The First National Bank of Manchester v. Maurice K. Smith ( 2022 )

RENDERED: MARCH 11, 2022; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2020-CA-0758-MR
THE FIRST NATIONAL BANK
OF MANCHESTER APPELLANT
APPEAL FROM CLAY CIRCUIT COURT
v. HONORABLE OSCAR G. HOUSE, JUDGE
ACTION NO. 15-CI-00338
MAURICE K. SMITH;
COMMONWEALTH OF KENTUCKY,
TRANSPORTATION CABINET,
DEPARTMENT OF HIGHWAYS;
DELBERT J. SMITH; JANET SMITH;
JOHNNY T. SMITH; LOLA DEANE
SMITH; SHELBY JEAN SMITH,
INDIVIDUALLY; SHELBY JEAN
SMITH AS TRUSTEE OF THE TRUST
AGREEMENT OF CLIFFORD M.
SMITH; AND VICKIE SMITH APPELLEES
AND
NO. 2020-CA-0759-MR
THE FIRST NATIONAL BANK
OF MANCHESTER APPELLANT
APPEAL FROM CLAY CIRCUIT COURT
v. HONORABLE OSCAR G. HOUSE, JUDGE
ACTION NO. 17-CI-00236
MAURICE K. SMITH; DELBERT J.
SMITH; JANET SMITH; JOHNNY
TAYLOR SMITH; LOLA DEANE
SMITH; SHELBY JEAN SMITH,
INDIVIDUALLY; SHELBY JEAN
SMITH AS TRUSTEE OF THE TRUST
AGREEMENT OF CLIFFORD M.
SMITH; AND VICKIE SMITH APPELLEES
OPINION
REVERSING AND REMANDING APPEAL NO. 2020-CA-0758-MR
AND AFFIRMING APPEAL NO. 2020-CA-0759-MR1
** ** ** ** **
BEFORE: CALDWELL, JONES, AND TAYLOR, JUDGES.
TAYLOR, JUDGE: The First National Bank of Manchester (First National) brings
Appeal No. 2020-CA-0758-MR from a May 4, 2020, summary judgment and
brings Appeal No. 2020-CA-0759-MR from a May 4, 2020, declaratory judgment
of the Clay Circuit Court. We reverse and remand Appeal No. 2020-CA-0758-
MR; we affirm Appeal No. 2020-CA-0759-MR.
1
Due to the related parties and subject matter, for judicial economy and expediency, these two
appeals have been considered together by the Court.
-2-
First National entered into a commercial ground lease with Maurice
K. Smith, Delbert J. Smith, Janet Smith, Johnny Taylor Smith, Lola Deane Smith,
Clifford M. Smith, Shelby Jean Smith, and Vickie Smith (collectively referred to
as the Smiths)2 on August 9, 1990. First National constructed a branch bank upon
the leased real property; however, the branch bank is currently closed.
On December 9, 2015, the Commonwealth of Kentucky,
Transportation Cabinet, Department of Highways, (Transportation Cabinet) filed a
petition (Action No. 15-CI-00338) in Clay Circuit Court to, inter alia, condemn a
portion of the real property leased by First National and owned by the Smiths.3
The Transportation Cabinet named, inter alios, both First National and the Smiths
as parties.
First National filed answers and asserted its right to just compensation
for the condemnation of a portion of the real property. The Smiths also filed an
answer and asserted their right to just compensation for the taking of their fee
simple interest in the real property.
2
It must be pointed out that Clifford M. Smith subsequently passed away and Shelby Jean Smith
as Trustee of the Trust Agreement of Clifford M. Smith was substituted.
3
Several parcels of real property were condemned, including a portion of real property owned by
Maurice K. Smith, Delbert J. Smith, Janet Smith, Johnny Taylor Smith, Lola Deane Smith,
Clifford M. Smith, Shelby Jean Smith, and Vickie Smith and leased to the First National Bank of
Manchester.
-3-
Eventually, by Interlocutory Order and Judgment, the circuit court
determined that the Transportation Cabinet possessed the authority to condemn the
real property. The court ordered that $87,500 be paid as compensation and be held
by the circuit court clerk pending trial.4
Thereafter, the Smiths filed a motion for summary judgment upon the
issue of apportionment of compensation between First National, as holder of the
leasehold, and the Smiths, as holder of the fee simple. Citing to Commonwealth,
Department of Highways v. Sherrod, 367 S.W.2d 844 (Ky. 1963), the Smiths
argued that First National was not entitled to any compensation as holder of the
leasehold. The Smiths attached an affidavit of a real estate appraiser, J.W.
Grabeel, who opined that the fair market value of the real property subject to the
lease was greater than the fair market value of the real property free of the lease.
As a result, the Smiths maintained that First National was not entitled to any
compensation for the taking of a portion of the real property by the Transportation
Cabinet.
First National responded and also cited to Sherrod, 367 S.W.2d 844.
However, First National maintained that the Smiths’ real estate appraiser failed to
4
Although not relevant to this appeal, three commissioners were appointed by the circuit court to
determine the fair market value of several parcels of real property sought to be condemned. In
their report, the commissioners determined that the fair market value of the real property taken
was $80,000 and the fair rental value of temporary easements was $7,500, for a total of $87,500.
However, exceptions to the amount of compensation were filed to the report, and the matter of
just compensation was set for jury trial.
-4-
supply specific fair market values of the real property; rather, the appraiser
improperly concluded that the fair market value of the real property with the lease
exceeded the fair market value of the real property without the lease. Additionally,
First National argued that the appraisal of the real property was premature.
While the condemnation action was pending, on August 2, 2017, First
National filed a Petition for Declaration of Rights against the Smiths in the Clay
Circuit Court (Action No. 17-CI-00236). In the petition, First National asserted
that it and the Smiths disputed the terms of the 1990 lease. First National claimed
that the 1990 lease was for successive five-year terms with each term being
renewable at the sole discretion of First National. First National also stated that it
did not intend to renew the lease at the end of the current five-year terms ending on
September 8, 2020. First National argues that it had the option to renew the five-
year terms for a period of 100 years. In response, as set forth in their answer, the
Smiths stated that the lease was a long-term lease for an initial term of 100 years,
rather than successive five-year terms.
First National then filed a Motion for Expediated Determination.
Therein, First National maintained that the sole issue for determination involved
the interpretation of the 1990 lease, which presented a legal issue for the court.
First National stated that there was “no necessity of the development of proof.”
Motion at 2. First National argued that the 1990 lease clearly provided for twenty
-5-
five-year terms, for a total of 100 years, and each term was renewed by First
National’s continued payment of rent.
The Smiths filed a response and argued that First National’s
interpretation of the 1990 lease was erroneous. The Smiths maintained that the
term of the 1990 lease was for 100 years, not five years, and there was an option to
extend the lease for another 100-year term. The Smiths argued the five-year
periods provided for in the lease were merely included to set forth the increased
amount of monthly lease payments due during each five-year period.
Ultimately, in a May 4, 2020, Declaration of Rights judgment in
Action No. 17-CI-00236, the circuit court concluded that the 1990 lease was a
long-term lease for an initial term of 100 years, with the option to be extended for
another 100 years. The circuit court determined that “the breakdown . . . into
segments of five years was for the purpose of periodic rental [payments].” May 4,
2020, Judgment at 7.
Also, in a May 4, 2020, summary judgment in Action No. 15-CI-
00338, the circuit court determined that First National was not entitled to
compensation for the taking of a portion of the real property subject to the
leasehold under the rule of Sherrod, 367 S.W.2d 844. Thus, the circuit court
concluded that the Smiths, as owners of the fee simple title, were entitled to all
compensation flowing from the condemnation of the real property. The circuit
-6-
court included complete Kentucky Rules of Civil Procedure (CR) 54.02 language
and these appeals followed.
As noted, First National filed Appeal No. 2020-CA-0758-MR from
the May 4, 2020, summary judgment rendered in Action No. 15-CI-00338 and
filed Appeal No. 2020-CA-0759-MR from the May 4, 2020, declaratory judgment
rendered in Action No. 17-CI-00236. To aid in disposition of these appeals, we
shall initially address Appeal No. 2020-CA-0759-MR and then Appeal No. 2020-
CA-0758-MR.
APPEAL NO. 2020-CA-0759-MR
First National contends that the circuit court erroneously interpreted
the 1990 lease. First National asserts that the term of the 1990 lease is for five
years and that the five-year term is renewable at the discretion of First National for
a total of twenty terms or 100 years. Thereafter, First National maintains that it
may extend the lease for another 100 years. According to First National, each five-
year term was renewed by First National’s act of paying monthly rent and of
continued possession upon expiration of the prior five-year term. First National
believes the circuit court overly emphasized the legal distinction between the terms
renew and extend and other provisions of the lease tending to demonstrate that the
parties intended a long-term lease.
-7-
To begin, this case is a declaratory judgment action filed pursuant to
Kentucky Revised Statutes (KRS) 418.040 et seq. No discovery was taken and the
action was heard by the court upon motion by First National. KRS 418.050. The
declaratory judgment was thereupon appealed pursuant to KRS 418.060.
For purposes of this appeal, we have treated the declaratory judgment
as one for summary judgment. Godman v. City of Fort Wright, 234 S.W.3d 362,
368 (Ky. App. 2007). We review a grant of summary judgment de novo because
only legal questions and the existence, or nonexistence, of material facts are
considered. Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky. App. 2001).
Additionally, the interpretation or construction of a contract, including questions
regarding ambiguity, is also a question of law and subject to de novo review.
Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 105 (Ky. 2003); see also Cantrell
Supply, Inc. v. Liberty Mutual Ins. Co., 94 S.W.3d 381, 385 (Ky. App. 2002).
Thus, our review in this case is limited to the 1990 lease and the terms
set forth therein. Unless there is an ambiguity in the lease terms, the parties’
intentions must be determined from the four corners of the lease without resort to
any extrinsic evidence. Cantrell, 94 S.W.3d at 385. If the lease is not ambiguous,
we will strictly enforce its terms, assigning them their ordinary meaning. Hazard
Coal Corp. v. Knight, 325 S.W.3d 290, 298 (Ky. 2010). And, Kentucky courts
have recognized that in interpreting the construction of a lease, the interpretation
-8-
must be construed more strongly against the party who prepared the lease. Boyd v.
Phillips Petroleum Co., 418 S.W.2d 736, 738 (Ky. 1966), as modified on denial of
reh’g (Apr. 28, 1967). In this case, the lease was drafted by First National’s
lawyer.
The 1990 lease, in relevant part, read as follows:
NOW FOR AND IN THE CONSIDERATION of
the premises and the payment of 1200.00 Dollars cash in
hand paid the Lessors do hereby grant and convey to the
Lessee the above described property. The terms of the
lease and rent payments for this lease on the above
described property are as follows:
(1) Beginning on or before the 9 day of
September, 1990, and each consecutive month thereafter
for sixty (60) consecutive months, rent shall be due in the
amount of One Thousand Two Hundred Dollars
($1,200.00) per month;
(2) After the first Five (5) years of this lease
(the terms set forth in paragraph 1) this lease shall be
renewable for an additional term of Five (5) years at the
monthly rental of One Thousand Five Hundred Dollars
($1,500.00) per month for each consecutive month in the
Five (5) year term.
(3) After the Five (5) year period set forth in
paragraph one (1) and the Five (5) year period set forth in
paragraph two (2) this lease shall be renewable for an
additional Five (5) year term with monthly rentals in the
amount of One Thousand Eight Hundred Dollars
($1,800.00) per month for the Five (5) year term.
(4) After the three (3) Five (5) year rental terms
set forth in paragraphs 1, 2, and 3 above, this lease is
renewable for an additional Five (5) year terms [sic] and
-9-
rent shall be set by the National Wholesale Price Index
effective at the time renewal is due. The parties hereto
agree that the rental rate will be set within thirty (30)
days of expiration of the prior term. The beginning of
the rental rate on the 16th year will be no less than One
Thousand Eight Hundred Dollars ($1,800.00) per month
and will be adjusted on the 16th year through the 20th
year being based on the prior five (5) year average
National Wholesale Price Index. Each five (5) year term
thereafter shall be computed the same as the third (3rd)
five (5) year term.
Example: Prior years 11, 12, 13, 14 and 15
National Wholesale Price Index is 4% per
year so five (5) years would be 20% of
$1,800.00 which would be an increase of
$360.00 per month for the next five (5) year
term.
....
(5) This lease shall be enforceable for the initial
Five (5) year term set forth in paragraph 1, and for at
least nineteen (19) subsequent Five (5) terms, unless
agreed to otherwise in writing by the parties. The parties
hereto agree that Lessee shall have the option to extend
the lease for a likewise term of One Hundred (100) years
under the same terms and conditions set forth above.
1990 Lease at 1-3.
The circuit court concluded that the lease was not ambiguous. We
agree. Viewing the lease as a whole, we believe the parties intended to enter into a
long-term lease with a term of 100 years, and the option to extend the term for
another 100 years under Section 5. And, while Sections 1-4 speak of five-year
terms or periods, these sections merely do so within the confines of setting forth
-10-
correspondingly increased lease payments. So, we conclude the five-year periods
in Sections 1-4 were only included to provide a time table in connection with
increased lease payments. Although not pivotal to our disposition, we observe that
the parties disagree as to the proper definition of the word “renewable” as set forth
in Sections 2-4 of the 1990 lease. The term “renew” has a strict legal meaning and
requires a “new, formal agreement in writing” to renew the lease. Lexington
Flying Serv. v. Anderson’s Ex’r, 239 S.W.2d 945, 946 (Ky. 1951). However, such
a technical definition will not be utilized if the intent of the parties demonstrates a
contrary interpretation of the term. Id. at 946-47. We believe the term
“renewable,” as set forth in the lease, should not be given its strict legal meaning,
as the whole of the lease illustrates that a new written agreement every five years
was not intended by the parties. As set forth above, we interpret these Sections of
the lease as merely providing five-year periods for the purpose of increasing lease
payments.
In sum, we interpret the 1990 lease as a long-term lease with an initial
100-year term and with an option to extend for another 100 years. The circuit
court’s granting a declaration of rights in accordance therewith was not reversible
error. For the reasons stated, we affirm. Any remaining contentions of error are
moot or without merit.
-11-
APPEAL NO. 2020-CA-0758-MR
First National contends that the circuit court erroneously rendered
summary judgment determining that it was not entitled to compensation for the
partial taking of the leased premises by the Transportation Cabinet. First National
agrees with the circuit court that Sherrod, 367 S.W.2d 844, controls upon the issue
of allocation of compensation between a tenant and landowner in a condemnation
action. Nonetheless, First National argues that the circuit court improperly relied
upon the expert opinion of Grabeel, as to the fair market value of the leased tract of
real property free of the lease and subject to the lease before the condemnation.
According to First National, Grabeel’s opinion was tainted because he failed to
include specific values of the leased tract. Also, First National points out that
Grabeel’s affidavit of September 25, 2019, was given approximately eight months
before the circuit court declared that the 1990 lease was for an initial 100-year
term. For these reasons, First National argues that the circuit court erred by relying
upon Grabeel’s affidavit to render summary judgment.
Summary judgment is proper where there exists no material issue of
fact and movant is entitled to judgment as a matter of law. CR 56; Steelvest, Inc. v.
Scansteel Service Center, Inc., 807 S.W.2d 476 (Ky. 1991). Under CR 56.05, an
affidavit submitted in support of or in opposition to a summary judgment “shall set
-12-
forth such facts as would be admissible in evidence.” Our review proceeds
accordingly.
It is well established that “Sections 13 and 242 of the Kentucky
Constitution permit the public condemnation of private property, but only for a
valid ‘public use,’ and only upon prior payment of ‘just compensation.’” Bianchi
v. City of Harlan, 274 S.W.3d 368, 372 (Ky. 2008) (quoting Sherrod, 367 S.W.2d
at 857)). Just compensation is the difference between the fair market value of the
real property before the taking and the fair market value of the remainder of the
real property after the taking. KRS 416.660; Commonwealth v. R.J. Corman
Railroad Co./Memphis Line, 116 S.W.3d 488, 491 (Ky. 2003). In a condemnation
action, the valuation of a leasehold and the allocation of compensation between a
tenant and a landlord is controlled by Sherrod, 367 S.W.2d at 850, which sets forth
the following method for determining same:
Under this method the proof should be directed towards
showing, and the instructions should require the jury to
find, only the following three values:
A. The fair market value of the leased tract as a whole
immediately before the taking, giving consideration to
the fact that it has rental value but evaluating it as if free
and clear of the lease. (This will be factor A.)
B. The fair market value of the leased tract as a whole,
immediately before the taking, if sold subject to the
existing lease. (This will be factor B.)
-13-
C. The fair market value of so much of the leased tract as
remains immediately after the taking, giving
consideration to the fact that it has rental value but
evaluating it as if free and clear of the lease. (This will
be factor C.) (Of course, if the entire tract is taken by the
condemnation, this value will be zero and need not be
found by the jury, but for the purpose of the following
computations C will be considered to be zero.)
After the jury has fixed the foregoing three values the
judge will compute and apportion the damages as
follows:
(1) Subtract C from A. The result is the total damages
payable by the condemnor.
(2) If B is the same as or more than A, ignore B. In this
situation all of the damages will go the landowner,
because the leasehold had no value, by reason of the fact
that the existence of the lease has not impaired the
market value of the tract.
(3) If B is less than A, subtract B from A, and then divide
the difference by A. The result will be the percentage of
ownership interest the lessee is deemed to have had in
the leased tract before the condemnation.
(4) Multiply the total damages, found under (1) above, by
the percentage found under (3) above. The result will be
the lessee’s share of the total damages. Subtracting his
share from the total damages will leave the landowner’s
share.
In this case, the Smiths submitted the affidavit of Grabeel, who is a
real estate appraiser. In the affidavit, Grabeel averred, in relevant part:
(5) It is necessary that the parcel described in
ATTACHMENT be appraised separately from the
remaining property in order to determine the respective
-14-
compensation to the fee owners and the lessee, First
National Bank. The remaining property that is the
subject of Civil Action No. 2015-CI-338 is owned in fee
[simple] by the Smiths with numerous parcels having
been leased to business entities other than First National
Bank.
(6) I have been asked to render an expert opinion
pursuant to the principles of Commonwealth, Dep’t of
Highways v. Sherrod, 367 S.W.2d 844 (Ky. 1963). As
set forth in Sherrod the method determining
compensation in cases of condemnation of property that
is under lease requires the determination of these three
separate values:
A. The fair market value of the leased tract as a
whole immediately before the taking, giving
consideration to the fact that it has rental value but
evaluating it as if free and clear of the lease. (This
will be factor A.)
B. The fair market value of the leased tract as a
whole, immediately before the taking, if sold subject
to the existing lease. (This will be factor B.)
C. The fair market value of so much of the leased
tract as remains immediately after the taking, giving
consideration to the fact that it has rental value but
evaluating it as if free and clear of the lease. (This
will be factor C.)
If the fair market value of the leased tract as a whole
immediately before the taking, if sold subject to the
existing lease (Factor B), exceeds the fair market value of
the leased tract as a whole immediately before the taking,
giving consideration that it has a rental value but
evaluating it as if free and clear of the lease (Factor A),
then all damages go to the landowner.
-15-
(4) I have been asked to address the issue of whether the
fair market value of the leased tract as a whole,
immediately before the taking if sold subject to the
existing lease (Factor B) exceeds the fair market value of
the leased tract as a whole immediately before the taking,
giving consideration to the fact that it has rental value but
evaluating it as if free and clear of the lease (Factor A).
In my expert opinion Factor B exceeds Factor A.
Affidavit of Grabeel at 2-3.
In his affidavit, Grabeel failed to set forth the specific fair market
value of the tract of real property without the 1990 lease and with the 1990 lease
before the taking. Rather, Grabeel simply opined that “Factor B exceeds Factor A”
per Sherrod, 367 S.W.2d 844. However, as plainly set forth in Sherrod, 367
S.W.2d at 850, the determination of whether factor B exceeds factor A is for the
court to compute only after the fair market values as to factor A and factor B are
established. So, an expert witness may not properly express an opinion upon
whether factor B exceeds factor A; rather, an expert witness may properly testify
as to the fair market values of the real property with and without a lease before the
taking. This Grabeel failed to do.
We conclude that Grabeel improperly opined upon whether the real
property was worth more with the lease under Sherrod, 367 S.W.2d 844, and
Grabeel failed to offer any specific fair market values of the leased real property
before the taking per Sherrod, 367 S.W.2d 844. Taken together, we do not believe
that Grabeel’s affidavit is sufficient to support summary judgment in favor of the
-16-
Smiths. House v. Deutsche Bank National Trust as Trustee for Wamu Series 2007-
HE1 Trust, 624 S.W.3d 736, 744 (Ky. App. 2021) (holding that an affidavit
containing inadmissible evidence is insufficient and cannot be considered on a
motion for summary judgment). Therefore, we are of the opinion that the circuit
court erroneously rendered summary judgment and thus reverse and remand for
additional proceedings thereon.5
In summation, we reverse and remand Appeal No. 2020-CA-0758-
MR and affirm Appeal No. 2020-CA-0759-MR.
ALL CONCUR.
BRIEFS FOR APPELLANT: BRIEFS FOR APPELLEE:
John P. Brice Yancey L. White
Lexington, Kentucky Manchester, Kentucky
5
Our Opinion should not be misconstrued as holding that summary judgment is impossible in a
condemnation action. Commonwealth v. R.J. Corman Railroad Co./Memphis Line, 116 S.W.3d
488, 497-98 (Ky. 2003).
-17-