Opinion
NO. 2014-CA-001483-MR
03-17-2017
BILLIE S. DUNAVENT, AS TRUSTEE OF THE WILLIAM H. AND ALICE M. SEBASTIAN LIVING TRUST; AND BILLIE S. DUNAVENT, AS EXECUTRIX OF THE ESTATE OF WILLIAM H. SEBASTIAN APPELLANTS v. DENNIS BRADLEY, ADMINISTRATOR OF THE ESTATE OF RUTH ANN SEBASTIAN; FREDRICH MANEY; MEREDITH MANEY; ROSCOE SEBASTIAN; AND BRENDA SEBASTIAN APPELLEES
BRIEFS FOR APPELLANTS: Wesley A. Gersh Louisville, Kentucky J. Gregory Troutman Louisville, Kentucky ORAL ARGUMENT FOR APPELLANTS: J. Gregory Troutman Louisville, Kentucky BRIEF AND ORAL ARGUMENT FOR APPELLEES, ROSCOE AND BRENDA SEBASTIAN: Richard S. Foley Lexington, Kentucky BRIEF AND ORAL ARGUMENT FOR APPELLEES, FREDRICH MANEY AND MEREDITH MANEY: Norbert J. Arrington Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE PAMELA R. GOODWINE, JUDGE
ACTION NO. 09-CI-01892 OPINION
VACATING AND REMANDING
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BEFORE: MAZE, TAYLOR, AND THOMPSON, JUDGES. TAYLOR, JUDGE: Billie S. Dunavent, as trustee of the William H. and Alice M. Sebastian Living Trust, and Billie S. Dunavent, as executrix of the estate of William H. Sebastian, bring this appeal from an August 26, 2014, Order of the Fayette Circuit Court imposing a constructive trust upon certain real property located in Fayette County, Kentucky, subject to two mortgage claims against the property. We vacate and remand.
The substantive and procedural facts of this case are complex. In an effort to render a cogent opinion, we will only recite those facts necessary to resolution of this appeal.
William H. Sebastian and Alice M. Sebastian were married and had three daughters (Ruth Sebastian, Billie S. Dunavent, and Patricia Sebastian). In September 1996, William and Alice created the William H. and Alice M. Sebastian Living Trust (Sebastian Trust). The Sebastian Trust was created for William and Alice's benefit during their lifetime and, thereafter, for the benefit of their three daughters. Both William and Alice served as co-trustees of the Sebastian Trust. Concomitantly, William and Alice also executed their respective wills in September 1996.
Alice passed away on July 11, 2003. Shortly thereafter, Ruth began residing with her father, William, and was his primary caretaker. In July 2004, William executed a general durable power of attorney and named Ruth as his attorney-in-fact. Then, in November 2006, Ruth organized Sebastian Care Services, LLC (Sebastian Care) as a Kentucky limited liability company and opened a bank account at Central Bank in the name of Sebastian Care. It is undisputed that Ruth deposited funds belonging either to William or to the Sebastian Trust into the Sebastian Care bank account at Central Bank. Ruth also organized Fayette Properties, LLC as a Kentucky limited liability company on July 23, 2008. By deed executed July 23, 2008, Fayette Properties purchased real property located at 968 Maywick Drive in Lexington, Kentucky.
Ruth Sebastian was the only member of Sebastian Care Services, LLC. It was administratively dissolved on November 1, 2007.
Ruth was the only member of Fayette Properties, LLC. It was administratively dissolved on November 3, 2009.
The deed was recorded July 25, 2010, with the Fayette County Clerk.
William passed away on September 28, 2008. Upon his death, Billie became trustee of the Sebastian Trust, and she was also appointed executrix of William's estate. On November 11, 2008, Ruth executed a promissory note in the principle amount of $50,000 payable to Roscoe Sebastian and Brenda Sebastian (the Sebastians). Also, on November 11, 2008, Ruth executed another promissory note in the principle amount of $20,000 payable to Fredrich Maney and Meredith Maney (the Maneys). On the same date and to provide security for replacement of the promissory notes, Fayette Properties granted two separate mortgages upon the Maywick Drive property; one mortgage to the Maneys and the other mortgage to the Sebastians. Neither the Maney mortgage nor the Sebastian mortgage was recorded at the time of execution. On the same day that the mortgages were executed (November 11, 2008), Fayette Properties executed a deed transferring to Ruth fee simple title in the Maywick Drive real property.
Both the Maney mortgage and the Sebastian mortgage were recorded in the Fayette County Clerk's Office on March 22, 2010.
The deed conveying fee simple title from Fayette Properties to Ruth, was recorded on March 22, 2010.
On April 8, 2009, Billie, in her capacity as both trustee of the Sebastian Trust and as executrix of William's estate, (collectively referred to as the Estate) filed a petition for declaratory judgment in the Fayette Circuit Court. The Estate named as respondents/defendants Ruth, Sebastian Care, Fayette Properties, the Maneys and the Sebastians. In the petition, the Estate alleged that Ruth had misappropriated funds and property of William and the Sebastian Trust and in so doing, breached her fiduciary duty as William's attorney-in-fact. The Estate sought an accounting of funds and other property belonging to William or to the Sebastian Trust. The Estate also claimed that Ruth committed the tort of intentional interference with inheritance. On February 26, 2010, the Estate filed a notice of lis pendens upon the Maywick Drive real property in the office of the Fayette County Clerk. This notice was filed prior to the mortgages being recorded against the property on March 22, 2010.
Billie S. Dunavent, in her capacity as both trustee of the Sebastian Trust and as executrix of the estate, (collectively referred to as the Estate) also filed an amended petition on February 10, 2010, and a second amended petition on October 29, 2012.
By Opinion, Order, and Judgment entered April 18, 2014, the circuit court concluded that Ruth deposited $476,179.51 of funds belonging to William or the Sebastian Trust into the Sebastian Care bank account and that such funds were not used for William's care or for his needs. Rather, the circuit court held that Ruth misappropriated these funds in her capacity as Williams' attorney-in-fact and breached her fiduciary duty by doing so. The circuit court ultimately assessed $476,179.51 in compensatory damages and $250,000 in punitive damages against Ruth.
The April 18, 2014, judgment was made final and appealable by appropriate Kentucky Rules of Civil Procedure 54.02 recitations therein. Ruth immediately appealed to this Court, Appeal No. 2014-CA-000753-MR on May 6, 2014. That appeal was dismissed by order entered March 18, 2016, upon motion of Dennis Bradley, administrator of the Estate of Ruth Sebastian.
On May 5, 2014, the Estate filed a motion to impose a constructive trust upon the real property located on Maywick Drive. The Estate claimed that Ruth utilized funds from the Sebastian Care account to purchase said real property. On July 25, 2014, the circuit court rendered an Order imposing a constructive trust upon the Maywick Drive property. Therein, the court held:
The Court determined in its April 18, 2014[,] Opinion, Order and Judgment that Ruth has misappropriated over $476,000.00 of monies from her late father while serving in a fiduciary capacity as his attorney-in-fact. The Court further determined that Ruth utilized $145,000.00 of these monies to purchase Maywick Property on July 23, 2008. On March 22, 2010, Ruth caused separate mortgages to be recorded in the Office of the Fayette County Clerk in favor of the Maneys (her son and daughter-in-law) and the Sebastians.
. . . .
IT IS FURTHER ORDERED that this matter is referred to the Master Commissioner of the Fayette Circuit Court with directions to execute a deed to the Maywick Property on behalf of Ruth in favor of [Billie] Dunavent, as Trustee of the William H. and Alice M. Sebastian Living Trust dated September 11, 1996. The
Trust shall take the Maywick Property subject to the Maney and Sebastian mortgages.July 25, 2014, Order at 2.
The Maneys then filed a motion to alter, amend, or vacate the July 25, 2014, Order. Kentucky Rules of Civil Procedure (CR) 59. By Order entered August 26, 2014, the circuit court granted the motion and vacated the July 25, 2014, Order. In the August 26, 2014, Order, the court concluded:
IT IS HEREBY ORDERED that Petitioner, Billie Dunavent, as the Trustee of the William H. and Alice M. Sebastian Living Trust dated September 11, 1996, is hereby granted a constructive trust upon the 968 Maywick Drive currently held by Defendant, Ruth Sebastian. Said constructive trust is granted subject to the property tax liens on said property as well as the mortgages held by the Maney and the Sebastian Defendants.August 26, 2014, Order at 1. This appeal follows.
To begin, we review the circuit court's findings of fact under the clearly erroneous standard. CR 52.01. A finding of fact is clearly erroneous if not supported by substantial evidence of a probative value. Stanford Health & Rehab. v. Brock, 344 S.W.3d 833 (Ky. App. 2010). We review issues of law de novo as discussed in Gosney v. Glenn, 163 S.W.3d 894 (Ky. App. 2005):
[A]ppellate review of the trial court's findings of fact is governed by the rule that such findings shall not be set aside unless clearly erroneous. A factual finding is not clearly erroneous if it is supported by substantial evidence. Substantial evidence is evidence, when taken alone or in light of all the evidence, has sufficient probative value to induce conviction in the mind of a reasonable person. The trial court's conclusions of law,
however, are subject to independent de novo appellate determination.Id. at 898 (citations omitted). Our review proceeds accordingly.
The Estate initially contends that the circuit court erred by upholding the validity of the Maney mortgage and the Sebastian mortgage against the Maywick Drive property. The validity of the Sebastian mortgage was upheld by an interlocutory order entered January 2, 2013, following a hearing on December 12, 2012. No order was entered by the court addressing the validity of the Maney mortgage. The Estate argues in this appeal that the real property located on Maywick Drive was subject to a constructive trust at the time of its purchase and that Ruth was the constructive trustee. As the trustee, Ruth "was obligated both legally and equitably, to do nothing more than hold the Maywick Property for [the Estate's] . . . benefit and transfer same to" it. Estate's Brief at 3. The Estate maintains that "Ruth was without legal authority" to encumber the Maywick Property with the mortgages; thus, the mortgages are invalid.
In Kentucky, a constructive trust is "raised by equity in respect to property which has been acquired by fraud, or where, though acquired originally without fraud, it is against equity that it should be retained by him who holds it." Kaplon v. Chase, 690 S.W.2d 761, 763 (Ky. App. 1985) (quoting Hall v. Simon, 278 Ky. 442, 128 S.W.2d 954, 958 (1939)). A constructive trust is an equitable remedy imposed by the court. Keeney v. Keeney, 223 S.W.3d 843 (Ky. App. 2007). However, a constructive trust will not defeat a bona fide purchaser. McCracken Cnty. v. Lakeview Country Club, 254 Ky. 515, 70 S.W.2d 938 (1934). This rule of law is applicable where a trustee of a constructive trust transfers property or an interest therein to a third party. Under the bona fide purchaser rule, a third party who acquires trust property or an interest therein for value and without notice is entitled to retain such property free of the trust. See Lakeview Country Club, 70 S.W.2d 938; Mobile Cos., Inc. v. Am. States Ins. Co., 823 S.W.2d 934 (Ky. App. 1991). The bona fide purchaser rule was originally set forth in the Restatement of Restitution (First) § 172 (1937) and provides, in relevant part:
(1) Where a person acquires title to property under such circumstances that otherwise he would hold it upon a constructive trust or subject to an equitable lien, he does not so hold it if he gives value for the property without notice of such circumstances.More recently, this rule was restated with minor nonsubstantive changes in the Restatement of Restitution (Third) and Unjust Enrichment § 66 (2011) as follows:
A purchaser for value and without notice acquires the legal interest that the grantor holds and purports to convey, free of equitable interests that a restitution claimant might have asserted against the property in the hands of the grantor.
In this case, the circuit court imposed a constructive trust upon the real property located at Maywick Drive. In its order sustaining appellees' CR 59 motions, entered August 26, 2014, the circuit court effectively held that the Sebastian and Maney mortgages were valid encumbrances upon the Maywick Drive property and the mortgages were not subject to the constructive trust. The circuit court did not address how it reached this conclusion. We believe that for the court to reach such conclusion, it was necessary that the Maneys and Sebastians qualify as bona fide purchasers. Mobile Cos., 823 S.W.2d 934; see also Restatement of Restitution (Third) and Unjust Enrichment §§ 68-69 (2011). Based upon our thorough review of the record, we conclude that the circuit court failed to determine whether the Maneys and/or the Sebastians obtained their respective mortgages for value and without notice of the facts giving rise to imposition of the constructive trust. Simply stated, the circuit court erred by failing to address whether the Maneys and the Sebastians were bona fide purchasers.
We do not reach the issue of whether the constructive trust was properly imposed upon the Maywick Drive property as neither appellee (the Maneys or the Sebastians) filed a cross-appeal raising such issue with this Court. --------
Accordingly, we vacate the circuit court's order that the Maney mortgage and the Sebastian mortgage constituted valid encumbrances upon the Maywick Property, not subject to the constructive trust. Upon remand, the circuit court shall conduct an evidentiary hearing and shall set forth separate findings of fact and conclusions of law on this issue. CR 52.01. Specifically, the circuit court shall determine whether the Maneys and the Sebastians obtained their respective mortgage interests for value and without notice of the facts giving rise to the constructive trust, and otherwise qualify as bona fide purchasers. If they are not bona fide purchasers, the Sebastian Trust shall take the property free and clear of the mortgages. If the court concludes the mortgages are valid encumbrances, the Sebastian Trust's ownership of the property shall be held subject to the respective mortgage claims.
We consider any remaining contentions of error as moot.
For the foregoing reasons, the order of the Fayette Circuit Court is vacated and remanded for proceedings consistent with this Opinion.
ALL CONCUR. BRIEFS FOR APPELLANTS: Wesley A. Gersh
Louisville, Kentucky J. Gregory Troutman
Louisville, Kentucky ORAL ARGUMENT FOR
APPELLANTS: J. Gregory Troutman
Louisville, Kentucky BRIEF AND ORAL ARGUMENT
FOR APPELLEES, ROSCOE AND
BRENDA SEBASTIAN: Richard S. Foley
Lexington, Kentucky BRIEF AND ORAL ARGUMENT
FOR APPELLEES, FREDRICH
MANEY AND MEREDITH
MANEY: Norbert J. Arrington
Louisville, Kentucky