Opinion
CASE NO. 98-50956.
August 30, 2011
MEMORANDUM OPINION
The factual background of the litigation in this case is set out in some detail in the previous opinion of the court dated October 13, 2010. More facts from various perspectives are set out in several related state court opinions, and, of course, in the several complaints initiating civil actions related to this case. See Commonwealth of Kentucky Court of Appeals unpublished opinion, Dr. John W. Backer v. Manning Family Trust and Lexington Bloodstock, Inc. No. 93-CA-2378-MR and Central Kentucky Agricultural Credit Association v. Manning Family Trust No. 93-CA-2580-MR, July 14, 1995, and Manning Family Trust et al v. Bank One Lexington, NA, United States of America, and Simon Manning, Commonwealth of Kentucky Court of Appeals 1999-CA-000654-MR, December 22, 2000.
One unresolved issue before the court is whether the General Release and Settlement Agreement dated September ___ (sic) 2006, between JP Morgan Chase Bank and the Manning Family Trust, settling several state court civil actions in which the Bank and the Trust were parties as plaintiff or defendant, should, as contended by counsel for the debtor, be construed as having the additional effect of releasing a judgment in the amount of $1,483,294.00 in favor of the Trust against the debtor, Dr. Backer, and the estate of the debtor. Counsel for the debtor contends enforcement of this judgment against the debtor would result in an impermissible double recovery from alleged joint tort-feasors.
Based on the foregoing judgment, the claim of Manning Family Trust was, by an agreed order, allowed in the debtor's bankruptcy case in the amount of $1,573,248.75. This amount includes interest computed to the date of the debtor's bankruptcy.
In connection with the General Release and Settlement Agreement between JP Morgan Chase Bank and Manning Family Trust, the bank released its judicial lien on the Trust's judgment claim against the debtor. The Manning claim against the debtor based on the foregoing judgment remains encumbered by statutory liens asserted by several attorneys for fees earned in representing the Manning Family Trust.
In an opinion entered October 13, 2010, this court sustained the motions of the debtor and Griggs Management Company, a secured creditor of the debtor, seeking reconsideration of the allowance of the Manning Family Trust claim against the debtor.
Before dealing with the law limiting duplicate recovery from joint tort-feasors, the undersigned judge believes he is obligated to raise an issue that may make determination of the joint tort-feasors question unnecessary.
Section 105 of the Bankruptcy Code, 11 U.S.C. § 105(a), permits this court sua sponte to make any determination necessary or appropriate to prevent an abuse of process.
During the Spring and Summer of 1990, while the negotiation, which form the basis of the claim of the Manning Family Trust against the debtor were in process, a relevant amendment to the Kentucky Statute of Frauds, KRS 371.010, adding thereto subparagraph (9), took effect July 13, 1990. As indicated hereinafter, this court believes this amendment adding subsection (9) to KRS 371.010 controls the question of the debtor's liability on the judgment awarded to the Manning Family Trust against the debtor.
The applicability of KRS 371.010(9), which applies to extensions of credit, was not addressed in the opinion of the state trial court nor in the opinion of the Kentucky Court of Appeals, affirming in part and reversing in part the initial judgment of the state trial court.
In March of 1990 the debtor, Dr. Backer, entered into a listing agreement with Charles White, a partner in Lexington Bloodstock, Inc. (LBI), which authorized LBI to sell a 4-in-1 package of thoroughbred horses consisting of the mare Female Star in foal to the stallion Alydar, a 1990 Female Star-Alydar colt, and a 1989 Sunny's Halo-Female Star colt.
After having placed a for sale ad for these horses in Bloodhorse Magazine in April of 1990, Mr. White was contacted by Ron Manning, a trustee of Manning Family Trust. In May of 1990 Mr. White arranged for Mr. Manning to view the horses offered for sale. Mr. Manning was not interested in acquiring the 1989 Sunny's Halo-Female Star colt. Thereafter, Mr. Manning submitted a written offer, prepared by Mr. White, to purchase a 3-in-1 package of thoroughbreds consisting of Female Star in foal to Alydar and the 1990 Alydar-Female Star colt, for a purchase price of $1,000,000.00. The proposed agreement was signed by Charles White, as agent for Ron Manning, and by R.C. Manning for Manning Family Trust. The offer was then forwarded to Dr. Backer for his signature.
Dr. Backer refused to sign the agreement. The signature line for showing acceptance of the seller remained blank. See facts recited in Commonwealth of Kentucky Court of Appeals opinion in No. 93-CA-2378-MR, July 14, 1995 cited above.
While these negotiations were in process in the Spring and Summer of 1990, the Kentucky Statute of Frauds, KRS 371.010, was amended to add thereto a new subparagraph (9), as follows, which became effective July 13, 1990.
"No action shall be brought to charge any person:
. . . . . . .
(9) Upon any promise, contract, agreement, undertaking, or commitment to loan money, to grant, extend, or renew credit, or to make any financial accommodation to establish or assist a business enterprise . . . unless the promise, contract, agreement, representation, assurance, or ratification. . . . be in writing and signed by the party to be charged therewith. . . ."
This amendment is applicable in this instance because the Agreement, which Dr. Backer, the debtor, refused to sign, required him to extend credit to Manning Family Trust in the amount of $350,000.00, one-third of the purchase price of the thoroughbred package offered for sale. This sum was to be paid to Dr. Backer by the Manning Family Trust, in two installments of $175,000.00 each, plus interest, over a period of two years.
In other words, this was not simply an agreement for the sale and purchase of thoroughbred horses, it was also an agreement that required the seller, Dr. Backer, to extend credit to the Manning Family Trust, the buyer, in the amount of $350,000.00, one third of the purchase price of this package of thoroughbreds. The proffered agreement required Dr. Backer to extend credit in this amount to the Manning Family Trust to consummate the sale. This is apparent from the statement of facts set out in paragraphs 4 and 6 of Count 1 of the original complaint in behalf of the Manning Family Trust against the debtor, initiating this action as follows:
"4. On or about the 12th day of May, 1990 and thereafter plaintiff R.C. Manning entered into a purchase agreement with the defendant John W. Backer whereby plaintiff agreed to purchase and defendant Backer agreed to sell the thoroughbred mare Female Star, in foal to Alydar, and her unnamed colt for a total consideration of One Million Dollars ($1,000,000.00), of which Fifty-Thousand Dollars ($50,000.00) was to be paid as a down-payment and deposited in the escrow account of Lexington Bloodstock Inc. for and on behalf the defendant John W. Backer; the balance to be paid as follows: Six Hundred Thousand Dollars ($600,000.00) at closing, with the remaining installment payments of One Hundred Seventy-Five (sic) Dollars ($175,000.00) each, payable in two annual installments, plus interest at prime." Underscoring supplied.
. . . . . . . . .
"6. The plaintiff is ready and willing to pay the defendant John W. Backer the balance of the purchase price as provided in the purchase agreement at such time as the defendant John W. Backer directs." Underscoring supplied.
The plaintiff's complaint containing these allegations was filed with the Fayette Circuit Court, Civil Branch, 3rd Division on October 9, 1990 and was designated Civil Action No. 90-CI-3506.
This complaint was filed nearly three months after the effective date of the amendment to the Kentucky Statute of Frauds, KRS 371.010, adding thereto new subparagraph (9), which provides:
"No action shall be brought to charge any person;
Upon any promise, contract, agreement, undertaking, or commitment to loan money, to grant, extend or renew credit, or to make any financial accommodation to establish or assist a business enterprise . . . unless the promise, contract, agreement . . . be in writing and signed by the person to be charged therewith or his authorized agent. Underscoring supplied.
Mr. White, who prepared and signed this document and obtained thereon the signature of the buyer, R.C. Manning for Manning Family Trust, before the agreement was submitted to and seen by the debtor, was an agent of the buyer, Manning Family Trust, not of the seller, Dr. Backer.
Clearly, the action filed in the Fayette Circuit Court on October 9, 1990, to enforce this unsigned agreement was a premature, impermissible action which the Kentucky Statute of Frauds mandated with respect thereto that no such action "shall be brought" before the document was signed by the "person to be charged therewith," in this instance, the seller, Dr. Backer. The only issue open to proof by parole or other evidence was the selling price, which was set out in this agreement and was undisputed.
The initial answer in behalf of the debtor alleged the Statute of Frauds as a defense, without reference to a specific subsection of the statute, but which nevertheless merited a look at the statute.
Following an initial trial held March 18-19, 1992, in Fayette Circuit Court, in this Civil Action No. 1990-CI-3506, the judge determined there was clear and convincing evidence, apparently only testimony, that Dr, Backer had agreed to sell the 3-in-1 bloodstock package to Manning Family Trust on the terms set out in the unsigned agreement. The judge ordered an ultimately disapproved form of specific performance.
In her Opinion and Order of July 14, 1992, in paragraph 2 of her Conclusions of Law, the Judge states:
"2. The Defendant's arguments that the horses are unique, and that the Statute of Frauds precludes the enforcement of the contract, are without merit. Expert testimony at trial clearly indicated that horses of this type are "unique." Horses are only able to produce a foal once a year. Furthermore, these are horses with exceptional pedigrees. As to the Statute of Frauds, KRS 355.2-201(2) would take this transaction outside of the Statute of Frauds since all parties involved were experienced horsemen and thus considered merchants under the statute."
Perhaps the foregoing observations might be accurate if this were merely a contract for the sale of thoroughbred horses. However, this was also a contract that required the seller, Dr. Backer, to extend credit to the buyer, the Manning Family Trust, in the amount of $350,000.00, one-third of the sales price of the thoroughbreds, exclusive of LBI's commission on the sale.
The Statute of Frauds, KRS 371.010(9), precluded judicial enforcement of this agreement absent the acceptance signature of Dr. Backer, the person to be charged therewith.
The language of KRS 371.010(9) is pristine. It precludes the commencement of an action against "any" person to enforce "any" promise, contract, or agreement to grant or extend credit unless the agreement is signed by the person to be charged therewith.
The fact the debtor did not timely respond to demands that he sign this contract In no way authorized the commencement of a civil action to enforce this contract so long as the contract remained unsigned.
This civil action against the debtor was premature. Commencement of the action was barred by state law until such time as the debtor signed the agreement.
Section 355.2-201(2) of the Uniform Commercial Code, which deals with the sale of goods, was enacted in 1958, and became effective July 1, 1960. It applies to contracts for the sale of goods. It does not purport to apply to contracts for the granting or extension of credit.
The relevant amendment to the Statute of Frauds, KRS 371.010, adding thereto subparagraph (9), dealing with commitments to loan money or extend credit, was enacted in 1990 and became effective July 13, 1990.
Fungible goods and money are separately defined in the Uniform Commercial Code. Section 355.2-201, of the Uniform Commercial Code does not purport to deal with the inseparable provisions of this contract relating to the extension of credit by the seller to the buyer to consummate the sale. KRS 371.010(9) plainly precluded commencement of this action to enforce this agreement so long as the agreement remained unsigned by the seller, Dr. Backer.
No cause of action existed until Dr. Backer signed the agreement indicating his willingness to extend $350,000.00 in credit to the Manning Family Trust or the Manning family to consummate the sale.
The fact the debtor subsequently may have given invalid reasons for not signing this agreement, or the fact the debtor's banker, First Security National Bank and Trust Company, on learning of the proposed sale of some of the debtor's bloodstock may have required the debtor to execute a security agreement granting the bank a security interest in the debtor's thoroughbreds to secure an indebtedness of $680,000.00 the debtor owed to the bank, or may have informed the debtor the bank would not release its security interest in the debtor's bloodstock until the debtor's indebtedness to the bank was paid, or may have insisted that the debtor not obligate himself by funding part of the sales price of the 3-in-1 package of thoroughbreds the Manning Family Trust wanted to buy, all are not particularly relevant because no cause of action to enforce this agreement existed from its inception until the debtor signed the agreement.
In the interim between the filing of the complaint on October 9, 1990, and the initial trial held March 18-19, 1992, Dr. Backer had sold the Female Star-Alydar colt for $500,000. This complicated the Mannings' request for specific performance of the sales contract. Nevertheless, the trial judge ordered that Female Star and two of her offspring by stallions other than Alydar be turned over to the Manning Family and awarded the Manning Family Trust damages in the amount of $73,459.15, apparently based on projected lost earnings suffered by the Mannings due to the failure of the debtor to honor the sales agreement. The Mannings took possession of and moved the horses to their newly purchased farm in Woodford County near Versailles, Kentucky.
The Kentucky Court of Appeals reversed this judgment on the ground the delivery to the Mannings of the non-Alydar offspring was inconsistent with the law of specific performance. The horses were then returned to the Woodford County farm of Dr. Backer. The Court of Appeals directed that the judgment against the debtor be limited to monetary damages.
Neither the trial judge nor the Kentucky Court of Appeals took note of the applicability of KRS 371.010(9) to the legitimacy of this action. The fact the Kentucky Court of Appeals became involved does not restore validity to this earlier or later judgment of the trial court because the action in which the judgments were entered was prohibited and invalid from the date of commencement of the case.
Following a non-jury evidentiary hearing held November 29-30, 1995, the state trial court on February 16, 1996, entered a judgment in favor of the Mannings against the debtor for damages in the amount of $1,483,294.00. This is the judgment on which the claim of the Mannings is based in Dr. Backer's bankruptcy case.
This judgment for damages was assessed against the debtor, Dr. Backer, for his refusal to sign the agreement, which would have obligated him to extend credit to the Manning Family Trust to enable the Trust to purchase the 3-in-1 package of thoroughbreds Dr. Backer was offering for sale.
There was the additional complication that the horses had become subject to a security interest held by Central Kentucky Agricultural Credit Association (Ag Credit). The security agreement encumbering the horses precluded their sale without Ag Credit's approval.
This came about because, perhaps at the suggestion of and in cooperation with First Security National Bank and Trust Company, Ag Credit had loaned the debtor an amount sufficient to pay his indebtedness of approximately $680,000.00 to First Security National Bank and Trust Company, which previously had taken and held a security interest in the debtor's horses to secure payment of the debtor's indebtedness to the bank.
It appears that because of the debtor's indebtedness initially to First Security National Bank and Trust Company and thereafter to Ag Credit, in each instance secured by a security interest in the debtor's bloodstock, the debtor would have been unable to deliver clear title to the 3-in-1 package of thoroughbreds to Manning Family Trust, without the approval of Ag Credit,
Section 105 of the Bankruptcy Code, 11 U.S.C. 105, permits the Bankruptcy Court sua sponte to make any determination necessary or appropriate to prevent an abuse of process.
It is clear this barred civil action, in which this monetary judgment in the amount of $1,453,294.00 was entered against the debtor, was commenced prematurely and therefore illegally, in the Fayette Circuit Court.
KRS 371.010(9) clearly prohibited the bringing of this action to obtain specific performance of an alleged oral promise to loan money or extend credit. The state legislature obviously did not intend to create, and did not create, a cause of action whereby an individual could be compelled to comply with oral agreement to loan money or extend credit. To be enforceable such an agreement not only must be in writing. It also must have been signed by the person making the commitment.
Because of the debtor's refusal to sign this agreement there was no court of competent jurisdiction authorized to entertain an action for specific performance of the agreement. The jurisdiction of the court, if any, would be limited to dismissal of the action for having been improvidently filed.
The Fayette Circuit Court was not a court of competent jurisdiction to enforce this unsigned agreement to extend credit because no such cause of action, if it previously had existed, existed any longer.
In view of this amendment to the Kentucky Statute of Frauds, none of our Kentucky state courts would have competent jurisdiction to do other than dismiss this barred cause of action.
This assertion is bolstered by the ruling of the Kentucky Court of Appeals in an unpublished opinion in Manning Family Trust, et al. v. Bank One Lexington et al. That court, citing the provisions of KRS 371.010(9), instructs that alleged verbal representations may not be relied on to prove the existence of a commitment to renew or extend credit. See Kentucky Court of Appeals Opinion No. 1999-CA-000654-MR, pgs. 11-12.
CONCLUSIONS OF LAW
Section 105 of the Bankruptcy Code, 11 U.S.C sec. 105(a), permits this court sua sponte to make any determination necessary or appropriate to prevent an abuse of process.
"A court cannot confer jurisdiction on its self where none existed and cannot make a void proceeding valid. It is clear and well established law that a void order can be challenged in any court." Wayne Mut. L. Assoc. v. McDonauch, 204 U.S. 8, 27 S. Ct. 236 (1907).
A void judgment is to be distinguished from an erroneous one, in that the latter is subject only to direct attack. A void judgment is one which from its inception is a complete nullity and without legal effect. Lubben v. Selective Service System, 453 F. 2d 645, 649 (1st Cir. 1972).
A court may not render a judgment which transcends the limits of its authority, and a judgment is void if it is beyond the powers granted to the court by the law of its organization, even where the court has jurisdiction over the parties and the subject matter. Thus, if the court is authorized by statute to entertain jurisdiction in a particular case only, and undertakes to exercise the jurisdiction in a case to which the statute has no application, the judgment is rendered void. The lack of statutory authority to make a particular order or judgment is akin to lack of subject matter jurisdiction and is subject to collateral attack. 46 Am Jur.2d, Judgments § 25, pp. 388-89.
Subparagraph (9) of the Kentucky Statute of Frauds, KRS 371.010(9) clearly, unequivocally, without question, precluded the commencement of this adversary proceeding for specific performance of this agreement for sale of the 3-in-1 package of thoroughbred horses because the agreement was not signed by the person to be charged, Dr. Backer, the debtor.
Because this civil action was barred by statute from being brought, unless the debtor had signed the agreement, the Fayette Circuit Court never acquired jurisdiction of the action in which it entered the judgment in question.
Thus, the judgment of $1,483,294.75 that court entered against the debtor is void.
Compare the result reached by the Kentucky Court of Appeals in a somewhat similar civil action filed by Manning Family Trust, Ronald C. Manning, Trustee, et al. v. Bank One, Lexington, N.A., Kentucky Court of Appeals, unpublished opinion, December 22, 2000 No. 1999-CA-000654-MR, appeal from Fayette Circuit Court Action No. 93-CI-0177, referred to above on page 20. In this action the Mannings were seeking an order requiring Bank One, Lexington to permit them to draw on a draw note, originally intended to enable Manning Family Trust to purchase a Sally's Ride thoroughbred package. After they were unable to purchase the Sally Ride package, they alleged in a civil action against the bank that an officer of the bank had agreed to modification of the note to enable them to purchase other thoroughbreds.
The Kentucky Court of Appeals, citing KRS 371.010(9), ruled that Ronald C. Manning could not rely on alleged verbal representations of an officer of the bank as grounds for modification of the pre-existing draw note.
This represents the current law of Kentucky since enactment of subparagraph 9 of the Kentucky Statute of Frauds with respect to use of testimony to establish an agreement to extend credit. Our state law does not permit use of such testimony to circumvent the iron-clad requirement that an agreement to extend credit must be in writing signed by the party to be charged.
An order shall be entered determining the judgment in favor of Manning Family Trust against the debtor, Dr. Backer, to be null and void and unenforceable.
See Garcia v. Garcia, 712 F.2d 288 (Utah 1989); Omer v. Shalala, 30 F.3d 1307, 1310 (10th Cir. 1994).
The money paid to Manning Family Trust by JP Morgan Chase Bank in settlement of claims against the bank and its predecessors is not property of the bankruptcy estate.
It is possible the debtor has a claim against Manning Family Trust for reimbursement for amounts paid to the Trust pursuant to the terms of the Forbearance Agreement discussed in the opinion of the Court entered October 13, 2010, but that issue is not presently before the court.