northern kentucky law review · 228 northern kentucky law review [vol. 22:2 strove to improve the...

NORTHERN KENTUCKYLAW REVIEW

Volume 22 Spring 1995 Number 2

Kentucky Law Issue

IN MEMORIAMTimothy J. Brandt ..................................................... Joseph L. Baker 227

ARTICLESLimited Liability Companies and RegisteredLimited Liability Partnerships in Kentucky:A Practical Analysis .......................................... Francis J. Mellen, Jr

Theodore T Myre, JrJames W. Lee 229

Recommendations for Improving Kentucky'sInheritance Laws ......................................... Frederick R. Schneider 317

House Bill 928: Solution or Band-Aid forKentucky Workers' Compensation? ................ . . .. . . .. . . . .. Paul E. Jones 357

The Kentucky Health Reform Act ....................... Julia Field CostichMike Helton 381

Kentucky Division, Horsemen's Benevolent& Protective Association, Inc. v. Turfway ParkRacing Association, Inc.: Controlling the Stakesof Kentucky Horseracing ..................................... Susan Zeller Dunn 405

Wanton Murder, Self-Defense, and JuryInstructions: Shannon v. Commonwealthis Revisited; But Does it Remain? ............ . .. . . . .. . . James G. Hodge, Jr 435

Recent Decisions on the Kentucky Rulesof Evidence ............................................................ Sheryl Egli Heeter 463

Kentucky Estate Planning andAdministration Update ................................ Mary Lee Muehlenkamp 489

NOTESDeters v. Judicial Retirement and Removal Commission:Free Speech and the Appearanceof Judicial Impartiality ........................................ Scott Robert Brown 497

Piercing the Corporate Veil in Kentucky: AnAnalysis of United States v. WRW Corp ............ Russell Lance Miller 541

IN MEMORIAM

TIMOTHY J. BRANDT

by Joseph L. Baker*

Timothy J. Brandt passed away on August 17, 1994. A gradu-ate of Thomas More College and Notre Dame University LawSchool, he maintained a 4.0 grade-point average at both institu-tions. Tim also held an M.B.A. from the University of Cincinnati.He had studied in England and taught economics at the Univer-sity of California at Berkeley. Tim also had travelled extensivelythroughout Europe and Russia.

Since 1972 Tim had practiced law in Northern Kentucky withthe firm of Ziegler & Schneider, P.S.C. He concentrated primari-ly in the areas of real estate, condominiums and commercialfinancing. In these areas Tim achieved recognition from thepracticing bar and judiciary as an exceptionally talented practi-tioner. Frequently, other lawyers sought his advice on real estatematters and Tim always took the time to discuss these matters,often sending a pertinent article or case. His senior partner, WillZiegler, says Tim had the best legal mind he has ever encoun-tered.

Tim read voraciously, regularly poring over (riather than scan-ning) not only the advance sheets of Kentucky cases, but alsoUnited States Law Week and a number of legal publications andjournals. Tim also published in both the Northern Kentucky LawReview, volume 21-2, and Probate & Property, the magazine ofthe Real Property Probate and Trust Law section of the Ameri-can Bar Association.

As a member of the Kentucky Bar Association, the NorthernKentucky Bar Association, the Cincinnati Bar Association andthe American Bar Association, Tim volunteered his time to semi-nars and especially Law Day forums and moot court competi-tions. In short, Tim Brandt was a lawyer's lawyer. He constantly

* Joseph L. Baker is a partner of the law firm Ziegler & Schneider, P.S.C. in

Covington, Kentucky.

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228 NORTHERN KENTUCKY LAW REVIEW [Vol. 22:2

strove to improve the quality of service and the public image ofthe profession.

Those who worked with Tim soon learned to expect the high-est level of professionalism and legal ability. What set him apart,however, was Tim's dry wit and sense of humor. Complimentingand balancing Tim's demanding work ethic and high standardswas his ready wit and self-effacing sense of humor. These quali-ties defined the real Tim Brandt. More than his unquestionablybrilliant and erudite mind, his wit and sense of humor will bemissed by his colleagues and co-workers. In a profession whichoften takes itself too seriously, Tim never did. He is missed.

ARTICLES

LIMITED LIABILITY COMPANIES AND REGISTEREDLIMITED LIABILITY PARTNERSHIPS IN KENTUCKY:

A PRACTICAL ANALYSIS

Francis J. Mellen, Jr.*

Theodore T. Myre, Jr.**

James W. Lee**

I. INTRODUCTION .......................... 233

II. KENTUCKY LLCS - NON-TAXCONSIDERATIONS ........................ 234

A. A Summary of Basic LLC Termsand Concepts .......................... 235

1. Formation of an LLC .................. 2362. Foreign LLCs ....................... 2373. Amending the Articles of

Organization ....................... 2384. Name of the Entity .................. 2385. M em bers .......................... 2396. Management of the LLC ............... 240

* Francis J. Mellen, Jr. is a partner of the law firm Wyatt, Tarrant & Combs

in Louisville, Kentucky. B.A., M.A., University of Kentucky; J.D., Harvard Universi-ty. ** Theodore T. Myre, Jr. is a partner of the law firm, Wyatt, Tarrant & Combsin Louisville, Kentucky. A.B., magna cum laude, Cornell University; J.D., Universityof North Carolina; L.L.M., Taxation, New York University.

*** James W. Lee is an associate of the law firm Wyatt, Tarrant & Combs inLouisville, Kentucky. B.A., Washington University; J.D., Harvard University. Theauthors gratefully acknowledge the contributions of Paul J. Cox and Todd A. Haussto this article.

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a. Management by Members .......... 241b. Voting Rights of Members .......... 242c. Voting Rights Affecting Tax

Status ......................... 243d. Management by Managers ......... 243e. Appointment of a Manager ......... 244f. Additional Considerations in Selecting

Member Versus ManagerManagement .................... 245

g. Additional GovernanceFormalities ..................... 246

7. Economic Considerations .............. 246

a. LLC Interest .................... 246b. Capital Contributions ............. 247c. Promise to Contribute Capital ........ 247d. Initial Capital Structure ........... 248e. Operating Distributions ........... 249f. Tax Allocations .................. 250g. Liquidating Distributions .......... 251h. Payments to a Withdrawing

M em ber ....................... 251

8. Other Notable Considerations andAttributes ......................... 252

a. Limited Liability ................. 252b. Transfers of Interests ............. 255c. Agency Principles ................ 257

9. Dissolution ......................... 25710. Conversions ........................ 25811. Annual Reports ..................... 25912. M ergers ........................... 25913. Foreign LLCs ....................... 259

B. Limitation on Usage ..................... 260

1. Professionals ....................... 2602. A Caveat .......................... 260

1995] LIMITED LIABILITY COMPANIES 231

III. KENTUCKY RLLPS - NON-TAXCONSIDERATIONS ........................ 261

IV. PARTNERSHIP CLASSIFICATION FORTAX PURPOSES ........................... 266

A. A General Overview ..................... 266

B. The Corporate ClassificationRegulations ........................... 267

1. Limited Liability .................... 2682. Centralization of Management .......... 2703. Free Transferability of

Interests .......................... 2724. Continuity of Life .................... 2795. Amendments ....................... 284

V. SELECTED PARTNERSHIP TAXATION ISSUES.. 285

A. Substantial Economic EffectR ules ................................ 285

1. Maintenance of Capital Accounts ........ 2862. Liquidation in Accordance

with Capital Accounts ................ 2863. Makeup of Deficit Capital

Account Balance .................... 287

B. Section 704(c) Book/Tax Disparities ......... 288

1. Traditional Method .................. 2892. Traditional Method with

Curative Allocations .................. 2903. Remedial Allocation Method ............ 290

C. Disguised Sale Provisions ................. 290D. Retirement Payments .................... 292E. Section 754 Elections .................... 292F. Revaluation of Capital Accounts ............ 292G. Unified Audit Provisions .................. 293


VI. CHOICE OF ENTITY CONSIDERATIONS ....... 293

A. Eligibility Considerations ................. 294B. Flow-Through Tax Status ................. 294

1. Favorable Tax Features of LLCs andPartnerships Compared to S andC Corporations ...................... 294

2. Favorable Tax Features of S Corporations Com-pared to LLCs ...................... 300

3. C Corporations and Partnerships ......... 300

C. Business Complexity Factor ............... 300D. Tax Complexity Factor ................... 301E. Unfamiliarity Factor ..................... 301F. Uncertainty Factor ...................... 301G. Limited Liability ........................ 302H. Multi-State Operations ................... 302I. Participation in Management .............. 302J. Fringe Benefits ......................... 302K. Timing of Taxes ........................ 304L. Use of Tax Losses ....................... 304

M. Alternative Minimum Tax ................. 304N. Double Tax ............................ 3040. Tax Rates ............................. 305P. Insolvency Exception .................... 305Q. Section 1244 Loss Treatment .............. 305R. Tax Terminations ....................... 306S. Sole Owner ............................ 306T. Securities Law Considerations ............. 306U . Form alities ............................ 307V. Affiliated Groups ....................... 307

W. Self-Employment Taxes .................. 307X. Method of Accounting .................... 311Y. Fifty Percent Gain Exclusion .............. 313Z. Right of Owners to Dissolve ............... 313

AA. Status of LLC Members as "Employees" ....... 314

VII. CONCLUSION ....................... .... 314

LIMITED LIABILITY COMPANIES

I. INTRODUCTION

This article will provide a practical discussion of two types ofbusiness entities now permitted to be formed under Kentuckylaw: limited liability companies (LLCs) and registered limitedliability partnerships (RLLPs). Both entities were authorized bylegislation enacted during the 1994 General Assembly, which be-came effective on July 15, '1994.1 For convenience, this articlewill refer to those portions of the legislation dealing with LLCsas "the LLC Act" and those portions dealing with RLLPs as "theRLLP Act."

LLCs are entities of reasonably longstanding origin and wide-spread use. The first enabling legislation in the United Stateswas enacted in Wyoming in 1977.2 Since then, nearly everystate has enacted limited liability statutes, including Tennesseeand Indiana.3 Registered limited liability partnerships are ofmore recent vintage.4 While LLCs are a new type of entity inKentucky, RLLPs are simply a new category of general partner-ships. RLLPs are general partnerships that are afforded some,but not all of the limited liability protection available in thecorporate or LLC context. 5

The primary attraction of the LLC and the RLLP is in limitingpersonal liability while maintaining a single level of tax. Whilelimited owner liability previously could be achieved through thecorporate form, or through the use of a limited partnership witha corporate general partner, LLCs offer a new level of operation-al flexibility without sacrificing the tax benefits available in atax pass-through entity. Thus, LLCs will generally not be attrac-tive to owners unless the entity qualifies as a partnership for taxpurposes, although state law permits their use even if they failto obtain or maintain that classification.6 To qualify for pass-

1. 1994 Ky. Acts 389 (creating KY. REV. STAT. ANN. § 275 (Michie/Bobbs-MerrillSupp. 1994) and amending KY. REV. STAT. ANN. § 362 (MichielBobbs-Merrill 1987 &Supp. 1994) and § 271B (Michie/Bobbs-Merrill 1989 & Supp. 1994)).

2. William D. Bagley & Philip P. Whynott, THE LIMITED LIABILITY COMPANY:THE BETTER ALTERNATIVE 1.502 (1991).

3. Brian L. Schorr & Sylvia Wong, Limited Liability Company Law, Part One,N.Y.L.J., July 13, 1994, at 1.

4. Brian L. Schorr & Sylvia Wong, Limited Liability Company Law, Part Two,N.Y.L.J., July 14, 1994, at 4.

5. RLLPs are otherwise subject to the Kentucky Uniform Partnership Act. KY.REV. STAT. ANN. §§ 362.150-.360 (Michie/Bobbs-Merrill 1987 & Supp. 1994).

6. Cf KY. REV. STAT. ANN. § 275.020 (Michie/Bobbs-Merrill Supp. 1994) (setting

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through taxation, however, the LLC "operating agreement" (dis-cussed below) may have to include certain terms that are notnecessarily consistent with the owners' business objectives. Reg-istered limited liability partnerships provide more limited, butstill quite valuable, liability protection and will generally betaxed as partnerships without the necessity of altering the busi-ness arrangement.7

II. KENTUCKY LLCS - NON-TAX CONSIDERATIONS

This section will discuss the LLC Act8 and comment on non-tax considerations that go into the formation and operation of anLLC.

A notable similarity between the LLC Act,9 the Kentucky Uni-form Partnership Act'0 and the Kentucky Revised Uniform Lim-ited Partnership Act,1" is that the LLC Act provides a series of"default" or fallback provisions that will apply to a KentuckyLLC unless there is an agreement of the owners to the contrary.Thus, many Kentucky LLCs will likely have an operating agree-ment that is backed up with one or more statutory default provi-sions, which arise only where there is no superseding provisionin the operating agreement.

For example, as with the Kentucky Uniform Partnership Act,the LLC Act provides that if management of an LLC is vested inits members, as opposed to being vested in a manager or manag-ers, then the members' vote is "per capita" rather than in propor-tion to their relative capital contributions. 2 Consequently, un-less all members contribute capital to the LLC in equal shares,the allocation of voting power contained in the LLC Act defaultprovision will generally be unacceptable since it would allow amember who contributes a small portion of capital to have votingrights equal to those of a member who contributes a larger por-tion.

forth the requirements for articles of organization).7. Id. § 141.208.8. Id. § 275.9. Id. §§ 275.001-.455.

10. Id. §§ 362.150.360 (Michie/Bobbs-Merrill 1987 & Supp. 1994).11. Id. §§ 362.401-710 (Michie/Bobbs-Merrill Supp. 1994).12. Id. § 275.175(1).

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This example illustrates the importance of being familiar withthe LLC Act default provisions and knowing when those provi-sions should be superseded by agreement of the members. It iscomforting to know, however, that certain default provisions ofthe LLC Act are intended to ensure that an entity formed underthe LLC Act will qualify as a partnership for tax purposes, as-suming that those provisions are not inadvertently countermand-ed by agreement of the parties. This article will identify impor-tant default provisions and discuss the general advisability ofrelying on such provisions or overriding them by agreement ofthe members.

A. A Summary of Basic LLC Terms and Concepts

An LLC is a creature of state statute, the LLC Act. 13 TheLLC Act creates a whole new lexicon applicable to this new formof entity, using key statutory terminology that includes suchterms as "operating agreement,"'4 "members,'' 5 and "manag-ers." 6 This new terminology may be somewhat daunting to law-yers and their clients who are much more familiar with theterms "shareholder," "partner," "president," "directors," "articlesof incorporation and bylaws," and "partnership agreement." Themore artfully the legal advisor can explain the basic principles ofthe LLC at the outset and during its operation, the less intimi-dating this type of entity will be to clients who otherwise mightbe favorably served by utilizing the LLC form.

As discussed in detail below, an LLC is formed with the filingof articles of organization, 7 which are analogous to articles ofincorporation 8 in the corporate context and a certificate of lim-ited partnership 9 in the limited partnership setting. LLCs areowned by "members," rather than by "shareholders" or "part-ners," whose rights and duties will normally be embodied in awritten "operating agreement."2 ° The operating agreement com-

13. Id. § 275.14. Id. § 275.015(13).15. Id. § 275.015(12).16. Id. § 275.015(11).17. Id. § 275.020.18. Id. § 271B.1-200 (Michie/Bobbs Merrill 1989).19. Id. § 362.425 (Michie/Bobbs-Merrill Supp. 1994).20. Id. § 275.015(13).

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prises the rules and regulations of the LLC and is a vital andusually essential document.2 An important consideration informing an LLC, and one that should be dealt with at the veryoutset, is whether the members are willing to abide by the re-quirements that must be met in order for the entity to qualify asa partnership for federal and state income tax purposes. If thisquestion is not answered in the affirmative, the LLC format isunlikely to be in the members' best interests.One of the early decisions that must be made by the owners ofan LLC is whether the LLC will be managed by its members, orwhether management will be delegated in some form or fashionto a manager or management committee.22 Obviously, the larg-er the number of members, the more likely that managementwill be vested in fewer than all members or even in a managerthat is not a member.

1. Formation of an LLC

Although a great deal of thought and decision-making musttake place before an LLC is formed, the actual creation of theLLC as a legal entity is little more than a ministerial act. TheLLC is created simply by filing articles of organization.2"

As with corporate articles and a limited partnership certifi-cate, the requirements that must be met to organize the entityare minimal.24 The articles must state: the name of the LLC,which must meet certain requirements; the street address of theLLC's initial registered office and name of its initial registeredagent at that address; the mailing address of the initial principaloffice; that the LLC has at least two members; whether the LLCwill be managed by its members or managed by one or moremanagers; and if the LLC is to have a specific date of dissolu-tion, although no such specific date is required.25 Clients who

21. Id.22. See id. § 275.165.23. Id. § 275.020.24. Compare these to the organizational provisions of the Kentucky Business Cor-

poration Act, KY. REV. STAT. ANN. § 271B, Subtitle 2, and the Kentucky Revised

Uniform Limited Partnership Act, KY. REV. STAT. ANN. § 362.415 (MichiefBobbsMerrill Supp. 1994).

25. Id. § 275.025(1) (Michie/Bobbs-Merrill Supp. 1994).

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desire anonymity will appreciate the fact that the articles do nothave to name the members or the managers.

In addition to the foregoing, the articles must be accompaniedby a written statement of the initial registered agent consentingto serve in that capacity.26 If the LLC is a professional LLC, thearticles of organization must also set forth the particular profes-sional services that will be practiced through the LLC.27

The articles also may contain other matters that are permittedto be set forth in an operating agreement as long as they are notinconsistent with the LLC Act or any other law.28 For example,members may wish to set out the basic outline of their agree-ment in the articles. Nonetheless, most articles should generallyonly contain the required information and statements. The arti-cles of organization may be filed by any person or persons, re-gardless of whether such person is a member of the LLC or aresident of Kentucky, with the Kentucky Secretary of State.29

The original articles of organization must be accompanied by twocopies and a filing fee of $40.30 Generally, the LLC will beformed as of the date of filing; however, the articles may specifya delayed effective date so long as that date is no later than theninetieth day after the actual date of filing.31 One of thestamped copies filed with and returned by the Secretary of Statemust be filed with the clerk of the county in which the registeredoffice of the LLC is situated. Failing to file the articles with thecounty clerk will not impair the existence of the entity so long asthey have been filed with the Secretary of State. 2

2. Foreign LLCs

The LLC Act prohibits a foreign LLC from transacting busi-ness in Kentucky unless it first obtains a certificate of authority

26. Id. § 275.025(4).27. Id. § 275.025(2).28. Id. § 275.025(3).29. Id. § 275.020.30. Id. §§ 275.045(10), .055(1)(a).31. Id. § 275.060(2).32. Id. § 275.045(11).

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from the Secretary of State.33 Additional requirements in thisregard are set out in the statute.34

3. Amending the Articles of Organization

An LLC may amend its articles at any time. 5 Moreover, itmust amend its articles to reflect a name change, a change inthe latest date upon which the organization will dissolve, achange in whether the organization is managed by its membersor by managers, or a change in any other matter that is set forthin the existing articles.3"

The reader should note an important default provision of theLLC Act. Unless the articles of organization or the operatingagreement provides otherwise, an amendment to the articles oforganization normally must be approved by one-half of the num-ber of members if the LLC is member-managed, or by one-half ofthe number of the managers if the LLC is manager-managed.37

However, all members must vote to approve amending the arti-cles to change the management from members to managers orvice versa.3

1 Member approval is not required if the amendmentcorrects the registered agent or office, or the mailing address ofthe principal office, which amendment may be made by a manag-er or, if there is no manager, by any member. 39

4. Name of the Entity

The LLC Act requires that the name of each LLC organized inKentucky include the words "limited liability company" or "limit-ed company," or the abbreviations "LLC" or "LC."4 ° ProfessionalLLCs must include in their names the words "professional limit-ed liability company" or "professional limited company," or theabbreviations 'PLLC" or 'PLC., 41 The word "limited" may beabbreviated as "ltd." and the word "company" may be abbreviat-

33. Id. § 275.385(1).34. See id. §§ 275.390-395.35. Id. § 275.030.36. Id.37. Id. § 275.175.38. Id. §§ 275.030(2), .175.39. Id. § 275.030(3).40. Id. § 275.100(1).41. Id.


ed as "co."42 As with other business organizations, the name ofthe LLC must be distinguishable from any other name on recordwith the Secretary of State.43 The LLC Act provides for namereservation and consent procedures to use similar names.44 Al-though it would be most prudent to do so, it is unclear whetherthe entity must use the LLC name appendages on its letterhead,business cards, or otherwise in order to gain the liability protec-tion of the LLC Act.

5. Members

The "members" of an LLC are the owners of the entity.45 Assuch, their rights are vastly different from and should not beconfused with "members" as used in the Kentucky NonprofitCorporation Act.46 Under the LLC Act, a member generallystands in the same economic position as the shareholder of a cor-,poration or the partner of a partnership, although the LLC formblends the corporate and partnership forms in terms of gover-nance. In the corporate setting, the shareholders generally arefar removed from the day-to-day management of the corporation,except to the extent the shareholders are the officers and direc-tors. In the general partnership setting, the partners can haveday-to-day management authority unless such authority is spe-cifically delegated to a managing partner or to a non-partner.The limited partners of a limited partnership are more compara-ble in this regard to shareholders of a corporation.

In the LLC setting, the statute provides greater flexibility inregards to governance. Members of an LLC can select the man-ner in which the LLC is managed, which may be by all membersin accordance with prescribed voting requirements, by one ormore (but not all) members, or by non-member managers.47 Ifmanagement is delegated by the members, approval and otherpowers may be reserved by the members as they deem appropri-ate. However the LLC ultimately is managed, the members re-tain their proportionate economic rights as owners of the entity,

42. Id.43. Id. § 275.100(2).44. Id. § 275.100(5).45. See id. § 275.015(12).46. See id. § 273.161(6) (Michie/Bobbs-Merrill 1989 & Supp. 1994).47. See id. § 275.165 (Michie/Bobbs-Merrill Supp. 1994).

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which is reflected in distributions of operating income,' 8 alloca-tions of tax items,'9 and sharing in liquidation proceeds.5"

Indirectly, the LLC Act requires that there be at least twomembers in an LLC. Although the requirement is not specificallystated, it is implied in the requirement that the articles of orga-nization must state that the LLC has at least two members. 51

6. Management of the LLC

As with partnerships, LLCs will normally be governed by adetailed contract, the operating agreement, that spells out therights and duties of the owners and managers.52 The operatingagreement will normally override many of the default provisionsof the LLC Act. This attribute is one that distinguishes the LLCfrom corporations, where the provisions of the applicable Ken-tucky statute, whether business or nonprofit, are normally close-ly in accord with the desires of the parties. With its multitude ofchoices, the LLC lends itself to a great deal of creativity andcomplexity in designing the entity's management structure.

An operating agreement is defined as "any agreement, writtenor oral, among all of the members, as to the conduct of the busi-ness and affairs of a limited liability company." 3 The membersof an LLC conceivably could choose to have no operating agree-ment.54 Generally speaking, however, an LLC will have an op-erating agreement even if there is no formal written documentdesignated as such. Since an operating agreement may be oral,any oral agreement or understanding among the members re-garding the conduct of the LLC business would probably be con-sidered to be an operating agreement.

Obviously, it is good practice to utilize a written operatingagreement. In addition to the natural uncertainty as to theterms of an oral operating agreement, a written agreement is

48. Id. § 275.205.49. Id. § 275.210.50. Id. § 275.310.51. Id. § 275.025(1)(d).52. See id. § 275.015(13).53. Id.54. See id. (defining "operating agreement" as "any agreement, written or oral,

among all of the members, as to the conduct of the business and affairs of a limitedliability company" (emphasis added)). No provision of the LLC Act expressly requiresa Kentucky LLC to have an operating agreement.

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required in order to override some of the default provisions ofthe LLC Act. Kentucky Revised Statutes (KRS) section275.015(13) provides that if the written agreement requires thatamendments to the operating agreement be in writing andadopted in accordance with the requirements of the written oper-ating agreement, such a provision is enforceable.55 A provisionof this nature is generally desirable in order to prevent one ormore members from arguing that there is an oral agreement thatsupplements or amends the existing written agreement.

Furthermore, the management structure of the LLC should beset out in detail in the LLC operating agreement. Creating themanagement structure of an LLC will require numerous deci-sions, all of which should be embodied in the operating agree-ment.

a. Management by Members

An important default provision set forth at KRS section275.165(1) provides that, unless the articles of organization vestmanagement of the LLC in a manager or managers, the manage-ment of the business and affairs of the LLC shall vest in itsmembers." Thus, an LLC will be member-managed unless itsarticles of organization specifically provide otherwise."

LLCs that are most suitable to member management are thosethat consist of only a few owners who will actively participate inthe day-to-day operations of the business, or those where thebusiness is of a nature that does not require the constant atten-tion of the owners, such as holding real estate for investment.However, it should be kept in mind that a member-managedLLC can contract out or otherwise designate an employee oragent to handle the day-to-day affairs of the LLC without techni-cally converting itself into a manager-managed LLC under theLLC Act. Ultimately, the ability of a member-managed LLC tohire a nonstatutory "manager" blurs the practical distinctionbetween the two types of management structures. The majordifferences are where the overall powers ultimately are vestedand who can bind the entity.

55. Id.56. Id. § 275.165(1).57. Id.

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b. Voting Rights of Members

If the LLC is managed by its members, then the voting rightsobviously reside with those persons. However, the operatingagreement can prescribe the manner in which certain acts are tobe approved, whether by super-majority vote, specific vote, orveto by certain named members.

As noted above, it is very important to remember the defaultprovision with respect to voting by members. KRS section 275.1-75(1) specifically states that, unless otherwise provided in thearticles of organization, the operating agreement, or in the LLCAct itself, member voting is per capita, rather than by propor-tionate ownership interest or by relative capital contributions.Thus, failure to spell out voting rights specifically in the operat-ing agreement could lead to unexpected results.

In establishing the voting rights of the members, the firstquestion is allocating the percentages of voting power. Normally,voting power will be proportionate to the members' relative capi-tal contributions and their rights to share in distributions andreceive tax allocations. Once the percentages of voting power areestablished, it is then necessary to identify certain events thatmight require super-majority vote, such as sale of all, or sub-stantially all, of the LLC's assets or merger of the business intoanother LLC or partnership. In this regard, one should be awareof the default provision set forth in KRS section 275.175(2),which imposes the requirement of unanimous member approval,absent an agreement to the contrary in the operating agreement,for: (1) amending a written operating agreement; (2) authorizinga manager or member to do any act on behalf of the LLC thatcontravenes the written operating agreement; and (3) amendingthe articles of organization to change the management of theLLC from member-managed to manager-managed and vice ver-sa.58

There also may be instances where a provision requiring thevote of a particular member or members is desirable. For exam-ple, an operating agreement might require that a sale of a par-ticular asset take place if it is approved by a majority of thepercentage interests, but only if such majority includes the affir-

58. Id. § 275.165(2).

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mative vote of a particular member or members. This wouldeffectively give those members a veto over the transaction. Inaddition, there may be certain circumstances where an actioncan be compelled by vote of less than a majority of the members,a "super-minority right." For instance, it might be desirable for aparticular member or members to be able to compel the LLC tomake an election under the Internal Revenue Code (the Code) orto revalue the LLC capital accounts, even though a majority ofthe members do not wish to do so.

c. Voting Rights Affecting Tax Status

Certain decisions regarding voting rights can affect the taxstatus of the LLC.59 These relate to the right of the members toadmit an assignee as a member of the LLC and continue theLLC despite an "event of disassociation."' The LLC Act con-tains statutory default clauses that will ensure tax classificationas a partnership. If the members propose to override these de-fault provisions, great care should be taken to ensure that part-nership tax status is not jeopardized.

d. Management by Managers

The members of an LLC may choose to override the member-managed default provision of the LLC Act and provide for man-agement by one or more statutory managers.6 If the organiza-tion is managed by managers, many of the rights and dutiesnormally vested in members devolve automatically to the manag-ers.62 KRS section 275.135(2) states that if the articles of orga-nization provide that the LLC is to be managed by managers,then the manager, rather than the members, stands as an agentof the LLC.6"

The most important provision regarding the role of managersis set out in KRS section 275.165(2), which provides for the role

59. See infra part IV.60. See infra part IV.B.3-.4.61. Ky. REV. STAT. ANN. § 275.165 (Michie/Bobbs-Merrill Supp. 1994).62. Id. § 275.165(2).63. Id. § 275.135(2). Similar provisions are contained in KRS § 275.140(2) regard-

ing admissions, statements, and representations, and in KRS § 275.145(2) regardingnotice or knowledge imputed to the organization.

NORTHERN KENTUCKY LAW REVIEW

of the manager vis-a-vis the members.64 The default provisioncontained in KRS section 275.165(2) provides that managershave exclusive power to manage the business and affairs of amanager-managed LLC."5 Thus, except where otherwise specif-ically provided by the LLC Act, the manager(s) will have solemanagement authority unless the operating agreement providesto the contrary.6 There are certainly instances where it couldbe desirable to restrict the management role of the manager,both in terms of specifically limiting the functions and acts thatthe manager(s) may carry out and requiring some form of mem-ber vote or approval in designated circumstances.

Where there is more than one manager, the operating agree-ment should also clearly spell out how decisions are to be madeby the management group, whether the group consists of a man-agement committee or of several named managers. In this re-gard, the practitioner should be aware of the default provisionwhich provides that, as with the vote of members, the vote ofmanagers must be by more than one-half of the number of man-agers unless otherwise provided by the articles, the operatingagreement or the LLC Act.67 Thus, if there are two managers,unanimity will be required in order for the managers to act.Accordingly, where there are multiple managers, the operatingagreement should provide a mechanism for the exercise of man-agement authority.

e. Appointment of a Manager

Unless otherwise provided in the operating agreement or thearticles of organization, managers are not required to be drawnfrom the LLC's membership.68 The LLC Act contains defaultprovisions regarding appointment of managers that may not bedesirable and many times will be overridden by the operatingagreement. For example, KRS section 275.165(2)(a) provides thatmanagers shall be designated, appointed, elected, removed, or re-

64. Id. § 275.165(2).65. Id.66. Id.67. Id. § 275.175(1).68. Id. § 275.165(2)(b).

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placed by a vote, approval, or consent of more than one-half ofthe number of the members.69

Two observations are in order here. First, the per capita de-fault voting requirements in KRS section 275.175 once again arerelevant. Unless the operating agreement overrides the per capi-ta requirement and makes it clear that the contractually createdvoting rights apply in all instances, confusion could arise as towhether the per capita voting provisions in the LLC Act havebeen supervened for all issues on which a vote can be taken.Second, there may be instances where the members will wantthe appointment or removal of a manager to be by a super-ma-jority vote, for instance, where a mutually agreeable manager isappointed at the outset and the members wish to make it diffi-cult for that person to be removed.

f. Additional Considerations in Selecting Member VersusManager Management

If the members choose a manager-managed LLC, they mightunwittingly trigger some adverse tax consequences discussed ingreater detail below. ° First, manager-managed LLCs will beprecluded from claiming the non-corporate attribute of decen-tralized management. This could make it more difficult, or re-quire changes in other provisions, to obtain partnership tax sta-tus.

Second, by electing to be a manager-managed LLC, the ownersmay disqualify the entity from using the cash method of account-ing. If the predecessor entity was a general partnership withsubstantial accounts receivable, that election could result inaccelerated income recognition of the receivables.'

On the other hand, choosing to be a member-managed LLCand consolidating management authority in a few members hasits own potential problems. The main drawback of member-man-aged LLCs is the ability, mandated under the LLC Act, of eachand every member to bind the entity contractually, notwith-standing the terms of the operating agreement.7 Obviously, the

69. Id. § 275.165(2)(A).70. See infra part IV.B.2.71. See KY. REV. STAT. ANN. § 141.208 (Michie/Bobbs-Merrill Supp. 1994) (cover-

ing tax treatment for LLCs).72. Id. § 275.135(1). *

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larger and looser the membership, the greater the risk. Selectingmember management may also unnecessarily subject one ormore of the members to self-employment tax.73

g. Additional Governance Formalities

Quite unlike the corporate statutes, the LLC statutes do notaddress many of the formalities and procedures that will arise inthe governance of the LLC. Thus, as contrasted with the Ken-tucky Business Corporation Act,74 the LLC Act does not spellout default provisions for member meetings and, where appropri-ate, meetings of managers. These provisions must therefore beplaced in the operating agreement and will normally be similarto the provisions typically contained in a corporation's bylaws.Periodicity of meetings, quorum requirements, notice require-ments for meetings, unanimous written consent provisions, andother provisions dealing with governance formalities must al-ways be spelled out in the operating agreement if they are de-sired. In LLCs with only a few members, such governance provi-sions may not be necessary; but where there are many members,especially where some are not actively involved in the businessof the LLC, spelling out the formalities of governance provisionsis very important.

7. Economic Considerations

There are a variety of economic issues attendant to the choiceof the LLC entity. The following are a few of the more importantpoints.

a. LLC Interest

The ownership interest in an LLC, and the LLC equivalent tostock or a partnership interest, is a "limited liability companyinterest."75 Such "interests" may be, but are not required to be,represented by certificates.76

73. See infra part VI.W.74. Id. § 271B (Michie/Bobbs Merrill 1989 & Supp. 1994).75. A "limited liability company interest" is defined as "the interest that may be

issued in accordance with KRS 275.195." Id. § 275.015(9) (MichielBobbs Merrill Supp.1994).

76. Id. § 275.255(2).

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b. Capital Contributions

Members of an LLC have great latitude in the type of propertythat they can contribute to the LLC in exchange for an LLCinterest. The LLC Act provides that "a limited liability companyinterest may be issued in exchange for consideration consistingof cash, property, services rendered, or a promissory note orother obligation to contribute cash or property or to performservices."" In this regard, the permissiveness of the LLC formshould be distinguished from the corporate law requirementsthat allow the issuance of stock only for actual contributions ofmoney or property or in exchange for services already per-formed. 8 A promise to pay money, whether in writing or oral,as well as a promise to perform services in the future, cannot bea basis for issuing corporate stock. 9

c. Promise to Contribute Capital

KRS section 275.200(1) provides that "[a] promise by a mem-ber to contribute to the limited liability company shall not beenforceable unless set forth in a writing signed by the mem-ber."8 ° Several important points are raised by this provision.

First, unlike many other provisions in the LLC Act, this provi-sion cannot be countermanded by the operating agreement. Sec-ond, this provision probably applies both to a promise to contrib-ute money or other property and to a promise to perform servic-es. Thus, the requirement for a written agreement could have animpact on the employment relationship of the member in ques-tion. Finally, the statute does not describe what happens whenan agreement is not enforceable but one of the parties has acted.For instance, what happens if a member orally agrees to contrib-ute cash and receives a substantial interest in the LIC? If themember subsequently fails to contribute and the unwrittenpromise is unenforceable, one would expect that the interestissued to that person would be void and he or she would have no

77. Id. § 275.195.78. KY. CONST. § 193; KY. REV. STAT. ANN. § 271B.6-210(2) (Michie/Bobbs-Merrill

1989).79. Kirk v. Kirk's Auto Elec., Inc., 728 S.W.2d 529 (Ky. 1987).80. KY. REV. STAT. ANN. § 275.200(1) (MichielBobbs-Merrill Supp. 1994).

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interest in the entity. It would seem clear that the member inquestion could not force his or her way into the LLC based uponan unenforceable oral agreement.

Issues may arise even where a promise to contribute is inwriting. KRS section 275.200(2) provides that, "Unless otherwiseprovided in the operating agreement, a member shall be obligat-ed to... perform an enforceable promise to contribute cash orproperty or to perform services, even if the member is unable toperform due to death, disability or other reason."81 If the obliga-tion is to contribute future services, the member's estate willlikely be required to contribute cash equal to the value of theservices that were to have been contributed. Failure to make aproperty contribution can also result, at the option of the LLC, ina requirement that the defaulting member pay cash to the LLCequal to the value of the property.82

d. Initial Capital Structure

Before the members make capital contributions to an LLC, itis important that they have a complete understanding of theinitial capital structure and the economic sharing arrangementamong the members. This, in part, is due to the fact that thedefault provisions of the LLC Act relating to distributions andallocations can result in very surprising consequences.

Normally, it is advisable to spell out the various capital contri-butions and, where contributions will be made in other thancash, the value placed by the members on those contributions.The initial capital contributions should be reflected in capitalaccounts that will comply with the federal tax requirements."Where appreciated or depreciated property is to be contributed, adecision must be made as to how tax allocations for the propertywill be handled in view of the mandatory allocation rules ofsection 704(c) of the Code.84

81. Id. § 275.200(2).82. Id. § 275.200(3).83. See infra part V.A.84. See 26 U.S.C. § 704 (1988 & Supp. V 1993).

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e. Operating Distributions

Owners of a business organization normally anticipate thatthey will share in the success of the organization roughly inproportion to the capital that they contribute to it. However, thismight not be the case in an LLC absent an operating agreementthat overrides the default provision of the LLC Act relating todistributions. KRS section 275.210 provides that, "If an operatingagreement does not provide in writing [the manner in whichdistributions of cash or other assets are to be shared among themembers of an LLC], each member shall share equally in anydistribution."85 This default provision obviously can have quiteunexpected consequences and in almost every LLC should beoverridden by the operating agreement.

The amount and timing of operating distributions should nor-mally be established by the terms of the operating agreement. Ifthe operating agreement does not specifically provide for theextent or times at which distributions are to be made, they willbe made in accordance with the voting provisions of the oper-ating agreement, or if no such voting provisions exist, under thedefault provisions of the LLC Act.86 For example, in a three-member LLC, suppose one member contributes $98,000 and theother two contribute $1,000 each and the members fail to specifi-cally address voting or distribution rights in their operatingagreement. The default provisions of the LLC Act would give thetwo $1,000 contributors voting control and they would have anequal voice in deciding when and how to make operating distri-butions, which would be shared equally by the three members.This is undoubtedly not what the $98,000 contributor had inmind.

Other noteworthy provisions of the LLC Act regarding LLCdistributions are as follows. KRS section 275.220(1) providesthat, unless otherwise provided in the operating agreement, amember shall not have a right to demand and receive any distri-bution from an LLC in any form other than cash.87 KRS section

85. Ky. REV. STAT. ANN. § 275.210 (Michie/Bobbs-Merrill Supp. 1994) (emphasisadded).

86. Id. § 275.175.87. Id. § 275.220(1).

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275.220(2) provides that, unless the operating agreement pro-vides to the contrary, no member will be obligated to receive adisproportionate in-kind distribution as compared to other mem-bers.8 KRS section 275.225 contains impairment of capital lim-itations on distributions from an LLC, 9 and KRS section275.230 makes members who vote for a distribution that violatesKRS section 275.225 or the operating agreement personally liableto the LLC for the amount of the excess distribution.90 Finally,KRS section 275.235 provides that, at such time that a memberis entitled to a distribution, the member shall have the status of,and shall be entitled to all remedies available to, a creditor ofthe LLC with respect to such distribution. 91

f. Tax Allocations

As is the case with operating distributions, the owners of anLLC will be well-advised to spell out their scheme for tax alloca-tions in their operating agreement. An important default provi-sion, KRS section 275.205, purports to allocate "profits and loss-es," absent a contrary arrangement in the operating agreement,to the members on a per capita basis.92 However, unlike thedistribution default provision, this default provision does not re-quire that an agreement be in writing in order for it to overcomethe default provision of the LLC Act. At any rate, this defaultprovision could create results contrary to the expectations of theparties. In some instances, a default provision in the LLC Actmight actually be unenforceable with respect to certain tax itemssince the Code might dictate the proper allocation of the taxitems, especially in the case of section 704(c) allocations.93

KRS section 275.310 lays out the default provision in the caseof LLC liquidating distributions. After payment of LLC debts, orprovision therefor, distributions are first made to the membersin satisfaction of any operating distribution obligation underKRS sections 275.210 and 275.215.94 Thereafter, distributions

88. Id. § 275.220(2).89. Id. § 275.225.90. Id. § 275.230.91. Id. § 275.235.92. Id. § 275.205.93. See 26 U.S.C. § 704 (1988 & Supp. V 1993).94. Ky. REV. STAT. ANN. § 275.310 (Michie/Bobbs-Merrill Supp. 1994).

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are made to members and former members, first, for the returnof their contributions, and second, in proportion to the members'respective rights to share in operating distributions.95 This en-tire liquidation scheme can be overcome only by a written operat-ing agreement.96

Unfortunately, the default provision can lead to some unto-ward results. First, there might be some argument as to whethercertain assets of the LLC fit in the first layer of distributions,including operating distributions not yet made, or in the secondlayer, including return of contributions. Second, as with theoperating distributions, the third layer of distributions will bedivided equally among the members without regard to their pro-portionate or disproportionate capital contributions. It shouldalso be kept in mind that the statutory liquidation scheme doesnot ensure the "substantial economic effect" of the tax allocationsunder section 704(b) of the Code.9" Thus, it is almost essentialto override this default provision of the LLC Act with regard toliquidating distributions and it is important to bear in mind thatthis provision cannot be overridden by oral agreement.

g. Liquidating Distributions

Events causing dissolution and certain tax aspects of dissolu-tion are discussed below. Again, as with other economic featuresof an LLC, it is best to set out the liquidation scheme in theoperating agreement. Once the winding up process has beentriggered, whatever the trigger may be, relying upon the LLCAct's default provision can lead to uncertainty and disappoint-ment.

h. Payments to a Withdrawing Member

KRS section 275.215 provides for the rights of a "disassociat-ing" member, a member whose membership has been terminatedbecause of the occurrence of one of the events of disassociationlisted in KRS section 275.280. These events include voluntarywithdrawal, assignment of interest, removal, assignment for thebenefit of creditors, filing of a petition in bankruptcy or other

95. Id.96. Id. § 275.210.97. See 26 U.S.C. § 704(b) (1988 & Supp. V 1993).

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acts of similar economic import, death or incompetency in thecase of an individual member, or dissolution or termination inthe case of a member that is an entity.98 In such case, the dis-associating member is entitled to all distributions that suchmember was entitled to receive prior to the event of disassocia-tion.99

KRS section 275.215 provides that within a reasonable periodof time, the disassociating member is entitled to receive the "fairvalue" for such member's LLC interest as of the date of disasso-ciation "based on the member's right to share in distributions"from the LLC.'1° It is not entirely clear what thi modified"fair value" definition means, and the uncertainty should beavoided by specifically providing for a withdrawing member'srights in the operating agreement.

8. Other Notable Considerations and Attributes

a. Limited Liability

At the heart of the LLC Act is the provision that limits theliability of owners and certain other persons. KRS section275.150 states:

Except as otherwise specifically set forth in this chapter, nomember, manager, employee, or agent of a limited liability com-pany, including a professional limited liability company, shall bepersonally liable by reason of being a member, manager, employ-ee, or agent of the limited liability company, under a judgment,decree, or order of a court, agency, or tribunal of any type, or inany other manner, in this or any other state, or on any otherbasis, for a debt, obligation, or liability of the limited liabilitycompany, whether arising in contract, tort, or otherwise. Thestatus of a person as a member, manager, employee, or agent of alimited liability company, including a professional limited liabilitycompany, shall not subject the person to personal liability for theacts or omissions, including any negligence, wrongful act, or ac-tionable misconduct, of any other member, manager, agent, oremployee of the limited liability company.' 0'

98. KY. REV. STAT. ANN. § 275.280 (Michie/Bobbs-Merrill Supp. 1994).99. See id. §§ 275.300, .215.

100. Id. § 275.215.101. Id. § 275.150.

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This provision represents a powerful shield against the imposi-tion of personal liability upon the owners and practically anyoneelse providing services or acting on behalf of the LLC. Reinforc-ing the protection of KRS section 275.150 is KRS section275.155, which provides that .a member of an LLC is not a prop-er party to a proceeding by or against an LLC "solely by reasonof being a member" of the LLC unless the object of the proceed-ing is to compel a member's right against or liability to the LLCor as otherwise provided in the operating agreement. 10 2 Beforeaddressing its broad scope, however, it may be beneficial to listthe types of liabilities that are not protected by this provision.

First, a member is personally liable under KRS section275.200(2) on account of a written promise to contribute cash,property or services to an LLC.' 0 ' Second, pursuant to KRSsection 275.230, a member may be personally liable to the extentthe member receives or approves a distribution that impairscapital. 0 4 Third, someone in a supervisory position may havethe negligence of persons under his or her control imputed onhim and consequently be liable even though such person is nothimself directly negligent.0 5 The statute, however, attempts tolimit such supervisory exposure, as discussed below. Fourth, aperson may be liable for certain penalties or other payment obli-gations imposed on owners or other responsible persons. Theseobligations could include environmental damages or costs, re-sponsible person penalties under the tax laws, and other penal-ties or fines levied directly against owners or responsible personsunder federal law. There is some question whether the LLC Act,in its broad sweep, supersedes such penalties or damages as im-posed under Kentucky law. Finally, there is the possibility that acourt might "pierce the veil" of the LLC entity.16

To assess the breadth of the liability insulation that is offered,or at least attempted to be offered, under KRS section 275.150, acomparison should be made to the protection offered to share-

102. Id. § 275.155.103. Id. § 275.200(2).104. Id. § 275.230.105. In other words, the protection rendered by the LLC Act may not insulate a

supervisor or employer from traditional common law theories of vicarious liability.106. Cf. White v. Winchester Land Dev. Corp., 584 S.W.2d 56 (Ky. Ct. App. 1979).

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holders under the Kentucky Business Corporation Act. KRSsection 271B.6-220 provides that, "[A] shareholder of a corpora-tion shall not be personally liable for the acts or debts of thecorporation except that he may become personally liable by rea-son of his own acts or conduct."107 This provision is short andsimple compared to the LLC analogue.

KRS section 275.150 does not contain an affirmative statement(as does KRS section 271B.6-220) that a member, manager, em-ployee or agent is liable for his or her own acts or conduct.0 8

KRS section 275.150 purports to protect members and the otherlisted persons from any liability within or without Kentucky forany reason.'0 9 Also notable is the fact that the statute protectsvirtually anyone associated with the LLC, whereas the analogouscorporate statute only protects the shareholders of the corpora-tion. 10

There are, however, a host of federal and state laws that im-pose direct sanctions against owners and other participatingindividuals."' The LLC Act obviously would not supersedethese provisions, and there is some question as to whether itsupersedes state law provisions such as the no-fault sales anduse tax liability imposed upon an organization's officers.1 2

In KRS section 275.160, the drafters attempted to extend theKentucky LLC statute into other jurisdictions and control, bystatute, the choice of law decision by permitting domestic LLCsto do business in other states and countries and by providingthat the extent of limited liability afforded members, managers,employees, and agents of such LLCs in those jurisdictions wouldbe governed by Kentucky law."' It is not clear how successfulthis attempt will be in states without LLC statutes, states wherethe LLC statute provides less protection to members, managers,

107. KY. REV. STAT. ANN. § 271B.6-220(2) (MichiefBobbs-Merrill 1989). This provi-sion is subject to the individual entity's articles of incorporation.

108. Id. § 275.150 (Michie/Bobbs-Merrill Supp. 1994).109. Id.110. Cf. id. § 271B.6-220 (Michie/Bobbs-Merrill 1989).111. Federal environmental law is a good example of this. See, e.g., the Federal

Comprehensive Environmental Response, Compensation and Liability Act of 1980(CERCLA), 42 U.S.C. §§ 9601-9657 (1988 & Supp. V 1993).

112. See KY. REV. STAT. ANN. § 139.185 (Michie/Bobbs-Merrill 1991 & Supp. 1994).113. Id. § 275.160 (MichiefBobbs-Merrill Supp. 1994).

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employees and agents of LLCs, or states that have contrarychoice of law provisions.

An attempt was made in the second sentence of KRS section275.150 to specifically limit exposure in the case of supervisoryliability,114 that is, where a person in a supervisory capacity isheld liable for the acts or omissions of those under his or hersupervision regardless of whether the supervisor was directlynegligent. This protection might prove to be especially importantin the case of professional service LLCs that have managingpartners or that have teams of individuals carrying out a partic-ular task.

For example, in Boyd v. Badenhausen115 a physician in aprofessional service corporation was held personally liable for thenegligence of an employee under his supervision, even thoughthe physician was not directly involved. A subsequent amend-ment to the applicable statute should produce a different resultin the future for shareholders, directors, officers or employees ofprofessional service corporations." 6 Whether, .and to what e'x-tent, supervisory liability will exist for members and managersof LLCs under the LLC Act will be answered in the courts.

KRS section 275.180(1) provides that, "The operating agree-ment may ... [e]liminate or limit the personal liability of amember or manager for monetary damages for breach of anyduty provided for in KRS section 275.170. '' 1 In addition, theoperating agreement may "[p]rovide for indemnification of amember or manager for judgments, settlements, penalties, fines,or expenses incurred in a proceeding to which a person is a partybecause the person is or was a member or manager.""' 8

b. Transfers of Interests

While the LLC Act contemplates free assignment of the eco-nomic rights connected with an LLC interest, it restricts theright of the assignee to become a member or to exercise therights of a member after the transfer of the interest. An impor-tant default provision of the LLC Act, KRS section 275.265(1),

114. Id. § 275.150.115. Boyd v. Badenhausen, 556 S.W.2d 896 (Ky. 1977).116. See KY. REV. STAT. ANN. § 274.055 (Michie/Bobbs-Merrill 1989).117. Id. § 275.180 (Michie/Bobbs-Merrill Supp. 1994).118. Id. § 275.180(2).

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provides that, "Unless otherwise provided in a written operatingagreement, an assignee of a limited liability company interestmay become a member only if all of the other members unani-mously consent" to the assignee's admission as a member. 119 Ifthe operating agreement does not provide the manner in whichconsent will be evidenced, it must be provided by one or morewritten instruments dated and signed by all members. 2 ° Thedefault provision follows the approach of the Kentucky UniformPartnership Act and its underlying philosophy that the owners ofthe entity, whether a general partnership or an LLC, cannothave a partner or member foisted upon them without their con-sent.'12 Yet there is another more important reason for this de-fault provision. It helps to assure partnership tax classification,unless other provisions of the operating agreement underminethe effort.

The LLC Act contains a helpful provision that subjects an as-signee who becomes a member to the provisions of the operatingagreement notwithstanding that the member has not signed theagreement.'22 As between assignor and assignee, where the as-signee is admitted as a member, the assignee is liable for allcontribution obligations of the assignor, except to the extent theassignee was not aware of the obligation and it could not beascertained from the articles or a written operating agree-ment.12 The assignor also continues to be liable for the contri-bution unless otherwise provided in the operatingagreement.

24

KRS section 275.265(4), in conjunction with KRS section275.255(1)(d), addresses an interesting issue: a member whoassigns his or her entire interest to another will cease to be amember at such time as the assignee is admitted as a member;and absent the admission of the assignee, the assignor will con-tinue to be a member and exercise all rights of a member unlesssuch person is affirmatively removed from the LLC pursuant tothe member removal provisions. Because of this provision, it

119. Id. § 275.265(1) (emphasis added).120. Id. § 275.265(1).121. See id. § 362.280 (Michie/Bobbs-Merrill 1987).122. Id. § 275.265(2) (Michie/Bobbs-Merrill Supp. 1994).123. Id.124. Id. § 275.265(3).

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probably is advisable to anticipate the situation and, if so de-sired, provide in the written operating agreement that an assign-or shall be removed and will lose member status despite the factthat the assignee is not admitted as a substitute member.

Finally, for reasons discussed below relating to tax classifica-tion, it is almost always advisable to either: (1) rely on the de-fault provision in KRS section 275.265(1),125 which requiresunanimous consent for the admission of a new member; or (2)require that at least a majority of the non-transferring membersapprove the admission of a new member. Requisite consent mayalso be obtained from a majority of the non-transferring member-managers if certain other requirements are met. 126 For thesepurposes, the "majority" requirement must comply with the fed-eral tax definition discussed later in this article.

c. Agency Principles

KRS section 275.135(1) provides that if an LLC is member-managed, then any member can bind the LLC unless the mem-ber so acting has no authority to act on the particular matterand the person with whom the member is dealing has knowl-edge, or has received notification of the fact, that the memberdoes not have such authority. If the LLC is managed by manag-ers, no member shall be an agent of the LLC, and every managershall have the same authority to bind the LLC as does a memberin the member-managed context.1 27 In dealing with an LLC,therefore, it is important for other parties to establish whetherthe LLC is member-managed or manager-managed in order toknow whether the person purporting to act on behalf of the LLChas the authority to bind or otherwise act on behalf of the entity.

9. Dissolution

KRS section 275.285 provides that an LLC shall be dissolvedand its affairs wound when the first of the following occurs:(1) an event as specified in the LLC's articles of organization orin a written operating agreement; (2) the written consent of allmembers; (3) an event of disassociation of a member, unless the

125. See supra notes 119-20 and accompanying text.126. See infra note 192 and accompanying text.127. KY. REV. STAT. ANN. § 275.135(2) (Michie/Bobbs-Merrill Supp. 1994).

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business is continued by the consent of all remaining memberson or before the ninetieth day following the occurrence of theevent and unless otherwise provided in a written operatingagreement; (4) the entry of a judicial decree dissolving the entity;or (5) the filing of a certificate of dissolution by the Secretary ofState for the reasons specified in KRS section 275.295(1), one ofwhich is the failure to file an annual report within sixty days ofits due date. 28 The death, resignation, expulsion, bankruptcy,or dissolution of a member constitutes an event of disassociationfor purposes of KRS section 275.285.129 Accordingly, unless allremaining partners vote to continue the LLC within the ninety-day period, any event of disassociation with respect to any mem-ber will result in the dissolution and winding up of the LLC."3 °

Obviously, if the LLC is composed of more than a few members,this default provision can create serious continuity problems forthe entity since it essentially allows any member, no matter howsmall that member's interest, to compel liquidation of the entity.Normally, and especially with an LLC composed of a large num-ber of members, it will be best to override the default provisionwith a written operating agreement provision. For tax classifica-tion reasons, and for other reasons discussed below, continuationafter a triggering event must generally be approved by at least a"majority in interest" of the members.

10. Conversions

The LLC Act contains provisions that specifically address theconversion of a general or limited partnership into an LLC. Sucha conversion requires approval of all partners"' and will notresult in the dissolution of the partnership entity that is con-verting into LLC form. 1 2 Although such a conversion will insu-late general partners from post-conversion entity liabilities, such

128. The other reasons specified in KY. REV. STAT. ANN. § 275.295(1) are: the LLCis without a registered agent or registered office in Kentucky for at least 60 days; orthe LLC does not notify the Secretary of State within 60 days after its registeredagent or registered office has been changed or its registered agent has resigned orits registered office has been discontinued. Id.

129. Id. § 275.280.130. Id. § 275.285(3).131. Id. § 275.370.132. Id. § 275.375.

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partners will continue to bear state law liability for partnershipdebts arising prior to conversion in the same manner they wereliable under state law as partners. 3 '

11. Annual Reports

KRS section 275.190(1) requires that all domestic and foreignLLCs authorized to transact business in Kentucky file an annualreport with the Kentucky Secretary of State. The annual reportmust set forth: (1) the name of the LLC and state or countryunder whose law it is organized; (2) the address of the LLC'sregistered office and the name of its registered agent at thatoffice; (3) the address of the LLC's principal office; and (4) thenames and addresses of its managers, if management is vestedin managers, or one or more designated members, if manage-ment is vested in members. The annual report is required to befiled between January 1st and June 30th of the year followingthe calendar year in which a domestic LLC is organized or aforeign LLC first becomes authorized to transact business inKentucky, and every year thereafter. 3 4 Failure to file the an-nual report could result in the administrative dissolution of theLLC, or in the case of a foreign LLC, its disqualification.3

12. Mergers

The LLC Act also contains provisions which allow LLCs tomerge with business entities that are not LLCs.136 To permitsuch mergers, conforming amendments were made to the Ken-tucky Business Corporation Act' 37 and the Kentucky RevisedUniform Limited Partnership Act. 138

13. Foreign LLCs

A foreign LLC may apply for a certificate of authority to trans-act business in Kentucky by delivering an application to theSecretary of State that sets forth certain prescribed informa-

133. Id. § 275.370(5).134. Id. § 275.190(3).135. Id. § 275.295(1)(a).136. Id. § 275.345-.365.137. See id. § 271B.11-080.138. See id. § 362.531.

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tion.139 However, the penalties for failing to obtain a certificateof authority are not severe. The entity is subject to a fine of twodollars per day up to a maximum of $500140 and cannot main-tain a suit in Kentucky until it obtains such a certificate.'Nevertheless, the foreign LLC does not forfeit its limited liabilityprotection on account of its failure to register. 142

B. Limitation on Usage

1. Professionals

If the LLC is to be a professional service organization, themembers must confirm that the LLC form is approved for theparticular profession. The Kentucky Board of Medical Licensurehas approved the use of LLCs for physician practices, but as ofApril 1, 1995, the Kentucky Supreme Court has not expresslyapproved their use by attorneys. LLCs have also been approvedfor use by accountants.'

2. A Caveat

LLCs provide an option for business entities; one that in somecircumstances can be quite.beneficial, while in others, very unde-sirable. The LLC format is not a panacea for all ills, and clientsshould not be advised to form an LLC without considering otheralternatives. For many business entities, the traditional formswhich combine limited liability and pass-through taxa-tion - such as a corporation which files a Subchapter S electionunder the Code, or a limited partnership -will continue to beappropriate and can be formed in most cases more quickly and ata more reasonable cost in initial attorney and accountant fees tothe client.

139. Id. § 275.395. The information that must be contained in the application is asfollows: (1) a name; (2) the state or country under whose law the LLC is organized;(3) the date of organization, and, if applicable, the date of dissolution; (4) the streetaddress of its principal office; (5) the address of its registered office in Kentucky andname of its registered agent at that office; (6) the names and business addresses ofits current managers;' and (7) a statement of valid existence as an LLC elsewhere.

140. Id. § 275.390(4).141. Id. § 275.390(3).142. Id. § 275.390(5).143. See id. § 325.220(6) (Michie/Bobbs-Merrill 1990 & Supp. 1994).

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III. KENTUCKY RLLPS - NON-TAX CONSIDERATIONS

Generally stated, a Kentucky RLLP is a general partnershipwhich has elected to have additional attributes and be subject tocertain legal requirements that are established under the RLLPAct. 144 Stated differently, a Kentucky RLLP is treated like anyother Kentucky general partnership except in those areas wherethe RLLP Act has expressly provided for a different treatment. Asummary of the special attributes and advantages of, and re-quirements applicable to, Kentucky RLLPs is set forth below.

In the typical general partnership, each general partner isjointly and severally liable for the debts and obligations of thepartnership.'45 RLLP status gives general partners the abilityto limit their personal liability for certain obligations of the part-nership. 146 RLLP status is easily attained by a new partner-ship that simply adopts RLLP status when it is organized or byan existing partnership that elects RLLP status.'47 This abilityto easily achieve RLLP status offers a potential advantage overthe more cumbersome and potentially costly steps involved inthe formation of an LLC or the conversion of an existing corpora-tion or partnership into an LLC structure. While not limited toservice partnerships, RLLP status may be particularly attractiveto service partnerships, such as law firms, accounting firms, andmedical partnerships, that face potential exposure to malpracticeclaims.148

The general rule of KRS section 362.220(1) makes each gener-al partner jointly and severally liable for everything chargeableto the partnership under KRS sections 362.2 10149 and362.215150 and jointly liable for all other debts and obligations

144. Id. §§ 362.155(7), .555 (Michie/Bobbs-Merrill Supp. 1994).145. Id. § 362.220(1).146. Id. § 362.220(2).147. Id. § 362.555.148. As noted above, accountants currently are authorized to practice in the form

of LLCs or RLLPs. However, as of April 1, 1995, lawyers have not yet been express-ly authorized to use RLLPs in their professional practices.

149. KRS § 362.210 provides that a partnership is liable for any loss or injurycaused to a third person by any partner acting in the ordinary course of the busi-ness. Id. § 362.210 (Michie/Bobbs-Merrill 1987).

150. KRS § 362.215 provides that a partnership "is bound to make good the loss"when the partnership or any partner receives money or property from a third personand misapplies it. Id. § 362.215.

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of the partnership. However, KRS section 362.220(2) now pro-vides that a partner in an RLLP will not be liable:

directly or indirectly, including by way of indemnification, contri-bution, assessment or otherwise, for debts, obligations, and liabil-ities of or chargeable to the partnership, whether arising in tort,contract or otherwise, arising from negligence, malpractice, wrong-ful acts, or misconduct committed while the partnership is a regis-tered limited liability partnership and in the course of the part-nership business by another partner or an employee, agent, orrepresentative of the partnership.

However, KRS section 362.220(3) adds that this protection fromliability does not extend to the partner's own negligence, wrong-ful acts, or misconduct. Thus, a partner in an RLLP can general-ly limit his liability exposure for the acts of his partners andothers acting on behalf of the partnership, but he cannot limithis exposure for his own negligent or wrongful acts or miscon-duct.

Also, newly enacted KRS section 362.605 makes it clear thatthe partnership itself can be sued in its common name. Thus, if aphysician in a medical RLLP commits malpractice, all of thepartnership's assets and the negligent physician's personal as-sets will continue to be subject to liabilities resulting from themalpractice.

Two additional points warrant particular consideration. First,unlike an LLC, the RLLP does not limit the partners' personalliability for the contractual obligations of the partnership, suchas rent under real estate leases, but rather limits only thoseobligations attributable to the "negligence, malpractice, wrongfulacts, or misconduct committed" by the other partners or employ-ees and agents of the partnership.'51

Second, it remains somewhat uncertain Whether a partner inan RLLP can be held liable for the acts of those the partnersupervises on the theory that the partner was a negligent super-visor. For example, can the managing partner of an accountingor law firm be held liable for the malpractice of an associate whowas not adequately supervised? Can the tax partner who headsthe tax section of a law firm be held liable under the same theo-ry? While the courts will eventually have to answer this issue, it

151. Id. § 362.220(2) (Michie/Bobbs-Merrill Supp. 1994).

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is reasonable to assume that the more directly a partner in anRLLP works with an associate or subordinate and the moredirect "hands on" supervisory responsibility he or she has, themore likely that the liability of the subordinate will be attributedto the partner, and thus, not be encompassed within the liabilityshield provided under KRS section 362.220(2).

KRS section 362.555 sets forth the prerequisites for becomingan RLLP. As noted above, an RLLP is simply a regular partner-ship that elects to receive the special liability limitation treat-ment accorded by amended KRS section 362.220. To elect to betreated as an RLLP or to renew such an election, a partnershipmust simply file a statement with the Secretary of State whichsets forth the following: (1) the name of the partnership; (2) theaddress of its principal office, if the principal office is not locatedin Kentucky; (3) the number of partners in the partnership; (4) abrief statement of the business in which the partnership engag-es; and (5) an acknowledgement or indication that the partner-ship is hereby registering or renewing its status as anRLLP.'52 The statement must be signed by either a majority ininterest of the partners or by one or more partners who are au-thorized to execute such statement. Whether an original or arenewal, the statement must be accompanied by a fee of$200.' The original registration of a partnership as an RLLPis valid for one year from the date the statement is filed with theSecretary of State. 154 Renewal of RLLP status can be accom-plished by filing an annual renewal statement with the Secre-tary of State during the sixty-day period preceding the nextanniversary of the original registration date. 55 The RLLP Actmakes it clear that a partnership's status as an RLLP will beunaffected by changes in the information contained in the origi-nal or renewal statements when those changes arise after thestatements have been filed. 156

KRS section 362.565(1) requires that the name of the RLLPmust contain the words "registered limited liability partnership"or the abbreviation "LLP" as the last words or letters of the

152. Id. § 362.555(1).153. Id. § 362.555(2), (3).154. Id. § 362.555(5).155. Id.156. Id. § 362.555(6).

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name. Also, the name cannot be the same as, or indistinguish-able from the name of any of the following: (1) an existing corpo-ration, limited partnership, LLC or RLLP that is organized inKentucky or registered as a foreign entity in Kentucky; (2) anynonprofit corporation; (3) a fictitious name adopted for use by aforeign corporation; (4) an assumed name; or (5) a name that hasbeen reserved or registered in Kentucky by another person.'57

KRS section 362.575 provides that an RLLP established underthe RLLP Act has the authority to carry on its business with thepowers accorded it under the RLLP Act in any U.S. state, territo-ry, district or possession, as well as in any foreign country.'58

It also provides the General Assembly intended for RLLPsformed under the RLLP Act to be recognized outside of Ken-tucky, and for Kentucky law governing RLLPs to likewise begiven the protection of full faith and credit under the Constitu-tion of the United States.'59 It is also significant to note thatKRS section 362.575 makes it clear that the General Assemblyintended that the laws of Kentucky, including those providing forthe limitations on liabilities of RLLP partners, should control theinternal affairs of Kentucky RLLPs. 6 °

KRS section 362.575 generally provides that foreign RLLPs,those formed and existing under the laws of another jurisdiction,can engage in any business in Kentucky, subject of course, to thegeneral statutes which regulate the particular industry in whichthe RLLP is engaged.'' The section also allows the internalaffairs of such foreign RLLPs, including liability limitations, tobe governed by the laws of the RLLPs' jurisdiction. 16 2

KRS section 362.585(1) requires foreign RLLPs to registerwith the Secretary of State before transacting business in Ken-tucky. These registration requirements are the same as for thosegoverning Kentucky RLLPs as discussed above. 163 If the for-eign RLLP's name in its home jurisdiction does not include the

157. Id. § 362.565.158. Id. § 362.575(1).159. Id. § 362.575(2).160. Id. § 362.575(3).161. Id. § 362.575(4).162. Id. § 362.575(5).163. 'The registration shall be governed by KRS 362.555 as if the foreign limited

liability partnership were a domestic registered limited liability partnership." Id.§ 362.585(1).

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words "registered limited liability partnership" or the letters"LLP," it must add one or the other to its name for purposes ofregistering in Kentucky. 164 KRS section 362.585(4) also autho-rizes the Attorney General to enjoin the foreign RLLP fromtransacting business in Kentucky if the registration require-ments are not been met.

KRS section 362.595 spells out the effect of the failure of anRLLP to comply with the registration requirements of KRS sec-tion 362.555. It makes it clear that such failure will not impairthe validity of any contract, deed, mortgage, security interest,lien, or act of the RLLP, nor prevent the RLLP from defendingitself from actions brought against it in Kentucky.'65 The fail-ure to comply with the registration requirements also will notaffect the limited liability of the RLLP partners under KRS sec-tion 362.220(2), except in cases where an action or proceeding isbrought by a person who did business with the RLLP at a timewhen the RLLP was not in compliance with the registrationrequirements and who did not have actual knowledge of theRLLP status of the partnership at that time.166

It is interesting to note that the RLLP provisions of the LLCAct speak in terms of a "partnership" becoming an RLLP. Nodistinction is drawn between a general partnership and a limitedpartnership. Therefore, it is arguable that a limited partnershipis eligible for RLLP status as is a general partnership. While atfirst blush it may seem unnecessary for a limited partnership toseek the liability protection of RLLP status or for an RLLP to bestructured for state law purposes as a limited partnership, thereappears to be some reason for taking this step.

The most obvious reason is the fact that the general partner(s)of a limited partnership may want the benefit of the liabilityprotection offered by RLLP status. Conversely, an RLLP maywant to be a limited partnership for state law purposes because:(1) the limited partners will enjoy liability insulation for bothtort and contractual liabilities of the partnership, rather thanjust the tort-type liabilities that are limited in RLLPs; and (2)the liability protection under the Uniform Limited Partnership

164. Id. § 362.585(2).165. Id. § 362.595(1).166. Id. § 362.595(3).

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Act is much more widely recognized than is the protection ofRLLP status.

IV. PARTNERSHIP CLASSIFICATION FOR TAX PURPOSES

A. A General Overview

Forming an LLC to conduct business makes little or no senseunless the entity qualifies for tax purposes as a partnership. AnLLC that fails to qualify as a partnership can have considerablygreater adverse tax consequences than if the organization hadbeen established as a non-Subchapter S corporation in the firstplace. These consequences include: interest; potential penalties;the fact that there will be no statute of limitations defense be-cause the LLC will never have filed a corporate return; and thesurprises of overdue taxes, penalties, and interest at the entitylevel when none were expected.

Obviously, once a client has chosen to utilize the LLC format,it is essential that proper steps be taken to ensure partnershiptax status. But classification concerns should be discussed evenearlier than that; the requirements for obtaining partnership taxstatus must be considered in making the choice of entity. It isquite possible that some or all of the limitations that must beobserved to achieve partnership tax status will not be acceptableto the client. In short, the tax requirements must be mentionedearly in discussing the advantages and disadvantages of LLCstatus.

As will be discussed below, the Kentucky LLC Act is not whatis referred to as a "bullet-proof statute." LLCs formed under"bullet-proof statutes" of some states will, subject to a change inthe federal tax laws, always qualify as partnerships becausethose statutes do not permit overriding agreements by the mem-bers that could overturn tax classification. Instead, the drafts-men of the Kentucky LLC Act selected a flexible statutoryscheme that will allow members to bear the level of risk theychoose in order to achieve the desired business structure and canevolve with the changing IRS interpretations. On the other hand,the more rigid "bullet-proof statutes" have no flexibility and canactually disqualify the LLC form based upon the particularbusiness objectives of the owners.

Before plunging into the maze of partnership classification, itis worth noting that the United States Congress has never ad-

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dressed LLC taxation. The treatment of LLCs as partnershipsfor federal income tax purposes is solely the product of the De-partment of the Treasury's independent decision-making in issu-ing regulations and rulings. While the Code contains detailedstatutory frameworks for regular corporations, S corporations,partnerships, trusts, and charitable organizations, it does notaddress or even acknowledge the existence of LLCs. Some con-cern has been expressed by members of Congress that the Inter-nal Revenue Service (IRS) has administratively punched a gap-ing hole in the double corporate taxation normally applicable tolimited liability entities that do not satisfy the S corporationstandards. Because there is a congressional drift toward an inte-grated tax system, the risk that the pass-through taxation ofLLCs will be legislatively undermined is not great, but such adevelopment is possible.

B. The Corporate Classification Regulations

Treasury Regulation section 301.7701-2 sets out the rules forwhen an organization will be classified as an "association," andthus, taxed as a corporation under the Code, and by reason ofKRS section 141.050, under the Kentucky income tax system.Although the regulation sets forth six "corporate" characteristics,two of those attributes, the existence of "associates" and "theobjective to carry on business and divide the gains therefrom,"are common to both corporations and partnerships, and there-fore, are not considered in distinguishing the two. The other fourcorporate characteristics, which are listed below, are consideredstrictly to be corporate attributes, and not attributes of a part-nership. These four corporate characteristics are: limited liabili-ty, centralization of management, continuity of life, and freetransferability of interests.

The regulations state that "An unincorporated organizationshall not be classified as an association unless such organizationhas more corporate characteristics than non-corporate charac-teristics.' 67 A simpler way of saying this is if an entity hasfewer than three of the four corporate characteristics, then it is apartnership.

167. Treas. Reg. § 301.7701-2(a)(3) (as amended in 1993).

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The partnership classification regulations have historicallybeen of greatest relevance in the classification of limited partner-ships that have a sole corporate general partner. Unlike suchlimited partnerships, LLCs generally cannot, and will not want,to claim that any members have personal liability on account ofentity liabilities or claims. Therefore, the classification process isgenerally more difficult in the case of LLCs. Each of the fourrelevant corporate characteristics are discussed in turn below.

On December 28, 1994, the IRS issued a long-awaited RevenueProcedure (Rev. Proc.), Rev. Proc. 95-10 addressing the tax clas-sification of LLCs in the private letter ruling context.168 Priorto the issuance of this revenue procedure, general legal authorityfor LLC classification issues was derived from Treasury Regula-tion (Treas. Reg.) section 301.7701-2. Specific guidance was bor-rowed from the classification rules established by the IRS forlimited partnerships with corporate general partners 169 andwas also gleaned from a series of private letter rulings issued bythe IRS to LLCs. While the revenue procedure makes it clearthat ultimate authority continues to spring from the treasuryregulations under section 7701(a)(2) of the Code, 70 it alsostates that "Rev. Proc. 89-12 no longer applies to LLCs.'1 7 1

Rev. Proc. 95-10 sets out the requirements that must be met inorder to obtain a favorable ruling that an LLC will be taxed as apartnership for federal income tax purposes. In this respect, therules are "safe harbor" provisions that technically do not set oridentify the outer limits of the law. However, it would generallybe imprudent to deviate to any substantial degree from theguidelines established by the new revenue procedure.

1. Limited Liability

A contention by a company, referring to itself as a LLC, that itlacks the corporate attribute of limited liability will generally nothave intuitive appeal. Treas. Reg. section 301.7701-2 providesthat "An organization has the corporate characteristic of limitedliability if under local law there is no member who is personally

168. Rev. Proc. 95-10, 1995-3 I.R.B. 20.169. Rev. Proc. 89-12, 1989-1 C.B. 798.170. See Rev. Proc. 95-10 § 2.01, 1995-3 I.R.B. 20.171. Rev. Proc. 95-10 § 1.01, 1995-3 I.R.B. 20. .

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liable for the debts of or claims against the organization." '172

Further, 'Tersonal liability means that a creditor of an organiza-tion may seek personal satisfaction from a member of the organi-zation to the extent that the assets of such organization are in-sufficient to satisfy the creditor's claim."'73 Section 5.04 of Rev.Proc. 95-10 states that the IRS "generally will not rule that anLLC lacks limited liability unless at least one assuming membervalidly assumes personal liability for all (but not less than all)obligations of the LLC, pursuant to express authority granted inthe controlling statute.' 74 The assuming member must alsopossess an aggregate net worth that equals ten percent of thetotal capital contributions to the LLC and that is expected tocontinue at that level.'75 In view of the broad protectionagainst personal liability offered by KRS section 275.150,176 itis very unlikely that a Kentucky LLC could avoid this corporatecharacteristic even if it wanted to.

It could be argued that KRS section 275.150 does not allow theliability limitation to be overridden by the operating agreement.Accordingly, "under local law" no member is personally liable forthe debts of or claims against a Kentucky LLC and it does notappear that unlimited LLC debt assumption is "expressly" autho-rized by the "controlling statute," as required in Rev. Proc. 95-10.177 Contractually obligating members to make capital contri-butions or providing personal member guarantees generally willnot overcome this rule, nor will the fact that a member is liablefor his or her own negligence. Thus, Kentucky LLCs will havethe corporate characteristic of limited liability, at least as inter-preted by Rev. Proc. 95-10.

Under the Kentucky RLLP statute, general partners are joint-ly and severally liable for the contractual liabilities of the part-

172. Treas. Reg. § 301.7701-2(d)(1) (as amended in 1993).173. Id.174. Rev. Proc. 95-10 § 5.04, 1995-3 I.R.B. 20.175. Id.176. Ky. REV. STAT. ANN. § 275.150 (Michie/Bobbs-Merrill Supp. 1994) grants com-

plete immunity from personal liability to any "member, manager, employee, or agentof a limited liability company, under a judgment, decree, or order ... for a debt,obligation, or liability of the limited liability company, whether arising in contract,tort, or otherwise." Immunity is also granted from personal liability "for the acts oromissions, including any negligence, wrongful act, or actionable misconduct," of anyother person acting for the LLC. Id.

177. Id.

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nership. 17' Accordingly, Kentucky RLLPs normally will avoid

the corporate characteristic of limited liability.

2. Centralization of Management

Treas. Reg. section 301.7701-2(c)(1) provides that "An organi-zation has centralized management if any person (or any groupof persons which does not include all the members) has continu-ing exclusive authority to make the management decisions neces-sary to the conduct of the business for which the organizationwas formed.' '179 Rev. Proc. 95-10 states that if the controllingstatute or the operating agreement "provides that the LLC ismanaged by the members exclusively in their membership capac-ity," centralized management generally will be lacking. 8 ° If, onthe other hand, "the members designate or elect one or moremembers as managers of the LLC," a manager ownership testmust be satisfied. 8' In such case the member-managers mustin the aggregate own at least twenty percent of the total inter-ests in the LLC in order for the entity to avoid the corporateattribute of centralization of management. Even if the twentypercent threshold is achieved, satisfaction of the guidelines couldbe negated if other facts and circumstances exist, includingmember control of the member-managers.'' In addition, cen-tralized management will not be lacking if the member-manag-ers are not secure in their management positions - that is they"are subject to periodic elections by the members, or, the non-managing members have a substantially non-restricted power toremove" them.'8 3

The revenue procedure represents a significant liberalizationof the IRS's position with respect to manager-managed LLCssince the general belief in the past has been that manager-man-aged LLCs by definition were centrally managed, despite a sub-stantial participation of members as managers. This belief wassupported most prominently by Revenue Ruling 93-6 wherein theIRS concluded that a five-member LLC had centralized manage-

178. Id. § 362.220.179. Treas. Reg. § 301.7701-2(c)(1) (as amended in 1993).180. Rev. Proc. 95-10 § 5.03(1), 1995-3 I.R.B. 20.181. Id. § 5.03(2).182. Id.183. Id.

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ment despite the fact that all five members were appointed asmanagers.18' It should be noted that the result in Revenue Rul-ing 93-6 might still be the same since the managers in that rul-ing were subject to "periodic elections by the members."'85

If an LLC elects to be member-managed, and all the membersparticipate in management in their member capacity, the LLCwill not have the corporate characteristic of centralized manage-ment., Pending further interpretation of Rev. Proc. 95-10, theresult is not entirely clear where the members of a member-man-aged LLC designate one member or a small percentage of mem-bers to run the day-to-day operations of the LLC, or where theseduties are contractually delegated to a non-member. The betterargument is that the entity will still lack centralized manage-ment on the basis that management authority is ultimately vest-ed in the members, even though it is exercised by a select few oreven by non-members. The IRS has ruled that a member-man-aged LLC that delegated the day-to-day management of theenterprise to a single member lacked the corporate centralizedmanagement characteristic when overall management of theLLC remained with the full membership. 86 This result is con-sistent with example (3) of Treas. Reg. section 301.7701-2(g),which demonstrates that the ability of members to bind an enti-ty is sufficient to avoid centralized management even when man-agement authority is consolidated, by agreement, into the handsof five out of twenty-five members. 87 There is some slight risk,however, that the IRS could construe the term "member-manag-er" in Rev. Proc. 95-10 to describe member-managers selected bya member-managed LLC, in which case the more restrictive testset out for manager-managed LLCs would apply. By far, thebetter view would appear to be that a Kentucky LLC electingmember-management will avoid the corporate characteristic ofcentralized management so long as the law continues to permitmembers to bind the entity, despite lack of authorization underthe operating agreement with respect to outsiders who have nonotice of the restricted authority.'88 This fact alone may be

184. Rev. Rul. 93-6, 1993-1 C.B. 229.185. See Rev. Proc. 95-10 § 5.03(2).186. Priv. Ltr. Rul. 93-20-019 (Feb. 18, 1993).187. Treas. Reg. § 301.7701-2(g) (as amended in 1993).188. KY. REV. STAT. ANN. § 275.135(1) (Michie/Bobbs-Merrill Supp. 1994).

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enough to overcome centralized management even where awholesale delegation of management powers has occurred.

Treas. Reg. section 301.7701-2(c)(4) provides that "because ofthe mutual agency relationship between members of a generalpartnership subject to a statute corresponding to the UniformPartnership Act, such a general partnership cannot achieve effec-tive concentration of management powers and, therefore, central-ized management." '189 Because the Kentucky Uniform Partner-ship Act varies from the Uniform Partnership Act only in imma-terial respects, it is virtually guaranteed, in the case of an RLLP,that the centralized management attribute will be avoided. Onceagain, there is always the possibility that the IRS might chooseto find the corporate characteristic of centralized managementwhere all elements of management authority have been dele-gated to a small group. However, this is unlikely in the generalpartnership setting due to the express statement in the regula-tions set out above.

3. Free Transferability of Interests

Treas. Reg. section 301.7701-2(e)(1) provides that an:organization has the corporate characteristic of free transferabilityof interests if each of its members or those members owning sub-stantially all of the interests in the organization have the power,without the consent of other members, to substitute for them-selves in the same organization a person who is not a member ofthe organization. 90

The default provision in KRS section 275.265(1) provides that,unless otherwise provided in a written operating agreement, anassignee of an LLC interest may become a member only if all ofthe other members unanimously consent to the assignee's admis-sion as a member.' If an LLC defers to the default provision,or if the operating agreement contains a provision that mirrorsthe LLC Act default provision, then the LLC is assured that itwill lack the corporate characteristic of free transferability.

Often, however, allowing each and every member the right toveto the admission of a new member will not comport with the

189. Treas. Reg. § 301.7701-2(c)(4).190. Treas. Reg. § 301.7701-2(e)(1).191. KY. REv. STAT. ANN. § 275.265(1) (Michie/Bobbs-Merrill Supp. 1994).

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desires of the owners, and the parties will wish to override thestatute. As noted above, the default provision must be overriddenin writing and that writing must be contained in the operatingagreement.

There is no doubt that an LLC can avoid the corporate charac-teristic of free transferability by means that are less restrictivethan those contained in the LLC Act's default provision. Rev.Proc. 95-10 sets out two separate tests for purposes of determin-ing the existence of "free transferability of interests." The firsttest provides:

If the members of the LLC designate or elect one or more mem-bers as managers, and the controlling statute, or the operatingagreement pursuant to the controlling statue, provides that eachmember, or those members owning more than 20 percent of allinterests in the LLC's capital, income, gain, loss, deduction, andcredit, does not have the power to confer upon a non-member allthe attributes of the member's interests in the LLC without theconsent of not less than a majority of the non-transferring mem-ber-managers, the Service will generally rule that the LLC lacksfree transferability of interests. 192

Again, there is some confusion as to whether this rule appliesonly to LLCs that elect to be manager-managed under the LLCAct, or whether the rule might also apply to member-managedLLCs where management authority is delegated to less than allmembers. At this point, especially where lack of free transfer-ability is essential to partnership classification, the prudentapproach would be to assume, pending further clarification fromthe IRS, that the test only applies to LLCs electing to be manag-er-managed.

The revenue procedure defines "majority" for purposes of de-termining whether consent of a majority of the non-transferringmember-managers must be obtained. For these purposes, theterm "majority" means either a "majority in interest" (discussedbelow in the Continuity of Life section), which is defined as amajority of either capital or profits interests in the LLC, or amajority as determined on a per capita basis.193

192. Rev. Proc. 95-10 § 5.02(1), 1995-3 I.R.B. 20.193. Id. § 5.02(3).

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In order for an LLC to rely on this test, the revenue procedureprovides that the member-managers must satisfy certain mini-mum ownership requirements. Member-managers must own, inthe aggregate and pursuant to the express terms of the operatingagreement, "at least a one percent interest in each material itemof the LLC's income, gain, loss, deduction, or credit during theentire existence of the LLC.' 94 Excepted from this requirementare mandatory allocations that, pursuant to either section 704(b)or section 704(c) of the Code or corresponding regulations, tem-porarily reduce the interest of member-managers beneath theone percent floor.' 95 Section 4.03 also creates a limited excep-tion to the one percent rule for large LLCs.' 96 Section 4.04 ofthe revenue procedure also requires that the member-managersmaintain a minimum capital account through the entire exis-tence of the LLC, which is equal to the lesser of one percent oftotal capital account balances or $500,000.97 An exception ismade to the minimum capital account requirement in certaincircumstances.' 98

The second. "free transferability" test provides that:If the members of the LLC do not designate or elect one or moremembers as managers [or, as an alternative to the first test, evenif the LLC is member-managed], and the controlling statute, orthe operating agreement pursuant to the controlling statute, pro-vides that each member, or those members owning more than 20percent of all interests in the LLC's capital, income, gain, loss,deduction, and credit, does not have the power to confer upon anon-member all the attributes of the member's interests in theLLC without the consent of not less than a majority of the non-transferring members, the Service will generally rule that theLLC lacks free transferability of interests.199

Thus, in the case of member-managed LLCs, and as an alterna-tive test in the case of manager-managed LLCs, free transfer-ability will be avoided if a majority of the members, with "major-

194. Id. § 4.02.195. Id.196. Id. § 4.03. A large LLC is defined as one having "total contributions exceed-

ing $50 million."197. Id. § 4.04.198. Id. § 4.05.199. Id. § 5.02(2).

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ity" defined in the same manner as described immediatelyabove,"' must approve the admission of new members.

As with partnership interests, it is possible to split an LLCinterest into two parts - the economic interest and the non-eco-nomic rights of the member. KRS section 275.255(1) specificallyprovides for the assignment of economic rights by stating that,"Unless otherwise provided in writing in an operating agree-ment," a "limited liability company interest shall be assignablein whole or in part.""2 1 This free assignability can be counter-manded by a written operating agreement provision that limitssuch assignment, 2 2 but the failure to overcome this defaultprovision of the LLC Act will not result in free transferability forpartnership classification purposes under the express provisionsof the regulations. Treas. Reg. section 301.7701-2(e)(1) providesthat "[T]he characteristic of free transferability of interests doesnot exist in a case in which each member can, without the con-sent of other members, assign only his right to share in profitsbut cannot so assign his rights to participate in the managementof the organization. 20 3 Rev. Proc. 95-10 is consistent with thissince a member must be able to "confer upon a non-member allthe attributes of the member's interests in the LLC., 20 4 Itshould be noted that, unless the operating agreement otherwiseprovides and allows for the removal of the assignor as a member,the assignor will continue as a member and will be entitled toexercise all the rights of a member. 20 5

Referring back to the general rule enunciated under the freetransferability attribute, free transferability will exist if mem-bers owning "substantially all" of the interests are free to trans-fer their interests, including their rights as members.2 6 Thus,it is not necessary that all member interests be subject to atransfer restriction in order for the corporate attribute to beavoided. This is confirmed in Rev. Proc. 92-33, which, whilecautioning that the determination ultimately will turn on theparticular facts and circumstances, concludes that "substantially

200. See supra note 193 and accompanying text.201. KY. REV. STAT. ANN. § 275.255(1)(a) (Michie/Bobbs-Merrill Supp. 1994).202. Id.203. Treas. Reg. § 301.7701-2(e)(1) (as amended in 1993).204. Rev. Proc. 95-10 § 5.02(2), 1995-3 I.R.B. 20.205. KY. REV. STAT. ANN. § 275.255(3) (Michie/Bobbs-Merrill Supp. 1994).206. Treas. Reg. § 301.7701-2(e)(1).

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all" is "more than 20 percent of all interests in partnership capi-tal, income, gain, loss, deduction, and credit. 2 °7 This is furtherconfirmed in Rev. Proc. 95-10, which cites Rev. Proc. 92-33, re-quiring that more than twenty percent of the pertinent interestsmust be encumbered with the consent limitation. °8

Accordingly, it would be possible to avoid the free transferabil-ity by restricting a good deal less than all of the interests. Itshould again be noted that to meet the qualified safe harbor ofRev. Proc. 92-33 and Rev. Proc. 95-10 all interests in capital,income, gain, loss, deduction, and credit of a particular member'sinterest must be restricted.09 In addition, it should be notedthat particular facts and circumstances could undermine theeffort. Such "facts and circumstances" could include an instancewhere the consenting party or parties are not economically ad-verse to the restricted party or where there is virtually no likeli-hood, for whatever the reason, that the restricted party willtransfer its membership interest.

Rev. Proc. 95-10 requires that the consent requirement mustbe "meaningful., 210 As an example, the revenue procedurestates that "a power to withhold consent to a transfer is not ameaningful restriction if the consent may not be unreasonablywithheld."21' This is consistent with a Tax Court opinion thatthe placing of a reasonableness limitation upon the withholdingof consent dilutes the consent restriction to the point where itdoes not sufficiently inhibit the transfer of membership inter-ests.212 Thus, it is advisable not to place discretionary limita-tions upon the power to withhold consent and even more advis-able to provide specifically that consent can be withheld in thesole and absolute discretion of the particular member(s) to avoidthe possibility that a duty of reasonableness would otherwise beimplied.

It is certainly true that the members or managers who arerequired to consent to the admission of a substituted membercannot bargain away their consent rights in advance, by contract

207. Rev. Proc. 92-33, 1992-1 C.B. 782.208. Rev. Proc. 95-10 § 5.02(2).209. See supra note 202 and infra note 211.210. Rev. Proc. 95-10 § 5.02(4).211. Id.212. Larson v. Commissioner, 66 T.C. 159 (1976).

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or otherwise. If so, the consent requirement is illusory and willnot work to avert the free transferability characteristic. A re-striction that prohibits transferability in the sole and absolutediscretion of other members or managers could be found to lacksubstance if the persons from whom consent is required arerelated, under common control, or represent a single economicinterest. Thus, where a sole shareholder and his corporationrepresent the only members of an LLC, it is quite possible that aconsent restriction on the transfer of a membership interest willhave no substance and will be ignored. The law is currentlyunclear in this area, and there is by no means an automatic rulethat identity of interests, family relationship, or common controlwill negate what otherwise would be sufficient impediments totransferability. However, the conservative practitioner will avoidbasing partnership tax status upon consent powers to be exer-cised by a person who is related and not demonstrably adverse tothe restricted party.

While the owners may generally be agreeable to subjectingtheir interests to appropriate transfer restrictions, they maywish to dilute this restriction with limited exceptions. For in-stance, the members may wish to have the right to freely trans-fer membership interests to their spouses or children or possiblyto a trust for their benefit. In addition, one or more membersmay insist upon the ability of their estate to be freely admittedas a member. Free transferability may also be requested in thecase of transfers to a bankrupt estate or to a lender, and in thecase of transfers to successors in interest in a liquidation ormerger of a member. Generally speaking, free transferabilitywith respect to extraordinary transfers, when they are involun-tary, should not be deemed to result in free transferability forpartnership classification purposes.213

The effect of a transfer by operation of law in the case of amerger is not quite as clear, although the IRS has concluded byprivate letter ruling that free transferability does not exist insuch circumstances.214 However, the comfort of this ruling issomewhat undone by the contrary statements in an IRS General

213. See Priv. Ltr. Rul. 92-53-013 (Sept. 30, 1992); Priv. Ltr. Rul. 92-43-018 (July22, 1992); Priv. Ltr. Rul. 92-10-019 (Dec. 6, 1991).

214. Priv. Ltr. Rul. 92-10-019 (Dec. 6, 1991).

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Counsel Memorandum.21 Where members are permitted totransfer on a voluntary basis at any time to a particular personor group of persons, such as family members, the result is muchmore uncertain. The IRS could certainly argue that despite thelimited group of potential transferees, the member does in factpossess the right to freely transfer to such persons at any time,and, therefore, free transferability exists. Thus, there is a realrisk that in creating a limited exception to the restrictions, re-stricted transferability is lost and the LLC would have the un-wanted corporate characteristic.

Treas. Reg. section 301.7701-2(e)(2) provides that:If each member of an organization can transfer his interest to aperson who is not a member of the organization only after havingoffered such interest to the other members at its fair market val-ue, it will be recognized that a modified form of free transferabili-ty of interests exists.216

In short, a right of first refusal at fair market value does notsufficiently impede transferability to avert the corporate attrib-ute. A right of first refusal at materially less than fair marketvalue, on the other hand, would probably subvert free transfer-ability.

In the final analysis, when issues arise with respect to thecorporate characteristic of free transferability, one must look tothe substance of the restriction. When consent requirements areplaced in the hands of an adverse party who would have no ulte-rior motive for giving consent, and that person is given the un-fettered ability to withhold consent, transferability of memberinterests will be sufficiently restricted to avoid this corporatecharacteristic.

Finally, with regard to RLLPs, Treas. Reg. section 301.7701-2(e)(1) provides that "[A]lthough the agreement provides for thetransfer of a member's interest, there is no power of substitutionand no free transferability of interest if under local law atransfer of a member's interest results in the dissolution of theold organization and the formation of a new organization.' 217

Under the Kentucky Uniform Partnership Act, a transfer of a

215. Gen. Couns. Mem. 38,012 (July 13, 1979).216. Treas. Reg. § 301.7701-2(e)(2) (as amended in 1993).217. Id. § 301.7701-2(e)(1).

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partnership interest will cause a technical dissolution of thepartnership.218 Accordingly, reading the regulation and thestate statute in conjunction, an RLLP generally will not have thecorporate characteristic of free transferability.

4. Continuity of Life

Treas. Reg. section 301.7701-2(b)(1) provides that "[a]n organi-zation has continuity of life if the death, insanity, bankruptcy,retirement, resignation, or expulsion of any member will notcause dissolution of the organization" under applicable statelaw.219 As with the free transferability attribute, the corporatecharacteristic of continuity of life is one that the draftsman canachieve by reaching a happy compromise between the extremeposition of the statutory default provision and the business objec-tives of the owners. Obviously, continuity can be very importantfrom a business standpoint and it is generally best to limit thenumber of circumstances under which an LLC can be compelledto liquidate against the will of most members.

Kentucky's statutory default provision ensures, absent a writ-ten operating agreement to the contrary, that an LLC will avoidthe corporate characteristic of continuity of life.22° This *sectionprovides that an LLC will be dissolved and its affairs wound upif, among other occurrences, there is an event of disassociation ofa member, unless the business is continued by the consent of allremaining members on or before the ninetieth day following theoccurrence of the event.22" ' The death, resignation, expulsion,bankruptcy or dissolution of a member constitutes an event ofdisassociation for these purposes.222 In many cases, it would beadvisable to override the default provision since it allows anymember, no matter how small the member's interest or votingpower, to compel the dissolution and winding up of the LLC if adisassociation event occurs. In addition, the ninety-day voterequirement is one that could easily be overlooked, thus result-ing in the inadvertent dissolution of the entity. Even if the mem-bers wish to impose a unanimous vote requirement for continua-

218. KY. REv. STAT. ANN. § 362.290 (Michie/Bobbs-Merrill 1987).219. Treas. Reg. § 301.7701-2(b)(1).220. KY. REV. STAT. ANN. § 275.285(3) (Michie/Bobbs-Merrill Supp. 1994).221. Id.222. Id. § 275.280.

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tion upon the occurrence of all events of disassociation, it mightstill be advisable to override the statutory default provision sim-ply to eliminate or further define the requirement that the votemust occur within ninety days.

The IRS regulations now make it clear that, in order to avoidthe continuity of life attribute, it is not necessary that the mem-bers vote unanimously to continue. Treas. Reg. section 301.7701-2(b)(1), as amended and finalized on May 14, 1993, now providesthat, in the case of limited partnerships, so long as a "majority ininterest" is required to approve continuation upon the occurrenceof a dissolution event, the continuity attribute will be avert-ed.22

' As would be expected, Rev. Proc. 95-10 transports thisstandard into the LLC realm, providing that:

If the members of the LLC do not designate or elect one or moremembers as managers (or if the LLC requests a ruling under thissection 5.01(2) despite the presence of member-managers) and thecontrolling statute, or the operating agreement pursuant to thecontrolling statute, provides that the death, insanity, bankruptcy,retirement, resignation, or expulsion of any member dissolves theLLC without further action of the members, unless the LLC iscontinued by the consent of not less than a majority in interest ofthe remaining members, the Service generally will rule that theLLC lacks continuity of life.224

The "continuity of life" classification test presents the same di-chotomy as do the "free transferability" and "centralization ofmanagement" tests. Distinct tests are established for LLCswhere the members do not designate or elect one or more mem-bers as managers and LLCs and where the members do so desig-nate or elect one or more members as managers.

As with the other two classification elements, and until theIRS provides further enlightenment, it would be prudent to as-sume that the above-quoted standard applies to Kentucky LLCsthat elect to be member-managed, notwithstanding that themembers otherwise elect or designate a manager to carry outcertain or all day-to-day management duties. Thus, where theLLC elects to be member-managed, the dissolution trigger shouldapply to the entire membership rather than to just those mem-

223. Treas. Reg. § 301.7701-2(b)(1) (as amended in 1993).224. Rev. Proc. 95-10 § 5.01(2), 1995-3 I.R.B. 20 (emphasis added).

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bers or managers who are selected to manage the LLC. Oncetriggered, the vote to continue must be by majority in interest ofall members, a standard which is discussed below.

If the LLC elects to be manager-managed, the revenue proce-dure allows a continuity decision to be triggered strictly byevents occurring with respect to member-managers:

If the members of the LLC designate or elect one or more mem-bers as managers and the controlling statute, or the operatingagreement pursuant to the controlling statute, provides that thedeath, insanity, bankruptcy, retirement, resignation, or expulsionof any member-manager causes a dissolution of the LLC withoutfurther action of the members, unless the LLC is continued by theconsent of not less than a majority in interest of the remainingmembers, the Service will generally rule that the LLC lacks conti-nuity of life.2"

In summary, this alternate test may be available with respect toLLCs that elect member-management and constrict the member-managers to less than all members, but there is some risk inrelying on such application. It certainly applies to LLCs thatelect to be manager-managed (as does the test otherwise applica-ble to member-managed LLCs). The advantage of this alternativeis that it allows a potentially substantial reduction in the pool ofpersons to which a dissolution event requiring a vote can occur.In the case of an LLC with a large number of members, thisalternative in and of itself may prompt an election to be manag-er-managed.

As with the member-manager alternative with respect to freetransferability, there are certain ownership and percentage iriter-est tests that must be satisfied in order for an LLC to obtain afavorable ruling. These tests, which are summarized above in theFree Transferability of Interests section, are intended to requirethat the member-managers have at least a minimal ownershipinterest in the LLC.226

The revenue procedure requires that the particular dissolutiontrigger must, with respect to the test set out in section 5.01(2),apply to all members.227 In the case of the test set out in sec-

225. Id. § 5.01(1).226. See supra part IV.B.3.227. Rev. Proc. 95-10 § 5.01(2), 1995-3 I.R.B. 20.

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tion 5.01(1), the trigger must apply to all member-managers.228

In both instances, if a vote is triggered, the full LLC membershipmust vote to continue and such continuation must be approvedby at least a majority in interest.229

The term "majority in interest" was defined in Rev. Proc. 94-46with respect to limited partnerships as "a majority of the profitsinterests and a majority of the capital interests owned by all theremaining partners., 230 A member's profits interest is to be de-termined by calculating a "reasonable estimate" of profits fromthe date of the dissolution event to the projected termination ofthe partnership, taking into account present and future alloca-tions of profits under the operating agreement. 231' A member'scapital interest is to be determined by reference to the member'srelative capital accounts at the time of the dissolution event,probably after a deemed revaluation of capital accounts. 2 Thesame standards were expressly adopted for LLCs in Rev. Proc.9510.233

While this standard may be relatively easy to apply in thecase of an LLC that does not have, or does not have the potentialfor, shifting or special allocations (where allocations are not fixedthroughout the term of the LLC) the standard may be absurdlydifficult to apply (especially the measurement of relative profitsinterests). Where avoiding the continuity of life corporate charac-teristic is essential to partnership classification, it is best not totempt the IRS with aggressive interpretations of the majority ininterest test, and where there is doubt, the best course may be torequire a higher percentage than majority vote in order to con-tinue the enterprise.

Remember that Kentucky's LLC Act provides that any event ofdisassociation occurring with respect to any member triggers avote to continue.2 34 However, the statutory dissolution andwinding up provisions in the event of a disassociation of a mem-ber can be overridden by a written operating agreement.23 5 If

228. Id. § 5.01(1).229. See supra notes 227 & 228.230. Rev. Proc. 94-46 § 4, 1994-28 I.R.B. 129 (emphasis added).231. Id.232. Id.233. Rev. Proc. 95-10 § 5.01(3), 1995-3 I.R.B. 20.234. KY. REV. STAT. ANN. § 275.285(3) (Michie/Bobbs-Merrill Supp. 1994).235. Id.

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an organization wishes to assure some level of continuity, it canlimit the number of disassociation events giving rise to a contin-uation vote of the members. Even though the general rule seemsto require that the organization face potential dissolution on thehappening of each and every event listed in that regulation, theregulations go further to state just the opposite: "If the death,insanity, bankruptcy, retirement, resignation, expulsion, or otherevent of withdrawal ... causes a dissolution of the [entity], con-tinuity of life does not exist."2 6 This sentence clearly statesthat there need only be a single event that requires a continu-ation decision in order for the continuity of life attribute to beavoided.2" ' Rev. Proc. 95-10 section 5.01(4) expressly permitslimiting dissolution triggering events to "less than all of thedissolution events" set out in the above quoted te~ts.238

Accordingly, the members, by way of the LLC agreement,could bolster business continuity by selecting only one event ofdisassociation that could give rise to a member vote to continue.The only caveat is that the particular event or events of disasso-ciation selected must be meaningful. As an extreme example, ifdeath is chosen as the only event of disassociation that will trig-ger a member continuation vote, an LLC cannot avoid the char-acterization of continuity of life where all members of the LLCare corporations. Rev. Proc. 95-10 provides that the taxpayermust clearly establish that the event or events selected provide ameaningful possibility of dissolution.239

An operating agreement that complies with the requirementsfor avoiding-the continuity characteristic could be undermined ifthe parties have a side agreement that restricts their ability tocompel a liquidation, or if the operating agreement itself re-stricts this right. Although continuation agreements did notresult in continuity of life in several reported cases,2 4

1 suchagreements are risky.

236. Treas. Reg. § 301.7701-2(b)(1) (as amended in 1993).237. See Larson v. Commissioner, 66 T.C. 159 (1976); Rev. Rul. 88-79, 1988-2 C.B.

361; Priv. Ltr. Rul. 92-10-019 (Dec. 6, 1991).238. Rev. Proc. 95r10, § 5.01(4) (as amended in 1993).239. Id.240. See Zuckman v. United States, 524 F.2d 729 (Ct. C1. 1975); Foster v. Com-

missioner, 80 T.C. 34 (1983), affid in part and vacated in part on other grounds, 756F.2d 1430 (9th Cir. 1985), cert. denied, 474 U.S. 1055 (1986).

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As in the case of the transferability attribute, a question couldarise as to whether there is a real risk of dissolution where themembers are related or otherwise have unity of economic inter-ests. The risk appears to have been dispelled, however, by Rev.Rul. 93-4 which, in the case of a limited partnership, states that"the presence or absence of separate interests [that are common-ly controlled] is not relevant to the determination of whether anentity possesses continuity of life. '214 ' This is not necessarily afinal answer, however, for the IRS may impose a slightly stricterstandard for LLCs in a future revenue procedure.

Finally, Treas. Reg. section 301.7701-2(b)(1) provides that ageneral partnership organized under a statute corresponding tothe Uniform Partnership Act lacks continuity of life.242 Becausethe Kentucky Uniform Partnership Act varies from the UniformPartnership Act only in immaterial respects, a Kentucky generalpartnership will lack the corporate characteristic of continuity oflife.

5. Amendments

A practitioner can properly structure an LLC and draft anoperating agreement that assures partnership tax status, only tohave the owners, unbeknownst to the practitioner, subsequentlyamend the operating agreement in a manner that is fatal to theLLC's partnership tax status. For example, an LLC that dependsupon the fact that it is member-managed could amend its arti-cles of organization to convert to the manager-managed alterna-tive. This change might cost it an essential partnership tax at-tribute. For this reason, clients should be advised, preferably inwriting, that an amendment to the pertinent provisions of theirLLC agreement could result in taxation as a corporation. Thepractitioner might even consider placing a warning in the operat-ing agreement itself, either in the amendment provision or in therelevant provisions that pertain to the particular partnershipcharacteristics, in order to protect against such an ill-advisedamendment.

241. Rev. Rul. 93-4, 1993-1 C.B. 225.242. Treas. Reg. § 301.7701-2(b)(1) (as amended in 1993).

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V. SELECTED PARTNERSHIP TAXATION ISSUES

As LLCs become more and more popular, there will be greaterpressure on the practitioner to learn the intricacies of partner-ship taxation, or at least to consult a person who has done so.The practitioner working with LLCs should at least have passingfamiliarity with certain issues that can arise in the partnershiptax area.

A. Substantial Economic Effect Rules

The substantial economic effect (SEE) test under section704(b) of the Code and Treasury regulations is intended to in-sure that partnership and LLC tax allocations comport witheconomic reality.243 For example, if A and B both contribute$50 to an LLC, which loses $25, all of which is allocated to A, A'sinvestment should have shrunk to $25 since his interest bore theloss. B's interest should remain the same. If the parties liquidat-ed the LLC the next day, A should get back $25 and B shouldget back $50. If the LLC operating agreement provides that Agets the $25 loss and also gets $50 in liquidation proceeds, theSEE test will be violated, and the loss will be reallocated by theIRS to the party that bore it economically. Thus, allocationsmust have "economic effect. 244

As long as all contributions, distributions, and tax allocationsof an LLC are in the same proportion and expected to remain soindefinitely, it is probably not necessary to comply with the SEEprovisions of the Code because the allocations will be in accor-dance with the "partner's interest in the partnership" as provid-ed for in the heading of section 704(b) of the Code.245 Whenthere are economics or allocations that will or can vary overtime, such as shifting tax allocations, preferred returns and thelike, the tax allocations must meet the SEE requirements.246

This is no easy task. Section 704(b) of the Code consists ofeighty-three words;247 the regulations consist of thirty-one pag-es of fine print.248

243. I.R.C. § 704(b) (1988); Treas. Reg. § 1.704-1(b)(2) (as amended in 1993).244. See Treas. Reg. § 1.704-1(b)(2)(ii) (as amended in 1993).245. See I.R.C. § 704(b)(1988).246. See Treas. Reg. § 1.704-1(b)(2) (as amended in 1993).247. See I.R.C. 704(b)(1988).248. See Treas. Reg. § 1.704-1 (as amended in 1993); Treas. Reg § 1.704-2 (as

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In addition to having economic effect, allocations must also be"substantial.249 Substantiality requires that there be a "rea-sonable possibility that the allocation will affect substantiallythe dollar amounts to be received by the partners from the part-nership, independent of tax consequences."'25 For example, as-sume the same facts as stated above except that the loss is acapital loss recognized early in the year and A has a $50 capitalgain. The members allocate their loss to A, who can offset itagainst his capital gain, and A's investment interest drops to $50so that there is an "economic effect." However, the LLC agree-ment is amended to provide that B will be allocated the next $50in loss, and A the next $50 in gain or income, to bring themembers' capital accounts into balance. This arrangement wouldprobably not be "substantial" since the IRS would have a goodargument that the special allocation to A was undertaken solelyto offset the capital loss against A's capital gain.

There are three basic requirements in meeting the SEE test,all of which must be complied with in the operating agreementthroughout the full term of the LLC. They are: (1) maintenanceof capital accounts;251 (2) liquidation in accordance with capitalaccounts; 252 and (3) makeup of deficit capital account bal-ance.

253

1. Maintenance of Capital Accounts

The LLC operating agreement must actually provide for thedetermination and maintenance of LLC capital accounts in accor-dance with the rules of Treas. Reg. section 1.7041(b)(2)(iv). 254

2. Liquidation in Accordance with Capital Accounts

The LLC operating agreement must provide that upon liquida-tion of the LLC, liquidating distributions will be made in accor-dance with the positive capital account balances of the members,

amended in 1992); Treas. Reg. § 1.704-3 (as amended in 1994); Temp. Treas. Reg.§ 1.704-3T (1993).

249. See Treas. Reg. § 1.704-1(b)(2)(iii) (as amended in 1993).250. Id.251. Id. § 1.704-1(b)(2)(iv).252. Id. § 1.704-1(b)(20(ii)(b)(2).253. Id. § 1.704-1(b)(2)(ii)(b)(3).254. Id. § 1.704-1(b)(2)(iv).

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after taking into account all adjustments for the year. Such dis-tributions must be made by the end of the taxable year, or ifmade later, within ninety days after the date of liquidation. 25

3. Makeup of Deficit Capital Account Balance

The LLC agreement must actually provide that, upon liquida-tion of the LLC, each member who has a deficit balance in his orher capital account must be unconditionally obligated to restorethe amount of such deficit balance to the LLC by the end of thetaxable year, or if later, within ninety days after the date ofliquidation.

2 5 6

The third requirement of the economic effect test will often betroubling to an owner who is seeking the shelter of a limitedliability entity. Notwithstanding the liability protection offeredby the LLC form, if the operating agreement contains a deficitcapital account restoration obligation, there will be a leak in theliability protection that could undermine limited liability status.The regulations acknowledge this situation and address it byplacing a limit on the losses that can be allocated to a memberwho does not have a deficit capital account makeup obligation,and in certain instances, by specially allocating income to suchmember to bring his or her capital account up to an appropriatelevel.257 Essentially, two requirements must be met.

First, the non-obligated member's capital account must beadjusted downward to reflect projected future distributions andcertain tax allocations, and then upward to reflect future obliga-tions or deemed obligations to contribute to the LLC. No lossescan be allocated to the member to the extent such losses wouldresult in a negative balance in the member's adjusted capital ac-count.258

Second, if the member unexpectedly receives certain adjust-ments, allocations or distributions as defined in the regulations,income must be allocated to the member "as quickly as possible"in order to bring his or her adjusted capital account back up tothe correct level. 259 This alternate test makes it difficult if not

255. Id. § 1.704-1(b)(2)(ii)(b)(2).256. Id. § 1.704-1(b)(2)(ii)(b)(3).257. See id. § 1.704-1(b)(2)(ii)(d).258. Id.259. See id. § 1.704-1(b)(2)(ii)(d)(6).

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impossible for a member to ever have a negative capital accountsince all future projected distributions are built into the capitalaccount, as adjusted, and no losses are permitted to reduce thatadjusted account. Thus, at least theoretically, there should al-ways be a sufficient balance in the capital account to accommo-date LLC distributions to the member.

Blind adherence to the tax rules is not always wise. The SEEtest rules are so complex that they might, instead of reflectingthe economics of the LLC, actually control the economics in amanner that is contrary to the expectations of the parties. Thus,if the practitioner simply inserts a provision that liquidation willbe undertaken in accordance with the tax requirements, theresult may end up being completely different than what themembers had in mind. The tax rules should be made to fit themembers' economic agreement and not the reverse.

A word should be said about nonrecourse debt. No member ofan LLC bears the economic burden with respect to losses derivedfrom nonrecourse debt because no member has to pay itback.26 ' Thus, loss allocations derived from nonrecourse debtcannot have substantial economic effect.26' Although the alloca-tion rules on account of nonrecourse debt are really beyond thescope of this article, they generally require that nonrecourse debtallocations correspond to allocations from property that is se-cured by the debt, and that there be a "minimum gainchargeback" with respect to the gain inherent in such proper-ty.

262

B. Section 704(c) Book/ Tax Disparities

The mandatory rules of section 704(c) of the Code come intoplay anytime there is a disparity in the basis of LLC property ascarried on its books for tax and for accounting purposes. 263 Themost common instance where section 704(c) will apply is in thecase of a contribution of appreciated property to the LLC. Insuch case, the contributing member's capital account will beequal to the agreed-upon fair market value of the property, while

260. Treas. Reg. § 1.752-1(a)(2).(1991).261. See Treas. Reg. § 1.704-1(b)(2)(ii)(a) (as amended in 1993).262. See generally id. § 1.704-2 (as amended in 1992).263. I.R.C. § 704(c) (1993).

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the LLC's tax basis in the property will be carried over from thecontributing member.26 4 The tax rules require that this dispari-ty be eliminated in some fashion. The regulations provide thatthe LLC must use a "reasonable method that is consistent withthe purpose" of section 704(c), which purpose is to prevent artifi-cial shifts in tax benefits and burdens.265 The three prescribedmethods set out in the regulations are as follows.

1. Traditional Method

Under the traditional method, there must be allocations thatavoid the shifting of the tax consequences of built-in gains or -

built-in losses.266 One method is to simply charge back thebuilt-in gain to the contributing member.267 Alternatively, ifthe property that is contributed is depreciable, the depreciationdeductions can be allocated to the cash contributor and awayfrom the property contributor until the accounts are bal-anced.268 The traditional method may not be reasonable whereadjusting allocations are limited by the so-called "ceilingrule."26 9 For example, suppose A contributes to an LLC depre-ciable property with a $25 basis that is worth $50 and has a five-year straight-line useful life. B contributes $50 in cash. If theproperty had a full fair market basis, it would have generated$10 in depreciation a year, which would be split equally $5 permember. But there is actually only $5 in annual depreciationdeductions. The traditional method would allocate all of this tomember B. If the property had only a $10 basis at the time ofcontribution, the ceiling rule would come into play because therewould not be enough LLC depreciation, $2 total, to make Bwhole. In such case, the traditional method might not be reason-able.

264. See Treas. Reg. § 1.704-3 (as amended in 1994).265. Id. § 1.704-3(a).266. Id. § 1.704-3(b).267. Id.268. Id.269. See id.

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.2. Traditional Method with Curative Allocations

This method attempts to overcome the ceiling rule by usingother tax items.2 v° While these rules are too complicated to ad-dress here, they essentially allow the LLC to use other tax itemsnot related to the contributed property to correct for distortionscaused by the ceiling rule.271

3. Remedial Allocation Method

This method allows taxpayers to use deferred sale concepts inorder to correct for the book/tax disparity; that is, the contributorwill be treated as selling the property to the LLC at its fair mar-ket value.272 The contributing member's recognition of gain isdeferred until it is triggered into recognition by a correspondingLLC tax benefit attributable to the increased asset basis, such asincreased depreciation or reduced gain on sale.273 Final regula-tions adopting the remedial allocation method were issued by theIRS on December 28, 1994.274

Section 704(c) issues can arise in other circumstances, someunintended. For instance, a technical tax termination of the LLCwould result in the deemed distribution of property and then adeemed recontribution of that property to the LLC. Such recontr-ibution would trigger the application of section 704(c). In addi-tion, LLC capital account revaluations would trigger the applica-tion of section 704(c).

C. Disguised Sale Provisions

Under previous tax law, a person could contribute appreciatedassets, perhaps even an entire business, to a partnership tax-free.2 75 Later, that person could receive a distribution of prop-erty, perhaps Treasury notes, in complete redemption of the

270. See id. § 1.704-3(c).271. Id.272. See Temp. Treas. Reg. § 1.704-3T(d) (1993).273. Id.274. Treas. Reg. § 1.704-3(d), 59 Fed. Reg. 66,724 (1994).275. I.R.C. § 707(a)(2)(B)(iii) (1982 & Supp. III 1985) (current version at I.R.C.

§ 707(a)(2)(B)(iii) (1988)).

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person's partnership interest, also tax-free. In the end, the per-son would have effected a sale of the assets tax-free. This prac-tice was substantially foreclosed by an amendment to section 707of the Code in 1984, which added section 707(a)(2)(B), leading tothe so-called "disguised sale rules" of Treas. Reg. section 1.707-3(a)(3). 276 The regulations, while quite complex, essentially cre-ate a rebuttable presumption that a contribution that is followedby a disproportionate distribution to the contributor within atwo-year period constitutes a taxable sale of the property at thetime of contribution.277 The regulations contain some harshprovisions, foremost of which is the presumption that liabilitiesincurred within two years prior to the contribution that are thenassumed (or taken subject to) by the partnership, or in this casethe LLC, constitute sale proceeds.2 7

1 Similar rules can apply inthe case of distributions by an LLC.

Another disguised sale provision is contained in section704(c)(1)(B) of the Code and provides that where appreciatedproperty is contributed to an LLC, and is subsequently distribut-ed by the LLC to another member within five years of such con-tribution, gain will be charged back to the contributing memberin an amount equal to the section 704(c) gain. 9 This is an ex-ception to the normal tax-free distribution rules.

Finally, section 737 of the Code, which was enacted on October24, 1992, requires that where a member contributes appreciatedproperty to the LLC, that member will recognize gain upon thedistribution of property to him or her that occurs within fiveyears of the contribution.28 ° The gain will be equal to the lesserof the contributing member's net pre-contribution gain inherentin the property or the excess of the fair market value of the dis-tributed property over the member's LLC interest basis.28' TheIRS proposed regulations interpreting both the disguised saleprovisions of section 704(c)(1)(B) and section 737 of the Code onJanuary 9, 1995.282

276. I.R.C. § 707(a)(2)(B) (1988); Treas. Reg. § 1.707-3(a)(3) (1992).277. See Treas. Reg. § 1.707-3 (1992).278. Id. § 1.707-3(c).279. I.R.C. § 704(c)(1)(B) (Supp. V 1993).280. Id. § 737.281. Id. § 737(a).282. Prop. Treas. Reg. § 1.704-4, 60 Fed. Reg. 2352 (1995); Prop. Treas. Reg.

§ 1.737-1 to -5, 60 Fed. Reg. 2352 (1995).

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D. Retirement Payments

Section 736 of the Code contains a curious and often over-looked provision that could affect the tax treatment of paymentsin redemption of a member's interest.2" 3 Suppose A, B, C and Dare equal members in an accounting LLC and their LLC agree-ment entitles retiring members to LLC payments in redemptionof their interest upon death or retirement. D dies and is entitledto $100,000, $75,000 of which is attributable to the goodwill Dhelped to engender. The LLC operating agreement does not statespecifically that D is entitled to a liquidating payment with re-spect to goodwill. Seventy-five thousand dollars of the liquidatingpayment will be includable as ordinary income in D's estate anddeductible by the LLC.284 The fact that D received a basis step-up at death will not prevent this result. Although this resultobviously is quite beneficial to the remaining members, it is alsovery detrimental to D's heirs. This can be avoided by including aprovision in the LLC operating agreement stating that the pay-ments made to a retiring member include a payment with re-spect to goodwill.

E. Section 754 Elections

As discussed above, LLCs can make an election under section754 of the Code to adjust the basis of LLC assets to reflect cer-tain transactions that occur outside of the LLC entity or betweenthe entity and its owners, including sales and exchanges of LLCinterests, basis step-ups in the event of the death of an LLCmember, and certain other events.2"' Once made, a section 754election is revocable only with the approval of the IRS.

F. Revaluation of Capital Accounts

Pursuant to Treas. Reg. section 1.704-1(b)(2)(iv)(f(2), an LLCcan elect to revalue capital accounts upon the occurrence of cer-tain events so long as there is a substantial non-tax businesspurpose for doing so.286 Suppose A and B form an LLC in 1994

283, See I.R.C. § 736 (1988 & Supp. V 1993).284. See id.285. I.R.C. §§ 754, 743, 734 (1988).286. Treas. Reg. § 1.704-1(b)(2)(iv)(f)(2) (as amended in 1993).

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with each contributing $50 in cash. The LLC purchases land thatappreciates to $600 by 1996. C is admitted to the LLC in 1996and acquires a one-third interest for $300. Shortly thereafter, theLLC sells the property for $600 and liquidates. If A and B do nottake action, gain from the property will be allocated equally sothat C will be allocated $167 in gain, elevating his basis to $467to which he will be entitled upon liquidation. Thus, C will havebeen a member for a few days, yet will share in the appreciationin LLC property that occurred prior to his admission.

This can be corrected in two ways. First, the operating agree-ment can be amended so as to specially allocate appreciationearned prior to C's admission to A and B. In this case, C willonly get his money back upon liquidation. Alternatively, themembers could elect to revalue their capital accounts so that Aand B would have a $300 capital account upon C's admission andthe section 704(c) rules would prevent any pre-admission LLCappreciation from affecting capital accounts. It is often prudentfor a minority member to insist upon a right to compel revalua-tion, which can be very burdensome from an accounting andbookkeeping standpoint, upon the occurrence of certain events inorder to protect himself from being unfairly diluted.

G. Unified Audit Provisions

As with partnerships and S corporations, LLCs will be subjectto the "unified audit provisions" of section 6231 of the Code.287

Accordingly, a "tax matters partner" should generally be selectedand named in the operating agreement.

VI. CHOICE OF ENTITY CONSIDERATIONS

Ultimately, in selecting the form in which to conduct a busi-ness, a careful comparison must be undertaken to assess therelative benefits and drawbacks of the various entities basedupon the .particular facts of the situation. This section comparesLLCs with other business entities.

287. I.R.C. § 6231 (1988).

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A. Eligibility Considerations

Before examining all of the other considerations in choosing anentity, one must decide whether the entity is even availableunder the circumstances. For instance, if one or more of the own-ers will be a corporation or partnership, a nonresident alien, orwith certain limited exceptions, a trust, an S corporation cannotbe used.288 Eligibility considerations will generally focus on theavailability of the S corporation, although the ability of an LLCor a limited partnership to qualify as a partnership for tax pur-poses could also be viewed as a threshold issue that must be ad-dressed before analyzing other considerations.

B. Flow-Through Tax Status

As a preliminary matter, a determination must be made as towhether and to what extent flow-through tax status is importantto the investors. In the case of a service entity, such as a profes-sional service corporation, all income may be paid out annuallyso that, effectively, there is a single level of tax despite the factthat the entity is not a flow-through entity. Additionally, thedividends received deduction, or the ability to report on a consoli-dated basis, may eliminate or dramatically reduce the doublecorporate tax burden in many instances. Assuming that pass-through tax status is desirable, however, there are several fea-tures of partnership taxation that make LLCs as well as partner-ships more favorable than S corporations. For purposes of thisdiscussion, references to LLCs contemplate that the LLC will betaxed as a partnership.

1. Favorable Tax Features of LLCs and Partnerships Comparedto S and C Corporations

It should be noted that even though the discussion immediate-ly below compares LLCs to S corporations, many of the differ-ences are equally applicable in comparing LLCs to regular Ccorporations.

The owners of LLCs can allocate profits and losses and othertax items in ratios that are disproportionate with the capital

288. See id. § 1361 (1988 & Supp. V 1993).

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contributions of the members and that vary over the life of theentity. This allows for the payment of preferences, fixed returnson capital, allocations to reflect risk and other factors, all ofwhich to one extent or another are forbidden under the S corpo-ration rules. The LLC allocations will be respected for tax pur-poses so long as they meet with the SEE requirements of section704(b) of the Code.289

Section 706 of the Code allows LLC members, to a limitedextent, to retroactively amend their tax allocations for a period ofup to three and one-half months after the close of the LLC'staxable year. The S corporation rules contain no such provisionand in fact do not allow shifting allocations at all.

Unlike S corporations, there is no requirement that distribu-tions made by an LLC must be proportionate with owner inter-ests at any particular time, either in the operational stage or atthe end stage. Distributions can generally be made in any man-ner that the parties wish, although certain distributions that aremade in a manner that is inconsistent with section 704(b) princi-ples could result in unanticipated tax liability.

In the S corporation setting, contributions of appreciated prop-erty are tax-free only if they are made by an eighty percent "con-trol" group as defined in section 368(c) of the Code.29 ° Thus, ifa fifty percent shareholder wishes to contribute highly appreciat-ed land to an existing S corporation, the transaction will nor-mally be treated as a sale to the corporation. In the case of anLLC, the contribution will generally be tax-free without regardto the amount of the contributor's ownership interest so long asthe contribution does not result in assumption of debt by theLLC in excess of the member's adjusted basis.291 Thus, Scorporations charge an "admission fee" in certain circumstanceswhere appreciated property is contributed to the enterprise.

Pursuant to section 357(c) of the Code, a shareholder whocontributes encumbered property to an S corporation will recog-nize gain, whether or not such person is within a control group,to the extent that the debt assumed (or that the property is tak-en subject to) exceeds the contributing shareholder's basis in the

289. See id. § 704(b) (1988); Treas. Reg. § 1.704-1(b)(2) (as amended in 1993).290. See I.R.C. § 351(a), 368(c) (1988).291. Id. §§ 721(a), 752(b).

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property.29 2 This can be true even if the shareholder remainspersonally liable on the debt. The rules applicable to LLCs arenot so harsh. In determining the amount realized on the trans-fer, the contributing member is deemed only to receive the net ofthe liability transferred over the amount of that liability attrib-uted to the contributor under section 752 of the Code.293 Thus,the LLC member, unlike the S corporation shareholder, will beable to reduce the amount of the assumed liability before deter-mining whether he or she must recognize gain upon the shiftingof that liability to the LLC.

Subject to the disguised sale rules discussed above,2 94 LLCscan make tax-free, non-cash distributions of property to theirowners. Even if the owner has no basis in the property whatso-ever, a non-cash distribution will not normally result in anygain; instead, the property will carry out the owner's basis to theextent of the property's "inside" basis. For these purposes, cashcan include marketable securities under recently amended sec-tion 731 of the Code.295 In the S corporation setting, however,the distribution of property will normally trigger a deemed saleat the corporate level pursuant to section 311(b) of the Code.296

Thus, S corporations also charge an "exit fee" in nearly everyinstance where appreciated property is distributed by the corpo-ration.

Pursuant to section 752(a) of the Code, increases in amember's share of LLC liabilities will be deemed to be a contri-bution by such member to the LLC, thus producing an outsidebasis increase in the member's interest.297 This rule allowsmembers in LLCs and partners in partnerships to take tax de-ductions that are derived from assets purchased or expensesincurred by the partnership with borrowed funds, and therebytake advantage of a leveraging effect with respect to such entitydebt. By contrast, the S corporation rules do not permit outsidebasis, or stock basis, to be increased by inside corporate

292. Id. § 357(c) (1988 & Supp. V 1993).293. Id. §§ 721(a), 752(b); Treas. Reg. § 1.752-1.294. See supra part V.C.295. The Complete Internal Revenue Code, I.R.C. § 731(c)(1), at 3056 (Research

Inst. of America, Jan. 1995).296. I.R.C. § 311(b) (1988).297. Id. § 752(a).

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debt.298 As a result, the tax losses that can be taken by S cor-poration shareholders in this regard are limited to the amount ofmoney or fair market value of property contributed to the entity,increased by the amount of money loaned to the corporation.

Section 754 of the Code allows LLCs to elect to have the taxbasis of partnership assets track externally produced fluctuationsin the outside basis of the members' interests.2 99 Thus, where amember sells his or her interest to a third party, a section 754election will allow the buyer to obtain a stepped-up basis withrespect to his or her share of LLC assets, and the tax benefitsattributable to such step-up flow back directly to the purchaserrather than being shared with all other members. The ability totake advantage of this provision can substantially increase thevalue of an interest at sale. For this reason, if a practitioner isrepresenting a member who would not normally possess votingcontrol over the affairs of the LLC, an attempt should be madeto obtain the right of the member to compel a section 754 elec-tion. Another common situation where a section 754 election canbe quite beneficial is at death where the outside basis of a de-ceased member's LLC interest will be stepped-up pursuant tosection 1014 of the Code.30 ° Again, section 754 permits this ba-sis step-up to be transported into the entity so that there in factis a "double" basis step-up at death.3"1 The S corporation ruleshave no comparable provisions, and, therefore, stock transactionsand other stock basis adjustments generally have no impact onthe basis of corporate assets.

The LLC rules are somewhat more generous than the corpora-tion rules regarding the manner in which service-providers canbe rewarded for their efforts. First, KRS section 275.195 allowsLLC interests to be issued for services to be rendered in thefuture so long as the promise to provide services is inwriting.3"2 This statute is more permissive than the rules ap-plying to the issuance of corporate stock, which may be issuedfor consideration consisting only of "an equivalent in money paidor labor done, or property actually received." ' 3 Fortuitously,

298. Id. § 1367.299. Id. § 754. See also id. §§ 743, 734.300. Id. § 1014.301. Id. § 754.302. KY. REV. STAT. ANN. § 275.195 (Michie/Bobbs-Merrill Supp. 1994).303. KY. CONST. § 193; KY. REV. STAT. ANN. § 271B.6-210(2) (MichieiBobbs Merrill

1995] 297


this state law permissiveness is supported by favorable tax lawtreatment, for certain ownership interests in an LLC can beissued tax-free for services rendered or to be rendered, while thesame tax result cannot normally be obtained when corporatestock is issued. According to Rev. Proc. 93-27, 1993-2 C.B. 343,the issuance of a "profits interest" in a partnership in exchangefor services rendered will generally not be considered a tax rec-ognition event.0 4 Although a corporation can offer a serviceprovider a right that is similar to a profits interest by way ofcontract, a corporation generally cannot provide such personwith an unrestricted stock interest without immediate taxation.

S corporations cannot convert into LLCs or partnerships tax-free. Such a conversion will necessarily result in a liquidation ofthe S corporation and therefore at least one level of tax.3 °5

LLCs, on the other hand, generally can move into any form ofbusiness entity on a tax-free basis, whether it be an S or C cor-poration, a limited or general partnership, or some other form,such as a business trust.

Section 704(c) of the Code requires that the variation betweenthe adjusted basis of property and its fair market value at contri-bution be taken into account in the allocation of tax items amongLLC members.306 This mandatory provision compels the mem-bers to address an issue that is often overlooked in the corporatesetting, that is, the inherent tax burden that encumbers appreci-ated, or substantially depreciated, property that is contributed tothe enterprise. For example, suppose that A and B form an Scorporation, with A contributing $1,000 in cash and B contrib-uting land with a basis of $100 and with a fair market value of$1,000. Six months later the land is sold for $1,000 and the cor-poration, which now has $2,000 in cash, commences liquidation.A receives $1,000 in liquidation for no gain on his stock, but thenmust pay approximately $150 to the IRS on account of his dis-tributive share of corporate gain on the sale of the land. Thus, Ainvested $1,000, the corporate assets did not depreciate in value,yet A ends up with after-tax proceeds of $850. What A has doneis pay B's share of the tax.

1989) (emphasis added).304. Rev. Proc. 93-27, 1993-2 C.B. 343.305. I.R.C. § 336 (1988).306. Id. § 704(c)(1)(A) (Supp. V 1993).

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The S corporation rules do not really provide a means of cor-recting this result. The parties can adjust the value of appreciat-ed property to reflect its inherent tax burden, but such an ad-justment is difficult to make because the time, if ever, when thetax encumbrance will be paid cannot be predicted. In contrast,section 704(c) allows, in many cases, the appreciation inherent atthe time of contribution to be charged back to the contributingpartner or LLC member at the time it is recognized. °7 Itshould be noted, however, that allocations under the section704(c) rules entail accounting complexities and for that reasonmany would regard the application of section 704(c) as a curserather than a blessing.

In the case of an S corporation, an affirmative election mustbe made to obtain "pass-through" status. °8 In addition, subse-quent elections must be made by qualified Subchapter S corpora-tion trusts at such time as they become shareholders in the Scorporation. 9 Finally, in order to obtain and maintain theelection, an S corporation must abide by the maze of eligibilityrules. 10 Failure to file for S corporation status in a timely orproper way can result in unintended tax consequences, as canfailure to maintain such status. The corporation might be ineligi-ble for S corporation treatment for up to five years if such statusis lost.31'

On the other hand, no affirmative election is required in thecase of an LLC. Of course, the practitioner must ensure that theLLC is properly structured to avoid corporate tax treatment, andthe members must avoid any subsequent amendments to theoperating agreement which would forfeit partnership tax status.

307. Id.308. Id. § 1362 (1988).309. Id. § 1361(d).310. See id. § 1361 (1988 & Supp. V 1993), § 1362 (1988).311. Id. § 1362(g) (1988).

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2. Favorable Tax Features of S Corporations Compared to LLCs

This portion of this article focuses on flow-through tax attrib-utes and does not look at all aspects, including non-tax consider-ations, of the two business forms. There are some features, inthis regard, that commend the S corporation form over that ofthe LLC.

With certain very unusual exceptions, the sale of S corporationstock will constitute a capital gain transaction that is taxable atcapital gains rates. By comparison, the "aggregate" approach toLLC taxation prevails over the "entity" approach such that, pur-suant to section 751 of the Code, all or a portion of the gainrecognized upon the sale of an LLC interest could result in recog-nition of ordinary income.312

.The IRS has not yet provided guidance as to how the "materialparticipation" standards regarding passive income under section469 of the Code will be applied to LLCs.313 Until such time,and possibly even thereafter, greater certainty will be found inthe S corporation area. This section is obviously much shorterthan the section describing tax advantages of the LLC form ver-sus that of the S form. Thus, if legal fees, tax complexity andbusiness complexity were not considered, and the focus was themost favored tax entity, the LLC form would most often be cho-sen.

3. C Corporations and Partnerships

Much of the discussion contained in the preceding section alsoapplies in comparing LLCs to C corporations. Obviously, thediscussion generally does not distinguish LLCs from partner-ships since the federal tax laws do not distinguish the two.

C. Business Complexity Factor

Given the newness of LLCs, there are many aspects of theirgovernance, operation, and other matters yet to be resolved. TheLLC Act is new, and few practitioners have committed the statu-tory rules to memory or have put them into practice. The lack of

312. Id. § 751 (1988 & Supp. V 1993).313. Id. § 469.

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past experience for both practitioners and clients will lead to acertain amount of business complexity. For a period of time,persons doing business with LLCs, including lenders, may havesome natural reservations about the entity. Eventually, thisfactor should fade in importance, but currently it is one to beconsidered. One aspect that will not disappear, however, is thenecessity of drafting a detailed operating agreement that can bemore time-consuming and expensive than drafting the articlesand bylaws of a corporation.

D. Tax Complexity Factor

Complex tax issues must be faced at the very outset in thecase of LLCs, as they must be in the case of limited partner-ships, on account of the need to qualify the entity as a partner-ship for tax purposes. Additionally, the partnership tax rulesthat apply to tax allocations and owner-entity transactions are,as a general proposition, much more complex than those applica-ble to S or C corporations. Finally, the lengthy boilerplate taxlanguage that must be used in LLC agreements can add pagesupon pages of virtually incomprehensible prose to an otherwiseclear agreement, a fact that can be particularly unwelcome to aclient

E. Unfamiliarity. Factor

While a client may like the sound of "limited liability compa-ny," there are numerous concepts and terms of art associatedwith the entity with which the client must become familiar andcomfortable. This task may prove difficult.

F. Uncertainty Factor

As discussed above, and unlike the case with partnerships andespecially corporations, there is not an established body of lawconstruing the LLC Act and LLC law in general. Accordingly,there is substantial legal uncertainty in the LLC area. For exam-ple, such concepts as the fiduciary duties owed by members tothe LLC and each other have not been distilled by judicial deci-sion or otherwise.

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G. Limited Liability

A factor that distinguishes LLCs from partnerships, both gen-eral and limited, is the fact that they shield all of their ownersfrom entity liability. As discussed above, the broad liability pro-tection of KRS section 275.150 may even offer greater protectionto members and other persons connected to an LLC than is of-fered to corporate shareholders.314 Limited liability, withoutforfeiture of pass-through tax status, is obviously an importantadvantage of the LLC form.

H. Multi-State Operations

While the problem is rapidly declining as more states passLLC statutes, there is still some uncertainty as to the status ofLLCs in terms of liability and tax considerations where theiractivities cross state lines. Some states still do not recognize thelimited liability nature of LLCs, and other states,. such as Flori-da and Texas, tax LLCs as corporations. Accordingly, the laws ofthe particular states in which the entity may do business mustbe carefully considered before venturing into those states.

I. Participation in Management

Limited partners cannot participate in the "control of the busi-ness" of the partnership without losing their limited liabilityprotection. KRS section 362.437, however, does permit limitedpartners to actively participate in a role other than as a limitedpartner, including as an employee of the partnership or of thegeneral partner.315 Members of an LLC, however, will not jeop-ardize their limited liability status by participating in manage-ment, except to the extent that their negligent acts or omissionsmight give rise to personal liability.

J. Fringe Benefits

In the vast majority of cases, an LLC will be taxed as a part-nership and its members will be taxed as partners. This partner-ship regime tax treatment will likewise govern the tax treatment

314. See KY. REV. STAT. ANN, § 275.150 (Michie/Bobbs-Merrill Supp. 1994).315. Id. § 362.437(2)(a).

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of various fringe benefits that may be provided to the LLC mem-bers.

Under section 132 of the Code, a number of fringe benefits arestatutorily excluded from the income of employees.316 Amongthe fringe benefits that employees can exclude are: the cost of upto $50,000 of section 79 group-term life insurance on theemployee's life;317 $5,000 death benefit exclusion under section101(b); 318 amounts paid under an accident or health plan undersection 105;319 amounts paid by the employee to an accidentand health plan under section 106;320 meals or lodging fur-nished for the convenience of the employer under section119;321 and benefits received under a section 125 cafeteriaplan.322 For these purposes, greater than two percent of share-holders of S corporations, partners and LLC members will gener-ally not be viewed as employees and thus will not be entitled toexclude the foregoing benefits from income. On the other hand,the following fringe benefits are generally excludable from in-come for employees as well as partners, LLC members andgreater than two percent of S corporation shareholders: employeeachievement awards under section 75(c);323 qualified group le-gal services plans under section 120;324 education assistanceunder section 127;325 dependent care assistance programs un-der section 129;326 no additional cost services under section132(b); 327 qualified employee discounts under section132(c); 328 working condition fringe benefits under section132(d);3 29 de minimis fringe benefits under section 132(e);330

and on-premises athletic facilities under section 132(j)(4).331

316. I.R.C. § 132 (1988 & Supp. V 1993).317. Id. § 79 (1988 & Supp. V 1993).318. Id. § 101(b) (1988).319. Id. § 105 (1988 & Supp. V 1993).320. Id. § 106 (1988).321. Id. § 119.322. Id. § 125 (Supp. V 1993).323. Id. § 75(c) (1988).324. Id. § 120 (1988 & Supp. V 1993).325. Id. § 127.326. Id. § 129.327. Id. § 132(b) (1988).328. Id. § 132(c).329. Id. § 132(d).330. Id. § 132(e).331. Id. § 132(j)(4) (Supp. V 1993).

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K. Timing of Taxes

LLCs are like S corporations and partnerships in that therecan be a taxable income flow-through without a correspondingdistribution of cash. Thus, unless distributions can somehow beassured, a successful flow-through entity could actually inflict asevere financial burden upon one or more of its owners. Thisfeature is distinguishable from the taxation of C corporationswhere the taxes are due from the level where the income is actu-ally earned.

L. Use of Tax Losses

The tax losses of a C corporation cannot be utilized directly byits shareholders, but are only available at the entity level. Thisattribute should be distinguished from that of LLCs, partner-ships and S corporations where, subject to limitations such asthe "at risk" rules and the passive loss limitations among others,losses can be allocated to and deducted by the owners.

M. Alternative Minimum Tax

Pass-through entities are not subject to the corporate alterna-tive minimum tax.3 2 In the closely held business setting, thiscan be very important where the corporation has large insurancepolicies on the lives of its owners, with the proceeds payable tothe corporation to cover a corporate redemption of the deceasedowner's stock. If the corporation is a C corporation, the receipt ofinsurance proceeds, normally considered tax-free, could be sub-jected to tax under the corporate alternative minimum tax provi-sions of sections 55 and 56 of the Code. 3

N. Double Tax

C corporations are subject to dual-level taxation, as are Scorporations in certain cases after conversion from C corporationstatus. LLCs, assuming they qualify for partnership tax treat-ment, and partnerships are only subject to a single level of tax atthe owner level.

332. Id. §. 56(g)(6) (1988).333. Id. §§ 55-56 (1988 & Supp. V 1993).

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0. Tax Rates

The top marginal corporate income tax rate is thirty-four per-cent at the federal level334 - actually, thirty-five percent fortaxable income over ten million dollars 335 _ and 8.25% at thestate level,336 for a combined tax rate of 42.25%. In addition,personal service corporations are denied the benefits of the grad-uated rates pursuant to section 11(b)(2) of the Code.337 In con-trast, the owners of a pass-through entity are subject to a topmarginal federal income tax rate of 39.6%338 and a maximumstate income tax rate of six percent,339 for a combined maxi-mum marginal tax rate of 45.6%. Of course, the comparison isnot quite this simple since one must look to the effect of thegraduated rates in order to determine the true impact in givensituations.

P. Insolvency Exception

With respect to both S and C corporations, the insolvencyexception to recognition of income in the event of a discharge ofindebtedness pursuant to section 108 of the Code is based strict-ly upon the solvency or insolvency of the corporation.34 ° Per-versely, the insolvency of a partnership, and consequently of anLLC, is determined first at the entity level and then again at theowner level. This rule obviously reduces the availability of theinsolvency exception and increases the likelihood of gain recogni-tion by the owners upon the recognition of "phantom income."

Q. Section 1244 Loss Treatment

Under section 1244, owners of a "small business corporation"are eligible to deduct losses on the sale of their stock in the cor-poration as ordinary losses.341 This benefit is not available topartners or members of an LLC.

334. Id. § ll(b)(1)(C).335. Id. § ii(b)(1)(D) (Supp. V 1993):336. Ky. REV. STAT. ANN. § 141.040(3)(e) (Michie/Bobbs-Merrill 1991).337. I.R.C. § 11(b)(2) (Supp. V 1993).338. Id. § 1.339. KY. REV. STAT. ANN. § 141.020(2)(e) (Michie/Bobbs-Merrill 1991).340. I.R.C. § 108 (1988 & Supp. V 1993).341. Id. § 1244 (1988).


R. Tax Terminations

Both partnerships and LLCs must "terminate" for tax purpos-es if there is a sale or exchange of fifty percent or more of the"total interest in partnership capital and profits" during a twelvemonth period.34 2 While such an event may not generate anytax liability and should not result in any non-tax consequences, atax termination could produce accounting complexities such as aclosing of the books, a revaluation of capital accounts, and theautomatic application of section 704(c). There is no similar provi-sion that applies to corporations.

S. Sole Owner

An LLC apparently cannot be held by a sole owner under theKentucky LLC Act.343 In order to be classified as a partnershipfor federal income tax purposes, it is also generally assumed thatthere must be more than one owner.344 Accordingly, if a busi-ness entity will have a sole owner, that person will probablyhave to form a corporation.

T. Securities Law Considerations

A limited partnership interest will almost always be classifiedas a "security" while a general partnership interest normally willnot. The classification of an LLC interest will depend upon thefacts and circumstances and generally will follow the test set outin Securities & Exchange Commission v. W. J. Howey, Compa-ny 345 and subsequent case law. While the determination is nota simple one, it appears that, based upon the specific facts andcircumstances, LLC interests should be more susceptible to es-caping classification as securities than are limited partnershipinterests.

342. Id. § 708(b)(1)(B).343. See KY. REV. STAT. ANN. § 275.025(1)(d) (Michie/Bobbs-Merrill Supp. 1994).344. See Treas. Reg. § 1.761-1(a) (1972) (providing that a partnership must consist

of at least two persons); Treas. Reg. § 1.708-1(b)(1)(i) (1993) (providing that a part-nership with only one partner terminates for tax purposes).

345. Securities & Exch. Comm'n v. W. J. Howey, Co., 328 U.S. 293, 298-99, re-hearing denied, 329 U.S. 819 (1946).

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U. Formalities

Corporate formalities are generally more exacting than thoseapplicable to partnerships or LLCs.

V. Affiliated Groups

Among the other eligibility requirements of S corporations,such a corporation is prohibited from owning more than eightypercent of another corporation. 346 No such restriction applies tothe other business entities discussed.

W. Self-Employment Taxes

A significant issue for members of LLCs is the application ofthe self-employment tax under section 1401 of the Code.34

Generally stated, section 1401 of the Code imposes a self-employ-ment tax on the "self employment income" of every individu-al.34 The current tax rate is 15.30%, which combines a 12.40%OASDI (Old-Age, Survivors and Disability Insurance) rate im-posed on the first $60,600 of self-employment income and a2.90% hospital insurance rate imposed on all self-employmentincome.3 49 For these purposes, section 1402(a) generally pro-vides that "net earnings from self employment" includes theindividual's distributive share of income from any trade or busi-ness carried on by a partnership in which the individual is amember.35 ° However, section 1402(a)(13) provides that the dis-tributive share of a limited partner does not constitute self-em-ployment income unless the distributive share represents a sec-tion 707(c) "guaranteed payment" to the limited partner for ser-vices actually rendered to or on behalf of the partnership.351

Stated differently, the general impact of section 1402(a) is totreat the distributive shares of general partners as income thatis subject to the self-employment tax but to exempt from the self-

346. I.R.C. §§ 1361(b)(2), 1504(a)(2) (1988).347. Id. § 1401 (1988 & Supp. V 1993).348. Id.349. Id.350. Id. § 1402(a).351. Id. § 1402(a)(13) (1988).

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employment tax the distributive shares of limited partners, ex-cept for section 707(c) guaranteed payments.

On December 29, 1994, the IRS issued proposed regulationsaddressing the application of the self-employment tax toLLCs.352 Until that time, it was unclear as to whether LLCswould be tested under the all-or-nothing partnership rules, orviewed under the much more flexible and favorable Subchapter Scorporation rules, which impose employment taxes upon thatportion of earnings that constitutes reasonable compensation.The proposed regulations make it clear that the approach uti-lized for partnerships will be the general approach applied toLLCs, and that, with at least one notable exception, the level ofinvolvement of LLC members in LLC management will deter-mine whether the distributive share of such members will besubject to self-employment tax.353

The proposed regulations adopt the all-or-nothing approachapplied to partnerships.354 Thus, if a member is classified asself-employed, all of his or her distributive share of income willbe subjected to self-employment tax, subject to certain specificexceptions.355 The analysis begins with the general presump-tion that a member's net earnings from self-employment includethe member's distributive share of income, whether or not dis-tributed, from any trade or business carried on by an LLC. Anexception is provided if two conditions are met: (1) the member isnot a manager, and (2) the entity could have been formed as alimited partnership rather than an LLC in the same jurisdictionand the member could have qualified as a limited partner inthat limited partnership under applicable law. 56 If the excep-tion applies, the member will be treated as a limited partner forpurposes of the exception contained in section 1402(a)(13) of theCode and the member's distributive share of income will not beincluded in net earnings from self-employment.357

With regard to the first exception, a "manager" is defined bythe proposed regulations as a person who, alone or together with

352. Prop. Treas. Reg. § 1.1402(a)-18, 59 Fed. Reg. 67,253 (1994).353. See id.354." See id.355. See id. § 1.1402(a)-15(a), 59 Fed. Reg. 67,253.356. Id. § 1.402(a)-1S(b), 59 Fed. Reg. 67,253.357. Id.

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others, is vested with the continuing exclusive authority to makethe management decisions necessary to conduct the business forwhich the LLC was formed.358 If there are no designated orelected managers, then all of the members .will be treated asmanagers, even if some members have greater managementauthority than others. 9

If a Kentucky LLC elects to be member-managed, the IRS islikely to take the position that all members are self-employedsince each member is "vested" under the LLC Act with the au-thority to manage together with others.36 ° On the other hand,the proposed regulation could be read to allow a member-man-aged LLC that isolates management in the hands of a few mem-bers to avoid inflicting self-employment tax on passive members.Even so, until further clarification from the IRS, electing mem-ber-management could (and probably will) expose all members tothe self-employment tax. In evaluating whether to play it safe onthis issue and elect to be manager-managed, the impact on part-nership tax classification - particularly with respect to "cen-tralized management" - should be assessed.

If the LLC elects to be manager-managed, then only the mem-ber-managers should be subject to self-employment tax unlessthe second requirement of the exception, further described below,cannot be met. Members who are not elected or appointed asmanagers will normally not be subject to the tax. Moreover, evenif a member is -not a manager for purposes of the proposed regu-lations, he or she could be subject to the self-employment tax ifeither the LLC could not have qualified as a limited partnershipunder state law or the member could not have qualified as alimited partner.

With respect to the first of these requirements, if the entitywould not qualify as a limited partnership under applicable law,because, for instance, it is a professional LLC that is prohibitedfrom utilizing the limited partnership form; or if there is someother defect, such as no member of the LLC functions in the roleof a "general partner" and therefore the entity would not qualifyas a limited partnership due to the lack of a general partner, allmembers presumably would be subject to self-employment tax.

358. Id. § 1.402(a)-18(c)(3), 59 Fed. Reg. 67,253.359. See id.360. See KY. REV. STAT. ANN. § 275.165 (Michie/Bobbs-Merrill Supp. 1994).

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The second requirement is member-specific and apparentlyseeks to impose the tax on members who do not behave likelimited partners, that is, members who would lose limited lia-bility protection under state law if they were limited partners ofa limited partnership due to their participation in management.The interesting and unanswered aspect of this second require-ment is that, under the Kentucky Revised Uniform Limited Part-nership Act, a limited partner can participate in the control ofthe partnership as an independent contractor, agent or employeeof the partnership or of the general partner, and in other speci-fied ways without forfeiting his or her status as a limited part-ner.36' The question is thus left open as to whether, despite thegeneral tenor of the proposed regulations, a member can bifur-cate his or her participation by avoiding "manager" status withrespect to his or her member interest and loss of "limited part-ner" protection by structuring the service relationship so as tomeet the permissive provisions of KRS section 362.437. It ispossible that a member might be able to avoid self-employmenttax with respect to his or her distributive share by providingservices through an employment or independent contractor ar-rangement - possibly even through a wholly-owned subsidiaryand potentially in conjunction with a separate "member-manag-er" interest - while maintaining the separate investment inter-est in the LLC as a passive interest that does not generate self-employment earnings.

If an LLC member does not qualify for the exception containedin the proposed regulations, all of his or her distributive share ofLLC income generally will be classified as self-employment earn-ings.362 There are, however, some additional exceptions. Theself-employment tax only applies to individuals. 63 If a memberis a corporation, the tax generally will not apply. If the memberis a pass-through entity, however, such as another LLC or apartnership, self-employment income might be imputed to theultimate owner if he or she is an individual. In addition, thereare certain categories of LLC income that are specifically except-ed from self-employment tax under section 1402 of the Code,such as rental income, dividend income, income that is not pro-

361. Id. § 362.437(2)(a).362. See Prop. Treas. Reg. § 1.402(a)-18, 59 Fed. Reg. 67,253 (1994).363. I.R.C. § 1401 (1988 & Supp. V 1993).


duced by a trade or business, and other specified types of in-come.

364

X. Method of Accounting

An important step in forming a LLC is selecting the method ofaccounting to be employed by the LLC. An LLC makes that elec-tion by filing its first tax return using the method chosen. Oncethe election is made, the LLC must continue to use the account-ing method chosen. If the LLC later desires to change its methodof accounting, it must obtain permission from the IRS to do so.

Taxpayers are generally free to adopt the cash method, theaccrual method, or any other method that clearly reflects income.However, there are some limitations that could apply to LLCswith respect to adopting the cash method of accounting. TheCode specifically provides that the cash method cannot be usedby a C corporation, a partnership that has a C corporation as apartner, or a tax shelter.3 6

1 It should be noted that, with re-spect to C corporations, the Code provides an exception for "qual-ified personal service corporations." '66 These are professionalcorporations that provide services in the fields of health, law,engineering, architecture, accounting, actuarial sciences, per-forming arts, or consulting.367

Because it is possible for an LLC to be taxed as either a corpo-ration or a partnership, an LLC may or may not be eligible touse the cash method depending on its classification for tax pur-poses. For example, an LLC will not be able to use the cashmethod if it fails to avoid classification as a corporation for taxpurposes and it has not made an election to be taxed as an Scorporation. The LLC will also be precluded from using the cashmethod if it is considered a partnership for tax purposes and oneor more of its members is a C corporation.

As for determining whether an LLC is a "tax shelter" underfederal tax law, further analysis is necessary. For this purpose, atax shelter is defined as any of the following:

364. Id. § 1402.365. Id. § 448(a) (1988).366. Id. § 448(b)(2).367. Id. § 448(d)(2).

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A. An enterprise other than a C corporation if at any time inter-ests in such enterprise have been offered for sale in any offeringrequired to be registered with any Federal or State agency hav-ing authority to regulate the offering of securities for sale.

B. An entity, including a partnership, investment plan, or otherarrangement the principal purpose of which is the avoidance ofFederal income tax.

C. A syndicate.36 8

The descriptions in items A and B are self-explanatory. Withrespect to item C, a "syndicate" is defined as any entity, otherthan a C corporation which is not an S corporation, if more thanthirty-five percent of the losses of such entity during the taxableyear are allocable to limited entrepreneurs (the thirty-five per-cent threshold).369 A "limited entrepreneur" is a person, eitheran entity or individual, who has an ownership interest in anenterprise as something other than a limited partner and whodoes not "actively participate" in the management of the enter-prise."' Neither the Code nor the Treasury Regulations pro-vide any guidance as to the level of involvement that would con-stitute "active participation" for this purpose.

This requirement of active participation in management pres-ents a significant risk for LLCs that use the cash method andare managed by managers or by a committee of members. If theLLC incurs a loss for a particular year and the thirty-five per-cent threshold is met in that year, then the LLC would be forcedto convert to the accrual method in the year of the loss. Such aconversion would likely generate harsh tax results. For example,the LLC would have to recognize as income any outstandingaccounts receivable despite the fact that the LLC would not havereceived any cash to pay the tax on that income.

Professional LLCs, which are typically cash-driven and there-fore ought to be on the cash method of accounting, must be ex-tremely sensitive to the thirty-five percent threshold rule. Be-cause such entities usually generate income rather than losses,

368. Id. § 461(i)(3) (1988 & Supp. V 1993).369. Id. § 1256(e)(3)(B) (1988).370. Id. § 464(e)(2).

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the risk of becoming a syndicate is lessened somewhat. In addi-tion, in several letter rulings the IRS has demonstrated a will-ingness to construe the facts as favorably as possible so thatprofessional LLCs can utilize the cash method of accountingdespite the fact that more than thirty-five percent of the mem-bers are not actively involved in management of the LLC.37'

If an LLC loses the right to use the cash method of accountingbecause the thirty-five percent threshold is met in a year whenthe LLC has a loss, the question then becomes whether the LLCcan convert back to the cash method if, in a subsequent year, theLLC is not a syndicate because it either has income or it has aloss but does not breach the thirty-five percent threshold. Whilethere currently is no specific guidance on that issue, the likelyresponse is that the LLC could not convert back to the cashmethod without the express approval of the IRS because suchapproval is statutorily mandated for any change in accountingmethod.372

Y. Fifty Percent Gain Exclusion

Section 1202 of the Code provides a fifty percent gain exclu-sion upon the sale or exchange of "qualified small business stock"that has been held for more than five years.3 Section1202(c)(1) limits this benefit to C corporations only.

Z. Right of Owners to Dissolve

General partners have a right under state law to compel aliquidation of the partnership.374 The liquidation may be"wrongful," that is in violation of the partnership agreement, andcould lead to damages owed by the violating partner, but statelaw places a great power in the hands of each general partner,including those with a very small ownership interest. Membersof an LLC, on the other hand, do not have this power unless theoperating agreement affirmatively gives it to them.

371. See Priv. Ltr. Rul. 93-21-047 (May 28, 1993); Priv. Ltr. Rul. 93-28-005 (July16, 1993); Priv. Ltr. Rul. 93-50-013 (Dec. 17, 1993).

372. See I.R.C. § 446(e) (1988). See also Priv. Ltr. Rul. 89-11-011 (Mar. 17, 1993)(tending to support that conclusion although it did not expressly address that issue).

373. I.R.C. § 1202(a) (Supp. V 1993).374. KY REv. STAT. ANN. § 362.300 (Michie/Bobbs-Merrill 1987).

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AA. Status of LLC Members as "Employees"

Certain statutes, most notably various federal anti-discrimina-tion statutes, apply to or provide protection for "employees. 3 v5

Likewise, state statutes relating to areas such as workers com-pensation and unemployment insurance are typically applicableto employees. Under these type statutes, a partner in a generalpartnership may be exempt from the coverage of the statutebecause he or she is not considered to be an employee.3 76 It isunclear whether a member of an LLC will be considered an em-ployee for purposes of these statutes. The result may depend onthe extent to which all members participate in management, aswell as other factors. Case law in this area is beginning to devel-op under some statutes.

VII. CONCLUSION

This article has attempted to provide to readers a practicalintroduction to both the non-tax and the tax aspects of LLCs,and to a lesser extent, RLLPs. It is apparent that not every busi-ness entity can or should be organized as an LLC given that: theauthorizing statute is new and has not been construed by theKentucky courts; the LLC format and the terminology associatedwith it is unfamiliar to clients; an LLC must be structured prop-erly and the proper structure must be maintained to obtain pass-through taxation; an LLC should begin life with a detailed oper-ating agreement that must be drafted to fit the particular cir-cumstances of the investors; and an LLC must have more thanone owner. On the other hand, the great flexibility offered by theLLC format, when combined with the benefits of limited liabilityand single level taxation, will make the LLC the ideal. entity forsome businesses. The challenge to practitioners will be in assist-ing clients in evaluating the risks and benefits of the LLC format

375. Sqe e.g., Age Discrimination in Employment Act, 29 U.S.C. § 621-634 (1988& Supp. V 1993); Title VII of the Civil Rights Act of 1964, 42 U.S.C. §9 2000e-2000e17 (1988 & Supp. V 1993); Equal Pay Act of 1963, 29 U.S.C. § 206(d) (1988);Americans with Disabilities Act of 1990, 42 U.S.C. §§ 12101-12213 (1988 & Supp. V1993); Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601-2654 (Supp. V1993).

376. See, e.g., Hyland v; New Haven Radiology Assocs., P.C., 794 F.2d 793 (2d Cir.1986).

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and arriving at a sound business decision as to the choice of anentity in each case.

RECOMMENDATIONS FOR IMPROVING KENTUCKY'SINHERITANCE LAWS

by Frederick R. Schneider*

In less than a decade, several articles have appeared in Ken-tucky law reviews which suggest or recommend changes inKentucky's inheritance laws, particularly changes in the law ofintestacy.' This is an appropriate time to review these sugges-tions and others which are relevant. Most of this article dealswith intestacy, but the first area covered, allowances and exemptproperty, applies equally to testate and intestate estates.

Intestate succession is very important and occurs more oftenthan popularly believed.2 Every jurisdiction in the United Stateshas made statutory provision for intestate succession. In Ken-tucky these provisions are found in chapter 392, dower and cur-tesy, and chapter 391, descent and distribution, of the KentuckyRevised Statutes (KRS). Of necessity, intestate succession stat-utes cannot provide details for many variations in their applica-tion. Instead, one common plan is applied to all intestates andalso to cases of partial intestacy. These statutes serve as a statu-tory will substitute,3 and they direct the distribution of all theintestate's property. Thus, these statutes should be designed toserve the needs of the citizens of the state. Within the statutorypattern of succession, all variations of property owned and per-sons surviving will be accommodated. It is possible that lesscommon situations may not be dealt with wholly appropriately.4

* Professor of Law, Salmon P. Chase College of Law, Northern Kentucky

University. 'B.A., Luther College; J.D., University of Chicago.1. Carolyn S. Bratt, Kentucky's Doctrine of Advancements: A Time for Reform, 75

KY. L.J. 341 (1986-87); Frederick R. Schneider, A Kentucky Study of Will Provisions:Implications for Intestate Succession Law, 13 N. KY. L. REV. 409 (1986-87) [hereinaf-ter Schneider, Kentucky Wills Study]; Carolyn S. Bratt, Family Protection UnderKentucky's Inheritance Laws: Is the Family Really Protected?, 76 KY. L.J. 387 (1987-88) [hereinafter Bratt, Family Protection]; Carolyn S. Bratt, A Primer on Kentucky'sIntestacy Laws, 82 KY. L.J. 29 (1993-94) [hereinafter Bratt, Kentucky Primer].

2. For instance, Professor Dunham, in his study of estates in Cook County,Illinois, reported that about 60% of the estates studied were intestate. Allison Dun-ham, The Method, Process and Frequency of Wealth Transmission at Death, 30 U.Cm. L. REV. 241, 248 (1963) [hereinafter Dunham, The Chicago Study].

3. Schneider, Kentucky Wills Study, supra note 1, at 413.4. Id.

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It is common to find writers who advocate that intestate suc-cession statutes ought to implement the desires of those who dietestate.5 This was a foundation for the Kentucky Wills Study.6

Others believe that there are specific goals and policies whichthe intestate succession laws should fulfill.7 This article positsthat intestate succession laws should strike a balance betweenimplementing the desires of the populace, as measured by thewills of those who die testate, and giving adequate protection tothe financially dependent surviving spouse and family when theysurvive the intestate.

Intestate succession laws often have little impact on the poorbecause their property is given to survivors by self-help mea-sures,8 or perhaps to secured creditors.9 On occasion, personswho possess considerable property or wealth die without leavinga valid will.' ° Nonetheless, the intestate succession laws aremost often applied to estates of smaller value." The Uniform

5. See, e.g., DAVID HUGHES PARRY, THE LAW OF SUCCESSION (2d ed. 1947); Wil-liam F. Fratcher, Toward Uniform Succession Legislation, 41 N.Y.U. L. REV. 1037(1966).

6. Schneider, Kentucky Wills Study, supra note 1. The Kentucky Wills Studyexamined 499 wills filed for probate in Kentucky courts in nine counties. The studydetermined the preferences for property distribution by Kentucky residents by valueof the estates and the actual distributions made in the wills. Prior studies had vali-dated this technique. Based upon the findings, there was a series of recommenda-tions for changes in statutes.

7. See, for example, Mary Louise Fellows et al., Public Attitudes About PropertyDistribution at Death and Intestate Succession Laws in the United States, 1978 AM.BAR FOUND. RES.J. 319, 324, where four specific goals were set forth: "(1) to protectthe financially dependent family; (2) to avoid complicating property titles; (3) to pro-mote and encourage the nuclear family; and (4) to encourage the accumulation ofproperty by individuals." Id.

8. Often the poor have no property which requires administration of an estate.The survivors simply divide the property among themselves without the formality ofadministration.

9. Secured creditors are able to enforce their liens after the debtor dies. THOMASE. ATKINSON, HANDBOOK OF THE LAW OF WILLS AND OTHER PRINCIPLES OF SUCCES-SION, INCLUDING INTESTACY AND ADMINISTRATION OF DECEDENTS ESTATES 712 (2d ed.1953). In my law practice experience, many poor people who had some steady sourceof income were able to obtain small loans secured by their personal property.

10. See Schneider, Kentucky Wills Study, supra note 1, at 417, 425, 433-35. TheKentucky Wills Study found 47 estates whose value exceeded $100,000. One of theseestates was valued at about $267,000; the intestate was not survived by a spouse,any descendants, any parent, and siblings or their issue, nor by grandparents or anyissue of grandparents.

11. Fratcher, supra note 5, at 1047.

INHERITANCE LAWS

Probate Code's intestate succession provisions were written toapply to modest estates.12

This discussion begins with allowances and exempt propertybecause these are designed to be the first distributions from anestate regardless of whether the decedent dies testate or intes-tate. Intestate succession issues are then addressed and specificrecommendations are offered for each concern discussed." It ishoped that this article will stimulate further discussion and leadto action by the Kentucky legislature. The Appendix containssuggested statutory language to implement the following recom-mendations.

I. ALLOWANCES AND EXEMPT PROPERTY

Kentucky law has long provided that a husband has a legalduty to support his wife' 4 and that parents have the duty tosupport their minor children. 15 As between the parents, the fa-ther has the primary duty of supporting their children.' 6 In-deed, the father has the primary duty to support his childrenregardless of the mother's income,' 7 and regardless of theamount of his earnings, financial obligations, 8 or property."If the father takes a new wife, his duty to his living childrentakes preference over his duty to support his new wife.20 Fur-ther, while the duty to support children ordinarily ends when thechildren reach majority, a contract entered into by a parent toprovide support beyond minority may be enforced. 2' And if achild is incapable of self-support upon reaching majority, the

12. "A principle purpose . . . is to provide suitable rules and procedures for theperson of modest means .... " UNIFORM PROBATE CODE, art. 2, pt. 1 cmt., 8 U.L.A.1, 56 (1983) [hereinafter ORIGINAL UNIFORM PROBATE CODE].

13. I have considered only substantive provisions. Thus, recommendations for pro-cedural changes, such as combining all court treatment of all aspects of administra-tion of an estate into one court, are beyond the scope of this article.

14. E.g., White v. White, 54 S.W.2d 24 (Ky. 1932); Brewer v. Brewer, 105 S.W.2d582 (Ky. 1937); Johnson v. Johnson, 255 S.W.2d 610 (Ky. 1953).

15. E.g., Brewer, 105 S.W.2d 582; Cashen v. Riney, 40 S.W.2d 339 (Ky. 1931).16. Sowders v. Sowders, 150 S.W.2d 903 (Ky. 1941).17. Gay v. Gay, 421 S.W.2d 603 (Ky. 1967).18. Johnson v. Johnson, 438 S.W.2d 493 (Ky. 1969).19. Ward v. Ward, 281 S.W. 801 (Ky. 1926).20. Yadon v. Simpson, 445 S.W.2d 452 (Ky. 1969).21. Wilhoit v. Wilhoit, 521 S.W.2d 512 (Ky. 1975).

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duty of support may continue. 22 The Kentucky criminal non-support statute provides that a spouse has a duty to provide foran indigent spouse and for minor children and children who havebeen adjudged mentally disabled.23 Of course, the duty to pro-vide support terminates upon the death of the obligor.24

However, the death of the decedent creates an immediatefinancial problem for those who were dependent upon thedecedent's support. The decedent's income used for that supportis no longer received. Therefore, it is common for statutes toprovide some short-term relief from this need.25

Present Kentucky law provides a modest amount of exemptproperty to a decedent's surviving spouse or to the decedent'ssurviving children if the spouse does not survive.26 This exemptproperty is exempt from distribution and from sale2

' and isavailable for intestate and testate estates.2 s Part of the exemptproperty may be received in an expedited manner,29 while therest is set apart upon application.3 0 However, exempt propertydoes not have priority over security interests.3 '

A homestead exemption is also provided by Kentucky law.3 2

Presently, this exemption may not exceed $5,000 in value, but itdoes not appear that the homestead exemption is widely used.While addressed in the standard Kentucky practice books, 3 thelast reported case listed in the most recent KRS annotationswhich considered the homestead exemption was decided in

22. Clark v. Graves, 282 S.W.2d 146 (Ky. 1955).23. Ky. REV. STAT. ANN. § 530.050(1)(a), (2) (Baldwin 1993 & Supp. 1994).24. A husband is also liable for the funeral expenses of his wife. See, e.g., Palmer

v. Turner, 43 S.W.2d 1017 (Ky. 1931); Moore v. Citizens Bank, 420 S.W.2d 669 (Ky.1967).

25. "A limited claim for support is allowed in most states to cover the periodwhile the decedent's estate is being administered." WILLIAM M. MCGOVERN, JR. ETAL., WILLS, TRUSTS AND ESTATES 102 (1988).

26. KY. REV. STAT. ANN. § 391.030(1)(c) (Baldwin 1988 & Supp. 1994).27. Id.28. Id. § 391.030(4).29. There may be a petition for permission to withdraw $1,000 from any bank or

depository, which amount is charged to the $7,500 exempt property. Id. § 391.030(2).30. Id. § 391.030(I)(c). See JAMES R. MERRITT, 1 KENTUCKY PRACTICE, PROBATE

AND PROCEDURE § 302, at 203 (2d ed. 1984).31. International Harvester Co. v. Dyer's Adm'r, 178 S.W.2d 966 (Ky. 1944).32. Ky. REV. STAT. ANN. § 427.060 (Baldwin 1991 & Supp. 1994).33. E.g., MERRrrr, supra note 30, §§ 331-345.

320

INHERITANCE LAWS

1976. s4 The most recent cases prior to that were decided in the1950s.3 5 Several reasons explain this. Exempt property is takenfrom personal property. Most, perhaps all, intestates leave per-sonal property. Many decedents, especially those who leavesmaller estates, own no real property. Where the decedent doesleave real property, the surviving spouse must elect between thehomestead exemption and dower.36 Clearly the election will bein favor of that option which will yield the greater value. Todayit is likely that most parcels of real property are valued at morethan $10,000 and dower is usually a fee interest.3 v Therefore, ifthe intestate owned real property at death, normally the surviv-ing spouse will elect to receive dower.

The Model Probate Code,"8 which was published in 1946, pro-vided greater relief in the form of a homestead exemption, 39 ex-empt property of $2,000,4o and a family allowance in an amountand for a duration to be determined by the courts. 4' In line withthe thought of the times, the homestead exemption was in realproperty.42 This was, in totality, probably adequate protectionin 1946. This also set the stage for later developments in protect-ing a surviving spouse's and a decedent's minor and dependentchildren's immediate needs following a decedent's death, includ-ing the Uniform Probate Code.

The Uniform Probate Code43 also provides a homestead al-lowance, 44 exempt property,45 and a family allowance. 46 How-

34. Lockhard v. Brown, 536 S.W.2d 318 (Ky. 1976).35. Lunsford v. Witt, 309 S.W.2d 348 (Ky. 1958); Ball v. Swiddy, 249 S.W.2d 715

(Ky. 1952).36. E.g., Thompson v. Thompson, Adm'r, 105 S.W. 1185 (Ky. 1907). See MERRITT,

supra note 30.37. Ky. REV. STAT. ANN. § 392.020 (Baldwin 1988 & Supp. 1994).38. LEWIS M. SIMES & PAUL E. BAYSE, PROBLEMS IN PROBATE LAW INCLUDING A

MODEL PROBATE CODE (1946) [hereinafter MODEL PROBATE CODE].39. Id. § 42, at 77.40. Id. § 43, at 79.41. Id. § 44, at 80.42. "Statutes or constitutional provisions are found in nearly every state, exempt-

ing the homestead from claims of unsecured creditors." Id. § 42 cmt., at 77.43. ORIGINAL UNIFORM PROBATE CODE, supra note 12.44. Id. § 2-401.45. Id. § 2-402.46. Id. § 2-403. Oddly, the Uniform Probate Code does not list these sections in

their order of priority. The homestead allowance has first priority, followed by thefamily allowance, then the exempt property section.

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ever, the homestead allowance is not dependent upon real prop-erty being in the decedent's estate, thereby accommodating thesituation of the many decedents who die not owning any realproperty.4" The usual maximum aggregate of these allowancesin the original edition of the code was $14,500; all of it was to bepaid before any claims against the estate, except that the exemptproperty is only taken from the value of property in excess of anysecurity interests.

These sections and their comments make clear that the draft-ers intended these allowances for three reasons: First, to providethe spouse, minor children and any dependent child of the dece-dent a place to live;48 second, to provide money with which tolive (ordinarily for no more than one year);49 and third, to givethe dependents certain property owned by the decedent.5

' Thereis no mechanism to insure that is how these allowances willactually be used, but it gives the survivors flexibility to meettheir own needs on an individual basis. It is a stated purposethat these allowances will be an important factor in dealing withsmall estates.5 '

In 1990, the Uniform Probate Code was amended to increasethe amount of: the homestead allowance to a suggested value of$15,000;52 the family allowance to an amount not to exceed$18,000, or $1,500 per month for a period not to exceed oneyear53 without the approval of a court;5 4 and the value of ex-

47. Id. § 2-401.48. Id. §§ 2-401 to 2-403.49. Id.50. Id.51. Id. § 2-401 cmt. The comment states: "A set dollar amount for homestead

allowance was dictated by the desirability of having a certain level below whichadministration may be dispensed with or handled summarily . I..." Id.

52. UNIFORM PROBATE CODE § 2-402, 8 U.L.A. 124 (Supp. 1994).

A decedent's surviving spouse is entitled to a homestead allowance of($15,000]. If there is no surviving spouse, each minor child and each dependentchild of the decedent is entitled to a homestead allowance amounting to[$15,000) divided by the number of minor and dependent children of the dece-dent. The homestead allowance is exempt from and has priority over all claimsagainst the estate. Homestead allowance is in addition to any share passing tothe surviving spouse or minor or dependent children by the will of the dece-dent, unless otherwise provided, by intestate succession, or by way of electiveshare.

Id. The 1990 revisions of the Uniform Probate Code will be referred to hereinafter asthe "REVISED UNIFORM PROBATE CODE."

53. Id. § 2-404.

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1995] INHERITANCE LAWS 323

empt property to $10,000."s The total of these usual maximum

(a) In addition to the right to homestead allowance and exempt property, thedecedent's surviving spouse and minor children whom the decedent was obli-gated to support and children who were in fact being supported by the dece-dent are entitled to a reasonable allowance in money out of the estate fortheir maintenance during the period of administration, which allowance maynot continue longer than one year if the estate is inadequate to dischargeallowed claims. It is payable to the surviving spouse, if living, for the use ofthe surviving spouse and minor and dependent children; otherwise to the chil-dren, or persons having their care and custody. If a minor child or dependentchild is not living with the surviving spouse, the allowance may be made par-tially to the child or his [or her] guardian or other person having the child'scare and custody, and partially to the spouse, as their needs may appear. Thefamily allowance is exempt from and has priority over all claims except thehomestead allowance.(b) The family allowance is not chargeable against any benefit or share passingto the surviving spouse or children by the will of the decedent, unless other-wise provided, by intestate succession or by way of elective share. The death ofany person entitled to family allowance terminates the right to allowances notyet paid.

Id.54. Id. § 2-405(a).The personal representative may determine the family allowance in a lumpsum not exceeding $18,000 or periodic installments not exceeding $1,500 permonth for one year, and may disburse funds of the estate in payment of thefamily allowance and any part of the homestead allowance payable in cash.The personal representative or an interested person aggrieved by any selection,determination, payment, proposed payment, or failure to act under this sectionmay petition the court for appropriate relief, which may include a family al-lowance other than that which the personal representative determines or couldhave determined.

Id.55. Id. § 2-403.

In addition to the homestead allowance, the decedent's surviving spouseis entitled from the estate to a value, not exceeding $10,000 in excess of anysecurity interests therein, in household furniture, automobiles, furnishings,appliances, and personal effects. If there is no surviving spouse, the decedent'schildren are entitled jointly to the same value. If encumbered chattels are se-lected and the value in excess of security interests, plus that of other exemptproperty, is less than $10,000, or if there is not $10,000 'worth of exempt prop-erty in the estate, the spouse or children are entitled to other assets of the es-tate, if any, to the extent necessary to make up the $10,000 value. Rights toexempt property and assets needed to make up a deficiency of exempt propertyhave priority over all claims against the estate, but the right to any assets tomake up a deficiency of exempt property abates as necessary to permit earlierpayment of homestead allowance and family allowance. These rights are inaddition to any benefit or share passing to the surviving spouse or children bythe decedent's will, unless otherwise provided, by intestate succession, or byway of elective share.


values is $43,000, an amount certainly sufficient for most fami-lies if there is sufficient value in the decedent's estate fromwhich to pay these allowances.

The Kentucky exempt property provision provides that exemptproperty is exempt from distribution and sale,5" so there is al-ready imbedded in Kentucky law the notion that property can be-passed to the surviving spouse or to the decedent's children freeof claims of general creditors. Increasing the amount andspecifying different purposes does no violence to that idea.

Using the then provisions of the Uniform Probate Code57 as afoundation, Professor Bratt proposed that two new sections beadded to Kentucky law to replace all the present provisions thatprovide for the surviving spouse, minor children and dependentchildren.58 She proposed first a single interim family allowance,pending completion of administration of the decedent's estate,59

and then a post-probate allowance.60 While Professor Bratt'sconclusion "that both the homestead and personalty exemptionscurrently available in Kentucky are inadequate to protect thedecedent's family from the economic hardships caused by thedeath of a spouse or parent"61 is sound, this article offers animproved proposal.

A decedent's support obligation must come to an end at somefinite point. Support should come from a decedent's estate whileit is being administered, but there seems no more appropriatetime to end that obligation than at the conclusion of thedecedent's estate. That is the point at which the decedent's af-fairs have been concluded, and the decedent's property is distrib-uted to those entitled to receive it. Any support which wouldcontinue beyond that point in time ought to be from propertywhich the survivors have inherited. The survivors must adapt to

56. Ky. REV. STAT. ANN. § 391.030(1)(a) (Baldwin 1988 & Supp. 1994).57. This was before the 1990 amendments increased the amounts of the allowanc-

es and exempt property.58. Bratt, Family Protection, supra note 1, at 444-51.59. Id.60. Id. at 451-55.61. Id. We are not alone in reaching this conclusion. Professor Merritt wrote: "Be-

cause of the piecemeal growth of the Kentucky legislation the result is a hodgepodgeof rather ambiguous statutes which at best give skimpy benefits to the family andare capricious in their application." MERRITT, supra note 30, § 337, at 224.

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life without the decedent. The post-probate allowance whichProfessor Bratt has proposed would delay that adjustment.

At first glance, one might be enticed to support ProfessorBratt's proposed interim family allowance.6 2 However, the Re-vised Uniform Probate Code's provisions are superior. ProfessorBratt's proposal requires that the allowance be no larger thanthe minimum federal poverty guideline for the same size fami-ly.63 Clearly an allowance larger than the value of the estatecannot be paid, but increasing this allowance from the $7,500 ex-empt property amount to the federal poverty guideline is not asignificant improvement. To be sure, the allowance would bemore flexible in amount and would be paid periodically duringthe first year of administration. But why require court approvalto exceed the poverty guideline? And why lump the UniformProbate Code's three provisions into one?

The Revised Uniform Probate Code provides first a homesteadallowance." The suggested amount is $15,000. This is paidwithout need for determination of an amount or court ap-proval65 and will exhaust the available probate property inmany estates, triggering the provisions of KRS section 395.455,allowing transfer of the assets without administration.66

The second allowance provided by the Uniform Probate Codeis the family allowance.67 While similar to the interim familyallowance proposed by Professor Bratt, the maximum suggestedamounts which a personal representative may pay exceed federalpoverty guidelines.68 If there are sufficient assets in the estate,why require extra court proceedings to allow a family allowancegreater than federal poverty guidelines? The personal represen-tative should be able to continue supporting the family in thelifestyle to which it is accustomed without the necessity of re-

62. Bratt, Family Protection, supra note 1, at 445-46.63. Id. at 447.64. See supra note 52.65. See supra note 54.66. KY. REV. STAT. ANNt § 395.455 (Baldwin 1988) would need to be amended to

allow this, not only for transfer to the surviving spouse, but also to the decedent'sminor children and children who were in fact dependent upon the decedent for sup-port.

67. See supra note 53.68. REVISED UNIFORM PROBATE CODE, supra note 52, § 2-404 (allowing the per-

sonal representative to pay a reasonable allowance).

1995] 325


ceiving court approval unless more than $1,500 per month issought. It is unlikely that a larger family allowance would besought very often. The net benefit to the decedent's survivingspouse and family exceeds that proposed by Professor Bratt. TheRevised Uniform Probate Code does allow a court to approve agreater family allowance in appropriate cases.69

The homestead allowance is a fixed maximum amount; it iseasy to administer. The family allowance is more flexible. It is tobe determined by the standard of living set by the decedent.Both are limited by the value in the decedent's estate. Thus,having the separate allowances is not unduly complicated andprovides greater protection to a surviving spouse and dependentchildren than does Professor Bratt's proposal.

The Uniform Probate Code also provides for $10,000 of exemptproperty70 to be assigned in addition to the homestead allow-ance and the family allowance. This increases the financial pro-tection available to a surviving spouse and to dependent childrenin estates which have sufficient value from which to pay all ofthese allowances. The combined Uniform Probate Code allowanc-es and exempt property would give adequate support for thesurviving spouse, minor children, and children actually depen-dent upon the decedent, during the administration of thedecedent's estate. Most families make do with less during thecourse of any one year. The combination of allowances and ex-emptions would also allow the easy closing of many estates with-out the need for complete administration, resulting in a savingsof time and expense. Revising KRS section 395.455(1) to includethese provisions would be necessary, but this would fit into al-ready accepted procedures. It is suggested that these provisionsof the Revised Uniform Probate Code should therefore be adopt-ed in Kentucky.

69. Id. § 2-405(a).70. Id. § 2-403.

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II. COMBINE REAL AND PERSONAL PROPERTYPROVISIONS INTO A SINGLE SECTION WITH A COMMON

PLAN OF DISTRIBUTION

The first Kentucky Constitution expressly continued all theVirginia statutes of a general nature.7 1 Thus, the Virginia Stat-utes of Descent and Distribution, which were in turn derivedfrom the English law,72 formed the basis for later Kentucky in-testacy law.73 Accordingly, there were separate provisions fordescent of real property and for distribution of personal property,each of which can be traced to the separate handling of realproperty and personal property as it developed in England.7 4 Atthe time this law developed in England, land was the most im-portant form of wealth. 75 Real property was given specialtreatment. Real property descended directly to the heirs, whilepersonal property went first to the personal representative forpayment of claims and expenses, and that which was left afteradministration was distributed to the legatees. v6

However, it is common knowledge that in modern times thereis more wealth in personal property than in real property. Thus,the reason for separate treatment of real and personal propertyno longer exists. In England, this separate treatment was aban-doned more than half a century ago. 7 In Kentucky, the lawnow provides that personal property will pass to the same personand in the same proportions as real property, with only a fewexceptions,78 but by separate statutes for real79 and personalproperty. 0

71. KY. CONST. of 1792, art. VIII, § 6.72. See ATKINSON, supra note 9; Boyd F. Goldsworthy, Uniform Probate

Code - Abolishing the Distinction Between Real and Personal Property in EstateAdministration, 46 N. DAK. L. REv. 311, 311-14 (1972-73).

73. E.g., the first specific Kentucky Statute of Descent was enacted in 1796. Actof December 19, 1796, 1796 Ky. Acts 66-68 (Session 1). It was clearly of the Englishmodel as modified by Virginia. See MERRITT, supra note 30, § 4, at 4-5.

74. Fratcher, supra note 5, at 1045-46. See also THEODORE F. T. PLUCKNETT, ACONCISE HISTORY OF THE COMMON LAw 711-31 (5th ed. 1956) (explaining the devel-opment of the law in England).

75. ATKINSON, supra note 9, at 11-21.76. Id. at 27-28.77. Administration of Estates Act, 15 Geo. V., ch. 23, § 1(1) (1925).78. KY. REV. STAT. ANN. § 391.030(1) (Baldwin 1988 & Supp. 1994). The principal

exception is a $7,500 exemption. Id. § 391.030(1)(c).79. Id. § 391.010.80. Id. § 391.030.

3271995]


Because the reason for separate treatment of real and person-al property no longer exists, it is appropriate to recommend thatdescent and distribution of real and personal property be com-bined into one section of the statutes and treated uniformly. Thiscould be accomplished most easily by amending the first sen-tence of KRS section 391.010 to read: "When a person havingright or title to any property, real or personal, dies intes-tate . ... " This change would simplify administration of estates,making both real and personal property available for claims,taxes and expenses of administration. The personal representa-tive could exercise good judgment, selling that property whichleast adversely affected the survivors or which most easily facili-tated administration of the estate. Currently, personal propertymust usually be exhausted before real property may be sold andused for these purposes, unless the decedent's will provides oth-erwise.81

Other states which had their early statutes of descent anddistribution based on the same English law have already madethis change and now have a common section of the statute gov-erning distribution of both real and personal property.82 A sur-vey of the law of the states which surround Kentucky is reveal-ing. Only Virginia retains separate statutes for descent of realproperty and distribution of personal property. 8 The otherstates, Illinois, Indiana, Missouri, Ohio, Tennessee and West Vir-ginia, now provide for the distribution of real and personal prop-erty in a single, unified section of the intestacy statutes.8 4

However, making this change leads to an additional concern.Currently, title to real property passes directly to the heirs.85

81. Jones v. Keen, 160 S.W.2d 164 (Ky. 1942); Breetz v. Hill, 169 S.W.2d 632(Ky. 1943).

82. Goldsworthy, supra note 72, at 316.83. VA. CODE ANN. §§ 64.1-1 (descent of real property), 64.1-11 (distribution of

personal property) (Michie 1991).84. ILL. ANN. STAT. ch. 755, para. 5/2-1 (Smith-Hurd 1992 & Supp. 1994); IND.

CODE ANN. § 29-1-2-1 (West 1979 & Supp. 1994); Mo. ANN. STAT. § 474.010 (Vernon1992); OHIO REV. CODE ANN. § 2105.06 (Anderson 1994 & Supp. 1994); TENN CODEANN. § 31-2-104(a) (1984 & Supp. 1994); W. VA. CODE §§ 42-1-3, -3a (1982 & Supp.1994).

85. KY. REV. STAT. ANN. § 391.010 (Baldwin 1988 & Supp. 1994). "[Ilt is plainthat title to real estate owned by an intestate passes directly to the heirs by virtueof K.R.S. 391.010." Wood v. Wingfield, 816 S.W.2d 899, 902 (Ky. 1991). See alsoHall's Executors v. Robinson, 165 S.W.2d 163 (Ky. 1942); Edinger v. Finn's Adm'r,

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Only the surplus personal property, which is that remaining"after payment of funeral expenses, charges of administration,and debts," passes to the recipients.86 Modem thought holdsthat both real and personal property should be equally subject toclaims, debts and expenses, and then pass to the takers uponcompletion of administration of the estate. The Model ProbateCode provided that the "net estate" of an intestate would descendand be distributed." The Uniform Probate Code provides thatreal and personal property pass to the recipients "subject to [the]homestead allowance, exempt property and family allowance, torights of creditors, [the] elective share of the surviving spouse,and to [costs of] administration."88 Thus, this language fromKRS section 391.030(1), "after payment of funeral expenses,charges of administration, and debts," should be added to KRSsection 391.010.

Proof of title to real property distributed from a decedent'sestate would then require something be recorded. This is rathereasily accomplished. In Wisconsin, a judgment is obtained at theend of the estate, ordering distribution of described and namedreal and personal property to named person(s) in proportions setforth therein.89 It is then recorded as a deed.9" In Ohio, certifi-cate of transfer is obtained9' and recorded.92 The Uniform Pro-bate Code provides for an instrument or deed of distribution. 9

Once the judgment, certificate, or deed is recorded, title examin-ers would know that title to the real property is held by the per-son(s) named therein. None of these methods is cumbersome or

255 S.W.2d 47 (Ky. 1952).86. KY. REV. STAT. ANN. § 391.030(1) (Baldwin 1988 & Supp. 1994). 'Title to the

personal property of a decedent vests in his personal representative for purposes ofadministration, and devisees or heirs acquire no title to it until there has been asettlement of the estate." Burchett v. Burchett, 10 S.W.2d 460 (Ky. 1928). See alsoMoore's Administratrix v. Boskins, 92 S.W.2d 813 (Ky. 1938); Wood v. Wingfield, 816S.W.2d 899 (Ky. 1991).

87. MODEL PROBATE CODE, supra note 38, § 22, at 59.88. ORIGINAL UNIFORM PROBATE CODE, supra note 12, § 3-101.

89. Wis. STAT. ANN. § 863.27 (West 1991).

90. Id. § 863.29.91. OHmo REV. CODE § 2113.61 (Anderson 1994).92. Id. § 2113.62.93. UNIFORM PROBATE CODE § 3-907, 8 U.L.A. 384 (1983). This is conclusive evi-

dence of title against all persons interested in the estate. Id. § 3-908, 8 U.L.A. 395(1983 & Supp. 1994). The personal representative can recover the property if distri-bution was improper. Id.

1995] 329


difficult. It is already necessary to show proof of title to somekinds of personal property,94 so this would not add much bur-den to the tasks of personal representatives. Any of the abovemethods works. The Uniform Probate Code method is easy toutilize, is the least expensive to implement and should thereforebe adopted in Kentucky.

III. INCREASE THE INTESTATE SHARE FORA SURVIVING SPOUSE

Present Kentucky statutes provide two ways in which a sur-viving spouse of an intestate can inherit intestate property fromthe decedent. First, following setting aside the exempt proper-ty,95 chapter 392 provides that a share of the decedent's estatecalled "dower and curtesy" be given to the surviving spouse.96

The spouse's share is carefully defined. The survivor will receiveone-half of the surplus real estate owned by the decedent atdeath or owned by another for the use of the decedent, a lifeestate in one-third of the real estate owned by the decedent dur-ing the marriage but not at death, and one-half of the surpluspersonal property owned by the decedent.97 The fractions applyregardless of the value of the property. Second, chapter 391 pro-vides that the surviving spouse is the decedent's heir if the dece-dent left no issue surviving, no parent surviving, and no siblingor issue of any sibling surviving.98 Intestate succession lawsshould strike a balance between implementing the desires of thepopulace and giving adequate protection to the financially depen-dent survivors.99 A number of studies have been done whichshow how decedents direct inheritance of property by theirwills.' 0 These studies consistently have shown that decedentsleave more than the intestate share to their surviving

94. One must show title to motor vehicles and securities, for example.95. KY. REV. STAT. ANN. § 391.030(1)(c) (Baldwin 1988 & Supp. 1994).96. Id. § 392.020.97. Id.98. Id. §§ 391.010, .030.99. See supra note 7 and accompanying text.

100. See, e.g., Schneider, Kentucky Wills Study, supra note 1; Dunham, The Chica-go Study, supra note 2, Edward H. Ward & J. H. Beuscher, The Inheritance Processin Wisconsin, 1950 WIs. L. REV. 399; Mary Louise Fellows et al., An Empirical Studyof the Illinois Statutory Estate Plan, 1976 U. ILL. L. REV. 717.

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spouses.'0 ' In the Kentucky Wills Study, for instance, the dece-dent was survived by a spouse in 279 cases of the 441 stud-ied. 102 Of these 279 estates, all 279 of these decedents left theirentire estates to their surviving spouses, and two more decedentsleft virtually all their estate to their surviving spouses.0 3

These findings were consistent with the findings of prior stud-ies.

104

Further, the prior studies also consistently found that dece-dents desire to give all their estates to their spouses even wherethey have children who survive them.0 5 Indeed; one study re-ported that where the intestacy statutes divided property be-tween the surviving spouse and the decedent's children, there of-ten was a redistribution by the survivors whereby the spousewas given the family house or other property.'

However, the situation was more complicated when the intes-tate decedent died during a second or later marriage. In suchcases decedents seemed to have a desire to give more property totheir issue.0 7 A smaller number of decedents gave all of theirproperty to their surviving spouses in such cases, 0 8 and in alllikelihood, this is easily explained.

Most decedents who are married to the parent of all theirchildren can leave their property to their spouse with the expec-tation that the spouse will leave the property to their children atdeath. Thus, while the children are technically disinherited whenthe decedent dies, they ultimately will inherit anyway. 0 9 Butwhen the spouse to whom the decedent is married at death isnot the parent of all of the decedent's children, then that surviv-ing spouse may be more reluctant to give the decedent's proper-ty, or other property, to the decedent's children when the survi-vor dies."0

101. Id.102. Schneider, Kentucky Wills Study, supra note 1, at 417.103. Id.104. Id. at 418-19.105. Id. at 419.106. MARviN B. SUSSMAN ET AL., THE FAMILY INHERITANCE 122 (1970).107. Schneider, Kentucky Wills Study, supra note 1, at 420-22.108. Id.109. See id. at 421.110. Id.

1995]


These and other considerations complicate life for legislatorsseeking a fair and equitable distribution pattern for intestates.Fortunately, a proposed solution is not hard to find. The UniformProbate Code suggests that the share given to the survivingspouse be different when the surviving spouse is the parent ofthe decedent's children, as compared to when the decedent leaveschildren of an earlier marriage or from more than one marriage.The original version gave the surviving spouse the first $50,000and one-half of the balance of the intestate estate if all thedecedent's issue were of the marriage to that spouse, but one-half of the intestate estate if there were any issue of anothermarriage."' The 1990 revision of the Uniform Probate Code in-creased the surviving spouse's share to: all of the intestate estateif all of the decedent's issue were also issue of the survivingspouse and the surviving spouse has no other issue who survivethe decedent; the first $200,000 plus three-fourths of the balanceof the intestate estate if no descendant of the decedent survivesbut a parent of the decedent survives; and the first $150,000plus one-half of the balance of the intestate estate if thedecedent's surviving issue are all issue of the surviving spouseand the surviving spouse has no other issue who survive thedecedent. The 1990 revision also changed the share of the surviv-ing spouse, when one or more of the decedent's issue are notissue of the surviving spouse, to the first $100,000 plus one-halfof the balance of the estate."2 Clearly, the revisors intended togive surviving spouses a more adequate share." 3

Should the decedent's parent(s) inherit along with the surviv-ing spouse when the decedent has no descendants, but is sur-vived by one or both parents? Present Kentucky law gives half ofthe intestate's surplus real and personal property to the par-ent(s) in this situation.14 Some modern thinking challengesthis choice by giving all of the decedent's property to the surviv-ing spouse." 5 Not all authorities agree, however. The 1990 re-vision of the Uniform Probate Code gives the surviving spouse

111. ORIGINAL UNIFORM PROBATE CODE, supra note 12, § 2-102.112. REVISED UNIFORM PROBATE CODE, supra note 52, § 2-102.113. Lawrence W. Waggoner, The Multiple-Marriage Society and Spousal Rights

Under the Revised Uniform Probate Code, 76 IOWA L. REV. 223, 233 (1991).114. KY. REV. STAT. ANN. §§ 391.010(2), .030(1) (Baldwin 1988 & Supp. 1994).115. E.g., W. VA. CODE § 42-1-3(a)(1) (Supp. 1994).

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the first $200,000, plus three-fourths of the balance of the es-tate,"6 while the remaining share of the estate goes to the par-ent(s).117

It is again instructive to look at the intestate succession stat-utes of the states which surround Kentucky. The variety of theprovisions providing for the surviving spouse highlights the diffi-culty in finding the proper balance when the intestate is sur-vived by a spouse and by descendants. First, look at the respec-tive provisions which apply when the decedent is survived by aspouse and by descendants. Illinois law gives one-half of theintestate estate to the surviving spouse when the decedent issurvived by issue118 and the balance to the decedent'sdescendants." 9

The Indiana statutes give the surviving spouse one-half of theintestate estate where the decedent is survived by a spouse andby one or more descendants 2 ' and the balance to the survivingdescendants.' 2' But if the surviving spouse is a second or sub-sequent spouse who had no surviving children by the decedentand the decedent left one or more surviving descendants, thesurviving spouse takes only a life estate in one-third or thedecedent's intestate real estate and the fee interest vests in thedecedent's issue subject to the life estate.'22 The survivingspouse also inherits one-half of the decedent's personal proper-ty. 2 ' The balance of the intestate estate is given to thedecedent's descendants.'24

In Missouri, the legislature also has taken into considerationwhether the decedent's issue are also the issue of the survivingspouse. Thus, the surviving spouse inherits the first $20,000 plusone-half of the balance of the intestate estate where the decedentis survived by a spouse and by issue all of whom are also issue ofthe surviving spouse,125 but only one-half of the intestate es-

116. REVISED UNIFORM PROBATE CODE, supra note 52, § 2-102(2).117. Id. § 2-103(2).118. ILL. ANN. STAT. ch. 755, para. 5/2-1(a) (Smith-Hurd 1992 & Supp. 1994).119. Id.120. IND. CODE ANN. § 29-1-2-1(b)(1) (West 1979 & Supp. 1994).121. Id. § 29-1-2-1(d)(1).122. Id. § 29-1-2-1(c).123. Id.124. Id. § 29-1-2-1(d)(1).125. Mo. ANN. STAT. § 474.010(1)(c) (Vernon 1992).

1995] 333


tate where the decedent is survived by a spouse and by issue,one or more of whom are not also issue of the survivingspouse."6 The decedent's descendants inherit the balance ofthe intestate estate. 127

The Ohio intestacy statute varies the spouse's inheritance bythe number of descendants and by whether all are the descen-dants of the surviving spouse. Thus, where the decedent diessurvived by a spouse and one child or lineal descendants, thespouse takes the first $60,000 plus one-half of the balance of theintestate estate if the spouse is the natural or adopted parent ofthe child,12

' but only the first $20,000 plus one-half of the es-tate if the spouse is not the natural or adopted parent of thechild. 2 9 If the decedent is survived by a spouse and more thanone child or lineal descendants, the spouse takes the first$60,000 plus one-third of the balance if the spouse is the naturalor adopted parent of one of the children, 3 ° but only the first$20,000 plus one-third of the balance if the spouse is not thenatural or adopted parent of any child.'3' The decedent's de-scendants inherit the balance in all these cases.1 2

In Tennessee, if the decedent is survived by a spouse and byissue, the spouse inherits one-third of the estate 3 and the is-sue inherit the rest. 34 In Virginia, the surviving spouse willinherit all of the intestate's real estate unless the intestate wassurvived by one or more descendants who are not also descen-dants of the surviving spouse, in which case the spouse takesone-third of the real estate and the descendants will inherit theremaining two-thirds.3 5 The surplus personal property is dis-tributed in the same manner.'36

In West Virginia, the surviving spouse receives all of the intes-tate estate if all of the decedent's descendants are also descen-

126. Id. § 474.010(1)(d).127. Id. § 474.010(2)(a).128. OHio REV. CODE ANN. § 2105.06(B) (Anderson 1994 & Supp. 1994).129. Id.130. Id. § 2105.06(C).131. Id.132. Id. § 2105.06(B).(D).133. TENN. CODE ANN. § 31-2-104(a)(2) (1984 & Supp. 1994).134. Id. § 31-2-104(b)(1).135. VA. CODE ANN. § 64.1-1 (Michie 1991).136. Id. § 64.1-11.

334

1995] INHERITANCE LAWS 335

dants of the surviving spouse and the surviving spouse has noother descendants." 7 If all of the intestate's descendants arealso descendantsof the surviving spouse and the survivingspouse has one or more descendants who are not the intestate'sdescendants, then the surviving spouse takes three-fifths of theintestate estate.3 s If one or more of the decedent's descendantsare not descendants of the surviving spouse, then the survivingspouse takes one-half of the intestate estate. 139

These statutes show a wide diversity in the share given to asurviving spouse where the decedent is survived by a spouse andby descendants. Serial marriages are a fact of life in modernsociety. 4 ° The 1990 revision of the Uniform Probate Code wasdone with this thought as a primary underpinning.' The the-ory of these revisions, as they affect the share of the survivingspouse, is set forth in Professor Waggoner's article."4

According to Waggoner, the dominant consideration was theimputed decedents' intentions, based upon empirical studies.4 3

Another consideration was the trend in intestate succession lawto increase the share of the surviving spouse.' A third consid-eration was that typically children are not viewed as losing whenone parent inherits property from the other; instead they viewthis as a postponement, with the children expecting to inheritwhen the survivor dies.' Of course, this consideration doesnot apply as strongly when the decedent's surviving issue are notall of the same spouse.'46 When the surviving spouse has chil-dren by a different spouse, there is more likelihood that thedecedent's property will be diverted to others."'

When the problem was striking a proper balance, the code'srevisors' dominant objective was to give an adequate share to thesurviving spouse. 4 s Thus, the lump-sum amount plus a frac-

137. W. VA. CODE § 42-1-3(a)(2) (Supp. 1994).138. Id. § 42-1-3(b).139. Id. § 42-1-3(c).140. Waggoner, supra note 113, at 223-24.141. Id. at 224-25.142. Id. at 229-35.143. Id. at 230.144. Id. at 230-31.145. Id. at 232.146. Id. at 233.147. Id.148. Id.


tion of the balance method was used to compute the share of thesurviving spouse.4 9 Recall, too, that the Uniform Probate Codehas as an underlying premise that intestacy will normally occurin estates of modest value.5 0

The survey of the states surrounding Kentucky revealed con-siderable agreement on the proper distribution of an intestate'sestate in those cases where the decedent is survived by a spouseand one or both parents, but not by any descendants. Only Indi-ana' 51 and Missouri 52 give any inheritance to a parent inthis situation. The rest of the surrounding states give all to thesurviving spouse.

53

The first recommendation is clear. A parent should not inheritunless the decedent is not survived by a spouse or any descen-dant. It seems quite clear under modern thought, the UniformProbate Code notwithstanding, that a surviving spouse's anddescendants' claims to inherit are far superior to that of any sur-viving parent. The Kentucky statutes should be amended to giveall of the estate to the surviving spouse when there are no sur-viving descendants of the decedent, even if one or both parentsdo survive.

It is recommended that the remainder of the Revised UniformProbate Code provisions for a surviving spouse be adopted asKentucky law. 54 Some states have already enacted statutesgiving the surviving spouse the entire estate where the decedentis survived by a spouse and by descendants, all of whom are alsodescendants of the surviving spouse.'55 As noted above, it is ex-pected that the descendants will inherit from their survivingparent when that person dies.'56 The possibility of the surviv-ing spouse's remarriage is most difficult to factor into a statute.

149. Id.150. ORIGINAL UNIFORM PROBATE CODE, supra note 12.

151. IND. CODE ANN. § 29-1-2-1(b)(2) (West 1979 & Supp. 1994).152. Mo. ANN. STAT. § 474.010(1)(b) (Vernon 1992).153. ILL. ANN. STAT. ch. 755, para. 5/2-1(c) (Smith-Hurd 1992 & Supp. 1994); OHIO

REV. CODE ANN. § 2015.06(D) (Anderson 1994 & Supp. 1994); TENN. CODE ANN.§ 31-2-104(a)(1) (1984 & Supp. 1994); VA. CODE ANN. § 64.1-1 (Michie 1991); W. VA.CODE § 42-1-3(a)(1) (Supp. 1994).

154. See supra notes 111-12.155. E.g., ARIZ. REV. STAT. ANN. § 14-2102.1. (1975 & Supp. 1994); MONT. CODE

ANN. § 72-1-202(1) (1993); W. VA. CODE § 42-1-3(a)(2) (Supp. 1994); WIS. STAT. ANN.§ 852.01(1)(a)(1) (West 1991 & Supp. 1994).

156. See supra note 145.

336

INHERITANCE LAWS

That spouse could also have additional children and descendants.These could be taken into account by establishing a trust, withincome to the spouse for life, and perhaps principal as needed,with the remainder to the decedent's descendants when the sur-viving spouse dies. However, the revisors of the Uniform ProbateCode properly rejected this scheme as too complicated. 157

In those cases where the decedent leaves descendants by priorspouses or the surviving spouse has descendants by a priorspouse, the Revised Uniform Probate Code makes reasonableaccommodation of the competing claims. It provides an appropri-ate inheritance for both the spouse and for the decedent's descen-dants. The surviving spouse's needs are substantial and requireproper recognition by the law.

IV. CHANGE THE SYSTEM OF TAKING

BY REPRESENTATION

Kentucky law provides for taking by representation in situa-tions where more remote takers inherit a share which an ances-tor would have inherited had the ancestor been alive at theintestate's death.5 8 By this statute, the legislature adopted thestrict English per stirpes system. 59 Using this system, theshare which the ancestor would have inherited is divided into asmany shares as there are persons in the next generation, wheth-er they are then alive or have predeceased, leaving issue whosurvive the decedent, even if all of the persons at this generationpredeceased the decedent. 60

An example will help illustrate the concept. Suppose that adecedent had three children, Allen, Beth, and Carol. Allen hadtwo children, Beth had three children and Carol had four chil-dren. All three of decedent's children predeceased the decedent

157. Waggoner, supra note 113, at 234-35. It is highly unlikely that there will beany consideration of a return to common law dower and curtesy, or to some similarscheme.

158. Ky. REV. STAT. ANN. § 391.040 (Baldwin 1988 & Supp. 1994).159. Kentucky Trust Co. v. Sweeney, 163 F. Supp. 450 (W.D. Ky. 1958). Professor

Bratt calls this the "orthodox per stirpes system." Bratt, Kentucky Primer, supra note1, at 55. Kentucky is not the only state which follows this system. For example,Florida adopts this system by statute. FLA. STAT. ANN. § 732.104 (West 1976 &Supp. 1995).

160. ATKINSON, supra note 9, at 64-65.

1995] 337


so that the decedent died survived by no children and ninegrandchildren. This can be diagramed as follows:

Decedenti II

[Allen] [Beth] [Carol]

GC1 GC2 GC3 GC4 GC5 GC6 GC7 GC8 GC9

[ ] deceased at decedent's death

Using Kentucky law in this situation, the initial division ofdecedent's estate is made at the level of the children, even if allof the children are dead.16 Thus, there are three equal shares.Allen's share is divided into two equal shares, one for GC1 andone for GC2. Beth's share is divided into three equal shares, oneeach for GC3, GC4, and GC5. Carol's share is divided into fourequal shares, one each for GC6, GC7, GC8, and GC9. Eachgrandchild inherits, but they inherit unequal shares; with someinheriting more than others.'

A majority of states in the United States follows a somewhatdifferent form of representation. While most writers call this percapita representation, 62 some state statutes refer to this asper stirpes. 16

1 Using this system, the children's generation isskipped over in making the initial division of the estate in theexample above.'64 The initial division is made at that genera-tion closest to the decedent in which there is a living person.Thus, in the example above, each grandchild would receive anequal one-ninth share.

There is also the question of what is meant by representation.In the strict per stirpes system used in Kentucky there is nodifficulty. One simply follows down the family tree until reachinga living taker. Thus, if the intestate were to die leaving no sur-viving spouse, no surviving descendants, parents or siblings, butleaving surviving descendants of three predeceased siblings, theestate would be divided into three equal parts, one for each sib-

161. Id.; Bratt, Kentucky Primer, supra note 1, at 55.162. E.g., ATKINSON, supra note 9, at 65, 68; McGOVERN, ET AL., supra note 25, at

9-11.163. E.g., OHIO REV. CODE ANN. § 2105.06 (Anderson 1994 & Supp. 1994).164. Schneider, Kentucky Wills Study, supra note 1, at 429.

INHERITANCE LAWS

ling who predeceased the decedent but left descendants whosurvived the decedent. One would descend the family tree foreach of the predeceased siblings, and the first living person oneach branch would inherit his respective share. If the first suchpredeceased sibling left two surviving children and two grand-children of a predeceased child, the predeceased sibling's thirdwould be divided into three equal parts, one each to the twosurviving children, and the last third divided into two equalparts, one each to the two surviving grandchildren of that sib-ling.

In a jurisdiction which had adopted the per capita system, onewould look to the first generation in which there were livingpersons. Since the decedent's siblings' children all predeceasedthe decedent, one would look at the next generation. One finds atleast one person alive at this generation, so this is where tomake the initial division of the estate. There will be one sharefor each person alive at this generation and one share for eachperson who predeceased the decedent but left descendants whosurvived the decedent.

It is clear from these examples that once the initial division ofan estate is made, representation is per stirpes, regardless ofwhether the initial division is per stirpes or per capita. The Mod-el Probate Code adopted this system of representation. 165 How-ever, the Uniform Probate Code proposed a system of representa-tion which modified the per stirpes representation in a few un-common situations. 16 6 Shortly after the Uniform Probate Codewas issued, Professor Waggoner proposed that intestate distribu-tion be per capita with per capita representation. 167 The Re-

165. MODEL PROBATE CODE, supra note 38, § 22(c).

166.If representation is called for by this Code, the estate is divided into as

many shares as there are surviving heirs in the nearest degree of kinship anddeceased persons in the same degree who left issue who survive the decedent,each surviving heir in the nearest degree receiving one share and the share ofeach deceased person in the same degree being divided among his issue in thesame manner.

ORIGINAL UNIFORM PROBATE CODE, supra note 12, § 2-106. This provision wasadopted by many of the 15 states which adopted the Original Uniform Probate Code.E.g., Alaska Stat. § 13.11.030 (1985); MICH. COMP. LAWS ANN. § 700.108 (West 1995);S.C. CODE ANN. § 62-2-106 (Law. Co-op. 1987 & Supp. 1994).

167. Lawrence W. Waggoner, A Proposed Alternative to the Uniform Probate Code'sSystem for Intestate Distribution among Descendants, 66 Nw. U. L. REV. 626 (1971).

1995] 339


vised Uniform Probate Code adopted Professor Waggoner's pro-posal. 68 However, only a few states have adopted this sys-tem. 1

69

Looking at the states surrounding Kentucky, only Illinoisretains the strict per stirpes system. 7 ° All of the other sur-rounding states, including Virginia, the original source of Ken-tucky intestacy law,'7 ' have adopted the per capita systemwith per stirpes representation. 172 Per capita with per stirpesrepresentation is the majority rule in the United States.'73

Neither of these systems has been proven clearly better thanthe other in the sense that one is absolutely wrong and one abso-lutely correct. Various debates, however, have been reported. 174

Presumably, most lawyers think that the system used in their

168. REVISED UNIFORM PROBATE CODE, supra note 52, § 2-106.169. N.C. GEN. STAT. §§ 29-15, 29-16 (1984 & Supp. 1994); ME. REV. STAT. ANN.

tit. 18A, § 2-106 (West 1981). The UNIFORM ACT ON INTESTACY, WILLS, AND DONA-TWVE TRANSFERS, 8B U.L.A. 1 (1993) influenced at least one state, which had firstadopted the Original Uniform Probate Code system, to adopt the per capita at eachgeneration system. MONT. CODE ANN. § 72-2-116 (1993). This act was created as afreestanding act in 1991. It contains substantive, but not procedural, provisions ofthe Revised Uniform Probate Code. It is intended to assist with the revision of sub-stantive law where revision of procedural law is not sought.

170. ILL. ANN. STAT. ch. 755, para. 5/2-1 (Smith-Hurd 1992 & Supp. 1994).171. See supra notes 71-73.172. IND. CODE ANN. § 29-1-2-1(d)(1), (3), (6) (West 1979 & Supp. 1994); Mo. ANN.

STAT. § 474.020 (Vernon 1992); OHIO REV. CODE ANN. §§ 2105.12, .13 (Anderson1994) (as to descendants of the decedent and collaterals); Washburn v. Surlock, 449N.E.2d 797 (Ohio Ct. App. 1982); TENN. CODE ANN. § 31-2-104(b)(1), (3), (4) (1984 &Supp. 1994); VA. CODE ANN. § 64.1-3 (Michie 1991); W. VA. CODE § 42-1-3d (Supp.1994).

173. JOHN T. GAUBATZ ET AL., ESTATES AND TRUSTS: CASES, PROBLEMS, AND MATE-RIALS 33 (1989).

174. James N. Zartman, An Illinois Critique of the Uniform Probate Code, 1970 U.ILL. L. F. 413, 417 ("In my own experience, the great majority of Illinois testatorsdisagree with the Code scheme and want their estates distributed on a straight 'perstirpes' basis.'. Cf. Richard V. Wellman, A Reaction to the Chicago Commentary,1970 U. ILL. L. F. 536, 537:

Mr. Zartman also argues that his clients prefer division by families rath-er than per capita when descendants of the same degree inherit. This makesIllinois law, which so ordains, preferable in his view to the Code which goesthe other way. In my experience, clients prefer what the lawyer suggests to be"normal" when it comes to secondary gifts to descendants. Also, there appearsto be a marked tendency for lawyers to equate normalcy with the statutorypatterns they know. Many state codes now prescribe per capita division whenall members of the generation of descendants closest to the designated ances-tors are dead.

INHERITANCE LAWS

state is correct. 175 However, in the first example given above, itis probable that the decedent would have preferred to have thegrandchildren treated equally. In fact, several of the prior stud-ies reported that persons who were interviewed greatly preferredthe per capita system for the initial division of an estate.'7

As this writer stated in the report of the Kentucky WillsStudy, "[T]he per capita method should be used for making theinitial division of an estate in Kentucky.' '177 Therefore, Ken-tucky should adopt per capita division with per stirpes represen-tation. To do so would put Kentucky law in harmony with itssister states, with the majority position in the United States, andwith the desires of the overwhelming majority of those respon-dents in the earlier studies.'78

V. REQUIRE AN HEIR TO SURVIVE THE INTESTATE BY 120HOURS TO INHERIT

All too often, two or more people die in a manner which cre-ates difficulty determining the order of death. On occasion, sucha situation involves an intestate and one or more of theintestate's heirs-apparent. Under existing Kentucky law, it isdifficult to determine who should inherit from the intestate.

One of the significant problems which occurs when courts dealwith such cases is the necessity to administer two or more es-tates concurrently, one or more of which exists simply to passproperty received from one intestate to the heirs of another in-testate who never enjoyed the property. Thus, the same propertyis subject to multiple charges for expenses of administration andto multiple assessment of death taxes. The process unnecessarilydepletes the property.

175. See supra note 174. In this, I agree with Professor Wellman.176. Those percentages of respondents preferring the per capita system were: 95%,

Fellows et al., supra note 100, at 741; 87%, Comment, A Comparison of Iowans'Dispositive Preferences With Selected Provisions of the Iowa and Uniform ProbateCodes, 63 IOwA L. REv. 1041, 1111 (1978); and, 94.5%, Mary Louise Fellows et al.,Public Attitudes About Property Distribution at Death and Intestate Succession Lawsin the United States, 1978 AM. BAR FOUND. RES. J. 319, 384.

177. Schneider, Kentucky Wills Study, supra note 1, at 430.178. As reported in the Kentucky Wills Study, there was a significant correlation

between the findings in Kentucky and those of the other studies. There is no reasonto believe that there would be any significant differences in areas not included in theKentucky Wills Study. Id.

1995]


It is abhorrent to incur these multiple expenses and taxessimply to direct property to the ultimate taker(s). Requiring anheir to survive by some short period of time avoids these unnec-essary costs and taxes in most of the cases where deaths occurclosely in time.

Will drafters sometimes provide for this possibility,179 butmany will forms and drafters make no provision for this foresee-able occurrence.18 ° Where no such will provision is available, asin cases of intestacy, the determination of who is entitled to theproperty at issue when the intestate and the heir-apparent diesimultaneously involves application of Kentucky's Uniform Si-multaneous Death Act.i 18

Fortunately, the Kentucky courts have been spared the diffi-culty of resolving hard cases. Only two cases have been found inwhich a Kentucky appellate court considered the Uniform Simul-taneous Death Act. 82 However, neither case applied the Actdirectly.

Courts in other jurisdictions have directly applied the UniformSimultaneous Death Act in cases where the evidence of order ofdeath is in significant or hopeless disagreement.183 These cases

179. Sample common disaster clauses and some supporting information can befound in NATIONAL CITY BANK, KENTUCKY, WILLS AND TRUSTS MANUAL, ch. XVI, atXVI-17 (1964). See also, L. RUSH HUNT, BALDWIN'S KENTUCKY WILLS AND TRUSTS149-50 (1993). A more extensive treatment, including practical suggestions coveringsimultaneous death provisions, time of survival clauses, common disaster clauses, andmarital deduction considerations, can be found at 3 JACOB RABKIN & MARK H. JOHN-SON, CURRENT LEGAL FORMS WITH TAX ANALYSIS, Form 7.55, 7-4524-7-4530 (1948).Most authorities prefer the time of survival clause.

180. For instance, a complete reading of two forms in a continuing legal educationbook found no such provision in either sample instrument. The first instrument ex-amined was a sample will -by Howard VanAntwerp III, Short Will and Codicil, §§ 3-1, 3-8 to 3-14. The second instrument was a sample form by James L. Coorssen, TheMarital Deduction, §§ 4-1, 4-10 to 4-56. OFFICE OF CONTINUING LEGAL EDUCATION,UNIVERSITY OF KENTUCKY COLLEGE OF LAW, DRAFTING WILLS AND TRUSTS IN KEN-TUCKY (1988).

181. KY.. REV. STAT. ANN. § 397 (Baldwin 1988).182. Ruckel v. Baston, 252 S.W.2d 432 (Ky. 1952); McCallum, Adm'r v. Harris,

Adm'x, 379 S.W.2d 438 (Ky. 1964). In at least two cases decided before the UniformSimultaneous Death Act was adopted in Kentucky, its provisions would have assistedin determining who would have inherited. See Colovos, Adm'r v. Gouvas, 108 S.W.2d820 (Ky. 1937); Gugel's Adm'r v. Orth's Ex'r, 236 S.W.2d 460 (Ky. 1950). Both casesinvolved difficult facts which made determination of the orders of death impossible.

183. E.g., Janus v. Tarasewicz, 482 N.E.2d 418 (Ill. App. Ct. 1985); In re Estate ofVillwock, 419 N.W.2d 562 (Wis. 1988). My favorite horrible of horribles is the seriesof the Estates of Eannelli cases, which involved four family members - a father,

INHERITANCE LAWS

often involve protracted litigation, significant delay, and largeexpenses due to the need for several contemporaneous estateadministrations. Nor is it unusual for all the property to pass toone side of the family to the exclusion of the other. Unfortunate-ly, the Uniform Simultaneous Death Act promotes such litigationbecause it does not apply if a court can determine the order ofdeath. As in the cases cited above, courts normally do resolve theconflict of evidence and ultimately do determine the order ofdeath.

Will drafters have succeeded in using time of survival clausesto avoid almost all such problems. 8 4 Requiring a potential tak-er to survive the decedent by 120 hours, or some other quantityof time, eliminates all but a minuscule number of cases in whichorder of death is not readily determined.'85 The drafters of theUniform Probate Code incorporated a time of survival provisionin the intestate succession provisions.'86 The Revised UniformProbate Code carries this provision forward.'87 The recentlyamended Uniform Simultaneous Death Act now incorporates a120 hour survival time,'88 but Kentucky has not adopted therevised Act. Kentucky should therefore adopt the Uniform Pro-bate Code provision requiring an heir to survive the intestate by120 hours in order to inherit. This provision would avoid need-less delay and expense in settling the estates of intestates.

mother and two children - killed as a result of a car-train accident. See In re Es-tate of Eannelli, 63 N.W.2d 108 (Wis. 1954); In re Estate of Eannelli, 63 N.W.2d 111(Wis. 1954); In re Estate of Eannelli, 68 N.W.2d 791 (Wis. 1955); In re Estate ofEannelli, 68 N.W.2d 804 (Wis. 1955); In re Estate of Eannelli, 80 N.W.2d 240 (Wis.1956). After considering conflicting evidence as to the order of deaths, it was deter-mined that one son survived the other three family members. He inherited every-thing from his parents' estates. His heirs were his paternal grandparents who inher-ited to the exclusion of all maternal relatives.

184. Will provisions which specifically deal with simultaneous death raise the samelitigation issues raised by the Uniform Simultaneous Death Act. Will provisionswhich deal with so-called common disasters raise different, but also difficult issues.Thus neither of these kinds of provisions should be used.

185. An estate can qualify for the Federal Estate Tax Marital Deduction if therequired time of survival does not exceed six months. I.R.C. § 2056(b)(3) (1982).

186. ORIGINAL UNIFORM PROBATE CODE, supra note 12, § 2-104.187. REVISED UNIFORM PROBATE CODE, supra note 52, § 2-104.188. UNIFORM SwuLTANEOUS DEATH AcT § 2, 8B U.L.A. 253, 258 (1993 & Supp.

1994).

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VI. ELIMINATE INHERITANCE BY "LAUGHING HEIRS"

The statutory scheme chosen by the Kentucky legislatureevidences a strong intent to avoid escheat to the state.' 89 In or-der to accomplish this intention, the statute allows inheritanceby remote relatives regardless of the degree of relationship. 9 'The statute traces potential heirs as far as grandparents andtheir issue, then great-grandparents and their descendants, "andso on in other cases without end."' 9 ' In addition, if there are nokindred of one parent, then the whole of the estate goes to thekindred of the other parent as if that parent "had survived theintestate and died entitled to the estate."'92 Thus, inheritanceby those remotely related to the decedent, often called "laughingheirs,"'93 can occur.

Modern thought limits inheritance by these laughing heirs. AsProfessor Bratt wrote: "Kentucky's system of intestate inheri-tance is antiquated in comparison to the modern trend towardeliminating inheritance by those more remotely related to thedecedent than grandparent or issue of a grandparent."'' TheKentucky Wills Study reported that "[m]any modern stat-utes ... provide for escheat to the state in this situation."'95

The Model Probate Code limited inheritance to those relatedto the decedent no more remotely than grandparents and theirissue,196 with escheat to the state if no persons of that or closer

relationship survived the decedent. 197 The authors stated thatthis complied with the wishes of average intestates who "mightwell prefer that [their] property go to the state rather than tosuch relatives."'98 The authors also noted that some statutes inthe United States already so limited inheritance.' 99 The Uni-form Probate Code also adopted this inheritance scheme.2"0

189. Bratt, Kentucky Primer, supra note 1, at 43.190. KY. REV. STAT. ANN. § 391.010(5) (Baldwin 1988 & Supp. 1994).191. Id.192. Id. § 391.010(6).193. "[They] are sometimes called 'laughing heirs' because they are personally

unaffected by the decedent's death and reportedly laugh all the way to the bank."MCGOVERN ET AL., supra note 25, § 1.3, at 17.

194. Bratt, Kentucky Primer, supra note 1, at 44.195. Schneider, Kentucky Wills Study, supra note 1, at 436-37.196. MODEL PROBATE CODE, supra note 38, § 22(b)(5).197. Id. § 22(b)(6).198. Id. § 22(b)(6) cmt., at 62.199. Id.200. See ORIGINAL UNIFORM PROBATE CODE, supra note 12, §2-103; REVISED UNI-

344

INHERITANCE LAWS

The policy which supports eliminating inheritance by remoterelatives is twofold. First, this reduces administrative costs in-volved with efforts to find these relatives, efforts which usuallyfail.2 ' Second, this prevents those who are unknown to the in-testate from receiving a windfall." 2

The Kentucky Wills Study found six decedents who died andleft no surviving relatives more closely related than grandpar-ents or their issue.0 3 If these decedents had not left validwills, so-called laughing heirs would have inherited. But none ofthese decedents' wills left any property to any of the decedents'relatives. Most of these estates were modest in value, althoughone was worth about $60,000, and another worth about$267,000. °4 Five of these decedents gave their property tonamed persons, and one gave the entire estate to charity.0 5

These findings were consistent with findings of prior studies.0 6

A look at the law of the states surrounding Kentucky disclosesthat several have already eliminated inheritance by remote rela-tives. Indiana allows inheritance out to grandparents and theirissue,2°

' but the estate is given to the state if there are no per-sons within the statutory class of permitted takers.208 Tennes-see also limits inheritance to those no more remotely relatedthan grandparents or their issue.2 9 The West Virginia statutereaches the same result.210

Rarely does an intestate die with no surviving relatives whoare not related at least as closely as grandparents or their is-sue. 211 Thus the number of cases in which escheat to the stateoccurs is very small. There are significant proof problems when

FORM PROBATE CODE, supra note 52, § 2-103.

201. Douglas P. Quay, Note, Intestate Succession in Tennessee, 8 MEM. ST. U. L.REV. 63, 69 (1977).

202. Id.203. Schneider, Kentucky Wills Study, supra note 1, at 435.204. Id.205. Id.206. See id. at 435-36.207. IND. CODE ANN. § 29-1-2-1(d)(5), (6) (West 1979 & Supp. 1994).208. Id. § 29-1-2-1(d)(8).209. TENN. CODE ANN. § 31-2-104(b)(4) (1984 & Supp. 1994).210. W. VA. CODE § 42-1-3a(d) (Supp. 1994).211. There are enough such cases, however, to support businesses that find

heirs - usually at a fee of one-third of the heirs' inheritance. McGOVERN ET AL.,supra note 25, § 1.3, at 17.

1995] 345


more remote relationships are proven. This process is often ex-pensive and time-consuming. 12 The modern position makeseminent sense. It is therefore recommended that Kentuckyamend the statute to allow inheritance by relatives no moreremotely related to the decedent than grandparents and theirissue. If there is no person within this class of potential takers,then the estate should escheat to the state.

VII. ABOLISH THE HALF-BLOOD STATUTE

Half-blood relationships are common in our multiple marriagesociety because of frequent remarriage following divorce. Forexample, suppose that Allen marries Betty and they have achild, Mary. Later Allen and Betty are divorced. Allen marriesCarol and they have a child, Norman. Mary and Norman arerelated by half-blood. They have one common parent, nottwo. 21 3 Half-blood relationships can also occur when a spouseremarries after a former spouse's death and has one or moreadditional children. Present Kentucky law provides: "Collateralsof the halfblood shall inherit only half as much as those of thewholeblood, or as ascending kindred, when they take with ei-ther.,,214 Application of the statute is fairly easy. For example,where an intestate is survived by a whole-blood sibling and ahalf-blood sibling, the whole-blood sibling inherits two-thirds ofthe estate while the half-blood sibling inherits one-third of theestate.215

Most modern intestacy statutes treat half-blood relatives thesame as whole-blood relatives.2 6 The Model Probate Codeadopted this position 21

1 with the comment that the then "mod-ern tendency is in the direction of abolishing distinctions be-tween persons of the half blood and the whole blood. 2 8 The

212. Id.213. "Half-bloods are related to each other through only one common ancestor." Id.

at 16.214. KY. REV. STAT. ANN. § 391.050 (Baldwin 1988). "Of course there can be no

such things as direct ancestors or direct descendants of the half-blood. Each personis as much of the blood of one parent as he is of the other parent, and any child isas much of his parent's blood as any other child." ATKINSON, supra note 9, at 50-51.

215. Covington v. Beck, 292 S.W. 752 (Ky. 1927).216. ATKINSON, supra note 9, at 74; MCGOVERN ET AL., supra note 25, at 16.217. MODEL PROBATE CODE, supra note 38, § 24.218. Id. § 24 cmt., at 64.

346

INHERITANCE LAWS

Uniform Probate Code has always adopted this position.219 Asurvey of states surrounding Kentucky reveals that Missouri22

and Virginia221 continue to apply half-blood statutes. All of theother states' statutes explicitly give equal shares to whole andhalf-blood relatives.222

The half-blood statute is a product of the development of thecommon law at a time when society was ordered much different-ly than today.223 The time to repeal Kentucky's half-blood stat-ute has come.

VIII. ABOLISH THE ANCESTRAL PROPERTY STATUTE

At common law, real property inherited from an ancestor wasreturned to the ancestor's blood line when the owner diedintestate.224 The ordinary rules of descent were altered in suchcases. 25 If the intestate was not survived by descendants orancestors, the ancestral real property could be inherited only bythe decedent's collaterals who were also descendants of the an-cestor who had purchased the real property. 226

Ancestral property rules were first developed in England,perhaps growing out of feudal concepts.227 Clearly they weredeveloped because of the very special character of land. In mod-ern times, land is simply one of many forms of wealth. Today aperson can be very wealthy without owning any real property.However, the conditions which caused the doctrine to be devel-oped have disappeared. Moreover, retention of ancestral propertyrules sometimes creates questions as to title to real property andinvites litigation.228

219. ORIGINAL UNIFORM PROBATE CODE, supra note 12, §2-107; REVISED UNIFORMPROBATE CODE, supra note 52, § 2-107.

220. MO. STAT. ANN. § 474.040 (Vernon 1992).221. VA. CODE ANN. § 64.1-2 (Michie 1991).222. ILL. ANN. STAT. ch. 755, para. 5/2-1 (Smith-Hurd 1992 & Supp. 1994); IND.

CODE ANN. § 29-1-2-5 (West 1979); OHIO REV. CODE ANN. § 2105.01 (Anderson 1994);TENN. CODE ANN. § 31-2-107 (1984); W. VA. CODE § 42-1-3e (Supp. 1994).

223. See THEODORE F.T. PLUCKNETT, A CONCISE HISTORY OF THE COMMON LAW

719-22 (1956).224. ATKINSON, supra note 9, § 21, at 77.225. Bratt, Kentucky Primer, supra note 1, at 128.226. Id. at 128-29.227. Thomas L. Jones, Alabama Probate Law - Need for Revision of Intestate

Provisions, 20 ALA. L. REV. 1, 12-13 (1967).228. Id. at 13.

1995] 347


Kentucky has an ancestral property statute, but one whichdiffers somewhat from the usual common law rules. The firstpart of the statute requires that real property acquired from aparent by gift shall be inherited by the parent if the parent isalive.229 The second part of the statute requires that where aperson under eighteen years old dies without issue, owning realproperty acquired from a parent by gift, devise or descent, thenthat real property shall be inherited by that parent or his kin-dred, or if there be none, by the other parent or his kindred.23 °

Most states in the United States have repealed the ancestralproperty rules.23' A survey of nearby states shows that none ofthem have an ancestral property statute.2 32 Neither the ModelProbate Code,233 nor the Uniform Probate Code provides forancestral property. It is clear that as real property has becomeless important as wealth, most states in the United States haverepealed their ancestral property provisions. It is therefore rec-ommended that Kentucky also repeal its ancestral property stat-ute.

IX. CONCLUSION

This article reviews and considers several important areas ofKentucky inheritance law. Based upon a survey of the law with-in states surrounding Kentucky and with reference to the ModelProbate Code and Revised Model Probate Code, several recom-mendations for change are made. Each change would affect somelong-standing aspect of Kentucky law and would be an improve-ment over existing law.

First, it is recommended that a new system be adopted toprovide 'for the surviving spouse and dependent children of adecedent during the administration of the decedent's estate. By

229. KY. REV. STAT. ANN. § 391.020(1) (Baldwin 1988).230. Id. § 391.020(2).231. McGOVERN ET AL., supra note 25, § 1.3, at 15.232. The Indiana Probate Code Commission 1953 Comments note that the ances-

tral property rules were abolished in 1953. In Ohio, the statute provides: "In intes-tate succession, there shall be no difference between ancestral and nonancestral prop-erty .... " OHIO REV. CODE ANN. § 2105.01 (Anderson 1994). Searches of Tennessee,Virginia, Missouri, Illinois, and West Virginia statutes also found no ancestral prop-erty rules.

233. "[N]o distinction is made between ancestral and nonancestral real estate."MODEL PROBATE CODE, supra note 38, § 22 cmt., at 62.

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INHERITANCE LAWS

using two allowances, a homestead allowance and a family al-lowance, and also providing exempt property, these survivorswould have more financial resources available to them duringthe administration of the decedent's estate. In addition, it iscontemplated that these provisions would often exhaust theestate, enabling transfer of assets without need for full adminis-tration of the estate which would save time and expense. Theseprovisions would apply to testate as well as intestate estates.

Second, several changes which would affect only intestateestates are recommended. Distribution of both real and personalproperty should be combined into one section and treated togeth-er because the reasons for separate treatment of real and person-al property no longer exist. This change would subject real prop-erty to debts and claims, giving the personal representativegreater flexibility to choose the appropriate property out of whichto satisfy these claims. A method of proving transfer of title fromthe decedent to the heir(s) is offered.

Third, it is proposed that the intestate share for the survivingspouse be increased in cases where the intestate is also survivedby descendants or parents. The law needs to provide an adequateshare for the surviving spouse. The proposal allows differentshares for the surviving spouse depending upon how the surviv-ing descendants are related to both the decedent and the surviv-ing spouse.

Finally, it is recommended that: Kentucky change from thestrict per stirpes system of representation to an initial per capitadivision with per stirpes representation; an heir be required tosurvive the intestate by 120 hours in order to inherit; inheri-tance by "laughing heirs" be abolished; and the half-blood andancestral property statutes be repealed.

It is hoped that this article will stimulate discussion and ac-tion. These changes in the law could easily be made during thenext regular session of the Kentucky Legislature.

1995] 349


APPENDIX

ARTICLE I

INTESTATE SUCCESSION

Section 1. General Provisions

A. Any part of a decedent's estate not effectively disposed of bywill shall pass by intestate succession to the decedent's heirs asdescribed in this Article.B. There shall be no distinction between ancestral and non-an-cestral real property.C. The estates of dower and curtesy are abolished.

Section 2. Distribution of Intestate Property

When any decedent owning title to any real or personal prop-erty or inheritance dies intestate as to such estate or any partthereof, it shall be distributed as described herein, subject to thehomestead and family allowances, exempt property, funeral ex-penses, rights of creditors, and costs of administration.A. The intestate share of a decedent's surviving spouse is:

(1) The entire estate if:(a) no descendant of the decedent survives the decedent; or(b) all of the decedent's surviving descendants are also de-scendants of the surviving spouse and there is no otherdescendant of the surviving spouse who survives the dece-dent;

(2) The first $150,000, plus one-half of any balance of theintestate estate, if all of the decedent's surviving descendantsare also descendants of the surviving spouse and the survivingspouse has one or more surviving descendants who are notdescendants of the decedent;(3) The first $100,000, plus one-half of any balance of theintestate estate, if one or more of the decedent's survivingdescendants are not descendants of the surviving spouse.

B. Any part of the intestate estate not passing to the decedent'ssurviving spouse under subsection A., above, or the entire estateif there is no surviving spouse, shall be distributed as describedherein, subject to the homestead and family allowances, exemptproperty, funeral expenses, rights of creditors, and costs of ad-

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INHERITANCE LAWS

ministration, in the following order to the persons designatedbelow who survive the decedent:

(1) To the decedent's descendants by representation;(2) If there is no surviving descendant, to the decedent's par-ents equally if both survive, or to the surviving parent;(3) If there is no surviving descendant or parent, to the de-scendants of the decedent's parents or either of them by repre-sentation;(4) If there is no surviving descendant, parent, or descendantof a parent, but the decedent is survived by one or moregrandparents or descendants of grandparents, half of the es-tate passes to the decedent's paternal grandparents, equally ifboth survive, or to the surviving paternal grandparent, or tothe descendants of the decedent's paternal grandparents oreither of them if both are deceased, the descendants taking byrepresentation; and the other half passes to the decedent'smaternal grandparents in the same manner; but if there is nosurviving grandparent or descendant of a grandparent of ei-ther the paternal or maternal side, the entire estate passes tothe decedent's relatives on the other side in the same manneras the half.

Section 3. Escheat to the State

If there is no taker under the provisions of this Article, theintestate estate escheats to the state pursuant to KRS Chapter393.

Section 4. Representation

If taking by representation is called for by the provisions ofthis Article, the intestate estate shall be divided into as manyshares as there are surviving heirs in the nearest generation tothe decedent and deceased persons in the same generation wholeft issue who survived the decedent, each surviving heir in thatgeneration receiving one share and the share of each deceasedperson in that generation being divided among the descendantsof that person per stirpes.

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Section 5. Heirs Required to Survive 120 Hours

Any person who fails to survive the decedent by 120 hours isdeemed to have predeceased the decedent for purposes of thehomestead and family allowances, exempt property and intestatesuccession, and the decedent's heirs shall be determined as ifthat person in fact predeceased the decedent. If the time of deathof the decedent or of the person who would otherwise be an heir,or the times of death of both, cannot be determined, and it can-not be established that the person who would otherwise be anheir has survived the decedent by 120 hours, it is deemed thatthe person failed to survive the decedent. This section shall notbe applied where its application would result in escheat to thestate by the provisions of this Article.

Section 6. No Distinction for Half-Blood Relationship

Relatives of the half-blood inherit the same share they wouldinherit if they were of the whole blood.

ARTICLE II

ALLOWANCES AND EXEMPT PROPERTY

Section 1. Applies to Domiciles

This Article applies to the estate of each decedent, testate andintestate, who dies domiciled in Kentucky. Rights to homesteadand family allowances, and to exempt property, or similar rights,if any, for any decedent who dies not domiciled in Kentucky aregoverned by the law of the jurisdiction of the decedent's domicileat death.

Section 2. Applies to Testate and Intestate Succession

The provisions of this Article apply to testate and intestateestates.

Section 3. Homestead Allowance

A decedent's surviving spouse is entitled to a homestead allow-ance of $15,000. If there is no surviving spouse, each minor childand each dependent child of the decedent is entitled to a home-stead allowance amounting to $15,000 divided by the number of

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INHERITANCE LAWS

minor and dependent children of the decedent. The homesteadallowance is exempt from and has priority over all claims againstthe estate. The homestead allowance is in addition to any sharepassing to the surviving spouse or minor or dependent childrenby the will of the decedent, unless otherwise provided, by intes-tate succession, or by way of elective share.

Section 4. Family Allowance

A. In addition to the right to the homestead allowance, thedecedent's surviving spouse and minor children whom the dece-dent was obligated to support and children who were in factbeing supported by the decedent are entitled to a reasonableallowance in money out of the estate for their maintenance dur-ing the period of administration, which allowance may not con-tinue longer than one year if the estate is inadequate to dis-charge allowed claims. It is payable to the surviving spouse, ifliving, for the use of the surviving spouse and minor and depen-dent children; otherwise to the children, or persons having theircare and custody. If a minor child or dependent child is not liv-ing with the surviving spouse, the allowance may be made par-tially to the child or his or her guardian or other person havingthe child's care and custody, and partially to the spouse, as suchneeds may appear. The family allowance is exempt from and haspriority over all claims except the homestead allowance.B. The family allowance is not chargeable against any benefit orshare passing to the surviving spouse or children by the will ofthe decedent, unless otherwise provided, by intestate successionor by way of election against a will. The death of any personentitled to family allowance terminates the right to allowancesnot yet paid.

Section 5. Exempt Property

In addition to the homestead and family allowances, thedecedent's surviving spouse is entitled from the estate to a value,not exceeding $10,000 in excess of any security interests therein,in household furniture, automobiles, furnishings, appliances, andpersonal effects. If there is no surviving spouse, the decedent'schildren are entitled jointly to the same value. If encumberedchattels are selected and the value in excess of security interests,plus that of other exempt property, is less than $10,000, or if

1995]


there is not $10,000 worth of exempt property in the estate, thespouse or children are entitled to other assets of the estate, ifany, to the extent necessary to make up the $10,000 value.Rights to exempt property and assets needed to make up a defi-ciency of exempt property have priority over all claims againstthe estate, but the right to any assets to make up a deficiency ofexempt property abates as necessary to permit earlier paymentof the homestead allowance and the family allowances. Theserights are in addition to any benefit or share passing to the sur-viving spouse or children by the decedent's will, unless otherwiseprovided, by intestate succession, or by way of electing to takeagainst a will.

Section 6. Selection of Property

If the estate is otherwise sufficient, property specifically de-vised may not be used to satisfy rights to homestead allowanceor exempt property. Subject to this restriction, the survivingspouse, guardians of minor children, or children who are adultsmay select property of the estate as homestead allowance andexempt property. The personal representative may make thoseselections if the surviving spouse, the children, or the guardiansof the minor children are unable or fail to do so within a reason-able time or there is no guardian of a minor child. The personalrepresentative may execute an instrument or deed to distributionto establish the ownership of property taken as homestead allow-ance or exempt property. The personal representative may de-termine the family allowance in a lump sum not exceeding$18,000 or periodic installments not exceeding $1,500 per monthfor one year, and may disburse funds of the estate in payment ofthe family allowance and any part of the homestead allowancepayable in cash. The personal representative or an interestedperson aggrieved by any selection, determination, payment, pro-posed payment, or failure to act under this section may petitionthe court for appropriate relief, which may include a family al-lowance other than that which the personal representative deter-mines or could have determined.

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INHERITANCE LAWS

ARTICLE III

TRANSFER OF TITLE TO DISTRIBUTEE

Section 1. Instrument or Deed

If distribution in kind is made, the personal representativeshall execute an instrument or deed of distribution assigning,transferring or releasing the assets to the distributee as evidenceof the distributee's title to the property.

Section 2. Conclusive Evidence of Title

Proof that a distributee has received an instrument or deed ofdistribution of assets in kind, or payment in distribution, from apersonal representative, is conclusive evidence that the distribu-tee has succeeded to the interest of the estate in the distributedassets, as against all persons interested in the estate, except thatthe personal representative may recover the assets or their valueif the distribution was improper.

ARTICLE IV

DISPENSING WITH ADMINISTRATION

Section 1. Amend KRS Section 395.445(1)

KRS Section 395.455(1) is amended to read:Where the homestead allowance, family allowance and exempt

property of the surviving spouse or children of the deceased,together with the preferred claims paid by any on or more ofthem which are legally binding on them, equals or exceeds theamount of probatable assets, the court may order that adminis-tration of the estate be dispensed with and such assets trans-ferred to the surviving spouse or children as set forth in theprovision governing those allowances and the exempt property.The court may so order in both testate and intestate estates andwithout requiring renunciation of a will or the giving of a bond.

Section 2. Amend KRS Section 395.445(4)

KRS Section 395.455(4) is amended to read:For purposes of this section, the homestead allowance is the

allowance created by Article II, Section 3, the family allowance isthe allowance created by Article II, Section 4, the exempt prop-

1995] 355


erty is created by Article II, Section 5, and preferred claims arethose listed in KRS section 396.095 and in the order thereof.

HOUSE BILL 928: SOLUTION OR BAND-AID FORKENTUCKY WORKERS' COMPENSATION?

by Paul E. Jones*

I. INTRODUCTION

On April 4, 1994, the Kentucky legislature, following the pathstaken by several other states throughout the country, adoptedsweeping changes in its workers' compensation program. Thesechanges cover the entire program and include, among other ar-eas of concern, the administration of the program, the receipt ofbenefits, fraud, and the creation of a competitive state fund. Thelegislation also repealed many judicial decisions which liberal-ized workers' compensation, including Teledyne-Wirz v.Willhite,' Peabody Coal Company v. Gossett,2 Yocom v. Pierce,3

and Eastern Coal Corporation v. Blankenship.4 Osborne v. John-son,5 the leading case on distributing awards in permanent par-tial disability cases where the injured worker returned to workat the same or similar level of compensation, was also modified.

After completing an extensive study of the problems inworkers' compensation in Kentucky, a report prepared by athree-member team6 of the Center for Business and EconomicResearch at the University of Kentucky concluded:

Relatively high and rising costs for medical, hospital, rehabili-tation, and legal services have contributed to the financial trou-bles affecting the workers' compensation program in Kentucky.The basic problem, however, is that Kentucky legislation and caselaw have blurred the line between injuries sustained in the

* Paul E. Jones is a partner in the law firm Baird, Baird, Baird & Jones,P.S.C. in Pikeville, Kentucky. B.A., Eastern Kentucky University; J.D., Salmon P.Chase College of Law, Northern Kentucky University.

1. Teledyne-Wirz v. Wilihite, 710 S.W.2d 858 (Ky. Ct. App. 1986).2. Peabody Coal Co. v. Gossett, 819 S.W.2d 33 (Ky. 1991).3. Yocom v. Pierce, 534 S.W.2d 796 (Ky. 1976).4. Eastern Coal Corp. v. Blankenship, 813 S.W.2d 808 (Ky. 1991).5. Osborne v. Johnson, 432 S.W.2d 800 (Ky. 1968).6. The three research members were: Dr. Charles F. Haywood, National City

Bank Professor of Finance, University of Kentucky; Dr. William Baldwin, AssociateProfessor of Economics, Transylvania University; and Ms. Melanie Arvin, ResearchAssociate, Center for Business and Economic Research, University of Kentucky.

357


workplace and changes in physical condition that result from thenormal aging process. According to the October 1993 report of theWorkers' Compensation Board to the Workers' Compensation Ad-visory Council (entitled "Cost Drivers"), the big increase in injuryclaims has not been due to an increasing frequency of accidentsbut rather a broadening of what is considered a compensable inju-ry. The workers' compensation program in Kentucky appears tohave become more and more a social welfare or entitlements pro-gram.7

This continuing avalanche of claims and indemnity benefitshas left the Special Fund' with $1.8 billion in unfunded liability,which grows daily.9 If left unchecked, it is estimated that theSpecial Fund will have a $3.1 to $3.6 billion deficit by the year2017.10 Due to the impending insolvency of the Special Fund,the lack of an insurance market for employers in Kentucky, andthe run away costs of the program, a push for change in theworkers' compensation laws began in late 1993. Both labor andindustry representatives realized that changes had to occur forthe Commonwealth of Kentucky to remain competitive with itsneighboring states.

The Kentucky House leadership reacted to the cry for reformand created an ad hoc committee to tackle the problems. Thecommittee was asked to cut twenty percent out of the workers'compensation program which cost $800 million each year. Aftermuch debate, a compromise was obtained which made sweepingchanges in the administration, benefit structure, and overallprogram. The compromise bill was amended several times byboth the House and the Senate, and several of the cost-reducingfeatures were eliminated.11 House Bill 928 was signed by Gov-

7. Dr. William Baldwin et al., Workers' Compensation In Kentucky: A System inDistress, A Report by the Center for Business and Economic Research 32 (Feb. 1994)(College of Business Economics, University of Kentucky, Lexington, KY).

8. The Special Fund was established by the General Assembly in 1946 and pro-vides two kinds of indemnity benefits: 1) those resulting from the aggravation ofpreexisting conditions or dormant conditions activated by a subsequent injury; and 2)-compensation for workers disabled by occupational diseases. See id. at 8.

9. Id. at Executive Summary 2.10. Id.11. The House voted to cut off all benefits once a worker reached age 70 while

the Senate voted to pay only 40% of a total for life. The House Bill limited medicalto 115% of Medicaid, and the Senate deleted this and gave the Commissioner a man-date to cut medical costs by 25%. See KY. REV. STAT. ANN. §§ 342.730(4), .035(1)

358

1995] WORKERS' COMPENSATION 359

ernor Jones on April 4, 1994 and became effective immediatelydue to an emergency clause added to the Bill.'2 The new Billcontains several key features which are set forth and discussedin this article.

II. SUMMARY OF KEY CHANGES

A. Re-Definition of Injury as It Relates to Mental Claims

The ultimate problem faced by Kentucky in the workers' com-pensation arena stemmed from the definition of injury and thedetermination of which conditions are, and should be, compensa-ble. In the past, Kentucky courts were liberal in their interpreta-tions of compensable injuries. The result was that even the natu-ral aging process could be found to be compensable under certainconditions.'" Not surprisingly, the number of claims in Ken-tucky has increased significantly over the past seven years. 14

(MichielBobbs-Merrill 1993 & Supp. 1994).12. 1994 Ky. Acts 928.13. Haycraft v. Corhart Refractories Co., 544 S.W.2d 222 (Ky. 1976) (degenerative

disc disease); Stovall v. Dal-Camp, Inc., 669 S.W.2d 531 (Ky. 1984) (heart attack);Henry Vogt Mach. Co. v. Quiggins, 596 S.W.2d 17 (Ky. Ct. App. 1979) (hearing loss);Princess Mfg. Co. v. Jarrell, 465 S.W.2d 45 (Ky. 1971) and Farmers Rural Elec.Coop. Corp. v. Cooper, 715 S.W.2d 478 (Ky. Ct. App. 1986) (allergic reaction); Yocomv. Pierce, 534 S.W.2d 796 (Ky. 1976) (stress); Randall Co. v. Pendland, 770 S.W.2d687 (Ky. Ct. App. 1988) (arthritis); Robinson v. Crider Mining Co., 533 S.W.2d 530(Ky. 1976) (chronic bronchitis).

14.

Kentucky Claims Filed

1988* 1989 1990 1991 1992 1993** 1994**Injury 2,421 3,991 4,863 5,939 6,434 6,994 7,222OD 403 789 824 1,199 1,439 1,702 1,419RIB 8 23 158 948 1,471 2,183 2,335

2,832 4,803 5,845 8,086 9,344 10,879 10,976Reopens 152 210 523 794 868 521 543

2,984 5,013 6,368 8,880 10,212 11,400 11,519

* All claims annualized from May-December 1988 data.**Does not include new categories of "medical only" (514 filed in 1993, 624 filed in

1994) and "medical fee dispute" (1,359 filed in 1994).

Telephone interview with Walt Turner, Commissioner of the Kentucky Workers' Com-pensation Board (Aug. 29, 1994).


Mental and stress-related claims have also increased through-out the United States in the last few years. 5 These claims ariseprimarily when a worker alleges that the pressure of the job hascaused him to suffer a nervous breakdown even though theremay be no injury or traumatic event involved. Stress-relatedclaims are also brought up in sexual harassment suits where aworker alleges he or she has been subjected to a hostile workingenvironment. 6 House Bill 928 does not allow psychiatric andstress-related claims unless they are a direct result of a physicalinjury.1

7

B. Award of Permanent Partial Disability When An Injured WorkerReturns to Work

Under the previous workers' compensation statute, a finding ofoccupational disability in every permanent partial disability casewas required. This allowed some workers who returned to workat the same or higher wages to obtain three to four times theirfunctional impairment rating based upon the nebulous theorythat the injury might result in the loss of some future earnings.For example, under the previous law, a thirty-five year old indi-vidual with a herniated disc who returned to work at the samewages with a fifteen percent functional impairment could receivean impairment rating of up to fifty or sixty percent by an admin-istrative law judge (ALA). This award would cost between$66,300 and $79,500.18

Telephone interview with Walt Turner, Commissioner of the Kentucky Workers' Com-pensation Board (Mar. 1995).

15. Workers' Comp. Rep. 560 (BNA) (Dec. 7, 1992).16. See Meyers v. The Chapman Printing Co., 840 S.W.2d 814 (Ky. 1992); Meritor

Say. Bank v. Vinson, 477 U.S. 57 (1986).17."Injury" means any work-related harmful change in the human organism, aris-ing out of and in the course of employment, including damage to or loss of aprosthetic appliance, but does not include any communicable disease unless therisk of contracting the disease is increased by the nature of the employment."Injury" when used generally, unless the context indicates otherwise, shallinclude an occupational disease, but shall not include a psychological, psychiat-ric, or stress-related change in the human organism, unless it is a direct resultof a physical injury.

KY. REV. STAT. ANN. § 342.0011(1) (MichiefBobbs-Merrill 1993 & Supp. 1994) (empha-sis added).

18. Computing the figures would look like this:

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1995] WORKERS' COMPENSATION

Kentucky Revised Statutes (KRS) section 342.730(b) wasamended to limit the workers' compensation benefits given to aninjured worker who returns to work at the same or higher wagesto his or her functional impairment rating unless the employeecan show a greater occupational impairment. 9 However, even ifgreater occupational impairment can be shown, the injuredworker can receive no more than two times the functional im-pairment rating.2" Applying the amended statute to the workerin the above example, the worker with a fifteen percent impair-ment rating, but who could show a greater occupational impair-ment, would be limited to a maximum cap of thirty percent forhis impairment rating (two times the functional impairmentrating of fifteen percent). The result is a significantly loweraward, ranging from $19,800 and $39,800.

While the above provision limits awards to some extent, thedrafters of House Bill 928 realized that without safeguards em-ployers could hypothetically take advantage of the stricter lawsto the employees' disadvantage. The drafters were concernedthat employers would use the new stricter requirements in the

(50%) - $311.96 x .50 = $155.98 x 425 weeks = $66,291.50

(60%) - $311.96 x .60 = $187.17 x 425 weeks = $79,547.25.19.

For permanent, partial disability, where an employee returns to work at awage equal to or greater than the employee's preinjury wage, sixty-six and two-thirds percent (66-2/3%) of the employee's average weekly wage but not morethan seventy-five percent (75%) of the state average weekly wage as deter-mined by KRS 342.740, multiplied by his percentage of impairment caused bythe injury or occupational disease as determined by "Guides to the Evaluationof Permanent Impairment," American Medical Association, latest edition avail-able, unless the employee establishes a greater percentage of disability as deter-mined under KRS 342.0011(11), in which event the benefits shall not exceed two(2) times the functional impairment rate, for a maximum period, from the datethe disability arises, of four hundred twenty-five (425) weeks subject to theprovisions of subsection (1)(d) of this section. The period of disability under thisparagraph for nonwork-related disabilities shall not extend the maximum periodof disability under this paragraph. Any temporary total disability period withinthe maximum period for permanent, partial disability benefits shall extend themaximum period but shall not make payable a weekly benefit exceeding thatdetermined in subsection (1)(a) of this section. Notwithstanding any section ofthis chapter to the contrary, there shall be no minimum weekly income benefitfor permanent partial disability and medical benefits shall be paid for theduration of the disability.

Ky. REV. STAT. ANN. § 342.730(b) (Michie/Bobbs-Merrill 1993 & Supp. 1994)(emphasis added).

20. Id.


reopening provision to their advantage by rehiring a truly dis-abled worker, limiting his award to a reduced amount, and thenlaying him off within one year. To alleviate this problem KRSsection 342.125 was amended to allow workers in this situationto reopen claims based on occupational disability alone.2'

The injured worker also received a new benefit found in KRSsection 342.730(1)(d). Pursuant to that statute, a worker who isfound to have over fifty percent occupational disability will re-ceive benefits for 520 weeks rather than 425 weeks.22 There-fore, if the original award is for thirty percent and upon reopen-ing an additional thirty percent is awarded, the worker can onlydraw the additional weeks if the motion to reopen is filed within520 weeks of the original award and then only for the durationof the 520 weeks.

C. The Effect on Teledyne

Under Kentucky law, an injured employee who is totally dis-abled due to a work-related injury or occupational disease, otherthan coal workers' pneumoconiosis, receives benefits for life un-der KRS section 342.730(1)(a).23 Any employee who is partiallydisabled receives benefits for 425 weeks under KRS section342.730(1)(b).24 In Teledyne,25 the court held that an employeecould stack non-compensable, non-work related conditions withpartially disabling work-related conditions in order to receivelifetime benefits and escape the 425-week cap.26 The effect was

21. Id. § 342.125.22. Id. § 342.730(1)(d). The statute states:

For permanent, partial disability, if an employee sustains impairment ordisability in excess of fifty percent (50%) as a result of a work-related injuryor occupational disease and prior work-related active disability the compensablepermanent. partial disability period shall then be five hundred twenty (520)weeks from the date the impairment or disability exceeding fifty percent (50%)arises. Nonwork-related impairment or disability and claims under KRS342.732 shall not be considered in determining whether the employee is im-paired or disabled in excess of fifty percent (50%) for purposes of this subsec-tion.

Id.23. Id. § 342.730(1)(a).24. Id. § 342.730(1)(b).25. Teledyne-Wirz v. Willhite, 710 S.W.2d 858 (Ky. Ct. App. 1986).26. Id. at 860.

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WORKERS' COMPENSATION

staggering and effectively changed Kentucky Workers' Compen-sation into a Social Security program.

For example, assume a fifty-year old miner earning $2,000 amonth files a claim for total disability as a result of a back inju-ry in 1987. The miner has a preexisting heart disease which isnot work-related. Testimony reveals that the employee's backinjury is a severe strain with no evidence of disc herniation andis only partially disabling; however, his non-work related heartdisease leaves him disabled and unable to perform his formercoal mine employment. An AIJ enters a fifty percent occupation-al disability award due to the injury and finds a fifty percentdisability due to non-work related heart disease, awarding fiftypercent disability under KRS section 342.730(1)(a) for life. Thedifference between the calculation of benefits under KRS section342.730(1)(a) and (b) is:

KRS section 342.730(1)(a): 1987 total rate - $322.19 with lifeexpectancy of 25.29 years: $322.19 x 50% = $161.10 per week;25.29 x 52 weeks = 1,315 weeks at $161.10 = $211,859.38.

KRS section 342.730(1)(b): 1987 permanent partial rate $241.64x 50% = $120.82 per week; $120.82 x 425 weeks = $51,348.50.

Difference when allowing non-work related, non-compensableinjuries or non-work related physical problems to be stackedwith work related problems = $160,510.88.

The new statute reads:

(1) Except as provided in KRS 342.732, income benefits for dis-ability shall be paid to the employee as follows:

(a) For total disability due to a work-related injury or occupa-tional disease, sixty-six and two-thirds percent (66-2/3%) of theemployee's average weekly wage but not more than one hundredpercent (100%) of the state average weekly wage and not lessthan twenty percent (20%) of the state average weekly wage asdetermined in KRS 342.740 during that disability. Nonwork-relat-ed disability shall not be considered in determining whether theemployee is totally disabled for purposes of this subsection.27

27. KY. REv. STAT. ANN. § 342.730(1) (Michie/Bobbs-Merrill 1993 & Supp. 1994)(emphasis added).

1995]


The new language overrules Teledyne and prevents the occur-rence of the situation illustrated above.

D. Working Miner Retraining IncentiveBenefits (RIBs)

In 1987 the General Assembly created the working minerretraining incentive benefits (RIBs) claim.28 The purpose of thisBill was to give miners with Category 1 pneumoconiosis and noimpairment the opportunity to obtain money and retrain foranother profession outside of the mining industry. The KentuckySupreme Court in Blankenship held that while this was thelegislative intent, the legislature did not specifically requireretraining and, therefore, the court would not order it.29 Thisled to an avalanche of claims.3"

However, under House Bill 928, the working miners must usetheir benefits at an approved retraining facility, and benefits willthen be paid directly to the institution conducting the training.31

28. Id. § 342.732(1)(a).29. Eastern Coal Corp. v. Blankenship, 813 S.W.2d 808, 810 (Ky. 1991).30. These statistics show the number of claims recently filed:

1988 1989 1990 1991 1992 1993 19948 25 158 948 1,471 2,183 2,335

Telephone Interview with Walt Turner, Commissioner of the Kentucky Workers' Com-pensation Board (Mar. 1995).

31. 803 KY. ADMIN. REGS. 25:120 (1994). Ky. REV. STAT. ANN. § 342.732(1)(Michie/Bobbs-Merrill 1993 & Supp. 1994) provides:

(1) Notwithstanding any other provision of this chapter, income benefits andretraining incentive benefits for occupational pneumoconiosis resulting fromexposure to coal dust shall be paid as follows:

(a) If the administrative law judge finds that an employee has a radio-graphic classification of category 1/0, 1/1, or 1/2, based on the latest ILO Inter-national Classification of Radiographics, resulting from exposure to coal dust,which is validated by two (2) X-rays and reports of the X-rays which conformto the standards for X-rays contained in subsection (2) of KRS 342.316, heshall award a one (1) time only retraining incentive benefit which shall be anamount equal to sixty-six and two-thirds percent (66-2/3%) of the employee'saverage weekly wage but not more than seventy-five percent (75%) of the stateaverage weekly wage as determined by KRS 342.740, multiplied by fifty per-

.cent (50%) and shall be payable for a period not to exceed two hundred andeight (208) weeks. These benefits may be paid directly to the employee only ifthe employee is not working in the mining industry in the severance and pro-cessing of coal as defined in KRS 342.0011(23)(a), in which event the one (1)time only retraining incentive benefit awarded under this paragraph may be


Further, on July 29, 1994, the Workers' Compensation Boardheld that the above provision was remedial in nature and, there-fore, applied retroactively to all pending working miner RIBclaims. The Board stated:

We believe the intent of the General Assembly by amendingKRS 342.732(1)(a), considering the frequency of RIB claim filings,and in light of the urging by the Supreme Court in Blankenship,supra, for the Legislature to enact legislation to effectively accom-plish the purpose of encouraging workers in the coal mining in-dustry to be retrained in other areas of vocational opportunitiesafter they contracted the disease of coal workers' pneumoconiosisis obvious. We further believe that from the apparent purpose ofthe 1994 amendment to KRS 342.732(1)(a), it is clear that theamendment was remedial rather than prospectively in nature andapplies to all RIB claims pending on the effective date of theamendment.

We also take note that the General Assembly, in its declarationof emergency, realized the crisis in claim filings and consequentdrain upon the various workers' compensation insurance marketsand further expressed language requiring remedial changes, §105of House Bill 928 states:

Whereas there is a workers' compensation crisis in theCommonwealth; and the projected unfunded liability of theWorkers' Compensation special fund is projected to be ap-proximately two billion dollars ($2,000,000,000.00); and thevoluntary insurance market in the Commonwealth is rapidlydisappearing and approximately fifty percent (50%) of theworkers' compensation insurance market is in the Kentucky

collected semimonthly as provided in KRS 342.040. While the employee isworking in the mining industry in the severance and processing of coal as de-fined in KRS 342.0011(23)(a), and if the employee is enrolled and activelyparticipating in a bona fide training and education program approved underadministrative regulations to be promulgated by the commissioner, benefitsawarded under this paragraph shall be paid directly to the institution conduct-ing the training or education program on a semimonthly basis. The benefitshall not be paid for a period in which the employee ceases to participate inthe program. In no event shall the benefit be paid to the employee while theemployee is working in the mining industry in the severance and processing ofcoal as defined in KRS 342.0011(23)(a), nor shall the employee personally re-ceive any benefits pursuant to this award other than for traveling expenses.When the employee, through no fault of his own, is no longer working in themining industry in the severance or processing of coal as defined in KRS

.342.0011(23)(a), then any remaining benefits shall be paid directly to the em-ployee on the same monthly basis as provided in KRS 342.040.

1995]


Workers' Compensation Insurance Plan (KWCIP), theworkers' compensation residual market mechanism in theCommonwealth; and more than fifty percent (50%) of eachworkers' compensation benefit dollars is attributable to medi-cal costs, an emergency is declared to exist and the provi-sions of this Act shall become effective upon their passageand approval by the Governor.

We conclude that KRS 342.732(1)(a) was amended andenacted to correct the situation, and is remedial in that isdoes not create a new or take away any vested right, butinstead operates in furtherance of the legislative intent toprovide a remedy for those employees of the coal mines whoseek to leave the industry to be retrained for other work. 2

To further complicate the RIBs law, the Kentucky SupremeCourt held in Pikeville Coal Company v. Sullivan33 that once aRIB case is dismissed the plaintiff can refile successive motionsto reopen the dismissal. In Sullivan, the plaintiff filed three RIBcases in two years, and the court stated that while the plaintiffcannot file three new claims he can process motions to reopen atany time.

The Kentucky Court of Appeals recently ruled that a workingminer may file and draw benefits pursuant to KRS section342.732(1)(b) since there is an irrebuttable presumption of dis-ability.34 This interpretation was under the law prior to April 4,1994, and the new law specifically states that "in no event shalla claim be filed [for benefits] under this subsection while theemployee continues to work in the mining industry ....

E. Reopening of Claims

Prior to 1987, a claimant had to establish a: change in func-tional and occupational disability before he could reopen a prioraward. The law was revised on October 27, 1987 to allow a

32. Aero Energy v. Thornsbury, No. 93-35615 (Ky. Workers' Comp. Bd. July 29,1994), affd, No. 94-CA-002036-WC, 1"995 WL 29025 (Ky. Ct. App. Jan. 27, 1995).

33. Pikeville Coal Co. v. Sullivan, No. 94-SC-728-WC, 1995 WL 124080 (Ky. Mar.23, 1995).

34. Shamrock Processing v. Ratliff, No. 93-CA-1339-WC, 1994 WL 470224 (Ky. Ct.App. Aug. 5, 1994). But see Smith v. Leeco, No. 94-SC-563-WC, 1995 WL 63721 (Ky.Feb. 16, 1995).

35. See KY. REV. STAT. ANN. § 342.732(1)(b) (MichielBobbs-Merrill 1993 & Supp.1994).

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claimant to reopen with only a showing of an increase in occupa-tional disability.36 The Kentucky Supreme Court applied thelaw retroactively to all reopenings after that date regardless ofthe date of the prior injury award.37 This liberal standard al-lowed any claimant who filed an old claim and was laid off toreopen the claim and receive additional compensation withoutmedical evidence to support a change of condition.38 The follow-ing statistics reveal the effect of the change in the law:

Reopenings1988- 1521989 - 2101990 -5231991 -7941992 -8681993 -5211994 - 543.39

The new law requires a claimant to prove a change in hismedical condition (functional impairment) and that the change inimpairment has increased his occupational disability.4 °

36. Id. § 342.125 (Michie/Bobbs-Merrill 1993).37. Peabody Coal Co. v. Gossett, 819 S.W.2d 33 (Ky. 1991).38. See Bernard J. Blau, Workers' Compensation in Kentucky, 1991 UK CLE 10-9;

Beale v. Rolley, 777 S.W.2d 921 (Ky. 1989).39. See Baldwin, supra note 7.40. KY. REV. STAT. ANN. § 342.125(1) (MichielBobbs-Merrill 1993 & Supp. 1994)

provides:

(1) In claims where an award or order is entered pursuant to KRS342.730(1)(a) or (1)(b) and upon its own motion or upon the application of anyparty and a showing of change of occupational disability, mistake or fraud, ornewly-discovered evidence, the administrative law judge may at any time re-open and review any award or order, except as provided in subsection (2) ofthis section, ending, diminishing, or increasing the compensation previouslyawarded, within the maximum and minimum provided in this chapter, orchange or revoke his previous order, sending immediately to the parties a copyof his subsequent order or award. In claims where an award or order is en-tered pursuant to KRS 342.730(1)(c) or (d) and upon its own motion or uponthe application of any party and a showing of change of medical condition,mistake, or fraud, or newly-discovered evidence, the administrative law judgemay at any time reopen and review any award or order, except as provided insubsection (2) of this section, ending, diminishing, or increasing the compen-sation previously awarded, within the maximum and minimum provided in thischapter, or the administrative law judge may change or revoke his previous


F. Anti-Stacking of Benefits on Black Lung and Injury Claims

KRS sections 342.730 and 342.732 created different standardsand disability awards for injury and black lung claims. Section342.732 provides irrebuttable presumptions of occupational dis-ability and an ALJ need not make a finding of actual occupation-al disability.4' Thus, a miner with Category 1 coal workers'pneumoconiosis and pulmonary function studies between fifty-five and seventy-nine percent will automatically receive a seven-ty-five percent occupational disability award.42

In contrast, any injury under KRS section 342.730 requires anA.J to make a finding of actual occupational disability.4 Min-ers who quit work file wear and tear and hearing loss claimsunder KRS section 342.730 and black lung -claims under KRSsection 342.732. The Kentucky Supreme Court recently ruled,pursuant to the previous law, that an ALJ may stack these twoawards, even though there is not a finding of actual disabilityunder the black lung claim, and award total disability."

However, House Bill 928 prohibits the stacking of awardsunder sections 342.730 and 342.732. 4

' Thus, the miner who hasTier II benefits at seventy-five percent for coal workers' pneumo-coniosis must prove that the other injury and/or hearing lossunder KRS section 342.730 is totally disabling by itself or thesebenefits will be for 425 or 520 weeks. Consequently, under thenew law, if the worker is awarded benefits pursuant to KRSsection 342.732(1)(b), he will draw seventy-five percent for 425

order, sending immediately to the parties a copy of his subsequent order oraward. Any final award increasing or diminishing benefits shall require ashowing of a change in occupational disability. Reopening and review underthis section shall be had upon notice to the parties and in the same manneras provided for an initial proceeding hereunder but shall not affect the previ-ous order or award as to any sums already paid thereunder. The employershall not suspend the payment of benefits during the pendency of any reopen-ing procedures.41. Id. § 342.732.42. Id. § 342.732(1)(b).43. Id. § 342.730.44. Whittaker v. Kennedy, 883 S.W.2d 489 (Ky. 1994).45. "In no event shall income benefits awarded under paragraphs (a) or (b) of

subsection (1) of this section be stacked or added to income benefits awarded underKRS 342.730 to extend the period of disability." KY. REV. STAT. ANN. § 342.732(4)(Michie/Bobbs-Merrill 1993 & Supp. 1994).

368


weeks.46 If the worker is concurrently awarded sixty percentdisability for an injury, the benefits will offset during the origi-nal 425 weeks and the worker will then draw sixty percent forninety-five weeks.47

G. Tier-Down

Prior to April 4, 1994, total disability benefits were awardedfor the life of the injured worker. 48 Therefore, the average fifty-year old with maximum wages who lived to his life expectancy of75.3 years would receive approximately $547,000 in benefits asshown by the following example: 25.29 years x 52 weeks = 1,315weeks x $415.94 = $546,994.37.

KRS section 342.730 was amended to reduce benefits at agesixty-five by ten percent annually until age seventy and thenallow the claimant to receive forty percent of the originalaward.49 This should provide substantial savings to the SpecialFund.

H. Benefit Freeze

Benefits are tied into the state average weekly wage withinjured workers receiving sixty-six and two-thirds percent oftheir actual wages, not to exceed 100% (seventy-five percent forpartial) of the state average weekly wage.5 ° The state averageweekly wage is re-calculated each year and over the past severalyears has increased by approximately three to five percent. KRSsection 342.143 was amended to freeze the average weekly wage

46. Id. § 342.732(1)(b).47. Id. § 342.730.48. See Pickands Mather & Co. v. Newberg, No. 94-SC-618-WC, 1995 WL 124094

(Ky. March 23, 1995) (holding that where the injured employee outlives his life ex-pectancy the Special Fund is liable for the payment of all benefits).

49. Ky. REV. STAT. ANN. § 342.730(4) (Michie/Bobbs-Merrill 1993 & Supp. 1994)provides:

If the injury or last exposure occurs prior to the employee's sixty-fifth birthday,any income benefits awarded under KRS 342.750, 342.316, 342.732 or thissection shall 'be reduced by ten percent (10%) beginning at age sixty-five (65)and, by ten percent (10%) each year thereafter until and including age seventy(70). Income benefits shall not be reduced beyond the employee's seventiethbirthday.50. Id. §§ 342.730, .740.

1995] 369


for the years 1995 and 1996 and then pick up in 1997 with theaverage weekly wage in effect two years prior.5

I. Fraud

House Bill 928 adopts strong fraud provisions which apply toall participants in the workers' compensation program. KRSsection 342.165 creates a new defense and provides that no com-pensation will be paid to an employee who falsely represents, inwriting, his prior medical history or physical condition if: (a) it isknowingly and willfully done; (b) the employer relied upon thisinformation and it was a factor in hiring; and (c) there was acausal connection between the false information and the inju-ry

52

House Bill 928 also established civil and criminal penalties forfraud and abuse of the system.5' Employers should be awarethat failure to make timely payment without reasonable causemay result in a fine of not less than $100, or more than $1,000for each offense.54

51. Id. § 342.143.Notwithstanding the provisions of this section, KRS 342.140, KRS 342.740, or

any other provisions of this chapter to the contrary, the average weekly wagefor calendar years 1995 and 1996 shall be determined to be no higher thanthe average weekly wage determined by the commissioner to be in effect inthe calendar year of 1994. If the average weekly wage calculated by the com-missioner is determined to be lower than the 1994 calendar year wage, theaverage weekly wage may be lowered as provided by this section. Beginning incalendar year 1997 and annually thereafter, the average weekly wage shall becalculated based upon the state average weekly wage in effect two (2) yearsprior to that calculation.

Id.52. Id. § 342.165. The statute was amended to read:No compensation shall be payable for work-related injuries if the employee atthe time of entering the employment of the employer by whom compensationwould otherwise be payable falsely represents, in writing, his physical conditionor medical history, if all of the following factors are present:

(a) The employee has knowingly and willfully made a false representationas to his physical condition or medical history;

(b) The employer has relied upon the false representation, and this reli-ance was a substantial factor in the hiring; and

(c) There is a causal connection between the false representation and theinjury for which compensation has been claimed.

Id.53. Id. § 342.990.54. Id. § 342.990(8).


J. Medical Costs

Under the previous law, workers' compensation medical costswere covered by a medical fee schedule.55 Medical costs com-prised approximately fifty-four percent of every workers' compen-sation dollar.56 Originally, House Bill 928 limited medical coststo 115% of Medicaid. However, KRS section 342.035(1) requiresthe Commissioner within four to six months to cut the total med-ical costs within the program by twenty-five percent.5 7

K. Managed Care

Currently, employers may contract for managed care withapproved facilities and, for the first time in Kentucky history,they have the ability to control "doctor shopping" and to get theirinjured employees excellent medical care at a reasonable cost.This should allow injured employees to return to the workplacequicker and resolve indemnity problems in the future.58

55. 803 KY. ADMIN. REGS. 25:090 (1994) (repealed July 7, 1994).56. Cost Drivers: Report of Workers' Compensation Board to Workers' Compensa-

tion Advisory Council 3 (Oct. 23, 1993) (available from the Department of Workers'Claims) [hereinafter Workers' Compensation Report].

57. KY. REV. STAT. ANN. § 342.035(1) (MichiefBobbs-Merrill 1993 & Supp. 1994)provides:

Periodically, the commissioner shall promulgate administrative regulations toadopt a schedule of fees for the purpose of ensuring that all fees, charges, andreimbursements under KRS 342.020 and this section shall be fair, current, andreasonable and shall be limited to such charges as are fair, current, and rea-sonable for similar treatment of injured persons in the same community forlike services, where treatment is paid for by general health insurers. In deter-mining what fees are reasonable, the commissioner may also consider the in-creased security of payment afforded by this chapter. On or before November1, 1994, and on July 1 every two (2) years thereafter, the schedule of feescontained in administrative regulations promulgated pursuant to this sectionshall be reviewed and updated, if appropriate. Within ten (10) days of April 4,1994, the commissioner shall execute a contract with an appropriately-qualifiedconsultant pursuant to which each of the following elements Within theworkers' compensation system are evaluated; the methods of health care deliv-ery; quality assurance and utilization mechanisms; type, frequency, and intensi-ty of services; risk management programs; and the schedule of fees containedin administrative regulation. The consultant shall present recommendationsbased on its review to the commissioner no later than sixty (60) days followingexecution of the contract. The commissioner shall consider these recommenda-tions and, not later than thirty (30) days after their receipt, promulgate aregulation which shall be effective on an emergency basis, to effect a twenty-five percent (25%) reduction in the total medical costs within the program.58. The regulations concerning managed care may be found in the September is-


Under this system, the employer must contract with a man-aged care program which has been certified by the Commission-er. 9 Once in place, an injured employee will pick a "gatekeeperphysician" within the plan to be his primary care giver.6" The"gatekeeper" will be allowed to refer the injured employee to spe-cialists if needed.6 An exception to managed care provides thatif an injured employee receives emergency medical care from anon-plan physician, the injured employee may elect to continuetreating with that physician.62 The regulations are silent as tohow long the injured employee may continue to treat with thenon-plan physician. However, it would appear reasonable thatonce the emergency situation is over, the injured employeeshould then be converted into the managed health care plan.Without this the managed care network may have little or novalue. The primary issue of litigation under managed care willbe the definition of emergency medical care and how it applies ina given fact situation.

The regulations may also cover prior injured workers whowere not covered by a plan. Title 803 of the Kentucky Adminis-trative Regulations 25:110E section eight, subsection one statesthat when an employee under continuing care changes the desig-nation of his treating physician, the employee's provider choiceshall be limited to providers under the certified plan and medicalservices shall be furnished pursuant to the managed careplan.63

sue of the Administrative Register of Kentucky, pages 890-92. They became final onFebruary 1, 1995 as codified in 803 KY. ADMIN. REGS. 25:110 (1995).

59. Id.60. Id.61. Id.62.

"Emergency care" means those medical services required for the immedi-ate diagnosis or treatment of a medical condition that if not immediately diag-nosed or treated could lead to serious physical or mental disability or death ormedical services that are immediately necessary to alleviate severe pain."Emergency medical care" does not include follow-up care, except when immedi-ate care is required to avoid serious disability or death.

803 KY. ADMIN. REGS. 25:110E § 1(2) (1994).63.

All employees of an employer for whom a managed care plan has beenapproved by the commissioner shall obtain medical services compensable underKRS Chapter 342 from the certified managed care plan of the employer, exceptfor those injuries, or diseases for which continuing treatment was initiated


L. Creation of a Strong Commissioner

There has been a tremendous push to put one person incharge of the entire workers' compensation system and bringmore accountability to the program. As it stood, workers' com-pensation was fragmented into several departments and agen-cies. House Bill 928 designates a commissioner with extremelybroad regulatory powers which include, inter alia, the power tocut medical costs by twenty-five percent, adopt regulations for anombudsman program, create an alternative dispute resolutionprocedure to curtail litigation, develop a managed care system,conduct independent audits of the program, and adopt practiceparameters for physicians to curtail medical malpracticeclaims.' Since House Bill 928 placed the administration of theprogram under a commissioner, the Workers' CompensationBoard will now have only appellate duties.65

M. State Fund

Approximately twenty-seven other states have some type ofstate fund to insure workers' compensation risks.66 These fundscan be competitive or monopolistic; however, the majority of thestate funds are so new that it is too early to determine actualsuccess. House Bill 928 creates a new state fund entitled TheEmployers Mutual Insurance Authority which is patterned afterNew Mexico's system.67 Initially, the company will be fundedwith $7 million and will begin providing coverage on or beforeSeptember 1, 1995.68

prior to the date the managed care plan for the employer was approved. How-ever, when an employee under continuing care changes the designation oftreating physician, the employee's provider choice shall be limited to providersunder the certified plan and medical services thereafter shall be obtained pur-suant to the managed care plan.

Id. § 8(1).64. See generally KY. REV. STAT. ANN. § 342.260 (Michie/Bobbs-Merrill 1993 &

Supp. 1994).65. See id. § 342.215.66. See LET'S TALK ... WORKERS' COMPENSATION (Kentucky Roll Call, Inc., June

30, 1994).67. N.M. STAT. ANN. §§ 52-9-1 to 52-9-25 (Michie 1994).68. The provisions governing the state fund are found in KY. REV. STAT. ANN.

§§ 342.801-.843 (Michie/Bobbs-Merrill Supp. 1994).

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N. Alternative Dispute Resolution

Due to the fact that litigation is slow and costly, alternativedispute resolution (ADR) has become a popular means of resolv-ing legal disputes. The legislature recognized this and includedan ADR provision in House Bill 928. Under the new law, compa-nies and their employees may opt out of the workers' compensa-tion system and through their collective bargaining agreementsresolve their disputes outside of the workers' compensation are-na.

69

0. Miscellaneous Provisions

Under the prior law, any miner who quit work and filed astate workers' compensation claim for coal workers' pneumoconi-osis was required to file a Federal Black Lung Claim. House Bill928 repealed this requirement."v However, the majority of min-ers still file a federal claim at this time.7'

69. Ky. REV. STAT ANN. § 342.277 provides:

(1) In accordance with administrative regulations promulgated by the commis-sioner, a collective bargaining agreement between an employer and a recog-nized or certified exclusive bargaining representative that contains the follow-ing provisions may be recognized as valid and binding:

(a) An alternative dispute resolution system to supplement, modify, or re-place the provisions of this chapter that relate to the resolution of disputes,and which may include but is not limited to mediation and arbitration, theresults of which may be binding upon the parties;

(b) The use of an agreed list of providers of medical treatment, whichmay be the exclusive source of all medical and related treatment providedunder this chapter;

(c) The use of a limited list of physicians to conduct independent medicalexaminations;

(d) A light duty, modified job, or return-to-work program;(e) A vocational rehabilitation or retraining program; and(f) A twenty-four (24) hour health care coverage plan for medical benefits.

(2) A system of arbitration may provide that the decision of the arbiter issubject to review by an administrative law judge.(3) Notwithstanding the provisions in subsection (1) of this section, no agree-ment shall be recognized as valid and binding that diminishes the rights ofany of the parties under this chapter. Also, no agreement shall be valid andbinding unless it is agreed to by the employer's insurance carrier.70. Id. § 342.800 (Michie/Bobbs-Merrill 1993). This section required a claimant

filing a state claim to file a federal claim as well. House Bill 928 repealed this re-quirement.

71. In 1993, 1,876 federal claims were filed in the Department of Labor's office inPikeville, Kentucky. In 1994, 2,110 federal claims were filed there. Telephone inter-


Attorneys' fees are now capped at $15,000 and working minerRIBs are capped at $750.72 Moreover, the new law makes reha-bilitation available if the parties request it or an ALJ ordersit.' 3 However, unless it is specifically ordered by an AILJ, thissection is not mandatory.74

The Special Fund liability will not exceed fifty percent of in-come benefits in any case other than coal workers' pneumoconio-sis. 7

' The Special Fund assessments will be as follows:

1995: $78,662,062 - all employers$40,000,000 - coal only

1996: $88,006,241 - all employers$40,000,000 - coal only.76

Further, KRS section 342.035(7) provides that a medical pro-vider may not charge more than fifty cents per page forphotocopying.7 Also, there shall be no charge for reviewing re-cords of a medical provider during regular business hours if thereviewer is authorized to do so and has requested a review pur-suant to the Workers' Compensation Act. 8

KRS section 342.180 allows compensation benefits to be as-signed to a court or administratively ordered child support pay-ment.7'9 KRS section 342.185(2) creates a five-year statute oflimitations for filing an AIDS claim with the statute of limita-tions triggered after the injurious exposure to the virus.8"

KRS section 342.275 now requires an AI.J to render his opin-ion within sixty days following a final hearing.8 ' KRS section

view with Willie Looney, Division of Coal Mine Workers' Compensation, Departmentof Labor (Apr. 5, 1995).

72. KY. REV. STAT. ANN. § 342.320 (MichielBobbs-Merrill 1993 & Supp. 1994).73. Id. § 342.710.74. Id.75. Id. § 342.1202(2).76. Id. § 342.122.77. Id. § 342.035(7).78. Id.79. Id. § 342.180.80. Id. § 342.185(2).81. Id. § 342.275.

1995] 375


342.281 provides that the failure to file a petition for reconsider-ation on any issue will not preclude an appeal on that issue.82

Under KRS section 342.329, the Commissioner may establishan ombudsman program which will facilitate the flow of informa-tion between employers, employees and insurance carriers." Atoll free number shall be provided throughout the Common-wealth to insure easy access by all parties to the program. s4

KRS section 342.352 requires the establishment of a pilot twen-ty-four hour coverage program which must be reviewed andapproved by the Commissioner.85

III. AUTHOR'S COMMENTS

House Bill 928 is the first step by the Kentucky legislaturetoward fixing the enormous problems associated with theworkers' compensation program. However, the new law does not'address the primary problem which is the absence of a morenarrow definition of injury. The current definition directly re-lates to the number and frequency of claims; until this ischanged, Kentucky will continue to have a high volume ofclaims.

The definition at this time is "any work related harmfulchange in the human organism.'86 This is too broad and allowsfor compensation for non-work related problems. The definitionmust be tightened to exclude hundreds of non-work related con-ditions. Kentucky should pattern its laws after Virginia's defi-.nition, which excludes gradual injuries and requires a specificaccident to occur which is identifiable by time and place of occur-rence.87 The legislature must also revisit the new changes andmake tough decisions concerning the entire delivery system andthe amount of disability benefits paid to each injured worker.

As stated previously, the legislature debated about what toaward injured workers who returned to work at the same or

82. Id. § 342.281.83. Id. § 342.329 (Michie/Bobbs-Merrill Supp. 1994).84. The toll free numbers are assigned by regions as follows: Central - (800)

554-8601; Eastern - (800) 554-8602; Western - (800) 554-8603; Local - (502) 595-4775.

85. KY. REV. STAT. ANN. § 342.352 (Michie/Bobbs-Merrill Supp. 1994).86. See supra note 17.87. See Workers' Compensation Report, supra note 56, at 13-16. See also VA.

CODE ANN. §§ 65.2-101, -400 (Michie 1991 & Supp. 1994).

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similar wages. There is no question what should be done here. Ifa worker returns to work with no wage loss, he should receivenothing. The law should be amended to state that if a workerreturns to work at the same or similar wages, there is no claimand only a notice of claim is filed. The statute of limitationsshould then be extended to four years, and if the work-relatedproblem causes the injured worker to sustain a future wage lossor becomes disabling to the extent that he is not able to work,then the worker should be allowed to reopen the claim. Thisperiod of time is sufficient for an injury to stabilize and for thedetermination of whether it will cause a problem.

The legislature also discussed the amount of benefits injuredworkers should receive. At the present time the law provides forthe following: an injured worker who sustains an impairmentbetween one and fifty percent receives 425 weeks of benefits; onewho sustains an impairment between fifty and ninety-nine per-cent receives 520 weeks of benefits; and one who is 100% dis-abled receives lifetime benefits subject to the tier-down at agesixty-five. This type of benefit structure is unfair and fails tocompensate those who are truly disabled.-Why should an individ-ual with five percent impairment receive the same number ofweeks as an individual with a fifty percent impairment? A moreequitable system would award more weeks to the injured workerwho has a higher level of impairment. The legislature shouldadopt a system like the one in place in West Virginia, whichawards four weeks for each percentage of disability as long asthe disability is less than permanent and total.88 Thus, if aninjured worker receives a five percent award, he would receivetwenty weeks, while a fifty percent impairment award wouldreceive 200 weeks. Furthermore, all lifetime awards should ceaseat age sixty-five since Social Security starts paying at that timeand the wage loss potential is gone as most workers do not workafter age sixty-five. However, medical benefits should still bepayable over the lifetime of the injured worker.

On the other hand, the Kentucky legislature did a good jobaddressing the problems of occupational lung diseases, particu-larly coal workers' pneumoconiosis, over the last several years.However, the coal industry still faces a problem in that generally

88. W. VA. CODE § 23-4-6 (1994).

1995]


they must still defend both a state and federal claim for pneumo-coniosis. It is unconscionable that an employer must defend twoseparate claims for the same condition. Kentucky should adoptthe Federal Black Lung Program in its entirety so far as benefitsare concerned and apply for primacy under section 922 of theFederal Coal Mine Health and Safety Act to end this burden-some problem. This would allow the truly disabled worker suffer-ing from coal workers' pneumoconiosis to receive an award andstop the double defense and double premiums which coal compa-nies must pay for black lung.

The legislature should also reevaluate the reopening provi-sions of the Act. Under the current law, an individual can file areopening at any time there has been a change of condition.Thus, an individual could receive a minor injury in 1970 andreopen that claim in 1990. The legislature should place a four-year statute of limitations on any reopening since medical condi-tions usually stabilize after a certain period of time and general-ly do not become more disabling.

Furthermore, the Kentucky legislature should also look forways to encourage employers and employees to resolve and settletheir disputes and claims without litigation. The state of Illinoishas adopted a procedure whereby attorneys' fees are tied into theawards above the employer's offer.8 9 Thus, the employer willsubmit a written offer to the plaintiff, and if the worker rejects itand an attorney takes the case, the attorney is allowed onlytwenty percent of the award in excess of the offer previouslymade.90 This seems to accomplish the goal of encouraging par-ties to settle their disputes without litigation.

One of the biggest problems over the years has been the liber-al interpretations by Kentucky courts concerning workers' com-pensation cases. The legislature should give direction to the judi-ciary on how the laws it passes should be interpreted much likethe Arkansas legislature has done. In 1993 the Arkansas legisla-ture passed the following resolution which sent an obvious mes-sage to the courts:

The primary purposes of the workers' compensation laws are topay timely temporary and permanent disability benefits to all

89. ILL. ANN. STAT. ch. 820, para. 310/16a (Smith-Hurd 1993).90. Id.

378


legitimately injured workers who suffer an injury or disease aris-ing out of and in the course of their employment, to pay reason-able and necessary medical expenses resulting therefrom, andthen to return the worker to the workforce; to improve workplacesafety through safety programs; to improve health care deliverythrough use of managed care concepts; to encourage the return towork of injured workers; to deter and punish frauds of agents,brokers, solicitors, employers, and employees relating to procure-ment of workers' compensation coverage or the provision or denialof benefits; to curtail the rise in medical costs associated with theprovision of workers' compensation benefits; and to emphasizethat the workers' compensation system in this state must be re-turned to a state of economic viability. 91

A resolution such as this one by the Kentucky legislature wouldgo a long way toward alleviating the problems associated withcourt interpretation of the supposed legislative intent.

IV. CONCLUSION

Various individuals and groups have attempted to forecastwhat savings, if any, House Bill 928 will accomplish. The Nation-al Council on Compensation Insurance (NCCI) has predicted aten to fifteen percent savings, some members of the House havepredicted savings from twenty to thirty percent, while othershave concluded only five to eight percent savings. Only time willtell whether the changes are enough to accomplish the goal oftwenty percent savings originally requested by House leadership.Regardless, it has become obvious that the problems withworkers' compensation cannot be solved immediately or at anyone time, and undoubtedly these issues will be revisited in manylegislative sessions in the future.

91. "As originally enacted by Acts 1993, No. 796, § 1, this section provided, inpart: 'Any and all case law inconsistent with the purposes set forth herein is specifi-cally annulled."' ARK. CODE ANN. § 11-9-101 (Michie 1987 & Supp. 1993).

1995] 379

THE KENTUCKY HEALTH REFORM ACT

by Julia Field Costich*

Mike Helton "

Despite the best efforts of the Clinton administration and theinput of a host of experts, the 102nd Congress failed to pass ei-ther the Health Security Act of 1994 or the myriad compromiseefforts that sprang up in the later months of the session. Theburden of health care reform has therefore shifted back to thestates, where a great deal of activity was already under way. Amajority of states have undertaken some form of health care sys-tem insurance reform in the past two years. Kentucky thus hasthe advantage of being able to learn from the pioneering effortsin areas such as Washington and Florida, where painful but pro-ductive health reforms generated models of success and failurein the implementation of major changes in the delivery and fund-ing of health care.

The legislative history of House Bill 250 is rather complex andconfusing, characterized by the extensive political maneuveringof legislative and executive branch leaders and a truly astound-ing quantity of proposed amendments.' House Bill 250 was firstintroduced on January 11, 1994, to the House Health and Wel-fare Committee. The committee chairman announced that hewould hold hearings on the bill after the daily adjournment ofthe House. However, these hearings never took place during thefour weeks when the committee, had the bill, and it was votedout on February 18, 1994, with very little discussion.2 TheHouse Rules Committee recommitted the bill to the House Ap-

* Julia Field Costich is an associate in the law firm McBrayer, McGinnis,

Leslie & Kirkland in Lexington, Kentucky. A.B., Duke University; M.P.A., J.D., Uni-versity of Kentucky.

** Mike Helton is the Director of Government Relations at the law firmMcBrayer, McGinnis, Leslie & Kirkland in Frankfort, Kentucky. He attended theUniversity of Louisville.

1. A summary of actions and amendments is found in the LEGISLATIVE RECORD,at 186-91 (April 14-15, 1994).

2. LEGISLATIVE RECORD, at 191 (April 15, 1994).

381


propriations and Revenue (A & R) ,Committee five days later.3 A& R adopted a House Committee Substitute #1 and proceeded towork through a series of committee amendments.4 The amend-ments that were adopted would become the House CommitteeSubstitute #2, which was favorably reported out by A & R on thesame day, February 25, 1994.5 This version was posted for pas-sage on March 1, and forty-one floor amendments were filed forconsideration.6 House Committee Substitute #2 and sixteen ofthe floor amendments were passed fifty-eight to forty-one by theHouse of Representatives and sent to the Senate.'

House Bill 250 as amended went directly to the Senate A & RCommittee, which circulated another substitute.' The committeeheard testimony from health care providers, insurance carriers,and consumers and considered a limited number of amendmentsbefore settling on Senate Committee Substitute #2.' The billwas reported favorably on March 14th and sent to the Senatefloor,' ° where it was passed over for five days as the Senateleadership worked to gain support for its passage. In a patternthat came to characterize the progress of health reform legisla-tion in 1994, eighty-nine floor amendments were filed over thefive-day period." Twenty-five of these amendments were in-cluded in the version of House Bill 250 that passed the Senate asSenate Committee Substitute #2 on March 22, 1994.12

The bill came back to the House on March 23rd for concur-rence with the Senate Committee substitutes, but the Houseexpressed its refusal to concur a week later.13 The bill was thenassigned to a conference committee of House and Senate mem-bers, whose members agreed to request the appointment of a freeconference committee. 14 This committee reported out an amend-

3. Id.4. Id.5. Id.6. Id.7. Id.8. Id.9. Id.

10. Id.11. Id.12. Id.13. Id.14. A free conference committee includes appointees of the Speaker of the House

and the Senate President pro-temporate. It is not bound to accept either the House

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HEALTH REFORM ACT

ed bill to the Senate, which passed it with a vote of twenty tosixteen.15 The House initially rejected the report but then sus-pended the rules on the last day of the legislative session, Fri-'day, April 15th, to reconsider and adopt House Bill 250.16

Governor Jones was disappointed in the watered-down versionof health reform that emerged from this legislative process andinitially refused to sign the bill.17 However, he reconsidered andrelented almost immediately,18 giving rise to one of the moreconfusing moments in recent legislative history. Thus, House Bill250, the Kentucky Health Care Reform Act, became law.

Like President Clinton, Governor Jones made health carereform a major issue in his election campaign; unlike the Presi-dent, the Governor has actually seen some of his aspirationscome to legislative fruition. For several years before he ran forGovernor, Jones chaired the Kentucky Health Care Access Coali-tion, a privately-funded network that facilitated physician volun-teer services to the medically indigent. The Governor's personalexperience with serious injury in a 1992 helicopter crash furtherreinforced what can only be termed a fascination with the healthcare system and its shortcomings.

Despite the compromises and legislative carpentry that struc-tured its final shape, the Kentucky Health Care Reform Actmakes important changes in the administration and delivery ofhealth care to a sizable segment of the state's population. Asummary of its major provisions reveals an underlying policy as-sumption that uniform health benefits, disclosure and analysis ofhealth care delivery practices, and cost containment will enhancethe health status of the Commonwealth as a whole.

I. KENTUCKY HEALTH POLICY BOARD

A. The Key Players

The first five sections of House Bill 250'9 define and describethe activities Of the new Kentucky Health Policy Board (the

or the Senate version of proposed legislation.15. LEGISLATIvE RECORD, at 191 (April 15, 1994).16. Id.17. Id.18. Id.19. 1994 Ky. Acts 512, §§ 1-5, codified as KY. REV. STAT. ANN. §§ 216.2901-.2907

(Michie/Bobbs-Merrill Supp. 1994).

1995] 383


Board). The Board, which occupied a renovated barn onIronworks Pike in Lexington until it relocated to Frankfort inApril 1995, includes five appointed full-time state employees,whose appointment has been confirmed by the Senate.20 Thefirst chairman, Donald B. Clapp, who had held several senioradministrative positions at the University of Kentucky MedicalCenter as well as the main campus, resigned in late November1994 and was replaced by veteran administrator Jack B. Hall.Other appointees are Michael Hammons, a Northern Kentuckylawyer and former hospital board member; Sherry Cooper, aGlasgow attorney and consumer activist; Sister Michael LeoMullaney, former CEO of Lexington's Saint Joseph Hospital anda senior officer in the Sisters of Charity of Nazareth health caresystem; and Beverly Gaines, M.D., a Louisville pediatrician.Clapp, Hall, Cooper, and Hammons meet the statutory criterionthat members "shall be persons who do not hold, and have notheld, any full-time employment with a [health care] facility andwho are not, and have not been licensed providers.,,2' The othertwo board members must be either administrators or licensedproviders with at least five years' experience; 22 Mullaney andGaines meet these criteria. Board members serve staggered,four-year terms.23

B. Duties of the Board

Section 2 of House Bill 250 created the Board as an "indepen-dent agency of state government. 24 This independence is rein-forced by the following two provisions:

(1)The power of the secretary for human resources over plans,proposals, and projects of units in the cabinet does not include thepower to disapprove or modify any decision or determination thatthe board makes under powers specifically delegated by law to theboard.(2)The power of the secretary for human resources to transfer byadministrative regulation, administrative order, or written direc-

20. Id. § 216.2903(2).21. Id.22. Id.23. Id. § 216.2903(3).24. 1994 Ky. Acts 512, § 2, codified as KY. REV. STAT. ANN. § 216.2903(1)


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HEALTH REFORM ACT

tive, any staff, functions, or funds of units in the cabinet does notapply to any staff, function, or funds of the board."

One of the most important ongoing challenges faced by the Boardis to coordinate its efforts with established state agencies in thehealth care arena, notably the Cabinet for Human Resources andthe Department of Insurance.

The Board has a truly awesome array of duties, ranging fromthe development of demonstration projects to the establishmentof a purchasing cooperative, the Kentucky Health PurchasingAlliance.2" In addition to general oversight of the alliance,which has been formed to coordinate the health care purchasingfor large groups of Kentuckians, the Board is required to analyzethe costs and benefits of specific health care interventions27 andto develop recommendations to the 1996 session for implementa-tion and funding of a universal access plan.28 Other mandatoryfunctions include developing standardized claim forms;29 ap-proving certificate of need applications;" ° authorizing pilot pro-jects for twenty-four hour coverage including all forms of pay-ment for health care;3 ' and compiling fee lists for the twenty-five health care services, procedures, or tests most often per-formed by various health care providers in the state, as well asthe fifty prescription drugs most often dispensed. 2 The Board

25. 1994 Ky. Acts 512, § 4, codified as KY. REV. STAT. ANN. § 216.2907(Michie/Bobbs-Merrill Supp. 1994).

26. 1994 Ky. Acts 512, § 3, codified as KY. REV. STAT. ANN. § 216.2905(Michie/Bobbs-Merrill Supp. 1994). The September 15, 1994 Board Agenda lists thefollowing areas of responsibility:

Clapp: Medical education, state employee health plan buy-in, general duties asChairCooper: Certificate of need, pilot programs coordinating Workers' Compensationand health insurance coverage; Medicaid oversightGaines: Minority health needs plan, practice parameters, provider fee disclosure(with Mullaney)Hammons: Health data functions, health purchasing alliancesMullaney: Standard benefit plans, integrated delivery network, provider feedisclosure (with Gaines).27. KY. REV. STAT. ANN. § 216.2905(2) (Michie/Bobbs-Merrill Supp. 1994).28. Id.29. Id. § 216.2905(2)(c).30. Id. § 216.2905(2)(h). See also id. §§ 216B.010-.145 (transferring certificate of

need authority to Health Policy Board and setting out detailed requirements).31. Id. § 2 16 .29 05 (2 )(g). See also id. § 216.2960 (describing pilot project require-

ments).32. Id. § 216.2905(2)(x)-(y). See also id. § 216.2940-.2949 (setting out fee disclo-

1995]


will not manage the day-to-day operations of the Kentucky Med-ical Assistance Program, but it will have oversight responsibilityfor cost containment.33

C. Quality Improvement

The Board is to work with the various licensure boards (medi-cal, dental, nursing, etc.) to develop and recommend clinicalpractice parameters. 4 One important provision in this sectionof the health care legislation states that any provider who fol-lows the practice guidelines is entitled to a legal presumptionthat the provider has met the standard of care in medical mal-practice cases."5 This may be the sole vestige of the tort reformproposals that were part of the original House Bill 250.36

D. Health Data Collection

The Board, as required, adopted regulations by January 1,1995 listing data elements that allow analysis and disseminationof information on "the cost, quality, and outcomes of health ser-vices provided by health facilities and health care providers inthe Commonwealth. 37 In order to determine the total cost perinsured group per month, the Board will collect and analyze dataon various forms of insurance for medical benefits.3" The Boardwill publish annual reports "in understandable language withsufficient explanation to allow consumers to draw meaningfulcomparisons" among providers as to their charges, quality, andoutcomes.39

sure requirements and penalties).33. Id. § 216.2905(5).34. 1994 Ky. Acts 512, § 17, codified as KY. REV. STAT. ANN. § 216B.145

(Michie/Bobbs-Merrill Supp. 1994).35. Id. § 216B.145(2).36. LEGISLATIVE RESEARCH COMMISSION, SUMMARY OF CHANGES TO HOUSE BILL

250 AS CONTAINED IN THE PROPOSED HOUSE COMMITTEE SUBSTITUTE FOR HB 250(Feb. 11, 1994). Part 5 would have established alternative resolution mechanisms formalpractice claims; the Committee. Substitute would have provided for a $500,000damages cap and required expert claim review. Id. at 2-3.


38. Id. § 216.2923(3).39. 1994 Ky. Acts 512, § 10, codified as KY. REV. STAT. ANN. § 216.2929


386

HEALTH REFORM ACT 3

II. KENTUCKY HEALTH PURCHASING ALLIANCE

A.. Definitions

'The alliance is the exclusive entity for the oversight and coor-dination" of members' health care purchasing, through contractswith accountable health plans.4 ° The Alliance is governed byfive directors who "have expertise in business, finance, econom-ics, or health benefits management and shall represent the inter-ests of employers and health care consumers."4 ' However, thesedirectors must never have provided or insured health care direct-ly or as employees.42 Though these provisions combine to re-strict the field of eligible directors to a very select group, theyapparently are intended to protect the alliance against any realor perceived influence by special interests in the health caresector. The Alliance Board is chaired by Sylvia Leach Lovely,executive director of the Kentucky League of Cities. The othernumbers are Carla S. Chance, vice president for administrationof Northern Kentucky University; Janis M. Davis, superinten-dent of the Barbourville Public Schools; Dr. Walter Malone, pas-tor of a Louisville Baptist Church; and Edwin Wilson, humanresources manager for a Western Kentucky manufacturer.

Only "accountable health plans" can contract with the Alliancefor the provision of health care.43 An accountable health plan is"an organization that integrates health care providers and facili-ties and assumes financial risk, in order to provide health careservices to alliance members, and is certified by the alliancepursuant to [Kentucky Revised Statutes (KRS) section] 304.17A-070. ''4 The latter subsection sets out specific eligibility criteriathat are generally similar to requirements for prepaid healthplans in other sections of the insurance code.45 Accountable

40. 1994 Ky. Acts 512, § 47, codified as KY. REV. STAT. ANN. § 304.17A-020(2)(Michie/Bobbs-Merrill Supp. 1994).

41. Id. § 304.17A-020(4).42. Id.43. Id. § 304.17A-020(2).44. KY. REV. STAT. ANN. § 304.17A-010(1) (Michie/Bobbs-Merrill Supp. 1994).45. The criteria include provider licensure, administrative experience, solvency,

utilization and quality management mechanisms, responsive grievance procedures,non-exclusivity for providers (unless they are full-time employees), non-discrimination,and availability of services within thirty miles of enrollees' residence whenever possi-ble. 1994 Ky. Acts 512, § 52, codified as KY. REV. STAT. ANN. § 304.17A-070(2)(a)-(q)(Michie/Bobbs-Merrill Supp. 1994).

1995] 387


health plans are thus a specific manifestation of what generallyare known as integrated delivery systems.

B. Memberships

Alliance members fall into two categories, mandatory andvoluntary. Membership is mandatory for all state employees andis to include: employees of public school districts, colleges, uni-versities, and the justice system; all local government employees;and Medicaid recipients to the extent permitted by law and cov-ered by the benefit package.46 However, a state or local govern-ment employer is only required to provide coverage for individu-als who were covered on the effective date of the Act. Personswho had other coverage on April 1, 1994 that is still effective onJanuary 1, 1996 are not required to become alliance membersuntil their insurance contracts terminate.47 Mandatory mem-bers will enter the plan in two phases: eligible state governmentemployees may become members on July 15, 1995, and othersmust enter by January 1, 1996.48

Voluntary members include individuals, employers or associa-tions of one hundred persons or fewer.49 An employer whoelects voluntary participation and contributes to the cost mustprovide health plan benefits for all full-time and part-time em-ployees on a proportionate basis."0 It is important to rememberthat employer-funded benefit plans are generally exempt fromstate regulation under the Employee Retirement Income Security


47. Id. § 304.17A-010(17)(c).48. Id. § 304.17(a)-(b). Enrollment of Medicaid recipients will only occur if two

conditions are met:a. The Kentucky Health Policy Board determines enrolling Medicaid recipientsin the alliance to be practicable; andb. Necessary waivers are obtained by the Cabinet for Human Resources fromthe Federal Health Care Financing Administration to permit enrolling Medicaidrecipients in the alliance.

Id. § 304.17(a)(7). Medicaid coverage includes items such as transportation anddurable medical equipment that may not be covered under an alliance plan, andenrollment would not cut off these benefits. Id.

49. 1994 Ky. Acts 512, § 46(23), codified as KY. REV. STAT. ANN. § 304.17A-010(23) (Michie/Bobbs-Merrill Supp. 1994).

50. Id. § 304.17A-010(23)(a).

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HEALTH REFORM ACT

Act (ERISA).5' ERISA preemption is frequently cited as a majorstumbling block to the implementation of meaningful healthinsurance reform on the state level because so many employeesare covered under ERISA plans.

Larger employers, who were mandatory participants in theoriginal House Bill 250, are now excluded from either mandatoryor voluntary participation. This means that there still will besignificant opportunities for private insurance contracting out-side the Alliance. However, insurance plans must conform to theAlliance specifications in order to be sold in the state.52

C. Functions of the Alliance

Alliance activities are funded by a portion of annual premiumsfrom approved plans not to exceed 1.5%." The Alliance will:- Negotiate and contract with health plans on price and cover-age, ensuring that members have access to at least one fee-for-service plan;54

• Educate and enroll individuals in qualified health plans;55

" Establish membership criteria for employers; 6

" Administer the risk adjustment process;5 '

" Collect data and prepare a plan performance "report card;5 8

• Monitor and regulate plan marketing procedures; and 9

• Serve as ombudsman for consumer complaints.6 °

51. 29 U.S.C. § 1001 (1988).52. 1994 Ky. Acts 512, § 58, codified as KY. REV. STAT. ANN. § 304.17A-060(2)

(Michie/Bobba-Merrill Supp. 1994).53. 1994 Ky. Acts 512, § 48, codified as KY. REV. STAT. ANN. § 304.17A-030(16)

(Michie/Bobbs.Merrill Supp. 1994). The fee may be increased to a maximum of 3%with Board approval. Id.

54. Id. § 304.17A-030(4)-(5).55. id. § 304.17A-030(2)-(3).56. Id. § 304.17A-030(1).57. Id. § 304.17A-030(17).58. Id. See also KY. REV. STAT. ANN. § 304.17A-070(4) (Michie/Bobbs-Merrill Supp.

1994) (requiring accountable health plans to ensure that their providers report speci-fied data for medical outcomes evaluation).

59. Ky. REV. STAT. ANN. § 304.17A-030(5) (Michie/Bobbs-Merrill Supp. 1994).60. Id. § 304.17A-030(9).

1995] 389


III. INSURANCE REFORMS

The most widely publicized aspect of the health care reformlegislation is the change it brings about in the health insuranceindustry. Not only will the Board define the plans that can beoffered by accountable health plans, but section 59 of the Actforbids insurers from offering any plans other than those thatare approved as standard or supplemental plans.6'

A. Portability

The principle known as "portability," the ability of an insuredperson to remain insured regardless of employment status, isembodied in the first part of section 54, which guarantees renew-ability of health insurance contracts unless the subscriber failsto pay the premiums, commits fraud or misrepresentation, orfails to comply with plan provisions; or the insurer ceases doingbusiness in Kentucky." In the latter case, the insurer mustgive the policyholder one year's notice and may not resume doingbusiness in Kentucky for five years from the date of notice."

B. Preexisting Conditions

Exclusions based on preexisting conditions are strictly limitedto those conditions manifesting themselves within the sixmonths preceding enrollment. 4 Coverage for those conditionscan only be limited during the first six months following enroll-ment. An individual who changes plans is credited for the periodof insurance under the first plan, so long as the first coveragewas continuous to a date within sixty days of the new cover-age.65 This means that an individual with a preexisting condi-tion is not forced to remain with an employer out of fear of losinginsurance coverage. A related provision that appears in the con-text of benefit plan definition forbids exclusion of "any eligibleperson or dependent, who would otherwise be covered under a

61. 1994 Ky. Acts 512, § 59, codified as KY. REV. STAT. ANN. § 304.17A-160(2)(MichiefBobbs-Merrill Supp. 1994).


63. Id. § 304.17A-100(1)(d).64. Id. § 304.17A-100(2).65. Id. § 304.17A-100(2)(b).

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HEALTH REFORM ACT

group health benefit plan, on the basis of an actual or expectedhealth condition of the person.'66

C. "Any Willing Provider" Language

A version of the controversial "any willing provider" languageappears in section 54(3): "Health care benefit plans shall notdiscriminate against any provider who is located within the geo-graphic coverage area of the health benefit plan and is willing tomeet the terms and conditions for participation established bythe health benefit plan."67 The effect of this provision may bemitigated by another provision which appears in the criteria forstandard and supplemental benefit plans in section 59(3): 'Theplans shall include ... selective contracting with hospitals, physi-cians, and other health care providers; reasonable benefit differ-entials applicable to participating and nonparticipating provid-ers; and other managed care provisions."68 Selective contractingwill allow plans to tailor eligibility "terms and conditions" tomeet their needs within the scope of the "any willing provider"mandate. In this context, it is interesting to note that any selec-tive contract is required to include the teaching facilities of thetwo medical schools that are located in the relevant geographicarea.

6 9

D. Benefit Definition

The definition of basic and supplemental benefit plans is ad-dressed in section 59;70 these plans are to become effective onJuly 15, 1995."' The scope of this section is broader than that ofmost other parts of the Act because once the set of five basicbenefit plans and approved supplemental plans is established,

66. 1994 Ky. Acts 512, § 59(2)(e), codified as KY. REV. STAT. ANN. § 304.17A-

160(2)(e) (Michie/Bobbs-Merrill Supp. 1994).67. 1994 Ky. Acts 512, § 54(3), codified as KY. REV. STAT. ANN. § 304.17A-110(3)

(Michie/Bobbs-Merrill Supp. 1994).68. 1994 Ky. Acts 512, § 59(3), codified as KY. REV. STAT. ANN. § 304.17A-160(3)

(Michie/Bobbs-Merrill Supp. 1994).69. 1994 Ky. Acts 512, § 47, codified as KY. REV. STAT. ANN. § 304.17A-020(11)

(Michie/Bobbs-Merrill Supp. 1994).70. 1994 Ky. Acts 512, § 59, codified as KY. REV. STAT. ANN. § 304.17A-160

(Michie/Bobbs-Merrill Supp. 1994).71. Id. § 304.17A-160(1).

3911995]


insurers will be required to issue the basic benefit plans and willbe forbidden from issuing any plans other than those establishedby the Board:

Notwithstanding any other provision of this chapter to the con-trary, on and after July 15, 1995:

(a) No insurer doing business in Kentucky shall issue or renewhealth benefit plans other than the standard health benefit plansestablished by the board and the supplemental plans approved bythe board pursuant to paragraph (c) of this subsection, and any ofthe standard health benefit plans and supplemental plans offeredshall be offered on a guaranteed-issue basis;

(b) Every insurer shall, as a condition of transacting businessin this state, offer and issue the basic health benefit plan on aguarantee-issue basis;

(c) Each insurer may offer supplemental policies that are ap-proved by the board and that are advertised, marketed, and de-signed as a supplement to the standard health benefit plans. Nobenefits paid under the supplemental policies shall duplicate ben-efits paid under the standard health benefit plans.72

Insurers may choose to offer plans to alliance members only, butthey cannot offer different sets of plans to members and non-members.73

Specific provisions mandate the use of-managed care princi-ples, utilization review, and a hospice benefit equal to or exceed-ing those available under Medicare.74 A maximum of five planscan be established by the Board,75 and with the addition of ap-proved supplemental plans, there is the potential for a consider-able variety of options. One of the standard plans is to be a "ba-sic" plan, and another must replicate the coverage under Ken-tucky Kare Standard as of January 1, 1994.76 Each set of bene-fits approved as a plan must be offered both as a traditionalinsurance product and in a managed care format.7 7 A separate

72. Id. § 304.17A-160(2)(a)-(c).73. Id. § 304.17A-160(1)(d). This provision would not impede the ability of ERISA

plans, those self-funded by employers or employer groups, to offer non-standardbenefits because such plans are currently exempt from state regulation. See supranote 51.


75. Id. § 304.17A-160(1).76. Id.77. Id.

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HEALTH REFORM ACT

section requires coverage for "legally adopted children of theinsured or any child for which the insured is a court appointedguardian."78

E. Miscellaneous Criteria for Plan Qualification

Services included in the plan must be available within thirtymiles of the member's residence, or as close as possible if notlocated within the thirty-mile radius.7 9 All plans in the Alliancethat use selective contracting must include university-affiliatedteaching facilities, a group that will expand as community-basedprograms increase.80

F. Rate-Setting

Modified community rating is mandated by section 55 of theHealth Care Reform Act.81 This provision limits the ability ofinsurers to vary rates in relation to projected risks associatedwith specific populations. The only considerations allowed underthe statute are "age, geography, family composition, benefit plandesign, and cost containment provisions, whether or not theproduct is offered through an alliance, and limited discounts forhealth lifestyles. 82 Some leeway is built into this rating systemwith the provision: "Community rates may be established sepa-rately for individuals and employer groups plus public em-ployees."83 However, where age is the determining factor for thedifference in premiums, the statute sets a 300% cap on varia-tions.84 The Kentucky Health Policy Board is mandated to de-velop geographic rating guidelines. 85 A separate provision re-

78. 1994 Ky. Acts 512, § 52, codified as KY. REV. STAT. ANN. § 304.17A-140(MichiefBobbs-Merrill Supp. 1994).

79. Id. 99 304.17A-140, .17A-070(2)(q).80. 1994 Ky. Acts 512, § 47, codified as KY. REV. STAT. ANN. § 304.17A-020(11)

(MichiefBobbs-Merrill Supp. 1994). See also 1994 Ky. Acts 512, §68, codified as KY.REV. STAT. ANN. 99 164.900-.915 (Michie/Bobbs-Merrill Supp. 1994) (creating Ken-tucky Health Service at the University of Kentucky and University of Louisvillemedical schools).

81. 1994 Ky. Acts 512, § 55, codified as KY. REV. STAT. ANN. § 304.17A-120(Michie/Bobbs-Merrill Supp. 1994).

82. Id. § 304.17A-120(1).83. Id.84. Id. § 304.17A-120(2).85. Id. § 304.17A-120(3).

3931995]


quires the Board to promulgate administrative regulations ad-dressing risk adjustment. 86

Unfair insurance trade practices are an active field for bothstate regulation and litigation. In addition to the unfair practicesbanned by existing statutes,8 7 the Health Care Reform Act pro-hibits agents, brokers, and others who sell health insurance fromdiscouraging applicants based on "the individual's or group'shealth status, claims experience, industry, occupation, or geo-graphic location."8 The Act bans an employer from excludingspecific employees from its health benefit plan89 and, likewise,forbids rewards to insurance sellers for selling insurance togroups with lower risks.9 °

In a significant change from past practices, carriers are re-quired to receive approval from the insurance commissionerbefore raising premium rates until July 1, 1996 when the Act'srate-setting mechanisms take full effect.9' A hearing must beheld within sixty days of filing for a premium increase, and adecision must be issued within thirty days of the hearing.92 Theintent of this provision is to impede insurers' ability to raiserates in anticipation of the new risk adjustment and enrollmentrequirements.

G. Twenty-Four Hour Coverage Projects

Twenty-four hour health coverage combines health insurancewith medical benefits provided under motor vehicle and workers'compensation programs.93 Pilot projects are being developed bythe Board to include up to five percent of Kentuckians who haveboth workers' compensation and health insurance.94 Despite theappeal of such programs and the fact that similar projects have

86. 1994 Ky. Acts 512, § 56, codified as KY. REV. STAT. ANN. § 304.17A-130(Michie/Bobbs-Merrill Supp. 1994).

87. See Ky. REV. STAT. ANN. § 304.12-120 (Michie/Bobbs-Merrill 1988).88. Id. § 304.17A-150(1)(a) (Michie/Bobbs-Merrill Supp. 1994).89. Id. § 304.17A-150(1)(c).90. Id. § 304.17A-150(2).91. 1994 Ky. Acts 512, § 56, iodified as KY. REV. STAT. ANN. § 304.18-023(1)-(2)

(MichielBobbs-Merrill Supp. 1994).92. Id. § 304.18-023(2).93. 1994 Ky. Acts 512, § 19, codified as KY. REV. STAT. ANN. § 216.2960(1)

(Michie/Bobbs-Merrill Supp. 1994).94. Id.

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HEALTH REFORM ACT

been undertaken in other states, there are serious obstacles tofull implementation of twenty-four hour coverage. The statuteimplicitly acknowledges the potential complexity of such policiesin stating:

If an employer obtains a twenty-four (24) hour health insurancepolicy, pursuant to this section, to secure payment of compensa-tion for medical care and treatment under KRS Chapter 342 [theworkers' compensation statute], the employer shall also procurean insurance policy which shall provide indemnity benefits toensure that the total coverage afforded by both the twenty-four(24) hour insurance policy and the policy providing indemnitybenefits, shall provide the total compensation required by KRSChapter 342."5

In other words, the twenty-four hour policy would not be compre-hensive and employers would still have to carry some form ofsupplemental workers' compensation insurance, albeit at a re-duced premium.96

IV. PROVISIONS FOR INDIVIDUAL PROVIDERS

A. Fee Disclosure

Part 3, sections 11 to 16 of the Health Care Reform Act man-date the disclosure of provider fees.97 The stated purpose of thedisclosure requirement is to encourage competitive health carepricing through increased public awareness of differences infees.98 Fees for the twenty-five services or procedures most fre-quently performed and the fifty prescription drugs most fre-quently dispensed as identified by the Board must be posted byproviders.99 No health care provider may charge or receive pay-ment over the maximum amount quoted. 100 Every person hasthe right to information about fees and insurance payments toproviders from HMOs or accountable health plans.10'

95. Id. § 216.2960(5).96. See id. § 216.2960(4) (requiring such a premium reduction subject to approval

by the Department of Insurance).97. 1994 Ky. Acts 512, §§ 11-16, codified as KY. REV. STAT. ANN. §§ 216.2940-

.2949 (Michie/Bobbs-Merrill Supp. 1994).98. KY. REV. STAT. ANN. § 216.2940 (MichieiBobbs-Merrill Supp. 1994).99. Id. § 216.2945. The Board announced the proposed fee schedule lists at its

October 1994 meetings.100. Id. § 216.2943.101. Id. § 216.2949. There are several fundamental flaws in the fee disclosure

1995] 395


B. Self-Referral and Anti-Kickback Provisions

Part 5 is entitled "Self-Referral Restrictions,' ' 1 2 but actuallyfollows the Medicare anti-kickback laws 10 3 rather than the"Stark" self-referral bans.'0 4 As under federal law, Kentuckylaw dictates that no provider may knowingly receive a bribe,kickback, or rebate for furnishing benefits in return for goods orservices, or receive a payment or fee for referring a patient to an-other provider.0 5 Like the federal law, Kentucky's criminalstatute states: "Any person who violates section (1) or (2) of thissection shall be guilty of a Class A misdemeanor unless the com-bination or aggregation of offenses is valued at three hundreddollars ($300) or more, in which case it shall be a class D felo-ny."'1

0 6

There are a number of exemptions and safe harbors under thefederal self-referral and anti-kickback laws and these protectionsare extended by reference in the new statute.' By making the

system. The health care consumer will only see one set of posted fees at a time, andis often ill-equipped to compare providers on a price basis. For example, an individu-al transported to a hospital emergency room is most unlikely to request transfer to adifferent facility based on posted charges, even if he or she can remember what wasposted at another hospital. The other obvious problem with posted fees is that veryfew health care consumers actually pay directly for their care at the time it is ren-dered, and the posted rates are likely to be higher than negotiated rates under thecoverage of accountable health plans through the alliance. The only providers forwhom posted rates may be meaningful are those whose services are not covered byhealth insurance, such as pharmacies.


103. 42 U.S.C. § 1320a-7b(b) (1988 & Supp. V 1993).104. Id. § 1395nn. The self-referral law, known as "Stark II" because of its princi-

pal sponsor Fortney "Pete" Stark, D-CA, differs from the anti-kickback law in severalimportant respects. It applies only to physicians, it does not require the governmentto prove intent, and its penalties are civil rather than criminal. The scope of StarkII is broader than that of the anti-kickback law in that it bans most referrals toentities in which the referring physician has an ownership interest, while the anti-kickback law bans referrals in exchange for some type of compensation. Although theanti-kickback law may be construed to include self-referrals, it has generally beenapplied to situations in which the referring individual was compensated by anotherparty. See, e.g., Polk County v. Peters, 800 F. Supp. 1451 (E.D. Tex. 1992); Vana v.Vista Hosp. Sys., Inc., 1993 WL 597402 (Cal. App. Dep't Super. Ct. Nov. 15, 1993).

105. KY. REV. STAT. ANN. § 216.2950(1)-(2) (MichiefBobbs-Merrill Supp. 1994).106. Id. § 216.2950(3).107. See id. § 216.2950(2)(b), which provides:

1995] HEALTH REFORM ACT 397

state law similar to federal law, much of which has not yet takenshape, the drafters of this statute avoided the need for futureupdates and amendments. However, this strategy places a signif-icant burden on the practitioner who risks both state and federalsanctions in this complex and rapidly evolving field.

C. Certificates of Need

The Health Policy Board now has authority over certificates ofneed (CON), °8 which have been expanded to include physicianoffice medical equipment expenditures of $500,000 or more,'0 9

and the purchase of medical laboratory equipment."0 Applica-tions for CON's must be consistent with the state healthplan,"' and will be reviewed biennially for compliance with theterms of the CON,112 subject to biennial budget authorizationsand limitations."' Regulations establishing criteria and proce-dures for CON review are expressly brought under the provisionsof KRS chapter 13A, which prescribes the administrative rule-

Any conduct or activity which does not violate or which is protectedunder the provisions of 42 U.S.C. sec. 1395nn or 42 U.S.C. sec. 1320A-7B(b),as amended, or federal regulations promulgated under those statutes, shall notbe deemed to violate the provisions of this section and the conduct or activityshall be accorded the same protections allowed under federal law and regula-tion.

108. 1994 Ky. Acts 512, § 22, amending KY. REV. STAT. ANN. § 216B.010(MichiefBobbs-Merrill Supp. 1994). From April 1992 until the Health Care ReformAct became effective on July 15, 1994, certificate of need authority vested in theInterim Office for Health Planning and Certification, pursuant to Executive Order 92-311. Subsequent executive orders renewed the status of the Interim Office, suspendedthe state health plan, and extended a moratorium on most new health care facilitiesand services. See Executive Orders 92-419, 93-505, 94-540.

109. 1994 Ky. Acts 512, § 23(3), amending KY. REV. STAT. ANN. § 216B.015(3)(Michie/Bobbs-Merrill Supp. 1994).

110. Id. § 216B.015(12). The amendment deletes language exempting "medicalequipment acquired by or on behalf of a medical laboratory." See KY. REV. STAT.ANN. § 216B.015(13) (Michie/Bobbs-Merrill 1991).

111. KY. REV. STAT. ANN. § 216B.040(3)(a)(2)(A) (Michie/Bobbs-Merrill 1991 &Supp. 1994) (retaining language from previous KY. REV. STAT. ANN. § 216B.040(3)(Michie/Bobbs-Merrill 1991)). See also id. § 216B.015(19): "'State health plan' meansthe document was prepared, under the direction of the [Kentucky Health Policy]board triennially, updated annually, and approved by the Governor." As previouslynoted, the state health plan was suspended in 1992, and no plan was in effect whenthe Board took over planning authority.

112. 1994 Ky. Acts 512, § 26, amending KY. REV. STAT. ANN. § 216.040(3)(Michie/Bobbs-Merrill Supp. 1994).

113. Id. § 216.040(2)(a)(2)(A).


making process." 4 The Board is also given authority to "estab-lish a mechanism for biennial review of projects for compliancewith the terms of the certificate of need.""' 5 The balance of theformal CON review process remains the same.

Nonsubstantive review is an expedited form of CON procedurethat is available for certain types of applications that have longbeen considered to pose little threat of "proliferation of unneces-sary health care facilities, health services and major medicalequipment."'

16 In the nonsubstantive review provision of the

Health Care Reform Act, the CON authority is no longer re-quired to approve nonsubstantively reviewed applications thatare required to meet the specific needs; the amended provisionstates that the Board "may approve" applications that are other-wise in compliance with the statutory criteria." 7

Nonsubstantive status is thus no longer a guarantee of CONapproval.

D. Provider Tax

There are some changes and clarifications in the new legisla-tion regarding the tax on health care facilities and providers." 8

One important feature that has not changed is the identificationof taxable "health care items or services," which are limited tothe eight original federally approved categories: hospitals' inpa-tient and outpatient services, nursing facilities, intermediatecare facilities for the mentally retarded, physicians, HMOs, homehealth agencies, and outpatient prescription drugs."9 Efforts to

114. Id. § 216B.040(2)(a). Cf. KY. REV. STAT. ANN. § 216B.040(2)(a) (Michie/Bobbs-Merrill 1991) (not expressly requiring compliance with Chapter 13A).

115. 1994 Ky. Acts 512, § 26, amending KY. REV. STAT. ANN. § 216B.040(3)(f)(Michie/Bobbs-Merrill Supp. 1994).

116. This is the justification for the certification and licensure process set out inKy. REV. STAT. ANN. § 216B.010; the language is not changed in the Health CareReform Act. See 1994 Ky. Acts 512, § 22. Non-substantive review became a majorfunction of the Interim Office for Health Planning and Certification under the mora-torium on new health facilities and services because it was one of the few mecha-nisms by which a new entity could enter the market. See supra note 108.

117. 1994 Ky. Acts 512, § 39, amending KY. REV. STAT. ANN. § 216B.095(3)(Michie/Bobbs-Merrill Supp. 1994).

118. 1994 Ky. Acts 512, §§ 96-113, codified as KY. REV. STAT. ANN. §§ 142.301-.359 (Michie/Bobbs-Merrill Supp. 1994).

119. 1994 Ky. Acts 512, § 96(6), codified as KY. REV. STAT. ANN. § 142.301(6)(Michie/Bobbs-Merrill Supp. 1994).

398

HEALTH REFORM ACT

expand the list to include such providers as dentists, chiroprac-tors, nurses, physical therapists, and optometrists met with ve-hement opposition and technical difficulties in 1993.

Because providers are taxed on "gross revenues," the definitionof that term is important. The following are excluded from grosstaxable income: payments made by a taxable employing or con-tracting provider to an employee or independent contractor forproviding health-related items or services; payments made byfederal facilities (e.g., VA hospitals); grants and donations thatfund research or experimentation; payments made by state orlocal government entities; payments made by public universitystudent health facilities; and those of charitable providers (e.g.,Shriners Hospital). 2 ° "Amounts received by an HMO on afixed, prepayment basis as premium payments" are also exemptfrom taxation.' 2'

E. Medical Records

Health care providers now must make one copy of a patient'smedical record available, free of charge, upon request by thepatient or an authorized representative.'22 A charge for a sec-ond copy may be no more than one dollar per page. 2 3 A longlegal tradition holds that because medical records are the proper-ty of an institution or other health care provider, they need notbe released unless they are subpoenaed, though these recordsnormally are released. Not only does this new law require re-lease, but it also places the burden of copying costs on the insti-tutional or individual provider without any means of recoupingthese costs.

F. Restrictive Covenants

Section 118 of the Health Care Reform Act makes a significantchange in health care contract law by voiding as against publicpolicy all covenants restricting competition that extend for oneyear or longer after the severance of "any relationship between

120. Id. § 142.301(5).121. Id. § 142.301(5)(e).122. 1994 Ky. Acts 512, § 117, codified as KY. REV. STAT. ANN. § 422.317

(Michie/Bobbs-Merrill Supp. 1994).123. Id.

1995] 399


the health care providers. 124 In the past covenants not to com-pete have been upheld so long as they were reasonable in scopeand duration.'25 While this provision may be necessary to allowfor the kind of selective contracting required in benefit plans, itwill require many Kentucky physicians to revise their contracts.

IV. MEDICAL EDUCATION REFORM

Sections 68 to 71 of the Health Care Reform Act will affecthealth education programs across the state. Section 68 creates a"Kentucky Health Service" at the state's two medical schoolswhich will develop six community-based family practice residen-cies outside the Lexington and Louisville areas (one per congres-sional district) and provide funding to medical students andresidents who commit to practicing primary care in under-servedareas.'26 Residency positions are to be added in "primary carespecialties," a term defined to include specialties that the Boarddeems to be in short supply even if they fall outside the custom-ary definition of "primary care. ' In addition, an interestingprovision in section 70 defines a "generalist physician" as onewho, in essence, practices as a primary care physician regardlessof training.'28 This is important because of fee enhancementsavailable to generalist physicians who practice in under-servedareas. 1

29

Various administrative and support services are to be integrat-ed into the primary care training programs, including a telecom-munications network that will reach allied health professionalcommunity-based training sites. 3 ° In contrast, the non-prima-ry care residency positions at the two medical schools are to be"capped at the 1994 level."'31 To fund these endeavors, the


125. See, e.g., Hodges v. Todd, 698 S.W.2d 317 (Ky. Ct. App. 1985) ("Courts in thisand other jurisdictions have consistently upheld noncompetition restrictions if theyare reasonable and not in restraint of trade.").

126. 1994 Ky. Acts 512, § 68, codified as KY. REv. STAT. ANN. § 164.900(Michie/Bobbs-Merrill Supp. 1994).

127. Id. § 164.900(8).128. Ky. REV. STAT. ANN. § 164.904(13) (MichielBobbs-Merrill Supp. 1994).129. Id. § 164.904(16).130. 1994 Ky. Acts 512, § 68(5), (10), codified as KY. REV. STAT. ANN.

§ 164.900(5), (10) (Michie/Bobbs-Merrill Supp. 1994).131. Id. § 164.900(9).

400

HEALTH REFORM ACT

medical schools are to submit requests to the Health Care Fi-nancing Administration to allow reallocation of Medicare gradu-ate medical education funding.132

The Health Care Reform Act is particularly concerned withenhancing minority student recruitment to health care profes-sions and assessing service needs for minority populations. 133

With regard to the development of allied health professionaltraining programs, the supply of "physician extenders," definedas advanced registered nurse practitioners, nurse midwives, andphysician assistants, will be increased by establishing five addi-tional training sites so that 160 students will graduate annual-ly."" An intriguing provision requires the preparation of a planto be presented to the 1996 General Assembly for cross-disciplin-ary training of clinical laboratory technicians with radiologytechnicians, and physical therapists with occupational thera-pists.

13 5

In another part of the bill, section 115 establishes a loan re-payment program for primary care professionals who serve infederally designated health professional shortage areas.'36 Thisprogram would be funded by state and federal governments aswell as the locality where the individual practices. 1'3 One tothree model programs of care for the frail elderly are to be estab-lished under the federal Program of All-Inclusive Care for theElderly (PACE) program, with appropriate Medicaid waivers. 38

V. MEDICAID

The Health Care Reform Act contains a variety of initiatives tomake Medicaid more efficient and effective. Among these mea-sures are more closely controlling emergency room usage;139

132. Id. § 164.900(12).133. Ky. REV. STAT. ANN. §H 164.902, .904(1)-(5) (Michie/Bobbs-Merrill Supp. 1994).134. 1994 Ky. Acts 512, § 70(7)-(8), codified as KY. REV. STAT. ANN. § 164.904(7)-

(8) (Michie/Bobbs-Merrill Supp. 1994).135. 1994 Ky. Acts 512, § 70(6), codified as KY. REV. STAT. ANN. § 164.904(6)

(Michie/Bobbs-Merrill Supp. 1994).136. 1994 Ky. Acts 512, § 115, codified as KY. REV. STAT. ANN. § 211.165

(Michie/Bobbs-Merrill Supp. 1994).137. Id. § 211.165(5).138. 1994 Ky. Acts 512, § 116, codified as KY. REV. STAT. ANN. § 205.6338

(Michie/Bobbs-Merrill Supp. 1994).139. 1994 Ky. Acts 512, § 72, codified as KY. REv. STAT. ANN. § 205.6310


1995]


requiring nominal co-payments from some Medicaid recipi-ents;14° evaluating reimbursement for emergency transporta-tion;..' tightening oversight of pharmacy practices;".2

strengthening managed care under the Kentucky Patient Careand Access System (KenPAC);" 3 developing standards forHMO service to Medicaid clients;144 avoiding the sheltering ofassets to qualify for Medicaid;1 45 reviewing reimbursementsystems; 146 improving data management and oversight;14

and developing a computerized "smart card" for tracking Medic-aid utilization."

48

One of the most innovative provisions of the Act is the dis-count option program, which allows persons whose incomes fallbelow 200% of federal poverty guidelines are allowed to buy allbenefits other than long term care at Medicaid rates."19 Provid-ers who participate in Medicaid must be participating physiciansfor these elective Medicaid clients. 50 The implications of thispart of the Health Care Reform Act include establishing a certifi-cation system that generates eligibility information for income-eligible patients.

An expansion of the existing KenPAC into rural areas is to befollowed by a system of partnerships with managed care organi-zations to serve Medicaid clients.' 5 ' A request for information

140. 1994 Ky. Acts 512, § 73, codified as(MichieiBobbs-Merrill Supp. 1994).

141. 1994 Ky. Acts 512, § 74, codified as(Michie/Bobbs-Merrill Supp. 1994).



144. Id. § 205.6320(2).145. 1994 Ky. Acts 512, § 78, codified as

(Michie/Bobbs-Merrill Supp. 1994).146. 1994 Ky. Acts 512, § 80, codified as




(Michie/Bobbs-Merrill Supp. 1994).150. Id. § 205.6330(2).151. 1994 Ky. Acts 512, § 77, codified as


KY. REV. STAT. ANN. § 205.6312










402

HEALTH REFORM ACT

was publicized to all Medicaid providers in early October; feed-back from this process could lead to the development of a requestfor proposals. Simultaneously, the Cabinet may apply to theHealth Care Financing Administration (HCFA) for a waiver ofstandard Medicaid requirements under the provisions of section1115 of the Social Security Act, 15 2 which authorizes managedcare demonstrations to evaluate the cost-effectiveness of specificmanaged care interventions.

VI. CONCLUSION

House Bill 250 is interesting for what it leaves out as well aswhat it includes. The goal of universal health insurance cover-age, whether via employer mandate or otherwise, has not beenrealized, though access has been expanded broadly. The exten-sion of Medicaid benefits to some 200,000 new recipients was re-jected by the General Assembly, but substantial reforms in theMedicaid system should improve coverage.'53 Many importantelements of the Governor's initial proposal succumbed to thelegislative process. The Health Policy Board, for example, wouldhave had power to set fee schedules and insurance premiumrates. Large and small employers would have been eligible forvoluntary membership, and insurance would have been subsi-dized for some needy subscribers. Tort reform, also a priority ofthe Governor in his initial proposals, has fallen by the wayside.At one point, Governor Jones would have increased the providertax to six percent; now it remains at the existing level. Yet, keyelements such as portability, limits on preexisting condition ex-clusions, and standard benefits packages remain in the finalversion.

The Board has a massive task ahead in implementing theambitious legislative mandate of House Bill 250. Some of itsmost formidable challenges will arise from the very tightschedule imposed for the most significant elements of the stat-ute, most notably implementation of insurance reforms. Legalchallenges have already arisen from the health care providersaid insurance carriers, whose practices are dramatically altered

152. 42 USC § 1396n(b) (1988 & Supp. V 1993). The waiver request is mandatedby 1994 Ky. Acts 512, § 84, codified as KY. REV. STAT. ANN. § 205.6334(Michie/Bobbs-Merrill Supp. 1994).

153. See supra notes 137-42.

1995] 403


by the new law. Much of the ultimate fate of these initiativeswill depend upon the ability of the emerging health care struc-tures and functions to establish positions in the political arenathat are strong enough to endure beyond the close of the Jonesadministration.

KENTUCKY DIVISION, HORSEMEN'S BENEVOLENT &PROTECTIVE ASSOCIATION, INC. V. TURFWAY PARK

RACING ASSOCIATION, INC.:CONTROLLING THE STAKES OF KENTUCKY

HORSERACING

by Susan Zeller Dunn*

I. INTRODUCTION

On September 14, 1993, Judge William O. Bertelsman of theUnited States District Court for the Eastern District of Ken-tucky1 ruled that the Interstate Horseracing Act of 19782 wasunconstitutional.3 This ruling, while limited in scope, created"intense discussion throughout the [horseracing] industry."4 Itwas not the power of this decision that disturbed many in theindustry, but its impact as legal precedent.5 At no time in thefifteen year history of the IHA had its constitutionality beenovertly challenged in court. However, this decision would notstand.

Seven months later, on April 6, 1994, the United States Courtof Appeals for the Sixth Circuit overruled the district court'sopinion' and upheld the constitutionality of the InterstateHorseracing Act of 1978.' In making such a decision, the SixthCircuit sanctioned the use of the IHA as a powerful bargainingchip in contract negotiations.

* Susan Zeller Dunn practices law in Milford, Ohio and is a member of the

adjunct faculty at Salmon P. Chase College of Law, Northern Kentucky University.B.S., Miami University, Oxford, Ohio; J.D., Salmon P. Chase College of Law,Northern Kentucky University.

1. Covington Division.2. Interstate Horseracing Act of 1978, Pub. L. No. 95-515, 92 Stat. 1811 (cod-

ified at 15 U.S.C. §§ 3001-3007 (1988)).3. Kentucky Div., Horsemen's Benevolent & Protective Ass'n, Inc. v. Turfway

Park Racing, 832 F. Supp. 1097 (E.D. Ky. 1993), rev'd, 20 F.3d 1406 (6th Cir. 1994).4. Ron Indrisano, Legal Picture Has Changed; Kentucky Ruling a Signal the

Simulcast Law Needs Overhaul; At the Races, BOSTON GLOBE, Sept. 26, 1993, at 101.5. Id.6. Kentucky Div., Horsemen's Benevolent & Protective Ass'n, Inc. v. Turfway

Park Racing Ass'n, Inc., 20 F.3d 1406 (6th Cir. 1994).7. Id. at 1408.

405


At the heart of this conflict lay a dispute over purse money.The horsemen, represented by the Kentucky Division of theHorsemen's Benevolent & Protective Association (KHBPA) andthe Kentucky Thoroughbred Association (KTA), during negotia-tions with Turfway Park, demanded a greater share of the intra-state off-track betting revenues for its membership.8 WhenTurfway refused to give them what they wanted, the horsementurned to the Interstate Horseracing Act of 1978 for leverage. 9

This article addresses the dispute between Turfway Park andits horsemen, as well as the impact of these cases on a statutethat is very important to Kentucky's horseracing industry - theInterstate Horseracing Act of 1978.10

A. The Business of Interstate Off-TrackWagering

During the 1970s, a very profitable new business developedwithin the United States horseracing industry:11 interstate off-track betting.12 In cities, and more specifically, at many race-tracks themselves, off-track betting parlors were springing upwhere patrons could engage in legal interstate off-track wageringon horseraces.13,

An interstate off-track wager occurs when a bet is "placed oraccepted in one State with respect to the outcome of a horseracetaking place in another State."14 For example, Track A mightaccept wagers on horseraces scheduled to be run at Track Bmany miles away in another state.

[E]mploying telephone and wire linkages, [Track A] effectivelyplaces these wagers in [Track B] the host track's parimutuel 5

8. Kentucky Div., Horsemen's Benevolent & Protective Ass'n, Inc. v. TurfwayPark Racing, 832 F. Supp. 1097, 1099 (E.D. Ky. 1993), rev'd, 20 F.3d 1406 (6th Cir.1994).

9. Id.10. 15 U.S.C. §§ 3001-3007 (1988).11. See generally S. REP. No. 1117, 95th Cong., 2d Sess. (1978), reprinted in 1978

U.S.C.C.A.N. 4144 (Senate Judiciary Committee Report on S. 1185).12. Id.13. Id.14. 15 U.S.C. § 3002(3) (1988).15. "Parimutuel" is defined in the IHA as "any system whereby wagers with re-

spect to the outcome of a horserace are placed with, or in, a wagering pool conduct-ed by a person licensed or otherwise permitted to do so under State law, and inwhich the participants are wagering with each other and not against the operator."Id. § 3002(13).

406

TURFWAY PARK RACING

pool. When a race is run, closed circuit television transmission en-ables [Track A's] patrons to witness it. [Track A] then settles withthe bettors, pays a percentage to the host track [Track B], andretains the balance. 16

In 1975 "more than 56 million persons attended horseraces insome 30 states.' 7 This number represented a thirty-five per-cent larger attendance figure than major league baseball andprofessional football combined. 8 Further, at the time of theIHA's passage, the United States horseracing industry employedmore than 175,000 people.'9

That figure include[d] owners, trainers, jockeys, drivers, racingofficials, mutuel clerks, et cetera, but [did] not include [the] manythousands of additional employees, such as grooms on the farms,carpenters, plumbers, electricians, van drivers, fence builders,sales company personnel, insurance people, veterinarians, harnessmakers, and assorted others who derive[d] their living from theracing and breeding industries. A substantial number of theseemployees [could] be classified as unskilled or marginally em-ployed, and without the employment opportunities offered by theracing industry, would be contributing to the already overcrowdedranks of the unemployed.2 °

Those in support of interstate off-track betting argued thatthrough proper regulation and management this new businesscould:

contribute substantial benefits to the States and the horse racingindustry. These benefits would result from expanded market areasthat would enable an increased number of fans to participate inracing, from additional media coverage of racing because of thoseexpanded market areas and because of additional interest in rac-ing engendered by the aforementioned two benefits, and fromadditional employment opportunities and additional revenues toStates and the racing industry.2

16. Sterling Suffolk Racecourse Ltd. Partnership v. Burrillville Racing Ass'n, Inc.,989 F.2d 1266, 1267 (1st Cir.), cert. denied, 114 S. Ct. 634 (1993).

17. 122 CONG. REc. 31,642 (1976) (remarks of Rep. Rooney from Pennsylvania).18. Id.19. S. REP. NO. 554, 95th Cong., 2d Sess. 3 (1978), reprinted in 1978

U.S.C.C.A.N. 4132, 4134-35 (Senate Commerce, Science and Transportation CommitteeReport).

20. Id.21. S. REP. NO. 1117, supra note 11, at 4, reprinted in 1978 U.S.C.C.A.N. at

4147.

1995]


Further, proponents asserted that off-track betting would providethe public "with a legal alternative to illegal bookmaking opera-tions, thereby increasing the flow of revenue to legal parimutueloperations and to governments.,

22

Conversely, opponents of interstate off-track betting believedthat if allowed to prosper, the parlors would substantially reduceattendance and on-track wagering at racetracks throughout theUnited States.23 They viewed the end result being "diminishedemployment within the industry, severe reductions in the assetsof the industry, and serious damage to the smaller circuit tracksthat are racing's minor leagues.",2' During these debates, overseventy-five percent of the existing racetracks in the UnitedStates were small circuit tracks. 25 These tracks, considered the"backbone of the racing and breeding industry," played a criticalrole in the development of new talent among both jockeys andhorses.26 In addition, these small racetracks could not survive ifthey had to compete with the major racetracks for patrons.27

"Furthermore, not all horses are of the quality to compete at thefew major national tracks. Thus, small tracks provide[d] a neces-sary marketplace and [gave] horse owners an opportunity toreceive a return on their investment."28 Additionally, thesetracks provided the "necessary revenue from which bloodstock isdeveloped that produces national champion horses."29 Eighthundred foals were bred to find the right combination that creat-ed one Secretariat.3" For these reasons, many members of Con-gress became concerned when testimony in front of the SenateCommerce, Science and Transportation Committee indicated that"the disruptive influence of interstate [off-track betting] and itsadverse effects on small racetracks could reduce the number ofracetracks in America by as much as 90 percent."31

22. Id. at 6, reprinted in 1978 U.S.C.C.A.N. at 4149.23. S. REP. NO. 554, supra note 19, at 3, reprinted in 1978 U.S.C.C.A.N. at 4134.24. S. REP. No. 1117, supra note 11, at 6, reprinted in 1978 U.S.C.C.A.N. at

4149.25. Id. at 5, reprinted in 1978 U.S.C.C.A.N. at 4148.26. Id.27. Id.28. Id.29. S. REP. No. 554, supra note 19, at 4, reprinted in 1978 U.S.C.C.A.N. at 4135.30. 122 CONG. REC. 31,642 (1976) (remarks of Rep. Rooney from Pennsylvania).31. S. REP. No. 554, supra note 19, at 4, reprinted in 1978 U.S.C.C.A.N. at 4135.

408

TURFWAY PARK RACING

Finally, there were two specific incidents that fueled theopposition's campaign for prohibiting or at least heavily regulat-,ing interstate off-track betting. First, there was an announce-ment by the New York Off-Track Betting Corporation (NYOTB)in September 197632 of its plan to convert "at least three movietheaters into so-called teletracks which would feature live tele-casts of racing with a seating capacity in excess of 10,000.''3

Next came an incident involving the Kentucky Derby. NYOTBoffered Kentucky a specific percentage of the betting revenue inexchange for its permission to use the Kentucky Derby for off-track wagering.34 Even though Kentucky declined to enter intothe contract, NYOTB took wagers on the race. 35 In 1976, whenthe IHA was first being discussed in the House of Representa-tives, NYOTB processed nearly $15 million in pirated bets on theKentucky Derby.36 This was more'than Churchill Downs itselfhandled on the race.37 Neither Churchill Downs nor the Com-monwealth received a penny of this money.3

B. The History of the Interstate Horseracing Act

On September 21, 1976, House Resolution 14,071'9 waspassed by the House of Representatives by a vote of 315 to 86.40The bill called for an absolute prohibition of interstate off-trackwagering on horseraces. 41 It also provided that any off-trackbetting operation that accepted such a wager would be liable tothe state, the host track, and to the owners of any horses run-

32. 122 CONG. REC. 31,643 (1976) (remarks of Rep. Rooney from Pennsylvania)(citing Steve Cady, OTB Pushes for Theater Racing: Tracks Skeptical on Fan Impact,N.Y. TIMES, Sept. 12, 1976, at 85).

33. Id.34. 122 CONG. REC. 31,650 (1976) (remarks of Rep. Carter from Kentucky).35. Id.36. Id.37. Id.38. 122 CONG. REC. 31,644 (1976) (remarks of Rep. Goodling from Pennsylvania).39. H.R. 14,071, 94th Cong., 2d Sess. (1976).40. S. REP. No. 1117, supra note 11, at 4, reprinted in 1978 U.S.C.C.A.N. at

4147.41. Id. Prior to its passage, there was a proposal on the House floor by Repre-

sentative Murphy of New York that instead of an absolute prohibition, the billshould be amended to include a consent provision for those states that felt the bene-fits of interstate off-track betting outweighed the potential harm to their horseracingindustries.

1995]


ning in a particular race.42 House Resolution 14,071 was notconsidered by the Senate before the 94th Congress closed. Yet,similar legislation was introduced in the Senate as Senate Bill118543 on March 30, 1977. 44

The bill was sent to the Senate Commerce, Science and Trans-portation Committee.45 The committee recommended passage ofthe bill as amended.46 This version of Senate Bill 1185 was stillbased on a total prohibition of interstate off-track parimutuelwagering.47 Moreover, like the original House bill, Senate Bill1185 made the off-track betting facility liable to the state, thehost track, and the horse owners.48

Next, the bill was sent to the Senate Judiciary Committeewhere it began to take its present form.49 On July 18, 1978, theCommittee adopted its amended version of Senate Bill 1185.50This version provided an exception to the absolute prohibitionwhere the off-track betting system51 obtained the consent of the"host racing association"52 [host track], who could only act withthe consent of its "horsemen's group. 53 Further, the entiretransaction was "subject to the approval of the host racing com-mission and the off-track racing commission. 54 This version of

42. S. REP. No. 554, supra note 19, at 2, 7, reprinted in 1978 U.S.C.C.A.N. at4133, 4138.

43. S. 1185, 95th Cong., 1st Sess. (1977).44. S. REP. No. 1117, supra note 11, at 4, reprinted in 1978 U.S.C.C.A.N. at

4147.45. Id.46. Id.47. S. REP. No. 554, supra note 19, at 1-2, reprinted in 1978 U.S.C.C.A.N. at

4132-33.48. Id. at 2, reprinted in 1978 U.S.C.C.A.N. at 4133.49. S. REP. No. 1117, supra note 11, at 4, reprinted in 1978 U.S.C.C.A.N. at

4147.50. Id.51. The IHA defines "off-track betting system" as "any group which is in the

business of accepting wagers on horseraces at locations other than the place wherethe horserace is run, which business is conducted by the State or licensed or other-wise permitted by State law." 15 U.S.C. § 3002(7) (1988).

52. The IHA defines "host racing association" as "any person who, pursuant to alicense or other permission granted by the host State, conducts the horserace subjectto the interstate wager." Id. § 3002(9).

53. "Horsemen's group" is described as the organization "which represents themajority of owners and trainers racing at a race meeting at the host track." S. REP.No. 1117, supra note 11, at 7, reprinted in 1978 U.S.C.C.A.N. at 4150. See also 15U.S.C. § 3002(12) (1988).

54. S. REP. No. 1117, supra note 11, at 8, reprinted in 1978 U.S.C.C.A.N. at4151.

TURFWAY PARK RACING

the bill served as the foundation for the enacted InterstateHorseracing Act of 1978."5

C. The Provisions of the Interstate Horseracing Act of 1978 (IHA)

The IHA is composed of seven provisions. Section 3001 setsforth the congressional findings and the public policy upon whichthe IHA is based."6 These findings focus primarily on improvingthe relationship between the states in the areas of gambling andhorseracing." Section 3001(a)(1) provides that "the Statesshould have the primary responsibility for determining whatforms of gambling may legally take place within their bor-ders."58 Subsections 3001(a)(2) and (3) discuss the areas ofhorseracing where federal intervention is warranted, such aswhere one state interferes with another state's gambling poli-cies.59 Congress then set forth its own broad public policy objec-tive for the IHA which was "to regulate interstate commercewith respect to wagering on horseracing, in order to further thehorseracing and legal off-track betting industries in the UnitedStates."6" Section 3002 covers the key definitions. 1 The mosttroublesome definitions in Kentucky Division, Horsemen's Benev-olent & Protective Association, Inc. v. Turfway Park Racing Asso-ciation, Inc. include:

(12) "horsemen's group" [which] means, with reference to theapplicable host racing association, the group which represents themajority of owners and trainers racing there, for the races subjectto the interstate off-track wager on any racing day; [and]

55. 15 U.S.C. §§ 3001-3007 (1988).56. Id. § 3001.57. See id.58. Id. § 3001(a)(1).59. Id. § 3001(a)(2), (3).(a) The Congress finds that ...(2) the Federal Government should prevent interference by one State with thegambling policies of another, and should act to protect identifiable nationalinterests; and(3) in the limited area of interstate off-track wagering on horseraces, there is aneed for Federal action to ensure States will continue to cooperate with oneanother in the acceptance of legal interstate wagers.

Id.60. Id. § 3001(b).61. Id. § 3002.

1995]

4 NORTHERN KENTUCKY LAW REWEW [Vol. 22:2

(21) "regular contractual process" [which] means those negotia-tions by which the applicable horsemen's group and host racingassociation reach agreements on issues regarding the conduct ofhorseracing by the horsemen's group at that racing associa-tion ... 62

Section 3003 institutes the general prohibition of interstateoff-track wagering, subject to exceptions.6 3 These exceptions arefound in section 3004, which contains the consent provisions.6 4

Section 3004 states:

An interstate off-track wager may be accepted by an off-trackbetting system only if consent is obtained from-(1) the host racing association, except that-

(A) as a condition precedent to such consent, said racing associ-ation... must have a written agreement with the horsemen'sgroup, under which said racing association may give such con-sent, setting forth the terms and conditions relating thereto...(B)... the written agreement of such horsemen's groupshall ... be required as such condition precedent and as a partof the regular contractual process, and may not be withdrawn orvaried except in the regular contractual process ....

(2) the host racing commission;(3) the off-track racing commission.6"

Section 3004(b) requires the off-track betting office to obtainconsent from "(A) all currently operating tracks within 60 milesof such off-track betting office; and (B) if there are no currentlyoperating tracks within 60 miles then the closest currently oper-ating track in an adjoining State. 66

Section 3005 details the liabilities and damages6" and makesany person accepting an interstate off-track wager in violation of

the IHA "civilly liable for damages to the host State, the hostracing association and the horsemen's group."' It also providesa formula for measuring these damages.6 9

62. Id.63. Id. § 3003. "No person may accept an interstate off-track wager except as

provided in this Chapter." Id.64. Id. § 3004.65. Id. (emphasis added).66. Id. § 3004(b).67. Id. § 3005.68. Id.69. Id.

Damages for each violation shall be based on the total of off-track wagers asfollows:

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1995] TURFWAY PARK RACING 413

Section 3006 creates a civil cause of action for the "host State,the host racing association, or the horsemen's group .. againstany person alleged to be in violation of this Act, for injunctiverelief to restrain violations and for damages .... "'0 Moreover,it allows any of these groups to intervene if not already a partyto the action.7' Finally, section 3007 gives the federal districtcourts jurisdiction for enforcement of the Act.72

(1) If the interstate off-track wager was of a type accepted at the host racingassociation, damages shall be in an amount equal to that portion of the take-out which would have been distributed to the host State, host racing associa-tion and the horsemen's group, as if each such interstate off-track wager hadbeen placed at the host racing association.(2) If such interstate off-track wager was of a type not accepted at the hostracing association, the amount of damages shall be determined at the rate oftakeout prevailing at the off-track betting system for that type of wager andshall be distributed according to the same formulas as in paragraph (1) above.

Id.70. Id. § 3006(a).71. Id. § 3006(b).72. Id. § 3007.(a) District court jurisdiction

Notwithstanding any other provision of law, -the district courts of theUnited States shall have jurisdiction over any civil action under this chapter,without regard to the citizenship of the parties or the amount in controversy.(b) Venue; service of process

A civil action under this chapter may be brought in any district court ofthe United States for a district located in the host State or the off-track State,and all process in any such civil action may be served in any judicial districtof the United States.(c) Concurrent State court jurisdiction

The jurisdiction of the district courts of the United States pursuant tothis section shall be concurrent with that of any State court of competentjurisdiction located in the host State or the off-track State.


II. KENTUCKY DIVISION, HORSEMEN'S BENEVOLENT &PROTECTIVE ASSOCIATION, INC. V. TURFWAY PARK

RACING ASSOCIATION, INC.

A. Factual Background

'Turfway Park Racing Association, Inc. (Turfway), operates athoroughbred racetrack in Florence; Kentucky."73 The horseowners, trainers, and jockeys are not employees of the track.74

Rather, they represent independent businesses whose interestsare promoted by two different horsemen's associations, theKHBPA 5 and the KTA.76 These parties were referred to asthe "Horsemen" throughout the litigation.77

For several years, Turfway and the Horsemen controlled theirrelationship through contractual agreements, with the KHBPAand the KTA acting together for the benefit of all the horsemenracing at the track. 8 These agreements governed the terms andconditions of horseracing at the track. 9 In fact, they resolved amultitude of issues including:

the amount of Turfway's commission or revenues from on-trackwages and from off-track intrastate and interstate wagers to bedistributed to the horsemen's purses; the establishment of purseschedules and a horsemen's account by Turfway; the provision ofstall and track facilities to horsemen by Turfway, including on-track office facilities for the KHBPA and KTA; and the agreementof KHBPA and KTA not to boycott races at Turfway. s°

On April 30, 1992, the existing three-year agreement betweenthe track and the Horsemen expired.8 Soon thereafter Turfwayentered into negotiations with the KHBPA and the KTA for anew contract.82 These negotiations were unsuccessful because

73. Kentucky Div., Horsemen's Benevolent & Protective Ass'n, Inc. v. TurfwayPark Racing, 832 F. Supp. 1097, 1098 (E.D. Ky. 1993), rev'd, 20 F.3d 1406 (6th Cir.1994).

74. Id.75. Id. The KHBPA is "a nonprofit Kentucky corporation whose membership con-

sists of thoroughbred owners and trainers." Id.76. Id. The KTA is "an organization similar to that of the KHBPA, but its mem-

bership includes owners, trainers, and breeders." Id.77. Id. at 1099.78. Id.79. Id.80. Id. (citing Doc. #4, Maline Af., Ex. A).81. Id.82. Id.

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Turfway refused to submit to the "[H]orsemen's demands that[it] increase the statutory split on [intrastate] wagers distributedby Turfway to the purses." 3 It was then that the Horsementurned to the IHA. The Horsemen informed the track that unlessthey came to a mutual agreement, the Horsemen would withholdtheir consent to all interstate simulcasting of races fromTurfway.

84

Turfway's racing schedule includes a fall meet, a holiday meet,and a spring meet. 5 The parties failed to reach a new agree-ment prior to the start of the fall meet but agreed to extend theterms of their existing contract through the fall schedule.86 Theparties attempted to resolve their differences again after the fallmeet. 87 By the start of the holiday meet on November 29, 1992,there was still no agreement between Turfway and the Horse-men.

88

During this time, Turfway made two attempts to get aroundthe "consent" problem. 89 First, using a written consent provisionon the back of one of its entry blanks, Turfway attempted toobtain permission directly from the individual horse owners.9"Following this, Turfway requested the consent of the KentuckyRacing Commission, another requirement of the IHA.91 Thecommission conditioned its consent on Turfway's obtainment ofall other necessary approvals under the IHA.92

83. Id. (citing Doc. #71, at 4-7). Intrastate wagers occur when one Kentucky race-track accepts wagers for a horserace running at another Kentucky racetrack. Thehorsemen demanded a 50-50 split of the revenue from these intrastate wagers.Jeanne Houck, Union to Appeal Simulcast Ruling, KENTUCKY POST, Sept. 24, 1993.KY. REV. STAT. ANN. § 230.378(3) (Michie/Bobbs-Merrill 1991 & Supp. 1992) providesfor the apportionment of betting revenues between the host and receiving tracks.This statutory apportionment may be modified by contract. Turfway, 832 F. Supp. at1099 n.2.

84. Turfway, 832 F. Supp. at 1099 (citing Maline Aff., Ex. C; 15 U.S.C.§ 3004(a)(1)(A) (1988)).

85. Id.86. Id. at 1099.87. Id.88. Id.89. Id.90. Id.91.- Id. See also 15 U.S.C. § 3004(a)(2) (1988).92. Turfway, 832 F. Supp. at 1099 (citing Doc. #3, at 59-60; Ex. 1).

1995]


In December, without the consent of the horsemen's groups,Turfway began to simulcast its races.93 The "KHBPA moved fora preliminary injunction to restrain Turfway from simulcastingraces."'94 The KHBPA filed an action for damages under theIHA, alleging that Turfway violated that Act when it began tosimulcast races without the required consent of the horsemen'sgroups. 95 The KHBPA argued that the "entry blank consent re-lied upon by Turfway did not satisfy the consent require-ment."96 Further, the KHBPA maintained that the off-track fa-cilities,97 by accepting wagers on these simulcasts, also violatedthe IHA.9s

The litigation soon turned bitter and became very public.99

For example, Turfway reacted to the lawsuit by padlocking theKHBPA and the KTA out of their offices located at the track.'°'To preserve the status quo" until resolution of this matter, thecourt ordered the offices reopened.'' The KHBPA also went tocourt to prevent Turfway from including another consent provi-sion in its stall applications for the 1993 fall meet."2 Onceagain, the court granted an injunction, ordering the parties tomaintain the "status quo.' 0 3 The court's frustration with theseskirmishes was evident. Judge Bertelsman's opinion noted thatat a hearing on Turfway's motion for a temporary restrainingorder, which alleged that the Horsemen were engaged in anillegal boycott of Turfway's races, "about half of the statementsmade by both sides were for the benefit of the court and theremainder for media consumption."'' 4

Ultimately, the case would be decided without a trial."5 At apre-trial conference, the parties agreed to submit arguments

93. Id.94. Id. at 1099-100.95. Id. at 1099.96. Id.97. The off-track facilities included Rockingham Venture, Inc.; Douglas Racing

Corp., d/b/a Ak-Sar-Ben; Bensalem Racing Association, d/b/a Philadelphia Park; andDakota Race Management. For a more thorough discussion of the off-track parties,see id. at 1099 n.3.

98. Id. at 1099.99. Id. at 1101.

100. Id. at 1100.101. Id. (citing Doc. #30).102. Id.103. Id. (citing Doc. #96).104. Id. at 1101.105. Id. at 1100.

416

1995] TURFWAY PARK RACING

solely on the issue of the IHA's constitutionality.' °6 The districtcourt entered a partial summary judgment in favor of Turfwayon September 20, 1993, determining that the InterstateHorseracing Act of 1978 was unconstitutional. 10 7

B. The United States District Court'sReasoning

The United States District Court for the Eastern District ofKentucky found the IHA unconstitutional on two grounds.' °8

First, the court held that the IHA was "an invalid restriction oncommercial speech in violation of the First Amendment."'0 9

Second, the court ruled that the IHA was a "fatally vague andirrational statute in violation of substantive due process.""0

1. "The Act Is An Invalid Restriction on CommercialSpeech."'1 '

The district court's justification for holding the IHA an invalidrestriction of commercial speech was laid out in three parts.First, the district court established that the simulcast ofTurfway's races falls within the domain of commercialspeech.112 Next, the court demonstrated how the Act restrictsthis commercial speech." 3 Finally, the court evaluated themeans used versus the ends to be achieved. 4

106. Id.107. Id. at 1105. Until Turfway, only five federal cases and one state case dis-

cussed or even mentioned the IHA. See Sterling Suffolk Racecourse Ltd. Partnershipv. Burrillville Racing Ass'n, 989 F.2d 1266 (1st Cir.), cert. denied, 114 S. Ct. 634(1993); Retail, Wholesale & Dep't Store Union, Local 310 v. NLRB, 745 F.2d 358 (6thCir. 1984); New York Racing Ass'n v. NLRB, 708 F.2d 46 (2d Cir.), cert. denied, 486U.S. 914 (1983); Alabama Sportservice, Inc. v. National Horsemen's Benevolent &Protective Ass'n, 767 F. Supp. 1573 (M.D. Fla. 1991); New Suffolk Downs Corp. v.Rockingham Venture, Inc., 656 F. Supp. 1190 (D.N.H. 1987); Atlantic City RacingAss'n v. Attorney Gen. of New Jersey, 461 A.2d 178 (N.J. Super. Ct. Law Div.), affd,486 A.2d 1261 (N.J. Super. Ct. App. Div. 1983), rev'd, 489 A.2d 165 (N.J. 1985); Ricev. Connolly, 488 N.W.2d 241 (Minn. 1992).

108. Turfway, 832 F. Supp. at 1098.109. Id.110. Id.111. Id. at 1100.112. Id.113. Id.114. Id. at 1101-02.


a. Commercial Speech Defined

The district court looked to two fairly recent Supreme Courtdecisions, Board of Trustees of State University of New York v.Fox"' and United States v. Edge Broadcasting Company,16

for the "test for identifying commercial speech.""' 7 From thesedecisions, the court concluded that the basic question was"whether a communication constitutes an invitation to enter intoa commercial transaction.""'

The district court placed Turfway's simulcasts in this categorybecause they invite "patrons of out-of-state tracks to bet onTurfway's races.""' 9 Therefore, "commercial transactions occurwhen.., patrons place such bets."'2 ° The court also noted thatthe simulcasts act as "an implied advertisement for the qualityof the track and its racing as well as an implied invitation to theviewers to patronize Turfway if they are in the Northern Ken-tucky/Cincinnati area.

b. The IHA's Restriction of Commercial Speech

Having established that Turfway's simulcasts are commercialspeech, the district court determined that the IHA allows thisspeech "to be prohibited whenever one of the designated partieswithholds consent.' 22

c. Finding the IHA's Restriction Invalid

Next, the district court addressed whether the IHA's restric-tion of this type of commercial speech is invalid.' 2' The courtbegan by stating that in order for commercial speech to receiveprotection under the First Amendment, it 'at least must concernlawful activity and not be misleading."124 The court concluded

115. Board of Trustees of State University v. Fox, 492 U.S. 469, 473-74 (1989).116. United States v. Edge Broadcasting Co., 113 S. Ct. 2696, 2703 (1993).117. Turfway, 832 F. Supp. at 1100.118. Id.119. Id.120. Id.121. Id.122. Id.123. Id. at 1100-01.124. Id. (citing Board of Trustees of State University v. Fox, 492 U.S. 469, 475

(1989); Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447 U.S. 557, 566(1980); United States v. Edge Broadcasting Co., 113 S. Ct. 2696, 2703-04 (1993)).

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TURFWAY PARK RACING

that Turfway's simulcasts met these requirements.125 The courtidentified the next step as involving the determination of"'whether the regulation directly advances the governmentalinterest asserted, and whether it is not more extensive than isnecessary to serve that interest.' 126 The district court "reluc-tantly" held that the "means chosen by Congress [were] not 'nar-rowly tailored to achieve [the] desired objective[s]. ''' 127

While the district court recognized that commercial speechtypically receives "less protection under the First Amendmentthan non-commercial speech,' 12 it found that such expressionis still entitled to a "reasonable fit" test. 29 What the courtfound most unreasonable about the means chosen through theIHA is that it places the power to veto Turfway's simulcastingwith two state agencies and the horsemen's organizations. 30

The court characterized the latter group as "bitter enemies ofTurfway.'' Moreover, the court was bothered by the fact thatthe veto power not only affects Turfway's ability to simulcast itshorseraces, but that it is being used as leverage for the parties'on-going contract negotiations. 32

Additionally, relying on the reasoning of the United StatesSupreme Court in City of Lakewood v. Plain Dealer PublishingCompany,3 3 the district court declared that a 'statute placingunbridled discretion in the hands of a governmental official oragency [such as the Kentucky racing commission] constitutes aprior restraint' and is anathema."'34

125. Id. at 1101.126. Id. (citing Central Hudson, 447 U.S. at 566).127. Id. (citing Fox, 492 U.S. at 480; Edge, 113 S. Ct. at 2703-04).128. Id. (citing Outdoor Sys. Inc. v. City of Mesa, 997 F.2d 604, 610 (9th Cir.

1993)).129. Id.130. Id.131. Id. at 1101.132. Id.133. City of Lakewood v. Plain Dealer Publishing Co., 486 U.S. 750 (1988).134. Turfway, 832 F. Supp. at 1102 (citing Lakewood, 486 U.S. at 755-56).

1995] 419


2. "The Act Is A Vague and Irrational Means To Carry Out APermissible Objective."'35

The district court's principal objection to the -IHA centeredaround section 3004(a)(1)(A). This consent provision'36 providesan exception to the total ban on interstate off-track wageringwhere as a "condition precedent" to giving its consent, a hostracing association enters into "a written agreement with thehorsemen's group, under which said racing association may givesuch consent, setting forth the terms and conditions thereto."'37

This exception is controlled in part by the IHA's definition of a"horsemen's group." 38 Within the meaning of the statute, a"horsemen's group" is 'the group which represents the majorityof owners and trainers racing there, for the races subject to theinterstate off-track wager on any racing day." 139

The district' court concluded that while this exception and theconnecting definition may have been effective when the IHA wasenacted, it is completely ineffective without a pre-racing-dayagreement. 14 The court found that the definition was insuffi-cient to handle the situation where "there are two horsemen'sgroups - rivals of each other and both at loggerheads with thetrack - and numerous owners and trainers unaffiliated witheither group.'' In support of its conclusion, the court pointedto five flaws in the construction and application of the IHA.

First, the court demonstrated how "the statute is self-contra-dictory.' ' 3 On one hand, the IHA anticipates that thehorsemen's group's consent will be obtained during the "regularcontractual process.' ' 144 However, on the other hand, the defini-tion of a horsemen's group involves the "identification ofthe.., group representing the majority of owners and trainerson each racing day.''145 The most recent contract between

135. Id. at 1103.136. Id. See also 15 U.S.C. § 3004(a)(1)(A) (1988).137. Turfway, 832 F. Supp. at 1103 (quoting 15 U.S.C. § 3004(a)(1)(A) (1988)).138. 15 U.S.C. § 3002(12) (1988).139. Turfway, 832 F. Supp. at 1103 (quoting 15 U.S.C. § 3002(12) (1988)).140. Id. at 1103.141. Id.142. Id.143. Id.144. Id. (citing 15 U.S.C. § 3004(b) (1988)).145. Id. (citing 15 U.S.C. § 3002 (1988)) (emphasis added). The IHA defines "rac-

420

TURFWAY PARK RACING

Turfway Park and the horsemen's group lasted for threeyears.146 A "racing day" occurs several times during a givenmeet. 141

Second, the Act's definition of an "owner" is unclear. 4 s Thestatute fails to establish whether it is one vote per horse or, inthe case of a single horse owned by ten owners, whether it is onevote per partner/owner.'49 The IHA does not indicate whether atrainer is entitled to a vote. 50

Third, because "the largest horsemen's group [at TurfwayPark] represents only [fifty-five percent] of [the] owners eligibleto race ... the possibility exists that on 'any racing day' nohorsemen's group will represent a majority of the owners andtrainers."'' The statute does not address this situation or re-solve whether in this case anyone's consent is required.5 2

Fourth, although "entries to a race are usually closed [forty-eight] hours in advance.., emergency scratches are possible upto post time."'53 The court, concerned that an emergencyscratch could change the election results for a given racingday,154 wondered what the parties were to do in this case.'55

Fifth, the IHA does not clearly define the term "repre-sent."'56 The court questioned whether membership in a specif-ic organization is required or whether Turfway can technically"represent" the majority by soliciting consents to a simulcast (ona given racing day) from the individual horse owners.5 7

While the district court acknowledged its "duty to give everypresumption of validity to an Act of Congress," the court alsorecognized that it could not "rewrite the statute to save it.' 5 8

ing day" as "a full program of races at a specified racing association on a specifiedday." 15 U.S.C. § 3002(16) (1988).

146. Turfway, 832 F. Supp. at 1099.147. The IHA defines "race meeting" as "those scheduled days during the year a

racing association is granted permission by the appropriate State racing commissionto conduct horseracing." 15 U.S.C. § 3002(15) (1988).

148. Turfway, 832 F. Supp. at 1103.149. Id.150. Id.151. Id.152. Id.153. Id.154. Id.155. Id.156. Id.157. Id.158. Id. at 1103-04 (citing United States v. Thirty-Seven Photographs, 402 U.S.

1995].


Moreover, the court emphasized that these five problems "[were]not speculative"; these were real problems that the parties ad-dressed in court.159

Finally, the district court discussed the unrealistic burden thatthis provision and definition place on the off-track betting sys-tem. 6 ' The court emphasized that "[t]he receiving tracks mustascertain at their peril from thousands of miles away which, ifany, horsemen's group represents a majority of owners and train-ers on any racing day."'.'

a. Vagueness

After identifying the potential problem areas within the stat-ute, the district court presented its vagueness analysis. 6 2 Itbegan by drawing on the following well-accepted legal princi-ple: '6 "'[T]he void for vagueness doctrine requires that a penalstatute define the criminal offense with sufficient definitenessthat ordinary people can understand what conduct is prohibitedand in a manner that does not encourage arbitrary and discrimi-natory enforcement.""64 While the court recognized that voidfor vagueness problems are typically found in criminal or FirstAmendment cases, "'[v]ague laws in any area suffer a constitu-tional infirmity."'165 Turning again to the five "ambiguities inthe statute," the court maintained that this statute, which im-poses severe civil penalties, "is impossible to apply with certaintyon a day-to-day basis in the context of an ongoing dispute."'6 6

For this reason, the district court held the Act "void for vague-ness."

167

b. Irrationality

The district court also held that the IHA fails to satisfy therequirement of rationality.' First, the court looked to Pearson

363, 369 (1971); Blount v. Rizzi, 400 U.S. 410, 419 (1970)).159. Id. at 1104.160. Id.161. Id.162. Id.163. Id.164. Id. (quoting Kolender v. Lawson, 461 U.S. 352, 357 (1983) (citations omitted)).165. Id. (quoting Ashton v. Kentucky, 384 U.S. 195, 200 (1966) (citations omitted)).166. Id. at 1104.167. Id.168. Id. at 1104-05.

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TURFWAY PARK RACING

v. City of Grand Blanc'69 for the general constitutional princi-ple that "[s]ubstantive due process requires that a statute have arational relationship to a legitimate legislative goal."' ° Thepurpose of the IHA is to regulate interstate gambling which Con-gress has the power to do under the Commerce Clause.'7 'Thus, "regulating simulcasting [of horseraces] is rationally relat-ed to that end."'7 2

The court then turned to the second part of the rational basistest which requires that the means used to "advance a legitimategovernmental interest" be reasonable."7 3 The court contendedthat the means used by the IHA are not reasonable and, there-fore, not rational.' 4 The court based this finding on the factthat the IHA places the absolute power to veto a simulcast in thehands of private parties, gives these parties no standards onwhich to base their decision, and imposes no requirement thatthey exercise their veto power to promote Congress' objective ofpromoting horseracing."' In sum, the district court viewed theIHA as "totally counterproductive in, achieving the legislativegoal in the present situation, which is not unlikely to occuragain, here or elsewhere.' 7 6

C. The Appeal to the Sixth Circuit

In December 1993, the KHBPA, the KTA, and the UnitedStates Department of Justice filed appellate briefs with the SixthCircuit.1 7 Turfway responded in January 1994178 and thecase was heard by Sixth Circuit judges Contie, Kennedy and Guyon February 28, 1994.'9

169. Pearson v. City of Grand Blanc, 961 F.2d 1211 (6th Cir. 1992).170. Turfway, 832 F. Supp. at 1104-05 (citing Pearson, 961 F.2d at 1223).171. Id. at 1104.172. Id.173. Id.174. Id. at 1105.175. Id.176. Id.177. See Briefs for Plaintiff-Appellant KHBPA, Plaintiff-Intervenor KTA, and In-

tervenor United States Department of Justice, Kentucky Div., Horsemen's Benevolent& Protective Ass'n, Inc. v. Turfway Park Racing Ass'n, Inc., 20 F.3d 1406 (6th Cir.1994) (No. 93-6425).

178. See Brief for Defendant-Appellee Turfway Park, Kentucky Div., Horsemen'sBenevolent & Protective Ass'n, Inc. v. Turfway Park Racing Ass'n, Inc., 20 F.3d 1406(6th Cir. 1994) (No. 93-6425).

179. Kentucky Div., Horsemen's Benevolent & Protective Ass'n, Inc. v. Turfway

1995] 423


D. The Sixth Circuit's Holding

The Court of Appeals for the Sixth Circuit reversed the districtcourt's decision, 80 holding that:

1) The IHA does not implicate the First Amendment;' 8'2) The IHA is not unconstitutionally vague and, therefore, not

in violation of substantive due process; 18 2

3) The IHA is rationally related to the furthering of legitimategovernmental interests; 183

4) The IHA does not compel state government to violate theTenth Amendment by regulating interstate off-track betting;184

5) The IHA does not unconstitutionally transfer legislativepower into the hands of private parties; 85 and

6) Under the IHA, a host race track "accepts" an interstate off-track wager when it permits wagers from out-of-state, off-trackbetting facilities to be placed in its pari-mutuel pool.'86

E. The Sixth Circuit's Reasoning

1. "[Tihe Act does not implicate the First Amendment .. .. ,187

The district court subjected the IHA to First Amendment scru-tiny because the Horsemen sought not only damages but aninjunction that would force Turfway to stop interstate "simul-casting for wagering purposes," an activity the court viewed ascommercial speech.' 8 Contrary to the district court, the SixthCircuit found that the IHA does not unlawfully regulate or re-strict commercial speech by restricting simulcasting.' 9 TheSixth Circuit held that the IHA "regulates interstate wagering,

Park Racing, 832 F. Supp. 1097 (E.D. Ky. 1993), appeal docketed, No. 93-6425 (6thCir. Feb. 28, 1994).

180. Kentucky Div., Horsemen's Benevolent & Protective Ass'n, Inc. v. TurfwayPark Racing Ass'n, Inc., 20 F.3d 1406 (6th Cir. 1994).

181. Id. at 1412.182. Id. at 1412-14.183. Id. at 1414-15.184. Id. at 1415-16.185. Id. at 1415-17.186. Id. at 1417.187. Id. at 1412.188. Id.189. Id.

424

TURFWAY PARK RACING

not simulcasting."'9 ° It noted that "the Act does not even men-tion simulcasting."'9'

Additionally, the court rejected Turfway's argument that "Con-gress was implicitly regulating interstate off-track wageringbecause [according to the court] interstate off-track wagering mayoccur without simulcasting, and simulcasting may occur withoutinterstate off-track wagering.' ' These activities, in the eyes ofthe Sixth Circuit, were "not inextricably linked.' 93

2. The Act requires "a 'less strict vagueness test."194

The Sixth Circuit turned to the United States Supreme Courtcase Grayned v. City of Rockford'95 for the basic test foridentifying a vague law.' 96 Under Grayned, a law is vague if itfails to "give the person of ordinary intelligence a reasonableopportunity to know what is prohibited."' 9' Further, vaguelaws failed to "provide explicit standards for those who applythem" and, therefore, risked "arbitrary and discriminatory en-forcement."' 9s The court of appeals also noted that "[t]he de-gree of vagueness that the Constitution tolerates 'depends inpart on the nature of the enactment." 9 The court specifiedtwo areas where the United States Supreme Court has applied a"less strict vagueness test."200 These areas of law include stat-utes that rely on "civil rather than criminal penalties" and "eco-nomic legislation."' 0 ' The court remarked:

[e]conomic legislation, in particular, "is subject to a less strictvagueness test because its subject matter is often more narrow,

190. Id.191. Id.192. Id. at 1412 n.10 (emphasis added).193. Id.194. Id. at 1413 (quoting Fleming v. United States Dep't of Agric., 713 F.2d 179,

185 (6th Cir. 1983)).195. Grayned v. City of Rockford, 408 U.S. 104 (1972).196. Turfway, 20 F.3d at 1412-13.197. Grayned, 408 U.S. at 108.198. Id. The court also cited United States v. Petrillo, 332 U.S. 1 (1947) (explain-

ing that a statute must "mark boundaries sufficiently distinct for judges and juriesfairly to administer the law in accordance with the will of Congress").

199. Turfway, 20 F.3d at 1413 (quoting Village of Hoffman Estates v. Flipside,Hoffman Estates, Inc., 455 U.S. 489, 498 (1982)).

200. Id.201. Id.

1995] 425


and because businesses, which face economic demands to planbehavior carefully, can be expected to consult relevant legislationin advance of action., 202

Having laid this groundwork, the Sixth Circuit then concededthat "the language used in the Interstate Horseracing Act of1978 is imprecise and subject to interpretation. 2 3 Neverthe-less, the court classified the IHA as "economic legislation regu-lating a very narrow subject matter., 20 4 On this basis the IHAwas subject to a "less strict vagueness test. 20 5 The court thenadvanced the wisdom of this less stringent approach by empha-sizing the "strong presumptive validity that attaches to an Act ofCongress."2 6 The Sixth Circuit went even further by statingthat interpreting federal statutes 'to reach a conclusion whichwill avoid serious doubt of their constitutionality" is, in fact, a"duty" of the federal court.20 7

Next, the Sixth Circuit addressed "difficulty" the district courthad "reconciling the Act's provisions. 20 8 From the IHA's legis-lative history, the Sixth Circuit identified Congress' intent "topreserve the traditional relationships that existed in thehorseracing industry (between the track and horsemen) by limit-ing the emerging interstate off-track wagering industry. '2°9 Itviewed Turfway's effort to terminate its practice of negotiatingwith its horsemen through their trade associations, the KHBPAand the KTA, as an attempt to abandon the "traditional relation-ship., 210 According to the Sixth Circuit, "Congress intendedthat the Horsemen play a significant role in limiting off-trackwagering ....2 In the court's view, if the Horsemen lost this

202. Id.203. Id. at 1413.204. Id.205. Id. For a general understanding of this approach, the court cited Fleming v.

United States Dep't of Agric., 713 F.2d 179, 185 (6th Cir. 1983) (stating that whenthe entities affected by a statute "are a select group with specialized understandingof the subject being regulated the degree of definiteness required to satisfy due pro-cess concerns is measured by the common understanding and commercial knowledgeof the group").

206. Turfway, 20 F.3d at 1413 (citing United States v. National Dairy Prods.Corp., 372 U.S. 29, 32 (1963)).

207. Id. (quoting United States v. Rumely, 345 U.S. 41, 45 (1953) (citations omit-ted)).

208. Id. at 1413.209. Id.210. Id. at 1414.211. Id.

426

TURFWAY PARK RACING

ability, they would have serious problems protecting their inter-ests.212

3. "[T]he Act is rationally related to advancing Congress'legitimate federal interests ....

The Sixth Circuit determined that the IHA "regulates inter-state horserace wagering by balancing the interests of thehorseracing industry against those of the interstate off-trackwagering industry."214 Further, because the IHA is an exampleof a legislative act which "adjust[s] the burdens and benefits ofeconomic life[,]" entitling it to a "presumption of constitutional-ity, '215 it will be upheld as long as it promotes a "legitimatelegislative purpose furthered by rational means. 2 6 The bottomline is that the IHA must be 'rational and not arbitrary.' 21 1

As observed by the Sixth Circuit, "[T]he district court found theAct irrational (and therefore unconstitutional) because the horse-men may withhold their consent to further their own 'selfishmotives' .. 2... 28 The Sixth Circuit did not agree with thisanalysis. The court ruled that:

[t]hough appealing to the horsemen's self-interest may not be thebest or most logical method for promoting the horseracing and in-terstate off-track wagering industries, it is not irrational to be-lieve that the horsemen would refrain from using their veto powerto destroy an industry that provides them with additional reve-nues. 2 19

The court went on to point out that the Horsemen's veto poweralso fosters the horseracing industry's goal of controlling thegrowth of interstate off-track wagering.22

' Through the use of

212. Id.213. Id. at 1415.214. Id. at 1414.215. Id. (quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1976)).216. Id. (quoting Pension Benefit Guarantee Corp. v. R.A. Gray & Co., 467 U.S.

717, 729 (1984)).217. Id. (quoting National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe

Ry. Co., 470 U.S. 451, 477 (1985)).218. Id. at 1414.219. Id. at 1415 (citing Williamson v. Lee Optical of Oklahoma, Inc., 348 U.S. 483,

487-88 (1955) ("[T]he law need not be in every respect logically consistent with itsaims to be constitutional.")).

220. Id. at 1415.

1995] 427


their veto power, the Horsemen can continue to protect the de-mand for their services as well as the sport of horseracing over-all.221 On these grounds, the Sixth Circuit ruled that the IHAwas "rationally related to advancing Congress' legitimate federalinterests notwithstanding the horsemen's veto power. '222

4. The Act Does Not Violate the Tenth Amendment223

In its appellate brief, Turfway argued that the IHA "compelsthe States to regulate off-track betting, in violation of the TenthAmendment., 224 Turfway relied on the United States SupremeCourt case New York v. United States225 for the rule that "theConstitution simply does not give Congress the authority torequire the States to regulate., 226 The Sixth Circuit held, 'how-ever, that the IHA "does not require a State to do anything whenpresented with a request for its consent to off-track betting. 227

"Regulation," the court ruled, "is an affirmative act., 221 Con-

versely, "[t]he Act merely gives the States a limited power topreempt the general federal prohibition of interstate off-trackwagering." '229 Because the state may always ignore the requestto consent, the court ruled that the Tenth Amendment was notviolated.

5. "The Act ... does not delegate legislative power to privateparties. ,

2 3 1

Turfway argued that through the Horsemen's veto the IHAunconstitutionally delegated power to private parties.232 Tosupport its argument, Turfway cited the United States SupremeCourt cases of Eubank v.. City of Richmond233 and Washington

221. Id.222. Id.223. Id. at 1415-16.224. Id. at 1415.225. New York v. United States, 112 S. Ct. 2408 (1992).226. Id. at 2429.227. Turfway, 20 F.3d at 1415.228. Id. (citing New York, 112 S. Ct. at 2420).229. Id. at 1416.230. Id. at 1415.231. Id. at 1417232. Id. at 1416.233. Eubank v. City of Richmond, 226 U.S. 137 (1912).

428

TURFWAY PARK RACING

ex rel. Seattle Title & Trust Company v. Roberge.234 In Eubank,a city ordinance that allowed two-thirds of the property ownerson a given street to vote on and establish building set bank lineswas held unconstitutional.235 In Roberge, a city ordinance wasinvalidated that only allowed the establishment of "philanthropichomes for the aged in residential areas" after two-thirds of theproperty owners located within four hundred feet of the homeconsented.236

The Sixth Circuit determined, however, that the controllingprecedents in this case were Thomas Cusack Company v. City ofChicago... and Currin v. Wallace.238 In Cusack, the UnitedStates Supreme Court "upheld a provision that waived, upon theconsent of one-half of the affected property owners, a municipalprohibition on the erection of billboards.""2 9 In Currin, "theCourt upheld a provision that made the effect of certain tobaccoregulations contingent upon the approval of two-thirds of thetobacco growers voting in a prescribed referendum."'24 TheSixth Circuit interpreted these cases as being acceptable becausethey did not "allow a private party to make the law and force itupon a minority."24' These ordinances gave the citizens the op-portunity to waive enforcement of a legislative prohibition.242

Similarly, the IHA "affords the Horsemen a limited power towaive a restriction created by Congress. 243

Additionally, the court of appeals rejected Turfway's argumentthat the IHA violates the "nondelegation doctrine ' 244 by dele-gating legislative power to the states without clear standards toguide them.245 The court reminded the appellees that thenondelegation doctrine protected against a violation of the sepa-ration of powers principle by prohibiting delegation of legislative

234. Washington ex rel. Seattle Title & Trust Co. v. Roberge, 278 U.S. 116 (1928).235. Turfway, 20 F.3d at 1416 (quoting City of Eastlake v. Forest City Enter.,

Inc., 426 U.S. 668, 677 (1976)).236. Id.237. Thomas Cusack Co. v. City of Chicago, 242 U.S. 526 (1917).238. Currin v. Wallace, 306 U.S. 1 (1939).239. Turfway, 20 F.3d at 1416.240. Id.241. Id.242. Id. (quotations omitted).243. Id.244. This principle is described in Mistretta v. United States, 488 U.S. 361 (1989).245. Turfway, 20 F.3d at 1417.

1995] 429


power to the judicial or executive branches. 246 A delegation tothe states simply does not implicate this doctrine.247 In fact,such a delegation actually promotes another important princi-ple - federalism.248

6. "Turfway Park accepted an interstate off-track wager....2 4 9

Finally, in its appeal Turfway argued that as a meresimulcaster, as opposed to an actual off-track betting parlor, itsconduct fell outside the prohibition of the IHA and, therefore, thefederal court had no subject matter jurisdiction.2

" The SixthCircuit found a simple solution to this problem. The court deter-mined that Turfway had technically accepted an interstate off-track wager under the Act because in an off-track wagering ar-rangement the off-track wagers eventually become part of thehost track's pari-mutuel pool.251

III. THE IHA: LOSING SIGHT OF THE OBJECTIVE

Beyond the resolution of the dispute between Turfway and theHorsemen, these decisions have focused much needed attentionon the weaknesses in the IHA. Essentially, these cases demon-strate the great potential for manipuldtion and misuse of theIHA, and why the dispute between Turfway and the Horsemenshould have been settled by state law.

It is clear that somewhere between ascertaining the needs ofthe horseracing industry252 and designing the tools to servethose needs, Congress lost sight of its objectives. Congress de-clared three problems that would be solved by the IHA.25 '

First, the states needed to take "primary responsibility for deter-mining what forms of gambling [should] legally take place withintheir borders. 254 Second, because of the unsavory activities ofsome parties during the mid-seventies,. Congress stepped in to"prevent interference by one State with the gambling policies of

246. Id.247. Id.248. Id.249. Id.250. Id.251. Id.252. See 15 U.S.C. § 3001 (1988).253. Id. § 3001(a)(1)-(3).254. Id.

430

TURFWAY PARK RACING

another." '255 Finally, there was "a need for Federal action to en-sure States [would] continue to cooperate with one another inthe acceptance of legal interstate wagers." '256 While these find-ings seem very clear, the riddle is "how does granting the horse-men an unfettered, unregulated, unaccountable veto over inter-state wagering further these goals?"25 '

The horsemen in this case were not acting because of a desireto protect the interests of a small track. Nor were they usingtheir veto power to prevent Turfway, or any off-track bettingfacility, from reducing the demand for their services by transmit-ting in races from out of state tracks. Here, the Horsemen re-fused to give their consent to interstate off-track betting becauseTurfway refused to give them a bigger slice of intrastate off-trackbetting. This dispute had nothing to do with interstate off-trackwagering. The IHA was just a wedge used by the Horsemen inan attempt to force through another money provision of theircontract. By upholding the constitutionality of the IHA underthese circumstances, the Sixth Circuit has regrettably sanctionedsuch misapplication of the statute. In this jurisdiction, arguably,any contract dispute between horsemen and tracks can be tied tointerstate off-track wagering. The horsemen could demand alarger cut of the local purse or even new stables and conditiontheir consent on the track's agreement. Furthermore, consider-ation must be given to the fact that while the IHA was designedto protect small racetracks, it gives them no direct cause of ac-tion against an off-track betting system that runs races, withouttheir consent, during their racing meets. In two separate cases,neighboring racetracks have attempted, unsuccessfully, to estab-lish a cause of action against off-track betting systems that wereinfringing on their markets.258 The legislative history of theIHA repeatedly makes reference to the possible extinction ofthese small tracks if they cannot protect themselves from a

255. Id.256. Id.257. Brief for Appellee at 37, Kentucky Div., Horsemen's Benevolent & Protective

Ass'n, Inc. v. Turfway Park Racing Ass'n, Inc., 20 F.3d 1406 (6th Cir. 1994) (No. 93-6425).

258. See, e.g., Sterling Suffolk Racecourse Ltd. Partnership v. Burrillville RacingAss'n, Inc., 989 F.2d 1266 (1st Cir.), cert. denied, 114 S. Ct. 634 (1993); New SuffolkDowns Corp. v. Rockingham Venture, Inc., 656 F. Supp. 1190 (D.N.H. 1987).

1995] 431


growing and indiscriminate off-track betting industry.259 Nev-ertheless, the IHA fails in this regard. Tracks located within asixty-mile radius of an off-track betting parlor are offered vetopower but no means of enforcement.26 °

The IHA was intended to serve the needs of the states and thehorseracing industry as a whole. However, the Act places privateparties with private agendas on equal footing with state racingcommissions. This is counter-productive because the state is inthe best position to ascertain the overall costs and benefits of agiven decision to its internal horseracing industry. The horseowners and the tracks simply have too great a personal stake inthese decisions to exercise even-handed judgment. Lou Raffetto,vice president of racing at SuffOlk Downs in Massachusetts,probably described the situation best.

The law doesn't always make sense .... It has so many inconsis-tencies. It is vague. But we need certain protections within thisindustry. I'm not bureaucratic, and I don't like to see laws set instone, but this industry is not one that pulls together. When pushcomes to shove, people do what's best for them and not what'sgood overall. So the industry does need to establish guidelines sothat tracks can't do what's good for them, meanwhile leading tothe demise of another track. But the simulcasting has changed injust the last two years, let alone ... the last [fifteen]. We need alaw that reflects the way the game is played now, not the way itwas played [fifteen] years ago.2"'

IV. CONCLUSION

Turfway demonstrates that the IHA is no longer effective inits present form. It is not a practical tool in light of modernhorseracing and interstate off-track betting practices. Of course,the IHA has not completely lost its usefulness. There still existstoday the potential threat that large off-track betting systemscould destroy the market for small racetracks. Further, thesesmall racetracks continue to be as important to the stability ofthe horseracing industry today as they were twenty years ago.

Nevertheless, the IHA is in serious need of refurbishment. Forexample, Congress could make the following amendments. First,

259. See supra notes 23-31 and accompanying text.260. See 15 U.S.C. § 3004 (1988).261. Indrisano, supra note 4 (quoting Lou Raffetto, vice-president of racing at

Suffolk Downs).

TURFWAY PARK RACING

it could create specific guidelines that a plaintiff must satisfy inorder to demonstrate that it is using IHA for its intended pur-pose - to limit the potentially damaging impact of interstate off-track wagering. Second, Congress could clean up the definitionsprovision, section 3002, and remove the obvious ambiguities.Third, it could require a simple consent registration systemthrough the state racing commissions so an off-track bettingsystem could ascertain from an objective source whether all ofthe necessary approvals had been obtained. Fourth, Congresscould return to its original course and establish a cause of actionfor the small, neighboring racetrack whose market may still bein danger of being consumed by the off-track betting parlor.

Just a few days before the district court's ruling, Mel Bowman,national president of the Horsemen's Benevolent & ProtectiveAssociation, predicted that a decision by the court holding theIHA unconstitutional would create "chaos. '26 2 Instead, what itcreated was not chaos, but cooperation between two immoveableopponents. Even though the Horsemen were to appeal the deci-sion and eventually win, one day after Judge Bertelsman's rul-ing, members of the KHBPA voted overwhelmingly to give uptheir demand for a fifty-fifty split of the revenues from intrastatewagering.263 Instead, they agreed to accept forty-seven percent,with a fifty percent share above a certain threshold.264 For itstrouble, the Horsemen received nearly $300,000 more peryear.65 The races are on again at Turfway Park.

262. Jacalyn Carfagno, Turfway Dispute Could Alter Racing, LEXINGTON HERALD-LEADER, Sept. 11, 1993, at Cl.

263. See Paul A. Long, Simulcast Law Unconstitutional, KENTUCKY POST, Sept. 15,1993, at 1K; Monica Dias, Vote Puts Turfway Back on Track, KENTUCKY POST, Sept.16, 1993, at 3K.

264. Dias, supra note 263.265. Id.

1995] 433

WANTON MURDER, SELF-DEFENSE, AND JURYINSTRUCTIONS: SHANNON V. COMMONWEALTH IS

REVISITED; BUT DOES IT REMAIN?

by James G. Hodge, Jr.*

I. INTRODUCTION

On March 24, 1994, the Kentucky Supreme Court handeddown its decision in McGinnis v. Commonwealth and a compan-ion case, Terry v. Commonwealth.1 Through extended discussion,Justice Leibson crafted an opinion for the majority which ablyre-defined what the court termed "the Shannon problem."2 Thismulti-faceted dilemma of criminal law originated from the Ken-tucky Supreme Court's prior decision in Shannon v. Common-wealth.3 The gist of the "problem" concerns giving a jury instruc-tion for wanton murder where evidence of self-defense, whichwas wanton in nature, was presented.' The problem stems fromthe inconsistent mental states of wanton murder, which is sim-ply another form of murder and not a separate offense, and actsof self-defense performed in an intentional manner.5

Yet, there is more at work in these two companion cases thanexposing the judicial confusion resulting from what JusticeLeibson identified as the post-decision misapplication of the

* James G. Hodge, Jr. practices privately in Louisville, Kentucky and is also

admitted to practice in South Carolina. B.S., The College of Charleston; J.D., SalmonP. Chase College of Law, Northern Kentucky University.

1. McGinnis v. Commonwealth, 875 S.W.2d 518 (Ky. 1994).2. Id. at 520.3. Shannon v. Commonwealth, 767 S.W.2d 548 (Ky. 1988).4. McGinnis, 875 S.W.2d at 521. A person acts "wantonly" when:

[One) is aware of and consciously disregards a substantial and unjustifiablerisk that the result will occur or that the circumstance exists. The risk mustbe of such nature and, degree that disregard thereof constitutes a gross devia-tion from the standard of conduct that a reasonable person would observe inthe situation.

KY. REV. STAT. ANN. § 501.020(3) (Michie/Bobbs-Merrill 1990).5. A person acts "intentionally" when one's "conscious objective is to cause that

result or to engage in that conduct." KY. REV. STAT. ANN. § 501.020(1) (Michie/Bobbs-Merrill 1990).

435


court's decision in Shannon.' The McGinnis court not only ex-plained the Shannon problem as it surfaced in the lower court'sdecisions in McGinnis and Terry, but also intended to solve thislegal quagmire. The subject of this article is whether the majori-ty actually managed to solve the Shannon problem. Or rather, asstated by Justice Spain in his dissenting opinion, will Kentuckytrial courts "continue to meander and float where the RiverShannon flows[?] ' 7

II. FACTS OF THE CASES

These separate appeals arose from jury trials conducted inJefferson Circuit Court in Louisville, Kentucky, and as JusticeLeibson pointed out in his majority opinion, the cases are similarin many other ways. 8 In each case, the appellant admitted heshot the victim9 and attempted to justify the victim's death asan act of self-defense."° At the conclusion of each case, the trialcourt instructed the jury on five different possible criminal homi-cide offenses despite the fact that there are only four such offens-es set forth in Kentucky Revised Statutes (KRS) chapter 507."The court charged the jury with:

(1) Intentional murder, 2 noting that the appellant could not befound guilty of this charge if he was acting in self-defense;

(2) Wanton murder," omitting the same note on self-defense asprovided in the first instruction;

6. McGinnis, 875 S.W.2d at 521.7. Id. at 530 (Spain, J., dissenting) (quotations omitted).8. McGinnis v. Commonwealth, 875 S.W.2d 518, 520 (Ky. 1994).9. Id.

10. Id.11. Id.12. A person is guilty of the capital offense of murder when "[w]ith intent to

cause the death of another person, [one] causes the death of such person or of athird . . . [unless acting under] extreme emotional disturbance." KY. REV. STAT. ANN.§ 507.020(1)(a) (MichiefBobbs-Merrill 1990).

13. A person is also guilty of murder when "under circumstances manifesting ex-treme indifference to human life, [one] wantonly engages in conduct which creates agrave risk of death to another person and thereby causes the death of another per-son." Id. § 507.020(1)(b). This form of murder is also referred to as "depraved heart"murder. See 40 C.J.S. Homicide § 43 (1991); WAYNE R. LAFAVE & AUSTIN W. SCOoT,JR., CRIMINAL LAW § 7.4 (2d ed. 1986).

436

WANTON MURDER, SELF-DEFENSE

(3) First-degree manslaughter; 14

(4) Second-degree manslaughter; 5 and

(5) Reckless homicide. 6

Each appellant requested a directed verdict of acquittal on thewanton murder charge, arguing that the only evidence presentedwas that he shot intentionally in self-defense.'" Each appellantalso objected to submitting a wanton murder instruction to thejury, believing it was unsupported by any evidence of a wantonact, and to the form of the wanton murder instruction, whichwas unqualified with any instruction on the right of self-protec-tion.' In each case, the jury found the appellant'guilty of wan-ton murder under the second instruction. 9

However, the specific facts by which each appellant wasbrought to trial could not be more different. One case centeredon the death of a rival gang member at the hands of a nineteen-year old teenager armed with a revolver, which he hastily ob-tained in the heat of a fight.2" The other case involved an olderman who, just days after the death of his sister, placed himselfin an explosive domestic encounter with his ex-brother-in-lawwho he suspected had killed her.2' An elaboration of these factsis appropriate to further expose the significant events leading upto the court's joint decision.

14. A person is guilty of manslaughter in the first degree when:(a) With intent to cause serious physical injury to another person, [one] causedthe death of such person or of a third person; or(b) With intent to cause the death of another person, [one] causes the death ofsuch person or of a third person under circumstances which do not constitutemurder because [one] acts under the influence of extreme emotional distur-bance ....

KY. REV. STAT. ANN. § 507.030(1) (Michie/Bobbs-Merrill 1990).15. "A person is guilty of manslaughter in the second degree when ... [one]

wantonly causes the death of another person." Id. § 507.040(1).16. "A person is guilty of reckless homicide when, with recklessness [one] causes

the death of another person." Id. § 507.050(1).17. McGinnis v. Commonwealth, 875 S.W.2d at 518, 520 (Ky. 1994).18. Id.19. Id.20. Id. at 522-23.21. Id. at 526-27.

1995] 437


A. McGinnis v. Commonwealth

Early in the morning on February 8, 1990, Dante LeeMcGinnis, age nineteen, and others had gathered at the parkinglot of a downtown Louisville fast-food restaurant.22 Togetherwith his friends, Reginald Stroud and Blair Kidwell, McGinnisinitiated a fist fight with Eric Rufus, who was a member of ahostile gang.23 Some of Rufus' fellow gang members joined in asthe fight escalated.24

Anticipating the need for a quick getaway, Kidwell ran toMcGinnis' car, drove it toward the scene and parked it nearbywith the motor running.25 With Rufus and his cronies in hotpursuit, McGinnis ran to the car and retrieved a revolver fromthe glove box. 26 At once he fired a shot into the ground.2

1

McGinnis' second shot came by accident when Stroud attemptedunsuccessfully to take the gun away from him, resulting inStroud being shot in the leg.28 One of Rufus' cronies, AntonioMiller, ascended upon Stroud, kicking him after he fell to thesidewalk in pain.2"

All the while, Rufus had advanced further on McGinnis.McGinnis shot again, this time at Rufus' legs.3 ° Rufus was nothurt, although McGinnis had threatened to kill him.3' At thatpoint, Miller ran behind McGinnis, hitting him across the side ofhis face.32 Dazed and stumbling, McGinnis turned and fired forthe fourth time.3 Miller took the shot in his chest and waskilled. McGinnis fled the scene, disposed the gun at some pointthereafter, and was later apprehended.34

At trial, McGinnis claimed self-defense to his killing of Miller,arguing that he shot in fear of his own life in consideration of

22. Id. at 522.23. Id.24. Id.25. Id.26. Id.27. Id.28. Id.29. Id.30. Id.31. Id.32. Id.33. Id.34. Id.

438


Miller's and Rufus' acts of violence toward Stroud and him-self.35 McGinnis further pleaded in vain that he "did not meanfor it to happen."36 While the jury acquitted McGinnis of a sec-ond-degree assault charge in connection with his accidentalshooting of Stroud, it found him guilty of first-degree wantonendangerment for shooting at the feet of Rufus and guilty ofwanton murder in the death of Miller.37 Rufus was sentenced toforty. years imprisonment on the charge of wanton murder andone year for wanton endangerment; both sentences were to runconcurrently.3"

B. Terry v. Commonwealth

The facts of this case, while entirely different from those ofMcGinnis, are equally compelling. Tennessean, Richard WayneTerry, thirty-one, was tried for the death of his brother-in-law,Abraham King, in Jefferson County, Kentucky.39 King was mar-ried to Terry's sister, Elvinia, who had recently died.4" Terryshared a belief with other family members that King was insome way responsible for the death of Elvinia.4'

A few days after Elvinia's passing, King arrived at the home ofElvinia's mother with some of his relatives.42 He proceeded tothe back bedroom of the house where his former mother-in-lawwas making various plans for her daughter's funeral.43 Terrythen arrived upon the scene with his own relatives and met Kingin the back bedroom." Seconds later, King was shot twice, oncethrough the back of the head and again through the neck.4 5

Terry later testified at trial that the weapon involved was King'sgun, which King pulled on him.46 He said he grabbed King'shands and the gun went off during the struggle, firing harmless-

35. Id.36. Id.37. Id.38. Id.39. Id.40. Id.41. Id. at 526.42. Id.43. Id.44. Id.45. Id.46. Id.

1995] 439


ly through a window.4 ' Terry overcame King to obtain the gun,which he then used to shoot King twice, despite the fact thatKing ceased to struggle.48

The evidence showed that Terry ran from the house with hisrelatives - although Terry testified that he waited around alittle while49 - got back into the car in which they came, anddrove directly to his home in Tennessee. 50 At some point duringthis trip, Terry discarded the gun used to kill King out of his carwindow into the countryside.51

At trial, Terry said he "didn't know what his intent was whenhe shot King, other than 'he was scared."'52 The trial court, asin McGinnis, denied the defendant's motion for a directed verdictof acquittal on the charge of wanton murder and refused to in-clude the element of self-defense in the wanton murder instruc-tion." Terry was convicted of wanton murder and was sen-tenced to forty-five years imprisonment. 54

III. BACKGROUND

A. The Shannon Problem

The crux of the problem illustrated by these facts pertains tovarious statutory provisions found in KRS chapter 507, criminalhomicide, and chapter 503, general principles of justification.55

The separate instructions given at trial for murder and wan-ton murder and the resulting convictions for wanton murderunderlie the problem. As Justice Leibson pointed out, "[M]urder'is but one offense which may be committed in one of two differ-ent ways: either by intentionally causing the death of anotherperson or by wantonly engaging in conduct which 'causes thedeath of another person' 'under circumstances manifesting ex-treme indifference to human life."'56

47. Id.48. Id. at 526-27.49. Id. at 527.50. Id. at 526.51. Id.52. Id. at 527.53. Id.54. Id. at 526.55. Id. at 520.56. Id. (quoting KY. REV. STAT. ANN. § 507.020 (Michie/Bobbs-Merrill 1990)). See

440

1995] WANTON MURDER, SELF-DEFENSE

Yet, in order to punish wanton conduct as murder under KRSsection 507.020, the conduct must be as culpable as intentionalmurder.5" Culpable conduct which is merely wanton does notsuffice to convict a person under murder charges. 8 In additionto conduct being wanton in nature, there must also be evidenceof "circumstances manifesting extreme indifference to humanlife,"' for a conviction of murder to arise. To be found guilty ofwanton murder one "must exhibit 'purposeful or knowing' indif-ference [to the killing, or other] conduct evidencing a 'depravedheart' with no regard for human life."6 ° Thus, "[m]urderous in-tent is as much a component of wanton murder as it is of inten-tional murder."'" For McGinnis or Terry to have been guilty ofmurder, it must also have been true that both had murderousintent. From this conclusion the question must necessarily arise:Can wanton murder be charged where proof of the wanton con-duct derives from an act, which may be wanton in nature, but iscommitted in self-defense?62

A derivative question concerns a fundamental presumption ofcriminal law; when an accused admits shooting someone andattempts to justify the shooting as an act of self-protection,63

also Smith v. Commonwealth, 734 S.W.2d 437 (Ky. 1987), cert. denied, 484 U.S. 1036(1988).

57. McGinnis, 875 S.W.2d at 520 (citing KY. REV. STAT. ANN. § 507.020 commen-tary (Michie/Bobbs-Merrill 1990)).

58. Culpable conduct that is merely wanton in nature may only result in chargesof manslaughter in the second degree. Id. at 520.

59. Id. (citing KY. REV. STAT. ANN. § 507.020 commentary (Michie/Bobbs-Merrill1990)) (internal quotation marks omitted).

60. Id. (citing MODEL PENAL CODE AND COMMENTARIES pt. II, § 210.2 (Am. LawInst. 1980)).

61. Id. at 520. As explained by Justice Leibson in his majority opinion, the culpa-ble mental state of wanton murder is equal to that of murder. In a practical sense,the difference between the crimes of intentional murder and wanton murder is illus-trated by the shooting and killing of a person after taking specific aim at the person(murder) versus shooting point-blank into a crowd of people and killing a person(wanton murder). Both scenarios involve the intent to kill someone. See Shannon v.Commonwealth, 767 S.W.2d 548, 552 (Ky. 1988) (citing KY. REV. STAT. ANN.§ 507.020 commentary (Michie/Bobbs-Merrill 1990)). Typical wanton murder conductincludes: shooting into an automobile (see Nichols v. Commonwealth, 657 S.W.2d 932(Ky. 1983), cert. denied, 465 U.S. 1028 (1984)), a crowd or an occupied building;placing a bomb in a public place; or derailing a speeding locomotive. See alsoLAFAVE & SCOTT, supra note 13, for additional examples of actions which may con-stitute "wanton murder."

62. McGinnis, 875 S.W.2d at 521.63. The common law standard to qualify an act of self-protection as a defense


this action must be considered intentional. As quoted in'Shannon: '[The court] cannot escape the fact that an act claimedto be done in self-defense is an intentional act.' 64 Because ac-tions of self-defense must be considered intentional, by statutorydefinition self-protection as a defense is not available in the pros-ecution of an offense for which wantonness or recklessness estab-lishes culpability. 65 It seems that the intentional nature6 ofan act done in self-defense cannot be reconciled with the culpablemental state67 required for wanton murder. This is the secondlegal dilemma extending from the Shannon problem.

And, as Justice Leibson opined, an additional prong of theShannon problem concerns the defendant who claims not onlythat he acted in self-defense, but also that he did not mean tokill the victim. What impact does this sort of testimony have onthe trial court's instructions to the jury?69

Thus, there exist three legal problems extending from thesefacts:

was proof that the actions were "objectively reasonable" in belief of the need for self-

defense. See id. However, Kentucky's enactment of its version of the Model PenalCode in 1971 changed this standard to one of "subjective belief' in the need for self-

defense. See KY. REV. STAT. ANN. § 503.050(2) (MichieiBobbs-Merrill 1990 & Supp.1994) ("The use of deadly physical force by a defendant upon another person is justi-fiable . . .only when the defendant believes that such force is necessary to protect

himself against death, serious physical injury ...." (emphasis added)).

64. Shannon, 767 S.W.2d at 548-49 (quoting Baker v. Commonwealth, 677 S.W.2d876, 879 (Ky. 1984), overruled on other grounds by Shannon, 767 S.W.2d 548).

65. McGinnis, 875 S.W.2d at 521 (citing KY. REV. STAT. ANN. § 503.120(1)

(Michie/Bobbs-Merrill 1990)). The statute states:

When the defendant believes that the use of force upon or toward the

person of another is necessary for any of the purposes for which such beliefwould establish a justification under KRS 503.050 to 503.110 but the defendantis wanton or reckless in believing the use of any such force, or the degree of

such force used, to be necessary or in acquiring or failing to acquire anyknowledge or belief which is material to the justifiability of his use of force,the justification afforded by those sections is unavailable in a prosecution for anoffense for which wantonness or recklessness, as the case may be, suffices toestablish culpability.

KY. REV. STAT. ANN. § 503.120(1) (Michie/Bobbs-Merrill 1990) (emphasis added).66. See supra note 5.67. See supra note 4.68. McGinnis, 875 S.W.2d at 521.69. Id.


1. Can wanton murder be charged where proof of the wantonconduct derives from an act, which may be wanton in nature, butis committed in self-defense?

2. Can the intentional nature of an act done in self-defense bereconciled with the culpable mental state required for wantonmurder?

3. What effect does the defendant's statements that he did notmean to kill another person have on the instructions given to thejury?

B. The Twist in the Shannon Problem

The twist in the Shannon problem is that all the legal dilem-mas attributed to the case should not have arisen therefrom.70After a long line of cases in which the Kentucky Supreme Courtstruggled with the claim of self-defense coupled with the variouscriminal homicide classifications,71 Shannon was meant to bethe court's definitive opinion on these issues, although similarones were addressed later in McGinnis.72 Recalling its dicta inShannon, the court opined in McGinnis:7 3

[T]rial judges should not instruct on wanton murder where theclaim is self-defense because: (1) if this claim is not believed, theaccused's intention in firing the fatal shot or striking the fatal

70. See id.71. Blake v. Commonwealth, 607 S.W.2d 422 (Ky. 1980), overruled by Baker v.

Commonwealth, 677 S.W.2d 876, 879 (Ky. 1984); Baker, 677 S.W.2d 876, overruled byShannon v. Commonwealth, 767 S.W.2d 548 (Ky. 1988); Gray v. Commonwealth, 695S.W.2d 860 (Ky. 1985), overruled by Shannon, 767 S.W.2d 548; Commonwealth v.Rose, 725 S.W.2d 588 (Ky. 1987), cert. denied, 484 U.S. 838 (1987), overruled byCommonwealth v. Craig, 783 S.W. 2d 387 (Ky. 1990). For an analysis of several ofthese cases, see Kohlheim v. Commonwealth, 618 S.W.2d 591 (Ky. Ct. App. 1981),overruled by Shannon, 767 S.W.2d 548; Thompson v. Commonwealth, 652 S.W.2d 78(Ky. 1983), overruled by Shannon, 767 S.W.2d 548; Roston v. Commonwealth, 724S.W.2d 221 (Ky. Ct. App. 1987). See WILLIAM S. HAYNES, KY. JUR. CRIMINAL LAWDefenses § 15-14 (1986 & Supp. 1994) for a partial summary of these cases as theyinterpret the availability of self-defense in homicide cases.

72. McGinnis, 875 S.W.2d at 521. This is not to say that the issues in Shannonwere identical to those addressed in McGinnis. As argued by Justice Leibson inMcGinnis, "One of the problems with Shannon, perhaps, is that it did not sufficientlyaddress the problem that arises where, in claiming self-defense, the defendant alsodenies meaning to kill the victim." Id. at 524.

73. See infra part IV.A-B.

1995] 443


blow fits only the definition of "intentionally" in KRS 501.020(1);(2) on the other hand, if this claim of self-defense is believed, butthe jury further believes the defendant wantonly or recklessly per-ceived a need for self-protection or deadly force where none ex-isted, the level of culpability needed for wanton murder is missingand under KRS 503.120 the act should be punished only as Man-slaughter II or Reckless Homicide."4

However, although the court came to the same basic conclu-sion in McGinnis and Terry, it faced a very different proceduralbackground in Shannon. Unlike defendants McGinnis and Terry,Shannon failed to move for a directed verdict on the charge ofwanton murder and object to an instruction on the charge.75

Given the procedural deficiencies in Shannon and what the courtsaw as "overwhelming" evidence 6 of the defendant's guilt of theunderlying murder offense, the court held in Shannon that thetrial court's error in instructing the jury was "harmless andunpreserved."7 Thus, the court in Shannon actually affirmed amurder conviction despite the faulty jury instructions on thewanton murder offense.78

Shannon's conviction, which was upheld on appeal, has beenthe source of confusion in a subsequent "class of cases." As Jus-tice Leibson explained in McGinnis:

The unintended result of the Shannon opinion has been to createa class of cases wherein, because the accused claims self-defense,trial courts have been instructing on wanton murder while disre-garding the fact that diminished culpability is a necessary corol-lary to a "wanton or reckless belief' in the need for self-de-fense.

One of these cases was Barbour v. Commonwealth" in whichthe Kentucky Supreme Court upheld the conviction of the defen-dant for wanton murder despite evidence of intentional actions ofself-defense.81 Although Barbour caused the death of another by

74. McGinnis, 875 S.W.2d at 521.75. Id.; Shannon, 767 S.W.2d at 551.76. McGinnis, 875 S.W.2d at 521.77. Id. See Shannon, 767 S.W.2d at 552-53.78. Shannon, 767 S.W.2d at 552.79. McGinnis, 875 S.W.2d at 521.80. Barbour v. Commonwealth, 824 S.W.2d 861 (Ky. 1992), overruled by

McGinnis, 875 S.W.2d 518.81. Id. at 864. The opinion of the court in Barbour was written by Justice

444


"sticking" him with a knife after a verbal encounter, he claimedhis actions were in self-defense and not intended to causedeath.82 The trial court instructed the jury on the full range ofhomicides as in McGinnis, inconspicuously inserting a self-de-fense instruction.8" The jury found Barbour guilty of wantonmurder. Barbour appealed on the basis there was no evidence ofwanton conduct to support the conviction.8 4

Despite recognizing the admonition in Shannon against in-structing the jury on self-defense and wanton murder, the Ken-tucky Supreme Court affirmed the trial court's conviction.85 Itfound that "[w]hile it was error to give such [a self-defense] in-struction, it redounded to the benefit rather than to the detri-ment of the appellant," and thus, was not a proper ground forreversal.86 In his dissent, Justice Leibson stated plainly, "Theinstructions given in this case were contrary to the Penal Code,were contrary to the explanation of [the] Penal Code in[Shannon] ... and were prejudicial error."87

Another notable case belonging in this class is Sizemore V.Commonwealth.88 In Sizemore, the defendant had killed hisbrother in the course of a mutual fight that escalated into ashoot-out in the former's potato patch.89 The full gamut of ho-micide offenses, less reckless homicide, was provided for in thejury instructions along with an instruction for self-defense (forall offenses other than wanton murder).9" The jury convictedSizemore of wanton murder.91 And as in Barbour, the KentuckySupreme Court again upheld the conviction of the defendant forwanton murder in disregard of the substantive holding ofShannon .92

Reynolds, who later dissented from the court's decision in McGinnis. Justice Leibson,writing for the majority in McGinnis, not surprisingly, dissented in Barbour.

82. Id. at 862.83. Id.84. Id.85. Id. at 863-64.86. Id. at 864.87. Id. at 866 (Leibson, J., dissenting).88. Sizemore v. Commonwealth, 844 S.W.2d 397 (Ky. 1992), overruled by

McGinnis v. Commonwealth, 875 S.W.2d 518 (Ky. 1994).89. Id. at 398.90. Id.91. Id.92. Id. at 398-99. The majority's opinion in Sizemore was written by Justice

19951 445


In dissenting, Justice Leibson reiterated his resounding theorythat wanton murder does not fit into the available instructionsin self-defense cases such as Sizemore.9" In commenting thatShannon has been misapplied in Barbour and Sizemore, JusticeLeibson, who wrote the court's opinion in Shannon, made aninteresting admission, "I take full responsibility for the opinionin Shannon being misapplied. 94

Thus, despite Shannon's clear admonition against giving aninstruction on wanton murder in cases such as McGinnis, trialcourts had continued to do so on the presumption such instruc-tions were permissible, all the while failing to understand thereason Shannon's conviction was upheld.95 It therefore becamethe court's task in McGinnis, through Justice Leibson, to acceptits "responsibility" and fully "unravel" the "confusion" resultingfrom the misapplication of Shannon.96

IV. THE MAJORITY OPINION

By a slim majority, the Kentucky Supreme Court reversed theconvictions of McGinnis and Terry for the offenses of wantonmurder.9" Noting that the defendants had properly preservedthe issues surrounding their convictions for wanton murder onappeal unlike in Shannon,98 the court concluded that, "IT]hevarious provisions of the Penal Code, construed as a whole, donot justify submitting the case on a wanton murder instructionwhere the issue is self-defense . ... .99

Wintersheimer, who later dissented in McGinnis. Justices Combs and Leibson dis-sented in separate opinions.

93. Id. at 406-07 (Leibson, J., dissenting).94. Id. at 407.95. McGinnis v. Commonwealth, 875 S.W.2d 518, 522 (Ky. 1994).96. Id.97. Id. at 529. Chief Justice Stephens, Justice Lambert, and Justice Stumbo con-

curred with Justice Leibson for the majority. Justices Spain, Reynolds, andWintersheimer joined in two separate dissenting opinions. The court also discussed anumber of other unrelated legal issues of each case, the substance of which shall not

be discussed in this article unless relevant to the topic of wanton murder.98. See sulira part III.B.99. McGinnis, 875 S.W.2d at 524.

446


A. McGinnis v. Commonwealth

After disposing of a number of other issues, all of which wereirrelevant to the court's discussion of McGinnis' wanton murderconviction, the court first considered the problem resulting fromMcGinnis' claim that he did not mean to kill the victim.100 Thecourt was particularly concerned whether a murder instructioncould follow such evidence.101 Obviously, as Justice Leibsonconcluded, it could. 12

While an intentional murder instruction requires a jury find-ing of "intent to cause the death of another person" under KRSsection 507.020(1), intent may be inferred from the consequenc-es, regardless of the defendant's claim that he did not mean tkill his victim.0 ' The crime of homicide ,is a "result" offense:whether the accused means to kill or not is inconsequentialwhere the defendant knows his conduct is of such a nature tocause the death of another.0 4 Thus, as held in Shannon, whilethe defendant's claim that he did not mean to kill is part of theself-defense claim, it does not change the character of intentionalmurder to wanton murder.0 5

Although a murder conviction can follow such evidence ofdefendant's claim denying any intent to kill, the jury should alsobe instructed on other homicide charges, on the assumption suchtestimony supports the defendant's diminished culpability. 106

An instruction for voluntary manslaughter, 107 qualified by anaccompanying self-defense instruction, suffices where the defen-dant shoots "with intent to cause serious physical injury to an-other person" but causes death.' 8 As Justice Leibson ex-plained, 'This instruction would apply where the jury does not

100. Id.101. Id.102. Id.103. Id.104. Id. See also KY. REV. STAT. ANN. § 501.020 commentary (Michie/Bobbs-Merrill

1990) (stating that for result offenses, like homicide and assault, "the distinctionbetween intentionally and knowingly is practically nonexistent").

105. See McGinnis, 875 S.W.2d at 524.106. Id. at 524-25.107. Voluntary manslaughter is also known as manslaughter in the first degree

under KY. REV. STAT. ANN. § 507.030 (MichiefBobbs-Merrill 1990). See supra note 14.108. McGinnis, 875 S.W.2d at 525 (citing KY. REV. STAT. ANN. § 507.030(1)(a)

(Michie/Bobbs-Merrill 1990)). See supra note 14.

1995] 447


believe the claim of self-defense, but further concludes the defen-dant did not intend to kill."' 9

Instructions for Manslaughter I1110 and RecklessHomicide". should also be given in case a jury finds a defen-dant did not intend serious physical injury by his actions, whichnevertheless cannot be justified as reasonable. Any defendantwho shoots in the direction of a victim without justification maybe found to have wantonly caused the death of another personunder the charge of Manslaughter II or recklessly caused thedeath of another person under the charge of Reckless Homi-cide.

112

The instruction that should not have been given was one forwanton murder."' Evidence that the defendant did not meanto cause the death of the victim, if believed, establishes thedefendant's diminished culpability." 4 Once this is established,a defendant "cannot be convicted on evidence of this nature ofwanton murder because, although the element of wantonness ispresented, the element of extreme indifference to human life isnot."115

The court found support for its conclusion in its prior decision,Holbrook v. Commonwealth,"6 which interpreted in part theShannon decision:

In Shannon, we recognized that an individual may intentional-ly commit murder while acting under a wanton or reckless belief,and that the actor's subjective belief may be unreasonable whenviewed by an objective standard. If the jury believes from theevidence that the defendant's claimed need for self-defense isobjectively reasonable under the circumstances, then it becomes a

109. McGinnis, 875 S.W.2d at 525.110. Manslaughter II is also known as involuntary manslaughter under KY. REV.

STAT. ANN. § 507.040(1) (Michie/Bobbs-Merrill 1990). See sup'a note 15.111. KY. REV. STAT. ANN. § 507.050(1) (Michie/Bobbs-Merrill 1990). See supra note

16.112. McGinnis, 875 S.W.2d at 525.113. Id.114. Id.115. Id. Justice Leibson noted the following language on point from the dissenting

opinion of Justice Dan Jack Combs in Sizemore: "[Wiantonness suffices to establishculpability for manslaughter in the second degree, but it does not suffice to establishculpability for wanton murder, which requires the additional state-of-mind element ofmanifest extreme indifference to human life." Sizemore v. Commonwealth, 844 S.W.2d397, 403 (Ky. 1992) (Combs, J. dissenting), overruled by McGinnis, 875 S.W.2d 518.

116. Holbrook v. Commonwealth, 813 S.W.2d 811 (Ky. 1991).

448


complete defense. However, if the justification is not reasonable,then the defendant can only be convicted under Shannon of eitherthe offenses of manslaughter in the second degree or reckless homi-cide, depending upon the juys determination of the defendant'sstate of mind at the time of the act."'

The court also found that Shannon plainly states that self-de-fense is no defense to an offense where the culpable mental stateis either wanton or reckless." 8 The court then reasoned, "Bythe same token, wanton murder is no option in the self-defensescenario. ' " 9

The relationship between self-defense under KRS section503.050 and diminished culpability under KRS section 503.120 ismutually exclusive. 2 ° A person who acts in the belief that hislife is in danger, no matter how wanton the belief, cannot beconvicted of wanton murder. He can be convicted of manslaugh-ter in the second degree because a self-defense argument is notjustified under this offense.' 2 ' Under any conception of theterms, self-defense is an available defense to a charge of inten-tional murder, but not for a charge of second-degree manslaugh-ter. Subsequently, the court concluded that "[iun structuring fourdegrees of criminal homicide based on the degree of culpability,the Penal Code intended no such result" as the wanton murderconviction of McGinnis."2

117. McGinnis, 875 S.W.2d at 525 (quoting Holbrook, 813 S.W.2d at 814 (quotingShannon v. Commonwealth, 767 S.W.2d 548, 550-52 (1988))) (emphasis added). Asthe Holbrook court went on to explain, 'The logic behind this theory is . . . that '[a]subjective belief in the need for self-defense, which is objectively wanton or reckless,is a 'circumstance' falling within the definition of wanton or reckless behavior .... "

Holbrook, 813 S.W.2d at 814 (quoting Shannon, 767 S.W.2d at 551-52). See alsosupra note 4 for a definition of wanton conduct.

118. McGinnis, 875 S.W.2d at 526 (citing Shannon, 767 S.W.2d 548; Ky. REV.STAT. ANN. § 503.120 (Michie/Bobbs-Merrill 1990)). See also William S. Cooper &Robert G. Lawson, Self-Defense in Kentucky: A Need for Clarification or Revision, 76KY. L.J. 167, 174 (1987-88).

119. McGinnis, 875 S.W.2d at 526.120. Id.121. Id. See also KY. REV. STAT. ANN. § 503.120 commentary (MichiefBobbs-Merrill

1990).122. McGinnis, 875 S.W.2d at 526.

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B. Terry v. Commonwealth

The Kentucky Supreme Court found that Terry, likeMcGinnis, had preserved his right to a directed verdict on thecharge of wanton murder and preserved his objection to the in-struction on the same charge.'23 Although Terry shot Kingthrough the back of the head, the court deduced that a jury stillcould have found Terry acted in self-defense or at least thoughthe was doing so.'24

After disposing of some unrelated issues, the court once againsummarized its findings concerning McGinnis. Under the PenalCode, if Terry believed he needed to act in self-defense, no mat-ter whether such belief was wanton or unreasonable, Terry'sdegree of culpability did not rise to the level necessary to convicthim of murder. 125 At the very most, Terry's level of culpabilitywas sufficient to charge the jury on the offenses of ManslaughterII or Reckless Homicide, not qualified by a self-defense instruc-tion because, as already mentioned, such is "unavailable in aprosecution for an offense for which wantonness or recklessnessestablish[es] culpability."'26 The charges of Manslaughter IIand Reckless Homicide also would have sufficed if the jury ac-cepted that Terry's belief in the need for self-defense was objec-tively reasonable, or if the jury did not believe Terry's claim ofself-defense but found Terry intended no or minimal injury.'27

Justice Leibson, writing for the majority, also found that aninstruction on Manslaughter I accompanied by a self-defenseinstruction was proper.128 Such instruction would have coveredthe situation where the jury concluded from Terry's testimonythat, while he lacked the intent to cause death which might leadto a conviction of intentional murder, he intended serious physi-cal injury. 29 Provided the jury also found Terry was not actingin self-defense, Manslaughter I would have been the appropriate

123. Id. at 528.124. Id.125. Id.126. Id. at 528-29 (citing KY. REV. STAT. ANN. § 503.120(1) (Michie/Bobbs-Merrill

1990)).127. Id. at 529.128. Id.129. Id.


conviction. 30 Furthermore, "Manslaughter I [was] the appro-priate verdict should the jury [have concluded] Terry shot to killwhile acting under the influence of extreme emotional distur-bance" under KRS section 507.030(2). 1''

V. THE DISSENTING OPINIONS

A. Justice Spain

Justice Spain, joined by Justices Reynolds and Wintersheimer,specifically opposed the majority's reversal of the convictions ofMcGinnis and Terry for wanton murder.'32 Justice Spain ar-gued that the "peculiar circumstances of each of these cases"completely justified the trial court instructing the jury on theoffenses of wanton murder and intentional murder. 3' In sup-port of his dissenting view, Justice Spain focused his attentionon what he considered sufficient evidence in two prior casesconsidered by the court to establish the guilt of these prior defen-dants on the charge of murder.' However, he failed to makeany comparison of the facts of these prior cases to the facts ofMcGinnis and Terry. For lack of such comparison, Justice Spain'spretentious argument lacked support.

Labeling the majority's opinion a "scholarly dissertation of allthe precise niceties of theoretical criminal law," Justice Spainalso attacked what he saw as the "ivory tower" majority's en-gagement in "a high degree of 'Monday morningquarterbacking.""35 He concluded that the proper inquirywould have been to leave the decision-making in the hands ofthe jury.'36 In support thereof, Justice Spain noted an interest-ing passage from the Comments of the Model Penal Code:

"[T]here is a kind of [wanton] homicide that cannot fairly bedistinguished... from homicides committed [intentionally]. [Wan-

130. Id.131. Id. (citing KY. REV. STAT. ANN. § 507.030(2) (Michie/Bobbs-Merrill 1990)).132. Id. (Spain, J., dissenting).133. Id. (arguing that the Kentucky Supreme Court's partial reversals of these

cases were unnecessary: Barbour v. Commonwealth, 824 S.W.2d 821 (Ky. 1992), over-ruled by McGinnis, 875 S.W.2d 518; Sizemore v. Commonwealth, 844 S.W.2d 397(Ky. 1992), overruled by McGinnis, 875 S.W.2d 518).

134. Id. at 529-30.135. Id. at 530.136. Id.

1995]


tonness] ... presupposes an awareness of the creation of substan-tial homicidal risk, a risk too great to be deemed justifiable byany valid purpose that the actor's conduct serves .... Whether[wantonness] is so extreme that it demonstrates similar indiffer-ence is not a question that, in our view, can be further clarified; itmust be left directly to the trier of the facts. If [wantonness] existsbut is not so extreme, the homicide is manslaughter ...""'

As stated in this passage, the dissenters concluded that the in-structions and convictions for wanton murder were proper inthese cases and otherwise under the discretion of the trial judgeand jury, respectively.' 8

B. Justice Wintersheimer

In a separate opinion in which all of the other members of thedissent equally concurred, Justice Wintersheimer raised thesame basic argument as Justice Spain, noting that convictions ofthis sort are best left to the jury.139 Claiming that the"Shannon problem is not solved in any respect," JusticeWintersheimer found, "The holding in Shannon is perfectlysound.' 4 °

Justice Wintersheimer contributed support to Justice Spain'sargument that the jury was justified in convicting both McGinnisand Terry of murder (in either form) through his plain restate-ment of the facts:

McGinnis claims not to have wanted to kill the victim, yet duringa street brawl, where he was the only person armed with a gun,he spun around and discharged the gun at point blank range intothe victim's chest. Terry claims he wrestled the gun out of thevictim's hands before shooting him in the neck and the back of thehead. 4'

By this summary of the facts, a reversal of the convictions forwanton murder justifiably seemed unreasonable to the dissent-ers. 1

42

137. Id. (quoting MODEL PENAL CODE § 201.2 cmt. 2 (Tentative Draft No. 9,1959)).

138. Id. at 530.139. Id. at 530-31 (Wintersheimer, J., dissenting).140. Id. at 531.141. Id. (concluding that there was no reason to reverse the decision of the jury).142. Id.

452


Justice Wintersheimer concluded his dissenting opinion with adiscussion of the legal precedential value of the commentary tothe Penal Code which the majority had quoted at length. 4 3 Al-though he may have been correct that the dated statutory com-mentary is nothing more than "a series of 'unofficial notes, ''"A 44

Justice Wintersheimer failed to cite any substantive legal au-thority in support of his legal conclusions and otherwise contraryto the commentary. Thus, much like Justice Spain's dissentingarguments, Justice Wintersheimer's points, while well-taken,somewhat fizzled out.

VI. ANALYSIS

Through the series of cases beginning with Shannon and end-ing with McGinnis, the Kentucky Supreme Court has come fullcircle. It unintentionally created a legal dilemma in Shannon,which was subsequently misapplied in Barbour and Sizemore,and attempted to solve the problem in McGinnis. Part of thesolution in McGinnis was to overrule the court's decisions inBarbour and Sizemore insofar as they misinterpret Shannon.45

Thus, the legal community is left with the court's decisions inShannon and McGinnis.

The various prongs of the Shannon problem have previouslybeen documented in this article. 4 The only question which re-mains is whether the problem has been solved. That is, has thecourt through its majority opinion in McGinnis adequately pre-pared the next trial court that faces similar facts to properlyinstruct a jury on the available charges? The key facts in all ofthese cases are that the defendant admitted or the evidencesupported: his intentional act of shooting at his victim; his inten-tional act was in self-defense; and he did not mean to kill thevictim. The key mistake in all of these cases is that the charge ofwanton murder was instructed as a separate offense from theintentional murder instruction.

143. Id. at 531-32. See also Shannon v. Commonwealth, 767 S.W.2d 548, 555 (Ky.1988) (Vance, J., dissenting) ("The commentary is not the law of the Common-wealth.").

144. McGinnis, 875 S.W.2d at 531 (Wintersheimer, J., dissenting).145. McGinnis v. Commonwealth, 875 S.W.2d 518, 526 (Ky. 1994).146. See supra part III.A-B.

1995] 453


As Justice Leibson argued in his dissenting opinion inSizemore and his majority opinion in McGinnis, there are onlyfour instructions which should follow facts similar to those stat-ed above:

147

(1) If a jury finds that a defendant did not actually believe heneeded to shoot a victim in self-defense, but rather that hemeant to kill the victim, an instruction for intentional murdershould be charged and a conviction thereunder may follow. 148

(2) If the jury finds that the defendant did not believe in theneed for self-defense but did not mean to kill the victim, an in-struction for manslaughter in the first degree (voluntary man-slaughter) is appropriate. 149

(3) If the jury finds that the defendant actually believed he need-ed to shoot the victim in self-defense, which caused the victim'sdeath, but such belief was wanton, an instruction for manslaugh-ter in the second degree (involuntary manslaughter) would suf-fice. 1

5 0

(4) If the jury finds that the defendant actually believed he need-ed to shoot the victim, which caused the victim's death, but suchbelief was reckless, an instruction for -reckless homicide would beappropriate.' 5 '

(5) Finally, if the jury finds that the defendant actually believedhe needed to shoot the victim, which caused the victim's death,and such belief was reasonable, the defendant should be acquit-ted of all charges.'52

147. Sizemore v. Commonwealth, 844 S.W.2d 397, 408 (Ky. 1992) (Leibson, J.,dissenting), overruled by McGinnis 875 S.W.2d 518; McGinnis, 875 S.W.2d at 524-25.

148. Sizemore, 844 S.W.2d at 408 (Leibson, J., dissenting).149. Id.150. Id.151. Id.152. Id.

454

1995] WANTON MURDER, SELF-DEFENSE 455

'THERE IS NO PLACE IN THIS STRUCTURE OF POSSIBLEOFFENSES FOR A WANTON MURDER INSTRUCTION OR AWANTON MURDER CONVICTION. 153

There are several reasons why a wanton murder instructiondoes not fit these facts, all of which a trial court should beaware. The primary reason a wanton murder instruction doesnot fit these facts is because an intentional murder instructiondoes. As mentioned by Justice Leibson, under KRS section507.020 "murder" is one offense which can be committed in twodifferent ways.1 54 It is the exception when a defendant's actionstoward a single victim justify dual charges for intentional mur-der and wanton murder.'55 While the two types of murdershare the element of murderous intent, they are otherwise quitedifferent in application. Thus, where one type of murder ischarged related to the death of a specific victim, the other doesnot generally apply.'56 And more specific to the facts of thesecases, "It]he ordinary situation involving shooting or stabbing

153. Id.154. McGinnis v. Commonwealth, 875 S.W.2d 518, 520 (Ky. 1994) (citing KY REV.

STAT. ANN. § 507.020 (Michie/Bobbs-Merrill 1990)).155. See Barbour v. Commonwealth, 824 S.W.2d 861, 863 (Ky. 1992), overruled by

McGinnis, 875 S.W.2d 518, where Justice Reynolds, writing for the majority stated,'This court recognizes that it is improper to instruct as to intentional murder and asto wanton murder when all of the evidence indicates that the defendant's conductwas either intentional or wanton to the exclusion of the other culpable state or mur-der." Id. (citing Smith v. Commonwealth, 737 S.W.2d 683 (Ky. 1987); Gray v. Com-monwealth, 695 S.W.2d 860 (Ky. 1985), overruled by Shannon v. Commonwealth, 767S.W.2d 548 (Ky. 1988); Baker v. Commonwealth, 677 S.W.2d 876 (Ky. 1984), over-ruled by Shannon, 767 S.W.2d 548; Hayes v. Commonwealth, 625 S.W.2d 583 (Ky.1981)). But see Wallen v. Commonwealth, 657 S.W.2d 232 (Ky. 1983) (upholding thegiving of jury instructions for intentional murder and wanton murder for the singleacts of the defendant).

156. But see Sizemore v. Commonwealth, 844 S.W.2d 397, 402 (Ky. 1992) (Combs,J., dissenting), overruled by McGinnis, 875 S.W.2d 518:

Under our statutes, then, intentional murder and wanton murder are not mu-tually exclusive. All murders are wanton murder; some of them fall into a sub-set - intentional murder - which may affect sentencing, but these are none-theless wanton murder as well. Technically, a wanton murder instruction maybe given in any case wherein an intentional murder instruction is appropri-ate ....

See also F. Lee Bailey & Henry B. Rothblatt, Crimes of Violence: Homicide andAssault, § 552 (1973) (citing 40 AM. JUR. 2D Homicide § 53 (1968) ("Generallyspeaking, where there has been an unlawful killing and the evidence reveals neithera condition of express malice, nor justification, nor such facts as might reduce it tomanslaughter, the slayer is guilty of murder in the second degree.")).


under an erroneous belief in the need for self-defense is not com-patible with" a wanton murder charge.5 7

Another reason why a wanton murder instruction does not fitthese facts is because the culpable mental state required for aconviction on the charge is largely eliminated by a showing ofself-defense. Even where the defendant's belief in the need forself-defense is wanton in nature, he still cannot be convicted ofmurder.'58 Although the defendant may have acted in such amanner as to cause the death of another, his actions when sup-ported by a showing of self-defense cannot establish the neces-sary culpable mental state to result in a murder conviction.'59

In addition, the fact that the defendant did not intend to killhis victim, if believed by the jury, may contribute to a finding ofthe defendant's diminished culpability. Although his actions mayhave been wanton, the defendant cannot be convicted of wantonmurder in light of such evidence because the element of extremeindifference to human life is missing.60 A conviction undermanslaughter in the second degree or reckless homicide, un-qualified by any self-defense instruction, would be proper.' 6'Given these logical reasons why a wanton murder instruction isinappropriate under the facts presented in each of these cases, itseems that trial courts may finally have the proper road mapwhen instructing juries in these type of cases. An instruction forwanton murder is not a stop on this map, even when coupledwith a self-defense instruction.'62 Instructions for intentionalmurder with a self-defense instruction, manslaughter in the firstdegree with the same self-defense instruction, or manslaughterin the second degree coupled with reckless homicide less anyself-defense instructions should be given.6 3

157. Shannon, 767 S.W.2d at 552. But see Wallen, 657 S.W.2d 232.158. McGinnis, 875 S.W.2d at 526.159. Id. (citing KY. REV. STAT. ANN. § 503.120 commentary (Michie/Bobbs-Merrill

1990)).160. Id. at 525, 528.161. Id. at 529.162. See Sizemore v. Commonwealth, 844 S.W.2d 397, 407 (Ky. 1992) (Leibson, J.,

dissenting), overruled by McGinnis, 875 S.W.2d 518 ('The intent in Shannon was totell trial courts not to instruct on wanton murder in cases like the present one. Butthe Shannon case has been misconstrued as advising the opposite - to instruct onwanton murder, but omit self-defense.").

163. McGinnis, 875 S.W.2d at 528-29.

456

1995] WANTON MURDER, SELF-DEFENSE

However, as seen in prior cases, the fact that an instructionfor wanton murder is given under these facts does not guaranteea reversal of the resulting conviction. Because the error of in-structing the jury on wanton murder may be prejudicial, suchshould be properly preserved at trial to afford an appeal.'64

Shannon failed to do this, and thus, his conviction was up-held.'65 However, even when properly preserved, the error maynot be deemed prejudicial'66 where there is overwhelming evi-dence of the defendant's guilt of intentional murder.'67 In otherwords, if the evidence more than supports a conviction for inten-tional murder, then a conviction for wanton murder, which car-ries the same penalty, may not be deemed prejudicial. 8' Thisin fact was the case in Shannon,'69 Barbour,7 ° and possiblyeven in Terry.17' A conviction for wanton murder in Terrymight not have proven to be prejudicial error because the jurydid not rule out the possibility of a subsequent conviction forintentional murder.17 Therefore, it is plausible that Terrycould still have been found guilty of intentional murder.

The prejudicial error of a wanton murder instruction is clearlyseen in Sizemore and McGinnis. In these cases, the juries found

164. Sizemore, 844 S.W.2d at 399; Eversole v. Commonwealth, 550 S.W.2d 513(Ky. 1977).

165. Shannon v. Commonwealth, 767 S.W.2d 548, 552 (Ky. 1988).166. See KY. R. CRIM. PROC. § 9.24 (stating that no error is grounds for setting

aside a verdict "unless it appears to the court that the denial of such relief would beinconsistent with substantial justice").

167. See HAYNES, supra note 71, Trial § 16-1. See also Brown v. Commonwealth,711 S.W.2d 488, 490 (Ky. 1986).

168. See HAYNES, supra note 167. See also Barbour:

The problem here is that the appellant has been erroneously convicted ofwanton murder when there is overwhelming evidence that would have justifiedconvicting him of intentional murder. Both crimes carry the same penalty, andit is difficult to afford the appellant relief based on what some may view as atechnicality.

Barbour v. Commonwealth, 824 SW.2d 861, 866 (Ky. 1992) (Leibson, J., dissenting),overruled by McGinnis v. Commonwealth, 875 S.W.2d 581 (Ky. 1994).

169. Shannon, 767 S.W.2d at 552.170. Barbour, 824 S.W.2d at 864.171. McGinnis, 875 S.W.2d 518.172. Id. at 520 (where the jury disregarded the instruction on intentional murder).

See also Wells v. Commonwealth, 561 S.W.2d 85, 88 (Ky. 1978) ("Ve hold that averdict cannot be successfully attacked upon the ground that the jurors could havebelieved either of two theories of the case where both interpretations are supportedby the evidence and the proof of either beyond a reasonable doubt constitutes thesame offense.").


the defendants "not guilty" under an intentional murder instruc-tion, but guilty of wanton murder.' The wanton murder in-struction plainly prejudiced Sizemore and McGinnis since, in itsabsence, the juries likely would have found them guilty of alesser, non-capital offense.

It is the difference between cases like Terry and McGinniswhich may lead to further confusion. If and when these factsarise again in the future on appeal - even though such a caseshould not arise if trial courts instruct juries according to thedefinitive McGinnis opinion - an appellate court may find itselftrying to decipher whether a prejudicial error has occurred. Un-less the jury has specifically precluded an intentional murderconviction, the appellate court may find it difficult to determinewhether there is overwhelming evidence to support a murderconviction, even if the jury mislabeled it as wanton murder. De-spite the due process considerations raised by Justice Leibson inhis dissent in Barbour,'74 prejudicial error must exist before aconviction will be overturned.'75 Therefore, if a defendant isfound guilty of wanton murder, but is not cleared on the chargeof intentional murder, an appellate court may have to initiallydetermine whether prejudicial error has occurred where over-whelming evidence exists to convict the defendant of intentionalmurder.

An additional source of future confusion could be in identifyingthose cases in which McGinnis-style instructions are appropriate.Take, for example, the case of Wallen v. Commonwealth, 76 adecision of the Kentucky Supreme Court written in 1983 by theauthor of the McGinnis opinion, Justice Leibson. In Wallen, thedefendant admitted that he shot the victim, who allegedly rapedhis sister, after driving to the victim's home to confront him.'77

Wallen claimed self-defense in the shooting, arguing that hethought the victim had a knife in his hand.' 8 There was someadditional testimony to the effect that the defendant may have

173. Sizemore v. Commonwealth, 844 S.W.2d 397, 408 (Ky. 1992) (Leibson, J.,dissenting), overruled by McGinnis, 875 S.W.2d 518; McGinnis, 875 S.W.2d at 520.

174. Barbour, 824 S.W.2d at 866 (Leibson, J., dissenting).175. Sizemore, 844 S.W.2d at 399.176. Wallen v. Commonwealth, 657 S.W.2d 232 (Ky. 1983).177. Id. at 233.178. Id. (where the alleged object was actually a beer can).


been intoxicated.179 The trial judge instructed the jury on in-tentional murder and wanton murder, and the jury found Wallenguilty of murder. 8 °

On appeal, the court dismissed Wallen's argument that wan-ton murder should not have been charged because, as inShannon, the defendant failed to properly preserve the error.' 8 'Justice Leibson added:

However, considering the evidence as a whole, in our view itwas sufficient to support an instruction on both the alternativemental states to murder. Appellant claims he shot Mullins inten-tionally in self-defense. On the other hand, from the testimony andthe circumstances in the case it was reasonable to infer that ap-pellant was shooting wantonly while overcome by a combination ofanger and alcohol. 182

Thus, in this opinion, which is not cited in Shannon orMcGinnis, the court supported a wanton murder instruction inthe face of evidence of the defendant's intentional acts of self-defense.

How are the facts in Wallen different than those in Terry?Both Wallen and Terry killed another through intentional ac-tions. Both Wallen and Terry initiated the actions which led tothe deaths by confronting their victims in a state of anger. Andboth defendants claimed they acted in self-defense. Could it bethe suggestion that Wallen was intoxicated that displaced thecourt's attention away from the giving of a wanton murder in-struction despite evidence of self-defense? The effect of such apresumption would be to deny the claim of self-defense to anyintoxicated person involved in any criminal activity. Yet, this iscertainly not the case because an intoxicated defendant may beentitled to a self-defense instruction. 183

179. Id. at 234.180. Id. (showing no indication of whether the conviction was for intentional mur-

der or wanton murder).181. Id.182. Id. (emphasis added).183. See, e.g., Burch v. Commonwealth, 555 S.W.2d 954, 958 (Ky. 1977) (where

intoxicated defendant received an instruction on self-defense in the shooting death ofhis minor-stepson). See also Brown v. Commonwealth, 575 S.W.2d 451, 452 (Ky.1978) (showing a defendant's drunkenness can, in some instances, have the effect ofexcusing the defendant from being found guilty of intentional crimes where evidenceof defendant's intoxication is sufficient to require defense of voluntary intoxication tobe submitted to jury).

1995] 459


Interestingly enough, in Roston v. Commonwealth,8 4 anoth-er case pre-dating Shannon, the Kentucky Court of Appeals af-firmed the conviction of a defendant for involuntary manslaugh-ter under facts similar to those of McGinnis. Roston, likeMcGinnis, got into a fight in the parking lot of a Louisville fast-food restaurant.'85 However, unlike McGinnis, Roston wasfighting with a woman, Josephine McCray. When McCray pulleda knife on Roston, he whipped out a pistol and fired three shots,one of which killed McCray. At trial, Roston claimed self-de-fense. 1

86

As if guided by the Kentucky Supreme Court's opinion inMcGinnis, the trial court properly instructed the jury on thecharges of intentional murder, first-degree manslaughter, sec-ond-degree manslaughter, and reckless homicide.'87 A chargeon wanton murder was objected to and subsequently not giv-en. 8 However, when the defendant was convicted of second-degree (wanton) manslaughter, he appealed on the grounds thatthere was no evidence that his actions were wanton in na-ture.8 9

The Kentucky Court of Appeals affirmed Roston's convictionprimarily because he failed to preserve the issue for appeal. 9 °

Yet, it also found that while the evidence showed Roston inten-tionally shot McCray, he did not have the "conscious objective" ofkilling her.' 9 ' In support thereof, the court noted that duringRoston's testimony at trial, he "did not state that he intended tokill McCray."' 92 And what if Roston had so stated that he in-tended to kill McCray? Would this mean that a wanton murdercharge would have been proper? The court in Roston seemed tobelieve it would in so much as it cited Wallen as authority. 193

184. Roston v. Commonwealth, 724 S.W.2d 221, 223 (Ky. Ct. App. 1986). Thiscase, like Wallen, was not cited in Shannon or McGinnis.

185. Id. at 222.186. Id.187.. Id.188. Id.189. Id.190. Id.191. Id. at 223.192. Id.193. Id. at 222-23.

460


The results in Wallen and Roston and the failure of the Ken-tucky Supreme Court to specifically overrule these opinions inMcGinnis may serve as a forewarning of bad things to come.Wallen explicitly stands for the proposition that a defendant canbe charged with intentional murder and wanton murder for thesame actions despite a claim of self-defense. Roston gives a de-fendant an escape valve from charges of wanton murder so longas the jury believes him when he testifies that he did not meanto kill the victim or at least remains silent about his intentions.Both cases may haunt the Kentucky Supreme Court in its con-tinued effort to clean up the Shannon mess.

VII. CONCLUSION

As the Kentucky Supreme Court stated in its final commentsin McGinnis, "[W]e reverse the convictions of both Dante LeeMcGinnis and Richard Wayne Terry, and in each case remand tothe trial court for further proceedings consistent with this opin-ion." '194 With these reversals of the defendants' convictions onthe charges of wanton murder comes a new and definitive set ofinstructions for all future trial courts to follow in similar cases.Intentional murder and manslaughter in the first degree quali-fied by a self-defense instruction, as well as manslaughter in thesecond degree and reckless homicide are all options which shouldbe provided for in jury instructions in such cases.

With the McGinnis and Terry reversals also comes a relativelysimple solution to the multi-prong Shannon problem: eliminatewanton murder from the jury's instructions in cases likeMcGinnis and Terry. Yet the solution, as evidenced by the court'sdecision in Shannon,'95 is only as good as its application. Priorconflicting cases, such as Wallen and Roston, may interfere withapplying McGinnis. The crucial moment will be when the nextcase in which similar facts are present is handed. down. Perhapsthe next defendant will be intoxicated like Wallen, or silent likeRoston.

And unless the defendant properly preserves the error andunless the jury precludes a conviction for intentional murder,there is every reason to believe a Shannon-like decision may be

194. McGinnis v. Commonwealth, 875 S.W.2d 518, 529 (Ky. 1994).195. Shannon v. Commonwealth, 767 S.W.2d 548, 553 (Ky. 1988).

1995]


rendered by the court. The Shannon court realized that a seriouslegal error had been made in the instruction for wanton murder,but recognized that no prejudice resulted therefrom since thedefendant could have been found guilty of intentional murder.

Thus, while the court's decision in McGinnis explained andsolved the Shannon problem, it neither accounted for deviationsfrom the facts in future cases nor prevented the future misappli-cation of the solution in the hands of a severely divided Ken-tucky Supreme Court. It seems that McGinnis may only be an-other link in the chain of cases dealing with the Shannon prob-lem. Therefore, future defendants must continue to float uponthe "River Shannon" as it flows on. 9 6 At least from this pointon, future defendants have a new map named McGinnis whichthe trial courts should use to navigate as best they can.

196. See McGinnis, 875 S.W.2d at 530 (Spain, J., dissenting). See also supra part

462

RECENT DECISIONS ON THEKENTUCKY RULES OF EVIDENCE

by Sheryl Egli Heeter"

I. INTRODUCTION

The purpose of this article is to review recent decisions by theKentucky Supreme Court and Kentucky Court of Appeals in civiland criminal cases which address issues of evidence. The Ken-tucky Rules of Evidence (KRE) have been in effect since July 1,1992; 1 however, the KRE may not apply depending on whetherthe action was originally brought before the court on or afterJuly 1, 1992.2 Of the twenty-one cases addressed in this article,three are civil and eighteen are criminal. The cases have beenarranged by topic for the convenience of the reader.

II. GENERAL PROVISIONS

In FB Insurance Co. v. Jones,3 the Kentucky Court of Appealsaddressed the use of an avowal pursuant to KRE 103.4 The is-sue on appeal was whether an expert's testimony was properlyexcluded by the trial court. The insureds had sued their home-owner insurer for the replacement cost of their burned home.5

The insurer had introduced "lengthy and repetitive testimonyfrom three different arson investigators and at least one of their

* Sheryl Egli Heeter is a partner in the Northern Kentucky law firm of

Wasson, Braden, Heeter & King. B.A., M.A., Indiana University; J.D., Salmon P.Chase College of Law, Northern Kentucky University.

1. Ky. R. EVID. 107(b).2. Id.3. FB Ins. Co. v. Jones, 864 S.W.2d 926 (Ky. Ct. App. 1993).4. KY. R. EVID. 103 states in part:

(a) Effect of erroneous ruling. Error may not be predicated upon a rulingwhich admits or excludes evidence unless a substantial right of the party isaffected; and ...

(2) Offer of proof. In case the ruling is one excluding evidence, upon re-quest of the examining attorney, the witness may make a specific offer of hisanswer to the question.5. FB Ins. Co., 864 S.W.2d at 926.

463


assistants."6 The insurer attempted to have the deputy state firemarshall testify but the trial court "held that any further testi-mony would be cumulative and useless."7

On appeal the insurer argued that the trial court abused itsdiscretion when it excluded the fire marshall's testimony.8 Thecourt of appeals refused to review the decision as the issue hadnot been properly preserved for appeal and there was not anavowal stating what the proposed testimony would have been.9

The court of appeals did comment that, while what constitutesan adequate avowal may be unclear, ° at a minimum, an avow-al must inform the court as to what the witness would say." Inthis case, insurer's counsel merely stated:

Jack Flowers from the State Fire Marshal Office was to behere. He had examined the photographs that have been enteredinto evidence and he was prepared to go to the scene but the courtdeclined a motion to allow him to go to the scene. We will just saythat we needed him as a witness. 2

The court emphasized that when testimony is excluded as beingcumulative, the offering party should indicate why it is not cu-mulative, which would require more information than providedby the insurer's counsel. 3

III. JUDICIAL NOTICE

The use of judicial notice pursuant to KRE 20114 and its in-teraction with Kentucky Revised Statutes (KRS) section342.285(2) 15 was addressed in Newberg v. Jent6 by the Ken-tucky Court of Appeals. The issue was whether the Workers'Compensation Board (the Board) erred in taking judicial notice

6. Id. at 929.7. Id.8. Id.9. Id. (citing Freeman v. Elam, 372 S.W.2d 796 (Ky. Ct. App. 1963)).

10. Id. (citing Herbert v. Commonwealth, 566 S.W.2d 798, 803 (Ky. Ct. App.1978) (requiring the witness to make the avowal)). Cf. ROBERT G. LAWSON, THE KEN-TUCKY EVIDENCE LAW HANDBOOK § 1.10 (II), at 21-23 (3d ed. 1993) (allowing theattorney to make the avowal).

11. FB Ins. Co., 864 S.W.2d at 929.12. Id.13. Id.14. KY. R. EVID. 201.15. Ky. REV. STAT. ANN. § 342.285(2) (MichiefBobbs-Merrill 1993).16. Newberg v. Jent, 867 S.W.2d 207 (Ky. Ct. App. 1993).

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RECENT EVIDENCE DECISIONS

of a bankruptcy petition that was introduced into evidence afterthe administrative law judge's decision and after the SpecialFund had filed its brief with the Board. 17 The Special Fund ar-gued that: judicial notice only applies at the trial court level; 8

and KRS section 342.285(2)' 9 prohibits the late request for judi-cial notice.2"

The court of appeals noted that KRE 201(f) permits judicialnotice to be taken at any stage of the proceeding.2' But, thedrafters of the rules suggest that judicial notice should be usedsparingly on appeal when it is not requested at the trial level,that is, only to correct palpable error.22 The court of appeals didnot rule on whether the appellate body should have taken noticesince the court determined that KRS section 342.285(2) appliedin this case, and therefore, the Board could not take judicialnotice of the new evidence.23

The court of appeals did take the opportunity to comment onthe difference between Kentucky's common law rule of evidenceregarding judicial notice and KRE 201.24 The court indicatedthat, under the common law, a court would only take judicialnotice of a record if it involved the same court, the same partiesand the same issues.25 However, the court suggested that KRE201 may expand Kentucky's use of judicial notice to includerecords of other courts.26

17. Id. at 208.18. Id. at 210.19. Ky. REV. STAT. ANN. § 342.285(2) (Michie/Bobbs-Merrill 1993) provides in

part: "No new or additional evidence may be introduced before the board except asto the fraud or misconduct of some person engaged in the administration of thischapter and affecting the order, ruling, or award ....

20. Newberg, 867 S.W.2d at 209.21. Id. at 210.22. Id. (citing LAWSON, supra note 10, § 1.00(IV), at 13) (citing Evidence Rules

Study Committee, KENTUCKY RULES OF EVIDENCE, at 17 n.77 (Final Draft, Nov.1989)).

23. Id. at 210.24. Id.25. Id.26. Id. (citing LAWSON, supra note 10, § 1.00(), at 10).

1995]


IV. RELEVANCY AND RELATED SUBJECTS

A. Character Evidence and Evidence of Other Crimes

As a general rule, character evidence is not admissible toprove that an individual acted in conformity therewith." InBell v. Commonwealth,28 the Kentucky Supreme Court ad-dressed the issue of whether the trial court erred in admittingtestimony regarding prior uncharged crimes by the defendant.29

Bell was charged with offenses of sodomy."0 The trial court per-mitted the victim's brother to testify that the defendant hadforced him to commit acts of sodomy on a prior occasion.31 Thecourt determined that KRE 404(b)32 was controlling and the"thrust of KRE 404(b) has always been interpreted asexclusionary in nature."33 Keeping this general rule of exclusionin mind, the court used a three-inquiries test to determinewhether to admit such evidence.34 The three inquiries includedrelevance, probativeness and prejudice."

The first inquiry involved whether "the other crimes evidencewas relevant for some purpose other than to prove the criminaldisposition of the accused."36 The Commonwealth argued thatin this case the evidence was being used to prove a common plan

27. KY. R. EVID. 404(a).28. Bell v. Commonwealth, 875 S.W.2d 882 (Ky. 1994).29. Id. at 885.30. Id.31. Id. at 884.32. KY. R. EVID. 404(b) provides:Evidence of other crimes, wrongs, or acts is not admissible to prove the char-acter of a person in order to show action in conformity therewith. It may,however, be admissible:

(1) If offered for some other purpose, such as proof of motive, opportu-nity, intent, preparation, plan, knowledge, identity, or absence of mistake oraccident; or

(2) If so inextricably intertwined with other evidence essential to the casethat separation of the two (2) could not be accomplished without serious ad-verse effect on the offering party.33. Bell, 875 S.W.2d at 889.34. Id. (citing LAWSON, supra note 10, § 2.25(II)(A)-(D), at 88-94). The court indi-

cated that Billings v. Commonwealth, 843 S.W.2d 890 (Ky. 1992) contains an exten-sive discussion of the analysis a trial court is to conduct in determining admissibilityunder 404(b). Bell, 875 S.W.2d at 888.

35. Id. at 889.36. Id.


or scheme.3" The supreme court answered the question by ap-plying the Adcock38 test which considers "whether the methodof the commission of the other crime or crimes is so similar andso unique as to indicate a reasonable probability that the crimeswere committed by the same person." 39 The court reviewed thefacts and determined that in this particular case there was not a"striking similarity" and therefore the evidence of the unchargedcrime should have been excluded.4 °

The second inquiry was whether "evidence of the uncharged.crime was sufficiently probative of its commission by the accusedto warrant its introduction into evidence., 41 The court comment-ed that the only evidence of the uncharged crime was the testi-mony of one individual and his hearsay statements repeated toothers.42 Based on this limited evidence regarding the prior un-charged crime, the court found there was not a strong basis forprobativeness.43

The third inquiry was whether "the potential for prejudicefrom the use of other crimes evidence substantially outweighedits probative value. 44 Even if the other two inquires supportadmitting the evidence, it may still have been excluded after thetrial court conducted this balancing test.45 As part of this bal-ancing test, a trial court "must consider whether a clear instruc-tion limiting the jury's use to its proper purpose is likely to beeffective.' 46 The supreme court determined that since the recordlacked the factual and legal basis upon which the trial judgemade its ruling, the court did not have to defer to the trialcourt's discretion. In reversing the trial court's decision, thecourt determined that the uncharged conduct was not strikinglysimilar to the charged crime and its potential prejudice substan-tially outweighed its probative value. 8

37. Id.38. Id. (citing Adcock v. Commonwealth, 702 S.W.2d 440, 443 (Ky. 1986)).39. Id.40. Id. at 890. But see Wintersheimer's dissent, which argued that there was a

common plan or scheme. Id. at 891-92 (Wintersheimer, J., dissenting).41. Bell v. Commonwealth, 875 S.W.2d 882, 890 (Ky. 1994).42. Id.43. Id.44. Id.45. Id. (citing LAWSON, supra note 10, § 2.25(II)(D), at 93-94).46. Id. at 890.47. Id. at 890-91.48. Id. at 890-91 (citing Walker v. Commonwealth, 476 S.W.2d 630 (Ky. Ct. App.

1995] 467


In McCarthy v. Commonwealth,49 the Kentucky SupremeCourt addressed whether prior emergency protective orders(EPOs) should have been excluded pursuant to KRE 404(b).5" InMcCarthy, the defendant was convicted of burglary and fourthdegree assault of his wife.5' In this case, EPOs had been en-tered ordering the defendant to stay away from his estrangedwife.52 The EPOs were entered into evidence by a deputy clerkwho testified as to the general nature of the EPOs and read froma recent order against the defendant.53 While the court citedKRE 404(b) it did not specifically analyze its language. Instead,the supreme court relied on preexisting case law in determiningthat the EPOs were admissible because they were relevant as tomotive or state of mind and were also a part of the immediatecircumstances bearing on the crimes charged.5 4

In Mack v. Commonwealth,55 the Kentucky Supreme Courtcommented on the use of prior bad acts pursuant to KRE 404.56

1972)).49. McCarthy v. Commonwealth, 867 S.W.2d 469 (Ky. 1994).50. KY. R. EVID. 404(b).51. McCarthy, 867 S.W.2d at 469.52. Id. at 470.53. Id.54. Id. (citing Matthews v. Commonwealth, 709 S.W.2d 414 (Ky. 1986); Francis v.

Commonwealth, 468 S.W.2d 287 (Ky. Ct. App. 1971)).55. Mack v. Commonwealth, 860 S.W.2d 275 (Ky. 1993).56. Id. at 278.Rule 404 Character evidence and evidence of other crimes(a) Character evidence generally. Evidence of a person's character or a trait ofcharacter is not admissible for the purpose of proving action in conformitytherewith on a particular occasion, except:

(1) Character of accused. Evidence of a pertinent trait of character or ofgeneral moral character offered by an accused, or by the prosecution to rebutthe same;

(2) Character of victim generally. Evidence of a pertinent trait of charac-ter of the victim of the crime offered by an accused, other than in a prosecu-tion for criminal sexual conduct, or by the prosecution to rebut the same, orevidence of a character trait of peacefulness of the victim offered by the prose-cution in a homicide case to rebut evidence that the victim was the first ag-gressor;

(3) Character of witnesses. Evidence of the character of witnesses, as pro-vided in KRE 607, KRE 608, and KRE 609.(b) Other crimes, wrongs, or acts. Evidence of other crimes, wrongs, or acts isnot admissible to prove the character of a person in order to show action inconformity therewith. It may, however, be admissible:

(1) If offered for some other purpose, such as proof of motive, opportu-nity, intent, preparation, plan, knowledge, identity, or absence of mistake or

RECENT EWDENCE DECISIONS

The court remanded the case to the trial court and held that pri-or act evidence should be evaluated under KRE 404 and Billingsv. Commonwealth," both of which became controlling authorityafter the original trial.58 In Mack, the issue raised was whetherthe testimony of two prior victims of the defendant's sexualcrimes and a police officer's reading of defendant's confession tothose crimes were improperly admitted pursuant to KRE 404. 59

The defendant indicated that the testimony should have been ex-cluded because: "(a) the prior acts were too remote in time (b)the prior acts were not sufficiently similar to charged acts and(c) a proper foundation was not laid."6 °

As to argument (a), the court indicated that six years did notnecessarily make the acts too remote because the defendant wasimprisoned for nearly four of the six years.6' As to argument(b), the court indicated that a good deal of the evidence of crimeswas sufficiently similar but that some of the evidence was notsufficiently similar.62 In response to argument (c), the court in-dicated that a proper foundation was not laid because the prioract testimony preceded the introduction of testimony regardingthe current charges.63

B. Character Evidence and Impeachment/Rehabilitation

In the case of LaMastus v. Commonwealth,64 the KentuckyCourt of Appeals addressed another exception to the general rulethat character evidence is not admissible to prove a person actedin conformity with his character on a particular occasion.65 Spe-cifically, the court addressed the interaction of KRE 404(a)(3) 66

accident; or(2) If so inextricably intertwined with other evidence essential to the case

that separation of the two (2) could not be accomplished without serious ad-verse effect on the offering party.

KY. R. EVID. 404.57. Billings v. Commonwealth, 843 S.W.2d 890 (Ky. 1992).58. Mack, 860 S.W.2d at 278.59. Id.60. Id.61. Id.62. Id.63. Id.64. LaMastus v. Commonwealth, 878 S.W.2d 32 (Ky. Ct. App. 1994).65. See supra note 56 for the text of KY. R. EVID. 404(a).66. Id. KY. R. EVID. 404(a)(3) permits the use of character evidence when the

1995] 469


and KRE 608.67 The issue on appeal was whether the trialcourt erroneously permitted the introduction of character evi-dence regarding defendant's reputation as a known liar andcharacter evidence regarding the victim's reputation for truthful-ness.68 Both the defendant and the victim had testified at tri-al.69 The defendant appealed the admissibility of this evidence,arguing that the introduction of such evidence is not permissibleunder 404, and the victim's reputation for truthfulness was bol-stered prior to being attacked by the defendant. °

This case was the first regarding the interaction of KRE404(a)(3) and KRE 608. 71 The court noted that, 'By its terms,KRE 608 applies to anyone who testifies.... With no specialprotection an accused who testifies opens the door to an attackon his character or truthfulness."72 The court of appeals decidedthe defendant was subject to the rules of impeachment and credi-bility based on character evidence under KRE 608 because hetestified at trial.73

The second issue raised was whether the credibility of thevictim could be bolstered prior to being impeached by the defen-dant.74 Under Federal Rule 608(a)(2), the truthfulness of a wit-ness must be attacked prior to the admission of opinion or repu-tation evidence to bolster the witness. 75 Kentucky's preexistinglaw followed federal law.76 The Kentucky Court of Appeals not-

evidence satisfies KY. R. EVID. 607, 608 or 609. KY. R. EVID. 404(a)(3).67. KY. R. EVID. 608 provides: "Opinion and reputation evidence of character. The

credibility of a witness may be attacked or supported by evidence in the form ofopinion or reputation, but subject to the limitation that the evidence may refer onlyto general reputation in the community."

68. LaMastus, 878 S.W.2d at 34-35.69. Id.70. Id. at 35.71. Id.72. Id. (quoting LAWSON, supra note 10, § 4.25(11), at 203).73. Id. (citing Carver v. Commonwealth, 634 S.W.2d 418, 422 (Ky. 1982);

LAWSON, supra note 10, § 4.25(11), at 203).74. Id. at 36.75. FED. R. EVID. 608(a)(2). The rule states in part:The credibility of a witness may be attacked or supported by evidence in theform of opinion or reputation, but subject to these limitations: (1) the evidencemay refer only to character for truthfulness or untruthfulness, and (2) evidenceof truthful character is admissible only after the character of the witness fortruthfulness has been attacked by opinion or reputation evidence or otherwise.76. LAWSON, supra note 10, § 4.25(11), at 202.

470


ed that neither KRE 404(a)(3) nor KRE 608 restricts the order inwhich the evidence can be presented.7 7 The court avoided pro-viding a definitive answer as to whether KRE 608 changes theattack requirement by indicating that, in this case, any bolster-ing of the victim's credibility prior to the defendant's attack washarmless error.78

C. Character Evidence and Mode and Order of Interrogation andPresentation

In Derosset v. Commonwealth,79 the Kentucky Supreme Courtcommented on the application of KRE 611 and KRE 404(a)(1).The issue on appeal was whether the Commonwealth improperlyattempted to impeach the defendant's character with the intro-duction of prior bad acts.8° At trial, the Commonwealth askedthe defendant whether he had ever previously pulled a gun onhis wife or on other people.81 The defendant's objections weresustained and the trial court advised the jury not to consider thequestions. 82 The defendant claimed the questions were improp-er under KRE 404(a)(1) since the defendant never opened thedoor to impeachment of his character under KRE 404(a)(1)'byaffirmatively stating he was not violent.83

The court of appeals ruled, and the supreme court agreed, thatthe error was not preserved for appeal because the objectionswere sustained and the defendant failed to request further re-lief. 4 However, the supreme court took the opportunity to af-firm the "wide open" rule of cross-examination, which underKRE 611 allows "questioning as to any matter relevant to anyissue in the case, subject to judicial discretion in the control ofinterrogation of witnesses and production of evidence."85

77. LaMastus, 878 S.W.2d at 35.78. Id. at 36 (citing Reed v. Commonwealth, 738 S.W.2d 818 (1987) (determining

that although proper rebuttal evidence of credibility was admitted in improper order,it was not prejudicial)).

79. Derosset v. Commonwealth, 867 S.W.2d 195 (Ky. 1993)80. Id. at 198.81. Id.82. Id.83. Id. See supra note 56 for the text of KY. R. EvID. 404(a)(1).84. Derosset, 867 S.W.2d at 198.85. Id.

19951


D. Character Evidence and Impeachment by Evidence of Convictionof Crime

In McGinnis v. Commonwealth,86 the Kentucky SupremeCourt addressed the use of impeachment by prior felony convic-tions when the felony convictions occurred more than ten yearsprior to the trial."7 At the time of the trial, KRE 609 was not ineffect.8" The court reiterated that the use of prior felony convic-tions under Kentucky common law rested within the sound dis-cretion of the trial court, which determined whether the remote-ness of a conviction limited its probative value.89

However, the supreme court did use the opportunity to com-ment on KRE 609 since the case was being remanded for trialand KRE 609 would apply.9 ° The court stated that "KRE 609does not, by its terms, divest the trial court of a limited discre-tion to admit a conviction more than ten years old. It is precato-ry, rather than mandatory, and leaves room for a trial judge torule such evidence admissible in circumstances where fairness sodemands."'" The difference between the common law and KRE609 is that KRE 609 "imposes on the Commonwealth the burdenof persuading the court that, in the circumstances in which the

86. McGinnis v. Commonwealth, 875 S.W.2d 518 (Ky. 1994).87. Id. at 524.88. Id. at 528. KY. R. EVID. 609 provides:Impeachment by evidence of conviction of crime.

(a) General rule. For the purpose of reflecting upon the credibility of awitness, evidence that the witness has been convicted of a crime shall be ad-mitted if elicited from the witness or established by public record if denied bythe witness, but only if the crime was punishable by death or imprisonmentfor one (1) year or more under the law under which the witness was convicted.The identity of the crime upon which the witness was convicted may not bedisclosed upon cross-examination unless the witness has denied the existence ofthe conviction. However, a witness against whom a conviction is admitted un-der this provision may choose to disclose the identity of the crime upon whichthe conviction is based.

(b) Time limit. Evidence of a conviction under this rule is not admissible

if a period of more than ten (10) years has elapsed since the date of the con-viction unless the court determines that the probative value of the convictionsubstantially outweighs its prejudicial effect.89. McGinnis, 875 S.W.2d at 528. (citing Commonwealth v. Richardson, 674

S.W.2d 515 (Ky. 1984)). See also LAWSON, supra note 10, § 4.30(111), at 215-18 (re-garding the history of the use of prior convictions in Kentucky).

90. McGinnis, 875 S.W.2d at 528. The court also took the opportunity to alertKentucky practitioners that KRE 609 "differs in several respects" from FRE 609. Id.

91. Id.

1995] RECENT EVIDENCE DECISIONS 473

evidence is being offered, 'the probative value of the convictionsubstantially outweighs its prejudicial effect.' 92

E. Prior Crimes and Inadmissibility of Pleas, Plea Discussions andRelated Statements

In Pettiway v. Commonwealth,93 the Kentucky SupremeCourt addressed the issue of whether the introduction of anAlford plea9 4 should be excluded under KRE 803(22)"5 andKRE 41096 when determining whether to enhance a sentenceunder the persistent felony offender (PFO) provisions.9" Thecourt ruled that KRE 803(22) and KRE 410 exclude the introduc-tion of an Alford plea as an admission against interest, but theseKRE exclusions do not bar a jury from considering convictionsobtained through an Alford plea when determining when to en-hance a sentence at a PFO hearing.9"

F. Character Evidence of Victim

The Kentucky Court of Appeals addressed the use of characterevidence of the victim in Wilson v. Commonwealth.99 The issuewas whether the trial court erred in excluding evidence regard-ing the victim's prior acts.' 0 Defendant attempted to introduce

92. Id. (quoting KY. R. EVID. 609).93. Pettiway v. Commonwealth, 860 S.W.2d 766 (Ky. 1993).94. The Alford plea is used similarly to the nolo contendere plea. A defendant

entering an Alford plea "protects his innocence while waiving trial and accepting theconsequences of a guilty plea." LAWSON, supra note 10, § 2.55(11), at 138.

95. KY. R. EVID. 803(22) provides:

The following are not excluded by the hearsay rules, even though thedeclarant is available as a witness .. . Judgment of previous conviction. Evi-dence of a final judgment entered after a trial or upon a plea of guilty, (butnot upon a plea of nolo contendere) adjudging a person guilty of a crime pun-ishable by death or imprisonment under the law defining the crime, to proveany fact essential to sustain the judgment ....96. KY. R. EVID. 410 states in part:

Except as otherwise provided in this rule, evidence of the following isnot, in any civil or criminal proceeding, admissible against the defendant whomade the plea or was a participant in the plea discussions . . . (2) A plea ofnolo contendere in a jurisdiction which accepts such pleas, and a plea underAlford v. North Carolina, 394 U.S. 956 (1969).97. Pettiway, 860 S.W.2d at 767.98. Id.99. Wilson v. Commonwealth, 880 S.W.2d 877 (Ky. Ct. App. 1994).

100. Id.


four separate acts of violence by the alleged victim to demon-strate why the defendant believed it was necessary to use deadlyphysical force in self-protection.'' The Commonwealth insistedthe evidence was properly excluded because "specific acts of con-duct are not permitted [in evidence] to show the violent char-acter of the deceased.' 0 2

. The court agreed that specific acts of violence committed bythe victim are not admissible to show who was the aggressor, butthe court determined this was not the issue in this case. Instead,the court ruled the violent acts of the alleged victim were admis-sible to show the defendant had a justifiable fear of the victim atthe time of the encounter. 0 3

V. PRIVILEGES

A. Spousal Privilege

In Dawson v. Commonwealth,10' the Kentucky Court of Ap-peals addressed the issue of whether the spousal privilege barredadmission of the wife's hearsay statements after the wife invokedthe privilege. The defendant was convicted of fourth degree as-sault of his wife and resisting arrest.' At the trial level, thewife refused to testify against her husband.0 6 The Common-wealth introduced the wife's statements through the police offi-cers and the domestic violence report.' ° The court determinedthere were two obstacles to the admission of the wife's testimo-ny.0 8 The first obstacle was whether the wife could be com-pelled to testify against her husband, and the second obstaclewas the hearsay rule.109 Since the case was tried in 1991, KRSsection 421.210(1) applied."0

101. Id.102. Id.103. Id. at 878 (referencing LAWSON, supra note 10, § 2.15(111), at 70).104. Dawson v. Commonwealth, 867 S.W.2d 493 (Ky. Ct. App. 1993).105. Id.106. Id. at 494.107. Id.108. Id. at 494-95.109. Id. See infra part VI.A.3 for a hearsay rule discussion.110. KY. REV. STAT. ANN. § 421.210 (Michie/Bobbs-Merrill 1992) was repealed in

July 1992 and replaced by Ky. R. EVID. 501-511. The statute provided: "In all ac-

tions, between husband and wife, or between either or both of them and another,either or both of them may testify as other witnesses, except as to confidential com-

474


The court of appeals held that the spousal testimony privilegedoes not apply to domestic violence cases pursuant to KRS sec-tion 290.060."' The -basis for the spousal privilege, maritalharmony, does not apply when a case involves violence betweenspouses." 2 The court did provide guidance to KRE 504 by com-menting that KRE 504(c)(2)"' continues this policy. 114

B. Marital Communication Privilege

In Wadlington v. Sextet Mining Co.," 5 the Kentucky Court ofAppeals addressed the use of the marital communication privi-lege and the testimony of a former spouse in a workers' compen-sation hearing. Wadlington appealed the denial of his benefitsbased in part on the fact that his ex-wife's deposition containedcommunications subject to the marital privilege and thereforewas erroneously admitted into evidence by the administrativelaw judge." 6 Wadlington's former spouse testified thatWadlington went canoeing and came home complaining that here-injured his right knee, which he had originally injured playingfootball." 7 She also observed his swollen knee." 8 Wadlingtonwent to work the next day and reported to his employer that hesustained a work-related injury to his right knee that day." 9

Wadlington's former spouse also testified that she andWadlington later joked about the receipt of benefits. 2 °

munications between them during marriage . . .neither of them may be compelled totestify for or against the other."

111. Dawson, 867 S.W.2d at 495. See KY. REV. STAT. ANN. § 290.060(Michie/Bobbs-Merrill 1992) ("Neither the psychiatrist-patient privilege nor the hus-band-wife privilege shall be a ground for excluding evidence regarding the abuse,neglect or exploitation of an adult or the cause thereof in any judicial proceedingresulting from a report pursuant to this chapter.").

112. Dawson, 867 S.W.2d at 495.113. KY. R. EVID. 504(c) provides in part: 'There is no privilege under this

rule ... [i]n any proceeding in which one (1) spouse is charged with wrongful con-duct against the person or property of . . . [t]he other ..

114. Dawson, 867 S.W.2d at 495.115. Wadlington v. Sextet Mining Co., 878 S.W.2d 814 (Ky. Ct. App. 1994).116. Id. at 815.117. Id. at 816.118. Id.119. Id.120. Id.

1995] 475


Wadlington's worker's compensation benefits were denied and hefaced sanctions and charges of fraud.121

The objection to the use of the deposition was presented to theadministrative law judge prior to the adoption of KRE 504,122and therefore, was governed by KRS section 421.210.123 Basedon the statute, Wadlington had the right to prevent his formerspouse from testifying since the communication was made duringmarriage and was confidential. 124 However, the court of ap-peals ruled that on remand portions of the former spouse's depo-sition testimony were admissible because certain informationwas not based upon a marital communication.'25 Instead, theinformation was based on certain observations she made whichcould have been made by anyone, "including the members of hiscanoeing party or fellow workers he encountered the nextday.' 26

VI. HEARSAY

A. Hearsay Exceptions: Availability of Declarant Immaterial

1. Statements for Purposes of Medical Treatment or Diagnosis

In Bell v. Commonwealth,12 the Supreme Court of Kentuckyused the opportunity to explain the application of Drumm v.Commonwealth,2 ' which had adopted FRE 803(4).129 Theissue on appeal in Bell was whether a medical report preparedby a physician who examined a child abuse victim more than twoyears after the alleged sexual abuse was improperly admitted at

121. Id.122. Ky. R. EVID. 107(b).

123. See KY. REV. STAT. ANN. § 421.210 (Michie/Bobbs-Merrill 1992). See also su-pra note 110.

124. Wadlington, 878 S.W.2d at 817-18.125. Id. at.818.126. Id.127. Bell v. Commonwealth, 875 S.W.2d 882 (Ky. 1994).128. Drumm v. Commonwealth, 783 S.W.2d 380 (Ky. 1990).129. Now codified in the Kentucky rules, FED. R. EVID. 803(4) provides:

The following are not excluded by the hearsay rules, even though thedeclarant is available as a witness . . .[s]tatements [made] for the purposes ofmedical treatment or diagnosis and describing medical history or past orpresent symptoms, pain or sensations, or the inception or general character ofthe cause or external source thereof insofar as reasonably pertinent to treat-ment or diagnosis.

476


the trial court level. 130 The court indicated that prior toDrumm there was a bright-line rule that determined admissibil-ity of a report based on whether the physician was a treatingphysician or a non-treating physician.' 3 ' Drumm maintainedthe distinction but diminished its role.'32 The primary factor indetermining the reliability of medical expert testimony underDrumm is to examine the motivation behind the declarations ofthe witness.'

The supreme court stated that the trial judge should conduct abalancing test pursuant to KRE 403134 to determine whetherthe prejudicial effect outweighs the probative value, "taking intoaccount that when such statements are not made for the purposeof treatment they have 'less inherent reliability than evidenceadmitted under the traditional common-law standard underlyingthe physician treatment rule.""3 5 In Bell, the trial court neededto assess the reliability of each hearsay statement. 3 Since theprosecution did not have the physician testify, but merely admit-ted the medical records into evidence, 137 the supreme court in-dicated that the trial court could not have conducted the neces-sary analysis.

13

In Sharp v. Commonwealth,139 the Kentucky Supreme Courtaddressed the same issue as it relates to a psychiatrist who wasnot the treating physician, but who was hired by Social Servicesto evaluate the alleged victims of child abuse. 14 Using the bal-ancing test addressed in Drumm, the supreme court determinedthe hearsay testimony of the psychiatrist was not admissiblebecause of "the otherwise limited relationship between the psy-

130. Bell, 875 S.W.2d at 887.131. Id.132. Id.133. Id. (citing Hellstrom v. Commonwealth, 825 S.W.2d 612, 615 (Ky. 1992)).134. KY. R. EVID. 403 provides: "Although relevant, evidence may be excluded if

its probative value is substantially outweighed by the danger of unfair prejudicialconfusion of the issues, or misleading the jury, or by considerations of undue delayor needless presentation of cumulative evidence."

135. Bell, 875 S.W.2d at 887 (quoting Hellstrom, 825 S.W.2d at 615).136. Id. at 888.137. Id. at 885.138. Id. at 888.139. Sharp v. Commonwealth, 849 S.W.2d 542 (Ky. 1993).140. Id. at 545.

1995] 477


chiatrist and the children." ' Furthermore, the court noted thepsychiatrist's testimony "added little of a probative nature, butby virtue of the aura which attends such testimony, the prejudi-cial effect was significant."'42 The court held this reversible er-ror. 1

43

2. Records of Regularly Conducted Activity & The BusinessRecord Exception

In Alexander v. Commonwealth, 44 the Kentucky SupremeCourt determined the business record exception did not apply toa social worker's investigative report that included a child's priorstatements to the social worker. The court noted that the busi-ness record exception requires the following elements: (1) anentry must constitute an original entry; (2) the entry must havebeen made in the course of regularly conducted business activity;(3) it must have been made at or near the time of the phenome-non which it represents; and (4) it must have been made undercircumstances which do not indicate a lack of trustworthi-ness. 1

45

The supreme court determined the investigative report by theCabinet for Human Resources (CHR) was not admissible becausethe individual providing the information to the social worker, inthis case the child, was not under a business duty to report theinformation to the social worker. 146 Consequently, there was aninherent lack of trustworthiness. 47 However, the court heldthat the portions of a report containing observations made by thesocial worker would have been admissible. However, in this casethere were no such observations. 41

In 1994, the Kentucky Supreme Court addressed the businessrecord exception again in Johnson v. Commonwealth. 49 The

141. Id.142. Id.143. Id.144. Alexander v. Commonwealth, 862 S.W.2d 856 (Ky. 1993).145. Id. at 861 (citing ROBERT G. LAWSON, THE KENTUCKY EVIDENCE LAW HAND-

BOOK, § 8.65(I)-(IX), at 457-72 (2d ed 1984)).146. Id. at 861. The supreme court analogized this case to the inadmissibility of

police reports. Id.147. Id.148. Id.149. Johnson v. Commonwealth, 883 S.W.2d 482 (Ky. 1994).

478


supreme court indicated it need not determine whether KRE803(6) amounts to an expansion of the common law businessrecords exception since the KRE were not in effect at the time oftrial. 5 ° In Johnson the issue was whether the Department ofCorrections' records relating to birthdays, social security num-bers, names of parents and home addresses were admissibleunder the business record exception to the hearsay rule as estab-lished in Garner v. Commonwealth.'5 ' Here, the defendant wasconvicted as a persistent felony offender. 5 2 The prosecutionused the Department of Corrections' records to establish that thedefendant was the same individual who was convicted of priorfelonies even though the last name was different. 5 3

The defendant wanted to apply Garner to this case since Gar-ner limited the admission of evidence from the Department ofCorrections' records to age and parole status. 4 In analyzingwhether the additional evidence used from the Department'srecords met the business record exception, the court determinedthat the information was obtained in the ordinary course of busi-ness and for the purpose of accurately identifying the prison-er."'55 As such, there was no qualitative difference between ageand parole status in Garner and the other evidence admitted inthe case at bar.'56 Therefore the supreme court found no errorin the trial court's decision.'57

3. Excited Utterances & Present State of Mind

In Dawson v. Commonwealth,'58 the Kentucky Court of Ap-peals determined whether the trial court improperly admitted apolice officer's testimony relating a wife's statements made to theofficer while investigating a domestic violence report. Also ques-tioned was the propriety of admitting the domestic violence re-port and the testimony of the second officer who spoke with the

150. Id. at 483 n.1.151. Id. at 484. (citing Garner v. Commonwealth, 645 S.W.2d 705 (Ky. 1983)).152. Id. at 484.153. Id. at 483.154. Id. at 484.155. Id.156. Id.157. Id. at 485.158. Dawson v. Commonwealth, 867 S.W.2d 493 (Ky. Ct. App. 1993).

1995] 479


wife.159 The defendant objected on the basis that it was im-proper hearsay. 6 ° The court of appeals determined that the ex-cited utterance exception applied to the statements made to thefirst police officer, but not to those made to the second officer norto the domestic violence report.' The court relied on Souder v.Commonwealth, 2 which outlined the elements necessary toinvoke the excited utterance exception. To be admissible, the "ut-terance" must be (1) "uttered under stress of nervous excitementand not after reflection or deliberation,"'63 and (2) "so connect-ed that the declarant is reacting to the event and has had noopportunity to reflect upon or fabricate the statement.' '164

Spontaneity is the central element to this exception. 5

First, the court of appeals determined the testimony of thefirst police officer was admissible because he had arrived withinfive minutes of being dispatched. 66 The wife was visibly upsetand crying and her husband, the defendant, was still present inthe household. 7 Based on these facts, the court determinedthe excitement was still effecting the wife.'68 The courtweighed these facts against the wife's statement given in re-sponse to questioning by the first police officer and determinedthat since the police officer had not launched into an interroga-tion, but simply had made a preliminary inquiry, the questioningdid not destroy spontaneity. 9

However, the court of appeals found the trial court in error foradmitting the testimony of the second police officer. The courtstated first that this officer did not speak to the wife until afterher husband had left the scene, and by that time the events

159. Id. at 495-96.160. Id. at 495. See supra part V.A. regarding the objection based on spousal

privilege.161. Id. at 496.162. Souder v. Commonwealth, 719 S.W.2d 730 (Ky. 1986).163. Dawson, 867 S.W.2d at 496 (quoting Souder, 719 S.W.2d 730 (adopting the

definition found in LAWSON, supra note 145, § 8.60(B))).164. Id. at 496. While KRE 803(2) did not apply in this case, the elements are

essentially the same: "A statement relating to a startling event or condition madewhile the declarant was under the stress of excitement caused by the event or condi-tion." KY. R. EVID. 803(2). See also LAWSON, supra note 10, § 8.60(111), at 454.

165. Dawson, 867 S.W.2d at 496.166. Id.167. Id.168. Id.169. Id.

480


surrounding the assault had come to an end.17 ° Secondly, thestatement to the second officer lacked the required element ofspontaneity."7 ' Furthermore, the domestic violence report wasnot admissible because it also- lacked spontaneity. 172 However,the court of appeals did find that the admission of the secondofficer's testimony and the domestic violence report were harm-less error and therefore the judgment of the trial court wasaffirmed.

17

4. Investigative Hearsay

Investigative hearsay, as used in Kentucky, refers to the intro-duction of statements made to investigators, most often policeofficers, in their course of investigation. The admissibility ofinvestigative hearsay appeared to be resolved in 1990 in Busseyv. Commonwealth174 when the court "firmly rejected the admis-sion of hearsay evidence under the so-called 'investigative hear-say exception.",175 As noted in Alexander above, the courts havealso rejected the use of the business record exception to admitsuch evidence.

176

In LaMastus v. Commonwealth, 77 the court of appeals revis-ited the issue of investigative hearsay. A police officer testifiedabout the facts of the case as told to him by the victim.'78 Thevictim also testified. 79 The court ruled that the police officer'stestimony improperly lent credence to the victim's testimony andunfairly prejudiced the jury in her favor and served no other pur-pose.' 80 Furthermore, the court held there was no other excep-tion to the hearsay rule that would allow the introduction of thestatements.' 81

170. Id. at 496-97.171. Id.172. Id. at 497.173. Id.174. Bussey v. Commonwealth, 797 S.W.2d 483 (Ky. 1990).175. Id. at 486.176. Alexander v. Commonwealth, 862 S.W.2d 856, 861 (Ky. 1993).177. LaMastus v. Commonwealth, 878 S.W.2d 32 (Ky. Ct. App. 1994). See also

supra part W.B. where the issue of impeachment is discussed.178. LaMastus, 878 S.W.2d at 33.179. Id. at 34.180. Id.181. Id.

1995]


In Sharp v. Commonwealth,'82 the Kentucky Supreme Courtaddressed the issue of investigative hearsay as it relates to socialworkers. i 8' The issue on appeal was whether social workersmay repeat out of court statements made to them by childrenwho may be sex abuse victims. A social worker testified as to thedrawings prepared by a child and the statements she made whilemaking the drawings. 8 4 The supreme court reiterated its rulein Souder v. Commonwealth,'85 saying, "There is no recognizedexception to the hearsay rule for social workers or the results oftheir investigations, ' and held that the social worker's testi-mony was inadmissible.'

Releford v. Commonwealth'88 was another case involving in-vestigative hearsay. Unlike the previous cases, the evidenceintroduced by the police officers in Releford was ruled admissi-ble. "'89 The police officer testified regarding the reason for theremoval of "eavesdropping equipment" from an informant.'9

The Kentucky Supreme Court stated that if any extrajudicialstatements were made, they would have been admissible pursu-ant to KRE 801(c)19' and Sanborn v. Commonwealth.'92 InSanborn,9' the Kentucky Supreme Court ruled that a policeofficer may testify about information furnished to him where ittends to explain the action that was taken by the officer, that is,it is not admissible to prove the facts as told to the police officer,but rather to prove why the police officer acted as he did.'

182. Sharp v. Commonwealth, 849 S.W.2d 542 (Ky. 1993).183. See also supra part VI.A.1. for a discussion of inadmissible hearsay testimony

by the psychiatrist.184. Sharp, 849 S.W.2d at 545.185. Souder v. Commonwealth, 719 S.W.2d 730 (Ky. 1986).186. Id. at 734.187. Sharp, 849 S.W.2d at 546. The court did attempt to distinguish an earlier

case, Hellstrom v. Commonwealth, 825 S.W.2d 612 (Ky. 1992) (permitting an exhibitof drawings by a child to be admitted into evidence). Sharp, 849 S.W.2d at 546.

188. Releford v. Commonwealth, 860 S.W.2d 770 (Ky. 1993).189. Id. at 771.190. Id. at 770.191. KY. R. EVID. 801(c) provides: "Hearsay' is a statement, other than one made

by the declarant while testifying at the trial or hearing, offered in evidence to provethe truth of the matter asserted."

192. Releford, 860 S.W.2d at 771.193. Sanborn v. Commonwealth, 754 S.W.2d 534 (Ky. 1988).194. Id. at 541.


This rule is to be used only if the officer's actions are at issue. 195

5. Then Existing Mental, Emotional, or Physical Condition

DeGrella v. Elston, 96 known as one of the "right to die" cas-es, addressed the existing state of mind exception to hear-say. "'97 There, a mother brought suit against a guardian ad li-tern to terminate nutrition and hydration of her daughter, whowas in a vegetative state as a result of a severe beating.'98 Theevidentiary issue on appeal was whether a prior statement'99

made by the daughter regarding her wishes if she were in avegetative state was "competent evidence upon which a surro-gate decision-maker could exercise substitute judgment underthe circumstances." 2°°The "relevancy of expressions of states ofmind can exist without a concurrence in point of time betweenthe making of the statements and states of mind required to beproved." '' The court determined that the out-of-court state-ment fell within the hearsay exception of the declarant's thenexisting state of mind, which exception is now codified as KRE803(3), 2°2and was relevant to the issue at hand. 0 3

195. Id.196. DeGrella v. Elston, 858 S.W.2d 698 (Ky. 1993).197. Id. at 699.198. Id.199. Id. at 708. (referencing statements made by the daughter prior to her beating

that if she was ever to be in a permanent vegetative state, extraordinary measuresto sustain her life should not be taken).

200. Id. at 709.201. Id. (quoting LAWSON, supra note 10, § 8.50 (XI), at 435).202. Ky. R. EvID. 803(3) provides:

The following are not excluded by the hearsay rules . ..A statement ofthe declarant's then existing state of mind, emotion, sensation, or physicalcondition .. .but not including a statement of memory or belief to prove thefact remembered or believed unless it relates to the execution, revocation, iden-tification, or terms of a declarant's will.

203. DeGrella, 858 S.W.2d at 709.

19951 483


B. Hearsay Exceptions: Declarant Unavailable;Statement Against Interest

Harrison v. Commonwealth °4 involved the use of anaccomplice's confession in the trial of a defendant. The issue onappeal was whether the accomplice's confession implicating thedefendant was inadmissible hearsay because it was an unswornout-of-court statement. °5 "At common law, trustworthiness of ahearsay statement against penal interest is a prerequisite to itsadmissibility."" 6 The factors relevant to trustworthiness are:"(1) The time of the declaration and the party to whom made; (2)the existence of corroborating evidence in the case; (3) the extentto which the declaration is against the declarant's penal interest;and (4) the availability of the declarant as a witness. 20 7 Inevaluating the admissibility, the court relied upon KRE804(b)(3) 2 8 even though it was not in effect at the time, be-cause KRE 804(b)(3) represents a codification of the commonlaw.20 9 In this case the facts show that the statement by theprincipal was made to the sheriff and his deputy prior to hisarrest, that the principal was Mirandized, that the facts werecorroborated by testimony and physical evidence, and the princi-pal took the stand but did not respond to any of the ques-tions.210 Based on these facts and the preexisting law and KRE804(b)(3), the court determined that the statement was admissi-ble.

211

204. Harrison v. Commonwealth, 858 S.W.2d 172 (Ky. 1993).205. Id. at 174-75.206. Id. at 175.207. Id. (citing Taylor v. Commonwealth, 821 S.W.2d 72, 74 (Ky. 1991); Chambers

v. Mississippi, 410 U.S. 284, 300 (1973)).208. KY. R. EVID. 804(b)(3) provides:

A statement which was at the time of its making so far contrary to thedeclarant's pecuniary or proprietary interests, or so far tended to subject thedeclarant to civil or criminal liability, or to render invalid a claim by the de-clarant against another, that a reasonable person in the declarant's positionwould not have made the statement unless believing it to be true. A statementtending to expose the defendant to criminal liability is not admissible unlesscorroborating circumstances clearly indicate the trustworthiness of thestatement.

209. Harrison, 858 S.W.2d at 175-76.210. Id. at 175.211. Id. While noting that the principal did not plead the 5th, the court stated

that he was still considered unavailable based on his failure to testify. Id. at 176.

484


VII. OPINIONS AND EXPERT TESTIMONY;TESTIMONY BY EXPERTS

In Staggs v. Commonwealth,2"'2 the supreme court addressedwhether the testimony from an expert on the science of art ther-apy was admissible under the Frye test. Since, this matter aroseand was tried prior to the effective date of KRE 702,213 thecourt applied the Frye test.214 The Commonwealth failed todemonstrate that art therapy is generally accepted as reliable foridentifying sexual abuse or that the technique used in this casecomplied with acknowledged methods for applying the sci-ence.

215

The issue in the case was not whether art therapy could quali-fy as a scientific method for diagnosing sex abuse, but ratherthat the doctor "admitted that the technique in this case did notcomply with the acknowledged method for applying this sci-ence." 216 The doctor's opinion was a personal and not an expertopinion, and the testimony was not relevant; in fact, was moreprejudicial than probative.217 The court made it clear that thereason the testimony regarding art therapy was not admissiblewas because the Commonwealth failed to establish the necessarypredicate of foundation, reliability, and relevance. 21

" The su-preme court indicated art therapy may be admissible in thefuture whether under the Frye test or KRE 702.219

In Mack v. Commonwealth,22 ° the Kentucky Supreme Courtaddressed the trial court's refusal to admit medical records froma state facility and the deposition of a child victim's treatingpsychiatrist at the facility.221 The defendant indicated the evi-dence would show the child had suffered from post-traumatic

212. Staggs v. Commonwealth, 877 S.W.2d 604 (Ky. 1993).213. KY. R. EVID. 702 provides: "If scientific, technical, or other specialized knowl-

edge will assist the trier of fact to understand the evidence or to determine a fact inissue, a witness qualified as an expert by knowledge, skill, experience, training, oreducation, may testify thereto in the form of an opinion or otherwise."

214. Staggs, 877 S.W.2d at 605. The Frye test was enunciated in Frye v. UnitedStates, 293 F. 1013 (D.C. Cir. 1923).

215. Staggs, 877 S.W.2d at 606.216. Id.217. Id.218. Id.219. Id.220. Mack v. Commonwealth, 860 S.W.2d 275 (Ky. 1993).221. Id. at 277-78.

1995] 485


stress disorder and transference.222 The deposition includedtestimony that the child might confuse the person who may havecommitted the acts against her and transfer her feelings towardanother person.223 The supreme 'court ruled the trial court didnot abuse its discretion in excluding this testimony since thedefense failed to "establish that either post-traumatic stressdisorder or transference was a condition generally recognized inthe medical or scientific community. 22 4 Furthermore, the de-fendant did not establish that opinions expressed within thedeposition were based upon a reasonable degree of medical prob-ability.

225

In Hall v. Commonwealth,226 the Kentucky Supreme Courtaddressed the issue of expert opinion testimony regarding al-leged sexual offenses against children. In this case, a clinicalpsychologist testified that in her expert opinion, a child wassexually abused and that the child was telling the truth aboutthe abuse.227 'The general rule is that opinion evidence, in or-der to be admissible, must not decide an ultimate issue offact."22 The court made known its exasperation with this issuewhen it stated, "By this time, the law in Kentucky should beclear. In the case of a psychologist or social worker, 'testimo-ny... of whether sexual abuse has occurred... 'is impermissi-ble, as these experts are simply not 'qualified to express anopinion' that a person has been sexually abused., 229 The courtthen noted that "any expert 'vouch[ing] for the truth of [avictim's] out-of-court statements.., invades the province of thejury,' and [that] is likewise impermissible.""2 ' Furthermore, thecourt indicated that psychologists are not experts in discerningthe truth, and therefore, any testimony that the child's testimonywas most likely accurate is also improper."'

222. Id. at 278.223. Id.224. Id. (referencing Dyer v. Kentucky, 816 S.W.2d 647 (Ky. 1991)).225. Id. at 278.226. Hall v. Commonwealth, 862 S.W.2d 321 (Ky. 1993).227. Id. at 322.228. Id. (quoting Mitchell v. Commonwealth, 777 S.W.2d 930, 935 (Ky. 1989);

Hellstrom v. Commonwealth, 825 S.W.2d 612, 614 (Ky. 1992)).229. Id. (citing Hellstrom, 825 S.W.2d at 614).230. Id. (quoting Hellstrom, 825 S.W.2d at 614).231. Id.

486


VIII. AUTHENTICATION & IDENTIFICATION;REQUIREMENT OF AUTHENTICATION OR IDENTIFICATION

In Bell v. Commonwealth,232 the court addressed the issue ofauthentication. A medical report by a non-treating physician wasread into evidence without the doctor testifying as a witness. 3

It appears the trial court permitted it to be read at trial based onthe prosecution's representation that it had been "certified" in-stead of calling the doctor to the stand to authenticate the re-cord.23 4 The supreme court determined the introduction of thisreport was in error because the record was riot properly authen-ticated pursuant to KRE 901.235

IX. CONCLUSION

The cases reviewed reflect the beginning of the transition fromKentucky common law to the use of the KRE. At this point intime, reference to the Federal Rules of Evidence as a source fordetermining how to apply the new rules has been very limited.Instead, as noted in a majority of the cases addressed herein, thedevelopment of the new rules of evidence has relied on preexist-ing common law. In addition, a majority of the opinions citedRobert G. Lawson's The Kentucky Evidence Law Handbook as areference when interpreting the rules. Therefore, practitionerswould be best served in consulting these two sources when seek-ing an interpretation of the new rules.

232. Bell v. Commonwealth, 875 S.W.2d 882 (Ky. 1994).233. Id. at 886.234. Id. The court inferred that the trial court may have believed the document

was admissible under Ky. REv. STAT. ANN. § 422.300 (Michie/Bobbs-Merrill 1992), a

statute which allows hospital records to be proved by certification without the needfor authentication contemplated by KY. R. EVID. 901. Bell, 875 S.W.2d at 886.

235. Bell, 875 S.W.2d at 887. The court noted that "the most widely used methodof authentication is testimony by one with personal knowledge that a writing is whatit is claimed to be." Id. at 886 (quoting LAWSON, supra note 10, § 7.05, at 317-23).KY. R. EVID. 901 provides: '"he requirement of authentication or identification as acondition precedent to admissibility is satisfied by evidence sufficient to support afinding that the matter in question is what its proponent claims."

19951 487

KENTUCKY ESTATE PLANNING AND ADMINISTRATIONUPDATE

by Mary Lee Muehlenkamp*

I. STATUTORY UPDATE

During its 1994 Session, the Kentucky General Assemblyenacted two pieces of legislation of special interest to the estateattorney. The first was the Kentucky Living Will Directive Act,1

and the second dealt with standby guardians and conservators.2

A. Living Will Statute

The new Kentucky Living Will Directive Act is broader inscope than the previous law and permits a grantor to make ad-vance directives regarding health care.3 First, the grantor maydesignate one or more persons, including alternates, to act as asurrogate in making health care decisions on his or her behalf.4Second, the grantor may direct the withholding or withdrawal oflife-prolonging treatment.5 Third, the grantor may direct thewithholding of artificially provided nutrition or hydration.6

* Mary Lee Muehlenkamp is an associate of the law firm Greenebaum Doll &

McDonald in Covington, Kentucky. B.S., cum laude, Northern Kentucky University;J.D., summa cum laude, Salmon P. Chase College of Law, Northern Kentucky Uni-versity. The author gratefully acknowledges the assistance of Michael A. Ruh in thepreparation of this article.

1. Act of July 15, 1994, 1994 Ky. Acts 235 (codified as amended at KY. REV.STAT. ANN. §§ 311.621-.643 (Michie/Bobbs-Merrill Supp. 1994)).

2. Act of July 15, 1994, 1994 Ky. Acts 61 (codified as amended at KY. REV.STAT. ANN. § 387.330 (Michie/Bobbs-Merrill Supp. 1994)).

3. Advance directives made prior to the effective date of July 15, 1994 are stillgiven effect. KY. REV. STAT. ANN. § 311.621(2) (Michie/Bobbs-Merrill Supp. 1994).However, it may be wise to execute a new advance directive because of the increasedscope of direction that can now be made.

4. Id. § 311.623(1)(c). If two or more surrogates are serving at the same time,unless the advance directive provides otherwise, any decisions must be made byunanimous consent of the surrogates. Id.

5. Id. § 311.623(1)(a). Life prolonging treatment is any medical procedure that"uses mechanical or other artificial means to sustain, prolong, restore, or supplant aspontaneous vital function;" and "[wihen administered to a patient would serve onlyto prolong the dying process." Id. § 311.621(11).

6. Id. § 311.623(1)(b). Artificially provided nutrition and hydration means sus-

489


Designating a health care surrogate in advance of a seriousaccident or illness should help ensure that a grantor's wishesregarding health care decisions are carried out. A surrogate isonly permitted to act on behalf of the grantor when the grantorno longer can make decisions. The surrogate must make anydecisions in accordance with the desires of the grantor as indi-cated in the advance directive.7

An advance directive must be in writing and either witnessedby two or more adults in the presence of the grantor, or acknowl-edged before a notary public.8 The advance directive may berevoked by: a writing, signed and dated by the grantor declaringthe grantor's intent to revoke; an oral statement of intent to re-voke made in the presence of two witnesses, one of whom is ahealth care provider; or the destruction of the document by thegrantor or by some other person at the direction and in the pres-ence of the grantor.9

The living will act contains additional provisions dealing spe-cifically with pregnant women," adult patients who have notexecuted an advance directive," and attending physicians orhealth care facilities which refuse to comply with the advancedirective of a patient. 12

tenance or fluids that are artificially or technologically administered. Id. § 311.621(3).7. Id. § 311.629(1). A surrogate may authorize the withdrawal or withholding of

artificially provided nutrition and hydration if: (a) inevitable death is imminent, byreasonable medical standards, within a few days; (b) the declarant is in a perma-nently unconscious state, if the grantor has previously directed such withholding orwithdrawal; (c) the provision of artificial nutrition cannot be physically assimilated bythe grantor; or (d) the burden of the provision of artificial nutrition and hydrationoutweighs its benefits. Id. § 311.629(3).

8. Id. § 311.625(2). The following persons are not authorized witnesses under theAct: a blood relative of the grantor; a beneficiary of the grantor under Kentuckydescent and distribution law; an employee of a health care facility in which thegrantor is a patient, unless the employee is a notary; an attending physician of thegrantor; or a person directly, financially responsible for the grantor's health care. Id.

9. Id. § 311.627(1).10. Id. § 311.629(4). Advance directives have no force or effect during the course

of pregnancy unless, to a reasonable degree of medical certainty after examination bytwo physicians, it is certified by the physicians that the procedures will: fail to main-tain the woman in a way to permit the continuing development and live birth of theunborn child; be physically harmful to the woman; or prolong severe pain whichcannot be alleviated by medication. Id.

11. Id.' § 311.631. The Act specifies parties, in order of priority, to be contactedto make health care decisions on behalf of the patient. Id.

12. Id. § 311.633(2). The provider shall inform the patient or responsible party of

ESTATE PLANNING UPDATE

B. Standby Guardians and Conservators

The Kentucky General Assembly has enacted legislation thatwill allow an individual to express his or her wishes as to whichperson is to be appointed as guardian or conservator in the eventof the individual's disability. 13 A verified petition may be filedwith the circuit clerk of the county in which the petitioner re-sides or given to any person, firm, bank or trust company chosenby the petitioner. 14 If the petitioner is of sound mind, such apetition may be revoked at any time before a court appoints aguardian or conservator by destroying the petition or executingan acknowledged instrument of revocation. 5 Any time after de-livering the petition to the clerk and before revocation, one mayrequest a hearing on the petition by filing a verified statementindicating that an event has occurred or a condition has hap-pened which was provided for in the petition." If a guardian orconservator is appointed under this section, he or she is vestedwith the same duties and powers as guardians or conservatorsotherwise appointed under chapter 387 of the Kentucky RevisedStatutes (KRS)17

II. CASE LAW UPDATE

In 1994, the Kentucky Supreme Court and court of appealshanded down notable opinions on joint wills, s testamentaryintent in holographic instruments, 9 and procedures that mustbe followed when actions are brought to settle estates.20

its refusal to comply and shall not impede the transfer of the patient to anotherfacility. Id.

13. For the voluntary appointment of a guardian or a conservator, a person mustexecute a verified petition that will be acted upon by a court only upon the occur-rence of an event specified or the existence of a described condition of the mental orphysical health of the petitioner. Id. § 387.330(1).

14. Id. § 387.330(3).15. Id. § 387.330(4). If the petition has previously been filed with the circuit

clerk, the revocation may be deposited there. Id.16. Id. § 387.330(5). If the petition was not previously deposited with the clerk,

the petitioner may request a hearing on the petition by filing the petition and theverified statement with the circuit clerk in the county where the person who execut-ed the petition then resides. Id.

17. Id. § 387.330(7).18. Fryxell v. Clark, 856 S.W.2d 892 (Ky. Ct. App. 1993).19. Mallory v. Mallory, 862 S.W.2d 879 (Ky. 1993).20. White v. White, 883 S.W.2d 502 (Ky. Ct. App. 1994).

1995] 491


A. Joint Wills

The effective date of a statute dealing with joint wills was thefocus of the court of appeals in Fryxell v. Clark.2 In 1951, Al-bert McGiveney and Flora McGiveney executed a joint will whichprovided that all of Albert and Flora's property would go to thesurvivor of them, and upon the death of the survivor, all of theproperty would go to their daughter, Judith.22 In 1972, the Ken-tucky General Assembly had enacted KRS section 394.540, whichdealt with contracts not to revoke wills. 23

Albert died in 1989. The joint will was probated, and Florareceived all of his assets.24 Flora then revoked the joint will andexecuted a new will, naming beneficiaries other than Judith.25

When Flora passed away and her new will was offered for pro-bate, Judith contested the will, claiming that as a beneficiarypursuant to the terms of the joint will, she was entitled to re-ceive Flora's estate.26

The court agreed and determined that KRS section 394.540did not apply to wills executed prior to June 16, 1972, notingthat there was no express declaration that the statute be appliedretroactively.27 The joint will executed prior to June 16, 1972was held to be an irrevocable contract that gave a life estate tothe survivor, and any attempt by the survivor to revoke suchjoint will was invalid.28

21. Fryxell, 856 S.W.2d at 892.22. Id. at 893.23. KY. REV. STAT. ANN. § 394.540 (Michie/Bobbs-Merrill 1990 & Supp. 1994) pro-

vides:

(1) A contract to make a will or devise, or not to revoke a will or devise or todie intestate, if executed after June 16, 1972, can be established only by:

(a) Provisions of a will stating material provisions of the contract;(b) An express reference in a will to a contract and extrinsic evidenceproving the terms of the contract; or(c) A writing signed by the decedent evidencing the contract.

(2) The execution of a joint will or mutual wills gives rise to no presumptionof a contract not to revoke the will or wills.24. Fryxell, 856 S.W.2d at 893.25. Id.26. Id.27. Id. The lack of an effective date in subsection (2) of KRS section 394.540 did

not result in that subsection being applied retroactively, and the argument for retro-active application was an unsuccessful attempt to recognize form over substance andignore the intent of the legislature. Id. at 893-94.

28. Id. at 893.

492

1995] ESTATE PLANNING UPDATE 493

B. Testamentary Intent

The Kentucky Supreme Court considered the validity of aholographic will in Mallory v. Mallory.29 During the administra-tion of the estate of Lillian Mallory, a formal will executed in1967 was offered for-probate.30 A few days later a holographicinstrument written in 1987 was found in the decedent's bibleand was tendered to the probate court as the will of the dece-dent.3 ' Subsequently, an attorney-prepared codicil executed in1989 was found."

The issue was whether the holographic instrument containedsufficient expression of the decedent's testamentary intent tojustify its treatment as a will.3 3 Testamentary intent is neces-sary before an instrument will be treated as a will. Requisiteintent requires a disposition of property which takes effect afterdeath.34 The court concluded that the language "to be sold anddivided between them property" was sufficient to satisfy thedisposition element.3 5

However, the court held that the requirement that the disposi-tion take effect at death was not met. The holographic instru-

29. Mallory v. Mallory, 862 S.W.2d 879 (Ky. 1993).30. Id. at 880.31. Id.32. Id. The codicil designated executors of the decedent's estate and indicated

that her original. executors had predeceased her. Only the formal 1967 will designat-ed an executor of Mrs. Mallory's estate. The doctrine of re-publication was argued.However, because the codicil 'failed to expressly identify the prior instrument, thecourt turned its focus to the holographic instrument and whether it was executedwith testamentary intent. Id.

33. Id. at 881. The holographic instrument, duplicated as nearly as possible bythe court, said:

Valentine DayFebruary 14 1987Jackie Mallory +Virginia Boothsaid by Lillian Malloryto be sold and be dividedbetween them/propertyby my handMrs. Lillian Mallory

Id. at 880.34.. Id. at 881 (citing Simon v. Wildt, 84 Ky. 157 (1886)). See also Dixon v.

Dameron's Adm'r, 77 S.W.2d 6 (Ky. 1934).35. Mallory, 862 S.W.2d at 881. While the court concluded that this element was

met, it did so with "little conviction." Id.


ment did not state a time when the property would be sold anddivided or contain any language indicating that the decedent wascontemplating death.36 The supreme court rejected the lowercourt's reliance on the circumstances surrounding the executionof the instrument as providing the necessary intent, holdinginstead that extrinsic evidence should not be relied upon infinding the elements of a valid will."v While the court has along-standing tradition of upholding poorly executed documentsas wills, such documents must contain all essential elements of awill."

C. Actions to Settle Estates

In White v. White,39 the court of appeals discussed the neces-sary parties in settling an estate and when a court has authorityto order the sale of real property from an estate. In White,Howard E. White, Sr. (White) died testate in 1982 and his wife,Anna, was appointed executrix of his estate.4 ° Anna died intes-tate in 1985. Her son, Howard E. White, Jr. (Howard), was ap-pointed administrator of her estate, and with his brother, An-drew, was appointed co-administrator of White's estate withWhite's will annexed.4' In 1992, Howard filed actions with thecircuit court to settle both estates and have the court order thesale of the real property in the estates.42

The court of appeals first addressed the issue of who are nec-essary parties in an action to settle an estate.43 KRS section

36. Id. at 882. While it is not necessary that the ,decedent use terms such as"death" or "die," the court must be able to discern an intention that the instrumenttake effect at death. If the court permitted testimony to supply this intention, theconcern would be that any casual writing could be converted into a will. Id.

37. Id. Extrinsic parol evidence is inadmissible to show what the testator intend-ed to say but did not, to alter or contradict the terms of a will, to add to or sub-tract anything from it, or to supply an essential element missing from an instru-ment. Id. (citing Deboe v. Brown Ex'r, 22 S.W.2d 111, 114 (Ky. 1929)).

38. Id. (citations omitted).39. White v. White, 883 S.W.2d 502 (Ky. Ct. App. 1994).40. Id. at 503.41. Id.42. Id.43. Id. at 504. Howard initiated the action in his capacity as administrator of

Anna's estate and as co-administrator of White's estate. He named as defendantsthree creditors of the estate, including his brother, Andrew, and Andrew's wife. Id. at503.

494

ESTATE PLANNING UPDATE

395.510 provides that a decedent's representative, all personshaving a lien upon or interest in the property left by the dece-dent, and the decedent's creditors must be parties to an action tosettle an estate.4 Because Howard failed to name himself as anheir to his parents' estates and Andrew in his capacity as co-administrator of White's estate, the suit failed to comply withthe statute and the case was remanded to the trial court so thatHoward could amend his pleading to remedy the deficiency. 4

The court also considered the elements required in order for acircuit court to have authority to order the sale of real propertyfrom an estate.46 Under KRS section 395.515, a petition mustidentify the debts of an estate and the nature and value of thereal and personal property in the estate.47 A court must findthat the personal estate is insufficient for the payment of alldebts.4 The court cannot summarily order the sale of real prop-erty without making this finding.49

44. KY. REV. STAT. ANN. § 395.510 (Michie/Bobbs-Merrill 1984 & Supp. 1994).45. White, 883 S.W.2d at 504. The court reasoned that to allow an action to

proceed that did not name all heirs and representatives of the decedent would frus-trate the purpose of the statute of final determination of the rights of all interestedparties. Id.

46. Id.47. Ky. REV. STAT. ANN. § 395.515 (Michie-Bobbs Merrill 1984 & Supp. 1994).48. White, 883 S.W.2d at 504. The lower court failed to make this finding which

is required because real property is to be preserved, and sold only after all otherassets have been exhausted in the payment of valid claims. Id.

49. Id.

1995] 495

NOTES

DETERS V. JUDICIAL RETIREMENT AND REMOVAL COM-MISSION: FREE SPEECH AND THE APPEARANCE OF

JUDICIAL IMPARTIALITY

by Scott Robert Brown

I. INTRODUCTION

On March 24, 1994, the Kentucky Supreme Court decided thecase of Deters v. Judicial Retirement and Removal Commission.'The court held that Jed K. Deters had violated the Code of Judi-cial Conduct while he was a candidate for district court judge inKenton County, Kentucky.2 During the campaign, Deters causedto have published advertisements in two newspapers of local,general circulation in Northern Kentucky which stated that "JedDeters is a Pro-Life Candidate."3 A complaint was subsequentlyfiled with the Judicial Retirement and Removal Commission(Commission) which charged that Deters had violated Canon7(B)(1)(c) of the Code of Judicial Conduct.4

Justice Spain, writing for the majority, affirmed theCommission's order of public censure of Deters, holding that heviolated the Code of Judicial Conduct by making publicstatements that committed or appeared to commit him to a posi-tion on abortion, an issue that was likely to come before him inKenton County District Court.5

In its decision, the Kentucky Supreme Court determinedwhether the Commission had the jurisdiction to sanction

1. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W.2d 200 (Ky.1994). Justice Spain delivered the court's opinion. Chief Justice Stephens and Justic-es Leibson, Reynolds and Stumbo concurred. Justices Wintersheimer and Lambertconcurred in part and dissented in part.

2. Id. at 205.3. Id. at 201.4. Id. at 202.5. Id. at 205.


candidates' conduct in judicial elections in the Commonwealth.6

The court also considered whether abortion was an issue likelyto come before the Kenton County District Court.7 Most impor-tantly, the court addressed the question of whether the FirstAmendment of the Constitution protects the right of a judicialcandidate to publicly express his or her views on cases and con-troversies likely to come before him or her in court.8 Last, thecourt analyzed whether the state had a compelling interest inproscribing a judicial candidate's speech, and if the Code of Judi-cial Conduct was sufficiently and narrowly drawn to further thatstate interest.9

Deters addressed important issues concerning the constitution-al right to free speech - the cornerstone upon which our demo-cratic society is founded. It is axiomatic that the free expressionof political ideas by candidates for public office must be protectedfervently in a society with a representative government. A fortio-ri, the law must also guard against state regulations which re-strict the ability of the electorate to receive information in orderto make informed, intelligent choices. On the other hand, Detersalso focused upon the necessity of impartiality on the part ofjudges in the administration of the law and the concern thatstatements made during a judicial election can potentially under-mine the integrity of our judicial system.

This note will examine the conflict that arises between theseprinciples when a judicial candidate speaks out on disputed legalissues and explore whether the Commission has jurisdiction tosanction the speech of a judicial candidate. First Amendmentcase law involving election speech will be reviewed, and an in-quiry will be made into .whether a judicial candidate can be disci-plined due to the content of his or her statements during a cam-paign. This. article will also question whether the state has acompelling interest in protecting the integrity of our legal sys-tem, and whether a judicial candidate's First Amendment rightto communicate his or her position upon legal issues may belimited. Finally, an analysis will be conducted to determinewhether Canon 7(B)(1)(c) furthers this state interest, and wheth-

6. Id. at 202-03.7. Id. at 203.8. Id. at 203-05.9. Id.

498

1995] DETERS 499

er this ethical standard, which restricts content-based speech, issufficiently and narrowly tailored to meet the constitutional testof "strict scrutiny."

II. BACKGROUND

A. Jurisdiction of the Judicial Retirement and RemovalCommission

1. Statutory Authority for the Commission's Jurisdiction

Section 121 of the Kentucky Constitution grants authority to acommission composed of judges from the court of appeals, circuitcourts, and district courts, to retire a judge for disability or sus-pend him for "good cause."1 The Rules of the Supreme Court ofKentucky also provide that the Commission has the jurisdictionto impose sanctions of admonition, private reprimand, publicreprimand or censure upon any judge or lawyer for a variety ofoffenses committed while campaigning for judicial office, includ-ing violation of the Code of Judicial Conduct, Rule 4.300.1" Rule

10. KY. CONST. § 121. This section provides:

Retirement & Removal. - Subject to rules of procedure to be established bythe Supreme Court, and after notice and hearing, any justice of the SupremeCourt or judge of the Court of Appeals, Circuit Court or District Court may beretired for disability or suspended without pay or removed for good cause by acommission composed of one judge of the Court of Appeals, selected by thatcourt, one circuit judge and one district judge selected by a majority vote ofthe circuit judges and district judges, respectively, one member of the bar ap-pointed by its governing body, and two persons, not members of the bench orbar, appointed by the Governor. The commission shall be a state body whosemembers shall hold office for four-year terms. Its actions shall be subject tojudicial review by the Supreme Court.

Id.11. Ky. SuP. CT. R. 4.020. This section provides:(1) Commission shall have authority:

(a) To order a temporary or permanent retirement of any judge whom itfinds to be suffering from a mental or physical disability that seriously inter-feres with the performance of his duties, and to suspend temporarily from theperformance of his duties, without affecting his pay status, any judge (i)against whom there is pending in any court of the United States an in-dictment or information charging him with a crime punishable as a felony, or(ii) after notice and an opportunity to be heard, and upon a finding that itwill be in the best interest of justice that he be suspended from acting in hisofficial capacity as a judge until final adjudication of the complaint, any judgeagainst whom formal proceedings have been initiated under Rule 4.180.


4.000 provides that Part IV of the Rules of the Supreme Court ofKentucky applies to all proceedings before the Commission in-volving discipline of judges, as well as lawyers seeking judicialoffice.

12

2. Case Law Interpreting the Commission's Authority

In Nicholson v. Judicial Retirement and Removal Commis-sion,'" the Kentucky Supreme Court considered the scope of theCommission's jurisdiction and whether section 121 of the Ken-tucky Constitution violates a judge's due process rights. 4 TheCommission issued an order of public censure of Judge S. RushNicholson after it found that he had so ineptly handled a pro-ceeding as to cause disrepute of his judicial office.'5

Judge Nicholson appealed this order to the Kentucky SupremeCourt, arguing that the ex post facto prohibitions of the Ken-tucky and United States Constitutions would prohibit the Com-

(b) To impose the sanctions separately or collectively of (1) admonition,

private reprimand, public reprimand- or censure; (2) suspension without pay or

removal or retirement from judicial office, upon any judge of the Court of Jus-tice or lawyer while a candidate for judicial office, who after notice and hear-

ing the Commission finds guilty of any one or more of the following:(i) Misconduct in office.(ii) Persistent failure to perform his duties.(iii) Incompetence.(iv) Habitual intemperance.(v) Violation of The Code of Judicial Conduct, Rule 4.300.

(vi) Any willful refusal or persistent failure to conform to official

policies and directives adopted by the Supreme Court and issued by the Chief

Justice in his constitutional capacity as Chief Executive Officer of the Court ofJustice.

(vii) Conviction of a crime punishable as a felony.

(c) After notice and hearing, to remove a judge whom it finds to lack the

constitutional and statutory qualifications for the judgeship in question.

(d) To refer any judge of the Court of Justice or lawyer while a candi-

date for judicial office, after notice and hearing found by' the Commission to be

guilty of misconduct, to the Kentucky Bar Association for possible suspensionor disbarment from the practice of law.

(2) Any erroneous decision made in good faith shall not be subject to the juris-diction of the Commission.

Id.12. KY. SUP. CT. R. 4.000.13. Nicholson v. Judicial Retirement and Removal Comm'n, 562 S.W.2d 306 (Ky.

1978).14. Id. at 308-10.15. Id. at 308.

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mission from sanctioning his actions which occurred after theeffective date of section 121 of the Kentucky Constitution, butbefore the implementation of Supreme Court Rule 4.000 by theKentucky Supreme Court. 6 He also contended that his due pro-cess rights were violated because the Commission was permittedto remove judges for "good cause," a standard that isimpermissibly vague in that it provides no advance notice ofwhat conduct is proscribed."7 The court rejected JudgeNicholson's first argument, stating that ex post facto prohibitionsonly apply to criminal matters. 8 The court said:

The purpose of Section 121 of our constitution is the regulationof the conduct of those persons charged with the administration ofjustice. The aim of proceedings instituted pursuant to this sectionis to improve the quality of justice administered within the Com-monwealth by examining specific complaints of judicial miscon-duct, determining their relation to a judge's fitness for office andcorrecting any deficiencies found by taking the least severe actionnecessary to remedy the situation.19

The court found that the purpose of this section was not to pun-ish the judge, and therefore, there was no violation of any expost facto prohibitions.2 ° The court also refused to find that the"good cause" standard was impermissibly vague, stating that thisstandard is a term of art which has meaning to the members ofthe legal profession, who are aware of the guidelines establishedfor their professional and ethical conduct as adopted by nationaland state bar associations.2'

Judge Nicholson also contended that the investigation andadjudication of his conduct violated his right to due process be-cause the members of the Commission could not remain impar-tial in the adjudicative phase of the proceedings after they hadbeen involved in the investigation of the case.22 The court, how-ever, held that Judge Nicholson had failed to "overcome a pre-sumption of honesty and integrity in those serving as adjudica-

16. Id.17. Id.18. Id.19. Id.20. Id.21. Id. at 308-09.22. Id. at 309.

1995]


tors; and ... [show that] ... conferring investigative and adjudi-cative powers on the same individuals poses such a risk of actualbias or prejudgment that the practice must be forbidden if theguarantee of due process is to be adequately implemented. 23

Finally, Judge Nicholson argued that because section 121 ofthe Kentucky Constitution only provides that the Commissionmay retire a judge for disability, suspend him without pay orremove him for good cause, the Commission is without the au-thority to provide for other sanctions such as a public repri-mand.24 The court held that section 121 provides that a judgemay be removed from office and that the Commission has, byimplication, the power to impose lesser sanctions not enumeratedin the Constitution.25

The Kentucky Supreme Court once again addressed the ques-tion of the Commission's authority in Kentucky Bar Associationv. Hardesty.26 Judge Thomas F. Hardesty was investigated bythe Commission for allegedly offering leniency to women chargedwith crimes in exchange for favors from them.27 Hardesty re-signed from office and the Commission issued an order of publiccensure. 28 The Kentucky Bar Association's (KBA) Inquiry Tribu-nal subsequently filed a charge of misconduct againstHardesty. 29 Hardesty argued before the Kentucky SupremeCourt that he had already been punished by the Commission,and therefore, could not be punished by the KBA for the sameconduct.3"

The court noted that although section 121 of the KentuckyConstitution permits the Commission to retire a judge for dis-ability, suspend him without pay, or remove him for good cause,it does not provide that the Commission has the authority toimpose the additional sanctions of suspension or disbarmentfrom the practice of law.31 The court held that this power haderroneously been given to the Commission in the former rule,

23. Id. (quoting Withrow v. Larkin, 421 U.S. 35, 47 (1975)).24. Id.25. Id. at 309-10.26. Kentucky Bar Ass'n v. Hardesty, 775 S.W.2d 87 (Ky. 1989).27. Id.28. Id.29. Id.30. Id.31. Id.

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Supreme Court Rule 4.020(1)(b), in contravention of the Ken-tucky Constitution.3 2 The court then dismissed the charges ofthe bar association due to the conflict between the rule and theConstitution and recommended that the KBA proceed withsanctions against judges in their capacities as lawyers, regard-less of actions taken by the Commission.33

Kentucky Supreme Court Rule 4.050 was subsequently re-drafted after the Hardesty decision to provide for the referral ofdisciplinary matters concerning lawyers by the Commission tothe KBA.34 Rule 4.020(1)(b) also was rewritten to require theCommission to refer the possible sanctions of suspension or dis-barment to the KBA.

B. Kentucky Supreme Court Rule 4.300, Canon 7(B)(1)(c)

In 1924, the American Bar Association (ABA) adopted theCanons of Judicial Ethics to provide mandatory professional andethical standards of conduct for judges.36 The canons wereadopted in most states, and in 1969, the ABA created a commis-sion which developed the Code of Judicial Conduct, which theABA endorsed in 1972.37

In the 1972 version of the Code of Judicial Conduct, Canon7(B)(1)(c) provided that a candidate for judicial office "should notmake pledges or promises of conduct in office other than thefaithful and impartial performance of the duties of the office;announce his views on disputed legal or political issues; or mis-represent his identity, qualifications, present position, or otherfact."3 In 1990, the ABA amended the Code of Judicial Conductby eliminating the "announcement" clause and replaced it withthe rule that a judicial candidate should not "make statementsthat commit or appear to commit the candidate with respect tocases, controversies or issues that are likely to come before the

32. Id. at 87-88.33. Id. at 88.34. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W.2d 200, 203

(Ky. 1994) (citing KY. SUP. CT. R. 4.050).35. Id. (citing KY. SUP. CT. R. 4.020(1)(b)).36. MODEL CODE OF JUDICLAL CONDUCT Preface (1972).

37. Id.38. Id. Canon 7(B)(1)(c).

1995] 503


court."39 The drafters of this ethical standard stated that thephrase "announce his views on disputed legal or political issues"was replaced because the Committee on Ethics and ProfessionalResponsibility believed it to be an "overly broad restriction onspeech.,

40

Section 121 of the Kentucky Constitution confers the authorityto regulate the conduct of the judiciary upon a Commission com-prised of judges from various state courts.4' The 1972 ABACode of Judicial Conduct was adopted in Kentucky pursuant toSupreme Court Rule effective January 1, 1978.42 In 1991, theKentucky Supreme Court held in J.C.J.D. v. R.J.C.R that the1972 Code's Canon 7(B)(1)(c), which prohibited a judicial candi-date from announcing his or her views on disputed legal issues,violated the First Amendment of the United States Constitutionand section 8 of the Kentucky Constitution.43 Subsequent to thedecision in J.C.J.D. v. R.J.C.R., Kentucky adopted the new lan-guage of the 1990 Code of Judicial Conduct, which prohibits ajudicial candidate from making statements that commit or ap-

39. Id. Canon 5(A)(3)(d)(ii) (1990).40. Id. Appendix C, at 72 (as submitted for consideration at the 1990 Annual

Meeting of the House of Delegates).41. KY. CONST. § 121.42. KY. Sup. CT. R. 4.300 (1978).43. J.C.J.D. v. R.J.C.R., 803 S.W.2d 953, 956 (Ky. 1991). This case will be dis-

cussed in detail later in this note.

504

1995] DETERS 505

pear to commit him to a position on a case or issue that is likelyto come before him in court."

44. The current Rule 4.300, Canon 7 provides:

CANON 7. A Judge Should Refrain From Political Activity Inappropriate ToHis Judicial OfficeA. Political Conduct in General.(1) A judge or a candidate for election to judicial office should not:

(a) act as a leader or hold any office in a political organization;

(b) make speeches for a political organization or candidate or publiclyendorse a candidate for public office; however, a judge may privately endorseany candidate of his choice;

(c) solicit funds for or pay an assessment or make a contribution to apolitical organization or candidate, attend political gatherings, or purchasetickets for political party dinners, or other functions, except as authorized in

subsection A(2);(2) A judge holding an office filled by public election between competing candi-

dates, or a candidate for such office, may attend political gatherings and speak

to such gatherings on his own behalf when he is a candidate for election or

reelection. A judge or candidate for nomination. or election to judicial officemay not identify himself as a member of a political party in any form of ad-vertising, or when speaking to a gathering on his own behalf. If not initiated

by the judge or candidate for such office, and only in answer to a direct ques-tion, he may identify himself as a member of a particular political party. For

purposes of this canon a judge holding such office will be deemed to be acandidate for reelection during his entire term of office.(3) A judge should resign his office when he becomes a candidate either in aparty primary or in a general election for a non-judicial office, except that he

may continue to hold his judicial office while being a candidate for election to

or serving as a delegate in a state constitutional convention, if he is otherwisepermitted by law to do so.

(4) A judge should not engage in any other political activity except on behalfof measures to improve the law, the legal system, or the administration ofjustice.(5) No member of the judiciary shall engage in any activity in the nature oflobbying with the executive or legislative branch of the state government onmatters affecting the judiciary without express authority from the Chief Jus-tice.(B) Campaign Conduct.(1) A candidate, including an incumbent judge for a judicial office that is filledeither by public election between competing candidates or on the basis of amerit system election:

(a) should maintain the dignity appropriate to judicial office, and shouldencourage members of his family to adhere to the same standards of politicalconduct that apply to him;

(b) should prohibit public officials or employees subject to his direction or

control from doing for him what he is prohibited from doing under this Canon;and except to the extent authorized under subsection B(2) or B(3), he shouldnot allow any other person to do for him what he is prohibited from doingunder this Canon;


C. The First Amendment and the Judicial Candidate

1. Freedom of Speech During an Election

The First Amendment of the United States Constitution statesin concise and simple terms that "Congress shall make nolaw... abridging the freedom of speech."" The Supreme Courtheld in Thornhill v. Alabama46 that freedom of speech is"among the fundamental personal rights and liberties which aresecured to all persons" and is incorporated by the FourteenthAmendment against abridgment by the states.

The Supreme Court has interpreted the brief terms of theFirst Amendment in a wide variety of contexts and establishedvarious rules and tests to determine when a federal or stategovernment may limit speech given certain circumstances. 4 In

(c) should not make pledges or promises of conduct in office other thanthe faithful and impartial performance of the duties of the office; make state-ments that commit or appear to commit the candidate with respect to cases,controversies or issues that are likely to come before the court; or misrepresenthis identity, qualifications, present position, or other facts.(2) A candidate, including an incumbent, for a judicial office that is filled bypublic election between competing candidates should not himself solicit cam-paign funds, but he may establish committees of responsible persons to secureand manage the expenditure of funds for his campaign and to obtain publicstatements of support for his candidacy. Such committees are not prohibitedfrom soliciting campaign contributions and public support from lawyers. Acandidate's committees may solicit funds for his campaign no earlier than 120days before a primary election and no later than 120 days after the lastelection in which he participates during the election year. A candidate shouldnot use or permit the use of campaign contributions for the private benefit ofhimself or members of his family.

KY. Sup. CT. R. 4.300 Canon 7 (emphasis added).45. U.S. CONST. amend. I.46. Thornhill v. Alabama, 310 U.S. 88 (1940).47. Id. at 95.48. See Schenck v. United States, 249 U.S. 47 (1919); Abrams v. United States,

250 U.S. 616 (1919); Gitlow v. New York, 268 U.S. 652 (1925); Whitney v. California,274 U.S. 357 (1927); De Jonge v. Oregon, 299 U.S. 353 (1937); Herndon v. Lowry,301 U.S. 242 (1937); Dennis v. United States, 341 U.S. 494 (1951); Yates v. UnitedStates, 354 U.S. 298 (1957); Scales v. United States, 367 U.S. 203 (1961);Brandenburg v. Ohio, 395 U.S. 444 (1969) (advocacy of the overthrow of the govern-ment and membership to particular political parties); Adderley v. Florida 385 U.S. 39(1966); Coates v. Cincinnati, 402 U.S. 611 (1971); Carey v. Brown, 447 U.S. 455(1980); Frisby v. Schultz, 487 U.S. 474 (1988); Boos v. Barry, 485 U.S. 312 (1988);International Soc'y for Krishna Consciousness v. Lee, 112 S. Ct. 2701 (1992) (freespeech, assembly and association in public and non-public fora); United States CivilServ. Comm'n v. National Ass'n of Letter Carriers, 413 U.S. 548 (1973); Broadrick v.

1995] DETERS 507

one of the earliest cases concerning state restrictions of speechduring an election, Mills v. Alabama,49 Justice Black wrote:

Whatever differences may exist about interpretations of theFirst Amendment, there is practically universal agreement that amajor purpose of that Amendment was to protect the free discus-sion of governmental affairs. This of course includes discussions ofcandidates, structures and forms of government, the manner inwhich government is operated or should be operated, and all suchmatters relating to political processes.5 °

Under the Alabama Corrupt Practices Act, it was a crime tosolicit votes for, publicly support or oppose a proposition on elec-tion day.51 Mills, the editor of a daily newspaper, was arrestedfor publishing an editorial on the day of a local election thatrecommended the adoption of a mayor-city council form of gov-ernment.52 The Supreme Court reversed the Alabama SupremeCourt's holding that the statute was not an unreasonable limita-tion upon free speech.53 Justice Black stated:

Oklahoma, 413 U.S. 601 (1973) (political activity by federal and state employees);Brockett v. Spokane Arcades, 472 U.S. 491 (1985); Vance v. Universal AmusementCo., 445 U.S. 308 (1980); Paris Adult Theater I v. Slaton, 413 U.S. 49 (1973); Millerv. California, 413 U.S. 15 (1973); Jenkins v. Georgia, 418 U.S. 153 (1974); FortWayne Books v. Indiana, 489 U.S. 46 (1989); FW/PBS v. City of Dallas, 493 U.S. 215(1990); Osborne v. Ohio, 495 U.S. 103 (1990) (obscenity); Cantwell v. Connecticut, 310U.S. 296 (1940); Chaplinksy v. New Hampshire, 315 U.S. 568 (1942); Cohen v. Cali-fornia, 403 U.S. 15 (1971); F.C.C. v. Pacifica Foundation, 438 U.S. 726 (1978); City ofRenton v. Playtime Theaters, 475 U.S. 41 (1986); City of Houston v. Hill, 482 U.S.451 (1987); Sable Communications of California, Inc. v. F.C.C., 492 U.S. 115 (1989);R.A.V. v. City of St. Paul, 112 S. Ct. 2538 (1992) ("fighting words" and offensivespeech); Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc.,425 U.S. 748 (1976); Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447U.S. 557 (1980); Posadas de Puerto Rico Assoc. v. Tourism Co., 478 U.S. 328 (1986)(commercial speech); New York Times Co. v. Sullivan, 376 U.S. 254 (1964); Gertz v.Robert Welch, Inc., 418 U.S. 323 (1974) (libel and defamation); United States v.O'Brien, 391 U.S. 367 (1968); Spence v. Washington, 418 U.S. 405 (1974); Clark v.Community for Creative Non-Violence, 468 U.S. 288 (1984); Texas v. Johnson, 491U.S. 397 (1989); United States v. Eichman, 496 U.S. 310 (1990); Barnes v. GlenTheatre, Inc., 501 U.S. 560 (1991) (symbolic speech); Tinker v. Des Moines Indep.Community Sch. Dist., 393 U.S. 503 (1969); Bethel Sch. Dist. No. 403 v. Fraser, 478U.S. 675 (1986); Board of Educ., Island Trees Union Free Sch. Dist. No. 26 v. Pico,457 U.S. 853 (1982); Hazelwood Sch. Dist. v. Kuhlmeier, 484 U.S. 260 (1988) (speechin the public schools).

49. Mills v. Alabama, 384 U.S. 214 (1966).50. Id. at 218-19.51. Id. at 216.52. Id. at 215-16.53. Id. at 220.


We hold that no test of reasonableness can save a state law frominvalidation as a violation of the First Amendment when that lawmakes it a crime for a newspaper editor to do no more than urgepeople to vote one way or another in a publicly held election.54

In the case of Morial v. Judiciary Commission of the State ofLouisiana,55 the United States Court of Appeals for the FifthCircuit considered the question of whether Canon 7 (A)(3) of theLouisiana Code of Judicial Ethics, which required a judge toresign his position on the court before announcing his candidacyfor non-judicial office, violated the First Amendment. 6 Thecourt of appeals overruled the district court's holding that thecanon had a "chilling effect" upon a judicial candidate's right tofree speech, and it was not a "necessary means" for effectuatingthe state's compelling interest in maintaining the integrity of thejudiciary.5 7 The appeals court held that the Supreme Court de-cisions of United States Civil Service Commission v. NationalAssociation of Letter Carriers58 and Broadrick v. Oklahoma59

permitted restriction of the political activity of federal and statecivil service employees, provided that there was a close relation-ship between the statute and the important governmental inter-est in protecting the integrity of our civil institutions. 0

[T]he requisite closeness of the means-end relation must be deter-mined on a case-by-case basis. The standard to be applied in anycase is a function of the severity of impairment of first amend-ment interests. As the burden comes closer to impairing core firstamendment values, e.g. the right to hold particular political views,or impairs some given first amendment value more substantially,the requisite closeness of fit of means and end increases accord-ingly.... [R]estrictions on the partisan political activity of publicemployees and officers, where such activity contains substantialnon-speech elements are constitutionally permissible if justified by

54. Id.55. Morial v. Judiciary Comm'n, 565 F.2d 295 (5th Cir. 1977).56. Id. at 297.57. Id.58. United States Civil Serv. Comm'n v. National Ass'n of Letter Carriers, 413

U.S. 548 (1973).59. Broadrick v. Oklahoma, 413 U.S. 601 (1973).60. Morial, 565 F.2d at 299-300.

508

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a reasonable necessity to burden those activities to achieve acompelling public objective.6

The court held that although a candidate has an importantright to be able to run for office, this right is not a recognized"fundamental" constitutional right.6 2 Also, the court stated thata "resign to run" requirement does not prohibit the candidatefrom making statements about issues outside of the campaign,penalize the candidate's belief on any particular idea, or limitthe right of the citizens of the state to vote for the candidates oftheir choice.64 Because "core first amendment values" are notimplicated, strict scrutiny of the restriction is not required, andthe state need only demonstrate that there is a reasonable needto require judges to resign before becoming candidates for non-judicial office.6"

The court held that the canon was reasonably necessary toeffectuate the state's interests in the prevention of abuse of thejudicial office during a campaign, the deterrence of misuse of thejudicial office by those who have lost the election and have sincereturned to the bench, and the obviation of the appearance ofjudicial impropriety.66 Because the court did not strictly scruti-nize the canon, it did not require the state to select a least re-strictive alternative to protect its interests, such as proceedingsagainst judges who improperly use their offices or involuntaryrecusal, and instead permitted the state to choose a means witha "degree of prophylaxis" such as the canon in question."

In 1982, a Kentucky case, Brown v. Hartlage,"8 which in-volved state restrictions on the speech of a candidate for non-judicial office, was decided by the United States SupremeCourt.69 The Kentucky Corrupt Practices Act prohibited candi-dates from making promises, agreements or contracts in consid-eration for votes, or from voting for or supporting any individualor issue in consideration for votes or financial or moral support

61. Id. at 300 (citations omitted).62. Id. at 301.64. Id.65. Id. at 301-02.66. Id. at 302-03.67. Id. at 303.68. Brown v. Hartlage, 456 U.S. 45 (1982).69. Id.

1995] 509


in any election."v Brown, while candidate for Commissioner ofJefferson County, promised to reduce the salary of the Commis-sioner if elected. 1 Brown retracted this statement after learn-ing that he may have violated the Kentucky Corrupt PracticesAct.72 After 'Brown's subsequent victory in the election,Hartlage filed suit, seeking to have the election declared voiddue to Brown's violation of the Act.73

Justice Brennan, writing for the Court in a unanimous opin-ion, held:

[Wlhen a State seeks to uphold [its] interest by restricting speech,the limitations on state authority imposed by the First Amend-ment are manifestly implicated.

... the First Amendment surely requires that the restriction bedemonstrably supported by not only a legitimate state interest,but a compelling one, and that the restriction operate withoutunnecessarily circumscribing protected expression.74

The Court found that although the state had an interest in pre-venting candidates from buying votes, Brown's statement inwhich he promised to reduce his salary remained protected bythe First Amendment.75

It is thus plain that some kinds of promises made by a candidateto voters, and some kinds of promises elicited by voters from can-didates, may be declared illegal without constitutional difficulty.But it is equally plain that there are constitutional limits on theState's power to prohibit candidates from making promises in thecourse of an election campaign. Some promises are universallyacknowledged as legitimate, indeed "indispensable todecisionmaking in a democracy," and the "maintenance of theopportunity for free political discussion to the end that govern-ment may be responsive to the will of the people and that changesmay be obtained by lawful means ... is a fundamental principleof our constitutional system." Candidate commitments enhancethe accountability of governmental officials to the people whom

70. Id. at 49.71. Id. at 48.72. Id. at 48-49.73. Id. at 49.74. Id. at 52-54.75. Id. at 54-58.

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they represent, and assist the voters in predicting the effect oftheir vote. The fact that some voters may find their self-interestreflected in a candidate's commitment does not place that com-mitment beyond the reach of the First Amendment .... So long asthe hoped-for personal benefit is to be achieved through the nor-mal processes of government, and not through some private ar-rangement, it has always been, and remains, a reputable basisupon which to cast one's ballot.76

Brown's statement which promised an ultimate benefit to thevoters through the exercise of his public office, therefore, did notconstitute "an invitation to engage in private and politicallycorrupting arrangement.""

The Court also noted that a state might be legitimately con-cerned that independently wealthy candidates, who could prom-ise to reduce or forgo their salaries, would thereby reduce thenumber of elected officials who are more qualified but require asalary in order to serve. 78 However, the Court found that thestate may not choose a means that violates the First Amendmentto protect this interest.7 9 "The [s]tate's fear that voters mightmake an ill-advised choice does not provide the [s]tate with acompelling justification for limiting speech."8

Finally, the Court acknowledged that: false statements are notgiven the same protection as truthful statements under the FirstAmendment; under Kentucky Revised Statute (KRS) section121.055, Brown could not reduce his salary as it had been "fixedby law"; and, Kentucky law required that his election victory bevoided for making his misstatement, even though it had beenquickly repudiated.8 The Court, however, recognized that erro-neous statements often occur during a campaign, and there hadbeen no showing that Brown made the statement in bad faith,with knowledge of its falsity and reckless disregard as to its ve-racity.82 'The chilling effect of such absolute accountability forfactual misstatements in the course of political debate is incom-

76. Id. at 55-56 (quoting First Nat'l Bank v. Bellotti, 435 U.S. 765, 777 (1978);Stromberg v. California, 283 U.S. 359, 369 (1931)) (citations omitted).

77. Id. at 57.78. Id. at 59-60.79. Id. at 60.80. Id.81. Id. at 60-61.82. Id. at 61.

19951 511


patible with the atmosphere of free discussion contemplated bythe First Amendment in the context of political campaigns.""3

2. The Constitutionality of Canon 7(B)(1)(c)

The United States Supreme Court has not considered whetherCanon 7(B)(1)(c) of the Code of Judicial Conduct violates acandidate's First Amendment right to free speech. However,several courts have addressed the constitutionality of the lan-guage used in the 1972 Code and in its current formulation inthe 1990 Code.

The controlling Kentucky case concerning former Canon7(B)(1)(c) is J.C.J.D. v. R.J.C.R.8 4 In November 1988, the Com-mission brought disciplinary proceedings against Justice Combsfor violating Kentucky Supreme Court Rule 4.020(1)(b)(i) andCanon 7 (B)(1) due to his statements on various disputed legaland political issues during his campaign for election to the Ken-tucky Supreme Court.85 After finding "clear and convincing"evidence of Justice Combs's violation of the Code of JudicialConduct and his "misconduct in office" in violation of KentuckySupreme Court Rule 4.020(1)(b)(i), the Commission ordered thatJustice Combs be suspended without pay from elective office andfrom performing his judicial duties for a period of threemonths.

8 6

The Supreme Court of Kentucky, sitting as a panel of SpecialJustices, held that a judicial candidate maintains his freedom ofspeech guaranteed by the First Amendment of the United StatesConstitution and section 8 of the Kentucky Constitution.87 Thecourt also mandated that a state regulation that restricts speechmust serve a compelling state interest and be narrowly draftedand strictly applied to effectuate that interest.88

83. Id.84. J.C.J.D. v. R.J.C.R., 803 S.W.2d 953 (Ky. 1991).85. Id. at 953-54.86. Id. at 954.87. Id. at 954-56. 'The candidate, no less than any other person, has a First

Amendment right to engage in the discussion of public issues and vigorously andtirelessly to advocate his own election." Id. at 955-56 (quoting Buckley v. Valeo, 424U.S. 1, 52 (1976)). "[A) person does not [however] surrender his constitutional rightto freedom of speech when he becomes a candidate for judicial office. A state cannotrequire so much." Id. at 955 (quoting ACLU v. The Florida Bar, 744 F. Supp. 1094,1097 (N.D. Fla. 1990)).

88. Id. at 955 (citing Brown v. Hartlage, 456 U.S. 45 (1982); First Nat'l Bank v.

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The court found that Kentucky has a compelling interest inprotecting the "integrity and objectivity of the judicial sys-tem." 9 The court stated that judges must not show oppositionor favoritism to any party or position, must maintain the appear-ance of impartiality, and must refrain from "untruthful or mis-leading statements,... pledges of specific judicial conduct onpending cases,... [or] promises or predispositions of cases orissues that are likely to come before the courts that might reflectupon a judge's impartiality."90

However, the court held that the former Canon 7(B)(1)(c),which prohibited a judicial candidate from "announcing his viewson disputed legal or political issues," was not narrowly drafted asto serve the state's interest.9' The court ruled that rather thansetting out specific restrictions, the canon was a blanket prohibi-tion on all of a candidate's views on disputed legal or politicaltopics and unnecessarily violated the state and federalconstitutions' guarantees of free speech.92 Special JusticeBertram, writing for the court, also commented that the publichas the right to receive information in a judicial election, and thecanon, as written, prohibited the receipt of a judicial candidate'sviews on "virtually every issue that would be of interest to thevoting public."93

The court also rejected the Commission's contention that Can-on 7(B)(1)(c) was necessary to prevent statements by judicialcandidates that would indicate favoritism or antagonism towardfuture litigants.94 The court reasoned that the ethical rule couldbe drafted more narrowly, as had been recently done by the ABAin its amendment of Canon 7, by prohibiting candidates frommaking "statements that commit or appear to commit the candi-date with respect to cases, controversies or issues that are likelyto come before the court."95 The court also noted that the ABACommittee on Ethics and Professional Responsibility believedthat the phrase "announce his views on disputed legal or politi-

Bellotti, 435 U.S. 765 (1978)).89. Id. at 956.90. Id.91. Id.92. Id.93. Id.94. Id.95. Id. (quoting MODEL CODE OF JUDICIAL CONDUCT Canon 5(A)(3)(d)(ii) (1990)).

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cal issues" was an "overly broad restriction on speech."96 Final-ly, the court did not find that the statements made by JusticeCombs amounted to pledges or promises of conduct in office, andthere was no evidence that advertisements or statements madeby him were false or misleading.97

The United States District Court for the Northern District ofFlorida came to similar conclusions regarding the former Canon7(B)(1)(c) in American Civil Liberties Union of Florida, Inc. v.The Florida Bar.98 The plaintiffs argued that the "announce"clause that prohibited statements on "disputed legal and politicalissues" was vague and overbroad because it provided no notice ofwhat speech was prohibited and was not the least restrictivemethod of achieving the state's interest in protecting the integri-ty of the judiciary.99 The court asserted that judicial candidatescan be treated differently from other non-judicial candidates andheld to a higher standard of conduct.' 0 The court also cau-tioned judicial candidates not to make public statements orpledges that commit them "to decide particular cases in order toachieve a given programmatic result."10'

However, the court also held that a judicial candidatemaintains his or her constitutional right to freedom of speech,and that before a state can restrict the candidate's statements, itmust prove that its regulation is narrowly written and strictlyapplied to serve a compelling interest.0 2 The court ruled thatthe canon was an overly broad prohibition that "effectively pro-scribe[d] announcements on almost every issue that might be ofinterest to the public" and required the electorate to "choose itsjudges based upon little more than biographical data."'0 3 Thecourt also concluded that the state had underestimated the vot-ing public's ability to properly use the information presented byjudicial candidates and mistakenly believed that "members of arespected and learned profession cannot announce their views on

96. Id. at 956-57.97. Id. at 957.98. ACLU v. The Florida Bar, 744 F. Supp. 1094 (N.D. Fla. 1990).99. Id. at 1097.

100. Id.101. Id. (quoting Morial v. Judiciary Comm'n, 565 F.2d 295, 305 (5th Cir. 1977)).102. Id. at 1097-98.103. Id. at 1098.

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legal and/or political issues without undermining the public'sconfidence in the objectivity of the judiciary."'10 4

In Beshear v. Butt, °5 the United States District Court forthe Eastern District of Arkansas also held that the former Canon7(B)(1)(c) was violative of the First Amendment." 6 The courtnot only found that the canon was an overly broad and vaguerestriction of a judicial candidate's freedom of speech, 1 7 but al-so refused to certify the three interests presented by the state ascompelling.0 8 The state's proffered interests in preventingabuse of the judicial office by a candidate during a campaign,deterring abuse of the judicial office by a judge who had lost anelection and returned to the bench, and precluding the appear-ance of impropriety, were dismissed by the court because theArkansas Judicial Discipline and Disability Commission hadfailed to "advance any substantial regulatory interest in the formof coping with some imminent dangers or wrong growing outof... expressions which can justify the broad prohibition con-tained in Canon 7(B)(1)(c)."'10 9

Judge Beshear in no way was advocating any unlawful activitiesor seeking to breach the peace in any way. Judge Beshear wasendeavoring to voice ideas and policies that he would institute, ifelected, to cope with the increasing crime rate. Obviously thepolicies would be implemented in open court and in the presenceof all interested parties and not in secrecy or in an arbitrary oroppressive manner. Indeed, neither the Commission nor the Stateof Arkansas may, under the pretext of prohibiting professionalmisconduct, ignore basic and fundamental federal rights."'

In Stretton v. Disciplinary Board of the Supreme Court ofPennsylvania,"' the United States Court of Appeals for theThird Circuit upheld the constitutionality of the former Canon7(B)(1)(c)." 2 However, it did so by narrowly construing the lan-

104. Id. at 1099.105. Beshear v. Butt, 773 F. Supp. 1229 (E.D. Ark. 1991).106. Id. at 1234.107. Id. at 1233.108. Id. at 1234.109. Id.110. Id.111. Stretton v. Disciplinary Bd. of the Supreme Court, 944 F.2d 137 (3d Cir.

1991).112. Id. at 144.

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guage of the ethical norm so as to find it not to be in violation ofthe First Amendment." 3 The court acknowledged that where astate restricts political speech, the regulation is subject to strictscrutiny and it must be narrowly tailored to meet a compellingstate interest."" The court held that the state had a compellinginterest in maintaining the integrity and quality of the judiciary,and the restriction of the judicial candidate's statements on"disputed legal or political issues" served that interest."15

The court recognized that the canon presented First Amend-ment concerns due to the breadth of its prohibition of speech butalso felt compelled to follow "[t]he elementary rule ... that everyreasonable construction must be resorted to, in order to save astatute from unconstitutionality.""' 6 The Disciplinary Board ofthe Supreme Court of Pennsylvania argued for a restrictive read-ing of the canon, which would only prevent a judicial candidatefrom announcing views on an issue that may come before him orher in court."' The court accepted this narrow interpretationof the canon, reasoning that by "[h]aving adopted [this] positionin litigation... the [Judicial Inquiry Review and Disciplinary]Boards are barred from returning to court and adopting a con-trary position.""' 8 The court also predicted that the state su-preme court would also interpret the canon in a similar manner,and would accept the construction proposed by the Boards." 9

The court concluded that this reading of Canon 7(B)(1)(c) was"narrowly tailored to serve the state's compelling interest in animpartial judiciary" and "does not unnecessarily curtail protectedspeech.'20

A split among the circuits arose in 1993, however, when theUnited States Court of Appeals for the Seventh Circuit, in thecase of Buckley v. Illinois Judicial Inquiry Board,'2' refused tonarrowly construe the language of the former Canon 7(B)(1)(c) to

113. Id. at 143-44.114. Id. at 141-42 (citing Brown v. Hartlage, 456 U.S. 45 (1982)).115. Id. at 142.116. Id. at 144 (quoting Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. &

Constr. Trades Council, 485 U.S. 568, 575 (1988)).117. Id. at 142.118. Id. at 143.119. Id. at 144.120. Id.121. Buckley v. Illinois Judicial Inquiry Bd., 997 F.2d 224 (7th Cir. 1993).

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uphold its constitutionality.12 2 The court found that the canonwas an overinclusive prohibition that reached "far beyond speechthat could reasonably be interpreted as committing the candidatein a way that would compromise his impartiality should he besuccessful in the election.' ' 123 The court refused to affirm thedistrict court's narrow construction that the "announce" clauseonly proscribes statements on issues that are likely to comebefore the judge while on the bench.124 The court stated thatsuch a construction does not substantially limit the scope of theclause, because "there is almost no legal or political issue that isunlikely to come before a judge of an American court, state orfederal, of general jurisdiction."'25 The court also held thatsuch a construction did nothing to limit the clause that prohibitsa candidate from making "pledges or promises" of conduct inoffice other than the faithful and impartial performance in office,which is equally as overbroad as the "announce" clause.'26

The judicial board urged the court to adopt a restrictive read-ing of the "announce" clause, though the court interpreted theclause to mean no more than Canon 5(A)(3)(d)(ii) of the ABA's1990 Model Code of Judicial Conduct, which prohibits "state-ments that commit or appear to commit the candidate with re-spect to cases, controversies or issues that are likely to comebefore the court."'27 The court, however, noted that the ABAhad found a large difference between the wording of the old andnew canons, 128 and refused a reconstruction that would adoptthe same meaning for both. 29 The court also advised that itwould not overstep its judicial authority, stating:

Counsel and the district judge have tried to rewrite IllinoisSupreme Court Rule 67(B)(1)(c) to make it narrower and they ask

122. Id. at 230-31.123. Id. at 228.124. Id. at 229.125. Id.126. Id.127. Id. at 230 (quoting MODEL CODE OF JUDICIAL CONDUCT Canon 5(A)(3)(d)(ii)

(1990)).128. Id. (quoting MODEL CODE OF JUDICIAL CONDUCT Appendix C, at 72 (as sub-

mitted for consideration at the 1990 Annual Meeting of the House of Delegates)). Thecourt noted that the new language replaced the "announce" clause of the 1972 ModelCode of Judicial Conduct, which was believed to be "an overly broad restriction onspeech." Id.

129. Id.

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us in effect to promulgate their revised rule in an opinion affirm-ing the dismissal of these suits. It is not our proper business topatch up the rule - and it would be a patchwork job indeed, withthe rule itself saying one thing and the judicial gloss on it anoth-er. A "saving" construction which transformed the rule into theABA Canon that we just quoted would cast us in the role of aCouncil of Revision empowered to make such changes in a pro-posed enactment, state or federal, as might be necessary to renderit constitutional. We are not authorized to play such a role."' °

The court also refused to follow the Third Circuit's decision inStretton, which had upheld virtually the same wording in itsjudicial canon.1 31 The court attempted to distinguish the casesby stating that the Third Circuit had not been confronted with ajudicial commission's prohibition of an "innocuous" statement,which would demonstrate the overbreadth of the canon. 13 2 Al-so, the Illinois Judicial Inquiry Board in Buckley sought to en-force the former Canon 7(B)(1)(c), despite acknowledging that ajudicial candidate had a right to reply to questions about his orher views, and argued that the word "announce" only related to acandidate's future votes on the bench - neither of which wereissues in Stretton .

The constitutionality of Kentucky's revised Supreme CourtRule 4.300, Canon 7(B)(1)(c), which prohibits a judicial candidatefrom making "statements that commit or appear to commit thecandidate with respect to cases, controversies or issues that arelikely to come before the court," was upheld by the United StatesDistrict Court for the Western District of Kentucky in Ackersonv. Kentucky Judicial Retirement and Removal Commission.3

130. Id.131. Id. (citing Stretton v. Disciplinary Bd. of the Supreme Court, 944 F.2d 137

(3d Cir. 1991)).132. Id. In Stretton, a judicial candidate sought an injunction against the enforce-

ment of Canon 7 so that he could protest the fact that the majority of common pleasjudges in the county were Republicans and announce his opinions on the need foractivist judges, criminal sentencing, "reasonable doubt," the scrutiny of judges, pro-posed changes in judicial administration, the hiring of minority lawyers and lawclerks, his qualifications, the need for women judges, and the right to privacy.Stretton, 944 F.2d at 139. In Buckley, a justice for the Appellate Court of Illinois,while campaigning for a seat on the supreme court, stated that he had "never writ-ten an opinion reversing a rape conviction." Buckley, 997 F.2d at 226.

133. Buckley, 997 F.2d at 230.134. Ackerson v. Kentucky Judicial Retirement and Removal Comm'n, 776 F. Supp.

309, 315 (W.D. Ky. 1991).

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Jon Ackerson was a candidate for the office of judge of the Ken-tucky Court of Appeals who brought suit against the Commis-sion, alleging that the canon violated the First, Fifth and Four-teenth Amendments of the United States Constitution because itwas an impermissibly vague and overbroad prior restraint thatchilled his freedom of speech during an election.135 The courtagreed that a candidate, "no less than any other person, has aFirst Amendment right to engage in the discussion of publicissues" and the "unfettered opportunity to make their viewsknown" to the public. 13 6

However, the court held that because campaigns for judicialoffice are different from other elections, the state may regulate ajudicial candidate's conduct and speech to a greater degree thana candidate for non-judicial office.'37 In order to restrict a judi-cial candidate's speech, the state must demonstrate a compellinginterest that is served by a narrowly drafted regulation that doesnot unnecessarily abridge the judicial candidate's First Amend-ment rights.'38 The court found that Kentucky had a compel-ling state interest in an "impartial judiciary," and in "the integri-ty and objectivity of the judicial system."'3 9 It ruled that thestate did not have a compelling interest in limiting speech onnon-adjudicatory issues, and that a prohibition on "pledges,promises and commitments" on administrative matters constitut-ed an overbroad restriction in violation of the First Amend-ment. 1

40

The court did not void the entire canon, however, because the"remainder of the statute.., covers a whole range of easily iden-tifiable and constitutionally proscribable ... conduct.' Thecourt concluded that the prohibition of statements that "appear"to commit the candidate to views on issues that "are likely tocome before the court" is not impermissibly vague and is closelydrafted to achieve the state's interest in protecting the impartial-

135. Id. at 310-11.136. Id. at 313 (quoting Buckley v. Valeo, 424 U.S. 1, 52-53 (1976)).137. Id.138. Id. (citing First Nat'l Bank v. Bellotti, 435 U.S. 765 (1978); ACLU v. The

Florida Bar, 744 F. Supp. 1094 (N.D. Fla. 1990)).139. Id.140. Id. at 313-14.141. Id. at 314 (quoting New York v. Ferber, 458 U.S. 747, 770 n.25 (1982)).

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ity of the judiciary."' According to the court, direct commit-ments by judicial candidates are clearly proscribed by the canon,and the appearance of a commitment simply prohibits indirectcommitments by the candidate.' Also, the court asserted thatalthough any issue could potentially be presented in court, theconstraint on a judicial candidate who is "unable to gauge thelikelihood of an issue coming before his court" is permissiblewhen weighed against the "necessity of maintaining the impar-tiality of the legal process."'44 The court also held that allspeech with respect to legal issues is not prohibited, and thecandidate is free to discuss those topics that are unlikely to bepresented in court.'45 The court issued a temporary restrainingorder and preliminary injunction enjoining the Commission fromenforcing Canon 7(B)(1)(c) with respect to pledges and promisesconcerning administrative issues but upheld the constitutionalityof the restriction of "statements that commit or appear to committhe candidate with respect to cases, controversies or issues thatare likely to come before the court.'' 46

III. DETERS V. JUDICIAL RETIREMENT AND REMOVALCOMMISSION

A. Factual Summation of the Case and the Proceedings

In the fall of 1991, Jed K. Deters was a candidate for districtcourt judge in Kenton County, Kentucky. 4 v He ran as one ofseven candidates in the November 1991 election for an unexpiredterm of a judgeship in the Sixteenth Judicial District. 48 In Oc-tober of that year, Deters was called before the Commission toanswer a complaint that he had disseminated campaign adver-tisements in which he identified himself as a member of a politi-cal party, an action which would violate Canon 7(A)(2) ofKentucky's Code of Judicial Conduct.149 Without formal proof

142. Id. at 314-15.143. Id. at 314.144. Id. at 315.145. Id.146. Id. at 315-16.147. Brief for Appellant at 1, Deters v. Judicial Retirement and Removal Comm'n,

873 S.W.2d 200 (Ky. 1994) (No. 93-SC-000076).148. Deters, 873 S.W.2d at 201.149. Id. Kentucky Supreme Court Rule 4.300, Canon 7(A)(2) provides that:

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being presented, Deters accepted a public reprimand, and anorder of public censure was issued against him. 5 '

Immediately before the election in November, Deters causedpolitical advertisements to be published in The Messenger, aCatholic periodical, and The Kentucky Post, a newspaper of local,general circulation. 5' Both advertisements contained the state-ment "Jed Deters is a Pro-Life Candidate" in bold print.'52 Af-ter Deters lost the election, a complaint was filed, alleging thathe had violated Canon 7(B)(1)(c) of the Code of Judicial Conduct,which prohibits a judicial candidate from making "statementsthat commit or appear to commit the candidate with respect tocases, controversies or issues that are likely to come before thecourt.'

153

The Commission held a hearing on September 23, 1992, atwhich Deters denied the allegations and refused to accept a pub-lic' reprimand. 5 ' After evidence was presented, the Commis-sion entered its Findings of Fact and Conclusions of Law, hold-ing that it was proved by clear and convincing evidence thatDeters had publicly announced his pro-life opinions on abortionin an attempt to gain an "unwarranted and illegal" advantage inthe election and that he had made statements that would com-mit or appear to commit him to a position with respect to a casethat would likely come before the Kenton County DistrictCourt.'55 On February 3, 1993, the Commission entered anorder of public censure of Deters. 5 ' Deters appealed to theKentucky Supreme Court as a matter of right.5 7

A judge or candidate for nomination or election to judicial office may notidentify himself as a member of a political party in any form of advertising, orwhen speaking to a gathering on his own behalf. If not initiated by the judgeor candidate for such office, and only in answer to a direct question, he mayidentify himself as a member of a particular political party.

KY. SuP. CT. R. 4.300 Canon 7(A)(2) (emphasis added).150. Deters, 873 S.W.2d at 201.151. Id.152. Id.153. Id. at 202 (quoting KY. SUP. CT. R. 4.300 Canon 7(B)(1)(c)).154. Brief for Appellant at 2, Deters (No. 93-SC-000076).155. Deters, 873 S.W.2d at 203.156. Id.157. Id. at 201.

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B. The Kentucky Supreme Court Decision

1. The Majority Opinion

a. The Jurisdiction of the Judicial Retirement and RemovalCommission

Justice Spain, writing for the majority, held that the Commis-sion had the authority to issue an order of public censure of JedDeters. 158 Deters had conceded that the Commission had juris-diction over candidates during the period of the campaign, butcontended that this jurisdiction ended when he was defeated inthe election.' 59 In support of this argument, Deters cited Rule4.020, which provides authority to the Commission to "imposethe sanctions ... upon any judge ... or lawyer while a candi-date for judicial office," and Rule 4.000, which provides that PartIV of the Supreme Court rules applies to Commission proceed-ings "involving the discipline, retirement, or removalof ... [judges] .. .as well as the disciplining of lawyers seekingjudicial office who during their candidacy shall be deemed sub-ject to the jurisdiction and discipline of the Commission.' 6 0

Justice Spain and the majority rejected this argument, holdingthat the rules cited by Deters do not limit when the Commissioncan exercise its investigative and adjudicative authority andmerely define the time in which the prohibited conduct by thecandidate must occur in order to subject him or her to theCommission's jurisdiction.16' Deters had published the adver-tisements within two days of the election, and the court conclud-ed that it could not be "seriously contended" that the Commis-sion was required to investigate and hear charges, make find-ings, and impose sanctions within this short time frame beforelosing its jurisdiction.6

2

Deters also argued that the Hardesty case prohibited the Com-mission from exercising authority over attorneys, that such exer-cise was in contravention with section 121 of the Kentucky Con-stitution, and that subsequent to this decision, Rule 4.050 was

158. Id. at 202.159. Id.160. Id. (quoting KY. SUP. CT. R. 4.020, 4.000) (emphasis added).161. Id.162. Id.

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amended to require the Commission to refer attorney disciplin-ary cases to the KBA. 163 The majority disagreed with this anal-ysis, holding that Hardesty only found that the Commission, inaccordance with section 121, could not impose the sanction ofsuspension or disbarment of the practice of law, and under Rule4.020(1)(d) only these sanctions were required to be referred tothe KBA for its determination. 16 4 Therefore, the sanction ofpublic censure would not need to be referred to the KBA, and theconduct of the judicial candidate would remain within theCommission's jurisdiction. 165

b. Canon 7(B)(1)(c)

Prior to considering Deters' constitutional claims, the courtevaluated whether the issue of abortion is an issue which is"likely to come before the court."'66 Deters contended that itwas virtually impossible for the issue of abortion to come beforehim in court because no abortion cases had been decided inKenton County District Court for more than ten years, the twohospitals in the county did not perform abortions, and abortionswere easily available in nearby Cincinnati. 67 The court, how-ever, concurred with the Commission's findings that under KRSsection 311.732, the district court may issue an order permittinga minor to obtain an abortion.'68 The court also agreed withthe Commission that cases involving abortion protests, livingwills and "right to die" controversies would likely come beforethe Kenton County District Court.'69 Justice Spain and the ma-jority found that Deters' advertisements were motivated by hisdesire to attract voters and "appeared to commit him to a posi-tion not only on abortion matters, but also on other controver-sies, and that any or all of such issues or controversies are likelyto come before the court.' 170

163. Id. at 202-03.164. Id. at 203.165. Id.166. Id.167. Id.168. Id. (citing KY. REV. STAT. ANN. § 311.732 (Michie/Bobbs Merrill (1990)).169. Id.170. Id.

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The court then turned to Deters' contentions that his FirstAmendment right to free speech was violated because the statehad no compelling interest in restricting his comments, and thatCanon 7(B)(1)(c) was not narrowly drafted. 171 Deters arguedthat he had a constitutionally protected right to discuss abortionin the public forum, stating:

At the core of... First Amendment election cases is the recog-nition that the people have a right to know the candidates' viewsand to obtain the information that is relevant to them in makingtheir decisions. Chilling the candidate's right to engage in politicaldiscussion distorts the electoral process by not allowing the elec-torate to obtain relevant information. It is no surprise that theSupreme Court consistently takes such a dim view of content-based regulations that, in the name of "integrity", actually serveto deny the voting public access to relevant information. Thesegovernment regulations are highly paternalistic and antitheticalto the ideals of robust electoral processes and free speech. 172

Deters argued that the case of J.C.J.D., which found the for-mer Canon 7(B)(1)(c) unconstitutional, demonstrated that broad,content-based prohibitions deny the electorate needed informa-tion and turn a "judicial election into a popularity contest, wherethe electorate judges a candidate on not much more than looksand personality."'7 3 He also cited Buckley v. Illinois JudicialInquiry Board,'74 where the Seventh Circuit refused to narrowCanon 7(B)(1)(c) because virtually every subject could come be-fore a court under the "likely" standard.'75

Deters claimed that the State has no compelling interest inprohibiting his statements because Canon 7(B)(1)(c) is "neitherappropriate nor useful" to protect the integrity and impartialityof the judiciary.'76 According to Deters, the canon only limitsspeech during the 120 days of the campaign, while the rest of thetime, the candidate, as a lawyer and leader of the community, isencouraged to offer his viewpoints on issues.'77 Deters also ar-

171. Id. at 203-05.172. Brief for Appellant at 9-10, Deters (No. 93-SC-000076).173. Reply Brief for Appellant at 2-3, Deters (No. 93-SC-000076).174. Buckley v. Illinois Judicial Inquiry Bd., 997 F.2d 224 (7th Cir. 1993).175. Reply Brief for Appellant at 3, Deters (No. 93-SC-000076) (citing Buckley, 997

F.2d 224 at 229).176. Brief for Appellant at 12, Deters (No. 93-SC-000076).177. Id.

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gued that Canon 7(B)(1)(c) prohibits judges from making state-ments on disputed issues when that is the "essence of what thejudge is expected to do as part and parcel of the judicial func-tion.' 'i7 Deters noted that the canon is not needed because Su-preme Court Rule 4.300, Canon 3(C) requires that a judge recusehimself when "personal viewpoints obstruct the ability to renderan impartial decision," and because Canon 7(B)(1)(c) is in conflictwith Supreme Court Rule 4.300, Canon 4, which permits a judgeto make comments about disputed legal issues. 79

The court acknowledged that "the election process enjoys thestrongest possible protection under the First Amend-ment ... because it is during elections that freedom of speech ismost urgently needed"; the court also commented that thecandidate's views and opinions must be "freely available" to thepublic so that it can make informed voting decisions.' s Thecourt, however, disagreed with Deters' contention that his rightto free speech had been violated, reasoning that because the ju-dicial office is different from other elected offices and the statehad a compelling interest in protecting the "fundamental fairnessand impartiality of the legal system," the campaign conduct of ajudicial candidate can be regulated to a greater extent than thatof a non-judicial candidate. 8' The court distinguished J.C.J.D.,arguing that this case only held the former Canon 7(B)(1)(c) wasoverbroad, and therefore, unconstitutional. 182

The court asserted, however, that the ethical standard in ques-tion had already been found by the United States district courtin Ackerson to be "sufficiently and closely drawn so as to avoidunnecessary abridgment of a judicial candidate's right of freespeech during the campaign."'8 3 Justice Spain agreed that thecanon was narrowly drafted and not impermissibly vague be-cause the candidate could fully discuss issues that were not like-ly to come before the court, and the canon provided that he or

178. Id.179. Id. at 12-15.180. Deters, 873 S.W.2d at 204 (citing Monitor Patriot Co. v. Roy, 401 U.S. 265,

272 (1971); Buckley v. Valeo, 424 U.S. 1 (1976); Brown v. Hartlage, 456 U.S. 45(1982)).

181. Id. at 204-05.182. Id. at 204 (citing J.C.J.D. v. R.J.C.R., 803 S.W.2d 953 (Ky. 1991)).183. Id. at 204 (quoting Ackerson v. Kentucky Judicial Retirement and Removal

Comm'n, 776 F. Supp. 309, 315 (W.D. Ky. 1991)).

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she, making no direct or indirect commitments, could also dis-cuss issues that are likely to be presented before him or her incourt. 8 4 Because the court found that the current version ofCanon 7(B)(1)(c) was not impermissibly vague, served a compel-ling state interest, and was narrowly drafted to meet that inter-est, the court upheld the constitutionality of the canon and af-firmed the order of public censure of Jed Deters by the Commis-sion.

115

2. Justice Wintersheimer's Dissenting Opinion

Justice Wintersheimer concurred with the majority's holdingthat the Commission had jurisdiction to sanction a judicial candi-date even though he or she had been defeated in an election. 8 'However, he filed a dissenting opinion, in which Justice Lambertjoined, to voice his disagreement with the majority's affirmationof the Commission's order of public censure.' 87

.First, Justice Wintersheimer questioned whether the issue ofabortion would likely come before the Kenton County DistrictCourt.'88 He observed that the Commission had stipulated thatthe sitting Kenton County district judges would testify that theyhad never heard an abortion case and that there were no hospi-tals or licensed clinics that would perform abortions in the coun-ty."'89 Justice Wintersheimer reasoned that there is a "distinctdifference between the standard of 'likely' to come before thecourt and the criteria 'could possibly' come before the court"; hestated, "An abortion related issue is not likely to come before theKenton County District Court."'9 °

Justice Wintersheimer also recognized that political speechmay not be proscribed unless the state proved that it had a com-pelling interest and the regulation was narrowly written to servethat interest.'9 ' This "strict scrutiny" standard becomes moreexacting if the regulation will result in disciplinary action

184. Id.185. Id. at 204-05.186. Id. at 205 (Wintersheimer, J., dissenting).187. Id.188. Id.189. Id. at 205-06.190. Id. at 206.191. Id.

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against the speaker. 192 Justice Wintersheimer stated that Can-on 7(B)(1)(c) is not narrowly drawn and unnecessary because Su-preme Court Rule 4.300, Canon 3(C) requires that a judge recusehimself if his personal opinions restrict his ability to give an im-partial decision, thus providing a "full guarantee for any appear-ance of impropriety. 1 93 Because the state had not met its bur-den under the "strict scrutiny" standard, Justice Wintersheimerfound Canon 7(B)(1)(c) to be unconstitutional. 19 4

IV. ANALYSIS

The first question presented by this case is whether the Com-mission has the jurisdiction to sanction a defeated judicial candi-date for his or her public statements made during an election.The jurisdiction of the Commission is provided by section 121 ofthe Kentucky Constitution. 95 Under Kentucky Supreme CourtRules 4.020 and 4.000, the Commission has the authority tosanction judges and lawyers seeking judicial office for violationsof Rule 4.300, which includes the breach of Canon 7(B)(1)(c). 196

In Nicholson, the Kentucky Supreme Court held that althoughsection 121 provides that the Commission may only remove, sus-pend or retire a judge for disability or good cause, the Commis-sion also has the authority to issue lesser sanctions enumeratedin Rule 4.020.197 The court ruled in Hardesty, however, thatthe Commission could not impose the greater sanctions of sus-pension or disbarment from the practice of law.'98

Both the majority and the dissent correctly determined thatthe Commission had the authority to issue an order of publiccensure of Jed Deters. Deters' reading of Rules 4.020 and 4.000would hold that the KBA, and not the Commission, has jurisdic-tion to discipline the unsuccessful candidate for judicialoffice. 9 Justice Spain properly determined, however, thatthese rules simply establish the time frame in which the conduct

192. Id. (citing In re Primus, 436 U.S. 412 (1978)).193. Id. at 205-06.194. Id. at 207.195. See supra note 10 and accompanying text.196. See supra notes 11-12 and accompanying text.197. See supra notes 24-25 and accompanying text.198. See supra notes 31-32 and accompanying text.199. Brief for Appellant at 2-5; Deters v. Judicial Retirement and Removal

Comm'n, 873 S.W.2d 200 (Ky. 1994) (No. 93-SC-000076).

1995]


of the candidate subjects him to the jurisdiction of the Commis-sion; the rules do not limit to the period of the campaign thetime in which the Commission must take action.2"' The major-ity also accurately explained that although the Commission hasno power to impose the sanctions of suspension or disbarmentfrom the practice of law, the Hardesty decision does not stand forthe proposition that all disciplinary matters concerning attorneysmust be referred to the KBA.2 °1

If Deters' interpretation were adopted, a candidate could vio-late Rule 4.300 of the Code of Judicial Conduct, which specifi-cally governs distinct political conduct during campaigns, byengaging in prohibited acts within a few days of the election. Hecould avoid sanctions due to inability of the Commission to im-pose them during the short time frame of the campaign and hissubsequent defeat in the election. This illogical result could leadto potential abuses of the electoral process. A candidate couldrisk engaging in prohibited conduct shortly before the election,because should his bid turn out to be unsuccessful, it would beunlikely that the KBA would impose sanctions against him forall violations specifically enumerated in Rule 4.300. Hardestyand Nicholson teach us that the Kentucky Supreme Court, inaccordance with section 121 of the Kentucky Constitution, haspermissibly given the authority to the Commission to imposeparticular sanctions for violations of Rule 4.300 by judicial candi-dates in order to protect the integrity of the judicial system. Itwould be fallacious to hold that a candidate who violated Rule4.300 could avoid this jurisdiction because of the timing of hisconduct during the campaign and his subsequent election defeat.

The more important issue presented in Deters is whether Can-on 7(B)(1)(c), which prohibits the judicial candidate from making"statements that commit or appear to commit the candidate withrespect to cases, controversies or issues that are likely to comebefore the court," violates the First Amendment rights of thecandidate. It will be demonstrated that this ethical standard isunconstitutional due to several crucial reasons not fully consid-ered by the Kentucky Supreme Court.

200. See supra note 162 and accompanying text.201. See supra notes 164-65 and accompanying text.

DETERS

Throughout the history of First Amendment jurisprudence, theSupreme Court has forcefully articulated the paramount value tobe placed upon free political speech. Justice Black wrote in Millsthat it is clearly understood that "a major purpose of [the First]Amendment was to protect the free discussion of governmentalaffairs. This of course includes discussions of candidates.., andall such matters relating to political processes."2 °2 Indeed, theprimary reason for the existence of the First Amendment was to"'assure the unfettered interchange of ideas for the bringingabout of political and social changes desired by the people,"' and"the constitutional guarantee has its fullest and most urgentapplication precisely to the conduct of campaigns for politicaloffice."20 3 It has also been recognized that a candidate for officedoes not lose his First Amendment rights.

The candidate, no less than any other person, has a First Amend-ment right to engage in the discussion of public issues and vigor-ously and tirelessly to advocate his own election and the electionof other candidates. Indeed, it is of particular importance thatcandidates have the unfettered opportunity to make their viewsknown so that the electorate may intelligently evaluate thecandidate's personal qualities and their positions on vital publicissues before choosing among them on election day.20 4

The courts have also affirmed that "a person does not surren-der his constitutional right to freedom of speech when he be-comes a candidate for judicial office."20 5 Therefore, Jed Deters,while candidate for judge in Kenton County, possessed a funda-mental constitutional right to free speech - a right upon whichour democratic society and representative form of government

202. Mills v. Alabama, 384 U.S. 214, 218-19 (1966).203. Monitor Patriot Co. v. Roy, 401 U.S. 265, 272 (1971) (quoting Roth v. United

States, 354 U.S. 476, 484 (1957)). See also Stromberg v. California, 283 U.S. 359, 369(1931) ("[The] maintenance of the opportunity for free political discussion to the endthat government may be responsive to the will of the people and the changes maybe obtained by lawful means . . . is a fundamental principle of our constitutionalsystem."); Garrison v. Louisiana, 379 U.S. 64, 75-85 (1964) ("For speech concerningpublic affairs is more than self-expression; it is the essence of self-government.");Brown v. Hartlage, 456 U.S. 45, 52 (1982) ('The free exchange of ideas providesspecial vitality to the process traditionally at the heart of the American constitution-al democracy - the political campaign.").

204. Buckley v. Valeo, 424 U.S. 1, 52 (1976).205. J.C.J.D. v. R.J.C.R., 803 S.W.2d 953, 955 (Ky. 1991) (quoting ACLU v. The

Florida Bar, 744 F. Supp. 1094, 1097 (N.D. Fla. 1990)).

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are based. The question then becomes whether a judicialcandidate's speech may be proscribed. When a state regulationseeks to restrict speech on the basis of its content, "there is astrong presumption of its unconstitutionality. 2 °6 The courtshave required that a state demonstrate a compelling interestbefore it can limit the speech of a non-judicial or judicial candi-date, and that a regulation be narrowly drafted to serve thatinterest. °7 In addition, when a regulation results in disciplin-ary action to the speaker, it is "subject to even stricterscrutiny. 20 8 The Commission sought to impose the sanction ofpublic censure due to the content of Jed Deters' political state-ments, and therefore, Canon 7(B)(1)(c) must be subjected to"most exacting scrutiny., 20 9 Special care must be taken not tolose sight of the importance of Deters' fundamental constitution-al right to free political speech. It must also be remembered thatthe State bears the heavy burden of proving that it has a com-pelling interest which required the restriction upon speech.

The majority of the Kentucky Supreme Court in Deters heldthat the State has a compelling interest in "limiting a judicialcandidate's speech, because the making of campaign commit-ments on issues likely to come before the court tends to under-mine the fundamental fairness and impartiality of the legalsystem."21 Other courts have come to the same conclusion,holding that the maintenance of the integrity of our legal systemis an important and compelling interest that meets constitution-al scrutiny.211

206. Id. (citing Widmar v. Vincent, 454 U.S. 263 (1981)). See also Regan v. Time,Inc., 468 U.S. 641, 648-49 (1984) ("Regulations which permit the Government todiscriminate on the basis of the content of the message cannot be tolerated underthe First Amendment."); Burson v. Freeman, 112 S. Ct. 1846, 1850 (1991) ('ThisCourt has held that the First Amendment's hostility to content-based regulation ex-tends not only to a restriction of a particular viewpoint, but also to a prohibition ofpublic discussion of an entire topic.").

207. See Brown, 456 U.S. at 53-54. Accord J.C.J.D., 803 S.W.2d at 955; Buckleyv. Illinois Judicial Inquiry Bd., 997 F.2d 224, 227-31 (7th Cir. 1993); ACLU, 744 F.Supp. at 1097.

208. In re Primus, 436 U.S. 412 (1978).209. See Widmar, 454 U.S. at 276.210. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W. 200, 205 (Ky.

1994).211. See J.C.J.D., 803 S.W.2d at 956; ACLU, 744 F. Supp. at 1098; Morial v.

Judiciary Comm'n of the State, 565 F.2d 295, 302 (5th Cir. 1977). Cf. Beshear v.Butt, 773 F. Supp. 1229, 1234 (E.D. Ark. 1991).

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The concerns related to the appearance of impartiality andfairness by the judiciary are similar to those regarding free polit-ical speech by candidates. Both interests concern the preserva-tion and proper functioning of our democratic, representativesystem of government, which could not survive if neither werezealously safeguarded. In Nicholson, the Kentucky SupremeCourt articulated the compelling interests of the Commonwealthwhen it said that the purpose of section 121 of the KentuckyConstitution is to regulate the activities of those who would beresponsible for the administration of justice. The court alsostated that the Commission's mission is to "improve the qualityof justice ... by examining specific complaints of judicial miscon-duct, determining their relation to a judge's fitness for office andcorrecting any deficiencies" that it finds in its investigation ofspecific complaints.212 Although Deters may contend that themeans selected by the State to serve its interests wereoverbroad, vague and unnecessary, these arguments do not di-minish the vital importance of the State's compelling interests.

The State, however, not only has the weighty burden of dem-onstrating its compelling interest, it must also prove that itscontent-based restriction on speech is not vague, is narrowlydrafted, and is necessary to effectuate the State's interest.21

Although the State has a compelling interest in the integrity ofthe judiciary which supports the different treatment of judicialcandidates, the courts have consistently held that a canon ofjudicial ethics that restricts speech must still be strictly scruti-nized. 4 It will be demonstrated that some courts, includingthe Kentucky Supreme Court in Deters, have overemphasized theState's compelling interest so as to effectively ignore the State'sadditional burdens of proving that its regulation: is narrowlydrafted; clearly defines the speech that is to be prohibited; istruly needed; and, is the least restrictive alternative available.

In applying this "second step" of the strict scrutiny test, itmust be initially determined whether Canon 7(B)(1)(c) is narrow-ly drafted and not so vague that it provides no notice of what

212. See Nicholson v. Judicial Retirement and Removal Comm'n, 562 S.W.2d 306,308 (Ky. 1978); supra note 19.

213. Burson v. Freeman, 112 S. Ct. 1846, 1851-52 (1991).214. See supra notes 89, 103, 115.

1995]


speech falls within its ambit. Two aspects of the canon fail tomeet this requirement.

First, the disagreement between the majority and the dissentin Deters over whether the issue of abortion is "likely to comebefore the court" demonstrates the imprecision of this language.The term "likely" connotes probability yet does not sufficientlydefine the frequency or centrality that must occur before anissue falls within the perimeter of Canon 7(B)(1)(c). The majoritycited examples where there was the "possibility" of cases relatingto abortion and living wills being presented to the Kenton Coun-ty District Court.215 The dissent, however, argued that "practi-cally, there is little likelihood" that these issues would arise.1 6

Our rules of criminal and civil procedure have responded tothis definitional problem by establishing different levels of quan-tum of proof such as "reasonable doubt," "clear and convincingevidence," and "preponderance of the evidence," so as to differen-tiate between the degrees of probability required to establish afact as true. Unlike these evidentiary standards, the canon's"likely" standard, without additional clarification of its scope,does not sufficiently convey the speech that is prohibited byCanon 7(B)(1)(c), and disagreements are certain to occur amongreasonable persons as to what "likely" means. For example, howfrequently must an issue reach a court before it qualifies as"likely"? Once a year, once every two years, once every ten years?Must the "likely" issue be central to the holding of the case, orare peripheral issues also included? If the term is interpretedbroadly, practically any issue is "likely" to come before an Ameri-can court of law. If one attempts to view the term more narrow-ly, he discovers that there are no criteria available to determinewhen the standard is satisfied. Strict scrutiny requires the Stateto prove that its regulation is narrowly drafted so that it givesfair warning to the speaker, and does not proscribe protectedspeech. The judicial candidate, faced with the uncertainty of the"likely" standard, is relegated to silence lest he risk potentialsanctions by the Commission.

In addition, Canon 7(B)(1)(c) prohibits statements that "com-mit or appear to commit the candidate with respect to cases,

215. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W.2d 200, 203(Ky. 1994).

216. Id. at 205 (Wintersheimer, J., dissenting).

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controversies or issues. ,2 1

' The "appearance of a commitment"is also impermissibly vague with such a broad sweep that acandidate is unsure which of his or her comments may be pro-hibited. If an "appearance of a commitment" is merely an "indi-rect" commitment, as suggested by the court in Ackerson, how isthe candidate to regard statements such as "The fetus is a per-son," "I believe that life begins at conception," "I believe in Godas the creator of all life," or "I am a Catholic"? Are each of thesestatements "indirect" commitments? The majority in Deters con-tends that the candidate may "fully discuss" disputed legal is-sues, even if they are likely to come before the court, so long asthey do not "appear" to be commitments. 218 However, it is un-clear at what point a candidate's discussion of legal issues cross-es the line to become an "indirect" commitment. A speaker wouldbe required to consider that the statements he or she makes maybe taken in or out of context, and that various interpretations,many of which the speaker does not intend, may be given tothem. It is not the burden of the candidate to perform this calcu-lus; the Constitution requires the courts to allocate the burden tothe State to narrowly draft a regulation that proscribes the con-tent of speech so that it is it neither overbroad nor vague.

In Buckley v. Illinois Judicial Inquiry Board,"9 the SeventhCircuit refused to follow the reasoning of the Third Circuit inStretton that narrowed the former-Canon 7(B)(1)(c) to prohibitonly statements that appear to commit a candidate to issues thatare "likely" to come before the court.22° The Buckley court de-clined to adopt this construction because practically any issuecan come before an American court of law. 221 Although JusticeSpain, writing for the majority in Deters, dismissed this state-ment as dicta,222 it was in fact central to the Seventh Circuit'sholding. The Buckley opinion held not only that Canon 7(B)(1)(c)was overbroad, but also that it could not be saved as constitu-tional by adopting the "likely" standard proposed by the judicial

217. KY. Sup. CT. R. 4.300 Canon 7(B)(1)(c) (emphasis added).218. Deters, 873 S.W.2d at 205.219. Buckley v. Illinois Judicial Inquiry Bd., 997 F.2d 224 (7th Cir. 1993).220. Id. at 230.221. Id. at 229.222. Deters, 873 S.W.2d at 204.

5331995]


board.22 Had it adopted the board's recommended con-struction, its holding would have been entirely different.

The majority in Deters instead decided to follow the UnitedStates district court's decision in Ackerson, which held that Can-on 7(B)(1)(c) was narrowly drafted to achieve the State's interestand did not unnecessarily abridge a candidate's speech.224

However, it will be shown that Ackerson was wrongly decided,and the Kentucky Supreme Court should have rejected its rea-soning.

The court in Ackerson held that Canon 7(B)(1)(c) is "sufficient-ly and closely drawn" and not vague or overbroad because itpermits the candidate to fully discuss legal issues that are notlikely to come before the court, and only direct and indirect com-mitments on issues that are likely to come before the court areproscribed.225 Curiously, however, the court also conceded, "Itis undoubtedly true that any issue may be presented in court atany time" and "[A] judicial candidate [may be] unable to gaugethe likelihood of an issue coming before his court .... ,,226These two statements by the court are at war with one anotherand cannot be easily reconciled. It is difficult to understand howthe court can find the canon to be narrowly drafted becausestatements and commitments on issues unlikely to come beforethe court are not prohibited, and at the same time, admit that itmay not be possible to distinguish between statements that arelikely or unlikely to come before the court. It is the burden of theState to unequivocally prove that its regulation is clear andidentifies the speech that is proscribed. By its own admission,the court acknowledged this burden has not been met.

The Ackerson court, however, dismissed this difficulty by stat-ing that although a judicial candidate may not be able to deter-mine whether an issue is likely to come before him in court,making the candidate reluctant to speak, "[T]his constraint onFirst Amendment speech is permissible and proper when bal-anced against the necessity of maintaining the impartiality of

223. Buckley, 997 F.2d at 229-31.224. Deters, 873 S.W.2d at 204.225. Ackerson v. Kentucky Judicial Retirement and Removal Comm'n, 776 F. Supp.

312, 315 (W.D. Ky. 1991).226. Id.

534

DETERS

the legal process."22 The court once again focused on thestrength of the state's interest without applying the second prongof strict scrutiny analysis. The "balancing test" adopted by thecourt is in contravention to the requirement that the State, un-der strict scrutiny, meet its burden of proof by showing that itsregulation was narrowly drafted to meet a compelling interest.The Fifth Amendment rights of the candidate are not to be "bal-anced" away in such an analysis.

The Fifth Circuit specifically eschewed such a "balancing test"in Morial. The court held that when a state or public servantbecomes a candidate for judicial office, a "means-ends" test is tobe employed that measures the closeness of fit of the regulationto the interest of the State.228 Where an activity involves sub-stantial "non-speech" elements, the fit does not have to be perfectand does not need to be the least restrictive alternative.229

However, when "core First Amendment values" are involved,such as the right to express particular political views, the close-ness of fit increases.23 ° A content-based regulation which re-stricts a judicial candidate's free speech rights implicates "coreFirst Amendment values" and is subject to strict scrutiny inevaluating its closeness of fit.231 A "balancing test" which pitsthe interests of the government against the speaker is "mislead-ing" '232 and inappropriate because it fails to properly maintainthe burden of proof upon the State to show that its regulationpasses the second prong of the constitutional test of strict scruti-ny. The Ackerson court improperly shifted the burden of prooffrom the State to the judicial candidate by requiring the candi-date to determine when an issue is "likely" to come before thecourt. The Ackerson court then balanced away the candidate'sright to free speech and forced silence upon him when he is un-able to determine the "likelihood" of an issue. The Kentucky Su-preme Court should have rejected this erroneous and improperanalysis in making its decision in Deters.

227. Id. (emphasis added).228. Morial v. Judiciary Comm'n, 565 F.2d 295, 299-300 (5th Cir. 1977).229. See id. at 300.230. Id.231. See id. See also supra notes 89, 103, 115.232. Morial, 565 F.2d at 299.

1995] 535


In addition to being narrowly drafted and not vague, a regula-tion that restricts a judicial candidate's speech must also benecessary and the least restrictive alternative available to theState in protecting its interest. Justice Brennan, writing for themajority of the United States Supreme Court in Brown v.Hartlage held that the restriction on speech must "operate with-out unnecessarily circumscribing protected expression."233 Also,the restriction on speech must not be permitted to stand whereother less restrictive alternatives are, available to the State. TheSupreme Court of Kentucky explained in Nicholson that thecorrective steps taken by the Commission should be the "leastsevere action to remedy the situation. 234 In Morial, the courtheld that where "core First Amendment values" are implicated,the closeness of fit between the means and ends of the regulationare to be increased.235 The Commission must employ the leastrestrictive means of protecting the integrity of the judiciary, andthese means must closely fit this objective.

The restriction of a judicial candidate's speech regarding is-sues that are likely to come before the court is neither needednor the least restrictive alternative available to the State. TheState's interest in protecting the integrity of the judiciary isalready adequately protected by Kentucky Supreme Court Rule4.300, Canon 3(C), which requires a judge to disqualify himselffrom a proceeding in which his personal bias or prejudice con-cerning a matter or a party prohibits him from making an im-partial decision.2 36 As Justice Wintersheimer astutely noted,"Recusal is a full guarantee for any appearance of impropri-ety.,237 As explained in Morial, disciplinary proceedingsagainst judges for misconduct or involuntary recusal are "de-

233. Brown v. Hartlage, 456 U.S. 45, 54 (1982) (emphasis added). See, e.g.,Stretton v. Disciplinary Bd. of the Supreme Court, 944 F.2d 137, 142 (3d Cir. 1991)("The state . .. [must] demonstrate that its restriction is narrowly tailored and doesnot unnecessarily circumscribe protected speech.") (emphasis added); J.C.J.D. v.R.J.C.R., 803 S.W.2d 953, 956 (Ky. 1991) (holding that former KY. SUP. CT. R. 4.300Canon 7(B)(1)(c) "unnecessarily" violated a judicial candidate's constitutional right tofree speech).

234. See Nicholson v. Judicial Retirement and Removal Comm'n, 562 S.W.2d 306,308 (Ky. 1978); supra note 19.

235. Morial, 565 F.2d at 300.236. KY. Sup. CT. R. 4.300 Canon 3(C).237. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W.2d 200, 205

(Ky. 1994) (Wintersheimer, J., dissenting).

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signed to target perfectly those situations where the dangers ofabuse or its appearance are greatest.""2 ' It has already beennoted that where a speaker is subject to discipline due to his orher speech, the regulation is subject to "even stricter scruti-

1)239ny. Where an adequate remedy, such as voluntary or invol-untary recusal, exists to protect the State's interest, the restric-tion on speech unnecessarily abridges the candidate's free speechrights and does not pass constitutional scrutiny.

In addition, recusal proceedings, which adequately support theState's interest in preserving the integrity of the judiciary, aresupported by permitting a judicial candidate to make publicstatements during an election. The public statements of a judge,made during his or her candidacy, may reveal particular biasesor prejudices that are so strong they will serve as evidence of hisor her inability to render an impartial decision.

There are additional reasons why Canon 7(B)(1)(c) must berejected as an impermissible restriction on free speech. At thecenter of this ethical standard is a deep mistrust of the judicialcandidate and the public. Despite its affirmation of theelectorate's constitutional right to receive "freely available" polit-ical information so that informed decisions can be made240 andthe candidate's fundamental right to "vigorously and tirelesslyadvocate his own views on vital public issues, 24' the majorityin Deters denies these constitutional rights because of its fearthat the judicial candidate who makes his or her views knownduring the campaign will not be able be fair and impartial as ajudge.242 This rationale fails to recognize that "despite any sup-posed fixed views a candidate or judge might have, he or she isstill bound to recuse himself when personal viewpoints obstructthe ability to render an impartial decision. 243 The majorityopinion fails to respect the integrity and professionalism of can-didates who seek judicial office. In Bates v. State Bar of Arizo-

238. Morial, 565 F.2d at 303.239. J.C.J.D. v. R.J.C.R., 803 S.W.2d 953, 955 (Ky. 1991) (citing In re Primus, 436

U.S. 412 (1978)).240. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W.2d 200, 204

(Ky. 1994) (citing Monitor Patriot Co. v. Roy, 401 U.S. 265, 272 (1971)).241. Id. (quoting Buckley v. Valeo, 424 U.S. 1, 52-53 (1976)).242. See id. at 205.243. Brief for Appellant at 12-13, Deters (No. 93-SC-000076).

1995] 537


na,2 4 4 a case concerning the First Amendment rights of attor-neys that advertise, the United States Supreme Court cautionedagainst the presumption that respected members of the legalprofession will abuse their positions:

It is at least somewhat incongruous for the opponents of adver-tising to extol the altruism of the legal profession at one point,and, at another, to assert that its members will size the opportu-nity to mislead and distort. We suspect that, with advertising,most lawyers will behave as they always have: They will abide bytheir solemn oaths to uphold the integrity and honor of their pro-fession and of the legal system.245

In Nicholson, the Kentucky Supreme Court refused to presumethat the members of the Commission could not be impartial intheir adjudication of a proceeding after investigating thefacts.246 Rather, the court held that there is a presumption of"honesty and integrity" on the part of members of the Commis-sion that must be overcome before their decision could be at-tacked as a violation of due process. 247 Similarly, judicial candi-dates should receive the same presumption of trustworthiness,and the burden should be on the State to demonstrate otherwisewithout resorting to a prior restraint on the candidate's funda-mental right to free speech.

The majority, in its support of Canon 7(B)(1)(c), also distrustedthe public's ability to properly use political information dissemi-nated during a judicial campaign. As noted by the Seventh Cir-cuit in Buckley v. Illinois Judicial Inquiry Board,248 "only com-plete silence would comply with a literal ... interpretation" ofthe ethical standard, thereby denying the electorate its right tothe candidate's views.249 Justice Wintersheimer correctly recog-nized that "[t]he best antidote for the misbehaving candidate isthe voice of a truly informed electorate. 25 ° In response to thecontention that the public should be denied advertisements by

244. Bates v. State Bar, 433 U.S. 350 (1977).245. Id. at 379.246. See supra note 23.247. Id.248. Buckley v. Illinois Judicial Inquiry Bd., 997 F.2d 224 (7th Cir. 1993).249. Id. at 231.250. Deters v. Judicial Retirement and Removal Comm'n, 873 S.W.2d 200, 205

(Ky. 1994) (Wintersheimer, J., dissenting).

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attorneys, United States Supreme Court Justice Blackmunwrote:

[T]he argument assumes that the public is not sophisticatedenough... and... is better kept in ignorance than trusted withcorrect but incomplete information. We suspect the argumentrests on an underestimation of the public. In any event, we viewas dubious any justification that is based on the benefits of publicignorance.... [T]he preferred remedy is more disclosure, ratherthan less.25'

The court in Beasher recognized that any decision rendered bya judge "would be implemented in open court and in the pres-ence of all interested parties and not in secrecy. 2 52 The judge,in full view of the parties and the public, is required by SupremeCourt Rule 4.300, Canon 3(C) to render an impartial decision orrecuse himself when his personal views do not permit him to doso.25 The public is able to distinguish between statementsmade by judicial candidates during an election and those madeby judges who must adjudicate the cases before them in a fairand impartial manner. The integrity of the judiciary and ourelectoral process are not furthered by placing a muzzle on thecandidate and plugs in the ears of the voting public.

V. CONCLUSION

The question of whether a judicial candidate has the right tomake "statements that commit or appear to commit the candi-date with respect to cases, controversies or issues that are likelyto come before the court 25 4 involves important First Amend-ment values upon which our democratic government is based. Atthe same time, vital concerns over the integrity of our judicialsystem and electoral process become evident in the analysis ofthis issue. The Kentucky Supreme Court in deciding Deters cor-rectly determined that the Commission has jurisdiction, underthe Kentucky Constitution and Rules of the Supreme Court ofKentucky, to impose 'sanctions upon judicial candidates for theirmisconduct during a campaign. The court also accurately found

251. Bates v. State Bar, 433 U.S. 350, 374-75 (1977).252. Beasher v. Butt, 773 F. Supp. 1229, 1234 (E.D. Ark. 1991).253. See Stretton v. Disciplinary Bd. of the Supreme Court, 944 F.2d 137 (3d Cir.

1991).254. KY. SUP. CT. R. 4.300 Canon 7(B)(1)(c).

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540 NORTHERN KENTUCKY LAW RE1VIEW [Vol. 22:2

that the State has a compelling interest in protecting the integri-ty and impartiality of the judiciary.

However, the court mistakenly followed the decision inAckerson, which wrongly determined that Canon 7(B)(1)(c) isnarrowly drafted and does not unnecessarily abridge the judicialcandidate's right to free speech. The court failed to apply proper-ly the second prong of strict scrutiny analysis and neglected toallocate the heavy burden of proof upon the State to prove thatits regulation passed constitutional muster. The court did notfind that this vague and overbroad ethical standard is not need-ed and is not the least restrictive alternative because voluntaryand involuntary recusal already effectively guard against theState's concern over the appearance of judicial impropriety. Thecourt also failed to respect the honesty and integrity of judicialcandidate by questioning his or her ability to render an fair andimpartial decision and underestimated the public's ability todifferentiate between campaign statements and those made bythe court in the administration of justice.

Unfortunately, the Kentucky Supreme Court misinterpretedand incorrectly applied the constitutional law applicable to theFirst Amendment, and Deters was wrongly decided. It is hopedthat a future court - perhaps the United States SupremeCourt - will rectify this error and restore the judicialcandidate's fundamental right to free speech, which is guaran-teed by the Constitution.

PIERCING THE CORPORATE VEIL IN KENTUCKY:AN ANALYSIS OF

UNITED STATES V. WRW CORP.

by Russell Lance Miller

I. INTRODUCTION

The incorporation of a business serves to protect investors bylimiting their losses for corporate obligations to the amount theyhave invested' and has been called the most attractive featureof the corporation.2 The concept of limited liability for investorsalso serves a public policy function by encouraging investment.3

"[I]n a society which wishes to stimulate investment it is not sur-prising that the law should sanction, at least to some degree, adevice which protects an investor against unlimited liability."4

In spite of the advantages of limited liability, the courts may,upon occasion, disregard the corporate existence or "pierce thecorporate veil."'5 'Piercing the corporate veil' refers to the judi-cially imposed exception to this principle by which [the] courtsdisregard the separateness of the corporation and hold a share-holder responsible for the corporation's action as if it were theshareholder's own."' The purpose of this article is to review thestandards for piercing the corporate veil in Kentucky and toanalyze a recent federal court decision in which the veil waspierced, in light of the Kentucky standards.

On February 17, 1993, the Sixth Circuit Court of Appealsdisregarded the corporate entity of WRW Corporation and heldthe shareholders of WRW personally liable for $90,350 in civilpenalties "for serious violations of safety standards under the

1. HARRY G. HENN, HANDBOOK OF THE LAW OF CORPORATIONS AND OTHER BUSI-

NESS ENTERPRISES § 73, at 96 (2d ed. 1970).2. Id.3. Harvey Gelb, Piercing the Corporate Veil - The Under Capitalization Factor,

59 CHi.-KENT L. REv. 1, 1 (1982).4. Id. (citing HENN, supra note 1, § 146, at 252).5. Id. at 2.6. Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76

CORNELL L. REv. 1036, 1036 (1991).


Federal Mine Safety and Health Act which resulted in thedeaths of two miners."7 WRW was incorporated under the lawsof Kentucky on November 6, 1980; the sole shareholders wereWilliam Woolum, Noah Woolum and Roger Richardson.' Thepurpose of the corporation was to conduct mining activities on aplot of land that was owned by Noah and William.9 Prior to in-corporation, the individual defendants bought a $5,000 reclama-tion bond. and $46,500 of equipment, and entered into a leasewith the corporation to be formed.' °

Two WRW miners died as a result of a mining accident onJanuary 5, 1982, which prompted the Secretary of Labor to issuethirty separate citations for violations of the Federal Mine Safetyand Health Act of 1977.11 While WRW did not contest the factthat the violations had occurred, it did contest the civil penaltyassessments of $90,350, contending that the corporation was notthe operator of the mine. 2 WRW went out of business after theaccident and its assets were liquidated in order to satisfy itsdebts. 13 An administrative law judge upheld the penaltiesagainst WRW, finding that WRW was the operator of themine.'4 The case went to trial in federal district court in Lon-don, Kentucky, where Chief Judge Siler upheld the civil penal-ties against WRW and imposed personal liability against theindividual defendants. 5 The Sixth Circuit Court of Appeals af-firmed the district court in piercing WRW's corporate veil andheld the shareholders personally liable for the civil penalties. 6

7. United States v. WRW Corp., 986 F.2d 138, 140 (6th Cir. 1993).8. United States v. WRW Corp., 778 F. Supp. 919, 920 (E.D. Ky. 1991), affd,

986 F.2d 138 (6th Cir. 1993).9. Id.

10. Id.11. Id. at 921.12. Id.13. Id.14. Id.15. Id. at 924-25.16. United States v. WRW Corp., 986 F.2d 138, 145 (6th Cir. 1993).

542

UNITED STATES v. WRW CORP.

II. THE LAW IN KENTUCKY ON PIERCINGTHE CORPORATE VEIL

The Sixth Circuit, in affirming the disregard of WRW's corpo-rate veil, cited only one Kentucky case as authority," White v.Winchester Land Development. s Because White is asserted asthe controlling authority on point, it is necessary to examine theanalysis used in that decision.

In White, a bank attempted to obtain personal liability toreach the assets of shareholders when the corporate assets wereinsufficient to satisfy corporate debts owed to the bank. 9 Thecourt refused to pierce the corporate veil, but did discuss "[t]hreebasic theories [that] have been utilized to hold the shareholdersof a corporation responsible for corporate liabilities."2 Thethree theories discussed were the instrumentality theory, thealter ego theory, and the equity formulation theory.2' It shouldbe noted that the labels placed on these theories are somewhatempty. The courts, however, often use such terms in holdingshareholders personally liable for corporate debts. 2 As Profes-sor Hamilton stated, 'This language is inherently unsatisfactorysince it merely states the conclusion and gives no guide to theconsiderations that lead a court to decide that a particular caseshould be considered an exception to the general principle ofnonliability. ' '23 While these terms may be conclusive, their usein White was helpful in identification of differing approaches tothe problem and provide a framework for analysis.

A. The Instrumentality Theory

The instrumentality theory provides that the corporate veilshould be pierced if the following three elements are established:(1) the corporation was a mere instrumentality of the sharehold-er; (2) the shareholder exercised control over the corporation insuch a way as to defraud or to harm the plaintiff; and (3) a re-fusal to disregard the corporate entity would subject the plaintiff

17. Id. at 142.18. White v. Winchester Land Dev., 584 S.W.2d 56, 62 (Ky. Ct. App. 1979).19. Id. at 58-59.20. Id. at 61.21. Id.22. Robert W. Hamilton, The Corporate Entity, 49 TEx. L. REV. 979, 979 (1971).23. Id.

1995] 543


to unjust loss. 24 This approach was introduced by ProfessorPowell in 1931.25

The court in White stated: "The courts adopting this test havebeen virtually unanimous in requiring that these three elementsco-exist before the corporate veil will be pierced., 26 The amountof dominance required under the instrumentality theory "mustdepend upon a domination and control so complete that the cor-poration may be said to have no will, mind or existence of itsown, and to be operated as a mere department of the business ofthe stockholder."27 Additionally, there is a requirement that anelement of unfairness be present. 2

' This was explained inBrown v. Margrande Companie Naviera, S.A."9 where the courtstated that "[s]omething more [than control] is needed, such asfraud, illegality, or wrongdoing which produced the injury orcomplaint, otherwise the corporate entity will stand."3

This element had found support in Kentucky case law. In BigFour Mills, Limited v. Commercial Credit Company,"l the Ken-tucky Court of Appeals stated that "ownership of all or a sub-stantial portion of the capital stock of one corporation by anothercorporation does not create an identity of corporate interest. 32

The court went on to say that it would be appropriate to "ignorethe distinction between corporate entities where its recognitionwould operate as a shield for fraudulent or criminal acts orwhere [it is] subversive of the public policy of a state. 33

Therefore, under the instrumentality theory, in addition to thethree elements advanced by Professor Powell, Kentucky courtswill deny recognition of a separate corporate existence where the

24. White, 584 S.W.2d at 61.25. Rutherford B. Campbell, Limited Liability for Corporate Shareholders: Myth or

Matter-of-Fact, 63 KY. L.J. 23, 33 (1975) (citing P. POWELL, PARENT AND SUBSIDIARYCORPORATIONS (1931)).

26. White, 584 S.W.2d at 61 (citing Campbell, supra note 25, at 33).27. Campbell, supra note 25, at 34 (quoting Lowendahl v. Baltimore & O.R.R.,

287 N.Y.S. 62 (App. Div. 1936), affd, 6 N.E.2d 56 (1936)).28. Id.29. Brown v. Margrande Companie Naviera, S.A., 281 F. Supp. 1004 (E.D. Va.

1968).30. Campbell, supra note 25, at 34 (quoting Brown, 281 F. Supp. at 1006).31. Big Four Mills, Ltd. v. Commercial Credit Co., 211 S.W.2d 831 (1948).32. Id. at 834 (citing Harlan Pub. Serv. Co. v. Eastern Constr. Co., 71 S.W.2d 24

(1934); Kentucky Auto Mechanics Serv. Co. v. Kentucky Auto Parts Co., 102 S.W.2d1022 (1937)).

33. Id.

544


corporation is merely a shield from legal responsibility fromfraudulent or criminal acts.34

B. The Alter Ego Theory

The elements required to pierce the corporate veil under thealter ego theory were outlined in G.E.J. Corporation v. UraniumAire, Inc.35 In G.E.J., a parent corporation (M.F. Corporation)was held liable for the breach of contract by its subsidiary(G.E.J. Corporation). The court stated that "[g]enerally a corpo-ration which owns and controls another is not responsible for theliabilities of the latter .... [b]ut ... if the subsidiary is thealterego of the parent the fact of separate corporate existencewill be disregarded."36 The elements identified by the court arethat the subsidiary is not only influenced and governed by theparent, but that there is such a unity of interest and ownershipthat their individuality, or separateness, has ceased; and thatadherence to the normal attributes of separate corporate exis-tence would sanction a fraud or promote injustice.37

The Kentucky Court of Appeals did acknowledge the alter egotheory in White, but felt that "issues of 'alter ego' do not lendthemselves to strict rules and prima facie cases: whether thecorporate veil should be pierced depends upon the innumerableequities of each case."3 Rather than adoption of the alter egotheory, the court rejected it in favor of an analysis of "a numberof factors ... in all the cases no matter what 'test' is being ap-

34. Poyner v. Lear Siegler, Inc., 542 F.2d 955, 958 (6th Cir. 1976).35. G.E.J. Corp. v. Uranium Aire, Inc., 311 F.2d 749 (9th Cir. 1963) (cited in

Campbell, supra note 25, at 35).36. Id. at 756.37. Id. (citing Minifie v. Rowley, 202 P. 673, 676 (Cal. 1921); Thomson v. L.C.

Roney & Co., 246 P.2d 1017, 1021 (Cal. 1952); Duarte v. Postal Union Life Ins. Co.,171 P.2d 574, 586 (Cal. 1946); Marr v. Postal Union Life Ins. Co., 105 P.2d 649, 654(Cal. 1940)).

38. White v. Winchester Land Dev., 584 S.W.2d 56, 62 (Ky. Ct. App. 1979) (com-paring United States v. Standard Beauty Supplies Stores, Inc., 561 F.2d 774 (9thCir. 1977)).

1995] 545


plied."39 The court in White labelled the process of evaluatingall factors in the particular case as the "equity formulation.'

C. The Equity Formulation

In deciding whether to pierce the corporate veil under theequity formulation, a court is to examine all of the relevant fac-tors and determine the necessity of piercing the veil in light ofthese factors.4 Professor Hamilton maintains that the terms"alter ego" and "instrumentality" are meaningless terms thatcourts use to buttress a conclusion that the shareholders areliable for corporate acts. 4

' The following factors were identifiedin White as the basis for determining whether disregard of thecorporate entity was warranted: (1) undercapitalization; (2) afailure to observe the formalities of corporate existence; (3) non-payment or overpayment of dividends; (4) a siphoning of fundsby the dominant shareholders; and (5) the majority of sharehold-ers having guaranteed corporate liabilities in their individual ca-pacities. 43

There have been additional factors that other courts have usedin deciding whether to pierce the corporate veil. These include:the insolvency of the debtor corporation at the time;4' the non-functioning of other officers or directors;45 the absence of corpo-rate records;46 and the domination or excessive control by ashareholder. 7 While these factors are used by some courts,

39. Id. (citing Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540F.2d 681 (4th Cir. 1976); Dudley v. Smith, 504 F.2d 979 (5th Cir. 1974); Lakota GirlScout Council, Inc. v. Havey Fund Raising Management, Inc., 519 F.2d 634 (8th Cir.1975); Amoco Chems. Corp. v. Bach, 567 P.2d 1337 (Kan. 1977)).

40. Id. at 61.41. Campbell, supra note 25, at 36. Professor Campbell credits Professor Latty

with the formulation of this standard. 'What the formula comes down to, once shornof verbiage about control, instrumentality, agency and corporate entity, is that theliability is imposed to reach an equitable result." Id. (citing E. LArTY, SUBSIDIARIESAND AFFILIATED CORPORATIONS 191 (1936)).

42. Hamilton, supra note 22, at 990.43. White, 584 S.W.2d at 62 (citing 1 FLETCHER'S CYCLOPEDIA OF PRIVATE CORPO-

RATIONS § 41 (1990)).44. TSS Sportswear, Ltd. v. Swank Shop (Guam), Inc., 380 F.2d 512, 516 (9th

Cir. 1967).45. Financial Counsellors, Inc. v. Securities and Exchs. Comm'n, 339 F.2d 196,

197 (2d Cir. 1964).46. Lakota Girl Scout Council, Inc. v. Havey Fund Raising Management, Inc., 519

F.2d 634, 638 (8th Cir. 1975).47. Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 687

546


there is substantial overlap among the factors. This article willfocus on the five factors listed in White as it is the controllingauthority in Kentucky.

1. Undercapitalization

The amount of capitalization of a corporation is frequently afactor that courts use in evaluating whether to pierce the corpo-rate veil. 4

' An adequate capitalization is "the amount a 'reason-ably prudent man with a general knowledge of the particulartype of business and its hazards would determine was reason-able ... in light of any special circumstances which existed atthe time of incorporation . . . .""' The adequacy of acorporation's capitalization is to be measured at the time of in-corporation and is inadequate if it is "very small in relation tothe nature of the business of the corporation and the risks thebusiness necessarily entails."5 ° Yet another formulation forundercapitalization is stated as follows:

If a corporation is organized and carries on business withoutsubstantial capital in such a way that the corporation is likely tohave no sufficient assets available to meet its debts, it is inequita-ble that the shareholders should set up such a flimsy organizationto escape personal liability. The attempt to do corporate businesswithout providing any sufficient basis of financial responsibility tocreditors is an abuse of the separate entity and will be ineffectualto exempt the shareholders from corporate debts .... If the capitalis illusory or trifling compared with the business to be done andthe risks of loss, this is a ground for denying the separate entityprivilege.5

The court in White found the theory of undercapitalization tobe difficult as Kentucky law does not require a minimum amount

(4th Cir. 1976).48. Campbell, supra note 25, at 39.49. Id. at 40 (quoting NORMAN D. LATriN, THE LAW OF CORPORATIONS 77-78 (2d

ed. 1971)).50. Hamilton, supra note 22, at 986. Professor Gelb would disagree that the time

of incorporation is the only time at which capitalization should be measured; heargues that "the analysis cannot stop there . . . if the corporation was started withan adequate level of assets which thereafter became inadequate the court must delveinto the factors causing the decline." Gelb, supra note 3, at 15.

51. HENRY W. BALLANTINE, BALLANTINE ON CORPORATIONS § 129, at 302-03

(1946). See also Gelb, supra note 3, at 3 n.13.

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of capital to be paid prior to the commencement of business by acorporation.5 2 This should not prove problematic, however, sincethe focus of undercapitalization is not upon meeting a statutoryamount.5" Rather, it focuses on the amount a corporation willneed to satisfy its obligations in the course of business.54

2. Failure to Follow Corporate Formalities

The failure to follow corporate formalities is a more generalterm that entails activities and procedures that a corporation isnormally required to observe. Such failure can include the lack ofdirector or shareholder meetings, or the absence of corporate re-cords.55 Additionally, it can involve a failure to maintain fiscalseparateness.56 There is much criticism, however, over the im-position of personal liability based on the failure to follow corpo-rate formalities. Professor Hamilton asserts that the failure tofollow formalities is usually unrelated to a plaintiffs claim andtherefore gives the plaintiff a windfall in cases where courtspierce the corporate veil.5" Despite the windfall, some courts ra-tionalize that a defendant ought not be allowed to ignore cor-porate rules and later use the corporate form as a shield.58

However, in a close corporation, running a business may notallow a director/shareholder much time to observe corporateformalities; these are put off or ignored because they are seen asunnecessary.59 Yet, when the failure to observe formalities isrelated to the plaintiffs claim, there is little objection to a find-ing of liability.6 °

52. White v. Winchester Land Dev., 584 S.W.2d 56, 62 (Ky. Ct. App. 1979).53. Hamilton, supra note 22, at 985.54. Id.55. Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 687-

88 (4th Cir. 1976).56. Stone v. Cleveland C.C. & St. L. Ry., 95 N.E. 816 (N.Y. 1911). See also

Campbell, supra note 25, at 44.57. Hamilton, supra note 22, at 990.58. Id.59. Id. at 997.60. Id. Professor Gelb would agree. In criticizing Dewitt in its reliance on the

defendant's failure to follow corporate formalities, he does acknowledge that "[i]f suchdisregard confused a creditor into believing that he was dealing with the individualshareholder rather than the corporation it would certainly have been quite signifi-cant." Gelb, supra note 3, at 7.


3. Nonpayment or Qverpayment of Dividends

The failure of a corporation to pay dividends or to overpaydividends has also been. held to be a factor in a court's analy-sis." But this factor only seems important where there is a gen-eral abuse of corporate funds. 2 An illustration of the overlap ofthis factor with others is found in Thermothrift Industries, Inc. v.Mono-therm Insulation Systems, Inc.,63 where the court listedthe nonpayment of dividends as a factor in applying the alter egotheory.

64

Professor Gelb is critical of the use of this factor in the formu-lation because he feels that there is no reason to attach signifi-cance to the failure of the corporation to pay a dividend. 5 Inhis criticism of Dewitt, he states, "Surely, there is nothing inher-ently evil about the fact that no other shareholder or officerreceived payment and nothing linked that fact to the failure topay the creditor."6

It is also important to note that it may be impossible for acorporation to pay a dividend, particularly in a close corporation.In Kentucky, a corporation may not pay a dividend if, after mak-ing the payment, the corporation is unable to pay its debts asthey become due in the usual course of business, or if its totalassets would be less than the sum of its total liabilities plus theamount necessary to pay the holders of preferred stock.6" Seenin this light, it is possible for a shareholder, who may also be adirector in a close corporation, to be penalized for nonpayment of

61. Schoenberg v. Romike Properties, 59 Cal. Rptr. 359, 368 (1967).62. Id. The court in Schoenberg only referred to the nonpayment of dividends in

passing, and in connection with a string of other types of financial abuse:

the combined facts were the Koutniks' ownership of all the stock of the corpo-ration; the undercapitalization as compared with its operations; Koutnik's com-plete control of the board of directors and of the corporation's business, assetsand finances; the failure of the corporation to pay dividends; and, generally,the use of corporate funds by Koutnik as if they were his own.

Id. See also Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681,685 (4th Cir. 1976).

63. Thermothrift Indus., Inc. v. Mono-therm Insulation Sys., Inc., 450 F. Supp.398 (W.D. Ky. 1978).

64. Id. at 406.65. Gelb, supra note 3, at 8.66. Id.67. Ky. REV. STAT. ANN. § 271B.6-400.(3) (Michie/Bobbs-Merrill 1989).

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a. dividend that may have been illegal had the dividend beenpaid. Given this anomaly, the nonpayment of dividends seems aprecarious basis for assessment of personal liability for theshareholders in a close corporation.

4. Siphoning of Funds by the Dominant Shareholders

Another factor related to financial abuse of corporate funds isthe siphoning of funds by the dominant shareholder.68

Chatterley v. Omnico, Inc. 9 is an illustration. In Chatterley, asubsidiary, Interface Computer, Inc., was controlled by a parentcorporation, Omnico, Inc.7" Omnico was the majority sharehold-er, owning eighty percent of the stock.7' Omnico voted to addthree directors to Interface's board, including the chairman ofOmnico's board. Later that year, Interface failed to meet itspayroll obligations to its employees, who sued to recover theirlost wages.7" The court pierced the corporate veil, finding theparent, Omnico, liable for the debts as the majority sharehold-er. 4 The taking of funds by the majority shareholder, whichcaused the subsidiary to be unable to pay its employees, consti-tuted a siphoning of funds by a dominant shareholder.75

The siphoning of funds was also a factor cited in Dewitt TruckBrokers, Inc. v. W. Ray Flemming Fruit Company76 There, how-ever, its use was less clear. The court acknowledged that thedefendant corporation was a "close, one-man corporation fromthe very beginning.' '77 Yet, the $15,000 to $25,000 that was paidto Flemming annually was seen as a siphoning of funds because"[n]o stockholder or officer of the corporation other thanFlemming ever received any salary, dividend, or fee from thecorporation. 78

68. White v. Winchester Land Dev., 584 S.W.2d 56, 62 (Ky. Ct. App. 1979).69. Chatterley v. Omnico, Inc., 485 P.2d 667 (Utah 1971).70. Id. at 668.71. Id.72. Id..73. Id.74. Id. at 670.75. Id.76. Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th

Cir. 1976).77. Id. at 687.78. Id. at 688.

.550


Domination or control is an important factor. Louisville &N.R. Company v. Carter,79 is illustrative. In Carter, the plaintiffwas injured when his car was struck by a train operated by asubsidiary of the L & N Railroad. s° Kentucky's court of appealsaffirmed the piercing of the corporate veil based on the completedomination of the subsidiary by L & N and the commingling ofthe finances of the companies.8"

5. Personal Guarantee of Corporate Liabilities

A personal guarantee of payment of corporate debts is relatedto the capitalization factor. 2 This is because when a creditorcontracts with or extends credit to a corporation, it is assumedthat the creditor is relying on the assets of the corporation, noton the assets or credit of the shareholder personally.8" Thus,when a shareholder gives a personal guarantee, it is argued thatthe creditor is no longer relying on the corporation's capitaliza-tion, which "should diminish, rather than increase any inclina-tion which the court might have to attach significance to theundercapitalization factor."84 A shareholder's personal assur-ance which causes a creditor to overlook the capitalization of acorporation militates piercing the corporate veil.85 The Whitecourt, however, refused to pierce the corporate veil because thecreditor could have sought security for the obligation.86

Professor Campbell maintains that a creditor should not becharged with the duty to insure that a corporation is adequatelycapitalized prior to contracting. "One who signs a contract with acorporation should be entitled to assume that the corporationhas a reasonable amount of capitalization from which he couldrecover in the event of a breach."87 Professor Campbell contendsthat there is a presumption that the creditor has agreed to rely

79. Louisville & N.R. Co. v. Carter, 10 S.W.2d 1064 (Ky. 1927) (cited in Camp-bell, supra note 25, at 51).

80. Id.81. Campbell, supra note 25, at 51-52.82. Gelb, supra note 3, at 9.83. Id.84. Id. at 10.85. Id.86. White v. Winchester Land Dev., 584 S.W.2d 56, 62 (Ky. Ct. App. 1979).87. Campbell, supra note 25, at 53.

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only on corporate assets.8 8 However, when the corporation isundercapitalized at the time of contract, the resulting unfairnessshould permit the creditor to seek personal liability. s9

Professor Campbell offers two rationales for the propositionthat a shareholder should be denied limited liability if his negli-gence caused the corporation to be unable to meet its debts.9"'The first is that one contracting with a corporation has a rea-sonable expectation that the corporation will be run in a fair andnon-negligent fashion."'" The second, related to the first, "isbased on the need to fairly apportion losses."92 A court mustdetermine who faces the loss when a creditor goes unpaid by acorporation; unless the corporate veil is pierced, the loss is thatof the creditor and not that of the negligent shareholder.93

When personal assurances of corporate debts are given orallyby shareholders, there may be a problem of enforceability be-cause of the statute of frauds.94 The defendant in Dewitt madesuch oral personal assurances and asserted the statute of fraudsas a defense.95 The court rejected the defense, however, holdingthat the issue was a matter for the jury.96 The court went on tostate:

Whenever the main purpose and object of the promisor is not toanswer for another, but to subserve some pecuniary or businesspurpose of his own, involving either a benefit to himself, or dam-age to the other contracting party, his promise is not within thestatute, although it may be in form a promise to pay the debt of

88. Id. at 54.89. Id.90. Id. at 71.91. Id.92. Id.93. Id.94. KY. REV. STAT. ANN. § 371.010 (Michie/Bobbs-Merrill 1989 & Supp. 1994) pro-

vides:No action shall be brought to charge any person: (1) For any representation orassurance concerning the character, conduct, credit, ability, trade, or dealingsof another, made with the intent that such other may obtain thereby credit,money, or goods ...unless the promise, contract, agreement, representation,assurance or ratification, or some memorandum or note thereof, be in writingand signed by the party to be charged ....95. Dewitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 689

(4th Cir. 1976).96. Id. (citing Goldsmith v. Erwin, 183 F.2d 432, 435-36 (4th Cir. 1950)).

552


another, and although the performance of it may incidentally havethe effect of extinguishing that liability. 7

6. An Additional Consideration - Contract v. Tort

There are differing views on whether the substantive groundsfor a claim will affect the probability that a court will pierce thecorporate veil. Whereas White involved a contractual claim,98

United States v. WRW Corporation concerned a tort issue wherecivil penalties resulted from the deaths of employees.99 "Manycommentators have noted that tort claimants have a better claimto piercing the veil because they did not choose to deal with thecorporate enterprise that ultimately was unable to pay its obliga-tion."'' 0 Moreover, contract plaintiffs are able to evaluate therisks and capitalization of the defendant corporation prior to con-tracting while the tort plaintiff cannot.' One explanation isthat the "distinction follows directly from the economics of moralhazard - where corporations must pay for the risk faced bycreditors as a result of limited liability, they are less likely toengage in activities with social costs that exceed their socialbenefits."'0 2 Where there is undercapitalization, the tort plain-tiff is more likely to succeed in piercing the corporate veil.'O3

Nevertheless, based on empirical data, contract plaintiffs havebeen statistically more successful in piercing the corporate veilthan tort plaintiffs.'0 4 In a study of 779 contract cases, thecourts pierced the veil in 327 of the cases (41.98%), while in 226tort cases, the veil was pierced only seventy times (30.97%).105

Professor Thompson notes that this finding goes "against theconventional wisdom.' 0 6

97. Id. (quoting Emerson v. Slater, 63 U.S. (22 How.) 28 (1859)).98. White v. Winchester Land Dev., 584 S.W.2d 56 (Ky. Ct. App. 1979).99. United States v. WRW Corp., 986 F.2d 138 (6th Cir. 1993).

100. Thompson, supra note 6, at 1058-59 (citing Cathy S. Krendl & James R.Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 DEN. L.J. 1, 34 (1978);

Jonathan M. Landers, A Unified Approach to Parent, Subsidiary & Affiliate Questionsin Bankruptcy, 42 U. CHI. L. REV. 589, 623 (1975)).

101. Id.102. Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corpo-

ration, 52 U. CHI. L. REV. 89, 112 (1985).103. Hamilton, supra note 22, at 988.104. Thompson, supra note 6, at 1057.105. Id. at 1058.106. Id.

1995]


III. ANALYSIS OF WRW IN LIGHT OF WHITE

In WRW, after the Sixth Circuit Court of Appeals decided thatthe imposition of civil penalties did not constitute doublejeopardy, it turned to the issue of piercing WRW's corporateveil.' °7 The court noted that the district court had ruled thatthe facts of the case warranted the disregard of the corporateentity "under either an equity theory or an alter ego theory, bothof which are recognized under Kentucky law."'0 8 The courtthen cited the five factors in White.'0 9

Note that while White did discuss the alter ego theory,"0 theinstrumentality theory,"' and the equity formulation," 2 theKentucky Court of Appeals did not expressly adopt any of thethree but concluded that the corporate veil should not bepierced."' Moreover, in WRW the court of appeals stated thatthe five elements, which were listed in White as applicable to theequity formulation, were to apply under either the equity or alterego theory." 4 The court's mixing of the terms makes it easy tounderstand that there is no systematic analysis and courts relyon terms such as "alter ego" and "instrumentality" as metaphorsto explain their results." 5

The court found that the corporation was undercapitalized"because it was incorporated with only $3,000 of capital, whichthe record indicates was insufficient to pay normal expensesassociated with the operation of a coal mine ... [and] WRWlacked working capital to pay any employees or expenses, to paylicensing or permit fees, or to obtain adequate mining equip-ment.""' 6 The court found capitalization to be the cash deliv-ered to the corporation in exchange for shares only and did notcount the $46,500 of equipment" 7 nor the $13,000 tractor,"8

107. United States v. WVRW Corp., 986 F.2d 138, 143 (6th Cir. 1993).108. Id.109. Id.110. White v. Winchester Land Dev., 584 S.W.2d 56, 61 (Ky. Ct . App. 1979).111. Id.112. Id. at 62.113. Id. at 63.114. United States v. WRW Corp., 986 F.2d 138, 143 (6th Cir. 1993).115. Hamilton, supra note 22, at 979. It should be noted that the district court

did not blend the theories; rather, it followed the structural analysis as outlined inWhite. United States v. WRW Corp., 778 F. Supp. 919, 922-25 (E.D. Ky. 1991), affd,986 F.2d 138 (6th Cir. 1993).

116. WRW, 986 F.2d at 143.117. WRW, 778 F. Supp. at 920.

554


both of which were purchased in the name of WRW. Since thesewere assets of the corporation, they should have been consideredpart of the capitalization of the corporation.'19 Had the share-holders donated this equipment in exchange for shares of stock,this would be corporate capital. 2 ° Therefore, the mere fact thatthe individual defendants received no shares for the equipmentdoes not provide a reason why this property could not be consid-ered part of WRW's capitalization. Certainly, a capitalization of$62,500 is much different from that of $3,000. The court's asser-tion that WRW was unable to pay its working expenses 121 iscontrary to the record in the district court where it is stated that"the Individual Defendants did lend their credit to WRW andmake unsecured operating loans to WRW to enable it to remaincurrent on it obligations.' '122 Therefore, the conclusion thatWRW was undercapitalized is questionable.

The court went on to affirm the district court's finding thatWRW failed to follow corporate formalities.' 2

1 WRW did followcorporate formalities, at least to a degree. WRW properly filed itsarticles of incorporation and produced a certificate of incorpora-tion, minutes of organization of the board of directors, and awaiver of notice of the first meeting of shareholders. 24 It alsomaintained a separate corporate checking account and hired anaccountant, who filed its annual reports, coal tax returns, andseverance returns. 125 In light of all the formalities followed byWRW, the court's finding that WRW did not do enough in theway of corporate formalities leaves much uncertainty as to whatwould satisfy the requirement. There is criticism for using thefailure to follow corporate formalities as a reason for piercing thecorporate veil. "[T]here seems to be little reason to punish errantshareholders unless their actions are directed toward defrauding

118. Id.119. See, e.g., Obre v. Alban Tractor Co., 179 A.2d 861 (Md. 1962) (holding that

cash and equipment contributed by a shareholder to a corporation in return forpromissory notes were part of the corporation's capitalization).

120. See KY. REV. STAT. ANN. § 271B.6-210.(2) (Michie/Bobbs-Merrill 1989) (allow-ing for property received to constitute adequate consideration for the issuance ofshares).

121. United States v. WRW Corp., 986 F.2d 138, 143 (6th Cir. 1993).122. WRW, 778 F. Supp. at 920.123. WRW, 986 F.2d at 143.124. WRW, 778 F. Supp. at 923.125. Id. at 921.

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another party." '126 This is true, particularly in a close corpora-tion where running the business may not allow the direc-tor/shareholder much time to observe corporate formalities whichare put off or ignored because they are seen as unnecessary. 127

There was no reason to believe that WRW's failure to strictlycomport with all corporate formalities was related to the miningaccident, which prompted the civil penalties at issue. Therefore,this basis for imposing personal liability is also subject to ques-tion.

WRW did not pay any dividends; this fact was mentioned bythe district court 128 and 'the court of appeals.'29 However, thecourt of appeals placed little emphasis upon this factor. 3 °

Since WRW operated at a loss during its two years of busi-ness,131 any payment of a dividend would have been illegal 132

and the directors would have faced personal liability for thedistribution. 33 It is therefore understandable why the courtcould not emphasize this factor in its analysis.

The remaining two factors, siphoning of funds and personalguarantees of corporate liabilities, merited little attention fromthe court.' The court found no evidence that either of thesefactors was present but stated that "these factors alone do notmitigate against piercing the corporate veil in this case becauseWRW was never sufficiently capitalized and operated at a lossduring its two years of active existence.

IV. CONCLUSION

The insulation of shareholders from corporate obligations, orlimited liability, is a fundamental principle in corporate law, butit is not absolute. 136 On occasion, the corporate veil will be dis-regarded and its shareholders held personally liable for corporate

126. Hamilton, supra note 22, at 990-91.127. Id.128. WRW, 778 F. Supp. at 924.129. United States v. WRW Corp., 986 F.2d 138, 143 (6th Cir. 1993).130. Id.131. WRW, 778 F. Supp. at 921.132. KY. REV. STAT. ANN. § 271B.6-400(3) (Michie/Bobbs-Merrill 1989).133. Id. § 271B.8-330(1).134. WRW, 986 F.2d at 143.135. Id.136. Easterbrook & Fischel, supra note 102, at 89.

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obligations." 7 In Kentucky, the courts will pierce the corporateveil under appropriate circumstances. 138 While Kentucky courtsseem to emphasize the same factors as those in other jurisdic-tions, the Kentucky courts have been "quite reluctant todisregard the corporate entity.' 39 In fact, Kentucky courtshave only pierced the corporate veil 26.67% of the time. 4 ' Thisis the lowest in the Sixth Circuit and the ninth lowest in theUnited States.'4 '

A federal court should take Kentucky's reluctance to disregardthe corporate entity into account when faced with an attempt topierce the corporate veil. The court in WRW was perhaps toohasty in imposing personal liability on individual shareholdersfor the payment of civil penalties. Evidence of this is found inthe court's questionable assessment of WRW's capitalization andin its reliance on WRW's failure to follow corporate formalities.This reliance was unfounded, first, because many formalities hadbeen followed, and second, because the formalities at issue hadnothing to do with the mining accident which was the basis forthe civil penalties. If limiting the liability of shareholders doesserve a public function by stimulating growth and invest-ment, 4 2 then the federal courts must acknowledge the reluc-tance of Kentucky courts to pierce the corporate veil.143 If themethodology of the courts appears random and unpredictable,then prospective investors may be less willing to invest in Ken-tucky corporations, thereby stunting the economic growth of theCommonwealth.

137. Id.138. Campbell, supra note 25, at 52.139. Id.140. Thompson, supra note 6, at 1052.141. Id. Reportedly, Tennessee pierces 38.89%, Michigan pierces 27.27%, and Ohio

pierces 57.14% of the time when presented with a challenge to the corporate entity.142. Gelb, supra note 3, at 1.143. Campbell, supra note 25, at 52.

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