Opinion
Case No. 94-70016, Adv. No. 95-7032.
September 13, 2005
Bruce A. Levy, Esq., Trustee, C. Wayne Shepherd, Esq., C. Christopher Trower, Esq., W. Thomas Bunch, Esq., Jerry D. Truitt, Esq., John O. Morgan Jr., Esq., for Debtors.
FINDINGS OF FACT and CONCLUSIONS OF LAW
This matter came before the Court for trial on August 29 and 30, 1996, and September 9, 1996. The Court having considered the testimony offered at trial, the joint stipulation of the parties, the briefs of the parties, and the documentary and other pertinent evidence of record in this case, and being otherwise fully advised, now, in accordance with Rule 52 of the Federal Rules of Civil Procedure, made applicable herein by Rule 7052 of the Federal Rules of Bankruptcy Procedure, makes the following Findings of Fact and Conclusions of Law:
Findings of Fact
This matter was initiated by the filing of the plaintiffs' Amended Adversary Complaint on August 22, 1995. Defendant Citizens Bank of Jackson ("the Bank") filed its Answer on October 12, 1995. Defendants Laura P. Graham, Joyce G. Hogg, and Juanita Faye King, as Co-Executrixes of the Estate of J. Douglas Graham (collectively "the Graham Estate") filed a Motion to Dismiss Complaint on October 12, 1995. Defendants William Back, Velma Back, and Ethel Back ("the Backs") filed a Motion to Dismiss or in the Alternative Abate Proceedings on October 13, 1995.
The Bank filed Motion for Rule 12(b)/56 Against the Trustee on November 2, 1995. The plaintiffs filed their Joint Response to Motions to Dismiss on November 13, 1995. By Order entered on November 15, 1995, this Court denied the Backs' Motion to Dismiss. This Court further entered an Order on December 1, 1995, allowing the plaintiffs to amend their Complaint against the Bank and the Graham Estate, sustaining the Bank's Motion for Leave to File a Cross-Claim against the Graham Estate and allowing the Cross-Claim tendered with its Motion to be filed, and sustaining the Graham Estate's Motion for Leave to File Third-Party Complaint.
The plaintiffs filed their Second Amended Adversary Complaint on December 8, 1995. The Graham Estate filed its Third Party Complaint against American Home Assurance Company ("American Home") on December 12, 1995. American Home had insured J. Douglas Graham against liability for acts, errors, or omissions in the practice of law. The Bank filed its Answer to Second Amended Adversary Complaint and Cross-Claim on December 12, 1995, as well as a Motion for Rule 12(b)/56 Against the Trustee, Griffith and Nobles (sic) as a Result of Their Filing of the Second Adversary Complaint. The Graham Estate filed its Answer to Cross-Claim on December 15, 1995.
The Graham Estate filed a Motion to Dismiss Second Amended Adversary Complaint on December 19, 1995. American Home filed its Answer to Third Party Complaint on January 24, 1996, and its Motion for Summary Judgment on Third-Party Plaintiffs' Claims on February 9, 1996. On February 26, 1996, this Court entered an Order sustaining the Bank's Motion for Rule 12(b)/56 Against the Trustee to the extent of any state law preferential conveyances, and overruling it as to all other assertions in the Complaint. The Graham Estate's Motion to Dismiss was overruled. On the same date the Graham Estate filed a Supplement to Motion to Dismiss and its Third-Party Plaintiffs' Response to Motion for Summary Judgment.
The Bank filed a Renewed Motion for Summary Judgment on February 28, 1996. After a hearing conducted on February 29, 1996, this Court entered an Order on March 1, 1996, sustaining American Home's Motion for Summary Judgment. On March 7, 1996, the Graham Estate filed a Motion to Reconsider or in the Alternative to Alter or Amend, in regard to the Court's Order of February 26, 1996. The Bank filed its Answer to Cross-Claim and a Motion for Rule 12(b)/56 Against the Backs on April 1, 1996. The plaintiffs filed their Joint Response to Bank's Renewed Motion for Summary Judgment on April 12, 1996. The Bank filed its Reply to Plaintiffs' Joint Response on April 15, 1996. The Backs filed their Reply to the Bank's Motion for Summary Judgment and a Cross-Motion for Summary Judgment against the Bank on May 2, 1996. The Bank filed its Response to the Backs' Cross-Motion for Summary Judgment on May 6, 1996.
On May 9, 1996, an Agreed Order was entered by which the parties agreed to submit to the jurisdiction of the Bankruptcy Court all related proceedings under 28 U.S.C. § 157(c)(1). The Agreed Order further provided that this Court would hear and determine and enter appropriate orders and judgments under § 157(c)(2) subject to review under 28 U.S.C. § 158. An Order for Trial was entered on May 13, 1996, setting this matter for trial on August 8 and 9, 1996.
On July 15, 1996, an Order was entered in which this Court ruled, inter alia, that the correct interpretation of the Court of Appeals' Opinion entered on October 19, 1992 (rendered on February 14, 1992 and modified on May 8, 1992), is that the Backs have no interest in or lien upon the insurance proceeds which constitute the res of this matter, although the Backs may assert a claim against the plaintiffs for breach of the lease. An Order on the Motion to Reconsider or in the Alternative to Alter or Amend filed by the Graham Estate was also entered on July 15. This Order altered the Memorandum Opinion and Order entered on February 26, 1996, by changing a date in the opinion and making the order interlocutory rather than final.
A third Order was entered on July 15 on the Graham Estate's Motion to Dismiss or in the Alternative for Summary Judgment of First Adversary Complaint and Second Amended Adversary Complaint. This Order overruled the Motion to Dismiss. It further overruled the Motion for Summary Judgment of the Second Adversary Complaint on the counts contained in paragraphs 60, 61, 62, 65, 67, 68, 69, 70, 71, 72, 84, 85, and 92. It sustained the Motion in regard to paragraphs 56, 57, 58, 59, 66, and 73. The Order further sustained the Motion for Summary Judgment as to paragraph 64 to the extent of the allegation of the amount of $392,843.39 and overruled it as to the amount of $130,491.62 plus interest.
An Amended Order for Trial was entered on July 15, 1996, setting the matter for trial on August 29, 1996. On August 2, 1996, an Order was entered on the Bank's Renewed Motion for Summary Judgment in regard to the counts added by the Second Amended Complaint, i.e., paragraphs 54 et seq.. The Court ordered that the Motion for Summary Judgment was overruled as to paragraphs 54-58, 63, 67-71, 74, 75, 76, 77-79, 84-85, 86-87, 88-89, 90-91, 93-94, 95, 96-97, 98-99, and 100-103. It sustained the Motion for Summary Judgment as to paragraph 66.
The Graham Estate filed its Answer and a Cross Claim against the Bank on August 5, 1996. The Backs filed a Motion for Partial Summary Judgment on August 5, as well, seeking judgment in the amount of $320,000.00, the claimed value of the burned building. The Bank filed its Answer to Cross-Claim of Graham Estate on August 9, 1996. The trial of this matter took place as set out above. At the conclusion of the trial, the Court asked for attorney time and charges from counsel for the plaintiffs in regard to representation of their clients in the portion of the case relating to the claims of the Backs. Upon the filing of this information and the response thereto from the Graham Estate, the matter was submitted for decision.
In preparation for trial the parties herein entered into their Second Joint Stipulations which set out the following undisputed facts:
"1. On or about July 30, 1984, the Griffiths and the Nobles executed and delivered to defendant Citizens Bank of Jackson a Real Estate Mortgage Note dated July 30, 1984, in the principal amount of $363,276.28 (the "Citizens Bank Note").
2. On or about July 30, 1984, a partnership known as East Kentucky Market, of which the partners were the Griffiths and the Nobles, executed and delivered to Citizens Bank of Jackson a Security Agreement dated July 30, 1984 (the "Citizens Bank Security Agreement").
3. On or about July 30, 1984, Harlan Noble and Bonnie Noble executed and delivered to Citizens Bank a Mortgage dated July 30, 1984 (the "Noble Mortgage").
4. Approximately eighteen months prior to the execution and delivery of the Citizens Bank Note, the Griffiths executed and delivered to Citizens Bank a Mortgage dated November 30, 1982, (the "Griffith Mortgage").
5. On or about August 15, 1984, the defendants William T. Back and his wife Velma Back, and Ethel Back, a widow, leased to Harlan Noble, Bonnie Noble, George Griffith, and Helen Griffith, a tract of vacant land located in Breathitt County, Kentucky, pursuant to a Lease dated August 15, 1984 (the "Final Land Lease"), which superseded a prior lease of essentially the same property on virtually identical terms executed on or about April 11, 1994 (the "Initial Land Lease").
6. On or about August 15, 1984, Harlan Noble and Bonnie Noble, his wife, and George Griffith and Helen Griffith, his wife (hereinafter "Nobles and Griffiths"), entered into a second real estate lease, the terms and conditions thereof being substantially the same as the original real estate lease, except as to the amount or size of the real estate leased and the monthly rentals due thereunder. The Lease was for a term of 20 years and provided that the Nobles and Griffiths were solely responsible for the construction of any and all buildings and improvements to be placed upon the premises and that any and all buildings and improvements which the Nobles and Griffiths placed upon the premises leased shall be placed thereon without lien or encumbrance upon them, and upon the expiration of the lease all such buildings and improvements shall become the property of the Backs and that the Nobles and Griffiths agree to maintain insurance coverage in an amount to reconstruct any building or buildings in the event of a fire or other damages to same. It was duly lodged of record in the office of the Clerk of the Breathitt County on August 21, 1984, at 1:12 p.m., and subsequently recorded on August 23, 1984, in Lease Book No. 19, at Page 614.
7. Neither the Initial Land Lease nor the Final Land Lease required the co-tenants to build or construct any improvements on the leasehold.
8. The Griffiths Nobles had a right under the Lease. "To cancel or terminate this agreement upon the giving of thirty (30) days written notice of such cancellation or termination unto the parties of the first part, and in the event that such notice of termination and cancellation is given by the parties of the second part, then and in that event, all buildings and improvements located upon the premises shall become the sole property of the parties of the second part, free of any liens and encumbrances."
9. East Kentucky Market, a general partnership of which the partners were the Griffiths and the Nobles, constructed a grocery store building on the property leased from the Backs under the Final Land Lease.
10. The Citizens Bank had no interest in the Building and had actual knowledge of the Back's lease and the Bank had no lien, mortgage or other encumbrance on the building.
11. On or about June 15, 1984, East Kentucky Market entered into a contract of insurance with Midwestern Indemnity Company of Milford, Ohio, identified as Policy No. 61-54264, and insuring against loss of the East Kentucky Market Building by fire in the amount of $250,000 and against the loss of the equipment and inventory of the East Kentucky Market grocery by fire in the amount of $175,000 (the "Midwestern Policy").
12. By an endorsement to the Midwestern Policy dated August 28, 1984, Citizens Bank of Jackson was listed as the beneficiary of a mortgage clause, pursuant to which the Bank could be paid any loss as its interest might appear as a secured mortgagee.
13. On January 19, 1985, the grocery store building constructed on the property subject to the Land Lease (the "Back Leasehold"), and any inventory and equipment located at such time on the premises, were completely destroyed by fire.
14. On or about January 29, 1985, the Griffiths and the Nobles exercised their option to cancel the Land Lease pursuant to written notice to the Backs (the "Notice of Cancellation").
15. In canceling the Land Lease, the Griffiths and the Nobles acted on the advice of their attorney J. Douglas Graham.
16. The Backs gave the Griffiths and the Nobles notice to reconstruct the grocery store building on or about February 5, 1985 (the "Notice to Reconstruct").
17. Griffiths and Nobles breached the lease with the Backs by failing to reconstruct the building and improvements that were destroyed by fire.
18. The Midwestern Indemnity Company denied coverage under the Midwestern Policy during early April 1985.
19. On or about May 2, 1985, Citizens Bank of Jackson brought a civil action against the Griffiths, the Nobles, East Kentucky Market, and The Midwestern Indemnity Company, initiated by a complaint filed in Breathitt Circuit Court as Civil Action No. 85-CI-116 (the "Breathitt Civil Action").
20. At the time the Breathitt Civil Action was initiated, the Griffiths and the Nobles knew that J. Douglas Graham, their attorney, was a director of Citizens Bank of Jackson.
21. During most or all of his representation of the Griffiths and the Nobles, J. Douglas Graham was also serving as a director of Citizens Bank of Jackson.
22. Defendants William T. Back, Velma Back, and Ethel Back were granted leave to intervene in the Breathitt Civil Action as defendants on October 10, 1985.
23. On or about October 24, 1985, the Breathitt Circuit Court granted Citizens Bank of Jackson's motion for summary judgment against the Griffiths, the Nobles, and East Kentucky Market, pursuant to a Summary Judgment entered November 16, 1985, by the Breathitt Circuit Clerk (the "1985 Summary Judgment").
24. Dale Bryant was general counsel for Citizens Bank and counsel of record to the Griffiths and Nobles during part of the litigation from November 2, 1985 to November 14, 1985.
25. J. Douglas Graham's position as a director of Citizens Bank of Jackson was publicly stated in the Breathitt Circuit Court during the voir dire examination of jurors at the beginning of the trial against the insurance company on August 11, 1988.
26. By agreement of counsel, the claim of the Backs was not a jury issue and the claim of the Backs was held in abeyance as a legal issue to be made by the Court after a resolution of the liability under the insurance policy.
27. Following trial in the Breathitt Circuit Court, a jury verdict returned on August 16, 1988, awarded East Kentucky Market $499,000 against The Midwestern Indemnity Company, which jury verdict was subsequently entered as a judgment on October 13, 1988, against Midwestern (the "1988 Midwestern Judgment").
28. The sum of $320,000.00 was awarded by the jury as the actual cash value of the building.
29. The Kentucky Court of Appeals affirmed the jury verdict and judgment against Midwestern Indemnity on November 3, 1989, and the Kentucky Supreme Court denied discretionary review on March 7, 1990.
30. On March 21, 1990, Midwestern paid $652,458.12 to the Breathitt Circuit Clerk in full satisfaction of the 1988 Midwestern Judgment (which provided for the recovery of $499,000 plus interest at the rate of eight percent compounded annually from May 7, 1985, until entry of judgment, and twelve percent thereafter), pursuant to an Order of the Breathitt Circuit Court entered March 21, 1990.
31. The funds were invested by the Breathitt Circuit Clerk in a certificate of deposit at Citizens Bank.
32. On or about March 27, 1990, the Breathitt Circuit Court entered an Agreed Order of Partial Distribution dated March 26, 1990 and entered by the Breathitt Circuit Clerk March 27, 1990, providing for the distribution of a total of $268,918.43 to Citizens Bank of Jackson by the Breathitt Circuit Clerk (representing $175,000.00 in principal and $93,918.43 in interest), and further providing that "the remaining money being held in an interest bearing escrow account and representing insurance proceeds for destruction to the building shall continue to be held by the Circuit Clerk pending further court orders" (the "Partial Distribution Order").
33. After distribution of $268,918.43 pursuant to the Partial Distribution Order on March 27, 1990, the Breathitt Circuit Clerk held $384,447.69, including interest earned on the funds deposited by Midwestern on March 21, 1990.
34. On or about March 19, 1990, John Raymond Turner, the Bank's controlling shareholder agreed to reduce the interest rate on the 1985 Summary Judgment debt from 12 percent to 10 percent. This agreement was not reflected in the Partial Distribution Order, which provided that the amount paid reflected interest at 12 percent. By subsequently treating the entire amount paid under the Partial Distribution Order as a paydown of principal, the Bank on July 2, 1990 honored Turner's agreement.
35. Following subsequent proceedings in the Breathitt Civil Action on the claims of the Backs against the Griffiths and the Nobles, the Breathitt Circuit Court, by a Judgment dated June 21, 1990, and entered by the Breathitt Circuit Clerk June 22, 1990, dismissed the claim of the Backs against the Griffiths and the Nobles, and further ordered that "the money in escrow is ordered to be paid to Griffiths and Nobles" (the "1990 Back Judgment").
36. On or about June 25, 1990, Citizens Bank obtained an Order of Garnishment directed to the Circuit Clerk of Breathitt County/Citizens Bank of Jackson as garnishee, pursuant to an Affidavit of Writ of Garnishment dated June 25, 1990.
37. On June 27, 1990, the Backs filed a Notice of Appeal of the June 21, 1990, Judgment.
38. The Backs did not post a supersedeas bond or obtain a stay pending appeal.
39. On or about June 29, 1990, Citizens Bank of Jackson filed in the Breathitt Civil Action an Affidavit Regarding Amount Due Under Judgment stating that the amount due to Citizens Bank computed through July 10, 1990, by the Griffiths and the Nobles, was $315,992.93, representing the remaining principal plus interest due Citizens Bank of Jackson under the 1985 Summary Judgment, after giving effect to the amounts received by Citizens Bank pursuant to the Partial Distribution Order.
40. On June 29, 1990, an Authorization to Pay Creditor Directly was signed by Michael E. McGrath, attorney for Citizens Bank and filed with the Breathitt Circuit Court.
41. On July 1, 1990, J. Douglas Graham spoke with both the Griffiths and the Nobles and told them they would be settling with Citizens Bank of Jackson and would each need to pay additional monies to the Bank in satisfaction of their debt.
42. On July 2, 1990, Griffith and Noble with their spouses met J. Douglas Graham in the Breathitt Circuit Clerk's office.
43. On July 2, 1990, the Breathitt Circuit Clerk contacted Citizens Bank of Jackson and made arrangements for Citizens Bank to Pay out the proceeds of the certificate of deposit in which the Circuit Clerk had invested the funds recovered from Midwestern. Citizens Bank delivered its cashier's check No. 79361 in the amount of $392,843.39 to the Circuit Clerk, who in turn deposited the check in his account at First National Bank of Jackson.
44. On July 2, 1990, the $392,843.39 then held by the Breathitt Circuit Court, representing the balance of the Midwestern insurance proceeds plus interest earned thereon, was withdrawn by the Clerk by check No. 00917 of the Breathitt Circuit Clerk, drawn on First National Bank of Jackson., payable to the order of George Griffith, Helen Griffith, Harlan Noble, Bonnie Noble, Citizens Bank of Jackson, and J. Douglas Graham.
45. J. Douglas Graham, accompanied by the Griffiths and the Nobles, carried Check No. 001917 across the street to the Bank.
46. The Griffiths and the Nobles intended to settle their debt with the Bank when they left the Circuit Clerk's office with J. Douglas Graham.
47. J. Douglas Graham told Noble that there were insufficient proceeds to pay the Bank in full and Noble took with him his son's check to pay his share of the shortfall.
48. J. Douglas Graham told Griffith that there were insufficient proceeds to pay the Bank in full, but that the Bank would loan Griffith an amount equal to his share of the shortfall.
49. Check No. 001917 was endorsed by the Griffiths, the Nobles, and Graham and cashed at Citizens Bank. The Griffiths, the Nobles, Graham, and the Bank agreed that the Bank would retain $262,351.77 to be applied to the debt of the Griffiths and the Nobles to the Bank, and that $130,491.62 would be paid to George Griffith and Harlan Noble, by Citizens Bank cashier's check No. 79363.
50. During the July 2, 1990 meeting at the Bank, the Griffiths and the Nobles intended to pay the Bank the full balance of their debt out of the insurance proceeds.
51. On July 2, 1990, George Griffith and Harlan Noble endorsed Citizens Bank of Jackson check No. 79363 to the Bank, and Certificate of Deposit No. 11161 in the principal amount of $130,491.62 was purchased from the Bank.
52. Burt Bellamy wrote "escrowed to CD" on a copy of the face of Check No. 79363.
53. On July 2, 1990, each of the Griffiths and the Nobles paid to Citizens Bank of Jackson an additional $6,357.24. Griffith borrowed the additional $6,357.24 from the Bank, which had been arranged by Graham. Noble brought his son's check to the Bank and paid the additional $6,357.24 by delivery of the check.
54. The total funds received and disbursed by the parties on July 2, 1990 were as follows. In a transaction intended to finalize matters between the Bank and the Griffiths and Nobles, the Bank agreed to settle the debt owed by the Griffiths and Nobles to the Bank, and to release its mortgages on the Griffiths and Nobles' homes, in exchange for $275,066.24, which was understood by the parties to represent the original principal of the 1985 Summary Judgment debt ($363,306.68), less the amount paid to the Bank in March 1990 pursuant to the Partial Distribution Order ($268,918.43), plus interest computed at 10 percent on the principal outstanding from time to time since May 2, 1985 (when Citizens Bank originally brought suit). The difference between what the Bank agreed to accept in full settlement — $275,066.24 — and the Bank's portion of the proceeds of the Circuit Clerk's Check No. 001917-$262,351.77, amounted to a "deficit" of $12,714.47. The Griffiths and Nobles paid this "deficit" to the Bank on July 2, 1990. Noble delivered his son's check for $6357.24; Griffith borrowed an additional $6357.24 from the Bank and used the proceeds to effect the settlement. In a transaction intended to arrange for payment of Graham's agreed fee. Griffith and Noble endorsed Citizens Bank's Cashier's Check No. 79363, in the amount of $130,491.62, back to Citizens Bank of Jackson. In exchange for Cashier's Check No. 79363, the Bank issued its Certificate of Deposit No. 11161 in the amount of $130,491.62. The amount of Certificate of Deposit No. 11161 was exactly equal to 20 percent of the amount paid into court by the insurance company in March 1990 ($652,498.12). The parties disagree as to whether Graham's fee was earned as of July 2, 1990.
55. On or about July 2, 1990, defendant J. Douglas Graham, as "party of the second part," and plaintiffs George Griffith and Harlan Noble, as "parties of the first part," signed a document styled as a Contract dated July 2, 1990 (the "July 2 Contract").
56. J. Douglas Graham drafted the July 2 Contract.
57. The July 2 Contract provides in part that $130,491.62 "be placed in escrow in the Citizens Bank of Jackson by parties of the first part and that J. Douglas Graham represent first parties as their attorney in the Back case. This money will be held by said bank in an interest bearing account, and upon termination of this litigation with Back, it will be paid to J. Douglas Graham."
58. On July 2, 1990, Citizens Bank of Jackson issued its Certificate of Deposit No. 11161 in the amount of $130,491.62 in the name of "George Griffith and Harlan Noble, payable to J. Douglas Graham," pursuant to the request of Griffith, Noble and Graham.
59. J. Douglas Graham retained possession of Certificate of Deposit No. 11161 when the Griffiths, the Nobles, and Graham left the Bank.
60. On or about July 2, 1990, Citizens Bank of Jackson paid its attorneys in the Breathitt Civil Action fees of $43,246.20.
61. The Bank's agreement to reduce the interest rate on the debt from 12 percent to 10 percent saved the Griffiths and the Nobles $40,494.65 in interest.
62. On August 10, 1990, Mr. Graham wrote a letter to Beattyville Wholesale, a creditor of the Nobles and Griffiths stating:
This case is now on the Supreme Court. I represent the Griffiths and Nobles who own the market. Even if they win the case they will not get enough to pay the mortgage to Citizens Bank which is more than $500,000.00.
The twelve (12) percent interest on the mortgage has been a disaster.
63. On appeal of the 1990 Back Judgment, the Kentucky Court of Appeals reversed and remanded in an unpublished opinion dated February 14, 1992, and modified May 8, 1992.
64. J. Douglas Graham filed a Petition for Rehearing on behalf of the Griffiths and Nobles regarding the February, 1992, Court of Appeals decision.
65. Stidham, on behalf of the Backs, filed a Petition for Modification following the February, 1992, Court of Appeals Order.
66. In April, 1992, Citizens Bank of Jackson paid to J. Douglas Graham $147,600.59, representing the original principal plus accrued interest on Certificate of Deposit No. 1116, less an early withdrawal penalty (the "CD Proceeds"), by its Citizens Bank cashier's check No. 107932.
67. Citizens Bank of Jackson paid the CD proceeds to J. Douglas Graham prior to the termination of the Breathitt Civil Action.
68. Citizens Bank of Jackson paid the CD proceeds to J. Douglas Graham without reviewing the original or a copy of Certificate of Deposit No. 11161, but reviewed the computer screen regarding the CD.
69. On or about October 14, 1992, the Kentucky Supreme Court denied discretionary review of the Court of Appeals' February 1992 decision.
70. On remand from the Court of Appeals, the Breathitt Circuit Court entered a Judgment on October 31, 1992, generally in favor of the Backs and against Citizens Bank, the Nobles, and the Griffiths (the "1992 Vacated Judgment").
71. On March 11, 1993, the Breathitt Circuit Court, vacated the judgment entered October 31, 1992, and entered an Order (the "March 11, 1993 Order").
72. The 1993 Order required the Special Commissioner of the Breathitt Circuit Court to "sell the real estate of the defendants George Griffith, Helen Griffith, Harlan Noble and Bonnie Noble which is referred to in the original Summary Judgment of November 16, 1985; and report the same to the Court. The proceeds which are derived from the sale shall be applied against the debt which was adjudged due the Bank by George Griffith, Helen Griffith, Harlan Noble and Bonnie Noble on November 16, 1985."
73. The 1993 Order further provides that "the court is reserving ruling on who is legally entitled to the $384,441.69 plus the interest which has accrued thereupon, until the real estate of the defendants debtors George Griffith, Helen Griffith, Harlan Noble and Bonnie Noble is sold as hereinabove directed."
74. Citizens Bank filed a Notice of Appeal from the 1993 Order. The Court of Appeals dismissed Citizens Bank's appeal, by an Order Dismissing Appeal entered July 21, 1993 (the "Order Dismissing Appeal").
75. The Order Dismissing Appeal provides that "Appellant [Citizens Bank of Jackson] obtained a summary judgment in its favor on November 16, 1985, which directed the Special Commissioner to sell the defendants' real estate and apply the proceeds derived therefrom to the debt which was owed to Appellant. No appeal was taken from that judgment and it is the law of the case."
76. On August 30, 1993, the Breathitt Circuit Court granted Citizens Bank's Motion to appoint a special master commissioner and sell the real estate of the Griffiths and Nobles and set aside the releases to the property of Griffiths and Nobles and permitted the Bank to join third parties who had purchased Griffiths and Nobles real estate.
77. On September 25, 1993, the Breathitt Circuit Court dismissed the new Defendants.
78. On September 29, 1993, the Griffiths and Nobles appealed the August 30, 1993, Order.
79. On October 5, 1993, the Bank made a motion in the Breathitt Circuit Court to dismiss the Griffiths and Nobles appeal.
80. On October 8, 1993, the Backs filed a motion to dismiss the appeal in the Court of Appeals.
81. On December 16, 1993, the Kentucky Court of Appeals dismissed the Nobles and Griffiths appeal.
82. After the Order Dismissing Appeal and the March 11, 1993 Order became final and unappealable, a Commissioner's sale of the property subject to the Griffith Mortgage was scheduled for January 14, 1994.
83. Prior to the Commissioner's sale of the property subject to the Griffith Mortgage, the Griffiths filed their Chapter 7 petition in this case, and the Commissioner's sale was canceled.
84. On July 13, 1994, the Griffiths were discharged, and subsequently, the Backs requested that the Breathitt Circuit Court enforce its previous sale order on the real estate.
85. On May 12, 1995, the Griffiths' property was sold and on July 7, 1995, the order of sale and order of distribution were entered by Judge Caudill.
86. The property was purchased by George Glenn Griffith and Nellie Ann Doyle the children of the Griffiths for $35,500.00.
87. From the proceeds of sale the bank received $27,582.80 and its attorney received $5,325.00.
88. In 1993, the Bank loaned Griffith an additional sum of approximately $30,000, secured by the Griffith Mortgage of July 30, 1984 under a subsequent advances clause.
89. The Griffith farm foreclosure sale proceeds were sufficient to pay the Bank the remaining balance of the July 2, 1990 loan to Griffith and the 1993 loan to Griffith in full, for a total of $27,582.80 plus attorney's fees of $5325.00.
90. The Bank loaned the Griffiths' son $35,000 for him to bid on the Griffiths' farm at the foreclosure sale.
91. The property subject to the Noble Mortgage, following a release by Citizens Bank of Jackson of its mortgage, was conveyed by the Nobles to third parties and is no longer owned by the Nobles.
92. Citizens Bank of Jackson accrued interest on Certificate of Deposit No. 11161 and reported such interest to the Internal Revenue Service as income to George Griffith in 1991 and 1992.
93. Citizens Bank paid the CD Proceeds to J. Douglas Graham without consulting its attorneys as to the legality of the payment.
94. Citizens Bank paid the CD proceeds to J. Douglas Graham without taking any action (other than relying on Graham's statements) to verify that the Breathitt Civil Action had terminated.
95. Citizens Bank paid the CD proceeds to J. Douglas Graham without taking any action (other than relying on Graham's statements) to verify that Harlan Noble and George Griffith had consented to such payment, if such consent were needed.
96. Joint Exhibit J-30 is a true and correct copy of Burt Bellamy's handwritten notes.
97. Immediately prior to the Bank's payment of the CD Proceeds to Graham, defendant J. Douglas Graham told Bellamy that the time for appealing the Order Denying Petition for Rehearing had expired, there was no further appeal, and the case was over.
98. The Order Denying Petition for Rehearing in no way refers to the Backs, the Bank, or the termination or conclusion of the Breathitt Civil Action.
99. The Order Denying Petition for Rehearing denied the Griffith/Noble petition for rehearing, not the Backs' petition for modification.
100. Citizens Bank never asked J. Douglas Graham to return the CD Proceeds.
101. The Bank never informed the Plaintiffs that the CD Proceeds had been paid to Graham.
102. J. Douglas Graham did not report the CD Proceeds as income for years 1990, 1991 or 1992.
103. J. Douglas Graham did not report interest earned on Certificate of Deposit No. 11161 in 1990 as income.
104. J. Douglas Graham did not report interest earned on Certificate of Deposit No. 11161 in 1991 as income.
105. J. Douglas Graham did not report interest earned on Certificate of Deposit No. 11161 in 1992 as income.
106. J. Douglas Graham never informed the Plaintiffs that he had received the CD Proceeds."
Both counsel for the trustee and for the Nobles have contingency fee arrangements in representing their respective clients herein.
Harlan Noble testified at trial that he sold the property subject to the Bank's mortgage (No. 91 above) to his brother on July 5, 1990, for $90,000.00, but that since he owed his brother $45,000.00, he only realized $45,000.00 from the sale.
The plaintiffs and the Backs have agreed that the presently discounted difference between their lease and the Backs' lease with their present tenants is $226,920.17, and that the cost to reconstruct the building after the fire was $225,000.00.
A number of the counts of the Complaint have been dismissed, or otherwise ruled on in favor of the defendants against whom they were directed. The issues that remain to be decided are, therefore, whether the Bank holds the remaining insurance proceeds, the res of this action, in escrow; whether the Bank breached the contract represented by Certificate of Deposit No. 11161, or negligently paid out the proceeds to J. Douglas Graham; whether J. Douglas Graham breached his contract as an attorney to represent the Griffiths and the Nobles in the Breathitt Civil Action; and the measure of damages sustained by the Backs by reason of the Griffiths' and Nobles' breach of the lease.
Conclusions of Law
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b). It is both a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and a "related-to" proceeding pursuant to 28 U.S.C. § 157(c)(1). This Court has jurisdiction over all related proceedings herein, and may hear and determine and enter appropriate orders and judgments under § 157(c)(2) subject to review under 28 U.S.C. § 158.
This Court is bound by the doctrine of collateral estoppel from relitigating issues finally determined in the state court action. Collateral estoppel applies if the precise issue was raised in the prior proceeding between the same parties or parties in privity with them, if it was actually litigated, if it was determined by a valid and final judgment, and if its determination was necessary to the outcome. One issue that has been previously determined is that the remainder of the insurance proceeds belonged to the Griffiths and Nobles, after the security interest of the Bank in the equipment and inventory was satisfied. Another is that the Backs had no direct interest in or lien upon the insurance proceeds, and that the Griffiths and Nobles violated their lease with the Backs.
In that regard, this Court has previously ruled that the correct interpretation of the Court of Appeals' Opinion entered on October 19, 1992 (rendered on February 14, 1992 and modified on May 8, 1992), is that the Backs have no interest in or lien upon the insurance proceeds which constitute the res of this matter, although the Backs may assert a claim against the bankruptcy estate of the Griffiths and against the Nobles for breach of contract.
In dealing with the issues that remain, the Court will first address the plaintiffs' claims against J. Douglas Graham. The plaintiffs maintain that Graham did not earn the fee he collected in regard to the state court litigation because he withdrew from it without cause before it was completed, in violation of their fee contract of July 2, 1990. The contract, however, is clear in its terms: "The parties of the first part are indebted to J. Douglas Graham in the sum of $130,491.62." Graham had earned his fee based on the recovery of the insurance proceeds. The Court of Appeals had ruled that the Backs had no interest in or lien upon them.
The Court is unable to discern a reason for Graham's placing the fee amount in escrow. He had a valid attorney's lien upon it pursuant to KRS 376.460, and he could have collected it at the time the remaining proceeds were paid to the Griffiths and Nobles. His later withdrawal from the state court litigation in the face of the Bank's being required to foreclose on the Griffiths' and Nobles' property does not provide justification for denying him this fee. This Court believes that his withdrawal was for good cause, as permitted under SCR 3.130(1.16)(b)(5). His prior representation of the Griffiths and Nobles had not involved any interest adverse to the Bank of which he was a director. Representing them in a foreclosure action which the Bank was pursuing, on the other hand, would have involved a conflict of interest.
This Court is also of the opinion, however, that Graham violated the escrow agreement when he withdrew the funds without informing George Griffith or Harlan Noble. The essence of their agreement appears to the Court to be that Graham would continue to represent them in the state court action without charging them any further fee, not that he would not have earned it until the litigation was concluded. This is evidenced by the fact that he continued to represent them after he cashed the CD. Therefore their damages are the additional attorney fees incurred in defense of the Back claim after Graham withdrew, including the $5,000.00 paid to Calvin Akers. This sum was paid by the payment of $2,500 by the Nobles and the same sum by the Griffiths. The trustee is entitled to recover any damages that the Griffiths would have recovered in this regard as this cause of action became property of the bankruptcy estate when the Griffiths filed their petition. Since the plaintiffs' attorneys are on a contingent fee basis as regards defending the respective Nobles and the estate of the Griffiths against the Back claims, apparently neither the Nobles nor the bankruptcy estate of the Griffiths will incur additional attorneys' fees beyond the $5,000 already paid to Calvin Akers so this sum represents the damages recoverable by the plaintiffs as against the Graham estate.
The Court will next address the issues of whether the remaining insurance proceeds constitute a fund in court which the Bank is holding in escrow, and whether the Bank breached the CD contract by releasing those funds to Graham. As set out above, it has already been determined that the proceeds belonged to the Griffiths and the Nobles, and that the Backs had no direct interest in or lien upon them. At the time the Griffiths and Nobles were awarded the proceeds there were several creditors hoping to claim the entire pot, or some significant portion of it.
The Bank held mortgages on the property of both the Griffiths and the Nobles, the Backs had a contract claim against them based on the breach of their lease for failure to reconstruct the grocery store building, and their attorney had a lien for 20% of the recovery. The Griffiths and Nobles chose to satisfy their debts to the Bank and their attorney, or come as close as possible. It was their pot to divide, and, there not being enough to satisfy everyone, they took their chances with those who got nothing. Perhaps because of the determination concerning the Backs' interest in the insurance proceeds, the Griffiths and Nobles believed that they could avoid liability in regard to the Backs indefinitely.
However, the Court of Appeals decision concerning the breach of the lease changed everything. That decision was the turning point in this case, the point at which it became clear that the Backs' claims were not going to die or go away. Up to that point, the results in this case had been perfectly acceptable to the Griffiths and Nobles. They had recovered on their insurance policy, they had paid the Bank (except for a few thousand dollars), they had paid their lawyer, and their property had been spared from foreclosure.
Upon remand from the Court of Appeals, the Breathitt Circuit Court applied the doctrine of marshaling of assets, ordering the sale of the Griffiths' and Nobles' mortgaged property pursuant to the 1985 Summary Judgment to establish the Bank's deficiency.
In Bartley v. Pikeville Nat. Bank Trust Co., 532 S.W.2d 446, Ky. (1975), the court explained that
[t]he doctrine of marshaling assets requires that where two or more creditors seek satisfaction out of the assets of their common debtor, and one of them can resort to two funds where another has recourse to only one of the funds, the former creditor may be required to seek satisfaction out of the funds which the latter creditor cannot reach, before resorting to the other fund.
At page 448. See also First Nat. Bank of Grayson v. Holbrook, 217 S.W.2d 787, Ky. (1949). The doctrine of marshaling of assets is not applicable in this matter, however, because the Backs had already been determined to have no interest in or lien upon the insurance proceeds. They therefore had no "recourse" to any fund owned by the Griffiths and Nobles.
The Bank was not required to execute upon its Summary Judgment, and it did not. It chose to wait upon the outcome of the Griffiths' and Nobles' attempt to recover from the insurance company. When the Breathitt Circuit Court entered its Order dated June 21, 1990, ruling that the Griffiths and Nobles were entitled to the insurance proceeds, it also ordered those proceeds ("[t]he money in escrow") released to them. The Breathitt Circuit Clerk was therefore justified in releasing the funds to them, and with the funds in hand, they were free to do with them as they pleased. Their entitlement to these funds and their freedom to dispose of them at will has been a constant in this matter. The equivocal language of subsequent orders of the Breathitt Circuit Court with respect to the disposition of these funds does not change the fact that the Griffiths and Nobles had been adjudged entitled to the funds.
The Court will next consider the issue of whether the Bank breached the CD contract by releasing the funds to Graham. This Court agrees with the Bank that KRS 391.330 applies herein. That section provides, in pertinent part, that
[f]inancial institutions may enter into multiple-party accounts to the same extent that they may enter into single-party accounts. Any multiple-party account may be paid to any one or more of the parties.
In addition, as set out in Farmers Bank Trust Co. v. Brazell, Ky.App., 902 S.W.2d 830 (1995)
[a] certificate of deposit is an instrument that is subject to the provisions of the Uniform Commercial Code. KRS 355.3-104(2)(c). Since two people owned these certificates, KRS 355.3-116, the statute describing how two-party instruments may be negotiated, applies. In relevant part, the statute provides:
`An instrument payable to the order of two (2) or more persons
(1) if in the alternative is payable to any one of them and may be negotiated, discharged or enforced by any of them who has possession of it. . . .'
These certificates of deposit were payable in the alternative because of the inclusion of `or' on their faces.
At pages 831-832. KRS 355.3-116(2) further provides that if an instrument payable to the order of two or more persons is not payable in the alternative, it is payable to all of them, and may be negotiated, discharged or enforced only by all of them.
The CD at issue here was not negotiated, but the rules set out in KRS 355.3-116 still apply. The problem is that this CD does not fit either definition. It is not payable in the alternative, but it does not appear to fit squarely within the definition of KRS 355.3-116(2), since it is specifically designated as "payable to J. Douglas Graham." This Court believes that while the CD names multiple parties as depositors, those depositors evidenced their desire that the funds be paid to only one of them, Graham, by the language they chose. The inclusion of their names as depositors speaks to the source of the funds, not to whom they would be paid. This Court therefore concludes that the Bank was justified in releasing the funds to Graham.
Thus far, the Court has determined that Graham breached his contract to represent the Griffiths and the Nobles in the Breathitt Civil Action, but that he had earned his fee prior to the breach and the plaintiffs' damages are their costs in defending the Backs' claims after Graham withdrew from the case. The Court has further determined that the Bank does not hold the insurance proceeds in escrow, and that it did not breach the CD contract or negligently pay out the proceeds of it to Graham. It now remains for the Court to consider the issue of the measure of the Backs' damages for the Griffiths' and Nobles' breach of the lease.
Review of the lease provisions reveals that it was the intention of the parties that upon default or termination of the lease the Backs would take possession and become the sole owners of the grocery store building, and that if the building were destroyed, it would be rebuilt. The Court of Appeals opinion which held that the Griffiths and Nobles had breached the lease stated clearly that they were obligated under the lease to reconstruct that building. The fact that there is now a different building on the property is immaterial.
The lease has no provision for acceleration of lease payments, or any other remedy concerning the rent. In Moore v. Ford Motor Credit Company, 778 S.W.2d 657, 659, Ky.App. (1989), the court considered damages for breach of an automobile lease. That lease, in contrast to the lease being considered herein, allowed the lessor, upon default, to obtain possession of the property, terminate the lease, and accelerate the remaining monthly payments. Consequently, the lessor was able to recover the discounted accelerated rents, as well as the amount the vehicle brought at resale. Under the provisions of this lease the appropriate measure of damages appears to be the cost to reconstruct the building, or $225,000.00.
In consideration of all of the foregoing, the Court therefore concludes that the remaining counts of the Second Amended Complaint against the Bank should be dismissed, that the plaintiffs Nobles should have judgment against the Graham Estate in the amount of $2,500, the Trustee should have judgment against the Graham estate in the amount of $2,500 and that the Backs should have judgment against the Nobles in the amount of $225,000.00 and a claim against the bankruptcy estate of the Griffiths in the same amount.
The attorneys are directed to submit an appropriate judgment herein.