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Can the LLC Pay My Legal Fees?

On Behalf of | Aug 19, 2020 | Business, Debt, Firm News, Litigation

Factors to Consider During Legal Disputes Between LLC Partners in KY

By: Laura Day DelCotto

We often see situations of business divorce and the falling out among small business co- owners. In this age of online legal forms, we also often see Operating Agreements that the 2 or 3 owners found online and did themselves, without any advice of counsel. So, when “partners” in a Limited Liability Company – LLC  (they always call themselves partners although that is not technically accurate) get into a dispute, do they each have to pay their own legal fees out of pocket, or can the entity fund the fight?

It depends. On what, you ask?

  • The explicit terms of the Operating Agreement
  • Any possible ambiguities in the Operating Agreement
  • The silence of the Operating Agreement
  • The statutes of the state where the LLC is formed and exists

KY LLC Statutes

Kentucky’s LLC statutes are found in KRS Chapter 275. In KRS 275.180(2), the Kentucky statutes provide that a written operating agreement may “provide for indemnification of a member or manager for judgments, settlements, penalties, fines or expenses incurred in a proceeding to which a person is a party because the person is or was a member or manager.”

KRS 275.337 governs derivative actions, and states that a member may maintain a direct action against a LLC, another member or a manager to enforce any duties owed or redress injuries to the LLC. There are lengthy procedural demand procedures in the statutes which must be followed.  KRS 275.337(9) provides that the court may award attorneys’ fees at the termination of the proceeding, against both the plaintiff member as well as to require the LLC to pay the plaintiff member’s costs and fees to the extent it finds that the proceeding results in substantial benefit of the LLC.

LLC internal disputes are messy and costly. Who will pay for these types of fights is an important factor. Members in LLCs should be prepared that there will also be disputes over paying lawyers to fight. This is a complex area and individual member counsel should be consulted early in the game.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.