Opinion
NO. 2012-CA-000725-MR
01-10-2014
THE PEOPLES BANK OF BULLITT COUNTY APPELLANT v. STOUT'S FEED STORE, INC. APPELLEE
BRIEF FOR APPELLANT: John W. Wooldridge Shepherdsville, Kentucky BRIEF FOR APPELLEE: John F. Carroll Louisville, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM BULLITT CIRCUIT COURT
HONORABLE ROERT A. MILLER, JUDGE
ACTION NO. 99-CI-00663
OPINION
REVERSING AND REMANDING
BEFORE: ACREE, CHIEF JUDGE; CAPERTON AND NICKELL, JUDGES. ACREE, CHIEF JUDGE: This is the second time this foreclosure dispute between Appellant, The Peoples Bank of Bullitt County (PBBC), and Appellee, Stout's Feed Store, has been before this Court. Peoples Bank of Bullitt County v. Stout's Feed Store, No. 2002-CA-001780-MR, 2004 WL 406016, at *1 (Ky. App. March 5, 2004) (Stout's I). In Stout's I, this Court reversed the trial court's order invoking the doctrine of marshaling assets and remanded for a factual determination regarding the ownership of a second piece of property. Id. at *2. Of concern was whether the second parcel was owned by the same debtor and thus an asset subject to marshaling. Id. Upon remand, the circuit court resolved the remanded factual query and again invoked the doctrine of marshaling assets. Displeased, PBBC appealed. For the reasons that follow, we reverse and remand.
While the facts are accurately recounted in Stout's I, we choose to repeat and supplement those facts as needed to dispose of this appeal.
Tim and Chantel Pearson purchased real property in Bullitt County, Kentucky (Lot 204); they wanted to build a home. PBBC lent monies to the Pearsons in return for a mortgage on the property as security (1998 mortgage). The Pearsons executed a promissory note for $50,000.00 to PBBC along with a lien deed that authorized future advances not to exceed $150,000.00. As of October 1998, PBBC had advanced $117,500.00 to the Pearsons.
Subsequent to filing the lien deed, Stout's informed PBBC of its intent to supply materials to the Pearsons on credit. Stout's filed a Statement of Lien on October 13, 1998, and notified PBBC of its recorded statement. Stout's then advanced $21,882.17 worth of materials to the Pearsons. When the Pearsons failed to honor their payment obligation, Stout's recorded a mechanic's lien on Lot 204 on or about December 9, 1998. Stout's sent a letter to PBBC notifying it of the mechanic's lien. The letter requested that PBBC consider Stout's lien before authorizing future disbursements.
In February 1999, PBBC agreed to advance an additional $25,000.00 to the Pearsons if, in addition to the real property covered by its lien deed (i.e., Lot 204), the Pearsons provided additional security. Chantell Pearsons' parents co-signed the subsequent advance and a second, separate parcel of real estate - Lot 14 - was cross-collateralized.
The collateral for the additional $25,000.00 promissory note was listed as Lot 204 and "Real Estate Mtg Dated 9-6-97." That mortgage was secured by three lots: Lots 14 and 15 of The Village, and Lot 112 of Twelve Oaks. At the time of the February 11, 1999 disbursement, the Pearsons had already sold two of the three lots; only Lot 14 remained in the hands of the Pearsons.
On September 29, 1999, Stout's sued to collect on its mechanic's lien against the Pearsons. Because of the 1998 mortgage, PBBC was named as a party defendant.
The Pearsons also failed to honor their payment obligations to PBBC.
On August 2000, while separate legal proceedings concerning Lot 204 were pending, PBBC filed an action against the Pearsons to foreclose on Lot 14. By order entered by the circuit court December 22, 2000, Lot 14 was to be sold; the property was sold to a bona fide purchaser on January 30, 2001.
Thereafter, on March 13, 2001, Lot 204 was sold by the master commissioner for a total of $152,654.01. Distribution of the sale proceeds was to be made by the circuit court.
Only the priority of liens was at issue before the circuit court. By order entered May 6, 2002, the circuit court found PBBC had priority to all proceeds until its final disbursement of $25,000.00. The circuit court also found that PBBC "acted totally out of self interest in maximizing the completion of the construction and security for its loan[.]" The circuit court further made the following factual findings relevant to this appeal: PBBC lent additional monies to the Pearsons despite notice of Stout's lien, PBBC discouraged Tim Pearson from executing a document affording Stout's mechanic's lien priority over all future disbursements, and PBBC reportedly advised the Pearsons "to finish the house rather than pay [Stout's] lien." Based on this, the circuit court applied the equitable doctrine of marshaling assets with the result being that Stout's received payment on its mechanic's lien. The court ultimately ordered PBBC to receive $130,771.84 and Stout's to receive $21,882.17, thereby disbursing all funds received from the sale of Lot 204.
PBBC appealed to this Court. The only issue on appeal in Stout's I was "whether the circuit court correctly applied the doctrine of marshaling of assets to a portion of the proceeds from the sale of the real property [Lot 204] in this case." Stout's I, 2004 WL 406016, at *1. In conducting its review, this Court could not discern from the record whether the two funds from which PBBC could receive payment, i.e., Lot 204 and Lot 14, were both in the hands of the Pearsons and, as a result, was unable to determine whether the marshaling assets doctrine was properly applied. This Court remanded for further factual determinations.
Following remand, in 2006, the circuit court ordered the parties to produce additional discovery. An evidentiary hearing was then held on February 23, 2012, after which, by order entered on March 20, 2012, the circuit court determined the Pearsons wholly owned Lot 14 and, as a result, Lot 14 constituted a separate fund from which PBBC could have marshaled assets and to which Stout's had no claim. The circuit court again applied the doctrine and divided the sales proceeds between PBBC and Stout's. From this order, PBBC appealed.
The circuit court took care to emphasize that Chantel Pearson's parents, the co-signers of the February 1999 promissory note, were neither co-owners of Lot 14 nor held any interest attendant thereto.
Before this Court, PBBC does not take issue with the circuit court's factual finding that, until its sale on January 30, 2001, the Pearsons were the sole owners of Lot 14. Instead, PBBC argues that, because two separate funds do not exist from which PBBC can seek satisfaction, the doctrine is not feasible and the circuit court erred by concluding otherwise. PBBC's argument is well-taken.
We pause to admonish PBBC for failing to comply with Kentucky Rule of Civil Procedure (CR) 76.12(4). In its brief, PBBC included neither citations to the record nor a statement of preservation identifying where and in what manner it preserved the argument raised. CR 76.12(4)(c)(iv), (v). Because the record is not voluminous and the issue raised easily disposed of we have overlooked PBBC's CR 76.12 violation.
The doctrine of marshaling assets is rooted in equity and should be cautiously applied. UPS Capital Business Credit v. C.R. Cable Const., Inc., 181 S.W.3d 44, 47-48 (Ky. 2005). No party is entitled to the doctrine as a matter of right; instead, application is subject to the trial court's discretion. See id.; Western Casualty & Surety Co. v. Meyer, 301 Ky. 487, 192 S.W.2d 388, 391 (1946) (explaining with an "award of equitable remedies there is normally an element of great discretion."). We decline to disturb the circuit court's decision to afford a party an equitable remedy absent an abuse of its discretion. "An abuse of discretion occurs when a 'trial judge's decision [is] arbitrary, unreasonable, unfair, or unsupported by sound legal principles.'" Baptist Healthcare Systems, Inc. v. Miller, 177 S.W.3d 676, 684 (Ky. 2005) (citation omitted).
The doctrine of marshaling assets promotes fair dealing and, by invoking it, the trial court seeks to do what is equitable and just under the particular circumstances of a particular case. The doctrine necessitates:
"[W]here two or more creditors seek satisfaction out of the assets of their common debtor, and one of them can resort to two funds where another has recourse to only one of the funds, the former creditor may be required to seek satisfaction out of the funds which the latter creditor cannot reach, before resorting to the other fund." Bartley v. Pikeville Nat. Bank & Trust Co., 532 S.W.2d 446, 448 (Ky. 1975). By this method of distribution both creditors may be paid or both funds will be exhausted. Id.UPS Capital Business Credit., 181 S.W.3d at 47-48; M.A. Walker Co., Inc. v. PBK Bank, Inc., 95 S.W.3d 70, 76 (Ky. App. 2002). The doctrine is not applicable unless two funds exist, both of which "are in the hands of a common debtor of both creditors." Bartley, 532 S.W.2d at 448. Should the doctrine of marshaling assets so apply in this case, PBBC "may be required to seek satisfaction out of the funds [Lot 14] which the latter creditor [Stout's] cannot reach, before resorting to the other fund[,]" Lot 204, that both creditors can reach. UPS Capital Business Credit, 181 S.W.3d at 48.
Here, two creditors - PBBC and Stout's - seek satisfaction of their respective debts out of the assets of a common debtor, the Pearsons. PBBC and Stout's can both resort to Lot 204 as a means of satisfaction. The dispute centers on whether Lot 14 is a second fund out of which PBBC can seek satisfaction. Without question, Stout's lacks access to Lot 14.
PBBC argues Lot 14 cannot possibly be a "second fund" from which PBBC can satisfy its debt because it was sold on January 30, 2001, two weeks prior to the sale of Lot 204 and sixteen months before the circuit court's original order in this matter marshaling assets. In response, Stout's contends, when it filed its complaint seeking to collect on its mechanic's lien, both Lot 204 and Lot 14 where available and constituted funds from which PBBC could, and should, have sought satisfaction of the 1998 mortgage.
In Bronaugh v. Burley Tobacco Company, 212 Ky. 680, 280 S.W. 97 (1926), Kentucky's highest court explained "[t]he equity of marshaling assets . . . is one to be determined at the time the marshaling is invoked. It can only become a fixed right by taking proper steps to have it enforced, and is therefore subject to defeat at any time before it is attempted to be enforced." Id. at 97; see also Humphries v. Fitzpatrick, 253 Ky. 517, 69 S.W.2d 1058, 1061 (Ky. 1934) ("The right to marshal assets is . . . a right determined by the principles of intrinsic equity between existing liens on the property of a common debtor, at the time the marshaling is invoked."); 21 C.J.S. Creditor and Debtor § 120 ("Thus, the propriety of marshaling is generally determined as of the time when the written demand for marshaling is made or when realization out of the security is sought."). A review of the record reveals Stout's did not invoke or make written demand for marshaling until May 16, 2001. Stout's neither demanded in its complaint that the doctrine of marshaling assets be invoked, nor raised or sought to enforce the doctrine in any subsequent pleading or motion until May 2001. While Lot 14 was available and possibly subject to marshaling when Stout's sued to enforce its mechanic's lien in September 1999, it was no longer a viable marshaling asset when Stout's actually invoked the doctrine in May 2001.
The first reference to the doctrine of marshaling assets appears in Stout's "Supplement with Regard to Exceptions to Commissioner's Recommendations and Report" filed May 16, 2001.
We cannot avoid concluding that the circuit court's order requiring the marshaling of these assets is not in accord with the principles articulated in Bronaugh, supra. This is unfortunate because, as the record reveals, during the course of this twelve-year litigation, PBBC repeatedly engaged in unscrupulous practices. As the circuit court noted, despite PBBC's unquestionable notice of Stout's mechanic's lien, it chose to lend the Pearsons an additional $25,000.00 and discouraged the Pearsons from using that disbursement to satisfy its mechanic's lien. Moreover, when PBBC filed its complaint seeking to foreclose on Lot 14, it had notice of and been a party to Stout's action involving Lot 204 and, in turn, tacitly involving Lot 14, for over one year. The circuit court's inclination to invoke the doctrine of marshaling assets is entirely understandable. However, "equity operates on fixed rules, as well defined as are the rules of law[.]" McCord v. McCord, 558 S.W.2d 624, 626 (Ky. App. 1977) (citing Cox v. Burgess, 139 Ky. 699, 96 S.W. 577 (1906), overruled on other grounds by Hutton v. Hutton, 118 S.W.3d 176 (Ky. 2003)). Accordingly, we find the circuit court abused its discretion when it invoked the doctrine of marshaling assets.
Finally, we note Stout's request for sanctions in the form of attorney's fees. Kentucky Rule of Civil Procedure (CR) 73.02(4) authorizes an appellate court to award damages if it determines an appeal is frivolous. "An appeal or motion is frivolous if the court finds that it is so totally lacking in merit that it appears to have been taken in bad faith." Id. As grounds for its sanctions request, Stout's contends that PBBC's willful withholding of discovery records and intentional misrepresentations prolonged this litigation thereby substantially increasing Stout's costs and attorney's fees. Such practices, if proven, should not be condoned; however, this is not the proper court to sanction PBBC for such conduct. In this court, PBBC's appeal does not lack merit such as to have been taken in bad faith, as required by CR 73.02(4). According, we deny Stout's request for sanctions. Nothing in this opinion should be construed as prohibiting Stout's pursuing a proper course before the circuit court, including filing a CR 11, should it deem such a motion is warranted.
Those practices include: (1) tendering an inaccurate affidavit stating that the files provided to Stout's contained all the documentation that PBBC ever had in its possession concerning the loans made by it to the Pearsons; and (2) destroying relevant records despite being under a court-ordered discovery obligation.
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The Bullitt Circuit Court's March 20, 2012 order is reversed and this matter remanded for proceedings consistent with this opinion.
ALL CONCUR. BRIEF FOR APPELLANT: John W. Wooldridge
Shepherdsville, Kentucky
BRIEF FOR APPELLEE: John F. Carroll
Louisville, Kentucky