Am. Founders Bank, Inc. v. St. Martins Boat Owners, LLC

Full title: AMERICAN FOUNDERS BANK, INC. APPELLANT/CROSS-APPELLEE v. ST. MARTINS BOAT…

Court: Commonwealth of Kentucky Court of Appeals

Date published: Jul 20, 2012

NO. 2011-CA-000468-MR (Ky. Ct. App. Jul. 20, 2012)

Opinion

NO. 2011-CA-000468-MR NO. 2011-CA-000497-MR

07-20-2012

AMERICAN FOUNDERS BANK, INC. APPELLANT/CROSS-APPELLEE v. ST. MARTINS BOAT OWNERS, LLC AND DOUGLAS EDWARDS APPELLEES/CROSS-APPELLANTS

BRIEFS FOR APPELLANT/CROSS- APPELLEE: Douglas G. Sharp Louisville, Kentucky BRIEF FOR APPELLEES/CROSS- APPELLANTS: David A. Franklin Lexington, Kentucky

CLAYTON

NOT TO BE PUBLISHED

APPEAL AND CROSS-APPEAL FROM SHELBY CIRCUIT COURT

HONORABLE STEPHEN K. MERSHON, JUDGE

ACTION NO. 07-CI-00772

OPINION

AFFIRMING

BEFORE: CLAYTON, STUMBO, AND TAYLOR JUDGES. CLAYTON, JUDGE: This is an appeal and a cross-appeal of a decision of the Shelby Circuit Court regarding a lending arrangement between St. Martins Boat Owners, LLC ("St. Martins") and Douglas Edwards, the borrowers, and American Founders Bank ("AFB"), the lender.

FACTUAL BACKGROUND

John and Paula Guzman were owners of a boat dock and houseboat rental business on Lake Cumberland, Kentucky. Edwards met John Guzman in the summer of 2002 at which time they discussed time-shares for houseboats. On August 23, 2002, Edwards signed documents which listed him as the sole shareholder of St. Martins. On August 26, 2002, Edwards signed a $200,000 promissory note on behalf of St. Martins for the purchase of a 2001 Horizon houseboat. The note required payments of $2,297.05 per month for 120 months. The boat was owned by J & P Boats, Inc., a company owned by Guzman. The note was drawn on AFB and an AFB employee, James Tate, facilitated the loan. The note paid off the loan J & P made with AFB for the boat. However, J & P remained the owner of the houseboat until it was repossessed by AFB. Edwards believed that St. Martins was to own the houseboat. Edwards never made any payments on the note.

On January 24, 2004, Edwards signed a second promissory note with AFB on behalf of St. Martins. This note, which restructured the 2002 note, was for $190,811.19. Monthly payments of $833.82 would be due in the amount of the interest and a balloon payment would be due to pay off the principle on November 26, 2004. At this time, Edwards also signed a personal guaranty on the note and AFB executed a hypothecation agreement with J & P, pursuant to which the boat was pledged as collateral for the loan. Several extensions were made on this note until this action was instituted in Shelby Circuit Court for collection on the loan. At that time, the boat was repossessed by AFB and subsequently sold.

A bench trial was held in Shelby Circuit Court at which Edwards testified that he was unaware he was the sole owner of St. Martins. He stated that he had talked to Guzman about a boat time-share and that he was unaware of the terms of the documents he was signing. The trial court found that there were many other similar loans involving Guzman and Tate and made the following Conclusions of Law:

The record in this case basically consists of AFB's documents associated with the 2004 loan (the majority of which bear forged signatures), Edwards' tax returns, and Edwards [sic] deposition. The deposition testimony of Mike Feldman did not provide much information beyond what could be gleaned from the documents produced by AFB that related to the St Martins' transaction.

Findings and Conclusions at 9.

The trial court then held "that Guzman lied to Edwards regarding the St. Martins' 'deal.' " "No benefit accrued to either St. Martins or Edwards as a result of the 2004 note, and the note and guarantee fail for lack of consideration and are unenforceable against St. Martins and Edwards." As to the assertion of fraud by Edwards, the trial court found that:

on the record before the Court . . . Edwards can not [sic] prove that AFB committed fraud by clear and convincing evidence to succeed on their counterclaim. The evidence is such that the Court could find by a preponderance of the evidence, i.e., it is more likely than not, that AFB, through Tate, helped Guzman perpetuate his fraud. The Court can not [sic] find that Edwards has proven by clear
and convincing evidence that AFB committed fraud. Edwards did not read any of the documents he signed for the 2004 note and guaranty, rather he relied on the oral representations of Tate and Guzman while ignoring how the "deal" was actually structured as reflected in the note and guaranty documents. The evidence presents AFB in a profoundly negative light and shows that Tate engaged in behavior for which he should be ashamed and for which he should be criminally prosecuted. On this record, it appears that Guzman was the party committing fraud and Tate was a facilitator of Guzman's fraud. However, the Court finds that on the record before it that it has not been proven by clear and convincing evidence that AFB committed fraud in this instance.

Findings and Conclusions at 13.

AFB appealed the trial court's Findings and Conclusions, arguing that the trial court:

(1) Erred in finding that the execution of the security agreement was an empty gesture;
(2) Erred when it stated that "Edwards stated that he trusted and relied on the statements of Guzman and
Tate";
(3) Erred in imputing the wrongdoing of Tate to AFB; and
(4) Erred in concluding that there was no consideration for the St. Martins' loan.

AFB then brought this appeal. Edwards and St. Martins cross-appealed the trial court's finding that they did not meet their burden of proof regarding their counterclaim for fraud against AFB.

STANDARD OF REVIEW

Kentucky Rules of Civil Procedure (CR) 52.01 provides that "[f]indings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of witnesses." Findings are considered to be clearly erroneous if they are manifestly against the weight of the evidence. Frances v. Frances, 266 S.W.3d 754, 756 (Ky. 2008); Wells v. Wells, 412 S.W.2d 568, 571 (Ky. 1967). With this standard in mind, we examine the record.

DISCUSSION

AFB first contends that the trial court erred in finding that the execution of the Security Agreement was an empty gesture. The trial court found that Edwards, on behalf of St. Martins, signed a security agreement and a hypothecation agreement. The latter involved the pledge of the boat by J & P Boats as collateral for the loan. The security agreement provided that a security interest was granted in all of the property described in the security agreement, that the debtor owned or had sufficient rights in which he could transfer an interest at the time of the security agreement or in the future.

AFB argues that, pursuant to the security agreement language, St. Martins may have had an interest in the houseboat due to the management agreement, the security agreement and the hypothecation agreement. In finding that Edwards's signing of the security agreement was an empty gesture, the trial court held that Tate and AFB were aware that the boat was owned by J & P Boats. We agree.

While AFB argues that Edwards would have had an interest in the boat if and when the loan had been repaid, the evidence set forth indicated that Edwards was unaware that payments needed to be made, that he made no payments and that the balloon payment was extended several times without his knowledge or consent. Thus, we find the trial court was correct in its finding that the security interest in the boat was an "empty gesture."

Next, AFB argues that the trial court erred in finding that Edwards trusted and relied on the statements of Guzman and Tate. AFB argues that while Edwards did say he relied on statements made by Guzman and Tate "in a general sense," he was unable to restate or recall what they had said. The overwhelming evidence in this action, however, indicated that Edwards was led to believe one thing by Guzman and Tate while they proceeded to go forth with the loans without full disclosure to Edwards.

AFB asserts that for a statement to be relied upon or to form the basis of a reliance recognized by the law, it has to be reasonable. AFB then goes on to conclude that since Edwards could not recall what was said, there was no reasonable reliance. In Flegles, Inc. v. TruServ Corp., 289 S.W.3d 554, 549 (Ky. 2009) (citing McHargue v. Fayette Coal & Feed Co., 283 S.W.2d 170 (Ky. 1955), and Restatement (Second) of Torts § 537 (1977)), the Kentucky Supreme Court held that reliance must be reasonable or justifiable. We agree that such is the case and find no conflict between the trial court's finding and this statement of law.

We do not interpret the court's order to mean that it "found" that Edwards relied upon the statements. The trial court's finding was that Edwards stated he "trusted and relied on the statements of Tate and Guzman." Reading this sentence in conjunction with the court's Conclusions of Law, the court's language is more of a recitation of the proof submitted than a finding upon which the court relied. Edwards also set forth other evidence in regard to the loan and payments made thereon which indicated that he relied on Tate and Guzman as well. Consequently, we affirm the trial court's finding.

AFB next asserts that it was erroneous for the court to impute the wrongdoing of Tate to AFB. AFB does not point to a specific instance of this, but states that it is "implied." While AFB argues that there is no proof of its wrongdoing, there is proof of Tate's wrongdoing. We disagree that the trial court's order imputes the wrongdoing of Tate to AFB. AFB points to the last sentence of the Findings of Fact #28 as an indication of the court imputing wrongdoing of Tate to AFB. The last sentence is: "[f]rom this perspective, the St. Martins' transaction is just one instance of wrongdoing perpetuated by AFB's Tate and Guzman."

AFB also asserts that the trial court erred in concluding there was no consideration for the loan. AFB argues that it is not for the court to determine whether the consideration was reasonable, but whether there was consideration. It contends that the fact that the bulk of the loan proceeds went to Guzman or J & P Boats does not negate the fact that there was consideration to St. Martins and Edwards. The boat, however, was never transferred to St. Martins or Edwards. It remained with J & P Boats. AFB's Tate clearly had knowledge of this fact and failed to inform Edwards. The possibility that the boat would be transferred in the future, after the loan was paid, was insufficient to provide consideration. Sufficient consideration requires that the promisor and the promisee have equal value. McDevitt v. Stokes, 174 Ky. 515, 192 S.W. 681, 682 (Ky. 1917). Thus, we affirm the trial court's finding on this issue.

AFB's final contention is that the trial court erred in concluding there was no consideration for the St. Martins' loan. As set forth above, there was no transfer of any asset; neither Edwards nor St. Martins received the money. Nothing could be construed as consideration in this deal. Thus, we affirm the decision of the trial court.

St. Martins and Edwards assert in their cross-appeal that there was fraud by Guzman and Tate with both the execution of the 2002 note and the subsequent refinancing in 2004. The 2004 note was extended four (4) times and Edwards's signature was forged on all four (4) of these extensions/renewal agreements. St. Martins and Edwards argue and that the trial court erred in concluding that fraud was not proven. A prima facie cause of action based on fraud requires proof of:

a) a material representation
b) which is false
c) known to be false or made recklessly
d) made with inducement to be acted upon
e) acted in reliance thereon and
f) causing injury.

United Parcel Service v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999).

The trial court found that Edwards could not prove that AFB committed fraud by clear and convincing evidence. The trial court based this on the fact that while it had found Guzman and Tate had been deceptive in their business practices with Edwards, he had admitted that he had not read the documents he had signed for the 2004 note and guaranty. Further, the trial court found that it appeared that Guzman was the one committing the fraud with the help of Tate. We agree. However, without clear and convincing evidence of fraudulent conduct by Tate, we agree that AFB cannot be found to have committed fraud in this transaction. Thus, we affirm the decision of the trial court.

STUMBO, JUDGE, CONCURS.

TAYLOR, JUDGE, CONCURS IN RESULT ONLY. BRIEFS FOR APPELLANT/CROSS-
APPELLEE:
Douglas G. Sharp
Louisville, Kentucky
BRIEF FOR APPELLEES/CROSS-
APPELLANTS:
David A. Franklin
Lexington, Kentucky