First Southern National Bank v. Cumberland Security Bank, Inc. ( 2021 )

RENDERED: OCTOBER 1, 2021; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2019-CA-0205-MR
FIRST SOUTHERN NATIONAL
BANK APPELLANT
APPEAL FROM PULASKI CIRCUIT COURT
v. HONORABLE DAVID A. TAPP, JUDGE
ACTION NO. 18-CI-00235
CUMBERLAND SECURITY BANK,
INC.; DON NICHOLS EXECUTOR OF
THE ESTATE OF CAROLE
WOEHLER A/K/A CAROLE D.
WOEHLER A/K/A CAROLE
NICHOLS; DON NICHOLS; MOLLY
NICHOLS; LARRY NICHOLS; FRAN
NICHOLS; KENNETH NICHOLS;
CHERYL NICHOLS; STEVE
NICHOLS; YVONNE NICHOLS;
AMY ERB; DANIEL ERB;
SOMERSET DEVELOPMENT, LLC;
BURNSIDE, KENTUCKY;
SOMERSET, KENTUCKY; PULASKI
COUNTY, KENTUCKY; AND THE
NEIGHBORHOOD VILLAS APPELLEES
ASSOCIATION, INC.
AND
NO. 2019-CA-0206-MR
SOMERSET DEVELOPMENT, LLC APPELLANT
APPEAL FROM PULASKI CIRCUIT COURT
v. HONORABLE DAVID A. TAPP, JUDGE
ACTION NO. 18-CI-00235
CUMBERLAND SECURITY BANK,
INC.; DON NICHOLS, EXECUTOR
OF THE ESTATE OF CAROLE
WOEHLER, A/K/A CAROLE D.
WOEHLER, A/K/A CAROLE
NICHOLS; DON NICHOLS AND
MOLLY NICHOLS, HIS WIFE;
LARRY NICHOLS AND FRAN
NICHOLS, HIS WIFE; KENNETH
NICHOLS AND CHERYL NICHOLS,
HIS WIFE; STEVE NICHOLS AND
YVONNE NICHOLS, HIS WIFE; AMY
ERB AND DANIEL ERB, HER
HUSBAND; FIRST SOUTHERN
NATIONAL BANK; CITY OF
BURNSIDE, KENTUCKY; CITY OF
SOMERSET, KENTUCKY; PULASKI
COUNTY, KENTUCKY; AND THE
NEIGHBORHOOD VILLAS
ASSOCIATION, INC. APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE: CLAYTON, CHIEF JUDGE; MAZE AND K. THOMPSON, JUDGES.
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THOMPSON, K., JUDGE: In this case a mortgage listing both a condominium
and a second piece of land as security was filed by the Pulaski County Clerk only
in a book designated for “apartment mortgages.” The question is whether that
mortgage has priority over a later mortgage filed which involved the second piece
of land. We conclude the mortgage filed in the apartment mortgage book has
priority.
The core facts are uncontested. In 2013, Carole Woehler borrowed
money from the Cumberland Security Bank (Cumberland). To secure that loan,
Woehler granted Cumberland a mortgage on two separate properties: a
condominium located in Somerset, Kentucky and land located on Grandview
Avenue in Burnside, Kentucky (the Grandview property). In 2013, the mortgage,
which describes both properties, was submitted to the Pulaski County Clerk for
recording. The county clerk recorded the mortgage in an “apartment mortgage
book.”
Apparently without notifying Cumberland, Woehler sold the
Grandview property to Somerset Development, LLC in late November 2016. To
finance its purchase, Somerset Development received a loan from First Southern
National Bank (First Southern), which was secured by a mortgage recorded in
early 2017 with the county clerk. About three months later, Somerset
Development refinanced its loan with First Southern, which was again secured by a
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mortgage, which was recorded in a mortgage book by the county clerk on March 1,
2017. First Southern contends it obtained title opinions before issuing the original
and refinanced loans, but neither opinion mentioned Cumberland’s mortgage.1
After Woehler died, her loan from Cumberland went into default.
Cumberland then filed suit against Woehler’s executor, her next of kin and heirs at
law, Somerset Development, First Southern, the City of Burnside, the City of
Somerset, and Pulaski County, Kentucky (the localities were named as defendants
in case there were any unpaid taxes).2 The complaint asked the trial court to find
that Cumberland had a “first, prior and superior lien[.]”
The condominium was later sold for an amount insufficient to satisfy
Woehler’s indebtedness to Cumberland. In October 2018, Cumberland filed a
1
The timing of when the title opinions were rendered is suspect. First Southern asserts those title
opinions were rendered before executing the original and refinanced loans to Somerset
Development. First Southern’s litigation officer averred the same in an affidavit. However, the
dates on the title opinions vis-à-vis the loans seem to indicate the title opinions were obtained
after the loans.
A member of Somerset Development averred in an affidavit that Somerset Development
purchased the Grandview property from Woehler on November 30, 2016 and executed a
promissory note to First Southern that same date, which was secured by a mortgage. The
affidavit further states that pursuant to the refinancing Somerset executed another promissory
note, again secured by a mortgage, to First Southern on February 28, 2017 (which was recorded
on March 1, 2017). However, that same affidavit states that First Southern’s title opinions were
“dated December 2, 2016” and “March 1, 2017[.]” It is extremely unclear how a title opinion
dated December 2, 2016 can predate a mortgage dated November 30, 2016, or how a title
opinion dated March 1, 2017 can predate a mortgage dated February 28, 2017. First Southern
has failed to explain adequately those temporal incongruities, but ultimately the timing of the
title opinions does not change our analysis.
2
None of the appellees, except Cumberland, has actively participated in this appeal.
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motion for summary judgment; about two days later, Somerset Development and
First Southern filed a joint motion for summary judgment. The trial court
concluded that Cumberland and the county clerk had complied with their duties.
Thus, the trial court granted Cumberland’s motion for summary judgment. Soon
thereafter, the trial court ordered the Grandview property to be sold by the Master
Commissioner. First Southern and Somerset Development then each filed a
separate appeal, which we ordered to be consolidated.3
The question before us is the same as that presented to the trial court:
Whether a mortgage secured by two parcels of real property, including a
condominium, which is recorded in an apartment mortgage book, rather than the
traditional mortgage book provides sufficient actual or constructive notice to give
Cumberland priority. We agree with the trial court that it does.
Under our familiar standards, summary judgment “shall be rendered
forthwith” if the record shows “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
Rules of Civil Procedure (CR) 56.03. Our Supreme Court has fleshed out CR
56.03 by explaining that:
The trial court must view the evidence in the light most
favorable to the nonmoving party, and summary
judgment should be granted only if it appears impossible
3
First Southern and Somerset Development have filed a joint brief. We shall hereafter refer to
them jointly as First Southern.
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that the nonmoving party will be able to produce
evidence at trial warranting a judgment in his favor. The
moving party bears the initial burden of showing that no
genuine issue of material fact exists, and then the burden
shifts to the party opposing summary judgment to present
at least some affirmative evidence showing that there is a
genuine issue of material fact for trial. The trial court
must examine the evidence, not to decide any issue of
fact, but to discover if a real issue exists. The word
“impossible,” as set forth in the standard for
summary judgment, is meant to be used in a practical
sense, not in an absolute sense. Because summary
judgment involves only legal questions and the existence
of any disputed material issues of fact, an appellate court
need not defer to the trial court’s decision and will
review the issue de novo.
Blackstone Mining Co. v. Travelers Ins. Co., 351 S.W.3d 193, 198 (Ky. 2010)
(internal quotation marks and citations omitted).
Kentucky is a race-notice state. See Kentucky Revised Statute (KRS)
382.270. In plain English, that means “the first person to the courthouse wins,
unless he or she knows or should have known of a competing equity or prior
claim.” 3 KY. PRAC. Real Estate Transactions § 2:55 (2020). “Put another way, a
prior interest in real property takes priority over a subsequent interest that was
taken with notice, actual or constructive, of the prior interest.” Mortgage
Electronic Registration Systems, Inc. v. Roberts, 366 S.W.3d 405, 408 (Ky. 2012).
First Southern’s argument that it did not have actual notice of
Cumberland’s prior mortgage on the Grandview property does not appear to be in
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dispute. Instead, the key dispute at the heart of this appeal is whether First
Southern also lacked constructive notice of Cumberland’s prior mortgage.
First Southern argues that Cumberland’s error in filing its mortgage
prevented it from having both actual or constructive notice. It argues this occurred
because Cumberland failed in its duty to make sure its mortgage was recorded in
both the regular and apartment mortgage books. However, First Southern cites no
binding Kentucky authority whatsoever which either: (1) made it improper for two
pieces of property to be used as security for one mortgage or (2) required
Cumberland to present two copies of its mortgage to the clerk, or to otherwise
direct the clerk to file the mortgage in any particular record book(s). Instead, it
relies on a federal appellate opinion rendered over fifty years ago for the
proposition that “[w]hen dealing with a multi-purpose document, it is incumbent
upon the filing party to disclose to the Clerk the purpose for recording.” In re
Leckie Freeburn Coal Co., 405 F.2d 1043, 1046 (6th Cir. 1969).
Of course, “[a]s an initial matter, we note that we are not bound by a
federal court’s interpretation of state law.” LKS Pizza, Inc. v. Commonwealth ex
rel. Rudolph, 169 S.W.3d 46, 49 (Ky.App. 2005).
The document at issue in Leckie was intended to serve two separate,
discrete functions: (1) as a lease and (2) as a UCC financing statement showing a
security interest in mining property. Leckie, 405 F.2d at 1045-46. See also Ky.
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OAG 81-33, 1981 WL 142318 (Jan. 26, 1981) (summarizing the holding of Leckie
as being that “when someone tenders a multipurpose document to the clerk (in that
case it was a single document which acted as a lease and as a security agreement to
perfect a security interest in certain mining equipment) the party must provide the
clerk with duplicates of the document, must inform the clerk as to the purpose for
which each is to be filed, and must pay the appropriate fee for each filing.”).
Leckie is materially distinguishable from the case at hand because
Cumberland’s mortgage was not a “multi-purpose” document. Instead, its sole
recording purpose was to provide notice to subsequent creditors and purchasers of
Cumberland’s security interest in two pieces of property. We do not believe that
Cumberland failed in any duty by not attempting to have its mortgage recorded in
two separate books because while its mortgage encumbered two separate pieces of
property, Cumberland’s mortgage was not intended to serve two separate and
legally discrete purposes.
Additionally, we note that regardless of what information a person
delivering a document to a county clerk to be recorded provides about its purpose
and where it should be recorded, it is ultimately in the clerk’s discretion to record
that document in the book that the clerk believes is appropriate. Therefore, while it
may be the better practice for a person filing a document with the clerk to discuss
why the document is being filed and what its purpose is and ask whether additional
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copies need to be filed to fulfill that purpose, Cumberland’s best efforts may not
have provided First Southern with any better notice as Cumberland ultimately had
no control over the fact that the clerk chose to record its mortgage in the apartment
mortgage book. See generally PBI Bank, Inc. v. Schnabel Foundation Co., 392
S.W.3d 421, 424 (Ky.App. 2013) (allowing equitable tolling to apply to untimely
mechanics lien where the county clerk wrongfully rejected a proper and timely
mechanics lien from being filed, explaining “[the contractor] could not force the
county clerk to perform official duties and file the instrument.”).
We also do not believe the county clerk committed any error in
recording the mortgage in the apartment mortgage book. KRS 382.110(1) only
requires a mortgage to be “recorded in the county clerk’s office” in order to be
“effectual against purchasers without notice, or creditors[.]” Notably, there is no
requirement for the county clerk to record a mortgage in any particular record
book, and we cannot “engraft language onto a statute in order to achieve a desired
result” as “it is neither the duty nor the prerogative of the judiciary to breathe into
the statute that which the Legislature has not put there.” Crouch v.
Commonwealth, 323 S.W.3d 668, 674 (Ky. 2010) (internal quotation marks and
citation omitted).
Perhaps the General Assembly did not require county clerks to file
mortgages in any designated set of record books in KRS 382.110 because another
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statute requires county clerks to create a cross-index of conveyances, including
mortgages. See KRS 382.200(1). It is undisputed that the clerk here properly
cross-indexed Cumberland’s mortgage. That cross-index provided constructive
notice of Cumberland’s mortgage. In practical terms, that means the existence of
Cumberland’s mortgage was readily discernible for anyone checking Woehler’s
name in the cross-index.
Moreover, First Southern would not be entitled to relief even if the
county clerk had failed to properly index Cumberland’s mortgage. A century or so
of Kentucky precedent has generally held that even an improperly indexed
instrument provides constructive notice. As an illustrative example, in 1927,
Kentucky’s then-highest court held that “[w]here the clerk records an instrument
which is recordable in his office, it is notice to all parties as provided by law, and
this notice exists regardless of whether the clerk has properly indexed the
instrument.” Seat v. Louisville & Jefferson County Land Co., 219 Ky. 418, 293
S.W. 986, 991 (1927). See also, e.g., Kentucky River Coal Corporation v. Sumner,
195 Ky. 119, 241 S.W. 820, 822 (1922).
We agree with a leading treatise on Kentucky law that “[i]t is
incumbent upon the attorney who does title work to become familiar with the
methods of indexing and record-keeping in the county clerk’s office of the county
in which the attorney practices.” 3 KY. PRAC. Real Estate Transactions § 2:21
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(2020).4 See 3 KY. PRAC. Real Estate Transactions § 2:43 (2020) (explaining
“[t]he recording statutes as regards liens on real property mean that the rule of
caveat emptor has been eliminated from such dealings and places on the title
examiner the duty of examining the cross-index files to determine if any mortgages
have been recorded against the property or lodged for record.”); State Street Bank
& Tr. Co. of Boston v. Heck’s, Inc., 963 S.W.2d 626, 630 (Ky. 1998) (explaining
that “constructive notice is established by mere proof that a valid interest in real
property is properly recorded in the office of a county court clerk” while actual
knowledge or “knowledge of such facts as would lead a reasonably prudent person
under like circumstances to inquire into the matter and discover the existence of
that mortgage” provides priority even when a mortgage is either unrecorded or
improperly recorded).
4
Unsurprisingly, the lack of a mandate by the General Assembly as to exactly in which books
mortgages, and other recordable documents, must be lodged has led to idiosyncratic, county-
specific filing systems across the Commonwealth. For example, Cumberland’s attorney
submitted an affidavit in the trial court, the contents of which have not been controverted,
averring that “[i]n Pulaski County, the County Court Clerk records mortgage releases in its
Power of Attorney Books. In Laurel County, Kentucky, the County Court Clerk records Land
Contracts in its Lease Books. In Whitley County, Kentucky, the County Court Clerk records
Land Contracts in its Miscellaneous Books.” Even the main case relied upon by First Southern,
Leckie, involved a lease having been recorded in a Deed Book, which the Sixth Circuit deemed
to have been a “proper recordation[.]” Leckie, 405 F.2d at 1046.
We recite those quirky filing systems to highlight how vital it is for a title examiner to
thoroughly research documents appearing in a cross-index. However, although there is not a
statute requiring a statewide uniform filing system, we would encourage county clerks to
collectively adopt more uniform and commonsense filing systems going forward which would be
more user-friendly and offer the best opportunity for actual notice.
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First Southern also seeks equity-based relief because its title opinions
did not locate Cumberland’s mortgage. We do not know why First Southern’s title
opinions omitted Cumberland’s mortgage, though the strong implication is that the
examiners failed to look at that mortgage since it was filed in an apartment
mortgage book. However, the fact that the title examiners failed to find
Cumberland’s mortgage does not answer the question of whether First Southern’s
title examiners reasonably should have seen Cumberland’s mortgage. The title
examiners’ error is not an appropriate basis for relief against Cumberland.
We are satisfied that First Southern had constructive or inquiry notice
of Cumberland’s previously-recorded mortgage. Therefore, the impact of the
failure to note Cumberland’s mortgage must be felt by First Southern because it
“was in better position by reasonable diligence or care to have averted the loss
which now must be borne by the one or the other.” Louisville Asphalt Co. v. Cobb,
310 Ky. 126, 129, 220 S.W.2d 110, 112 (1949).
We have considered all issues raised in the briefs, but deem all
arguments not discussed herein to be irrelevant, redundant, or without merit.
For the foregoing reasons, the Pulaski Circuit Court is affirmed
because it properly determined that based on the prior filing and recordation of
Cumberland’s mortgage on the Grandview property, Cumberland had priority over
First Southern’s later filed mortgage on that property.
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ALL CONCUR.
BRIEFS FOR APPELLANTS: BRIEF FOR APPELLEE
CUMBERLAND SECURITY BANK,
Stephanie L. McGehee-Shacklette INC.:
Ashley D. Gerughty
Bowling Green, Kentucky Sarah Tipton Reeves
Jeffrey R. Tipton
John S. Gillum Corbin, Kentucky
Somerset, Kentucky
Molly K. Hardy
Somerset, Kentucky
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