KEITH A. DUKE, Individually and HELEN L. DUKE; and GARY L. DUKE, Individually and as Co-Executor v. HONORABLE WILLIAM R. HARRIS, JUDGE FIRST AMERICAN NATIONAL BANK OF KENTUCKY, f/k/a FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF BOWLING GREEN, KENTUCKY; AMERICAN GENERAL FINANCE, INC. v. FIRST AMERICAN NATIONAL BANK OF KENTUCKY
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RENDERED: May 1, 1998; 2:00 p.m.
NOT TO BE PUBLISHED
NO. 96-CA-3305-MR
KEITH A. DUKE, Individually and
as Co-Executor of the Estate of
HELEN L. DUKE; and GARY L. DUKE,
Individually and as Co-Executor
of the Estate of HELEN L. DUKE
v.
APPEAL FROM SIMPSON CIRCUIT COURT
HONORABLE WILLIAM R. HARRIS, JUDGE
ACTION NO. 93-CI-135
FIRST AMERICAN NATIONAL BANK OF
KENTUCKY, f/k/a FIRST FEDERAL
SAVINGS & LOAN ASSOCIATION OF
BOWLING GREEN, KENTUCKY;
AND
APPELLEE
NO. 96-CA-003361-MR
AMERICAN GENERAL FINANCE, INC.
v.
APPELLANTS
APPELLANT
APPEAL FROM SIMPSON CIRCUIT COURT
HONORABLE WILLIAM R. HARRIS, JUDGE
ACTION NO. 93-CI-135
FIRST AMERICAN NATIONAL BANK OF
KENTUCKY
OPINION
AFFIRMING
APPELLEE
* * * * * * *
BEFORE:
DYCHE, EMBERTON, and JOHNSON, Judges.
JOHNSON, JUDGE:
Keith Duke and Gary Duke, individually and as
co-executors of the estate of Helen Duke (the Dukes), and
American General Finance, Inc. (American General) have appealed
from the judgment of the Simpson Circuit Court entered on
September 26, 1996, and the amended judgment entered on November
12, 1996, which award an attorney's fee in the total amount of
$18,707.24, to First American National Bank of Kentucky (First
American or the bank).
Finding no error, we affirm.
The facts necessary for a resolution of the issues
presented in this appeal are relatively simple.
In December
1977, the Dukes' parents, Otis and Helen Duke, executed a
promissory note in favor of First American.
The note was secured
by a mortgage on real property located in Franklin, Kentucky.
Ten years later, Otis and Helen Duke executed a promissory note
in favor of American General which was also secured by a mortgage
on the same property.
four months later.
Otis Duke died in 1992.
Helen Duke died
The Dukes made no payments on these notes
after the death of their mother.
On July 9, 1993, First American commenced a foreclosure
action in the Simpson Circuit Court.
At that time, the realty
securing the note was worth approximately $40,000.
American was owed about $13,000.
First
American General joined in the
foreclosure to recover its outstanding balance of $13,905, plus
attorney's fees and court costs.
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The Dukes resisted the lenders'
attempts to foreclose and made several arguments that foreclosure
was an inappropriate remedy against a decedent's estate and that
the lenders should have filed their respective claims pursuant to
provisions of Kentucky Revised Statutes (KRS) Chapter 396 et seq.
On February 23, 1994, the trial court entered a final
partial summary judgment and order of sale in which it determined
that there were no genuine issues of material fact regarding the
amounts owed to First American and American General, or that the
estate of Helen Duke was in default on the notes.
It also
determined that First American was entitled to recover a
reasonable attorney's fee to be determined at the conclusion of
the proceedings and that such fees were secured by First
American's mortgage on the real property.
The property was
ordered to be sold by the Master Commissioner with the proceeds
to be applied in the following order:
(1) the costs of sale; (2)
First American's costs; (3) First American's priority mortgage
lien, "including interest, late charges, expenses and costs of
collection, and attorney's fees;" (4) American General's second
priority mortgage lien, also including interest, costs of
collection and attorney's fees.
The Dukes appealed from this judgment but did not post
a supersedeas bond.
Thus, on June 24, 1994, the realty was sold
and the proceeds of $43,527.40 were disbursed as follows:
$14,306.80 to First American for principal and interest owed on
the note, $7,750.50 for its attorney's fee and $361.61 for its
costs and expenses.
American General received $13,905 due on its
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note and $2,045.75 in costs and attorney's fees.
The remaining
balance of $5,157.74 was ordered to be placed in an interest
bearing account held by the Simpson Circuit Court Clerk.
The Dukes proceeded with their appeal.
On June 23,
1995, this Court affirmed the trial court's summary judgment and
rejected all arguments raised by the Dukes including their major
contention that they were under no obligation to pay claims
against the estate until six months after their appointment as
co-executors.1
This Court, however, declined to address the
award of attorney's fees as the partial summary judgment was not
final in that regard as it did not determine the specific amount
of those awards.
On July 17, 1995, First American moved for an
additional award of attorney's fees and expenses in the amount of
$8,060.96.
The motion was held in abeyance by the trial court
until disposition of the Dukes' motion for discretionary review
in the Supreme Court.2
On April 29, 1996, the fee dispute still
unresolved, First American sought another $2,372.50 in fees it
incurred for work performed by its attorney since July 1995,
including its response to the motion filed by the Dukes in the
Supreme Court.
The Dukes argued below that First American's fees
should not be allowed as it was their belief that it was
unnecessary and unreasonable for First American to seek
1
94-CA-0587-MR, opinion designated "not to be published."
2
Discretionary review was denied by the Supreme Court of
Kentucky on March 13, 1996.
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foreclosure in the first instance and that the bank would have
received all amounts it was due under the note and mortgage had
it cooperated with the Dukes' plans to repair and privately sell
their parents' property.
Both the Dukes and American General
argued that even if First American were entitled to legal fees,
such fees were not secured by the mortgage.
On September 26, 1996, the trial court entered a final
order resolving the attorney's fee dispute.
It determined that
First American was entitled to recover an additional attorney's
fee and expenses of $10,724.13, and that American General was
entitled to an additional attorney's fee of $1,935.50.
The sums
held by the Simpson Circuit Court Clerk were ordered to be paid
to First American.
The trial court made several findings and
conclusions including (1) that the Dukes had failed to establish
that the estate of Helen Duke was insolvent; (2) that a
constitutional challenge to KRS 411.195 would not be entertained
as no notice was given to the Attorney General; (3) that the
attorney's fee recovery clause of the mortgage was enforceable
despite the fact that the mortgage was executed prior to the
passage of KRS 411.195; (4) that the language of the attorney's
fee recovery clause of the mortgage was sufficiently clear to
create a lien secured by the property; (5) that, although the
attorney's fee and expenses exceeded the underlying debt when the
suit was filed, "the course of this litigation and the services
required of First American's counsel . . . render[ed] the claimed
amount proper and reasonable."
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In ruling on First American's motion to alter or amend
the judgment pursuant to Kentucky Rules of Civil Procedure 59.05,
the trial court directed American General to return the sum of
$5,649.78 which it had previously received from the proceeds of
the Master Commissioner's sale to satisfy First American's
priority lien.
In their respective appeals, the Dukes and American
General argue that First American's attorney's fees are not
secured by the mortgage instrument executed by Otis and Helen
Duke in 1977.
The clause of the mortgage at issue reads as
follows:
Mortgagor agrees that in the event the
Association is required in its judgment
to incur any expenses by reason of legal
fees, court costs or expenses incidental
thereto, by reason of the filing of any
divorce action, suit for sale of
indivisible property or any other
litigation involved with said premises,
including the enforcement of this
mortgage, then the mortgagor will pay
said expenses and cost upon submission
of an itemized statement for same by the
Association at the conclusion of the
litigation.
The appellants insist that the failure of this paragraph to
specifically recite that the real estate secures the payment of
attorney's fees described therein compels a determination that
the parties did not intend that the property would secure these
additional fees.
The Dukes also assert that the language of the
last sentence of the clause, specifically that the fees are to be
paid "at the conclusion of the litigation," requires the
conclusion that the fees would of necessity have to be determined
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after the proceeds of a foreclosure were disbursed.
First American argues that the scope of the mortgage,
when read as a whole, creates a lien on any indebtedness incurred
under its various performance covenants.
Indeed, the next-to-
last paragraph of the mortgage states that a release of the
mortgage will occur only when the "Mortgagor well and truly
pay[s] said debt and interest, and perform[s] all of the
covenants and agreements herein set out."
We agree with the
trial court's reasoning that the "clear and unambiguous meaning"
of the language employed in the instrument is that attorney's
fees are a secured debt. See O'Bryan v. Massey-Ferguson, Inc.,
Ky., 413 S.W.2d 891 (1966).
Next, the Dukes insist that an award of attorney's fees
is improper against an insolvent estate.
453.210 which provides in pertinent part:
They rely on KRS
"No attorney's fee
shall be allowed any claimant in any case against an insolvent
estate."
We find no merit in this argument for two reasons.
First, we are not satisfied that the trial court's findings in
this regard are clearly erroneous.
The court found that the
Dukes had not shown that the estate of Helen Duke was actually
insolvent.
At best, the record demonstrates that the estate may
be insolvent if the award of attorney's fees is affirmed.
If
these fees are not allowed, there is nothing in the record to
suggest that the estate will be insolvent.
Additionally, the
Dukes have not provided us with any authority that this statute
is implicated in the instant case.
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It is our opinion that KRS
453.210 simply does not contemplate attorney's fees that are
secured by a mortgage or other lien.
Next, the Dukes argue that the attorney's fee recovery
clause of the mortgage should be declared unenforceable "as
unconscionable and violative of the implied covenant of good
faith and fair dealing."
The Dukes insist that First American,
which they describe as a "sophisticated commercial lender,"
violated its duty to deal with Otis and Helen Duke in good faith
by including the attorney's fee recovery clause in the mortgage
at a time when such clauses were known to offend public policy
and were routinely determined to be unenforceable.
The passage of KRS 453.250 (now KRS 411.195), which
became effective on July 15, 1980, reflects a change in public
policy and gives effect to such clauses.
This statute reads:
Any provisions in a writing which
create a debt, or create a lien on real
property, requiring the debtor, obligor,
lienor or mortgagor to pay reasonable
attorney fees incurred by the creditor,
obligee or lienholder in the event of
default, shall be enforceable, provided,
however, such fees shall only be allowed
to the extent actually paid or agreed to
be paid, and shall not be allowed to a
salaried employee of such creditor,
obligor or lienholder.
There are two cases which specifically hold that this statute is
remedial in nature and that such clauses are enforceable for fees
incurred after its effective date even though the document
creating the debt or lien was executed prior to the statute's
passage.
See Freas v. First Federal Savings and Loan
Association, Ky. App., 636 S.W.2d 660 (1982), and Central
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Kentucky Production Credit Association v. Smith, Ky., 633 S.W.2d
64 (1982).
Surely, if inserting such a provision constituted a
"flagrant example of overreaching" on a lender's part as the
Dukes suggest, our highest court would not have given KRS 453.250
retroactive application.
Finally, the Dukes argue, as they did below, that First
American acted unreasonably in foreclosing on property worth
$40,000 to recover the sum of $13,000 owed to it.
This Court's
opinion in their previous appeal has required the Dukes to
recognize that First American had a legal right to seek
foreclosure upon default.
However, they now argue that while
First American's actions were not unlawful, the bank should not
have exercised its rights and that all of First American's fees
should be disallowed.
In the alternative, they argue that First
American's counsel practiced the case at a "leisurely pace" which
should result in a "drastic reduction in fees."
We believe the trial court wisely declined to become
embroiled in the dispute over which party caused this routine
foreclosure action to evolve into such contentious and protracted
litigation.
However, the fact remains that the Dukes were in
default and First American was pursuing its legal remedies.
Under these circumstances, First American was entitled to a
reasonable attorney's fee.
Having reviewed the five volumes of
record compiled in this matter, we find no error in the amount of
the fee allowed.
The question of the amount of an attorney's fee
is one left to the sound discretion of the trial court.
-9-
See
Dingus v. Fada Service Co., Inc., Ky. App., 856 S.W.2d 45 (1993).
The trial court made extensive findings about the quality and
quantity of work performed by First American's counsel.
These
findings are amply supported by this record.
Accordingly, the judgment of the Simpson Circuit Court
is affirmed.
ALL CONCUR.
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BRIEF AND ORAL ARGUMENT FOR
APPELLANTS, Keith Duke and
Gary Duke:
BRIEF AND ORAL ARGUMENT FOR
APPELLEE:
Hon. David Cummins
Franklin, KY
Hon. Mike Kelly
Louisville, KY
BRIEF AND ORAL ARGUMENT FOR
APPELLANT, American General:
Hon. David T. Wilson, II
Radcliff, KY
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