Opinion
NO. 2016-CA-001937-MR
04-27-2018
JAD FARHAT IRREVOCABLE GSST TRUST #1 APPELLANT v. TTM GROUP, LLC; DJD INVESTMENTS, LLC; JAMES FOSTER; LESLIE FOSTER; EAC PROPERTY HOLDING, LLC; TODD DARLAND; AND TARA DARLAND APPELLEES
BRIEF FOR APPELLANT: F. William Hardt, III The Hardt Law Firm, LLC Lexington, Kentucky JOINT BRIEF FOR APPELLEES: Christopher L. Thacker Stephen F. Wilson Billings Law Firm, PLLC Lexington, Kentucky William R. Renner Walton, Kentucky
NOT TO BE PUBLISHED APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE KIMBERLY N. BUNNELL, JUDGE
ACTION NO. 15-CI-01668 OPINION
AFFIRMING
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BEFORE: CLAYTON, MAZE, AND THOMPSON, JUDGES. CLAYTON, JUDGE: Jad Farhat Irrevocable GSTT Trust #1 (hereinafter "Farhat Trust") appeals from the Fayette Circuit Court's November 21, 2016, grant of summary judgment to the appellees. For the reasons set forth below, we affirm.
BACKGROUND
The events of this case stem from a dispute regarding a developed, commercial real property in Hardin County, Kentucky ("the property"), which was co-owned by the Farhat Trust and one of the appellees, TTM Group, LLC ("TTM") prior to its foreclosure. This is the second appeal brought before us by the Farhat Trust relating to the property. We summarize the facts surrounding the property by quoting, in relevant part, from our previous opinion:
In 2002, TTM was formed as a limited liability company by its members, Marc King, Todd Darland, and Tara Darland. TTM subsequently purchased real property located at 1506 Ring Road, Elizabethtown, Kentucky, and constructed a commercial building for use as a fitness center. In January 2009, TTM leased the building to Energy Sports and Fitness of Elizabethtown, LLC (Energy Sports). Energy Sports was also owned by King and the Darlands. According to the lease, Energy Sports would pay $24,000 per month in rent to TTM.
Thereafter, on July 7, 2009, TTM entered into a Purchase Agreement with the Farhat Trust. Pursuant to the Purchase Agreement, the TTM agreed to convey an undivided one-fifth interest in the subject real property to Farhat Trust. Section 2 of the Purchase Agreement provided that Farhat Trust would pay TTM $180,000 for the undivided one-fifth interest. Paragraph D of the Purchase Agreement also provided that TTM would pay the Farhat Trust "twenty (20%) percent of the [net] rental proceeds; on a monthly basis." In accordance therewith, on July 7, 2009, the parties executed a general warranty deed conveying the undivided one-fifth interest in the real property from TTM to the Farhat Trust (2009 Deed). No reference was made in the 2009 Deed to the payment of future rents.
TTM was initially managed by King. Under King's management, TTM paid the Farhat Trust in
substantial compliance with the terms of the Purchase Agreement. In the spring of 2010, King and the Darlands sold 70.833% of their interest in TTM to DJD, LLC (DJD). A member of DJD, James Foster, M.D., subsequently took over as manager of TTM in August 2010.Jad Farhat Irrevocable GSTT Tr. No. 1 v. T.T.M. Group, LLC, 2012-CA-002103-MR, 2014 WL 5314701, at *1 (Ky. App. Oct. 17, 2014). In the previous decision, this Court held the terms of the Purchase Agreement setting the payment of future rents were unenforceable. However, we also held "[a]s a matter of law, the Farhat Trust legally owns an undivided one-fifth interest in the real property through the conveyance and, therefore, is legally a co-tenant with TTM in the joint ownership of the real property." Id. at *3. Because "one co-tenant is liable to the other co-tenants for any rents and profits collected from the joint property[,]" id. (citations omitted), we remanded the matter to circuit court for "an accounting and allocation of all rents and profits from the property among the joint owners." Id.
It is helpful to our examination to review the current appellees and their relationship with one another with regard to the property. TTM was the initial owner of the property, and its members at that time were Marc King, Tara Darland, and Todd Darland. TTM sold twenty percent of the property to Farhat Trust in 2009. DJD then acquired over seventy percent of TTM in 2010. DJD had at least three members, one of whom was Dr. James Foster. Leslie Foster was Dr. Foster's wife and assisted him in the management of the property. Lastly, EAC Property Holding, LLC ("EAC"), managed by Dr. Foster, was formed on June 30, 2014. EAC is the current owner of the property.
Marc King was a party in the underlying action, but Farhat Trust obtained a default judgment against King on December 3, 2015. He is not a party in the case sub judice.
The property suffered financial difficulties before, during, and after this Court's earlier decision. At the time Farhat Trust gained its twenty percent interest, the property was encumbered by two mortgages: the first owned by Bank of the Bluegrass, and the second owned by First Federal Savings Bank. Despite owning an interest in the property, Farhat Trust was not a party to the mortgages and did not pay on those instruments. Instead, Farhat Trust allowed TTM to manage the property, pay the mortgages, and then distribute profits to the owners. According to Jad Farhat's deposition, Farhat Trust knew of the encumbrances at the time of its investment in the property and also knew the investment was a risky one:
Marc told me about the 1.9 million on the first mortgage. I knew about the 670 something thousand dollars on the second mortgage. The deal was upside down from the getgo. Okay? Only an idiot would do a deal like this. I did it in good faith to help a few friends out, okay, and I knew I was upside down and I'm still upside down. Okay? It is what it is.Deposition at pg. 48.
At some point after DJD took control of TTM and began managing the property, TTM started having difficulty making regular payments on the mortgages. The parties dispute the underlying cause of TTM's failure to make its mortgage payments. Farhat Trust asserted this was due to DJD paying themselves from the proceeds on the property instead of paying on the mortgages. However, even after discovery, Farhat Trust was unable to produce evidence supporting this contention, with the sole exception of Jad Farhat's affidavit indicating his personal belief. For their part, the appellees asserted the failure to pay the mortgages was due to the following: (1) TTM had generally mismanaged the property prior to acquisition by DJD; (2) despite the best efforts of DJD and TTM, the athletic club regularly failed to pay rent and other required expenses under its lease; and (3) as a result of the athletic club's failure to pay rent, TTM did not have the funds to pay the mortgages.
In August 2012, the second mortgage holder, First Federal Savings Bank, filed a petition to foreclose on the property in Hardin Circuit Court. Bank of the Bluegrass filed responsive pleadings asserting its position as the first mortgage holder. The property was foreclosed upon and sold through a master commissioner sale on December 19, 2013. Bank of the Bluegrass purchased the property for $1.4 million. All co-owners of the property—Farhat Trust, TTM, and DJD—lost their equity in the property due to the foreclosure. Approximately ten months after foreclosure, on October 17, 2014, EAC secured financing and bought the property from Bank of the Bluegrass for $1,461,344.
On May 6, 2015, Farhat Trust filed a complaint against the appellees in Fayette Circuit Court, alleging a variety of claims relating to the foreclosure on the property and EAC's subsequent purchase of the property from Bank of the Bluegrass. Farhat Trust asserted it was in partnership with the appellees when they mismanaged the property and allowed the mortgages to go unpaid, resulting in the loss of Farhat Trust's twenty percent ownership interest in the property. Furthermore, Farhat Trust asserted the existence of a conspiracy, whereby appellees deliberately engineered foreclosure by Bank of the Bluegrass in order to strip Farhat Trust of its interest, allowing EAC to purchase the property outright. On these grounds, Farhat Trust's complaint alleged fraud, conspiracy, unjust enrichment, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and conversion. The complaint also asked for imposition of a constructive trust.
Following discovery, Farhat Trust moved for summary judgment. It repeated the substance of its complaint, alleging it was owed fiduciary duties by the appellees, appellees breached the duties by self-dealing and mismanagement, and appellees conspired to relieve Farhat Trust of its interest in the property. As a "smoking gun" showing evidence of a conspiracy, Farhat Trust produced an email from Leslie Foster to a Bank of the Bluegrass representative on April 1, 2013. The email states, inter alia, she and Dr. Foster "are interested in the property . . . and would consider buying it after foreclosure[,]" and she asks if the bank would be willing to consider moving forward with them on it.
In their own motion for summary judgment, the appellees denied the email as being probative of any kind of conspiracy, asserting: (1) the property was already in the process of foreclosure when the email was sent; (2) the foreclosure action was instituted by the second mortgage holder, First Federal Savings Bank, and not Bank of the Bluegrass; and (3) Farhat Trust had the same opportunity as the Fosters, or anyone else, to negotiate with Bank of the Bluegrass regarding disposition of the property following foreclosure. The appellees continued by asserting they owed no fiduciary duties to Farhat Trust, they did not commit fraud or conversion, and no one was unjustly enriched by the foreclosure.
Following oral argument, the trial court granted partial summary judgment on September 27, 2016, to appellees on the two counts in the complaint relating to fiduciary duty. The court found the appellees owed no fiduciary duties to Farhat Trust, and further, even if such a duty could be found, there was nothing in the record supporting a breach. Several weeks later, the court heard further arguments on the remainder of the counts in the complaint. The court found there was no evidence in the record supporting Farhat Trust's claims and granted summary judgment to the appellees on the remaining counts. The court thereafter issued a written summary judgment in favor of the appellees on November 21, 2016, which also incorporated its earlier judgment. This appeal follows.
ANALYSIS
Farhat Trust contends the circuit court erroneously granted summary judgment to the appellees. A trial court properly awards summary judgment when "the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Kentucky Rule of Civil Procedure (CR) 56.03. Summary judgment should be granted only if it appears impossible the nonmoving party will be able to produce evidence at trial warranting a judgment in his or her favor. Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, 482 (Ky. 1991). Furthermore,
a trial judge must view the evidence in the light most favorable to the nonmoving party . . . . The moving party bears the initial burden of demonstrating that no genuine issue of material fact exists and then the burden shifts to the party opposing summary judgment to produce at least some affirmative evidence showing that there is a genuine issue of material fact requiring trial.First Federal Sav. Bank v. McCubbins, 217 S.W.3d 201, 203 (Ky. 2006) (citations omitted). We review a trial court's summary judgment ruling de novo. Baptist Physicians Lexington, Inc. v. New Lexington Clinic, P.S.C., 436 S.W.3d 189, 194 (Ky. 2013).
As briefed before us, Farhat Trust argues the trial court erred on four separate grounds by granting summary judgment to the appellees. We consider each argument in turn below.
I. Fiduciary Duty
Farhat Trust alleges the appellees owed it fiduciary duties on three separate grounds: (1) the appellees were in partnership with Farhat Trust regarding the property; (2) the appellees acted as Farhat Trust's agents by managing the property; and (3) Farhat Trust bestowed special confidence in the appellees to act in its best interests. Farhat Trust then argues the appellees breached those fiduciary duties by mismanagement, self-dealing, and conspiracy, as outlined supra.
"A fiduciary relationship creates the highest order of duty imposed by law. If a fiduciary relationship exists, the fiduciary cannot profit from the relationship without the knowledge and permission of the principal." Ballard v. 1400 Willow Council of Co-Owners, Inc., 430 S.W.3d 229, 241 (Ky. 2013) (quoting In re Sallee, 286 F.3d 878, 891 (6th Cir. 2002)). "[A] fiduciary relationship exists 'where a special confidence is reposed in another who . . . is bound to act . . . with regard to the interests of the one reposing confidence.'" In re Sallee, 286 F.3d at 893 (quoting Lappas v. Barker, 375 S.W.2d 248, 251 (Ky. 1963)). In addition,
the party seeking to have a fiduciary relationship recognized must show more than mere subjective trust. An aggrieved party must also show that he trusted the other party to act as a fiduciary and that such trust was reasonable under the circumstances. Only in rare commercial cases is it reasonable to believe the other party will put your interests ahead of their own.Id. at 892 (citation and footnote omitted). "[I]t is one thing to trust someone to deal honestly and quite another to trust someone to put one's interests above his own. Extraordinary facts are necessary to make this latter kind of trust plausible and reasonable." Id. at 892 n.10 (quoting Roy Anderson, The Wolf at the Campfire: Understanding Confidential Relationships, 53 SMU L. Rev. 315, 320 (2000)).
In examining Farhat Trust's first claim of fiduciary duty, we find nothing in the record establishing a partnership between Farhat Trust and the appellees in this case. This Court previously held the relationship between the Farhat Trust and TTM was that of co-tenancy holding joint ownership of the property. Jad Farhat Irrevocable GSTT Tr. No. 1, 2014 WL 5314701 at *3. "Joint tenancy, tenancy in common, tenancy by the entirety, joint property, common property, or part ownership does not of itself establish a partnership." Cordier v. Lincoln County Nat. Bank, 702 S.W.2d 428, 430 (Ky. 1986) (citing Kentucky Revised Statute (KRS) 362.180(2)). Statutes relating to partnership formation are consistent with the case law. Kentucky's Uniform Partnership Act contains the following provisions:
In determining whether a partnership exists . . . [j]oint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property.KRS 362.180(2), (4)(b). The Kentucky Revised Uniform Partnership Act, effective July 12, 2006, contains similar provisions:
. . .
The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment . . . [a]s wages of an employee or rent to a landlord.
Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
. . .
A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment . . . [o]f rent.KRS 362.1-202(3)(a), (3)(c)(3). Despite Farhat Trust's repeated attempts to label its relationship with one or more of the appellees as a partnership, there is nothing in the record to support that assertion. We hold Farhat Trust cannot claim the appellees owed fiduciary duties on the basis of partnership.
Next, we examine Farhat Trust's claim to fiduciary duties through agency, claiming the appellees acted as its agents in the management of the property. We disagree. "An individual is the agent of another if the principal has the power or responsibility to control the method, manner, and details of the agent's work." Nazar v. Branham, 291 S.W.3d 599, 606-07 (Ky. 2009). There is nothing in the record supporting the view that Farhat Trust had such power or responsibility over the appellees' management of the property. The evidence before the trial court was that Farhat Trust was simply willing to act as a passive co-owner and collect its portion of the monthly rent. This is not sufficient to support a finding of agency. Farhat Trust cannot claim fiduciary duties through an agency relationship.
Finally, we examine Farhat Trust's claim to fiduciary duties through a special confidence placed in the appellees to act in its best interests. In order to find a fiduciary relationship, one requirement is that the party claiming the relationship "must show [the] reliance was not merely subjective." Ballard, 430 S.W.3d at 242 (quoting In re Sallee, 286 F.3d at 892). Inexplicably, Farhat Trust asserts its "reliance on Appellees was not subjective since the Trust completely entrusted Appellees with managing the Property on its behalf and looking out for its interests." This statement fails to show anything but a subjective reliance. Farhat Trust cannot demonstrate it was entitled to fiduciary duties through a special confidence.
None of Farhat Trust's three arguments support its claim to fiduciary duties; therefore, Farhat Trust cannot claim a fiduciary relationship with any of the appellees. Consistent with our earlier opinion, Farhat Trust's position was merely that of a joint owner of the property prior to its foreclosure. Because the appellees did not owe Farhat Trust fiduciary duties, the trial court properly found they could not have been in breach of such duties. We find no error.
II. Negligence
In its second argument, Farhat Trust contends the appellees committed negligence through its mismanagement of the property, which led to foreclosure and the consequent loss of Farhat Trust's twenty percent interest in the property. Farhat Trust argues the appellees owed it "a duty to prudently manage the Property, its finances, and to manage the payment of the two mortgages - in other words, to not commit financial waste to the Property." The appellees respond by arguing the only duties owed with regard to the mortgages were to the banks holding the mortgages. Furthermore, even if a duty were found, the appellees contend Farhat Trust has provided no evidence supporting a breach of duty.
This cause of action was not specifically pleaded, although the trial court permitted the parties to argue the issue based upon allegations of mismanagement against the appellees. --------
During the hearing, the trial court focused on Farhat Trust's lack of evidence supporting a breach of duty. It found that a "horrible result," i.e. foreclosure, does not automatically mean negligence. The court noted, even after discovery, Farhat Trust had presented no evidence the appellees were paying themselves rather than the mortgages, aside from Jad Farhat's affidavit expressing mere belief. The court ultimately found this was not sufficient factual support for the count and granted summary judgment to the appellees.
We agree with the trial court on the lack of any evidence supporting breach of duty, but we must also point out how Farhat Trust has failed to prove the existence of a duty as part of its negligence theory. "In any negligence action under Kentucky law, a plaintiff must prove the existence of a duty, breach thereof, causation, and damages." Kendall v. Godbey, 537 S.W.3d 326, 331 (Ky. App. 2017) (quoting Boland-Maloney Lumber Co. v. Burnett, 302 S.W.3d 680, 686 (Ky. App. 2009)). Here, Farhat Trust has failed to cite any authority whatsoever supporting its negligence theory. "If the plaintiff cannot prove the defendant owed . . . a duty of care, then the defendant is entitled to judgment as a matter of law." Bryant v. Jefferson Mall Company, L.P., 486 S.W.3d 310, 312 (Ky. App. 2015) (citing Pathways, Inc. v. Hammons, 113 S.W.3d 85, 89 (Ky. 2003)). The trial court did not err in granting summary judgment to the appellees on this count.
III. Unjust Enrichment
For its third argument, Farhat Trust contends the appellees "were unjustly enriched at the Trust's expense" as a result of the foreclosure, because (1) EAC and the Fosters were able to acquire Farhat Trust's twenty percent interest in the property without compensation; (2) TTM, DJD, the Darlands, and the Fosters were relieved of the mortgages for which they were liable at Farhat Trust's expense; and (3) TTM, DJD, the Darlands, and the Fosters were unjustly enriched by paying themselves from the proceeds of the property without paying on the two mortgages.
In Jones v. Sparks, 297 S.W.3d 73 (Ky. App. 2009), this Court provided the following guidance on a successful suit for unjust enrichment:
For a party to prevail under the theory of unjust enrichment, they must prove three elements: (1) benefit conferred upon defendant at plaintiff's expense; (2) a resulting appreciation of benefit by defendant; and (3) inequitable retention of benefit without payment for its value.Id. at 78 (citations omitted). Here, there was no benefit to anyone as a result of the foreclosure. All of the owners - TTM, DJD, and Farhat Trust - lost their equity in the property. The Darlands and the Fosters suffered losses as well, commensurate with their interests as members or associates of TTM and DJD. Therefore, elements (1) and (2) under Jones, requiring conferral of a benefit, were not met for these appellees. In addition, as previously considered, there is also no evidence supporting Farhat Trust's assertion that these appellees paid themselves rather than the mortgages.
EAC, the eventual owner of the property, did not exist when the foreclosure occurred. Bank of the Bluegrass acquired the property during the master commissioner sale for $1.4 million. Approximately ten months later, EAC purchased the property from Bank of the Bluegrass for $1,461,344. Because EAC paid full market value for the property, element (3) of Jones, requiring "retention of benefit without payment for its value[,]" was not met. Because Farhat Trust cannot meet its burden under Jones showing unjust enrichment as to any of the appellees, the trial court did not err in granting summary judgment on this count.
IV. Constructive Trust
Finally, Farhat Trust asserts the trial court erred in not granting it a constructive trust on its interests in the property.
A constructive trust is one that all courts and text writers define as one raised by equity for the purpose of circumventing fraud 'where there is no intention of the parties to create such a relation.' Graham v. King, 96 Ky. 339, 24 S.W. 430, 431 [(1893)]. They never arise except where the holder of the legal title obtained it through fraud, misrepresentation, concealments, undue influence, duress, or some other wrongful act whereby another is deprived of the title to his property.Dotson v. Dotson, 307 Ky. 106, 108, 209 S.W.2d 852, 853 (1948). In Jad Farhat's deposition, he admitted knowing the property was heavily encumbered at the time of the Farhat Trust's purchase of its twenty percent interest. Farhat Trust does not allege concealment, fraud, or misrepresentation regarding the property's status at the time of the purchase. Despite Farhat Trust's allegations here and in preceding arguments, it has presented no evidence of a "wrongful act" by the appellees which would justify an equitable remedy. We find no error.
CONCLUSION
For the foregoing reasons, we affirm the Fayette Circuit Court's grant of summary judgment to the appellees, entered November 21, 2016.
ALL CONCUR. BRIEF FOR APPELLANT: F. William Hardt, III
The Hardt Law Firm, LLC
Lexington, Kentucky JOINT BRIEF FOR APPELLEES: Christopher L. Thacker
Stephen F. Wilson
Billings Law Firm, PLLC
Lexington, Kentucky William R. Renner
Walton, Kentucky