Opinion
2023-CA-0236-MR 2023-CA-0255-MR
08-09-2024
ERIN HERNANDEZ AND JUAN MANUEL HERNANDEZ APPELLANTS v. COUNTY INVESTMENTS, LLC; ALAN STEVEN RUBIN; MAC SAWYERS; AND ROSS LERNER APPELLEES AND COUNTY INVESTMENTS, LLC CROSS-APPELLANT v. ERIN HERNANDEZ AND JUAN MANUEL HERNANDEZ CROSS-APPELLEES
BRIEFS FOR APPELLANTS/CROSS-APPELLEES: David B. Mour Louisville, Kentucky. BRIEFS FOR APPELLEES/CROSS-APPELLANT: Alan S. Rubin Louisville, Kentucky.
APPEAL FROM JEFFERSON CIRCUIT COURT ACTION NOS. 17-CI-002331, 17-CI-002331, HONORABLE BRIAN C. EDWARDS, JUDGE.
BRIEFS FOR APPELLANTS/CROSS-APPELLEES: David B. Mour Louisville, Kentucky.
BRIEFS FOR APPELLEES/CROSS-APPELLANT: Alan S. Rubin Louisville, Kentucky.
BEFORE: COMBS, LAMBERT, AND MCNEILL, JUDGES.
OPINION
MCNEILL, JUDGE:
Erin and Juan Hernandez (“Hernandezes”) appeal from a Jefferson Circuit Court judgment awarding $7,760 in damages to County Investments LLC (“County Investments”) for unpaid rent, property damage, and attorney fees. County Investments cross-appeals. For the reasons below, we affirm in part and reverse in part.
In 2014, County Investments obtained a quitclaim deed for property at 1612 Lou Gene Avenue in Louisville, Kentucky, which at the time was in foreclosure. In September 2016, the Hernandezes entered into a rental agreement with County Investments to rent the property for twelve months at $1,100 monthly. The Hernandezes paid the first month's rent and a security deposit, totaling $2,200.
In December, the Hernandezes learned the property was in foreclosure and would be sold at a judicial sale the following month. At this time, they stopped paying rent. Following the judicial sale, County Investments exercised its right of redemption under KRS 426.530 to purchase the property and obtained a Commissioner's Deed in July 2017. The Hernandezes vacated the property in May 2017 and County Investments filed a complaint in Jefferson Circuit Court seeking unpaid rent, attorney fees and costs, and damages for "wear and tear" to the property.
Kentucky Revised Statutes.
Subsequently, County Investments moved for partial summary judgment seeking the unpaid rent. The Hernandezes argued County Investments had no right to lease the property and collect rent before the Commissioner's Deed was recorded in June 2017. Essentially, it argued County Investments' quitclaim deed, recorded after the filing of the foreclosure action, was insufficient to grant title.
The circuit court disagreed, holding County Investments "was properly vested with authority to enter into the lease agreement . . . and was entitled to collect rent ...." After a subsequent hearing on damages, the circuit court entered a final judgment awarding County Investments $4,400 for unpaid rent, $1,000 for property damage, and $2,360 for attorney fees. The Hernandezes moved to alter, amend, or vacate the judgment and for additional findings, which the circuit court denied. This appeal and cross-appeal followed.
The Hernandezes raise numerous allegations of error on appeal, which we will address individually. Their first argument concerns the circuit court's grant of partial summary judgment, which we review de novo. "The standard of review on appeal 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 v. Nat'l Feeding Systems, Inc., 90 S.W.3d 46, 49 (Ky. 2002).
The Hernandezes argue the circuit court erred in determining County Investments had the right to lease the property and collect rent. They contend County Investments had no ownership interest in the property until the judicial sale in June 2017 and thus had no authority to rent the property in 2016. We disagree. The Hernandezes' brief focuses on when title passes during a judicial sale but makes little mention of County Investments' quitclaim deed acquired in 2014.
As recognized by the circuit court, a quitclaim deed is a valid form of conveyance and transfers whatever interest the seller has. See Smith v. Graf, 259 Ky. 456, 470, 82 S.W.2d 461, 468 (1935); Johnson v. Johnson, 173 Ky. 701, 705, 191 S.W. 672, 675 (1917). The Hernandezes seem to believe the quitclaim deed was null because County Investments acquired the property while it was in foreclosure; however, they have cited no case law in support. In fact, "Kentucky law has long subscribed to the 'lien theory' of mortgages and holds that 'a mortgage is a mere security for debt, and that, substantially, both at law and in equity, the mortgagor is the real owner of the property mortgaged. '" Grafton v. Shields Mini Markets, Inc., 346 S.W.3d 306, 310 (Ky. App. 2011) (citation omitted). Thus, "upon default a mortgagor's interest in real property is not forfeited. Rather, the mortgagee has only a security interest, and ownership of the premises remains with the mortgagor and subject to the mortgagor's right to redeem the property . . . ." Id. (citation omitted).
When the previous owners defaulted on their mortgage, they retained ownership of the property and could convey that interest via quitclaim deed. However, under a quitclaim conveyance, the purchaser "takes the estate, subject to all the disadvantages that it was liable to in the hands of the vendor, and the law will presume notice of all incumbrances, either legal or equitable." Jones v. Arthur, 244 S.W.2d 469, 471 (Ky. 1951) (citation omitted). Therefore, County Investments took the property subject to the mortgage lien, but it still was the property owner and entitled to lease it out. See McEwan v. EiA Properties, LLC, 428 S.W.3d 633, 636 (Ky. App. 2014) ("[A] mortgagor generally retains the right to lease a mortgaged premises . . . ."). It later exercised its right of redemption (obtained via quitclaim deed from the mortgagor) and gained the property free from encumbrance.
The Hernandezes next claim the circuit court lacked subject matter jurisdiction because the amount in controversy was less than the minimum $5,000 required by statute. In its complaint, County Investments sought $5,500 in unpaid rent and an unspecified amount for property damage. The Hernandezes argue the maximum amount of damages sustained, if any, is $4,400 because County Investments never returned their $1,100 security deposit, and the court's award for property damage was erroneous.
However, for jurisdictional purposes, the amount in controversy is determined based on the allegations in the complaint, not what a party is entitled to. See Jackson v. Beattyville Water Dep't, 278 S.W.3d 633, 637 (Ky. App. 2009) ("[P]leading[s] and answers are not proof of damages. Rather, they merely represent the amount in controversy as required by KRS Chapters 23A and 24A and the caselaw."); see also Montgomery v. Glasscock, 121 S.W. 668, 668 (Ky. 1909) ("Jurisdiction in such cases depends, not upon the amount to which plaintiff shows himself entitled, but upon the amount sued for."). The circuit court properly exercised subject matter jurisdiction over County Investments' claims.
The Hernandezes also allege the circuit court's attorney fee award was contrary to KRS 383.570(1)(c), which precludes attorney fees provisions in rental agreements. Despite this prohibition, KRS 383.660(3) provides that if "noncompliance [of the tenant with the rental agreement] is willful the landlord may recover actual damages and reasonable attorney's fees." "'Willful' means with deliberate intention, not accidentally or inadvertently, and done according to a purpose." KRS 383.545(17).
Here, the Hernandezes contend, the circuit court awarded attorney fees based on the rental agreement without any finding of willfulness. However, we reverse the attorney fee award on a different basis. In O'Rourke v. Lexington Real Estate Company, L.L.C., 365 S.W.3d 584 (Ky. App. 2011), a panel of this Court reversed an attorney fee award under very similar circumstances. In addition to finding no evidence of willfulness on the debtor's part to authorize an award of attorney fees under KRS 383.660(3), we held the landlord failed to properly plead a claim for attorney fees under KRS 383.660(3):
CR 8.01 provides that a claim "shall contain (a) a short and plain statement of the claim showing that the pleader is entitled to relief, and (b) a demand for judgment for the relief to which he deems himself entitled." Our review of the complaint filed herein reveals that Lexington Real Estate failed to properly plead any claim for attorney's fees, and certainly no claim under KRS 383.660(3).
Although the complaint requested an award of attorney's fees in the ad damnum clause, it failed to state any claim for attorney's fees in the body of the complaint. CR 8.01 requires notice of the claim, and O'Rourke was not given notice of any acts or omissions alleged against him that would authorize application of KRS 383.660(3).
Although KRS 383.660(3) creates a limited exception to the general rule that each party shall pay its own attorney's fees, to invoke that exception notice of the claim must be pled to join the issue. See Pike v. George, 434 S.W.2d 626 (Ky. App. 1968).Id. at 587.
Kentucky Rules of Civil Procedure.
Similarly, here, County Investments' complaint fails to plead any claim for attorney fees. While its tendered amended complaint states a claim for attorney fees generally, it did not mention KRS 383.660(3) or allege any act that would authorize the application of KRS 383.660(3). Without proper notice of a claim for attorney fees under KRS 383.660(3), the attorney fee award was erroneous.
While County Investments cites two other statutes, KRS 383.645 and 383.695(4), as authorizing an award of attorney fees, those statutes also require findings of willfulness or bad faith, which the circuit court did not find here.
Further, as above, County Investments did not plead a claim for attorney fees under either statute. County Investments also claims attorney fees are proper in equity; however, this argument was expressly rejected in O'Rourke. See 365 S.W.3d at 587 ("In view of [KRS 383.570 and KRS 383.660(3)], we see no room for trial court discretion [based on equity] in this arena [(attorney fees)] except as provided in KRS 383.660(3).").
The Hernandezes next contend the circuit court failed to make sufficient findings of fact to support its property damage award. "CR 55.01 clearly contemplates that damages hearings in cases where a [summary] judgment for liability has been entered should be evidentiary in nature to determine the amount of damages and establish the truth of any other allegations or evidence supporting the damage claim." Deskins v. Estep, 314 S.W.3d 300, 304 (Ky. App. 2010). "Kentucky Courts have concluded that proceedings of this nature are governed by CR 52.01." Id. (citation omitted). "The provisions in CR 52.01 are mandatory and require the court to make specific findings of fact and separate conclusions of law before rendering a judgment." Id. (citation omitted).
The Hernandezes also challenge the sufficiency of the findings supporting the attorney fee award, but because we have determined the attorney fee award to be error, the issue is moot.
At the damages hearing, Mac Sawyers, one of County Investments' principals, testified to various property damage following the Hernandezes' tenancy, including a broken window, missing door, and ruined carpet. He further estimated the cost to repair this damage was $3,500. This estimate was based on the $5,000 County Investments paid to rehabilitate the property minus the $1,500 they typically paid to rehabilitate other properties following tenancy. He further testified that new carpet alone could cost $3,500 to $4,000. Sawyers provided no itemized costs for the various damages but testified he paid someone a lump sum to fix everything.
In its final judgment, the circuit court found that County Investments "presented sufficient evidence to support their claim that they are entitled to damages in the amount of $1,000 for damages to the property." "To perform meaningful review of a trial court's decision, this Court must be able to fully understand the facts and evidence upon which the court relied." Patmon v. Hobbs, 495 S.W.3d 722, 728 (Ky. App. 2016). Here, it is unclear what damage the $1,000 was awarded for. To make an award for property damage, the court needed to find the Hernandezes liable for any or all the property damage testified to by Sawyers. Yet from the order, we cannot tell which acts the circuit court believed were committed. Sawyers testified to $3,500 in repair costs and various property damage, but the court's order does not state which evidence it relied upon in awarding $1,000 in damages. Therefore, we remand for the circuit court to make specific findings of fact, based on the evidence presented at the hearing, to support its damage award.
Finally, the Hernandezes also challenge the sufficiency of the proof concerning property damage. They question Sawyers's reliability as a witness and the court's discounting of Erin Hernandez's testimony regarding the house's condition. However, "judging the credibility of witnesses and weighing evidence are tasks within the exclusive province of the trial court." Moore v. Asente, 110 S.W.3d 336, 354 (Ky. 2003) (citation omitted); see also CR 52.01 ("[D]ue regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses."). Considering our remand for additional findings, we do not address the sufficiency of the evidence.
Turning to County Investments' cross-appeal, it argues the circuit court erred by not granting its motion to amend its complaint. County Investments filed its motion to amend almost four years after filing its original complaint. The amended complaint sought the full eight months of rent due under the rental agreement, rather than the five months owed when it filed the original complaint. The circuit court denied the motion, finding it was untimely.
CR 15.01 provides that "a party may amend his pleading only by leave of court . . . and leave shall be freely given when justice so requires." "[L]iberality in granting leave to amend is desirable, [but] the application is addressed to the sound discretion of the trial judge." Bradford v. Billington, 299 S.W.2d 601, 603 (Ky. 1957). Absent abuse of discretion, we will not disturb the trial court's decision. M.A. Walker Co., Inc. v. PBK Bank, Inc., 95 S.W.3d 70, 74 (Ky. App. 2002) (citation omitted).
Factors to be considered in determining whether to grant or deny leave to amend a complaint include "timeliness, excuse for delay, and prejudice to the opposite party[,]" Lawrence v. Marks, 355 S.W.2d 162, 164 (Ky. 1961), as well as "failure to cure deficiencies by amendment or the futility of the amendment itself." First National Bank of Cincinnati v. Hartman, 747 S.W.2d 614, 616 (Ky. App. 1988). However, "delay alone is insufficient reason to deny a motion to amend." Estes v. Kentucky Utilities Co., 636 F.2d 1131, 1134 (6th Cir. 1980). Here, the circuit court gave no other reason for denying the motion to amend but timeliness.
While the motion to amend was filed almost four years after the original complaint, it sought only increased damages due under the rental agreement. The Hernandezes would have suffered no prejudice by the amendment. They knew or should have known they owed $8,800 under the lease. They understood it was a one-year lease and conceded they only paid four-months' rent. The lease agreement specifically provided forfeiture of the lease "shall in no way affect any obligation or undertaking hereunder by Lessee" and "[r]eturn of the keys for the Lease Premises . . . shall in no way create or produce a cancellation or release hereunder, nor a cancellation of any monies due, or to become due ...."
Further, the motion to amend was filed before the damages hearing; therefore, the Hernandezes had time and opportunity to present evidence and argument in opposition. Under these facts, we believe the circuit court abused its discretion in denying the motion to amend.
County Investments next argues it was entitled to the full eight months of unpaid rent owed under the rental agreement. In a breach of contract claim, the measure of damages "is that sum which will put the injured party into the same position he would have been in had the contract been performed." Barnett v. Mercy Health Partners-Lourdes, Inc., 233 S.W.3d 723, 727-28 (Ky. App. 2007). In its final judgment, the circuit court found the Hernandezes "failed to honor their contractual obligation to pay monthly rent in the agreed amount of $1,100 for an 8-month period of time." But it declined to award County Investments damages for eight months of unpaid rent, finding it "failed to present evidence to demonstrate that meaningful effort was made to re-lease and mitigate their damages."
"A party claiming damages for breach of contract is obligated to use reasonable efforts to mitigate his damages." Jones v. Marquis Terminal, Inc., 454 S.W.3d 849, 852 (Ky. App. 2014) (citation omitted). "However, his efforts to minimize or avoid losses need not be unduly risky, expensive, burdensome, or humiliating." Id. (citing 24 Williston on Contracts § 64:27 (4th ed. 2010)). Further, "[t]he party committing the breach bears the burden of proving that the plaintiff failed to mitigate his damages." Id.
Here, it appears the circuit court placed the burden of proof on County Investments rather than the Hernandezes. Nevertheless, Sawyers testified that it took three months to get the property rental ready after the Hernandezes vacated and that County Investments spent $5,000 on the renovations. This was $3,500 more than it normally spent to prepare a property for rent. He further testified that he showed the property to about twelve to fifteen people, put out signs, and posted a link on Facebook Marketplace. Additionally, his daughter showed the property. Despite these efforts, County Investments was unable to lease the property.
Based upon this evidence, the circuit court's finding that County Investments failed to reasonably mitigate its damages was clearly erroneous. As noted above, the burden of proof was on the Hernandezes and they presented no evidence to contradict Sawyers's testimony. Based upon the court's finding that the Hernandezes breached the rental agreement, County Investments was entitled to the remaining eight months of rent due under the contract. Thus, we reverse the circuit court's award of damages for breach of contract.
Finally, County Investments argues the court erred in failing to award its costs as the prevailing party under CR 54.04. That rule provides, in relevant part, "[c]osts shall be allowed as of course to the prevailing party unless the court otherwise directs ...." Thus, "while costs are allowed 'as of course' to the prevailing party, trial courts retain the authority to 'otherwise direct[],' that is, not to award costs to the prevailing party." Lang v. Sapp, 71 S.W.3d 133, 136 (Ky. App. 2002). We cannot say the circuit court abused its discretion in not awarding costs.
Based upon the foregoing, as to the Hernandezes' appeal, we affirm the Jefferson Circuit Court's orders in part but reverse as to the award of attorney fees and the denial of the motion for additional findings and remand for the circuit court to make written findings in support of its damage award based on the evidence presented at the hearing, including the facts and evidence which it relied upon. As to County Investments' cross-appeal, we affirm the circuit court's denial of costs but reverse its denial of County Investments' motion to amend its complaint and the court's damage award for breach of the rental agreement.
ALL CONCUR.