not

identical. Unlike the Robinson Patman Act, the

statute applies to sales of both goods and

services. The Kentucky statute proscribes

selling such goods or services at different

locations within a "section, community, or city,"

or a portion thereof, at different prices where the

"intent" is to "destroy the competition" of any

"regular established dealer" in the goods or

services involved, or to "prevent the

86

competition" of any person who in good faith

intends to become such a dealer.

As in the case of Kentucky's "Baby" Sherman

Act, there are only a handful of cases

interpreting the locality discrimination statute.

See Belfry Coal Corp. v. East Ky. Beverage Co.,

294 S.W.2d 539 (Ky. 1956); Jefferson Ice &

Fuel Co. v. Grocers Ice & Cold Storage Co.,

286 S.W.2d 80 (Ky. 1955); Moore v. Northern

Ky. Indep. Food Dealers Ass'n, 149 S.W.2d 755

(Ky. 1941); Kentucky Utils. Co. v. Carlisle Ice

Co., 131 S.W.2d 499 (Ky. 1939); Kentucky

Utils. Co. v. Commonwealth, 118 S.W.2d 158

(Ky. 1938); Warfield Tobacco, Inc. v. R.J.

Reynolds Tobacco Co., 34 F.Supp.2d 1050 (E.D.

Ky. 1999). "Motion picture films", when

delivered under a "lease to a motion picture

house" are statutorily exempted from the

statute’s reach. KRS 365.020 (2). Similar to the

federal Robinson Patman Act, there is a

statutory "good faith meeting of competition"

defense. KRS 365.020 (2).

KRS 365.050, entitled "Unfair trade practices,"

addresses certain payments or allowances. The

statute proscribes the "secret payment or

allowance of rebates, refunds, commissions or

unearned discounts," as well as "secretly

extending to certain purchasers special services

or privileges not extended to all purchasers

purchasing upon like terms and conditions."

The statute, however, is only violated when this

is done "to the injury of a competitor" and where

such payment or allowance "tends to destroy

competition."

The case law interpreting KRS 365.050 is scant.

See Jefferson Ice & Fuel Co. v. Grocers Ice &

Cold Storage Co., 286 S.W.2d 80 (Ky. 1955);

Louisa Coca-Cola Bottling Co. v. Pepsi-Cola

Metro. Bottling Co., Inc., 94 F. Supp. 2d 804

(E.D. Ky. 1999); Warfield Tobacco, Inc. v. R.J.

Reynolds Tobacco Co., 34 F. Supp. 2d 1050

(E.D. Ky. 1999). While there is no express

statutory exemption, the Sixth Circuit has held

that the statute does not apply to commercial

lending institutions. See George v. United Ky.

Bank, 753 F.2d 50 (6th Cir. 1985).

While many of them still remain on the books,

the Kentucky courts have held a number of

Kentucky statutes dealing with below cost

pricing to be in violation of the Kentucky

Constitution. The Kentucky Milk Marketing

Act, KRS 260.675 to 260.760, was the first of

the below cost pricing restrictions to be held

unconstitutional under the Kentucky

constitutional provisions preventing "arbitrary"

exercises of governmental power. See Kentucky

Milk Mktg. & Anti-Monopoly Comm’n v.

Kroger, 691 S.W.2d 893 (Ky. 1985).

Since the milk marketing decision, the generally

applicable below-cost provision contained in

KRS 365.030 was held to be subject to the same

constitutional defect in Remote Services v. FDR

87

Corp., 764 S.W.2d 80 (Ky. 1989). While there

is no appellate decision considering the

constitutionality of the "Unfair Cigarette Sales

Law" contained in KRS 365.260 to 365.380, a

Kentucky trial court has stated that the below

cost provisions of that statute are

unconstitutional as well. Revenue Cabinet v. A.

Topicz & Sons, No. 89--CI--0509 (Franklin Cir.

Ct. Oct. 29, 1989); OAG 93-074.

According to the provisions of KRS of 365.060:

"Any contract, express or implied, made in

violation of any of the provisions of KRS

365.020 to 365.050 is an illegal contract and no

recovery shall be had thereon." In addition,

pursuant to KRS 365.070, an injured person may

bring an action to recover treble damages for a

violation of KRS 365.020 to 365.050. An action

for injunctive relief is also authorized, and in

such a case it is not necessary for the plaintiff to

establish that it has suffered "actual damages."

Under the terms of KRS 365.070 (2), directors,

officers, and agents who "assist or aid" in a

violation are deemed equally responsible with

the corporation or person whom they assisted or

aided. In addition to the private rights of action

described in KRS 365.070, there are criminal

penalties and fines provided for in KRS 365.990

(2) for violations of KRS 365.020 to 365.050.

PRODUCTS LIABILITY

88

Ben T. Keller Lexington, Kentucky www.wyattfirm.com

Product manufacturers and sellers should not

feel the least bit chagrined if they find some

aspects of Kentucky law regarding product

liability a little confusing. In 1999, a U.S.

district court that was called upon to interpret

and apply Kentucky law in a product liability

case remarked on its complexities, then added

the somewhat contradictory assessment that

“Kentucky law is clear; though the precise

application of it in a given case can be

confounding.” Although several years have

passed since the federal court made those

observations, some aspects of Kentucky’s law

on product liability remain complex and there

are still unresolved questions about the interplay

between provisions of Kentucky statutes that

pertain to product liability and product liability

case law. Some of the complexity in Kentucky

law results from the application of Kentucky’s

“bare bones” rule for instructing juries.

Notwithstanding these complexities, the ultimate

question in all Kentucky product liability cases

can be boiled down to whether the manufacturer

or seller of a product acted with reasonable care

when they put the product in question on the

market.

OVERVIEW

Before 1978, Kentucky’s law on product

liability was all common law, reflected in the

body of opinions of Kentucky’s appellate courts.

In 1978 the Kentucky General Assembly

enacted the Product Liability Act of Kentucky

(the PLA). The PLA applies to all claims

arising from the use of products and provides

that actions may be brought “on account of

personal injury, death, or property damage

caused by or resulting from the manufacture,

construction, design, formulation, development

of standards, preparation, processing, assembly,

testing, listing, certifying, warning, instructing,

marketing, advertising, packaging or labeling of

any product.” In some ways, the PLA codified

Kentucky’s common law as it existed in 1978.

In other ways, it modified it. For example,

under the common law product liability lawsuits

could be brought against a product’s

manufacturer, and the wholesalers, distributors,

and retailers who moved it in the market.

However, the PLA contains a so-called

“middleman statute” that limits the

circumstances under which wholesalers,

distributors, and retailers may be held liable for

product-related injuries.

A person seeking compensation for a product-

related injury in Kentucky can bring suit under

three general theories: (1) breach of warranty

under Kentucky’s version of the Uniform

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89

Commercial Code (UCC); (2) negligence; or

(3) strict liability. Warranty claims can only be

brought by an original product buyer or a

member of his or her household, but negligence

and strict liability claims may be brought by

injured bystanders as well as by buyers and

users.

While negligence is a generally understood legal

concept, the concept of strict liability is less

commonly understood and, at least theoretically,

is in many ways a more nuanced concept. To

prove that a manufacturer or seller of a product

that caused an injury was negligent for having

put that product on the market, the injured party

must prove that the manufacturer or seller

actually foresaw, or should have foreseen, that

the product would cause the type of injuries at

issue and failed to take appropriate corrective

action. There are variations on strict liability

theory, but generally speaking under that theory

the manufacturer or seller of a product is

presumed to know of any dangers the product

poses, and will be held liable if a jury

determines that it was unreasonable for the

manufacturer or seller to have put the product on

the market.

It is therefore usually considered simpler for an

injured party to hold a manufacturer or seller

liable under a strict liability theory than under a

negligence theory. Under Kentucky law this is

not necessarily true. Regardless, in Kentucky,

as in most other jurisdictions, the most important

evidence in product liability cases is typically

expert testimony concerning product design,

testing, and the use of product warning labels or

instructions. This testimony often focuses on

industry standards and the adequacy of testing,

the feasibility and practicability of safer designs,

and whether different or better instructions or

warnings should have been given.

Warranty Theories Under the UCC

Claims for breach of warranty require a

demonstration that a product has not performed

as expected based upon an express or implied

representation as to how it would perform in an

intended use. Unlike claims for negligence and

strict liability, damage claims can only be

brought under a warranty theory if there was a

contractual relationship between the injured

party and the party who sold the product.

Generally speaking, this limits the pursuit of

warranty claims to direct buyers. The sole

exception to this requirement is that the UCC

extends warranty liability beyond the product’s

buyer to natural persons in the buyer’s family or

household and to guests in the buyer’s home.

Kentucky’s version of the UCC allows

manufacturers to disclaim implied and express

warranties so long as the disclaimers are in

writing and are obvious to any purchaser. It also

provides that contracting parties can contract to

limit or exclude liability for warranty damages

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90

unless the limitation is “unconscionable.” Any

attempt to limit damages for personal injuries a

product may cause is considered to be

unconscionable as a matter of law, and thus will

not be enforced by a court. In 2011, Kentucky

officially adopted the economic-loss rule with

respect to product liability claims. This rule

precludes recovery in tort for economic losses,

such as repair costs and lost profits, but not

damages related to personal injury or injury to

other property. Of course, the consumer/user

may still recover economic losses under contract

and warranty theories.

Negligence and Strict Liability Theories

Most product liability litigation involves claims

for negligence or strict liability, or both. The

foundation of both the negligence and strict

liability theories is that the product that caused

the injury was “defective” in a way that rendered

it “unreasonably dangerous.” Under both

negligence and strict liability theories, a product

may be found to be defective because of: (1) the

way it was designed; (2) a flaw in the process or

materials used in its manufacture even if the

design is not defective; or (3) an absence or

inadequacy of labels or instructions warning

users of any latent or non-obvious risks,

including risks that arise from foreseeable

misuses of the product. In cases where the

defect that caused the injury was the result of a

flaw in the manufacturing process or the

materials used, the product is held to be

unreasonably dangerous as a matter of law

because it was sold in a condition that was more

dangerous than it was designed to be. Under all

of these theories, the plaintiff must prove that

the product actually caused his injuries and that

it reached him in substantially the same

condition that it was in when it left the

manufacturer’s or seller’s hands.

In theory at least, it is said that the focus of a

case brought under a negligence theory of

product liability is the knowledge and conduct of

the manufacturer or seller of the product, while

under a strict liability theory the focus is solely

on the product. Therefore, theoretically, it is

simpler for a plaintiff to prove that a

manufacturer or product seller is liable under a

strict liability theory than under a negligence

theory. However, as a result of Kentucky case

law concerning the manner in which the

question of strict liability is presented to a jury

for decision, there is little practical difference

between these theories.

Under the negligence standard the plaintiff must

show that the manufacturer or seller was aware,

or should at least have foreseen that the type of

injury in question would occur, and that it failed

to exercise reasonable care to eliminate or

mitigate that danger. On the other hand, if a

case is presented to a jury under the strict

liability standard, the jury is instructed to

assume that the manufacturer or seller was fully

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aware of whatever risks the product posed. In

such a case the jury would simply be instructed

to decide whether the product posed or created

such a risk of causing the type of injury in

question that an “ordinarily prudent”

manufacturer of that type of product, having full

knowledge of the risk, would not have put it on

the market.

In determining whether an “ordinarily prudent”

manufacturer would have put a product on the

market, juries can be asked to consider evidence

concerning a number of factors, including

whether the product is inherently unsafe, how

feasible it would have been to make a safer

product, how obvious the danger was and

whether warnings and instructions adequately

mitigated the danger, and whether misuse,

modification, or a lack of maintenance or repair

caused or contributed to the danger. Although

the focus in a strict liability case is supposed to

be solely on the product, the determination of

what an ordinarily prudent manufacturer would

have done inherently involves questions about

the reasonableness of the manufacturer’s actions

in light of a host of factors. Similarly, in

negligence cases, liability can be imposed based

on what a manufacturer should have known

about a product’s risks, not only what it actually

knew. The ordinarily prudent manufacturer

standard is thus essentially a reasonable care

standard, the same basic standard that applies in

negligence cases. Thus, as a practical matter,

there is little difference between the theories.

The principle difference between the negligence

and strict liability theories in Kentucky is in how

the instructions the court gives the jury are

written.

It is clear that, under Kentucky law, the fact that

a product’s dangerous qualities are common

public knowledge or well known to the average

consumer will not, in all instances, immunize a

manufacturer or seller from liability. In this

aspect, Kentucky has rejected a consumer

expectations test for determining if a product is

unreasonably dangerous, a test suggested by

commentary to the Restatement of Torts and

which is the rule in some jurisdictions. The

rationale for rejecting immunity for injuries

resulting from well known product dangers is

that even if the dangers are well known to the

public, there may be ways those dangers could

be eliminated or mitigated by design changes or

warnings. Because common knowledge of a

product’s dangers are not an absolute shield

from liability, its manufacturer still has an

economic incentive to make the product safer

notwithstanding the widespread knowledge of

the risk. Nevertheless, after holding as a matter

of law “that cigarettes which have burning

embers and couches which might be lit on fire if

brought in contact with a burning cigarette, are

not thereby unreasonably dangerous,” a federal

district court in Kentucky, applying Kentucky

law, granted a cigarette manufacturer’s and a

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92

furniture manufacturer’s motion to dismiss a

product liability lawsuit because the court

concluded that “[t]he dangers of a burning

cigarette coming into contact with a piece of

upholstered furniture are obvious” and “[t]he

relevant inherent characteristics of both products

are readily-observable and familiar to consumers

. . . .” However, while obviousness of product

risks does not always confer immunity, it is still

a factor that can bear on the question of whether

the manufacturer acted prudently. There is some

Kentucky authority that in considering the

feasibility of designing a safer product, a jury

can be asked to consider evidence regarding the

costs and likely benefits of such design changes,

and the effect they would have on the product’s

usefulness or utility.

Whatever factors might bear on a jury’s

determination of what an “ordinarily prudent”

manufacturer would have done in a particular

case, it is unlikely under Kentucky procedural

law that a court will give a jury instruction that

directs a jury to consider any specific factor or

factors. Kentucky adheres to the rule that the

written instructions the court gives to the jury

should contain only the “bare bones” of the

issues the jury is to decide. Such instructions

must frame the issues in the most minimal

possible terms and not place undue emphasis on

any particular facts or issues. Kentucky courts

have made clear that it is up to the lawyers for

the parties to put “flesh” on the “bare bones” of

the instructions in their closing arguments. Thus

it is critical that the lawyers develop evidence on

those factors they want the jury to consider as it

decides whether the manufacturer’s or seller’s

conduct was on par with what an “ordinarily

prudent” manufacturer or seller would have

done, and that in their closing arguments the

lawyers point out how that evidence bears on

this question.

OTHER NOTABLE FEATURES OF KENTUCKY PRODUCTS LIABILITY LAW

Presumptions that Products are not Defective

The PLA sets forth that until proved otherwise,

it will be presumed that the product in question

was not defective if the injury, death, or property

damage occurred more than five years after the

date of sale to the first consumer, or more than

eight years after manufacture. The PLA also

provides a rebuttable presumption that a product

was not defective if the design, methods of

manufacture, and testing conformed to the

generally recognized and prevailing standards

(or the state of the art) in existence at the time

the design was prepared and the product was

manufactured. If this presumption applies, it is

up to the plaintiff to produce evidence to rebut

it.

Modifications and Alterations Destroy Causation

The PLA incorporates the common-law

limitation that manufacturers may only be held

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93

liable for those injuries that would have occurred

if the product had been used in its original,

unaltered, and unmodified condition, except for

alterations and modifications carried out in

accordance with specifications or modifications

furnished by the manufacturer. For purposes of

the statute, a failure to observe routine care and

maintenance is considered to be an alteration or

modification of the product. If an alteration or

modification of a product is a substantial cause

of the plaintiff’s injury, then the alteration or

modification is an intervening cause that

precludes imposing liability on the

manufacturer.

Comparative Fault

The comparative fault statute enacted in 1988

requires the apportionment of liability according

to fault in all tort actions, including product

liability actions. The comparative fault statute

seemingly conflicts with the section of the PLA

that precludes manufacturer liability in cases

where the product has been altered or modified.

This is one of the unresolved inconsistencies in

Kentucky product liability law. Notwith-

standing the specific language of Kentucky’s

comparative fault statute, the Kentucky Supreme

Court held, in a case it decided in 1997, that the

dismantling of a product in order to salvage

valuable scrap components was an alteration or

modification that precluded imposing any

liability on the manufacturer when salvage

workers were exposed to dangerous chemicals

that were released from the product during the

salvage work. Had the Court viewed the case as

being governed by a comparative fault standard,

then, arguably, it should have sent the case back

for trial to allow a jury to decide whether and

how much of the responsibility for the injuries to

assign to the manufacturer and how much to the

salvage company or its workers. However, the

Court apparently did not even consider the

question of whether the jury should have been

instructed to determine whether, under the facts

of the case, the manufacturer had any liability.

Limitation on Middleman Liability

The so-called middleman provision of the PLA

prescribes that in any action in which the

product manufacturer is identifiable and subject

to the jurisdiction of the court, a wholesaler, a

distributor, or a retailer (a “middleman”) that

can show that it did not modify or alter the

product before sale will not be liable unless the

middleman breached an express warranty, or

unless the plaintiff can show the middleman

knew or should have known at the time of

distribution or sale that the product was

defective and unreasonably dangerous.

No Duty to Retrofit

In 2003, the Kentucky Supreme Court rejected

the theory that product manufacturers owe a

duty to retrofit products when post-sale

technological advances come into existence that

would make the original product safer. The

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Court gave two reasons for its decision. First, it

noted that such a duty would not affect the duty

of manufacturers to make products safe in the

first place, while it would create confusion as to

whether a product was defective in its original

condition, potentially tainting jury verdicts in

cases in which the defectiveness of the original

product was at issue. Secondly, the Court found

that such a duty would place an unreasonable

burden on manufacturers and discourage them

from developing new designs.

Learned Intermediary Doctrine

In 2004, the Kentucky Supreme Court adopted

the learned intermediary doctrine, under which

the manufacturer of a prescription drug or

medical device generally need not warn a

consumer directly of the risks associated with

the medication or device as long as it adequately

instructed and warned the physician who

prescribed it or employed it in treating the

consumer patient.

Component Parts Doctrine

Kentucky adheres to the rule that a component

part supplier has no duty, independent of the

completed or finished product manufacturer, to

analyze the design of the completed or finished

product that incorporates its non-defective

component, and, accordingly, that it owes no

duty to warn the finished product manufacturer

of the dangers arising from the latter’s failure to

eliminate defects from the finished product.

Occasional Seller Doctrine

Under Kentucky law, strict liability does not

apply to the occasional seller of an allegedly

defective product. Kentucky courts have held

that when a product is sold on only one occasion

or in conjunction with the sale of a business, the

transaction is an occasional sale and thus the

doctrine of strict liability does not apply.

Punitive Damages

Juries in Kentucky are not permitted to award

punitive damages for conduct or injuries that

occurred outside of Kentucky. In product

liability cases, evidence of other accident

occurrences is commonly allowed for the

purpose of proving that the product involved is

defective and that the manufacturer knew of the

defect. Such evidence is also permitted with

respect to the issue of whether and to what

degree the manufacturer’s conduct within

Kentucky was reprehensible. When such

evidence is admitted for those purposes,

defendants are entitled to have the jury

instructed that they are not to consider evidence

of out-of-state incidents in calculating the

amount of any punitive damage award.

Subsequent Remedial Measures

Kentucky’s evidence rule dealing with

subsequent remedial measures is more liberal

than the corresponding federal rule of evidence.

Under the federal rule, evidence of subsequent

remedial measures is not admissible in a product

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liability case unless the manufacturer disputes

that a safer design or more effective warning

was feasible. Kentucky’s rule, on the other

hand, expressly provides that evidence of

subsequent remedial measures is admissible in

product liability cases. This difference in

evidence rules is one reason that federal courts

are a better forum for defendants than

Kentucky’s state courts.

Jurisdiction and Diversity

Pursuant to Kentucky’s “long-arm” statute,

Kentucky state courts will assert jurisdiction

over the manufacturer of a product if the product

has caused injury or property damage in

Kentucky. If the manufacturer is incorporated

in, or has its principle place of business in

Kentucky, then the manufacturer will be

considered a Kentucky resident for purposes of

determining whether federal diversity

jurisdiction exists. If the manufacturer is not a

Kentucky resident, if there are no other resident

defendants, and if the damages sought exceed a

minimum amount prescribed by federal statute

(currently $75,000 exclusive of interest and

court costs), then diversity jurisdictional

requirements are met and the manufacturer can

have the case removed to the appropriate federal

district court in Kentucky. Generally, there are a

number of advantages to defending product

liability cases in federal court and thus it is

typically a preferred forum for defendants.

If it appears the product liability plaintiff has

sued Kentucky residents for the purpose of

preventing a non-resident manufacturer or seller

from removing the case from state to federal

court, then the non-resident manufacturer or

seller may have grounds to remove the case

anyway and to seek dismissal of the Kentucky

residents. For example, if the plaintiff has also

sued a resident retailer, a non-resident manufac-

turer should consider whether the claims against

the retailer are barred by the so-called

“middleman” provision of the PLA. Likewise, if

the plaintiff asserts that the product-related

injury occurred at work and sues a resident

employer, the claims against that employer will

likely be barred by the exclusive remedy

provisions of the Kentucky’s Workers’

Compensation Act. If the claims against a

resident defendant are barred or otherwise lack a

basis in law, then a federal court can find that

the defendant was sued merely in an attempt to

prevent a non-resident defendant from removing

the case from state to federal court. In that case,

the federal court can dismiss the resident

defendant and retain jurisdiction over the case.

ENVIRONMENTAL PROTECTION

96

George L. Seay, Jr. Lexington, Kentucky www.wyattfirm.com Lesly A.R. Davis Lexington, Kentucky www.wyattfirm.com and H. Carl Horneman Louisville, Kentucky www.wyattfirm.com

GENERAL OVERVIEW

The Commonwealth of Kentucky has devoted

significant attention to the protection of its

natural resources, with the aim of improving air

quality, protecting water resources and

developing comprehensive solid and hazardous

waste regulatory programs. State regulatory

agencies have enacted comprehensive

environmental regulations governing, among

others, the handling, disposal and management

of solid and hazardous wastes, reporting and

cleanup requirements, and permitting and

performance standards. These regulations

represent just a few of Kentucky’s attempts to

preserve the Commonwealth’s environment.

ENVIRONMENTAL TORT LAW

Tort liability exists under federal and state

statutes. A “tort” is a civil wrong where one

party, owing a legal duty to another, breaches

that duty, resulting in injury to person, property,

or both. This breach of duty may occur either

intentionally or carelessly. Under certain

circumstances, liability is imposed based solely

on the outcome. This is called strict liability.

In Kentucky, environmental tort actions may be

based upon various legal theories. First,

nuisance is a very broad claim encompassing

actions including annoyance, inconvenience, or

discomfort. This cause of action is codified in

KRS 411.500-411.570. Second, trespass occurs

when a person’s exclusive right to possession of

property is violated. Third, waste is a type of

action based on the abuse or mistreatment of

property in which another person has an interest.

Fourth, negligence embodies any conduct that

does not meet a “reasonable standard of care.”

Fifth, the Kentucky legislature has established

strict liability in certain circumstances. Finally,

Kentucky recognizes the tort of outrageous

conduct for intentional or reckless conduct

resulting in emotional distress.

REGULATORY AGENCIES

The United States Environmental Protection

Agency (the “EPA”) has ceded program

authority to the states under certain federal

statutes but retains authority under others. For

the areas in which states have authority,

Kentucky regulatory agencies enforce

environmental protection standards and control

97

the handling and disposal of pollutants through

permit programs.

COMMONWEALTH OF KENTUCKY ENERGY AND ENVIRONMENT CABINET

In Kentucky, there are two bodies that

work together to oversee regulation of the

environment and make changes to the laws of

the Commonwealth: (1) the Kentucky General

Assembly, a legislative body; and (2) the Energy

and Environment Cabinet (“EEC”), an

administrative agency operating within the

executive branch.

The EEC, headed by a secretary appointed by

the governor, is responsible for the protection

and preservation of Kentucky’s land, air, and

water resources. Within the EEC, there are two

departments that regulate environmental

standards: (1) the Department for

Environmental Protection; and (2) the

Department for Natural Resources. Within the

departments are various divisions that specialize

in certain areas. The Department for

Environmental Protection includes the Divisions

for Air Quality, Compliance Assistance,

Environmental Program Support, Waste

Management, Water, and Enforcement. The

Department for Natural Resources includes the

Divisions of Conservation, Forestry, Abandoned

Mine Lands, Mine Reclamation and

Enforcement, Mine Permits, Oil and Gas, and

the Office of Mine Safety and Licensing.

A third department within the EEC, the

Department for Energy Development and

Independence, oversees energy development.

This department consists of the Divisions of

Efficiency and Conservation, Renewable

Energy, Biofuels, Energy Generation

Transmission and Distribution, Carbon

Management, and Fossil Energy Development.

The EEC also contains several independent

commissions, including the Environmental

Quality Commission which is charged with

monitoring environmental trends; increasing

public awareness and discussion; and advising

the government.

Environmental regulations are revised

frequently. Therefore, any analysis of

obligations thereunder requires careful review of

the updated Kentucky Administrative

Regulations (“KAR”) published by the

Kentucky Legislative Research Commission.

AIR POLLUTION

Air pollution control starts with ambient air

quality standards that define the concentration of

pollutants acceptable for ambient air.

Restrictions on industrial and commercial

activities are then designed to keep pollutant

levels in ambient air below those standards.

The U.S. Congress has established a

comprehensive program to control air pollution

and improve U.S. air quality with its Clean Air

98

Act of 1970 and subsequent amendments to that

act (“CAA”). The CAA creates a process and

criteria for establishing and updating national

ambient air quality standards, and programs to

control sources of air pollution sufficiently to

maintain pollutant levels below those standards

and leave room for future growth. The CAA

covers both stationary and mobile sources of air

pollutants.

The CAA also requires states to develop

programs to control stationary sources and

submit them to the EPA for evaluation of their

adequacy. When approved by the EPA, these

state programs, called State Implementation

Plans (“SIPs”), define requirements for

stationary sources and replace otherwise

applicable federal requirements. By obtaining

the EPA’s approval of its SIP, Kentucky has

assumed the responsibility of regulating

stationary sources of air pollution in Kentucky to

fulfill most CAA requirements. The Kentucky

administrative agencies responsible for

monitoring air quality and developing and

enforcing restrictions on air polluting activities

are the Division for Air Quality and the

Louisville Metro Air Pollution Control District

(“LMAPCD”) (collectively called the

“Kentucky Agencies”). The LMAPCD is

responsible for activities within Metropolitan

Louisville, and the Division for Air Quality is

responsible for activities in the rest of the

Commonwealth. The Division for Air Quality’s

main office is in Frankfort, Kentucky and

LMAPCD’s office is in Metropolitan Louisville.

Each agency adopts and enforces its own

regulations and Kentucky’s SIP separately

identifies the regulations and requirements of

each agency.

The EPA has adopted primary national ambient

air quality standards for seven pollutants, if

particulates and fine particulates are considered

to be different pollutants. The Division for Air

Quality also has adopted primary ambient air

quality standards for seven pollutants, but only

six are for the same constituents covered by

national standards. The Division for Air Quality

has not adopted an ambient air quality standard

for fine particulates, but has adopted primary

and secondary standards for gaseous fluorides, a

substance not covered by a national standard.

LMAPCD has adopted primary ambient air

quality standards for eight pollutants, including

fine particulates and gaseous fluorides. When

the Kentucky Agencies adopt or revise their

standards they are equivalent the national

standards, but there is a lag between when EPA

adopts or revises an ambient air quality standard

and the Kentucky Agencies revise theirs. While

the Division for Air Quality has not updated its

ambient air quality standards since 2007, all

LMAPCD ambient air quality standards are

equivalent to federal standards for the same

pollutants except the annual standard for fine

particulates. The EPA reduced that standard

99

from 15 ug/m3 to 12 ug/m3 in a rule signed on

December 14, 2012. Less stringent state

ambient air quality standards have not caused

Kentucky’s programs to not meet CAA

requirements because the Kentucky Agencies

have been careful to assure that Kentucky’s SIP

is designed to achieve the national standards.

While mobile sources in Kentucky, (e.g., cars,

trucks, railroad locomotives, ships and air craft)

are subject only to federal requirements,

stationary sources are rigorously regulated by

the Kentucky Agencies. Depending on the size

of a stationary source, its owner may need a

permit before building, modifying or operating

that source. Generally, the amount of scrutiny a

source is subject to before receiving a permit,

and the stringency of controls imposed by that

permit increase for larger sources.

The Kentucky Agencies have adopted permit

programs to implement the CAA-required

Nonattainment New Source Review (“NNSR”),

Prevention of Significant Deterioration (“PSD”)

and Title V Operating Permit programs. NNSR

and PSD require persons wishing to build a new

major source or significantly modify an existing

major source, to assess the project’s potential

impact on air quality and demonstrate that the

project will use state of the art air pollution

controls. NNSR also requires offsetting

emission reductions. Title V of the CAA

requires major sources to have federally-

enforceable operating permits that identify all

requirements applicable to the source and

require monitoring and reporting sufficient to

reasonably demonstrate compliance with any

applicable emission limitation. Kentucky

sources subject to NNSR, PSD or Title V must

obtain a Kentucky-issued permit and not one

issued by the EPA. The EPA, however, reviews

those permits as they are made available for

public comment, can object if they do not

adequately fulfill CAA requirements and can

enforce the permits directly. The Kentucky

Agencies also can issue federally-enforceable

permits to sources that want to be classified as

minor sources, but which must become subject

to permit-based restrictions in order to keep their

potential emissions below the major source

threshold. The Kentucky Agencies also require

permits for true minor sources of air pollution

and establish a threshold of potential emissions

below which no permit is needed.

In 2007 Kentucky adopted administrative

regulations necessary to implement federal

requirements designed to address certain

interstate air pollution concerns known as the

Clean Air Interstate Rule (“CAIR”). Under the

program, the EPA issued annual or ozone season

emission budgets to participating states, and in

turn, states granted emission allowances to

individual facilities in their states. This CAIR

program was held by the court in 2008 to be

deficient, but the court left the program in place

100

while the EPA worked to promulgate a

replacement rule. EPA promulgated that

replacement rule in July of 2011, and is was

known as the Cross-State Air Pollution Rule

(“CSAPR”). The court struck down CSAPR in

August of 2012, but the court again left CAIR in

place when it remanded CSAPR to the EPA.

The EPA has sought a rehearing in the court, but

in the meantime it is seeking to enforce CAIR

requirements. The Division for Air Quality

likely will do the same.

The CAA requires the EPA to restrict hazardous

air pollutants emitted by major sources to a level

that reflects use of the Maximum Achievable

Control Technology (“MACT”). These National

Emissions Standards for Hazardous Air

Pollutants (“NESHAPs”) are commonly called

MACT Standards, and they apply to specific

industrial activities. Kentucky adopts and

enforces these federal MACT Standards as the

EPA finalizes them. Between the time when the

EPA finalizes a MACT Standard and Kentucky

adopts that standard, the Kentucky Agencies still

incorporate the federal requirements in their

Title V permits. LMAPCD has adopted

additional rules to control Toxic Air Pollutants

that drive emission reductions based on potential

off-site health risks.

In 2010 and 2011, the Kentucky Agencies

amended their regulations to begin regulating

greenhouse gas emissions from stationary

sources consistent with EPA regulations. The

EPA has assigned each greenhouse gas a

potency number, with CO2 assigned the value of

“1” and other greenhouse gases a number equal

to how much more potent they are than CO2 in

causing global warming. Using these Global

Warming Potential numbers, emissions of any

greenhouse gas can be expressed as a CO2-

equivalent emission and the EPA uses the

expression “CO2e” to identify when a value is of

CO2-equivalent emissions. Between January 2,

2011 and July 1, 2011, the Kentucky Agencies

required any facility obligated to obtain a PSD

permit because of its potential to emit other

pollutants, to also limit its greenhouse gas

emissions if the facility was a new source that

could emit more than 75,000 CO2e tons per

year, or was an existing source the modification

of which would increase its potential to emit

greenhouse gases by more than 75,000 CO2e

tons per year. Since July 1, 2011, Kentucky

Agencies have required any person wishing to

construct a new source or modify an existing

major source to obtain a PSD Permit if the new

source has the potential to emit more than

100,000 CO2e tons per year of greenhouse

gases, or the existing source modifications

would increase potential greenhouse gas

emissions by more than 75,000 CO2e tons per

year. Those PSD permits must impose a limit

on greenhouse gas emissions that reflect Best

Available Control Technology. All sources that

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have a potential to emit more than 100,000

CO2e tons per year of greenhouse gases after

July 1, 2011 also must obtain a Title V operating

permit. The Division for Air Quality amended

its SIP to include these obligations and the EPA

approved that SIP amendment effective January

3, 2011. On February 8, 2011 LMAPCD

submitted a request to amend its portion of

Kentucky’s SIP seeking EPA approval of

LMAPCD’s rule to regulate greenhouse gas

emissions. The EPA approved that request on

October 12, 2012.

WATER POLLUTION

The Clean Water Act (“CWA”) was enacted

through federal legislation to protect the quality

of the nation’s water resources. The CWA

provides for the establishment of water quality

standards and effluent limitations. Kentucky has

been delegated permitting and enforcement

authority for most facilities. The EEC’s

Department for Environmental Protection,

Division of Water, is that agency within the

Commonwealth charged with the regulation and

protection of Kentucky’s water resources. The

Division of Water works cooperatively with a

number of federal, state, and local agencies in

administering permits, including the U.S. Forest

Service, U.S. Park Service, U.S. Geologic

Survey, and Kentucky Geologic Survey.

One of the primary permits issued by the

Division of Water is the Kentucky Pollutant

Discharge Elimination System Permit. This

permit is required for the discharge of pollutants

from any point source. A “point source” means

any discernible, confined, and discreet

conveyance, including, but not limited to, any

pipe, ditch, channel, tunnel, conduit, well,

discreet fissure, container, rolling stock or

concentrated animal feeding operation, from

which pollutants are or may be discharged.

Additionally, the Division of Water issues

permits for the construction of dams and stream

obstructions, for withdrawals of public water,

and for oil and gas facility activities that may

impact public waters.

Generally, the duration of a permit is for a fixed

term of five years or less. The director of the

Division of Water may issue a permit for less

than five years. Also, the permit may specify a

schedule requiring compliance by a specified

deadline. The permit may be modified, revoked

or reissued following a showing of cause. A

permit may be terminated upon permitee

noncompliance.

In addition to the regular permit, industrial waste

may require numerous other permits issued by

the Division of Water. Oil and gas facilities

must register all wells, and obtain approval for

constructing any holding pit or for transporting

produced water off-site.

Civil and criminal liability can be imposed for

failure to obtain a permit before discharging into

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the waters of the Commonwealth or for non-

compliance with a permit.

WETLANDS, FLOODPLAINS, AND WATER OBSTRUCTIONS

Construction in certain floodways is limited.

Prohibited activities include any fill, deposit,

obstruction, excavation, storage of materials, or

structure that could adversely affect the

efficiency or capacity of a regulated floodway.

EEC approval is necessary for any construction

or reconstruction, relocation or improvements to

a dam.

SOLID AND HAZARDOUS WASTE

The agencies responsible for regulating the

handling, transportation, treatment, storage, and

disposal of solid and hazardous waste in

Kentucky are the EEC’s Division of Waste

Management and the EPA. The EPA’s authority

is derived from federal statutes such as the

Resource Conservation and Recovery Act

(“RCRA”) and the Comprehensive

Environmental Response, Compensation, and

Liability Act (“CERCLA” or “Superfund”).

RCRA provides the EPA with regulatory

authority concerning the disposal of hazardous

waste materials upon land. The goal is to

properly regulate all aspects of the management

of a hazardous waste from the time it is

generated to the time of disposal. This is

commonly called “cradle to grave” tracking.

The Division of Waste Management has

authority to issue permits for the storage,

treatment and disposal of hazardous wastes.

Additionally, Kentucky statutes require that the

EEC promulgate and draft regulations, including

guidelines and standards, for waste planning and

management activities, approve waste

management facilities, and develop and publish

a comprehensive statewide plan for non-

hazardous waste management.

Solid Waste

Solid waste is defined as any garbage, refuse,

sludge, and other discarded material, including

solid, liquid, semi-solid, or contained gaseous

material resulting from industrial, commercial,

mining (excluding coal mining wastes, by-

products, refuse, and overburden), agricultural

operations, and waste from community

activities. It does not include material such as

sand, soil, rock, and gravel. A permit is required

for persons engaging in the management,

processing, and/or disposal of such wastes.

Hazardous Waste

Under Kentucky law, hazardous waste “means

any discarded material or material intended to

be discarded or substance or combination of

such substances intended to be discarded, in

any form which because of its quantity,

concentration or physical, chemical or

infectious characteristics may cause, or

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significantly contribute to an increase in

mortality or an increase in serious irreversible,

or incapacitating reversible, illness or pose a

substantial present or potential hazard to

human health or the environment when

improperly treated, stored, transported, or

disposed of, or otherwise managed[.]” KRS

224.01-010(31)(b).

Kentucky regulates hazardous waste from the

cradle to the grave. Generators of waste are

required to determine if their waste is a

hazardous waste under the EEC’s regulations, to

notify the EEC if they are hazardous, and to

comply with various standards governing the

way hazardous wastes are stored. Generators

must register with the EEC and report annually

not only the anticipated volume and the type of

waste that will be produced, but also the location

where the waste will be generated and a contact

person at that location. Generators must also

obtain an EPA identification number.

Generators are also required to prepare a

manifest to accompany each shipment of

hazardous waste to prove that the waste safely

reaches its destination.

FEDERAL SUPERFUND

The potential for environmental liability should

be a paramount consideration for businesses and

their counsel. This is true for not only buyers

and sellers of businesses and property, but for

lessors, lessees, lenders, trustees, successor

corporations, and even individual corporate

officers, directors, and shareholders.

CERCLA or Superfund poses the most

significant risk for environmental liability. The

statute has been liberally construed by courts to

impose liability on “potentially responsible

parties.” Additionally, CERCLA is retroactive.

Therefore, liability can be and is imposed for

prior acts. There is also joint and several

liability among a class of persons, defined by the

statute, irrespective of fault. This means that

each person or business can be responsible for

the entire amount of liability. Notably, there are

very limited defenses allowed under CERCLA.

KENTUCKY SUPERFUND

Like the federal Superfund program, Kentucky

operates a regulatory program to address

releases or threatened releases of hazardous

substances to the environment that are not

otherwise controlled by traditional air, water,

and waste management programs. Kentucky's

Superfund program involves identifying sites

where hazardous substances are being released

or threatened to be released into the

environment, and assuring that those conditions

are properly abated. Because funding has been

limited in Kentucky, the Kentucky program has

focused efforts primarily on enforcing private

cleanup obligations rather than implementing

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cleanup actions financed by the state cleanup

fund.

In 2012, KRS Chapter 224 was amended to

increase certainty regarding future liability by

establishing a Brownfield Redevelopment

Program. Although the amendment does not

relieve responsible parties of liability following

the release of hazardous material or excuse the

need for corrective action, it does contain two

important changes. First, the new language

limits a landowner’s duty to take corrective

action.

Second, and most significantly, KRS Chapter

224 now contains a new defense to liability for

landowners. If a petroleum or other hazardous

substance spill occurs on a landowner’s

property, he or she is not liable for the cost of

the spill if the owner certifies the following: (1)

the release occurred prior to acquisition of the

property; (2) “all appropriate inquiries” were

made; (3) all legally required notices were

provided; (4) compliance with all land use

restrictions; (5) compliance with any

information requests by the EEC; (6) no

affiliation with another “potentially responsible

party”; (7) has not caused or contributed to the

release; (8) the EEC concurs that the intended

use of the property will not interfere with

remediation or increase the impact on human

health or the environment; and (9) the owner

provides access to the EEC. This defense does

not apply to any real property for which a false

certification is made to the EEC.

If Kentucky landowners comply with the

elements of the new defense that was established

by the Brownfield Redevelopment Program,

they will not be “potentially responsible parties”

under CERCLA or its state counterpart.

UNDERGROUND STORAGE TANKS

RCRA also authorizes the regulation of

underground storage tanks (“USTs”) used for

storage of petroleum and hazardous substances

(collectively referred to as “regulated

substances”). In October of 2011, Kentucky

adopted new UST regulations. Among other

requirements, Kentucky statutes and regulations

require that owners and operators of USTs

containing regulated substances notify a

governmental agency of the existence of their

USTs. To better understand this law, UST

means any tank (including underground pipes)

used to hold regulated substances, the volume of

which is ten percent (10%) or more beneath the

ground’s surface. Certain statutorily defined

exceptions apply.

Owners or operators of petroleum USTs must

demonstrate financial responsibility for taking

corrective action and for compensating third

parties for bodily injury and property damages

caused by accidental releases from their USTs.

In the event of any violation of any UST

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requirement, the EPA may issue a compliance

order or bring a civil action in the appropriate

U.S. District Court. Kentucky currently inspects

USTs pursuant to a letter agreement with the

EPA and compels cleanup of contaminated

areas.

COAL AND NON-COAL MINING

The primary surface, underground, and non-coal

mining enforcement agency in Kentucky is the

EEC’s Department for Natural Resources,

Division of Mine Reclamation and Enforcement

(“DMRE”). DMRE’s main office is in

Frankfort, Kentucky.

Under the federal Surface Mining Control and

Reclamation Act (“SMCRA”), each state was

given an option to obtain “primacy” by adopting

a state surface coal mining regulatory program at

least as stringent as the federal program.

Kentucky has been granted “primacy” and thus

has the primary responsibility for regulating

surface coal mining and reclamation operations

within the Commonwealth.

Part of the regulation process is accomplished

through the use of permits. For example,

Kentucky regulations set forth the permit

requirements for surface coal mining and

reclamation operations. The receipt of a valid,

permanent-program permit is a prerequisite

under the regulation for any person or entity to

engage in surface coal mining and reclamation

operations in Kentucky. There is a requirement

that public notice be given to certain public

entities and interested persons in regard to

proposed permit applications.

One who accepts a permit issued by the EEC, or

begins operations pursuant to such a permit, is

deemed to have knowledge of the conditions set

forth in the regulations and to have accepted

them. The permittee must accept the regulatory

right of entry upon the permit area guaranteed

for authorized representatives of the Secretary of

the Interior and the EEC. Finally, the permittee

must agree to take all possible steps to minimize

any adverse impacts to the environment or

public health and safety resulting from failure to

comply with any term or condition of the permit.

Enforcement and inspection is regulated by the

EEC. Inspections are made at irregular intervals

and without need of a warrant or prior notice to

the operator or permittee. In order to conduct

these inspections, authorized representatives

must be provided the opportunity to copy any

required records and have access to any required

monitoring equipment. Partial inspections must

be done at least once a month for each area

affected until reclamation has been completed.

Full or complete inspections must be done at

least once every calendar year. The EEC can

impose penalties and sanctions for violations of

the mining statutes or regulations. Safety and

health standards are regulated by the Kentucky

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Office of Mine Safety and Licensing (formerly

known as the Division of Mines and Minerals).

REAL PROPERTY

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James T. Hodge Lexington, Kentucky www.wyattfirm.com and Jonathon Melton Lexington, Kentucky www.wyattfirm.com

ESTATES IN LAND – FREEHOLD ESTATES

Fee Simple Absolute

Fee simple ownership is the broadest estate a

person can have in real property. An owner in

fee simple absolute possesses the totality of all

the rights, privileges, powers, and immunities a

person may have in land. An estate in fee

simple absolute has two essential characteristics:

its general inheritability and its potential for

indefinite duration.

Life Estate

A life estate is an interest in real property that is

measured by the life of an individual. The

duration of a typical life estate is measured by

the life of the life tenant. Therefore, a life estate

is not an inheritable interest at the death of the

life tenant because the life estate ends at the life

tenant’s death. When the life of the life tenant is

not the measuring life, the interest created in the

life tenant is known as a life estate pur autre vie.

In a life estate pur autre vie, if the life tenant

dies before the measuring life, the unexpired

portion of the life estate is inheritable. KRS

395.340 directs that this leftover portion of the

life estate pur autre vie passes in intestacy as

personal property to the decedent’s personal

representative. With either type of life estate,

the income produced during the life of the life

tenant belongs to the life tenant.

ESTATES IN LAND -- NON FREEHOLD ESTATES

Non freehold estates are commonly known as

leasehold estates.

Estate for Years

An estate for years has a fixed period of

duration. At the creation of an estate for years,

the landlord and tenant agree on a exact

termination date. KRS 371.010(6) requires that

any lease for longer than one year be in writing

and signed by the party to be charged. A lease

of oil, gas, coal or mineral rights and privileges

for longer than five years is only good against a

bona fide purchaser for valuable consideration

who is without actual notice of the lease if it has

been properly recorded. KRS 382.080(1). An

estate for years terminates automatically without

notice by or to either party, at the end of the

stipulated term.

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Estate from Period to Period

An estate for years continues from year to year

or some fraction of a year, for example, month-

to-month or week-to-week, until terminated by

proper notice by one of the parties to the lease.

While an estate from period to period can be

expressly created, typically it is created when

the tenant enters into possession of the property

under an unenforceable oral lease and the

landlord accepts rent. If the tenant holds over

after the expiration of an estate for years and the

landlord accepts rent, an estate from period to

period is created.

Estate at Will

An estate at will is terminable at the will of

either party. In those localities in Kentucky that

have adopted the Uniform Residential Landlord

and Tenant Act (“URLTA”), a notice

requirement is imposed for termination of an

estate at will. KRS 383.565(3) converts what

would have been an estate at will into an estate

from month-to-month. KRS 383.695(2) requires

a landlord or tenant under a month-to-month

tenancy to give 30 days’ notice to terminate such

tenancy.

CONCURRENT OWNERSHIP

Tenancy in Common

Tenants in common own an undivided interest in

the real property. Tenancy in common is the

preferred form of concurrent ownership in

Kentucky, meaning that a joint tenancy with

right of survivorship can only be created when

the intention to create a survivorship right is

clearly expressed in the deed or will creating the

concurrent ownership interest. If words of

survivorship are absent from the instrument, a

tenancy in common is created. The possession

of one tenant in common is considered to be the

possession of all the tenants. Each tenant in

common may have the same or different size

fractional interests in the land. The interest of

each tenant in common is freely transferable,

descendible and devisable. Tenants in common,

acting either jointly or individually, may cause

the land to be partitioned. Physical, in-kind

partition of the land held by tenants in common

is preferred. However, physical partition of the

land will not be ordered by a court if it would

substantially impair the value of the land.

Joint Tenants With The Right of Survivorship

Joint tenancy with the right of survivorship can

be created only when the intention to create a

survivorship right in the joint owners is clearly

expressed in the deed or will. A joint tenancy

with the right of survivorship, therefore, rises

solely by an affirmative grant or devise. A joint

tenant with the right of survivorship has four

essential “unities” - that is the unities of interest,

title, time, and possession. The joint tenants

must have equal fractional interests in the

property (unity of interest) obtained from the

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same source (unity of title) at the same time

(unity of time) that gives rise to an equal right in

each joint tenant to possess the whole (unity of

possession). The most important characteristic

of a joint tenancy with the right of survivorship

is the right of survivorship. When one of the

joint tenants dies, his or her interest remains in

the surviving joint tenants, exempt from all

claims against the deceased joint tenant, rather

than descending in intestacy or passing via the

will of the deceased joint tenant.

In Sanderson v. Saxon, 834 S.W.2d 676 (Ky.

1992), the Kentucky Supreme Court rejected the

common law rule that one joint tenant could

destroy the right of survivorship of the other

joint tenant by making an inter vivos conveyance

to a third party. The Court found that, by

adopting KRS 381.130, the Legislature had

redefined the nature of the joint tenancy and

held that the inter vivos conveyance by one joint

tenant to another person transferred only the

grantor’s joint life estate and survivorship

interest to the grantee. It did not sever the other

joint tenant’s right to take the whole estate if he

or she survived. Severance of the right of

survivorship can only be accomplished by a joint

tenant who compels partition of the land under

KRS 381.120.

Tenancy by the Entirety

A tenancy by the entirety has the same four

unities of time, title, interest, and possession as a

joint tenancy with the right of survivorship, plus

the additional unity of marriage. The tenancy

can exist only between a husband and wife. It is

similar to a joint tenancy with the right of

survivorship because when either the husband or

wife dies, the surviving spouse has the whole

interest in the property. In a tenancy by the

entirety, the right of survivorship cannot be

severed by the unilateral act of either party.

KRS 381.050 provides that if property is

conveyed or devised to a husband and wife, they

take the respective interests as tenants in

common unless the instrument expressly

provides for a right of survivorship. The statute

is satisfied and a tenancy by the entirety is

created if the real property is conveyed to the

husband and wife, “by the entirety” or “with

right of survivorship.”

A tenancy by the entirety may be terminated by

voluntary petition. When a husband and wife

divorce, the tenancy by the entirety is severed

and converted into a tenancy in common.

Tenancy in Partnership

A form of ownership applicable only with

respect to Kentucky partnerships formed prior to

July 12, 2006, tenancy in partnership is a form

of joint ownership by partners of partnership

assets. KRS 362.270; see KRS 362.1-1204;

KRS 362.1-204. Under this form of ownership,

each partner has an equal right with his or her

partners to possess specific partnership property

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for partnership purposes. However, a partner has

no right to possess partnership property for any

purpose without the consent of the other

partners. The partner’s right in specific

partnership property is not assignable except in

connection with the assignment of rights of all

the partners in the same property. Also, a

partner’s right in specific partnership property is

not subject to attachment or execution, except on

a claim against the partnership. A partner’s right

in specific partnership property is not subject to

dower, curtesy, or allowances to surviving

spouses, heirs or next of kin of a deceased

partner.

With respect to Kentucky partnerships formed

on or after July 12, 2006, or for partnerships that

elect to be governed by the Kentucky Revised

Uniform Partnership Act, property acquired by a

partnership is property of the partnership and not

of the partners individually. See KRS 362.1-

1204; KRS 362.1-204.

FOREIGN OWNERSHIP AND ESCHEAT IN KENTUCKY

Under the common law in Kentucky, an alien

can only own real property by purchase or

devise and cannot take real property by descent

(intestacy). An alien’s title acquired by

purchase or by devise remains good against all

persons but the Commonwealth. Thus, an alien

can hold such title until the Commonwealth

completes an escheat action.

The escheat statutes of Kentucky modify the

common law regarding alienage and real

property. The Kentucky escheat statutes provide

that the Commonwealth may escheat the real

property of a non-resident alien any time after

the expiration of eight years from the time the

non-resident alien acquires title to the real

property. The real property does not

automatically escheat to the Commonwealth; the

Commonwealth must bring an escheat action. If

a non-resident alien dies before the expiration of

the eight-year period that commences from the

time he acquired the property, the real property

may pass by descent or devise. If the alien

becomes a United States citizen, or transfers the

property to a citizen before the Commonwealth

escheats the property, the Commonwealth no

longer has an escheat claim.

The escheat statutes also provide that an alien

who is not an enemy may recover, inherit, hold,

and pass by descent, devise, or otherwise, any

real property as if he were a citizen of the

Commonwealth if such alien declares his or her

intention to become a citizen of the United

States according to the forms required by law.

The escheat statutes provide that any alien who

is not an enemy and who resides within

Kentucky may, as long as he or she remains a

resident of Kentucky, take and hold any real

property that the alien holds (a) as residential

property; or (b) for any business, trade, or

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manufacture. An alien who so takes and holds

such property has the same rights, remedies and

exemptions concerning such property as a

citizen of the United States.

The escheat statutes also allow the spouse or

children of a United States citizen, although

born outside of the United States, to take and

hold real property by devise, purchase, descent,

or distribution.

Kentucky’s escheat statutes do not apply to

domestic corporations, even if an alien owns

part or all of the shares of the corporation. On

the other hand, the Commonwealth may be able

to escheat real property held by a foreign

corporation, unless the foreign corporation

qualifies to transact business in Kentucky. In

the latter case, the qualified foreign corporation

becomes entitled to the same rights and

privileges as a domestic corporation, and,

therefore, property held by a qualified foreign

corporation likely would not be subject to

escheat.

RULE AGAINST PERPETUITIES

Kentucky has, by statute, abrogated the common

law rule of perpetuities. KRS 381.224.

Kentucky, however, has enacted a statutory

scheme that, subject to stated exceptions, voids a

future interest or a trust if the future interest or

trust suspends the power of alienation for a

period longer than twenty-one (21) years after

the death of an individual then alive. See KRS

381.225.

SPOUSAL RIGHTS

By statute in Kentucky, the surviving spouse is

entitled to an estate in fee in one-half the

“surplus real estate” of which the other spouse

or anyone for the use of the other spouse was

“seized” of an estate in fee simple at the time of

death. The surviving spouse is also entitled to a

life estate in one-third of any real estate of which

the decedent or anyone for the use of the

decedent was seized of an estate in fee simple

during the marriage, but not at the time of the

decedent’s death. Because of the modifier

“surplus” in the statutory description of the

surviving spouse’s right in the decedent’s real

property, the surviving spouse’s claim to a fee

interest in one-half of the real property the

decedent died owning does not have priority

over any creditor’s claims. However, the

surviving spouse’s dower claims to a life estate

in one-third of any real property that the

decedent was seized of an estate in fee simple

during the marriage does have priority over the

claims of the decedent’s creditors. The statute

expressly limits the surviving spouse’s claim to

real property in which the decedent was seized

of an estate in fee simple during the marriage.

Consequently, the surviving spouse cannot claim

land in which the decedent had a lesser estate

during the marriage.

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ADVERSE POSSESSION

In order to acquire title to real property by

adverse possession, the possession must be: (i)

actual, (ii) open (notorious), (iii) hostile

(adverse, under claim of right), (iv) exclusive,

and (v) continuous. The adverse possession

must continue for fifteen years. The original

owner’s cause of action does not accrue and the

fifteen year statutory period does not begin to

run until the occupier’s wrongful possession has

all of the characteristics the courts require for

“adverse possession.”

STATUTE OF FRAUDS

Contracts for the Sale of Land

In Kentucky, no action shall be brought on any

contract for the sale of real estate unless the

promise, contract, agreement, representation,

assurance, and ratification, or some

memorandum thereof, be in writing and signed

by the party to be charged. If the contract of

sale does not satisfy the writing requirement

imposed by KRS 371.010(6), either the seller or

the purchaser may repudiate the contract.

Real Estate Brokerage Agreements

KRS 371.010(8) requires that any promise,

agreement, or contract for any commission or

compensation for the sale or lease of any real

property or for assisting another in the sale or

lease of any real estate be in writing. Ordinarily,

if a contract fails to comply with the Statute of

Frauds, the party seeking to enforce the contract

can sue in quantum meruit for the value of the

benefit conferred. However, in Louisville Trust

Co. v. Monsky, 444 S.W.2d 120 (Ky. 1969), the

Kentucky Court of Appeals expressly denied

brokers the right to such a recovery.

PURCHASE AGREEMENTS

Residential Purchase Agreements

The Kentucky Real Estate Commission has

promulgated administrative regulations that set

forth the minimum information that a purchase

contract prepared by a real estate broker and

other persons licensed pursuant to KRS Chapter

324 must contain with regard to residential real

property. The Regulations require the purchase

agreement to include: (1) purchase price, the

amount of contract deposit given, and who is to

hold the deposit; (2) date and time of signing of

the offer or counteroffer for all parties who sign;

(3) date and time when the offer or counteroffer

expires; (4) street address or general description

of the real property sufficient to identify the

parcels; (5) names of the offering party and the

agent who prepared the offer or counteroffer;

and (6) provisions setting forth the date by

which the closing shall occur. Only purchase

agreements facilitated by a real estate broker or

other person licensed pursuant to KRS Chapter

324 must comply with the regulation.

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Commercial Purchase Agreements

As with any contract, the basic elements of a

contract to purchase commercial real estate are

the requirements of “offer,” “acceptance,” and

“consideration.” To be binding on the offeror,

the offer must be sufficiently definite to describe

adequately the property proposed to be sold and

must adequately describe the consideration

required to be paid by the offeror (or provide an

adequate description of the manner by which the

price may be calculated, such as a price per

acre). If the “offer” does not specify a particular

manner in which the acceptance must be

indicated, assent may be manifested in any

manner (subject of course to the Statute of

Frauds, KRS 371.010 (discussed earlier)). The

third basic element necessary for the creation of

a contract is “consideration.” Under Kentucky

law consideration has been defined as:

“[B]enefit to the party promising, or a loss or detriment to the party to whom the promise is made.” “Benefit,” as thus employed means that the promisor has, in return for his promise, acquired some legal right to which he would not otherwise have been entitled, and “detriment” means that the promisee has, in return for the promise, forborne some legal right which he otherwise would have been entitled to exercise.

Phillips v. Phillips, 171 S.W.2d 458, 464 (Ky.

1943) (citations omitted).

REAL ESTATE BROKERS AND AGENTS

Real estate brokers and sales associates must be

licensed by the Kentucky Real Estate

Commission (the “Commission”). An

individual must hold a license issued by the

Commission to act as a broker or sales associate.

Only individuals, as opposed to entities, may be

licensed as brokers or sales associates.

With respect to “commercial real estate,”

persons licensed as brokers in other states may

engage in limited brokerage activities after

complying with certain specific requirements.

These requirements include, among other things,

the out-of-state broker entering into a

cooperation agreement with a Kentucky-licensed

broker and filing a notice of affiliation. In these

circumstances, “commercial real estate” includes

real estate (a) used primarily for (i) sales, retail,

wholesale, office, research, institutional,

warehouse, manufacturing or industrial

purposes; or (ii) multifamily residential purposes

involving five or more dwelling units; or (b)

zoned for a business or commercial use.

Kentucky licensing statutes have varying

requirements and duties associated with the

position of real estate broker or sales associate.

The Commission should be consulted for

specific requirements.

In a real estate transaction, a real estate licensee

must clearly disclose to all parties involved

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which party or parties the licensee is

representing. A licensee may represent more

than one party to a real estate transaction. If the

broker represents both the purchaser and the

seller, the broker must get the written consent of

all parties involved in the dual agency.

All principal brokers must have an escrow

account in which all contract deposits and

other’s money must be deposited without

reasonable delay. Unreasonable delay is defined

under the regulations as within two (2) working

days of the creation of an executory contract.

These accounts must be maintained in Kentucky

and identified to the Commission in writing.

Escrow accounts may bear interest. The interest

accrued may be distributed as the parties agree

in writing. Checks cannot be drawn against

uncollected deposits in the escrow account.

DEEDS

Form; Title Conveyed

Kentucky does not have statutory forms of

deeds. Unless a different purpose appears by

express words or necessary inference, all deeds

are construed to convey fee simple title. A

general warranty deed will also convey the

“after-acquired” title of the grantor.

Notice

In order for a conveyance of the title to real

property to be effective against third parties who

do not have actual notice of the conveyance, the

deed must be recorded in the office of the county

clerk of the county in which the land is located.

KRS 382.080; KRS 382.110.

Required Parts of Deeds

The deed must contain the names of both

the grantors and the grantees and the

mailing address of both the grantors and

the grantees. Although there is no

statutory requirement, it is customary for

the marital status of the grantors and the

grantees to be included. If the grantor is

married, the spouse will have dower or

curtesy rights and must join in the deed to

release them. If an entity is a grantor or

grantee, it is customary to state the site of

its formation.

Every deed must set out the full

consideration paid for the property. The

deed must also include the in-care-of

address to which the property bill for the

current year should be sent. Any person

who willfully and fraudulently gives a

false statement as to full actual

consideration paid for the property or the

full estimated value of the property as

required by statute, is guilty of a felony.

A transfer tax upon the grantor named in

the deed is imposed at the rate of fifty

cents (50¢) for each five hundred dollars

($500.00) of value or fraction thereof,

which value is declared in the deed upon

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the privilege of transferring the title to

real property.

In Kentucky, the operative words of

conveyance are usually: “bargain, sell,

grant, and convey” or simply “convey.”

Title to real property may not be

conveyed without words of conveyance or

language indicating an intention to pass

title to the property.

Warranties

By statute, the words “with general

warranty” or words of like import, in any

deed, have the same effect as if the

grantor had covenanted that he, his heirs,

and personal representatives would

forever warrant and defend the property

unto the grantee, his heirs, personal

representatives, and assigns, against the

claims and demands of all persons

whatsoever.

By statute, the words “with special

warranty” or words of like import, have

the same effect as if the grantor had

covenanted that he, his heirs, and personal

representatives, would forever warrant

and defend the property unto the grantee,

his heirs, personal representatives, and

assigns, against the claims and demands

of the grantor and all persons claiming by,

through or under him.

Quitclaim deeds merely convey to the

grantee “all right, title, interests, and

claim” of the grantor in and to the

property without warranty. They carry no

guarantee that the grantor owns the

property, much less that he or she will

defend grantee’s title to it.

Description of the Land

The legal description in a deed must identify the

property with enough particularity that a

competent person can locate it on the ground.

Source of Title

To be recordable, a deed conveying an interest

in land equal to or greater than a life estate must

state the grantor’s immediate source of title.

Habendum et tendendum Clauses

Traditionally it was customary to include in

deeds a “to have and to hold” clause. Most

deeds now cover this in the granting clause and

the habendum clause is superfluous.

Testimonium Clause and Date

Although a testimonium clause, for example, “in

testimony whereof witness our signatures this

___ day of ________, 20__” is unnecessary, it is

customary to include one.

Signature

The signatures of grantors should conform to

their names as set forth in the deed.

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Acknowledgement of Identity

An acknowledgment is a formal declaration

before an authorized public official that an

instrument executed by the acknowledger is

indeed his or her act and deed. Kentucky has

adopted the Uniform Short Form

Acknowledgment Act and those short forms are

customarily used.

Certificate of Consideration

A deed must contain a sworn, notarized

certificate by the grantor and the grantee or their

agents, or the parent or guardian of a minor

party, as to the full actual consideration paid for

the property. The in-care-of address to which

the tax bill for the current year should be sent, a

deed requirement, may be included in the

certificate of consideration. Transfers by gift

must be accompanied by a sworn, notarized

statement that the property was given in gift, and

setting forth the estimated fair cash value of the

property.

Scrivener’s Certificate

To be recordable, a deed must contain the name

and address of the person preparing the deed, as

well as his or her signature.

MORTGAGES

General

Kentucky is a mortgage, rather than a deed of

trust, state. Kentucky has adopted the lien

theory, rather than the title theory of mortgages.

Requirements for Enforceability Between the Parties

The requirements for an enforceable mortgage

are essentially the same as those for a deed. The

mortgage must be in writing and signed by the

party to be charged therewith, or by his or her

authorized agent. The borrower must be

identified in the mortgage as the

borrower/mortgagor to be legally bound, and the

amount of the debt must be recited or sufficient

information given to permit further inquiry by

interested parties. The mortgage must be

delivered and accepted. The property to be

mortgaged must be described with sufficient

definiteness to allow an interested party to locate

the land secured by the mortgage.

Requirements for Enforceability Against Third Parties

If a party has either actual knowledge of a

mortgage, or knowledge of such facts as would

lead a reasonably prudent person to inquire and

thereby discover the mortgage, it will take

subject to that mortgage regardless of whether it

has been recorded. To be enforceable against

third parties without such knowledge, however,

the mortgage must be: (a) legally acknowledged

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and proved and (b) lodged for record in the

office of the county clerk of the county in which

the land is located.

Requirements for Recordability

To be recordable, a mortgage must include:

The address of the person or the

corporation, owning or holding the note

or other evidence of indebtedness (Note—

KRS 446.010 provides that, for purposes

of statutory interpretation “corporation"

may include any corporation, company,

partnership, joint stock company, or

association);

The date and amount of the obligation

secured, as well as its maturity date;

A printed, typewritten or stamped

statement showing the name and address

of the individual who prepared the

instrument and the manual or facsimile

signature of the preparer;

The borrower’s signature must be

acknowledged or proven under one of five

statutory alternatives, the most customary

being an acknowledgment before a notary

public.

In addition, the better practice is to

include the next immediate source of title

of the mortgagor in the mortgage

immediately following the legal

description of the mortgaged property.

Future Advances, Additional Indebtedness and Revolving Credit Loans

If a mortgage complies with the

requirements of KRS 382.520, which

require that mortgagees securing future

advances stipulate the maximum

additional indebtedness that may be

secured thereby, a mortgage may secure

future advances or additional

indebtedness owed by the borrower to

lender.

Similarly, if a mortgage complies with the

requirements of KRS 382.385, which

requires that mortgages specify the

maximum principal amount of credit that

may be extended under the line of credit

or the maximum credit limit of a

revolving credit plan, that, in each case,

may be outstanding at any time or times

under the line of credit or plan, and that

may be secured by the mortgage, a

mortgage may secure the payment of any

or all sums due and payable by the debtor

under a line of credit or under a revolving

credit plan.

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FORECLOSURE OF MORTGAGES

Judicial Foreclosure

“Strict foreclosure,” that is, dispossessing the

borrower upon default, is forbidden in Kentucky

by KRS 426.525. Foreclosure in Kentucky is by

judicial action. All necessary parties should be

joined in the action and their names set forth in

the caption of the complaint.

Lis Pendens

Upon filing of the foreclosure petition in the

circuit court, a lis pendens notice should be filed

in the office of the county clerk of the county in

which the real property or a greater part thereof

lies, which notice should state: (1) the number

and style of the action and the court in which it

is commenced; (2) the names of the persons

affected thereby; and (3) a description of the real

property affected.

Judgment and Order of Sale

The mortgaged property is sold by the Master

Commissioner of the circuit court of the county

in which the land is located pursuant to a

Judgment and Order of Sale entered by the

circuit court. The mortgaged property is to be

appraised in accordance with KRS 426.520 and

advertisements of the date, time and location of

the sale are to be made in accordance with KRS

424.120-195.

The Commissioner’s Report of Sale and Confirmation

Under KRS 426.705, the purchaser is required to

give bond for the sale price with good surety

approved by the Commissioner, bearing interest

from the date of sale at the judgment rate, which

bond shall have the force of a judgment.

Following the sale, the Commissioner is

required to prepare his report to the court. If no

objections have been filed to the

Commissioner’s Report of Sale for a period of

10 days, an order confirming the sale may be

filed with the Clerk of the Court who shall

submit the order to the Court. The approval of

the Report of Sale of the Commissioner is a

distinct adjudication from the Judgment and

Order of Sale and may be separately appealed.

Rights of Redemption

If the mortgaged property does not bring two-

thirds of its appraised value, the defendant and

his representatives may redeem it within one

year from the date of sale, by paying the original

purchase price, plus interest thereon at 10% per

annum to the clerk of the court in which the

judgment was rendered.

Commissioner’s Deed and Purchaser’s Title

The conveyance of the property to the purchaser

is made by the Commissioner. The conveyance

“shall pass to the grantee the title of all the

parties to the action or proceeding.” KRS

426.574. By statute, a lien is reserved on the

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property as security for the purchase money.

KRS 426.715.

MECHANICS’ AND MATERIALMEN’S LIENS

Parties Entitled

Any person who furnishes material, labor,

supplies, or equipment for the improvements of

a construction project has a lien against the

property to secure the value of the items

furnished subject to the limitations set forth in

the statute.

Interest

A mechanic’s lien includes interest at the legal

rate. KRS 360.040 provides that the legal rate of

interest in Kentucky is 12.00% per annum.

Property Subject to Lien

A mechanic’s lien statement must contain a

description sufficient to permit identification of

the property to the exclusion of other property.

Quantum Meruit

The mechanic’s lien statute does not provide the

sole and exclusive remedy against owners by

contractors or subcontractors who make

improvements on property and do not receive

payment from the owner or the prime contractor.

Since the statute does not expressly state that its

remedy is sole or exclusive, the doctrine of

unjust enrichment has not been abrogated by its

enactment and the contractor may recover on the

basis of quantum meruit.

ENFORCEMENT OF MECHANIC’S LIENS

Intent to File Lien

KRS 376.010 provides for a preliminary lien

statement, which constitutes constructive notice

to certain classes of lienholders and transferees.

Notice

If the lien claimant has not contracted directly

with the owner or the owner’s agent, the statute

requires that the lien claimant must give written

notice to the owner.

Filing Statement of Lien

KRS 376.080 provides that the lien is dissolved

unless a statement is filed in the county clerk’s

office within six (6) months after the furnishing

of labor or materials and such statement sets

forth the necessary elements of a valid lien,

including the amount owed, credits and set-offs,

description of property, name of owner (if

known), and whether the work was done or

materials furnished pursuant to a contract. The

statement must be subscribed and sworn to and a

copy sent to the property owner within seven (7)

days.

Suit to Enforce a Lien

KRS 376.090 provides that a lien shall be

dissolved unless an action is brought to enforce

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the lien within twelve (12) months from the day

of the filing of the lien statement in the clerk’s

office.

RESIDENTIAL LEASES

Uniform Residential Landlord and Tenant Act

Kentucky has adopted a version of the Uniform

Residential Landlord-Tenant Act (“URLTA”),

that grants all political subdivisions of the State

the option of enacting its provisions as local

legislation.

Security Deposit and Damage Disclosures

If a security deposit is accepted, it must be

placed in an escrow account and the location and

account number must be disclosed to the tenant.

A pre-renting disclosure of then-existing damage

to the apartment, on which all existing

deficiencies in the rental residence’s conditions

are noted, is also required. The landlord may

not retain the security deposit if it was not

maintained in a separate account and if the

initial and final damage listings were not

provided.

Tenant’s Obligations

The tenant must comply with the obligations

placed by applicable building and housing codes

affecting health and safety, and must keep the

premises as clean and safe as the condition of

the property allows, dispose of all garbage and

rubbish, keep plumbing fixtures clean, use any

furnished facilities, surfaces and appliances in a

reasonable manner, not deface, harm, or destroy

the premises or remove anything therefrom, and

must conduct himself and his guests in such a

manner as to not destruct the quiet enjoyment of

the neighbors.

Landlord’s Obligations

The landlord’s maintenance obligations include

complying with the requirements of applicable

building and housing codes materially affecting

health and safety, making repairs and doing

what is necessary to keep the premises fit and

habitable, keeping all common areas clean and

safe, maintaining in good and safe working

order all electrical, plumbing, sanitary, heating,

ventilating, air-conditioning and other facilities

and appliances, and supplying running water and

reasonable amounts of hot water.

Landlord’s Adoption of Rules or Regulations

The landlord may adopt rules and regulations if

their purpose is to promote the convenience,

safety, or welfare of the tenants, protect the

property from abuse, and insure fair distribution

of services.

Tenant Remedies

If a matter materially affects health and

safety, the tenant may have repairs made

and deduct his or her costs from the

monthly rental payment as long as the

repair does not cost more than one-half of

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the monthly rent. The tenant, however,

must give prior notice to the landlord

who, in non-emergency circumstances,

has fourteen (14) days to make the

repairs.

If the landlord does not make the repairs

within fourteen (14) days, the lease will

terminate within thirty (30) days of the

notice given by the tenant. In addition to

termination of the leasehold, the tenant

may recover damages and obtain

injunctive relief.

Landlord Remedies

The landlord may obtain injunctive relief

and damages if the tenant does not

comply with the lease, does not comply

with his maintenance obligations or does

not comply with properly enacted rules

and regulations. If the landlord shows

that the tenant’s non-compliance was

willful, the landlord may recover actual

damages and a reasonable attorney’s fee.

If the tenant fails to maintain the dwelling

or violates an established rule or

regulation that materially affects health

and safety, or if the tenant fails, within

fourteen (14) days to repair or make the

cleaning necessary to remedy the

problem, the landlord may make such

repair or do such cleaning and pass the

cost thereof on to the tenant as rent due

the next month.

If the landlord delivers to the tenant

notice specifying the violation of the lease

that exists, the tenant has fourteen (14)

days to cure the problem. If a tenant does

not cure the problem, the landlord may

terminate on the fifteenth (15th) day after

the notice and proceed with a Writ of

Forcible Entry and Detainer in District

Court. KRS 383.660(1).

If the tenant fails to pay the rent on time,

the landlord may terminate the tenancy by

providing the tenant with notice

demanding that the rent be paid within

seven (7) days. If the rent is not paid

during the seven (7) day period, the

leasehold terminates on the eighth (8th)

day. In jurisdictions that have not

adopted the URLTA, if a tenant fails to

pay monthly rent on time, the landlord

may terminate the tenancy by providing

the tenant with a written notice

terminating the tenancy one (1) month

thereafter. KRS 383.195. After

termination of the lease, the landlord may

evict the tenant by obtaining a Writ of

Forcible Entry and Detainer

If the tenant abandons the dwelling unit,

the landlord must make reasonable efforts

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to rent the unit. If the landlord fails to use

reasonable efforts to rent the unit, the

leasehold is presumed to have terminated

as of the date the landlord has notice of

the abandonment.

Termination

Absent default, if the residential lease is on a

month-to-month basis, thirty (30) days’ notice is

necessary to terminate the lease. If the tenancy

is on a week-to-week basis, seven (7) days’

notice is required.

Return of Deposit

Upon termination of the rental agreement, a

post-occupancy inspection is conducted to

determine how much of the security deposit may

be returned to the tenant.

COMMERCIAL LEASES

Lease Term

In the absence of specific provisions

specifying the term of the lease, the

presumption is that the tenancy is one at

sufferance or at will.

If, following the expiration of the term of

the lease, a tenant under a lease for a term

of a year or more remains in possession of

the leased premises for more than ninety

(90) days in the absence of an express

contract and without proceedings for

possession having been instituted by the

landlord, the lease is deemed extended for

a period of one (1) year. At the end of

that year if the tenant does not abandon

the premises the tenant stands in the same

relationship to the landlord as at the

expiration of the lease term, and so from

year-to-year, until the tenant abandons the

premises, is turned out of possession or

makes a new contract. KRS 383.160(1).

A similar rule applies to leases for a term

of less than one (1) year except that if no

action is brought within thirty (30) days,

no proceeding shall be instituted until the

expiration of sixty (60) days.

Default Provisions

A provision in a lease providing for

forfeiture or right to re-enter upon

nonpayment of rent or default in the

performance of other portions of the lease

is valid and enforceable. Despite the

general rule that forfeiture provisions are

enforceable, Kentucky courts do not favor

forfeitures, and forfeiture provisions will

be strictly construed against the one

claiming the forfeiture.

Kentucky courts have ruled that a

landlord may not maintain an action for

possession by reason of a default and a

separate action for rentals not then due.

Even when the landlord is entitled to

continue collecting the rent, it has been

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held that the rents may be collected only

as they become due and not by

acceleration. Notwithstanding the fore-

going general rule, it is commonplace to

provide for a “survival clause” in drafting

commercial leases that impose an

obligation on the tenant to pay and the

right of the landlord to receive rentals

agreed to be paid during the term of the

lease or damages following any

termination of the lease or re-entry by the

landlord by reason of a default by the

tenant under the lease.

Whether the landlord has a duty to

mitigate damages by re-letting the

premises depends on whether the tenant

has abandoned the leased premises or

whether there has been a forfeiture of the

lease and re-entry by the landlord because

of a breach of covenant by the tenant.

If the landlord fails to keep the tenant in

possession according to the terms of the

lease, the tenant’s measure of damages for

the breach of the terms of the lease is the

difference between the price he agreed to

pay and the actual rental value of the

leased property, together with such

special damages as may be authorized by

the facts.

Assignment and Subletting.

In Kentucky, at common law, a tenant

could freely assign the lease without the

landlord’s consent in the absence of an

express prohibition to the contrary. The

common law has been modified by KRS

383.180(2), which provides that, unless

the landlord consents to the assignment in

writing, every assignment, or transfer of

the tenant’s term or interest in the

premises, or any portion thereof, by a

tenant at will or by sufferance, or by a

tenant who has a term less two (2) years,

shall operate as a forfeiture of the lease.

An assignment of the landlord’s

reversionary interest transfers with it the

benefit of the leasehold covenants that run

with the land and the right to receive rents

under the existing lease unless

specifically reserved. A conveyance of

the landlord’s interest is valid without an

attornment by the tenant, but no tenant

who pays the rent to the original landlord

before notice of the conveyance shall

suffer any damage thereby. KRS

383.100(2).

EASEMENTS

Nature of Interest

An easement is a privilege or an interest in land.

It is not itself an estate nor is it land. While an

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easement right is property, the holder of the right

is not an “owner” of real property or land. The

most important characteristic of an easement is

its ability to burden the land. If the easement

runs with the land, it burdens the land and each

successive possessor of the land regardless of

the manner by which the easement was created

or the circumstances under which the possessor

acquired possession of the land. In Kentucky,

the dominant and servient owners have

correlative rights and duties that neither may

unreasonably exercise to the injury of the other.

Classification of Easements

For an appurtenant easement to exist,

there must be a dominant tenement and a

servient tenement. The easement must

benefit the possessor of the dominant

tenement and burden the servient

tenement.

An easement in gross is a non-possessory

interest that permits its holder to use the

servient tenement for a special purpose

independent of the holder’s possession or

ownership of another tract of land. Thus,

there is a servient tenement, but no

dominant tenement.

Creation of Easements

In Kentucky, easements may be created by: (1)

express written grant, (2) implication, (3)

prescription or (4) estoppel.

An easement may be created by express

grant. Under the Kentucky Statute of

Frauds, the express grant of an easement

must be in writing.

Easements may be implied in particular

cases. When this is done, the courts

usually imply the intent of the parties to

the facts of the case, or refer to a public

policy favoring the productive use of

land, or both. Implied easements are

generally divided into two categories: (a)

easements of necessity and (b) easements

implied from quasi-easements. Each type

of implied easement depends upon (i)

common ownership, (ii) transfer

(severance) and (iii) some degree of

necessity. A demonstration of prior use

of the property primarily differentiates

between the two types of implied

easements, with such demonstration being

required for the creation of an easement

implied from a quasi-easement. The

requirements of an easement of necessity

are: (a) prior ownership of the dominant

and servient tenements, (b) transfer of one

of the parcels (severance), (c) necessity

for the easement at the time of severance

and (d) continuing necessity for the

easement. Kentucky follows the majority

rule that only “reasonable necessity” need

be shown (as opposed to absolute

necessity). The requirements of ease-

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ments implied from a quasi-easement are

(a) prior common ownership, (b) common

owner’s apparent and continuous use

(quasi-easement), (c) transfer (severance)

and (d) necessity for the pre-existing use

at the time of severance.

Under certain circumstances an easement

by estoppel is recognized. For example,

an otherwise unenforceable oral easement

grant can be made enforceable by

estoppel based on part performance.

Estoppel may also justify the implication

of an easement shown on a plat.

The general rule is that an easement by

prescription can be obtained in the same

manner as in the case of adverse

possession, that is, by adverse use that is

actual, open, notorious, exclusive, hostile,

and continued in full force for at least 15

years. Some cases, however, hold that a

right of way cannot really be the subject

of continuous, exclusive, and adverse

possession; and that prescriptive use of

the easement by the owner of the

dominant estate is established if it is

unobstructed, open, peaceable,

continuous, and as of right for the

statutory period.

Use of Easements

The scope of an express easement depends on

the terms of the grant or reservation. The use

must be reasonable and create as little burden as

the nature and purpose of the easement will

permit. The actual use defines the scope of an

easement by prescription. If the easement is

granted or reserved in general terms, the owner

of the servient land may locate the easement in a

reasonable manner, consistent with the rights of

the owner of the dominant estate.

Duration and Termination of Easement

An easement may be perpetual. Words of

inheritance are no longer required. An easement

created for a particular purpose ends when the

underlying purpose can no longer be served or

no longer exists. Unlike other interests in land,

an easement may be abandoned since no gap in

ownership will result. However, mere

temporary non-use will not constitute an

abandonment.

Transferability

An appurtenant easement adheres to the

dominant estate, is transferred with the dominant

estate, and may be enjoyed by a person who

succeeds to the possession of the dominant

estate. There is authority in Kentucky that an

easement in gross is personal to the holder and

cannot be assigned.

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ZONING

The current statutory framework for zoning in

Kentucky was adopted in 1966. It requires the

adoption of a basic scheme that generally

outlines plans and zoning objectives, known as a

comprehensive plan, before a jurisdiction may

implement zoning regulations for its territory.

The statutes further establish requirements for

the creation of planning commissions. A

comprehensive plan for the guidance of land use

activity is required together with detailed

“elements” that form the contents of the plan.

Regulations for zoning are authorized together

with procedures for the adoption and

amendment of those regulations. Procedures for

zone change map amendments are provided,

together with the requirement that “findings of

fact” based upon a consideration of the record

must be made by the planning commission or

legislative body.

EMINENT DOMAIN

By statute in Kentucky, eminent domain is

defined as “the right of the Commonwealth to

take for a public use and shall include the right

of private persons, corporations or business

entities to do so under authority of law.” KRS

416.540(6). The state has the power to delegate

the right of eminent domain to municipalities,

agencies, counties, and corporations that

perform duties or provide services of a public

nature. Entities exercising the power of domain

are authorized to take only such title as is

necessary for the particular public project

involved. The party whose property is taken by

the exercise of eminent domain is entitled to just

compensation. Generally, “just compensation”

is the fair market value of the property at the

time of taking. In determining fair market value,

Kentucky utilizes the “before and after” rule,

i.e., fair market value of the condemned property

equals the difference between the fair market

value of the property just before the taking and

the fair market value just after the taking. The

appraiser’s determination of fair market value

must include a determination of the highest and

best use of the property.

CONDOMINIUMS

A condominium is a creature of statute in

Kentucky. Prior to January 1, 2011, the

Kentucky Horizontal Property Law, Kentucky

Revised Statutes Chapter 381, controlled the

creation, continued existence and operation of a

condominium regime in Kentucky.

Condominiums created on January 1, 2011, or

thereafter are governed by the Kentucky

Condominium Act, Kentucky Revised States

Chapter 381.9101, et seq. Except as set forth in

KRS 381.9103 (including if a condominium

association opts into coverage under the

Kentucky Condominium Act), condominium

regimes created prior to January 1, 2011,

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continue to be governed by the Kentucky

Horizontal Property Law.

UNAUTHORIZED TRANSACTION OF BUSINESS

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Francis J. Mellen, Jr. Louisville, Kentucky www.wyattfirm.com and Aaron D. Zibart Louisville, Kentucky www.wyattfirm.com

Kentucky law imposes certain requirements on

foreign entities which transact business in

Kentucky.1 These requirements apply to

corporations (both business, nonprofit, and

professional service) as well as limited liability

companies, partnerships, and business and

statutory trusts.

KENTUCKY BUSINESS ENTITY FILING ACT

The Kentucky Business Entity Filing Act,

Chapter 14A of the Kentucky Revised Statutes

(sometimes referred to herein as the “Act”),

went into effect on January 1, 2011. Among

other things, the Act eliminates many of the

prior inconsistencies and distinctions in the

registration and annual reporting requirements

among the various forms of business entities.

The Act applies to all foreign entities, which is

defined to include corporations, nonprofit 1 For a discussion of what constitutes “doing business” in Kentucky for corporate income tax purposes, see “Business and Personal Taxes” beginning at page 15.

corporations, cooperatives, associations,

business and statutory trusts, partnerships,

limited partnerships and limited liability

companies not organized under the laws of

Kentucky. The Kentucky Secretary of State has

prescribed and furnished a number of updated

forms, which are available online at

www.sos.ky.gov/business/filings/forms.

Effective June 8, 2011, the Act requires the use

of the Kentucky Secretary of State’s prescribed

forms for: change of registered office or

registered agent; change of principal address;

resignation of registered agent or registered

office; application for reserved name; renewal of

reserved name; name registration; and annual

report. In addition, the Act permits the

Kentucky Secretary of State to require the use of

its prescribed forms for: application for

certificate of existence; application for

certificate of authority; amended application for

certificate of authority; certificate of withdrawal;

transfer of reserved name; and amendment to

annual report.

Certificate of Authority

A foreign entity may not transact business in

Kentucky until it obtains a certificate of

authority from the Kentucky Secretary of State

(the exceptions are foreign limited liability

partnerships, which must file a statement of

foreign qualification as discussed below, and

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foreign general partnerships, which have no

filing requirement). The term “transacting

business” has not been defined by statute,

regulation, case law, or otherwise. However, a

case decided under a prior statute held that the

similar term “doing business” is to be given its

ordinary meaning.2 Whether a foreign entity is

transacting business in Kentucky is therefore a

facts and circumstances determination.

Fortunately, the Act identifies certain activities

which, standing alone, do not constitute

transacting business in the state. The statute

contains the following list, which it expressly

states is not exhaustive:

maintaining, defending, or settling any

proceeding

holding meetings of the board of

directors, shareholders, partners,

members, managers, beneficial owners, or

trustees or carrying on other activities

concerning the internal affairs of the

foreign entity

maintaining bank accounts

maintaining offices or agencies for the

transfer, exchange, and registration of the

foreign entity’s own securities or

2 WSAZ, Inc. v. Lyons, 254 F.2d 242 (6th Cir. 1958).

maintaining trustees or depositaries with

respect to those securities

selling through independent contractors

soliciting or obtaining orders, whether by

mail or through employees or agents or

otherwise, if the orders require acceptance

outside Kentucky before they become

contracts

creating or acquiring indebtedness,

mortgages, and security interests in real,

personal or intangible property

securing or collecting debts or enforcing

mortgages and security interests in

property securing the debts

simply owning, without further activity,

real or personal property

conducting an isolated transaction that is

completed within 30 days and that is not

one in the course of repeated transactions

of a like nature3

3 A foreign entity otherwise exempted under this exception must obtain a certificate of authority or a statement of foreign qualification to be eligible for the award of certain state contracts. See KRS 14A.9-010(6). A foreign general partnership that is not a limited liability partnership is not required to file a statement of foreign qualification to transact business in Kentucky but may apply for a certificate of authority in order to be eligible for the award of certain state contracts.

130

transacting business in interstate

commerce

The Act expressly provides that it does not

determine the contacts or activities which may

subject a foreign entity to service of process or

taxation in Kentucky or to regulation under any

other law of the state.

The most recent published opinion addressing

what constitutes “transacting business” (a 1981

case decided prior to the adoption of the current

statute) held that a New York steeplechase

association was not transacting business in

Kentucky where the association did not maintain

any offices or employees in Kentucky and its

activities consisted of sanctioning race meetings,

approving race courses, officials, and sponsoring

organizations, and preparing booklets and

badges for meets, all from its New York

offices.4 The association’s leasing of fences and

jumps to the local racing organizations fell

within the interstate commerce exception.

Similarly, the delivery of steeplechase jumps to

Kentucky by the association’s driver (the

association did not assist in the setup of the

racing equipment) and the occasional provision

of association employees to serve as stewards

for race meetings (with such meetings each held

4 Stephens v. National Steeplechase and Hunt Ass’n, 612 S.W.2d 347 (Ky. Ct. App. 1981).

on three or four days each calendar year) fell

within the isolated transaction exception.

Transacting Business Without a Certificate of Authority

A foreign entity transacting business in the state

without a certificate of authority (or a statement

of foreign qualification in the case of a limited

liability partnership) may not maintain a

proceeding in any state court in Kentucky until it

obtains a certificate of authority. This restriction

also applies to the successor to a foreign entity

that transacted business in Kentucky without a

certificate of authority and to the assignee of a

cause of action arising out of that business.

Further, a foreign entity transacting business

without authority is liable for a civil penalty of

$2 per day. Failure to obtain a certificate of

authority does not impair the validity of the

foreign entity’s acts or prevent it from defending

any proceeding in a state court in Kentucky.

Application for a Certificate of Authority

A foreign entity may apply for a certificate of

authority with the Kentucky Secretary of State.5

The application must set forth:

5 See form FBE at www.sos.ky.gov/business/filings/forms.

131

the real name of the foreign entity (or, if

its real name is unavailable for use in

Kentucky, a name that satisfies the

naming requirements of the Act, as

discussed below)

the name of the state or country under

whose law the foreign entity is organized

its form and date of organization

its period of duration or a statement that

its duration is perpetual

the street address of its principal office

the address of its registered office in

Kentucky and the name of its registered

agent at that office

the names and usual business addresses of

its secretary, other principal officers and

directors (if a foreign corporation) or of

its general partners (if a foreign limited

partnership) or of its managers (if a

foreign limited liability company having

managers) or of its trustees (if a foreign

business or statutory trust)

if the foreign entity is a limited

partnership, whether it is a limited

liability limited partnership

if the foreign entity is a professional

service corporation, a representation that

all of the shareholders, not less than one-

half of the directors and all officers other

than the secretary and treasurer would be

qualified persons with respect to the

corporation were it incorporated in

Kentucky

The execution of a certificate of authority

constitutes a representation by the signatory that

the foreign entity validly exists under the laws of

its jurisdiction of organization. Unless the

registered agent signs the application, the

foreign entity must deliver with the application

the registered agent’s consent to the

appointment.

Effective June 8, 2011, a foreign entity must

obtain an amended certificate of authority upon

any change in the information required in its

application for certificate of authority.6

A certificate of authority authorizes the foreign

entity to transact business in Kentucky, with the

same rights and privileges as, and with only

certain limited exceptions, subject to the same

duties, restrictions, penalties, and liabilities

imposed on, a Kentucky entity. The Act does

not authorize Kentucky to regulate the

organization or internal affairs of the foreign

entity, including the inspection of books, records

and documents of the foreign entity.

6 See form FCA at www.sos.ky.gov/business/filings/forms.

132

Naming Requirements

A foreign entity’s real name must be

distinguishable from any real, fictitious,

reserved, registered or assumed name of record

with the Kentucky Secretary of State. The real

name of a foreign entity is the name as

determined by KRS 365.015 (discussed in the

following paragraphs); for entities not covered

by that statute, the real name is the name

recognized as its real name under the laws of the

jurisdiction of its origination.

The real name of a foreign limited liability

partnership is the name listed in its statement of

foreign qualification filed under the Kentucky

Revised Uniform Partnership Act (2006) (“KY

RUPA”) or predecessor law. The real name of a

foreign limited partnership is the name stated in

its certificate of limited partnership or the

fictitious name adopted for use in Kentucky

under the Act or predecessor law. The real

name of a foreign business trust or statutory trust

is the name which is recognized as its real name

under its jurisdiction of formation or the

fictitious name adopted for use in Kentucky

under the Kentucky Business Trust Act, Chapter

386, or Kentucky Uniform Statutory Trust Act

(2012), Chapter 386A, respectively, of the

Kentucky Revised Statutes. The real name of a

foreign corporation is the name set forth in its

articles of incorporation (or equivalent) or the

fictitious name adopted for use in Kentucky

under the Act or predecessor law. The real

name of a foreign limited liability company is

the name set forth in its articles of organization

(or equivalent) or the fictitious name adopted for

use in Kentucky under the Act or predecessor

law. The real name of any other foreign entity is

the name which is recognized as its real name in

its jurisdiction of origination.

The Kentucky Business Entity Filing Act

provides that the real name of any corporation or

nonprofit corporation must contain the word

“corporation,” “company,” or “limited” (or the

abbreviation “Corp.,” “Inc.,” “Co.,” or “Ltd.”) or

words or abbreviations of like import in another

language. If the corporation is a professional

service corporation, its real name must contain

the words “professional service corporation” or

the abbreviation “P.S.C.” The real name of a

corporation cannot contain language stating or

implying that the corporation is organized for a

purpose other than that permitted by the laws of

its state of incorporation or its articles of

incorporation.

A limited liability company’s real name must

contain the phrase “limited liability company” or

“limited company” (or the abbreviation “LLC”

or “LC”). The word Company may be

abbreviated as “Co.” and limited may be

abbreviated as “Ltd.” If the limited liability

company is a professional limited liability

company, its real name must contain the phrase

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“professional limited liability company” or

“professional limited company” or the

abbreviation “PLLC” or “PLC.”

The real name of any partnership subject to KY

RUPA may not contain the words “corporation”

or “incorporated” or the abbreviation “Corp.” or

“Inc.” and may contain the word “limited” or the

abbreviation “Ltd.” only if the partnership has

filed a statement of qualification.

The real name of any limited liability

partnership that has filed a statement of

qualification pursuant to KY RUPA must end

with the phrase “Registered Limited Liability

Partnership” or “Limited Liability Partnership”

or the abbreviation “R.L.L.P, “L.L.P.,” “RLLP”

or “LLP.”

The real name of a limited partnership that is

subject to the Kentucky Uniform Limited

Partnership Act (2006) (“KY ULPA”) and is not

a limited liability limited partnership may

contain the name of any partner and must

contain the phrase “limited partnership” or

“limited” or the abbreviation “L.P.,” “LP” or

“Ltd.” A limited liability limited partnership

subject to KY ULPA may contain the name of

any partner and must contain the phrase “limited

liability limited partnership” or the abbreviation

“L.L.L.P.” or “LLLP.”

If the real name of the foreign entity does not

satisfy the naming requirements of the Act, the

foreign entity may (1) use a fictitious name to

transact business in the state if its real name is

not distinguishable from any name of record

with the Kentucky Secretary of State or (2)

supplement its name as would be appropriate

were the foreign entity organized in the state.

Name Registration and Reservation

A foreign entity may register its real name, or its

real name with any additions required by the

Act, for the applicant’s exclusive use so long as

the name is distinguishable upon the records of

the Kentucky Secretary of State. The

registration application must set forth the

entity’s real name (or its real name with any

required additions), the state or country of its

organization, its form of organization, its

principal office address, and a brief description

of the nature of the business in which it is

engaged.7 The name registration is effective

until the next January 1 but may be renewed for

successive years by submitting a renewal

application between October 1 and December 31

of the preceding year. The registration

terminates when the foreign entity qualifies

under the registered name.

In addition, a foreign entity may reserve the

exclusive use of a name (or of a fictitious name

if the real name is not available) for 120 days by 7 See form REG at www.sos.ky.gov/business/filings/forms.

134

delivering an application to the Kentucky

Secretary of State. The reserved name must be

distinguishable upon the records of the

Kentucky Secretary of State. The name

reservation may be extended for an additional

120 days by applying for renewal during the 30

days prior to the expiration of the reservation.

The reserved name may be transferred to another

person by delivery of written notice to the

Kentucky Secretary of State. The foreign entity

need not be qualified to transact business in

Kentucky in order to register a name.

Registered Office and Agent

Each foreign entity qualified to transact business

in Kentucky must continuously maintain in the

state a registered office (which may be the same

as any of its places of business) and a registered

agent. These requirements for a registered

office and agent do not apply, however, to a

foreign general partnership that is not a limited

liability partnership. The registered agent may

be either (1) an individual resident of Kentucky

whose business address is identical with the

registered office or (2) an entity or foreign entity

qualified to transact business in Kentucky whose

business address is identical with the registered

office. A foreign entity may change its

registered office and/or agent by filing a

statement of change with the Kentucky

Secretary of State.8

A registered agent may resign at any time by

signing and filing a statement of resignation with

the Kentucky Secretary of State. The statement

of resignation may also include a statement that

the registered office is discontinued. After the

filing, the Secretary of State will mail a copy of

the statement to each of the registered office (if

not discontinued) and principal office of the

foreign entity. The agency appointment is

terminated (and, if applicable, the registered

office discontinued) on the earlier of the

appointment of a successor registered agent or

office or the thirty-first day after the date on

which the statement of resignation was filed.

The registered agent of a foreign entity is its

agent for service of process, notice or demand.

If the foreign entity has no registered agent (or

the registered agent cannot with reasonable

diligence be served), it may be served by

registered or certified mail, return receipt

requested, addressed to the entity at its principal

office and to the attention of person or office

appropriate for giving notice to the entity.

Annual Reports

8 See form RAC-POC at www.sos.ky.gov/business/filings/forms.

135

Each foreign entity authorized to transact

business in Kentucky must file an annual report

with the Kentucky Secretary of State between

January 1 and June 30 of each year beginning in

the year following the calendar year in which the

entity was authorized to transact business in the

state. The annual report may be submitted

online at:

http://www.sos.ky.gov/business/annualreports/.

The annual report must set forth the name of the

foreign entity and the state or country under

whose law it is organized; the address of its

registered office in the state and the name of its

registered agent at that office; the address of its

principal office; the names and business

addresses of its secretary, other principal officers

and directors (if a foreign corporation) or of its

general partners (if a foreign limited partnership)

or of its managers (if a foreign limited liability

company having managers) or of its trustees (if a

foreign business or statutory trust). If the

foreign entity is a professional service

corporation, the annual report must include a

statement that all of the shareholders, not less

than one-half of the directors and all officers

other than the secretary and treasurer would be

qualified persons with respect to the corporation

were it incorporated in Kentucky.

Certificate of Withdrawal

A foreign entity authorized to transact business

in Kentucky may not withdraw from the state

until it has filed a certificate of withdrawal with

the Kentucky Secretary of State. The certificate

of withdrawal must set forth the real name of the

entity (and, if applicable, the fictitious name

under which it is qualified in Kentucky); the

name of the state or country under whose law

the entity is organized; that the entity is not

transacting business in Kentucky and that it

surrenders its authority to transact business in

the state; that it revokes the authority of its

registered agent to accept service on its behalf

and appoints the Kentucky Secretary of State as

its agent for service of process in any proceeding

based on a cause of action arising consequent to

having transacted business in the state; a mailing

address to which the Kentucky Secretary of

State may mail a copy of any service of process

served on it; and a commitment to notify the

Secretary of State in the future of any changes in

its mailing address.9

Revocation of Certificate of Authority

The Kentucky Secretary of State may commence

a proceeding to revoke the certificate of

authority of a foreign entity if the entity does not

deliver its annual report for filing on or before

the date it is due; the entity is without a

registered agent or registered office in Kentucky

for 60 or more days; the entity fails to inform the

Secretary of State that its registered agent or 9 See form WFE at www.sos.ky.gov/business/filings/forms.

136

registered office has changed or that its

registered agent has resigned or that its

registered office has been discontinued; an

incorporator, organizer, director, member,

manager, officer, partner, agent or trustee of the

entity signed a document he or she knew was

false in any material respect with the intent that

the document be delivered to the Secretary of

State for filing; or the Secretary of State receives

a duly authenticated certificate from the

secretary of state or other official custodian of

business entity records of the state or country

under whose law the entity is organized stating

that the entity has been dissolved or disappeared

as a result of a merger.

If the Kentucky Secretary of State determines

that one or more grounds exist for revoking a

foreign entity’s certificate of authority, it must

serve the entity with notice of its determination

mailed to the entity’s principal place of business

address. If the entity does not correct each

ground for revocation (or demonstrate to the

reasonable satisfaction of the Secretary of State

that each ground does not exist) within 60 days

of the notice the Secretary of State may revoke

the entity’s certificate of authority by signing a

certificate of revocation reciting the ground(s)

for revocation and its effective date. The

authority of the entity to transact business in

Kentucky ceases on the date shown on the

certificate of revocation. Revocation of the

entity’s certificate of authority shall be deemed

an appointment of the Secretary of State as the

entity’s registered agent in any proceeding based

on a cause of action which arose during the time

the entity was authorized to transact business in

the state. Revocation of the entity’s certificate

of authority does not terminate the authority of

its registered agent, however.

A foreign entity may appeal the revocation of its

certificate of authority to the Circuit Court of

Franklin County, Kentucky within 30 days after

service of the certificate of revocation. The

court may summarily order the Secretary of

State to reinstate the certificate of authority and

may take any other action the court deems

appropriate. The final decision of the court may

be appealed.

Foreign general partnerships and limited liability partnerships

A foreign general partnership that is not a

limited liability partnership is not required to file

a statement of foreign qualification to transact

business in Kentucky; however, it may apply for

a certificate of authority in order to be eligible

for the award of certain state contracts. A

foreign general partnership may register a

fictitious name, and may also file a statement of

partnership authority under Section 362.1-303 of

the Kentucky Revised Statutes stating the

authority (or limitations on the authority) of

some or all of the partners to enter into

137

transactions on behalf of the partnership and any

other matter.10 A statement of partnership

authority is canceled by operation of law five

years after the date of filing with the Kentucky

Secretary of State unless earlier canceled or

amended to further extend the term for up to an

additional five years.

To transact business in Kentucky, a foreign

limited liability partnership must file a statement

of foreign qualification with the Kentucky

Secretary of State under Section 362.1-1102 of

the Kentucky Revised Statutes. The statement

must set forth the name of the foreign limited

liability partnership which satisfies the

requirements of the Act; the street address of the

foreign limited liability partnership’s chief

executive office and, if different, the street

address of an office in Kentucky, if any; the

name of the foreign limited liability

partnership’s registered agent and the address of

its registered office in Kentucky; and the foreign

limited liability partnership’s jurisdiction of

organization.11

10 See form KNG at www.sos.ky.gov/business/filings/forms.

11 See form FNL at www.sos.ky.gov/business/filings/forms.

UNAUTHORIZED PRACTICE OF LAW

138

Francis J. Mellen, Jr. Louisville, Kentucky www.wyattfirm.com and Aaron D. Zibart Louisville, Kentucky www.wyattfirm.com

The practice of law in the state of Kentucky is

regulated exclusively by the Supreme Court of

Kentucky.1

WHAT CONSTITUTES THE PRACTICE OF LAW

SCR 3.020 defines the practice of law as “any

service rendered involving legal knowledge or

legal advice, whether of representation, counsel

or advocacy in or out of court, rendered in

respect to the rights, duties, obligations,

liabilities, or business relations of one requiring

the services.” (emphasis added) SCR 3.020

includes exceptions for any person not holding

himself or herself out as a practicing attorney

who draws any instrument to which he or she is 1 The Kentucky Bar Association (“KBA”) is an independent agency of the Supreme Court of Kentucky. Its authority to regulate the legal profession in Kentucky, delegated by the Kentucky Supreme Court through rules, is derived from the Kentucky Constitution. See Section 116 of Kentucky Constitution. All persons admitted to the practice of law in Kentucky are members of the KBA upon the completion of the prerequisites for admission. See Kentucky Supreme Court Rule (“SCR”) 3.030(1).

a party as well as for an appearance in the small

claims division of the district court by a person

who is an officer of or who is regularly

employed in a managerial capacity by a

corporation or partnership which is a party to the

litigation in which the appearance is made.

The unauthorized practice of law has been

defined by Kentucky courts as the performance

of the foregoing defined services by non-lawyers

for others.2 There are a number of published

decisions of the Kentucky Supreme Court3 and

opinions of the KBA (available on the KBA

website at www.kybar.org) addressing whether

particular activities and services, if engaged in

or performed by a non-attorney or an attorney

licensed in another state but not in Kentucky,

would constitute the unauthorized practice of

law in the state. Such activities and services

include, but are not limited to:

giving advice and making decisions on

behalf of another person that requires

legal skill and knowledge of the law

2 Countrywide Home Loans, Inc. v. Kentucky Bar Association, 113 S.W.3d 105 (Ky. 2003).

3 See, e.g., Kentucky Bar Association v. Craft, 208 S.W. 3d 245 (Ky. 2006); Turner v. Kentucky Bar Association, 980 S.W. 2d 560 (Ky. 1998); Kentucky Bar Association v. Fox, 536 S.W. 2d 469 (Ky. 1976); Kentucky State Bar Association v. Tussey, 476 S.W. 2d 177 (Ky. 1972).

139

greater than that possessed by the average

citizen

giving advice to another person

concerning the application, preparation,

advisability, or quality of any legal

instrument or document in connection

with any legal proceeding or procedure

construing or interpreting the legal effect

of Kentucky or federal laws and statutes

for another person, as those laws relate to

any legal matter, including but not limited

to probate, dissolution of marriage, and

bankruptcy matters

giving advice and/or explaining legal

remedies and options to another person

that affects that person’s procedural and

substantive legal rights, duties, and

privileges

providing direct advice to another person

in the nature of explanation, recommenda-

tion, advice, and assistance in the

selection and completion of preprinted

legal forms

initiating and controlling a lawyer-client

relationship, setting fees, and paying an

attorney to do work for a third party

engaging in any personal legal assistance

in the preparation of legal forms including

the service of “correcting” another

person’s errors or omissions or providing

another person with any assistance in

preparing the forms other than mere

typing or ministerial acts of correcting

typographical errors

advising another person as to the sale,

preparation, or typing of a will, living

trust, or related documents by

recommending or identifying the type of

will, living trust, or related documents

most appropriate for another person’s

situation

assembling and/or drafting a will, living

trust, deed, durable power of attorney, or

related documents for another person

executing and/or advising on the steps

necessary for the legal execution of a will,

living trust, deed, durable power of

attorney or related documents for another

person other than providing notary

services

funding and/or advising on the funding of

a living trust for another person

It is clear, therefore, that “practicing law” is not

confined to performing services in actions or

proceedings in courts of law, but includes giving

advice and preparing wills, contracts, deeds,

mortgages, and other instruments of a legal

140

nature.4 It is also clear from the KBA opinions

that a lawyer (including in-house counsel) not

licensed to practice in Kentucky may not

represent a client in an administrative hearing.

Activities that have been deemed to constitute

the unauthorized practice of law if performed by

a person other than an attorney (even where such

person is a duly authorized officer or employee

of the company and does not receive

compensation for performing such particular

activities) include preparing and filing articles of

incorporation of a Kentucky corporation5 and

drafting mortgages, security agreements,

financing statements, and other instruments for

and on behalf of a bank, savings and loan

association, or other lending institution.

Thus, an attorney who was employed by a

corporation as its corporate general counsel in

Kentucky and whose duties included supervision

of in-house attorneys and outside counsel,

providing strategic legal direction, and

compliance with various legal requirements, was

held to have engaged in the unauthorized

4 Howton v. Morrow, 106 S.W.2d 81, 82 (Ky. 1937).

5 Further, all instruments for the corporation prepared following its incorporation (e.g. bylaws, stock certificates and article amendments) must be prepared by an attorney unless the lay draftsperson is a named and benefited party of such instruments.

practice of law,6 because he was not licensed to

practice law in Kentucky.

Any person who engages in the practice of law

in Kentucky without a license issued by the

Supreme Court of Kentucky may be subject to

an injunction or a finding of contempt by the

Supreme Court. The KBA is authorized to

investigate any report of unauthorized practice

of law. The unauthorized practice of law is also

a Class B misdemeanor criminal offense

(punishable by a sentence of imprisonment not

to exceed 90 days) and can be the subject of a

criminal complaint issued by the county attorney

of the county where it occurs.

ADVISORY OPINIONS

When in doubt whether a particular activity may

constitute the unauthorized practice of law, an

advisory opinion may be requested from the

Unauthorized Practice of Law Committee of the

KBA. Formal unauthorized practice of law

opinions may be issued by the KBA Board of

Governors upon recommendation of the

Unauthorized Practice of Law Committee.

ADMISSION PRO HAC VICE

Pursuant to SCR 3.030, a person admitted to

practice in another state but not in Kentucky

may practice a case in the state only if he or she

6 Hipwell v. Kentucky Bar Association, 267 S.W. 3d 682 (Ky. 2008).

141

subjects himself or herself to the jurisdiction and

rules of the court which govern professional

conduct, pays a per case fee of $270 to the KBA,

and engages a member of the KBA as co-

counsel. This limited admission to appear in a

particular case in a particular court with the

assistance of local counsel is commonly referred

to as admission pro hac vice. Such co-counsel

must be present at all trials and at other times as

may be required by the court.

The KBA has made available an out-of-state

certification request form, which can be found

on the KBA website at www.kybar.org/-

Documents/Membership/prohacvice.pdf

(revised March 1, 2012). The request must

include the Kentucky court name and full case

number for which the request is being made.

The applicant’s signature on the form must be

notarized. Upon receipt of a completed form

and accompanying fee, the KBA will mail a

letter/receipt to the applicant certifying that a

request was made and that it has received the

fee. This letter must then be presented to the

court. The decision to grant or deny a motion

for admission pro hac vice rests with the

discretion of the trial court.

LIMITED CERTIFICATE OF ADMISSION TO PRACTICE OF LAW

Pursuant to SCR 2.111, an attorney who

performs legal services in Kentucky solely for

his or her employer or its parent, subsidiary, or

affiliated entities shall file an application for

limited certificate of admission. The application

is submitted to the Kentucky Office of Bar

Admissions and reviewed by the Character and

Fitness Committee.7

The applicant must be admitted to practice in the

highest court of another state or the District of

Columbia and be a member in good standing at

the Bar of such court, or in such state, at the time

of filing the application. The applicant must

also certify to the court that he or she (i) has

completed the study of law in an accredited law

school, (ii) has been admitted to practice in the

highest court of another state or the District of

Columbia, (iii) is presently in good standing at

the Bar of such court or state, and (iv) will

perform legal services in the state solely for his

or her employer or its parent, subsidiary or

affiliated entities.

The application must be accompanied by a

sworn statement from the applicant’s employer

that the applicant is employed by it and performs

legal services in Kentucky for the employer or

its parent, subsidiary, or affiliated entities.

There is a one-time application fee in the

amount of $1,000 payable to the Kentucky

Office of Bar Admissions. In addition, the

7 The Kentucky Office of Bar Admissions is an agency created by the Supreme Court of Kentucky which is comprised of the Kentucky Board of Bar Examiners and the Character and Fitness Committee. See SCR 2.000, 2.020 and 2.040.

142

applicant must pay the current annual dues or

fees of the KBA.

Upon being granted and issued a limited

certificate of admission to practice law in

Kentucky by the Clerk of the Supreme Court,

the applicant becomes an active member of the

KBA, subject to all duties and obligations of

KBA members. All rules, rights, and privileges

governing the practice of law in Kentucky are

applicable to the attorney; provided, however,

that the attorney may only perform legal services

in the state for the employer or its parent,

subsidiary, or affiliated entities, and not for any

other individual or entity. Further, he or she

may not appear as attorney of record for the

employer or its parent, subsidiary or affiliated

entities in any case or matter pending before a

Kentucky state court without first engaging a

member of the KBA as co-counsel. Such co-

counsel must be present when required by the

court and at all trials or other times specified by

the court.

Once granted a limited certificate of admission,

the attorney is considered to be actively engaged

in the practice of law in the state for all

purposes.

The limited certificate of admission expires if

the attorney is granted a certificate of admission

to practice, is admitted to the KBA under any

other rule of the Supreme Court of Kentucky, or

ceases to be an employee of the employer (or its

parent, subsidiary or affiliated entities) listed on

the application. The attorney may maintain the

limited admission if he or she becomes

employed within 30 days by another employer

for which the attorney will solely perform legal

services. The attorney must promptly notify the

Clerk of the Supreme Court, stating the dates on

which his or her prior employment ceased and

the new employment commenced, identifying

his or her new employer, and reaffirming that he

or she shall not provide legal services to any

other individual or entity. In the event that the

attorney’s employment terminates with no

subsequent employment by a successor

employer within 30 days, the attorney must

promptly notify the Clerk of the Supreme Court,

stating the date that such employment ceased.

LEGAL ETHICS RULES APPLICABLE TO

THE UNAUTHORIZED PRACTICE OF

LAW

Under the Kentucky Rules of Professional

Conduct, a lawyer not admitted in Kentucky

may not establish or maintain a law office (even

if he or she is not physically present here) or

other presence in the state or hold out to the

public or otherwise represent that the lawyer is

admitted to practice law in Kentucky. However,

a lawyer admitted in another United States

jurisdiction and not disbarred or suspended from

practice in any jurisdiction may ethically

143

provide legal services on a temporary basis8 in

Kentucky if such services:

(1) comply with the requirements for admission

pro hac vice (discussed above) or do not require

such admission due to federal law;

(2) are in, or reasonably related to, a pending or

potential proceeding before a tribunal or

alternative dispute resolution proceeding in

another jurisdiction for a client, or prospective

client, if the services arise out of, or are

reasonably related to, the lawyer’s practice in a

jurisdiction in which the lawyer is admitted to

practice and are not services for which the forum

requires pro hac vice admission;9 or

(3) arise out of, or are reasonably related to, the

representation of the lawyer’s client in the

jurisdiction in which the lawyer is admitted.

Violations of the Kentucky Rules of

Professional Conduct are investigated by the

KBA Bar Counsel under procedures set forth in

8 As stated in the official commentary to SCR 3.130(5.5), “[t]here is no single test to determine whether a lawyer’s services are provided on a ‘temporary basis’ in this jurisdiction, and may therefore be permissible […]. Services may be ‘temporary’ even though the lawyer provides services in this jurisdiction on a recurring basis, or for an extended period of time.”

9 Examples of permitted activities cited by the rule commentary include meeting with the client, interviewing witnesses, document review and taking depositions.

SCR 3.160 through 3.400. Under SCR

3.130(8.5), a lawyer not admitted in Kentucky is

subject to such disciplinary authority if he or s

he provides or offers to provide any legal

services in Kentucky.