Summary
In Cabot Turfway Ridge Defendants v. U.S. Bank National Association, No. 2015-CA-001199-MR, 2017 WL 2211082, (Ky. App. May 12, 2017), a group of investors signed a promissory note and mortgage, but then turned over management of the encumbered property to their partners and tenants.
Summary of this case from Wain v. Cent. Bank & Tr. Co.Opinion
NO. 2015-CA-001199-MR
05-12-2017
CABOT TURFWAY RIDGE DEFENDANTS APPELLANTS v. U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE, SUCCESSOR-IN-INTEREST TO BANK OF AMERICA, N.A., AS TRUSTEE, SUCCESSOR TO WELLS FARGO BANK, N.A., AS TRUSTEE, FOR THE REGISTERED HOLDERS OF COBALT CMBS COMMERCIAL MORTGAGE TRUST 2007-C2, COMMERCIAL MORTGAGE PASS-THROUGH CERTS, SERIES 2007-C2, BY AND THROUGH CW CAPITAL ASSET MNGT, LLC., SOLEY IN ITS CAPACITY AS SPECIAL SERVICES APPELLEE
BRIEF FOR APPELLANTS: Brian F. Eviston Covington, Kentucky Christopher P. Katers Wauwatosa, Wisconsin ORAL ARGUMENT FOR APPELLANTS: Christopher P. Katers Wauwatosa, Wisconsin Neal Kroskosky Louisville, Kentucky BRIEF FOR APPELLEE: Griffin Terry Sumner Louisville, Kentucky Michael Nitardy Florence, Kentucky Gregory A. Cross Heather Deans Foley Baltimore, Maryland ORAL ARGUMENT FOR APPELLEE: Heather Deans Foley Baltimore, Maryland Griffin Terry Sumner Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL FROM BOONE CIRCUIT COURT
HONORABLE JAMES R. SCHRAND, JUDGE
ACTION NO. 12-CI-01684 OPINION
AFFIRMING
** ** ** ** **
BEFORE: KRAMER, CHIEF JUDGE; COMBS AND JONES, JUDGES. JONES, JUDGE: This is a foreclosure case in which the Appellants appeal from the granting of summary judgment and subsequent order of sale entered by the Boone Circuit Court. The circuit court determined that Appellants defaulted on the underlying loan documents and failed to raise any genuine issues of material fact and/or defenses that would preclude foreclosure. On appeal, Appellants argue that the circuit court erred in determining that there were no disputed issues of material fact, acted prematurely because discovery was incomplete, and abused its discretion when it denied their motion to amend their complaint to add several counterclaims against the Appellee. Having reviewed the record in conjunction with the applicable legal authorities, we affirm.
For simplicity's sake, we refer to the Appellants collectively. More precisely, the Appellants are a group of several individual Delaware limited liability companies. Collectively, they purchased a piece of commercial real estate in Boone County, Kentucky, which they owned as tenants in common.
I. Background
The real property at issue is located at 7300 and 7310 Turfway Road, Florence, Kentucky (hereinafter referred to as "the Property"). It consists of two five-story commercial office buildings. The Appellants, a group of several investors (hereinafter "Appellant Investors"), purchased the Property in 2007.
The Appellant Investors were recruited and brought together by Cabot Investment Properties LLC ("Cabot Investment Properties"), which was located in New York City, New York. Carlton Cabot and Timothy Kroll managed Cabot Investment Properties. This Property was one of several similar investments that Cabot Investment Properties offered to potential investors. Once an individual agreed to make an investment, he or she was placed in a pool with other investors for the purpose of collectively purchasing and owning a piece of commercial real estate. These investors were mostly passive. While they made an initial cash contribution, they were not involved in the day-to-day management of the properties at issue.
Mr. Cabot and Mr. Kroll were charged with various violations of federal law in connection with their roles in overseeing several tenants-in-common agreements. The Justice Department's complaint alleged that the two men used Cabot Investment Properties LLC to lure primarily elderly individuals to invest in their tenancy in common real estate transactions, and then embezzled millions of dollars of the funds for their own personal benefit. Both men pleaded guilty and were sentenced to federal imprisonment by the United States District Court for the Southern District of New York. Mr. Cabot was sentenced to ten-years' imprisonment, three-years' supervised release, and was ordered to pay $17 million in restitution and forfeiture. See United States of America v. Cabot, Case No. 1:15-cr-00680-JMF (S.D.N.Y. Document 73 Filed 10/31/16).
As was typical with other similar real estate deals Cabot Investment Properties put together, the Appellant Investors owned the Property as tenants in common. The exact terms of the Appellant Investors' ownership interests were set out in a separate Tenancy in Common Agreement ("TIC Agreement") they executed at the time they purchased the Property. The Appellant Investors entered into the TIC "to provide for the orderly administration of their rights and responsibilities to each other and as to others to delegate authority and responsibility for the intended operation and management of the Property." TIC at 1.
"The primary characteristic of a tenancy in common is unity of possession by two or more owners. Each cotenant, regardless of the size of his fractional share of the property, has a right to possess the whole." Johnson v. Envtl. & Pub. Prot. Cabinet, 289 S.W.3d 216, 219 (Ky. App. 2009) (quoting Martin v. Martin, 878 S.W.2d 30, 31 (Ky. App. 1994)).
The Appellant Investors also entered into a Master Lease Agreement with Cabot Turfway Ridge LeaseCo. LLC, ("Cabot Turfway LeaseCo."), a Delaware limited liability corporation formed by Cabot Investment Properties and managed by Mr. Cabot and Mr. Kroll. As the Master Lessee, Cabot Turfway LeaseCo. was responsible for overseeing the physical and administrative management of the Property. This included renting out the space to other tenants, paying all bills, and handling all the financial responsibilities related to the Property.
Pursuant to the terms of the TIC Agreement, Cabot Turfway LeaseCo. had the authority to secure the financing necessary to purchase the Property. Moreover, the Appellant Investors appointed Cabot Turfway LeaseCo as their agent for the purpose of receiving any lender-related notices:
Section 5.1 of the TIC provides:
Loan. In accordance with the Master Lease Agreement, the Master Lessee shall be entitled to seek and negotiate the terms of (a) permanent and other financing for the Property, including loans secured by Property; . . . By execution hereof, the Tenants in common confirm their approval of the Loan secured by, among other things, the Mortgage, and hereby approve the terms of the Master Lease Agreement.
Section 5.8 Lender Notice: During the term of the Loan, each Tenant in Common hereby appoints the Master Lessee as the agent of each Tenant in Common with respect to the following rights (A) the right to receive any
notice or other communication from Lender, provided that timely notice of such communication shall be given by the Master Lessee to each Tenant in Common; (B) the right to receive service of process from Lender under the Loan, provided that timely notice of such service of process shall be given by the Master Lessee to each Tenant in common; and (c) the right to sign or execute documents and negotiate any changes to the Loan Documents on behalf of each Tenant in Common with respect to any transaction relating to the Loan, provided the unanimous consent of the Tenants in Common has been received or deemed to have been received pursuant to section 10.16 by the Master Lessee prior to execution.TIC at 4.
To acquire the Property, the Appellant Investors secured an $18 million commercial loan. The loan was documented in a Promissory Note ("Note") also executed on February 9, 2007. Pursuant to the Note, the Appellant Investors promised, among other things, to repay the principal loan together with interest. As security for the payment of the Note, the Investors executed a Mortgage. The Mortgage encumbered the Property as well as the personal effects and improvements located thereon. The Mortgage was executed on February 9, 2007, and recorded three days later on February 12, 2007. As additional security for repayment of the loan, the Appellant Investors also executed an assignment of leases and rents. As a result of a series of assignments, the Note and all associated rights are currently owned by COBALT CMBS Commercial Trust 2007-C2, Commercial Mortgage Pass-Through Certificates, Series 2007-C2 ("the Trust"). Appellee, U.S. Bank National Association ("the Bank") is the trustee. For simplicity's sake, we will refer to Appellee and its predecessors simply as the Bank.
U.S. Bank National Association as Trustee is the successor-in-interest to Bank of America, N.A., as Trustee, who is the successor in interest to Wells Fargo Bank, N.A., the original trustee.
The Appellee is U.S. Bank National Association, as Trustee, successor-in-interest to Bank of America, N.A., as Trustee, successor to Wells Fargo Bank, N.A., as Trustee for the registered holders of COBALT CMBS Commercial Mortgage Trust 2007-C2, Commercial Mortgage Pass-Through Certificates, Series 2007-C2, by and through CW Capital Asset Management, LLC, solely in its capacity as Special Servicer.
As it was permitted to do, Cabot Turfway LeaseCo. contracted out some of its managerial responsibilities to a separate property management company, Neyer Commercial Realty LLC ("Neyer"). Neyer managed the Property on a day-to-day basis. For the first several years, it was also responsible for making sure all the bills for the property (janitorial, electrical, etc.) were paid on a timely basis. Eventually, Cabot Turfway LeaseCo. informed Neyer that it was going to take over paying the bills.
D. The Defaults
For a few years everything appeared to run smoothly. The Appellant Investors were able to meet all their financial obligations in addition to realizing a small monthly return on their investments. In approximately 2010, some issues began to crop up. Some of the Appellant Investors began to notice that their distribution checks were smaller or nonexistent. Additionally, Cabot Turfway LeaseCo. failed to pay some of the other debts associated with the Property. Eventually, at least two vendors filed mechanic liens on the Property.
On December 19, 2011, the Bank received a letter from Neyer, the property management company, that Cabot Turfway LeaseCo. had failed to pay it $94,346.12 in fees, making it in breach of the property management agreement. Over the next several months, the Bank became aware that fees were also owed for snow removal, janitorial services, and electricity. These unpaid obligations, as well as the liens placed on the property, constituted events of default.
By letters dated February 27, March 14, April 3, April 19, May 18, and May 23, 2012, the Bank sent notices of the alleged defaults to Cabot Turfway LeaseCo. In doing so, the Bank followed the notice requirements set forth in the TIC as well as the associated loan-related documents. Cabot Turfway LeaseCo. did not respond to the Bank's notices or take any action to notify any of the Appellant Investors about the notices.
By this time, some of the Appellant Investors had begun to have concerns about the Property and its management. Lower (and in some cases nonexistent) monthly distributions, in combination with news reports that Mr. Cabot was being investigated for defrauding other investors, caused them to fear something might be amiss with the Property. One of the Appellant Investors, Herman Grishaver, M.D., began the rather laborious task of attempting to locate the other investors, who were spread out across the country. Eventually, after much work, Dr. Grishaver was able to assemble a contact list for most of the other investors. Thereafter, he began communicating his general concerns with the group. After Dr. Grishaver's initial communication, a steering committee of four or five investors was set up to investigate further and report back to the group.
This task was complicated because the Tenants in Common are actually limited liability companies formed under Delaware law. They are all named similarly with only a unique number distinguishing them. For example, Cabot Turfway Ridge I LLC, a limited liability company, is controlled by its managing member, Valley View Manor Realty Trust. Steven E. Souza is the designated trustee. Likewise, Cabot Turfway Ridge 3 LLC, a limited liability company, is managed by the Marcus Family Trust. John T. Gosselin is its trustee.
On May 2, 2012, Dr. Grishaver spoke with April Owen, the Asset Manager assigned to oversee the subject loan at Wells Fargo (which was the trustee bank at the time), to ask about the loan's status. According to Dr. Grishaver, Ms. Owen stated that the loan payments were being made, and she was generally reassuring that default was not imminent. Dr. Grishaver does not remember the exact questions he asked Ms. Owen. It is possible that he may have asked her only whether the loan payments were being made. Steve Souza, another investor, testified that he had a similar conversation with Ms. Owen in July of 2012.
It is unclear whether Dr. Grishaver appreciated at that time that events other than a missed loan payment could trigger a default.
Ms. Owen does not recall the conversations. While Ms. Owen testified that she had no reason to believe that she did not speak with Dr. Grishaver and/or Mr. Souza, she testified that, generally, it would not be her practice to tell a borrower that foreclosure was not imminent as this was beyond her area of responsibility.
Ms. Owen was transferred to another position in the summer of 2012. As a result, Cindy Patterson became responsible for managing the Appellant Investors' loan. Dr. Grishaver testified that he spoke with Ms. Patterson on July 10, 2012. During this conversation, Dr. Grishaver asked Ms. Patterson about the status of the loan and changing the Master Tenant, and made a general inquiry as to the status of the Property. At this time, Ms. Patterson told Dr. Grishaver that the loan had been in default for several months and the Bank thought it should take over the property management. According to the Appellant Investors, this is the first time that any of them had knowledge of any alleged default. After speaking with Ms. Patterson, Mr. Grishaver sent the following email to the steering committee:
Gentlemen:
Bombshell!
Just got off the phone with a loan officer from WF re our property. The loan is in default—the mortgage has been paid, but the bank has taken over since "a few MONTHS ago" all the receipts from Cabot because the "property manager has not been paid" and the various "vendors have not been paid" and the "property is not being maintained properly". WF is amply aware of Cabot's multiple problems, and they have been unable to get ahold of Kroll as well
I don't know the legalities involved, but having an attorney is mandatory at this point. How easy it will be to regain control will be influenced by the fact that ours is a securitized loan, not like the bank "owns" the property.
. . .
And as for us not knowing that the loan was in default - notice went out to someone so designated in the master lease and legal documents, and they should have informed the TICs. In other words whoever was notified did not pass on the information to us—yet another flagrant breach of fiduciary responsibility.
The Appellant Investors then engaged legal counsel in an attempt to protect their investment. Legal counsel spoke to Ms. Owen the following day. According to the Appellant Investors, Ms. Owen was very reassuring that the loan would not go into receivership. Legal counsel conveyed this information to the Appellant Investors. Approximately a week later, legal counsel spoke with another Wells Fargo employee, Timothy Teague. This call occurred about the same time that the loan was being transferred. According to Appellant Investors, Mr. Teague failed to tell legal counsel that the loan was being transferred and that further conversations about the loan would need to take place with someone else. It was not until mid-August 2012 that counsel for the Appellant Investors was notified the loan had been transferred.
By letter addressed to the Appellant Investors and Cabot Turfway LeaseCo., dated August 22, 2012, the Bank provided notice that the Loan was in default, that the Appellant Investors and Cabot Turfway LeaseCo.'s revocable license to collect rents and profits granted by the Mortgage and Assignment of Rents had automatically terminated as a result of the Loan default, and that the Bank had exercised its right to accelerate the maturity of the Loan. The Bank also demanded that the Appellant Investors and Cabot Turfway LeaseCo. turn over all rental payments from the Property to the Bank. The next day, August 23, 2012, the Bank filed this foreclosure action in Boone Circuit Court.
The Appellant Investors filed their answer in October of 2012. Among other affirmative defenses, the Appellant Investors alleged that the Bank was barred from foreclosing on the Property because it had "unclean" hands. Specifically, the Appellant Investor's alleged as their fifth affirmative defense that the "plaintiffs have unclean hands in their dealings with the Master Tenant by authorizing and failing to cure in a timely fashion the alleged defaults."
The case was largely dormant for the next seven months. In March of 2013, the Bank filed a motion for summary judgment. In April of 2013, the Appellant Investors filed a response to the Bank's motion for summary judgment. The Appellant Investors supported their response with an affidavit from Dr. Grishaver. At that time, the Appellant Investors argued that (1) they did not receive actual notice of the defaults from the Bank; (2) they were misled by communications Dr. Grishavor, their counsel, and others had with the Bank (and Neyer) throughout May, July, and August of 2012; and (3) the Appellant Investors needed more time to conduct discovery. After reviewing the filings, the circuit court referred this case to Master Commissioner Larry B. Dillion for further proceedings related to the summary judgment motion.
As explained above, Neyer was the property management company Cabot Turfway LeaseCo., hired to perform most of the day-to-day operations related to the Property. Dr. Grishaver also spoke with a representative from Neyer during this time frame. Although the representative told him that the Property was not being managed to its highest potential in terms of renting out units, he allegedly never told Dr. Grishaver that Cabot Turfway LeaseCo. was not paying its management fees. Neyer is not a party to this action.
Eventually, an order was entered for fact discovery to conclude in mid-June 2014, and all discovery to close by July 25, 2014. A summary judgment hearing before the Master Commissioner was scheduled for September 3 and 4, 2014. As directed in the scheduling order, the parties submitted pre-hearing briefs on August 28, 2014. On September 2, 2014, the day before the hearing, Appellant Investors filed a motion to amend, seeking to amend their answer to add various counterclaims against the Bank.
The hearing before the Master Commissioner took place as scheduled. During the two-day hearing, the Master Commissioner heard the live testimony of four witnesses. Additionally, the parties submitted the depositions of seven witnesses and approximately seventy documentary exhibits. The Master Commissioner filed his report on September 19, 2014. The Master Commissioner concluded that the Bank was entitled to summary judgment on the issue of liability and, following submission by the Bank of a supplement itemizing the manner in which the Bank applied the loan reserves, a final judgment of foreclosure and order of sale should issue.
The Appellants filed objections to the Master Commissioner's report. They disputed that summary judgment was appropriate, contending that their defenses, primarily their defense of unclean hands, created genuine issues of material fact. However, they did not object to the Master Commissioner's conclusion that an event of default existed under the loan documents that entitled to the Bank to seek foreclosure.
In accordance with the Master Commissioner's report, on October 13, 2014, the Bank filed a supplemental declaration of Mr. Kevin Thompson. In the supplemental declaration, Mr. Thompson itemized the manner in which the reserves were applied by the Bank.
After briefing by the parties, the circuit court entered an order denying the Appellant Investors' motion to amend, overruling the Appellant Investors' objections to the Master Commissioner's report, and affirming the report. On March 10, 2015, the Bank submitted to the circuit court a proposed final judgment and order of sale. The Appellant Investors filed objections to the proposed order. After full briefing, the circuit court held a hearing on the objections. Thereafter, on July 8, 2015, the circuit court entered a final judgment and order of sale. This appeal followed.
II. Summary Judgment
A. Timing
We begin our analysis with the Appellant Investors' argument concerning the timing of summary judgment. They assert that their inability to conduct sufficient discovery necessitated the denial of summary judgment. The Appellant Investors explain that throughout discovery, the Bank refused to respond to most of their discovery requests and "blatantly failed to comply with orders from the Court." To this end, they assert that the evidentiary hearing was a "premature showdown of the type prohibited by Kentucky law."
We agree that summary judgment should not be granted unless "a party has been given ample opportunity to complete discovery." Pendleton Bros. Vending, Inc. v. Commonwealth of Kentucky Fin. & Admin. Cabinet, 758 S.W.2d 24, 29 (Ky.1988) (citing Hartford Ins. Group v. Citizens Fid. Bank & Trust Co., 579 S.W.2d 628 (Ky. App. 1979)). This holding has recently been reiterated by our Supreme Court, cautioning trial courts "not to take up these motions prematurely." Blankenship v. Collier, 302 S.W.3d 665, 668 (Ky. 2010).
However, "it is not necessary that litigants be allowed to complete discovery but only that they be granted sufficient time to complete discovery and then fail to produce any evidence to create a genuine issue of material fact." Martin v. Pack's Inc., 358 S.W.3d 481, 485 (Ky. App. 2011). "The trial court's determination that a sufficient amount of time has passed and that it can properly take up the summary judgment motion for a ruling is reviewed for an abuse of discretion." Blankenship, 302 S.W.3d at 668.
As is often the case when the stakes are high and the issues complex, discovery was not a smooth process. The Appellant Investors' discovery requests were met with objections. Some of the objections were determined to be justified, while others were not. The trial court was required to intervene, resulting in inevitable delays. In the end, however, we cannot agree that the Appellant Investors were forced to take part in a "premature showdown."
The Bank filed its complaint in August of 2012. The Appellant Investors answered in October of 2012. The hearing at issue before the Master Commissioner did not occur until September of 2014. During that two-year period, Appellant Investors had the opportunity to, and did, take a substantial amount of discovery. Numerous witnesses were deposed and hundreds of pages of written discovery was exchanged. While some of the discovery had to be compelled, it was produced in the end. Furthermore, while Appellant Investors filed various motions to compel along the way, none were pending at the time of the evidentiary hearing. And, we can find no evidence in the record where Appellant Investors requested additional discovery prior to the start of the evidentiary hearing. Appellant Investors had the opportunity to sufficiently develop the record prior to summary judgment's being rendered against them.
B. Issues of Material Fact
"Summary judgment is not a substitute for trial." Allstate Ins. Co. v. Smith, 487 S.W.3d 857, 860 (Ky. 2016). It is only appropriate to grant summary judgment if the record shows "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." CR 56.03. In reviewing the record, the trial court must be careful not to decide issues of fact. The trial court's role in reviewing the record is limited to the "simple determination of whether a fact question exists." Allstate Ins. Co., 487 S.W.3d at 860. In performing this review, the trial court must view the evidence "through a lens colored in favor of the party opposing summary judgment." Kirby v. Lexington Theological Seminary, 426 S.W.3d 597, 604 (Ky. 2014).
Kentucky Rules of Civil Procedure.
Summary judgment "is proper where the movant shows that the adverse party cannot prevail under any circumstances." Pearson ex rel. Trent v. Nat'l Feeding Sys., Inc., 90 S.W.3d 46, 49 (Ky. 2002); see also Paintsville Hosp. Co. v. Rose, 683 S.W.2d 255, 256 (Ky. 1985). Stated another way, "the movant should not succeed unless his right to judgment is shown with such clarity that there is no room left for controversy." Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 482 (Ky. 1991).
We review the trial court's issuance of summary judgment de novo. See Bd. of Regents of N. Kentucky Univ. v. Weickgenannt, 485 S.W.3d 299, 307 (Ky. 2016). On appeal, "[t]he standard of review . . . of a summary judgment is whether the circuit judge correctly found that there were no issues as to any material fact and that the moving party was entitled to a judgment as a matter of law." Pearson ex rel. Trent, 90 S.W.3d at 49.
The main thrust of the Appellant Investors' arguments against summary judgment focuses on their defense of unclean hands. According to the Appellant Investors, the Bank should be barred from foreclosing on the Property because it: (1) failed to notify the individual Appellant Investors about the loan defaults even though it knew that Cabot Turfway LeaseCo. was not being responsive to its notices; (2) provided false assurances to Dr. Grishaver, Mr. Souza, and the Appellant Investors' legal counsel that the loan payments were being made and that there was no imminent danger of receivership and/or foreclosure; and (3) failed to inform legal counsel that the loan was being transferred, preventing legal counsel from conducting meaningful negotiations. In the words of the Appellant Investors, the Bank "sat idly back and allowed the Appellants' Mortgage to fall into default, essentially taking an unconscientious advantage of Appellants 'through forms of technicalities of law.' In fact, [the Bank] filed for foreclosure prior to a monetary default occurring."
"The unclean hands doctrine is a rule of equity that forecloses relief to a party who has engaged in fraudulent, illegal, or unconscionable conduct." Suter v. Mazyck, 226 S.W.3d 837, 843 (Ky. App. 2007). Although the doctrine is quite broad, it will not be applied in every occurrence of inequity or deceit in relation to the matter in which relief is sought. Parris' Adm'r v. John W. Manning & Sons, 144 S.W.2d 490, 492 (Ky. 1940). "The doctrine does not repel all sinners from a court of equity, especially where there was no injurious consequences." Id. Moreover, where the right itself [that the plaintiff is suing on] is not based upon inequitable activity, a court of equity is not the proper forum for punishing this sort of conduct, unless it amounts to contempt." Maas v. Maas' Adm'r, 255 S.W.2d 497, 499 (Ky. 1952).
Appellant Investors have not produced any evidence that the Bank aided or abetted Mr. Cabot and Mr. Kroll in their fraud. In fact, there is nothing to suggest that the Bank even had reason to suspect the depth of fraud perpetrated by Mr. Cabot and Mr. Kroll until the spring and summer of 2012, after the events of default had already occurred. Furthermore, there is no evidence that Bank should have known prior to that time that Mr. Cabot and Mr. Kroll were not passing the notices of default on to the Appellant Investors.
The Appellant Investors entered into a sophisticated real estate transaction. Although they invested substantial sums of money, they did not want to be involved in the day-to-day operation of the Property. They made this clear in the TIC they executed when they purchased the Property. In that same TIC agreement, they designated Cabot Turfway LeaseCo. as their representative to receive all notices from the lender on their behalves. There is no evidence that any of the Appellant Investors ever revoked this designation or requested that the Bank notify them separately. The Bank cannot be guilty of misconduct where it followed the directions set forth in the loan documents as expressly agreed to by the Appellant Investors.
While the Appellant Investors are correct that a "monetary default" did not occur in that they did not miss any loan payments, they ignore the fact that the loan documents define default to include instances other than missing a loan payment. It is undisputed that defaults did occur as a result of the mechanics liens and unpaid bills. It is likewise undisputed that the defaults gave the Bank a contractual right to accelerate the Note and seek foreclosure. Nevertheless, the Appellant Investors argue that the Bank acted unethically, immorally, and dishonestly when it filed for foreclosure in August of 2012. They assert that in lieu of foreclosure the Bank had the power to contact them, work with them to remove Cabot Turfway LeaseCo., and afford them time to cure the defaults. The Appellant Investors argue that the Bank's decision to immediately pursue foreclosure when these options were available constitutes a breach of the Bank's duty of good faith and fair dealing. We cannot accept this argument.
The duty of good faith and fair dealing cannot be used to require the Bank to assume extra-contractual obligations. This was a complex commercial real estate transaction involving several sets of documents. The Appellant Investors assumed the risk of taking a passive role in the ownership and management of the Property. It was not the Bank's responsibility to oversee the deal from beginning to end or to protect the Appellant Investors from a bad bargain. The Bank was not obligated to place the Appellant Investors' interests ahead of its own. Likewise, it did not have any duty to notify or investigate. The Bank's duties were limited to those set out it the relevant documents. And, the Appellant Investors have failed to show that the Bank failed to comply with any of its contractual obligations.
Instead of focusing on the contractual obligations set forth in the loan documents, the Appellant Investors base the bulk of their arguments on the statements that various Bank officials made to them during the Spring and Summer of 2012. We do not find these statements to be evidence of unclean hands. As pointed out by the Master Commissioner, Ms. Owen's statement that the loan payments were current was correct. Viewing the evidence in a light most favorable to Appellant Investors, we will also presume that she represented that foreclosure and/or default was not imminent. Although this statement turned out to be inaccurate, there is no way to prove that Ms. Owen did not believe it to be true at the time she made it. Moreover, as detailed above, the Bank had given notice of the defaults in accordance with the loan documents. Additionally, we fail to appreciate how this single employee's statement to one of many investors evinces that the Bank acted with unclean hands when it filed for foreclosure in accordance with the loan documents over three months later.
The analysis of the other statements relied upon by the Appellant Investors is similar. They complain that their counsel was not warned that that the loan was being reassigned and that foreclosure was imminent. While Appellant Investors and their counsel may have desired to engage in pre-foreclosure negotiations with the Bank, we cannot identify anywhere in the loan documents where the Bank was obligated to do so.
In sum, it is undisputed that events of default occurred. It is likewise undisputed that the Bank complied with its contractual obligations prior to filing this foreclosure action. There is no evidence that the Bank erected roadblocks that kept the Appellant Investors from ascertaining the true facts (for example performing a title search on the property to discover the mechanics liens) or prevented them from paying off the Note once a demand was made by the Bank. While what transpired is regrettable for the Appellant Investors, it was not caused by the Bank's immoral or unethical conduct. We refuse to allow the doctrine of unclean hands to be used to insert additional duties into an arms-length commercial transaction such as this. Summary judgment was properly granted in favor of the Bank on its request for foreclosure and an order of sale.
To be sure, there is evidence that dirty hands harmed the Appellant Investors. However, the owners of those dirty hands, Mr. Cabot and Mr. Kroll, have not been sued by Appellant Investors as part of this action. --------
This does not end our inquiry, however, because the Appellant Investors assert that even if the Bank was entitled to an order of sale it should have been required to produce more specific evidence as to how it applied the money in the reserve accounts. Citing Conley v. Hall, 395 S.W.2d 575, 582 (Ky. 1965), Appellant Investors maintain that summary judgment was not proper because they are seeking an accounting as to the application of the reserve funds. However, the Appellant Investors never asserted an affirmative claim for an accounting. This action began and ended as a foreclosure action. As part of that action, the Bank established that an event of default existed which gave them the right to foreclose on the property. Moreover, through a series of affidavits, documents, and testimony, the Bank proved to the satisfaction of the trial court that the amounts in the reserve account had been appropriately accounted for by the Bank. The Appellant Investors, despite having the opportunity to do so during the hearing as well as during discovery, failed to put forth any evidence to show that the Bank's records were inaccurate with respect to the reserve account.
IV. Amendment
The Appellant Investors filed a motion to amend their complaint the day before the evidentiary hearing on the Bank's motion for summary judgment was scheduled to begin. Their proposed amendment sought to add counterclaims against the Bank: 1) breach of obligations under the note and mortgage; 2) breach of good faith and fair dealing; 3) fraudulent misrepresentation; 4) negligent misrepresentation; 5) negligence; 6) breach of fiduciary duty; and 7) declaratory judgment that the Bank does not have a legal right to foreclosure on the note and mortgage. The Bank opposed the motion on grounds of futility and prejudice.
Pursuant to CR 15.01, under circumstances such as those present herein, "a party may amend his pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. . . . The trial court has a wide discretion in permitting the amendment of pleadings." Cheshire v. Barbour, 481 S.W.2d 274, 276 (Ky. 1972). In determining whether to grant a party leave to amend a complaint, a circuit court should consider the nature of the amendment and whether the amendment would prejudice the opposing party or would work an injustice. See Kenney v. Hanger Prosthetics & Orthotics, Inc., 269 S.W.3d 866, 869 (Ky. App. 2007).
This foreclosure action was filed in 2012. Appellant Investors did not move to amend their complaint until years later, on the eve of a substantial summary judgment hearing. While Appellant Investors assert that they did not learn the facts that gave rise to their proposed amendments until shortly before their proposed amendments, the record largely belies this assertion. The facts that form the basis of their proposed amendment form the basis of most of the affirmative defenses asserted in their October 2012 answer. Additionally, those facts are detailed in the affidavit Dr. Grishaver filed in early 2013 after the Bank moved for summary judgment. While some of the discovery may have fleshed out the details, it is clear that the Appellant Investors had the information necessary to put them on notice of the potential for counterclaims long before they moved to amend their complaint. Furthermore, we cannot agree with the Appellant Investors that the Bank would not have suffered prejudice had the amendment been allowed. The amendments would have further delayed foreclosure, preventing the Bank from selling the property. The record supports that the circuit court acted appropriately when it denied the motion to amend. There was no abuse of discretion.
V. Conclusion
For the reasons set forth above, we affirm the Boone Circuit Court.
KRAMER, CHIEF JUDGE, CONCURS.
COMBS, JUDGE, CONCURS AND FILES SEPARATE OPINION. COMBS, JUDGE CONCURRING SEPARATELY: George Bailey is dead indeed. Dirty handprints, slick dealing, predatory instincts, and unsavory conduct in all of its dealings characterize the behavior of the bank in this case. Nonetheless, the law provides no real recourse for the Appellants under the circumstances. What a world in which we live and breathe! BRIEF FOR APPELLANTS: Brian F. Eviston
Covington, Kentucky Christopher P. Katers
Wauwatosa, Wisconsin ORAL ARGUMENT
FOR APPELLANTS: Christopher P. Katers
Wauwatosa, Wisconsin Neal Kroskosky
Louisville, Kentucky BRIEF FOR APPELLEE: Griffin Terry Sumner
Louisville, Kentucky Michael Nitardy
Florence, Kentucky Gregory A. Cross
Heather Deans Foley
Baltimore, Maryland ORAL ARGUMENT FOR
APPELLEE: Heather Deans Foley
Baltimore, Maryland Griffin Terry Sumner
Louisville, Kentucky