                                                     RENDERED : JUNE 25, 2009
                                                            TO BE PUBLISHED

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                                 2008-SC-000905-CL


JOHN R. WILSON, TRUSTEE FOR
FRANKLIN CAREER SERVICES, LLC



                            CERTIFICATION OF LAW
                         FROM U.S . BANKRUPTCY COURT
V.                      WESTERN DISTRICT OF KENTUCKY
                                 NO. 06-30010



DAVID B. PAINE AND                                                    RESPONDENT
JOHN NEWTON


             OPINION OF THE COURT BY JUSTICE CUNNINGHAM

                              CERTIFYING THE LAW


       Pursuant to CR 76 .37(1), this Court granted the certification request of

the United States Bankruptcy Court for the Western District of Kentucky to

answer the following question of Kentucky law:

      I . Whether the equitable rule of adverse domination applies to toll
          the statute of limitations set forth in KRS §§ 271B.8-330(3) and
          27113 .6-400?

      In certifying the question of law to this Court, the United States

Bankruptcy Court for the Western District of Kentucky provided a brief

explanation of the facts of the case .

       On January 4, 2006, Franklin Career Services, Inc ., fdba Franklin

Career Services, LLC, fdba DDH, INC. ("hereinafter FCS") fled a Chapter 7
 petition for relief under Title 11 of the United States Code. On December 21,

2007, Appellant, John R . Wilson, as Trustee in Bankruptcy for FCS and on

behalf of the Bankruptcy estate, filed suit against Capital Steel Ventures, Inc.,

a former parent company of FCS, and former officers and directors of FCS. The

Complaint alleged several counts of corporate malfeasance and sought recovery

of property as preferences and fraudulent transfers.

       In Count Seven of his Complaint, Appellant alleged that unlawful

distributions were made to various officers and directors pursuant to KRS §

271B.8-330 . Appellant seeks to void those distributions on behalf of the

corporation using Trustee's equitable powers provided under the Bankruptcy

Code . Appellees, David B . Paine and John Newton, each filed Motions to

Dismiss Count Seven on the grounds that the actions were barred by the

statute of limitations in KRS § 271B.8-330(3) . Appellant responded to this

defense by raising the equitable tolling doctrine of "adverse domination ."

      Because this issue involves a question of Kentucky law that has not been

addressed previously by this Court, the United States Bankruptcy Court for the

Western District of Kentucky requested certification of the aforementioned

question of law pursuant to CR 76 .37(1) .

      KRS § 271B .8-330 provides in pertinent part: "A proceeding under this

section shall be barred unless it is commenced within two (2) years after the

date on which the effect of the distribution was measured under subsection (S)

or (7) of KRS 271B.6-400 ." It does not appear that Appellant filed his claim
 against Appellees within the two-year limitations period.

       Ordinarily, lack of knowledge of one's rights is insufficient to prevent

operation of statutes of limitation. Wilcox v . Sams, 213 Ky. 696, 281 S .W. 832

 (1926) . However, when the complained of injury is not immediately

discoverable, courts steer away from the unfairness inherent in charging a

plaintiff with slumbering on rights not reasonably possible to ascertain. The

discovery rule, a means by which to identify the "accrual" of a cause of action

when an injury is not readily ascertainable or discoverable, was first

enunciated in Tomlinson v. Siehl, 459 S .W.2d 166 (Ky. 1970), and later refined

in Hackworth v. Hart, 474 S .W .2d 377 (Ky. 1971) . "[T]he statute begins to run

on the date of the discovery of the injury, or from the date it should, in the

exercise of ordinary care and diligence, have been discovered ." Id . at 379. This

rule entails knowledge that a plaintiff has a basis for a claim before the statute

of limitations begins to run . The knowledge necessary to trigger the statute is

two-pronged . One must know: (1) he has been wronged; and (2) by whom the

wrong has been committed. Drake v. B.F. Goodrich Co ., 782 F.2d 638, 641

(6th Cir. 1986) . See also Hazel v. General Motors Corp. , 863 F . Supp. 435, 438

(W.D .Ky. 1994) ("Under the `discovery rule,' a cause of action will not accrue

until the plaintiff discovers, or in the exercise of reasonable diligence should

have discovered, not only that he has been injured but also that his injury may

have been caused by the defendant's conduct.") . As such, the discovery rule

works as a "savings" clause or a "second bite at the apple." Queensway
Financial Holdings Ltd . v . Cotton 8s Allen, P.S.C . , 237 S .W.3d 141, 148 (Ky.

2007) .

       The doctrine of adverse domination shares the same theoretical

underpinnings as the discovery rule . Michael E. Baughman, Defining, the

Boundaries of the Adverse Domination Doctrine : Is There AnY Repose for

Corporate Directors? , 143 U. Pa . L. Rev. 1065, 1093 (1995) . It has been

described as "merely a corollary of . . . [the] discovery rule, applied in the

corporate context." Resolution Trust Corp . v. Farmer , 865 F. Supp. 1143, 1154

n.l l (E.D .Pa. 1994) (citing In re Lloyd Securities, 153 B .R. 677, 685 (E.D.Pa.

1993)) .

              It is the `inherently unknowable' character of the
              injury that is the critical factor that governs the
              applicability of the discovery rule . . . . A corporate
              plaintiff does not have `knowledge' of an injury to itself
              until those individuals who control it know of the
              injury and are willing to act on that knowledge .
              (Emphasis added .)

Id . at 1155. Moreover, "a corporate plaintiff cannot `discover' injuries to the

corporation caused by those who control the corporation." Clark v. Milam, 452

S.E .2d 714, 718 (W.Va . 1994) . Therefore, adverse domination provides that the

"cause of action will be tolled during the period that a plaintiff corporation is

controlled by wrongdoers," Resolution Trust Corp . v. Gardner, 798 F.Supp.

790, 795 (D .D .C . 1992) .

      The doctrine of adverse domination has not heretofore been considered
by this Court, but has been widely applied by federal courts in cases involving

corporate causes of action against directors and officers . I See, e ., Farmers &

Merchants Nat. Bank v . Bryan, 902 F.2d 1520 (10th Cir. 1990) ; IIT, an Intern .

Inv . Trust v. Cornfeld , 619 F.2d 909 (2d Cir. 1980) ; International Railways of

Central America v . United Fruit Co. , 373 F.2d 408 (2d Cir. 1967), cert. denied,

387 U .S . 921 (1967) ; Resolution Trust Corp. v . Kerr, 804 F. Supp . 1091

(W .D.Ark . 1992) ; Resolution Trust Corp . v. Gallagher, 800 F.Supp. 595 (N .D.I11.

1992) ; Resolution Trust Corp. v. Gardner, 798 F.Supp. 790 (D .D.C. 1992);

Federal Deposit Ins. Corp. v . Howse, 736 F.Supp. 1437 (S .D.Tex. 1990) ;

Federal Deposit Ins . Corp. v. Greenwood , 739 F.Supp. 450 (C .D.I11. 1989) ;

Federal Deposit Ins . Corp . v. Carlson , 698 F.Supp. 178 (D .Minn. 1988) ; Federal

Say. and Loan Ins . Corp . v. Burdette , 696 F .Supp. 1196 (E.D .Tenn. 1988);

Federal Deposit Ins. Corp. v. Hudson , 673 F .Supp. 1039 (D .Kan . 1987) ; Federal

Say . and Loan Ins . Corp. v. Williams , 599 F.Supp. 1184 (D .Md . 1984) ; Federal

Deposit Ins . Corp. v. Bird, 516 F. Supp. 647 (D .P. R. 1981) ; Saylor v. Lindsley ,

302 F.Supp. 1174 (S .D.N.Y. 1969) .

      The doctrine is rooted in the long-established principles of agency law.

Adverse domination is premised on the notion that knowledge is not imputed if

the agent is acting in a manner adverse to the interests of the principal. This

rule is consistent with Kentucky agency law. Owsley County Deposit Bank v.

Burns, 196 Ky. 359, 244 S.W. 755 (1922) . Thus, "[t]he knowledge of the agent


  While the majority of cases dealing with adverse domination have come at the
  federal level, many states have considered the issue as well . For an exhaustive list
  of states that have considered and applied adverse domination, see Resolution
  Trust Corp. v. Grant, 901 P .2d 807, 812 at n.16 (Okl . 1995) .
    is the knowledge of the corporation he serves when the knowledge relates to

    some matter over which the agent has control and with which his duties are

    connected and when they relate to matters over which he has authority . . . ."

    Warfield Natural Gas Co . v. Anderson, 249 Icy. 586, 61 S .W.2d 27, 28 (1933) .

    In the corporate context, the corporation is the principal and the board of

    directors as a whole is the agent. When the board of directors is accused of

 breaching its duty to the corporation, it necessarily is accused of acting

 adversely to the principal's interests. See Resolution Trust Corp. v. Farmer,

 865 F. Supp.     at   1155-56 .

          "Because, in most cases, defendants' control of the corporation will make

it impossible for the corporate plaintiff independently to acquire the knowledge

and resources necessary to bring suit," the adverse domination rule "presumes

that actual notice will not be available until the corporate plaintiff is no longer

under the control of the erring directors ." Hecht v. Resolution Trust Corp., 635

A.2d 394,     4615   (Md.   1994) .   "This prevents the culpable directors from

benefiting from their lack of action on behalf of the corporation ." Id . at 408.

         While courts which have been confronted with the question have almost

uniformly embraced adverse domination,2 there still exists some variation in its


2    A minority of courts that have considered this issue have declined to recognize the
     doctrine of adverse domination, concluding that the doctrine is inconsistent with
     applicable state law tolling doctrines and policies of strictly construing statutes of
     limitations . See, e.g., Resolution Trust Corp. v. Armbruster , 52 F.3d 748, 752 (8th
     Cir. 1995) (concluding that Arkansas courts do not recognize the doctrine of
     adverse domination) ; Resolution Trust Corp. v. Artley , 28 F.3d 1099, 1102 (11th
     Cir . 1994) (finding the doctrine inapplicable under Georgia law) ; Federal Deposit
     Ins . Corp. v. Cocke, 7 F.3d 396, 402-03 (4th Cir. 1993) (declining, under Virginia
     law, to apply the doctrine to the case at issue, but noting that Virginia recognizes
     the tolling doctrine of equitable estoppel in cases involving intentional
     concealment) .
 application. Notably, courts have differed on the degree of domination of the

 board required in order for the corporation to claim protection of the doctrine,

 as well as the degree of culpability that the plaintiff must allege against the

 directors .

        Each shall be discussed in turn.

        A majority of jurisdictions follow the "disinterested majority test,"

whereby a plaintiff is required to show that a majority of the board members

were wrongdoers during the period the plaintiff seeks to toll the statute of

limitations. See , e .g . , Fed . Deposit Ins. Corp . v. Dawson , 4 F.3d 1303, 1310

(5th Cir. 1993) ; Fed . Deposit Ins . Corp . v. Howse , 736 F.Supp. 1437, 1441

(S .D.Tex. 1990) ; Fed . Say . and Loan Ins . Corp. v. Williams, 599 F.Supp. 1184,

1195 (D.Md. 1984) ; Fed . Deposit Ins . Corp. v. Bird , 516 F.Supp. 647, 651

(D . P. R. 1981) . This standard is premised on the notion that "the mere

existence of a culpable majority on the board is so likely to preclude the

corporation from filing suit against the wrongdoers that tolling is thereby

justified." Dawson , 4 F.3d at 1310 (internal citations omitted) . Courts have

given two rationales to justify this assumption . First, a culpable majority can

control the flow of information and thereby prevent disclosure of incriminating

information. See Williams , 599 F.Supp. at 1193-94 n .12. ; Dawson , 4 F.3d at

1313 . Second, it is unreasonable to expect the culpable directors to bring suit

against themselves and that as a practical matter, only when a majority of the

board no longer consists of wrongdoers can an action be initiated. See , e.g. ,
 Howse , 736 F .Supp . at 1441 . Indeed, though it is in the realm of possibility

 that a board of directors could bring suit against itself, the likelihood of such is

 minute . Hecht, 635 A.2d at 407 . Thus, "it is only when the culpable directors

 are replaced by a majority of nonculpable directors and are no longer in control

 that the claim can be brought." Id. at 402 .

       Other courts have adopted the more stringent "complete domination"

test, which requires the plaintiff to show "full, complete and exclusive control

in the directors or officers charged" with the wrongdoing . Farmers 8v

Merchants National Bank v. BKyan , 902 F.2d 1520, 1522 (10th Cir. 1990)

(quoting Int'1 Rys . of Cent. Am. v. United Fruit Co. , 373 F.2d at 414) . See also

Mosesian v. Peat, Marwick, Mitchell 8s Co . ; 727 F.2d 873, 879 (9th Cir. 1984),

cert. denied, 469 U.S. 932 ( 1984) ; and Resolution Trust Corp. v. Fleischer, 826

F.Supp . 1273, 1276 (D .Kan. 1993) . Thus, the plaintiff must negate the

possibility that an informed shareholder or director could have induced the

corporation to initiate suit . Farmers 8v Merchants Nat. Bank, 902 F.2d at

1522 ; Int'1 Rys. , 373 F.2d at 414 .

      We believe the wiser approach to be the "disinterested majority" test, as it

comports with both common sense and human nature . See Federal Deposit

Ins . Corp. v . Smith , 980 P.2d 141, 148 (Or. 1999) . The policies enunciated in

the "disinterested majority" test also comply with equity and with how

limitation defenses generally operate .

             It provides that it is appropriate for the directors to
             bear the burden of rebutting a presumption of control,
             because they have greater access to the relevant
             information - it is the directors, those in control of the
             corporate records, who will know whether anyone was
             in a position to bring suit on the corporation's behalf.

Resolution Trust Corp . v . Grant, 901 P .2d 807, 818 (Okl. 1995) . To rebut a

presumption that accrual of the claims does not take place until a disinterested

majority has replaced the culpable directors, the defendants must show that

there was someone who had the knowledge, the ability and the motivation to

bring suit during the period of corporate control . Hecht, 635 A .2d at 406 .

Requiring the directors to carry the burden of production is consistent with the

general rule that the party raising the statute of limitations bears the burden of

presenting evidence to establish the time bar . Slack v. Bryan , 299 Ky. 132,

184 S .W.2d 873, 876 (1945) . The plaintiff, however, still has the initial burden

to plead and prove facts that the board was composed of a majority of culpable

directors . See Southeastern Kentucky Baptist Hosp., Inc . v. Gaylor, 756

S.W.2d 467, 469 (Ky. 1988) ("Once the statute of limitations is raised, the

burden falls on the complainant to prove such facts as would toll the statute



      Furthermore, it is reasonable to assume that a culpable majority would

act in its own interest, and, in so doing, would conceal information and prevail

on whether to pursue claims.

            While [the culpable majority] retain[s] control they can
            dominate the non-culpable directors and control the
            most likely sources of information and funding
            necessary to pursue the rights of the association. As a
             result, it may be extremely difficult, if not impossible,
             for the corporation to discover and pursue its rights
             while the wrongdoers retain control.

Williams, 599 F. Supp. a t 1193-94 n .12 . We, therefore, adopt the

"disinterested majority" version of the adverse domination doctrine . The party

most likely to be in possession of the information carries the burden to rebut a

presumption that accrual of the claim does not occur until a disinterested

majority has replaced the controlling culpable directors.

       The second area of disagreement among courts concerns the required

level of culpability that the plaintiff must allege against the directors. Three

theories have emerged . One theory holds that negligent conduct, without

more, is sufficient to toll the statute of limitations . See Federal Deposit Ins.

Corp v. Carlson , 698 F. Supp. 178, 180 (D .Minn. 1988) . More recently, courts

have held that negligent conduct is not enough to warrant the application of

adverse domination . See Dawson , 4 F.3d at 1313; Resolution Trust Corp. v.

Acton, 49 F.3d 1086 (5th Cir. 1995); Farmer, 865 F. Supp. at 1157. These

courts, however, have not defined exactly what level of culpability is required .

Lastly, at least one court has held that the degree of culpability was irrelevant ;

because the reason for tolling the statute of limitations is that the plaintiffs

cannot discover the cause of action. Clark, 452 S .E.2d at 719 .

      It is true that the discovery rule arose from medical malpractice claims,

and because adverse domination is a corollary of the rule, the logical result
 would be to follow the Carlson theory whereby negligent conduct would be

 sufficient. However, as other courts who have dealt with this issue have noted,

we fear that a negligent conduct standard would make the doctrine become too

widespread. As the Dawson court aptly stated :

                 To [allow a negligence standard] would effectively
                 eliminate the statute of limitations in all cases
                 involving a corporation's claims against its own
                 directors . . . . [I]t could almost always be said that
                 when one or two directors actively injure the
                 corporation, or profit at the corporation's expense, the
                 remaining directors are at least negligent for failing to
                 exercise "every precaution or investigation." (Internal
                 citation omitted.) If adverse domination theory is not
                 to overthrow the statute of limitations completely in
                 the corporate context, it must be limited to those cases
                 in which the culpable directors have been active
                 participants in wrongdoing or fraud, rather than
                 simply negligent.


Id . , 4 F .3d at 1312 .

           We believe that the Dawson standard best reflects the fundamental

concerns that adverse domination was designed to address. The doctrine is

founded on the presumption that those who engage in fraudulent activity likely

will make it difficult for others to discover their misconduct . "[T]he danger of

fraudulent concealment by a culpable majority of a corporation's board seems

small indeed when the culpable directors' behavior consists only of      negligence

. . . ."   Id. at 1312-13 (emphasis added) . Accordingly, a corporate plaintiff

cannot toll the statute of limitations under adverse domination unless it shows

that a majority of its directors was more than negligent for the desired tolling
period . We hold that intentional wrongdoing of some kind, which would

include fraud, is required.

      The doctrine of adverse domination recognizes the reality of situations

involving wrongdoing by controlling directors and officers of a corporation and

the corporation's inability to institute suit to protect it. It is applied to toll

statutes of limitations or to delay accrual of causes of action in situations when

those in power control the information necessary to institute suit on behalf of

an injured corporation. These parties cannot be expected to sue themselves or

to initiate an action contrary to their own interests. Today, we hold that the

doctrine of adverse domination may operate to toll the statute of limitations

under KRS §§ 271B .8-330(3) and 2718 .6-400 while directors, who are guilty of

alleged misconduct, exercise control over a corporation.

      The law is hereby certified to the United States Bankruptcy Court for the

Western District of Kentucky .

      All sitting. All concur.
COUNSEL FOR APPELLANT:

John Rollin Wilson
Ruck, Wilson, Helline 8v Brockman, PLLC
6008 Brownsboro Park Blvd., Suite A
Louisville, KY 40207-1295


COUNSEL FOR APPELLEE, DAVID B . PAINE:

John H. Dwyer, Jr.
Pedley, Zielke, Gordinier 8s Pence, PLLC
2000 Meidinger Tower
462 S . 4th Avenue
Louisville, KY 40202-2555


COUNSEL FOR APPELLEE, JOHN NEWTON :

Jan Charles Morris
125 S . 6th St., Suite 300
Louisville, KY 40202
