Opinion
NO. 2018-CA-001070-MR
03-27-2020
LISA BROWN APPELLANT v. TRISTAN HOLDMAN APPELLEE
BRIEFS FOR APPELLANT: S. Scott Marcum Paducah, Kentucky BRIEF FOR APPELLEE: M. Taylor Rains Paducah, Kentucky
NOT TO BE PUBLISHED APPEAL FROM MCCRACKEN CIRCUIT COURT
HONORABLE W.A. KITCHEN, III, JUDGE
ACTION NO. 17-CI-00608 OPINION
AFFIRMING AND REMANDING
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BEFORE: JONES, MAZE, AND L. THOMPSON, JUDGES. THOMPSON, L., JUDGE: Lisa Brown ("Appellant") appeals from three orders of the McCracken Circuit Court awarding attorney fees to Tristan Holdman ("Appellee") arising from Appellant's violation of a restraining order. Appellant argues that the attorney fees were improperly awarded, that the award is not reasonable, that the amount of the fees was not sufficiently specified, and that an award of accounting fees was also inappropriate. For the reasons addressed below, we AFFIRM the award of attorney and bookkeeping fees, but REMAND the matter for entry of an order stating the specific amount of the award.
FACTS AND PROCEDURAL HISTORY
The facts are not in controversy. Sudie Holdman ("Ms. Holdman") died intestate on April 28, 2015. At the time of her death, she owned 240 shares of stock in PNL, Inc., d/b/a Backwoods Barbeque. Ms. Holdman's daughter, the Appellant herein, owned 61 shares in the business. There were no other shareholders. Appellee Tristan Holdman, and his brother Matthew Holdman, are Ms. Holdman's other children. According to the record, Appellee and Matthew managed the restaurant, and Appellant played no role in its operation. As of the filing of this appeal, Ms. Holdman's estate had not been settled, and the 80% ownership interest in the business had not been distributed.
Appellee would later argue that he is a "beneficial shareholder" of the business by virtue of being a beneficiary of Ms. Holdman's estate.
When Ms. Holdman died, Appellee was president of the corporation, Appellant was secretary, and Matthew Holdman was treasurer and vice president. Appellee would later assert that in July 2017, Appellant held a shareholder/director's meeting when Appellee left the state on vacation. At the meeting, Appellant removed her brothers as officers, and voted herself as chairman of the board and registered agent for the corporation. According to Appellee, Appellant then changed the locks on the business and the passwords to the business computers, banking, and email, and did not provide the keys or passwords to Appellee. Appellee would allege that Appellant, who was not heretofore involved in the business operations, began improperly operating the restaurant and caused it to flounder. According to Appellee, Appellant was not able to operate the business in an effective manner. For example, he claims the following: that she made no arrangements to pay employees or vendors, she did not manage repairs to business equipment, she failed to withhold payroll taxes, she spent excessive money on supplies, and she gave herself a loan from business proceeds and improperly used Ms. Holdman's credit card after her death.
On July 11, 2017, Appellee—in his individual capacity and as director and beneficial shareholder of PNL, Inc.—filed the instant action in McCracken Circuit Court against Appellant. He alleged that Appellant breached her fiduciary duties to the beneficial shareholders and the company, that she breached the terms of a contract by failing to pay for services rendered by Appellee, and that she improperly converted $9,000 in business funds to her own use. Appellee sought to enjoin Appellant from removing Appellee as president and manager of PNL and from barring him from operating the business as he had for many years. In support of the claim for an injunction, Appellee alleged that irreparable harm would result to the business based on Appellant's failure to pay employees, vendors, and utility companies, in addition to the loss of goodwill with the customer base.
A hearing on the matter was conducted on August 1, 2017, after which the McCracken Circuit Court entered an order enjoining Appellant from removing Appellee as manager of the restaurant. The court allowed both parties to access business records, and restrained Appellant from denying Appellee access to bank accounts, records, passwords, and other information required to manage the business. On September 18, 2017, the court found that Appellee was a beneficial shareholder of Ms. Holdman's estate because he, along with each of his two siblings, was entitled to inherit one-third of Ms. Holdman's shares.
On December 20, 2017, Appellee moved for Appellant to show cause why she should not be held in contempt for violating the restraining order. Appellee asserted that Appellant had removed and improperly refused to return to the business all check stubs and receipts for purchases made from January 2017 through November 2017. Appellee argued that these receipts were vital to the operation of the business and that Appellant's refusal to return them to the business was violative of the court's order that she not interfere with ongoing business operations. Appellee also alleged that Appellant refused to provide credit card records which resulted in delays and penalties incurred by the restaurant. Appellant responded with a general denial.
A hearing on the show cause motion was conducted, resulting in the court granting the motion pending a final order. Before the order was entered, Appellee filed a supplemental motion alleging that Appellant was continuing to engage in conduct violative of the restraining order and detrimental to ongoing business operations. Appellee alleged that Appellant refused to turn over income tax returns and journal entries for 2016, which were needed for the operation of the business.
The McCracken Circuit Court entered an order on March 20, 2018, holding Appellant in contempt of court. The court found that Appellant had removed business records and kept them from Appellee for approximately 40 days despite Appellee's attempts to get them returned. The court also noted that despite its prior finding that Appellee was a "beneficial shareholder" of the business, Appellant affirmed that she did not believe he was a beneficial shareholder and "stated that she did not care what the court thought." It also found that Appellee incurred attorney fees and accounting costs as a result of Appellant's violation, that the business was incurring ongoing IRS penalties of $390 per month, and that the information was required so that income tax forms could be filed. The court concluded that Appellee was entitled to reimbursement of attorney fees, accounting costs, and IRS fees and penalties. It ordered Appellee to provide affidavits establishing the amount of the fees and costs.
Thereafter, Appellee tendered affidavits and invoices for attorney and accounting fees in the following amounts: $12,120.00 for legal fees owed to attorney Craig Clymer; $8,805.00 for legal fees to attorney Charles Walter; and $1,650.00 for bookkeeping services provided by David Mathis. Appellant filed a motion on March 30, 2018, objecting to the fees generally and the amounts specifically. She argued that Appellee was not entitled to any attorney or accounting fees, and that the tendered affidavits and invoices represented fees and costs dating back to the beginning of the case. She also filed a motion to alter, amend or vacate the March 20, 2018 order.
A hearing on the motions was conducted, after which the McCracken Circuit Court entered an order on May 2, 2018, denying Appellant's motion to vacate and reaffirming that good cause was shown to sanction Appellant via an award of attorney fees in favor of Appellee. On June 11, 2018, the court entered an Order Regarding Supplemental Motion to Show Cause, wherein it affirmed again that the court had discretion to sanction Appellant for what it found to be intentional delays in providing certain documentation to Appellee. The court characterized this order as "its final decision on the issue of attorney's fees [and that] there is no just reason to delay enforcement of the judgment." This appeal followed.
The McCracken Circuit Court also considered various issues relating to Appellee's objection to Appellant's grant of a quitclaim deed to a third party on a parcel of real property situated in West Paducah, Kentucky. Appellee argued that Appellant was improperly attempting to shield assets from the execution of judgment. These issues are not now before us.
ARGUMENTS AND ANALYSIS
Appellant now argues that the McCracken Circuit Court committed reversible error in awarding attorney fees; that the award of attorney fees is not reasonable nor sufficiently specified; and that the award of accounting fees is not appropriate. She directs our attention to White v. Sullivan, 667 S.W.2d 385, 389 (Ky. App. 1983), wherein a panel of this Court reiterated that "Kentucky Courts have been consistently reluctant to uphold awards of attorneys' fees except in those particular instances when such fees are authorized by a statute or a contract expressly providing therefor." (Citations omitted.) Appellant asserts that Appellee does not fall within either of those two categories, as there is no express statutory authority for the award of attorney fees under the facts presented, and no contract exists between the parties providing for such fees. Appellant also argues that Appellee is attempting to obtain reimbursement not only for the fees and costs associated with Appellant's failure to produce records and give unfettered access to the business, but also for costs for the entirety of the proceeding. She maintains that an award of such fees is unreasonable and not justified.
Appellant appeals from the March 20, 2018 order holding her in contempt, and the May 2, 2018 and June 11, 2018 orders addressing Appellee's supplemental motions to show cause. The June 11, 2018 order made the matter final and appealable. See Kentucky Rules of Civil Procedure (CR) 54.02(1), which renders an otherwise interlocutory order appealable if it contains language that the judgment is final and there is no just reason for delaying its execution. See also Maggard v. Kinney, 576 S.W.3d 559, 564 (Ky. 2019).
Appellant goes on to argue that the award of attorney fees was not sufficiently specified, as the McCracken Circuit Court never reduced to writing the final amount of the award. While the March 20, 2018 order did hold Appellant in contempt and directed Appellee to produce billing records to justify a sanction in the form of an award of attorney fees, the final sum was never memorialized in the record via a written order or judgment. Appellant asserts that the orders entered by the McCracken Circuit Court on the attorney fee issue are not sufficiently clear for this Court's review, and are otherwise violative of case law requiring the trial court to state with specificity the basis of the award and the amount of the award. Finally, Appellant argues that the award of accounting fees was inappropriate, as the fees were not reasonably associated with Appellant's violation of the restraining order. Appellant seeks an opinion reversing the award of attorney and accounting fees.
The first issue for our consideration is whether the McCracken Circuit Court may properly exercise its discretion in awarding attorney and accounting fees as a sanction for the violation of a restraining order. Appellant cites the general rule that attorney fees are not normally awarded absent a statutory or contractual basis for making the award. White, supra. A narrow exception to the general rule is found, however, when attorney fees are awarded as a sanction in circumstances where the integrity of the court is at stake. Seeger v. Lanham, 542 S.W.3d 286, 295 (Ky. 2018). The Kentucky Supreme Court stated in Seeger that:
"Historically, courts ruled based on the common law, code or statutory law, and equity." [Bell v. Commonwealth, Cabinet for Health and Family Servs., Dep't for Cmty. Based Servs., 423 S.W.3d 742, 747 (Ky. 2014)]. However, "[e]ventually, at least in most states, the courts of equity and law were combined . . ." Id. As courts are now empowered by statutory and rule-based law, "those rules are also binding. Equity practice, in general, is merged with law, or the statutory provisions. Only when there is no law or precedent does a court have the authority to exercise pure equity." Id. (citing Vittitow v. Keene, 265 Ky. 66, 95 S.W.2d 1083, 1084 (1936)). Thus, "[l]aw trumps equity." Bell, 423 S.W.3d at 748. Under the American rule, "attorney's fees in Kentucky are not awarded as costs to the prevailing party unless there is a statute permitting it or as a term of a contractual agreement between the parties." Id. While attorneys' fees are awardable as a sanction "when the very integrity of the court is in issue," id. at 749 (emphasis original), "trial courts may not award attorney's fees just because they think it is the right thing to do in a given case." Id. at 750.Id. (emphasis added).
Thus, we take this opportunity to clarify that, without a sound basis in contract or statute, a trial court may not award attorneys' fees. The trial court is still empowered to order a party to pay attorneys' fees as a sanction , but only when the integrity of the court is at stake.
In 2009, a panel of this Court addressed the authority of the circuit courts to impose sanctions for contempt. It stated that:
A trial court has inherent power to punish individuals for contempt, Newsome v. Commonwealth, 35 S.W.3d 836, 839 (Ky. App. 2001), and nearly unfettered discretion in issuing contempt citations. Smith v. City of Loyall, 702 S.W.2d 838, 839 (Ky. App. 1986). We will reverse a finding of contempt only if the trial court abused its discretion in imposing the sentence. Meyers v. Petrie, 233 S.W.3d 212, 215 (Ky. App. 2007). Abuse of discretion is defined as conduct by a court that is "arbitrary, unreasonable, unfair, or unsupported by sound legal principles." Commonwealth v. English, 993 S.W.2d 941, 945 (Ky. 1999) (citing 5 Am.Jur.2d Appellate Review § 695 (1995)); See also Kuprion v. Fitzgerald, 888 S.W.2d 679, 684 (Ky.1994).Crowder v. Reardon, 296 S.W.3d 445, 450 (Ky. App. 2009). And finally, a trial court may exercise its civil contempt powers either to force compliance with its orders, to compensate for losses or damages caused by the noncompliance, or both. Kentucky Retirement Systems v. Foster, 338 S.W.3d 788, 801 (Ky. App. 2010). An award of attorney fees is a proper sanction for contempt. Id. at 803. We will not disturb a circuit court's decision regarding contempt absent an abuse of its discretion. Meyers, 233 S.W.3d at 215. The test for abuse of discretion is whether the trial court's decision was "arbitrary, unreasonable, unfair, or unsupported by sound legal principles." English, 993 S.W.2d at 945 (citations omitted).
Contempt is the "willful disobedience of—or open disrespect for—the rules or orders of a court." Commonwealth v. Burge, 947 S.W.2d 805, 808 (Ky. 1996). Contempt may be either civil or criminal, depending upon the reason for the contempt citation. Id. Civil contempt, the focus of this appeal, is "the failure . . . to do something under order of court, generally for the benefit of a party litigant." Id. Thus, courts have inherent power to impose a sanction for a civil contempt to enforce compliance with their lawful orders. Blakeman v. Schneider, 864 S.W.2d 903, 906 (Ky. 1993). While one may be sentenced to jail for civil contempt, it is said the contemptuous one carries the keys to the jail in her pocket, because she is entitled to immediate release upon her obedience to the court's order. Campbell v. Schroering, 763 S.W.2d 145, 148 (Ky. App. 1988).
The questions for our consideration, then, are whether the attorney fees at issue were awarded as a sanction and, if so, whether the sanction was imposed because the integrity of the McCracken Circuit Court was at stake. We must answer these questions in the affirmative. The attorney fees at issue were not awarded in the general course of litigation pursuant to statute or contract. Rather, the circuit court expressly awarded the attorney fees as a sanction. See Order Regarding Supplemental Motion to Show Cause entered May 2, 2018. The record also demonstrates that the sanction was imposed because the integrity of the circuit court was at stake. In its order entered August 2, 2017, the circuit court restrained Appellant from denying Appellee access to bank accounts, records, passwords, keys, and other information required to manage the business. The court also restrained Appellant from interfering in the daily operations of the business.
According to the record, and as so found by the McCracken Circuit Court, Appellant violated the restraining order, did so on an ongoing basis, and flaunted the authority of the circuit court by affirming that she did not care what the court thought. Under such circumstances, the circuit court was faced with the prospect of permitting a litigant to disregard the court's authority to administer justice, thus rendering it null, or to bring about compliance by way of a sanction. The circuit court's determination to bring about compliance via the imposition of attorney fees made payable to Appellee squarely falls within the "nearly unfettered discretion" of the court in such circumstances, Crowder, supra, and is supported by the record and the law. We find no error in the imposition of attorney fees as a sanction for Appellant's noncompliance with the circuit court's directives. For the same reason, we find no error in the award of bookkeeping fees and no abuse of discretion. Meyers, supra.
Order Holding Defendant in Contempt of Court entered March 20, 2018. --------
Appellant goes on to argue that the circuit court improperly allowed Appellee to offer proof of attorney fees for services rendered from the beginning of the litigation, rather than only those fees related to her noncompliance. As the circuit court is vested with nearly unfettered discretion in this matter, id., and as the sanction is punitive as well as compensatory, we find no error.
The next issue for our consideration is Appellant's argument that the circuit court did not properly specify the amount of the award. She notes—and Appellee so concedes—that the circuit court did not enter an order or judgment expressly setting forth the amount of the sanction. Rather, the court sanctioned Appellant without establishing an amount of the sanction, directed Appellee to produce proof of his attorney fees and other costs, and Appellee then complied with that directive with several pages of invoices and billing records from two attorneys and a bookkeeper. Appellant characterizes as error the circuit court's subsequent failure to bring the matter to fruition with an order stating the final amount of the sanction. She argues that we may not properly adjudicate the matter before us in the absence of a final order or judgment setting out the amount of the sanction.
We find this argument persuasive. A party seeking sanctions in the form of a monetary award "must also prove the amount." Commonwealth, Cabinet for Health and Family Services v. Ivy, 353 S.W.3d 324, 332 (Ky. 2011). "The court has broad discretion to fashion compensatory remedies, but they must be based on evidence of actual loss." Id. at 335 (citation omitted). While Appellee did offer proof of his attorney and bookkeeping fees in compliance with the circuit court's directive, we believe the court must go beyond Appellee's offer of proof and bring the matter to resolution by clearly stating the amount and nature of the sanction for both the benefit of the parties and any appellate tribunal.
CONCLUSION
The McCracken Circuit Court properly sanctioned Appellant based on her noncompliance with its restraining order, and the sanction may take the form of an award of Appellee's attorney and bookkeeping fees and other costs. The amount of the sanction must be stated with specificity and memorialized in the record. Accordingly, we AFFIRM the McCracken Circuit Court's March 20, 2018, May 2, 2018, and June 11, 2018 orders finding Appellant to be in contempt of the court's restraining order, and sanctioning Appellant with an award to Appellee of his attorney and bookkeeping fees and costs. We REMAND the matter to the McCracken Circuit Court for entry of an order establishing the amount of the sanction.
ALL CONCUR. BRIEFS FOR APPELLANT: S. Scott Marcum
Paducah, Kentucky BRIEF FOR APPELLEE: M. Taylor Rains
Paducah, Kentucky