Salyersville National Bank v. Brandon Russell ( 2021 )

RENDERED: MAY 14, 2021; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2020-CA-0208-MR
SALYERSVILLE NATIONAL BANK APPELLANT
APPEAL FROM MAGOFFIN CIRCUIT COURT
v. HONORABLE KIMBERLY CHILDERS, JUDGE
ACTION NO. 19-CI-00240
BRANDON RUSSELL AND
TASHA RUSSELL APPELLEES
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: CALDWELL, KRAMER, AND MAZE, JUDGES.
MAZE, JUDGE: The primary question in this appeal is whether the Magoffin
Circuit Court erred in concluding that a mortgage held by appellant Salyersville
National Bank (“the Bank”) does not require the mortgagors, appellees Brandon
and Tasha Russell, to assign the Bank their claims against various contractors and
subcontractors for the destruction of their residence which slid down the hill upon
which it was constructed. The Bank also argues that it is entitled to the imposition
of a lien on any damages the Russells recover against the third-party tortfeasors for
destruction of its collateral. Because we are convinced that the judgment was
based upon an erroneous interpretation of the plain language of the mortgage and
relevant caselaw, we reverse the entry of summary judgment in favor of the
Russells and remand the case for entry of a judgment in favor of the Bank.
There is no dispute as to the facts. The Russells financed the purchase
of a piece of property and the construction of a home in Magoffin County,
Kentucky, with loans from the Bank. In September 2016, they executed a
mortgage against the property to secure a construction loan and, in September
2017, they signed another mortgage converting the construction loan to a
conventional thirty-year mortgage. The ultimate debt on the loan exceeded
$678,000.00.
The property in question sits atop a large hill, and the site required
significant preparation for the construction of the residence. The excavation
company that sold the property to the Russells was hired to excavate the land and
create a level building site. Soon after the Russells moved in, the land beneath the
residence began to give way causing foundation cracks and sinking. The general
contractor installed a supplemental concrete foundation support which did not
alleviate the problems. A second foundation company attempted to drive steel
pillars into the bedrock to support the residence, but that effort also failed to
-2-
correct the problems. Ultimately, the residence began sinking and sliding down
the hillside along with the soil and is estimated to be a total loss. The Bank
advanced one hundred percent of the funds used to purchase the land, construct the
residence, and finance the unsuccessful remediation efforts to address the
foundation problems. Thus, the value of the real property assigned to the Bank as
collateral for these loans has all but been destroyed by the alleged improper
foundation, construction, and remediation work.
In July 2017, the Russells filed suit in Magoffin Circuit Court against
the original foundation company that poured the foundation and basement. That
company subsequently filed third-party claims against the general contractor and
the excavation company. The Russells then amended their complaint to add the
second foundation contractor who attempted to remedy the foundation failure by
driving steel pillars into the bedrock. The litigation concerning the liability of the
various contractors and subcontractors for damages due to the destruction of the
Russells’ residence remains pending.
The litigation at issue in this appeal stems from the Russells’ refusal
to assign to the Bank their claims against the various contractors, their denial that
they have any duty to apply amounts recovered in those claims against the
outstanding balance of their mortgage loan, and their position that their cause of
action against the contractors is a personal property interest, a chose in action,
-3-
which is not covered by the real estate mortgage. After the Russells filed a petition
for Chapter 11 bankruptcy protection in November 2018, the bankruptcy judge
directed the parties to seek a declaratory judgment in state court to determine
whether and to what extent the Bank’s mortgage lien attached to their claims
against the contractors.
In response to the direction of the bankruptcy court, the Bank filed the
underlying action in Magoffin Circuit Court seeking a declaration: 1) that the
mortgages between the parties require the Russells to assign to the Bank their
claims against the third-party contractors allegedly responsible for the destruction
of the Bank’s collateral; and 2) that the mortgages give the Bank a lien on any
damages recovered against the third-party contactors up to the amount owed the
Bank on the underlying loan. Because there was no dispute as to the facts, both the
Bank and the Russells moved for summary judgment with respect to an
interpretation of the mortgage agreement.
After analyzing the various pertinent mortgage provisions, the circuit
court granted summary judgment in favor of the Russells on the basis: 1) that
language in Section 1 of the mortgage purporting to convey “all rights” the
Russells had in the mortgaged property was insufficient to require assignment to
the Bank of their personal property claims against the third-party contractors; 2)
that language in Section 7 of the mortgage concerning assignment of claims the
-4-
“Mortgagor may have against parties who supply labor or materials to maintain or
improve the Property” applied only to things such as adverse title claims, taxes,
and materialman’s liens; and 3) that nothing in any of the remaining contract
provisions included language which would require assignment of any of the
Russells’ claims against the contractors to the Bank. This appeal followed.
The Bank presses two arguments in support of its contention that the
judgment of the circuit court is erroneous: 1) that the circuit court erred in holding
the mortgages do not create an affirmative duty to assign to the Bank their claims
for destruction of the Bank’s collateral; and 2) that under Kentucky law an
equitable lien attaches to any proceeds recovered from third parties responsible for
the destruction of the Bank’s collateral, even without the express language of the
mortgages. We agree.
As an initial matter, we address the Russells’ contention that the Bank
is attempting to relitigate matters which have already been decided adversely to it
in their bankruptcy proceeding. A plain reading of the orders of the bankruptcy
court dispels any such contention.
The question is whether the plan is confirmable
with the special provision. I am not required to decide
what party has the right to any recovery from the
litigation. The plan is confirmable with the special
provision.
The special provision revests the causes of action
for negligence and breach of warranties in the Debtors.
-5-
The ownership of these causes of action is disputed,
but the record shows the state court has not yet
addressed the issue. Therefore, there is at least some
interest that has become property of the estate and the
estate’s interest may be addressed by the plan.
....
This decision does not decide the ultimate issue:
who has the right to the proceeds of the debtor’s
causes of action. The record shows the bank and
debtors are pursuing this question in the state court.
Therefore, confirmation of a plan with a special provision
that the addresses the debtors’ interest if they are
successful does not harm any party.
Opinion and Order of the United States Bankruptcy Court, Eastern District of
Kentucky, filed 11/26/2019 (emphases added). It is thus apparent that the ruling of
the bankruptcy court made provision for a ruling by the Magoffin Circuit Court
concerning the right to the proceeds of the ongoing litigation. Furthermore, the
bankruptcy court’s conclusion that the negligent construction and breach of
warranty claims are personal to the debtors does not preclude assignment of those
claims to the Bank in the instant action.
Turning now to the equitable trust claim, we are persuaded that the
decision in Grafton v. Shields Mini Markets, Inc., 346 S.W.3d 306 (Ky. App.
2011), is dispositive. In Grafton, this Court held that when the mortgagor receives
a recovery or settlement proceeds from a third-party tortfeasor, “he must hold it in
trust for the mortgagee to the extent of his or her outstanding debt” and that such
-6-
an equitable trust “is sufficient protection for the mortgagee’s security interest in
the mortgaged property.” Id. at 312. The holding in Grafton emphasizes that
while a tortfeasor may not be subjected to having “to pay twice for the same act of
property damage[,]” obligating the mortgagor to hold the proceeds in trust to the
extent of a lien likewise protects a mortgagee from being left without a remedy.
Id.The circuit court refused to apply Grafton to the facts of this case on
the basis that Grafton involved a case which had already been settled. We are
convinced that holding is clear error. Nothing in the Grafton analysis restricts its
application to cases which have previously been settled. Grafton simply and
unequivocally holds that once a third-party tortfeasor settles with the mortgagor,
the mortgagor is thereafter “obligated to hold the resulting proceeds in trust for the
mortgagee” to avoid leaving the mortgagee without remedy for the destruction of
its collateral. Id. at 311. We therefore hold that, under the authority of Grafton,
the Russells are obliged to hold the proceeds of their claims against the third-party
tortfeasors in trust for the Bank to the extent of its mortgage.
The Bank’s second allegation of error centers on the circuit court’s
interpretation of the mortgage document provisions. The Bank argues that the
plain language of those documents requires the assignment of the Russells’ claims
against the third-party tortfeasors. We agree.
-7-
Section 7 of the mortgage agreement between the parties provides:
7. Claims Against Title. Mortgagor will pay all taxes,
assessments, liens, encumbrances, lease payments,
ground rents, utilities, and other charges relating to the
Property when due. Lender may require Mortgagor to
provide to Lender copies of all notices that such amounts
are due and the receipts evidencing Mortgagor’s
payment. Mortgagor will defend title to the Property
against any claims that would impair the lien of this
Security Instrument. Mortgagor agrees to assign to
Lender, as requested by Lender, any rights, claims or
defenses Mortgagor may have against parties who supply
labor or materials to maintain or improve the Property.
(Emphasis added.)
The circuit court refused to give effect to this provision, holding:
Turning to Section 7, when one reads this section
in its full context, it obviously applies only to things such
as adverse title claims, taxes, and materialman’s liens.
This is not a case where someone is making a claim
against the property. Nowhere is there anything that
remotely suggests that the Russells are assigning any
cause of action for faulty construction or other claims for
damages to property. The only provision about
assignment relates to mechanics and materialman’s liens.
Under the doctrine of ejusdem generis the mortgage
clause is limited to things such as taxes, etc., i.e. the
clause is to be read narrowly, not broadly.
We are convinced that this conclusion is erroneous for several reasons.
Prior to setting out our rationale for setting aside the circuit court’s
decision, we reiterate that because the parties agree there are no genuine issues of
material fact, we review the circuit court’s decision de novo. 3D Enterprises
-8-
Contracting Corp. v. Louisville and Jefferson County Metropolitan Sewer District,
174 S.W.3d 440, 445 (Ky. 2005). We thus owe no deference to the circuit court’s
analysis of the contractual provisions.
Citing Kentucky Shakespeare Festival, Inc. v. Dunaway, the Bank
argues that the circuit court’s analysis does not comport with fundamental
principles of contract interpretation:
Our review must begin with an examination of the plain
language of the instrument. “‘In the absence of
ambiguity, a written instrument will be enforced strictly
according to its terms,’ and a court will interpret the
contract’s terms by assigning language its ordinary
meaning and without resort to extrinsic evidence.” “A
contract is ambiguous if a reasonable person would find
it susceptible to different or inconsistent interpretations.”
“When no ambiguity exists in the contract, we look
only as far as the four corners of the document to
determine the parties’ intentions.” . . . The interpretation
of a contract, including determining whether a contract is
ambiguous, is a question of law to be determined de novo
on appellate review.
490 S.W.3d 691, 694-95 (Ky. 2016) (citations omitted).
The Bank insists that the circuit court’s analysis not only fails to apply
the plain language of Section 7 regarding the assignment of claims, but also fails to
give effect to Section 23 regarding interpretation of the agreement. That section
provides in pertinent part that the “captions and headings of the section of the
-9-
Security Instrument are for convenience only and are not to be used to interpret or
define the terms of this Security Instrument.”
Returning to the circuit court’s order, the circuit court stated that
“when one reads this section in its full context, it obviously applies only to things
such as adverse title claims, taxes, and materialman’s liens.” Again, the caption
for Section 7 reads “Claims Against Title.” However, when Section 7 is read in
its entirety, it unambiguously requires the Russells to “assign to [the Bank] . . . any
rights, claims or defenses [they] may have against parties who supply labor or
materials to maintain or improve the Property.” Clearly, this language cannot be
construed as referring to a claim against title. Rather, according that portion of
Section 7 its ordinary meaning, we are convinced that a reasonable person would
find it susceptible of only one interpretation: that it encompasses a duty to assign
to the Bank the kind of claims the Russells are pursuing against the various
contractors and subcontractors for damages due to the destruction of their
residence and, in turn, the Bank’s collateral. Thus, the circuit court was not free to
simply ignore the plain and unambiguous language of Sections 7 and 23 of the
mortgages.
Accordingly, because we are convinced that the circuit court
misconstrued the plain language of the mortgage agreement and clearly erred in
applying settled caselaw to the undisputed facts of this case, we reverse the entry
-10-
of judgment in favor of the Russells and remand the case for entry of an order
granting the Bank’s motion for summary judgment.
ALL CONCUR.
BRIEFS FOR APPELLANT: BRIEF FOR APPELLEES:
John T. Hamilton Eldred E. Adams, Jr.
Lori B. Shelburne Louisa, Kentucky
Lexington, Kentucky
-11-